Whether a particular worker should be classified as an “employee” or an “independent contractor” has been the source of significant litigation over the past several decades. Determining that a worker is an employee gives rise to a large number of protections and benefits for the worker and a corresponding increase in costs for the businesses that engage the worker; in contrast, classification as an independent contractor comes with few protections and lower benefits for the worker and can result in cost savings for the businesses that engage the worker. This dynamic creates a strong incentive for businesses to classify workers as independent contractors, if possible.
Misclassification, however, can lead to significant legal problems. State and federal class actions for unpaid wages and lack of other protections are among the largest and most expensive employment lawsuits that businesses face.
On February 26, 2026, the US Department of Labor (DOL) announced a proposed rule that would, if adopted, revise the way federal regulators view the difference between employees and independent contractors under three federal statutes: the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act. However, as we discuss later, this change may not, as it purports to, streamline or simplify the determination between employee and independent contractor.
This marks the latest in a back-and-forth effort between Republican and Democratic administrations as they attempt to adjust the lines between employees and independent contractors—and, correspondingly, either expand or contract the number of workers covered by laws administered by the DOL.
Under a rule promulgated by the Biden Administration’s DOL in 2024 (and thereafter challenged in court and then paused by the Trump Administration’s DOL in early 2025) (the 2024 Rule), the DOL would have considered the following six factors, without assigning special weight to any of them:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- Degree of permanence;
- Nature and degree of control;
- Extent to which the work is an integral part of the potential employer’s business; and
- Skill and initiative.
These factors derive from the courts’ so-called “economic reality” test—an analysis that asks whether, as a matter of economic substance, a worker is dependent on an employer for work (an employee) or is in business for himself or herself (an independent contractor).
By comparison, the proposed rule would rescind the 2024 Rule and treat two core factors as the most probative for purposes of determining whether a worker is an economically dependent employee: (1) the nature and degree of control over the work; and (2) the worker’s opportunity for profit or loss.
It would also require the consideration of three additional less probative factors: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work is part of an integrated unit of production.
The proposed rule would also allow for the consideration of any additional factors that are relevant to the determination of economic independence or dependence.
Why This May Have Little Impact
While the proposed rule change has been touted as streamlining and simplifying the determination of employee status, there are two big reasons it does not.
First, it is very limited in its scope. The proposed rule applies to only three federal statutes administered by the DOL. It does not apply to determinations under other federal laws such as the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code, or anti-discrimination laws like Title VII of the Civil Rights Act of 1964 or the Americans with Disabilities Act (ADA). More importantly, it does not apply to the state law standards that vary between jurisdictions and, within a jurisdiction, between different laws. New Jersey, for example, has very strict laws which provide that, under most statutes, a worker is an employee unless the employer can satisfy its “ABC test” by proving that:
A. The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and
B. The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
C. The individual is customarily engaged in an independently established trade, occupation, profession, or business.
New Jersey’s ABC test has itself been the subject of a proposed amendment by the New Jersey Department of Labor that would make contractor status more difficult to establish, but this and other pending agency rules have been paused by a recent executive order by new Governor Mikie Sherill to give her incoming administration an opportunity to assess whether the new rulemaking is consistent with the administration’s policies and priorities.
The Massachusetts version of the ABC test is even more tilted toward finding employee status. New York, by contrast, focuses on the degree of control exercised over the manner and means by which the work is performed. Other states have varying rules on the distinction. Nothing in the proposed federal rule purports to change state law on this issue.
Second, even within the three narrow laws to which the DOL has directed this proposed rule, the ability of a federal agency to define statutory terms is extremely limited. Most enforcement of the FMLA and the FLSA is done through private lawsuits in federal court. The US Supreme Court held in 2024 that courts, not administrative agencies, define statutory terms, and that agency interpretations are entitled to little deference by courts.
The DOL’s proposed rule does not automatically rewrite the legal standard applied by federal courts. Courts have developed their own economic reality doctrine over decades and will continue to apply controlling precedent in their respective jurisdictions.
What Employers Should Do Now
This proposed rule provides employers with a reason to review their own worker classifications to determine whether individuals treated as independent contractors have been properly classified under all the applicable rules. This is a helpful exercise that employers should perform on a regular basis.
McCarter & English LLP will continue to monitor the rulemaking process and advise clients on its implications for enforcement strategy, compliance planning, and litigation exposure. If you have questions about legal issues associated with worker classification or the potential impact of the proposed rule, please contact the authors or your attorney at McCarter & English LLP.