U.S. DOL Rescinds Rule on Independent Contractor Misclassification

The U.S. Department of Labor (DOL) recently announced a change in its enforcement approach relating to how employers classify workers as independent contractors under the Fair Labor Standards Act (FLSA). This move reverses course from an earlier, more stringent interpretation of contractor classification criteria established under the Biden administration. It has far-reaching consequences for both businesses and workers across industries.

The Biden rule, introduced in 2021, sought to provide stricter guidelines for determining who qualifies as an independent contractor. The central intent was to curb the misclassification of workers — a practice prevalent in industries such as ride-sharing, delivery, construction, hospitality and healthcare. The misclassification issue is consequential because independent contractors are not entitled to certain workplace protections, including minimum wage, overtime pay and other FLSA-guaranteed benefits. The 2021 rule called for assessing the “totality of the circumstances” to decide if a worker was economically dependent on the employer and thus should be classified as an employee.

However, business groups responded with strong opposition and lawsuits, arguing that the 2021 rule’s broad scope created uncertainty and heightened litigation risk. Specifically, they pointed to the rule’s treatment of indirect control by employers as a decisive factor in classifying workers as employees, which they claimed expanded liability for businesses and made compliance more complicated.

On May 1, 2025, the DOL Wage and Hour Division issued a directive stating it would not enforce the 2021 rule, citing ongoing lawsuits challenging its validity. Instead, the agency announced it would revert to using previous criteria while it undertakes a review and formulation of updated standards.

This means that the DOL is returning to the so-called “economic realities” test, rooted in federal case law and guidance and agency guidance documents. This approach considers a range of factors, namely: 

1. The extent to which the services rendered are an integral part of the principal’s business 
2. The permanency of the relationship 
3. The amount of the alleged contractor’s investment in facilities and equipment 
4. The nature and degree of control by the principal 
5. The alleged contractor’s opportunities for profit and loss 
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor 
7. The degree of independent business organization and operation

No single factor is decisive. The goal is to assess whether a worker is truly in business for themselves or economically reliant on the employer.

The DOL’s announcement settles the immediate question of federal enforcement but leaves uncertainty in its wake. A new rule from the DOL is anticipated, but it is also likely to face legal challenges. In the interim, people working as independent contractors are advised to seek legal assistance to determine if they have been misclassified and thus are being denied benefits that they rightfully deserve.

At Deutsch Atkins & Kleinfeldt, P.C. in Hackensack, our New Jersey employment lawyers help workers with employee misclassification claims. If you have concerns about being classified as an independent contractor, call our Hackensack office at 551-245-8894 or contact us online to arrange a confidential meeting.