The DOL's Contractor Rule Just Shifted Again: Here's What To Do Now

Federal contractor classification has become one of the more disorienting corners of US labor law. A rule that defined who counts as an independent contractor under the Fair Labor Standards Act (FLSA) changed in 2021, changed again in 2024, and is now proposed to change once more with the current administration's February 2026 NPRM. The 60-day comment period closed on April 28, 2026, and a final rule is now in preparation.

For HR leaders and operations teams managing a mix of employees and contractors, each shift carries real consequences: classification decisions made under one standard can become legally exposed under the next. The pressing question is not only what the new rule says, but what HR teams should be doing with it before it takes effect.

What changed: three rules in five years

As Foley & Lardner noted shortly after the NPRM's publication, "the independent contractor test under the FLSA has started to resemble a ping-pong match, over the last five years the test has changed three times, leaving employers uncertain whether they may face steep penalties for employee misclassification."

Here is how the sequence played out:

The DOL's stated rationale for the 2026 revert: the 2024 rule "fails to provide effective guidance on how different factors in its multi-factor balancing test should be weighted or applied together," making independent contractor engagement "confusing and risky when different factors point to different conclusions."

Even before the 2026 NPRM, the DOL had effectively suspended the 2024 rule. In May 2025, the agency issued a Field Assistance Bulletin directing its Wage and Hour Division to stop applying the 2024 rule in enforcement actions.

How the 2026 proposed test works

The 2026 NPRM reinstates a five-factor economic reality test centered on a single overarching question: is the worker economically dependent on an employer for work, or in business for themselves?

The two core factors (given the most weight):

1. Nature and degree of control over the work: does the worker set their own schedule, choose assignments, and work with minimal supervision? Or does the hiring entity dictate key aspects of how the work is performed?
2. Opportunity for profit or loss based on initiative and investment: can the worker earn more by exercising entrepreneurial judgment, or are earnings fixed by the hiring entity?

When both core factors point in the same direction (toward independent contractor status or toward employee status), that determination is typically dispositive. When they diverge, three secondary factors come into play:

• The amount of skill required
• The degree of permanence of the working relationship
• Whether the work is part of an integrated unit of production

The proposed rule explicitly clarifies that requirements to meet contractual quality standards, comply with legal obligations, or carry insurance do not constitute the kind of "control" that points toward employee status. This is a meaningful practical change from the 2024 rule's approach, which created ambiguity around routine contract terms.

The 2026 NPRM also extends this analysis to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), both of which incorporate the FLSA's definitions, creating a single uniform standard across all three statutes.

Why this matters right now for HR teams

The comment period closed April 28, 2026. The DOL received thousands of comments from businesses, labor unions, worker advocates, and trade associations. A final rule is now in preparation.

HR leaders should treat the window between comment close and final rule publication as a preparation window, not a wait-and-see period. Here is why:

• The final rule will govern classification decisions made today. Auditing existing contractor relationships against the likely 2021-test parameters now reduces the risk of retroactive exposure
• The DOL is not applying the 2024 rule in enforcement actions. The WHD has instructed investigators to use the 2021-era framework, which effectively mirrors the 2026 NPRM's approach
• Litigation is ongoing. Five separate lawsuits challenging the 2024 rule are at different stages in federal courts. A final rule from the DOL would not necessarily resolve all of them

According to the DOL, there were approximately 11.9 million independent contractors in the United States in 2023, a figure the agency expects to increase under the proposed rule.

Two sides of the debate

The 2026 NPRM is contested. Both the employer community and worker advocacy groups have made substantive arguments, and HR teams managing contingent workforces benefit from understanding both perspectives.

The employer case: predictability and flexibility

Employers and business associations have broadly welcomed the proposed revert. Their core arguments:

• Reduced classification risk. The 2024 rule's six-factor totality-of-circumstances approach meant that any single factor could, in theory, tip a classification toward employee status. The restored emphasis on two core factors gives employers a more stable framework for making classification decisions with confidence
• Alignment with court precedent. Federal courts have long applied their own circuit-specific economic reality tests. The 2026 NPRM seeks to harmonize DOL policy with how federal judges have historically resolved these disputes
• Gig economy flexibility. Employers in industries that rely heavily on contractors (technology, construction, healthcare, freelance services) argue the 2024 rule's ambiguity increased compliance costs and deterred legitimate independent contractor relationships
• Good-faith reliance protection. The proposed rule specifically allows employers to invoke Section 10 of the Portal-to-Portal Act, shielding them from FLSA liability if they relied on the rule in good faith, even if a court later invalidates it

The worker advocate case: erosion of protections

Labor organizations and worker advocacy groups have raised substantive objections:

• Loss of minimum wage and overtime coverage. Under the FLSA, the law entitles employees to minimum wage, overtime pay, and other protections that independent contractors do not receive. Broader use of contractor status means more workers fall outside these floors
• FMLA exclusion. The Family and Medical Leave Act does not cover workers classified as independent contractors, meaning they have no federally protected right to unpaid job-protected leave for serious illness or caregiving
• Unemployment insurance gaps. Independent contractors are generally ineligible for unemployment benefits under state systems that tie eligibility to employment status
• Misclassification risk. Critics argue the 2026 test, by making it easier to establish contractor status, creates incentives for hiring entities to structure relationships in ways that reduce costs at workers' expense, particularly for workers with limited bargaining power

The DOL acknowledged this tension in the NPRM preamble, framing the proposed rule as better aligned with Congressional intent and long-standing judicial interpretation while pledging to maintain rigorous enforcement against actual misclassification.

Federal relief does not mean state-level compliance

One of the most important practical points for HR teams to internalize: a more employer-friendly federal standard does not simplify multi-state or global classification compliance.

Several states apply their own, stricter tests that operate entirely independently of the FLSA standard:

• California applies the ABC test under Assembly Bill 5 (AB5), which requires a worker to satisfy all three criteria simultaneously to qualify as an independent contractor: (A) free from control and direction in performing the work, (B) performing work outside the usual course of the hiring entity's business, and (C) customarily engaged in an independently established trade.
• Massachusetts and New Jersey also use the ABC test with substantially the same three-part structure.

For HR teams with distributed workforces that include California-based contractors, the 2026 federal NPRM is largely irrelevant to their California compliance exposure. These teams face a layered analysis: the federal standard for FLSA purposes and state-specific standards for state wage and labor law purposes.

International workforces add further complexity. Local employment laws govern workers engaged through non-US jurisdictions, and in many cases, including the UK, EU member states, and Canada, those laws apply classification frameworks entirely separate from the US DOL's rules.

What HR teams should do before the final rule drops

The practical implication of the DOL's 2026 NPRM is not that classification becomes simple, but that a clear, predictable federal standard now exists to audit against, and auditing now reduces exposure under any outcome.

Recommended actions:

1. Map your contractor population by jurisdiction. Identify which workers the FLSA covers (US-based) and which state-specific standards apply to each worker's location.
2. Assess against the two core factors. For US-based contractors, evaluate whether each relationship would withstand scrutiny under the control and profit/loss tests. Document findings.
3. Flag ABC-test jurisdictions separately. California, Massachusetts, and New Jersey require a distinct analysis. Do not assume a federal-standard-compliant relationship satisfies state law.
4. Review contract terms. The proposed rule clarifies that quality control requirements and contractual deadlines are not evidence of "control." Ensure contracts clearly reflect the contractor's independence.
5. Engage legal counsel for borderline cases. For relationships where the core factors are ambiguous, early legal review is significantly less costly than retroactive remediation.
6. Build a monitoring cadence. The last five years have demonstrated that classification rules can shift with each administration. An ongoing audit process is more sustainable than a one-time review.

Get ahead of classification risk before the rules change with Deel

Deel's platform includes AI-powered Worker Classification to audit designations against evolving standards, Compliance Monitoring to track multi-jurisdictional requirements, and Mass Misclassification Assessments to identify exposure across your contractor base. For workers better suited to employee status, Contractor to EOR reclassifications simplify the transition. And for organizations facing material risk, Deel's Contractor of Record solution transfers legal liability and indemnifies you against requalification orders.

Classification compliance doesn't require a reactive scramble. By understanding the proposed 2026 test structure now, identifying where state laws create independent obligations, and auditing your existing contractor base against likely 2021-test parameters, you significantly reduce exposure before the final rule lands—regardless of the outcome.

Deel was built to keep HR teams ahead of regulatory shifts rather than chasing them. If your team is reassessing its contractor workforce, book a demo below and let us help you navigate the change.