U.S. Department of Labor Proposes New Independent Contractor Rule

On February 26, the U.S. Department of Labor (DOL) announced a proposed rule that would once again revise how workers are classified as “employees” or “independent contractors” under the Fair Labor Standards Act (FLSA). (See DOL News Release and Proposed Rule). If finalized, the proposal would rescind the Biden‑era rule and replace it with a framework that closely resembles the DOL’s 2021 rule adopted during the first Trump administration.

Because worker classification directly affects wage obligations, benefits eligibility, tax treatment, and exposure to penalties under both federal and state law, employers should take note of this development and consider whether changes to their classification practices are warranted.

Background

Standards for determining whether a worker is an employee or an independent contractor have shifted repeatedly over the past several administrations. Most recently, the Biden‑era DOL adopted a worker‑friendly approach that applied a multi‑factor balancing test and encouraged interpretations favoring employee status. In May 2025, the DOL directed its enforcement personnel to stop applying that rule. The newly proposed regulation formally signals the Department’s intent to replace it.

The Proposed Test

Under the proposed rule, the DOL would place primary emphasis on two core factors:

1. The nature and degree of control the employer exercises over the worker’s performance of the work; and
2. The worker’s opportunity for profit or loss, based on the worker’s initiative and investment.

Additional considerations—such as the level of skill required, the permanence of the working relationship, and whether the work is part of an “integrated unit of production”—remain relevant. However, the DOL characterizes these as secondary guideposts that are “less probative” and unlikely to outweigh the two core factors when both point toward the same classification.

Notably, the analysis focuses on the work the individual actually performs, rather than tasks the worker could theoretically perform.

What This Means for Employers

At the federal level, the proposed rule would generally make it easier to classify workers as independent contractors. Independent contractors are not entitled to protections and benefits under laws such as the FLSA or the Family and Medical Leave Act (FMLA), and they are subject to different tax treatment.

That said, the DOL continues to emphasize the importance of the economic reality of the relationship. Classification decisions remain fact‑intensive and should carefully assess the degree of control exercised by the company and whether the worker is economically dependent on the business. Employers are encouraged to evaluate classification both at the outset of the engagement and periodically throughout the relationship.

State Law Still Matters

Importantly, the proposed federal rule does not override state law. Many states apply different—and often stricter—tests for determining whether a worker is an employee. In some jurisdictions, misclassification carries separate statutory penalties, including fines, in addition to liability for wages, overtime, taxes, and unemployment insurance.

As a result, employers should generally begin with the presumption that a worker is an employee unless the individual clearly qualifies as an independent contractor under both federal and applicable state law. A classification that may be defensible under the FLSA may still fail under state law.

Key Takeaways

While the DOL’s proposed rule may reduce federal barriers to independent contractor classification, the risks associated with misclassification remain substantial. Employers should review existing relationships, maintain consistent classification processes, and remain mindful of overlapping federal and state requirements as this rulemaking process unfolds.

If you have any questions about the new DOL Independent Contractor Rule, please contact the authors of this alert or the Womble Bond Dickinson attorney with whom you normally work.