As the Department of Labor’s (DOL) composition ebbs and flows from administration to administration, so does the guidance employers receive on one of the most challenging questions in workforce management: Should workers be classified as W-2 employees or as 1099 independent contractors?
On February 26, 2026, the DOL’s Wage and Hour Division announced a proposed rule that turns the tide in a slightly more employer-friendly direction. Specifically, the proposal would replace the 2024 Biden-era classification rule – which requires consideration of six separate factors under a “totality of the circumstances” framework – with a streamlined approach based on the “economic reality test,” similar to the framework used in the prior 2021 classification rule. Trimming an employer’s considerations down from six to just two, this economic reality test considers:
- The nature and degree of control that the employer is exerting over the work; and
- The worker’s opportunity for profit or loss based on initiative or investment.
These two core factors would anchor the analysis for determining whether a worker should be classified as an employee or an independent contractor. Additional considerations that appear in the broader “totality of the circumstances” analysis may still inform the inquiry, but the two factors above would generally carry the greatest weight in most cases.
Tips for Employers:
- Focus on practice, not just paperwork. In applying the economic reality test, the DOL will look closely at how the working relationship functions in practice — not simply how it is described in a contract. Labeling a worker as an independent contractor in an agreement and including language relating to the worker’s independence does not make it so if the day-to-day working relationship reflects significant employer control.
- Worker preference doesn’t control. Similarly, remember that workers and employers cannot sidestep these guidelines by agreeing to independent contractor status or by attempting to waive employee status in a signed contract. A worker’s preference is not determinative — or even a factor that is considered — in a classification case.
- This rule is only for certain statutes. The proposed rule would apply to whether a worker is classified correctly for purposes of the Fair Labor Standards Act and the Family and Medical Leave Act, as well as the Migrant and Seasonal Agricultural Worker Protection Act. While overtime obligations are a major source of liability for employers who misclassify independent contractors, the IRS has its own test, courts apply another test to cases under Title VII, the Americans with Disabilities Act and the Age Discrimination in Employment Act, and the National Labor Relations Board applies its own test.
- State laws also differ. Although the DOL uses its own guidance for investigations regarding classifications, note that there are also state-by-state variances that have developed through litigation and for different agencies, such as for eligibility for unemployment benefits and payment of state taxes.
What Comes Next?
The 2026 proposed rule is open for public comment for 60 days, with the comment period sunsetting on April 28, 2026. Until a final rule is issued, the 2024 “totality of the circumstances” test remains in effect.
Worker classification issues are complex, and misclassification can be costly. Improper classification may result in liability for minimum wage and overtime back pay, payroll taxes, benefits contributions, attorneys’ fees, and other serious penalties. With the DOL’s worker classification rules continuing to change based on administration, employers should make sure they are not caught off balance. If you have questions about your classifications or the new proposed rule, our team is here to help.
