This decision, along with other recent decisions at the state level and the introduction of a bill before Congress that proposes amending the worker classification standard in the Fair Labor Standards Act (FLSA) and the National Labor Relations Act (NLRA),3 signals a return to prior interpretations that are generally more business-friendly approaches to worker classification and, according to the DOL, “provide greater clarity for businesses and workers.”
Background
Under federal and state labor and tax laws, workers must be classified as either employees or independent contractors. The DOL and Internal Revenue Service (IRS) each maintain its own legal standard for classifying workers. This classification is important: employees have rights and legal benefits that independent contractors do not, and employee wages are subject to mandatory tax withholding. In contrast, independent contractors enjoy greater flexibility in working conditions but are responsible for their own tax remittances and are often ineligible to participate in company-sponsored employee benefit plans. Misclassification can result in potentially steep fines and/or penalties against the business receiving the worker’s services.
The 2024 Rule sets forth the controlling test for determining whether a worker was an employee or independent contractor under the FLSA. The 2024 Rule provides that worker classification is based on an assessment of six “economic reality” factors:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer’s business
- Skill and initiative
None of the economic reality factors were individually dispositive. Rather, all six factors under the 2024 Rule were required to be weighed to assess whether a service provider was, according to the totality of the circumstances, economically dependent on an employer.
In contrast, the IRS’s determination, which the Trump administration has not abandoned, is based on common law rules and focuses on the degree of control and independence, the evidence of which falls into three categories:
- Behavioral (the level of control the company has over what the worker does)
- Financial (the level of control the company has over the financial and business aspects of the worker’s job)
- The type of relationship (whether the worker receives employee-type benefits and what the contract says about the relationship between the parties)
The IRS has advised that companies should weigh all three factors and look at the entire business relationship before making a classification determination.4
Federal developments
On May 1, 2025, the DOL issued a directive instructing DOL staff not to enforce the 2024 Rule.5 The directive came in the form of a Field Assistance Bulletin and instructs the Wage and Hour Division staff of the DOL to rely on the worker classification framework outlined in a 2008 “Fact Sheet” issued in the context of FLSA investigations (Fact Sheet #13).6 Fact Sheet #13 provides that the following factors are significant for a worker classification analysis:
- The extent to which the services rendered are an integral part of the service recipient’s business
- The permanency of the relationship
- The amount of the alleged contractor’s investment in facilities and equipment
- The nature and degree of control by the service recipient
- The alleged contractor’s opportunities for profit and loss
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
- The degree of independent business organization and operation
Though both Fact Sheet #13 and the 2024 Rule utilize an “economic reality” factors test approach to assessing worker classification, Fact Sheet #13 is generally considered to be more business-friendly because it does not impose a singular test for determining worker classification and there is no requirement that companies consider all of the factors listed in above bullets, providing companies with more flexibility to make a determination that a worker is an independent contractor.
Several lawsuits alleging that the 2024 Rule violates the Administrative Procedures Act7 are pending, but the DOL has recently sought to suspend that litigation while it reconsiders whether to defend or rescind the 2024 Rule. In the meantime, the 2024 Rule will remain in effect for purposes of private litigation.
On July 23, 2025, the U.S. House Committee on Education and Workforce approved the Modern Worker Empowerment Act, which proposes amendments to the FLSA and the NLRA to clarify the standard for worker classification.8 The bill proposes that a worker be classified as an independent contractor rather than an employee if the company does not exercise “significant control over the details of the way the work is performed” and, while performing such work, the worker has “opportunities and risks inherent with entrepreneurship.”9 This proposal adopts a worker classification approach similar to the 2021 Trump-era rule that was rescinded by the 2024 Rule, which highlighted the degree of the worker’s control over the work and the worker’s opportunity for profit or loss.10 This bill has not been signed into law; it remains subject to passing by a majority vote in the House and Senate and approval by the president.
State law developments
States have their own worker classification tests that companies must also consider. Though worker classification laws vary among the states, 33 states currently use the “ABC test” (or a variation of the ABC test), which provides three criteria for determining whether a worker is an independent contractor:
- The worker must be free from the business’ control and direction in performing the work.
- The work must take place outside the business’ usual course of work.
- The worker must customarily be engaged in an independent trade, occupation, profession, or business.
The Ninth Circuit ruled on May 16, 2025 that California’s worker classification test, which is considered to be more employee-friendly, does not violate the dormant commerce clause doctrine or the equal protection clause of the U.S. Constitution.11 California codified the ABC test, which has been challenged on the basis that the effect of the second prong of the test set out in the above bullets is to classify all drivers who are engaged by a motor carrier12 operating within the state, including owner-operators, as employees, given that the work performed is within the motor carrier’s “usual course of work.”13
Challengers also argued that in-state owner-operators are not able to satisfy certain criteria for the business-to-business exception, including the requirement that a business operate a “business location that is separate from the business or work location of the contracting business.”14The court held that the ABC test neither precludes out-of-state drivers from working in California nor does it distinguish between intrastate and interstate drivers for purposes of the business-to-business exception.
On May 31, 2025, a new lawsuit was filed in the U.S. District Court for the Central District of California alleging that the second prong of the California test violates the equal protection clause by effectively requiring that all nail technicians be classified as independent contractors.15 We anticipate similar lawsuits will be filed involving industries in which there is significant overlap between a company’s core business and the offerings of a prospective service provider.
Additionally, the New Jersey Department of Labor and Workforce Development recently announced a proposal to codify a list of principles and factors used to determine whether a worker is an independent contractor under the ABC test.16 The proposed rule would provide that the burden of proof to establish an independent contractor relationship under the ABC test is on the company and that the company must establish that all three prongs of the ABC test are met.
Our take
When analyzing whether workers are properly classified as employees or independent contractors under the FLSA, DOL investigators will apply Fact Sheet #13, as further informed by Opinion Letter FLSA2019-6, instead of the 2024 Rule, which imposed stricter standards for classifying workers as independent contractors. Employers that classified workers as employees under the 2024 Rule can choose to either maintain the existing classifications or consider whether their employees could instead be properly classified as independent contractors under the more business-friendly framework of Fact Sheet #13.
Nothing in Fact Sheet #13 would require an employer to reclassify a worker already classified as an employee. Therefore, employers who wish to maintain current classifications may do so in compliance with Fact Sheet #13. On balance, certain industries appear to prefer having increased flexibility to classify workers as independent contractor.17
This is a developing area of the law that companies should monitor closely in order to ensure they are applying the appropriate worker classification standard. In the meantime, companies may wish to reexamine how their workers are classified or change how they approach classification of new hires.
We are continuing to monitor updates on worker classification law. Please feel free to reach out with any questions or if you would like to know more about how new developments relating to worker classification may affect your business.
Footnotes
1. In 2008, under the Bush administration, the Wage and Hour Division published Fact Sheet #13, which was revised under the first Trump administration and, as described below, was generally considered to be more business-friendly. In 2021, during the second Trump administration, the U.S. Department of Labor finalized a worker classification rule that made it even easier for businesses to classify workers as independent contractors by reducing the number of factors businesses were required to consider in determining worker classification. The 2024 Rule, published during the Biden administration, was deemed more employee-friendly because it increased the number of factors to be included in the worker classification analysis and required that all of the factors be considered.
2. Employee or Independent Contractor Classification Under the Fair Labor Standards Act, 29 C.F.R pts. 780, 788, 795 (2024).
3. H.R. 1319, 119th Congress (2025).
4. INTERNAL REVENUE SERVICE, Publication 1779, Independent Contractor or Employee (2012), https://www.irs.gov/pub/irs-pdf/p1779.pdf.
5. U.S. DEP’T OF LABOR, Field Assistance Bulletin (FAB) No. 2025-1, https://www.dol.gov/sites/dolgov/files/WHD/fab/fab2025-1.pdf?lec6tn7bd.
6. U.S. DEP’T OF LABOR, Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA) (July 2008), https://www.dol.gov/sites/dolgov/files/WHD/fact-sheets/whdfs13.pdf.
7. 5 U.S.C. §§ 551–559.
8. H.R. 1319, 119th Congress (2025).
9. Id.
10. Independent Contractor Status Under the Fair Labor Standards Act, 29 C.F.R pts. 780, 788, 795 (2021).
11. California Trucking Ass’n v. Bonta, No. 24-2341 (9th Cir. May 16, 2025) (mem.) (unpublished).
12. A person providing motor vehicle transportation for compensation.
13. California Trucking Ass’n v. Bonta, No. 20-55106 (9th Cir. April. 28, 2021).
14. California Trucking Ass’n, v. Becerra, No. 3:18-cv-02458-BEN-BLM (S.D. Cal. Nov. 12, 2019).
15. Blu Nail Bar, Inc. v. Newsom, No. 8:25-cv-01184 (C.D. Cal. May 31, 2025).
16. ABC Test; Independent Contractors, N.J. DEP’T OF LABOR AND WORKFORCE DEV. (Apr. 3, 2025), https://www.nj.gov/labor/assets/PDFs/Legal%20Notices/Notices%20of%20Proposal/NJAC_12_11_(independent_contractor)_notice_of_proposal_FILED_4_3_25.pdf.
17. Business groups such as the American Trucking Associations, the National Retail Federation Associated Builders and Contractors, the Coalition for Workforce Innovation, the Financial Services Institute and the National Federation of Independent Business have publicly opposed the 2024 Rule.
