The U.S. Department of Labor’s Wage and Hour Division announced a proposed rule intended to clarify when a worker is an employee and when the worker may be classified as an independent contractor under the Fair Labor Standards Act (FLSA) and related federal laws.
If finalized, the proposal would rescind the department’s 2024 final rule on independent contractor classification and replace it with an employee-classification analysis similar to the one adopted by the department in 2021. The DOL said the proposal aligns with U.S. Supreme Court and federal circuit court precedent and is designed to make it easier to properly differentiate between employees who are protected by the FLSA and workers who are legitimately operating as independent contractors.
For businesses that use 1099 labor, this is a timely moment to review classification practices.
For workers, the proposal signals how the federal government may evaluate whether someone is in business for themself or economically dependent on an employer.
In announcing the proposal, Secretary of Labor Lori Chavez-DeRemer emphasized both flexibility and protection.
“The tens of millions of Americans who work as independent contractors are helping drive the Golden Age of the American economy,” said Chavez-DeRemer. “The department’s proposed rule seeks to protect these workers’ entrepreneurial spirit and simplify compliance for American job creators navigating a modern workplace, all while maintaining robust protections for employees under the Fair Labor Standards Act.”
Wage and Hour Division Administrator Andrew Rogers similarly framed the proposal as a return to long-standing legal principles and improved predictability.
“The department believes that streamlined regulations in line with Congress’s intent when it passed the Fair Labor Standards Act would improve compliance, reduce misclassification and reduce costly litigation in an economic environment that needs flexibility and innovation,” he said.
At the center of the DOL independent contractor rule proposal is an “economic reality” test. The purpose of the test is to determine whether a worker is:
The DOL’s proposal identifies and explains two “core factors” that are intended to guide the analysis.
This factor looks at who is truly directing the work. In practice, that can include who controls the schedule, the manner and means of performance and the day-to-day decision-making.
The proposed rule also focuses on whether the worker has an opportunity for profit or loss based on initiative and/or investment. In other words, can the worker increase earnings through business-like decisions such as investing in tools or equipment, marketing services, negotiating rates or taking on additional clients?
Beyond the two core factors, the proposed rule identifies other factors that may help determine whether a worker is an employee or independent contractor, including:
The DOL also advises that actual practice matters more than what is contractually stated or theoretically possible. This is a critical point for employers: a well-drafted independent contractor agreement is helpful, but it will not override the real-world facts.
The DOL’s proposed rule includes eight fact-specific examples applying the factors to real-life circumstances. For employers, these examples can be especially useful because they show how the DOL expects the test to work in practice.
If your organization relies on contractors, these examples can serve as a practical checklist for internal review.
The DOL stated that the proposed rule would apply the department’s streamlined analysis not only to the FLSA but also to:
Both laws use the FLSA’s statutory definition of “employ,” which is why the DOL is proposing a consistent approach.
Even though this is a proposed rule, it is a strong signal of where enforcement and litigation risk may trend. Practical steps to consider now include:
If you operate across multiple states, remember that federal classification standards are only one part of the compliance picture. State rules can be different and sometimes stricter.
The DOL is encouraging interested parties to submit comments. The proposed rule has a 60-day comment period that closes on April 28 at 11:59 p.m. ET.
The DOL independent contractor rule proposal would rescind the 2024 final rule and move back toward a 2021-style, streamlined economic reality analysis with two core factors and additional supporting factors. For employers, the most important takeaway is that classification should be evaluated based on actual practice, not just contract language.
If you have concerns about how the potential DOL rule change could affect you or your business, contact Zinner & Co., as our team can help assess your current situation and prepare you for potential changes.