The DOL’s Proposed 2026 Independent Contractor Rule: What Business should Know

The U.S. Department of Labor has introduced a proposed rule for 2026 that would largely re‑adopt the 2021 Independent Contractor Rule, making only minor adjustments. Although the rule is still in the proposal stage, it reflects a continued movement toward a more predictable federal framework for determining whether a worker should be classified as a W-2 worker or an independent contractor under the Fair Labor Standards Act. For businesses and organizations relying on flexible workforces, this signals a potential return to clearer federal guidance, though it does not eliminate the complexities created by state‑level laws.

Under the current federal standard, worker classification is determined using the 2024 Independent Contractor Rule, which applies a six‑factor “totality of the circumstances” economic reality test to assess whether a worker is economically dependent on a hiring entity or operating an independent business. The factors include the degree of control over the work, the worker’s opportunity for profit or loss, investments made by each party, the permanence of the relationship, the worker’s skill and initiative, and how integral the work is to the business. No single factor carries predetermined weight, and the analysis focuses on the overall economic relationship between the parties.

A Return to the 2021 Economic Reality Test

At the core of the proposed 2026 rule is a reinstatement of the 2021 economic‑reality test, which evaluates whether a worker is economically dependent on the company they want to provide their services to. This test considers six factors, with two of them carrying the greatest weight in the analysis.

• Control Over the Work This examines how much control the company has over the worker’s schedule, performance, and ability to work for others.
• Opportunity for Profit or Loss This looks at whether the worker can influence their earnings through business decisions—such as negotiating rates, investing in tools, or hiring helpers.
• Skills Required Specialized, business-oriented skills support contractor classification.
• Permanence of the Relationship Ongoing, indefinite work suggests a W-2 relationship; while project-based or temporary work leans towards contractor status.
• Integration into Business Work that is central to the company’s operations tends to indicate a W-2 worker status.
• Other Business – Like Factors A catch all for additional evidence showing whether the worker is operating an independent business.

If these two core factors point strongly in one direction, they can outweigh the remaining factors. The four additional factors that provides context but carry less weight are:

Together, these elements create a structured, more predictable framework for assessing contractor status at the federal level.

Federal vs. State Rules

Even if the proposed rule is finalized, it is important to recognize that federal classification standards do not override state laws. Many states continue to apply far more restrictive tests, and businesses must comply with whichever standard is most protective of the worker. States such as California, Massachusetts, and New Jersey rely on variations of the ABC Test, which presumes a worker is a W-2 worker unless they can satisfy all three prongs of the test.

To understand the restrictive nature of this framework, it is helpful to examine the three prongs of the ABC Test. Prong A requires that the worker be free from the company’s control in performing their work. Prong B requires that the work be performed outside the usual course of the company’s business. Prong C requires that the worker be engaged in an independently established trade or business of the same nature as the work performed. If a worker cannot meet all three of these criteria, they must be classified as a W-2 worker under state law.

Other states, including Connecticut, Illinois, and Washington, use hybrid or industry‑specific rules that further complicate compliance. As a result, even if the federal landscape becomes less restrictive for companies to utilize independent contractors, state‑level requirements may still mandate a W-2 worker classification.

You can view state by state specific independent contractor analysis guide on our website: https://www.tcwglobal.com/usa-ic-compliance-guide/.

How TCWGlobal Can Help

Worker misclassification remains one of the most significant compliance risks for U.S. businesses. For businesses operating across multiple states - or internationally - navigating these overlapping standards can be challenging.

And this is where TCWGlobal can step in. By maintaining clear documentation, consistent vetting practices, and an understanding of jurisdictional differences, TCWGlobal can assist businesses better protect themselves from misclassification liability for their contingent workforce.