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The U.S. Department of Labor (DOL) has issued a significant proposed rule that would fundamentally change how workers are classified as either employees or independent contractors under the Fair Labor Standards Act (FLSA).
If finalized, this rule would rescind the 2024 “totality of the circumstances” framework and return to a standard similar to the 2021 regulations. This shift is widely viewed as a more “pro-business” approach, making it easier for companies to maintain independent contractor relationships.
The proposed rule would utilize an “economic reality” test to determine the fundamental nature of a working relationship. The core question is whether a worker is in business for themselves as an independent contractor or is an employee who is economically dependent on an employer for work.
To provide employers with more certainty, the DOL proposed identifying two “core factors” that would carry the most weight in the classification analysis.
- Nature and Degree of Control: The extent to which the worker, rather than the employer, controls the key aspects of the performance of the work.
- Opportunity for Profit or Loss: Whether the worker has the ability to earn a profit or suffer a loss based on their own initiative and/or investment in the task.
Under this proposal, if both core factors point toward the same classification, there is a “substantial likelihood” that the classification is accurate. The DOL also identified three other factors that would be used as guideposts to help determine a worker’s status:
- The amount of skill required for the work
- The degree of permanence of the working relationship
- Whether the work is a central part of the employer’s business process
Why This Matters for Your Business
- Reduced Risk at the DOL Level: While DOL rules do not strictly bind courts, if the DOL finalizes this proposal, it would significantly lower the risk of DOL-initiated audits or enforcement actions regarding misclassification.
- Operational Flexibility: The rule clarifies that requiring contractors to meet safety standards, carry insurance, or meet deadlines does not automatically make them employees.
Next Steps
The public comment period is open until April 28, 2026. Now is an ideal time to assess your independent contractor agreements and actual workplace practices.
Because “actual practice” outweighs written contracts under this proposal, we recommend reviewing your day-to-day operations to ensure they align with the proposed “core factors.” Doing so can help insulate your company from future liability for unpaid wages, taxes, and workers’ compensation if the rule is approved.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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