The DOL wants to change how you classify independent contractors. Here's what that means for payroll.

On February 26, 2026, the DOL's Wage and Hour Division issued a Notice of Proposed Rulemaking (NPRM) to rescind the Biden-era 2024 independent contractor rule and replace it with a framework close to the 2021 rule from the first Trump administration. The proposal would also apply the same classification standard to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act — a broader reach than the 2024 rule.

The 2024 rule used a six-factor "totality of the circumstances" test with no single factor carrying predetermined weight. The proposed 2026 rule replaces that with a two-core-factor "economic reality" test where the analysis has a clear hierarchy.

One important nuance: the DOL stopped enforcing the 2024 rule in May 2025 via internal guidance (Field Assistance Bulletin 2025-1). So enforcement has already shifted — but the 2024 rule technically remains on the books until a final rule formally rescinds it.

The two core factors

Here is what each core factor evaluates, drawn from the proposed rule text:

1. The nature and degree of control over the work. This factor looks at who actually controls how work gets done.
   • Who controls scheduling, project selection, and whether the worker can take on other clients?
   • Is the employer exercising direct or indirect control over workload or schedule?
   • Is the work performed exclusively for one employer?
   • Note: requirements to comply with federal or state regulations do not constitute control under the proposed rule.
2. The individual's opportunity for profit or loss. This factor looks at whether the worker can actually gain or lose based on their own decisions.
   • Can the worker earn profits or incur losses based on their own initiative, business acumen, or investment — in equipment, helpers, or materials?
   • If the worker can only affect their income by working more hours or faster, that points toward employee status, not contractor status.
   • The investment must reflect an independent business, not equipment required by the employer.

When both core factors point to the same classification, the proposed rule holds that there is a "substantial likelihood" that classification is accurate.

Three additional factors remain part of the economic reality test, but they are explicitly subordinate. When both core factors point the same direction, these are "very unlikely" — individually or collectively — to change the outcome.

Amount of skill required. Points toward employee status if the work requires no specialized training, or if the employer provides the skills or training to do the job. Independent contractors typically bring their own skills to the engagement.

Degree of permanence. Points toward contractor status if the relationship is fixed in duration, project-based, or sporadic by design. A continuous, indefinite relationship points toward employee status. Note: seasonal work alone is not determinative.

Whether the work is part of an integrated unit of production. Points toward contractor status if the work is separable from the employer's core production process. Points toward employee status if it is a component of an integrated production operation.

When the two core factors point in different directions or are neutral, the secondary factors carry more weight in the overall determination.

Five-factor framework at a glance

Three things payroll operators need to keep in mind, regardless of how the final rule reads.

The rule isn't final. The comment period closed April 28, 2026. The DOL is now reviewing comments. A final rule is expected late summer or fall 2026, with an effective date 30–60 days after publication. Until then, the 2024 rule is technically the operative standard — even though the DOL has stopped enforcing it.

Courts aren't bound by DOL rules. Loper Bright Enterprises v. Raimondo (2024) ended automatic judicial deference to federal agency interpretations. Courts apply their own economic reality analysis. Private misclassification lawsuits can proceed under the 2024 standard even after a new rule is finalized. A favorable DOL rule does not eliminate litigation exposure.

State laws stand independently. The proposed federal rule applies to the FLSA, FMLA, and MSPA. It has no effect on state employment laws, which often impose stricter standards. Organizations with workers in multiple states need to track federal and state classification rules independently — they don't move together.

The gap between a proposed rule and a final rule is the right time to act. Here's where to focus:

• Audit current contractor classifications against the two-factor test. Ask directly: does the company control this worker's schedule, workload, or exclusivity? Can the worker genuinely profit or lose money based on their own decisions? If both core factors point clearly toward one classification, you're on solid ground. If they split or are ambiguous, the analysis gets harder — and the documentation gets more important.
• Review written agreements against actual practice. The proposed rule is explicit: actual practice matters more than contract language. A worker labeled as a contractor in an agreement who is scheduled, supervised, and exclusively assigned like an employee carries misclassification risk regardless of the paperwork.
• Document the reasoning. Classification decisions should have a paper trail. In a DOL investigation or private lawsuit, documented good-faith analysis of the economic reality factors is meaningful. Absence of documentation is not neutral — it's a liability.
• Map state-specific obligations separately. For any contractors working in states with stricter classification tests, your compliance obligations don't change just because the federal floor may shift. Review your multi-state payroll setup against the requirements in each relevant state.

The right time to check whether your system can handle reclassification cleanly is before you need to do it — not during a DOL audit or the week a final rule is published. Reclassifying a worker from contractor to employee triggers payroll tax withholding and filing changes immediately, and depending on how many workers are affected, it can also trigger ACA eligibility and reporting obligations you weren't previously tracking. Getting your systems in order now is the lower-cost version of this problem.

Note: This information is for informational purposes only and does not constitute formal tax, legal, or compliance advice. Always consult with qualified tax advisors, legal counsel, and your organization's internal teams for guidance specific to your situation. Additional regulations may apply. For the most accurate and up-to-date information, refer to official government resources and regulatory agencies.