[Federal Register Volume 85, Number 187 (Friday, September 25, 2020)]
[Proposed Rules]
[Pages 60600-60639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21018]
[[Page 60599]]
Vol. 85
Friday,
No. 187
September 25, 2020
Part III
Department of Labor
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Wage and Hour Division
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29 CFR Parts 780, 788, and 795
Independent Contractor Status Under the Fair Labor Standards Act;
Proposed Rule
Federal Register / Vol. 85 , No. 187 / Friday, September 25, 2020 /
Proposed Rules
[[Page 60600]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Parts 780, 788, and 795
RIN 1235-AA34
Independent Contractor Status Under the Fair Labor Standards Act
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking and request for comments.
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SUMMARY: The U.S. Department of Labor (the Department) is revising its
interpretation of independent contractor status under the Fair Labor
Standards Act (FLSA or Act) in order to promote certainty for
stakeholders, reduce litigation, and encourage innovation in the
economy.
DATES: Submit written comments on or before October 26, 2020.
ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA34, by either of the following methods:
Electronic Comments: Submit comments through the Federal eRulemaking
Portal at http://www.regulations.gov. Follow the instructions for
submitting comments. Mail: Address written submissions to Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210. Instructions: Please submit only one copy of your
comments by only one method. Commenters submitting file attachments on
www.regulations.gov are advised that uploading text-recognized
documents--i.e., documents in a native file format or documents which
have undergone optical character recognition (OCR)--enable staff at the
Department to more easily search and retrieve specific content included
in your comment for consideration. Please be advised that comments
received will become a matter of public record and will be posted
without change to http://www.regulations.gov, including any personal
information provided. All comments must be received by 11:59 p.m. on
October 26, 2020 for consideration in this rulemaking. Commenters
should transmit comments early to ensure timely receipt prior to the
close of the comment period, as the Department continues to experience
delays in the receipt of mail. Submit only one copy of your comments by
only one method. Docket: For access to the docket to read background
documents or comments, go to the Federal eRulemaking Portal at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a
toll-free number). Copies of this Notice of Proposed Rulemaking (NPRM)
may be obtained in alternative formats (Large Print, Braille, Audio
Tape or Disc), upon request, by calling (202) 693-0675 (this is not a
toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to
obtain information or request materials in alternative formats.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or logging onto WHD's website for a nationwide listing of WHD
district and area offices at http://www.dol.gov/whd/america2.htm.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The FLSA requires covered employers to pay their nonexempt
employees at least the federal minimum wage for every hour worked and
overtime pay for every hour worked over 40 in a workweek, and mandates
that employers keep certain records regarding their employees. A worker
who performs services for an individual or entity (``person'' as
defined in the Act) as an independent contractor, however, is not that
person's employee under the Act. Thus, the FLSA does not require such
person to pay an independent contractor either the minimum wage or
overtime pay, nor does it require that person to keep records regarding
that independent contractor. The Act does not define the term
``independent contractor,'' but it defines ``employer'' as ``any person
acting directly or indirectly in the interest of an employer in
relation to an employee,'' 29 U.S.C. 203(d), ``employee'' as ``any
individual employed by an employer,'' id. at 203(e), and ``employ'' as
``includ[ing] to suffer or permit to work,'' id. at 203(g). See also
Fair Labor Standards Amendments of 1974, Public Law 93-259 (Apr. 8,
1974). Courts and the Department have long interpreted the ``suffer or
permit'' standard to require an evaluation of the extent of the
worker's economic dependence on the potential employer--i.e., the
putative employer or alleged employer--and have developed a multifactor
test to analyze whether a worker is an employee or an independent
contractor under the FLSA. The ultimate inquiry is whether, as a matter
of economic reality, the worker is dependent on a particular
individual, business, or organization for work (and is thus an
employee) or is in business for him- or herself (and is thus an
independent contractor). But the test's underpinning and the process
for its application lack focus and have not always been sufficiently
explained by courts or the Department, resulting in uncertainty among
the regulated community. The Department believes that clear
articulation will lead to increased precision and predictability in the
economic reality test's application, which will in turn benefit workers
and businesses and encourage innovation and flexibility in the economy.
Accordingly, in this Notice of Proposed Rulemaking (NPRM) the
Department proposes to introduce a new part to Title 29 of the Code of
Federal Regulations setting forth its interpretation of the FLSA as
relevant to the question whether workers are ``employees'' or are
independent contractors under the Act. The proposed regulations would
adopt general interpretations to which courts and the Department have
long adhered. For example, the proposed regulations would explain that
independent contractors are workers who, as a matter of economic
reality, are in business for themselves as opposed to being
economically dependent on the potential employer for work. The proposed
regulations would also explain that the inquiry into economic
dependence is conducted through application of several factors, with no
one factor being dispositive, and that actual practices are entitled to
greater weight than what may be contractually or theoretically
possible. The Department proposes to sharpen this inquiry into five
distinct factors, instead of the five or more overlapping factors used
by most courts and the Department previously. Moreover, consistent with
the FLSA's text, its purpose, and the Department's experience
administrating and enforcing it, the Department proposes that two of
those factors--the nature and degree of the worker's control over the
work and the worker's opportunity for profit or loss--should be more
probative of the question of economic dependence or lack thereof, and
thus are afforded greater weight in the analysis than any others.
This proposed rule would be the Department's sole and authoritative
[[Page 60601]]
interpretation of independent contractor status under the FLSA. As
such, it would replace the Department's previous interpretations of
independent contractor status under the FLSA in certain contexts,
including interpretations found at 29 CFR 780.330(b) (interpreting
independent contractor status under the FLSA for tenants and
sharecroppers) and 29 CFR 788.16(a) (interpreting independent
contractor status under the FLSA for certain forestry and logging
workers). The Department believes this proposal will significantly
clarify to stakeholders how to distinguish between employees and
independent contractors under the Act and seeks comment on all aspects
of this proposed rule.
This proposed rule is expected to be an Executive Order (E.O.)
13771 deregulatory action. Details on the estimated increased
efficiency and cost savings of this proposed rule can be found in the
preliminary regulatory impact analysis (PRIA) provided below in section
VI.
II. Background
A. Relevant FLSA Definitions
Enacted in 1938, the FLSA requires, among other provisions, that
covered employers pay their nonexempt employees at least the federal
minimum wage for every hour worked and overtime pay for every hour
worked over 40 in a workweek, and mandates that employers keep certain
records regarding their employees.\1\ The FLSA does not define the term
``independent contractor.'' The Act defines ``employer'' in section
3(d) to ``include[ ] any person acting directly or indirectly in the
interest of an employer in relation to an employee,'' ``employee'' in
section 3(e)(1) to mean ``any individual employed by an employer,'' and
``employ'' in section 3(g) to include ``to suffer or permit to work.''
\2\ The Supreme Court has recognized that ``there is in the [FLSA] no
definition that solves problems as to the limits of the employer-
employee relationship under the Act.'' Rutherford Food Corp. v. McComb,
331 U.S. 722, 728 (1947).
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\1\ See 29 U.S.C. 206(a), 207(a) (minimum wage and overtime pay
requirements); 29 U.S.C. 211(c) (recordkeeping requirements).
\2\ 29 U.S.C. 203(d), (e), (g). The Act defines a ``person'' as
``an individual, partnership, association, corporation, business
trust, legal representative, or any organized group of persons.'' 29
U.S.C. 203(a).
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The Supreme Court has held that the ``suffer or permit'' definition
is broad on its face and is more inclusive than the common law standard
for determining who is employed and thereby who is an employee. The
common law utilizes traditional agency principles exclusively to
examine the hiring party's right to control the manner and means by
which the worker accomplishes his or her task. See Nationwide Mut. Ins.
Co. v. Darden, 503 U.S. 318, 326 (1992) (``[T]he FLSA . . . defines the
verb `employ' expansively to mean `suffer or permit to work.' This . .
. definition, whose striking breadth we have previously noted,
stretches the meaning of `employee' to cover some parties who might not
qualify as such under a strict application of traditional agency law
principles.'' (citations omitted)); Walling v. Portland Terminal Co.,
330 U.S. 148, 150-51 (1947) (``But in determining who are `employees'
under the Act, common law employee categories or employer-employee
classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall within
an employer-employee category.'' (citations omitted)); Rutherford Food,
331 U.S. at 728 (``The [FLSA] definition of `employ' is broad.'').
However, the Act's ``statutory definition[s] . . . have [their]
limits.'' Tony & Susan Alamo Found. v. Sec'y of Labor, 471 U.S. 290,
295 (1985) (internal citation omitted); see also Portland Terminal, 330
U.S. at 152 (``The definition `suffer or permit to work' was obviously
not intended to stamp all persons as employees.''). For example, the
Supreme Court recognized not long after the FLSA's passage that,
despite the Act's broad definition of ``employ,'' ``[t]here may be
independent contractors who take part in production or distribution who
would alone be responsible for the wages and hours of their own
employees.'' Rutherford Food, 331 U.S. at 729. Accordingly, federal
courts of appeals have uniformly held, and the Department has
consistently maintained, that independent contractors are not
``employees'' for purposes of the FLSA. See, e.g., Saleem v. Corporate
Transp. Group, Ltd., 854 F.3d 131, 139-40 (2d Cir. 2017) (noting that
independent contractors are separate from employees in the context of
the FLSA); Karlson v. Action Process Serv. & Private Investigation,
LLC, 860 F.3d 1089, 1092 (8th Cir. 2017) (``FLSA wage and hour
requirements do not apply to true independent contractors.'');
Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311 (11th Cir. 2013)
(``[The Act's] `broad' definitions do not, however, bring `independent
contractors' within the FLSA's ambit.''); Hopkins v. Cornerstone
America, 545 F.3d 338, 342 (5th Cir. 2008) (observing that the ``FLSA
applies to employees but not to independent contractors'').
Accordingly, the FLSA does not require any ``person'' to pay an
independent contractor the minimum wage or overtime pay under sections
6(a) and 7(a) or to keep records regarding that independent contractor
under section 11(c).
B. Economic Dependence and the Economic Reality Test
1. Supreme Court Development of the Economic Reality Test
In a series of cases from 1944 to 1947, the U.S. Supreme Court
explored the limits of the employer-employee relationship under three
different federal statutes: The FLSA, the National Labor Relations Act
(NLRA), and the Social Security Act (SSA).
In the first of those cases, NLRB v. Hearst Publications, Inc., 322
U.S. 111 (1944), the Court considered the meaning of ``employee'' under
the NLRA, which merely defined the term to ``include any employee.''
Id. at 118-20. The Court explained that the meaning of employee ``takes
color from its surroundings . . . [in] the statute where it appears,
and derives meaning from the context of that statute, which must be
read in the light of the mischief to be corrected and the end to be
attained.'' Id. at 124 (citations omitted). The Hearst Court rejected
application of the common law standard alone, see id. at 123-25, and
concluded that ``the broad language of the [NLRA's] definitions . . .
leaves no doubt that its applicability is to be determined broadly, in
doubtful situations, by underlying economic facts rather than
technically and exclusively by previously established legal
classifications.'' Id. at 129. Congress's reaction to Hearst's
interpretation of ``employee'' under the NLRA ``was adverse,'' and on
June 23, 1947, Congress amended the NLRA ``with the obvious purpose of
hav[ing] the Board and the courts apply general agency principles in
distinguishing between employees and independent contractors under the
[NLRA].'' NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256 (1968).
On June 16, 1947, one week before Congress amended the NLRA to
abrogate Hearst, the Supreme Court decided United States v. Silk, 331
U.S. 704 (1947), which addressed the distinction between employees and
independent contractors under the SSA. In that case, the Court
favorably summarized Hearst as setting forth
[[Page 60602]]
``economic reality,'' as opposed to ``technical concepts'' of the
common law standard alone, as the framework for determining workers'
classification. Id. at 712-14. But it also acknowledged that not ``all
who render service to an industry are employees.'' Id. Although the
Court found it to be ``quite impossible to extract from the [SSA] a
rule of thumb to define the limits of the employer-employe[e]
relationship,'' the Court identified five factors as ``important for
decision'': ``degrees of control, opportunities for profit or loss,
investment in facilities, permanency of relation[,] and skill required
in the claimed independent operation.'' Id. at 716. The Court added
that ``[n]o one [factor] is controlling nor is the list complete.'' Id.
Just a week after Silk, on June 23, 1947, the Court reiterated these
five factors in another case involving employee or independent
contractor status under the SSA. See Bartels v. Birmingham, 332 U.S.
126, 130 (1947). The Court explained that, under the SSA, employee
status ``was not to be determined solely by the idea of control which
an alleged employer may or could exercise over the details of the
service rendered to his business by the worker.'' Id. Although
``control is characteristically associated with the employer-employee
relationship,'' employees under ``social legislation'' such as the SSA
are ``those who as a matter of economic reality are dependent upon the
business to which they render service.'' Id. Thus, in addition to
control, ``permanency of the relation, the skill required, the
investment in the facilities for work[,] and opportunities for profit
or loss from the activities were also factors'' to consider. Id.
Although the Court identified these specific factors as relevant to the
analysis, it explained that ``[i]t is the total situation that
controls'' the worker's classification under the SSA. Id.
Decided the same day as Silk, Rutherford Food applied Hearst's and
Silk's reasoning to the FLSA. Rutherford Food addressed whether certain
workers at a plant owned by Kaiser Packing Company (Kaiser) who cut
meat from the bones of slaughtered cattle were Kaiser's employees under
the FLSA or were instead independent contractors. Noting that
``[d]ecisions that define the coverage of the employer-[e]mployee
relationship under the [NLRA and the SSA] are persuasive in the
consideration of a similar coverage under the [FLSA],'' 331 U.S. at
723-24 (citing Hearst and Silk), the Court seemed to follow the path
laid down in these previous cases by examining facts pertaining to the
five factors identified in Silk. For example, the Court noted that the
slaughterhouse workers performed unskilled work ``on the production
line.'' Id. at 730. ``The premises and equipment of Kaiser were used
for the work,'' indicating little investment by the workers. Id. ``The
group had no business organization that could or did shift as a unit
from one slaughter-house to another,'' indicating a permanent work
arrangement. Id. ``The managing official of the plant kept close touch
on the operation,'' indicating control by the alleged employer. Id. And
``[w]hile profits to the boners depended upon the efficiency of their
work, it was more like piecework than an enterprise that actually
depended for success upon the initiative, judgment or foresight of the
typical independent contractor.'' Id.
In addition to facts relevant to the five Silk factors, the Court
also considered whether the work was ``a part of the integrated unit of
production'' (meaning whether the putative independent contractors were
integrated into the assembly line alongside the company's employees) to
assess whether they were employees or independent contractors under the
FLSA. Id. at 729-730. Ultimately, the Court agreed with the appellate
court that the ``underlying economic realities'' led to the conclusion
that the boners were employees of Kaiser under the FLSA. See id. at
727.
In November 1947, five months after Silk and Rutherford Food, the
Department of Treasury (Treasury) proposed regulations governing the
determination of whether an individual is an independent contractor or
employee under the SSA, which used a test that balanced the following
factors:
1. Degree of control of the individual;
2. Permanency of relation;
3. Integration of the individual's work in the business to which
he renders service;
4. Skill required by the individual;
5. Investment by the individual in facilities for work; and
6. Opportunity of the individual for profit or loss.
12 FR 7966. Factors 1, 2, and 4-6 corresponded directly with the five
factors identified as being ``important for decision'' in Silk, 331
U.S. at 716, and the third factor corresponded with Rutherford Food's
consideration of the fact that the workers were ``part of an integrated
unit of production.'' 331 U.S. at 729. The Treasury proposal further
relied on Bartels, 332 U.S. at 130, to apply these factors to determine
whether a worker was ``dependent as a matter of economic reality upon
the business to which he renders services.'' 12 FR 7966.
However, in 1948, Congress promptly rejected this application of
the proposed test. A committee report described the test as ```a
dimensionless and amorphous abstraction' '' that would confer upon ``
`the administrative agencies and the courts an unbridled license to
say, at will, whether an individual is an employee or an independent
contractor' '' for purposes of the SSA. United States v. W.M. Webb,
Inc., 397 U.S. 179, 187-88 (1970) (quoting S. Rep. No. 1255, at 12
(1948) and H.R. Rep. No. 2168, at 9 (1948)). The report stated that
Congress amended the SSA to ``avoid[ ] the uncertainty of the proposed
`economic reality' test'' and to ensure that the common law control
definition of employee alone would apply to that statute. See id. at
183-86, 191; 42 U.S.C. 410(j) (``The term `employee' [under the SSA]
means . . . any individual who, under the usual common law rules
applicable in determining the employer-employee relationship, has the
status of an employee.'').
Congress abrogated the interpretations of the definitions of
``employee'' adopted in Hearst for the NLRA and in Silk and Bartels for
the SSA ``to demonstrate that the usual common-law principles were the
keys to meaning.'' Darden, 503 U.S. at 324-25. However, Congress did
not similarly amend the FLSA. Thus, the Supreme Court stated in Darden
that the scope of employment under the FLSA is broader than that under
common law and is determined by the economic reality of the
relationship at issue, relying on the ``suffer or permit'' standard
that is unique to the FLSA. See id. However, since implicitly doing so
in Rutherford Food, the Court has not again applied (or rejected the
application of) the Silk factors to an FLSA classification question.
Accordingly, the Supreme Court has not mandated any specific set or
formulation of economic reality factors for purposes of the FLSA, nor
has it explicitly opined on any factor's relative probative value to
the inquiry. See Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28,
33 (1961) (noting that `` `economic reality' rather than `technical
concepts' is . . . the test of employment'' under the FLSA (citing
Silk, 331 U.S. at 713; Rutherford Food, 331 U.S. at 729)); Tony & Susan
Alamo, 471 U.S. at 301 (``The test of employment under the Act is one
of `economic reality.' '' (quoting Whitaker House, 366 U.S. at 33)).\3\
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\3\ In Whitaker House, the Supreme Court concluded that certain
homeworkers were employees under the FLSA, as opposed to being
``self-employed'' or ``independent.'' 366 U.S. at 33. The Court's
analysis did not explicitly mention the Silk factors or the concept
of economic dependence from Bartels. However, the Court focused on
the fact that workers were not ``selling their products on the
market for whatever price they could command,'' but were instead
``regimented under one organization, manufacturing what the
organization desire[d] and receiving the compensation the
organization dictates.'' Id.
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[[Page 60603]]
2. Application of the Economic Reality Test by Federal Courts of
Appeals
Following Rutherford Food, federal courts of appeals have also
stated that the common law standard alone does not determine employee
or independent contractor status under the FLSA and that instead the
inquiry was one of economic reality. See, e.g., Wirtz v. Dr. Pepper
Bottling Co. of Atlanta, 374 F.2d 5, 8 (5th Cir. 1967) (``[C]ommon law
concepts of the employer-employee relationship are not controlling.'');
McComb v. Homeworkers' Handicraft Coop., 176 F.2d 633, 636 (4th Cir.
1949) (same). For several decades after Rutherford Food, courts applied
this reasoning to ask, for example, whether a worker took ``the usual
path of an employee,'' Dr. Pepper, 347 F.2d at 8, or had
characteristics that ``resembled . . . the typical independent
contractor,'' Schultz v. Cadillac Assocs., Inc., 413 F.2d 1215, 1217
(7th Cir. 1969). But they did not adopt a systematic approach to the
question.
In the 1970s and 1980s, federal courts of appeals began to adopt a
multifactor ``economic reality'' test based on Silk, Rutherford Food,
and Bartels similar to Treasury's 1947 proposed SSA regulation to
analyze whether a worker was an employee or an independent contractor
under the FLSA.\4\
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\4\ As explained below, this multifactor economic realty test
had also been enforced and articulated by the Department in
subregulatory guidance since the 1950s.
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Drawing on the Supreme Court precedent discussed above, courts have
recognized that the heart of the inquiry is whether ``as a matter of
economic reality'' the workers are ``dependent upon the business to
which they render service.'' Usery v. Pilgrim Equip. Co., 527 F.2d
1308, 1311 (5th Cir. 1976) (quoting Bartels, 332 U.S. at 130 (emphasis
added)). And some courts have clarified that this question of economic
dependence may be boiled down to asking ``whether the individual is or
is not, as a matter of economic fact, in business for himself.''
Donovan v. Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981); see also
Parrish v. Premier Directional Drilling, L.P., 917 F.3d 369, 380 (5th
Cir. 2019) (``Essentially, our task is to determine whether the
individual is, as a matter of economic reality, in business for
himself.'' (internal quotation marks and citation omitted)); Saleem,
854 F.3d at 139 (``[O]ur ultimate concern [is] whether, as a matter of
economic reality, the workers depend upon someone else's business for
the opportunity to render service or are in business for themselves.''
(internal quotation marks and citations omitted)); Baker v. Flint Eng'g
& Constr. Co., 137 F.3d 1436, 1443 (10th Cir. 1998) (``Our final step
is to review the findings on each of the above factors and determine
whether plaintiffs, as a matter of economic fact, depend upon [the
employer's] business for the opportunity to render service, or are in
business for themselves.''). Courts have emphasized that the inquiry
into the level and nature of dependence in a given relationship should
be based on the totality of the circumstances. See, e.g., Donovan v.
DialAmerica Mktg., Inc., 757 F.2d 1376, 1382 (3d Cir. 1985) (noting
that Rutherford Food ``emphasized that the circumstances of the whole
activity should be considered . . .''). But these courts have also
explained that a non-exhaustive, standard set of factors--derived from
Silk and Rutherford--shape and guide this inquiry. See, e.g., Usery,
527 F.2d at 1311 (identifying ``[f]ive considerations [which] have been
set out as aids to making the determination of dependence, vel non'');
Real v. Driscoll Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir.
1979) (articulating a six-factor test).
In Driscoll, the Ninth Circuit Court of Appeals described its six-
factor test as follows:
1. The degree of the alleged employer's right to control the
manner in which the work is to be performed;
2. the alleged employee's opportunity for profit or loss
depending on his managerial skill;
3. the alleged employee's investment in equipment or materials
required for his task, or his employment of helpers;
4. whether the service rendered requires a special skill;
5. the degree of permanency of the working relationship; and
6. whether the service rendered is an integral part of the
alleged employer's business.
Id. at 754. Most courts of appeals articulate a similar test, but
application between courts may vary significantly. See, e.g., Sec'y of
Labor v. Lauritzen, 835 F.2d 1529, 1534-35 (7th Cir. 1987); DialAmerica
Mktg., 757 F.2d at 1382; Donovan v. Brandel, 736 F.2d 1114, 1117 (6th
Cir. 1984). For example, the Second Circuit has analyzed opportunity
for profit or loss and investment (the second and third factors listed
above) together as one factor. See, e.g., Brock v. Superior Care, Inc.,
840 F.2d 1054, 1058 (2d Cir. 1988). And the Fifth Circuit has not
adopted the sixth factor listed above, which analyzes the integrality
of the work. See, e.g., Usery, 527 F.2d at 1311.
A few courts of appeals have adopted noteworthy modifications to
the economic reality factors as originally articulated in 1947 by the
Supreme Court and by the Treasury Department. Compare, e.g.,
DialAmerica Mktg., 757 F.2d at 1382, with Silk, 331 U.S. at 716, and 12
FR 7966. First, the ``skill required'' factor identified in Silk, 331
U.S. at 716, is now articulated more expansively by some courts of
appeals as including consideration of ``initiative.'' See, e.g.,
Parrish, 917 F.3d at 379 (``the skill and initiative required in
performing the job''); Karlson, 860 F.3d at 1093 (same); Superior Care,
840 F.2d at 1058-59 (``the degree of skill and independent initiative
required to perform the work''). Second, Silk analyzed workers'
investments, 331 U.S. at 717-19, and the investment factor was
articulated in the proposed 1947 Treasury regulation as evaluating
``investments by the individual in facilities for work.'' 12 FR 7966
(emphasis added). However, the Fifth Circuit Court of Appeals has
modified the ``investment'' factor to consider ``the extent of the
relative investments of the worker and the alleged employer.'' Hopkins,
545 F.3d at 343. Some other circuits have adopted this ``relative
investment'' approach but continue to use the phrase ``worker's
investment'' to describe the factor. See, e.g., Keller v. Miri
Microsystems LLC, 781 F.3d 799, 810 (6th Cir. 2015); Dole v. Snell, 875
F.2d 802, 805 (10th Cir. 1989).
Third, although the permanence factor under Silk was understood in
the 1947 Treasury proposal to mean the continuity and duration of
working relationships, see 12 FR 7967, some courts of appeals have
expanded this factor to also consider the exclusivity of such
relationships. See, e.g., Scantland, 721 F.3d at 1319; Keller, 781 F.3d
at 807. Finally, Rutherford Food's consideration of whether work is
``part of an integrated unit of production,'' 331 U.S. at 729--which
was articulated as ``integration of the individual's work'' in the 1947
Treasury proposal, 12 FR 7966--is now typically articulated by many
courts of appeal as whether the service rendered is ``integral,'' which
those courts have mistakenly applied as meaning important or central to
the potential employer's business. See, e.g., Verma v. 3001 Castor,
Inc., 937 F.3d 221, 229 (3rd Cir. 2019) (concluding that workers'
services were integral because they were the providers of the
business's ``primary offering''); Acosta
[[Page 60604]]
v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th Cir. 2019)
(concluding that services provided by workers were ``integral'' because
the putative employer ``built its business around'' those services);
McFeeley, 825 F.3d at 244 (consideration ``the importance of the
services rendered to the company's business''); DialAmerica, 757 F.2d
at 1385 (``[W]orkers are more likely to be `employees' under the FLSA
if they perform the primary work of the alleged employer.'').
Courts of appeals applying the multifactor economic reality test
draw from the totality of circumstances, with no single factor being
determinative by itself. See, e.g., Keller, 781 F.3d at 807 (``No one
factor is determinative.''); Baker, 137 F.3d at 1440 (``None of the
factors alone is dispositive; instead, the court must employ a
totality-of-the-circumstances approach.''); Martin v. Selker Bros., 949
F.2d 1286, 1293 (3rd Cir. 1991) (``It is a well-established principle
that the determination of the employment relationship does not depend
on isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.'').
3. Application of the Economic Reality Test by WHD
Since at least 1954, WHD has applied a multifactor analysis when
considering whether a worker is an employee under the FLSA or is
instead an independent contractor. See WHD Opinion Letter (Aug. 13,
1954) (applying six factors very similar to the six economic reality
factors currently used by courts of appeal and noting that ``the
determination depends on the circumstances of the whole activity
considered in light of the statutory purposes of the Act'' (internal
quotation marks omitted)). In 1956, WHD reiterated the six factors and
noted that ``[t]he degree of control retained by the principal has
[been] rejected as the sole criterion to be applied.'' WHD Opinion
Letter (Feb. 8, 1956). In 1964, WHD stated: ``The Supreme Court has
made it clear that an employee, as distinguished from a person who is
engaged in a business of his own, is one who as a matter of economic
reality follows the usual path of an employee and is dependent on the
business which he serves.'' WHD Opinion Letter FLSA-795 (Sept. 30,
1964).
Over the years since, WHD has issued numerous opinion letters
addressing whether a worker is an employee under the FLSA or an
independent contractor. In those letters, WHD has generally relied on a
multifactor analysis very similar to the six economic reality factors
identified above; the circumstances of the whole activity are
considered; the inquiry is broader than the common law control standard
alone; and a worker is an employee if, as a matter of economic reality,
he or she is economically dependent on the employer as opposed to in
business for him- or herself.\5\ WHD has also promulgated regulations
applying a multifactor analysis for independent contractor status under
the FLSA in certain specific industries. See, e.g., 29 CFR 780.330(b)
(applying a six factor economic reality test to determine whether a
sharecropper or tenant is an independent contractor or employee under
the Act); 29 CFR 788.16(a) (applying a six factor economic reality test
in forestry and logging operations with no more than eight employees).
And WHD has promulgated a regulation applying a multifactor economic
reality analysis for determining independent contractor status under
the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).The
MSPA regulation is based on the FLSA's definition of ``employ'' because
MSPA incorporates that definition, and it asks ``whether or not an
independent contractor or employment relationship exist under the Fair
Labor Standards Act.'' 29 CFR 500.20(h)(4) (emphasis in original).
---------------------------------------------------------------------------
\5\ See, e.g., WHD Opinion Letter FLSA2019-6 at 4 (Apr. 29,
2019); WHD Opinion Letter, 2002 WL 32406602, at *2 (Sept. 5, 2002);
WHD Opinion Letter, 2000 WL 34444342, at *3 (Dec. 7, 2000); WHD
Opinion Letter, 2000 WL 34444352, at *1 (Jul. 5, 2000); WHD Opinion
Letter, 1999 WL 1788137, at *1 (Jul. 12, 1999); WHD Opinion Letter,
1995 WL 1032489, at *1 (June 5, 1995); WHD Opinion Letter, 1995 WL
1032469, at *1 (Mar. 2, 1995); WHD Opinion Letter, 1986 WL 740454,
at *1 (June 23, 1986); WHD Opinion Letter, 1986 WL 1171083, at *1
(Jan. 14, 1986); WHD Opinion Letter WH-476, 1978 WL 51437, at *2
(Oct. 19, 1978); WHD Opinion Letter WH-361, 1975 WL 40984, at *1
(Oct. 1, 1975); WHD Opinion Letter (Sept. 12, 1969); WHD Opinion
Letter (Oct. 12, 1965).
---------------------------------------------------------------------------
WHD Fact Sheet #13, ``Employment Relationship under the Fair Labor
Standards Act (FLSA)'' (Jul. 2008), similarly states that, when
determining whether an employment relationship exists under the FLSA:
The common law control is not the exclusive consideration; instead,
``it is the total activity or situation which controls''; and ``an
employee, as distinguished from a person who is engaged in a business
of his or her own, is one who, as a matter of economic reality, follows
the usual path of an employee and is dependent on the business which he
or she serves.'' \6\ The Fact Sheet identifies seven economic reality
factors; in addition to factors that are similar to the six factors
identified above, it also considers the worker's ``degree of
independent business organization and operation.'' \7\
---------------------------------------------------------------------------
\6\ Fact Sheet #13 is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf.
\7\ On July 15, 2015, WHD issued Administrator's Interpretation
No. 2015-1, ``The Application of the Fair Labor Standards Act's
`Suffer or Permit' Standard in the Identification of Employees Who
Are Misclassified as Independent Contractors'' (AI). The AI provided
guidance regarding the employment relationship under the FLSA and
the application of the six economic realities factors. The AI was
withdrawn on June 7, 2017 and is no longer in effect.
---------------------------------------------------------------------------
WHD's most recent opinion letter addressing this issue, from 2019,
generally applied the principles and factors similar to those described
in the prior opinion letters and Fact Sheet #13, but not the ``business
organization'' factor (which it said was ``[e]ncompassed within'' the
other factors). The opinion letter addressed the FLSA classification of
service providers who used a virtual marketplace company to be referred
to end-market consumers to whom the services were actually provided.
WHD concluded that the service providers appeared to be independent
contractors and not employees of the virtual marketplace company. See
WHD Opinion Letter FLSA2019-6 at 7. WHD found that it was ``inherently
difficult to conceptualize the service providers' `working
relationship' with [the virtual marketplace company], because as a
matter of economic reality, they are working for the consumer, not [the
company].'' Id. Because ``[t]he facts . . . demonstrate economic
independence, rather than economic dependence, in the working
relationship between [the virtual marketplace company] and its service
providers,'' WHD opined that they were not employees of the company
under the FLSA but rather were independent contractors. Id. at 9.
As explained in greater detail below, these prior interpretations
of independent contractor status, which themselves have evolved over
time, are subject to the same limitations as the court opinions from
the same period, and the Department believes that stakeholders would
benefit from clarification. As such, the Department is proposing to
promulgate a clearer and more consistent standard for evaluating
whether a worker is an employee or independent contractor under the
FLSA.
III. Need for Rulemaking
The Department has never promulgated a generally applicable
regulation addressing the question of who is an independent contractor
and, thus, not an employee under the Act. Instead, as described above,
the Department has issued and revised subregulatory guidance since at
least
[[Page 60605]]
1954, using different variations of a multifactor economic reality test
that analyzes economic dependence to distinguish independent
contractors from employees. The Department has also applied the
multifactor test in regulations addressing the meaning of independent
contractor in specific industries. See, e.g., 29 CFR 780.330(b); 29 CFR
788.16(a); 29 CFR 500.20(h)(4). For reasons explained below, however,
that multifactor test, as currently applied, has proven to be unclear
and unwieldy. The Department thus proposes to promulgate a regulation
that explains the contours of the economic reality test and clarifies
and sharpens a test that has become less clear and consistent through
decades of case-by-case administration in the courts of appeals. If
this proposed rule were finalized, it would contain the Department's
sole and authoritative interpretation of independent contractor status
under the FLSA. As such, the Department is proposing to strike previous
industry-specific interpretations set forth in 29 CFR 780.330(b) and
788.16(a) and replace them with cross-references to the interpretation
set forth in this proposed rule. The Department considered making
similar revisions to its regulation addressing independent contractor
status under the MSPA in 29 CFR 500.20(h)(4), but is not proposing not
to make such revisions at this time, as explained further below. The
Department invites comments on the need for conforming edits to these
or similar provisions.
A. Challenges Presented by the Economic Reality Test and Its
Application
The economic reality test has been criticized on several fronts.
First, the test's overarching concept of ``economic dependence'' is
under-developed and sometimes inconsistently applied, rendering it a
source of confusion. Second, the test is indefinite and amorphous in
that it makes all facts potentially relevant without providing any
guidance on how to prioritize or balance different and sometimes
competing considerations. Third, inefficiency and lack of structure in
the test further stem from blurred boundaries between the factors.
Fourth, these shortcomings have become more apparent over time as
technology, economic conditions, and work relationships have evolved.
1. Confusion Regarding the Meaning of Economic Dependence
Courts and the Department agree that economic dependence is the
touchstone of the economic reality test. See, e.g., Parrish, 917 F.3d
at 380; McFeeley, 825 F.3d at 241; see also Bartels, 332 U.S. at 130
(noting that the inquiry is whether ``as a matter of economic
reality,'' the worker is ``dependent upon the business to which [he or
she] render[s] service''). But underdeveloped analysis and
inconsistency cloud the application of this touchstone, generating
uncertainty both in and outside of litigation. Given the central
importance of the economic dependence concept, any confusion on this
front is problematic. The 1948 Senate Report criticized Treasury's
proposal to rely on economic dependence for determining independent
contractor status under the SSA by rhetorically asking: ``Who, in this
whole world engaged in any sort of service relationship, is not
dependent as a matter of economic reality on some other person? The
corner grocer, clearly not an employee, is economically dependent upon
his customers, his banker, his supplier.'' S. Rep. No. 80-1255 at 12
(1948). In other words, ``economic dependency is a vague concept that
without further explanation and refinement is often difficult, if not
impossible, to apply.'' \8\
---------------------------------------------------------------------------
\8\ Bruce Goldstein, et al., Enforcing Fair Labor Standards in
the Modern American Sweatshop: Rediscovering the Statutory
Definition of Employment, 46 UCLA L. Rev. 983, 1009 (1999)
(collecting cases).
---------------------------------------------------------------------------
The Department and some courts have attempted to provide a measure
of clarity by explaining, for example, that the proper inquiry is
```whether the workers are dependent on a particular business or
organization for their continued employment' in that line of
business,'' Mr. W Fireworks, 814 F.2d at 1054 (emphasis in original)
(quoting DialAmerica, 757 F.2d at 1385), or instead ``are in business
for themselves,'' Saleem, 854 F.3d at 139. But the Department and many
courts have often applied the test without helpful clarification on the
meaning of the economic dependency that they are seeking.\9\
---------------------------------------------------------------------------
\9\ Id. at 1010.
---------------------------------------------------------------------------
The lack of explanation of economic dependence has sometimes led to
inconsistent approaches and results. For example, the Fifth Circuit
held in 2009 that cable splicers hired as putative independent
contractors by BellSouth to provide post-Hurricane Katrina repairs
along the Gulf Coast were actually employees. See Cromwell v. Driftwood
Elec. Contractor, Inc., 348 F. App'x 57 (5th Cir. 2009). That case
applied the same approach to economic dependence as Mr. W. Fireworks
and similar cases, asking whether ``the worker is economically
dependent upon the alleged employer or is instead in business for
himself.'' Id. at 59. Less than a year later, a different panel of that
same circuit applied a second approach to economic dependence to find
another cable splicer hired under a very similar arrangement by the
same company to be an independent contractor. See Thibault v. BellSouth
Telecommunication, 612 F.3d 843 (5th Cir. 2010).\10\ The Thibault court
distinguished the result in Cromwell in part by highlighting the
plaintiff's sources of income and wealth other than from BellSouth in
the analysis of economic dependence. Id. at 849.\11\ Thibault's
reliance on income and wealth sources to analyze economic dependence is
incompatible with Mr. W. Fireworks and similar decisions, which have
repeatedly explained that ``[e]conomic dependence is not conditioned on
reliance on an alleged employer for one's primary source of income, for
the necessities of life.'' 814 F.2d at 1054 (emphasis in original).\12\
---------------------------------------------------------------------------
\10\ In both cases, the splicers performed post-Hurricane
Katrina repairs for BellSouth along the Gulf Coast; provided their
own tools and trucks; received assignments in the same manner;
received neither training nor close supervision; and worked the same
12-hour shifts for 13 days at a time. Compare Cromwell, 348 F. App'x
at 58-59, with Thibault, 612 F.3d at 844-49.
\11\ Specifically, Mr. Thibault earned significant profits from
his own sales company, ``owned eight drag-race cars [that] generated
$1,478 in income from racing professionally[,]'' and managed
``commercial rental property that generated some income.'' Thibault,
612 F.3d at 849. The Thibault court also highlighted the fact that
Mr. Thibault worked for only three months--although he intended to
work for seven or eight months--before being fired. Id. at 846, 849.
In contrast, the splicers in Cromwell worked approximately eleventh
months. 348 F. App'x at 58.
\12\ See also Off Duty Police, 915 F.3d at 1058 (``[W]hether a
worker has more than one source of income says little about that
worker's employment status.''); DialAmerica, 757 F.2d at 1385 (``The
economic-dependence aspect of the [economic reality] test does not
concern whether the workers at issue depend on the money they earn
for obtaining the necessities of life.'').
---------------------------------------------------------------------------
The Department agrees with Mr. W Fireworks and similar courts that
``the proper test of economic dependence . . . `examines whether the
workers are dependent on a particular business or organization for
their continued employment.' '' Id. (quoting DialAmerica, 757 F.2d at
1385); see also Halferty, 821 F.2d at 268 (``[I]t is not dependence in
the sense that one could not survive without the income from the job
that we examine, but dependence for continued employment.'').
Dependence for work as opposed to income comports with the FLSA's
``suffer or permit'' standard for employment relationship. 29 U.S.C.
203(g). An individual who depends on a potential employer for work is
an employee whom the
[[Page 60606]]
employer suffers or permits to work. In contrast, an independent
contractor does not work at the sufferance or permission of an employer
because, as a matter of economic reality, he or she is in business for
him- or herself. See Saleem, 854 F.3d at 139.
Without a consistent understanding of economic dependence, the
multifactor balancing test is left without a meaningful anchor. As a
result, the test's factors may become ``an end in themselves'' instead
of, as they are intended to be, guideposts in the inquiry of economic
dependence or lack thereof.\13\ For example, in Parrish, 917 F.3d 369,
the Fifth Circuit appears to have applied three different concepts of
economic dependence in a single opinion to analyze the control,
opportunity for profit or loss, and investment factors. First, the
court analyzed the control factor through the same concept of
dependence as Mr. W Fireworks, announcing that ``our task is to
determine whether the individual is, as a matter of economic reality,
in business for himself.'' Parrish, 917 F.3d at 379. The Parrish court
reasoned that mandated ``safety training and drug testing, when working
at an oil-drilling site, is not the type of control that counsels in
favor of employee status.'' Id. at 382 (emphasis in original). This
analysis is consistent with the ``in business for himself'' approach
because an oil-drilling company reasonably would require safety and
drug testing of both employees (who depend on the company for work) and
independent contractors (who are in business for themselves), since an
accident could pose potentially significant risks to the worksite and
to workers, regardless whether caused by an employee or an independent
contractor.
---------------------------------------------------------------------------
\13\ Goldstein, supra note 8 at 1010.
---------------------------------------------------------------------------
The Parrish court then expressly departed from Mr. W Fireworks in
favor of Thibault's dependence-for-income approach to analyze the
opportunity for profit or loss factor. Id. at 384. Specifically, the
court held that the consultant was an independent contractor, in part,
because he also earned income from his own goat farm. See id. at 383
(``Thibault is more on point [than Mr. W. Fireworks]. Accordingly we
consider . . . plaintiffs' enterprises, such as the goat farm, as a
part of the overall analysis of how dependent plaintiffs were on
[defendant].''). But the goat farm has absolutely nothing to do with
whether the worker was in business for himself as a consultant or was
``dependent on a particular business or organization for [his]
continued employment in that line of business.'' Mr. W Fireworks, 814
F.2d at 1054. Put another way, the economic reality analysis should ask
whether the plaintiff had ``opportunity for profit or loss . . . in the
claimed independent operations,'' Silk, 331 U.S. at 716, which in
Parrish was consulting, not goat farming.
The Parrish court impliedly took yet a third approach to economic
dependence when it analyzed the investment factor by comparing the
dollar value of ``each worker's individual investment'' to the
investment made by an oil drilling company in its overall operations:
``Obviously, [the drilling company] invested more money at a drill site
compared to each plaintiff's investments.'' Id. at 383 (emphasis in
original). That comparison was unresponsive to the economic dependence
inquiry of whether the worker is ``[e]ssentially . . . in business for
himself,'' id. at 379, because large companies routinely contract for
services with smaller entrepreneurs. Instead, the worker's investment
(or lack thereof) should have been analyzed to determine whether the
worker had an independent operation, distinct from the potential
employer's business, which created an opportunity for profit or loss.
The 1948 Senate Report cautioned that economic dependence was
potentially ``dimensionless.'' And although courts and the Department
have since added some guidance, the concept may be inconsistently
applied and under-analyzed. A more developed and dependable touchstone
at the heart of the economic reality test is needed to guide the
regulated community. Under this proposal, the Department would
interpret and apply ``economic dependence'' consistent with the
foregoing discussion.
2. The Lack of Focus in the Multifactor Balancing Test
Under the test, the Department and courts analyze the totality of
circumstances making up the economic reality of the relationship to
determine a worker's classification. But, as Judge Easterbrook warned
in 1987, `` `reality' encompasses millions of facts, and unless we have
a legal rule with which to sift the material from the immaterial, we
might as well examine the facts through a kaleidoscope.'' Lauritzen,
835 F.2d at 1539 (Easterbrook J., concurring) (``[A]ny balancing test
begs questions about which aspects of `economic reality' matter, and
why.''). Indeed, Congress rejected Treasury's 1947 proposal to use the
multifactor balancing test under the SSA, with some senators expressing
concern that, ``on virtually no state of facts may anyone be certain
whether or not he has a tax liability.'' Webb, 397 U.S. at 188 (quoting
S. Rep. No. 1255, at 12 (1948)). The same uncertainty often exists
under the FLSA. So far, neither the Department nor courts have
articulated clear, generally applicable guidance about how the multiple
factors, and the countless facts encompassed therein, are to be
balanced, creating uncertainty for the regulated community when, as is
often the case, the significance of facts is unclear or factors point
in opposite directions.
Courts applying the economic reality test often analyze the factors
individually and then reach an overall decision about a worker's
classification without meaningful explanation of how they balanced the
factors to reach the final decision. See, e.g., Parrish, 917 F.3d at
380 (analyzing each factor separately and then explaining ``for the
reasons stated supra, we reach the same conclusions as did the district
court''); Chao v. Mid-Atl. Installation Servs., Inc., 16 F. App'x 104,
108 (4th Cir. 2001) (same); Snell, 875 F.2d at 912 (same). This is so
even where many facts and factors support both sides of the
classification inquiry. See, e.g., Acosta v. Paragon Contractors Corp.,
884 F.3d 1225, 1238 (10th Cir. 2018) (concluding, without explanation
as to weighing of the factors, that workers were employees where two
factors (control and integral part) favored independent contractor
status and four factors (opportunity for profit or loss, investment,
skill, and permanence) favored employee status); Iontchev v. AAA Cab.
Services, 685 F. App'x 548, 550 (9th Cir. 2017) (concluding, without
explanation as to weighing of the factors, that the workers were
independent contractors where two factors (control and opportunity for
profit or loss) favored independent contractor status; one factor
(investment) was neutral; and three factors (skill, permanence, and
integral part) favored employee status).
At other times, courts have provided analysis as to the relative
weight of the factors in the specific case before them. For example,
some courts have noted where factors weigh ``strongly'' or ``weakly.''
See, e.g., Scantland, 721 F.3d at 1313-19 (finding that, assuming
factual inferences in favor of the workers, the control, opportunity
for profit or loss, permanence, and integral part factors strongly
point to employee status, and the investment and skill factors weakly
favor independent contractor status); Superior Care, 840 F.2d at 1059
(finding that opportunity
[[Page 60607]]
for profit or loss and integral part factors ``both weigh heavily in
favor of the . . . conclusion that nurses are employees,'' while skill
and permanence factors ``weigh slightly in favor of independent status,
[but] do not tip the balance''). And at least one court recently
dispensed with a factor-by-factor analysis and instead focused its
analysis on only those facts that determined the outcome in the case.
See Saleem, 854 F.3d at 140 (``draw[ing] upon and discuss[ing] the Silk
factors where relevant'' to the economic reality of the relationship at
issue).
While identifying the most relevant factors in a specific case
lends more clarity than a siloed analysis of each factor devoid of
context, this approach still leaves the regulated community without
generally applicable guidance as to what matters most and why. See
Lauritzen, 835 F.2d at 1539 (Easterbrook J., concurring) (``A legal
approach calling on judges to examine all of the facts, and balance
them, avoids formulating a rule of decision . . . [and] keep[s
businesses] in the dark about the legal consequences of their
deeds.''). In other words, the multifactor economic reality test is
missing direction on the relative importance of the factors.
3. Confusion and Inefficiency Due to Overlapping Factors
The economic reality test's multifactor framework gives some
structure to an otherwise roving inquiry by filtering the totality of
circumstances into distinct relevant categories. But three factors--
skill, permanence, and integral part--have been expanded by courts and
the Department to incorporate aspects of economic reality that also
fall under the control factor, creating overlapping coverage. There is
additional overlap between the opportunity for profit/loss and
investment factors, which ``relate logically to one [an]other.''
McFeeley, 825 F.3d at 243; Lauritzen, 835 F.2d at 1537 (``The capital
investment factor is . . . interrelated to the profit and loss
consideration.''). The structure provided by a multifactor framework
breaks down when the lines between factors are blurred. See Saleem, 854
F.3d at 140 n. 20 (``[C]aution is merited because the Silk factors,
while helpful in identifying relevant facts, overlap to a substantial
degree[.]''). Blurred lines further create inefficiency by requiring
courts to analyze the same facts multiple times, sometimes in
inconsistent ways. Additionally, litigants address and analyze the same
facts repeatedly, and businesses must evaluate those same facts again
and again when making worker classification decisions. Each of these
overlaps are discussed in more detail below.
Silk articulated a ``skill required'' factor as part of the
economic reality test, 331 U.S. at 716, and several federal courts of
appeals continue to apply this factor to consider ``the degree of skill
required to perform the work.'' Paragon, 884 F3d at 1235; see also
Iontchev, 685 F. App'x at 550 (asking ``whether services rendered . . .
require[d] a special skill''); Keller, 781 F.3d at 807 (analyzing ``the
degree of skill required''). As explained above, this inquiry has been
expanded by some other courts into a ``skill and initiative'' factor
which, in addition to asking whether workers have ``some unique skill
set,'' also analyzes whether they ``exercise significant initiative
within the business.'' Parrish, 917 F.3d at 385; see also, e.g.,
Superior Care, 840 F.2d at 1060. The ability to exercise significant
initiative is already analyzed as part of the control factor. This
expansion of the skill factor to incorporate the initiative aspect of
control occurred because courts recognized that ``the use of special
skills is not itself indicative of independent contractor status,
especially if the workers do not use those skills in any independent
way.'' Selker Bros., 949 F.2d at 1295; see also Superior Care, 840 F.2d
at 1060. The Department now believes this sentiment could have been
better incorporated into the analysis by explaining that capacity for
initiative under the control factor is more important than having a
specialized skill. Such an approach would have also provided helpful
guidance regarding how to balance the factors that point in different
directions.
Instead, courts and the Department have imported a control analysis
into the skill factor. See Selker Bros., 949 F.2d at 1295 (concluding
that the skill factor weighed towards employee classification due to
``the degree of control exercised by [the potential employer] over the
day-to-day operations''); see also WHD Fact Sheet #13 (describing the
skill factor to include ``initiative, judgment, or foresight''). For
many courts, the analysis of control appears to have become the most
important part of the skill factor, overriding presence or absence of
actual specialized skill. See Baker, 137 F.3d at 1443 (finding that the
skill factor weighed towards employee classification where skilled
welders ``are told what to do and when to do it''); Superior Care, 840
F.2d at 1060 (finding that the skill factor weighed towards employee
classification for skilled nurses because ``Superior Care in turn
controlled the terms and conditions of the employment relationship'').
In short, by adding ``initiative'' to the ``skill required'' factor
originally articulated by Silk, courts have turned that factor into an
extension of the control factor. The ``skill and initiative'' factor
also overlaps with the opportunity for profit or loss factor, which
considers whether a worker's earnings are determined by initiative.
See, e.g., Snell, 875 F.2d at 810 (finding employee status in part
because the workers' ``earnings did not depend upon their judgment or
initiative, but on the [potential employer's] need for their work'').
Thus, facts relating to initiative are analyzed through three factors:
Control, opportunity for profit, and skill.\14\
---------------------------------------------------------------------------
\14\ While both the control factor and the opportunity for
profit or loss factor overlap with the ``skill and initiative''
factor, they do not overlap with each other in this regard. The
control factor concerns the capacity for initiative, i.e., whether a
worker is able to exercise initiative. The opportunity for profit
concerns the effect of initiative, i.e., the extent to which profits
(or losses) are determined by the exercise of initiative. The former
is a prerequisite for the latter.
---------------------------------------------------------------------------
Such overlap exacerbates confusion by blurring the lines between
the economic reality factors. It also requires redundant analysis of
the same facts under different factors, which may yield inconsistent
and confusing results within the same case. For example, in Express
Sixty-Minutes Delivery, the court concluded that the control factor
pointed towards independent contractor status in part because the
delivery drivers had substantial capacity for initiative: ``Drivers set
their own hours and days of work[,] can reject deliveries without
retaliation,'' and ``can work for other courier delivery systems.'' 161
F.3d at 303. The court further determined that each ``driver's profit
or loss is determined largely on his or her skill, initiative, ability
to cut costs, and understanding of the courier business.'' Id. at 304.
But confusingly, the court also held that the ``skill and initiative
factor points towards employee status'' due to ``the key missing
ingredient . . . [of] initiative.'' Id at 305. Read together, these
holdings may be confusing because the court held that drivers lacked
the very initiative that the court recognized in the same opinion to
determine their profits and losses. It may also appear inconsistent for
the court to hold that initiative was a ``missing ingredient'' when it
determined in the same opinion that drivers had freedom to set hours,
reject assignments, and work for competitors.
Next, the permanence factor originally concerned the continuity and
duration of a working relationship. The factor has since been expanded
by many courts and the Department to also consider the exclusivity of
the relationship. See, e.g.,
[[Page 60608]]
Parrish, 917 F.3d at 386-87 (considering as part of the permanence
factor whether any worker worked exclusively for the potential
employer); Keller, 781 F.3d at 807-09 (considering the exclusivity of
the working relationship as part of the permanence factor); Scantland,
721 F.3d at 1319 (finding installation technicians' relationships with
the potential employer were permanent because they ``could not work for
other companies''); see also WHD Opinion Letter FLSA2019-6 at 8. But
exclusivity is already an aspect of control. See, e.g., Saleem, 854
F.3d at 141 (``[A] company relinquishes control over its workers when
it permits them to work for its competitors.''); Express Sixty-Minutes
Delivery, 161 F.3d at 303 (concluding that the control factor indicated
independent contractor status in part because the workers ``can work
for other courier delivery systems, and [their agreement] does not
contain a covenant-not-to-compete''). This overlap results in
exclusivity being analyzed twice in many cases,\15\ once as part of the
control factor and again as part of the permanence factor. As with
initiative, such repetitive analysis is inefficient and may exacerbate
confusion.
---------------------------------------------------------------------------
\15\ Compare, e.g., Freund, 185 F. App'x at 783 (``Hi-Tech
exerted very little control over Mr. Freund [in part because] Freund
was free to perform installations for other companies.''), with id.
at 784 (``Freund's relationship with Hi-Tech was not one with a
significant degree of permanence . . . [because] Freund was able to
take jobs from other installation brokers.'').
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Third, the integral part factor used by some courts to analyze
importance appears to be a proxy for control.\16\ Courts appear to
assume that businesses will use employees and not independent
contractors to perform important work in order to control how and when
that work is performed. For example, one court explained the use of
this factor by stating ``it is presumed that, with respect to vital or
integral parts of the business, the employer will prefer to engage an
employee rather than an independent contractor. This is so because the
employer retains control over the employee and can compel attendan[ce]
at work on a consistent basis.'' Baker v. Dataphase, Inc., 781 F. Supp.
724, 735 (D. Utah 1992); see also Baker v. Barnard Const. Co. Inc., 860
F. Supp. 766, 777 (D.N.M. 1994), aff'd sub nom. Baker v. Flint Eng'g &
Const. Co., 137 F.3d 1436 (10th Cir. 1998) (same). As an initial
matter, this observation appears to rest on a mistaken premise.
Manufacturers, for example, commonly have critical parts and components
produced and delivered by wholly separate companies. In any event, the
control factor already directly analyzes whether a business can compel
a worker to work on a consistent basis or otherwise closely supervise
and manage performance of the work. See, e.g., Nieman v. Nat'l Claims
Adjusters, Inc., 775 F. App'x 622, 625 (11th Cir. 2019) (``The first
factor--control--weighs in favor of independent contractor status
because Nieman . . . controlled his schedule.''). Such analysis
presumes a relationship between control and integral part, and
therefore is redundant.\17\
---------------------------------------------------------------------------
\16\ As discussed above, the Supreme Court's Rutherford opinion
did not analyze whether work was important but rather whether it was
``part of an integrated unit.'' 331 U.S. at 729. Notably, the Fifth
Circuit does not typically consider the integral part factor.
\17\ Moreover, some courts have further conflated the
integrality analysis by assuming that easily ``replaceable'' workers
are less integral to a business. Browning v. Ceva Freight, LLC, 885
F. Supp. 2d 590, 610 (E.D.N.Y. 2012); see also Velu v. Velocity
Exp., Inc., 666 F. Supp. 2d 300, 307 (E.D.N.Y. 2009) (observing that
integrality to business diminished where ``work is interchangeable
with the work of other[s]''). That may be true, but being easily
replaceable or interchangeable makes workers more economically
dependent on that business for work, not less. Thus, focusing on
integrality can sometimes obscure the ultimate issue of economic
dependence.
---------------------------------------------------------------------------
Finally, while Silk articulated opportunity for profit or loss and
investment as separate factors, 331 U.S. at 716, there is clear overlap
because ``[e]conomic investment, by definition, creates the opportunity
for loss, [and] investors take such a risk with an eye to profit.''
Saleem, 854 F.3d at 145 n.29. Indeed, the Supreme Court analyzed these
two factors together in Silk, concluding that coal unloaders were
employees because they had ``no opportunity to gain or lose except from
the work of their hands and [ ] simple tools.'' 331 U.S. at 717-18. In
contrast, truck drivers in that case were independent contractors in
part because they invested in their own trucks and had an ``opportunity
for profit from sound management'' of that investment. Id. at 319.
There often is redundancy where the opportunity for profit or loss
and investment factors are considered separately. See, e.g., Mid-
Atlantic Installation Servs., 16 F. App'x at 106-07. And separate
analyses may result in confusion to the extent that it encourages
analysis of a worker's investment outside of the context of the
worker's opportunity for profit or loss. As discussed above, some
courts compare the dollar value of a worker's personal investment
against the total investment of large companies that, for example,
``maintain[ ] corporate offices,'' Hopkins, 545 F.3d at 344; see also
Parrish, 917 F.3d at 383; Keller, 781 F.3d at 810, which says nothing
about whether the worker is in business for him- or herself, as opposed
to being economically dependent on the potential employer for work.
Such irrelevant and potentially misleading comparisons could be avoided
if investment were analyzed together with the opportunity for profit or
loss factor, as the Supreme Court did in Silk, 331 U.S. at 719. That is
precisely what the Second Circuit has done by combining opportunity for
profit or loss and investment in a single factor. See Superior Care,
840 F.2d at 1058.
In summary, significant overlaps between factors exacerbate
confusion about how certain facts are analyzed and balanced. They also
create inefficiency by requiring redundant review of the same facts by
courts, redundant litigation over the same facts by parties, and
redundant analysis of the same facts by business seeking to classify
workers.
4. The Shortcomings and Misconceptions That This Proposal Seeks To
Remedy Are More Apparent in the Modern Economy
Certain shortcomings of the economic reality test have become more
apparent in the modern economy. In particular, technological and social
change--such as falling transaction costs, the transition from more of
an industrial economy to more of a knowledge economy, and shorter job
tenures--have revealed how analyzing the integral part factor through
the lens of importance rather than integration, and giving undue weight
to the investment and permanence factors, may send misleading signals
regarding an individual's classification.
First, falling transaction costs in many sectors of the economy
highlight the potential for errors resulting from analyzing the
integral part factor through the lens of importance instead of
integration. When the transaction costs of hiring are high, firms tend
to hire employees rather than independent contractors for core tasks
that must be performed on a routine basis.\18\ Thus, analyzing the
importance, centrality, or frequency of the work to an organization's
business may have been correlated with a worker's classification,
[[Page 60609]]
even though such analysis departs from Rutherford Food's consideration
of whether work is part of an ``integrated unit of production.'' 331
U.S. at 726. Over the past several decades, however, technological
innovations have driven transactions costs down in many (but not all)
sectors of the economy, sometimes to negligible levels.\19\ Firms in
those sectors can now often hire independent contractors rather than
employees for core tasks without incurring onerous transaction costs.
For example, drivers are vital to the personal transportation business,
but transportation companies increasingly hire independent contractor
drivers rather than employees. See, e.g., Saleem, 854 F.3d at 140;
Iontchev, 685 F. App'x at 550. The Department thus believes analyzing
the importance or centrality of work may send misleading signals in
low-transaction-cost environments that have become more commonplace,
which militates in favor of refocusing the integral part factor on
integration rather than importance.\20\
---------------------------------------------------------------------------
\18\ Ronald Coase, Nature of the Firm, 4 Economica 386 (1937),
https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1468-0335.1937.tb00002.x. See also Nobel Prizes and Laureates, Oct., 15,
1991, https://www.nobelprize.org/prizes/economic-sciences/1991/press-release/ (explaining The Nature of the Firm's contribution to
economics literature as a central reason for Coase's receipt of the
1991 Nobel Prize in Economics).
\19\ See, e.g., Anders Henten and Iwona Windekie, ``Transaction
Costs and the Sharing Economy,'' 26th European Regional ITS
Conference p. 2 (2015) (asserting that ``digital platforms allow for
decreasing transaction costs''), https://www.econstor.eu/bitstream/10419/127145/1/Henten-Winderkilde.pdf.
\20\ As noted in the Background section and explained in further
detail below, the Supreme Court did not analyze whether work was
important, but rather whether work was ``part of an integrated unit
of production.'' Rutherford Food, 331 U.S. at 726. The Department
proposes to return to the Supreme Court's original factors.
---------------------------------------------------------------------------
Second, the transition from a more industrial economy to more of a
knowledge-based economy has diminished the investment factor's ability
to indicate economic dependence.\21\ Broadly speaking, the factors of
production in a more industrial economy consist of either physical
capital that produced investment returns or labor for which wages were
paid. Such a more industrial economy facilitated a relatively clear
distinction between ``wage earners toiling for a living'' and
``independent entrepreneurs seeking a return on their risky capital
investments.'' Mr. W Fireworks, 814 F.2d at 1051. In today's more
knowledge-based economy, however, it is often human rather than
physical capital that matters most. Because personal initiative and
know-how can enable entrepreneurship in a more knowledge-based economy,
workers who lack ``capital investments'' cannot be assumed to be ``wage
earners toiling for a living.'' See, e g., Lauritzen, 835 F.2d at 1540-
41 (Easterbrook, J. concurring) (observing that an attorney ``sells
human capital rather than physical capital, but this does not imply
that lawyers are `employees' of their clients under the FLSA''); Meyer
v. U.S. Tennis Ass'n, 607 F. App'x 121, 123 (2d Cir. 2015) (holding
that tennis umpires were independent contractors even though they
``invest little''). So, while the presence of significant capital
investment is still probative, its absence may be less so in more
knowledge-based occupations and industries. Indeed, technological
advances enable, for example, freelance journalists, graphic designers,
or consultants to be entrepreneurs with little more than a personal
computer and smartphone. See, e.g., Faludi v. U.S. Shale Sols., L.L.C.,
950 F.3d 269, 276 (5th Cir. 2020) (holding that a consultant who
``provided his own phone and computer'' and ``made investments in his
continuing education and home office equipment'' was an independent
contractor).
---------------------------------------------------------------------------
\21\ See, e.g., Walter Powell and Kaisa Snellman, The Knowledge
Economy, 30 Annu. Rev. Sociol. 199-220 (2004).
---------------------------------------------------------------------------
Finally, shorter job tenures among American workers have diminished
the underlying rationale of the permanence factor.\22\ That factor
assumes that independent contractors have relatively short working
relationships while employees have longer ones.\23\ Such distinction
was sharp when the vast majority of employees had job tenures that
lasted many years or even decades, as may have been the case for
employees born in the 1940s and earlier.\24\ But the Atlanta Federal
Reserve's 2015 analysis of BLS data for U.S. workers born between 1933
and 1993 found that median job tenure has declined steadily for every
age cohort, with younger generations having the lowest job tenures.\25\
The most recently available data from the Department's Bureau of Labor
Statistics (BLS) shows that, since 2014, job tenure rates have resumed
their long-term decline, following a brief increase attributable to the
2008 recession, with the lowest job tenure rates for younger workers.
The lowest median tenure (2.2 years) was found in the leisure and
hospitality industry, which tends to have younger workers on average.
This means that many employees today have shorter working relationships
with their employers, which dulls the usefulness of job duration to
distinguish an employee from an independent contractor.
---------------------------------------------------------------------------
\22\ The Department has not investigated the cause of shorter
job tenures since 1947 as part of this rulemaking.
\23\ Compare, e.g., Bartels, 332 U.S. at 127 (finding that band
members were independent contractors in part because ``[a]lmost all
of the engagements . . . involved were one-night stands''), with
Whitaker House, 366 U.S. at 29 (finding that homeworkers were
employees of a cooperative that ``required [the homeworkers] to
remain members at least a year'').
\24\ Julie Hotchkiss and Christopher Macpherson, Falling Job
Tenure: It's Not Just about Millennials, Federal Reserve Bank of
Atlanta, June 8, 2015, https://www.frbatlanta.org/blogs/macroblog/2015/06/08/falling-job-tenure-its-not-just-about-millennials.aspx.
\25\ Id.
---------------------------------------------------------------------------
In summary, the Department believes the current multifactor
economic reality test suffers because the analytical lens through which
all the factors are to be filtered remains inconsistent; there is no
clear principle regarding how to balance the multiple factors; the
lines between many of the factors are blurred; and these shortcomings
have become more apparent in the modern economy. The result is legal
uncertainty that obscures workers' and businesses' respective rights
and obligations under the FLSA. Such uncertainty is especially acute
when it comes to the growing number of more flexible and nimble work
relationships. While such relationships benefit workers and businesses
alike, they also lead to complex questions about a worker's
classification under the FLSA, which are difficult to answer due in
part to the shortcomings described above.\26\
---------------------------------------------------------------------------
\26\ See, e.g., Kati L. Griffith, The Fair Labor Standards Act
at 80: Everything Old Is New Again, 104 Cornell L. Rev. 557, 561
(2019) (``[N]ew trends raise complicated questions about who is a
true independent contractor excluded from the [FLSA]'s protections.
Most notably, the recent growth in workers who depend on freelance
or `contract work,' has received a lot of attention.''); Griffin
Toronjo Pivateau, The Prism of Entrepreneurship: Creating A New Lens
for Worker Classification, 70 Baylor L. Rev. 595, 625 (2018) (``The
economic realities test fails to cope with innovative working
arrangements.''); Keith Cunningham-Parmeter, From Amazon to Uber:
Defining Employment in the Modern Economy, 96 B.U. L. Rev. 1673,
1683-84, 1688 (2016) (``[P]ersistent uncertainty impacts an ever-
expanding list of businesses in retail, service, home care,
construction, information technology, and the burgeoning on-demand
economy.'').
---------------------------------------------------------------------------
The Department is further concerned that continued legal
uncertainty may deter innovative work arrangements by creating legal
risks with respect to misclassifying workers as independent contractors
instead of employees. Take, for example, the workers in WHD's April
2019 opinion letter who searched for job opportunities and negotiated
for prices by `` `multi-app[ing]'--that is simultaneously run[ing a
company]'s virtual platform alongside the platform of a competitor to
compare virtual opportunities in real time and pick the best
opportunity on a job-by-job basis.'' WHD Opinion Letter FLSA2019-6 at
8. Multi-apping creates significant economic value by letting workers
find the best paying opportunities, providing app companies with access
to a larger workforce, and helping consumers
[[Page 60610]]
benefit from competition. This innovative practice depends on being
able to confidently classify workers as independent contractors.\27\
For this reason, a clear standard for employee classification can help
encourage multi-apping and other economic innovations. Under the status
quo, a company may believe it cannot be sure of a classification
outside of costly litigation applying the economic reality test (which
may be too unwieldly as currently applied). The prospect of such
litigation expense and any potential back wages and penalties may be
enough to deter businesses from exploring innovative business models
and working relationships. Thus, legal uncertainty regarding worker
classification may inhibit the development of new job opportunities or
result in the elimination of existing jobs.
---------------------------------------------------------------------------
\27\ Businesses have a strong incentive to restrict multi-apping
to independent contractors because an employee who multi-apps may
create complicated questions regarding which of the multiple app
companies is responsible for FLSA obligations for time spent multi-
apping. During the multi-app period, a worker would be searching for
customers on behalf of multiple app companies, and it therefore may
be difficult or impractical to determine the company or companies
for which the worker is performing compensable work if he or she is
a non-exempt employee. This could raise challenging questions that
create legal risk for each employer. The Department believes that
the greater the legal certainty of workers' respective
classifications, the more the Department encourages innovative work
arrangements like multi-apping by providing companies with clear
frameworks to set up these arrangements.
---------------------------------------------------------------------------
The Department is therefore issuing this NPRM to provide greater
legal certainty and solicits comments on all these issues.
IV. Proposed Regulatory Provisions
In light of the foregoing concerns, the Department is proposing to
introduce a new part to Title 29 of the Code of Federal Regulations
addressing whether particular workers are ``employees'' or independent
contractors under the FLSA. In relevant part, and as discussed in
greater detail below, the Department proposes:
Introductory provisions at Sec. 795.100 explaining the
purpose and legal authority for the new part;
a provision at Sec. 795.105(a) explaining that
independent contractors are not employees under the FLSA;
a provision at Sec. 795.105(b) discussing the ``economic
reality'' test for distinguishing FLSA employees from independent
contractors, clarifying that the concept of economic dependence turns
on whether a worker is in business for him- or herself (independent
contractor) or is economically dependent on a potential employer for
work (employee);
provisions at Sec. 795.105(c) and (d) describing factors
examined as part of the economic reality test, including two ``core''
factors--the nature and degree of the worker's control over the work
and the worker's opportunity for profit or loss--which are afforded
greater weight in the analysis, as well as three other factors that may
serve as additional guideposts in the analysis;
a provision at Sec. 795.110 advising that the parties'
actual practice is more relevant than what may be contractually or
theoretically possible; and
a severability provision at Sec. 795.115.
These proposals would significantly clarify how the Department
distinguishes between employees and independent contractors under the
Act.
The Department welcomes comment on all aspects of its proposal.
The Department further proposes to adopt the above-described
provisions as its sole and authoritative interpretation of independent
contractor status under the FLSA. Accordingly, the Department would
replace industry-specific interpretations of independent contractor
status for sharecroppers or tenants at Sec. 780.330(b) and certain
forestry or logging operations at Sec. 788.16(a) with cross-references
to the interpretation set forth in this rule. These previous industry-
specific interpretations of independent contractor status all rely on
the same FLSA terms as the interpretation set forth in this propose
rule.\28\ As such, the Department believes the justifications
articulated in the need for rulemaking discussion in Section III,
particularly the need for a consistent and clear standard for
determining independent contractor status in all FLSA cases, largely
apply to the question of independent contractor status in those
industries.
---------------------------------------------------------------------------
\28\ The interpretation of independent contractor status under
Sec. 780.330(b) for sharecroppers or tenants pertain to an
exemption for certain ``employee[s] employed in agriculture'' under
section 13(a)(6) of the FLSA. The Department believes the
distinction this proposed rule draws between independent contractors
and employees would apply in the agricultural exemption context
because the same statutory terms, i.e., employee and employ, are
being interpreted.
---------------------------------------------------------------------------
The Department considered, but is not proposing at this time,
similar revisions to 29 CFR 500.20(h)(4), which addresses independent
contractor status under MSPA. The Department recognizes that MSPA
adopts by reference the FLSA's definition of ``employ,'' see 18 U.S.C.
1802(5), and that 29 CFR 500.20(h)(4) considers ``whether or not an
independent contractor or employment relationship exists under the Fair
Labor Standards Act'' to interpret independent contractor status under
MSPA. Nonetheless, MSPA imposes different legal obligations than the
FLSA's minimum wage and overtime pay obligations and applies to
different employers and employees.\29\ And the Department's enforcement
experience does not indicate that there is confusion regarding workers'
classifications as an employee or independent contractor in the MSPA
context to the same extent as the FLSA context. As such, it is not
entirely clear whether the justifications articulated in the need for
rulemaking discussion in Section III apply in the MSPA context. The
Department therefore proposes to proceed incrementally by first seeking
comment on a revised interpretation of independent contractor status
under the FLSA before considering whether to revise the MSPA
regulations.\30\ The Department welcomes comments regarding whether 29
CFR 500.20(h)(4) should be revised to be consistent with the
interpretation of independent contractor status set forth in this
proposed rule.
---------------------------------------------------------------------------
\29\ See WHD Fact Sheet #49, ``The Migrant and Seasonal
Agricultural Worker Protection Act'' (Jul. 2008).
\30\ See, e.g., Pharm. Research & Mfrs. of Am. v. FTC., 790 F.3d
198, 203 (D.C. Cir. 2015) (affirming that agency had discretion to
``proceeding incrementally'' in promulgating rules that were
directed to one industry but not others); Inv. Co. Inst. v.
Commodity Futures Trading Comm'n, 720 F.3d 370, 378 (D.C. Cir. 2013)
(observing that ``[n]othing prohibits federal agencies from moving
in an incremental manner'' (quoting F.C.C. v. Fox Television
Stations, Inc., 556 U.S. 502, 522 (2009)); City of Las Vegas v.
Lujan, 891 F.2d 927, 935 (D.C. Cir. 1989) (noting that ``agencies
have great discretion to treat a problem partially'').
---------------------------------------------------------------------------
A. Introductory Statements
Proposed Sec. 795.100 explains that the interpretations provided
in part 795 will guide WHD's enforcement of the FLSA and are intended
to be used by employers, businesses, the public sector, employees,
workers, and courts to assess employment status classifications under
the Act. Proposed Sec. 795.100 further clarifies that, if proposed
part 795 is adopted, employers may safely rely upon the interpretations
provided in part 795 under section 10 of the Portal-to-Portal Act,
unless and until any such interpretation ``is modified or rescinded or
is determined by judicial authority to be invalid or of no legal
effect.'' 29 U.S.C. 259.
[[Page 60611]]
B. Proposal To Explain That Independent Contractors Are Not Employees
Under the Act
Proposed Sec. 795.105(a) explains that an independent contractor
who renders services to a person is not an employee of that person
under the FLSA. This is consistent with the Supreme Court's affirmation
in Rutherford Food that the Act's definition of employee has
consistently been interpreted as excluding individuals who ``might work
for their own advantage,'' including ``independent contractors who take
part in production or distribution.'' 331 U.S. at 728-29; see also,
e.g., Hopkins, 545 F.3d at 342; Saleem, 854 F.3d at 139-40; Karlson,
860 F.3d at 1092. Minimum wage and overtime pay requirements under
sections 6 and 7 of the Act apply only to a person's employees. See 29
U.S.C. 206(a), 207(a)(1). As such, those requirements do not apply with
respect to a person's independent contractors. For the same reason, the
recordkeeping obligations for employers under section 11 of the Act do
not apply to a person with respect to services received from an
independent contractor. See 29 U.S.C. 211(c) (``Every employer subject
to any provision of [the FLSA] shall make, keep, and preserve such
records of the persons employed by him[.]'') (emphasis added).
C. Proposal To Adopt the Economic Reality Test To Determine a Worker's
Employee or Independent Contractor Status Under the Act
Proposed Sec. 795.105(b) adopts the economic reality test to
determine a worker's status as an employee or an independent contractor
under the Act.
The Department's analysis begins with the text of the statute,
following well-settled principles of statutory construction by
``reading the whole statutory text, considering the purpose and context
of the statute, and consulting any precedents or authorities that
inform the analysis.'' Kasten v. Saint-Gobain Performance Plastics
Corp., 563 U.S. 1, 7 (2011) (interpreting the FLSA) (internal quotation
marks and citation omitted). An employer employs an individual under
the Act if the employer ``suffer[s] or permit[s]'' the individual to
work. 29 U.S.C. 203(g). Proposed Sec. 795.105(b) codifies the Supreme
Court's statement that ``suffer or permit'' means something broader
than the common law conception of control; namely, economic dependence.
See, e.g., Darden, 503 U.S. at 326. Therefore, the Department proposes
that the central inquiry as to whether an individual is an employee or
independent contractor under the Act is whether, as a matter of
economic reality, the individual is economically dependent on the
potential employer for work. See Pilgrim Equip., 527 F.2d at 1311 (``It
is dependence that indicates employee status.'').
However, all workers--employees and independent contractors alike--
are economically dependent on others to some degree. Business owners
are likewise economically dependent on the workers they hire, but this
does not make them employees of their own workers. The economic reality
test can be `` `a dimensionless and amorphous abstraction' '' unless
its touchstone--economic dependence--is clarified. Webb, 397 U.S. at
188 (quoting S. Rep. No. 1255, at 12 (1948)). As explained in the need
for rulemaking discussion earlier in Section III, the meaning of
economic dependence is sometimes inconsistently applied and would
benefit from further explanation.
Clarifying the test requires putting the question of economic
dependence in the proper context. ``Economic dependence is not
conditioned reliance on an alleged employer for one's primary source of
income, for the necessities of life.'' Mr. W Fireworks, 814 F.2d at
1054. Rather, courts have framed the question as ``whether, as a matter
of economic reality, the workers depend upon someone else's business
for the opportunity to render service or are in business for
themselves.'' Saleem, 854 F.3d at 139; see also Parrish, 917 F.3d at
379; Baker, 137 F.3d at 1440 (``[T]he focal point is whether the
individual is economically dependent on the business to which he
renders service . . . or is, as a matter of economic fact, in business
for himself.'') (internal quotation marks and citation omitted);
Donovan v. Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981) (``The focal
inquiry in the characterization process is thus whether the individual
is or is not, as a matter of economic fact, in business for
himself.''). In other words, the key question is whether workers are
``more closely akin to wage earners,'' who depend on others to provide
work opportunities, or ``entrepreneurs,'' who create work opportunities
for themselves. Mr. W Fireworks, 814 F.2d at 1051; see also Express
Sixty-Minutes, 161 F.3d at 305 (asking whether workers ``are more like
wage earners than independent entrepreneurs''); cf. H.R. Rep. No. 245,
80th Cong., 1st Sess. 18 (1947) (`` `Employees' work for wages or
salaries under direct supervision. `Independent contractors' undertake
to do a job for a price, decide how the work will be done, usually hire
others to do the work, and depend for their income not upon wages, but
upon the difference between what they pay for goods, materials, and
labor and what they receive for the end result, that is, upon
profits.'').
The above-described concept of economic dependence comports with
the FLSA's definition of employ as ``includ[ing] to suffer or permit to
work.'' See 29 U.S.C. 203(g). An individual who depends on a potential
employer for work is able to work only by the sufferance or permission
of the potential employer. Such an individual is therefore an employee
under the Act. In contrast, an independent contractor does not work at
the sufferance or permission of others because, as a matter of economic
reality, he or she is in business for him- or herself. In other words,
an independent contractor is an entrepreneur who works for him- or
herself, as opposed to an employer.
Some courts have relied on a worker's entrepreneurship with respect
to one type of work to conclude that the worker was also in business
for him- or herself in a second, unrelated type of work. See, e.g.,
Parrish, 917 F.3d at 384 (considering ``plaintiff's enterprise, such as
the goat farm, as part of the overall analysis of how dependent
plaintiffs were on [defendant]'' for working as consultants); Thibault,
612 F.3d at 849 (concluding that plaintiff was an independent
contractor as a cable splicer in part because he managed unrelated
commercial operations and properties in a different state). However,
the Supreme Court was clear that the economic reality analysis is
limited to ``the claimed independent operation.'' Silk, 331 U.S. at
716. Thus, the relevant question in this context is whether the worker
providing certain service to a potential employer is an entrepreneur
``in that line of business.'' Mr. W Fireworks, 814 F.2d at 1054.
Otherwise, businesses must make worker classification decisions based
on facts outside the working relationship, such as whether a consultant
manages a ``goat farm,'' Parrish 917 F.3d at 384, or whether a cable
splicer owns an out-of-state commercial venture. Thibault, 612 F.3d at
849.\31\
---------------------------------------------------------------------------
\31\ It is possible for a worker to be an employee in one line
of business and an independent contractor in another.
---------------------------------------------------------------------------
At bottom, the phrase ``economic dependence'' may mean many
different things. But in the context of the economic reality test,
``economic dependence'' is best understood in terms of what it is not.
The phrase excludes individuals who, as a matter of economic reality,
are in business for themselves. Such individuals work for themselves
rather than at the sufferance
[[Page 60612]]
or permission of a potential employer, see 29 U.S.C. 203(g), and thus
are not dependent on that potential employer for work. Proposed Sec.
795.105(b) therefore recognizes the principle that, as a matter of
economic reality, workers who are in business for themselves with
respect to work being performed are independent contractors for that
type of work.
D. Proposal To Apply the Economic Reality Factors To Determine a
Worker's Independent Contractor or Employee Status
The uncertainty and unpredictability of the traditional multifactor
analysis of economic dependence has led some courts and commentators to
call for alternative approaches. Judge Easterbrook's concurrence in
Lauritzen, for instance, urged the Seventh Circuit to ``abandon these
unfocused `factors' and start again.'' 835 F.2d at 1543 (Easterbrook
J., concurring). One commentator in a recent article has proposed
replacing the economic reality factors with ``three main dimensions to
entrepreneurship.'' \32\ The Department, however, prefers to sharpen
the existing test, rather than to create a new test out of whole cloth,
in part because many existing work relationships are structured around
the current multifactor test and wholesale abandonment of that test may
impose undue and prohibitive adjustment costs on the regulated
community. Moreover, the economic reality test, properly construed and
applied, is effective at distinguishing employees from independent
contractors. As such, proposed Sec. 795.105(c) and (d) would adopt a
variation on the traditional multifactor analysis of economic
dependence to improve certainty and predictability, as well as increase
the test's probative value into the underlying question of economic
dependence.
---------------------------------------------------------------------------
\32\ Pivateau, supra note 26, at 631. The proposal would replace
the six-factor approach with ``the three main dimensions to
entrepreneurship,'' which are: ``(1) the processes and events that
make up entrepreneurship; (2) the skills and traits that
characterize an entrepreneur; and (3) the results that
entrepreneurship generates.'' Id.
---------------------------------------------------------------------------
Proposed Sec. 795.105(c) explains that certain nonexclusive
economic reality factors guide the determination of whether an
individual is, on one hand, economically dependent on a potential
employer and therefore an employee or, on the other, in business for
him- or herself and therefore an independent contractor. These factors
are listed in Sec. 795.105(d) and are based on economic reality
factors currently used by the Department and most federal courts of
appeals, with certain proposed clarifications.
First, the Department proposes to follow the Second Circuit's
approach of analyzing the worker's investment as part of the
opportunity for profit or loss factor. The combined factor would ask
whether the worker has an opportunity to earn profits or incur losses
based on his or her exercise of initiative or management of
investments. Second, the Department proposes to clarify that the
``skill required'' factor originally articulated by the Supreme Court
should be used, as opposed to the ``skill and initiative'' factor
currently used in some circuits, because considering initiative as part
of the skill factor creates unnecessary and confusing overlaps with the
control and opportunity for profit or loss factors. Third, the
Department proposes to further reduce overlap by analyzing the
exclusivity of the relationship as a part of the control factor only,
as opposed to both the control and permanence factors. Lastly, the
Department proposes to reframe the ``whether the service rendered is an
integral part of the alleged employer's business'' factor in accordance
with the Supreme Court's original inquiry of whether the work is ``part
of an integrated unit of production.'' See Rutherford, 331 U.S. at 729.
Proposed Sec. 795.105(c) further improves the certainty and
predictability of the test by focusing it on two core factors: (1) The
nature and degree of the worker's control over the work; and (2) the
worker's opportunity for profit or loss. These core factors, listed in
proposed Sec. 795.105(d)(1), are highly probative to the inquiry
because the ability to control one's work and to earn profits and risk
losses strikes at the core of what it means to be an entrepreneurial
independent contractor, as opposed to a ``wage earner'' employee. Mr. W
Fireworks, 814 F.2d at 1051; cf. FedEx Home Delivery v. NLRB, 563 F.3d
492, 497 (D.C. Cir. 2009) (``[I]ndependent contractors have
`significant entrepreneurial opportunity for gain or loss[.]' '').
Other factors listed in proposed Sec. 795.105(d)(2) are also probative
depending on the circumstances, but should be evaluated in the context
of these two core factors. Given their greater weight, if both proposed
core factors point towards the same classification--whether employee or
independent contractor--there is a substantial likelihood that the
individual's classification is accurate. This is because it is highly
unlikely for the other, less probative factors to outweigh the combined
weight of the core factors.\33\
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\33\ As discussed in greater detail below, the Department's
review of federal appellate decisions indicates that, when the two
proposed core factors are in alignment, they point to what the court
finds to be the individual's correct classification.
---------------------------------------------------------------------------
The following discussion addresses the five economic reality
factors, including proposed modifications and clarifications made to
each, and explains why the two core factors are entitled to greater
weight than other factors.
1. The Nature and Degree of the Individual's Control Over the Work
The first economic reality factor (proposed Sec. 795.105(d)(1)(i))
is ``the nature and degree of the individual's control over the work.''
\34\ This factor would weigh towards the individual being an
independent contractor to the extent that the individual, as opposed to
the potential employer, exercises substantial control over key aspects
of the performance of the work. Examples in the proposed regulatory
text of an individual's substantial control include setting his or her
own work schedule, choosing assignments, working with little or no
supervision, and being able to work for others, including a potential
employer's competitors.\35\ In addition, the Department agrees with
courts that have found that an individual worker's ``substantial
control of the key aspects'' of the work weighs in favor of independent
contractor classification ``even if the worker is not solely in control
of the work.'' Parrish, 917 F.3d at 381-82; see also Mid-Atl.
Installation Servs., 16 F. App'x at 106 (affirming the
[[Page 60613]]
district court's conclusion that, although the potential employer
exercised some control over the work, the manner in which the workers
completed their work was ``left to their broad discretion and business
judgment, which suggests that they are independent contractors'').
---------------------------------------------------------------------------
\34\ Many courts articulate this factor as the degree of control
over the work by the potential employer as opposed to by the worker.
See, e.g., Razak, 951 F.3d at 142; Hobbs, 946 F.3d at 829; McFeeley,
825 F.3d at 241; Keller, 781 F.3d at 807; Scantland, 721 F.3d at
1312. This distinction, however, is of no consequence. As the
proposed regulatory text and this accompanying discussion make
clear, the nature and degree of control over the work by the worker
and by the potential employer are considered to determine whether
control indicates employee or independent contractor status.
\35\ See, e.g., Saleem, 854 F.3d at 147 (noting that the
workers' ``flexible work schedules and considerable control over
when, where, and in what circumstances to accept a . . . fare''
indicated that they were independent contractors); Parrish, 917 F.3d
at 382 (finding control factor favored independent contractor status
where workers ``did not have to accept a project'' and occasionally
``turned down projects without negative repercussion''); Thibault,
612 F.3d at 847 (finding control factor favored independent
contractor status where ``supervisors would only come by
occasionally, and never specified how [the worker] should do the
[work]''); Express Sixty-Minutes Delivery, 161 F.3d at 303
(determining that the potential employer ``had minimal control''
over the delivery drivers where drivers ``set their own hours and
days of work,'' ``can work for other currier delivery systems,'' and
``can reject deliveries without retaliation'').
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In contrast, the control factor would weigh in favor of
classification as an employee to the extent that a potential employer,
as opposed to the individual, exercises substantial control over key
aspects of the work, including through requirements that the individual
work exclusively for it during the working relationship or prohibiting
the individual from working for others after that relationship ends.
According to the proposed regulatory text, a potential employer may
exercise substantial control, for example, where it explicitly requires
an exclusive working relationship or where it imposes restrictions that
effectively prevent an individual from working with others. Cf. Keller,
781 F.3d at 814 (``[A] reasonable jury could find that the way that
[the potential employer] scheduled [the worker's] installation
appointments made it impossible for [the worker] to provide
installation services for other companies.''); Baker, 137 F.3d at 1441
(``[T]he hours [the workers] are required to work on a project (ten to
fourteen hours a day, six days a week), coupled with driving time
between home and often remote work sites each day, make it practically
impossible for them to offer services to other employers.''). However,
a ``non-disclosure agreement does not require exclusive employment.''
Parrish, 917 F.3d at 382; see also Talbert, 405 F. App'x at 85
(``[T]here is nothing in the confidential agreement that would have
precluded . . . working for other[s].'').
Proposed Sec. 795.105(d)(1)(i) clarifies that requiring an
individual to comply with specific legal obligations, satisfy health
and safety standards, carry insurance, meet contractually agreed-upon
deadlines or quality control standards, or satisfy other similar terms
that are typical of contractual relationships between businesses (as
opposed to employment relationships) does not constitute control that
makes the individual more or less likely to be an employee under the
Act. These requirements frequently apply to work performed by employees
and independent contractors alike; as such, they are not probative as
to whether a working relationship is one of employment or independent
contracting. The case law supports this approach. See, e.g., Iontchev,
685 F. App'x at 550 (noting that the potential employer's
``disciplinary policy primarily enforced the Airport's rules and [the
city's] regulations governing the [drivers'] operations and conduct''
in finding that the potential employer exercised ``relatively little
control over the manner in which the [d]rivers performed their work'');
Mid-Atl. Installation Servs., 16 F. App'x at 106 (rejecting an argument
that backcharging the workers ``for failing to comply with various
local regulations or with technical specifications demonstrates the
type of control characteristic of an employment relationship,'' and
noting that withholding money in such circumstances is common in
contractual relationships); Mr. W Fireworks, 814 F.2d at 1048 (finding
that, because a scheduling requirement was imposed by the potential
employer and not by state law, it suggested control over the workers).
In addition, this aspect of the Department's proposal is supported
by case law regarding FLSA joint employer status. For example, the
Second Circuit agreed that control with respect to ``contractual
warranties of quality and time of delivery has no bearing on the joint
employment inquiry'' because such control is ``perfectly consistent
with a typical, legitimate subcontracting relationship.'' Zheng v.
Liberty Apparel Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003).\36\
---------------------------------------------------------------------------
\36\ See also, e.g., Godlewska v. HDA, 916 F. Supp. 2d 246, 259
60 (E.D.N.Y. 2013), aff'd sub nom. Godlewska v. Human Dev. Ass'n,
Inc., 561 F. App'x 108 (2d Cir. 2014) (``Quality control and
compliance monitoring . . . are qualitatively different from control
that stems from the nature of the relationship between the employees
and the putative employer.'' (quotation marks omitted)); Jacobson v.
Comcast Corp., 740 F. Supp. 2d 683, 691-92 (D. Md. 2010) (holding
that the potential joint employer's ``quality control procedures . .
. [were] qualitatively different from the control exercised by
employers over employees''); Thornton v. Charter Commc'ns, LLC, No.
4:12CV479 SNLJ, 2014 WL 4794320, at *16 (E.D. Mo. Sept. 25, 2014)
(same).
---------------------------------------------------------------------------
Moreover, control exercised by a potential joint employer over a
contractor's employees to ``ensure compliance with various safety and
security regulations'' has been found to be ``qualitatively different''
from control that indicates employer status. Moreau v. Air France, 356
F.3d 942, 950-51 (9th Cir. 2003). Accordingly, the Department agrees
with the above case law that the types of control listed in the last
sentence of proposed Sec. 795.105(d)(1)(i) are ``qualitatively
different'' from control that evinces employer status. Moreau, 343 F.3d
at 1189; see also Iontchev, 685 F. App'x at 550; Mid-Atlantic
Installation Servs., 16 F. App'x at 106; Mr. W Fireworks, 814 F.2d at
1048; Freund, 185 F. App'x at 783. The Department welcomes comment
regarding this approach, including the distinction being drawn between
bona fide quality control measures and control that is indicative of an
employment relationship.
2. The ``Opportunity for Profit or Loss'' Factor
The second economic reality factor (proposed Sec.
795.105(d)(1)(ii)) is ``the individual's opportunity for profit or
loss.'' In analyzing this factor, courts generally consider whether
such opportunities are based on personal initiative, managerial skill,
or business acumen.\37\ The Second Circuit also considers the
individual's opportunity for profit or loss based on investments. See
Superior Care, 840 F.2d at 1060. The Department and courts of appeals
outside of the Second Circuit have traditionally analyzed ``opportunity
for profit or loss'' and ``investment'' as separate factors, but at
least some of those courts recognize that the two are ``interrelated.''
Lauritzen, 835 F.2d at 1537; see also McFeeley, 825 F.3d at 243. The
Department believes the Second Circuit's approach of combining the
factors is preferable because it minimizes duplicative analysis of the
same facts under different factors and aligns more closely with the
Supreme Court's original analysis in Silk, 331 U.S. at 717-19.
---------------------------------------------------------------------------
\37\ See, e.g., Karlson, 860 F.3d at 1094-95 (discussing how the
worker's decisions and choices regarding assignments and customers
affected his profits); Saleem, 854 F.3d at 145 (noting in support of
independent contractor status that the degree to which the worker's
relationship with the potential employer ``yielded returns was a
function . . . of the business acumen of each [worker]''); McFeeley,
825 F.3d at 243 (``The more the worker's earnings depend on his own
managerial capacity rather than the company's . . . the less the
worker is economically dependent on the business and the more he is
in business for himself and hence an independent contractor.'')
(internal quotation marks omitted); Express Sixty-Minutes, 161 F.3d
at 304 (agreeing with district court that ``driver's profit or loss
is determined largely on his or her skill, initiative, ability to
cut costs, and understanding of the courier business.''); WHD
Opinion Letter FLSA2019-6 at 6 (``These opportunities typically
exist where the worker receives additional compensation based, not
[merely] on greater efficiency, but on the exercise of initiative,
judgment, or foresight.'').
---------------------------------------------------------------------------
As explained in the need for rulemaking discussion in Section III,
treating ``opportunity for profit or loss'' and ``investment'' as
separate factors results in duplicative analysis of the same facts. For
example, in Mid-Atlantic Installation Services, the Fourth Circuit
found that the opportunity for profit or loss factor weighed in favor
of independent contractor status because the cable installer's ``net
profit or loss depends on [in part] . . . the business acumen with
which the Installer makes
[[Page 60614]]
his required capital investments in tools, equipment, and a truck.'' 16
F. App'x at 106. The court further held that the investment factor also
pointed in that direction based on those same facts, i.e., the
installers ``suppl[ied] their own trucks (equipped with 28-foot
ladders), specialized tools, uniforms, and pagers.'' Id. at 107. Such
duplicative analysis is unwieldly, and it can be potentially confusing
where the two factors analyzing the same facts reach opposite
conclusions regarding a worker's classification. See, e.g., Parrish,
917 F.3d at 382-85; Cromwell, 348 F. App'x at 61.
The Second Circuit avoids duplication and potential confusion by
analyzing investment and opportunity for profit or loss together. Under
this approach, the worker's meaningful capital investments may evince
opportunity for profit or loss: ``[e]conomic investment, by definition,
creates the opportunity for loss, [and] investors take such a risk with
an eye to profit.'' Saleem, 854 F.3d at 145 n.29. But investment is not
the only way to satisfy this factor because workers who ``invest
little'' may nonetheless have an opportunity for profit through the
exercise of personal initiative. Meyer, 607 F. App'x at 121; accord
Parrish, 917 F.3d at 384-85; Express Sixty-Minutes, 161 F.3d at 304. In
short, meaningful investment is a sufficient but not necessary
dimension of the opportunity for profit or loss. See Lauritzen, 835
F.2d at 1540-41 (Easterbrook, J. concurring) (``[P]ossess[ing] little
or no physical capital . . . is true of many workers we would call
independent contractors. Think of lawyers, many of whom do not even own
books. The bar sells human capital rather than physical capital, but
this does not imply that lawyers are `employees' of their clients under
the FLSA.''); see also Faludi, 950 F.3d at 275 (``Faludi provided his
own phone and computer'' and ``made investments in his continuing
education and home office equipment'').
The Second Circuit's approach of combining opportunity for profit
or loss and investment is also more faithful to the Supreme Court's
original analysis in Silk. See 331 U.S. at 716. In that case, the Court
listed the two factors separately but analyzed them together. In
particular, the Court found that coal unloaders were employees because
they had ``no opportunity to gain or lose except from the work of their
hands and [ ] simple tools,'' while truck drivers who invested in their
own vehicles had ``opportunity for profit from sound management'' of
that investment by, for instance, hauling for different customers. Id.
at 719. Thus the question is whether workers are more like unloaders
whose profits were based solely on ``the work of their hands and [ ]
simple tools'' or the drivers whose profits depended on their
initiative and investments. See id.; see also Rutherford Food, 331 U.S.
at 730 (concluding that workers were employees in part because their
opportunity for profit ``was more like piecework than an enterprise
that actually depended for success upon the initiative, judgment or
foresight of the typical independent contractor'').
Not all courts follow the Second Circuit and the Supreme Court's
approach of analyzing investment through the lens of profit and loss.
Some, for instance, ``use[ ] a side-by-side comparison method'' that
directly ``compare[s] `each worker's individual investment to that of
the alleged employer.' '' Parrish, 917 F.3d at 383 (quoting Hopkins,
545 F.3d at 344); see also, e.g., Keller, 781 F.3d at 810 (agreeing
that ``courts must compar[e] the worker's investment in the equipment
to perform his job with the [potential employer's] total investment'').
In Hopkins, for example, the Fifth Circuit held that insurance sales
leaders' investments were insignificant because ``it is clear that [the
insurance company's] investment--including maintaining corporate
offices, printing brochures and contracts, providing accounting
services, and developing and underwriting insurance products--outweighs
the personal investment of any one Sales Leader.'' 545 F.3d at 344.
But such a ``side-by-side comparison method'' does not illuminate
the ultimate question of economic dependence. See Karlson, 860 F.3d at
1096 (``[C]omparing the amount Karlson spent . . . with [potential
employer's] total expenses in operating APS has little relevance . . .
[because] [l]arge corporations can hire independent contractors, and
small businesses can hire employees.''). Indeed, it merely highlights
the obvious and unhelpful fact that individual workers--whether
employees or independent contractors--likely have fewer resources than
businesses that, for example, ``maintain[ ] corporate offices,'' see
Hopkins, 545 F.3d at 344, or drill oil wells, see Parrish, 917 F.3d at
383 (``Obviously, [the oil drilling company] invested more money at a
drill site compared to each plaintiff's investments.''). In contrast,
analyzing investment as part of individuals' opportunity for profit or
loss illuminates the ultimate inquiry of whether individuals are ``more
closely akin to wage earners toiling for a living, than to independent
entrepreneurs seeking a return on their risky capital investments.''
Mr. W. Fireworks, 814 F.2d at 1051.
The Department is therefore proposing to adopt an approach similar
to that of the Second Circuit, which analyzes the worker's investment
as part of the opportunity for profit or loss factor. The combined
factor would weigh towards the individual being classified as an
independent contractor if he or she has an opportunity for profit or
loss based on either or both: (1) The exercise of personal initiative,
including managerial skill or business acumen; and/or (2) the
management of investments in, or capital expenditure on, for example,
helpers, equipment, or material. While the effects of the individual's
exercise of initiative and management of investment are both considered
under this factor, for reasons explained above, the individual would
not need to have an opportunity for profit or loss based on both for
this factor to weigh towards the individual being an independent
contractor. This factor would weigh towards the individual being an
employee to the extent the individual is unable to affect his or her
earnings through initiative or investment or is only able to do so by
working more hours or more efficiently.\38\
---------------------------------------------------------------------------
\38\ Workers who are paid on a piece-rate basis are an example
of workers who are able to affect their earnings only through
working more hours or more efficiently. Courts have generally agreed
that such workers lack meaningful opportunity for profit or loss.
See, e.g., Whitaker House, 366 U.S. at 33 (plaintiffs who
manufactured knitted goods at home were employees under the FLSA, in
part, because ``[t]he management fixes the piece rates at which they
work''); Hodgson v. Cactus Craft of Arizona, 481 F.2d 464, 467 (9th
Cir. 1973) (persons who manufacture novelty and souvenir gift items
at homes and were compensated at a piece rate were employees under
the FLSA). In DialAmerica, 757 F.2d at 1385, for example, the Third
Circuit held that homeworkers who were paid on a piece-rate basis to
perform the simple service of researching telephone numbers were
employees who lacked meaningful opportunity for profit or loss. In
contrast, distributors who recruited and managed researchers and
were paid based on the productivity of those they managed were
independent contractors, in part, because distributors' earnings
depended on ``business-like initiative.'' Id. at 1387.
---------------------------------------------------------------------------
The Department also considered keeping opportunity for profit or
loss and investment as separate factors in its proposal, but believes
that approach may be needlessly duplicative and confusing for reasons
stated above. If investment were kept as a separate factor, the
Department would emphasize that the factor should not reconsider
opportunity for profit or loss. Instead, it would focus on whether a
worker's investment (or lack thereof) in the equipment, materials,
technology, etc. necessary to perform the worker's work
[[Page 60615]]
renders the worker more or less economically dependent on the potential
employer for work. The Department welcomes comments on this alternative
approach.
3. The ``Skill Required'' Factor
``The amount of skill required for the work'' is an economic
reality factor under proposed Sec. 795.105(d)(2)(i). The Supreme Court
articulated the ``skill required'' factor in Silk, 331 U.S. at 716,
which several courts of appeals continue to consider as ``the degree of
skill required to perform the work.'' Paragon, 884 F.3d at 1235; see
also Iontchev, 685 F. App'x at 550; Keller, 781 F. 3d at 807. The
Department and other courts of appeals, however, have traditionally
expanded this factor to include consideration of ``initiative'' and
``judgment.'' See, e.g., Parrish, 917 F.3d at 379; Karlson, 860 F.3d at
1093; Superior Care, 840 F.2d at 1058-59; see also WHD Fact Sheet #13.
This expansion was intended to increase the probative value of the
skill factor by analyzing therein the worker's capacity to ``exercise
significant initiative within the business.'' See Parrish, 917 F.3d at
379; see also Selker Bros., 949 F.2d at 1295 (``[T]he use of special
skills is not itself indicative of independent contractor status,
especially if the workers do not use those skills in any independent
way.''); Superior Care, 840 F.2d at 1060 (same). But the worker's
capacity to exercise on-the-job initiative is already analyzed in
multiple ways under the control factor, including, for example, whether
the worker controls the means and manner of work, decides when to work,
or choice of assignments. Express Sixty-Minutes, 161 F.3d at 304. And
the effects of a worker's initiative are already analyzed as part of
the opportunity for profit or loss factor. Id.
As explained in the need for rulemaking discussion in Section III,
importing aspects of the control factor into the skill factor has
diluted the consideration of actual skill to the point of near
irrelevance. In many cases, analysis of control rather than skill
drives whether the skill factor favors independent contractor or
employee status. See, e.g., Selker Bros., 949 F.2d at 1295; Baker, 137
F.3d at 1443; Superior Care, 840 F.2d at 1060. The Department believes
such dilution generates confusion regarding the relevance and weight of
the worker's skill in the evaluation of economic dependence. It also
blurs the lines between the economic reality factors, thereby
undermining the structural benefits of a multifactor test. Furthermore,
as at least one court of appeals has found, workers can exercise enough
initiative to have a meaningful opportunity for profit or loss but
apparently not enough to satisfy the ``skill and initiative required''
factor. Express Sixty-Minutes, 161 F.3d at 304-05. This calls into
question the relevance of initiative as part of a separate skill
factor.
The Department therefore proposes to clarify that this factor
should focus on the ``amount of skill required,'' as originally
articulated by the Supreme Court in Silk, 331 U.S. at 716, and used
today by several courts of appeals, see, e.g., Paragon, 884 F.3d at
1235; Iontchev, 685 F. App'x at 550; Keller, 781 F.3d at 807. Notably,
this factor would not include a consideration of ``initiative'' (or the
related concepts of judgment and foresight) because facts related to
initiative are considered as part of the control and opportunity for
profit or loss factors. Proposed Sec. 795.105(d)(2)(i) thus explains
that the ``skill required'' factor weighs in favor of classification as
an independent contractor where the work at issue requires specialized
training or skill that the potential employer does not provide.
Otherwise, it weighs in favor of classification as an employee.
The Department believes that this approach would sharpen the
distinction between the economic reality factors by focusing on skill,
as opposed to aspects of control. The worker's ability to exercise
initiative would remain more important than the presence of skill
because it would be analyzed under the control factor, a core factor
that would be given more weight than the skill factor. And the effect
of the worker's initiative would be analyzed under the opportunity for
profit or loss factor, another core factor that would be given more
weight. The Department considered keeping initiative as an aspect of
the skill factor, but believes that such an approach may be needlessly
duplicative and confusing for the reasons stated above. The Department
welcomes comment on this alternative approach.
4. The ``Permanence of the Working Relationship'' Factor
``The degree of permanence of the working relationship between the
individual and the potential employer'' is an economic reality factor
under proposed Sec. 795.105(d)(2)(ii). Courts and the Department
routinely consider this factor when applying the economic reality
analysis under the FLSA to determine employee or independent contractor
status. See, e.g., WHD Opinion Letter FLSA2019-6 at 4; Razak, 951 F.3d
at 142; Hobbs, 946 F.3d at 829; Karlson, 860 F.3d at 1092-93; McFeeley,
825 F.3d at 241; Keller, 781 F.3d at 807; Scantland, 721 F.3d at 1312.
However, they sometimes redundantly analyze the exclusivity of the
working relationship as part of the permanence factor. The control
factor already considers whether a worker has freedom to pursue
external opportunities by working for others, including a potential
employer's rivals. See, e.g., Freund, 185 F. App'x at 783 (affirming
district court's finding that ``Hi-Tech exerted very little control
over Mr. Freund,'' in part, because ``Freund was free to perform
installations for other companies'').\39\ The same concept of
exclusivity is then re-analyzed as part of the permanence factor.
Compare id. (``Freund's relationship with Hi-Tech was not one with a
significant degree of permanence . . . [because] Freund was able to
take jobs from other installation brokers.''), with Scantland, 721 F.3d
at 1319 (finding installation technicians' relationships with the
potential employer were permanent because they ``could not work for
other companies'').
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\39\ In addition, the opportunity for profit or loss factor
considers whether a worker's decisions to work for others affects
profits or losses. See, e.g., Freund, 185 F. App'x at 783 (affirming
the district court's finding that the ``looseness of the
relationship between Hi-Tech and Freund permitted him great ability
to profit,'' in part, because ``Freund could have accepted
installation jobs from other companies.''). The Department does not
believe this consideration overlaps with the control factor. While
the control factor concerns the ability to work for others, the
opportunity for profit or loss factor concerns the effects of doing
so.
---------------------------------------------------------------------------
Such duplicative analysis of exclusivity under the permanence
factor is not supported by the Supreme Court's original articulation of
that factor in Silk. See 331 U.S. at 716 (analyzing the ``regularity''
of unloaders' work); id. at 719 (analyzing truck drivers' ability to
work ``for any customer'' as an aspect of ``the control exercised'' but
not permanence); see also 12 FR 7967 (describing the permanence factor
as pertaining to ``continuity of the relation'' but with no reference
to exclusivity). Nor is the concept of exclusivity part of the common
understanding of the word ``permanent.'' \40\ In a similar vein to the
Department's analysis of the concept of initiative, the Department
believes analysis of exclusivity as part of the permanence factor
dilutes the significance of actual permanence within that factor, blurs
the lines between the economic reality factors,
[[Page 60616]]
and creates confusion by incorporating a concept that is distinct from
permanence.
---------------------------------------------------------------------------
\40\ See Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/permanent (defining permanent as ``continuing
or enduring without fundamental or marked change''); see also Oxford
American Dictionary 1980 (defining permanent as ``lasting or meant
to last indefinitely''); Merriam-Webster Pocket Dictionary 1947
(defining permanent as ``Lasting; enduring'').
---------------------------------------------------------------------------
Because the worker's ability to work for others is already analyzed
as part of the control factor, proposed Sec. 795.105(d)(2)(ii)
articulates the permanence factor without referencing the exclusivity
of the relationship between the worker and potential employer. This
proposal does not require any changes to the articulation of this
factor because the current articulation, i.e., ``the permanency of the
working relationship,'' provides no hint that exclusivity is also
considered. This approach would focus the permanence factor on the
continuity and duration of the working relationship, which align both
with how the factor was originally articulated and with the plain
meaning of ``permanence.'' The permanence factor would weigh in favor
of an individual being classified as an independent contractor where
his or her working relationship with the potential employer is by
design definite in duration or sporadic. In contrast, the factor would
weigh in favor of classification as an employee where the individual
and the potential employer have a working relationship that is by
design indefinite in duration or continuous. The Department notes that
the seasonal nature of some jobs does not necessarily suggest
independent contractor classification, especially where the worker's
position is permanent for the duration of the relevant season and where
the worker has done the same work for multiple seasons. See Paragon
Contractors, 884 F.3d at 1236-37.
The Department also considered keeping exclusivity as part of this
factor but changing the articulation to ``permanence and exclusivity of
the working relationship'' to be more accurate. However, the Department
believes that such an approach may be needlessly duplicative and
confusing for the reasons stated above. The Department welcomes
comments on this alternative approach.
5. The ``Integrated Unit'' Factor
The Department and courts outside of the Fifth Circuit have
typically articulated the sixth factor of the economic reality test as
``the extent to which services rendered are an integral part of the
[potential employer's] business.'' WHD Fact Sheet #13. Under this
articulation, the ``integral part'' factor considers ``the importance
of the services rendered to the company's business.'' McFeeley, 825
F.3d at 244. In line with this thinking, courts generally state that
this factor favors employee status if the work performed is so
important that it is central to or at ``[t]he heart of [the potential
employer's] business.'' Werner v. Bell Family Med. Ctr., Inc., 529 F.
App'x 541, 545 (6th Cir. 2013); see also Baker, 137 F.3d at 1443
(``[R]ig welders' work is an important, and indeed integral, component
of oil and gas pipeline construction work.''); Lauritzen, 835 F.2d at
1537-38 (``[P]icking the pickles is a necessary and integral part of
the pickle business[.]''); DialAmerica, 757 F.2d at 1385 (``[W]orkers
are more likely to be `employees' under the FLSA if they perform the
primary work of the alleged employer.'').
The Department is concerned that this focus on importance or
centrality departs from the Supreme Court's original articulation of
the economic reality test, has limited probative value regarding the
ultimate question of economic dependence, and may be misleading in some
instances. As such, proposed Sec. 795.105(d)(2)(iii) would clarify
that the ``integral part'' factor should instead consider ``whether the
work is part of an integrated unit of production,'' which aligns with
the Supreme Court's analysis in Rutherford Food, 331 U.S. at 729. As
explained earlier, the ``integral part'' factor was not one of the
distinct factors identified in Silk as being ``important for
decision.'' 331 U.S. at 716.\41\ Nor was the importance of the work
discussed in Rutherford Food as one of the distinct considerations.
Instead, Rutherford Food observed that the work at issue was ``part of
an integrated unit of production'' in the potential employer's business
and concluded that workers were employees in part because they
``work[ed] alongside admitted employees of the plant operator at their
tasks.'' 331 U.S. at 729. The 1947 proposed Treasury regulations under
the Social Security Act articulated the sixth factor of the economic
reality test in line with Rutherford Food's ``integrated unit''
discussion as: ``[i]ntegration of the individual's work in the
businesses to which he renders services,'' which concerned ``the merger
of the individual's services into the businesses, so that such services
constitute a part of the unity or whole which comprise such business.''
12 FR at 7966-67.
---------------------------------------------------------------------------
\41\ Silk did ask whether workers themselves were ``an integral
part of [defendants'] businesses,'' as opposed to operating their
own businesses, but that question was presented as the ultimate
economic reality inquiry, as opposed to a factor to be weighed in
that analysis. 331 U.S. at 716.
---------------------------------------------------------------------------
The word ``integral'' can mean either very important or
integrated.\42\ As some courts recognize, a worker can perform services
that are important to a business without being integrated, meaning
merged, into that business's operations. See, e.g., Green v. Premier
Telecomm. Servs., LLC, No. 1:16-CV-0332-LMM, 2017 WL 4863239, at *14
(N.D. Ga. Aug. 15, 2017) (``While certainly Plaintiff performing his
job was integral to Premier's bottom-line, unlike in Rutherford,
Plaintiff did not perform one step in an integrated system.''). Federal
courts of appeals typically considered integration of worker into the
potential employer's production process until the 1970s. See, e.g.,
Driscoll, 603 F.2d at 754 (``Appellants' activities appear to be an
integral part of Driscoll's strawberry growing operation, rather than
an independently viable enterprise.''); Mednick v. Albert Enterprises,
Inc., 508 F.2d 297 (5th Cir. 1975) (asking whether the service ``was [
]an integrated part of the business of [a potential employer] in the
same way as the work of the meat boners in Rutherford.''); Tobin v.
Anthony-Williams Mfg. Co., 196 F.2d 547, 550 (8th Cir. 1952) (``The
haulers and woods workers here are such an integrated part of
defendant's production.'').\43\ Starting in the 1980s, courts instead
began to analyze whether the work is important to the potential
employer. See, e.g., Lauritzen, 835 F.2d 1529, 1534-35; DialAmerica
Mktg., 757 F.2d at 1386.
---------------------------------------------------------------------------
\42\ Compare, e.g., Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/integral (defining
integral as ``necessary and important'') with Merriam-Webster
Dictionary, https://www.merriam-webster.com/dictionary/integral
(defining ``integral'' as ``formed as a unit with another part'');
see also Merriam Webster Pocket Dictionary 1947 (defining integral
as either ``Needed for completeness'' or ``Composed of parts that
make up a whole'').
\43\ The Department has generally used ``integral'' rather than
``integrated'' in its subregulatory guidance since the 1950s. See
WHD Opinion Letter (Aug. 13, 1954); WHD Opinion Letter (Feb. 8,
1956). A 2002 opinion letter interpreted the factor to focus on the
importance of the work, explaining that ``[w]hen workers play a
crucial role in a company's operation, they are more likely to be
employees than independent contractors.'' WHD Opinion Letter, 2002
WL 32406602, at *3 (Sept. 5, 2002). However, the Department's most
recent opinion letter on this subject characterized the factor as
``the extent of the integration of the worker's services into the
potential employer's business.'' WHD Opinion Letter FLSA2019-6 at 6
(emphasis added).
---------------------------------------------------------------------------
Focusing on whether an individual's work is important to a
potential employer has questionable probative value regarding the issue
of economic dependence, and may even be counterproductive in some
cases. Judge Easterbrook's Lauritzen concurrence argued that asking
whether work is integral ``has neither significance nor
[[Page 60617]]
meaning'' because ``[e]verything the employer does is `integral' to its
business--why else do it?'' 835 F.2d at 1541 (Easterbrook, J.
concurring) (emphasis in original); see also Zheng, 355 F.3d at 73
(cautioning in the joint employer context that interpreting the factor
to focus on importance ``could be said to be implicated in every
subcontracting relationship, because all subcontractors perform a
function that a general contractor deems `integral' to a product or a
service'') (emphasis in original). Some courts have explained that ``a
worker who performs a routine task that is normal and integral to the
putative employer's business is likely to be dependent on the
defendant's overall enterprises.'' Beck v. Boce Grp., L.C., 391 F.
Supp. 2d 1183, 1192 (S.D. Fla. 2005); see also Charles v. Burton, 169
F.3d 1322, 1332-33 (11th Cir. 1999) (same). This explanation, however,
may be flawed: If certain workers perform tasks that are important to a
business, the logical inference is that the business is dependent on
those workers--not the reverse. Put differently, the relative
importance of the worker's task to the business of the potential
employer says nothing about whether the worker economically depends on
that business for work.
Other courts have explained that ``it is presumed that, with
respect to vital or integral parts of the business, the employer will
prefer to engage an employee rather than an independent contractor.
This is so because the employer retains control over the employee and
can compel attendan[ce] at work on a consistent basis.'' Dataphase, 781
F. Supp. at 735; see also Barnard Const., 860 F. Supp. at 777, aff'd
sub nom. Baker v. Flint Eng'g & Const. Co., 137 F.3d 1436 (10th Cir.
1998) (same). But the control factor already directly analyzes whether
a business can compel a worker to work on a consistent basis. See,
e.g., Nieman, 775 F. App'x at 625 (``The first factor--control--weighs
in favor of independent contractor status because Nieman . . .
controlled his schedule.''). It is unclear why there is a need to
indirectly analyze control by presuming a relationship between vital or
integral services and control. Nor is it clear that such presumption
survives scrutiny because businesses appear to routinely hire
independent contractors over whom they exercise little control to
perform vital or integral services.\44\ Indeed, as transaction costs
fall, as is the trend in many sectors of the economy,\45\ firms become
more willing to hire independent contractors for vital or integral
tasks, further diminishing the probative value of the importance of the
work.
---------------------------------------------------------------------------
\44\ See, e.g., Iontchev, 685 F. App'x at 551; Meyer, 607 F.
App'x at 123; Freund, 185 F. App'x at 784; Mid-Atl. Installation
Servs., Inc., 16 F. App'x at 107.
\45\ See, e.g., L. Katz and A. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,'' p.
25 (2018) (``Coase's (1937) classic explanation for the boundary of
firms rested on the minimization of transaction costs within firm-
employee relationships. Technological changes may be reducing the
transaction costs associated with contracting out job tasks,
however, and thus supporting the disintermediation of work.'').
---------------------------------------------------------------------------
Focusing on the importance of work can sometimes send misleading
signals regarding economic dependence. For instance, some courts have
explained that ``easily replaceable'' workers are less integral to a
business, and therefore, are less dependent on that business. Browning
v. Ceva Freight, LLC, 885 F. Supp. 2d 590, 610 (E.D.N.Y. 2012); see
also Velu v. Velocity Exp., Inc., 666 F. Supp. 2d 300, 307 (E.D.N.Y.
2009) (observing that integrality to business diminished where ``work
is interchangeable with the work of other[s]''). But the workers in
Rutherford Food were also ``easily replaceable'' precisely because they
were ``part of the integrated unit of production'' of a slaughterhouse
processing line, which in turn indicated they were employees. 331 U.S.
at 729. More often than not, easily replaceable workers are more
dependent on that business for work--not less. Thus, focusing on the
worker's importance to a business under the ``integral part'' factor
may obscure rather than illuminate the ultimate economic dependence
inquiry.
Finally, analyzing the importance of work under the ``integral
part'' factor may send misleading signals due to the increasing
difficulty of defining important or core functions of a growing number
of intermediary companies whose main activity is ``selling reductions
in transaction costs.'' \46\ By one view, the core functions of a
company that connects service providers to customers might be the
service being provided. See O'Connor v. Uber Techs., Inc., 82 F. Supp.
3d 1133, 1153 (N.D. Cal. 2015) (``[D]rivers perform a regular and
integral part of Uber's business[.]''). But in another view, such a
company's core services might be connecting service providers and
customers.\47\ See Razak, 951 F.3d at 147 n. 12 (``We also believe
[there] could be a disputed material fact'' whether Uber is ``a
technology company that supports drivers' transportation businesses,
and not a transportation company that employs drivers.''). Under this
view, the intermediary company's ``business operations effectively
terminate at the point of connecting service providers to consumers and
do not extend to the service provider's actual provision of services.''
WHD Opinion Letter FLSA2019-6 at 10. While intermediary companies are
more prevalent in the virtual marketplace, they are not limited to that
context.\48\ For instance, health care brokers may be intermediaries
that are in the business of connecting health care providers to health
care consumers. See State Dep't of Employment, Training & Rehab.,
Employment Sec. Div. v. Reliable Health Care Servs. of S. Nevada, Inc.,
983 P.2d 414, 419 (Nev. 1999) (``[W]e cannot ignore the simple fact
that providing patient care and brokering workers are two distinct
businesses.'').
---------------------------------------------------------------------------
\46\ See Michael Munger, Tomorrow 3.0: Transaction Costs and the
Sharing Economy, 51 (2018).
\47\ See id. at 61 (``The middleman makes possible transactions
that otherwise could not take place . . . [by] selling transaction
cost reduction[.]'').
\48\ See id. at 125 (``The idea of a `gig economy' is old, but
the possibility of serial short term employment or `gigs' are
expanding rapidly'' because ``entrepreneurs have found [new] ways to
sell reductions in transaction costs.'').
---------------------------------------------------------------------------
Analyzing the importance of services to a potential employer often
first requires characterizing the potential employer's business as
either an intermediary or a direct provider of services. But that
characterization, in turn, requires answering the economic dependence
question. If a potential employer is an intermediary company that
merely connects service providers with customers, those service
providers would have distinct businesses of their own. WHD Opinion
Letter FLSA2019-6 at 10. As such, they would not be a part, let alone
an essential or important part, of the potential employer's business.
Analyzing the importance of services to evaluate economic dependence
thus becomes a circular exercise. The factor considers whether workers'
services are an important part of the potential employer's business to
answer the ultimate inquiry of whether workers provide services as part
of their own distinct businesses. See Silk, 331 U.S. at 716 (asking
whether workers were ``an integral part of [defendants'] businesses,''
as opposed to operating their own businesses, as the ultimate inquiry,
rather than a discrete factor to be weighed).
For these reasons, proposed Sec. 795.105(d)(2)(iii) would
rearticulate the ``integral part'' factor in accordance with the
Supreme Court's original inquiry in Rutherford Food of whether the work
was ``part of the integrated unit of production,'' with an emphasis
[[Page 60618]]
that the factor is different from the concept of importance or
centrality. Courts that have applied the ``integral part'' factor to
analyze integration rather than importance have typically grounded this
factor to the specific circumstances in Rutherford Food. The Second
Circuit, for example, recognized in a joint employer case that this
factor was derived from the Supreme Court's focus on the fact that the
Rutherford Food plaintiffs ``did a specialty job on the production
line,'' and thus limited this factor's application to the production
line or an analogous context. Zheng, 355 F.3d at 73 (``[W]e construe
Rutherford to mean that work on a production line occupies a special
status under the FLSA[.]''); see also Antenor v. D & S Farms, 88 F.3d
925, 937 (11th Cir. 1996) (asking whether workers ``were analogous to
employees working at a particular position on a larger production
line''); Mednick, 508 F.2d at 300 (analyzing whether the service ``was
[ ]an integrated part of the business of [a potential employer] in the
same way as the work of the meat boners in Rutherford''); Green, 2017
WL 4863239, at *14 (``[U]nlike in Rutherford, Plaintiff did not perform
one step in an integrated system. He was not dependent on Premier's
overall process to execute his duties.'').
Proposed Sec. 795.105(d)(2)(iii) thus focuses the ``integrated
unit'' factor on whether an individual works in circumstances analogous
to a production line. This factor weighs in favor of employee status
where a worker is a component of a potential employer's integrated
production process, whether for goods or services. The overall
production process need not be a physical assembly line, but it must be
an integrated process that requires the coordinated function of
interdependent subparts working towards a specific unified purpose.\49\
This may occur where the worker depends on the overall process to
perform work duties, such as, for example, a programmer who works on a
software development team. See Antenor, 88 F.3d at 937 (finding
farmworkers ``were dependent on the growers' overall production
process''). Another example would be where an individual works closely
alongside conceded employees and performs identical or closely
interrelated tasks as those employees, such as where an individual
provides office cleaning services as part of a team of employees.
---------------------------------------------------------------------------
\49\ The unified purpose must be defined with specificity and
thus would not include general business objectives such as
increasing profits, cutting costs, or satisfying customer's needs.
---------------------------------------------------------------------------
Conversely, if the individual's work is not integrated into the
potential employer's production process, the factor would favor
classification as an independent contractor. This includes where an
individual service provider is able to perform his or her duties
without depending on the potential employer's production process.
Green, 2017 WL 4863239, at *14 (``[U]nlike in Rutherford, [residential
cable installer] . . . was not dependent on Premier's overall process
to execute his duties.''). Thus, performance of discrete, segregable
services for individual customers is not part of an integrated unit of
production. See WHD Opinion Letter FLSA 2019-6 at 11 (concluding that
the workers who provide services to the virtual marketplace company's
individual customers ``are not integrated into [the company]'s referral
business''). The Department welcomes comments on this approach to the
``integrated unit'' factor.
The Department considered removing the ``integral part'' factor
instead of rearticulating it as the above-described ``integrated unit''
factor, in part, out of concern that the ``integrated unit'' factor may
have limited applicability in the modern economy. However, the
Department believes that the ``integrated unit'' factor described above
would be applicable in sufficient cases to warrant its listing as an
economic reality factor. The Department also welcomes comments on this
alternative approach to remove this factor and instead focus the
economic reality test on four factors.
6. Affording Greater Weight to the Two Core Factors
Proposed Sec. 795.105(c) explains that the two core factors--i.e.,
control and opportunity for profit or loss--are each afforded more
weight in the analysis of economic dependence than are any of the
others. As a result of their greater weight, if both core factors point
towards the same classification, their combined weight is substantially
likely to outweigh the combined weight of other factors that may point
towards the opposite classification. In other words, where the two core
factors align, the bulk of the analysis is complete. Anyone who is
assessing the classification--whether a business, a worker, the
Department, a court, or a jury--may approach the remaining factors and
circumstances with skepticism, as only in unusual cases may such
considerations outweigh the combination of the two core factors. At the
same time, if the two core factors do not point toward the same
classification, the remaining enumerated factors will usually determine
the correct classification. The discussion below explains in greater
detail why Department's proposes to focus the economic reality test on
the two core factors in Sec. 795.105(d)(1) over the other factors
listed in Sec. 795.105(d)(2) and any additional factors that may be
considered.
The Department proposes a focus on the two core factors in light of
the sharpened articulation of economic dependence in proposed Sec.
795.105(b). The Supreme Court cautioned that control is not the sole
consideration, see Rutherford Food, 331 U.S. at 730, but it did not
deny that factor's significance in the analysis. Indeed, the Court
recognized that, ``[o]bviously control is characteristically associated
with the employer-employee relationship,'' Bartels, 332 U.S. at 130.
And the opportunity for profit and loss factor is more closely tied to
the concept of economic dependence than any other factors because it is
a necessary component of being in business for oneself. As the D.C.
Circuit observed in an NLRA case, `` `significant entrepreneurial
opportunity for gain or loss' . . . [even] better captures the
distinction between an employee and an independent contractor'' than
control. Corporate Exp. Delivery Sys. v. NLRB, 292 F.3d 777, 780
(2002); see also FedEx Home Delivery, 563 F.3d at 497. Together, these
two factors shape the economic dependence inquiry of ``whether the
individual is, as a matter of economic reality, in business for
himself.'' Parrish, 917 F.3d at 379. In ordinary circumstances, an
individual ``who is in business for him- or herself'' will have
meaningful control over the work performed and a meaningful opportunity
to profit (or risk loss). In sum, it is not possible to properly assess
whether workers are in business for themselves or are instead dependent
on another's business without analyzing their control over the work and
profit or loss opportunities.
While the Supreme Court established a multifactor approach to the
question of employee versus independent contractor status, it did not
require all factors to be treated equally. To the contrary, focusing on
the control and opportunity for profit or loss factors is supported by
the reasoning in Silk, 331 U.S. at 316, and Whitaker House, 366 U.S. at
32-33, the latter of which is the only post-Rutherford Food Supreme
Court decision analyzing whether workers were employees or independent
contractors under the FLSA. Silk held that coal unloaders were
employees in the SSA context based on their lack of meaningful
opportunity for profit or loss, and further recognized that the
[[Page 60619]]
lack of permanence was not significant. 331 U.S. at 317-18. The Court
further held that truck drivers in that case were independent
contractors because of ``the control [they] exercised [and] the
opportunity for profit from sound management,'' without discussing any
of the other economic reality factors. Id. at 319.
In Whitaker House, the Court concluded that homeworkers who were
paid on a piece-rate basis to produce knitted goods were employees, as
opposed to being ``self-employed'' or ``independent.'' 366 U.S. at 32-
33. While the Court reaffirmed that `` `economic reality' rather than
`technical concepts' is to be the test for employment,'' id. at 33
(citing Silk, 331 U.S. at 713, and Rutherford Food, 331 U.S. at 729),
it did not analyze any of the specific factors that are part of the
current economic realty test. Instead, the Whitaker House Court's
conclusion was based on the facts that the homeworkers could not
``sell[ ] their products on the market for whatever price they can
command'' and were instead ``regimented under one organization,
manufacturing what the organization desires and receiving the
compensation the organization dictates.'' Id. at 32. In other words,
the Supreme Court's reasoning was based entirely on facts that related
to control (``regimented under one organization, manufacturing what the
organization desires'') and opportunity for profit (``selling their
products on the market for whatever price they can command'' versus
``receiving the [piece rate] compensation the organization dictates'').
The Court did not analyze any facts related to the workers' skill,
capital investment, permanence of relationship, or integration of the
work to the business.
Focusing on control and opportunity for profit or loss is further
supported by the results of federal courts of appeals cases weighing
the economic reality factors since 1975. In these cases, whenever the
court found (or affirmed a district court finding) that the potential
employer predominantly controlled the work, that court concluded that
the worker is an employee. See, e.g., Hobbs, 946 F.3d at 830-36; Verma,
937 F.3d at 230-32; Gayle v. Harry's Nurses Registry, Inc., 594 F.
App'x 714, 717-18 (2d Cir. 2014); Schultz v. Capital Int'l Sec., Inc.,
466 F.3d 298, 307-09 (4th Cir. 2006); Baker, 137 F.3d at 1440-44;
Martin, 949 F.2d at 1289. Conversely, whenever the court of appeals
found (or affirmed a district court finding) that the worker
predominantly controlled the work, that court nearly always concluded
that the worker is an independent contractor. See, e.g., Parrish, 917
F.3d at 379-388; Nieman, 775 F. App'x at 624-25 (per curiam); Saleem,
854 F.3d at 140-48; Iontchev, 685 F. App'x at 550-51; Barlow v. C.R.
England, Inc., 703 F.3d 497, 506-07 (10th Cir. 2012); Mid-Atl.
Installation Servs., 16 F. App'x at 106-08.
The few occasions where an appellate court's ruling on a worker's
classification was contrary to what the control factor indicated were
cases in which the other core factor--opportunity for profit or loss--
pointed in the opposite direction. For example, in Acosta v. Paragon
Contractors Corporation, the Tenth Circuit held that the control factor
``indicates status as an independent contractor'' because the defendant
``could set his own hours and determine how best to perform his job
within broad parameters.'' 884 F.3d 1225, 1235-36 (10th Cir. 2018). The
court nonetheless held that he was an employee, in part, because he
``was paid only a flat fee'' and therefore ``could not increase or
decrease his profits based on how well he did his job.'' Id. at 1236;
see also Cromwell, 348 F. App'x at 61 (concluding that the workers were
employees even though they ``controlled the details of how they
performed their work [and] were not closely supervised'' because, in
part, defendant's ``complete control over [their] schedule and pay[ ]
had the effect of severely limiting any opportunity for profit or
loss'').
This trend is also true, indeed even more so, for the opportunity
for profit or loss factor. Since 1975, virtually every time a circuit
court of appeals has found (or affirmed a district court finding) that
the potential employer predominantly determined the opportunities for
profit or loss, the court has concluded that the worker was an
employee. See, e.g., Hobbs, 946 F.3d at 832-36; Off Duty Police, 915
F.3d at 1059-1062; McFeeley, 825 F.3d at 243-44; Hopkins, 545 F.3d at
344-46; Baker, 137 F.3d at 1441-44; Snell, 875 F.2d at 808-812;
Superior Care, 840 F.2d at 1059-61. Conversely, if the court found (or
affirmed a district court finding) that the worker predominantly
determined the opportunities for profit or loss, the court concluded
that the worker was an independent contractor. See, e.g., Parrish, 917
F.3d at 384-88; Saleem, 854 F.3d at 140-48; Iontchev, 685 F. App'x at
550-51; Freund, 185 F. App'x at 783-84; Eberline v. Media Net, L.L.C.,
636 F. App'x 225, 228-29 (5th Cir. 2016); Mid-Atl. Installation Servs.,
16 F. App'x at 106-08. The opportunity for profit or loss factor as
proposed in this rulemaking should be even more probative than these
cases indicate because it would incorporate the probative value of the
facts regarding investment.\50\
---------------------------------------------------------------------------
\50\ Even if the Department were to keep opportunity for profit
or loss and investment as separate factors, the opportunity for
profit or loss factor would still be of primary importance. In the
above cited cases, the opportunity for profit or loss factor aligned
with the overall result of the case even where that factor did not
explicitly include consideration of the worker's investment. A
separate investment factor, however, would not be a core factor
because its importance is secondary compared to opportunity for
profit or loss. Federal courts of appeals have repeatedly concluded
that workers without meaningful investment in a business are
nonetheless independent contractors if they have meaningful
opportunity for profit or loss based on their initiative or business
acumen. See, e.g., Parrish, 917 F.3d at 382-85; Meyer, 607 F. App'x
at 123; Express Sixty-Minutes, 161 F.3d at 303-04. Conversely, where
the investment factor favors independent contractor classification
to some degree, workers may nonetheless be employees if they lack
such opportunity. See Cromwell, 348 F. App'x at 61. Thus, if
opportunity for profit or loss and investment were kept as separate
factors in a final rule, the Department would propose making
opportunity for profit or loss a core factor and investment a non-
core factor. The Department welcomes comments on this alternative
approach.
---------------------------------------------------------------------------
In summary, each of the two core factors is, by itself, highly
probative of a worker's economic dependence. Together, i.e., in cases
where they both indicate the same classification, they are
substantially likely to point to the answer of the classification
question--whether employee or independent contractor.
The Department's proposal is consistent with case law and adopting
a more focused approach. Many courts have analyzed all six factors (or
five depending on the circuit) on a factor-by-factor basis, even where
some factors were recognized as having limited relevance in a
particular context. See, e.g., Hobbs, 946 F.3d at 830-36; Off Duty
Police, 915 F.3d at 1055-1062; Nieman, 775 F. App'x at 624-25; Verma,
937 F.3d at 230-32; Snell, 875 F.2d at 805-12; Lauritzen, 835 F.2d at
1535-38; Mr. W Fireworks, 814 F.2d at 1047-55; DialAmerica, 757 F.2d at
1382-88; Donovan v. Sureway Cleaners, 656 F.2d 1368, 1370-73 (9th Cir.
1981). Several recent court opinions focus their analysis on just the
most relevant facts and factors to the case, thereby achieving
efficiency and clarity. In each such opinion, the most relevant factors
on which the court focused its attention were control and opportunity
for profit or loss. And to the extent that the court considered
elements of investment and initiative, such elements are part of the
control and opportunity for profit or loss factors under the
Department's proposal.
In Saleem, the Second Circuit did not engage in the same factor-by-
factor analysis as did the district court
[[Page 60620]]
regarding the black-car drivers, noting the economic reality ``factors
are merely aids to analysis.'' 854 F.3d at 138-39. Instead, the court
focused on the drivers' ``considerable discretion in choosing the
nature and parameters of their relationship with the defendant,''
``significant control over essential determinants of profits in [the]
business,'' how they ``invested heavily in their driving businesses,''
and the ``ability to choose how much work to perform,'' to conclude
that they were ``in business for themselves'' as independent
contractors. Id. at 139-47. In other words, Saleem primarily analyzed
facts pertaining to the drivers' control over their work and
opportunity for profit or loss based on initiative or investment, the
core factors under this proposed rule. In particular, the Second
Circuit explicitly questioned the relevance of the permanence factor in
light of the control factor, observing that ``whatever `the permanence
or duration' of Plaintiffs' affiliation with Defendants, both its
length and the `regularity' of work was entirely of Plaintiffs'
choosing,'' id. at 147 (citation omitted), and gave no consideration
whatsoever to the district court's findings, 52 F. Supp. 3d 526, 543
(S.D.N.Y. 2014), ``that driving is not a `specialized skill' and that
``drivers were integral to Defendants' business.''
The Second Circuit again focused on control and opportunity for
profit or loss in Agerbrink v. Model Service LLC by relying on several
disputed material facts (``control over her work schedule, whether she
had the ability to negotiate her pay rate, and, relatedly, her ability
to accept or decline work'') relating to those two factors to vacate
summary judgment. 787 F. App'x 22, 25-27 (2d Cir. 2019). The Third
Circuit took a similar approach in Razak v. Uber Technologies., Inc.,
which held that summary judgment was inappropriate because there were
genuine disputes of fact regarding ``whether Uber exercises control
over drivers'' and whether drivers have ``the opportunity for profit or
loss depending on managerial skill.'' 951 F.3d at 145-47.\51\ And the
Eighth Circuit recently affirmed a jury verdict that a process server
was an independent contractor, relying primarily on evidence relating
to the control and opportunity for profit or loss factors, including
the process server's ability to determine his own profits by
controlling hours, which assignments to take, and for which company to
work. See Karlson, 860 F.3d at 1095.
---------------------------------------------------------------------------
\51\ The Razak court also found a genuine dispute regarding
degree of permanence of the working relationship, but characterized
that dispute in one sentence solely as an issue of control, as
opposed to permanence of the relationship: ``On one hand, Uber can
take drivers offline, and on the other hand, Plaintiffs can drive
whenever they choose to turn on the Driver App, with no minimum
amount of driving time required.'' 951 F.3d at 147. In addition, the
court agreed with the district court that the skill factor
``certainly weighs in favor of finding that Plaintiffs are
employees.'' Id. Finally, the court acknowledged in a footnote that
``Uber strenuously disputes'' the district court's finding that the
``integral'' factor weighed in favor of employee status and
indicated that there could be disputed material facts relating to
this factor. Id. at n.12.
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In summary, control and opportunity for profit or loss drive at the
heart of what it means to be an independent contractor who is in
business for oneself and are the most relevant factors in virtually
every case. As such, the Department believes focusing on these two as
the core factors would add much needed clarity and efficiency to the
economic reality test. The Department welcomes comments on this
approach, which departs from courts' and Department's previous practice
of not expressly identifying which types of facts or factors are the
most important.
7. The Other Factors
In contrast to the two core factors, the other factors listed in
Sec. 795.105(d)(2) relating to skill, permanence, and integration are
not always as probative to an inquiry into whether a worker is, as a
matter of economic reality, in business for him- or herself or
economically dependent on someone else for work. Rather, their
relevance varies depending on the circumstances. Moreover, relevant
aspects of the skill and permanence factors under the current test--
i.e., initiative and exclusivity, respectively--are already part of the
analysis with respect to the core factors. Since this rulemaking would
remove such confusing overlaps by removing initiative and exclusivity
from the skill and permanence factors, respectively, the probative
value of these two factors would become even more limited.
Skill factor. To be sure, some independent contractors in business
for themselves have ``some unique skill set[s].'' Parrish, 917 F.3d at
385. But many skills that count towards this factor are not necessarily
relevant to the question of economic dependence. In Scantland, for
instance, the Eleventh Circuit reasoned that the skill factor weakly
favored independent contractor status in part because ``a highly
trained technician could gain economic independence by the ability to
market his skills to a competing employer.'' Scantland, 721 at 1318.
But ``the ability to market oneself to a competing employer,'' without
more, does not help answer the ultimate question the Scantland court
was attempting to answer: ``whether an individual is in business for
himself or is dependent upon finding employment in the business of
others.'' Id. at 1312 (emphasis added).
Thus, the skill factor is over-inclusive to the extent it includes
skills that may merely enable a worker to find employment, but do not
indicate the worker is in business for him- or herself. Recognizing
this over-inclusiveness issue, some courts have explained that ``the
use of special skills is not itself indicative of independent
contractor status, especially if the workers do not use those skills in
any independent way.'' Selker Bros., 949 F.2d at 1295; see also
Superior Care, 840 F.2d at 1060. As discussed above, these courts made
the worker's capacity for initiative, a consideration under the control
factor in the Department's proposal, the most important aspect of the
skill factor. This proposed rule would remove initiative as a
consideration under the skill factor. Because capacity for initiative
is already a part of the control factor and the effect of initiative is
already a part of the opportunity for profit or loss factor, these
changes would thus cement the secondary importance of the skill factor.
The skill factor is also under-inclusive because it excludes
certain managerial and business skills that are highly probative as to
economic dependence. See Hopkins, 545 F.3d at 345 (``Certainly, the
Sales Leaders required a general set of skills to effectively manage
their offices and teams. However, these are not specialized skills;
they are abilities common to all effective managers.''). A pair of
cases involving drivers are illustrative in this regard. In Express
Sixty-Minutes Delivery, the Fifth Circuit recognized that a delivery
driver ``must rely on his own judgment, knowledge of traffic patterns
and road conditions . . . , ability to read [mapping software], and
ability to anticipate the need for an alternative route.'' 161 F.3d at
304. However, these did not constitute skill indicating independent
contractor status. See id. at 305 (``We agree with the Secretary that
the skill and initiative factor points toward employee status.'').
Nonetheless, the court ultimately found the drivers were independent
contractors, in part, because ``a driver's profit or loss is determined
largely on his or her skill, initiative, ability to cut costs, and
understanding of the courier business.'' Id. at 304. In other words,
the skill factor expressly excluded the precise attributes that gave
drivers an opportunity for profit, thereby
[[Page 60621]]
indicating their independent contractor status. Id. A similar omission
occurred in Iontchev, a case in which the Ninth Circuit concluded that
certain taxi drivers were independent contractors in part because the
``[d]rivers' opportunity for profit or loss depended upon their
managerial skill.'' 685 F. App'x at 550. But such managerial skill
evidently did not count towards the skill factor because the court
concluded that ``[t]he service rendered by the Drivers did not require
a special skill.'' Id.
The Department's proposal to deemphasize the skill factor as
compared to the core factors is supported by the statutory text and
case law. Employers can ``suffer and permit'' both skilled and non-
skilled individuals to perform work as employees, 29 U.S.C. 203(g), and
federal courts of appeals have routinely held that the presence of
specialized skill does not mean a worker is an independent contractor
if the worker lacks control over the work, an opportunity for profit or
loss, or both. See, e.g., Cromwell, 348 F. App'x at 60 (telecom
splicers); Superior Care, 840 F.2d at 1060 (nurses). Nor does the
absence of specialized skill mean a worker is an employee if the worker
otherwise has control over the work and an opportunity for profit or
loss. See, e.g., Express Sixty-Minutes Delivery, 161 F.3d at 304
(delivery workers); Iontchev, 685 F. App'x at 550 (taxi drivers).
Permanence factor. Under the current test, this factor concerns the
exclusivity and length of the relationship between the worker and the
potential employer. If this rule were finalized as proposed,
exclusivity of the relationship would be analyzed under the control
factor rather than the permanence factor to reduce confusing overlap
between factors. The permanence factor would consider the duration,
continuity, and regularity of the relationship.\52\
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\52\ Even if the Department were to retain the analysis of
exclusivity under a newly named ``permanence and exclusivity''
factor, that factor would be of secondary importance. This is
because the most important part of the ``permanence and
exclusivity'' factor, i.e., exclusivity, would add no additional
probative value on top of what is already provided by the control
factor.
---------------------------------------------------------------------------
The Department believes that the remaining considerations that are
part of this factor--duration, continuity, and regularity--are relevant
to an economic reality analysis, though less so than the core factors.
Specifically, the length of relationship between a worker and a
potential employer has less relevance to the issue of economic
dependence than the core factors. To be sure, many independent
contractors who are in business for themselves lack a long-term
relationship with a single client because they work on ``a project-by-
project basis.'' See, e.g., Parrish 917 F.3d at 387. But that does not
mean independent contractors cannot have long-term working
relationships. To the contrary, the existence of a long-term
relationship has not prevented courts from finding workers to be
independent contractors, particularly when such workers control their
work and enjoy opportunities for profit or loss. See, e.g., Iontchev,
685 Fed. App'x at 550-51 (concluding that ``Drivers were not
economically dependent upon AAA Cab'' even though ``[t]he working
relationship was often lengthy''); Eberline, 636 F. App'x at 229
(concluding that installers were independent contractors even though
``the length of the relationship between the Defendants and the
installers was indefinite'' and ``no reasonable jury could have
concluded that [the permanence] factor favored independent contractor
status''); DialAmerica, 757 F.2d at 1387 (concluding that
``distributors were not employees under the FLSA because they operated
more like independent contractors'' even though ``many distributors did
perform delivery work for DialAmerica continuously for several
years'').
Nor does the absence of a long-term working relationship preclude a
finding of employee status. Workers who move from job to job or work
for short periods of time can still be economically dependent on an
employer. As the Second Circuit observed in Superior Care, ``even where
work forces are transient, the workers have been deemed employees where
the lack of permanence is due to operational characteristics intrinsic
to the industry rather than to the workers' own business initiative.''
840 F.2d at 1060-61. It is therefore unsurprising that federal courts
of appeals have held that workers who lack a permanent relationship
with a potential employer are nonetheless economically dependent if the
worker lacked control over the work and an opportunity for profit or
loss. See, e.g., Verma, 937 F.3d at 230-32; Reich v. Circle C.
Investments, Inc., 998 F.2d 324, 327-29 (5th Cir. 1993); Superior Care,
840 F.2d at 1060-61. Because it is often trumped by the core factors,
the proposed regulation gives less weight to the permanence of the
relationship.
Integrated unit factor. As discussed above, the applicability of
the ``integrated unit'' factor in proposed Sec. 795.105(d)(2)(iii) is
limited to the instances where a potential employer has an integrated
production process (including a service business). Given this limited
applicability, the Department believes the integrated unit factor is
entitled to less weight than the core factors.
In sum, the two core factors drive at the heart of the economic
dependence question because they bear a causal relationship with the
ultimate inquiry. A worker's control over the work and the opportunity
for profit or loss are generally what transforms him or her from being
economically dependent on an employer as a matter of economic reality
into being in business for him- or herself. This is not so with the
other factors. Possessing a specialized skill, having a temporary
working relationship, and not being part of an integrated unit of
production are certainly characteristics shared by many workers who are
in business for themselves. But they are often indicators rather than
essential elements of being in business for oneself.
Accordingly, the Department proposes to focus the economic reality
test on the two core factors. Instead of balancing six or so unweighted
and overlapping factors, a worker's classification as an employee or
independent contractor can be largely determined in many cases by two
simple questions: (1) Does the worker exercise substantial control over
the key aspects of the work; and (2) does the worker have an
opportunity for profit or a risk of loss based on initiative or
investment? If the answer to both is ``yes,'' the worker is most likely
an independent contractor. And if the answer to both is ``no,'' the
worker is most likely an employee. Other factors may also be probative
as part of the circumstances of the whole activity, but are less
important. They are especially relevant when the two core factors do
not point in the same direction or do not point strongly in either
direction. The Department believes this proposed approach would improve
the clarity and predictability of the economic reality test.
In the course of formulating this NPRM, the Department also
considered a more structured approach to sharpening the economic
reality test under the FLSA. In particular, the Department considered
creating a presumption of employee or independent contractor status
where both core factors indicate the same status. Such a presumption
would be rebuttable only by a showing that other factors weighed
strongly in favor of the other outcome. The Department is concerned
that this approach would be confusing or burdensome on courts and the
regulated community. Accordingly, the Department is not proposing a
presumption-based approach at this time, but is nonetheless interested
in
[[Page 60622]]
comments on this, or other possible approaches to the economic reality
test.
E. Proposed Guidance Regarding the Primacy of Actual Practice
Proposed Sec. 795.110 states that the actual practice of the
parties involved--both of the worker (or workers) at issue and of the
potential employer--is more relevant than what may be contractually or
theoretically possible. This principle is derived from the Supreme
Court's holding that `` `economic reality' rather than `technical
concepts' is to be the test of employment'' under the FLSA. Whitaker
House, 366 U.S. at 33; see also Tony & Susan Alamo, 471 U.S. at 301
(``The test of employment under the [FLSA] is one of `economic reality'
'' (citing Whitaker House, 366 U.S. at 33)). Applying this guidance,
federal courts of appeals have emphasized the primacy of actual
practice when evaluating whether workers are employees or independent
contractors under the FLSA. See, e.g., Saleem, 854 F.3d at 142
(``[P]ursuant to the economic reality test, it is not what [Plaintiffs]
could have done that counts, but as a matter of economic reality what
they actually do that is dispositive.'') (citations omitted); Parrish,
917 F.3d at 387 (``The analysis is focused on economic reality, not
economic hypotheticals.''); Scantland, 721 F.3d at 1311 (``It is not
significant how one `could have' acted under the contract terms. The
controlling economic realities are reflected by the way one actually
acts.'') (citations omitted).
As the examples in proposed Sec. 795.110 illustrate, the primacy
of the parties' actual practice applies to every potentially relevant
factor, and it can weigh in favor of either an employee or independent
contractor relationship. In some cases, the actual practice of the
parties involved may suggest that the worker or workers are employees.
See, e.g., Sureway Cleaners, 656 F.2d at 1371 (``[T]he fact that
Sureway's `agents' possess, in theory, the power to set prices,
determine their own hours, and advertise to a limited extent on their
own is overshadowed by the fact that in reality the `agents' work the
same hours, charge the same prices, and rely in the main on Sureway for
advertising.''); DialAmerica, 757 F.2d at 1387 (concluding that
evidence showing workers were not doing similar work for any other
businesses ``although they were free to do so'' indicates employee
status). In other cases, it may suggest that the worker or workers at
issue are independent contractors. See Saleem, 854 F.3d at 143
(concluding that black-car drivers were independent contractors in part
because ``many Plaintiffs . . . picked up passengers via street hail,
despite TLC's (apparently under-enforced) prohibition of this
practice''); see also Bartels, 332 U.S. at 129 (rejecting in an SSA
case the argument that employee status under an economic reality test
could ``be determined solely by the idea of control which an alleged
employer may or could exercise over the details of the service rendered
to his business by the worker or workers'') (emphasis added).
Importantly, proposed Sec. 795.110 does not suggest that what is
contractually or theoretically possible in a work arrangement is
irrelevant. Contractual and theoretical possibilities are also part of
the economic reality of the parties' relationship, and excluding them
outright would not be consistent with the Supreme Court's instruction
in Rutherford Food to evaluate ``the circumstances of the whole
activity.'' 331 U.S. at 730; see also Mid-Atlantic Installation Servs.,
16 F. App'x at 107 (determining that cable installers were independent
contractors in part because they had a ``right to employ [their own]
workers''); Keller, 781 F.3d at 813 (citing as relevant ``the fact that
Miri never explicitly prohibited Keller from performing installation
services for other companies'' and finding ``a material dispute as to
whether Keller could have increased his profitability had he improved
his efficiency or requested more assignments''). Contractual or
theoretical possibilities are less relevant evidence to the employment
status inquiry, but the Department believes they are potentially
relevant nonetheless.
F. Severability
Finally, the Department proposes to include a severability
provision in part 795 so that, if one or more of the provisions of part
795 is held invalid or stayed pending further agency action, the
remaining provisions would remain effective and operative. The
Department proposes to add this provision as Sec. 795.115.
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections, their
practical utility, as well as the impact of paperwork and other
information collection burdens imposed on the public, and how to
minimize those burdens. The PRA typically requires an agency to provide
notice and seek public comments on any proposed collection of
information contained in a proposed rule. See 44 U.S.C. 3506(c)(2)(B);
5 CFR 1320.8. This NPRM does not contain a collection of information
subject to OMB approval under the Paperwork Reduction Act. The
Department welcomes comments on this determination.
VI. Executive Order 12866, Regulatory Planning and Review; and
Executive Order 13563, Improved Regulation and Regulatory Review
A. Introduction
Under E.O. 12866, OMB's Office of Information and Regulatory
Affairs determines whether a regulatory action is significant and,
therefore, subject to the requirements of the Executive Order and OMB
review.\53\ Section 3(f) of Executive Order 12866 defines a
``significant regulatory action'' as an action that is likely to result
in a rule that: (1) Has an annual effect on the economy of $100 million
or more, or adversely affects in a material way a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or state, local or tribal governments or communities
(also referred to as economically significant); (2) creates serious
inconsistency or otherwise interferes with an action taken or planned
by another agency; (3) materially alters the budgetary impacts of
entitlement grants, user fees, or loan programs, or the rights and
obligations of recipients thereof; or (4) raises novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order. Because the annual
effect of this proposed rule would be greater than $100 million, this
proposed rule would be economically significant under section 3(f) of
Executive Order 12866.\54\
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\53\ See 58 FR 51735 (Sept. 30, 1993).
\54\ The entirety of the estimated costs from this deregulatory
action, which exceed the $100 million threshold and relate strictly
to familiarization, fall in the first year alone. The Department's
Regulatory Impact Analysis further explains that these one-year
costs are more than offset by continuing annual cost-savings of $447
million per year, accruing to the same parties that face the
familiarization costs.
---------------------------------------------------------------------------
Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; that it is tailored to impose the least burden on society,
consistent with achieving the regulatory objectives; and that, in
choosing among alternative regulatory approaches, the agency has
selected the approaches that maximize net benefits. Executive Order
13563 recognizes that some benefits are difficult to quantify and
provides that, when appropriate and permitted by law, agencies may
consider and discuss qualitatively values that are difficult or
[[Page 60623]]
impossible to quantify, including equity, human dignity, fairness, and
distributive impacts.
B. Overview of Analysis
The Department estimates there were 10.6 million workers who worked
at any given time as independent contractors as their primary jobs in
the United States in 2017 (6.9 percent of all workers), the most recent
year of data available. Including independent contracting on secondary
jobs results in an estimate of 18.9 million independent contractors
(12.3 percent of all workers). The Department discusses other studies
providing estimates of the total number of independent contractors,
ranging from 6.1 percent to 14.1 percent of workers (see Table 3 in
VI.C.2). Due to uncertainties regarding magnitude and other factors,
the Department has not quantified the potential change to the aggregate
number of independent contractors that may occur if this proposed rule
is finalized. Furthermore, the Department`s analysis relies on data
collected prior to 2020, which reflects the state of the economy prior
to the COVID-19 pandemic. The Department acknowledges that data on
independent contractors could look different following the economic
effects of the pandemic, but does not yet have information to determine
how the number of independent contractors could change nor whether
these changes would be lasting or a near term market distortion. The
Department invites comments from stakeholders on the data used in this
analysis and on how the universe of independent contractors might
change as a result of this proposed rule. Specifically, the Department
requests data and comment on the possible impacts resulting from the
COVID-19 pandemic as it relates to the composition of the labor market,
the share and scope of independent contractors in the workforce, and
any associated wage effects.
The Department estimated regulatory familiarization costs to be
$370.9 million in the first year. The Department estimated cost savings
due to increased clarity to be $447.2 million per year, and cost
savings due to reduced litigation to be $33.6 million per year. This
results in a 10-year annualized net cost savings of $374.8 million
using a 3 percent discount rate and $369.0 million using a 7 percent
discount rate.\55\ For purposes of E.O. 13771, the annualized net cost
savings over a perpetual time horizon are $221.3 million.\56\ Other
costs, benefits, and cost savings are discussed qualitatively.
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\55\ Discount rates are directed by OMB. See Circular A-4, OMB
(Sept. 17, 2003).
\56\ Per OMB guidelines, E.O. 13771 data is represented in 2016
dollars, inflation-adjusted for when the proposed rule would take
effect.
Table 3--Summary of Estimates of Independent Contracting
----------------------------------------------------------------------------------------------------------------
Annualized values \a\
Impact Year 1 Year 2 Year 10 -------------------------------
7% Discount 3% Discount
----------------------------------------------------------------------------------------------------------------
Regulatory Familiarization Costs ($2019 millions)
----------------------------------------------------------------------------------------------------------------
Establishments.................. $152.3 $0.0 $0.0 $21.7 $17.9
Independent Contractors......... 218.6 0.0 0.0 31.1 25.6
-------------------------------------------------------------------------------
Total....................... 370.9 0.0 0.0 52.8 43.5
----------------------------------------------------------------------------------------------------------------
Increased Clarity Cost Savings ($2019 millions)
----------------------------------------------------------------------------------------------------------------
Employers....................... 369.0 369.0 369.0 369.0 369.0
Independent Contractors......... 78.1 78.1 78.1 78.1 78.1
-------------------------------------------------------------------------------
Total....................... \b\ 447.2 447.2 447.2 447.2 447.2
----------------------------------------------------------------------------------------------------------------
Reduced Litigation Cost Savings ($2019 millions)
----------------------------------------------------------------------------------------------------------------
33.6 33.6 33.6 33.6 33.6
----------------------------------------------------------------------------------------------------------------
Total Cost Savings ($2019 millions)
----------------------------------------------------------------------------------------------------------------
480.8 480.8 480.8 480.8 480.8
----------------------------------------------------------------------------------------------------------------
Net Cost Savings (Cost Savings-Costs) ($2019 millions)
----------------------------------------------------------------------------------------------------------------
109.9 480.8 480.8 369.0 374.8
----------------------------------------------------------------------------------------------------------------
\a\ Annualized over 10-years.
\b\ The numbers in this table do not sum to the total exactly because of rounding. Please see Table 4 for
unrounded values.
C. Independent Contractors: Size and Demographics
1. Current Number of Independent Contractors
The Department estimated the number of independent contractors to
provide a sense of the current size of this population. There are a
variety of estimates of the number of independent contractors and these
span a wide range based on methodologies and how the population is
defined. The Department believes that the Current Population Survey
(CPS) Contingent Worker Supplement (CWS) offers an appropriate lower
bound for the number of independent contractors; however, there are
potential biases in these data that will be noted. Additionally,
estimates from other sources will be presented to demonstrate the
potential range.
The CPS is conducted by the U.S. Census Bureau and published
monthly by the Bureau of Labor Statistics (BLS). The sample includes
approximately 60,000 households and is nationally representative.
Periodically since 1995, and most recently in 2017, the CPS has
included a supplement to the May
[[Page 60624]]
survey to collect data on contingent and alternative employment
arrangements. Based on the CWS, there are 10.6 million independent
contractors, which amounts to 6.9 percent of workers.\57\ The CWS
measures those who say that their independent contractor job is their
primary job and that they worked at the independent contractor job in
the survey's reference week. It is an important data set and analysis.
However, based on the survey's design, while the Department refers to
the CWS measure of independent contractors throughout this analysis, it
should be uniformly recognized as representing a constrained subsection
of the entire independent contractor pool. Due to its clear
methodological constraints, the CWS measure should be differentiated
from other, more comprehensive measures.
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\57\ Bureau of Labor Statistics, ``Contingent and Alternative
Employment Arrangements--May 2017,'' USDL-18-0942 (June 7, 2018),
https://www.bls.gov/news.release/pdf/conemp.pdf.
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The BLS's estimate of independent contractors includes ``[w]orkers
who are identified as independent contractors, independent consultants,
or freelance workers, regardless of whether they are self-employed or
wage and salary workers.'' BLS asks two questions to identify
independent contractors: \58\
---------------------------------------------------------------------------
\58\ The variables used are PES8IC = 1 for self-employed and
PES7 = 1 for other workers.
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Workers reporting that they are self-employed are asked:
``Are you self-employed as an independent contractor, independent
consultant, freelance worker, or something else (such as a shop or
restaurant owner)?'' (9.0 million independent contractors). We refer to
these workers as ``self-employed independent contractors'' in the
remainder of the analysis.
Workers reporting that they are wage and salary workers
are asked: ``Last week, were you working as an independent contractor,
an independent consultant, or a freelance worker? That is, someone who
obtains customers on their own to provide a product or service.'' (1.6
million independent contractors). We refer to these workers as ``other
independent contractors'' in the remainder of the analysis.
It is important to note that independent contractors are identified
in the CWS in the context of the respondent's ``main'' job (i.e., the
job with the most hours).\59\ Therefore, the estimate of independent
contractors does not include those who may be defined as an employee
for their primary job, but may work as an independent contractor for a
secondary or tertiary job.\60\ For example, Lim et al. (2019) estimate
that independent contracting work is the primary source of income for
48 percent of independent contractors.\61\ Applying this estimate to
the 10.6 million independent contractors estimated from the CWS,
results in 22.1 million independent contractors (10.6 million / 0.48).
Alternatively, a survey of independent contractors in Washington found
that 68 percent of respondents reported that independent contract work
was their primary source of income.\62\ Applying that estimate to the
10.6 million independent contractors from the CWS results in an
estimated 15.6 million independent contractors (10.6 million / 0.68).
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\59\ While self-employed independent contractors are identified
by the worker's main job, other independent contractors answered yes
to the CWS question about working as an independent contractor last
week. Although the survey question does not ask explicitly about the
respondent's main job, it follows questions asked in reference to
the respondent's main job.
\60\ Even among independent contractors, failure to report
multiple jobs in response to survey questions is common. For
example, Katz and Krueger (2019) asked Amazon Mechanical Turk
participants the CPS-style question ``Last week did you have more
than one job or business, including part time, evening or weekend
work?'' In total, 39% of respondents responded affirmatively.
However, these participants were asked the follow-up question ``Did
you work on any gigs, HITs or other small paid jobs last week that
you did not include in your response to the previous question?''
After this question, which differs from the CPS, 61 percent of those
who indicated that they did not hold multiple jobs on the CPS-style
question acknowledged that they failed to report other work in the
previous week. As Katz and Krueger write, ``If these workers are
added to the multiple job holders, the percent of workers who are
multiple job holders would almost double from 39 percent to 77
percent.'' See L. Katz and A. Krueger, ``Understanding Trends in
Alternative Work Arrangements in the United States,'' RSF: The
Russell Sage Foundation Journal of the Social Sciences 5(5), p. 132-
46 (2019).
\61\ K. Lim, A. Miller, M. Risch, and E. Wilking, ``Independent
Contractors in the U.S.: New Trends from 15 years of Administrative
Tax Data,'' Department of Treasury, p. 61 (Jul. 2019), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
\62\ Washington Department of Commerce, ``Independent Contractor
Study,'' p. 21 (Jul. 2019), https://deptofcommerce.app.box.com/v/independent-contractor-study.
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The CWS's large sample size results in small sampling error.
However, the questionnaire's design may result in some non-sampling
error. For example, one potential source of bias is that the CWS only
considers independent contractors during a single point in time--the
survey week (generally the week prior to the interview).
These numbers will thus underestimate the prevalence of independent
contracting over a longer timeframe, which may better capture the size
of the population.\63\ For example, Farrell and Greig (2016) used a
randomized sample of 1 million Chase customers to estimate prevalence
of the Online Platform Economy.\64\ They found that ``[a]lthough 1
percent of adults earned income from the Online Platform Economy in a
given month, more than 4 percent participated over the three-year
period.'' Additionally, Collins et al. (2019) examined tax data from
2000 through 2016 and found that the number of workers who filed a form
1099 grew substantially over that period, and that fewer than half of
these workers earned more than $2,500 from 1099 work in 2016. The
prevalence of lower annual earnings implies that most workers who
received a 1099 did not work as an independent contractor every
week.\65\
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\63\ In any given week, the total number of independent
contractors would have been roughly the same, but the identity of
the individuals who do it for less than the full year would likely
vary. Thus, the number of unique individuals who work at some point
in a year as independent contractors would exceed the number of
independent contractors who work within any one-week period as
independent contractors.
\64\ D. Farrell and F. Greig, ``Paychecks, Paydays, and the
Online Platform,'' JPMorgan Chase Institute (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911293.
\65\ Collins, Brett, Andrew Garin, Emile Jackson, Dmitri
Koustas, and Mark Payne. 2019. ``Is Gig Work Replacing Traditional
Employment? Evidence from Two Decades of Tax Returns.'' Unpublished
paper, IRS SOI Joint Statistical Research Program.
---------------------------------------------------------------------------
The CWS also uses proxy responses, which may underestimate the
number of independent contractors. The RAND American Life Panel (ALP)
survey conducted a supplement in 2015 to mimic the CWS questionnaire,
but used self-responses only. The results of the survey were summarized
by Katz and Krueger (2018).\66\ This survey found that independent
contractors comprise 7.2 percent of workers.\67\ Katz and Krueger
identified that the 0.5 percentage point difference in magnitude
between the CWS and the ALP was due to both cyclical conditions, and
the lack of proxy responses in the ALP.\68\ Therefore, the Department
believes a reasonable upper-bound on the potential bias due to the use
of proxy responses in the CWS is 0.5 percentage points (7.2 versus
6.7).69 70
---------------------------------------------------------------------------
\66\ See Katz and Krueger (2018), supra note 45.
\67\ Id. at 49. The estimate is 9.6 percent without correcting
for overrepresentation of self-employed workers or multiple job
holders. Id. at 31.
\68\ Id. at Addendum (``Reconciling the 2017 BLS Contingent
Worker Survey'').
\69\ Note that they estimate 6.7 percent of employed workers are
independent contractors using the CWS, opposed to 6.9 percent as
estimated by the BLS. This difference is attributable to changes to
the sample to create consistency.
\70\ In addition to the use of proxy responses, this difference
is also due to cyclical conditions. The impacts of these two are not
disaggregated for independent contractors, but if we applied the
relative sizes reported for all alternative work arrangements, we
would get 0.36 percentage point difference due to proxy responses.
Additionally, it should be noted that this may not entirely be a
bias. It stems from differences in independent contracting reported
by proxy respondents and actual respondents. As Katz and Krueger
explain, this difference may be due to a ``mode'' bias or proxy
respondents may be less likely to be independent contractors. Id. at
Addendum p. 4.
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[[Page 60625]]
Another potential source of bias in the CWS is that some
respondents may not self-identify as an independent contractor, and
others who self-identify may be misclassified. There are reasons to
believe that some workers, who are legally considered independent
contractors, would not self-identify as such. For example, if the
worker has only one employer/client, or did not actively pursue the
employer/client, then they may not agree that they ``[obtain] customers
on their own to provide a product or service.'' Additionally,
individuals who do only informal work may not view themselves as
independent contractors.\71\ This population could be substantial.
Abraham and Houseman (2019) confirmed this in their examination of the
Survey of Household Economics and Decision-making. They found that 28
percent of respondents reported doing informal work for money over the
past month.\72\ Conversely, some workers misclassified as independent
contractors may answer in the affirmative, despite not truly being
independent contractors. The prevalence of misclassification is
unknown, but it is generally agreed to be common.\73\ Because reliable
data on the potential magnitude of these biases are unavailable, and so
the net direction of the biases is unknown, the Department has not
calculated any estimates of how these biases may impact the estimated
number of independent contractors.
---------------------------------------------------------------------------
\71\ The Department believes that including data on informal
work is useful when discussing the magnitude of independent
contracting, although not all informal work is done by independent
contractors. The Survey of Household Economics and Decision-making
asked respondents whether they engaged in informal work sometime in
the prior month. It categorized informal work into three broad
categories: Personal services, on-line activities, and off-line
sales and other activities, which is broader than the scope of
independent contractors. These categories include activities like
house sitting, selling goods online through sites like eBay or
Craigslist, or selling goods at a garage sale. The Department
acknowledges that the data discussed in this study might not be a
one-to-one match with independent contracting, but it nonetheless
provides useful data for this purpose.
\72\ Katherine G. Abraham, and Susan N. Houseman. 2019. ``Making
Ends Meet: The Role of Informal Work in Supplementing Americans'
Income.'' RSF: The Russell Sage Foundation Journal of the Social
Sciences 5(5): 110-31, https://www.aeaweb.org/conference/2019/preliminary/paper/QreAaS2h.
\73\ See, e.g., U.S. Gov't Accountability Off., GAO-09-717,
Employee Misclassification: Improved Coordination, Outreach, and
Targeting Could Better Ensure Detection and Prevention 10 (2008)
(``Although the national extent of employee misclassification is
unknown, earlier national studies and more recent, though not
comprehensive, studies suggest that employee misclassification could
be a significant problem with adverse consequences.'').
---------------------------------------------------------------------------
Because the CWS estimate represents only the number of workers who
worked as independent contractors on their primary job during the
survey reference week, the Department applied the research literature
and adjusted this measure to include workers who are independent
contractors in a secondary job or who were excluded from the CWS
estimate due to other factors. As noted above, integrating the
estimated proportions of workers who are independent contractors on
secondary or otherwise excluded jobs yields from other surveys produces
estimates of 15.6 million and 22.1 million. The Department used the
average of these two estimates, 18.9 million, as the estimated total
number of workers working as independent contractors in any job at a
given time. Given the prevalence of independent contractors who work
sporadically and earn minimal income, adjusting the estimate according
to these sources captures some of this population. It is likely that
this figure is still an underestimate of the true independent
contractor pool. The Department requests comments and data on the
assumptions made to calculate this estimate.
2. Range of Estimates in the Literature
To further consider the range of estimates available, the
Department conducted a literature review, the findings of which are
presented in Table 3. Other studies were also considered but are
excluded from this table because the study populations were broader
than just independent contractors or limited to one state.\74\ The RAND
ALP \75\ and the General Social Survey's (GSS's) Quality of Worklife
(QWL) \76\ supplement are widely cited alternative estimates. However,
the Department chose to use sources with significantly larger sample
sizes and more recent data for the primary estimate.
---------------------------------------------------------------------------
\74\ Including, but not limited to: McKinsey Global Institute,
``Independent Work: Choice, Necessity, and the Gig Economy'' (2016),
https://www.mckinsey.com/featured-insights/employment-and-growth/independent-work-choice-necessity-and-the-gig-economy; Kelly
Services, ``Agents of Change'' (2015); Robles and McGee, ``Exploring
Online and Offline Informal Work: Findings from the Enterprising and
Informal Work Activities (EIWA) Survey'' (2016); Upwork,
``Freelancing in America'' (2019); Washington Department of
Commerce, supra note 62; Farrell and Greig, supra note 64; MBO
Partners, ``State of Independence in America'' (2016); Abraham et
al., ``Measuring the Gig Economy: Current Knowledge and Open
Issues'' (2018), https://www.nber.org/papers/w24950; Collins et al.,
``Is Gig Work Replacing Traditional Employment? Evidence from Two
Decades of Tax Returns,'' IRS Working Paper (2019); Gitis et al.,
``The Gig Economy: Research and Policy Implications of Regional,
Economic, and Demographic Trends,'' American Action Forum (2017),
https://www.americanactionforum.org/research/gig-economy-research-policy-implications-regional-economic-demographic-trends/#ixzz5IpbJp79a; Dourado and Koopman, ``Evaluating the Growth of the
1099 Workforce,'' Mercatus Center (2015), https://www.mercatus.org/publication/evaluating-growth-1099-workforce.
\75\ See Katz and Krueger (2018), supra note 45.
\76\ See Abraham et al., supra note 743, Table 4 (2018).
---------------------------------------------------------------------------
Jackson et al. (2017) \77\ and Lim et al. (2019) \78\ use tax
information to estimate the prevalence of independent contracting. In
general, studies using tax data tend to show an increase in prevalence
of independent contracting over time. The use of tax data has some
advantages and disadvantages over survey data. Advantages include large
sample sizes, the ability to link information reported on different
records, the reduction in certain biases such as reporting bias,
records of all activity throughout the calendar year (the CWS only
references one week), and inclusion of both primary and secondary
independent contractors. Disadvantages are that independent contractor
status needs to be inferred; there is likely an underreporting bias
(i.e., some workers do not file taxes); researchers are generally
trying to match the IRS definition of independent contractor, which
does not mirror the scope of independent contractors under the FLSA;
and the estimates include
[[Page 60626]]
misclassified independent contractors.\79\ A major disadvantage of
using tax data for this NPRM is that the data are not publicly
available and thus the analyses conducted cannot be directly verified
or adjusted as necessary (e.g., to describe characteristics of
independent contractors, etc.).
---------------------------------------------------------------------------
\77\ E. Jackson, A. Looney, and S. Ramnath, ``The Rise of
Alternative Work Arrangements: Evidence and Implications for Tax
Filing and Benefit Coverage,'' OTA Working Paper 114 (2017), https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-114.pdf.
\78\ Lim et al., supra note 61.
\79\ In comparison to household survey data, tax data may reduce
certain types of biases (such as recall bias) while increasing other
types (such as underreporting bias). Because the Department is
unable to quantify this tradeoff, it could not determine whether, on
balance, survey or tax data are more reliable.
Table 3--Summary of Estimates of Independent Contracting
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent of
Source Method Definition \a\ workers Sample size Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
CPS CWS....................... Survey........................ Independent contractor, 6.9 50,392.................. 2017
consultant or freelance
worker (main only).
ALP........................... Survey........................ Independent contractor, 7.2 6,028................... 2015
consultant or freelance
worker (main only).
GSS QWL....................... Survey........................ Independent contractor, 14.1 2,538................... 2014
consultant or freelancer
(main only).
Jackson et al................. Tax data...................... Independent contractor, \b\ 6.1 \c\ ~5.9 million........ 2014
household worker.
Lim et al..................... Tax data...................... Independent contractor........ 8.1 1% of 1099-MISC and 5% 2016
of 1099-K.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ The survey data only identify independent contractors on their main job. Jackson et al. include independent contractors as long as at least 15
percent of their earnings were from self-employment income; thus, this population is broader. If Jackson et al.'s estimate is adjusted to exclude
those who are primary wage earners, the rate is 4.0 percent. Lim et al. include independent contractors on all jobs. If Lim et al.'s estimate is
adjusted to only those who receive a majority of their labor income from independent contracting, the rate is 3.9 percent.
\b\ Summation of (1) 2,132,800 filers with earnings from both wages and sole proprietorships and expenses less than $5,000, (2) 4,125,200 primarily sole
proprietorships and with less than $5,000 in expenses, and (3) 3,416,300 primarily wage earners.
\c\ Estimate based on a 10 percent sample of self-employed workers and a 1 percent sample of W-2 recipients.
3. Demographics of Independent Contractors
This section presents demographic information of independent
contractors using the CWS, which, as stated above, only measures those
who say that their independent contractor job is their primary job and
that they worked at the independent contractor job in the survey's
reference week. According to the CWS, these primary independent
contractors are most prevalent in the construction and professional and
business services industries. These two industries employ 44 percent of
primary independent contractors. Independent contractors tend to be
older and predominately male (65 percent). Millennials have a
significantly lower prevalence of primary independent contracting than
older generations: 3.6 percent for Millennials compared to 6.0 percent
for Generation X and 8.8 percent for Baby Boomers and Matures.\80\
However, surveys suggest that this trend is reversed when secondary
independent contractors, or those who did informal work as independent
contractors, are included. These divergent data suggest that younger
workers are more likely to use contractor work sporadically and/or for
supplemental income.\81\ White workers are somewhat overrepresented
among primary independent contractors; they comprise 85 percent of this
population but only 79 percent of the population of workers.
Conversely, black workers are somewhat underrepresented (comprising 9
percent and 13 percent, respectively).\82\ The opposite trends emerge
when evaluating informal work, where racial minorities participate at a
higher rate than white workers.\83\ Primary independent contractors are
spread across the educational spectrum, with no group especially
overrepresented. The same trend in education attainment holds for
workers who participate in informal work.\84\
---------------------------------------------------------------------------
\80\ The Department used the generational breakdown used in the
MBO Partner's 2017 report, ``The State of Independence in America.''
``Millennials'' were defined as individuals born 1980-1996,
``Generation X'' were defined as individuals born 1965-1980, and
``Baby Boomers and Matures'' were defined as individuals born before
1965.
\81\ Abraham and Houseman (2019), supra note 7272, find that
informal work decreases as a worker's age increases. Among 18 to 24
years olds, 41.3 percent did informal work over the past month. The
rate fell to 25.7 percent for 45 to 54 year olds, and 13.4 percent
for those 75 years and older. See also Upwork, ``Freelancing in
America'' (2019).
\82\ These numbers are based on the respondents who state that
their race is ``white only'' or ``black only'' as opposed to
identifying as being multi-racial.
\83\ Abraham and Houseman (2019), supra note 72.
\84\ Id.
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D. Potential Transfers
The substantive effect of the rule is not intended to favor
independent contractor or employee classification relative to the
status quo. However, the Department assumes in this RIA that the
increased legal certainty associated with this proposed rule could lead
to an increase in the number of independent contractor arrangements.
The Department has not attempted to estimate the magnitude of this
change, primarily because there are not objective tools for quantifying
the clarity, simplification, and enhanced probative value of the
Department's proposals for sharpening and focusing the economic reality
test.\85\ Therefore, potential transfers are discussed qualitatively
with some numbers presented on a per worker basis. Potential transfers
may result from differences in employer provided benefits, tax
liabilities, and earnings between employees and independent
contractors. Although employer-provided benefits could decrease, and
tax liabilities could increase for these workers, the Department
believes the net impact on total compensation should be small in either
direction. Furthermore, in order to attract qualified workers,
companies must offer competitive compensation. Therefore, in a
competitive labor market, any reduction in benefits and increase in
taxes is likely to be offset by
[[Page 60627]]
higher base earnings--referred to as an ``earnings premium.'' As
explained elsewhere, however, the data provides mixed evidence of this
earnings premium.
---------------------------------------------------------------------------
\85\ Another uncertainty limiting the Department's ability to
quantify the possible increase in independent contracting is the
nature and effect of state wage and hour laws. Some states, such as
California, have laws that place more stringent limitations on who
may qualify as independent contractors than the FLSA. See Cal. Labor
Code 2775 (establishing a demanding ``ABC'' test applicable to most
workers when determining independent contractor status under
California law). Because the FLSA does not preclude states and
localities from establishing broader wage and hour protections than
those that exist under the FLSA, see 29 U.S.C. 218(a), workers in
some states may be unaffected by this proposed rule. However,
because the Department is not well positioned to interpret the
precise scope of each state's wage and hour laws, the Department is
unable to definitively determine the degree to which workers in
particular states would or would not be affected by this proposed
rule.
---------------------------------------------------------------------------
Assuming that independent contractor arrangements increase
following this proposed rule, it is unclear whether this would occur as
a result of employees being subsequently classified as independent
contractors or as a result of the hiring of new workers as independent
contractors. This will have implications for transfers. If current
employees change classifications, then there may be transfers.
Employers could only change the classification of current employees if
those workers had previously been misclassified or by changing the
working conditions such that the relationship becomes a true
independent contractor relationship, assuming doing so is consistent
with any applicable employment contracts, collective bargaining
agreement, or other applicable laws. Lim et al. (2019) found ``little
evidence that firms are increasingly reclassifying existing employee
relationships as [independent contractor] relationships,'' however,
they found that ``firms are hiring more new workers as [independent
contractors] rather than as employees.'' \86\
---------------------------------------------------------------------------
\86\ Lim et al., supra note 61 at 3.
---------------------------------------------------------------------------
By decreasing uncertainty and thus potentially opening new
opportunities for firms, companies may hire independent contractors who
they otherwise would not have hired. In this case, there may be a
decrease in unemployment and/or an increase in the size of the labor
force. In a study of respondents from both Europe and the U.S.,
McKinsey Global Institute found that 15 percent of those not working
are interested in becoming an independent contractor for their primary
job.\87\ Attracting these individuals to join the labor force would be
considered a societal benefit, rather than a transfer, and therefore,
is analyzed more fully below as part of the discussion on Cost Savings
and Benefits.
---------------------------------------------------------------------------
\87\ McKinsey Global Institute, supra note 74 at 71.
---------------------------------------------------------------------------
The Department invites comment on its assumption that use of
independent contractors will increase if the proposed rule is
finalized. The Department also welcomes comments and data from
companies looking to increase their use of independent contractors,
specifically on whether employees' classifications would change to
independent contractor status, consistent with this proposed rule and
their other contractual and legal obligations, or whether they would
instead hire new workers as independent contractors.
1. Employer Provided Benefits
Although this rule only affects workers' independent contractor
status under the FLSA, the Department assumes in this analysis that
employers are likely to keep the status of the worker the same across
all benefits and requirements.\88\ To the extent that employers
currently provide employees benefits such as health insurance,
retirement contributions, and paid time off, these would likely
decrease with an increase in the use of independent contractors because
independent contractors generally do not receive these benefits
directly (although independent contractors are able to purchase at
least some of these benefits for themselves). Employer provided
benefits are a significant share of workers' compensation. According to
the BLS's Employer Costs for Employee Compensation (ECEC), the value of
employer benefits that directly benefit employees average 21 percent of
total compensation.\89\ The Department used the CWS to compare
prevalence of health insurance and retirement benefits across employees
and independent contractors. However, it should be noted that these two
populations may differ in ways other than just their employment
classification which may impact benefit amounts. For instance, an
employee shifting to independent contractor status who already receives
health benefits through a partner's benefit plan would not be impacted
by losing heath benefit eligibility. Additionally, lower benefits may
be offset by increased base pay in order to attract staff because
workers consider the full package of pay and benefits when accepting a
job.
---------------------------------------------------------------------------
\88\ Courts have noted that the FLSA has the broadest conception
of employment under federal law. See, e.g., Darden, 503 U.S. at 326.
To the extent that businesses making employment status
determinations base their decisions on the most demanding federal
standard, a rulemaking addressing the FLSA's distinction between
employees and independent contractors may affect the businesses'
classification decisions for purposes of benefits and legal
requirements under other federal and state laws.
\89\ BLS, ``Employer Costs for Employee Compensation News
Release'' (Sept. 2019), https://www.bls.gov/news.release/archives/ecec_12182019.htm, Civilian Workers. This includes paid leave
($2.68), insurance ($3.22), and retirement and savings benefits
($1.96). It does not include overtime and premium pay, shift
differential pay, nonproduction bonuses, or legally required
benefits. Calculated as ($2.68 + $3.22 + $1.96)/$37.03.
---------------------------------------------------------------------------
According to the CWS's relatively narrow definition of independent
contractor:
79.4 percent of self-employed independent contractors have
health insurance. Most of these workers either purchased insurance on
their own (31.5 percent) or have access through their spouse (28.6
percent).
80.7 percent of other independent contractors have health
insurance. There are three main ways these workers receive health
insurance: Through their spouse (25.1 percent), through an employer
(24.2), or on their own (20.1 percent).
88.3 percent of employees have health insurance. Most of
these workers receive health insurance through their work (64.1
percent). Furthermore, according to the ECEC, employers pay on average
12 percent of an employee's base compensation in health insurance
premiums.
From these data, it is unclear exactly how health insurance
coverage would change if the number of independent contractors
increased, but the data suggest that independent contractors, on
average, may be less likely to have health insurance coverage. That
said, employment is not a guarantee of health insurance, nor do
independent contractors generally lack health insurance.
A major source of retirement savings is employer sponsored
retirement accounts. According to the CWS, 55.5 percent of employees
have a retirement account with their current employer; in addition, the
ECEC found that employers pay 5.3 percent of employees' total
compensation in retirement benefits on average ($1.96/$37.03). If a
worker shifts from employee to independent contractor status, that
worker may no longer receive employer-provided retirement benefits, but
may choose alternate investment options. As with health insurance, it
is not clear whether retirement savings for such a worker would
increase or decrease, but such a worker would need to take a more
active role in saving for retirement vis-[agrave]-vis an employee with
an employer-sponsored retirement plan.
2. Tax Liability
Payroll tax liability is generally divided between the employer and
the employee in the United States. Most economists believe that the
``incidence'' of the payroll tax, regardless of liability, falls on the
employee.\90\ As self-
[[Page 60628]]
employed workers, independent contractors are legally obligated to pay
both the employee and employer shares of the Federal Insurance
Contributions Act (FICA) taxes. Thus, if workers' classifications
change from employees to independent contractors, there may be a
transfer in federal tax liabilities from employers to workers
(regardless of whether this affects the actual cost of these taxes to
the worker). These payroll taxes include: \91\
---------------------------------------------------------------------------
\90\ The share of payroll taxes borne by employees versus firms
is unknown but economists generally believe that employer payroll
taxes are partially-to-completely shifted to employees in the long
run. For a detailed review of the literature see J. Deslauriers, B.
Dostie, R. Gagn[eacute], and J. Par[eacute], ``Estimating the
Impacts of Payroll Taxes: Evidence from Canadian Employer-Employee
Tax Data,'' IZA Institute of Labor Economics Discussion Paper Series
IZA DP No. 11598 (June 2018), http://ftp.iza.org/dp11598.pdf.
Further information is available by the Tax Foundation, https://taxfoundation.org/what-are-payroll-taxes-and-who-pays-them/.
\91\ Internal Revenue Service, ``Publication 15, (Circular E),
Employer's Tax Guide'' (Dec. 23, 2019), https://www.irs.gov/pub/irs-pdf/p15.pdf.
---------------------------------------------------------------------------
Social Security tax: The 6.2 percent employer component
(half of the 12.4 percent total).\92\
---------------------------------------------------------------------------
\92\ The social security tax has a wage base limit of $137,700
in 2020.
---------------------------------------------------------------------------
Medicare tax: The 1.45 percent employer component (half of
the 2.9 percent total).\93\
---------------------------------------------------------------------------
\93\ An additional Medicare Tax of 0.9 percent applies to wages
paid in excess of $200,000 in a calendar year for individual filers.
---------------------------------------------------------------------------
In sum, independent contractors are legally responsible for an
additional 7.65 percent of their earnings in FICA taxes vis-[agrave]-
vis an employee. However, any tax-related transfers from employers to
workers are likely to be offset by higher wages employers pay to ensure
workers' take-home pay remains the same.
Companies also cover unemployment insurance and workers'
compensation taxes for their employees. Independent contractors may
choose to pay for comparable insurance protection offered in the
private market, but are not obligated to. The resulting regulatory
effect (experienced as savings, either by companies or employees,
depending on who ultimately bears the cost of the tax) combines
societal cost savings (the lessened administrative cost of
incrementally lower participation in unemployment insurance and
workers' compensation programs) and transfers (from individuals whose
unemployment insurance or workers' compensation payments decline, to
entities paying less in taxes). Independent contractors may recoup some
or all of the employer portion of these taxes and insurance premiums in
the form of increased wages. This rule could decrease employers' tax
liabilities and increase independent contractors' take-home
compensation. However, there are costs to independent contractors if
they become unemployed or injured or ill on the job because they no
longer are protected, unless they purchase their own private insurance.
The Department did not attempt to quantify the cost of changes in
coverage or whether the net effect is a benefit or cost to the worker.
3. Earnings
Although the minimum wage and overtime pay requirements of the FLSA
would no longer apply to workers who shift from employee status to
independent contractor status, the Department anticipates an increase
in labor force activity. That said, the Department does not attempt to
quantify the magnitude of any increase in earnings as a result of
increased labor force activity.
If currently unemployed workers or individuals who are out of the
labor market become independent contractors due to this rule, their
earnings will increase as they currently have no employment-related
earnings other than possibly unemployment benefits. The impact on
earnings is more ambiguous if employees' classifications change to
independent contractors. In theory, companies would likely have to pay
more per hour to independent contractors than to employees because
independent contractors generally do not receive employer-provided
benefits and have higher tax liabilities. Data show an hourly wage
premium for independent contractors when comparing unconditional means.
But as the analysis below shows, when controlling for certain
differences in worker characteristics, this expected wage premium may
not always be observable at a statistically significant level. It
should be noted, however, that these estimates do not attempt to
incorporate the value of flexibility and satisfaction that independent
contractors cite as key factors in their preference of independent
contracting arrangements over traditional employment.
Comparing the average earnings, hourly wages, and hours of current
employees and independent contractors may provide some indication of
the impact on wages of a worker who transitions from an employee to
independent contractor classification. A regression analysis that
controls for observable differences between independent contractors and
employees may help isolate the impact on earning, hourly wages, and
usual hours of being an independent contractor. Katz and Krueger (2018)
\94\ regressed the natural log of usual weekly earnings, the natural
log of hourly wages, and the natural log of weekly hours worked on
independent contractor status,\95\ occupation, sex, potential
experience, potential experience squared, education, race, and
ethnicity. They use the 2005 CWS and the 2015 RAND ALP (the 2017 CWS
was not available at the time of their analysis). The Department
conducted similar regressions using the 2017 CWS. In both Katz and
Krueger's regression results and the Department's calculations of
unconditional averages in the 2017 CWS data presented below, the
following outlying values were removed: Workers reporting earning less
than $50 per week, less than $1 per hour, or more than $1,000 per
hour.\96\
---------------------------------------------------------------------------
\94\ See Katz and Krueger (2018), supra note 45.
\95\ On-call workers, temporary help agency workers, and workers
provided by contract firms are excluded from the base group of
``traditional'' employees.
\96\ Choice of exclusionary criteria from Katz and Krueger
(2018), supra note 45.
---------------------------------------------------------------------------
The Department combined the CWS data on usual earnings per week and
hours worked per week to estimate hourly wage rates.\97\ Examining mean
earnings, the Department found that independent contractors tend to
earn more per hour: Employees earned an average of $24.07 per hour,
self-employed independent contractors earned an average of $27.43 per
hour, and other independent contractors earned an average of $26.71 per
hour (the average hourly wage is $27.29 when combining the two types of
independent contractors).\98\ Katz and Krueger conducted similar hourly
earnings estimates based on 2005 CWS and 2015 ALP data. Their analysis
of the 2005 CWS data indicated that ``[b]efore conditioning on
covariates, the 2005 and 2015 results are similar: Freelancers
[[Page 60629]]
and contract workers are paid more per hour than traditional
employees.'' \99\ When controlling for education, potential experience,
potential experience squared, race, ethnicity, sex and occupation,
independent contractors' higher hourly wages in the 2005 CWS data were
not statistically significant. But Katz and Krueger's analysis of the
2015 ALP data under the same specifications found that primary
independent contractors earned more per hour than traditional employees
with a statistically significant degree of confidence.\100\
---------------------------------------------------------------------------
\97\ The CWS data, based on its relatively narrow definition of
independent contractors, indicated that employees worked more hours
per week in comparison to primary independent contractors. The
Department found that 81 percent of employees worked full-time,
compared to 72 percent for self-employed independent contractors and
69 percent for other independent contractors. Katz and Krueger
similarly found that independent contractors work fewer hours per
week than employees (statistically significant at the 1 percent
level of significance in all specifications with both datasets).
Despite working fewer hours per week than employees, self-employed
independent contractors earned more per week on average ($980 per
week compared to $943 per week). Other independent contractors, on
average, worked fewer hours per week and earned less per week than
employees ($869 per week compared to $943 per week). Given the
difference between hours worked by primary independent contractors
and employees, and the appeal of flexibility cited by many
independent contractors, average weekly earnings may be an
inadequate measure. Accordingly, the Department's analysis focuses
on hourly wages.
\98\ The Department followed Katz and Krueger's methodology in
excluding observations with weekly earnings less than $50, hourly
wages less than $1, or with hourly wages above $1,000. Additionally,
workers with weekly earnings above $2,885 are topcoded at $2,885.
Weekly earnings are used to calculate imputed hourly wages.
\99\ Id. at 19.
\100\ Id. at 34.
---------------------------------------------------------------------------
Conceptually, the Department expects that independent contractors
would earn more per hour than traditional employees in base
compensation as an offset to employer-provided benefits and increases
in tax liabilities. Katz and Krueger's analysis of the 2015 RAND ALP
data appears to support this prediction.\101\ However, they recommend
caution in interpreting the estimates from the ALP due to the
relatively small sample size. Their analysis of the 2005 CWS data and
the Department's similar analysis of 2017 CWS data did not show a
statistically significant difference. But as previously noted,
comparing current employees to current primary independent contractors
may not be indicative of how earnings would change for current
employees who became independent contractors. Nor do such wage-based
comparisons reflect the non-pecuniary attributes of employees and
independent contractors.\102\
---------------------------------------------------------------------------
\101\ See Katz and Kreuger (2018), supra note 45 at 20 (``A
positive hourly wage premium for independent contractors could
reflect a compensating differential for lower benefits and the need
to pay self-employment taxes.'').
\102\ In particular, at least some research reveals significant
non-pecuniary advantages to independent contracting, including
through increased job satisfaction. See ``The State of Independence
in America,'' MBO Partners (2019), https://www.mbopartners.com/state-of-independence/; Chen et al., ``The Value of Flexible Work:
Evidence from Uber Drivers,'' Journal of Political Economy 127:6,
2735-794 (2019); He, H. et al., ``Do Workers Value Flexible Jobs? A
Field Experiment,'' NBER Working Paper No. w25423, (2019), https://ssrn.com/abstract=3311395; McKinsey Global Institute, supra note 74;
Upwork, ``Freelancing in America'' (2019).
---------------------------------------------------------------------------
One potential reason for the variance among the estimates for
independent contractor wages could be error in the measurement of
independent contractor status and earnings, a factor that is present
throughout all of the analyses in this area. As a recent analysis
concluded, ``different data sources provide quite different answers to
the simple question of what is the level and trend of self-employment
in the U.S. economy,'' which suggest substantial measurement error in
at least some data sources.\103\ As noted above, reporting errors by
survey respondents may contribute to measurement error in CWS
data.\104\ Additionally, CWS questions ``were asked only about people
who had already been identified as employed in response to the survey's
standard employment questions and only about their main jobs,'' and
therefore may miss important segments of the population. BLS has
recently acknowledged limitations in the 2017 CWS survey in response to
a GAO audit and is reevaluating how it would measure independent
contractors in the future.\105\
---------------------------------------------------------------------------
\103\ Abraham et al., supra note 74, at 15. Generally,
``[h]ousehold surveys consistently show lower levels of self-
employment than tax data and a relatively flat or declining long-
term trend in self-employment as contrasted with the upward trend
that is evident in tax data.'' Id.; see also id. at 45.
\104\ ``For example, a household survey respondent might fail to
mention informal work that they do not think of as a job, something
that further probing might uncover. To take another example, a
household member who is doing work for a business may be reported as
an employee of that business, even in cases where further probing
might reveal that the person is in fact an independent contractor or
freelancer.'' Id. at 15.
\105\ Specifically, BLS recognized that: (1) The ``CWS measures
only respondents' main jobs . . ., thus potentially missing workers
with nontraditional second or supplementary income jobs''; (2) ``CWS
only asks respondents about their work in the past week and may fail
to capture seasonal workers or workers that supplement their income
with occasional work''; and (3) ``added questions regarding
electronically-mediated employment resulted in a large number of
false positive answers.'' Government Accountability Office,
Contingent Workforce: BLS is Reassessing Measurement of
Nontraditional Workers, Jan. 29, 2019, https://www.gao.gov/assets/700/696643.pdf.
---------------------------------------------------------------------------
Another potential bias in the Department's results could be due to
the exclusion of relevant explanatory variables from the model
specification, including the omission of observable variables that
correlate with hourly earnings. For example, the Department's analysis
of 2017 CWS data used 22 occupation dummy variables but did not control
for a worker's job position within any of the occupations (although it
did control for ``potential experience''). However, as the Department's
Guidance indicates, a statistical comparison of earnings between
workers generally must control for ``job level or grade'' in addition
to experience to ensure the comparison is for workers in similar
jobs.\106\ If, hypothetically, independent contractors on average have
lower job levels (or equivalents) than traditional employees within
each occupation,\107\ the Department's analysis would not be comparing
the hourly earnings of primary independent contractors and employees
who have the same jobs. Instead, the Department would be comparing a
population of relatively low-level independent contractors with a
population that includes both low- and high-level employees.
---------------------------------------------------------------------------
\106\ Department of Labor, Office of Federal Contracting
Compliance Programs, Directive 2018-5, Aug. 24, 2018, https://www.dol.gov/agencies/ofccp/directives/2018-05#ftn.id10.
\107\ For example, because individuals working as independent
contractors are less likely to be in positions with managerial
responsibilities over other workers.
---------------------------------------------------------------------------
The existence of unobservable differences between independent
contractors and employees that are correlated with earnings, such as
productivity, skill, and preference for flexibility also bias
comparison of hourly earnings. For example, independent contractors may
be on average more willing than employees to trade monetary
compensation for increased workplace flexibility, which would obscure
the observability of an earnings premium for independent contractors.
It is possible that independent contractors' hourly earnings premium
may be best observed at the margin, such as comparing a worker's
behavior when deciding between two similar positions, one as an
employee and one as an independent contractor.
Labor market frictions and personal preferences facing both
employers and workers may further prevent a clear detection of a full
picture of any earnings premium. Employees that transition to
independent contractor classification may prefer monetary compensation
over employer-provided benefits (e.g., subsidies for health insurance
when they already have other coverage).\108\ The non-pecuniary benefits
of independent contracting, such as workplace flexibility, may impact
the observability of an earnings premium. Specifically, a range of
research shows that workers are willing to accept lower wages in
exchange for increased flexibility.\109\
---------------------------------------------------------------------------
\108\ Research using hedonic wage models has found mixed results
on the trade-off between pay and benefits, with some researchers
finding a positive correlation between increased pay and benefits,
rather than a trade-off. See Simon, K. (2001), Displaced workers and
employer-provided health insurance: Evidence of a wage/fringe
benefit tradeoff? Int J Health Care Finance Econ., (3-4): 249-71.
https://www.ncbi.nlm.nih.gov/pubmed/14625928.
\109\ He, H. et al. 2019. Do Workers Value Flexible Jobs? A
Field Experiment. NBER Working Paper No. w25423. https://ssrn.com/abstract=3311395.
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An additional consideration is that minimum wage and overtime pay
would no longer apply if workers shift from employee status to
independent contractor status. The 2017 CWS data
[[Page 60630]]
indicate that, before conditioning on covariates, independent
contractors under the narrower definition of primary, active work are
more likely than employees to report earning less than the FLSA minimum
wage of $7.25 per hour (8 percent for self-employed independent
contractors, 5 percent for other independent contractors, and 2 percent
for employees). That data further indicated that, before conditioning
on covariates, primary independent contractors are more likely to work
overtime at their main job (30 percent for self-employed independent
contractors and 19 percent for other independent contractors versus 18
percent for employees). The Department was unable to determine whether
these differences were the result of differences in worker
classification, as opposed to other factors.
E. Costs
The Department estimated that regulatory familiarization costs will
total $370.9 million in Year 1.
1. Regulatory Familiarization Costs
Regulatory familiarization costs represent direct costs to
businesses and current independent contractors associated with
reviewing the new regulation. To estimate the total regulatory
familiarization costs, the Department used (1) the number of
establishments, government entities, and current independent
contractors; (2) the wage rates for the employees and for the
independent contractors reviewing the rule; and (3) the number of hours
that it estimates employers and independent contractors will spend
reviewing the rule. This section presents the calculation for
establishments first and then the calculation for independent
contractors.
It is not clear whether regulatory familiarization costs are a
function of the number of establishments or the number of firms.\110\
Presumably, the headquarters of a firm will conduct the regulatory
review for businesses with multiple locations, and may also require
some locations to familiarize themselves with the regulation at the
establishment level. Other firms may either review the rule to
consolidate key takeaways for their affiliates or they may rely
entirely on outside experts to evaluate the rule and provide the
relevant information to their organization (e.g., a chamber of
commerce). The Department used the number of establishments to estimate
the fundamental pool of regulated entities--which is larger than the
number of firms. This assumes that regulatory familiarization occurs at
both the headquarters and establishment levels.
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\110\ An establishment is commonly understood as a single
economic unit, such as a farm, a mine, a factory, or a store, that
produces goods or services. Establishments are typically at one
physical location and engaged in one, or predominantly one, type of
economic activity for which a single industrial classification may
be applied. An establishment contrasts with a firm, or a company,
which is a business and may consist of one or more establishments.
See BLS, ``Quarterly Census of Employment and Wages: Concepts,''
https://www.bls.gov/opub/hom/cew/concepts.htm.
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There may be differences in familiarization cost by the size of
establishments; however, the analysis does not compute different costs
for establishments of different sizes. Furthermore, the analysis does
not revise down for states where the laws may more stringently limit
who qualifies as an independent contractor (such as California). To
estimate the number of establishments incurring regulatory
familiarization costs, the Department began by using the Statistics of
U.S. Businesses (SUSB) to define the total pool of establishments in
the United States.\111\ In 2017, the most recent year available, there
were 7.86 million establishments. These data were supplemented with the
2017 Census of Government that reports 90,075 local government
entities, and 51 state and federal government entities.\112\ The total
number of establishments and governments in the universe used for this
analysis is 7,950,800.
---------------------------------------------------------------------------
\111\ U.S. Census Bureau, 2017 SUSB Annual Data Tables by
Establishment Industry. https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.
\112\ U.S. Census Bureau, 2017 Census of Governments. https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------
The applicable universe used by the Department for assessing
familiarization costs of this proposed rule is all establishments that
engage independent contractors, which is a subset of the universe of
all establishments. The Department estimates the impact of regulatory
familiarization based upon assessment of the regulated universe. For
the Department's recent Joint Employer Status under the Fair Labor
Standards Act, Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees, and
Regular Rate Under the Fair Labor Standards Act rulemakings, it
estimated that the regulated universe comprised all establishments
because the rules were broadly applicable to every employer. For those
rules, the Department estimated familiarization costs by assuming each
establishment would review each rule. Because the proposed rule affects
only some establishments, i.e., those that do or may face an
independent contractor versus employee classification determination,
the Department accordingly reduces the estimated pool to better
estimate the establishments affected by the rule by assessing
regulatory familiarity costs only for those establishments that engage
independent contractors.
In 2019, Lim et al. used extensive IRS data to model the
independent contractor market, finding that 34.7 percent of firms have
any independent contractors.\113\ These data are based on annual tax
filings, so the dataset includes firms that may contract for only parts
of a year. This figure forms the foundation of the multiplier used in
this analysis. The Department requests public comments and data on
these assumptions.
---------------------------------------------------------------------------
\113\ Table 10: Firm sample summary statistics by year (2001-
2015), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
---------------------------------------------------------------------------
OMB Circular A-4 instructs that regulatory impact analyses
establish a baseline, usually a ``no action'' baseline, to represent
what the world is expected to be like in the absence of the proposed
rule.\114\ In the absence of this proposed rule, establishments that do
not currently have any independent contractors but are looking to hire
one or more will need to familiarize themselves with the current legal
framework.\115\ Accordingly, firms that do not currently use
independent contractors are not counted in this universe of employers;
however, to allow for an error margin, the Department is using a
rounded 35 percent of the total number of establishments defined above
(7,950,800), resulting in 2,782,780 establishments estimated to incur
familiarization costs.
---------------------------------------------------------------------------
\114\ OMB Circular A-4, https://www.reginfo.gov/public/jsp/Utilities/circular-a-4_regulatory-impact-analysis-a-primer.pdf.
\115\ An added dimension is that the proposed rule is expected
to provide significant clarity, which would result in time and cost
savings (net of regulatory familiarization costs) for those outside
the pool of firms with existing independent contractor
relationships. These (net) cost savings are not included in this
analysis, consistent with this analysis' treatment of resulting
growth in the independent contractor universe.
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The Department assumes that a Compensation, Benefits, and Job
Analysis Specialist (SOC 13-1141) (or a staff member in a similar
position) will review the rule.\116\ According to the
[[Page 60631]]
Occupational Employment Statistics (OES), these workers had a mean wage
of $33.58 per hour in 2019 (most recent data available). Given the
proposed clarification to the Department's interpretation of who is an
employee and who is an independent contractor under the FLSA, the
Department assumes that it will take on average about 1 hour to review
the rule as proposed. The Department believes that an hour, on average,
is appropriate, because while some establishments will spend longer
than one hour to review the rule, many establishments may rely on
third-party summaries of the changes or spend little or no time
reviewing the rule. Assuming benefits are paid at a rate of 46 percent
of the base wage, and overhead costs are 17 percent of the base wage,
the reviewer's effective hourly rate is $54.74; thus, the average cost
per establishment conducting regulatory familiarization is $54.74.
Therefore, regulatory familiarization costs to businesses in Year 1 are
estimated to be $152.3 million ($54.74 x 2,782,780) in 2019 dollars.
---------------------------------------------------------------------------
\116\ A Compensation/Benefits Specialist ensures company
compliance with federal and state laws, including reporting
requirements; evaluates job positions, determining classification,
exempt or non-exempt status, and salary; plans, develops, evaluates,
improves, and communicates methods and techniques for selecting,
promoting, compensating, evaluating, and training workers. See BLS,
``13-1141 Compensation, Benefits, and Job Analysis Specialists,''
https://www.bls.gov/oes/current/oes131141.htm.
---------------------------------------------------------------------------
For regulatory familiarization costs for independent contractors,
the Department used its estimate of 18.9 million independent
contractors and assumed each independent contractor will spend 15
minutes to review the regulation. The time estimates used for
independent contractors is estimated to be smaller than for
establishments. This difference is in part because the Department
believes independent contractors are likely to rely on summaries of the
key elements of the rule change published by the Department, worker
advocacy groups, media outlets, and accountancy and consultancy firms,
as has occurred with other rulemakings. Furthermore, the repercussions
for independent contractors are smaller (i.e., the costs associated
with misclassification tend to fall on establishments). This time is
valued at $46.36, which is the mean hourly wage rate for independent
contractors in the CWS, $27.27, with an additional 46 percent benefits
and 17 percent for overhead, then updated to 2019 dollars.
The estimate of 18.9 million independent contractors captures the
universe of workers over a one-year period. Using this figure for the
overall cost estimate results in an artificially high value because it
includes workers who would have otherwise been included in the baseline
case without the proposed rule and thus spent time familiarizing
themselves with the legal framework in the matter of course, without
incurring a supplementary cost. Furthermore, the Department believes
that it is probable that independent contractors would review the
regulation only when they had reason to believe that the benefits would
outweigh the costs incurred in familiarizing themselves with the rule,
and since this analysis does not attempt to calculate those economic
benefits it is possible that the costs presented in this section are
overestimated.\117\
---------------------------------------------------------------------------
\117\ For example, independent contractors in states with
classification frameworks that are known to be more stringent than
the existing FLSA classification framework, such as in California,
may not review the rule since it would be unlikely to affect their
classification.
---------------------------------------------------------------------------
The total one-time regulatory familiarization costs for independent
contractors are estimated to be $218.6 million. The total one-time
regulatory familiarization costs for establishments and independent
contractors are estimated to be $370.9 million.
Regulatory familiarization costs in future years are assumed to be
de minimis. Similar to the baseline case for employers, independent
contractors would continue to familiarize themselves with the
applicable legal framework in the absence of the rule, so this proposed
rulemaking--anticipated to provide more clarity--is not expected to
impose costs after the first year.\118\ This amounts to a 10-year
annualized cost of $43.5 million at a discount rate of 3 percent or
$52.8 million at a discount rate of 7 percent.
---------------------------------------------------------------------------
\118\ As explained below, the Department considers that the
regulation may produce benefits along this dimension in future years
by simplifying the regulatory environment.
---------------------------------------------------------------------------
2. Other Costs
There may be other costs associated with this NPRM that have not
been quantified due to uncertainties or data limitations. The
Department invites public comments and data to address this issue.
F. Cost Savings
This NPRM is expected to result in cost savings to firms and
workers. The Department has quantified only the cost savings from
increased clarity and reduced litigation. The other areas of
anticipated cost savings were not estimated due to uncertainties or
data limitations. The Department welcomes data and comments on the
potential cost savings and benefits to society.
1. Increased Clarity
This proposed rule is expected to increase clarity concerning
whether a worker is classified as an employee or as an independent
contractor under the FLSA. This would reduce the burden faced by
employers, potential employers, and workers to understand the
distinction and how the working relationship should be classified. It
is unclear exactly how much time would be saved, but the Department
provides some quantitative estimates to provide a sense of the
magnitude. To quantify this benefit, the following variables need to be
defined and estimated: (1) The number of new employer-worker
relationships being assessed to determine the appropriate
classification; (2) the amount of time saved per assessment; and (3) an
average wage rate for the time spent. The Department estimates this
will result in a $447.2 million in savings annually. The Department
requests comments on these assumptions and calculations.
The Department began with its estimate of the number of current
independent contractors as the basis for estimating the number of new
relationships. As discussed in section VI.C, according to the CWS,
there are 10.6 million workers who are independent contractors on their
primary job. Adjusting this figure to account for independent
contractors on their secondary job results in 18.9 million independent
contractors. According to Lim et al. (2019), in 2016 the average number
of 1099-MISC forms issued per independent contractor was 1.43.
Therefore, the Department assumes the average independent contractor
has 1.43 jobs per year.\119\ This number does not account for the
workers who do not file taxes, a recognized limitation in the cited
study. Because it is unclear whether those who do not file taxes would
have a higher or lower number jobs per year, the Department does not
believe that this biases the estimate in either direction. Multiplying
these two numbers results in an estimated 27.0 million new independent
contractor relationships each year.\120\
---------------------------------------------------------------------------
\119\ Lim et al., supra note 61, at 61.
\120\ The Department in this analysis did not incorporate
estimates of potential growth in independent contracting due to
uncertainty. For example, the trend in independent contracting
varies significantly based on the source. Additionally, the impact
of this rule on the prevalence of independent contracting is
uncertain. Lastly, state laws, such as those in California discussed
below, may have significant impacts on the prevalence of independent
contracting, which would make historical growth rates potentially
inappropriate.
---------------------------------------------------------------------------
The independent contracting sector is characterized by churn. In
their annual State of Independence in America 2019 report, MBO
Partners, a leading American staffing firm, finds that 47.8
[[Page 60632]]
percent of U.S. adults reported working as an independent contractor at
some point in their career; they estimate that figure will reach 53
percent in the next five years.\121\ This fits with the range of
estimates for the size of the independent contractor universe presented
in section VI.C. Thus, it is assumed that over the ten-year time
horizon of this analysis, millions of Americans will choose independent
contractor work either for the first time or return to it. This churn
is not explicitly estimated for use in this analysis, but it provides a
qualitative rationale for not attempting to taper the expected size of
the independent contractor universe over time. The Department requests
comments and data on these assumptions.
---------------------------------------------------------------------------
\121\ State of Independence in America, MBO Partners (2019).
https://www.mbopartners.com/state-of-independence/.
---------------------------------------------------------------------------
A subset of new independent contractor relationships may have time
savings associated with the proposed rule. Such a reduction is
difficult to quantify because it is unclear how many establishments and
independent contractors will realize benefits of increased clarity. It
is also possible that the increased clarity of the classification
process will lead to compound effects that generate far greater
benefits over time. Nonetheless, because it is possible that only a
subset of contracts would receive the cost savings associated with
increased clarity, the Department has reduced the number of contracts
in the estimate by 25 percent. This results in 20.2 million contracts
with cost savings to both the employer and the independent
contractor.\122\ The Department requests comments and data on this
assumption.
---------------------------------------------------------------------------
\122\ 18.9 million ICs x 1.43 contracts per year x (1-0.25
possible reduction in clarity benefits) = 20.2 million.
---------------------------------------------------------------------------
Per each new contract with time savings, the Department has assumed
that employers would save 20 minutes of time and independent
contractors would save 5 minutes.123 124 These numbers are
small because they represent the marginal time savings for each
contract, not the entire time necessary to identify whether an
independent contractor relationship holds. For employers, this time is
valued at a loaded hourly wage rate of $54.74. This is the mean hourly
rate of Compensation, Benefits & Job Analysis Specialists (13-1141)
from the OES multiplied by 1.63 to account for benefits and overhead.
For independent contractors, this time is valued at $46.36 per hour
(mean wage rate for independent contractors in the CWS of $27.29 with
the amount of benefits and overhead paid by employers for employees,
then adjusted to 2019 dollars using the GDP deflator).
---------------------------------------------------------------------------
\123\ These time savings are based on a 33 percent assumed
reduction in the estimated familiarization time per contract for
both independent contractors (15 minutes) and employers (1 hour).
\124\ The Department requests comment on whether more meaningful
estimates would distinguish between time periods (with, for example,
relatively large upfront savings at the time contracts are arranged
and smaller ongoing amounts) and/or would vary by affected industry.
---------------------------------------------------------------------------
Using these numbers, the Department estimates that employers will
save $369.0 million annually and independent contractors will save
$78.1 million annually due to increased clarity (Table 4). In sum, this
is estimated to be a $447.2 million savings. The Department assumes the
parameters used in this cost savings estimate will remain constant over
time. This assumes no growth in independent contracting, no real wage
growth, and no subsequent innovation in the employer-worker
relationship. These assumptions, while highly unlikely to be true in
reality, facilitate simplicity of calculation. The annualized savings
over both a 10-year horizon and in perpetuity, with both the 3 percent
and 7 percent discount rates is $447.2 million.
In addition to increased clarity when assessing whether each
relationship qualifies as an independent contractor or employment
relationship, there may also be upfront time savings for new entrants
who must familiarize themselves with the definition of an employee as
compared to an independent contractor, and who now have clearer
guidance to aid in that understanding. This would apply to new
independent contractors, new establishments, and current establishments
that are considering hiring independent contractors for the first time.
The Department did not quantify this benefit due to uncertainty and the
difficulty of determining reliable variables. However, such benefits
are expected to be real and significant. The Department requests
comments and data to address these constraints.
Table 4--Cost Savings for Increased Clarity to Employers and Independent
Contractors
------------------------------------------------------------------------
Parameter Value
------------------------------------------------------------------------
Number of new relationships (per year):
Independent contractors............................... 18,858,000
Number of jobs per contractor......................... 1.43
New independent contractor jobs....................... 26,966,940
Adjustment factor..................................... 75%
---------------
Total................................................. 20,225,205
Time savings per job (minutes):
Employers............................................. 20
Independent contractors............................... 5
Value of time:
Employers............................................. $54.74
Independent contractors............................... $46.36
Total savings:
Employers............................................. $369,042,574
Independent contractors............................... $78,137,248
---------------
Total................................................. $447,179,822
------------------------------------------------------------------------
2. Reduced Litigation
These proposed changes are expected to result in decreased
litigation due to increased clarity and reduced misclassification. The
Department provides analysis here to assess the potential magnitude of
this cost savings. The methodology of this section mirrors previous
final rules promulgated in recent years. The Department requests
comments on the assumptions in this section.\125\
---------------------------------------------------------------------------
\125\ The Department applied a similar approach to litigation
costs in the 2019 final rule Defining and Delimiting the Exemptions
for Executive, Administrative, Professional, Outside Sales and
Computer Employees, 81 FR 51230 (2019).
---------------------------------------------------------------------------
The Department estimates that, due to increased clarity on
independent contractor status, $33.6 million in litigation costs will
be avoided per year. To reach this estimate, the Department determined
that there were 6,711 federal cases relating to the FLSA filed in
2019.\126\ Of these cases, the Department estimates that 7 percent of
these cases relate to independent contractor status. To determine this
percentage, the Department reviewed a random sample of 500 of the FLSA
cases closed in 2014 (8,256 cases).\127\ Of those cases, the Department
identified 35 cases within this sample that related to independent
contractor status. This ratio was applied to the 6,711 FLSA cases from
2019 to
[[Page 60633]]
estimate 470 cases related to independent contractor status. The
Department assumes that the increased clarity of the proposed rule
would reduce litigation in this area by 10 percent as stakeholders
would better understand and be better able to agree on classification
determinations. This estimate is based on an initial Departmental
review of FLSA cases, and the Department requests comments and data to
help inform and refine this assumption. Multiplying these variables
results in an estimated 47 cases avoided annually.
---------------------------------------------------------------------------
\126\ Downloaded from Public Access to Court Electronic Records
(PACER).
\127\ The Department used data from 2014 already obtained for
use in the analysis performed for the 2019 overtime and regular rate
final rules. See 84 FR 51230, 51280-81 (reduced litigation estimate
for the final rule updating the FLSA's white collar exemptions at 29
CFR part 541); 84 FR 68736, 68767-68 (reduced litigation estimate
for the final rule updating the FLSA's ``regular rate'' regulations
at 29 CFR part 778). The Department invites comment on its
methodology but has no reason to believe that a more recent sample
would materially affect the results in this analysis.
---------------------------------------------------------------------------
Next, the Department applied a previous estimate of litigation
costs of $654,182 per case. To obtain this estimate, the Department
examined a selection of 56 FLSA cases concluded between 2012 and 2015
that contained litigation cost information to estimate the average
costs of litigation.\128\ The Department looked at records of court
filings in the Westlaw Case Evaluator tool and on PACER to ascertain
how much plaintiffs in these cases were paid for attorney fees,
administrative fees, and/or other costs, apart from any monetary
damages attributable to the alleged FLSA violations. After determining
the plaintiff's total litigation costs for each case, the Department
then doubled the figures to account for litigation costs that the
defendant employers incurred. According to this analysis, the average
litigation cost for FLSA cases concluded between 2012 and 2015 was
$654,182. Adjusting for inflation, using the GDP deflator, results in a
value of $715,637 in 2019.\129\
---------------------------------------------------------------------------
\128\ The 56 cases used for this analysis were retrieved from
Westlaw's Case Evaluator database using a keyword search for case
summaries between 2012 and 2015 mentioning the terms ``FLSA'' and
``fees.'' This was not limited to cases associated with independent
contracting. Although the initial search yielded 64 responsive
cases, the Department excluded one duplicate case, one case
resolving litigation costs through a confidential settlement
agreement, and six cases where the defendant employer(s) ultimately
prevailed. Because the FLSA only entitles prevailing plaintiffs to
litigation cost awards, information about litigation costs was only
available for the remaining 56 FLSA cases that ended in settlement
agreements or court verdicts favoring the plaintiff employees.
\129\ These totals may underestimate total litigation costs
because some FLSA cases are heard in state court and thus were not
captured by PACER; some filings are resolved before litigation or by
alternative dispute resolution; and some attorneys representing FLSA
plaintiffs may take a contingency fee atop their statutorily awarded
fees and costs.
---------------------------------------------------------------------------
Applying these figures to the estimated 47 cases that could be
prevented each year due to this rulemaking, the Department estimates
that avoided litigation costs resulting from the rule total $33.6
million per year (2019 dollars).\130\
---------------------------------------------------------------------------
\130\ Using the median litigation cost, rather than the mean,
results in a value of $122,341 (2019 dollars) per case, which for
the estimated 47 annual cases produces a total annual litigation
cost savings of $5.7 million. However, the median values do not
adequately capture the magnitude of the impact resulting from large-
scale litigation cases that are expected to benefit from the clarity
provided in this proposed rule. Therefore, the mean average is used
for this analysis.
---------------------------------------------------------------------------
The Department estimates that annual cost savings associated with
this rule would be $480.8 million ($447.2 million in increased clarity
+ $33.6 million in avoided litigation costs).
3. Other Cost Savings and Benefits
Removing uncertainty improves labor market efficiency by reducing
deadweight loss. As discussed in the need for rulemaking, the
Department believes emerging and innovative economic arrangements that
benefit both workers and business require reasonable certainty
regarding the worker's classification as an independent contractor. The
current legal uncertainty may deter businesses from offering these
arrangements or developing them in the first place.\131\ If so, the
result would be economic deadweight loss: Legal uncertainty prevents
mutually beneficial independent contractor arrangements. This proposed
rule may produce cost savings by reducing deadweight loss. Nonetheless,
due to the abundance of variables at play, the Department has not
attempted to quantify the precise amount of that reduction. The
Department invites data and comments on this topic.
---------------------------------------------------------------------------
\131\ See Pivateau, supra note 26, at 628 (``The continued
demand for innovative work solutions requires a new classification
test. Without clarification, parties will be unwilling to engage in
new or innovative work arrangements.''); see also Hollrah and
Hollrah, ``The Time Has Come for Congress to Finish Its Work on
Harmonizing the Definition of `Employee,' '' 26 J. L. & Pol'y 439
(2018), https://brooklynworks.brooklaw.edu/jlp/vol26/iss2/1/.
---------------------------------------------------------------------------
By decreasing uncertainty and thus potentially opening new
opportunities for firms, this proposed rule may encourage companies to
hire independent contractors whom they otherwise would not have hired.
Eisenach (2010) outlines the potential costs of curtailing independent
contracting.\132\ If independent contracting is expanded due to this
rule, this could generate benefits that may include:
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\132\ J. Eisenach, ``The Role of Independent Contractors in The
U.S. Economy,'' Navigant Economics (2010), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1717932.
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Increased job creation and small business formation.
Increased competition and decreased prices.
A more flexible and dynamic work force, where workers are
able to more easily move to locations or to employers where their labor
and skills are needed.
Eisenach explains several channels through which these efficiency
gains may be achieved. First, by avoiding some fixed employment costs,
it is easier for firms to adjust their labor needs based on
fluctuations in demand. Second, by using pay-for-preference,
independent contractors are incentivized to increase production and
quality. Third, ``contracting can be an important mechanism for
overcoming legal and regulatory barriers to economically efficient
employment arrangements.'' The analysis of these benefits assume that
businesses, especially in other industries, would like to increase
their use of independent contractors, but have refrained from doing so
because of uncertainty regarding who can appropriately be engaged as an
independent contractor under the FLSA. Conversely, significant use of
independent contractors may not be suitable for all industries, thus
limiting the growth in its utilization.
The Department believes this rulemaking may also result in greater
autonomy and job satisfaction for workers. Several surveys have shown
that independent contractors have high job satisfaction.\133\ Using the
CWS, which only considers primary, active contractors, the Department
estimates that of independent contractors with valid responses, 83
percent prefer their current arrangement rather than being an employee,
compared with only 9 percent who would prefer an employment arrangement
(the remaining 8 percent responded that it depends). Additionally, the
main reasons they work as independent contractors demonstrate that they
enjoy the benefits of being an independent contractor: 31 percent enjoy
being their own boss or the independence it allows, and 27 percent
enjoy the scheduling flexibility.\134\ Additionally, McKinsey Global
Institute found that ``[i]ndependent workers report higher levels of
satisfaction on many aspects of their work life than traditional
workers.'' \135\ The McKinsey Global
[[Page 60634]]
Institute examined workers who work independently by choice and those
who do so by necessity (such as needing supplemental income) and found
that both groups report being happy with the flexibility and autonomy
of their work.\136\ Similarly, Kelly Services found that ``free
agents''--i.e., workers who ``derive their primary income from
independent work and actively prefer it''--report higher satisfaction
than traditional workers concerning overall employment situation; work-
life balance; opportunities to expand skills; and opportunities to
advance career.\137\
---------------------------------------------------------------------------
\133\ See, e.g., ``The State of Independence in America,'' MBO
Partners (2019) https://www.mbopartners.com/state-of-independence/.
\134\ The Department used PES26IC to identify preferred work
arrangement and PES26IR to identify the reason they work as an
independent contractor.
\135\ McKinsey Global Institute, supra note 74 at 11. A 2009 Pew
survey similarly found that self-employed workers are
``significantly more satisfied with their jobs than other workers.''
Rich Morin, ``Job Satisfaction among the Self-Employed,'' Pew
Research Center, (September 2009), http://pewsocialtrends.org/pubs/743/job-satisfaction-highest-among-self-employed. In particular, 39
percent of self-employed workers reported being ``completely
satisfied'' with their jobs, compared with 28 percent of employees.
Id.
\136\ McKinsey Global Institute, supra note 74 at 10. The
McKinsey survey found that, while ``those working independently out
of necessity report being happier with the flexibility and content
of the work,'' they also report being ``less satisfied with their
level of income level and their income security.'' Id. This
rulemaking is unlikely to negatively impact the average income level
of such workers by encouraging independent contractor opportunities
because there is no statistical evidence that independent contractor
earn less than employees. To the contrary and as discussed above,
there are data indicating that independent contractors, on average,
may earn higher hourly wages than employees. Nor is rulemaking
likely to negatively impact workers' income security, on average.
The Department believes income security is best achieved by removing
barriers that prevent laid-off Americans from finding paid work,
including as independent contractors. See 151 Ph.D. Economists and
Political Scientists in California, ``Open Letter to Suspend
California AB-5'' (April 14, 2020). This lesson may be all the
greater in light of the COVID-19 emergency.
\137\ Kelly Services, ``Agents of Change'' (2015), https://www.kellyservices.com/global/siteassets/3-kelly-global-services/uploadedfiles/3-kelly_global_services/content/sectionless_pages/kocg1047720freeagent20whitepaper20210x21020final2.pdf.
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By clarifying that control and opportunity for profit are the core
economic reality factors, this proposed rule is likely to encourage the
creation of independent contractor jobs that provide autonomy and
entrepreneurial opportunities that workers find satisfying. For the
same reason, this proposed rule likely would diminish the incidence of
independent contractor jobs that lack these desired characteristics.
Thus, the Department expects this NPRM, if finalized, to result in more
independent contractor opportunities which bring with them autonomy and
job satisfaction. The benefits of worker autonomy and satisfaction
obviously ``are difficult or impossible to quantify,'' but they
nonetheless merit consideration.
G. Regulatory Alternatives
When proposing an economically significant rule, Executive Order
12866 requires agencies to conduct ``[a]n assessment, including the
underlying analysis, of costs and benefits of potentially effective and
reasonably feasible alternatives to the planned regulation.'' \138\
Here, in addition to ``the alternative of not regulating,'' \139\ the
Department considered three alternatives to the proposed rule, listed
below from least to most restrictive of independent contracting: \140\
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\138\ Exec. Order No. 12866 Sec. 6(a)(3)(C)(iii), 58 FR 51741.
\139\ Exec. Order No. 12866 Sec. 1, 58 FR 51735.
\140\ OMB guidance advises that, where possible, agencies should
analyze at least one ``more stringent option'' and one ``less
stringent option'' to the proposed approach. OMB Circular A-4 at 16.
(1) Codification of the common law control test, which applies in
distinguishing between employees and independent contractors under
various other federal laws; \141\
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\141\ See 26 U.S.C. 3121(d)(2) (generally defining the term
``employee'' under the Internal Revenue Code as ``any individual
who, under the usual common law rules applicable in determining the
employer-employee relationship, has the status of an employee''); 42
U.S.C. 410(j) (similarly defining ``employee'' under the Social
Security Act); see also, e.g., Community for Creative Non-Violence
v. Reid, 490 U.S. 730, 751 (1989) (applying ``principles of general
common law of agency'' to determine ``whether . . . work was
prepared by an employee or an independent contractor'' under the
Copyright Act of 1976); Darden, 503 U.S. 318 (holding that ``a
common-law test'' should resolve employee/independent contractor
disputes under ERISA).
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(2) codification of the traditional six-factor ``economic reality''
balancing test, as recently articulated in WHD Opinion Letter FLSA2019-
6; and
(3) codification of the ``ABC'' test, as adopted by the California
Supreme Court in Dynamex Operations W., Inc. v. Superior Court, 416
P.3d 1 (Cal. 2018).\142\
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\142\ See also Hargrove v. Sleepy's, LLC, 106 A.3d 449, 465
(N.J. 2015) (extending the ABC test to state wage claims in New
Jersey).
Although the Department recognizes that legal limitations prevent some
of these alternatives from being actionable, the Department nonetheless
presents them as regulatory alternatives in accord with OMB
guidance.\143\ These three regulatory alternatives are analyzed below
in qualitative terms, due to data constraints and inherent uncertainty
in measuring the exact stringency of multi-factor legal tests and
likely responses from the regulated community. The Department welcomes
comment on these regulatory alternatives, as well as suggestions
regarding any other potential alternatives.
---------------------------------------------------------------------------
\143\ OMB Circular A-4 advises that agencies ``should discuss
the statutory requirements that affect the selection of regulatory
Approach. If legal constraints prevent the selection of a regulatory
action that best satisfies the philosophy and principles of
Executive Order 12866, [agencies] should identify these constraints
and estimate their opportunity cost. Such information may be useful
to Congress under the Regulatory Right-to-Know Act.''
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1. Codifying a Common Law Control Test
The least stringent alternative to the proposed rule's streamlined
``economic reality'' test would be to adopt a common law control test,
as is generally used to determine independent contractor classification
questions arising under the Internal Revenue Code and various other
federal laws.\144\ The overarching focus of the common law control test
is ``the hiring party's right to control the manner and means by which
[work] is accomplished,'' Reid, 490 U.S. at 751, but the Supreme Court
has explained that ``other factors relevant to the inquiry [include]
the skill required; the source of the instrumentalities and tools; the
location of the work; the duration of the relationship between the
parties; whether the hiring party has the right to assign additional
projects to the hired party; the extent of the hired party's discretion
over when and how long to work; the method of payment; the hired
party's role in hiring and paying assistants; whether the work is part
of the regular business of the hiring party; whether the hiring party
is in business; the provision of employee benefits; and the tax
treatment of the hired party.'' Id. at 751-52.
---------------------------------------------------------------------------
\144\ See supra note 141.
---------------------------------------------------------------------------
Although the common law control test considers many of the same
factors as those identified in the proposed rule's ``economic reality''
test (e.g., skill, length of the working relationship, the source of
equipment and materials, etc.), courts generally recognize that,
because of its focus on control, the common law test is more permissive
of independent contracting arrangements than the economic reality test,
which more broadly examines the economic dependence of the worker. See,
e.g., Diggs v. Harris Hospital-Methodist, Inc., 847 F.2d 270, 272 n. 1
(5th Cir. 1988) (observing that ``[t]he `economic realities' test is a
more expansive standard for determining employee status'' than the
common law control test). Thus, if a common law control test determined
independent contractor status under the FLSA, it is possible that some
workers presently classified as FLSA employees could be reclassified as
independent contractors, increasing the overall number of independent
[[Page 60635]]
contractors and reducing the overall number of employees. The
Department is unable to estimate the exact magnitude of such a
reclassification effect, but believes that the vast majority of FLSA
employees would remain FLSA employees under a common law control
test.\145\
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\145\ As discussed earlier in section IV(D)(7), a review of
federal appellate case law since 1975 shows that the classification
outcome of almost every FLSA employee/independent contractor dispute
has aligned with the court's specific finding on the control factor.
Thus, adoption of a common law control test would be unlikely to
alter most FLSA worker classifications, including those close enough
to merit federal appellate litigation under the economic reality
test.
---------------------------------------------------------------------------
Codifying a common law control test would create a simpler legal
regime for regulated entities interested in receiving services from an
independent contractor, thereby reducing confusion, compliance costs,
and legal risk for entities interested in doing business with
independent contractors. Entities would not, for example, have to
understand and apply one employment classification standard for tax
purposes and a different employment classification standard for FLSA
purposes. Thus, adopting the common law control test would likely
increase perpetual cost savings for regulated entities attributable to
improved clarity and reduced litigation as compared to the proposed
rule. It could, on the other hand, impose burdens on workers who might
prefer to be employees subject to FLSA protections.
The Department notes that the Supreme Court has interpreted the
``suffer or permit'' language in section 3(g) of the FLSA as demanding
a broader definition of employment than that which exists under the
common law. See, e.g., Darden, 503 U.S. at 326; Portland Terminal Co.,
330 at 150-51. Accordingly, the Department believes it is legally
constrained from adopting the common law control test absent
Congressional legislation to amend the FLSA.
2. Codifying the Six-Factor ``Economic Reality'' Balancing Test
As discussed earlier in section II(B), WHD has long applied a
multifactor ``economic reality'' balancing test to distinguish between
employees and independent contractors in enforcement actions and
subregulatory guidance. Recently articulated in WHD Opinion Letter
FLSA2019-6, the six factors presently considered in WHD's multifactor
balancing test are as follows:
(1) The nature and degree of the potential employer's control;
(2) The permanency of the worker's relationship with the
potential employer;
(3) The amount of the worker's investment in facilities,
equipment, or helpers;
(4) The amount of skill, initiative, judgment, or foresight
required for the worker's services;
(5) The worker's opportunities for profit or loss; and
(6) The extent of integration of the worker's services into the
potential employer's business.
WHD Opinion Letter FLSA2019-6 at 4 (citing Rutherford, 331 U.S. at 730,
and Silk, 331 U.S. at 716).
The Department believes that the six-factor balancing test (as
articulated in WHD Opinion Letter FLSA2019-6) is neither more nor less
permissive of independent contractor relationships as compared to the
streamlined test proposed in this rulemaking. Both tests describe the
``economic dependence'' of the worker at issue as the ultimate inquiry
of the test; both emphasize the primacy of actual practice over
contractual or theoretical possibilities (i.e., the ``economic
reality'' of the work arrangement); and both evaluate the same set of
underlying factors, notwithstanding an emphasis and consolidation of
certain factors under the streamlined test. Notably, like Sec.
795.105(d)(1)(i) of the proposed rule, WHD Opinion Letter FLSA2019-6
advised that certain safety measures and quality control standards do
not constitute ``control'' indicative of an FLSA employment
relationship. See id. at 8 n. 4.
Although codifying this six-factor balancing test would thus impose
a comparably stringent legal standard on the regulated community, the
Department believes, as explained earlier in section III, that the six-
factor balancing test presently used by WHD and most courts would
benefit from clarification, sharpening, and streamlining. For this
reason, the Department believes that codifying such a test would not
yield the perpetual benefits and cost savings discussed earlier in this
analysis, such as improved clarity and reduced FLSA litigation.
Additionally, the Department does not believe that codifying the six-
factor balancing test would reduce initial regulatory familiarization
costs or provide per-contract clarity cost savings, as interested
establishments and independent contractors will likely spend the same
amount of time learning about any new regulatory language addressing
independent contractor status under the FLSA (no regulatory guidance on
the topic currently exists).
3. Codifying California's ``ABC'' Test
The most stringent regulatory alternative to the Department's
proposed rule would be to codify the ``ABC'' test recently adopted
under California's state wage and hour law to distinguish between
employee/independent contractor statuses.\146\ As described by the
California Supreme Court in Dynamex, ``[t]he ABC test presumptively
considers all workers to be employees, and permits workers to be
classified as independent contractors only if the hiring business
demonstrates that the worker in question satisfies each of three
conditions: (a) That the worker is free from the control and direction
of the hirer in connection with the performance of the work, both under
the contract for the performance of the work and in fact; and (b) that
the worker performs work that is outside the usual course of the hiring
entity's business; and (c) that the worker is customarily engaged in an
independently established trade, occupation, or business of the same
nature as that involved in the work performed.'' 416 P.3d at 34
(emphasis in original).\147\ In justifying the adoption of such a
stringent test, the Dynamex court noted the existence of an
``exceptionally broad suffer or permit to work standard'' in
California's wage and hour statute, id. at 31,\148\ as well as ``the
more general principle that wage orders are the type of remedial
legislation that must be liberally construed in a manner that
[[Page 60636]]
serves its remedial purposes.'' Id. at 32.\149\
---------------------------------------------------------------------------
\146\ See Dynamex, 416 P.3d 1; Assembly Bill (``A.B.'') 5, Ch.
296, 2019-2020 Reg. Sess. (Cal. 2019) (codifying the ABC test
articulated in Dynamex); A.B. 2257, Ch. 38, 2019-2020 Reg. Sess.
(Cal. 2020) (retroactively exempting certain professions,
occupations, and industries from the ABC test that A.B. 5 had
codified). The ABC test originated in state unemployment insurance
statutes, but some state courts and legislatures have recently
extended the test to govern employee/independent contractor disputes
under state wage and hour laws. See Keith Cunningham-Parmeter, Gig-
Dependence: Finding the Real Independent Contractors of Platform
Work, 39 N. Ill. U. L. Rev. 379, 408-11 (2019) (discussing the
origins and recent expansion of the ABC test).
\147\ California's ABC test is slightly more stringent than
versions of the ABC test adopted (or presently under consideration)
in other states. For example, New Jersey provides that a hiring
entity may satisfy the ABC test's ``B'' prong by establishing
either: (1) That the work provided is outside the usual course of
the business for which the work is performed, or (2) that the work
performed is outside all the places of business of the hiring
entity. N.J. Stat. Ann. Sec. 43:21-19(i)(6)(A-C). The Department
has chosen to analyze California's ABC test as a regulatory
alternative because businesses subject to multiple standards,
including nationwide businesses, are likely to comply with the most
demanding standard if they wish to make consistent classification
determinations.
\148\ See Cal. Code Regs., tit. 8, Sec. 11090, subd. 2(D) (``
`Employ' means to engage, suffer, or permit to work.''). The Dynamex
court noted that California's adoption of the ``suffer or permit to
work'' standard predated the enactment of the FLSA and was therefore
``not intended to embrace the federal economic reality test'' that
subsequently developed. 416 P.3d at 35.
\149\ See Cal. Code Regs., tit. 8, Sec. 11090, subd. 2(D) (``
`Employ' means to engage, suffer, or permit to work.'').
---------------------------------------------------------------------------
On its face, California's ABC test is far more restrictive of
independent contracting arrangements than any formulation of an
``economic reality'' balancing test, including the proposed rule.
Whereas no single factor necessarily disqualifies a worker from
independent contractor status under an economic reality test, each of
the ABC test's three factors may alone disqualify the worker from
independent contractor status. Thus, adoption of an ABC test to govern
independent contractor status under the FLSA would directly result in a
large-scale reclassification of many workers presently classified as
independent contractors into FLSA-covered employees. This
reclassification effect would be particularly disruptive in industries
that depend on independent contracting arrangements within the ``usual
course of the hiring entity's business,'' such as transportation,
residential construction, cable installation, etc. While some
independent contractors might benefit from reclassification by newly
receiving overtime pay and/or a guaranteed minimum wage, these workers
might also experience a reduction in work hours or diminished
scheduling flexibility as their new employers attempt to avoid
incurring additional expenses for overtime work. Others workers,
particularly off-site workers who operate free from the business'
direct control and supervision, might see their work arrangements
terminated by businesses unwilling or unable to assume the financial
burden and legal risk of the FLSA's overtime pay requirement. Some
businesses in California responded to the increased legal risk of
treating certain workers as independent contractors under the ABC test
by terminating their relationships with workers,\150\ thereby
eliminating some of the flexible work arrangements sought, for example,
by parents and others who must balance work and family
obligations.\151\ The Department believes adopting the ABC test as the
FLSA's generally applicable standard for distinguishing employees from
independent contractors would be unduly restrictive and disruptive to
the economy. The fact that California recently enacted numerous
exemptions to the ABC test highlights the test's limitations as a
possible alternative under the FLSA.\152\
---------------------------------------------------------------------------
\150\ See, e.g., Marc Tracy and Kevin Draper, ``Vox Media to Cut
200 Freelancers, Citing California Gig-Worker Law,'' New York Times
(Dec. 16, 2019), www.nytimes.com/2019/12/16/business/media/vox-media-california-job-cuts.html; Dawn Kawamoto, ``Exclusive: Fast-
growing S.F. company to exit market as result of state's new gig
worker law,'' San Francisco Business Times (Jan. 3, 2020),
www.bizjournals.com/sanfrancisco/news/2020/01/03/exclusive-fast-growing-s-f-company-to-exit-market.html; Sophia Bollag and Dale
Kasler, ``California Workers Blame New Labor Law for Lost Jobs.
Lawmakers are Scrambling to Fix It,'' Sacramento Bee (Feb. 10,
2020), www.sacbee.com/news/politics-government/capitol-alert/article239822623.html.
\151\ See, e.g., Elaine Pofeldt, ``California's AB-5 leaves
Women Business Owners Reeling,'' Forbes (Jan. 19, 2020),
www.forbes.com/sites/elainepofeldt/2020/01/19/californias-ab5-leaves-women-business-owners-reeling/#460fb6f05ef3.
\152\ See A.B. 2257, Ch. 38, 2019-2020 Reg. Sess. (Cal. 2020).
---------------------------------------------------------------------------
In any event, the Department believes it is legally constrained
from adopting California's ABC test because the Supreme Court has
instituted the economic reality test as the relevant standard for
determining workers' classification under the FLSA as an employee or
independent contractor. See Tony & Susan Alamo, 471 U.S. at 301 (``The
test of employment under the Act is one of `economic reality.' '');
Whitaker House, 366 U.S. at 33 (1961) (`` `economic reality' rather
than `technical concepts' is . . . the test of employment'' under the
FLSA) (citing Silk, 331 U.S. at 713; Rutherford Food, 331 U.S. at
729)).
The California Supreme Court explicitly recognized that the ABC
test defines ``employee'' more broadly than the FLSA when it explained
that the ABC test rests on a ``standard in California wage orders
[that] was not intended to embrace the [FLSA's] economic reality test''
and was instead ``intended to provide broader protection than that
accorded workers under the [FLSA] standard.'' Dynamex, 416 P.3d at
35.\153\ Moreover, the Supreme Court has stated that the existence of
employment relationships under the FLSA ``does not depend on such
isolated factors'' as the three independently determinative factors in
the ABC test, ``but rather upon the circumstances of the whole
activity.'' Rutherford Food, 331 U.S. at 730. Because the ABC test is
therefore inconsistent with Supreme Court precedent interpreting the
FLSA, the Department concludes it could not adopt the ABC test.
---------------------------------------------------------------------------
\153\ The ABC test would define ``employee'' to include workers
who have been held by the Supreme Court to be independent
contractors under the economic reality test. For instance, under the
ABC test, the term ``employee'' would include individuals who
perform work that falls within the usual course of the hiring
entity's business, regardless of all other considerations. Even
though transporting coal falls within a coal company's usual course
of business, the United States Supreme Court held in Silk that truck
drivers hired by a coal company to transport coal were independent
contractors rather than employees. 331 U.S. at 719. Similarly, the
Court held in Bartels that musicians were independent contractors
rather than employees of the music hall where they played, even
though playing music falls within the music hall's usual course of
business. 332 U.S. at 130.
---------------------------------------------------------------------------
Although the ABC test is ``a simpler, more structured test'' than a
multifactor balancing test and would likely lead to more consistent
classification outcomes, Dynamex, 416 P.3d at 34, legal constraints and
the disruptive economic effects of adopting such a stringent standard
advises against its adoption in the FLSA context. As mentioned earlier,
the Department has engaged in this rulemaking to clarify the existing
standard, not to radically transform it.
H. Summary of Impacts
In summary, the Department believes that this rule will increase
clarity regarding whether a worker is classified as an employee or an
independent contractor under the FLSA. This clarity could result in an
increased use of independent contractors. The costs and benefits to a
worker being classified as an independent contractor are discussed
throughout this analysis, and are summarized below.
The Department believes that there are real benefits to the use of
independent contractor status, for both workers and employers.
Independent contractors generally have greater autonomy and more
flexibility in their hours, providing them more control over the
management of their time. The use of independent contracting for
employers allows for a more flexible and dynamic workforce, where
workers provide labor and skills where and when they are needed.
Independent contractors may more easily work for multiple companies
simultaneously, have more control over their labor-leisure balance, and
more explicitly define the nature of their work. Independent
contractors also appear to have higher job satisfaction.
An increase in the number of job openings for independent
contractors can also have benefits for the economy as a whole.
Increased job creation and enhanced flexibility in work arrangements
are critical benefits during periods of economic uncertainty, such as
the current COVID-19 pandemic.
There are unique challenges that face independent contractors
compared to employees subject to the FLSA. Independent contractors are
not subject to the protections of the FLSA, such as minimum wage and
overtime pay. Independent contractors generally do not receive the same
employer-provided benefits as employees, such as health insurance,
retirement contributions, and
[[Page 60637]]
paid time off.\154\ Independent contractors may have a higher tax
liability than employees, as they are legally obligated to pay both the
employee and employer shares of the Federal Insurance Contributions Act
(FICA) taxes. However, economists recognize that payroll taxes
generally are subtracted from the wage rate of employees. Employers
also cover unemployment insurance and workers' compensation taxes for
their employees. These costs are also components of businesses' worker
costs, and employee wages are expected to reflect that accordingly.
Independent contractors do not pay these taxes nor are they generally
protected by these insurance programs, but there are private insurance
companies that offer equivalent coverage.
---------------------------------------------------------------------------
\154\ In some situations, independent contractors may be
provided with benefits similar to those provided to employees.
---------------------------------------------------------------------------
Because the Department does not know how many workers may shift
from employee status to independent contractor status, or how many
people who were previously unemployed or out of the labor force will
gain work as an independent contractor, these costs and benefits have
not been quantified. The Department welcomes comments and data on these
costs and benefits, and on how the prevalence of independent contractor
relationships will change as a result of this proposed rule.
VII. Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, Public Law 104-121 (1996), requires federal agencies engaged in
rulemaking to consider the impact of their proposals on small entities,
consider alternatives to minimize that impact, and solicit public
comment on their analyses. The RFA requires the assessment of the
impact of a regulation on a wide range of small entities, including
small businesses, not-for-profit organizations, and small governmental
jurisdictions. Accordingly, the Department examined the regulatory
requirements of the proposed rule to determine whether they would have
a significant economic impact on a substantial number of small
entities. Because both costs and cost savings are minimal for small
business entities, the Department certifies that the proposed rule will
not have a significant economic impact on a substantial number of small
entities.
The Department used the Small Business Administration size
standards, which determine whether a business qualifies for small-
business status, to estimate the number of small entities.\155\ The
Department then applied these thresholds to the U.S. Census Bureau's
2012 Economic Census to obtain the number of establishments with
employment or sales/receipts below the small business threshold in the
industry.\156\ These ratios of small to large establishments were then
applied to the more recent 2017 SUSB data.\157\ The Department
estimated there are 6.4 million small establishments or
governments.\158\
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\155\ SBA, Summary of Size Standards by Industry Sector, 2017,
www.sba.gov/document/support--table-size-standards.
\156\ The 2012 data are the most recently available with revenue
data.
\157\ For this analysis, the Department excluded independent
contractors who are not registered as small businesses, and who are
generally not captured in the SUSB, from the calculation of small
establishments.
\158\ The number of small governments was calculated based on
data from the 2017 Census of Governments.
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The per-entity cost for small business employers is the regulatory
familiarization cost of $54.74, or the fully loaded mean hourly wage of
a Compensation, Benefits, and Job Analysis Specialist multiplied by one
hour. The per-entity rule familiarization cost for independent
contractors, some of whom would be small businesses, is $11.59, or the
fully loaded mean hourly wage of independent contractors in the CWS
($46.36) multiplied by 0.25 hour.
The cost savings due to increased clarity estimated per year for
each small business employer is $18.25, or the fully loaded mean hourly
wage of a Compensation, Benefits, and Job Analysis Specialist
multiplied by 0.33 hours. The cost savings due to increased clarity for
each independent contractor, some of whom would be a small business, is
$3.86 per year, or the fully loaded mean hourly wage of independent
contractors in the CWS multiplied by 0.83 hours. Because regulatory
familiarization is a one-time cost and the cost savings from clarity
recur each year, the Department expects cost savings to outweigh
regulatory familiarization costs in the long run. Because both costs
and cost savings are minimal for small business entities, and well
below one percent of their gross annual revenues, which is typically at
least $100,000 per year for the smallest businesses, the Department
certifies that the proposed rule will not have a significant economic
impact on a substantial number of small entities.
There is some evidence that small firms use independent contractors
for a greater proportion of their workforce than large firms.\159\ If
so, then it may be reasonable to assume that the increased use of
independent contractors may also favor smaller companies. In which
case, costs and benefits and cost savings may be larger for these small
firms. Because benefits and cost savings are expected to outweigh
costs, the Department does not expect this rule will result in an undue
hardship for small businesses. The Department requests comments and
data on this finding, including the numbers of small entities affected
by this rule and the compliance costs and associated cost savings and
benefits.
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\159\ Lim et al, supra note 61 at 51.
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VIII. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA) \160\ requires
agencies to prepare a written statement for rules with a federal
mandate that may result in increased expenditures by state, local, and
tribal governments, in the aggregate, or by the private sector, of $156
million ($100 million in 1995 dollars adjusted for inflation) or more
in at least one year.\161\ This statement must: (1) Identify the
authorizing legislation; (2) present the estimated costs and benefits
of the rule and, to the extent that such estimates are feasible and
relevant, its estimated effects on the national economy; (3) summarize
and evaluate state, local, and tribal government input; and (4)
identify reasonable alternatives and select, or explain the non-
selection, of the least costly, most cost-effective, or least
burdensome alternative.
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\160\ See 2 U.S.C. 1501.
\161\ Calculated using growth in the Gross Domestic Product
deflator from 1995 to 2019. Bureau of Economic Analysis. Table
1.1.9. Implicit Price Deflators for Gross Domestic Product.
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A. Authorizing Legislation
This proposed rule is issued pursuant to the Fair Labor Standards
Act, 29 U.S.C. 201, et seq.
B. Assessment of Costs and Benefits
For purposes of the UMRA, this rule includes a federal mandate that
is expected to result in increased expenditures by the private sector
of more than $156 million in at least one year, but will not result in
increased expenditures by state, local, and tribal governments, in the
aggregate, of $156 million or more in any one year.
Based on the cost analysis from this proposed rule, the Department
determined that the proposed rule will result in Year 1 total costs for
state and local governments totaling $1.7 million, all for regulatory
familiarization. There
[[Page 60638]]
will be no additional costs incurred in subsequent years.
The Department determined that the proposed rule will result in
Year 1 total costs for the private sector of $369.2 million, all of
them incurred for regulatory familiarization. The Department included
all independent contractors in the private sector total regulatory
familiarization costs. There will be no additional costs incurred in
subsequent years.
UMRA requires agencies to estimate the effect of a regulation on
the national economy if such estimates are reasonably feasible and the
effect is relevant and material.\162\ However, OMB guidance on this
requirement notes that such macroeconomic effects tend to be measurable
in nationwide econometric models only if the economic effect of the
regulation reaches 0.25 percent to 0.5 percent of Gross Domestic
Product (GDP), or in the range of $53.6 billion to $107.2 billion
(using 2019 GDP).\163\ A regulation with a smaller aggregate effect is
not likely to have a measurable effect in macroeconomic terms, unless
it is highly focused on a particular geographic region or economic
sector, which is not the case with this proposed rule.
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\162\ See 2 U.S.C. 1532(a)(4).
\163\ According to the Bureau of Economic Analysis, 2019 GDP was
$21.43 trillion. https://www.bea.gov/system/files/2020-02/gdp4q19_2nd_0.pdf.
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The Department's PRIA estimates that the total costs of the
proposed rule will be $369.2 million. Given OMB's guidance, the
Department has determined that a full macroeconomic analysis is not
likely to show that these costs would have any measurable effect on the
economy.
C. Least Burdensome Option Explained
This Department believes that it has chosen the least burdensome
but still cost-effective methodology to clarify its interpretation of
the FLSA's distinction between employees and independent contractors.
Although the proposed regulation would impose costs for regulatory
familiarization, the Department believes that its proposal would reduce
the overall burden on organizations by simplifying and clarifying the
analysis for determining whether a worker is classified as an employee
or an independent contractor under the FLSA. The Department believes
that, after familiarization, this rule will reduce the time spent by
organizations to determine whether a worker is an independent
contractor. Additionally, revising the Department's guidance to provide
more clarity could promote innovation and certainty in business
relationships.
IX. Effects on Families
The undersigned hereby certifies that the proposed rule would not
adversely affect the well-being of families, as discussed under section
654 of the Treasury and General Government Appropriations Act, 1999.
List of Subjects
29 CFR Part 780
Agriculture, Child labor, Wages.
29 CFR Part 788
Forests and forest products, Wages.
29 CFR Part 795
Employment, Wages.
Signed at Washington, DC, this 18th day of September, 2020.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
For the reasons set out in the preamble, the Department of Labor
proposes to amend Title 29 of the Code of Federal Regulations parts 780
and 788 and add part 795, as follows:
PART 780--EXEMPTIONS APPLICABLE TO AGRICULTURE, PROCESSING OF
AGRICULTURAL COMMODITIES, AND RELATED SUBJECTS UNDER THE FAIR LABOR
STANDARDS ACT
0
1. The authority citation for part 780 continues to read as follows:
Authority: Secs. 1-19, 52 Stat. 1060, as amended; 29 U.S.C.
201-219.
0
2. Amend Sec. 780.330 by revising paragraph (b) as follows:
Sec. 780.330 Sharecroppers and tenant farmers.
* * * * *
(b) In determining whether such individuals are employees or
independent contractors, the criteria laid down in Sec. Sec. 795.100
through 795.110 of this chapter are used.
* * * * *
PART 788--FORESTRY OR LOGGING OPERATIONS IN WHICH NOT MORE THAN
EIGHT EMPLOYEES ARE EMPLOYED
0
3. The authority citation for part 788 continues to read as follows:
Authority: Secs. 1-19, 52 Stat. 1060, as amended; 29 U.S.C.
201-219.
0
4. Amend Sec. 788.16 by revising paragraph (a) as follows:
Sec. 788.16 Employment relationship.
(a) In determining whether individuals are employees or independent
contractors, the criteria laid down in Sec. Sec. 795.100 through
795.110 of this chapter are used.
* * * * *
0
5. Add part 795 to read as follows:
PART 795--EMPLOYEE OR INDEPENDENT CONTRACTOR CLASSIFICATION UNDER
THE FAIR LABOR STANDARDS ACT
Sec.
795.100 Introductory statement.
795.105 Determining employee and independent contractor
classification under the FLSA.
795.110 Primacy of actual practice.
795.115 Severability.
Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201-219.
Sec. 791.100 Introductory statement.
This part contains the Department of Labor's general
interpretations of the text governing individuals' classification as
employees or independent contractors under the Fair Labor Standards Act
(FLSA or Act). See 29 U.S.C. 201-19. The Administrator of the Wage and
Hour Division will use these interpretations to guide the performance
of his or her duties under the Act, and intends the interpretations to
be used by employers, employees, and courts to understand employers'
obligations and employees' rights under the Act. To the extent that
prior administrative rulings, interpretations, practices, or
enforcement policies relating to classification as an employee or
independent contractor under the Act are inconsistent or in conflict
with the interpretations stated in this part, they are hereby
rescinded. The interpretations stated in this part may be relied upon
in accordance with section 10 of the Portal-to-Portal Act, 29 U.S.C.
251-262, notwithstanding that after any such act or omission in the
course of such reliance, any such interpretation in this part ``is
modified or rescinded or is determined by judicial authority to be
invalid or of no legal effect.'' 29 U.S.C. 259.
Sec. 795.105 Determining employee and independent contractor
classification under the FLSA.
(a) Independent contractors are not employees under the Act. An
individual who renders services to a potential employer--i.e., a
putative employer or alleged employer-- as an independent contractor is
not that potential employer's employee under the Act. As such, sections
6, 7, and 11 of the Act, which impose obligations on employers
[[Page 60639]]
regarding their employees, are inapplicable. Accordingly, the Act does
not require a potential employer to pay an independent contractor
either the minimum wage or overtime pay under sections 6 or 7. Nor does
section 11 of the Act require a potential employer to keep records
regarding an independent contractor's activities.
(b) Economic dependence as the ultimate inquiry. An ``employee''
under the Act is an individual whom an employer suffers, permits, or
otherwise employs to work. 29 U.S.C. 203(e)(1), (g). An employer
suffers or permits an individual to work as an employee if, as a matter
of economic reality, the individual is economically dependent on that
employer for work. Rutherford Food Corp. v. McComb, 331 U.S. 722, 727
(1947); Bartels v. Birmingham, 332 U.S. 126, 130 (1947). An individual
is an independent contractor, as distinguished from an ``employee''
under the Act, if the individual is, as a matter of economic reality,
in business for him- or herself.
(c) Determining economic dependence. The economic reality factors
in paragraph (d) of this section guide the determination of whether the
relationship between an individual and a potential employer is one of
economic dependence and therefore whether an individual is properly
classified as an employee or independent contractor. These factors are
not exhaustive, and no single factor is dispositive. However, the two
core factors listed in paragraph (d)(1) of this section are the most
probative as to whether or not an individual is an economically
dependent ``employee,'' 29 U.S.C. 203(e)(1), and each is therefore
afforded greater weight in the analysis than is any other factor. Given
the greater weight afforded each of these two core factors, if they
both point towards the same classification, whether employee or
independent contractor, there is a substantial likelihood that is the
individual's accurate classification. This is because other factors,
which are less probative and afforded less weight, are highly unlikely,
either individually or collectively, to outweigh the combined weight of
the two core factors.
(d) Economic reality factors--(1) Core factors--(i) The nature and
degree of the individual's control over the work. This factor weighs
towards the individual being an independent contractor to the extent
the individual, as opposed to the potential employer, exercises
substantial control over key aspects of the performance of the work,
such as by setting his or her own schedule, by selecting his or her
projects, and/or through the ability to work for others, which might
include the potential employer's competitors. In contrast, this factor
weighs in favor of the individual being an employee under the Act to
the extent the potential employer, as opposed to the individual,
exercises substantial control over key aspects of the performance of
the work, such as by controlling the individual's schedule or workload
and/or by directly or indirectly requiring the individual to work
exclusively for the potential employer. Requiring the individual to
comply with specific legal obligations, satisfy health and safety
standards, carry insurance, meet contractually agreed-upon deadlines or
quality control standards, or satisfy other similar terms that are
typical of contractual relationships between businesses (as opposed to
employment relationships) does not constitute control that makes the
individual more or less likely to be an employee under the Act.
(ii) The individual's opportunity for profit or loss. This factor
weighs towards the individual being an independent contractor to the
extent the individual has an opportunity to earn profits or incur
losses based on his or her exercise of initiative (such as managerial
skill or business acumen or judgment) or management of his or her
investment in or capital expenditure on, for example, helpers or
equipment or material to further his or her work. While the effects of
the individual's exercise of initiative and management of investment
are both considered under this factor, the individual does not need to
have an opportunity for profit or loss based on both for this factor to
weigh towards the individual being an independent contractor. This
factor weighs towards the individual being an employee to the extent
the individual is unable to affect his or her earnings or is only able
to do so by working more hours or more efficiently.
(2) Other factors--(i) The amount of skill required for the work.
This factor weighs in favor of the individual being an independent
contractor to the extent the work at issue requires specialized
training or skill that the potential employer does not provide. This
factor weighs in favor of the individual being an employee to the
extent the work at issue requires no specialized training or skill and/
or the individual is dependent upon the potential employer to equip him
or her with any skills or training necessary to perform the job.
(ii) The degree of permanence of the working relationship between
the individual and the potential employer. This factor weighs in favor
of the individual being an independent contractor to the extent the
work relationship is by design definite in duration or sporadic, which
may include regularly occurring fixed periods of work, although the
seasonal nature of work by itself would not necessarily indicate
independent contractor classification. This factor weighs in favor of
the individual being an employee to the extent the work relationship is
instead by design indefinite in duration or continuous.
(iii) Whether the work is part of an integrated unit of production.
This factor weighs in favor of the individual being an employee to the
extent his or her work is a component of the potential employer's
integrated production process for a good or service. This factor weighs
in favor of an individual being an independent contractor to the extent
his or her work is segregable from the potential employer's production
process. This factor is different from the concept of the importance or
centrality of the individual's work to the potential employer's
business.
Sec. 795.110 Primacy of actual practice.
In evaluating the individual's economic dependence on the potential
employer, the actual practice of the parties involved is more relevant
than what may be contractually or theoretically possible. For example,
an individual's theoretical abilities to negotiate prices or to work
for competing businesses are less meaningful if, as a practical matter,
the individual is prevented from exercising such rights. Likewise, a
business' contractual authority to supervise or discipline an
individual may be of little relevance if in practice the business never
exercises such authority.
Sec. 795.115 Severability.
If any provision of this part is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further agency action, the provision
shall be construed so as to continue to give the maximum effect to the
provision permitted by law, unless such holding shall be one of utter
invalidity or unenforceability, in which event the provision shall be
severable from part 795 and shall not affect the remainder thereof.
[FR Doc. 2020-21018 Filed 9-24-20; 8:45 am]
BILLING CODE 4510-27-P