Reclassifying Employees to Independent Contractors Just Became Easier — Or Did It?

The February 26, 2026, “Newish” Independent Contractor Test

The independent contractor test under the Fair Labor Standards Act (FLSA), which determines whether an individual is classified as an employee or an independent contractor, has started to resemble a ping-pong match — over the last five years the test has changed three times — leaving employers uncertain whether they may face steep penalties for employee misclassification. On Friday, February 26, 2026, the Department of Labor (DOL) issued a proposed rule that largely reverts back to the 2021 business-friendly, five-part “economic reality” test to determine independent contractor status under FLSA, the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) (the proposed rule).

The proposed rule seeks to replace President Biden’s 2024 “totality of the circumstances” rule. The back and forth (summarized below) has left businesses grasping for certainty in classifying workers. Revisions to worker classification criteria can significantly impact franchisors and manufacturers, particularly concerning the categorization of franchisees and distributors. The balance between exercising control over brand standards and allowing operational independence franchisors and manufacturers susceptible to misclassification claims.

• 2021 (Trump administration): Established a five-factor “economic reality” test, elevating two core factors (control and opportunity for profit/loss) as the most important.
• 2024 (Biden administration): Rescinded the 2021 rule, returning to a six-factor “totality of the circumstances” test, where no single factor was weighted more than others, making it harder to classify workers as independent contractors.
• 2026 (Proposed – Trump administration): The 2026 proposed rule aims to reverse the 2024 rule’s “chilling effect” on contracting, prioritizing business certainty and reducing “regulatory whiplash.” While 2024 focused on reducing misclassification, the 2026 proposal seeks to re-establish an “employer-friendly” standard, similar to the 2021 regulations under the five-factor analysis.

The new proposed rule reflects an ongoing effort by the DOL to realign classification rules with long‑standing interpretations grounded in the “economic reality” test. It closely resembles the prior Trump administration’s 2021 classification test, which was replaced in 2024.

The 2026 Proposed Rule Summary

The proposed rule focuses on two main “core factors.” If the core factors do not “both point to the same classification decision,” three additional and less important “secondary factors” may be considered. However, the DOL seeks to continue with the 2021 rule’s emphasis that these factors are not exhaustive.

• Core factors:
  • Nature and degree of control over the work.
  • Opportunity for profit or loss based on initiative and/or investment. If these two factors align, there is a “substantial likelihood” that the classification is accurate.
• Secondary factors (used when core factors are inconclusive):
  • Amount of skill required for the work.
  • Degree of permanence of the working relationship.
  • Whether the work is part of an integrated unit of production. 

Why the Proposed Rule Was Issued to Change the Independent Contract Test — Again

The DOL explains that the 2024 rule failed to provide clarity on how the different factors should be weighed and applied as well as failed to emphasize that the proper inquiry is whether there is economic dependence on work rather than economic dependence for income.

The DOL also noted that the existing approach had a chilling effect on independent contractor status and referred to changes in the 2024 rule that were not consistent with applicable Supreme Court rulings. For example, the “investment factor” analysis typically focused on the investment of the worker. While the 2024 rule changed the investment fact analysis to consider the investment of the worker and the potential employer, prior Supreme Court authority focused solely on the investment of the worker. The proposed rule reverts back to this standard.

What Happens Next?

The DOL has invited comments to the Notice of Proposed Rulemaking (NPRM)within 60 days, or until April 28, 2026. The 2024 rule was not finalized for over a year after the NPRM was issued, so businesses should not anticipate an immediate change.

What Can Your Business Do Now?

Businesses should keep in mind that the proposed rule only addresses independent contractor status with respect to the FLSA and federal laws that incorporate the FLSA’s scope of employment. State-specific independent contractor tests, as well as different tests for purposes such as IRS compliance and the National Labor Relations Act, remain in effect and still must be complied with where applicable.

Businesses should look for guidance under the 2021 rule to determine if a worker’s job duties are controlled by company management and whether the worker has made a financial investment in the work.

Companies should also consider an internal audit of risky independent contractor decisions to determine independent contractor status under the core factors. Audits conducted in conjunction with legal counsel can provide a good faith defense to liquidated damages in the event a lawsuit is filed.

Companies should work closely with their legal counsel to determine whether decisions made under prior independent contractor tests will survive analysis under the proposed rule.