March 2026 HR Update

DOL Announces Proposed Independent Contractor Rule

On Feb. 26, 2026, the U.S. Department of Labor (DOL) announced a proposed rule that would rescind the department’s 2024 final independent contractor rule and replace it with an analysis for employee classification under the Fair Labor Standards Act (FLSA) similar to the one adopted by the DOL in 2021. The proposed rule was published in the Federal Register on Feb. 27, 2026.

Background

A worker’s coverage by a particular law or entitlement to a particular benefit often depends on whether they are an employee or an independent contractor. In general, labor laws and related tax laws do not apply to independent contractors. Under the FLSA, employees are entitled to minimum wage, overtime pay and other benefits. Independent contractors are not entitled to these protections and benefits.

Employers who misclassify employees may be liable for expensive fines and litigation if a worker should have been classified as an employee but did not receive a benefit or protection they were entitled to by law.

2024 Final Rule

On Jan. 9, 2024, the DOL released a final rule, effective March 11, 2024, that revised the agency’s guidance on how to analyze who is an employee or an independent contractor under the FLSA. The 2024 final rule rescinded the 2021 independent contractor rule that was published on Jan. 7, 2021, and restored the multifactor, totality-of-the-circumstances analysis to assess whether a worker is an employee or an independent contractor under the FLSA. Under the 2024 rule, six economic reality factors were weighed to assess whether a worker was economically dependent on a potential employer for work, according to the totality of the circumstances. However, several federal lawsuits challenged the 2024 final rule. In those lawsuits, the DOL took the position that it was reconsidering the final rule, including whether to rescind it.

On May 1, 2025, the DOL issued Field Assistance Bulletin 2025-1 on how to determine employee or independent contractor status when enforcing the FLSA. While the DOL reviewed the 2024 final rule, the DOL’s Wage and Hour Division (WHD) stated it would no longer apply the 2024 final rule’s analysis when determining employee versus independent contractor status in FLSA investigations. Instead, the WHD will rely on principles outlined in Fact Sheet #13 and the reinstated Opinion Letter FLSA2019-6, which addresses classification in the context of virtual marketplace platforms.

Proposed Rule

The proposed rule would:

• Apply an economic reality test to determine whether a worker is in business for themself as an independent contractor or is an employee economically dependent on an employer for work.
• Identify and explain two core factors to help determine if a worker is economically dependent on an employer for work or in business for themself:
  • The nature and degree of control over the work
  • The worker’s opportunity for profit or loss based on initiative and/or investment.
• Identify other factors to help determine a worker’s status as an employee or independent contractor, including:
  • The amount of skill required for the work
  • The degree of permanence of the working relationship
  • Whether the work is part of an integrated unit of production
• Advise that the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
• Provide eight fact-specific examples applying the factors to real-life circumstances.

According to the DOL, the proposed rule is consistent with U.S. Supreme Court and federal circuit court precedent and would make it easier to properly differentiate between employees protected by the FLSA and those workers who work as independent contractors.

The proposed rule would also apply to the department’s streamlined analysis of the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, both of which use the FLSA’s statutory definition of “employ.”

Employer Takeaway

The 60-day public comment period for the DOL’s proposed rule ends on April 28, 2026. The department encourages all interested parties to submit comments on the proposed rule once it is published in the Federal Register.

Employers should monitor updates on the proposed rule, including the publication of a final rule and any related legal challenges. If the final rule takes effect, employers may consider modifying existing practices and policies to comply with the new standard for employee classification under the FLSA.

ACA Health Plan Affordability: Avoiding Common Mistakes

The Affordable Care Act (ACA) requires applicable large employers (ALEs) to offer affordable, minimum value health coverage to their full-time employees or pay a penalty. This employer mandate provision is also known as the “pay-or-play” rules.

Under the pay-or-play rules, an ALE’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5% (as adjusted) of the employee’s household income for the taxable year. Because an employer generally will not know an employee’s household income, the IRS has provided three optional safe harbors ALEs may use to determine affordability based on information available to them. Before the start of each plan year, ALEs should confirm that at least one health plan option offered to full-time employees will satisfy the applicable affordability percentage using one or more of the safe harbors.

1. Mistake: Offering Affordable Health Coverage Only to Employees Working 40 or More Hours Per Week

ALEs may be assessed with penalties if they do not offer affordable health coverage to their full-time employees. Identifying full-time employees is a key step to avoiding penalties under the ACA’s pay-or-play rules. Under these rules, a full-time employee, for a calendar month, is an employee employed on average at least 30 hours of service per week, or 130 hours of service per month. ALEs may owe a penalty if they do not offer affordable, minimum-value health coverage to these employees, regardless of how the employer defines full-time employment for other purposes.

The IRS has provided two methods for determining full-time employee status — the monthly measurement method and the look-back measurement method. Under the monthly measurement method, the employer determines if an employee is a full-time employee on a month-by-month basis by looking at whether the employee has at least 130 hours of service for each month. Under the look-back measurement method, an employer may determine the status of an employee as a full-time employee during what is referred to as the stability period, based upon the hours of service of the employee in the preceding period, which is referred to as the measurement period.

2. Mistake: Applying the Affordability Test to All Health Plan Coverage Tiers

The affordability of an ALE’s health coverage is based solely on the cost of employee-only coverage. Under the ACA’s pay-or-play rules, an ALE’s health coverage is considered affordable for full-time employees and their family members if the employee portion of the premium for the lowest-cost self-only coverage that provides minimum value does not exceed 9.5% of an employee’s W-2 wages, rate-of-pay or the FPL for a single individual. The employee portion of the premium for other coverage tiers (e.g., self-plus-one or family coverage) is not considered to determine affordability under the pay-or-play rules, regardless of the coverage tier selected by the employee.

Example: An ALE’s health plan provides minimum value and has three coverage tiers: self-only, self-plus-one and family coverage. In 2026, employees must pay the following monthly premiums: $200 for self-only coverage, $300 for self-plus-one coverage and $400 for family coverage. An employee with an hourly rate of pay of $20 elects self-plus-one coverage for 2026. The ALE uses the rate-of-pay safe harbor to determine affordability. Using this safe harbor, the employee’s coverage is considered affordable if their monthly contribution for self-only coverage does not exceed approximately $259. Here is the formula: ($20 x 130 hours) x 9.96% affordability = $259. In this example, the ALE’s health coverage is considered affordable because the $200 monthly cost for self-only coverage is less than $259.

Note that the affordability rules are different for determining whether an individual is eligible for the ACA’s premium tax credit (PTC). The PTC lowers monthly premiums for eligible individuals who purchase health insurance coverage through an ACA Exchange. Individuals are ineligible for the PTC if they have access to affordable employer-sponsored health coverage. Under the PTC rules, the affordability of employer-sponsored health coverage for family members is determined by the employee’s share of the cost of covering the employee and those family members, not the cost of covering only the employee. However, the PTC’s rules do not affect whether health coverage is considered affordable under the pay-or-play rules, which just consider the cost of employee-only coverage.

3. Mistake: Applying the Affordability Test to Every Health Plan Option Offered by the ALE

An employer that offers more than one health coverage option to its full-time employees satisfies the ACA’s affordability test if the lowest-cost option that provides minimum value is affordable. While some employers offer only a single health plan option, many offer multiple health plan options. When an ALE offers more than one health plan option to its full-time employees, only one of the options needs to satisfy the ACA’s affordability threshold.

Example: An ALE offers the following three health plan options to its full-time employees (all providing minimum value):

• Option A has the lowest deductible and a monthly premium of $400 for employee-only coverage.
• Option B has the next lowest deductible and a monthly premium of $250 for employee-only coverage.
• Option C has the highest deductible and a monthly premium of $100 for employee-only coverage.

To avoid penalties under the ACA’s pay-or-play rules, only one of these options is required to satisfy the ACA’s affordability threshold. Thus, if Option C is considered affordable for the ALE’s full-time employees, employee contributions for Options A and B can exceed the ACA’s affordability percentage without triggering penalties.

However, the affordable option must be offered to full-time employees. If a full-time employee is not eligible for the affordable option (e.g., because they live outside the coverage area), the ALE would need to provide another affordable option for that employee to avoid potential penalties.

4. Mistake: Basing the Form W-2 Safe Harbor on Employee Salary (Not Taxable Compensation)

An ALE using the Form W-2 safe harbor retroactively determines the affordability of its health coverage by looking at each employee’s wages reported in Box 1 of Form W-2. These wages include taxable wages, tips and other compensation paid to the employee for the year, minus any pretax benefit deductions. This safe harbor is the least predictable method for determining affordability because it is based on the actual amount of each employee’s W-2 wages, which is not known until after the end of the year. Employees’ wages can change during the year for various reasons that are not within the employer’s control, such as an increase to pretax 401(k) contributions or an unpaid leave of absence.

Due to this uncertainty, the Form W-2 safe harbor works best for employees whose annual compensation can be accurately predicted before the start of the year. The other safe harbors, rate-of-pay and FPL provide more certainty and predictability than the Form W-2 safe harbor. However, if an ALE is comfortable with this risk, the Form W-2 safe harbor potentially allows it to maximize employee contributions toward the cost of health coverage based on actual compensation.

5. Mistake: Not Knowing When to Include Health Plan Opt-out Payments in Affordability Calculation

Some employers offer their eligible employees a taxable cash incentive to waive coverage under the employer’s group health plan. These arrangements, commonly known as “opt-out payments,” are often aimed at employees with working spouses who are eligible for group health coverage through another employer. The employer benefits by avoiding the cost of paying for its share of the premiums while the employee receives the extra cash.

The IRS has provided guidance on how medical opt-out payments impact the affordability calculation. According to this guidance, unless certain requirements are met, opt-out payments are treated as increasing employee contributions for health coverage, making an ALE’s health coverage less affordable under the pay-or-play rules. For example, an employee whose required contribution for the lowest-cost, self-only health coverage is $200 per month, but who is eligible for a cash payment of $100 per month if coverage is waived, would be treated as having a required contribution of $300 per month when determining if the coverage is affordable. However, if the opt-out arrangement is a conditional “eligible opt-out arrangement,” the payments are not added to the affordability calculation. An eligible opt-out arrangement is one where the opt-out payments are available only to employees who decline employer-sponsored coverage and provide reasonable evidence that they and their expected tax dependents have or will have minimum essential coverage other than individual market coverage during the year.

6. Mistake: Miscalculating Affordability Thresholds When Utilizing a Wellness Program with a Premium Differential

The IRS has also addressed how wellness plan incentives impact health plan affordability under the ACA’s pay-or-play rules. According to final regulations from November 2014, the affordability of an employer-sponsored health plan is determined by assuming that each employee fails to satisfy the wellness program’s requirements, unless the wellness program is related to tobacco use. This means the affordability of a plan that charges a higher initial premium for tobacco users will be determined by the premium charged to non-tobacco users, or tobacco users who complete the related wellness program, such as attending smoking cessation classes. Thus, for purposes of determining affordability under the pay-or-play rules:

• Wellness incentives unrelated to tobacco use are treated as unearned (i.e., the affordability calculation must include any surcharge for non-participation)
• Wellness incentives related to tobacco use are treated as earned (i.e., the affordability calculation does not need to include any portion of a surcharge related to tobacco use, meaning that the tobacco surcharge portion can make an employee’s contribution above 9.5%)

Employer Takeaway

To avoid any penalties under the ACA, ALEs should review their contribution strategies annually before open enrollment and set their employer contributions appropriately. If you need assistance in verifying the affordability of your employees’ contributions (or if you have wellness premium differentials and/or medical opt-out payments), please reach out to your Higginbotham representative.

Federal PBM Reform: Key Compliance Requirements and Penalties

The regulatory landscape for Pharmacy Benefit Managers (PBMs) has shifted from a period of minimal federal oversight to one with greater federal involvement amid a patchwork of state laws. Historically, PBMs have served as third-party administrators responsible for managing prescription drug benefits through claims processing, network design and rebate negotiations. However, the longstanding lack of transparency inherent in these operations has culminated in significant regulatory scrutiny and escalating litigation risks for plan sponsors.

The enactment of the Consolidated Appropriations Act of 2026 (CAA 2026), together with the Department of Labor’s (DOL) proposed fee-disclosure regulations, marks a pivotal transition toward greater federal oversight of PBM business practices. Although both the CAA 2026 and the DOL proposal introduce comprehensive PBM reforms, they differ in scope and timing.

Covered Plans

• CAA 2026: Applies broadly to both fully insured and self-insured group health plans, as well as health insurance issuers, under the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code and the Public Health Service Act.
• DOL Proposal: Applies to ERISA-covered self-insured group health plans and expressly excludes fully insured plans, although the DOL has requested public comments on this issue.

Effective Dates

• CAA 2026: The provisions discussed below are effective for plan years beginning on or after Aug. 3, 2028 (or Jan. 1, 2029, for calendar year plans).
• DOL Proposal: If finalized, the proposed rule would apply to plan years beginning on or after July 1, 2026 (or Jan. 1, 2027, for calendar year plans).

Key Provisions: Comparative Overview

The extent to which the CAA’s broader mandates may influence the final DOL rule remains uncertain as rule making progresses.

Penalties

Group health plan sponsors and health insurance issuers should be aware that noncompliance with these new federal requirements may result in substantial financial consequences:

• CAA 2026: Failure by a PBM or group health plan to provide required information may result in civil monetary penalties of $10,000 per day until the information is reported. Additional penalties — of up to $100,000 per item — may apply for knowingly providing false information, although penalties may be waived for good-faith efforts to comply.
• DOL Proposal: Plan fiduciaries of self-insured group health plans may be subject to enforcement action by the DOL and the imposition of civil penalties.

Employer Takeaway

As implementation timelines advance and the DOL moves toward finalizing its rule, plan sponsors and issuers should evaluate their existing PBM contracts and ensure that compliance processes are in place to meet their upcoming reporting, disclosure and fiduciary obligations. Proactive monitoring and early preparation will help ensure that plans remain aligned with evolving regulatory expectations.