The U.S. Department of Labor’s Proposed Independent Contractor Rule: Employer Considerations

The U.S. Department of Labor (USDOL) has proposed changes to the rule it uses to determine whether a worker should be classified as an independent contractor or an employee under the Fair Labor Standards Act (FLSA). The public comment period for the proposed rule ends April 28, 2026. We are not currently aware of any legal challenges to the proposed rule.

For employers relying on independent contractors — whether occasionally or as a core business model — the proposed rule warrants attention. Here are some reasons why companies should evaluate their current use of contractors.

The Fair Labor Standards Act (FLSA) and Overtime. The USDOL enforces the FLSA, the law which requires minimum wage and overtime payments to all employees, unless otherwise exempt. Improperly classified contractors are potentially entitled to minimum wage and overtime payments (in some cases for the previous 3 years, plus liquidated damages). The USDOL also is responsible for enforcing the Family Medical Leave Act (FMLA) and the proposed rule amends the FMLA regulations to apply the new classification analysis.

State Departments of Labor and Worker’s Compensation Insurance. In Oklahoma, the Oklahoma Department of Labor is responsible for ensuring employers provide worker’s compensation insurance to their employees. This often leads to state investigations to determine whether individuals are improperly classified as independent contractors are in fact employees who should be covered by worker’s compensation insurance. The Oklahoma Department of Labor has largely adopted the federal rule for determining whether a worker is properly classified.    

Private Worker’s Compensation Insurance Audits. If a company utilizes contractor workers it can expect that the company’s worker’s compensation carrier will conduct periodic audits of the company’s use of contractors. Private insurance companies consider themselves to have been at-risk for potential claims by workers improperly classified as independent contractors and will seek to recover worker’s compensation premiums based upon the carrier’s determination that a worker has been improperly classified.

Internal Revenue Service and the National Labor Relations Board. Many federal agencies have adopted their own tests and factors to determine whether an individual worker should be considered an employee or a contractor. While the tests may be similar to the rules proposed and adopted by the USDOL, the rules can be different, each with their own implications for improper worker classification.

What Is Changing?

With some modification, the proposed rule readopts the USDOL’s 2021 regulations which were rescinded and replaced in 2024. The proposed rule seeks to clarify that a company engages an individual as an employee if, as a matter of economic reality, the individual is economically dependent on that company for work, as distinguished from an independent contractor with their own business.

“Core” Factors. Under the current proposed rules, two factors - the nature and degree of control and the opportunity for profit or loss - carry greater weight in determining the economic reality of the relationship between an individual and a company. Other factors to be used to determine the economic reality of the relationship include:

• The amount of skill required for the work
• The degree of permanence of the working relationship between the individual and the potential employer
• Whether the work is part of an integrated unit of production

Even well-drafted independent contractor agreements may not be determinative of the contractor relationship if day-to-day practices suggest oversight or dependence.

Steps Employers Should Consider Now

1. Conduct a Classification Audit. Identify all independent contractors and evaluate them under the “economic reality” framework.
2. Review Actual Practices — Not Just Contracts. Courts look at the reality of a relationship over agreements reciting the existence of a contractor relationship. Companies should evaluate their contractor relationships, with a focus on:
   
   1. The level of scheduling control
   2. Supervision levels
   3. Restrictions on outside work
   4. Equipment requirements
   5. Duration of engagements
3. Revise Independent Contractor Agreements. While contract language alone will not control the outcome of any misclassification analysis, independent contractor agreements should reflect:
   
   1. contractor’s autonomy in how work is performed
   2. Lack of exclusivity (where appropriate)
   3. Clear acknowledgment of independent business status

If you would like assistance conducting a contractor classification audit, reviewing existing agreements and practices, or evaluating overtime exemptions, please contact us.

Kevin Doyle
‍Labor & Employment
kdoyle@praywalker.com

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