On February 26, 2026, the U.S. Department of Labor (DOL) issued a proposed rule for determining employee or independent contractor status under the Fair Labor Standards Act (FLSA). If adopted, the proposed rule would rescind the DOL’s 2024 Rule—which utilizes a complex six-factor “totality of the circumstances” test—and replace it with an “economic reality” test similar to the 2021 Rule, which focused on “control” and “opportunity for profit or loss.” To learn more about the impact on your organization, review these highlights of the 2024 Rule and potential changes under the DOL’s proposed rule.
2024 Rule: Six-Factor “Totality of the Circumstances” Test
Effective since March 11, 2024, the 2024 Rule analyzes six factors in light of the “totality of the circumstances” to determine worker status:
- Opportunity for profit or loss depending on managerial skill.
- Investments by the worker and potential employer.
- Degree of permanence of the work relationship.
- Nature and degree of control.
- Extent to which the work performed is an integral part of the potential employer’s business.
- Skill and initiative.
For additional information on the 2024 Rule, see HERE.
Current Status of the 2024 Rule
On May 1, 2025, the DOL issued a field assistance bulletin announcing it will no longer apply the 2024 Rule in current enforcement matters and will instead rely on the less stringent “economic reality” test outlined in Fact Sheet #13. However, the DOL noted that the 2024 Rule remains effective in the context of private litigation. For additional information on the DOL’s announcement, see HERE.
Proposed Rule: Return to “Economic Reality” Test
Two Core Factors
If adopted, the proposed rule would consider five factors to evaluate worker status, with a focus on two core factors that carry greater weight in the analysis:
- Nature and degree of control.
- Opportunity for profit or loss based on initiative or investment.
Additional “Guidepost” Factors
The three remaining factors “serve as additional guideposts but are less probative in the analysis”:
- Amount of specialized skill or training required for the work.
- Degree of permanence of the working relationship.
- Whether the work is part of an integrated unit of production.
The proposed rule states that the “guidepost” factors “are very unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors when together they point toward the same classification[,]” and “[i]n some cases, they may not be probative at all.”
Key Provisions of the Proposed Rule
The proposed rule also:
- Clarifies that the ultimate inquiry is whether workers are in business for themselves or are economically dependent on an employer for work.
- Emphasizes that “economic dependence does not focus on the amount the worker earns or whether the worker has other sources of income.”
- Advises that “the parties’ actual practice is more relevant than what may be contractually or theoretically possible.”
- States that certain requirements do not constitute “control,” including requiring a worker to comply with legal obligations, satisfy health and safety standards, carry insurance, meet deadlines or quality control standards, or satisfy other typical contractual terms.
- Seeks comments on potential “guidance that the control factor should be considered first, followed— if necessary—by the opportunity for profit or loss factor and the three other factors.”
- Provides fact-specific examples illustrating how the factors may be analyzed.
- Extends application of the “economic reality” test to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, both of which use the FLSA’s statutory definition of “employ.”
Employer Takeaways
The public comment period closes on April 28, 2026, and the proposed rule could be finalized later this year. While the proposed rule may be revised, no substantive changes are expected. In the meantime, employers should remain mindful that the 2024 Rule still applies in private litigation. To mitigate risk and prepare for potential changes, employers should consider the following:
- Evaluate current work arrangements to ensure proper worker classification under all tests;
- Update independent contractor agreements to reflect business independence (minimize control; enhance opportunities for profit or loss);
- Ensure actual practices align with contractual terms;
- Train appropriate personnel on limitations of “control”;
- Audit high-risk roles, including long-term contractors and workers integrated into core business operations; and
- Ensure compliance with stricter worker classification standards governing state-level claims
If you have any questions related to the proposed rule or need assistance reviewing independent contractor agreements, policies, and/or practices, please reach out to the NFC Attorney with whom you typically work or call us at 973.665.9100 or 619.292.0515.