What does the new proposal for the economic reality test mean?
Recently, the U.S. Department of Labor (DOL) has proposed rules that aim to clarify independent contractor status under federal wage and hour laws. While these are currently under review, understanding the suggested changes can help you stay on top of what you must revise in your company policies.
Current rules under the Department of Labor
Employment misclassification is an illegal practice that involves wrongfully classifying employees as independent contractors to avoid taxes and benefits. The DOL fights against this by implementing the Economic Reality Test. This requires employers to determine a worker’s status based on six key factors. However, a May 2025 bulletin halted its enforcement.
Latest updates on the new proposal
On February 26, 2026, the DOL officially published the proposed rule in the Federal Register. It seeks to redefine how workers are classified, pivoting towards a test that prioritizes two factors:
- The nature and degree of control over the work
- Opportunity for profit or loss based on initiative and investment
As of today, the proposal is in the review phase.
What to do to prevent misclassification audits
While waiting for a decision on the proposal, it is prudent to conduct a risk assessment that verifies the status of all your employees. Misclassifying employees can result in facing potential liabilities for unpaid overtime under the Fair Labor Standards Act (FLSA) and back taxes to the Florida Department of Revenue.
Compliance can be a moving target. Seeking legal advice from an employment law attorney can help you stay updated with all standards.