Labor Department Proposes New FLSA Independent Contractor Rule

The U.S. Department of Labor (DOL) today published notice of its intent to revise its regulations that distinguish covered employees from exempt independent contractors for enforcement purposes under the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA) and other laws.

Although the revised regulations would determine what administrative actions DOL takes in response to alleged noncompliance with the statutes, it is uncertain how courts will treat the regulation in adjudicating claims.

The proposal is open for public comment until April 28, 2026. NAHB will be submitting comprehensive comments.

The FLSA does not clearly define what form of employment relationship establishes entitlement to its protections, which include minimum wages and overtime. This has led to confusion in the labor market and uneven application in courts.

Since the 1940s, courts have applied “economic reality” tests that identify what factors about an employment relationship are relevant to a finding of covered employment under the FLSA. But the factors, and the relative importance of those factors, differ among the federal judicial circuits.

Less than two weeks prior to President Biden’s inauguration in 2021, the DOL in President Trump’s first administration codified a regulation establishing for the first time that FLSA case law supported nationwide application of a certain set of factors and a certain standard for what factors supersede others.

The 2021 regulation established a five-factor test and identified two factors — the degree of the potential employee’s control over the work and the individual’s opportunity for profit or loss — that would generally exclude application of the other factors when those two factors suggest the same classification. NAHB supported the 2021 regulation, which was intended to simplify compliance and minimize unnecessary hazards to entrepreneurship and the independent contracting model arising from FLSA enforcement.

The Biden administration declined to enforce the 2021 regulation and issued an NAHB-opposed 2024 regulation establishing a vague six-factor test that did not articulate the relative importance of the factors. Enforcement of the 2024 regulation was complicated by numerous court challenges and was suspended following President Trump’s second inauguration in 2025.

If finalized, the 2026 revision would restore the 2021 regulation’s five-factor test and two-factor emphasis. Unlike the 2021 regulation, the 2026 revision would:

• Extend application of the test beyond the FLSA to the FMLA and Migrant and Seasonal Agricultural Worker Protection Act,
• Include eight rather than six situational examples to aid compliance, and
• Include additional regulatory text further clarifying that covered employment is suggested where the employee depends on the employer for work rather than for income.

DOL’s Wage and Hour Division (WHD) conducts administrative investigations and settlements in response to alleged noncompliance with the FLSA, but in the absence of a settlement, DOL must sue in court to pursue the claim. The FLSA also allows private persons to sue independently to recover losses arising from alleged noncompliance with the FLSA. Although the revised regulations would govern how DOL applies the law for administrative enforcement, courts decide how the law applies in judicial proceedings. It is uncertain to what extent judges would adhere to the test that the revised regulations would establish, especially where a different test has consistently been applied in cases in the same judicial circuit.

Although DOL disclaims any intention “to favor independent contractor or employee classification relative to the status quo,” it projects that finalization of the regulation may “lead to an increase in the number of independent contractor arrangements” because of increased legal certainty.

NAHB will engage in the rulemaking process and provide updates as the rule moves forward.