On February 27, 2026, the U.S. Department of Labor’s Wage and Hour Division (“DOL”) released a Notice of Proposed Rulemaking that would reshape how employee versus independent contractor status is evaluated under federal wage and hour laws. The proposed rule, titled Employee or Independent Contractor Status Under the Fair Labor Standards Act, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act, would rescind the 2024 independent contractor rule and largely return to the approach published in January 2021. The DOL’s stated goal is to provide a clearer, more predictable framework for employers and workers navigating modern work arrangements, while continuing to apply an “economic reality” analysis focused on economic dependence.
1. From Trump To Biden And Back Again
Federal wage and hour law has long relied on an “economic reality” inquiry to determine whether a worker is an employee entitled to protections like minimum wage and overtime, or an independent contractor who is in business for themselves. In January 2021, in the final days of President Trump’s first term, the DOL issued a rule that aimed to simplify application of this test by prioritizing two “core” factors as the most probative. The first factor was the nature and degree of control over the work, while the second factor was the worker’s opportunity for profit or loss based on initiative or investment.
That 2021 rule was short-lived. The Biden administration attempted to delay and then withdraw it, and after litigation over those actions, the DOL ultimately replaced it with a new rule finalized in January 2024. The 2024 rule adopted a six-factor economic reality test and emphasized a “totality of the circumstances” approach, stating that no factor or subset of factors carried greater weight. Those six factors were: (1) the opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the potential employer; (3) the degree of permanence of the work relationship; (4) the nature and degree of control; (5) the extent to which the work performed is an integral part of the potential employer’s business; and (6) the skill and initiative required. The 2024 rule framed the analysis as holistic and flexible, but critics viewed it as more difficult to apply consistently in real-world planning, especially where factors pointed in different directions.
In May 2025, the DOL announced it would not apply the 2024 rule in its own enforcement investigations and would instead revert internally to older subregulatory guidance–i.e., informal agency materials such as opinion letters, field assistance bulletins, and internal enforcement directives that direct investigators and enforcement staff but have not gone through formal notice-and-comment rulemaking and do not carry the binding legal effect of a published regulation.
2. The Proposed Return To An Economic Reality Test With Two Core Factors
The February 2026 proposal represents the DOL’s formal effort to convert that internal subregulatory guidance into binding regulatory text.
Under the proposed rule, the DOL would rescind the 2024 regulation in 29 C.F.R. Part 795 and readopt the 2021 framework with modest modifications. The central inquiry remains the same: whether, as a matter of economic reality, the worker is economically dependent on an employer for work or is instead in business for themselves. Notably, the proposal clarifies that economic dependence is about dependence for work rather than dependence for income, meaning that the amount a worker earns or whether they have other income sources is not the focus of the analysis.
Consistent with the 2021 approach, the DOL would again elevate two “core” factors as most probative: the nature and degree of control over the work, and the worker’s opportunity for profit or loss based on initiative or investment. The proposal would also retain several secondary guideposts, including the skill required, the permanence of the relationship, and whether the work is part of an integrated unit of production. The proposal further reiterates that actual practice matters more than what is theoretically possible under a contract.
The DOL’s stated rationale for the change is clarity and predictability. By replacing the 2024 framework with a rule “generally similar” to the 2021 approach, the agency contends that workers and businesses will be able to more clearly and predictably structure their relationships in ways that align with how federal courts have historically applied the economic reality test. Public statements accompanying the proposal emphasize the dual objectives of protecting entrepreneurial independence and simplifying compliance for job creators, while maintaining baseline protections for employees under the FLSA.
From an operational standpoint, the proposed rule would also extend this streamlined two-core-factor analysis beyond the FLSA to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act. Because both statutes incorporate the FLSA’s broad “suffer or permit to work” definition of employ, the same economic reality framework used to determine independent contractor status for wage and hour purposes would also govern whether a worker qualifies as an employee eligible for FMLA leave protections or covered by the MSPA’s migrant and seasonal worker safeguards. This means that a single classification methodology would apply across all three statutes, reducing the need to conduct separate analyses for wage and hour, leave, and agricultural worker protection compliance at the federal level.
3. Next Steps And Timing
The proposed rule is open for public comment through 11:59 p.m. ET on April 28, 2026. After the comment period closes, the DOL will review submissions, potentially revise the proposal in response, and, if it elects to move forward, publish a final rule in the Federal Register. No finalization date has been set, and the timeline will largely depend on the volume and complexity of comments received.
Until a final rule is issued and takes effect, the 2024 rule technically remains on the books, though the DOL has made clear that its Wage and Hour Division investigators are no longer applying the 2024 framework in enforcement actions. That disconnect between the governing regulation and the agency’s stated enforcement posture creates a period of meaningful uncertainty. Employers–particularly those with significant independent contractor workforces or operating across multiple industries–should treat the proposal as a strong signal of regulatory direction rather than an immediate change in the legal standard, and should be prepared for potential litigation risk as the transition unfolds.
4. What This Means For Businesses
If finalized, the proposal would likely be viewed as more favorable to independent contractor models than the 2024 rule, primarily because it refocuses the analysis on control and entrepreneurial opportunity as the most important indicators of being “in business for oneself.” For workers, that could mean some roles are more likely to be classified as independent contractor relationships under federal standards, which generally do not carry minimum wage, overtime, and certain recordkeeping protections under the FLSA. At the same time, the proposal is not framed as eliminating protections, but as better distinguishing true employees from bona fide independent contractors using a familiar test grounded in federal precedent.
For employers and HR teams, the practical impact is that classification decisions will likely hinge more heavily on whether the worker has real control over key aspects of work performance and a genuine ability to affect profit or loss through initiative or investment, rather than simply whether the relationship looks continuous or whether the work is important to the business. The DOL’s repeated emphasis that actual practice controls means that operational realities, including scheduling practices, exclusivity expectations, pay-setting, and how assignments are handled, will matter as much or more than contract language.
5. State Independent Contractor Tests Still Apply
Even if the rule is finalized, it will not eliminate or preempt stricter state standards for employee versus independent contractor status. Many states apply their own tests that can be more restrictive than the federal economic reality analysis, including variations of ABC-style frameworks and other state-specific multi-factor tests. As a result, employers should continue to evaluate worker classification on a jurisdiction-by-jurisdiction basis and should not assume that a more employer-friendly federal rule automatically resolves state wage-hour exposure.
6. Practical Considerations
The DOL’s February 2026 proposal would replace the 2024 independent contractor rule with a modified return to the 2021 framework that emphasizes two core factors: control and opportunity for profit or loss. For employers, the proposal is designed to create more predictable classification outcomes and to better align with the way federal courts apply the economic reality test. However, even if finalized, the rule will not displace stricter state standards, so multi-state employers must continue to manage classification risk under both federal and state law.
To read more articles like this one, subscribe to the ALERT Newsletter today!
About The Author
Luke Bickel is an attorney in Sheppard’s Labor and Employment Practice Group in the firm’s San Diego (Del Mar) office. Mr. Bickel defends employers of all sizes in matters involving discrimination, retaliation, harassment, wrongful termination, and wage and hour. He has experience defending all aspects of employment-related claims, from single plaintiff to class and PAGA matters, in state and federal court. Beyond the realm of litigation, Luke advises clients on employment issues ranging from wage and hour compliance to federal OSHA and Cal/OSHA investigations. Luke’s experience also includes helping clients obtain workplace violence restraining orders and conducting workplace investigations.
Luke is a consistent contributor to Sheppard’s Labor & Employment Law Blog, Trade Secrets Law Blog, and the California Labor and Employment ALERT.
Mr. Bickel received his law degree from the USC Gould School of Law and his undergraduate degrees from Cal Poly State University, San Luis Obispo, magna cum laude.