DOL proposes new rule to clarify standard for independent contractor classification

On Feb. 26, the U.S. Department of Labor announced a new proposed rule clarifying the classification of independent contractors versus employees — the third change to independent contractor regulations since 2021. If finalized, the new rule would roll back a Biden-era rule that used a six-factor test to analyze contractor questions and replace it with a new test that focuses on two core issues: control and the opportunity for profit and loss. The new rule is open for comments until April 28. 

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Background of 2021 and 2024 rules

In January 2021, the DOL under the first Trump administration finalized a rule setting forth the proper analysis for determining whether a worker was an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The 2021 rule focused on two core factors for this analysis — the nature and degree of control over the work and the individual's opportunity for profit or loss — in addition to other relevant but less probative factors.

Thereafter, in March 2024, the Biden administration replaced the 2021 Trump-era rule with its own rule. This Biden-era rule was focused on a six-factor totality-of-the-circumstances test, and notably, no factor or set of factors held more weight than the others. The Biden-era rule was generally considered to be a more employee-friendly analysis than the 2021 Trump-era rule.

However, the Biden-era rule faced numerous hurdles to enforcement during its brief lifespan.  Indeed, the Biden-era rule was subject to multiple court challenges immediately upon its finalization. Moreover, on May 1, 2025 (following the transition of presidential administrations), the DOL issued a field assistance bulletin directing investigators to not apply the Biden-era rule in enforcement matters.

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The new rule

The new rule would fully rescind the Biden-era rule and confirm the DOL's use of an "economic realities" standard similar to the one propounded in the 2021 Trump-era rule. The new rule pinpoints two primary factors that are crucial in this analysis: 

1. The nature and degree of control over the work — how much oversight does the business have over the worker's activities?

2. The worker's opportunity for profit or loss based on initiative and/or investment — does the worker have a real stake in their financial success? 
   

Other less probative factors that may be relevant, depending on the circumstances, include: 

1. The amount of skill required for the work — what expertise is needed for the job? 

2. The degree of permanence of the working relationship — how stable is the arrangement? 

3. Whether the work is part of an integrated unit of production — is the work central to operations? 
   

The new rule also emphasizes actual practices of the business and the worker in determining whether the worker is an independent contractor, rather than what may be contractually or theoretically possible. For instance, if a worker has the contractual power to oversee subordinates but isn't allowed to do so in practice, that contractual authority may hold little weight in determining if they are an independent contractor.
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What does this mean for employers?

The new rule is still in the proposal stage and hasn't taken effect yet, and even if it does, it is not clear whether courts will apply it in lieu of their own analyses developed through years of litigation. Nevertheless, businesses — especially those in sectors heavily reliant on independent contractors, like healthcare, technology and agriculture — should take note of the new rule and its provisions. At its core, the new rule is for the most part a reversion back to the 2021 Trump-era rule. However, it is not entirely identical as it also applies to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, in addition to the FLSA.

In practice, the new rule reduces some uncertainty around federal classification standards, but it does not eliminate misclassification risk. Employers should use this rulemaking period to assess their current independent contractor arrangements and strengthen documentation supporting any independent contractor designation. Employers should also confirm that their business practices conform with their independent contractor arrangements, particularly given the new rule's emphasis on business practices over contractual and theoretical possibilities. Finally, employers should monitor applicable state laws governing independent contractor classification as those laws may be more stringent than the new rule. 

Those with questions about compliance should contact experienced labor and employment counsel for assistance.