If your business relies on independent contractors, a proposed rule from the U.S. Department of Labor (DOL) deserves your attention now, before it takes effect.
The DOL recently proposed rescinding the current 2024 worker classification rule and replacing it with a modified version of the 2021 standard. While the rule is not yet final, the shift in direction signals where federal enforcement is headed, and employers who act early will be better positioned to defend their classification decisions.
The central question in any classification analysis is whether a worker is economically dependent on your business or genuinely in business for themselves. Get it wrong, and you face significant exposure under the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). Misclassification claims can trigger back pay, benefits liability, and civil penalties, and they often come in waves when one worker’s claim opens the door for others.
The 2024 rule currently in effect uses a six-factor “totality of the circumstances” test. No single factor carries more weight than another, which many employers find difficult to apply consistently. The broad balancing approach created uncertainty and made it harder to predict how the DOL or a court would evaluate a given relationship.
The proposed rule returns to a framework closer to the 2021 standard, applying an “economic reality” test to determine whether a worker is in business for themselves or economically dependent on an employer. Here is how the DOL’s analysis would work in practice.
The test centers on two 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. These two factors carry the most weight in the analysis.
Beyond the core factors, the DOL would also consider the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production. Importantly, the proposed rule emphasizes that actual practice matters more than what a contract says on paper. How the relationship functions day to day will carry more weight than what may be theoretically or contractually possible.
To help employers apply the test, the DOL would include eight fact-specific examples illustrating how the factors play out in real-life circumstances.
For employers, a clearer standard is good news, but only if your actual classification practices can withstand scrutiny under it.
Don’t wait for the rule to be finalized. Use this period to:
• Audit your contractor relationships. Review whether your day-to-day practices match the independent contractor label on paper.
• Strengthen your documentation. Contracts should reflect the real nature of the working relationship, including how work is assigned, supervised, and compensated.
• Assess your exposure. If contractors are working exclusively for you, on your schedule, using your tools, the classification may not hold up regardless of which rule applies.
The DOL is currently accepting public comments. Finalization could come quickly, and enforcement priorities often shift alongside new rules.
If you have questions about how the proposed changes may affect your workforce, contact Carol Harding at 856-354-7700 or csharding@earpcohn.com. Carol represents employers in complex workforce compliance matters and uses her litigation experience to help clients avoid costly mistakes before they arise.
