Millions of people across the United States operate as independent contractors rather than traditional employees. This classification may provide certain benefits for both employers and workers, such as flexibility in scheduling, management, and the types of work performed. However, employees have certain benefits and protections that are not available to independent contractors. Employers may face litigation or penalties if they are charged with misclassifying workers as independent contractors rather than employees.
The rules for determining how workers may be classified have been in flux in recent years, and they may be changing again soon. In February 2026, the United States Department of Labor announced a proposed rule that would change the analysis used to determine whether a worker should be classified as an employee or an independent contractor. This proposed rule may have far-reaching effects on businesses and workers, and it may determine how legal disputes related to worker classification may be resolved.
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What the Proposed Rule Would Do
On February 26, 2026, the Department of Labor's Wage and Hour Division issued a Notice of Proposed Rulemaking regarding employee or independent contractor status. This proposal would change the analysis that will be used to distinguish between employees and independent contractors under the Fair Labor Standards Act. This would remove the analysis put in place by a 2024 rule with a new set of standards.
The proposed rule would also ensure that the same analysis is used when distinguishing between employees and independent contractors under the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act. This would ensure that there is a single standard used across all three federal laws.
The Analysis Used to Determine Worker Classification Under the Proposed Rule
The proposed rule focuses on what is known as the “economic reality” test to determine whether a worker is economically dependent on the business that hired them, which would suggest that they are an employee, or whether the worker is genuinely running their own independent business, which would suggest that they are an independent contractor.
Under the proposed rule, there are two “core” factors that may be considered:
- Control Over Work: This factor examines how much control a business has over the way work gets done. If an employer sets schedules for a worker, assigns them to specific projects, or dictates the methods that must be used while performing work, the worker is more likely to be classified as an employee. However, if the worker has control over their own schedule, the selection of projects, and whether they can work for multiple employers, they will be more likely to be considered an independent contractor.
- Opportunity for Profits or Losses: This factor looks at whether a worker can make decisions about the type of work they perform and the investments that may be made to increase their potential profits. A person who has the opportunity to negotiate pay, manage expenses related to their work, or hire others to assist with their work is likely to be considered an independent contractor.
In situations where the two core factors conflict or do not clearly show that a person is an employee or independent contractor, three additional factors may be considered. These include the amount of skill that is required and whether work requires training that an employer does not provide, whether the relationship between the employer and worker is long-term or involves temporary or sporadic work, and whether the work a person performs is a core part of the employer’s business. These factors carry less weight than the two core factors, but they may help to resolve certain cases.
The proposed rule also states that the actual behavior of employers and workers carries more weight than what may be theoretically possible under a contract or agreement. A contract stating that a worker is an independent contractor will not necessarily apply if, the business maintains a level of control over the worker that would indicate that they are an employee.
Why This Rule Change Matters
Independent contractors make up a substantial part of the American workforce. According to the Department of Labor, there were around 11.9 million people working as independent contractors in the United States in 2023, which is the most recent year for which data is available. Independent contractors make up 7.4% of all workers. As more businesses embrace independent contractor arrangements by hiring freelancers or other types of contractors, they will need to make sure workers are classified correctly. If the rules change, some businesses could face penalties for misclassifying workers.
Business Litigation Related to Worker Misclassification
Misclassifying employees as independent contractors may expose a business to several forms of legal action. Workers who believe they were wrongly classified may file claims for unpaid minimum wage or overtime under the Fair Labor Standards Act. Misclassified workers may also pursue claims related to denied benefits, such as health insurance, retirement contributions, or family and medical leave, all of which typically apply only to employees.
Businesses may also face government audits and enforcement actions from the Department of Labor or state labor agencies, which may result in fines, awards of back pay to employees who were misclassified, and other penalties. Some employers may face class action lawsuits brought by groups of workers who were affected by misclassification. The IRS or state tax agencies may also take steps to recover unpaid payroll taxes and impose penalties in situations where workers were treated as contractors but should have been classified as employees.
Legal Help with Worker Classification Issues
Matters related to worker classification are rarely straightforward. As the rules governing independent contractors and employees shift, business owners may need to resolve disputes with workers through litigation, or they may face penalties for their failure to classify workers correctly. A business law attorney who has a strong knowledge of employment law, experience navigating business and employment regulations, and an understanding of the ways changes to the government rules affect businesses can identify areas of risk, provide guidance on changes that may need to be made, and provide representation during litigation.
