U.S. Department of Labor Halts Enforcement of 2024 Independent-Contractor Rule; California’s AB 5 Remains the Stricter Standard
As of May 1, 2025, the U.S. Department of Labor’s Wage & Hour Division (WHD) told its staff it will not use the Biden-era 2024 independent-contractor rule when investigating Fair Labor Standards Act (FLSA) cases. Instead, investigators are to rely on Fact Sheet #13 (July 2008) (a public DOL guidance document that distills the “economic reality” test) and Opinion Letter FLSA2019-6 (a formal WHD interpretation applying that test to a typical platform model) until further notice. The agency emphasized that the 2024 rule still exists for private litigation—the non-enforcement decision binds WHD, not courts or private parties. Simply put, DOL investigators will use older guidance in audits; judges and private plaintiffs can still argue under the 2024 regulation in lawsuits.
What DOL Actually Changed (and What it Didn’t)
Enforcement Guidance Paused
On May 1, 2025, the Wage & Hour Division (WHD) issued a Field Assistance Bulletin directing investigators not to apply the 2024 independent-contractor rule in FLSA investigations. Instead, staff are to use Fact Sheet #13 (July 2008) and the analysis reinstated in Opinion Letter FLSA2019-6. The bulletin notes WHD is considering rescinding the 2024 rule. A Field Assistance Bulletin is internal guidance—it does not amend the regulations.
The 2024 Rule Still Governs Private Suits
The bulletin expressly states the 2024 rule remains in effect for private litigation. In other words, WHD investigators won’t apply it in agency audits, but courts and private parties may still rely on it in FLSA cases.
What the 2024 Rule is
Codified at 29 C.F.R. Part 795, finalized in January 2024, it replaced the 2021 two-factor approach with a six-factor, totality-of-the-circumstances “economic reality” test:
- opportunity for profit or loss;
- investments by worker and employer;
- degree of permanence of the relationship;
- nature and degree of control;
- whether the work is integral to the business;
- skill and initiative;
No single factor is determinative; the factors are weighed together.
Practical effect: For DOL investigations only, examiners will revert to long-standing “economic reality” interpretations reflected in the 2008 fact sheet and 2019 opinion letter, while courts may still analyze employee/contractor status under the 2024 regulation in private FLSA cases.
California is Far More Restrictive: AB 5’s ABC Test (With Narrow Carve-Outs)
Federal FLSA standards (whether the 2024 rule or earlier guidance) are not California’s rule. Since California’s AB 5 (codified at Lab. Code § 2775 et seq.), California state generally applies the ABC test, where a worker is an employee unless the hiring entity proves all three:
(A) the worker is free from control and direction;
(B) the work is outside the usual course of the hiring entity’s business; and
(C) the worker is customarily engaged in an independently established trade.
(Prong B is the usual trip-wire: if you run a delivery company, using “contractor” drivers flunks B because driving is your core business.)
Limited statutory exemptions exist; where an exemption applies, California reverts to the multi-factor Borello test (right-to-control plus economic factors). A notable carve-out exists for app-based rideshare and delivery drivers under Proposition 22, which the California Supreme Court upheld in 2024, allowing those “network companies” to continue classifying drivers as independent contractors under specific statutory conditions.
Why this contrast matters: Even if WHD eases federal tax enforcement, California’s Employment Development Department (EDD), DLSE/Labor Commissioner, and courts will still apply AB 5’s far stricter default. Misclassification in California state can hence trigger overtime/minimum-wage liability, meal/rest-break penalties, PAGA claims, and state payroll-tax assessments, independent of any federal outcome. (Different agencies, different statutes, different remedies.)
Employer Impact: Compliance is now even more Jurisdiction-Specific
Multi-Regime Risk
DOL’s enforcement pause does not change IRS worker-classification rules for federal employment taxes (common-law control factors), nor California’s AB 5 framework. A contractor model that passes WHD’s current lens could still fail in court under the 2024 FLSA rule—or fail outright under California’s ABC test.
Audit Posture
WHD investigators will use 2008/2019 guidance in administrative cases, but plaintiffs in private FLSA suits can still argue the 2024 rule, and California plaintiffs will rely on AB 5/ABC. Align policies and contracts to the strictest regime that applies to your footprint. (If you operate in California, assume AB 5 sets your floor.)
How the Tax Law Office of David W. Klasing Adds California-Specific Depth
At the Tax Law Offices of David W. Klasing, we see AB 5/EDD controversies every week. Our dual-licensed Tax Attorneys and CPAs will:
Engineer California-Defensible Models
We structure contractor relationships to survive ABC scrutiny (or document Borello factors for statutory exemptions), align independent-contractor agreements with actual operations, and train managers so day-to-day control doesn’t undo the paper. (Form must match function.)
Defend EDD Payroll-Tax Audits and DLSE Wage Claims
We conduct a privileged, examiner-style review, reconcile 1099s with books and bank records, and prepare interview scripts and document packages to reduce reclassification risk. Where exposure exists, we negotiate payment plans that avoid Trust Fund Recovery Penalty fallout and coordinate state and federal positions so one fix doesn’t trigger another.
Mitigate PAGA and Class-Action Risk
We harden arbitration/class-waiver strategies where appropriate, cure policy gaps that attract PAGA claims, and take remedial steps to minimize retroactive exposure. (PAGA penalties can dwarf back wages—prevention matters.)
Contact the Tax Law Offices of David W. Klasing
The rules just got more fragmented. At the Tax Law Offices of David W. Klasing, our dual-licensed Tax Attorneys & CPAs translate this shifting landscape into a single plan that works both federally and in California state. We conduct a privileged, examiner-style review of your contractor model, stress-testing it under WHD’s current guidance, the 2024 FLSA regulation (for private cases), and California AB 5’s ABC test. Where historical exposure exists, we negotiate resolutions with DOL/WHD, defend EDD payroll audits, manage DLSE wage-hour exposure, and contain parallel IRS trust-fund risks—keeping matters strictly civil and under privilege from the first document request to the final closing agreement.
Call the Tax Law Offices of David W. Klasing today at 800-681-1295 or contact us online HERE to schedule a reduced-rate, privilege-protected initial consultation.
