From JDSupra, Richard Reibstein discusses the final independent contractor rule and predicts that it will will not have a significant impact because courts are not required to follow it and no court has relied on either the 2021 or 2024 independent contractor rule. Richard writes:
It has been over seven months since the U.S. Department of Labor formally issued a proposed rule under the Fair Labor Standards Act (FLSA) setting forth this current administration’s standards for determining whether workers are independent contractors (ICs) or employees under that federal law. The rule, once issued in final form, is intended to replace the Biden administration’s 2024 rule on IC status under the FLSA, which had sought to replace the Trump administration’s 2021 rule on IC status. According to informed reports, a final 2026 rule will be issued sometime this month. Based on the minor differences between the proposed and final rules under the first Trump administration, we expect the final IC rule by this administration will likewise be nearly identical to the proposed rule. Like the 2021 rule, the final rule when issued will undoubtedly be regarded as business-friendly. That will give some comfort to businesses and be viewed by many as favoring the increased use of ICs throughout the U.S. While issuance of the final rule may change the commentary, the law has not changed in the least. The Labor Department’s rule on IC status is merely a regulation and not the law. Further, the courts, not the Labor Department, are the final arbiters of IC status. No court has relied on either the 2021 or the 2024 IC rule, and it is likely that few if any courts will rely on the new IC rule once finalized. Instead, the courts have historically chosen to apply their own judicial precedent rather than give deference to these administrative rules on IC status. The Labor Department’s anticipated issuance of a final IC rule will likely result in more visibility on the issue of IC misclassification; that, in turn, may well cause plaintiffs’ class action lawyers to bring even more misclassification lawsuits under state IC laws. For this reason, savvy businesses would be well-advised to enhance their compliance with IC laws, especially state laws governing ICs, by using a process such as IC Diagnostics®, as described in our Takeaways below.
Analysis
The proposed IC rule issued on February 26, 2026 had no significant differences from the wording of the 2021 rule on IC status issued by the first Trump administration. The main difference was in a few of the examples discussed in the proposed rule dealing with the transportation and construction industries.
The proposed regulation stated that it would rescind all conflicting and inconsistent administrative rulings, interpretations, practices, and enforcement policies of the Labor Department relating to the classification of ICs and employees. This appears to be a way to override the Biden administration’s 2024 rule on IC status. No change is expected here when the Labor Department issues its final rule.
In determining IC status, the proposed regulation listed five (5) factors to be examined, but stated that the five factors “are not exhaustive and no single factor is dispositive.” But the proposed rule also noted that any factor related to the relationship between an individual and potential employer may be relevant. Notably, the courts under the FLSA have considered dozens of factors bearing on IC status, and the proposed regulation therefore validates this type of broad judicial inquiry.
The Labor Department’s proposed regulation referred to two of the five factors as “core factors”: (1) the nature and degree of the individual’s control over their work; and (2) the individual’s opportunity for profit or loss. The proposed rule stated that these two core factors “are the most probative as to whether or not an individual is an economically dependent ‘employee,’ … and each is therefore afforded greater weight in the analysis than is any other factor.” While the proposed rule does not create a legal presumption, it does state that if both core factors point toward the same classification, whether employee or IC, “there is a substantial likelihood that is the individual’s accurate classification.”
This is hardly a new way to analyze IC status under the FLSA; instead, it is consistent with current jurisprudence. As the Department of Labor stated in its lengthy supplementary material appearing before the proposed rule, “whenever the control and opportunity factors both pointed to the same classification – whether employee or independent contractor – that was the court’s conclusion regarding the worker’s ultimate classification.” Proposed Rule at note 140.
Under the first factor relating to control, the proposed rule restated many of the same conclusions that most courts have already articulated — that several types of activities do “not constitute [the type of] control that makes the individual more or less likely to be an employee under the Act.” Those types of control that are not legally meaningful include requiring an individual to:
- comply with specific legal obligations;
- satisfy health and safety standards;
- carry insurance;
- meet contractually agreed-upon deadlines or quality control standards; or
- satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships).
The proposed regulation, however, considerably overstated the law when it stated that requiring an individual, directly or indirectly, to work exclusively for one company, weighs in favor of the individual being an employee under the FLSA. Many legitimate ICs commit to one or more projects or other arrangements that require a concentrated, full-time undertaking to produce deliverables within a tight timeframe, indirectly foreclosing their work for other clients. That is hardly the type of control that should support employee status. Hopefully, the final rule will recognize that full-time contractor work for one business does not favor employee status.
The proposed rule next addressed the profit or loss factor. Some courts in the pasts have examined only the worker’s financial investment. However, the proposed regulation would follow newer court decisions that also have examined the manner in which profits are maximized by the individual’s initiative. This part of the proposed rule is likely to be retained in its present form.
The proposed regulation also addressed the three so-called “other” factors: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship; and (3) whether the work is part of an integrated unit of production.
The proposed rule addressing the worker’s skill failed to mention that many legitimate ICs do not have what some may refer to as an elevated skillset. While some may think that taxi drivers, for example, do not have a high degree of skill, a number are very skillful and operate their own taxi business as legitimate ICs, as a number of courts have found over the years. Likewise, a doctor working for a hospital has elevated skills, but that does not make them an IC if the hospital directs and controls their work while they work at a fixed salary in a hospital. We would hope the final rule clarifies the skill factor and states that it is not often meaningful in terms of IC status.
The proposed rule’s treatment of the degree of permanence factor failed to recognize that many legitimate IC relationships are permanent or at least semi-permanent by choice of the worker: for example, a gardener who provides service weekly to a homeowner for 20 years; a distributor who chooses to operate their own business by exclusively distributing another company’s products over a prolonged period of time; and a tutor who provides frequent tutoring to the same family’s children throughout their junior and senior high school years. These types of circumstances dealing with permanence were not given adequate consideration in the proposed rule, but perhaps they will be addressed in the final rule.
The final “other” factor is characterized as whether the work “is part of an integrated unit of production.” As the proposed rule states: “This factor is different from the concept of the importance or centrality of the individual’s work to the potential employer’s business.” In this manner, the Department of Labor is seeking to change the focus of this factor, which historically has been given little weight by the courts anyway.
The proposed regulation added a new subsection with six examples of workers and comments on whether the workers would be properly classified as employees or ICs under the final regulation. Because ICs are commonplace in hundreds of business sectors, these six examples are not meaningful to most stakeholders, but it is unlikely the Labor Department will add more examples.
Finally, the proposed regulation addresses the “primacy of actual practice.” It states that a company’s actual practice is more significant than what is written in a purported IC’s contract. This is consistent with decades of court decisions on this point.
Takeaways
Like the first Trump administration’s 2021 Rule and the Biden administration’s 2024 Rule, the final IC rule is likely to face lawsuits regarding its enforceability. But because no court has relied upon either of those other rules in determining the IC status of workers, such litigation has limited practical significance.
Of course, the Labor Department’s proposed rule has no application to the IC status of workers under most other federal laws, such as ERISA and the National Labor Relations Act, which have different worker classification tests. It also has no application to the classification of workers under state IC tests, most of which vary considerably from the test under the FLSA. And most litigation against companies alleging IC misclassification arises in whole or in part under state laws and not exclusively under the federal wage and hour law.
For the past 15 years, IC compliance and misclassification have been front-page news every now and then. State workforce agencies and plaintiffs’ class action attorneys have continued to focus on companies that are out of compliance with federal and state IC laws. While the Trump administration’s final IC rule, once issued, will be construed as favoring IC status, it will likely increase attention on this matter and may well prompt more class action lawsuits by plaintiffs’ attorneys, who oftentimes file such lawsuits under state IC laws. Thus, rather than taking comfort, businesses should wisely seek to evaluate and enhance their compliance with applicable IC laws. Some companies have resorted to a process such as IC Diagnostics® to elevate their level of compliance with IC laws. Companies interested in enhancing their compliance in this area of the law can, consistent with their current business model, restructure, re-document, and re-implement their IC relationships in a customized and sustainable manner that minimizes their exposure to IC misclassification liability.