DOL Signals Shift Back to Two-Factor Independent Contractor Test

In late February, the Department of Labor (DOL) released a proposed rule that would roll back the 2024 Independent Contractor Rule and replace it with a revised version of the 2021 framework. The proposal would once again reshape how worker classification is determined under laws such as the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

Background

The standard for distinguishing employees from independent contractors has changed repeatedly in recent years. In 2021, the DOL introduced a rule centered on an “economic reality” test that emphasized two primary considerations. That approach was replaced in 2024 with a broader six-factor analysis resembling pre-2020 guidance. Then, in 2025, the DOL announced through a field bulletin that it would not enforce the 2024 rule, instead allowing employers to rely on earlier interpretations.

Proposed 2026 Framework

The new proposal, issued on February 26, 2026, returns to a model that prioritizes two key factors, with additional elements considered when necessary.

Primary Factors (Greatest Weight)

Control over the work
This examines how much autonomy the worker has. Indicators of independent contractor status include setting one’s own schedule, selecting assignments, working with minimal supervision, and providing services to multiple clients.

Opportunity for profit or loss
This looks at whether the worker can influence earnings through initiative, business judgment, or investment. The ability to manage expenses, scale operations, or take on financial risk supports independent contractor classification.

When both of these factors point in the same direction, the classification is more likely to be considered accurate.

Secondary Factors (Supplemental Considerations)

If the primary factors do not clearly align, three additional elements help inform the analysis:

  • Level of skill required: Specialized expertise or training not provided by the employer leans toward independent contractor status.

  • Duration of the relationship: Project-based or intermittent engagements suggest contractor status, while ongoing relationships may indicate employment.

  • Integration into the business: Work that is separable from the company’s core operations supports contractor classification; work central to the business suggests employee status.

Focus on Real-World Conditions

A key emphasis of the proposal is that classification should be based on how the relationship functions in practice—not just what is written in an agreement. The DOL underscores that the “economic reality” of the arrangement depends on day-to-day operations rather than theoretical contractual terms.

Implications for Employee Benefits

Proper classification remains critical in the benefits context. Many federal laws—including ERISA, the ACA, COBRA, HIPAA, and Section 125—apply only to employees. Misclassifying workers can lead to compliance failures, including extending benefits to ineligible individuals, risking tax advantages, incurring ACA penalties, and creating inconsistencies that expose employers to fiduciary liability.

Employer Action

Although the rule is still in the proposal stage, employers should begin preparing by:

  • Reviewing current contractor relationships with legal counsel

  • Identifying roles where control is high or financial independence is limited

  • Monitoring regulatory developments and preparing to adjust policies, procedures, and training as needed

Mark C