On February 26, 2026, the U.S. Department of Labor proposed a new rule for deciding who counts as an employee versus an independent contractor under federal wage-and-hour law — the third major rewrite of this test in five years. If it’s finalized as proposed, it would replace the current six-factor balancing test with a simpler, two-factor framework that’s more favorable to businesses that rely on contractors and gig workers.
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What happened
The Department of Labor’s Wage and Hour Division published a Notice of Proposed Rulemaking to rescind the 2024 independent contractor rule and largely restore the framework used under the prior administration in 2021, according to the DOL’s own rulemaking page and analysis from labor and employment firm Jackson Lewis. The DOL described the 2024 rule as “unworkably vague” and said it had a “chilling effect” on legitimate independent contractor arrangements.
The proposed rule centers on two heavily weighted “core” factors: the degree of control a worker has over their own schedule, assignments and ability to work for competitors, and the worker’s opportunity for profit or loss through their own managerial skill or investment. If those two factors point in the same direction, the DOL says there’s a “substantial likelihood” that’s the correct classification. Three secondary factors — skill required, permanence of the relationship, and whether the work is integrated into the business’s production — only come into play when the core factors conflict.
The public comment period closed April 28, 2026. Until DOL issues a final rule, the existing 2024 rule remains legally in effect, meaning employers are, for now, still operating under the more contractor-restrictive standard even as a friendlier one works its way through rulemaking.
Why it matters
Worker classification isn’t just an HR question — it determines whether a business owes payroll taxes, overtime, workers’ comp coverage, and benefits for a given worker. Misclassify someone as a contractor when they should be an employee, and the exposure includes back wages, unpaid payroll taxes, penalties, and potential class-action liability. The Small Business Administration’s Office of Advocacy flagged the DOL’s proposal specifically because small businesses — which often lack in-house employment counsel — are disproportionately exposed to the cost and uncertainty of getting this wrong.
What this means for small business owners
The practical challenge right now is timing: the rule that will eventually apply is friendlier to contractor arrangements, but the rule that legally applies today is not. Jackson Lewis’s guidance for employers is to treat this as a two-track problem — audit existing contractor relationships against the current 2024 standard now, while tracking the rulemaking process for when the new standard actually takes effect. Don’t assume the 2026 proposal already protects you; it doesn’t, until finalized.
For CentsIQ clients using 1099 contractors, freelancers, or gig-platform labor, this is a good moment to have a bookkeeper or CFO advisor pull a clean list of every contractor relationship and check it against both the old and proposed tests side by side — so you’re not caught flat-footed either way the final rule lands.
“Actual practice of the parties” matters more than what a contract says on paper, the proposed rule emphasizes — a reminder that job titles and 1099 forms don’t override how work actually happens day to day.
The bottom line
Nothing has changed yet legally, but a lot is about to. Businesses that wait for the final rule before reviewing their contractor relationships risk being judged against whichever standard applies at the time of an audit or lawsuit — not whichever one is more convenient. Getting ahead of it now, with a clear worker-classification review, costs far less than fixing a misclassification finding later.
