Why the DOL’s New Contractor Rule Won’t Protect You in California

The U.S. Department of Labor’s (DOL) Feb. 26 proposed rule on independent contractor classification signals yet another shift in federal guidance — one that may simplify analysis at the federal level but deepen compliance challenges for multistate employers. While the DOL is moving toward a more flexible, business-friendly framework, states like California continue to enforce far stricter standards.

Here’s how the two approaches diverge, and where risk is rising.

A Return to Economic Reality at the Federal Level

The DOL’s proposed rule would rescind the 2024 regulation on classification and replace it with a framework centered on the longstanding “economic reality” test. At its core, the analysis asks whether a worker is economically dependent on an employer (and therefore an employee) or is truly in business for themselves. 

Unlike the 2024 rule’s six-factor, equal-weight approach, the proposal emphasizes two “core” factors:

• The employer’s degree of control over the work. 
• The worker’s opportunity for profit or loss. 

If both point in the same direction, there is a strong likelihood of proper classification. Additional factors, such as skill, permanence, and integration into the business, serve as supporting considerations rather than equal determinants.

“The DOL rule considers multiple, non-exhaustive factors to determine whether the relationship is one of ‘economic dependence,’” said Melanie Ronen, an attorney with Stradley Ronon in Long Beach, Calif. “No single factor is determinative, making it a more flexible test.”

This flexibility is intentional. The DOL has signaled concern that prior guidance was overly complex and unpredictable, and the new rule aims to provide clearer, more business-friendly guardrails.

Sample Checklist: Utilizing Independent Contractors

California’s ABC Test: A Much Higher Bar

By contrast, California’s ABC test — codified under AB 5 — remains one of the strictest classification standards in the country. Under this framework, a worker is presumed to be an employee unless the employer can satisfy all three prongs:

A. The worker is free from control and direction. 
B. The worker performs work outside the usual course of the company’s business. 
C. The worker is engaged in an independently established trade. 

Failure on any single prong results in employee classification.

“It is often the second prong of the ABC test that is difficult to meet; thus, requiring the worker to be classified as an employee,” Ronen said. 

Notably, this requirement — work outside the usual course of business — does not exist in the DOL’s proposed rule.

Toolkit: Employing Independent Contractors and Other Gig Workers

Where Multistate Employers Face the Greatest Risk

For employers operating across jurisdictions, the divergence between federal and state standards creates a compliance trap, particularly for remote workforces.

“As is the case when there are differing standards among jurisdictions, employers attempting a ‘one size fits all’ approach has the potential to create significant risk,” Ronen explained. “Employers often look to use the standards applicable to the state in which the company is headquartered and apply those standards to remote workers or smaller workforces in varying states. However, that approach can often lead to gaps in compliance.”

This risk is amplified by the fact that the DOL rule does not preempt stricter state laws. Employers must comply with whichever standard is more protective of workers.

Why Federal Compliance Isn’t Enough

Even if employers fully align with the DOL’s proposed rule, they may still face liability in California.

“It is definitely possible that a worker performing work within the company’s usual course of business could be properly classified as an independent contractor under the DOL’s proposed rule but not the ABC test,” Ronen explained. 

This mismatch creates a scenario where a worker could be legally classified as an independent contractor under federal law but misclassified under state law. This would trigger penalties, back pay, and litigation risk.

HR Q&A: How do I know if an individual is considered an employee or independent contractor in California?

What HR Should Do Now

With the regulatory landscape in flux, HR leaders should take proactive steps to reduce exposure.

“It is important to stay apprised of where the independent contractors are working and the rules applicable to those jurisdictions,” Ronen said. “To minimize risk, employers are encouraged to periodically audit their independent contractor relationships across those jurisdictions to ensure the contractors are properly classified.”

Ronen emphasized that audits should go beyond contracts. Employers “must also carefully review the relationship between the contractors and the company and the work performed in light of the applicable standards.”

In practice, that means evaluating not just written terms, but actual working conditions — control, integration, and economic independence.

Enforcement Outlook: Diverging Paths

Looking ahead, employers should not expect uniform enforcement trends.

“I presume enforcement by the DOL will not be particularly aggressive in the next few years,” Ronen said. “I would expect states with more restrictive rules like California will either continue to enforce as they have or increase their level of enforcement in response to easing scrutiny by the DOL.”

For employers, the safest path forward is to meet the strictest applicable standard, not the most lenient.