On February 26, 2026, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) that could significantly reshape how workers are classified as employees or independent contractors under key federal laws, including the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).
If finalized, the proposal would roll back the 2024 rule and reinstate the more employer-friendly 2021 independent contractor framework introduced during the prior administration.
What Is Changing?
The proposed rule returns to the “economic reality” test, which evaluates whether a worker is truly in business for themselves or economically dependent on an employer.
Under this framework, two core factors carry the most weight:
- Control: The degree to which the worker controls how the work is performed
- Opportunity for Profit or Loss: Whether the worker can influence earnings through initiative or investment
If these factors do not clearly determine classification, three additional considerations may apply:
- Skill required for the work
- Permanence of the working relationship
- Whether the work is part of an integrated business operation
The DOL also emphasizes that real-world working conditions—not just written contracts—will drive the analysis, and includes multiple examples to illustrate how the test applies in practice.
Why This Matters for Businesses
The proposed shift signals a move toward a more flexible, business-friendly federal standard, potentially making it easier to classify workers as independent contractors. For many businesses, this could mean:
- Reduced labor and compliance costs
- Increased operational flexibility
- Lower exposure to certain employment-related liabilities
This is particularly relevant as freelance, gig, and project-based work continue to expand across industries.
Important Considerations for California Employers
Despite the potential federal shift, California businesses should proceed with caution.
Federal rules do not override stricter state standards, and courts are no longer required to defer to agency interpretations following the U.S. Supreme Court’s 2024 decision in Loper Bright Enterprises v. Raimondo. This means courts may independently interpret worker classification rules, even if the DOL finalizes its proposal.
As a result, businesses—especially those relying on independent contractors, subcontractors, or franchise models—face a complex legal landscape where federal flexibility may conflict with state-level restrictions.
What Businesses Should Do Now
With the comment period open through April 28, 2026, the rule is not yet final—but businesses should begin preparing now.
Key steps include:
- Review current contractor relationships for compliance risks
- Evaluate control and independence factors in day-to-day operations
- Align contracts with actual business practices
- Monitor federal and state developments closely
Proactive planning can help reduce exposure to costly misclassification claims and ensure your workforce structure supports long-term growth.
Final Takeaway
The DOL’s proposal reflects an ongoing shift in how worker classification is approached at the federal level. While it may offer more flexibility, it also introduces new complexity, especially for businesses operating in states like California.
Understanding the difference between what the law says and how it is applied in practice will be critical moving forward.
