[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86 FR 1168, and delayed on March 7, 2021 at 86 FR 12535 is withdrawn.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