The DOL’s Proposed Independent Contractor Rule: What Could Change for Employers

In February 2026, the Department of Labor (DOL) proposed changes to how the DOL determines whether workers are correctly classified as “employees” or “independent contractors.” Under the new policy, many workers would lose federal protections, including the right to be paid a minimum wage and to receive overtime pay. The U.S. Small Business Administration (SBA) estimates that the changes could save small businesses $2.31 billion over the next ten years.

The proposal is not yet final. While the public comment period expired in late April 2026, the DOL may revise the rule before it takes effect.

Why Do Labor Laws Protect Employees But Not Independent Contractors?

There are many federal, state, and local worker protection laws. Generally, these laws only apply to “employees” and exclude “independent contractors.” Knowing some historical background helps explain why the laws make this distinction.

In the early 1900s, states began passing laws to protect workers from exploitation as the Industrial Revolution progressed. Over the next few decades, these became a patchwork of confusing and sometimes conflicting protections. To establish a nationwide standard, the federal government passed the Fair Labor Standards Act of 1938 (FLSA), which set a minimum wage, established a set workweek, and prohibited most child labor.

The FLSA and other laws protecting workers’ rights grew out of the historical oppression of working-class laborers, individuals who were economically dependent on their current or potential employer. The laws specifically did not apply to merchants, artisans, and other individuals who worked for themselves. These “independent contractors” already had the freedom to choose when, where, and how they worked, and how much to charge for their goods and services. Thus, they didn’t need government protection.

Different Laws, Different Classification

A worker’s status as an employee or an independent contractor determines their rights and obligations under the FLSA, the tax code, and many other laws. However, no single standard applies to every law or government agency.

Some individuals classified as independent contractors by the DOL could be “employees” protected by other federal or state laws, such as workers’ compensation regulations, paid time off ordinances, anti-discrimination statutes, or other protections. These laws usually establish explicit classification guidelines explaining which workers fall within their scope of protection.

The IRS has a 20-point test for classifying workers, which most state tax agencies adopt. Employers must pay half of an employee’s Social Security and Medicare taxes (FICA) and withhold income taxes from their pay. Independent contractors are responsible for paying the full amount of these taxes.

The DOL’s proposal would only affect how the agency classifies workers under these federal laws:

• Fair Labor Standards Act (FLSA). Regulates minimum wage, overtime, and other workplace rights.
• Family and Medical Leave Act (FMLA). Provides the right to unpaid, job-protected leave for family or medical reasons.
• Migrant and Seasonal Agricultural Worker Protection Act (MSPA). Establishes baseline employment standards regarding wages, housing safety, transportation, and working condition disclosures for farm and migrant workers.

Importantly, the DOL’s guidelines only apply to its own investigations and audits. Federal courts around the country use various multi-factor tests to evaluate the “economic reality” of working relationships in FLSA cases. There is no federal law or binding judicial precedent that establishes a uniform nationwide test for courts to apply in these lawsuits.

The DOL Worker Classification Guidelines: 2021, 2024, and 2026

The U.S. Supreme Court acknowledged that the FLSA has “no definition that solves problems as to the limits of the employer-employee relationship under the Act.” It defines “employee” as “any individual employed by an employer” and “employ” as “to suffer or permit to work.” It does not define who is an “independent contractor.”

To clear up this confusion, the DOL published a “final rule” in 2021 establishing how the agency classifies workers under the FLSA. Its two most important factors were:

1. The nature and degree of each party’s control over the work.
2. The worker’s opportunity for profit or loss.

If these two factors clearly sorted a worker into one of the two categories, the agency stopped its analysis. If they did not, the investigators could consider other factors, including:

3. The degree of permanence in the relationship between the worker and employer.
4. The relationship of the work to the employer’s business.
5. The worker’s skill and initiative.

A 2024 guidance revised these factors, expressly removing the emphasis on the two “core” factors and emphasizing a “totality of the circumstances” approach. It also changed how the relationship of the work to the employer’s business contributed to the correct classification, and asked investigators to consider how much each party invested in the relationship. These changes reduced the likelihood that a worker would be correctly classified as an “independent contractor,” categorizing more workers as employees and bringing them under the protection of federal labor laws.

In May 2025, the DOL challenged the legality of the 2024 revisions and stopped using them in its FLSA investigations. Its proposed new test aims to “provide greater clarity and predictability to workers and employers alike as to their proper classification.” It would essentially restore the 2021 framework, making the first two criteria the “core” factors that determine a worker’s status and relegating the permanence of the working relationship and the worker’s skill to minimal importance.

Additionally, instead of considering whether a worker’s role is critical, necessary, or central to the employer’s principal business (i.e., the relationship of the work to the business), the DOL will consider whether the work is “part of an integrated unit of production.” Using this reasoning, workers directly involved in a company’s core business are more likely to be employees than those who perform discrete tasks.

The DOL emphasizes that it will give significantly more weight to the “actual practices” of the working relationship than either party’s “reserved” or theoretical rights. If a worker’s day-to-day reality reflects a very low degree of autonomy over the nature and performance of their duties, the agency may classify them as an employee regardless of other considerations.

How Does This Affect Michigan Employers and Workers?

Changes to DOL policies do not affect how Michigan law defines and applies to independent contractors. They also do not affect the classification of workers for cases involving the Internal Revenue Code, the National Labor Relations Act, or other federal laws besides the FLSA, FMLA, and MSPA.

Michigan employers should consult an experienced employment attorney to review how the DOL’s new policy might affect their workforces. Businesses of all sizes can benefit from reviewing their employee policies, handbooks, and payroll systems to ensure they comply with changing federal guidelines, state and local requirements, and other legal developments.

Workers who believe they have been misclassified should also consult an attorney. A skilled employment lawyer can help you understand your rights under federal, state, and local laws. If you’ve been underpaid or wrongfully denied benefits, an attorney can help you recover the compensation you deserve. The team at Sommers Schwartz, P.C., has decades of experience protecting Michigan workers’ rights and helping Michigan small business owners. Contact us today to schedule a free, confidential, no-obligation consultation.