Gavel & Glass Briefing: Update to FLSA Criteria for Employee/1099 Status
Proposed Rule: Employee or Independent Contractor Status Under the FLSA
On February 27, 2026, the U.S. Department of Labor issued a Notice of Proposed Rulemaking (NPRM) that would significantly modify the criteria used to determine whether a worker is an employee or an independent contractor. If finalized, the rule would rescind the 2024 final rule and return to an analysis similar to the framework established in 2021.
The "Economic Reality" Test
The proposed rule utilizes an "economic reality" test to determine whether a worker is in business for themselves as an independent contractor or is economically dependent on an employer for work. The analysis identifies two "core factors" that carry the most weight in this determination:
Nature and Degree of Control: This factor examines the level of control a worker has over their schedule, project selection, and performance of the work.
Opportunity for Profit or Loss: This factor assesses whether a worker can increase their earnings through their own initiative, business acumen, or investment in equipment and personnel.
Under the proposal, if both core factors align toward a specific classification, that classification is highly likely to be considered accurate.
Additional Factors and Provisions
Beyond the core factors, the DOL would consider several other elements, including the amount of skill required for the work, the degree of permanence in the working relationship, and whether the work is part of an "integrated unit of production."
Key provisions of the proposal include:
Primacy of Actual Practice: The actual day-to-day practice of the worker and the potential employer is considered more relevant than what may be contractually or theoretically possible.
Expanded Scope: The proposed rule would also apply this streamlined analysis to the Family and Medical Leave Act (FMLA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).
Uniformity: The Department indicates that using a consistent analysis across these acts will help reduce misclassification and provide more predictable outcomes for employers and workers.
Next Steps for Organizations
The Department of Labor is currently accepting public comments on the proposed rule. The 60-day comment period is scheduled to close at 11:59 p.m. ET on April 28, 2026. Organizations that utilize independent contractors are encouraged to review their current arrangements in light of these proposed "core factors" and the emphasis on actual workplace practices.
We will continue to track the progress of this rulemaking and provide updates as the final regulations are issued.
