The Federal Independent Contractor Pendulum Is About to Swing Back in Favor of Employers

On February 26, 2026, the U.S. Department of Labor (“DOL”) announced its intent to rescind the Biden-era employee/independent contractor classification rule and replace it with a new framework governing the determination of independent contractor classification under the Fair Labor Standards Act (“FLSA”).

If finalized, the proposed Rule will replace the current independent contractor classification framework with a streamlined set of guidelines similar to those issued during President Trump’s first term.  Per the DOL, the proposed Rule is “designed to help workers and businesses better understand how to determine when a worker is an employee and when the worker may be classified as an independent contractor.”

Under the proposed Rule, the DOL will continue to apply the longstanding “economic reality” test, which examines whether a worker is economically dependent on a business or operates as an independent business.  The proposed Rule, however, places greater weight on two “core” factors: (1) the nature and degree of control exercised over the work; and (2) the worker’s opportunity for profit or loss based on initiative or investment.  If these two factors point in the same direction, they will carry significant weight in the independent contractor versus employee classification analysis.

The proposed Rule retains several “guidepost” factors (including the worker’s skills, the permanence of the relationship, and whether the work is part of an integrated unit of production), but these factors will be less probative in the analysis.  As with prior DOL guidance, the analysis focuses on the parties’ actual working relationship rather than contractual labels alone.

The proposed Rule reflects a shift away from the broader multi-factor balancing framework adopted by Biden administration.  If finalized as drafted, the proposed Rule may provide greater predictability for businesses that rely on independent contractors, including those in healthcare, agriculture, construction, and the gig-economy (e.g., ride sharing and delivery sharing apps). Because independent contractors are not entitled to a minimum wage and overtime pay under the FLSA, the proposed Rule may significantly impact the bottom line of many businesses. 

Public comment is open through April 28, 2026.  We encourage businesses that may be affected by the proposed Rule to comment.  Until the DOL issues a new, final Rule, the 2024 Final Rule remains in effect.

Critically, for employers, many states, including California, Oregon, and Washington, all have stricter independent contractor tests compared to the current or proposed federal classification framework.  Employers must meet state classification standards to avoid state liability for misclassification regardless of the parallel federal rule.

Takeaways for Businesses

Although the proposed Rule is not yet final, it signals a likely shift in how the DOL will analyze independent contractor relationships moving forward and serves as a reminder that businesses should continue to closely evaluate their contractor agreements.  Businesses can take the following steps to prepare:

• Understand the Criteria:  Familiarize yourself with the criteria outlined in the proposed rule for determining whether a worker is classified as an employee or an independent contractor, paying particular attention to the two “core” factors.

• Review Current Practices:  Conduct a comprehensive review of your existing workforce and evaluate the classification of all independent contractors.  Assess whether your classifications align with the current final rule, and if not, whether they would align with the proposed rule.

• Maintain Records:  Keep detailed records of worker classifications, agreements, and any related communications.  Maintaining accurate and thorough documentation can help demonstrate compliance and mitigate potential risks.

• Consider Implications on Operations and Costs:  Assess the potential impact of the proposed rule on your business operations, costs, and overall workforce management strategies.  Be prepared to make necessary adjustments to mitigate any adverse effects and capitalize on opportunities for improvement.

• Know Applicable State Laws:  Familiarize yourself with applicable state wage and hour laws, which in many cases provide more protections for workers than the FLSA.

• Seek Legal Counsel:  Given the complexities surrounding worker classification and the potential legal implications of misclassification, consider consulting with legal professionals experienced in employment law to review your practices and provide guidance.

By taking a proactive and informed approach, businesses can effectively navigate the complexities of independent contractor classification, mitigate risks, and ensure compliance.

This communication is not intended to create or constitute, nor does it create or constitute, an attorney-client or any other legal relationship. No statement in this communication constitutes legal advice nor should any communication herein be construed, relied upon, or interpreted as legal advice. This communication is for general information purposes only regarding recent legal developments of interest, and is not a substitute for legal counsel on any subject matter. No reader should act or refrain from acting on the basis of any information included herein without seeking appropriate legal advice on the particular facts and circumstances affecting that reader. For more information, visit www.buchalter.com.