Drafted by Noemie Tabiou, Extern
Under the Supervision of Stephanie Messas, Esq.
Significant changes are occurring in the employment sector. Federal guidance on independent contractor classification is currently in transition and is expected to change. As of the date of this document, the proposed rule submitted on January 7, 2026, is under review. These changes will impact both businesses and the workforce.
Under the 2024 Independent Contractor Rule (Final Rule, 89 Fed. Reg. 1638, effective March 11, 2024) issued by the U.S. Department of Labor (DOL), an independent contractor is a worker who, as a matter of economic reality, is in business for themselves rather than economically dependent on an employer for work. The rule establishes a six-factor “totality of the circumstances” economic reality test to determine whether a worker is truly independent or is economically dependent on an employer and therefore an employee under the Fair Labor Standards Act (FLSA). The six factors are: (1) opportunity for profit or loss depending on managerial skill; (2) investments by the worker and the employer; (3) degree of permanence of the work relationship; (4) nature and degree of control; (5) extent to which the work performed is an integral part of the employer’s business; and (6) skill and initiative. No single factor is dispositive, and all factors must be considered in the totality of the circumstances. As such, an independent contractor is not considered an employee for FLSA purposes and is generally subject to self-employment tax.
If the individual performs services that can legally be controlled by an employer and/or an employer-employee relationship exists under the economic reality test, regardless of how such relationship is labeled by the parties, then the person must be classified as an employee rather than an independent contractor.
The determination of whether a worker is classified as an employee or an independent contractor is critical. Depending on the classification, the individual will be subject to different tax regimes (income tax, Social Security taxes, and Medicare taxes) and protections (such as minimum wage and overtime requirements), and the employer will have distinct legal obligations and liabilities. Misclassification can expose employers to liability for unpaid wages, taxes, and penalties under federal law, including potential remedies under the FLSA (including back wages, liquidated damages, and attorney’s fees), IRS standards (including back taxes, interest, and penalties under 26 U.S.C. 3509), state wage and hour laws, and potential criminal penalties in cases of willful misclassification.
As it stands, the 2024 rule made it more difficult to classify workers as independent contractors at the federal level under the FLSA. While this situation can benefit workers and grant them a higher standard of protection, many employers and business groups challenged this rule in federal court due to the resulting added compliance burdens and its complex application.
On January 7, 2026, the U.S. Department of Labor (DOL) submitted a proposed rule on the matter to the White House for review. During this period of transition, the DOL has announced a non-enforcement policy regarding the 2024 rule pending the completion of the rulemaking process. However, the 2024 rule remains legally effective, and private plaintiffs and state enforcement agencies may still bring claims under it. Legal commentators anticipate that the new independent contractor rule may substantially resemble the 2020 Independent Contractor Rule (Final Rule, 86 Fed. Reg. 1168, effective March 8, 2021, subsequently rescinded). However, the content of any final rule remains uncertain until published.
Under the prior Trump-era rule, courts and regulators focus on two main factors:
- The nature and degree of control over the relevant work, and
- The individual’s opportunity for profit or loss,
as key indicators of whether a worker is economically dependent on an employer, with other factors also considered as appropriate. This framework has historically provided more predictability for employers in classifying independent contractors.
Under the 2020 rule, if the two core factors both pointed clearly toward the same classification, then the analysis would likely yield that classification, though other factors could still be considered if they indicated a different classification. In more complex cases, courts would consider more factors. Many pro-business groups argue that this rule offered clearer guidelines and was more easily applicable than its successor. The 2024 rule’s multifactor test, which considers all factors without assigning predetermined weight to any subset, may result in more workers being classified as employees compared to the 2020 rule’s framework that emphasized two core factors.
This potential return to a more traditional test would provide businesses with greater leeway and flexibility to classify workers as independent contractors. This is particularly important for industries that rely on temporary, seasonal, or project-based workers.
As of the date of this document, the 2024 rule has not been formally rescinded and remains legally effective. Courts are not bound by the DOL’s regulatory interpretations and will conduct their own analysis of employment relationships under the FLSA’s statutory standard, though they may give deference to agency interpretations under applicable administrative law principles (see Skidmore v. Swift & Co., 323 U.S. 134 (1944)). Several states, including California (which applies the “ABC test” under AB 5 and Dynamex Operations West, Inc. v. Superior Court), New Jersey, Massachusetts, and others, impose stricter tests for worker classification
DISCLAIMER: This document is provided for informational purposes only and does not constitute legal advice. The information contained herein may become outdated as regulations change. Employers should consult with qualified legal counsel before making worker classification decisions, as misclassification can result in significant legal and financial liability. This document was prepared as of February 2, 2026, and reflects the regulatory status as of that date. that may classify workers as employees even when they would be independent contractors under federal law. Employers must comply with both federal and state law, and where state law is more protective of workers, state law will govern the employment relationship under state statutes. Employers should consult with legal counsel regarding the specific classification requirements in each jurisdiction where they engage workers.
SOURCES AND REFERENCES:
Primary Sources:
– Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 89 Fed. Reg. 1638 (Jan. 10, 2024) (2024 Final Rule)
– Independent Contractor Status Under the Fair Labor Standards Act, 86 Fed. Reg. 1168 (Jan. 7, 2021) (2020 Final Rule, rescinded)
– Fair Labor Standards Act, 29 U.S.C. 203(e)(1) (defining “employee”)
– 26 U.S.C. 3509 (IRS worker classification provisions)
Secondary Sources:
– https://hrcenter.us.brightmine.com/news/independent-contractor-rule-is-moving-forward/54704/ (last accessed Feb. 2, 2026)
– https://ogletree.com/insights-resources/blog-posts/trump-administration-to-rescind-biden-era-independent-contractor-rule-what-could-a-new-rule-look-like/ (last accessed Feb. 2, 2026)
– https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined (last accessed Feb. 2, 2026)
– https://news.bloomberglaw.com/daily-labor-report/punching-in-trump-independent-contractor-rule-making-a-comeback-31 (last accessed Feb. 2, 2026)