Two Labor Department Rules Are About to Redraw Who Your Workers Belong To
By Hari Nathan Kalyan, Managing Attorney, Warren Kalyan.
Five Key Takeaways
- A friendlier independent contractor test is close to final. The DOL proposed rescinding the 2024 rule in favor of an approach closer to 2021, and reporting from mid August 2026 places it in the final stages of review.
- Two factors now carry most of the weight. Control over the work and the worker's opportunity for profit or loss based on their own initiative become the core test, with the remaining factors treated as supporting detail.
- A national joint employer standard is the bigger story. The DOL has proposed one test across the FLSA, the FMLA, and the Migrant and Seasonal Agricultural Worker Protection Act, replacing rules that currently differ by federal circuit.
- Joint employers share liability, and hospitality operators are named directly. Two commonly owned restaurants with a shared manager and an employee who works both locations are the DOL's own example of horizontal joint employment, and their hours get aggregated for overtime.
- Neither rule is final, and state law runs on its own track. The Texas Workforce Commission and IRS apply separate tests, so a favorable federal rule does not resolve a state law classification question.
If you run a small or medium sized business, you have probably had this conversation with your bookkeeper. Is that person a 1099 or a W2? You picked an answer, you moved on, and you hoped nobody would ever ask again.
Two proposed federal rules are about to change the stakes of that answer. One is about who counts as an independent contractor. The other is about when a second company gets pulled in as a joint employer and made liable for wages it never paid. Both came out of the Department of Labor this year. Both are moving.
Here is what happened, and what we would do about it if we sat in your chair.
The Independent Contractor Rule Is Close to Final
On February 26, 2026, the DOL proposed rescinding the 2024 independent contractor rule and replacing it with something closer to the standard used in 2021. The comment period closed April 28 and drew more than 16,500 comments. As of mid August, reporting indicates the rule has moved into the final stages of review, with a final version expected later this year.
The proposal keeps the familiar economic reality language but stops treating every factor as equal. Instead, two core factors carry most of the weight: the nature and degree of control over the work, and the worker's opportunity for profit or loss based on their own initiative or investment. If both core factors point the same direction, the DOL says that is very likely the right classification. The remaining factors, things like the skill required, how permanent the relationship is, and whether the work is part of an integrated unit of production, become supporting detail rather than co equal tests.
The framework would also apply to employment status questions under the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act.
For owners, this is directionally good news. A predictable test is worth real money, because most misclassification exposure comes from uncertainty rather than bad intent.
The Joint Employer Proposal Is the Bigger Story
The rule getting less attention is the one we would worry about more.
On April 22, 2026, the DOL proposed a single national joint employer standard across the FLSA, the FMLA, and MSPA. The comment period closed June 22. Right now, joint employer tests differ by federal circuit, which means the same staffing arrangement can be legal in one appellate circuit and expensive in another. The proposal tries to settle that.
Joint employment matters because of what comes with it. When two businesses jointly employ someone, they are jointly and severally liable for that worker's wages, damages, and other relief. Hours worked for both employers get added together in the same workweek for overtime. If one company cannot or will not pay, the other one does.
Vertical and Horizontal Joint Employment, Explained
The proposal splits the analysis in two.
Vertical joint employment covers the situation where a worker is on one company's payroll but another company effectively runs the work. The test looks at four things: who hires and fires, who substantially supervises and controls the schedule and conditions of work, who sets the rate and method of pay, and who keeps the employment records. The DOL's own example is a general contractor and an electrical subcontractor. The electrician is on the sub's payroll, but the GC controls the daily schedule, supervises the site, and enforces its own safety protocols. Both companies exert control, so both are on the hook.
Horizontal joint employment is about the relationship between two employers rather than the amount of control either exercises. The DOL's example lands squarely on our hospitality clients. Two restaurants under common ownership, with intermingled administrative operations and a shared manager, share an employee who picks up shifts at both. Those restaurants are horizontal joint employers. That means their hours get aggregated for overtime, and it affects benefits and leave eligibility too.
The proposal also draws a useful line. A business relationship that has little to do with the employment of specific workers does not create horizontal joint employment. Sharing a vendor does not. Being franchisees of the same franchisor does not.
What This Does Not Change
Two cautions before anyone reclassifies anybody.
First, a federal wage and hour rule is not the whole picture. The IRS applies its own analysis for payroll tax purposes. Texas Workforce Commission unemployment tax and workers compensation questions run on their own tests. A worker can be an independent contractor for one purpose and an employee for another, and a favorable federal rule does not fix a state law problem.
Second, neither rule is final, and rules in this area swing with each administration. The 2024 rule replaced the 2021 rule, and this proposal would put the 2021 approach back. Major classification changes tend to draw litigation. Building your labor model on a proposed rule is a bad bet.
What We Would Do in the Next 60 Days
Pull your contractor list and sort it honestly. For each person, ask who really controls how and when the work gets done, and whether that person has a genuine shot at profit or loss based on their own investment. If the answer to both is "we do" and "no," you have a problem regardless of which rule is in effect.
Fix the paper and then fix the practice. Contracts matter, but the DOL has been clear that actual practice matters more. A contract calling someone a contractor while your manager sets their hours is worse than no contract at all, because it documents the gap.
Map your shared workers. If you own two or three operating entities and staff float between them, find out now whether anyone crossed 40 hours across entities in the same week. Unpaid overtime plus liquidated damages adds up quietly.
Look hard at staffing and subcontractor arrangements. Run the four vertical factors against how your site or store actually operates. If your people are directing the staffing agency's workers day to day, you are closer to joint employer status than your services agreement suggests.
Talk to your insurance broker and your CPA. Classification decisions touch payroll tax, workers compensation coverage, and employment practices liability all at once.
Our team at Warren Kalyan works with owners and operators on exactly these questions, usually before a Wage and Hour investigator or a plaintiff's lawyer forces the issue. Worker classification is one of the few areas where a few hours of planning genuinely prevents a five or six figure problem.
Is your worker classification ready for the new DOL rules?
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General information only, not legal advice for your specific situation.