On February 27, 2026, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) addressing whether a worker is properly classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). The DOL proposes rescinding its 2024 Rule and replacing it with a slightly revised version of the “economic realities” analysis adopted by the agency in 2021.
Key Features of the Proposed Rule
If adopted, the proposed rule would revive the “economic realities test” from the DOL’s 2021 Rule that was rescinded by the agency’s “totality of the circumstances” test in its 2024 Rule.
Like the 2021 Rule, this proposed rule outlines two “core” or “primary” factors, which include (i) the nature and degree of employer’s control over the work and (ii) opportunity for profit or loss based on initiative and/or investment. Wage & Hour Div., U.S. Dept. of Labor, 91 Fed. Reg. 9932, 9950 (Feb. 27, 2026) (proposed § 795.105(d)(1)).
Other factors that are relevant under this proposed rule include (i) the amount of skill required for the work, (ii) the degree of permanence to the work relationship, (iii) whether the work is part of an integrated unit of production, and (iv) potentially “additional factors” if they in “some way indicate whether [a] individual is in business for him- or herself, as opposed to being economically dependent on the potential employer for work.” 91 Fed. Reg. at 9953 (proposed § 795.105(d)(2)).
This proposed rule largely resembles the agency’s 2021 Rule. However, we might see some differences in the final version. For instance, the DOL is considering (and seeking comment on) publishing accompanying agency guidance to further streamline the two core factors analysis. With a streamlined approach, the control factor would be considered first and if it indicates employee status, then the analysis would stop, and no other factors would be considered. The worker would be classified as an employee at that point. Conversely, if the control factor indicates independent contractor status, or if the control factor is neutral, then the analysis would proceed. Depending on how this notion is received in public comment, this streamlined approach may or may not be incorporated into the final rule or agency guidance.
In addition, the proposed rule also would readopt the 2021 Rule’s provision clarifying that, for purposes of this classification analysis, the parties’ actual practice is more relevant than contractual or theoretical possibilities. 91 Fed. Reg. at 9974 (proposed § 795.110). If adopted, this language reaffirms that, while documents like job descriptions or written agreements between the parties are relevant, the actual day-to-day realities of the working relationship will carry more weight.
Finally, the NPRM also provides eight fact-specific examples to give employers additional guidance in evaluating worker classifications. While useful guidance, these examples are, by definition, limited to closed-universe fact patterns. As such, employers should be cautious about looking to them alone to make classification decisions without conducting their own audits of the facts unique to their workplaces.
Since the agency’s rulemaking is subject to a 60-day notice and comment period, the window for public comment will remain open on this proposed rule until 11:59 p.m. ET on April 28, 2026.
Costly Consequences of Misclassification
Both federal and state penalties for misclassifying employees can be significant. Employers who misclassify employees face liability for unpaid wages owed to employees under the FLSA and any state counterpart laws. In addition, employers may be required to pay liquidated damages in an amount equal to back wages, as well as civil money penalties. Also, employers who misclassify workers as independent contractors will face tax liability, including liability for unpaid payroll taxes, unemployment taxes, as well as tax-related interest and penalties. Employers may also have to pay attorneys’ fees associated with litigation.
If the misclassification practice is sufficiently widespread, employers should understand that such practices can give rise to collective action lawsuits, exposing employers to claims from a large number of employees. For example, in July 2025, in Chavez-Deremer v. Medical Staffing of America, LLC, the Fourth Circuit Court of Appeals upheld a $9.3 million judgment against a medical staffing company as a result of its misclassification of approximately 1,100 nurses as independent contractors. This case is an excellent example of how an employer’s decision to classify certain employees incorrectly can result in serious financial repercussions once it affects enough employees.
Takeaways for Employers
Although the proposed rule has not yet been adopted, it will likely be finalized in substantially the same form after the notice and comment period ends. Employers should use this time to conduct careful audits of their worker classifications, evaluating whether workers currently classified as independent contractors would be viewed as “in business for themselves.” If any classifications are uncertain or borderline, employers should consult with a labor and employment attorney.
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