Proper classification of workers under the Fair Labor Standards (“FLSA”) is critical for employers, as the classification of a worker as an independent contractor rather than an employee deprives the worker of certain legal rights and benefits, including unpaid overtime and minimum wage. Such misclassification can result in costly litigation, damages, and penalties to the employer – even if the worker prefers independent contractor classification. As a result, employers must stay abreast of the current rules imposed by the Department of Labor (“DOL”) to determine whether a worker meets the criteria to be properly classified as an independent contractor; if such criteria is not met, the worker is legally an employee and must be classified as such.

On Thursday, the DOL published a Notice of Proposed Rulemaking (the “Proposed Rule”) that clarifies the legal framework used to determine whether a worker is properly classified as an independent contractor versus an employee. The Proposed Rule, if passed, would replace the 2024 independent contractor rule issued during the Biden era with a rule the largely resembles the 2021 rule issued under the prior Trump administration. The proposal would also expressly apply to DOL’s analysis under the Family and Medical Leave Act (“FMLA”) and the Migrant and Seasonal Agricultural Worker Protection Act, both of which apply the FLSA’s statutory definition of “employ.”

Here’s what employers need to know:

Historical Determination of Independent Contractor Status

The Department of Labor (DOL) and courts have historically applied an economic realities test in determining whether a worker is properly classified as an independent contractor or an employee, which asks “whether, as a matter of economic reality, the worker is either economically dependent on the employer for work (and is thus an employee) or is in business for themselves (and thus an independent contractor).”

Previously, the DOL and courts have analyzed multiple factors (the application of which varied among circuits) to determine whether a worker is an employee or independent contractor under FLSA based on the “totality of the circumstances.” In 2021, however, the DOL under the Trump administration distilled the multifactor “totality-of-the-circumstances” analysis to two “core factors”—the nature and degree of control over the work and the worker’s opportunity for profit and loss (the “2021 Rule”). In 2024, the Biden-era reversed the 2021 Rule to reinstate a multi-factor test based on the totality of the circumstances. In a dizzying turn of events, the Proposed Rule seeks to reinstate the 2021 Rule.

Framework under the 2024 Rule (Currently in Effect)

The current framework applies a six-factor test to determine independent contractor versus employee status, where no single factor is dispositive. These factors include:

• The worker’s opportunity for profit or loss;
• Investments by the worker and the employer;
• The permanence of the relationship;
• The nature and degree of control the employer has over the worker;
• Whether the work is integral to the employer’s business; and
• The worker’s skill and initiative

The DOL also noted that “additional factors” could be considered, sparking confusion among employers. As such, the 2024 Rule has been criticized for its lack of clarity, ambiguity, and for raising the threshold for independent contractor status, resulting in hesitation to classify workers as independent contractors and increased litigation exposure.

The Proposed Rule

The Proposed Rule returns the analysis from a “totality of the circumstances” approach to a consideration of the two “core factors” assessed under the 2021 Rule, which include:

• The nature and degree of control the employer has over the worker; and
• The worker’s opportunity for profit or loss

While additional factors may be considered, including the worker’s degree of skill, the permanence of the relationship between the parties, and whether the work is integral to the business, these factors are less probative. Rather, if the two core factors suggest that the worker is economically independent from the employer or truly in business for themselves, classification as an independent contractor typically follows. The DOL also promises to provide eight fact-specific examples applying the factors to real life circumstances.

What’s Next?

The Proposed Rule remains open for comment until April 28, 2026. If finalized, the Proposed Rule will replace and rescind the 2024 Rule. The DOL asserts that the Proposed Rule will “improve compliance, reduce misclassification, and reduce costly litigation in an economic environment that needs flexibility and innovation.”

Practical Advice for Employers

As employers review and audit their use of independent contractors in light of this Proposed Rule, they should keep in mind that this rule only applies to classifications under the FLSA, FMLA, and the Migrant and Seasonal Agricultural Worker Protection Act – not state laws. Employers should particularly be mindful of certain state laws that impose different, often stricter, classification tests, when determining a worker’s status.

For now, employers must wait to see if the Department adopts a final rule, and if that final rule reflects the Proposed Rule. Taft’s employment team will continue to monitor the Proposed Rule’s status. In the meantime, please contact a member of the Taft employment team if you have questions about worker classification or related employment matters.