Labor Department Proposes Another Rewrite of the Contractor Test

Few employment questions change as often as the federal test for independent contractors. The Labor Department adopted one approach in 2021, replaced it in 2024, and in February 2026 proposed replacing it again. For employers that rely on freelancers, drivers, consultants or other contract workers, the shifting rules make it important to understand what stays constant.

What the proposal would do

On February 26, 2026, the department's Wage and Hour Division announced a proposed rule that would rescind its 2024 final rule on independent contractor classification under the Fair Labor Standards Act. The proposal would replace it with an analysis similar to the one the department adopted in 2021.

Under the proposal, the department would apply an economic reality test to decide whether a worker is in business for themselves or is economically dependent on an employer. It would also identify additional factors, including the amount of skill the work requires, the permanence of the working relationship and whether the work is part of an integrated unit of production.

Labor Secretary Lori Chavez-DeRemer described the proposal as a way to help workers and employers understand the distinction more easily. The department said the approach is consistent with Supreme Court and federal appeals court precedent.

How the approaches differ

The 2024 rule used a totality of the circumstances test with six factors and no single factor given priority. The 2021 approach, which the proposal would largely restore, identified two core factors as most important. Those are the nature and degree of control over the work and the worker's opportunity for profit or loss based on initiative or investment. When both core factors point the same way, they usually decide the outcome.

Employers often read the 2021 approach as more predictable, because it tells them which facts matter most. Worker advocates have argued that the 2024 approach better captured the realities of economically dependent workers. The final rule, once issued, will settle the federal standard until the next change.

What does not change

Regardless of the federal test, several facts consistently push a worker toward employee status. The company sets the worker's schedule. The company provides tools, equipment and training. The worker cannot hire helpers or work for competitors. The work is central to what the business sells. The relationship continues indefinitely rather than for a defined project.

Other facts point toward contractor status. The worker negotiates rates, sets their own hours, uses their own equipment, serves multiple clients, carries their own insurance and can make or lose money based on business decisions. No single fact decides the question, but a worker who looks and works like an employee will usually be treated as one.

Federal rules are only one layer

The Fair Labor Standards Act governs minimum wage and overtime. Other laws use their own tests. The Internal Revenue Service applies a common law control test for tax purposes. State unemployment insurance agencies and workers compensation systems often apply stricter standards. A worker can be a contractor under one law and an employee under another.

That is why classification audits look at every applicable test, not only the federal wage and hour rule. A Kentucky employer with contractors in several states may face several different standards for the same role.

Practical steps for employers

Start with an inventory of every contractor relationship, including what the person does, how long they have worked for the company, how they are paid and who controls the details of the work. Flag anyone who works set hours, reports to a supervisor or performs the same tasks as employees.

Next, review contracts. A written agreement calling someone an independent contractor does not decide the question, but a contract that reflects real independence supports the classification. Make sure the agreement matches practice.

Finally, decide which relationships should become employment. Converting a long-term contractor to an employee can carry costs, but it removes the risk of back wages, taxes and penalties. Employers reviewing classification should also check exempt status for salaried staff, explained in our overtime threshold guide, and restrictive covenants, covered in our noncompete enforcement report.

Contract workers also raise verification questions. Employers do not complete Form I-9 for genuine independent contractors, but a misclassified worker is an employee for every purpose, including employment verification. That overlap is one more reason to get classification right, as our Form I-9 guide explains.