The U.S. Department of Labor has proposed a new rule that would restore the 2021 federal framework for classifying independent contractors, potentially reshaping how businesses determine whether workers are employees or contractors.
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The proposal would rescind the 2024 worker classification rule and reinstate a modified version of the earlier “core factor” economic reality test used during the first administration of Donald Trump.
Legal analysts say the change could make federal contractor classification more predictable for companies that rely heavily on independent workers.
The proposed rule centers on the long-established economic reality test, which determines whether a worker is economically dependent on an employer or operates independently as a business.
Under the proposal, two factors would again carry greater weight in determining classification:
These “core factors” would play a primary role in classification decisions, while additional considerations—such as skill level, permanence of the working relationship and integration into a company’s operations—would serve as supporting elements.
If both primary factors point in the same direction, the analysis would likely lead to a consistent classification outcome.
The proposed rule would reverse a 2024 regulation adopted during the administration of Joe Biden, which established a broader six-factor “totality of the circumstances” test.
Under that approach, no single factor carried more weight than others. Critics argued that the framework made it harder for businesses to predict how regulators or courts might classify workers.
The new proposal attempts to restore a more structured evaluation process by prioritizing the two core factors while still allowing regulators to consider other elements of the employment relationship.
The Department of Labor emphasized that worker classification should be based primarily on actual working conditions rather than contractual language.
Even if a contract describes a worker as an independent contractor, regulators will examine how the relationship functions in practice. This includes evaluating whether workers control their schedules, pricing, tools, and business decisions.
The proposal also includes several detailed examples intended to illustrate how the rule would apply to real-world situations across various industries.
If finalized, the proposed rule could simplify classification decisions for businesses that use contractor-based models, including sectors such as transportation, construction, consulting and digital services.
Companies may find it easier to justify contractor classifications when workers operate with substantial independence and have the ability to generate profits through their own initiative.
However, legal experts note that the classification process will remain highly fact-driven and requires careful documentation of working relationships.
Employers are encouraged to periodically review contractor arrangements to ensure they align with federal standards and evolving business practices.
While the proposal could standardize classification under federal labor statutes such as the Fair Labor Standards Act and the Family and Medical Leave Act, businesses must still navigate a patchwork of state labor laws.
Some states use stricter tests—such as the ABC test—which often classify workers as employees unless companies can prove otherwise.
As a result, a worker considered an independent contractor under federal law could still be classified as an employee under state regulations.
Misclassification can expose businesses to significant financial risks, including unpaid wages, overtime claims, tax liabilities and potential class-action lawsuits.
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The proposed rule was published in the Federal Register on Feb. 27, 2026, and will remain open for public comment until April 28, 2026.
During this period, employers, labor organizations and industry groups can submit feedback on how the proposed framework might affect their sectors.
After reviewing public comments, the Department of Labor will determine whether revisions are needed before issuing a final rule.
The proposal reflects a broader policy debate in the United States over how gig workers, freelancers and other nontraditional employees should be classified.
Advocates for stronger worker protections argue that broader definitions of employment help ensure access to benefits, minimum wages and overtime protections. Business groups, meanwhile, say clearer contractor standards provide flexibility and support innovation in modern labor markets.
As the rulemaking process continues, the final decision could significantly influence employment practices across industries that rely on flexible workforce models.
Originally reported by JD Supra.
