How the DOL's 2026 Rules Reshape Worker Classification and Joint Liability

For millions of American freelancers, gig workers, and the businesses that hire them, the legal line between "employee" and "independent contractor" dictates access to minimum wage, overtime pay, and benefits. When that line shifts, it moves billions of dollars in labor costs and liability. In early 2026, the U.S. Department of Labor (DOL) proposed two major rules designed to redefine worker classification and joint employer liability under the Fair Labor Standards Act (FLSA). If finalized, these regulations will replace Biden-era frameworks with more business-friendly standards, making it easier for companies to classify workers as independent contractors and harder for them to be held jointly liable for third-party employees.[1][3]

The first proposed rule, announced in February 2026, targets independent contractor classification. It seeks to rescind the DOL's 2024 rule, which utilized a broad six-factor "totality-of-the-circumstances" test that often leaned toward employee status. In its place, the DOL proposes a return to an "economic reality" test closely mirroring the framework adopted in 2021. The core inquiry asks whether a worker is economically dependent on a potential employer or is genuinely in business for themselves.[1][3]

To answer that question, the proposed independent contractor rule elevates two "core factors" above all others: the nature and degree of control the employer exercises over the work, and the worker's opportunity for profit or loss based on their own initiative or investment. If both factors point toward the same classification, there is a "substantial likelihood" that it is the legally accurate status. While other elements—such as the skill required or the permanence of the working relationship—remain relevant, they carry less weight than the two primary guideposts.[1][3]

Two months later, in April 2026, the DOL issued a second proposed rule addressing joint employer liability. Joint employment occurs when two or more entities share control over a worker, making both jointly and severally liable for wage-and-hour violations. Since the rescission of a 2020 rule, employers have navigated a patchwork of conflicting judicial standards. The new proposal aims to establish a uniform nationwide framework, distinguishing between "vertical" and "horizontal" joint employment scenarios.[2]

Vertical joint employment typically arises when a company uses a staffing agency or subcontractor. The DOL proposes a four-factor test to determine if the potential joint employer exercises sufficient control over the worker. The test examines whether the entity hires or fires the employee, substantially supervises their work schedule or conditions, determines their rate and method of payment, and maintains their employment records. Crucially, the rule notes that "reserved control"—the contractual right to exert control, even if unexercised—is relevant, though actual exercise of control carries more weight.[2]

Horizontal joint employment occurs when an employee works separate hours for two or more employers that are "sufficiently associated" with each other. For example, if a worker splits a 50-hour week between two restaurants owned by the same parent company, the entities are horizontal joint employers and owe the worker 10 hours of overtime pay. The proposed rule clarifies that standard business practices, such as operating as a franchisor or requiring compliance with health and safety standards, do not automatically create a joint employment relationship.[2]

For small businesses and franchise operators, the regulatory shift offers significant financial relief. The U.S. Small Business Administration estimates that rescinding the 2024 independent contractor rule alone will save small entities $329 million annually in compliance and reclassification costs. By clarifying the joint employer standard, the DOL also aims to reduce the litigation risks associated with using third-party vendors and staffing firms.

Despite the federal push for clarity, the legal landscape remains fractured. The DOL's proposed rules apply only to the FLSA, the Family and Medical Leave Act, and the Migrant and Seasonal Agricultural Worker Protection Act. They do not alter the National Labor Relations Act, nor do they preempt stricter state-level classification laws. Employers in states like California, which utilizes the stringent "ABC test" for independent contractors, must still comply with local standards regardless of the federal rollback. Until the rules are finalized following their respective public comment periods, businesses must continue navigating the existing, more restrictive frameworks.[1][2][3][4]