Nearly 750,000 more U.S. workers could be designated as contractors should a proposed rule clarifying how to determine contracted worker or employee status become final, the Labor Department said in the proposal’s release on February 26.
The latest guidance would change what aspects of an employment experience should be considered in determining if a worker can be exempted from the worker protections offered under the Fair Labor Standards Act (FLSA) and generally seeks to revert to the 2021 requirements set down in the last days of the first Trump Administration.
The 2021 rule, rescinded and replaced under the Biden Administration, would generally be re-adopted by the department “with a few modifications,” now that the Trump Administration is back in charge. The proposal calls for the formal recission of the Biden Administration’s 2024 final rule; the Labor Department said in 2025 it would not be applying that rule’s criteria for enforcement purposes while it reconsidered the Biden policy.
The Struggle to Define
With nearly 25 million workers identified as being independent contractors, the government has struggled to reconcile whether the growing number of so-called gig workers were doing work that should be covered by the FLSA, or generally the work of sole proprietors.
The push-and-pull in determining proper worker status for labor law purposes has clear political party-line demarcations.
The Democrats generally support an approach of including more of these workers as covered under the FLSA, and more recently, seeking coverage for those in drive-sharing or delivery, who get paid via a third-party arranger of the services. They seek to make those third-party employers responsible for applying labor law standards to the workers. Republicans have balked at adding these workers to FLSA coverage, claiming that they legitimately work for themselves and the third parties should not be burdened with becoming their employers.
Focus on Control, ‘Economic Reality’
The new rule would apply as core factors the “nature and degree of control over the work” and the “worker’s opportunity for profit or loss based on initiative and/or investment” in determining worker status. It would apply an “economic reality” test to determine whether a worker is an employee “economically dependent on an employer for work” or in business for themselves as an independent contractor.
These criteria were in the Biden Administration’s rule, but were not given any more weight for determining worker status than other factors the old rule listed, such as investments by the worker and the potential employer; the degree of permanence of the work relationship; the extent to which the work performed is an integral part of the potential employer's business; and skill and initiative.
The proposal attempts to simplify the determination process by making the two core factors (the nature and degree of control over the work and the individual’s opportunity for profit or loss) “the most probative as to whether or not an individual is an economically dependent ‘employee,’” according to the new rule’s explanation.
Other factors “may not be probative at all in answering the ultimate ‘economic reality’ inquiry,” the Department said. “These two factors should be considered first, and if both point toward the same classification (either employee or independent contractor), there is a substantial likelihood that is the accurate classification for the individual.”
However, “the Department expressly rejects the notion that any factor, core or otherwise, is determinative of the economic reality analysis,” so the streamlined test criteria under the proposal may not be all that clarifying after all. The proposal, according to the Labor Department, “should not be interpreted, to apply in a mechanical way that precludes consideration of all relevant facts and factors.”
Examples
The proposed rule contains several examples to illustrate how it would be applied in practice.
In one case, the owner/operator of a tractor-trailer performs transportation services for a logistics company. The logistics company requires the driver to prove they meet federally mandated transportation safety rules through drug and alcohol tests. The agreement with the logistics company also contains agreed-upon delivery deadlines, incentives for meeting them, and penalties for failing. These issues do not constitute the magnitude of control that would make the driver an employee under the FLSA, according to the proposed rule.
Another example involves a gig worker, someone who accepts assignments from a company that provides an app-based service linking those who need home-repair work with those who perform home-repair work. The worker invests in equipment, but the company also provides the app, marketing activities, and directs and monitors the worker’s customers and their satisfaction with work performed. “The opportunity for profit and loss favors independent contractor status,” even though the investment by the worker in his own activities is much less than the company’s.
Two other examples involve workers in the construction industry, one who develops skills as he works jobs and another who comes to different jobs with a well-developed skill set or “specialized training.” The former would be classified as an employee because “the individual relies on the construction company to provide any training necessary to perform the work,” whereas the latter “brings his own skills to the work and does not rely on the construction company to provide training,” and is more likely to fall under independent contractor status.
Inconsistency Across Labor and Tax Laws, States Remain
The proposed rules would not affect how the U.S. Internal Revenue Service determines employment status for tax purposes; the IRS guidelines, separately laid out apply different criteria than either of the Labor Department approaches.
Also note that separate sets of rules, although related, can apply for determining employment status to be eligible for union membership under the Labor Relations Act, as well as for certain benefits, such as retirement benefits under the Employee Retirement Income Security Act. Coverage under these laws can differ from the general standard being reset under the FLSA.
This rulemaking is limited to coverage issues under the FLSA, the Family Medical Leave Act, and the Seasonal Agricultural Worker Protection Act, whose administration falls under the Labor Department oversight, the Labor Department said.
States and localities also retain the ability to create their own tests under their laws. California, for example, allows workers for drive-sharing apps like Uber and Lyft to remain independent contractors but requires minimum earnings standards and, in some cases, a health care stipend. New York also has an agreement with Uber to allow their drivers to retain their independent contractor status, while providing minimum earning standards and paid sick leave.
The proposed rule is not to be applied by employers until finalized and has a 60-day comment period that ends April 28, 2026. After the period ends, the Labor Department will review their comments and may change some aspects of the rule before it is finalized.
Author: Michael Baer
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.
Nearly 750,000 more U.S. workers could be designated as contractors should a proposed rule clarifying how to determine contracted worker or employee status become final, the Labor Department said in the proposal’s release on February 26.
The latest guidance would change what aspects of an employment experience should be considered in determining if a worker can be exempted from the worker protections offered under the Fair Labor Standards Act (FLSA) and generally seeks to revert to the 2021 requirements set down in the last days of the first Trump Administration.
The 2021 rule, rescinded and replaced under the Biden Administration, would generally be re-adopted by the department “with a few modifications,” now that the Trump Administration is back in charge. The proposal calls for the formal recission of the Biden Administration’s 2024 final rule; the Labor Department said in 2025 it would not be applying that rule’s criteria for enforcement purposes while it reconsidered the Biden policy.
The Struggle to Define
With nearly 25 million workers identified as being independent contractors, the government has struggled to reconcile whether the growing number of so-called gig workers were doing work that should be covered by the FLSA, or generally the work of sole proprietors.
The push-and-pull in determining proper worker status for labor law purposes has clear political party-line demarcations.
The Democrats generally support an approach of including more of these workers as covered under the FLSA, and more recently, seeking coverage for those in drive-sharing or delivery, who get paid via a third-party arranger of the services. They seek to make those third-party employers responsible for applying labor law standards to the workers. Republicans have balked at adding these workers to FLSA coverage, claiming that they legitimately work for themselves and the third parties should not be burdened with becoming their employers.
Focus on Control, ‘Economic Reality’
The new rule would apply as core factors the “nature and degree of control over the work” and the “worker’s opportunity for profit or loss based on initiative and/or investment” in determining worker status. It would apply an “economic reality” test to determine whether a worker is an employee “economically dependent on an employer for work” or in business for themselves as an independent contractor.
These criteria were in the Biden Administration’s rule, but were not given any more weight for determining worker status than other factors the old rule listed, such as investments by the worker and the potential employer; the degree of permanence of the work relationship; the extent to which the work performed is an integral part of the potential employer's business; and skill and initiative.
The proposal attempts to simplify the determination process by making the two core factors (the nature and degree of control over the work and the individual’s opportunity for profit or loss) “the most probative as to whether or not an individual is an economically dependent ‘employee,’” according to the new rule’s explanation.
Other factors “may not be probative at all in answering the ultimate ‘economic reality’ inquiry,” the Department said. “These two factors should be considered first, and if both point toward the same classification (either employee or independent contractor), there is a substantial likelihood that is the accurate classification for the individual.”
However, “the Department expressly rejects the notion that any factor, core or otherwise, is determinative of the economic reality analysis,” so the streamlined test criteria under the proposal may not be all that clarifying after all. The proposal, according to the Labor Department, “should not be interpreted, to apply in a mechanical way that precludes consideration of all relevant facts and factors.”
Examples
The proposed rule contains several examples to illustrate how it would be applied in practice.
In one case, the owner/operator of a tractor-trailer performs transportation services for a logistics company. The logistics company requires the driver to prove they meet federally mandated transportation safety rules through drug and alcohol tests. The agreement with the logistics company also contains agreed-upon delivery deadlines, incentives for meeting them, and penalties for failing. These issues do not constitute the magnitude of control that would make the driver an employee under the FLSA, according to the proposed rule.
Another example involves a gig worker, someone who accepts assignments from a company that provides an app-based service linking those who need home-repair work with those who perform home-repair work. The worker invests in equipment, but the company also provides the app, marketing activities, and directs and monitors the worker’s customers and their satisfaction with work performed. “The opportunity for profit and loss favors independent contractor status,” even though the investment by the worker in his own activities is much less than the company’s.
Two other examples involve workers in the construction industry, one who develops skills as he works jobs and another who comes to different jobs with a well-developed skill set or “specialized training.” The former would be classified as an employee because “the individual relies on the construction company to provide any training necessary to perform the work,” whereas the latter “brings his own skills to the work and does not rely on the construction company to provide training,” and is more likely to fall under independent contractor status.
Inconsistency Across Labor and Tax Laws, States Remain
The proposed rules would not affect how the U.S. Internal Revenue Service determines employment status for tax purposes; the IRS guidelines, separately laid out apply different criteria than either of the Labor Department approaches.
Also note that separate sets of rules, although related, can apply for determining employment status to be eligible for union membership under the Labor Relations Act, as well as for certain benefits, such as retirement benefits under the Employee Retirement Income Security Act. Coverage under these laws can differ from the general standard being reset under the FLSA.
This rulemaking is limited to coverage issues under the FLSA, the Family Medical Leave Act, and the Seasonal Agricultural Worker Protection Act, whose administration falls under the Labor Department oversight, the Labor Department said.
States and localities also retain the ability to create their own tests under their laws. California, for example, allows workers for drive-sharing apps like Uber and Lyft to remain independent contractors but requires minimum earnings standards and, in some cases, a health care stipend. New York also has an agreement with Uber to allow their drivers to retain their independent contractor status, while providing minimum earning standards and paid sick leave.
The proposed rule is not to be applied by employers until finalized and has a 60-day comment period that ends April 28, 2026. After the period ends, the Labor Department will review their comments and may change some aspects of the rule before it is finalized.
Author: Michael Baer
Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. For more on these issues discussed above, contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.
