[Federal Register Volume 86, Number 86 (Thursday, May 6, 2021)]
[Rules and Regulations]
[Pages 24303-24326]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09518]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
========================================================================
Federal Register / Vol. 86, No. 86 / Thursday, May 6, 2021 / Rules
and Regulations
[[Page 24303]]
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
(FLSA): Withdrawal
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Final rule; withdrawal.
-----------------------------------------------------------------------
SUMMARY: This action finalizes the Department of Labor's proposal to
withdraw the rule titled Independent Contractor Status under the Fair
Labor Standards Act, which was published in the Federal Register on
January 7, 2021.
DATES: As of May 6, 2021, the final rule published January 7, 2021 at
86 FR 1168, and delayed on March 7, 2021 at 86 FR 12535 is withdrawn.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210; 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
or enforcement of the agency's existing regulations may be directed to
the nearest Wage and Hour Division (``WHD'') district office. Locate
the nearest office by calling the 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 log onto WHD's website at https://www.dol.gov/agencies/whd/contact/local-offices for a nationwide listing of WHD district and area
offices.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory and Legal Background
The Fair Labor Standards Act (``FLSA'' or ``Act'') requires all
covered employers to pay nonexempt employees at least the federal
minimum wage for every hour worked in a non-overtime workweek.\1\ In an
overtime workweek, for all hours worked in excess of 40 in a workweek,
covered employers must pay a nonexempt employee at least one and one-
half times the employee's regular rate.\2\ The FLSA also requires
covered employers to make, keep, and preserve certain records regarding
employees.\3\
---------------------------------------------------------------------------
\1\ 29 U.S.C. 206(a).
\2\ 29 U.S.C. 207(a).
\3\ 29 U.S.C. 211(c).
---------------------------------------------------------------------------
The FLSA's minimum wage and overtime pay requirements apply only to
employees.\4\ Section 3(e) generally defines ``employee'' to mean ``any
individual employed by an employer.'' \5\ Section 3(d) of the Act
defines ``employer'' to ``include[ ] any person acting directly or
indirectly in the interest of an employer in relation to an employee.''
\6\ Section 3(g) defines ``employ'' to ``include[ ] to suffer or permit
to work.'' \7\
---------------------------------------------------------------------------
\4\ See 29 U.S.C. 206 (minimum wage) and 207 (overtime pay).
\5\ 29 U.S.C. 203(e)(1).
\6\ 29 U.S.C. 203(d).
\7\ 29 U.S.C. 203(g).
---------------------------------------------------------------------------
The Supreme Court, in interpreting these definitions, has stated
that ``[a] broader or more comprehensive coverage of employees within
the stated categories would be difficult to frame,'' and that ``the
term `employee' had been given `the broadest definition that has ever
been included in any one act.' '' \8\ The Supreme Court has further
stated that the ``striking breadth'' of the FLSA's definition of
``employ''--``to suffer or permit to work''--``stretches the meaning of
`employee' to cover some parties who might not qualify as such under a
strict application of traditional agency law principles.'' \9\ Thus,
the FLSA expressly rejects the common law standard for determining
whether a worker is an employee.\10\
---------------------------------------------------------------------------
\8\ United States v. Rosenwasser, 323 U.S. 360, 362, 363 n.3
(1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Black)).
\9\ Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992).
\10\ See id.; Walling v. Portland Terminal Co., 330 U.S. 148,
150-51 (1947) (``But in determining who are `employees' under the
Act, common law employee categories or employer-employee
classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall
within an employer-employee category.'' (citation omitted)).
---------------------------------------------------------------------------
Though the FLSA's definition of employee is broader than the common
law definition, the Supreme Court has also recognized that the Act was
``not intended to stamp all persons as employees.'' \11\ The Supreme
Court has acknowledged that even a broad definition of employee ``does
not mean that all who render service to an industry are employees.''
\12\ One category of workers that has been recognized as being outside
the FLSA's broad definition of ``employees'' is ``independent
contractors.'' \13\ Courts have thus recognized a need to delineate
between employees, who fall under the protections of the FLSA, and
independent contractors, who do not.
---------------------------------------------------------------------------
\11\ Portland Terminal, 330 U.S. at 152; see also Rutherford
Food Corp. v. McComb, 331 U.S. 722, 729 (1947) (workers may not be
employees when their work does not ``in its essence . . . follow[ ]
the usual path of an employee'').
\12\ United States v. Silk, 331 U.S. 704, 712 (1947) (analyzing
the definition of employee under the Social Security Act).
\13\ Rutherford Food, 331 U.S. at 729 (``There 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.'').
---------------------------------------------------------------------------
The Supreme Court has repeatedly emphasized that the test for
whether an individual is an employee under the FLSA is one of
``economic reality.'' \14\ Under this test, the ``technical concepts''
used to label a worker as an employee or independent contractor do not
drive the analysis, but rather it is the economic realities of the
relationship between the worker and the employer that is
determinative.\15\
---------------------------------------------------------------------------
\14\ Tony & Susan Alamo Found. v. Sec'y of Labor, 471 U.S. 290,
301 (1985) (quoting Goldberg v. Whitaker House Coop., Inc., 366 U.S.
28, 33 (1961)).
\15\ Goldberg, 366 U.S. at 32-33.
---------------------------------------------------------------------------
In United States v. Silk, 331 U.S. 704, 712 (1947), an early case
applying an economic realities test under the Social Security Act, the
Supreme Court acknowledged that ``[p]robably it is quite impossible to
extract from the statute a rule of thumb'' regarding the
[[Page 24304]]
limits of the employment relationship.\16\ The Court suggested that
federal agencies and courts ``will find that degrees of control,
opportunities for profit or loss, investment in facilities, permanency
of relation and skill required in the claimed independent operation are
important for decision.'' \17\ The Court cautioned that no single
factor is controlling and that the list is not exhaustive.\18\ The
Court went on to note that the workers in that case were ``from one
standpoint an integral part of the businesses'' of the employer,
supporting a conclusion that some of the workers in that case were
employees.\19\
---------------------------------------------------------------------------
\16\ 331 U.S. at 716. At the time, the Supreme Court noted that
``[d]ecisions that define the coverage of the employer-[e]mployee
relationship under the Labor and Social Security acts are persuasive
in the consideration of a similar coverage under the Fair Labor
Standards Act.'' Rutherford Food Corp. v. McComb, 331 U.S. 722, 723-
23 (1947). However, Congress amended the Social Security Act in
1948.
\17\ 331 U.S. at 716.
\18\ See id.
\19\ Id.
---------------------------------------------------------------------------
The same day that the Supreme Court issued its decision in Silk, it
also issued Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947), in
which it affirmed a circuit court decision that analyzed an FLSA
employment relationship based on its economic realities.\20\ The Court
rejected an approach based on ``isolated factors'' and again considered
``the circumstances of the whole activity.'' \21\ The Court considered
several of the factors that it listed in Silk as they related to meat
boners on a slaughterhouse's production line, ultimately determining
that the boners were employees.\22\ The Court noted, among other
things, that the boners did a specialty job on the production line, had
no business organization that could shift to a different slaughter-
house, and were best characterized as ``part of the integrated unit of
production under such circumstances that the workers performing the
task were employees of the establishment.'' \23\
---------------------------------------------------------------------------
\20\ See Rutherford Food, 331 U.S. at 727.
\21\ Id. at 730.
\22\ See id.
\23\ Id. at 729-30.
---------------------------------------------------------------------------
Since Silk and Rutherford Food, federal courts of appeals have
applied the economic realities test to distinguish independent
contractors from employees who are entitled to the FLSA's protections.
Recognizing that the common law concept of ``employee'' had been
rejected for FLSA purposes, courts of appeals followed the Supreme
Court's instruction that ```employees are those who as a matter of
economic realities are dependent upon the business to which they render
service.' '' \24\
---------------------------------------------------------------------------
\24\ Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir.
1976) (quoting Bartels v. Birmingham, 332 U.S. 126, 130 (1947)).
---------------------------------------------------------------------------
All of the courts of appeals have followed the economic realities
test, and nearly all of them analyze the economic realities of an
employment relationship using the factors identified in Silk.\25\ No
court of appeals considers any factor or combination of factors to
universally predominate over the others in every case.\26\ For example,
the Ninth Circuit has explained that some of the factors ``which may be
useful in distinguishing employees from independent contractors for
purposes of social legislation such as the FLSA'' are: (1) The degree
of the employer's right to control the manner in which the work is to
be performed; (2) the worker's opportunity for profit or loss depending
upon his or her managerial skill; (3) the worker's investment in
equipment or materials required for his or her task, or employment of
helpers; (4) whether the service rendered requires a special skill; (5)
the degree of permanence of the working relationship; and (6) whether
the service rendered is an integral part of the employer's
business.\27\ The Ninth Circuit repeated the Supreme Court's
instruction that no individual factor is conclusive and that the
ultimate determination depends upon the circumstances of the whole
activity.\28\
---------------------------------------------------------------------------
\25\ See Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d
668, 675 (1st Cir. 1998); Brock v. Superior Care, Inc., 840 F.2d
1054, 1058-59 (2d Cir. 1988); Donovan v. DialAmerica Mktg., Inc.,
757 F.2d 1376, 1382-83 (3d Cir. 1985); McFeeley v. Jackson Street
Entm't, LLC, 825 F.3d 235, 241 (4th Cir. 2016); Acosta v. Off Duty
Police Services, Inc., 915 F.3d 1050, 1055 (6th Cir. 2019);
Secretary of Labor, U.S. Dep't of Labor v. Lauritzen, 835 F.2d 1529,
1534 (7th Cir. 1987); Karlson v. Action Process Service & Private
Investigation, LLC, 860 F.3d 1089, 1092 (8th Cir. 2017); Real v.
Driscoll Strawberry Associates, Inc., 603 F.2d 748, 754 (9th Cir.
1979); Acosta v. Paragon Contractors Corp., 884 F.3d 1225, 1235
(10th Cir. 2018); Scantland v. Jeffry Knight, Inc., 721 F.3d 1308,
1311 (11th Cir. 2013); Morrison v. Int'l Programs Consortium, Inc.,
253 F.3d 5, 11 (D.C. Cir. 2001).
\26\ See, e.g., Parrish v. Premier Directional Drilling, L.P.,
917 F.3d 369, 380 (5th Cir. 2019) (stating that it ``is impossible
to assign to each of these factors a specific and invariably applied
weight'' (citation omitted)); Martin v. Selker Bros., 949 F.2d 1286,
1293 (3d Cir. 1991) (``It is a well-established principle that the
determination of the employment relationship does not depend on
isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.''); Scantland, 721 F.3d at 1312
n.2 (observing that the relative weight of each factor ``depends on
the facts of the case'').
\27\ Real, 603 F.2d at 754.
\28\ See id.
---------------------------------------------------------------------------
Some courts of appeals have applied the factors with some
variations. For example, the Fifth Circuit typically does not list the
``integral'' factor as one of the considerations that guides the
analysis.\29\ Nevertheless, the Fifth Circuit--recognizing that the
listed factors are not exhaustive--has considered the extent to which a
worker's function is integral to a business as part of its economic
realities analysis.\30\ The Second Circuit varies in that it treats the
employee's opportunity for profit or loss and the employee's investment
as a single factor, but it still uses the same considerations as the
other circuits to inform its economic realities analysis.\31\
---------------------------------------------------------------------------
\29\ See Usery, 527 F.2d at 1311.
\30\ See Hobbs v. Petroplex Pipe and Constr., Inc., 946 F.3d
824, 836 (5th Cir. 2020).
\31\ See, e.g., Franze v. Bimbo Bakeries USA, Inc., 826 F. App'x
74, 76 (2d Cir. 2020).
---------------------------------------------------------------------------
In sum, since the 1940s, federal courts have consistently analyzed
the question of employee status under the FLSA by examining the
economic realities of the employment relationship to determine whether
the worker is dependent on the employer for work or is in business for
him or herself.\32\ In doing so, courts have looked to the six factors
first articulated in Silk as useful guideposts while acknowledging that
those factors are not exhaustive and should not be applied
mechanically.\33\
---------------------------------------------------------------------------
\32\ See, e.g., Franze, 826 F. App'x at 76; Razak v. Uber
Techs., Inc., 951 F.3d 137, 142-43 (3d Cir. 2020) (cert. pet. filed
Apr. 8, 2021); Gilbo v. Agment, LLC, 831 F. App'x 772, 775 (6th Cir.
2020).
\33\ See, e.g., Superior Care, 840 F.2d at 1054.
---------------------------------------------------------------------------
B. Prior Wage and Hour Division Guidance
Since at least 1954, the Wage and Hour Division (WHD) has applied
variations of this multifactor analysis when considering whether a
worker is an employee under the FLSA or an independent contractor.\34\
In a guidance document issued 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.'' \35\ Like the courts, WHD has consistently
applied a multifactor economic realities analysis when determining
whether a worker is an employee under the FLSA or an independent
contractor.\36\
---------------------------------------------------------------------------
\34\ See WHD Opinion Letter (Aug. 13, 1954) (applying six
factors very similar to the six economic realities factors currently
used by courts of appeals).
\35\ WHD Opinion Letter FLSA-795 (Sept. 30, 1964).
\36\ See, e.g., 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).
---------------------------------------------------------------------------
[[Page 24305]]
The Department's primary sub-regulatory guidance addressing this
topic, WHD Fact Sheet #13, ``Employment Relationship Under the Fair
Labor Standards Act (FLSA),'' similarly states that, when determining
whether an employment relationship exists under the FLSA, the test is
the ``economic reality'' rather than an application of ``technical
concepts,'' and that status ``is not determined by common law standards
relating to master and servant.'' \37\ 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.'' The fact sheet identifies seven economic realities factors;
in addition to factors that are similar to the six factors used by the
federal courts of appeals and discussed above, it also identifies the
worker's ``degree of independent business organization and operation.''
The fact sheet identifies certain other factors that are immaterial to
determining whether a worker is an employee covered under the FLSA or
independent contractor, including the place where work is performed,
the absence of a formal employment agreement, and whether an alleged
independent contractor is licensed by a State or local government.\38\
---------------------------------------------------------------------------
\37\ WHD Fact Sheet #13 (July 2008) is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf (last
visited April 28, 2021).
\38\ WHD maintains additional sub-regulatory guidance addressing
whether a worker is an employee or independent contractor under the
FLSA. For example, WHD's Field Operations Handbook, in its section
titled ``Test of the employment relationship,'' cross-references
Fact Sheet #13. See section 10b05 of Chapter 10 (``FLSA Coverage:
Employment Relationship, Statutory Exclusions, Geographical
Limits'') of WHD's Field Operations Handbook, available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/FOH_Ch10.pdf (last
visited April 28, 2021); see also https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/misclassification-facts.pdf (last visited
April 28, 2021). And the section of WHD's elaws Advisor compliance-
assistance materials addressing independent contractors provides
guidance very similar to that of Fact Sheet #13. See https://webapps.dol.gov/elaws/whd/flsa/scope/ee14.asp (last visited April
28, 2021).
---------------------------------------------------------------------------
In 1969 and 1972, WHD promulgated regulations relevant to specific
industries after Congress amended the FLSA to change the way it applied
to those industries.\39\ Those regulations applied a multifactor
analysis under the FLSA for determining whether a worker is an employee
or independent contractor in those specific contexts.\40\ Further, WHD
promulgated a regulation in 1997 applying a multifactor economic
realities analysis for distinguishing between employees and independent
contractors under the Migrant and Seasonal Agricultural Worker
Protection Act (MSPA).\41\
---------------------------------------------------------------------------
\39\ See 37 FR 12084 (explaining that Part 780 was revised in
order to adapt to the changes made by the Fair Labor Standards
Amendments of 1966 (80 Stat. 830) and implementing 29 CFR 780.330(b)
to apply a six-factor economic realities test to determine whether a
sharecropper or tenant is an employee under the Act or an
independent contractor); 34 FR 15794 (explaining that Part 788 was
revised in order to adapt to the changes made by the 1966 Amendments
and implementing 29 CFR 788.16(a) to apply a six-factor economic
realities test to determine whether workers in certain forestry and
logging operations are employees under the Act or independent
contractors).
\40\ See id.
\41\ See 62 FR 11734 (amending 29 CFR 500.20(h)(4)).
---------------------------------------------------------------------------
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).\42\ AI 2015-1
reiterated that the economic realities of the relationship are
determinative and that the ultimate inquiry is whether the worker is
economically dependent on the employer or truly in business for him or
herself. It identified six economic realities factors that followed the
six factors used by most federal courts of appeals: (1) The extent to
which the work performed is an integral part of the employer's
business; (2) the worker's opportunity for profit or loss depending on
his or her managerial skill; (3) the extent of the relative investments
of the employer and the worker; (4) whether the work performed requires
special skills and initiative; (5) the permanency of the relationship;
and (6) the degree of control exercised or retained by the employer. AI
2015-1 further emphasized that the factors should not be applied in a
mechanical fashion and that no one factor was determinative. AI 2015-1
was withdrawn on June 7, 2017.\43\
---------------------------------------------------------------------------
\42\ AI 2015-1 is available at 2015 WL 4449086.
\43\ See News Release 17-0807-NAT, ``US Secretary of Labor
Withdraws Joint Employment, Independent Contractor Informal
Guidance'' (Jun. 7, 2017), available at https://www.dol.gov/newsroom/releases/opa/opa20170607 (last visited April 28, 2021).
---------------------------------------------------------------------------
In 2019, WHD issued an opinion letter, FLSA2019-6, regarding
whether workers who worked for companies operating self-described
``virtual marketplaces'' were employees covered under the FLSA or
independent contractors.\44\ Like WHD's prior guidance, the letter
stated that the determination depended on the economic realities of the
relationship and that the ultimate inquiry was whether the workers
depend on someone else's business or are in business for
themselves.\45\ The letter identified six economic realities factors
that differed slightly from the factors typically articulated by WHD
previously: (1) The nature and degree of the employer's control; (2)
the permanency of the worker's relationship with the employer; (3) the
amount of the worker's investment in facilities, equipment, or helpers;
(4) the amount of skill, initiative, judgment, and foresight required
for the worker's services; (5) the worker's opportunities for profit or
loss; and (6) the extent of the integration of the worker's services
into the employer's business.\46\ Opinion Letter FLSA2019-6 was
withdrawn for further review on February 19, 2021.\47\
---------------------------------------------------------------------------
\44\ See WHD Opinion Letter FLSA2019-6, 2019 WL 1977301 (Apr.
29, 2019) (withdrawn February 19, 2021).
\45\ See id. at *3.
\46\ See id. at *4.
\47\ See note at https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited April 28, 2021).
---------------------------------------------------------------------------
C. The January 2021 Independent Contractor Rule
On January 7, 2021, the Department published a final rule titled
``Independent Contractor Status Under the Fair Labor Standards Act''
with an effective date of March 8, 2021 (Independent Contractor Rule or
Rule).\48\ The Independent Contractor Rule would have introduced into
Title 29 of the Code of Federal Regulations a new part (Part 795)
titled ``Employee or Independent Contractor Classification under the
Fair Labor Standards Act'' that would have provided a new generally
applicable interpretation of employee or independent contractor status
under the FLSA.\49\ The Rule would also have revised WHD's prior
interpretations of independent contractor status in 29 CFR 780.330(b)
and 29 CFR 788.16(a), both of which apply in limited contexts.\50\
---------------------------------------------------------------------------
\48\ See 86 FR 1168. WHD had published a notice of proposed
rulemaking requesting comments on a proposal. See 85 FR 60600 (Sept.
25, 2020). The final rule adopted ``the interpretive guidance set
forth in [that proposal] largely as proposed.'' 86 FR 1168.
\49\ See 86 FR 1168.
\50\ See id.
---------------------------------------------------------------------------
[[Page 24306]]
The Independent Contractor Rule explained that its purpose was to
establish an economic realities test that improved on prior
articulations that the Rule viewed as ``unclear and unwieldy.'' \51\ It
stated that the existing economic realities test applied by WHD and
courts suffered from confusion regarding the meaning of ``economic
dependence,'' a lack of focus in the multifactor balancing test, and
confusion and inefficiency caused by overlap between the factors.\52\
The Rule explained that the shortcomings and misconceptions associated
with the test were more apparent in the modern economy and that
additional regulatory clarity would promote innovation in work
arrangements.\53\
---------------------------------------------------------------------------
\51\ 86 FR 1172.
\52\ 86 FR 1172-75.
\53\ See 86 FR 1175.
---------------------------------------------------------------------------
The Independent Contractor Rule further explained that under the
FLSA, independent contractors are not employees and are therefore not
subject to the Act's minimum wage, overtime pay, or recordkeeping
requirements.\54\ The Rule would have applied an ``economic
dependence'' test under which a worker is an employee of an employer if
that worker is economically dependent on the employer for work and is
an independent contractor if that worker is in business for him or
herself.\55\
---------------------------------------------------------------------------
\54\ See 86 FR 1246 (Sec. 795.105(a)).
\55\ See 86 FR 1246 (Sec. 795.105(b)).
---------------------------------------------------------------------------
The Rule's new economic realities test would have identified five
economic realities factors to guide the inquiry into a worker's status
as an employee or independent contractor.\56\ These factors would not
have been exhaustive, and additional factors would have been considered
if they ``in some way indicate[d] whether the [worker was] in business
for him- or herself, as opposed to being economically dependent on the
potential employer for work.'' \57\ Under the Rule's economic realities
test, no one factor would have been dispositive, but two of the
identified factors were designated as ``core factors'' that would have
carried greater weight in the analysis. If both of those factors
indicated the same classification, as either an employee or an
independent contractor, there would have been a ``substantial
likelihood'' that the classification indicated by those factors was the
worker's correct classification.\58\ In support of this elevation of
two core factors, the Rule noted that the Department had conducted a
review of appellate case law since 1975, and this review indicated that
courts of appeals had effectively been affording the control and
opportunity factors greater weight.\59\
---------------------------------------------------------------------------
\56\ See 86 FR 1246 (Sec. 795.105(c)).
\57\ 86 FR 1246-47 (Sec. Sec. 795.105(c) & (d)(2)(iv)).
\58\ 86 FR 1246 (Sec. 795.105(c)).
\59\ 86 FR 1198.
---------------------------------------------------------------------------
The first core factor was the nature and degree of control over the
work, which would have indicated independent contractor status to the
extent that the worker exercised 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.\60\ Under the Rule's analysis, requiring the worker 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) would not have constituted control.\61\
---------------------------------------------------------------------------
\60\ See 86 FR 1246-47 (Sec. 795.105(d)(1)(i)).
\61\ See id.
---------------------------------------------------------------------------
The second core factor was the worker's opportunity for profit or
loss.\62\ This factor would have weighed towards the worker being an
independent contractor to the extent the worker has an opportunity to
earn profits or incur losses based on either his or her exercise of
initiative (such as managerial skill or business acumen or judgment) or
his or her management of investment in or capital expenditure on, for
example, helpers or equipment or material to further the work.\63\
While the effects of the worker's exercise of initiative and management
of investment would both have been considered under this core factor,
the worker did not need to have an opportunity for profit or loss based
on both initiative and management of investment for this factor to have
weighed towards the worker being an independent contractor.\64\ This
factor would have weighed towards the worker being an employee to the
extent the worker is unable to affect his or her earnings or is only
able to do so by working more hours or faster.\65\
---------------------------------------------------------------------------
\62\ See 86 FR 1247 (Sec. 795.105(d)(1)(ii)).
\63\ See id.
\64\ See id.
\65\ See id.
---------------------------------------------------------------------------
The Rule would have also identified three other non-core factors:
The amount of skill required for the work, the degree of permanence of
the working relationship between the worker and the employer, and
whether the work is part of an integrated unit of production (which is
distinct from the concept of the importance or centrality of the
worker's work to the employer's business).\66\ The Rule would have
provided that these other factors would be ``less probative and, in
some cases, [would] not be probative at all'' and would be ``highly
unlikely, either individually or collectively, to outweigh the combined
probative value of the two core factors.'' \67\
---------------------------------------------------------------------------
\66\ See 86 FR 1247 (Sec. 795.105(d)(2)).
\67\ 86 FR 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------
The Rule would have further provided that the actual practice of
the parties involved is more relevant than what may be contractually or
theoretically possible.\68\ The Rule would also have provided five
examples illustrating how different factors informed the analysis.\69\
---------------------------------------------------------------------------
\68\ See 86 FR 1247 (Sec. 795.110).
\69\ See 86 FR 1247-48 (Sec. 795.115).
---------------------------------------------------------------------------
After publication of the Rule, WHD issued Opinion Letters FLSA2021-
8 and FLSA2021-9 on January 19, 2021 applying the Rule's analysis to
specific factual scenarios, and then withdrew those opinion letters on
January 26, 2021, explaining that the letters were issued prematurely
because they were based on a Rule that had yet to take effect.\70\
---------------------------------------------------------------------------
\70\ See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited April 28, 2021), noting the withdrawal of
Opinion Letters FLSA2021-8 and FLSA2021-9.
---------------------------------------------------------------------------
D. Delay of Rule's Effective Date
On February 5, 2021, the Department published a proposal to delay
the Independent Contractor Rule's effective date until May 7, 2021, 60
days after the original effective date of March 8, 2021.\71\ On March
4, 2021, after considering the approximately 1,500 comments received in
response to that proposal, the Department published a final rule
delaying the effective date of the Independent Contractor Rule as
proposed.\72\ The Department explained that the delay was consistent
with a January 20, 2021 memorandum from the Assistant to the President
and Chief of Staff, titled ``Regulatory Freeze Pending Review.'' \73\
The Department further explained that a delay would allow it additional
time to consider ``significant and complex'' issues associated with the
Rule, including whether the Rule effectuates the FLSA's purpose to
broadly cover workers as employees as well as the costs and benefits
attributed
[[Page 24307]]
to the Rule, including its effect on workers.\74\
---------------------------------------------------------------------------
\71\ See 86 FR 8326.
\72\ 86 FR 12535.
\73\ Id. (citing January 20, 2021 memo from the Assistant to the
President and Chief of Staff, titled ``Regulatory Freeze Pending
Review,'' 86 FR 7424).
\74\ Id. On March 26, 2021, a lawsuit was filed alleging that
the Department's final rule delaying the Independent Contractor
Rule's effective date did not comply with the Administrative
Procedure Act. See Coalition for Workforce Innovation v. Sec'y of
Labor (No. 1:21-cv-00130 E.D. Tex.).
---------------------------------------------------------------------------
E. Proposal To Withdraw
On March 12, 2021, the Department published a notice of proposed
rulemaking (NPRM) proposing to withdraw the Independent Contractor
Rule.\75\ The NPRM explained that the Department was considering
withdrawing the Independent Contractor Rule for several reasons. First,
the Rule's standard has never been used by any court or by WHD, and the
Department questioned whether the Rule is fully aligned with the FLSA's
text and purpose or case law describing and applying the economic
realities test. In particular, the NPRM noted that no court has, as a
general and fixed rule, elevated a subset of certain economic realities
factors above others, and there is no clear statutory basis for such a
predetermined weighting of the factors.\76\ Moreover, the NPRM
expressed concern that the Rule's emphasis on control and its recasting
of other factors typically considered by courts would improperly narrow
the facts to be considered in the application of the economic realities
test, contrary to the FLSA's more expansive conception of the
employment relationship contained in section 3(g) of the Act's
definition of ``employ'' as including ``to suffer or permit to work.''
\77\ As a matter of policy, the NPRM expressed concern that the Rule's
novel guidance would cause confusion or lead to inconsistent outcomes
rather than provide clarity or certainty,\78\ and asserted that the
Rule failed to fully consider the likely costs, transfers, and benefits
that could result from the Rule, particularly for affected workers who
might no longer receive the FLSA's wage and hour protections as an
independent contractor.\79\ Finally, the NPRM stated that withdrawing
the Independent Contractor Rule would not be disruptive because the
Rule has not yet taken effect.\80\
---------------------------------------------------------------------------
\75\ See 86 FR 14027.
\76\ See 86 FR 14031-32.
\77\ See 86 FR 14032-34.
\78\ See 86 FR 14034.
\79\ See 86 FR 14034-35.
\80\ See 86 FR 14035.
---------------------------------------------------------------------------
The Department sought comment on its NPRM to withdraw the
Independent Contractor Rule. The period for providing comment expired
on April 12, 2021.
II. Comments and Decision
The Department received 1,010 comments in response to the NPRM.\81\
Numerous state officials, members of Congress, labor unions, social
justice organizations, worker advocacy groups, and individual
commenters wrote in support of the Department's proposal to withdraw
the Independent Contractor Rule, including several hundred commenters
who submitted comments with similar template language. These commenters
expressed opposition to the Independent Contractor Rule predominantly
on the basis that, in their view, the Rule would have facilitated the
exploitation of workers reclassified or misclassified as independent
contractors as a consequence of the Rule. They also raised numerous
other legal and policy criticisms of the Rule, discussed in greater
detail below.
---------------------------------------------------------------------------
\81\ This figure includes a number of duplicate comments (i.e.,
identical comments submitted by the same requester) which appear to
have been submitted by mistake. The Department received
approximately 1,000 non-duplicative comments.
---------------------------------------------------------------------------
Numerous companies, trade associations, business advocacy
organizations, law firms, and individual commenters submitted comments
opposing the Department's proposal to withdraw the Independent
Contractor Rule, including several commenters who identified themselves
as current or former independent contractors. These commenters
generally supported the Independent Contractor Rule for, in their view,
providing a clearer and preferable analysis for determining employee or
independent contractor status, and they raised numerous other legal and
policy arguments in defense of the Rule (or in objection to the
proposed withdrawal), discussed in greater detail below.
The Department received a number of comments addressing issues that
are beyond the scope of this rulemaking to withdraw the Independent
Contractor Rule. For example, several commenters expressed opinions
related to the legal analysis for independent contractors under state
laws or federal laws other than the FLSA, such as the ``ABC'' test
generally used to evaluate independent contractor status under
California state law,\82\ or the ``PRO Act'' bill that would establish
a similar standard under National Labor Relations Act.\83\ As noted in
the NPRM, the Department did not propose regulatory guidance to replace
the guidance that the Independent Contractor Rule would have introduced
as Part 795, so commenter feedback addressing or suggesting such a
replacement or otherwise requesting that the Department adopt any
specific guidance if the Rule was withdrawn was considered outside the
scope of this rulemaking.\84\ Similarly, the Department received dozens
of comments addressing the merits of labor unions; however, this
rulemaking addresses whether to withdraw a rule that would have
provided a new analysis for determining whether a worker is an employee
or independent contractor for purposes of the FLSA, a wage and hour
statute that has no direct effect on collective bargaining rights.
---------------------------------------------------------------------------
\82\ See Assembly Bill (``A.B.'') 5, Ch. 296, 2019-2020 Reg.
Sess. (Cal. 2019) (codifying the ABC test for determining
independent contractor status articulated in Dynamex Operations W.,
Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018)); A.B. 2257, Ch. 38,
2019-2020 Reg. Sess. (Cal. 2020) (exempting certain additional
professions, occupations, and industries from the ABC test that A.B.
5 had codified).
\83\ See Protecting the Right to Organize Act of 2021, H.R. 842,
117th Cong. (2021) (introduced by Rep. Bobby Scott) and S. 420,
117th Cong. (2021) (introduced by Sen. Patty Murray).
\84\ 86 FR 14035.
---------------------------------------------------------------------------
Having considered the comments submitted in response to the NPRM,
the Department has decided to finalize the withdrawal of the
Independent Contractor Rule. The Department believes that the Rule is
inconsistent with the FLSA's text and purpose, and would have a
confusing and disruptive effect on workers and businesses alike due to
its departure from longstanding judicial precedent. The Department's
response to commenter feedback on specific aspects of the proposed
withdrawal is provided below.
A. The Rule's Standard Has Never Been Used by Any Court or by WHD, and
Is Not Supported by the Act's Text or Purpose or Judicial Precedent
Upon further review and consideration of the Rule and having
considered the public comments, the Department does not believe that
the Independent Contractor Rule is fully aligned with the FLSA's text
or purpose, or with decades of case law describing and applying the
multifactor economic realities test. The Department fully describes
below the rationale for its departure from the views expressed in the
prior Rule.\85\
---------------------------------------------------------------------------
\85\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515
(2009).
---------------------------------------------------------------------------
1. The Rule's Elevation of Control and Opportunity for Profit or Loss
as the ``Most Probative'' Core Factors in Determining Employee Status
Under the FLSA
For decades, WHD, consistent with case law, has applied a
multifactor
[[Page 24308]]
balancing test to assess whether the worker, as a matter of economic
reality, is economically dependent on the employer or is in business
for him or herself.\86\ Courts universally apply this analysis as well
and have explained that ``economic reality'' rather than ``technical
concepts'' is the test of employment under the FLSA.\87\ WHD and the
U.S. Courts of Appeals generally consider and balance the following
economic realities factors, derived from the Supreme Court's decisions
in Silk, 331 U.S. at 716, and Rutherford Food, 331 U.S. at 729-30: The
nature and degree of the employer's control over the work; the
permanency of the worker's relationship with the employer; the degree
of skill, initiative, and judgment required for the work; the worker's
investment in equipment or materials necessary for the work; the
worker's opportunity for profit or loss; whether the service rendered
by the worker is an integral part of the employer's business; and the
degree of independent business organization and operation.\88\
---------------------------------------------------------------------------
\86\ See, e.g., Fact Sheet #13 (July 2008), supra note 37.
\87\ Goldberg, 366 U.S. at 33; see also Tony & Susan Alamo, 471
U.S. at 301 (``The test of employment under the Act is one of
`economic reality.' '') (quoting Goldberg, 366 U.S. at 33).
\88\ See, e.g., Razak, 951 F.3d at 142-43; Karlson, 860 F.3d at
1092; Keller v. Miri Microsystems LLC, 781 F.3d 799, 807 (6th Cir.
2015); Lauritzen, 835 F.2d at 1534; Real, 603 F.2d at 754; Fact
Sheet #13 (July 2008), available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf (last visited April 28,
2021).
---------------------------------------------------------------------------
The Rule would have set forth a new articulation of the economic
realities test, elevating two factors (control and opportunity for
profit or loss) as ``core'' factors above the other factors, and
designating them as having greater probative value.\89\ The Rule would
have provided that only in ``rare'' cases would the other factors
outweigh the core factors.\90\ Notably, the Rule would have further
provided that if both core factors point towards the same
classification--that the worker is either an employee or an independent
contractor--then there would be a ``substantial likelihood'' that this
is the worker's correct classification.\91\ In addition, the preamble
to the Rule disagreed with court precedent that, as a general matter,
the economic realities test ``requires factors to be unweighted or
equally weighted.'' \92\ Although the Rule would have identified three
other factors as additional guideposts, it made clear that these
``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.'' \93\ Similarly, the Rule would have provided that unlisted
additional factors may be considered, but that they are ``unlikely to
outweigh either of the core factors.'' \94\ The Rule noted that
``[w]hile 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.'' \95\ Rather, the Rule would have
emphasized the control and opportunity for profit or loss factors as
more probative than other factors in determining whether an individual
is in business for him or herself, and would have provided that ``other
factors are less probative and may have little to no probative value in
some circumstances.'' \96\
---------------------------------------------------------------------------
\89\ 86 FR 1246-47 (Sec. 795.105(c) & (d)).
\90\ 86 FR 1201.
\91\ Id. at 1246 (Sec. 795.105(c)).
\92\ Id. at 1197.
\93\ Id. at 1246 (Sec. 795.105(c)).
\94\ Id. at 1197.
\95\ Id. at 1201 (internal quotation marks omitted).
\96\ Id. at 1202.
---------------------------------------------------------------------------
In the proposal to withdraw the Rule, the Department expressed
concern that no court has taken the Rule's approach in analyzing
whether a worker is an employee or an independent contractor under the
FLSA, that the Rule would mark a departure from WHD's own longstanding
approach, and that the Rule was in tension with the Act's text and
purpose.\97\ Among other things, the Department noted that the Rule's
elevation of only two factors may be inconsistent with the position,
expressed by the Supreme Court and federal courts of appeals, that no
single factor in the analysis is dispositive and that the totality-of-
the-circumstances must be considered.\98\
---------------------------------------------------------------------------
\97\ See 86 FR 14032-33.
\98\ See, e.g., Silk, 331 U.S. at 716 (explaining that ``[n]o
one [factor] is controlling'' in the economic realities test,
including ``degrees of control''); Parrish, 917 F.3d at 380 (stating
that it ``is impossible to assign to each of these factors a
specific and invariably applied weight'' (citation omitted)); Selker
Bros., 949 F.2d at 1293 (``It is a well-established principle that
the determination of the employment relationship does not depend on
isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.''); Dole v. Snell, 875 F.2d 802,
805 (10th Cir. 1989) (``It is well established that no one of these
factors in isolation is dispositive; rather, the test is based upon
a totality of the circumstances.'').
---------------------------------------------------------------------------
Multiple commenters who supported withdrawal of the Rule criticized
the Rule's focus on only two factors as departing from the Act's text
and purpose, as well as relevant case law. The AFL-CIO, for example,
noted that by focusing on control and opportunity for profit or loss,
the Rule ``would, in practice, adopt the common law standard contrary
to congressional intent and Supreme Court precedent.'' The American
Federation of State, County, and Municipal Employees (AFSCME) agreed
that there is no reason to elevate the ``control'' factor above others,
and a coalition of State Attorneys General and other officials (``State
Officials'') commented that this prioritization of only two factors
``jettisoned the definition of employment that flexibly accounts for
the full details of a working relationship, as decades of precedent
require.'' The Northwest Workers Justice Project asserted that the
Department's Rule would administratively amend the FLSA by placing
``undue weight on two factors'' and that the Rule also narrowed those
two factors in a way that would undermine the Act's statutory intent
and that is in tension with judicial precedent; Rep. Grace Napolitano
added that the Rule's weighting of two factors conflicted with
congressional intent. The Women's Law Project concurred that by
according greater weight to only two factors instead of allowing the
economic realities test to continue to be applied as a balancing test,
the Rule was inconsistent with the intent of the Act and judicial and
administrative precedent. Finally, the International Brotherhood of
Teamsters stated that by giving these two factors ``preeminent status''
over the other factors, the Rule ``would make it more difficult for
workers to prove they are employees.''
Commenters opposed to withdrawal of the Rule generally supported
giving two core factors greater weight in the analysis. For example,
the American Bakers Association noted approvingly the Rule's
determination that the control and opportunity for profit or loss
factors should be afforded greater weight because this weighting of the
factors would be consistent with the outcomes of prior court decisions
applying an economic realities analysis. The Owner-Operator Independent
Drivers Association also shared its support of the Rule's ``decision to
afford the `control' and `opportunity for profit or loss' factors
greater weight in the classification determination.'' Relatedly,
commenters such as the Coalition to Promote Independent Entrepreneurs
stated that the additional weight accorded to these two factors was not
intended to alter the economic realities analysis but rather reflected
the Department's review of prior court decisions applying the test, and
thus there is no inconsistency between this position and the
longstanding Supreme Court tenet that no single factor be dispositive.
Other commenters
[[Page 24309]]
supported the elevation of two core factors because it would improve
clarity. Cambridge Investment Research, for instance, stated that ``the
enhanced focus on the two core factors elucidates the test review
process, reduces inaccurate classifications and decreases associated
litigation,'' and the Center for Workplace Compliance agreed that the
use of two core factors would simplify the analysis. The Texas Policy
Foundation similarly commented that ``[r]ather than analyzing a non-
exhaustive list of six factors, the Independent Contractor Rule allows
employers to focus on two core factors regarding how workers should be
classified.''
After careful consideration of the comments received, the
Department believes that elevating two factors of the multifactor
economic realities analysis above all others is in conflict with the
Act, congressional intent, and longstanding judicial precedent. The
Department and courts recognize, as they have since the Act's
inception, that the cornerstone of the FLSA is the Act's broad
definition of ``employ,'' which provides that an employee under the Act
includes any individual whom an employer suffers, permits, or otherwise
employs to work.\99\ Rather than being derived from the common law of
agency, the FLSA's definition of ``employ'' and its ``suffer or
permit'' language originally came from state laws regulating child
labor.\100\ This standard was intended to expand coverage beyond
employers who control the means and manner of performance to include
entities who ``suffer'' or ``permit'' work.\101\ The FLSA's breadth in
defining the employment relationship, as well as its clear remedial
purpose, comes from the statutory text itself as well as the
legislative history.\102\ This standard ``stretches the meaning of
`employee' [under the FLSA] to cover some parties who might not qualify
as such under a strict application of traditional agency law
principles.'' \103\ The FLSA's overarching inquiry of economic
dependence thus establishes a broader scope of employment than that
which exists under the common law of agency and evinces Congress's
intent to ``protect all covered workers from substandard wages and
oppressive working hours.'' \104\ Altering the focus of this analysis
to two ``core'' factors--particularly the control factor, as discussed
below--risks excluding or misclassifying workers whose FLSA employment
status is established under other facts that demonstrate that they are
economically dependent on an employer and not in business for
themselves.
---------------------------------------------------------------------------
\99\ See 29 U.S.C. 203(e)(1), (g).
\100\ See Rutherford Food, 331 U.S. at 728 & n.7.
\101\ See generally People ex rel. Price v. Sheffield Farms-
Slawson-Decker Co., 225 N.Y. 25, 29-31 (N.Y. 1918).
\102\ See 29 U.S.C. 202, 203(e)(1), (g); Rosenwasser, 323 U.S.
at 362, 363 n.3 (quoting statement of Senator Black from 81 Cong.
Rec. 7657 that ``the term `employee' had been given `the broadest
definition that has ever been included in any one act' ''); see
also, e.g., Parrish, 917 F.3d at 378 (``Given the remedial purposes
of the [FLSA], an expansive definition of `employee' has been
adopted by the courts.'' (citation omitted)); Off Duty Police, 915
F.3d at 1054-55 (noting, directly under the heading ``Employment
Relationship,'' that ``[t]he FLSA is `a broadly remedial and
humanitarian statute . . . designed to correct labor conditions
detrimental to the maintenance of the minimum standard of living
necessary for health, efficiency, and general well-being of workers'
'' (quoting Donovan v. Brandel, 736 F.2d 1114, 1116 (6th Cir. 1984)
(some internal quotation marks omitted)). The FLSA's broad scope of
employment, broader than the common law, was not changed by the
Supreme Court's decision in Encino Motorcars, LLC v. Navarro, 138 S.
Ct. 1134 (2018), which explained that the Act's statutory exemptions
should be interpreted fairly because there is no textual indication
that the exemptions should be construed narrowly. See 138 S. Ct. at
1142. Here, the Act's definition of ``employ'' as including ``to
suffer or permit to work'' gives a clear textual basis for the
breadth of employment under the FLSA. 29 U.S.C. 203(g); see Off Duty
Police, 915 F.3d at 1062 (``[T]hese [economic reality] factors must
be balanced in light of the FLSA's strikingly broad definition of
employee.'' (quotations and citation omitted)).
\103\ Darden, 503 U.S. at 326; see also Portland Terminal, 330
U.S. at 150 (in determining employee status under the FLSA, ``common
law employee categories or employer-employee classifications under
other statutes are not of controlling significance'').
\104\ Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S.
728, 739 (1981).
---------------------------------------------------------------------------
Moreover, upon further review of the case law, the Department is
not aware of any court that has, as a general and fixed rule, elevated
a subset of the economic realities factors above the other factors in
all cases, and there is no clear statutory basis for such a
predetermined weighting of the factors. Rather, the Department is
cognizant of the voluminous case law that emphasizes that it ```is
impossible to assign to each of these factors a specific and invariably
applied weight.' '' \105\ Undeniably, courts have refused to assign
universal and predetermined weights to certain factors; rather, courts
stress that the analysis must consider the totality of the
circumstances and neither the presence nor absence of any particular
factor is dispositive.\106\
---------------------------------------------------------------------------
\105\ Parrish, 917 F.3d at 380 (quoting Hickey v. Arkla Indus.,
Inc., 699 F.2d 748, 752 (5th Cir. 1983)); see also Scantland, 721
F.3d at 1312 n.2 (observing that the relative weight of each factor
``depends on the facts of the case''); Silk, 331 U.S. at 716
(rejecting ``a rule of thumb to define the limits of the employer-
employee relationship'' immediately before providing an incomplete
list of factors considered ``important for decision'').
\106\ See Razak, 951 F.3d at 143 (citing DialAmerica Mktg., 757
F.2d at 1382); see also McFeeley, 825 F.3d at 241 (``While a six-
factor test may lack the virtue of providing definitive guidance to
those affected, it allows for flexible application to the myriad
different working relationships that exist in the national economy.
In other words, the court must adapt its analysis to the particular
working relationship, the particular workplace, and the particular
industry in each FLSA case.''); Ellington v. City of East Cleveland,
689 F.3d 549, 555 (6th Cir. 2012) (``This `economic reality'
standard, however, is not a precise test susceptible to formulaic
application. . . . It prescribes a case-by-case approach, whereby
the court considers the `circumstances of the whole business
activity.' '') (quoting Brandel, 736 F.2d at 1116); Morrison v.
Int'l Programs Consortium, Inc., 253 F.3d 5, 11 (D.C. Cir. 2001)
(``No one factor standing alone is dispositive and courts are
directed to look at the totality of the circumstances and consider
any relevant evidence.''); Superior Care, 840 F.2d at 1059 (``No one
of these factors is dispositive; rather, the test is based on a
totality of the circumstances. . . . Since the test concerns the
totality of the circumstances, any relevant evidence may be
considered, and mechanical application of the test is to be
avoided.''); Lauritzen, 835 F.2d at 1534 (``Certain criteria have
been developed to assist in determining the true nature of the
relationship, but no criterion is by itself, or by its absence,
dispositive or controlling.''); Hickey, 699 F.2d at 752 (``It is
impossible to assign to each of these factors a specific and
invariably applied weight.''); Usery, 527 F.2d at 1311-12 (``No one
of these considerations can become the final determinant, nor can
the collective answers to all of the inquiries produce a resolution
which submerges consideration of the dominant factor--economic
dependence.'').
---------------------------------------------------------------------------
Regarding the Department's review of certain appellate case law in
the Rule discussed by some commenters, the Department believes that
upon further consideration, this summary of appellate case law is
incomplete, oversimplifies the analysis provided by the courts, and
makes assumptions about the reasoning behind the courts' decisions that
are not necessarily clear from the decisions themselves.\107\ The
Rule's discussion of the review was incomplete because the Department
did not provide full documentation or citations for its case law
review. In addition, it was not made clear in the Rule what the scope
of the review entailed (e.g., whether it included only published
circuit court decisions or all cases, whether it included cases that
were simply remanded to the district court for any reason, etc.).\108\
The review oversimplified the analysis provided by the courts because
court decisions regarding classification under the FLSA often emphasize
the fact-specific nature of the totality of circumstances analysis and
do not parse out each factor like a
[[Page 24310]]
checklist.\109\ As the Third Circuit, for example, recently reiterated,
neither the presence nor absence of any particular factor is
dispositive, and courts should examine the circumstances of the whole
activity, which is how courts commonly approach this analysis.\110\
Mechanically deconstructing court decisions and considering what courts
have said about only two factors, even when courts did present their
analyses in this manner, ignores the holistic approach that most courts
have taken in determining worker classification.
---------------------------------------------------------------------------
\107\ See 86 FR 1196-98.
\108\ See 86 FR 1198 (stating ``[a]mong the appellate decisions
since 1975 that the Department reviewed . . .'' and thus indicating
that the universe may have been limited in some capacity that is not
noted in the Rule).
\109\ The economic realities factors ultimately assess whether
the worker is economically dependent on the employer or in business
for him/herself. See, e.g., Parrish, 917 F.3d at 380 (``[T]he focus
is on an assessment of the economic dependence of the putative
employees, the touchstone for this totality of the circumstances
test.'') (internal quotation marks and citation omitted); Keller,
781 F.3d at 807 (``[W]e address each factor with an eye toward the
ultimate question--[the worker's] economic dependence on or
independence from [the employer].''); Scantland, 721 F.3d at 1312
(the economic realities factors ``serve as guides, [and] the
overarching focus of the inquiry is economic dependence'').
\110\ See Razak, 951 F.3d at 143 (citing DialAmerica Mktg., 757
F.2d at 1382).
---------------------------------------------------------------------------
Most significantly, the Rule's assertion about the case law makes
assumptions about the courts' decisions that are not part of the
courts' reasoning--the Rule did not identify any court opinion that
states that control and opportunity for profit or loss should be
invariably prioritized over other factors as the Rule would have done,
and there is therefore no basis to suggest that the case law endorses
this ``core factor'' analysis. The Rule stated that ``[t]he
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.''
\111\ The Department should not have replaced the courts' analyses
based on the theory that they were actually setting forth an unstated,
different analysis, especially when courts expressly stated that they
were applying a multifactor, holistic analysis. Ultimately, these cases
were decided based on the application of the economic realities test to
their facts, and different facts produce different results. As Saleem--
a case relied upon heavily in the Rule--made clear, courts identify the
most probative facts for that particular case and rely on them in
reaching an outcome, and the factual differences do not need to be
great to produce a different result.\112\ The case law reflects that,
rather than prioritizing certain factors as the Rule contended, courts
have explicitly explained that the determination of the relationship
depends on ``the circumstances of the whole activity.'' \113\
---------------------------------------------------------------------------
\111\ 86 FR 1198. The Rule further hypothesized that ``[i]n
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.'' Id.
\112\ Saleem, 854 F.3d at 149 (``We conclude only that assessing
the totality of the circumstances here in light of each Silk factor,
undisputed evidence makes clear as a matter of law that these
Plaintiffs were not employees of these Defendants. In a different
case, and with a different record, an entity that exercised similar
control over clients, fees, and rules enforcement in ways analogous
to the Defendants here might well constitute an employer within the
meaning of the FLSA.'') (emphasis in original).
\113\ Rutherford Food, 331 U.S. at 730.
---------------------------------------------------------------------------
While there are certainly many cases in which the classification
decision made by the court aligns with the classification indicated by
the control and opportunity for profit and loss factors, the Rule
concedes that there are cases in which the classification suggested by
the control factor did not align with the worker's classification as
determined by the courts.\114\ The Rule also stated in a footnote,
regarding the opportunity factor, that ``[t]his 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.'' \115\ The Rule did
not, however, identify any cases stating that the opportunity for
profit or loss factor should be determinative or more probative of a
worker's classification than other factors. Additionally, it is
necessarily the case that if any two factors of a multifactor balancing
test point toward the same outcome, then that outcome becomes
increasingly likely to be the ultimate outcome; however, there was no
analysis provided in the Rule regarding whether a different combination
of factors would yield similar results.
---------------------------------------------------------------------------
\114\ 86 FR 1197.
\115\ Id. at 1197, n.44.
---------------------------------------------------------------------------
While the Department is always seeking to improve clarity for
workers and employers, the Rule's formulaic and mechanical weighting of
factors is precisely what courts have cautioned against for decades in
applying an economic reality analysis.\116\ This is because a true
balancing test that properly considers the totality of circumstances by
definition does not mechanically elevate certain factors, and doing so
would impermissibly narrow the Act's broad definition of ``employ.''
For example, if facts relevant to the control and opportunity for
profit or loss factors both point to independent contractor status for
a particular worker but weakly so, those factors should not be presumed
to carry more weight than stronger factual findings under other factors
(e.g., the existence of a lengthy and exclusive working relationship
under the ``permanence'' factor, the performance of work at the very
heart of the potential employer's business under the ``integral''
factor, etc.). Courts and the Department may focus on some relevant
factors more than others when analyzing a particular set of facts and
circumstances, but that does not mean that it is possible or
permissible to derive from these fact-driven decisions universal rules
regarding which factors deserve more weight than the others when the
courts themselves have not set forth any such universal rules despite
decades of opportunity.
---------------------------------------------------------------------------
\116\ The Supreme Court has been clear that there is no single
factor that is determinative, see Rutherford Food, 331 U.S. at 730,
nor is there any ``mathematical formula'' to be applied, Antenor v.
D & S Farms, 88 F.3d 925, 933 (11th Cir. 1996). Furthermore,
``courts have found economic dependence under a multitude of
circumstances where the alleged employer exercised little or no
control or supervision over the putative employees.'' Antenor, 88
F.3d at 933 (citations omitted). Courts of appeals have cautioned
against any ``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 v. Cornerstone America, 545 F.3d 338, 343 (5th Cir.
2008).
---------------------------------------------------------------------------
Further, the Rule's reliance on how courts assessed the control and
opportunity for profit or loss factors in the past is inapposite here,
because, as discussed below, the Rule would have significantly altered
both of these factors, changing what may be considered for each. For
example, the Rule would have downplayed the employer's right to control
the work and recast the opportunity for profit or loss factor as
indicating independent contractor status based on the worker's
initiative or investment.\117\ In other words, even if courts had
generally relied upon control and opportunity for profit or loss in
prior cases, the new framing of these factors, as redefined in the
Rule, nevertheless sets forth a new analysis without precedent.
---------------------------------------------------------------------------
\117\ See 86 FR 1246-47 (Sec. Sec. 795.105(d)(1)(i)-(ii),
795.110).
---------------------------------------------------------------------------
Accordingly, the Department agrees with the view expressed by
numerous commenters that the Rule's elevation of the control and
opportunity for profit or loss factors is in tension with the language
and purpose of the Act as well as the position, expressed by the
Supreme Court and in appellate cases from across the circuits, that no
single factor is determinative in the analysis of
[[Page 24311]]
whether a worker is an employee or independent contractor.
2. The Role of Control in the Rule's Analysis
As explained above, the Independent Contractor Rule would have
identified the nature and degree of control over the work as one of the
two ``core factors'' meant to carry ``greater weight in the analysis.''
\118\ According to the Rule, ``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.'' \119\ The Rule addressed and rejected comments
which opined that focusing the analysis on two core factors--one of
which would be control--would narrow the analysis to a common law
control test.\120\
---------------------------------------------------------------------------
\118\ See 86 FR 1246-47 (Sec. 795.105(d)(1)). The worker's
opportunity for profit or loss would have been the other core
factor.
\119\ Id. at 1198 (citing 85 FR 60619).
\120\ See id. at 1200-01.
---------------------------------------------------------------------------
In the proposal to withdraw the Independent Contractor Rule, the
Department expressed concern that ``significant legal and policy
implications could result from making control one of only two factors
that would be ascribed greater weight'' and cited several Supreme Court
decisions stating that the FLSA's definition of ``employ'' means that
the scope of employment under the Act is broader than under a common
law control (i.e., agency) analysis.\121\ The Department questioned
whether, in light of this Supreme Court ``directive,'' ``the outsized--
even if not exclusive--role that control would have if the Rule's
analysis were to apply may be contrary to the Act's text and case
law.'' \122\
---------------------------------------------------------------------------
\121\ 86 FR 14033 (citing 29 U.S.C. 203(g); Darden, 503 U.S. at
326; Portland Terminal, 330 U.S. at 150-51; Rutherford Food, 331
U.S. at 728; Rosenwasser, 323 U.S. at 362-63).
\122\ Id.
---------------------------------------------------------------------------
Several commenters who supported the proposed withdrawal of the
Rule compared, and even equated, the Rule's elevation of control as a
``core'' factor with the adoption of a common law control test, a test
which is inconsistent with the FLSA's ``suffer or permit'' standard.
For example, AFSCME stated that, ``by elevating consideration of day-
to-day control as near-determinative, rather than one coequal factor
among six, the Department has formulated a standard aligned with, and
possibly more restrictive than, the common law employment test.'' The
State Officials asserted that the Independent Contractor Rule ``was
wrong not only to elevate any one relevant factor over another in an
assessment of a worker's economic reality, but also to elevate control
in particular'' because ``the FLSA uses an intentionally broad
definition of employment, which expands the statute's protections to a
class of workers greater than just those who would satisfy a common law
understanding of employment based largely on the degree of control.''
They added that the Rule's ``emphasis on control reverts back to the
common law standard'' and that ``this, too, requires withdrawal of the
[Rule].'' See also AFL-CIO (``Despite . . . clear Supreme Court
instructions to construe the definition of employee in the FLSA more
broadly than under the common law . . . , the [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.''); Representative Scott, et al.
(``Giving the control factor outsized weight under the Rule's test is
in direct conflict with congressional intent.'').
Many commenters who opposed the proposed withdrawal of the Rule
expressed general support for elevating control as a ``core'' factor
along with opportunity for profit or loss. For example, Capital
Investment Companies stated that the Rule ``properly focuses on the
control over the working relationship and the financial aspects of the
relationship.'' The Intermodal Association of North America commended
the Rule's adoption of a ``revised economic reality test, with a focus
on the nature and degree of the worker's control over their work and
the worker's opportunity for profit or loss.'' Commenters who opposed
the Rule's proposed withdrawal generally did not express concerns with
elevating control as one of two core factors for determining employee
or independent contractor status.
As an initial matter and as explained above, it is not legally
supportable to elevate in a predetermined and universal manner two
factors above the others. Moreover, having considered the issue and the
comments received, it is the Department's position that, in particular,
elevating control is contrary to the FLSA's text and its particular
scope of employment. As noted, the FLSA defines ``employ'' to include
``to suffer or permit to work.'' \123\ The Supreme Court has explained
that this FLSA definition was a rejection of the common law control
standard for determining who is an employee under the Act in favor of a
broader scope of coverage.\124\
---------------------------------------------------------------------------
\123\ 29 U.S.C. 203(g).
\124\ See Darden, 503 U.S. at 326 (``[T]he FLSA . . . defines
the verb `employ' expansively'' and with ``striking breadth'' that
``stretches the meaning of `employee' to cover some parties who
might not qualify as such under a strict application of traditional
agency law principles.'') (citations omitted); Portland Terminal,
330 U.S. at 150-51 (``But in determining who are `employees' under
the Act, common law employee categories or employer-employee
classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall
within an employer-employee category.'') (citations omitted); see
also Rutherford Food, 331 U.S. at 728 (``The definition of `employ'
is broad.''); Rosenwasser, 323 U.S. at 362-63 (``A broader or more
comprehensive coverage of employees . . . would be difficult to
frame.'').
---------------------------------------------------------------------------
Although the Rule's test was not the same as the common law control
test, the Rule's mandate that control have such an elevated role in
every FLSA employee or independent contractor analysis brought the Rule
too close to the common law test that the Act squarely rejects.
Accordingly, the outsized role that control would have played in the
analysis supports withdrawing the Rule.
3. The Rule's Narrowing of Several Factors
In its proposal to withdraw the Independent Contractor Rule, the
Department expressed concern that the ways in which the Rule would have
redefined certain factors would improperly narrow the application of
the economic realities test.\125\ The Department identified four
examples of such narrowing: (1) Making the ``opportunity for profit or
loss'' factor indicate independent contractor status based on the
worker's initiative or investment; (2) disregarding the employer's
investments; (3) disregarding the importance or centrality of a
worker's work to the employer's business; and (4) downplaying the
employer's right or authority to control the worker.\126\ In each of
these ways, the Rule would have narrowed the scope of facts and
considerations comprising the analysis of whether the worker is an
employee or independent contractor, eliminating several facts and
concepts that have deep roots in both the courts' and WHD's application
of the analysis.\127\ Moreover, the Department expressed concern that,
as a policy matter, the Rule's narrowing of the analysis would result
in more workers being classified as independent contractors not
entitled to the FLSA's protections, contrary to the Act's
[[Page 24312]]
purpose of broadly covering workers as employees.\128\
---------------------------------------------------------------------------
\125\ See 86 FR 14033-34.
\126\ See id.
\127\ See id. at 14034.
\128\ See id.
---------------------------------------------------------------------------
A number of commenters who supported withdrawal agreed that the
Rule would have impermissibly narrowed how the factors are applied. For
example, the National Employment Lawyers Association (NELA) and the
Women's Law Project stated that the ``words of the FLSA are
unrecognizable in [the Rule's] cramped reading of the law and its
adoption of entirely irrelevant factors, twisting of the meaning of
other factors, and narrowing of the measure of what it means to be an
employee.'' According to AFSCME, the Rule would have ``redefine[d]''
the factors, ``narrowing and confining the depth of each factor's
inquiry.'' The State Officials added that the Rule would have
``unreasonably exclude[d] relevant criteria from the determination of
whether a worker is covered by the FLSA'' and would not have considered
``the full details of a working relationship, as decades of precedent
require.'' The National Employment Law Project commented that the Rule
``describe[d] a set of narrow `core' factors taken from a cramped
version of the narrowly-scoped common law, which is not the test for
employment coverage under the FLSA, assert[ed] new factors never before
considered relevant by the courts, and prevent[ed] consideration of
factors that the Supreme Court has always deemed critical to
determining whether an employment relationship exists.''
Of the commenters who opposed the proposed withdrawal of the Rule,
the National Association of Home Builders supported the Rule's
``adopting a narrower `economic reality' test to determine a worker's
status as an FLSA employee or an independent contractor'' and
``reject[ed] the contention and justification offered as support for
withdrawing the [Rule].'' Other commenters disputed the Department's
concern that the Rule would narrow the application or the factors and/
or that any narrowing is a basis for withdrawing the Rule. For example,
the Competitive Enterprise Institute disputed the concern, arguing
among other things that ``the underlying determining factors would
remain the same'' and that the Rule did ``not prevent courts from
weighing all factors,'' but instead ``merely offer[ed] guidance, as a
rulemaking should.'' The U.S. Chamber of Commerce characterized the
proposal's concern that the Rule's narrowing of the analysis would
result in more workers being classified as independent contractors as
``misguided and presum[ing] conclusions that the [Rule] does not
guarantee.'' Other comments asserted that the Rule's explanation of the
factors eliminated confusion and overlap among the factors. See, e.g.,
Seyfarth Shaw on behalf of Coalition for Workforce Innovation
(asserting that the Rule provided ``clear guidance regarding . . .
which facts fall within the various and sometimes blurred factors,''
``increas[ing] legal certainty in application of the economic realities
test'').
Having considered the comments and the issues further, the
Department believes that, by removing from the analysis several facts
and concepts that have a strong foundation in both the courts' and
WHD's application of the analysis, the Rule would have improperly
narrowed the scope of facts and considerations comprising the analysis
of whether a worker is an employee for purposes of the FLSA or an
independent contractor. Narrowing the facts and considerations that
comprise the analysis would have been inconsistent with the court-
mandated totality-of-the-circumstances approach to determining whether
a worker is an employee or an independent contractor.\129\ The
Department elaborates on this below in its discussion of several
examples of how the Rule would have narrowed application of the
factors. In addition, upon further consideration, the Rule's narrowing
of factors would, in the Department's view, have likely resulted in
more workers being reclassified or misclassified as independent
contractors not entitled to the FLSA's protections. Not only would such
a result have been contrary to the Act's purpose of broadly covering
workers as employees,\130\ but to the extent that women and people of
color are overrepresented in low-wage independent contractor positions
where misclassification is more likely (as a number of commenters
asserted), this result would have had a disproportionate impact on
these workers. Citing a study finding that seven of the eight high
misclassification occupations were held disproportionately by women
and/or workers of color, the National Women's Law Center, Kentucky
Equal Justice Center, Center for Law and Social Policy, Shriver Center
on Poverty Law, and other commenters asserted that ``it is no
coincidence that corporate misclassification is rampant in low-wage,
labor-intensive industries where women and people of color, including
Black, Latinx, and AAPI workers, are overrepresented.'' These
commenters, as well as numerous individual commenters, added that the
Rule would have ``inflict[ed] the most damage on workers of color who
predominate in the low-paying jobs where independent contractor
misclassification is common.'' The Department agrees that if the Rule
had resulted in an increase in the use of independent contractors in
low-wage industries where independent contracting is common, it could
have had a disproportionate effect on women and workers of color.
---------------------------------------------------------------------------
\129\ See, e.g., Ellington v. City of East Cleveland, 689 F.3d
549, 555 (6th Cir. 2012) (``This `economic reality' standard,
however, is not a precise test susceptible to formulaic application
. . . . It prescribes a case-by-case approach, whereby the court
considers the `circumstances of the whole business activity.' '')
(quoting Donovan v. Brandel, 736 F.2d 1114, 1116 (6th Cir. 1984));
Morrison v. Int'l Programs Consortium, Inc., 253 F.3d 5, 11 (D.C.
Cir. 2001) (``No one factor standing alone is dispositive and courts
are directed to look at the totality of the circumstances and
consider any relevant evidence.''); Snell, 875 F.2d at 805 (``It is
well established that no one of these factors in isolation is
dispositive; rather, the test is based upon a totality of the
circumstances.''); Superior Care, 840 F.2d at 1059 (2d Cir. 1988)
(``No one of these factors is dispositive; rather, the test is based
on a totality of the circumstances . . . . Since the test concerns
the totality of the circumstances, any relevant evidence may be
considered, and mechanical application of the test is to be
avoided.'').
\130\ See, e.g., supra notes 8-10, and accompanying text.
---------------------------------------------------------------------------
In sum, the Rule's narrowing of the application of the economic
realities factors, as further described below, warrants withdrawal of
the Rule.
a. Making the Opportunity for Profit or Loss Factor Indicate
Independent Contractor Status Based on the Worker's Initiative or
Investment
The Independent Contractor Rule would have provided that the
opportunity for profit or loss factor indicates independent contractor
status if the worker has that opportunity based on either his or her
exercise of initiative (such as managerial skill or business judgment)
or management of his or her investment in or capital expenditure on
helpers or equipment or material to further his or her work.\131\ The
worker ``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.'' \132\ In other words, the factor would have
indicated independent contractor status if the worker either: (1) Made
no capital investment but exercised initiative or (2) had a capital
investment but exercised no initiative. Most courts currently consider
investment as its own factor in the analysis, but the Rule's change
[[Page 24313]]
would have resulted in investment no longer being its own factor. In
addition, courts may currently consider initiative as part of the skill
factor, but the Rule's change would have resulted in initiative being
considered only as part of the opportunity for profit or loss factor.
The proposal to withdraw the Rule expressed the concern that, by
articulating the factor in this manner, the Rule would completely
remove investment or initiative from consideration in certain
cases.\133\ The proposal suggested that, for example, if the worker
exercised initiative, the opportunity for profit or loss factor would
indicate independent contractor status even if the worker made no
capital investment.\134\
---------------------------------------------------------------------------
\131\ See 86 FR 1247 (Sec. 795.105(d)(1)(ii)).
\132\ Id.
\133\ See 86 FR 14033.
\134\ See id.
---------------------------------------------------------------------------
Few commenters addressed the Rule's exact articulation of the
opportunity for profit or loss factor. AFSCME commented that although
this factor was ``initially formulated to determine whether an
independent contractor can grow and expand their business through
investment,'' the Rule would have ``look[ed] only to whether a worker's
success (or failure) in earnings can be attributable to individual
initiative or management but need not involve both.'' The International
Brotherhood of Teamsters objected to the Rule's ``refram[ing]'' of the
opportunity for profit or loss factor, arguing that it would
``overemphasiz[e] workers' theoretical ability to increase their
earnings through minimal investment or personal initiative.'' Other
commenters who supported the proposed withdrawal generally questioned
whether the opportunity for profit or loss should be determinative.
See, e.g., AFL-CIO; Women's Law Project. On the other hand, commenters
who opposed withdrawal of the Rule generally supported the Rule's
articulation of the opportunity for profit or loss factor as being
based on initiative or investment. See, e.g., SHRM; Seyfarth Shaw on
behalf of Coalition for Workforce Innovation; Associated General
Contractors of America; see also American Society of Travel Advisors.
Having considered the comments and the issue further, the
Department believes that the Rule's articulation of the opportunity for
profit or loss factor as indicating independent contractor status if
the worker either exercises initiative or manages capital investment is
not supported. No court articulates the opportunity for profit or loss
factor as having these two prongs, only one of which need indicate
independent contractor status for the factor as a whole to indicate
independent contractor status. Moreover, this articulation would have
erased from the analysis in certain situations the worker's lack of
initiative or lack of capital investment--both of which are
longstanding and well-settled indicators of employee status. Because
the worker's initiative and investment would have been considered under
the Rule only as the two prongs comprising the opportunity for profit
or loss factor, if either one indicated an opportunity for profit or
loss then the factor would have invariably indicated independent
contractor status. The other prong need not be considered at all as it
could not have reversed or weighed against that finding even if it
indicated employee status as a matter of economic reality. In effect,
the Rule's subordination of ``initiative'' and ``investment'' as
alternative considerations within the ``opportunity for profit or
loss'' factor would have favored independent contractor status even
when evidence of employee status was present.
b. Disregarding the Employer's Investments
The Independent Contractor Rule articulated investment as 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.'' \135\ The Rule's preamble provided that
``comparing the individual worker's investment to the potential
employer's investment should not be part of the analysis of
investment.'' \136\ Thus, the Rule precluded consideration of the
employer's investment. The proposal to withdraw the Rule questioned the
basis for the Rule's limited consideration of investment.\137\
---------------------------------------------------------------------------
\135\ 86 FR 1247 (Sec. 795.105(d)(1)(ii)).
\136\ Id. at 1188.
\137\ See 86 FR 14033.
---------------------------------------------------------------------------
Few commenters addressed the issue in response to the proposal. For
example, Farmworker Justice commented that the Department was
``correct'' to identify the Rule's preclusion of consideration of ``the
worker's investment relative to the putative employer's investment'' as
``inconsistent with the law.'' The International Brotherhood of
Teamsters opposed both the Rule's rejection of ``prior precedent which
held that in determining whether or not a worker's investment was
significant, courts must compare it to the employer's investment'' and
the Rule's suggestion that ``a minimal investment by a worker might be
sufficient to find that a worker is an independent contractor even if
the employer made much more significant investments.'' Representative
Scott, et al., when describing the factors ``almost uniformly used in
federal courts of appeal as indicators of economic dependence,''
articulated the investment factor as ``the extent of the relative
investments of the employer and the worker'' and cited AI 2015-1.
Commenters who opposed withdrawal of the Rule generally did not
share any concerns with the Rule's limiting of the investment factor to
consideration of the worker's investment. The Center for Workplace
Compliance, for example, commented that there is ``significant overlap
between the relative investment factor and the factor examining the
opportunity for profit or loss'' and that ``not separately list[ing]
the relative investment factor removes any confusion caused by the
overlap yet does not prevent an analysis of relative investment where
appropriate.'' These commenters generally approved of the Rule's
articulation of the factors, including investment. See, e.g., Seyfarth
Shaw on behalf of Coalition for Workforce Innovation; U.S. Chamber of
Commerce.
Having considered the comments and the issue further, the
Department believes that the Rule's interpretation against considering
the worker's investment as compared to the employer's investment was
legally unsound. As support for the interpretation, the Rule cited
decisions from the Fifth and Eighth Circuits in which courts gave
little weight to the comparison of the employer's investment in its
business to the worker's investment in the work in light of the facts
presented in those cases.\138\ However, the decisions cited did make
the comparison of the investments a part of the analysis, but found
that the comparison had little relevance or accorded it little weight
under those particular facts.\139\ Numerous other
[[Page 24314]]
courts of appeals have considered the worker's investment in the work
in comparison to the employer's investment in its business,\140\ as
does WHD in enforcement actions. As the Fifth and Eighth Circuit
decisions demonstrate, courts may give the relative comparison of
investments little weight in certain factual circumstances or make
nuanced decisions regarding how much evidence of the employer's
investment to allow. Accordingly, precluding consideration of the
worker's and the employer's relative investments would have very little
legal support, would have been contrary to numerous courts of appeals
decisions as well as the totality-of-the-circumstances approach applied
by courts,\141\ and would have been an unfounded limit on factfinders'
ability to pursue inquires that best differentiate between a worker's
economic dependence and independence based on the particular facts of
the case.
---------------------------------------------------------------------------
\138\ See 86 FR 14033. The Fifth Circuit decisions cited were
Parrish, 917 F.3d at 383, and Hopkins, 545 F.3d at 344-46. The
Eighth Circuit decision cited was Karlson, 860 F.3d at 1096.
\139\ See Parrish, 917 F.3d at 383; Hopkins, 545 F.3d at 344-46.
The Fifth Circuit recently again articulated the investment factor
as `` `the extent of the relative investments of the worker and the
alleged employer.' '' Hobbs, 946 F.3d at 829 (quoting Hopkins, 545
F.3d at 343). In Hobbs, the Fifth Circuit affirmed the district
court's finding that the relative investments--the potential
employer's ``overall investment in the pipe construction projects''
as compared to the workers' individual investments--favored employee
status. Id. at 831-32. The Fifth Circuit agreed with the district
court's conclusion to give the factor ``little weight in its
analysis'' in that case given the nature of the industry and work
involved. Id. at 832 (citing Parrish, 917 F.3d at 383). In sum and
contrary to what the Rule would have provided, the Fifth Circuit
routinely considers the relative investments of the worker and the
potential employer even if the factor may ultimately be accorded
little weight depending on the circumstances. And in the Eighth
Circuit's decision in Karlson, the court affirmed the district
court's decision to allow some evidence of the worker's and the
employer's relative investments but not allow the worker to
introduce evidence of the employer's overall investment (i.e., large
dollar figures) that ``would create the danger of unfair
prejudice.'' 860 F.3d at 1096.
\140\ See, e.g., McFeeley, 825 F.3d at 243 (comparing the
potential employers' payment of rent, bills, insurance, and
advertising expenses to the workers' ``limited'' investment in their
work); Keller, 781 F.3d at 810 (``We agree that courts must compare
the worker's investment in the equipment to perform his job with the
company's total investment, including office rental space,
advertising, software, phone systems, or insurance.''); Baker v.
Flint Eng'g & Constr. Co., 137 F.3d 1436, 1442 (10th Cir. 1998)
(``In making a finding on this factor, it is appropriate to compare
the worker's individual investment to the employer's investment in
the overall operation.''); Lauritzen, 835 F.2d at 1537 (disagreeing
that ``the overall size of the investment by the employer relative
to that by the worker is irrelevant'' and finding that ``that the
migrant workers' disproportionately small stake in the pickle-
farming operation is an indication that their work is not
independent of the defendants''); see also Iontchev v. AAA Cab
Service, Inc., 685 Fed. Appx. 548, 550 (9th Cir. 2017) (noting that
the drivers ``invested in equipment or materials and employed
helpers to perform their work'' but concluding that the investment
factor was ``neutral'' because the cab company ``leased taxicabs and
credit card machines to most of the [drivers]'').
\141\ See supra note 106.
---------------------------------------------------------------------------
c. Disregarding the Importance or Centrality of a Worker's Work to the
Employer's Business
The Independent Contractor Rule would have recast the factor
examining whether the worker's work ``is an integral part'' of the
employer's business as whether the work ``is part of an integrated unit
of production.'' \142\ The Rule rejected as irrelevant to this factor
whether the work is important or central (i.e., integral) to the
employer's business.\143\ Instead, the Rule would have provided that
``the relevant facts are the integration of the worker into the
potential employer's production processes'' because ``[w]hat matters is
the extent of such integration rather than the importance or centrality
of the functions performed'' by the worker.\144\ The Rule asserted that
this recast articulation was supported by Rutherford Food (which
considered whether the work was ``part of the integrated unit of
production'' of the employer),\145\ but acknowledged that WHD and
courts typically consider whether the work is important or
central.\146\ The proposal to withdraw the Rule identified this
factor's redefinition to ``integrated unit of production'' as another
example of how the Rule would eliminate from the economic realities
analysis facts and concepts that have a strong foundation in the
courts' and WHD's application of the analysis and would narrow the
scope of the analysis.\147\
---------------------------------------------------------------------------
\142\ See 86 FR at 1193-96, 1247 (Sec. 795.105(d)(2)(iii)).
\143\ See id. at 1193-95.
\144\ Id. at 1195.
\145\ See id. at 1193-94 (citing Rutherford Food, 331 U.S. at
729).
\146\ See id. at 1193.
\147\ See 86 FR 14033-34.
---------------------------------------------------------------------------
A number of commenters who supported the proposed withdrawal
objected to the Rule's narrowing of the ``integral'' factor. For
example, Farmworker Justice commented that the Department was
``correct'' to identify the Rule's ``remov[al of] consideration of the
work's importance to the business purpose'' as ``inconsistent with the
law.'' The State Officials stated that, ``under well-established
circuit court precedent, the relevant inquiry is whether the worker's
work is `an integral part of the business,' which could be satisfied by
being part of an integrated unit, or by being integral to the
business.'' Texas RioGrande Legal Aid asserted that, by ``removing''
consideration of whether ``farmworkers perform tasks integral to the
businesses of the growers to whom they provide services,'' the Rule
would have ``stacked the decks in favor of a narrower definition of
farm-based employee.'' The AFL-CIO added that the Rule would have
``narrow[ed] the meaning'' of the integral factor and was ``contrary to
Congress' intent and otherwise unjustified for several reasons,''
including because it would have been inconsistent with Supreme Court
and Circuit Court precedent and because it ``appears to be intended to
provide transportation network companies like Uber and Lyft with a
regulatory basis for their argument that their drivers are not their
employees.'' The International Brotherhood of Teamsters objected for
similar reasons, arguing that the Rule's ``bar[ring] any consideration
of whether the work performed is important or otherwise integral to the
employer's business [is] in direct contradiction of established
precedent'' and was undertaken to ``facilitat[e] the recognition of gig
workers as independent contractors.''
Commenters who opposed the proposal to withdraw did not share
concerns regarding this factor. The Center for Workplace Compliance
stated that ``many courts have found the former `integral part' framing
of the factor as overlapping with the ability to control work'' and
that ``the `integral part' factor can inappropriately be interpreted to
focus on the importance of the work instead of integration.'' It agreed
with the Rule that ``reframing this factor to look at whether the work
is part of an integrated unit of production . . . is much closer to how
the factor has been historically interpreted by the Supreme Court.''
Other commenters who opposed the proposal generally objected to the
proposal's assertion that the Rule would have narrowed the factors,
see, e.g., U.S. Chamber of Commerce, or generally supported the Rule's
articulation of the factors, including the ``integrated unit'' factor,
see, e.g., TechServe Alliance.
Having considered the comments and the issue further, the
Department believes that the Rule's narrowing of the ``integral part''
factor to exclude consideration of whether the work is central or
important was not supported. As the Rule acknowledged, WHD and courts
have been applying the ``integral part'' factor for decades,\148\ and
it is a longstanding factor within the economic realities analysis.
This is because a worker who performs work that is integral to the
employer's business is more likely to be economically dependent on the
employer; \149\ whereas a worker who performs work that is more
peripheral to the employer's business is more likely to be independent
from the employer. Moreover, as with the other ways in which the Rule
would have limited the analysis, the Rule's exclusion of whether the
work is important or central to the employer's business is
[[Page 24315]]
inconsistent with the court-mandated totality-of-the-circumstances
approach to determining whether a worker is an employee or an
independent contractor.\150\ In addition, the Rule's reliance on
Rutherford Food's ``integrated unit of production'' language was overly
rigid and incomplete. The Rule did not consider a passage from the
Supreme Court's contemporaneous decision in Silk finding that
``unloaders'' were employees of a retail coal company as a matter of
economic reality in part because they were ``an integral part of the
businesses of retailing coal or transporting freight.'' 331 U.S. at 716
(emphasis added). The Rule did not sufficiently credit courts' or WHD's
longstanding treatment of Rutherford Food's ``integrated unit''
language as tantamount to analyzing whether the work is an ``integral
part'' of the employer's business.\151\ Finally, the Rule stated that
the ``integral part'' factor tended to indicate employee status and had
a ``higher rate of misalignment'' with the ultimate result in certain
cases; \152\ however, it did not identify any cases where the
``integral part'' factor led to a result that was contrary to the
totality of the evidence. Accordingly, the Rule's narrowing of the
``integral'' factor is another reason in support of withdrawal.
---------------------------------------------------------------------------
\148\ See 86 FR at 1194 (citing WHD opinion letters and cases).
\149\ See DialAmerica Mktg., 757 F.2d at 1382-83.
\150\ See footnote 106, supra.
\151\ See, e.g., AI 2015-1, 2015 WL 4449086, at *5 (relying on
Rutherford Food's ``integrated unit of production'' language in its
discussion of the ``integral'' factor).
\152\ See 86 FR at 1194.
---------------------------------------------------------------------------
d. Downplaying the Employer's Right or Authority To Control the Worker
The Rule would also have stressed the primacy of the parties'
actual practice by providing that ``the actual practice of the parties
involved is more relevant than what may be contractually or
theoretically possible,'' and that ``a business' contractual authority
to supervise or discipline an individual may be of little relevance if
in practice the business never exercises such authority.'' \153\ In
support, the Rule's preamble asserted 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,'' and that
the FLSA ``does not necessarily include every worker considered an
employee under the common law.'' \154\ The proposal to withdraw the
Rule questioned whether this approach was consistent with Supreme Court
precedent.\155\
---------------------------------------------------------------------------
\153\ 86 FR at 1247 (Sec. 795.110).
\154\ Id. at 1205.
\155\ See 86 FR 14033-34.
---------------------------------------------------------------------------
Commenters who supported withdrawal objected to how the Rule would
treat the employer's right or authority to control the worker. For
example, the AFL-CIO commented that ``discounting contractual or
reserved control is inconsistent with congressional intent to expand
the coverage of the FLSA beyond the narrow confines of common law
employment and the Department provides a faulty basis for discounting
reserved control.'' The State Officials stated that the Rule ``unduly
narrowed the existing factors when it emphasized that evaluating
whether an employment relationship exists should rely heavily on actual
practice.'' They added that how the Rule would have treated the
employer's right or authority to control the worker ``is contrary to
law'' and would have impermissibly ``narrowed employment even further
than it was understood at common law'' (citing New York v. Scalia, 490
F. Supp.3d 748, 787-88 (S.D.N.Y. 2020)).
Commenters who opposed withdrawal generally agreed with how the
Rule would have treated the employer's right or authority to control
the worker. For example, the National Retail Federation commented that
the Rule would have ``appropriately focuse[d] the test on actual
practice rather than contractual or theoretical possibilities.'' The
Center for Workplace Compliance described this provision of the Rule as
``consistent with historical interpretation of the economic reality
test by federal courts and DOL.''
Having considered the comments and the issue further, the
Department believes that the actual practice of the employer is not
invariably more relevant than the authority that the employer may have
reserved for exercise in the future. As several commenters noted, the
right to control is part of control at the common law, and the Rule's
blanket diminishment of the relevance of the right to control seems
inconsistent with the Supreme Court's observations that the FLSA's
scope of employee coverage is exceedingly broad and broader than what
exists under the common law.\156\ Thus, an employer's right or
authority to control a worker, for example, can be strong evidence
suggesting the existence of an FLSA employment relationship, just as it
is under the common law.\157\ In sum, the Rule's simplistic declaration
that the parties' actual practices are invariably more relevant is
another reason to withdraw the Rule.
---------------------------------------------------------------------------
\156\ See Rosenwasser, 323 U.S. at 362 (``A broader or more
comprehensive coverage of employees'' than that contemplated under
the FLSA ``would be difficult to frame.''); Darden, 503 U.S. at 326
(the FLSA ``stretches the meaning of `employee' to cover some
parties who might not qualify as such under a strict application of
traditional agency law principles'').
\157\ See, e.g., Razak, 951 F.3d at 145 (``[A]ctual control of
the manner of work is not essential; rather, it is the right to
control which is determinative.'').
---------------------------------------------------------------------------
B. Whether the Rule Would Provide the Intended Clarity
One of the Independent Contractor Rule's primary stated purposes
was to ``significantly clarify to stakeholders how to distinguish
between employees and independent contractors under the Act.'' \158\
Although the stated intent of the Rule was to provide clarity, it would
also (as discussed above) have introduced several concepts to the
analysis that neither courts nor WHD have previously applied. As
explained in the NPRM, the Department's proposal to withdraw the Rule
arose in part from a concern that these changes would cause confusion
or lead to inconsistent outcomes rather than provide clarity or
certainty, as intended.
---------------------------------------------------------------------------
\158\ 86 FR 1168.
---------------------------------------------------------------------------
Numerous commenters asserted that the Independent Contractor Rule
would clarify the distinction between independent contractors and FLSA-
covered employees, and that withdrawing the Rule would forfeit the
benefits of this added clarity. For example, the U.S. Chamber of
Commerce stated that ``[under] the status quo ante . . . employers are
uncertain how to classify a worker under the economic realities test
because they can not [sic] know how WHD will evaluate the different
factors . . . [which] puts employers at risk of WHD enforcement and
private litigation, and can impede businesses from engaging many
smaller businesses or sole proprietors.'' Several commenters
specifically identified the Rule's elevation of two ``core factors'' as
a clarifying feature that would reduce uncertainty and inconsistency in
application of the economic realities test. See, e.g., American Society
of Travel Advisors (``[A]ssigning greater weight to any factor will
necessarily reduce, to some degree, the element of subjectivity
inherent in the test.''); Competitive Enterprise Institute
(``Increasing the number of factors that must be given equal weight
would lead to more inconsistent outcomes in the courts and
elsewhere.''). Some commenters, such as Brownstein Hyatt Farber Schreck
and the Washington Legal Foundation, praised the
[[Page 24316]]
Independent Contractor Rule's inclusion of illustrative factual
examples, while other commenters expressed appreciation for the Rule's
guidance on common business practices that would not militate against
independent contractor status, such as requiring individuals 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. See American
Trucking Association (``Without [such guidance], motor carriers and
other companies in other industries will be more reluctant to engage
with and require improved safety as a condition of working with them
for their independent contractors.''); New Jersey Warehousemen & Movers
Association (same). Numerous commenters asserted that these features of
the Rule would reduce litigation over the FLSA employment status of
alleged independent contractors. See, e.g., Chauvel & Glatt, LLP;
Society for Human Resource Management.
Some commenters supportive of the Independent Contractor Rule
addressed the concern expressed in the NPRM that the novelty of the
Rule's guidance would cause confusion or lead to inconsistent outcomes.
The Competitive Enterprise Institute asserted that ``[a]ll rule changes
are initially unfamiliar and require courts and others to adjust,'' and
that unfamiliarity ``is not a rationale for leaving the rules unchanged
when they become outdated.'' See also Melinda Spencer (``So what if
this is a new definition? The country clearly needs a new, clearer
definition.''). Associated Builders and Contractors (ABC) and Littler
Mendelson, P.C. disputed that the Rule's guidance was new or novel at
all, asserting that its features were consistent with the way that most
courts have been applying the economic realities test. Asserting
differences in the ways that circuit courts describe the economic
realities test, the Coalition to Promote Independent Entrepreneurs
opined that ``the Independent Contractor Rule provides an opportunity
to conform all federal circuits to one unified explication of the
test.''
By contrast, many other commenters shared the concern expressed in
the Department's NPRM that implementation of the Independent Contractor
Rule would add confusion rather than clarity due to the Rule's
deviation from established guidance and precedent. For example, AFSCME
asserted that the Rule would ``upset . . . settled understandings and
relied-upon judicial precedent upon which millions of American workers
and employers have ordered their relationships.'' A number of
commenters, including the Center for Law and Social Policy (CLASP), the
North Carolina Justice Center, and the Shriver Center on Poverty Law,
characterized the Independent Contractor Rule as a ``a radical
departure from established agency and court interpretations of the
FLSA.'' Farmworker Justice asserted that the Rule would ``still require
complex, fact-specific considerations of the unique circumstances of
each employer-worker relationship,'' but introduce ``a whole set of new
ambiguities and legal questions,'' such as ``whether it matters at all
that an activity is `integral'--or important--to the business . . . how
to weigh worker investment without comparing it to the investment made
by the employer; what type of control is relevant when deciding the
`control' factor; when to weigh the secondary factors and so forth.''
The Signatory Wall and Ceiling Contractors Alliance (SWACCA) asserted
that, if the Independent Contractor Rule were adopted, subsequent court
decisions interpreting the Rule would ``necessitate additional, ongoing
familiarization costs.'' NELA, Pleval Law, and the International
Brotherhood of Teamsters opined that implementation of the Rule would
be discordant with state laws featuring more expansive worker coverage,
increasing the likelihood that some workers might have different
employment statuses under state and federal law.
Several commenters asserted that the lack of clarity regarding
whether and to what extent courts would defer to the Independent
Contractor Rule's guidance would result in uncertainty. See AFL-CIO;
International Brotherhood of Teamsters; Northwest Workers Justice
Project; SWACCA; Texas RioGrande Legal Aid. The United Brotherhood of
Carpenters and Joiners of America stated that the Rule would itself be
vulnerable to a successful legal challenge, invoking the ``fate of the
[Department's] equally flawed joint employer rule.'' \159\ See also
State Officials (``[F]rom its initial proposal to the present, the
States and other commenters have consistently questioned [the Rule's]
legality due to its departure from the FLSA and violation of
[Administrative Procedure Act]-required procedures.'').
---------------------------------------------------------------------------
\159\ On September 8, 2020, the U.S. District Court for the
Southern District of New York vacated most of the FLSA Joint
Employer Final Rule issued by the Department and effective in March
2020, on the grounds that it is contrary to law and arbitrary and
capricious. See Scalia, 490 F. Supp.3d 748. An appeal is currently
pending before the Second Circuit Court of Appeals. See New York v.
Walsh, No. 20-3806 (2d Cir. appeal docketed Nov. 6, 2020).
---------------------------------------------------------------------------
Upon further reflection, including consideration of relevant
comments, the Department does not believe that the Independent
Contractor Rule would have achieved the added clarity it intended to
provide to the regulated community. To the contrary, given how the Rule
failed to account for the FLSA's broad ``suffer or permit'' language
and the numerous ways in which it departed from courts' longstanding
precedent, it is not clear whether courts would have deferred to the
Rule's guidance. To the extent that some courts would have declined to
apply the test set forth in the Independent Contractor Rule, this would
have created conflicts among courts and between courts and the
Department, resulting in more uncertainty as to the applicable economic
realities test. Businesses operating nationwide would have had to
familiarize themselves with multiple standards for determining who is
an employee under the FLSA across different jurisdictions, continuing
``to comply with the most demanding standard if they wish[ed] to make
consistent classification determinations.'' \160\
---------------------------------------------------------------------------
\160\ 86 FR 1241 n. 255.
---------------------------------------------------------------------------
In addition to uncertainty resulting from whether courts would
defer to the Independent Contractor Rule given its departures from
courts' own precedent, the Rule would have introduced several ambiguous
terms and concepts into the analysis for determining the FLSA
employment status of an alleged independent contractor. For example,
courts and regulated parties would have had to grapple with what it
would mean in practice for two factors to be ``core'' factors and
entitled to greater weight. In addition, they would have had to
determine, in cases where the two ``core'' factors pointed to the same
classification, how ``substantial'' the likelihood is that they point
toward the correct classification if the additional factors point
toward the other classification. Perhaps most difficult of all, the
Rule cautioned that its list of factors was ``not exhaustive,'' \161\
but did not specify whether the ``additional factors'' referenced in
Sec. 795.105(d)(2)(iv) would have had less probative value (or weight)
than the three ``other factors'' listed in Sec. 795.105(d)(2)(i)-(iii)
of the Rule.\162\ Assuming that they did, the Rule would have
essentially transformed the multifactor balancing test that courts and
the Department currently apply into a three-tiered
[[Page 24317]]
multifactor balancing test, with ``core'' factors given more weight
than enumerated ``other'' factors, and enumerated ``other'' factors
given more weight than unspecified ``additional'' factors. Rather than
weighing all factors against each other in a holistic fashion depending
on the facts of a particular work arrangement, courts and the regulated
community would have had to evaluate factors within and across groups
in a new hierarchical structure, which would have likely caused
confusion and inconsistency. Adding to the confusion, the Rule
collapses some factors into each other, so that investment and
initiative are only considered as a part of the opportunity for profit
or loss factor, requiring courts and the regulated community to
reconsider how they have evaluated those factors.
---------------------------------------------------------------------------
\161\ 86 FR 1246 (Sec. 795.105(c)).
\162\ 86 FR 1247.
---------------------------------------------------------------------------
In other words, the Independent Contractor Rule's guidance would
complicate rather than simplify the analysis for determining whether a
worker is an employee or independent contractor under the FLSA. Given
the likelihood that many courts would ignore, reject, or not defer to
the Rule's guidance for the reasons explained above, the Department
believes that the Rule would have introduced substantial confusion and
uncertainty on the topic of independent contractor status, to the
detriment of workers and businesses alike.
C. Whether the Rule Would Have Benefitted Workers as a Whole
As part of its analysis of possible costs, transfers, and benefits,
the Independent Contractor Rule quantified some possible costs
(regulatory familiarization) and some possible cost savings (increased
clarity and reduced litigation).\163\ The Rule identified and
discussed--but did not quantify--numerous other costs, transfers, and
benefits possibly resulting from the Rule, including ``possible
transfers among workers and between workers and businesses.'' \164\ The
Rule ``acknowledge[d] that there may be transfers between employers and
employees, and some of those transfers may come about as a result of
changes in earnings,'' but determined that these transfers cannot ``be
quantified with a reasonable degree of certainty for purposes of [the
Rule].'' \165\ The Economic Policy Institute (EPI) had submitted a
comment during the rulemaking estimating that the annual transfers from
workers to employers as a result of the Rule would be $3.3 billion in
pay, benefits, and tax payments.\166\ The Rule discussed its
disagreements with various assumptions underlying EPI's estimate and
explained its reasons for not adopting the estimate.\167\ The Rule
concluded that ``workers as a whole will benefit from [the 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 [in the Rule].'' \168\
---------------------------------------------------------------------------
\163\ See id. at 1211.
\164\ Id. at 1214-16.
\165\ Id. at 1223.
\166\ See id. at 1222.
\167\ See id. at 1222-23.
\168\ Id. at 1223.
---------------------------------------------------------------------------
The Department's view, upon further consideration, of the value of
EPI's analysis is addressed below in section IV, in the analysis of
costs and benefits of this withdrawal. As a general matter, the
Department notes here that it does not believe the Rule fully
considered the likely costs, transfers, and benefits that could result
from the Rule. This concern is premised in part on WHD's role as the
agency responsible for enforcing the FLSA and its experience with cases
involving the misclassification of employees as independent
contractors. The consequence for a worker of being classified as an
independent contractor is that the worker is excluded from the
protections of the FLSA. Without the protections of the FLSA, workers
need not be paid at least the federal minimum wage for all hours
worked, and are not entitled to overtime compensation for hours worked
over 40 in a workweek. Workers would also lose the FLSA's protection
against retaliation for complaining about a violation of the FLSA. The
Department concludes that, to the extent the Rule would result in the
reclassification or misclassification of employees as independent
contractors, the resulting denial of FLSA protections would harm the
affected workers. The Department's decision to withdraw the Rule is the
result in part of its belief that doing so will benefit workers as a
whole.
The Washington Legal Foundation commented that the Department
should not consider only the distributional effects of withdrawal. It
argued that the Rule would still benefit workers even if it benefitted
businesses more. As an initial matter, the Department believes that the
distributional consequences of withdrawal are appropriate to consider.
Moreover, it finds that the Rule would not merely benefit workers less
than business owners, but--for the reasons noted above and those
explained below--would actually harm workers.
Many commenters expressed concerns that the Rule's effects would
have harmed workers. For example, a number of individual commenters,
including independent contractors, employees, and employers who
supported withdrawing the Independent Contractor Rule believed that the
Rule would give businesses more power to force workers to accept
independent contractor status. As several commenters said in comments
that used template language, ``[i]n times of high unemployment like
today, individual workers have even less market power than usual to
demand fair conditions, especially in jobs that historically have been
undervalued; they are forced to accept take-it-or-leave-it job
conditions.'' Other of these commenters worried the Rule would ``stack
the deck against workers and enable employers to misclassify more and
more employees as independent contractors.'' The Rule would, according
to some, ``fuel a race to the bottom.'' One commenter who self-
identified as ``an actual independent contractor'' believed that the
only effect of the Rule would be ``to allow massive companies to deny
workers the benefits of employment status and squeeze extra profits for
shareholders,'' with the result that misclassified workers would ``end
up on public assistance for basic needs like healthcare, meaning
corporations are passing the true cost of business on to taxpayers.''
Some commenters were also worried about the effect of the Rule on
businesses. The Construction Employers of America commented that the
Rule ``will make it harder for employers providing middle class careers
in our industry to compete and provide good wages, benefits, and the
protections that have been part of the employer/employee relationship
since the 1930s.'' Other commenters also said that the Rule ``harms
companies that play by the rules and treat workers fairly. Companies
that take shortcuts are allowed under the rule to misclassify their
employees, undercut responsible employers and drag down the wages and
labor standards across essential industries.''
Commenters opposed to the withdrawal saw independent contractor
status in a more positive light. In particular, a number of individual
commenters expressed a desire to maintain their status as independent
contractors, articulating general support for the concept of
independent contractor status, especially the concept of flexible work
schedules. The Department appreciates these commenters' perspective,
however, these comments do not demonstrate the Rule's benefit to
workers. A worker
[[Page 24318]]
already properly classified as an independent contractor will retain
that status because, with this withdrawal, the economic realities test
the Department uses to determine who is an employee under the FLSA is
not changing. Moreover, flexible work schedules can be made available
to employees as well as independent contractors, so any determination
of or shift in worker classification need not affect flexibility in
scheduling.
Some other commenters stated that the Department ``seems to take
the position that independent contractors only exist to the extent that
they are simply misclassified employees.'' They further stated that the
proposal ``fails to recognize that independent contractors exist
separate and apart from employees who are misclassified as independent
contractors by some employers.'' Similarly, a self-described
``freelance writer and editor'' commented that the proposal ``appears
to be part of a larger effort to significantly restrict or even
eliminate the ability for employers to classify individuals as
independent contractors.'' Some of these commenters worried that
withdrawal would mean adopting a test similar to the ``ABC Test'' that
generally applies under California state wage laws. These comments do
not accurately characterize the proposal or the withdrawal of the
Independent Contractor Rule. The Department recognizes, and has always
recognized, that there are bona fide independent contractors that do
not fall under the FLSA. In fact, soon after the FLSA was enacted, the
Supreme Court stated that the Act was ``not intended to stamp all
persons as employees'' \169\ and recognized that independent
contractors are not employees within the Act's broad scope of
coverage.\170\ The Department is withdrawing the Rule for the reasons
described throughout this final rule, and is not creating a new test,
but is instead leaving in place the current economic realities test
which allows for determinations that some workers are independent
contractors.
---------------------------------------------------------------------------
\169\ Portland Terminal, 330 U.S. at 152.
\170\ See Rutherford Food, 331 U.S. at 729.
---------------------------------------------------------------------------
Commenters also assert that many independent contractors would
prefer independent contracting arrangements. Fundamentally, however,
``the purposes of the [FLSA] require that it be applied even to those
who would decline its protections,'' as allowing workers who otherwise
qualify as FLSA-covered employees to waive their rights ``would affect
many more people than those workers directly at issue . . . and would
be likely to exert a general downward pressure on wages in competing
businesses.'' \171\ The Department also believes that this preference
does not hold for a significant proportion of independent contractors.
A survey cited by CWI found that in May 2020, 45 percent of workers
preferred being an independent contractor to being fully employed. This
is by no means a majority--the same survey finds that 53 percent of
workers prefer being a full-time employee with benefits.\172\ This
survey--which was limited to users and potential users of one jobs
platform--found a significant increase in workers who preferred being
an independent contractor compared to the prior year, and also found
that a lack of childcare was workers' largest obstacle to full-time
employment.\173\ These findings suggest that even this minority of
workers who prefer being an independent contractor to full-time
employment are motivated in part by temporary pressures created by the
COVID-19 pandemic. The survey did not ask whether workers would prefer
a flexible schedule combined with employee status. As this rule notes
elsewhere, flexibility and FLSA employment are not mutually exclusive.
---------------------------------------------------------------------------
\171\ Tony & Susan Alamo Found., 471 U.S. at 302.
\172\ Wonolo, ``COVID-19 economic fallout weighs heavily on blue
collar gig workers,'' 2020. https://go.wonolo.com/rs/052-CZJ-953/images/Data-report-The-rise-of-blue-collar-gig-workers.pdf.
\173\ Id. (finding that workers preferred full-time employment
to independent contractor status by a ratio of 71-to-29 percent in
2019, and that workers concerned about a lack of childcare increased
from 12 percent to 23 percent).
---------------------------------------------------------------------------
Other commenters suggested that the Independent Contractor Rule
would harm workers in ways beyond the effects of a worker's
classification on their individual compensation. The AFL-CIO commented
that all workers benefit from the FLSA's minimum wage requirements,
even if those requirements do not apply to them directly, because the
FLSA establishes a wage floor that prevents wages in general from being
dragged downward. The NWLC commented that the FLSA's definition of
``employ'' governs other worker protections, including the provision of
lactation breaks and spaces for breastfeeding mothers as well as anti-
discrimination protections. The Department agrees that the Independent
Contractor Rule failed to consider these issues.
D. Whether Withdrawing the Independent Contractor Rule Is Disruptive
The Department explained in the NPRM that, because the Independent
Contractor Rule had yet to take effect, withdrawing it would not be
disruptive. The NPRM pointed out that, as remains the case, courts have
not applied the Rule in deciding cases, and WHD has not implemented the
Rule. For example, WHD's Fact Sheet #13, titled ``Employment
Relationship Under the Fair Labor Standards Act (FLSA)'' and dated July
2008, does not contain the Rule's analysis for determining whether a
worker is an employee or independent contractor.\174\ WHD's Field
Operations Handbook addresses independent contractor status by simply
cross-referencing Fact Sheet #13 and likewise does not contain the
Rule's new economic realities test.\175\ WHD's elaws Advisor
compliance-assistance information regarding independent contractors
likewise does not contain the Rule's analysis.\176\ On January 26,
2021, WHD withdrew two opinion letters issued on January 19, 2021
applying the Rule's analysis to several factual scenarios.\177\ WHD
explained that the letters were ``issued prematurely because they are
based on [a Rule] that ha[s] not gone into effect.'' \178\ Accordingly,
the NPRM asserted that the regulated community has been functioning
under the current state of the law and the Department does not believe
that it would be negatively affected by continuing to do so were the
Rule to be withdrawn.
---------------------------------------------------------------------------
\174\ Fact Sheet #13 (July 2008), supra note 37.
\175\ Chapter 10 of Wage and Hour's Field Operations Handbook,
``FLSA Coverage: Employment Relationship, Statutory Exclusions,
Geographical Limits,'' is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/FOH_Ch10.pdf (last visited April 28,
2021). The relevant provision, section 10b05 (``Test of the
employment relationship''), is on page 6.
\176\ See https://webapps.dol.gov/elaws/whd/flsa/scope/ee14.asp
(last visited April 28, 2021).
\177\ See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited April 28, 2021), noting the withdrawal of
Opinion Letters FLSA2021-8 and FLSA2021-9.
\178\ Id.
---------------------------------------------------------------------------
Several commenters agreed that withdrawing the Rule would not be
disruptive. The State Officials agreed that, because the Rule has not
taken effect, it ``has not required the substantial expenditure of
compliance resources from the regulated community'' and ``has not
engendered substantial reliance interests.'' The State Officials
explained that, to the contrary, failing to withdraw the Rule would be
disruptive, as they believed the Rule ``would have led employers to
reclassify many employees as independent contractors overnight.'' The
State Officials argued that such reclassification and misclassification
would have disruptive consequences for workers and states who are
already
[[Page 24319]]
dealing with disruptions caused by the ongoing COVID-19 pandemic and
resulting unemployment. The Department agrees that it is inappropriate
to issue a rule during the pandemic that could increase the
classification of workers as independent contractors, and therefore
reduce the number of workers protected by the FLSA. Farmworker Justice
likewise agreed that any disruption caused by withdrawal would be
``minimal,'' because ``no adjustments would need to be made by workers,
employers, or courts. Instead, the regulated community would be free to
continue applying the decades of case law built up around the FLSA.''
Texas RioGrande Legal Aid suggested that withdrawing the Rule before it
went into effect would be far less disruptive than withdrawing it after
it went into effect, because employers could simply refrain from
reclassifying employees, whereas workers who were reclassified as a
result of the Rule going into effect would be less likely to know if
the Rule were later withdrawn and therefore less likely to insist on
being reclassified again.
Some commenters disagreed with the Department, asserting that
withdrawal of the Rule would be disruptive. Multiple commenters argued
that ``DOL did not consider the costs of compliance preparation many
individuals and businesses have already undertaken in anticipation of
the Final Rule becoming effective as scheduled.'' However, none of
these commenters presented evidence of such costs or even described
what kind of costs they incurred, so the Department cannot assess the
validity or significance of these claims, or quantify these possible
costs. Moreover, the Department would expect any such costs to be
minimal given that to the extent businesses had reason to incur costs
in preparation for the Rule's becoming effective--even though the Rule
imposed no new requirements on businesses--the Department announced on
February 5, 2021 that it was proposing to delay the effective date of
the Rule in order to reconsider the Rule,\179\ putting businesses on
notice that it was far from certain when the Rule would go into effect,
or in what form. In addition, any costs of complying with the
Independent Contractor Rule were created by the Rule and would not be
increased by its withdrawal. The Rule's withdrawal does not impose new
compliance costs on the regulated community, because it imposes no new
requirements. Employers must continue to comply with the currently
governing interpretations of the FLSA.
---------------------------------------------------------------------------
\179\ See 86 FR 8326.
---------------------------------------------------------------------------
Some commenters confused the one-time costs of coming into
compliance with the withdrawal of the Rule with the ongoing costs of
complying with the FLSA, which may be higher under the current
interpretation of the FLSA than under the interpretation contained in
the Independent Contractor Rule. For example, Capital Investment
Companies stated that the Department ``should not be able to simply
withdraw a rule that was developed after public notice and comment''
because the regulated community ``cannot be expected to be able to
shift gears every two months.'' It argued that ``DOL did not consider
the costs to the current properly-classified independent contractors
who may face a loss of business opportunities in the face of the
uncertainties resulting from the DOL's actions.'' The Mercatus Center
likewise argued that the Department's belief that withdrawal would not
be disruptive was inaccurate, because ``[a]ny valid analysis of the
final rule's withdrawal must be measured in reference to the
anticipated cost and benefits of the previous rule.''
These comments incorrectly assert that the Department is ignoring
the costs and benefits of not implementing the Independent Contractor
Rule. The Department has considered comments from the public, following
the same procedures used to promulgate the Rule in the first instance.
In doing so, the Department has measured the costs and benefits of
retaining the current interpretation of the FLSA by withdrawing the
Rule against the costs and benefits of enacting the Rule. The
Department's determination that the Rule's withdrawal will not be
disruptive does not mean that there will not be costs imposed on some
employers. By its nature, the FLSA imposes costs on employers in the
form of minimum wage and overtime pay requirements. However, the costs
to come into compliance with the Department's decision to withdraw the
Rule are minimal, because employers and businesses who engage
independent contractors will only need to comply with the statutory
interpretations that already apply. They will not need to ``shift
gears'' or change anything about their business practices, so long as
they are currently complying with the FLSA.
The Coalition to Promote Independent Entrepreneurs (CPIE) argued
that the Rule's withdrawal will cause confusion in future enforcement
actions brought by the Department, because a company accused of
misclassifying workers as independent contractors ``could respond by
relying on DOL's own research findings that are published in the
Federal Register.'' In other words, though the Independent Contractor
Rule would not be in effect, the company could rely on the Department's
reasoning behind the Rule. CPIE asked rhetorically, ``If this were to
occur, would DOL dispute its own published research findings?''
Contrary to the implications of this comment, there should be no
confusion about the Department's position. The Department is
withdrawing the Rule because, as explained throughout this final rule,
it believes that the Rule's justifications were insufficient to support
such a departure from courts' well-established analysis and the
Department's previous guidance. Accordingly, the Independent Contractor
Rule does not reflect the Department's interpretation.
Finally, a few commenters argued that withdrawal would be
disruptive if it occurred before the resolution of the pending lawsuit
challenging the Department's delay of the Independent Contractor Rule's
original March 8, 2021 effective date.\180\ The Coalition for Workforce
Innovation (CWI), which brought that lawsuit, argued that the
Department should avoid confusion by allowing that litigation to
determine whether the delay of the Rule's effective date was lawful.
CWI argued that the Department's ``assumption'' that the Independent
Contractor Rule is not currently in effect is ``faulty.'' Littler
Mendelson argued that ``insofar as the Department's arguments in
support of withdrawal of the Rule rests [sic] on its status as not yet
in effect, they are at best premature, and at worst, incorrect as a
matter of fact and law.''
---------------------------------------------------------------------------
\180\ See Coalition for Workforce Innovation v. Sec'y of Labor
(No. 1:21-cv-00130 E.D. Tex.).
---------------------------------------------------------------------------
The Department does not agree with these comments. The Independent
Contractor Rule is not currently in effect and is not currently applied
by the Department, courts, or others. The Department maintains that its
delay of the Rule's original effective date was proper for the reasons
explained in the final rule effectuating that delay,\181\ but declines
to comment on the ongoing litigation. Regardless of the outcome of the
lawsuit, the result of this withdrawal of the Rule is that longstanding
prior guidance, such as Fact Sheet #13, remains in effect. Even if the
Department's delay of the Rule's effective date were vacated such that
the Rule is deemed to have been in effect since March 8, 2021, any
disruption caused by the short period in which the Rule was in effect
would be outweighed by the reasons described in this final
[[Page 24320]]
rule to withdraw the Independent Contractor Rule. In other words, the
Department would withdraw the Independent Contractor Rule even if it
were currently in effect. Therefore, businesses can, as of publication
of this withdrawal of the Rule, continue to rely upon the prior,
familiar guidance even if the delay is later vacated and the Rule is
retroactively deemed to have been in effect from March 8 until the
issuance of this final rule. The disruption caused by the withdrawal
would accordingly remain limited.
---------------------------------------------------------------------------
\181\ See 86 FR 12535.
---------------------------------------------------------------------------
After carefully considering commenter feedback, the Department
maintains its belief that withdrawing the Independent Contractor Rule
will not result in significant disruption to the regulated community.
In particular, any businesses currently engaging workers properly
classified as independent contractors or individuals who now correctly
consider themselves to be independent contractors will be able to
continue to operate without any effect brought about by the absence of
new regulations. Businesses that had taken steps in preparation for the
Rule taking effect will not be precluded from adjusting their
relationships with workers or paying for new services from workers, and
can rely on past court decisions and WHD guidance to determine whether
those workers are employees under the FLSA or independent contractors.
E. Timing and Effect of Withdrawal
1. Effective Date of Final Rule
Section 553(d) of the Administrative Procedure Act provides that
substantive rules should take effect not less than 30 days after the
date they are published in the Federal Register unless ``otherwise
provided by the agency for good cause found.'' 5 U.S.C. 553(d)(3). The
Department finds that it has good cause to make this rule effective
immediately upon publication. Allowing for a 30-day delay between
publication and the effective date of this rulemaking would result in
the Independent Contractor Rule taking effect for a short period before
its withdrawal, which would cause confusion for regulated entities. The
``Regulatory Freeze Pending Review'' Memorandum described in section
I(D) above, which directed the review that led the Department to
propose withdrawing the Independent Contractor Rule, was issued on
January 20, 2021. Even after delaying the Rule's original effective
date of March 8, 2021 to May 7, 2021, the Department had less than 4
months to consider the significant and complex issues raised by the
Independent Contractor Rule as directed by the Memorandum and
subsequent guidance from the Office of Management and Budget \182\ and
to conduct notice-and-comment rulemaking based on that consideration as
well as input from commenters.
---------------------------------------------------------------------------
\182\ Memorandum M-21-14, Implementation of Memorandum
Concerning Regulatory Freeze Pending Review, https://www.whitehouse.gov/wp-content/uploads/2021/01/M-21-14-Regulatory-Review.pdf (last visited April 28, 2021).
---------------------------------------------------------------------------
Withdrawing the Rule immediately ends employers' and workers'
uncertainty about whether the Rule would go into effect at all
following the Memorandum and the delay of the Rule's effective date. At
least since the Memorandum, businesses have been unsure whether to
expect to apply the Rule's analysis to their employment practices.
Ending this uncertainty immediately benefits employers and workers
alike. To delay the withdrawal by 30 days would mean that the Rule
would be in effect from May 7, 2021, until the effective date
approximately one month later. To require businesses to apply the
Rule's analysis only to have them reassess the analysis when the Rule
is withdrawn would impose unnecessary costs with no benefits. And, as
pointed out by Texas RioGrande Legal Aid, it could have negative
effects on workers--in particular, low-wage workers--whose employment
status could be changed upon the Rule's taking effect, and would be
unlikely to know that they were again entitled to FLSA protections.
Because withdrawing the Rule will merely retain the status quo rather
than impose any new requirements, immediate withdrawal will not require
any reassessments of employment status. The regulated community does
not require time to adjust to new requirements, because there are none
imposed by withdrawal of the Rule. Because a delay of this rule's
effective date would be impracticable and unnecessary, the Department
finds it has good cause to make this withdrawal effective immediately
upon publication.
2. Effect of Withdrawal
For the reasons described above, the Department has decided to
withdraw the Independent Contractor Rule, effective immediately.
Accordingly, the guidance that the Rule would have introduced as part
795 of Title 29 of the Code of Federal Regulations will not be
introduced and the revisions that the Rule would have made to 29 CFR
780.330(b) and 29 CFR 788.16(a) will not occur and their text will
remain unchanged. The Department did not propose and is not now issuing
regulatory guidance to replace the guidance that the Independent
Contractor Rule would have introduced as part 795.
III. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) and its attendant
regulations require an agency to consider its need for any information
collections, their practical utility, as well as the impact of
paperwork and other information collection burdens imposed on the
public, and how to minimize those burdens. The PRA typically requires
an agency to provide notice and seek public comments on any proposed
collection of information contained in a proposed rule. This final rule
does not contain a collection of information subject to Office of
Management and Budget approval under the PRA.
IV. 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.\183\ 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. This final rule is economically significant under section 3(f)
of Executive Order 12866 because it is withdrawing an economically
significant rule.
---------------------------------------------------------------------------
\183\ See 58 FR 51735 (Sept. 30, 1993).
---------------------------------------------------------------------------
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,
[[Page 24321]]
consistent with obtaining the regulatory objectives; and that, in
choosing among alternative regulatory approaches, the agency has
selected those approaches that maximize net benefits.\184\ 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. The analysis below outlines the
impacts that the Department anticipates may result from the Rule's
withdrawal and was prepared pursuant to the above-mentioned executive
orders.
---------------------------------------------------------------------------
\184\ See 76 FR 3821 (Jan. 21, 2011).
---------------------------------------------------------------------------
B. Background
On January 7, 2021, WHD published a final rule titled ``Independent
Contractor Status Under the Fair Labor Standards Act'' (Independent
Contractor Rule or Rule).\185\ In this final rule, the Department is
withdrawing the Independent Contractor Rule, which has not taken
effect. Aside from minimal rule familiarization costs, the Department
also provides below a qualitative discussion of the transfers that may
be avoided by withdrawing the Rule.
---------------------------------------------------------------------------
\185\ See 86 FR 1168. WHD had published a notice of proposed
rulemaking requesting comments on a proposal. See 85 FR 60600 (Sept.
25, 2020). The final rule adopted ``the interpretive guidance set
forth in [that proposal] largely as proposed.'' 86 FR 1168.
---------------------------------------------------------------------------
C. Costs
1. Rule Familiarization Costs
Withdrawing the Independent Contractor Rule will impose direct
costs on businesses that will need to review the withdrawal. To
estimate these regulatory familiarization costs, the Department
determined: (1) The number of potentially affected entities, (2) the
average hourly wage rate of the employees reviewing the withdrawal, and
(3) the amount of time required to review the withdrawal. It is
uncertain whether these entities would incur regulatory familiarization
costs at the firm or the establishment level.\186\ For example, in
smaller businesses there might be just one specialist reviewing the
withdrawal, while larger businesses might review it at corporate
headquarters and determine policy for all establishments owned by the
business. To avoid underestimating the costs of the withdrawal, the
Department uses both the number of establishments and the number of
firms to estimate a potential range for regulatory familiarization
costs. The lower bound of the range is calculated assuming that one
specialist per firm will review the withdrawal, and the upper bound of
the range assumes one specialist per establishment.
---------------------------------------------------------------------------
\186\ An establishment is a single physical location where one
predominant activity occurs. A firm is an establishment or a
combination of establishments.
---------------------------------------------------------------------------
The most recent data on private sector entities at the time this
NPRM was drafted are from the 2017 Statistics of U.S. Businesses
(SUSB), which reports 5,996,900 private firms and 7,860,674 private
establishments with paid employees.\187\ Because the Department is
unable to determine how many of these businesses are interested in
using independent contractors, this analysis assumes all businesses
will undertake review.
---------------------------------------------------------------------------
\187\ Statistics of U.S. Businesses 2017, https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html,
2016 SUSB Annual Data Tables by Establishment Industry.
---------------------------------------------------------------------------
The Department believes ten minutes per entity, on average, to be
an appropriate review time here. This rulemaking would withdraw the
Independent Contractor Rule and would not set forth any new regulations
in its place. Additionally, the Department believes that many entities
do not use independent contractors and thus would not spend any time
reviewing the withdrawal. Therefore, the ten-minute review time
represents an average of no time for the entities that do not use
independent contractors, and potentially more than ten minutes for
review by some entities that might use independent contractors.
The Department's analysis assumes that the withdrawal would be
reviewed by Compensation, Benefits, and Job Analysis Specialists (SOC
13-1141) or employees of similar status and comparable pay. The median
hourly wage for these workers was $31.04 per hour in 2019, the most
recent year of data available.\188\ The Department also assumes that
benefits are paid at a rate of 46 percent \189\ and overhead costs are
paid at a rate of 17 percent of the base wage, resulting in a fully
loaded hourly rate of $50.60.
---------------------------------------------------------------------------
\188\ Occupational Employment and Wages, May 2019, https://www.bls.gov/oes/current/oes131141.htm.
\189\ The benefits-earnings ratio is derived from the Bureau of
Labor Statistics' Employer Costs for Employee Compensation data
using variables CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------
The Department estimates that the lower bound of regulatory
familiarization cost range would be $50,675,004 (5,996,900 firms x
$50.60 x 0.167 hours), and the upper bound, $66,424,267 (7,860,674
establishments x $50.60 x 0.167 hours). The Department estimates that
all regulatory familiarization costs would occur in Year 1.
Additionally, the Department estimated average annualized costs of
this proposed withdrawal over 10 years. Over 10 years, it would have an
average annual cost of $6.7 million to $8.8 million, calculated at a 7
percent discount rate ($5.8 million to $7.6 million calculated at a 3
percent discount rate). All costs are in 2019 dollars.
In their comment, the Financial Services Institute (FSI) asserted
that the rule familiarization costs are understated because ``they fail
to consider the costs that will be imposed on stakeholders by repeating
their activities of the very recent notice/comment period.'' However,
they also acknowledged that there has been no change in law since the
Independent Contractor Rule was announced. The Department notes that
estimates of rule familiarization costs do not usually include the time
it takes stakeholders to comment on the rule, and instead only include
the time it takes to read and become familiar with the final rule.
2. Other Impacts
In the Independent Contractor Rule, the Department estimated cost
savings associated with increased clarity, as well as cost savings
associated with reduced litigation. The Department does not anticipate
that this withdrawal will increase costs in these areas, or result in
greater costs as compared to the Rule. Although the intent of the
Independent Contractor Rule was to provide clarity, it would also have
introduced several concepts to the FLSA economic realities analysis
that neither courts nor WHD have previously applied. Because the Rule
would have been unfamiliar and could have led to inconsistent
approaches and/or outcomes, and because withdrawal maintains the status
quo, the Department does not believe that withdrawal of the Independent
Contractor Rule will result in decreased clarity for stakeholders. As
discussed above in section II(B), numerous commenters agreed that the
Rule would not have increased clarity, and that there would have
instead been increased litigation following the Rule due to uncertainty
over whether and to what extent courts would adopt the Rule's
complicated guidance.
Some commenters asserted that there would be significant costs
associated with withdrawing the Independent Contractor Rule. For
example, the National Retail Federation (NRF) and Littler Mendelson's
Workplace Policy
[[Page 24322]]
Institute (WPI) claimed that employers had already begun to implement
the Rule, even though it had not yet gone into effect. WPI claimed
that, in the withdrawal NPRM, the Department ignored the costs of
compliance preparation that many businesses have already undertaken in
anticipation of the rule becoming effective. The commenters did not
provide information on the types of activities that businesses have
taken to implement the Rule, or how much time they spent. The
Department also did not receive any data on the number of businesses
that have incurred implementation costs, or the magnitude of these
costs, so the Department has not quantified them here. Any costs that
were incurred by businesses in response to the publication of the
Independent Contractor Rule are sunk costs, and would not be affected
by the withdrawal. Commenters did not provide any information on what
changes businesses would have to undo following the withdrawal.
In discussing the effects of the Independent Contractor Rule, many
commenters referenced the analysis that the Economic Policy Institute
(EPI) provided in their comment to the 2020 Independent Contractor
NPRM. EPI itself commented to again explain the results of its study,
which estimated that the Independent Contractor Rule would have cost
workers more than $3.7 billion annually. This figure represents $400
million in new annual paperwork costs and a transfer to employers of at
least $3.3 billion in the form of reduced compensation for employees
who are converted to independent contractors. EPI also estimated a loss
of $750 million in employer contributions to social insurance funds
such as Social Security, Medicare, Unemployment Insurance, and Workers'
Compensation. The Department believes that although the magnitude of
this estimate may be overstated, for reasons discussed in response to
the comment on the Independent Contractor Rule, the discussion of
impacts to workers is valid. EPI did not directly address the
Department's criticisms of its estimates in the Independent Contractor
Rule, but it agreed with the Department's statement in the NPRM that
EPI's analysis may be useful in understanding the types of impacts the
Rule would have had on workers.
Michael D. Farren and Liya Palagashvili of the Mercatus Center
provided a detailed comment evaluating the Department's economic
analysis. In their comment, they estimated the costs associated with
withdrawing the Independent Contractor Rule, stating that the annual
cost of withdrawing the Rule is approximately $1.85 billion. After
thoroughly reviewing this analysis, the Department concludes that this
cost estimate is not accurate, for the reasons described below.
Farren and Palagashvili note that their analysis is based on the
framework provided by EPI, in order to allow their estimate to be
comparable. They begin by estimating the own-wage elasticity of
employment costs from a meta-analysis of literature, finding that ``the
average own-wage elasticity with respect to changes in employment costs
is -0.66.'' They conclude that this suggests that workers capture 66
percent of the decrease in employer costs associated with reclassifying
employees as independent contractors. The Department believes that this
is not an accurate application of the findings of the meta-analysis.
The studies indicate that on average, the impact of a 1.0% increase in
taxes is a 0.66% decrease in wages for employees. It may be
inappropriate to assume that this estimate for employees also applies
to independent contractors. Additionally, it is unclear whether non-tax
labor costs would have the same elasticity as taxes. The Department
also notes that the studies referenced in their meta-analysis come from
many different countries, some of which may reflect a different
economic situation than that of the United States, and may not be
applicable to an analysis of worker classification in the United
States. Although the Department recognizes that regulatory impacts are
often experienced across both workers and employers (and, more
generally, labor market outcomes are the result of tradeoffs made by
both workers and employers), the Department's analysis on earnings does
not find that independent contractors capture a large portion of the
decrease in employer costs. As discussed in section IV(D)(4), when
controlling for observable characteristics related to earnings, the
data fail to show that independent contractors have an earnings premium
over employees sufficient to cover the increased tax liability.
The Mercatus Center commenters also estimate the average
willingness to pay for flexible work, by stating that a National Bureau
of Economic Research (NBER) working paper finds that the average worker
is willing to accept a salary that is 10.4 percent lower for a flexible
job. Although the Department could not find this figure in the three
papers that were cited in the comment, two of the three papers have a
range of results that include approximately 10 percent.\190\ The
Department does not believe that the first paper cited is appropriate
for applying to the analysis, because that study was a field experiment
using a Chinese job board, and only looked at college-educated workers
with 5-10 years of experience, all applying for professional/executive
positions. The tradeoff between wages and flexibility for this
population might not be comparable to that of the total population of
workers in the United States. The authors of the paper also note that
they ``look at a narrow set of jobs (and at one employer), so the
results may not generalize to different types of jobs and the workers
searching for them.''
---------------------------------------------------------------------------
\190\ The three papers cited were Haoran He, David Neumark, and
Qian Weng, ``Do Workers Value Flexible Jobs? A Field Experiment''
(NBER Working Paper No. 25423, National Bureau of Economic Research,
Cambridge, MA, July 2020), 26; Nicole Maestas et al., ``The Value of
Working Conditions in the United States and Implications for the
Structure of Wages'' (NBER Working Paper No. 25204, National Bureau
of Economic Research, Cambridge, MA, October 2018). M. Keith Chen et
al., ``The Value of Flexible Work: Evidence from Uber Drivers,''
Journal of Political Economy 127, no. 6 (December 2019): 2735-94.
---------------------------------------------------------------------------
The Mercatus Center assumed that workers would receive increased
flexibility if they are reclassified as independent contractors, but
this is not necessarily true. Many employees already enjoy flexible
work schedules \191\--and the share of employees with such flexible
work arrangements is likely to increase as a result of the COVID-19
pandemic.\192\ If an employee with a flexible work arrangement is
converted to an independent contractor, that worker might or might not
experience an increase in flexibility. Though the Mercatus Center
stated that it would be illegal for an employer to convert an employee
to an independent contractor without increasing their flexibility, this
[[Page 24323]]
does not accurately reflect the Independent Contractor Rule or WHD's
prior interpretations, because control over one's schedule is only one
part of one factor in the analysis. The assumption that all workers
converted to independent contractors would benefit from increased
flexibility may be inaccurate.
---------------------------------------------------------------------------
\191\ Flexible work schedules do not prevent courts from finding
workers to be employees. See, e.g., Silk, 331 U.S. at 706 (finding
that coal unloaders were employees despite their ability to show up
to work ``when they wish and work for others at will''); Verma v.
3001 Castor, Inc., 937 F.3d 221, 230 (3d Cir. 2019) (finding that
dancers were employees and not independent contractors despite fact
that they could select their own shifts and work for competitors);
DialAmerica Mktg., 757 F.2d at 1380 (finding that home researchers
were employees even though they were ``free to choose the weeks and
hours they wanted to work'').
\192\ See Society for Human Resources Management, ``Managing
Flexible Work Arrangements,'' https://www.shrm.org/ResourcesAndTools/tools-and-samples/toolkits/Pages/managingflexibleworkarrangements.aspx (last visited April 28, 2021)
(``Now that many employers have experienced how successful
telecommuting can be for their organization or how work hours that
differ from the normal 9-to-5 can be adopted without injury to
productivity, offering flexible work arrangements may become even
more commonplace.'').
---------------------------------------------------------------------------
These commenters then use these estimates to calculate the benefits
to workers when employees are reclassified as independent contractors.
The commenters first calculate the value of each worker's lost
supplemental income, lost employment fringe benefits (paid leave,
health insurance, and retirement benefits), and net change in FICA
(Federal Insurance Contributions Act) tax liability.\193\ They then
calculate the amount that workers would capture of these employer cost
savings using the average own-wage elasticity of 0.66.\194\ From that
amount, they subtract the amount that they claim workers are willing to
forgo for greater flexibility. Comparing the net gains to the net
losses, Farren and Palagashvili say that workers will receive a net
benefit of $414. The Department believes that the commenters misapplied
the estimate of elasticity when calculating this benefit, because they
multiplied 0.66 by total reduced costs. The Department believes it is
more appropriate to find the percent reduction in cost, and apply that
percentage to total wages. When adjusting for this change in the
analysis, it would result in a net loss to workers.\195\ Moreover, the
short-hand term ``total reduced costs'' lumps together several types of
impacts, some of which should not be used as inputs into the type of
comparative statics analysis suggested by the commenters; for example,
although legal tax liability shifts depending on whether workers are
employees or independent contractors, the size of the tax wedge is
unchanged.
---------------------------------------------------------------------------
\193\ The commenters calculate a sum of $6,185 using data in
EPI's comment: Heidi Shierholz, EPI Comments on Independent
Contractor Status, 5-6.
\194\ $6,186 x 0.66 = $4,082.
\195\ Assuming the bare minimum employer costs of wages plus
cost savings listed ($30,387), the Department calculates that of the
cost savings, $3,251 would be passed along to employees. Even with
the assumption that this amount would be paid to the independent
contractor, and incorporating the flexibility benefits that the
commenters claim independent contractors experience, it results in a
net loss of $417 per worker.
---------------------------------------------------------------------------
Additionally, the Mercatus Center noted that its estimates excluded
one cost from EPI's analysis: The cost of additional paperwork that
independent contractors must do. EPI estimated this cost would average
$777, which included an IRS estimate of an additional 13 hours of tax
preparation, an average of half an hour a week of other, non-tax
paperwork, and the cost of accounting and tax preparation software that
independent contractors use. The Mercatus Center explained that it
excluded these costs because ``[t]hese costs are required only for
business expense deductibility purposes, and workers would not engage
in such paperwork if their expected return were not positive.''
However, workers would not know if their return would be positive until
after they spent this time calculating their deductible expenses. The
IRS estimate of additional time independent contractors spend on tax
preparation is an average, so any independent contractors who do not
spend extra time on taxes are already accounted for in that average.
Moreover, only 13 of the 39 hours of additional paperwork estimated by
EPI were tax-related, and the Mercatus Center analysis did not account
for the time spent on non-tax paperwork. The $777 in paperwork expenses
that the Mercatus Center excluded from its analysis would outweigh its
conclusion of $414 in average net benefits to employees converted to
independent contractors. Even a somewhat smaller paperwork burden would
result in a net loss to workers.
In sum, the Department believes that the Mercatus Center's
criticisms of EPI's study overestimate the benefits to employees
converted to independent contractors in the form of higher wages and
greater flexibility, while underestimating the costs imposed on such
workers. Though it remains difficult to quantify the costs and benefits
of the Rule precisely, and the Department believes that the magnitude
of the costs in EPI's analysis may be overstated, the Department
nonetheless believes that the EPI estimate correctly concluded that
workers affected by the Independent Contractor Rule would suffer a net
loss.
One of the main benefits discussed in the Rule was the increased
flexibility associated with independent contractor status. The
Department acknowledges that although many independent contractors
report that they value the flexibility in hours and work, employment
and flexibility are not mutually exclusive. Many employees similarly
value and enjoy such flexibility.
Commenters such as the Mercatus Center and the Coalition for
Workforce Innovation (CWI) also claim that DOL's analysis does not
include the value of workplace flexibility, and that evidence does not
show that employees also have flexibility. The Department believes that
employment and flexibility are not mutually exclusive, and many
employees do have flexibility. For example, a 2016 study found that 81
percent of U.S. employers allow employees some flexibility in
schedule.\196\ A 2019 USAToday article cites results from surveys
indicating that a large percentage of companies offer flexibility and a
large percentage of employees say that they have flexibility in their
jobs.\197\
---------------------------------------------------------------------------
\196\ Kenneth Matos, Ellen Galinsky and James T. Bond. 2016
National Study of Employers, 2017, https://www.familiesandwork.org/research/workplace-research-national-study-of-employers.
\197\ Paul Davidson, ``More employers offer flexible hours, but
many grapple with how to make it succeed.'','' October 20, 2019.
https://www.usatoday.com/story/money/2019/10/20/flexible-hours-jobs-more-firms-offer-variable-schedules/4020990002/.
---------------------------------------------------------------------------
Some commenters assert that the Department's analysis ignores the
component of the workforce that like being independent contractors. For
example, the Financial Services Institute (FSI) says that DOL ``utterly
ignores the possibility that true independent contractors exist'' and
that independent financial advisors are proud to be their ``own boss.''
Throughout their comment, CWI cites many surveys, some with
questionable survey sampling procedures, showing that independent
contractors like the flexibility of their work. For example, in
opposition to the Department's withdrawal, CWI references a study on
freelancing, which concludes that the freelance workforce contributes
over a trillion dollars to the U.S. economy, freelance workers are
highly skilled, and that freelancing increases earnings potential.\198\
The Department appreciates the importance of freelance work, but
believes that comments such as these lack evidence to show that these
opportunities were restricted before the Independent Contractor Rule.
Therefore, the withdrawal will not create further restrictions on
independent contractor work beyond those imposed by existing guidance.
Existing freelancers who are properly classified as independent
contractors will not be affected by this withdrawal. Additionally, the
data cited by CWI showing that freelancing increases earning potential
is limited to freelancers who voluntarily left their employer to become
freelancers. This population could be different from workers who would
have been reclassified as independent contractors because of the
Independent Contractor Rule.
---------------------------------------------------------------------------
\198\ https://www.upwork.com/i/freelance-forward.
---------------------------------------------------------------------------
[[Page 24324]]
D. Transfers
The Department believes that it is important to provide a
qualitative discussion of the transfers that would have occurred under
the Independent Contractor Rule. In the economic analysis originally
accompanying the Rule, the Department assumed that the Rule would lead
to an increase in the number of independent contractor arrangements,
and acknowledged that some of this increase could be due to businesses
reclassifying employees as independent contractors.\199\ As discussed
in the Rule and again below, an increase in independent contracting
could have resulted in transfers associated with employer-provided
fringe benefits, tax liabilities, and minimum wage and overtime
pay.\200\ By withdrawing the Rule, these transfers from employees (and,
in some cases, from state or local governments and the recipients of
government-operated unemployment insurance of worker's compensation
programs) to employers are avoided.
---------------------------------------------------------------------------
\199\ See 86 FR 1225-27.
\200\ See 86 FR 1216-18, 1223-24.
---------------------------------------------------------------------------
1. Employer Provided Fringe Benefits
The reclassification of employees as independent contractors, or
the use of independent contracting relationships as opposed to
employment, decreases access to employer-provided fringe benefits such
as health care or retirement benefits. According to the BLS Current
Population Survey (CPS) Contingent Worker Supplement (CWS), 75.4
percent of independent contractors have health insurance, compared to
84 percent of employees.\201\ This gap between independent contractors
and employees is also true for low-income workers. Using CWS data, the
Department compared health insurance rates for workers earning less
than $15 per hour and found that 71.0 percent of independent
contractors have health insurance compared with 78.5 percent of
employees. Lastly, the Department considered whether this gap could be
larger for traditionally underserved groups or minorities. Considering
the subsets of independent contractors who are female, Hispanic, or
Black, only the Hispanic independent contractors have a statistically
significant difference in the percentage of workers with health
insurance (estimated to be about 18 percentage points lower).\202\
---------------------------------------------------------------------------
\201\ 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.
\202\ To measure if the difference between these proportions is
statistically significant, the Department used the replicate weights
for the CWS. At a 0.05 significance level, the proportion of
Hispanic independent contractors with any health insurance is lower
than the proportion for all independent contractors.
---------------------------------------------------------------------------
Additionally, 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 BLS Employer Costs for Employee Compensation (ECEC) found
that employers pay 5.3 percent of employees' total compensation in
retirement benefits on average ($1.96/$37.03). If a worker is
reclassified from employee to independent contractor status, that
worker would likely no longer receive employer-provided retirement
benefits.
2. Tax Liabilities
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, as discussed in the
Rule, if workers' classifications change from employees to independent
contractors, there may be a transfer in federal tax liabilities from
employers to workers.\203\ Although the Rule only addressed whether a
worker is an employee or an independent contractor 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, including for tax purposes.\204\ These payroll taxes
include the 6.2 percent employer component of the Social Security tax
and the 1.45 percent employer component of the Medicare tax.\205\ In
sum, 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). Some or all of this increased
tax liability may ultimately be paid for by a business if it increases
pay to compensate independent contractors for this tax liability, and
changes in compensation are discussed separately below. Changes in
benefits, tax liability, and earnings must be considered in tandem to
identify how the standard of living may change.
---------------------------------------------------------------------------
\203\ See 86 FR 1218.
\204\ 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 standard for determining
whether a worker is an FLSA employee or an independent contractor
may affect the businesses' classification decisions for purposes of
benefits and legal requirements under other federal laws.
\205\ Internal Revenue Service, ``Publication 15, (Circular E),
Employer's Tax Guide'' (Dec. 23, 2019), https://www.irs.gov/pub/irs-pdf/p15.pdf. The social security tax has a wage base limit of
$137,700 in 2020. An additional Medicare Tax of 0.9 percent applies
to wages paid in excess of $200,000 in a calendar year for
individual filers.
---------------------------------------------------------------------------
In addition to affecting tax liabilities for workers, some
commenters claimed that the Rule would have an impact on state tax
revenue and budgets. SWACCA noted that taxpayer costs would have
increased following the Rule. They state that an increase in
independent contractor arrangements leads to reduced tax revenues and
increased costs to Federal, State, and local governments for programs
like unemployment insurance and workers compensation. A comment from
the State Officials also claimed that reclassification following the
Independent Contractor Rule would disrupt States' efforts to administer
their unemployment insurance programs, especially at a time when they
have been processing record numbers of unemployment claims.
Because independent contractors do not receive benefits like health
insurance, workers compensation, and retirement plans from an employer,
the State Officials suggested that a rule that increases the prevalence
of independent contracting could shift this burden to State and Federal
governments.
3. FLSA Protections
When workers are classified as independent contractors, the minimum
wage, overtime pay, and other requirements of the FLSA no longer apply.
The 2017 CWS data indicate that 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).\206\ Research on drivers who are classified as independent
contractors and work for online transportation companies in California
and New York also finds that many drivers receive significantly less
than the applicable state minimum wages.\207\ Commenters asserted that
[[Page 24325]]
because of the COVID-19 pandemic and the resulting economic fallout,
there is an even greater need to ensure workers have access to FLSA
protections. The Center for Law and Social Policy (CLASP) cited a study
showing that minimum wage violations increased dramatically as
unemployment rose during the Great Recession, disproportionately
impacting Latinx, Black, and female workers.\208\ They anticipate that
the recent period of high unemployment could lead to similar
violations.
---------------------------------------------------------------------------
\206\ In their comment, CWI noted that the CWS data that was
cited by the Department does not include this data. These
calculations cannot be found in the tables published by BLS, but are
from the Department's own calculations of the CWS microdata.
\207\ 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.
\208\ Fine et al., Maintaining effective U.S. labor standards
enforcement through the coronavirus recession, Washington Center for
Equitable Growth, Sept. 3, 2020, available at https://equitablegrowth.org/research-paper/maintaining-effective-u-s-labor-standards-enforcement-through-the-coronavirus-recession/.
---------------------------------------------------------------------------
Concerning overtime pay, not only do independent contractors not
receive the overtime pay premium, but the number of overtime hours
worked is also higher. Analysis of the CWS data indicated that, before
conditioning on covariates, primary self-employed independent
contractors are more likely to work overtime (more than 40 hours in a
workweek) at their main job (29 percent for self-employed independent
contractors and 17 percent for employees).\209\
---------------------------------------------------------------------------
\209\ The Department based this calculation on the percentage of
workers in the CWS data who respond to the PEHRUSL1 variable (``How
many hours per week do you usually work at your main job?'') with
hours greater than 40. Workers who answer that hours vary were
excluded from the calculation. The Department also applied the
exclusion criteria used by Katz and Krueger (exclude workers
reporting weekly earnings less than $50 and workers whose calculated
hourly rate (weekly earnings divided by usual hours worked per week)
is either less than $1 or more than $1,000).
---------------------------------------------------------------------------
Commenters referenced other FLSA protections that employees would
lose if they were reclassified as independent contractors following the
Rule. The National Women's Law Center points out that the FLSA also
contains provisions that are centered on ensuring that women are
treated fairly at work, including employer-provided accommodations for
breastfeeding workers and protections against pay discrimination.
4. Hourly Wages, Bonuses, and Related Compensation
Some commenters asserted that independent contractors are
compensated better than employees, citing discussions of earnings from
the Independent Contractor Rule. The Department is concerned that its
discussion of data on the differences in earnings between employees and
independent contractors in the Independent Contractor Rule was
confusing and potentially inaccurate, so the findings and methodology
are discussed again here. Independent contractors are often expected to
earn a wage premium to compensate for reduced fringe benefits,
increased tax liability and associated paperwork costs. However, due to
asymmetric information, differences in bargaining power, or a
willingness to trade earnings for increased flexibility, this may not
hold. The Department compared the average hourly wages of current
employees and independent contractors to provide some indication of the
impact on wages of a worker who is reclassified from an employee to an
independent contractor.
The Department used an approach similar to Katz and Krueger
(2018).\210\ Both regressed hourly wages on independent contractor
status \211\ and observable differences between independent contractors
and employees (e.g., occupation, sex, potential experience, education,
race, and ethnicity) to help isolate the impact of independent
contractor status on hourly wages. Katz and Krueger used the 2005 CWS
and the 2015 RAND American Life Panel (ALP) (the 2017 CWS was not
available at the time of their analysis). The Department used the 2017
CWS.\212\
---------------------------------------------------------------------------
\210\ L. Katz and A. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,''
(2018).
\211\ On-call workers, temporary help agency workers, and
workers provided by contract firms are excluded from the base group
of ``traditional'' employees.
\212\ 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. Choice of exclusionary
criteria from Katz and Krueger (2018), supra note 210.
---------------------------------------------------------------------------
Both analyses found similar results. A simple comparison of mean
hourly wages showed that independent contractors tend to earn more per
hour than employees do (e.g., $27.29 per hour for all independent
contractors versus $24.07 per hour for employees using the 2017 CWS).
However, when controlling for observable differences between workers,
Katz and Krueger found no statistically significant difference between
independent contractors' and employees' hourly wages in the 2005 CWS
data. Although their analysis of the 2015 ALP data found that primary
independent contractors earned more per hour than traditional employees
do, they recommended caution in interpreting these results due to the
imprecision of the estimates.\213\ The Department found no
statistically significant difference between independent contractors'
and employees' hourly wages in the 2017 CWS data.
---------------------------------------------------------------------------
\213\ See top of page 20, ``Given the imprecision of the
estimates, we recommend caution in interpreting the estimates from
the [ALP].''
---------------------------------------------------------------------------
Based on these inconclusive results, the Department believes it is
inappropriate to conclude independent contractors generally earn a
higher hourly wage than employees do. Therefore, the Department does
not assert that wages would be impacted due to the Rule or its
withdrawal. The Department ran another hourly wage rate regression
including additional variables to determine if independent contractors
in underserved groups are impacted differently by including interaction
terms for female independent contractors, Hispanic independent
contractors, and Black independent contractors. The results did not
find a statistically significant difference in earnings for these
groups.\214\
---------------------------------------------------------------------------
\214\ The coefficient for Black independent contractors was
negative and statistically significant at a 0.10 level (with a p-
value of 0.067). However, a significance level of 0.05 is more
commonly used.
---------------------------------------------------------------------------
The Mercatus Center commenters also claim that independent
contractors earn supplemental compensation, which the Department
believes is unsupported by widespread evidence for most independent
contractors. They say that ``[t]he analysis assumes that independent
contractors do not receive supplemental compensation, despite
widespread evidence to the contrary in the platform economy, such as
signing and performance bonuses.'' The commenters cite one Wall Street
Journal article to support their assertion, and this article also
discusses the difficulty finding and retaining workers, including
statements like, ``turnover is driven by gig workers' unhappiness with
their take-home pay,'' ``a 2015 analysis found 45% of Uber's workforce
left in their first year,'' and, ``in any given month, an estimated 1
in six participants in the gig economy is new, and more than half of
such workers exit within a year.'' \215\
---------------------------------------------------------------------------
\215\ Kelsey Gee, ``In a Job Market This Good, Who Needs to Work
in the Gig Economy?,'' Wall Street Journal, August 8, 2017.
---------------------------------------------------------------------------
V. Regulatory Flexibility Act (RFA) Analysis
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, Public Law 104-121 (1996), requires federal agencies engaged in
rulemaking
[[Page 24326]]
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 this withdrawal to
determine whether it will have a significant economic impact on a
substantial number of small entities.
The most recent data on private sector entities at the time this
NPRM was drafted are from the 2017 Statistics of U.S. Businesses
(SUSB), which reports 5,996,900 private firms and 7,860,674 private
establishments with paid employees.\216\ Of these, 5,976,761 firms and
6,512,802 establishments have fewer than 500 employees. The per-entity
cost for small business employers is the regulatory familiarization
cost of $8.43, or the fully loaded mean hourly wage of a Compensation,
Benefits, and Job Analysis Specialist ($50.60) multiplied by \1/6\ hour
(ten minutes). Because this cost is 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 withdrawal will not have
a significant economic impact on a substantial number of small
entities.
---------------------------------------------------------------------------
\216\ Statistics of U.S. Businesses 2017, https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html,
2016 SUSB Annual Data Tables by Establishment Industry.
---------------------------------------------------------------------------
VI. Unfunded Mandates Reform Act of 1995
The Unfunded Mandates Reform Act of 1995 (UMRA) \217\ 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 $165
million ($100 million in 1995 dollars adjusted for inflation) or more
in at least one year.\218\ 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. This withdrawal is not expected to result in
increased expenditures by the private sector or by state, local, and
tribal governments of $165 million or more in any one year.
---------------------------------------------------------------------------
\217\ See 2 U.S.C. 1501.
\218\ 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.
---------------------------------------------------------------------------
VII. Executive Order 13132, Federalism
The Department has (1) reviewed this proposed withdrawal in
accordance with Executive Order 13132 regarding federalism and (2)
determined that it does not have federalism implications. The
Independent Contractor Rule's withdrawal will not have substantial
direct effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government.
VIII. Executive Order 13175, Indian Tribal Governments
This withdrawal will not have substantial direct effects on one or
more Indian tribes, on the relationship between the Federal Government
and Indian tribes, or on the distribution of power and responsibilities
between the Federal Government and Indian tribes.
Signed this 30th day of April, 2021.
Jessica Looman,
Principal Deputy Administrator, Wage and Hour Division.
[FR Doc. 2021-09518 Filed 5-5-21; 8:45 am]
BILLING CODE 4510-27-P