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Editorial 8 MIN READ

The DOL contractor rule is on borrowed time

A year into the six-factor test, the second Trump administration has already started the work of unwinding it

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 6 sections
  1. What the 2024 rule actually did
  2. The pending challenges
  3. Trump 2.0 and the regulatory freeze
  4. The state analogues are the actual constraint
  5. What to do in March 2025
  6. Sources

he Department of Labor's independent contractor final rule, 89 Fed. Reg. 1638, took effect on March 11, 2024, and is already being pulled apart. On February 2025 the new DOL under Secretary Lori Chavez-DeRemer opened rulemaking to rescind and replace it, while three federal challenges continue to work through the Fifth Circuit, the Eastern District of Louisiana, and the Northern District of Texas.

For anyone classifying workers under the Fair Labor Standards Act, the practical question in March 2025 is which test is actually binding this quarter, and the honest answer is that it depends on your circuit, your state, and how fast the new rulemaking moves.

What the 2024 rule actually did

The rule rewrites 29 C.F.R. Part 795 to implement the employee-or- contractor analysis under 29 U.S.C. § 203(e) and (g) of the FLSA, which defines "employ" to include "to suffer or permit to work." That phrase is what the courts and the DOL have been circling since the 1940s. The Biden DOL's version of the circle is a six-factor totality-of-the- circumstances test: opportunity for profit or loss depending on managerial skill, investments by the worker and the potential employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work is an integral part of the potential employer's business, and the worker's skill and initiative. No factor is dispositive, and additional factors can be considered if they bear on economic dependence.

This is a return to the multifactor "economic reality" approach that the agency and most circuits used before 2021. It replaced the 2021 Trump-era rule, 86 Fed. Reg. 1168, which had compressed the inquiry down to two "core" factors, the nature and degree of control over the work and the worker's opportunity for profit or loss, with three other factors acting as tiebreakers. The Biden DOL withdrew the 2021 rule by notice, lost a round on procedural grounds in the Eastern District of Texas in Coalition for Workforce Innovation v. Walsh, and came back with the current rule in January 2024.

Nothing in the 2024 rule changes the statute. It changes the agency's stated reading of the statute and the analytical framework WHD investigators use. Courts are not bound to defer to it, especially after Loper Bright v. Raimondo retired Chevron deference in June 2024. But it is still the document DOL enforcement staff will pull out of the drawer.

The pending challenges

Three cases are live.

Coalition for Workforce Innovation v. Department of Labor is the consolidated Fifth Circuit appeal that came out of the Eastern District of Texas. The plaintiffs, a trade coalition that includes gig platforms and freelancer groups, argue that the 2024 rule exceeds the DOL's authority and is arbitrary under the APA. Briefing ran through 2024 and oral argument was held in late 2024; a decision is pending. The Fifth Circuit is the most plaintiff-friendly venue in the country for this kind of challenge, and even a partial remand would force DOL back to the drawing board independent of whatever the new administration does.

Frisard's Transportation LLC v. Department of Labor, pending in the Eastern District of Louisiana, was brought by a trucking company and an owner-operator challenging the rule facially. The court denied a preliminary injunction in 2024 but left the merits open.

Warren v. Department of Labor, filed in the Northern District of Texas by four freelance writers, attacks the rule on First Amendment and APA grounds, arguing that the economic-reality test chills their ability to be treated as contractors and thus speak freely. The court denied a preliminary injunction in early 2024 and the case is at the summary-judgment stage.

None of these cases has vacated the rule. The rule is in force nationwide as of March 2025. But each of them gives the new DOL a reason to ask the courts to hold briefing in abeyance while rulemaking proceeds, which is the normal move and is probably what will happen next.

Trump 2.0 and the regulatory freeze

On January 20, 2025, Executive Order 14148 reinstated the standard inauguration-day regulatory freeze memorandum, directing agencies to pause the effective dates of rules that had not yet taken effect and to consider withdrawing or re-proposing rules already in force. The 2024 contractor rule had been effective for almost a year by that point, so the freeze itself did not suspend it. What the freeze did was cue the agency to reopen the record.

In February 2025, DOL under newly confirmed Secretary Chavez-DeRemer announced it would initiate rulemaking to rescind and replace the 2024 rule. The agency has not yet published a notice of proposed rulemaking, and until it does the 2024 rule remains the operative regulation. A full rescission under the APA requires notice, comment, and a reasoned explanation for the change, so the fastest realistic timeline to a replacement rule is late 2025, and more likely 2026. Until then, the 2024 rule is what WHD will apply and what private plaintiffs will cite in FLSA misclassification suits.

The interim question is enforcement posture. DOL has discretion over which investigations it opens and which cases it litigates. A Republican DOL has historically been less aggressive on contractor classification than a Democratic one, and the signal from the new leadership is that field offices should deprioritize misclassification investigations while the rulemaking is open. That does not change the rule; it changes the probability any given business ends up in front of an investigator this year.

The state analogues are the actual constraint

Most of the classification risk for operating companies does not come from the FLSA at all. It comes from state wage-and-hour statutes that use their own tests, many of them stricter than the federal economic- reality analysis.

California codified the ABC test in Cal. Lab. Code § 2775 following the Supreme Court's decision in Dynamex v. Superior Court and the legislature's AB 5. A worker is presumed to be an employee unless the hiring entity proves that (A) the worker is free from control and direction in connection with the performance of the work, (B) the worker performs work that is outside the usual course of the hiring entity's business, and (C) the worker is customarily engaged in an independently established trade of the same nature as the work performed. Prong B is the one that kills most gig classifications. California has since legislated a long list of occupational exemptions that revert those professions to the older Borello multifactor test, but the default remains ABC.

Massachusetts has its own ABC test at M.G.L. c. 149 § 148B, worded similarly and applied aggressively by the Attorney General. New Jersey uses an ABC test at N.J. Stat. § 34:20-13 for the New Jersey Unemployment Compensation Law. Illinois, Connecticut, and several other states use variants.

None of these tests is affected by what the DOL does with its FLSA rule. A California staffing firm could win a WHD audit under a rewritten federal rule and still owe back wages, PAGA penalties, and unemployment contributions under state law. The federal rule matters most for states that track the federal test by default, and for national employers trying to run a single contractor program across jurisdictions.

The gig-economy carveout in California is Proposition 22, the 2020 ballot measure that exempts app-based rideshare and delivery drivers from AB 5 in exchange for a set of earnings guarantees and benefits stipends. The California Supreme Court upheld Prop 22 against a constitutional challenge in Castellanos v. State of California in July 2024, which settled the question for Uber, Lyft, DoorDash, and similar platforms in California. Prop 22 does not extend to other states, and it does not extend to non-gig contractor relationships inside California.

What to do in March 2025

Operating companies should continue to classify under the 2024 rule federally, because it is the rule in force and because, even with a friendlier DOL, private plaintiffs can still bring FLSA collective actions using the current regulation as persuasive authority. For state-law classification, follow the state's test and do not assume federal action will help.

If you have a contractor program in California, Massachusetts, New Jersey, or another ABC state, the federal rulemaking is close to irrelevant to your risk. If your workforce is entirely in states that follow the FLSA test by default, a 2026 rollback could meaningfully loosen the constraint, but you will be classifying under the current rule in the interim and any reclassification decision made this year should be made on today's law.

The gig platforms will be fine in California under Prop 22 and will continue to litigate and lobby elsewhere. The companies actually exposed are the ones in the middle: logistics, home services, trucking, creative agencies, anywhere a large contingent workforce looks structurally like employees under a multifactor test but has been classified as contractors on the strength of written agreements and 1099s.

A rule that takes a year to write and a year to defend can be unwritten in the same timeframe, and the second round tends to invite the same litigation from the opposite side. The stable layer is the state ABC statutes, which do not move with administrations, and the FLSA text itself, which has said the same thing since 1938.

Sources

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