- Story provided by attorney Jeffrey Kimmel. This article initially appeard in the ACE National newsletter
If there is one employment law issue that gentlemen’s club operators must be aware of, over all others, it is, without doubt, the issue of classification of workers. Is a worker an Employee, an independent contractor (or some other form of non-employee)?
On February 26, 2026, the U.S. Department of Labor (DOL) issued a proposed new rule intended to change the federal standard for determining whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA).
The new rule would essentially reinstate the analysis that was put forth in its previous 2021 proposed rule. According to the DOL, the “new” proposed rule is intended to provide greater clarity and predictability to the test for worker classification.
Return of the “Core Factors” Approach
The proposed rule revives the short-lived “core factors” approach proposed by the outgoing Trump administration in January 2021 and shortly thereafter abandoned by the DOL under the Biden Administration. It is essentially a restructuring of the traditional economic realities test that has been applied by the federal courts in one form or another for several decades.
Under the core factors approach, two core factors are given supremacy over the other factors. The two core factors are the nature and degree of control over the work and the worker’s opportunity for profit or loss. This contrasts with the traditional approach under which no single factor is considered more significant than the others and how much weight to give a specific factor can differ depending on the facts of a particular case.
According to the DOL, these two factors are considered the most probative in determining whether a worker is an employee or an independent contractor. If both of these core factors point toward the same classification, that outcome is likely to be correct.
The rule also retains three other factors traditionally part of the economics reality test: skill required, permanence of the relationship, and whether the work is part of an integrated unit of production.
However, these are considered less probative and not be given significant weight unless the facts of a particular case demand it – for instance if the two core factors do not weigh strongly in the same direction.
Significance of Worker Investment and Initiative
Another significant change in the proposed rule is the “clarification” that a worker’s investment is considered as part of the “opportunity for profit or loss” factor, rather than as a separate factor.
Under some interpretations of the traditional economic realities test (including the prior rule that currently proposed rule would replace) the “worker investment” factor has been interpreted as a comparison of the amount invested by the worker in his or her business versus the amount invested by the business hiring the worker.
As one might imagine, generally the hiring entity’s investment in its business exceeds the investment of the worker and, as such, that factor often favors finding an employment relationship under that interpretation. Under the new proposed rule this comparison does not exist and it is simply a question of how a workers’ investment in their own business can impact the opportunity for profit or loss.
Economic Dependence
As part of its explanation of the proposed rule, the DOL emphasizes that economic dependence means reliance on an employer for work, not simply for income, and that the relevant question is whether the worker is truly in business for themselves.
The rule also stresses that the actual practice of the parties is more relevant than what may be contractually or theoretically possible. Thus, contractual rights (including rights to control worker activities) that are never exercised are less important than what actually happens in practice.
How the Proposed Rule Differs from the 2024 Standard
The DOL’s stated goal is to provide a clearer, more predictable standard for businesses and workers and thereby reduce ambiguity and litigation risk. According to the DOL, the department’s 2024 rule’s embrace of the traditional open-ended balancing of six factors created uncertainty.
Additionally, the 2024 rule required comparison of the worker’s investment to the employer’s, and included “business-like initiative” under the “skill” factor in order for that factor to weigh in favor of independent contractor status. The DOL expects the proposed rule to result in more predictable outcomes, which would make it easier for businesses to engage true independent contractors without fear of being found guilty of misclassification.
Practical Impact for Employers
The proposed rule is likely to become a final rule and fully adopted by the DOL this Spring. However, it is important to note that this rule will first and foremost apply to how the federal DOL analyzes the relationships between businesses and workers. So, businesses undergoing federal audits of their employment practices will be able to take advantage of the more business-friendly approach.
The federal courts may or may not choose to adopt this core factor analysis when ruling on misclassification cases. Under relatively recent U.S. Supreme Court precedent, the courts have significantly more discretion in deciding how much weight to give an administrative agency’s interpretation of the law.
In light of this, the expectation is that the more conservative, business-friendly federal circuits may adopt and apply this rule, while others may choose not to. It is also important to remember that applicable state law may apply stricter or different standards, such as the “ABC” test used in California and other states.
What Employers Should be Doing
Employers should monitor developments closely and consider submitting comments as well as seeking advice of counsel to assess how the proposed changes may affect their operations.
Businesses should review their worker classifications, particularly those relationships that may be close calls under the FLSA and determine if relationships can be redefined based on the new rule.
A review of independent contractor relationships, focusing on the actual day-to-day terms of the relationship, will help businesses ensure compliance regardless of the final outcome of this rulemaking.
Jeffrey Kimmel, Partner
Akerman LLP | 1251 Avenue of the Americas, 37th Floor | New York, NY 10020
D: 212 259 6435 or jeffrey.kimmel@akerman.com
