The Department of Labor has issued a notice of proposed rulemaking to rescind its 2024 rule on employee or independent contractor classification under the Fair Labor Standards Act and replace it with a modified version of the 2021 rule. Published on February 27, 2026, this proposal seeks to address concerns about clarity and potential restrictions on legitimate independent contracting. It also aims to align interpretations across related statutes by applying the same analysis to the Family and Medical Leave Act and Migrant and Seasonal Agricultural Worker Protection Act. This development could impact millions of workers and businesses by refining how economic dependence is evaluated.
Background and Rationale
The Fair Labor Standards Act defines "employ" broadly as "to suffer or permit to work," leading courts to develop an economic reality test to distinguish employees from independent contractors. Key Supreme Court cases like United States v. Silk (1947) and Rutherford Food Corp. v. McComb (1947) established factors such as control, opportunity for profit or loss, investment, skill, permanence, and integration into production. Over decades, federal appellate courts adapted these into multifactor tests, emphasizing economic dependence.
The Department's prior guidance evolved, with the 2021 rule introducing two core factors—control and opportunity for profit or loss—for greater predictability. However, the 2024 rule shifted to a totality-of-the-circumstances approach without core factors, which the Department now views as overly ambiguous and potentially restrictive. Critics, including self-identified independent contractors, argued it complicated classifications and deterred valid contracting arrangements. The current proposal attributes related executive orders to President Trump, reflecting ongoing policy shifts.
Key Provisions of the Proposed Rule
The proposal would reinstate the 2021 rule's framework with minor modifications, focusing on economic dependence. It identifies two core factors as most probative: the nature and degree of control over work, and the worker's opportunity for profit or loss. These typically outweigh others unless exceptional circumstances apply. For instance, control favors independent contractor status if the worker sets schedules or works for competitors, but employee status if the employer dictates workload or exclusivity.
Three additional factors serve as guideposts: skill required, permanence of the relationship, and integration into production. The rule clarifies that actual practices supersede contractual possibilities, supported by cases like Saleem v. Corporate Transportation Group, Ltd. (2d Cir. 2017). It includes updated examples, such as a truck driver complying with safety rules while retaining control, illustrating independent contractor status.
The proposal extends this analysis to FMLA and MSPA, revising regulations to cross-reference FLSA guidance for uniformity. This addresses inconsistencies, like in Alexander v. Avera St. Luke's Hospital (8th Cir. 2014), where courts diverged from FLSA principles.
Implications and Perspectives
Short-term effects include one-time familiarization costs, estimated at $488 million, offset by annual savings of $683 million from reduced litigation and misclassification. Long-term, it could increase independent contracting by 1-3 percent, adding 248,000 to 744,000 workers, boosting earnings by $88 billion over a decade.
Stakeholders offer varied views. Businesses favor clarity to minimize risks, as noted in comments from prior rulemakings. Workers valuing flexibility, such as caregivers or retirees, may benefit, per studies like Chen et al. (2019). However, labor advocates worry about misclassification eroding protections, citing National Employment Law Project reports. Legal experts debate alignment with precedents, with some seeing the core factors as consistent with Silk, while others prefer the 2024 rule's broader approach.
Economic and Regulatory Impact
The proposal is deregulatory under Executive Order 14192, with net savings exceeding costs. It avoids alternatives like common law or ABC tests due to legal constraints from Supreme Court rulings. Small businesses, comprising 6.4 million entities, face minimal impacts, with per-entity savings of $374 over 10 years.
In summary, this proposal refines FLSA classification to enhance predictability while preventing misclassification. Potential next steps include public comments until April 28, 2026, followed by a final rule. Ongoing debates may involve litigation or legislative action, but the focus remains on balancing worker protections with economic flexibility.
