DOL Proposes New Independent Contractor Rule: What Employers Need to Know

Late last month, the U.S. Department of Labor (DOL) announced a proposed rule that would rescind the agency’s 2024 independent contractor regulation and replace it with an employee-classification framework similar to the rule originally adopted in 2021.

The proposed rule was published in the Federal Register on February 27, 2026, and is subject to a 60-day public comment period ending April 28, 2026.

If finalized, the rule would once again reshape how employers assess whether a worker qualifies as an employee or an independent contractor under the Fair Labor Standards Act (FLSA).

Why Classification Matters

Worker classification remains one of the most consequential compliance issues facing employers. Under the FLSA, employees are entitled to minimum wage, overtime compensation, and other statutory protections. Independent contractors are not .

Misclassification can expose employers to significant financial risk, including back wages, penalties, tax liabilities, and costly litigation. As federal standards continue to evolve, employers must remain vigilant to ensure their classification decisions align with current regulatory guidance.

A Shifting Regulatory Landscape

The DOL’s approach to independent contractor classification has changed multiple times in recent years:

• 2021 Rule: Emphasized two “core factors” in assessing economic dependence.

• 2024 Final Rule: Rescinded the 2021 framework and reinstated a six-factor, totality-of-the-circumstances economic realities test.

• 2025 Enforcement Shift: While reviewing the 2024 rule amid legal challenges, the DOL’s Wage and Hour Division announced it would no longer apply the 2024 analysis in investigations. Instead, it reverted to principles outlined in Fact Sheet #13 and Opinion Letter FLSA2019-6.

The newly proposed 2026 rule signals yet another pivot in the agency’s interpretation of employee status under the FLSA.

Key Elements of the Proposed Rule

The proposed regulation would apply an economic reality test to determine whether a worker is truly in business for themselves (independent contractor) or economically dependent on an employer (employee).

Two Core Factors

The proposal highlights two primary considerations:

1. The nature and degree of control over the work; and

2. The worker’s opportunity for profit or loss based on initiative and/or investment.

These factors would carry greater weight in the analysis.

Additional Considerations

The DOL also identifies supplementary factors, including:

• The level of skill required for the work;

• The permanence of the working relationship; and

• Whether the work is part of an integrated unit of production .

Importantly, the proposed rule emphasizes that actual practice - how the relationship functions in reality - matters more than contractual language or theoretical possibilities.

To provide practical guidance, the DOL includes eight fact-specific examples illustrating how the factors would apply in real-world scenarios.

The department states that the proposal aligns with U.S. Supreme Court and federal appellate precedent and is intended to clarify the distinction between employees entitled to FLSA protections and bona fide independent contractors. Notably, the rule would also affect classification standards under the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act, both of which rely on the FLSA’s definition of “employ".

Employer Action Steps

With the public comment period closing on April 28, 2026 , employers should:

• Monitor developments and potential revisions during the comment process;

• Evaluate current independent contractor relationships under both federal and applicable state standards;

• Review contracts, operational practices, and managerial oversight to ensure alignment with evolving economic realities guidance; and

• Consult legal counsel to mitigate exposure and proactively address risk areas.

Given the frequency of regulatory shifts in this area, classification strategy should not be static. Employers must treat it as an ongoing compliance function rather than a one-time determination.

How Thrive PEO Helps Employers Navigate Classification Risk

Independent contractor classification is no longer a simple HR decision - it is a compliance, financial, and operational risk issue. At Thrive PEO, we help organizations stay ahead of regulatory change through proactive guidance, risk assessments, and structured workforce strategies that align with federal and state law.

Our team works alongside employers to review worker classifications, strengthen documentation practices, and implement policies designed to reduce exposure while preserving operational flexibility. In a regulatory environment that continues to shift, Thrive PEO provides the expertise, infrastructure, and strategic partnership employers need to move forward with confidence.

Ready to thrive? Contact us today at: (918) 794-2200.

Thrive PEO is a full-service Professional Employer Organization (PEO); and provides a customized suite of human resource solutions designed to help SMBs: lower employee benefit costs, increase productivity and profitability, and reduce employer liabilities and business risks. Services cover the entire employee lifecycle, and include: payroll and tax administration, employee benefits and related administration, HR and compliance, workers’ compensation insurance, retirement plans and more – all delivered via market-leading HRIS technology.