The February 26, 2026, “Newish” Independent Contractor Test

The independent contractor test under the Fair Labor Standards Act (FLSA), which determines whether an individual is classified as an employee or an independent contractor, has started to resemble a ping-pong match — over the last five years the test has changed three times — leaving employers uncertain whether they may face steep penalties for employee misclassification. On Friday, February 26, 2026, the Department of Labor (DOL) issued a that largely reverts back to the 2021 business-friendly, five-part “economic reality” test to determine independent contractor status under FLSA, the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) (the proposed rule).

The proposed rule seeks to replace President Biden’s 2024 “totality of the circumstances” rule. The back and forth (summarized below) has left businesses grasping for certainty in classifying workers. Revisions to worker classification criteria can significantly impact franchisors and manufacturers, particularly concerning the categorization of franchisees and distributors. The balance between exercising control over brand standards and allowing operational independence franchisors and manufacturers susceptible to misclassification claims.

• 2021 (Trump administration): Established a five-factor “economic reality” test, elevating two core factors (control and opportunity for profit/loss) as the most important.
• 2024 (Biden administration): Rescinded the 2021 rule, returning to a “totality of the circumstances” test, where no single factor was weighted more than others, making it harder to classify workers as independent contractors.
• 2026 (Proposed – Trump administration): The 2026 proposed rule aims to reverse the 2024 rule’s “chilling effect” on contracting, prioritizing business certainty and reducing “regulatory whiplash.” While 2024 focused on reducing misclassification, the 2026 proposal seeks to re-establish an “employer-friendly” standard, similar to the 2021 regulations under the five-factor analysis.

The new proposed rule reflects an ongoing effort by the DOL to realign classification rules with long‑standing interpretations grounded in the “economic reality” test. It closely resembles the prior Trump administration’s 2021 classification test, which was replaced in 2024.

The 2026 Proposed Rule Summary

The proposed rule focuses on two main “core factors.” If the core factors do not “both point to the same classification decision,” three additional and less important “secondary factors” may be considered. However, the DOL seeks to continue with the 2021 rule’s emphasis that these factors are not exhaustive.

• Core factors:
  • Nature and degree of control over the work.
  • Opportunity for profit or loss based on initiative and/or investment. If these two factors align, there is a “substantial likelihood” that the classification is accurate.
• Secondary factors (used when core factors are inconclusive):
  • Amount of skill required for the work.
  • Degree of permanence of the working relationship.
  • Whether the work is part of an integrated unit of production. 

Why the Proposed Rule Was Issued to Change the Independent Contract Test — Again

The DOL explains that the 2024 rule failed to provide clarity on how the different factors should be weighed and applied as well as failed to emphasize that the proper inquiry is whether there is economic dependence on work rather than economic dependence for income.

The DOL also noted that the existing approach had a chilling effect on independent contractor status and referred to changes in the 2024 rule that were not consistent with applicable Supreme Court rulings. For example, the “investment factor” analysis typically focused on the investment of the worker. While the 2024 rule changed the investment fact analysis to consider the investment of the worker and the potential employer, prior Supreme Court authority focused solely on the investment of the worker. The proposed rule reverts back to this standard.

What Happens Next?

The DOL has invited comments to the Notice of Proposed Rulemaking (NPRM)within 60 days, or until April 28, 2026. The 2024 rule was not finalized for over a year after the NPRM was issued, so businesses should not anticipate an immediate change.

What Can Your Business Do Now?

Businesses should keep in mind that the proposed rule only addresses independent contractor status with respect to the FLSA and federal laws that incorporate the FLSA’s scope of employment. State-specific independent contractor tests, as well as different tests for purposes such as IRS compliance and the National Labor Relations Act, remain in effect and still must be complied with where applicable.

Businesses should look for guidance under the 2021 rule to determine if a worker’s job duties are controlled by company management and whether the worker has made a financial investment in the work.

Companies should also consider an internal audit of risky independent contractor decisions to determine independent contractor status under the core factors. Audits conducted in conjunction with legal counsel can provide a good faith defense to liquidated damages in the event a lawsuit is filed.

Companies should work closely with their legal counsel to determine whether decisions made under prior independent contractor tests will survive analysis under the proposed rule.

On February 3, 2026, the Delaware Supreme Court issued a decision reiterating the well-settled contract principle that courts should consider the adequacy of consideration for restrictive covenants at the time of contract formation, not at the time of enforcement. The case is North American Fire Ultimate Holdings, LP v. Alan Doorly.Âą

As we have previously written, although the Federal Trade Commission (FTC) recently walked away from its multi-year effort to ban employee noncompete covenants altogether, states like Delaware are still making it harder to enforce noncompetes that do not contain reasonable temporal, geographic, or scope of activity restrictions. Employers thus need to remain vigilant and ensure that their employee restrictive covenants meet the necessary requirements for enforcement.

One often overlooked element of contract formation in the restrictive covenant space is the existence of adequate consideration. Many employers take for granted that their agreements with employees contain sufficient consideration to support the reciprocal promise to abide by post-employment restrictions. A common form of consideration in such agreements is stock or incentive units, which sometimes can be forfeited under specific conditions, and the Doorly decision addressed one critical aspect of this arrangement: when does a court assess the adequacy of consideration where the consideration is forfeited?

In Doorly, an employer and employee entered into an incentive unit grant agreement where, in exchange for the employer’s issuance of common units that would vest over time, the employee agreed to, among other things, abide by certain noncompetition and non-solicitation covenants. The unit agreement further contained a clause that required forfeiture of all vested and unvested units if the employee was terminated for cause, which the employer triggered when it terminated the employee for cause because he formed a competitive entity during employment.

The employer subsequently filed a lawsuit in Delaware Chancery Court seeking to enforce the restrictive covenants, and the employee responded by filing a motion to dismiss, arguing in part that the forfeiture of the units made the contract unenforceable for lack of consideration. The Delaware Chancery Court granted the motion to dismiss, holding that the units were the sole consideration for the restrictive covenants, and thus, once the employer terminated the employee for cause and declared the forfeiture of the units, the consideration disappeared. In other words, the Chancery Court said, “no consideration means no enforceable contract.”

The employer appealed this decision, arguing that consideration existed at the time of the contract’s formation, and thus that the Chancery Court erred by analyzing the consideration element after forfeiture, i.e., at the time of enforcement. The Delaware Supreme Court agreed with the employer, concluding that the determination of whether valid consideration exists should be assessed at the time of contract formation, not at the time of enforcement. The Delaware Supreme Court did not, however, reach the issue of whether forfeitable incentive units constitute valid consideration at the time of formation, instead sending the case back to the Chancery Court to reconsider this issue as well as the other arguments raised by the parties in the case below.

The Doorly decision reminds us that restrictive covenants are essentially just clauses in a contract, and Delaware law follows the bedrock contract principle that the existence of consideration is a necessary element for contract formation. It is also a warning to all employers that utilize Delaware choice of law clauses — which are popular in stock award agreements like the unit agreement in Doorly — to review their agreements to ensure the adequacy of consideration given in exchange for the promise to abide by the restrictive covenants. This is doubly true if the incentive units are forfeitable under various conditions, and employers should consider specifying other or additional consideration for the restrictive covenants to ensure the adequacy of the consideration, even in the event of forfeiture.

1. C.A. 142, 2026 WL 274647 (Del. Supr. Feb. 3, 2026)

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As we previously wrote and reminded readers, in April 2024, the Department of Labor (DOL) issued a final rule (the “2024 Rule”) increasing the standard salary level necessary to qualify for one of the executive, administrative, and professional (EAP or “white collar”) exemptions to the Fair Labor Standards Act (FLSA).

However, on November 15, 2024, Federal District Court Judge Sean Jordan of the Eastern District of Texas ordered vacatur of the 2024 Rule that saw the first increases to the salary basis requirement in decades. Now, the FLSA salary basis reverts to pre-2024 levels, and the impact on employers, many of whom were already adjusting to the new salary levels, is significant.

The 2024 Rule included three different increases. The first, which took effect on July 1, 2024, increased the minimum salary basis for an EAP exemption from the former level of $684/week ($35,568 annual) to $844/week ($43,888 annual). The second planned increase, scheduled to take effect on January 1, 2025, would have increased the salary basis from $844/week to $1,128/week ($58,656 annual). The 2024 Rule further specified that the salary basis would increase thereafter triennially based on contemporary earnings data, with the first triennial increase scheduled to take effect on July 1, 2027.

Now, all of these increases have been struck down by the Eastern District of Texas as unlawful. The District Court’s vacatur includes a roll back of the July 2024 increase that had already become effective nationally, but which is now vacated along with the entirety of the 2024 Rule. This means that there is no longer an increase to the salary basis for the EAP exemptions in 2024, and the salary basis for those exemptions, as of today, reverts to the pre-2024 Rule level of $684/week ($35,568 annual).

As part of its order, the District Court ordered the DOL back to the “drawing board” and to reconsider the rule altogether. In explaining its decision the District Court wrote at length about the historical basis and framework for setting a salary threshold, holding that the salary basis was historically intended to be “deliberately low” merely to weed out those who obviously would not meet the duties test for exemption and that the salary basis standard was never intended to replace the duties-based portion of the test. The District Court held that the DOL deviated from this historical framework beginning with its 2004 rule and determined that the 2024 Rule constituted an unlawful agency action, thus resulting in its vacatur.

Employers across the country must now grapple with what to do next. Many employers instituted salary increases when the July 2024 increase went into effect to ensure continuing exemption status for workers. These employers are now asking what they should do in light of the November 15 ruling, such as whether to claw back previously granted salary increases or to hit the pause button on future increases until salary levels catch up. Even with the ruling, making decisions such as clawing back already-granted increases or pausing future increases can be a complex situation. It is therefore critical that, before taking any action, employers speak with experienced employment counsel. Any action taken as a result of the order is likely to have significant ramifications for your workforce.

For employers that may now seek to claw back raises given out earlier this year, understand that said action risks negative impacts on employee morale, employee retention, and/or claims of adverse treatment. Conversely, employers considering leaving salaries at their post-July 2024 levels but ceasing future raises or inflation-based adjustments, should know that this option, too, carries many risks associated with employee morale, retention, and inflation-based hardships.

It is also important to note that the November 15 order does not in any way impact state salary thresholds for any state or local rules similar to the FLSA’s EAP salary test, many of which meet or exceed the thresholds required under the 2024 Rule. If you are an employer in a state with a state rule that exceeds the FLSA requirement, you will still be required to meet the state mandated minimum thresholds to continue to qualify for the exemption.

In the wake of the Supreme Court’s decision invalidating affirmative action at America’s colleges and universities, a flurry of lawsuits challenging private employers’ diversity and inclusion programs have been filed around the country. 

Meanwhile, with those suits making their way through the courts, the Equal Employment Opportunity Commission (EEOC) continues to remind us to remain focused on fostering inclusive work environments free from bias and harassment. In addition to issuing proposed enforcement guidance on harassment in the workplace (see this week’s companion article), the agency . 

The EEOC’s  provide important details on charges filed, litigation pursued, and recoveries achieved by the agency each year. While the 2023 report is not yet finalized, the EEOC’s recent publication sheds some light on its litigation priorities, including details on the types of lawsuits the agency is pursuing and highlighting key focus areas that employers need to consider. The key takeaway: the EEOC is acting on its Strategic Enforcement Plan in the litigation it’s pursuing.

In its publication, the EEOC notes that it filed 143 new employment discrimination lawsuits in FY 2023, a greater than 50% increase over the prior year’s litigation statistics. An important focus, the agency notes, is on systemic discrimination lawsuits (it filed 25 in FY 2023, double the number in the past three years). The  a “systemic” discrimination litigation as one that targets a “pattern or practice, policy and/or class … where the discrimination has broad impact on an industry, profession, company, or geographic location.” 

This uptick in systemic lawsuits indicates the EEOC is pursuing class action employment litigation, like the nationwide age discrimination suit it  earlier this month for $2.4 million. In that case, the defendant employer was accused of violating the Age Discrimination in Employment Act (ADEA) through its initiative to hire more millennials into its workforce, wherein it denied sales representative positions to applicants over 40 years old. Similar outcomes can be expected in the future as the EEOC’s systemic litigation initiatives continue.

The agency’s litigation efforts also focused on single- and multiple-employee non-systemic class suits, challenging barriers in recruiting and hiring, qualification standards, and inflexible workplace policies the EEOC alleges discriminate against individuals with disabilities. The report also notes that the agency’s 2023 litigation docket continued its focus on litigation involving the long-term impacts of COVID-19 on certain workers, pay equity, and combating unlawful harassment.

The wide array of litigation initiated by the EEOC in FY 2023 reminds us that employers should:

• Closely and regularly examine their compensation structures to ensure parity and implement transparent processes for promotions to counteract pay equity disparities
• Create a workplace culture that prioritizes diversity and inclusion, which is crucial in addressing gender- or race-based concerns
• Review, update, or implement robust anti-discrimination policies, provide diversity and inclusion training, and foster an environment that values employees’ differences
• Be mindful of stereotypes and biases associated with age and proactively address these within the workplace
• Encourage cross-generational collaboration and provide training on age inclusivity
• Prioritize flexibility and accessibility to ensure that employees with disabilities have the support they need to thrive in the workplace

You can expect another update from us, once the EEOC publishes its final report for FY 2023, with our further assessment on trends and guidance.