Federal Register, Volume 87 Issue 197 (Thursday, October 13, 2022)

[Federal Register Volume 87, Number 197 (Thursday, October 13, 2022)]
[Proposed Rules]
[Pages 62218-62275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-21454]

[[Page 62217]]

Vol. 87

Thursday,

No. 197

October 13, 2022

Part III

Department of Labor

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Wage and Hour Division

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29 CFR Parts 780, 788 and 795

Employee or Independent Contractor Classification Under the Fair Labor
Standards Act; Proposed Rule

Federal Register / Vol. 87 , No. 197 / Thursday, October 13, 2022 /
Proposed Rules

[[Page 62218]]

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 780, 788, and 795

RIN 1235-AA43

Employee or Independent Contractor Classification Under the Fair
Labor Standards Act

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The U.S. Department of Labor (the Department) is proposing to
modify Wage and Hour Division regulations to revise its analysis for
determining employee or independent contractor classification under the
Fair Labor Standards Act (FLSA or Act) to be more consistent with
judicial precedent and the Act's text and purpose.

DATES: Submit written comments on or before November 28, 2022.

ADDRESSES: You may submit comments, identified by Regulation Identifier
Number (RIN) 1235-AA43, by either of the following methods:
Electronic Comments: Submit comments through the Federal
eRulemaking Portal at https://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Address written submissions to Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210.
Instructions: Please submit only one copy of your comments by only
one method. Of the two methods, the Department strongly recommends that
commenters submit their comments electronically via https://www.regulations.gov to ensure timely receipt prior to the close of the
comment period, as the Department continues to experience delays in the
receipt of mail. All comments must be received by 11:59 p.m. ET on
November 28, 2022, for consideration in this rulemaking; comments
received after the comment period closes will not be considered.
Commenters submitting file attachments on https://www.regulations.gov are advised that uploading text-recognized
documents--i.e., documents in a native file format or documents which
have undergone optical character recognition (OCR)--enable staff at the
Department to more easily search and retrieve specific content included
in your comment for consideration. This recommendation applies
particularly to mass comment submissions, when a single sponsoring
individual or organization submits multiple comments on behalf of
members or other affiliated third parties. The Wage and Hour Division
(WHD) posts such comments as a group under a single document ID number
on https://www.regulations.gov.
Anyone who submits a comment (including duplicate comments) should
understand and expect that the comment will become a matter of public
record and will be posted without change to https://www.regulations.gov, including any personal information provided.
Accordingly, the Department requests that no business proprietary
information, copyrighted information, or personally identifiable
information be submitted in response to this notice of proposed
rulemaking (NPRM).
Docket: For access to the docket to read background documents or
comments, go to the Federal eRulemaking Portal at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a
toll-free number). Alternative formats are available upon request by
calling 1-866-487-9243. If you are deaf, hard of hearing, or have a
speech disability, please dial 7-1-1 to access telecommunications relay
services.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or logging onto WHD's website for a nationwide listing of WHD
district and area offices at https://www.dol.gov/whd/america2.htm.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

Congress enacted the FLSA in 1938 to eliminate ``labor conditions
detrimental to the maintenance of the minimum standard of living
necessary for health, efficiency, and general well-being of workers.''
\1\ To this end, the FLSA generally requires covered employers to pay
nonexempt employees at least the Federal minimum wage for all hours
worked and at least one and one-half times the employee's regular rate
of pay for every hour worked over 40 in a workweek. The Act also
requires covered employers to maintain certain records regarding
employees and prohibits retaliation against employees who are
discharged or discriminated against after, for example, inquiring about
their pay or filing a complaint with the U.S. Department of Labor.
However, the FLSA's minimum wage and overtime pay protections do not
apply to independent contractors. As explained below, as used in this
proposal, the term ``independent contractor'' refers to workers who, as
a matter of economic reality, are not economically dependent on their
employer for work and are in business for themselves. Such workers play
an important role in the economy and are commonly referred to by
different names, including independent contractor, self-employed, and
freelancer. Regardless of the name or title used, the test for whether
the worker is an employee or independent contractor under the FLSA
remains the same. This proposed rulemaking is not intended to disrupt
the businesses of independent contractors who are, as a matter of
economic reality, in business for themselves.
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\1\ 29 U.S.C. 202(a).
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Determining whether an employment relationship exists under the
FLSA begins with the Act's definitions. Although the FLSA does not
define the term ``independent contractor,'' it contains expansive
definitions of ``employer,'' ``employee,'' and ``employ.'' ``Employer''
is defined to ``include[ ] any person acting directly or indirectly in
the interest of an employer in relation to an employee,'' ``employee''
is defined as ``any individual employed by an employer,'' and
``employ'' is defined to ``include[] to suffer or permit to work.'' \2\
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\2\ 29 U.S.C. 203(d), (e)(1), (g).
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For more than 7 decades, the Department and courts have applied an
economic reality test to determine whether a worker is an employee or
an independent contractor under the FLSA. The ultimate inquiry is
whether, as a matter of economic reality, the worker is either
economically dependent on the employer for work (and is thus an
employee) or is in business for themself (and is thus an independent
contractor). To answer this ultimate inquiry of economic dependence,
the courts and the Department have historically conducted a totality-
of-the-circumstances analysis, considering multiple factors to
determine whether a worker is an employee or an independent contractor
under the FLSA. There is significant and widespread uniformity among
the circuit courts in

[[Page 62219]]

the application of the economic reality test, although there is slight
variation as to the number of factors considered or how the factors are
framed. These factors generally include the opportunity for profit or
loss, investment, permanency, the degree of control by the employer
over the worker, whether the work is an integral part of the employer's
business, and skill and initiative.
In January 2021, the Department published a rule titled
``Independent Contractor Status Under the Fair Labor Standards Act''
(2021 IC Rule), providing guidance on the classification of independent
contractors under the FLSA applicable to workers and businesses in any
industry.\3\ The 2021 IC Rule identified five economic reality factors
to guide the inquiry into a worker's status as an employee or
independent contractor.\4\ Two of the five identified factors--the
nature and degree of control over the work and the worker's opportunity
for profit or loss--were designated as ``core factors'' that are the
most probative and carry greater weight in the analysis. The 2021 IC
Rule stated that if these two core factors point towards the same
classification, there is a substantial likelihood that it is the
worker's accurate classification.\5\ The 2021 IC Rule also identified
three less probative 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.\6\ The 2021 IC Rule stated that it is
``highly unlikely'' that these three non-core factors can outweigh the
combined probative value of the two core factors.\7\ The 2021 IC Rule
also limited consideration of investment and initiative to the
opportunity for profit or loss factor in a way that narrows in at least
some circumstances the extent to which investment and initiative are
considered. The facts to be considered under other factors (such as
control) were also narrowed, and the factor that considers whether the
work is integral to the employer's business was limited to whether the
work is part of an integrated unit of production.\8\ Finally, the 2021
IC Rule provided that the actual practice of the parties involved is
more relevant than what may be contractually or theoretically possible
and provided illustrative examples demonstrating how the analysis would
apply in particular factual circumstances.\9\
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\3\ 86 FR 1168. The Office of the Federal Register did not amend
the Code of Federal Regulations (CFR) to include the regulations
from the 2021 IC Rule because, as explained elsewhere in this
section, the Department first delayed and then withdrew the 2021 IC
Rule before it became effective. A district court decision later
vacated the Department's rules to delay and withdraw the 2021 IC
Rule, and the Department has (since that decision) conducted
enforcement in accordance with that decision.
\4\ Id. at 1246-47 (Sec. 795.105(d)).
\5\ Id. at 1246 (Sec. 795.105(c)).
\6\ Id. at 1247 (Sec. 795.105(d)(2)).
\7\ Id. at 1246 (Sec. 795.105(c)).
\8\ Id. at 1246-47 (Sec. 795.105(d)(1) and (d)(2)(iii)).
\9\ Id. at 1247-48 (Sec. Sec. 795.110, 795.115).
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The effective date of the 2021 IC Rule was March 8, 2021. On March
4, 2021, the Department published a rule delaying the effective date of
the 2021 IC Rule (Delay Rule) and on May 6, 2021, it published a rule
withdrawing the 2021 IC Rule (Withdrawal Rule). On March 14, 2022, in a
lawsuit challenging the Department's delay and withdrawal of the 2021
IC Rule, a Federal district court in the Eastern District of Texas
issued a decision vacating the Delay and Withdrawal Rules.\10\ The
district court concluded that the 2021 IC Rule became effective on the
original effective date of March 8, 2021.
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\10\ See Coalition for Workforce Innovation v. Walsh, No. 1:21-
CV-130, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022).
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After further consideration, the Department believes that the 2021
IC Rule does not fully comport with the FLSA's text and purpose as
interpreted by courts and departs from decades of case law applying the
economic reality test. The 2021 IC Rule included provisions that are in
tension with this case law--such as designating two factors as most
probative and predetermining that they carry greater weight in the
analysis, considering investment and initiative only in the opportunity
for profit or loss factor, and excluding consideration of whether the
work performed is central or important to the employer's business.
These provisions narrow the economic reality test by limiting the facts
that may be considered as part of the test, facts which the Department
believes are relevant in determining whether a worker is economically
dependent on the employer for work or in business for themself.
While the Department considered waiting for a longer period of time
in order to monitor the effects of the 2021 IC Rule, after careful
consideration, it has decided it is appropriate to move forward with
this proposed regulation. The Department believes that retaining the
2021 IC Rule would have a confusing and disruptive effect on workers
and businesses alike due to its departure from case law describing and
applying the multifactor economic reality test as a totality-of-the-
circumstances test. Because the 2021 IC Rule departed from legal
precedent, it is not clear whether courts will adopt its analysis--a
question that could take years of appellate litigation in different
Federal circuits to sort out and will result in more uncertainty as to
the applicable test. The Department also believes that departing from
the longstanding test applied by the courts may result in greater
confusion among employers in applying the new analysis, which could in
some situations place workers at greater risk of misclassification as
independent contractors due to the new analysis being applied
improperly, and thus may negatively affect both the workers and
competing businesses that correctly classify their employees.
Therefore, the Department believes it is appropriate to rescind the
2021 IC Rule and set forth an analysis for determining employee or
independent contractor status under the Act that is more consistent
with existing judicial precedent and the Department's longstanding
guidance prior to the 2021 IC Rule. While prior to the 2021 IC Rule the
Department primarily issued subregulatory guidance in this area under
the FLSA, it believes that its proposal to both rescind the 2021 IC
Rule and replace it with detailed regulations addressing the
multifactor economic reality test--in a way that more fully reflects
the case law and provides the flexibility needed for application to the
entire economy--would be helpful for both workers and employers. And as
the 2021 IC Rule explained, workers and employers should benefit from
affirmative regulatory guidance from the Department further developing
the concept of economic dependence.
Accordingly, the Department is now proposing, in addition to
rescinding the 2021 IC Rule, to again add part 795. Specifically, the
Department proposes to modify the text of part 795 as published on
January 7, 2021, at 86 FR 1246 through 1248, addressing whether workers
are employees or independent contractors under the FLSA. As discussed
below, the Department is not proposing the use of ``core factors'' but
instead proposes to return to a totality-of-the-circumstances analysis
of the economic reality test in which the factors do not have a
predetermined weight and are considered in view of the economic reality
of the whole activity. The Department is further proposing to return
the consideration of investment to a standalone factor, provide
additional analysis of the control factor (including detailed

[[Page 62220]]

discussions of how scheduling, supervision, price-setting, and the
ability to work for others should be considered), and return to the
longstanding interpretation of the integral factor, which considers
whether the work is integral to the employer's business.
The Department recognizes that this return to a totality-of-the-
circumstances analysis in which the economic reality factors are not
assigned a predetermined weight and each factor is given full
consideration represents a change from the 2021 IC Rule. As discussed
below, however, it believes that this approach is the option that would
be most beneficial for stakeholders because this proposal provides
guidance that is aligned with the Department's decades-long approach
(prior to the 2021 IC Rule) as well as circuit case law. The Department
believes that this proposal, if finalized, will provide more consistent
guidance to employers as they determine whether workers are
economically dependent on the employer for work or are in business for
themselves, as well as useful guidance to workers on whether they are
correctly classified as employees or independent contractors.
Accordingly, the Department believes this proposal will help protect
workers from misclassification while at the same time recognizing that
independent contractors serve an important role in our economy and
providing a consistent approach for those businesses that engage (or
wish to engage) independent contractors.

II. Background

A. Relevant FLSA Definitions

Enacted in 1938, the FLSA generally requires that covered employers
pay nonexempt employees at least the Federal minimum wage (presently
$7.25 per hour) for every hour worked,\11\ and at least one and one-
half times the employee's regular rate of pay for all hours worked
beyond 40 in a workweek.\12\ The FLSA also requires covered employers
to ``make, keep, and preserve'' certain records regarding
employees.\13\
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\11\ 29 U.S.C. 206(a).
\12\ 29 U.S.C. 207(a).
\13\ 29 U.S.C. 211(c).
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The FLSA's wage and hour protections apply to employees. In
relevant part, section 3(e) of the Act defines the term ``employee'' as
``any individual employed by an employer.'' \14\ Section 3(d) defines
the term ``employer'' to ``includ[e] any person acting directly or
indirectly in the interest of an employer in relation to an employee.''
\15\ Finally, section 3(g) provides that the term `` `[e]mploy'
includes to suffer or permit to work.'' \16\
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\14\ 29 U.S.C. 203(e)(1).
\15\ 29 U.S.C. 203(d).
\16\ 29 U.S.C. 203(g).
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Interpreting these provisions, the U.S. Supreme Court 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.' '' \17\ In particular, the Court has
noted the ``striking breadth'' of section 3(g)'s ``suffer or permit''
language, observing that it ``stretches the meaning of `employee' to
cover some parties who might not qualify as such under a strict
application of traditional agency law principles.'' \18\ Thus, the
Court has repeatedly observed that the FLSA's scope of employment is
broader than the common law standard often applied to determine
employment status under other Federal laws.\19\
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\17\ United States v. Rosenwasser, 323 U.S. 360, 362, 363 n.3
(1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Hugo
Black)).
\18\ Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992).
\19\ Id. at 326; see also, e.g., Walling v. Portland Terminal
Co., 330 U.S. 148, 150-51 (1947) (``[I]n 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).
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At the same time, the Supreme Court has recognized that the Act was
``not intended to stamp all persons as employees.'' \20\ Among other
categories of workers excluded from FLSA coverage, the Court has
recognized that ``independent contractors'' fall outside the Act's
broad understanding of employment.\21\ Accordingly, the FLSA does not
require covered employers to pay an independent contractor the minimum
wage or overtime pay under sections 6(a) and 7(a) of the Act, or to
keep records regarding an independent contractor's work under section
11(c). However, merely ``putting on an `independent contractor' label
does not take [a] worker from the protection of the [FLSA].'' \22\
Courts have thus recognized a need to delineate between employees, who
fall under the protections of the FLSA, and independent contractors,
who do not.
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\20\ Portland Terminal, 330 U.S. at 152.
\21\ See, e.g., Rutherford Food Corp. v. McComb, 331 U.S. 722,
729 (1947) (noting that ``[t]here may be independent contractors who
take part in production or distribution who would alone be
responsible for the wages and hours of their own employees'').
\22\ Id.
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The FLSA does not define the term ``independent contractor.'' While
it is clear that section 3(g)'s ``suffer or permit'' language
contemplates a broader coverage of workers compared to what exists
under the common law, ``there is in the [FLSA] no definition that
solves problems as to the limits of the employer-employee relationship
under the Act.'' \23\ Therefore, in articulating the distinction
between FLSA-covered employees and independent contractors, courts rely
on a broad, multifactor ``economic reality'' analysis derived from
judicial precedent.\24\ Unlike the control-focused analysis for
independent contractors applied under the common law,\25\ the economic
reality test focuses more broadly on a worker's economic dependence on
an employer, considering the totality of the circumstances.
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\23\ Id. at 728.
\24\ Courts invoke the concept of ``economic reality'' in FLSA
employment contexts beyond independent contractor status. However,
as in prior rulemakings, this NPRM refers to the ``economic
reality'' analysis or test for independent contractors as a
shorthand reference to the independent contractor analysis used by
courts for FLSA purposes.
\25\ In distinguishing between employees and independent
contractors under the common law, courts evaluate ``the hiring
party's right to control the manner and means by which the product
is accomplished.'' Community for Creative Non-Violence v. Reid, 490
U. S. 730, 751 (1989). ``Among the other factors relevant to this
inquiry are the skill required; the source of the instrumentalities
and tools; the location of the work; the duration of the
relationship between the parties; whether the hiring party has the
right to assign additional projects to the hired party; the extent
of the hired party's discretion over when and how long to work; the
method of payment; the hired party's role in hiring and paying
assistants; whether the work is part of the regular business of the
hiring party; whether the hiring party is in business; the provision
of employee benefits; and the tax treatment of the hired party.''
Id. (footnotes omitted).
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B. Judicial Development of the Economic Reality Test

1. Supreme Court Development of the Economic Reality Test
In a series of cases from 1944 to 1947, the U.S. Supreme Court
considered employee or independent contractor status under three
different Federal statutes that were enacted during the 1930s New Deal
Era--the FLSA, the National Labor Relations Act (NLRA), and the Social
Security Act (SSA)--and applied an economic reality test under all
three laws.
In the first of these cases, NLRB v. Hearst Publications, Inc., 322
U.S. 111 (1944), the Court considered the meaning of ``employee'' under
the NLRA, which defined the term to

[[Page 62221]]

``include any employee.'' \26\ In relevant part, the Hearst Court
rejected application of the common law standard,\27\ noting that ``the
broad language of the [NLRA's] definitions . . . leaves no doubt that
its applicability is to be determined broadly, in doubtful situations,
by underlying economic facts rather than technically and exclusively by
previously established legal classifications.'' \28\
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\26\ 322 U.S. at 118-20; 29 U.S.C. 152(3).
\27\ 322 U.S. at 123-25.
\28\ Id. at 129.
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On June 16, 1947, the Supreme Court decided United States v. Silk,
331 U.S. 704 (1947), addressing the distinction between employees and
independent contractors under the SSA. In that case, the Court
favorably summarized Hearst as setting forth ``economic reality,'' as
opposed to ``technical concepts'' of the common law standard alone, as
the framework for determining workers' classification.\29\ But it also
acknowledged that not ``all who render service to an industry are
employees.'' \30\ Although the Court found it to be ``quite impossible
to extract from the [SSA] a rule of thumb to define the limits of the
employer-employe[e] relationship,'' the Court identified five factors
as ``important for decision'': ``degrees of control, opportunities for
profit or loss, investment in facilities, permanency of relation[,] and
skill required in the claimed independent operation.'' \31\ The Court
added that ``[n]o one [factor] is controlling nor is the list
complete.'' \32\ 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.\33\
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\29\ 331 U.S. at 712-14.
\30\ Id. at 712.
\31\ Id. at 716.
\32\ Id.
\33\ Id.
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The same day that the Supreme Court issued its decision in Silk, it
also issued Rutherford Food Corp. v. McComb, 331 U.S. 722, in which it
affirmed a circuit court decision that analyzed an FLSA employment
relationship based on its economic realities.\34\ Describing the FLSA
as ``a part of the social legislation of the 1930s of the same general
character as the [NLRA] and the [SSA],'' the Court opined that
``[d]ecisions that define the coverage of the employer-Employee
relationship under the Labor and Social Security acts are persuasive in
the consideration of a similar coverage under the [FLSA].'' \35\
Accordingly, the Court rejected an approach based on ``isolated
factors'' and again considered ``the circumstances of the whole
activity.'' \36\ 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.\37\ 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.'' \38\
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\34\ 331 U.S. at 727.
\35\ Id. at 723-24.
\36\ Id. at 730.
\37\ See id.
\38\ Id. at 729-30.
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On June 23, 1947, one week after the Silk and Rutherford decisions,
the Court decided Bartels v. Birmingham, 332 U.S. 126 (1947), another
case involving employee or independent contractor status under the SSA.
Here again, the Court rejected application of the common law control
test, explaining that, under the SSA, employee status ``was not to be
determined solely by the idea of control which an alleged employer may
or could exercise over the details of the service rendered to his
business by the worker.'' \39\ Rather, employees under ``social
legislation'' such as the SSA are ``those who as a matter of economic
reality are dependent upon the business to which they render service.''
\40\ Thus, in addition to control, ``permanency of the relation, the
skill required, the investment [in] the facilities for work and
opportunities for profit or loss from the activities were also
factors'' to consider.\41\ Although the Court identified these specific
factors as relevant to the analysis, it explained that ``[i]t is the
total situation that controls'' the worker's classification under the
SSA.\42\
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\39\ 332 U.S. at 130.
\40\ Id.
\41\ Id.
\42\ Id.
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Following these Supreme Court decisions, Congress responded with
separate legislation to amend the NLRA and SSA's employment
definitions. First, in 1947, Congress amended the NLRA's definition of
``employee'' to clarify that the term ``shall not include any
individual having the status of an independent contractor.'' \43\ The
following year, Congress similarly amended the SSA to exclude from
employment ``any individual who, under the usual common-law rules
applicable in determining the employer-employee relationship, has the
status of an independent contractor.'' \44\ The Supreme Court
interpreted the amendments to the NLRA as having the same effect as the
explicit definition included in the SSA, which was to ensure that
employment status would be determined by common law agency principles,
rather than an economic reality test.\45\
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\43\ Labor Management Relations (Taft-Hartley) Act, 1947, Public
Law 80-101, sec. 101, 61 Stat. 136, 137-38 (1947) (codified as
amended at 29 U.S.C. 152(3)).
\44\ Social Security Act of 1948, Public Law 80-642, sec. 2(a),
62 Stat. 438 (1948) (codified as amended at 26 U.S.C. 3121(d)).
\45\ See NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256
(1968) (noting that ``[t]he obvious purpose of'' the amendment to
the definition of employee under the NLRA ``was to have the Board
and the courts apply general agency principles in distinguishing
between employees and independent contractors under the Act'').
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Despite its amendments to the NLRA and SSA in response to Hearst
and Silk, Congress did not similarly amend the FLSA following the
Rutherford decision. Thus, when the Supreme Court revisited independent
contractor status under the FLSA several years later in Goldberg v.
Whitaker House Co-op., Inc., 366 U.S. 28 (1961), the Court affirmed
that `` `economic reality' rather than `technical concepts' '' remained
``the test of employment'' under the FLSA,\46\ quoting from its earlier
decisions in Silk and Rutherford. The Court in Whitaker House found
that certain homeworkers were ``not self-employed . . . [or]
independent, selling their products on the market for whatever price
they can command,'' but instead were ``regimented under one
organization, manufacturing what the organization desires and receiving
the compensation the organization dictates.'' \47\ Such facts, among
others, established that the homeworkers at issue were FLSA-covered
employees.\48\
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\46\ 366 U.S. at 33 (quoting from Silk, 331 U.S. at 713, and
Rutherford, 331 U.S. at 729).
\47\ Id. at 32.
\48\ Id. at 33.
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Most recently, in Nationwide Mutual Insurance Co. v. Darden, 503
U.S. 318 (1992), the Court again endorsed application of the economic
reality test to evaluate independent contractor status under the FLSA,
citing to Rutherford and emphasizing the broad ``suffer or permit''
language codified in section 3(g) of the Act.\49\
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\49\ Darden, 503 U.S. at 325-26.
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2. Application of the Economic Reality Test by Federal Courts of
Appeals
Since Rutherford, Federal courts of appeals have applied the
economic

[[Page 62222]]

reality 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.' '' \50\
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\50\ Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir.
1976) (quoting Bartels, 332 U.S. at 130).
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When determining whether a worker is an employee under the FLSA or
an independent contractor, Federal circuit courts of appeals apply an
economic reality test using the factors identified in Silk.\51\ No
court of appeals considers any one factor or combination of factors to
predominate over the others in every case.\52\ For example, the
Eleventh Circuit has explained that some of the factors ``which many
courts have used as guides in applying the economic reality test'' are:
(1) the degree of the alleged 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 their managerial skill; (3) the worker's
investment in equipment or materials required for their task, or their
employment of helpers; (4) whether the service rendered requires a
special skill; (5) the degree of permanence of the working
relationship; and (6) the extent to which the service rendered is an
integral part of the alleged employer's business.\53\ Like other
circuits, the Eleventh Circuit repeats the Supreme Court's explanation
from Silk that no one factor is controlling, nor is the list
exhaustive.\54\
---------------------------------------------------------------------------

\51\ See 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 Ent., LLC, 825
F.3d 235, 241 (4th Cir. 2016); Pilgrim Equip., 527 F.2d at 1311;
Acosta v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th
Cir. 2019); Sec'y of Labor, U.S. Dep't of Labor v. Lauritzen, 835
F.2d 1529, 1534-35 (7th Cir. 1987); Walsh v. Alpha & Omega USA,
Inc., 39 F.4th 1078, 1082 (8th Cir. 2022); Real v. Driscoll
Strawberry Assocs., 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, 1311-12 (11th Cir.
2013); Morrison v. Int'l Programs Consortium, Inc., 253 F.3d 5, 11
(DC Cir. 2001).
\52\ 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'') (quoting Hickey v. Arkla Indus., Inc., 699 F.2d 748, 752
(5th Cir. 1983) (applying economic realities test in Age
Discrimination in Employment Act case)); 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 (the relative weight of each factor ``depends on
the facts of the case'') (quoting Santelices v. Cable Wiring, 147 F.
Supp. 2d 1313, 1319 (S.D. Fla. 2001)).
\53\ Scantland, 721 F.3d at 1311-12.
\54\ Id. at 1312 n.2.
---------------------------------------------------------------------------

Some courts of appeals have applied the factors with some
variations. For example, the Fifth Circuit typically does not list the
``integral part'' factor as one of the considerations that guides the
analysis.\55\ 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.\56\ The Second and D.C. Circuits vary in that they
treat the employee's opportunity for profit or loss and the employee's
investment as a single factor, but they still use the same
considerations as the other circuits to inform their economic realities
analysis.\57\
---------------------------------------------------------------------------

\55\ See Pilgrim Equip., 527 F.2d at 1311.
\56\ See Hobbs v. Petroplex Pipe & Constr., Inc., 946 F.3d 824,
836 (5th Cir. 2020).
\57\ See, e.g., Franze v. Bimbo Bakeries USA, Inc., 826 F. App'x
74, 76 (2d Cir. 2020); Superior Care, 840 F.2d at 1058-59. The D.C.
Circuit has adopted the Second Circuit's articulation of the
factors, including treating opportunity for profit or loss and
investment as one factor. See Morrison, 253 F.3d at 11 (citing
Superior Care, 840 F.2d at 1058-59).
---------------------------------------------------------------------------

In sum, since the 1940s, Federal courts have analyzed the question
of employee or independent contractor status under the FLSA by
examining the economic realities of the employment relationship to
determine whether the worker is economically dependent on the employer
for work or is in business for themself, even if they have varied
slightly in their articulations of the factors. Nevertheless, all
courts have looked to the factors first articulated in Silk as useful
guideposts while acknowledging that those factors are not exhaustive
and should not be applied mechanically.\58\
---------------------------------------------------------------------------

\58\ See, e.g., Superior Care, 840 F.2d at 1059.
---------------------------------------------------------------------------

C. The Department's Application of the Economic Reality Test

The Department has applied a multifactor economic reality test
since the Supreme Court's opinions in Rutherford and Silk. For example,
on June 23, 1949, the Wage and Hour Division (WHD) issued an opinion
letter distilling six ``primary factors which the Court considered
significant'' in Rutherford and Silk: ``(1) the extent to which the
services in question are an integral part of the `employer[']s'
business; (2) the amount of the so-called `contractor's' investment in
facilities and equipment; (3) the nature and degree of control by the
principal; (4) opportunities for profit and loss; . . . (5) the amount
of initiative judgment or foresight required for the success of the
claimed independent enterprise[;] and [(6)] permanency of the
relation.'' \59\ The guidance cautioned that no single factor is
controlling, and ``[o]rdinarily a definite decision as to whether one
is an employee or an independent contractor under the [FLSA] cannot be
made in the absence of evidence as to his actual day-to-day working
relationship with his principal. Clearly a written contract does not
always reflect the true situation.'' \60\
---------------------------------------------------------------------------

\59\ WHD Op. Ltr. (June 23, 1949).
\60\ Id.
---------------------------------------------------------------------------

Subsequent WHD opinion letters addressing employee or independent
contractor status under the FLSA have provided similar recitations of
the Silk factors, sometimes omitting one or more of the six factors
described in the 1949 opinion letter,\61\ and sometimes adding (or
substituting) a seventh factor: the worker's ``degree of independent
business organization and operation.'' \62\ Numerous opinion letters
have emphasized that employment status is ``not determined by the
common law standards relating to master and servant,'' \63\ and that
``[t]he degree of control retained by the principal has been rejected
as the sole criterion to be applied.'' \64\
---------------------------------------------------------------------------

\61\ See, e.g., WHD Op. Ltr. FLSA-314 (Dec. 21, 1982)
(discussing three of the Silk factors); WHD Op. Ltr. FLSA-164 (Jan.
18, 1990) (discussing four of the Silk factors).
\62\ See WHD Op. Ltr. (Oct. 12, 1965); WHD Op. Ltr. (Feb. 18,
1969).
\63\ See, e.g., WHD Op. Ltr. (Feb. 18, 1969); WHD Op. Ltr.
(Sept. 1, 1967); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981); WHD Op. Ltr.
(June 5, 1995).
\64\ See, e.g., WHD Op. Ltr. FLSA-106 (Feb. 8, 1956); WHD Op.
Ltr. (July 20, 1965); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981).
---------------------------------------------------------------------------

In 1962, the Department revised the regulations in 29 CFR part
788,\65\ which generally provides interpretive guidance on the FLSA's
exemption for employees in small forestry or lumbering operations, and
added a provision addressing the distinction between employees and
independent contractors.\66\ Citing to Silk, Rutherford, and Bartels,
the regulation advised that ``an employee, as distinguished from a
person who is engaged in a business of his own, is one who `follows the
usual path of an employee' and is dependent on the business which he
serves.'' \67\ To ``aid in assessing the total situation,'' the
regulation then identified a partial list of ``characteristics of the
two classifications which should be considered,'' including ``the
extent to

[[Page 62223]]

which the services rendered are an integral part of the principal's
business; the permanency of the relationship; the opportunities for
profit or loss; the initiative, judgment or foresight exercised by the
one who performs the services; the amount of investment; and the degree
of control which the principal has in the situation.'' \68\ Implicitly
referring to the Bartels decision, the regulation advised that ``[t]he
Court specifically rejected the degree of control retained by the
principal as the sole criterion to be applied.'' \69\
---------------------------------------------------------------------------

\65\ See 27 FR 8032.
\66\ See 29 U.S.C. 213(b)(28) (previously codified at 29 U.S.C.
213(a)(15)).
\67\ 27 FR 8033 (29 CFR 788.16(a)).
\68\ Id.
\69\ 27 FR 8033-34 (29 CFR 788.16(a)).
---------------------------------------------------------------------------

In 1972, the Department added similar guidance on independent
contractor status at 29 CFR 780.330(b), in a provision addressing the
employment status of sharecroppers and tenant farmers.\70\ This
regulation was nearly identical to the independent contractor guidance
for the logging and forestry industry previously codified at 29 CFR
788.16(a), including an identical description of the same six economic
reality factors.\71\ Both provisions--29 CFR 780.330(b) and 788.16(a)--
remained unchanged until 2021.
---------------------------------------------------------------------------

\70\ See 37 FR 12084, 12102 (introducing 29 CFR 780.330(b)).
\71\ Id.
---------------------------------------------------------------------------

In 1997, the Department promulgated a regulation applying a
multifactor economic reality analysis for distinguishing between
employees and independent contractors under the Migrant and Seasonal
Agricultural Worker Protection Act (MSPA),\72\ which notably
incorporates the FLSA's ``suffer or permit'' definition of employment
by reference.\73\ The regulation (which has not since been amended)
advises that ``[i]n determining if the farm labor contractor or worker
is an employee or an independent contractor, the ultimate question is
the economic reality of the relationship--whether there is economic
dependence upon the agricultural employer/association or farm labor
contractor, as appropriate.'' \74\ The regulation elaborates that
``[t]his determination is based upon an evaluation of all of the
circumstances, including the following: (i) The nature and degree of
the putative employer's control as to the manner in which the work is
performed; (ii) The putative employee's opportunity for profit or loss
depending upon his/her managerial skill; (iii) The putative employee's
investment in equipment or materials required for the task, or the
putative employee's employment of other workers; (iv) Whether the
services rendered by the putative employee require special skill; (v)
The degree of permanency and duration of the working relationship; (vi)
The extent to which the services rendered by the putative employee are
an integral part of the putative employer's business.'' \75\ This
description of six economic reality factors was very similar to the
earlier description of six economic reality factors provided in 29 CFR
780.330(b) and 788.16(a).
---------------------------------------------------------------------------

\72\ See 62 FR 11734 (amending 29 CFR 500.20(h)(4)); see also 29
U.S.C. 1861 (explicitly providing that ``[t]he Secretary may issue
such rules and regulations as are necessary to carry out this
chapter'').
\73\ See 29 U.S.C. 1802(5) (``The term `employ' has the meaning
given such term under section 3(g) of the [FLSA]'').
\74\ 29 CFR 500.20(h)(4).
\75\ Id.
---------------------------------------------------------------------------

Also in 1997, WHD issued Fact Sheet #13, ``Employment Relationship
Under the Fair Labor Standards Act (FLSA).'' \76\ Like WHD opinion
letters, Fact Sheet #13 advises that ``an employee, as distinguished
from a person who is engaged in a business of his or her own, is one
who, as a matter of economic reality, follows the usual path of an
employee and is dependent on the business which he or she serves.''
\77\ The fact sheet identifies the six familiar economic realities
factors, as well as consideration of the worker's ``degree of
independent business organization and operation.'' \78\
---------------------------------------------------------------------------

\76\ See WHD Fact Sheet #13 (1997) https://web.archive.org/web/19970112162517/http:/www.dol.gov/dol/esa/public/regs/compliance/whd/whdfs13.htm). WHD made minor revisions to Fact Sheet #13 in 2002 and
2008, before a more substantial revision in 2014. In 2018, WHD
reverted back to the 2008 version of Fact Sheet #13, which remains
the current version (available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf).
\77\ Id.
\78\ Id.
---------------------------------------------------------------------------

On July 15, 2015, WHD issued additional subregulatory guidance,
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).\79\ 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.\80\
---------------------------------------------------------------------------

\79\ AI 2015-1 is available at 2015 WL 4449086.
\80\ See News Release 17-0807-NAT, ``US Secretary of Labor
Withdraws Joint Employment, Independent Contractor Informal
Guidance'' (June 7, 2017), https://www.dol.gov/newsroom/releases/opa/opa20170607 (last visited June 30, 2022).
---------------------------------------------------------------------------

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.\81\ Like the Department'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.\82\ The letter identified six economic realities factors
that differed slightly from the factors typically articulated by the
Department 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.\83\ Opinion
Letter FLSA2019-6 was withdrawn on February 19, 2021.\84\
---------------------------------------------------------------------------

\81\ See WHD Op. Ltr. FLSA2019-6, 2019 WL 1977301 (Apr. 29,
2019) (withdrawn Feb. 19, 2021).
\82\ See id. at *3.
\83\ See id. at *4. Opinion Letter FLSA2019-6's ``extent of the
integration'' factor was a notable recharacterization of the factor
traditionally considered by courts and the Department regarding the
extent to which work is ``an integral part'' of an employer's
business.
\84\ See note at https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited June 30, 2022).
---------------------------------------------------------------------------

D. The Department's 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 (2021 IC

[[Page 62224]]

Rule).\85\ The 2021 IC Rule set forth regulations to be added to a new
part (part 795) in title 29 of the Code of Federal Regulations titled
``Employee or Independent Contractor Classification under the Fair
Labor Standards Act,'' providing guidance on the classification of
independent contractors under the FLSA applicable to workers and
businesses in any industry.\86\ The 2021 IC Rule also addressed the
Department's prior interpretations of independent contractor status in
29 CFR 780.330(b) and 788.16(a)--both of which applied to specific
industries--by cross-referencing part 795.\87\
---------------------------------------------------------------------------

\85\ See 86 FR 1168. The Department initially published a notice
of proposed rulemaking (NPRM) soliciting public comment on September
25, 2020. See 85 FR 60600. The final rule adopted ``the interpretive
guidance set forth in the [NPRM] largely as proposed.'' 86 FR 1168.
\86\ 86 FR 1246-48.
\87\ Id. at 1246.
---------------------------------------------------------------------------

The Department explained that the purpose of the 2021 IC Rule was
to establish a ``streamlined'' economic reality test that improved on
prior articulations described as ``unclear and unwieldy.'' \88\ It
stated that the existing economic reality test applied by the
Department and courts suffered from confusion regarding the meaning of
``economic dependence'' because the concept is ``underdeveloped,'' a
lack of focus in the multifactor balancing test, and confusion and
inefficiency caused by overlap between the factors.\89\ The 2021 IC
Rule asserted that shortcomings and misconceptions associated with the
economic reality test were more apparent in the modern economy and that
additional clarity would promote innovation in work arrangements.\90\
---------------------------------------------------------------------------

\88\ Id. at 1172, 1240.
\89\ Id. at 1172-75.
\90\ Id. at 1175.
---------------------------------------------------------------------------

The 2021 IC Rule explained that independent contractors are not
employees under the FLSA and are therefore not subject to the Act's
minimum wage, overtime pay, or recordkeeping requirements.\91\ It
adopted an economic reality test under which a worker is an employee of
an employer if that worker is economically dependent on the employer
for work.\92\ By contrast, the worker is an independent contractor if
the worker is in business for themself.
---------------------------------------------------------------------------

\91\ Id. at 1246 (Sec. 795.105(a)).
\92\ Id. at 1168, 1246 (Sec. 795.105(b)).
---------------------------------------------------------------------------

The 2021 IC Rule identified five economic realities factors to
guide the inquiry into a worker's status as an employee or independent
contractor,\93\ while acknowledging that the factors are not
exhaustive, no one factor is dispositive, and additional factors may be
considered if they ``in some way indicate whether the [worker] is in
business for him- or herself, as opposed to being economically
dependent on the potential employer for work.'' \94\ But in contrast to
prior guidance and contrary to case law, the 2021 IC Rule designated
two of the five factors--the nature and degree of control over the work
and the worker's opportunity for profit or loss--as ``core factors''
that should carry greater weight in the analysis. Citing the need for
greater certainty and predictability in the economic reality test, and
in an effort to sharpen the concept of economic dependence, the 2021 IC
Rule determined that these two factors were more probative of economic
dependence than the other economic realities factors. If both of those
core factors indicate the same classification, as either an employee or
an independent contractor, the 2021 IC Rule stated that there is a
``substantial likelihood'' that the indicated classification is the
worker's correct classification.\95\
---------------------------------------------------------------------------

\93\ Id. at 1246 (Sec. 795.105(c)).
\94\ Id. at 1246-47 (Sec. 795.105(c) and (d)(2)(iv)).
\95\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------

The 2021 IC Rule's first core factor is the nature and degree of
control over the work, which indicates 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 their own
schedule, by selecting their projects, and/or through the ability to
work for others, which might include the potential employer's
competitors.\96\ The 2021 IC Rule provides that 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) does not constitute control.\97\
---------------------------------------------------------------------------

\96\ Id. at 1246-47 (Sec. 795.105(d)(1)(i)).
\97\ Id. at 1247 (Sec. 795.105(d)(i)).
---------------------------------------------------------------------------

The 2021 IC Rule's second core factor is the worker's opportunity
for profit or loss.\98\ The Rule states that this factor indicates
independent contractor status to the extent the worker has an
opportunity to earn profits or incur losses based on either (1) their
exercise of initiative (such as managerial skill or business acumen or
judgment) or (2) their management of investment in or capital
expenditure on, for example, helpers or equipment or material to
further the work.\99\ While the effects of the worker's exercise of
initiative and management of investment are both considered under this
factor, the worker does not need to have an opportunity for profit or
loss based on both initiative and management of investment for this
factor to weigh towards the worker being an independent
contractor.\100\ This factor indicates employment status to the extent
that the worker is unable to affect his or her earnings or is only able
to do so by working more hours or faster.\101\
---------------------------------------------------------------------------

\98\ Id. (Sec. 795.105(d)(1)(ii)).
\99\ Id.
\100\ Id.
\101\ Id.
---------------------------------------------------------------------------

The 2021 IC Rule 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 it
cautioned is ``different from the concept of the importance or
centrality of the individual's work to the potential employer's
business'').\102\ The 2021 IC Rule provided that these other factors
are ``less probative and, in some cases, may not be probative at all''
of economic dependence and are ``highly unlikely, either individually
or collectively, to outweigh the combined probative value of the two
core factors.'' \103\
---------------------------------------------------------------------------

\102\ Id. (Sec. 795.105(d)(2)).
\103\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------

The 2021 IC Rule also stated that the actual practice of the
parties involved is more relevant than what may be contractually or
theoretically possible,\104\ and provided five ``illustrative
examples'' demonstrating how the analysis would apply in particular
factual circumstances.\105\ Finally, the 2021 IC Rule rescinded any
``prior administrative rulings, interpretations, practices, or
enforcement policies relating to classification as an employee or
independent contractor under the FLSA'' to the extent that such items
``are inconsistent or in conflict with the interpretations stated in
this part,'' \106\ and explained that the 2021 IC Rule would guide
WHD's enforcement of the FLSA.\107\
---------------------------------------------------------------------------

\104\ Id. at 1247 (Sec. 795.110).
\105\ Id. at 1247-48 (Sec. 795.115).
\106\ Id. at 1246 (Sec. 795.100).
\107\ Id.
---------------------------------------------------------------------------

On January 19, 2021, WHD issued Opinion Letters FLSA2021-8 and
FLSA2021-9 applying the Rule's analysis to specific factual scenarios.
WHD subsequently withdrew those opinion letters on January 26, 2021,
explaining that the letters were issued

[[Page 62225]]

prematurely because they were based on a rule that had yet to take
effect.\108\
---------------------------------------------------------------------------

\108\ See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited June 30, 2022), noting the withdrawal of
Opinion Letters FLSA2021-8 and FLSA2021-9.
---------------------------------------------------------------------------

E. Delay and Withdrawal of the 2021 Independent Contractor Rule

On February 5, 2021, the Department published a proposal to delay
the 2021 IC Rule's effective date until May 7, 2021--60 days after the
Rule's original March 8, 2001, effective date.\109\ 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 2021 IC Rule as proposed (``Delay Rule'').\110\
---------------------------------------------------------------------------

\109\ 86 FR 8326.
\110\ Id. at 12535.
---------------------------------------------------------------------------

On March 12, 2021, the Department published a notice of proposed
rulemaking (NPRM) proposing to withdraw the 2021 IC Rule.\111\ On May
5, 2021, after reviewing approximately 1,000 comments submitted in
response to the NPRM, the Department announced a final rule withdrawing
the 2021 IC Rule (``Withdrawal Rule'').\112\ In explaining its decision
to withdraw the 2021 IC Rule, the Department stated that the Rule was
inconsistent with the FLSA's text and purpose and would have had a
confusing and disruptive effect on workers and businesses alike due to
its departure from longstanding judicial precedent.\113\ The Withdrawal
Rule stated that it took effect immediately upon its publication in the
Federal Register on May 6, 2021.\114\
---------------------------------------------------------------------------

\111\ Id. at 14027.
\112\ Id. at 24303.
\113\ Id. at 24307.
\114\ Id. at 24320.
---------------------------------------------------------------------------

F. Litigation Over the 2021 Independent Contractor Rule

On March 14, 2022, in a lawsuit challenging the Department's Delay
and Withdrawal Rules under the Administrative Procedure Act (APA), a
district court in the Eastern District of Texas issued a decision
vacating the Department's Delay and Withdrawal Rules.\115\ While
acknowledging that the Department engaged in separate notice-and-
comment rulemakings in promulgating both of these rules, the district
court concluded that the Department ``failed to provide a meaningful
opportunity for comment in promulgating the Delay Rule,'' \116\ failed
to show ``good cause for making the [Delay Rule] effective immediately
upon publication,'' \117\ and acted in an arbitrary and capricious
manner in its Withdrawal Rule by ``fail[ing] to consider potential
alternatives to rescinding the Independent Contractor Rule.'' \118\
Accordingly, the district court vacated the Delay and Withdrawal Rules
and concluded that the 2021 IC Rule ``became effective as of March 8,
2021, the rule's original effective date, and remains in effect.''
\119\ The district court's ruling did not address the validity of the
2021 IC Rule; rather, the case was focused solely on the validity of
the Delay and Withdrawal Rules.
---------------------------------------------------------------------------

\115\ Coalition for Workforce Innovation, 2022 WL 1073346.
\116\ Id. at *9. The court specifically faulted the Department's
use of a shortened 19-day comment period in its proposal to delay of
the 2021 IC Rule's original effective date (instead of 30 days), and
for failing to consider comments beyond its proposal to delay the
2021 IC Rule's effective date. Id. at *7-10.
\117\ Id. at *11.
\118\ Id. at *13.
\119\ Id. at *20.
---------------------------------------------------------------------------

The Department filed a notice of appeal of the district court's
decision.\120\ In response to a request by the Department informing the
court of this rulemaking, the Fifth Circuit Court of Appeals entered an
order staying the appeal until December 7, 2022 (subject to considering
a further stay at that time).
---------------------------------------------------------------------------

\120\ See Fifth Circuit No. 22-40316 (appeal filed, May 13,
2022).
---------------------------------------------------------------------------

III. Need for Rulemaking

The Department recognizes that independent contractors and small
businesses play an important role in our economy. It is fundamental to
the Department's obligation to administer and enforce the FLSA,
however, that workers who should be covered under the Act are able to
receive its protections, as the misclassification of employees as
independent contractors remains one of the most serious problems facing
workers, businesses, and the broader economy. In the FLSA context,
misclassified workers are denied basic workplace protections including
rights to minimum wage and overtime pay.\121\ Meanwhile, employers that
comply with the law are placed at a competitive disadvantage compared
to other businesses that misclassify employees, contravening the FLSA's
goal of eliminating ``unfair method[s] of competition in commerce.''
\122\
---------------------------------------------------------------------------

\121\ Workers who are employees under the FLSA but are
misclassified as independent contractors remain legally entitled to
the Act's wage and hour protections and are protected from
retaliation for attempting to assert their rights under the Act. See
29 U.S.C. 215(a)(3). However, many misclassified employees may not
be aware that such rights and protections apply to them or face
obstacles when asserting those rights.
\122\ 29 U.S.C. 202(a)(3); see also Tony & Susan Alamo Found. v.
Sec'y of Labor, 471 U.S. 290, 302 (1985) (noting that the
misclassification of employees ``affect[s] many more people than
those workers directly at issue . . . [because it] exert[s] a
general downward pressure on wages in competing businesses'').
---------------------------------------------------------------------------

After further consideration, the Department believes that the 2021
IC Rule does not fully comport with the FLSA's text and purpose as
interpreted by the courts. The Department believes that retaining the
2021 IC Rule would have a confusing and disruptive effect on workers
and businesses alike due to its departure from decades of case law
describing and applying the multifactor economic reality test as a
totality-of-the-circumstances test. While the 2021 IC Rule recognized
the need to further develop the concept of economic dependence, the
rule includes provisions that are in tension with this longstanding
case law--such as designating two factors as most probative and
predetermining that they carry greater weight in the analysis,
considering investment and initiative only in the opportunity for
profit or loss factor, and excluding consideration of whether the work
performed is central or important to the employer's business. These
provisions narrow the economic reality test by limiting the facts that
may be considered as part of the test, facts which the Department
believes are relevant in determining whether a worker is economically
dependent on the employer for work or in business for themself.
The 2021 IC Rule's elevation of certain factors and its preclusion
of consideration of relevant facts under several factors may result in
misapplication of the economic reality test and may have conveyed to
employers that it might be easier than it used to be to classify
certain workers as independent contractors rather than FLSA-covered
employees. Elevating certain factors and precluding consideration of
relevant facts may increase the risk of misclassification of employees
as independent contractors. The 2021 IC Rule did not address the
potential risks to workers of such misclassification.
Therefore, in light of the vacatur of the Withdrawal Rule, the
Department believes it is appropriate to rescind the 2021 IC Rule and
set forth an analysis for determining employee or independent
contractor status under the Act that is more consistent with existing
judicial precedent and the Department's longstanding guidance prior to
the 2021 IC Rule. While prior to the 2021 IC Rule the Department
primarily issued subregulatory guidance in this area, as explained in
greater detail below, it believes that rescinding the 2021 IC

[[Page 62226]]

Rule and replacing it with detailed regulations addressing the
multifactor economic reality test--in a way that both more fully
reflects the case law and continues to be relevant to the evolving
economy--would be helpful for both workers and employers. The
Department further believes that this proposal will protect workers
from misclassification while at the same time providing a consistent
approach for those businesses that engage (or wish to engage) with
properly classified independent contractors, who the Department
recognizes play an important role in the economy.
As noted in the 2021 IC Rule, the Department ``without question has
relevant expertise in the area of what constitutes an employment
relationship under the FLSA, given its responsibility for administering
and enforcing the Act and its decades of experience doing so.'' \123\
The Department continues to believe, as it stated in the 2021 IC Rule,
that ``a clear explanation of the test for whether a worker is an
employee under the FLSA or an independent contractor not entitled to
the protections of the Act in easily accessible regulatory text is
valuable to potential employers, to workers, and to other
stakeholders.'' \124\ Upon further consideration, however, the
Department believes that the most valuable approach for stakeholders
would be an accessible regulation that is more consistent with case
law. As the 2021 IC Rule noted, rulemaking regarding employee or
independent contractor status can have ``great value regardless of what
deference courts ultimately give to it.'' \125\ The Department also
believes, however, that this proposal is more likely to have such value
because it is better aligned with judicial precedent and longstanding
principles used by circuit courts and the Department.
---------------------------------------------------------------------------

\123\ 86 FR 1176 (internal citations omitted).
\124\ Id.
\125\ Id.
---------------------------------------------------------------------------

The Department acknowledges that it is changing the approach taken
in the 2021 IC Rule, and that this warrants further discussion of the
rationale used in that rule and why the Department has carefully
reconsidered that reasoning and determined that modifications are
necessary.\126\ As noted above, the Department identified in the 2021
IC Rule four reasons underlying the need to promulgate the rule: (1)
confusion regarding the meaning of ``economic dependence'' because the
concept is ``underdeveloped''; (2) lack of focus in the multifactor
balancing test; (3) confusion and inefficiency due to overlapping
factors; and (4) the shortcomings of the economic reality test that are
more apparent in the modern economy.\127\ Moreover, the Department
suggested as a fifth reason for the 2021 IC Rule that legal uncertainty
based on the concerns identified with the economic reality test
hindered innovation in work arrangements.\128\ The Department believes
that this proposed rule's approach offers a better framework for
understanding and applying the concept of economic dependence by
explaining how the touchstone of whether an individual is in business
for themself is analyzed within each of the six economic realities
factors. The proposal's discussion of how courts and the Department's
previous guidance apply the factors brings the multifactor test into
focus, reduces confusion as to the overlapping factors, and provides a
better basis for understanding how the test has the flexibility to be
applied to changes in the modern economy, such that the Department no
longer views the concerns articulated in the 2021 IC Rule as
impediments to using the economic reality test formulated by the courts
and the Department's longstanding guidance.
---------------------------------------------------------------------------

\126\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502,
515 (2009).
\127\ 86 FR 1172-75.
\128\ Id. at 1175.
---------------------------------------------------------------------------

The Department continues to believe that the concept of economic
dependence is underdeveloped in the case law. As noted in the 2021 IC
Rule, a minority of courts have applied a ``dependence-for-income''
approach that considers whether the worker has other sources of income
or wealth or is financially dependent on the employer instead of a
``dependence-for-work'' approach used by the majority of courts and the
Department that appropriately considers whether the worker is dependent
on the employer for work or depends on the worker's own business for
work.\129\ The Department is therefore proposing to continue to include
its interpretation, as it did in the 2021 IC Rule, that economic
dependence is the ultimate inquiry, and that an employee is someone
who, as a matter of economic reality, is economically dependent on an
employer for work--not for income.\130\
---------------------------------------------------------------------------

\129\ See id. at 1172-73.
\130\ See id. at 1246 (Sec. 795.105(b) (``An employer suffers
or permits an individual to work as an employee if, as a matter of
economic reality, the individual is economically dependent on that
employer for work.'')); see also infra section V.B.; proposed Sec.
795.105(b) (``An `employee' under the Act is an individual whom an
employer suffers, permits, or otherwise employs to work. . . . [This
is] meant to encompass as employees all workers who, as a matter of
economic reality, are economically dependent on an employer for
work. . . . Economic dependence does not focus on the amount of
income earned, or whether the worker has other income streams.'').
---------------------------------------------------------------------------

Rather than give primacy to only two factors as indicators of
economic dependence, upon further consideration, the Department
believes that developing the concept of economic dependence is better
accomplished by, in addition to elaborating on the general meaning of
economic dependence, sharpening the focus of each of the six factors'
probative value as to the distinction between economic dependence on
the employer for work and being in business for oneself. By focusing on
that distinction in its discussion of each factor, this proposal would
provide the further development of the concept of economic dependence
that the 2021 IC Rule indicated would be welcomed by workers and
employers, but would do so in a way that is generally consistent with
case law and the Department's prior guidance.
To address what the Department viewed as a ``lack of focus in the
multifactor balancing test'' that led to uncertainty as to how a court
would balance the factors and which would be deemed more probative, the
2021 IC Rule identified two factors as more probative than the
others.\131\ The Department now finds that giving extra weight to two
factors cannot be harmonized with decades of case law and guidance from
the Department explaining that the economic reality test is a
multifactor test in which no one factor or set of factors automatically
carries more weight and that all relevant factors must be considered.
Regardless of the rationale for elevating two factors, there is no
legal support for doing so.\132\ Moreover, elevating certain factors in
such a predetermined fashion overlooks that each factor can be
probative of the distinction between a worker who is economically
dependent on the employer for work and a worker who is in business for
themself. Thus, the Department believes that refining the factors with
this distinction in mind and consistent with case law is a better
approach to giving the multifactor test more focus than the novel
approach of elevating two factors.
---------------------------------------------------------------------------

\131\ 86 FR 1173.
\132\ See infra section III.A.
---------------------------------------------------------------------------

The Department believes upon further consideration that any
purported ``confusion and inefficiency due to overlapping factors'' was
overstated in the 2021 IC Rule and that, in any event, when each factor
is viewed under the framework of whether the worker is economically
dependent or in business

[[Page 62227]]

for themself, the rationale for considering facts under more than one
factor is clearer. The Department explains in more detail below why
considering certain facts under more than one factor is consistent with
the totality-of-the-circumstances approach of the economic realities
analysis used by courts. And the Department provides guidance below
regarding how to consider certain facts, such as the ability to work
for others and whether the working relationship is exclusive, under
more than one factor. The Department believes that this flexible
approach is supported by the case law and preferable to rigidly and
artificially limiting facts to only one factor, as the 2021 IC Rule
did. Finally, in the 2021 IC Rule, the Department stated that
``technological and social changes have made shortcomings of the
economic realities test more apparent in the modern economy,'' thus
justifying the 2021 IC Rule's characterization of the integral,
investment, and permanence factors as less important in determining a
worker's classification.\133\ However, upon further consideration, the
Department believes that the multifactor economic reality test relied
on by courts where no one factor or set of factors is presumed to carry
more weight remains a helpful tool when evaluating modern work
arrangements. The test's vitality is confirmed by its application over
seven decades that have seen monumental shifts in the economy. Modern
work arrangements utilizing applications or other technology must be
addressed, but the underlying economic reality test, which considers
the totality of the circumstances in each working arrangement, offers
the most flexible, comprehensive, and appropriately nuanced approach
which can be adapted to disparate industries and occupations. It can
also encompass continued social changes because it does not presume
which aspects of the work relationship are most probative or relevant
and leaves open the possibility that changed circumstances may make
certain factors more important in certain cases or future scenarios.
---------------------------------------------------------------------------

\133\ 86 FR 1175.
---------------------------------------------------------------------------

A. The 2021 IC Rule's Test Is Not Supported by Judicial Precedent or
the Department's Historical Position and Is Not Fully Aligned With the
Act's Text as Interpreted by the Courts

Among other reasons the Department is proposing to rescind and
replace the 2021 IC Rule, the Department does not believe that the Rule
is fully aligned with the FLSA's text as interpreted by the courts or
the Department's longstanding analysis, as well as decades of case law
describing and applying the multifactor economic reality test.
1. The 2021 IC Rule's Elevation of Control and Opportunity for Profit
or Loss as the ``Most Probative'' Factors in Determining Employee
Status Under the FLSA
The 2021 IC Rule set forth a new articulation of the economic
reality test, elevating two factors (control and opportunity for profit
or loss) as ``core'' factors above other factors, asserting that the
two core factors have ``greater probative value'' in determining a
worker's economic dependence.\134\ Notably, the 2021 IC Rule further
provides that if both core factors point towards the same
classification--either employee or independent contractor--then there
is a ``substantial likelihood'' that this is the worker's correct
classification.\135\ Although it identifies three other factors as
additional guideposts and acknowledges that additional factors may be
considered, it makes clear that non-core 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.'' \136\ In justifying this
stratified analysis, the 2021 IC Rule disagreed that, as a general
matter, the economic reality test ``requires factors to be unweighted
or weighted equally,'' \137\ asserting 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.'' \138\
---------------------------------------------------------------------------

\134\ 86 FR 1246 (Sec. 795.105(c) and (d)).
\135\ Id. (Sec. 795.105(c)); see also id. at 1201 (advising
that other factors would only outweigh the two core factors ``in
rare cases'').
\136\ Id. at 1246 (Sec. 795.105(c)).
\137\ Id. at 1197.
\138\ Id. at 1198.
---------------------------------------------------------------------------

Upon further review of judicial precedent, the Department is not
aware of any court that has, as a general and fixed rule, elevated any
one economic reality factor or subset of factors above others, and
there is no statutory basis for such a predetermined weighting of the
factors. To the contrary, the Supreme Court has emphasized that
employment status under the economic reality test turns upon ``the
circumstances of the whole activity,'' rather than ``isolated
factors.'' \139\ Federal appellate courts have repeatedly cautioned
against a mechanical or formulaic application of the economic reality
test,\140\ and specifically warn that it `` `is impossible to assign to
each of these factors a specific and invariably applied weight.' ''
\141\ The 2021 IC Rule's elevation of two ``core factors'' is also in
tension with the position, expressed by the Supreme Court and Federal
courts of appeals, that no single factor in the analysis is
dispositive.\142\ Thus, the Department recognizes that the 2021 IC
Rule's predetermined and mechanical weighting of factors is not
consistent with how courts have, for decades, applied the economic
reality analysis.\143\
---------------------------------------------------------------------------

\139\ Rutherford, 331 U.S. at 730; see also Silk, 331 U.S. at
716, 719 (denying the existence of ``a rule of thumb to define the
limits of the employer-employee relationship'' and determining
employment status based on ``the total situation'').
\140\ See, e.g., Superior Care, 840 F.2d at 1059 (``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.'').
\141\ Parrish, 917 F.3d at 380 (quoting Hickey, 699 F.2d at
752); see also Scantland, 721 F.3d at 1312 n.2 (the relative weight
of each factor ``depends on the facts of the case'' (quoting
Santelices, 147 F. Supp. 2d at 1319)).
\142\ See, e.g., Silk, 331 U.S. at 716 (explaining that ``[n]o
one [factor] is controlling'' in the economic realities test);
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.''); Morrison, 253
F.3d at 11 (``No one factor standing alone is dispositive and courts
are directed to look at the totality of the circumstances and
consider any relevant evidence.''); 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.''); 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.'').
\143\ See 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.'').
---------------------------------------------------------------------------

As explained in the Withdrawal Rule, the Department believes that
the review of appellate cases \144\ relied on to support the 2021 IC
Rule's creation of ``core factors'' is not complete and makes
assumptions about the reasoning behind the courts' decisions that are
not clear from the decisions themselves.\145\ For example, the 2021 IC
Rule's discussion of the case law review did not provide full
documentation or citations, did not make clear what the scope of the
review entailed (e.g.,

[[Page 62228]]

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.), and oversimplified the analysis
provided by the courts because court decisions regarding classification
under the FLSA generally emphasize the fact-specific nature of the
totality-of-circumstances analysis. 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 broader approach that most courts have taken in determining
worker classification.
---------------------------------------------------------------------------

\144\ The 2021 IC Rule references on several occasions a review
of appellate case law since 1975 to justify its elevation of two
``core'' factors. 86 FR 1196, 1198, 1202, 1240.
\145\ See 86 FR 24309-10.
---------------------------------------------------------------------------

In fact, many decisions explicitly deny assigning any predetermined
weight to these factors, but instead state that they considered the
factors as part of an analysis of the whole activity.\146\ While there
are many cases in which the classification decision made by the court
aligns with the classification indicated by the control and opportunity
for profit or loss factors, the 2021 IC Rule did not identify any cases
stating that those two factors are ``more probative'' of a worker's
classification than other factors. Moreover, the 2021 IC 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.\147\ 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, the 2021 IC Rule did not address whether a
different combination of factors would yield similar results.
Particularly when viewed in the context of repeated statements from the
courts that no one factor in the economic reality test is dispositive,
the selective reading of an undefined set of cases to support the
opposite conclusion is not persuasive.
---------------------------------------------------------------------------

\146\ See supra nn.139-142.
\147\ See 86 FR 1197 n.45.
---------------------------------------------------------------------------

In any event, the 2021 IC Rule significantly altered both these
factors, changing what may be considered for each. For example,
contrary to the approach taken by most courts, the 2021 IC Rule
downplays the employer's right to control the work and recasts the
opportunity for profit or loss factor as indicating independent
contractor status based on the worker's initiative or investment. Thus,
irrespective of whether control and opportunity for profit or loss were
more frequently aligned with the ultimate result in prior appellate
cases, the new framing of these factors, as redefined in the 2021 IC
Rule, sets forth a new standard for analysis without precedent.
Finally, the Department has concerns that prioritizing two ``core
factors'' over other factors may not fully account for the Act's broad
definition of ``employ,'' as interpreted by the courts. 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 working relationship under the
``permanence'' factor and the performance of work that does not require
specialized skills). 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. Numerous commenters responding to the
Department's proposed withdrawal of the 2021 IC Rule voiced similar
concerns.\148\
---------------------------------------------------------------------------

\148\ Id. at 24307-11.
---------------------------------------------------------------------------

In sum, the Department believes that the 2021 IC Rule's elevation
of the control and opportunity for profit or loss factors is in tension
with the language 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 whether a worker is
an employee or an independent contractor and does not better determine
who is in fact economically dependent on their employer for work as
opposed to being in business for themself.
2. The Role of Control in the 2021 IC Rule's Analysis
As explained above, the 2021 IC Rule identifies ``the nature and
degree of control over the work'' as one of two core factors given
``greater weight'' in the independent contractor analysis.\149\ The
2021 IC 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.\150\
---------------------------------------------------------------------------

\149\ Id. at 1246-47 (Sec. 795.105(c), (d)).
\150\ Id. at 1200-01.
---------------------------------------------------------------------------

Although the 2021 IC Rule's standard for determining who is an
employee and who is an independent contractor is not the same as the
common law control analysis, the Department continues to believe, as
expressed in the Withdrawal Rule, that elevating the importance of
control in every FLSA employee or independent contractor analysis
brings the Rule closer to the common law control test that courts have
rejected when interpreting the Act. As previously noted, section 3(g)
of the FLSA expansively defines the term ``employ'' to include ``to
suffer or permit to work.'' \151\ The Supreme Court has repeatedly
stated that this provision establishes a broader scope of employment
for FLSA purposes than under a common law (i.e., agency) analysis
focused on control.\152\ In light of this directive, the Department
remains concerned that the outsized role of control under the 2021 IC
Rule's analysis is contrary to the Act's text and case law interpreting
the Act's definitions of employment.
---------------------------------------------------------------------------

\151\ 29 U.S.C. 203(g).
\152\ See Darden, 503 U.S. at 324-26; Portland Terminal, 330
U.S. at 150-51; and Rutherford, 331 U.S. at 728.
---------------------------------------------------------------------------

3. The 2021 IC Rule Improperly Altered Several Factors by Precluding
the Consideration of Relevant Facts
As previously discussed in the Withdrawal Rule, the Department
remains concerned that the 2021 IC Rule's preclusion of certain facts
from being considered under the factors improperly narrows the economic
reality test and does not allow for a full consideration of all facts
which might be relevant to determining whether a worker is economically
dependent upon an employer for work or in business for themself.
Examples include: (1) advising that ``control'' indicative of an
employment relationship must involve an employer's ``substantial
control over key aspects of the performance of the work,'' excluding
requirements ``to comply with specific legal obligations, satisfy
health and safety standards, carry insurance, meet contractually
agreed-upon deadlines or quality control standards, or satisfy other
similar terms;'' \153\ (2) making the ``opportunity for profit or
loss'' factor indicate independent contractor status based on the
worker's initiative or investment (not both); \154\ (3) disregarding
the employer's investments; \155\ (4) disregarding the importance or

[[Page 62229]]

centrality of a worker's work to the employer's business; \156\ and (5)
downplaying the employer's reserved right or authority to control the
worker.\157\ In each of these ways--as explained in greater detail
below--the 2021 IC Rule limits the scope of facts and considerations
comprising the analysis of whether the worker is an employee or
independent contractor.
---------------------------------------------------------------------------

\153\ 86 FR 1246-47 (Sec. 795.105(d)(1)(i)).
\154\ Id. at 1247 (Sec. 795.105(d)(1)(ii)).
\155\ Id.; see also id. at 1188 (``[T]he Department reaffirms
its position that comparing the individual worker's investment to
the potential employer's investment should not be part of the
analysis of investment.'').
\156\ Id. at 1247 (Sec. 795.105(d)(2)(iii)); see also id. at
1248 (noting through an example in Sec. 795.115(b)(6)(ii) that
``[i]t is not relevant . . . that the writing of articles is an
important part of producing newspapers''); accord id. at 1195
(responding to commenters regarding the Department's decision to
shift to an ``integrated unit of production'' analysis).
\157\ See id. at 1246-47 (advising, in Sec. 795.105(d)(1)(i),
that the control factor indicates employment status if a potential
employer ``exercises substantial control over key aspects of the
performance of the work'') (emphasis added); id. at 1247 (advising,
in Sec. 795.110, 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''); see also
id. at 1203-04 (same in response to commenters).
---------------------------------------------------------------------------

As further explained below, the 2021 IC Rule's narrowing of certain
economic realities factors by precluding consideration of certain facts
provides another justification for the Rule's rescission and
replacement.

B. Confusion and Uncertainty Introduced by the 2021 IC Rule

One of the 2021 IC Rule's primary goals was to ``significantly
clarify to stakeholders how to distinguish between employees and
independent contractors under the Act.'' \158\ Although the stated
intent was to provide clarity, it has introduced several concepts to
the analysis that neither courts nor the Department have previously
applied, as discussed above.\159\ This rulemaking arises in part from a
concern that these changes will not provide clarity because of the
inconsistency with circuit court case law, and that the conflict
between the 2021 IC Rule's analysis and circuit precedent will
inevitably lead to greater uncertainty as well as lead to inconsistent
outcomes, rather than increase clarity or certainty.
---------------------------------------------------------------------------

\158\ Id. at 1168.
\159\ See supra section III.A.
---------------------------------------------------------------------------

As a threshold matter, because the 2021 IC Rule departed from
courts' longstanding precedent, if left in place, it is not clear
whether courts would adopt its analysis--a question that could take
years of appellate litigation in different Federal circuits to sort
out. If some courts try to reconcile the 2021 IC Rule's analysis with
their precedent and the statute and some courts do not, it will create
conflicts among courts and between courts and the Department, resulting
in more uncertainty as to the applicable economic reality test.
Businesses operating nationwide will have had to familiarize themselves
with multiple standards for determining who is an employee under the
FLSA across different jurisdictions.\160\
---------------------------------------------------------------------------

\160\ See, e.g., 86 FR 1241 n.255 (noting, while rejecting the
``ABC'' test for worker classification, that companies operating
``nationwide businesses[ ] are likely to comply with the most
demanding standard if they wish to make consistent classification
determinations'').
---------------------------------------------------------------------------

In addition to uncertainty resulting from the 2021 IC Rule's
reception by courts, the Rule introduces several ambiguous terms and
concepts into the analysis for determining whether a worker is an
employee under the FLSA or an independent contractor. For example,
courts and regulated parties now must grapple with what it means in
practice for two factors to be ``core'' factors and entitled to greater
weight. In addition, they must determine, in cases where the two
``core'' factors point 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.
Additionally, the 2021 IC Rule cautions that its list of factors is
``not exhaustive,'' \161\ but does not specify whether the ``additional
factors'' referenced in Sec. 795.105(d)(2)(iv) have less probative
value (or weight) than the three ``other factors'' listed in Sec.
795.105(d)(2)(i) through (iii).\162\ Assuming that they do, the 2021 IC
Rule has essentially transformed the analysis that courts and the
Department have previously applied into a three-tiered 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 depending on the facts of a particular work
arrangement, courts and the regulated community must evaluate factors
within and across groups in a new hierarchical structure, which will
likely cause confusion and inconsistency. Adding to the confusion, the
Rule improperly 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 long applied those
factors.\163\
---------------------------------------------------------------------------

\161\ Id. at 1246 (Sec. 795.105(c)).
\162\ Id. at 1247.
\163\ Id. (Sec. 795.105(d)(1)(ii)).
---------------------------------------------------------------------------

The Department believes that the 2021 IC Rule has complicated
rather than simplified the analysis for determining whether a worker is
an employee or independent contractor under the FLSA and does not
provide clarity behind the meaning of economic dependence or reduce
confusion.\164\ For the reasons explained above, the Department
believes that the 2021 IC Rule has introduced substantial confusion and
uncertainty on the topic of independent contractor status, to the
detriment of workers and businesses alike.
---------------------------------------------------------------------------

\164\ The 2021 IC Rule includes several important principles
from the case law, such as that economic dependence is the ultimate
inquiry, that the list of economic reality factors is not exhaustive
and that no single factor is determinative--principles that the
Department continues to agree with and has included in this NPRM.
The 2021 IC Rule, however, also incorporates provisions that are in
tension with these well-established judicial principles, such as the
predetermined elevating of two factors. The Department is also
concerned with this internal inconsistency in the 2021 IC Rule.
---------------------------------------------------------------------------

C. Risks to Workers From the 2021 IC Rule

As part of its regulatory impact analysis, the 2021 IC Rule
quantified some possible costs (regulatory familiarization) and some
possible cost savings (increased clarity and reduced litigation).\165\
It identified and discussed--but did not quantify--numerous other
costs, transfers, and benefits possibly resulting from the 2021 IC
Rule, including ``possible transfers among workers and between workers
and businesses.'' \166\ The 2021 IC 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].'' \167\ The
2021 IC 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\
---------------------------------------------------------------------------

\165\ 86 FR 1211.
\166\ Id. at 1214-16.
\167\ Id. at 1223.
\168\ Id.
---------------------------------------------------------------------------

The preliminary regulatory impact analysis for this proposed rule
is provided below in section VII. As a general matter, the Department
notes here that it does not believe that the 2021 IC 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.

[[Page 62230]]

The consequence for a worker of being misclassified as an independent
contractor is that the worker is excluded from the protections of the
FLSA to which they are entitled. These protections include being paid
at least the Federal minimum wage for all hours worked, overtime
compensation for hours worked over 40 in a workweek, and protection
against retaliation for complaining about, for example, a violation of
the FLSA. The Department concludes that, to the extent the 2021 IC Rule
results in the reclassification or misclassification of employees as
independent contractors, the resulting denial of FLSA protections would
harm the affected workers. To the extent that women and people of color
are overrepresented in low-wage positions where misclassification as
independent contractors is more likely, this result could have a
disproportionate impact on these workers. In comments on the Withdrawal
Rule, several commenters cited a study finding that seven of the eight
occupations with the highest rate of misclassification were held
disproportionately by women and/or workers of color, asserting that
``misclassification is rampant in low-wage, labor-intensive industries
where women and people of color, including Black, Latinx, and AAPI
workers, are overrepresented.'' \169\ These workers already experience
multiple types of economic inequities in the labor force, including
gender and racial wage gaps and occupational segregation. When
comparing the median wages of women who worked full-time, year-round to
the wages of men who worked full-time, year-round, women were paid 83
cents to every dollar paid to men.\170\ For women of color, this wage
gap is even greater--Black women were paid 64%, and Hispanic women (of
any race) were paid 57% of what white non-Hispanic men were paid. The
misclassification of these workers as independent contractors deprives
them of the minimum wage and overtime protections that could help
alleviate some of this inequality.
---------------------------------------------------------------------------

\169\ Id. at 24312.
\170\ U.S. Department of Labor, Women's Bureau. Connecting the
Dots: ``Women's Work'' and the Wage Gap (2022) https://blog.dol.gov/2022/03/15/connecting-the-dots-womens-work-and-the-wage-gap?_ga=2.244962629.155756293.1655992165-662785877.1655992165.
---------------------------------------------------------------------------

In sum, the Department's proposal to rescind and replace the 2021
IC Rule is motivated, in part, by an assessment that doing so will
benefit workers as a whole, including those workers at risk of being
misclassified as independent contractors as well as those who are
appropriately classified as independent contractors.

D. The Benefits of Replacing the Part 795 Regulations on Employee or
Independent Contractor Status

In its rulemaking last year to withdraw the 2021 IC Rule, the
Department declined to propose alternative regulations.\171\ The
Department had not previously promulgated generally applicable
regulations on independent contractor classification in the FLSA's 83
years of existence.\172\ Particularly in light of the consistency of
the economic reality test as adopted by the circuits, the Department
had for decades relied on subregulatory documents to provide generally
applicable guidance for the Department and the regulated community on
determining employee or independent contractor status under the
FLSA.\173\
---------------------------------------------------------------------------

\171\ See 86 FR 24307.
\172\ The FLSA was enacted in 1938. 29 U.S.C. 201. Until 2021,
the Department had not promulgated generally applicable regulations
regarding the classification of workers as employees or independent
contractors.
\173\ See, e.g., 86 FR 24318-20.
---------------------------------------------------------------------------

In its decision invalidating the Withdrawal Rule, the Eastern
District of Texas faulted the Department for failing to consider ``less
disruptive alternatives'' to withdrawal, such as ``promulgat[ing] a
regulation that enumerated six factors instead of five'' or ``adopting
the seven factors that the Department previously set forth in Fact
Sheet #13 as the applicable economic realities test.'' \174\ While the
Department believes that its subregulatory guidance provided
appropriate guidance to the regulated community, upon further
consideration, it recognizes that publishing regulatory guidance on the
distinction between FLSA-covered employees and independent contractors
is beneficial for stakeholders, particularly because the Department
published a regulation in 2021. In addition, detailed Federal
regulations would be easier to locate and read for interested
stakeholders than applicable circuit caselaw, potentially helping
workers and businesses better understand the Department's
interpretation of their rights and responsibilities under the law. In
contrast to WHD's earlier opinion letters on independent contractor
status and its prior regulations on the topic located in parts 780 and
788, new part 795 would also provide guidance to workers and businesses
in any industry.
---------------------------------------------------------------------------

\174\ Coalition for Workforce Innovation, 2022 WL 1073346, at
*18.
---------------------------------------------------------------------------

Adopting detailed regulations aligned with existing precedent that
help workers and businesses to better understand their rights and
responsibilities under the law could also better protect workers, who
have been placed at a greater risk of misclassification as a
consequence of the 2021 IC Rule. As described in sections III.A. and
B., the 2021 IC Rule's elevation of certain factors and its preclusion
of consideration of relevant facts under several factors may result in
misapplication of the economic reality test and may have conveyed to
employers that it might be easier than it used to be to classify
certain workers as independent contractors rather than FLSA-covered
employees. Elevating certain factors and precluding consideration of
relevant facts may increase the risk of misclassification of employees
as independent contractors. Because the Department has serious concerns
about the 2021 IC Rule, it is proposing to rescind and replace it with
regulations that are fully aligned with the text of the FLSA as
interpreted by the courts, the Department's longstanding subregulatory
guidance, and decades of court cases interpreting the Act while still
providing additional clarity to workers and employers on the concept of
economic dependence.

IV. Alternatives Considered

The Department assessed four regulatory alternatives to this
proposed rule below in section VII.F. of the regulatory impact
analysis. The Department previously considered and rejected, on legal
viability grounds, the first two alternatives--codifying either a
common law or ABC test for determining employee or independent
contractor status--in the 2021 IC Rule.\175\ The Department continues
to believe that legal limitations prevent the Department from adopting
either of those alternatives.
---------------------------------------------------------------------------

\175\ See 86 FR 1238.
---------------------------------------------------------------------------

For the first alternative, the Department considered codifying the
common law control test, which is used to distinguish between employees
and independent contractors under other Federal laws, such as the
Internal Revenue Code.\176\ The focus of the

[[Page 62231]]

common law control test is ``the hiring party's right to control the
manner and means by which [work] is accomplished,'' \177\ but the
Supreme Court has explained that ``other factors relevant to the
inquiry [include] the skill required; the source of the
instrumentalities and tools; the location of the work; the duration of
the relationship between the parties; whether the hiring party has the
right to assign additional projects to the hired party; the extent of
the hired party's discretion over when and how long to work; the method
of payment; the hired party's role in hiring and paying assistants;
whether the work is part of the regular business of the hiring party;
whether the hiring party is in business; the provision of employee
benefits; and the tax treatment of the hired party.'' \178\
---------------------------------------------------------------------------

\176\ See 26 U.S.C. 3121(d)(2) (generally defining the term
``employee'' under the Internal Revenue Code as ``any individual
who, under the usual common law rules applicable in determining the
employer-employee relationship, has the status of an employee'').
The Supreme Court has advised that the common law control test
applies by default under Federal law unless a statute specifies an
alternative standard. See Darden, 503 U.S. at 322-23 (`` `[W]hen
Congress has used the term `employee' without defining it, we have
concluded that Congress intended to describe the conventional
master-servant relationship as understood by common-law agency
doctrine.' '') (quoting Reid, 490 U. S. at 739-40).
\177\ Reid, 490 U.S. at 751.
\178\ Id. at 751-52.
---------------------------------------------------------------------------

Although the common law control test considers some of the same
factors as those identified in the proposed rule's ``economic reality''
test (e.g., skill, length of the working relationship, the source of
equipment and materials, etc.), courts generally recognize that,
because of its focus on control, the common law test is more permissive
of independent contracting arrangements than the economic reality test,
which examines the economic dependence of the worker.\179\
---------------------------------------------------------------------------

\179\ See, e.g., Baker v. Flint Eng'g & Const. Co., 137 F.3d
1436, 1440 (10th Cir. 1998) (recognizing that the ``economic
realities'' test is a more expansive standard for determining
employee status than the common law test).
---------------------------------------------------------------------------

Codifying a common law control test for the FLSA could create a
more uniform legal framework among Federal statutes, in the sense that
entities would not, for example, have to understand and apply one
employment classification standard for tax purposes and a different
employment classification standard for FLSA purposes. However, the
Department does not believe that adopting a common law control test for
determining employee or independent contractor status under the FLSA
would, in fact, simplify the analysis for the regulated community
because courts and enforcement agencies applying a common law test for
independent contractors have considered a greater number and different
variation of factors than the six or so factors commonly considered
under the economic reality test.\180\
---------------------------------------------------------------------------

\180\ See RESTATEMENT (THIRD) OF AGENCY sec. 7.07, Comment (f)
(2006) (identifying 10 factors); IRS Tax Topic No. 762 Independent
Contractor vs. Employee (May 19, 2022), https://www.irs.gov/taxtopics/tc762 (explaining the common law analysis through three
main categories: behavioral control, financial control, and the
relationship of the parties); Reid, 490 U.S. at 751-52 (identifying
13 factors).
---------------------------------------------------------------------------

Regardless, applying the common law test would be contrary to the
``suffer or permit'' language in section 3(g) of the FLSA, which the
Supreme Court has interpreted as demanding a broader definition of
employment than that which exists under the common law.\181\
Accordingly, the Department believes it is legally constrained from
adopting the common law control test and that the common law test is
not sufficiently protective in assessing worker classification under
the FLSA.
---------------------------------------------------------------------------

\181\ See, e.g., Darden, 503 U.S. at 326; Portland Terminal, 330
at 150-51.
---------------------------------------------------------------------------

For the second alternative, the Department considered codifying an
ABC test to determine independent contractor status under the FLSA,
similar to the ABC test recently adopted under California's state wage
and hour law.\182\ As described by the California Supreme Court in
Dynamex Operations W., Inc. v. Superior Court, ``[t]he ABC test
presumptively considers all workers to be employees, and permits
workers to be classified as independent contractors only if the hiring
business demonstrates that the worker in question satisfies each of
three conditions: (a) that the worker is free from the control and
direction of the hirer in connection with the performance of the work,
both under the contract for the performance of the work and in fact;
and (b) that the worker performs work that is outside the usual course
of the hiring entity's business; and (c) that the worker is customarily
engaged in an independently established trade, occupation, or business
of the same nature as that involved in the work performed.'' \183\
---------------------------------------------------------------------------

\182\ See Dynamex Operations W., Inc. v. Superior Court, 416
P.3d 1 (Cal. 2018); Assembly Bill (``A.B.'') 5, Ch. 296, 2019-2020
Reg. Sess. (Cal. 2019) (codifying the ABC test articulated in
Dynamex); A.B. 2257, Ch. 38, 2019-2020 Reg. Sess. (Cal. 2020)
(retroactively exempting certain professions, occupations, and
industries from the ABC test that A.B. 5 had codified). The ABC test
originated in state unemployment insurance statutes, but some state
courts and legislatures have recently extended the test to govern
employee/independent contractor disputes under state wage and hour
laws. See Keith Cunningham-Parmeter, Gig-Dependence: Finding the
Real Independent Contractors of Platform Work, 39 N. Ill. U. L. Rev.
379, 408-11 (2019) (discussing the origins and recent expansion of
the ABC test).
\183\ 416 P.3d at 34 (emphasis in original). California's ABC
test is slightly different than versions of the ABC test adopted (or
presently under consideration) in other states. For example, New
Jersey provides that a hiring entity may satisfy the ABC test's
``B'' prong by establishing either: (1) that the work provided is
outside the usual course of the business for which the work is
performed, or (2) that the work performed is outside all the places
of business of the hiring entity. N.J. Stat. Ann. sec. 43:21-
19(i)(6)(A-C). The Department has chosen to analyze California's ABC
test as a regulatory alternative because businesses subject to
multiple standards, including nationwide businesses, are likely to
comply with the most demanding standard if they wish to make
consistent classification determinations.
---------------------------------------------------------------------------

Codifying an ABC test could establish a simpler and clearer
standard for determining whether workers are employees or independent
contractors. The ABC test only has three criteria, and no balancing of
the criteria is required; all three prongs must be satisfied for a
worker to qualify as an independent contractor. However, the Department
believes it is legally constrained from adopting an ABC test because
the Supreme Court has held that the economic reality test is the
applicable standard for determining workers' classification under the
FLSA as an employee or independent contractor.\184\ Moreover, the
Supreme Court has stated that the existence of employment relationships
under the FLSA ``does not depend on such isolated factors'' as the
three independently determinative factors in the ABC test, ``but rather
upon the circumstances of the whole activity.'' \185\ Because the ABC
test is inconsistent with Supreme Court precedent interpreting the
FLSA, the Department believes that it could only implement an ABC test
if the Supreme Court revisits its precedent or if Congress passes
legislation that alters the applicable analysis under the FLSA.
---------------------------------------------------------------------------

\184\ See Tony & Susan Alamo, 471 U.S. at 301 (``The test of
employment under the Act is one of `economic reality.' ''); Whitaker
House, 366 U.S. at 33 (`` `economic reality' rather than `technical
concepts' is . . . the test of employment'' under the FLSA) (citing
Silk, 331 U.S. at 713; Rutherford, 331 U.S. at 729). ABC tests are
not the same as the FLSA economic realities test. For example, the
ABC test does not consider the totality of the circumstances of the
working relationship between the employer and the worker; instead,
it considers three specific circumstances. In addition, the ABC test
does not weigh or balance the various considerations; instead, the
test results in a finding of employee status if any one factor is
not met regardless how close the facts are on that factor and
regardless what the other two factors indicate.
\185\ Rutherford, 331 U.S. at 730.
---------------------------------------------------------------------------

[[Page 62232]]

development; and a clear explanation of the test for whether a worker
is an employee or independent contractor in easily accessible
regulatory text is valuable. This proposal also includes several other
important principles from the case law that were included in the 2021
IC Rule: economic dependence is the ultimate inquiry; the list of
economic reality factors is not exhaustive; and no single factor is
determinative. Further, with respect to specific factors, this proposal
reinforces certain aspects addressed in the 2021 IC Rule such as that
an exclusivity requirement imposed by the employer is a strong
indicator of control, and that issues related to scheduling and
supervision over the performance of the work (including the ability to
assign work) are relevant considerations under the control factor.
Despite these areas of agreement, the governing principle of the
2021 IC Rule is that two of the economic reality factors are
predetermined to be more probative and therefore carry more weight,
which may obviate the need to meaningfully consider the remaining
factors. Upon further consideration, as discussed in this proposal, the
Department believes that this departure from decades of case law and
the Department's own longstanding position that no one factor or subset
of factors should carry more or less weight would have a confusing and
disruptive effect on employers and workers alike. The Department
considered simply removing the problematic ``core factors'' analysis
from the 2021 IC Rule and retaining the five factors as described in
the rule. However, the Department rejected this approach because other
aspects of the rule such as considering investment and initiative only
in the opportunity for profit or loss factor and excluding
consideration of whether the work performed is central or important to
the employer's business are also in tension with judicial precedent and
longstanding Department guidance. These provisions narrow the economic
reality test by limiting the facts that may be considered as part of
the test, facts which the Department believes are relevant in
determining whether a worker is economically dependent on the employer
for work or in business for themself. Therefore, after considering all
of the common aspects of the 2021 IC Rule and whether to retain some
portions of that rule, the Department has concluded that in order to
provide clear, affirmative regulatory guidance that aligns with case
law and is consistent with the text and purpose of the Act as
interpreted by courts, a complete rescission and replacement of the
2021 IC Rule is needed. For these reasons, the Department is not
proposing a partial rescission of the 2021 IC Rule.
For the fourth alternative, the Department considered rescinding
the 2021 IC Rule and providing guidance on employee or independent
contractor classification through subregulatory guidance instead of
through new regulations. To begin with, for the reasons set forth in
this NPRM, the Department believes that rescission of the 2021 IC Rule
is appropriate, regardless of the new content proposed for its
replacement. Specifically, the Department believes that the 2021 IC
Rule does not fully comport with the FLSA's text as interpreted by the
courts, and that retaining the 2021 IC Rule would have a confusing and
disruptive effect on workers and businesses alike due to its departure
from decades of case law describing and applying the multifactor
economic reality test as a totality-of-the-circumstances test. The 2021
IC Rule's provisions--such as designating two factors as most probative
and predetermining that they carry greater weight in the analysis,
considering investment and initiative only in the opportunity for
profit or loss factor, and excluding consideration of whether the work
performed is central or important to the employer's business--are in
tension with this longstanding case law.
The Department recognizes that the 2021 IC Rule sought to ``clarify
and sharpen the contours of the economic reality test used to determine
independent contractor classification under the FLSA.'' \186\ However,
as noted above, although the stated intent was to provide clarity, the
2021 IC Rule introduced several concepts to the analysis that neither
courts nor the Department have previously applied.\187\ The Department
believes that these changes will not provide clarity because of the
inconsistency with circuit court case law, and that the conflict
between the 2021 IC Rule's analysis and circuit precedent will
inevitably lead to greater uncertainty as well as lead to inconsistent
outcomes, rather than increase clarity or certainty.
---------------------------------------------------------------------------

\186\ 86 FR 1172.
\187\ See supra sections III.A, B.
---------------------------------------------------------------------------

Given the substantial uniformity among the circuit courts in the
application of the economic reality test prior to the 2021 IC Rule, the
Department believes that rescinding the 2021 IC Rule would provide
greater clarity than retaining the 2021 IC Rule. For more than 80 years
prior to the 2021 IC Rule, the Department primarily issued
subregulatory guidance in this area and did not have generally
applicable regulations on the classification of workers as employees or
independent contractors. This subregulatory guidance was informed by
the case law and set forth a multifactor economic reality test to
answer the ultimate question of economic dependence. However, as
explained in section III above, the Department believes that replacing
the 2021 IC Rule with regulations addressing the multifactor economic
reality test that more fully reflect the case law and continue to be
relevant to the modern economy will be helpful for both workers and
employers in understanding how to apply the law in this area.
Specifically, issuing regulations allows the Department to provide in-
depth guidance that is more closely aligned with circuit case law,
rather than the regulations set forth in the 2021 IC Rule which have
created a dissonance between the Department's regulations and judicial
precedent. Additionally, issuing regulations allows the Department to
formally collect and consider a wide range of views from stakeholders
by electing to use the notice-and-comment process. Finally, because
courts are accustomed to considering relevant agency regulations,
providing guidance in this format may further improve consistency among
courts regarding this issue. Therefore, the Department has decided not
to rescind the 2021 IC Rule and provide only subregulatory guidance,
but to instead propose these regulations.

V. Discussion of Proposed Rule

In view of the foregoing concerns and considerations, the
Department is proposing modifications to title 29 of the Code of
Federal Regulations addressing whether workers are employees or
independent contractors under the FLSA. In relevant part, and as
discussed in greater detail below, the Department proposes:
Not using ``core factors'' and instead returning to a
totality-of-the-circumstances analysis of the economic reality test
that has a refined focus on whether each factor shows the worker is
economically dependent upon the employer for work versus being in
business for themself, does not use predetermined weighting of factors,
and that considers the factors comprehensively instead of as discrete
and unrelated.
Returning the consideration of investment to a standalone
factor, focusing on whether the worker's investment is capital or
entrepreneurial in nature, and considering the worker's

[[Page 62233]]

investments on a relative basis with the employer's investment.
Providing additional analysis of the control factor,
including detailed discussions of how scheduling, supervision, price-
setting, and the ability to work for others should be considered when
analyzing the degree of control over a worker, and not limiting control
to control that is actually exerted.
Returning to the longstanding Departmental interpretation
of the integral factor, which considers whether the work is integral to
the employer's business rather than whether it is exclusively part of
an ``integrated unit of production.''
As in the 2021 IC Rule, the Department is proposing to include
cross-references to the interpretations set forth in this proposed rule
in 29 CFR 780.330(b) and 788.16(a); these provisions contain industry-
specific guidance. Additionally, in the 2021 IC Rule, the Department
declined to revise its regulation addressing employee or independent
contractor status under MSPA in 29 CFR 500.20(h)(4), stating, in part,
that the MSPA regulation and the 2021 IC Rule both applied an economic
reality test in which the ultimate inquiry was economic
dependence.\188\ Although the Department has again considered revising
the MSPA regulation, it proposes the same approach that it took in
2021--which is to not make any revisions at this time. The Department
continues to recognize that MSPA adopts by reference the FLSA's
definition of ``employ,'' \189\ and that 29 CFR 500.20(h)(4) considers
``whether or not an independent contractor or employment relationship
exists under the Fair Labor Standards Act'' to interpret employee or
independent contractor status under MSPA.\190\ The test contained in
the MSPA regulation is substantially similar to the proposed test here,
so the Department believes that there is not a need to revise the MSPA
regulation at this time. The Department, however, welcomes comments
regarding whether 29 CFR 500.20(h)(4) should be revised to more fully
reflect the interpretation of employee or independent contractor status
set forth in this proposed rule.
---------------------------------------------------------------------------

\188\ See 86 FR 1177.
\189\ 29 U.S.C. 1802(5).
\190\ The MSPA regulations consider, for example, whether a
worker is economically dependent upon an agricultural association or
farm labor contractor. See 29 CFR 500.20(h)(4).
---------------------------------------------------------------------------

Finally, the Department is also proposing to formally rescind the
2021 IC Rule and to add a new part 795. In the Department's view, the
operative effects of proposing to rescind the 2021 IC Rule follow. If
finalized, the proposed rule would formally rescind the 2021 IC Rule.
That rescission would operate independently of the new content in any
new final rule, as the Department intends it to be severable from the
substantive proposal for adding a new part 795. For the reasons set
forth in this NPRM, the Department believes that rescission of the 2021
IC Rule is appropriate, regardless of the new content proposed in this
rulemaking. Thus, even if the substantive provisions of a new final
rule were invalidated, enjoined, or otherwise not put into effect, the
Department would not intend that the 2021 IC Rule become operative.
Since the passage of the FLSA until the 2021 IC Rule, the
Department primarily issued subregulatory guidance in this area and did
not have generally applicable regulations addressing the classification
of workers as employees or independent contractors. The Department's
subregulatory guidance was informed by the case law and set forth a
multifactor economic reality test to answer the ultimate question of
economic dependence that is consistent with the analysis set forth in
this proposal. Should the 2021 IC Rule be rescinded without any
replacement regulations, the Department would rely on circuit case law
and provide subregulatory guidance for stakeholders through existing
documents (such as Fact Sheet #13) and new documents (for example, a
Field Assistance Bulletin). As explained below, there is widespread
uniformity among the circuit courts in the application of the economic
reality test, with slight variation as to the number of factors
considered or how the factors are framed.\191\ The well-known
multifactor, totality-of-the-circumstances analysis that had been in
place prior to the 2021 IC Rule has been reflected in the Department's
subregulatory guidance for many years and accurately represents this
case law. Thus, the Department believes reliance on this case law and
subregulatory guidance, rather than the 2021 IC Rule, would be
preferable due to the 2021 IC Rule's divergence from well-established
precedent and potential effects on workers, as previously discussed. In
sum, should a new final rule adding a new part 795 not go into effect
for any reason, reverting to reliance on circuit case law and
subregulatory guidance consistent with that case law for determining
whether a worker is an employee or independent contractor would
accurately reflect the Act's text and purpose as interpreted by the
courts and offer a standard familiar to most stakeholders.
---------------------------------------------------------------------------

\191\ See generally infra section V.C.
---------------------------------------------------------------------------

The Department welcomes comments on all aspects of its proposal.

A. Introductory Statement (Proposed Sec. 795.100)

Section 795.100 of the 2021 IC Rule generally explains that the
interpretations in part 795 will guide WHD's enforcement of the FLSA
and are intended to be used by employers, employees, workers, and
courts to assess employment status under the Act.\192\ The Department
is proposing only clarifying edits to this section.
---------------------------------------------------------------------------

\192\ 86 FR 1246.
---------------------------------------------------------------------------

B. Economic Reality Test (Proposed Sec. 795.105)

Section 795.105(a) of the 2021 IC Rule states that independent
contractors are not employees under the FLSA. Section 795.105(b)
explains that economic dependence is the ultimate inquiry in
determining whether a worker is an independent contractor or employee
under the Act, and Sec. 795.105(c) addresses how to determine economic
dependence, including the elevation of two ``core'' economic reality
factors.\193\ Section 795.105(d) discusses the economic reality
factors.\194\
---------------------------------------------------------------------------

\193\ Id.
\194\ Id. at 1246-47.
---------------------------------------------------------------------------

The Department is proposing to simplify paragraph (a) and make
additional clarifying edits to paragraph (b). Proposed Sec. 795.105(a)
would continue to make clear that independent contractors are not
``employees'' under the Act. Proposed Sec. 795.105(b) would affirm
that economic dependence is the ultimate inquiry for determining
whether a worker is an independent contractor or an employee and makes
clear that the plain language of the statute is relevant to the
analysis. This section focuses the analysis on whether the worker is in
business for themself and clarifies that economic dependence does not
focus on the amount the worker earns or whether the worker has other
sources of income. The Department is proposing to delete Sec.
795.105(c) because it believes, as previously discussed in section
III.A.1. of this preamble, that the factors of the economic reality
test should not be given a predetermined weight. The Department is also
proposing to delete Sec. 795.105(d) and move discussion of the
economic reality test and the individual factors to Sec. 795.110.

[[Page 62234]]

C. Economic Reality Test and Economic Reality Test Factors (Proposed
Sec. 795.110)

The Department is proposing to replace Sec. 795.110 of the 2021 IC
Rule (Primacy of actual practice) with a provision discussing the
economic reality test and the economic reality factors. Proposed Sec.
795.110(a) introduces the economic reality test, emphasizing that the
economic reality factors are guides to be used to conduct a totality-
of-the-circumstances analysis. It also explains that the factors are
not exhaustive, and no single factor is dispositive. The Department is
proposing to address the economic reality factors in Sec. 795.110(b).
Before addressing the specific changes proposed, the Department
believes that it is helpful to discuss the overarching framework of the
economic reality test and how it should be considered.
Determining whether an employment relationship exists under the
FLSA begins with the Act's definitions. The Act's text is expansive,
defining ``employer'' to ``include[ ] any person acting directly or
indirectly in the interest of an employer in relation to an employee,''
``employee'' as ``any individual employed by an employer,'' and
``employ'' to ``include[ ] to suffer or permit to work.'' \195\ In its
1947 brief before the Supreme Court in Rutherford, the Department
explained that the 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.' '' \196\ The Department continued,
stating that ``[t]he purposes of this Act require a practical,
realistic construction of the employment relationship . . . and the
broad language of the statutory definitions is more than adequate to
support such a construction.'' \197\ The Supreme Court agreed,
reiterating the breadth and reach of the Act's definitions to work
relationships that were not previously considered to constitute
employment relationships, and emphasizing that the determination of an
employment relationship under the FLSA depends not on ``isolated
factors but rather upon the circumstances of the whole activity.''
\198\ The same need for a practical, realistic construction of the
employment relationship under the FLSA exists today. As explained
below, the long-standing economic reality test, applied in view of the
statutory language of the Act, is nimble enough to continue to provide
a useful analysis for the broad range of potential employment
relationships that exist today.
---------------------------------------------------------------------------

\195\ 29 U.S.C. 203(d), (e)(1), (g).
\196\ Brief for the Administrator at 10, Rutherford Food Corp.
v. McComb, 331 U.S. 722 (1947) (No. 562), 1947 WL 43939, at *10
(quoting Portland Terminal, 330 U.S. at 152).
\197\ Id.
\198\ Rutherford, 331 U.S. at 728-30.
---------------------------------------------------------------------------

Prior to the FLSA's enactment, the phrasing ``suffer or permit''
was commonly used in state laws regulating child labor. As the Eleventh
Circuit explained in Antenor v. D & S Farms, ``[t]he `suffer or permit
to work' standard derives from state child-labor laws designed to reach
businesses that used middlemen to illegally hire and supervise
children.'' \199\ In other words, the standard was designed to ensure
that an employer could be covered under the labor law even if they did
not directly control a worker or used an agent to provide supervision.
The Supreme Court has explicitly and repeatedly recognized that this
``suffer or permit'' language demonstrates Congress's intent for the
FLSA to apply broadly and more inclusively than the common law
standard.\200\ This textual breadth reflects Congress's stated intent.
Section 2 of the Act, Congress's ``declaration of policy,'' states that
the Act is intended to eliminate ``labor conditions detrimental to the
maintenance of the minimum standard of living necessary for health,
efficiency, and general well-being of workers.'' \201\ Particularly
relevant to misclassification, section 2 identifies ``unfair method[s]
of competition in commerce'' as an additional condition ``to correct
and as rapidly as practicable . . . eliminate.'' \202\
---------------------------------------------------------------------------

\199\ 88 F.3d 925, 929 n.5 (11th Cir. 1996).
\200\ See, e.g., Darden, 503 U.S. at 326 (noting that ``employ''
is defined with ``striking breadth'' (citing Rutherford, 331 U.S. at
728)); Rosenwasser, 323 U.S. at 362 (``A broader or more
comprehensive coverage of employees . . . would be difficult to
frame.''); Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 665
(5th Cir. 1983) (``The term `employee' is thus used `in the broadest
sense `ever . . . included in any act.' '' (quoting Donovan v. Am.
Airlines, Inc., 686 F.2d 267, 271 (5th Cir. 1982))).
\201\ 29 U.S.C. 202(a).
\202\ See id. at sec. 202(a), (b); see also Rosenwasser, 323
U.S. at 361-62; Pilgrim Equip., 527 F.2d at 1311 (``Given the
remedial purposes of the legislation, an expansive definition of
`employee' has been adopted by the courts.'').
---------------------------------------------------------------------------

For decades, the Department and courts have applied an economic
reality test to determine whether a worker is an employee or an
independent contractor under the Act. The test was developed by the
Supreme Court in interpreting and applying the social legislation of
the 1930s, including the Fair Labor Standards Act, which defines the
employment relationship in broad and comprehensive terms.\203\ In 1947,
the Supreme Court issued two decisions, Silk and Rutherford, that used
an economic reality test to determine employment status.\204\ As
explained in Rutherford, the ``economic reality'' test is designed to
bring within such legislation ``persons and working relationships
which, prior to this Act, were not deemed to fall within an employer-
employee category.'' \205\ In applying this economic reality test, it
is essential to consider the Act's statutory language. The
determination of whether a worker is covered under the FLSA must be
made in the context of the Act's own definitions and the courts'
expansive reading of its scope.\206\ The

[[Page 62235]]

FLSA's ``particularly broad'' definition of ``employee'' encompasses
all workers who are, ``as a matter of economic reality, . . .
economically dependent upon the alleged employer.'' \207\ Only a worker
who ``is instead in business for himself'' is an independent contractor
not covered by the Act.\208\ The ``focus'' and ``ultimate concept'' of
the determination of whether a worker is an employee or an independent
contractor, then, is ``the economic dependence of the alleged
employee.'' \209\ The statutory language thus frames the central
question that the economic reality test asks--whether the worker is
economically dependent on an employer who suffers or permits the work
or whether the worker is in business for themself.
---------------------------------------------------------------------------

\203\ Rosenwasser, 323 U.S. at 362.
\204\ See Silk, 331 U.S. at 716-18 (applying the test under the
Social Security Act); Rutherford, 331 U.S. at 730 (same under the
FLSA).
\205\ Rutherford, 331 U.S. at 729; see also Whitaker House, 366
U.S. at 31-32 (describing the same as it relates to homeworkers).
\206\ The line of cases in which the Supreme Court has
repeatedly recognized that the definitions of ``employ,''
``employee,'' and ``employer'' that establish who is entitled to the
FLSA's protections were written broadly and have appropriately been
interpreted broadly are premised on the statutory text itself, not
on any principle of how to interpret remedial legislation. Because
these cases addressing the Act's definitions do not address
exemptions from the Act's pay requirements, they have not been
called into question by Encino Motorcars v. Navarro, 138 S. Ct. 1134
(2018), which overturned a rule of interpretation based on the
FLSA's remedial purpose that applied to the Act's exemptions. In
Encino, the Supreme Court addressed an exemption from the FLSA's
overtime pay requirements and ruled that the ``narrow construction''
principle--that FLSA exemptions should be narrowly construed in
favor of employee status--should no longer be used. The Court
explained that instead, such exemptions should be given a fair
reading, stating ``[b]ecause the FLSA gives no textual indication
that its exemptions should be construed narrowly, there is no reason
to give [them] anything other than a fair (rather than a narrow)
interpretation.'' Encino, 138 S. Ct. at 1142 (internal quotations
and citation omitted). This decision did not apply to the Act's
definitions, and, crucially, there is no need to rely on such an
interpretive principle here because there is a clear textual
indication in the Act's definitions, by the inclusion of the
``suffer or permit'' language, that broad coverage under the Act was
intended. See 29 U.S.C. 203(g). Thus, the broad scope of who is an
employee under the FLSA comes from the statutory text itself and not
any ``narrow-construction'' principle. Moreover, Encino did not hold
that the FLSA's remedial purpose may never be considered, it simply
noted that it is a ``flawed premise that the FLSA `pursues' its
remedial purpose `at all costs.' '' Id. at 1142 (quoting American
Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 234 (2013))
(emphasis added). To the extent that the language in the 2021 IC
Rule preamble implied that the Act's remedial purpose can never be
considered, including when determining whether an individual is an
employee or an independent contractor under the FLSA, the Department
clarifies that it believes that this would be an unwarranted
extension of the Supreme Court's decision. See, e.g., 86 FR 1207-08
(discussing Encino's application in response to commenters' concerns
that the 2021 IC Rule conflicted with the FLSA's remedial purpose).
Finally, courts have not changed their application of the economic
reality test to determine employee status based on Encino.
\207\ Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir.
2008) (citing Darden, 503 U.S. at 326; Herman v. Express Sixty-
Minutes Delivery Serv., Inc., 161 F.3d 299, 303 (5th Cir. 1998)).
\208\ Id. (citing Express Sixty-Minutes, 161 F.3d at 303).
\209\ Id. (emphasis in the original); see also Pilgrim Equip.,
527 F.2d at 1311-12 (``[T]he final and determinative question must
be whether the total of the testing establishes the personnel are so
dependent upon the business with which they are connected that they
come within the protection of [the] FLSA or are sufficiently
independent to lie outside its ambit.'').
---------------------------------------------------------------------------

To aid in answering this ultimate inquiry of economic dependence,
several factors have been considered by courts and the Department as
particularly probative when conducting a totality-of-the-circumstances
analysis of whether a worker is an employee or an independent
contractor under the FLSA.\210\ In Silk, the Supreme Court suggested
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.'' \211\ The Court
cautioned that no single factor is controlling and that the list is not
exhaustive.\212\ In Rutherford, the Court used a similar analysis
considering ``the circumstances of the whole activity,'' and relied on
the fact that the workers' work was ``a part of the integrated unit of
production.'' \213\ Since Silk and Rutherford, Federal courts of
appeals have applied the economic reality test to distinguish
independent contractors from employees who are entitled to the FLSA's
protections. Federal appellate courts considering employee or
independent contractor status under the FLSA generally analyze the
economic realities of the work relationship using the factors
identified in Silk and Rutherford.\214\ There is significant and
widespread uniformity among the circuit courts in the application of
the economic reality test, although there is slight variation as to the
number of factors considered or how the factors are framed (for
example, whether relative investment is considered within the
investment factor, or whether skill must be used with business-like
initiative).\215\ As the 2021 IC Rule explained, ``[m]ost courts of
appeals articulate a similar test,'' and these courts consistently
caution against the ``mechanical application'' of the economic reality
factors, view the factors as tools to ``gauge . . . economic
dependence,'' and ``make clear that the analysis should draw from the
totality of circumstances, with no single factor being determinative by
itself.'' \216\ All of the circuit courts that have addressed employee
or independent contractor status consider five of the same
factors.\217\ Briefly, these factors include the degree of control
exercised by the employer over the worker, skill, permanency,
opportunity for profit or loss, and investment, although the Second
Circuit and the D.C. Circuit treat the worker's opportunity for profit
or loss and the worker's investment as a single factor.\218\ Nearly all
circuit courts expressly consider a sixth factor, whether the work is
an integral part of the employer's business. The Fifth Circuit has not
adopted the integral factor but has at times assessed integrality as an
additional relevant factor.\219\
---------------------------------------------------------------------------

\210\ See, e.g., Flint Eng'g, 137 F.3d at 1441 (explaining that
``[n]one of the factors alone is dispositive; instead, the court
must employ a totality-of-the-circumstances approach'').
\211\ 331 U.S. at 716.
\212\ See id.
\213\ Rutherford, 331 U.S. at 729-30.
\214\ See generally supra nn. 51-52.
\215\ See, e.g., Cornerstone Am., 545 F.3d at 344 (discussing
relative investments); Superior Care, 840 F.2d at 1060 (discussing
the use of skill as it relates to business-like initiative).
\216\ 86 FR 1170; see also Saleem v. Corporate Transp. Grp.,
Ltd., 854 F.3d 131,139-40 (2d Cir. 2020); Cornerstone Am., 545 F.3d
at 343; Keller v. Miri Microsystems LLC, 781 F.3d 799, 807 (6th Cir.
2015); Flint Eng'g, 137 F.3d at 1440-41.
\217\ Superior Care, Inc., 840 F.2d at 1058-59; DialAmerica, 757
F.2d at 1382-83; McFeeley, 825 F.3d at 241; Off Duty Police, 915
F.3d at 1055; Lauritzen, 835 F.2d at 1534-35; Alpha & Omega, 39
F.4th at 1082; Driscoll, 603 F.2d at 754-55; Paragon, 884 F.3d at
1235; Scantland, 721 F.3d at 1311-12; Morrison, 253 F.3d at 11.
\218\ See, e.g., Superior Care, 840 F.2d at 1058-59; Morrison,
253 F.3d at 11 (citing Superior Care, 840 F.2d at 1058-59).
\219\ See, e.g., Hobbs, 946 F.3d at 836.
---------------------------------------------------------------------------

Because the 2021 IC Rule focused on these slight variations among
some of the factors or how to apply certain factors, it overlooked both
the broader fact that the ultimate inquiry has remained unchanged as
well as the extent of the consistency in use of the economic reality
test among the courts of appeals. The economic reality test, the case
law, and the Department's position have remained remarkably consistent
since the 1940's--the test's focus has remained on whether the worker
is in business for themself, with the inquiry directed toward the
question of economic dependence. It is not surprising that some courts
and the Department may have used slightly different iterations of the
factors over the last several decades, as the factors ``are aids--tools
to be used to gauge the degree of dependence of alleged employees on
the business with which they are connected.'' \220\ These factors are
only guideposts, and ``[i]t is dependence that indicates employee
status. Each [factor] must be applied with that ultimate notion in
mind.'' \221\ This is why most courts, and the Department, have long
made clear that additional factors may be relevant when applying the
test to a particular case. It is also expected that outcomes may vary
somewhat among workers in the same profession, for example, because the
test demands a fact-specific analysis and facts like job titles may not
be probative of the economic realities of the relationship. In
undertaking this analysis, each factor is examined and analyzed in
relation to one another and to the Act's definitions. The test should
not be approached in a formulaic manner, neglecting to consider the
statutory framework upon which the test is based. Importantly, ``[n]one
of these factors is determinative on its own, and each must be
considered with an eye toward the ultimate question--the worker's
economic dependence on or independence from the alleged employer.''
\222\
---------------------------------------------------------------------------

\220\ Pilgrim Equip., 527 F.2d at 1311.
\221\ Id.
\222\ Off Duty Police, 915 F.3d at 1055 (alterations and
internal quotations omitted).
---------------------------------------------------------------------------

With this proposed rulemaking, the Department describes the
economic reality factors that reflect the totality-of-the-circumstances
approach that courts have taken for decades, and provides an analysis
as to how the Department considers each factor in today's workplaces,
based on case law and the Department's enforcement expertise in this
area. For example, the proposed investment factor is returned to being
a standalone factor, considers facts such as whether the investment is
capital or entrepreneurial in nature, and considers the worker's
investments relative to the employer's investments. Significant
additional guidance is provided for the

[[Page 62236]]

proposed control factor, including detailed discussions of how
scheduling, supervision, price-setting, and the ability to work for
others should be considered when analyzing the degree of control
exerted over a worker. And the proposed integral factor is returned to
its longstanding Departmental and judicial interpretation, rather than
the ``integrated unit of production'' approach that was included in the
2021 IC Rule.
This totality-of-the-circumstances analysis considers all factors
that may be relevant and, in accordance with the case law, does not
assign any of the factors a predetermined weight. While the 2021 IC
Rule aspired to provide a clearer test, the Department believes, upon
further consideration, that the weighted analysis in the 2021 IC Rule,
which could have the effect of winnowing the test to two ``core''
factors--control and opportunity for profit or loss--sits in tension
with decades of instruction from the Supreme Court and the circuit
courts of appeals, as well as the Department's own longstanding
position that no factor or subset of factors should carry more or less
weight in all cases. The 2021 IC Rule also errs in bringing the test
closer to the common law test, which is inconsistent with the plain
text of the Act and the case law interpreting it.\223\ Limiting and
weighting the factors in such a predetermined manner undermines the
very purpose of the test, which is to consider--based on the economic
realities--whether a worker is economically dependent on the employer
for work or is in business for themself.\224\ Importantly, each factor,
considered in isolation, does not determine whether a worker is
economically dependent on an employer for work or in business for
themself. Rather, the factors are merely tools or indicators and must
be analyzed together in order to answer this ultimate inquiry.\225\
---------------------------------------------------------------------------

\223\ See supra section III.A.2.
\224\ See, e.g., Scantland, 721 F.3d at 1312 (quoting Mednick v.
Albert Enters., Inc., 508 F.2d 297, 301-02 (5th Cir. 1975)); see
also Saleem, 854 F.3d at 139-140; Brock v. Mr. W Fireworks, Inc.,
814 F.2d 1042, 1054-55 (5th Cir. 1987).
\225\ See, e.g., Scantland, 721 F.3d at 1312 (the economic
reality factors ``serve as guides, [and] the overarching focus of
the inquiry is economic dependence''); Pilgrim Equip., 527 F.2d at
1311 (The economic reality factors ``are aids--tools to be used to
gauge the degree of dependence of alleged employees on the business
with which they are connected. It is dependence that indicates
employee status. Each test must be applied with that ultimate notion
in mind.'').
---------------------------------------------------------------------------

This is not to say that in a particular case one factor may not be
more or less probative than others--this is to be expected in each
fact-specific analysis. One or more factors may be more probative than
the other factors depending on the facts and circumstances of a case;
the analysis, however, cannot be conducted like a scorecard or a
checklist. For example, two factors that strongly indicate employment
status in a particular case could possibly outweigh other factors that
indicate independent contractor status. But to assign a predetermined
and immutable weight to certain factors ignores the totality-of-the-
circumstances, fact-specific nature of the inquiry that is intended to
reach a multitude of employment relationships across occupations and
industries and over time. Similarly, it is possible that not every
factor will be particularly relevant in each case and that is also to
be expected.\226\
---------------------------------------------------------------------------

\226\ See, e.g., Lauritzen, 835 F.2d at 1534 (referring to the
economic reality factors and stating that ``[c]ertain 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.'').
---------------------------------------------------------------------------

Thus, the economic reality factors help determine whether a worker
is in business for themself or is instead economically dependent on the
employer for work.\227\ ``Ultimately, in considering economic
dependence, the court focuses on whether an individual is `in business
for himself' or is `dependent upon finding employment in the business
of others.' '' \228\ Economic dependence, however, ``does not concern
whether the workers at issue depend on the money they earn for
obtaining the necessities of life . . . . Rather, it examines whether
the workers are dependent on a particular business or organization for
their continued employment.'' \229\ Additionally, consistent with the
2021 IC Rule, economic dependence does not mean that a worker who works
for other employers, earns a very limited income from a particular
employer, or is independently wealthy, cannot nevertheless be
economically dependent on that employer for purposes of the FLSA.\230\
As the Fifth Circuit has explained, ``it is not dependence in the sense
that one could not survive without the income from the job that we
examine, but dependence for continued employment.'' \231\
---------------------------------------------------------------------------

\227\ See, e.g., Cornerstone Am., 545 F.3d at 343 (``To
determine if a worker qualifies as an employee, we focus on whether,
as a matter of economic reality, the worker is economically
dependent upon the alleged employer or is instead in business for
himself.''); Flint Eng'g, 137 F.3d at 1440 (noting that the economic
realities of the relationship govern, and the focal point is whether
the individual is economically dependent on the business to which he
renders service or is, as a matter of economic fact, in business for
himself); Superior Care, 840 F.2d at 1059 (``The ultimate concern is
whether, as a matter of economic reality, the workers depend upon
someone else's business . . . or are in business for themselves.'').
\228\ Scantland, 721 F.3d at 1312 (quoting Mednick, 508 F.2d at
301-02).
\229\ DialAmerica, 757 F.2d at 1385.
\230\ See 86 FR 1173; see also McLaughlin v. Seafood, Inc., 861
F.2d 450, 452-53 (5th Cir. 1988) (reasoning that ``[l]aborers who
work for two different employers on alternate days are no less
economically dependent than laborers who work for a single
employer''); Halferty v. Pulse Drug Co., 821 F.2d 261, 267-68 (5th
Cir. 1987) (rejecting the employer's argument that the worker's
wages were too little to constitute dependence).
\231\ See Halferty, 821 F.2d at 268.
---------------------------------------------------------------------------

The 2021 IC Rule stated that one of the reasons for that rulemaking
was to reduce ``overlap'' between factors.\232\ In the effort to
eliminate redundancy, the 2021 IC Rule limits full consideration of how
the factors may interrelate or be more relevant in certain factual
scenarios than others. Upon further consideration, the Department
believes that emphasizing the discrete nature of each particular factor
and evaluating each factor in a vacuum fails to analyze potential
employment relationships in the manner demanded by the Act's text and
accompanying case law. The Act's definitions envision a broad range of
potential employment relationships--defining ``employer'' as including
``any person acting directly or indirectly in the interest of an
employer in relation to an employee'' and using the ``suffer or
permit'' standard--and the test needs to be applicable to all of those
potential relationships.\233\ The Department recognizes that there are
a variety of bona fide independent contractor relationships that need
to be adequately addressed by the test as well.\234\
---------------------------------------------------------------------------

\232\ 86 FR 1202.
\233\ See 29 U.S.C. 203(d), (g).
\234\ Independent contractors are not ``employees'' for purposes
of the FLSA. See generally Portland Terminal, 330 U.S. at 152
(stating that the ``definition `suffer or permit to work' was
obviously not intended to stamp all persons as employees'').
---------------------------------------------------------------------------

Applying a formulaic or rote analysis that isolates each factor is
contrary to decades of case law, decreases the utility of the economic
reality test, and makes it harder to analyze the ultimate inquiry of
economic dependence. Rather, the analysis needs to be flexible enough
to work for all kinds of jobs, all kinds of workers, from traditional
economy jobs to jobs in emerging business models. A multifactor,
totality-of-the-circumstances test provides that flexibility, which is
why it has been used for more than 75 years to determine which workers
receive the Act's basic labor protections. Making the test facially
simpler by, for example, limiting consideration of the employment
relationship to only two ``core'' factors (as the 2021 IC Rule in

[[Page 62237]]

effect does in some cases), ranking all of the factors, or creating a
checklist, is unfaithful to the text of the Act and decades of case
law. It also ignores what the test is required to do, which is to
provide a totality-of-the-circumstances analysis to determine, in a
wide variety of settings, which workers are economically dependent on
their employers for work and should receive the basic labor protections
of the Act. The FLSA applies to an extremely broad scope of employment
relationships, and only workers who are in business for themselves are
excluded from its coverage as independent contractors. The economic
reality test, applied in view of the Act's definitions and with a focus
on economic dependence, is able to assess that scope of potential
employment relationships.
The Department is providing a detailed analysis about the
application of each factor in this NPRM based on case law and the
Department's enforcement experience as a guide for employers and
workers in determining whether a worker is an employee or an
independent contractor. Each factor is reviewed with the ultimate
inquiry in mind: whether the worker is economically dependent on the
employer for work or in business for themself. The following discussion
addresses each of the economic reality factors, including proposed
revisions made to each to better reflect the weight of legal authority
throughout the country.
1. Opportunity for Profit or Loss Depending on Managerial Skill
(Proposed Sec. 795.110(b)(1))
Section 795.105(d)(1)(ii) of the 2021 IC Rule states that the
opportunity for profit or loss factor ``weighs towards the individual
being an independent contractor to the extent the individual has an
opportunity to earn profits or incur losses based on his or her
exercise of initiative (such as managerial skill or business acumen or
judgment) or management of his or her investment in or capital
expenditure on, for example, helpers or equipment or material to
further his or her work.'' \235\ The provision also states that,
``[w]hile the effects of the individual's exercise of initiative and
management of investment are both considered under this factor, the
individual does not need to have an opportunity for profit or loss
based on both for this factor to weigh towards the individual being an
independent contractor.'' \236\ Finally, the provision provides that
``[t]his factor weighs towards the individual being an employee to the
extent the individual is unable to affect his or her earnings or is
only able to do so by working more hours or faster.'' \237\
---------------------------------------------------------------------------

\235\ 86 FR 1247.
\236\ Id.
\237\ Id.
---------------------------------------------------------------------------

Proposed Sec. 795.110(b)(1) focuses the opportunity for profit or
loss factor on whether the worker exercises managerial skill that
affects the worker's economic success or failure in performing the
work. The 2021 IC Rule similarly considered managerial skill, as noted
above. As discussed below, however, the Department is proposing to
consider investment as a separate factor in the analysis, unlike the
approach in the 2021 IC Rule. The proposed provision provides guidance
on the application of this factor, including a non-exhaustive list of
relevant facts to consider. And the proposed provision states that if a
worker has no opportunity for a profit or loss, then that fact suggests
that the worker is an employee. Similar to the 2021 IC Rule, the
proposal states that some decisions by a worker that can affect the
amount of pay that a worker receives, such as the decision to work more
hours or take more jobs, generally do not reflect the exercise of
managerial skill indicating independent contractor status under this
factor. Compared to the 2021 IC Rule, proposed Sec. 795.110(b)(1) more
accurately reflects the consideration of the profit or loss factor in
the case law and reflects the ultimate inquiry into the worker's
economic dependence or independence.
Many circuit courts of appeals apply this factor with an eye to
whether the worker is using managerial skill to affect the worker's
opportunity for profit or loss. For example, the Third Circuit
describes the factor as the opportunity for profit or loss depending on
managerial skill.\238\ In Razak v. Uber Technologies, Inc., the Third
Circuit reversed the district court's ruling that this factor indicated
independent contractor status, holding that, because the employer
``decides (1) the fare[,] (2) which driver receives a trip request[,]
(3) whether to refund or cancel a passenger's fare[,] and (4) a
driver's territory,'' ``a reasonable fact-finder'' could ``rule in
favor of'' employee status on this factor.\239\ In Verma v. 3001
Castor, Inc., the Third Circuit acknowledged that each exotic dancer
``had some degree of control over her profits and losses'' by
attracting followers to the club, but explained that managerial skill
is ``the relevant factor here.'' \240\ After cataloguing the numerous
ways in which the employer determined and managed the dancers'
opportunity for profit or loss (such as determining the hours of
operation, deciding whether to charge an admission fee, setting the
length and price of dances on stage and in private rooms, and managing
the club's atmosphere, operations, and advertising), the court
ultimately found that any managerial skills exercised by the dancers
had ``minimal influence,'' and ruled that this factor weighed in favor
of employee status.\241\
---------------------------------------------------------------------------

\238\ See, e.g., Razak v. Uber Techs., Inc., 951 F.3d 137, 146
(3d Cir.), amended, 979 F.3d 192 (3d Cir. 2020), and cert. denied,
141 S. Ct. 2629 (2021); Verma v. 3001 Castor, Inc., 937 F.3d 221,
229 (3d Cir. 2019) (citing Selker Bros., 949 F.2d at 1293).
\239\ 951 F.3d at 146-47.
\240\ 937 F.3d at 230-31.
\241\ Id. at 231.
---------------------------------------------------------------------------

Other courts likewise consider whether the workers' opportunities
for profit or loss depend on their managerial skill.\242\ In McFeeley
v. Jackson Street Entertainment, LLC, the Fourth Circuit found that the
dancers' ``opportunities for profit or loss depended far more on [the
employer's] management and decision-making than on their own'' because
the employer controlled the client base, handled all advertising,
managed the club's atmosphere, and determined pricing.\243\ And in
Schultz v. Capital International Security, Inc., the court concluded
that ``[t]here is no evidence the agents could exercise or hone their
managerial skill to increase their pay.'' \244\ The Sixth Circuit
likewise assesses whether the workers' opportunities for profit or loss
depend on their managerial skill.\245\ For example, in Acosta v. Off
Duty Police Services, Inc., the Sixth Circuit ruled that this factor
favored employee status because the workers ``earned a set hourly wage
regardless of'' the managerial skill they exercised, and the employer
required them to work fixed hourly shifts ``regardless of what skills
they exercised, so workers could not complete jobs more or less
efficiently than their counterparts.'' \246\ The Seventh, Ninth, and
Eleventh Circuits also describe this factor as the worker's

[[Page 62238]]

opportunity for profit or loss depending on the worker's managerial
skill.\247\
---------------------------------------------------------------------------

\242\ See, e.g., McFeeley, 825 F.3d at 241 (citing Schultz v.
Capital Int'l Sec., Inc., 466 F.3d 298, 304-05 (4th Cir. 2006)).
\243\ 825 F.3d at 243.
\244\ 466 F.3d at 308.
\245\ See, e.g., Off Duty Police, 915 F.3d at 1059; Keller, 781
F.3d at 812 (describing this factor as whether the worker ``had an
opportunity for greater profits based on his management and
technical skills'').
\246\ 915 F.3d at 1059. In response to the employer's argument
that the workers could accept or reject shifts, the court explained
that ``[w]hile the decision to accept or reject work is a type of
managerial action, the relevant question is whether workers could
increase profits through managerial skill.'' Id. (emphases in
original).
\247\ See, e.g., Lauritzen, 835 F.2d at 1535; Iontchev v. AAA
Cab Serv., Inc., 685 F. App'x 548, 550 (9th Cir. 2017) (finding that
the workers' ``opportunity for profit or loss depended upon their
managerial skill''); Driscoll, 603 F.2d at 754-55; Scantland, 721
F.3d at 1312. And the Eighth Circuit recently described this factor
as ``whether workers had control over profits and losses depending
on their `managerial skill.' '' Alpha & Omega, 39 F.4th at 1084.
---------------------------------------------------------------------------

Other circuits do not articulate this factor by expressly using the
words ``managerial skill,'' but they nonetheless apply the factor in a
very similar way by focusing on whether the worker has an opportunity
to use ``initiative'' or ``judgment'' to affect profits or losses. For
example, the Tenth Circuit has found that this factor favored employee
status because the workers' ``earnings did not depend upon their
judgment or initiative, but on the [employer's] need for their work.''
\248\ And when affirming a ruling that this factor indicated employee
status in another case, the Tenth Circuit explained that the workers
``exercise independent initiative only in locating new work
assignments,'' and ``[w]hile working on a particular assignment, there
is little or no room for initiative (certainly none related to profit
or loss).'' \249\ The Second Circuit, although it considers the
workers' opportunities for profit or loss along with their investment
as one factor,\250\ similarly evaluates the extent to which the
workers' business judgment or acumen affects their opportunity for
profit or loss. In Franze v. Bimbo Bakeries USA, Inc., the Second
Circuit found this factor to favor independent contractor status
because the workers purchased delivery territories that could
ultimately be sold again and the overall value of their territories
``primarily depended on their own business judgment and foresight in
modifying their territories and managing day-to-day costs, suggesting
that they bore the risks of their decisions.'' \251\ And in Saleem v.
Corporate Transportation Group, Ltd., the Second Circuit found that the
workers ``possessed considerable independence in maximizing their
income through a variety of means'' and their profits increased through
their initiative, judgment, and foresight--indicating independent
contractor status.\252\
---------------------------------------------------------------------------

\248\ Snell, 875 F.2d at 810.
\249\ Flint Eng'g, 137 F.3d at 1441.
\250\ See, e.g., Franze, 826 F. App'x at 76; Superior Care, 840
F.2d at 1058-59.
\251\ 826 F. App'x at 77-78 (internal quotations omitted).
\252\ 854 F.3d at 143-44.
---------------------------------------------------------------------------

By concentrating on the degree to which the worker's opportunity
for profit or loss is determined by the employer,\253\ the Fifth
Circuit focuses on whether the worker exercises judgment or initiative
vis-a-vis the employer to affect profit or loss and thus takes a
related approach to this factor. In Hobbs v. Petroplex Pipe &
Construction, Inc., for example, the Fifth Circuit relied on the facts
that the workers never negotiated their rates of pay (the employer set
a fixed hourly rate) and ``the work schedule imposed by [the employer]
severely limited the [workers'] opportunity for profit or loss''
(meaning that ``it would have been unrealistic for them to have worked
for other companies'') to affirm a finding that this factor indicated
employee status.\254\ In Hopkins v. Cornerstone America, the Fifth
Circuit found that this factor weighed in favor of employee status
because ``[t]he major determinants of the Sales Leaders' profit or loss
were controlled almost exclusively by [the employer],'' including ``the
hiring, firing, and assignment of subordinate agents,'' the ``overwrite
commissions,'' the ``distribution of sales leads,'' which products they
could sell, and their territories.\255\ In Parrish v. Premier
Directional Drilling, L.P., the Fifth Circuit found that the workers
had ``enough control over their profits and losses to have this factor
support [independent contractor] status,'' including by making
``decisions affecting their expenses.'' \256\ And in Herman v. Express
Sixty-Minutes Delivery Service, Inc., the Fifth Circuit affirmed the
district court's finding that this factor favored independent
contractor status because ``a driver's profit or loss is determined
largely on his or her skill, initiative, ability to cut costs, and
understanding of the courier business.'' \257\
---------------------------------------------------------------------------

\253\ See, e.g., Hobbs, 946 F.3d at 832-34; Parrish., 917 F.3d
at 384-85.
\254\ 946 F.3d at 833-34.
\255\ 545 F.3d 338, 344-45 (5th Cir. 2008).
\256\ 917 F.3d at 384-85. The workers could also turn down work
and negotiate their pay. See id. at 376.
\257\ 161 F.3d at 304.
---------------------------------------------------------------------------

In AI 2015-1, the Department described this factor as whether the
worker's managerial skill affects the worker's opportunity for profit
or loss and explained that this factor focuses ``on whether the worker
has the ability to make decisions and use his or her managerial skill
and initiative to affect opportunity for profit or loss.'' \258\
Section 795.105(d)(1)(ii) of the 2021 IC Rule similarly considers the
impact of the worker's initiative and managerial skill on the
opportunity for profits or losses, discussing the worker's ``exercise
of initiative (such as managerial skill or business acumen or
judgment).'' \259\ It also considers the impact of 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''
on the worker's opportunity for profit or loss.\260\ For the reasons
explained below, however, the Department is proposing that investment
be a separate, standalone factor in the analysis.\261\
---------------------------------------------------------------------------

\258\ AI 2015-1, 2015 WL 4449086, at *6 & n.7 (withdrawn June 7,
2017).
\259\ 86 FR 1247.
\260\ Id.
\261\ See infra, section V.C.2. In addition to the explanation
set forth infra, the Department is concerned by situations where
workers are required to make a significant upfront payment in order
to be allowed to perform work as non-employees but they exercise
little, if any, managerial skill. In those situations, application
of the opportunity for profit or loss factor should indicate
employee status because of the lack of managerial skills affecting
the opportunity for profit or loss.
---------------------------------------------------------------------------

Focusing on managerial skill, proposed Sec. 795.110(b)(1) sets
forth the following facts, which among others, can be relevant to
assessing the degree to which the worker's managerial skill affects the
worker's economic success or failure in performing the work: whether
the worker determines the charge or pay for the work provided (or at
least can meaningfully negotiate it); whether the worker accepts or
declines jobs or chooses or can meaningfully negotiate the order and/or
time in which the jobs are performed; whether the worker engages in
marketing, advertising, or other efforts to expand their business or
secure more work; and whether the worker makes decisions to hire
others, purchase materials and equipment, and/or rent space (as opposed
to the amount and nature of the worker's investment).
In addition to those facts, whether the worker actually has an
opportunity for a loss should be considered. Consistent with the
overall inquiry of determining whether a worker is economically
dependent on the employer or in business for themself, the fact that a
worker has no opportunity for a loss indicates employee status. On the
other hand, workers who are in business for themselves face the
possibility of experiencing a loss, and the risk of a loss as a
possible result of the worker's managerial decisions indicates
independent contractor status. Workers who incur little or no costs or
expenses, simply provide their labor, and/or are paid an hourly or flat
rate are unlikely to possibly experience a loss, and this factor may
suggest employee status in those circumstances. The fact that workers
may earn more or less at times (and their earnings may decline)

[[Page 62239]]

depending on how much they work is not the equivalent of experiencing a
financial loss.
For example, the Third Circuit has explained that certain workers
whose earnings ``derived primarily from their fixed commission'' from
the employer and ``were not tied to price levels and resale profit
margins'' had ``no meaningful opportunities for profit nor any
significant risk of financial loss,'' indicating employee status.\262\
Yet, a finding that workers ``risked financial loss'' indicates
independent contractor status.\263\ The Tenth Circuit has explained, in
a case finding that this factor favored employee status, that the
workers ``did not undertake the risks usually associated with an
independent business,'' ``there was no way that [they] could experience
a business loss,'' and ``[a] reduction in money earned by the [workers]
is not a `loss' sufficient to satisfy the criteria for independent
contractor status.'' \264\ The Seventh Circuit has explained, in a case
involving migrant farm workers, that they had no possibility of a loss
and that ``[a]ny reduction in earnings due to a poor pickle crop is a
loss of wages, and not of an investment.'' \265\ And the Sixth Circuit
has explained in a case involving workers paid by the hour that they
did not ``appear to have been at risk of a loss based on their decision
to work or not'' and that ``[d]ecreased pay from working fewer hours
does not qualify as a loss.'' \266\ Relatedly, the fact that an
employer may impose fines, penalties, or chargebacks on a worker for
faulty performance does not mean that the worker may experience a loss.
The Eleventh Circuit has explained that the ``argument that plaintiffs
could control losses by avoiding chargebacks is unpersuasive,''
elaborating that ``[c]hargebacks relate to the quality of a
technician's skill, not his managerial or entrepreneurial prowess.''
\267\
---------------------------------------------------------------------------

\262\ Selker Bros., 949 F.2d at 1294 (emphasis added).
\263\ DialAmerica, 757 F.2d at 1386.
\264\ Snell, 875 F.2d at 810. See also Flint Eng'g, 137 F.3d at
1441 (``[P]laintiffs are hired on a per-hour basis rather than on a
flat-rate-per-job basis. There is no incentive for plaintiffs to
work faster or more efficiently in order to increase their
opportunity for profit. Moreover, there is absolutely no risk of
loss on plaintiffs' part.'').
\265\ Lauritzen, 835 F.2d at 1536.
\266\ Off Duty Police, 915 F.3d at 1059.
\267\ Scantland, 721 F.3d at 1317.
---------------------------------------------------------------------------

Some decisions by a worker that may affect the worker's earnings do
not necessarily reflect managerial skill. Accordingly, proposed Sec.
795.110(b)(1) explains that a worker's decision to work more hours
(when paid hourly) or work more jobs (when paid a flat fee per job)
where the employer controls assignment of hours or jobs is similar to
decisions that employees routinely make and does not reflect managerial
skill.
The Eleventh Circuit explained in a case involving cable installers
that their ``opportunity for profit was largely limited to their
ability to complete more jobs than assigned, which is analogous to an
employee's ability to take on overtime work or an efficient piece-rate
worker's ability to produce more pieces.'' \268\ The court further
explained that a worker's ``ability to earn more by being more
technically proficient is unrelated to [the worker's] ability to earn
or lose profit via his managerial skill, and it does not indicate that
he operates his own business.'' \269\ The Fourth Circuit similarly
explained in a case involving security guards that the guards could not
``exercise or hone their managerial skill to increase their pay''
because the employer ``paid [them] a set rate for each shift worked''
and the customer's ``schedule and security needs dictated the number of
shifts available and the hours worked.'' \270\ And the Sixth Circuit
explained in a case involving workers paid by the hour that they
``earned a set hourly wage regardless of the skill they exercised.''
\271\ By comparison, the Eighth Circuit found in a case involving a
process server that, because the worker decided where and how often to
work and ``decided which assignments he was willing to accept'' based
on the worker's own decisions regarding which jobs were more or less
profitable and without any negative consequences imposed by the
employer, this factor indicated independent contractor status.\272\
Thus, where a worker is paid by the job, the worker's decision to work
more jobs and the worker's technical proficiency in completing each job
are not the type of managerial skill that would indicate independent
contractor status under this factor.
---------------------------------------------------------------------------

\268\ Id. at 1316-17.
\269\ Id. at 1317.
\270\ Capital Int'l, 466 F.3d at 308.
\271\ Off Duty Police, 915 F.3d at 1059. See also Snell, 875
F.2d at 810 (cake decorators' ``earnings did not depend upon their
judgment or initiative, but on the [employer's] need for their
work''); Collinge v. IntelliQuick Delivery, Inc., No. 2:12-cv-00824
JWS, 2015 WL 1299369, at *4-5 (D. Ariz. Mar. 23, 2015) (workers
could not increase profit by taking on more work, noting that ``a
worker's ability to simply work more is irrelevant'' because
``[m]ore work may lead to more revenue, but not necessarily more
profit''); Solis v. Kansas City Transp. Grp., No. 10-0887-CV-W-REL,
2012 WL 3753736, at *9 (W.D. Mo. Aug. 28, 2012) (``The driver's
ability to make more money by driving additional routes is akin to a
waiter making more money by taking another shift.''); Solis v.
Cascom, No. 3:09-cv-257, 2011 WL 10501391, at *6 (S.D. Ohio Sept.
21, 2011) (explaining that there was no opportunity for increased
profit based on the workers' managerial skills; although they could
work additional hours to increase their income, they made no
decisions regarding routes, acquisition of materials, ``or any facet
normally associated with operating an independent business'').
\272\ See Karlson v. Action Process Serv. & Priv. Investigation,
LLC, 860 F.3d 1089, 1095 (8th Cir. 2017). See also Express Sixty-
Minutes, 161 F.3d at 304 (opportunity for profit or loss factor
indicated independent contractor status because the drivers could
choose among ``which jobs were most profitable'').
---------------------------------------------------------------------------

Proposed Sec. 795.110(b)(1) is consistent on this point with 2021
IC Rule Sec. 795.105(d)(1)(ii), which states that the opportunity for
profit or loss factor ``weighs towards the individual being an employee
to the extent the individual is unable to affect his or her earnings or
is only able to do so by working more hours or faster.'' \273\ The
Department likewise stated in AI 2015-1 that a ``worker's ability to
work more hours and the amount of work available from the employer have
nothing to do with the worker's managerial skill and do little to
separate employees from independent contractors--both of whom are
likely to earn more if they work more and if there is more work
available.'' \274\ Thus, the Department's proposed regulation on this
point is consistent with its prior guidance in addition to being
supported by case law.\275\
---------------------------------------------------------------------------

\273\ 86 FR 1247.
\274\ 2015 WL 4449086, at *6 (withdrawn June 7, 2017).
\275\ The Department notes, as it explains elsewhere in this
proposal, that the fact that a worker has a business in an industry
separate from the business in which the worker is working for the
employer has little relevance when applying this factor.
---------------------------------------------------------------------------

The Department welcomes comments on all aspects of this factor.
Example: Opportunity for Profit or Loss Depending on Managerial Skill
\276\
---------------------------------------------------------------------------

\276\ The Department is providing examples at the end of the
discussion of each factor for the benefit of the public, and the
addition or alteration of any of the facts in any of the examples
may change the resulting analysis. Additionally, while the examples
help illustrate the application of particular factors of the
economic reality test, no one factor is determinative of whether a
worker is an employee or independent contractor.
---------------------------------------------------------------------------

A worker for a landscaping company performs assignments only as
determined by the company for its corporate clients. The worker does
not independently choose assignments, solicit additional work from
other clients, advertise their services, or endeavor to reduce costs.
The worker regularly agrees to work additional hours in order to earn
more. In this scenario, the worker does not exercise managerial skill
that affects their profit or loss. Rather, their earnings may fluctuate
based on the work available and their willingness to work more.

[[Page 62240]]

Because of this lack of managerial skill affecting opportunity for
profit or loss, this factor indicates employee status.
In contrast, a worker provides landscaping services directly to
corporate clients, including Company A. The worker produces their own
advertising, negotiates contracts, decides which jobs to perform and
when to perform them, and decides when and whether to hire helpers to
assist with the work. This worker exercises managerial skill that
affects their opportunity for profit or loss, indicating independent
contractor status.
2. Investments by the Worker and the Employer (Proposed Sec.
795.110(b)(2))
The Department is proposing to treat investment as a standalone
factor in the economic reality analysis (consistent with the
Department's approach prior to the 2021 IC Rule and with the approach
of most courts) instead of considering investment within the
opportunity for profit or loss factor (as Sec. 795.105(d)(1)(ii) in
the 2021 IC Rule does). Proposed Sec. 795.110(b)(2) states that an
investment borne by the worker must be capital or entrepreneurial in
nature to indicate independent contractor status. Such investments, for
example, generally support an independent business and serve a
business-like function, such as increasing the worker's ability to do
different types of or more work, reducing costs, or extending market
reach, thus suggesting that the worker is in business for themself.
Proposed Sec. 795.110(b)(2) further notes that costs borne by the
worker simply to perform their job (e.g., tools and equipment to
perform a specific job and the worker's labor) are not evidence of
capital or entrepreneurial investment. Finally, proposed Sec.
795.110(b)(2) provides that the worker's investments should be
evaluated on a relative basis with the employer's investments, a
position taken by many circuit courts of appeals.
From its earliest applications of the economic reality analysis
until the 2021 IC Rule, the Department consistently identified the
worker's investment as a separate factor in the analysis.\277\
Beginning with the Supreme Court's decision in Silk,\278\ courts with
the exception of the Second and D.C. Circuits have almost universally
identified the worker's investment as a separate factor.\279\ Breaking
from this longstanding approach, the 2021 IC Rule stated that
investment is considered as part of the opportunity for profit or loss
factor: ``[T]he Department adopts its proposal, consistent with Second
Circuit caselaw, to consider investment as part of the opportunity
factor.'' \280\ The Department further stated in the 2021 IC Rule that
courts consider opportunity for profit or loss and investment to be
related and combining them into one factor eliminates duplicative
analyses.\281\
---------------------------------------------------------------------------

\277\ See, e.g., WHD Op. Ltr. (Aug. 13, 1954); WHD Op. Ltr.
FLSA-795 (Sept. 30, 1964); WHD Op. Ltr. (Oct. 12, 1965); WHD Op.
Ltr. (Sept. 12, 1969); WHD Op. Ltr. WH-476, 1978 WL 51437, at *1
(Oct. 19, 1978); WHD Op. Ltr., 1986 WL 1171083, at *1 (Jan. 14,
1986); WHD Op. Ltr., 1986 WL 740454, at *1 (June 23, 1986); WHD Op.
Ltr., 1995 WL 1032469, at *1 (Mar. 2, 1995); WHD Op. Ltr., 1995 WL
1032489, at *1 (June 5, 1995); WHD Op. Ltr., 1999 WL 1788137, at *1
(July 12, 1999); WHD Op. Ltr., 2000 WL 34444352, at *1 (July 5,
2000); WHD Op. Ltr., 2000 WL 34444342, at *3 (Dec. 7, 2000); WHD Op.
Ltr., 2002 WL 32406602, at *2 (Sept. 5, 2002); WHD Fact Sheet #13,
``Employment Relationship Under the Fair Labor Standards Act
(FLSA)'' (July 2008); AI 2015-1 (available at 2015 WL 4449086)
(withdrawn June 7, 2017).
\278\ 331 U.S. 704 (1947).
\279\ See, e.g., DialAmerica, 757 F.2d at 1382; McFeeley, 825
F.3d at 241; Hobbs, 946 F.3d at 829; Off Duty Police, 915 F.3d at
1055; Lauritzen, 835 F.2d at 1534-35; Alpha & Omega, 39 F.4th at
1082; Driscoll, 603 F.2d at 754; Paragon, 884 F.3d at 1235;
Scantland,721 F.3d at 1311. The Second Circuit and the D.C. Circuit
are alone among the circuit courts of appeals in treating the
worker's opportunity for profit or loss and the worker's investment
as a single factor. See, e.g., Franze, 826 F. App'x at 76; Superior
Care, 840 F.2d at 1058-59; Morrison, 253 F.3d at 11 (citing Superior
Care, 840 F.2d at 1058-59).
\280\ 86 FR 1186.
\281\ Id. The 2021 IC Rule also cited Silk. Id. (citing Silk,
331 U.S. at 719). However, the Court in Silk merely decided that
case based on its facts, 331 U.S. at 716-19, and in no way indicated
that ``opportunities for profit or loss'' and ``investment in
facilities'' must be combined into one factor when reciting each of
the relevant factors separately, id. at 716.
---------------------------------------------------------------------------

The Department believes that the 2021 IC Rule's approach of
considering investment ``as part of'' the opportunity for profit or
loss factor is flawed. Section 795.105(d)(1)(ii) of the 2021 IC Rule
states that the opportunity for profit or loss factor indicates
independent contractor status if the worker exercises initiative or if
the worker manages their investment in the business.\282\ Under the
provision, 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.'' \283\ Thus, if either initiative or
investment suggests independent contractor status, the other cannot
change that outcome even if it suggests employee status. For example,
under the 2021 IC Rule, if the worker makes no investment in the work
but exercises initiative, then the opportunity for profit or loss
factor indicates independent contractor status. In effect, that the
worker makes no capital or entrepreneurial investment (a fact that
indicates employee status) is eliminated from the analysis under that
rule. Put another way, if a worker has an opportunity for profit or
loss based on initiative, the opportunity for profit or loss factor
under the 2021 IC Rule indicates independent contractor status, and the
investment factor cannot reverse or weigh against that finding even if
it indicates employee status as a matter of economic reality because,
for example, the worker makes no investment. The Department believes
that the way in which 2021 IC Rule Sec. 795.105(d)(1)(ii) considers
investment as part of the opportunity for profit or loss factor may
incorrectly tilt the analysis in favor of independent contractor
outcomes. Moreover, although the 2021 IC Rule purported to adopt the
Second Circuit's approach of considering investment as part of
opportunity for profit or loss, Second Circuit case law does not
support the Rule's position that this factor indicates independent
contractor status if either investment or initiative indicates an
opportunity for profit or loss even if the other indicates employee
status.\284\
---------------------------------------------------------------------------

\282\ 86 FR 1247.
\283\ Id.
\284\ See generally Saleem, 854 F.3d at 141-46.
---------------------------------------------------------------------------

There is little basis for an approach that always considers the
worker's investment within the worker's opportunity for profit or loss
factor, which can have the effect in some cases of preventing
investment from affecting the analysis. The worker's investment may be
relevant to whether the worker is economically dependent on the
employer separate and apart from the worker's opportunity for profit or
loss. This is consistent with various circuit court decisions which
have found both opportunity for profit or loss and investment to be
independently probative. For example, the Fifth Circuit found in
Parrish that the investment factor favored employee status (although it
merited ``little weight'' given the nature of the work) and that the
opportunity for profit or loss factor favored independent contractor
status.\285\ In Cromwell v. Driftwood Electrical Contractors, Inc., the
Fifth Circuit conversely found that the investment factor indicated
independent contractor status because the workers ``invested a
relatively substantial amount in their trucks, equipment, and tools''
but that their opportunity for profit or loss was ``severely
limit[ed].'' \286\ In Nieman v. National Claims Adjusters, Inc., the
Eleventh Circuit found that the

[[Page 62241]]

investment factor weighed in favor of independent contractor status
while the opportunity for profit or loss factor did ``not weigh in
favor of either'' independent contractor or employee status.\287\ And
in Scantland v. Jeffry Knight, Inc., the Eleventh Circuit found that
the opportunity for profit or loss factor ``point[ed] strongly toward
employee status'' although the investment factor weighed slightly in
favor of independent contractor status.\288\ Thus, investment is
relevant to the ultimate economic dependence inquiry separate and apart
from opportunity for profit or loss.
---------------------------------------------------------------------------

\285\ 917 F.3d at 382-85.
\286\ 348 F. App'x 57, 60-61 (5th Cir. 2009).
\287\ 775 F. App'x 622, 624-25 (11th Cir. 2019).
\288\ 721 F.3d at 1316-18.
---------------------------------------------------------------------------

For these reasons, the Department is proposing to return to
treating the worker's investment as a separate factor from the
opportunity for profit or loss factor.
The Department is also proposing, in addition to considering the
amount and value of the worker's investment, that the nature of and
reason for the investment should be considered. Specifically, proposed
Sec. 795.110(b)(2) states that for a worker's investment to indicate
independent contractor status, the investment must be capital or
entrepreneurial in nature. The Department believes that the worker's
investment should generally support an independent business or serve a
business-like function, such as increasing the worker's ability to do
different types of or more work, reducing costs, or extending market
reach, to indicate independent contractor status.\289\ On the other
hand, as proposed Sec. 795.110(b)(2) notes, costs borne by a worker to
perform a particular job are not the type of capital/entrepreneurial
investments that suggest independent contractor status. The Department
believes that considering the investment factor in this manner is
consistent with the overall inquiry of determining whether the worker
is economically dependent on the employer for work or is in business
for themself. The nature of the worker's investment illuminates that
distinction: an investment that is capital in nature indicates that the
worker is operating as an independent business. Yet, an investment that
is expedient to perform a particular job (such as tools or equipment
purchased to perform the job and that have no broader use for the
worker) does not indicate independence. The Department understands that
independent contractors make both capital investments to generally
support their business and investments to perform particular jobs;
therefore, the existence of expenses to perform jobs will not prevent
this factor from indicating independent contractor status so long as
there are also investments that are capital in nature indicating an
independent business.
---------------------------------------------------------------------------

\289\ The 2021 IC Rule suggested that a shift to a ``knowledge-
based economy'' reduced the probative value of the investment factor
because these types of workers can be in business for themselves
``with minimal physical capital'' investment. 86 FR 1175. That
rule's suggestion would be addressed by this proposal's approach to
the investment factor. By focusing on the capital or entrepreneurial
nature of the worker's investment, the proposed investment factor
would not be limited to considering investments in physical capital
but would also consider entrepreneurial investments by a worker to
develop marketable knowledge.
---------------------------------------------------------------------------

Consistent with the proposed approach, many appellate court
decisions have emphasized how the worker's investment must be capital
in nature for it to indicate independent contractor status. For
example, in Secretary of Labor v. Lauritzen, the Seventh Circuit found
that migrant farm workers were not independent contractors, but
employees, due in part to the lack of capital investments made by the
workers.\290\ As the court noted, investments that establish a worker's
status as an independent contractor should ``be large expenditures,
such as risk capital, capital investments, and not negligible items or
labor itself. . . . The workers here are responsible only for providing
their own gloves [which] do not constitute a capital investment.''
\291\ In Acosta v. Paragon Contractors Corp., the Tenth Circuit
explained that ``[t]he mere fact that workers supply their own tools or
equipment does not establish status as independent contractors; rather,
the relevant `investment' is `the amount of large capital expenditures,
such as risk capital and capital investments, not negligible items, or
labor itself.' '' \292\
---------------------------------------------------------------------------

\290\ See 835 F.2d at 1537.
\291\ Id.
\292\ 884 F.3d at 1236 (quoting Snell, 875 F.2d at 810). See
also, e.g., Off Duty Police, 915 F.3d at 1056 (`` `The capital
investment factor is most significant if it reveals that the worker
performs a specialized service that requires a tool or application
which he has mastered.' '') (quoting Donovan v. Brandel, 736 F.2d
1114, 1118-19 (6th Cir. 1984)); Mr. W Fireworks, 814 F.2d at 1052
(``The fact that a few [workers] engage in minimal investments has
little legal relevance, when the overwhelming majority of the risk
capital is supplied by [the employer].''); Pilgrim Equip., 527 F.2d
at 1314 (The employer's provision of ``[a]ll investment or risk
capital'' and ``all costly necessities'' that the workers need to
operate confirms the workers' ``total dependency'' on the
employer.); cf. Nieman, 775 F. App'x at 625 (investment factor
indicated independent contractor status because the worker ``had his
own home office, a laptop, and iPad for field work and was equipped
with a vehicle, ladder, measuring tools, digital voice and
photographic equipment, and `other similar tools of the trade.' '').
---------------------------------------------------------------------------

Relatedly, the use of a personal vehicle that the worker already
owns to perform work--or that the worker leases as required by the
employer to perform work--is generally not an investment that is
capital or entrepreneurial in nature. For example, in Scantland, the
Eleventh Circuit explained that the ``fact that most technicians will
already own a vehicle suitable for the work'' suggests that there is
``little need for significant independent capital.'' \293\ In Off Duty
Police, the Sixth Circuit found that, because the workers' vehicles
``could be used for any purpose, not just on the job,'' they did not
indicate independent contractor status.\294\ The Fifth Circuit likewise
considers the purpose of the vehicle and how the worker uses it. For
example, in Express Sixty-Minutes, it explained that, ``[a]lthough the
driver's investment of a vehicle is no small matter, that investment is
somewhat diluted when one considers that the vehicle is also used by
most drivers for personal purposes.'' \295\ And in Brock v. Mr. W
Fireworks, it noted that most of the workers in that case purchased
vehicles for personal and family reasons, not business reasons.\296\
This approach to considering a worker's use of a personal vehicle that
the worker already owns to perform work is consistent with the
overarching inquiry of examining the economic realities of the worker's
relationship with the employer.
---------------------------------------------------------------------------

\293\ 781 F.2d at 1318.
\294\ 915 F.3d at 1056. See also Keller, 781 F.3d at 810-11
(fact that equipment could be used ``for both personal and
professional tasks'' weakens the indication of independent
contractor status).
\295\ 161 F.3d at 304.
\296\ 814 F.2d at 1052; see also Sigui v. M + M Commc'ns, Inc.,
484 F. Supp. 3d 29, 39 (D.R.I. 2020) (discounting relevance of
workers' investment in vehicles because they could be used for other
purposes), jury verdict for plaintiffs, 1:14-CV-00442, Dckt. No. 172
(June 13, 2022); Roeder v. DirecTV, Inc., No. C14-4091-LTS, 2017 WL
151401, at *17 (N.D. Iowa Jan. 13, 2017) (rejecting argument that
``plaintiffs' purchase and/or use of personal vehicles [weighs] in
favor of finding plaintiffs were independent contractors'' because
the ``vehicles had been purchased prior to taking DIRECTV work
orders'' and the record does not indicate that the vehicles were
purchased for any business purpose).
---------------------------------------------------------------------------

Proposed Sec. 795.110(b)(2) additionally provides that the
worker's investment be evaluated in relation to the employer's
investment in its business. This approach is not only consistent with
the totality-of-the-circumstances analysis that is at the heart of the
economic reality test, but it would also provide factfinders with an
additional tool to differentiate between a worker's economic dependence
and independence based on the particular

[[Page 62242]]

facts of the case. Comparing the worker's investment to the employer's
investment can be a gauge of the worker's independence or dependence.
If the worker's investment compares favorably to the employer's
investment, then that fact suggests independence on the worker's part
and the existence of a business-to-business relationship between the
worker and the employer. If the worker's investment does not compare
favorably to the employer's investment, then that fact suggests that
the worker is economically dependent and an employee of the employer.
The Department understands that a worker's investment need not be (and
rarely ever is) of the same magnitude and scope as the employer's
investment to indicate that the worker is an independent contractor.
Thus, although a worker's investment need not be on par with the
employer's investment, it should support an independent business for
this factor to indicate independent contractor status.
The Department has previously, but not consistently, explained that
a worker's investment should be considered in relation to the
employer's investment in its business. For example, in the Withdrawal
Rule, the Department questioned the 2021 IC Rule's preclusion of
consideration of the employer's investment.\297\ In AI 2015-1, the
Department explained that a worker's investment ``should not be
considered in isolation'' because ``it is the relative investments that
matter.'' \298\ AI 2015-1 further explained that, in addition to ``the
nature of the investment,'' ``comparing the worker's investment to the
employer's investment helps determine whether the worker is an
independent business.'' \299\ The Department also compared the worker's
and the employer's relative investments in opinion letters issued by
the Wage and Hour Division.\300\ However, in the 2021 IC Rule, the
Department rejected any comparison of the worker's investment to the
employer's investment in its business.\301\ Because of the Department's
inconsistency on this point, it is important for the Department to
address this point in this rulemaking.
---------------------------------------------------------------------------

\297\ See 86 FR 24313-24314 (as explained in section II.E.
supra, the Withdrawal Rule was vacated by a district court decision
that is currently on appeal before the Fifth Circuit).
\298\ 2015 WL 4449086, at *8 (withdrawn June 7, 2017).
\299\ Id.
\300\ See WHD Op. Ltr., 2002 WL 32406602, at *1-2 (Sept. 5,
2002) (workers' ``hand tools, which can cost between $5,000 and
$10,000,'' were ``small in comparison to [the employer's]
investment,'' but the ``amount is none the less substantial'' and
``thus indicative of an independent contractor relationship''); WHD
Op. Ltr., 2000 WL 34444342, at *4 (Dec. 7, 2000) (comparing ``the
relative investments'' of the worker and the employer is the correct
approach).
\301\ See 86 FR 1188 (``comparing the individual worker's
investment to the potential employer's investment should not be part
of the analysis of investment''). See also WHD Fact Sheet #13 (July
2008) (describing the factor as ``[t]he amount of the [worker's]
investment in facilities and equipment'' without any further
discussion).
---------------------------------------------------------------------------

Numerous circuit courts of appeals consider the worker's investment
in the work in comparison to the employer's investment in its business.
For example, the Fifth Circuit has explained that it ``consider[s] the
relative investments'' and that, ``[i]n considering this factor, `we
compare each worker's individual investment to that of the alleged
employer.''' \302\ The Tenth Circuit has similarly explained that,
``[t]o analyze this factor, we compare the investments of the worker
and the alleged employer.'' \303\ The Sixth Circuit has explained that
``[t]his factor requires comparison of the worker's total investment to
the `company's total investment, including office rental space,
advertising, software, phone systems, or insurance.' '' \304\ And the
Fourth Circuit has compared the employers' payment of rent, bills,
insurance, and advertising expenses to the workers' ``limited''
investment in their work.\305\
---------------------------------------------------------------------------

\302\ Hobbs, 946 F.3d at 831-32 (quoting Cornerstone Am., 545
F.3d at 344) (emphasis in quoted language).
\303\ Paragon, 884 F.3d at 1236; see also Flint Eng'g, 137 F.3d
at 1442 (``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.'').
\304\ Off Duty Police, 915 F.3d at 1056 (quoting Keller, 781
F.3d at 810).
\305\ McFeeley, 825 F.3d at 243. See also Verma, 937 F.3d at 231
(summarizing how courts have viewed this factor in cases examining
the employment status of exotic dancers: ``all concluded that `a
dancer's investment is minor when compared to the club's investment'
'') (quoting the district court's decision); 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''); Driscoll, 603 F.2d at 755
(strawberry growers' investment in light equipment, including hoes,
shovels, and picking carts was ``minimal in comparison'' with
employer's total investment in land and heavy machinery); see also
Iontchev, 685 F. App'x at 550 (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]'').
---------------------------------------------------------------------------

A few circuits do not compare the worker's investment in the work
to the employer's investment in its business. For example, the Second
Circuit has recently focused on whether the worker has made a
significant investment, irrespective of the employer's investment. In
Saleem, the Second Circuit stated (like many other courts) that under
``the economic reality test, `large capital expenditures'--as opposed
to `negligible items, or labor itself'--are highly relevant to
determining whether an individual is an employee or an independent
contractor.'' \306\ The Second Circuit elaborated that the key is
whether the worker's financial investment was made in order to generate
a return on the investment.\307\ The Eleventh Circuit has likewise
focused on the nature of the worker's investment without comparing it
to the employer's investment.\308\ Neither the Second Circuit nor the
Eleventh Circuit have expressly rejected comparing the investments, and
as explained herein, the Department believes that comparing investments
is consistent with the totality-of-the-circumstances analysis and is
helpful in distinguishing between a worker's economic dependence and
independence.
---------------------------------------------------------------------------

\306\ 854 F.3d at 144 (quoting Snell, 875 F.2d at 810).
\307\ Id. at 144-46; see also Franze, 826 F. App'x at 77-78
(purchasing delivery routes ``without any financial assistance from
Bimbo'' constitutes a substantial financial outlay that weighs in
favor of independent contractor status).
\308\ Scantland, 721 F.3d at 1317-18; see also Nieman, 775 F.
App'x at 625.
---------------------------------------------------------------------------

The usefulness of comparing the worker's investment to the
employer's investment is not undermined because certain decisions from
the Fifth and Eighth Circuits gave little weight to the comparison
based on the facts and circumstances of the particular cases before
them.\309\ The Fifth Circuit decisions (Parrish and Cornerstone
America) compared the relative investments as part of their
analyses.\310\ Although the Parrish decision accorded the relative
investment factor ``little weight in the light of the other summary-
judgment-record evidence supporting IC-status,'' \311\ this does not
support the conclusion that this factor is not useful. Instead, it
simply reflects the Fifth Circuit's faithful application in that case
of a totality-of-the-

[[Page 62243]]

circumstances approach considering many factors--no one of which was
dispositive. Moreover, that the Cornerstone America decision ``did not
even mention the [employer's] larger investment'' when ``summing up the
entirety of the facts and analyzing whether the workers were
economically dependent on the [employer] as a matter of economic
reality'' as stated in the 2021 IC Rule,\312\ likewise does not support
the conclusion that the relative investment factor is not useful, but
instead simply reflects the overwhelming evidence of employee status in
that case. Indeed, the Fifth Circuit's recent decisions reflect a
continued commitment to considering the worker's investment in relation
to the employer's investment.\313\
---------------------------------------------------------------------------

\309\ The 2021 IC Rule cited these decisions from the Fifth and
Eighth Circuits in rejecting the relative investments approach. See
86 FR 1188.
\310\ See Parrish, 917 F.3d at 382-83 (explaining that ``[o]ur
court uses a side-by-side comparison method in evaluating this
factor'' and determining that the relative investments factor favors
employee status); Cornerstone Am., 545 F.3d at 344 (explaining that
``we compare each worker's individual investment to that of the
alleged employer'' and determining that the employer's ``greater
overall investment in the business scheme convinces us that the
relative-investment factor weighs in favor of employee status'')
(emphasis in original).
\311\ 917 F.3d at 383.
\312\ 86 FR 1188 (citing Cornerstone Am., 545 F.3d at 346).
\313\ See, e.g., Sanchez Oil & Gas Corp. v. Crescent Drilling &
Prod., Inc., 7 F.4th 301, 313 n.17 (5th Cir. 2021); Hobbs, 946 F.3d
at 829 (describing the investment factor as ```the extent of the
relative investments of the worker and the alleged employer''')
(quoting Cornerstone Am., 545 F.3d at 343). Thus, the Fifth Circuit
routinely considers the relative investments of the worker and the
employer even if the factor may ultimately be accorded less weight
in some cases depending on the facts and circumstances of the case.
---------------------------------------------------------------------------

In Karlson v. Action Process Service & Private Investigations, LLC,
the Eighth Circuit affirmed the district court's decision to allow
evidence of the worker's and the employer's relative investments but
not allow the worker to ask the employer about the dollar amount of its
investment because ``allowing [the worker] to `billboard large numbers'
. . . would create the danger of unfair prejudice.'' \314\ Thus, the
Eighth Circuit simply affirmed a nuanced district court decision
regarding how much evidence of the employer's investment to allow but
did not preclude consideration of the worker's and the employer's
relative investments. Moreover, the Eighth Circuit recently issued a
decision articulating, as the jury instruction in Karlson had, the
investment factor as ``the relative investments of the alleged employer
and the employee.'' \315\
---------------------------------------------------------------------------

\314\ 860 F.3d at 1096.
\315\ Alpha & Omega, 39 F.4th at 1082 (citing Karlson, 860 F.3d
at 1093).
---------------------------------------------------------------------------

For all of these reasons, the Department believes that the proposal
to consider the worker's investment in relation to the employer's
investment in its business is supported by prior WHD guidance and many
appellate court decisions, is consistent with the overall totality-of-
the-circumstances inquiry whether the worker is economically dependent
on the employer or operating as an independent business and would aid
factfinders' analyses when applying that inquiry.
The Department welcomes comments on all aspects of this factor.
Example: Investments by the Worker and the Employer
A graphic designer provides design services for a commercial design
firm. The firm provides software, a computer, office space, and all the
equipment and supplies for the worker. The company invests in marketing
and finding clients and maintains a central office from which to manage
services. The worker occasionally uses their own preferred drafting
tools for certain jobs. In this scenario, the worker's relatively minor
investment in supplies is not capital in nature and does little to
further a business beyond completing certain jobs. Thus, this factor
indicates employee status.
A graphic designer occasionally completes design projects for a
local design firm. The graphic designer purchases their own design
software, computer, drafting tools, and rents an office in a shared
workspace. The worker also spends money to market their services. These
types of investments support an independent business and are capital in
nature (e.g., they allow the worker to do more work and extend their
market reach). Thus, these facts indicate that the worker is in
business for themself and may be a freelance graphic designer (i.e., an
independent contractor), not an employee of the local design firm.
3. Degree of Permanence of the Work Relationship (Sec. 795.110(b)(3))
The Department is proposing to modify Sec. 795.105(d)(2)(ii) of
the 2021 IC Rule, which describes the ``degree of permanence of the
working relationship between the individual and the potential
employer,'' and address the permanency factor in proposed Sec.
795.110(b)(3). This provision in the 2021 IC Rule states that this
factor weighs in favor of the worker being an independent contractor
where the work relationship is ``by design definite in duration or
sporadic'' and that it weighs in favor of the worker being an employee
where the work relationship is ``by design indefinite in duration or
continuous.'' \316\ The 2021 IC Rule provision also recognizes that
``the seasonal nature of work by itself would not necessarily indicate
independent contractor classification.'' \317\
---------------------------------------------------------------------------

\316\ 86 FR 1247.
\317\ Id.
---------------------------------------------------------------------------

As the Department noted in the 2021 IC Rule, ``courts and the
Department routinely consider this factor when applying the economic
reality analysis under the FLSA to determine employee or independent
contractor status.'' \318\ Consistent with case law analyzing this
factor, the Department is proposing to provide further specificity by
noting that an indefinite or continuous relationship is consistent with
an employment relationship, but that a worker's lack of a permanent or
indefinite relationship with an employer is not necessarily indicative
of independent contractor status if it does not result from the
worker's own independent business initiative.\319\ The Department is
also proposing to continue to recognize that a lack of permanence may
be inherent in certain jobs--such as temporary and seasonal work--and
that this is not necessarily an indicator of independent contractor
status because a lack of permanence does not necessarily mean that the
worker is in business for themself instead of being economically
dependent on the employer for work.
---------------------------------------------------------------------------

\318\ 86 FR 1192 (citing a variety of circuit case law: Razak,
951 F.3d at 142; Hobbs, 946 F.3d at 829; Karlson, 860 F.3d at 1092-
93; McFeeley, 825 F.3d at 241; Keller, 781 F.3d at 807; Scantland,
721 F.3d at 1312).
\319\ See, e.g., Superior Care, 840 F.2d at 1060-61.
---------------------------------------------------------------------------

Courts typically describe this factor's relevance as follows: ``
`Independent contractors' often have fixed employment periods and
transfer from place to place as particular work is offered to them,
whereas `employees' usually work for only one employer and such
relationship is continuous and of indefinite duration.'' \320\ For
example, a typical employee often has an at-will work relationship with
the employer and works indefinitely until either party decides to end
that work relationship. Conversely, an independent contractor does not
seek such a permanent or indefinite engagement with one entity. Because
of these general characteristics of work relationships, the length of
time or duration of the work relationship has long been considered
under the ``permanence'' factor as an indicator of employee or
independent contractor status.\321\
---------------------------------------------------------------------------

\320\ Snell, 875 F.2d at 811 (citing Donovan v. Sureway
Cleaners, 656 F.2d 1368, 1372 (9th Cir. 1981)); see also Keller, 781
F.3d at 807 (same); WHD Op. Ltr., 2002 WL 32406602, at *3 (Sept. 5,
2002) (same).
\321\ See, e.g., Parrish., 917 F.3d at 386-87 (noting that one
of the relevant considerations under the permanency factor is the
total length of the working relationship between the parties);
Capital Int'l, 466 F.3d at 308-09 (in analyzing the degree of
permanency of the working relationship, the ``more permanent the
relationship, the more likely the worker is to be an employee'');
DialAmerica, 757 F.2d at 1385 (finding that ``the permanence-of-
working-relationship factor indicates that the home researchers were
`employees' '' because they ``worked continuously for the defendant,
and many did so for long periods of time''); Pilgrim Equip., 527
F.2d at 1314 (``the permanent nature of the relations between [the
employer] and these operators indicates dependence''); see also
Reyes v. Remington Hybrid Seed Co., 495 F.3d 403, 408 (7th Cir.
2007) (describing an independent contractor as an individual who
``appears, does a discrete job, and leaves again''); Reich v. Circle
C. Invs., Inc., 998 F.2d 324, 328 (5th Cir. 1993) (``[a]lthough not
determinative, the impermanent relationship between the dancers and
the [employer] indicates non-employee status'').

---------------------------------------------------------------------------

[[Page 62244]]

However, the analysis under the ``permanence'' factor is not
limited solely to the length or definiteness of the work relationship.
Courts have also recognized that the temporary or seasonal nature of
some jobs may result in a ``lack of permanence . . . due to operational
characteristics intrinsic to the industry rather than to the workers'
own business initiative.'' \322\ In such instances, a lack of
permanence alone is not an indicator of independent contractor status.
One industry where courts have recognized that the lack of permanence
or indefiniteness in the work relationship does not preclude employee
status is seasonal agricultural work, where workers often work solely
for the duration of a harvest season and may return the following
year.\323\ Another seasonal example is the Fifth Circuit's analysis of
the working relationship between a fireworks business that operated
during specific periods of the year and the fireworks stand operators
who sold the company's goods, where the district court found the
relationship to be impermanent due to the 80 percent turnover rate
between seasons.\324\ The Fifth Circuit noted that ``in applying the
Silk factors courts must make allowances for those operational
characteristics that are unique or intrinsic to the particular business
or industry, and to the workers they employ.'' \325\ The Fifth Circuit
held that the ``proper test for determining the permanency of the
relationship'' in such a seasonal industry is ``not whether the alleged
employees returned from season to season, but whether the alleged
employees worked for the entire operative period of a particular
season.'' \326\
---------------------------------------------------------------------------

\322\ Superior Care, 840 F.2d at 1061 (citing Mr. W Fireworks,
814 F.2d at 1053-54); see also Flint Eng'g, 137 F.3d at 1442
(finding short duration of work relationships in oil and gas
pipeline construction work to be intrinsic to the industry rather
than a ``choice or decision'' on the part of the workers).
\323\ See Paragon, 884 F.3d at 1235 (permanence factor favored
employee status because the worker was hired temporarily for the
harvest season ``[b]ut his employment was permanent for the duration
of each harvest season''); Lauritzen, 835 F.2d at 1537 (agricultural
harvesters' relationship with employer was ``permanent and exclusive
for the duration of that harvest season'' and permanency was also
indicated by the fact that many of the same migrant workers returned
for the harvest each year; the court noted that ``[m]any seasonal
businesses necessarily hire only seasonal employees, but that fact
alone does not convert seasonal employees into seasonal independent
contractors'').
\324\ Mr. W Fireworks, 814 F.2d at 1053.
\325\ Id. at 1054.
\326\ Id.
---------------------------------------------------------------------------

Courts have also recognized that non-seasonal temporary work is
common in some industries, and that a lack of permanence in these work
relationships is also not indicative of independent contractor status.
For example, in Brock v. Superior Care, Inc., the Second Circuit found
that nurses who were referred by a temporary health-care staffing
agency to work for patients, hospitals, and nursing homes on a short-
term basis were ``transient'' workers who did not have continuous or
permanent work relationships with the staffing agency.\327\ Citing the
discussion in Mr. W Fireworks regarding operational characteristics
that may be unique to certain industries and the workers they employ,
the Second Circuit determined that the lack of permanence did not
preclude the nurses from being employees because this reflected ``the
nature of their profession and not their success in marketing their
skills independently.'' \328\ Similarly, in Baker v. Flint Engineering
& Construction Co., the Tenth Circuit determined that temporary rig
welders who worked no more than two months at a time for a gas pipeline
contractor exhibited sufficient permanency in their work relationship
to indicate employee status because such temporary work was intrinsic
in the industry rather than a ``choice or decision'' by the
workers.\329\ Therefore, consistent with the applicable case law, the
Department is proposing to revise the 2021 IC Rule provision's
acknowledgement that the seasonal nature of work alone would not
necessarily indicate independent contractor status to acknowledge more
broadly that a lack of permanence may be due to operational
characteristics that are unique or intrinsic to particular businesses
or industries and the workers they employ rather than the workers'
business initiative, in which case this factor would not weigh in favor
of independent contractor classification.\330\
---------------------------------------------------------------------------

\327\ Superior Care, 840 F.2d at 1060.
\328\ Id. at 1061.
\329\ Flint Eng'g, 137 F.3d at 1442.
\330\ The 2021 IC Rule suggested that a trend in the modern
economy that reduces the probative value of the permanence factor is
that workers have shorter job tenures. See 86 FR 1175. However, as
explained above, courts have developed ways to consider permanency
that take into account the fact that some jobs and industries have
shorter job tenures, yet can evidence the regularity consistent with
an employment relationship.
---------------------------------------------------------------------------

Case law discussing the permanence factor also commonly addresses
whether the work relationship is exclusive and the extent to which the
workers work for others.\331\ The Department believes this analytical
approach is appropriate, because working exclusively for a particular
employer speaks to the permanence of the work relationship.\332\
However, although an exclusive relationship is often associated with an
employment relationship and a sporadic or project-based non-exclusive
relationship is more frequently associated with independent contractor
classification,\333\ courts have explained that simply having more than
one job or working irregularly does not remove a worker from employee
status and the protections of the FLSA. For example, in Silk, the
``unloaders'' came to the coal yard ``when and as they please[d] . . .
work[ing] when they wish and work[ing] for others at will.'' \334\ The
Court determined that the unloaders were employees even though they had
the ability to work for others: ``That the unloaders did not work
regularly is not significant. They did work in the course of the
employer's trade or business. This brings them under the coverage of
the Act.'' \335\ Similarly, as the Second Circuit explained in Superior
Care, the fact that the temporary nurses ``typically work for several
employers,'' was ``not dispositive of independent contractor status''
as ``employees may work for more than one employer without losing their
benefits under the FLSA.'' \336\
---------------------------------------------------------------------------

\331\ See, e.g., Parrish, 917 F.3d at 386-87 (noting that one of
the relevant considerations under the permanency factor is whether
any plaintiff worked exclusively for the potential employer);
Keller, 781 F.3d at 807 (noting that ``even short, exclusive
relationships between the worker and the company may be indicative
of an employee-employer relationship''); Scantland, 721 F.3d at 1319
(noting that ``[e]xclusivity is relevant'' to the permanency of the
work relationship).
\332\ See, e.g., WHD Op. Ltr., 2002 WL 32406602, at *3 (Sept. 5,
2002) (considering exclusivity under permanence factor); WHD Op.
Ltr., 2000 WL 34444342, at *5 (Dec. 7, 2000) (same).
\333\ See, e.g., Carrell v. Sunland Constr., Inc., 998 F.2d 330,
332 (5th Cir. 1993) (finding welders to be independent contractors
where they worked for multiple employers on a project-by-project
basis rather than exclusively for one employer).
\334\ 331 U.S. at 706.
\335\ Id. at 718.
\336\ Superior Care, 814 F.2d at 1060; see also Saleem, 854 F.3d
at 142 n.24 (``It is certainly not unheard of for an individual to
maintain two jobs at the same time, and to be an `employee' in each
capacity.''); Keller, 781 F.3d at 808 (agreeing with the Second
Circuit that ``employees may work for more than one employer without
losing their benefits under the FLSA''); Circle C Invs., 998 F.2d at
328-29 (noting that ``[t]he transient nature of the work force is
not enough here to remove the dancers from the protections of the
FLSA''); Seafood Inc., 867 F.2d at 877 (``The only question,
therefore, is whether the fact that the workers moved frequently
from plant to plant and from employer to employer removed them from
the protections of the FLSA. We hold that it did not.''); Hart v.
Rick's Cabaret Int'l, Inc., 967 F. Supp. 2d 901, 921 (S.D.N.Y. 2013)
(noting that ``countless workers . . . who are undeniably employees
under the FLSA--for example, waiters, ushers, and bartenders''--work
for multiple employers).

---------------------------------------------------------------------------

[[Page 62245]]

Relatedly, courts have also determined that the fact that a worker
does not rely on the employer as their exclusive or primary source of
income is not indicative of whether an employment relationship
exists.\337\ For example, the Sixth Circuit explained: ``[W]hether a
worker has more than one source of income says little about that
worker's employment status. Many workers in the modern economy,
including employees and independent contractors alike, must routinely
seek out more than one source of income to make ends meet.'' \338\
---------------------------------------------------------------------------

\337\ Superior Care, 814 F.2d at 1060; see also Halferty, 821
F.2d at 267-68 (``it is not dependence in the sense that one could
not survive without the income from the job that we examine, but
dependence for continued employment''); DialAmerica, 757 F.2d at
1385 (noting that ``[t]here is no legal basis'' to say that work
that constitutes a second source of income indicates a worker's lack
of economic dependence on a job because the proper analysis is
``whether the workers are dependent on a particular business or
organization for their continued employment'').
\338\ Off Duty Police, 915 F.3d at 1058. The 2021 IC Rule
correctly noted that a handful of cases improperly conflate having
multiple sources of income with a lack of economic dependence on the
potential employer. See 86 FR 1173, 1178. The 2021 IC Rule
characterized such a ``dependence-for-income'' analysis as incorrect
and a ``dependence-for-work'' analysis as correct. Id. at 1173. This
critique continues to be valid, as is the observation that ``[i]t is
possible for a worker to be an employee in one line of business and
an independent contractor in another.'' Id. at 1178 n.19.
---------------------------------------------------------------------------

Thus, the Department is proposing in Sec. 795.110(b)(3) to include
exclusivity as an additional consideration under the permanency factor
while noting that working for others and having multiple jobs in which
workers are economically dependent on each employer for work--as
compared to a worker who is in business for themself and chooses to
market their independent services or labor to multiple entities--does
not weigh in favor of independent contractor status. While the 2021 IC
Rule did not include exclusivity as part of the permanence analysis,
this was not based on a view that exclusivity was inconsistent with
circuit case law but, rather, was primarily based on the view that
concepts should not apply to more than one factor. Including
consideration of exclusivity under permanence is consistent with the
case law, as the 2021 IC Rule acknowledged.\339\ Because the 2021 IC
Rule sought to avoid duplicating consideration of certain facts or
concepts under more than one factor, however, it confined exclusivity
and the ability to work for others under the control factor and
excluded it from the permanence factor.\340\
---------------------------------------------------------------------------

\339\ The 2021 IC Rule recognized that courts often analyze the
exclusivity of the work relationship as part of the permanence
factor, and the Department considered in its NPRM for that rule to
include exclusivity under the permanence factor ``to be more
accurate.'' 85 FR 60616.
\340\ 86 FR 1192-93.
---------------------------------------------------------------------------

The Department continues to believe that an exclusivity requirement
imposed by the employer is a strong indicator of control, as discussed
under the control factor. However, in this proposed rulemaking, the
Department is prioritizing consideration of all facts that may be
relevant to a particular factor, consistent with a totality-of-the-
circumstances approach and the way courts analyze the factors. While
some courts have focused on exclusivity (or the lack thereof) under the
control factor rather than the permanence factor,\341\ others have
considered whether workers were able to work for other employers under
both the control and permanency factors.\342\ However, the weight of
circuit authority appears to consider exclusivity and ability to work
for others primarily under permanence, though it is certainly not the
only relevant consideration under this factor.\343\ As such, the
Department believes it is appropriate to include exclusivity under this
factor as well as the control factor.\344\
---------------------------------------------------------------------------

\341\ See, e.g., Saleem, 854 F.3d at 141.
\342\ See, e.g., 86 FR 1192 (noting the analysis in Freund v.
Hi-Tech Satellite, Inc., 185 F. App'x 782, 783-84 (11th Cir. 2006),
where the court found that ``Hi-Tech exerted very little control
over Mr. Freund,'' in part, because ``Freund was free to perform
installations for other companies'' and that ``Freund's relationship
with Hi-Tech was not one with a significant degree of permanence . .
. [because] Freund was able to take jobs from other installation
brokers.'').
\343\ See, e.g., Parrish, 917 F.3d at 386-87 (noting that one of
the relevant considerations under the permanency factor is whether
any plaintiff worked exclusively for the potential employer);
Keller, 781 F.3d at 808 (noting under permanency whether satellite-
dish installer could work for other companies but that working for
more than one employer does not necessarily result in independent
contractor status); Scantland, 721 F.3d at 1319 (length of
relationship and exclusivity was relevant insofar as workers'
schedules and inability to refuse work prohibited them from actually
working for other companies); Cornerstone Am., 545 F.3d at 346
(permanency factor weighed in favor of employee status because sales
leaders worked exclusively for the potential employer, often for
significant periods of time); Superior Care, 840 F.2d at 1060-61
(noting under permanency that nurses typically worked for several
employers but that this did not weigh in favor of independent
contractor status because it was inherent in the profession);
Lauritzen, 835 F.2d at 1537 (``however temporary the relationship
may be it is permanent and exclusive for the duration of that
harvest season''); DialAmerica, 757 F.2d at 1384 (noting under
permanency that home researchers generally did not perform services
for other organizations and therefore did not ``transfer their
services from place to place, as do independent contractors'').
\344\ The 2021 IC Rule also supported its decision to reject
consideration of exclusivity under permanence by referring to a
dictionary definition of ``permanent'' that does not include
exclusivity. 86 FR 1193 n.39. However, a dictionary definition
should not override the longstanding case law applying exclusivity
to the permanence factor. Additionally, the 2021 IC Rule viewed such
case law as inconsistent with the Supreme Court's Silk decision. 86
FR 1192-93. However, upon further consideration, the decision does
not clearly identify which factor the Court associated with the
truck drivers' ability to work for others (leading to a decision
that they were independent contractors, among other reasons), nor
does it clearly identify which factor the Court associated with the
coal unloaders' ability to work for others (leading to a decision
that they were employees, among other reasons). See Silk, 331 U.S.
at 717-19. Therefore, reliance on Silk for this proposition is not
warranted.
---------------------------------------------------------------------------

Finally, the Department notes that where workers provide services
under a contract that is routinely or automatically renewed, courts
have determined that this indicates permanence and an indefinite
working arrangement associated with employment.\345\ The proposed
regulation noting that work relationships that are indefinite in
duration or continuous favor employee status is consistent with that
case law.
---------------------------------------------------------------------------

\345\ See, e.g., Scantland, 721 F.3d at 1318 (finding one-year
contracts that were automatically renewed to ``suggest substantial
permanence of relationship''); Pilgrim Equip., 527 F.2d at 1314
(finding laundry operators' one-year contracts that were routinely
renewed indicated employee status); Acosta v. Senvoy, LLC, No. 3:16-
CV-2293-PK, 2018 WL 3722210, at *9 (D. Or. July 31, 2018) (noting
that one-year contracts that automatically renew are ``evidence that
a worker is an employee''); Solis v. Velocity Exp., Inc., No. CV 09-
864-MO, 2010 WL 3259917, at *9 (D. Or. Aug. 12, 2010) (the fact that
package delivery drivers understood their contracts to be of
indefinite duration and that contracts were routinely renewed
without renegotiation indicated employee status).
---------------------------------------------------------------------------

The Department welcomes comments on all aspects of this factor.
Example: Degree of Permanence of the Work Relationship
A cook has prepared meals for an entertainment venue continuously
for several years. The cook prepares meals as directed by the venue,
depending on the size and specifics of the event. The cook only
prepares food for the entertainment venue, which has regularly
scheduled events each week. The relationship between the cook and the
venue is characterized by a high degree of permanence and exclusivity.
The permanence factor indicates employee status.
A cook has prepared specialty meals intermittently for an
entertainment venue over the past 3 years for certain events. The cook
markets their meal preparation services to multiple venues and private
individuals and turns down

[[Page 62246]]

work for any reason, including because the cook is too busy with other
meal preparation jobs. The cook has a sporadic or project-based non-
exclusive relationship with the entertainment venue. These facts
indicate independent contractor status.
4. Nature and Degree of Control (Proposed Sec. 795.110(b)(4))
The Department is proposing to modify 2021 IC Rule Sec.
795.105(d)(1)(i), which considers control as a ``core'' factor in the
economic reality test. This provision in the 2021 IC Rule assesses the
employer's and the worker's ``substantial control over key aspects of
the performance of the work,'' which include setting schedules,
selecting projects, controlling workloads, and affecting the worker's
ability to work for others.\346\ This 2021 IC Rule provision also
states that ``[r]equiring the individual to comply with specific legal
obligations, satisfy health and safety standards, carry insurance, meet
contractually agreed-upon deadlines or quality control standards, or
satisfy other similar terms that are typical of contractual
relationships between businesses . . . does not constitute control''
for purposes of the economic reality test.\347\
---------------------------------------------------------------------------

\346\ See 86 FR 1246-47.
\347\ Id. at 1247.
---------------------------------------------------------------------------

As reflected in proposed Sec. 795.110(b)(4), the Department
continues to believe that issues related to scheduling, supervision
over the performance of the work (including the ability to assign
work), and the worker's ability to work for others are relevant
considerations. The Department's proposal would also consider
additional aspects of control in the workplace that have been
identified in the case law or through the Department's enforcement
experience--such as control mediated by technology or control over the
economic aspects of the work relationship. However, as noted above, the
Department's proposal would not elevate control as a ``core'' factor in
the analysis.\348\ For decades, courts and the Department have taken
the view that the control factor represents one facet of the economic
reality test.\349\ As such, control should be analyzed in the same
manner as every other factor, rather than take an outsized role when
analyzing whether a worker is an employee or independent contractor. As
the Fifth Circuit noted in 2019, it ``is impossible to assign to each
of these factors a specific and invariably applied weight.'' \350\
---------------------------------------------------------------------------

\348\ See supra section V.B.
\349\ See, e.g., WHD Op. Ltr. (Aug. 13, 1954) (applying six
factors, of which control was one, that are very similar to the six
economic reality factors currently used by almost all courts of
appeals); Shultz v. Hinojosa, 432 F.2d 259, 265 (5th Cir. 1970)
(affirming judgment in favor of Secretary of Labor that
slaughterhouse worker was an employee under the FLSA under a
multifactor economic reality test of which control was one of the
factors).
\350\ Parrish, 917 F.3d at 380 (internal citation omitted). The
circuit courts have taken this position for decades. See also, e.g.,
Scantland, 721 F.3d at 1312 n.2 (the relative weight of each factor
``depends on the facts of the case'') (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 . . . [, and] neither the presence nor the absence
of any particular factor is dispositive.'').
---------------------------------------------------------------------------

In addition, as described in more detail below, and after taking
relevant case law into account, an employer's compliance with legal
obligations, safety or health standards, or requirements to meet
contractual or quality control obligations, for example, may in some
cases indicate that the employer is exerting control, suggesting that
the worker is economically dependent on the employer. What follows is
an overview of the Department's proposal regarding control as well as
detailed descriptions of certain aspects of control such as scheduling,
supervision, price setting, and the ability to work for others.
a. Overview of Control Factor
When analyzing this factor for purposes of applying the economic
reality test, the control factor is one of several factors used to
reach the ultimate determination of whether a worker is economically
dependent on an employer or is in business for themself.\351\ Control
can be exerted directly in the workplace by an employer, such as when
it sets a worker's schedule, compels attendance, or directs or
supervises the work.\352\ However, the absence of these more apparent
forms of control does not invariably lead to the conclusion that the
factor weighs in favor of independent contractor status.\353\ Employers
may also exercise control in other ways, such as by relying on
technology to supervise a workforce, setting prices for services, or
restricting a worker's ability to work for others--actions that can
exert control without the traditional use of direct supervision,
assignment, or scheduling.
---------------------------------------------------------------------------

\351\ The control factor has its roots in the common law, where
the inquiry was whether the ``employer'' had the ``right to control
the manner and means by which [work] is accomplished.'' Reid, 490
U.S. at 751. Employers that exercise such control could be held
responsible for (or be in the best position to prevent) negligent
actions affecting their workers. See Lauritzen, 835 F.2d at 1544
(describing how common law notions of control relate to findings of
vicarious liability). Yet, the scope of employment under the FLSA is
broader than the common law and is not concerned with assigning
responsibility for negligent acts imputed to the employer. Rather,
employment under the FLSA is determined by applying an economic
reality analysis, which ``does not depend on the common-law
understanding of employment, which was based on limiting concepts of
control.'' Antenor v. D & S Farms, 88 F.3d 925, 933 (11th Cir. 1996)
(drawing this conclusion, in the context of evaluating possible
joint employment, by relying on the FLSA's broad definition of
employ which uses the term ``suffer or permit to work'').
\352\ See, e.g., Scantland, 721 F.3d at 1314 (finding workers to
be employees, in part, because they ``were subject to meaningful
supervision and monitoring by'' their employer).
\353\ See, e.g., Mr. W Fireworks, 814 F.2d at 1049 (``[T]he lack
of supervision over minor regular tasks cannot be bootstrapped into
an appearance of real independence.'') (citation omitted); Antenor,
88 F.3d at 934 (noting in FLSA joint employment case that the Act
reaches even those employers who ``[do] not directly supervise the
activities of putative employees'') (emphasis in original). Indeed,
this has been the perspective of the Department for almost six
decades. See WHD Op. Ltr., FLSA-795, at 3 (Sept. 30, 1964)
(determining that professional divers were employees of a diving
corporation, despite the lack of control over their work, by noting
``that persons may be employees within the meaning of the Act even
though they are unsupervised in their work, are not required to
devote any particular amount of time to their work, [and] are under
no restriction not to work for competitors of the employer'').
---------------------------------------------------------------------------

The analysis focuses on whether the employer still retains control
over meaningful economic aspects of the work relationship such that the
control indicates that the worker does not stand apart as their own
business, not simply whether the employer lacks control over discrete
working conditions (e.g., scheduling) or whether the employer failed to
exercise physical control over the workplace.\354\ For example, even
though dancers had some scheduling flexibility, the Third Circuit
concluded that the control factor weighed in favor of employee status
because the employer, and not the workers, controlled the economic
aspects of the dancers' work, such as the price of services, the
clientele to be served, and the operations of the club in which they
worked.\355\
---------------------------------------------------------------------------

\354\ See, e.g., Cornerstone Am., 545 F.3d at 343-44 (finding
that control weighs in favor of employee status even where the
employer disclaims control over ``day-to-day affairs'' of the
workers because the employer controlled the meaningful economic
aspects of the work). Other elements may also be included in this
examination of control, such as those identified by the Supreme
Court in Whitaker House. They include whether the worker could sell
their products or services ``on the market for whatever price they
can command;'' whether the worker's compensation was dictated by the
employer; and whether management could fire the worker for failure
to obey its regulations. 366 U.S. at 32-33.
\355\ Verma, 937 F.3d at 230.
---------------------------------------------------------------------------

This analytical approach was applied by the Fifth Circuit in a case
where an insurance sales firm not only ``controlled the hiring, firing,
assignment, and promotion of the [workers' subordinates],'' but also

[[Page 62247]]

controlled how the workers priced the insurance products, received
leads for sales, and defined the territory in which the agents could
sell products.\356\ These actions made it clear that the employer, and
not the workers, retained meaningful control over the ``economic
aspects of the business,'' suggesting that the workers were
employees.\357\
---------------------------------------------------------------------------

\356\ Cornerstone Am., 545 F.3d at 343-44.
\357\ Id. at 343.
---------------------------------------------------------------------------

Finally, 2021 IC Rule Sec. 795.105(d)(1)(i) states that an
employer requiring a 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 . . . does not constitute control that
makes the [worker] more or less likely to be an employee.'' \358\ In
the 2021 IC Rule, however, the Department acknowledged ``that some
courts have found requirements that workers comply with specific legal
obligations or meet quality control standards to be indicative of
employee status.'' \359\ Upon further consideration and a thorough
review of relevant case law, the Department believes, as reflected in
proposed Sec. 795.110(b)(4), that certain instances of control should
not be excluded as irrelevant to the economic reality analysis only
because they are required by business needs, contractual requirements,
quality control standards, or legal obligations. As the Eleventh
Circuit explained in Scantland:
---------------------------------------------------------------------------

\358\ 86 FR 1247.
\359\ 86 FR 1183.
---------------------------------------------------------------------------

The economic reality inquiry requires us to examine the nature and
degree of the alleged employer's control, not why the alleged employer
exercised such control. . . . If the nature of a business requires a
company to exert control over workers . . . then that company must hire
employees, not independent contractors.\360\
---------------------------------------------------------------------------

\360\ 721 F.3d at 1316 (emphasis added); see also Schultz v.
Mistletoe Express Serv., Inc., 434 F.2d 1267, 1271 (10th Cir. 1970)
(noting that ``arguments that an independent contractor relationship
is shown by . . . the need to comply with the regulations of federal
and state agencies do not persuade us'' before affirming the
conclusion that workers were employees under the FLSA).
---------------------------------------------------------------------------

The Department believes that the nature and degree of the
employer's control should be fully assessed, and this assessment may,
in some cases, include consideration of control that is due to an
employer's compliance with legal, safety, or quality control
obligations. As with all the economic reality factors, this control
should be examined in view of the ultimate inquiry: is it probative of
whether the worker is in business for themself or economically
dependent on the employer for work. For example, when an employer,
rather than a worker, controls compliance with legal, safety, or other
obligations, it may be evidence that the worker is not in fact in
business for themself because they are not doing the entrepreneurial
tasks that suggest that they are responsible for understanding and
adhering to the legal and other requirements that apply to the work or
services they are performing such that they are assuming the risk of
noncompliance.\361\
---------------------------------------------------------------------------

\361\ Case law further demonstrates that legal obligations
imposed by the government can provide evidence of control. For
example, in Chao v. First National Lending Corp., loan officers were
prohibited by state licensing requirements from working for more
than one mortgage company at a time. 516 F. Supp. 2d 895, 900 (N.D.
Ohio 2006), aff'd, 249 F. App'x 441 (6th Cir. 2007). This inability
to work for others--albeit in compliance with state requirements--
was determined to be further evidence that the loan officers ``were
economically dependent on [the employer] and, therefore, were
employees and not independent contractors for purposes of the
FLSA.'' Id. The Fifth Circuit reached a similar conclusion when it
rejected an insurance sales company's argument that it ``exerted
little control beyond what insurance-industry regulations
required.'' Hopkins, 545 F.3d at 343. Instead, the court found that
the employer exerted significant control over the economics of the
insurance sales work performed by the workers, which was dispositive
on this factor. Id.
---------------------------------------------------------------------------

While the case law is not uniform on this issue, the Department
finds cases such as Scantland and others--which recognize that
compliance with legal obligations or quality control may be relevant
evidence of control--more persuasive and consistent with the totality-
of-the-circumstances, economic reality analysis than the 2021 IC Rule's
approach. For example, in Badon v. Berry's Reliable Resources, LLC, a
district court, in granting the worker's summary judgment motion,
rejected a home healthcare employer's argument that a state's plan of
care for each consumer dictated the work performed by the workers.\362\
In finding that the control factor weighed in favor of employee status,
the court credited testimony that the employer had, in fact, hired,
trained, supervised, and directed the work of the caregivers to ensure
compliance with the state's requirements.\363\ After taking these facts
into consideration, the court found that the control factor weighed in
favor of employee status.\364\ Similarly, in Molina v. South Florida
Express Bankserv, Inc., a district court rejected the employer's
argument that its monitoring of workers was at customers' behest and
therefore was not relevant to control, explaining that ``[t]he
Defendant's reasoning is circular'' since ``[a]ny employer's business
is, in essence, directed by the needs of its customers.'' \365\
---------------------------------------------------------------------------

\362\ Civil Action Nos. 19-12317 c/w 20-584 & 21-596, 2022 WL
2111341, at *3-4 (E.D. La. June 10, 2022).
\363\ Id.
\364\ Id. at *4.
\365\ 420 F. Supp. 2d 1276, 1284 n.24 (M.D. Fla. 2006); see also
Amponsah v. DirecTV, LLC, 278 F. Supp. 3d 1352, 1360 (N.D. Ga. 2017)
(applying Scantland and finding genuine issues of material fact
regarding control despite defendant's argument that ``strict
installation standards and quality metrics'' were not indicative of
control because such requirements ``were aimed at customer
satisfaction, not control of Plaintiffs''); Crouch v. Guardian Angel
Nursing, Inc., Civil Action No. 3:07-cv-00541, 2009 WL 3737887, at
*18-20 (M.D. Tenn. Nov. 4, 2009) (finding a state law that required
licensed practical nurses to work under the supervision and
direction of doctors or registered nurses was strong evidence of
control by the employer under the FLSA and rejecting defendants'
argument ``that because a certain amount of supervision is mandated
by the state or by the home health agencies with which they
contract, it . . . does not count toward the quantification of the
degree of control exercised''); Flores v. Velocity Express, LLC, 250
F. Supp. 3d 468, 484 (N.D. Cal. 2017) (``undisputed indicia of
control'' included completing a Department of Transportation-
required road rest; obtaining certain insurance or enrolling in
employer's insurance program and undergoing a criminal history
background check); see also Ruiz v. Affinity Logistics Corp., 754
F.3d 1093, 1101-02 (9th Cir. 2014) (evaluating control for the
purpose of applying state wage and hour laws and rejecting the
employer's assertion that control that is ``driven by a need to
comply with federal regulations or [customer] requirements'').
---------------------------------------------------------------------------

Among the FLSA cases cited by the 2021 IC Rule to support the
provision excluding facts about compliance with specific legal,
contractual, or quality control obligations from consideration--such as
Parrish, Iontchev v. AAA Cab Service, Inc., Mr. W Fireworks, and Chao
v. Mid-Atlantic Installation Services, Inc.\366\--none support the
conclusion drawn by the 2021 IC Rule that the requirement to comply
with, for example, legal obligations is never probative of employee
status. In Parrish, for example, the Fifth Circuit concluded that
``[a]lthough requiring safety training and drug testing is an exercise
of control in the most basic sense of the word,'' the safety training
and drug testing in this particular case was not dispositive of control
``because of the nature of the employment'' at an oil-drilling
site.\367\ There, the employer was responsible for providing a place of
employment free from certain recognized hazards and ensuring that all
people working at an oil-drilling site comply with relatively minimal
safety training and drug testing as ``required for safe operations,''
generally.\368\ Thus, workers were not made more economically dependent
on the employer because of these safety

[[Page 62248]]

requirements.\369\ Moreover, in Iontchev, the Ninth Circuit determined
that the employer had ``relatively little control over the manner in
which'' the work was performed in part because ``its disciplinary
policy primarily enforced the Airport's rules and regulations''
governing drivers; it did not say that the fact that government
regulations applied to the work was not relevant at all to
control.\370\
---------------------------------------------------------------------------

\366\ See 86 FR 1183.
\367\ 917 F.3d at 382.
\368\ Id.
\369\ See id. at 376.
\370\ See 685 F. App'x at 550. Additionally, in Mr. W Fireworks,
the Fifth Circuit found that a defendant company's requirement that
plaintiffs work after ordinary business hours favored plaintiffs'
employee status notwithstanding the company's attempt to link
plaintiffs' work schedules to state regulatory requirements
(finding, however, that state regulations did not require such
after-hours work). See 814 F.2d at 1048.
---------------------------------------------------------------------------

These cases are thus not inconsistent with the Department's
proposed regulation that compliance with safety standards, for example,
may be relevant in assessing the control factor, depending on the facts
of the individual case, and that a complete bar to considering such
facts is inappropriate under the economic reality test. The facts and
circumstances of each case must be assessed, and the manner in which
the employer chooses to implement such obligations will be highly
relevant to the analysis. For example, if an employer requires all
individuals to wear hard hats at a construction site for safety
reasons, that is less probative of control; if an employer chooses a
specific time and location for weekly safety briefings and requires all
workers to attend, that is more probative of control. Similarly, if an
employer requires workers to provide proof of insurance required by
state law, that is less probative of control; if an employer mandates
what insurance carrier workers must use, that is more probative of
control.
Control exerted by the employer to achieve these ends therefore may
be relevant to the underlying analysis of whether the worker is
economically dependent on the employer, particularly where the employer
dictates and enforces the manner and circumstances of compliance. Of
course, such control may not be determinative of the worker's employee
or independent contractor status (given the other factors included in
the economic reality test) or probative of whether the control factor
itself weighs in favor of employee status. This is merely one aspect of
a multifactor test. Even if compliance with specific legal obligations
or safety requirements is indicative of control in a specific case,
this does not compel a particular conclusion as to that worker's status
under the Act.\371\ Thus, the Department's proposal would not preclude
a finding that a worker is an independent contractor where an employer
obligates workers, for example, to comply with safety standards, after
also considering other relevant factors in the economic reality
analysis.
---------------------------------------------------------------------------

\371\ Additionally, even in cases in which a court did not
consider control exerted over workers to comply with safety
obligations as indicative of control, the court nevertheless
concluded that such workers were employees under the FLSA. See,
e.g., Rick's Cabaret, 967 F. Supp. 2d at 916, 922.
---------------------------------------------------------------------------

With these general principles in mind, the next sections address
the Department's proposals regarding several aspects of control to be
considered in determining whether the nature and degree of control
indicates that the worker is an employee or an independent contractor.
This discussion is intended to be an aid in assessing common aspects of
control--including scheduling, supervision, price setting, and ability
to work for others--but should not be considered an exhaustive list,
given the various ways in which an employer may control a worker or the
economic aspects of the work relationship.
b. Scheduling
As noted above, an employer's direct control over a worker's
schedule can be evidence of employee status. For example, the Fifth
Circuit, in Cromwell, concluded that workers were employees even though
the workers ``controlled the details of how they performed their work
[and] were not closely supervised'' because, in part, the employer had
``complete control over [workers'] schedule[s].'' \372\ Yet the absence
of direct scheduling control is not necessarily strong evidence that
the employer lacks control for purposes of the economic reality test,
particularly where other evidence demonstrates control.\373\
---------------------------------------------------------------------------

\372\ 348 F. App'x 57, 61 (5th Cir. 2009); see also Mr. W
Fireworks, 814 F.2d at 1048 (noting that compelled work schedules
were evidence of control and thus employee status).
\373\ See, e.g., Pilgrim Equip., 527 F.2d at 1312 (``In the
total context of the relationship neither the [worker's] right to
hire employees nor the right to set hours indicates such lack of
control by [the employer] as would show these operators are
independent from it.'') (emphasis added).
---------------------------------------------------------------------------

Independent contractor arrangements can include the ability to work
at any time the contractor decides it is appropriate to begin and end
work. Some courts have found such scheduling control by the worker to
be indicative of an independent contractor relationship.\374\ For
example, the Eighth Circuit affirmed a jury verdict finding a process
server to be an independent contractor, in part, because the worker
``was not required to report for work[,] . . . did not punch a time
clock,'' and did not have a set schedule, report a daily schedule to
the employer, or face discipline for not working.\375\ Section
795.105(d)(1)(i) of the 2021 IC Rule suggests as much, noting that the
ability to set their own schedule is evidence that weighs towards a
worker being an independent contractor.\376\
---------------------------------------------------------------------------

\374\ See, e.g., Franze, 826 F. App'x at 77 (emphasizing that
schedule flexibility ``weigh[s] in favor of independent contractor
status''); Express Sixty-Minutes, 161 F.3d at 303 (determining that
the employer ``had minimal control'' over the delivery drivers in
part because the drivers ``set their own hours and days of work''
which was evidence that the worker was an independent contractor).
\375\ Karlson, 860 F.3d at 1095-96.
\376\ 86 FR 1246-47.
---------------------------------------------------------------------------

However, after further consideration and review of the case law,
the Department considers this framing to be too narrow because it does
not take into account actions the employer may take that would limit
the significance of the worker setting their own schedule. In fact,
courts have concluded that the ability to set one's own schedule
provides only minimal evidence that the worker is an independent
contractor when considered in relation to other forms of control by the
employer in the workplace.\377\ If the ability to pick one's shift is
offset by the limited hours provided by the employer,\378\ or the
employer purports to allow a worker an accommodating schedule, but
arranges the work in a way that makes finding other clients
impossible,\379\ then meaningful scheduling flexibility may not exist.
Moreover, employers may also exert so much control over the amount or
pace of the work as to negate any meaningful scheduling
flexibility.\380\
---------------------------------------------------------------------------

\377\ See, e.g., Verma, 937 F.3d at 230 (finding the ability to
set hours, select shifts, stay beyond a shift, and accept or reject
work to be, in truth, ``narrow choices'' when evaluated against
other types of control exerted by the employer); DialAmerica, 757
F.2d at 1384-86 (finding telephone survey workers who set their own
hours and were free from supervision to be employees); Sureway, 656
F.2d at 1371 (``circumstances of the whole activity'' show that
laundry company ``exercises control over the meaningful aspects of
the cleaning [work]'' despite the fact that workers could set their
own hours).
\378\ Doty v. Elias, 733 F.2d 720, 723 (10th Cir. 1984) (``Since
plaintiffs could wait tables only during the restaurant's business
hours, [the employer] essentially established plaintiffs' work
schedules.'').
\379\ See, e.g., Keller, 781 F.3d at 814 (``[A] reasonable jury
could find that the way that [the employer] scheduled [the worker's]
installation appointments made it impossible for [the worker] to
provide installation services for other companies.'').
\380\ See, e.g., Flint Eng'g, 137 F.3d at 1441 (``The record
indicates rig welders cannot perform their work on their own
schedule; rather, pipeline work has assembly line qualities in that
it requires orderly and sequential coordination of various crafts
and workers to construct a pipeline.'').

---------------------------------------------------------------------------

[[Page 62249]]

As the Tenth Circuit observed in Dole v. Snell, ``flexibility in
work schedules is common to many businesses and is not significant in
and of itself.'' \381\ Thus, scheduling flexibility should not supplant
a full evaluation of the control factor, with the ultimate question of
economic dependence guiding the analysis. For example, the Third
Circuit reversed summary judgment in favor of the employer and found
disputed issues of material fact about drivers' classification even
where it was undisputed that drivers were free to choose their work
schedules.\382\ The Fifth Circuit has also found that the employer had
``significant control'' indicating employee status over dancers even
though they had ``input . . . as to the days that they wish to work.''
\383\
---------------------------------------------------------------------------

\381\ 875 F.2d at 806; see also Doty, 733 F.2d at 723 (``A
relatively flexible work schedule alone, however, does not make an
individual an independent contractor rather than an employee.'');
Lilley v. BTM Corp., 958 F.2d 746, 750 (6th Cir. 1992) (noting that
even though a worker could ``set [their] own hours and vacation
schedule, such flexibility is not sufficient to negate control'');
Walling v. Twyeffort, Inc., 158 F.2d 944, 947 (2d Cir. 1946)
(holding that workers who ``are at liberty to work or not as they
choose'' were employees under FLSA)
\382\ Razak, 951 F.3d at 146.
\383\ Circle C. Invs., 998 F.2d at 327.
---------------------------------------------------------------------------

In fact, circuit courts have often evaluated scheduling flexibility
relative to other forms of control by the employer; where the employer
has more control in other ways, scheduling flexibility becomes less
relevant. In Verma, the Third Circuit found the ability to set hours,
select shifts, stay beyond a shift, and accept or reject work to be
``narrow choices'' when evaluated against other types of control by the
employer, such as setting the price for services.\384\ And multiple
district courts have concluded that scheduling flexibility--including
picking when to work or having the freedom to decline work--was not
necessarily indicative of the overall control by an employer nor
dispositive of a worker's independent contractor status.\385\
Conversely, as the Second Circuit noted, where workers have greater
scheduling flexibility and can use that flexibility to further their
independent business, then that flexibility may be probative of their
independent contractor status.\386\
---------------------------------------------------------------------------

\384\ 937 F.3d at 230; see also Paragon, 884 F.3d at 1235-38
(finding that even though a worker could set his own schedule, he
was an employee, in part, because his flat rate of pay did not allow
him profit based on his performance).
\385\ See, e.g., Hill v. Cobb, No. 3:13-CV-045-SA-SAA, 2014 WL
3810226, at *4-8 (N.D. Miss. Aug. 1, 2014) (holding that workers
were employees even though they had no specific hours or schedule
and could ``come and go as [they] pleased''); Wilson v. Guardian
Angel Nursing, Inc., No. 3:07-0069, 2008 WL 2944661, at *12-17 (M.D.
Tenn. July 31, 2008) (holding that nurses were employees, even
though they could accept or reject shifts).
\386\ See Saleem, 854 F.3d at 146 (finding drivers that were
able to set schedules that ``were entirely of their making'' were
properly found to be independent contractors where, among other
factors, drivers could select routes, turn down jobs without
penalty, and exercise business-like initiative); see also Alpha &
Omega, 39 F.4th at 1083-84 (finding genuine disputes of fact under
control regarding whether drivers could set their own hours and
whether drivers were allowed to decline trips without penalization).
---------------------------------------------------------------------------

Flexibility may also be an inherent component of a business model,
which allows some workers the freedom to use time between tasks or jobs
in any fashion, providing some evidence of the employer's lack of
control. But flexible work arrangements that allow workers to, among
other things, work for others, are not exclusive to independent
contractors \387\ and do not preclude a finding that an employer has
sufficient control over a worker in other ways such that this factor
weighs in favor of employee status.\388\ Moreover, the power to decline
work, and thus maintain a flexible schedule, is not alone persuasive
evidence of independent contractor status when the employer can
discipline a worker for doing so.\389\
---------------------------------------------------------------------------

\387\ Employers continue to offer even more flexibility in work
arrangements while retaining workers as employees. See, e.g.,
Andr[egrave] Dua et al., Americans are Embracing Flexible Work--and
They Want More of It, McKinsey & Company (June 23, 2022), https://www.mckinsey.com/industries/real-estate/our-insights/americans-are-embracing-flexible-work-and-they-want-more-of-it (finding, for
example, that 58 percent of surveyed workers have the option to work
remotely, either on a full-time or part-time basis; a flexibility
that spans industries and occupations); Alicia Adamczyk, Say Goodbye
To 9-To-5: More and More, Corporate America is Letting People Work
Whenever They Want, Fortune (March 21, 2022, 10:36 a.m.), https://fortune.com/2022/03/21/9-to-5-dead-flexible-schedules-more-popular/
(noting the shift in corporate culture that is allowing more workers
to remain employees while also obtaining flexible working
schedules).
\388\ For example, in Collinge, the employer contended that the
on-demand drivers were properly independent contractors because of
the flexible nature of their work despite exercising significant
control including training the drivers, disciplining them for
violations of procedure, dispatching pick-ups, and setting
schedules. 2015 WL 1299369, at *2-4. Importantly, the fact that on-
demand ``[d]rivers are free to wait at home for their first delivery
of the day, and . . . are free to `kill time' on a computer or run
personal errands'' in between jobs was ``unavailing because they
merely show that [the employer] is unable to control its drivers
when they are not working, an irrelevant point.'' Id. at *4
(footnotes omitted).
\389\ Off Duty Police, 915 F.3d at 1060 (``Although workers
could accept or reject assignments, multiple workers testified that
[the employer] would discipline them if they declined a job,'' which
was evidence of the employer's ultimate control.).
---------------------------------------------------------------------------

In sum, case law on this issue demonstrates that scheduling control
must be assessed in view of the total amount of control exerted by an
employer. This is consistent with the economic realities, totality-of-
the-circumstances approach. Thus, scheduling flexibility is not
necessarily indicative of independent contractor status where other
aspects of control are present, such as where an employer asserts that
workers can work when and where they want but retains authority to
discipline workers for declining work or imposes other methods of
control that limit flexibility.
c. Supervision
Like the presence of a pre-defined work schedule, an employer's
close supervision of a worker on the job may be evidence of employee
status.\390\ Conversely, the ability to work independently without
close supervision may be evidence that a worker is an independent
contractor.\391\ However, traditional forms of in-person, continuous
supervision are not required for a court to determine that this factor
weighs in favor of employee status.\392\ The form supervision takes can
vary by type and method, and this should be part of any consideration
of supervision under the control factor.
---------------------------------------------------------------------------

\390\ See, e.g., Scantland, 721 F.3d at 1314 (finding
``meaningful supervision and monitoring'' in part because the
employer required cable installers to log in and out of a service on
their cell phones to record when they arrived on a job and when they
completed a job).
\391\ See, e.g., Chao v. Mid-Atlantic Installation Servs., Inc.,
16 F. App'x 104, 106-08 (4th Cir. 2001) (agreeing with the district
court's analysis that the ability to complete jobs in any order,
conduct personal affairs, and work independently is evidence that
leans toward identifying a worker as an independent contractor).
\392\ See, e.g., Superior Care, 840 F.2d at 1060 (``An employer
does not need to look over his workers' shoulders every day in order
to exercise control.''); Driscoll, 603 F.2d at 756 (farmworkers
could be employees of a strawberry farming company even where the
employer exercised little direct supervision over them); Twyeffort,
158 F.2d at 947 (rejecting an employer's contentions that its
tailors are independent contractors because they are ``free from
supervision, are at liberty to work or not as they choose, and may
work for other employers if they wish'').
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While it may be indicative of independent contractor status if a
worker is free to work without close supervision, the lack of
supervision is not alone indicative of independent contractor
status.\393\ For instance, the nature of an employer's business or the
nature of the work may make direct supervision unnecessary. A lack of
supervision in those circumstances, without further inquiry, does not
compel a finding that the control factor

[[Page 62250]]

weighs in favor of independent contractor status. For example, the
Sixth Circuit found that security officers were employees although they
were ``rarely if ever supervised'' on the job, noting that ``the actual
exercise of control requires only such supervision as the nature of the
work requires.'' \394\ More directly, ``the level of supervision
necessary in a given case is in part a function of the skills required
to complete the work at issue,'' and the officers in that case ``had
far more experience and training than necessary to perform the work
assigned.'' \395\ Moreover, an employer may develop training and hiring
systems that make direct supervision unnecessary. This was the case in
Keller v. Miri Microsystems LLC, where an employer relied on pre-hire
certification programs and installation instructions when hiring their
satellite dish installers.\396\ The employer argued that it had little
day-to-day control over the workers and did not supervise the
performance of their work. Yet the court noted that a factfinder could
``find that [the employer] controlled [the installer's] job performance
through its initial training and hiring practices'' in a way that would
suggest that the workers were employees.\397\ Conversely, the Eleventh
Circuit affirmed a district court's conclusion that an insurance claims
investigator was properly classified as an independent contractor, in
part, because the investigator worked largely without supervision when
setting up appointments, deciding where to work, and how and when to
complete his assignments.\398\
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\393\ The legislative history of the FLSA also supports this
point directly, since the definition of ``employ'' was explicitly
intended to cover as employment relationships those relationships
where the employer turned a blind eye to labor performed for its
benefit. Antenor, 88 F.3d at 934; see supra section V.C.4.a.
\394\ Off Duty Police, 915 F.3d at 1061-62 (citation omitted).
This dynamic is also present in cases where the work can be
performed away from a single work site and without supervision. This
was the precise situation faced by the Third Circuit in DialAmerica.
There, the fact that the workers could control the hours during
which they worked and that they were subject to little direct
supervision was unsurprising given that such facts are typical of
homeworkers and thus largely insignificant in determining their
status. 757 F.2d at 1383-84; see also McComb v. Homeworkers'
Handicraft Coop., 176 F.2d 633, 636 (4th Cir. 1949) (``It is true
that there is no supervision of [homeworkers'] work; but it is so
simple that it requires no supervision.'').
\395\ Off Duty Police, 915 F.3d at 1061-62; see also Antenor 88
F.3d at 933 n.10 (explaining in an FLSA joint employment case that
``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''); Superior
Care, 840 F.2d at 1060 (``An employer does not need to look over his
workers' shoulders every day in order to exercise control.'').
\396\ 781 F.3d at 814.
\397\ Id.
\398\ Nieman, 775 F. App'x at 624-25.
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In addition, the right of the employer to supervise at its
discretion is evidence of control, even if the employer rarely exerts
supervision.\399\ The Second Circuit, for example, affirmed a district
court's rejection of a nursing referral company's argument that they
did not supervise the nursing staff directly where the employer, in the
court's judgment, ``unequivocally expressed the right to supervise the
nurses' work,'' even though the supervision ``occurred only once or
twice a month.'' \400\
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\399\ See infra section V.D. (discussing this proposed rule's
approach to the primacy of actual practice); see also Herman v. RSR
Security Servs., 172 F.3d 132, 139 (2d Cir. 1999) (noting, in a
joint employment case, that supervisory control ``may be restricted,
or exercised only occasionally, without removing the employment
relationship from the protections of the FLSA'').
\400\ Superior Care, 840 F.2d at 1060 (emphasis added); see also
Off Duty Police, 915 F.3d at 1060 (describing the control analysis
as an inquiry into ``whether the company retains the right to
dictate the manner of the worker's performance'') (emphasis added
and internal quotations omitted).
---------------------------------------------------------------------------

Finally, the Department notes that supervision can also come in
many different forms, which may not be immediately apparent. For
example, supervision can be maintained remotely through technology
instead of, or in addition to, being performed in person. For instance,
employers may implement monitoring systems that can track a worker's
location and productivity, and even generate automated reminders to
check in with supervisors.\401\ Additionally, an employer can remotely
supervise its workforce, for instance, by using electronic systems to
verify attendance, manage tasks, or assess performance.\402\
---------------------------------------------------------------------------

\401\ See, e.g., Ruiz, 754 F.3d at 1102-03 (finding in a state
wage-and-hour case that direct monitoring techniques used by an
employer to monitor its furniture delivery drivers were a form of
supervision that made it more likely that the worker was an
employee; as the court noted, the employer supervised the drivers by
``conducting `follow-alongs;' requiring that drivers call their . .
. supervisor after every two or three stops; monitoring the progress
of each driver on the `route monitoring screen'; and contacting
drivers if . . . [they] were running late or off course''--all of
which supported the conclusion that the workers were employees under
state law). For a general discussion of trends regarding remote
supervision accomplished via technological means, see Matthew
Finnegan, Rise in Employee Monitoring Prompts Calls for New Rules to
Protect Workers, Computerworld (Nov. 30, 2021, 3:01 a.m.), https://www.computerworld.com/article/3642712/rise-in-employee-monitoring-prompts-calls-for-new-rules-to-protect-workers.html; and Rakeen
Mabud, When the Real Threat Is Worker Surveillance--Not The Robot
Apocalypse, Forbes (Jan. 22, 2019, 9:28 a.m.), https://www.forbes.com/sites/rakeenmabud/2019/01/22/when-the-real-threat-is-worker-surveillance-not-the-robot-apocalypse/?sh=11fdfe046a2f.
\402\ The Department's enforcement experience in this area is
informative. An employer's use of electronic visitor verification
(``EVV'') systems can be evidence of an employment relationship,
especially in those instances where the employer uses the systems to
set schedules, discipline staff, or run payroll systems, for
example. See Domestic Service Final Rule Frequently Asked Questions
(FAQs), U.S. Department of Labor (May 24, 2022, 10:30 a.m.), https://www.dol.gov/agencies/whd/direct-care/faq#g11 (discussing EVV
systems at question #10 in relation to an FLSA joint employment
analysis).
---------------------------------------------------------------------------

Simply put, consistent with a totality-of-the-circumstances
analysis, the ways in which supervision can be accomplished without
traditional in-person techniques requires thorough consideration. As
the Fifth Circuit recently reiterated, the `` `lack of supervision [of
the individual] over minor regular tasks cannot be bootstrapped into an
appearance of real independence.' '' \403\ Control may be exercised
through nontraditional means such as automated systems that monitor
performance, but it can be found to be control nonetheless. Employers
may also eliminate the need for close supervision because the structure
of the job or the fact that little skill or discretion is envisioned or
allowed. Thus, the lack of apparent in-person supervision (or even the
lack of any in-person supervision) is not necessarily indicative of
independent contractor status and additional consideration must be
given to the ways in which an employer can implement supervision over a
worker.
---------------------------------------------------------------------------

\403\ Parrish, 917 F.3d at 381 (quoting Pilgrim Equip., 527 F.2d
at 1312) (alteration in original).
---------------------------------------------------------------------------

d. Setting a Price or Rate for Goods or Services
The ability to set a price or rate for the goods or services
provided by the worker, or influence the price or rate, is relevant
when examining the control factor under the economic realities
analysis. This fact relates directly to whether the worker is
economically dependent on the employer for work and helps answer the
question whether the worker is in business for themself.
There is substantial case law supporting the relevance of price
setting to the economic realities analysis under the FLSA, and workers
in business for themselves are generally able to set (or at least
negotiate) their own prices for services rendered. As the Supreme Court
explained in Whitaker House, in concluding that workers for a
cooperative were employees under the Act, such workers ``are not self-
employed; nor are they independent, selling their products on the
market for whatever price they can command. They are regimented under
one organization, manufacturing what the organization desires and
receiving the compensation the organization dictates.'' \404\ Circuit
courts have similarly made clear that the employer's setting a price
for goods or services provided by the worker is a form of

[[Page 62251]]

control indicative of an employment relationship. For example, in
Martin v. Selker Bros., the court noted that, among other things, the
fact that the employer set the price of cash sales of gasoline
reflected the employer's ``pervasive control'' over the workers.\405\
In Off Duty Police, the Sixth Circuit concluded that certain security
guards were employees, in part, because ``[the employer] set the rate
at which the workers were paid.'' \406\ The Fourth Circuit in McFeeley,
affirmed that a nightclub owner was exercising significant control
because, among other things, they set the fees for private dances.\407\
And in Verma, the court identified, among other things, the employer's
setting the price and duration of private dances as indicative of
``overwhelming control'' over the performance of the work.\408\
Consistently, when a worker negotiates or sets prices, those facts
weigh in favor of independent contractor status. For example, in
Eberline v. Media Net, LLC, the court found that a jury had sufficient
evidence to conclude that a worker exerted independent control over
meaningful aspects of his business in part due to ``testimony that
installers could negotiate prices for custom work directly with the
customer and keep that money without consequence.'' \409\ The price of
goods and services may sometimes be included in contracts between a
business and an independent contractor.\410\ Such a contract, however,
does not automatically alleviate the need for a full analysis of this
factor in order to consider whether and if the employer has control
over the economic realities of the job; for example, whether the worker
had the opportunity to negotiate and alter the terms of the contract.
As with the other economic reality factors, the particular facts and
circumstances of each case must be examined and considered in the
context of the totality of the circumstances. Accordingly, setting a
price or rate for goods provided or services rendered is a form of
control that must be carefully considered when undertaking an economic
realities analysis. It is evidence of employee status when an entity
other than the worker sets a price or rate for the goods or services
offered by the worker, or where the worker simply accepts a
predetermined price or rate without meaningfully being able to
negotiate it.\411\
---------------------------------------------------------------------------

\404\ 366 U.S. at 32.
\405\ 949 F.2d at 1294.
\406\ 915 F.3d at 1060.
\407\ 825 F.3d at 241-42.
\408\ 937 F.3d at 230. Similarly, the Second Circuit in
Agerbrink v. Model Service, LLC, 787 F. App'x 22, 25 (2d Cir. 2019),
determined that there were material facts in dispute regarding the
worker's ``ability to negotiate her pay rate,'' which related to the
degree of control exerted by the employer. The court also rejected
the employer's contention that the worker had control over her pay
rate simply because she could either work for the amount offered or
not work for that amount, stating that this ``says nothing of the
power to negotiate a rate of pay.'' Id. at 26. See also Cornerstone
Am., 545 F.3d at 343-44 (finding employment where employer
controlled ``meaningful'' aspects of the work, including pricing);
Karnes v. Happy Trails RV Park, LLC, 361 F. Supp. 3d 921, 929 (W.D.
Mo. 2019) (finding park managers to be employees in part because the
park owners ``set all the prices''); Hurst v. Youngelson, 354 F.
Supp. 3d 1362, 1370 (N.D. Ga. 2019) (finding relevant to the control
analysis that the plaintiff was not free to set the prices she
charged customers and had no ability to waive or alter cover charges
for her customers).
\409\ 636 F. App'x 225, 227 (5th Cir. 2016); see also Nelson v.
Texas Sugars, Inc., 838 F. App'x 39, 42 (5th Cir. 2020) (concluding
that because the dancers set their own schedule, worked for other
clubs, chose their costume and routine, decided where to perform
(onstage or offstage), kept all the money that they earned, and even
chose how much to charge customers for dances, a reasonable jury
could conclude that the Club did not exercise significant control
over them'') (emphasis added).
\410\ McFeeley, 825 F.3d at 242-43 (observing that a worker
doesn't ``automatically become[] an employee covered by the FLSA the
moment a company exercises any control over him. After all, a
company that engages an independent contractor seeks to exert some
control, whether expressed orally or in writing, over the
performance of the contractor's duties . . . .'').
\411\ See, e.g., Scantland, 721 F.3d at 1315 (reversing summary
judgment for the employer based in part on evidence that the workers
``could not bid for jobs or negotiate the prices for jobs'').
---------------------------------------------------------------------------

e. Ability To Work for Others
Another aspect of the control factor is the ability to work for
others, which is reflected in 2021 IC Rule Sec. 795.105(d)(1)(i). This
provision states that the control factor weighs in favor of independent
contractor status when the worker, as opposed to the employer,
exercises substantial control, such as ``through the ability to work
for others, which might include the potential employer's competitors.''
The provision also states that the control factor weighs in favor of
employee status where the employer, as opposed to the worker, exercises
substantial control, such as ``by directly or indirectly requiring the
individual to work exclusively for the potential employer.''
The Department continues to believe that where a worker has an
exclusive work relationship with one employer and does not have the
ability to work for others, this indicates employee status. Where the
employer exercises control over a worker's ability to work for others--
either by directly prohibiting other work, for example, through a
contractual provision,\412\ or indirectly by, for example, making
demands on workers' time such that they are not able to work for other
employers \413\--this is indicative of the type of control over
economic aspects of the work associated with an employment
relationship. For example, in Scantland, the Eleventh Circuit
determined that even if the workers were not prohibited from working
for others, the workers essentially had an exclusive work relationship
with the employer because they were required to work five to seven days
a week and could not decline work.\414\ Thus, the employer controlled
whether they could work for others, which suggested that they were
economically dependent on the employer.\415\
---------------------------------------------------------------------------

\412\ See Parrish, 917 F.3d at 382 (noting that the non-
disclosure agreement did not require exclusive employment, and was
therefore not an element of control that indicated employee status);
Off Duty Police, 915 F.3d at 1060-61 (non-compete clause preventing
workers from working for employer's customers for two years after
leaving employment was among evidence supporting finding that
control factor indicated employee status); Express Sixty-Minutes,
161 F.3d at 303 (``Independent Contractor Agreement'' did not
contain a ``covenant-not-to-compete'' and drivers could work for
other courier delivery providers, which indicated independent
contractor status); see also WHD Op. Ltr., 2000 WL 34444342, at *1,
4 (Dec. 7, 2000) (workers were required to sign an agreement that
prohibited them from working for other companies while driving for
the employer, which suggested employee status).
\413\ See, e.g., Keller, 781 F.3d at 813-14 (although worker was
not prohibited from working for other companies, ``a reasonable jury
could find that the way that [the employer] scheduled [the worker's]
installation appointments made it impossible for [the worker] to
provide installation services for other companies''); Scantland, 721
F.3d at 1313-15 (finding even if workers were not prohibited from
working for other installation contractors their long hours and
inability to turn down work suggested that the employer controlled
whether they could work for others, which was in part why the
control factor favored employee status); Cromwell v. Driftwood Elec.
Contractors, Inc., 348 F. App'x 57, 61 (5th Cir. 2009) (``Although
it does not appear that [the workers] were actually prohibited from
taking other jobs while working for [the employers], as a practical
matter the work schedule established by [the employers] precluded
significant extra work.''); Flint Eng'g, 137 F.3d at 1441-42
(finding the hours the company required of the workers, coupled with
driving time between home and remote work sites every day, made it
``practically impossible for them to offer services to other
employers'').
\414\ 721 F.3d at 1314-15.
\415\ Id. at 1315.
---------------------------------------------------------------------------

The Department also recognizes that some courts find that less
control is exercised by an employer where the worker can work for
others, particularly competitors, and that this is indicative of an
independent contractor relationship.\416\ For example, in Saleem,

[[Page 62252]]

the Second Circuit determined that black car drivers' ability to work
for business rivals and transport personal clients showed less control
by and economic dependence on the employer.\417\ The Second Circuit
distinguished the black car drivers' ability to shift their business
operations from one entity to another in order to maximize their
profits through the exercise of ``initiative, judgment, or foresight''
from the nurses in Superior Care who were dependent on the employer for
referrals to job assignments with multiple health care entities.\418\
The Second Circuit also noted that the black car drivers were able to
seek out multiple sources of income by building their own long-term
business relationships, creating business cards, and advertising their
services.\419\
---------------------------------------------------------------------------

\416\ See, e.g., Razak, 951 F.3d at 145-46 (discussing disputed
facts regarding the control factor, including whether drivers could
drive for other services); Paragon, 884 F.3d at 1235 (finding
control factor favored independent contractor status in part because
worker could and did work for other employers); Saleem, 854 F.3d at
141-43 (drivers' ability to work for business rivals and transport
personal clients showed less control by and economic dependence on
the employer); Express Sixty-Minutes, 161 F.3d at 303 (control
factor ``point[ed] toward independent contractor status'' in part
because of drivers' ability to work for other courier delivery
providers).
\417\ 854 F.3d at 141-43.
\418\ Id. at 143-44 (citing Superior Care, 840 F.2d at 1060 and
Keller, 781 F.3d at 809) (internal quotation marks omitted).
\419\ Id. at 143.
---------------------------------------------------------------------------

Consistent with the case law, the Department is proposing to
address the ability to work for others in the control factor. The
proposed regulation explains that where an employer either explicitly
limits a worker's ability to work for others or places demands on a
worker's time that effectively preclude them from working for others,
these facts are relevant to the employer's control over the worker. The
proposed regulation also states that more indicia of employer control
favors employee status and more indicia of worker control favors
independent contractor status. However, the regulation does not state
that the ability to work for others is a form of control exercised by
the worker. The Department is concerned that this framing, as reflected
in the 2021 IC Rule, fails to distinguish between work relationships
where a worker has multiple jobs in which they are dependent on each
employer and do not exercise the control associated with being in
business for oneself, and relationships where the worker has sought out
multiple clients in furtherance of their business. For example, if one
worker holds multiple lower-paying jobs for which they are dependent on
each employer for work in order to earn a living, and a different
worker services multiple clients due to their business acumen and
entrepreneurial skills, there are qualitative and legally significant
differences in how these two scenarios should be evaluated under the
economic reality test. Thus, the mere fact that an employer allows
workers to work for others does not transform an employee into an
independent contractor. As the Fifth Circuit stated, ``[the] purposes
[of the FLSA] are not defeated merely because essentially fungible
piece workers work from time to time for neighboring competitors.''
\420\
---------------------------------------------------------------------------

\420\ McLaughlin v. Seafood, Inc., 867 F.2d 875, 877 (5th Cir.
1989) (per curiam).
---------------------------------------------------------------------------

Ultimately, ``the question [a] court must resolve is whether a
[worker's] freedom to work when she wants and for whomever she wants
reflects economic independence, or whether those freedoms merely mask
the economic reality of dependence.'' \421\ For example, in McLaughlin
v. Seafood, Inc., the Fifth Circuit examined whether piece-rate workers
who peeled and picked crabmeat and crawfish for a seafood processor,
and who were allowed ``to come and go as they please . . . and even to
work for competitors on a regular basis'' were, as a matter of economic
reality, dependent on their employers and therefore employees under the
Act.\422\ The court determined that the workers' ability to work for
others was not dispositive, and that ``[l]aborers who work for two
different employers on alternate days are no less economically
dependent on their employers than laborers who work for a single
employer'' because ``that freedom is hardly the same as true economic
independence.'' \423\
---------------------------------------------------------------------------

\421\ Reich v. Priba Corp., 890 F. Supp. 586, 592 (N.D. Tex.
1995) (citing Mednick, 508 F.2d at 300, 301-02).
\422\ 861 F.2d 450, 451-53 (5th Cir. 1988), modified on reh'g,
867 F.2d 875 (5th Cir. 1989).
\423\ Seafood Inc., 867 F.2d at 877.
---------------------------------------------------------------------------

Finally, the Department notes that courts frequently consider the
exclusivity of the work relationship and workers' ability to work for
others under the permanence factor as well, as discussed above in
section V.C.3. The 2021 IC Rule elected to consider exclusivity and
ability to work for others only under the control factor.\424\ Upon
further consideration, however, the Department is proposing to retain
consideration of these issues under the control factor as well as
considering exclusivity under the permanency factor. The Department
does not believe that this leads to confusion, however, because courts
often analyze workers' ability to work for others under both the
control and permanence factors, demonstrating that these facts are
relevant to both factors and aid factfinders' analyses when determining
whether the worker is economically dependent on the employer or
operating as an independent business as part of the overall economic
realities inquiry. Specifically, the case law reflects and the
Department believes that exclusivity can be considered as it relates to
the degree of control exercised by the employer--such as what an
employer's actions allow a worker to do vis-[agrave]-vis other
employers-- and that it speaks to the permanency of the work
relationship. While permanency is often associated with an exclusive
work relationship, it may or may not be due to the employer's
control.\425\
---------------------------------------------------------------------------

\424\ 86 FR 1192-93.
\425\ The Department noted in the 2021 IC Rule that it
``disagree[d] with the interpretation suggested by various business
commenters that only worker practices which are affirmatively
coerced by a potential employer may indicate employee status.'' Id.
at 1205. As noted, ``[s]uch a reading conflicts with the definition
of `employ' in section 3(g) of the Act, which makes clear that the
FLSA was intended to cover employers who passively `suffer or
permit' work from individuals.'' Id.
---------------------------------------------------------------------------

The Department welcomes comments on all aspects of this factor.
Example: Nature and Degree of Control
A registered nurse provides nursing care for Alpha House, a nursing
home. The nursing home sets the work schedule with input from staff
regarding their preferences and determines where in the nursing home
each nurse will work. Alpha House's internal policies prohibit nurses
from working for other nursing homes while employed with Alpha House in
order to protect its residents. In addition, the nursing staff are
supervised by regular check-ins with managers, but nurses generally
perform their work without direct supervision. While nurses at Alpha
House work without close supervision and can express preferences for
their schedule, Alpha House maintains control over when and where a
nurse can work and whether a nurse can work for another nursing home.
These facts related to the control factor indicate employee status.
Another registered nurse provides specialty movement therapy to
residents at Beta House. The nurse maintains a website and was
contacted by Beta House to assist its residents. The nurse provides the
movement therapy for residents on a schedule agreed upon between the
nurse and the resident, without direction or supervision from Beta
House, and sets the price for services on the website. In addition, the
nurse simultaneously provides therapy sessions to residents at Beta
House as well as other nursing homes in the community. The facts
related to the control factor--that the nurse markets their specialized
services to obtain work for multiple clients, is not supervised by

[[Page 62253]]

Beta House, sets their own prices, and has the flexibility to select a
work schedule--indicate independent contractor status.
5. Extent to Which the Work Performed is an Integral Part of the
Employer's Business (Proposed Sec. 795.110(b)(5))
Section 795.105(d)(2)(iii) of the 2021 IC Rule addresses whether
the worker's work ``is part of an integrated unit of production'' of
the employer's business.\426\ The 2021 IC Rule explained 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.\427\ Thus, Sec.
795.105(d)(2)(iii) expressly rejects as irrelevant to this factor
whether the work is important or central to the employer's business,
and Sec. 795.115(b)(6)(ii) similarly advises in an illustrative
example involving a freelance journalist that ``[i]t is not relevant .
. . that the writing of articles is an important part of producing
newspapers.\428\
---------------------------------------------------------------------------

\426\ 86 FR 1247.
\427\ 86 FR 1195.
\428\ 86 FR 1247-48.
---------------------------------------------------------------------------

In proposed Sec. 795.110(b)(5), the Department returns to the
framing of this factor as whether the worker's work is an ``integral
part'' of the employer's business. The Department believes that this
return to considering whether the work is critical, necessary, or
central to the employer's business better reflects the economic reality
case law and is more consistent with the totality-of-the-circumstances
approach to determining whether a worker is an employee or an
independent contractor.\429\ For decades, courts have repeatedly found
a worker's performance of work that is integral to the employer's
business to be an indicator of employee status.\430\ This judicial
treatment reflects the understanding that a worker who performs work
that is integral to an employer's business is more likely to be
employed by the business, whereas a worker who performs work that is
more peripheral to the employer's business is more likely to be
independent from the employer.\431\
---------------------------------------------------------------------------

\429\ In addition, the common law test considers ``whether the
work is part of the regular business of the hiring party'' in
distinguishing between employees and independent contractors. Reid,
490 U.S. at 752.
\430\ See Silk, 331 U.S. at 716 (unloaders were ``an integral
part of the business[] of retailing coal''); see also Off Duty
Police, 915 F.3d at 1055; McFeeley, 825 F.3d at 244; Scantland, 721
F.3d at 1319; Flint Eng'g, 137 F.3d at 1443; Superior Care, 840 F.2d
at 1060-61; Lauritzen, 835 F.2d at 1537-38; DialAmerica, 757 F.2d at
1385; Driscoll, 603 F.2d at 755.
\431\ See, e.g., Keller, 781 F.3d 799 at 815 (``The more
integral the worker's services are to the business, then the more
likely it is that the parties have an employer-employee
relationship.''); DialAmerica, 757 F.2d at 1385 (``workers are more
likely to be `employees' under the FLSA if they perform the primary
work of the alleged employer'').
---------------------------------------------------------------------------

The 2021 IC Rule suggested that, in the modern economy, this
assumption ``may not always be valid,'' because lower transaction costs
make it easier for companies to contract for products and
services.\432\ Yet, a firm's economic decision to contract for more
essential functions is not synonymous with their workers' proper
classification as employees or independent contractors. Practices that
lead to efficiency or cost savings for the employer do not diminish the
role of a factor in the economic reality test. Of course, it is not
always true that workers whose work is integral are employees.\433\ The
integral factor is just one part of the analysis. However, courts
continue to find the factor useful for evaluating economic dependence
or independence because of the insight it provides into whether a
worker is in business for themself or is a part of the employer's
business.\434\
---------------------------------------------------------------------------

\432\ 86 FR 1194. The 2021 IC Rule's rejection of the
``integral'' factor relied in part on a criticism articulated by
Judge Easterbrook in a concurring opinion. Id. (citing Lauritzen,
835 F.2d at 1541 (Easterbrook, J., concurring)). Judge Easterbrook
argued that the factor was not useful, because ``[e]verything the
employer does is ``integral'' to its business-why else do it?'' Id.
He argued that the cucumber-pickers in Lauritzen may be crucial to
the employer's pickle business, but so would architects be to a
building firm, or tires to Chrysler--but that does not imply the
firms employ the architects or Chrysler employs tire makers. 835
F.2d at 1541. The Department believes, however, that although other
factors may indicate that workers who provide important or central
services are independent contractors, it is nevertheless the case
that such workers are more likely to be employees. Like any other
factor, the integral factor provides only part of the analysis.
\433\ See, e.g., Meyer v. U.S. Tennis Ass'n, 607 F. App'x 121,
123 (2d Cir. 2015) (``Although tennis umpires are an integral part
of the U.S. Open,'' other factors supported determination that
umpires were independent contractors); Perdomo v. Ask 4 Realty &
Mgmt., Inc., No. 07-20089, 2007 WL 9706364, at *4 (S.D. Fla. Dec.
19, 2007) (construction worker's work was integral to remodeling
business, but economic reality factors as a whole indicated
independent contractor status).
\434\ See, e.g., Sigui, 484 F. Supp. 3d at 41 (finding that this
factor indicated employee status for cable installers after
acknowledging that not all courts consider this factor but rejecting
employer's argument that the factor ``is not particularly important
in the analysis'' because, in this case, it ``gives a complete
picture of the business relationship'') (quoting Pizzarelli v.
Cadillac Lounge, LLC, No. 15-254, 2018 WL 2971114, at *6 (D.R.I.
Apr. 13, 2018)).
---------------------------------------------------------------------------

Most courts adopt a common-sense approach to whether the work or
service performed by the worker is an integral part of the employer's
business. For example, if the employer could not function without the
service performed by the workers, then the service they provide is
integral.\435\ Such workers are more likely to be economically
dependent on the employer because their work depends on the existence
of the employer's principal business, rather than their having an
independent business that would exist with or without the
employer.\436\ Courts also look at whether the work is important,
critical, primary, or necessary to the employer's business.\437\ In
most cases, if an employer's primary business is to make a product or
provide a service, then the workers who are involved in making the
product or providing the service are integral.\438\
---------------------------------------------------------------------------

\435\ See, e.g., Off Duty Police, 915 F.3d at 1055 (rejecting
employer's argument that it was merely an agent between its
customers and the officers because the company ``could not function
without the services its workers provide''); McFeeley, 825 F.3d at
244 (``[E]ven the clubs had to concede the point that an `exotic
dance club could [not] function, much less be profitable, without
exotic dancers.' '') (quoting Secretary of Labor's Amicus Br. in
Supp. of Appellees at 24); Capital Int'l, 466 F.3d at 309 (finding
security guards were integral to a business where company ``was
formed specifically for the purpose of supplying'' private
security); cf. Johnson v. Unified Gov't of Wyandotte Cnty./Kansas
City, 371 F.3d 723, 730 (10th Cir. 2004) (upholding jury verdict
finding independent contractor status for security guards working
for government housing authority and noting, with regard to integral
factor, that the housing authority ``had functioned for years before
and after the program'' under which security guards were hired).
\436\ See, e.g., Brock v. Lauritzen, 624 F. Supp. 966, 969 (E.D.
Wis. 1985), aff'd, 835 F.2d 1529 (7th Cir. 1987) (finding that
cucumber harvesters were integral to cucumber farmer's business and
were ``economically dependent upon Lauritzen's business for their
work during the cucumber harvest season'').
\437\ See, e.g., Alpha & Omega, 39 F.4th at 1085 (noting that
this factor ``turns `on whether workers' services are a necessary
component of the business' '') (quoting Paragon, 884 F.3d at 1237);
Flint Eng'g, 137 F.3d at 1443 (finding rig welders' work to be ``an
important, and indeed integral, component of oil and gas pipeline
construction work'' because their work is a critical step on every
transmission system construction project); Lauritzen, 835 F.2d at
1537-38 (``It does not take much of a record to demonstrate that
picking the pickles is a necessary and integral part of the pickle
business[.]''); cf. Paragon, 884 F.3d at 1237 (``Because [the
worker]'s management of the pecan grove was not integral to the bulk
of Paragon's [construction] business, this factor supports
consideration of [the worker] as an independent contractor'').
\438\ See, e.g., Superior Care, 840 F.2d at 1059 (for business
that provided on-demand health care personnel, the nurses provided
were themselves integral to the business).
---------------------------------------------------------------------------

The focus of the integral factor is on the work performed, not the
individual worker.\439\ This approach evaluates

[[Page 62254]]

whether the worker performs work that is central to the employer's
business, not whether the worker possesses some unique qualities that
render them indispensable as an individual. An individual worker who
performs the work that an employer is in business to provide but is
just one of hundreds or thousands who perform the work (such as one
operator among many at a call center) is nonetheless an integral part
of the employer's business even if that one worker makes a minimal
contribution to the business when considered among the workers as a
whole.
---------------------------------------------------------------------------

\439\ See, e.g., Montoya v. S.C.C.P. Painting Contractors, Inc.,
589 F. Supp. 2d 569, 581 (D. Md. 2008) (explaining that ``this
factor does not turn on whether the individual worker was integral
to the business; rather, it depends on whether the service the
worker performed was integral to the business'').
---------------------------------------------------------------------------

As with the other components of the economic reality test, the
integral part factor is just one area of inquiry and must be considered
in relation to the other factors and to the extent that it contributes
to the determination of economic dependence or independence. As such,
it is unsurprising that, as noted in the 2021 IC Rule, there will be
instances in which this factor ``misaligns'' with the ultimate
result.\440\ It is to be expected that not every factor will ``align''
with the ultimate result in many cases. With a multifactor analysis, it
is common that some factors will indicate one result while others will
indicate another. This difference shows that courts correctly weigh the
factors against each other. A factor pointing in a different direction
from other factors in any one case is not evidence that a factor is not
useful in the run of situations.
---------------------------------------------------------------------------

\440\ 86 FR 1194. Although it asserted a ``higher rate of
misalignment'' when the ultimate classification was independent
contractor status, the 2021 IC Rule did not identify any cases where
the ``integral part'' factor led to a result that was contrary to
the totality of the evidence. See id.
---------------------------------------------------------------------------

In support of its rejection of the integral factor in favor of an
``integrated unit'' factor, the 2021 IC Rule relied on a rigid reading
of Rutherford (which noted that the work was ``part of an integrated
unit of production'' of the employer).\441\ Upon further consideration,
the Department finds that this rigid approach to the specific phrasing
of Rutherford does not reflect Supreme Court or circuit court
precedent. As the 2021 IC Rule acknowledged, the Supreme Court's
contemporaneous decision in Silk determined that coal ``unloaders''
were employees of a retail coal company as a matter of economic reality
in part because they were ``an integral part of the business[] of
retailing coal.'' \442\ This language was interpreted in the 2021 IC
Rule as being part of the overall inquiry rather than a factor that is
useful to guide the inquiry.\443\ The Supreme Court's list of factors
in Silk was not intended to be exhaustive, but instead consisted of
factors the Court believed would be useful to courts and agencies
applying the economic reality test in the future.\444\ The Court noted
that the workers were an ``integral part'' of the business, and later
courts have likewise found this to be useful to the economic reality
analysis--so much so that most circuit courts routinely list it as an
enumerated factor, but no court uses ``integrated unit'' for this
factor.\445\
---------------------------------------------------------------------------

\441\ 86 FR 1193-94 (citing Rutherford, 331 U.S. at 729).
\442\ 331 U.S. at 716 (emphasis added).
\443\ 86 FR 1194.
\444\ 331 U.S. at 716.
\445\ Id.; see supra n. 430.
---------------------------------------------------------------------------

For these reasons, the Department is proposing to eliminate the
``integrated unit'' factor as an enumerated factor and instead to
restore the integral factor, understood by courts as being focused on
whether the work is critical, necessary, or central to the employer's
business.\446\ The Department used this approach for decades prior to
the 2021 IC Rule and found it a useful factor in the economic reality
analysis.\447\ No court has applied the ``integrated unit'' approach
adopted by the 2021 IC Rule. Restoring the integral factor would avoid
confusion and provide greater consistency with existing case law--the
overwhelming majority of which includes an analysis of the integral
factor as set forth in this proposed rule.
---------------------------------------------------------------------------

\446\ Of course, if it is somehow relevant to the question of
economic dependence or independence, the extent to which a worker is
integrated into a business's production processes may be considered
under any relevant factor or as an additional factor. For example,
indicators that a worker is integrated into an employer's main
production processes, such as whether the worker is required to work
at the employer's main workplace or wear the employer's uniform, may
be indicators of an employer's control over the work.
\447\ See, e.g., WHD Fact Sheet #13 (July 2008) (listing ``[t]he
extent to which the services rendered are an integral part of the
principal's business'' as a factor).
---------------------------------------------------------------------------

The Department welcomes comments on all aspects of this factor.
Example: Extent To Which the Work Performed Is An Integral Part of the
Employer's Business
A large farm grows tomatoes that it sells to distributors. The farm
pays workers to pick the tomatoes during the harvest season. Because
picking tomatoes is an integral part of farming tomatoes, and the
company is in the business of farming tomatoes, the tomato pickers are
integral to the company's business. The integral factor indicates
employee status.
Alternatively, the same farm pays an accountant to provide non-
payroll accounting support, including filing its annual tax return.
This accounting support is not critical, necessary, or central to the
principal business of the farm, thus the accountant is not integral to
the business. Therefore, the integral factor indicates independent
contractor status.
6. Skill and Initiative (Proposed Sec. 795.110(b)(6))
The 2021 IC Rule includes an ``amount of skill required for the
work'' factor and Sec. 795.105(d)(2)(i) states that this factor
``weighs in favor of the individual being an independent contractor to
the extent the work at issue requires specialized training or skill
that the potential employer does not provide.'' \448\ That regulation
further states that this factor ``weighs in favor of the individual
being an employee to the extent the work at issue requires no
specialized training or skill and/or the individual is dependent upon
the potential employer to equip him or her with any skills or training
necessary to perform the job.'' \449\
---------------------------------------------------------------------------

\448\ 86 FR 1247.
\449\ Id.
---------------------------------------------------------------------------

The Department is proposing that this factor be described as the
``skill and initiative'' factor and consider whether a worker uses
specialized skills to perform the work and whether those skills
contribute to business-like initiative that is consistent with the
worker being in business for themself instead of being economically
dependent on the employer. The Department is proposing to reaffirm the
longstanding principle that this factor indicates employee status where
the worker lacks specialized skills. Proposed Sec. 795.110(b)(6)
states that where the worker brings specialized skills to the work
relationship, it is the worker's use of those specialized skills in
connection with business-like initiative that indicates that the worker
is an independent contractor instead of an employee. The Department
believes that the application of initiative in connection with
specialized skills is useful in answering the overarching inquiry of
whether the worker is economically dependent on the employer for work
or is in business for themself, and is therefore proposing to
reintegrate initiative into this factor and no longer exclude
consideration of initiative when applying this factor, as provided in
the 2021 IC Rule.
When applying this factor, many courts have recognized that a
worker's lack of specialized skills to perform the work indicates that
the worker is an employee. For example, courts have

[[Page 62255]]

found that where the work of security guards and traffic control
officers requires little skill, this lack of specialized skills
indicates that the workers are employees instead of independent
contractors.\450\ Numerous courts have found that driving is not a
specialized skill, indicating employee status.\451\ Other courts have
found that the skill factor favors employee status where janitorial
work does not require specialized skills.\452\ Courts have reached
similar conclusions in cases involving landscape workers and call
center workers, among other workers.\453\
---------------------------------------------------------------------------

\450\ See, e.g., Off Duty Police, 915 F.3d at 1055-56 (noting
that ``[t]he skills required to work for ODPS are far more limited
than those of a typical independent contractor'' in finding that the
skill factor weighed in favor of employee status for security guards
and traffic control workers); Walsh v. EM Protective Servs. LLC, No.
3:19-cv-00700, 2021 WL 3490040, at *7 (M.D. Tenn. Aug. 9, 2021)
(traffic control officers require ``relatively little skill'' and
security guards require ``minimal skill,'' indicating employee
status); Solis v. Int'l Detective & Protective Serv., Ltd., 819 F.
Supp. 2d 740, 752 (N.D. Ill. 2011) (finding that the ``vast majority
of the Guards' work . . . did not require any special skills'').
\451\ See, e.g., Razak, 951 F.3d at 147 (noting that it ``is
generally accepted that `driving' is not itself a `special skill' ''
in determining that the skill factor weighs in favor of employee
status); Iontchev, 685 F. App'x at 550 (``The service rendered by
the [taxi drivers] did not require a special skill.''); Campos v.
Zopounidis, No. 3:09-cv-1138 (VLB), 2011 WL 2971298, at *7 (D. Conn.
July 20, 2011) (``There is no evidence that Campos's job as a
delivery person required him to possess any particular degree of
skill. Campos did not need education or experience to perform his
job. Although he needed a driver's license in order to legally drive
his vehicle for deliveries, the possession of a driver's license and
the ability to drive an automobile is properly characterized as a
`routine life skill' that other courts have found to be indicative
of employment status rather than independent contractor status.'').
\452\ See, e.g., Perez v. Super Maid, LLC, 55 F. Supp. 3d 1065,
1077-78 (N.D. Ill. 2014) (noting, in finding that skill factor
favored employee status, that ``[m]aintenance work, such as
cleaning, sweeping floors, mowing grass, unclogging toilets,
changing light fixtures, and cleaning gutters, does not necessarily
involve such specialized skills as would support independent
contractor status,'' and that ``cleaning services, although
difficult and demanding, were even less complex than those
maintenance services'') (internal quotation marks omitted); Harris
v. Skokie Maid & Cleaning Serv., Ltd., No. 11 C 8688, 2013 WL
3506149, at *8 (N.D. Ill. July 11, 2013) (``The maids' work may be
difficult and demanding, but it does not require special skill,''
indicating employee status.).
\453\ See, e.g., Acosta v. New Image Landscaping, LLC, No. 1:18-
cv-429, 2019 WL 6463512, at *6 (W.D. Mich. Dec. 2, 2019) (facts that
``little or no skill was required'' and ``prior landscaping
experience'' was not required meant that skill factor favored
employee status for landscapers); Acosta v. Wellfleet Commc'ns, LLC,
No. 2:16-cv-02353-GMN-GWF, 2018 WL 4682316, at *7 (D. Nev. Sept. 29,
2018) (explaining that skill factor favored employee status for call
center workers because ``all that Defendants required was the
ability to communicate well and read a script''), aff'd sub nom.
Walsh v. Wellfleet Commc'ns, No. 20-16385, 2021 WL 4796537 (9th Cir.
Oct. 14, 2021).
---------------------------------------------------------------------------

As these cases make clear, the worker's lack of specialized skills
when performing the work generally indicates employee status.\454\ This
is consistent with 2021 IC Rule Sec. 795.105(d)(2)(i),\455\ as noted
above. It is also consistent with the position taken in an opinion
letter issued by WHD in 2000, which stated that the fact that ``the
drivers appear to perform routine work that requires no prior
experience'' indicates employee status.\456\
---------------------------------------------------------------------------

\454\ As the Tenth Circuit, for example, has explained, ``the
lack of the requirement of specialized skills is indicative of
employee status.'' Flint Eng'g, 137 F.3d at 1443 (quoting Snell, 875
F.2d at 811) (alteration omitted).
\455\ 86 FR 1247.
\456\ WHD Op. Ltr., 2000 WL 34444342, at *5 (Dec. 7, 2000).
---------------------------------------------------------------------------

That the work does not require prior experience, that the worker is
dependent on training from the employer to perform the work, or that
the work requires no training are indicators that the worker lacks
specialized skills. Even if the worker possesses specialized skills,
this factor may indicate employee status if the work does not require
those skills. The Sixth Circuit explained that the skill factor favored
employee status in a case because, although a subset of the workers
possessed skill and prior experience, the work did not require skill
and prior experience and the ``workers [we]re required to attend only a
four-hour training session before they begin work.'' \457\ The Tenth
Circuit has similarly explained in a case that, even if some workers
had prior experience and training, the workers were not required ``to
have any specialized skills or prior experience when they start to
work,'' indicating employee status.\458\
---------------------------------------------------------------------------

\457\ Off Duty Police, 915 F.3d at 1056 (citing Keller, 781 F.3d
at 807, 809).
\458\ Snell, 875 F.2d at 811; see also McFeeley, 825 F.3d at 244
(``As to the degree of skill required, the clubs conceded that they
did not require dancers to have prior dancing experience.'').
---------------------------------------------------------------------------

Consistent with the principle that no one factor is dispositive,
however, workers who lack specialized skills may be independent
contractors even if this factor is very unlikely to point in that
direction in their circumstances. A landscaper, for example, may
perform work that does not require specialized skills, but application
of the other factors may demonstrate that the landscaper is an
independent contractor (for example, the landscaper may have a
meaningful role in determining the price charged for the work, make
decisions affecting opportunity for profit or loss, determine the
extent of capital investment, work for many clients, and/or perform
work for clients for which landscaping is not integral).
Where a worker brings specialized skills to the work relationship,
further analysis will determine whether this factor indicates employee
or independent contractor status. Consistent with the approach of
evaluating each factor in the context of the ultimate inquiry of
whether the worker is economically dependent on the employer or in
business for themself, proposed Sec. 795.110(b)(6) states that the
worker should use the specialized skills in connection with business-
like initiative for this factor to suggest independent contractor
status. Many circuit courts of appeals have expressly recognized that
business-like initiative is at least part of the inquiry. For example,
the Second Circuit has explained that ``the fact that workers are
skilled is not itself indicative of independent contractor status.''
\459\ Although the workers in that case ``possess[ed] technical
skills,'' the court noted that ``nothing in the record reveal[ed] that
they used these skills in any independent way,'' which indicated that
the workers' skill did not ``weigh significantly in favor of
independent contractor status.'' \460\ The Third Circuit agreed that
``the use of special skills is not itself indicative of independent
contractor status, especially if the workers do not use those skills in
any independent way.'' \461\ The Third Circuit has further explained
that if the workers use their skills in connection with ``business-like
initiative,'' the factor indicates independent contractor status:
``Some distributors benefitted from their skill in persuading others to
become distributees, and they certainly exercised business-like
initiative in this regard.'' \462\
---------------------------------------------------------------------------

\459\ Superior Care, 840 F.2d at 1060.
\460\ Id.
\461\ Selker Bros., 949 F.2d at 1295.
\462\ DialAmerica, 757 F.2d at 1387.
---------------------------------------------------------------------------

The Fifth Circuit describes this factor as evaluating the skill and
initiative required in performing the work and considers initiative
along with skill.\463\ The Fifth Circuit has explained that, generally,
``we look for some unique skill set, or some ability to exercise
significant initiative within the business.'' \464\ It has noted that
``[g]reater skill and more demonstrated initiative counsel in favor of
[independent contractor] status.'' \465\ When the

[[Page 62256]]

worker's specialized skills are coupled with initiative, the Fifth
Circuit has found that this factor indicates independent contractor
status.\466\
---------------------------------------------------------------------------

\463\ See, e.g., Hobbs, 946 F.3d at 834; Parrish, 917 F.3d at
385.
\464\ Cornerstone Am., 545 F.3d at 345 (citations omitted).
\465\ Parrish, 917 F.3d at 385; see also, e.g., Express Sixty-
Minutes, 161 F.3d at 305 (``The district court did not discuss
initiative during its evaluation of this factor. We agree with the
Secretary that the skill and initiative factor points toward
employee status.''); Circle C. Invs., 998 F.2d at 328 (``The dancers
do not exhibit the skill or initiative indicative of persons in
business for themselves.'').
\466\ See, e.g., Thibault v. Bellsouth Telecommc'ns, Inc., 612
F.3d 843, 847 (5th Cir. 2010) (noting when considering this factor
that ``the splicers' success depended on their ability to find
consistent work by moving from job-to-job''); Carrell, 998 F.2d at
333 (welders' work ``requires specialized skills'' and, although
they exercised ``limited'' initiative ``once on a job,'' a welder's
``success depended on his ability to find consistent work by moving
from job to job and from company to company''); cf. Hobbs, 946 F.3d
at 834 (agreeing with the district court's finding that this factor
was neutral because, although the workers ``were highly skilled
workers'' and their work ``required specialized skills,'' their work
``did not require them to demonstrate significant initiative''); but
see Parrish, 917 F.3d at 386 (although the employer's evidence that
the workers showed initiative was not very compelling, the workers'
``specialized skill weighs heavily in our analysis and persuades us
to hold this factor leans in favor of [independent contractor]
status'').
---------------------------------------------------------------------------

Similarly, in a case involving workers on a pickle farm, the
Seventh Circuit explained that employees are skilled workers too,
noting that although the workers in that case had ``develop[ed] some
specialized skill,'' ``this development of occupational skills is no
different from what any good employee in any line of work must do,''
and concluding that ``[s]kills are not the monopoly of independent
contractors.'' \467\ The Tenth Circuit has explained that although the
lack of specialized skills indicates employee status, ``the use of
special skills is not itself indicative of independent contractor
status, especially if the workers do not use those skills in any
independent way.'' \468\ And the Eleventh Circuit has explained in a
case where the workers were ``clearly skilled workers'' that ``[t]he
meaningfulness of this skill as indicating that plaintiffs were in
business for themselves or economically independent, however, is
undermined by the fact that [the employer] provided most technicians
with their skills.'' \469\
---------------------------------------------------------------------------

\467\ Lauritzen, 835 F.2d at 1537; see also Super Maid, 55 F.
Supp. 3d at 1077 (noting that ``all jobs require some modicum of
skill'') (citing Lauritzen, 835 F.2d at 1537); Keller, 781 F.3d at
809 (noting that, ``[t]o a certain extent, . . . every worker has
and uses relevant skills to perform his or her job, but not everyone
is an independent contractor'').
\468\ Flint Eng'g, 137 F.3d at 1443 (quoting Selker Bros., 949
F.2d at 1295).
\469\ Scantland, 721 F.3d at 1318.
---------------------------------------------------------------------------

The Department has previously stated in guidance that specialized
skills should be coupled with business-like initiative for this factor
to indicate independent contractor status. In AI 2015-1, the Department
explained that ``specialized skills do not indicate that workers are in
business for themselves, especially if those skills are technical and
used to perform the work.'' \470\ For that reason, application of this
factor should not ``overlook[] whether the worker is exercising
business skills, judgment, or initiative.'' \471\ The July 2008 version
of WHD Fact Sheet #13 describes the factor as ``[t]he amount of
initiative, judgment, or foresight in open market competition with
others required for the success of the claimed independent
contractor.'' \472\ The Department's May 2014 version of Fact Sheet #13
explained:
---------------------------------------------------------------------------

\470\ 2015 WL 4449086, at *9 (citing Superior Care, 840 F.2d at
1060) (withdrawn June 7, 2017).
\471\ Id.
\472\ WHD Fact Sheet #13 (July 2008). This language from the
July 2008 version of Fact Sheet #13 comes from Rutherford, which
noted that the workers in that case did not exercise ``the
initiative, judgment or foresight of the typical independent
contractor.'' 331 U.S. at 730.
---------------------------------------------------------------------------

Both employees and independent contractors may be skilled workers.
To indicate possible independent contractor status, the worker's skills
should demonstrate that he or she exercises independent business
judgment. Further, the fact that a worker is in open market competition
with others would suggest independent contractor status. For example,
specialized skills possessed by carpenters, construction workers, and
electricians are not themselves indicative of independent contractor
status; rather, it is whether these workers take initiative to operate
as independent businesses, as opposed to being economically dependent,
that suggests independent contractor status.
For all these reasons, there is strong support in the case law and
the Department's prior guidance for not limiting this factor to an
evaluation of whether the worker has specialized skills and for also
considering whether the worker is exercising business-like initiative
in relation to any specialized skills. Moreover, considering initiative
in this manner would be consistent with evaluating each factor in the
context of the ultimate inquiry of whether the worker is economically
dependent on the employer or is an independent business. Considering
only whether the worker has technical or specialized skills is not
necessarily probative of the ultimate inquiry of economic dependence or
independence because, as explained above, employees and independent
contractors often both have specialized skills, and thus evaluating
those skills is not particularly distinguishing. Whether a worker uses
those specialized skills to exercise business-like initiative or in
some other way that suggests that the worker is operating as an
independent business is more probative, as a matter of economic
reality, of that distinction between economic dependence and
independence.\473\
---------------------------------------------------------------------------

\473\ Some circuit court decisions have not considered the
worker's initiative when evaluating the skill factor. See, e.g.,
Keller, 781 F.3d at 809-10 (focusing on the workers' skill and how
they acquired it and contrasting carpenters, who have ``unique
skill, craftsmanship, and artistic flourish,'' with cable
technicians, who do not need ``unique skills'' but rather are
selected on the basis of availability and location); Mid-Atlantic
Installation, 16 F. App'x at 107 (affirming district court's
conclusion that the skills of installing cable are indicative of
independent contractor status because the skills are ``akin to those
of carpenters, construction workers, and electricians, who are
usually considered independent contractors''). For the reasons
explained above, however, whether workers use those specialized
skills to exercise business-like initiative is what makes this
factor probative of the ultimate inquiry of whether the workers are
in business for themselves. Thus, the skills of cable installers,
carpenters, construction workers, and electricians, for example,
even assuming that they are specialized, are not themselves
indicative of independent contractor status. Carpenters,
construction workers, electricians, and other workers who operate as
independent businesses, instead of being economically dependent on
their employer, are independent contractors. See generally AI 2015-
1, 2015 WL 4449086, at *9-10.
---------------------------------------------------------------------------

The 2021 IC Rule does not consider initiative in the context of
this factor.\474\ The 2021 IC Rule limited this factor to ``focus
solely on skill'' to ``clarif[y] the analysis''; the 2021 IC Rule
acknowledged that initiative is an important consideration, but it
confined consideration of initiative to the control and opportunity for
profit or loss factors because, for purposes of that rule, those
factors are the more probative factors.\475\
---------------------------------------------------------------------------

\474\ See 86 FR 1247 (Sec. 795.105(d)(2)(i)).
\475\ 86 FR 1191.
---------------------------------------------------------------------------

Upon further consideration, the Department believes that it is
appropriate to consider initiative under the skill factor to the extent
that workers exercise business-like initiative in the use of their
specialized skills. For the reasons explained above, the worker's use
of initiative in connection with any specialized skills is more
probative of the ultimate inquiry of whether the worker is economically
dependent on the employer or is an independent business. Both employees
and independent contractors can be highly skilled,\476\ so
consideration of the worker's specialized skills alone can be less
probative of that inquiry. On the other hand, consideration of the
worker's initiative in connection with any specialized skills better
assesses the economic realities of the work relationship and is more
helpful in distinguishing between employees and independent
contractors.
---------------------------------------------------------------------------

\476\ See, e.g., supra n. 467 and accompanying text.
---------------------------------------------------------------------------

As explained above in this NPRM, types of initiative by a worker
may also

[[Page 62257]]

be relevant when applying the control factor or the opportunity for
profit or loss factor.\477\ When evaluating the skill factor, the focus
should be whether the worker uses any specialized skills to exercise
business-like initiative. When applying the opportunity for profit or
loss factor, for example, the focus is whether the worker uses
managerial skill--a type of initiative--to affect the worker's
opportunity for profit or loss. Thus, the focus of each factor is
different, but some facts showing an exercise of initiative can
nonetheless be relevant under the skill factor and another factor.
Considering facts showing an exercise of initiative under more than one
factor to the extent appropriate depending on the facts of a case is
consistent with and furthers the totality-of-the-circumstances approach
to assessing the economic realities of the work relationship.\478\
---------------------------------------------------------------------------

\477\ See supra sections V.C.1. and 4., discussions of
opportunity for profit or loss and control.
\478\ See supra section V.C., discussion of economic reality
test.
---------------------------------------------------------------------------

The Department welcomes comments on all aspects of this factor.
Example: Skill and Initiative
A highly skilled welder provides welding services for a
construction firm. The welder does not make any independent judgments
at the job site beyond the decisions necessary to do the work assigned.
The welder does not determine the sequence of work, order additional
materials, think about bidding the next job, or use those skills to
obtain additional jobs, and is told what work to perform and where to
do it. In this scenario, the welder, although highly skilled
technically, is not using those skills in a manner that evidences
business-like initiative. The skill and initiative factor indicates
employee status.
A highly skilled welder provides a specialty welding service, such
as custom aluminum welding, for a variety of area construction
companies. The welder uses these skills for marketing purposes, to
generate new business, and to obtain work from multiple companies. The
welder is not only technically skilled, but also uses and markets those
skills in a manner that evidences business-like initiative. The skill
and initiative factor indicates independent contractor status.
7. Additional Factors (Proposed Sec. 795.110(b)(7))
Section 795.105(d)(2)(iv) of the 2021 IC Rule states that
additional factors may be considered if they are relevant to the
ultimate question of whether the workers are economically dependent on
the employer for work or in business for themselves.\479\ This reflects
the necessity of considering all facts that are relevant to the
question of economic dependence or independence, regardless of whether
those facts fit within one of the enumerated factors. This approach is
consistent with the Supreme Court's guidance in Silk, where it
cautioned that its suggested factors are not intended to be
exhaustive.\480\ It is also consistent with the approach that courts
and the Department have used in the decades since to determine whether
workers are employees or independent contractors under the FLSA. The
Department is proposing to move this provision to proposed Sec.
795.110(b)(7) with minor editorial changes.
---------------------------------------------------------------------------

\479\ 86 FR 1247.
\480\ Silk, 331 U.S. at 716 (``No one [factor] is controlling
nor is the list complete.'').
---------------------------------------------------------------------------

The 2021 IC Rule states that its list of factors is ``not
exhaustive.'' \481\ In order to emphasize that point, the Department
included an explicit provision recognizing that other potentially
relevant factors may exist in some circumstances.\482\ The 2021 IC Rule
thus states that ``[a]dditional factors may be relevant in determining
whether an individual is an employee or independent contractor for
purposes of the FLSA[.]'' \483\ The regulation further cautions that
such additional factors are only relevant ``if the factors in some way
indicate whether the individual is in business for him- or herself, as
opposed to being economically dependent on the potential employer for
work.'' \484\ The preamble to the Rule explained that ``[f]actors that
do not bear on this question, such as whether an individual has
alternate sources of wealth or income and the size of the hiring
company, are not relevant.'' \485\
---------------------------------------------------------------------------

\481\ 86 FR 1246 (Sec. 795.105(c)).
\482\ 86 FR 1196.
\483\ 86 FR 1247 (Sec. 795.105(d)(2)(iv)).
\484\ Id.
\485\ 86 FR 1196.
---------------------------------------------------------------------------

The Department is proposing to retain Sec. 795.105(d)(2)(iv) with
only minor editorial changes. Retaining this provision reiterates that
the enumerated factors are not to be applied mechanically but should be
viewed along with any other relevant facts in light of whether they
indicate economic dependence or independence. Retaining the provision
also preserves the caution that only factors that are relevant to the
overall question of economic dependence or independence should be
considered. This language stresses that the economic reality is what
matters, and not labels or formalities.
The Department is not proposing to identify any particular
additional factors that may be relevant. The Department previously
identified the ``degree of independent business organization and
operation'' as a seventh factor that it considered in its
analysis.\486\ However, given the Department's focus in this proposed
rulemaking on reflecting the economic reality factors commonly used by
the circuit courts of appeals, the Department is not proposing to
include the worker's ``degree of independent business organization and
operation'' as a seventh factor. The Department is not aware of any
court that has used this as a standalone factor. Moreover, the
Department is concerned that facts that may relate to whether a worker
has an independent business organization--such as whether the worker
has incorporated or receives an Internal Revenue Service (IRS) Form
1099 from an employer--reflect mere labels rather than the economic
realities and are thus not relevant. To the extent facts such as the
worker having a business license or being incorporated may suggest that
the worker is in business for themself, they may be considered either
as an additional factor or under any enumerated factor to which they
are relevant. However, consistent with an economic reality analysis, it
is important to inquire into whether the worker's license or
incorporation are reflective of the worker being in business for
themselves as a matter of economic reality. For example, if an employer
requires a worker to obtain a certain license or adopt a certain form
of business in order to perform work for it, this may be evidence of
the employer's control, rather than a worker who is independently
operating a business. Indeed, even where ``the parties structure[] the
relationship as an independent contractor, . . . the caselaw counsels
that, for purposes of the worker's rights under the FLSA, we must look
beyond the structure to the economic realities.'' \487\
---------------------------------------------------------------------------

\486\ WHD Fact Sheet #13 (July 2008).
\487\ Safarian v. American DG Energy Inc., 622 F. App'x 149, 151
(3d Cir. 2015).
---------------------------------------------------------------------------

The Department welcomes comments on this provision.

D. Primacy of Actual Practice (2021 IC Rule Sec. 795.110)

The Department is proposing to delete 2021 IC Rule Sec. 795.110
and use this section for the discussion of the economic reality
factors.
Section 795.110 of the 2021 IC Rule provides that in determining
economic dependence ``the actual practice of the parties involved is
more relevant than

[[Page 62258]]

what may be contractually or theoretically possible.'' \488\ This
absolute rule, elevating actual practice over contractual authority
that the employer may have reserved for exercise in the future, is
overly mechanical and does not allow for appropriate weight to be given
to contractual provisions in situations in which they are crucial to
understanding the economic realities of a relationship. Instead, the
Department believes that a less prescriptive approach is more faithful
to the totality-of-circumstances economic reality analysis, such that
contractual or other reserved rights should be considered like any
other fact under each factor to the extent they indicate economic
dependence.
---------------------------------------------------------------------------

\488\ 86 FR 1247.
---------------------------------------------------------------------------

The 2021 IC Rule stressed that ``unexercised powers, rights, and
freedoms'' are ``less relevant'' than those that are actually
exercised.\489\ Section 795.110 of the 2021 IC Rule states that a
worker's theoretical ability to control aspects of the work are less
meaningful if the worker is prevented from exercising those rights, and
that a business' contractual authority to exercise control may be of
little relevance if it is never exercised.\490\ Though it is true that
contractual authority may in some instances be less relevant, the 2021
IC Rule's blanket statement that actual practice is always more
relevant is incompatible with an approach that does not apply the
factors mechanically but looks to the totality of the circumstances in
evaluating the economic realities.\491\ The focus is always on the
economic realities rather than mere labels,\492\ but contractual
provisions are not always mere labels. They sometimes reflect and
influence the economic realities of the relationship.
---------------------------------------------------------------------------

\489\ Id. at 1204.
\490\ Id. at 1247.
\491\ See Flint Eng'g, 137 F.3d at 1441 (``None of the factors
alone is dispositive; instead, the court must employ a totality-of-
the-circumstances approach.''); Superior Care, 840 F.2d at 1059
(``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.'').
\492\ Rutherford, 331 U.S. at 729 (``Where the work done, in its
essence, follows the usual path of an employee, putting on an
`independent contractor' label does not take the worker from the
protection of the Act.'').
---------------------------------------------------------------------------

Every fact that is relevant to economic dependence should be
considered in the analysis. Because the entirety of the economic
reality must be considered, both the actual practices of the parties
and the contractual possibilities must be considered. Within each
factor of the test, there may be actual practices that are relevant,
and there may also be contractual provisions that are relevant. The
significance of each in the overall analysis should be informed by
their relevance to the economic realities. This examination will be
specific to the facts of each economic relationship and cannot be
predetermined.
It is often the case that the actual practice of the parties is
more relevant to the economic dependence inquiry than contractual or
theoretical possibilities. For example, where an employer theoretically
permits its workers to decline work assignments, but in practice
disciplines workers who decline assignments, the actual practice of the
parties outweighs the theoretical rights of the workers.\493\ However,
in other cases the contractual possibilities may reveal more about the
economic reality than the parties' practices. For example, a company
may reserve the right to supervise workers despite rarely making
supervisory visits.\494\ Such reserved rights to control the worker may
strongly influence the behavior of the worker in their performance of
the work even without the company exercising its contractual rights. As
a result, this contractual possibility may be more indicative of the
reality of the economic relationship between the worker and the company
than the company's apparent hands-off practice. That courts often refer
to the control factor as the ``right to control'' the work suggests
that even rarely exercised or unexercised rights can be informative in
evaluating economic dependence.\495\
---------------------------------------------------------------------------

\493\ See Off Duty Police, 915 F.3d at 1060-61 (finding that,
among other things, officers' testimony that they were disciplined
for turning down assignments, despite having the right to do so,
supported employee status).
\494\ See Superior Care, 840 F.2d at 1060 (``Though visits to
the job sites occurred only once or twice a month, Superior Care
unequivocally expressed the right to supervise the nurses' work, and
the nurses were well aware that they were subject to such checks as
well as to regular review of their nursing notes. An employer does
not need to look over his workers' shoulders every day in order to
exercise control.'').
\495\ See, e.g., Off Duty Police, 915 F.3d at 1060; DialAmerica,
757 F.2d at 1386; Driscoll, 603 F.2d at 754.
---------------------------------------------------------------------------

In response to comments asserting that prioritizing actual practice
would make the economic reality test impermissibly narrower than the
common law control test, the 2021 IC Rule 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.'' \496\ This understanding of the FLSA's scope of employment is
inconsistent with the Supreme Court's observations that ``[a] broader
or more comprehensive coverage of employees'' than that contemplated
under the FLSA ``would be difficult to frame,'' \497\ and that 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.'' \498\ The 2021 IC Rule's blanket diminishment of the
relevance of the right to control is 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.
That the employer's right to control is part of the common law test
shows that it is a useful indicator of employee status.\499\ The 2021
IC Rule's dismissal of contractual rights as always less relevant than
actual practice is inconsistent with the need to consider all facts
relevant to the economic realities.\500\
---------------------------------------------------------------------------

\496\ 86 FR 1205.
\497\ Rosenwasser, 323 U.S. at 362-63.
\498\ Darden, 503 U.S. at 326.
\499\ Id. at 323 (common-law employment test considers ``the
hiring party's right to control the manner and means by which the
product is accomplished'') (quoting Reid, 490 U.S. at 751-52);
Restatement (Third) of Agency, sec. 7.07, Comment (f) (2006) (``For
purposes of respondeat superior, an agent is an employee only when
the principal controls or has the right to control the manner and
means through which the agent performs work.'').
\500\ Though the economic reality test requires consideration of
all relevant facts, and upon further consideration, the Department
does not believe it is appropriate to maintain a regulatory
provision that dismisses consideration of reserved rights that are
not exercised where relevant to economic dependence, the Department
does not intend to minimize or disregard the longstanding case law
that looks to the actual behavior of the parties. See, e.g.,
Parrish, 917 F.3d at 387 (``[T]he analysis is focused on economic
reality, not economic hypotheticals.''); Saleem, 854 F.3d at 142
(``[P]ursuant to the economic reality test, it is not what [workers]
could have done that counts, but as a matter of economic reality
what they actually do that is dispositive.'') (internal quotation
marks and citation omitted); Sureway, 656 F.2d at 1371 (``[T]he fact
that Sureway's `agents' possess, in theory, the power to set prices,
determine their own hours, and advertise to a limited extent on
their own is overshadowed by the fact that in reality the `agents'
work the same hours, charge the same prices, and rely in the main on
Sureway for advertising.'').
---------------------------------------------------------------------------

In sum, the declaration in 2021 IC Rule Sec. 795.110 that the
parties' actual practices are invariably more relevant is inconsistent
with how courts have evaluated employment relationships. It lacks the
flexibility required by the economic reality test and is inconsistent
with the FLSA's broad definition of employment. For these reasons, the
Department is proposing to strike Sec. 795.110, so that all facts
relevant to the economic realities of a potential employment
relationship may be evaluated according to their relevance to the
question of economic dependence.

[[Page 62259]]

The Department welcomes comments on the removal of this provision.

E. Examples of Analyzing Economic Reality Factors (2021 IC Rule Sec.
795.115)

Section 795.115 of the 2021 IC Rule provides examples of factors in
the economic reality test. The Department is proposing to delete this
section and instead include examples in the preamble. Real-world
examples provide valuable information to the general public and
regulated parties and help succinctly explain relevant issues in the
analysis. The Department believes, however, that the examples best
serve this explanatory function in preamble text, particularly
considering how fact-dependent the analysis of each economic reality
factor is. The preamble contains the most detailed description of each
factor along with the case law and rationale for each interpretation
proposed by the Department. Providing the examples after the discussion
of each factor in the economic reality test thus provides an immediate
application of the relevant interpretation.
The Department cautions that the examples are specific to the
included facts and the addition or alteration of any of the facts in
any of the examples may change the resulting analysis. Additionally,
while the examples help illustrate the application of particular
factors of the economic reality test, no one factor is determinative of
whether a worker is an employee or an independent contractor.

F. Severability (Proposed Sec. 795.115)

Section 795.120 of the 2021 IC Rule contains a severability
provision. The Department is proposing to move this provision to Sec.
795.115 and is not proposing any edits to this section.

VI. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections, their
practical utility, as well as the impact of paperwork and other
information collection burdens imposed on the public, and how to
minimize those burdens. The PRA typically requires an agency to provide
notice and seek public comments on any proposed collection of
information contained in a proposed rule. See 44 U.S.C. 3506(c)(2)(B);
5 CFR 1320.8. This NPRM does not contain a collection of information
subject to OMB approval under the Paperwork Reduction Act. The
Department welcomes comments on this determination.

VII. Executive Order 12866, Regulatory Planning and Review; Executive
Order 13563, Improved Regulation and Regulatory Review

Under Executive Order 12866, the Office of Management and Budget's
(OMB) Office of Information and Regulatory Affairs (OIRA) determines
whether a regulatory action is significant and, therefore, subject to
the requirements of the Executive Order and OMB review.\501\ 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. OIRA has determined
that this proposed rule is a ``significant regulatory action'' under
section 3(f) of Executive Order 12866 and is economically significant.
---------------------------------------------------------------------------

\501\ See 58 FR 51735, 51741 (Oct. 4, 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, consistent with obtaining the regulatory objectives;
and that, in choosing among alternative regulatory approaches, the
agency has selected those approaches that maximize net benefits.\502\
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 this proposed
rule and was prepared pursuant to the above-mentioned executive orders.
---------------------------------------------------------------------------

\502\ See 76 FR 3821 (Jan. 21, 2011).
---------------------------------------------------------------------------

A. Introduction

In this NPRM, the Department is proposing to modify the regulations
addressing the classification of workers as employees or independent
contractors under the Fair Labor Standards Act (FLSA or Act) to be more
consistent with judicial precedent and the Act's text and purpose as
interpreted by the courts. For decades, the Department and courts have
applied an economic reality test to determine whether a worker is an
employee or an independent contractor under the FLSA. The ultimate
inquiry is whether, as a matter of economic reality, the worker is
economically dependent on the employer for work (and is thus an
employee) or is in business for themself (and is thus an independent
contractor). To answer this ultimate inquiry of economic dependence,
the courts and the Department have historically conducted a totality-
of-the-circumstances analysis, considering multiple factors to
determine whether a worker is an employee or an independent contractor
under the FLSA.
In January 2021, the Department published a rule titled
``Independent Contractor Status Under the Fair Labor Standards Act''
(2021 IC Rule) that provided guidance on the classification of
independent contractors under the FLSA.\503\ As explained in sections
III, IV, and V above, the Department believes that the 2021 IC Rule
does not fully comport with the FLSA's text and purpose as interpreted
by the courts and will have a confusing and disruptive effect on
workers and businesses alike due to its departure from decades of case
law describing and applying the multifactor economic reality test as a
totality-of-the-circumstances test. The 2021 IC Rule included
provisions that are in tension with this longstanding case law--such as
designating two factors as most probative and predetermining that they
carry greater weight in the analysis, considering investment and
initiative only in the opportunity for profit or loss factor, and
excluding consideration of whether the work performed is central or
important to the employer's business. These and other provisions in the
2021 IC Rule narrow the application of the economic reality test by
limiting the facts that may be considered as part of the test, facts
which the Department believes are relevant in determining whether a
worker is economically dependent on the employer for work or in
business for themself. The Department believes that retaining the 2021
IC Rule would have

[[Page 62260]]

a confusing and disruptive effect on workers and businesses alike due
to its departure from case law describing and applying the multifactor
economic reality test as a totality-of-the-circumstances test.
Departing from the longstanding test applied by the courts also
increases the risk of misapplication of the economic reality test,
which the Department believes may result in increased misclassification
of workers as independent contractors.
---------------------------------------------------------------------------

\503\ See 86 FR 1168.
---------------------------------------------------------------------------

Therefore, the Department is proposing to rescind the 2021 IC Rule
and replace it with an analysis for determining employee or independent
contractor status under the Act that is more consistent with existing
judicial precedent and the Department's longstanding guidance prior to
the 2021 IC Rule. Specifically, the Department is not proposing the use
of ``core factors'' and instead proposes to return to a totality-of-
the-circumstances analysis of the economic reality test in which the
factors do not have a predetermined weight and are considered in view
of the economic reality of the whole activity. The Department is
further proposing to return the consideration of investment to a
standalone factor, provide additional analysis of the control factor
(including detailed discussions of how scheduling, remote supervision,
price-setting, and the ability to work for others should be
considered), and return to the longstanding interpretation of the
integral factor, which considers whether the work is integral to the
employer's business. The Department believes this proposed rule is more
grounded in the ultimate inquiry of whether a worker is in business for
themself or is economically dependent on the employer for work.
Workers, employers, and independent businesses should benefit from
affirmative regulatory guidance from the Department further developing
the concept of economic dependence and how each economic reality factor
is probative of whether the worker is economically dependent on the
employer for work or is in business for themself.
When evaluating the economic impact of this proposed rule, the
Department has considered the appropriate baseline with which to
compare changes. As discussed in section II.E., on March 14, 2022, in a
lawsuit challenging the Department's delay and withdrawal of the 2021
IC Rule, a Federal district court in the Eastern District of Texas
issued a decision vacating the delay and withdrawal of the 2021 IC Rule
and concluded that the 2021 IC Rule became effective on March 8,
2021.\504\ Because the 2021 IC Rule is currently in effect, is being
enforced and would continue to be in effect in the absence of this
proposed rule, the Department believes that the 2021 IC Rule is the
official baseline to compare against when estimating the economic
impact of this proposed rule.\505\ Compared to the 2021 IC Rule, the
Department anticipates that this proposed rule would reduce
misclassification of employees as independent contractors, because this
rule is more consistent with existing judicial precedent and the
Department's longstanding guidance. The 2021 IC Rule could increase
misclassification because its elevation of certain factors and its
preclusion of consideration of relevant facts under several factors may
result in misapplication of the economic reality test and may have
conveyed to employers that it might be easier than it used to be to
classify certain workers as independent contractors rather than FLSA-
covered employees. The issuance of this proposed rule could reduce or
prevent this misclassification from occurring.
---------------------------------------------------------------------------

\504\ See Coalition for Workforce Innovation, 2022 WL 1073346.
\505\ OMB Circular A-4 notes that when agencies are developing a
baseline, ``[it] should be the best assessment of the way the world
would look absent the proposed action.''
---------------------------------------------------------------------------

Because the Department does not have data on the number of
misclassified workers and because there are inherent challenges in
determining the extent to which the rule would reduce this
misclassification, much of the analysis is presented qualitatively,
aside from rule familiarization costs, which are quantified.\506\ The
Department has therefore provided a qualitative analysis of the
transfers and benefits that could occur because of this reduced
misclassification.
---------------------------------------------------------------------------

\506\ The Department uses the term ``misclassification''
throughout this analysis to refer to workers who have been
classified as independent contractors but who, as a matter of
economic reality, are economically dependent on their employer for
work. These workers' legal status would not change under the 2021 IC
Rule or this proposed rule--they would properly be classified as
employees under both rules. The Department notes that sources cited
in this in this analysis may use other misclassification standards
which may not align fully with the Department's use of the term.
---------------------------------------------------------------------------

As discussed above, the 2021 IC Rule is the appropriate baseline to
represent what the world could look like going forward in the absence
of this proposed rule. However, this baseline may not reflect what the
world looked like prior to this NPRM. Until March of 2022, the
Department had not been using the framework for analysis from that rule
when assessing independent contractor status in its enforcement and
compliance assistance activities. The 2021 IC Rule baseline also may
not reflect the current economic landscape, because the Department is
not aware of any Federal district or appellate court that has relied on
the substance of the 2021 IC Rule so far to resolve a dispute regarding
the proper classification of a worker as an employee or independent
contractor. Therefore, if the Department were to instead compare the
proposed rule to the current economic and legal landscape, the economic
impact would be much smaller, because this proposed rule is consistent
with the longstanding judicial precedent and guidance that the
Department was relying on prior to March of 2022. The Department still
believes that the 2021 IC Rule is the appropriate baseline, but notes
that the current economic landscape may not be the same as a future
situation without this proposed rule.
The Department does not believe, as reflected in this analysis,
that this proposed rule would result in widespread reclassification of
workers. That is, for workers who are properly classified as
independent contractors, the Department does not, for the most part,
anticipate that this rule would result in these workers being
reclassified as employees. Especially compared to the guidance that was
in effect before the 2021 IC Rule, the test proposed in this NPRM would
not make independent contractor status significantly less likely.
Rather, impacts resulting from this rule would mainly be due to a
reduction in misclassification. If the 2021 IC Rule is retained, the
risk of misclassification could be increased. As noted previously, the
2021 IC Rule's elevation of certain factors and its preclusion of
consideration of relevant facts under several factors, which is a
departure from judicial precedent applying the economic reality test,
may result in misapplication of the economic reality test and may have
conveyed to employers that it might be easier than it used to be to
classify certain workers as independent contractors rather than FLSA-
covered employees. This NPRM could therefore help prevent this
misclassification by providing employers with guidance that is more
consistent with longstanding precedent. The Department welcomes
comments and data on all of the analysis presented here.

B. Estimated Number of Independent Contractors

To provide some context on the prevalence of independent
contracting, the Department first estimated the number of independent
contractors. There are a variety of estimates of the

[[Page 62261]]

number of independent contractors spanning a wide range depending on
methodologies and how the population is defined.\507\ There is no data
source on independent contractors that perfectly mirrors the definition
of independent contractor in the Department's regulations. There is
also no regularly published data source on the number of independent
contractors and data from the current year does not exist, making it
difficult to examine trends in independent contracting or to measure
how regulatory changes impact the number of independent contractors.
---------------------------------------------------------------------------

\507\ The Department uses the term ``independent contractor''
throughout this analysis to refer to workers who, as a matter of
economic reality, are not economically dependent on their employer
for work and are in business for themselves. The Department notes
that sources cited in this analysis may use other definitions of
independent contractors that may not align fully with the
Department's use of the term.
---------------------------------------------------------------------------

The Department believes that the Current Population Survey (CPS)
Contingent Worker Supplement (CWS) offers an appropriate lower bound
for the number of independent contractors; however, there are potential
biases in these data that will be noted. This is the estimation method
used in the 2021 IC Rule, and the Department has not found any new data
or analyses to indicate a need for any changes. Some recent data
sources provide an indication of how COVID-19 may have impacted the
number of independent contractors, but this is inconclusive.
Additionally, estimates from other sources will be presented to
demonstrate the potential range.
The U.S. Census Bureau conducts the CPS, and it is published
monthly by the Bureau of Labor Statistics (BLS). The sample includes
approximately 60,000 households and is nationally representative.
Periodically since 1995, and most recently in 2017, the CPS included a
supplement to the May survey to collect data on contingent and
alternative employment arrangements. Based on the CWS, there were 10.6
million independent contractors in 2017, amounting to 6.9 percent of
workers.\508\ The CWS measures those who say that their independent
contractor job is their primary job and that they worked at the
independent contractor job in the survey's reference week.
---------------------------------------------------------------------------

\508\ 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.
---------------------------------------------------------------------------

The BLS's estimate of independent contractors includes ``[w]orkers
who are identified as independent contractors, independent consultants,
or freelance workers, regardless of whether they are self-employed or
wage and salary workers.'' BLS asks two questions to identify
independent contractors: \509\
---------------------------------------------------------------------------

\509\ The variables used are PES8IC=1 for self-employed and
PES7=1 for other workers.
---------------------------------------------------------------------------

Workers reporting that they are self-employed are asked:
``Are you self-employed as an independent contractor, independent
consultant, freelance worker, or something else (such as a shop or
restaurant owner)?'' (9.0 million independent contractors.) We refer to
these workers as ``self-employed independent contractors'' in the
remainder of the analysis.
Workers reporting that they are wage and salary workers
are asked: ``Last week, were you working as an independent contractor,
an independent consultant, or a freelance worker? That is, someone who
obtains customers on their own to provide a product or service.'' (1.6
million independent contractors.) We refer to these workers as ``other
independent contractors'' in the remainder of the analysis.
It is important to note that independent contractors are identified
in the CWS in the context of the respondent's ``main'' job (i.e., the
job with the most hours).\510\ Therefore, the estimate of independent
contractors does not include those who may be an employee for their
primary job, but may also work as an independent contractor.\511\ For
example, Lim et al. (2019) estimate that independent contracting work
is the primary source of income for 48 percent of independent
contractors.\512\ Applying this estimate to the 10.6 million
independent contractors estimated from the CWS, results in 22.1 million
independent contractors (10.6 million / 0.48). Alternatively, a survey
of independent contractors in Washington found that 68 percent of
respondents reported that independent contract work was their primary
source of income.\513\ However, because this survey only includes
independent contractors in one state, the Department has not used this
data to adjust its estimate of independent contractors.
---------------------------------------------------------------------------

\510\ While self-employed independent contractors are identified
by the worker's main job, other independent contractors answered yes
to the CWS question about working as an independent contractor last
week. Although the survey question does not ask explicitly about the
respondent's main job, it follows questions asked in reference to
the respondent's main job.
\511\ Even among independent contractors, failure to report
multiple jobs in response to survey questions is common. For
example, Katz and Krueger (2019) asked Amazon Mechanical Turk
participants the CPS-style question ``Last week did you have more
than one job or business, including part time, evening, or weekend
work?'' In total, 39 percent of respondents responded affirmatively.
However, these participants were asked the follow-up question ``Did
you work on any gigs, HITs or other small paid jobs last week that
you did not include in your response to the previous question?''
After this question, which differs from the CPS, 61 percent of those
who indicated that they did not hold multiple jobs on the CPS-style
question acknowledged that they failed to report other work in the
previous week. As Katz and Krueger write, ``If these workers are
added to the multiple job holders, the percent of workers who are
multiple job holders would almost double from 39 percent to 77
percent.'' See L. Katz and A. Krueger, ``Understanding Trends in
Alternative Work Arrangements in the United States,'' RSF: The
Russell Sage Foundation Journal of the Social Sciences 5(5), p. 132-
46 (2019).
\512\ K. Lim, A. Miller, M. Risch, and E. Wilking, ``Independent
Contractors in the U.S.: New Trends from 15 years of Administrative
Tax Data,'' Department of Treasury, p. 61 (Jul. 2019), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf. From table 5, the
total number of independent contractors across all categories is
13.81 million. The number of independent contractors in the
categories where these workers earn the majority of their labor
income from independent contractor earnings is 6.63 million. 6.63
million / 13.81 million = 0.48.
\513\ Washington Department of Commerce, ``Independent
Contractor Study,'' p. 21 (Jul. 2019), https://deptofcommerce.app.box.com/v/independent-contractor-study.
---------------------------------------------------------------------------

The CWS's large sample size results in small sampling error.
However, the questionnaire's design may result in some non-sampling
error. For example, one potential source of bias is that the CWS only
considers independent contractors during a single point in time--the
survey week (generally the week prior to the interview).
These numbers will thus underestimate the prevalence of independent
contracting over a longer timeframe, which may better capture the size
of the population.\514\ For example, Farrell and Greig (2016) used a
randomized sample of 1 million Chase customers to estimate prevalence
of the Online Platform Economy.\515\ They found that ``[a]lthough 1
percent of adults earned income from the Online

[[Page 62262]]

Platform Economy in a given month, more than 4 percent participated
over the three-year period.'' Additionally, Collins et al. (2019)
examined tax data from 2000 through 2016 and found that the number of
workers who filed a form 1099 grew substantially over that period, and
that fewer than half of these workers earned more than $2,500 from 1099
work in 2016. The prevalence of lower annual earnings implies that most
workers who received a 1099 did not work as an independent contractor
every week.\516\
---------------------------------------------------------------------------

\514\ In any given week, the total number of independent
contractors would have been roughly the same, but the identity of
the individuals who do it for less than the full year would likely
vary. Thus, the number of unique individuals who work at some point
in a year as independent contractors would exceed the number of
independent contractors who work within any one-week period as
independent contractors.
\515\ D. Farrell and F. Greig, ``Paychecks, Paydays, and the
Online Platform,'' JPMorgan Chase Institute (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911293. The authors
define the Online Platform Economy as ``economic activities
involving online intermediaries.'' This includes ``labor platforms''
that ``connect customers with freelance or contingent workers'' and
``capital platforms'' that ``connect customers with individuals who
rent assets or sell goods peer-to-peer.'' As such, this study
encompasses data on income sources that the Department acknowledges
might not be a one-to-one match with independent contracting and
could also include work that is part of an employment relationship.
However, the Department believes that including data on income
earned through online platforms is useful when discussing the
potential magnitude of independent contracting.
\516\ B. Collins, A. Garin, E. Jackson, D. Koustas, and M.
Payne, ``Is Gig Work Replacing Traditional Employment? Evidence from
Two Decades of Tax Returns,'' IRS SOI Joint Statistical Research
Program (2019) (unpublished paper), https://www.irs.gov/pub/irs-soi/19rpgigworkreplacingtraditionalemployment.pdf.
---------------------------------------------------------------------------

The CWS also uses proxy responses, which may underestimate the
number of independent contractors. The RAND American Life Panel (ALP)
survey conducted a supplement in 2015 to mimic the CWS questionnaire
but used self-responses only. The results of the survey were summarized
by Katz and Krueger (2018).\517\ This survey found that independent
contractors comprise 7.2 percent of workers.\518\ Katz and Krueger
identified that the 0.5 percentage point difference in magnitude
between the CWS and the ALP was due to both cyclical conditions, and
the lack of proxy responses in the ALP.\519\ Therefore, the Department
believes a reasonable upper-bound on the potential bias due to the use
of proxy responses in the CWS is 0.5 percentage points (7.2 versus
6.7).^{520 521}
---------------------------------------------------------------------------

\517\ See L. Katz and A. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,''
(2018).
\518\ Id. at 49. The estimate is 9.6 percent without correcting
for overrepresentation of self-employed workers or multiple job
holders. Id. at 31.
\519\ Id. at Addendum (``Reconciling the 2017 BLS Contingent
Worker Survey'').
\520\ Note that they estimate 6.7 percent of employed workers
are independent contractors using the CWS, as opposed to 6.9 percent
as estimated by the BLS. This difference is attributable to changes
to the sample to create consistency.
\521\ In addition to the use of proxy responses, this difference
is also due to cyclical conditions. The impacts of these two are not
disaggregated for independent contractors, but if we applied the
relative sizes reported for all alternative work arrangements, we
would get 0.36 percentage point difference due to proxy responses.
Additionally, it should be noted that this may not entirely be a
bias. It stems from differences in independent contracting reported
by proxy respondents and actual respondents. As Katz and Krueger
explain, this difference may be due to a ``mode'' bias or proxy
respondents may be less likely to be independent contractors. Id. at
Addendum p. 4.
---------------------------------------------------------------------------

Another potential source of bias in the CWS is that some
respondents may not self-identify as independent contractors. For
example, Abraham et al. (2020) estimated that 6.6 percent of workers in
their study initially respond that they are employees but were then
determined (by the researcher) to be independent contractors based on
their answers to follow-up questions.\522\ Additionally, individuals
who do what some researchers refer to as ``informal work'' may in fact
be independent contractors though they may not characterize themselves
as such.\523\ This population could be substantial. Abraham and
Houseman (2019) confirmed this in their examination of the Survey of
Household Economics and Decision-making. They found that 28 percent of
respondents reported doing ``informal work'' for money over the past
month.\524\
---------------------------------------------------------------------------

\522\ K. Abraham, B. Hershbein, and S. Houseman, ``Contract Work
at Older Ages,'' NBER Working Paper 26612 (2020), http://www.nber.org/papers/w26612.
\523\ The Department believes that including data on what is
referred to in some studies as ``informal work'' is useful when
discussing the magnitude of independent contracting, although not
all informal work is done by independent contractors. The Survey of
Household Economics and Decision-making asked respondents whether
they engaged in informal work sometime in the prior month. It
categorized informal work into three broad categories: personal
services, on-line activities, and off-line sales and other
activities, which is broader than the scope of independent
contractors. These categories include activities like house sitting,
selling goods online through sites like eBay or craigslist, or
selling goods at a garage sale. The Department acknowledges that the
data discussed in this study might not be a one-to-one match with
independent contracting and could also include work that is part of
an employment relationship, but it nonetheless provides some useful
data for this purpose.
\524\ K. Abraham, and S. Houseman, ``Making Ends Meet: The Role
of Informal Work in Supplementing Americans' Income,'' RSF: The
Russell Sage Foundation Journal of the Social Sciences 5(5): 110-31
(2019), https://www.aeaweb.org/conference/2019/preliminary/paper/QreAaS2h.
---------------------------------------------------------------------------

Conversely, another source of bias in the CWS is that some workers
who self-identify as independent contractors may misunderstand their
status or may be misclassified by their employer. These workers may
answer the survey in the affirmative, despite not truly being
independent contractors. While precise and representative estimates of
nationwide misclassification are unavailable, multiple studies suggest
its prevalence in numerous sectors in the economy.\525\ See section
VII.D.2. for a more thorough discussion of the prevalence of
misclassification.
---------------------------------------------------------------------------

\525\ See, e.g., U.S. Gov't Accountability Off., GAO-09-717,
Employee Misclassification: Improved Coordination, Outreach, and
Targeting Could Better Ensure Detection and Prevention 10 (2008)
(``Although the national extent of employee misclassification is
unknown, earlier national studies and more recent, though not
comprehensive, studies suggest that employee misclassification could
be a significant problem with adverse consequences.'').
---------------------------------------------------------------------------

Because reliable data on the potential magnitude of the biases
discussed above are unavailable, and so the net direction of the biases
is unknown, the Department has not attempted to calculate how these
biases may impact the estimated number of independent contractors.
Because the CWS estimate represents only the number of workers who
worked as independent contractors on their primary job during the
survey reference week, the Department applied the research literature
and adjusted this measure to include workers who are independent
contractors in a secondary job or who were excluded from the CWS
estimate due to other factors. As noted above, integrating the
estimated proportions of workers who are independent contractors on
secondary or otherwise excluded jobs produces an estimate of 22.1
million, representing the total number of workers working as
independent contractors in any job at a given time. Given the
prevalence of independent contractors who work sporadically and earn
minimal income, adjusting the estimate according to these sources
captures some of this population. It is likely that this figure is
still an underestimate of the true independent contractor pool.
1. COVID-19 Adjustment to the Estimated Number of Independent
Contractors
The Department's estimate of the number of independent contractors,
22.1 million, is based primarily on 2017 data. Because COVID-19 has had
a substantial impact on the labor market, it is possible that this
estimate is not currently appropriate. The Department conducted a
search for more recent data to indicate any trends in the number of
independent contractors since 2017. The findings are inconclusive but
generally do not indicate an increase.
The Federal Reserve Board's annual Survey of Household Economics
and Decisionmaking (SHED) provides measures of the economic well-being
of U.S. households. The Federal Reserve Board publishes a report
``Economic Well-Being of U.S. Households'' summarizing the findings of
each survey.\526\ One subsection of the Employment section describes
the results of the questions related to ``The Gig Economy.'' While the
survey questions about work in the ``gig economy'' include more types
of work

[[Page 62263]]

scenarios than just independent contracting, a decrease from 30 percent
to 20 percent of adults answering ``yes'' from 2017 to 2020 may
indicate that the number of independent contractors in this industry
also decreased during that time period.\527\ The report summarizing the
2021 data is available, but unfortunately the gig economy questions
were revised substantially, so a comparable value is not available for
2021. Moreover, trends of potential independent contractors in one
industry are not necessarily indicative of trends across the economy.
---------------------------------------------------------------------------

\526\ Consumer and Community Research Section of the Federal
Reserve Board's Division of Consumer and Community Affairs,
``Economic Well-Being of U.S. Households in 2021,'' Board of
Governors of the Federal Reserve System (2022). Reports from all
years available at https://www.federalreserve.gov/publications/report-economic-well-being-us-households.htm.
\527\ The report defines gig work as including ``three types of
non-traditional activities: offline service activities, such as
child care or house cleaning; offline sales, such as selling items
at flea markets or thrift stores; and online services or sales, such
as driving using a ride-sharing app or selling items online.''
Consumer and Community Research Section of the Federal Reserve
Board's Division of Consumer and Community Affairs, ``Economic Well-
Being of U.S. Households in 2017,'' Board of Governors of the
Federal Reserve System (May 2018).
---------------------------------------------------------------------------

MBO Partners, a company with the goal of connecting enterprise
organizations and top independent professionals, also conducts an
annual survey and prepares a research report of the findings.\528\ In
all groups of ``independent workers,'' MBO Partners similarly found a
decrease in the number from 2017 to 2020. Conversely, in total, the
2021 report shows a large increase from 2020, enough that the number of
independent workers in 2021 is larger than the 2017 number. However,
this increase occurs only in the ``occasional independent'' workers
category, described as those who work part-time and regularly, but
without set hours. Comparing the number of part-time and full-time
independent workers yields similar values in 2017 and 2021, so the
Department believes that no adjustments are needed to the 2017 estimate
of 22.1 million independent contractors.
---------------------------------------------------------------------------

\528\ MBO partners, ``The Great Realization: 11th Annual State
of Independence,'' (2021). Annual reports are available at https://www.mbopartners.com/state-of-independence/previous-reports/.
---------------------------------------------------------------------------

2. Range of Estimates in the Literature
To further consider the range of estimates available, the
Department conducted a literature review, the findings of which are
presented in Table 1. Other studies were also considered but are
excluded from this table because the study populations were broader
than just independent contractors, limited to one state, or include
workers outside of the United States.\529\ The RAND ALP,\530\ the
Gallup Survey,\531\ and the General Social Survey's (GSS's) Quality of
Worklife (QWL) \532\ supplement are widely cited alternative estimates.
However, the Department chose to use sources with significantly larger
sample sizes and/or more recent data for the primary estimate.
---------------------------------------------------------------------------

\529\ Including, but not limited to: McKinsey Global Institute,
``Independent Work: Choice, Necessity, and the Gig Economy'' (2016),
https://www.mckinsey.com/featured-insights/employment-and-growth/independent-work-choice-necessity-and-the-gig-economy; Kelly
Services, ``Agents of Change'' (2015), https://www.kellyservices.com/global/siteassets/3-kelly-global-services/uploadedfiles/3-kelly_global_services/content/sectionless_pages/kocg1047720freeagent20whitepaper20210x21020final2.pdf; Robles and
McGee, ``Exploring Online and Offline Informal Work: Findings from
the Enterprising and Informal Work Activities (EIWA) Survey''
(2016); Upwork, ``Freelancing in America'' (2019); Washington
Department of Commerce, supra n. 513; Farrell and Greig, supra n.
515; MBO Partners, ``State of Independence in America'' (2016);
Abraham et al., ``Measuring the Gig Economy: Current Knowledge and
Open Issues'' (2018), https://www.nber.org/papers/w24950; Collins et
al. (2019), supra n. 516; Gitis et al., ``The Gig Economy: Research
and Policy Implications of Regional, Economic, and Demographic
Trends,'' American Action Forum (2017), https://www.americanactionforum.org/research/gig-economy-research-policy-implications-regional-economic-demographic-trends/#ixzz5IpbJp79a;
Dourado and Koopman, ``Evaluating the Growth of the 1099
Workforce,'' Mercatus Center (2015), https://www.mercatus.org/publication/evaluating-growth-1099-workforce.
\530\ See Katz and Krueger (2018), supra n. 517.
\531\ ``Gallup's Perspective on The Gig Economy and Alternative
Work Arrangements,'' Gallup (2018), https://www.gallup.com/workplace/240878/gig-economy-paper-2018.aspx.
\532\ See Abraham et al. (2018), supra n. 529, Table 4.
---------------------------------------------------------------------------

Jackson et al. (2017) \533\ and Lim et al. (2019) \534\ use tax
information to estimate the prevalence of independent contracting. In
general, studies using tax data tend to show an increase in prevalence
of independent contracting over time. The use of tax data has some
advantages and disadvantages over survey data. Advantages include large
sample sizes, the ability to link information reported on different
records, the reduction in certain biases such as reporting bias,
records of all activity throughout the calendar year (the CWS only
references one week), and inclusion of both primary and secondary
independent contractors. Disadvantages are that independent contractor
status needs to be inferred; there is likely an underreporting bias
(i.e., some workers do not file taxes); researchers are generally
trying to match the IRS definition of independent contractor, which
does not mirror the scope of independent contractors under the FLSA;
and the estimates include misclassified independent contractors.\535\ A
major disadvantage of using tax data for this analysis is that the
detailed source data are not publicly available and thus the analyses
cannot be directly verified or adjusted as necessary (e.g., to describe
characteristics of independent contractors, etc.).
---------------------------------------------------------------------------

\533\ E. Jackson, A. Looney, and S. Ramnath, ``The Rise of
Alternative Work Arrangements: Evidence and Implications for Tax
Filing and Benefit Coverage,'' OTA Working Paper 114 (2017), https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-114.pdf.
\534\ Lim et al., supra n. 512.
\535\ In comparison to household survey data, tax data may
reduce certain types of biases (such as recall bias) while
increasing other types (such as underreporting bias). Because the
Department is unable to quantify this tradeoff, it could not
determine whether, on balance, survey or tax data are more reliable.

Table 1--Summary of Estimates of Independent Contracting
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent of
Source Method [a] Definition [b] workers Sample size Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
CPS CWS............................... Survey................... Independent contractor, 6.9% 50,392............... 2017
consultant or freelance
worker (main only).
ALP................................... Survey................... Independent contractor, 7.2% 6,028................ 2015
consultant or freelance
worker (main only).
Gallup................................ Survey................... Independent contractor........ 14.7% 5,025................ 2017
GSS QWL............................... Survey................... Independent contractor, 14.1% 2,538................ 2014
consultant or freelancer
(main only).
Jackson et al. Tax data................. Independent contractor, 6.1% [c] ~5.9 million [d]..... 2014
household worker.

[[Page 62264]]

Lim et al. Tax data................. Independent contractor........ 8.1% 1% of 1099-MISC and 2016
5% of 1099-K.
--------------------------------------------------------------------------------------------------------------------------------------------------------
[a] The CPS CWS and the GSS QWL are nationally representative, and the ALP CWS is approximately nationally representative. The Gallup poll is
demographically representative but does not explicitly claim to be nationally representative. Lastly, the two tax data sets are very large random
samples and consequently are likely to be nationally representative, although the authors do not explicitly claim so.
[b] The survey data only identify independent contractors on their main job. Jackson et al. include independent contractors as long as at least 15
percent of their earnings were from self-employment income; thus, this population is broader. If Jackson et al.'s estimate is adjusted to exclude
those who are primary wage earners, the rate is 4.0 percent. Lim et al. include independent contractors on all jobs. If Lim et al.'s estimate is
adjusted to only those who receive a majority of their labor income from independent contracting, the rate is 3.9 percent.
[c] Summation of (1) 2,132,800 filers with earnings from both wages and sole proprietorships and expenses less than $5,000, (2) 4,125,200 primarily sole
proprietorships and with less than $5,000 in expenses, and (3) 3,416,300 primarily wage earners.
[d] Estimate based on a 10 percent sample of self-employed workers and a 1 percent sample of W-2 recipients.

3. Demographics of Independent Contractors
The Department reviewed demographic information on independent
contractors using the CWS, which, as stated above, only measures those
who say that their independent contractor job is their primary job and
that they worked at the independent contractor job in the survey's
reference week. According to the CWS, these primary independent
contractors are most prevalent in the construction and professional and
business services industries. These two industries comprise 44 percent
of primary independent contractors. Independent contractors tend to be
older and predominately male (64 percent). Millennials (defined as
those born 1981-1996) have a significantly lower prevalence of primary
independent contracting than older generations: 4.2 percent for
Millennials compared to 7.2 percent for Generation X (defined as those
born 1965-1980) and 10.2 percent for Baby Boomers and Matures (defined
as individuals born before 1965).\536\ However, other surveys that
capture secondary independent contractors, or those who did informal
work as independent contractors show that the prevalence of informal
work is lower among older workers. Abraham and Houseman (2019), find
that among 18- to 24-year-olds, 41.3 percent did informal work over the
past month. The rate fell to 25.7 percent for 45- to 54-year-olds, and
13.4 percent for those 75 years and older.\537\ According to MBO
partners, the COVID-19 pandemic may have accelerated this trend; when
accounting for both primary and secondary independent work, 2021 marked
the first year that Millennials and members of Generation Z (34 percent
and 17 percent of independent workers respectively) outnumbered members
of Generation X and Baby Boomers (23 percent and 26 percent
respectively) as part of the independent workforce.\538\
---------------------------------------------------------------------------

\536\ The Department used the generational breakdown used in the
MBO Partners 2017 report, ``The State of Independence in America.''
``Millennials'' were defined as individuals born 1981-1996,
``Generation X'' were defined as individuals born 1965-1980, and
``Baby Boomers and Matures'' were defined as individuals born before
1965.
\537\ Abraham and Houseman (2019), supra n. 524. Note that this
informal work may be broader than what would be considered
independent contracting and includes activities like babysitting/
housesitting and selling goods online through sites like eBay and
Craigslist. See also Upwork (2019), supra n. 529.
\538\ This data comes from the 2021 edition of the MBO Partners
report, ``The State of Independence in America.'' While maintaining
the generational breakdown used in the 2017 edition, ``Generation
Z'' was additionally defined as individuals born 1997-2012. https://info.mbopartners.com/rs/mbo/images/MBO_2021_State_of_Independence_Research_Report.pdf.
---------------------------------------------------------------------------

According to the CWS, 64 percent of primary independent contractors
are men. Additionally, Garin and Koustas (2021) find that men comprise
both a larger share of independent contractors who perform work through
traditional contracting arrangements and those who secure work through
online platforms.\539\ This study also found that a greater share of
men than women who earn income in this way are primarily self-employed;
women who perform online platform work are more likely to use that work
to supplement other income.\540\
---------------------------------------------------------------------------

\539\ Garin, A. and Koustas, D., ``The Distribution of
Independent Contractor Activity in the United States: Evidence from
Tax Filings,'' (2021).
\540\ Id.
---------------------------------------------------------------------------

According to the CWS, white workers are somewhat overrepresented
among primary independent contractors; they comprise 85 percent of this
population but only 79 percent of the population of workers.
Conversely, Black workers are somewhat underrepresented (comprising 8
percent and 13 percent, respectively).\541\ The opposite trends emerge
when evaluating the broader category of ``informal work'', where racial
minorities participate at a higher rate than white workers.\542\
Primary independent contractors are spread across the educational
spectrum, with no group especially overrepresented. The same trend in
education attainment holds for workers who participate in informal
work.\543\
---------------------------------------------------------------------------

\541\ These numbers are calculated by the Department and based
on the CWS respondents who state that their race is ``white only''
or ``black only'' as opposed to identifying as multi-racial.
\542\ Abraham and Houseman (2019), supra n. 524.
\543\ Id.

[[Page 62265]]

Table 2--Characteristics of Workers, All Workers and Independent Contractors
----------------------------------------------------------------------------------------------------------------
Number of
Number of independent Percent of
Demographic workers Percent of contractors independent
(millions) workers (primary job) contractors
(millions)
----------------------------------------------------------------------------------------------------------------
Total........................................... 158.9 100 10.6 100
----------------------------------------------------------------------------------------------------------------
By Age
----------------------------------------------------------------------------------------------------------------
16-20 (Generation Z)............................ 8.2 5.1 0.1 0.7
21-37 (Millennials)............................. 59.2 37.3 2.5 23.4
38-52 (Generation X)............................ 49.8 31.3 3.6 33.8
53+ (Baby Boomers and Matures).................. 43.6 27.5 4.5 42.1
----------------------------------------------------------------------------------------------------------------
By Sex
----------------------------------------------------------------------------------------------------------------
Female.......................................... 75.4 47.4 3.8 35.7
Male............................................ 85.4 53.7 6.8 64.3
----------------------------------------------------------------------------------------------------------------
By Race
----------------------------------------------------------------------------------------------------------------
White only...................................... 125.6 79.1 9.0 84.6
Black only...................................... 20.3 12.8 0.9 8.3
All other races................................. 14.9 9.4 0.8 7.1
----------------------------------------------------------------------------------------------------------------
By Ethnicity
----------------------------------------------------------------------------------------------------------------
Hispanic........................................ 27.0 17.0 1.6 14.8
Not Hispanic.................................... 133.8 84.2 9.0 85.2
----------------------------------------------------------------------------------------------------------------
By Industry
----------------------------------------------------------------------------------------------------------------
Agr, forestry, fishing, and hunting............. 2.6 1.6 0.2 2.0
Mining.......................................... 0.8 0.5 0.0 0.1
Construction.................................... 11.0 6.9 2.0 19.3
Manufacturing................................... 16.5 10.4 0.2 2.2
Wholesale and retail trade...................... 20.5 12.9 0.8 7.9
Transportation and utilities.................... 8.0 5.1 0.6 5.7
Information..................................... 3.0 1.9 0.2 2.2
Financial activities............................ 10.9 6.9 1.0 9.6
Professional and business services.............. 19.3 12.2 2.7 25.1
Educational and health services................. 36.2 22.8 1.0 9.6
Leisure and hospitality......................... 15.1 9.5 0.7 6.2
Other services.................................. 7.8 4.9 1.0 9.7
Public administration........................... 7.2 4.6 0.0 0.4
----------------------------------------------------------------------------------------------------------------
By Education
----------------------------------------------------------------------------------------------------------------
Less than high school diploma................... 14.3 9.0 1.0 9.3
High school diploma or equivalent............... 41.9 26.4 2.6 24.4
Less than Bachelor's degree..................... 45.3 28.5 2.8 26.5
Bachelor's degree............................... 37.3 23.5 2.7 25.5
Master's degree or higher....................... 21.9 13.8 1.5 14.5
----------------------------------------------------------------------------------------------------------------
Note: Estimates based on the 2017 CPS Contingent Worker Survey.

C. Costs

1. Rule Familiarization Costs
Regulatory familiarization costs represent direct costs to
businesses and current independent contractors associated with
reviewing the new regulation. To estimate the total regulatory
familiarization costs, the Department used (1) the number of
establishments and government entities using independent contractors,
and the current number of independent contractors; (2) the wage rates
for the employees and for the independent contractors reviewing the
rule; and (3) the number of hours that it estimates employers and
independent contractors will spend reviewing the rule. This section
presents the calculation for establishments first and then the
calculation for independent contractors.
Regulatory familiarization costs may be a function of the number of
establishments or the number of firms.\544\ Presumably, the
headquarters of a firm will conduct the regulatory review for
businesses with multiple locations and may require some locations to
familiarize themselves with the regulation at the establishment level.
Other firms may either review the rule to consolidate key takeaways for
their affiliates or they may rely entirely on

[[Page 62266]]

outside experts to evaluate the rule and relay the relevant information
to their organization (e.g., a chamber of commerce). The Department
used the number of establishments to estimate the fundamental pool of
regulated entities--which is larger than the number of firms. This
assumes that regulatory familiarization occurs at both the headquarters
and establishment levels.
---------------------------------------------------------------------------

\544\ An establishment is commonly understood as a single
economic unit, such as a farm, a mine, a factory, or a store, that
produces goods or services. Establishments are typically at one
physical location and engaged in one, or predominantly one, type of
economic activity for which a single industrial classification may
be applied. An establishment contrasts with a firm, or a company,
which is a business and may consist of one or more establishments.
See BLS, ``Quarterly Census of Employment and Wages: Concepts,''
https://www.bls.gov/opub/hom/cew/concepts.htm.
---------------------------------------------------------------------------

To estimate the number of establishments incurring regulatory
familiarization costs, the Department began by using the Statistics of
U.S. Businesses (SUSB) to define the total pool of establishments in
the United States.\545\ In 2019, the most recent year available, there
were 7.96 million establishments. These data were supplemented with the
2017 Census of Government that reports 90,075 local government
entities, and 51 state and Federal government entities.\546\ The total
number of establishments and governments in the universe used for this
analysis is 8,049,229.
---------------------------------------------------------------------------

\545\ U.S. Census Bureau, 2019 SUSB Annual Datasets by
Establishment Industry. https://www.census.gov/data/datasets/2019/econ/susb/2019-susb.html.
\546\ U.S. Census Bureau, 2017 Census of Governments. https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

This universe is then restricted to the subset of establishments
that engage independent contractors. In 2019, Lim et al. used extensive
IRS data to model the independent contractor market and found that 34.7
percent of firms hire independent contractors.\547\ These data are
based on annual tax filings, so the dataset includes firms that may
contract for only parts of a year. Multiplying the universe of
establishments and governments by 35 percent results in 2.8 million
entities.
---------------------------------------------------------------------------

\547\ Lim et al., supra n. 512, Table 10: Firm sample summary
statistics by year (2001-2015), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
---------------------------------------------------------------------------

The Department assumes that a Compensation, Benefits, and Job
Analysis Specialist (SOC 13-1141) (or a staff member in a similar
position) will review the rule.\548\ According to the Occupational
Employment and Wage Statistics (OEWS), these workers had a median wage
of $30.83 per hour in 2021 (most recent data available).\549\ Assuming
benefits are paid at a rate of 45 percent of the base wage,\550\ and
overhead costs are 17 percent of the base wage, the reviewer's
effective hourly rate is $49.94. The Department assumes that it will
take on average about 30 minutes to review the rule as proposed. The
Department believes that 30 minutes, on average, is appropriate,
because while some establishments will spend longer to review the rule,
many establishments may rely on third-party summaries of the changes or
spend little or no time reviewing the rule. Furthermore, the analysis
outlined in this rule aligns with existing judicial precedent and
previous guidance released by the Department, with which much of the
regulated community is already familiar. Total regulatory
familiarization costs to businesses in Year 1 are estimated to be $70.3
million ($49.94 x 0.5 hour x 2,817,230) in 2021 dollars.
---------------------------------------------------------------------------

\548\ A Compensation/Benefits Specialist ensures company
compliance with Federal and state laws, including reporting
requirements; evaluates job positions, determining classification,
exempt or non-exempt status, and salary; plans, develops, evaluates,
improves, and communicates methods and techniques for selecting,
promoting, compensating, evaluating, and training workers. See BLS,
``13-1141 Compensation, Benefits, and Job Analysis Specialists,''
https://www.bls.gov/oes/current/oes131141.htm.
\549\ The 2021 IC Rule used the mean wage rate to calculate rule
familiarization costs, but the Department has used the median wage
rate here, because it is more consistent with cost analyses in other
Wage and Hour Division rulemakings. The Department used the median
wage rate in the Withdrawal Rule. Generally, the Department uses
median wage rates to calculate costs, because the mean wage rate has
the potential to be biased upward by high-earning outlier wage
observations.
\550\ Employer Costs for Employee Compensation, 2021 Annual
Averages. https://www.bls.gov/ncs/data.htm.
---------------------------------------------------------------------------

For regulatory familiarization costs for independent contractors,
the Department used its estimate of 22.1 million independent
contractors and assumed each independent contractor will spend 15
minutes to review the regulation. The average time spent by independent
contractors is estimated to be smaller than for establishments and
governments. This difference is in part because the Department believes
independent contractors are likely to rely on summaries of the key
elements of the rule change published by the Department, worker
advocacy groups, media outlets, and accountancy and consultancy firms,
as has occurred with other rulemakings. This time is valued at $21.35,
which is the median hourly wage rate for independent contractors in the
CWS of $19.45 updated to 2021 dollars using the gross domestic product
(GDP) deflator.\551\ \552\ Therefore, regulatory familiarization costs
to independent contractors in Year 1 are estimated to be $118 million
($21.35 x 0.25 hour x 22.1 million).
---------------------------------------------------------------------------

\551\ Based on Department calculations using the individual
level data. The Department also calculated the mean hourly wage for
independent contractors using the CWS data and found that the mean
wage in 2017 was $27.29, which would be $29.97 updated to 2021
dollars using the GDP deflator.
\552\ In the 2021 IC Rule the Department included an additional
45 percent for benefits and 17 percent for overhead. These
adjustments have been removed here, because independent contractors
do not usually receive employer provided benefits and generally have
overhead costs built into their hourly rate.
---------------------------------------------------------------------------

The total one-time regulatory familiarization costs for
establishments, governments, and independent contractors are estimated
to be $188.3 million. Regulatory familiarization costs in future years
are assumed to be de minimis. Employers and independent contractors
would continue to familiarize themselves with the applicable legal
framework in the absence of the rule, so this rulemaking is not
expected to impose costs after the first year. This amounts to a 10-
year annualized cost of $26.0 million at a discount rate of 3 percent
or $25.1 million at a discount rate of 7 percent.

D. Benefits

1. Increased Consistency
This proposed rule presents a detailed analysis for determining
employee or independent contractor status under the Act that is more
consistent with existing judicial precedent and the Department's
longstanding guidance prior to the 2021 IC Rule. This analysis will
provide more consistent guidance to employers in properly classifying
workers as employees or independent contractors, as well as useful
guidance to workers on whether they are correctly classified as
employees or independent contractors. The analysis will provide a
consistent approach for those businesses that engage (or wish to
engage) independent contractors, who the Department recognizes play an
important role in the economy. The proposed rule's consistency with
judicial precedent could also help to reduce legal disputes.
2. Reduced Misclassification
This proposed rule would provide consistent guidance to employers
in properly classifying workers as employees or independent
contractors, as well as useful guidance to workers on whether they are
correctly classified as employees or independent contractors. This
clear guidance could help reduce the occurrence of misclassification.
The prevalence of misclassification of employees as independent
contractors is unclear, but the literature indicates it is substantial.
A 2020 National Employment Law Project (NELP) report, for example,
reviewed state audits and concluded that ``these state reports show
that 10 to 30 percent of employers (or more) misclassify their
employees as independent contractors.'' \553\ Similarly,

[[Page 62267]]

a 2000 Department of Labor study also found that ``between 10 percent
and 30 percent of employers audited in 9 states misclassified workers
as independent contractors.'' \554\ This same report found that
depending on the state, between 1 percent and 9 percent of workers are
misclassified as independent contractors.
---------------------------------------------------------------------------

\553\ NELP, Independent Contractor Misclassification Imposes
Huge Costs on Workers and Federal and State Treasuries, (Oct. 2020),
https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-federal-state-treasuries-update-october-2020.
\554\ Lalith de Silva, Adrian Millett, Dominic Rotondi, and
William F. Sullivan, ``Independent Contractors: Prevalence and
Implications for Unemployment Insurance Programs'' Report of
Planmatics, Inc., for U.S. Department of Labor Employment and
Training Administration (2000), https://wdr.doleta.gov/owsdrr/00-5/00-5.pdf.
---------------------------------------------------------------------------

Misclassification disproportionately affects Black, indigenous, and
people of color (BIPOC) because of the disparity in occupations
affected by misclassification.\555\ High incidence of misclassification
of employees as independent contractors has been documented in
agriculture, construction, trucking, housecleaning, in-home care,
stagecraft, and `sharing economy' companies.\556\
---------------------------------------------------------------------------

\555\ See NELP, supra n. 553.
\556\ Carr[eacute], F. (2015). (In)dependent contractor
misclassification. Economic Policy Institute. Briefing Paper #403,
https://www.epi.org/publication/independent-contractor-misclassification/.
---------------------------------------------------------------------------

Misclassification violates one of the purposes of the FLSA:
eliminating ``unfair method[s] of competition in commerce.'' \557\ When
employers misclassify employees as independent contractors, they
illegally cut labor costs, undermining law-abiding competitors.\558\
While the services offered may be comparable at face value, the
employer engaging in misclassification is able to offer lower estimates
and employers following the rules are left at a disadvantage.
---------------------------------------------------------------------------

\557\ 29 U.S.C. 202(a), (b).
\558\ Id.
---------------------------------------------------------------------------

E. Transfers

1. Employer-Provided Fringe Benefits
Misclassification of independent contractors culminates in a
reduced social safety net starting with the individual and cascading
out through the local, state, and Federal programs. Employees who are
misclassified as independent contractors generally do not receive
employer-sponsored health and retirement benefits, potentially
resulting in or contributing to long-term financial insecurity.
Employees are more likely than independent contractors to have
health insurance. According to the CWS, 75.4 percent of independent
contractors have health insurance, compared to 84.0 percent of
employees. 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).\559\
---------------------------------------------------------------------------

\559\ 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 in 2021 employers pay 5.1 percent of employees' total compensation
in retirement benefits on average ($2.03/$39.46). A 2017 Treasury study
found that in 2014, while forty two percent of wage earners made
contributions to an individual retirement account (IRA) or employer
plan, only eight percent of self-employed individuals made any
retirement contribution.\560\ Smaller retirement savings could result
in a long-term tax burden to all Americans due to increased reliance
upon social assistance programs.
---------------------------------------------------------------------------

\560\ Jackson, E., Looney, A., & Ramnath, S., Department of
Treasury, The Rise of Alternative Work Arrangements: Evidence and
Implications for Tax Filing and Benefit Coverage, Working Paper #114
(Jan. 2017), https://home.treasury.gov/system/files/131/WP-114.pdf.
As discussed in the 2021 IC Rule, this study defines retirement
accounts as ``employer-sponsored plans,'' which may not encompass
all of the possible long-term saving methods.
---------------------------------------------------------------------------

To the extent that this proposed rule would reduce
misclassification, it could result in transfers to workers in the form
of employer-provided benefits like health care and retirement benefits.
As shown in Table 3 below, using from BLS Employer Costs for Employee
Compensation, the Department has calculated the average cost to
employers for various benefits as a percentage of the average cost to
employers for wages and salaries. This share was then applied to the
median weekly wage of both full-time and part-time independent
contractors to estimate the value of these benefits to an average
independent contractor if they were to begin receiving these benefits.
The Department estimated that the value of these benefits could average
more than $15,000 annually for full-time independent contractors and
almost $6,000 annually for part-time independent contractors. This
example transfer estimate could be reduced if there is a downward
adjustment in the worker's wage rate to offset a portion of the
employer's cost associated with these new benefits.

Table 3--Potential Transfers Associated With Employer-Provided Fringe Benefits
----------------------------------------------------------------------------------------------------------------
Value of Value of
Employer cost benefit for benefit for
for benefit as the median the median
a share of weekly wage of weekly Wage of
Employer-provided fringe benefit employer cost a full-time a part-time
for wages and independent independent
salaries (Q1 contractor contractor
2022) [a] ($980) [d] ($383) [d]
----------------------------------------------------------------------------------------------------------------
Health Insurance................................................ 11.5% $112.70 $44.05
Retirement [b].................................................. 7.5% 73.50 28.73
Paid Leave [c].................................................. 10.8% 105.84 41.36
-----------------------------------------------

[[Page 62268]]

Total Annual Value of Fringe Benefits....................... .............. 15,186.08 5,934.97
----------------------------------------------------------------------------------------------------------------
[a] The share for each benefit is calculated as the cost per hour for civilian workers divided by the wages and
salaries cost per hour for civilian workers. Series IDs CMU1150000000000D, CMU1180000000000D, and
CMU1040000000000D divided by Series ID 1020000000000D
[b] Includes defined benefit and defined contribution retirement plans
[c] Includes vacation, holiday, sick and personal leave
[d] Earnings data from the 2017 CWS (https://www.bls.gov/news.release/conemp.t13.htm) were inflated to Q1 2022
using GDP Deflator

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, if workers'
classifications change from independent contractors to employees, there
could be a transfer in Federal tax liabilities from workers to
employers.\561\ Although this proposed rule only addresses 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.\562\ 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.\563\ 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 of this increased tax
liability may be partially or wholly paid for by the individuals and
companies that engage independent contractors, to the extent that the
compensation paid to independent contractors accounts for this added
tax liability. However, 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.
---------------------------------------------------------------------------

\561\ See 86 FR 1218.
\562\ 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
classification of worker as an employee or an independent contractor
under the FLSA may affect the businesses' classification decisions
for purposes of benefits and legal requirements under other Federal
laws.
\563\ Internal Revenue Service, ``Publication 15, (Circular E),
Employer's Tax Guide'' (Dec 16, 2021), 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, this proposed
rule could have an impact on state tax revenue and budgets.
Misclassification results in lost revenue and increased costs for
states, because states receive less tax revenue than they otherwise
would from payroll taxes, and they have reduced funds to unemployment
insurance, workers' compensation, and paid leave programs.\564\
Although it has not been updated more recently, the IRS conducted a
comprehensive worker misclassification estimate in 1984. At the time,
the IRS found misclassification resulted in an estimated total tax loss
of $1.6 billion in Social Security taxes, Medicare taxes, Federal
unemployment taxes, and Federal income taxes (for Tax Year 1984).\565\
To the extent workers were incorrectly classified due to misapplication
of the 2021 IC Rule, that could lead to reduced tax revenues.
---------------------------------------------------------------------------

\564\ See, e.g., Lisa Xu and Mark Erlich, Economic Consequence
of Misclassification in the State of Washington, Harvard Labor and
Worklife Program, 2 (2019), https://lwp.law.harvard.edu/files/lwp/files/wa_study_dec_2019_final.pdf; Karl A. Racine, Issue Brief and
Economic Report, Illegal Worker Misclassification: Payroll Fraud in
the District's Construction Industry, 13 (September 2019), https://oag.dc.gov/sites/default/files/2019-09/OAG-Illegal-Worker-Misclassification-Report.pdf.
\565\ Treasury Inspector General for Tax Inspection 2013,
Employers Do Not Always Follow Internal Revenue Service Worker
Determination Rulings, https://www.treasury.gov/tigta/auditreports/2013reports/201330058fr.pdf.
---------------------------------------------------------------------------

Generally, employers are only required to contribute to
unemployment insurance, disability insurance, or worker's compensation
on behalf of employees therefore independent contractors do not have
access to those benefits. Reduced unemployment insurance, disability
insurance, and worker's compensation contributions result in reduced
disbursement capabilities. Misclassification of employees as
independent contractors thus impacts the funds paid into such state
programs. Even if the misclassified worker is unaffected and needs no
assistance, the state has diminished funds for those who require the
benefits. In Tennessee, from September 2017 to October 2018, the
Uninsured Employers Fund unit ``assessed 234 penalties against
employers for not maintaining workers' compensation insurance, for a
total assessment amount of $2,730,269.60.'' \566\ This amount
represents only what was discovered by the taskforce in thirteen months
and in just one state. By rescinding the 2021 IC Rule, this proposed
rule could prevent this increased burden on government entities.
---------------------------------------------------------------------------

\566\ NELP, supra n. 553.
---------------------------------------------------------------------------

3. FLSA-Protections
When workers are properly 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). Concerning overtime pay, not only do independent
contractors not receive the overtime pay premium, but the number of
overtime hours worked by independent contractors 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 than employees, as 29 percent of self-employed independent
contractors reported working overtime versus just 17 percent for
employees.\567\

[[Page 62269]]

Additionally, independent contractors who work overtime tend to work
more hours of overtime than employees. According to the Department's
analysis of CWS data, among those who usually work overtime, the mean
usual number of overtime hours for independent contractors is 15.4 and
the mean for employees is 11.8 hours. Independent contractors are also
not protected by other provisions in the FLSA that are centered on
ensuring that women are treated fairly at work, including employer-
provided accommodations for breastfeeding workers and protections
against pay discrimination.
---------------------------------------------------------------------------

\567\ 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).
---------------------------------------------------------------------------

As discussed above, compared to the 2021 IC Rule, this proposed
rule could result in reduced misclassification of employees as
independent contractors. Any reduction in misclassification that occurs
as a result of this proposed rule would lead to an increase in the
applicability of these FLSA protections for workers and subsequently
may result in transfers relating to minimum wage and overtime.
Specifically, to the extent misclassified workers were not earning the
minimum wage, reduced misclassification would increase hourly wages for
these workers to the Federal minimum wage. Similarly, to the extent
misclassified workers were not receiving the applicable overtime pay,
reduced misclassification would increase overtime pay for any overtime
hours they continued to work. However, compared to the economic
landscape prior to the Department's enforcement of the 2021 IC Rule in
March 2022, these transfers would be less likely to occur.
4. Hourly Wages, Bonuses, and Related Compensation
In addition to increased compliance with minimum wage and overtime
requirements, potential transfers may also result from this rulemaking
as a consequence of differences in earnings between employees and
independent contractors.\568\ Independent contractors are generally
expected to earn a wage premium relative to employees who perform
similar work to compensate for their reduced access to benefits and
increased tax liability. However, this may not always be the case in
practice. 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 independent
contractor to an employee.
---------------------------------------------------------------------------

\568\ The discussion of data on the differences in earnings
between employees and independent contractors in the 2021 IC Rule
was potentially confusing and included some evidence that was not
statistically significant, so the findings and methodology are
discussed again here.
---------------------------------------------------------------------------

The Department used an approach similar to Katz and Krueger
(2018).\569\ Both regressed hourly wages on independent contractor
status \570\ 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.\571\
---------------------------------------------------------------------------

\569\ Katz and Krueger (2018), supra n. 517.
\570\ On-call workers, temporary help agency workers, and
workers provided by contract firms are excluded from the base group
of ``traditional'' employees.
\571\ 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 n. 517.
---------------------------------------------------------------------------

Both analyses found similar results. A simple comparison of mean
hourly wages showed that independent contractors tend to earn more per
hour than employees (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, they recommended caution in interpreting these results due
to the imprecision of the estimates.\572\ The Department found no
statistically significant difference between independent contractors'
and employees' hourly wages in the 2017 CWS data.
---------------------------------------------------------------------------

\572\ See top of page 20, ``Given the imprecision of the
estimates, we recommend caution in interpreting the estimates from
the [ALP].'' The standard error on the estimated coefficient on the
independent contractor variable in Katz and Kreuger's regression
based on the 2015 ALP is more than 2.5 times larger than the
standard error of the coefficient using the 2017 CWS.
---------------------------------------------------------------------------

Based on these inconclusive results, the Department believes it is
inappropriate to conclude independent contractors generally earn a
higher hourly wage than employees. 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 indicate that in addition to the lower wages earned by
Black workers in general, Black independent contractors also earn less
per hour than independent contractors of other races; however, this is
not statistically significant at the most commonly used significance
level.\573\
---------------------------------------------------------------------------

\573\ 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.
---------------------------------------------------------------------------

In addition to the potential transfers discussed above, the
Department welcomes comments on how the interaction of these transfer
dynamics may be realized by workers and businesses.

F. Analysis of Regulatory Alternatives

Pursuant to its obligations under Executive Order 12866,\574\ the
Department assessed four regulatory alternatives to this proposed rule.
The Department welcomes comments on these regulatory alternatives, as
well as suggestions regarding any other potential alternatives.
---------------------------------------------------------------------------

\574\ E.O. 12866, section 6(a)(3)(C)(iii), 58 FR 51741.
---------------------------------------------------------------------------

The Department previously considered and rejected the first two
alternatives described below--codifying either a common law or ABC test
for determining employee or independent contractor status--in the 2021
IC Rule.\575\ Although the Department continues to believe that legal
limitations prevent the Department from adopting either of those
alternatives, the Department nonetheless presents them as regulatory
alternatives, which is permissible under OMB guidance.\576\
---------------------------------------------------------------------------

\575\ See 86 FR 1238.
\576\ OMB Circular A-4 advises that agencies ``should discuss
the statutory requirements that affect the selection of regulatory
Approach. If legal constraints prevent the selection of a regulatory
action that best satisfies the philosophy and principles of
Executive Order 12866, [agencies] should identify these constraints
and estimate their opportunity cost. Such information may be useful
to Congress under the Regulatory Right-to-Know Act.''
---------------------------------------------------------------------------

[[Page 62270]]

Revenue Code.\577\ The focus of the common law control test is ``the
hiring party's right to control the manner and means by which [work] is
accomplished,'' \578\ but the Supreme Court has explained that ``other
factors relevant to the inquiry [include] the skill required; the
source of the instrumentalities and tools; the location of the work;
the duration of the relationship between the parties; whether the
hiring party has the right to assign additional projects to the hired
party; the extent of the hired party's discretion over when and how
long to work; the method of payment; the hired party's role in hiring
and paying assistants; whether the work is part of the regular business
of the hiring party; whether the hiring party is in business; the
provision of employee benefits; and the tax treatment of the hired
party.'' \579\
---------------------------------------------------------------------------

\577\ See 26 U.S.C. 3121(d)(2) (generally defining the term
``employee'' under the Internal Revenue Code as ``any individual
who, under the usual common law rules applicable in determining the
employer-employee relationship, has the status of an employee''); 42
U.S.C. 410(j)(2) (similarly defining ``employee'' under the Social
Security Act); see also, e.g., Darden, 503 U.S. 318 (holding that
``a common-law test'' should resolve employee/independent contractor
disputes under ERISA); Reid, 490 U.S. at 751 (applying ``principles
of general common law of agency'' to determine ``whether . . . work
was prepared by an employee or an independent contractor'' under the
Copyright Act of 1976). The Supreme Court has advised that the
common law control test applies by default under Federal law unless
a statute specifies an alternative standard. See Darden, 503 U.S. at
322-23 (`` `[W]hen Congress has used the term `employee' without
defining it, we have concluded that Congress intended to describe
the conventional master-servant relationship as understood by
common-law agency doctrine.' '') (quoting Reid, 490 U.S. at 739-40).
\578\ Reid, 490 U.S. at 751.
\579\ Id. at 751-52.
---------------------------------------------------------------------------

Although the common law control test considers some of the same
factors as those identified in the proposed rule's ``economic reality''
test (e.g., skill, length of the working relationship, the source of
equipment and materials, etc.), courts generally recognize that,
because of its focus on control, the common law test is more permissive
of independent contracting arrangements than the economic reality test,
which examines the economic dependence of the worker.\580\
---------------------------------------------------------------------------

\580\ See, e.g., Flint Eng'g, 137 F.3d at 1440 (recognizing that
the ``economic realities'' test is a more expansive standard for
determining employee status than the common law test).
---------------------------------------------------------------------------

Codifying a common law control test for the FLSA may create a more
uniform legal framework among Federal statutes, in the sense that
entities would not, for example, have to understand and apply one
employment classification standard for tax purposes and a different
employment classification standard for FLSA purposes. However, the
Department does not believe that adopting a common law control test for
determining employee or independent contractor status under the FLSA
would otherwise simplify the analysis for the regulated community
because courts and enforcement agencies applying a common law test for
independent contractors have considered a greater number and different
variation of factors than the six or so factors commonly considered
under the economic reality test.\581\ And as with the economic reality
test, the Supreme Court has cautioned that ``the common-law test
contains `no shorthand formula or magic phrase that can be applied to
find the answer, [as] all of the incidents of the relationship must be
assessed and weighed with no one factor being decisive.' '' \582\
---------------------------------------------------------------------------

\581\ See RESTATEMENT (THIRD) OF AGENCY sec. 7.07, Comment (f)
(2006) (identifying 10 factors); IRS Tax Topic No. 762 Independent
Contractor vs. Employee (May 19, 2022), https://www.irs.gov/taxtopics/tc762 (explaining the common law analysis through three
main categories: behavioral control, financial control, and the
relationship of the parties); Reid, 490 U.S. at 751-52 (identifying
13 factors).
\582\ Darden, 503 U.S. at 324 (quoting United Ins. Co. of
America, 390 U.S. at 258).
---------------------------------------------------------------------------

With respect to workers, replacing the FLSA's economic reality test
with a common law control test would jeopardize the employment status
of some economically dependent workers who have traditionally qualified
as FLSA-covered employees. The Department believes that depriving
economically dependent workers of the FLSA's wage and hour protections
would be detrimental to such workers, for reasons explained earlier.
Moreover, applying the common law test would be contrary to the
``suffer or permit'' language in section 3(g) of the FLSA, which the
Supreme Court has interpreted as demanding a broader definition of
employment than that which exists under the common law.\583\
Accordingly, the Department believes it is legally constrained from
adopting the common law control test absent Congressional legislation
to amend the FLSA.
---------------------------------------------------------------------------

\583\ See, e.g., Darden, 503 U.S. at 326; Portland Terminal, 330
at 150-51.
---------------------------------------------------------------------------

For the second alternative, the Department considered codifying an
``ABC'' test to determine independent contractor status under the FLSA,
similar to the ABC test recently adopted under California's state wage
and hour law.\584\ As described by the California Supreme Court in
Dynamex, ``[t]he ABC test presumptively considers all workers to be
employees, and permits workers to be classified as independent
contractors only if the hiring business demonstrates that the worker in
question satisfies each of three conditions: (a) that the worker is
free from the control and direction of the hirer in connection with the
performance of the work, both under the contract for the performance of
the work and in fact; and (b) that the worker performs work that is
outside the usual course of the hiring entity's business; and (c) that
the worker is customarily engaged in an independently established
trade, occupation, or business of the same nature as that involved in
the work performed.'' \585\ In justifying the adoption of this test for
independent contractors, the Dynamex court noted the existence of an
``exceptionally broad suffer or permit to work standard'' in
California's wage and hour statute,\586\ as well as ``the more general
principle that wage orders are the type of remedial legislation that
must be liberally construed in a manner that serves its remedial
purposes.'' \587\
---------------------------------------------------------------------------

\584\ See Dynamex, 416 P.3d 1; Assembly Bill (``A.B.'') 5, Ch.
296, 2019-2020 Reg. Sess. (Cal. 2019) (codifying the ABC test
articulated in Dynamex); A.B. 2257, Ch. 38, 2019-2020 Reg. Sess.
(Cal. 2020) (retroactively exempting certain professions,
occupations, and industries from the ABC test that A.B. 5 had
codified). The ABC test originated in state unemployment insurance
statutes, but some state courts and legislatures have recently
extended the test to govern employee/independent contractor disputes
under state wage and hour laws. See Keith Cunningham-Parmeter, Gig-
Dependence: Finding the Real Independent Contractors of Platform
Work, 39 N. Ill. U. L. Rev. 379, 408-11 (2019) (discussing the
origins and recent expansion of the ABC test).
\585\ 416 P.3d at 34 (emphasis in original). California's ABC
test is slightly different than versions of the ABC test adopted (or
presently under consideration) in other states. For example, New
Jersey provides that a hiring entity may satisfy the ABC test's
``B'' prong by establishing either: (1) that the work provided is
outside the usual course of the business for which the work is
performed, or (2) that the work performed is outside all the places
of business of the hiring entity. N.J. Stat. Ann. sec. 43:21-
19(i)(6)(A-C). The Department has chosen to analyze California's ABC
test as a regulatory alternative because businesses subject to
multiple standards, including nationwide businesses, are likely to
comply with the most demanding standard if they wish to make
consistent classification determinations.
\586\ 416 P.3d at 31; see also Cal. Code Regs., tit. 8, sec.
11090, subd. 2(D) (```Employ' means to engage, suffer, or permit to
work.''). The Dynamex court noted that California's adoption of the
``suffer or permit to work'' standard predated the enactment of the
FLSA and was therefore ``not intended to embrace the federal
economic reality test'' that subsequently developed. 416 P.3d at 35.
\587\ Id. at 32.
---------------------------------------------------------------------------

Compared to either the common law or economic reality tests,
codifying an ABC test would establish a far simpler and clearer
standard for determining whether workers are employees or independent
contractors. The ABC test only has three criteria, and no balancing of
the criteria is required; all three prongs must be satisfied for a
worker to

[[Page 62271]]

qualify as an independent contractor. For this reason, adopting an ABC
test may eliminate some of the uncertainty related to independent
contracting under laws which apply different standards, and
substantially reduce the risk of worker misclassification.\588\ Though
an ABC test would be clear and simple to use for regulated entities who
use (or wish to use) independent contractors, it would also be more
restrictive of independent contracting arrangements compared to the
proposed rule.
---------------------------------------------------------------------------

\588\ See id. at 48 (observing that the ABC test ``will provide
greater clarity and consistency, and less opportunity for
manipulation, than a test or standard that invariably requires the
consideration and weighing of a significant number of disparate
factors on a case-by-case basis'').
---------------------------------------------------------------------------

In any event, the Department believes it is legally constrained
from adopting an ABC test because the Supreme Court has held that the
economic reality test is the applicable standard for determining
workers' classification under the FLSA as an employee or independent
contractor.\589\ Moreover, the Supreme Court has stated that the
existence of employment relationships under the FLSA ``does not depend
on such isolated factors'' as the three independently determinative
factors in the ABC test, ``but rather upon the circumstances of the
whole activity.'' \590\ Because the ABC test is inconsistent with
Supreme Court precedent interpreting the FLSA, the Department believes
that it could only implement an ABC test if the Supreme Court revisits
its precedent or if Congress passes legislation to amend the FLSA.
---------------------------------------------------------------------------

\589\ See Tony & Susan Alamo, 471 U.S. at 301 (``The test of
employment under the Act is one of `economic reality.'''); Whitaker
House, 366 U.S. at 33 (```economic reality' rather than `technical
concepts' is . . . the test of employment'' under the FLSA) (citing
Silk, 331 U.S. at 713; Rutherford, 331 U.S. at 729).
\590\ Rutherford, 331 U.S. at 730.
---------------------------------------------------------------------------

For the third alternative, the Department considered a proposed
rule that would not fully rescind the 2021 IC Rule and instead retain
some aspects of that rule. As the Department has noted throughout this
proposal, there are multiple instances in which this NPRM is consistent
or in agreement with the 2021 IC Rule. Specifically, the Department has
noted its agreement with the following aspects of the 2021 IC Rule: a
totality of the circumstances test should be applied to appropriately
determine classification as an employee or independent contractor; the
concept of economic dependence needs further development; and a clear
explanation of the test for whether a worker is an employee or
independent contractor in easily accessible regulatory text is
valuable. This proposal also includes several other important
principles from the case law that were included in the 2021 IC Rule:
economic dependence is the ultimate inquiry; the list of economic
reality factors is not exhaustive; and no single factor is
determinative. Further, with respect to specific factors, this proposal
reinforces certain aspects addressed in the 2021 IC Rule such as that
an exclusivity requirement imposed by the employer is a strong
indicator of control, and that issues related to scheduling and
supervision over the performance of the work (including the ability to
assign work) are relevant considerations under the control factor.
Despite these areas of agreement, the governing principle of the
2021 IC Rule is that two of the economic reality factors are
predetermined to be more probative and therefore carry more weight,
which may obviate the need to meaningfully consider the remaining
factors. Upon further consideration, as discussed in this proposal, the
Department believes that this departure from decades of case law and
the Department's own longstanding position that no one factor or subset
of factors should carry more or less weight would have a confusing and
disruptive effect on employers and workers alike. The Department
considered simply removing the problematic ``core factors'' analysis
from the 2021 IC Rule and retaining the five factors as described in
the rule. However, the Department rejected this approach because other
aspects of the rule such as considering investment and initiative only
in the opportunity for profit or loss factor and excluding
consideration of whether the work performed is central or important to
the employer's business are also in tension with judicial precedent and
longstanding Department guidance. These provisions narrow the economic
reality test by limiting the facts that may be considered as part of
the test, facts which the Department believes are relevant in
determining whether a worker is economically dependent on the employer
for work or in business for themself. Therefore, after considering all
of the common aspects of the 2021 IC Rule and whether to retain some
portions of that rule, the Department has concluded that in order to
provide clear, affirmative regulatory guidance that aligns with case
law and is consistent with the text and purpose of the Act as
interpreted by courts, a complete rescission and replacement of the
2021 IC Rule is needed. For these reasons, the Department is not
proposing a partial rescission of the 2021 IC Rule.
For the fourth alternative, the Department considered rescinding
the 2021 IC Rule and providing guidance on employee or independent
contractor classification through subregulatory guidance. For more than
80 years prior to the 2021 IC Rule, the Department primarily issued
subregulatory guidance in this area and did not have generally
applicable regulations on the classification of workers as employees or
independent contractors. This subregulatory guidance was informed by
the case law and set forth a multifactor economic reality test to
answer the ultimate question of economic dependence. The Department
considered rescinding the 2021 IC Rule and continuing to provide
subregulatory guidance for stakeholders through existing documents
(such as Fact Sheet #13) and new documents (for example a Field
Assistance Bulletin). Rescinding the 2021 IC Rule without issuing a new
regulation would lower the regulatory familiarity costs associated with
the proposal. As explained in sections III, IV, and V above, however,
the Department believes that replacing the 2021 IC Rule with
regulations addressing the multifactor economic reality test that more
fully reflects the case law and continues to be relevant to the modern
economy will be helpful for both workers and employers. Specifically,
issuing regulations allows the Department to provide in-depth guidance
that is more closely aligned with circuit case law, rather than the
regulations set forth in the 2021 IC Rule which have created a
dissonance between the Department's regulations and judicial precedent.
Additionally, issuing regulations allows the Department to formally
collect and consider a wide range of views from stakeholders by
electing to use the notice-and-comment process. Finally, because courts
are accustomed to considering relevant agency regulations, providing
guidance in this format may further improve consistency among courts
regarding this issue Therefore, the Department is not proposing to
rescind the 2021 IC Rule and provide only subregulatory guidance but
welcomes comments on the costs and benefits of this alternative.

VIII. Initial Regulatory Flexibility Act (IRFA) 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 (March 29, 1996), requires Federal agencies
engaged in rulemaking to consider the impact of their proposals on
small entities,

[[Page 62272]]

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. Agencies must perform a review to determine whether a
proposed or final rule would have a significant economic impact on a
substantial number of small entities.

A. Why the Department Is Considering Action

As discussed in section II.E., on March 14, 2022, a district court
in the Eastern District of Texas issued a decision vacating the
Department's delay and withdrawal of the 2021 IC Rule and concluding
that the 2021 IC Rule became effective on March 8, 2021.\591\ The
Department believes that the 2021 IC Rule does not fully comport with
the FLSA's text and purpose as interpreted by the courts and will have
a confusing and disruptive effect on workers and businesses alike due
to its departure from decades of case law describing and applying the
multifactor economic reality test. Therefore, the Department believes
it is appropriate to rescind the 2021 IC Rule and set forth an analysis
for determining employee or independent contractor status under the Act
that is more consistent with existing judicial precedent and the
Department's longstanding guidance prior to the 2021 IC Rule.
---------------------------------------------------------------------------

\591\ See Coalition for Workforce Innovation, 2022 WL 1073346.
---------------------------------------------------------------------------

B. Objectives of and the Legal Basis for the Proposed Rule

The Department is proposing to modify the regulations addressing
whether workers are employees or independent contractors under the
FLSA. Specifically, the Department is proposing to discontinue the use
of ``core factors'' and instead proposing to return to a totality-of-
the-circumstances analysis of the economic reality test in which the
factors do not have a predetermined weight and are considered in view
of the economic reality of the whole activity. The Department is
further proposing to return the consideration of investment to a
standalone factor, provide additional analysis of the control factor
(including detailed discussions of how scheduling, remote supervision,
price-setting, and the ability to work for others should be
considered), and return to the longstanding interpretation of the
integral factor, which considers whether the work is integral to the
employer's business. The Department is also proposing to formally
rescind the 2021 IC Rule.
The Department believes that rescinding the 2021 IC Rule and
replacing it with regulations addressing the multifactor economic
reality test--in a way that both more fully reflects the case law and
continues to be relevant to the evolving economy--would be helpful for
both workers and employers. The Department believes this proposal will
help protect workers from misclassification while at the same time
providing a consistent approach for those businesses that engage (or
wish to engage) independent contractors.
The Department's authority to interpret the Act comes with its
authority to administer and enforce the Act. See Herman v. Fabri-
Centers of Am., Inc., 308 F.3d 580, 592-93 & n.8 (6th Cir. 2002)
(noting that ``[t]he Wage and Hour Division of the Department of Labor
was created to administer the Act'' while agreeing with the
Department's interpretation of one of the Act's provisions); Dufrene v.
Browning-Ferris, Inc., 207 F.3d 264, 267 (5th Cir. 2000) (``By granting
the Secretary of Labor the power to administer the FLSA, Congress
implicitly granted him the power to interpret.''); Condo v. Sysco
Corp., 1 F.3d 599, 603 (7th Cir. 1993) (same).

C. Estimating the Number of Small Businesses Affected by the Rulemaking

The Department used the Small Business Administration (SBA) size
standards, which determine whether a business qualifies for small-
business status, to estimate the number of small entities.\592\ \593\
The Department then applied these thresholds to the U.S. Census
Bureau's 2017 Economic Census to obtain the number of establishments
with employment or sales/receipts below the small business threshold in
the industry.\594\ These ratios of small to large establishments were
then applied to the more recent 2019 Statistics of United States
Businesses (SUSB) data on number of establishments.\595\ Next, the
Department estimated the number of small governments, defined as having
population less than 50,000, from the 2017 Census of Governments.\596\
In total, the Department estimated there are 6.5 million small
establishments or governments who could potentially have independent
contractors, and who could be affected by this rulemaking. However, not
all of these establishments will have independent contractors, and so
only a share of this number will actually be affected. The impact of
this rule could also differ by industry. As shown in Table 2 of the
regulatory impact analysis, the industries with the highest number of
independent contractors are the professional and business services and
construction industries.
---------------------------------------------------------------------------

\592\ SBA, Summary of Size Standards by Industry Sector, 2017,
https://www.sba.gov/sites/default/files/2018-05/Size_Standards_Table_2017.xlsx.
\593\ The most recent size standards were issued in 2022.
However, the Department used the 2017 standards for consistency with
the older Economic Census data.
\594\ The 2017 data are the most recently available with revenue
data.
\595\ For this analysis, the Department excluded independent
contractors who are not registered as small businesses, and who are
generally not captured in the Economic Census, from the calculation
of small establishments.
\596\ 2017 Census of Governments. https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

Additionally, as discussed in section VII.B., the Department
estimates that there are 22.1 million independent contractors. Some of
these independent contractors may be considered small businesses and
may also be impacted by this rule.
The Department welcomes comments and data on any costs to small
businesses.

D. Compliance Requirements of the Proposed Rule, Including Reporting
and Recordkeeping

This proposed rule lays out the framework for assessing employee or
independent contractor status under the FLSA. It does not create any
new reporting or recordkeeping requirements for businesses.
In the Regulatory Impact Analysis, the Department estimated
regulatory familiarization to be one hour per entity and one-quarter
hour per independent contractor. The per-entity cost for small business
employers is the regulatory familiarization cost of $24.97, or the
fully loaded median hourly wage of a Compensation, Benefits, and Job
Analysis Specialist multiplied by 0.5 hour. The per-entity rule
familiarization cost for independent contractors, some of whom would be
small businesses, is $5.34, or the median hourly wage of independent
contractors in the CWS multiplied by 0.25 hour. The Department welcomes
comments and data on any costs to small businesses.

E. Relevant Federal Rules Duplicating, Overlapping, or Conflicting With
the Proposed Rule

The Department is not aware of any relevant Federal rules that
conflict with this NPRM.

[[Page 62273]]

F. Alternatives to the Proposed Rule

The RFA requires agencies to discuss ``any significant alternatives
to the proposed rule which accomplish the stated objectives of
applicable statutes and which minimize any significant economic impact
of the proposed rule on small entities.'' \597\ As discussed earlier in
section VII.F., the Department does not believe that it has the legal
authority to adopt either a common law or ``ABC'' test to determine
employee or independent contractor status under the FLSA, foreclosing
the consideration of these alternatives for purposes of the RFA.
---------------------------------------------------------------------------

\597\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

As explained in section VII.F., the Department considered two other
regulatory alternatives: proposing a rule that would not fully rescind
the 2021 IC Rule and instead retain some aspects of that rule in the
new proposal; and completely rescinding the 2021 IC Rule and providing
guidance on employee or independent contractor classification through
subregulatory guidance, as the Department had done for over 80 years
prior to the 2021 IC Rule. The Department believes that the overall
economic impact of retaining some portions of the 2021 IC Rule while
issuing a proposed rule to revise other portions of the rule would not
minimize the economic impact on small entitles as they would incur
costs to familiarize themselves with the new regulation. Similarly, the
Department believes that the overall economic impact of fully
rescinding the 2021 IC Rule and providing subregulatory guidance, would
not necessarily minimize the economic impact on small entities as they
would incur some costs to familiarize themselves with any subregulatory
guidance. Moreover, as explained in sections III, IV, and V above, the
Department believes that replacing the 2021 IC Rule with regulations
addressing the multifactor economic reality test that more fully
reflect the case law and continue to be relevant to the modern economy
will be helpful for both workers and employers, particularly over the
long term.
In addition to the alternatives discussed above, Section 603(c) of
the RFA describes four categories of regulatory alternatives that might
be appropriate for consideration in an IRFA analysis The Department
does not believe that the FLSA is best interpreted to encompass these
categories of regulatory alternatives or that they are necessarily
applicable to this proposal.
1. Differing Compliance or Reporting Requirements That Take Into
Account the Resources Available to Small Entities
Nothing in the FLSA or the decades of court decisions interpreting
it suggest that a worker's status as an employee or independent
contractor should turn on the size of the entity that benefits from
their labor. As described earlier, one of the primary goals of the FLSA
is to curtail ``unfair method[s] of competition in commerce'' by
establishing minimum labor standards that all covered employers must
observe.\598\ Providing differing compliance or reporting requirements
for small businesses would undermine this important purpose of the
FLSA. The Department makes available a variety of resources to
employers for understanding their obligations and achieving compliance
and, if this proposed rule is finalized, will prepare a small entity
compliance guide, as required by the Small Business Regulatory
Enforcement Fairness Act (SBREFA).\599\ Therefore, the Department has
not proposed differing compliance or reporting requirements for small
businesses.
---------------------------------------------------------------------------

\598\ 29 U.S.C. 202(a)(3).
\599\ Small Business Regulatory Enforcement Fairness Act, Public
Law 104-121, sec. 212.
---------------------------------------------------------------------------

2. The Clarification, Consolidation, or Simplification of Compliance
and Reporting Requirements for Small Entities
This proposed rule does not impose any new reporting requirements,
and the Department makes available a variety of resources to employers
for understanding their obligations and achieving compliance.
3. The Use of Performance Rather Than Design Standards
This proposed rule provides guidance regarding the factors that
should be considered regarding a worker's employment status under the
FLSA where no one factor is, in a pre-determined manner, given more
weight than the others and the weight given to the various factors may
depend on the particular circumstances of the case.
4. An Exemption From Coverage of the Rule, or Any Part Thereof, for
Such Small Entities
Creating an exemption from coverage of this proposed rule for
businesses with as many as 500 employees, those defined as small
businesses under SBA's size standards, would be inconsistent with the
FLSA, which applies to all employers that satisfy the enterprise
coverage threshold or employ individually covered employees, regardless
of the employer's number of employees. Further, as described above,
case law interpreting the distinction between employees and independent
contractors under the FLSA does not support such an exemption.
The Department welcomes comments on this IRFA's analysis of
regulatory alternatives.

IX. Unfunded Mandates Reform Act of 1995

The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532, requires
agencies to prepare a written statement, which includes an assessment
of anticipated costs and benefits, before proposing any unfunded
Federal mandate that may result in excess of $100 million (adjusted
annually for inflation) in expenditures in any one year by State,
local, and tribal governments in the aggregate, or by the private
sector. Adjusting the threshold for inflation using the GDP deflator,
using the most recent annual result (2021), yields a threshold of $165
million. Therefore, this rulemaking is expected to create unfunded
mandates that exceed that threshold. See section VII for an assessment
of anticipated costs and benefits.

X. Executive Order 13132, Federalism

The Department has reviewed this proposed rule in accordance with
Executive Order 13132 regarding federalism and determined that it does
not have federalism implications. The proposed rule would 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.

XI. Executive Order 13175, Indian Tribal Governments

This proposed rule would not have tribal implications under
Executive Order 13175 that would require a tribal summary impact
statement. The proposed rule would 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.

List of Subjects

29 CFR Part 780

Agriculture, Child labor, Wages.

29 CFR Part 788

Forests and forest products, Wages.

[[Page 62274]]

29 CFR Part 795

Employment, Wages.
For the reasons set out in the preamble, the Department of Labor
proposes to amend 29 CFR chapter V as follows:

PART 780--EXEMPTIONS APPLICABLE TO AGRICULTURE, PROCESSING OF
AGRICULTURAL COMMODITIES, AND RELATED SUBJECTS UNDER THE FAIR LABOR
STANDARDS ACT

0
1. The authority citation for part 780 continues to read as follows:

Authority: Secs. 1-19, 52 Stat. 1060, as amended; 75 Stat. 65;
29 U.S.C. 201-219. Pub. L. 105-78, 111 Stat. 1467.
0
2. Amend Sec. 780.330 by revising paragraph (b) to read as follows:

Sec. 780.330 Sharecroppers and tenant farmers.

* * * * *
(b) In determining whether such individuals are employees or
independent contractors, the criteria set forth in Sec. Sec. 795.100
through 795.110 of this chapter are used.
* * * * *

PART 788--FORESTRY OR LOGGING OPERATIONS IN WHICH NOT MORE THAN
EIGHT EMPLOYEES ARE EMPLOYED

0
3. The authority citation for part 788 continues to read as follows:

Authority: Secs. 1-19, 52 Stat. 1060, as amended; 29 U.S.C.
201-219.

0
4. Amend Sec. 788.16 by revising paragraph (a) to read as follows:

Sec. 788.16 Employment relationship.

(a) In determining whether individuals are employees or independent
contractors, the criteria set forth in Sec. Sec. 795.100 through
795.110 of this chapter are used.
* * * * *
0
5. Add part 795 to read as follows:

PART 795--EMPLOYEE OR INDEPENDENT CONTRACTOR CLASSIFICATION UNDER
THE FAIR LABOR STANDARDS ACT.

Sec.
795.100 Introductory statement.
795.105 Determining employee or independent contractor
classification under the FLSA.
795.110 Economic reality test to determine economic dependence.
795.115 Severability.

Authority: 29 U.S.C. 201-219.

Sec. 795.100 Introductory statement.

This part contains the Department of Labor's (the Department)
general interpretations for determining whether workers are employees
or independent contractors under the Fair Labor Standards Act (FLSA or
Act). See 29 U.S.C. 201-19. These interpretations are intended to serve
as a ``practical guide to employers and employees'' as to how the
Department will seek to apply the Act. Skidmore v. Swift & Co., 323
U.S. 134, 138 (1944). The Administrator of the Department's Wage and
Hour Division will use these interpretations to guide the performance
of their duties under the Act, unless and until the Administrator is
otherwise directed by authoritative decisions of the courts or the
Administrator concludes upon reexamination of an interpretation that it
is incorrect. To the extent that prior administrative rulings,
interpretations, practices, or enforcement policies relating to
determining who is an employee or independent contractor under the Act
are inconsistent or in conflict with the interpretations stated in this
part, they are hereby rescinded. The interpretations stated in this
part may be relied upon in accordance with section 10 of the Portal-to-
Portal Act, 29 U.S.C. 251-262, notwithstanding that after any act or
omission in the course of such reliance, the interpretation is modified
or rescinded or is determined by judicial authority to be invalid or of
no legal effect. 29 U.S.C. 259.

Sec. 795.105 Determining employee or independent contractor
classification under the FLSA.

(a) Relevance of independent contractor or employee status under
the Act. The Act's minimum wage, overtime pay, and recordkeeping
obligations apply only to workers who are covered employees. Workers
who are independent contractors are not covered by these protections.
Labeling employees as ``independent contractors'' does not make these
protections inapplicable. A determination of whether workers are
employees or independent contractors under the Act focuses on the
economic realities of the workers' relationship with the employer and
whether the workers are either economically dependent on the employer
for work or in business for themselves.
(b) Economic dependence as the ultimate inquiry. An ``employee''
under the Act is an individual whom an employer suffers, permits, or
otherwise employs to work. 29 U.S.C. 203(e)(1), (g). The Act's
definitions are meant to encompass as employees all workers who, as a
matter of economic reality, are economically dependent on an employer
for work. A worker is an independent contractor, as distinguished from
an ``employee'' under the Act, if the worker is, as a matter of
economic reality, in business for themself. Economic dependence does
not focus on the amount of income earned, or whether the worker has
other income streams.

Sec. 795.110 Economic reality test to determine economic dependence.

(a) Economic reality test. (1) In order to determine economic
dependence, multiple factors assessing the economic realities of the
working relationship are used. These factors are tools or guides to
conduct a totality-of-the-circumstances analysis. This means that the
outcome of the analysis does not depend on isolated factors but rather
upon the circumstances of the whole activity to answer the question of
whether the worker is economically dependent on the employer for work
or is in business for themself.
(2) The six factors described in paragraphs (b)(1) through (6) of
this section should guide an assessment of the economic realities of
the working relationship and the question of economic dependence.
Consistent with a totality-of-the-circumstances analysis, no one factor
or subset of factors is necessarily dispositive, and the weight to give
each factor may depend on the facts and circumstances of the particular
case. Moreover, these six factors are not exhaustive. As explained in
paragraph (b)(7) of this section, additional factors may be considered.
(b) Economic reality factors--(1) Opportunity for profit or loss
depending on managerial skill. This factor considers whether the worker
exercises managerial skill that affects the worker's economic success
or failure in performing the work. The following facts, among others,
can be relevant: whether the worker determines or can meaningfully
negotiate the charge or pay for the work provided; whether the worker
accepts or declines jobs or chooses the order and/or time in which the
jobs are performed; whether the worker engages in marketing,
advertising, or other efforts to expand their business or secure more
work; and whether the worker makes decisions to hire others, purchase
materials and equipment, and/or rent space. If a worker has no
opportunity for a profit or loss, then this factor suggests that the
worker is an employee. Some decisions by a worker that can affect the
amount of pay that a worker receives, such as the decision to work more
hours or take more jobs, generally do not reflect the

[[Page 62275]]

exercise of managerial skill indicating independent contractor status
under this factor.
(2) Investments by the worker and the employer. This factor
considers whether any investments by a worker are capital or
entrepreneurial in nature. Costs borne by a worker to perform their job
(e.g., tools and equipment to perform specific jobs and the workers'
labor) are not evidence of capital or entrepreneurial investment and
indicate employee status. Investments that are capital or
entrepreneurial in nature and thus indicate independent contractor
status generally support an independent business and serve a business-
like function, such as increasing the worker's ability to do different
types of or more work, reducing costs, or extending market reach.
Additionally, the worker's investments should be considered on a
relative basis with the employer's investments in its overall business.
The worker's investments need not be equal to the employer's
investments, but the worker's investments should support an independent
business or serve a business-like function for this factor to indicate
independent contractor status.
(3) Degree of permanence of the work relationship. This factor
weighs in favor of the worker being an employee when the work
relationship is indefinite in duration or continuous, which is often
the case in exclusive working relationships. This factor weighs in
favor of the worker being an independent contractor when the work
relationship is definite in duration, non-exclusive, project-based, or
sporadic based on the worker being in business for themself and
marketing their services or labor to multiple entities. This may
include regularly occurring fixed periods of work, although the
seasonal or temporary nature of work by itself would not necessarily
indicate independent contractor classification. Where a lack of
permanence is due to operational characteristics that are unique or
intrinsic to particular businesses or industries and the workers they
employ, rather than the workers' own independent business initiative,
this factor is not indicative of independent contractor status.
(4) Nature and degree of control. This factor considers the
employer's control, including reserved control, over the performance of
the work and the economic aspects of the working relationship. Facts
relevant to the employer's control over the worker include whether the
employer sets the worker's schedule, supervises the performance of the
work, or explicitly limits the worker's ability to work for others.
Additionally, facts relevant to the employer's control over the worker
include whether the employer uses technological means of supervision
(such as by means of a device or electronically), reserves the right to
supervise or discipline workers, or places demands on workers' time
that do not allow them to work for others or work when they choose.
Whether the employer controls economic aspects of the working
relationship should also be considered, including control over prices
or rates for services and the marketing of the services or products
provided by the worker. Control implemented by the employer for
purposes of complying with legal obligations, safety standards, or
contractual or customer service standards may be indicative of control.
More indicia of control by the employer favors employee status; more
indicia of control by the worker favors independent contractor status.
(5) Extent to which the work performed is an integral part of the
employer's business. This factor considers whether the work performed
is an integral part of the employer's business. This factor does not
depend on whether any individual worker in particular is an integral
part of the business, but rather whether the function they perform is
an integral part. This factor weighs in favor of the worker being an
employee when the work they perform is critical, necessary, or central
to the employer's principal business. This factor weighs in favor of
the worker being an independent contractor when the work they perform
is not critical, necessary, or central to the employer's principal
business.
(6) Skill and initiative. This factor considers whether the worker
uses specialized skills to perform the work and whether those skills
contribute to business-like initiative. This factor indicates employee
status where the worker does not use specialized skills in performing
the work or where the worker is dependent on training from the employer
to perform the work. Where the worker brings specialized skills to the
work relationship, it is the worker's use of those specialized skills
in connection with business-like initiative that indicates that the
worker is an independent contractor.
(7) Additional factors. Additional factors may be relevant in
determining whether the worker is an employee or independent contractor
for purposes of the FLSA, if the factors in some way indicate whether
the worker is in business for themself, as opposed to being
economically dependent on the employer for work.

Sec. 795.115 Severability.

If any provision of this part is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further agency action, the provision
shall be construed so as to continue to give the maximum effect to the
provision permitted by law, unless such holding shall be one of utter
invalidity or unenforceability, in which event the provision shall be
severable from this part and shall not affect the remainder thereof.

Martin J. Walsh,
Secretary of Labor.
[FR Doc. 2022-21454 Filed 10-11-22; 8:45 am]
BILLING CODE 4510-27-P