Key Points

• DOL proposed rule rescinds Biden 2024 independent contractor rule, readopts Trump 2021 two-core-factor framework under FLSA economic realities test.
• Control over work and opportunity for profit or loss elevated as primary classification factors; skill, permanence, and integrated production unit serve as secondary guideposts.
• Rule narrows misclassification risk by excluding routine business requirements (insurance, deadlines, quality standards) from the control analysis.
• Federal rule does not preempt state independent contractor tests, including the more restrictive ABC test; businesses must satisfy both frameworks.

Overview

The U.S. Department of Labor (DOL) has issued a proposed rule that would rescind the Biden administration’s 2024 independent contractor rule and replace it with a more business-friendly version of the “economic realities” test under the Fair Labor Standards Act. The proposed rule would also govern classification under the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, though it would not be binding on other federal laws, including the National Labor Relations Act. Nor does it impact classification rules under many analogous state laws. If finalized, the DOL estimates the rule could result in between 250,000 and 750,000 new independent contracting relationships.

What the Proposed Rule Would Do

The proposed rule establishes a “core factors” framework that prioritizes two primary considerations: (1) the nature and degree of the company’s control over the work, and (2) the worker’s opportunity for profit or loss. If both core factors point toward the same classification (either employee or independent contractor), there is a substantial likelihood that the classification is correct. The following three additional “guidepost” factors serve as supplementary considerations, but carry less weight in the analysis:

• the amount of skill required,
• the degree of permanence of the working relationship, and
• whether the work is part of an integrated unit of production.

The proposed rule emphasizes that the amount of control a company theoretically could exercise over a worker is less relevant than the amount of control it actually does exercise. The rule also clarifies that requiring a worker to carry insurance, meet contractual deadlines or quality control standards, or satisfy similar common business terms does not constitute control indicative of an employment relationship.

How the Proposed Rule Differs from the Biden-Era 2024 Rule

The proposed rule departs from the Biden administration’s 2024 rule in several significant ways:

The Biden rule adopted a six-factor “totality of the circumstances” test in which no one factor was weighted more heavily than others. The new, proposed rule instead establishes a clear hierarchy, elevating the control and opportunity-for-profit-or-loss factors as “core factors” that carry greater weight.

Under the Biden rule, the investment analysis compared the worker’s investment to the employer's investment. The new, proposed rule considers only the worker’s investment without comparison to the employer’s, reflecting the DOL’s view that comparing relative investments serves only to highlight their respective sizes and resources and sheds little light on economic dependence.

The Biden rule used an “integral part” analysis, asking whether work is “critical, necessary, or central” to the employer's principal business. The new, proposed rule replaces this with an “integrated unit of production” analysis, which is a narrower inquiry that asks whether the work is segregable from the employer’s production process.

Relationship to the Trump Administration’s 2021 Rule

The proposed rule is essentially a readoption of the Trump administration’s 2021 rule with only minor modifications. The DOL explicitly states it is rescinding the 2024 Biden Rule and readopting the 2021 Rule with a few updates. The key structural elements are identical: the same two-core-factor framework and the same three additional guidepost factors. The modifications are minimal. The DOL’s proposed rule also dedicates extensive analysis to past court decisions, concluding that this standard formalizes how courts have been deciding independent contractor cases across administrations for decades.

What Comes Next?

The proposed rule will go through a 60-day comment period before it can be finalized, and it could be revised further in the process. However, even after finalization, the Supreme Court’s decision in Loper Bright means that any new DOL guidance may not be entitled to judicial deference, adding another layer of uncertainty.

What Businesses Should Do Now

There is no need for businesses to sound the alarms, but proactive steps are advisable. Businesses should resist the temptation to view this rule as a green light for reclassifying workers, as the DOL’s more contractor-friendly test is unlikely to dramatically change the overall risk calculus.

Businesses should focus on the two core factors by structuring contractor relationships to ensure the worker controls key aspects of the work, including scheduling, project selection, and the ability to work for others, and that the worker has a genuine opportunity for profit or loss through initiative or investment.

Businesses should also be alert to common red flags for misclassification, including mandatory or set schedules, exclusivity requirements, non-compete clauses, long tenure, and providing contractors with company badges, email addresses, or managers. A written agreement labeling someone as an independent contractor is not dispositive, and the economic reality of the working relationship matters more than contractual labels.

Don’t Forget State Law

Federal law is only half the equation. Many states apply their own classification tests, including the more restrictive “ABC test,” to determine whether an employment relationship exists. Businesses must comply with both state and federal requirements, and states are ramping up enforcement efforts, including criminal prosecutions in some jurisdictions.

Risks of Misclassification

The stakes for misclassification remain significant. Potential exposure includes back pay spanning up to three years under the FLSA, attorneys’ fees, liquidated damages that may double liability under federal law and potentially more under state law. Claims are also frequently alleged as class actions under state law or collective actions under federal law (or a combination of both).

Looking Ahead

This rule will almost certainly face legal challenges that could delay or prevent enforcement. After five years of regulatory uncertainty about independent contractor classification, the question of who qualifies as an independent contractor remains far from settled. Businesses should monitor the comment period and any subsequent litigation closely while ensuring their current contractor relationships can withstand scrutiny under both the proposed federal framework and applicable state law.

For more information about class action wage-and-hour lawsuits and related matters, contact co-authors Nikki H. Howell at nhowell@foxrothschild.com or another member of the firm’s Labor & Employment Department.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.