The Contractor Test Is Changing Again, And It’s Not That Simple

05.12.2026

Shift from six-factor to two-factor test reshapes FLSA worker classification and compliance risk

Worker classification remains one of the most consequential threshold questions under federal wage-and-hour law. Employees are entitled to Fair Labor Standards Act (FLSA) protections such as minimum wage and overtime; independent contractors are not.

The US Department of Labor’s Wage and Hour Division on February 26 issued a notice of proposed rulemaking that would rescind the 2024 independent contractor rule and replace it with a revised framework modeled largely on the January 2021 rule. See Employee or Independent Contractor Status under FLSA, Family and Medical Leave Act (FMLA), and Migrant and Seasonal Agricultural Worker Protection Act, Notice of Proposed Rulemaking, at 1, 91 Fed. Reg. 9932, RIN 1235–AA34 (Feb. 27, 2026).

The 2024 rule, which became effective on March 11, 2024, provided a broad six-factor economic-realities analysis and expressly stated that no factor or set of factors had predetermined weight. The 2024 Rule identifies six factors as “tools or guides to conduct a totality-of-the-circumstances analysis”:

1. opportunity for profit or loss depending on managerial skill;
2. investments by the worker and the potential employer;
3. degree of permanence of the work relationship;
4. nature and degree of control;
5. extent to which the work performed is an integral part of the potential employer's business;
6. skill and initiative.

The 2024 Rule does not identify any core factors or otherwise order the relative importance of these factors. In addition, the 2024 Rule noted the six factors “are not exhaustive” and “[a]dditional factors may be relevant in determining whether the worker is an employee or independent contractor.”

The 2026 proposal focuses on “economic reality”: is the worker entrepreneurial and an independent business, or does the worker depend on the employer for all work.  Unlike the 2024 rule, the new 2026 proposal emphasizes two primary factors:

1. the nature and degree of control over the work; and

2. the worker’s opportunity for profit or loss based on initiative and/or investment.

Other factors would remain relevant, including:

3. the amount of skill required

4. the degree of permanence of the relationship, and

5. whether the work is part of an integrated unit of production.

In substance, the proposed rule would re-center the primary inquiry on the employer’s control and the worker’s entrepreneurial opportunity.

In applying the test, actual practice matters more than what is merely contractual or theoretically possible. The 2026 proposed rule also notes that all facts regarding economic dependence should be evaluated using all facts and circumstances, noting:

“Economic dependence is not conditioned reliance on an alleged employer for one's primary source of income, for the necessities of life. Rather, courts have framed the question as whether, as a matter of economic reality, the workers depend upon someone else's business for the opportunity to render service or are in business for themselves.”

To simplify the worker classification question the DOL also requested comments regarding an alternate standard: if the control factor indicates employee status, the employee classification inquiry simply stops there.

The DOL has already altered its enforcement to correspond with the 2026 proposed rule, but the 2026 proposed rule expressly stated that the 2024 Rule nevertheless remains in effect for purposes of private litigation.

Accordingly, employers currently must handle divided compliance standards: the DOL is using the more employer-favorable standard of the 2026 proposed rule, but private plaintiffs may still use the 2024 Rule in litigation until the 2024 Rule is officially replaced.

The 2026 proposed rule provides good cause to revisit worker classification decisions and documentation, particularly with respect to the factors emphasized in the 2026 proposed rule. Employers can review policies and procedures such as:

1. Level of operational control - how much should the employer specify where, in what manner, when and with what training or equipment work is performed;
2. Level of control by workers over pricing/compensation, acceptance of projects, and exclusively working for one employer versus working for multiple employers;
3. Level of business owner-like investments by the worker or other ownership risks by the worker;
4. Whether existing agreements accurately reflect actual practice; and
5. Evaluating state-law versus federal-law positions based on specific employment facts.  A position consistent the federal-law rule must still be evaluated for compliance with applicable state-law standards.

In Virginia, the Virginia Employment Commission (VEC) generally defines an employee as any person performing services for remuneration (wages, salaries, or commissions) where the employer controls both the work result and the methods used to achieve it. Per statute, Virginia law presumes workers are employees unless the employer can prove they are independent contractors.

Key Factors for VEC Employee Classification:

1. Right of Control: The key factor is whether the employer has the right to direct what is done and how it is done.
2. Behavioral & Financial Control: Does the employer provide tools, training, and dictate work methods?
3. Relationship: Is the work a key aspect of the business, and is it a continuous relationship?
4. Statutory Presumption: Since July 2020, workers are presumed employees, and employers must use the IRS 21-factor test to prove otherwise.

Click here to view the originally published article in the May 2026 issue of HR Legal & Compliance Excellence. 

David S. Lionberger's practice focuses on taxation and business planning, tax credit transactions, trusts and estates, and mergers and acquisitions. He represents clients ranging from professional dental, medical and services practices to multiple real estate development, investment and construction-related businesses, including a variety of closely-held growth and middle market companies.