As we previously discussed, on February 26, 2026, the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) announced a Notice of Proposed Rulemaking to revise its analysis for distinguishing between employees and independent contractors under the Fair Labor Standards Act (FLSA).
The DOL is proposing to rescind the 2024 rule on that topic and replace it with a streamlined analysis that is designed to provide greater clarity and predictability to workers and employers alike. For the first time, the DOL is proposing the this analysis should apply to the Family and Medical Leave Act (FMLA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA), both of which incorporate the FLSA’s relevant definitions.
Background on the 2021 Federal Independent Contractor Rule
As we blogged about five years ago, the standard in the 2021 rule to determine a worker’s classification was the economic realities standard. It was used to determine whether an individual should be treated as an employee or an independent contractor by looking to the reality of a person’s economic status.
The rule focused on a multi-factor assessment including two important factors in determining worker classification: (1) the level of control over the worker and (2) the “worker’s opportunity for profit or loss based on initiative and/or investment.”
If the two factors don’t conclusively establish someone is an employee versus an independent contractor, then the DOL shifted its focus to several additional factors, such as
- How much skill is required for the work,
- Whether the working relationship is permanent, and
- Whether the work performed is “part of an integrated unit of production”
The old rule emphasized that the focus was on the actual practice between the worker and the potential employer rather than any contract between the parties or what might theoretically be possible.
Background on the 2024 Federal Independent Contractor Rule
We previously discussed the 2024 rule in a post from last year, where we predicted the possibility that the DOL would rescind the enforcement of the 2024 rule. This Biden-era rule replaced the 2021 rule issued during the first Trump Administration.
Under the 2024 rule, six non-exclusive factors are considered:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the employer
- Degree of permanence of the working relationship
- Nature and degree of control over the work
- Whether the work is integral to the employer’s business
- Skill and initiative required for the work
The DOL emphasized in the 2024 rule that no one factor is determinative. Rather, the rule focused on the totality of the circumstances and whether the worker is economically dependent on the business or, rather, is running her own business.
The DOL emphasized that actual practice often is more relevant to the economic dependence inquiry than contractual possibilities and that in some circumstances, contract rights can be a better indicator of economic reality than the actual practices of the parties.
The principal flaw of the 2024 rule, as the DOL now contends, is it failed to provide a sufficient distinction between independent contractors and employees under the FLSA that would result in predictable outcomes. The DOL also is concerned that the 2024 rule may make it too hard to classify a worker as independent contractor under the law.
Where Does This Leave Us in 2026?
If you’re a business owner, manager, or HR professional, this is the practical takeaway: worker classification is still a moving target.
In 2026, the U.S. Department of Labor proposed stepping away from the 2024 rule and returning to the 2021 framework. That framework uses the economic reality test to decide whether a worker is an employee covered by the Fair Labor Standards Act, or a true independent contractor.
At its core, the question is simple: Is the worker economically dependent on your business, or is the worker really in business for themselves?
If the worker is economically dependent on the company for work, the worker is more likely an employee. If the worker is operating an independent business, the worker is more likely an independent contractor.
The DOL says this approach is intended to bring more predictability and clarity for businesses and workers alike.
The Federal Independent Contractor Test in 2026
Under the proposed federal rule, the DOL uses a five-factor economic reality test.
Not every factor carries the same weight. Two of the factors are considered the most important, or the “core” factors.
Just as important, no one factor automatically decides the issue. The full relationship still matters. And the DOL makes clear that what actually happens in practice matters more than what a contract says could happen in theory.
That last point matters a lot.
You can have a beautifully drafted independent contractor agreement. But if the real working relationship looks like employment, that contract likely won’t save you.
The Fed’s Five Factors
The DOL’s proposed test looks at these five non-exclusive factors:
1. Nature and Degree of Control
2. Opportunity for Profit or Loss
3. Amount of Skill Required
4. Degree of Permanence of the Relationship
5. Whether the Work Is Part of an Integrated Unit of Production
The Two Most Important Factors
The DOL says these two factors carry the greatest weight:
Nature and Degree of Control
Opportunity for Profit or Loss
If both of these point in the same direction, there’s a strong chance that’s the right classification. If they point in different directions, the other three factors become more important.
So let’s get to it.
Factor One: Who Controls the Work (and Why Control Matters)
This is one of the biggest worker classification issues under federal law.
A worker is more likely to be an independent contractor if the worker controls important parts of the job, such as:
- setting their own schedule
- choosing which projects to take
- deciding how to perform the work
- working for other businesses, including competitors
A worker is more likely to be an employee if the company controls important parts of the job, such as:
- setting the schedule
- controlling the workload
- requiring exclusive service
- closely directing how the work gets done
What Doesn’t Automatically Count as Control
The DOL also recognizes that some requirements are normal in a business-to-business relationship.
For example, requiring a worker to:
- follow the law
- meet health and safety standards
- carry insurance
- meet deadlines
- satisfy quality standards
does not automatically make that worker an employee.
That’s important for employers. Setting reasonable business expectations is not the same as exercising employer-level control.
Factor Two: Can the Worker Make a Profit or Suffer a Loss?
This is the other core factor.
A worker is more likely to be an independent contractor if the worker can affect their own profit or loss through business judgment. That could include:
- using managerial skill
- deciding whether to hire helpers
- investing in equipment or materials
- making decisions that increase profit or create loss
A worker is more likely to be an employee if the only way they can make more money is by working more hours or working faster.
In other words, if the worker has no real business upside or downside, that weighs against independent contractor status.
Factor Three: How Much Specialized Skill Is Required?
A worker is more likely to be an independent contractor if the job requires specialized skill or training that your business does not provide.
A worker is more likely to be an employee if:
- the work requires little specialized skill, or
- the worker depends on your company for the training needed to do the job
This factor is less about whether the person is talented and more about whether they bring an independent, specialized business skill to the relationship.
Factor Four: Is the Relationship Temporary or Ongoing?
A worker is more likely to be an independent contractor if the relationship is designed to be:
- project-based
- definite in duration
- sporadic
- limited to specific time periods
A worker is more likely to be an employee if the relationship is:
- ongoing
- indefinite
- continuous
That said, seasonal work by itself does not automatically create independent contractor status.
Factor Five: Is the Worker Part of Your Production Process?
A worker is more likely to be an independent contractor if their work is separate from your company’s production process.
A worker is more likely to be an employee if their work is part of your business’s integrated process for delivering a good or service.
The key point here is that this factor is not about whether the worker’s role is important to your business. It’s about whether the work is built into how your business actually operates.
What New York Employers Need to Know
If you operate in New York, don’t stop at federal law, because New York uses its own stricter standard. In New York, the central question is usually this:
How much supervision, direction, and control does the employer exercise over the worker?
That means New York employers need to be especially careful. Even if a worker might arguably qualify as an independent contractor under a federal analysis, that doesn’t mean the worker will qualify under New York law.
New York Looks at the Real Relationship
Like federal law, New York looks at the actual relationship, not just the label the parties use.
Calling someone an independent contractor does not make it so.
New York courts look at the full picture, including the degree of:
- supervision
- direction
- control
- independence in performing the work
Generally speaking, an employee works under the employer’s direction about the manner, means, and results of the work.
An independent contractor, by contrast, is typically operating their own business and is free from that level of control.
New York’s Separate Business Entity Test
New York also uses a separate business entity test in some circumstances. This is a tough standard.
To be treated as a legitimate independent business entity rather than an employee, the worker must satisfy a detailed multi-part test. That includes factors such as whether the worker:
- is free from direction and control
- sets their own hours
- can work for others, including competitors
- advertises their services
- carries business insurance
- maintains their own business location
- offers services to the public
- has a real risk of profit or loss
- makes a significant investment in facilities or equipment
- pays their own expenses
- files taxes as a business entity
The big issue for employers is this: if one required element is missing, reclassification can become a real risk.
Why Worker Misclassification Is Such a Big Deal
Misclassifying workers can be expensive. It can expose your business to:
- wage and hour liability
- unpaid overtime claims
- unemployment contributions
- workers’ compensation issues
- tax audits
- civil lawsuits
- agency investigations
For New York employers, the risk is even greater because you have to comply with both federal and state law, and New York may be more demanding.
What Small Business Owners and HR Should Do Now (Don’t Wait for a Claim!)
This isn’t an area where you want to guess.
If you use independent contractors, now is a good time to review those relationships carefully. Look beyond the contract and ask what is really happening day to day.
Focus on the real facts and ask questions like:
- Who sets the worker’s schedule?
- Can the worker take jobs from others?
- Does the worker have a real chance for profit or loss?
- Is the relationship project-based or ongoing?
- Is the worker part of the company’s regular operations?
- Does New York’s stricter control test create added risk?
Document what matters because good documentation still matters. But documentation should reflect reality, not try to paper over it.
That means reviewing:
- independent contractor agreements
- payment practices
- scheduling expectations
- exclusivity requirements
- supervision levels
- onboarding and training practices
The Bottom Line on Independent Contractor Rules in 2026
The 2026 federal rule is still a proposed rule, not a final one.
But employers shouldn’t treat this as background noise. Worker classification remains a major compliance issue, especially in New York.
The safest approach is to review your current classifications regularly, pay close attention to how the relationship works in real life, and make sure your documentation matches the facts.
For New York employers, that’s especially important because State law likely still imposes a stricter standard than federal law.
Staying current on worker classification, wage and hour laws, and New York employment rules takes time. Most business owners, managers, and HR professionals already have enough on their plates.
That’s why it makes sense to address these issues before they turn into claims, audits, or agency investigations.
If you have any questions, feel free to contact us at 716.839.9700 or info@coppolalegal.com.
