On February 26, 2026, the United States Department of Labor proposed a new rule requiring use of an “economic reality” test in analyzing employee/independent contractor classification under several federal employment laws. If adopted, the proposed rule would replace the 2024 Biden-era rule, which applied a non-exhaustive six-factor “totality of the circumstances” framework, with a framework that is very similar to the 2021 Trump-era rule.

The new proposed economic reality test is based primarily on two “core factors”:

  1. the nature and degree of control the worker has over their work, and
  2. the worker’s opportunity for profit or loss based on initiative or investment.

These are meant to determine whether a worker is in business for themself as an independent contractor or is an employee economically dependent on an employer for work.

If the individual’s status is not clear based on these factors, additional criteria may be considered, including the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is an integrated unit of production. The Department of Labor has advised that the actual practice of the worker and the potential employer is more relevant than what may be theoretically possible under a contract.

The proposed rule also clarifies that economic dependence means the dependence that a typical employee has on an employer for work rather than the amount of income the worker earns, or whether the worker has other sources of income.

Employers should be aware that this rule would only apply to certain federal employment laws, including the Fair Labor Standards Act, Family and Medical Leave Act, and the Migrant and Seasonal Agricultural Worker Protection Act. The IRS has a separate employee/independent contractor classification for tax purposes, and many states continue to use more employee-protective standards for their state employment laws.

The proposed rule is open for public comments through April 28, 2026. Employers with independent contractor arrangements should continue to monitor developments and consult with counsel to assess how the rule, if finalized, may affect their classification practices.

You can review the text of the proposed rule here: 2026-03962.pdf