[Federal Register Volume 86, Number 4 (Thursday, January 7, 2021)]
[Rules and Regulations]
[Pages 1168-1248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-29274]
[[Page 1167]]
Vol. 86
Thursday,
No. 4
January 7, 2021
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; Final
Rule
Federal Register / Vol. 86 , No. 4 / Thursday, January 7, 2021 /
Rules and Regulations
[[Page 1168]]
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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: Final rule.
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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 the Act) to promote certainty for stakeholders,
reduce litigation, and encourage innovation in the economy.
DATES: This final rule is effective on March 8, 2021.
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 final rule 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 it
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) (subject to certain
exceptions), and ``employ'' as ``includ[ing] to suffer or permit to
work,'' id. at 203(g). 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).
This economic realities test and its component factors have not
always been sufficiently explained or consistently articulated by
courts or the Department, resulting in uncertainty among the regulated
community. The Department believes that a 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,
earlier this year the Department proposed to introduce a new part to
Title 29 of the Code of Federal Regulations setting forth its
interpretation of whether workers are ``employees'' or independent
contractors under the Act.
Having received and reviewed the comments to its proposal, the
Department now adopts as a final rule the interpretive guidance set
forth in the Notice of Proposed Rulemaking (NPRM) (85 FR 60600) largely
as proposed. This regulatory guidance adopts general interpretations to
which courts and the Department have long adhered. For example, the
final rule explains 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
final rule also explains that the inquiry into economic dependence is
conducted by applying 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 final
rule sharpens this inquiry into five distinct factors, instead of the
five or more overlapping factors used by most courts and previously the
Department. Moreover, consistent with the FLSA's text, its purpose, and
the Department's experience administering and enforcing the Act, the
final rule explains that two of those factors--(1) the nature and
degree of the worker's control over the work and (2) the worker's
opportunity for profit or loss--are more probative of the question of
economic dependence or lack thereof than other factors, and thus
typically carry greater weight in the analysis than any others.
The regulatory guidance promulgated in this final rule regarding
independent contractor status under the FLSA is generally applicable
across all industries. As such, it replaces the Department's previous
interpretations of independent contractor status under the FLSA which
applied only in certain contexts, 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 final rule will significantly
clarify to stakeholders how to distinguish between employees and
independent contractors under the Act.
This final rule is considered to be an Executive Order 13771
deregulatory action. Details on the estimated increased efficiency and
cost savings of this rule can be found in the regulatory impact
analysis (RIA) in section VI.
II. Background
A. Relevant FLSA Definitions
Enacted in 1938, the FLSA requires that, among other things,
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 it mandates that employers keep
certain records regarding their employees. See 29 U.S.C. 206(a), 207(a)
(minimum wage and overtime pay requirements); 29 U.S.C. 211(c)
(recordkeeping requirements). 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, subject to certain exceptions, ``any
[[Page 1169]]
individual employed by an employer,'' and ``employ'' in section 3(g) to
include ``to suffer or permit to work.'' \1\ 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\ 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 interpreted the ``suffer or permit'' language
to define FLSA employment to be broad and more inclusive than the
common law standard. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S.
318, 326 (1992). However, the Court also recognized that 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 Walling v. Portland Terminal Co., 330 U.S.
148, 152 (1947) (``The definition `suffer or permit to work' was
obviously not intended to stamp all persons as employees.''). The
Supreme Court specifically recognized that ``[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); Karlson v. Action Process
Serv. & Private Investigation, LLC, 860 F.3d 1089, 1092 (8th Cir.
2017).
B. Economic Dependence and the Economic Reality Test
1. Supreme Court Development of the Economic Reality Test
As the NPRM explained, the U.S. Supreme Court explored the limits
of the employer-employee relationship in a series of cases from 1944 to
1947 under three different Federal statutes: The FLSA, the National
Labor Relations Act (NLRA), and the Social Security Act (SSA). 85 FR
60601 (summarizing NLRB v. Hearst Publications, Inc., 322 U.S. 111
(1944); United States v. Silk, 331 U.S. 704 (1947); Bartels v.
Birmingham, 332 U.S. 126 (1947); and Rutherford Food, 331 U.S. 722)).
In Hearst, the Supreme Court held that the NLRA's definition of
employment was broader than that of the common law. 322 U.S. 123-25.
Congress responded by amending the definition of employment under the
NLRA on June 23, 1947, ``with the obvious purpose of hav[ing] the
[National Labor Relations] 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 in
response to Hearst, the Supreme Court decided Silk, which addressed the
distinction between employees and independent contractors under the
SSA. In that case, the Court relied on Hearst to hold that ``economic
reality,'' as opposed to ``technical concepts'' of the common law
standard alone, determines workers' classification. 331 U.S. at 712-14.
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,'' it 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.
One week after Silk and on the same day Congress amended the NLRA, the
Court reiterated these five factors in Bartels, another case involving
employee or independent contractor status under the SSA. In Bartels,
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.
The same day as it decided Silk, the Court ruled in Rutherford Food
that certain workers at a slaughterhouse were employees under the FLSA,
and not independent contractors, by examining facts pertaining to the
five factors identified in Silk.\2\ 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.
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\2\ For example, the Court noted that the slaughterhouse workers
performed unskilled work ``on the production line.'' 331 U.S. at
730. ``The premises and equipment of [the employer] 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.
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In November 1947, five months after Silk and Rutherford Food, the
Department of the Treasury (Treasury) proposed regulations r defining
when an individual was 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 one, two, and four through six 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.\3\
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\3\ The Treasury proposal was never finalized because Congress
amended the SSA to foreclose the proposal.
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Congress replaced 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 remains broader than that
under common law and is determined not by the common law but instead by
the economic reality of the relationship at issue. See id. Since
implicitly doing so in Rutherford Food,
[[Page 1170]]
the Court has not again applied (or rejected the application of) the
Silk factors to an FLSA classification question.
2. Application of the Economic Reality Test by Federal Courts of
Appeals
As the NPRM explained, in the 1970s and 1980s Federal courts of
appeals began to adopt versions of a multifactor ``economic reality''
test based on Silk, Rutherford Food, and Bartels and similar to
Treasury's 1947 proposed SSA regulation to analyze whether a worker was
an employee or an independent contractor under the FLSA. See 85 FR
60603.\4\ 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).
Some courts have clarified that this question of economic dependence
may be boiled down to asking ``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 (internal quotation marks and citations
omitted). Courts have also explained that a non-exhaustive set of
factors--derived from Silk and Rutherford Food--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).
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\4\ As explained below, versions of this multifactor economic
realty test have also been enforced and articulated by the
Department in subregulatory guidance since the 1950s.
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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. Compare, e.g., Sec'y of Labor v.
Lauritzen, 835 F.2d 1529, 1534-35 (7th Cir. 1987) (applying six-factor
economic reality test to hold that pickle pickers were employees under
the FLSA), with Donovan v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984)
(applying the same six-factor economic reality test to hold that pickle
pickers were not employees under the FLSA). 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).
The Fifth Circuit has not adopted the sixth factor listed above, which
analyzes the integrality of the work, as part of its standard, see,
e.g., Usery, 527 F.2d at 1311, but has at times assessed integrality as
an additional factor, see, e.g. Hobbs v. Petroplex Pipe & Constr.,
Inc., 946 F.3d 824, 836 (5th Cir. 2020).
The NPRM highlighted noteworthy modifications some courts of
appeals have made to the economic reality factors as originally
articulated in 1947 by the Supreme Court. See 85 FR 60603-04. First,
the ``skill required'' factor identified in Silk, 331 U.S. at 716, is
now articulated more expansively by some courts to include
``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.
However, the Fifth Circuit has revised the ``investment'' factor to
instead 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 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, has now been
replaced by many courts of appeals by consideration of whether the
service rendered is ``integral,'' which those courts have 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 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 v. Jackson Street Entertainment, LLC, 825 F.3d 235, 244 (4th
Cir. 2016) (considering ``the importance of the services rendered to
the company's business'').
Courts of appeals have cautioned against the ``mechanical
application'' of the economic reality factors. See, e.g., Saleem, 854
F.3d at 139. ``Rather, each factor is a tool used to gauge the economic
dependence of the alleged employee, and each must be applied with this
ultimate concept in mind.'' Hopkins, 545 F.3d at 343. Further, courts
of appeals make clear that the analysis should 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.'').
3. Application of the Economic Reality Test by WHD
Since at least 1954, WHD has applied variations of this multifactor
analysis when considering whether a worker is an employee under the
FLSA or 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 appeals). 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
applying a multifactor analysis very similar to the multifactor
economic reality test courts use (with some variation) to determine
whether workers are employees or
[[Page 1171]]
independent contractors.\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).
Further, 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). 29 CFR 500.20(h)(4).
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\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).
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The Department's sub-regulatory guidance, WHD Fact Sheet #13,
``Employment Relationship under the Fair Labor Standards Act (FLSA)''
(Jul. 2008), similarly stated that, when determining whether an
employment relationship exists under the FLSA, 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 identified seven economic reality factors; in addition to factors
that are similar to the six factors identified above, it also
considered the worker's ``degree of independent business organization
and operation.'' 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 2015-
1). AI 2015-1 provided guidance regarding the employment relationship
under the FLSA and the application of the six economic realities
factors. AI 2015-1 was withdrawn on June 7, 2017 and is no longer in
effect.
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\6\ Fact Sheet #13 is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf.
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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
``independent business organization'' factor because it did not add to
the analysis as a separate factor and was ``[e]ncompassed within'' the
other factors. It also stated that the investment factor should focus
on the ``amount of the worker's investment in facilities, equipment, or
helpers.'' 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 below, the Department's prior interpretations of
independent contractor status, which themselves have evolved over time,
are subject to similar limitations as that of court opinions, and the
Department believes that stakeholders would benefit from clarification.
For these reasons, the Department proposed promulgating a clearer and
more consistent standard for evaluating whether a worker is an employee
or independent contractor under the FLSA and is now finalizing that
proposal, with some modifications based on comments received.
C. The Department's Proposal
On September 25, 2020, the Department published the NPRM in the
Federal Register. The Department proposed to adopt an ``economic
reality'' test to determine a worker's status as an FLSA employee or an
independent contractor. The test considers whether a worker is in
business for himself or herself (independent contractor) or is instead
economically dependent on an employer for work (employee). The
Department further identified two ``core factors'': The nature and
degree of the worker's control over the work; and the worker's
opportunity for profit or loss based on initiative, investment, or
both. The Department explained it was proposing to emphasize these
factors because they are the most probative of whether workers are
economically dependent on someone else's business or are in business
for themselves. The proposal identified three other factors to also be
considered, though they are less probative than the core factors: The
amount of skill required for the work, the degree of permanence of the
working relationship between the individual and the potential employer,
and whether the work is part of an integrated unit of production. The
Department further proposed to advise that the actual practice is more
probative than what may be contractually or theoretically possible in
determining whether a worker is an employee or an independent
contractor.
D. Comments
The Department solicited comments on all aspects of the proposed
rule. More than 1800 individuals and organizations timely commented on
the Department's NPRM during the thirty-day comment period that ended
on October 26, 2020. The Department received comments from employers,
workers, industry associations, worker advocacy groups, and unions,
among others. All timely comments may be viewed at the website
www.regulations.gov, docket ID WHD-2020-0007.
Of the comments received, the Department received approximately 230
comments from workers who identified themselves as independent
contractors (not including the over 900 comments received from Uber
drivers discussed below). Of those, the overwhelming majority expressed
support for the NPRM. These individuals identified themselves as
freelancers or independent contractors in jobs including translator,
journalist, consultant, musician, and many others. Among this group of
commenters, over 200 expressed support for the proposed rule, while
only 8 opposed it. The remaining individuals in this group did not
express a specific position. Uber drivers submitted over 900 comments.
While many expressed views on Uber corporate policies and not on the
NPRM itself, the majority of these drivers who addressed the NRPM
supported the Department's proposal. The Department also received a
number of other
[[Page 1172]]
comments that are beyond the scope of this rulemaking. For example,
several commenters expressed opinions related to the issues addressed
in the Department's proposal but that were specific to state
legislation or employer policies. Significant issues raised in the
timely comments received are discussed below, along with the
Department's response to those comments.
III. Need for Rulemaking
The NPRM explained that the Department has never promulgated a
generally-applicable regulation addressing who is an independent
contractor and thus not an employee under the FLSA. Instead, as
described above, the Department has issued and revised guidance since
at least 1954, using different variations of a multifactor economic
reality test that analyzes economic dependence to distinguish
independent contractors from employees. Such guidance reflects, in
large part, application of the general principles of the economic
reality test by Federal courts of appeals. Such guidance, however, did
not reflect any public input. Indeed, the NPRM kicked off the
Department's first ever notice-and-comment rulemaking to provide a
generally applicable interpretation of independent contractor status
under the FLSA. As recounted just above, the Department received many
comments from stakeholders who are actually impacted by FLSA
classification decisions, which are valuable information and insight
that the Department has not previously gathered and many of which
reinforced the Department's view that more clarity is needed in this
area.
The Department explained in the NPRM preamble that prior
articulations of the test have proven to be unclear and unwieldy for
the four following reasons. 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 in that it makes all facts potentially relevant without
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.
The Department thus proposed to promulgate a regulation that would
clarify and sharpen the contours of the economic reality test used to
determine independent contractor classification under the FLSA. The
NPRM explained that such a regulation would provide much needed clarity
and encourage (or at least stop deterring) flexible work arrangements
that benefit both businesses and workers.
Commenters in the business community and freelance workers
generally agreed with the Department that the multifactor balancing
test is confusing and needs clarification. The National Retail
Federation (NRF) complained that ``existing tests for independent
contractor status tend to have a large number of factors which can be
nebulous, overlapping, and even irrelevant to the ultimate inquiry.''
The Workplace Policy Institute of Littler Mendelson, P.C. (WPI) stated
that ``[b]oth the Department and the courts have struggled to define
`dependence' '' in the modern economy--resulting in confusion,
unpredictability and inconsistent results.'' The Society for Human
Resource Management (SHRM) echoed this sentiment, writing ``the
business community and workers are left applying numerous factors in a
variety of ways that is mired in uncertainty and, therefore,
unnecessary risk.'' The U.S. Chamber of Commerce stated that ``[t]he
confusion regarding whether a worker is properly classified as an
employee or an independent contractor has long been a vexing problem
for the business community, across many different industries and work
settings.'' See also, e.g., World Floor Covering Association (WFCA)
(``The current test has resulted in inconsistent decisions, much
confusion, and unnecessary costs.''). Numerous individual freelancers
and organizations that represent freelance workers also stated they
would welcome ``greater clarity and predictability in the application
of the `economic realities' test.'' Coalition to Promote Independent
Entrepreneurs (CPIE); see also Coalition of Practicing Translators &
Interpreters of California (CoPTIC) (requesting ``greater clarity in
Federal law''). Individual freelancers generally welcomed greater legal
clarity. For example, one individual commenter wrote ``to express [her]
support for this proposed rule. As someone who has enjoyed freedom and
flexibility as a freelancer for 20 years, this would be a welcome
clarification.'' Another individual freelancer stated that ``[t]he
clarity and updating of [the FLSA] through this NPRM is long overdue
and the DOL should issue ruling on independent contracting. . . .''
These supportive commenters generally agreed with the Department
that additional clarity would encourage flexible work arrangements that
benefit businesses and workers alike. For example, the Coalition for
Workforce Innovation (CWI) asserted that additional clarity of the
economic reality test would ``allow workers and businesses to pursue [
] mutually beneficial opportunities as the United States economy
evolves with technology.'' Fight for Freelancers explained that its
members value flexibility that comes with working as independent
contractors and supported the Department's ``efforts to protect [its
members'] classification.''
Some commenters who opposed this rulemaking questioned the need for
a regulation on this topic. The Southwest Regional Council of
Carpenters (SWRCC) stated that the ``[t]he first of the Rule's
shortcomings is its assumption that a new rule is necessary in the
first place,'' and the American Federation of Labor & Congress of
Industrial Organization (AFL-CIO) asserted that the Department's
``quest for certainty . . . is quixotic.'' Mr. Edward Tuddenham, an
attorney, contended that the current test is ``generally consistent and
predictable'' and thus does not need further clarification. He and
others repeatedly questioned the Department's reasons for rulemaking by
asserting that the Department did not identify cases where courts
reached incorrect outcomes. Rather than focus on the outcomes in
particular cases, the NPRM highlighted inconsistent or confusing
reasoning in many decisions to explain why the regulated community
would benefit from regulatory clarity. See 85 FR 60605. Mr. Tuddenham
and others also provided thoughtful and detailed comments criticizing
specific aspects of the reasons presented in the NPRM's need for
rulemaking discussion. The following discussion retraces those reasons
and responds to these criticisms.
A. Confusion Regarding the Meaning of Economic Dependence
The NPRM explained that undeveloped analysis and inconsistency
cloud the application of ``economic dependence,'' the touchstone of the
economic reality test. 85 FR 60605. The Department and some courts have
attempted to furnish 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,'' Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042,
1054 (5th Cir. 1987) (quoting DialAmerica, 757 F.2d at 1385), or
instead ``are in business for themselves,'' Saleem, 854 F.3d at 139.
[[Page 1173]]
But the Department and many courts have often applied the test without
helpful clarification of the meaning of the economic dependency that
they are seeking.
The NPRM explained that the lack of explanation of economic
dependence has sometimes led to inconsistent approaches and results and
highlighted as an example the apparently inconsistent results in
Cromwell v. Driftwood Elec. Contractor, Inc., 348 F. App'x 57 (5th Cir.
2009) (holding that cable splicers hired by Bellsouth to perform post-
Katrina repairs were employees), and Thibault v. BellSouth
Telecommunication, 612 F.3d 843 (5th Cir. 2010) (holding that cable
splicer hired by same company under a very similar arrangement was an
independent contractor). See 85 FR 60605. The Thibault court
distinguished its result from Cromwell in part by highlighting Mr.
Thibault's significant income from (1) his own sales company that had
profits of approximately $500,000, (2) ``eight drag-race cars [that]
generated $1,478 in income from racing professionally[,]'' and (3)
``commercial rental property that generated some income.'' Thibault,
612 F.3d at 849. While these facts indicate that Mr. Thibault may have
been in business for himself as a manager of a sales business, drag-
race cars, and commercial properties, they are irrelevant as to whether
he was in business for himself as a cable splicer.\7\ The Thibault
court nonetheless assigned these facts substantial weight because it
understood economic dependence to mean dependence for income or wealth,
which is incompatible with the dependence-for-work approach that other
courts and the Department apply.\8\ See, e.g., 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.''); 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''); 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.''). As the DialAmerica court
explained, the dependence-for-income approach ``would lead to a
senseless result'' because a wealthy individual who had an independent
source of income would be an independent contractor even though a
poorer individual who worked for the same company under the same work
arrangement is an employee. 757 F.2d at 1385 n.11. Mr. Tuddenham
initially defended the reasoning in Thibault, but later listed that
case as an example of ``the occasional erroneous application of the
[economic reality] test.''
---------------------------------------------------------------------------
\7\ The Thibault court also highlighted the fact that Mr.
Thibault worked for only 3 months--although he intended to work for
7 or 8 months--before being fired. See 612 F.3d at 846, 849. In
contrast, the splicers in Cromwell worked approximately 11 months.
See 348 F. App'x at 58.
\8\ The Thibault case recognized that ``[a]n individual's wealth
is not a solely dispositive factor in the economic dependence
question.'' 612 F.3d at 849 n.4. This confirms that wealth was in
fact a meaningful consideration, which runs against other cases
explaining that dependence on wealth is an inappropriate lens.
---------------------------------------------------------------------------
The NPRM also highlighted the decision in Parrish v. Premier
Directional Drilling, 917 F.3d 369, as an example of inconsistent
articulation of economic dependence. In that case, the court first
applied a dependence-for-work concept to analyze the control factor and
then explicitly departed from that framework in favor of a dependence-
for-income analysis of the opportunity factor. See 85 FR 60606. The
Parrish court impliedly took a third concept of dependence to analyze
the investment factor through a ``side-by-side comparison'' of each
worker's individual investment to that of the alleged employer.'' 917
F.3d at 383. AI 2015-1 took the same approach and explained that ``it
is the relative investments that matter'' because ``[i]f the worker's
investment is relatively minor, that suggests that the worker and the
employer are not on similar footing and that the worker may be
economically dependent on the employer.'' The comparative analysis of
investments thus appears to rely on a concept of economic dependence
that means ``not on a similar footing,'' which is different from the
``dependence for work'' concept that the Department believes to be
correct.
In summary, courts and the Department typically economic dependence
as ``dependence for work,'' but have sometimes applied other concepts
of dependence to analyze certain factors, such as ``dependence for
income'' and ``not on similar footing.'' Because economic dependence is
the ultimate inquiry of FLSA employment, these different conceptions
result in essentially different tests that confuse the regulated
community. Accordingly, the economic reality test needs a more
developed and dependable touchstone at its heart.
B. Lack of Focus in the Multifactor Balancing Test
The NPRM explained that the versions of the multifactor economic
reality test used by courts since at least the 1980s and the Department
since the 1950s lack clear, generally applicable guidance about how to
balance the multiple factors and the countless facts encompassed
therein. See 85 FR 60606.The test's lack of guidance leads to
uncertainty regarding ``which aspects of `economic reality' matter, and
why.'' Lauritzen, 835 F.2d at 1539 (Easterbrook J., concurring).
As examples of such uncertainty, the NPRM highlighted court
decisions analyzing economic reality factors to reach an overall
decision about a worker's classification without meaningful explanation
of how they balanced the factors to reach the final decision. 85 FR
60606 (citing, e.g., Parrish, 917 F.3d at 380; Chao v. Mid-Atl.
Installation Servs., Inc., 16 F. App'x 104, 108 (4th Cir. 2001); and
Snell, 875 F.2d at 912). Even where many facts and factors support both
sides of the classification inquiry, courts have not explained how they
balanced the competing considerations. See, e.g., Acosta v. Paragon
Contractors Corp., 884 F.3d 1225, 1238 (10th Cir. 2018); Iontchev v.
AAA Cab. Services, 685 F. App'x 548, 550 (9th Cir. 2017). The NPRM thus
identified a need for guidance on which factors are most probative.
Even some commenters critical of the Department's approach in the
NPRM conceded that the test as currently applied can create
considerable ambiguity. Mr. Tuddenham asserted that the lack of general
guidance regarding how to balance factors is ``an unavoidable function
of determining something as nebulous as `economic dependence.' '' See
also Farmworker Justice (``[T]he test, as currently applied, creates
necessary ambiguity.''). The Department disagrees that the concept of
``economic dependence'' is necessarily ``nebulous.'' FLSA employment
itself depends on economic dependence, and nothing in the statute
requires that this standard be nebulous and thus unmanageable. See
Usery, 527 F.2d at 1311 (``It is dependence that indicates employee
status.''). Instead, the Department believes the correct concept of
economic dependence tangibly defines FLSA employment to include
individuals who are dependent on others for work, and to exclude
individuals who are, as a matter of economic reality, in business for
themselves. See Saleem, 854 F.3d at 139. The Department thus believes
it is
[[Page 1174]]
possible to provide generally applicable guidance regarding how to
consider and balance the economic reality factors to assess this
concept of economic dependence.
C. Confusion and Inefficiency Due to Overlapping Factors
The NPRM next explained that courts and the Department have
articulated the economic reality factors such that they have
overlapping coverage, which undermines the structural benefits of a
multifactor test. See 85 FR 60607. The NPRM noted that most of these
overlaps did not exist in the Supreme Court's original articulation of
the economic reality factors in Silk and were instead introduced by
subsequent court of appeals decisions. The NPRM then explained several
ways in which extensive overlaps may lead to inefficiency and confusion
for the regulated community.
First, the ``skill required'' factor articulated in Silk, 331 U.S.
at 716, has been expanded by the Department and some courts to analyze
``skill and initiative.'' See, e.g., Superior Care, 840 F.2d at 1060;
WHD Fact Sheet WHD #13. Because the capacity for on-the-job initiative
is already part of the control factor, the NPRM explained that this
approach essentially imports control analysis into the skill factor.
Indeed, the presence of control appears to overrides the existence of
skill,\9\ effectively transforming the skill factor into an extension
of the control factor in some circuits, but not others.\10\ The ``skill
and initiative'' factor also overlaps with the opportunity factor,
which considers the impact of initiative on worker's earnings,
resulting in initiative being analyzed under three different factors.
As an illustration of confusion resulting from this overlap, the NPRM
highlighted a case in which a court found that workers exercised enough
on-the-job initiative for the control and opportunity factors to point
towards independent contractor status, but nonetheless found the `skill
and initiative factor points towards employee status' due to `the key
missing ingredient . . . of initiative.' '' 85 FR 60607 (quoting
Express Sixty-Minutes Delivery, 161 F.3d at 303).
---------------------------------------------------------------------------
\9\ See, e.g., 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 operation''); 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'').
\10\ Some courts of appeal continue to analyze skill rather than
control as part of the skill factor. See, e.g., Paragon, 884 F3d at
1235 (considering ``the degree of skill required to perform the
work''); see also Iontchev, 685 F. App'x at 550 (asking ``whether
services rendered . . . require[d] a special skill''); Keller, 791
F.3d at 807 (analyzing ``the degree of skill required'').
---------------------------------------------------------------------------
Next, the permanence factor originally concerned the continuity and
duration of a working relationship but has since been expanded by some
courts and the Department to also consider the exclusivity of that
relationship. See 85 FR 60608 (citing Parrish 917 F.3d at 386-87;
Keller, 781 F.3d at 807-09; Scantland, 721 F.3d at 1319; WHD Opinion
Letter FLSA 2019-6 at 8). But exclusivity--the ability or inability for
a worker to offer services to different companies--is already a part of
the control factor. This overlap results in exclusivity being analyzed
twice and causes the actual consideration of permanence being
potentially subsumed by control.
Third, the ``integral part'' factor is used by some courts to be
merely a proxy of control. As one such court explained: ``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). But the control factor already directly analyzes whether a
business can compel attendance on a consistent basis. It is unclear
what additional value can be gained by indirectly analyzing that same
consideration a second time under the ``integral part'' factor.\11\
---------------------------------------------------------------------------
\11\ As the NPRM explained, this presumption that firms would
control all important services on which they rely may rest on a
mistaken premise because, for example, manufacturers routinely have
critical parts and components produced and delivered by wholly
separate companies. 85 FR 60608. And companies whose business is to
connect independent service providers with customers would find
those service providers to be important even though they are
independent from the company's business. 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.' '')
---------------------------------------------------------------------------
Finally, while Silk articulated the opportunity for profit and loss
and investment as separate factors, it analyzed the two together in
concluding that 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. 331
U.S. at 719. The Second Circuit recognized such clear overlap, noting
that ``[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. Nonetheless, most courts and Department
have analyzed opportunity for profit and loss and investment as
separate factors. When done right, separate analysis leads to
redundancy. See, e.g., Mid-Atlantic Installation Servs., 16 F. App'x at
106-07. When done wrong, it leads to analysis of investment without
regard for the worker's profit or loss, such as by comparing the dollar
value of a worker's personal investments against the total investment
of a large company that, for example, ``maintain[s] corporate
offices.'' Hopkins 545 F.3d at 344. The NPRM explained that such a
comparison says nothing about whether the worker is in business for
himself, as opposed to being economically dependent on that company for
work, and is therefore not probative and potentially misleading. 85 FR
60608. The NRPM concluded that reducing the above-mentioned overlaps
would make the economic reality test easier to understand and apply.
The SWRCC contended that ``overlapping factors [have] never been
the source of--and the DOL cannot point to--any credible criticism,''
but did not question or even acknowledge the above criticism discussed
at length in the NRPM. In contrast, commenters that are significantly
impacted by the FLSA's obligations generally agreed with the Department
that overlapping factors have created confusion. For example, the
Association of General Contractors stated that ``[n]avigating and
complying with the various overlapping and inconsistent standards are
confusing and costly,'' and WPI ``agree[d] with the Department that
such overlap and blurring of factors is confusing and inefficient.''
See also, e.g., Center for Workplace Compliance (CWC); NRF; U.S.
Chamber of Commerce.
A multifactor test is a useful framework for determining FLSA
employment in part because it organizes the many facts that are part of
economic reality into distinct categories, thus providing some
structure to an otherwise roving inquiry. However, this benefit is lost
if the lines between those factors blur. Under prior articulations of
the test, considerations within the control factor--capacity for on-
the-job initiative, exclusivity, and ability to compel attendance--have
been imported into analysis of three other factors: Skill, permanence,
and integral
[[Page 1175]]
part. Indeed, those control-based considerations appear to be the most
important aspect of the other factors, which obscures those factors'
distinctive probative values. Moreover, considerations under the
opportunity factor--the ability to affect profits through initiative--
have been imported into the skill factor. And the ability to earn
profits through investment overlaps completely with the investment
factor. The Department continues to believe these overlapping coverages
contribute to confusion and should be reduced where practicable.
D. The Shortcomings and Misconceptions That This Rulemaking Seeks To
Remedy Are More Apparent in the Modern Economy
The NPRM explained that certain technological and social changes
have made shortcomings of the economic reality test more apparent in
the modern economy. It highlighted the effects of three types of
change. First, falling transaction costs in many industries makes it
more cost effective for firms to hire independent contractors rather
than employees to perform core functions.\12\ This in turn means
analyzing the importance of the work through the ``integral part''
factor, which the Supreme Court never endorsed, is more likely to
result in misleading signals regarding an individual's employment
status. Second, the transition from a more industrial-based to a more
knowledge-based economy reduces the probative value of the investment
factor in certain industries because individuals can be in business for
themselves in those industries with minimal physical capital. Third,
shorter job tenures among employees dull the ability of the permanence
factor to distinguish between employees and independence contractor.
See 85 FR 60608-09.
---------------------------------------------------------------------------
\12\ 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); 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.'').
---------------------------------------------------------------------------
Several commenters agreed with the Department's assessments of
modern trends. See, e.g., TechNet (``Given falling transaction costs,
companies are more willing to allocate certain pieces of their
production, even integrated parts, to independent contractors.''); Food
Industry Association (``societal changes have resulted in innovative
work arrangements and changes in job tenure expectation''). Former
Deputy Under Secretary of Labor and retired law professor Henry H.
Perritt, Jr. found the discussion of modern trends to be ``particularly
insightful and should be retained and expanded in the preamble to any
final rule.'' Other commenters disagreed. The AFL-CIO, for instance,
theorized that lower transaction costs ``might just as easily result in
employers not taking steps to retain employees who perform work central
to their business, but instead tolerate frequent turnover in such
positions'' and that the ``job tenure of independent contractors may
have fallen more'' than for employees--though it did not provide
evidence in support of its hypotheses.\13\ The Department continues to
believe that each of the above shortcomings of the previously applied
economic reality test provides sufficient reason for this rulemaking
and that technological and societal changes have made these
shortcomings even more apparent.
---------------------------------------------------------------------------
\13\ The Department notes that it is unlikely that job tenures
of independent contractors have fallen by more than employees
because average job tenure for employees have dropped by many years,
which is greater than the total duration of a typical independent
contractor relationship. See 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. (showing that median job tenure
for individuals born in 1933 was ten years or longer while median
job tenure for individuals born after 1983 was three years or less).
---------------------------------------------------------------------------
E. Effects of Additional Regulatory Clarity on Innovation
The NPRM expressed concern that the legal uncertainty arising from
the above-described shortcomings of the multifactor economic reality
test may deter innovative, flexible work arrangements that benefit
businesses and workers alike. Some commenters questioned this
assumption. The Coalition of State Attorneys General, Cities, and
Municipal Agencies (State AGs), for instance, contended that the
Department ``provides no empirical evidence or data demonstrating that
employers now hesitate to engage in innovative arrangements'' and
further argued that because ``digital platforms have become part of the
modern economy . . . they have not been stifled by the current test.''
But the mere existence of certain types of businesses is insufficient
evidence that other such businesses are not being stifled, and it is
unclear what empirical data could measure innovation that is not
occurring due to legal uncertainty. Commenters who represent technology
companies stated that legal uncertainty regarding worker classification
in fact deters them from developing innovative and flexible work
arrangements. See, e.g., CWI; TechNet. In addition, economists who
study the impact of labor regulation on entrepreneurship also commented
that clear independent contractor regulations would assist startup
companies. Dr. Liya Palagashvilli (``71 percent of startups relied on
independent contractors and thought it was necessary to use contract
labor during their early stages''); Dr. Michael Farren and Trace
Mitchell (``[G]reater legal clarity to employers and workers will allow
for more efficient production processes and will reduce the resources
wasted on determining a worker's employment classification through the
legal process.'').
For the reasons mentioned above, the Department continues to
believe that, unless revised, the multifactor economic reality test
suffers because the analytical lens through which all the factors are
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 resulting legal uncertainty obscures
workers' and businesses' respective rights and obligations under the
FLSA and deters innovative work arrangements, thus inhibiting the
development of new job opportunities or eliminating existing jobs. The
Department is therefore issuing this final rule to increase legal
certainty.
IV. Final Regulatory Provisions
Having reviewed commenter feedback submitted in response to the
proposed rule, the Department is finalizing the addition of a new part
795 to Title 29 of the Code of Federal Regulations, which will address
whether particular workers are ``employees'' or independent contractors
under the FLSA. In relevant part, and as discussed in greater detail
below, the part includes:
An introductory provision 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 and clarifying that the concept of economic
[[Page 1176]]
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 typically carry
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 probative than what may be contractually or
theoretically possible;
fact-specific examples at Sec. 795.115; and
a severability provision at Sec. 795.120.
The Department responds to commenter feedback on the proposed rule
below.
A. The Purpose of Part 795
Proposed Sec. 795.100 explained that the interpretations 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.
See 85 FR 60638. Proposed Sec. 795.100 further clarified that, if
proposed part 795 is adopted, employers may safely rely upon the
interpretations 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.'' Id. (quoting 29 U.S.C. 259).
Few commenters specifically addressed proposed Sec. 795.100, but
several discussed issues relevant to its content. For example, a few
commenters questioned the Department's legal authority to promulgate
any regulation addressing independent contractor status under the FLSA.
See Northern California Carpenters Regional Council (``At no time since
the FLSA was passed has Congress made substantive amendments to the
definitions of employee, employer, or the `suffer or permit to work'
standard . . . nor has it directed any changes in the controlling
regulations.''); Rep. Bobby Scott et al. (``Congress has not delegated
rulemaking authority to the DOL with respect to the scope of the
employment relationship under the FLSA.''). A few commenters requested
that the Department explain its source of rulemaking authority and the
level of deference it expects to receive from courts interpreting its
proposed regulation. A diverse collection of commenters, including the
American Trucking Association (ATA), the National Home Delivery
Association (NHDA), the Northwest Workers Justice Project (NWJP), and
Winebrake & Santillo, LLC, opined that the Department's proposed
regulation would be entitled to Skidmore deference from courts, though
these commenters diverged on the proposed rule's ``power to persuade.''
Skidmore v. Swift & Co., 323 US 134, 140 (1944). Finally, the AFL-CIO
asserted that ``[t]he proposed rule is based on considerations that did
not motivate Congress when it adopted the FLSA, that the Department of
Labor is not authorized to consider in construing the terms of the
FLSA, and that the Department has no expertise regarding,'' thus
placing the proposed rule ``outside the `limits of the delegation' from
Congress to the Department contained in the Act.'' (quoting Chevron,
U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 865 (1984)).
The Department appreciates commenter interest in these issues. The
Department without question has relevant expertise in the area of what
constitutes an employment relationship under the FLSA, given its
responsibility for administering and enforcing the Act \14\ and its
decades of experience doing so. The Department's authority to interpret
the Act comes with its authority to administer and enforce the Act. See
Herman v. Fabri-Centers of Am., Inc., 308 F.3d 580, 592-93 (6th Cir.
2002) (noting that ``[t]he Wage and Hour Division of the Department of
Labor was created to administer the Act'' while agreeing with the
Department's interpretation of one of the Act's provisions); Dufrene v.
Browning-Ferris, Inc., 207 F.3d 264, 267 (5th Cir. 2000) (``By granting
the Secretary of Labor the power to administer the FLSA, Congress
implicitly granted him the power to interpret.''); Condo v. Sysco
Corp., 1 F.3d 599, 603 (7th Cir. 1993) (same). The Department believes
a clear explanation of the test for whether a worker is an employee
under the FLSA or an independent contractor not entitled to the
protections of the Act in easily accessible regulatory text is valuable
to potential employers, to workers, and to other stakeholders. It has a
long history of offering interpretations in this area and believes this
rulemaking has great value regardless of what deference courts
ultimately give to it.
---------------------------------------------------------------------------
\14\ See 29 U.S.C. 204, 211(a), 212(b), 216(c), 217; see also
Fernandez v. Zoni Language Centers, Inc., 858 F.3d 45, 48-49 (2d
Cir. 2017) (noting that ``[t]he DOL . . . administers the FLSA'').
---------------------------------------------------------------------------
While proposed Sec. 795.100 emphasized that part 795 would state
the Department's interpretation of independent contractor status under
the FLSA, some commenters expressed concern that it would affect the
scope of employment under other Federal laws. The United Food and
Commercial Workers International Union (UFCW) believed that the
proposal may narrow the coverage of the ``Title VII of the Civil Rights
Act of 1964, Americans with Disabilities Act, Age Discrimination in
Employment Act (ADEA), and the Equal Pay Act.'' See also National
Women's Law Center (NWLC); CLASP. The Department reaffirms that the
rule concerns the distinction between employees and independent
contractors solely for the purposes of the FLSA, and as such, would not
affect the scope of employment under other Federal laws.\15\
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\15\ Additionally and as explained in greater detail below, this
rule does not narrow the longstanding standard for distinguishing
between FLSA employees and independent contractors; employees are
economically dependent on another for work, and independent
contractors are in business for themselves as matter of economic
reality.
---------------------------------------------------------------------------
Many commenters requested that the Department promulgate a standard
more broadly applicable across other state and Federal employment laws.
See, e.g., American Society of Travel Advisors, Inc. (``[The NPRM . . .
represents something of a missed opportunity insofar as it fails to
address the longstanding difficulty associated with the continued use
of multiple tests at the Federal level to determine worker status.'');
Cambridge Investment Research, Inc. (``[W]ithout a more encompassing
Department position or guidance addressing different state standards,
some of the current uncertainty and unpredictability remain.''); Chun
Fung Kevin Chiu (``[I]nconsistent Federal and state standards with
regards to classification may render the DOL rules ineffective in
practice for those independent contractors and businesses affected.'').
While several commenters acknowledged the Department's lack of
authority to interpret the scope of laws outside of its jurisdiction,
the National Association of Manufacturers and the Mechanical
Contractors Association of America (MCAA) urged the Department to
collaborate with other Federal agencies to harmonize the varying
employment definitions under Federal law. Finally, the Zobrist Law
Group ``urge[d] the Department to prohibit states from using
classification tests that
[[Page 1177]]
conflict with the proposed rule,'' asserting that ``state law not
preempted by the FLSA is narrow'' and that state laws ``shifting an
independent contractor under the FLSA to an employee under state law .
. . [impose] greater obligations upon those workers.'' But see
Truckload Carriers Association (``TCA understands that, due to our
nation's federalist system, individual states such as California can
pursue misguided statues that are more stringent than the Federal
standard the Department is seeking to clarify[.]'').
While the Department appreciates the desire to achieve uniformity
across the various state and Federal laws which may govern work
arrangements, requests to modify definitions and tests under different
laws are outside the scope of this rulemaking.
Some commenters supportive of the proposed rule requested that the
Department make conforming edits to its MSPA regulation at 29 CFR
500.20(h)(4), addressing whether or not a farm labor contractor engaged
by an agricultural employer/association is an independent contractor or
an employee under MSPA. See Americans for Prosperity Foundation (AFPF)
(``To further the Department's goal of clarification, simplification,
and consistency . . . the same criteria used in the NPRM to define
independent contractors for purposes of the FLSA also should apply to
the MSPA, and to any other provision that references the FLSA.'');
Administrative Law Clinic at the Antonin Scalia Law School (``[T]he
Department should simply use its proposed regulations in 29 CFR
795.100, et seq., to determine employee status under MSPA, and repeal
[29 CFR 500.20(h)] as duplicative.''). Relatedly, Texas RioGrande Legal
Aid (TRLA), which expressed opposition to the proposed rule, asserted
that ``the proposed rule will lead to considerable confusion among both
employers and workers . . . because the proposed rule at odds with the
Department's [MSPA] regulations,'' but opined that any effort to revise
29 CFR 500.20(h) ``would be in direct contravention of Congressional
directives regarding the interpretation of the MSPA.''
As noted in the NPRM preamble, the Department acknowledges 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. At this time, however, the Department does not see a
compelling need to revise 29 CFR 500.20(h)(4), as we are unsure whether
application of the six factor economic reality test described in that
regulation has resulted in confusion and uncertainty in the more
limited MSPA context similar to that described in the FLSA context.
Importantly, the regulatory standard for determining an individual's
classification status under MSPA is generally consistent with the FLSA
guidance finalized in this rule: ``In determining if the farm labor
contractor or worker is an employee or an independent contractor, the
ultimate question is the economic reality of the relationship--whether
there is economic dependence upon the agricultural employer/association
or farm labor contractor, as appropriate.'' 29 CFR 500.20(h)(4).
Therefore, as explained in the NPRM, the Department prefers to proceed
incrementally at this time by leaving the MSPA regulation at 29 CFR
500.20(h)(4) unchanged.16 17
---------------------------------------------------------------------------
\16\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 no others); Inv. Co. Inst. v. Commodity
Futures Trading Comm'n, 720 F.3d 370, 378 (D.C. 2013) (observing
that ``[n]othing prohibits Federal agencies from moving in an
incremental manner'' (quoting FCC 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'').
\17\ Similar to the MSPA regulation at 29 CFR 500.20(h)(4), a
regulation promulgated by the Department's Veterans' Employment &
Training Service (VETS) at 20 CFR 1002.44 articulates a six-factor
balancing test based on the tests used by courts under the FLSA for
determining whether an individual is an employee or an independent
contractor under the Uniformed Services Employment and Reemployment
Rights Act (USERRA). See 70 FR 75254 (``The independent contractor
provision in this rule is based on Congress's intent that USERRA's
definition of `employee' be interpreted in the same expansive manner
as the term is defined under the [FSLA].'' (citing H.R. Rep. No.
103-65, Pt. I, at 29 (1993); S. Rep. No. 103-58, at 40 (1993))).
Consistent with this rulemaking's incremental focus of the FLSA
context, the Department declines to amend 20 CFR 1002.44 at this
time.
---------------------------------------------------------------------------
The American Network of Community Options and Resources (ANCOR)
expressed concern about the Department's statement in proposed Sec.
795.100 that, if finalized, the proposed rule ``would contain the
Department's sole and authoritative interpretation of independent
contractor status under the FLSA,'' fearing that the statement could be
interpreted to ``render obsolete the Department's specific guidance on
the application of the FLSA to shared living in Fact Sheet #79G and
Administrator's Interpretation No. 2014-1.'' The Department disagrees
with this interpretation, noting that Sec. 795.100 only rescinds
earlier WHD guidance addressing independent contractor status under the
FLSA ``[t]o the extent . . . [that such guidance is] inconsistent or in
conflict with the interpretations stated in this part.'' As explained
in the NPRM, the Department engaged in this rulemaking to ``clarify the
existing standard, not radically transform it,'' 85 FR 60636, and none
of the industry-specific guidance in Administrator's Interpretation No.
2014-1 is meaningfully affected by this final rule. For similar
reasons, we believe that the assertion by the Nebraska Appleseed Center
for Law in the Public Interest (Appleseed Center) that this rulemaking
will ``rescind years of [Departmental] guidance'' is an overstatement.
This rule is premised on familiar FLSA concepts that courts, employers,
workers, and the Department have applied for years while providing
updated and clearer explanations of what the concepts mean and how they
are considered. Although this rule will change the Department's
analysis for classifying workers as employees or independent
contractors in some respect, those changes do not favor independent
contractor classification (i.e., the ultimate legal outcome) relative
to the status quo, but rather offer greater clarity as to workers'
proper classifications.
B. Clarification That Independent Contractors Are Not Employees Under
the Act
Proposed Sec. 795.105(a) explained that an independent contractor
who renders services to a person is not an employee of that person
under the FLSA, and that the Act's wage and hour requirements do not
apply with respect to a person's independent contractors. See 85 FR
60638-39. Proposed 795.105(a) similarly explained that 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. Id.
The vast majority of substantive comments agreed with proposed
Sec. 795.105(a). One anonymous commenter suggested that the Department
interpret the FLSA's minimum wage and overtime pay requirements to
apply to independent contractors because the Act's ``declaration of
policy'' at 29 U.S.C. 202 ``suggests the purpose of the FLSA is to
protect workers.'' The Department does not adopt this interpretation
because Federal courts of appeals have uniformly held, and the
Department has consistently maintained, that ``FLSA wage and hour
requirements do not apply to true independent contractors.'' Karlson,
860 F.3d at 1092; see also, e.g., Parrish, 917 F.3d at 384; Saleem, 854
[[Page 1178]]
F.3d at 139-40; Express Sixty-Minutes Delivery, 161 F.3d at 305; see
also Portland Terminal, 330 U.S. at 152 (holding that the FLSA ``was
obviously not intended to stamp all persons as employees'').
C. Adopting the Economic Reality Test To Determine a Worker's Employee
or Independent Contractor Status Under the Act
Proposed Sec. 795.105(b) would adopt the economic reality test to
determine a worker's status as an employee or an independent contractor
under the Act. As the proposal explained, the inquiry of 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 85 FR
60611; see also Pilgrim Equip., 527 F.2d at 1311 (``It is dependence
that indicates employee status.''). The proposal and this final rule
provide further clarity as to the economic reality test's touchstone--
economic dependence.
The NPRM preamble explained that 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 (quoting Superior Care, 840 F.2d at 1059). This conception 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 for an
employer.\18\ The Department did not receive any substantive comments
disputing this distinction between employee and independent contractor
classification under the Act.
---------------------------------------------------------------------------
\18\ The Department's prior guidance has stated that ``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.'' Fact Sheet #13;
see also WHD Opinion Letter FLSA-795 (Sept. 30, 1964). Upon
consideration, however, the Department believes that describing an
employee as someone who ``follows the usual path of an employee'' is
circular and unhelpful.
---------------------------------------------------------------------------
The Department observed in the NPRM preamble that 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). This approach is inconsistent with
the Supreme Court's instruction that the economic reality analysis be
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.\19\
---------------------------------------------------------------------------
\19\ 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 or permission of a potential employer,
see 29 U.S.C. 203(g), and thus are not dependent on that potential
employer for work. Section 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 work.
Many commenters supported the Department's decision to implement
the economic reality test applying the above-described approach to
economic dependence. WPI applauded the ``decision to retain the long-
standing economic reality test while sharpening the factors used to
apply that test.'' The NRF stated that the economic reality test ``is
the proper basis for distinguishing independent contractors from
employees under the FLSA as articulated by the U.S. Supreme Court.''
ATA) found that the economic dependence framework ``comports with a
thoughtful reading of decades of court precedent.'' See also Americans
for Prosperity Foundation; Cetera Financial Group; Center for Workplace
Compliance (``DOL is correct to propose using the economic dependence
standard for determining whether an individual is an employee or
independent contractor'').
The majority of commenters agreed with the Department's proposal to
adopt the economic reality test using the above-mentioned definition of
economic dependence, including commenters that were generally critical
of the proposed rule. For example, the State AGs approvingly stated
that ``[f]or nearly three-quarters of a century, the Supreme Court has
held that whether a worker is a covered ``employee'' under the FLSA is
governed by the economic reality test.'' See also National Employment
Law Project (NELP); Signatory Wall and Ceiling Contractors Alliance
(SWACCA) (recommending adopting an economic reality test with a
different number of factors). While objecting commenters challenged
various aspects of the proposed rule, they did not dispute the
sharpened explanation of the economic dependence inquiry. Commenters,
both supportive and objecting, made a number of thoughtful suggestions,
which are addressed below.
The Administrative Law Clinic at the Antonin Scalia Law School
suggested further clarifying the test by adding ``[a]n individual is
not an `employee' merely because he or she is economically dependent in
some way on the potential employer.'' Such additional language may be
redundant in Sec. 795.105(b) because that section already articulates
economic dependence as dependence on a potential employer for work, as
opposed to being in business for oneself. As explained above, other
forms of dependence, such as dependence on income or subsistence, do
not count. However, given how important it is to apply the correct
concept of economic dependence, the Department believes this point
bears emphasis through a concrete, fact-specific example in the
regulatory text. The Department is thus adding an example in Sec.
795.115 to demonstrate that a different form of dependence, i.e.,
dependence of income or subsistence, is not a relevant consideration in
the economic reality test.
[[Page 1179]]
A number of individual commenters who generally support this rule
requested that the Department allow workers who voluntarily agree to be
independent contractors to be classified as such, regardless of other
facts. For example, Farren and Mitchell urged the Department to ``allow
the parties themselves to explicitly define the nature of their labor
relationship,'' asserting that such an approach would respect worker
autonomy, maximize legal certainty, and promote greater flexibility in
work arrangements. This requested approach would allow voluntary
agreements to supersede the economic reality test in determining
classification as an employee or independent contractor. The Supreme
Court, however, held in Tony & Susan Alamo, 471 U.S. at 302, that the
FLSA must be ``applied even to those who would decline its
protections.'' In other words, an individual may not waive application
of the Act through voluntary agreement. See Barrentine v. Arkansas-Best
Freight Sys., Inc., 450 U.S. 728, 740 (1981) (``FLSA rights cannot be
abridged by contract or otherwise waived, because this would `nullify
the purposes' of the statute and thwart the legislative policies it was
designed to effectuate.'') (quoting Brooklyn Savings Bank v. O'Neil,
324 U.S. 697, 707 (1945)); Lauritzen, 835 F.2d at 1544-45 (``The FLSA
is designed to defeat rather than implement contractual arrangements.
If employees voluntarily contract to accept $2.00 per hour, the
agreement is ineffectual.'') (Easterbrook J., concurring). Because this
request would contradict this precedent by allowing the possibility of
workers who are employees under the facts and law to waive the FLSA's
protections by classifying themselves as independent contractors, the
Department declines to implement it in the final rule.
Some commenters, including the Minnesota State Building &
Construction Trades Council, PJC, and SWRCC, suggested that the rule
include a presumption of employee status. The Supreme Court has said
and the Department agrees that this is a totality of the circumstances
analysis, based on the facts. The Department thus declines to create a
presumption in favor of employee status.
NELA, Farmworker Justice (FJ), and several other commenters
requested that the Department abandon the economic reality test in
favor of the ABC test adopted by the California Supreme Court in
Dynamex Operations West v. Superior Court, 416 P.3d 1 (2018). By
contrast, other commenters, such as the American Society of Travel
Advisors (ASTA) and National Federation of Independent Business (NFIB),
urged the Department to adopt the common law standard used to
distinguish between employees and independent contractors under the
Internal Revenue Code and other Federal laws. These requests are
addressed in the discussion of regulatory alternatives in Section VI,
which explains why the Department is not adopting either the common law
control test or the ABC test for employment under the FLSA.
For the reasons discussed above, the Department adopts Sec.
795.105(b) as proposed to adopt the economic realty test to determine
whether an individual is an employee or independent contractor under
the FLSA. Under that test, an individual is an employee if he or she is
dependent on an employer for work, and is an independent contractor if
that he or she is, as a matter of economic reality, in business for
him- or herself.
D. Applying the Economic Reality Factors To Determine a Worker's
Independent Contractor or Employee Status
Proposed Sec. 795.105(c) explained that certain nonexclusive
economic reality factors guide the determination of whether an
individual is, on one hand, economically dependent on a potential
employer for work and therefore an employee or, on the other hand, in
business for him- or herself and therefore an independent contractor.
See 85 FR 60639. These factors were listed in proposed Sec.
795.105(d), based on the factors currently used by the Department and
most Federal courts of appeals, with certain proposed reformulations.
Id.
First, the Department proposed to follow the Second Circuit's
approach of analyzing the worker's investment as part of the
opportunity factor. The combined factor asked whether the worker has an
opportunity to earn profits or incur losses based on his or her
exercise of initiative or management of investments. See 85 FR 60613-
15, 60639. Second, the Department proposed 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 factors. See 85 FR 60615, 60639. Third, the Department
proposed 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. See 85 FR 60615-16, 60639. Lastly,
the Department proposed 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 in Rutherford
Food, 331 U.S. at 729, of whether the work is ``part of an integrated
unit of production.'' See 85 FR 60616-18, 60639.\20\
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\20\ Consistent with WHD Opinion Letter FLSA2019-6, the
Department's proposal did not include the ``independent business
organization'' factor mentioned in Fact Sheet #13. The opinion
letter explained that the ``independent business organization''
factor was ``[e]ncompassed within'' the other factors. Because the
ultimate inquiry of the economic dependence test is whether workers
are ``in business for themselves,'' Saleem, 854 F.3d at 139,
analyzing the worker's degree of ``independent business
organization'' restates the inquiry and adds little, if anything, to
the analysis that is not already covered by the other factors.
---------------------------------------------------------------------------
Proposed Sec. 795.105(c) further aimed to improve 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. The proposed rule
explained that if both proposed core factors point towards the same
classification--whether employee or independent contractor--there is a
substantial likelihood that that classification is appropriate. See 85
FR 60618-20, 60639.
The following discussion addresses commenter feedback on the five
proposed economic reality factors.
1. The ``Nature and Degree of the Individual's Control Over the Work''
Factor
The first core factor identified in the proposed regulatory text
was the ``nature and degree of the individual's control over the
work.'' 85 FR 60639. Proposed Sec. 795.105(d)(1)(i) explained that
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.''
Proposed Sec. 795.105(d)(1)(i) further explained that, 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
[[Page 1180]]
work exclusively for the potential employer.'' In addition, the
proposal stated that the following actions by the potential employer
``do[ ] not constitute control that makes the individual more or less
likely to be an employee under the Act'': ``[r]equiring 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).'' Numerous commenters requested changes to
the proposed control section regarding (1) the perspective from which
control is framed; (2) the examples of control that are relevant to the
economic dependence inquiry; and (3) examples of control that are not.
a. Responses to Requests Regarding the Framing of Control
Some commenters asserted that the control factor should focus on
the potential employer's substantial control over the worker instead of
the worker's substantial control over the work. For example, the State
AGs said that the ``proposed control factor incorrectly focuses on the
worker's control over the work'' and that ``[w]ell-established
precedent makes clear that the proper focus is the employer's control
over the worker.'' According to NELA, ``the control analysis has
historically been, and should continue to be, on the control that the
employer has over the employee, not that the employee has over their
work.'' NELA added that the Department ``cannot deny that its proposal
casts the control inquiry differently than the Supreme Court, courts of
appeals, and the Department have in the past.'' And the United
Brotherhood of Carpenters and Joiners of America stated that the
proposal's ``focus on the individual's control over the work turns the
`suffer or permit' standard on its head'' because that standard
``references the purported employer's behavior--not the worker's.'' See
also Northern California Carpenters Regional Council (noting that
``[b]ecause the `nature and degree of the individual's control over the
work' . . . focuses on the individual's control, as opposed to the
employer's control, the factor skews towards most skilled tradespeople
being classified as independent cont[r]actors''). Relatedly, attorney
Richard Reibstein suggested that the title of the control subsection
``be re-drafted in a manner that does not suggest it favors independent
contractor status because the remaining text regarding [the control
factor] is neutral.'' Mr. Reibstein suggested that the title be changed
from the ``nature and degree of the individual's control over the
work'' to the ``nature and degree of each party's control over the
work.'' Finally, WPI expected that some commenters would object to the
Department's proposed articulation of the control factor, and it
supported the Department's approach by saying that ``the economic
reality test focuses on the individual--whether the individual is
economically dependent on another business or in business for him or
herself,'' and that, ``[t]hus, the focus of each factor should also be
on the economic realities of the individual, not the businesses with
which [he or she] contracts.'' See also CPIE (supporting ``the NPRM's
articulation of this factor'').
Notwithstanding differing commenter preferences over the primary
articulation of the control factor, the proposed (and final) regulatory
text at Sec. 795.105(d)(1)(i) discusses both the individual worker's
control and the potential employer's control.\21\ This approach is
consistent with that of courts, which also generally consider both the
individual's control and the potential employer's control. See, e.g.,
Razak, 951 F.3d at 142; Hobbs, 946 F.3d at 829; Saleem, 854 F.3d at
144-45; Karlson, 860 F.3d at 1096. The Department explained in the NPRM
preamble that whether the control factor is articulated with reference
to the individual worker's control or the potential employer's control
is a ``distinction . . . of no consequence,'' and that both ``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.'' 85 FR 60612
n.34. The Department reaffirms that statement now and reiterates that
both the worker's control and the potential employer's control should
be considered. To remove any ambiguity on this point, the Department
has modified the title of subsection 795.105(d)(1)(i) to ``[t]he nature
and degree of control over the work,'' removing the proposed rule's
reference to ``the individual's control over the work.'' This revised
articulation is closer to the Supreme Court's description of the
economic reality test's control factor in Silk, 331 U.S. at 716
(``degrees of control''), which does not indicate a focus on either the
individual worker or the potential employer.
---------------------------------------------------------------------------
\21\ As Mr. Reibstein acknowledged, the proposed regulatory text
beyond the title of the control section was written in a ``neutral''
manner. The final regulatory text is written in a similarly neutral
manner.
---------------------------------------------------------------------------
Mr. Reibstein also suggested that the control factor ``should be
drafted in a manner that focuses attention on the key to control, which
is control over the manner and means by which the work in question is
performed.'' He asserted that, as proposed, the control section ``is
ambiguous at best and may be misleading at worst,'' and suggested that
``control over the work'' should be changed to ``control over the
performance of the work, particularly how the work is to be
performed.'' The Department, however, prefers to retain the ``control
over the work'' articulation. It is purposefully broad to encompass
various different types of control that the individual worker and the
potential employer may exercise over the working relationship.
Moreover, the Department agrees that who controls the manner and means
by which the work is performed is a key component of the control
analysis, and the Department believes that both the proposed and final
regulatory text reflect the importance of the manner and means by which
the work is performed.
b. Responses to Comments Regarding Examples of Relevant Control
A number of comments addressed the proposed regulatory text's three
non-exhaustive examples of control that may indicate employee or
independent contractor status, which were setting schedules, selecting
projects, and working exclusively for the employer or working for
others.
Several commenters sought clarification that these examples may not
always be probative of an employment or independent contracting
relationship. For instance, NRF stated ``there may be limits on
schedules that are consistent with business relationships that should
not be treated as impacting the analysis,'' such as delivery workers
who can deliver only during the restaurant's operating hours and a
retailer that arranges for after-hours cleaning services. The
Department agrees that there are examples of impacts on a workers
schedule that are not probative of the type of control that indicates
economic dependence and that NRF has identified two such examples by
pointing to the fact that a delivery worker can deliver for a
restaurant only when the restaurant is open and a cleaning worker can
clean a retailer only when it is closed. But the Department does not
think any change to the regulatory text is warranted to clarify this
point, as the regulatory text merely provides a few examples of facets
of control that may--
[[Page 1181]]
or may not--be probative in any given case depending on the facts. NHDA
sought clarification of the working for others example because, in its
view, ``it is not enough for the individual to claim he/she never
turned down projects or never worked for others. Rather, the individual
must demonstrate some action, implementation, or execution (in other
words, act or conduct) by the potential employer that prevented the
individual from turning down projects or working for others.'' In
response, the Department notes its statement in the NPRM preamble that
``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.'' 85 FR 60613 (citing cases where the employer's
schedule made it ``impossible'' or ``practically impossible'' for the
worker to work for others). Where a worker could work for others,
meaning the potential employer is not explicitly or effectively
preventing the worker from doing so, the worker retains control over
this aspect of his or her work. That he or she exercises this control
by choosing to work only for one potential employer does not
necessarily shift the control to the potential employer. Further, the
parties' actions, including whether the potential employer enforced an
explicit bar on working for others or has imposed working conditions
that make doing so impracticable, are stronger evidence of control than
contractual or theoretical ability or inability to control this aspect
of the working relationship.\22\
---------------------------------------------------------------------------
\22\ The Department received related feedback from commenters
asking for proposed Sec. 795.110 to discount the relevance of
voluntary worker practices (e.g., choosing to work exclusively for
one business, declining to negotiate prices, etc.); as explained in
greater detail in Section IV(F), coercive behavior by a potential
employer (e.g., vigilant enforcement of a non-compete clause,
punishing workers for turning down available work, etc.) constitutes
stronger evidence of employment status than such voluntary worker
practices, but is not a prerequisite for such worker practices to
have import under the FLSA's economic reality test.
---------------------------------------------------------------------------
Some commenters interpreted the few examples of control in the
proposal as an effort to limit the types of control that may be
considered. For example, Farmworker Justice stated that the proposal
``improperly and erroneously tries to narrow the relevant
considerations for the [control] factor.'' According to Edward
Tuddenham, the proposal ``lists some `key' elements of control that . .
. may have little or no significance whatsoever'' and ``[s]uch a rigid
approach to the question of control can only wreak havoc with the
established common law of FLSA employer/employee relationships.''
However, the examples of types of control identified in the proposal
were not an attempt to narrow or limit the control factor analysis. The
Department cannot provide an exhaustive list of types of control and so
instead focused on several key examples of types of control. Any type
of control over the work by the individual worker or the potential
employer may be considered. Such considerations should not be
``mechanical,'' Saleem, 854 F.3d at 140, and instead must focus on
whether the control exercised by either the individual or the potential
employer answers the ultimate inquiry of ``whether the individual is,
as a matter of economic reality, in business for himself,'' as opposed
to being economically dependent on the potential employer for work. In
any event, as explained below, the Department is clarifying types of
control that may be relevant to the analysis.
Numerous other commenters suggested the addition of dozens of
examples of types of control that indicate employee or independent
contractor status. For example, WPI suggested that the following types
of control by the individual worker are indicative of independent
contractor status: Controlling whether to work at all; controlling the
location of where to perform the work; controlling how the work is
performed; setting prices or choosing between work opportunities based
on prices; and hiring employees or engaging subcontractors. It
suggested, conversely, that the following types of control by the
potential employer are indicative of employee status: Requiring the
individual worker to comply with company specific procedures regarding
how the work is performed; requiring a set schedule or minimum hours;
controlling when the individual can take meal and rest breaks; and
controlling when the individual can take time off. CWI recommended
addition of the following as examples of the individual worker's
control over the work that are indicative of independent contractor
status: The worker's ability to make decisions with respect to the
details of how the work is performed, including the staging and
sequencing of aspects of the work; the worker's selection of supplies,
tools, or equipment to be used (or not used) by the worker; the
worker's control over when the work is conducted (e.g., worker
flexibility in start and end times) where flexibility exists in the
result to be accomplished or the time periods available to a worker to
offer their services; the worker's control over where certain aspects
of the services can be performed where the subparts do not change the
results provided by the worker; and the worker's discretion to use the
services of others to perform the work in whole or in part, or to
support the worker's performance of services (including performing some
of the contracted work and/or performing supporting services such as
accounting, legal, administrative, or financial services to support the
worker or services to support equipment or tools used by the worker to
perform services). UPS stated that the proposal ``fails to provide
examples beyond controlling the worker's schedule or workload and
restricting the worker's ability to work with other entities,'' and
that ``courts have properly widened the lens when assessing control,
looking at factors such as background checks, authority to hire and
fire, training, advertising, licensing, uniforms, monitoring,
supervision, evaluation, and discipline.'' Farmworker Justice commented
that the proposal did ``not acknowledge other examples of employer
control that unquestionably shape a worker's experience and performance
of daily tasks'' and provided as examples ``[r]equirements about how a
worker must dress, what language or tone she may use in a professional
setting, or what prices she must charge customers.'' Likewise, Sen.
Sherrod Brown and 22 other senators commented that the proposal
``ignore[s] other critical matters of control that an employer
typically exercises or retains the right to, including setting the rate
of pay and the manner in which the work must be performed and
disciplining workers who do not meet their standards.'' And Human
Rights Watch commented that the proposed control factor ``potentially
omits other ways that gig companies control their workers, such as the
ways in which they unilaterally change the formula for calculating base
earnings, the setting of default tip options, and restrictions on the
range of assignments that are offered to workers at a specific time or
in a specific locale.'' Other commenters provided various industry-
specific examples that they viewed as indicative of control by the
individual worker or the potential employer.
The Department has considered the various comments regarding
additional examples of types of control that can be indicative of
employee or independent contractor status and declines to make changes
to the proposed regulatory text in response. While this preamble and
[[Page 1182]]
the regulatory test cannot (and should not) address each and every
potential scenario and example, they clarify and articulate principles
related to the control factor that can be applied to an array of fact
patterns as they arise.
As an initial matter, a number of commenters' examples fall within
the general categories of control already identified in the regulatory
text. For example, the worker's controlling whether to work at all,
controlling when the work is conducted, and choosing between work
opportunities based on prices are all examples of the worker's setting
his or her schedule or selecting his or her projects, which the
regulatory text identifies as examples of the worker's control over the
work. Similarly, the potential employer's requiring a set schedule or
minimum hours, controlling when the individual can take meal and rest
breaks, controlling when the individual can take time off, and
restricting the range of assignments that are offered to the worker are
all examples of the potential employer's control over the worker's
schedule, workload, or both, which the regulatory text identifies as
examples of the potential employer's control over the work.
Moreover, as explained in the NPRM preamble, the Department is
concerned that application of the economic reality factors has resulted
in certain overlaps between the factors. See 85 FR 60607-08
(identifying ways in which the former skill/initiative, permanence, and
``integral'' factors considered control). Consistent with that
discussion and in the interest of further clarification, the Department
reiterates that the worker's ability to exercise significant
initiative, whether the potential employer directly or indirectly
requires the worker to work exclusively for it, and the potential
employer's ability to compel the worker's attendance to work on a
consistent basis or otherwise closely supervise and manage performance
of the work are examples of relevant types of control and are part of
the control analysis. And as stated above, the Department agrees that
who controls the manner and means by which the work is performed is a
key component of the control analysis. In addition, the Department
approvingly cited in the NPRM preamble cases in which the workers'
ability to accept or reject projects or deliveries without negative
repercussions or retaliation,\23\ the potential employer's lack of
close supervision or specifications how the workers should do the
work,\24\ and the potential employer's allowing the workers broad
discretion in the manner in which to complete their work \25\ indicated
substantial control over the work by the workers. Finally, the
Department agrees that the various examples of types of control
identified by the commenters above may, at least in some factual
circumstances, be relevant to the control analysis.
---------------------------------------------------------------------------
\23\ See 85 FR 60612 n.35 (citing Parrish, 917 F.3d at 382;
Express Sixty-Minutes Delivery, 161 F.3d at 303).
\24\ See id. (citing Thibault, 612 F.3d at 847).
\25\ See 85 FR 60612-13 (citing Mid-Atl. Installation, 16 F.
App'x at 106).
---------------------------------------------------------------------------
Ultimately, however, it is not possible--and would be
counterproductive--to identify in the regulatory text every type of
control (especially industry-specific types of control) that can be
relevant when determining under the FLSA whether a worker is an
employee or independent contractor. As explained above, the Department
purposefully articulated the control analysis in a general manner to
encompass various different types of control that the individual worker
and the potential employer may exercise over the working relationship,
and to avoid any unintended inferences regarding omitted types of
control. Accordingly, any type of control over the work by the
individual worker or the potential employer may be considered, although
some types of control are not probative of economic dependence as set
forth in the final regulatory text (and discussed below).
The Owner-Operator Independent Drivers Association (OOIDA) objected
that the proposal ``offers no guidance on how'' the examples of types
of control ``should be weighed against each other'' and asked whether
the Department intends ``that a worker must satisfy all of the criteria
that it mentions in order to be an independent contractor,'' or if
there is ``some other balance when evaluating this factor.'' OOIDA
noted that although the proposal stated that no single factor of the
economic reality test is dispositive, ``it does not offer the same
clarification when considering the details within a single factor.'' As
explained above, any type of control over the work by the individual
worker or the potential employer may be considered to the extent it is
probative as to whether the individual is, as a matter of economic
reality, in business for himself, as opposed to being economically
dependent on the potential employer for work. No single example of
control, if present or not present, is necessarily dispositive as to
whether the control factor indicates economic dependence. The examples
are simply that: Examples.
c. Responses to Comments Regarding Examples of Requirements That Are
Not Probative
Despite the final rule's broad articulation of the control factor,
not every requirement or limitation on the means of doing business
constitutes control for the purpose of analyzing whether a worker is an
employee under the FLSA. The proposed regulatory text contained
examples of requirements by a potential employer that do not constitute
control and thus are not probative to the ultimate inquiry of whether
the individual is, as a matter of economic reality, in business for
himself. These are requirements 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).'' In other words, insisting on adherence to certain
rules to which the worker is already legally bound would not make the
worker more or less likely to be an employee.
NELA challenged the Department's ``claims that case law supports
this approach'' and asserted that ``[t]he majority view among courts .
. . is that evidence of a business compelling its workers to comply
with certain legal obligations or customer requirements is probative of
control over the work relationship'' (citing Scantland v. Jeffry
Knight, Inc., 721 F.3d 1308, 1316 (11th Cir. 2013), among other cases).
NELA added that ``[c]ourts have routinely held that employer guidelines
put in place to ensure that workers conform with the law or follow
safety regulations constitute control over employees'' (citing Narayan
v. EGL, Inc., 616 F.3d 895, 902 (9th Cir. 2010), among other cases).
The National Women's Law Center similarly stated that ``courts have
regularly rejected arguments that external requirements imposed by the
defendant company's customers are irrelevant to the right to control
factor'' (citing cases). NELP asserted that the Department's ``attempts
to take away consideration of certain employer controls based on the
source of the control'' is ``nonsense'' because ``if legislators or
regulators have placed an obligation on employers to comply with
certain laws, that makes the worker less independent and more dependent
on that employer, and this should be accorded weight.'' AFL-CIO
commented that the ``categorical exclusion of evidence of control based
solely on the reasons why the employer exercises the
[[Page 1183]]
control is both irrational and contrary to Supreme Court precedent and
Congress' intent.'' And the United Brotherhood of Carpenters and
Joiners of America asserted that the Department's proposal would
``create[ ] a gaping hole that is fertile ground for exploitation by
irresponsible employers like the ones we find in the construction
industry.''
On the other hand, the Coalition to Promote Independent
Entrepreneurs ``strongly agree[d]'' with this proposal and ``agree[d]
that these types of requirements frequently apply to work performed by
employees and independent contractors alike and thus are not probative
of whether an individual is economically dependent on a company.'' In
addition, NRF asserted that ``this clarification is important, as there
is a difference between `control' and `quality control' and/or other
performance standards.'' And the Independent Bakers Association
``strongly support[ed] the proposed clarification that requiring an
individual to comply with specific legal obligations typical of
business relationships would not constitute evidence of control or make
an individual more or less likely to be an employee.'' See also SHRM
(``support[ing] the [p]roposed . . . recognition that contracting
parties should be able to build compliance with, for example, specific
legal obligations, satisfy health and safety standards, and the
carrying of insurance into the contractual relationship'').
The Department understands that some courts have found requirements
that workers comply with specific legal obligations or meet quality
control standards to be indicative of employee status. In particular,
the Eleventh Circuit in Scantland stated that it examines ``the nature
and degree of the alleged employer's control, not why the alleged
employer exercised such control'' and that ``a company must hire
employees, not independent contractors'' if ``the nature of [its]
business requires [the] company to exert control over workers to the
extent that [the defendant] has allegedly done.'' 721 F.3d at 1316. The
Scantland court correctly recognized that the ultimate inquiry in the
economic reality test is ``whether an individual is in business for
himself or is dependent upon finding employment in the business of
others.'' 721 F.3d at 1312 (quotation marks omitted). But to answer
that question it is necessary to consider ``why'' the potential
employer imposed a requirement. If the reason for a requirement applies
equally to individuals who are in business for themselves and those who
are employees, imposing the requirement is not probative. See Parrish,
917 F.3d at 379 (``although requiring safety training and drug testing
is an exercise of control in the most basic sense of the word, . . .
[r]equiring . . . 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.'').
The Scantland court's discussion of the control factor included the
fact that ``[t]echnicians could also be . . . fired, for consistently
misbilling, fraudulently billing, stealing, . . . [and] having
consistently low quality control ratings'' as evidence that the control
factor weighed in favored employee classification. 721 F.3d at 1314
(11th Cir. 2013).\26\ However, employees and independent contractors
alike are routinely terminated for fraud, theft, and substandard work.
Such dismissal are therefore not probative as to whether and the
dismissed workers were in business for themselves, as opposed to being
economically dependent on the potential employer. In contrast,
dismissals for failing to work mandatory hours or for disregarding
close supervision would be probative because mandatory hours and close
supervision are typically not imposed on individuals who are in
business for themselves. At bottom, the question of ``why'' workers
were dismissed matters a great deal.
---------------------------------------------------------------------------
\26\ The court also relied on the employers' close supervision,
control over schedules, and ability to prevent technicians from
hiring helpers or working for others to conclude that the control
factors weighed in favor of employee classification. Scantland, 721
F.3d at 1314-15.
---------------------------------------------------------------------------
In any event, Scantland's reasoning appears to be in the minority
among courts of appeals.\27\ As explained in the NPRM preamble, other
courts have concluded that requiring such types of compliance is not
probative of an employment relationship. See, e.g., Parrish 917 F.3d at
379; Iontchev v. AAA Cab Serv., Inc., 685 F. App'x 548, 550 (9th Cir.
2017) (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 ``had relatively little control over the manner in
which the [d]rivers performed their work''); Mid-Atl. Installation, 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); cf. 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). And
courts have reached analogous conclusions in joint employer cases. See,
e.g., Zheng v. Liberty Apparel Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003)
(finding 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''); Moreau v. Air
France, 356 F.3d 942, 950-51 (9th Cir. 2003) (noting that control
exercised by potential joint employer over contractor's employees to
``ensure compliance with various safety and security regulations'' is
``qualitatively different'' from control that indicates employer
status).
---------------------------------------------------------------------------
\27\ In Narayan, the Ninth Circuit applied California law--not
the FLSA--and merely recited requirements imposed by the potential
employer to comply with certain legal obligations among a litany of
examples of control that precluded summary judgment on the employee
versus independent contractor issue in that case. See 616 F.3d at
900-02.
---------------------------------------------------------------------------
In addition to the supportive case law, the extent to which courts
take differing approaches to the probative value of such requirements
is yet another example of the need identified by the Department for a
clear and uniform standard under the FLSA to distinguish between
employees and independent contractors. Moreover, the Department
believes that these types of requirements are generally imposed by
employers on both employees and independent contractors (as some
commenters indicated). Employers expect and often require all of their
workers to, for example, comply with the law, satisfy health and safety
standards, and meet deadlines and quality standards. Thus, the
existence of the requirements themselves are not probative of whether
the worker is an employee or independent contractor. Other indicia of
control over the work, including the indicia of control identified in
the final regulatory text, are more probative of the worker's economic
dependence or independence. Accordingly, the Department retains in the
final regulatory text's statement that requirements by the potential
employer that the worker ``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
[[Page 1184]]
businesses (as opposed to employment relationships)'' are not ``control
that makes the individual more or less likely to be an employee under
the Act.''
Although the ATA ``strongly agrees'' with the Department's proposal
that requirements by the potential employer that the worker ``comply
with specific legal obligations'' would not be ``control that makes the
individual more or less likely to be an employee under the Act,'' it
suggested that ``specific'' be changed to ``any'' in the final
regulatory text. ATA explained that referring to ``specific'' legal
obligations ``may unfortunately result in a great deal of litigation
over whether any particular aspect of a contract is `specifically'
mandated by law.'' It cited, as examples, laws that impose general
safety standards with which employers determine the specifics of how to
comply. See also NHDA (``The proposal carves out compliance with
specific legal obligations. However, not all legal obligations are
specific, making other language in the proposal unnecessarily
problematic.'').
After careful consideration, the Department declines to adopt the
suggested change. As an initial matter, the Department used the
``specific legal obligations'' language in its recent Joint Employer
Status under the Fair Labor Standards Act final rule. See 85 FR 2859
(finalizing 29 CFR 791.2(d)(3)).\28\ The Department noted there that
the obligations include compliance with the FLSA or other similar laws,
sexual harassment policies, background checks, or workplace safety
practices and protocols. See id. The Department did not intend a high
degree of specificity there and intends the same meaning here.
Moreover, a potential employer's requirement that a worker comply with
legal obligations without any further specificity as to the law or the
actual obligations is unlikely to be probative of control in the first
place. Accordingly, retaining the word ``specific'' is consistent with
the Department's position that, although requiring workers to comply
with legal obligations could be some manner of control, such
requirements reflect the applicable legal regime more than the
potential employer's control, and encouraging such requirements in
contractual work relationships has obvious benefits for employers,
workers, and society generally.
---------------------------------------------------------------------------
\28\ The Department's Joint Employer final rule was mostly
vacated by the U.S. District Court for the Southern District of New
York for reasons unrelated to the ``specific legal obligations''
language. See New York v. Scalia, No. 1:20-cv-1689-GHW, 2020 WL
5370871 (S.D.N.Y. Sept. 8, 2020). The Department appealed the
decision to the U.S. Court of Appeals for the Second Circuit on
November 6, 2020.
---------------------------------------------------------------------------
Other commenters expressed support for the Department's proposal to
carve out from the control analysis the identified employer actions
toward individual workers, but also requested that the Department
expand its proposal by identifying many additional employer
requirements as not types of control that make the individual more or
less likely to be an employee under the Act. For example, SHRM asserted
that ``the Final Rule must emphasize that all workers, regardless of
their formal employment status, should be able to benefit from the
training, resources, and positive workplace practices as those who are
directly employed in the same workplace,'' and it gave examples of
workplace trainings and audit measures. The U.S. Chamber of Commerce
stated that the Department ``should expand this concept'' and
``explicitly state that workers and businesses should not be
discouraged from incorporating terms (and audit and other certification
processes) into their relationship that support sound, lawful, safe
work practices.'' It suggested the following examples of such terms:
``Incorporation of an obligation that the work be performed pursuant to
acceptable professional, industry and customer service standards, as
well as commonly accepted safety, ethics, licensure and other standards
and recommendations (such as compliance with limitations or control
imposed or necessitated by law, regulation, order or ordinance).'' See
also Seyfarth Shaw (requesting that the following employer actions
toward workers be excluded from the control analysis: ``(1) compliance
with professional obligations and ethics standards; (2) compliance with
regulatory obligations, including over health and safety; (3)
compliance with other published industry standards; (4) compliance with
applicable local, state, and national licensure standards and rules;
and (5) additional contractual term examples of agreed upon results and
deadlines''); \29\ WPI (asserting that the potential employer's
practice or ability to do the following are not probative: Requiring
the individual to comply with or pass down contractual and legal
obligations to subcontractors and employees; requiring the individual
to comply with customer requirements; tracking and monitoring data
related to the individual; providing the individual with market data on
pricing; establishing default pricing that the individual may change;
providing the individual with information related to the establishment
or running of a business; providing the individual with emergency
assistance (e.g., protective equipment during a public-health crisis);
and complying with Federal, state or locals laws related to a
contracting relationship). Likewise, the Financial Services Institute
requested that the Department carve out from the control analysis
requirements that ``Independent Broker-Dealers'' (IBDs) place on their
``financial advisors'' to ``comply with requirements imposed by FINRA,
the SEC, and state securities regulators'' and exclusivity requirements
that IBDs place on their financial advisors to comply with ``the
extensive supervisory obligations imposed by the SEC and FINRA.'' OOIDA
also expressed concerns about exclusivity requirements and sought
clarification that a potential employer's compliance with ``Federal
regulations requir[ing] that an owner-operator lease[ ] his or her
equipment exclusively to a carrier for the duration of the lease'' not
affect the control analysis. Finally, CPIE asked the Department to
``make clear that duties or requirements imposed by any third party,
whether it be a government agency or a third-party customer, . . . be
disregarded'' when applying the control factor. See also NHDA
(``[C]ontrol weighing in favor of employee status should be control
exercised by the potential employer that originates with the potential
employer and does not originate from outside, independent forces or
circumstances, such as customer requirements or governmental
regulations.'').
---------------------------------------------------------------------------
\29\ In a separate section of its comment, Seyfarth Shaw
recommended that the Department state that the following are not
evidence of a potential employer's control over the work of the
worker: The business provides information regarding the final result
to be accomplished by the worker; the business provides customer
specifications/details and feedback relating to the work (including
requesting confirmation that the customer feedback has been
addressed); the business provides time frames within which services
can be provided in light of the services contracted for, and/or the
time sensitivity or perishable nature of the services/products; the
business' right to enforce contractual obligations; the business
provides the worker suggestions, recommendations, guidance, and/or
tips that are not mandated but informational relating to the
services; and the business pays the worker by the hour where it is
customary in the particular business/trade to do so (e.g.,
attorneys, physical trainers).
---------------------------------------------------------------------------
The Department does not agree with CPIE that any requirement
stemming from ``duties or requirements imposed by any third party'' be
``disregarded'' or with NHDA that only control ``that originates with
the potential employer'' can indicate employee status. This is because
a third party may explicitly or impliedly encourage businesses to
[[Page 1185]]
impose requirements on workers that signify employee classification.
For example, clients of a home cleaning company may prefer that the
company's workers wear uniforms, use the same equipment, and be closely
supervised. Imposing such requirements, even to satisfy client
preferences, makes the workers more likely to be classified as
employees because those requirements are inconsistent with the workers
being in business for themselves. A company may also require that
workers it hires perform timely and high-quality work, as clients
surely prefer. But contractually agreed-upon deadlines and quality
standards do not signify employee classification because independent
businesses routinely agree to meet deadlines and quality standards as
part of their businesses.
In response to comments requesting that the Department identify
many additional employer requirements as not types of control that make
the individual more or less likely to be an employee under the Act, the
Department declines to change its proposed regulatory text. As an
initial matter, many of the requested additions are already covered by
the proposed text. For example, the following requested additions are
requirements to ``comply with specific legal obligations'' and thus
already covered: Requirements to comply with limitations or control
imposed or necessitated by law, regulation, order, or ordinance;
regulatory obligations; Federal, state, or local laws related to a
contracting relationship; requirements imposed by FINRA, the SEC, and
state securities regulators; and Federal regulations requiring that an
owner-operator lease his or her equipment exclusively to a carrier for
the duration of the lease.\30\ Other requested additions may fall into
the ``satisfy health and safety standards'' category (for example:
Requiring that the work be performed pursuant to commonly accepted
safety standards; and providing the individual emergency assistance
such as protective equipment during a public-health crisis) or the
``meet contractually agreed-upon deadlines or quality control
standards'' category (for example: Agreements that the work be
performed pursuant to acceptable professional, industry, or published
industry standards; agreements to comply with applicable local, state,
and national licensure standards and rules; and agreed upon results and
deadlines). Other requested additions are narrow or industry-specific
in nature, and the Department prefers general guidance that may be used
by as many employers and workers as possible.
---------------------------------------------------------------------------
\30\ Uber requested that the Department clarify that background
checks are not an indicia of control: ``Where a business is required
by law to engage in certain activities (such as screening potential
workers for violent crime history), the Department should make clear
that this required screening is not an indicia of control.''
However, requiring a worker to undergo and pass a background check
when the law requires it falls in the ``comply with specific legal
obligations'' category. No further clarification is necessary.
---------------------------------------------------------------------------
In any event, it is not possible to identify in the regulation
every employer requirement that is not the type of control that makes
the individual more or less likely to be an employee under the Act. The
regulatory text accounts for this with a broader final category:
Requiring the worker to ``satisfy other similar terms that are typical
of contractual relationships between businesses (as opposed to
employment relationships).'' This category recognizes that contractual
work relationships currently vary and will evolve going forward, and
provides that additional employer requirements that are not expressly
identified in the regulatory text but which are similar to those
identified and are typical of such relationships do ``not constitute
control that makes the individual more or less likely to be an employee
under the Act.''
SHRM requested that the Department exclude from the control
analysis the offering of benefits such as ``health insurance, bonuses,
or retirement savings.'' According to SHRM, ``the modern workplace
would suffer if businesses were effectively barred from providing
workplace enhancements that all workers should enjoy like healthcare or
retirement savings.'' Other commenters made overlapping requests,
although not necessarily in the context of applying the control factor.
For example, TechNet requested that the Department add a ``safe
harbor'' stating that ``a worker does not lose his or her independent
status solely because a network platform provides the worker with
emergency aid or benefits allowed or required under state law.''
Similarly, WPI requested a general ``safe harbor'' with respect to the
provision of ``protections or benefits as allowed or required by
Federal, state or local laws, including but not limited to minimum
guaranteed earnings, health insurance, retirement benefits, health or
retirement subsidies, life insurance, workers compensation or similar
insurance, unemployment insurance, sick or other paid leave, training
and expense reimbursement.''
The Department declines to change the regulatory text in response
to these comments. The offering of health, retirement, and other
benefits is not necessarily indicative of employment status. For
example, payment of proceeds owed into a worker's own health plan or
retirement account would not indicate an employment relationship. This
is because it is reasonable for an independent contractor to have a
personal health or retirement plan, and the precise method of
compensation--whether cash, contributions to an account, or some other
method--is not relevant to the question of economic dependence.
However, providing a worker with the same employer-provided health or
retirement plans on the terms that a business also gives its own
employees may indicate the worker is not an independent contractor but
rather an employee. Certain other benefits could also suggest employee
status. For example, sick or other paid leave, especially the potential
employer's administration and authorization of the leave, could be
indicative of the potential employer's control over the worker's
schedule. Finally, offering a bonus to a worker may or may not be
indicative of employee status. For example, a worker's participation in
a bonus or profit sharing plan in which he or she receives a bonus
depending on the employer's, a division of the employer's, or his or
her own performance over a period of time could limit the worker's
ability to affect his or her profit or loss through initiative or
investment--suggesting economic dependence and thus employee status.
But a contractual agreement to provide a worker with a fixed bonus if
the worker completes a job by a certain deadline or completes a certain
number of tasks over a fixed period is typical of contractual
relationships between businesses and itself does not make the worker
more or less likely to be an employee under the Act. Even if, based on
the circumstances of a particular case, the provision of certain
health, retirement, or other benefits suggests classification as an
employee, that fact is not determinative by itself because other facts
and factors must also be considered.
2. The ``Opportunity for Profit or Loss'' Factor
The second core factor identified in the proposed regulatory text
was the ``individual's opportunity for profit or loss.'' 85 FR 60639.
This factor, included at proposed Sec. 795.105(d)(1)(ii), ``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
[[Page 1186]]
investment in or capital expenditure on, for example, helpers or
equipment or material to further his or her work.'' Proposed Sec.
795.105(d)(1)(ii) further explained that, ``[w]hile 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.'' In
addition, under the proposal, 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.'' Numerous comments were submitted regarding
the proposals to analyze investment through the lens of opportunity for
profit or loss and to focus that analysis on the worker's investment
rather than comparing the worker's investment to the potential
employer's investment. One commenter requested eliminating this factor
altogether, and several commenters requested changes to the other
aspects of the proposed opportunity factor section.
a. Whether To Analyze Investment Through the Lens of Opportunity for
Profit or Loss
Some commenters opposed the proposal to consider the individual
worker's ``management of his or her investment in or capital
expenditure on, for example, helpers or equipment or material to
further his or her work'' as part of the opportunity factor. For
example, NELA stated that a worker's investment has ``been a critically
important factor in the economic realities test analysis'' and that
``[d]iscounting this important piece of the economic reality test, as
the Department has done here, plainly makes it easier for businesses to
require workers to make significant financial investments without
risking a finding of employee status.'' The State AGs similarly
commented that the proposed approach of considering investment only in
the context of opportunity for profit or loss ``inappropriately
subordinates the investment factor to the opportunity for profit or
loss'' factor. According to the State AGs, ``[c]ourts consider both
factors, often together, but investment `is, itself, indicative of
independent contractor status' especially in smaller businesses''
(quoting Saleem v. Corp. Transp. Group, Ltd., 854 F.3d 131, 144 n.29
(2d Cir. 2017)). UPS said that ``workers [who] make little or no
monetary investment toward completion of the work . . . are more likely
to be dependent on the company,'' but that the Department's proposal
``ignores that reality'' by suggesting that initiative and investment
``are on equal footing.'' NELP stated that, although opportunity for
profit or loss and investment ``are linked, they are hardly duplicative
and separately serve as useful indicia of an entity's status under the
FLSA, as the Supreme Court's tests note.''
On the other hand, some commenters supported the proposal to
consider investment in the opportunity factor. For example, according
to WPI, ``[t]he Department's proposal to combine [opportunity for
profit or loss] with an individual's investment in facilities and
equipment, following Second Circuit precedent, is a welcome change that
will bring clarity and reduce overlap.'' It added that ``[w]ise
decisions about investments are perhaps the clearest path to increasing
profits or suffering losses.'' CPIE supported the proposed ``adoption
of the Second Circuit's approach of combining the factors `opportunity
for profit or loss' and `investment,' and not treating them as separate
factors.'' According to CPIE, the proposal ``better captures both the
manufacturing-based independent contractor (who likely has a tangible
capital business investment) and the new-economy independent contractor
(who likely does not).''
Having carefully considered the comments on this issue, the
Department adopts its proposal, consistent with Second Circuit case
law, to consider investment as part of the opportunity factor. Some
courts have acknowledged that the two concepts are related while still
keeping the factors separate. See McFeeley, 825 F.3d at 243; Lauritzen,
835 F.2d at 1537. Other courts do not expressly acknowledge that they
are related but consider investment when evaluating opportunity for
profit or loss--resulting in unnecessary and duplicative analysis of
the same facts under two factors. See, e.g., Mid-Atl. Installation, 16
F. App'x at 106-07 (finding that the worker's capital investments in
tools, equipment, and a truck indicated independent contractor status
under both the opportunity and the investment factors). And
consideration of investment separately has caused other courts to
discuss the worker's involvement in outside businesses in the context
of opportunity for profit or loss. See, e.g., Parrish, 917 F.3d at 384
(considering consultant's management of a goat farm). After considering
these varying approaches, the Department believes that adopting the
Second Circuit's approach best furthers the Department's goal: A clear
and non-duplicative analysis for determining employee versus
independent contractor status. In sum, the individual 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; see also Superior Care, 840 F.2d at 1060
(identifying ``the workers' opportunity for profit or loss and their
investment in the business'' as a single factor).
Moreover, considering investment as part of opportunity for profit
or loss is consistent with the Supreme Court's opinion in Silk which
articulated 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, it framed the analysis as 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. As the Court explained decades ago
and as the Second Circuit noted much more recently in Saleem,
investment is a pathway to opportunity for profit or loss.
In response to NELA and likeminded commenters' concern that
employers may require significant investments by their workers to avoid
employee status, the Department reiterates that the investment must be
capital in nature and consistent with the worker being in business for
him/herself for the investment to indicate an opportunity for profit or
loss. Senator Sherrod Brown and 22 other senators stated that
``[r]equiring [workers] to purchase a franchise or their own equipment,
including a vehicle'' or otherwise ``take on financial risk as a
condition of employment does not convert an employee into an
independent contractor under the FLSA.'' While no single fact or factor
may ``convert an employee into an independent contractor,'' the
prospect of financial risk and reward plays an important role in
distinguishing ``wage earners toiling for a living'' from ``independent
entrepreneurs seeking a return on their risky capital investments.''
Mr. W. Fireworks, 814 F.2d at 1051. Moreover, it matters why certain
investments are required. If certain capital investments
[[Page 1187]]
are necessary to perform the job for which the contractor is hired,
then requiring a contractor to make such investments would be
consistent with the contractor being in business for him- or herself.
For example, a company that hires independent contractors to haul
freight may obviously require that drivers bring their own vehicles.
Silk 331 U.S at 719. In contrast, a requirement to ``invest'' in
specific, company-provided equipment would not be consistent with the
worker being in business for him- or herself, and may constitute a
consideration under the control factor that points towards employee
status. See Scantland, 721 F.3d at 1318 (concluding that technicians'
``expenditures [in equipment and materials] detract little from the[ir]
economic dependence on Knight'' in part because ``many technicians
purchased specialty tools from Knight directly via payroll
withholdings''). As such, OOIDA's concern ``that any requirement that a
worker must purchase services or equipment from the business for which
they work [w]ould weigh in favor of employee status'' is misplaced. See
also SWRCC (``[T]his standard would provide a perverse incentive for
companies to require putative employees to maintain their own equipment
in an effort to steer those employees to independent contractor
status.''). Consistent with the economic dependence inquiry, an
investment must indicate an independent business by the worker, as
opposed to merely being required by the potential employer, for it to
indicate an opportunity for profit or loss.
In response to the State AGs, the Department's approach does not
subordinate investment; it can still separately indicate independent
contractor status as they suggest. Finally, the Department's approach
is not contrary to UPS' assertion that workers who make little or no
investment ``are more likely to be dependent'' on the potential
employer.\31\ Workers who make little or no investment are more likely
to be employees than workers who make significant investments, but of
course, such a worker's ultimate status as an employee or independent
contractor will also depend on other factors. As the Department
explained in the NPRM preamble, workers who do not make significant
investments may still be independent contractors: ``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.'' 85 FR 60609 (citing Faludi
v. U.S. Shale Sols., L.L.C., 950 F.3d 269, 276 (5th Cir. 2020)); see
also Meyer v. United States Tennis Ass'n, 607 F. App'x 121, 123 (2d
Cir. 2015) (concluding that workers who invested little were
independent contractors primarily because of their control over the
work and their initiative); 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.'').\32\
---------------------------------------------------------------------------
\31\ The American Society of Travel Advisors disagreed at least
in part, commenting that ``workers in many service industries may
make only a minimal investment in equipment or materials and in such
situations this consideration, by itself, should not be taken to
weigh in favor of employee status.''
\32\ LocumTenens, an online company that specializes in the
temporary placement of physicians and other health clinicians,
requested that the Department eliminate from the economic reality
test consideration of whether an individual has an opportunity for
profit or loss. According to LocumTenens, its physicians and
clinicians who provide temporary healthcare services ``do not have
an obvious investment or opportunity for profit when they step in''
for another physician or clinician. However, as explained later, the
Department believes that opportunity for profit or loss is very
predictive of a worker's status as an employee or independent
contractor. In addition, the rule requires a worker to exercise
personal initiative or manage capital investments, but not
necessarily both, for the opportunity factor to indicate independent
contractor status. In other words, an absence of capital investment
does not prevent an individual from having an opportunity for profit
or loss, because such opportunity can be based on the individual's
initiative. Nor does such absence necessarily prevent an individual
from being properly classified an independent contractor,
particularly in knowledge-based industries such as medicine where
human capital matters more than physical capital.
---------------------------------------------------------------------------
b. Whether To Analyze the Worker's Investment or Compare the Worker's
Investment With That of the Potential Employer
The Department noted in the NPRM preamble that, when considering
investment, some courts use ``a side-by-side comparison method'' that
directly compares the worker's individual investment to the investment
by the potential employer. See 85 FR 60614 (citing cases). The
Department explained that ``such a `side-by-side comparison method'
does not illuminate the ultimate question of economic dependence,'' but
instead ``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. Id. (citing cases). The Department received
a number of comments addressing its proposed rejection of the relative
investment approach.
For example, UPS stated that the Department's proposal
``undervalues comparative analysis of investment'' and noted that
courts ``have evaluated investment comparatively--correctly measuring
the worker's investment against the company's'' (citing cases). NELA
added that ``comparing workers' investments to the employer's
investments'' has been ``a critically important factor in the economic
realities test analysis'' and ``must be done in the context of the
working relationship.'' TRLA objected that ``the proposed test does not
include the Fifth Circuit's `extent of the relative investments of the
worker and alleged employer' factor'' and asserted that, while its
usefulness may vary ``depending on the facts of individual cases,''
``its wholesale exclusion from the test factors is not warranted,
especially given the Supreme Court's caution against an exhaustive
list'' (citing Silk, 331 U.S. at 716). The Southwest Regional Council
of Carpenters described the relative investment approach as simple and
efficient by ``lining up the expenses between worker and company'' and
thus ``advanc[ing] the key interest of all parties concerned with the
predictability of this part of the independent contractor test.''
According to the Pacific Northwest Regional Council of Carpenters, the
Department acted ``arbitrarily'' in proposing to eliminate
consideration of relative investments and asserted that, because
``virtually every craftsperson who works in the various carpentry
trades owns his or her own tools,'' the proposal would make ``all of
those individuals more susceptible to being classified as'' independent
contractors regardless whether the investment is small or extensive.
Other commenters supported the Department's proposed position. For
example, the ATA, the Arkansas Trucking Association, NHDA, and
Scopelitis, Garvin, Light, Hanson & Feary (on behalf of various
transportation companies) each agreed with the Department's proposal
``that the relative investment test fashioned by the Fifth Circuit
`does not illuminate the ultimate question of economic
[[Page 1188]]
dependence' '' (quoting 85 FR 60614). TechNet explained that ``the
relative sizes of the parties' investments'' are not relevant to the
analysis, asserting that ``[l]arge businesses may contract with small
businesses,'' make investments that ``typically exceed their smaller
partners' investments by orders of magnitude . . . because of their
size,'' and ``not endanger [their] partners' independence merely
because [they are] bigger than [their partners] are.'' CPIE stated that
``the determinative inquiry relative to investment should be whether
the individual has a sufficient investment in his or her trade or
business as to enable the individual to operate independently,''
asserting that ``[t]he investment of a potential client has no
discernible relevance to this inquiry.'' See also WFCA (``The issue is
whether a worker invested in his or her business, not how that
investment compares to the employing company's investment.'').
Having carefully considered the comments, the Department reaffirms
its position that comparing the individual worker's investment to the
potential employer's investment should not be part of the analysis of
investment. Comparing their respective investments does little more
than compare their respective sizes and resources. In Hopkins v.
Cornerstone America, 545 F.3d 338, 344 (5th Cir. 2008), it was of
course ``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.'' The court, however, never explained how this fact indicated
the Sales Leaders' economic dependence. See id. Tellingly, when summing
up the entirety of the facts and analyzing whether the workers were
economically dependent on the insurance company as a matter of economic
reality, the court did not even mention the insurance company's larger
investment. See id. at 346. And in Karlson, 860 F.3d at 1096, the court
found that comparing the worker's investment with the potential
employer's total operating expenses had little relevance because
``[l]arge corporations can hire independent contractors, and small
businesses can hire employees.'' Cf. Parrish, 917 F.3d at 383
(comparing relative investments, but noting that ``[o]bviously, [the
oil drilling company] invested more money at a drill site compared to
each plaintiff's investments'' and according the factor little weight
in light of the other evidence). In sum, comparing the relative
investments does not illuminate the worker's economic dependence or
independence. By contrast, as explained herein, analyzing the extent to
which the individual worker has an opportunity for profit or loss
because of his or her investment in, or capital expenditure on, helpers
or equipment or material to further his or her work is probative of the
worker's economic dependence or independence.
c. Other Comments Concerning the Opportunity Factor
WFCA agreed that ``an evaluation of a worker's investment and
capital expenditures are relevant factors in determining whether he or
she is an independent contractor'' and suggested including of ``a
definition of what constitutes an investment or capital expense.'' WFCA
suggested the following: ``Investments and capital expenditure shall
include: The purchase or rental of tools, equipment, material, and
office or work facilities; the payment for marketing and administrative
expenses; the payment of costs incurred hiring or using other workers;
and similar expenditures.'' However, the regulatory text already
identifies investment in ``helpers or equipment or material'' as
relevant, and the ``for example'' preceding them in the regulatory text
makes clear that the list is non-exhaustive. The Department believes
that general and non-exhaustive examples are more helpful than trying
to precisely identify as many examples of relevant investments as
possible.
NRF commented that ``it is important to emphasize that it is the
`opportunity' or `ability' to earn profits or incur losses based on
investment and/or initiative, as opposed to the actual level of
investment or initiative shown by the individual.'' Relatedly, NRF
expressed concern whether this factor squares with the discussion in
proposed Sec. 795.110 that the actual practice of the parties involved
is more relevant than what may be contractually or theoretically
possible, asserting that ``the fact that someone might not engage in
certain practices or take on certain risks that would further impact
the level of profit or loss should not result in a finding that the
individual is not an independent contractor, unless that person is
prevented from doing so by the entity with whom the individual
contracts.'' Here, the Department believes that NRF is conflating the
ultimate outcome of independent entrepreneurship (profit or loss) with
the actions indicative of entrepreneurship (initiative and/or
investment) that largely determine that outcome. While profits are
hardly guaranteed for anyone in business for him/herself, the text at
Sec. 795.105(d)(1)(ii) makes clear that independent contractors
typically ``exercise . . . initiative'' and/or ``manag[e] . . .
investment,'' (emphasis added). Thus, a lack of profit viewed in
hindsight says little about a worker's economic independence; instead,
the focus is the degree to which the worker actually exercised
initiative or actually managed investments. A worker's theoretical
ability to, for example, exercise initiative is weaker evidence than
the worker's actual practices. 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 . . . and advertise to a limited extent on their
own is overshadowed by the fact that in reality the `agents' . . .
charge the same prices, and rely in the main on Sureway for
advertising.''). However, a worker's conscious decision to not make a
particular investment (especially when choosing among a range of
investments) or to not take a particular action (especially when
choosing among a range of options) may constitute an affirmative
exercise of initiative to consider among others when evaluating
opportunity for profit or loss. In sum, in the context of the
opportunity factor, the focus is the individual worker's opportunity
for profit or loss, as shown by meaningful investments or the exercise
of personal initiative; actual profits or losses are less relevant.
OOIDA expressed ``concern[ ] that the timeline for determining
profit or loss is not clarified in the NPRM'' and explained that
certain ``[m]otor carriers that take advantage of drivers through a
lease-purchase agreement are likely to argue that a driver's
opportunity for profit is merely a few years in the future, and that
this full timeline must be considered.'' The Department agrees with
OOIDA that ``[t]his is a fallacy''; the opportunity for profit or loss
must be reasonably current to indicate independent contractor status.
Regarding the Department's proposal to include initiative as a
consideration in the opportunity factor, NRF agreed that ``[t]he
ability to impact profits or losses also may be dependent on business
acumen and managerial skills, regardless of the `skill level' of the
work or the level of investment.'' NRF added that ``identifying
`business acumen' or `management skill' as part of the profit or loss
factor is appropriate and consistent with the FLSA.'' Senator Sherrod
Brown and 22 other senators disagreed, commenting: ``Just because
[[Page 1189]]
employees can increase their wages by exercising skill or initiative
does not mean they are running a separate, independent business,
particularly if they cannot pass along costs to customers.'' They added
that ``[t]he rule does not include additional, critical considerations
of skill and initiative that are necessary to define an employment
relationship.'' And Seyfarth Shaw requested that the Department state
that ``a worker's business acumen is to be interpreted to cover acumen
relevant to the wide range of business endeavors in the U.S. economy,
including, for example: Sales, managerial, customer service, marketing,
distribution, communications, and other professional, trade, technical,
and other learned skills, as well as other unique business abilities
and acumen, including acumen that impacts a worker's ability to
profitably run their own independent business.''
Having carefully considered the comments, the Department continues
to believe that a worker's initiative, such as managerial skill or
business acumen or judgment, is an appropriate measure of a worker's
opportunity to earn profits or incur losses. 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 Delivery, 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.''). Commenters did not
seriously dispute the relevance of initiative to a worker's opportunity
for profit or loss. In response to the comment by Senator Sherrod Brown
and 22 other senators, the Department agrees that a worker is not
necessarily an independent contractor because he or she can use
initiative to affect his or her opportunity for profit or loss but
maintains that yet initiative is indicative of--or weighs towards--
independent contractor status in the multifactor analysis. And the
Department agrees that a worker's ability to cut costs, including by
passing them along to customers, is relevant to determining initiative.
See Express Sixty-Minutes Delivery, 161 F.3d at 304. Finally, the
Department agrees with Seyfarth Shaw that a worker's business acumen
can ``cover acumen relevant to the wide range of business endeavors in
the U.S. economy''--initiative is not limited to or automatically
present in any particular type of job.
Regarding the last sentence of the proposed opportunity factor
regulatory text (``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.''), WFCA expressed the concern that the sentence means
that a worker who starts his or her own business and seeks to develop
efficiencies in so doing will be an employee under the analysis. WFCA
suggested that the sentence be deleted. WPI also asked that the last
sentence be deleted because ``[a]n individual who uses initiative,
skill or judgment to perform a job more efficiently can generate
greater profits, even if compensated by the hour or piece rate.'' It
asserted: ``The ability to use managerial skill, expertise, market
experience, or business acumen to perform work more efficiently is
indicative of independent contractor status.'' The Department agrees
that such use of initiative can indicate independent contractor status
when it affects opportunity for profit or loss. The word
``efficiently'' was used in proposed Sec. 795.105(d)(2)(ii) to mean
working faster to perform rote tasks more quickly. See 85 FR 60614 n.38
(identifying piece-rate workers as ``an example of workers who are able
to affect their earnings only through working more hours or more
efficiently.''). Higher earnings that result solely from this ``working
faster'' concept of efficiency do not by themselves indicate
independent contractor status. However, as WFCA and WPI note,
efficiency may also mean effective management based on business acumen,
which is indicative of being in business for oneself if it results in
increased earnings. For instance, the Fifth Circuit found that the
opportunity factor ``points towards independent contractor status''
where ``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,'' observing that ``drivers who made the most money
appeared to be the most experienced and most concerned with efficiency,
while the less successful drivers tended to be inexperienced and less
concerned with efficiency.'' Express Sixty-Minutes Delivery Serv. 161
F.3d at 304. To avoid confusion between multiple potential meanings of
``more efficiently,'' the Department is revising Sec.
795.105(d)(2)(ii) to replace that term with ``faster.'' Relatedly, ATA
and other transportation commenters objected to the Department's
statements in the NPRM preamble that ``[w]orkers who are paid on a
piece-rate basis are an example of workers who . . . lack meaningful
opportunity for profit or loss.'' They asserted that the statements may
result in some judges refraining from engaging in the actual analysis
set forth in the rule as to opportunity for profit or loss. They
further asserted that truck drivers paid on a piece-rate basis may be
independent contractors based on their management decisions or ability
to cut costs. The Department's statements in the NPRM preamble
regarding workers paid on a piece-rate basis were general observations
supported by case law \33\ and not a categorical rule or the complete
analysis. The fact that a worker is paid on a piece-rate basis set by
the potential employer does not indicate an opportunity for profit or
loss, but whether that worker has an opportunity for profit or loss
indicative of independent contractor status is determined by a fuller
analysis of the worker's circumstances.
---------------------------------------------------------------------------
\33\ See Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28,
33 (1961) (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''); Rutherford Food, 331 U.S. at
730 (because workers' earnings ``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''); 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). And in
Donovan v. DialAmerica Marketing, Inc., the court 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. See 757 F.2d 1376,
1385 (3rd Cir. 1985). 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.
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Some commenters requested additional examples that are indicative
[[Page 1190]]
of an opportunity for profit or loss (many of the suggested examples
overlapped with each other). TechNet asked for ``concrete examples''
and suggested the following: ``[d]rivers who can set their own hours,
choose which jobs to accept or reject, and use their judgment in how to
best complete jobs,'' as well as ``[a]pp-based opportunities--including
opportunities to provide personal transportation, parcel deliveries,
shopping services, or food delivery, among other types of service.''
The U.S. Chamber of Commerce offered eleven ``additional examples of a
worker's initiative or investment that may impact a worker's profit or
loss.'' \34\ The U.S. Chamber of Commerce also suggested ``examples of
fact situations which are neutral in the analysis of whether the worker
controls their profits and losses.'' \35\ SHRM requested numerous
``additional examples of worker investment and initiative that impact
profit and loss.'' \36\ SHRM also requested that the final rule make
``the following explicit statements regarding facts that do not support
a finding of dependency: [w]orkers may experience financial losses as a
result of cancellations of their service or the provision of service
that does not meet customer expectations when the worker has
flexibility to choose between work opportunities; and [e]ven if the
business sets the price of goods provided by the worker, that does not
negate the worker's initiative when the worker controls the amount of
time, when, and where they provide the services as well as the amount
of the same service they chose to provide.'' Seyfarth Shaw asked the
Department to ``expand upon the examples of ways that workers impact
their own profitability as well as their losses (by impacting their
profits and their costs)'' and to include numerous examples.\37\ And
Mr. Reibstein commented that ``[e]xamples of loss should be identified
. . . so it is clear [that this factor] does not focus only on
profit.'' He offered the following examples: ``He or she has to re-do
work that is not consistent with industry standards or does not meet a
customer's expectations; is potentially liable to the potential
employer in the event his or her actions or inactions cause harm or
legal expense to the potential employer; or fails to render services in
a cost-efficient manner by not managing expenses or investing far too
much time on activities that are unproductive.''
---------------------------------------------------------------------------
\34\ The U.S. Chamber of Commerce's suggested examples were:
``(1) The worker's own decision-making with respect to the details
and means by which they make use of, secure, and pay helpers,
substitutes, and related labor or specialties . . . (2) The worker's
own decision-making with respect to the details and means by which
they purchase, rent, or otherwise obtain and use tools . . . ; (3)
The worker's own decision-making with respect to the details and
means by which they purchase or otherwise obtain and use supplies .
. . ; (4) The worker's own decision-making with respect to the
details and means by which they purchase, rent, or otherwise obtain
and use equipment . . . ; (5) The worker's initiative and decisions
they implement in connection with their own performance of services
through higher service fees, incentives, charges, and other ways;
(6) The worker's initiative to invest in the development of skills,
competencies, and trades . . . ; (7) The worker's expertise in
delivery of services/products that result in enhanced profits, for
example through tips and other incentives as a result of providing
quality customer service; (8) The worker's losses incurred as a
result of customer complaints or other charges where the worker's
results were below customer or contractual expectations and
obligations; (9) The worker's flexibility to choose amongst work
opportunities offered that impact profits and losses; (10) The
worker's contractual or other losses if they do not provide the
accepted services or the worker provides substandard services, and
are engaged to provide time-sensitive, often perishable services and
products; and (11) The worker's avoidance of liquidated damages
charges or indemnification obligations in the parties' agreement
relating to various provisions, including material breaches of the
parties' agreement.''
\35\ These suggested examples were: ``(1) The business pays the
worker by the hour where it is customary in the particular business/
trade to do so (e.g., attorneys, physical trainers); (2) The
business sets the price of goods and services offered by a worker to
customers where the worker controls the amount of time, date and
place they provide the services as well as the amount of services
they choose to provide and the price is set to facilitate the time
sensitive transaction as a result of the time sensitive or
perishable nature of the service the customer desires[;] and (3) The
business's facilitation of payments from the customer to the
worker.''
\36\ SHRM's suggested examples were: ``[t]he worker's decisions
in choosing amongst opportunities offered that impact profit and
loss; [t]he worker's losses suffered from receipt of customer
complaints where the worker's results were below customer or
contractual expectations; [t]he worker's decisions in avoiding
liquidated damages charges or indemnification obligations in the
parties' agreement; [t]he worker's own decision-making on whether to
use other workers or services as helpers or substitutes as well as
the use of related labor or specialties to assist in either the
services provided, the tools and equipment used, or the maintenance
of the worker's business structure; [t]he worker's acumen regarding
the delivery of services/products that result in enhanced profits
through tips and other incentives; [t]he worker's decision-making
regarding the details and means by which they obtain supplies,
tools, and equipment for use in their business, including choices
regarding from whom to purchase these goods, how much of the goods
are obtained at any one time, the quality of the goods, and the
negotiated prices regarding said goods; and [t]he worker's decision-
making regarding investment in skills they deem necessary to achieve
the desired results from their work, including education,
certificates, or classes.''
\37\ Seyfarth Shaw's suggested examples were ``[t]he worker's
own decision-making regarding the use of helpers, substitutes, and
related labor or specialties to assist in the services provided, the
tools and equipment used, or the maintenance of the worker's
business structure . . . to the extent those decisions impact the
worker's costs and overall profitability; [t]he worker's initiative
and the decisions they implement in connection with the performance
of services and/or capital expenditures on equipment, supplies, and
tools . . . ; [t]he worker's initiative to invest in the development
of skills, competencies, and trades (including education, training,
licenses, certifications, and classes) . . . ; [t]he worker's
expertise in delivery of services/products that result in enhanced
profits through tips and other incentives as a result of great
customer service and exceptional skills, for example[; t]he worker's
losses incurred as a result of customer complaint or other charges
where the worker's results were below customer or contractual
expectations and obligations; and [t]he worker's avoidance of
liquidated damages charges or indemnification obligations in the
parties' agreement relating to various provisions, including
material breaches of the parties' agreement.''
---------------------------------------------------------------------------
The Department has considered the various requests for additional
examples of initiative and investment that can indicate a worker's
opportunity for profit or loss, but declines to change to the proposed
regulatory text. The regulatory text already broadly describes
initiative as including managerial skill and business acumen or
judgment, and explains that investment is the worker's management of
his or her investment in or capital expenditure on, for example,
helpers or equipment or material to further his or her work. Many of
the suggested examples seem to fall into one of these categories, and
some of them effectively repeat concepts already identified in the
regulatory text--especially the ones involving helpers, tools,
supplies, and equipment. The Department does not believe that (even
after culling out all of the overlap) additional examples of initiative
and investment would benefit employers or workers. It is not possible
or productive to seek to identify in the regulatory text every example
of initiative and investment that may be relevant to the opportunity
for profit or loss analysis. The Department purposefully described both
initiative and investment in a broad and general manner to provide
helpful guidance to as many employers and workers as possible. The
Department believes that this approach, along with the further
clarification provided throughout this preamble section as well as the
examples added in Sec. 795.115, will be more helpful and functional
for employers and workers as they apply the analysis.
3. The ``Skill Required'' Factor
In the NPRM, the Department identified three other factors that may
serve as ``additional guideposts'' in the analysis to determine whether
a worker is an employee or independent contractor. The first of these
other factors, included at proposed Sec. 795.105(d)(2)(i), is the
amount of skill required for the work. 85 FR 60639. The Department's
proposed regulatory text stated that this factor would weigh in favor
of the individual being an independent contractor to the extent the
work at issue requires specialized training or skill that the potential
[[Page 1191]]
employer does not provide; conversely, the factor would weigh 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. As explained in the
NPRM, the Department proposed to clarify that this factor should focus
on the amount of skill required because importing aspects of the
control factor into the skill factor has diluted the consideration of
actual skill to the point of near irrelevance, and such dilution
generates confusion regarding the relevance and weight of the worker's
skill in evaluating economic dependence.
Employer representatives were generally supportive of the
Department's clarification and relegation of this factor as an
``additional guidepost'' but provided additional commentary and
requests for modification. Several commenters suggested that this
factor be eliminated entirely. The National Restaurant Association
commented that this factor ``does not add much clarity to the
analysis'' and ``unnecessarily discriminates against individuals who
operate businesses that do not require advanced degrees.'' WPI stated
that ``[s]o narrowed, this factor has little probative value in
determining economic dependence and should be eliminated as a separate
factor.''
Other commenters suggested that the factor be included within the
core, ``profit and loss'' factor or otherwise minimized. CWI suggested
that the factor be incorporated into the profit and loss factor because
``[w]here specialized skills are required to perform work, workers
unquestionably have taken the initiative to invest time and money into
developing those skills.'' SHRM and U.S. Chamber of Commerce agreed
that this factor should not be a stand-alone factor, but rather should
be incorporated into the opportunity factor, to ensure that workers who
desire the flexibility and freedom of independent contractor status--
but who provide services that may not require specialized training--are
not negatively impacted. See also WFCA (requesting that lack of skill
should not weigh in favor of the worker being an employee). Commenters
also stated that this additional factor should be minimized further in
the analysis, commenting that the factor places too much emphasis on
the importance of skill, and requested that ``the final rule should at
least indicate that this may be a relevant factor in some but not all
instances.'' Reibstein.
After considering these comments, the Department declines both the
request to eliminate this factor from consideration entirely and the
request to include it as part of the opportunity factor. The Department
agrees with commenters that the concepts of initiative and judgment are
sufficiently analyzed in multiple ways under the control and
opportunity core factors, but believes that longstanding case law
militates in favor of considering this additional factor--skill
required--when relevant under the particular circumstances of each
situation. As explained in the NPRM, the Supreme Court articulated the
factor as ``skill required'' in Silk, 331 U.S. at 716, and multiple
courts of appeals continue to consider as ``the degree of skill
required to perform the work.'' Paragon Contractors, 884 F.3d at 1235;
see also Iontchev, 685 F. App'x at 550; Keller, 781 F.3d at 807. The
Department believes that sharpening this factor to focus solely on
skill clarifies the analysis. Moreover, analyzing the worker's ability
to exercise initiative under the control factor, a core factor that is
given more weight than the skill factor, appropriately reflects that
that the presence or absence of initiative is usually more important
than the presence or absence of skill. Similarly, the effect of the
worker's initiative is analyzed under the opportunity factor, another
core factor that, for the reasons explained above, is usually more
probative than the skill factor.
Commenters such as the National Restaurant Association and NRF
suggested that the regulation should focus not on whether the skill
required is specialized, but rather the extent to which a worker relies
on the potential employer for training needed to perform the work. The
Wood Flooring Covering Association, however, stated that the regulation
as proposed may create unintended limits on training and employers
should not be discouraged from funding needed training for workers,
particularly in view of its industry's labor shortage. With respect to
these requests, the Department declines to eliminate the modifier
``specialized'' from the regulation. This type of consideration is
supported by discussions of this factor in case law. See, e.g.,
Simpkins v. DuPage Hous. Auth., 893 F.3d 962, 966 (7th Cir. 2018)
(``whether Simpkins had specialized skills, as well as the extent to
which he employed them in performing his work, are [material]
issues''); Carrell v. Sunland Const., Inc., 998 F.2d 330, 333 (5th Cir.
1993) (finding it relevant that ``[p]ipe welding, unlike other types of
welding, requires specialized skills''). The Department also declines
to adjust the regulatory text to directly address who provides the
training because such facts are not necessarily probative in every
circumstance; the Department notes, however, that it can be suggests
employee status if a worker receives all specialized skills from the
employer. See, e.g., Keller, 781 F.3d at 809 (explaining that if ``the
company provides all workers with the skills necessary to perform the
job,'' that suggests employee status); Scantland, 721 F.3d at 1318;
Hughes v. Family Life Care Inc., 117 F. Supp. 3d 1365, 1372 (N.D. Fla.
2015) (``The relevant inquiry [for the skill factor] is whether [the
worker] is dependent upon [the company] to equip her with the skills
necessary to perform her job.''). This is because an individual who is
in business for him- or herself typically brings his or her own skills
to the job, rather than relying on the client to provide training.
While the WFCA generally supports this factor, it also requested
that the Department include examples of specialized training or skill
that focused on indicators such as certifications and licensing.
Scopelitis, Garvin, Light, Hanson & Feary, a law firm commenting on
behalf of several unnamed transportation providers, agreed that
credentials such as testing to earn a Commercial Driver's License can
demonstrate specialized skill, but also noted that skills needed to
successfully operate a business should also be considered specialized
skills to help distinguish independent contractors from employees. The
Department notes that the opportunity factor already considers whether
workers have an opportunity for profit or loss based on their business
acumen or managerial expertise. It would be redundant to analyze
``skills needed to successfully operate a business'' as part of the
skill factor. As to requests for examples or additional clarification
as to what constitutes ``specialized'' skills, the Department agrees
that credentials such as certifications and licenses can be helpful
indicators of specialized skill, though they are by no means the only
indicators of such skill. The Department does not believe any change to
the regulatory text to clarify this point is warranted, however.
Employee representatives such as the AFL-CIO expressed concern that
de-emphasizing the skill factor would ``place considerable competitive
pressure on law-abiding employers employing employees at the bottom of
the wage scale, thus undermining the
[[Page 1192]]
national minimum wage standard.'' The AFL-CIO further asserted that the
proposed regulation would make it more likely that unskilled workers
such as home care workers, delivery drivers, and janitors will be
classified as independent contractors, and thus such workers will be
unprotected by the FLSA's minimum wage and overtime pay standards. See
AFL-CIO. The National Employment Lawyers Association (NELA) commented
that the Department's proposed regulation ``seeks to constrict and
demote'' the skill factor, and, relying on case law, noted that
``courts typically assess whether workers are required to use
specialized skills, beyond those typically acquired through
occupational or technical training, in an independent way to perform
their job'' but that this factor, ``which often favors employee status,
does not suit the Department's purposes.''
Regarding farmworkers specifically, TRLA stated that whether the
services rendered by an employee require special skills has often been
probative in the farm labor context, and that by largely eliminating
consideration of this factor, the proposed rule makes the proper
classification of farmworkers harder to determine. See Texas Rio Grande
Legal Aid. This ``will lead to more farmworkers being classified as
independent contractors, thereby denying the protections of the FLSA to
one of the most vulnerable classes of workers''; moreover, ``[t]o the
extent that the proposed rule purports to be descriptive of the current
state of the law, it is flatly inaccurate.''
The Department has considered these comments but continues to
believe that its proposal with respect to this factor is logical and
helpful. Although many courts consider the skill factor, courts appear
to find the core factors to be more dispositive than the skill factor
when such factors conflict. See 85 FR 60621-22 (listing cases).
Continuing to take it into account, but not as one of the core factors,
adds clarity to the economic realities test. The Department's
formulation of the test does not preclude the possibility that in some
circumstances, such as with respect to farmworkers, that this factor
could be particularly probative.
The Department adopts Sec. 795.105(d)(2)(i) as proposed.
4. The ``Permanence of the Working Relationship'' Factor
The second additional guidepost factor, described in the regulatory
text at Sec. 795.105(d)(2)(ii), is the degree of permanence of the
working relationship between the individual and the potential employer.
The Department proposed that this factor would weigh 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. In particular, the Department
explained that the seasonal nature of work would not indicate
independent contractor status 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 proposal also provided that this factor would weigh in
favor of the individual being an employee to the extent the work
relationship is instead by design indefinite in duration or continuous.
As noted in the NPRM, 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.
Multiple commenters urged the Department to focus this factor
further on the indefiniteness of a working relationship. For example,
the U.S. Chamber of Commerce commented that independent contractors
often enter into multiple, long-term contracts with the same business.
It suggested that the Department clarify that such contracts do not
indicate employee status merely because of their length, but that only
contracts of an indefinite length would be indicative of employee
status. CWI similarly requested that this factor focus only on the
length of the relationship as reflected in contractual agreements,
regardless of how long the relationship is in reality.
The Department considered adding clarifying language to the
regulation indicating that a relationship whose length is indefinite is
more indicative of employee status than a relationship that is merely
long. However, because the focus of the economic realities test is not
on technical formalities, it may be that a long relationship could be
evidence of permanence despite a contract with a definite end. For
example, an employer may have a permanent relationship with an employee
despite requiring the employee to enter into annual employment
contracts. Or a potential employer may have a long-term relationship
reflected in several short-term contracts. The Department has therefore
retained the proposed regulatory text because, although indefiniteness
is a stronger indicator of permanence, the length of a working
relationship is still relevant to this factor.
One commenter urged the Department to consider the exclusivity of a
relationship as part of the permanence factor, an approach taken by
some courts. Specifically, CPIE commented that permanence does not
indicate an employment relationship unless it is due to the potential
employer's requirement of exclusivity rather than the worker's choice.
The Department agrees that exclusivity most strongly indicates an
employment relationship when the exclusivity is required by the
potential employer. However, as the Department discussed in the NPRM,
an exclusivity requirement more strongly relates to the control
exercised over the worker than the permanence of the relationship. As
explained in the discussion of the control factor, that 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'').\38\ 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''). Such duplicative
analysis of exclusivity under the permanence factor, however, is not
supported by the Supreme Court's original articulation of that factor
in Silk. See 331 U.S. at 716 (analyzing the
[[Page 1193]]
``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.''
\39\ 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, and creates confusion by incorporating a concept that is
distinct from permanence.
---------------------------------------------------------------------------
\38\ In addition, as also noted in the NPRM, the opportunity
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 factor concerns the effects of doing so.
\39\ 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)
articulated the permanence factor without referencing the exclusivity
of the relationship between the worker and potential employer, and the
Department retains the same language in the final rule.
Commenters also requested that the Department clarify that long-
term relationships that are based on the workers' choice to continue
working for the same business rather than the potential employer's
requirements should not indicate employee status under this factor. NRF
commented that an independent contractor may choose to focus on a
particular client for reasons of the contractor's own rather than the
client's requirements, suggesting that the worker's choice does not
indicate employee status. The Department does not believe that further
explanation in the regulatory text is necessary, though it agrees that
a long-term relationship may not always indicate an employee
relationship. This factor is not always probative to the analysis, and
the scenarios described by the commenters may be situations where the
length of the relationship is not a useful indicator. However,
explicitly stating that a relationship is not permanent whenever the
worker chooses for it to be long-term is not accurate. After all, every
employee to some extent chooses whether to continue working for their
employer, and the FLSA's definition of ``employ'' includes to passively
``suffer or permit to work.'' 29 U.S.C. 203(g). A long-term
relationship is always the result of choices by both the potential
employer and the worker, but it is sometimes a helpful indicator of
employee status.
Edward Tuddenham urged the Department to give examples
relationships that may or may not be viewed as permanent, such as a
contract that is repeatedly renewed or an industry that is generally
itinerant. Although the Department has added one example regarding this
factor to new Sec. 795.115 to help illustrate how the factor is to be
considered, the Department does not believe it is possible to address
all of the possible working relationships and contractual arrangements
in a useful fashion. Certain general principles should inform any
analysis of work relationships. The Department reiterates that it is
not contractual formalities that are relevant to the inquiry, but
economic reality. A potential employer's attempts to use contractual
technicalities to label a relationship as temporary even though it is
indefinite in reality should not affect whether this factor indicates
employee or independent contractor status. Again, this factor will not
always be probative, and, for example, in certain industries where
employees are often employed for short periods, a short term of
employment would not indicate independent contractor status.
SWCCA pointed out that a recent WHD opinion letter included
language stating that ``the existence of a long-term working
relationship may indirectly indicate permanence.'' WHD Opinion Letter
FLSA 2019-06 (April 29, 2019). The Alliance requested that this
language be added to Sec. 795.105(d)(2)(ii). Though the quoted
language and the case law from which it is drawn remain useful guidance
for employers, the Department does not believe it is necessary to add
this language to the regulation, which already indicates that a long-
term relationship points toward an employment relationship.
Accordingly, the Department finalizes Sec. 795.105(d)(2)(ii) as
proposed.
5. The ``Integrated Unit'' Factor
The final additional guidepost factor, described in Sec.
795.105(d)(2)(iii), is whether the work is part of an integrated unit
of production. The Department proposed that this factor would weigh 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. The proposed regulatory text further
explained that this factor would weigh 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. The Department
proposed to clarify that this factor is different from the concept of
the importance or centrality of the individual's work to the potential
employer's business.
As noted in the NPRM, 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 explained in the NPRM that it 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, the Department
proposed that 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.
Many commenters representing workers urged the Department to retain
the ``integral part'' factor used by courts as part of the economic
realities test, rather than replacing it with the ``integrated unit''
factor articulated in the proposed rule. This ``integral part'' factor
would consider the importance or centrality of the work performed to
the purported employer's business. In
[[Page 1194]]
particular, several commenters, including United Food and Commercial
Workers, Senator Patty Murray, and the State AGs contended that
removing the ``integral'' factor would be contrary to established
circuit court precedent. The UFCW asserted that ``[w]hether a worker's
service is an integral part of the company's business may not be a
relevant factor in all situations, but it may be in some and some
courts have found value in analyzing this fact.'' It commented that if
the Department stated that integrality is not relevant to the economic
realities test, the Department's proposed rule would unduly limit the
inquiry. One commenter, the Greenlining Institute, commented that
eliminating an ``integral part'' factor disfavors workers ``performing
physical tasks instead of stereotypically `intellectual' pursuits,''
who are disproportionately racial or ethnic minorities.
Many commenters agreed with the Department's proposal to eliminate
the ``integral part'' factor or any similar factor focused on the
importance of the work. The U.S. Chamber of Commerce, for example,
commented, ``In today's economy, independent workers provide services
in all aspects of the economy and all aspects of individual businesses,
including core and non-core functions, as well as in the same or
different lines of business.'' The Society for Human Resource
Management similarly commented that the ``analysis concerning the
`integrated unit' factor should not focus on the `importance of
services' provided.''
Though circuit courts have applied an ``integral part'' factor, it
was not one of the factors analyzed by the Supreme Court in Rutherford
Food. Rather, the Court considered whether the worker was part of an
``integrated unit of production,'' 331 U.S. at 729, as this final rule
does. The Department believes that circuit courts--and even the
Department itself--have deviated from the Supreme Court's guidance and,
in doing so, have introduced an ``integral part'' factor that can be
misleading. As explained in the NPRM, the ``integral part'' factor was
not one of the distinct factors identified in Silk as being ``important
for decision.'' 331 U.S. at 716. The ``integrated unit'' factor instead
derives from Rutherford Food, where the Supreme Court 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. As the NPRM
explained, the Department began using the ``integral part'' factor in
subregulatory guidance in the 1950s. See WHD Opinion Letter (Aug. 13,
1954); WHD Opinion Letter (Feb. 8, 1956).\40\ And circuit courts in the
1980s began referring to it as the ``integral part'' factor and
analyzing it in terms of the ``importance'' of the work to the
potential employer. See, e.g., Lauritzen, 835 F.2d 1529, 1534-35;
DialAmerica Mktg., 757 F.2d at 1386.
---------------------------------------------------------------------------
\40\ 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).
---------------------------------------------------------------------------
The NPRM explained the reasons that the Department now believes the
Supreme Court's original ``integrated unit'' formulation is more
probative than the ``integral part'' (meaning ``important'') approach.
As Judge Easterbrook pointed out in his concurrence in Lauritzen,
``[e]verything the employer does is `integral' to its business--why
else do it?'' Lauritzen, 835 F.2d at 1541 (Easterbrook J., concurring);
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'').
The Department's review of appellate cases since 1975 involving
independent contractor disputes under the FLSA supports this criticism.
The Department generally found that, in cases where the ``integral
part'' factor was addressed, the factor aligned with the ultimate
classification when the ultimate classification was employee.\41\
However, courts' analyses of the ``integral part'' factor--again, if it
was analyzed at all \42\--were misaligned more frequently than they
were aligned with the ultimate classification when the ultimate
classification was independent contractor status. Compare Iontchev, 685
F. App'x at 551; Meyer, 607 F. App'x at 123; Freund, 185 F. App'x at
784-85; Mid-Atl. Installation, 16 F. App'x at 107-08; Brandel, 736 F.2d
at 1120, with Werner, 529 F. App'x at 545-46; DialAmerica Mktg., 757
F.2d at 1387. This higher rate of misalignment is precisely what Judge
Easterbrook's criticism would have predicted: If ``[e]verything the
employer does is `integral,' '' that factor would point towards
employee status for workers who are employees, but also for workers who
are independent contractors.
---------------------------------------------------------------------------
\41\ The only appellate case the Department found of
misalignment in this scenario is Paragon Contractors, 884 F.3d at
1237-38.
\42\ As explained elsewhere, the Fifth Circuit does not usually
consider the ``integral part'' factor in its analysis.
---------------------------------------------------------------------------
The NPRM further explained that ``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.'' 85 FR 60617. While some courts assumed that business may desire
to exert more control over workers who provide important services,
there is no need to use importance as an indirect proxy for control
because control is already a separate factor. Id. (citing Dataphase,
781 F. Supp. at 735, and 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)). And this assumption may not always be valid. Modern
manufacturers, for example, commonly assemble critical parts and
components that are produced and delivered by wholly separate companies
through contract rather than employment arrangements. And low
transaction costs in many of today's industries make it cost-effective
for firms to hire contractors to perform routine tasks.
The Department considered salvaging the ``integral part'' factor by
deemphasizing ``integral'' and emphasizing ``part.'' Instead of
focusing on whether the work is important ``to'' a potential employer's
business, the factor would focus on whether the work is an important
``part'' of that business. This approach would more closely align with
how ``integral part'' was used by the Supreme Court in Silk, which
asked whether workers were ``an integral part of [defendants']
businesses,'' as opposed to operating their own businesses. 331 U.S.
716. But as the NPRM noted, the Silk Court framed that question as the
ultimate inquiry, and not as a factor that is useful to guide the
inquiry. See 85 FR 60616 n.41. Asking whether a worker is part of--
integral or otherwise--a potential employer's business is not useful
because it simply restates the ultimate inquiry: If a worker were part
of the potential employer's business, then he or she could not be in
business for him- or herself and therefore would be economically
dependent. As an added complication, new technologies have led to the
emergence of platform companies that connect consumers directly with
service providers, and it is often difficult to determine whether those
platform companies are in
[[Page 1195]]
business of supporting service providers' own businesses or are in the
business of hiring service providers to serve customers. Compare 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.''), with O'Connor v. Uber Techs., Inc., 82 F.
Supp. 3d 1133, 1153 (N.D. Cal. 2015) (``it is clear that Uber is most
certainly a transportation company''). For the reasons explained, the
final rule retains the ``integrated unit'' approach.
The Department does not share the Greenlining Institute's concern
that the final rule's ``integrated unit'' factor would result in
workers who perform ``physical tasks'' being classified as independent
contractors more than workers who perform white collar,
``intellectual'' work. Meat deboning is a physical task, but deboners
were found to be part of an integrated unit of production in Rutherford
Food. 331 U.S. at 729. On the other hand, freelance writers perform a
white collar task, but they generally are not integrated into a
publication's production process because they are not involved in, for
instance, assigning, editing, or determining the layout of articles.
Both white collar and physical labor jobs may be part of an integrated
unit of production. The Department has added one example in new Sec.
795.115 showing that a newspaper editor--who performs primarily white
collar tasks--may be part of an integrated unit of production.
Another commenter, the Arkansas Trucking Association, agreed that
the ``integrated unit'' factor was superior to ``integral part,'' but
suggested an alternative formulation based on whether the business's
activities would cease or be severely impacted by the absence of the
worker. However, this approach has the same limitations as the
approaches that emphasize ``importance.'' Almost every worker performs
work that is in some sense important to the business that has hired the
worker; otherwise, the business would not hire the worker. Moreover, as
explained in the NPRM, easily-replaced workers are often more dependent
on a particular business for work precisely because they are so easily
replaced. Focusing on the impact of a worker's absence turns the
economic dependence analysis on its head by essentially looking at the
business's dependence on the worker. As a result, it sends misleading
signals about employee status.
Another group of commenters suggested that the factor should
include an explicit consideration of the location of the work
performed. The U.S. Chamber of Commerce, for example, suggested that
the factor should consider whether the worker is performing work ``the
majority of which is performed off the physical premises of the
business.''
Whether the work is performed on the business's physical premises
may be a consideration under the ``integrated unit'' factor, as it may
indicate the extent to which the worker is part of an integrated unit
of production. However, the Department does not believe it is necessary
to include this consideration as an explicit part of the ``integrated
unit'' factor. Many businesses have no physical location but
nevertheless employ employees. In other instances, an employee may be
part of an integrated unit despite performing work at a different
location than other employees. See, e.g., Goldberg v. Whitaker House
Cooperative, Inc., 366 US 28, 32 (1961) (holding that workers who
produced copies of a sample product at home were employees). Some
workers perform work on a business's physical premises but perform
discrete, segregable services unrelated to any integrated process or
unified purpose. Thus, although the location of the work may be a fact
that is relevant to the ``integrated unit'' factor, it is not so
probative that it would be useful to elevate it above other facts that
may be more relevant in a particular case.
Several commenters asked that the Department clarify that the
relevant inquiry is whether the worker is part of an integrated unit of
production that is part of the potential employer's own processes
rather than part of a broader supply chain. NRF suggested clarifying
language that would ``expressly state that merely serving as a link in
the chain of a company's provision of goods or services'' does not
indicate employee status. It suggested that such language would make it
clear that this factor does not indicate employee status where a worker
is merely one, segregable step in the process of delivering a product
to a consumer.
The Department does not believe such a clarification is needed,
because the text of the final rule states that this factor points
toward employee status only when the worker performs ``a component of
the potential employer's integrated production process.'' The relevant
process is the potential employer's process, not the broader supply
chain. A worker who performs a segregable step in the process of
delivering a product but who is not integrated into the employer's own
production process is not part of an integrated unit of production.
Multiple businesses, including independent contractors, may perform
steps in the same supply chain.
Some commenters suggested that the description of this factor in
the preamble should define the scope of the ``unified purpose'' toward
which the potential employer's processes work. WPI requested that the
Department clarify that the ``unified purpose'' cannot be broader than
the potential employer's ``core or primary business purpose.'' On the
other hand, Farmworker Justice urged a broad definition of ``unified
purpose'' to prevent gamesmanship by which an employer may attempt to
artificially separate its production process into separate units in
order to claim that they are segregable rather than parts of a unified
whole. It cited a hypothetical tomato farmer who could label its tomato
harvesters as a separate unit rather than as part of the process of
growing tomatoes.
The Department rejects these suggestions, because the final rule's
rejection of the ``integral part'' factor and the question of
``importance'' or ``centrality'' makes clear that the relevant facts
are the integration of the worker into the potential employer's
production processes, rather than the nature of the work performed. As
explained above, identifying the ``core or primary business purpose''
is not a useful inquiry in the modern economy. Falling transaction
costs and other factors described above allow businesses to hire
independent contractors to carry out tasks that are part of the
businesses' core functions, while keeping those functions separate from
its own production processes. At the same time, seemingly peripheral
functions may be integrated into an employer's own processes,
indicating employee status. What matters is the extent of such
integration rather than the importance or centrality of the functions
performed, which the Department does not find to be a useful indicator
of employee or independent contractor status.
As noted in the NPRM, the Department recognizes that it may be
difficult to determine the extent to which a worker is part of an
integrated unit of production. For this reason, this factor is not
always useful to the economic realities inquiry, and it is less likely
than the core factors to be determinative. For example, this factor
would not indicate independent contractor status for Farmworker
Justice's hypothetical tomato harvesters
[[Page 1196]]
merely because the farmer artificially labeled them a separate unit. As
has been the case since the concepts underlying the economic realities
test was articulated, the test does not depend on labels assigned to
workers. Rutherford Food, 331 U.S. at 729 (``Where the work done, in
its essence, follows the usual path of an employee, putting on an
`independent contractor' label does not take the worker from the
protection of the Act.''). The factor may indicate either employee or
independent contractor status based on the extent to which the
harvesters are integrated into the farmer's production process as a
matter of fact, but most likely the ultimate determination would depend
more on other factors, such as control and opportunity for profit or
loss.
WPI also suggested that the Department clarify language in the
preamble to the proposed rule stating that employee status would be
indicated for a worker who performs work closely alongside conceded
employees. WPI expressed concern that this language could wrongly imply
that a worker performing different tasks than the conceded employees
but in close proximity to them would indicate employee status. The
Department does not believe such clarification is necessary, because
the preamble stated that employee status is indicated where the worker
``performs identical or closely interrelated tasks as those
employees.'' In other words, WPI is correct that if a worker works
physically close to conceded employees but performs unrelated tasks,
that fact alone would not indicate employee status.
Finally, many commenters requested that the Department add examples
explaining how this factor would apply to specific industries,
including trucking, construction, financial advising, and personal
shopping. Others wanted examples to address certain types of
contractual arrangements, such as multi-sided platforms, franchisees,
and buy/sell agreements. In response to these requests, the Department
notes that the facts that inform the ``integrated unit'' factor are too
circumstance-specific to apply blanket statements to entire industries
or broad types of employment arrangements. Any particular task that is
common in a particular industry may be performed in one instance by a
worker who is part of an integrated unit of production or by a
segregable unit. In other words, this factor may point in a different
direction for workers who perform similar duties in the same industry
but who are more or less integrated into their potential employer's
processes based on the potential employer's business model. Moreover,
contractual formalities such as a buy/sell agreement or contracts
formed using multi-sided platforms could memorialize either employment
or independent contractor arrangements; the determination would not
depend on the labels assigned but on the various economic realities
factors, including the worker's integration into the potential
employer's production process.
That said, as explained elsewhere in this preamble, although the
Department cannot address all industries or all possible factual
scenarios, it does appreciate that examples are helpful to
understanding how each factor operates. The new regulatory provision
added in this final rule to further illustrate several factors, Sec.
795.115, includes two examples specifically meant to demonstrate how
facts about whether a worker is part of an integrated unit of
production should be considered as part of the employment relationship
analysis.
For the reasons explained, the Department finalizes Sec.
795.105(d)(2)(iii) as proposed.
6. Additional Unlisted Factors
The National Restaurant Association stated that facts and factors
not listed in Sec. 795.105(d) may be relevant to the question of
economic dependence even though they would not be as probative as the
two core factors. This commenter expressed concern that future courts
may ignore these unlisted but potentially relevant considerations in
response to this rulemaking and requested that the Department revise
the regulatory text to explicitly recognize that unlisted factors may
be relevant.
While proposed Sec. 795.105(c) already states that the five
factors listed in Sec. 795.105(d) are ``not exhaustive,'' \43\ the
Department agrees that it may be helpful to make this point more
explicit. The Department is thus adding Sec. 795.105(d)(2)(iv), which
states that additional factors not listed in Sec. 795.105(d) may be
relevant to determine whether an individual is an employee or an
independent contractor under the FLSA. As with any fact or factor, such
additional factors are relevant only to the extent that they help
answer whether the individual is in business for him- or herself, as
opposed to being economically dependent on an employer for work.
Factors that do not bear on this question, such as whether an
individual has alternate sources of wealth or income and the size of
the hiring company, are not relevant. These unlisted factors are less
probative than the core factors listed in Sec. 795.105(d)(1), while
their precise weight depends on the circumstances of each case and is
unlikely to outweigh either of the core factors .
---------------------------------------------------------------------------
\43\ See Silk, 331 U.S. at 716 (``No one [factor] is controlling
nor is the list complete.'').
---------------------------------------------------------------------------
E. Focusing the Economic Reality Test on Two Core Factors
Proposed Sec. 795.105(c) was intended to improve the certainty and
predictability of the economic reality test by focusing the test 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. This
focus is an important corollary of the sharpened definition of economic
dependence to include individuals who are dependent on a potential
employer for work and to exclude individuals who are in business for
themselves. The NPRM explained that these core factors, listed in
proposed Sec. 795.105(d)(1), drive at the heart of what is meant by
being in business for oneself: Such a person typically controls the
work performed in his or her business and enjoys a meaningful
opportunity for profit or risk of loss through personal initiative or
investment. The other economic reality factors--skill, permanence, and
integration--are also relevant as to whether an individual is in
business for him- or herself. But they are less probative to that
determination. For instance, it is not uncommon for comparatively high
skilled individuals--such as software engineers--to work as employees,
and for comparatively low skill individuals--such as drivers--to be in
business for themselves. See, e.g., Saleem, 854 F 3d at 140; Express
Sixty-Minutes Delivery, 161 F.3d at 306. In contrast, ``[i]n 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).'' 85 FR 60618. As such, ``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.'' Id.
The NPRM further explained that focusing on the two core factors is
also supported by the Department's review of case law. The NPRM
presented a remarkably consistent trend based on the Department's
review of the results of appellate decisions since 1975 applying the
economic reality test. Among those cases, the classification favored by
the control factor aligned with the worker's
[[Page 1197]]
ultimate classification in all except a handful where the opportunity
factor pointed in the opposite direction. And the classification
favored by the opportunity factor aligned with the ultimate
classification in every case.\44\ These two findings imply that
whenever the control and opportunity factors both pointed to the same
classification--whether employee or independent contractor--that was
the court's conclusion regarding the worker's ultimate
classification.\45\ See 85 FR 60619. In other words, the Department did
not uncover a single court decision where the combined weight of the
control and opportunity factors was outweighed by the other economic
reality factors. In contrast, the classification supported by other
economic reality factors was occasionally misaligned with the worker's
ultimate classification, particularly when the control factor, the
opportunity factor, or both, favored a different classification. See
id. at 60621.
---------------------------------------------------------------------------
\44\ This is not to imply that the opportunity factor
necessarily aligns with the ultimate classification, but rather that
the Department is not aware of an appellate case in which
misalignment occurred.
\45\ The only cases in which an appellate court's ruling on a
worker's classification was contrary to the court's conclusions as
to the control factor were cases in which the opportunity factor
pointed in the opposite direction. See 85 FR 60619 (citing Paragon
Contractors, 884 F.3d at 1235-36, and Cromwell, 348 F. App'x at 61).
---------------------------------------------------------------------------
The NPRM thus provided that, given their greater probative value,
if both proposed core factors point towards the same classification--
whether employee or independent contractor--there is a substantial
likelihood that is the individual's correct classification. This is
because it is quite unlikely for the other, less probative factors to
outweigh the combined weight of the core factors. In other words, where
the two core factors align, the bulk of the analysis is complete, and
anyone who is assessing the classification may approach the remaining
factors and circumstances with skepticism, as only in unusual cases
would such considerations outweigh the combination of the two core
factors.
Numerous commenters welcomed proposed Sec. 795.105(c)'s sharpening
of the economic reality test by recognizing the two core factors'
greater probative value on whether an individual is in business for
him- or herself. For instance, the U.S. Chamber of Commerce stated that
``[t]he Department's straightforward focus on two core factors presents
a concise interpretation of `economic dependency' grounded in the Act's
statutory definition of `employ' and `employer,' consistent with
Supreme Court precedent, and well-reasoned courts of appeals'
decisions.'' The American Bakers Association (ABA) likewise ``supports
the Department's position that the two most probative `core' factors
for determining independent contractor status under the FLSA are the
degree and nature of an individual's control over their work, and the
opportunity for profit (or loss).'' See also, e.g., ATA; CPIE; National
Restaurant Association; SHRM. Even one commenter who did not generally
support this rulemaking ``agreed with the Department that the two main
factors, control and opportunity for profit or loss, should be given
greater weight.'' Owner-Operator Independent Driver Association
(OOIDA).
Many commenters objected to focusing on the two core factors.
Broadly speaking, they raised three interrelated concerns. First,
commenters contended that elevating the two core factors is
inconsistent with the economic reality test, which they asserted
requires that factors be either unweighted or weighted equally. See,
e.g., NELP (objecting to ``elevating two narrow `core' factors'');
SWACCA; Commissioner Slaughter of the Federal Trade Commission (FTC).
Second, commenters contended that focusing on two core factors would
narrow the scope of who is an employee (as opposed to an independent
contractor) under the FLSA. See, e.g., NELP (``The NPRM narrows the
FLSA test for employee coverage[.]''); State AGs (``The Proposed Rule's
interpretation of [employment under] the FLSA is unlawfully narrow.'');
Appleseed Center (``The Department of Labor is trying to impermissibly
narrow this definition''); NCFW (objecting to ``agency's proposed
attempt to narrow the definition of employee''). Third, commenters
asserted that focusing on two core factors would impermissibly restrict
the set of circumstances that may be considered when assessing whether
a worker is an employee or independent contractor under the FLSA. TRLA
(``proposed reformulation would eliminate . . . any consideration of
[the skill and permanence] factors''); NELA (objecting to ``a narrow,
control-dominated inquiry''); State AGs (objecting to proposed rule
because it ``narrows several areas of inquiry.'').\46\ The Department
responds to each of the above concerns below, and then addresses other
requests relating to the focus on the two factors.
---------------------------------------------------------------------------
\46\ There are two distinct concepts within the economic reality
test--and any test for employment status--that can be broad or
narrow. The first concept is the test's standard for employment,
which is economic dependence. See Bartels, 332 U.S. at 130. The
second concept is the set of circumstances that may be considered as
part of the test, which is the ``circumstances of the whole
activity.'' See Rutherford Food, 331 U.S at 730. The breadth of
these two concepts are not always logically related. For instance,
the ABC test states that a worker is an employee unless the hiring
party can establish that three criteria are met, see, e.g., Dynamex,
416 P.3d at 35; thus, the ABC test considers a relatively narrow set
of circumstances while imposing a broad standard for employment.
While most commenters that objected to the narrowing of the economic
reality test did not present the standard of employment and
circumstance that may be considered as separate concepts, the
Department addresses them separately.
---------------------------------------------------------------------------
1. Focusing on Two Core Factors is Consistent With the Economic Reality
Test
Many commenters contended that emphasizing core factors over others
would violate a requirement that economic reality factors be unweighted
or weighted equally. According to SWACCA, ``[t]he proposed weighted
rule is a novel concept and a departure from existing caselaw.'' See
also, e.g., NELA (objecting to ``emphasizing certain factors over what
should be the `ultimate inquiry' ''). FTC Commissioner Slaughter
likewise objected that ``[t]he Proposal takes the Supreme Court's five
factor test, where all five factors are given equal weight, and narrows
it down to focus on only two [core] factors.'' See also Appleseed
Center (``[A]ll are given equal weight.''); Senator Patty Murray
(suggesting that ``DOL afford [factors] equal weight''). NELP appeared
to agree with the Department that the economic reality test may focus
on certain factors over others, but asserted that ``the factor of
integration into the business of another should be weighed heavily,''
rather than the proposed rule's two core factors. Several commenters
further relied on an age discrimination case to contend that the
economic reality test ``cannot be rigidly applied'' and that ``[i]t is
impossible to assign to each of these factors a specific and invariably
applied weight.'' NELP (quoting Hickley v. Arkla Indus., Inc., 699 F.2d
748, 752 (5th Cir. 1983)); see also Michigan Regional Council of
Carpenters (MRCC) (same).
The Department disagrees that the economic reality test requires
factors to be unweighted or equally weighted. Each time the Department
or a court applies the test, it must balance potentially competing
factors based on their respective probative value to the ultimate
inquiry of economic dependence. In the very case that announced the
economic reality factors, the Supreme Court listed five factors that
are ``important for decision'' but
[[Page 1198]]
did not treat them equally. Silk, 331 U.S. at 716. It instead
emphasized the most probative factors, while de-emphasizing less
probative ones in that case. The Court focused on the fact that coal
unloaders ``had no opportunity to gain or lose'' to conclude they were
employees under the SSA, while explaining the fact ``[t]hat the
unloaders did not work regularly was not significant.'' Id. at 717-18.
The Court further focused on ``the control exercised [and] the
opportunity for profit from sound management'' to conclude that truck
drivers were independent contractors, without discussing any of the
other economic reality factors. Id. at 719. Similarly, the Court in
Whitaker House concluded that workers at issue in that case were
employees based primary on considerations relating to control (e.g.,
the workers were ``regimented under one organization, manufacturing
what the organization desires'') and opportunity for profit (e.g., the
workers were ``receiving the [piece rate] compensation the organization
dictates'' rather than ``selling their products on the market for
whatever price they can command''). 366 U.S. at 32-33.
As discussed in the NPRM, courts of appeals also emphasized facts
and factors that are more probative of the economic dependence inquiry.
See 85 FR 60620. In Saleem, the Second Circuit focused on facts
relating to drivers' control over their work and their opportunity for
profit or loss based on initiative or investment to conclude that they
were independent contractors.\47\ 854 F.3d at 138-39; see also
Agerbrink v. Model Service LLC, 787 F. App'x 22, 25-27 (2d Cir. 2019)
(denying summary judgement based solely on disputed facts regarding
plaintiff's ``control over her work schedule, whether she had the
ability to negotiate her pay rate, and, relatedly, her ability to
accept or decline work''). The Third Circuit in Razak v. Uber
Technologies took a similar approach by emphasizing disputed facts
regarding ``whether Uber exercises control over drivers'' ' and had
``the opportunity for profit or loss depending on managerial skill'' to
deny summary judgment. 951 F.3d at 145-47.\48\ And the Eight Circuit
recently emphasized a process server's ability to determine his own
profits by controlling hours, which assignments to take, and for which
company to work, to affirm a jury verdict that he was an independent
contractor. See Karlson, 860 F.3d at 1095.
---------------------------------------------------------------------------
\47\ In particular, the Saleem court focused on: 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.'' 854 F.3d at 137-49.
\48\ The Razak decision also briefly addressed other factors,
including a footnote on the ``integral'' factor and a discussion
that was nominally about the permanence factor but actually
concerned control: ``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 n.12.
---------------------------------------------------------------------------
Courts have repeatedly warned against the ``mechanical
application'' of the economic reality factors when determining whether
an individual is an employee or independent contractor. See, e.g.,
Saleem, 854 F.3d at 139; Superior Care, 840 F.2d at 1059. Rather, the
factors should be analyzed with the aim of answering the ultimate
inquiry under the FLSA: ``Whether an individual is `in business for
himself' or is `dependent upon finding employment in the business of
others.' '' Scantland, 721 F.3d at 1312 (quoting Mednick, 508 F.2d at
301-02). Commenters who object to focusing on the two core factors do
not dispute this principle, and some affirmatively support it. For
instance, NELA and the State AGs both stated that economic reality
``factors `are aids--tools to be used to gauge the degree of dependence
of alleged employees on the business with which they are connected' ''
(quoting Pilgrim Equip., 527 F.2d at 1311). NELA nonetheless believed
that it would be inappropriate to ``emphasiz[e] certain factors over
what should be the `ultimate inquiry': The worker's economic dependence
on the putative employer.'' Emphasizing certain factors, however, would
dilute the ultimate inquiry of economic dependence only if those
factors were less probative of economic dependence than others. In
contrast, emphasizing factors that are more probative would not dilute
but rather focus the analysis on the ultimate inquiry under the FLSA.
If NELA and the State AGs are correct that the economic reality factors
must be ``used to gauge the degree of dependence,'' then focusing on
factors that are more probative measures of economic dependence is not
only permitted but preferred.
The Department's review of case law indicates that courts of
appeals have effectively been affording the control and opportunity
factors greater weight, even if they did not always explicitly
acknowledge doing so.\49\ See 85 FR 60619. Among the appellate
decisions since 1975 that the Department reviewed, whenever the control
factor and the opportunity factor both pointed towards the same
classification--whether employee or independent contractor--that was
the worker's ultimate classification. Put another way: In those cases
where the control factor and opportunity factor aligned, had the courts
hypothetically limited their analysis to just those two factors, it
appears to the Department that the overall results would have been the
same. One commenter attempted to dispute this finding. TRLA asserted
that, in the following four cases, farmworkers who were found to be
employees ``might be reclassified as independent contractors based on
the NPRM's two core factors:'' Driscoll, 603 F.2d 748; Lauritzen, 835
F.2d 1529; Perez v. Howes, 7 F. Supp. 3d 715 (W.D. Mich. 2014); and
Cavazos v. Foster, 822 F. Supp. 438 (W.D. Mich. 1993). However, the
court in each of these cases actually concluded that the control and
opportunity factors both favored employee classification,\50\ and thus
the farmworkers would have been found to be employees even if those
courts had hypothetically based is decision solely on the core factors.
These cases therefore reinforce the Department's conclusion that the
control and opportunity factors have been consistently afforded
significant weight in the economic dependence inquiry.
---------------------------------------------------------------------------
\49\ Some courts have explicitly acknowledged that facts related
to the control factor were more probative than facts related to
other factors. For instance, the court in Saleem stated that
``whatever `the permanence or duration' of Plaintiffs' affiliation
with Defendants, both its length and the `regularity' of work was
entirely of Plaintiffs' choosing.'' 854 F. 3d at 147 (citation
omitted). When discussing ``the use of special skills,'' the court
in Selker Brothers similarly explained that, ``[g]iven the degree of
control exercised by Selker over the day-to-day operations of the
stations, this criterion cannot be said to support a conclusion of
independent contractor status.'' 949 F.2d at 1295.
\50\ Driscoll, 603 F.2d at 755 (``The appellants' affidavits,
which must be taken as true for summary judgment purposes, plainly
disclose that [defendant] possesses substantial control over
important aspects of the appellants' work''); id. (``The appellants'
opportunity for profit or loss appears to depend more upon the
managerial skills of [defendant]''); Lauritzen, 835 F.2d at 1536
(``The defendants exercise pervasive control over the operation as a
whole.''); id. (``The Sixth Circuit [in a prior case] found that the
migrant workers had the opportunity to increase their profits
through the management of their pickle fields. . . .We do not
agree.''); Howes 7 F. Supp. 3d at 726, aff'd sub nom. Perez v. D.
Howes LLC, 790 F.3d 681 (6th Cir. 2015); (``Accordingly, [the
control] factor weighs in favor of a finding that the workers were
employees.''); id. (``[W]orkers could simply increase their wages by
working longer, harder, and smarter--this does not constitute an
opportunity for profit.''); Cavazos, 822 F. Supp. at 442 (``Their
lack of control supports plaintiffs' claim that they are
employees.''); id. at 443 (noting that the work relationship ``does
not afford plaintiffs an opportunity for profits'').
---------------------------------------------------------------------------
The consistent empirical trend indicating that the control and
opportunity factors have been afforded
[[Page 1199]]
greater weight should be unsurprising given their greater probative
value. As the NPRM explained, those two factors ``strike at the core''
of what it means to be in business for oneself, 85 FR 60612, and
therefore they are more probative of the ultimate inquiry under the
FLSA: ``whether an individual is `in business for himself' or is
`dependent upon finding employment in the business of others.' ''
Scantland, 721 F.3d at 1312 (quoting Mednick, 508 F.2d at 301-02). No
commenters offered a persuasive counterargument to the commonsense
logic that, when determining whether an individual is in business for
him- or herself, the extent of the individual's control over his or her
work is more useful information than, for example, the skill required
for that work. Nor did any commenters effectively rebut that the extent
of an individual's ability to earn profits (or suffers losses) through
initiative or investment is more useful information than, for example,
how long that individual has worked for a particular company.
NELP appeared to agree with the Department that emphasis should be
given to factors that are most probative to the ultimate inquiry of
whether an individual is in business for him- or herself, but disagrees
as to what those factors should be. In particular, NELP asserted that
``the factor of integration into the business of another should be
weighed heavily and in fact is ultimately the test. If the work is
integrated this leads to the conclusion that the worker is not
independently running a business.'' \51\
---------------------------------------------------------------------------
\51\ According to NELP, this language is a quotation from AI
2015-1 that was withdrawn in 2017. But that withdrawn guidance does
not contain the quoted language.
---------------------------------------------------------------------------
NELP correctly defines the economic dependence inquiry as ``whether
a person is in business for themselves and therefore independent, or
works instead in the business of another and dependent on that business
for work.'' If a worker is economically dependent on an employer for
work, the worker is not in business for him- or herself. NELP then
defines the ``integration factor'' to mean the exact same thing: ``If
the work is integrated this leads to the conclusion that the worker is
not independently running a business.'' NELP is correct that, when
defined as such, ``the factor of integration . . . in fact is the
ultimate test,'' but that factor would not be helpful in ascertaining a
worker's employment status because it simply restates the question. The
Department, courts, and the regulated community would still have to
determine which factors to analyze to determine whether an individual
is in business for him- or herself. The Department therefore declines
to create and give greater weight to NELP's concept of the
``integration factor'' and continues to believe that the control and
opportunity factors are the most probative as to whether an individual
is in business for him- or herself as a matter of economic reality.
NELP and MRCC quoted dicta from an age-discrimination case that
``[i]t is impossible to assign to each of [the economic reality]
factors a specific and invariably applied weight.'' Hickley, 699 F.2d
at 752.\52\ This proposed rule, however, does not run afoul of
Hickley's dicta. As an initial matter, neither core factor individually
has ``a specific and invariably applied weight'' because the proposed
rule does not state that one necessarily outweighs the other. The
Department nonetheless recognizes that proposed Sec. 795.105(c)'
statement that ``each [core factor] is afforded greater weight in the
analysis than is any other factor'' may be overly rigid. For reasons
explained above, certain types of facts--i.e., those falling within the
control and opportunity factors--are more probative than others
regarding whether an individual is in business for him- or herself. But
that does not necessarily mean the control or opportunity factors are
entitle to greater weight in all cases. For example, it may be the case
that, after all the circumstances have been considered, a core factor
does not weigh very strongly towards a particular classification
because considerations within that factor point in different
directions. See Cromwell, 348 F. App'x at 61 (finding that ``defendants
here did not control the details of how the plaintiffs performed their
assign jobs'' but did have ``complete control over [their] schedule and
pay''). A core factor could even be at equipoise, in which case it
would not weigh at all in favor of a classification. See Johnson, 371
F. 3d at 730 (concluding that competing facts regarding plaintiffs'
opportunity for profit or loss meant that the ``jury could have viewed
this factor as not favoring either side''). In short, there is a subtle
but important distinction that was not fully reflected in the NPRM's
language between a factor's probative value as a general matter and its
specific weight in a particular case. Probative value refers to the
extent to which a factor encapsulates types of facts that illuminate
the ultimate inquiry of whether workers are in business for themselves,
as opposed to being dependent on an employer for work. The weight
assigned to a factor in a particular case refers to how strongly
specific facts within the factor, on balance, favors a particular
classification. Considerations within a core factor may have
significant probative value even though that factor, on balance, does
not weigh heavily towards a classification in a specific case. The
Department therefore revises Sec. 795.105(c) to more clearly
distinguish between a core factor's probative value as a general matter
and its' weight in a specific case and to clarify that the core
factors' greater probative value means that they typically (but not
necessarily) carry greater weight . Thus it should be clear that the
rule does not assign any factor a specific or invariable weight. In
contrast, the approach favored by some commenters, including the
Appleseed Center and Commission Slaughter, to give each factor ``equal
weight'' would ``assign to each of the factors a specific and
invariably applied weight.'' Hickley, 699 F.2d at 752.
---------------------------------------------------------------------------
\52\ The court in Hickley applied the economic reality test in
the context of the Age Discrimination in Employment Act of 1967, 29
U.S.C. 621-34, without opining whether that was the correct test
under the ADEA. 699 F.2d at 752 (``Finding . . . there was no
evidence . . . that Hickey was an employee under the more liberal
`economic realities' test used in FLSA cases, [but] express[ing] no
opinion on whether it or one of the tests used in Title VII cases
should ultimately be used to determine employee status in ADEA
cases.''). Hickley's ``specific and invariably applied weight''
dicta appears in one FLSA case, Parrish, 719 F.3d at 380, as a see
also parenthetical to support the proposition that economic reality
factors should not be applied mechanically.
---------------------------------------------------------------------------
At bottom, the final rule's focus on two core factors thus does not
depart from the economic reality test--it merely elucidates the
factors' respective probative values that have always existed but never
been explained. Cf. Lauritzen, 835 F.2d at 1539 (``Why keep [employers]
in the dark about the legal consequences of their deeds.''
(Easterbrook, J., concurring)). As explained in more detail below,
providing such clarification for the regulated community would not
narrow the scope of who is an FLSA employee as opposed to an
independent contractor. Nor would it narrow the circumstances that may
be considered under the economic reality test.
2. The Proposed Rule Would Not Narrow the Standard for FLSA Employment
A number of commenters argued that focusing the economic reality
test on the control and opportunity factors would narrow the standard
for employment under the FLSA. The FLSA defines ``employ'' as including
``to suffer or permit to work,'' 29 U.S.C. 203(g), and these commenters
argued this definition should be interpreted to provide broad coverage
in light of the Act's remedial
[[Page 1200]]
purpose. See, e.g., AFL-CIO; NELA; NELP; Senator Patty Murray; State
AGs. Most of these commenters argued that the proposed rule is
incompatible with the Act's broad definition of employment because
focusing on the control factor would effectively adopt the narrower
scope of employment under the common law control test. One commenter,
however, had a different view: UPS argued that the proposed rule would
adopt a narrower standard for employment by giving the control factor
too little weight.
Discussing the proposed rule's consistency with the FLSA's standard
for employment first requires an understanding of the Act's
definitions. Commenters point out that the Act defines ``employ'' as
including ``to suffer or permit to work,'' 29 U.S.C. 203(g), but the
Supreme Court has observed that, although broad, the Act's definitions
are not clear regarding the scope of relationships that are included.
Rutherford Food, 331 U.S. at 728 (``[T]here is in the [FLSA's text] no
definition that solves problems as to the limits of the employer-
employee relationship under the Act.''). Courts of appeals have
likewise found the definitions not to clearly indicate the precise
contours of FLSA employment. See, e.g., Solis v. Laurelbrook Sanitarium
& Sch., Inc., 642 F.3d 518, 522 (6th Cir. 2011); Steelman v. Hirsch,
473 F.3d 124, 128 (4th Cir. 2007).
As commenters also noted, the Supreme Court relied on the FLSA's
purpose and legislative history to interpret the ``suffer and permit''
language to encompass a more inclusive definition of employment than
that of the common law. Rutherford Food, 331 U.S. at 727 (affirming
that FLSA employment is not limited to the ``common law test of
control, as the act concerns itself with the correction of economic
evils through remedies which were unknown at common law''); see also
Darden, 503 U.S. at 326. The Supreme Court has ``consistently construed
the Act liberally in recognition that broad coverage is essential to
accomplish [its] goal,'' Tony & Susan Alamo, 471 U.S. at 296, but at
the same time, the Court also recognized that the ``suffer or permit''
definition ``does have its limits.'' Id. at 295; 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.''). No
court has suggested that applying such limits (including the limit that
bona fide independent contractors are not employees under the Act)
cannot be reconciled with the Act's remedial purpose. Cf. Encino
Motorcars, LLC v. Navarro, 138 S. Ct. 1134, 1142 (2018) (Encino II)
(warning against relying on ``flawed premise that the FLSA `pursues'
its remedial purpose `at all costs''' when interpreting the Act).
Ultimately, ``[t]he test of employment under the Act is one of
`economic reality.''' Tony & Susan Alamo, 471 U.S. at 301 (quoting
Whitaker House, 366 U.S. at 33)). This rule applies such a test and
does so with sufficient breadth consistent with the Act's remedial
purpose.
While the phrase ``economic reality'' is on its face no clearer
than the ``suffer or permit'' language, see Lauritzen, 835 F.2d at 1539
(Easterbrook J., concurring), decades of case law has refined its
meaning. The Court determined that employees include ``those who as a
matter of economic reality are dependent upon the business to which
they render service.'' Bartels, 332 U.S. at 130. Courts of appeals have
subsequently used Bartels's concept of economic dependence to determine
employment under the FLSA. See, e.g., Saleem, 854 F.3d at 139; Mr. W
Fireworks, 814 F.2d at 1054; DialAmerica, 757 F.2d at 1385. Thus, the
courts have interpreted the scope of employment under the Act's
definition to include any individual who is ``dependent upon finding
employment in the business of others,'' and to exclude any individual
who is ``in business for himself.'' Scantland, 721 F.3d at 1312.\53\
However, as noted in the need for rulemaking discussion, this principle
has not always been applied consistently.
---------------------------------------------------------------------------
\53\ Courts apply this economic dependence standard for
employment in the employee-versus-independent contractor context,
but use different approaches in other contexts. See, e.g., Glatt v.
Fox Searchlight Pictures, 811 F.3d 528 (2d Cir. 2016).
---------------------------------------------------------------------------
The Department agrees with this interpretation and further believes
that the economic dependence standard developed by courts comports with
the ``suffer or permit'' statutory text. As the NPRM explained: ``An
individual who depends on a potential employer for work is an employee
whom the 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.'' 85 FR 60606 (citing Saleem, 854 F.3d at
139). Commenters generally agreed that employee versus independent
contractor status under the FLSA is determined by the worker's economic
dependence, and several of the above-mentioned commenters affirmatively
supported this standard. For example, NELA stated that ``[i]t is
dependence that indicates employee status'' (quoting Usery, 527 F.2d at
1311). And the State AGs explain that ``[t]he ultimate concern is
whether, as a matter of economic reality, the workers depend on someone
else's business . . . or are in business for themselves'' (quoting
Superior Care, 840 F.2d at 1059).
Most commenters who objected to focusing the economic reality test
on the two core factors were concerned that such an approach would
narrow FLSA employment to the common law standard. For instance, NELA
stated that ``[b]y affording the control factor greater weight in the
economic reality analysis, the Department slides back toward the common
law agency test.'' See, e.g., AFL-CIO (``[T]he proposed rule
effectively collapses the FLSA's definition into the common law
definition by giving primacy and controlling weight to the two factors
of control and opportunity for profit and loss.''). The implied logic
behind this concern is that if one test gives greater weight to a
factor that is also given greater weight by a second test, the two
tests necessarily have an equal scope of employment. But that does not
follow.
A comparison with the ABC test is illustrative. That test creates a
presumption of employee status, which can be overridden only if all
three factors are established. One of the ABC test's factors is
``whether the worker is free from the control and direction of the
hiring entity.'' This factor is given dispositive weight under certain
circumstances: If the worker is controlled by the hiring party, then he
or she is automatically an employee, regardless of other
considerations. The common law control test also gives control
dispositive weight. While both tests afford control greater weight than
the economic reality test, one test (ABC) has a broader scope of
employment than the economic reality test and the other (common law)
has a narrower scope. The relative weight attached to a particular
factor does not, by itself, determine whether the ultimate scope of
employment is broad or narrow. Accordingly, it is not possible to
compare the breadth of the standards for employment used by two tests
simply by comparing the weight attached to a shared factor. Rather, it
is necessary to consider how each test's factors are actually applied.
Under the common law control test, control is the ultimate inquiry:
If an individual controls the work, then he or she would be an
independent contractor rather than an employee. However, such control
by itself would be insufficient to establish the worker as an
independent contractor under the Department's rule.
[[Page 1201]]
Other considerations, including the second core factor of opportunity
for profit or loss, can outweigh the control factor and result in a
classification of employee status. That is precisely what happened in
Paragon Contractors, wherein the control and integral part factors
weighed in favor of independent contractor classification but the court
nonetheless held that the worker was an employee because the remaining
factors, including opportunity for profit or loss, favored
classification as an employee. See 884 F.3d at 1238. And even if the
individual both controls the work and has a meaningful opportunity for
profit or loss, he or she still would not necessarily be classified as
an independent contractor under the Department's rule because other
factors may outweigh those two core factors in rare cases. In short,
because the ultimate inquiry under the common law control test is the
worker's right to control the manner and means by which the work is
performed, such control by the worker disqualifies the worker from
being an employee under that test, but more is needed under the rule's
articulation of the economic reality test because economic dependence
is the ultimate inquiry. Thus, the rule's standard for employment
remains broader than the common law standard. Nor does the rule
``slide[ ] back toward the common law agency test,'' as NELA contends,
or otherwise narrow the standard of employment under the FLSA. As
explained above, the standard for determining whether an individual is
an employee under the FLSA or an independent contractor has always been
economic dependence. The two core factors are more probative than other
factors regarding whether an individual is in business for him- or
herself, as opposed to being dependent on an employer for work. Neither
NELA nor likeminded commenters dispute this specific claim. NELA
further recognized that economic reality factors must be ``used to
gauge the degree of dependence.'' If so, the test should focus on core
factors that are more probative measures of dependence. Doing otherwise
would serve no purpose other than to make regulations more confusing,
thereby reducing compliance and driving up the transaction cost of a
lawful business practice.
UPS expressed the opposite concern as NELA and likeminded
commenters, asserting that the proposed rule did not give enough weight
to the control factor. According to UPS, treating control as a factor
to be balanced rather than giving it dispositive weight ``leaves open
the possibility that a worker could be classified as an `independent
contractor' even when the common-law control factor indicated employee
status.'' The potential for such an outcome implies that FLSA
employment may be narrower than the common law standard in certain
circumstances.
As an initial matter, UPS's concern that the control factor may be
outweighed by other considerations even when it indicates employee
status also applies to every prior articulation of the economic reality
test--indeed more so--because none of them gave the control factor
greater weight, much less dispositive weight. The rule addresses UPS's
concern because it explicitly identifies control as a core factor that
is less likely to be outweighed by other factors. More importantly,
UPS's concern could materialize only if the control factor were
balanced against other factors without regard for the ultimate inquiry
for FLSA employment. Courts have cautioned against such ``mechanical
application'' of the economic reality factors and have instead
instructed that all factors should guide the analysis of whether the
individual is in business for him or herself or is dependent on others
for work. See, e.g., Saleem, 854 F.3d at 140. For these reasons, the
Department does not share UPS's concern that not giving dispositive
weight to the control factor results in a standard for employment that
is narrower than the common law.\54\
---------------------------------------------------------------------------
\54\ In any event, courts have foreclosed UPS's requested remedy
of giving the control factor dispositive weight to determine
employee status. See, e.g., Silk, 331 U.S. at 716 (``No one factor
is controlling); Keller, 781 F.3d at 807 (``No one factor is
determinative.''); Baker, 37 F.3d at 1440 (``None of the factors
alone is dispositive.'').
---------------------------------------------------------------------------
3. The Rulemaking Will Not Restrict the Range of Considerations Within
Economic Reality Test
A number of commenters contend that the proposed rule's focus on
the two core factors is inconsistent with case law requiring the
``circumstances of the whole activity'' to be considered as part of the
inquiry into economic dependence. State AGs (quoting Rutherford Food,
331 U.S. at 730); see also, e.g., NELA (``The economic reality inquiry
therefore cannot be answered without `employ[ing] a totality-of-the-
circumstances approach.' '' (quoting Baker, 137 F.3d at 1441)); see
also Senator Patty Murray (``No one test factor is controlling, nor is
the list exhaustive.''); TRLA (same).
The Department agrees with commenters that the circumstances of the
whole activity should be considered as part of the economic reality
inquiry. See 85 FR 60621 (``Other factors may also be probative as part
of the circumstances of the whole activity''). While all circumstances
must be considered, it does not follow that all circumstances or
categories of circumstance, i.e., factors, must also be ``given equal
weight.'' See e.g., FTC Commissioner Slaughter; Appleseed Center.
Assigning one factor less weight than another does not restrict the
circumstances being considered because the very act of determining
relative weight requires considering both factors.
As explained above, each factor should be analyzed in accordance
with its probative value to the ultimate inquiry of whether an
individual is in business for him or her-self. To be sure, the specific
weight of the factors depends on specific circumstances. The control
and opportunity factors are nonetheless more probative than other
factors in determining whether an individual is in business for him- or
herself. As such, it is appropriate to recognize, as the proposed rule
does, that these two more probative factors should typically carry
greater weight than other factors. Doing so would not, as TRLA
contends, ``eliminate . . . any consideration of [other] factors that
have often been regarded as probative in the farm labor context.'' The
proposed rule explicitly permits other factors to outweigh the two core
factors if the specific circumstances of the case--whether in the farm
labor context or another contexts--warrants such a result. In order to
determine whether the combined weight of the two core factors are
outweighed or not by other factors, it is necessary to consider both
sets of factors. Nor would it make any ``single factor determinative by
itself.'' Hopkins, 545 F.3d at 343. Neither of the core factors can be
``determinative by itself'' because there is a second core factor
against which each is balanced. Even when both core factors align, they
are not ``controlling'' because their combined weight can still be
outweighed by other considerations.
4. Other Comments Regarding the Focus on the Two Core Factors
PAM and Global Tranz requested that the Department create a
``bright-line test'' that ``would be limited to the two `core factors'
already identified in the Proposed Rule: (1) the nature and degree of
the individual's control over the work, and (2) the individual's
opportunity for profit or loss.'' See also Cetera Financial Group (CFG)
(``we believe it would be appropriate for the Department to limit the
criteria employed in the economic dependence analysis to the two Core
factors and
[[Page 1202]]
eliminate the others''). According to these commenters, a two-factor
test would be even clearer and simpler than the proposal to focus the
test on the two core factors, while still considering other factors.
Other commenters requested that the Department eliminate one or more of
the non-core factors listed in Sec. 795.105(d)(2) from the economic
reality test because such factors have little to no probative value in
some circumstance, and may sometimes send misleading signals regarding
an individual's classification. CWI and the National Restaurant
Association asked the Department to eliminate the skill required
factor; SHRM and the U.S. Chamber of Commerce were among several
commenters who suggested that the Department eliminate the permanence
factor; and ATA, NDHA, and others requested eliminating the integrated
unit factor.
The Department believes that the two core factors of control and
opportunity are always probative as to whether an individual is in
business for him- or herself. The Department further agrees with the
above commenters that the other factors are less probative and may have
little to no probative value in some circumstances. See, e.g., Silk,
331 U.S. at 718 (``That the unloaders did not work regularly is not
significant.''). However, ``circumstances of the whole activity should
be examined'' as part of the economic reality test, meaning that the
other factors should be considered in all cases even if they are not
always probative once considered. DialAmerica Mktg., Inc., 757 F.2d at
1382. If a factor is probative in some situations but not in others,
there is still a need to consider that factor to determine whether it
is probative in a particular case. Eliminating the non-core factors
from consideration would therefore be warranted only if those factors
lacked probative value in all circumstances--that is, if there was
never a need to even consider whether they had probative value.
Because non-core factors are probative in many circumstances, the
Department believes it would be inappropriate to eliminate them. In
response to commenters' concern that non-core factors may not always be
probative, the Department is making non-substantive revisions to
clarify that the two core factors are always probative as to whether an
individual is in business for him- or herself, but there may be
circumstances where one or more of the non-core factors, upon
consideration, has little or no probative value.
Several commenters requested that the Department revise Sec.
795.105(c) to state that if the two core factors point towards the same
classification, there is no need to consider any other factors. See
e.g., NRF (``if both of the core factors point in the same direction,
then a court may consider only those two factors and end the analysis
without examining the three additional possible factors identified by
DOL''); SHRM (requesting revision ``to ensure that if the Core Factors
indicate the same status of the worker, no further analysis is
necessary''). According to the SHRM, such an approach would ``create
clear expectations and stable grounds to build working relationships.''
The Department believes that the economic reality test cannot be
rigidly applied and concludes that its approach of giving certain
factors greater weight and other factors lesser weight while retaining
flexibility as to the degree of weight depending on the facts of the
case best accounts for all of the circumstances that work relationships
present. Commenters' requests would require the Department to state
that the combined probative value of the two core factors--whatever
that might be--always outweighs the combined probative value of other
factors. The Department believes that will usually be the case, but
does not rule out the possibility that, in some circumstances, the core
factors could be outweighed by particularly probative facts related to
other factors.
Several commenters effectively requested that the Department assign
a specific relative weight to one core factor as compared to the other.
CWI requested that the Department always weigh the two core factors
equally, while the HR Policy Institute requested that the control
factor always be given greater weight than the opportunity factor. The
Department declines to implement both requests. The Department's review
of U.S. Courts of Appeals cases since 1975 did not indicate that the
control and opportunity factors should be weighed equally. Nor did that
review indicate that the control factor should always outweigh the
opportunity factor. Indeed, in the few cases reviewed by the Department
where the control and opportunity factors pointed towards different
classifications, the ultimate classification aligned with the
opportunity for factor. See 85 FR 60619 (citing Paragon Contractors,
884 F.3d at 1235-36, and Cromwell, 348 F. App'x at 61). Ultimately, the
Department is confident in its conclusion that the two core factors are
more probative than all other factors and that framework is logical, as
described above. But the Department declines to assign an invariable
relative weight between the two core factors.
Several commenters requested that the Department revise Sec.
795.105(c) to establish a rebuttable presumption of employee or
independent contractor status if both core factors indicate the same
classification. Such a presumption would be rebuttable only by
``substantial evidence to the contrary under all three [other
factors].'' ATA. According to ATA, a rebuttable presumption ``[w]ould
further reduce the possibility of courts unnecessarily and potentially
selectively applying and weighing the three additional factors for
preferred policy outcomes, which has been a concern with regard to the
current test in some instances.'' As the NPRM explained, the Department
considered but did not propose a rebuttable presumption based on
alignment of the two core factors because it was concerned a formal
presumption may be needlessly complex or burdensome. See 85 FR 60621.
The Department further believes that emphasizing the importance of the
two core factors provides sufficient clarity. As such, the Department
declines to adopt a presumption-based framework.
CWI requested that the ``the Final Rule spell out specifically that
each of the Core Factors should be analyzed independently of the other,
without overlap.'' The Department agrees with CWI that overlaps between
economic reality factors, core or otherwise, should be minimized. As
discussed in the NPRM and in this preamble, reducing such overlap is
one of the reasons for this rulemaking. That said, the Department
believes specific regulatory instructions against overlapping analysis
of the two core factors is not necessary and may be confusing. The
Department believes proposed Sec. 795.105(d)(1) articulates the two
core factors without apparent overlap, and CWI does not identity any
specific considerations that risk being analyzed under both factors.
Language in the regulatory text warning against overlapping analysis
may therefore confuse members of the regulated community by priming
them to look for potential overlapping considerations when there are
none. The Department therefore declines to add CWI's requested
language.
In summary, the economic reality test examines the circumstances of
the whole activity to determine whether an individual is in business
for him- or herself, as opposed to being economically deponent on
others for work. Not all facts or factors are equally probative (if
they are probative at all) as
[[Page 1203]]
to whether, as a matter of economic reality, an individual is in
business for him- or herself. Treating them all as equal would not
focus the inquiry on economic dependence, but rather would distort that
analysis. In contrast, highlighting factors that are more probative
would sharpen the test's focus on economic dependence.
The NPRM presented reasoning and evidence based on the Department's
review of case law indicating that control and opportunity factors are
more probative to whether an individual is in business for him- or
herself, as opposed to being economically dependent. While not all
commenters agree with this approach, commenters who object to it have
not convinced the Department to change its original assessment. The
Department therefore believes that it is appropriate to focus the
economic reality test on the two core factors that are more probative
to the test's ultimate inquiry. Such focus appropriately guides how
factors should be balanced, while retaining flexibility in the test.
F. Proposed Guidance Regarding the Primacy of Actual Practice
Proposed Sec. 795.110 stated 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. The proposed rule explained that 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)).
Several commenters expressed support for proposed Sec. 795.110.
For example, ATA wrote that ``[t]he general principle also is almost
black letter law--substance is always more important than form--under
virtually every regulation WHD enforces.'' The Center for Workplace
Compliance described the language as ``consistent with historical
interpretation of the economic reality test by Federal courts and
DOL.'' Other commenters complimented the proposal with little or no
further explanation, see NHDA; New Jersey Civil Justice Institute; WPI,
while HR Policy Association urged the final rule to go further by
entirely disregarding the relevance of unexercised contractual or
theoretical possibilities. WFCA supported proposed Sec. 795.110, but
asked the Department to elaborate in the final rule that ``best
indicator of the actual practices is whether a significant segment of
the industry has traditionally treated similar workers as independent
contractors or employees.''
No worker advocacy organizations specifically commented in support
of the provision, but several groups, including NELA, the Pacific
Northwest Regional Council of Carpenters, and the Public Justice
Center, quoted Judge Frank Easterbrook's observation from Lauritzen,
835 F.2d at 1545, that ``[t]he FLSA is designed to defeat rather than
implement contractual arrangements.'' The International Brotherhood of
Teamsters similarly asserted that Congress ``chose to define
`employment' in a manner that would allow the Act to be applied
flexibly so that employers could not simply recalibrate their
contractual arrangements with workers to evade coverage.'' Finally,
NELP and 32 other organizations quoted Judge Learned Hand's observation
from Lehigh Valley Coal Co. v. Yensavage, 218 F. 547 (2d Cir. 1914),
cert. denied, 235 U.S. 705 (1915), that employment statutes from the
early 20th century were intended to ``upset the freedom of contract''
between workers and businesses. Id. at 553.
Some business commenters expressed general support for proposed
Sec. 795.110, but requested edits to discount the relevance of
voluntary choices on the part of an individual worker that implicate
one or more of the economic reality factors described in proposed Sec.
795.105(d), such as choosing to work exclusively for one business,
accepting all available work assignments from the business, or
declining to negotiate prices. See, e.g., American Bakers Association;
ATA; New Jersey Warehousemen & Movers Association (NJWMA); NRF; Private
Care Association; Scopelitis, Garvin, Light, Hanson & Feary; U.S.
Chamber of Commerce (``[T]he Chamber urges the Department clarify that
so long as a business does not take actions to foreclose an individual
from exercising certain rights, that the individual's choice to not
exercise those rights does not diminish their indicia of independence
in the relationship.''). Some of these commenters asserted that
allowing voluntary worker practices to influence classification
outcomes would lead to costly and inefficient business decisions. See
Dart Transit Company (``[T]he practical effect of [proposed Sec.
795.110] is to require independent contractors to arbitrarily switch
routes and carriers . . . simply in order to preserve their independent
status''); Minnesota Trucking Association (``In effect, the motor
carrier would have to restrict offering to the independent owner
operator a route both find beneficial in order to ensure that the
independent owner operator performs services for other motor
carriers.''). Others asserted that considering voluntary worker
practices would lead to classification discrepancies between workers
with similar contractual freedoms. See NRF; SHRM.
Some business commenters were flatly opposed to proposed Sec.
795.110. SHRM wrote that ``[a] focus on `practice' as opposed to the
contractual `rights,' of the parties . . . unnecessarily de-emphasizes
voluntariness of the contract itself and places ambiguity over parties'
negotiations.'' The Customized Logistics and Delivery Association
objected that worker classifications could turn on voluntary worker
practices that a business may not know about (e.g., whether particular
workers perform labor for other companies), asserting that proposed
Sec. 795.110 ``essentially shift[s] the burden of proof to the alleged
employer to establish a worker's status as an IC'' and ``could force
mass reclassifications of ICs for motor carriers, and many other
industries.''
Finally, several commenters representing workers, as well as
Senator Patty Murray and the State AGs, voiced opposition to proposed
Sec. 795.110 on the basis that emphasizing the primacy of an alleged
employer's practices would establish an employee classification
standard impermissibly narrower than the common law, which evaluates an
alleged employer's ``right to control.'' \55\ In this regard, the State
AGs compared proposed Sec. 795.110 to the Department's interpretation
in its recent Joint Employer final rule that ``[a] potential joint
employer must actually exercise--directly or indirectly--one or more .
. . indicia of control to be jointly liable'' (85 FR 2859). Winebrake &
Santillo, LLC asserted that proposed Sec. 795.110 conflicts with a
statement from a recent Third Circuit opinion that ``actual control of
the manner of work is not essential; rather, it is the right to control
which is determinative,'' Razak, 951 F.3d at 145, while Edward.
Tuddenham commented that ``[a]ll of the cases [the Department cited in
its NPRM] to support the primacy of `actual practice' are referring to
the actual practices of workers and are not discussing analysis of
employer controls.'' In rejecting the proposed rule's distinction
between a potential employer's contractual
[[Page 1204]]
authority to control workers and control that they actually exercise,
Senator Murray asserted that contractual authority ``provides a
potential employer an incredible amount of de facto control over a
worker . . . induc[ing] a worker to perform the work in the manner the
employer prefers, suggests, recommends, or hints at, even if the
employer does not ever command it.'' See also State AGs (``[R]eserved
authority in an agreement, like the looming sword of Damocles, will
often influence what the parties do[.]'').
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\55\ Restatement (Second) of Agency Sec. 2(3); see also Commun.
for Non-Violence v. Reid, 490 U.S. 730, 751 (1989) (describing ``the
hiring party's right to control the manner and means by which the
product is accomplished'' as the overarching focus of the common law
standard).
---------------------------------------------------------------------------
The Department has carefully considered the views and arguments
expressed by commenters and decided to implement Sec. 795.110 as
proposed. As emphasized in the NPRM, and as the plain language of Sec.
795.110 makes clear, unexercised powers, rights, and freedoms are not
irrelevant in determining the employment status of workers under the
economic reality test; \56\ such possibilities are merely less relevant
than powers, rights, and freedoms which are actually exercised under
the economic reality test.\57\ Affording equal relevance to reserved
control and control that is actually exercised--by either party--would
ignore the Supreme Court's command to focus on the ``reality'' of the
work arrangement, Silk, 331 U.S. at 713, which places a greater
importance on what actually happens than what a contract suggests may
happen. Several Federal courts of appeals decisions have explicitly
made this observation. 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)). Moreover, as some commenters pointed out,
prioritizing substance over form is consistent with the Department's
general interpretation and enforcement of the FLSA. See, e.g., 29 CFR
541.2 (``A job title alone is insufficient to establish the exempt
status of an employee.''); 29 CFR 541.603(a) (providing that employers
violate the salary basis requirement for certain employees exempt under
Sec. 13(a)(1) of the Act only when they demonstrate ``an actual
practice of making improper deductions''); \58\ 29 CFR 778.414
(``[W]hether a contract which purports to qualify an employee for
exemption under section 7(f) meets the requirements . . . will in all
cases depend not merely on the wording of the contract but upon the
actual practice of the parties thereunder.'').
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\56\ Entirely disregarding unexercised contractual rights and
authorities 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-Atl.
Installation, 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'').
\57\ In this respect, Sec. 795.110's emphasis on actual
practice differs from the treatment of control in the Department's
partially invalidated Joint Employer rule, which provided that ``[a]
potential joint employer must actually exercise--directly or
indirectly--one or more . . . indicia of control to be jointly
liable.'' 85 FR 2859 (emphasis added).
\58\ In a 2004 final rule amending this language, the Department
rejected commenter arguments that the mere existence of a policy
permitting improper deductions should disqualify an employer from
claiming the Section 13(a)(1) exemption for salaried employees whose
earnings and job duties otherwise qualify for exemption. ``[Such an]
approach . . . would provide a windfall to employees who have not
even arguably been harmed by a `policy' that a manager has never
applied and may never intend to apply[.]'' 69 FR 22122, 22180.
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The Department disagrees with commenters who assert that
prioritizing the actual practice of the parties involved makes the
economic reality test impermissibly narrower than the common law
control test. In many instances, the actual practices of the parties
will establish the existence of an employment relationship despite what
a ``skillfully devised'' contract might suggest on paper. Silk, 331
U.S. at 715; see, e.g., Scantland, 721 F.3d at 1313-14 (``Though
plaintiffs' `Independent Contractor Service Agreements' provided that
they could `decline any work assignments,' plaintiffs testified that
they could not reject a route or a work order within their route
without threat of termination or being refused work in the following
days.''); Hobbs, 946 F.3d at 833 (dismissing the fact that welders
determined to be employees ``could hypothetically negotiate their rate
of pay''). In any event, because the ultimate inquiry of the economic
reality test is ``economic dependence,'' the test ensures coverage over
more workers in the aggregate than the common law control test,
notwithstanding its more nuanced interpretation of the control factor
itself. See Silk, 331 U.S. at 716 (listing ``degrees of control'' as
one of several non-dispositive factors in the economic reality test)
(emphasis added).
It is true that, under the economic reality test, some workers
subject to a potential employer's ``right to control'' may nevertheless
qualify as bona fide independent contractors for other reasons. To the
extent that this excludes some workers who might qualify as
``employees'' under a traditional common law test,\59\ this is the
logical outcome of a multifactor test where ``no one [factor] is
controlling.'' Silk, 331 U.S. at 716; see also, e.g., Selker Bros., 949
F.2d at 1293 (``It is a well-established principle that . . . neither
the presence nor the absence of any particular factor is
dispositive.''). Moreover, the Supreme Court arrived at precisely this
outcome in two of its seminal cases applying the economic reality test.
---------------------------------------------------------------------------
\59\ See Commun. for Non-Violence v. Reid, 490 U.S. 730, 751
(1989) (``In determining whether a hired party is an employee under
the general common law of agency, we consider the hiring party's
right to control the manner and means by which the product is
accomplished.'') (emphasis added).
---------------------------------------------------------------------------
First, in Silk, the Court evaluated the employment status of owner-
operator truck drivers who contracted to perform services exclusively
for a motor carrier company, subject to a ``manual of instructions . .
. purport[ing] to regulate in detail the conduct of the truckmen in the
performance of their duties.'' 331 U.S. at 709-710. Before reaching its
own conclusion, the Court excerpted an analysis from the appellate
court below noting that, ``[w]hile many provisions of the manual, if
strictly enforced, would go far to establish an employer-employee
relationship between the Company and its truckmen . . . there was
evidence to justify the [district] court's disregarding of it,''
including testimony that the manual was ``impractical and was not
adhered to.'' Id. at 716 n.11 (quoting Greyvan Lines v. Harrison, 156
F.2d 412, 415 (7th Cir. 1946)). Although the Court acknowledged ``cases
. . . where driver-owners of trucks or wagons have been held employees
in accident suits at tort'' (under the common law), the Court said it
``agree[d] with the decisions below'' that the owner-operator truck
drivers were independent contractors, as ``the total situation,
including . . . the control exercised . . . marks these driver-owners
as independent contractors.'' Id. at 718-19 (emphasis added).
The Court in Bartels, even more clearly illustrated of how the
economic reality test's emphasis on actual practice may indicate
independent contractor. There, the Court found that band members were
not employees of a public dance hall that hired them for
[[Page 1205]]
short-term gigs, despite a contract provision stipulating that the
dance hall ``shall at all times have complete control of the services
which the [band members] will render under the specifications of this
contract.'' 332 U.S. at 128. Again applying the economic reality test,
the Court noted that a worker's employment 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 or workers.'' Id. at 130 (emphasis added). While
the Court made clear that other economic reality factors (e.g., skill,
permanence, profit) indicated that the band members were independent
contractors, id. at 132, the Court implicitly found that the control
factor did as well, noting that it was the band leader (and not the
dance hall) which ``organizes and trains the band . . . [and] selects
[its] members.'' Id. at 132. In other words, notwithstanding the dance
hall's contractual authority to ``complete[ly] control'' the band
members, the actual practice of the parties made clear that the band
members themselves controlled the work, as a matter of economic
reality.
Contrary to the argument put forth by several worker advocacy
commenters, the outcome and reasoning of the Supreme Court's decisions
in Silk and Bartels show that the common law control test does not
establish an irreducible baseline of worker coverage for the broader
economic reality test applied under the FLSA. In other words, while the
economic reality test is broad in the sense that it covers more workers
as a general matter, it does not necessarily include every worker
considered an employee under the common law.
At the same time, the Department disagrees with the interpretation
suggested by various business commenters that only worker practices
which are affirmatively coerced by a potential employer may indicate
employee status. Such a reading conflicts with the definition of
``employ'' in section 3(g) of the Act, which makes clear that the FLSA
was intended to cover employers who passively ``suffer or permit'' work
from individuals.\60\ Accordingly, courts applying the economic reality
test have not hesitated to consider voluntary worker practices where
such practices indicate economic dependence. See Keller, 781 F.3d at
814 (``[A] reasonable jury could find that the way that [the defendant]
scheduled [the worker's] installation appointments made it impossible
for [the worker] to provide installation services for other
companies.''). To be sure, the Department agrees that coercive behavior
by a potential employer (e.g., vigilant enforcement of a non-compete
clause, punishing workers for turning down available work, etc.)
constitutes stronger evidence of employment status than voluntary
worker practices (e.g., the mere existence of an exclusive work
arrangement, the fact that a worker rarely turn down available work,
etc.), but coercive action on the part of the potential employer is not
a prerequisite for such worker practices to have import.
---------------------------------------------------------------------------
\60\ 29 U.S.C. 203(g). See also 83 C.J.S. Suffer (1953) (``[T]o
suffer work requires no affirmative act by a putative employer.'').
---------------------------------------------------------------------------
The Department believes that commenters' concerns that proposed
Sec. 795.110 will cause workers with similar contractual freedoms to
be classified differently are overstated. Consistent with evaluating
the ``the circumstances of the whole activity'' in a work arrangement,
Rutherford Food, 331 U.S. at 730, courts have often considered the
rights and practices of similarly situated workers affiliated with a
particular business, arriving at a single classification outcome for
the group of workers at issue. See, e.g., Freund, 185 F. App'x. at 784
(finding independent contractor status in part because ``although
Freund did not hire any workers, other of Hi-Tech's installers did'');
Express Sixty-Minutes Delivery, 161 F.3d at 305 (finding independent
contractor status in part because ``[t]he majority of drivers work for
Express for a short period of time''); cf. Mr. W Fireworks, 814 F.2d at
1048-51 (finding employee status in part because ``the overwhelming
majority of operators did not engage in independent advertising'' and
``the vast majority of operators made only minor investments in the
business''). Even where meaningful factual differences exist between
workers, courts may separate them into multiple groups for separate
collective analyses instead of making individualized determinations.
See, e.g., Off Duty Police, 915 F.3d at 1055-1062 (separate collective
analyses of ``sworn officers'' and ``nonsworn officers'' who provide
security and traffic control services); DialAmerica, 757 F.2d at 1383-
88 (separate collective analyses of home researchers and distributors).
Judicial application of the economic reality test to groups of workers
has shown that classification outcomes cannot turn on one factor alone.
See, e.g., Silk, 331 U.S. at 719 (``In one instance they haul for a
single business, in the other for any customer. The distinction, though
important, is not controlling. It is the total situation . . . that
marks these driver-owners as independent contractors.'').
In summary, finalized Sec. 795.110's emphasis on the actual
practices of the parties involved is not a one-way ratchet, applying
selectively either for or against a finding of independent contractor
status. Instead, as the examples in Sec. 795.110 illustrate, the
principle applies to every potentially relevant factor, and 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 Silk, 331
U.S. at 718-19; Bartels, 332 U.S. at 129. Section 795.110's focus on
actual practice is a neutral interpretive principle, consistent with
the way courts and the Department have long applied the FLSA's economic
reality test. Accordingly, and contrary to the concerns expressed by
some commenters, it should not disrupt specific industries or result in
substantial worker reclassifications in either direction (i.e., from
employee to independent contractor status, or vice versa).
G. Other Comments
Many substantive comments were not directed towards a specific
provision of the proposed rule but rather the rule as a whole. These
comments addressed the following topics: (1) Whether the proposed rule
would create confusion or clarity for the regulated community; (2)
whether the proposed rule would exacerbate or ameliorate
misclassification of employees; (3) whether the rule is consistent with
the FLSA's purpose; (4) whether
[[Page 1206]]
Congressional inaction prohibits this rulemaking; and (5) whether the
Department may depart from its prior practice.
1. Whether the Rulemaking Will Create Confusion or Clarity
Commenters from the business and freelance community generally
expressed the view that the proposed rule would improve clarity
regarding which workers are independent contractors versus employees
under the FLSA. For example, the U.S. Chamber of Commerce stated that
``[t]he Proposed Rule would provide long-awaited and much needed
structure and clarity to the evaluation of worker relationships under
the Act.'' SHRM agreed that ``[t]he Proposed Rule is necessary to
provide certainty and consistency to businesses and workers.'' See also
CWI; WPI; ATA; NRF; National Restaurant Association. Freelancers and
groups that represent them echoed this message, with the CPIE, for
instance, stating that ``[w]e believe the proposed guidance would
provide greater clarity and predictability in the application of the
`economic realities' test to independent entrepreneurs and their
clients.'' See also Fight for Freelancers. Individual commenters who
identified themselves as freelancers or small business owners
overwhelmingly agreed that the rule would improve legal clarity. For
example, one individual commenter who believed that ``independent
contracting . . . kept [her] family afloat when [she] unexpectedly
became a single mom'' stated that ``[t]his proposed rule is simple to
understand and provides necessary clarity for both employers and
individuals like myself that want to engage in freelancing.'' Another
individual who identified himself as a small business owner believed
that ``[t]he regulations proposed seem to provide clarity for
determining an individual's status as an employee or independent
contractor under the Fair Labor Standards Act.''
Some government and union commenters took the opposite view. The
State AGs, for instance, asserted that ``this rule will create
confusion, not clarity'' in part because they believe it ``departs from
the statutory text and Supreme Court precedent and is contrary to
established application of the economic reality test.'' FTC
Commissioner Slaughter expressed concern that the proposed rule would
``create legal confusion around the labor exemption to the antitrust
laws.'' The AFL-CIO argued that ``the proposal is likely to increase
rather than decrease confusion because it does not clearly define `an
integrated unit of production.' ''
The Department continues to believe that the rule will improve
clarity because it clarifies the meaning of economic dependence, which
determines FLSA employment, and aligns the economic reality test to
more accurately analyze that concept by, among other things,
highlighting the two core factors that are most probative to the
inquiry. The rule does not depart from the statutory text, which courts
have interpreted to define FLSA employment based on the concept of
economic dependence on which this rule focuses. Nor does the rule
depart from any Supreme Court precedent because it continues to
consider the circumstances of the activity as a whole to analyze
whether workers, as a matter of economic reality, depend on another
business for work, or are in business for themselves. The Department
further disagrees with the State AGs that the rule departs from the
``established application of the economic reality test.'' The final
rule takes into account facts and factors that have historically been
part of the economic reality test, and decades of appellate decisions
indicating that the two core factors frequently align with the ultimate
determination of economic dependence or lack thereof. See 85 FR 60619-
21. As one comment stated, the rulemaking ``synthesizes previous
understandings of the independent contractor rule,'' as opposed to
departing from them. See Farren and Mitchell.
The Department does not believe this final rule will cause
confusion regarding the labor exemption to antitrust laws because, as
explained by FTC Commissioner Slaughter, that exemption is governed
``[u]nder the Clayton Act and the Norris-La Guardia Act.'' In contrast,
this rule's application is limited to the FLSA, and therefore, would
not affect the labor exemption to antitrust laws established by other
statutes. Finally, for reasons explained in the NPRM and this preamble,
the Department believes this rule's articulation of the ``integrated
unit'' is clearer than the prior ``integral part'' articulation. For
added clarity, the Department added a pair of examples in Sec. 795.115
to further illustrate application of the ``integrated unit'' factor.
For these reasons, the Department believes the final rule will
result in greater clarity.
2. Whether the Rulemaking Exacerbates or Ameliorates Misclassification
Many commenters expressed concern that the proposed rule would
exacerbate the misclassification of employees as independent
contractors. See, e.g., Equal Justice Center; Employee Rights Center;
NELP; State AGs; TRLA. According to these commenters, the proposed rule
would make it easier for an unscrupulous employer to classify its
employees as independent contractors, and they cite statistics that
purport to show high rates of misclassification in support of that
contention. Several other commenters took the opposite position and
asserted, for example, that ``[c]larifying the application of the test
for independent contractor status will promote compliance with labor
standards under the FLSA and, in turn, reduce worker
misclassification.'' Opportunity Solutions Project (OSP); see also,
e.g., TCA (``[t]he increased clarity provided by the [proposed rule]
would likely lead to reduced misclassification.''); IAW (``This rule
will clear up misclassifications''); Financial Services Institute (``we
agree that it will reduce worker misclassification and litigation'').
These commenters also presented reports that dispute the widespread
occurrence of misclassification. See, e.g. CWI; U.S. Chamber of
Commerce; WPI.
FLSA employee versus independent contractor status is determined in
terms of economic dependence. Misclassification occurs when an
individual who is economically dependent on a business is classified by
that business as an independent contractor and treated as such. This
can occur inadvertently because the business misunderstands the concept
of economic dependence or incorrectly analyzes factors to assess the
concept. It can also occur intentionally. This final rule clearly
defines economic dependence and explains how to assess facts and
factors to evaluate whether that dependence exists. It discards
misleading and confusing interpretations of that concept developed over
the years and emphasizes the essential aspects. A clearer test means
more businesses will better understand their obligations under the FLSA
and thereby inadvertently misclassify fewer workers. As one commenter
who identified himself as a small business owner explained: ``We want
to comply [with the FLSA] but we need guidance that allows us to know
how to comply.'' A clearer test also means more workers will understand
their rights under the FLSA and thereby will be better positioned to
combat intentional misclassification through, for example, private
litigation or complaints to the Department. Unscrupulous employers
[[Page 1207]]
may also be deterred from intentional misclassification in the first
place if workers better understand their legal rights. For these
reasons, the Department believes the final rule is likely to reduce
both inadvertent and intentional FLSA misclassification.
While several commenters asserted that the proposed rule will
facilitate misclassification, the Department does not agree. The
Department's final rule makes clear that a business may classify a
worker as an independent contractor with greater confidence if the
worker has control over key aspects of the work and a meaningful
opportunity for profit or loss based on initiative or investment.
Except in unusual cases, a worker who enjoys substantial control over
the work and has opportunity for profit in abundant measures is, as a
matter of economic reality, in business for him- or herself, and thus
properly classified as an independent contractor. The rule thus makes
it easier for a business and its workers to structure their work
arrangements to create bona fide independent contractor relationships.
But that effect of the final rule will help avoid misclassification,
not encourage it.
As discussed in greater detail in the RIA at Section VI(D)(6), the
Department has concerns regarding the reliability of statistics cited
by commenters regarding the prevalence of misclassification. Even
assuming commenters' statistics are accurate, however, they would
merely estimate the current rate of misclassification rather than how
that rate would change as a result of this rule. Insofar as the final
rule will reduce misclassification, these statistics make this
rulemaking even more urgent.
For the above reasons, the Department believes this rule will
ameliorate rather than exacerbate misclassification of employees under
the FLSA.
3. Whether the Rulemaking Is Consistent With the FLSA's Remedial
Purpose
A number of commenters asserted that this rule ``conflicts with the
FLSA's remedial purposes of protecting workers.'' State AGs; see also,
e.g., Pacific Northwest Council of Carpenters (``the Proposed Rule . .
. is contrary to the statutory definitions and remedial purpose of the
FLSA''). NELP, for instance, stated that ``DOL's proposed test would
leave behind workers in high growth sectors with high rates of wage
theft, contrary to the purposes of the FLSA.'' And NELA indicated that,
because ``the FLSA is a remedial statute'' its coverage should be
construed liberally to adopt a standard for employment that is even
broader than economic dependence.\61\ Commenters that supported the
proposed rule pointed that the FLSA is not intended to cover all
workers and that ``Congress intended to cut off [the FLSA's] coverage
at a certain point to preserve the freedom of workers to operate as
independent contractors.'' Scalia School; see also WPI (``Nothing in
the text or legislative history of any Federal employment law indicates
that Congress intended to supplant or displace independent work and
require instead for all workers to be employees.'').
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\61\ NELA specifically urged the Department to adopt the ``ABC''
test to determine whether a worker is an independent contractor or
an employee under the FLSA. The Regulatory Alternative discussion at
Section VI(G) provide further explanation why the Department is not
adopting that test.
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The Supreme Court has cautioned against the ``flawed premise that
the FLSA `pursues' its remedial purpose `at all costs' '' when
interpreting the Act. Encino, 138 S. Ct. at 1142. The Encino II Court
rejected the principle that FLSA's remedial purpose required exemptions
to be narrowly construed, id, and courts of appeal have followed that
logic to reject the corollary principle, articulated above by NELA,
that the Act's remedial purpose requires its coverage to be construed
broadly. See Sec'y United States Dep't of Labor v. Bristol Excavating,
Inc., 935 F.3d 122, 135 (3d Cir. 2019) (rejecting broad reading of the
FLSA based its remedial purpose); Diaz v. Longcore, 751 F. App'x 755,
758 (6th Cir. 2018) (same). Rather, `` `a fair reading' of the FLSA,
neither narrow nor broad, is what is called for.'' Bristol, 935 F.3d at
135 (quoting Encino, 138 S. Ct. at 1142); Diaz, 751 F. App'x at 758
(``We must instead give the FLSA a `fair' interpretation.'').
``The principal congressional purpose in enacting the Fair Labor
Standards Act of 1938 was to protect all covered workers from
substandard wages and oppressive working hours.'' Barrentine v.
Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739 (1981) (emphasis
added). The Supreme Court, however, has long recognized held that the
FLSA ``was obviously not intended to stamp all persons as employees.''
Portland Terminal Co., 330 U.S. at 152. As the State AGs stated, the
``the FLSA must be interpreted with its `remedial and humanitarian
purpose . . . purpose' in mind to protect `those who sacrifices a full
measure of their freedom and talents to the use and profit of others.'
'' State AGs (quoting Tenn. Coal, Iron. R. Co. v. Muscoda Local No.
123, 321 U.S. 590, 598 (1944)). Workers who are economically dependent
on an employer for work have sacrificed ``freedom and talents to the
use of profits of others,'' and therefore are covered by the Act as
employees. But independent contractors use their ``freedom and
talents'' to operate their own businesses, and thus fall outside of the
FLSA's coverage. See Saleem, 854 F.3d 131, 139-40 (2d Cir. 2017)
(noting that independent contractors are separate from employees in the
context of the FLSA); Karlson, 860 F.3d 1089, 1092 (8th Cir. 2017)
(``FLSA wage and hour requirements do not apply to true independent
contractors.''); Scantland, 721 F.3d at 1311 (``[The Act's] `broad'
definitions do not, however, bring `independent contractors' within the
FLSA's ambit.''); Hopkins, 545 F.3d at 342 (observing that the ``FLSA
applies to employees but not to independent contractors'').
The Department believes the line between economically dependent
workers who are covered by the FLSA and independent contractors who are
not comports with the Act's purpose to ``protect all covered workers
from substandard wages and oppressive working hours.'' Barrentine, 450
U.S. at 739. Independent contractors who are in business for themselves
do not need protection against ``oppressive working hours'' because
they are not economically dependent on any employer who could oppress
them. Nor do they need protection from ``substandard wages'' because
they are not economically dependent on an employer that sets wages.
Forcing workers who are in business of themselves into the FLSA's
coverage would not protect them, and would instead unduly restrict
their ability to operate their own businesses. Indeed, numerous
individuals who identified as freelancers or independent contractors
commented that being classified as an employee would undermine their
ability to operate their own business. For example, one freelance
translator lamented that ``many of my clients became unwilling to work
with me'' when a state law required her to be classified as clients'
employee. Another commenter identified himself ``[a]s a self employed
professional [who] do[es] NOT want to be forced into employment.'' As a
final illustrative example, another commenter stated that ``I have no
desire to be an employee . . . . If I was required to be an employee, I
would no longer be able to make money for my family from my home on my
own schedule.''
The Supreme Court has explained that the FLSA's ``exemptions are as
much a part of the FLSA's purpose as
[[Page 1208]]
the [Act's] requirement[s].'' Encino, 138 S. Ct. at 1134. By the same
logic, respecting the independence of workers whom the FLSA does not
cover is as much a part of the Act's purpose as extending the Act's
coverage to workers who need its protection. Denying FLSA coverage to
workers who are economically dependent on an employer for work would
result in workers loosing needed protection ``from substandard wages
and oppressive working hours.'' Barrentine, 450 U.S. at 739. But
extending the Act's coverage to workers who, as a matter of economic
reality, are in business for themselves would unduly restrict
independent workers who neither need nor benefit from the Act's
provisions. This rule sharpens the distinction between these two
categories of worker and thereby furthers the Act's purpose to protect
employee who need protection without burdening independent contractors
who do not.
4. Whether Congressional Inaction Prohibits This Rulemaking
The American Federation of State, County, and Municipal Employees,
AFL-CIO (AFSCME) asserted that, ``[b]ecause Congress has legislatively
ratified the existing six-factor Economic Reality test, the Secretary
and Administrator are powerless to alter the standard. This also means
the Proposed Rule would fail the first step of the Chevron deference
analysis and would be entitled to no deference by the courts.''
According to AFSCME, ``when Congress re-enacts a statute without
change, it is presumed to be aware of administrative and judicial
interpretation of that statute and to have adopted those
interpretations.'' Based on this principle, AFSCME reasoned that,
because Congress did not revise the definition of ``employ'' when it
amended the FLSA in 1966, it must have adopted the ``integrated unit of
production'' factor articulated in Rutherford Food, 331. U.S. 730.
Additionally, AFSCME asserted that Congress's 1983 decision to adopt
the FLSA's definition of ``employ'' without revision in MSPA indicates
that Congress implicitly adopted the ``six-factor test [that] was well
embedded as the interpretation of the FLSA's `employ.' ''
AFSCME's ratification argument is based entirely on the fact that
Congress has not amended the FLSA's definition of ``employ.'' The
Supreme Court, however, has ``criticized . . . reliance on
congressional inaction'' as a tool of statutory interpretation,
cautioning that, ``[a]s a general matter . . . these arguments deserve
little weight in the interpretive process.'' Central Bank of Denver,
N.A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164, 187
(1994). ``And when . . . Congress has not comprehensively revised a
statutory scheme but has made only isolated amendments, [the Court has]
spoken more bluntly: `It is impossible to assert with any degree of
assurance that congressional failure to act represents affirmative
congressional approval of the Court's statutory interpretation.' ''
Alexander v. Sandoval, 532 U.S. 275, 292, (2001) (quoting Patterson v.
McLean Credit Union, 491 U.S. 164, 175 n.1 (1989)). Congress has not
``comprehensively revised'' the Act's statutory scheme in a manner that
would indicate Congressional approval of a judicially created six-
factor test as the standard for FLSA employment.
Even if some insight could be gleaned from Congressional inaction,
that insight would not support ratifying a specific and definitive six-
factor test because there has never been a uniform test for Congress to
ratify. The Supreme Court has never articulated a six-factor test, and
courts of appeals articulate the test differently. As discussed
earlier, the Second Circuit combines two of the factors. The Fifth
Circuit omits one factor, while the remaining circuits use a sixth,
``integral part'' factor that departs from the Supreme Court's
consideration of ``integrated unit of production.'' Some circuits
analyze a ``skill and initiative'' factor, while others consider just
``skill required.'' Some circuits analyze the investment factor by
comparing the dollar value of the worker's investment against that of
the hiring entity, while others analyze whether the worker's investment
creates opportunities for profit or loss. Simply put, there is no
single test that Congress could have impliedly ratified, nor did AFSCME
suggest one.
For these reasons, Congress's inaction does not demonstrate that it
ratified a specific six-factor economic reality test.
5. Whether the Rulemaking Improperly Departs From Prior Practice
Several commenters, including NELA, contended that the proposed
rule would be an improper departure from the Department's prior
practice. The rule is consistent with the Department's prior position
that the ultimate inquiry for determining employee versus independent
contractor status under the FLSA is whether an individual is, as a
matter of economic reality, economically dependent on another for work
or is instead in business for him- or herself. The rule is further
consistent with the Department's longstanding position that all
economic reality factors should be analyzed when answering that
ultimate inquiry.
The Department acknowledges that the rule's focus on two core
factors that are most probative to that ultimate inquiry is different
from how the Department articulated the economic reality test in the
past. ``Agencies are free to change their existing policies as long as
they provide a reasoned explanation for the change.'' Encino Motorcars,
LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016). The Department has
explained its reasoning for focusing the economic reality test on two
core factors throughout the NPRM and this preamble. The Department
further acknowledges that the rule lists economic reality factors in
Sec. 795.105(d) that correspond with how the Department has
articulated those factors in the past, with a few modifications. The
Department explained its reasons for these modifications in the NPRM
and in this preamble. This rule does not improperly depart from the
Department's prior positions.
H. Examples
As discussed above, many commenters requested that the regulatory
text contain examples of how the economic reality test would apply in
the context of their specific industries or practices. The Department,
however, prefers to adopt generally applicable principles as opposed to
attempting to provide guidance for every potential scenario. The later
approach would require the regulation be drafted as an exhaustive
treatise that is neither accessible nor helpful for most members of the
regulated community. It would also invariably omit many important types
of circumstances and be more difficult to adapt to future industries
and practices that neither the Department nor commenters could have
conceived.
While the Department cannot provide examples for every conceivable
scenario, it is adding Sec. 795.115 to provide six illustrative
examples that involve a variety of industries and specific facts. Due
to the complexities of balancing multiple factors that encompass
countless facts that are part of the totality of the circumstances, the
Department does not believe it would be helpful to provide examples
that make conclusions regarding workers' ultimate classifications.
Rather, each illustrative example focuses on the classification favored
by a specific economic reality factor within the context of the fact-
specific scenario. The first example concerns the control factor in the
context of the long-haul transportation industry. The second example
concerns
[[Page 1209]]
the opportunity factor in the context of the gig economy. The third
example concerns the opportunity factor in the context of the
construction industry and clarifies the concept of economic dependence.
The fourth example concerns the permanence factor within the context of
a seasonal hospitality industry. The fifth example concerns the
reframed ``integrated unit'' factor within the context of the
journalism industry. The sixth example also concerns the new
``integrated unit'' factor within the context of the journalism
industry and is designed to work with the fifth example to elucidate
the distinction between when this factor favors classification as an
employee versus independent contractor.
I. Severability
The Department proposed 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 did not
receive any comments on this provision, and finalizes it as proposed.
J. Amendments to Existing Regulatory Provisions at Sec. Sec.
780.330(b) and 788.16(a)
Finally, in addition to the proposed addition of part 795, the
Department proposed to amend existing regulatory provisions addressing
independent contractor status under the FLSA in narrower contexts at 29
CFR 780.330(b) (tenants and sharecroppers) and 29 CFR 788.16(a)
(certain forestry and logging workers). Specifically, the Department
proposed to replace descriptions of the six economic reality factors
WHD has historically used to evaluate independent contractor status
under the FLSA with a cross-reference to the guidance provided in new
part 795. While some commenters invoked the existing provisions at
Sec. Sec. 780.330(b) and 788.16(a) to justify opposition to proposed
part 795, the Department did not receive any commenter feedback
regarding the proposed amendment of these provisions. Accordingly, the
Department finalizes amendments to these provisions as proposed.
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, the impact of paperwork and other information
collection burdens imposed on the public, and how to minimize those
burdens. In the NPRM, the Department invited public comment on its
determination that the proposal did not contain a collection of
information subject to OMB approval under the PRA. A few commenters,
while not referencing the PRA directly, discussed records in their
public comments. However, this was merely to note agreement that
section 11 of the FLSA does not require the keeping of records
regarding workers who are independent contractors. This final rule does
not contain a collection of information subject to OMB approval under
the PRA.
VI. Executive Order 12866, Regulatory Planning and Review; and
Executive Order 13563, Improved Regulation and Regulatory Review
A. Introduction
Under Executive Order 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.\62\ Section 3(f) of Executive Order
12866 defines a ``significant regulatory action'' as a regulatory
action that is likely to result in a rule that may: (1) Have an annual
effect on the economy of $100 million or more, or adversely affect 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) create serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) materially alter
the budgetary impact of entitlements, grants, user fees or loan
programs or the rights and obligations of recipients thereof; or (4)
raise 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 rule is estimated to be
greater than $100 million, this rule will be economically significant
under section 3(f) of Executive Order 12866.\63\
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\62\ See 58 FR 51735 (Sept. 30, 1993).
\63\ 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
$495.8 million per year, accruing to the same parties that face the
familiarization costs.
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Executive Order 13563 directs agencies to, among other things,
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 obtaining the regulatory objectives;
and that, in choosing among alternative regulatory approaches, the
agency has selected those approaches that maximize net benefits.
Executive Order 13563 recognizes that some costs and 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 impossible to quantify, including equity, human dignity,
fairness, and distributive impacts.
B. Overview of Analysis
The Department believes this rule is likely to improve the welfare
of both workers and businesses on the whole. With respect to
businesses, the Department believes that the improved clarity offered
by the rule will increase the efficiency of the labor market, allowing
businesses to be more productive and decreasing their litigation
burden. With respect to workers, broadly speaking, this rule is likely
to have four categories of potential effects.
First, this rulemaking makes it easier for the millions of
individuals who currently work as independent contractors and those who
hire them to comply with the law. See Farren and Mitchell (``The
proposed rule will likely reduce the cost of complying with the
relevant Federal regulations.''). Compliance cost savings will be
shared between the independent contractors and businesses for which
they work. Id. (``labor regulations are generally paid for by
reductions in workers' total compensation'').
Second, as explained above, the legal clarity from this rule is
likely to reduce occurrences of misclassification by enabling firms and
workers to better understand their respective obligations and rights
under the FLSA. The Department agrees with commenters that
misclassification harms workers and believes this rule will reduce
those harms by facilitating compliance.
Third, legal clarity may encourage firms to create independent
contractor arrangements for roles that did not previously exist, which
may attract workers who otherwise would not work in that field. Such
job creation unambiguously benefits workers and firms alike. See Dr.
Liya Palagashvili (``[W]e got the impression from our interviews that
the primary concern for startups in terms of labor regulation or policy
is mostly with regulation of independent contractors.''), and Fuller et
al. (``[M]ore than two-thirds of [women with advanced degrees or high-
[[Page 1210]]
honors BAs] who drop out of the workforce would not have done so if
they'd had access to more-flexible job arrangements.'').\64\
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\64\ Joseph B. Fuller, et al., Rethinking the On-Demand
Workforce, Harvard Business Review (Oct. 20, 2020).
---------------------------------------------------------------------------
Fourth, as a result of the improved clarity of the rule, businesses
might convert existing positions from employee to independent
contractor. This rule provides the most legal certainty to employers
classifying a worker as an independent contractor if the worker
substantially controls the work and has a meaningful opportunity for
profit or loss based on initiative or investment. As such, a job
conversion attributable to the legal clarity provided by this rule is
likely to satisfy the control and opportunity criteria.\65\ Businesses
could reclassify existing employees as independent contractors by
modifying their working relationship under the criteria of this rule,
and would only be expected to do so upon determination that the clarity
provided by this rule materially shifts the balance of tradeoffs.
Business could also reclassify positions because the increased clarity
of the rule confirms that their workers are actually already
effectively independent contractors because their workers have
substantial control over the work and have an opportunity for
profit.\66\ Any benefit to businesses of modified classifications would
need to outweigh the costs, including any autonomy they cede to workers
in such arrangements and any costs associated with implementation or
modifying the classification itself, and such a relationship would need
to be compatible with their business models. Further, generally
speaking, workers have a choice of whether to agree to the new
independent contractor arrangement. The overall effect of job
conversion on workers is ambiguous and could vary from worker to
worker, as discussed in more detail in section VI(D)(7) below. Impacts
resulting from litigation avoidance due to increased clarity are
discussed in section VI(F)(2).
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\65\ Section 795.105(c) indicates that a worker who lacks both
control and opportunity is most likely an employee. As such, the
Department believes this rule would discourage employers from
converting such workers from employee to independent contractor
status. Section 795.105(c) would not give an employer sufficient
confidence that it could change the classification of a worker who
has only control but not opportunity, or vice versa.
\66\ The Department notes that the final rule does not, by its
operation, change the classification of any employee.
Notwithstanding the assertions of several commentators, as explained
throughout the analysis, the rule does not narrow the definition of
who is an employee under the FLSA.
---------------------------------------------------------------------------
The Department did not attempt to quantify all aspects of these
four categories of potential impacts. In particular, the Department
believes that significant uncertainty surrounds any attempt to quantify
the number or nature of new independent contractor relationships that
could arise as a result of this rule. Although the Department assumes
that there will be an increase in the number of independent contracting
relationships, the Department did not attempt to put a specific number
on this figure and did not attempt to estimate how new independent
contractors might differ from existing independent contractors. The
Department is uncertain with respect to several key questions,
including how many new workers will be added and what their
characteristics will be, how many existing employee relationships may
be converted to independent contractor status, and which industries,
type or sizes of employers would be most impacted. Absent these data,
the Department is not well positioned to generate a constructive
estimate or model of impact on the change in independent contracting
relationships due to the rule. Notwithstanding, the Department
quantified certain other impacts associated with the final rule,
including those to current independent contractors and businesses where
sufficient data and theory afforded greater confidence in the resulting
estimates.
Regarding the employees who may be negatively impacted by this
rule, the Department has ascertained certain characteristics that it
expects will be representative across this group. This rule provides a
sharpening of the economic realities test, which is a marginal change
that may impact firms' assessment of legal risk, leading to an
increased chance that some employers will choose to reclassify certain
positions from employee to independent contractor relationships.
Because this analysis attempts to quantify the marginal impacts of this
rule, if the only change is increased legal clarity, any resulting
change in classification will most likely be limited to workers who
already possess characteristics associated with independent contractor
status, including control and opportunity for profit or loss.\67\ Due
to the customary negotiation between firms and workers, most workers
whose positions are converted will be in a position to influence the
tradeoffs between employee and independent contractor status. The one
group of workers for whom these assumptions may not apply is those
workers paid the minimum wage, and whose positions already resemble
characteristics of independent contractors. Workers earning the minimum
wage may lack the bargaining power to fully offset the adverse effects
triggered by the job conversion; however, independent contractor status
often carries flexibilities that may further offset some of these
effects, albeit non-monetarily. Further, on one hand, these workers
likely do not have extensive benefits coverage, but on the other hand,
they may qualify for access to benefits from other means. There are
approximately 370,000 workers over the age of 19 who earn the minimum
wage, which represents 0.24 percent of the workforce. It is unclear how
many of these jobs could be converted to independent contractor status
without material modifications to the position or substantive
negotiation on overall compensation, but it is not likely to be many.
Further, many of these workers may have access to health insurance
coverage via a spouse or partner, a parent, or a government program
(Medicaid, Medicare, Tricare, etc.). For these reasons, the Department
does not expect there to be many current employees whose positions are
converted to independent contractor relationships without meaningful
ability to influence the terms of the new position in a way that
mitigates deleterious impacts of the resulting tradeoffs.
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\67\ For greater discussion on this and other points in this
summary, please see Section XXXX on Job Conversion.
---------------------------------------------------------------------------
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
estimating the total number of independent contractors, ranging from
6.1 percent to 14.1 percent of workers (see Table 2 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 as a result of this rule.
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 during the pandemic and following its
[[Page 1211]]
economic effects, 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.\68\
---------------------------------------------------------------------------
\68\ Recent studies and news reports suggest that more
individuals are working under freelance or independent contractor
arrangements during the pandemic. See, e.g., Press Release, New
Upword Study Finds 36% of the U.S. Workforce Freelance Amid the
COVID-19 Pandemic, Sep. 15, 2020, available at https://www.upwork.com/press/releases/new-upwork-study-finds-36-of-the-us-workforce-freelance-amid-the-covid-19-pandemic; Kim Mackrael, In the
Covid Economy, Laid-Off Employees become New Entrepreneurs, Wall
Street Journal, Nov. 18, 2020; Uri Berliner, Jobs in the Pandemic:
More Are Freelance and may stay that way forever, NPR, Sep. 16,
2020; Jon Younger, A New Payoneer Report Shows Covid 19 is
Accelerating Freelance Growth, Forbes, Sep. 1., 2020.
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The Department estimates regulatory familiarization costs to be
$370.9 million in the first year. The Department estimates cost savings
due to increased clarity to be $447.1 million per year, and cost
savings due to reduced litigation to be $48.7 million per year. This
results in a 10-year annualized net cost savings of $452.4 million
using a 3 percent discount rate and $443.0 million using a 7 percent
discount rate.\69\ For purposes of Executive Order 13771, the
Department calculated the difference between the total cost savings and
the total costs in $2016, discounted over a perpetual time horizon
using a 7 percent discount rate beginning in 2021 when the rule will
take effect. This results in an annualized net cost savings over a
perpetual time horizon of $315.5 million.\70\ Other anticipated costs,
benefits, and cost savings are discussed qualitatively.
---------------------------------------------------------------------------
\69\ Discount rates are directed by OMB. See Circular A-4, OMB
(Sept. 17, 2003).
\70\ $332.9 million-$17.4 million = $315.5 million. Per OMB
guidelines, Executive Order 13771 data is represented in 2016
dollars, inflation-adjusted for when the rule will take effect.
Table 1--Summary of Rule Impacts
[$2019 Millions]
----------------------------------------------------------------------------------------------------------------
Annualized values \a\
Impact Year 1 Years 2-10 -------------------------------
7% Discount 3% Discount
----------------------------------------------------------------------------------------------------------------
Regulatory Familiarization Costs:
Establishments.............................. $152.3 $0.0 $21.7 $17.9
Independent Contractors..................... 218.6 0.0 31.1 25.6
---------------------------------------------------------------
Total................................... 370.9 0.0 52.8 43.5
Cost Savings from Increased Clarity:
Employers................................... 369.0 369.0 369.0 369.0
Independent Contractors..................... 78.1 78.1 78.1 78.1
---------------------------------------------------------------
Total................................... 447.1 447.1 447.1 447.1
Cost Savings from Reduced Litigation............ 48.7 48.7 48.7 48.7
Total Cost Savings.............................. 495.8 495.8 495.8 495.8
Net Cost Savings (Cost Savings--Costs).......... 125.0 495.8 443.0 452.4
----------------------------------------------------------------------------------------------------------------
\a\ Annualized over 10-years.
C. Independent Contractors: Size and Demographics
The Department extrapolated from U.S. Census Bureau data to
estimate that there are 15.6 to 22.1 million individuals who work as
independent contractors as either a primary or secondary job. This
estimated figure could be higher or lower depending on different data
sources and methodologies discussed below. The Department used the
median of the above range, 18.9 million, for its estimates to avoid
overestimation by accounting for a number of criteria, which are
presented in this section.
1. Current Number of Independent Contractors
The Department estimated the number of independent contractors.
There are a variety of estimates of the number of independent
contractors spanning a wide range depending 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 U.S. Census Bureau conducts the CPS and it is 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 survey to collect data on contingent
and alternative employment arrangements. Based on the CWS, there were
10.6 million independent contractors in 2017, amounting to 6.9 percent
of workers.\71\ 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. However,
while the Department refers to the CWS measure of independent
contractors throughout this analysis, due to the survey's design 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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\71\ 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: \72\
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\72\ The variables used are PES8IC=1 for self-employed and
PES7=1 for other workers.
---------------------------------------------------------------------------
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
[[Page 1212]]
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).\73\ 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.\74\ For example, Lim et al. (2019) estimate
that independent contracting work is the primary source of income for
48 percent of independent contractors.\75\ 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.\76\ 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).
---------------------------------------------------------------------------
\73\ 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.
\74\ 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 percent 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).
\75\ 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.
\76\ Washington Department of Commerce, ``Independent Contractor
Study,'' p. 21 (Jul. 2019), https://deptofcommerce.app.box.com/v/independent-contractor-study.
---------------------------------------------------------------------------
The Coalition for Workforce Innovation (CWI) submitted a survey
they conducted of 600 self-identified independent contractors. The
survey found that independent contracting is the primary source of
income for 71 percent of respondents.\77\ This is consistent with the
prior estimate from Washington State. Applying this estimate to the
10.6 million primary independent contractors estimated from the CWS,
results in 14.9 million independent contractors (10.6 million / 0.71).
---------------------------------------------------------------------------
\77\ Coalition for Workforce Innovation. ``National Survey of
600 Self-Identified Independent Contractors'' (January 2020),
https://rilastagemedia.blob.core.windows.net/rila-web/rila.web/media/media/pdfs/letters%20to%20hill/hr/cwi-report-final.pdf.
---------------------------------------------------------------------------
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.\78\ For example, Farrell and Greig (2016) used a
randomized sample of 1 million Chase customers to estimate prevalence
of the Online Platform Economy.\79\ 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.\80\
---------------------------------------------------------------------------
\78\ 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.
\79\ 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.
\80\ B. Collins, A. Garin, E. Jackson, D. Koustas, and M. Payne,
``Is Gig Work Replacing Traditional Employment? Evidence from Two
Decades of Tax Returns,'' IRS SOI Joint Statistical Research Program
(2019) (unpublished paper), https://www.irs.gov/pub/irs-soi/19rpgigworkreplacingtraditionalemployment.pdf.
---------------------------------------------------------------------------
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).\81\ This survey found that independent
contractors comprise 7.2 percent of workers.\82\ 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.\83\ 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).84 85
---------------------------------------------------------------------------
\81\ See Katz and Krueger (2018), supra note 12.
\82\ Id. at 49. The estimate is 9.6 percent without correcting
for overrepresentation of self-employed workers or multiple job
holders. Id. at 31.
\83\ Id. at Addendum (``Reconciling the 2017 BLS Contingent
Worker Survey'').
\84\ Note that they estimate 6.7 percent of employed workers are
independent contractors using the CWS, as opposed to 6.9 percent as
estimated by the BLS. This difference is attributable to changes to
the sample to create consistency.
\85\ 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.
---------------------------------------------------------------------------
Another potential source of bias in the CWS is that some
respondents may not self-identify as independent contractors, and
others who self-identify may themselves be improperly classified. 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
[[Page 1213]]
informal work may not view themselves as independent contractors.\86\
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.\87\ Conversely, some workers who are improperly classified by
their employers as independent contractors may answer in the
affirmative, despite not truly being independent contractors. The
prevalence of misclassification is unknown, but it likely occurs across
numerous sectors in the economy.\88\ 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 attempted to
calculate how these biases may impact the estimated number of
independent contractors.
---------------------------------------------------------------------------
\86\ 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.
\87\ K. Abraham, and S. Houseman. ``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
(2019), https://www.aeaweb.org/conference/2019/preliminary/paper/QreAaS2h.
\88\ 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 produces estimates of 15.6 million
and 22.1 million. The Department uses 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.
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 2. 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.\89\ The RAND
ALP \90\ and the General Social Survey's (GSS's) Quality of Worklife
(QWL) \91\ 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.
---------------------------------------------------------------------------
\89\ 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), https://www.kellyservices.com/global/siteassets/3-kelly-global-services/uploadedfiles/3-kelly_global_services/content/sectionless_pages/kocg1047720freeagent20whitepaper20210x21020final2.pdf; 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 76; Farrell and Greig, supra note
79; 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. (2019), supra note 80; 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.
\90\ See Katz and Krueger (2018), supra note 12.
\91\ See Abraham et al. (2018), supra note 89, Table 4.
---------------------------------------------------------------------------
Jackson et al. (2017) \92\ and Lim et al. (2019) \93\ 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 misclassified independent contractors.\94\ A
major disadvantage of using tax data for this analysis is that the
detailed source data are not publicly available and thus the analyses
cannot be directly verified or adjusted as necessary (e.g., to describe
characteristics of independent contractors, etc.).
---------------------------------------------------------------------------
\92\ 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.
\93\ Lim et al., supra note 75.
\94\ 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 2--Summary of Estimates of Independent Contracting
----------------------------------------------------------------------------------------------------------------
Percent of workers
Source Method Definition \a\ (%) Sample size Year
----------------------------------------------------------------------------------------------------------------
CPS CWS............... Survey........... Independent 6.9 50,392............. 2017
contractor,
consultant or
freelance worker
(main only).
ALP................... Survey........... Independent 7.2 6,028.............. 2015
contractor,
consultant or
freelance worker
(main only).
[[Page 1214]]
GSS QWL............... Survey........... Independent 14.1 2,538.............. 2014
contractor,
consultant or
freelancer (main
only).
Jackson et al......... Tax data......... Independent \b\ 6.1 ~5.9 million \c\... 2014
contractor,
household worker.
Lim et al............. Tax data......... Independent 8.1 1% of 1099-MISC and 2016
contractor. 5% 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
The Department reviewed demographic information on 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.\95\
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.\96\ 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).\97\ The opposite trends emerge
when evaluating informal work, where racial minorities participate at a
higher rate than white workers.\98\ 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.\99\
---------------------------------------------------------------------------
\95\ 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.
\96\ Abraham and Houseman (2019), supra note 87, 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 (2019), supra note 89.
\97\ These numbers are based on the respondents who state that
their race is ``white only'' or ``black only'' as opposed to
identifying as multi-racial.
\98\ Abraham and Houseman (2019), supra note 87.
\99\ Id.
---------------------------------------------------------------------------
D. Potential Transfers
Given the current universe of independent contractors and the
possibility that more individuals may become independent contractors
after the rule is finalized, the Department here identifies the
possible transfers among workers and between workers and businesses,
which may occur. These transfer effects are discussed qualitatively and
include effects relating to employer provided benefits, tax liability,
earnings, minimum wage and overtime pay, accurate classification of
workers, and conversions of employee jobs to independent contractor
jobs.
In evaluating potential transfers that could be occasioned by the
rule, the Department notes at the outset that the substantive effect of
the rule is not intended to favor independent contractor or employee
classification relative to the status quo of the Department's existing
guidance and precedent from courts. However, the Department assumes in
this RIA that the increased legal certainty associated with this final
rule could lead to an increase in the number of independent contractor
arrangements by reducing the transaction and compliance costs inherent
in structuring such an arrangement. 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.\100\ Several commenters assumed
the increase in independent contractors would be 5 percent, although
none provided substantive support to bolster the assumption. See EPI,
Washington Center. Due to the lack of certainty and data to support a
reliable estimate, the Department does not attempt to estimate the
increase in independent contractor relationships that would result due
to this rule. Therefore, potential transfers are discussed
qualitatively with some numbers presented on a per worker basis.
Potential transfers may result from differences in benefits, tax
liabilities, and earnings between employees and independent
contractors. Although employment benefits could decrease, and tax
liabilities could increase, the Department believes the net impact on
total compensation should be small in either direction. Furthermore, to
attract qualified workers, companies must offer competitive
compensation. Therefore,
[[Page 1215]]
for workers in a competitive labor market, any reduction in benefits
and increase in taxes are expected to be offset by higher base
earnings. This concept is discussed further below in the Earnings
section.
---------------------------------------------------------------------------
\100\ 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 final 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 final rule.
---------------------------------------------------------------------------
Assuming that independent contractor arrangements increase
following this final rule, it is unclear the extent to which this would
occur as a result of current 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 change the classification of current employees only if
those workers could already have been classified as independent
contractors or if the working conditions are modified 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.\101\ Lim et al. (2019) found in the status quo that there was
``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.'' \102\ The
Department does not anticipate this phenomenon will cease occurring in
the presence of the final rule. As discussed below, the limited number
of businesses with employees whose roles would meet the requirements to
be independent contractors likely face incentives to maintain the
status quo for those workers, but there will likely be some degree of
innovation in the labor market in response to the rule that compounds
the current trend towards greater numbers of independent contractors.
For more discussion on how employees may be affected by transfers, see
the Job Conversion discussion in Section VI(D)(7).
---------------------------------------------------------------------------
\101\ Under the final rule, a worker may be classified only if
the job meets the requirements of section 795.105.
\102\ Lim et al., supra note 75 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, an increase in the size of the labor force,
or both. 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 as their primary
job.\103\ Attracting these individuals to join the labor force would be
classified as a societal benefit, rather than a transfer. These impacts
are evaluated more fully below as part of the discussion on Cost
Savings and Benefits.
---------------------------------------------------------------------------
\103\ McKinsey Global Institute, supra note 89 at 71.
---------------------------------------------------------------------------
The Department requested comments on its assumption that use of
independent contractors will increase if the proposed rule is
finalized. Most commenters took the view that, consistent with the
Department's assumption, the final rule will lead to an increase in the
number and proportion of workers who are independent contractors. Some
commenters, such as the Signatory Wall and Ceiling Contractors Alliance
(SWACCA) and other construction workers' unions commented that the rule
could lead to increases in the percentage of independent contractors in
the workforce by narrowing the standard for FLSA employment. But as
explained above in Section IV(E)(2) and later in the discussion of
regulatory alternatives in Section VI(G)(2), the final rule does not
narrow or expand the standard for FLSA employment. Rather, the
Department agrees with many commenters representing businesses and
freelance workers that the final rule serves only to make that standard
clearer, enabling businesses and individuals to structure their work
relationships to comply with the law. See Section III (discussing
commenter feedback). While this could lead to a greater incidence of
independent contracting--as businesses and workers will be able to more
freely adopt independent worker arrangements without fear of FLSA
liability--the final rule does not narrow the standard for FLSA
employment.\104\
---------------------------------------------------------------------------
\104\ The fact that the final rule is not an expansion or
narrowing of the FLSA's scope of employment is not to say that
courts have never in the past misapplied the economic reality test
in particular cases. For example, some courts have expressly
disagreed on the meaning of the ``integral/integrated'' factor in
the test. The existence of seemingly contradictory and inconsistent
case law is one of the reasons why the Department sees a need to
issue this final rule. However, as discussed extensively above, the
Department believes that the statement of the economic reality test
in the final rule is consistent with precedent and the FLSA as a
whole, even if it is in tension with particular cases.
---------------------------------------------------------------------------
Some commenters disagreed with the Department's decision not to
specifically quantify a change in the number of independent
contractors. Furthermore, most of the commenters who included
assumptions of growing numbers of independent contractors also assumed
that those workers were drawn from the existing pool of employees, not
from the otherwise unemployed or those outside the labor market.\105\
The Washington Center for Equitable Growth (Washington Center), for
instance, simply assumed a 5 percent increase in the number of
independent contractors (corresponding to an equivalent decline in
employees); \106\ however, it neither provided explanation why that
percentage was reasonable nor justified its assumption that the
percentage would entirely represent a shift of existing employment
relationships to independent contractor relationships. Many commenters
asserting and estimating a sizable shift from employment to independent
contracting relationships seem to have based their estimates on the
false impression that the final rule would narrow the FLSA scope of
employment. As explained above, this is not the case--the final rule
does not shift the definition of who is an employee under the FLSA. Any
shift, the Department believes, would have to result from increased
certainty, reduced overhead, and reduced misclassification. Conversely,
the Americans for Prosperity Foundation (AFPF) agreed with the
Department's decision to not quantify potential changes in the
aggregate number of independent contractors and supported the
Department's analysis.
---------------------------------------------------------------------------
\105\ Some commenters and reports (See e.g., Palagashvili;
Fuller et al.,) cited data that indicate increased regulatory
clarity would likely result in workers entering the workforce due to
the greater flexibility and control provided by independent
contracting relationships. This would expand the workforce rather
than transfer workers between classifications.
\106\ EPI, Washington Center, and other commenters who use this
5 percent estimate assume the entire increase to independent
contractors consists of workers whose overall compensation will
decline and whose jobs otherwise remain the same. See EPI
(characterizing converted workers as having ``the same job for
substantially less compensation''). The Department finds this highly
unlikely. For more discussion on this topic, see the Job Conversion
topic in Section II.D.6.
---------------------------------------------------------------------------
The Department continues to believe that the necessary data and
information are not available to quantify either any shift in
independent contracting away from employee relationships or the number
of new independent contractors who may enter the workforce in response
to the rule and the impact of such a shift on workers and businesses.
As explained in the NPRM, any attempt to produce a useful estimate for
the impact of an increase in independent contractors requires
ascertaining a
[[Page 1216]]
number of additional variables, including how this reduction in
administrative overhead and misclassification would impact independent
contracting. See 85 FR 60626. The approach taken by some commenters of
simply choosing a number without support and applying it across the
entire economy, given the extremely large number of employment
relationships in the United States, the differences in how a worker may
value certain ``benefits,'' \107\ and the unique relationships between
different types of independent contractors and different businesses,
could create a misleading and uncertain estimate of the impact of the
rule without lending any additional clarity because of the lack of the
basis for such a figure and likely differences between the current
independent contractor population and the population likely to arise as
a result of this rule. Since commenters, including those in support and
those in opposition, did not proffer sufficient data upon which to
build more accurate assumptions, the Department has not attempted to
quantify this impact.
---------------------------------------------------------------------------
\107\ If, for example, a state mandates that employees receive
paid parental leave, but the worker does not have and intends not to
have children, this ``benefit'' is of no value to that worker.
Estimating how an individual worker values a particular ``benefit''
or even a tax liability would require a worker-by-worker analysis
for which the Department lacks necessary data.
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1. Impact of COVID-19 on the Rule
The Department also requested 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. Several
commenters noted the importance of independent contracting in
weathering the pandemic. For example, the Center for Growth and
Opportunity at Utah State University (CGO) wrote that the benefits of
independent contracting ``are likely to grow if the United States labor
market adapts to the recession spurred by the COVID-19 pandemic
similarly as it did to the financial crisis of 2008.'' They note that
during an economic downturn, workers can turn to alternative work
arrangements such as independent contracting to supplement their
income. The view is supported by a recent Harvard Business Review
article that describes how firms have increasingly relied on
freelancing and platforms that allow access to the growing supply of
on-demand workers to identify innovative solutions more flexibly and
quickly than relying solely on their fulltime workforce, noting that
``Early signs suggest that Covid-19 will also speed up this shift.''
\108\ It is also supported by a range of recent news reports indicating
that freelance opportunities provide an important path for individuals
to return to the workforce who lost their jobs due to the
pandemic.\109\ Women Employed claimed that this rule will degrade jobs,
and that doing so in the midst of a pandemic would be harmful, basing
this claim on assumptions that this rule would ``undermine the FLSA''
and increase misclassification of workers. But as explained above, this
rule does not undermine the FLSA; it sharpens the focus of the economic
reality test and clarifies the meaning of economic dependence that
courts, the Department, and most commenters agree is the standard for
employment under the Act. This clearer standard is likely to reduce
rather than increase occurrences of misclassification.
---------------------------------------------------------------------------
\108\ Fuller, et al., supra note 64 (``Many freelance platforms
offer access to workers from around the world with a wide variety of
skills, and payment is often per completed task. Covid-19 is
accelerating the move toward these platforms. . ..''); see also
Press Release, New Upwork Study Finds 36% of the U.S. Workforce
Freelance Amid the COVID-19 Pandemic, Sep. 15, 2020, available at
https://www.upwork.com/press/releases/new-upwork-study-finds-36-of-the-us-workforce-freelance-amid-the-covid-19-pandemic.
\109\ See, e.g., Kim Mackrael, In the Covid Economy, Laid-Off
Employees become New Entrepreneurs, Wall Street Journal, Nov. 18,
2020; Uri Berliner, Jobs in the Pandemic: More Are Freelance and may
stay that way forever, NPR, Sep. 16, 2020; Jon Younger, A New
Payoneer Report Shows Covid 19 is Accelerating Freelance Growth,
Forbes, Sep. 1. 2020.
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2. Employer Provided Benefits
In the context of transfers, the Department attempted to evaluate
how an increase in independent contracting relationships could affect
employer provided benefits. Although this rule only addresses workers'
independent contractor status under the FLSA, the Department assumes in
this analysis that employers are likely to keep the status of most
workers the same across all benefits and requirements.\110\ 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 and, as
explained in the preamble, the offering of health, retirement, and
other benefits to workers is not necessarily indicative of employee
status). Employer-provided benefits are often 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.\111\ The Department notes that this 21 percent figure is
an average for all employees and may not be representative of the
subset of employees whose classification may be impacted by this rule.
Since the 21 percent figure includes paid leave (7.2 percentage points)
and retirement benefits (5.3 percentage points), and workers may value
these benefits at very different levels, applying these elements does
not seem reasonable in the context of this analysis.\112\
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\110\ 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.
\111\ BLS, ``Employer Costs for Employee Compensation News
Release'' (Sept. 2019), https://www.bls.gov/news.release/archives/ecec_12182019.htm. For 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.
\112\ The average economy-wide provision of insurance benefits,
which represent 8.7 percentage points of the 21 percent figure, is
also likely to be an overestimate for the average percentage of
compensation offered to the workers most likely to be impacted by
this rule.
---------------------------------------------------------------------------
The Department used the CWS to compare prevalence of health
insurance and retirement benefits across employees and independent
contractors to produce a highly generalized picture. However, it should
be noted that these two populations may differ in other ways than just
their employment classification and the particular elements of their
compensation packages discussed in the preceding paragraph 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 to attract workers because workers consider the full
package of pay and benefits when accepting a job.
According to the CWS's relatively narrow definition of independent
contractor:
[[Page 1217]]
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.
Several commenters estimated the prevalence of health insurance
among independent contractors. In early 2020, CWI commissioned a
national survey of 600 self-identified independent contractors. Their
survey found that 84 percent of independent contractors have healthcare
coverage.\113\ The Workplace Policy Institute of Littler Mendelson,
P.C. (WPI) pointed to a study that found about 90 percent of gig
workers have health insurance.\114\ The study also found that less than
one-third of 1099-MISC workers purchase their own health insurance,
``and most indicate that health insurance does not affect their
decision to work as an independent contractor.'' It also notes that the
businesses interviewed believe that workers may have ``made an economic
decision with their spouse--where one spouse works without benefits for
higher pay and the other receives lower pay with benefits--resulting in
a higher total income and health benefits for the household.''
---------------------------------------------------------------------------
\113\ Coalition for Workforce Innovation (2020), supra note 77.
\114\ A. Yildirmaz, M. Goldar, S. Klein, ``Illuminating the
Shadow Workforce: Insights Into the Gig Workforce in Businesses,''
ADP Research Institute (February 2020), https://www.adpri.org/research/illuminating-the-shadow-workforce/?release=illuminating-the-shadow-workforce-2020.
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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. Additionally,
simply comparing rates between independent contractors and employees
may be misleading. As the U.S. Chamber of Commerce pointed out, many
independent contractors would not be eligible for benefits even if they
were employees due to the short-term and/or part-time nature of such an
employment relationship.
Women Employed noted that the although the Department showed high
rates of health insurance among independent contractors in general, the
Department did not show that low-wage independent contractors have
access to health insurance. In response, the Department compared health
insurance rates for workers earning less than $15 per hour and found
that 71.0 percent of such independent contractors have health insurance
compared with 78.5 percent of such employees. Health insurance rates
are lower for both independent contractors and employees when limited
to low-wage workers. However, the gap in coverage between low-wage
employees and independent contractors remains comparable to that for
all workers: 7.5 percentage points for low-wage workers compared to 8.1
percentage points for all workers.
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 personal 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 likely need to take
a more active role in saving for retirement vis-[agrave]-vis an
employee with an employer-sponsored retirement plan.\115\
---------------------------------------------------------------------------
\115\ Access to such benefits might be similar for both
employees and independent contractors, but it is unlikely that the
business will contribute similar sums to benefits for an independent
contractor and employee.
---------------------------------------------------------------------------
Commenters pointed out that independent contractors generally have
retirement accounts. CWIs survey of independent contractors found that
73 percent have a retirement savings plan. The WPI pointed to a study
by T. Rowe Price that found that more than half of independent
contractors are saving for retirement.\116\ Conversely, commenters such
as the Washington Center cited a study showing that independent
contractors are ``less likely . . . to make contributions to a
retirement account.'' \117\ However, that study narrowly defines
retirement accounts to include ``employer-sponsored plans'' while
excluding other common long-term saving methods, which biases the
comparison between independent contractors and employees. This hampers
the ability to substantively compare this commenter's position with
those of other commenters, such as CWI and WPI, listed above.
---------------------------------------------------------------------------
\116\ T. Rowe Price, ``Press Release: The Majority of
Independent Workers are Actively Saving for Retirement'' (March 25,
2019), https://www.troweprice.com/corporate/en/press/t-rowe-price-the-majority-of-independent-workersare-actively-.html
\117\ Jackson, Looney, and Ramnath (2017), supra note 92.
---------------------------------------------------------------------------
Some commenters asserted the Department should quantify the impact
of the rule on benefits such as health insurance and retirement
savings. This includes a letter from 107 U.S. Representatives and
separate letters from Rep. Donald Norcross and Rep. Pramila Jayapal.
The Texas RioGrande Legal Aid (TRLA) claimed that because the
Department did not estimate the ``financial impact on the health and
retirement accounts of workers'' it violated the Administrative
Procedure Act. However, the Department does not believe that these
impacts could be usefully quantified. First, quantifying these impacts
necessarily requires estimating any increase in the prevalence of
independent contracting relationships. As explained previously, the
Department does not believe that this figure can be meaningfully
estimated. Second, classification under the FLSA does not directly
determine whether workers qualify for these benefit programs, and as
such, it is difficult to assess how the specific workers who are
converted from employee to independent contractor status under the FLSA
could have their individual benefits affected. If an employer provides
health and retirement benefits to employees, but does not provide them
to the same workers upon conversion of the positions into independent
contractor relationships, overall compensation will be negatively
impacted unless offset by sufficiently higher earnings. However, this
could happen only in non-competitive labor markets in which employers
have the ability to set compensation without regard for worker
preferences. While some employers may desire to save the costs of
providing certain benefits to employees by engaging independent
contractors, if the relevant labor markets are even somewhat
competitive, they likely will need to increase monetary compensation,
give up, for example,
[[Page 1218]]
certain elements of control (i.e., non-pecuniary compensation), or both
to recruit workers for providing the same work. The impacts of the rule
would not be uniform across workers, especially with respect to those
workers that may become independent contractors. Furthermore and as
explained further in Section VI(D)(7), the Department believes the
ability for firms to deny benefits by converting their workers into
independent contractors is constrained.
3. Tax Liability
Another potentially important source of transfers affected by the
prevalence of independent contracting is 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.\118\
As self-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: \119\
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\118\ 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/.
\119\ Internal Revenue Service, ``Publication 15, (Circular E),
Employer's Tax Guide'' (Dec. 23, 2019), https://www.irs.gov/pub/irs-pdf/p15.pdf.
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Social Security tax: The 6.2 percent employer component
(half of the 12.4 percent total).\120\
---------------------------------------------------------------------------
\120\ 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).\121\
---------------------------------------------------------------------------
\121\ An additional Medicare Tax of 0.9 percent applies to wages
paid in excess of $200,000 in a calendar year for individual filers.
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In sum, vis-[agrave]-vis an employee, independent contractors are
legally responsible for an additional 7.65 percent of their earnings in
FICA taxes (less the applicable tax deduction for this additional
payment). However, any tax-related transfers from employers to workers
would likely be offset by higher wages employers pay independent
contractors. Employers will not pay payroll taxes for work transferred
to workers classified as independent contractors and market forces
could compel them to pass the full wage (wage + payroll tax) to the
independent contractors. That is not the only reason we expect
independent contractors will earn higher hourly earnings, but is the
focus here. For discussion on other expected wage effects, see Section
VI(D)(4) below.
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 are out of work or injured or ill on the job because they no
longer are protected, unless they purchase their own private
insurance.\122\ Many of these impacts will depend on the individual
risk tolerances of the workers. It is likely that workers who are more
comfortable taking risks will be attracted to the potentially higher
take-home compensation of independent contractor status, while workers
who are risk averse will likely prefer the predictability of
traditional employee relationships. It is uncertain how the universe of
workers is dispersed, beyond theoretical generalizations. It is further
unclear how workers' risk preferences will be distributed across the
market for insurance products. The Department was not able to identify
economy-wide distributional data on worker preferences and projected
purchasing dynamics. That is likely because worker preferences are
difficult to accurately measure and capture in datasets due to their
high variability worker to worker and ambiguity of sorting across
economic sectors. Without access to such data, the Department did not
attempt to quantify the cost of changes in coverage or whether the net
effect is a benefit or cost.
---------------------------------------------------------------------------
\122\ The Department did not undertake to comprehensively review
state law on unemployment insurance in this area, but notes that
some states do not use the economic reality test to determine which
individuals are covered by state unemployment insurance.
---------------------------------------------------------------------------
4. Earnings
Potential transfers could also occur through changes to earnings as
a result of an increase in independent contracting. These transfers
could occur if workers who were employees experience a change in
earnings by becoming independent contractors, or if workers who are out
of the labor market enter in order to become independent contractors.
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, as discussed below, this does not
sufficiently explain the potential transfers that could occur as a
result of such a shift. Furthermore, the Department anticipates an
increase in labor force activity, but for the reasons stated above, the
Department does not attempt to quantify the magnitude of any increase
or decrease 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 work-related earnings
other than possibly unemployment benefits. The impact on earnings is
more ambiguous if employees' classifications change to independent
contractors. In theory, because independent contractors likely prefer
to have at least similar levels of total compensation as they would
earn if they were employees, companies would likely have to pay more
per hour to independent contractors than to employees because
independent contractors generally do not receive company-provided
benefits and have higher tax liabilities. Data show an hourly wage
premium for independent contractors when comparing unadjusted mean
averages. But as the analysis below illustrates, 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 many
independent contractors cite as key factors in their preference of
[[Page 1219]]
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)
\123\ regressed the natural log of hourly wages on independent
contractor status,\124\ 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 a similar
regression using the 2017 CWS. In both Katz and Krueger's regression
results and the Department's calculations, 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.\125\
---------------------------------------------------------------------------
\123\ See Katz and Krueger (2018), supra note 12.
\124\ On-call workers, temporary help agency workers, and
workers provided by contract firms are excluded from the base group
of ``traditional'' employees.
\125\ Choice of exclusionary criteria from Katz and Krueger
(2018), supra note 12.
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The Department combined the CWS data on usual earnings per week and
hours worked per week to estimate hourly wage rates to normalize the
comparison between independent contractors and employees.\126\ 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).\127\ 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 and
contract workers are paid more per hour than traditional employees.''
\128\ When controlling for education, potential experience, potential
experience squared, race, ethnicity, sex and occupation, independent
contractors' higher hourly wages in the 2005 CWS data remained higher
but 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, and the estimates were statistically significant.\129\
---------------------------------------------------------------------------
\126\ 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.
\127\ 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.
\128\ Id. at 19.
\129\ Id. at 34.
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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.\130\ 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.\131\
---------------------------------------------------------------------------
\130\ See Katz and Kreuger (2018), supra note 12 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.'').
\131\ 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 89;
Upwork (2019), supra note 89.
---------------------------------------------------------------------------
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 every analysis 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.\132\ As noted above, reporting errors by survey
respondents may contribute to measurement error in CWS data.\133\
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.\134\
---------------------------------------------------------------------------
\132\ Abraham et al. (2018), supra note 89 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.
\133\ ``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.
\134\ 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
[[Page 1220]]
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.\135\ If, hypothetically, independent contractors on average have
lower job levels (or equivalents) than traditional employees within
each occupation,\136\ 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.
---------------------------------------------------------------------------
\135\ 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.
\136\ For example, because individuals working in that
occupation as independent contractors are less likely to be in
positions with managerial responsibilities over other workers than
are employees.
---------------------------------------------------------------------------
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 that may accompany
independent contractor status, which would obscure the observability of
an earnings premium for independent contractors.\137\ Non-pecuniary
benefits of independent contracting, often including workplace
flexibility, may impact the occurrence of an earnings premium, measured
strictly in monetary terms, but may contribute to workers' evaluation
of the merits of in engaging as independent contractors.
---------------------------------------------------------------------------
\137\ He, H. et al. (2019), supra note 131.
---------------------------------------------------------------------------
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. However, the Department could not find data
on such situations to allow for an economy-wide estimate, nor did
commenters provide such data.
Some commenters expressed concern that the Department did not
sufficiently justify its claim that independent contractors earn an
earnings premium. Other commenters cited evidence purporting to show
that workers misclassified as independent contractors earn less than
employees. Much of this evidence, however, relates only to total take-
home pay, which may reflect mere variation in hours-worked, rather than
indicate any relation to the existence of an earnings premium. Some
other evidence on lower earnings relates to misclassified workers--but
the final rule is expected to reduce misclassifications by increasing
certainty, and as explained further below, the Department does not
believe that evidence relating to misclassified workers is applicable
to the independent contracting population as a whole. For example, the
Coalition of State Attorneys General, Cities, and Municipal Agencies
(State AGs) cited recent state data on awards to workers who were
misclassified and evidence that the misclassified workers face higher
rates of wage theft and wage suppression.138 139 They
additionally cited evidence produced by another critical commenter of
this rule, the National Employment Law Project (NELP), that the State
AGs claimed shows that once controls are implemented to account for
taxes, business expenses, and legal risks, workers who have been
misclassified as independent contractors often earn significantly less
than similar workers paid as employees.\140\ The Department expects the
rule to reduce misclassification, which based on these above
commenters' analyses will result in significant cost savings.
---------------------------------------------------------------------------
\138\ California Labor Commissioner's Office, 2017-2018 Fiscal
Year Report on the Effectiveness of the Bureau of Field Enforcement
(2018), https://www.dir.ca.gov/dlse/BOFE_LegReport2018.pdf.
Massachusetts Council on the Underground Economy, 2017 Annual
Report, (2017), https://www.mass.gov/doc/cue-annual-report-2017-0/download. Written Testimony of Jennifer L. Berrier, Deputy
Secretary, Department of Labor & Industry Before the House Labor &
Industry Committee (April 29, 2019).
\139\ C. Ruckelshaus and C. Gao, ``Who's the Boss: Restoring
Accountability for Labor Standards in Outsourced Work,'' National
Employment Law Project, 9-27, (2014), https://www.nelp.org/wp-content/uploads/2015/02/Whos-the-Boss-Restoring-Accountability-Labor-Standards-Outsourced-Work-Report.pdf.
\140\ S. Leberstein and C. Ruckelshaus, ``Independent Contractor
vs. Employee: Why Independent Contractor Misclassification Matters
and What We Can Do to Stop It,'' National Employment Law Project,
(2016), https://s27147.pcdn.co/wp-content/uploads/Policy-Brief-Independent-Contractor-vs-Employee.pdf. Bureau of Labor Statistics,
``Contingent and Alternative Employment Arrangements--May 2017,''
(2018), https://www.bls.gov/news.release/archives/conemp_06072018.htm.
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A number of other commenters made similar claims that the
Department did not adequately address the misclassification of workers,
and posited this would impose costs. In each case, the commenter did
not demonstrate how the rule would increase the frequency of
misclassification. North America's Building Trades Unions made similar
claims. Its comment cited a number of studies, including a GAO study
finding contingent workers (workers who lack an explicit or implicit
contract for long-term employment, but who can be employees or
independent contractors under the FLSA) have lower earnings than those
who are not contingent workers; a DC Office of Attorney General study
that estimated misclassified construction workers in DC may earn 11.5
percent less in take-home pay than employees, based on implied findings
that result from a series of selected assumptions; and a sampling of
studies on construction workers that claimed significant losses in net
pay for construction workers misclassified as independent contractors
compared to employees.\141\ The United Brotherhood of Carpenters and
Joiners of America asserted that many construction companies
misclassify workers as independent contractors in order to pay them
less than employees and cited estimates of the magnitude of the
difference, and claims that the Department's rule ``does nothing to
stem the abuse.'' \142\ Commenter Matt Brown cited a Washington Center
report that claims low- and middle-wage gig workers make less than
comparable employees.\143\ The same commenter noted that, applied
appropriately, ``Independent contracting is a critical part of the
economy.'' NELP and the National Women's Law Center (NWLC) cited a
study, notably from a report for New York's taxi and limousine
industry, claiming that while independent contractors in New York in a
subset of industries (construction, retail, personal care, and others)
[[Page 1221]]
experienced positive wage growth, they had lower increases in their
real annual earnings from 2013 to 2018 than the counterpart
employees.\144\ PA L&I claimed that the Department provided ``no
evidence'' to support other claims about compensation premiums.
However, the Department offered a significant data-backed rationale for
those sections, and in fact notes that PA L&I's own comment refers to
some of these sources in its critique, though it offers no data of its
own. Some commenters asserted that companies make workers independent
contractors specifically because they can pay them less due to a lack
of bargaining power, but they do not offer substantive data to
demonstrate that this is the case throughout the economy. Since the
failure to pay misclassified workers the wages that are due them is
already prohibited by law, the Department determined comments on the
topic fall outside the scope of this rule and analysis. As stated
elsewhere, the Department expects that misclassification will be
reduced because of this rule. Further, because meeting the proper
standards for legitimate independent contracting will generally entail
a substantively different relationship between a worker and a business
beyond a simple change in classification, and no commenters nor the
Department's own review of past court cases yielded any examples of
this phenomenon in practice, the Department has not attempted to
quantify it. For most discussion, see the Job Conversion discussion at
Section (VI)(D)(7).
---------------------------------------------------------------------------
\141\ U.S. Government Accountability Office, ``Contingent
Workforce,'' GAO-15-168R. DC, (2018). Office of Attorney General,
``Illegal Worker Misclassification: Payroll Fraud in the District's
Construction Industry,'' (2019). Ormiston, R., Belman, D., Brockman,
J., and M. Hinkel, ``Rebuilding Residential Construction,'' in
Creating Good Jobs: An Industry-Based Strategy 75, 80 (Paul Osterman
ed., MIT Press 2020).
\142\ R. Ormiston et al. (2020), supra note 141. Liu, Y.Y.,
Flaming, D. and P. Burns, ``Sinking Underground: The Growing
Informal Economy in California Construction,'' Economic Roundtable,
2 (2014), https://economicrt.org/publication/sinking-underground.
\143\ C. Husak, ``How U.S. Companies Harm Workers by Making them
Independent Contractors,'' Washington Center for Equitable Growth,
(2019), https://equitablegrowth.org/how-u-s-companies-harm-workers-by-making-them-independent-contractors/.
\144\ J.A. Parrott and M. Reich, ``An Earnings Standard for New
York City's App-based Drivers: Economic Analysis and Policy
Assessment,'' Report for the New York City Taxi and Limousine
Commission, (2018), https://static1.squarespace.com/static/53ee4f0be4b015b9c3690d84/t/5b3a3aaa0e2e72ca74079142/1530542764109/Parrott-Reich+NYC+App+Drivers+TLC+Jul+2018jul1.pdf.
---------------------------------------------------------------------------
The data employed in the comments and the reports commenters cite
to support their claims on impacts to earnings are not strictly based
on independent contractors. In fact, several of them focus explicitly
on contingent workers, who are defined as ``persons who do not expect
their jobs to last or who report that their jobs are temporary.'' \145\
These persons can be employees or independent contractors, and may not
include all independent contractors, depending on the nature of the
contractor's work. Estimates based on these definitions are not useful
for the purpose of evaluating the universe of independent contractors.
The non-representative data sources preclude widespread applicability.
Further, these commenters and their cited sources largely focused on
misclassified workers, who are defined as workers unlawfully classified
as independent contractors in order to limit employers' monetary and
legal liabilities. Selection bias causes the estimates of the impacts
on this group to be unreliable; the sample likely includes illicit
actors. The Department recognizes that some illicit actors
intentionally evade the law, but its analysis of this rule's impact
naturally focuses on employers, employees, and independent contractors
that would follow the rule to the best of their ability. While these
comments and the sources upon which they rely highlight important
worker issues, the non-representative data presented cannot be
extrapolated to the universe of individuals classified as independent
contractors, for whom the literature offers strong evidence of an
earnings premium.
---------------------------------------------------------------------------
\145\ BLS, https://www.bls.gov/news.release/conemp.nr0.htm.
---------------------------------------------------------------------------
Some commenters provided specific concerns with the Department's
numbers. SWACCA disputes the Department's justification of the
assertion that independent contractors earn more than employees because
the unconditional mean hourly rate of independent contractors is higher
than the unconditional mean hourly rate of employees. They note that
the 11 to 14 percent higher hourly wage ($26.71 and $27.43 per hour for
independent contractors versus $24.07 per hour for employees) is
insufficient to cover the average of 21 percent of total compensation
that employees receive in employer-provided benefits. While SWACCA
correctly identified that the hourly wage premium independent
contractors enjoy economy-wide may be less than employer's total cost
of providing benefits, such a comparison may not accurately reflect the
value the employee places on the employer-provided benefits. If, for
example, a worker already has access to health insurance as a military
veteran, that worker will not value the employer's provision of health
insurance. Further, even assuming the worker values these benefits at
the same level as the employer's cost for the benefits, the analysis
cited earnings premiums and benefits which are based on all employees
and independent contractors in the economy and may not reflect the
narrower universe of employees whose classification is most likely be
affected by this rule.\146\ Employing economy-wide averages to compare
niche subsets of the economy is not a sound approach. As such, it is
inappropriate to assume, as SWACCA did, that the average employee who
is converted to independent contractor status as a result of the rule
would gain the same earnings premium enjoyed by the average economy-
wide independent contractor, or lose benefits equal to the benefits
enjoyed by the average economy-wide employee. The Department believes
that many workers who are most likely to be converted due to this rule
likely do not presently receive benefits or, if they do receive fringe
benefits, their value (both as measured by the worker and as an
absolute cost to the employer) falls below the economy-wide
average.\147\ Due to the highly individualized impacts that vary across
numerous undefined variables (risk tolerances; specifics regarding
level of position, industry, location; access to other means of
benefits provision; etc.), the Department did not attempt to quantify
such an impact. Considered qualitatively, the Department notes that
employees who make more than the minimum wage implicitly display a
measure of bargaining power because their employer could lawfully
reduce their wages but has not. If employees have bargaining power--
meaning labor market conditions require employers to account for
workers' preferences-- they would be positioned to negotiate an
earnings premium that could offset a reduction in benefits that may
result from being converted to independent contractors, which may be
higher or lower than the economy-wide average. Similarly, a worker
without bargaining power would be unlikely to receive the 11 to 14
percent earnings premium if converted from employee to independent
contractor status--but such no-bargaining-power employees are also much
less likely to have any company-provided benefits to lose as a result
of the conversion. Ultimately, there is no reason to believe employees
whose classification may be affected by the rule are likely to have the
same benefits as an average employee or, if converted to independent
contractors, would receive the same earnings premium that the average
independent contractor has over the average employee. As explained
below further in Section
[[Page 1222]]
VI(D)(7), the Department expects that most workers whose classification
may be affected by this rule will have a measure of bargaining power
that could allow them to offset reductions in benefits with higher
earnings, better working conditions, or both.
---------------------------------------------------------------------------
\146\ The 11 to 14 percent earnings premium for independent
contractors is also an economy-wide finding.
\147\ The Department expects that many new independent
contractor jobs will be created due to this rule, but does not
anticipate many existing employee positions to be converted to
independent contractor relationships because of it.
---------------------------------------------------------------------------
The Washington Center asserted that the population of independent
contractors is very diverse and that comparing mean wages is not
appropriate, expounding that the independent contractor market includes
both high-wage workers with adequate bargaining power and low-wage
workers with little bargaining power. The commenter did not explain how
this point meaningfully applies to the Department's analysis, which
addressed the diversity of the labor market in its regression
specifications, controlling for many more variables than simply income.
Nonetheless, in response to this comment the Department conducted two
additional regression analyses as a proxy for the labor market for low-
wage workers. The results were largely consistent with the initial
conclusions presented in the NPRM. The Department ran its regression
model including only low-education workers (a high school diploma or
less). In this case, independent contractors had an average wage about
9 percent higher, and the results were statistically significant. The
Department also ran a regression including only workers in low-wage
occupations (12 occupations with mean hourly rate less than the overall
mean), for which the coefficient on independent contractor was
positive, although small.\148\
---------------------------------------------------------------------------
\148\ The result is statistically significant at the 90 percent
confidence level but not at the 95 percent level.
---------------------------------------------------------------------------
The Economic Policy Institute (EPI) estimated annual transfers from
workers to employers of $3.3 billion in supplemental pay, paid leave,
insurance and retirement benefits, and the employer share of Social
Security and Medicare taxes. Its estimate is based on the primary
assumptions that (1) employees reclassified as independent contractors
will be paid the same in nominal wages and (2) there will be an
increase of 5 percent in the number of independent contractors. EPI
states that the first assumption is based on sources demonstrating that
perfect competition in labor markets is rare, a claim stated by several
other commenters. However, Alan Manning, the author of the foundational
source referenced to make this case (cited by EPI, sources cited by EPI
in the same section, and other commenters), explicitly caveats that the
wage-setting assumption should not be applied to the self-employed
(under which category independent contractors fall).\149\ Manning
states, ``In this book it is assumed that firms set wages. This is a
more appropriate assumption in some labour markets than others. For
example, it would not seem to be appropriate [. . .] for the self-
employed.'' \150\ The sources that EPI cites thus do not support its
ultimate conclusion. Rather, EPI's methodological assumptions appear to
run counter to a widely-cited source that EPI itself relies on.
Finally, the EPI analysis also relied on firms' wage-setting power to
be absolute, that labor supply is perfectly inelastic. EPI's analysis
proceeds from the premise that ``perfect competition is rare,'' but
then jumps to the claim that ``most labor markets do not function
competitively,'' and that worker are particularly ``likely to lack the
power to bargain for higher wages to compensate for their loss of
benefits and increase in taxes when they become independent
contractors.'' However, each of the sources the EPI cites for this
proposition, which are discussed above, clearly show that firms do not
possess or exert such absolute wage-setting power. These flaws
fundamentally undermine EPI's estimates and yet go unaddressed by EPI
and other commenters that reference EPI's estimates. The Department,
therefore, declined to integrate these unreliable estimates into its
analysis due to such methodological concerns.
---------------------------------------------------------------------------
\149\ EPI cites three sources alongside its claim, Manning
(2003), Dube et al. (2018), and a literature review by the
Washington Center, which also submitted a comment opposing this
rule. The Manning book is cited by both other commenters, with the
Washington Center's analysis drawing on it in numerous sections of
its review as fundamental support. The Dube et al study focused
exclusively on users of a specific online task portal (Amazon
Mechanical Turk), which is a niche market of independent contractors
and is a marketplace accessible to 49 countries, which makes it
difficult to apply the findings with confidence to the U.S. market
and the whole independent contractor universe. The Washington Center
citation was a literature review of work in the field of monopsony
in labor markets; its findings did not offer direct applications to
the independent contractor universe. Furthermore, its review
concluded, ``our results provide evidence on the elasticity of labor
supply to the firm and the implied degree of firms' wage-setting
power, but not necessarily whether the firms are able to exercise
this power,'' explaining that it appears other forces rein in firms'
wage-setting power to some degree.
\150\ A. Manning, Monopsony in Motion: Imperfect Competition in
Labor Markets, Princeton, N.J.: Princeton University Press, (2003).
A. Sokolova and T. Sorensen, ``Monopsony in Labor Markets: A Meta-
Analysis,'' Washington Center for Equitable Growth, (February 2020).
A. Dube, J. Jacobs, S. Naidu, and S. Suri, ``Monopsony in Online
Labor Markets,'' American Economic Review: Insights 2(1): 33-46
(March 2020), https://www.aeaweb.org/articles?id=10.1257/aeri.20180150.
---------------------------------------------------------------------------
EPI's analysis states that ``it is difficult to imagine that there
are a meaningful number of workers who would get more satisfaction from
doing the same job for substantially less compensation as an
independent contractor than for substantially more compensation as a
payroll employee.'' But this statement exposes what appears to be a
flawed assumption in EPI's analysis. Under the economic reality test,
an employee typically cannot possess the ``same job'' as an independent
contractor. Rather, for the worker to be classified as an independent
contractor, the worker must, on the whole, possess the characteristics
of an independent contractor, which often include meaningful control
over the work or meaningful opportunity for profit. EPI's analysis
assumes, however, that the employer can and will simply reclassify a
worker as an independent contractor without regard for the features of
the working relationship.
EPI's analysis considers only monetary compensation as part of the
``value of a job to a worker.'' In the May 2017 Contingent Worker
Supplement (CWS) to the Current Population Survey (CPS) workers
classified as independent contractors were asked about their
preferences toward employment arrangement. Their responses are
indicative of non-monetary value derived from independent contractor
status. When asked, ``Would you prefer to work for someone else?''
independent contractors resoundingly stated ``No'' over ``Yes'' by a
ratio of nearly 8 to 1. Furthermore, the two most noted responses to
the question, ``What is the main reason you are self-employed/an
independent contractor?'' were ``Flexibility of schedule'' and ``Enjoys
being own boss/independent.'' It is evident that most independent
contractors strongly value the non-pecuniary compensation they receive.
EPI does not address how these non-pecuniary benefits factor into
worker compensation.
Arguing against the Department's inclusion of flexibility and
satisfaction as important non-pecuniary compensation factors in the
NPRM, EPI states that ``employers are able to provide a huge amount of
flexibility to payroll employees if they choose to; the `inherent'
tradeoff between flexibility and payroll employment is greatly
exaggerated.'' \151\
---------------------------------------------------------------------------
\151\ Some sources have argued that businesses, in fact, use
scheduling in a way that negatively affect worker flexibility. See
e.g., L. Golden, ``Irregular Work Scheduling and Its Consequences,''
Economic Policy Institute, (April 2015), https://files.epi.org/pdf/82524.pdf (``Facilitated by new software technology, many employers
are adopting a human resource strategy of hiring a cadre of part-
time employees whose work schedules are modified, often on short
notice, to match the employer's staffing with customer demand at the
moment.'').
---------------------------------------------------------------------------
[[Page 1223]]
EPI's argument is less than persuasive for a number of reasons.
First, economists have long recognized that workers value leisure as
well as the remuneration of labor. As such, any worker selecting
between jobs is likely to consider the flexibility of work schedules,
the compensation package, fringe benefits, and a host of non-pecuniary
compensation factors when deciding both whether to work at a particular
company and how many hours to spend working at that company. Second,
the fact that some employees have flexibility does not imply that those
employees do not value the flexibility or that greater flexibility is
not something employees would trade for lower compensation. Third, in
many jobs, employee flexibility is necessarily limited because the
business requires a certain number of employees working together to
accomplish a task, and so granting significant flexibility to employees
would result in less productivity for the business which would likely
result in lower compensation for the workers. Fourth, some employers do
offer employees flexibility, but often that flexibility comes at a cost
to the workers (of note, payroll employees generally have less control
over their own schedules than similarly-situated independent
contractors).
EPI, however, fails to explain why an employer would, all things
equal, allow its employees to work for direct competitors, let them
choose assignments, or set their own hours. The point of hiring
employees is to have workers that an employer can call upon and direct
to perform desired tasks, as opposed to contractors who operate their
own businesses. While some employers may provide a measure of
flexibility they generally would not offer the same degree of
flexibility enjoyed by individuals who are in business for themselves.
The Department believes, based on data in the CWS survey and beyond,
that independent contractors experience significantly more flexibility
than employees and that such a feature is a core motivator.\152\
---------------------------------------------------------------------------
\152\ 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. MBO Partners, The
State of Independence in America: 2018: The New Normal, 2018, 7.
James Manyika et al., Independent Work: Choice, Necessity, and the
Gig Economy (New York: McKinsey Global Institute, October 2016).
---------------------------------------------------------------------------
The Department notes several other key weaknesses in EPI's estimate
that undermine its assertions. EPI's estimate of transfers from workers
to employers is an estimate of the gross transfer without taking into
account that the independent contractors also have the ability to
deduct some of their additional expenses on their income taxes and thus
is not a comprehensive comparison of the net earnings of employees and
independent contractors. EPI's estimate is based on applying a net loss
in income for every new independent contractor, yet the data
resoundingly show that workers pursue independent contract work
voluntarily and in vast numbers, suggesting that other factors,
unmentioned by the commenter, are significant to worker decisions in
this field. EPI nonetheless assumes a blanket negative impact will be
felt economy-wide for all new independent contractors--an assumption
the Department believes is unsupportable in the face of the existing
evidence.
Ultimately, based on the assumption that the final rule will
increase independent contracting arrangements, the Department
acknowledges that there may be transfers between employers and
employees, and some of those transfers may come about as a result of
changes in earnings. However, for the reasons stated above, the
Department does not believe that these transfers can be quantified with
a reasonable degree of certainty for purposes of this rule. The
Department also does not believe that independent contracting roles are
usefully compared by focusing solely on earnings to employee roles--
under the economic reality test embraced by the final rule, control and
an opportunity for profit are core considerations for determining who
is an independent contractor. The Department believes that these
factors are often valued by workers in ways that are difficult to
quantify. Furthermore, the Department believes that workers as a whole
will benefit from this rule, both from increased labor force
participation as a result of the enhanced certainty provided by the
rule, and from the substantial other benefits detailed below.
5. Minimum Wage and Overtime Pay
As noted above, an additional consideration in the discussion of
transfers is that minimum wage and overtime pay requirements would no
longer apply if workers shift from employee status to independent
contractor status. The 2017 CWS data indicate that, before conditioning
on covariates, primary independent contractors 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).
Several commenters highlighted this possibility that independent
contractors could earn below the minimum wage. The Washington Center
cited a report by the Center of American Progress that estimated that
almost 10 percent of independent contractors earn less than the Federal
minimum wage.\153\ Representative Mark Takano pointed to literature
finding that in California and New York many gig drivers receive
significantly less than the state minimum wage.\154\ A letter from 107
U.S. Representatives referenced an instance where the Wage and Hour
Division (WHD) recovered roughly $250,000 in unpaid overtime and
minimum wages for 75 workers misclassified as independent contractors
by a cleaning company.\155\ EPI stated in its comment, ``The workers
most likely to be affected by this rule are workers in lower-wage
occupations in labor-intensive industries, such as delivery workers,
transportation workers like taxi drivers and some truckers, logistics
workers including warehouse workers, home care workers, housecleaners,
construction laborers and carpenters, agricultural workers, janitors,
call center workers, and staffing agency workers in lower-paid
placements.'' However, EPI did not provide a source for this important
assumption, and the Department was unable to verify EPI's assertion in
the Department's own research. The nature of the work done by workers
across the diverse fields EPI identified is uncertain, although many
roles in the
[[Page 1224]]
above fields could lack features that would facilitate a position
conversion to independent contractor status.
---------------------------------------------------------------------------
\153\ K. Walter and K. Bahn, ``Raising Pay and Providing
Benefits for Workers in a Disruptive Economy.'' Washington: Center
for American Progress (2017), https://www.americanprogress.org/issues/economy/reports/2017/10/13/440483/raising-pay-providing-benefits-workers-disruptive-economy/.
\154\ M. Reich. ``Pay, Passengers and Profits: Effects of
Employee Status for California TNC Drivers.'' University of
California, Berkeley (October 5, 2020), https://irle.berkeley.edu/files/2020/10/Pay-Passengers-and-Profits.pdf; L. Moe, et al. ``The
Magnitude of Low-Paid Gig and Independent Contract Work in New York
State,'' The New School Center for New York City Affairs (February
2020), https://static1.squarespace.com/static/53ee4f0be4b015b9c3690d84/t/5e424affd767af4f34c0d9a9/1581402883035/Feb112020_GigReport.pdf.
\155\ ``Skokie Cleaning Business Must Pay $500K In Unpaid Wages,
Damages to Workers,'' CHICAGO.CBSLOCAL.COM (May 5, 2012), https://chicago.cbslocal.com/2012/05/05/skokie-cleaning-business-must-pay-500k-in-unpaid-wages-damages-to-workers/. The Department believes
that misclassification is an important concern that the rule
addresses, and that the rule will reduce the ability of employers to
misclassify its workers by rendering the test more clear and
understandable.
---------------------------------------------------------------------------
With respect to overtime, CWS has further indicated that, before
conditioning on covariates, primary independent contractors are more
likely to work overtime or extra hours beyond what they usually work 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. The Department has cited many sources
throughout this analysis that point to a wide range of income for
independent contractors, and does not believe that this rule will be
especially applicable to any particular income segment of independent
contractors. Accordingly, the Department believes it prudent to rely on
the numerous sources it has drawn on in the development of this rule,
rather than to focus on any particular slice of the income
distribution. And while independent contractors are not, by definition,
subject to the minimum wage requirements of the FLSA, none of the
evidence cited by commenters suggests that the final rule is likely to
significantly impact this issue, and if so, to what extent.
Accordingly, the Department did not attempt to quantify these potential
transfers.
6. Misclassification
Many commenters expressed concerns regarding misclassification of
employees as independent contractors, which occurs when an individual
who is economically dependent on an employer is classified by that
employer as an independent contractor. FLSA misclassification may be
inadvertent or intentional and its direct effects could include a
transfer from the worker to the employer if the employer fails to pay
minimum wage and overtime pay to which the worker is entitled.
Conversely, reducing misclassification could result in a transfer from
employers to workers.
Several commenters believe that ``[c]larifying the application of
the test for independent contractor status will promote compliance with
labor standards under the FLSA and, in turn, reduce worker
misclassification.'' Opportunity Solutions Project (OSP); see also,
e.g., Truckload Carriers Association (``[t]he increased clarity
provided by the [proposed rule] would likely lead to reduced
misclassification.''); IAW (``This rule will clear up
misclassifications''); Financial Services Institute (``we agree that it
will reduce worker misclassification and litigation''). Other
commenters believe this rule may make it easier for employers to
misclassify employees as independent contractors. See, e.g., Equal
Justice Center; Employee Rights Center; NELP; State AGs; TRLA. These
commenters cited reports purporting to show extremely high rates of
misclassification. For example, a 2020 NELP report cited by many
commenters reviewed state audits and concluded that ``these state
reports show that 10 to 30 percent of employers (or more) misclassify
their employees as independent contractors.'' \156\ The Washington
Center also cited a study conducted by the Department of Labor in 2000
to claim that ``between 10 percent and 30 percent of employers audited
in 9 states misclassified workers as independent contractors.'' \157\
---------------------------------------------------------------------------
\156\ NELP, Independent Contractor Misclassification Imposes
Huge Costs on Workers and Federal and State Treasuries, Oct. 2020,
available at https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-Federal-state-treasuries-update-october-2020.
\157\ Lalith de Silva, Adrian Millett, Dominic Rotondi, and
William F. Sullivan, ``Independent Contractors: Prevalence and
Implications for Unemployment Insurance Programs'' Report of
Planmatics, Inc., for U.S. Department of Labor Employment and
Training Administration (2000), available at https://wdr.doleta.gov/owsdrr/00-5/00-5.pdf.
---------------------------------------------------------------------------
These estimates, however, appear to be unreliable for at least two
reasons. First, they make generalized conclusions regarding rates of
misclassification using non-representative audit data. For example, the
Department's 2000 study cited by the Washington Center states that
audits were ``selected on a targeted basis because of some prior
evidence of possible non-compliance.'' \158\ The 2020 NELP report
likewise explained that ``[m]ost studies [on misclassification] rely on
audit data from unemployment insurance and workers' compensation
audits, targeted or random.'' \159\ As a 2015 EPI report explained,
``[a]udit methods vary across states in the extent to which they target
employers for audit: They can base the audits on specific criteria
(e.g., a record of prior violation), or use a random sample of
employers within industries prone to misclassification, or a mix of
both methods.'' \160\ Thus, even ``random'' audits are not necessarily
representative because they target industries with high rates of
misclassification. Because audits focus on groups of businesses or
industries in which misclassification rates are the highest, their
results would not support generalized conclusions regarding the wider
population. As such, the reports' generalized conclusion lack reliable
and representative evidence, and are almost certainly significant
overestimates.
---------------------------------------------------------------------------
\158\ Id. (emphasis added).
\159\ NELP, Independent Contractor Misclassification Imposes
Huge Costs on Workers and Federal and State Treasuries, Policy Brief
Oct. 2020, available at https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-Federal-state-treasuries-update-october-2020/.
\160\ Employment Policy Institute. Carre, Francoise,
(In)dependent Contractor Misclassification. https://www.epi.org/publication/independent-contractor-misclassification.
---------------------------------------------------------------------------
Second, the audit data cited by NELP and others do not necessarily
focus on misclassification of employees as independent contractors;
some states' data are evaluated based on prevalence of employer
violations, which is not representative of percentages of workers
misclassified as independent contractors. For example, the 2020 NELP
report appears to state that audits conducted by Ohio found a
misclassification rate of 45 percent, but the cited Ohio report stated
otherwise. The report explained that the audits searched for
unemployment insurance violations, not just misclassifications, and
that ``45% of the audits produce findings, in many cases for workers
misclassification.'' \161\ In other words, the Ohio audits found 45% of
audited employers failed to comply with some unemployment insurance
requirement, with an unspecified subset committing misclassification.
This and other misunderstandings of state audit findings may result in
a misleading estimate of the frequency with which employers misclassify
employees as independent contractors. Furthermore, the reporting is
based on misclassification (or other issues, as documented above) on a
per employer basis. The employer rate of misclassification may not
necessarily correspond to the rate of employee misclassification. For
example, if an employer employs 100 employees and misclassifies only
one of them, the employer is recorded as a misclassifying employer in
the aggregated results.\162\
[[Page 1225]]
This binary approach to data collection on a per employer basis
prevents a disambiguation to analyze the actual number of misclassified
workers in the labor force. This phenomenon is present is another study
conducted by the Wisconsin Department of Revenue cited by NELP, which
claimed that ``In 2018, 44% of audited employers were found to be
misclassifying workers.'' \163\ However, that data seems to be
misleading for multiple reasons. First, the quotation does not appear
to match the cited source. Appendix 2 of the Wisconsin Workforce Report
states that in 2019 the ``percentage of audited employers with
misclassified workers'' was 33.3 percent (divergent from the ``44
percent'' that NELP stated). Second, the number of businesses found to
be misclassifying workers does not address how many workers were
misclassified. The percentage of workers misclassified was 10.6, across
all of the audited employers, which is much smaller than either 33 or
44 percent. Finally, all of these estimates are compounded by the
targeting bias described earlier, namely that the results only reflect
businesses specifically targeted for audits, which presents only a
partial picture of the incidence of such misclassification economy-
wide.
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\161\ Report of the Ohio Attorney General on the Economic Impact
of Misclassified Workers for State and Local Governments in Ohio 16-
17 (Feb. 18, 2009), available at https://iiiffc.org/images/pdf/employee_classification/OH%20AG%20Rpt%20on%20Misclass.Workers.2009.pdf.
\162\ If 11 percent of businesses misclassify only one worker as
an independent contractor, there are 100 businesses, and each
employer has 20 workers, then the total percentage of these
misclassified workers is actually 0.5 percent. To find that 11
percent of workers are misclassified as independent contractors, all
of the businesses who misclassified workers as independent
contractors would need to have misclassified 100 percent of their
workforce as independent contractors.
\163\ Wisconsin Department of Workforce Development, Payroll
Fraud and Worker Misclassification Report 16 (2020), available at:
https://dwd.wisconsin.gov/misclassification/pdf/2019-2020-misclassification-task-force-report.pdf.
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Ultimately, and as explained above in Section VI(G)(2), commenters'
estimates regarding current rates of misclassification--whether
accurate or not--have little bearing on how misclassification rates are
likely to change as a result of this rule. This rule establishes a
clearer test for when a worker is an independent contractor rather than
an employee under the FLSA. As such, it would reduce inadvertent
misclassification by employers who are confused by the prior test,
particularly small businesses that lack resources to hire expensive
attorneys. For example, one small business owner commented to explain
that ``the ability to understand and properly determine worker status
under the FSLA is paramount for small businesses who cannot afford the
cost of litigation . . . I believe that with the proper transparency
within the regulations, the better the outcome not only for small
businesses, but the worker, and ultimately the care recipient. We want
to comply, and I have confidence that the proposed [rule] . . . will be
highly effective in achieving the desired clarity and certainty.'' A
clearer test also means more workers will better understand their
rights under the FLSA and can defend those rights through private
litigation or complaints to the Department, which should deter
unscrupulous employers from intentionally misclassifying them.
In summary, the Department believes that the simplicity and clarity
this rule provides will reduce both inadvertent and intentional
misclassification, which could produce transfers from employers to
employees who are more likely to be correctly classified and given
minimum wage and overtime pay. The Department is unable to calculate
the exact transfer amount because it lacks reliable metrics on, for
example, the existing misclassification rates in the general economy,
the precise extent to which this rule improves legal clarity, and how
firms will respond to that clarity.
7. Job Conversion
Many commentators expressed concerns that the rule would cause
businesses to reclassify their workers as independent contractors,
causing those workers to lose the benefits of the FLSA with little gain
in return. See, e.g., Washington Center (asserting that ``independent
contractors tend to be worse-off than their wage-and-salary
counterparts''); National Women's Law Center (``if finalized, this rule
will cost workers . . . in the form of reduced compensation''); EPI
(estimating that converted ``workers would lose $6,963 per year'').
Some of these issues are discussed above. For example, the Department
discussed possible earnings effects of workers converting from employee
to independent contractor extensively in this section VI(D) and
concluded it could not definitively determine whether overall
compensation--i.e., earnings plus benefits--for a job that is converted
from employee to independent contractor classification in response to
this rule is likely to rise or fall on average. Regardless, the
Department acknowledges that whether the overall effect of job
conversion is likely to be, on balance, positive depends on the
individual, reclassified worker, the unique circumstances of the
business, and whether or not the working conditions were changed in
order to reclassify the worker.
If the converted position is an entirely new position, it is more
likely to be filled by one of the many individuals who desire to work
as an independent contractor, for example because they value the
``flexibility to choose when and where to work'' that the position may
provide more than ``access to a steady income and benefits.'' \164\
Such an individual may, for example, discount the value of certain
types of compensation associated with employee classification, such as
health insurance, that he or she might already enjoy from a different
source. The individual may also simply prefer to trade overall
compensation for the greater flexibility that often accompanies
independent contractor roles. Thus, the lower paid converted new jobs
do not necessarily reduce such workers' welfare because they could
offer tradeoffs that may be preferable to the workers who are most
likely to sort themselves into those positions. On balance, the
Department believes conversion of new jobs will have an overall
positive impact on workers.
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\164\ See Coalition for Workforce Innovation (2020), supra note
77.
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The second category of job conversion discussed above occurs when
employers modify their working relationship with existing employees
such that they are rendered independent contractors under this rule. As
explained above, to act on the legal certainty provided by this rule,
the converted position likely would have to provide the worker with
substantial control over the work and a meaningful opportunity for
profit or loss. The Department believes such conversions will be less
common than conversion of future positions because the marginal cost of
restructuring an existing work arrangement is greater than altering the
arrangement of an unfilled position. And such restructuring would
disrupt the preexisting working relationships, which risks negatively
impacting worker morale, productivity, and retention. Nonetheless, some
conversion of existing positions may occur, and some converted workers
may prefer the additional flexibility and earn more by taking advantage
of the opportunity for profit or loss that may accompany the
conversion. The effect of the rule would be positive for these workers.
Other converted workers may prefer the security, stability, and other
features of an employment relationship or earn less due to, for
example, reduction of employer-provided benefits, employment taxes, and
loss of the FLSA's minimum wage and overtime pay. The effect of the
rule would be negative for these converted workers, but, as explained
above, the Department believes this type of conversion will be rare.
Finally, an employer may reclassify an existing employee position
to an independent contractor position
[[Page 1226]]
without meaningfully changing the nature of the job in response to the
added legal clarity provided by this rule. Employers could be most
confident of such reclassification under this rule if the preexisting
job already provided the worker with substantial control over the work
and a meaningful opportunity for profit or loss. The Department
believes this phenomenon is likely to be rare because the current
position would have to be held by an individual who is in business for
him- or herself as an economic reality but is nonetheless presently
classified as an employee. While many commenters warned that
economically dependent employees may be improperly classified as
independent contractors, none expressed concern that there is
widespread classification of individuals who are in business for
themselves as employees.\165\ Such employees may nonetheless exist and
be converted into independent contractors as a result of this rule.
Features of these converted workers' work, for example the level of
flexibility and stability, would remain unchanged because the job
remains the same. Firms could potentially reclassify existing workers
who are already in business for themselves in a manner that reduces
overall compensation, but their ability do to so would be constrained
because such reduction could negatively impact worker morale,
productivity, and retention.\166\
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\165\ Commenters in the business and freelancer community
indicated that--rather than classify independent entrepreneurs as
employee in response to legal uncertainty regarding classification--
business simply decline to do business with those entrepreneurs in
the first place. See, e.g., ASTA (``The prospect of inconsistent
determinations has had a chilling effect on the growth of businesses
in industries reliant on contract workers which has resulted in
fewer opportunities for individuals who choose to offer their
services as independent entrepreneurs.''); CPIE (``uncertainty
associated with worker classification under the FLSA . . .
discourages companies from doing business with independent
entrepreneurs''). The effects described by these commenters are
unsurprising. For example, it makes little sense for a business to
classify a worker as an employee, thus obligating themselves to pay
a premium rate for overtime work under the FLSA, if it is the worker
and not the business who determines how many hours to work each
week. Rather, the business likely would either not hire the worker
at all or hire him or her as an employee but insist on controlling
hours worked.
\166\ Most firms can already reduce the overall compensation of
their employees whose wages exceed the minimum wage through more
direct means than reclassification as independent contractors but do
not do so because of risks regarding morale, productivity, and
retention.
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Nonetheless, the sharpening of the economic reality test may
negatively impact some current employees who could be reclassified as
independent contractors in a manner that results in reduced overall
compensation but are not afforded non-pecuniary benefits, for example
additional flexibility, in return.\167\ EPI and likeminded commenters
believe these workers would be ``doing the same job for substantially
less compensation as an independent contractor,'' and that this class
of worker comprises the majority or even all of the workers impacted by
this rule. The Department agrees that some workers could be impacted in
this manner, but believes such occasions are likely to be rare because
two necessary conditions limit the number of such workers.
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\167\ Employers and employees could make similar conversions to
independent contractor status for reasons outside the sharpening of
the economic reality test this rule provides. Such shifts would not
be identified as impacts in this analysis because the impetus for
such conversion is due to factors other than this rule.
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First, in order for conversion to have an unambiguously negative
affect, a converted worker's overall compensation must be at the
minimum wage. Generally, firms impacted by the rule can already
directly reduce wages and benefits of their employees--they do not need
to convert those employees to independent contractor to achieve these
labor cost savings. However, most firms do not reduce their employees'
compensation due to the risk of lowering morale, reducing productivity,
and causing turnover. That is to say, the labor markets in which most
firms operate prevents them from setting compensation without regard
for worker preferences. The Department believes that a firms' ability
and willingness to reduce its employees' compensation is shaped by the
tradeoff between labor savings, on one hand, and the risk of lower
productivity and higher turnover, on the other. Clarifying the legal
requirement for firms to convert a position from employee to
independent contractor status would not make firms any more willing or
able to reduce compensation unless the worker was already earning the
minimum wage and receiving no benefits. According to BLS, based on CPS
data, in 2017 there were 370,000 adult \168\ employees paid at the
minimum wage, which comprise 0.24 percent of the U.S. labor force.\169\
Second and as explained above, the converted worker whose job remains
unchanged is likely to already have substantial control over the work
and a meaningful opportunity for profit or loss such that he or she can
be classified as independent contractor with the most legal certainty
this rule can provide.
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\168\ This figure excludes workers under the age of 19. If
excluding workers under the age of 24, this figure drops over 40
percent to 221,000. This figure does not include workers who make
less than the minimum wage, a vast majority of whom work in the
restaurant industry and receive tips for their work. The average
earnings of a restaurant worker who receives tips is significantly
above the minimum wage. The figure includes part time workers, who
would not likely receive overtime compensation due to the limited
number of hours they work.
\169\ In 2017, there were approximately 152,000,000 workers in
the U.S., according to the U.S. Bureau of Labor Statistics.
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The Department was unable to determine how many of the 370,000
current minimum wage employees also meet these two criteria, although
it expects the number to be low. The Department attempted to identify
examples of minimum wage employees who enjoy substantial control over
their work and a meaningful opportunity for profit or loss, but was
unable to do so. Nor did commenters provide specific data or examples
of minimum wage employees who would meet these criteria. Several
commenters argued that the Department failed to adequately consider the
effects of these possible conversions from employee to independent
contractor, or the potential negative effects of misclassification on
workers. NELA, for instance, asserted that the NPRM's cost-benefit
analysis focused solely on companies rather than workers and further
claimed that the Department ``ignores the massive cost to misclassified
workers.'' Other commenters stated that the final rule would harm
workers by either increasing the rate of misclassification or by
allowing employers to reduce wages and benefits of employees who are
converted into independent contractors. See, e.g., Washington Center
for Equitable Growth (Washington Center) (asserting that ``independent
contractors tend to be worse-off than their wage-and-salary
counterparts''); Appleseed Center (expressing concern that rule ``will
harm workers across a broad spectrum, [but] will have a
disproportionate impact on Black and Hispanic workers who are
overrepresented in the low-paying jobs where independent contractor
misclassification is common''); National Women Law Center (``if
finalized, this rule will cost workers . . . in the form of reduced
compensation''); EPI (estimating that individual ``workers would lose
$6,963 per year'').
As is explained in greater detail below, the Department disagrees
with these comments that the rule will broadly harm workers. The
Department agrees with the numerous commenters, including nearly all
individual commenters who self-identified as freelancer workers, who
asserted that the rule would encourage flexible work arrangements and
thereby create meaningful--though not easily measurable-- value for
workers. One
[[Page 1227]]
commenter explained that ``[b]eing an independent worker allows for me
to do what I can as a single mother, have flexibility.'' Another stated
that ``[f]reelancing has afforded me independence and flexibility and
the opportunity to be a productive member of society, and do my best
work.'' As a final illustrative example, another commenter asserted
that ``[t]he primary value for myself as an independent contractor for
my services is the freedom to negotiate, to choose, and the freedom to
limit what services I provide, the days, and hours of work, and the
price of my labor, unencumbered by the less flexible but more secure
employer employee relationship.'' Although some workers in positions
converted from employees to independent contractor relationships may
receive fewer benefits traditionally associated with classification as
employees, the Department believes that this would likely be infrequent
and their net effect would not necessarily be negative.\170\ Moreover,
the Department believes any negative effects would be outweighed by the
significant value the rule delivers to other workers and businesses by
clarifying, simplifying, and reducing transaction costs around
independent contractor arrangements.
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\170\ As explained in more detailed above, this is because most
workers can be converted from employee into independent contractor
classification only if they are provided with greater control over
their work and opportunity for profit or loss based on their
initiative or investment. Such flexibility and entrepreneurial
opportunities may be more valuable to such workers than potential
reduction in benefits associated with classification as employees.
---------------------------------------------------------------------------
No commenter provided evidence or specific cases in which
individuals or types of workers would, as a result of this rule, be
converted from employees to independent contractors. Because the rule
does not change the classification of any employee, any jobs converted
without meaningful change would have had to already have satisfied the
requirements of bona fide independent contracting arrangements under
this rule, with the only change likely being a lower assessed
litigation risk for certain businesses. While the number of workers for
whom reclassification occurs without bringing them meaningful benefits
may not be zero, the Department believes such cases will be rare
exceptions. Even if the classification of a worker were to change, the
business could face market forces that would likely hold overall
compensation steady. Furthermore, businesses would need to take caution
that any new contract relationship would neither damage worker
relations nor its underlying business model, both of which would likely
negatively impact productivity.
In summary, the most common categories of job conversions--e.g.,
new positions--are likely to positively impact workers. And the
category of job conversions that is likely to produce negative
impacts--i.e., reclassification of workers without changes to the job--
is most likely the rarest. For these reasons, the Department believes
benefits to workers from job conversions will, on balance, exceed
costs.
E. Costs
The Department considered several costs in evaluating the rule. The
Department quantified regulatory familiarization costs and estimated
that they will total $370.9 million in Year 1. Other potential costs,
including those raised by commentators, were not quantified, for
reasons explained in the sections that follow.
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.
For a rule like this one, it is not clear whether regulatory
familiarization costs are a function of the number of establishments or
the number of firms.\171\ Presumably, the headquarters of a firm will
conduct the regulatory review for businesses with multiple locations,
and also may 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 relay 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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\171\ 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) and
thus the new rule will have little to no effect on classifications. 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.\172\ 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.\173\ The total
number of establishments and governments in the universe used for this
analysis is 7,950,800.
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\172\ 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.
\173\ 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 final rule is all establishments that
engage independent contractors, which is a subset of the universe of
all establishments. In its analyses, the Department estimates the
impact of regulatory familiarization based upon assessment of the
regulated universe. In several recent rulemakings, the Department
estimated that the regulated universe comprised all establishments
because the rules were broadly applicable to every employer.\174\ For
those rules, the Department estimated familiarization costs by assuming
each establishment would review each rule. Because this final rule
affects only some establishments, i.e.,
[[Page 1228]]
those that currently or may in short order 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.
---------------------------------------------------------------------------
\174\ These include 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.
---------------------------------------------------------------------------
In 2019, Lim et al. used extensive IRS data to model the
independent contractor market, finding that 34.7 percent of firms hire
independent contractors.\175\ These data are based on annual tax
filings, so the dataset includes firms that may contract for only parts
of a year. The 34.7 percent of establishments provides a figure of
2,758,928, which forms the foundation of the multiplier used in this
analysis.
---------------------------------------------------------------------------
\175\ Table 10: Firm sample summary statistics by year (2001-
2015), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
---------------------------------------------------------------------------
The Department did not estimate familiarization costs for companies
that may decide to work with independent contractors only after the new
rule is finalized, because they would need to familiarize themselves
with the current legal framework even in the absence of this rule.\176\
Although firms that do not currently use independent contractors are
not counted in this universe of employers, 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.
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\176\ An added dimension is that the final 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.
---------------------------------------------------------------------------
The Pennsylvania Department of Labor & Industry (PA L&I) commented
that the Department underestimated the cost of the rule by failing to
include businesses that are newly incentivized to consider
reclassifying workers to independent contractors. As stated above, even
without the new rule any firm that does not currently engage any
independent contractors but chooses to do so in the future would have
already had to familiarize itself in the baseline case, so this rule
does not impact those firms. Since the commenter's point is premised on
the fact that the firm may be incentivized to investigate the
regulation, it would be reasonable to assume that any firm without
independent contractors that reviews the new rule and ultimately
decides to hire independent contractors is doing so because the firm
believes the new relationship will be beneficial to itself and the
independent contractor also believes that the new relationship will be
beneficial to him or herself. Such a situation would result in net
benefits to the employer that more than fully compensate for any
familiarization costs. Notably, and for comparability in estimates, the
Department does not add these potential firms to the Benefits section
either.
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.\177\ According to the 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.
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\177\ 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.
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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 average time spent by 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 litigation costs, damages, and
penalties associated with misclassification tend to fall on
establishments).\178\ 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. Therefore, regulatory familiarization costs to
independent contractors in Year 1 are estimated to be $218.6 million
($46.36 x 15 minutes x 18.9 million).
---------------------------------------------------------------------------
\178\ An independent contractor that hires independent
contractors would already be captured in the ``establishment''
calculation.
---------------------------------------------------------------------------
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 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.\179\
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\179\ 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
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
rulemaking--anticipated to provide more clarity--is not expected to
impose costs after the first year.\180\ This
[[Page 1229]]
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.
---------------------------------------------------------------------------
\180\ As explained below, the Department considers that the
regulation may produce benefits along this dimension in future years
by simplifying the regulatory environment.
---------------------------------------------------------------------------
SWACCA commented that regulatory familiarization costs were
underestimated because they ``would not only be imposed upon adoption
of a final rule but would be ongoing as stakeholders begin to
understand whether and how it will be applied.'' Additionally, they
asserted the costs for businesses to familiarize themselves with the
new guidance would exceed the cost of familiarization for the existing
guidance, a claim that the commenter did not substantiate with data.
The Department disagrees with this assertion. The rule is expected to
reduce the time spent analyzing how the economic reality test's factors
interact. Accordingly, the Department reiterates that incremental
regulatory familiarization costs in future years are expected to be de
minimis.
A number of commenters expressed support for the cost estimates.
The CGO states that, ``As currently written, the proposed rule
carefully quantifies the cost savings of reduced litigation and
increased clarity.'' AFPF posited that, if anything, the calculations
would tend to reflect ``an overstatement of regulatory familiarization
costs.''
2. Other Costs \181\
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\181\ Various commenters to the NPRM raised points that they
considered ``costs,'' although those points may more accurately be
defined as transfers under Executive Order 12866. To clearly address
these points, the Department decided to address the following areas
with the language used by commenters. For further discussion of
related impacts, please see the Potential Transfers section.
---------------------------------------------------------------------------
It is possible this rule will result in costs beyond the above
described familiarization costs. In the NPRM, the Department invited
comments and data on potential other costs of this rule. The Department
received comments responsive to these requests which generally fell
into seven categories: Impacts to workers; impacts to tax revenues;
impacts on competition; impacts on income inequality and to minorities
and women; tax filing; implementation; and impacts on income stability.
The Department evaluated all of the potential costs that were
identified, and examined many of the citations provided. In general,
the commenters did not provide ample data or other evidence to support
their claims, and, upon review, the Department was unable to confirm or
substantiate the proposed cost categories in its own research.
Therefore, in this section of the analysis, the Department addresses
the points raised and discusses the qualitative merits, but does not
quantify estimates for inclusion in its top line figures.\182\ Detailed
explanations are presented in each category below, including discussion
of the range of uncertainties and data limitations identified.
---------------------------------------------------------------------------
\182\ In some cases, commenters raised points that may very well
impact certain individuals in specialized circumstances, but which
are not, when aggregated across the economy as a whole, cumulatively
significant or representative.
---------------------------------------------------------------------------
a. Additional Impacts to Workers
Several commenters asserted that the NPRM's discussion of costs did
not include a discussion of effects on workers beyond minimum wage and
overtime pay. Ironworkers Local Union 7 stressed the importance of
benefits such as workers' compensation for the dangerous nature of the
work of their members and other construction workers. The Center for
Law and Social Policy (CLASP) noted that the rule could also impact
other benefits based on the FLSA's definition of employment, such as
access to paid sick leave in general and under the Families First
Coronavirus Response Act (FFCRA). The Washington Center, among others,
contended it may also impact workers' rights to join a union. The
International Brotherhood of Teamsters commented that the liquidated
damages remedy for willful or bad faith violations of the FLSA is not
available to workers who are classified as independent contractors.
Other commenters asserted that independent contractors are also not
protected by the Federal anti-discrimination and health and safety
statutes, and that the Department failed to consider this effect.\183\
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\183\ The Department has not conducted a thorough review of
discrimination law at the Federal or state level for the purposes of
this rulemaking, but notes that independent contractors are
protected by at least some Federal anti-discrimination laws. See,
e.g., 42 U.S.C. 1981. Further, the scope of these laws is not
dependent on employee status under the FLSA. See, e.g., Gulino v.
New York State Educ. Dep't, 460 F.3d 361, 379 (2d Cir. 2006)
(``[T]he Supreme Court has given us guidelines for discerning the
existence of an employment relationship [in the race-discrimination
context]: Traditional indicators of employment under the common law
of agency.''); Weary v. Cochran, 377 F.3d 522, 524 (6th Cir. 2004)
(``[T]he proper test to apply in determining whether a hired party
is an employee or an independent contractor under the [Age
Discrimination in Employment] Act is the `common law agency test.'
'').
---------------------------------------------------------------------------
These potential impacts do not change the Department's overarching
view that workers as a whole will be better off as a result of this
rule, even if some workers may not be better off. Generally speaking,
the above commenters raise points that fundamentally rest on the
assumption that independent contractors cannot adequately assess their
risks, needs, and goals. Furthermore, these commentators seem to assume
that the listed features could be obtained by workers with no cost to
the worker. The Department does not agree with such assessments. The
Independent Women's Forum stated that the flexibility afforded by
independent contracting is especially ``crucial for women who are the
primary caregivers in their households.'' Palagashvili; Independent
Women's Forum (``Women find independent contracting appealing because
of the flexibility, autonomy, and freedom it provides.''). Nor did
individual freelancer commenters, who repeatedly affirmed their ability
to make rational decisions for themselves and their own businesses. One
such commenter stated that ``I prefer the option to make my own
schedule and decide how I want to proceed in making my money at my own
discretion.'' Another explained that, ``[a]s an independent contractor
I am free to choose when and where I work. This is important to me as a
caregiver for elderly relatives.'' As a final illustrative example, a
freelancer stated that ``I have chosen this profession because of the
freedom and flexibility it affords me. I also can earn more freelancing
than I could working in a similar full-time job [. . .]. I am a far
better judge of what is good for me than a politician in Washington.''
Independent workers are a bedrock of the U.S. economy and are acutely
aware of their own values and needs. Fundamental to being an
independent contractor is the ability to control one's own work, which
enables workers to be the deciding factor in accepting or declining
work that may be risky or not as rewarding. The commenters above did
not cite or offer data to support their assumption that employees
covered by the FLSA are intrinsically better off compared to genuine
independent contractors who are not covered by the FLSA. Several
commenters, notably CLASP and NWLC, who submitted comments related to
the pandemic do not address the abundant data demonstrating that access
to independent contracting has been essential for many workers
attempting to balance responsibilities, especially for women and
caregivers. Accordingly, to the extent the final rule will increase the
frequency of independent contracting, the Department believes that
workers will, on net, benefit from that option.
[[Page 1230]]
b. Impacts to Tax Revenue and Public Assistance
Some commenters asserted that the rule will either reduce tax
revenue or increase public assistance. For example, some commenters
pointed out that low-income workers who are classified as independent
contractors are often forced to rely on public assistance programs. The
UFCW cites a study finding 15 percent of platform workers in the San
Francisco area receive some form of public support (e.g. food stamps,
housing assistance) and 30 percent were on state public-access health
insurance.\184\ This report did not, however, compare this finding with
the extent to which low-income employees rely on public assistance. The
Department notes that public assistance is available to low-income
individual whether they are employees or independent contractors. An
increase in independent contracting will not necessarily lead to
increased public assistance expenditures. To the contrary, if
independent contracting, even at a low income, is the alternative to
unemployment or nonparticipation in the labor force, then it would
reduce means-tested public assistance expenditures. Several individual
commenters suggested that they would not be working at all but for
independent contractor opportunities. One commenter said, ``I am an
independent contractor, i.e. business owner; I am self-employed. I
would not be able to work in any capacity, other than self-employed.''
Another explained, ``I am 71 years old and cannot (and will not) take
regular employment. Earning an income from my home is safer, more
effective and more satisfying.'' As a final illustrative example, a
woman explained that ``[a]s a single mother trying to go back to school
I have day and night classes. Having a regular job during this time be
[sic] very challenging to meet my school hours.'' Thus, making it
easier for individuals to work as independent contractors may reduce
the burden on public assistance. Furthermore, since this RIA focuses on
the changes at the margin based on increased clarity of the
classification factors, the concerns raised by the studies cited by
these commenters would not necessarily apply to those this rule
impacts.
---------------------------------------------------------------------------
\184\ C. Benner, E. Johansson, K. Feng, and H. Witt. ``On-Demand
and On the Edge: Ride-Hailing & Delivery Workers in San Francisco''
(May 5, 2020), https://transform.ucsc.edu/on-demand-and-on-the-edge.
---------------------------------------------------------------------------
Several commenters noted that taxpayers funded unemployment
payments for independent contractors through the Pandemic Unemployment
Assistance (PUA) program. SWACCA noted that more than 11 million self-
employed individuals have received assistance from PUA.\185\ The
nationwide response to the COVID-19 pandemic was intentionally robust.
PUA assistance was funded by Congress in the CARES Act.
---------------------------------------------------------------------------
\185\ Unemployment Insurance Weekly Claims Report (October 15,
2020), https://oui.doleta.gov/press/2020/101520.pdf.
---------------------------------------------------------------------------
Several commenters noted that any shift from employees to
independent contractors will result in lost tax revenue. Specifically,
the Michigan Regional Council of Carpenters cites estimates of the loss
in taxes in Michigan and other states due to misclassification.\186\
Notably, misclassified workers are not the same as independent
contractors. In fact, this rule clarifies the classification of workers
and is expected to result in fewer total cases of misclassified
workers. The Department does not agree with the assumptions about the
U.S. labor market held by commenters to this rule that reference
studies on the cost of misclassified workers. EPI estimated that the
increase in workers classified as independent contractors will lead to
a transfer of at least $750 million annually from social insurance
funds. EPI's estimate is predicated on an assumption that eligibility
for independent contractors to receive unemployment benefits ``will
occur in future recessions.'' The unprecedented CARES Act funded
unemployment benefits through PUA for the first time in history. EPI's
entire estimate rests on such unprecedented relief becoming
commonplace, a view which the Department does not share. The Washington
Center cites a study by Harvard Law School's Labor and Worklife program
that ``found that between 2013 and 2017, the state of Washington lost
$152 million in unemployment taxes and the Federal government lost $299
million in payroll taxes due to worker misclassification in the
state.'' \187\ Again, worker misclassification is erroneously compared
to independent contractors. Further, the majority of these estimates of
lost revenue are due to an assumption that freelance workers do not
report their full earnings, which is a criminal offense. A letter from
seven Congressional Representatives cited a 1984 IRS estimate that
misclassification cost the Federal government $3.72 billion (adjusted
to 2019 dollars), nearly 60 percent of which was from misclassified
workers failing to pay income taxes and the remainder was due to
failure to pay taxes used to fund social insurance programs. Once
again, this comment failed to meaningfully explain how the studies it
cites can be extrapolated across independent contractors.
---------------------------------------------------------------------------
\186\ D. Belman and R. Block, ``Informing the Debate: The Social
and Economic Costs of Misclassification in the Michigan Construction
Industry,'' Institute for Public Policy and Social Research,
Michigan State University (2008), http://ippsr.msu.edu/publications/ARMisClass.pdf. F. Carre, ``(In)dependent Contractor
Misclassification,'' EPI Briefing Paper #403 (June 8, 2015), https://files.epi.org/pdf/87595.pdf. O. Cooke, D. Figart, J. Froonjian, and
K. Sloane, ``The Underground Construction Economy in New Jersey,''
Stockton University (2016), https://www.mcofnj.org/wp-content/uploads/2018/05/Underground-Construction-Economy-Summary-June-2016.pdf.
\187\ L. Xu and M. Erlich, ``Economic Consequences of
Misclassification in the State of Washington.'' Harvard Law School
Labor and Worklife Program (2019), https://lwp.law.harvard.edu/news/worker-misclassification-washington-state-leads-millions-revenue-losses-new-harvard-report.
---------------------------------------------------------------------------
The Department notes that certain employer required taxes, such as
unemployment insurance and workers' compensation, are not required for
independent contractors, and thus the associated tax revenue will
decrease if more individuals choose to work as independent contractors.
However, the lack of transfer means that the worker keeps more money,
which may be saved to provide for periods of unemployment.
Additionally, these are transfer programs where the benefits are paid
to the workers who pay into the program through their employers. Thus,
if independent contractors are not eligible to participate in these
program, government expenditures would also decrease. Therefore,
providing unemployment benefit or workers' compensation to independent
contractors is generally not a cost to state and local governments. To
demonstrate, consider unemployment programs, which are a type of
insurance. Reduced unemployment taxes are generally offset by reduced
unemployment benefits. The only direct cost would be if workers who no
longer pay into these programs continue to receive benefits. These
direct costs are expected to be small.
Government revenue from other taxes, such as income and Medicare
taxes, may go up or down as a result of this rulemaking depending on
the total income of employers, employees, and independent contractors.
However, a decrease in tax revenue due to a failure of some independent
contractors to fully pay their required taxes is not a cost
attributable to the Department's rulemaking revising the standards for
independent contractor status under a
[[Page 1231]]
Federal law separate and apart from any tax law.
Finally, the Department notes that overall state and local tax
revenue may increase as a result of the efficiency and flexibility this
rule promotes. The Department believes that legal clarity provided by
this rule will result in, among other things, lower regulatory
compliance and litigation costs, more efficient and innovative work
arrangements, and new jobs for individuals who otherwise would not
work. All of this could increase firms' profits and workers' incomes,
which results in a larger pool from which state and local taxes are
drawn. The overall positive effect on state and local tax revenue may
dwarf, for example, any reduction in unemployment insurance or workers
compensation taxes. The Department, however, declines to quantify net
effects on state and local tax revenue because it believe any such
attempt to do so would require too many assumptions.
c. Fair Competition
Several commenters stated that expanding the scope of independent
contractors will ``fuel a race to the bottom,'' where companies will
feel pressure to classify workers as independent contractor to reduce
labor costs in order to compete in their market. UPS claimed that
companies misclassifying workers as independent contractors externalize
their costs and hurt other businesses through unfair competition.\188\
The Department believes that this will be unlikely because the risks of
losing workers likely prevents businesses from reducing overall
compensation, which includes the fully burdened wage rate (i.e., with
taxes and benefits included). Any decrease in compensation below this
level would likely result in firms not being able to hire adequate
labor (either quantity or quality). This rule does not, as some
commenters claimed, expand the scope of permissible independent
contracting arrangements but rather clarifies and sharpens the test for
determining proper classification, which is expected to benefit both
workers and firms.
---------------------------------------------------------------------------
\188\ UPS does not use independent contractors for some of the
roles or occupations that its largest competitor, FedEx, does. FedEx
relies heavily on independent contractors for its business model,
and recently won a legal case against the National Labor Relations
Board, in which the court found that certain FedEx drivers were
legitimately classified as independent contractors under the NLRA.
See FedEx Home Delivery v. NLRB, 893 F.3d 1123No. 14-1196 (D.C. Cir.
2017).
---------------------------------------------------------------------------
d. Income Inequality and Impacts on Minorities and Women
Some commenters asserted that the rule could increase racial and
gender income inequality. NWLC wrote that additional protections other
than minimum wage and overtime pay afforded by the FLSA were
particularly important for working women, such as ``employer
obligations to accommodate breastfeeding workers'' \189\ and
``protections against pay discrimination.'' The Washington Center cited
a study on outsourcing that it believed shows independent contracting
``has contributed to increased wage inequality in the United States.''
\190\ But the cited study actually found something different: ``the
increased concentration of typically low-wage occupations over time can
be explained by changes in the characteristics of establishments
employing these occupations.'' \191\ In other words, the study linked
wage inequality to employers outsourcing jobs to other employers that
paid lower wages, and made no attempt to isolate the effects of
independent contracting. The evidence discussed in this analysis shows
that independent contractors often earn more than their employee
counterparts further undermines the commenter's assertion.
---------------------------------------------------------------------------
\189\ Independent contractor relationships provide flexibility
to accommodate individual worker needs, such as child care and
breastfeeding.
\190\ Including E. Handwerker and others. ``Increased
Concentration of Occupations, Outsourcing, and Growing Wage
Inequality in the United States,'' (2015), https://www.semanticscholar.org/paper/Increased-Concentration-of-Occupations%2C-and-Growing-Handwerker-Abraham/f7d0d2c9cfcbf53f961bb07a2542abefe4be84c0?p2df.
\191\ Id. at 13 (emphasis added).
---------------------------------------------------------------------------
UFCW wrote that ``[t]he proposed regulation fails to address its
potential impact on people of color who are overrepresented in low-wage
independent contractor positions such as app-based platform work.''
This rule clarifies for app-based platforms how to properly classify
workers, thereby reducing regulatory compliance, litigation, and
transaction costs. Some of these cost savings could be shared by app-
based workers in the form of increased earnings, bonuses, or more job
opportunities.\192\ To the extent that certain racial groups make up a
disproportionate share of app-based workers, those groups will also
enjoy a disproportionate share of benefits. Regarding gender-based
inequality in the gig economy, a recent NBER study found that the
gender wage gap among on-demand rideshare workers is lower than that of
the rest of the economy and is ``entirely attributed'' to differences
in experience and preferences.\193\ The NBER study specifically found
that ``discrimination is not creating a gender gap in this setting,''
and ``no other paper has ever estimated such a precise `zero' gender
gap in any setting.'' \194\ Several commenters cited other studies that
document measurable benefits of independent contractor opportunities
for women. Dr. Liya Palagashvili provided a lengthy review of the
literature on the beneficial impacts of independent contract work for
women. She cited a study that finds that women are the main caregivers
at home, and 96 percent of women ``indicate that the primary benefit of
engaging in platform-economy work is the flexible working hours.'' See
also Independent Women's Forum (``Women find independent contracting
appealing because of the flexibility, autonomy, and freedom it
provides.''). A McKinsey Global Institute study, discussed in an
earlier section, found that independent work offers caregivers, who are
predominantly women, access to economic opportunity they would
otherwise not have, concluding that ``[t]his type of flexibility can
ease the burden on financially stressed households facing logistical
challenges.'' Dr. Palagashvili cited numerous other studies that are
consistent in their findings: Women are very much attracted to work
arrangements that offer flexibility, including one that finds ``75
percent of self-identified homemakers, or stay-at-home mothers in the
United States, indicated they would be likely to return to work if they
were to have flexible options.'' These studies offer data based on
primary research, and several sources are based on economy-wide survey
data.
---------------------------------------------------------------------------
\192\ If, for example, the platform were to transfer some of
these increased earnings to consumers in the form of discounts, the
demand quantity for the services (and thus the job opportunities for
the ICs) could increase.
\193\ Cody Cook, et al., The Gender Earnings Gap in the Gig
Economy: Evidence From Over a Million Rideshare Drivers, NBER
Working Paper No. 24732, June 2018, available at https://www.nber.org/system/files/working_papers/w24732/w24732.pdf.
\194\ Id. at 14.
---------------------------------------------------------------------------
Dr. Palagashvili's comments are supported by many individual women
who commented to affirm that independent contracting provides necessary
flexibility to balance their work and life priorities. One woman
explained that ``[a]s a work-at-home mom, I ramped up my business to
coincide with the time I had available while raising my kids. I worked
during their nap times, and then added more hours as they went to
school.'' Another
[[Page 1232]]
stated, ``I have been a military spouse for 17 years and the ability to
work as an independent contractor has been invaluable to my family.
Through every move, my job comes with me; all I need is a computer and
access to the internet. Had I been forced to find a new job with each
[change of station], our family would have had some very tough times.''
As a final illustrative example, a woman informed the Department that,
``I have been an independent contractor for more than 3 decades; it
helped me as a single mother and now it helps me help the kids with my
granddaughter.''
The Department agrees with the above commenters and data indicating
that women would benefit from greater access to independent contracting
opportunities. By clarifying how workers can be properly classified as
an independent contractor, this rule promotes the formation of such
opportunities.
e. Tax Filing Costs
The AFL-CIO and the Washington Center commented that independent
contractors have more time-intensive accounting and tax filing
processes, and the Department should address these costs. The
Washington Center claims that it is inappropriate to quantify time
savings from increased clarity but not to quantify the increased time
necessary to file taxes, which they estimate to amount to $832.3
million annually. Even assuming independent contractors spent more on
their tax filings than employees, the Washington Center's estimate is
based on average costs for all business filers in the country, drawn
from the IRS's ``Estimated Average Taxpayer Burden for Individuals by
Activity'' Table in its 2019 instructions on form 1040.\195\ This group
of business filers includes anyone with income from rental property,
royalties, S corporation earnings, farming, and other business
ventures, which dramatically expands the scope beyond independent
contractors. The Washington Center neither attempts to adjust for this
overestimate nor explain how one might disentangle the conflated
grouping, so the Department was unable to assess whether a real impact
can be expected. The Department noted in the NPRM that it did not
attempt to quantify the numerous benefits that it expects from the
increased clarity regarding classification. Instead, it assumed that
market actors operate in their own best interest, noting that for those
workers that choose to pursue work as an independent contractor, as
opposed to an employee, and file taxes as such it can be assumed that
they have correctly determined for themselves that the benefits
outweigh the costs, including any costs associated with increased time
spent on tax filings.\196\
---------------------------------------------------------------------------
\195\ Based on the difference in estimates of burdens for
businesses and nonbusinesses from the table ``Estimated Average
Taxpayer Burden for Individuals by Activity'' in U.S. Internal
Revenue Services, ``1040 and 1040-SR Instructions,'' p. 101, (2019),
https://www.irs.gov/pub/irs-pdf/i1040gi.pdf.
\196\ All workers are required to file with the IRS regardless
of classification. The time and cost of tax filing is highly
dependent on the individual circumstances of the workers. The
Department believes workers are able to best assess the costs and
benefits of tax filing.
---------------------------------------------------------------------------
f. Implementation Costs
The PA L&I asserted that the Department ``provided zero estimates
for the cost of actual implementation of the regulation.'' PA L&I also
claimed that implementation costs include reclassifying current workers
and identifying the employment status of new hires. Concerning the
first, the Department maintains that workers will only be reclassified
when the benefits to businesses outweigh the costs. Concerning the
later, the Department believes there will be a cost savings when new
employment relationships must be analyzed (see following section on
cost savings). The Department believes the implementation costs will be
de minimis.
g. Income Stability
Several commenters asserted that independent contracting is
associated with more volatile earnings. The Washington Center asserted
that income stability is important for these workers and their
families. UFCW cited literature finding that inconsistent earnings are
one of the most reported disadvantages to gig work.\197\
---------------------------------------------------------------------------
\197\ Prudential Research, ``Gig Workers in America'' (2017),
https://www.prudential.com/media/managed/documents/rp/Gig_Economy_Whitepaper.pdf.
---------------------------------------------------------------------------
The Department agrees that income volatility may be problematic for
some workers and may require better money management to smooth
consumption over periods of higher and lower income. However, as stated
above, the Department assumes that market actors operate in their own
best interest, and if a worker chooses to pursue work as an independent
contractor, as opposed to an employee, it can be assumed that the
worker has determined for himself or herself that the benefits outweigh
the costs. The Department also believes income security is best
achieved by removing barriers that prevent laid-off Americans from
finding paid work, including as independent contractors. This lesson
may be more important in the wake of the COVID-19 emergency, a point
that has been presented by hundreds of academics.\198\ Additionally,
some literature indicates that many independent contractors value
flexibility over income stability. CWI submitted a survey they
conducted that found 61 percent of independent contractors prefer the
``flexibility to choose when and where to work'' over ``having access
to a steady income and benefits.'' \199\
---------------------------------------------------------------------------
\198\ See 151 Ph.D. Economists and Political Scientists in
California, ``Open Letter to Suspend California AB-5'' (April 14,
2020).
\199\ Coalition for Workforce Innovation (2020), supra note 77.
---------------------------------------------------------------------------
F. Cost Savings
This final rule is expected to result in cost savings to firms and
workers. While the Department believes that there are multiple areas
where firms and workers may experience cost savings, the Department has
quantified only two: The cost savings from increased clarity and
reduced litigation. The Department estimates that annual cost savings
associated with this rule would be $495.9 million ($447.2 million in
increased clarity + $48.7 million in avoided litigation costs). Other
areas of anticipated cost savings were not estimated due to
uncertainties or data limitations. The Department believe the rule will
result in the following additional cost savings, which are discussed
qualitatively: Making labor market more efficient; improving worker
autonomy satisfaction; providing an alternate source of income for some
workers during the pandemic; and facilitating independent contractors'
ability to work for multiple customers.
While public comments specific to parts of the calculations are
addressed at the corresponding location throughout this section, some
commenters submitted general comments about the cost savings estimates.
Several commenters offered supportive comments. The CGO said that ``the
proposed rule carefully quantifies the cost savings of reduced
litigation and increased clarity.'' The AFPF also expressed support but
suggested that cost-savings may be underestimated. Conversely, other
commenters objected to the estimated cost savings, including that it
was inappropriate to quantify the potential cost savings from this rule
but not quantify the costs to workers. Representative Pramila Jayapal
asserted that the Department's analysis did not include ``any serious,
fact-based argument as to why this rules change would be of benefit to
the workers who would be most impacted by this rule change.'' Other
commenters offered equivocal comments, including one
[[Page 1233]]
individual who noted that ``point made about less litigation is a valid
one,'' but countered that the ``cost-savings pointed out seem to fall
only on the side of the business/employer.''
1. Increased Clarity
This final 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 in understanding 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.
The importance of increased clarity is noted by a study coauthored
and cited by the Society for Human Resource Management (SHRM) that
found human resources professionals' largest challenge concerning
external workers that they would like to see resolved is the legal
ambiguity regarding the use and management of external workers.\200\
Commenters from the business community agreed with the Department that
the rule would improve legal clarity. See, e.g., U.S. Chamber of
Commerce; CWI; WPI; ATA; NRF; National Restaurant Association. Groups
that represent freelancers and individual freelancers who commented
also believe this rule would improve legal clarity. See, e.g., CPIE;
Fight for Freelancers. However, several commenters dispute the
Department's claim that the rule will increase clarity, with some
focusing on specific industries. The TRLA stated that ``the proposed
rule unnecessarily muddies the waters with respect to the farm labor
market'' because they believe it contradicts ``Federal courts'
interpretation of a Federal statute.'' The State AGs also stated this
rule will create confusion because ``many jurisdictions have applied
the economic reality test'' to distinguish between employees and
independent contractors for decades.\201\
---------------------------------------------------------------------------
\200\ SHRM and SAP SuccessFactors. ``Want Your Business to
Thrive? Cultivate Your External Talent'' (2019), https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/pages/external-workers.aspx.
\201\ While state-imposed requirements may influence the use of
flexibilities provided by this rule, and could impact the number of
entities and workers affected, the Department does not possess the
requisite data to estimate the number of states that would implement
measures or the magnitude of their impact on the universe of
independent contractors considered in this analysis.
---------------------------------------------------------------------------
The Department expects this rule to produce beneficial cost savings
by clarifying the classification process. 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 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.\202\ 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 of jobs per year, the Department does not
believe that this limitation biases the estimate in either direction.
Multiplying these two numbers results in an estimated 27.0 million new
independent contractor relationships each year.\203\
---------------------------------------------------------------------------
\202\ Lim et al., supra note 75, at 61.
\203\ The Department 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 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.\204\ 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.
---------------------------------------------------------------------------
\204\ MBO Partners (2019), supra note 131.
---------------------------------------------------------------------------
A subset of new independent contractor relationships may have time
savings associated with the final 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.\205\
---------------------------------------------------------------------------
\205\ 18.9 million independent contractors x 1.43 contracts per
year x (1-0.25 possible reduction in clarity benefits) = 20.2
million.
---------------------------------------------------------------------------
In her comment, Representative Pramila Jayapal questioned the
breadth of the time savings benefit. She claimed that the only
beneficiaries of this rulemaking would be large, repeat players that
frequently misclassify workers. It is unclear what data Representative
Jayapal relied on to come to this conclusion. Furthermore,
Representative Jayapal largely ignores the millions of properly
classified independent contractors that will benefit from added
regulatory clarity. The Department disagrees that the cost savings
benefits will be limited to large, repeat players. Other comments
concur with the Department's view, supported by data-backed arguments
that the expect the rule to enable access to flexible work for
caregivers responding to the pandemic, enable workers to readily
supplement their income, and unlock the potential of the growing tech
sector. Farren and Mitchell, of the Mercatus Center, assert that the
rule, ``builds on existing precedent and serves largely as a synthesis
and clarification of previous economic reality tests, rather than
implementing any sort of radical change,'' adding that independent
contractors will likely ``develop more productive economic
relationships.''
Per each new contract with time savings, the Department has assumed
that employers would save 20 minutes of time and independent
contractors
[[Page 1234]]
would save 5 minutes.\206\ 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.
---------------------------------------------------------------------------
\206\ 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).
---------------------------------------------------------------------------
The Washington Center commented, ``[t]here is no transparency into
what surveys or studies were used to quantify the current amount of
time individuals and businesses currently spend on independent
contractor regulatory familiarization. Further, there was no attempt to
explain with any degree of accuracy how this rule will change that time
spent.'' The Washington Center seems to misunderstand the analysis
presented. The time savings variables are estimates of how the clarity
provided in the rule will facilitate the contracting process.
Estimating administrative time spend due to comply with government laws
and regulations is a typical component of economic analyses and is
often informed by consultation with subject matter experts. The
Department requested data to further refine its estimate, but did not
receive any. Notwithstanding, numerous commenters expressed support of
the analysis the Department presented.
The UFCW believes that there will be an increase in time to assess
employment status because employers and independent contractors will
now evaluate the classification under both current precedent and the
definition laid out in this rule; ``courts may decide to ignore the
DOL's new interpretation, meaning that companies and workers would now
analyze their FLSA independent contractor determinations under current
precedent and also the agency's proposed non-binding new test.'' The
Department disagrees that courts will ignore the final rule. The RIA
already includes a familiarization cost for the new rule, and, in the
baseline, establishments are assumed to be familiar with the status quo
environment. Accordingly, additional costs as stated in this comment
are likely to be insignificant.
To estimate the cost savings due to the increased clarity this rule
provides, the Department applies the following estimates. 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).
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 3). In sum, this
is estimated to be a $447.1 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 facilitate simplicity of
calculation.\207\ The annualized savings over both a 10-year horizon
and in perpetuity, with both the 3 percent and 7 percent discount rates
is $447.1 million.
---------------------------------------------------------------------------
\207\ By applying these assumptions to the Department's
estimates, instead of incorporating anticipated growth and
innovation impacts, the results may be an underestimate of total
cost savings.
Table 3--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........................................... $369,011,556
Independent contractors............................. $78,137,248
---------------
Total............................................... $447,148,804
------------------------------------------------------------------------
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 standard for being 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 for the number of new
relationships that might occur due to the rule. However, such benefits
are expected to be real and significant.
2. Reduced Litigation
The changes included in this rule are expected to result in
decreased litigation due to increased clarity and reduced
misclassification. The methodology of this section mirrors previous
final rules promulgated in recent years.\208\ The rule would clarify to
stakeholders how to distinguish between employees and independent
contractors under the Act. The increased clarity is expected to result
in fewer independent contractor misclassification legal disputes, and
lower litigation costs. The Department estimates that $48.7 million in
litigation costs related to independent contractor disputes will be
avoided per year as a result of this rule. This may be a lower-bound
estimate, reasons for which are described in more detail below.
---------------------------------------------------------------------------
\208\ For example, 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 litigation cost savings as being equal to
an estimate of the number of cases avoided as a result of the rule
multiplied by the average litigation cost per case.
Number of Cases Avoided
According to the Public Access to Court Records (PACER) system,
there were 7,238 Federal cases relating to the FLSA closed in
2019.\209\ The Department estimates that 9.4 percent of these cases
relate to independent contractor status.\210\
---------------------------------------------------------------------------
\209\ Downloaded from Public Access to Court Electronic Records
(PACER).
\210\ PACER does not provide a granular classification of FLSA
case types to identify the number of cases specific to independent
contractor disputes, so the Department performed a keyword analysis
with spot checking of a random sample of 500 cases closed in 2019,
determining that 9.4 percent of cases were related to independent
contractor status (47/500 = 9.4 percent).
---------------------------------------------------------------------------
For the NPRM, to determine this percentage of cases relating to
independent contracting, the Department reviewed a previous random
sample of FLSA cases closed in 2014.\211\ For this final rule, the
[[Page 1235]]
Department updated its dataset, using a sample that included 500 cases
closed in 2019. Of those cases, the Department identified 47 cases
within this sample that related to independent contractor status. This
ratio was applied to the 7,238 FLSA cases closed in 2019 to estimate
680 cases related to independent contractor status. The Department
assumes that the increased clarity of the rule would reduce the number
of Federal FLSA cases involving independent contractor classification
disputes by 10 percent as stakeholders would better understand and be
better able to agree on classification determinations without having to
litigate.\212\ Multiplying these variables results in an estimated 68
cases related to independent contractor disputes avoided annually. This
estimate of the reduction in the number of independent contractor
disputes filed does not take into account any reduction in the number
of FLSA cases related to independent contractor disputes heard in state
courts (e.g., where the state has adopted the FLSA standards for
classifying workers), nor does it take into account any reduction in
filings resolved before litigation or by alternative dispute
resolution, neither of which are captured in PACER data.
---------------------------------------------------------------------------
\211\ The Department used data from 2014 already obtained for
use in the analyses 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).
\212\ This aligns with the methodology the Department has
applied in a number of rulemakings (See e.g., Regular Rate Under the
Fair Labor Standards Act), and in the NPRM for this rule. In each
rulemaking with this assumption, the Department requested comments
and data on this point, which yielded no substantive data or
critiques on its merit. Therefore, the Department believes this is
an appropriate assumption in this analysis.
---------------------------------------------------------------------------
Average Litigation Cost per Case
The Department applied a previous estimate of litigation costs of
$654,182 per case. To obtain this estimate, the Department conducted a
search for FLSA cases concluded between 2012 and 2015 in the Westlaw
Case Evaluator tool and on PACER and identified 56 cases that contained
sufficient litigation cost information to estimate the average costs of
litigation.213 214 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 dollars.\215\
---------------------------------------------------------------------------
\213\ Litigation costs are not tracked in a systematic way by
any publicly available source. Individual case records are available
through various sources (e.g. PACER and Westlaw), but litigation
costs are often not reported because of undisclosed settlement
agreements or because attorney fees are not included in verdict
judgements. However, because the FLSA entitles prevailing plaintiffs
to litigation cost awards, the Department was able to ascertain
costs for 56 relevant cases.
\214\ 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.
\215\ This average litigation cost per case may underestimate
total average costs because some attorneys representing FLSA
plaintiffs may take a contingency fee atop their statutorily awarded
fees and costs.
---------------------------------------------------------------------------
Applying these figures to the estimated 68 cases that could be
prevented each year due to this rulemaking, the Department estimates
that avoided litigation costs resulting from the rule total $48.7
million per year (2019 dollars).216 217
---------------------------------------------------------------------------
\216\ Using the median litigation cost, rather than the mean,
results in a value of $122,341 (2019 dollars) per case, which for
the estimated 68 annual cases produces a total annual litigation
cost savings of $8.3 million. However, the median values do not
adequately capture the magnitude of the impact resulting from the
large-scale litigation cases that are expected to benefit from the
clarity provided in this final rule. Therefore, the mean average is
used for this analysis.
\217\ The Department's approach to estimating litigation cost
savings takes into account the impact of the rule on the number of
relevant cases filed. The approach does not take into account the
impact of the rule on promoting settlements in the future among
cases that are filed. Clarifying a rule may increase the settlement
rate among cases filed, reducing litigation costs further (see
Gelbach, J., ``The Reduced Form of Litigation Models and the
Plaintiff's Win Rate,'' J. Law & Economics 61(1), (2018), https://www.journals.uchicago.edu/doi/10.1086/699151).
---------------------------------------------------------------------------
3. Improved Labor Market Conditions
The Department anticipates the final rule will produce benefits by
reducing uncertainty and improving labor market conditions. 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.\218\ If so, the result would be
economic deadweight loss: Legal uncertainty prevents mutually
beneficial independent contractor arrangements. This final 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.
---------------------------------------------------------------------------
\218\ See Griffin Toronjo Pivateau, The Prism of
Entrepreneurship: Creating A New Lens for Worker Classification, 70
Baylor L. Rev. 595, 628 (2018) (``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 R. Hollrah and P.
Hollrah, ``The Time Has Come for Congress to Finish Its Work on
Harmonizing the Definition of `Employee,' '' J. L. & Pol'y 26(2), p.
439 (2018), https://brooklynworks.brooklaw.edu/jlp/vol26/iss2/1/.
---------------------------------------------------------------------------
The CGO concurred in its public comment, emphasizing that an
important benefit of this rule will likely be increased labor market
flexibility. They note that ``most labor models suggest flexibility is
crucial in allowing labor markets to efficiently match workers with
jobs, spur entrepreneurship, and act as an important source of
countercyclical income during a recession.'' They cite a study showing
that a 10 percent increase in the freelance workforce is correlated
with a 1 percent increase in entrepreneurial activity.\219\ Similarly,
CWI submitted their report that finds independent workers ``can be an
important part of improving business performance, such as by increasing
speed to market, increasing organizational agility, improving overall
financial performance, and allowing firms to compete in a digital world
where increasingly relevant, highly-skilled talent is in short-
supply.'' \220\ By decreasing uncertainty and thus potentially opening
new opportunities for firms, this final 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.\221\ If
[[Page 1236]]
independent contracting is expanded due to this rule, this could
generate benefits that may include:
---------------------------------------------------------------------------
\219\ A. Burke, I. Zawwar, and S. Hussels. ``Do Freelance
Independent Contractors Promote Entrepreneurship?'' Small Business
Economics 55(2), 415-27 (2019), https://doi.org/10.1007/s11187-019-00242-w.
\220\ J. Langenfeld and C. Ring. ``Analysis of Literature on
Technology and Alternative Workforce Arrangements.'' Ankura (October
2020).
\221\ 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.
---------------------------------------------------------------------------
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 assumes 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.
Some commenters agreed that expanding independent contracting can
lead to employment gains. For example, Dr. Palagashvili discussed the
literature showing how restricting independent contracting can lead to
loss of jobs. This final rule, by expanding independent contracting,
could conversely increase employment. She also noted the importance of
independent contracting for unemployed workers, referencing a paper
that found workers who ``suffered a spell of unemployment are 7 to 17
percentage points more likely than observationally similar workers to
be employed in an alternative work arrangement when surveyed 1 to 2.5
years later.'' 222 223
---------------------------------------------------------------------------
\222\ L. Katz and A. Krueger, ``The Role of Unemployment in the
Rise in Alternative Work Arrangements,'' American Economic Review,
107(5), p. 388 (2017), https://www.aeaweb.org/articles?id=10.1257/aer.p20171092.
\223\ It should be noted that government-mandated coverage is
not free. The total value that a worker provides a business must be
at least as large as the wage, any provided benefits, and government
(state or Federal) mandates combined. Congress and/or state
governments may conclude that the value of mandating certain
coverages outweighs the costs of such coverage, but that does not
necessarily mean that all covered workers receive significant
benefits from such coverage or value such coverage compared to other
compensation. In fact, in some cases workers may be able to strike a
better deal with a business than would be provided under the terms
of an employee relationship that operates under the associated
mandates. Such as in a situation where a worker has clusters of
available time to work punctuated by extended periods of inability
to work, such as a long-haul shipper who spends a month at sea and
then a month at home or a divorced parent who has five kids to care
for every other week but is fully available on the off weeks to work
as many hours as needed. In these cases, independent contractor
relationships may be pivotal in mutually benefiting workers and
business owners.
---------------------------------------------------------------------------
She also emphasized the importance of independent contracting to
startup firms. She references her work conducting interviews and a
survey of technology startup executives. During these interviews they
found that ``71 percent of startups relied on independent contractors
and thought it was necessary to use contract labor during their early
stages.'' Independent contractors are important to startups because
``during unpredictable times, when startups are trying to find their
market and build their product, they need flexible labor and need to be
able to hire and fire easily.''
Several commenters disagreed that the rule would improve outcomes
in the labor market. FTC Commissioner Rebecca Kelly Slaughter commented
that it is inappropriate to conclude ``that `competition will increase
and prices will decrease' when more workers are classified as
independent contractors'' because, according to the commenter, the only
support offered in the NPRM was a 2010 non-peer-reviewed article
providing little evidence of this claim. The Department maintains that
economic laws generally apply to labor markets, and that as supply
increases then prices can be expected to decrease. UFCW contested the
Department's claim that this rule will lead to increased productivity.
They presented an example of how independent contracting hurts
efficiency: ``Instead of ecommerce fulfil[l]ment carried out by a team
of output-optimizing role players, the `independent contractor' item
selection and packing is carried out by the same individual who does
the delivery, adding unnecessary and time consuming steps to the
process. The `independent contractor' must first park his or her car,
walk into the store, orient him or herself to the store layout, select
and pack the items, transact the payment, then carry the packed items
back to the car.'' The Department does not think UFCW's claims are
valid across the incredibly dynamic range of independent contractor
jobs, and further questions UFCW's unsupported assertion that the
expansive emergence of mobile customer-service-focused delivery
applications ``reduces the opportunity for productivity-enhancing
innovation.'' Further, even the example ignores that efficiencies will
likely be gained over time as the independent contractor fulfils
additional orders each day, week, and month. The Department does not
believe that these commenters provided reliable data to revise its
analysis, especially in light of the data provided to its support by
other commenters.
4. Improved Worker Satisfaction and Flexibility
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.\224\ 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).
---------------------------------------------------------------------------
\224\ See, e.g., MBO Partners (2019), supra note 131.
---------------------------------------------------------------------------
Additionally, the main reasons individuals work as independent
contractors demonstrate that being an independent contractor often has
valuable benefits. The 2017 CWS asked, ``What is the main reason you
are self-employed/an independent contractor?'' The two most popular
reasons were (1) being their own boss, and (2) scheduling
flexibility.\225\ In fact, these two choices were each selected over
three times more often than any of the other options.\226\
Additionally, McKinsey Global Institute found that ``[i]ndependent
workers report higher levels of satisfaction on many aspects of their
work life than traditional workers.'' \227\ The McKinsey Global
Institute examined workers who work
[[Page 1237]]
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.\228\ 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.\229\
---------------------------------------------------------------------------
\225\ The Department used PES26IC to identify preferred work
arrangement and PES26IR to identify the reason they work as an
independent contractor.
\226\ The third most commonly selected reason was ``Money is
better,'' supporting the Department's view that monetary and non-
pecuniary benefits are central motivations of most independent
contractors.
\227\ McKinsey Global Institute, supra note 89 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.
\228\ McKinsey Global Institute, supra note 89 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. The
Department believes this rulemaking is unlikely to negatively impact
the average income level of such workers by encouraging independent
contractor opportunities. 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 (see Section
VI(E)(2)(viii)).
\229\ Kelly Services (2015), supra note 89.
---------------------------------------------------------------------------
Many commenters agreed that the scheduling flexibility afforded to
independent contractors is of importance to many of these workers. WPI
pointed out that many independent contractors require flexibility to
balance work and other obligations. They cite a recent report that
found ``48 percent of freelancers report being caregivers, while 33
percent report having a disability in their household.'' \230\ Dr.
Palagashvili discussed the significance of independent contracting work
for women, who tend to be the primary caregiver, and thus value
scheduling flexibility. She cited several papers demonstrating the
importance of flexible work arrangements for women. For example, a
survey by HyperWallet found that ``96 percent of women indicate that
the primary benefit of engaging in platform-economy work is the
flexible working hours.\231\ SHRM pointed to their survey that found
that 49 percent of external workers chose that work arrangement for the
ability to set their own hours.\232\
---------------------------------------------------------------------------
\230\ Upwork, Freelance Forward 2020: The U.S. Independent
Workforce Report (September 2020).
\231\ HyperWallet. ``The Future of Gig Work Is Female: A Study
on the Behaviors and Career Aspirations of Women in the Gig
Economy,'' (2017), https://www.hyperwallet.com/app/uploads/HW_The_Future_of_Gig_Work_is_Female.pdf.
\232\ SHRM and SAP SuccessFactors (2019), supra note 200.
---------------------------------------------------------------------------
Conversely, other commenters asserted that valuing flexibility is
not relevant as a benefit to a worker who is classified as an
independent contractor. The Department believes that non-pecuniary
benefits like flexibility are very important to workers and should
receive adequate attention in this RIA. Research has shown that
flexibility is a criterion workers consider when evaluating job
offers.\233\
---------------------------------------------------------------------------
\233\ He, H. et al. (2019), supra note 131.
---------------------------------------------------------------------------
The PA L&I wrote that it is inappropriate to present flexibility
for independent contractors as a ``replacement for lower wages and no
benefits.'' PA L&I also stated that the Department does not discuss
independent contractors' counteracting loss of stability in income,
location of work, and frequency and schedule of work and instead simply
``presumes that workers prize flexibility over stability'' without
citing any evidence. The Department notes that it examined numerous
studies that directly address, and provide evidence regarding, the
tradeoffs many independent contractors voluntarily make to attain
flexibility. To that point, a survey submitted by CWI found 61 percent
of independent contractors prefer the ``flexibility to choose when and
where to work'' over ``having access to a steady income and benefits.''
\234\ Additionally, the workers who value flexibility will be the ones
drawn to those independent contracting arrangements that provide
flexibility.
---------------------------------------------------------------------------
\234\ Coalition for Workforce Innovation (2020), supra note.
---------------------------------------------------------------------------
The Washington Center posited that in many industries, such as
trucking and deliveries, the flexibility benefits for independent
contractors are small because workers often do not have control over
their routes or work hours. This was echoed by the UFCW, who pointed
out that in retail the use of just-in-time scheduling limits the
scheduling flexibility for workers classified as independent
contractors. The Department acknowledges that the flexibility benefits
may differ across industries, but that they tend to exist in all
industries to some degree.
UFCW contended that although current independent contractors may be
satisfied with their employment status, this will not necessarily hold
for newly classified workers. The Department acknowledges that new
independent contractors may differ from current independent contractors
but lacks any data to show how their satisfaction levels would differ.
Lacking such data, which commenters did not provide, the best predictor
of job satisfaction for new independent contractors is job satisfaction
among current independent contractors. Further, the Department notes,
as explained above, that this rule will not directly reclassify any
workers but rather provides clarity regarding the current process for
determining worker classification.
UFCW used a 2017 report from Prudential Research, specifically
regarding gig workers, to dispute the Department's claim that
independent contractors are more satisfied than employees. UFCW
excerpted from the report that, ``on-demand independent contractors who
work full-time hours are less satisfied with their current work
situation than full-time employees (44 percent vs. 55 percent).'' \235\
However, the commenter did not include all of the findings in the
source it cited; the same Prudential study notes that for gig workers
who also have other jobs, their job satisfaction rate is 86 percent.
Notably, UFCW focused on gig workers in its comment, but conflates such
workers with the entire universe of independent contractors. The
Department acknowledges that although there may be lower job
satisfaction for some subsets of independent contractors, studies that
consider all independent contractors generally find that independent
contractors report similar or higher job satisfaction than employees.
For example, CWI submitted a survey they conducted finding that 94
percent of independent workers are satisfied with their work
arrangements.\236\
---------------------------------------------------------------------------
\235\ Prudential Research (2017), supra note.
\236\ Coalition for Workforce Innovation (2020), supra note.
---------------------------------------------------------------------------
By clarifying that control and opportunity for profit or loss are
the core economic reality factors, this final rule is likely to
encourage the creation of independent contractor jobs that provide
autonomy and entrepreneurial opportunities that many workers find
satisfying. For the same reason, this final rule likely will diminish
the incidence of independent contractor jobs that lack these widely
desired characteristics. Thus, the Department expects this final rule
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.
5. Income Smoothing
Several commenters asserted that independent contracting plays a
key role in smoothing income during recessions by providing an
alternative source of income. Commenters cited to a JPMorgan Chase
Institute study that makes this case.\237\ Other commenters
[[Page 1238]]
held the opposite view and highlighted the economic downturn related to
COVID-19. For example, the Center for Innovation in Worker Organization
claimed that high unemployment increases the likelihood that employers
fail to pay minimum wage. Because this rule is focused on independent
contractors, even assuming the premise of the comment from the Center
for Innovation in Worker Organization is correct, this concern does not
directly apply. Further, this commenter did not provide clear evidence
that independent contracting does not help workers supplement their
income.
---------------------------------------------------------------------------
\237\ D. Farrell, F. Greig, and A. Hamoudi, ``The Online
Platform Economy in 27 Metro Areas: JPMorgan Chase Institute,''
JPMorgan Chase Institute (2019), https://www.jpmorganchase.com/institute/research/labor-markets/report-ope-cities.htm.
---------------------------------------------------------------------------
6. Opportunities To Work for Multiple Customers
In the NPRM, the Department noted that independent contractors may
more easily work for multiple companies simultaneously. The Washington
Center disputed this claim, asserting that ``economists have found that
about 75 percent of workers receiving non-employee compensation are
tied to one employer'' and the likelihood of being tied to a single
employer is similar for wage earners and contractors.\238\ But the
economists whom the Washington Center cites in support of their
assertion explicitly noted that the independent contractors in their
study ``include[ ] those who are primarily employed at a W2 job, and
vice versa.'' \239\ This overlap prevents meaningful comparisons
between independent contractors and W2 employees for the purpose of
this RIA. Rebecca Kelly Slaughter, a Commissioner at the FTC wrote:
``Independent contractor status is not what allows a worker to work for
two rivals. Indeed, many hourly workers are employed at more than one
job, including for two employers who are rivals in the same industry.''
Commissioner Slaughter gave an example of a worker who holds two jobs
at competing fast food restaurants, but this does not undermine the
Department's discussion of independent contractors being able to use
mobile applications to pick which tasks they choose to perform in real
time on a job-by-job basis. That fast food worker cannot always decide
which job he wants to work for each shift of the day. Additionally,
Slaughter commented that working for multiple employers may demonstrate
a worker's need to hold multiple jobs to pay bills rather than being
indicative of flexibility. This point, however, was not substantiated
by data showing that such a critique can effectively be applied across
the universe of millions of independent contractors who cite
flexibility as a core motivator. And as explained in Sections III(A)
and IV(C), courts have repeatedly explained that need for income is not
the correct legal lens through which to analyze whether a worker is an
independent contractor or employee under the FLSA.\240\ Lastly, she
noted that ``Uber has been known to discourage multi-apping by
monitoring whether drivers were logging into more than one platform
simultaneously and penalizing those that did not exclusively take Uber
customers.'' \241\ Under this rule, Uber's monitoring and controlling
certain drivers' ability to multi-app would be a consideration under
the control factors of the economic reality test as applied to those
drivers. See Razak, 951 F.3d at 145-46 (including drivers' contention
``that while `online' for Uber, they cannot also accept rides through
other platforms'' in list of ``disputed facts regarding control''). But
it appears that the majority of rideshare drivers are able to multi-
app.\242\ The Department believes that economy-wide data reveal that
many independent contractors hold multiple jobs,\243\ and they
resoundingly prize the flexibility to work when, where, and how they
choose.\244\
---------------------------------------------------------------------------
\238\ Collins et al. (2019), supra note 80.
\239\ Id. at 14 n.7.
\240\ See, e.g., 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''); 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.'').
\241\ Commissioner Slaughter cited a note submitted as
background material for an OECD meeting and a law review article to
support this contention. See M. Steinbaum, Monopsony and the
Business Model of Gig Economy Platforms, OECD 7 (Sept. 17, 2020),
https://one.oecd.org/document/DAF/COMP/WD(2019)66/en/pdf; M.
Steinbaum, ``Antitrust, the Gig Economy, and Labor Market Power,''
82 Law and Contemp. Probs. 45, 55 (2019), https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=4918&context=lcp.
\242\ See This App Lets Drivers Juggle Competing Uber and Lyft
Rides, Wired (Feb. 15, 2018) (estimating that over 70 percent of
rideshare drivers multi-app), https://www.wired.com/story/this-app-lets-drivers-juggle-competing-uber-and-lyft-rides/.
\243\ Lim et al., supra note 75, at 61.
\244\ See the May 2017 CWS supplement to the CPS.
---------------------------------------------------------------------------
G. Regulatory Alternatives
Pursuant to its obligations under Executive Order 12866,\245\ the
Department assessed three regulatory alternatives to the standard
promulgated in this final rule. These three alternatives are the same
as those analyzed in the NPRM,\246\ listed below in order from least to
most restrictive of independent contracting: \247\
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\245\ Exec. Order No. 12866 Sec. 6(a)(3)(C)(iii), 58 FR 51741.
\246\ See 85 FR 60634 (discussing regulatory alternative to the
proposed rule).
\247\ 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; \248\
---------------------------------------------------------------------------
\248\ 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).
---------------------------------------------------------------------------
(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).\249\
---------------------------------------------------------------------------
\249\ 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 believes that legal limitations preclude
adoption of the ``common law'' and ``ABC'' test alternatives listed
above, the Department notes that Congress is presently considering
separate bills that would amend the FLSA to adopt these
alternatives,\250\ and accordingly presents them for the benefit of the
public as recommended by OMB guidance.\251\ All
[[Page 1239]]
three regulatory alternatives are analyzed 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 appreciates the feedback it
received on these regulatory alternatives from commenters, which is
described and addressed below.
---------------------------------------------------------------------------
\250\ The Modern Worker Empowerment Act, H.R. 4069, 116th Cong.
(2019) (introduced by Rep. Elise Stefanik), would amend Sec. 3(e) of
the FLSA statute to clarify that the term ``employee'' is
``determined under the usual common law rules (as applied for
purposes of section 3121(d) of the Internal Revenue Code of 1986).''
See also S. 2973, 116th Cong. (2019) (companion Senate bill
introduced by Sen. Tim Scott). By contrast, the Worker Flexibility
and Small Business Protection Act, H.R. 8375, 116th Cong. (2020)
(introduced by Rep. Rosa DeLauro) would, among other provisions,
amend the FLSA and other labor statutes to clarify that ``[a]n
individual performing any labor for remuneration shall be considered
an employee and not an independent contractor'' unless such
individual passes the ``ABC'' test discussed in this analysis. See
also S. 4738, 116th Cong. (2020) (companion bill introduced by
Senators Patty Murray and Sherrod Brown).
\251\ 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.''
---------------------------------------------------------------------------
1. Codifying a Common Law Control Test
The least stringent alternative to the final 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.\252\ 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 parties' relationship;
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.
---------------------------------------------------------------------------
\252\ See supra note 248. The Supreme Court has explained that
the common law standard of employment applies by default under
Federal law ``unless [Congress] clearly indicates otherwise.''
Darden, 503 U.S. at 325; see also Community for Creative Non-
Violence v. Reid, 490 US 730, 739-40 (1989) (``[W]hen Congress has
used the term `employee' without defining it, we have concluded that
Congress intended to describe the conventional master-servant
relationship as understood by common-law agency doctrine.'').
---------------------------------------------------------------------------
Although the common law control test considers many of the same
factors as those identified in the final 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
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 even under a common law control
test.
As discussed in the NPRM, codifying a common law control test that
is used for purposes of at least some other Federal statutes 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 have to
understand and apply 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 final rule.
It could, on the other hand, impose burdens on workers who might prefer
to be employees subject to FLSA protections. Moreover, the Supreme
Court has interpreted the ``suffer or permit'' language in section 3(g)
of the FLSA as establishing a broader definition of employment than the
common law. See, e.g., Darden, 503 U.S. at 326; Portland Terminal Co.,
330 at 150-51.
A handful of business commenters addressed the merits of the common
law control test as a regulatory alternative. In a joint comment,
Vanliner Insurance Company and the Great American Trucking Division
implicitly requested adoption of the common law standard presently used
under the National Labor Relations Act (NLRA) and the Social Security
Act (SSA), as they urged the Department to ``foster efficiency and
consistency by creating uniformity for compliance with the FLSA, the
[NLRA], and the [SSA].'' The American Society of Travel Advisors, Inc.
(ASTA) asserted that ``the simplest means to accomplish [a uniform
classification standard under Federal law] would be to revise the FLSA,
either legislatively or through regulation, to replace the economic
reality test with the right of control test.'' While appearing to
support the common law control test on substance, the Workplace Policy
Institute warned that ``any attempt by the Department to depart from
the economic reality test likely would result in a successful legal
challenge to this rulemaking,'' expressing support for the Department's
proposed economic reality test ``in the spirit of `don't let the
perfect be the enemy of the good.' '' See also Dr. Palagashvili
(``[A]lthough the DOL is constrained in adopting a common law control
test, I suggest that lawmakers amend the FLSA to allow for codification
thereof.''). By contrast, the National Federation of Independent
Business (NFIB) criticized the Department's conclusion in the NPRM that
it lacks the legal authority to implement a common law standard through
rulemaking as ``unfortunate'' and ``questionable.''
The Department appreciates the policy appeal of establishing a
uniform Federal classification standard, and understands that the
standard most familiar to the regulated community is likely the common
law control test used for tax and other purposes. However, such an
approach would be inconsistent with the Supreme Court's statement that
FLSA employment is more inclusive than the common law control test.
See, e.g., Walling v. Portland Terminal Co., 330 U.S. 148, 150 (1947)
(``[I]n determining who are `employees under the [FLSA], common law
employee categories . . . are not of controlling significance.''). The
overwhelming majority of commenters who mentioned the common law
standard in their comment, including business commenters inclined to
favor the relative permissiveness of a common law standard, expressed
agreement with that conclusion.
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. The six factors in WHD's multifactor balancing
test, as recently articulated in WHD Opinion Letter FLSA2019-6, are as
follows:
(1) The nature and degree of the potential employer's control;
[[Page 1240]]
(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 Food, 331 U.S. at
730, and Silk, 331 U.S. at 716).
As discussed in the NPRM, the Department believes that this six-
factor balancing test is neither more nor less permissive of
independent contractor relationships as compared to the streamlined
test finalized in this rulemaking. Both tests describe the ``economic
dependence'' of the worker at issue as the ultimate inquiry; 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
this rule's streamlined test. Notably, like Sec. 795.105(d)(1)(i) of
the final 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. However, the Department explained in the NPRM that the six-factor
balancing test used by WHD and most courts, with some significant
variations, would benefit from clarification, sharpening, and
streamlining.
A number of commenters urged the Department to codify a six-factor
balancing test. Several commenters, including NELP, Eastern Atlantic
States Regional Council of Carpenters (EASRCC), and the United
Brotherhood of Carpenters, specifically requested that the Department
reinstate AI 2015-1, which was withdrawn in 2017. SWACCA asserted that
``codification of the six[hyphen]factor balancing test may well achieve
more consistency of application from the courts as it pushes them to
develop their similar precedents to align with the Department's
views,'' criticizing the proposed rule as ``a novel weighted test that
will result in more litigation and less certain outcomes[.]'' SWACCA
also disputed the Department's assumption in the NPRM that codifying
the six[hyphen]factor balancing test would not reduce initial
regulatory familiarization costs or provide greater per[hyphen]contract
cost savings compared to the proposed rule, see 85 FR 60635, arguing
that this assumption ``overlooks the fact that codifying the
six[hyphen]factor balancing test would simply incorporate what is now
subregulatory guidance at the regulatory level.'' Finally, NELP, NWLC,
and the State AGs asserted that the Department has no legal authority
to promulgate any regulatory standard except the traditional six-factor
balancing test, citing to Kimble v. Marvel Entm't, LLC, 576 U.S. 446
(2015), for the proposition that the six-factor balancing test derived
from Silk and Rutherford Food has effectively become part of the FLSA's
``statutory scheme.'' See id. at 456 (``All [of the Supreme Court's]
interpretive decisions, in whatever way reasoned, effectively become
part of the statutory scheme, subject (just like the rest) to
congressional change.'').
While the Department agrees with NELP, NWLC, and the State AGs that
Supreme Court precedent requires application of an ``economic reality''
test to evaluate independent contractor claims under the FLSA, we
disagree that the Court has definitively prescribed the specific
components of such a test. As explained earlier, courts in different
Federal circuits have articulated the number and nature of relevant
factors in different ways, so any formulation endorsed by the
Department would be at least marginally ``novel'' to courts and
affected stakeholders across jurisdictions in some respect. Moreover,
many commenters are overstating the degree to which the standard
finalized in this rule meaningfully departs from existing precedent. If
anything, by elevating the two factors that are most probative to what
courts have established as the ultimate inquiry of the test--i.e.,
whether workers ``are in business for themselves,'' Saleem, 854 F.3d at
139--the Department's approach is more faithful to courts' instruction
that the factors ``must be applied with that ultimate notion in mind.''
Usery, 527 F.2d at 1311. Moreover, because the Department's analysis of
appellate case law since 1975 has found workers' control and
opportunity for profit or loss to be most predictive of a worker's
classification status, the finalized standard provides more accurate
guidance.
To the extent that some businesses and independent contractors
familiar with the Department's earlier subregulatory guidance might
spend less time reviewing new regulatory language on the topic under
this alternative, any reduction in initial regulatory familiarization
costs compared to the streamlined test adopted in this final rule would
likely be minimal. By contrast, and as we explained in the NPRM,
codification of the traditional six-factor balancing test would yield
smaller recurring benefits and cost savings over the long term, as the
Department continues to believe in the added clarity of an
appropriately weighted test with less overlapping redundancy.
The Department further believes that reinstatement of AI 2015-1's
specific articulation of the six-factor test would be inappropriate
because that withdrawn guidance exacerbates the very shortcomings that
this rule remedies. As discussed in Section III(A), the first such
shortcoming is the need for consistent application of economic
dependence. While the AI 2015-1 correctly stated that ``[t]he ultimate
inquiry under the FLSA is whether the worker is economically dependent
on the employer or truly in business for him or herself,'' it failed to
apply that concept consistently. Notably, it explained that the
investment factor should be analyzed by comparing the amount of the
worker's investments with the amount the potential employer invests
because ``[i]f the worker's investment is relatively minor, that
suggests that the worker and the [potential] employer are not on
similar footings and that the worker may be economically dependent on
the employer.'' But the correct concept of economic dependence is not
an inquiry into whether two entities are on a ``similar footing,'' but
rather whether an individual is in business for him- or herself.\253\
Such an approach to the investment factor is misleading by placing the
focus on the worker's financial means instead of the worker's
relationship with the purported employer. Several cases explicitly or
implicitly reject the ``similar footing'' analysis, most plainly
because independent contractors routinely work for companies with whom
they are not on a ``similar footing.'' See Karlson, 860 F.3d at 1096
(``Large corporations can hire independent contractors''). The
``similar footing'' concept of economic dependence is also inconsistent
with the Supreme Court's analysis in Silk, 331 U.S. 718, which found
that truck drivers who invested in their own vehicles were independent
contractors who transported coal for a coal company. The Court did not
compare
[[Page 1241]]
the relative investment of the drivers with that of the coal company or
ask whether they were on a ``similar footing''--they obviously were
not. Instead, the Court ruled that the drivers were independent
contractors, in part because they had ``the opportunity for profit from
sound management'' of their investment. Id. at 719. What matters is not
the relative size of a worker's investment, but whether the worker has
a meaningful opportunity for profit or loss based on that investment.
---------------------------------------------------------------------------
\253\ The Department is also concerned that the phrase ``similar
footing'' lacks a clear meaning and therefore may be confusing to
the regulated community.
---------------------------------------------------------------------------
The second shortcoming discussed at Section III(B) is the need for
guidance regarding which economic reality factors are more probative.
AI 2015-1 exacerbates this shortcoming by relegating the more probative
control factor while elevating the less probative ``integral part''
factor. In particular, AI-2015 stated that ``[t]he control factor
should not overtake the other factors of the economic realities test.''
Such guidance is plainly inconsistent with cases in which control
explicitly ``overtakes'' other factors. See, e.g., Saleem; 854 F.3d at
147 (``whatever `the permanence or duration' of Plaintiffs' affiliation
with Defendants, both its length and the `regularity' of work was
entirely of Plaintiffs' choosing'' (citation omitted)); Selker Bros. 84
F.3d at 147 (``Given the degree of control exercised by Selker over the
day-to-day operations of the stations, this [use of special skills]
cannot be said to support a conclusion of independent contractor
status.''). Deemphasizing the control factor is also at odds with
commonsense logic; control over the work seems to be extremely
probative as to whether an individual is in business for him- or
herself. In addition to de-emphasizing a highly probative factor, AI-
2015 also states that ``[c]ourts have found the `integral' factor to be
compelling,'' citing Snell, 875 F.2d at 811 and Lauritzen, F.2d at
1537-38 for support. But both cited cases actually analyzed the
``integral part'' factor as an afterthought: Each devoted only a few
conclusory sentences to this factor after more in depth analysis of the
other factors Snell, 875 F.2d at 811 and Lauritzen, 835 F.2d at 1537-
38. The ``integral part'' factor falls short of even an afterthought in
the Fifth Circuit, which typically does not analyze it at all. As
explained in Section IV(D)(5), the ``integral part'' factor--as used in
AI 2015-1 to mean a worker's importance to a business--is not supported
by Supreme Court precedent and may send misleading signals in many
cases.
The third shortcoming discussed at Section III(C) is overlaps
between economic reality factors, which undermines the structural
benefits of a multifactor test by blurring the lines between factors.
One type of overlap highlighted by the NPRM is the importation of the
analysis of initiative and business judgment, which are already part of
the control and opportunity factors, into the skill factor, thus
``dilut[ing] the consideration of actual skill to the point of
irrelevance.'' 85 FR 60607. Id. AI 2015-1 reinforces this problem by
focusing the skill factor entirely on initiative and business judgment,
thus eliminating consideration of skill: ``A worker's business skills,
judgment, and initiative, not his or her technical skills, will aid in
determining whether the worker is economically independent.'' The
withdrawn guidance makes clear that it is not simply that skill matters
less than initiative, but that skill matters not at all, because it
unequivocally states that ``specialized skill do not indicate that
workers are in business for themselves.'' This categorical statement,
however, is supported by more circumspect case law explaining that
``skill is not itself indicative of independent contractor status.'' AI
2015-1 (quoting Superior Care, 84 F.2d at 1060 (emphasis added)); see
also id. (``the use of special skills is not itself indicative of
independent contractor status'' (quoting Selker Bros. 949 F.d at 1295)
(emphasis added)). AI 2015-1's categorical position is also at odds
with the Supreme Court's instruction in Silk that ``skill required''
may be ``important for decision.'' 331 U.S. at 716; see also Simpkins,
893 F.3d at 966 (``whether Simpkins had specialized skills, as well as
the extent to which he employed them in performing his work, are
[material] issues'').
Further, reinstating AI 2015-1 or otherwise adopting a six-factor
test with overlapping factors and without guidance regarding the
factors' relative probative value would negate the overall beneficial
effects that would likely result from this rule, which are discussed
above.
For these reasons, the Department declines commenters' requests to
reinstate AI 2015-1.The Department further notes that, unlike this
rule, AI 2015-1 was issued without notice and comment and thus did not
benefit from helpful input from the regulated community.
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.\254\ 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.\255\
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,\256\
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 serves its remedial purposes.'' Id. at 32.
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\254\ 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) (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).
\255\ 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.
\256\ 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.
---------------------------------------------------------------------------
On its face, California's ABC test is far more restrictive of
independent contracting arrangements than any formulation of an
``economic reality''
[[Page 1242]]
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, the NPRM stated that 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, particularly those
in industries that depend on independent contracting arrangements
within the ``usual course of the hiring entity's business.'' Dynamex,
416 P.3d at 34. While some independent contractors might benefit from
reclassification by newly receiving overtime pay 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.
After highlighting some of the reports of adverse consequences
experienced by workers and businesses in California following the
passage A.B. 5, the Department concluded that 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. Finally, as a matter of law, the Department asserted
that adoption of California's ABC test would be inconsistent with the
more flexible economic reality test adopted by the Supreme Court, as it
would cover workers who have been held by the Supreme Court to be
independent contractors under the economic reality test. See Silk, 331
U.S. at 719; Bartels, 332 U.S. at 130.
The Department received a large volume of commenter feedback on the
merits of California's ABC test. While the majority of these comments
were highly critical of the standard, it did have several supporters.
Commenters in favor of the ABC test asserted that, as the regulatory
alternative most restrictive of independent contracting considered by
the Department, it would best effectuate Congress' intent to extend
FLSA coverage broadly and reduce unlawful misclassification of
employees as independent contractors. See, e.g., Matt Brown; National
Domestic Workers Alliance; Public Justice Center; SEIU. Numerous
commenters asserted that the ABC test, with its three individually
determinative factors, was also the clearest and most predictable
approach considered. See, e.g., International Brotherhood of Teamsters;
Writers Guild of America, East, AFL-CIO. New York University's People's
Parity Project argued that ``[g]iven the importance of the California
market to the national economy and the fact that it follows the more
stringent ABC standard, any business that wishes to operate in
California, and any national business, will have economic motivation to
follow the ABC standard.'' NELA similarly disputed concerns that
adoption of the ABC test would be unduly disruptive, asserting that
Massachusetts wage and hour law has used an ABC test since 2004 and
that ``[m]any other states, including New Jersey, Illinois,
Connecticut, and Hawaii, use an ABC test for certain [other] purposes,
and have similarly suffered no disruption to their economies.''
Finally, regarding the Department's legal authority to adopt the ABC
test, NELA asserted that ``none of the cases on which the Department
relies suggest that the multi-factor test is the only way to test
`economic reality' or that the ABC test ignores `economic reality.' ''
A diverse array of commenters voiced strong opposition to adopting
an ABC test under the FLSA, including law firms, trade associations,
advocacy organizations, academics, and individual freelancers. Several
commenters dedicated the entirety or vast majority of their comment
towards criticizing California's ABC test. See, e.g., American Consumer
Institute Center for Citizen Research (ACI); Fight for Freelancers USA;
Institute for the American Worker; Joint Comment of the Pacific Legal
Foundation (PLF), the American Society of Journalists and Authors, Inc.
(ASJA), and the National Press Photographers Association (NPPA); Dr.
Palagashvili; The People v. AB5. The primary objection voiced by
commenters critical of the ABC test regarded the disruptive economic
effects of implementing such a stringent standard, with several
asserting that an ABC test would devastate their industry. See, e.g.,
American Council of Life Insurers (``Thousands of jobs would likely
have been lost had the California legislature failed to create [an
exemption for insurance professionals].''); Coalition of Practicing
Translators & Interpreters of California (CoPTIC) (``[A.B. 5] posed an
existential threat to the survival of our profession.''); Intermodal
Association of North America (IANA)) (``The ABC test essentially
eliminates the independent contractor model for motor carriers involved
in intermodal drayage.''). Several commenters invoked the numerous
exemptions to the ABC test that California lawmakers initially adopted
in A.B. 5 and subsequently expanded in A.B. 2257 as evidence of the
standard's overreach. See, e.g., California Chamber of Commerce
(``During the first few months of the 2020 Legislative Session, more
than 30 bills were introduced to add a myriad of exemptions to the ABC
test. . . . As a result of the adoption of AB 2257, which was signed
into law in September, there are now 109 exemptions to the ABC
test.''); Rep. Virginia Foxx et al. (``Rather than setting a dependable
and workable standard, the AB 5 framework results in arbitrary
treatment of industries based on political considerations to the
detriment of workers.''); Joint Comment of PLF, ASJA, and NPPA (``If a
law requires dozens of exceptions to avoid destroying the careers of
successful independent professionals, it is a strong indication that
the law's basic premise--the ABC test--is flawed.''). Some individual
freelancers, including writer Karen Kroll, filmmaker/actor Margarita
Reyes, unspecified professional Chun Fung Kevin Chiu, and unspecified
professional Carola Berger, asserted that the ABC test is falsely
premised on the assumption that all independent contractors, or at
least those who provide services in a client's usual course of
business, feel exploited and would prefer to be employees. The
Independent Women's Forum and Dr. Palagashvili asserted that the ABC
test implemented in California disproportionately burdened female
workers with caregiving responsibilities, who are less able to find
adequately flexible work schedules through traditional employment.
Finally, some commenters agreed with the Department's conclusion in the
NPRM that Supreme Court precedent precludes the Department from
adopting an ABC test under the FLSA. See NRF; FMI--The Food Industry
Association.
After reviewing commenter feedback, the Department continues to
believe that the ABC test would be infeasible, difficult to administer,
and disruptive to the economy if adopted as the FLSA standard. The
weight of data, arguments, and anecdotes that commenters shared about
the ABC test's
[[Page 1243]]
effects in California support the NPRM's conclusion that adopting an
ABC test would have unacceptably disruptive economic effects. For
instance, a self-employed ``professional handyman with technical skills
in furniture assembly and home repair'' stated that ``[a]s a California
resident, it has been concerning to watch the way AB-5 has affected our
state. I don't believe legislators should make decisions that make it
harder for people like me to find work and earn a living the way we
want to.'' A medical translator stated that ``ABC test simply doesn't
work in my field and it is not a fair standard to measure my situation.
The original AB5 law in California was destructive to the livelihood of
many of my colleagues in that state.'' And as a final illustrative
example, a freelance journalist in California characterized that
state's adoption of the ABC test as an ``attempt to legislate an entire
class of entrepreneurs out of business.'' See also, e.g., People vs.
AB5; Fight for Freelancers; NPPA; WPI.
Moreover, as commenters pointed out, the numerous exemptions
initially and subsequently passed by the California legislature
indicate the ABC test's inadequacy as a generally applicable standard,
as well as its unpopularity with affected stakeholders. An ``owner of a
small, one-woman business in California'' explained in her comment that
``[t]he absurdity and overreach of AB5 is evidenced by the numerous
attempts at clean-up bills in California (SB 875, SB 1039, SB 900, AB
1850, AB 2257 . . .) that clogged the CA legislative landscape for
months, culminating in the now adopted AB 2257, which lists too many
exemptions to count.'' The recent passage of the high-profile
Proposition 22 ballot initiative in California,\257\ which occurred
shortly after the end of the comment period for this rulemaking and
exempted numerous gig workers from the ABC test, is further evidence in
this regard.
---------------------------------------------------------------------------
\257\ See Kate Conger, ``Uber and Lyft Drivers in California
Will Remain Contractors,'' NY Times (Nov. 4, 2020), https://www.nytimes.com/2020/11/04/technology/california-uber-lyft-prop-22.html.
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While California retains the ABC test for some industries but not
others, the Department is required to apply the FLSA consistently for
all covered industries (absent explicit statutory authority to do
otherwise). Thus, if the Department adopted the ABC test, that standard
would apply to virtually all industries nationwide, including numerous
industries that the Californian legislature and voters exempted because
they would suffer undue disruption under that standard. NELA contended
that adoption of the ABC test by Massachusetts has not led to the same
type of disruption experienced in California, which is disputed by some
commenters from Massachusetts. See e.g., New Jobs for Massachusetts;
IFA; Fight for Freelancers. But even if NELA were correct, a nationwide
ABC test would still disrupt California, the state with the largest
population and economy, and likely many others. In the Department's
view, the fact that a legal standard may be disruptive in only some
states (e.g., California) but not others (e.g., Massachusetts) is not a
persuasive reason for nationwide adoption.
Additionally, the Department continues to believe that it lacks
legal authority to adopt the ABC test under the FLSA because that test
is far too rigid and restrictive of independent contracting
arrangements. As a threshold matter, each of the ABC test's three
independently determinative factors would contradict binding Supreme
Court precedent applying the economic reality test, where ``[n]o one
[factor] is controlling.'' Silk, 331 U.S. at 716. In particular, the
test's ``B'' prong--denying independent contractor status unless the
contractor ``performs work that is outside the usual course of the
hiring entity's business''--would contradict the Court's recognition in
Silk that ``[f]ew businesses are so completely integrated that they can
themselves produce the raw material, manufacture and distribute the
finished product to the ultimate consumer without assistance from
independent contractors.'' 331 U.S. at 714; see also Rutherford Food,
331 U.S. at 729 (recognizing that ``[t]here may be independent
contractors who take part in [the] production or distribution'' of a
hiring party). Indeed, application of California's ABC test would
result in different classification outcomes than those the Supreme
Court arrived at applying the economic reality test in Silk, 331 U.S.
at 719 (ruling that truckers who were ``an integral part of the
businesses of retailing coal or transporting freight'' were independent
contractors), and Bartels, 332 U.S. at 130 (concluding that musicians
were independent contractors rather than employees of the music hall
where they played). Absent revised guidance from the Supreme Court or
Congressional legislation amending the FLSA statute, the Department
continues to believe that it lacks the legal authority to implement a
California-style ``ABC'' test through administrative rulemaking.
NELA contended that ``an ABC test is more faithful to the broad,
remedial purpose of the FLSA.'' According to NELA, ``[a]t its core, the
FLSA is a remedial statute'' and therefore, the Department should
interpret the FLSA's standard of employment to be broader than economic
dependence. However, the Supreme Court warned against relying on
``flawed premise that the FLSA `pursues' its remedial purpose `at all
costs' '' when interpreting the Act. Encino, 138 S. Ct. at 1142; see
also Bristol, 935 F.3d 122 (`` `[A] fair reading' of the FLSA, neither
narrow nor broad, is what is called for.'' (quoting Encino, 138 S. Ct.
at 1142)); Diaz, 751 F. App'x at, 758 (rejecting request to interpret
FLSA provisions to provide ``broad'' coverage because ``[w]e must
instead give the FLSA a `fair' interpretation.''). Furthermore, even if
remedial statutes should be liberally construed, the ABC test still
runs afoul of the Supreme Court's stated limits on the extent of the
FLSA's definition of employment, as explained above. As such, the
Department may not (and no court has ever suggested that it could)
replace the economic reality test with the ABC test to be faithful to
the FLSA's remedial purpose.
In sum, legal constraints and the disruptive economic effects of
adopting the ABC test in the FLSA context. As we stated in the NPRM,
the Department 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
[[Page 1244]]
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 also certain 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 paid time off.\258\ 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.
---------------------------------------------------------------------------
\258\ 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.
VII. Regulatory Flexibility Act
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 this final 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 this final 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.259 260 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.\261\ These ratios of
small to large establishments were then applied to the more recent 2017
Economic Census data on number of establishments.\262\ Next, the
Department estimated the number of small governments, defined as having
population less than 50,000, from the 2017 Census of Governments.\263\
In total, the Department estimated there are 6.4 million small
establishments or governments.
---------------------------------------------------------------------------
\259\ SBA, Summary of Size Standards by Industry Sector, 2017,
www.sba.gov/document/support--table-size-standards.
\260\ The most recent size standards were issued in 2019.
However, the Department used the 2017 standards for consistency with
the older Economic Census data.
\261\ The 2012 data are the most recently available with revenue
data.
\262\ For this analysis, the Department excluded independent
contractors who are not registered as small businesses, and who are
generally not captured in the Economic Census, from the calculation
of small establishments.
\263\ 2017 Census of Governments. https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------
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.\264\ According to the 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. 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 Department believes that 15 minutes, on average, is
appropriate, because while some independent contractors will spend
longer than one hour to review the rule, many will spend little or no
time reviewing the rule.
---------------------------------------------------------------------------
\264\ 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.
---------------------------------------------------------------------------
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
$4.14 per year, or the fully loaded mean hourly wage of independent
contractors in the CWS multiplied by 0.89 hours.\265\ 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 this final rule will not have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\265\ Note that the NPRM reported $3.86 which is the cost per
job, rather than the cost per independent contractor.
---------------------------------------------------------------------------
There is some evidence that small firms use independent contractors
for a greater proportion of their workforce than large firms.\266\ If
so, then it may be reasonable to assume that the increased
[[Page 1245]]
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.
---------------------------------------------------------------------------
\266\ Lim et al, supra note 75 at 51.
---------------------------------------------------------------------------
AFL-CIO disagreed with including cost savings from increased
clarity for independent contractors. They argue that ``the independent
contractors at issue--those who falls [sic] close to the line
separating independent contractors from employees are not themselves
employers, they provide services solely as individuals and they have no
need to determine if they are themselves independent contractors.''
They additionally stated that the analysis failed to include compliance
costs for the new small businesses created--the workers newly
classified as independent contractors. Specifically, these new
independent contractors will have increased regulatory burden due to
additional accounting and tax filing costs. The Department believes it
did address this because workers who choose to pursue independent
contractor roles will not take them unless they believe the gains will
offset the costs.
The AFL-CIO asserts that the Department failed to conduct the
outreach to small businesses as required by Section 609(a) of the RFA.
The Department notes that these requirements only apply when the rule
will have a significant economic impact on a substantial number of
small entities, which is not the case for this rulemaking.
VIII. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA) \267\ 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.\268\ 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.
---------------------------------------------------------------------------
\267\ See 2 U.S.C. 1501.
\268\ 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.
---------------------------------------------------------------------------
A. Authorizing Legislation
This final 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 final rule, the Department
determined that it will result in Year 1 total costs for state and
local governments totaling $1.7 million, all for regulatory
familiarization. There will be no additional costs incurred in
subsequent years.
The Department determined that the 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.\269\ 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).\270\ 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 rule.
---------------------------------------------------------------------------
\269\ See 2 U.S.C. 1532(a)(4).
\270\ 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.
---------------------------------------------------------------------------
The Department's RIA estimates that the total costs of the final
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.
Many commenters claim that the rule will result in costs to Federal
and state governments in the form of increased public assistance and
decreased tax revenue. The Department discussed these potential costs
in the RIA and directs the reader to Section VI(E)(2)(ii).
The State AGs stated that the Department failed to include the
increased administrative and enforcement costs to states due to the
change in the standard for determining independent contractor status
under the FLSA. They wrote that states ``would need to invest time and
resources into training agency employees and educating the public,''
particularly in states with laws that are more restrictive than the
economic reality test. States do not enforce Federal laws and therefore
have no need to train their personnel in the enforcement of the FLSA or
the Department's regulations. There is also no need for states to be
``educating'' the public about FLSA regulations--aside from pointing
out that Federal law may impose different requirements than state labor
laws. Finally, under the nation's federalist system, states may and
often do enact and enforce labor standards and are more restrictive
than Federal standards. A state's decision to do so, however, rests
with the state because no state is forced to enact labor standards that
are stricter than the Federal standard. Any costs associated with
implementing a stricter standard, including training and education,
reflect the free choice of the individual state, and not the existence
of a different Federal standard. As such, costs that a state choose to
bear in enacting and enforcing their own laws are the result of the
state's own decision, and are outside the scope of the unfunded mandate
concept.
C. Least Burdensome Option Explained
The Department believes that it has chosen the least burdensome but
still cost-effective methodology to clarify the FLSA's distinction
between employees and independent contractors. Although the regulation
will 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. Moreover, the additional clarification
[[Page 1246]]
could promote innovation and certainty in business relationships. The
AFPF agreed ``that the Department has adequately analyzed potential
alternatives as well as selected the least burdensome option under the
Unfunded Mandates Reform Act of 1995.''
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 31st day of December, 2020.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
For the reasons set out in the preamble, the Department of Labor
amends 29 CFR chapter V 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) to read 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) to read 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 subchapter B 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 Examples of analyzing economic reality factors.
795.120 Severability.
Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201-219.
Sec. 795.100 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
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 therefore
typically carries greater weight in the analysis than any other factor.
Given these two core factors' greater probative value, 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 are less
probative and, in some cases, may not be probative at all, and thus are
highly unlikely, either individually or collectively, to outweigh the
combined probative value of the two core factors.
(d) Economic reality factors--(1) Core factors--(i) The nature and
degree of 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
[[Page 1247]]
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 faster.
(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.
(iv) Additional factors. Additional factors may be relevant in
determining whether an individual is an employee or independent
contractor for purposes of the FLSA, but only if the factors in some
way indicate whether the individual is in business for him- or herself,
as opposed to being economically dependent on the potential employer
for work.
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 Examples of analyzing economic reality factors.
(a) The following illustrative examples demonstrate how the factors
listed in Sec. 795.105(d) may be analyzed under the facts presented
and are limited to substantially similar factual situations.
(b)(1)(i) Example. An individual is the owner and operator of a
tractor-trailer and performs transportation services for a logistics
company. The owner-operator substantially controls the key aspects of
the work. However, the logistics company has installed, at its own
expense, a device that limits the maximum speed of the owner-operator's
vehicle and monitors the speed through GPS. The company limits the
owner-operator's speed in order to comply with federally mandated motor
carrier safety regulations and to ensure that she complies with local
traffic laws. The company also requires the owner-operator to meet
certain contractually agreed-upon delivery deadlines, and her contract
includes agreed-upon incentives for meeting, and penalties for missing,
the deadlines.
(ii) Application. The owner-operator exercises substantial control
over key aspects of her work, indicating independent contractor status.
The fact that the company has installed a device that limits and
monitors the speed of the owner-operator's vehicle does not change the
above conclusion. This measure is implemented in order to comply with
specific legal obligations and to ensure safety, and thus under Sec.
795.105(d)(1)(i) would not constitute control that makes the owner-
operator more or less likely to be an employee under the Act. The
contractually agreed-upon delivery deadlines, incentives, and penalties
are typical of contractual relationships between businesses and
likewise would not constitute control that makes the owner-operator
more or less likely to be an employee under the Act.
(2)(i) Example. An individual accepts assignments from a company
that provides an app-based service linking those who need home-repair
work with those who perform home-repair work. The individual is able to
meaningful increase his earnings by exercising initiative and business
acumen and by investing in his own equipment. The company, however, has
invested millions of dollars in developing and maintaining the app,
marketing itself, maintaining the security of information submitted by
actual and prospective customers and workers, and monitoring customer
satisfaction with the work performed.
(ii) Application. The opportunity for profit or loss factor favors
independent contractor status for the individual, despite the
substantial difference in the monetary value of the investments made by
each party. While the company may have invested substantially more in
its business, the value of that investment is not relevant in
determining whether the individual has a meaningful opportunity for
profit or loss through his initiative, investment, or both.
[[Page 1248]]
(3)(i) Example. An individual worker works full time performing
home renovation and repair services for a residential construction
company. She is also the part owner of a food truck, which she operates
on weekends. In performing the construction work, the worker is paid a
fixed hourly rate, and the company determines how many and which tasks
she performs. Her food truck recently became very popular and has
generated substantial profits for her.
(ii) Application. With regard to the construction work, the worker
does not have a meaningful opportunity for profit or loss based on her
exercise of initiative or investment, indicating employee status. She
is unable to profit, i.e., increase her earnings, by exercising
initiative or managing investments because she is paid a fixed hourly
rate and the company determines the assignment of work. While she earns
substantial profits through her food truck, that is a separate business
from her work in the construction industry, and therefore is not
relevant to the question of whether she is an employee of the
construction company or in business for herself in the construction
industry.
(4)(i) Example. A housekeeper works for a ski resort every winter.
At the end of each winter, he stops working for the ski resort because
the resort shuts down. At the beginning of each of the past several
winters, the housekeeper returned to his prior position at the ski
resort without formally applying or interviewing.
(ii) Application. The housekeeper has a long-term and indefinite
work relationship with the ski resort under the permanence factor,
which weighs in favor of classification as an employee. That his
periods of working for the ski resort end at the end of each winter is
a result of the seasonal nature of the ski industry and is thus not
indicative of a sporadic relationship. The fact that the housekeeper
returns to his prior position each new season indicates that his
relationship with ski resort does not end and is indefinite as a matter
of economic reality.
(5)(i) Example. An editor works part-time for a newspaper. The
editor works from home and is responsible for assigning and reviewing
many articles published by the newspaper. Sometimes she also writes or
rewrites articles. The editor is responsible for determining the layout
and order in which all articles appear in the newspaper's print and
online editions. She makes assignment and lay-out decisions in
coordination with several full-time editors who make similar decisions
with respect to different articles in the same publication and who are
employees of the newspaper.
(ii) Application. The editor is part of an integrated unit of
production of the newspaper because she is involved in the entire
production process of the newspaper, including assigning, reviewing,
drafting, and laying out articles. This factor points in the direction
of her being an employee of the newspaper. This conclusion is further
supported by the fact that the editor performs the same work as
employees of the newspaper in coordination with those employees. The
fact that she does not physically work at the newspaper's office does
not outweigh these more probative considerations of the integrated unit
factor.
(6)(i) Example. A journalist writes articles for a newspaper on a
freelance basis. The journalist does not have an office and generally
works from home. He submits an article to the newspaper once every 2 to
3 weeks, which the newspaper may accept or reject. The journalist
sometimes corresponds with the newspaper's editor regarding what to
write about or regarding revisions to the articles that he submits, but
he does not otherwise communicate or work with any of the newspaper's
employees. The journalist never assigns articles to others nor does he
review or revise articles that others submit. He is not responsible for
determining where his article or any other articles appear in the
newspaper's print and online editions.
(ii) Application. The journalist is not part of an integrated unit
of production of the newspaper, indicating independent contractor
status. His work is limited to the specific articles that he submits
and is completely segregated from other parts of the newspaper's
processes that serve its specific, unified purpose of producing
newspapers. It is not relevant in analyzing this factor that the
writing of articles is an important part of producing newspapers.
Likewise, the fact that he works at home does not strongly indicate
either status, because the nature of the journalist's work is such that
the physical location where it is performed is largely irrelevant.
Sec. 795.120 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 this part and shall not affect the remainder thereof.
[FR Doc. 2020-29274 Filed 1-6-21; 8:45 am]
BILLING CODE 4510-27-P