Earlier this year, the Department of Labor published a new proposed rule regarding independent contractors. The proposal amounts to a rescission of the department’s rule tightening the employee classification test, which was established during the Biden Administration. After the proposed rule’s 60-day comment period ends on April 28, 2026, the administration anticipates finalizing the rule.
This rule would indicate a return to the “economic reality” test that was in effect during the first Trump Administration. Essentially, is an individual economically dependent on a single employer for work, or are they economically independent? If they are dependent, then they are considered an employee under the law and therefore afforded protections unavailable to independent contractors, such as minimum wage and overtime pay.
In making this determination, the rule identifies two core factors and three tangential factors.
The core factors are:
1) The nature and degree of the employer’s control over the work, and
2) The worker’s opportunity for profit or loss based on initiative and investment.
The tangential, but not dispositive, factors are:
1) Whether the work requires specialized skills,
2) The degree of permanence of the working relationship, and
3) Whether the work is part of an integrated unit of production.
By contrast, the Biden-era rule established a six-factor test, seeking to protect misclassified employees and consider the totality of the circumstances of their “employment.” The loosening of the classification test factors provided for in the 2026 proposal is more employer friendly and less stringent on companies. Indeed, many in the business community have welcomed a return of the economic reality test, indicating that the Biden rule was confusing and posed greater risk of inadvertent violations based on a company’s size and industry.
Employers in industries that rely heavily on independent contractors are likely to be most affected. Specifically, it will be easier to establish independent contractor status using the two-factor test. That said, employers should remain aware that regardless of a change in the federal rules, state laws may still apply their own, possibly more restrictive, classification tests.
For example, while independent contractor classification laws vary by state, at least 27 states have adopted the three factor “ABC test,” including California and Illinois. Under the ABC test, the burden is on the employer to demonstrate that a worker is not an employee. A worker is presumed to be an employee unless:
1) The worker is free from the control and direction of the employer when performing the contracted work,
2) The worker performs work outside the usual course of the employer’s regular business, and
3) The worker is engaged in an independently established trade.
Eight states employ a classification test using a combination of these three factors without weighing them equally.
The remaining 16 states, including New York, Florida, and Washington, D.C., employ a common law test, which is based on classification guidance issued by the Internal Revenue Service (IRS). Under the Trump Administration, it is likely that this guidance will shift to fall in line with the economic realities test.
Ultimately, the impact on employers will heavily depend on the nature of their business. Employers should continue to be aware of their obligations under state law while adjusting to the new federal guidelines as proper classification can affect more than just wage payments. It can also impact a business’ wage and hour compliance, payroll and tax withholding obligations for both a business and the worker, eligibility and obligations for health insurance and retirement benefits, and a business’ unemployment insurance contributions. Misclassification can trigger regulatory and legal liability for businesses in any of these categories. With penalties for misclassifications increasing, especially at the state level, the stakes are high.
Businesses should continue to monitor the DOL’s guidance and relevant federal and state judicial opinions, maintain clear records related to hiring decisions, audit their wage and hour practices, and seek counsel if there is any uncertainty as to which classification test applies to their workforce.
View the List of ABC Test Usage Across States Here.
Leech Tishman regularly advises employers on independent contractor classification, wage and hour compliance, and evolving workplace laws. We are prepared to assist clients in assessing the implications of the Department of Labor’s proposed rule, reviewing existing independent contractor relationships and agreements, and implementing appropriate compliance measures if the rule is finalized. For assistance or additional information, please contact Lydia A. Pappas at lpappas@leechtishman.com, attorney in Leech Tishman’s Labor & Employment Practice Group.