Department of Labor Announces Proposed Rule Reinstating Economic Reality Test for Independent Contractor Classification
Bayan Biazar, Associate
On February 26, 2026, the Department of Labor (“DOL”) announced a proposed rule (the “Proposed Rule”) that would reinstate a modified version of the 2021 employer-friendly “economic reality” test used to determine whether a worker is properly classified as an independent contractor or employee under the Fair Labor Standards Act (“FLSA”), the Family and Medical Leave Act, and the Migrant and Seasonal Agricultural Worker Protection Act.
Economic Reality Test
In 2021, the Trump administration established a five-factor test that was to be used when determining whether an individual is an independent contractor or employee.[1] The five factors are: the nature and degree of the individual’s control over the work; the opportunity for profit or loss; skill required for the work; permanence of the working relationship; and whether the work is part of an integrated unit of production. Under the 2021 rule, the nature and degree of control over the work and the individual’s opportunity for profit or loss were considered the most important factors and were given greater weight when determining worker classification.
In 2024, the Biden administration rescinded the 2021 rule and returned to a six-factor “totality of the circumstances” test.[2] Under that framework, no single factor carried greater weight, and courts and agencies were directed to evaluate all factors collectively to determine whether an individual was economically dependent on the employer or operating an independent business. Additional factors could also be considered if relevant to the worker’s economic dependence.
Proposed Rule
The 2026 Proposed Rule[3] restores the five-factor economic reality framework but divides the analysis into two tiers of factors. The first tier is the “core factors,” which are the nature and degree of the control over the work and the opportunity for profit or loss based on initiative and/or investment. If the two “core factors” align, there is a “substantial likelihood” that the classification, whether it be independent contractor or employee, is accurate.[4] If the two “core factors” are inconclusive, then the analysis turns to “secondary factors.”[5] The “secondary factors” include: the amount of skill required for the work; the degree of permanence of the working relationship between the individual and the potential employer; and whether the work is part of an integrated unit of production. Although the DOL considers these factors less probative than the “core factors,” they are evaluated in every case for whatever value they provide in assessing the individual’s economic dependence for work—specifically, whether the individual is more likely operating an independent business or functioning as a typical employee.[6]
The DOL explained that reverting to the economic reality framework is intended to provide a clearer and more predictable method for determining worker classification under the FLSA.[7]
How These Proposed Changes Effect Colorado
The Proposed Rule only addresses independent contractor status under the FLSA, meaning state-specific classification tests remain unchanged. In Colorado, an individual is presumed to be an employee unless the employer can demonstrate that the worker: is free from control and direction in the performance of the service both under contract and fact, and the individual is customarily engaged in an independent trade, occupation, profession, or business related to the service performed.[8] Colorado law also provides an alternative method of establishing independent contractor status through a written agreement containing nine statutory requirements. Employers who rely on independent contractor relationships must ensure that their agreements and working relationships satisfy these statutory criteria.[9]
Employer Considerations
Employers should note that the Proposed Rule has not yet been finalized and may change before taking effect. The DOL is accepting public comments on the proposal for 60 days following its publication in the Federal Register on February 27, 2026, and comments may be submitted electronically through the Federal eRulemaking Portal[10] or by mail to the Wage and Hour Division. Employers should also remember that the Proposed Rule only impacts worker classification under federal law and does not alter Colorado’s independent contractor requirements, so independent contractor relationships should continue to be evaluated under both federal and applicable state standards.
[1] See https://public-inspection.federalregister.gov/2020-29274.pdf for the final version of the 2021 rule.
[2] See https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship for a more detailed discussion on the totality of the circumstances test and the factors both tests considered.
[3] See https://public-inspection.federalregister.gov/2026-03962.pdf for the full draft of the Proposed Rule.
[4] Proposed Rule, p. 62.
[5] Id. at p. 73.
[6] Id.
[7] Id. at p. 96.
[8] Colo. Rev. Stat. §§ 8-70-115, 8-4-101.
[9] See Colo. Rev. Stat. § 8-70-115(1)(c) for the nine statutory requirements establishing independent contractor status.
[10] The Portal can be found at: http://www.regulations.gov/.