Upcoming Changes to Independent Contractor Rules: Key Tips for SMBs

Quick look: Independent contractor classification is getting a federal overhaul. The Department of Labor’s (DOL’s) proposed rule replaces the Biden-era six-factor test with a streamlined “economic reality” analysis centered on two factors: a worker’s control over their work and their opportunity for profit or loss. Small and midsized businesses (SMBs) should audit their contractor relationships and review state-specific rules before the final rule takes effect later in 2026.

If your business relies on freelancers, gig workers, or independent contractors, there’s a regulatory update on the horizon worth paying close attention to.

The DOL’s Wage and Hour Division announced a proposed rule in February 2026 that would clarify how to determine when a worker is an employee versus an independent contractor under the Fair Labor Standards Act (FLSA).

For SMBs, this proposal could help simplify the classification process, but it also comes with some important action items.

Why it matters

Properly classifying your workers is crucial. Workers classified as independent contractors are considered to be in business for themselves and aren’t covered by the minimum wage or overtime requirements that apply to employees under the FLSA. That distinction significantly affects how you structure your workforce and the liability you could face if you get it wrong.

For instance, if workers you classified as independent contractors are later determined to be employees by a court, you may be liable for unpaid minimum wage, overtime premiums, benefits, and taxes, as well as other penalties and attorneys’ fees. For a small business who may have limited legal resources, that kind of exposure can take a serious toll.

Luckily, the latest proposed rule from the current administration offers much-sought-after clarity and more flexibility for organizations that rely on independent contractors.

What’s changing, and what isn’t

The proposal would consider five factors when evaluating whether a worker is an employee or an independent contractor, grounded in an evaluation of the “economic realities” of the working relationship.

The two primary factors that carry the most weight are:

• The individual’s control over the work
• Their opportunity for profit or loss

If a worker’s status isn’t clear after considering those two factors, the proposal instructs businesses to also consider the amount of skill required for the work, the degree of permanence of the working relationship, and whether the work is part of an integrated unit of production.

Notably, the evaluation focuses on economic dependence as it relates to work, not income, meaning it’s not about how much a worker earns or whether they have other income sources, but about the nature of the working relationship itself.

The proposed rule also advises that the actual practice of the worker and the potential employer is more relevant than what’s contractually or theoretically possible. In other words, what you put in a contract matters less than what the day-to-day working relationship actually involves.

Read the full proposal >

Don’t forget: state laws still apply

It’s important for SMB leaders to remember that the DOL’s proposed rule applies only to the FLSA, the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act. Many states have their own, often stricter, tests for determining worker classification.

A growing number of states, including California, Illinois, New Jersey, and Massachusetts, apply a stringent “ABC test,” which generally considers a worker an employee unless the hiring entity can establish that the worker is:

• Free from the company’s control,
• Performs work outside the usual course of the business, and
• Is independently established in that type of work.

If your workforce spans multiple states, this is exactly the kind of layered compliance challenge where having a trusted human resources (HR) partner in your corner makes a difference.

A look back at fluctuating independent contractor legislation

This marks the third federal regulation on independent contractor status since 2021, and the back-and-forth has left many businesses uncertain about where they stand.

The Biden administration’s 2024 rule introduced a more complex and more ambiguous six-factor test that allowed regulators to consider additional factors beyond those listed.

The current proposal aims to facilitate more accurate and predictable worker classification that better reflects the modern economy.

What happens next

The rule includes a 60-day public comment period, which closes at 11:59 p.m. ET on April 28, 2026. After that, the DOL will review feedback, potentially complete minor modifications, and move toward finalization. The final rule is expected to take effect sometime later this year.

4 steps SMBs should take now

You don’t have to wait for the final rule to start preparing. Here are four things to do today:

1. Audit your current contractor relationships

Review how you’re classifying workers and whether those arrangements hold up under the proposed five-factor test. Pay particular attention to day-to-day practices, not just contractual language.

2. Check your state’s rules

Federal changes don’t override state law. If you’re in a state with an ABC test or other stricter standards, those requirements still govern your state-level obligations.

3. Train your managers

Make sure managers discuss worker classification with HR or internal counsel before engaging freelancers, gig workers, or other independent contractors. Misclassification often starts with a well-intentioned hiring decision made without proper guidance.

4. Consult an HR or legal expert

If you’re uncertain about how the proposed rule affects your workforce, now is the time to get ahead of it. Partnering with legal counsel and/or a professional employer organization (PEO) can help you proactively stay compliant.

The bottom line

The DOL’s proposed independent contractor rule intends to bring clearer, more predictable worker classification standards. However, with state-level complexity still very much in play, and a final rule still months away, this is the ideal time to prepare.

Disclaimer: This content is provided for informational purposes only and does not constitute legal advice. Because laws and regulations may change and vary by jurisdiction, you should consult with qualified legal counsel or an HR professional regarding your organization’s specific circumstances before making any decisions.