Independent Contractor Status Under the Fair Labor Standards Act, 60600-60639 [2020-21018]

Download as PDF 60600 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules DEPARTMENT OF LABOR Wage and Hour Division 29 CFR Parts 780, 788, and 795 RIN 1235–AA34 Independent Contractor Status Under the Fair Labor Standards Act Wage and Hour Division, Department of Labor. ACTION: Notice of proposed rulemaking and request for comments. AGENCY: The U.S. Department of Labor (the Department) is revising its interpretation of independent contractor status under the Fair Labor Standards Act (FLSA or Act) in order to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy. DATES: Submit written comments on or before October 26, 2020. ADDRESSES: You may submit comments, identified by Regulatory Information Number (RIN) 1235–AA34, by either of the following methods: Electronic Comments: Submit comments through the Federal eRulemaking Portal at http://www.regulations.gov. Follow the instructions for submitting comments. Mail: Address written submissions to Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S– 3502, 200 Constitution Avenue NW, Washington, DC 20210. Instructions: Please submit only one copy of your comments by only one method. Commenters submitting file attachments on www.regulations.gov are advised that uploading text-recognized documents— i.e., documents in a native file format or documents which have undergone optical character recognition (OCR)— enable staff at the Department to more easily search and retrieve specific content included in your comment for consideration. Please be advised that comments received will become a matter of public record and will be posted without change to http:// www.regulations.gov, including any personal information provided. All comments must be received by 11:59 p.m. on October 26, 2020 for consideration in this rulemaking. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period, as the Department continues to experience delays in the receipt of mail. Submit only one copy of your comments by only one method. Docket: For access to the docket to read background documents or comments, go to the khammond on DSKJM1Z7X2PROD with PROPOSALS3 SUMMARY: VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 Federal eRulemaking Portal at http:// www.regulations.gov. FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division (WHD), U.S. Department of Labor, Room S–3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693–0406 (this is not a toll-free number). Copies of this Notice of Proposed Rulemaking (NPRM) may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693–0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1–877–889– 5627 to obtain information or request materials in alternative formats. Questions of interpretation and/or enforcement of the agency’s regulations may be directed to the nearest WHD district office. Locate the nearest office by calling WHD’s toll-free help line at (866) 4US–WAGE ((866) 487–9243) between 8 a.m. and 5 p.m. in your local time zone, or logging onto WHD’s website for a nationwide listing of WHD district and area offices at http:// www.dol.gov/whd/america2.htm. SUPPLEMENTARY INFORMATION: I. Executive Summary The FLSA requires covered employers to pay their nonexempt employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek, and mandates that employers keep certain records regarding their employees. A worker who performs services for an individual or entity (‘‘person’’ as defined in the Act) as an independent contractor, however, is not that person’s employee under the Act. Thus, the FLSA does not require such person to pay an independent contractor either the minimum wage or overtime pay, nor does it require that person to keep records regarding that independent contractor. The Act does not define the term ‘‘independent contractor,’’ but it defines ‘‘employer’’ as ‘‘any person acting directly or indirectly in the interest of an employer in relation to an employee,’’ 29 U.S.C. 203(d), ‘‘employee’’ as ‘‘any individual employed by an employer,’’ id. at 203(e), and ‘‘employ’’ as ‘‘includ[ing] to suffer or permit to work,’’ id. at 203(g). See also Fair Labor Standards Amendments of 1974, Public Law 93– 259 (Apr. 8, 1974). Courts and the Department have long interpreted the ‘‘suffer or permit’’ standard to require an evaluation of the extent of the worker’s economic dependence on the potential PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 employer—i.e., the putative employer or alleged employer—and have developed a multifactor test to analyze whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and is thus an employee) or is in business for him- or herself (and is thus an independent contractor). But the test’s underpinning and the process for its application lack focus and have not always been sufficiently explained by courts or the Department, resulting in uncertainty among the regulated community. The Department believes that clear articulation will lead to increased precision and predictability in the economic reality test’s application, which will in turn benefit workers and businesses and encourage innovation and flexibility in the economy. Accordingly, in this Notice of Proposed Rulemaking (NPRM) the Department proposes to introduce a new part to Title 29 of the Code of Federal Regulations setting forth its interpretation of the FLSA as relevant to the question whether workers are ‘‘employees’’ or are independent contractors under the Act. The proposed regulations would adopt general interpretations to which courts and the Department have long adhered. For example, the proposed regulations would explain that independent contractors are workers who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on the potential employer for work. The proposed regulations would also explain that the inquiry into economic dependence is conducted through application of several factors, with no one factor being dispositive, and that actual practices are entitled to greater weight than what may be contractually or theoretically possible. The Department proposes to sharpen this inquiry into five distinct factors, instead of the five or more overlapping factors used by most courts and the Department previously. Moreover, consistent with the FLSA’s text, its purpose, and the Department’s experience administrating and enforcing it, the Department proposes that two of those factors—the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss—should be more probative of the question of economic dependence or lack thereof, and thus are afforded greater weight in the analysis than any others. This proposed rule would be the Department’s sole and authoritative E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules interpretation of independent contractor status under the FLSA. As such, it would replace the Department’s previous interpretations of independent contractor status under the FLSA in certain contexts, including interpretations found at 29 CFR 780.330(b) (interpreting independent contractor status under the FLSA for tenants and sharecroppers) and 29 CFR 788.16(a) (interpreting independent contractor status under the FLSA for certain forestry and logging workers). The Department believes this proposal will significantly clarify to stakeholders how to distinguish between employees and independent contractors under the Act and seeks comment on all aspects of this proposed rule. This proposed rule is expected to be an Executive Order (E.O.) 13771 deregulatory action. Details on the estimated increased efficiency and cost savings of this proposed rule can be found in the preliminary regulatory impact analysis (PRIA) provided below in section VI. khammond on DSKJM1Z7X2PROD with PROPOSALS3 II. Background A. Relevant FLSA Definitions Enacted in 1938, the FLSA requires, among other provisions, that covered employers pay their nonexempt employees at least the federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek, and mandates that employers keep certain records regarding their employees.1 The FLSA does not define the term ‘‘independent contractor.’’ The Act defines ‘‘employer’’ in section 3(d) to ‘‘include[ ] any person acting directly or indirectly in the interest of an employer in relation to an employee,’’ ‘‘employee’’ in section 3(e)(1) to mean ‘‘any individual employed by an employer,’’ and ‘‘employ’’ in section 3(g) to include ‘‘to suffer or permit to work.’’ 2 The Supreme Court has recognized that ‘‘there is in the [FLSA] no definition that solves problems as to the limits of the employer-employee relationship under the Act.’’ Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947). The Supreme Court has held that the ‘‘suffer or permit’’ definition is broad on its face and is more inclusive than the common law standard for determining who is employed and thereby who is an employee. The common law utilizes 1 See 29 U.S.C. 206(a), 207(a) (minimum wage and overtime pay requirements); 29 U.S.C. 211(c) (recordkeeping requirements). 2 29 U.S.C. 203(d), (e), (g). The Act defines a ‘‘person’’ as ‘‘an individual, partnership, association, corporation, business trust, legal representative, or any organized group of persons.’’ 29 U.S.C. 203(a). VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 traditional agency principles exclusively to examine the hiring party’s right to control the manner and means by which the worker accomplishes his or her task. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992) (‘‘[T]he FLSA . . . defines the verb ‘employ’ expansively to mean ‘suffer or permit to work.’ This . . . definition, whose striking breadth we have previously noted, stretches the meaning of ‘employee’ to cover some parties who might not qualify as such under a strict application of traditional agency law principles.’’ (citations omitted)); Walling v. Portland Terminal Co., 330 U.S. 148, 150–51 (1947) (‘‘But in determining who are ‘employees’ under the Act, common law employee categories or employer-employee classifications under other statutes are not of controlling significance. This Act contains its own definitions, comprehensive enough to require its application to many persons and working relationships, which prior to this Act, were not deemed to fall within an employer-employee category.’’ (citations omitted)); Rutherford Food, 331 U.S. at 728 (‘‘The [FLSA] definition of ‘employ’ is broad.’’). However, the Act’s ‘‘statutory definition[s] . . . have [their] limits.’’ Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 295 (1985) (internal citation omitted); see also Portland Terminal, 330 U.S. at 152 (‘‘The definition ‘suffer or permit to work’ was obviously not intended to stamp all persons as employees.’’). For example, the Supreme Court recognized not long after the FLSA’s passage that, despite the Act’s broad definition of ‘‘employ,’’ ‘‘[t]here may be independent contractors who take part in production or distribution who would alone be responsible for the wages and hours of their own employees.’’ Rutherford Food, 331 U.S. at 729. Accordingly, federal courts of appeals have uniformly held, and the Department has consistently maintained, that independent contractors are not ‘‘employees’’ for purposes of the FLSA. See, e.g., Saleem v. Corporate Transp. Group, Ltd., 854 F.3d 131, 139–40 (2d Cir. 2017) (noting that independent contractors are separate from employees in the context of the FLSA); Karlson v. Action Process Serv. & Private Investigation, LLC, 860 F.3d 1089, 1092 (8th Cir. 2017) (‘‘FLSA wage and hour requirements do not apply to true independent contractors.’’); Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311 (11th Cir. 2013) (‘‘[The Act’s] ‘broad’ definitions do not, however, bring ‘independent contractors’ within the PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 60601 FLSA’s ambit.’’); Hopkins v. Cornerstone America, 545 F.3d 338, 342 (5th Cir. 2008) (observing that the ‘‘FLSA applies to employees but not to independent contractors’’). Accordingly, the FLSA does not require any ‘‘person’’ to pay an independent contractor the minimum wage or overtime pay under sections 6(a) and 7(a) or to keep records regarding that independent contractor under section 11(c). B. Economic Dependence and the Economic Reality Test 1. Supreme Court Development of the Economic Reality Test In a series of cases from 1944 to 1947, the U.S. Supreme Court explored the limits of the employer-employee relationship under three different federal statutes: The FLSA, the National Labor Relations Act (NLRA), and the Social Security Act (SSA). In the first of those cases, NLRB v. Hearst Publications, Inc., 322 U.S. 111 (1944), the Court considered the meaning of ‘‘employee’’ under the NLRA, which merely defined the term to ‘‘include any employee.’’ Id. at 118– 20. The Court explained that the meaning of employee ‘‘takes color from its surroundings . . . [in] the statute where it appears, and derives meaning from the context of that statute, which must be read in the light of the mischief to be corrected and the end to be attained.’’ Id. at 124 (citations omitted). The Hearst Court rejected application of the common law standard alone, see id. at 123–25, and concluded that ‘‘the broad language of the [NLRA’s] definitions . . . leaves no doubt that its applicability is to be determined broadly, in doubtful situations, by underlying economic facts rather than technically and exclusively by previously established legal classifications.’’ Id. at 129. Congress’s reaction to Hearst’s interpretation of ‘‘employee’’ under the NLRA ‘‘was adverse,’’ and on June 23, 1947, Congress amended the NLRA ‘‘with the obvious purpose of hav[ing] the Board and the courts apply general agency principles in distinguishing between employees and independent contractors under the [NLRA].’’ NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256 (1968). On June 16, 1947, one week before Congress amended the NLRA to abrogate Hearst, the Supreme Court decided United States v. Silk, 331 U.S. 704 (1947), which addressed the distinction between employees and independent contractors under the SSA. In that case, the Court favorably summarized Hearst as setting forth E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 60602 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules ‘‘economic reality,’’ as opposed to ‘‘technical concepts’’ of the common law standard alone, as the framework for determining workers’ classification. Id. at 712–14. But it also acknowledged that not ‘‘all who render service to an industry are employees.’’ Id. Although the Court found it to be ‘‘quite impossible to extract from the [SSA] a rule of thumb to define the limits of the employer-employe[e] relationship,’’ the Court identified five factors as ‘‘important for decision’’: ‘‘degrees of control, opportunities for profit or loss, investment in facilities, permanency of relation[,] and skill required in the claimed independent operation.’’ Id. at 716. The Court added that ‘‘[n]o one [factor] is controlling nor is the list complete.’’ Id. Just a week after Silk, on June 23, 1947, the Court reiterated these five factors in another case involving employee or independent contractor status under the SSA. See Bartels v. Birmingham, 332 U.S. 126, 130 (1947). The Court explained that, under the SSA, employee status ‘‘was not to be determined solely by the idea of control which an alleged employer may or could exercise over the details of the service rendered to his business by the worker.’’ Id. Although ‘‘control is characteristically associated with the employer-employee relationship,’’ employees under ‘‘social legislation’’ such as the SSA are ‘‘those who as a matter of economic reality are dependent upon the business to which they render service.’’ Id. Thus, in addition to control, ‘‘permanency of the relation, the skill required, the investment in the facilities for work[,] and opportunities for profit or loss from the activities were also factors’’ to consider. Id. Although the Court identified these specific factors as relevant to the analysis, it explained that ‘‘[i]t is the total situation that controls’’ the worker’s classification under the SSA. Id. Decided the same day as Silk, Rutherford Food applied Hearst’s and Silk’s reasoning to the FLSA. Rutherford Food addressed whether certain workers at a plant owned by Kaiser Packing Company (Kaiser) who cut meat from the bones of slaughtered cattle were Kaiser’s employees under the FLSA or were instead independent contractors. Noting that ‘‘[d]ecisions that define the coverage of the employer-[e]mployee relationship under the [NLRA and the SSA] are persuasive in the consideration of a similar coverage under the [FLSA],’’ 331 U.S. at 723–24 (citing Hearst and Silk), the Court seemed to follow the path laid down in these previous cases by examining facts pertaining to the five VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 factors identified in Silk. For example, the Court noted that the slaughterhouse workers performed unskilled work ‘‘on the production line.’’ Id. at 730. ‘‘The premises and equipment of Kaiser were used for the work,’’ indicating little investment by the workers. Id. ‘‘The group had no business organization that could or did shift as a unit from one slaughter-house to another,’’ indicating a permanent work arrangement. Id. ‘‘The managing official of the plant kept close touch on the operation,’’ indicating control by the alleged employer. Id. And ‘‘[w]hile profits to the boners depended upon the efficiency of their work, it was more like piecework than an enterprise that actually depended for success upon the initiative, judgment or foresight of the typical independent contractor.’’ Id. In addition to facts relevant to the five Silk factors, the Court also considered whether the work was ‘‘a part of the integrated unit of production’’ (meaning whether the putative independent contractors were integrated into the assembly line alongside the company’s employees) to assess whether they were employees or independent contractors under the FLSA. Id. at 729–730. Ultimately, the Court agreed with the appellate court that the ‘‘underlying economic realities’’ led to the conclusion that the boners were employees of Kaiser under the FLSA. See id. at 727. In November 1947, five months after Silk and Rutherford Food, the Department of Treasury (Treasury) proposed regulations governing the determination of whether an individual is an independent contractor or employee under the SSA, which used a test that balanced the following factors: 1. Degree of control of the individual; 2. Permanency of relation; 3. Integration of the individual’s work in the business to which he renders service; 4. Skill required by the individual; 5. Investment by the individual in facilities for work; and 6. Opportunity of the individual for profit or loss. 12 FR 7966. Factors 1, 2, and 4–6 corresponded directly with the five factors identified as being ‘‘important for decision’’ in Silk, 331 U.S. at 716, and the third factor corresponded with Rutherford Food’s consideration of the fact that the workers were ‘‘part of an integrated unit of production.’’ 331 U.S. at 729. The Treasury proposal further relied on Bartels, 332 U.S. at 130, to apply these factors to determine whether a worker was ‘‘dependent as a matter of economic reality upon the business to which he renders services.’’ 12 FR 7966. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 However, in 1948, Congress promptly rejected this application of the proposed test. A committee report described the test as ‘‘‘a dimensionless and amorphous abstraction’ ’’ that would confer upon ‘‘ ‘the administrative agencies and the courts an unbridled license to say, at will, whether an individual is an employee or an independent contractor’ ’’ for purposes of the SSA. United States v. W.M. Webb, Inc., 397 U.S. 179, 187–88 (1970) (quoting S. Rep. No. 1255, at 12 (1948) and H.R. Rep. No. 2168, at 9 (1948)). The report stated that Congress amended the SSA to ‘‘avoid[ ] the uncertainty of the proposed ‘economic reality’ test’’ and to ensure that the common law control definition of employee alone would apply to that statute. See id. at 183–86, 191; 42 U.S.C. 410(j) (‘‘The term ‘employee’ [under the SSA] means . . . any individual who, under the usual common law rules applicable in determining the employeremployee relationship, has the status of an employee.’’). Congress abrogated the interpretations of the definitions of ‘‘employee’’ adopted in Hearst for the NLRA and in Silk and Bartels for the SSA ‘‘to demonstrate that the usual common-law principles were the keys to meaning.’’ Darden, 503 U.S. at 324–25. However, Congress did not similarly amend the FLSA. Thus, the Supreme Court stated in Darden that the scope of employment under the FLSA is broader than that under common law and is determined by the economic reality of the relationship at issue, relying on the ‘‘suffer or permit’’ standard that is unique to the FLSA. See id. However, since implicitly doing so in Rutherford Food, the Court has not again applied (or rejected the application of) the Silk factors to an FLSA classification question. Accordingly, the Supreme Court has not mandated any specific set or formulation of economic reality factors for purposes of the FLSA, nor has it explicitly opined on any factor’s relative probative value to the inquiry. See Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28, 33 (1961) (noting that ‘‘ ‘economic reality’ rather than ‘technical concepts’ is . . . the test of employment’’ under the FLSA (citing Silk, 331 U.S. at 713; Rutherford Food, 331 U.S. at 729)); Tony & Susan Alamo, 471 U.S. at 301 (‘‘The test of employment under the Act is one of ‘economic reality.’ ’’ (quoting Whitaker House, 366 U.S. at 33)).3 3 In Whitaker House, the Supreme Court concluded that certain homeworkers were employees under the FLSA, as opposed to being ‘‘self-employed’’ or ‘‘independent.’’ 366 U.S. at 33. E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 2. Application of the Economic Reality Test by Federal Courts of Appeals Following Rutherford Food, federal courts of appeals have also stated that the common law standard alone does not determine employee or independent contractor status under the FLSA and that instead the inquiry was one of economic reality. See, e.g., Wirtz v. Dr. Pepper Bottling Co. of Atlanta, 374 F.2d 5, 8 (5th Cir. 1967) (‘‘[C]ommon law concepts of the employer-employee relationship are not controlling.’’); McComb v. Homeworkers’ Handicraft Coop., 176 F.2d 633, 636 (4th Cir. 1949) (same). For several decades after Rutherford Food, courts applied this reasoning to ask, for example, whether a worker took ‘‘the usual path of an employee,’’ Dr. Pepper, 347 F.2d at 8, or had characteristics that ‘‘resembled . . . the typical independent contractor,’’ Schultz v. Cadillac Assocs., Inc., 413 F.2d 1215, 1217 (7th Cir. 1969). But they did not adopt a systematic approach to the question. In the 1970s and 1980s, federal courts of appeals began to adopt a multifactor ‘‘economic reality’’ test based on Silk, Rutherford Food, and Bartels similar to Treasury’s 1947 proposed SSA regulation to analyze whether a worker was an employee or an independent contractor under the FLSA.4 Drawing on the Supreme Court precedent discussed above, courts have recognized that the heart of the inquiry is whether ‘‘as a matter of economic reality’’ the workers are ‘‘dependent upon the business to which they render service.’’ Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir. 1976) (quoting Bartels, 332 U.S. at 130 (emphasis added)). And some courts have clarified that this question of economic dependence may be boiled down to asking ‘‘whether the individual is or is not, as a matter of economic fact, in business for himself.’’ Donovan v. Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981); see also Parrish v. Premier Directional Drilling, L.P., 917 F.3d 369, 380 (5th Cir. 2019) (‘‘Essentially, our task is to determine whether the individual is, as a matter of economic reality, in business for himself.’’ (internal quotation marks and citation The Court’s analysis did not explicitly mention the Silk factors or the concept of economic dependence from Bartels. However, the Court focused on the fact that workers were not ‘‘selling their products on the market for whatever price they could command,’’ but were instead ‘‘regimented under one organization, manufacturing what the organization desire[d] and receiving the compensation the organization dictates.’’ Id. 4 As explained below, this multifactor economic realty test had also been enforced and articulated by the Department in subregulatory guidance since the 1950s. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 omitted)); Saleem, 854 F.3d at 139 (‘‘[O]ur ultimate concern [is] whether, as a matter of economic reality, the workers depend upon someone else’s business for the opportunity to render service or are in business for themselves.’’ (internal quotation marks and citations omitted)); Baker v. Flint Eng’g & Constr. Co., 137 F.3d 1436, 1443 (10th Cir. 1998) (‘‘Our final step is to review the findings on each of the above factors and determine whether plaintiffs, as a matter of economic fact, depend upon [the employer’s] business for the opportunity to render service, or are in business for themselves.’’). Courts have emphasized that the inquiry into the level and nature of dependence in a given relationship should be based on the totality of the circumstances. See, e.g., Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376, 1382 (3d Cir. 1985) (noting that Rutherford Food ‘‘emphasized that the circumstances of the whole activity should be considered . . .’’). But these courts have also explained that a non-exhaustive, standard set of factors—derived from Silk and Rutherford—shape and guide this inquiry. See, e.g., Usery, 527 F.2d at 1311 (identifying ‘‘[f]ive considerations [which] have been set out as aids to making the determination of dependence, vel non’’); Real v. Driscoll Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir. 1979) (articulating a six-factor test). In Driscoll, the Ninth Circuit Court of Appeals described its six-factor test as follows: 1. The degree of the alleged employer’s right to control the manner in which the work is to be performed; 2. the alleged employee’s opportunity for profit or loss depending on his managerial skill; 3. the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; 4. whether the service rendered requires a special skill; 5. the degree of permanency of the working relationship; and 6. whether the service rendered is an integral part of the alleged employer’s business. Id. at 754. Most courts of appeals articulate a similar test, but application between courts may vary significantly. See, e.g., Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1534–35 (7th Cir. 1987); DialAmerica Mktg., 757 F.2d at 1382; Donovan v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984). For example, the Second Circuit has analyzed opportunity for profit or loss and investment (the second and third factors listed above) together as one factor. See, e.g., Brock v. Superior Care, Inc., 840 PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 60603 F.2d 1054, 1058 (2d Cir. 1988). And the Fifth Circuit has not adopted the sixth factor listed above, which analyzes the integrality of the work. See, e.g., Usery, 527 F.2d at 1311. A few courts of appeals have adopted noteworthy modifications to the economic reality factors as originally articulated in 1947 by the Supreme Court and by the Treasury Department. Compare, e.g., DialAmerica Mktg., 757 F.2d at 1382, with Silk, 331 U.S. at 716, and 12 FR 7966. First, the ‘‘skill required’’ factor identified in Silk, 331 U.S. at 716, is now articulated more expansively by some courts of appeals as including consideration of ‘‘initiative.’’ See, e.g., Parrish, 917 F.3d at 379 (‘‘the skill and initiative required in performing the job’’); Karlson, 860 F.3d at 1093 (same); Superior Care, 840 F.2d at 1058–59 (‘‘the degree of skill and independent initiative required to perform the work’’). Second, Silk analyzed workers’ investments, 331 U.S. at 717–19, and the investment factor was articulated in the proposed 1947 Treasury regulation as evaluating ‘‘investments by the individual in facilities for work.’’ 12 FR 7966 (emphasis added). However, the Fifth Circuit Court of Appeals has modified the ‘‘investment’’ factor to consider ‘‘the extent of the relative investments of the worker and the alleged employer.’’ Hopkins, 545 F.3d at 343. Some other circuits have adopted this ‘‘relative investment’’ approach but continue to use the phrase ‘‘worker’s investment’’ to describe the factor. See, e.g., Keller v. Miri Microsystems LLC, 781 F.3d 799, 810 (6th Cir. 2015); Dole v. Snell, 875 F.2d 802, 805 (10th Cir. 1989). Third, although the permanence factor under Silk was understood in the 1947 Treasury proposal to mean the continuity and duration of working relationships, see 12 FR 7967, some courts of appeals have expanded this factor to also consider the exclusivity of such relationships. See, e.g., Scantland, 721 F.3d at 1319; Keller, 781 F.3d at 807. Finally, Rutherford Food’s consideration of whether work is ‘‘part of an integrated unit of production,’’ 331 U.S. at 729—which was articulated as ‘‘integration of the individual’s work’’ in the 1947 Treasury proposal, 12 FR 7966—is now typically articulated by many courts of appeal as whether the service rendered is ‘‘integral,’’ which those courts have mistakenly applied as meaning important or central to the potential employer’s business. See, e.g., Verma v. 3001 Castor, Inc., 937 F.3d 221, 229 (3rd Cir. 2019) (concluding that workers’ services were integral because they were the providers of the business’s ‘‘primary offering’’); Acosta E:\FR\FM\25SEP3.SGM 25SEP3 60604 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th Cir. 2019) (concluding that services provided by workers were ‘‘integral’’ because the putative employer ‘‘built its business around’’ those services); McFeeley, 825 F.3d at 244 (consideration ‘‘the importance of the services rendered to the company’s business’’); DialAmerica, 757 F.2d at 1385 (‘‘[W]orkers are more likely to be ‘employees’ under the FLSA if they perform the primary work of the alleged employer.’’). Courts of appeals applying the multifactor economic reality test draw from the totality of circumstances, with no single factor being determinative by itself. See, e.g., Keller, 781 F.3d at 807 (‘‘No one factor is determinative.’’); Baker, 137 F.3d at 1440 (‘‘None of the factors alone is dispositive; instead, the court must employ a totality-of-thecircumstances approach.’’); Martin v. Selker Bros., 949 F.2d 1286, 1293 (3rd Cir. 1991) (‘‘It is a well-established principle that the determination of the employment relationship does not depend on isolated factors . . . neither the presence nor the absence of any particular factor is dispositive.’’). 3. Application of the Economic Reality Test by WHD Since at least 1954, WHD has applied a multifactor analysis when considering whether a worker is an employee under the FLSA or is instead an independent contractor. See WHD Opinion Letter (Aug. 13, 1954) (applying six factors very similar to the six economic reality factors currently used by courts of appeal and noting that ‘‘the determination depends on the circumstances of the whole activity considered in light of the statutory purposes of the Act’’ (internal quotation marks omitted)). In 1956, WHD reiterated the six factors and noted that ‘‘[t]he degree of control retained by the principal has [been] rejected as the sole criterion to be applied.’’ WHD Opinion Letter (Feb. 8, 1956). In 1964, WHD stated: ‘‘The Supreme Court has made it clear that an employee, as distinguished from a person who is engaged in a business of his own, is one who as a matter of economic reality follows the usual path of an employee and is dependent on the business which he serves.’’ WHD Opinion Letter FLSA–795 (Sept. 30, 1964). Over the years since, WHD has issued numerous opinion letters addressing whether a worker is an employee under the FLSA or an independent contractor. In those letters, WHD has generally relied on a multifactor analysis very similar to the six economic reality factors identified above; the VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 circumstances of the whole activity are considered; the inquiry is broader than the common law control standard alone; and a worker is an employee if, as a matter of economic reality, he or she is economically dependent on the employer as opposed to in business for him- or herself.5 WHD has also promulgated regulations applying a multifactor analysis for independent contractor status under the FLSA in certain specific industries. See, e.g., 29 CFR 780.330(b) (applying a six factor economic reality test to determine whether a sharecropper or tenant is an independent contractor or employee under the Act); 29 CFR 788.16(a) (applying a six factor economic reality test in forestry and logging operations with no more than eight employees). And WHD has promulgated a regulation applying a multifactor economic reality analysis for determining independent contractor status under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).The MSPA regulation is based on the FLSA’s definition of ‘‘employ’’ because MSPA incorporates that definition, and it asks ‘‘whether or not an independent contractor or employment relationship exist under the Fair Labor Standards Act.’’ 29 CFR 500.20(h)(4) (emphasis in original). WHD Fact Sheet #13, ‘‘Employment Relationship under the Fair Labor Standards Act (FLSA)’’ (Jul. 2008), similarly states that, when determining whether an employment relationship exists under the FLSA: The common law control is not the exclusive consideration; instead, ‘‘it is the total activity or situation which controls’’; and ‘‘an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.’’ 6 The Fact Sheet identifies seven economic reality factors; in addition to factors that are similar to the six factors identified above, it also 5 See, e.g., WHD Opinion Letter FLSA2019–6 at 4 (Apr. 29, 2019); WHD Opinion Letter, 2002 WL 32406602, at *2 (Sept. 5, 2002); WHD Opinion Letter, 2000 WL 34444342, at *3 (Dec. 7, 2000); WHD Opinion Letter, 2000 WL 34444352, at *1 (Jul. 5, 2000); WHD Opinion Letter, 1999 WL 1788137, at *1 (Jul. 12, 1999); WHD Opinion Letter, 1995 WL 1032489, at *1 (June 5, 1995); WHD Opinion Letter, 1995 WL 1032469, at *1 (Mar. 2, 1995); WHD Opinion Letter, 1986 WL 740454, at *1 (June 23, 1986); WHD Opinion Letter, 1986 WL 1171083, at *1 (Jan. 14, 1986); WHD Opinion Letter WH–476, 1978 WL 51437, at *2 (Oct. 19, 1978); WHD Opinion Letter WH–361, 1975 WL 40984, at *1 (Oct. 1, 1975); WHD Opinion Letter (Sept. 12, 1969); WHD Opinion Letter (Oct. 12, 1965). 6 Fact Sheet #13 is available at https:// www.dol.gov/sites/dolgov/files/WHD/legacy/files/ whdfs13.pdf. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 considers the worker’s ‘‘degree of independent business organization and operation.’’ 7 WHD’s most recent opinion letter addressing this issue, from 2019, generally applied the principles and factors similar to those described in the prior opinion letters and Fact Sheet #13, but not the ‘‘business organization’’ factor (which it said was ‘‘[e]ncompassed within’’ the other factors). The opinion letter addressed the FLSA classification of service providers who used a virtual marketplace company to be referred to end-market consumers to whom the services were actually provided. WHD concluded that the service providers appeared to be independent contractors and not employees of the virtual marketplace company. See WHD Opinion Letter FLSA2019–6 at 7. WHD found that it was ‘‘inherently difficult to conceptualize the service providers’ ‘working relationship’ with [the virtual marketplace company], because as a matter of economic reality, they are working for the consumer, not [the company].’’ Id. Because ‘‘[t]he facts . . . demonstrate economic independence, rather than economic dependence, in the working relationship between [the virtual marketplace company] and its service providers,’’ WHD opined that they were not employees of the company under the FLSA but rather were independent contractors. Id. at 9. As explained in greater detail below, these prior interpretations of independent contractor status, which themselves have evolved over time, are subject to the same limitations as the court opinions from the same period, and the Department believes that stakeholders would benefit from clarification. As such, the Department is proposing to promulgate a clearer and more consistent standard for evaluating whether a worker is an employee or independent contractor under the FLSA. III. Need for Rulemaking The Department has never promulgated a generally applicable regulation addressing the question of who is an independent contractor and, thus, not an employee under the Act. Instead, as described above, the Department has issued and revised subregulatory guidance since at least 7 On July 15, 2015, WHD issued Administrator’s Interpretation No. 2015–1, ‘‘The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors’’ (AI). The AI provided guidance regarding the employment relationship under the FLSA and the application of the six economic realities factors. The AI was withdrawn on June 7, 2017 and is no longer in effect. E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 1954, using different variations of a multifactor economic reality test that analyzes economic dependence to distinguish independent contractors from employees. The Department has also applied the multifactor test in regulations addressing the meaning of independent contractor in specific industries. See, e.g., 29 CFR 780.330(b); 29 CFR 788.16(a); 29 CFR 500.20(h)(4). For reasons explained below, however, that multifactor test, as currently applied, has proven to be unclear and unwieldy. The Department thus proposes to promulgate a regulation that explains the contours of the economic reality test and clarifies and sharpens a test that has become less clear and consistent through decades of case-bycase administration in the courts of appeals. If this proposed rule were finalized, it would contain the Department’s sole and authoritative interpretation of independent contractor status under the FLSA. As such, the Department is proposing to strike previous industry-specific interpretations set forth in 29 CFR 780.330(b) and 788.16(a) and replace them with cross-references to the interpretation set forth in this proposed rule. The Department considered making similar revisions to its regulation addressing independent contractor status under the MSPA in 29 CFR 500.20(h)(4), but is not proposing not to make such revisions at this time, as explained further below. The Department invites comments on the need for conforming edits to these or similar provisions. A. Challenges Presented by the Economic Reality Test and Its Application The economic reality test has been criticized on several fronts. First, the test’s overarching concept of ‘‘economic dependence’’ is under-developed and sometimes inconsistently applied, rendering it a source of confusion. Second, the test is indefinite and amorphous in that it makes all facts potentially relevant without providing any guidance on how to prioritize or balance different and sometimes competing considerations. Third, inefficiency and lack of structure in the test further stem from blurred boundaries between the factors. Fourth, these shortcomings have become more apparent over time as technology, economic conditions, and work relationships have evolved. 1. Confusion Regarding the Meaning of Economic Dependence Courts and the Department agree that economic dependence is the touchstone VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 of the economic reality test. See, e.g., Parrish, 917 F.3d at 380; McFeeley, 825 F.3d at 241; see also Bartels, 332 U.S. at 130 (noting that the inquiry is whether ‘‘as a matter of economic reality,’’ the worker is ‘‘dependent upon the business to which [he or she] render[s] service’’). But underdeveloped analysis and inconsistency cloud the application of this touchstone, generating uncertainty both in and outside of litigation. Given the central importance of the economic dependence concept, any confusion on this front is problematic. The 1948 Senate Report criticized Treasury’s proposal to rely on economic dependence for determining independent contractor status under the SSA by rhetorically asking: ‘‘Who, in this whole world engaged in any sort of service relationship, is not dependent as a matter of economic reality on some other person? The corner grocer, clearly not an employee, is economically dependent upon his customers, his banker, his supplier.’’ S. Rep. No. 80– 1255 at 12 (1948). In other words, ‘‘economic dependency is a vague concept that without further explanation and refinement is often difficult, if not impossible, to apply.’’ 8 The Department and some courts have attempted to provide a measure of clarity by explaining, for example, that the proper inquiry is ‘‘‘whether the workers are dependent on a particular business or organization for their continued employment’ in that line of business,’’ Mr. W Fireworks, 814 F.2d at 1054 (emphasis in original) (quoting DialAmerica, 757 F.2d at 1385), or instead ‘‘are in business for themselves,’’ Saleem, 854 F.3d at 139. But the Department and many courts have often applied the test without helpful clarification on the meaning of the economic dependency that they are seeking.9 The lack of explanation of economic dependence has sometimes led to inconsistent approaches and results. For example, the Fifth Circuit held in 2009 that cable splicers hired as putative independent contractors by BellSouth to provide post-Hurricane Katrina repairs along the Gulf Coast were actually employees. See Cromwell v. Driftwood Elec. Contractor, Inc., 348 F. App’x 57 (5th Cir. 2009). That case applied the same approach to economic dependence as Mr. W. Fireworks and similar cases, asking whether ‘‘the worker is economically dependent upon the 8 Bruce Goldstein, et al., Enforcing Fair Labor Standards in the Modern American Sweatshop: Rediscovering the Statutory Definition of Employment, 46 UCLA L. Rev. 983, 1009 (1999) (collecting cases). 9 Id. at 1010. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 60605 alleged employer or is instead in business for himself.’’ Id. at 59. Less than a year later, a different panel of that same circuit applied a second approach to economic dependence to find another cable splicer hired under a very similar arrangement by the same company to be an independent contractor. See Thibault v. BellSouth Telecommunication, 612 F.3d 843 (5th Cir. 2010).10 The Thibault court distinguished the result in Cromwell in part by highlighting the plaintiff’s sources of income and wealth other than from BellSouth in the analysis of economic dependence. Id. at 849.11 Thibault’s reliance on income and wealth sources to analyze economic dependence is incompatible with Mr. W. Fireworks and similar decisions, which have repeatedly explained that ‘‘[e]conomic dependence is not conditioned on reliance on an alleged employer for one’s primary source of income, for the necessities of life.’’ 814 F.2d at 1054 (emphasis in original).12 The Department agrees with Mr. W Fireworks and similar courts that ‘‘the proper test of economic dependence . . . ‘examines whether the workers are dependent on a particular business or organization for their continued employment.’ ’’ Id. (quoting DialAmerica, 757 F.2d at 1385); see also Halferty, 821 F.2d at 268 (‘‘[I]t is not dependence in the sense that one could not survive without the income from the job that we examine, but dependence for continued employment.’’). Dependence for work as opposed to income comports with the FLSA’s ‘‘suffer or permit’’ standard for employment relationship. 29 U.S.C. 203(g). An individual who depends on a potential employer for work is an employee whom the 10 In both cases, the splicers performed postHurricane Katrina repairs for BellSouth along the Gulf Coast; provided their own tools and trucks; received assignments in the same manner; received neither training nor close supervision; and worked the same 12-hour shifts for 13 days at a time. Compare Cromwell, 348 F. App’x at 58–59, with Thibault, 612 F.3d at 844–49. 11 Specifically, Mr. Thibault earned significant profits from his own sales company, ‘‘owned eight drag-race cars [that] generated $1,478 in income from racing professionally[,]’’ and managed ‘‘commercial rental property that generated some income.’’ Thibault, 612 F.3d at 849. The Thibault court also highlighted the fact that Mr. Thibault worked for only three months—although he intended to work for seven or eight months—before being fired. Id. at 846, 849. In contrast, the splicers in Cromwell worked approximately eleventh months. 348 F. App’x at 58. 12 See also Off Duty Police, 915 F.3d at 1058 (‘‘[W]hether a worker has more than one source of income says little about that worker’s employment status.’’); DialAmerica, 757 F.2d at 1385 (‘‘The economic-dependence aspect of the [economic reality] test does not concern whether the workers at issue depend on the money they earn for obtaining the necessities of life.’’). E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 60606 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules employer suffers or permits to work. In contrast, an independent contractor does not work at the sufferance or permission of an employer because, as a matter of economic reality, he or she is in business for him- or herself. See Saleem, 854 F.3d at 139. Without a consistent understanding of economic dependence, the multifactor balancing test is left without a meaningful anchor. As a result, the test’s factors may become ‘‘an end in themselves’’ instead of, as they are intended to be, guideposts in the inquiry of economic dependence or lack thereof.13 For example, in Parrish, 917 F.3d 369, the Fifth Circuit appears to have applied three different concepts of economic dependence in a single opinion to analyze the control, opportunity for profit or loss, and investment factors. First, the court analyzed the control factor through the same concept of dependence as Mr. W Fireworks, announcing that ‘‘our task is to determine whether the individual is, as a matter of economic reality, in business for himself.’’ Parrish, 917 F.3d at 379. The Parrish court reasoned that mandated ‘‘safety training and drug testing, when working at an oil-drilling site, is not the type of control that counsels in favor of employee status.’’ Id. at 382 (emphasis in original). This analysis is consistent with the ‘‘in business for himself’’ approach because an oil-drilling company reasonably would require safety and drug testing of both employees (who depend on the company for work) and independent contractors (who are in business for themselves), since an accident could pose potentially significant risks to the worksite and to workers, regardless whether caused by an employee or an independent contractor. The Parrish court then expressly departed from Mr. W Fireworks in favor of Thibault’s dependence-for-income approach to analyze the opportunity for profit or loss factor. Id. at 384. Specifically, the court held that the consultant was an independent contractor, in part, because he also earned income from his own goat farm. See id. at 383 (‘‘Thibault is more on point [than Mr. W. Fireworks]. Accordingly we consider . . . plaintiffs’ enterprises, such as the goat farm, as a part of the overall analysis of how dependent plaintiffs were on [defendant].’’). But the goat farm has absolutely nothing to do with whether the worker was in business for himself as a consultant or was ‘‘dependent on a particular business or organization for [his] continued employment in that line 13 Goldstein, VerDate Sep<11>2014 supra note 8 at 1010. 19:03 Sep 24, 2020 Jkt 250001 of business.’’ Mr. W Fireworks, 814 F.2d at 1054. Put another way, the economic reality analysis should ask whether the plaintiff had ‘‘opportunity for profit or loss . . . in the claimed independent operations,’’ Silk, 331 U.S. at 716, which in Parrish was consulting, not goat farming. The Parrish court impliedly took yet a third approach to economic dependence when it analyzed the investment factor by comparing the dollar value of ‘‘each worker’s individual investment’’ to the investment made by an oil drilling company in its overall operations: ‘‘Obviously, [the drilling company] invested more money at a drill site compared to each plaintiff’s investments.’’ Id. at 383 (emphasis in original). That comparison was unresponsive to the economic dependence inquiry of whether the worker is ‘‘[e]ssentially . . . in business for himself,’’ id. at 379, because large companies routinely contract for services with smaller entrepreneurs. Instead, the worker’s investment (or lack thereof) should have been analyzed to determine whether the worker had an independent operation, distinct from the potential employer’s business, which created an opportunity for profit or loss. The 1948 Senate Report cautioned that economic dependence was potentially ‘‘dimensionless.’’ And although courts and the Department have since added some guidance, the concept may be inconsistently applied and under-analyzed. A more developed and dependable touchstone at the heart of the economic reality test is needed to guide the regulated community. Under this proposal, the Department would interpret and apply ‘‘economic dependence’’ consistent with the foregoing discussion. 2. The Lack of Focus in the Multifactor Balancing Test Under the test, the Department and courts analyze the totality of circumstances making up the economic reality of the relationship to determine a worker’s classification. But, as Judge Easterbrook warned in 1987, ‘‘ ‘reality’ encompasses millions of facts, and unless we have a legal rule with which to sift the material from the immaterial, we might as well examine the facts through a kaleidoscope.’’ Lauritzen, 835 F.2d at 1539 (Easterbrook J., concurring) (‘‘[A]ny balancing test begs questions about which aspects of ‘economic reality’ matter, and why.’’). Indeed, Congress rejected Treasury’s 1947 proposal to use the multifactor balancing test under the SSA, with some PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 senators expressing concern that, ‘‘on virtually no state of facts may anyone be certain whether or not he has a tax liability.’’ Webb, 397 U.S. at 188 (quoting S. Rep. No. 1255, at 12 (1948)). The same uncertainty often exists under the FLSA. So far, neither the Department nor courts have articulated clear, generally applicable guidance about how the multiple factors, and the countless facts encompassed therein, are to be balanced, creating uncertainty for the regulated community when, as is often the case, the significance of facts is unclear or factors point in opposite directions. Courts applying the economic reality test often analyze the factors individually and then reach an overall decision about a worker’s classification without meaningful explanation of how they balanced the factors to reach the final decision. See, e.g., Parrish, 917 F.3d at 380 (analyzing each factor separately and then explaining ‘‘for the reasons stated supra, we reach the same conclusions as did the district court’’); Chao v. Mid-Atl. Installation Servs., Inc., 16 F. App’x 104, 108 (4th Cir. 2001) (same); Snell, 875 F.2d at 912 (same). This is so even where many facts and factors support both sides of the classification inquiry. See, e.g., Acosta v. Paragon Contractors Corp., 884 F.3d 1225, 1238 (10th Cir. 2018) (concluding, without explanation as to weighing of the factors, that workers were employees where two factors (control and integral part) favored independent contractor status and four factors (opportunity for profit or loss, investment, skill, and permanence) favored employee status); Iontchev v. AAA Cab. Services, 685 F. App’x 548, 550 (9th Cir. 2017) (concluding, without explanation as to weighing of the factors, that the workers were independent contractors where two factors (control and opportunity for profit or loss) favored independent contractor status; one factor (investment) was neutral; and three factors (skill, permanence, and integral part) favored employee status). At other times, courts have provided analysis as to the relative weight of the factors in the specific case before them. For example, some courts have noted where factors weigh ‘‘strongly’’ or ‘‘weakly.’’ See, e.g., Scantland, 721 F.3d at 1313–19 (finding that, assuming factual inferences in favor of the workers, the control, opportunity for profit or loss, permanence, and integral part factors strongly point to employee status, and the investment and skill factors weakly favor independent contractor status); Superior Care, 840 F.2d at 1059 (finding that opportunity E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 for profit or loss and integral part factors ‘‘both weigh heavily in favor of the . . . conclusion that nurses are employees,’’ while skill and permanence factors ‘‘weigh slightly in favor of independent status, [but] do not tip the balance’’). And at least one court recently dispensed with a factor-by-factor analysis and instead focused its analysis on only those facts that determined the outcome in the case. See Saleem, 854 F.3d at 140 (‘‘draw[ing] upon and discuss[ing] the Silk factors where relevant’’ to the economic reality of the relationship at issue). While identifying the most relevant factors in a specific case lends more clarity than a siloed analysis of each factor devoid of context, this approach still leaves the regulated community without generally applicable guidance as to what matters most and why. See Lauritzen, 835 F.2d at 1539 (Easterbrook J., concurring) (‘‘A legal approach calling on judges to examine all of the facts, and balance them, avoids formulating a rule of decision . . . [and] keep[s businesses] in the dark about the legal consequences of their deeds.’’). In other words, the multifactor economic reality test is missing direction on the relative importance of the factors. 3. Confusion and Inefficiency Due to Overlapping Factors The economic reality test’s multifactor framework gives some structure to an otherwise roving inquiry by filtering the totality of circumstances into distinct relevant categories. But three factors—skill, permanence, and integral part—have been expanded by courts and the Department to incorporate aspects of economic reality that also fall under the control factor, creating overlapping coverage. There is additional overlap between the opportunity for profit/loss and investment factors, which ‘‘relate logically to one [an]other.’’ McFeeley, 825 F.3d at 243; Lauritzen, 835 F.2d at 1537 (‘‘The capital investment factor is . . . interrelated to the profit and loss consideration.’’). The structure provided by a multifactor framework breaks down when the lines between factors are blurred. See Saleem, 854 F.3d at 140 n. 20 (‘‘[C]aution is merited because the Silk factors, while helpful in identifying relevant facts, overlap to a substantial degree[.]’’). Blurred lines further create inefficiency by requiring courts to analyze the same facts multiple times, sometimes in inconsistent ways. Additionally, litigants address and analyze the same facts repeatedly, and businesses must evaluate those same facts again and again when making worker classification decisions. Each of VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 these overlaps are discussed in more detail below. Silk articulated a ‘‘skill required’’ factor as part of the economic reality test, 331 U.S. at 716, and several federal courts of appeals continue to apply this factor to consider ‘‘the degree of skill required to perform the work.’’ Paragon, 884 F3d at 1235; see also Iontchev, 685 F. App’x at 550 (asking ‘‘whether services rendered . . . require[d] a special skill’’); Keller, 781 F.3d at 807 (analyzing ‘‘the degree of skill required’’). As explained above, this inquiry has been expanded by some other courts into a ‘‘skill and initiative’’ factor which, in addition to asking whether workers have ‘‘some unique skill set,’’ also analyzes whether they ‘‘exercise significant initiative within the business.’’ Parrish, 917 F.3d at 385; see also, e.g., Superior Care, 840 F.2d at 1060. The ability to exercise significant initiative is already analyzed as part of the control factor. This expansion of the skill factor to incorporate the initiative aspect of control occurred because courts recognized that ‘‘the use of special skills is not itself indicative of independent contractor status, especially if the workers do not use those skills in any independent way.’’ Selker Bros., 949 F.2d at 1295; see also Superior Care, 840 F.2d at 1060. The Department now believes this sentiment could have been better incorporated into the analysis by explaining that capacity for initiative under the control factor is more important than having a specialized skill. Such an approach would have also provided helpful guidance regarding how to balance the factors that point in different directions. Instead, courts and the Department have imported a control analysis into the skill factor. See Selker Bros., 949 F.2d at 1295 (concluding that the skill factor weighed towards employee classification due to ‘‘the degree of control exercised by [the potential employer] over the day-to-day operations’’); see also WHD Fact Sheet #13 (describing the skill factor to include ‘‘initiative, judgment, or foresight’’). For many courts, the analysis of control appears to have become the most important part of the skill factor, overriding presence or absence of actual specialized skill. See Baker, 137 F.3d at 1443 (finding that the skill factor weighed towards employee classification where skilled welders ‘‘are told what to do and when to do it’’); Superior Care, 840 F.2d at 1060 (finding that the skill factor weighed towards employee classification for skilled nurses because ‘‘Superior Care in turn controlled the terms and conditions of the employment relationship’’). In short, PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 60607 by adding ‘‘initiative’’ to the ‘‘skill required’’ factor originally articulated by Silk, courts have turned that factor into an extension of the control factor. The ‘‘skill and initiative’’ factor also overlaps with the opportunity for profit or loss factor, which considers whether a worker’s earnings are determined by initiative. See, e.g., Snell, 875 F.2d at 810 (finding employee status in part because the workers’ ‘‘earnings did not depend upon their judgment or initiative, but on the [potential employer’s] need for their work’’). Thus, facts relating to initiative are analyzed through three factors: Control, opportunity for profit, and skill.14 Such overlap exacerbates confusion by blurring the lines between the economic reality factors. It also requires redundant analysis of the same facts under different factors, which may yield inconsistent and confusing results within the same case. For example, in Express Sixty-Minutes Delivery, the court concluded that the control factor pointed towards independent contractor status in part because the delivery drivers had substantial capacity for initiative: ‘‘Drivers set their own hours and days of work[,] can reject deliveries without retaliation,’’ and ‘‘can work for other courier delivery systems.’’ 161 F.3d at 303. The court further determined that each ‘‘driver’s profit or loss is determined largely on his or her skill, initiative, ability to cut costs, and understanding of the courier business.’’ Id. at 304. But confusingly, the court also held that the ‘‘skill and initiative factor points towards employee status’’ due to ‘‘the key missing ingredient . . . [of] initiative.’’ Id at 305. Read together, these holdings may be confusing because the court held that drivers lacked the very initiative that the court recognized in the same opinion to determine their profits and losses. It may also appear inconsistent for the court to hold that initiative was a ‘‘missing ingredient’’ when it determined in the same opinion that drivers had freedom to set hours, reject assignments, and work for competitors. Next, the permanence factor originally concerned the continuity and duration of a working relationship. The factor has since been expanded by many courts and the Department to also consider the exclusivity of the relationship. See, e.g., 14 While both the control factor and the opportunity for profit or loss factor overlap with the ‘‘skill and initiative’’ factor, they do not overlap with each other in this regard. The control factor concerns the capacity for initiative, i.e., whether a worker is able to exercise initiative. The opportunity for profit concerns the effect of initiative, i.e., the extent to which profits (or losses) are determined by the exercise of initiative. The former is a prerequisite for the latter. E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 60608 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules Parrish, 917 F.3d at 386–87 (considering as part of the permanence factor whether any worker worked exclusively for the potential employer); Keller, 781 F.3d at 807–09 (considering the exclusivity of the working relationship as part of the permanence factor); Scantland, 721 F.3d at 1319 (finding installation technicians’ relationships with the potential employer were permanent because they ‘‘could not work for other companies’’); see also WHD Opinion Letter FLSA2019–6 at 8. But exclusivity is already an aspect of control. See, e.g., Saleem, 854 F.3d at 141 (‘‘[A] company relinquishes control over its workers when it permits them to work for its competitors.’’); Express Sixty-Minutes Delivery, 161 F.3d at 303 (concluding that the control factor indicated independent contractor status in part because the workers ‘‘can work for other courier delivery systems, and [their agreement] does not contain a covenant-not-to-compete’’). This overlap results in exclusivity being analyzed twice in many cases,15 once as part of the control factor and again as part of the permanence factor. As with initiative, such repetitive analysis is inefficient and may exacerbate confusion. Third, the integral part factor used by some courts to analyze importance appears to be a proxy for control.16 Courts appear to assume that businesses will use employees and not independent contractors to perform important work in order to control how and when that work is performed. For example, one court explained the use of this factor by stating ‘‘it is presumed that, with respect to vital or integral parts of the business, the employer will prefer to engage an employee rather than an independent contractor. This is so because the employer retains control over the employee and can compel attendan[ce] at work on a consistent basis.’’ Baker v. Dataphase, Inc., 781 F. Supp. 724, 735 (D. Utah 1992); see also Baker v. Barnard Const. Co. Inc., 860 F. Supp. 766, 777 (D.N.M. 1994), aff’d sub nom. Baker v. Flint Eng’g & Const. Co., 137 F.3d 1436 (10th Cir. 1998) (same). As an initial matter, this observation appears to rest on a mistaken premise. Manufacturers, for example, commonly have critical parts and components produced and delivered by wholly separate companies. In any event, the control factor already directly analyzes whether a business can compel a worker to work on a consistent basis or otherwise closely supervise and manage performance of the work. See, e.g., Nieman v. Nat’l Claims Adjusters, Inc., 775 F. App’x 622, 625 (11th Cir. 2019) (‘‘The first factor—control—weighs in favor of independent contractor status because Nieman . . . controlled his schedule.’’). Such analysis presumes a relationship between control and integral part, and therefore is redundant.17 Finally, while Silk articulated opportunity for profit or loss and investment as separate factors, 331 U.S. at 716, there is clear overlap because ‘‘[e]conomic investment, by definition, creates the opportunity for loss, [and] investors take such a risk with an eye to profit.’’ Saleem, 854 F.3d at 145 n.29. Indeed, the Supreme Court analyzed these two factors together in Silk, concluding that coal unloaders were employees because they had ‘‘no opportunity to gain or lose except from the work of their hands and [ ] simple tools.’’ 331 U.S. at 717–18. In contrast, truck drivers in that case were independent contractors in part because they invested in their own trucks and had an ‘‘opportunity for profit from sound management’’ of that investment. Id. at 319. There often is redundancy where the opportunity for profit or loss and investment factors are considered separately. See, e.g., Mid-Atlantic Installation Servs., 16 F. App’x at 106– 07. And separate analyses may result in confusion to the extent that it encourages analysis of a worker’s investment outside of the context of the worker’s opportunity for profit or loss. As discussed above, some courts compare the dollar value of a worker’s personal investment against the total investment of large companies that, for example, ‘‘maintain[ ] corporate offices,’’ Hopkins, 545 F.3d at 344; see also 15 Compare, e.g., Freund, 185 F. App’x at 783 (‘‘Hi–Tech exerted very little control over Mr. Freund [in part because] Freund was free to perform installations for other companies.’’), with id. at 784 (‘‘Freund’s relationship with Hi–Tech was not one with a significant degree of permanence . . . [because] Freund was able to take jobs from other installation brokers.’’). 16 As discussed above, the Supreme Court’s Rutherford opinion did not analyze whether work was important but rather whether it was ‘‘part of an integrated unit.’’ 331 U.S. at 729. Notably, the Fifth Circuit does not typically consider the integral part factor. 17 Moreover, some courts have further conflated the integrality analysis by assuming that easily ‘‘replaceable’’ workers are less integral to a business. Browning v. Ceva Freight, LLC, 885 F. Supp. 2d 590, 610 (E.D.N.Y. 2012); see also Velu v. Velocity Exp., Inc., 666 F. Supp. 2d 300, 307 (E.D.N.Y. 2009) (observing that integrality to business diminished where ‘‘work is interchangeable with the work of other[s]’’). That may be true, but being easily replaceable or interchangeable makes workers more economically dependent on that business for work, not less. Thus, focusing on integrality can sometimes obscure the ultimate issue of economic dependence. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 Parrish, 917 F.3d at 383; Keller, 781 F.3d at 810, which says nothing about whether the worker is in business for him- or herself, as opposed to being economically dependent on the potential employer for work. Such irrelevant and potentially misleading comparisons could be avoided if investment were analyzed together with the opportunity for profit or loss factor, as the Supreme Court did in Silk, 331 U.S. at 719. That is precisely what the Second Circuit has done by combining opportunity for profit or loss and investment in a single factor. See Superior Care, 840 F.2d at 1058. In summary, significant overlaps between factors exacerbate confusion about how certain facts are analyzed and balanced. They also create inefficiency by requiring redundant review of the same facts by courts, redundant litigation over the same facts by parties, and redundant analysis of the same facts by business seeking to classify workers. 4. The Shortcomings and Misconceptions That This Proposal Seeks To Remedy Are More Apparent in the Modern Economy Certain shortcomings of the economic reality test have become more apparent in the modern economy. In particular, technological and social change—such as falling transaction costs, the transition from more of an industrial economy to more of a knowledge economy, and shorter job tenures—have revealed how analyzing the integral part factor through the lens of importance rather than integration, and giving undue weight to the investment and permanence factors, may send misleading signals regarding an individual’s classification. First, falling transaction costs in many sectors of the economy highlight the potential for errors resulting from analyzing the integral part factor through the lens of importance instead of integration. When the transaction costs of hiring are high, firms tend to hire employees rather than independent contractors for core tasks that must be performed on a routine basis.18 Thus, analyzing the importance, centrality, or frequency of the work to an organization’s business may have been correlated with a worker’s classification, 18 Ronald Coase, Nature of the Firm, 4 Economica 386 (1937), https://onlinelibrary.wiley.com/doi/ epdf/10.1111/j.1468-0335.1937.tb00002.x. See also Nobel Prizes and Laureates, Oct., 15, 1991, https:// www.nobelprize.org/prizes/economic-sciences/ 1991/press-release/ (explaining The Nature of the Firm’s contribution to economics literature as a central reason for Coase’s receipt of the 1991 Nobel Prize in Economics). E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules even though such analysis departs from Rutherford Food’s consideration of whether work is part of an ‘‘integrated unit of production.’’ 331 U.S. at 726. Over the past several decades, however, technological innovations have driven transactions costs down in many (but not all) sectors of the economy, sometimes to negligible levels.19 Firms in those sectors can now often hire independent contractors rather than employees for core tasks without incurring onerous transaction costs. For example, drivers are vital to the personal transportation business, but transportation companies increasingly hire independent contractor drivers rather than employees. See, e.g., Saleem, 854 F.3d at 140; Iontchev, 685 F. App’x at 550. The Department thus believes analyzing the importance or centrality of work may send misleading signals in low-transaction-cost environments that have become more commonplace, which militates in favor of refocusing the integral part factor on integration rather than importance.20 Second, the transition from a more industrial economy to more of a knowledge-based economy has diminished the investment factor’s ability to indicate economic dependence.21 Broadly speaking, the factors of production in a more industrial economy consist of either physical capital that produced investment returns or labor for which wages were paid. Such a more industrial economy facilitated a relatively clear distinction between ‘‘wage earners toiling for a living’’ and ‘‘independent entrepreneurs seeking a return on their risky capital investments.’’ Mr. W Fireworks, 814 F.2d at 1051. In today’s more knowledge-based economy, however, it is often human rather than physical capital that matters most. Because personal initiative and knowhow can enable entrepreneurship in a more knowledge-based economy, workers who lack ‘‘capital investments’’ cannot be assumed to be ‘‘wage earners toiling for a living.’’ See, e g., Lauritzen, 835 F.2d at 1540–41 (Easterbrook, J. concurring) (observing that an attorney ‘‘sells human capital rather than physical capital, but this does not imply that lawyers are ‘employees’ of their clients under the FLSA’’); Meyer v. U.S. Tennis Ass’n, 607 F. App’x 121, 123 (2d Cir. 2015) (holding that tennis umpires were independent contractors even though they ‘‘invest little’’). So, while the presence of significant capital investment is still probative, its absence may be less so in more knowledge-based occupations and industries. Indeed, technological advances enable, for example, freelance journalists, graphic designers, or consultants to be entrepreneurs with little more than a personal computer and smartphone. See, e.g., Faludi v. U.S. Shale Sols., L.L.C., 950 F.3d 269, 276 (5th Cir. 2020) (holding that a consultant who ‘‘provided his own phone and computer’’ and ‘‘made investments in his continuing education and home office equipment’’ was an independent contractor). Finally, shorter job tenures among American workers have diminished the underlying rationale of the permanence factor.22 That factor assumes that independent contractors have relatively short working relationships while employees have longer ones.23 Such distinction was sharp when the vast majority of employees had job tenures that lasted many years or even decades, as may have been the case for employees born in the 1940s and earlier.24 But the Atlanta Federal Reserve’s 2015 analysis of BLS data for U.S. workers born between 1933 and 1993 found that median job tenure has declined steadily for every age cohort, with younger generations having the lowest job tenures.25 The most recently available data from the Department’s Bureau of Labor Statistics (BLS) shows that, since 2014, job tenure rates have resumed their long-term decline, following a brief increase attributable to the 2008 recession, with the lowest job tenure rates for younger workers. The lowest median tenure (2.2 years) was found in the leisure and hospitality 19 See, e.g., Anders Henten and Iwona Windekie, ‘‘Transaction Costs and the Sharing Economy,’’ 26th European Regional ITS Conference p. 2 (2015) (asserting that ‘‘digital platforms allow for decreasing transaction costs’’), https:// www.econstor.eu/bitstream/10419/127145/1/ Henten-Winderkilde.pdf. 20 As noted in the Background section and explained in further detail below, the Supreme Court did not analyze whether work was important, but rather whether work was ‘‘part of an integrated unit of production.’’ Rutherford Food, 331 U.S. at 726. The Department proposes to return to the Supreme Court’s original factors. 21 See, e.g., Walter Powell and Kaisa Snellman, The Knowledge Economy, 30 Annu. Rev. Sociol. 199–220 (2004). 22 The Department has not investigated the cause of shorter job tenures since 1947 as part of this rulemaking. 23 Compare, e.g., Bartels, 332 U.S. at 127 (finding that band members were independent contractors in part because ‘‘[a]lmost all of the engagements . . . involved were one-night stands’’), with Whitaker House, 366 U.S. at 29 (finding that homeworkers were employees of a cooperative that ‘‘required [the homeworkers] to remain members at least a year’’). 24 Julie Hotchkiss and Christopher Macpherson, Falling Job Tenure: It’s Not Just about Millennials, Federal Reserve Bank of Atlanta, June 8, 2015, https://www.frbatlanta.org/blogs/macroblog/2015/ 06/08/falling-job-tenure-its-not-just-aboutmillennials.aspx. 25 Id. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 60609 industry, which tends to have younger workers on average. This means that many employees today have shorter working relationships with their employers, which dulls the usefulness of job duration to distinguish an employee from an independent contractor. In summary, the Department believes the current multifactor economic reality test suffers because the analytical lens through which all the factors are to be filtered remains inconsistent; there is no clear principle regarding how to balance the multiple factors; the lines between many of the factors are blurred; and these shortcomings have become more apparent in the modern economy. The result is legal uncertainty that obscures workers’ and businesses’ respective rights and obligations under the FLSA. Such uncertainty is especially acute when it comes to the growing number of more flexible and nimble work relationships. While such relationships benefit workers and businesses alike, they also lead to complex questions about a worker’s classification under the FLSA, which are difficult to answer due in part to the shortcomings described above.26 The Department is further concerned that continued legal uncertainty may deter innovative work arrangements by creating legal risks with respect to misclassifying workers as independent contractors instead of employees. Take, for example, the workers in WHD’s April 2019 opinion letter who searched for job opportunities and negotiated for prices by ‘‘ ‘multi-app[ing]’—that is simultaneously run[ing a company]’s virtual platform alongside the platform of a competitor to compare virtual opportunities in real time and pick the best opportunity on a job-by-job basis.’’ WHD Opinion Letter FLSA2019–6 at 8. Multi-apping creates significant economic value by letting workers find the best paying opportunities, providing app companies with access to a larger workforce, and helping consumers 26 See, e.g., Kati L. Griffith, The Fair Labor Standards Act at 80: Everything Old Is New Again, 104 Cornell L. Rev. 557, 561 (2019) (‘‘[N]ew trends raise complicated questions about who is a true independent contractor excluded from the [FLSA]’s protections. Most notably, the recent growth in workers who depend on freelance or ‘contract work,’ has received a lot of attention.’’); Griffin Toronjo Pivateau, The Prism of Entrepreneurship: Creating A New Lens for Worker Classification, 70 Baylor L. Rev. 595, 625 (2018) (‘‘The economic realities test fails to cope with innovative working arrangements.’’); Keith Cunningham-Parmeter, From Amazon to Uber: Defining Employment in the Modern Economy, 96 B.U. L. Rev. 1673, 1683–84, 1688 (2016) (‘‘[P]ersistent uncertainty impacts an ever-expanding list of businesses in retail, service, home care, construction, information technology, and the burgeoning on-demand economy.’’). E:\FR\FM\25SEP3.SGM 25SEP3 60610 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules benefit from competition. This innovative practice depends on being able to confidently classify workers as independent contractors.27 For this reason, a clear standard for employee classification can help encourage multiapping and other economic innovations. Under the status quo, a company may believe it cannot be sure of a classification outside of costly litigation applying the economic reality test (which may be too unwieldly as currently applied). The prospect of such litigation expense and any potential back wages and penalties may be enough to deter businesses from exploring innovative business models and working relationships. Thus, legal uncertainty regarding worker classification may inhibit the development of new job opportunities or result in the elimination of existing jobs. The Department is therefore issuing this NPRM to provide greater legal certainty and solicits comments on all these issues. IV. Proposed Regulatory Provisions khammond on DSKJM1Z7X2PROD with PROPOSALS3 In light of the foregoing concerns, the Department is proposing to introduce a new part to Title 29 of the Code of Federal Regulations addressing whether particular workers are ‘‘employees’’ or independent contractors under the FLSA. In relevant part, and as discussed in greater detail below, the Department proposes: • Introductory provisions at § 795.100 explaining the purpose and legal authority for the new part; • a provision at § 795.105(a) explaining that independent contractors are not employees under the FLSA; • a provision at § 795.105(b) discussing the ‘‘economic reality’’ test for distinguishing FLSA employees from independent contractors, clarifying that the concept of economic dependence turns on whether a worker is in business for him- or herself (independent contractor) or is economically 27 Businesses have a strong incentive to restrict multi-apping to independent contractors because an employee who multi-apps may create complicated questions regarding which of the multiple app companies is responsible for FLSA obligations for time spent multi-apping. During the multi-app period, a worker would be searching for customers on behalf of multiple app companies, and it therefore may be difficult or impractical to determine the company or companies for which the worker is performing compensable work if he or she is a non-exempt employee. This could raise challenging questions that create legal risk for each employer. The Department believes that the greater the legal certainty of workers’ respective classifications, the more the Department encourages innovative work arrangements like multi-apping by providing companies with clear frameworks to set up these arrangements. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 dependent on a potential employer for work (employee); • provisions at § 795.105(c) and (d) describing factors examined as part of the economic reality test, including two ‘‘core’’ factors—the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss—which are afforded greater weight in the analysis, as well as three other factors that may serve as additional guideposts in the analysis; • a provision at § 795.110 advising that the parties’ actual practice is more relevant than what may be contractually or theoretically possible; and • a severability provision at § 795.115. These proposals would significantly clarify how the Department distinguishes between employees and independent contractors under the Act. The Department welcomes comment on all aspects of its proposal. The Department further proposes to adopt the above-described provisions as its sole and authoritative interpretation of independent contractor status under the FLSA. Accordingly, the Department would replace industry-specific interpretations of independent contractor status for sharecroppers or tenants at § 780.330(b) and certain forestry or logging operations at § 788.16(a) with cross-references to the interpretation set forth in this rule. These previous industry-specific interpretations of independent contractor status all rely on the same FLSA terms as the interpretation set forth in this propose rule.28 As such, the Department believes the justifications articulated in the need for rulemaking discussion in Section III, particularly the need for a consistent and clear standard for determining independent contractor status in all FLSA cases, largely apply to the question of independent contractor status in those industries. The Department considered, but is not proposing at this time, similar revisions to 29 CFR 500.20(h)(4), which addresses independent contractor status under MSPA. The Department recognizes that MSPA adopts by reference the FLSA’s definition of ‘‘employ,’’ see 18 U.S.C. 1802(5), and that 29 CFR 500.20(h)(4) considers ‘‘whether or not an independent contractor or employment 28 The interpretation of independent contractor status under § 780.330(b) for sharecroppers or tenants pertain to an exemption for certain ‘‘employee[s] employed in agriculture’’ under section 13(a)(6) of the FLSA. The Department believes the distinction this proposed rule draws between independent contractors and employees would apply in the agricultural exemption context because the same statutory terms, i.e., employee and employ, are being interpreted. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 relationship exists under the Fair Labor Standards Act’’ to interpret independent contractor status under MSPA. Nonetheless, MSPA imposes different legal obligations than the FLSA’s minimum wage and overtime pay obligations and applies to different employers and employees.29 And the Department’s enforcement experience does not indicate that there is confusion regarding workers’ classifications as an employee or independent contractor in the MSPA context to the same extent as the FLSA context. As such, it is not entirely clear whether the justifications articulated in the need for rulemaking discussion in Section III apply in the MSPA context. The Department therefore proposes to proceed incrementally by first seeking comment on a revised interpretation of independent contractor status under the FLSA before considering whether to revise the MSPA regulations.30 The Department welcomes comments regarding whether 29 CFR 500.20(h)(4) should be revised to be consistent with the interpretation of independent contractor status set forth in this proposed rule. A. Introductory Statements Proposed § 795.100 explains that the interpretations provided in part 795 will guide WHD’s enforcement of the FLSA and are intended to be used by employers, businesses, the public sector, employees, workers, and courts to assess employment status classifications under the Act. Proposed § 795.100 further clarifies that, if proposed part 795 is adopted, employers may safely rely upon the interpretations provided in part 795 under section 10 of the Portal-to-Portal Act, unless and until any such interpretation ‘‘is modified or rescinded or is determined by judicial authority to be invalid or of no legal effect.’’ 29 U.S.C. 259. 29 See WHD Fact Sheet #49, ‘‘The Migrant and Seasonal Agricultural Worker Protection Act’’ (Jul. 2008). 30 See, e.g., Pharm. Research & Mfrs. of Am. v. FTC., 790 F.3d 198, 203 (D.C. Cir. 2015) (affirming that agency had discretion to ‘‘proceeding incrementally’’ in promulgating rules that were directed to one industry but not others); Inv. Co. Inst. v. Commodity Futures Trading Comm’n, 720 F.3d 370, 378 (D.C. Cir. 2013) (observing that ‘‘[n]othing prohibits federal agencies from moving in an incremental manner’’ (quoting F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 522 (2009)); City of Las Vegas v. Lujan, 891 F.2d 927, 935 (D.C. Cir. 1989) (noting that ‘‘agencies have great discretion to treat a problem partially’’). E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules B. Proposal To Explain That Independent Contractors Are Not Employees Under the Act Proposed § 795.105(a) explains that an independent contractor who renders services to a person is not an employee of that person under the FLSA. This is consistent with the Supreme Court’s affirmation in Rutherford Food that the Act’s definition of employee has consistently been interpreted as excluding individuals who ‘‘might work for their own advantage,’’ including ‘‘independent contractors who take part in production or distribution.’’ 331 U.S. at 728–29; see also, e.g., Hopkins, 545 F.3d at 342; Saleem, 854 F.3d at 139– 40; Karlson, 860 F.3d at 1092. Minimum wage and overtime pay requirements under sections 6 and 7 of the Act apply only to a person’s employees. See 29 U.S.C. 206(a), 207(a)(1). As such, those requirements do not apply with respect to a person’s independent contractors. For the same reason, the recordkeeping obligations for employers under section 11 of the Act do not apply to a person with respect to services received from an independent contractor. See 29 U.S.C. 211(c) (‘‘Every employer subject to any provision of [the FLSA] shall make, keep, and preserve such records of the persons employed by him[.]’’) (emphasis added). khammond on DSKJM1Z7X2PROD with PROPOSALS3 C. Proposal To Adopt the Economic Reality Test To Determine a Worker’s Employee or Independent Contractor Status Under the Act Proposed § 795.105(b) adopts the economic reality test to determine a worker’s status as an employee or an independent contractor under the Act. The Department’s analysis begins with the text of the statute, following well-settled principles of statutory construction by ‘‘reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis.’’ Kasten v. Saint-Gobain Performance Plastics Corp., 563 U.S. 1, 7 (2011) (interpreting the FLSA) (internal quotation marks and citation omitted). An employer employs an individual under the Act if the employer ‘‘suffer[s] or permit[s]’’ the individual to work. 29 U.S.C. 203(g). Proposed § 795.105(b) codifies the Supreme Court’s statement that ‘‘suffer or permit’’ means something broader than the common law conception of control; namely, economic dependence. See, e.g., Darden, 503 U.S. at 326. Therefore, the Department proposes that the central inquiry as to whether an individual is an employee or independent contractor under the Act is VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 whether, as a matter of economic reality, the individual is economically dependent on the potential employer for work. See Pilgrim Equip., 527 F.2d at 1311 (‘‘It is dependence that indicates employee status.’’). However, all workers—employees and independent contractors alike—are economically dependent on others to some degree. Business owners are likewise economically dependent on the workers they hire, but this does not make them employees of their own workers. The economic reality test can be ‘‘ ‘a dimensionless and amorphous abstraction’ ’’ unless its touchstone— economic dependence—is clarified. Webb, 397 U.S. at 188 (quoting S. Rep. No. 1255, at 12 (1948)). As explained in the need for rulemaking discussion earlier in Section III, the meaning of economic dependence is sometimes inconsistently applied and would benefit from further explanation. Clarifying the test requires putting the question of economic dependence in the proper context. ‘‘Economic dependence is not conditioned reliance on an alleged employer for one’s primary source of income, for the necessities of life.’’ Mr. W Fireworks, 814 F.2d at 1054. Rather, courts have framed the question as ‘‘whether, as a matter of economic reality, the workers depend upon someone else’s business for the opportunity to render service or are in business for themselves.’’ Saleem, 854 F.3d at 139; see also Parrish, 917 F.3d at 379; Baker, 137 F.3d at 1440 (‘‘[T]he focal point is whether the individual is economically dependent on the business to which he renders service . . . or is, as a matter of economic fact, in business for himself.’’) (internal quotation marks and citation omitted); Donovan v. Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981) (‘‘The focal inquiry in the characterization process is thus whether the individual is or is not, as a matter of economic fact, in business for himself.’’). In other words, the key question is whether workers are ‘‘more closely akin to wage earners,’’ who depend on others to provide work opportunities, or ‘‘entrepreneurs,’’ who create work opportunities for themselves. Mr. W Fireworks, 814 F.2d at 1051; see also Express Sixty-Minutes, 161 F.3d at 305 (asking whether workers ‘‘are more like wage earners than independent entrepreneurs’’); cf. H.R. Rep. No. 245, 80th Cong., 1st Sess. 18 (1947) (‘‘ ‘Employees’ work for wages or salaries under direct supervision. ‘Independent contractors’ undertake to do a job for a price, decide how the work will be done, usually hire others to do the work, and depend for their income not upon wages, but upon the PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 60611 difference between what they pay for goods, materials, and labor and what they receive for the end result, that is, upon profits.’’). The above-described concept of economic dependence comports with the FLSA’s definition of employ as ‘‘includ[ing] to suffer or permit to work.’’ See 29 U.S.C. 203(g). An individual who depends on a potential employer for work is able to work only by the sufferance or permission of the potential employer. Such an individual is therefore an employee under the Act. In contrast, an independent contractor does not work at the sufferance or permission of others because, as a matter of economic reality, he or she is in business for him- or herself. In other words, an independent contractor is an entrepreneur who works for him- or herself, as opposed to an employer. Some courts have relied on a worker’s entrepreneurship with respect to one type of work to conclude that the worker was also in business for him- or herself in a second, unrelated type of work. See, e.g., Parrish, 917 F.3d at 384 (considering ‘‘plaintiff’s enterprise, such as the goat farm, as part of the overall analysis of how dependent plaintiffs were on [defendant]’’ for working as consultants); Thibault, 612 F.3d at 849 (concluding that plaintiff was an independent contractor as a cable splicer in part because he managed unrelated commercial operations and properties in a different state). However, the Supreme Court was clear that the economic reality analysis is limited to ‘‘the claimed independent operation.’’ Silk, 331 U.S. at 716. Thus, the relevant question in this context is whether the worker providing certain service to a potential employer is an entrepreneur ‘‘in that line of business.’’ Mr. W Fireworks, 814 F.2d at 1054. Otherwise, businesses must make worker classification decisions based on facts outside the working relationship, such as whether a consultant manages a ‘‘goat farm,’’ Parrish 917 F.3d at 384, or whether a cable splicer owns an out-ofstate commercial venture. Thibault, 612 F.3d at 849.31 At bottom, the phrase ‘‘economic dependence’’ may mean many different things. But in the context of the economic reality test, ‘‘economic dependence’’ is best understood in terms of what it is not. The phrase excludes individuals who, as a matter of economic reality, are in business for themselves. Such individuals work for themselves rather than at the sufferance 31 It is possible for a worker to be an employee in one line of business and an independent contractor in another. E:\FR\FM\25SEP3.SGM 25SEP3 60612 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 or permission of a potential employer, see 29 U.S.C. 203(g), and thus are not dependent on that potential employer for work. Proposed § 795.105(b) therefore recognizes the principle that, as a matter of economic reality, workers who are in business for themselves with respect to work being performed are independent contractors for that type of work. D. Proposal To Apply the Economic Reality Factors To Determine a Worker’s Independent Contractor or Employee Status The uncertainty and unpredictability of the traditional multifactor analysis of economic dependence has led some courts and commentators to call for alternative approaches. Judge Easterbrook’s concurrence in Lauritzen, for instance, urged the Seventh Circuit to ‘‘abandon these unfocused ‘factors’ and start again.’’ 835 F.2d at 1543 (Easterbrook J., concurring). One commentator in a recent article has proposed replacing the economic reality factors with ‘‘three main dimensions to entrepreneurship.’’ 32 The Department, however, prefers to sharpen the existing test, rather than to create a new test out of whole cloth, in part because many existing work relationships are structured around the current multifactor test and wholesale abandonment of that test may impose undue and prohibitive adjustment costs on the regulated community. Moreover, the economic reality test, properly construed and applied, is effective at distinguishing employees from independent contractors. As such, proposed § 795.105(c) and (d) would adopt a variation on the traditional multifactor analysis of economic dependence to improve certainty and predictability, as well as increase the test’s probative value into the underlying question of economic dependence. Proposed § 795.105(c) explains that certain nonexclusive economic reality factors guide the determination of whether an individual is, on one hand, economically dependent on a potential employer and therefore an employee or, on the other, in business for him- or herself and therefore an independent contractor. These factors are listed in § 795.105(d) and are based on economic reality factors currently used by the Department and most federal courts of 32 Pivateau, supra note 26, at 631. The proposal would replace the six-factor approach with ‘‘the three main dimensions to entrepreneurship,’’ which are: ‘‘(1) the processes and events that make up entrepreneurship; (2) the skills and traits that characterize an entrepreneur; and (3) the results that entrepreneurship generates.’’ Id. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 appeals, with certain proposed clarifications. First, the Department proposes to follow the Second Circuit’s approach of analyzing the worker’s investment as part of the opportunity for profit or loss factor. The combined factor would ask whether the worker has an opportunity to earn profits or incur losses based on his or her exercise of initiative or management of investments. Second, the Department proposes to clarify that the ‘‘skill required’’ factor originally articulated by the Supreme Court should be used, as opposed to the ‘‘skill and initiative’’ factor currently used in some circuits, because considering initiative as part of the skill factor creates unnecessary and confusing overlaps with the control and opportunity for profit or loss factors. Third, the Department proposes to further reduce overlap by analyzing the exclusivity of the relationship as a part of the control factor only, as opposed to both the control and permanence factors. Lastly, the Department proposes to reframe the ‘‘whether the service rendered is an integral part of the alleged employer’s business’’ factor in accordance with the Supreme Court’s original inquiry of whether the work is ‘‘part of an integrated unit of production.’’ See Rutherford, 331 U.S. at 729. Proposed § 795.105(c) further improves the certainty and predictability of the test by focusing it on two core factors: (1) The nature and degree of the worker’s control over the work; and (2) the worker’s opportunity for profit or loss. These core factors, listed in proposed § 795.105(d)(1), are highly probative to the inquiry because the ability to control one’s work and to earn profits and risk losses strikes at the core of what it means to be an entrepreneurial independent contractor, as opposed to a ‘‘wage earner’’ employee. Mr. W Fireworks, 814 F.2d at 1051; cf. FedEx Home Delivery v. NLRB, 563 F.3d 492, 497 (D.C. Cir. 2009) (‘‘[I]ndependent contractors have ‘significant entrepreneurial opportunity for gain or loss[.]’ ’’). Other factors listed in proposed § 795.105(d)(2) are also probative depending on the circumstances, but should be evaluated in the context of these two core factors. Given their greater weight, if both proposed core factors point towards the same classification—whether employee or independent contractor—there is a substantial likelihood that the individual’s classification is accurate. This is because it is highly unlikely for the other, less probative factors to PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 outweigh the combined weight of the core factors.33 The following discussion addresses the five economic reality factors, including proposed modifications and clarifications made to each, and explains why the two core factors are entitled to greater weight than other factors. 1. The Nature and Degree of the Individual’s Control Over the Work The first economic reality factor (proposed § 795.105(d)(1)(i)) is ‘‘the nature and degree of the individual’s control over the work.’’ 34 This factor would weigh towards the individual being an independent contractor to the extent that the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work. Examples in the proposed regulatory text of an individual’s substantial control include setting his or her own work schedule, choosing assignments, working with little or no supervision, and being able to work for others, including a potential employer’s competitors.35 In addition, the Department agrees with courts that have found that an individual worker’s ‘‘substantial control of the key aspects’’ of the work weighs in favor of independent contractor classification ‘‘even if the worker is not solely in control of the work.’’ Parrish, 917 F.3d at 381–82; see also Mid-Atl. Installation Servs., 16 F. App’x at 106 (affirming the 33 As discussed in greater detail below, the Department’s review of federal appellate decisions indicates that, when the two proposed core factors are in alignment, they point to what the court finds to be the individual’s correct classification. 34 Many courts articulate this factor as the degree of control over the work by the potential employer as opposed to by the worker. See, e.g., Razak, 951 F.3d at 142; Hobbs, 946 F.3d at 829; McFeeley, 825 F.3d at 241; Keller, 781 F.3d at 807; Scantland, 721 F.3d at 1312. This distinction, however, is of no consequence. As the proposed regulatory text and this accompanying discussion make clear, the nature and degree of control over the work by the worker and by the potential employer are considered to determine whether control indicates employee or independent contractor status. 35 See, e.g., Saleem, 854 F.3d at 147 (noting that the workers’ ‘‘flexible work schedules and considerable control over when, where, and in what circumstances to accept a . . . fare’’ indicated that they were independent contractors); Parrish, 917 F.3d at 382 (finding control factor favored independent contractor status where workers ‘‘did not have to accept a project’’ and occasionally ‘‘turned down projects without negative repercussion’’); Thibault, 612 F.3d at 847 (finding control factor favored independent contractor status where ‘‘supervisors would only come by occasionally, and never specified how [the worker] should do the [work]’’); Express Sixty-Minutes Delivery, 161 F.3d at 303 (determining that the potential employer ‘‘had minimal control’’ over the delivery drivers where drivers ‘‘set their own hours and days of work,’’ ‘‘can work for other currier delivery systems,’’ and ‘‘can reject deliveries without retaliation’’). E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules district court’s conclusion that, although the potential employer exercised some control over the work, the manner in which the workers completed their work was ‘‘left to their broad discretion and business judgment, which suggests that they are independent contractors’’). In contrast, the control factor would weigh in favor of classification as an employee to the extent that a potential employer, as opposed to the individual, exercises substantial control over key aspects of the work, including through requirements that the individual work exclusively for it during the working relationship or prohibiting the individual from working for others after that relationship ends. According to the proposed regulatory text, a potential employer may exercise substantial control, for example, where it explicitly requires an exclusive working relationship or where it imposes restrictions that effectively prevent an individual from working with others. Cf. Keller, 781 F.3d at 814 (‘‘[A] reasonable jury could find that the way that [the potential employer] scheduled [the worker’s] installation appointments made it impossible for [the worker] to provide installation services for other companies.’’); Baker, 137 F.3d at 1441 (‘‘[T]he hours [the workers] are required to work on a project (ten to fourteen hours a day, six days a week), coupled with driving time between home and often remote work sites each day, make it practically impossible for them to offer services to other employers.’’). However, a ‘‘non-disclosure agreement does not require exclusive employment.’’ Parrish, 917 F.3d at 382; see also Talbert, 405 F. App’x at 85 (‘‘[T]here is nothing in the confidential agreement that would have precluded . . . working for other[s].’’). Proposed § 795.105(d)(1)(i) clarifies that requiring an individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreedupon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute control that makes the individual more or less likely to be an employee under the Act. These requirements frequently apply to work performed by employees and independent contractors alike; as such, they are not probative as to whether a working relationship is one of employment or independent contracting. The case law supports this approach. See, e.g., Iontchev, 685 F. App’x at 550 (noting that the potential employer’s ‘‘disciplinary policy VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 primarily enforced the Airport’s rules and [the city’s] regulations governing the [drivers’] operations and conduct’’ in finding that the potential employer exercised ‘‘relatively little control over the manner in which the [d]rivers performed their work’’); Mid-Atl. Installation Servs., 16 F. App’x at 106 (rejecting an argument that backcharging the workers ‘‘for failing to comply with various local regulations or with technical specifications demonstrates the type of control characteristic of an employment relationship,’’ and noting that withholding money in such circumstances is common in contractual relationships); Mr. W Fireworks, 814 F.2d at 1048 (finding that, because a scheduling requirement was imposed by the potential employer and not by state law, it suggested control over the workers). In addition, this aspect of the Department’s proposal is supported by case law regarding FLSA joint employer status. For example, the Second Circuit agreed that control with respect to ‘‘contractual warranties of quality and time of delivery has no bearing on the joint employment inquiry’’ because such control is ‘‘perfectly consistent with a typical, legitimate subcontracting relationship.’’ Zheng v. Liberty Apparel Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003).36 Moreover, control exercised by a potential joint employer over a contractor’s employees to ‘‘ensure compliance with various safety and security regulations’’ has been found to be ‘‘qualitatively different’’ from control that indicates employer status. Moreau v. Air France, 356 F.3d 942, 950–51 (9th Cir. 2003). Accordingly, the Department agrees with the above case law that the types of control listed in the last sentence of proposed § 795.105(d)(1)(i) are ‘‘qualitatively different’’ from control that evinces employer status. Moreau, 343 F.3d at 1189; see also Iontchev, 685 F. App’x at 550; MidAtlantic Installation Servs., 16 F. App’x at 106; Mr. W Fireworks, 814 F.2d at 1048; Freund, 185 F. App’x at 783. The Department welcomes comment 36 See also, e.g., Godlewska v. HDA, 916 F. Supp. 2d 246, 259 60 (E.D.N.Y. 2013), aff’d sub nom. Godlewska v. Human Dev. Ass’n, Inc., 561 F. App’x 108 (2d Cir. 2014) (‘‘Quality control and compliance monitoring . . . are qualitatively different from control that stems from the nature of the relationship between the employees and the putative employer.’’ (quotation marks omitted)); Jacobson v. Comcast Corp., 740 F. Supp. 2d 683, 691–92 (D. Md. 2010) (holding that the potential joint employer’s ‘‘quality control procedures . . . [were] qualitatively different from the control exercised by employers over employees’’); Thornton v. Charter Commc’ns, LLC, No. 4:12CV479 SNLJ, 2014 WL 4794320, at *16 (E.D. Mo. Sept. 25, 2014) (same). PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 60613 regarding this approach, including the distinction being drawn between bona fide quality control measures and control that is indicative of an employment relationship. 2. The ‘‘Opportunity for Profit or Loss’’ Factor The second economic reality factor (proposed § 795.105(d)(1)(ii)) is ‘‘the individual’s opportunity for profit or loss.’’ In analyzing this factor, courts generally consider whether such opportunities are based on personal initiative, managerial skill, or business acumen.37 The Second Circuit also considers the individual’s opportunity for profit or loss based on investments. See Superior Care, 840 F.2d at 1060. The Department and courts of appeals outside of the Second Circuit have traditionally analyzed ‘‘opportunity for profit or loss’’ and ‘‘investment’’ as separate factors, but at least some of those courts recognize that the two are ‘‘interrelated.’’ Lauritzen, 835 F.2d at 1537; see also McFeeley, 825 F.3d at 243. The Department believes the Second Circuit’s approach of combining the factors is preferable because it minimizes duplicative analysis of the same facts under different factors and aligns more closely with the Supreme Court’s original analysis in Silk, 331 U.S. at 717–19. As explained in the need for rulemaking discussion in Section III, treating ‘‘opportunity for profit or loss’’ and ‘‘investment’’ as separate factors results in duplicative analysis of the same facts. For example, in Mid-Atlantic Installation Services, the Fourth Circuit found that the opportunity for profit or loss factor weighed in favor of independent contractor status because the cable installer’s ‘‘net profit or loss depends on [in part] . . . the business acumen with which the Installer makes 37 See, e.g., Karlson, 860 F.3d at 1094–95 (discussing how the worker’s decisions and choices regarding assignments and customers affected his profits); Saleem, 854 F.3d at 145 (noting in support of independent contractor status that the degree to which the worker’s relationship with the potential employer ‘‘yielded returns was a function . . . of the business acumen of each [worker]’’); McFeeley, 825 F.3d at 243 (‘‘The more the worker’s earnings depend on his own managerial capacity rather than the company’s . . . the less the worker is economically dependent on the business and the more he is in business for himself and hence an independent contractor.’’) (internal quotation marks omitted); Express Sixty-Minutes, 161 F.3d at 304 (agreeing with district court that ‘‘driver’s profit or loss is determined largely on his or her skill, initiative, ability to cut costs, and understanding of the courier business.’’); WHD Opinion Letter FLSA2019–6 at 6 (‘‘These opportunities typically exist where the worker receives additional compensation based, not [merely] on greater efficiency, but on the exercise of initiative, judgment, or foresight.’’). E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 60614 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules his required capital investments in tools, equipment, and a truck.’’ 16 F. App’x at 106. The court further held that the investment factor also pointed in that direction based on those same facts, i.e., the installers ‘‘suppl[ied] their own trucks (equipped with 28-foot ladders), specialized tools, uniforms, and pagers.’’ Id. at 107. Such duplicative analysis is unwieldly, and it can be potentially confusing where the two factors analyzing the same facts reach opposite conclusions regarding a worker’s classification. See, e.g., Parrish, 917 F.3d at 382–85; Cromwell, 348 F. App’x at 61. The Second Circuit avoids duplication and potential confusion by analyzing investment and opportunity for profit or loss together. Under this approach, the worker’s meaningful capital investments may evince opportunity for profit or loss: ‘‘[e]conomic investment, by definition, creates the opportunity for loss, [and] investors take such a risk with an eye to profit.’’ Saleem, 854 F.3d at 145 n.29. But investment is not the only way to satisfy this factor because workers who ‘‘invest little’’ may nonetheless have an opportunity for profit through the exercise of personal initiative. Meyer, 607 F. App’x at 121; accord Parrish, 917 F.3d at 384–85; Express Sixty-Minutes, 161 F.3d at 304. In short, meaningful investment is a sufficient but not necessary dimension of the opportunity for profit or loss. See Lauritzen, 835 F.2d at 1540–41 (Easterbrook, J. concurring) (‘‘[P]ossess[ing] little or no physical capital . . . is true of many workers we would call independent contractors. Think of lawyers, many of whom do not even own books. The bar sells human capital rather than physical capital, but this does not imply that lawyers are ‘employees’ of their clients under the FLSA.’’); see also Faludi, 950 F.3d at 275 (‘‘Faludi provided his own phone and computer’’ and ‘‘made investments in his continuing education and home office equipment’’). The Second Circuit’s approach of combining opportunity for profit or loss and investment is also more faithful to the Supreme Court’s original analysis in Silk. See 331 U.S. at 716. In that case, the Court listed the two factors separately but analyzed them together. In particular, the Court found that coal unloaders were employees because they had ‘‘no opportunity to gain or lose except from the work of their hands and [ ] simple tools,’’ while truck drivers who invested in their own vehicles had ‘‘opportunity for profit from sound management’’ of that investment by, for instance, hauling for different customers. Id. at 719. Thus the question VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 is whether workers are more like unloaders whose profits were based solely on ‘‘the work of their hands and [ ] simple tools’’ or the drivers whose profits depended on their initiative and investments. See id.; see also Rutherford Food, 331 U.S. at 730 (concluding that workers were employees in part because their opportunity for profit ‘‘was more like piecework than an enterprise that actually depended for success upon the initiative, judgment or foresight of the typical independent contractor’’). Not all courts follow the Second Circuit and the Supreme Court’s approach of analyzing investment through the lens of profit and loss. Some, for instance, ‘‘use[ ] a side-by-side comparison method’’ that directly ‘‘compare[s] ‘each worker’s individual investment to that of the alleged employer.’ ’’ Parrish, 917 F.3d at 383 (quoting Hopkins, 545 F.3d at 344); see also, e.g., Keller, 781 F.3d at 810 (agreeing that ‘‘courts must compar[e] the worker’s investment in the equipment to perform his job with the [potential employer’s] total investment’’). In Hopkins, for example, the Fifth Circuit held that insurance sales leaders’ investments were insignificant because ‘‘it is clear that [the insurance company’s] investment— including maintaining corporate offices, printing brochures and contracts, providing accounting services, and developing and underwriting insurance products—outweighs the personal investment of any one Sales Leader.’’ 545 F.3d at 344. But such a ‘‘side-by-side comparison method’’ does not illuminate the ultimate question of economic dependence. See Karlson, 860 F.3d at 1096 (‘‘[C]omparing the amount Karlson spent . . . with [potential employer’s] total expenses in operating APS has little relevance . . . [because] [l]arge corporations can hire independent contractors, and small businesses can hire employees.’’). Indeed, it merely highlights the obvious and unhelpful fact that individual workers—whether employees or independent contractors— likely have fewer resources than businesses that, for example, ‘‘maintain[ ] corporate offices,’’ see Hopkins, 545 F.3d at 344, or drill oil wells, see Parrish, 917 F.3d at 383 (‘‘Obviously, [the oil drilling company] invested more money at a drill site compared to each plaintiff’s investments.’’). In contrast, analyzing investment as part of individuals’ opportunity for profit or loss illuminates the ultimate inquiry of whether individuals are ‘‘more closely akin to wage earners toiling for a living, than to independent entrepreneurs seeking a PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 return on their risky capital investments.’’ Mr. W. Fireworks, 814 F.2d at 1051. The Department is therefore proposing to adopt an approach similar to that of the Second Circuit, which analyzes the worker’s investment as part of the opportunity for profit or loss factor. The combined factor would weigh towards the individual being classified as an independent contractor if he or she has an opportunity for profit or loss based on either or both: (1) The exercise of personal initiative, including managerial skill or business acumen; and/or (2) the management of investments in, or capital expenditure on, for example, helpers, equipment, or material. While the effects of the individual’s exercise of initiative and management of investment are both considered under this factor, for reasons explained above, the individual would not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor. This factor would weigh towards the individual being an employee to the extent the individual is unable to affect his or her earnings through initiative or investment or is only able to do so by working more hours or more efficiently.38 The Department also considered keeping opportunity for profit or loss and investment as separate factors in its proposal, but believes that approach may be needlessly duplicative and confusing for reasons stated above. If investment were kept as a separate factor, the Department would emphasize that the factor should not reconsider opportunity for profit or loss. Instead, it would focus on whether a worker’s investment (or lack thereof) in the equipment, materials, technology, etc. necessary to perform the worker’s work 38 Workers who are paid on a piece-rate basis are an example of workers who are able to affect their earnings only through working more hours or more efficiently. Courts have generally agreed that such workers lack meaningful opportunity for profit or loss. See, e.g., Whitaker House, 366 U.S. at 33 (plaintiffs who manufactured knitted goods at home were employees under the FLSA, in part, because ‘‘[t]he management fixes the piece rates at which they work’’); Hodgson v. Cactus Craft of Arizona, 481 F.2d 464, 467 (9th Cir. 1973) (persons who manufacture novelty and souvenir gift items at homes and were compensated at a piece rate were employees under the FLSA). In DialAmerica, 757 F.2d at 1385, for example, the Third Circuit held that homeworkers who were paid on a piece-rate basis to perform the simple service of researching telephone numbers were employees who lacked meaningful opportunity for profit or loss. In contrast, distributors who recruited and managed researchers and were paid based on the productivity of those they managed were independent contractors, in part, because distributors’ earnings depended on ‘‘business-like initiative.’’ Id. at 1387. E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 renders the worker more or less economically dependent on the potential employer for work. The Department welcomes comments on this alternative approach. 3. The ‘‘Skill Required’’ Factor ‘‘The amount of skill required for the work’’ is an economic reality factor under proposed § 795.105(d)(2)(i). The Supreme Court articulated the ‘‘skill required’’ factor in Silk, 331 U.S. at 716, which several courts of appeals continue to consider as ‘‘the degree of skill required to perform the work.’’ Paragon, 884 F.3d at 1235; see also Iontchev, 685 F. App’x at 550; Keller, 781 F. 3d at 807. The Department and other courts of appeals, however, have traditionally expanded this factor to include consideration of ‘‘initiative’’ and ‘‘judgment.’’ See, e.g., Parrish, 917 F.3d at 379; Karlson, 860 F.3d at 1093; Superior Care, 840 F.2d at 1058–59; see also WHD Fact Sheet #13. This expansion was intended to increase the probative value of the skill factor by analyzing therein the worker’s capacity to ‘‘exercise significant initiative within the business.’’ See Parrish, 917 F.3d at 379; see also Selker Bros., 949 F.2d at 1295 (‘‘[T]he use of special skills is not itself indicative of independent contractor status, especially if the workers do not use those skills in any independent way.’’); Superior Care, 840 F.2d at 1060 (same). But the worker’s capacity to exercise on-the-job initiative is already analyzed in multiple ways under the control factor, including, for example, whether the worker controls the means and manner of work, decides when to work, or choice of assignments. Express Sixty-Minutes, 161 F.3d at 304. And the effects of a worker’s initiative are already analyzed as part of the opportunity for profit or loss factor. Id. As explained in the need for rulemaking discussion in Section III, importing aspects of the control factor into the skill factor has diluted the consideration of actual skill to the point of near irrelevance. In many cases, analysis of control rather than skill drives whether the skill factor favors independent contractor or employee status. See, e.g., Selker Bros., 949 F.2d at 1295; Baker, 137 F.3d at 1443; Superior Care, 840 F.2d at 1060. The Department believes such dilution generates confusion regarding the relevance and weight of the worker’s skill in the evaluation of economic dependence. It also blurs the lines between the economic reality factors, thereby undermining the structural benefits of a multifactor test. Furthermore, as at least one court of appeals has found, workers can exercise VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 enough initiative to have a meaningful opportunity for profit or loss but apparently not enough to satisfy the ‘‘skill and initiative required’’ factor. Express Sixty-Minutes, 161 F.3d at 304– 05. This calls into question the relevance of initiative as part of a separate skill factor. The Department therefore proposes to clarify that this factor should focus on the ‘‘amount of skill required,’’ as originally articulated by the Supreme Court in Silk, 331 U.S. at 716, and used today by several courts of appeals, see, e.g., Paragon, 884 F.3d at 1235; Iontchev, 685 F. App’x at 550; Keller, 781 F.3d at 807. Notably, this factor would not include a consideration of ‘‘initiative’’ (or the related concepts of judgment and foresight) because facts related to initiative are considered as part of the control and opportunity for profit or loss factors. Proposed § 795.105(d)(2)(i) thus explains that the ‘‘skill required’’ factor weighs in favor of classification as an independent contractor where the work at issue requires specialized training or skill that the potential employer does not provide. Otherwise, it weighs in favor of classification as an employee. The Department believes that this approach would sharpen the distinction between the economic reality factors by focusing on skill, as opposed to aspects of control. The worker’s ability to exercise initiative would remain more important than the presence of skill because it would be analyzed under the control factor, a core factor that would be given more weight than the skill factor. And the effect of the worker’s initiative would be analyzed under the opportunity for profit or loss factor, another core factor that would be given more weight. The Department considered keeping initiative as an aspect of the skill factor, but believes that such an approach may be needlessly duplicative and confusing for the reasons stated above. The Department welcomes comment on this alternative approach. 4. The ‘‘Permanence of the Working Relationship’’ Factor ‘‘The degree of permanence of the working relationship between the individual and the potential employer’’ is an economic reality factor under proposed § 795.105(d)(2)(ii). Courts and the Department routinely consider this factor when applying the economic reality analysis under the FLSA to determine employee or independent contractor status. See, e.g., WHD Opinion Letter FLSA2019–6 at 4; Razak, 951 F.3d at 142; Hobbs, 946 F.3d at 829; Karlson, 860 F.3d at 1092–93; McFeeley, PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 60615 825 F.3d at 241; Keller, 781 F.3d at 807; Scantland, 721 F.3d at 1312. However, they sometimes redundantly analyze the exclusivity of the working relationship as part of the permanence factor. The control factor already considers whether a worker has freedom to pursue external opportunities by working for others, including a potential employer’s rivals. See, e.g., Freund, 185 F. App’x at 783 (affirming district court’s finding that ‘‘Hi–Tech exerted very little control over Mr. Freund,’’ in part, because ‘‘Freund was free to perform installations for other companies’’).39 The same concept of exclusivity is then re-analyzed as part of the permanence factor. Compare id. (‘‘Freund’s relationship with Hi–Tech was not one with a significant degree of permanence . . . [because] Freund was able to take jobs from other installation brokers.’’), with Scantland, 721 F.3d at 1319 (finding installation technicians’ relationships with the potential employer were permanent because they ‘‘could not work for other companies’’). Such duplicative analysis of exclusivity under the permanence factor is not supported by the Supreme Court’s original articulation of that factor in Silk. See 331 U.S. at 716 (analyzing the ‘‘regularity’’ of unloaders’ work); id. at 719 (analyzing truck drivers’ ability to work ‘‘for any customer’’ as an aspect of ‘‘the control exercised’’ but not permanence); see also 12 FR 7967 (describing the permanence factor as pertaining to ‘‘continuity of the relation’’ but with no reference to exclusivity). Nor is the concept of exclusivity part of the common understanding of the word ‘‘permanent.’’ 40 In a similar vein to the Department’s analysis of the concept of initiative, the Department believes analysis of exclusivity as part of the permanence factor dilutes the significance of actual permanence within that factor, blurs the lines between the economic reality factors, 39 In addition, the opportunity for profit or loss factor considers whether a worker’s decisions to work for others affects profits or losses. See, e.g., Freund, 185 F. App’x at 783 (affirming the district court’s finding that the ‘‘looseness of the relationship between Hi–Tech and Freund permitted him great ability to profit,’’ in part, because ‘‘Freund could have accepted installation jobs from other companies.’’). The Department does not believe this consideration overlaps with the control factor. While the control factor concerns the ability to work for others, the opportunity for profit or loss factor concerns the effects of doing so. 40 See Merriam-Webster Dictionary, https:// www.merriam-webster.com/dictionary/permanent (defining permanent as ‘‘continuing or enduring without fundamental or marked change’’); see also Oxford American Dictionary 1980 (defining permanent as ‘‘lasting or meant to last indefinitely’’); Merriam-Webster Pocket Dictionary 1947 (defining permanent as ‘‘Lasting; enduring’’). E:\FR\FM\25SEP3.SGM 25SEP3 60616 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 and creates confusion by incorporating a concept that is distinct from permanence. Because the worker’s ability to work for others is already analyzed as part of the control factor, proposed § 795.105(d)(2)(ii) articulates the permanence factor without referencing the exclusivity of the relationship between the worker and potential employer. This proposal does not require any changes to the articulation of this factor because the current articulation, i.e., ‘‘the permanency of the working relationship,’’ provides no hint that exclusivity is also considered. This approach would focus the permanence factor on the continuity and duration of the working relationship, which align both with how the factor was originally articulated and with the plain meaning of ‘‘permanence.’’ The permanence factor would weigh in favor of an individual being classified as an independent contractor where his or her working relationship with the potential employer is by design definite in duration or sporadic. In contrast, the factor would weigh in favor of classification as an employee where the individual and the potential employer have a working relationship that is by design indefinite in duration or continuous. The Department notes that the seasonal nature of some jobs does not necessarily suggest independent contractor classification, especially where the worker’s position is permanent for the duration of the relevant season and where the worker has done the same work for multiple seasons. See Paragon Contractors, 884 F.3d at 1236–37. The Department also considered keeping exclusivity as part of this factor but changing the articulation to ‘‘permanence and exclusivity of the working relationship’’ to be more accurate. However, the Department believes that such an approach may be needlessly duplicative and confusing for the reasons stated above. The Department welcomes comments on this alternative approach. 5. The ‘‘Integrated Unit’’ Factor The Department and courts outside of the Fifth Circuit have typically articulated the sixth factor of the economic reality test as ‘‘the extent to which services rendered are an integral part of the [potential employer’s] business.’’ WHD Fact Sheet #13. Under this articulation, the ‘‘integral part’’ factor considers ‘‘the importance of the services rendered to the company’s business.’’ McFeeley, 825 F.3d at 244. In line with this thinking, courts generally state that this factor favors employee VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 status if the work performed is so important that it is central to or at ‘‘[t]he heart of [the potential employer’s] business.’’ Werner v. Bell Family Med. Ctr., Inc., 529 F. App’x 541, 545 (6th Cir. 2013); see also Baker, 137 F.3d at 1443 (‘‘[R]ig welders’ work is an important, and indeed integral, component of oil and gas pipeline construction work.’’); Lauritzen, 835 F.2d at 1537–38 (‘‘[P]icking the pickles is a necessary and integral part of the pickle business[.]’’); DialAmerica, 757 F.2d at 1385 (‘‘[W]orkers are more likely to be ‘employees’ under the FLSA if they perform the primary work of the alleged employer.’’). The Department is concerned that this focus on importance or centrality departs from the Supreme Court’s original articulation of the economic reality test, has limited probative value regarding the ultimate question of economic dependence, and may be misleading in some instances. As such, proposed § 795.105(d)(2)(iii) would clarify that the ‘‘integral part’’ factor should instead consider ‘‘whether the work is part of an integrated unit of production,’’ which aligns with the Supreme Court’s analysis in Rutherford Food, 331 U.S. at 729. As explained earlier, the ‘‘integral part’’ factor was not one of the distinct factors identified in Silk as being ‘‘important for decision.’’ 331 U.S. at 716.41 Nor was the importance of the work discussed in Rutherford Food as one of the distinct considerations. Instead, Rutherford Food observed that the work at issue was ‘‘part of an integrated unit of production’’ in the potential employer’s business and concluded that workers were employees in part because they ‘‘work[ed] alongside admitted employees of the plant operator at their tasks.’’ 331 U.S. at 729. The 1947 proposed Treasury regulations under the Social Security Act articulated the sixth factor of the economic reality test in line with Rutherford Food’s ‘‘integrated unit’’ discussion as: ‘‘[i]ntegration of the individual’s work in the businesses to which he renders services,’’ which concerned ‘‘the merger of the individual’s services into the businesses, so that such services constitute a part of the unity or whole which comprise such business.’’ 12 FR at 7966–67. 41 Silk did ask whether workers themselves were ‘‘an integral part of [defendants’] businesses,’’ as opposed to operating their own businesses, but that question was presented as the ultimate economic reality inquiry, as opposed to a factor to be weighed in that analysis. 331 U.S. at 716. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 The word ‘‘integral’’ can mean either very important or integrated.42 As some courts recognize, a worker can perform services that are important to a business without being integrated, meaning merged, into that business’s operations. See, e.g., Green v. Premier Telecomm. Servs., LLC, No. 1:16–CV–0332–LMM, 2017 WL 4863239, at *14 (N.D. Ga. Aug. 15, 2017) (‘‘While certainly Plaintiff performing his job was integral to Premier’s bottom-line, unlike in Rutherford, Plaintiff did not perform one step in an integrated system.’’). Federal courts of appeals typically considered integration of worker into the potential employer’s production process until the 1970s. See, e.g., Driscoll, 603 F.2d at 754 (‘‘Appellants’ activities appear to be an integral part of Driscoll’s strawberry growing operation, rather than an independently viable enterprise.’’); Mednick v. Albert Enterprises, Inc., 508 F.2d 297 (5th Cir. 1975) (asking whether the service ‘‘was [ ]an integrated part of the business of [a potential employer] in the same way as the work of the meat boners in Rutherford.’’); Tobin v. AnthonyWilliams Mfg. Co., 196 F.2d 547, 550 (8th Cir. 1952) (‘‘The haulers and woods workers here are such an integrated part of defendant’s production.’’).43 Starting in the 1980s, courts instead began to analyze whether the work is important to the potential employer. See, e.g., Lauritzen, 835 F.2d 1529, 1534–35; DialAmerica Mktg., 757 F.2d at 1386. Focusing on whether an individual’s work is important to a potential employer has questionable probative value regarding the issue of economic dependence, and may even be counterproductive in some cases. Judge Easterbrook’s Lauritzen concurrence argued that asking whether work is integral ‘‘has neither significance nor 42 Compare, e.g., Cambridge Dictionary, https:// dictionary.cambridge.org/us/dictionary/english/ integral (defining integral as ‘‘necessary and important’’) with Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/ integral (defining ‘‘integral’’ as ‘‘formed as a unit with another part’’); see also Merriam Webster Pocket Dictionary 1947 (defining integral as either ‘‘Needed for completeness’’ or ‘‘Composed of parts that make up a whole’’). 43 The Department has generally used ‘‘integral’’ rather than ‘‘integrated’’ in its subregulatory guidance since the 1950s. See WHD Opinion Letter (Aug. 13, 1954); WHD Opinion Letter (Feb. 8, 1956). A 2002 opinion letter interpreted the factor to focus on the importance of the work, explaining that ‘‘[w]hen workers play a crucial role in a company’s operation, they are more likely to be employees than independent contractors.’’ WHD Opinion Letter, 2002 WL 32406602, at *3 (Sept. 5, 2002). However, the Department’s most recent opinion letter on this subject characterized the factor as ‘‘the extent of the integration of the worker’s services into the potential employer’s business.’’ WHD Opinion Letter FLSA2019–6 at 6 (emphasis added). E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules meaning’’ because ‘‘[e]verything the employer does is ‘integral’ to its business—why else do it?’’ 835 F.2d at 1541 (Easterbrook, J. concurring) (emphasis in original); see also Zheng, 355 F.3d at 73 (cautioning in the joint employer context that interpreting the factor to focus on importance ‘‘could be said to be implicated in every subcontracting relationship, because all subcontractors perform a function that a general contractor deems ‘integral’ to a product or a service’’) (emphasis in original). Some courts have explained that ‘‘a worker who performs a routine task that is normal and integral to the putative employer’s business is likely to be dependent on the defendant’s overall enterprises.’’ Beck v. Boce Grp., L.C., 391 F. Supp. 2d 1183, 1192 (S.D. Fla. 2005); see also Charles v. Burton, 169 F.3d 1322, 1332–33 (11th Cir. 1999) (same). This explanation, however, may be flawed: If certain workers perform tasks that are important to a business, the logical inference is that the business is dependent on those workers—not the reverse. Put differently, the relative importance of the worker’s task to the business of the potential employer says nothing about whether the worker economically depends on that business for work. Other courts have explained that ‘‘it is presumed that, with respect to vital or integral parts of the business, the employer will prefer to engage an employee rather than an independent contractor. This is so because the employer retains control over the employee and can compel attendan[ce] at work on a consistent basis.’’ Dataphase, 781 F. Supp. at 735; see also Barnard Const., 860 F. Supp. at 777, aff’d sub nom. Baker v. Flint Eng’g & Const. Co., 137 F.3d 1436 (10th Cir. 1998) (same). But the control factor already directly analyzes whether a business can compel a worker to work on a consistent basis. See, e.g., Nieman, 775 F. App’x at 625 (‘‘The first factor— control—weighs in favor of independent contractor status because Nieman . . . controlled his schedule.’’). It is unclear why there is a need to indirectly analyze control by presuming a relationship between vital or integral services and control. Nor is it clear that such presumption survives scrutiny because businesses appear to routinely hire independent contractors over whom they exercise little control to perform vital or integral services.44 Indeed, as transaction costs fall, as is the trend in 44 See, e.g., Iontchev, 685 F. App’x at 551; Meyer, 607 F. App’x at 123; Freund, 185 F. App’x at 784; Mid-Atl. Installation Servs., Inc., 16 F. App’x at 107. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 many sectors of the economy,45 firms become more willing to hire independent contractors for vital or integral tasks, further diminishing the probative value of the importance of the work. Focusing on the importance of work can sometimes send misleading signals regarding economic dependence. For instance, some courts have explained that ‘‘easily replaceable’’ workers are less integral to a business, and therefore, are less dependent on that business. Browning v. Ceva Freight, LLC, 885 F. Supp. 2d 590, 610 (E.D.N.Y. 2012); see also Velu v. Velocity Exp., Inc., 666 F. Supp. 2d 300, 307 (E.D.N.Y. 2009) (observing that integrality to business diminished where ‘‘work is interchangeable with the work of other[s]’’). But the workers in Rutherford Food were also ‘‘easily replaceable’’ precisely because they were ‘‘part of the integrated unit of production’’ of a slaughterhouse processing line, which in turn indicated they were employees. 331 U.S. at 729. More often than not, easily replaceable workers are more dependent on that business for work—not less. Thus, focusing on the worker’s importance to a business under the ‘‘integral part’’ factor may obscure rather than illuminate the ultimate economic dependence inquiry. Finally, analyzing the importance of work under the ‘‘integral part’’ factor may send misleading signals due to the increasing difficulty of defining important or core functions of a growing number of intermediary companies whose main activity is ‘‘selling reductions in transaction costs.’’ 46 By one view, the core functions of a company that connects service providers to customers might be the service being provided. See O’Connor v. Uber Techs., Inc., 82 F. Supp. 3d 1133, 1153 (N.D. Cal. 2015) (‘‘[D]rivers perform a regular and integral part of Uber’s business[.]’’). But in another view, such a company’s core services might be connecting service providers and customers.47 See Razak, 951 F.3d at 147 n. 12 (‘‘We also believe [there] 45 See, e.g., L. Katz and A. Krueger, ‘‘The Rise and Nature of Alternative Work Arrangements in the United States, 1995–2015,’’ p. 25 (2018) (‘‘Coase’s (1937) classic explanation for the boundary of firms rested on the minimization of transaction costs within firm-employee relationships. Technological changes may be reducing the transaction costs associated with contracting out job tasks, however, and thus supporting the disintermediation of work.’’). 46 See Michael Munger, Tomorrow 3.0: Transaction Costs and the Sharing Economy, 51 (2018). 47 See id. at 61 (‘‘The middleman makes possible transactions that otherwise could not take place . . . [by] selling transaction cost reduction[.]’’). PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 60617 could be a disputed material fact’’ whether Uber is ‘‘a technology company that supports drivers’ transportation businesses, and not a transportation company that employs drivers.’’). Under this view, the intermediary company’s ‘‘business operations effectively terminate at the point of connecting service providers to consumers and do not extend to the service provider’s actual provision of services.’’ WHD Opinion Letter FLSA2019–6 at 10. While intermediary companies are more prevalent in the virtual marketplace, they are not limited to that context.48 For instance, health care brokers may be intermediaries that are in the business of connecting health care providers to health care consumers. See State Dep’t of Employment, Training & Rehab., Employment Sec. Div. v. Reliable Health Care Servs. of S. Nevada, Inc., 983 P.2d 414, 419 (Nev. 1999) (‘‘[W]e cannot ignore the simple fact that providing patient care and brokering workers are two distinct businesses.’’). Analyzing the importance of services to a potential employer often first requires characterizing the potential employer’s business as either an intermediary or a direct provider of services. But that characterization, in turn, requires answering the economic dependence question. If a potential employer is an intermediary company that merely connects service providers with customers, those service providers would have distinct businesses of their own. WHD Opinion Letter FLSA2019–6 at 10. As such, they would not be a part, let alone an essential or important part, of the potential employer’s business. Analyzing the importance of services to evaluate economic dependence thus becomes a circular exercise. The factor considers whether workers’ services are an important part of the potential employer’s business to answer the ultimate inquiry of whether workers provide services as part of their own distinct businesses. See Silk, 331 U.S. at 716 (asking whether workers were ‘‘an integral part of [defendants’] businesses,’’ as opposed to operating their own businesses, as the ultimate inquiry, rather than a discrete factor to be weighed). For these reasons, proposed § 795.105(d)(2)(iii) would rearticulate the ‘‘integral part’’ factor in accordance with the Supreme Court’s original inquiry in Rutherford Food of whether the work was ‘‘part of the integrated unit of production,’’ with an emphasis 48 See id. at 125 (‘‘The idea of a ‘gig economy’ is old, but the possibility of serial short term employment or ‘gigs’ are expanding rapidly’’ because ‘‘entrepreneurs have found [new] ways to sell reductions in transaction costs.’’). E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 60618 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules that the factor is different from the concept of importance or centrality. Courts that have applied the ‘‘integral part’’ factor to analyze integration rather than importance have typically grounded this factor to the specific circumstances in Rutherford Food. The Second Circuit, for example, recognized in a joint employer case that this factor was derived from the Supreme Court’s focus on the fact that the Rutherford Food plaintiffs ‘‘did a specialty job on the production line,’’ and thus limited this factor’s application to the production line or an analogous context. Zheng, 355 F.3d at 73 (‘‘[W]e construe Rutherford to mean that work on a production line occupies a special status under the FLSA[.]’’); see also Antenor v. D & S Farms, 88 F.3d 925, 937 (11th Cir. 1996) (asking whether workers ‘‘were analogous to employees working at a particular position on a larger production line’’); Mednick, 508 F.2d at 300 (analyzing whether the service ‘‘was [ ]an integrated part of the business of [a potential employer] in the same way as the work of the meat boners in Rutherford’’); Green, 2017 WL 4863239, at *14 (‘‘[U]nlike in Rutherford, Plaintiff did not perform one step in an integrated system. He was not dependent on Premier’s overall process to execute his duties.’’). Proposed § 795.105(d)(2)(iii) thus focuses the ‘‘integrated unit’’ factor on whether an individual works in circumstances analogous to a production line. This factor weighs in favor of employee status where a worker is a component of a potential employer’s integrated production process, whether for goods or services. The overall production process need not be a physical assembly line, but it must be an integrated process that requires the coordinated function of interdependent subparts working towards a specific unified purpose.49 This may occur where the worker depends on the overall process to perform work duties, such as, for example, a programmer who works on a software development team. See Antenor, 88 F.3d at 937 (finding farmworkers ‘‘were dependent on the growers’ overall production process’’). Another example would be where an individual works closely alongside conceded employees and performs identical or closely interrelated tasks as those employees, such as where an individual provides office cleaning services as part of a team of employees. 49 The unified purpose must be defined with specificity and thus would not include general business objectives such as increasing profits, cutting costs, or satisfying customer’s needs. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 Conversely, if the individual’s work is not integrated into the potential employer’s production process, the factor would favor classification as an independent contractor. This includes where an individual service provider is able to perform his or her duties without depending on the potential employer’s production process. Green, 2017 WL 4863239, at *14 (‘‘[U]nlike in Rutherford, [residential cable installer] . . . was not dependent on Premier’s overall process to execute his duties.’’). Thus, performance of discrete, segregable services for individual customers is not part of an integrated unit of production. See WHD Opinion Letter FLSA 2019–6 at 11 (concluding that the workers who provide services to the virtual marketplace company’s individual customers ‘‘are not integrated into [the company]’s referral business’’). The Department welcomes comments on this approach to the ‘‘integrated unit’’ factor. The Department considered removing the ‘‘integral part’’ factor instead of rearticulating it as the above-described ‘‘integrated unit’’ factor, in part, out of concern that the ‘‘integrated unit’’ factor may have limited applicability in the modern economy. However, the Department believes that the ‘‘integrated unit’’ factor described above would be applicable in sufficient cases to warrant its listing as an economic reality factor. The Department also welcomes comments on this alternative approach to remove this factor and instead focus the economic reality test on four factors. 6. Affording Greater Weight to the Two Core Factors Proposed § 795.105(c) explains that the two core factors—i.e., control and opportunity for profit or loss—are each afforded more weight in the analysis of economic dependence than are any of the others. As a result of their greater weight, if both core factors point towards the same classification, their combined weight is substantially likely to outweigh the combined weight of other factors that may point towards the opposite classification. In other words, where the two core factors align, the bulk of the analysis is complete. Anyone who is assessing the classification— whether a business, a worker, the Department, a court, or a jury—may approach the remaining factors and circumstances with skepticism, as only in unusual cases may such considerations outweigh the combination of the two core factors. At the same time, if the two core factors do not point toward the same classification, the remaining enumerated factors will usually determine the correct PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 classification. The discussion below explains in greater detail why Department’s proposes to focus the economic reality test on the two core factors in § 795.105(d)(1) over the other factors listed in § 795.105(d)(2) and any additional factors that may be considered. The Department proposes a focus on the two core factors in light of the sharpened articulation of economic dependence in proposed § 795.105(b). The Supreme Court cautioned that control is not the sole consideration, see Rutherford Food, 331 U.S. at 730, but it did not deny that factor’s significance in the analysis. Indeed, the Court recognized that, ‘‘[o]bviously control is characteristically associated with the employer-employee relationship,’’ Bartels, 332 U.S. at 130. And the opportunity for profit and loss factor is more closely tied to the concept of economic dependence than any other factors because it is a necessary component of being in business for oneself. As the D.C. Circuit observed in an NLRA case, ‘‘ ‘significant entrepreneurial opportunity for gain or loss’ . . . [even] better captures the distinction between an employee and an independent contractor’’ than control. Corporate Exp. Delivery Sys. v. NLRB, 292 F.3d 777, 780 (2002); see also FedEx Home Delivery, 563 F.3d at 497. Together, these two factors shape the economic dependence inquiry of ‘‘whether the individual is, as a matter of economic reality, in business for himself.’’ Parrish, 917 F.3d at 379. In ordinary circumstances, an individual ‘‘who is in business for him- or herself’’ will have meaningful control over the work performed and a meaningful opportunity to profit (or risk loss). In sum, it is not possible to properly assess whether workers are in business for themselves or are instead dependent on another’s business without analyzing their control over the work and profit or loss opportunities. While the Supreme Court established a multifactor approach to the question of employee versus independent contractor status, it did not require all factors to be treated equally. To the contrary, focusing on the control and opportunity for profit or loss factors is supported by the reasoning in Silk, 331 U.S. at 316, and Whitaker House, 366 U.S. at 32–33, the latter of which is the only post-Rutherford Food Supreme Court decision analyzing whether workers were employees or independent contractors under the FLSA. Silk held that coal unloaders were employees in the SSA context based on their lack of meaningful opportunity for profit or loss, and further recognized that the E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules lack of permanence was not significant. 331 U.S. at 317–18. The Court further held that truck drivers in that case were independent contractors because of ‘‘the control [they] exercised [and] the opportunity for profit from sound management,’’ without discussing any of the other economic reality factors. Id. at 319. In Whitaker House, the Court concluded that homeworkers who were paid on a piece-rate basis to produce knitted goods were employees, as opposed to being ‘‘self-employed’’ or ‘‘independent.’’ 366 U.S. at 32–33. While the Court reaffirmed that ‘‘ ‘economic reality’ rather than ‘technical concepts’ is to be the test for employment,’’ id. at 33 (citing Silk, 331 U.S. at 713, and Rutherford Food, 331 U.S. at 729), it did not analyze any of the specific factors that are part of the current economic realty test. Instead, the Whitaker House Court’s conclusion was based on the facts that the homeworkers could not ‘‘sell[ ] their products on the market for whatever price they can command’’ and were instead ‘‘regimented under one organization, manufacturing what the organization desires and receiving the compensation the organization dictates.’’ Id. at 32. In other words, the Supreme Court’s reasoning was based entirely on facts that related to control (‘‘regimented under one organization, manufacturing what the organization desires’’) and opportunity for profit (‘‘selling their products on the market for whatever price they can command’’ versus ‘‘receiving the [piece rate] compensation the organization dictates’’). The Court did not analyze any facts related to the workers’ skill, capital investment, permanence of relationship, or integration of the work to the business. Focusing on control and opportunity for profit or loss is further supported by the results of federal courts of appeals cases weighing the economic reality factors since 1975. In these cases, whenever the court found (or affirmed a district court finding) that the potential employer predominantly controlled the work, that court concluded that the worker is an employee. See, e.g., Hobbs, 946 F.3d at 830–36; Verma, 937 F.3d at 230–32; Gayle v. Harry’s Nurses Registry, Inc., 594 F. App’x 714, 717–18 (2d Cir. 2014); Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298, 307–09 (4th Cir. 2006); Baker, 137 F.3d at 1440–44; Martin, 949 F.2d at 1289. Conversely, whenever the court of appeals found (or affirmed a district court finding) that the worker predominantly controlled the work, that court nearly always concluded that the VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 worker is an independent contractor. See, e.g., Parrish, 917 F.3d at 379–388; Nieman, 775 F. App’x at 624–25 (per curiam); Saleem, 854 F.3d at 140–48; Iontchev, 685 F. App’x at 550–51; Barlow v. C.R. England, Inc., 703 F.3d 497, 506–07 (10th Cir. 2012); Mid-Atl. Installation Servs., 16 F. App’x at 106– 08. The few occasions where an appellate court’s ruling on a worker’s classification was contrary to what the control factor indicated were cases in which the other core factor— opportunity for profit or loss—pointed in the opposite direction. For example, in Acosta v. Paragon Contractors Corporation, the Tenth Circuit held that the control factor ‘‘indicates status as an independent contractor’’ because the defendant ‘‘could set his own hours and determine how best to perform his job within broad parameters.’’ 884 F.3d 1225, 1235–36 (10th Cir. 2018). The court nonetheless held that he was an employee, in part, because he ‘‘was paid only a flat fee’’ and therefore ‘‘could not increase or decrease his profits based on how well he did his job.’’ Id. at 1236; see also Cromwell, 348 F. App’x at 61 (concluding that the workers were employees even though they ‘‘controlled the details of how they performed their work [and] were not closely supervised’’ because, in part, defendant’s ‘‘complete control over [their] schedule and pay[ ] had the effect of severely limiting any opportunity for profit or loss’’). This trend is also true, indeed even more so, for the opportunity for profit or loss factor. Since 1975, virtually every time a circuit court of appeals has found (or affirmed a district court finding) that the potential employer predominantly determined the opportunities for profit or loss, the court has concluded that the worker was an employee. See, e.g., Hobbs, 946 F.3d at 832–36; Off Duty Police, 915 F.3d at 1059–1062; McFeeley, 825 F.3d at 243–44; Hopkins, 545 F.3d at 344–46; Baker, 137 F.3d at 1441–44; Snell, 875 F.2d at 808–812; Superior Care, 840 F.2d at 1059–61. Conversely, if the court found (or affirmed a district court finding) that the worker predominantly determined the opportunities for profit or loss, the court concluded that the worker was an independent contractor. See, e.g., Parrish, 917 F.3d at 384–88; Saleem, 854 F.3d at 140–48; Iontchev, 685 F. App’x at 550–51; Freund, 185 F. App’x at 783–84; Eberline v. Media Net, L.L.C., 636 F. App’x 225, 228–29 (5th Cir. 2016); Mid-Atl. Installation Servs., 16 F. App’x at 106–08. The opportunity for profit or loss factor as proposed in this rulemaking should be even more probative than these cases indicate PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 60619 because it would incorporate the probative value of the facts regarding investment.50 In summary, each of the two core factors is, by itself, highly probative of a worker’s economic dependence. Together, i.e., in cases where they both indicate the same classification, they are substantially likely to point to the answer of the classification question— whether employee or independent contractor. The Department’s proposal is consistent with case law and adopting a more focused approach. Many courts have analyzed all six factors (or five depending on the circuit) on a factor-byfactor basis, even where some factors were recognized as having limited relevance in a particular context. See, e.g., Hobbs, 946 F.3d at 830–36; Off Duty Police, 915 F.3d at 1055–1062; Nieman, 775 F. App’x at 624–25; Verma, 937 F.3d at 230–32; Snell, 875 F.2d at 805–12; Lauritzen, 835 F.2d at 1535–38; Mr. W Fireworks, 814 F.2d at 1047–55; DialAmerica, 757 F.2d at 1382–88; Donovan v. Sureway Cleaners, 656 F.2d 1368, 1370–73 (9th Cir. 1981). Several recent court opinions focus their analysis on just the most relevant facts and factors to the case, thereby achieving efficiency and clarity. In each such opinion, the most relevant factors on which the court focused its attention were control and opportunity for profit or loss. And to the extent that the court considered elements of investment and initiative, such elements are part of the control and opportunity for profit or loss factors under the Department’s proposal. In Saleem, the Second Circuit did not engage in the same factor-by-factor analysis as did the district court 50 Even if the Department were to keep opportunity for profit or loss and investment as separate factors, the opportunity for profit or loss factor would still be of primary importance. In the above cited cases, the opportunity for profit or loss factor aligned with the overall result of the case even where that factor did not explicitly include consideration of the worker’s investment. A separate investment factor, however, would not be a core factor because its importance is secondary compared to opportunity for profit or loss. Federal courts of appeals have repeatedly concluded that workers without meaningful investment in a business are nonetheless independent contractors if they have meaningful opportunity for profit or loss based on their initiative or business acumen. See, e.g., Parrish, 917 F.3d at 382–85; Meyer, 607 F. App’x at 123; Express Sixty-Minutes, 161 F.3d at 303–04. Conversely, where the investment factor favors independent contractor classification to some degree, workers may nonetheless be employees if they lack such opportunity. See Cromwell, 348 F. App’x at 61. Thus, if opportunity for profit or loss and investment were kept as separate factors in a final rule, the Department would propose making opportunity for profit or loss a core factor and investment a non-core factor. The Department welcomes comments on this alternative approach. E:\FR\FM\25SEP3.SGM 25SEP3 60620 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 regarding the black-car drivers, noting the economic reality ‘‘factors are merely aids to analysis.’’ 854 F.3d at 138–39. Instead, the court focused on the drivers’ ‘‘considerable discretion in choosing the nature and parameters of their relationship with the defendant,’’ ‘‘significant control over essential determinants of profits in [the] business,’’ how they ‘‘invested heavily in their driving businesses,’’ and the ‘‘ability to choose how much work to perform,’’ to conclude that they were ‘‘in business for themselves’’ as independent contractors. Id. at 139–47. In other words, Saleem primarily analyzed facts pertaining to the drivers’ control over their work and opportunity for profit or loss based on initiative or investment, the core factors under this proposed rule. In particular, the Second Circuit explicitly questioned the relevance of the permanence factor in light of the control factor, observing that ‘‘whatever ‘the permanence or duration’ of Plaintiffs’ affiliation with Defendants, both its length and the ‘regularity’ of work was entirely of Plaintiffs’ choosing,’’ id. at 147 (citation omitted), and gave no consideration whatsoever to the district court’s findings, 52 F. Supp. 3d 526, 543 (S.D.N.Y. 2014), ‘‘that driving is not a ‘specialized skill’ and that ‘‘drivers were integral to Defendants’ business.’’ The Second Circuit again focused on control and opportunity for profit or loss in Agerbrink v. Model Service LLC by relying on several disputed material facts (‘‘control over her work schedule, whether she had the ability to negotiate her pay rate, and, relatedly, her ability to accept or decline work’’) relating to those two factors to vacate summary judgment. 787 F. App’x 22, 25–27 (2d Cir. 2019). The Third Circuit took a similar approach in Razak v. Uber Technologies., Inc., which held that summary judgment was inappropriate because there were genuine disputes of fact regarding ‘‘whether Uber exercises control over drivers’’ and whether drivers have ‘‘the opportunity for profit or loss depending on managerial skill.’’ 951 F.3d at 145–47.51 And the Eighth 51 The Razak court also found a genuine dispute regarding degree of permanence of the working relationship, but characterized that dispute in one sentence solely as an issue of control, as opposed to permanence of the relationship: ‘‘On one hand, Uber can take drivers offline, and on the other hand, Plaintiffs can drive whenever they choose to turn on the Driver App, with no minimum amount of driving time required.’’ 951 F.3d at 147. In addition, the court agreed with the district court that the skill factor ‘‘certainly weighs in favor of finding that Plaintiffs are employees.’’ Id. Finally, the court acknowledged in a footnote that ‘‘Uber strenuously disputes’’ the district court’s finding that the ‘‘integral’’ factor weighed in favor of employee status and indicated that there could be VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 Circuit recently affirmed a jury verdict that a process server was an independent contractor, relying primarily on evidence relating to the control and opportunity for profit or loss factors, including the process server’s ability to determine his own profits by controlling hours, which assignments to take, and for which company to work. See Karlson, 860 F.3d at 1095. In summary, control and opportunity for profit or loss drive at the heart of what it means to be an independent contractor who is in business for oneself and are the most relevant factors in virtually every case. As such, the Department believes focusing on these two as the core factors would add much needed clarity and efficiency to the economic reality test. The Department welcomes comments on this approach, which departs from courts’ and Department’s previous practice of not expressly identifying which types of facts or factors are the most important. 7. The Other Factors In contrast to the two core factors, the other factors listed in § 795.105(d)(2) relating to skill, permanence, and integration are not always as probative to an inquiry into whether a worker is, as a matter of economic reality, in business for him- or herself or economically dependent on someone else for work. Rather, their relevance varies depending on the circumstances. Moreover, relevant aspects of the skill and permanence factors under the current test—i.e., initiative and exclusivity, respectively—are already part of the analysis with respect to the core factors. Since this rulemaking would remove such confusing overlaps by removing initiative and exclusivity from the skill and permanence factors, respectively, the probative value of these two factors would become even more limited. Skill factor. To be sure, some independent contractors in business for themselves have ‘‘some unique skill set[s].’’ Parrish, 917 F.3d at 385. But many skills that count towards this factor are not necessarily relevant to the question of economic dependence. In Scantland, for instance, the Eleventh Circuit reasoned that the skill factor weakly favored independent contractor status in part because ‘‘a highly trained technician could gain economic independence by the ability to market his skills to a competing employer.’’ Scantland, 721 at 1318. But ‘‘the ability to market oneself to a competing disputed material facts relating to this factor. Id. at n.12. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 employer,’’ without more, does not help answer the ultimate question the Scantland court was attempting to answer: ‘‘whether an individual is in business for himself or is dependent upon finding employment in the business of others.’’ Id. at 1312 (emphasis added). Thus, the skill factor is over-inclusive to the extent it includes skills that may merely enable a worker to find employment, but do not indicate the worker is in business for him- or herself. Recognizing this over-inclusiveness issue, some courts have explained that ‘‘the use of special skills is not itself indicative of independent contractor status, especially if the workers do not use those skills in any independent way.’’ Selker Bros., 949 F.2d at 1295; see also Superior Care, 840 F.2d at 1060. As discussed above, these courts made the worker’s capacity for initiative, a consideration under the control factor in the Department’s proposal, the most important aspect of the skill factor. This proposed rule would remove initiative as a consideration under the skill factor. Because capacity for initiative is already a part of the control factor and the effect of initiative is already a part of the opportunity for profit or loss factor, these changes would thus cement the secondary importance of the skill factor. The skill factor is also under-inclusive because it excludes certain managerial and business skills that are highly probative as to economic dependence. See Hopkins, 545 F.3d at 345 (‘‘Certainly, the Sales Leaders required a general set of skills to effectively manage their offices and teams. However, these are not specialized skills; they are abilities common to all effective managers.’’). A pair of cases involving drivers are illustrative in this regard. In Express Sixty-Minutes Delivery, the Fifth Circuit recognized that a delivery driver ‘‘must rely on his own judgment, knowledge of traffic patterns and road conditions . . . , ability to read [mapping software], and ability to anticipate the need for an alternative route.’’ 161 F.3d at 304. However, these did not constitute skill indicating independent contractor status. See id. at 305 (‘‘We agree with the Secretary that the skill and initiative factor points toward employee status.’’). Nonetheless, the court ultimately found the drivers were independent contractors, in part, because ‘‘a driver’s profit or loss is determined largely on his or her skill, initiative, ability to cut costs, and understanding of the courier business.’’ Id. at 304. In other words, the skill factor expressly excluded the precise attributes that gave drivers an opportunity for profit, thereby E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules indicating their independent contractor status. Id. A similar omission occurred in Iontchev, a case in which the Ninth Circuit concluded that certain taxi drivers were independent contractors in part because the ‘‘[d]rivers’ opportunity for profit or loss depended upon their managerial skill.’’ 685 F. App’x at 550. But such managerial skill evidently did not count towards the skill factor because the court concluded that ‘‘[t]he service rendered by the Drivers did not require a special skill.’’ Id. The Department’s proposal to deemphasize the skill factor as compared to the core factors is supported by the statutory text and case law. Employers can ‘‘suffer and permit’’ both skilled and non-skilled individuals to perform work as employees, 29 U.S.C. 203(g), and federal courts of appeals have routinely held that the presence of specialized skill does not mean a worker is an independent contractor if the worker lacks control over the work, an opportunity for profit or loss, or both. See, e.g., Cromwell, 348 F. App’x at 60 (telecom splicers); Superior Care, 840 F.2d at 1060 (nurses). Nor does the absence of specialized skill mean a worker is an employee if the worker otherwise has control over the work and an opportunity for profit or loss. See, e.g., Express Sixty-Minutes Delivery, 161 F.3d at 304 (delivery workers); Iontchev, 685 F. App’x at 550 (taxi drivers). Permanence factor. Under the current test, this factor concerns the exclusivity and length of the relationship between the worker and the potential employer. If this rule were finalized as proposed, exclusivity of the relationship would be analyzed under the control factor rather than the permanence factor to reduce confusing overlap between factors. The permanence factor would consider the duration, continuity, and regularity of the relationship.52 The Department believes that the remaining considerations that are part of this factor—duration, continuity, and regularity—are relevant to an economic reality analysis, though less so than the core factors. Specifically, the length of relationship between a worker and a potential employer has less relevance to the issue of economic dependence than the core factors. To be sure, many independent contractors who are in business for themselves lack a long-term relationship with a single client because 52 Even if the Department were to retain the analysis of exclusivity under a newly named ‘‘permanence and exclusivity’’ factor, that factor would be of secondary importance. This is because the most important part of the ‘‘permanence and exclusivity’’ factor, i.e., exclusivity, would add no additional probative value on top of what is already provided by the control factor. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 they work on ‘‘a project-by-project basis.’’ See, e.g., Parrish 917 F.3d at 387. But that does not mean independent contractors cannot have long-term working relationships. To the contrary, the existence of a long-term relationship has not prevented courts from finding workers to be independent contractors, particularly when such workers control their work and enjoy opportunities for profit or loss. See, e.g., Iontchev, 685 Fed. App’x at 550–51 (concluding that ‘‘Drivers were not economically dependent upon AAA Cab’’ even though ‘‘[t]he working relationship was often lengthy’’); Eberline, 636 F. App’x at 229 (concluding that installers were independent contractors even though ‘‘the length of the relationship between the Defendants and the installers was indefinite’’ and ‘‘no reasonable jury could have concluded that [the permanence] factor favored independent contractor status’’); DialAmerica, 757 F.2d at 1387 (concluding that ‘‘distributors were not employees under the FLSA because they operated more like independent contractors’’ even though ‘‘many distributors did perform delivery work for DialAmerica continuously for several years’’). Nor does the absence of a long-term working relationship preclude a finding of employee status. Workers who move from job to job or work for short periods of time can still be economically dependent on an employer. As the Second Circuit observed in Superior Care, ‘‘even where work forces are transient, the workers have been deemed employees where the lack of permanence is due to operational characteristics intrinsic to the industry rather than to the workers’ own business initiative.’’ 840 F.2d at 1060–61. It is therefore unsurprising that federal courts of appeals have held that workers who lack a permanent relationship with a potential employer are nonetheless economically dependent if the worker lacked control over the work and an opportunity for profit or loss. See, e.g., Verma, 937 F.3d at 230–32; Reich v. Circle C. Investments, Inc., 998 F.2d 324, 327–29 (5th Cir. 1993); Superior Care, 840 F.2d at 1060–61. Because it is often trumped by the core factors, the proposed regulation gives less weight to the permanence of the relationship. Integrated unit factor. As discussed above, the applicability of the ‘‘integrated unit’’ factor in proposed § 795.105(d)(2)(iii) is limited to the instances where a potential employer has an integrated production process (including a service business). Given this limited applicability, the Department believes the integrated unit PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 60621 factor is entitled to less weight than the core factors. In sum, the two core factors drive at the heart of the economic dependence question because they bear a causal relationship with the ultimate inquiry. A worker’s control over the work and the opportunity for profit or loss are generally what transforms him or her from being economically dependent on an employer as a matter of economic reality into being in business for him- or herself. This is not so with the other factors. Possessing a specialized skill, having a temporary working relationship, and not being part of an integrated unit of production are certainly characteristics shared by many workers who are in business for themselves. But they are often indicators rather than essential elements of being in business for oneself. Accordingly, the Department proposes to focus the economic reality test on the two core factors. Instead of balancing six or so unweighted and overlapping factors, a worker’s classification as an employee or independent contractor can be largely determined in many cases by two simple questions: (1) Does the worker exercise substantial control over the key aspects of the work; and (2) does the worker have an opportunity for profit or a risk of loss based on initiative or investment? If the answer to both is ‘‘yes,’’ the worker is most likely an independent contractor. And if the answer to both is ‘‘no,’’ the worker is most likely an employee. Other factors may also be probative as part of the circumstances of the whole activity, but are less important. They are especially relevant when the two core factors do not point in the same direction or do not point strongly in either direction. The Department believes this proposed approach would improve the clarity and predictability of the economic reality test. In the course of formulating this NPRM, the Department also considered a more structured approach to sharpening the economic reality test under the FLSA. In particular, the Department considered creating a presumption of employee or independent contractor status where both core factors indicate the same status. Such a presumption would be rebuttable only by a showing that other factors weighed strongly in favor of the other outcome. The Department is concerned that this approach would be confusing or burdensome on courts and the regulated community. Accordingly, the Department is not proposing a presumption-based approach at this time, but is nonetheless interested in E:\FR\FM\25SEP3.SGM 25SEP3 60622 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 comments on this, or other possible approaches to the economic reality test. E. Proposed Guidance Regarding the Primacy of Actual Practice Proposed § 795.110 states that the actual practice of the parties involved— both of the worker (or workers) at issue and of the potential employer—is more relevant than what may be contractually or theoretically possible. This principle is derived from the Supreme Court’s holding that ‘‘ ‘economic reality’ rather than ‘technical concepts’ is to be the test of employment’’ under the FLSA. Whitaker House, 366 U.S. at 33; see also Tony & Susan Alamo, 471 U.S. at 301 (‘‘The test of employment under the [FLSA] is one of ‘economic reality’ ’’ (citing Whitaker House, 366 U.S. at 33)). Applying this guidance, federal courts of appeals have emphasized the primacy of actual practice when evaluating whether workers are employees or independent contractors under the FLSA. See, e.g., Saleem, 854 F.3d at 142 (‘‘[P]ursuant to the economic reality test, it is not what [Plaintiffs] could have done that counts, but as a matter of economic reality what they actually do that is dispositive.’’) (citations omitted); Parrish, 917 F.3d at 387 (‘‘The analysis is focused on economic reality, not economic hypotheticals.’’); Scantland, 721 F.3d at 1311 (‘‘It is not significant how one ‘could have’ acted under the contract terms. The controlling economic realities are reflected by the way one actually acts.’’) (citations omitted). As the examples in proposed § 795.110 illustrate, the primacy of the parties’ actual practice applies to every potentially relevant factor, and it can weigh in favor of either an employee or independent contractor relationship. In some cases, the actual practice of the parties involved may suggest that the worker or workers are employees. See, e.g., Sureway Cleaners, 656 F.2d at 1371 (‘‘[T]he fact that Sureway’s ‘agents’ possess, in theory, the power to set prices, determine their own hours, and advertise to a limited extent on their own is overshadowed by the fact that in reality the ‘agents’ work the same hours, charge the same prices, and rely in the main on Sureway for advertising.’’); DialAmerica, 757 F.2d at 1387 (concluding that evidence showing workers were not doing similar work for any other businesses ‘‘although they were free to do so’’ indicates employee status). In other cases, it may suggest that the worker or workers at issue are independent contractors. See Saleem, 854 F.3d at 143 (concluding that blackcar drivers were independent contractors in part because ‘‘many VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 Plaintiffs . . . picked up passengers via street hail, despite TLC’s (apparently under-enforced) prohibition of this practice’’); see also Bartels, 332 U.S. at 129 (rejecting in an SSA case the argument that employee status under an economic reality test could ‘‘be determined solely by the idea of control which an alleged employer may or could exercise over the details of the service rendered to his business by the worker or workers’’) (emphasis added). Importantly, proposed § 795.110 does not suggest that what is contractually or theoretically possible in a work arrangement is irrelevant. Contractual and theoretical possibilities are also part of the economic reality of the parties’ relationship, and excluding them outright would not be consistent with the Supreme Court’s instruction in Rutherford Food to evaluate ‘‘the circumstances of the whole activity.’’ 331 U.S. at 730; see also Mid-Atlantic Installation Servs., 16 F. App’x at 107 (determining that cable installers were independent contractors in part because they had a ‘‘right to employ [their own] workers’’); Keller, 781 F.3d at 813 (citing as relevant ‘‘the fact that Miri never explicitly prohibited Keller from performing installation services for other companies’’ and finding ‘‘a material dispute as to whether Keller could have increased his profitability had he improved his efficiency or requested more assignments’’). Contractual or theoretical possibilities are less relevant evidence to the employment status inquiry, but the Department believes they are potentially relevant nonetheless. F. Severability Finally, the Department proposes to include a severability provision in part 795 so that, if one or more of the provisions of part 795 is held invalid or stayed pending further agency action, the remaining provisions would remain effective and operative. The Department proposes to add this provision as § 795.115. V. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., and its attendant regulations, 5 CFR part 1320, require the Department to consider the agency’s need for its information collections, their practical utility, as well as the impact of paperwork and other information collection burdens imposed on the public, and how to minimize those burdens. The PRA typically requires an agency to provide notice and seek public comments on any proposed collection of information contained in a proposed rule. See 44 PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 U.S.C. 3506(c)(2)(B); 5 CFR 1320.8. This NPRM does not contain a collection of information subject to OMB approval under the Paperwork Reduction Act. The Department welcomes comments on this determination. VI. Executive Order 12866, Regulatory Planning and Review; and Executive Order 13563, Improved Regulation and Regulatory Review A. Introduction Under E.O. 12866, OMB’s Office of Information and Regulatory Affairs determines whether a regulatory action is significant and, therefore, subject to the requirements of the Executive Order and OMB review.53 Section 3(f) of Executive Order 12866 defines a ‘‘significant regulatory action’’ as an action that is likely to result in a rule that: (1) Has an annual effect on the economy of $100 million or more, or adversely affects in a material way a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local or tribal governments or communities (also referred to as economically significant); (2) creates serious inconsistency or otherwise interferes with an action taken or planned by another agency; (3) materially alters the budgetary impacts of entitlement grants, user fees, or loan programs, or the rights and obligations of recipients thereof; or (4) raises novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Executive Order. Because the annual effect of this proposed rule would be greater than $100 million, this proposed rule would be economically significant under section 3(f) of Executive Order 12866.54 Executive Order 13563 directs agencies to propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs; that it is tailored to impose the least burden on society, consistent with achieving the regulatory objectives; and that, in choosing among alternative regulatory approaches, the agency has selected the approaches that maximize net benefits. Executive Order 13563 recognizes that some benefits are difficult to quantify and provides that, when appropriate and permitted by law, agencies may consider and discuss qualitatively values that are difficult or 53 See 58 FR 51735 (Sept. 30, 1993). entirety of the estimated costs from this deregulatory action, which exceed the $100 million threshold and relate strictly to familiarization, fall in the first year alone. The Department’s Regulatory Impact Analysis further explains that these one-year costs are more than offset by continuing annual cost-savings of $447 million per year, accruing to the same parties that face the familiarization costs. 54 The E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules impossible to quantify, including equity, human dignity, fairness, and distributive impacts. B. Overview of Analysis The Department estimates there were 10.6 million workers who worked at any given time as independent contractors as their primary jobs in the United States in 2017 (6.9 percent of all workers), the most recent year of data available. Including independent contracting on secondary jobs results in an estimate of 18.9 million independent contractors (12.3 percent of all workers). The Department discusses other studies providing estimates of the total number of independent contractors, ranging from 6.1 percent to 14.1 percent of workers (see Table 3 in VI.C.2). Due to uncertainties regarding magnitude and other factors, the Department has not quantified the potential change to the aggregate number of independent contractors that may occur if this proposed rule is finalized. Furthermore, the Department‘s analysis relies on data collected prior to 2020, which reflects the state of the economy prior to the COVID–19 pandemic. The Department acknowledges that data on independent contractors could look different following the economic effects of the pandemic, but does not yet have information to determine how the number of independent contractors could change nor whether these changes would be lasting or a near term market distortion. The Department invites comments from stakeholders on the data used in this analysis and on how the universe of independent contractors might change as a result of this proposed rule. Specifically, the Department requests data and comment 60623 on the possible impacts resulting from the COVID–19 pandemic as it relates to the composition of the labor market, the share and scope of independent contractors in the workforce, and any associated wage effects. The Department estimated regulatory familiarization costs to be $370.9 million in the first year. The Department estimated cost savings due to increased clarity to be $447.2 million per year, and cost savings due to reduced litigation to be $33.6 million per year. This results in a 10-year annualized net cost savings of $374.8 million using a 3 percent discount rate and $369.0 million using a 7 percent discount rate.55 For purposes of E.O. 13771, the annualized net cost savings over a perpetual time horizon are $221.3 million.56 Other costs, benefits, and cost savings are discussed qualitatively. TABLE 3—SUMMARY OF ESTIMATES OF INDEPENDENT CONTRACTING Annualized values a Impact Year 1 Year 2 Year 10 7% Discount 3% Discount Regulatory Familiarization Costs ($2019 millions) Establishments ..................................................................... Independent Contractors ..................................................... $152.3 218.6 $0.0 0.0 $0.0 0.0 $21.7 31.1 $17.9 25.6 Total .............................................................................. 370.9 0.0 0.0 52.8 43.5 Increased Clarity Cost Savings ($2019 millions) Employers ............................................................................ Independent Contractors ..................................................... 369.0 78.1 369.0 78.1 369.0 78.1 369.0 78.1 369.0 78.1 Total .............................................................................. b 447.2 447.2 447.2 447.2 447.2 33.6 33.6 33.6 480.8 480.8 480.8 480.8 369.0 374.8 Reduced Litigation Cost Savings ($2019 millions) 33.6 33.6 Total Cost Savings ($2019 millions) 480.8 480.8 Net Cost Savings (Cost SavingsØCosts) ($2019 millions) 109.9 480.8 a Annualized b The over 10-years. numbers in this table do not sum to the total exactly because of rounding. Please see Table 4 for unrounded values. khammond on DSKJM1Z7X2PROD with PROPOSALS3 C. Independent Contractors: Size and Demographics 1. Current Number of Independent Contractors The Department estimated the number of independent contractors to provide a sense of the current size of this population. There are a variety of estimates of the number of independent 55 Discount rates are directed by OMB. See Circular A–4, OMB (Sept. 17, 2003). VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 contractors and these span a wide range based on methodologies and how the population is defined. The Department believes that the Current Population Survey (CPS) Contingent Worker Supplement (CWS) offers an appropriate lower bound for the number of independent contractors; however, there are potential biases in these data that will be noted. Additionally, estimates from other sources will be presented to demonstrate the potential range. The CPS is conducted by the U.S. Census Bureau and published monthly by the Bureau of Labor Statistics (BLS). The sample includes approximately 60,000 households and is nationally representative. Periodically since 1995, and most recently in 2017, the CPS has included a supplement to the May 56 Per OMB guidelines, E.O. 13771 data is represented in 2016 dollars, inflation-adjusted for when the proposed rule would take effect. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 E:\FR\FM\25SEP3.SGM 25SEP3 60624 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 survey to collect data on contingent and alternative employment arrangements. Based on the CWS, there are 10.6 million independent contractors, which amounts to 6.9 percent of workers.57 The CWS measures those who say that their independent contractor job is their primary job and that they worked at the independent contractor job in the survey’s reference week. It is an important data set and analysis. However, based on the survey’s design, while the Department refers to the CWS measure of independent contractors throughout this analysis, it should be uniformly recognized as representing a constrained subsection of the entire independent contractor pool. Due to its clear methodological constraints, the CWS measure should be differentiated from other, more comprehensive measures. The BLS’s estimate of independent contractors includes ‘‘[w]orkers who are identified as independent contractors, independent consultants, or freelance workers, regardless of whether they are self-employed or wage and salary workers.’’ BLS asks two questions to identify independent contractors: 58 • Workers reporting that they are selfemployed are asked: ‘‘Are you selfemployed as an independent contractor, independent consultant, freelance worker, or something else (such as a shop or restaurant owner)?’’ (9.0 million independent contractors). We refer to these workers as ‘‘self-employed independent contractors’’ in the remainder of the analysis. • Workers reporting that they are wage and salary workers are asked: ‘‘Last week, were you working as an independent contractor, an independent consultant, or a freelance worker? That is, someone who obtains customers on their own to provide a product or service.’’ (1.6 million independent contractors). We refer to these workers as ‘‘other independent contractors’’ in the remainder of the analysis. It is important to note that independent contractors are identified in the CWS in the context of the respondent’s ‘‘main’’ job (i.e., the job with the most hours).59 Therefore, the 57 Bureau of Labor Statistics, ‘‘Contingent and Alternative Employment Arrangements—May 2017,’’ USDL–18–0942 (June 7, 2018), https:// www.bls.gov/news.release/pdf/conemp.pdf. 58 The variables used are PES8IC = 1 for selfemployed and PES7 = 1 for other workers. 59 While self-employed independent contractors are identified by the worker’s main job, other independent contractors answered yes to the CWS question about working as an independent contractor last week. Although the survey question does not ask explicitly about the respondent’s main job, it follows questions asked in reference to the respondent’s main job. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 estimate of independent contractors does not include those who may be defined as an employee for their primary job, but may work as an independent contractor for a secondary or tertiary job.60 For example, Lim et al. (2019) estimate that independent contracting work is the primary source of income for 48 percent of independent contractors.61 Applying this estimate to the 10.6 million independent contractors estimated from the CWS, results in 22.1 million independent contractors (10.6 million ÷ 0.48). Alternatively, a survey of independent contractors in Washington found that 68 percent of respondents reported that independent contract work was their primary source of income.62 Applying that estimate to the 10.6 million independent contractors from the CWS results in an estimated 15.6 million independent contractors (10.6 million ÷ 0.68). The CWS’s large sample size results in small sampling error. However, the questionnaire’s design may result in some non-sampling error. For example, one potential source of bias is that the CWS only considers independent contractors during a single point in time—the survey week (generally the week prior to the interview). These numbers will thus underestimate the prevalence of independent contracting over a longer timeframe, which may better capture the size of the population.63 For example, 60 Even among independent contractors, failure to report multiple jobs in response to survey questions is common. For example, Katz and Krueger (2019) asked Amazon Mechanical Turk participants the CPS-style question ‘‘Last week did you have more than one job or business, including part time, evening or weekend work?’’ In total, 39% of respondents responded affirmatively. However, these participants were asked the follow-up question ‘‘Did you work on any gigs, HITs or other small paid jobs last week that you did not include in your response to the previous question?’’ After this question, which differs from the CPS, 61 percent of those who indicated that they did not hold multiple jobs on the CPS-style question acknowledged that they failed to report other work in the previous week. As Katz and Krueger write, ‘‘If these workers are added to the multiple job holders, the percent of workers who are multiple job holders would almost double from 39 percent to 77 percent.’’ See L. Katz and A. Krueger, ‘‘Understanding Trends in Alternative Work Arrangements in the United States,’’ RSF: The Russell Sage Foundation Journal of the Social Sciences 5(5), p. 132–46 (2019). 61 K. Lim, A. Miller, M. Risch, and E. Wilking, ‘‘Independent Contractors in the U.S.: New Trends from 15 years of Administrative Tax Data,’’ Department of Treasury, p. 61 (Jul. 2019), https:// www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf. 62 Washington Department of Commerce, ‘‘Independent Contractor Study,’’ p. 21 (Jul. 2019), https://deptofcommerce.app.box.com/v/ independent-contractor-study. 63 In any given week, the total number of independent contractors would have been roughly PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 Farrell and Greig (2016) used a randomized sample of 1 million Chase customers to estimate prevalence of the Online Platform Economy.64 They found that ‘‘[a]lthough 1 percent of adults earned income from the Online Platform Economy in a given month, more than 4 percent participated over the three-year period.’’ Additionally, Collins et al. (2019) examined tax data from 2000 through 2016 and found that the number of workers who filed a form 1099 grew substantially over that period, and that fewer than half of these workers earned more than $2,500 from 1099 work in 2016. The prevalence of lower annual earnings implies that most workers who received a 1099 did not work as an independent contractor every week.65 The CWS also uses proxy responses, which may underestimate the number of independent contractors. The RAND American Life Panel (ALP) survey conducted a supplement in 2015 to mimic the CWS questionnaire, but used self-responses only. The results of the survey were summarized by Katz and Krueger (2018).66 This survey found that independent contractors comprise 7.2 percent of workers.67 Katz and Krueger identified that the 0.5 percentage point difference in magnitude between the CWS and the ALP was due to both cyclical conditions, and the lack of proxy responses in the ALP.68 Therefore, the Department believes a reasonable upper-bound on the potential bias due to the use of proxy responses in the CWS is 0.5 percentage points (7.2 versus 6.7).69 70 the same, but the identity of the individuals who do it for less than the full year would likely vary. Thus, the number of unique individuals who work at some point in a year as independent contractors would exceed the number of independent contractors who work within any one-week period as independent contractors. 64 D. Farrell and F. Greig, ‘‘Paychecks, Paydays, and the Online Platform,’’ JPMorgan Chase Institute (2016), https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2911293. 65 Collins, Brett, Andrew Garin, Emile Jackson, Dmitri Koustas, and Mark Payne. 2019. ‘‘Is Gig Work Replacing Traditional Employment? Evidence from Two Decades of Tax Returns.’’ Unpublished paper, IRS SOI Joint Statistical Research Program. 66 See Katz and Krueger (2018), supra note 45. 67 Id. at 49. The estimate is 9.6 percent without correcting for overrepresentation of self-employed workers or multiple job holders. Id. at 31. 68 Id. at Addendum (‘‘Reconciling the 2017 BLS Contingent Worker Survey’’). 69 Note that they estimate 6.7 percent of employed workers are independent contractors using the CWS, opposed to 6.9 percent as estimated by the BLS. This difference is attributable to changes to the sample to create consistency. 70 In addition to the use of proxy responses, this difference is also due to cyclical conditions. The impacts of these two are not disaggregated for independent contractors, but if we applied the relative sizes reported for all alternative work E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 Another potential source of bias in the CWS is that some respondents may not self-identify as an independent contractor, and others who self-identify may be misclassified. There are reasons to believe that some workers, who are legally considered independent contractors, would not self-identify as such. For example, if the worker has only one employer/client, or did not actively pursue the employer/client, then they may not agree that they ‘‘[obtain] customers on their own to provide a product or service.’’ Additionally, individuals who do only informal work may not view themselves as independent contractors.71 This population could be substantial. Abraham and Houseman (2019) confirmed this in their examination of the Survey of Household Economics and Decision-making. They found that 28 percent of respondents reported doing informal work for money over the past month.72 Conversely, some workers misclassified as independent contractors may answer in the affirmative, despite not truly being independent contractors. The prevalence of misclassification is unknown, but it is generally agreed to be common.73 Because reliable data on 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. 71 The Department believes that including data on informal work is useful when discussing the magnitude of independent contracting, although not all informal work is done by independent contractors. The Survey of Household Economics and Decision-making asked respondents whether they engaged in informal work sometime in the prior month. It categorized informal work into three broad categories: Personal services, on-line activities, and off-line sales and other activities, which is broader than the scope of independent contractors. These categories include activities like house sitting, selling goods online through sites like eBay or Craigslist, or selling goods at a garage sale. The Department acknowledges that the data discussed in this study might not be a one-to-one match with independent contracting, but it nonetheless provides useful data for this purpose. 72 Katherine G. Abraham, and Susan N. Houseman. 2019. ‘‘Making Ends Meet: The Role of Informal Work in Supplementing Americans’ Income.’’ RSF: The Russell Sage Foundation Journal of the Social Sciences 5(5): 110–31, https:// www.aeaweb.org/conference/2019/preliminary/ paper/QreAaS2h. 73 See, e.g., U.S. Gov’t Accountability Off., GAO– 09–717, Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention 10 (2008) (‘‘Although the national extent of employee misclassification is unknown, earlier national studies and more recent, though not comprehensive, studies suggest that employee misclassification could be a significant problem with adverse consequences.’’). VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 the potential magnitude of these biases are unavailable, and so the net direction of the biases is unknown, the Department has not calculated any estimates of how these biases may impact the estimated number of independent contractors. Because the CWS estimate represents only the number of workers who worked as independent contractors on their primary job during the survey reference week, the Department applied the research literature and adjusted this measure to include workers who are independent contractors in a secondary job or who were excluded from the CWS estimate due to other factors. As noted above, integrating the estimated proportions of workers who are independent contractors on secondary or otherwise excluded jobs yields from other surveys produces estimates of 15.6 million and 22.1 million. The Department used the average of these two estimates, 18.9 million, as the estimated total number of workers working as independent contractors in any job at a given time. Given the prevalence of independent contractors who work sporadically and earn minimal income, adjusting the estimate according to these sources captures some of this population. It is likely that this figure is still an underestimate of the true independent contractor pool. The Department requests comments and data on the assumptions made to calculate this estimate. 2. Range of Estimates in the Literature To further consider the range of estimates available, the Department conducted a literature review, the findings of which are presented in Table 3. Other studies were also considered but are excluded from this table because the study populations were broader than just independent contractors or limited PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 60625 to one state.74 The RAND ALP 75 and the General Social Survey’s (GSS’s) Quality of Worklife (QWL) 76 supplement are widely cited alternative estimates. However, the Department chose to use sources with significantly larger sample sizes and more recent data for the primary estimate. Jackson et al. (2017) 77 and Lim et al. (2019) 78 use tax information to estimate the prevalence of independent contracting. In general, studies using tax data tend to show an increase in prevalence of independent contracting over time. The use of tax data has some advantages and disadvantages over survey data. Advantages include large sample sizes, the ability to link information reported on different records, the reduction in certain biases such as reporting bias, records of all activity throughout the calendar year (the CWS only references one week), and inclusion of both primary and secondary independent contractors. Disadvantages are that independent contractor status needs to be inferred; there is likely an underreporting bias (i.e., some workers do not file taxes); researchers are generally trying to match the IRS definition of independent contractor, which does not mirror the scope of independent contractors under the FLSA; and the estimates include 74 Including, but not limited to: McKinsey Global Institute, ‘‘Independent Work: Choice, Necessity, and the Gig Economy’’ (2016), https:// www.mckinsey.com/featured-insights/employmentand-growth/independent-work-choice-necessityand-the-gig-economy; Kelly Services, ‘‘Agents of Change’’ (2015); Robles and McGee, ‘‘Exploring Online and Offline Informal Work: Findings from the Enterprising and Informal Work Activities (EIWA) Survey’’ (2016); Upwork, ‘‘Freelancing in America’’ (2019); Washington Department of Commerce, supra note 62; Farrell and Greig, supra note 64; MBO Partners, ‘‘State of Independence in America’’ (2016); Abraham et al., ‘‘Measuring the Gig Economy: Current Knowledge and Open Issues’’ (2018), https://www.nber.org/papers/w24950; Collins et al., ‘‘Is Gig Work Replacing Traditional Employment? Evidence from Two Decades of Tax Returns,’’ IRS Working Paper (2019); Gitis et al., ‘‘The Gig Economy: Research and Policy Implications of Regional, Economic, and Demographic Trends,’’ American Action Forum (2017), https://www.americanactionforum.org/ research/gig-economy-research-policy-implicationsregional-economic-demographic-trends/ #ixzz5IpbJp79a; Dourado and Koopman, ‘‘Evaluating the Growth of the 1099 Workforce,’’ Mercatus Center (2015), https://www.mercatus.org/ publication/evaluating-growth-1099-workforce. 75 See Katz and Krueger (2018), supra note 45. 76 See Abraham et al., supra note 743, Table 4 (2018). 77 E. Jackson, A. Looney, and S. Ramnath, ‘‘The Rise of Alternative Work Arrangements: Evidence and Implications for Tax Filing and Benefit Coverage,’’ OTA Working Paper 114 (2017), https:// www.treasury.gov/resource-center/tax-policy/taxanalysis/Documents/WP-114.pdf. 78 Lim et al., supra note 61. E:\FR\FM\25SEP3.SGM 25SEP3 60626 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules misclassified independent contractors.79 A major disadvantage of using tax data for this NPRM is that the data are not publicly available and thus the analyses conducted cannot be directly verified or adjusted as necessary (e.g., to describe characteristics of independent contractors, etc.). TABLE 3—SUMMARY OF ESTIMATES OF INDEPENDENT CONTRACTING Percent of workers Source Method Definition a CPS CWS ......... Survey .............. ALP ................... Survey .............. GSS QWL ......... Survey .............. Jackson et al ..... Lim et al ............ Tax data ........... Tax data ........... Independent contractor, consultant or freelance worker (main only). Independent contractor, consultant or freelance worker (main only). Independent contractor, consultant or freelancer (main only). Independent contractor, household worker ..... Independent contractor .................................... Sample size Year 6.9 50,392 ......................... 2017 7.2 6,028 ........................... 2015 14.1 2,538 ........................... 2014 b 6.1 c ∼5.9 2014 2016 8.1 million ............... 1% of 1099–MISC and 5% of 1099–K. khammond on DSKJM1Z7X2PROD with PROPOSALS3 a The survey data only identify independent contractors on their main job. Jackson et al. include independent contractors as long as at least 15 percent of their earnings were from self-employment income; thus, this population is broader. If Jackson et al.’s estimate is adjusted to exclude those who are primary wage earners, the rate is 4.0 percent. Lim et al. include independent contractors on all jobs. If Lim et al.’s estimate is adjusted to only those who receive a majority of their labor income from independent contracting, the rate is 3.9 percent. b Summation of (1) 2,132,800 filers with earnings from both wages and sole proprietorships and expenses less than $5,000, (2) 4,125,200 primarily sole proprietorships and with less than $5,000 in expenses, and (3) 3,416,300 primarily wage earners. c Estimate based on a 10 percent sample of self-employed workers and a 1 percent sample of W–2 recipients. 3. Demographics of Independent Contractors This section presents demographic information of independent contractors using the CWS, which, as stated above, only measures those who say that their independent contractor job is their primary job and that they worked at the independent contractor job in the survey’s reference week. According to the CWS, these primary independent contractors are most prevalent in the construction and professional and business services industries. These two industries employ 44 percent of primary independent contractors. Independent contractors tend to be older and predominately male (65 percent). Millennials have a significantly lower prevalence of primary independent contracting than older generations: 3.6 percent for Millennials compared to 6.0 percent for Generation X and 8.8 percent for Baby Boomers and Matures.80 However, surveys suggest that this trend is reversed when secondary independent contractors, or those who did informal work as independent contractors, are included. These divergent data suggest that younger workers are more likely to use contractor work sporadically and/or for supplemental income.81 White workers are somewhat overrepresented among primary independent contractors; they comprise 85 percent of this population but only 79 percent of the population of workers. Conversely, black workers are somewhat underrepresented (comprising 9 percent and 13 percent, respectively).82 The opposite trends emerge when evaluating informal work, where racial minorities participate at a higher rate than white workers.83 Primary independent contractors are spread across the educational spectrum, with no group especially overrepresented. The same trend in education attainment holds for workers who participate in informal work.84 The substantive effect of the rule is not intended to favor independent contractor or employee classification relative to the status quo. However, the Department assumes in this RIA that the increased legal certainty associated with this proposed rule could lead to an increase in the number of independent contractor arrangements. The Department has not attempted to estimate the magnitude of this change, primarily because there are not objective tools for quantifying the clarity, simplification, and enhanced probative value of the Department’s proposals for sharpening and focusing the economic reality test.85 Therefore, potential transfers are discussed qualitatively with some numbers presented on a per worker basis. Potential transfers may result from differences in employer provided benefits, tax liabilities, and earnings between employees and independent contractors. Although employer-provided benefits could decrease, and tax liabilities could increase for these workers, the Department believes the net impact on total compensation should be small in either direction. Furthermore, in order to attract qualified workers, companies must offer competitive compensation. Therefore, in a competitive labor market, any reduction in benefits and increase in taxes is likely to be offset by 79 In comparison to household survey data, tax data may reduce certain types of biases (such as recall bias) while increasing other types (such as underreporting bias). Because the Department is unable to quantify this tradeoff, it could not determine whether, on balance, survey or tax data are more reliable. 80 The Department used the generational breakdown used in the MBO Partner’s 2017 report, ‘‘The State of Independence in America.’’ ‘‘Millennials’’ were defined as individuals born 1980–1996, ‘‘Generation X’’ were defined as individuals born 1965–1980, and ‘‘Baby Boomers and Matures’’ were defined as individuals born before 1965. 81 Abraham and Houseman (2019), supra note 7272, find that informal work decreases as a worker’s age increases. Among 18 to 24 years olds, 41.3 percent did informal work over the past month. The rate fell to 25.7 percent for 45 to 54 year olds, and 13.4 percent for those 75 years and older. See also Upwork, ‘‘Freelancing in America’’ (2019). 82 These numbers are based on the respondents who state that their race is ‘‘white only’’ or ‘‘black only’’ as opposed to identifying as being multiracial. 83 Abraham and Houseman (2019), supra note 72. 84 Id. 85 Another uncertainty limiting the Department’s ability to quantify the possible increase in independent contracting is the nature and effect of state wage and hour laws. Some states, such as California, have laws that place more stringent limitations on who may qualify as independent contractors than the FLSA. See Cal. Labor Code 2775 (establishing a demanding ‘‘ABC’’ test applicable to most workers when determining independent contractor status under California law). Because the FLSA does not preclude states and localities from establishing broader wage and hour protections than those that exist under the FLSA, see 29 U.S.C. 218(a), workers in some states may be unaffected by this proposed rule. However, because the Department is not well positioned to interpret the precise scope of each state’s wage and hour laws, the Department is unable to definitively determine the degree to which workers in particular states would or would not be affected by this proposed rule. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 D. Potential Transfers PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules higher base earnings—referred to as an ‘‘earnings premium.’’ As explained elsewhere, however, the data provides mixed evidence of this earnings premium. Assuming that independent contractor arrangements increase following this proposed rule, it is unclear whether this would occur as a result of employees being subsequently classified as independent contractors or as a result of the hiring of new workers as independent contractors. This will have implications for transfers. If current employees change classifications, then there may be transfers. Employers could only change the classification of current employees if those workers had previously been misclassified or by changing the working conditions such that the relationship becomes a true independent contractor relationship, assuming doing so is consistent with any applicable employment contracts, collective bargaining agreement, or other applicable laws. Lim et al. (2019) found ‘‘little evidence that firms are increasingly reclassifying existing employee relationships as [independent contractor] relationships,’’ however, they found that ‘‘firms are hiring more new workers as [independent contractors] rather than as employees.’’ 86 By decreasing uncertainty and thus potentially opening new opportunities for firms, companies may hire independent contractors who they otherwise would not have hired. In this case, there may be a decrease in unemployment and/or an increase in the size of the labor force. In a study of respondents from both Europe and the U.S., McKinsey Global Institute found that 15 percent of those not working are interested in becoming an independent contractor for their primary job.87 Attracting these individuals to join the labor force would be considered a societal benefit, rather than a transfer, and therefore, is analyzed more fully below as part of the discussion on Cost Savings and Benefits. The Department invites comment on its assumption that use of independent contractors will increase if the proposed rule is finalized. The Department also welcomes comments and data from companies looking to increase their use of independent contractors, specifically on whether employees’ classifications would change to independent contractor status, consistent with this proposed rule and their other contractual and legal obligations, or whether they would 86 Lim et al., supra note 61 at 3. Global Institute, supra note 74 at 71. 87 McKinsey VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 instead hire new workers as independent contractors. 1. Employer Provided Benefits Although this rule only affects workers’ independent contractor status under the FLSA, the Department assumes in this analysis that employers are likely to keep the status of the worker the same across all benefits and requirements.88 To the extent that employers currently provide employees benefits such as health insurance, retirement contributions, and paid time off, these would likely decrease with an increase in the use of independent contractors because independent contractors generally do not receive these benefits directly (although independent contractors are able to purchase at least some of these benefits for themselves). Employer provided benefits are a significant share of workers’ compensation. According to the BLS’s Employer Costs for Employee Compensation (ECEC), the value of employer benefits that directly benefit employees average 21 percent of total compensation.89 The Department used the CWS to compare prevalence of health insurance and retirement benefits across employees and independent contractors. However, it should be noted that these two populations may differ in ways other than just their employment classification which may impact benefit amounts. For instance, an employee shifting to independent contractor status who already receives health benefits through a partner’s benefit plan would not be impacted by losing heath benefit eligibility. Additionally, lower benefits may be offset by increased base pay in order to attract staff because workers consider the full package of pay and benefits when accepting a job. According to the CWS’s relatively narrow definition of independent contractor: • 79.4 percent of self-employed independent contractors have health 88 Courts have noted that the FLSA has the broadest conception of employment under federal law. See, e.g., Darden, 503 U.S. at 326. To the extent that businesses making employment status determinations base their decisions on the most demanding federal standard, a rulemaking addressing the FLSA’s distinction between employees and independent contractors may affect the businesses’ classification decisions for purposes of benefits and legal requirements under other federal and state laws. 89 BLS, ‘‘Employer Costs for Employee Compensation News Release’’ (Sept. 2019), https:// www.bls.gov/news.release/archives/ecec_ 12182019.htm, Civilian Workers. This includes paid leave ($2.68), insurance ($3.22), and retirement and savings benefits ($1.96). It does not include overtime and premium pay, shift differential pay, nonproduction bonuses, or legally required benefits. Calculated as ($2.68 + $3.22 + $1.96)/ $37.03. PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 60627 insurance. Most of these workers either purchased insurance on their own (31.5 percent) or have access through their spouse (28.6 percent). • 80.7 percent of other independent contractors have health insurance. There are three main ways these workers receive health insurance: Through their spouse (25.1 percent), through an employer (24.2), or on their own (20.1 percent). • 88.3 percent of employees have health insurance. Most of these workers receive health insurance through their work (64.1 percent). Furthermore, according to the ECEC, employers pay on average 12 percent of an employee’s base compensation in health insurance premiums. From these data, it is unclear exactly how health insurance coverage would change if the number of independent contractors increased, but the data suggest that independent contractors, on average, may be less likely to have health insurance coverage. That said, employment is not a guarantee of health insurance, nor do independent contractors generally lack health insurance. A major source of retirement savings is employer sponsored retirement accounts. According to the CWS, 55.5 percent of employees have a retirement account with their current employer; in addition, the ECEC found that employers pay 5.3 percent of employees’ total compensation in retirement benefits on average ($1.96/ $37.03). If a worker shifts from employee to independent contractor status, that worker may no longer receive employer-provided retirement benefits, but may choose alternate investment options. As with health insurance, it is not clear whether retirement savings for such a worker would increase or decrease, but such a worker would need to take a more active role in saving for retirement vis-a`-vis an employee with an employer-sponsored retirement plan. 2. Tax Liability Payroll tax liability is generally divided between the employer and the employee in the United States. Most economists believe that the ‘‘incidence’’ of the payroll tax, regardless of liability, falls on the employee.90 As self90 The share of payroll taxes borne by employees versus firms is unknown but economists generally believe that employer payroll taxes are partially-tocompletely shifted to employees in the long run. For a detailed review of the literature see J. Deslauriers, B. Dostie, R. Gagne´, and J. Pare´, ‘‘Estimating the Impacts of Payroll Taxes: Evidence from Canadian Employer-Employee Tax Data,’’ IZA E:\FR\FM\25SEP3.SGM Continued 25SEP3 60628 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 employed workers, independent contractors are legally obligated to pay both the employee and employer shares of the Federal Insurance Contributions Act (FICA) taxes. Thus, if workers’ classifications change from employees to independent contractors, there may be a transfer in federal tax liabilities from employers to workers (regardless of whether this affects the actual cost of these taxes to the worker). These payroll taxes include: 91 • Social Security tax: The 6.2 percent employer component (half of the 12.4 percent total).92 • Medicare tax: The 1.45 percent employer component (half of the 2.9 percent total).93 In sum, independent contractors are legally responsible for an additional 7.65 percent of their earnings in FICA taxes vis-a`-vis an employee. However, any tax-related transfers from employers to workers are likely to be offset by higher wages employers pay to ensure workers’ take-home pay remains the same. Companies also cover unemployment insurance and workers’ compensation taxes for their employees. Independent contractors may choose to pay for comparable insurance protection offered in the private market, but are not obligated to. The resulting regulatory effect (experienced as savings, either by companies or employees, depending on who ultimately bears the cost of the tax) combines societal cost savings (the lessened administrative cost of incrementally lower participation in unemployment insurance and workers’ compensation programs) and transfers (from individuals whose unemployment insurance or workers’ compensation payments decline, to entities paying less in taxes). Independent contractors may recoup some or all of the employer portion of these taxes and insurance premiums in the form of increased wages. This rule could decrease employers’ tax liabilities and increase independent contractors’ take-home compensation. However, there are costs to independent contractors if they become unemployed or injured or ill on the job because they no longer are Institute of Labor Economics Discussion Paper Series IZA DP No. 11598 (June 2018), http:// ftp.iza.org/dp11598.pdf. Further information is available by the Tax Foundation, https:// taxfoundation.org/what-are-payroll-taxes-and-whopays-them/. 91 Internal Revenue Service, ‘‘Publication 15, (Circular E), Employer’s Tax Guide’’ (Dec. 23, 2019), https://www.irs.gov/pub/irs-pdf/p15.pdf. 92 The social security tax has a wage base limit of $137,700 in 2020. 93 An additional Medicare Tax of 0.9 percent applies to wages paid in excess of $200,000 in a calendar year for individual filers. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 protected, unless they purchase their own private insurance. The Department did not attempt to quantify the cost of changes in coverage or whether the net effect is a benefit or cost to the worker. 3. Earnings Although the minimum wage and overtime pay requirements of the FLSA would no longer apply to workers who shift from employee status to independent contractor status, the Department anticipates an increase in labor force activity. That said, the Department does not attempt to quantify the magnitude of any increase in earnings as a result of increased labor force activity. If currently unemployed workers or individuals who are out of the labor market become independent contractors due to this rule, their earnings will increase as they currently have no employment-related earnings other than possibly unemployment benefits. The impact on earnings is more ambiguous if employees’ classifications change to independent contractors. In theory, companies would likely have to pay more per hour to independent contractors than to employees because independent contractors generally do not receive employer-provided benefits and have higher tax liabilities. Data show an hourly wage premium for independent contractors when comparing unconditional means. But as the analysis below shows, when controlling for certain differences in worker characteristics, this expected wage premium may not always be observable at a statistically significant level. It should be noted, however, that these estimates do not attempt to incorporate the value of flexibility and satisfaction that independent contractors cite as key factors in their preference of independent contracting arrangements over traditional employment. Comparing the average earnings, hourly wages, and hours of current employees and independent contractors may provide some indication of the impact on wages of a worker who transitions from an employee to independent contractor classification. A regression analysis that controls for observable differences between independent contractors and employees may help isolate the impact on earning, hourly wages, and usual hours of being an independent contractor. Katz and Krueger (2018) 94 regressed the natural log of usual weekly earnings, the natural log of hourly wages, and the natural log of weekly hours worked on independent 94 See PO 00000 Katz and Krueger (2018), supra note 45. Frm 00030 Fmt 4701 Sfmt 4702 contractor status,95 occupation, sex, potential experience, potential experience squared, education, race, and ethnicity. They use the 2005 CWS and the 2015 RAND ALP (the 2017 CWS was not available at the time of their analysis). The Department conducted similar regressions using the 2017 CWS. In both Katz and Krueger’s regression results and the Department’s calculations of unconditional averages in the 2017 CWS data presented below, the following outlying values were removed: Workers reporting earning less than $50 per week, less than $1 per hour, or more than $1,000 per hour.96 The Department combined the CWS data on usual earnings per week and hours worked per week to estimate hourly wage rates.97 Examining mean earnings, the Department found that independent contractors tend to earn more per hour: Employees earned an average of $24.07 per hour, selfemployed independent contractors earned an average of $27.43 per hour, and other independent contractors earned an average of $26.71 per hour (the average hourly wage is $27.29 when combining the two types of independent contractors).98 Katz and Krueger conducted similar hourly earnings estimates based on 2005 CWS and 2015 ALP data. Their analysis of the 2005 CWS data indicated that ‘‘[b]efore conditioning on covariates, the 2005 and 2015 results are similar: Freelancers 95 On-call workers, temporary help agency workers, and workers provided by contract firms are excluded from the base group of ‘‘traditional’’ employees. 96 Choice of exclusionary criteria from Katz and Krueger (2018), supra note 45. 97 The CWS data, based on its relatively narrow definition of independent contractors, indicated that employees worked more hours per week in comparison to primary independent contractors. The Department found that 81 percent of employees worked full-time, compared to 72 percent for selfemployed independent contractors and 69 percent for other independent contractors. Katz and Krueger similarly found that independent contractors work fewer hours per week than employees (statistically significant at the 1 percent level of significance in all specifications with both datasets). Despite working fewer hours per week than employees, selfemployed independent contractors earned more per week on average ($980 per week compared to $943 per week). Other independent contractors, on average, worked fewer hours per week and earned less per week than employees ($869 per week compared to $943 per week). Given the difference between hours worked by primary independent contractors and employees, and the appeal of flexibility cited by many independent contractors, average weekly earnings may be an inadequate measure. Accordingly, the Department’s analysis focuses on hourly wages. 98 The Department followed Katz and Krueger’s methodology in excluding observations with weekly earnings less than $50, hourly wages less than $1, or with hourly wages above $1,000. Additionally, workers with weekly earnings above $2,885 are topcoded at $2,885. Weekly earnings are used to calculate imputed hourly wages. E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules and contract workers are paid more per hour than traditional employees.’’ 99 When controlling for education, potential experience, potential experience squared, race, ethnicity, sex and occupation, independent contractors’ higher hourly wages in the 2005 CWS data were not statistically significant. But Katz and Krueger’s analysis of the 2015 ALP data under the same specifications found that primary independent contractors earned more per hour than traditional employees with a statistically significant degree of confidence.100 Conceptually, the Department expects that independent contractors would earn more per hour than traditional employees in base compensation as an offset to employer-provided benefits and increases in tax liabilities. Katz and Krueger’s analysis of the 2015 RAND ALP data appears to support this prediction.101 However, they recommend caution in interpreting the estimates from the ALP due to the relatively small sample size. Their analysis of the 2005 CWS data and the Department’s similar analysis of 2017 CWS data did not show a statistically significant difference. But as previously noted, comparing current employees to current primary independent contractors may not be indicative of how earnings would change for current employees who became independent contractors. Nor do such wage-based comparisons reflect the non-pecuniary attributes of employees and independent contractors.102 One potential reason for the variance among the estimates for independent contractor wages could be error in the measurement of independent contractor status and earnings, a factor that is present throughout all of the analyses in this area. As a recent analysis concluded, ‘‘different data sources provide quite different answers to the simple question of what is the level and 99 Id. at 19. at 34. 101 See Katz and Kreuger (2018), supra note 45 at 20 (‘‘A positive hourly wage premium for independent contractors could reflect a compensating differential for lower benefits and the need to pay self-employment taxes.’’). 102 In particular, at least some research reveals significant non-pecuniary advantages to independent contracting, including through increased job satisfaction. See ‘‘The State of Independence in America,’’ MBO Partners (2019), https://www.mbopartners.com/state-ofindependence/; Chen et al., ‘‘The Value of Flexible Work: Evidence from Uber Drivers,’’ Journal of Political Economy 127:6, 2735–794 (2019); He, H. et al., ‘‘Do Workers Value Flexible Jobs? A Field Experiment,’’ NBER Working Paper No. w25423, (2019), https://ssrn.com/abstract=3311395; McKinsey Global Institute, supra note 74; Upwork, ‘‘Freelancing in America’’ (2019). khammond on DSKJM1Z7X2PROD with PROPOSALS3 100 Id. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 trend of self-employment in the U.S. economy,’’ which suggest substantial measurement error in at least some data sources.103 As noted above, reporting errors by survey respondents may contribute to measurement error in CWS data.104 Additionally, CWS questions ‘‘were asked only about people who had already been identified as employed in response to the survey’s standard employment questions and only about their main jobs,’’ and therefore may miss important segments of the population. BLS has recently acknowledged limitations in the 2017 CWS survey in response to a GAO audit and is reevaluating how it would measure independent contractors in the future.105 Another potential bias in the Department’s results could be due to the exclusion of relevant explanatory variables from the model specification, including the omission of observable variables that correlate with hourly earnings. For example, the Department’s analysis of 2017 CWS data used 22 occupation dummy variables but did not control for a worker’s job position within any of the occupations (although it did control for ‘‘potential experience’’). However, as the Department’s Guidance indicates, a statistical comparison of earnings between workers generally must control for ‘‘job level or grade’’ in addition to experience to ensure the comparison is for workers in similar jobs.106 If, hypothetically, independent contractors on average have lower job levels (or equivalents) than traditional employees 103 Abraham et al., supra note 74, at 15. Generally, ‘‘[h]ousehold surveys consistently show lower levels of self-employment than tax data and a relatively flat or declining long-term trend in selfemployment as contrasted with the upward trend that is evident in tax data.’’ Id.; see also id. at 45. 104 ‘‘For example, a household survey respondent might fail to mention informal work that they do not think of as a job, something that further probing might uncover. To take another example, a household member who is doing work for a business may be reported as an employee of that business, even in cases where further probing might reveal that the person is in fact an independent contractor or freelancer.’’ Id. at 15. 105 Specifically, BLS recognized that: (1) The ‘‘CWS measures only respondents’ main jobs . . ., thus potentially missing workers with nontraditional second or supplementary income jobs’’; (2) ‘‘CWS only asks respondents about their work in the past week and may fail to capture seasonal workers or workers that supplement their income with occasional work’’; and (3) ‘‘added questions regarding electronically-mediated employment resulted in a large number of false positive answers.’’ Government Accountability Office, Contingent Workforce: BLS is Reassessing Measurement of Nontraditional Workers, Jan. 29, 2019, https://www.gao.gov/assets/700/696643.pdf. 106 Department of Labor, Office of Federal Contracting Compliance Programs, Directive 2018– 5, Aug. 24, 2018, https://www.dol.gov/agencies/ ofccp/directives/2018-05#ftn.id10. PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 60629 within each occupation,107 the Department’s analysis would not be comparing the hourly earnings of primary independent contractors and employees who have the same jobs. Instead, the Department would be comparing a population of relatively low-level independent contractors with a population that includes both lowand high-level employees. The existence of unobservable differences between independent contractors and employees that are correlated with earnings, such as productivity, skill, and preference for flexibility also bias comparison of hourly earnings. For example, independent contractors may be on average more willing than employees to trade monetary compensation for increased workplace flexibility, which would obscure the observability of an earnings premium for independent contractors. It is possible that independent contractors’ hourly earnings premium may be best observed at the margin, such as comparing a worker’s behavior when deciding between two similar positions, one as an employee and one as an independent contractor. Labor market frictions and personal preferences facing both employers and workers may further prevent a clear detection of a full picture of any earnings premium. Employees that transition to independent contractor classification may prefer monetary compensation over employer-provided benefits (e.g., subsidies for health insurance when they already have other coverage).108 The non-pecuniary benefits of independent contracting, such as workplace flexibility, may impact the observability of an earnings premium. Specifically, a range of research shows that workers are willing to accept lower wages in exchange for increased flexibility.109 An additional consideration is that minimum wage and overtime pay would no longer apply if workers shift from employee status to independent contractor status. The 2017 CWS data 107 For example, because individuals working as independent contractors are less likely to be in positions with managerial responsibilities over other workers. 108 Research using hedonic wage models has found mixed results on the trade-off between pay and benefits, with some researchers finding a positive correlation between increased pay and benefits, rather than a trade-off. See Simon, K. (2001), Displaced workers and employer-provided health insurance: Evidence of a wage/fringe benefit tradeoff? Int J Health Care Finance Econ., (3–4): 249–71. https://www.ncbi.nlm.nih.gov/pubmed/ 14625928. 109 He, H. et al. 2019. Do Workers Value Flexible Jobs? A Field Experiment. NBER Working Paper No. w25423. https://ssrn.com/abstract=3311395. E:\FR\FM\25SEP3.SGM 25SEP3 60630 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules indicate that, before conditioning on covariates, independent contractors under the narrower definition of primary, active work are more likely than employees to report earning less than the FLSA minimum wage of $7.25 per hour (8 percent for self-employed independent contractors, 5 percent for other independent contractors, and 2 percent for employees). That data further indicated that, before conditioning on covariates, primary independent contractors are more likely to work overtime at their main job (30 percent for self-employed independent contractors and 19 percent for other independent contractors versus 18 percent for employees). The Department was unable to determine whether these differences were the result of differences in worker classification, as opposed to other factors. E. Costs The Department estimated that regulatory familiarization costs will total $370.9 million in Year 1. khammond on DSKJM1Z7X2PROD with PROPOSALS3 1. Regulatory Familiarization Costs Regulatory familiarization costs represent direct costs to businesses and current independent contractors associated with reviewing the new regulation. To estimate the total regulatory familiarization costs, the Department used (1) the number of establishments, government entities, and current independent contractors; (2) the wage rates for the employees and for the independent contractors reviewing the rule; and (3) the number of hours that it estimates employers and independent contractors will spend reviewing the rule. This section presents the calculation for establishments first and then the calculation for independent contractors. It is not clear whether regulatory familiarization costs are a function of the number of establishments or the number of firms.110 Presumably, the headquarters of a firm will conduct the regulatory review for businesses with multiple locations, and may also require some locations to familiarize themselves with the regulation at the establishment level. Other firms may either review the rule to consolidate key takeaways for 110 An establishment is commonly understood as a single economic unit, such as a farm, a mine, a factory, or a store, that produces goods or services. Establishments are typically at one physical location and engaged in one, or predominantly one, type of economic activity for which a single industrial classification may be applied. An establishment contrasts with a firm, or a company, which is a business and may consist of one or more establishments. See BLS, ‘‘Quarterly Census of Employment and Wages: Concepts,’’ https:// www.bls.gov/opub/hom/cew/concepts.htm. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 their affiliates or they may rely entirely on outside experts to evaluate the rule and provide the relevant information to their organization (e.g., a chamber of commerce). The Department used the number of establishments to estimate the fundamental pool of regulated entities—which is larger than the number of firms. This assumes that regulatory familiarization occurs at both the headquarters and establishment levels. There may be differences in familiarization cost by the size of establishments; however, the analysis does not compute different costs for establishments of different sizes. Furthermore, the analysis does not revise down for states where the laws may more stringently limit who qualifies as an independent contractor (such as California). To estimate the number of establishments incurring regulatory familiarization costs, the Department began by using the Statistics of U.S. Businesses (SUSB) to define the total pool of establishments in the United States.111 In 2017, the most recent year available, there were 7.86 million establishments. These data were supplemented with the 2017 Census of Government that reports 90,075 local government entities, and 51 state and federal government entities.112 The total number of establishments and governments in the universe used for this analysis is 7,950,800. The applicable universe used by the Department for assessing familiarization costs of this proposed rule is all establishments that engage independent contractors, which is a subset of the universe of all establishments. The Department estimates the impact of regulatory familiarization based upon assessment of the regulated universe. For the Department’s recent Joint Employer Status under the Fair Labor Standards Act, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, and Regular Rate Under the Fair Labor Standards Act rulemakings, it estimated that the regulated universe comprised all establishments because the rules were broadly applicable to every employer. For those rules, the Department estimated familiarization costs by assuming each establishment would review each rule. Because the proposed rule affects only some 111 U.S. Census Bureau, 2017 SUSB Annual Data Tables by Establishment Industry. https:// www.census.gov/data/tables/2017/econ/susb/2017susb-annual.html. 112 U.S. Census Bureau, 2017 Census of Governments. https://www.census.gov/data/tables/ 2017/econ/gus/2017-governments.html. PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 establishments, i.e., those that do or may face an independent contractor versus employee classification determination, the Department accordingly reduces the estimated pool to better estimate the establishments affected by the rule by assessing regulatory familiarity costs only for those establishments that engage independent contractors. In 2019, Lim et al. used extensive IRS data to model the independent contractor market, finding that 34.7 percent of firms have any independent contractors.113 These data are based on annual tax filings, so the dataset includes firms that may contract for only parts of a year. This figure forms the foundation of the multiplier used in this analysis. The Department requests public comments and data on these assumptions. OMB Circular A–4 instructs that regulatory impact analyses establish a baseline, usually a ‘‘no action’’ baseline, to represent what the world is expected to be like in the absence of the proposed rule.114 In the absence of this proposed rule, establishments that do not currently have any independent contractors but are looking to hire one or more will need to familiarize themselves with the current legal framework.115 Accordingly, firms that do not currently use independent contractors are not counted in this universe of employers; however, to allow for an error margin, the Department is using a rounded 35 percent of the total number of establishments defined above (7,950,800), resulting in 2,782,780 establishments estimated to incur familiarization costs. The Department assumes that a Compensation, Benefits, and Job Analysis Specialist (SOC 13–1141) (or a staff member in a similar position) will review the rule.116 According to the 113 Table 10: Firm sample summary statistics by year (2001–2015), https://www.irs.gov/pub/irs-soi/ 19rpindcontractorinus.pdf. 114 OMB Circular A–4, https://www.reginfo.gov/ public/jsp/Utilities/circular-a-4_regulatory-impactanalysis-a-primer.pdf. 115 An added dimension is that the proposed rule is expected to provide significant clarity, which would result in time and cost savings (net of regulatory familiarization costs) for those outside the pool of firms with existing independent contractor relationships. These (net) cost savings are not included in this analysis, consistent with this analysis’ treatment of resulting growth in the independent contractor universe. 116 A Compensation/Benefits Specialist ensures company compliance with federal and state laws, including reporting requirements; evaluates job positions, determining classification, exempt or non-exempt status, and salary; plans, develops, evaluates, improves, and communicates methods and techniques for selecting, promoting, compensating, evaluating, and training workers. See E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules Occupational Employment Statistics (OES), these workers had a mean wage of $33.58 per hour in 2019 (most recent data available). Given the proposed clarification to the Department’s interpretation of who is an employee and who is an independent contractor under the FLSA, the Department assumes that it will take on average about 1 hour to review the rule as proposed. The Department believes that an hour, on average, is appropriate, because while some establishments will spend longer than one hour to review the rule, many establishments may rely on third-party summaries of the changes or spend little or no time reviewing the rule. Assuming benefits are paid at a rate of 46 percent of the base wage, and overhead costs are 17 percent of the base wage, the reviewer’s effective hourly rate is $54.74; thus, the average cost per establishment conducting regulatory familiarization is $54.74. Therefore, regulatory familiarization costs to businesses in Year 1 are estimated to be $152.3 million ($54.74 × 2,782,780) in 2019 dollars. For regulatory familiarization costs for independent contractors, the Department used its estimate of 18.9 million independent contractors and assumed each independent contractor will spend 15 minutes to review the regulation. The time estimates used for independent contractors is estimated to be smaller than for establishments. This difference is in part because the Department believes independent contractors are likely to rely on summaries of the key elements of the rule change published by the Department, worker advocacy groups, media outlets, and accountancy and consultancy firms, as has occurred with other rulemakings. Furthermore, the repercussions for independent contractors are smaller (i.e., the costs associated with misclassification tend to fall on establishments). This time is valued at $46.36, which is the mean hourly wage rate for independent contractors in the CWS, $27.27, with an additional 46 percent benefits and 17 percent for overhead, then updated to 2019 dollars. The estimate of 18.9 million independent contractors captures the universe of workers over a one-year period. Using this figure for the overall cost estimate results in an artificially high value because it includes workers who would have otherwise been included in the baseline case without the proposed rule and thus spent time BLS, ‘‘13–1141 Compensation, Benefits, and Job Analysis Specialists,’’ https://www.bls.gov/oes/ current/oes131141.htm. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 familiarizing themselves with the legal framework in the matter of course, without incurring a supplementary cost. Furthermore, the Department believes that it is probable that independent contractors would review the regulation only when they had reason to believe that the benefits would outweigh the costs incurred in familiarizing themselves with the rule, and since this analysis does not attempt to calculate those economic benefits it is possible that the costs presented in this section are overestimated.117 The total one-time regulatory familiarization costs for independent contractors are estimated to be $218.6 million. The total one-time regulatory familiarization costs for establishments and independent contractors are estimated to be $370.9 million. Regulatory familiarization costs in future years are assumed to be de minimis. Similar to the baseline case for employers, independent contractors would continue to familiarize themselves with the applicable legal framework in the absence of the rule, so this proposed rulemaking—anticipated to provide more clarity—is not expected to impose costs after the first year.118 This amounts to a 10-year annualized cost of $43.5 million at a discount rate of 3 percent or $52.8 million at a discount rate of 7 percent. 2. Other Costs There may be other costs associated with this NPRM that have not been quantified due to uncertainties or data limitations. The Department invites public comments and data to address this issue. F. Cost Savings This NPRM is expected to result in cost savings to firms and workers. The Department has quantified only the cost savings from increased clarity and reduced litigation. The other areas of anticipated cost savings were not estimated due to uncertainties or data limitations. The Department welcomes data and comments on the potential cost savings and benefits to society. 1. Increased Clarity This proposed rule is expected to increase clarity concerning whether a worker is classified as an employee or 117 For example, independent contractors in states with classification frameworks that are known to be more stringent than the existing FLSA classification framework, such as in California, may not review the rule since it would be unlikely to affect their classification. 118 As explained below, the Department considers that the regulation may produce benefits along this dimension in future years by simplifying the regulatory environment. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 60631 as an independent contractor under the FLSA. This would reduce the burden faced by employers, potential employers, and workers to understand the distinction and how the working relationship should be classified. It is unclear exactly how much time would be saved, but the Department provides some quantitative estimates to provide a sense of the magnitude. To quantify this benefit, the following variables need to be defined and estimated: (1) The number of new employer-worker relationships being assessed to determine the appropriate classification; (2) the amount of time saved per assessment; and (3) an average wage rate for the time spent. The Department estimates this will result in a $447.2 million in savings annually. The Department requests comments on these assumptions and calculations. The Department began with its estimate of the number of current independent contractors as the basis for estimating the number of new relationships. As discussed in section VI.C, according to the CWS, there are 10.6 million workers who are independent contractors on their primary job. Adjusting this figure to account for independent contractors on their secondary job results in 18.9 million independent contractors. According to Lim et al. (2019), in 2016 the average number of 1099–MISC forms issued per independent contractor was 1.43. Therefore, the Department assumes the average independent contractor has 1.43 jobs per year.119 This number does not account for the workers who do not file taxes, a recognized limitation in the cited study. Because it is unclear whether those who do not file taxes would have a higher or lower number jobs per year, the Department does not believe that this biases the estimate in either direction. Multiplying these two numbers results in an estimated 27.0 million new independent contractor relationships each year.120 The independent contracting sector is characterized by churn. In their annual State of Independence in America 2019 report, MBO Partners, a leading American staffing firm, finds that 47.8 119 Lim et al., supra note 61, at 61. Department in this analysis did not incorporate estimates of potential growth in independent contracting due to uncertainty. For example, the trend in independent contracting varies significantly based on the source. Additionally, the impact of this rule on the prevalence of independent contracting is uncertain. Lastly, state laws, such as those in California discussed below, may have significant impacts on the prevalence of independent contracting, which would make historical growth rates potentially inappropriate. 120 The E:\FR\FM\25SEP3.SGM 25SEP3 60632 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 percent of U.S. adults reported working as an independent contractor at some point in their career; they estimate that figure will reach 53 percent in the next five years.121 This fits with the range of estimates for the size of the independent contractor universe presented in section VI.C. Thus, it is assumed that over the ten-year time horizon of this analysis, millions of Americans will choose independent contractor work either for the first time or return to it. This churn is not explicitly estimated for use in this analysis, but it provides a qualitative rationale for not attempting to taper the expected size of the independent contractor universe over time. The Department requests comments and data on these assumptions. A subset of new independent contractor relationships may have time savings associated with the proposed rule. Such a reduction is difficult to quantify because it is unclear how many establishments and independent contractors will realize benefits of increased clarity. It is also possible that the increased clarity of the classification process will lead to compound effects that generate far greater benefits over time. Nonetheless, because it is possible that only a subset of contracts would receive the cost savings associated with increased clarity, the Department has reduced the number of contracts in the estimate by 25 percent. This results in 20.2 million contracts with cost savings to both the employer and the independent contractor.122 The Department requests comments and data on this assumption. Per each new contract with time savings, the Department has assumed that employers would save 20 minutes of time and independent contractors would save 5 minutes.123 124 These numbers are small because they represent the marginal time savings for each contract, not the entire time necessary to identify whether an independent contractor relationship holds. For employers, this time is valued at a loaded hourly wage rate of $54.74. This is the mean hourly rate of 121 State of Independence in America, MBO Partners (2019). https://www.mbopartners.com/ state-of-independence/. 122 18.9 million ICs × 1.43 contracts per year × (1¥0.25 possible reduction in clarity benefits) = 20.2 million. 123 These time savings are based on a 33 percent assumed reduction in the estimated familiarization time per contract for both independent contractors (15 minutes) and employers (1 hour). 124 The Department requests comment on whether more meaningful estimates would distinguish between time periods (with, for example, relatively large upfront savings at the time contracts are arranged and smaller ongoing amounts) and/or would vary by affected industry. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 Compensation, Benefits & Job Analysis Specialists (13–1141) from the OES multiplied by 1.63 to account for benefits and overhead. For independent contractors, this time is valued at $46.36 per hour (mean wage rate for independent contractors in the CWS of $27.29 with the amount of benefits and overhead paid by employers for employees, then adjusted to 2019 dollars using the GDP deflator). Using these numbers, the Department estimates that employers will save $369.0 million annually and independent contractors will save $78.1 million annually due to increased clarity (Table 4). In sum, this is estimated to be a $447.2 million savings. The Department assumes the parameters used in this cost savings estimate will remain constant over time. This assumes no growth in independent contracting, no real wage growth, and no subsequent innovation in the employer-worker relationship. These assumptions, while highly unlikely to be true in reality, facilitate simplicity of calculation. The annualized savings over both a 10-year horizon and in perpetuity, with both the 3 percent and 7 percent discount rates is $447.2 million. In addition to increased clarity when assessing whether each relationship qualifies as an independent contractor or employment relationship, there may also be upfront time savings for new entrants who must familiarize themselves with the definition of an employee as compared to an independent contractor, and who now have clearer guidance to aid in that understanding. This would apply to new independent contractors, new establishments, and current establishments that are considering hiring independent contractors for the first time. The Department did not quantify this benefit due to uncertainty and the difficulty of determining reliable variables. However, such benefits are expected to be real and significant. The Department requests comments and data to address these constraints. TABLE 4—COST SAVINGS FOR INCREASED CLARITY TO EMPLOYERS AND INDEPENDENT CONTRACTORS Parameter Value Number of new relationships (per year): Independent contractors ... Number of jobs per contractor ............................ New independent contractor jobs ..................... PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 18,858,000 1.43 26,966,940 TABLE 4—COST SAVINGS FOR INCREASED CLARITY TO EMPLOYERS AND INDEPENDENT CONTRACTORS— Continued Parameter Value Adjustment factor .............. 75% Total .................................. Time savings per job (minutes): Employers ......................... Independent contractors ... Value of time: Employers ......................... Independent contractors ... Total savings: Employers ......................... Independent contractors ... 20,225,205 $369,042,574 $78,137,248 Total .................................. $447,179,822 20 5 $54.74 $46.36 2. Reduced Litigation These proposed changes are expected to result in decreased litigation due to increased clarity and reduced misclassification. The Department provides analysis here to assess the potential magnitude of this cost savings. The methodology of this section mirrors previous final rules promulgated in recent years. The Department requests comments on the assumptions in this section.125 The Department estimates that, due to increased clarity on independent contractor status, $33.6 million in litigation costs will be avoided per year. To reach this estimate, the Department determined that there were 6,711 federal cases relating to the FLSA filed in 2019.126 Of these cases, the Department estimates that 7 percent of these cases relate to independent contractor status. To determine this percentage, the Department reviewed a random sample of 500 of the FLSA cases closed in 2014 (8,256 cases).127 Of those cases, the Department identified 35 cases within this sample that related to independent contractor status. This ratio was applied to the 6,711 FLSA cases from 2019 to 125 The Department applied a similar approach to litigation costs in the 2019 final rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 81 FR 51230 (2019). 126 Downloaded from Public Access to Court Electronic Records (PACER). 127 The Department used data from 2014 already obtained for use in the analysis performed for the 2019 overtime and regular rate final rules. See 84 FR 51230, 51280–81 (reduced litigation estimate for the final rule updating the FLSA’s white collar exemptions at 29 CFR part 541); 84 FR 68736, 68767–68 (reduced litigation estimate for the final rule updating the FLSA’s ‘‘regular rate’’ regulations at 29 CFR part 778). The Department invites comment on its methodology but has no reason to believe that a more recent sample would materially affect the results in this analysis. E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules estimate 470 cases related to independent contractor status. The Department assumes that the increased clarity of the proposed rule would reduce litigation in this area by 10 percent as stakeholders would better understand and be better able to agree on classification determinations. This estimate is based on an initial Departmental review of FLSA cases, and the Department requests comments and data to help inform and refine this assumption. Multiplying these variables results in an estimated 47 cases avoided annually. Next, the Department applied a previous estimate of litigation costs of $654,182 per case. To obtain this estimate, the Department examined a selection of 56 FLSA cases concluded between 2012 and 2015 that contained litigation cost information to estimate the average costs of litigation.128 The Department looked at records of court filings in the Westlaw Case Evaluator tool and on PACER to ascertain how much plaintiffs in these cases were paid for attorney fees, administrative fees, and/or other costs, apart from any monetary damages attributable to the alleged FLSA violations. After determining the plaintiff’s total litigation costs for each case, the Department then doubled the figures to account for litigation costs that the defendant employers incurred. According to this analysis, the average litigation cost for FLSA cases concluded between 2012 and 2015 was $654,182. Adjusting for inflation, using the GDP deflator, results in a value of $715,637 in 2019.129 Applying these figures to the estimated 47 cases that could be prevented each year due to this rulemaking, the Department estimates that avoided litigation costs resulting from the rule total $33.6 million per year (2019 dollars).130 The Department estimates that annual cost savings associated with this rule would be $480.8 million ($447.2 million in increased clarity + $33.6 million in avoided litigation costs). 128 The 56 cases used for this analysis were retrieved from Westlaw’s Case Evaluator database using a keyword search for case summaries between 2012 and 2015 mentioning the terms ‘‘FLSA’’ and ‘‘fees.’’ This was not limited to cases associated with independent contracting. Although the initial search yielded 64 responsive cases, the Department excluded one duplicate case, one case resolving litigation costs through a confidential settlement agreement, and six cases where the defendant employer(s) ultimately prevailed. Because the FLSA only entitles prevailing plaintiffs to litigation cost awards, information about litigation costs was only available for the remaining 56 FLSA cases that ended in settlement agreements or court verdicts favoring the plaintiff employees. 129 These totals may underestimate total litigation costs because some FLSA cases are heard in state court and thus were not captured by PACER; some filings are resolved before litigation or by alternative dispute resolution; and some attorneys representing FLSA plaintiffs may take a contingency fee atop their statutorily awarded fees and costs. 130 Using the median litigation cost, rather than the mean, results in a value of $122,341 (2019 dollars) per case, which for the estimated 47 annual cases produces a total annual litigation cost savings of $5.7 million. However, the median values do not adequately capture the magnitude of the impact resulting from large-scale litigation cases that are expected to benefit from the clarity provided in this proposed rule. Therefore, the mean average is used for this analysis. 131 See Pivateau, supra note 26, at 628 (‘‘The continued demand for innovative work solutions requires a new classification test. Without clarification, parties will be unwilling to engage in new or innovative work arrangements.’’); see also Hollrah and Hollrah, ‘‘The Time Has Come for Congress to Finish Its Work on Harmonizing the Definition of ‘Employee,’ ’’ 26 J. L. & Pol’y 439 (2018), https://brooklynworks.brooklaw.edu/jlp/ vol26/iss2/1/. 132 J. Eisenach, ‘‘The Role of Independent Contractors in The U.S. Economy,’’ Navigant Economics (2010), https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1717932. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 3. Other Cost Savings and Benefits Removing uncertainty improves labor market efficiency by reducing deadweight loss. As discussed in the need for rulemaking, the Department believes emerging and innovative economic arrangements that benefit both workers and business require reasonable certainty regarding the worker’s classification as an independent contractor. The current legal uncertainty may deter businesses from offering these arrangements or developing them in the first place.131 If so, the result would be economic deadweight loss: Legal uncertainty prevents mutually beneficial independent contractor arrangements. This proposed rule may produce cost savings by reducing deadweight loss. Nonetheless, due to the abundance of variables at play, the Department has not attempted to quantify the precise amount of that reduction. The Department invites data and comments on this topic. By decreasing uncertainty and thus potentially opening new opportunities for firms, this proposed rule may encourage companies to hire independent contractors whom they otherwise would not have hired. Eisenach (2010) outlines the potential costs of curtailing independent contracting.132 If independent contracting is expanded due to this rule, this could generate benefits that may include: • Increased job creation and small business formation. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 60633 • Increased competition and decreased prices. • A more flexible and dynamic work force, where workers are able to more easily move to locations or to employers where their labor and skills are needed. Eisenach explains several channels through which these efficiency gains may be achieved. First, by avoiding some fixed employment costs, it is easier for firms to adjust their labor needs based on fluctuations in demand. Second, by using pay-for-preference, independent contractors are incentivized to increase production and quality. Third, ‘‘contracting can be an important mechanism for overcoming legal and regulatory barriers to economically efficient employment arrangements.’’ The analysis of these benefits assume that businesses, especially in other industries, would like to increase their use of independent contractors, but have refrained from doing so because of uncertainty regarding who can appropriately be engaged as an independent contractor under the FLSA. Conversely, significant use of independent contractors may not be suitable for all industries, thus limiting the growth in its utilization. The Department believes this rulemaking may also result in greater autonomy and job satisfaction for workers. Several surveys have shown that independent contractors have high job satisfaction.133 Using the CWS, which only considers primary, active contractors, the Department estimates that of independent contractors with valid responses, 83 percent prefer their current arrangement rather than being an employee, compared with only 9 percent who would prefer an employment arrangement (the remaining 8 percent responded that it depends). Additionally, the main reasons they work as independent contractors demonstrate that they enjoy the benefits of being an independent contractor: 31 percent enjoy being their own boss or the independence it allows, and 27 percent enjoy the scheduling flexibility.134 Additionally, McKinsey Global Institute found that ‘‘[i]ndependent workers report higher levels of satisfaction on many aspects of their work life than traditional workers.’’ 135 The McKinsey Global 133 See, e.g., ‘‘The State of Independence in America,’’ MBO Partners (2019) https:// www.mbopartners.com/state-of-independence/. 134 The Department used PES26IC to identify preferred work arrangement and PES26IR to identify the reason they work as an independent contractor. 135 McKinsey Global Institute, supra note 74 at 11. A 2009 Pew survey similarly found that self- E:\FR\FM\25SEP3.SGM Continued 25SEP3 60634 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 Institute examined workers who work independently by choice and those who do so by necessity (such as needing supplemental income) and found that both groups report being happy with the flexibility and autonomy of their work.136 Similarly, Kelly Services found that ‘‘free agents’’—i.e., workers who ‘‘derive their primary income from independent work and actively prefer it’’—report higher satisfaction than traditional workers concerning overall employment situation; work-life balance; opportunities to expand skills; and opportunities to advance career.137 By clarifying that control and opportunity for profit are the core economic reality factors, this proposed rule is likely to encourage the creation of independent contractor jobs that provide autonomy and entrepreneurial opportunities that workers find satisfying. For the same reason, this proposed rule likely would diminish the incidence of independent contractor jobs that lack these desired characteristics. Thus, the Department expects this NPRM, if finalized, to result in more independent contractor opportunities which bring with them autonomy and job satisfaction. The benefits of worker autonomy and satisfaction obviously ‘‘are difficult or impossible to quantify,’’ but they nonetheless merit consideration. employed workers are ‘‘significantly more satisfied with their jobs than other workers.’’ Rich Morin, ‘‘Job Satisfaction among the Self-Employed,’’ Pew Research Center, (September 2009), http:// pewsocialtrends.org/pubs/743/job-satisfactionhighest-among-self-employed. In particular, 39 percent of self-employed workers reported being ‘‘completely satisfied’’ with their jobs, compared with 28 percent of employees. Id. 136 McKinsey Global Institute, supra note 74 at 10. The McKinsey survey found that, while ‘‘those working independently out of necessity report being happier with the flexibility and content of the work,’’ they also report being ‘‘less satisfied with their level of income level and their income security.’’ Id. This rulemaking is unlikely to negatively impact the average income level of such workers by encouraging independent contractor opportunities because there is no statistical evidence that independent contractor earn less than employees. To the contrary and as discussed above, there are data indicating that independent contractors, on average, may earn higher hourly wages than employees. Nor is rulemaking likely to negatively impact workers’ income security, on average. The Department believes income security is best achieved by removing barriers that prevent laid-off Americans from finding paid work, including as independent contractors. See 151 Ph.D. Economists and Political Scientists in California, ‘‘Open Letter to Suspend California AB– 5’’ (April 14, 2020). This lesson may be all the greater in light of the COVID–19 emergency. 137 Kelly Services, ‘‘Agents of Change’’ (2015), https://www.kellyservices.com/global/siteassets/3kelly-global-services/uploadedfiles/3-kelly_global_ services/content/sectionless_pages/ kocg1047720freeagent 20whitepaper20210x21020final2.pdf. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 G. Regulatory Alternatives When proposing an economically significant rule, Executive Order 12866 requires agencies to conduct ‘‘[a]n assessment, including the underlying analysis, of costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation.’’ 138 Here, in addition to ‘‘the alternative of not regulating,’’ 139 the Department considered three alternatives to the proposed rule, listed below from least to most restrictive of independent contracting: 140 (1) Codification of the common law control test, which applies in distinguishing between employees and independent contractors under various other federal laws; 141 (2) codification of the traditional sixfactor ‘‘economic reality’’ balancing test, as recently articulated in WHD Opinion Letter FLSA2019–6; and (3) codification of the ‘‘ABC’’ test, as adopted by the California Supreme Court in Dynamex Operations W., Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018).142 Although the Department recognizes that legal limitations prevent some of these alternatives from being actionable, the Department nonetheless presents them as regulatory alternatives in accord with OMB guidance.143 These three regulatory alternatives are analyzed below in qualitative terms, due to data constraints and inherent uncertainty in 138 Exec. Order No. 12866 § 6(a)(3)(C)(iii), 58 FR 51741. 139 Exec. Order No. 12866 § 1, 58 FR 51735. 140 OMB guidance advises that, where possible, agencies should analyze at least one ‘‘more stringent option’’ and one ‘‘less stringent option’’ to the proposed approach. OMB Circular A–4 at 16. 141 See 26 U.S.C. 3121(d)(2) (generally defining the term ‘‘employee’’ under the Internal Revenue Code as ‘‘any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee’’); 42 U.S.C. 410(j) (similarly defining ‘‘employee’’ under the Social Security Act); see also, e.g., Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751 (1989) (applying ‘‘principles of general common law of agency’’ to determine ‘‘whether . . . work was prepared by an employee or an independent contractor’’ under the Copyright Act of 1976); Darden, 503 U.S. 318 (holding that ‘‘a common-law test’’ should resolve employee/independent contractor disputes under ERISA). 142 See also Hargrove v. Sleepy’s, LLC, 106 A.3d 449, 465 (N.J. 2015) (extending the ABC test to state wage claims in New Jersey). 143 OMB Circular A–4 advises that agencies ‘‘should discuss the statutory requirements that affect the selection of regulatory Approach. If legal constraints prevent the selection of a regulatory action that best satisfies the philosophy and principles of Executive Order 12866, [agencies] should identify these constraints and estimate their opportunity cost. Such information may be useful to Congress under the Regulatory Right-to-Know Act.’’ PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 measuring the exact stringency of multifactor legal tests and likely responses from the regulated community. The Department welcomes comment on these regulatory alternatives, as well as suggestions regarding any other potential alternatives. 1. Codifying a Common Law Control Test The least stringent alternative to the proposed rule’s streamlined ‘‘economic reality’’ test would be to adopt a common law control test, as is generally used to determine independent contractor classification questions arising under the Internal Revenue Code and various other federal laws.144 The overarching focus of the common law control test is ‘‘the hiring party’s right to control the manner and means by which [work] is accomplished,’’ Reid, 490 U.S. at 751, but the Supreme Court has explained that ‘‘other factors relevant to the inquiry [include] the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.’’ Id. at 751–52. Although the common law control test considers many of the same factors as those identified in the proposed rule’s ‘‘economic reality’’ test (e.g., skill, length of the working relationship, the source of equipment and materials, etc.), courts generally recognize that, because of its focus on control, the common law test is more permissive of independent contracting arrangements than the economic reality test, which more broadly examines the economic dependence of the worker. See, e.g., Diggs v. Harris Hospital-Methodist, Inc., 847 F.2d 270, 272 n. 1 (5th Cir. 1988) (observing that ‘‘[t]he ‘economic realities’ test is a more expansive standard for determining employee status’’ than the common law control test). Thus, if a common law control test determined independent contractor status under the FLSA, it is possible that some workers presently classified as FLSA employees could be reclassified as independent contractors, increasing the overall number of independent 144 See E:\FR\FM\25SEP3.SGM supra note 141. 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules contractors and reducing the overall number of employees. The Department is unable to estimate the exact magnitude of such a reclassification effect, but believes that the vast majority of FLSA employees would remain FLSA employees under a common law control test.145 Codifying a common law control test would create a simpler legal regime for regulated entities interested in receiving services from an independent contractor, thereby reducing confusion, compliance costs, and legal risk for entities interested in doing business with independent contractors. Entities would not, for example, have to understand and apply one employment classification standard for tax purposes and a different employment classification standard for FLSA purposes. Thus, adopting the common law control test would likely increase perpetual cost savings for regulated entities attributable to improved clarity and reduced litigation as compared to the proposed rule. It could, on the other hand, impose burdens on workers who might prefer to be employees subject to FLSA protections. The Department notes that the Supreme Court has interpreted the ‘‘suffer or permit’’ language in section 3(g) of the FLSA as demanding a broader definition of employment than that which exists under the common law. See, e.g., Darden, 503 U.S. at 326; Portland Terminal Co., 330 at 150–51. Accordingly, the Department believes it is legally constrained from adopting the common law control test absent Congressional legislation to amend the FLSA. khammond on DSKJM1Z7X2PROD with PROPOSALS3 2. Codifying the Six-Factor ‘‘Economic Reality’’ Balancing Test As discussed earlier in section II(B), WHD has long applied a multifactor ‘‘economic reality’’ balancing test to distinguish between employees and independent contractors in enforcement actions and subregulatory guidance. Recently articulated in WHD Opinion Letter FLSA2019–6, the six factors presently considered in WHD’s multifactor balancing test are as follows: (1) The nature and degree of the potential employer’s control; (2) The permanency of the worker’s relationship with the potential employer; 145 As discussed earlier in section IV(D)(7), a review of federal appellate case law since 1975 shows that the classification outcome of almost every FLSA employee/independent contractor dispute has aligned with the court’s specific finding on the control factor. Thus, adoption of a common law control test would be unlikely to alter most FLSA worker classifications, including those close enough to merit federal appellate litigation under the economic reality test. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 (3) The amount of the worker’s investment in facilities, equipment, or helpers; (4) The amount of skill, initiative, judgment, or foresight required for the worker’s services; (5) The worker’s opportunities for profit or loss; and (6) The extent of integration of the worker’s services into the potential employer’s business. WHD Opinion Letter FLSA2019–6 at 4 (citing Rutherford, 331 U.S. at 730, and Silk, 331 U.S. at 716). The Department believes that the sixfactor balancing test (as articulated in WHD Opinion Letter FLSA2019–6) is neither more nor less permissive of independent contractor relationships as compared to the streamlined test proposed in this rulemaking. Both tests describe the ‘‘economic dependence’’ of the worker at issue as the ultimate inquiry of the test; both emphasize the primacy of actual practice over contractual or theoretical possibilities (i.e., the ‘‘economic reality’’ of the work arrangement); and both evaluate the same set of underlying factors, notwithstanding an emphasis and consolidation of certain factors under the streamlined test. Notably, like § 795.105(d)(1)(i) of the proposed rule, WHD Opinion Letter FLSA2019–6 advised that certain safety measures and quality control standards do not constitute ‘‘control’’ indicative of an FLSA employment relationship. See id. at 8 n. 4. Although codifying this six-factor balancing test would thus impose a comparably stringent legal standard on the regulated community, the Department believes, as explained earlier in section III, that the six-factor balancing test presently used by WHD and most courts would benefit from clarification, sharpening, and streamlining. For this reason, the Department believes that codifying such a test would not yield the perpetual benefits and cost savings discussed earlier in this analysis, such as improved clarity and reduced FLSA litigation. Additionally, the Department does not believe that codifying the sixfactor balancing test would reduce initial regulatory familiarization costs or provide per-contract clarity cost savings, as interested establishments and independent contractors will likely spend the same amount of time learning about any new regulatory language addressing independent contractor status under the FLSA (no regulatory guidance on the topic currently exists). 3. Codifying California’s ‘‘ABC’’ Test The most stringent regulatory alternative to the Department’s PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 60635 proposed rule would be to codify the ‘‘ABC’’ test recently adopted under California’s state wage and hour law to distinguish between employee/ independent contractor statuses.146 As described by the California Supreme Court in Dynamex, ‘‘[t]he ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) That the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity’s business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.’’ 416 P.3d at 34 (emphasis in original).147 In justifying the adoption of such a stringent test, the Dynamex court noted the existence of an ‘‘exceptionally broad suffer or permit to work standard’’ in California’s wage and hour statute, id. at 31,148 as well as ‘‘the more general principle that wage orders are the type of remedial legislation that must be liberally construed in a manner that 146 See Dynamex, 416 P.3d 1; Assembly Bill (‘‘A.B.’’) 5, Ch. 296, 2019–2020 Reg. Sess. (Cal. 2019) (codifying the ABC test articulated in Dynamex); A.B. 2257, Ch. 38, 2019–2020 Reg. Sess. (Cal. 2020) (retroactively exempting certain professions, occupations, and industries from the ABC test that A.B. 5 had codified). The ABC test originated in state unemployment insurance statutes, but some state courts and legislatures have recently extended the test to govern employee/ independent contractor disputes under state wage and hour laws. See Keith Cunningham-Parmeter, Gig-Dependence: Finding the Real Independent Contractors of Platform Work, 39 N. Ill. U. L. Rev. 379, 408–11 (2019) (discussing the origins and recent expansion of the ABC test). 147 California’s ABC test is slightly more stringent than versions of the ABC test adopted (or presently under consideration) in other states. For example, New Jersey provides that a hiring entity may satisfy the ABC test’s ‘‘B’’ prong by establishing either: (1) That the work provided is outside the usual course of the business for which the work is performed, or (2) that the work performed is outside all the places of business of the hiring entity. N.J. Stat. Ann. § 43:21–19(i)(6)(A–C). The Department has chosen to analyze California’s ABC test as a regulatory alternative because businesses subject to multiple standards, including nationwide businesses, are likely to comply with the most demanding standard if they wish to make consistent classification determinations. 148 See Cal. Code Regs., tit. 8, § 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. E:\FR\FM\25SEP3.SGM 25SEP3 60636 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 serves its remedial purposes.’’ Id. at 32.149 On its face, California’s ABC test is far more restrictive of independent contracting arrangements than any formulation of an ‘‘economic reality’’ balancing test, including the proposed rule. Whereas no single factor necessarily disqualifies a worker from independent contractor status under an economic reality test, each of the ABC test’s three factors may alone disqualify the worker from independent contractor status. Thus, adoption of an ABC test to govern independent contractor status under the FLSA would directly result in a large-scale reclassification of many workers presently classified as independent contractors into FLSAcovered employees. This reclassification effect would be particularly disruptive in industries that depend on independent contracting arrangements within the ‘‘usual course of the hiring entity’s business,’’ such as transportation, residential construction, cable installation, etc. While some independent contractors might benefit from reclassification by newly receiving overtime pay and/or a guaranteed minimum wage, these workers might also experience a reduction in work hours or diminished scheduling flexibility as their new employers attempt to avoid incurring additional expenses for overtime work. Others workers, particularly off-site workers who operate free from the business’ direct control and supervision, might see their work arrangements terminated by businesses unwilling or unable to assume the financial burden and legal risk of the FLSA’s overtime pay requirement. Some businesses in California responded to the increased legal risk of treating certain workers as independent contractors under the ABC test by terminating their relationships with workers,150 thereby eliminating some of the flexible work arrangements sought, for example, by parents and others who must balance work and 149 See Cal. Code Regs., tit. 8, § 11090, subd. 2(D) (‘‘ ‘Employ’ means to engage, suffer, or permit to work.’’). 150 See, e.g., Marc Tracy and Kevin Draper, ‘‘Vox Media to Cut 200 Freelancers, Citing California GigWorker Law,’’ New York Times (Dec. 16, 2019), www.nytimes.com/2019/12/16/business/media/voxmedia-california-job-cuts.html; Dawn Kawamoto, ‘‘Exclusive: Fast-growing S.F. company to exit market as result of state’s new gig worker law,’’ San Francisco Business Times (Jan. 3, 2020), www.bizjournals.com/sanfrancisco/news/2020/01/ 03/exclusive-fast-growing-s-f-company-to-exitmarket.html; Sophia Bollag and Dale Kasler, ‘‘California Workers Blame New Labor Law for Lost Jobs. Lawmakers are Scrambling to Fix It,’’ Sacramento Bee (Feb. 10, 2020), www.sacbee.com/ news/politics-government/capitol-alert/ article239822623.html. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 family obligations.151 The Department believes adopting the ABC test as the FLSA’s generally applicable standard for distinguishing employees from independent contractors would be unduly restrictive and disruptive to the economy. The fact that California recently enacted numerous exemptions to the ABC test highlights the test’s limitations as a possible alternative under the FLSA.152 In any event, the Department believes it is legally constrained from adopting California’s ABC test because the Supreme Court has instituted the economic reality test as the relevant standard for determining workers’ classification under the FLSA as an employee or independent contractor. See Tony & Susan Alamo, 471 U.S. at 301 (‘‘The test of employment under the Act is one of ‘economic reality.’ ’’); Whitaker House, 366 U.S. at 33 (1961) (‘‘ ‘economic reality’ rather than ‘technical concepts’ is . . . the test of employment’’ under the FLSA) (citing Silk, 331 U.S. at 713; Rutherford Food, 331 U.S. at 729)). The California Supreme Court explicitly recognized that the ABC test defines ‘‘employee’’ more broadly than the FLSA when it explained that the ABC test rests on a ‘‘standard in California wage orders [that] was not intended to embrace the [FLSA’s] economic reality test’’ and was instead ‘‘intended to provide broader protection than that accorded workers under the [FLSA] standard.’’ Dynamex, 416 P.3d at 35.153 Moreover, the Supreme Court has stated that the existence of employment relationships under the FLSA ‘‘does not depend on such isolated factors’’ as the three independently determinative factors in the ABC test, ‘‘but rather upon the circumstances of the whole activity.’’ Rutherford Food, 331 U.S. at 151 See, e.g., Elaine Pofeldt, ‘‘California’s AB–5 leaves Women Business Owners Reeling,’’ Forbes (Jan. 19, 2020), www.forbes.com/sites/elainepofeldt/ 2020/01/19/californias-ab5-leaves-women-businessowners-reeling/#460fb6f05ef3. 152 See A.B. 2257, Ch. 38, 2019–2020 Reg. Sess. (Cal. 2020). 153 The ABC test would define ‘‘employee’’ to include workers who have been held by the Supreme Court to be independent contractors under the economic reality test. For instance, under the ABC test, the term ‘‘employee’’ would include individuals who perform work that falls within the usual course of the hiring entity’s business, regardless of all other considerations. Even though transporting coal falls within a coal company’s usual course of business, the United States Supreme Court held in Silk that truck drivers hired by a coal company to transport coal were independent contractors rather than employees. 331 U.S. at 719. Similarly, the Court held in Bartels that musicians were independent contractors rather than employees of the music hall where they played, even though playing music falls within the music hall’s usual course of business. 332 U.S. at 130. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 730. Because the ABC test is therefore inconsistent with Supreme Court precedent interpreting the FLSA, the Department concludes it could not adopt the ABC test. Although the ABC test is ‘‘a simpler, more structured test’’ than a multifactor balancing test and would likely lead to more consistent classification outcomes, Dynamex, 416 P.3d at 34, legal constraints and the disruptive economic effects of adopting such a stringent standard advises against its adoption in the FLSA context. As mentioned earlier, the Department has engaged in this rulemaking to clarify the existing standard, not to radically transform it. H. Summary of Impacts In summary, the Department believes that this rule will increase clarity regarding whether a worker is classified as an employee or an independent contractor under the FLSA. This clarity could result in an increased use of independent contractors. The costs and benefits to a worker being classified as an independent contractor are discussed throughout this analysis, and are summarized below. The Department believes that there are real benefits to the use of independent contractor status, for both workers and employers. Independent contractors generally have greater autonomy and more flexibility in their hours, providing them more control over the management of their time. The use of independent contracting for employers allows for a more flexible and dynamic workforce, where workers provide labor and skills where and when they are needed. Independent contractors may more easily work for multiple companies simultaneously, have more control over their laborleisure balance, and more explicitly define the nature of their work. Independent contractors also appear to have higher job satisfaction. An increase in the number of job openings for independent contractors can also have benefits for the economy as a whole. Increased job creation and enhanced flexibility in work arrangements are critical benefits during periods of economic uncertainty, such as the current COVID–19 pandemic. There are unique challenges that face independent contractors compared to employees subject to the FLSA. Independent contractors are not subject to the protections of the FLSA, such as minimum wage and overtime pay. Independent contractors generally do not receive the same employer-provided benefits as employees, such as health insurance, retirement contributions, and E:\FR\FM\25SEP3.SGM 25SEP3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS3 paid time off.154 Independent contractors may have a higher tax liability than employees, as they are legally obligated to pay both the employee and employer shares of the Federal Insurance Contributions Act (FICA) taxes. However, economists recognize that payroll taxes generally are subtracted from the wage rate of employees. Employers also cover unemployment insurance and workers’ compensation taxes for their employees. These costs are also components of businesses’ worker costs, and employee wages are expected to reflect that accordingly. Independent contractors do not pay these taxes nor are they generally protected by these insurance programs, but there are private insurance companies that offer equivalent coverage. Because the Department does not know how many workers may shift from employee status to independent contractor status, or how many people who were previously unemployed or out of the labor force will gain work as an independent contractor, these costs and benefits have not been quantified. The Department welcomes comments and data on these costs and benefits, and on how the prevalence of independent contractor relationships will change as a result of this proposed rule. VII. Regulatory Flexibility Act Analysis The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq., as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Public Law 104–121 (1996), requires federal agencies engaged in rulemaking to consider the impact of their proposals on small entities, consider alternatives to minimize that impact, and solicit public comment on their analyses. The RFA requires the assessment of the impact of a regulation on a wide range of small entities, including small businesses, not-for-profit organizations, and small governmental jurisdictions. Accordingly, the Department examined the regulatory requirements of the proposed rule to determine whether they would have a significant economic impact on a substantial number of small entities. Because both costs and cost savings are minimal for small business entities, the Department certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. The Department used the Small Business Administration size standards, 154 In some situations, independent contractors may be provided with benefits similar to those provided to employees. VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 which determine whether a business qualifies for small-business status, to estimate the number of small entities.155 The Department then applied these thresholds to the U.S. Census Bureau’s 2012 Economic Census to obtain the number of establishments with employment or sales/receipts below the small business threshold in the industry.156 These ratios of small to large establishments were then applied to the more recent 2017 SUSB data.157 The Department estimated there are 6.4 million small establishments or governments.158 The per-entity cost for small business employers is the regulatory familiarization cost of $54.74, or the fully loaded mean hourly wage of a Compensation, Benefits, and Job Analysis Specialist multiplied by one hour. The per-entity rule familiarization cost for independent contractors, some of whom would be small businesses, is $11.59, or the fully loaded mean hourly wage of independent contractors in the CWS ($46.36) multiplied by 0.25 hour. The cost savings due to increased clarity estimated per year for each small business employer is $18.25, or the fully loaded mean hourly wage of a Compensation, Benefits, and Job Analysis Specialist multiplied by 0.33 hours. The cost savings due to increased clarity for each independent contractor, some of whom would be a small business, is $3.86 per year, or the fully loaded mean hourly wage of independent contractors in the CWS multiplied by 0.83 hours. Because regulatory familiarization is a one-time cost and the cost savings from clarity recur each year, the Department expects cost savings to outweigh regulatory familiarization costs in the long run. Because both costs and cost savings are minimal for small business entities, and well below one percent of their gross annual revenues, which is typically at least $100,000 per year for the smallest businesses, the Department certifies that the proposed rule will not have a significant economic impact on a substantial number of small entities. There is some evidence that small firms use independent contractors for a greater proportion of their workforce 155 SBA, Summary of Size Standards by Industry Sector, 2017, www.sba.gov/document/support-table-size-standards. 156 The 2012 data are the most recently available with revenue data. 157 For this analysis, the Department excluded independent contractors who are not registered as small businesses, and who are generally not captured in the SUSB, from the calculation of small establishments. 158 The number of small governments was calculated based on data from the 2017 Census of Governments. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 60637 than large firms.159 If so, then it may be reasonable to assume that the increased use of independent contractors may also favor smaller companies. In which case, costs and benefits and cost savings may be larger for these small firms. Because benefits and cost savings are expected to outweigh costs, the Department does not expect this rule will result in an undue hardship for small businesses. The Department requests comments and data on this finding, including the numbers of small entities affected by this rule and the compliance costs and associated cost savings and benefits. VIII. Unfunded Mandates Reform Act Analysis The Unfunded Mandates Reform Act of 1995 (UMRA) 160 requires agencies to prepare a written statement for rules with a federal mandate that may result in increased expenditures by state, local, and tribal governments, in the aggregate, or by the private sector, of $156 million ($100 million in 1995 dollars adjusted for inflation) or more in at least one year.161 This statement must: (1) Identify the authorizing legislation; (2) present the estimated costs and benefits of the rule and, to the extent that such estimates are feasible and relevant, its estimated effects on the national economy; (3) summarize and evaluate state, local, and tribal government input; and (4) identify reasonable alternatives and select, or explain the non-selection, of the least costly, most cost-effective, or least burdensome alternative. A. Authorizing Legislation This proposed rule is issued pursuant to the Fair Labor Standards Act, 29 U.S.C. 201, et seq. B. Assessment of Costs and Benefits For purposes of the UMRA, this rule includes a federal mandate that is expected to result in increased expenditures by the private sector of more than $156 million in at least one year, but will not result in increased expenditures by state, local, and tribal governments, in the aggregate, of $156 million or more in any one year. Based on the cost analysis from this proposed rule, the Department determined that the proposed rule will result in Year 1 total costs for state and local governments totaling $1.7 million, all for regulatory familiarization. There 159 Lim et al, supra note 61 at 51. 2 U.S.C. 1501. 161 Calculated using growth in the Gross Domestic Product deflator from 1995 to 2019. Bureau of Economic Analysis. Table 1.1.9. Implicit Price Deflators for Gross Domestic Product. 160 See E:\FR\FM\25SEP3.SGM 25SEP3 60638 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules will be no additional costs incurred in subsequent years. The Department determined that the proposed rule will result in Year 1 total costs for the private sector of $369.2 million, all of them incurred for regulatory familiarization. The Department included all independent contractors in the private sector total regulatory familiarization costs. There will be no additional costs incurred in subsequent years. UMRA requires agencies to estimate the effect of a regulation on the national economy if such estimates are reasonably feasible and the effect is relevant and material.162 However, OMB guidance on this requirement notes that such macroeconomic effects tend to be measurable in nationwide econometric models only if the economic effect of the regulation reaches 0.25 percent to 0.5 percent of Gross Domestic Product (GDP), or in the range of $53.6 billion to $107.2 billion (using 2019 GDP).163 A regulation with a smaller aggregate effect is not likely to have a measurable effect in macroeconomic terms, unless it is highly focused on a particular geographic region or economic sector, which is not the case with this proposed rule. The Department’s PRIA estimates that the total costs of the proposed rule will be $369.2 million. Given OMB’s guidance, the Department has determined that a full macroeconomic analysis is not likely to show that these costs would have any measurable effect on the economy. khammond on DSKJM1Z7X2PROD with PROPOSALS3 C. Least Burdensome Option Explained This Department believes that it has chosen the least burdensome but still cost-effective methodology to clarify its interpretation of the FLSA’s distinction between employees and independent contractors. Although the proposed regulation would impose costs for regulatory familiarization, the Department believes that its proposal would reduce the overall burden on organizations by simplifying and clarifying the analysis for determining whether a worker is classified as an employee or an independent contractor under the FLSA. The Department believes that, after familiarization, this rule will reduce the time spent by organizations to determine whether a worker is an independent contractor. Additionally, revising the Department’s guidance to provide more clarity could 162 See 2 U.S.C. 1532(a)(4). to the Bureau of Economic Analysis, 2019 GDP was $21.43 trillion. https:// www.bea.gov/system/files/2020-02/gdp4q19_2nd_ 0.pdf. 163 According VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 promote innovation and certainty in business relationships. IX. Effects on Families The undersigned hereby certifies that the proposed rule would not adversely affect the well-being of families, as discussed under section 654 of the Treasury and General Government Appropriations Act, 1999. List of Subjects 29 CFR Part 780 Agriculture, Child labor, Wages. 29 CFR Part 788 Forests and forest products, Wages. 29 CFR Part 795 Employment, Wages. Signed at Washington, DC, this 18th day of September, 2020. Cheryl M. Stanton, Administrator, Wage and Hour Division. For the reasons set out in the preamble, the Department of Labor proposes to amend Title 29 of the Code of Federal Regulations parts 780 and 788 and add part 795, as follows: PART 780—EXEMPTIONS APPLICABLE TO AGRICULTURE, PROCESSING OF AGRICULTURAL COMMODITIES, AND RELATED SUBJECTS UNDER THE FAIR LABOR STANDARDS ACT 1. The authority citation for part 780 continues to read as follows: ■ Authority: Secs. 1–19, 52 Stat. 1060, as amended; 29 U.S.C. 201–219. 2. Amend § 780.330 by revising paragraph (b) as follows: ■ § 780.330 farmers. Sharecroppers and tenant * * * * * (b) In determining whether such individuals are employees or independent contractors, the criteria laid down in §§ 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 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. 4. Amend § 788.16 by revising paragraph (a) as follows: ■ PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 § 788.16 Employment relationship. (a) In determining whether individuals are employees or independent contractors, the criteria laid down in §§ 795.100 through 795.110 of this chapter are used. * * * * * ■ 5. Add part 795 to read as follows: PART 795—EMPLOYEE OR INDEPENDENT CONTRACTOR CLASSIFICATION UNDER THE FAIR LABOR STANDARDS ACT Sec. 795.100 Introductory statement. 795.105 Determining employee and independent contractor classification under the FLSA. 795.110 Primacy of actual practice. 795.115 Severability. Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201–219. § 791.100 Introductory statement. This part contains the Department of Labor’s general interpretations of the text governing individuals’ classification as employees or independent contractors under the Fair Labor Standards Act (FLSA or Act). See 29 U.S.C. 201–19. The Administrator of the Wage and Hour Division will use these interpretations to guide the performance of his or her duties under the Act, and intends the interpretations to be used by employers, employees, and courts to understand employers’ obligations and employees’ rights under the Act. To the extent that prior administrative rulings, interpretations, practices, or enforcement policies relating to classification as an employee or independent contractor under the Act are inconsistent or in conflict with the interpretations stated in this part, they are hereby rescinded. The interpretations stated in this part may be relied upon in accordance with section 10 of the Portal-to-Portal Act, 29 U.S.C. 251–262, notwithstanding that after any such act or omission in the course of such reliance, any such interpretation in this part ‘‘is modified or rescinded or is determined by judicial authority to be invalid or of no legal effect.’’ 29 U.S.C. 259. § 795.105 Determining employee and independent contractor classification under the FLSA. (a) Independent contractors are not employees under the Act. An individual who renders services to a potential employer—i.e., a putative employer or alleged employer— as an independent contractor is not that potential employer’s employee under the Act. As such, sections 6, 7, and 11 of the Act, which impose obligations on employers E:\FR\FM\25SEP3.SGM 25SEP3 khammond on DSKJM1Z7X2PROD with PROPOSALS3 Federal Register / Vol. 85, No. 187 / Friday, September 25, 2020 / Proposed Rules regarding their employees, are inapplicable. Accordingly, the Act does not require a potential employer to pay an independent contractor either the minimum wage or overtime pay under sections 6 or 7. Nor does section 11 of the Act require a potential employer to keep records regarding an independent contractor’s activities. (b) Economic dependence as the ultimate inquiry. An ‘‘employee’’ under the Act is an individual whom an employer suffers, permits, or otherwise employs to work. 29 U.S.C. 203(e)(1), (g). An employer suffers or permits an individual to work as an employee if, as a matter of economic reality, the individual is economically dependent on that employer for work. Rutherford Food Corp. v. McComb, 331 U.S. 722, 727 (1947); Bartels v. Birmingham, 332 U.S. 126, 130 (1947). An individual is an independent contractor, as distinguished from an ‘‘employee’’ under the Act, if the individual is, as a matter of economic reality, in business for him- or herself. (c) Determining economic dependence. The economic reality factors in paragraph (d) of this section guide the determination of whether the relationship between an individual and a potential employer is one of economic dependence and therefore whether an individual is properly classified as an employee or independent contractor. These factors are not exhaustive, and no single factor is dispositive. However, the two core factors listed in paragraph (d)(1) of this section are the most probative as to whether or not an individual is an economically dependent ‘‘employee,’’ 29 U.S.C. 203(e)(1), and each is therefore afforded greater weight in the analysis than is any other factor. Given the greater weight afforded each of these two core factors, if they both point towards the same classification, whether employee or independent contractor, there is a substantial likelihood that is the individual’s accurate classification. This is because other factors, which are less probative and afforded less weight, are highly unlikely, either individually or collectively, to outweigh the combined weight of the two core factors. (d) Economic reality factors—(1) Core factors—(i) The nature and degree of the individual’s control over the work. This factor weighs towards the individual being an independent contractor to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by VerDate Sep<11>2014 19:03 Sep 24, 2020 Jkt 250001 selecting his or her projects, and/or through the ability to work for others, which might include the potential employer’s competitors. In contrast, this factor weighs in favor of the individual being an employee under the Act to the extent the potential employer, as opposed to the individual, exercises substantial control over key aspects of the performance of the work, such as by controlling the individual’s schedule or workload and/or by directly or indirectly requiring the individual to work exclusively for the potential employer. Requiring the individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreedupon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute control that makes the individual more or less likely to be an employee under the Act. (ii) The individual’s opportunity for profit or loss. This factor weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work. While the effects of the individual’s exercise of initiative and management of investment are both considered under this factor, the individual does not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor. This factor weighs towards the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently. (2) Other factors—(i) The amount of skill required for the work. This factor weighs in favor of the individual being an independent contractor to the extent the work at issue requires specialized training or skill that the potential employer does not provide. This factor weighs in favor of the individual being an employee to the extent the work at issue requires no specialized training or skill and/or the individual is dependent upon the potential employer to equip him or her with any skills or training necessary to perform the job. (ii) The degree of permanence of the working relationship between the PO 00000 Frm 00041 Fmt 4701 Sfmt 9990 60639 individual and the potential employer. This factor weighs in favor of the individual being an independent contractor to the extent the work relationship is by design definite in duration or sporadic, which may include regularly occurring fixed periods of work, although the seasonal nature of work by itself would not necessarily indicate independent contractor classification. This factor weighs in favor of the individual being an employee to the extent the work relationship is instead by design indefinite in duration or continuous. (iii) Whether the work is part of an integrated unit of production. This factor weighs in favor of the individual being an employee to the extent his or her work is a component of the potential employer’s integrated production process for a good or service. This factor weighs in favor of an individual being an independent contractor to the extent his or her work is segregable from the potential employer’s production process. This factor is different from the concept of the importance or centrality of the individual’s work to the potential employer’s business. § 795.110 Primacy of actual practice. In evaluating the individual’s economic dependence on the potential employer, the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible. For example, an individual’s theoretical abilities to negotiate prices or to work for competing businesses are less meaningful if, as a practical matter, the individual is prevented from exercising such rights. Likewise, a business’ contractual authority to supervise or discipline an individual may be of little relevance if in practice the business never exercises such authority. § 795.115 Severability. If any provision of this part is held to be invalid or unenforceable by its terms, or as applied to any person or circumstance, or stayed pending further agency action, the provision shall be construed so as to continue to give the maximum effect to the provision permitted by law, unless such holding shall be one of utter invalidity or unenforceability, in which event the provision shall be severable from part 795 and shall not affect the remainder thereof. [FR Doc. 2020–21018 Filed 9–24–20; 8:45 am] BILLING CODE 4510–27–P E:\FR\FM\25SEP3.SGM 25SEP3

Agencies

[Federal Register Volume 85, Number 187 (Friday, September 25, 2020)]
[Proposed Rules]
[Pages 60600-60639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21018]

[[Page 60599]]

Vol. 85

Friday,

No. 187

September 25, 2020

Part III

Department of Labor

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Wage and Hour Division

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29 CFR Parts 780, 788, and 795

Independent Contractor Status Under the Fair Labor Standards Act;
Proposed Rule

Federal Register / Vol. 85 , No. 187 / Friday, September 25, 2020 /
Proposed Rules

[[Page 60600]]

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 780, 788, and 795

RIN 1235-AA34

Independent Contractor Status Under the Fair Labor Standards Act

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Notice of proposed rulemaking and request for comments.

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SUMMARY: The U.S. Department of Labor (the Department) is revising its
interpretation of independent contractor status under the Fair Labor
Standards Act (FLSA or Act) in order to promote certainty for
stakeholders, reduce litigation, and encourage innovation in the
economy.

DATES: Submit written comments on or before October 26, 2020.

ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA34, by either of the following methods:
Electronic Comments: Submit comments through the Federal eRulemaking
Portal at http://www.regulations.gov. Follow the instructions for
submitting comments. Mail: Address written submissions to Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210. Instructions: Please submit only one copy of your
comments by only one method. Commenters submitting file attachments on
www.regulations.gov are advised that uploading text-recognized
documents--i.e., documents in a native file format or documents which
have undergone optical character recognition (OCR)--enable staff at the
Department to more easily search and retrieve specific content included
in your comment for consideration. Please be advised that comments
received will become a matter of public record and will be posted
without change to http://www.regulations.gov, including any personal
information provided. All comments must be received by 11:59 p.m. on
October 26, 2020 for consideration in this rulemaking. Commenters
should transmit comments early to ensure timely receipt prior to the
close of the comment period, as the Department continues to experience
delays in the receipt of mail. Submit only one copy of your comments by
only one method. Docket: For access to the docket to read background
documents or comments, go to the Federal eRulemaking Portal at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a
toll-free number). Copies of this Notice of Proposed Rulemaking (NPRM)
may be obtained in alternative formats (Large Print, Braille, Audio
Tape or Disc), upon request, by calling (202) 693-0675 (this is not a
toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to
obtain information or request materials in alternative formats.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or logging onto WHD's website for a nationwide listing of WHD
district and area offices at http://www.dol.gov/whd/america2.htm.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

The FLSA requires covered employers to pay their nonexempt
employees at least the federal minimum wage for every hour worked and
overtime pay for every hour worked over 40 in a workweek, and mandates
that employers keep certain records regarding their employees. A worker
who performs services for an individual or entity (``person'' as
defined in the Act) as an independent contractor, however, is not that
person's employee under the Act. Thus, the FLSA does not require such
person to pay an independent contractor either the minimum wage or
overtime pay, nor does it require that person to keep records regarding
that independent contractor. The Act does not define the term
``independent contractor,'' but it defines ``employer'' as ``any person
acting directly or indirectly in the interest of an employer in
relation to an employee,'' 29 U.S.C. 203(d), ``employee'' as ``any
individual employed by an employer,'' id. at 203(e), and ``employ'' as
``includ[ing] to suffer or permit to work,'' id. at 203(g). See also
Fair Labor Standards Amendments of 1974, Public Law 93-259 (Apr. 8,
1974). Courts and the Department have long interpreted the ``suffer or
permit'' standard to require an evaluation of the extent of the
worker's economic dependence on the potential employer--i.e., the
putative employer or alleged employer--and have developed a multifactor
test to analyze whether a worker is an employee or an independent
contractor under the FLSA. The ultimate inquiry is whether, as a matter
of economic reality, the worker is dependent on a particular
individual, business, or organization for work (and is thus an
employee) or is in business for him- or herself (and is thus an
independent contractor). But the test's underpinning and the process
for its application lack focus and have not always been sufficiently
explained by courts or the Department, resulting in uncertainty among
the regulated community. The Department believes that clear
articulation will lead to increased precision and predictability in the
economic reality test's application, which will in turn benefit workers
and businesses and encourage innovation and flexibility in the economy.
Accordingly, in this Notice of Proposed Rulemaking (NPRM) the
Department proposes to introduce a new part to Title 29 of the Code of
Federal Regulations setting forth its interpretation of the FLSA as
relevant to the question whether workers are ``employees'' or are
independent contractors under the Act. The proposed regulations would
adopt general interpretations to which courts and the Department have
long adhered. For example, the proposed regulations would explain that
independent contractors are workers who, as a matter of economic
reality, are in business for themselves as opposed to being
economically dependent on the potential employer for work. The proposed
regulations would also explain that the inquiry into economic
dependence is conducted through application of several factors, with no
one factor being dispositive, and that actual practices are entitled to
greater weight than what may be contractually or theoretically
possible. The Department proposes to sharpen this inquiry into five
distinct factors, instead of the five or more overlapping factors used
by most courts and the Department previously. Moreover, consistent with
the FLSA's text, its purpose, and the Department's experience
administrating and enforcing it, the Department proposes that two of
those factors--the nature and degree of the worker's control over the
work and the worker's opportunity for profit or loss--should be more
probative of the question of economic dependence or lack thereof, and
thus are afforded greater weight in the analysis than any others.
This proposed rule would be the Department's sole and authoritative

[[Page 60601]]

interpretation of independent contractor status under the FLSA. As
such, it would replace the Department's previous interpretations of
independent contractor status under the FLSA in certain contexts,
including interpretations found at 29 CFR 780.330(b) (interpreting
independent contractor status under the FLSA for tenants and
sharecroppers) and 29 CFR 788.16(a) (interpreting independent
contractor status under the FLSA for certain forestry and logging
workers). The Department believes this proposal will significantly
clarify to stakeholders how to distinguish between employees and
independent contractors under the Act and seeks comment on all aspects
of this proposed rule.
This proposed rule is expected to be an Executive Order (E.O.)
13771 deregulatory action. Details on the estimated increased
efficiency and cost savings of this proposed rule can be found in the
preliminary regulatory impact analysis (PRIA) provided below in section
VI.

II. Background

A. Relevant FLSA Definitions

Enacted in 1938, the FLSA requires, among other provisions, that
covered employers pay their nonexempt employees at least the federal
minimum wage for every hour worked and overtime pay for every hour
worked over 40 in a workweek, and mandates that employers keep certain
records regarding their employees.\1\ The FLSA does not define the term
``independent contractor.'' The Act defines ``employer'' in section
3(d) to ``include[ ] any person acting directly or indirectly in the
interest of an employer in relation to an employee,'' ``employee'' in
section 3(e)(1) to mean ``any individual employed by an employer,'' and
``employ'' in section 3(g) to include ``to suffer or permit to work.''
\2\ The Supreme Court has recognized that ``there is in the [FLSA] no
definition that solves problems as to the limits of the employer-
employee relationship under the Act.'' Rutherford Food Corp. v. McComb,
331 U.S. 722, 728 (1947).
---------------------------------------------------------------------------

\1\ See 29 U.S.C. 206(a), 207(a) (minimum wage and overtime pay
requirements); 29 U.S.C. 211(c) (recordkeeping requirements).
\2\ 29 U.S.C. 203(d), (e), (g). The Act defines a ``person'' as
``an individual, partnership, association, corporation, business
trust, legal representative, or any organized group of persons.'' 29
U.S.C. 203(a).
---------------------------------------------------------------------------

The Supreme Court has held that the ``suffer or permit'' definition
is broad on its face and is more inclusive than the common law standard
for determining who is employed and thereby who is an employee. The
common law utilizes traditional agency principles exclusively to
examine the hiring party's right to control the manner and means by
which the worker accomplishes his or her task. See Nationwide Mut. Ins.
Co. v. Darden, 503 U.S. 318, 326 (1992) (``[T]he FLSA . . . defines the
verb `employ' expansively to mean `suffer or permit to work.' This . .
. definition, whose striking breadth we have previously noted,
stretches the meaning of `employee' to cover some parties who might not
qualify as such under a strict application of traditional agency law
principles.'' (citations omitted)); Walling v. Portland Terminal Co.,
330 U.S. 148, 150-51 (1947) (``But in determining who are `employees'
under the Act, common law employee categories or employer-employee
classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall within
an employer-employee category.'' (citations omitted)); Rutherford Food,
331 U.S. at 728 (``The [FLSA] definition of `employ' is broad.'').
However, the Act's ``statutory definition[s] . . . have [their]
limits.'' Tony & Susan Alamo Found. v. Sec'y of Labor, 471 U.S. 290,
295 (1985) (internal citation omitted); see also Portland Terminal, 330
U.S. at 152 (``The definition `suffer or permit to work' was obviously
not intended to stamp all persons as employees.''). For example, the
Supreme Court recognized not long after the FLSA's passage that,
despite the Act's broad definition of ``employ,'' ``[t]here may be
independent contractors who take part in production or distribution who
would alone be responsible for the wages and hours of their own
employees.'' Rutherford Food, 331 U.S. at 729. Accordingly, federal
courts of appeals have uniformly held, and the Department has
consistently maintained, that independent contractors are not
``employees'' for purposes of the FLSA. See, e.g., Saleem v. Corporate
Transp. Group, Ltd., 854 F.3d 131, 139-40 (2d Cir. 2017) (noting that
independent contractors are separate from employees in the context of
the FLSA); Karlson v. Action Process Serv. & Private Investigation,
LLC, 860 F.3d 1089, 1092 (8th Cir. 2017) (``FLSA wage and hour
requirements do not apply to true independent contractors.'');
Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311 (11th Cir. 2013)
(``[The Act's] `broad' definitions do not, however, bring `independent
contractors' within the FLSA's ambit.''); Hopkins v. Cornerstone
America, 545 F.3d 338, 342 (5th Cir. 2008) (observing that the ``FLSA
applies to employees but not to independent contractors'').
Accordingly, the FLSA does not require any ``person'' to pay an
independent contractor the minimum wage or overtime pay under sections
6(a) and 7(a) or to keep records regarding that independent contractor
under section 11(c).

B. Economic Dependence and the Economic Reality Test

1. Supreme Court Development of the Economic Reality Test
In a series of cases from 1944 to 1947, the U.S. Supreme Court
explored the limits of the employer-employee relationship under three
different federal statutes: The FLSA, the National Labor Relations Act
(NLRA), and the Social Security Act (SSA).
In the first of those cases, NLRB v. Hearst Publications, Inc., 322
U.S. 111 (1944), the Court considered the meaning of ``employee'' under
the NLRA, which merely defined the term to ``include any employee.''
Id. at 118-20. The Court explained that the meaning of employee ``takes
color from its surroundings . . . [in] the statute where it appears,
and derives meaning from the context of that statute, which must be
read in the light of the mischief to be corrected and the end to be
attained.'' Id. at 124 (citations omitted). The Hearst Court rejected
application of the common law standard alone, see id. at 123-25, and
concluded that ``the broad language of the [NLRA's] definitions . . .
leaves no doubt that its applicability is to be determined broadly, in
doubtful situations, by underlying economic facts rather than
technically and exclusively by previously established legal
classifications.'' Id. at 129. Congress's reaction to Hearst's
interpretation of ``employee'' under the NLRA ``was adverse,'' and on
June 23, 1947, Congress amended the NLRA ``with the obvious purpose of
hav[ing] the Board and the courts apply general agency principles in
distinguishing between employees and independent contractors under the
[NLRA].'' NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256 (1968).
On June 16, 1947, one week before Congress amended the NLRA to
abrogate Hearst, the Supreme Court decided United States v. Silk, 331
U.S. 704 (1947), which addressed the distinction between employees and
independent contractors under the SSA. In that case, the Court
favorably summarized Hearst as setting forth

[[Page 60602]]

``economic reality,'' as opposed to ``technical concepts'' of the
common law standard alone, as the framework for determining workers'
classification. Id. at 712-14. But it also acknowledged that not ``all
who render service to an industry are employees.'' Id. Although the
Court found it to be ``quite impossible to extract from the [SSA] a
rule of thumb to define the limits of the employer-employe[e]
relationship,'' the Court identified five factors as ``important for
decision'': ``degrees of control, opportunities for profit or loss,
investment in facilities, permanency of relation[,] and skill required
in the claimed independent operation.'' Id. at 716. The Court added
that ``[n]o one [factor] is controlling nor is the list complete.'' Id.
Just a week after Silk, on June 23, 1947, the Court reiterated these
five factors in another case involving employee or independent
contractor status under the SSA. See Bartels v. Birmingham, 332 U.S.
126, 130 (1947). The Court explained that, under the SSA, employee
status ``was not to be determined solely by the idea of control which
an alleged employer may or could exercise over the details of the
service rendered to his business by the worker.'' Id. Although
``control is characteristically associated with the employer-employee
relationship,'' employees under ``social legislation'' such as the SSA
are ``those who as a matter of economic reality are dependent upon the
business to which they render service.'' Id. Thus, in addition to
control, ``permanency of the relation, the skill required, the
investment in the facilities for work[,] and opportunities for profit
or loss from the activities were also factors'' to consider. Id.
Although the Court identified these specific factors as relevant to the
analysis, it explained that ``[i]t is the total situation that
controls'' the worker's classification under the SSA. Id.
Decided the same day as Silk, Rutherford Food applied Hearst's and
Silk's reasoning to the FLSA. Rutherford Food addressed whether certain
workers at a plant owned by Kaiser Packing Company (Kaiser) who cut
meat from the bones of slaughtered cattle were Kaiser's employees under
the FLSA or were instead independent contractors. Noting that
``[d]ecisions that define the coverage of the employer-[e]mployee
relationship under the [NLRA and the SSA] are persuasive in the
consideration of a similar coverage under the [FLSA],'' 331 U.S. at
723-24 (citing Hearst and Silk), the Court seemed to follow the path
laid down in these previous cases by examining facts pertaining to the
five factors identified in Silk. For example, the Court noted that the
slaughterhouse workers performed unskilled work ``on the production
line.'' Id. at 730. ``The premises and equipment of Kaiser were used
for the work,'' indicating little investment by the workers. Id. ``The
group had no business organization that could or did shift as a unit
from one slaughter-house to another,'' indicating a permanent work
arrangement. Id. ``The managing official of the plant kept close touch
on the operation,'' indicating control by the alleged employer. Id. And
``[w]hile profits to the boners depended upon the efficiency of their
work, it was more like piecework than an enterprise that actually
depended for success upon the initiative, judgment or foresight of the
typical independent contractor.'' Id.
In addition to facts relevant to the five Silk factors, the Court
also considered whether the work was ``a part of the integrated unit of
production'' (meaning whether the putative independent contractors were
integrated into the assembly line alongside the company's employees) to
assess whether they were employees or independent contractors under the
FLSA. Id. at 729-730. Ultimately, the Court agreed with the appellate
court that the ``underlying economic realities'' led to the conclusion
that the boners were employees of Kaiser under the FLSA. See id. at
727.
In November 1947, five months after Silk and Rutherford Food, the
Department of Treasury (Treasury) proposed regulations governing the
determination of whether an individual is an independent contractor or
employee under the SSA, which used a test that balanced the following
factors:

1. Degree of control of the individual;
2. Permanency of relation;
3. Integration of the individual's work in the business to which
he renders service;
4. Skill required by the individual;
5. Investment by the individual in facilities for work; and
6. Opportunity of the individual for profit or loss.

12 FR 7966. Factors 1, 2, and 4-6 corresponded directly with the five
factors identified as being ``important for decision'' in Silk, 331
U.S. at 716, and the third factor corresponded with Rutherford Food's
consideration of the fact that the workers were ``part of an integrated
unit of production.'' 331 U.S. at 729. The Treasury proposal further
relied on Bartels, 332 U.S. at 130, to apply these factors to determine
whether a worker was ``dependent as a matter of economic reality upon
the business to which he renders services.'' 12 FR 7966.
However, in 1948, Congress promptly rejected this application of
the proposed test. A committee report described the test as ```a
dimensionless and amorphous abstraction' '' that would confer upon ``
`the administrative agencies and the courts an unbridled license to
say, at will, whether an individual is an employee or an independent
contractor' '' for purposes of the SSA. United States v. W.M. Webb,
Inc., 397 U.S. 179, 187-88 (1970) (quoting S. Rep. No. 1255, at 12
(1948) and H.R. Rep. No. 2168, at 9 (1948)). The report stated that
Congress amended the SSA to ``avoid[ ] the uncertainty of the proposed
`economic reality' test'' and to ensure that the common law control
definition of employee alone would apply to that statute. See id. at
183-86, 191; 42 U.S.C. 410(j) (``The term `employee' [under the SSA]
means . . . any individual who, under the usual common law rules
applicable in determining the employer-employee relationship, has the
status of an employee.'').
Congress abrogated the interpretations of the definitions of
``employee'' adopted in Hearst for the NLRA and in Silk and Bartels for
the SSA ``to demonstrate that the usual common-law principles were the
keys to meaning.'' Darden, 503 U.S. at 324-25. However, Congress did
not similarly amend the FLSA. Thus, the Supreme Court stated in Darden
that the scope of employment under the FLSA is broader than that under
common law and is determined by the economic reality of the
relationship at issue, relying on the ``suffer or permit'' standard
that is unique to the FLSA. See id. However, since implicitly doing so
in Rutherford Food, the Court has not again applied (or rejected the
application of) the Silk factors to an FLSA classification question.
Accordingly, the Supreme Court has not mandated any specific set or
formulation of economic reality factors for purposes of the FLSA, nor
has it explicitly opined on any factor's relative probative value to
the inquiry. See Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28,
33 (1961) (noting that `` `economic reality' rather than `technical
concepts' is . . . the test of employment'' under the FLSA (citing
Silk, 331 U.S. at 713; Rutherford Food, 331 U.S. at 729)); Tony & Susan
Alamo, 471 U.S. at 301 (``The test of employment under the Act is one
of `economic reality.' '' (quoting Whitaker House, 366 U.S. at 33)).\3\
---------------------------------------------------------------------------

\3\ In Whitaker House, the Supreme Court concluded that certain
homeworkers were employees under the FLSA, as opposed to being
``self-employed'' or ``independent.'' 366 U.S. at 33. The Court's
analysis did not explicitly mention the Silk factors or the concept
of economic dependence from Bartels. However, the Court focused on
the fact that workers were not ``selling their products on the
market for whatever price they could command,'' but were instead
``regimented under one organization, manufacturing what the
organization desire[d] and receiving the compensation the
organization dictates.'' Id.

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[[Page 60603]]

2. Application of the Economic Reality Test by Federal Courts of
Appeals
Following Rutherford Food, federal courts of appeals have also
stated that the common law standard alone does not determine employee
or independent contractor status under the FLSA and that instead the
inquiry was one of economic reality. See, e.g., Wirtz v. Dr. Pepper
Bottling Co. of Atlanta, 374 F.2d 5, 8 (5th Cir. 1967) (``[C]ommon law
concepts of the employer-employee relationship are not controlling.'');
McComb v. Homeworkers' Handicraft Coop., 176 F.2d 633, 636 (4th Cir.
1949) (same). For several decades after Rutherford Food, courts applied
this reasoning to ask, for example, whether a worker took ``the usual
path of an employee,'' Dr. Pepper, 347 F.2d at 8, or had
characteristics that ``resembled . . . the typical independent
contractor,'' Schultz v. Cadillac Assocs., Inc., 413 F.2d 1215, 1217
(7th Cir. 1969). But they did not adopt a systematic approach to the
question.
In the 1970s and 1980s, federal courts of appeals began to adopt a
multifactor ``economic reality'' test based on Silk, Rutherford Food,
and Bartels similar to Treasury's 1947 proposed SSA regulation to
analyze whether a worker was an employee or an independent contractor
under the FLSA.\4\
---------------------------------------------------------------------------

\4\ As explained below, this multifactor economic realty test
had also been enforced and articulated by the Department in
subregulatory guidance since the 1950s.
---------------------------------------------------------------------------

Drawing on the Supreme Court precedent discussed above, courts have
recognized that the heart of the inquiry is whether ``as a matter of
economic reality'' the workers are ``dependent upon the business to
which they render service.'' Usery v. Pilgrim Equip. Co., 527 F.2d
1308, 1311 (5th Cir. 1976) (quoting Bartels, 332 U.S. at 130 (emphasis
added)). And some courts have clarified that this question of economic
dependence may be boiled down to asking ``whether the individual is or
is not, as a matter of economic fact, in business for himself.''
Donovan v. Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981); see also
Parrish v. Premier Directional Drilling, L.P., 917 F.3d 369, 380 (5th
Cir. 2019) (``Essentially, our task is to determine whether the
individual is, as a matter of economic reality, in business for
himself.'' (internal quotation marks and citation omitted)); Saleem,
854 F.3d at 139 (``[O]ur ultimate concern [is] whether, as a matter of
economic reality, the workers depend upon someone else's business for
the opportunity to render service or are in business for themselves.''
(internal quotation marks and citations omitted)); Baker v. Flint Eng'g
& Constr. Co., 137 F.3d 1436, 1443 (10th Cir. 1998) (``Our final step
is to review the findings on each of the above factors and determine
whether plaintiffs, as a matter of economic fact, depend upon [the
employer's] business for the opportunity to render service, or are in
business for themselves.''). Courts have emphasized that the inquiry
into the level and nature of dependence in a given relationship should
be based on the totality of the circumstances. See, e.g., Donovan v.
DialAmerica Mktg., Inc., 757 F.2d 1376, 1382 (3d Cir. 1985) (noting
that Rutherford Food ``emphasized that the circumstances of the whole
activity should be considered . . .''). But these courts have also
explained that a non-exhaustive, standard set of factors--derived from
Silk and Rutherford--shape and guide this inquiry. See, e.g., Usery,
527 F.2d at 1311 (identifying ``[f]ive considerations [which] have been
set out as aids to making the determination of dependence, vel non'');
Real v. Driscoll Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir.
1979) (articulating a six-factor test).
In Driscoll, the Ninth Circuit Court of Appeals described its six-
factor test as follows:

1. The degree of the alleged employer's right to control the
manner in which the work is to be performed;
2. the alleged employee's opportunity for profit or loss
depending on his managerial skill;
3. the alleged employee's investment in equipment or materials
required for his task, or his employment of helpers;
4. whether the service rendered requires a special skill;
5. the degree of permanency of the working relationship; and
6. whether the service rendered is an integral part of the
alleged employer's business.

Id. at 754. Most courts of appeals articulate a similar test, but
application between courts may vary significantly. See, e.g., Sec'y of
Labor v. Lauritzen, 835 F.2d 1529, 1534-35 (7th Cir. 1987); DialAmerica
Mktg., 757 F.2d at 1382; Donovan v. Brandel, 736 F.2d 1114, 1117 (6th
Cir. 1984). For example, the Second Circuit has analyzed opportunity
for profit or loss and investment (the second and third factors listed
above) together as one factor. See, e.g., Brock v. Superior Care, Inc.,
840 F.2d 1054, 1058 (2d Cir. 1988). And the Fifth Circuit has not
adopted the sixth factor listed above, which analyzes the integrality
of the work. See, e.g., Usery, 527 F.2d at 1311.
A few courts of appeals have adopted noteworthy modifications to
the economic reality factors as originally articulated in 1947 by the
Supreme Court and by the Treasury Department. Compare, e.g.,
DialAmerica Mktg., 757 F.2d at 1382, with Silk, 331 U.S. at 716, and 12
FR 7966. First, the ``skill required'' factor identified in Silk, 331
U.S. at 716, is now articulated more expansively by some courts of
appeals as including consideration of ``initiative.'' See, e.g.,
Parrish, 917 F.3d at 379 (``the skill and initiative required in
performing the job''); Karlson, 860 F.3d at 1093 (same); Superior Care,
840 F.2d at 1058-59 (``the degree of skill and independent initiative
required to perform the work''). Second, Silk analyzed workers'
investments, 331 U.S. at 717-19, and the investment factor was
articulated in the proposed 1947 Treasury regulation as evaluating
``investments by the individual in facilities for work.'' 12 FR 7966
(emphasis added). However, the Fifth Circuit Court of Appeals has
modified the ``investment'' factor to consider ``the extent of the
relative investments of the worker and the alleged employer.'' Hopkins,
545 F.3d at 343. Some other circuits have adopted this ``relative
investment'' approach but continue to use the phrase ``worker's
investment'' to describe the factor. See, e.g., Keller v. Miri
Microsystems LLC, 781 F.3d 799, 810 (6th Cir. 2015); Dole v. Snell, 875
F.2d 802, 805 (10th Cir. 1989).
Third, although the permanence factor under Silk was understood in
the 1947 Treasury proposal to mean the continuity and duration of
working relationships, see 12 FR 7967, some courts of appeals have
expanded this factor to also consider the exclusivity of such
relationships. See, e.g., Scantland, 721 F.3d at 1319; Keller, 781 F.3d
at 807. Finally, Rutherford Food's consideration of whether work is
``part of an integrated unit of production,'' 331 U.S. at 729--which
was articulated as ``integration of the individual's work'' in the 1947
Treasury proposal, 12 FR 7966--is now typically articulated by many
courts of appeal as whether the service rendered is ``integral,'' which
those courts have mistakenly applied as meaning important or central to
the potential employer's business. See, e.g., Verma v. 3001 Castor,
Inc., 937 F.3d 221, 229 (3rd Cir. 2019) (concluding that workers'
services were integral because they were the providers of the
business's ``primary offering''); Acosta

[[Page 60604]]

v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th Cir. 2019)
(concluding that services provided by workers were ``integral'' because
the putative employer ``built its business around'' those services);
McFeeley, 825 F.3d at 244 (consideration ``the importance of the
services rendered to the company's business''); DialAmerica, 757 F.2d
at 1385 (``[W]orkers are more likely to be `employees' under the FLSA
if they perform the primary work of the alleged employer.'').
Courts of appeals applying the multifactor economic reality test
draw from the totality of circumstances, with no single factor being
determinative by itself. See, e.g., Keller, 781 F.3d at 807 (``No one
factor is determinative.''); Baker, 137 F.3d at 1440 (``None of the
factors alone is dispositive; instead, the court must employ a
totality-of-the-circumstances approach.''); Martin v. Selker Bros., 949
F.2d 1286, 1293 (3rd Cir. 1991) (``It is a well-established principle
that the determination of the employment relationship does not depend
on isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.'').
3. Application of the Economic Reality Test by WHD
Since at least 1954, WHD has applied a multifactor analysis when
considering whether a worker is an employee under the FLSA or is
instead an independent contractor. See WHD Opinion Letter (Aug. 13,
1954) (applying six factors very similar to the six economic reality
factors currently used by courts of appeal and noting that ``the
determination depends on the circumstances of the whole activity
considered in light of the statutory purposes of the Act'' (internal
quotation marks omitted)). In 1956, WHD reiterated the six factors and
noted that ``[t]he degree of control retained by the principal has
[been] rejected as the sole criterion to be applied.'' WHD Opinion
Letter (Feb. 8, 1956). In 1964, WHD stated: ``The Supreme Court has
made it clear that an employee, as distinguished from a person who is
engaged in a business of his own, is one who as a matter of economic
reality follows the usual path of an employee and is dependent on the
business which he serves.'' WHD Opinion Letter FLSA-795 (Sept. 30,
1964).
Over the years since, WHD has issued numerous opinion letters
addressing whether a worker is an employee under the FLSA or an
independent contractor. In those letters, WHD has generally relied on a
multifactor analysis very similar to the six economic reality factors
identified above; the circumstances of the whole activity are
considered; the inquiry is broader than the common law control standard
alone; and a worker is an employee if, as a matter of economic reality,
he or she is economically dependent on the employer as opposed to in
business for him- or herself.\5\ WHD has also promulgated regulations
applying a multifactor analysis for independent contractor status under
the FLSA in certain specific industries. See, e.g., 29 CFR 780.330(b)
(applying a six factor economic reality test to determine whether a
sharecropper or tenant is an independent contractor or employee under
the Act); 29 CFR 788.16(a) (applying a six factor economic reality test
in forestry and logging operations with no more than eight employees).
And WHD has promulgated a regulation applying a multifactor economic
reality analysis for determining independent contractor status under
the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).The
MSPA regulation is based on the FLSA's definition of ``employ'' because
MSPA incorporates that definition, and it asks ``whether or not an
independent contractor or employment relationship exist under the Fair
Labor Standards Act.'' 29 CFR 500.20(h)(4) (emphasis in original).
---------------------------------------------------------------------------

\5\ See, e.g., WHD Opinion Letter FLSA2019-6 at 4 (Apr. 29,
2019); WHD Opinion Letter, 2002 WL 32406602, at *2 (Sept. 5, 2002);
WHD Opinion Letter, 2000 WL 34444342, at *3 (Dec. 7, 2000); WHD
Opinion Letter, 2000 WL 34444352, at *1 (Jul. 5, 2000); WHD Opinion
Letter, 1999 WL 1788137, at *1 (Jul. 12, 1999); WHD Opinion Letter,
1995 WL 1032489, at *1 (June 5, 1995); WHD Opinion Letter, 1995 WL
1032469, at *1 (Mar. 2, 1995); WHD Opinion Letter, 1986 WL 740454,
at *1 (June 23, 1986); WHD Opinion Letter, 1986 WL 1171083, at *1
(Jan. 14, 1986); WHD Opinion Letter WH-476, 1978 WL 51437, at *2
(Oct. 19, 1978); WHD Opinion Letter WH-361, 1975 WL 40984, at *1
(Oct. 1, 1975); WHD Opinion Letter (Sept. 12, 1969); WHD Opinion
Letter (Oct. 12, 1965).
---------------------------------------------------------------------------

WHD Fact Sheet #13, ``Employment Relationship under the Fair Labor
Standards Act (FLSA)'' (Jul. 2008), similarly states that, when
determining whether an employment relationship exists under the FLSA:
The common law control is not the exclusive consideration; instead,
``it is the total activity or situation which controls''; and ``an
employee, as distinguished from a person who is engaged in a business
of his or her own, is one who, as a matter of economic reality, follows
the usual path of an employee and is dependent on the business which he
or she serves.'' \6\ The Fact Sheet identifies seven economic reality
factors; in addition to factors that are similar to the six factors
identified above, it also considers the worker's ``degree of
independent business organization and operation.'' \7\
---------------------------------------------------------------------------

\6\ Fact Sheet #13 is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf.
\7\ On July 15, 2015, WHD issued Administrator's Interpretation
No. 2015-1, ``The Application of the Fair Labor Standards Act's
`Suffer or Permit' Standard in the Identification of Employees Who
Are Misclassified as Independent Contractors'' (AI). The AI provided
guidance regarding the employment relationship under the FLSA and
the application of the six economic realities factors. The AI was
withdrawn on June 7, 2017 and is no longer in effect.
---------------------------------------------------------------------------

WHD's most recent opinion letter addressing this issue, from 2019,
generally applied the principles and factors similar to those described
in the prior opinion letters and Fact Sheet #13, but not the ``business
organization'' factor (which it said was ``[e]ncompassed within'' the
other factors). The opinion letter addressed the FLSA classification of
service providers who used a virtual marketplace company to be referred
to end-market consumers to whom the services were actually provided.
WHD concluded that the service providers appeared to be independent
contractors and not employees of the virtual marketplace company. See
WHD Opinion Letter FLSA2019-6 at 7. WHD found that it was ``inherently
difficult to conceptualize the service providers' `working
relationship' with [the virtual marketplace company], because as a
matter of economic reality, they are working for the consumer, not [the
company].'' Id. Because ``[t]he facts . . . demonstrate economic
independence, rather than economic dependence, in the working
relationship between [the virtual marketplace company] and its service
providers,'' WHD opined that they were not employees of the company
under the FLSA but rather were independent contractors. Id. at 9.
As explained in greater detail below, these prior interpretations
of independent contractor status, which themselves have evolved over
time, are subject to the same limitations as the court opinions from
the same period, and the Department believes that stakeholders would
benefit from clarification. As such, the Department is proposing to
promulgate a clearer and more consistent standard for evaluating
whether a worker is an employee or independent contractor under the
FLSA.

III. Need for Rulemaking

The Department has never promulgated a generally applicable
regulation addressing the question of who is an independent contractor
and, thus, not an employee under the Act. Instead, as described above,
the Department has issued and revised subregulatory guidance since at
least

[[Page 60605]]

1954, using different variations of a multifactor economic reality test
that analyzes economic dependence to distinguish independent
contractors from employees. The Department has also applied the
multifactor test in regulations addressing the meaning of independent
contractor in specific industries. See, e.g., 29 CFR 780.330(b); 29 CFR
788.16(a); 29 CFR 500.20(h)(4). For reasons explained below, however,
that multifactor test, as currently applied, has proven to be unclear
and unwieldy. The Department thus proposes to promulgate a regulation
that explains the contours of the economic reality test and clarifies
and sharpens a test that has become less clear and consistent through
decades of case-by-case administration in the courts of appeals. If
this proposed rule were finalized, it would contain the Department's
sole and authoritative interpretation of independent contractor status
under the FLSA. As such, the Department is proposing to strike previous
industry-specific interpretations set forth in 29 CFR 780.330(b) and
788.16(a) and replace them with cross-references to the interpretation
set forth in this proposed rule. The Department considered making
similar revisions to its regulation addressing independent contractor
status under the MSPA in 29 CFR 500.20(h)(4), but is not proposing not
to make such revisions at this time, as explained further below. The
Department invites comments on the need for conforming edits to these
or similar provisions.

A. Challenges Presented by the Economic Reality Test and Its
Application

The economic reality test has been criticized on several fronts.
First, the test's overarching concept of ``economic dependence'' is
under-developed and sometimes inconsistently applied, rendering it a
source of confusion. Second, the test is indefinite and amorphous in
that it makes all facts potentially relevant without providing any
guidance on how to prioritize or balance different and sometimes
competing considerations. Third, inefficiency and lack of structure in
the test further stem from blurred boundaries between the factors.
Fourth, these shortcomings have become more apparent over time as
technology, economic conditions, and work relationships have evolved.
1. Confusion Regarding the Meaning of Economic Dependence
Courts and the Department agree that economic dependence is the
touchstone of the economic reality test. See, e.g., Parrish, 917 F.3d
at 380; McFeeley, 825 F.3d at 241; see also Bartels, 332 U.S. at 130
(noting that the inquiry is whether ``as a matter of economic
reality,'' the worker is ``dependent upon the business to which [he or
she] render[s] service''). But underdeveloped analysis and
inconsistency cloud the application of this touchstone, generating
uncertainty both in and outside of litigation. Given the central
importance of the economic dependence concept, any confusion on this
front is problematic. The 1948 Senate Report criticized Treasury's
proposal to rely on economic dependence for determining independent
contractor status under the SSA by rhetorically asking: ``Who, in this
whole world engaged in any sort of service relationship, is not
dependent as a matter of economic reality on some other person? The
corner grocer, clearly not an employee, is economically dependent upon
his customers, his banker, his supplier.'' S. Rep. No. 80-1255 at 12
(1948). In other words, ``economic dependency is a vague concept that
without further explanation and refinement is often difficult, if not
impossible, to apply.'' \8\
---------------------------------------------------------------------------

\8\ Bruce Goldstein, et al., Enforcing Fair Labor Standards in
the Modern American Sweatshop: Rediscovering the Statutory
Definition of Employment, 46 UCLA L. Rev. 983, 1009 (1999)
(collecting cases).
---------------------------------------------------------------------------

The Department and some courts have attempted to provide a measure
of clarity by explaining, for example, that the proper inquiry is
```whether the workers are dependent on a particular business or
organization for their continued employment' in that line of
business,'' Mr. W Fireworks, 814 F.2d at 1054 (emphasis in original)
(quoting DialAmerica, 757 F.2d at 1385), or instead ``are in business
for themselves,'' Saleem, 854 F.3d at 139. But the Department and many
courts have often applied the test without helpful clarification on the
meaning of the economic dependency that they are seeking.\9\
---------------------------------------------------------------------------

\9\ Id. at 1010.
---------------------------------------------------------------------------

The lack of explanation of economic dependence has sometimes led to
inconsistent approaches and results. For example, the Fifth Circuit
held in 2009 that cable splicers hired as putative independent
contractors by BellSouth to provide post-Hurricane Katrina repairs
along the Gulf Coast were actually employees. See Cromwell v. Driftwood
Elec. Contractor, Inc., 348 F. App'x 57 (5th Cir. 2009). That case
applied the same approach to economic dependence as Mr. W. Fireworks
and similar cases, asking whether ``the worker is economically
dependent upon the alleged employer or is instead in business for
himself.'' Id. at 59. Less than a year later, a different panel of that
same circuit applied a second approach to economic dependence to find
another cable splicer hired under a very similar arrangement by the
same company to be an independent contractor. See Thibault v. BellSouth
Telecommunication, 612 F.3d 843 (5th Cir. 2010).\10\ The Thibault court
distinguished the result in Cromwell in part by highlighting the
plaintiff's sources of income and wealth other than from BellSouth in
the analysis of economic dependence. Id. at 849.\11\ Thibault's
reliance on income and wealth sources to analyze economic dependence is
incompatible with Mr. W. Fireworks and similar decisions, which have
repeatedly explained that ``[e]conomic dependence is not conditioned on
reliance on an alleged employer for one's primary source of income, for
the necessities of life.'' 814 F.2d at 1054 (emphasis in original).\12\
---------------------------------------------------------------------------

\10\ In both cases, the splicers performed post-Hurricane
Katrina repairs for BellSouth along the Gulf Coast; provided their
own tools and trucks; received assignments in the same manner;
received neither training nor close supervision; and worked the same
12-hour shifts for 13 days at a time. Compare Cromwell, 348 F. App'x
at 58-59, with Thibault, 612 F.3d at 844-49.
\11\ Specifically, Mr. Thibault earned significant profits from
his own sales company, ``owned eight drag-race cars [that] generated
$1,478 in income from racing professionally[,]'' and managed
``commercial rental property that generated some income.'' Thibault,
612 F.3d at 849. The Thibault court also highlighted the fact that
Mr. Thibault worked for only three months--although he intended to
work for seven or eight months--before being fired. Id. at 846, 849.
In contrast, the splicers in Cromwell worked approximately eleventh
months. 348 F. App'x at 58.
\12\ See also Off Duty Police, 915 F.3d at 1058 (``[W]hether a
worker has more than one source of income says little about that
worker's employment status.''); DialAmerica, 757 F.2d at 1385 (``The
economic-dependence aspect of the [economic reality] test does not
concern whether the workers at issue depend on the money they earn
for obtaining the necessities of life.'').
---------------------------------------------------------------------------

The Department agrees with Mr. W Fireworks and similar courts that
``the proper test of economic dependence . . . `examines whether the
workers are dependent on a particular business or organization for
their continued employment.' '' Id. (quoting DialAmerica, 757 F.2d at
1385); see also Halferty, 821 F.2d at 268 (``[I]t is not dependence in
the sense that one could not survive without the income from the job
that we examine, but dependence for continued employment.'').
Dependence for work as opposed to income comports with the FLSA's
``suffer or permit'' standard for employment relationship. 29 U.S.C.
203(g). An individual who depends on a potential employer for work is
an employee whom the

[[Page 60606]]

employer suffers or permits to work. In contrast, an independent
contractor does not work at the sufferance or permission of an employer
because, as a matter of economic reality, he or she is in business for
him- or herself. See Saleem, 854 F.3d at 139.
Without a consistent understanding of economic dependence, the
multifactor balancing test is left without a meaningful anchor. As a
result, the test's factors may become ``an end in themselves'' instead
of, as they are intended to be, guideposts in the inquiry of economic
dependence or lack thereof.\13\ For example, in Parrish, 917 F.3d 369,
the Fifth Circuit appears to have applied three different concepts of
economic dependence in a single opinion to analyze the control,
opportunity for profit or loss, and investment factors. First, the
court analyzed the control factor through the same concept of
dependence as Mr. W Fireworks, announcing that ``our task is to
determine whether the individual is, as a matter of economic reality,
in business for himself.'' Parrish, 917 F.3d at 379. The Parrish court
reasoned that mandated ``safety training and drug testing, when working
at an oil-drilling site, is not the type of control that counsels in
favor of employee status.'' Id. at 382 (emphasis in original). This
analysis is consistent with the ``in business for himself'' approach
because an oil-drilling company reasonably would require safety and
drug testing of both employees (who depend on the company for work) and
independent contractors (who are in business for themselves), since an
accident could pose potentially significant risks to the worksite and
to workers, regardless whether caused by an employee or an independent
contractor.
---------------------------------------------------------------------------

\13\ Goldstein, supra note 8 at 1010.
---------------------------------------------------------------------------

The Parrish court then expressly departed from Mr. W Fireworks in
favor of Thibault's dependence-for-income approach to analyze the
opportunity for profit or loss factor. Id. at 384. Specifically, the
court held that the consultant was an independent contractor, in part,
because he also earned income from his own goat farm. See id. at 383
(``Thibault is more on point [than Mr. W. Fireworks]. Accordingly we
consider . . . plaintiffs' enterprises, such as the goat farm, as a
part of the overall analysis of how dependent plaintiffs were on
[defendant].''). But the goat farm has absolutely nothing to do with
whether the worker was in business for himself as a consultant or was
``dependent on a particular business or organization for [his]
continued employment in that line of business.'' Mr. W Fireworks, 814
F.2d at 1054. Put another way, the economic reality analysis should ask
whether the plaintiff had ``opportunity for profit or loss . . . in the
claimed independent operations,'' Silk, 331 U.S. at 716, which in
Parrish was consulting, not goat farming.
The Parrish court impliedly took yet a third approach to economic
dependence when it analyzed the investment factor by comparing the
dollar value of ``each worker's individual investment'' to the
investment made by an oil drilling company in its overall operations:
``Obviously, [the drilling company] invested more money at a drill site
compared to each plaintiff's investments.'' Id. at 383 (emphasis in
original). That comparison was unresponsive to the economic dependence
inquiry of whether the worker is ``[e]ssentially . . . in business for
himself,'' id. at 379, because large companies routinely contract for
services with smaller entrepreneurs. Instead, the worker's investment
(or lack thereof) should have been analyzed to determine whether the
worker had an independent operation, distinct from the potential
employer's business, which created an opportunity for profit or loss.
The 1948 Senate Report cautioned that economic dependence was
potentially ``dimensionless.'' And although courts and the Department
have since added some guidance, the concept may be inconsistently
applied and under-analyzed. A more developed and dependable touchstone
at the heart of the economic reality test is needed to guide the
regulated community. Under this proposal, the Department would
interpret and apply ``economic dependence'' consistent with the
foregoing discussion.
2. The Lack of Focus in the Multifactor Balancing Test
Under the test, the Department and courts analyze the totality of
circumstances making up the economic reality of the relationship to
determine a worker's classification. But, as Judge Easterbrook warned
in 1987, `` `reality' encompasses millions of facts, and unless we have
a legal rule with which to sift the material from the immaterial, we
might as well examine the facts through a kaleidoscope.'' Lauritzen,
835 F.2d at 1539 (Easterbrook J., concurring) (``[A]ny balancing test
begs questions about which aspects of `economic reality' matter, and
why.''). Indeed, Congress rejected Treasury's 1947 proposal to use the
multifactor balancing test under the SSA, with some senators expressing
concern that, ``on virtually no state of facts may anyone be certain
whether or not he has a tax liability.'' Webb, 397 U.S. at 188 (quoting
S. Rep. No. 1255, at 12 (1948)). The same uncertainty often exists
under the FLSA. So far, neither the Department nor courts have
articulated clear, generally applicable guidance about how the multiple
factors, and the countless facts encompassed therein, are to be
balanced, creating uncertainty for the regulated community when, as is
often the case, the significance of facts is unclear or factors point
in opposite directions.
Courts applying the economic reality test often analyze the factors
individually and then reach an overall decision about a worker's
classification without meaningful explanation of how they balanced the
factors to reach the final decision. See, e.g., Parrish, 917 F.3d at
380 (analyzing each factor separately and then explaining ``for the
reasons stated supra, we reach the same conclusions as did the district
court''); Chao v. Mid-Atl. Installation Servs., Inc., 16 F. App'x 104,
108 (4th Cir. 2001) (same); Snell, 875 F.2d at 912 (same). This is so
even where many facts and factors support both sides of the
classification inquiry. See, e.g., Acosta v. Paragon Contractors Corp.,
884 F.3d 1225, 1238 (10th Cir. 2018) (concluding, without explanation
as to weighing of the factors, that workers were employees where two
factors (control and integral part) favored independent contractor
status and four factors (opportunity for profit or loss, investment,
skill, and permanence) favored employee status); Iontchev v. AAA Cab.
Services, 685 F. App'x 548, 550 (9th Cir. 2017) (concluding, without
explanation as to weighing of the factors, that the workers were
independent contractors where two factors (control and opportunity for
profit or loss) favored independent contractor status; one factor
(investment) was neutral; and three factors (skill, permanence, and
integral part) favored employee status).
At other times, courts have provided analysis as to the relative
weight of the factors in the specific case before them. For example,
some courts have noted where factors weigh ``strongly'' or ``weakly.''
See, e.g., Scantland, 721 F.3d at 1313-19 (finding that, assuming
factual inferences in favor of the workers, the control, opportunity
for profit or loss, permanence, and integral part factors strongly
point to employee status, and the investment and skill factors weakly
favor independent contractor status); Superior Care, 840 F.2d at 1059
(finding that opportunity

[[Page 60607]]

for profit or loss and integral part factors ``both weigh heavily in
favor of the . . . conclusion that nurses are employees,'' while skill
and permanence factors ``weigh slightly in favor of independent status,
[but] do not tip the balance''). And at least one court recently
dispensed with a factor-by-factor analysis and instead focused its
analysis on only those facts that determined the outcome in the case.
See Saleem, 854 F.3d at 140 (``draw[ing] upon and discuss[ing] the Silk
factors where relevant'' to the economic reality of the relationship at
issue).
While identifying the most relevant factors in a specific case
lends more clarity than a siloed analysis of each factor devoid of
context, this approach still leaves the regulated community without
generally applicable guidance as to what matters most and why. See
Lauritzen, 835 F.2d at 1539 (Easterbrook J., concurring) (``A legal
approach calling on judges to examine all of the facts, and balance
them, avoids formulating a rule of decision . . . [and] keep[s
businesses] in the dark about the legal consequences of their
deeds.''). In other words, the multifactor economic reality test is
missing direction on the relative importance of the factors.
3. Confusion and Inefficiency Due to Overlapping Factors
The economic reality test's multifactor framework gives some
structure to an otherwise roving inquiry by filtering the totality of
circumstances into distinct relevant categories. But three factors--
skill, permanence, and integral part--have been expanded by courts and
the Department to incorporate aspects of economic reality that also
fall under the control factor, creating overlapping coverage. There is
additional overlap between the opportunity for profit/loss and
investment factors, which ``relate logically to one [an]other.''
McFeeley, 825 F.3d at 243; Lauritzen, 835 F.2d at 1537 (``The capital
investment factor is . . . interrelated to the profit and loss
consideration.''). The structure provided by a multifactor framework
breaks down when the lines between factors are blurred. See Saleem, 854
F.3d at 140 n. 20 (``[C]aution is merited because the Silk factors,
while helpful in identifying relevant facts, overlap to a substantial
degree[.]''). Blurred lines further create inefficiency by requiring
courts to analyze the same facts multiple times, sometimes in
inconsistent ways. Additionally, litigants address and analyze the same
facts repeatedly, and businesses must evaluate those same facts again
and again when making worker classification decisions. Each of these
overlaps are discussed in more detail below.
Silk articulated a ``skill required'' factor as part of the
economic reality test, 331 U.S. at 716, and several federal courts of
appeals continue to apply this factor to consider ``the degree of skill
required to perform the work.'' Paragon, 884 F3d at 1235; see also
Iontchev, 685 F. App'x at 550 (asking ``whether services rendered . . .
require[d] a special skill''); Keller, 781 F.3d at 807 (analyzing ``the
degree of skill required''). As explained above, this inquiry has been
expanded by some other courts into a ``skill and initiative'' factor
which, in addition to asking whether workers have ``some unique skill
set,'' also analyzes whether they ``exercise significant initiative
within the business.'' Parrish, 917 F.3d at 385; see also, e.g.,
Superior Care, 840 F.2d at 1060. The ability to exercise significant
initiative is already analyzed as part of the control factor. This
expansion of the skill factor to incorporate the initiative aspect of
control occurred because courts recognized that ``the use of special
skills is not itself indicative of independent contractor status,
especially if the workers do not use those skills in any independent
way.'' Selker Bros., 949 F.2d at 1295; see also Superior Care, 840 F.2d
at 1060. The Department now believes this sentiment could have been
better incorporated into the analysis by explaining that capacity for
initiative under the control factor is more important than having a
specialized skill. Such an approach would have also provided helpful
guidance regarding how to balance the factors that point in different
directions.
Instead, courts and the Department have imported a control analysis
into the skill factor. See Selker Bros., 949 F.2d at 1295 (concluding
that the skill factor weighed towards employee classification due to
``the degree of control exercised by [the potential employer] over the
day-to-day operations''); see also WHD Fact Sheet #13 (describing the
skill factor to include ``initiative, judgment, or foresight''). For
many courts, the analysis of control appears to have become the most
important part of the skill factor, overriding presence or absence of
actual specialized skill. See Baker, 137 F.3d at 1443 (finding that the
skill factor weighed towards employee classification where skilled
welders ``are told what to do and when to do it''); Superior Care, 840
F.2d at 1060 (finding that the skill factor weighed towards employee
classification for skilled nurses because ``Superior Care in turn
controlled the terms and conditions of the employment relationship'').
In short, by adding ``initiative'' to the ``skill required'' factor
originally articulated by Silk, courts have turned that factor into an
extension of the control factor. The ``skill and initiative'' factor
also overlaps with the opportunity for profit or loss factor, which
considers whether a worker's earnings are determined by initiative.
See, e.g., Snell, 875 F.2d at 810 (finding employee status in part
because the workers' ``earnings did not depend upon their judgment or
initiative, but on the [potential employer's] need for their work'').
Thus, facts relating to initiative are analyzed through three factors:
Control, opportunity for profit, and skill.\14\
---------------------------------------------------------------------------

\14\ While both the control factor and the opportunity for
profit or loss factor overlap with the ``skill and initiative''
factor, they do not overlap with each other in this regard. The
control factor concerns the capacity for initiative, i.e., whether a
worker is able to exercise initiative. The opportunity for profit
concerns the effect of initiative, i.e., the extent to which profits
(or losses) are determined by the exercise of initiative. The former
is a prerequisite for the latter.
---------------------------------------------------------------------------

Such overlap exacerbates confusion by blurring the lines between
the economic reality factors. It also requires redundant analysis of
the same facts under different factors, which may yield inconsistent
and confusing results within the same case. For example, in Express
Sixty-Minutes Delivery, the court concluded that the control factor
pointed towards independent contractor status in part because the
delivery drivers had substantial capacity for initiative: ``Drivers set
their own hours and days of work[,] can reject deliveries without
retaliation,'' and ``can work for other courier delivery systems.'' 161
F.3d at 303. The court further determined that each ``driver's profit
or loss is determined largely on his or her skill, initiative, ability
to cut costs, and understanding of the courier business.'' Id. at 304.
But confusingly, the court also held that the ``skill and initiative
factor points towards employee status'' due to ``the key missing
ingredient . . . [of] initiative.'' Id at 305. Read together, these
holdings may be confusing because the court held that drivers lacked
the very initiative that the court recognized in the same opinion to
determine their profits and losses. It may also appear inconsistent for
the court to hold that initiative was a ``missing ingredient'' when it
determined in the same opinion that drivers had freedom to set hours,
reject assignments, and work for competitors.
Next, the permanence factor originally concerned the continuity and
duration of a working relationship. The factor has since been expanded
by many courts and the Department to also consider the exclusivity of
the relationship. See, e.g.,

[[Page 60608]]

Parrish, 917 F.3d at 386-87 (considering as part of the permanence
factor whether any worker worked exclusively for the potential
employer); Keller, 781 F.3d at 807-09 (considering the exclusivity of
the working relationship as part of the permanence factor); Scantland,
721 F.3d at 1319 (finding installation technicians' relationships with
the potential employer were permanent because they ``could not work for
other companies''); see also WHD Opinion Letter FLSA2019-6 at 8. But
exclusivity is already an aspect of control. See, e.g., Saleem, 854
F.3d at 141 (``[A] company relinquishes control over its workers when
it permits them to work for its competitors.''); Express Sixty-Minutes
Delivery, 161 F.3d at 303 (concluding that the control factor indicated
independent contractor status in part because the workers ``can work
for other courier delivery systems, and [their agreement] does not
contain a covenant-not-to-compete''). This overlap results in
exclusivity being analyzed twice in many cases,\15\ once as part of the
control factor and again as part of the permanence factor. As with
initiative, such repetitive analysis is inefficient and may exacerbate
confusion.
---------------------------------------------------------------------------

\15\ Compare, e.g., Freund, 185 F. App'x at 783 (``Hi-Tech
exerted very little control over Mr. Freund [in part because] Freund
was free to perform installations for other companies.''), with id.
at 784 (``Freund's relationship with Hi-Tech was not one with a
significant degree of permanence . . . [because] Freund was able to
take jobs from other installation brokers.'').
---------------------------------------------------------------------------

Third, the integral part factor used by some courts to analyze
importance appears to be a proxy for control.\16\ Courts appear to
assume that businesses will use employees and not independent
contractors to perform important work in order to control how and when
that work is performed. For example, one court explained the use of
this factor by stating ``it is presumed that, with respect to vital or
integral parts of the business, the employer will prefer to engage an
employee rather than an independent contractor. This is so because the
employer retains control over the employee and can compel attendan[ce]
at work on a consistent basis.'' Baker v. Dataphase, Inc., 781 F. Supp.
724, 735 (D. Utah 1992); see also Baker v. Barnard Const. Co. Inc., 860
F. Supp. 766, 777 (D.N.M. 1994), aff'd sub nom. Baker v. Flint Eng'g &
Const. Co., 137 F.3d 1436 (10th Cir. 1998) (same). As an initial
matter, this observation appears to rest on a mistaken premise.
Manufacturers, for example, commonly have critical parts and components
produced and delivered by wholly separate companies. In any event, the
control factor already directly analyzes whether a business can compel
a worker to work on a consistent basis or otherwise closely supervise
and manage performance of the work. See, e.g., Nieman v. Nat'l Claims
Adjusters, Inc., 775 F. App'x 622, 625 (11th Cir. 2019) (``The first
factor--control--weighs in favor of independent contractor status
because Nieman . . . controlled his schedule.''). Such analysis
presumes a relationship between control and integral part, and
therefore is redundant.\17\
---------------------------------------------------------------------------

\16\ As discussed above, the Supreme Court's Rutherford opinion
did not analyze whether work was important but rather whether it was
``part of an integrated unit.'' 331 U.S. at 729. Notably, the Fifth
Circuit does not typically consider the integral part factor.
\17\ Moreover, some courts have further conflated the
integrality analysis by assuming that easily ``replaceable'' workers
are less integral to a business. Browning v. Ceva Freight, LLC, 885
F. Supp. 2d 590, 610 (E.D.N.Y. 2012); see also Velu v. Velocity
Exp., Inc., 666 F. Supp. 2d 300, 307 (E.D.N.Y. 2009) (observing that
integrality to business diminished where ``work is interchangeable
with the work of other[s]''). That may be true, but being easily
replaceable or interchangeable makes workers more economically
dependent on that business for work, not less. Thus, focusing on
integrality can sometimes obscure the ultimate issue of economic
dependence.
---------------------------------------------------------------------------

Finally, while Silk articulated opportunity for profit or loss and
investment as separate factors, 331 U.S. at 716, there is clear overlap
because ``[e]conomic investment, by definition, creates the opportunity
for loss, [and] investors take such a risk with an eye to profit.''
Saleem, 854 F.3d at 145 n.29. Indeed, the Supreme Court analyzed these
two factors together in Silk, concluding that coal unloaders were
employees because they had ``no opportunity to gain or lose except from
the work of their hands and [ ] simple tools.'' 331 U.S. at 717-18. In
contrast, truck drivers in that case were independent contractors in
part because they invested in their own trucks and had an ``opportunity
for profit from sound management'' of that investment. Id. at 319.
There often is redundancy where the opportunity for profit or loss
and investment factors are considered separately. See, e.g., Mid-
Atlantic Installation Servs., 16 F. App'x at 106-07. And separate
analyses may result in confusion to the extent that it encourages
analysis of a worker's investment outside of the context of the
worker's opportunity for profit or loss. As discussed above, some
courts compare the dollar value of a worker's personal investment
against the total investment of large companies that, for example,
``maintain[ ] corporate offices,'' Hopkins, 545 F.3d at 344; see also
Parrish, 917 F.3d at 383; Keller, 781 F.3d at 810, which says nothing
about whether the worker is in business for him- or herself, as opposed
to being economically dependent on the potential employer for work.
Such irrelevant and potentially misleading comparisons could be avoided
if investment were analyzed together with the opportunity for profit or
loss factor, as the Supreme Court did in Silk, 331 U.S. at 719. That is
precisely what the Second Circuit has done by combining opportunity for
profit or loss and investment in a single factor. See Superior Care,
840 F.2d at 1058.
In summary, significant overlaps between factors exacerbate
confusion about how certain facts are analyzed and balanced. They also
create inefficiency by requiring redundant review of the same facts by
courts, redundant litigation over the same facts by parties, and
redundant analysis of the same facts by business seeking to classify
workers.
4. The Shortcomings and Misconceptions That This Proposal Seeks To
Remedy Are More Apparent in the Modern Economy
Certain shortcomings of the economic reality test have become more
apparent in the modern economy. In particular, technological and social
change--such as falling transaction costs, the transition from more of
an industrial economy to more of a knowledge economy, and shorter job
tenures--have revealed how analyzing the integral part factor through
the lens of importance rather than integration, and giving undue weight
to the investment and permanence factors, may send misleading signals
regarding an individual's classification.
First, falling transaction costs in many sectors of the economy
highlight the potential for errors resulting from analyzing the
integral part factor through the lens of importance instead of
integration. When the transaction costs of hiring are high, firms tend
to hire employees rather than independent contractors for core tasks
that must be performed on a routine basis.\18\ Thus, analyzing the
importance, centrality, or frequency of the work to an organization's
business may have been correlated with a worker's classification,

[[Page 60609]]

even though such analysis departs from Rutherford Food's consideration
of whether work is part of an ``integrated unit of production.'' 331
U.S. at 726. Over the past several decades, however, technological
innovations have driven transactions costs down in many (but not all)
sectors of the economy, sometimes to negligible levels.\19\ Firms in
those sectors can now often hire independent contractors rather than
employees for core tasks without incurring onerous transaction costs.
For example, drivers are vital to the personal transportation business,
but transportation companies increasingly hire independent contractor
drivers rather than employees. See, e.g., Saleem, 854 F.3d at 140;
Iontchev, 685 F. App'x at 550. The Department thus believes analyzing
the importance or centrality of work may send misleading signals in
low-transaction-cost environments that have become more commonplace,
which militates in favor of refocusing the integral part factor on
integration rather than importance.\20\
---------------------------------------------------------------------------

\18\ Ronald Coase, Nature of the Firm, 4 Economica 386 (1937),
https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1468-0335.1937.tb00002.x. See also Nobel Prizes and Laureates, Oct., 15,
1991, https://www.nobelprize.org/prizes/economic-sciences/1991/press-release/ (explaining The Nature of the Firm's contribution to
economics literature as a central reason for Coase's receipt of the
1991 Nobel Prize in Economics).
\19\ See, e.g., Anders Henten and Iwona Windekie, ``Transaction
Costs and the Sharing Economy,'' 26th European Regional ITS
Conference p. 2 (2015) (asserting that ``digital platforms allow for
decreasing transaction costs''), https://www.econstor.eu/bitstream/10419/127145/1/Henten-Winderkilde.pdf.
\20\ As noted in the Background section and explained in further
detail below, the Supreme Court did not analyze whether work was
important, but rather whether work was ``part of an integrated unit
of production.'' Rutherford Food, 331 U.S. at 726. The Department
proposes to return to the Supreme Court's original factors.
---------------------------------------------------------------------------

Second, the transition from a more industrial economy to more of a
knowledge-based economy has diminished the investment factor's ability
to indicate economic dependence.\21\ Broadly speaking, the factors of
production in a more industrial economy consist of either physical
capital that produced investment returns or labor for which wages were
paid. Such a more industrial economy facilitated a relatively clear
distinction between ``wage earners toiling for a living'' and
``independent entrepreneurs seeking a return on their risky capital
investments.'' Mr. W Fireworks, 814 F.2d at 1051. In today's more
knowledge-based economy, however, it is often human rather than
physical capital that matters most. Because personal initiative and
know-how can enable entrepreneurship in a more knowledge-based economy,
workers who lack ``capital investments'' cannot be assumed to be ``wage
earners toiling for a living.'' See, e g., Lauritzen, 835 F.2d at 1540-
41 (Easterbrook, J. concurring) (observing that an attorney ``sells
human capital rather than physical capital, but this does not imply
that lawyers are `employees' of their clients under the FLSA''); Meyer
v. U.S. Tennis Ass'n, 607 F. App'x 121, 123 (2d Cir. 2015) (holding
that tennis umpires were independent contractors even though they
``invest little''). So, while the presence of significant capital
investment is still probative, its absence may be less so in more
knowledge-based occupations and industries. Indeed, technological
advances enable, for example, freelance journalists, graphic designers,
or consultants to be entrepreneurs with little more than a personal
computer and smartphone. See, e.g., Faludi v. U.S. Shale Sols., L.L.C.,
950 F.3d 269, 276 (5th Cir. 2020) (holding that a consultant who
``provided his own phone and computer'' and ``made investments in his
continuing education and home office equipment'' was an independent
contractor).
---------------------------------------------------------------------------

\21\ See, e.g., Walter Powell and Kaisa Snellman, The Knowledge
Economy, 30 Annu. Rev. Sociol. 199-220 (2004).
---------------------------------------------------------------------------

Finally, shorter job tenures among American workers have diminished
the underlying rationale of the permanence factor.\22\ That factor
assumes that independent contractors have relatively short working
relationships while employees have longer ones.\23\ Such distinction
was sharp when the vast majority of employees had job tenures that
lasted many years or even decades, as may have been the case for
employees born in the 1940s and earlier.\24\ But the Atlanta Federal
Reserve's 2015 analysis of BLS data for U.S. workers born between 1933
and 1993 found that median job tenure has declined steadily for every
age cohort, with younger generations having the lowest job tenures.\25\
The most recently available data from the Department's Bureau of Labor
Statistics (BLS) shows that, since 2014, job tenure rates have resumed
their long-term decline, following a brief increase attributable to the
2008 recession, with the lowest job tenure rates for younger workers.
The lowest median tenure (2.2 years) was found in the leisure and
hospitality industry, which tends to have younger workers on average.
This means that many employees today have shorter working relationships
with their employers, which dulls the usefulness of job duration to
distinguish an employee from an independent contractor.
---------------------------------------------------------------------------

\22\ The Department has not investigated the cause of shorter
job tenures since 1947 as part of this rulemaking.
\23\ Compare, e.g., Bartels, 332 U.S. at 127 (finding that band
members were independent contractors in part because ``[a]lmost all
of the engagements . . . involved were one-night stands''), with
Whitaker House, 366 U.S. at 29 (finding that homeworkers were
employees of a cooperative that ``required [the homeworkers] to
remain members at least a year'').
\24\ Julie Hotchkiss and Christopher Macpherson, Falling Job
Tenure: It's Not Just about Millennials, Federal Reserve Bank of
Atlanta, June 8, 2015, https://www.frbatlanta.org/blogs/macroblog/2015/06/08/falling-job-tenure-its-not-just-about-millennials.aspx.
\25\ Id.
---------------------------------------------------------------------------

In summary, the Department believes the current multifactor
economic reality test suffers because the analytical lens through which
all the factors are to be filtered remains inconsistent; there is no
clear principle regarding how to balance the multiple factors; the
lines between many of the factors are blurred; and these shortcomings
have become more apparent in the modern economy. The result is legal
uncertainty that obscures workers' and businesses' respective rights
and obligations under the FLSA. Such uncertainty is especially acute
when it comes to the growing number of more flexible and nimble work
relationships. While such relationships benefit workers and businesses
alike, they also lead to complex questions about a worker's
classification under the FLSA, which are difficult to answer due in
part to the shortcomings described above.\26\
---------------------------------------------------------------------------

\26\ See, e.g., Kati L. Griffith, The Fair Labor Standards Act
at 80: Everything Old Is New Again, 104 Cornell L. Rev. 557, 561
(2019) (``[N]ew trends raise complicated questions about who is a
true independent contractor excluded from the [FLSA]'s protections.
Most notably, the recent growth in workers who depend on freelance
or `contract work,' has received a lot of attention.''); Griffin
Toronjo Pivateau, The Prism of Entrepreneurship: Creating A New Lens
for Worker Classification, 70 Baylor L. Rev. 595, 625 (2018) (``The
economic realities test fails to cope with innovative working
arrangements.''); Keith Cunningham-Parmeter, From Amazon to Uber:
Defining Employment in the Modern Economy, 96 B.U. L. Rev. 1673,
1683-84, 1688 (2016) (``[P]ersistent uncertainty impacts an ever-
expanding list of businesses in retail, service, home care,
construction, information technology, and the burgeoning on-demand
economy.'').
---------------------------------------------------------------------------

The Department is further concerned that continued legal
uncertainty may deter innovative work arrangements by creating legal
risks with respect to misclassifying workers as independent contractors
instead of employees. Take, for example, the workers in WHD's April
2019 opinion letter who searched for job opportunities and negotiated
for prices by `` `multi-app[ing]'--that is simultaneously run[ing a
company]'s virtual platform alongside the platform of a competitor to
compare virtual opportunities in real time and pick the best
opportunity on a job-by-job basis.'' WHD Opinion Letter FLSA2019-6 at
8. Multi-apping creates significant economic value by letting workers
find the best paying opportunities, providing app companies with access
to a larger workforce, and helping consumers

[[Page 60610]]

benefit from competition. This innovative practice depends on being
able to confidently classify workers as independent contractors.\27\
For this reason, a clear standard for employee classification can help
encourage multi-apping and other economic innovations. Under the status
quo, a company may believe it cannot be sure of a classification
outside of costly litigation applying the economic reality test (which
may be too unwieldly as currently applied). The prospect of such
litigation expense and any potential back wages and penalties may be
enough to deter businesses from exploring innovative business models
and working relationships. Thus, legal uncertainty regarding worker
classification may inhibit the development of new job opportunities or
result in the elimination of existing jobs.
---------------------------------------------------------------------------

\27\ Businesses have a strong incentive to restrict multi-apping
to independent contractors because an employee who multi-apps may
create complicated questions regarding which of the multiple app
companies is responsible for FLSA obligations for time spent multi-
apping. During the multi-app period, a worker would be searching for
customers on behalf of multiple app companies, and it therefore may
be difficult or impractical to determine the company or companies
for which the worker is performing compensable work if he or she is
a non-exempt employee. This could raise challenging questions that
create legal risk for each employer. The Department believes that
the greater the legal certainty of workers' respective
classifications, the more the Department encourages innovative work
arrangements like multi-apping by providing companies with clear
frameworks to set up these arrangements.
---------------------------------------------------------------------------

The Department is therefore issuing this NPRM to provide greater
legal certainty and solicits comments on all these issues.

IV. Proposed Regulatory Provisions

In light of the foregoing concerns, the Department is proposing to
introduce a new part to Title 29 of the Code of Federal Regulations
addressing whether particular workers are ``employees'' or independent
contractors under the FLSA. In relevant part, and as discussed in
greater detail below, the Department proposes:
Introductory provisions at Sec. 795.100 explaining the
purpose and legal authority for the new part;
a provision at Sec. 795.105(a) explaining that
independent contractors are not employees under the FLSA;
a provision at Sec. 795.105(b) discussing the ``economic
reality'' test for distinguishing FLSA employees from independent
contractors, clarifying that the concept of economic dependence turns
on whether a worker is in business for him- or herself (independent
contractor) or is economically dependent on a potential employer for
work (employee);
provisions at Sec. 795.105(c) and (d) describing factors
examined as part of the economic reality test, including two ``core''
factors--the nature and degree of the worker's control over the work
and the worker's opportunity for profit or loss--which are afforded
greater weight in the analysis, as well as three other factors that may
serve as additional guideposts in the analysis;
a provision at Sec. 795.110 advising that the parties'
actual practice is more relevant than what may be contractually or
theoretically possible; and
a severability provision at Sec. 795.115.
These proposals would significantly clarify how the Department
distinguishes between employees and independent contractors under the
Act.
The Department welcomes comment on all aspects of its proposal.
The Department further proposes to adopt the above-described
provisions as its sole and authoritative interpretation of independent
contractor status under the FLSA. Accordingly, the Department would
replace industry-specific interpretations of independent contractor
status for sharecroppers or tenants at Sec. 780.330(b) and certain
forestry or logging operations at Sec. 788.16(a) with cross-references
to the interpretation set forth in this rule. These previous industry-
specific interpretations of independent contractor status all rely on
the same FLSA terms as the interpretation set forth in this propose
rule.\28\ As such, the Department believes the justifications
articulated in the need for rulemaking discussion in Section III,
particularly the need for a consistent and clear standard for
determining independent contractor status in all FLSA cases, largely
apply to the question of independent contractor status in those
industries.
---------------------------------------------------------------------------

\28\ The interpretation of independent contractor status under
Sec. 780.330(b) for sharecroppers or tenants pertain to an
exemption for certain ``employee[s] employed in agriculture'' under
section 13(a)(6) of the FLSA. The Department believes the
distinction this proposed rule draws between independent contractors
and employees would apply in the agricultural exemption context
because the same statutory terms, i.e., employee and employ, are
being interpreted.
---------------------------------------------------------------------------

The Department considered, but is not proposing at this time,
similar revisions to 29 CFR 500.20(h)(4), which addresses independent
contractor status under MSPA. The Department recognizes that MSPA
adopts by reference the FLSA's definition of ``employ,'' see 18 U.S.C.
1802(5), and that 29 CFR 500.20(h)(4) considers ``whether or not an
independent contractor or employment relationship exists under the Fair
Labor Standards Act'' to interpret independent contractor status under
MSPA. Nonetheless, MSPA imposes different legal obligations than the
FLSA's minimum wage and overtime pay obligations and applies to
different employers and employees.\29\ And the Department's enforcement
experience does not indicate that there is confusion regarding workers'
classifications as an employee or independent contractor in the MSPA
context to the same extent as the FLSA context. As such, it is not
entirely clear whether the justifications articulated in the need for
rulemaking discussion in Section III apply in the MSPA context. The
Department therefore proposes to proceed incrementally by first seeking
comment on a revised interpretation of independent contractor status
under the FLSA before considering whether to revise the MSPA
regulations.\30\ The Department welcomes comments regarding whether 29
CFR 500.20(h)(4) should be revised to be consistent with the
interpretation of independent contractor status set forth in this
proposed rule.
---------------------------------------------------------------------------

\29\ See WHD Fact Sheet #49, ``The Migrant and Seasonal
Agricultural Worker Protection Act'' (Jul. 2008).
\30\ See, e.g., Pharm. Research & Mfrs. of Am. v. FTC., 790 F.3d
198, 203 (D.C. Cir. 2015) (affirming that agency had discretion to
``proceeding incrementally'' in promulgating rules that were
directed to one industry but not others); Inv. Co. Inst. v.
Commodity Futures Trading Comm'n, 720 F.3d 370, 378 (D.C. Cir. 2013)
(observing that ``[n]othing prohibits federal agencies from moving
in an incremental manner'' (quoting F.C.C. v. Fox Television
Stations, Inc., 556 U.S. 502, 522 (2009)); City of Las Vegas v.
Lujan, 891 F.2d 927, 935 (D.C. Cir. 1989) (noting that ``agencies
have great discretion to treat a problem partially'').
---------------------------------------------------------------------------

A. Introductory Statements

Proposed Sec. 795.100 explains that the interpretations provided
in part 795 will guide WHD's enforcement of the FLSA and are intended
to be used by employers, businesses, the public sector, employees,
workers, and courts to assess employment status classifications under
the Act. Proposed Sec. 795.100 further clarifies that, if proposed
part 795 is adopted, employers may safely rely upon the interpretations
provided in part 795 under section 10 of the Portal-to-Portal Act,
unless and until any such interpretation ``is modified or rescinded or
is determined by judicial authority to be invalid or of no legal
effect.'' 29 U.S.C. 259.

[[Page 60611]]

B. Proposal To Explain That Independent Contractors Are Not Employees
Under the Act

Proposed Sec. 795.105(a) explains that an independent contractor
who renders services to a person is not an employee of that person
under the FLSA. This is consistent with the Supreme Court's affirmation
in Rutherford Food that the Act's definition of employee has
consistently been interpreted as excluding individuals who ``might work
for their own advantage,'' including ``independent contractors who take
part in production or distribution.'' 331 U.S. at 728-29; see also,
e.g., Hopkins, 545 F.3d at 342; Saleem, 854 F.3d at 139-40; Karlson,
860 F.3d at 1092. Minimum wage and overtime pay requirements under
sections 6 and 7 of the Act apply only to a person's employees. See 29
U.S.C. 206(a), 207(a)(1). As such, those requirements do not apply with
respect to a person's independent contractors. For the same reason, the
recordkeeping obligations for employers under section 11 of the Act do
not apply to a person with respect to services received from an
independent contractor. See 29 U.S.C. 211(c) (``Every employer subject
to any provision of [the FLSA] shall make, keep, and preserve such
records of the persons employed by him[.]'') (emphasis added).

C. Proposal To Adopt the Economic Reality Test To Determine a Worker's
Employee or Independent Contractor Status Under the Act

Proposed Sec. 795.105(b) adopts the economic reality test to
determine a worker's status as an employee or an independent contractor
under the Act.
The Department's analysis begins with the text of the statute,
following well-settled principles of statutory construction by
``reading the whole statutory text, considering the purpose and context
of the statute, and consulting any precedents or authorities that
inform the analysis.'' Kasten v. Saint-Gobain Performance Plastics
Corp., 563 U.S. 1, 7 (2011) (interpreting the FLSA) (internal quotation
marks and citation omitted). An employer employs an individual under
the Act if the employer ``suffer[s] or permit[s]'' the individual to
work. 29 U.S.C. 203(g). Proposed Sec. 795.105(b) codifies the Supreme
Court's statement that ``suffer or permit'' means something broader
than the common law conception of control; namely, economic dependence.
See, e.g., Darden, 503 U.S. at 326. Therefore, the Department proposes
that the central inquiry as to whether an individual is an employee or
independent contractor under the Act is whether, as a matter of
economic reality, the individual is economically dependent on the
potential employer for work. See Pilgrim Equip., 527 F.2d at 1311 (``It
is dependence that indicates employee status.'').
However, all workers--employees and independent contractors alike--
are economically dependent on others to some degree. Business owners
are likewise economically dependent on the workers they hire, but this
does not make them employees of their own workers. The economic reality
test can be `` `a dimensionless and amorphous abstraction' '' unless
its touchstone--economic dependence--is clarified. Webb, 397 U.S. at
188 (quoting S. Rep. No. 1255, at 12 (1948)). As explained in the need
for rulemaking discussion earlier in Section III, the meaning of
economic dependence is sometimes inconsistently applied and would
benefit from further explanation.
Clarifying the test requires putting the question of economic
dependence in the proper context. ``Economic dependence is not
conditioned reliance on an alleged employer for one's primary source of
income, for the necessities of life.'' Mr. W Fireworks, 814 F.2d at
1054. Rather, courts have framed the question as ``whether, as a matter
of economic reality, the workers depend upon someone else's business
for the opportunity to render service or are in business for
themselves.'' Saleem, 854 F.3d at 139; see also Parrish, 917 F.3d at
379; Baker, 137 F.3d at 1440 (``[T]he focal point is whether the
individual is economically dependent on the business to which he
renders service . . . or is, as a matter of economic fact, in business
for himself.'') (internal quotation marks and citation omitted);
Donovan v. Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981) (``The focal
inquiry in the characterization process is thus whether the individual
is or is not, as a matter of economic fact, in business for
himself.''). In other words, the key question is whether workers are
``more closely akin to wage earners,'' who depend on others to provide
work opportunities, or ``entrepreneurs,'' who create work opportunities
for themselves. Mr. W Fireworks, 814 F.2d at 1051; see also Express
Sixty-Minutes, 161 F.3d at 305 (asking whether workers ``are more like
wage earners than independent entrepreneurs''); cf. H.R. Rep. No. 245,
80th Cong., 1st Sess. 18 (1947) (`` `Employees' work for wages or
salaries under direct supervision. `Independent contractors' undertake
to do a job for a price, decide how the work will be done, usually hire
others to do the work, and depend for their income not upon wages, but
upon the difference between what they pay for goods, materials, and
labor and what they receive for the end result, that is, upon
profits.'').
The above-described concept of economic dependence comports with
the FLSA's definition of employ as ``includ[ing] to suffer or permit to
work.'' See 29 U.S.C. 203(g). An individual who depends on a potential
employer for work is able to work only by the sufferance or permission
of the potential employer. Such an individual is therefore an employee
under the Act. In contrast, an independent contractor does not work at
the sufferance or permission of others because, as a matter of economic
reality, he or she is in business for him- or herself. In other words,
an independent contractor is an entrepreneur who works for him- or
herself, as opposed to an employer.
Some courts have relied on a worker's entrepreneurship with respect
to one type of work to conclude that the worker was also in business
for him- or herself in a second, unrelated type of work. See, e.g.,
Parrish, 917 F.3d at 384 (considering ``plaintiff's enterprise, such as
the goat farm, as part of the overall analysis of how dependent
plaintiffs were on [defendant]'' for working as consultants); Thibault,
612 F.3d at 849 (concluding that plaintiff was an independent
contractor as a cable splicer in part because he managed unrelated
commercial operations and properties in a different state). However,
the Supreme Court was clear that the economic reality analysis is
limited to ``the claimed independent operation.'' Silk, 331 U.S. at
716. Thus, the relevant question in this context is whether the worker
providing certain service to a potential employer is an entrepreneur
``in that line of business.'' Mr. W Fireworks, 814 F.2d at 1054.
Otherwise, businesses must make worker classification decisions based
on facts outside the working relationship, such as whether a consultant
manages a ``goat farm,'' Parrish 917 F.3d at 384, or whether a cable
splicer owns an out-of-state commercial venture. Thibault, 612 F.3d at
849.\31\
---------------------------------------------------------------------------

\31\ It is possible for a worker to be an employee in one line
of business and an independent contractor in another.
---------------------------------------------------------------------------

At bottom, the phrase ``economic dependence'' may mean many
different things. But in the context of the economic reality test,
``economic dependence'' is best understood in terms of what it is not.
The phrase excludes individuals who, as a matter of economic reality,
are in business for themselves. Such individuals work for themselves
rather than at the sufferance

[[Page 60612]]

or permission of a potential employer, see 29 U.S.C. 203(g), and thus
are not dependent on that potential employer for work. Proposed Sec.
795.105(b) therefore recognizes the principle that, as a matter of
economic reality, workers who are in business for themselves with
respect to work being performed are independent contractors for that
type of work.

D. Proposal To Apply the Economic Reality Factors To Determine a
Worker's Independent Contractor or Employee Status

The uncertainty and unpredictability of the traditional multifactor
analysis of economic dependence has led some courts and commentators to
call for alternative approaches. Judge Easterbrook's concurrence in
Lauritzen, for instance, urged the Seventh Circuit to ``abandon these
unfocused `factors' and start again.'' 835 F.2d at 1543 (Easterbrook
J., concurring). One commentator in a recent article has proposed
replacing the economic reality factors with ``three main dimensions to
entrepreneurship.'' \32\ The Department, however, prefers to sharpen
the existing test, rather than to create a new test out of whole cloth,
in part because many existing work relationships are structured around
the current multifactor test and wholesale abandonment of that test may
impose undue and prohibitive adjustment costs on the regulated
community. Moreover, the economic reality test, properly construed and
applied, is effective at distinguishing employees from independent
contractors. As such, proposed Sec. 795.105(c) and (d) would adopt a
variation on the traditional multifactor analysis of economic
dependence to improve certainty and predictability, as well as increase
the test's probative value into the underlying question of economic
dependence.
---------------------------------------------------------------------------

\32\ Pivateau, supra note 26, at 631. The proposal would replace
the six-factor approach with ``the three main dimensions to
entrepreneurship,'' which are: ``(1) the processes and events that
make up entrepreneurship; (2) the skills and traits that
characterize an entrepreneur; and (3) the results that
entrepreneurship generates.'' Id.
---------------------------------------------------------------------------

Proposed Sec. 795.105(c) explains that certain nonexclusive
economic reality factors guide the determination of whether an
individual is, on one hand, economically dependent on a potential
employer and therefore an employee or, on the other, in business for
him- or herself and therefore an independent contractor. These factors
are listed in Sec. 795.105(d) and are based on economic reality
factors currently used by the Department and most federal courts of
appeals, with certain proposed clarifications.
First, the Department proposes to follow the Second Circuit's
approach of analyzing the worker's investment as part of the
opportunity for profit or loss factor. The combined factor would ask
whether the worker has an opportunity to earn profits or incur losses
based on his or her exercise of initiative or management of
investments. Second, the Department proposes to clarify that the
``skill required'' factor originally articulated by the Supreme Court
should be used, as opposed to the ``skill and initiative'' factor
currently used in some circuits, because considering initiative as part
of the skill factor creates unnecessary and confusing overlaps with the
control and opportunity for profit or loss factors. Third, the
Department proposes to further reduce overlap by analyzing the
exclusivity of the relationship as a part of the control factor only,
as opposed to both the control and permanence factors. Lastly, the
Department proposes to reframe the ``whether the service rendered is an
integral part of the alleged employer's business'' factor in accordance
with the Supreme Court's original inquiry of whether the work is ``part
of an integrated unit of production.'' See Rutherford, 331 U.S. at 729.
Proposed Sec. 795.105(c) further improves the certainty and
predictability of the test by focusing it on two core factors: (1) The
nature and degree of the worker's control over the work; and (2) the
worker's opportunity for profit or loss. These core factors, listed in
proposed Sec. 795.105(d)(1), are highly probative to the inquiry
because the ability to control one's work and to earn profits and risk
losses strikes at the core of what it means to be an entrepreneurial
independent contractor, as opposed to a ``wage earner'' employee. Mr. W
Fireworks, 814 F.2d at 1051; cf. FedEx Home Delivery v. NLRB, 563 F.3d
492, 497 (D.C. Cir. 2009) (``[I]ndependent contractors have
`significant entrepreneurial opportunity for gain or loss[.]' '').
Other factors listed in proposed Sec. 795.105(d)(2) are also probative
depending on the circumstances, but should be evaluated in the context
of these two core factors. Given their greater weight, if both proposed
core factors point towards the same classification--whether employee or
independent contractor--there is a substantial likelihood that the
individual's classification is accurate. This is because it is highly
unlikely for the other, less probative factors to outweigh the combined
weight of the core factors.\33\
---------------------------------------------------------------------------

\33\ As discussed in greater detail below, the Department's
review of federal appellate decisions indicates that, when the two
proposed core factors are in alignment, they point to what the court
finds to be the individual's correct classification.
---------------------------------------------------------------------------

The following discussion addresses the five economic reality
factors, including proposed modifications and clarifications made to
each, and explains why the two core factors are entitled to greater
weight than other factors.
1. The Nature and Degree of the Individual's Control Over the Work
The first economic reality factor (proposed Sec. 795.105(d)(1)(i))
is ``the nature and degree of the individual's control over the work.''
\34\ This factor would weigh towards the individual being an
independent contractor to the extent that the individual, as opposed to
the potential employer, exercises substantial control over key aspects
of the performance of the work. Examples in the proposed regulatory
text of an individual's substantial control include setting his or her
own work schedule, choosing assignments, working with little or no
supervision, and being able to work for others, including a potential
employer's competitors.\35\ In addition, the Department agrees with
courts that have found that an individual worker's ``substantial
control of the key aspects'' of the work weighs in favor of independent
contractor classification ``even if the worker is not solely in control
of the work.'' Parrish, 917 F.3d at 381-82; see also Mid-Atl.
Installation Servs., 16 F. App'x at 106 (affirming the

[[Page 60613]]

district court's conclusion that, although the potential employer
exercised some control over the work, the manner in which the workers
completed their work was ``left to their broad discretion and business
judgment, which suggests that they are independent contractors'').
---------------------------------------------------------------------------

\34\ Many courts articulate this factor as the degree of control
over the work by the potential employer as opposed to by the worker.
See, e.g., Razak, 951 F.3d at 142; Hobbs, 946 F.3d at 829; McFeeley,
825 F.3d at 241; Keller, 781 F.3d at 807; Scantland, 721 F.3d at
1312. This distinction, however, is of no consequence. As the
proposed regulatory text and this accompanying discussion make
clear, the nature and degree of control over the work by the worker
and by the potential employer are considered to determine whether
control indicates employee or independent contractor status.
\35\ See, e.g., Saleem, 854 F.3d at 147 (noting that the
workers' ``flexible work schedules and considerable control over
when, where, and in what circumstances to accept a . . . fare''
indicated that they were independent contractors); Parrish, 917 F.3d
at 382 (finding control factor favored independent contractor status
where workers ``did not have to accept a project'' and occasionally
``turned down projects without negative repercussion''); Thibault,
612 F.3d at 847 (finding control factor favored independent
contractor status where ``supervisors would only come by
occasionally, and never specified how [the worker] should do the
[work]''); Express Sixty-Minutes Delivery, 161 F.3d at 303
(determining that the potential employer ``had minimal control''
over the delivery drivers where drivers ``set their own hours and
days of work,'' ``can work for other currier delivery systems,'' and
``can reject deliveries without retaliation'').
---------------------------------------------------------------------------

In contrast, the control factor would weigh in favor of
classification as an employee to the extent that a potential employer,
as opposed to the individual, exercises substantial control over key
aspects of the work, including through requirements that the individual
work exclusively for it during the working relationship or prohibiting
the individual from working for others after that relationship ends.
According to the proposed regulatory text, a potential employer may
exercise substantial control, for example, where it explicitly requires
an exclusive working relationship or where it imposes restrictions that
effectively prevent an individual from working with others. Cf. Keller,
781 F.3d at 814 (``[A] reasonable jury could find that the way that
[the potential employer] scheduled [the worker's] installation
appointments made it impossible for [the worker] to provide
installation services for other companies.''); Baker, 137 F.3d at 1441
(``[T]he hours [the workers] are required to work on a project (ten to
fourteen hours a day, six days a week), coupled with driving time
between home and often remote work sites each day, make it practically
impossible for them to offer services to other employers.''). However,
a ``non-disclosure agreement does not require exclusive employment.''
Parrish, 917 F.3d at 382; see also Talbert, 405 F. App'x at 85
(``[T]here is nothing in the confidential agreement that would have
precluded . . . working for other[s].'').
Proposed Sec. 795.105(d)(1)(i) clarifies that requiring an
individual to comply with specific legal obligations, satisfy health
and safety standards, carry insurance, meet contractually agreed-upon
deadlines or quality control standards, or satisfy other similar terms
that are typical of contractual relationships between businesses (as
opposed to employment relationships) does not constitute control that
makes the individual more or less likely to be an employee under the
Act. These requirements frequently apply to work performed by employees
and independent contractors alike; as such, they are not probative as
to whether a working relationship is one of employment or independent
contracting. The case law supports this approach. See, e.g., Iontchev,
685 F. App'x at 550 (noting that the potential employer's
``disciplinary policy primarily enforced the Airport's rules and [the
city's] regulations governing the [drivers'] operations and conduct''
in finding that the potential employer exercised ``relatively little
control over the manner in which the [d]rivers performed their work'');
Mid-Atl. Installation Servs., 16 F. App'x at 106 (rejecting an argument
that backcharging the workers ``for failing to comply with various
local regulations or with technical specifications demonstrates the
type of control characteristic of an employment relationship,'' and
noting that withholding money in such circumstances is common in
contractual relationships); Mr. W Fireworks, 814 F.2d at 1048 (finding
that, because a scheduling requirement was imposed by the potential
employer and not by state law, it suggested control over the workers).
In addition, this aspect of the Department's proposal is supported
by case law regarding FLSA joint employer status. For example, the
Second Circuit agreed that control with respect to ``contractual
warranties of quality and time of delivery has no bearing on the joint
employment inquiry'' because such control is ``perfectly consistent
with a typical, legitimate subcontracting relationship.'' Zheng v.
Liberty Apparel Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003).\36\
---------------------------------------------------------------------------

\36\ See also, e.g., Godlewska v. HDA, 916 F. Supp. 2d 246, 259
60 (E.D.N.Y. 2013), aff'd sub nom. Godlewska v. Human Dev. Ass'n,
Inc., 561 F. App'x 108 (2d Cir. 2014) (``Quality control and
compliance monitoring . . . are qualitatively different from control
that stems from the nature of the relationship between the employees
and the putative employer.'' (quotation marks omitted)); Jacobson v.
Comcast Corp., 740 F. Supp. 2d 683, 691-92 (D. Md. 2010) (holding
that the potential joint employer's ``quality control procedures . .
. [were] qualitatively different from the control exercised by
employers over employees''); Thornton v. Charter Commc'ns, LLC, No.
4:12CV479 SNLJ, 2014 WL 4794320, at *16 (E.D. Mo. Sept. 25, 2014)
(same).
---------------------------------------------------------------------------

Moreover, control exercised by a potential joint employer over a
contractor's employees to ``ensure compliance with various safety and
security regulations'' has been found to be ``qualitatively different''
from control that indicates employer status. Moreau v. Air France, 356
F.3d 942, 950-51 (9th Cir. 2003). Accordingly, the Department agrees
with the above case law that the types of control listed in the last
sentence of proposed Sec. 795.105(d)(1)(i) are ``qualitatively
different'' from control that evinces employer status. Moreau, 343 F.3d
at 1189; see also Iontchev, 685 F. App'x at 550; Mid-Atlantic
Installation Servs., 16 F. App'x at 106; Mr. W Fireworks, 814 F.2d at
1048; Freund, 185 F. App'x at 783. The Department welcomes comment
regarding this approach, including the distinction being drawn between
bona fide quality control measures and control that is indicative of an
employment relationship.
2. The ``Opportunity for Profit or Loss'' Factor
The second economic reality factor (proposed Sec.
795.105(d)(1)(ii)) is ``the individual's opportunity for profit or
loss.'' In analyzing this factor, courts generally consider whether
such opportunities are based on personal initiative, managerial skill,
or business acumen.\37\ The Second Circuit also considers the
individual's opportunity for profit or loss based on investments. See
Superior Care, 840 F.2d at 1060. The Department and courts of appeals
outside of the Second Circuit have traditionally analyzed ``opportunity
for profit or loss'' and ``investment'' as separate factors, but at
least some of those courts recognize that the two are ``interrelated.''
Lauritzen, 835 F.2d at 1537; see also McFeeley, 825 F.3d at 243. The
Department believes the Second Circuit's approach of combining the
factors is preferable because it minimizes duplicative analysis of the
same facts under different factors and aligns more closely with the
Supreme Court's original analysis in Silk, 331 U.S. at 717-19.
---------------------------------------------------------------------------

\37\ See, e.g., Karlson, 860 F.3d at 1094-95 (discussing how the
worker's decisions and choices regarding assignments and customers
affected his profits); Saleem, 854 F.3d at 145 (noting in support of
independent contractor status that the degree to which the worker's
relationship with the potential employer ``yielded returns was a
function . . . of the business acumen of each [worker]''); McFeeley,
825 F.3d at 243 (``The more the worker's earnings depend on his own
managerial capacity rather than the company's . . . the less the
worker is economically dependent on the business and the more he is
in business for himself and hence an independent contractor.'')
(internal quotation marks omitted); Express Sixty-Minutes, 161 F.3d
at 304 (agreeing with district court that ``driver's profit or loss
is determined largely on his or her skill, initiative, ability to
cut costs, and understanding of the courier business.''); WHD
Opinion Letter FLSA2019-6 at 6 (``These opportunities typically
exist where the worker receives additional compensation based, not
[merely] on greater efficiency, but on the exercise of initiative,
judgment, or foresight.'').
---------------------------------------------------------------------------

As explained in the need for rulemaking discussion in Section III,
treating ``opportunity for profit or loss'' and ``investment'' as
separate factors results in duplicative analysis of the same facts. For
example, in Mid-Atlantic Installation Services, the Fourth Circuit
found that the opportunity for profit or loss factor weighed in favor
of independent contractor status because the cable installer's ``net
profit or loss depends on [in part] . . . the business acumen with
which the Installer makes

[[Page 60614]]

his required capital investments in tools, equipment, and a truck.'' 16
F. App'x at 106. The court further held that the investment factor also
pointed in that direction based on those same facts, i.e., the
installers ``suppl[ied] their own trucks (equipped with 28-foot
ladders), specialized tools, uniforms, and pagers.'' Id. at 107. Such
duplicative analysis is unwieldly, and it can be potentially confusing
where the two factors analyzing the same facts reach opposite
conclusions regarding a worker's classification. See, e.g., Parrish,
917 F.3d at 382-85; Cromwell, 348 F. App'x at 61.
The Second Circuit avoids duplication and potential confusion by
analyzing investment and opportunity for profit or loss together. Under
this approach, the worker's meaningful capital investments may evince
opportunity for profit or loss: ``[e]conomic investment, by definition,
creates the opportunity for loss, [and] investors take such a risk with
an eye to profit.'' Saleem, 854 F.3d at 145 n.29. But investment is not
the only way to satisfy this factor because workers who ``invest
little'' may nonetheless have an opportunity for profit through the
exercise of personal initiative. Meyer, 607 F. App'x at 121; accord
Parrish, 917 F.3d at 384-85; Express Sixty-Minutes, 161 F.3d at 304. In
short, meaningful investment is a sufficient but not necessary
dimension of the opportunity for profit or loss. See Lauritzen, 835
F.2d at 1540-41 (Easterbrook, J. concurring) (``[P]ossess[ing] little
or no physical capital . . . is true of many workers we would call
independent contractors. Think of lawyers, many of whom do not even own
books. The bar sells human capital rather than physical capital, but
this does not imply that lawyers are `employees' of their clients under
the FLSA.''); see also Faludi, 950 F.3d at 275 (``Faludi provided his
own phone and computer'' and ``made investments in his continuing
education and home office equipment'').
The Second Circuit's approach of combining opportunity for profit
or loss and investment is also more faithful to the Supreme Court's
original analysis in Silk. See 331 U.S. at 716. In that case, the Court
listed the two factors separately but analyzed them together. In
particular, the Court found that coal unloaders were employees because
they had ``no opportunity to gain or lose except from the work of their
hands and [ ] simple tools,'' while truck drivers who invested in their
own vehicles had ``opportunity for profit from sound management'' of
that investment by, for instance, hauling for different customers. Id.
at 719. Thus the question is whether workers are more like unloaders
whose profits were based solely on ``the work of their hands and [ ]
simple tools'' or the drivers whose profits depended on their
initiative and investments. See id.; see also Rutherford Food, 331 U.S.
at 730 (concluding that workers were employees in part because their
opportunity for profit ``was more like piecework than an enterprise
that actually depended for success upon the initiative, judgment or
foresight of the typical independent contractor'').
Not all courts follow the Second Circuit and the Supreme Court's
approach of analyzing investment through the lens of profit and loss.
Some, for instance, ``use[ ] a side-by-side comparison method'' that
directly ``compare[s] `each worker's individual investment to that of
the alleged employer.' '' Parrish, 917 F.3d at 383 (quoting Hopkins,
545 F.3d at 344); see also, e.g., Keller, 781 F.3d at 810 (agreeing
that ``courts must compar[e] the worker's investment in the equipment
to perform his job with the [potential employer's] total investment'').
In Hopkins, for example, the Fifth Circuit held that insurance sales
leaders' investments were insignificant because ``it is clear that [the
insurance company's] investment--including maintaining corporate
offices, printing brochures and contracts, providing accounting
services, and developing and underwriting insurance products--outweighs
the personal investment of any one Sales Leader.'' 545 F.3d at 344.
But such a ``side-by-side comparison method'' does not illuminate
the ultimate question of economic dependence. See Karlson, 860 F.3d at
1096 (``[C]omparing the amount Karlson spent . . . with [potential
employer's] total expenses in operating APS has little relevance . . .
[because] [l]arge corporations can hire independent contractors, and
small businesses can hire employees.''). Indeed, it merely highlights
the obvious and unhelpful fact that individual workers--whether
employees or independent contractors--likely have fewer resources than
businesses that, for example, ``maintain[ ] corporate offices,'' see
Hopkins, 545 F.3d at 344, or drill oil wells, see Parrish, 917 F.3d at
383 (``Obviously, [the oil drilling company] invested more money at a
drill site compared to each plaintiff's investments.''). In contrast,
analyzing investment as part of individuals' opportunity for profit or
loss illuminates the ultimate inquiry of whether individuals are ``more
closely akin to wage earners toiling for a living, than to independent
entrepreneurs seeking a return on their risky capital investments.''
Mr. W. Fireworks, 814 F.2d at 1051.
The Department is therefore proposing to adopt an approach similar
to that of the Second Circuit, which analyzes the worker's investment
as part of the opportunity for profit or loss factor. The combined
factor would weigh towards the individual being classified as an
independent contractor if he or she has an opportunity for profit or
loss based on either or both: (1) The exercise of personal initiative,
including managerial skill or business acumen; and/or (2) the
management of investments in, or capital expenditure on, for example,
helpers, equipment, or material. While the effects of the individual's
exercise of initiative and management of investment are both considered
under this factor, for reasons explained above, the individual would
not need to have an opportunity for profit or loss based on both for
this factor to weigh towards the individual being an independent
contractor. This factor would weigh towards the individual being an
employee to the extent the individual is unable to affect his or her
earnings through initiative or investment or is only able to do so by
working more hours or more efficiently.\38\
---------------------------------------------------------------------------

\38\ Workers who are paid on a piece-rate basis are an example
of workers who are able to affect their earnings only through
working more hours or more efficiently. Courts have generally agreed
that such workers lack meaningful opportunity for profit or loss.
See, e.g., Whitaker House, 366 U.S. at 33 (plaintiffs who
manufactured knitted goods at home were employees under the FLSA, in
part, because ``[t]he management fixes the piece rates at which they
work''); Hodgson v. Cactus Craft of Arizona, 481 F.2d 464, 467 (9th
Cir. 1973) (persons who manufacture novelty and souvenir gift items
at homes and were compensated at a piece rate were employees under
the FLSA). In DialAmerica, 757 F.2d at 1385, for example, the Third
Circuit held that homeworkers who were paid on a piece-rate basis to
perform the simple service of researching telephone numbers were
employees who lacked meaningful opportunity for profit or loss. In
contrast, distributors who recruited and managed researchers and
were paid based on the productivity of those they managed were
independent contractors, in part, because distributors' earnings
depended on ``business-like initiative.'' Id. at 1387.
---------------------------------------------------------------------------

The Department also considered keeping opportunity for profit or
loss and investment as separate factors in its proposal, but believes
that approach may be needlessly duplicative and confusing for reasons
stated above. If investment were kept as a separate factor, the
Department would emphasize that the factor should not reconsider
opportunity for profit or loss. Instead, it would focus on whether a
worker's investment (or lack thereof) in the equipment, materials,
technology, etc. necessary to perform the worker's work

[[Page 60615]]

renders the worker more or less economically dependent on the potential
employer for work. The Department welcomes comments on this alternative
approach.
3. The ``Skill Required'' Factor
``The amount of skill required for the work'' is an economic
reality factor under proposed Sec. 795.105(d)(2)(i). The Supreme Court
articulated the ``skill required'' factor in Silk, 331 U.S. at 716,
which several courts of appeals continue to consider as ``the degree of
skill required to perform the work.'' Paragon, 884 F.3d at 1235; see
also Iontchev, 685 F. App'x at 550; Keller, 781 F. 3d at 807. The
Department and other courts of appeals, however, have traditionally
expanded this factor to include consideration of ``initiative'' and
``judgment.'' See, e.g., Parrish, 917 F.3d at 379; Karlson, 860 F.3d at
1093; Superior Care, 840 F.2d at 1058-59; see also WHD Fact Sheet #13.
This expansion was intended to increase the probative value of the
skill factor by analyzing therein the worker's capacity to ``exercise
significant initiative within the business.'' See Parrish, 917 F.3d at
379; see also Selker Bros., 949 F.2d at 1295 (``[T]he use of special
skills is not itself indicative of independent contractor status,
especially if the workers do not use those skills in any independent
way.''); Superior Care, 840 F.2d at 1060 (same). But the worker's
capacity to exercise on-the-job initiative is already analyzed in
multiple ways under the control factor, including, for example, whether
the worker controls the means and manner of work, decides when to work,
or choice of assignments. Express Sixty-Minutes, 161 F.3d at 304. And
the effects of a worker's initiative are already analyzed as part of
the opportunity for profit or loss factor. Id.
As explained in the need for rulemaking discussion in Section III,
importing aspects of the control factor into the skill factor has
diluted the consideration of actual skill to the point of near
irrelevance. In many cases, analysis of control rather than skill
drives whether the skill factor favors independent contractor or
employee status. See, e.g., Selker Bros., 949 F.2d at 1295; Baker, 137
F.3d at 1443; Superior Care, 840 F.2d at 1060. The Department believes
such dilution generates confusion regarding the relevance and weight of
the worker's skill in the evaluation of economic dependence. It also
blurs the lines between the economic reality factors, thereby
undermining the structural benefits of a multifactor test. Furthermore,
as at least one court of appeals has found, workers can exercise enough
initiative to have a meaningful opportunity for profit or loss but
apparently not enough to satisfy the ``skill and initiative required''
factor. Express Sixty-Minutes, 161 F.3d at 304-05. This calls into
question the relevance of initiative as part of a separate skill
factor.
The Department therefore proposes to clarify that this factor
should focus on the ``amount of skill required,'' as originally
articulated by the Supreme Court in Silk, 331 U.S. at 716, and used
today by several courts of appeals, see, e.g., Paragon, 884 F.3d at
1235; Iontchev, 685 F. App'x at 550; Keller, 781 F.3d at 807. Notably,
this factor would not include a consideration of ``initiative'' (or the
related concepts of judgment and foresight) because facts related to
initiative are considered as part of the control and opportunity for
profit or loss factors. Proposed Sec. 795.105(d)(2)(i) thus explains
that the ``skill required'' factor weighs in favor of classification as
an independent contractor where the work at issue requires specialized
training or skill that the potential employer does not provide.
Otherwise, it weighs in favor of classification as an employee.
The Department believes that this approach would sharpen the
distinction between the economic reality factors by focusing on skill,
as opposed to aspects of control. The worker's ability to exercise
initiative would remain more important than the presence of skill
because it would be analyzed under the control factor, a core factor
that would be given more weight than the skill factor. And the effect
of the worker's initiative would be analyzed under the opportunity for
profit or loss factor, another core factor that would be given more
weight. The Department considered keeping initiative as an aspect of
the skill factor, but believes that such an approach may be needlessly
duplicative and confusing for the reasons stated above. The Department
welcomes comment on this alternative approach.
4. The ``Permanence of the Working Relationship'' Factor
``The degree of permanence of the working relationship between the
individual and the potential employer'' is an economic reality factor
under proposed Sec. 795.105(d)(2)(ii). Courts and the Department
routinely consider this factor when applying the economic reality
analysis under the FLSA to determine employee or independent contractor
status. See, e.g., WHD Opinion Letter FLSA2019-6 at 4; Razak, 951 F.3d
at 142; Hobbs, 946 F.3d at 829; Karlson, 860 F.3d at 1092-93; McFeeley,
825 F.3d at 241; Keller, 781 F.3d at 807; Scantland, 721 F.3d at 1312.
However, they sometimes redundantly analyze the exclusivity of the
working relationship as part of the permanence factor. The control
factor already considers whether a worker has freedom to pursue
external opportunities by working for others, including a potential
employer's rivals. See, e.g., Freund, 185 F. App'x at 783 (affirming
district court's finding that ``Hi-Tech exerted very little control
over Mr. Freund,'' in part, because ``Freund was free to perform
installations for other companies'').\39\ The same concept of
exclusivity is then re-analyzed as part of the permanence factor.
Compare id. (``Freund's relationship with Hi-Tech was not one with a
significant degree of permanence . . . [because] Freund was able to
take jobs from other installation brokers.''), with Scantland, 721 F.3d
at 1319 (finding installation technicians' relationships with the
potential employer were permanent because they ``could not work for
other companies'').
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\39\ In addition, the opportunity for profit or loss factor
considers whether a worker's decisions to work for others affects
profits or losses. See, e.g., Freund, 185 F. App'x at 783 (affirming
the district court's finding that the ``looseness of the
relationship between Hi-Tech and Freund permitted him great ability
to profit,'' in part, because ``Freund could have accepted
installation jobs from other companies.''). The Department does not
believe this consideration overlaps with the control factor. While
the control factor concerns the ability to work for others, the
opportunity for profit or loss factor concerns the effects of doing
so.
---------------------------------------------------------------------------

Such duplicative analysis of exclusivity under the permanence
factor is not supported by the Supreme Court's original articulation of
that factor in Silk. See 331 U.S. at 716 (analyzing the ``regularity''
of unloaders' work); id. at 719 (analyzing truck drivers' ability to
work ``for any customer'' as an aspect of ``the control exercised'' but
not permanence); see also 12 FR 7967 (describing the permanence factor
as pertaining to ``continuity of the relation'' but with no reference
to exclusivity). Nor is the concept of exclusivity part of the common
understanding of the word ``permanent.'' \40\ In a similar vein to the
Department's analysis of the concept of initiative, the Department
believes analysis of exclusivity as part of the permanence factor
dilutes the significance of actual permanence within that factor, blurs
the lines between the economic reality factors,

[[Page 60616]]

and creates confusion by incorporating a concept that is distinct from
permanence.
---------------------------------------------------------------------------

\40\ See Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/permanent (defining permanent as ``continuing
or enduring without fundamental or marked change''); see also Oxford
American Dictionary 1980 (defining permanent as ``lasting or meant
to last indefinitely''); Merriam-Webster Pocket Dictionary 1947
(defining permanent as ``Lasting; enduring'').
---------------------------------------------------------------------------

Because the worker's ability to work for others is already analyzed
as part of the control factor, proposed Sec. 795.105(d)(2)(ii)
articulates the permanence factor without referencing the exclusivity
of the relationship between the worker and potential employer. This
proposal does not require any changes to the articulation of this
factor because the current articulation, i.e., ``the permanency of the
working relationship,'' provides no hint that exclusivity is also
considered. This approach would focus the permanence factor on the
continuity and duration of the working relationship, which align both
with how the factor was originally articulated and with the plain
meaning of ``permanence.'' The permanence factor would weigh in favor
of an individual being classified as an independent contractor where
his or her working relationship with the potential employer is by
design definite in duration or sporadic. In contrast, the factor would
weigh in favor of classification as an employee where the individual
and the potential employer have a working relationship that is by
design indefinite in duration or continuous. The Department notes that
the seasonal nature of some jobs does not necessarily suggest
independent contractor classification, especially where the worker's
position is permanent for the duration of the relevant season and where
the worker has done the same work for multiple seasons. See Paragon
Contractors, 884 F.3d at 1236-37.
The Department also considered keeping exclusivity as part of this
factor but changing the articulation to ``permanence and exclusivity of
the working relationship'' to be more accurate. However, the Department
believes that such an approach may be needlessly duplicative and
confusing for the reasons stated above. The Department welcomes
comments on this alternative approach.
5. The ``Integrated Unit'' Factor
The Department and courts outside of the Fifth Circuit have
typically articulated the sixth factor of the economic reality test as
``the extent to which services rendered are an integral part of the
[potential employer's] business.'' WHD Fact Sheet #13. Under this
articulation, the ``integral part'' factor considers ``the importance
of the services rendered to the company's business.'' McFeeley, 825
F.3d at 244. In line with this thinking, courts generally state that
this factor favors employee status if the work performed is so
important that it is central to or at ``[t]he heart of [the potential
employer's] business.'' Werner v. Bell Family Med. Ctr., Inc., 529 F.
App'x 541, 545 (6th Cir. 2013); see also Baker, 137 F.3d at 1443
(``[R]ig welders' work is an important, and indeed integral, component
of oil and gas pipeline construction work.''); Lauritzen, 835 F.2d at
1537-38 (``[P]icking the pickles is a necessary and integral part of
the pickle business[.]''); DialAmerica, 757 F.2d at 1385 (``[W]orkers
are more likely to be `employees' under the FLSA if they perform the
primary work of the alleged employer.'').
The Department is concerned that this focus on importance or
centrality departs from the Supreme Court's original articulation of
the economic reality test, has limited probative value regarding the
ultimate question of economic dependence, and may be misleading in some
instances. As such, proposed Sec. 795.105(d)(2)(iii) would clarify
that the ``integral part'' factor should instead consider ``whether the
work is part of an integrated unit of production,'' which aligns with
the Supreme Court's analysis in Rutherford Food, 331 U.S. at 729. As
explained earlier, the ``integral part'' factor was not one of the
distinct factors identified in Silk as being ``important for
decision.'' 331 U.S. at 716.\41\ Nor was the importance of the work
discussed in Rutherford Food as one of the distinct considerations.
Instead, Rutherford Food observed that the work at issue was ``part of
an integrated unit of production'' in the potential employer's business
and concluded that workers were employees in part because they
``work[ed] alongside admitted employees of the plant operator at their
tasks.'' 331 U.S. at 729. The 1947 proposed Treasury regulations under
the Social Security Act articulated the sixth factor of the economic
reality test in line with Rutherford Food's ``integrated unit''
discussion as: ``[i]ntegration of the individual's work in the
businesses to which he renders services,'' which concerned ``the merger
of the individual's services into the businesses, so that such services
constitute a part of the unity or whole which comprise such business.''
12 FR at 7966-67.
---------------------------------------------------------------------------

\41\ Silk did ask whether workers themselves were ``an integral
part of [defendants'] businesses,'' as opposed to operating their
own businesses, but that question was presented as the ultimate
economic reality inquiry, as opposed to a factor to be weighed in
that analysis. 331 U.S. at 716.
---------------------------------------------------------------------------

The word ``integral'' can mean either very important or
integrated.\42\ As some courts recognize, a worker can perform services
that are important to a business without being integrated, meaning
merged, into that business's operations. See, e.g., Green v. Premier
Telecomm. Servs., LLC, No. 1:16-CV-0332-LMM, 2017 WL 4863239, at *14
(N.D. Ga. Aug. 15, 2017) (``While certainly Plaintiff performing his
job was integral to Premier's bottom-line, unlike in Rutherford,
Plaintiff did not perform one step in an integrated system.''). Federal
courts of appeals typically considered integration of worker into the
potential employer's production process until the 1970s. See, e.g.,
Driscoll, 603 F.2d at 754 (``Appellants' activities appear to be an
integral part of Driscoll's strawberry growing operation, rather than
an independently viable enterprise.''); Mednick v. Albert Enterprises,
Inc., 508 F.2d 297 (5th Cir. 1975) (asking whether the service ``was [
]an integrated part of the business of [a potential employer] in the
same way as the work of the meat boners in Rutherford.''); Tobin v.
Anthony-Williams Mfg. Co., 196 F.2d 547, 550 (8th Cir. 1952) (``The
haulers and woods workers here are such an integrated part of
defendant's production.'').\43\ Starting in the 1980s, courts instead
began to analyze whether the work is important to the potential
employer. See, e.g., Lauritzen, 835 F.2d 1529, 1534-35; DialAmerica
Mktg., 757 F.2d at 1386.
---------------------------------------------------------------------------

\42\ Compare, e.g., Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/integral (defining
integral as ``necessary and important'') with Merriam-Webster
Dictionary, https://www.merriam-webster.com/dictionary/integral
(defining ``integral'' as ``formed as a unit with another part'');
see also Merriam Webster Pocket Dictionary 1947 (defining integral
as either ``Needed for completeness'' or ``Composed of parts that
make up a whole'').
\43\ The Department has generally used ``integral'' rather than
``integrated'' in its subregulatory guidance since the 1950s. See
WHD Opinion Letter (Aug. 13, 1954); WHD Opinion Letter (Feb. 8,
1956). A 2002 opinion letter interpreted the factor to focus on the
importance of the work, explaining that ``[w]hen workers play a
crucial role in a company's operation, they are more likely to be
employees than independent contractors.'' WHD Opinion Letter, 2002
WL 32406602, at *3 (Sept. 5, 2002). However, the Department's most
recent opinion letter on this subject characterized the factor as
``the extent of the integration of the worker's services into the
potential employer's business.'' WHD Opinion Letter FLSA2019-6 at 6
(emphasis added).
---------------------------------------------------------------------------

Focusing on whether an individual's work is important to a
potential employer has questionable probative value regarding the issue
of economic dependence, and may even be counterproductive in some
cases. Judge Easterbrook's Lauritzen concurrence argued that asking
whether work is integral ``has neither significance nor

[[Page 60617]]

meaning'' because ``[e]verything the employer does is `integral' to its
business--why else do it?'' 835 F.2d at 1541 (Easterbrook, J.
concurring) (emphasis in original); see also Zheng, 355 F.3d at 73
(cautioning in the joint employer context that interpreting the factor
to focus on importance ``could be said to be implicated in every
subcontracting relationship, because all subcontractors perform a
function that a general contractor deems `integral' to a product or a
service'') (emphasis in original). Some courts have explained that ``a
worker who performs a routine task that is normal and integral to the
putative employer's business is likely to be dependent on the
defendant's overall enterprises.'' Beck v. Boce Grp., L.C., 391 F.
Supp. 2d 1183, 1192 (S.D. Fla. 2005); see also Charles v. Burton, 169
F.3d 1322, 1332-33 (11th Cir. 1999) (same). This explanation, however,
may be flawed: If certain workers perform tasks that are important to a
business, the logical inference is that the business is dependent on
those workers--not the reverse. Put differently, the relative
importance of the worker's task to the business of the potential
employer says nothing about whether the worker economically depends on
that business for work.
Other courts have explained that ``it is presumed that, with
respect to vital or integral parts of the business, the employer will
prefer to engage an employee rather than an independent contractor.
This is so because the employer retains control over the employee and
can compel attendan[ce] at work on a consistent basis.'' Dataphase, 781
F. Supp. at 735; see also Barnard Const., 860 F. Supp. at 777, aff'd
sub nom. Baker v. Flint Eng'g & Const. Co., 137 F.3d 1436 (10th Cir.
1998) (same). But the control factor already directly analyzes whether
a business can compel a worker to work on a consistent basis. See,
e.g., Nieman, 775 F. App'x at 625 (``The first factor--control--weighs
in favor of independent contractor status because Nieman . . .
controlled his schedule.''). It is unclear why there is a need to
indirectly analyze control by presuming a relationship between vital or
integral services and control. Nor is it clear that such presumption
survives scrutiny because businesses appear to routinely hire
independent contractors over whom they exercise little control to
perform vital or integral services.\44\ Indeed, as transaction costs
fall, as is the trend in many sectors of the economy,\45\ firms become
more willing to hire independent contractors for vital or integral
tasks, further diminishing the probative value of the importance of the
work.
---------------------------------------------------------------------------

\44\ See, e.g., Iontchev, 685 F. App'x at 551; Meyer, 607 F.
App'x at 123; Freund, 185 F. App'x at 784; Mid-Atl. Installation
Servs., Inc., 16 F. App'x at 107.
\45\ See, e.g., L. Katz and A. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,'' p.
25 (2018) (``Coase's (1937) classic explanation for the boundary of
firms rested on the minimization of transaction costs within firm-
employee relationships. Technological changes may be reducing the
transaction costs associated with contracting out job tasks,
however, and thus supporting the disintermediation of work.'').
---------------------------------------------------------------------------

Focusing on the importance of work can sometimes send misleading
signals regarding economic dependence. For instance, some courts have
explained that ``easily replaceable'' workers are less integral to a
business, and therefore, are less dependent on that business. Browning
v. Ceva Freight, LLC, 885 F. Supp. 2d 590, 610 (E.D.N.Y. 2012); see
also Velu v. Velocity Exp., Inc., 666 F. Supp. 2d 300, 307 (E.D.N.Y.
2009) (observing that integrality to business diminished where ``work
is interchangeable with the work of other[s]''). But the workers in
Rutherford Food were also ``easily replaceable'' precisely because they
were ``part of the integrated unit of production'' of a slaughterhouse
processing line, which in turn indicated they were employees. 331 U.S.
at 729. More often than not, easily replaceable workers are more
dependent on that business for work--not less. Thus, focusing on the
worker's importance to a business under the ``integral part'' factor
may obscure rather than illuminate the ultimate economic dependence
inquiry.
Finally, analyzing the importance of work under the ``integral
part'' factor may send misleading signals due to the increasing
difficulty of defining important or core functions of a growing number
of intermediary companies whose main activity is ``selling reductions
in transaction costs.'' \46\ By one view, the core functions of a
company that connects service providers to customers might be the
service being provided. See O'Connor v. Uber Techs., Inc., 82 F. Supp.
3d 1133, 1153 (N.D. Cal. 2015) (``[D]rivers perform a regular and
integral part of Uber's business[.]''). But in another view, such a
company's core services might be connecting service providers and
customers.\47\ See Razak, 951 F.3d at 147 n. 12 (``We also believe
[there] could be a disputed material fact'' whether Uber is ``a
technology company that supports drivers' transportation businesses,
and not a transportation company that employs drivers.''). Under this
view, the intermediary company's ``business operations effectively
terminate at the point of connecting service providers to consumers and
do not extend to the service provider's actual provision of services.''
WHD Opinion Letter FLSA2019-6 at 10. While intermediary companies are
more prevalent in the virtual marketplace, they are not limited to that
context.\48\ For instance, health care brokers may be intermediaries
that are in the business of connecting health care providers to health
care consumers. See State Dep't of Employment, Training & Rehab.,
Employment Sec. Div. v. Reliable Health Care Servs. of S. Nevada, Inc.,
983 P.2d 414, 419 (Nev. 1999) (``[W]e cannot ignore the simple fact
that providing patient care and brokering workers are two distinct
businesses.'').
---------------------------------------------------------------------------

\46\ See Michael Munger, Tomorrow 3.0: Transaction Costs and the
Sharing Economy, 51 (2018).
\47\ See id. at 61 (``The middleman makes possible transactions
that otherwise could not take place . . . [by] selling transaction
cost reduction[.]'').
\48\ See id. at 125 (``The idea of a `gig economy' is old, but
the possibility of serial short term employment or `gigs' are
expanding rapidly'' because ``entrepreneurs have found [new] ways to
sell reductions in transaction costs.'').
---------------------------------------------------------------------------

Analyzing the importance of services to a potential employer often
first requires characterizing the potential employer's business as
either an intermediary or a direct provider of services. But that
characterization, in turn, requires answering the economic dependence
question. If a potential employer is an intermediary company that
merely connects service providers with customers, those service
providers would have distinct businesses of their own. WHD Opinion
Letter FLSA2019-6 at 10. As such, they would not be a part, let alone
an essential or important part, of the potential employer's business.
Analyzing the importance of services to evaluate economic dependence
thus becomes a circular exercise. The factor considers whether workers'
services are an important part of the potential employer's business to
answer the ultimate inquiry of whether workers provide services as part
of their own distinct businesses. See Silk, 331 U.S. at 716 (asking
whether workers were ``an integral part of [defendants'] businesses,''
as opposed to operating their own businesses, as the ultimate inquiry,
rather than a discrete factor to be weighed).
For these reasons, proposed Sec. 795.105(d)(2)(iii) would
rearticulate the ``integral part'' factor in accordance with the
Supreme Court's original inquiry in Rutherford Food of whether the work
was ``part of the integrated unit of production,'' with an emphasis

[[Page 60618]]

that the factor is different from the concept of importance or
centrality. Courts that have applied the ``integral part'' factor to
analyze integration rather than importance have typically grounded this
factor to the specific circumstances in Rutherford Food. The Second
Circuit, for example, recognized in a joint employer case that this
factor was derived from the Supreme Court's focus on the fact that the
Rutherford Food plaintiffs ``did a specialty job on the production
line,'' and thus limited this factor's application to the production
line or an analogous context. Zheng, 355 F.3d at 73 (``[W]e construe
Rutherford to mean that work on a production line occupies a special
status under the FLSA[.]''); see also Antenor v. D & S Farms, 88 F.3d
925, 937 (11th Cir. 1996) (asking whether workers ``were analogous to
employees working at a particular position on a larger production
line''); Mednick, 508 F.2d at 300 (analyzing whether the service ``was
[ ]an integrated part of the business of [a potential employer] in the
same way as the work of the meat boners in Rutherford''); Green, 2017
WL 4863239, at *14 (``[U]nlike in Rutherford, Plaintiff did not perform
one step in an integrated system. He was not dependent on Premier's
overall process to execute his duties.'').
Proposed Sec. 795.105(d)(2)(iii) thus focuses the ``integrated
unit'' factor on whether an individual works in circumstances analogous
to a production line. This factor weighs in favor of employee status
where a worker is a component of a potential employer's integrated
production process, whether for goods or services. The overall
production process need not be a physical assembly line, but it must be
an integrated process that requires the coordinated function of
interdependent subparts working towards a specific unified purpose.\49\
This may occur where the worker depends on the overall process to
perform work duties, such as, for example, a programmer who works on a
software development team. See Antenor, 88 F.3d at 937 (finding
farmworkers ``were dependent on the growers' overall production
process''). Another example would be where an individual works closely
alongside conceded employees and performs identical or closely
interrelated tasks as those employees, such as where an individual
provides office cleaning services as part of a team of employees.
---------------------------------------------------------------------------

\49\ The unified purpose must be defined with specificity and
thus would not include general business objectives such as
increasing profits, cutting costs, or satisfying customer's needs.
---------------------------------------------------------------------------

Conversely, if the individual's work is not integrated into the
potential employer's production process, the factor would favor
classification as an independent contractor. This includes where an
individual service provider is able to perform his or her duties
without depending on the potential employer's production process.
Green, 2017 WL 4863239, at *14 (``[U]nlike in Rutherford, [residential
cable installer] . . . was not dependent on Premier's overall process
to execute his duties.''). Thus, performance of discrete, segregable
services for individual customers is not part of an integrated unit of
production. See WHD Opinion Letter FLSA 2019-6 at 11 (concluding that
the workers who provide services to the virtual marketplace company's
individual customers ``are not integrated into [the company]'s referral
business''). The Department welcomes comments on this approach to the
``integrated unit'' factor.
The Department considered removing the ``integral part'' factor
instead of rearticulating it as the above-described ``integrated unit''
factor, in part, out of concern that the ``integrated unit'' factor may
have limited applicability in the modern economy. However, the
Department believes that the ``integrated unit'' factor described above
would be applicable in sufficient cases to warrant its listing as an
economic reality factor. The Department also welcomes comments on this
alternative approach to remove this factor and instead focus the
economic reality test on four factors.
6. Affording Greater Weight to the Two Core Factors
Proposed Sec. 795.105(c) explains that the two core factors--i.e.,
control and opportunity for profit or loss--are each afforded more
weight in the analysis of economic dependence than are any of the
others. As a result of their greater weight, if both core factors point
towards the same classification, their combined weight is substantially
likely to outweigh the combined weight of other factors that may point
towards the opposite classification. In other words, where the two core
factors align, the bulk of the analysis is complete. Anyone who is
assessing the classification--whether a business, a worker, the
Department, a court, or a jury--may approach the remaining factors and
circumstances with skepticism, as only in unusual cases may such
considerations outweigh the combination of the two core factors. At the
same time, if the two core factors do not point toward the same
classification, the remaining enumerated factors will usually determine
the correct classification. The discussion below explains in greater
detail why Department's proposes to focus the economic reality test on
the two core factors in Sec. 795.105(d)(1) over the other factors
listed in Sec. 795.105(d)(2) and any additional factors that may be
considered.
The Department proposes a focus on the two core factors in light of
the sharpened articulation of economic dependence in proposed Sec.
795.105(b). The Supreme Court cautioned that control is not the sole
consideration, see Rutherford Food, 331 U.S. at 730, but it did not
deny that factor's significance in the analysis. Indeed, the Court
recognized that, ``[o]bviously control is characteristically associated
with the employer-employee relationship,'' Bartels, 332 U.S. at 130.
And the opportunity for profit and loss factor is more closely tied to
the concept of economic dependence than any other factors because it is
a necessary component of being in business for oneself. As the D.C.
Circuit observed in an NLRA case, `` `significant entrepreneurial
opportunity for gain or loss' . . . [even] better captures the
distinction between an employee and an independent contractor'' than
control. Corporate Exp. Delivery Sys. v. NLRB, 292 F.3d 777, 780
(2002); see also FedEx Home Delivery, 563 F.3d at 497. Together, these
two factors shape the economic dependence inquiry of ``whether the
individual is, as a matter of economic reality, in business for
himself.'' Parrish, 917 F.3d at 379. In ordinary circumstances, an
individual ``who is in business for him- or herself'' will have
meaningful control over the work performed and a meaningful opportunity
to profit (or risk loss). In sum, it is not possible to properly assess
whether workers are in business for themselves or are instead dependent
on another's business without analyzing their control over the work and
profit or loss opportunities.
While the Supreme Court established a multifactor approach to the
question of employee versus independent contractor status, it did not
require all factors to be treated equally. To the contrary, focusing on
the control and opportunity for profit or loss factors is supported by
the reasoning in Silk, 331 U.S. at 316, and Whitaker House, 366 U.S. at
32-33, the latter of which is the only post-Rutherford Food Supreme
Court decision analyzing whether workers were employees or independent
contractors under the FLSA. Silk held that coal unloaders were
employees in the SSA context based on their lack of meaningful
opportunity for profit or loss, and further recognized that the

[[Page 60619]]

lack of permanence was not significant. 331 U.S. at 317-18. The Court
further held that truck drivers in that case were independent
contractors because of ``the control [they] exercised [and] the
opportunity for profit from sound management,'' without discussing any
of the other economic reality factors. Id. at 319.
In Whitaker House, the Court concluded that homeworkers who were
paid on a piece-rate basis to produce knitted goods were employees, as
opposed to being ``self-employed'' or ``independent.'' 366 U.S. at 32-
33. While the Court reaffirmed that `` `economic reality' rather than
`technical concepts' is to be the test for employment,'' id. at 33
(citing Silk, 331 U.S. at 713, and Rutherford Food, 331 U.S. at 729),
it did not analyze any of the specific factors that are part of the
current economic realty test. Instead, the Whitaker House Court's
conclusion was based on the facts that the homeworkers could not
``sell[ ] their products on the market for whatever price they can
command'' and were instead ``regimented under one organization,
manufacturing what the organization desires and receiving the
compensation the organization dictates.'' Id. at 32. In other words,
the Supreme Court's reasoning was based entirely on facts that related
to control (``regimented under one organization, manufacturing what the
organization desires'') and opportunity for profit (``selling their
products on the market for whatever price they can command'' versus
``receiving the [piece rate] compensation the organization dictates'').
The Court did not analyze any facts related to the workers' skill,
capital investment, permanence of relationship, or integration of the
work to the business.
Focusing on control and opportunity for profit or loss is further
supported by the results of federal courts of appeals cases weighing
the economic reality factors since 1975. In these cases, whenever the
court found (or affirmed a district court finding) that the potential
employer predominantly controlled the work, that court concluded that
the worker is an employee. See, e.g., Hobbs, 946 F.3d at 830-36; Verma,
937 F.3d at 230-32; Gayle v. Harry's Nurses Registry, Inc., 594 F.
App'x 714, 717-18 (2d Cir. 2014); Schultz v. Capital Int'l Sec., Inc.,
466 F.3d 298, 307-09 (4th Cir. 2006); Baker, 137 F.3d at 1440-44;
Martin, 949 F.2d at 1289. Conversely, whenever the court of appeals
found (or affirmed a district court finding) that the worker
predominantly controlled the work, that court nearly always concluded
that the worker is an independent contractor. See, e.g., Parrish, 917
F.3d at 379-388; Nieman, 775 F. App'x at 624-25 (per curiam); Saleem,
854 F.3d at 140-48; Iontchev, 685 F. App'x at 550-51; Barlow v. C.R.
England, Inc., 703 F.3d 497, 506-07 (10th Cir. 2012); Mid-Atl.
Installation Servs., 16 F. App'x at 106-08.
The few occasions where an appellate court's ruling on a worker's
classification was contrary to what the control factor indicated were
cases in which the other core factor--opportunity for profit or loss--
pointed in the opposite direction. For example, in Acosta v. Paragon
Contractors Corporation, the Tenth Circuit held that the control factor
``indicates status as an independent contractor'' because the defendant
``could set his own hours and determine how best to perform his job
within broad parameters.'' 884 F.3d 1225, 1235-36 (10th Cir. 2018). The
court nonetheless held that he was an employee, in part, because he
``was paid only a flat fee'' and therefore ``could not increase or
decrease his profits based on how well he did his job.'' Id. at 1236;
see also Cromwell, 348 F. App'x at 61 (concluding that the workers were
employees even though they ``controlled the details of how they
performed their work [and] were not closely supervised'' because, in
part, defendant's ``complete control over [their] schedule and pay[ ]
had the effect of severely limiting any opportunity for profit or
loss'').
This trend is also true, indeed even more so, for the opportunity
for profit or loss factor. Since 1975, virtually every time a circuit
court of appeals has found (or affirmed a district court finding) that
the potential employer predominantly determined the opportunities for
profit or loss, the court has concluded that the worker was an
employee. See, e.g., Hobbs, 946 F.3d at 832-36; Off Duty Police, 915
F.3d at 1059-1062; McFeeley, 825 F.3d at 243-44; Hopkins, 545 F.3d at
344-46; Baker, 137 F.3d at 1441-44; Snell, 875 F.2d at 808-812;
Superior Care, 840 F.2d at 1059-61. Conversely, if the court found (or
affirmed a district court finding) that the worker predominantly
determined the opportunities for profit or loss, the court concluded
that the worker was an independent contractor. See, e.g., Parrish, 917
F.3d at 384-88; Saleem, 854 F.3d at 140-48; Iontchev, 685 F. App'x at
550-51; Freund, 185 F. App'x at 783-84; Eberline v. Media Net, L.L.C.,
636 F. App'x 225, 228-29 (5th Cir. 2016); Mid-Atl. Installation Servs.,
16 F. App'x at 106-08. The opportunity for profit or loss factor as
proposed in this rulemaking should be even more probative than these
cases indicate because it would incorporate the probative value of the
facts regarding investment.\50\
---------------------------------------------------------------------------

\50\ Even if the Department were to keep opportunity for profit
or loss and investment as separate factors, the opportunity for
profit or loss factor would still be of primary importance. In the
above cited cases, the opportunity for profit or loss factor aligned
with the overall result of the case even where that factor did not
explicitly include consideration of the worker's investment. A
separate investment factor, however, would not be a core factor
because its importance is secondary compared to opportunity for
profit or loss. Federal courts of appeals have repeatedly concluded
that workers without meaningful investment in a business are
nonetheless independent contractors if they have meaningful
opportunity for profit or loss based on their initiative or business
acumen. See, e.g., Parrish, 917 F.3d at 382-85; Meyer, 607 F. App'x
at 123; Express Sixty-Minutes, 161 F.3d at 303-04. Conversely, where
the investment factor favors independent contractor classification
to some degree, workers may nonetheless be employees if they lack
such opportunity. See Cromwell, 348 F. App'x at 61. Thus, if
opportunity for profit or loss and investment were kept as separate
factors in a final rule, the Department would propose making
opportunity for profit or loss a core factor and investment a non-
core factor. The Department welcomes comments on this alternative
approach.
---------------------------------------------------------------------------

In summary, each of the two core factors is, by itself, highly
probative of a worker's economic dependence. Together, i.e., in cases
where they both indicate the same classification, they are
substantially likely to point to the answer of the classification
question--whether employee or independent contractor.
The Department's proposal is consistent with case law and adopting
a more focused approach. Many courts have analyzed all six factors (or
five depending on the circuit) on a factor-by-factor basis, even where
some factors were recognized as having limited relevance in a
particular context. See, e.g., Hobbs, 946 F.3d at 830-36; Off Duty
Police, 915 F.3d at 1055-1062; Nieman, 775 F. App'x at 624-25; Verma,
937 F.3d at 230-32; Snell, 875 F.2d at 805-12; Lauritzen, 835 F.2d at
1535-38; Mr. W Fireworks, 814 F.2d at 1047-55; DialAmerica, 757 F.2d at
1382-88; Donovan v. Sureway Cleaners, 656 F.2d 1368, 1370-73 (9th Cir.
1981). Several recent court opinions focus their analysis on just the
most relevant facts and factors to the case, thereby achieving
efficiency and clarity. In each such opinion, the most relevant factors
on which the court focused its attention were control and opportunity
for profit or loss. And to the extent that the court considered
elements of investment and initiative, such elements are part of the
control and opportunity for profit or loss factors under the
Department's proposal.
In Saleem, the Second Circuit did not engage in the same factor-by-
factor analysis as did the district court

[[Page 60620]]

regarding the black-car drivers, noting the economic reality ``factors
are merely aids to analysis.'' 854 F.3d at 138-39. Instead, the court
focused on the drivers' ``considerable discretion in choosing the
nature and parameters of their relationship with the defendant,''
``significant control over essential determinants of profits in [the]
business,'' how they ``invested heavily in their driving businesses,''
and the ``ability to choose how much work to perform,'' to conclude
that they were ``in business for themselves'' as independent
contractors. Id. at 139-47. In other words, Saleem primarily analyzed
facts pertaining to the drivers' control over their work and
opportunity for profit or loss based on initiative or investment, the
core factors under this proposed rule. In particular, the Second
Circuit explicitly questioned the relevance of the permanence factor in
light of the control factor, observing that ``whatever `the permanence
or duration' of Plaintiffs' affiliation with Defendants, both its
length and the `regularity' of work was entirely of Plaintiffs'
choosing,'' id. at 147 (citation omitted), and gave no consideration
whatsoever to the district court's findings, 52 F. Supp. 3d 526, 543
(S.D.N.Y. 2014), ``that driving is not a `specialized skill' and that
``drivers were integral to Defendants' business.''
The Second Circuit again focused on control and opportunity for
profit or loss in Agerbrink v. Model Service LLC by relying on several
disputed material facts (``control over her work schedule, whether she
had the ability to negotiate her pay rate, and, relatedly, her ability
to accept or decline work'') relating to those two factors to vacate
summary judgment. 787 F. App'x 22, 25-27 (2d Cir. 2019). The Third
Circuit took a similar approach in Razak v. Uber Technologies., Inc.,
which held that summary judgment was inappropriate because there were
genuine disputes of fact regarding ``whether Uber exercises control
over drivers'' and whether drivers have ``the opportunity for profit or
loss depending on managerial skill.'' 951 F.3d at 145-47.\51\ And the
Eighth Circuit recently affirmed a jury verdict that a process server
was an independent contractor, relying primarily on evidence relating
to the control and opportunity for profit or loss factors, including
the process server's ability to determine his own profits by
controlling hours, which assignments to take, and for which company to
work. See Karlson, 860 F.3d at 1095.
---------------------------------------------------------------------------

\51\ The Razak court also found a genuine dispute regarding
degree of permanence of the working relationship, but characterized
that dispute in one sentence solely as an issue of control, as
opposed to permanence of the relationship: ``On one hand, Uber can
take drivers offline, and on the other hand, Plaintiffs can drive
whenever they choose to turn on the Driver App, with no minimum
amount of driving time required.'' 951 F.3d at 147. In addition, the
court agreed with the district court that the skill factor
``certainly weighs in favor of finding that Plaintiffs are
employees.'' Id. Finally, the court acknowledged in a footnote that
``Uber strenuously disputes'' the district court's finding that the
``integral'' factor weighed in favor of employee status and
indicated that there could be disputed material facts relating to
this factor. Id. at n.12.
---------------------------------------------------------------------------

In summary, control and opportunity for profit or loss drive at the
heart of what it means to be an independent contractor who is in
business for oneself and are the most relevant factors in virtually
every case. As such, the Department believes focusing on these two as
the core factors would add much needed clarity and efficiency to the
economic reality test. The Department welcomes comments on this
approach, which departs from courts' and Department's previous practice
of not expressly identifying which types of facts or factors are the
most important.
7. The Other Factors
In contrast to the two core factors, the other factors listed in
Sec. 795.105(d)(2) relating to skill, permanence, and integration are
not always as probative to an inquiry into whether a worker is, as a
matter of economic reality, in business for him- or herself or
economically dependent on someone else for work. Rather, their
relevance varies depending on the circumstances. Moreover, relevant
aspects of the skill and permanence factors under the current test--
i.e., initiative and exclusivity, respectively--are already part of the
analysis with respect to the core factors. Since this rulemaking would
remove such confusing overlaps by removing initiative and exclusivity
from the skill and permanence factors, respectively, the probative
value of these two factors would become even more limited.
Skill factor. To be sure, some independent contractors in business
for themselves have ``some unique skill set[s].'' Parrish, 917 F.3d at
385. But many skills that count towards this factor are not necessarily
relevant to the question of economic dependence. In Scantland, for
instance, the Eleventh Circuit reasoned that the skill factor weakly
favored independent contractor status in part because ``a highly
trained technician could gain economic independence by the ability to
market his skills to a competing employer.'' Scantland, 721 at 1318.
But ``the ability to market oneself to a competing employer,'' without
more, does not help answer the ultimate question the Scantland court
was attempting to answer: ``whether an individual is in business for
himself or is dependent upon finding employment in the business of
others.'' Id. at 1312 (emphasis added).
Thus, the skill factor is over-inclusive to the extent it includes
skills that may merely enable a worker to find employment, but do not
indicate the worker is in business for him- or herself. Recognizing
this over-inclusiveness issue, some courts have explained that ``the
use of special skills is not itself indicative of independent
contractor status, especially if the workers do not use those skills in
any independent way.'' Selker Bros., 949 F.2d at 1295; see also
Superior Care, 840 F.2d at 1060. As discussed above, these courts made
the worker's capacity for initiative, a consideration under the control
factor in the Department's proposal, the most important aspect of the
skill factor. This proposed rule would remove initiative as a
consideration under the skill factor. Because capacity for initiative
is already a part of the control factor and the effect of initiative is
already a part of the opportunity for profit or loss factor, these
changes would thus cement the secondary importance of the skill factor.
The skill factor is also under-inclusive because it excludes
certain managerial and business skills that are highly probative as to
economic dependence. See Hopkins, 545 F.3d at 345 (``Certainly, the
Sales Leaders required a general set of skills to effectively manage
their offices and teams. However, these are not specialized skills;
they are abilities common to all effective managers.''). A pair of
cases involving drivers are illustrative in this regard. In Express
Sixty-Minutes Delivery, the Fifth Circuit recognized that a delivery
driver ``must rely on his own judgment, knowledge of traffic patterns
and road conditions . . . , ability to read [mapping software], and
ability to anticipate the need for an alternative route.'' 161 F.3d at
304. However, these did not constitute skill indicating independent
contractor status. See id. at 305 (``We agree with the Secretary that
the skill and initiative factor points toward employee status.'').
Nonetheless, the court ultimately found the drivers were independent
contractors, in part, because ``a driver's profit or loss is determined
largely on his or her skill, initiative, ability to cut costs, and
understanding of the courier business.'' Id. at 304. In other words,
the skill factor expressly excluded the precise attributes that gave
drivers an opportunity for profit, thereby

[[Page 60621]]

indicating their independent contractor status. Id. A similar omission
occurred in Iontchev, a case in which the Ninth Circuit concluded that
certain taxi drivers were independent contractors in part because the
``[d]rivers' opportunity for profit or loss depended upon their
managerial skill.'' 685 F. App'x at 550. But such managerial skill
evidently did not count towards the skill factor because the court
concluded that ``[t]he service rendered by the Drivers did not require
a special skill.'' Id.
The Department's proposal to deemphasize the skill factor as
compared to the core factors is supported by the statutory text and
case law. Employers can ``suffer and permit'' both skilled and non-
skilled individuals to perform work as employees, 29 U.S.C. 203(g), and
federal courts of appeals have routinely held that the presence of
specialized skill does not mean a worker is an independent contractor
if the worker lacks control over the work, an opportunity for profit or
loss, or both. See, e.g., Cromwell, 348 F. App'x at 60 (telecom
splicers); Superior Care, 840 F.2d at 1060 (nurses). Nor does the
absence of specialized skill mean a worker is an employee if the worker
otherwise has control over the work and an opportunity for profit or
loss. See, e.g., Express Sixty-Minutes Delivery, 161 F.3d at 304
(delivery workers); Iontchev, 685 F. App'x at 550 (taxi drivers).
Permanence factor. Under the current test, this factor concerns the
exclusivity and length of the relationship between the worker and the
potential employer. If this rule were finalized as proposed,
exclusivity of the relationship would be analyzed under the control
factor rather than the permanence factor to reduce confusing overlap
between factors. The permanence factor would consider the duration,
continuity, and regularity of the relationship.\52\
---------------------------------------------------------------------------

\52\ Even if the Department were to retain the analysis of
exclusivity under a newly named ``permanence and exclusivity''
factor, that factor would be of secondary importance. This is
because the most important part of the ``permanence and
exclusivity'' factor, i.e., exclusivity, would add no additional
probative value on top of what is already provided by the control
factor.
---------------------------------------------------------------------------

The Department believes that the remaining considerations that are
part of this factor--duration, continuity, and regularity--are relevant
to an economic reality analysis, though less so than the core factors.
Specifically, the length of relationship between a worker and a
potential employer has less relevance to the issue of economic
dependence than the core factors. To be sure, many independent
contractors who are in business for themselves lack a long-term
relationship with a single client because they work on ``a project-by-
project basis.'' See, e.g., Parrish 917 F.3d at 387. But that does not
mean independent contractors cannot have long-term working
relationships. To the contrary, the existence of a long-term
relationship has not prevented courts from finding workers to be
independent contractors, particularly when such workers control their
work and enjoy opportunities for profit or loss. See, e.g., Iontchev,
685 Fed. App'x at 550-51 (concluding that ``Drivers were not
economically dependent upon AAA Cab'' even though ``[t]he working
relationship was often lengthy''); Eberline, 636 F. App'x at 229
(concluding that installers were independent contractors even though
``the length of the relationship between the Defendants and the
installers was indefinite'' and ``no reasonable jury could have
concluded that [the permanence] factor favored independent contractor
status''); DialAmerica, 757 F.2d at 1387 (concluding that
``distributors were not employees under the FLSA because they operated
more like independent contractors'' even though ``many distributors did
perform delivery work for DialAmerica continuously for several
years'').
Nor does the absence of a long-term working relationship preclude a
finding of employee status. Workers who move from job to job or work
for short periods of time can still be economically dependent on an
employer. As the Second Circuit observed in Superior Care, ``even where
work forces are transient, the workers have been deemed employees where
the lack of permanence is due to operational characteristics intrinsic
to the industry rather than to the workers' own business initiative.''
840 F.2d at 1060-61. It is therefore unsurprising that federal courts
of appeals have held that workers who lack a permanent relationship
with a potential employer are nonetheless economically dependent if the
worker lacked control over the work and an opportunity for profit or
loss. See, e.g., Verma, 937 F.3d at 230-32; Reich v. Circle C.
Investments, Inc., 998 F.2d 324, 327-29 (5th Cir. 1993); Superior Care,
840 F.2d at 1060-61. Because it is often trumped by the core factors,
the proposed regulation gives less weight to the permanence of the
relationship.
Integrated unit factor. As discussed above, the applicability of
the ``integrated unit'' factor in proposed Sec. 795.105(d)(2)(iii) is
limited to the instances where a potential employer has an integrated
production process (including a service business). Given this limited
applicability, the Department believes the integrated unit factor is
entitled to less weight than the core factors.
In sum, the two core factors drive at the heart of the economic
dependence question because they bear a causal relationship with the
ultimate inquiry. A worker's control over the work and the opportunity
for profit or loss are generally what transforms him or her from being
economically dependent on an employer as a matter of economic reality
into being in business for him- or herself. This is not so with the
other factors. Possessing a specialized skill, having a temporary
working relationship, and not being part of an integrated unit of
production are certainly characteristics shared by many workers who are
in business for themselves. But they are often indicators rather than
essential elements of being in business for oneself.
Accordingly, the Department proposes to focus the economic reality
test on the two core factors. Instead of balancing six or so unweighted
and overlapping factors, a worker's classification as an employee or
independent contractor can be largely determined in many cases by two
simple questions: (1) Does the worker exercise substantial control over
the key aspects of the work; and (2) does the worker have an
opportunity for profit or a risk of loss based on initiative or
investment? If the answer to both is ``yes,'' the worker is most likely
an independent contractor. And if the answer to both is ``no,'' the
worker is most likely an employee. Other factors may also be probative
as part of the circumstances of the whole activity, but are less
important. They are especially relevant when the two core factors do
not point in the same direction or do not point strongly in either
direction. The Department believes this proposed approach would improve
the clarity and predictability of the economic reality test.
In the course of formulating this NPRM, the Department also
considered a more structured approach to sharpening the economic
reality test under the FLSA. In particular, the Department considered
creating a presumption of employee or independent contractor status
where both core factors indicate the same status. Such a presumption
would be rebuttable only by a showing that other factors weighed
strongly in favor of the other outcome. The Department is concerned
that this approach would be confusing or burdensome on courts and the
regulated community. Accordingly, the Department is not proposing a
presumption-based approach at this time, but is nonetheless interested
in

[[Page 60622]]

comments on this, or other possible approaches to the economic reality
test.

E. Proposed Guidance Regarding the Primacy of Actual Practice

Proposed Sec. 795.110 states that the actual practice of the
parties involved--both of the worker (or workers) at issue and of the
potential employer--is more relevant than what may be contractually or
theoretically possible. This principle is derived from the Supreme
Court's holding that `` `economic reality' rather than `technical
concepts' is to be the test of employment'' under the FLSA. Whitaker
House, 366 U.S. at 33; see also Tony & Susan Alamo, 471 U.S. at 301
(``The test of employment under the [FLSA] is one of `economic reality'
'' (citing Whitaker House, 366 U.S. at 33)). Applying this guidance,
federal courts of appeals have emphasized the primacy of actual
practice when evaluating whether workers are employees or independent
contractors under the FLSA. See, e.g., Saleem, 854 F.3d at 142
(``[P]ursuant to the economic reality test, it is not what [Plaintiffs]
could have done that counts, but as a matter of economic reality what
they actually do that is dispositive.'') (citations omitted); Parrish,
917 F.3d at 387 (``The analysis is focused on economic reality, not
economic hypotheticals.''); Scantland, 721 F.3d at 1311 (``It is not
significant how one `could have' acted under the contract terms. The
controlling economic realities are reflected by the way one actually
acts.'') (citations omitted).
As the examples in proposed Sec. 795.110 illustrate, the primacy
of the parties' actual practice applies to every potentially relevant
factor, and it can weigh in favor of either an employee or independent
contractor relationship. In some cases, the actual practice of the
parties involved may suggest that the worker or workers are employees.
See, e.g., Sureway Cleaners, 656 F.2d at 1371 (``[T]he fact that
Sureway's `agents' possess, in theory, the power to set prices,
determine their own hours, and advertise to a limited extent on their
own is overshadowed by the fact that in reality the `agents' work the
same hours, charge the same prices, and rely in the main on Sureway for
advertising.''); DialAmerica, 757 F.2d at 1387 (concluding that
evidence showing workers were not doing similar work for any other
businesses ``although they were free to do so'' indicates employee
status). In other cases, it may suggest that the worker or workers at
issue are independent contractors. See Saleem, 854 F.3d at 143
(concluding that black-car drivers were independent contractors in part
because ``many Plaintiffs . . . picked up passengers via street hail,
despite TLC's (apparently under-enforced) prohibition of this
practice''); see also Bartels, 332 U.S. at 129 (rejecting in an SSA
case the argument that employee status under an economic reality test
could ``be determined solely by the idea of control which an alleged
employer may or could exercise over the details of the service rendered
to his business by the worker or workers'') (emphasis added).
Importantly, proposed Sec. 795.110 does not suggest that what is
contractually or theoretically possible in a work arrangement is
irrelevant. Contractual and theoretical possibilities are also part of
the economic reality of the parties' relationship, and excluding them
outright would not be consistent with the Supreme Court's instruction
in Rutherford Food to evaluate ``the circumstances of the whole
activity.'' 331 U.S. at 730; see also Mid-Atlantic Installation Servs.,
16 F. App'x at 107 (determining that cable installers were independent
contractors in part because they had a ``right to employ [their own]
workers''); Keller, 781 F.3d at 813 (citing as relevant ``the fact that
Miri never explicitly prohibited Keller from performing installation
services for other companies'' and finding ``a material dispute as to
whether Keller could have increased his profitability had he improved
his efficiency or requested more assignments''). Contractual or
theoretical possibilities are less relevant evidence to the employment
status inquiry, but the Department believes they are potentially
relevant nonetheless.

F. Severability

Finally, the Department proposes to include a severability
provision in part 795 so that, if one or more of the provisions of part
795 is held invalid or stayed pending further agency action, the
remaining provisions would remain effective and operative. The
Department proposes to add this provision as Sec. 795.115.

V. Paperwork Reduction Act

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

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

A. Introduction

Under E.O. 12866, OMB's Office of Information and Regulatory
Affairs determines whether a regulatory action is significant and,
therefore, subject to the requirements of the Executive Order and OMB
review.\53\ Section 3(f) of Executive Order 12866 defines a
``significant regulatory action'' as an action that is likely to result
in a rule that: (1) Has an annual effect on the economy of $100 million
or more, or adversely affects in a material way a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or state, local or tribal governments or communities
(also referred to as economically significant); (2) creates serious
inconsistency or otherwise interferes with an action taken or planned
by another agency; (3) materially alters the budgetary impacts of
entitlement grants, user fees, or loan programs, or the rights and
obligations of recipients thereof; or (4) raises novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order. Because the annual
effect of this proposed rule would be greater than $100 million, this
proposed rule would be economically significant under section 3(f) of
Executive Order 12866.\54\
---------------------------------------------------------------------------

\53\ See 58 FR 51735 (Sept. 30, 1993).
\54\ The entirety of the estimated costs from this deregulatory
action, which exceed the $100 million threshold and relate strictly
to familiarization, fall in the first year alone. The Department's
Regulatory Impact Analysis further explains that these one-year
costs are more than offset by continuing annual cost-savings of $447
million per year, accruing to the same parties that face the
familiarization costs.
---------------------------------------------------------------------------

Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; that it is tailored to impose the least burden on society,
consistent with achieving the regulatory objectives; and that, in
choosing among alternative regulatory approaches, the agency has
selected the approaches that maximize net benefits. Executive Order
13563 recognizes that some benefits are difficult to quantify and
provides that, when appropriate and permitted by law, agencies may
consider and discuss qualitatively values that are difficult or

[[Page 60623]]

impossible to quantify, including equity, human dignity, fairness, and
distributive impacts.

B. Overview of Analysis

The Department estimates there were 10.6 million workers who worked
at any given time as independent contractors as their primary jobs in
the United States in 2017 (6.9 percent of all workers), the most recent
year of data available. Including independent contracting on secondary
jobs results in an estimate of 18.9 million independent contractors
(12.3 percent of all workers). The Department discusses other studies
providing estimates of the total number of independent contractors,
ranging from 6.1 percent to 14.1 percent of workers (see Table 3 in
VI.C.2). Due to uncertainties regarding magnitude and other factors,
the Department has not quantified the potential change to the aggregate
number of independent contractors that may occur if this proposed rule
is finalized. Furthermore, the Department`s analysis relies on data
collected prior to 2020, which reflects the state of the economy prior
to the COVID-19 pandemic. The Department acknowledges that data on
independent contractors could look different following the economic
effects of the pandemic, but does not yet have information to determine
how the number of independent contractors could change nor whether
these changes would be lasting or a near term market distortion. The
Department invites comments from stakeholders on the data used in this
analysis and on how the universe of independent contractors might
change as a result of this proposed rule. Specifically, the Department
requests data and comment on the possible impacts resulting from the
COVID-19 pandemic as it relates to the composition of the labor market,
the share and scope of independent contractors in the workforce, and
any associated wage effects.
The Department estimated regulatory familiarization costs to be
$370.9 million in the first year. The Department estimated cost savings
due to increased clarity to be $447.2 million per year, and cost
savings due to reduced litigation to be $33.6 million per year. This
results in a 10-year annualized net cost savings of $374.8 million
using a 3 percent discount rate and $369.0 million using a 7 percent
discount rate.\55\ For purposes of E.O. 13771, the annualized net cost
savings over a perpetual time horizon are $221.3 million.\56\ Other
costs, benefits, and cost savings are discussed qualitatively.
---------------------------------------------------------------------------

\55\ Discount rates are directed by OMB. See Circular A-4, OMB
(Sept. 17, 2003).
\56\ Per OMB guidelines, E.O. 13771 data is represented in 2016
dollars, inflation-adjusted for when the proposed rule would take
effect.

Table 3--Summary of Estimates of Independent Contracting
----------------------------------------------------------------------------------------------------------------
Annualized values \a\
Impact Year 1 Year 2 Year 10 -------------------------------
7% Discount 3% Discount
----------------------------------------------------------------------------------------------------------------
Regulatory Familiarization Costs ($2019 millions)
----------------------------------------------------------------------------------------------------------------
Establishments.................. $152.3 $0.0 $0.0 $21.7 $17.9
Independent Contractors......... 218.6 0.0 0.0 31.1 25.6
-------------------------------------------------------------------------------
Total....................... 370.9 0.0 0.0 52.8 43.5
----------------------------------------------------------------------------------------------------------------
Increased Clarity Cost Savings ($2019 millions)
----------------------------------------------------------------------------------------------------------------
Employers....................... 369.0 369.0 369.0 369.0 369.0
Independent Contractors......... 78.1 78.1 78.1 78.1 78.1
-------------------------------------------------------------------------------
Total....................... \b\ 447.2 447.2 447.2 447.2 447.2
----------------------------------------------------------------------------------------------------------------
Reduced Litigation Cost Savings ($2019 millions)
----------------------------------------------------------------------------------------------------------------
33.6 33.6 33.6 33.6 33.6
----------------------------------------------------------------------------------------------------------------
Total Cost Savings ($2019 millions)
----------------------------------------------------------------------------------------------------------------
480.8 480.8 480.8 480.8 480.8
----------------------------------------------------------------------------------------------------------------
Net Cost Savings (Cost Savings-Costs) ($2019 millions)
----------------------------------------------------------------------------------------------------------------
109.9 480.8 480.8 369.0 374.8
----------------------------------------------------------------------------------------------------------------
\a\ Annualized over 10-years.
\b\ The numbers in this table do not sum to the total exactly because of rounding. Please see Table 4 for
unrounded values.

C. Independent Contractors: Size and Demographics

1. Current Number of Independent Contractors
The Department estimated the number of independent contractors to
provide a sense of the current size of this population. There are a
variety of estimates of the number of independent contractors and these
span a wide range based on methodologies and how the population is
defined. The Department believes that the Current Population Survey
(CPS) Contingent Worker Supplement (CWS) offers an appropriate lower
bound for the number of independent contractors; however, there are
potential biases in these data that will be noted. Additionally,
estimates from other sources will be presented to demonstrate the
potential range.
The CPS is conducted by the U.S. Census Bureau and published
monthly by the Bureau of Labor Statistics (BLS). The sample includes
approximately 60,000 households and is nationally representative.
Periodically since 1995, and most recently in 2017, the CPS has
included a supplement to the May

[[Page 60624]]

survey to collect data on contingent and alternative employment
arrangements. Based on the CWS, there are 10.6 million independent
contractors, which amounts to 6.9 percent of workers.\57\ The CWS
measures those who say that their independent contractor job is their
primary job and that they worked at the independent contractor job in
the survey's reference week. It is an important data set and analysis.
However, based on the survey's design, while the Department refers to
the CWS measure of independent contractors throughout this analysis, it
should be uniformly recognized as representing a constrained subsection
of the entire independent contractor pool. Due to its clear
methodological constraints, the CWS measure should be differentiated
from other, more comprehensive measures.
---------------------------------------------------------------------------

\57\ Bureau of Labor Statistics, ``Contingent and Alternative
Employment Arrangements--May 2017,'' USDL-18-0942 (June 7, 2018),
https://www.bls.gov/news.release/pdf/conemp.pdf.
---------------------------------------------------------------------------

The BLS's estimate of independent contractors includes ``[w]orkers
who are identified as independent contractors, independent consultants,
or freelance workers, regardless of whether they are self-employed or
wage and salary workers.'' BLS asks two questions to identify
independent contractors: \58\
---------------------------------------------------------------------------

\58\ The variables used are PES8IC = 1 for self-employed and
PES7 = 1 for other workers.
---------------------------------------------------------------------------

Workers reporting that they are self-employed are asked:
``Are you self-employed as an independent contractor, independent
consultant, freelance worker, or something else (such as a shop or
restaurant owner)?'' (9.0 million independent contractors). We refer to
these workers as ``self-employed independent contractors'' in the
remainder of the analysis.
Workers reporting that they are wage and salary workers
are asked: ``Last week, were you working as an independent contractor,
an independent consultant, or a freelance worker? That is, someone who
obtains customers on their own to provide a product or service.'' (1.6
million independent contractors). We refer to these workers as ``other
independent contractors'' in the remainder of the analysis.
It is important to note that independent contractors are identified
in the CWS in the context of the respondent's ``main'' job (i.e., the
job with the most hours).\59\ Therefore, the estimate of independent
contractors does not include those who may be defined as an employee
for their primary job, but may work as an independent contractor for a
secondary or tertiary job.\60\ For example, Lim et al. (2019) estimate
that independent contracting work is the primary source of income for
48 percent of independent contractors.\61\ Applying this estimate to
the 10.6 million independent contractors estimated from the CWS,
results in 22.1 million independent contractors (10.6 million / 0.48).
Alternatively, a survey of independent contractors in Washington found
that 68 percent of respondents reported that independent contract work
was their primary source of income.\62\ Applying that estimate to the
10.6 million independent contractors from the CWS results in an
estimated 15.6 million independent contractors (10.6 million / 0.68).
---------------------------------------------------------------------------

\59\ While self-employed independent contractors are identified
by the worker's main job, other independent contractors answered yes
to the CWS question about working as an independent contractor last
week. Although the survey question does not ask explicitly about the
respondent's main job, it follows questions asked in reference to
the respondent's main job.
\60\ Even among independent contractors, failure to report
multiple jobs in response to survey questions is common. For
example, Katz and Krueger (2019) asked Amazon Mechanical Turk
participants the CPS-style question ``Last week did you have more
than one job or business, including part time, evening or weekend
work?'' In total, 39% of respondents responded affirmatively.
However, these participants were asked the follow-up question ``Did
you work on any gigs, HITs or other small paid jobs last week that
you did not include in your response to the previous question?''
After this question, which differs from the CPS, 61 percent of those
who indicated that they did not hold multiple jobs on the CPS-style
question acknowledged that they failed to report other work in the
previous week. As Katz and Krueger write, ``If these workers are
added to the multiple job holders, the percent of workers who are
multiple job holders would almost double from 39 percent to 77
percent.'' See L. Katz and A. Krueger, ``Understanding Trends in
Alternative Work Arrangements in the United States,'' RSF: The
Russell Sage Foundation Journal of the Social Sciences 5(5), p. 132-
46 (2019).
\61\ K. Lim, A. Miller, M. Risch, and E. Wilking, ``Independent
Contractors in the U.S.: New Trends from 15 years of Administrative
Tax Data,'' Department of Treasury, p. 61 (Jul. 2019), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
\62\ Washington Department of Commerce, ``Independent Contractor
Study,'' p. 21 (Jul. 2019), https://deptofcommerce.app.box.com/v/independent-contractor-study.
---------------------------------------------------------------------------

The CWS's large sample size results in small sampling error.
However, the questionnaire's design may result in some non-sampling
error. For example, one potential source of bias is that the CWS only
considers independent contractors during a single point in time--the
survey week (generally the week prior to the interview).
These numbers will thus underestimate the prevalence of independent
contracting over a longer timeframe, which may better capture the size
of the population.\63\ For example, Farrell and Greig (2016) used a
randomized sample of 1 million Chase customers to estimate prevalence
of the Online Platform Economy.\64\ They found that ``[a]lthough 1
percent of adults earned income from the Online Platform Economy in a
given month, more than 4 percent participated over the three-year
period.'' Additionally, Collins et al. (2019) examined tax data from
2000 through 2016 and found that the number of workers who filed a form
1099 grew substantially over that period, and that fewer than half of
these workers earned more than $2,500 from 1099 work in 2016. The
prevalence of lower annual earnings implies that most workers who
received a 1099 did not work as an independent contractor every
week.\65\
---------------------------------------------------------------------------

\63\ In any given week, the total number of independent
contractors would have been roughly the same, but the identity of
the individuals who do it for less than the full year would likely
vary. Thus, the number of unique individuals who work at some point
in a year as independent contractors would exceed the number of
independent contractors who work within any one-week period as
independent contractors.
\64\ D. Farrell and F. Greig, ``Paychecks, Paydays, and the
Online Platform,'' JPMorgan Chase Institute (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911293.
\65\ Collins, Brett, Andrew Garin, Emile Jackson, Dmitri
Koustas, and Mark Payne. 2019. ``Is Gig Work Replacing Traditional
Employment? Evidence from Two Decades of Tax Returns.'' Unpublished
paper, IRS SOI Joint Statistical Research Program.
---------------------------------------------------------------------------

The CWS also uses proxy responses, which may underestimate the
number of independent contractors. The RAND American Life Panel (ALP)
survey conducted a supplement in 2015 to mimic the CWS questionnaire,
but used self-responses only. The results of the survey were summarized
by Katz and Krueger (2018).\66\ This survey found that independent
contractors comprise 7.2 percent of workers.\67\ Katz and Krueger
identified that the 0.5 percentage point difference in magnitude
between the CWS and the ALP was due to both cyclical conditions, and
the lack of proxy responses in the ALP.\68\ Therefore, the Department
believes a reasonable upper-bound on the potential bias due to the use
of proxy responses in the CWS is 0.5 percentage points (7.2 versus
6.7).^{69 70}
---------------------------------------------------------------------------

\66\ See Katz and Krueger (2018), supra note 45.
\67\ Id. at 49. The estimate is 9.6 percent without correcting
for overrepresentation of self-employed workers or multiple job
holders. Id. at 31.
\68\ Id. at Addendum (``Reconciling the 2017 BLS Contingent
Worker Survey'').
\69\ Note that they estimate 6.7 percent of employed workers are
independent contractors using the CWS, opposed to 6.9 percent as
estimated by the BLS. This difference is attributable to changes to
the sample to create consistency.
\70\ In addition to the use of proxy responses, this difference
is also due to cyclical conditions. The impacts of these two are not
disaggregated for independent contractors, but if we applied the
relative sizes reported for all alternative work arrangements, we
would get 0.36 percentage point difference due to proxy responses.
Additionally, it should be noted that this may not entirely be a
bias. It stems from differences in independent contracting reported
by proxy respondents and actual respondents. As Katz and Krueger
explain, this difference may be due to a ``mode'' bias or proxy
respondents may be less likely to be independent contractors. Id. at
Addendum p. 4.

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

[[Page 60625]]

Another potential source of bias in the CWS is that some
respondents may not self-identify as an independent contractor, and
others who self-identify may be misclassified. There are reasons to
believe that some workers, who are legally considered independent
contractors, would not self-identify as such. For example, if the
worker has only one employer/client, or did not actively pursue the
employer/client, then they may not agree that they ``[obtain] customers
on their own to provide a product or service.'' Additionally,
individuals who do only informal work may not view themselves as
independent contractors.\71\ This population could be substantial.
Abraham and Houseman (2019) confirmed this in their examination of the
Survey of Household Economics and Decision-making. They found that 28
percent of respondents reported doing informal work for money over the
past month.\72\ Conversely, some workers misclassified as independent
contractors may answer in the affirmative, despite not truly being
independent contractors. The prevalence of misclassification is
unknown, but it is generally agreed to be common.\73\ Because reliable
data on the potential magnitude of these biases are unavailable, and so
the net direction of the biases is unknown, the Department has not
calculated any estimates of how these biases may impact the estimated
number of independent contractors.
---------------------------------------------------------------------------

\71\ The Department believes that including data on informal
work is useful when discussing the magnitude of independent
contracting, although not all informal work is done by independent
contractors. The Survey of Household Economics and Decision-making
asked respondents whether they engaged in informal work sometime in
the prior month. It categorized informal work into three broad
categories: Personal services, on-line activities, and off-line
sales and other activities, which is broader than the scope of
independent contractors. These categories include activities like
house sitting, selling goods online through sites like eBay or
Craigslist, or selling goods at a garage sale. The Department
acknowledges that the data discussed in this study might not be a
one-to-one match with independent contracting, but it nonetheless
provides useful data for this purpose.
\72\ Katherine G. Abraham, and Susan N. Houseman. 2019. ``Making
Ends Meet: The Role of Informal Work in Supplementing Americans'
Income.'' RSF: The Russell Sage Foundation Journal of the Social
Sciences 5(5): 110-31, https://www.aeaweb.org/conference/2019/preliminary/paper/QreAaS2h.
\73\ See, e.g., U.S. Gov't Accountability Off., GAO-09-717,
Employee Misclassification: Improved Coordination, Outreach, and
Targeting Could Better Ensure Detection and Prevention 10 (2008)
(``Although the national extent of employee misclassification is
unknown, earlier national studies and more recent, though not
comprehensive, studies suggest that employee misclassification could
be a significant problem with adverse consequences.'').
---------------------------------------------------------------------------

Because the CWS estimate represents only the number of workers who
worked as independent contractors on their primary job during the
survey reference week, the Department applied the research literature
and adjusted this measure to include workers who are independent
contractors in a secondary job or who were excluded from the CWS
estimate due to other factors. As noted above, integrating the
estimated proportions of workers who are independent contractors on
secondary or otherwise excluded jobs yields from other surveys produces
estimates of 15.6 million and 22.1 million. The Department used the
average of these two estimates, 18.9 million, as the estimated total
number of workers working as independent contractors in any job at a
given time. Given the prevalence of independent contractors who work
sporadically and earn minimal income, adjusting the estimate according
to these sources captures some of this population. It is likely that
this figure is still an underestimate of the true independent
contractor pool. The Department requests comments and data on the
assumptions made to calculate this estimate.
2. Range of Estimates in the Literature
To further consider the range of estimates available, the
Department conducted a literature review, the findings of which are
presented in Table 3. Other studies were also considered but are
excluded from this table because the study populations were broader
than just independent contractors or limited to one state.\74\ The RAND
ALP \75\ and the General Social Survey's (GSS's) Quality of Worklife
(QWL) \76\ supplement are widely cited alternative estimates. However,
the Department chose to use sources with significantly larger sample
sizes and more recent data for the primary estimate.
---------------------------------------------------------------------------

\74\ Including, but not limited to: McKinsey Global Institute,
``Independent Work: Choice, Necessity, and the Gig Economy'' (2016),
https://www.mckinsey.com/featured-insights/employment-and-growth/independent-work-choice-necessity-and-the-gig-economy; Kelly
Services, ``Agents of Change'' (2015); Robles and McGee, ``Exploring
Online and Offline Informal Work: Findings from the Enterprising and
Informal Work Activities (EIWA) Survey'' (2016); Upwork,
``Freelancing in America'' (2019); Washington Department of
Commerce, supra note 62; Farrell and Greig, supra note 64; MBO
Partners, ``State of Independence in America'' (2016); Abraham et
al., ``Measuring the Gig Economy: Current Knowledge and Open
Issues'' (2018), https://www.nber.org/papers/w24950; Collins et al.,
``Is Gig Work Replacing Traditional Employment? Evidence from Two
Decades of Tax Returns,'' IRS Working Paper (2019); Gitis et al.,
``The Gig Economy: Research and Policy Implications of Regional,
Economic, and Demographic Trends,'' American Action Forum (2017),
https://www.americanactionforum.org/research/gig-economy-research-policy-implications-regional-economic-demographic-trends/#ixzz5IpbJp79a; Dourado and Koopman, ``Evaluating the Growth of the
1099 Workforce,'' Mercatus Center (2015), https://www.mercatus.org/publication/evaluating-growth-1099-workforce.
\75\ See Katz and Krueger (2018), supra note 45.
\76\ See Abraham et al., supra note 743, Table 4 (2018).
---------------------------------------------------------------------------

Jackson et al. (2017) \77\ and Lim et al. (2019) \78\ use tax
information to estimate the prevalence of independent contracting. In
general, studies using tax data tend to show an increase in prevalence
of independent contracting over time. The use of tax data has some
advantages and disadvantages over survey data. Advantages include large
sample sizes, the ability to link information reported on different
records, the reduction in certain biases such as reporting bias,
records of all activity throughout the calendar year (the CWS only
references one week), and inclusion of both primary and secondary
independent contractors. Disadvantages are that independent contractor
status needs to be inferred; there is likely an underreporting bias
(i.e., some workers do not file taxes); researchers are generally
trying to match the IRS definition of independent contractor, which
does not mirror the scope of independent contractors under the FLSA;
and the estimates include

[[Page 60626]]

misclassified independent contractors.\79\ A major disadvantage of
using tax data for this NPRM is that the data are not publicly
available and thus the analyses conducted cannot be directly verified
or adjusted as necessary (e.g., to describe characteristics of
independent contractors, etc.).
---------------------------------------------------------------------------

\77\ E. Jackson, A. Looney, and S. Ramnath, ``The Rise of
Alternative Work Arrangements: Evidence and Implications for Tax
Filing and Benefit Coverage,'' OTA Working Paper 114 (2017), https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-114.pdf.
\78\ Lim et al., supra note 61.
\79\ In comparison to household survey data, tax data may reduce
certain types of biases (such as recall bias) while increasing other
types (such as underreporting bias). Because the Department is
unable to quantify this tradeoff, it could not determine whether, on
balance, survey or tax data are more reliable.

Table 3--Summary of Estimates of Independent Contracting
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent of
Source Method Definition \a\ workers Sample size Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
CPS CWS....................... Survey........................ Independent contractor, 6.9 50,392.................. 2017
consultant or freelance
worker (main only).
ALP........................... Survey........................ Independent contractor, 7.2 6,028................... 2015
consultant or freelance
worker (main only).
GSS QWL....................... Survey........................ Independent contractor, 14.1 2,538................... 2014
consultant or freelancer
(main only).
Jackson et al................. Tax data...................... Independent contractor, \b\ 6.1 \c\ ~5.9 million........ 2014
household worker.
Lim et al..................... Tax data...................... Independent contractor........ 8.1 1% of 1099-MISC and 5% 2016
of 1099-K.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ The survey data only identify independent contractors on their main job. Jackson et al. include independent contractors as long as at least 15
percent of their earnings were from self-employment income; thus, this population is broader. If Jackson et al.'s estimate is adjusted to exclude
those who are primary wage earners, the rate is 4.0 percent. Lim et al. include independent contractors on all jobs. If Lim et al.'s estimate is
adjusted to only those who receive a majority of their labor income from independent contracting, the rate is 3.9 percent.
\b\ Summation of (1) 2,132,800 filers with earnings from both wages and sole proprietorships and expenses less than $5,000, (2) 4,125,200 primarily sole
proprietorships and with less than $5,000 in expenses, and (3) 3,416,300 primarily wage earners.
\c\ Estimate based on a 10 percent sample of self-employed workers and a 1 percent sample of W-2 recipients.

3. Demographics of Independent Contractors
This section presents demographic information of independent
contractors using the CWS, which, as stated above, only measures those
who say that their independent contractor job is their primary job and
that they worked at the independent contractor job in the survey's
reference week. According to the CWS, these primary independent
contractors are most prevalent in the construction and professional and
business services industries. These two industries employ 44 percent of
primary independent contractors. Independent contractors tend to be
older and predominately male (65 percent). Millennials have a
significantly lower prevalence of primary independent contracting than
older generations: 3.6 percent for Millennials compared to 6.0 percent
for Generation X and 8.8 percent for Baby Boomers and Matures.\80\
However, surveys suggest that this trend is reversed when secondary
independent contractors, or those who did informal work as independent
contractors, are included. These divergent data suggest that younger
workers are more likely to use contractor work sporadically and/or for
supplemental income.\81\ White workers are somewhat overrepresented
among primary independent contractors; they comprise 85 percent of this
population but only 79 percent of the population of workers.
Conversely, black workers are somewhat underrepresented (comprising 9
percent and 13 percent, respectively).\82\ The opposite trends emerge
when evaluating informal work, where racial minorities participate at a
higher rate than white workers.\83\ Primary independent contractors are
spread across the educational spectrum, with no group especially
overrepresented. The same trend in education attainment holds for
workers who participate in informal work.\84\
---------------------------------------------------------------------------

\80\ The Department used the generational breakdown used in the
MBO Partner's 2017 report, ``The State of Independence in America.''
``Millennials'' were defined as individuals born 1980-1996,
``Generation X'' were defined as individuals born 1965-1980, and
``Baby Boomers and Matures'' were defined as individuals born before
1965.
\81\ Abraham and Houseman (2019), supra note 7272, find that
informal work decreases as a worker's age increases. Among 18 to 24
years olds, 41.3 percent did informal work over the past month. The
rate fell to 25.7 percent for 45 to 54 year olds, and 13.4 percent
for those 75 years and older. See also Upwork, ``Freelancing in
America'' (2019).
\82\ These numbers are based on the respondents who state that
their race is ``white only'' or ``black only'' as opposed to
identifying as being multi-racial.
\83\ Abraham and Houseman (2019), supra note 72.
\84\ Id.
---------------------------------------------------------------------------

D. Potential Transfers

The substantive effect of the rule is not intended to favor
independent contractor or employee classification relative to the
status quo. However, the Department assumes in this RIA that the
increased legal certainty associated with this proposed rule could lead
to an increase in the number of independent contractor arrangements.
The Department has not attempted to estimate the magnitude of this
change, primarily because there are not objective tools for quantifying
the clarity, simplification, and enhanced probative value of the
Department's proposals for sharpening and focusing the economic reality
test.\85\ Therefore, potential transfers are discussed qualitatively
with some numbers presented on a per worker basis. Potential transfers
may result from differences in employer provided benefits, tax
liabilities, and earnings between employees and independent
contractors. Although employer-provided benefits could decrease, and
tax liabilities could increase for these workers, the Department
believes the net impact on total compensation should be small in either
direction. Furthermore, in order to attract qualified workers,
companies must offer competitive compensation. Therefore, in a
competitive labor market, any reduction in benefits and increase in
taxes is likely to be offset by

[[Page 60627]]

higher base earnings--referred to as an ``earnings premium.'' As
explained elsewhere, however, the data provides mixed evidence of this
earnings premium.
---------------------------------------------------------------------------

\85\ Another uncertainty limiting the Department's ability to
quantify the possible increase in independent contracting is the
nature and effect of state wage and hour laws. Some states, such as
California, have laws that place more stringent limitations on who
may qualify as independent contractors than the FLSA. See Cal. Labor
Code 2775 (establishing a demanding ``ABC'' test applicable to most
workers when determining independent contractor status under
California law). Because the FLSA does not preclude states and
localities from establishing broader wage and hour protections than
those that exist under the FLSA, see 29 U.S.C. 218(a), workers in
some states may be unaffected by this proposed rule. However,
because the Department is not well positioned to interpret the
precise scope of each state's wage and hour laws, the Department is
unable to definitively determine the degree to which workers in
particular states would or would not be affected by this proposed
rule.
---------------------------------------------------------------------------

Assuming that independent contractor arrangements increase
following this proposed rule, it is unclear whether this would occur as
a result of employees being subsequently classified as independent
contractors or as a result of the hiring of new workers as independent
contractors. This will have implications for transfers. If current
employees change classifications, then there may be transfers.
Employers could only change the classification of current employees if
those workers had previously been misclassified or by changing the
working conditions such that the relationship becomes a true
independent contractor relationship, assuming doing so is consistent
with any applicable employment contracts, collective bargaining
agreement, or other applicable laws. Lim et al. (2019) found ``little
evidence that firms are increasingly reclassifying existing employee
relationships as [independent contractor] relationships,'' however,
they found that ``firms are hiring more new workers as [independent
contractors] rather than as employees.'' \86\
---------------------------------------------------------------------------

\86\ Lim et al., supra note 61 at 3.
---------------------------------------------------------------------------

By decreasing uncertainty and thus potentially opening new
opportunities for firms, companies may hire independent contractors who
they otherwise would not have hired. In this case, there may be a
decrease in unemployment and/or an increase in the size of the labor
force. In a study of respondents from both Europe and the U.S.,
McKinsey Global Institute found that 15 percent of those not working
are interested in becoming an independent contractor for their primary
job.\87\ Attracting these individuals to join the labor force would be
considered a societal benefit, rather than a transfer, and therefore,
is analyzed more fully below as part of the discussion on Cost Savings
and Benefits.
---------------------------------------------------------------------------

\87\ McKinsey Global Institute, supra note 74 at 71.
---------------------------------------------------------------------------

The Department invites comment on its assumption that use of
independent contractors will increase if the proposed rule is
finalized. The Department also welcomes comments and data from
companies looking to increase their use of independent contractors,
specifically on whether employees' classifications would change to
independent contractor status, consistent with this proposed rule and
their other contractual and legal obligations, or whether they would
instead hire new workers as independent contractors.
1. Employer Provided Benefits
Although this rule only affects workers' independent contractor
status under the FLSA, the Department assumes in this analysis that
employers are likely to keep the status of the worker the same across
all benefits and requirements.\88\ To the extent that employers
currently provide employees benefits such as health insurance,
retirement contributions, and paid time off, these would likely
decrease with an increase in the use of independent contractors because
independent contractors generally do not receive these benefits
directly (although independent contractors are able to purchase at
least some of these benefits for themselves). Employer provided
benefits are a significant share of workers' compensation. According to
the BLS's Employer Costs for Employee Compensation (ECEC), the value of
employer benefits that directly benefit employees average 21 percent of
total compensation.\89\ The Department used the CWS to compare
prevalence of health insurance and retirement benefits across employees
and independent contractors. However, it should be noted that these two
populations may differ in ways other than just their employment
classification which may impact benefit amounts. For instance, an
employee shifting to independent contractor status who already receives
health benefits through a partner's benefit plan would not be impacted
by losing heath benefit eligibility. Additionally, lower benefits may
be offset by increased base pay in order to attract staff because
workers consider the full package of pay and benefits when accepting a
job.
---------------------------------------------------------------------------

\88\ Courts have noted that the FLSA has the broadest conception
of employment under federal law. See, e.g., Darden, 503 U.S. at 326.
To the extent that businesses making employment status
determinations base their decisions on the most demanding federal
standard, a rulemaking addressing the FLSA's distinction between
employees and independent contractors may affect the businesses'
classification decisions for purposes of benefits and legal
requirements under other federal and state laws.
\89\ BLS, ``Employer Costs for Employee Compensation News
Release'' (Sept. 2019), https://www.bls.gov/news.release/archives/ecec_12182019.htm, Civilian Workers. This includes paid leave
($2.68), insurance ($3.22), and retirement and savings benefits
($1.96). It does not include overtime and premium pay, shift
differential pay, nonproduction bonuses, or legally required
benefits. Calculated as ($2.68 + $3.22 + $1.96)/$37.03.
---------------------------------------------------------------------------

According to the CWS's relatively narrow definition of independent
contractor:
79.4 percent of self-employed independent contractors have
health insurance. Most of these workers either purchased insurance on
their own (31.5 percent) or have access through their spouse (28.6
percent).
80.7 percent of other independent contractors have health
insurance. There are three main ways these workers receive health
insurance: Through their spouse (25.1 percent), through an employer
(24.2), or on their own (20.1 percent).
88.3 percent of employees have health insurance. Most of
these workers receive health insurance through their work (64.1
percent). Furthermore, according to the ECEC, employers pay on average
12 percent of an employee's base compensation in health insurance
premiums.
From these data, it is unclear exactly how health insurance
coverage would change if the number of independent contractors
increased, but the data suggest that independent contractors, on
average, may be less likely to have health insurance coverage. That
said, employment is not a guarantee of health insurance, nor do
independent contractors generally lack health insurance.
A major source of retirement savings is employer sponsored
retirement accounts. According to the CWS, 55.5 percent of employees
have a retirement account with their current employer; in addition, the
ECEC found that employers pay 5.3 percent of employees' total
compensation in retirement benefits on average ($1.96/$37.03). If a
worker shifts from employee to independent contractor status, that
worker may no longer receive employer-provided retirement benefits, but
may choose alternate investment options. As with health insurance, it
is not clear whether retirement savings for such a worker would
increase or decrease, but such a worker would need to take a more
active role in saving for retirement vis-[agrave]-vis an employee with
an employer-sponsored retirement plan.
2. Tax Liability
Payroll tax liability is generally divided between the employer and
the employee in the United States. Most economists believe that the
``incidence'' of the payroll tax, regardless of liability, falls on the
employee.\90\ As self-

[[Page 60628]]

employed workers, independent contractors are legally obligated to pay
both the employee and employer shares of the Federal Insurance
Contributions Act (FICA) taxes. Thus, if workers' classifications
change from employees to independent contractors, there may be a
transfer in federal tax liabilities from employers to workers
(regardless of whether this affects the actual cost of these taxes to
the worker). These payroll taxes include: \91\
---------------------------------------------------------------------------

\90\ The share of payroll taxes borne by employees versus firms
is unknown but economists generally believe that employer payroll
taxes are partially-to-completely shifted to employees in the long
run. For a detailed review of the literature see J. Deslauriers, B.
Dostie, R. Gagn[eacute], and J. Par[eacute], ``Estimating the
Impacts of Payroll Taxes: Evidence from Canadian Employer-Employee
Tax Data,'' IZA Institute of Labor Economics Discussion Paper Series
IZA DP No. 11598 (June 2018), http://ftp.iza.org/dp11598.pdf.
Further information is available by the Tax Foundation, https://taxfoundation.org/what-are-payroll-taxes-and-who-pays-them/.
\91\ Internal Revenue Service, ``Publication 15, (Circular E),
Employer's Tax Guide'' (Dec. 23, 2019), https://www.irs.gov/pub/irs-pdf/p15.pdf.
---------------------------------------------------------------------------

Social Security tax: The 6.2 percent employer component
(half of the 12.4 percent total).\92\
---------------------------------------------------------------------------

\92\ The social security tax has a wage base limit of $137,700
in 2020.
---------------------------------------------------------------------------

Medicare tax: The 1.45 percent employer component (half of
the 2.9 percent total).\93\
---------------------------------------------------------------------------

\93\ An additional Medicare Tax of 0.9 percent applies to wages
paid in excess of $200,000 in a calendar year for individual filers.
---------------------------------------------------------------------------

In sum, independent contractors are legally responsible for an
additional 7.65 percent of their earnings in FICA taxes vis-[agrave]-
vis an employee. However, any tax-related transfers from employers to
workers are likely to be offset by higher wages employers pay to ensure
workers' take-home pay remains the same.
Companies also cover unemployment insurance and workers'
compensation taxes for their employees. Independent contractors may
choose to pay for comparable insurance protection offered in the
private market, but are not obligated to. The resulting regulatory
effect (experienced as savings, either by companies or employees,
depending on who ultimately bears the cost of the tax) combines
societal cost savings (the lessened administrative cost of
incrementally lower participation in unemployment insurance and
workers' compensation programs) and transfers (from individuals whose
unemployment insurance or workers' compensation payments decline, to
entities paying less in taxes). Independent contractors may recoup some
or all of the employer portion of these taxes and insurance premiums in
the form of increased wages. This rule could decrease employers' tax
liabilities and increase independent contractors' take-home
compensation. However, there are costs to independent contractors if
they become unemployed or injured or ill on the job because they no
longer are protected, unless they purchase their own private insurance.
The Department did not attempt to quantify the cost of changes in
coverage or whether the net effect is a benefit or cost to the worker.
3. Earnings
Although the minimum wage and overtime pay requirements of the FLSA
would no longer apply to workers who shift from employee status to
independent contractor status, the Department anticipates an increase
in labor force activity. That said, the Department does not attempt to
quantify the magnitude of any increase in earnings as a result of
increased labor force activity.
If currently unemployed workers or individuals who are out of the
labor market become independent contractors due to this rule, their
earnings will increase as they currently have no employment-related
earnings other than possibly unemployment benefits. The impact on
earnings is more ambiguous if employees' classifications change to
independent contractors. In theory, companies would likely have to pay
more per hour to independent contractors than to employees because
independent contractors generally do not receive employer-provided
benefits and have higher tax liabilities. Data show an hourly wage
premium for independent contractors when comparing unconditional means.
But as the analysis below shows, when controlling for certain
differences in worker characteristics, this expected wage premium may
not always be observable at a statistically significant level. It
should be noted, however, that these estimates do not attempt to
incorporate the value of flexibility and satisfaction that independent
contractors cite as key factors in their preference of independent
contracting arrangements over traditional employment.
Comparing the average earnings, hourly wages, and hours of current
employees and independent contractors may provide some indication of
the impact on wages of a worker who transitions from an employee to
independent contractor classification. A regression analysis that
controls for observable differences between independent contractors and
employees may help isolate the impact on earning, hourly wages, and
usual hours of being an independent contractor. Katz and Krueger (2018)
\94\ regressed the natural log of usual weekly earnings, the natural
log of hourly wages, and the natural log of weekly hours worked on
independent contractor status,\95\ occupation, sex, potential
experience, potential experience squared, education, race, and
ethnicity. They use the 2005 CWS and the 2015 RAND ALP (the 2017 CWS
was not available at the time of their analysis). The Department
conducted similar regressions using the 2017 CWS. In both Katz and
Krueger's regression results and the Department's calculations of
unconditional averages in the 2017 CWS data presented below, the
following outlying values were removed: Workers reporting earning less
than $50 per week, less than $1 per hour, or more than $1,000 per
hour.\96\
---------------------------------------------------------------------------

\94\ See Katz and Krueger (2018), supra note 45.
\95\ On-call workers, temporary help agency workers, and workers
provided by contract firms are excluded from the base group of
``traditional'' employees.
\96\ Choice of exclusionary criteria from Katz and Krueger
(2018), supra note 45.
---------------------------------------------------------------------------

The Department combined the CWS data on usual earnings per week and
hours worked per week to estimate hourly wage rates.\97\ Examining mean
earnings, the Department found that independent contractors tend to
earn more per hour: Employees earned an average of $24.07 per hour,
self-employed independent contractors earned an average of $27.43 per
hour, and other independent contractors earned an average of $26.71 per
hour (the average hourly wage is $27.29 when combining the two types of
independent contractors).\98\ Katz and Krueger conducted similar hourly
earnings estimates based on 2005 CWS and 2015 ALP data. Their analysis
of the 2005 CWS data indicated that ``[b]efore conditioning on
covariates, the 2005 and 2015 results are similar: Freelancers

[[Page 60629]]

and contract workers are paid more per hour than traditional
employees.'' \99\ When controlling for education, potential experience,
potential experience squared, race, ethnicity, sex and occupation,
independent contractors' higher hourly wages in the 2005 CWS data were
not statistically significant. But Katz and Krueger's analysis of the
2015 ALP data under the same specifications found that primary
independent contractors earned more per hour than traditional employees
with a statistically significant degree of confidence.\100\
---------------------------------------------------------------------------

\97\ The CWS data, based on its relatively narrow definition of
independent contractors, indicated that employees worked more hours
per week in comparison to primary independent contractors. The
Department found that 81 percent of employees worked full-time,
compared to 72 percent for self-employed independent contractors and
69 percent for other independent contractors. Katz and Krueger
similarly found that independent contractors work fewer hours per
week than employees (statistically significant at the 1 percent
level of significance in all specifications with both datasets).
Despite working fewer hours per week than employees, self-employed
independent contractors earned more per week on average ($980 per
week compared to $943 per week). Other independent contractors, on
average, worked fewer hours per week and earned less per week than
employees ($869 per week compared to $943 per week). Given the
difference between hours worked by primary independent contractors
and employees, and the appeal of flexibility cited by many
independent contractors, average weekly earnings may be an
inadequate measure. Accordingly, the Department's analysis focuses
on hourly wages.
\98\ The Department followed Katz and Krueger's methodology in
excluding observations with weekly earnings less than $50, hourly
wages less than $1, or with hourly wages above $1,000. Additionally,
workers with weekly earnings above $2,885 are topcoded at $2,885.
Weekly earnings are used to calculate imputed hourly wages.
\99\ Id. at 19.
\100\ Id. at 34.
---------------------------------------------------------------------------

Conceptually, the Department expects that independent contractors
would earn more per hour than traditional employees in base
compensation as an offset to employer-provided benefits and increases
in tax liabilities. Katz and Krueger's analysis of the 2015 RAND ALP
data appears to support this prediction.\101\ However, they recommend
caution in interpreting the estimates from the ALP due to the
relatively small sample size. Their analysis of the 2005 CWS data and
the Department's similar analysis of 2017 CWS data did not show a
statistically significant difference. But as previously noted,
comparing current employees to current primary independent contractors
may not be indicative of how earnings would change for current
employees who became independent contractors. Nor do such wage-based
comparisons reflect the non-pecuniary attributes of employees and
independent contractors.\102\
---------------------------------------------------------------------------

\101\ See Katz and Kreuger (2018), supra note 45 at 20 (``A
positive hourly wage premium for independent contractors could
reflect a compensating differential for lower benefits and the need
to pay self-employment taxes.'').
\102\ In particular, at least some research reveals significant
non-pecuniary advantages to independent contracting, including
through increased job satisfaction. See ``The State of Independence
in America,'' MBO Partners (2019), https://www.mbopartners.com/state-of-independence/; Chen et al., ``The Value of Flexible Work:
Evidence from Uber Drivers,'' Journal of Political Economy 127:6,
2735-794 (2019); He, H. et al., ``Do Workers Value Flexible Jobs? A
Field Experiment,'' NBER Working Paper No. w25423, (2019), https://ssrn.com/abstract=3311395; McKinsey Global Institute, supra note 74;
Upwork, ``Freelancing in America'' (2019).
---------------------------------------------------------------------------

One potential reason for the variance among the estimates for
independent contractor wages could be error in the measurement of
independent contractor status and earnings, a factor that is present
throughout all of the analyses in this area. As a recent analysis
concluded, ``different data sources provide quite different answers to
the simple question of what is the level and trend of self-employment
in the U.S. economy,'' which suggest substantial measurement error in
at least some data sources.\103\ As noted above, reporting errors by
survey respondents may contribute to measurement error in CWS
data.\104\ Additionally, CWS questions ``were asked only about people
who had already been identified as employed in response to the survey's
standard employment questions and only about their main jobs,'' and
therefore may miss important segments of the population. BLS has
recently acknowledged limitations in the 2017 CWS survey in response to
a GAO audit and is reevaluating how it would measure independent
contractors in the future.\105\
---------------------------------------------------------------------------

\103\ Abraham et al., supra note 74, at 15. Generally,
``[h]ousehold surveys consistently show lower levels of self-
employment than tax data and a relatively flat or declining long-
term trend in self-employment as contrasted with the upward trend
that is evident in tax data.'' Id.; see also id. at 45.
\104\ ``For example, a household survey respondent might fail to
mention informal work that they do not think of as a job, something
that further probing might uncover. To take another example, a
household member who is doing work for a business may be reported as
an employee of that business, even in cases where further probing
might reveal that the person is in fact an independent contractor or
freelancer.'' Id. at 15.
\105\ Specifically, BLS recognized that: (1) The ``CWS measures
only respondents' main jobs . . ., thus potentially missing workers
with nontraditional second or supplementary income jobs''; (2) ``CWS
only asks respondents about their work in the past week and may fail
to capture seasonal workers or workers that supplement their income
with occasional work''; and (3) ``added questions regarding
electronically-mediated employment resulted in a large number of
false positive answers.'' Government Accountability Office,
Contingent Workforce: BLS is Reassessing Measurement of
Nontraditional Workers, Jan. 29, 2019, https://www.gao.gov/assets/700/696643.pdf.
---------------------------------------------------------------------------

Another potential bias in the Department's results could be due to
the exclusion of relevant explanatory variables from the model
specification, including the omission of observable variables that
correlate with hourly earnings. For example, the Department's analysis
of 2017 CWS data used 22 occupation dummy variables but did not control
for a worker's job position within any of the occupations (although it
did control for ``potential experience''). However, as the Department's
Guidance indicates, a statistical comparison of earnings between
workers generally must control for ``job level or grade'' in addition
to experience to ensure the comparison is for workers in similar
jobs.\106\ If, hypothetically, independent contractors on average have
lower job levels (or equivalents) than traditional employees within
each occupation,\107\ the Department's analysis would not be comparing
the hourly earnings of primary independent contractors and employees
who have the same jobs. Instead, the Department would be comparing a
population of relatively low-level independent contractors with a
population that includes both low- and high-level employees.
---------------------------------------------------------------------------

\106\ Department of Labor, Office of Federal Contracting
Compliance Programs, Directive 2018-5, Aug. 24, 2018, https://www.dol.gov/agencies/ofccp/directives/2018-05#ftn.id10.
\107\ For example, because individuals working as independent
contractors are less likely to be in positions with managerial
responsibilities over other workers.
---------------------------------------------------------------------------

The existence of unobservable differences between independent
contractors and employees that are correlated with earnings, such as
productivity, skill, and preference for flexibility also bias
comparison of hourly earnings. For example, independent contractors may
be on average more willing than employees to trade monetary
compensation for increased workplace flexibility, which would obscure
the observability of an earnings premium for independent contractors.
It is possible that independent contractors' hourly earnings premium
may be best observed at the margin, such as comparing a worker's
behavior when deciding between two similar positions, one as an
employee and one as an independent contractor.
Labor market frictions and personal preferences facing both
employers and workers may further prevent a clear detection of a full
picture of any earnings premium. Employees that transition to
independent contractor classification may prefer monetary compensation
over employer-provided benefits (e.g., subsidies for health insurance
when they already have other coverage).\108\ The non-pecuniary benefits
of independent contracting, such as workplace flexibility, may impact
the observability of an earnings premium. Specifically, a range of
research shows that workers are willing to accept lower wages in
exchange for increased flexibility.\109\
---------------------------------------------------------------------------

\108\ Research using hedonic wage models has found mixed results
on the trade-off between pay and benefits, with some researchers
finding a positive correlation between increased pay and benefits,
rather than a trade-off. See Simon, K. (2001), Displaced workers and
employer-provided health insurance: Evidence of a wage/fringe
benefit tradeoff? Int J Health Care Finance Econ., (3-4): 249-71.
https://www.ncbi.nlm.nih.gov/pubmed/14625928.
\109\ He, H. et al. 2019. Do Workers Value Flexible Jobs? A
Field Experiment. NBER Working Paper No. w25423. https://ssrn.com/abstract=3311395.
---------------------------------------------------------------------------

An additional consideration is that minimum wage and overtime pay
would no longer apply if workers shift from employee status to
independent contractor status. The 2017 CWS data

[[Page 60630]]

indicate that, before conditioning on covariates, independent
contractors under the narrower definition of primary, active work are
more likely than employees to report earning less than the FLSA minimum
wage of $7.25 per hour (8 percent for self-employed independent
contractors, 5 percent for other independent contractors, and 2 percent
for employees). That data further indicated that, before conditioning
on covariates, primary independent contractors are more likely to work
overtime at their main job (30 percent for self-employed independent
contractors and 19 percent for other independent contractors versus 18
percent for employees). The Department was unable to determine whether
these differences were the result of differences in worker
classification, as opposed to other factors.

E. Costs

The Department estimated that regulatory familiarization costs will
total $370.9 million in Year 1.
1. Regulatory Familiarization Costs
Regulatory familiarization costs represent direct costs to
businesses and current independent contractors associated with
reviewing the new regulation. To estimate the total regulatory
familiarization costs, the Department used (1) the number of
establishments, government entities, and current independent
contractors; (2) the wage rates for the employees and for the
independent contractors reviewing the rule; and (3) the number of hours
that it estimates employers and independent contractors will spend
reviewing the rule. This section presents the calculation for
establishments first and then the calculation for independent
contractors.
It is not clear whether regulatory familiarization costs are a
function of the number of establishments or the number of firms.\110\
Presumably, the headquarters of a firm will conduct the regulatory
review for businesses with multiple locations, and may also require
some locations to familiarize themselves with the regulation at the
establishment level. Other firms may either review the rule to
consolidate key takeaways for their affiliates or they may rely
entirely on outside experts to evaluate the rule and provide the
relevant information to their organization (e.g., a chamber of
commerce). The Department used the number of establishments to estimate
the fundamental pool of regulated entities--which is larger than the
number of firms. This assumes that regulatory familiarization occurs at
both the headquarters and establishment levels.
---------------------------------------------------------------------------

\110\ An establishment is commonly understood as a single
economic unit, such as a farm, a mine, a factory, or a store, that
produces goods or services. Establishments are typically at one
physical location and engaged in one, or predominantly one, type of
economic activity for which a single industrial classification may
be applied. An establishment contrasts with a firm, or a company,
which is a business and may consist of one or more establishments.
See BLS, ``Quarterly Census of Employment and Wages: Concepts,''
https://www.bls.gov/opub/hom/cew/concepts.htm.
---------------------------------------------------------------------------

There may be differences in familiarization cost by the size of
establishments; however, the analysis does not compute different costs
for establishments of different sizes. Furthermore, the analysis does
not revise down for states where the laws may more stringently limit
who qualifies as an independent contractor (such as California). To
estimate the number of establishments incurring regulatory
familiarization costs, the Department began by using the Statistics of
U.S. Businesses (SUSB) to define the total pool of establishments in
the United States.\111\ In 2017, the most recent year available, there
were 7.86 million establishments. These data were supplemented with the
2017 Census of Government that reports 90,075 local government
entities, and 51 state and federal government entities.\112\ The total
number of establishments and governments in the universe used for this
analysis is 7,950,800.
---------------------------------------------------------------------------

\111\ U.S. Census Bureau, 2017 SUSB Annual Data Tables by
Establishment Industry. https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html.
\112\ U.S. Census Bureau, 2017 Census of Governments. https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------

The applicable universe used by the Department for assessing
familiarization costs of this proposed rule is all establishments that
engage independent contractors, which is a subset of the universe of
all establishments. The Department estimates the impact of regulatory
familiarization based upon assessment of the regulated universe. For
the Department's recent Joint Employer Status under the Fair Labor
Standards Act, Defining and Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales and Computer Employees, and
Regular Rate Under the Fair Labor Standards Act rulemakings, it
estimated that the regulated universe comprised all establishments
because the rules were broadly applicable to every employer. For those
rules, the Department estimated familiarization costs by assuming each
establishment would review each rule. Because the proposed rule affects
only some establishments, i.e., those that do or may face an
independent contractor versus employee classification determination,
the Department accordingly reduces the estimated pool to better
estimate the establishments affected by the rule by assessing
regulatory familiarity costs only for those establishments that engage
independent contractors.
In 2019, Lim et al. used extensive IRS data to model the
independent contractor market, finding that 34.7 percent of firms have
any independent contractors.\113\ These data are based on annual tax
filings, so the dataset includes firms that may contract for only parts
of a year. This figure forms the foundation of the multiplier used in
this analysis. The Department requests public comments and data on
these assumptions.
---------------------------------------------------------------------------

\113\ Table 10: Firm sample summary statistics by year (2001-
2015), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
---------------------------------------------------------------------------

OMB Circular A-4 instructs that regulatory impact analyses
establish a baseline, usually a ``no action'' baseline, to represent
what the world is expected to be like in the absence of the proposed
rule.\114\ In the absence of this proposed rule, establishments that do
not currently have any independent contractors but are looking to hire
one or more will need to familiarize themselves with the current legal
framework.\115\ Accordingly, firms that do not currently use
independent contractors are not counted in this universe of employers;
however, to allow for an error margin, the Department is using a
rounded 35 percent of the total number of establishments defined above
(7,950,800), resulting in 2,782,780 establishments estimated to incur
familiarization costs.
---------------------------------------------------------------------------

\114\ OMB Circular A-4, https://www.reginfo.gov/public/jsp/Utilities/circular-a-4_regulatory-impact-analysis-a-primer.pdf.
\115\ An added dimension is that the proposed rule is expected
to provide significant clarity, which would result in time and cost
savings (net of regulatory familiarization costs) for those outside
the pool of firms with existing independent contractor
relationships. These (net) cost savings are not included in this
analysis, consistent with this analysis' treatment of resulting
growth in the independent contractor universe.
---------------------------------------------------------------------------

The Department assumes that a Compensation, Benefits, and Job
Analysis Specialist (SOC 13-1141) (or a staff member in a similar
position) will review the rule.\116\ According to the

[[Page 60631]]

Occupational Employment Statistics (OES), these workers had a mean wage
of $33.58 per hour in 2019 (most recent data available). Given the
proposed clarification to the Department's interpretation of who is an
employee and who is an independent contractor under the FLSA, the
Department assumes that it will take on average about 1 hour to review
the rule as proposed. The Department believes that an hour, on average,
is appropriate, because while some establishments will spend longer
than one hour to review the rule, many establishments may rely on
third-party summaries of the changes or spend little or no time
reviewing the rule. Assuming benefits are paid at a rate of 46 percent
of the base wage, and overhead costs are 17 percent of the base wage,
the reviewer's effective hourly rate is $54.74; thus, the average cost
per establishment conducting regulatory familiarization is $54.74.
Therefore, regulatory familiarization costs to businesses in Year 1 are
estimated to be $152.3 million ($54.74 x 2,782,780) in 2019 dollars.
---------------------------------------------------------------------------

\116\ A Compensation/Benefits Specialist ensures company
compliance with federal and state laws, including reporting
requirements; evaluates job positions, determining classification,
exempt or non-exempt status, and salary; plans, develops, evaluates,
improves, and communicates methods and techniques for selecting,
promoting, compensating, evaluating, and training workers. See BLS,
``13-1141 Compensation, Benefits, and Job Analysis Specialists,''
https://www.bls.gov/oes/current/oes131141.htm.
---------------------------------------------------------------------------

For regulatory familiarization costs for independent contractors,
the Department used its estimate of 18.9 million independent
contractors and assumed each independent contractor will spend 15
minutes to review the regulation. The time estimates used for
independent contractors is estimated to be smaller than for
establishments. This difference is in part because the Department
believes independent contractors are likely to rely on summaries of the
key elements of the rule change published by the Department, worker
advocacy groups, media outlets, and accountancy and consultancy firms,
as has occurred with other rulemakings. Furthermore, the repercussions
for independent contractors are smaller (i.e., the costs associated
with misclassification tend to fall on establishments). This time is
valued at $46.36, which is the mean hourly wage rate for independent
contractors in the CWS, $27.27, with an additional 46 percent benefits
and 17 percent for overhead, then updated to 2019 dollars.
The estimate of 18.9 million independent contractors captures the
universe of workers over a one-year period. Using this figure for the
overall cost estimate results in an artificially high value because it
includes workers who would have otherwise been included in the baseline
case without the proposed rule and thus spent time familiarizing
themselves with the legal framework in the matter of course, without
incurring a supplementary cost. Furthermore, the Department believes
that it is probable that independent contractors would review the
regulation only when they had reason to believe that the benefits would
outweigh the costs incurred in familiarizing themselves with the rule,
and since this analysis does not attempt to calculate those economic
benefits it is possible that the costs presented in this section are
overestimated.\117\
---------------------------------------------------------------------------

\117\ For example, independent contractors in states with
classification frameworks that are known to be more stringent than
the existing FLSA classification framework, such as in California,
may not review the rule since it would be unlikely to affect their
classification.
---------------------------------------------------------------------------

The total one-time regulatory familiarization costs for independent
contractors are estimated to be $218.6 million. The total one-time
regulatory familiarization costs for establishments and independent
contractors are estimated to be $370.9 million.
Regulatory familiarization costs in future years are assumed to be
de minimis. Similar to the baseline case for employers, independent
contractors would continue to familiarize themselves with the
applicable legal framework in the absence of the rule, so this proposed
rulemaking--anticipated to provide more clarity--is not expected to
impose costs after the first year.\118\ This amounts to a 10-year
annualized cost of $43.5 million at a discount rate of 3 percent or
$52.8 million at a discount rate of 7 percent.
---------------------------------------------------------------------------

\118\ As explained below, the Department considers that the
regulation may produce benefits along this dimension in future years
by simplifying the regulatory environment.
---------------------------------------------------------------------------

2. Other Costs
There may be other costs associated with this NPRM that have not
been quantified due to uncertainties or data limitations. The
Department invites public comments and data to address this issue.

F. Cost Savings

This NPRM is expected to result in cost savings to firms and
workers. The Department has quantified only the cost savings from
increased clarity and reduced litigation. The other areas of
anticipated cost savings were not estimated due to uncertainties or
data limitations. The Department welcomes data and comments on the
potential cost savings and benefits to society.
1. Increased Clarity
This proposed rule is expected to increase clarity concerning
whether a worker is classified as an employee or as an independent
contractor under the FLSA. This would reduce the burden faced by
employers, potential employers, and workers to understand the
distinction and how the working relationship should be classified. It
is unclear exactly how much time would be saved, but the Department
provides some quantitative estimates to provide a sense of the
magnitude. To quantify this benefit, the following variables need to be
defined and estimated: (1) The number of new employer-worker
relationships being assessed to determine the appropriate
classification; (2) the amount of time saved per assessment; and (3) an
average wage rate for the time spent. The Department estimates this
will result in a $447.2 million in savings annually. The Department
requests comments on these assumptions and calculations.
The Department began with its estimate of the number of current
independent contractors as the basis for estimating the number of new
relationships. As discussed in section VI.C, according to the CWS,
there are 10.6 million workers who are independent contractors on their
primary job. Adjusting this figure to account for independent
contractors on their secondary job results in 18.9 million independent
contractors. According to Lim et al. (2019), in 2016 the average number
of 1099-MISC forms issued per independent contractor was 1.43.
Therefore, the Department assumes the average independent contractor
has 1.43 jobs per year.\119\ This number does not account for the
workers who do not file taxes, a recognized limitation in the cited
study. Because it is unclear whether those who do not file taxes would
have a higher or lower number jobs per year, the Department does not
believe that this biases the estimate in either direction. Multiplying
these two numbers results in an estimated 27.0 million new independent
contractor relationships each year.\120\
---------------------------------------------------------------------------

\119\ Lim et al., supra note 61, at 61.
\120\ The Department in this analysis did not incorporate
estimates of potential growth in independent contracting due to
uncertainty. For example, the trend in independent contracting
varies significantly based on the source. Additionally, the impact
of this rule on the prevalence of independent contracting is
uncertain. Lastly, state laws, such as those in California discussed
below, may have significant impacts on the prevalence of independent
contracting, which would make historical growth rates potentially
inappropriate.
---------------------------------------------------------------------------

The independent contracting sector is characterized by churn. In
their annual State of Independence in America 2019 report, MBO
Partners, a leading American staffing firm, finds that 47.8

[[Page 60632]]

percent of U.S. adults reported working as an independent contractor at
some point in their career; they estimate that figure will reach 53
percent in the next five years.\121\ This fits with the range of
estimates for the size of the independent contractor universe presented
in section VI.C. Thus, it is assumed that over the ten-year time
horizon of this analysis, millions of Americans will choose independent
contractor work either for the first time or return to it. This churn
is not explicitly estimated for use in this analysis, but it provides a
qualitative rationale for not attempting to taper the expected size of
the independent contractor universe over time. The Department requests
comments and data on these assumptions.
---------------------------------------------------------------------------

\121\ State of Independence in America, MBO Partners (2019).
https://www.mbopartners.com/state-of-independence/.
---------------------------------------------------------------------------

A subset of new independent contractor relationships may have time
savings associated with the proposed rule. Such a reduction is
difficult to quantify because it is unclear how many establishments and
independent contractors will realize benefits of increased clarity. It
is also possible that the increased clarity of the classification
process will lead to compound effects that generate far greater
benefits over time. Nonetheless, because it is possible that only a
subset of contracts would receive the cost savings associated with
increased clarity, the Department has reduced the number of contracts
in the estimate by 25 percent. This results in 20.2 million contracts
with cost savings to both the employer and the independent
contractor.\122\ The Department requests comments and data on this
assumption.
---------------------------------------------------------------------------

\122\ 18.9 million ICs x 1.43 contracts per year x (1-0.25
possible reduction in clarity benefits) = 20.2 million.
---------------------------------------------------------------------------

Per each new contract with time savings, the Department has assumed
that employers would save 20 minutes of time and independent
contractors would save 5 minutes.^{123 124} These numbers are
small because they represent the marginal time savings for each
contract, not the entire time necessary to identify whether an
independent contractor relationship holds. For employers, this time is
valued at a loaded hourly wage rate of $54.74. This is the mean hourly
rate of Compensation, Benefits & Job Analysis Specialists (13-1141)
from the OES multiplied by 1.63 to account for benefits and overhead.
For independent contractors, this time is valued at $46.36 per hour
(mean wage rate for independent contractors in the CWS of $27.29 with
the amount of benefits and overhead paid by employers for employees,
then adjusted to 2019 dollars using the GDP deflator).
---------------------------------------------------------------------------

\123\ These time savings are based on a 33 percent assumed
reduction in the estimated familiarization time per contract for
both independent contractors (15 minutes) and employers (1 hour).
\124\ The Department requests comment on whether more meaningful
estimates would distinguish between time periods (with, for example,
relatively large upfront savings at the time contracts are arranged
and smaller ongoing amounts) and/or would vary by affected industry.
---------------------------------------------------------------------------

Using these numbers, the Department estimates that employers will
save $369.0 million annually and independent contractors will save
$78.1 million annually due to increased clarity (Table 4). In sum, this
is estimated to be a $447.2 million savings. The Department assumes the
parameters used in this cost savings estimate will remain constant over
time. This assumes no growth in independent contracting, no real wage
growth, and no subsequent innovation in the employer-worker
relationship. These assumptions, while highly unlikely to be true in
reality, facilitate simplicity of calculation. The annualized savings
over both a 10-year horizon and in perpetuity, with both the 3 percent
and 7 percent discount rates is $447.2 million.
In addition to increased clarity when assessing whether each
relationship qualifies as an independent contractor or employment
relationship, there may also be upfront time savings for new entrants
who must familiarize themselves with the definition of an employee as
compared to an independent contractor, and who now have clearer
guidance to aid in that understanding. This would apply to new
independent contractors, new establishments, and current establishments
that are considering hiring independent contractors for the first time.
The Department did not quantify this benefit due to uncertainty and the
difficulty of determining reliable variables. However, such benefits
are expected to be real and significant. The Department requests
comments and data to address these constraints.

Table 4--Cost Savings for Increased Clarity to Employers and Independent
Contractors
------------------------------------------------------------------------
Parameter Value
------------------------------------------------------------------------
Number of new relationships (per year):
Independent contractors............................... 18,858,000
Number of jobs per contractor......................... 1.43
New independent contractor jobs....................... 26,966,940
Adjustment factor..................................... 75%
---------------
Total................................................. 20,225,205
Time savings per job (minutes):
Employers............................................. 20
Independent contractors............................... 5
Value of time:
Employers............................................. $54.74
Independent contractors............................... $46.36
Total savings:
Employers............................................. $369,042,574
Independent contractors............................... $78,137,248
---------------
Total................................................. $447,179,822
------------------------------------------------------------------------

2. Reduced Litigation
These proposed changes are expected to result in decreased
litigation due to increased clarity and reduced misclassification. The
Department provides analysis here to assess the potential magnitude of
this cost savings. The methodology of this section mirrors previous
final rules promulgated in recent years. The Department requests
comments on the assumptions in this section.\125\
---------------------------------------------------------------------------

\125\ The Department applied a similar approach to litigation
costs in the 2019 final rule Defining and Delimiting the Exemptions
for Executive, Administrative, Professional, Outside Sales and
Computer Employees, 81 FR 51230 (2019).
---------------------------------------------------------------------------

The Department estimates that, due to increased clarity on
independent contractor status, $33.6 million in litigation costs will
be avoided per year. To reach this estimate, the Department determined
that there were 6,711 federal cases relating to the FLSA filed in
2019.\126\ Of these cases, the Department estimates that 7 percent of
these cases relate to independent contractor status. To determine this
percentage, the Department reviewed a random sample of 500 of the FLSA
cases closed in 2014 (8,256 cases).\127\ Of those cases, the Department
identified 35 cases within this sample that related to independent
contractor status. This ratio was applied to the 6,711 FLSA cases from
2019 to

[[Page 60633]]

estimate 470 cases related to independent contractor status. The
Department assumes that the increased clarity of the proposed rule
would reduce litigation in this area by 10 percent as stakeholders
would better understand and be better able to agree on classification
determinations. This estimate is based on an initial Departmental
review of FLSA cases, and the Department requests comments and data to
help inform and refine this assumption. Multiplying these variables
results in an estimated 47 cases avoided annually.
---------------------------------------------------------------------------

\126\ Downloaded from Public Access to Court Electronic Records
(PACER).
\127\ The Department used data from 2014 already obtained for
use in the analysis performed for the 2019 overtime and regular rate
final rules. See 84 FR 51230, 51280-81 (reduced litigation estimate
for the final rule updating the FLSA's white collar exemptions at 29
CFR part 541); 84 FR 68736, 68767-68 (reduced litigation estimate
for the final rule updating the FLSA's ``regular rate'' regulations
at 29 CFR part 778). The Department invites comment on its
methodology but has no reason to believe that a more recent sample
would materially affect the results in this analysis.
---------------------------------------------------------------------------

Next, the Department applied a previous estimate of litigation
costs of $654,182 per case. To obtain this estimate, the Department
examined a selection of 56 FLSA cases concluded between 2012 and 2015
that contained litigation cost information to estimate the average
costs of litigation.\128\ The Department looked at records of court
filings in the Westlaw Case Evaluator tool and on PACER to ascertain
how much plaintiffs in these cases were paid for attorney fees,
administrative fees, and/or other costs, apart from any monetary
damages attributable to the alleged FLSA violations. After determining
the plaintiff's total litigation costs for each case, the Department
then doubled the figures to account for litigation costs that the
defendant employers incurred. According to this analysis, the average
litigation cost for FLSA cases concluded between 2012 and 2015 was
$654,182. Adjusting for inflation, using the GDP deflator, results in a
value of $715,637 in 2019.\129\
---------------------------------------------------------------------------

\128\ The 56 cases used for this analysis were retrieved from
Westlaw's Case Evaluator database using a keyword search for case
summaries between 2012 and 2015 mentioning the terms ``FLSA'' and
``fees.'' This was not limited to cases associated with independent
contracting. Although the initial search yielded 64 responsive
cases, the Department excluded one duplicate case, one case
resolving litigation costs through a confidential settlement
agreement, and six cases where the defendant employer(s) ultimately
prevailed. Because the FLSA only entitles prevailing plaintiffs to
litigation cost awards, information about litigation costs was only
available for the remaining 56 FLSA cases that ended in settlement
agreements or court verdicts favoring the plaintiff employees.
\129\ These totals may underestimate total litigation costs
because some FLSA cases are heard in state court and thus were not
captured by PACER; some filings are resolved before litigation or by
alternative dispute resolution; and some attorneys representing FLSA
plaintiffs may take a contingency fee atop their statutorily awarded
fees and costs.
---------------------------------------------------------------------------

Applying these figures to the estimated 47 cases that could be
prevented each year due to this rulemaking, the Department estimates
that avoided litigation costs resulting from the rule total $33.6
million per year (2019 dollars).\130\
---------------------------------------------------------------------------

\130\ Using the median litigation cost, rather than the mean,
results in a value of $122,341 (2019 dollars) per case, which for
the estimated 47 annual cases produces a total annual litigation
cost savings of $5.7 million. However, the median values do not
adequately capture the magnitude of the impact resulting from large-
scale litigation cases that are expected to benefit from the clarity
provided in this proposed rule. Therefore, the mean average is used
for this analysis.
---------------------------------------------------------------------------

The Department estimates that annual cost savings associated with
this rule would be $480.8 million ($447.2 million in increased clarity
+ $33.6 million in avoided litigation costs).
3. Other Cost Savings and Benefits
Removing uncertainty improves labor market efficiency by reducing
deadweight loss. As discussed in the need for rulemaking, the
Department believes emerging and innovative economic arrangements that
benefit both workers and business require reasonable certainty
regarding the worker's classification as an independent contractor. The
current legal uncertainty may deter businesses from offering these
arrangements or developing them in the first place.\131\ If so, the
result would be economic deadweight loss: Legal uncertainty prevents
mutually beneficial independent contractor arrangements. This proposed
rule may produce cost savings by reducing deadweight loss. Nonetheless,
due to the abundance of variables at play, the Department has not
attempted to quantify the precise amount of that reduction. The
Department invites data and comments on this topic.
---------------------------------------------------------------------------

\131\ See Pivateau, supra note 26, at 628 (``The continued
demand for innovative work solutions requires a new classification
test. Without clarification, parties will be unwilling to engage in
new or innovative work arrangements.''); see also Hollrah and
Hollrah, ``The Time Has Come for Congress to Finish Its Work on
Harmonizing the Definition of `Employee,' '' 26 J. L. & Pol'y 439
(2018), https://brooklynworks.brooklaw.edu/jlp/vol26/iss2/1/.
---------------------------------------------------------------------------

By decreasing uncertainty and thus potentially opening new
opportunities for firms, this proposed rule may encourage companies to
hire independent contractors whom they otherwise would not have hired.
Eisenach (2010) outlines the potential costs of curtailing independent
contracting.\132\ If independent contracting is expanded due to this
rule, this could generate benefits that may include:
---------------------------------------------------------------------------

\132\ J. Eisenach, ``The Role of Independent Contractors in The
U.S. Economy,'' Navigant Economics (2010), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1717932.
---------------------------------------------------------------------------

Increased job creation and small business formation.
Increased competition and decreased prices.
A more flexible and dynamic work force, where workers are
able to more easily move to locations or to employers where their labor
and skills are needed.
Eisenach explains several channels through which these efficiency
gains may be achieved. First, by avoiding some fixed employment costs,
it is easier for firms to adjust their labor needs based on
fluctuations in demand. Second, by using pay-for-preference,
independent contractors are incentivized to increase production and
quality. Third, ``contracting can be an important mechanism for
overcoming legal and regulatory barriers to economically efficient
employment arrangements.'' The analysis of these benefits assume that
businesses, especially in other industries, would like to increase
their use of independent contractors, but have refrained from doing so
because of uncertainty regarding who can appropriately be engaged as an
independent contractor under the FLSA. Conversely, significant use of
independent contractors may not be suitable for all industries, thus
limiting the growth in its utilization.
The Department believes this rulemaking may also result in greater
autonomy and job satisfaction for workers. Several surveys have shown
that independent contractors have high job satisfaction.\133\ Using the
CWS, which only considers primary, active contractors, the Department
estimates that of independent contractors with valid responses, 83
percent prefer their current arrangement rather than being an employee,
compared with only 9 percent who would prefer an employment arrangement
(the remaining 8 percent responded that it depends). Additionally, the
main reasons they work as independent contractors demonstrate that they
enjoy the benefits of being an independent contractor: 31 percent enjoy
being their own boss or the independence it allows, and 27 percent
enjoy the scheduling flexibility.\134\ Additionally, McKinsey Global
Institute found that ``[i]ndependent workers report higher levels of
satisfaction on many aspects of their work life than traditional
workers.'' \135\ The McKinsey Global

[[Page 60634]]

Institute examined workers who work independently by choice and those
who do so by necessity (such as needing supplemental income) and found
that both groups report being happy with the flexibility and autonomy
of their work.\136\ Similarly, Kelly Services found that ``free
agents''--i.e., workers who ``derive their primary income from
independent work and actively prefer it''--report higher satisfaction
than traditional workers concerning overall employment situation; work-
life balance; opportunities to expand skills; and opportunities to
advance career.\137\
---------------------------------------------------------------------------

\133\ See, e.g., ``The State of Independence in America,'' MBO
Partners (2019) https://www.mbopartners.com/state-of-independence/.
\134\ The Department used PES26IC to identify preferred work
arrangement and PES26IR to identify the reason they work as an
independent contractor.
\135\ McKinsey Global Institute, supra note 74 at 11. A 2009 Pew
survey similarly found that self-employed workers are
``significantly more satisfied with their jobs than other workers.''
Rich Morin, ``Job Satisfaction among the Self-Employed,'' Pew
Research Center, (September 2009), http://pewsocialtrends.org/pubs/743/job-satisfaction-highest-among-self-employed. In particular, 39
percent of self-employed workers reported being ``completely
satisfied'' with their jobs, compared with 28 percent of employees.
Id.
\136\ McKinsey Global Institute, supra note 74 at 10. The
McKinsey survey found that, while ``those working independently out
of necessity report being happier with the flexibility and content
of the work,'' they also report being ``less satisfied with their
level of income level and their income security.'' Id. This
rulemaking is unlikely to negatively impact the average income level
of such workers by encouraging independent contractor opportunities
because there is no statistical evidence that independent contractor
earn less than employees. To the contrary and as discussed above,
there are data indicating that independent contractors, on average,
may earn higher hourly wages than employees. Nor is rulemaking
likely to negatively impact workers' income security, on average.
The Department believes income security is best achieved by removing
barriers that prevent laid-off Americans from finding paid work,
including as independent contractors. See 151 Ph.D. Economists and
Political Scientists in California, ``Open Letter to Suspend
California AB-5'' (April 14, 2020). This lesson may be all the
greater in light of the COVID-19 emergency.
\137\ Kelly Services, ``Agents of Change'' (2015), https://www.kellyservices.com/global/siteassets/3-kelly-global-services/uploadedfiles/3-kelly_global_services/content/sectionless_pages/kocg1047720freeagent20whitepaper20210x21020final2.pdf.
---------------------------------------------------------------------------

By clarifying that control and opportunity for profit are the core
economic reality factors, this proposed rule is likely to encourage the
creation of independent contractor jobs that provide autonomy and
entrepreneurial opportunities that workers find satisfying. For the
same reason, this proposed rule likely would diminish the incidence of
independent contractor jobs that lack these desired characteristics.
Thus, the Department expects this NPRM, if finalized, to result in more
independent contractor opportunities which bring with them autonomy and
job satisfaction. The benefits of worker autonomy and satisfaction
obviously ``are difficult or impossible to quantify,'' but they
nonetheless merit consideration.

G. Regulatory Alternatives

When proposing an economically significant rule, Executive Order
12866 requires agencies to conduct ``[a]n assessment, including the
underlying analysis, of costs and benefits of potentially effective and
reasonably feasible alternatives to the planned regulation.'' \138\
Here, in addition to ``the alternative of not regulating,'' \139\ the
Department considered three alternatives to the proposed rule, listed
below from least to most restrictive of independent contracting: \140\
---------------------------------------------------------------------------

\138\ Exec. Order No. 12866 Sec. 6(a)(3)(C)(iii), 58 FR 51741.
\139\ Exec. Order No. 12866 Sec. 1, 58 FR 51735.
\140\ OMB guidance advises that, where possible, agencies should
analyze at least one ``more stringent option'' and one ``less
stringent option'' to the proposed approach. OMB Circular A-4 at 16.

(1) Codification of the common law control test, which applies in
distinguishing between employees and independent contractors under
various other federal laws; \141\
---------------------------------------------------------------------------

\141\ See 26 U.S.C. 3121(d)(2) (generally defining the term
``employee'' under the Internal Revenue Code as ``any individual
who, under the usual common law rules applicable in determining the
employer-employee relationship, has the status of an employee''); 42
U.S.C. 410(j) (similarly defining ``employee'' under the Social
Security Act); see also, e.g., Community for Creative Non-Violence
v. Reid, 490 U.S. 730, 751 (1989) (applying ``principles of general
common law of agency'' to determine ``whether . . . work was
prepared by an employee or an independent contractor'' under the
Copyright Act of 1976); Darden, 503 U.S. 318 (holding that ``a
common-law test'' should resolve employee/independent contractor
disputes under ERISA).
---------------------------------------------------------------------------

(2) codification of the traditional six-factor ``economic reality''
balancing test, as recently articulated in WHD Opinion Letter FLSA2019-
6; and
(3) codification of the ``ABC'' test, as adopted by the California
Supreme Court in Dynamex Operations W., Inc. v. Superior Court, 416
P.3d 1 (Cal. 2018).\142\
---------------------------------------------------------------------------

\142\ See also Hargrove v. Sleepy's, LLC, 106 A.3d 449, 465
(N.J. 2015) (extending the ABC test to state wage claims in New
Jersey).

Although the Department recognizes that legal limitations prevent some
of these alternatives from being actionable, the Department nonetheless
presents them as regulatory alternatives in accord with OMB
guidance.\143\ These three regulatory alternatives are analyzed below
in qualitative terms, due to data constraints and inherent uncertainty
in measuring the exact stringency of multi-factor legal tests and
likely responses from the regulated community. The Department welcomes
comment on these regulatory alternatives, as well as suggestions
regarding any other potential alternatives.
---------------------------------------------------------------------------

\143\ OMB Circular A-4 advises that agencies ``should discuss
the statutory requirements that affect the selection of regulatory
Approach. If legal constraints prevent the selection of a regulatory
action that best satisfies the philosophy and principles of
Executive Order 12866, [agencies] should identify these constraints
and estimate their opportunity cost. Such information may be useful
to Congress under the Regulatory Right-to-Know Act.''
---------------------------------------------------------------------------

1. Codifying a Common Law Control Test
The least stringent alternative to the proposed rule's streamlined
``economic reality'' test would be to adopt a common law control test,
as is generally used to determine independent contractor classification
questions arising under the Internal Revenue Code and various other
federal laws.\144\ The overarching focus of the common law control test
is ``the hiring party's right to control the manner and means by which
[work] is accomplished,'' Reid, 490 U.S. at 751, but the Supreme Court
has explained that ``other factors relevant to the inquiry [include]
the skill required; the source of the instrumentalities and tools; the
location of the work; the duration of the relationship between the
parties; whether the hiring party has the right to assign additional
projects to the hired party; the extent of the hired party's discretion
over when and how long to work; the method of payment; the hired
party's role in hiring and paying assistants; whether the work is part
of the regular business of the hiring party; whether the hiring party
is in business; the provision of employee benefits; and the tax
treatment of the hired party.'' Id. at 751-52.
---------------------------------------------------------------------------

\144\ See supra note 141.
---------------------------------------------------------------------------

Although the common law control test considers many of the same
factors as those identified in the proposed rule's ``economic reality''
test (e.g., skill, length of the working relationship, the source of
equipment and materials, etc.), courts generally recognize that,
because of its focus on control, the common law test is more permissive
of independent contracting arrangements than the economic reality test,
which more broadly examines the economic dependence of the worker. See,
e.g., Diggs v. Harris Hospital-Methodist, Inc., 847 F.2d 270, 272 n. 1
(5th Cir. 1988) (observing that ``[t]he `economic realities' test is a
more expansive standard for determining employee status'' than the
common law control test). Thus, if a common law control test determined
independent contractor status under the FLSA, it is possible that some
workers presently classified as FLSA employees could be reclassified as
independent contractors, increasing the overall number of independent

[[Page 60635]]

contractors and reducing the overall number of employees. The
Department is unable to estimate the exact magnitude of such a
reclassification effect, but believes that the vast majority of FLSA
employees would remain FLSA employees under a common law control
test.\145\
---------------------------------------------------------------------------

\145\ As discussed earlier in section IV(D)(7), a review of
federal appellate case law since 1975 shows that the classification
outcome of almost every FLSA employee/independent contractor dispute
has aligned with the court's specific finding on the control factor.
Thus, adoption of a common law control test would be unlikely to
alter most FLSA worker classifications, including those close enough
to merit federal appellate litigation under the economic reality
test.
---------------------------------------------------------------------------

Codifying a common law control test would create a simpler legal
regime for regulated entities interested in receiving services from an
independent contractor, thereby reducing confusion, compliance costs,
and legal risk for entities interested in doing business with
independent contractors. Entities would not, for example, have to
understand and apply one employment classification standard for tax
purposes and a different employment classification standard for FLSA
purposes. Thus, adopting the common law control test would likely
increase perpetual cost savings for regulated entities attributable to
improved clarity and reduced litigation as compared to the proposed
rule. It could, on the other hand, impose burdens on workers who might
prefer to be employees subject to FLSA protections.
The Department notes that the Supreme Court has interpreted the
``suffer or permit'' language in section 3(g) of the FLSA as demanding
a broader definition of employment than that which exists under the
common law. See, e.g., Darden, 503 U.S. at 326; Portland Terminal Co.,
330 at 150-51. Accordingly, the Department believes it is legally
constrained from adopting the common law control test absent
Congressional legislation to amend the FLSA.
2. Codifying the Six-Factor ``Economic Reality'' Balancing Test
As discussed earlier in section II(B), WHD has long applied a
multifactor ``economic reality'' balancing test to distinguish between
employees and independent contractors in enforcement actions and
subregulatory guidance. Recently articulated in WHD Opinion Letter
FLSA2019-6, the six factors presently considered in WHD's multifactor
balancing test are as follows:

(1) The nature and degree of the potential employer's control;
(2) The permanency of the worker's relationship with the
potential employer;
(3) The amount of the worker's investment in facilities,
equipment, or helpers;
(4) The amount of skill, initiative, judgment, or foresight
required for the worker's services;
(5) The worker's opportunities for profit or loss; and
(6) The extent of integration of the worker's services into the
potential employer's business.

WHD Opinion Letter FLSA2019-6 at 4 (citing Rutherford, 331 U.S. at 730,
and Silk, 331 U.S. at 716).
The Department believes that the six-factor balancing test (as
articulated in WHD Opinion Letter FLSA2019-6) is neither more nor less
permissive of independent contractor relationships as compared to the
streamlined test proposed in this rulemaking. Both tests describe the
``economic dependence'' of the worker at issue as the ultimate inquiry
of the test; both emphasize the primacy of actual practice over
contractual or theoretical possibilities (i.e., the ``economic
reality'' of the work arrangement); and both evaluate the same set of
underlying factors, notwithstanding an emphasis and consolidation of
certain factors under the streamlined test. Notably, like Sec.
795.105(d)(1)(i) of the proposed rule, WHD Opinion Letter FLSA2019-6
advised that certain safety measures and quality control standards do
not constitute ``control'' indicative of an FLSA employment
relationship. See id. at 8 n. 4.
Although codifying this six-factor balancing test would thus impose
a comparably stringent legal standard on the regulated community, the
Department believes, as explained earlier in section III, that the six-
factor balancing test presently used by WHD and most courts would
benefit from clarification, sharpening, and streamlining. For this
reason, the Department believes that codifying such a test would not
yield the perpetual benefits and cost savings discussed earlier in this
analysis, such as improved clarity and reduced FLSA litigation.
Additionally, the Department does not believe that codifying the six-
factor balancing test would reduce initial regulatory familiarization
costs or provide per-contract clarity cost savings, as interested
establishments and independent contractors will likely spend the same
amount of time learning about any new regulatory language addressing
independent contractor status under the FLSA (no regulatory guidance on
the topic currently exists).
3. Codifying California's ``ABC'' Test
The most stringent regulatory alternative to the Department's
proposed rule would be to codify the ``ABC'' test recently adopted
under California's state wage and hour law to distinguish between
employee/independent contractor statuses.\146\ As described by the
California Supreme Court in Dynamex, ``[t]he ABC test presumptively
considers all workers to be employees, and permits workers to be
classified as independent contractors only if the hiring business
demonstrates that the worker in question satisfies each of three
conditions: (a) That the worker is free from the control and direction
of the hirer in connection with the performance of the work, both under
the contract for the performance of the work and in fact; and (b) that
the worker performs work that is outside the usual course of the hiring
entity's business; and (c) that the worker is customarily engaged in an
independently established trade, occupation, or business of the same
nature as that involved in the work performed.'' 416 P.3d at 34
(emphasis in original).\147\ In justifying the adoption of such a
stringent test, the Dynamex court noted the existence of an
``exceptionally broad suffer or permit to work standard'' in
California's wage and hour statute, id. at 31,\148\ as well as ``the
more general principle that wage orders are the type of remedial
legislation that must be liberally construed in a manner that

[[Page 60636]]

serves its remedial purposes.'' Id. at 32.\149\
---------------------------------------------------------------------------

\146\ See Dynamex, 416 P.3d 1; Assembly Bill (``A.B.'') 5, Ch.
296, 2019-2020 Reg. Sess. (Cal. 2019) (codifying the ABC test
articulated in Dynamex); A.B. 2257, Ch. 38, 2019-2020 Reg. Sess.
(Cal. 2020) (retroactively exempting certain professions,
occupations, and industries from the ABC test that A.B. 5 had
codified). The ABC test originated in state unemployment insurance
statutes, but some state courts and legislatures have recently
extended the test to govern employee/independent contractor disputes
under state wage and hour laws. See Keith Cunningham-Parmeter, Gig-
Dependence: Finding the Real Independent Contractors of Platform
Work, 39 N. Ill. U. L. Rev. 379, 408-11 (2019) (discussing the
origins and recent expansion of the ABC test).
\147\ California's ABC test is slightly more stringent than
versions of the ABC test adopted (or presently under consideration)
in other states. For example, New Jersey provides that a hiring
entity may satisfy the ABC test's ``B'' prong by establishing
either: (1) That the work provided is outside the usual course of
the business for which the work is performed, or (2) that the work
performed is outside all the places of business of the hiring
entity. N.J. Stat. Ann. Sec. 43:21-19(i)(6)(A-C). The Department
has chosen to analyze California's ABC test as a regulatory
alternative because businesses subject to multiple standards,
including nationwide businesses, are likely to comply with the most
demanding standard if they wish to make consistent classification
determinations.
\148\ See Cal. Code Regs., tit. 8, Sec. 11090, subd. 2(D) (``
`Employ' means to engage, suffer, or permit to work.''). The Dynamex
court noted that California's adoption of the ``suffer or permit to
work'' standard predated the enactment of the FLSA and was therefore
``not intended to embrace the federal economic reality test'' that
subsequently developed. 416 P.3d at 35.
\149\ See Cal. Code Regs., tit. 8, Sec. 11090, subd. 2(D) (``
`Employ' means to engage, suffer, or permit to work.'').
---------------------------------------------------------------------------

On its face, California's ABC test is far more restrictive of
independent contracting arrangements than any formulation of an
``economic reality'' balancing test, including the proposed rule.
Whereas no single factor necessarily disqualifies a worker from
independent contractor status under an economic reality test, each of
the ABC test's three factors may alone disqualify the worker from
independent contractor status. Thus, adoption of an ABC test to govern
independent contractor status under the FLSA would directly result in a
large-scale reclassification of many workers presently classified as
independent contractors into FLSA-covered employees. This
reclassification effect would be particularly disruptive in industries
that depend on independent contracting arrangements within the ``usual
course of the hiring entity's business,'' such as transportation,
residential construction, cable installation, etc. While some
independent contractors might benefit from reclassification by newly
receiving overtime pay and/or a guaranteed minimum wage, these workers
might also experience a reduction in work hours or diminished
scheduling flexibility as their new employers attempt to avoid
incurring additional expenses for overtime work. Others workers,
particularly off-site workers who operate free from the business'
direct control and supervision, might see their work arrangements
terminated by businesses unwilling or unable to assume the financial
burden and legal risk of the FLSA's overtime pay requirement. Some
businesses in California responded to the increased legal risk of
treating certain workers as independent contractors under the ABC test
by terminating their relationships with workers,\150\ thereby
eliminating some of the flexible work arrangements sought, for example,
by parents and others who must balance work and family
obligations.\151\ The Department believes adopting the ABC test as the
FLSA's generally applicable standard for distinguishing employees from
independent contractors would be unduly restrictive and disruptive to
the economy. The fact that California recently enacted numerous
exemptions to the ABC test highlights the test's limitations as a
possible alternative under the FLSA.\152\
---------------------------------------------------------------------------

\150\ See, e.g., Marc Tracy and Kevin Draper, ``Vox Media to Cut
200 Freelancers, Citing California Gig-Worker Law,'' New York Times
(Dec. 16, 2019), www.nytimes.com/2019/12/16/business/media/vox-media-california-job-cuts.html; Dawn Kawamoto, ``Exclusive: Fast-
growing S.F. company to exit market as result of state's new gig
worker law,'' San Francisco Business Times (Jan. 3, 2020),
www.bizjournals.com/sanfrancisco/news/2020/01/03/exclusive-fast-growing-s-f-company-to-exit-market.html; Sophia Bollag and Dale
Kasler, ``California Workers Blame New Labor Law for Lost Jobs.
Lawmakers are Scrambling to Fix It,'' Sacramento Bee (Feb. 10,
2020), www.sacbee.com/news/politics-government/capitol-alert/article239822623.html.
\151\ See, e.g., Elaine Pofeldt, ``California's AB-5 leaves
Women Business Owners Reeling,'' Forbes (Jan. 19, 2020),
www.forbes.com/sites/elainepofeldt/2020/01/19/californias-ab5-leaves-women-business-owners-reeling/#460fb6f05ef3.
\152\ See A.B. 2257, Ch. 38, 2019-2020 Reg. Sess. (Cal. 2020).
---------------------------------------------------------------------------

In any event, the Department believes it is legally constrained
from adopting California's ABC test because the Supreme Court has
instituted the economic reality test as the relevant standard for
determining workers' classification under the FLSA as an employee or
independent contractor. See Tony & Susan Alamo, 471 U.S. at 301 (``The
test of employment under the Act is one of `economic reality.' '');
Whitaker House, 366 U.S. at 33 (1961) (`` `economic reality' rather
than `technical concepts' is . . . the test of employment'' under the
FLSA) (citing Silk, 331 U.S. at 713; Rutherford Food, 331 U.S. at
729)).
The California Supreme Court explicitly recognized that the ABC
test defines ``employee'' more broadly than the FLSA when it explained
that the ABC test rests on a ``standard in California wage orders
[that] was not intended to embrace the [FLSA's] economic reality test''
and was instead ``intended to provide broader protection than that
accorded workers under the [FLSA] standard.'' Dynamex, 416 P.3d at
35.\153\ Moreover, the Supreme Court has stated that the existence of
employment relationships under the FLSA ``does not depend on such
isolated factors'' as the three independently determinative factors in
the ABC test, ``but rather upon the circumstances of the whole
activity.'' Rutherford Food, 331 U.S. at 730. Because the ABC test is
therefore inconsistent with Supreme Court precedent interpreting the
FLSA, the Department concludes it could not adopt the ABC test.
---------------------------------------------------------------------------

\153\ The ABC test would define ``employee'' to include workers
who have been held by the Supreme Court to be independent
contractors under the economic reality test. For instance, under the
ABC test, the term ``employee'' would include individuals who
perform work that falls within the usual course of the hiring
entity's business, regardless of all other considerations. Even
though transporting coal falls within a coal company's usual course
of business, the United States Supreme Court held in Silk that truck
drivers hired by a coal company to transport coal were independent
contractors rather than employees. 331 U.S. at 719. Similarly, the
Court held in Bartels that musicians were independent contractors
rather than employees of the music hall where they played, even
though playing music falls within the music hall's usual course of
business. 332 U.S. at 130.
---------------------------------------------------------------------------

Although the ABC test is ``a simpler, more structured test'' than a
multifactor balancing test and would likely lead to more consistent
classification outcomes, Dynamex, 416 P.3d at 34, legal constraints and
the disruptive economic effects of adopting such a stringent standard
advises against its adoption in the FLSA context. As mentioned earlier,
the Department has engaged in this rulemaking to clarify the existing
standard, not to radically transform it.

H. Summary of Impacts

In summary, the Department believes that this rule will increase
clarity regarding whether a worker is classified as an employee or an
independent contractor under the FLSA. This clarity could result in an
increased use of independent contractors. The costs and benefits to a
worker being classified as an independent contractor are discussed
throughout this analysis, and are summarized below.
The Department believes that there are real benefits to the use of
independent contractor status, for both workers and employers.
Independent contractors generally have greater autonomy and more
flexibility in their hours, providing them more control over the
management of their time. The use of independent contracting for
employers allows for a more flexible and dynamic workforce, where
workers provide labor and skills where and when they are needed.
Independent contractors may more easily work for multiple companies
simultaneously, have more control over their labor-leisure balance, and
more explicitly define the nature of their work. Independent
contractors also appear to have higher job satisfaction.
An increase in the number of job openings for independent
contractors can also have benefits for the economy as a whole.
Increased job creation and enhanced flexibility in work arrangements
are critical benefits during periods of economic uncertainty, such as
the current COVID-19 pandemic.
There are unique challenges that face independent contractors
compared to employees subject to the FLSA. Independent contractors are
not subject to the protections of the FLSA, such as minimum wage and
overtime pay. Independent contractors generally do not receive the same
employer-provided benefits as employees, such as health insurance,
retirement contributions, and

[[Page 60637]]

paid time off.\154\ Independent contractors may have a higher tax
liability than employees, as they are legally obligated to pay both the
employee and employer shares of the Federal Insurance Contributions Act
(FICA) taxes. However, economists recognize that payroll taxes
generally are subtracted from the wage rate of employees. Employers
also cover unemployment insurance and workers' compensation taxes for
their employees. These costs are also components of businesses' worker
costs, and employee wages are expected to reflect that accordingly.
Independent contractors do not pay these taxes nor are they generally
protected by these insurance programs, but there are private insurance
companies that offer equivalent coverage.
---------------------------------------------------------------------------

\154\ In some situations, independent contractors may be
provided with benefits similar to those provided to employees.
---------------------------------------------------------------------------

Because the Department does not know how many workers may shift
from employee status to independent contractor status, or how many
people who were previously unemployed or out of the labor force will
gain work as an independent contractor, these costs and benefits have
not been quantified. The Department welcomes comments and data on these
costs and benefits, and on how the prevalence of independent contractor
relationships will change as a result of this proposed rule.

VII. Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, Public Law 104-121 (1996), requires federal agencies engaged in
rulemaking to consider the impact of their proposals on small entities,
consider alternatives to minimize that impact, and solicit public
comment on their analyses. The RFA requires the assessment of the
impact of a regulation on a wide range of small entities, including
small businesses, not-for-profit organizations, and small governmental
jurisdictions. Accordingly, the Department examined the regulatory
requirements of the proposed rule to determine whether they would have
a significant economic impact on a substantial number of small
entities. Because both costs and cost savings are minimal for small
business entities, the Department certifies that the proposed rule will
not have a significant economic impact on a substantial number of small
entities.
The Department used the Small Business Administration size
standards, which determine whether a business qualifies for small-
business status, to estimate the number of small entities.\155\ The
Department then applied these thresholds to the U.S. Census Bureau's
2012 Economic Census to obtain the number of establishments with
employment or sales/receipts below the small business threshold in the
industry.\156\ These ratios of small to large establishments were then
applied to the more recent 2017 SUSB data.\157\ The Department
estimated there are 6.4 million small establishments or
governments.\158\
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\155\ SBA, Summary of Size Standards by Industry Sector, 2017,
www.sba.gov/document/support--table-size-standards.
\156\ The 2012 data are the most recently available with revenue
data.
\157\ For this analysis, the Department excluded independent
contractors who are not registered as small businesses, and who are
generally not captured in the SUSB, from the calculation of small
establishments.
\158\ The number of small governments was calculated based on
data from the 2017 Census of Governments.
---------------------------------------------------------------------------

The per-entity cost for small business employers is the regulatory
familiarization cost of $54.74, or the fully loaded mean hourly wage of
a Compensation, Benefits, and Job Analysis Specialist multiplied by one
hour. The per-entity rule familiarization cost for independent
contractors, some of whom would be small businesses, is $11.59, or the
fully loaded mean hourly wage of independent contractors in the CWS
($46.36) multiplied by 0.25 hour.
The cost savings due to increased clarity estimated per year for
each small business employer is $18.25, or the fully loaded mean hourly
wage of a Compensation, Benefits, and Job Analysis Specialist
multiplied by 0.33 hours. The cost savings due to increased clarity for
each independent contractor, some of whom would be a small business, is
$3.86 per year, or the fully loaded mean hourly wage of independent
contractors in the CWS multiplied by 0.83 hours. Because regulatory
familiarization is a one-time cost and the cost savings from clarity
recur each year, the Department expects cost savings to outweigh
regulatory familiarization costs in the long run. Because both costs
and cost savings are minimal for small business entities, and well
below one percent of their gross annual revenues, which is typically at
least $100,000 per year for the smallest businesses, the Department
certifies that the proposed rule will not have a significant economic
impact on a substantial number of small entities.
There is some evidence that small firms use independent contractors
for a greater proportion of their workforce than large firms.\159\ If
so, then it may be reasonable to assume that the increased use of
independent contractors may also favor smaller companies. In which
case, costs and benefits and cost savings may be larger for these small
firms. Because benefits and cost savings are expected to outweigh
costs, the Department does not expect this rule will result in an undue
hardship for small businesses. The Department requests comments and
data on this finding, including the numbers of small entities affected
by this rule and the compliance costs and associated cost savings and
benefits.
---------------------------------------------------------------------------

\159\ Lim et al, supra note 61 at 51.
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VIII. Unfunded Mandates Reform Act Analysis

The Unfunded Mandates Reform Act of 1995 (UMRA) \160\ requires
agencies to prepare a written statement for rules with a federal
mandate that may result in increased expenditures by state, local, and
tribal governments, in the aggregate, or by the private sector, of $156
million ($100 million in 1995 dollars adjusted for inflation) or more
in at least one year.\161\ This statement must: (1) Identify the
authorizing legislation; (2) present the estimated costs and benefits
of the rule and, to the extent that such estimates are feasible and
relevant, its estimated effects on the national economy; (3) summarize
and evaluate state, local, and tribal government input; and (4)
identify reasonable alternatives and select, or explain the non-
selection, of the least costly, most cost-effective, or least
burdensome alternative.
---------------------------------------------------------------------------

\160\ See 2 U.S.C. 1501.
\161\ Calculated using growth in the Gross Domestic Product
deflator from 1995 to 2019. Bureau of Economic Analysis. Table
1.1.9. Implicit Price Deflators for Gross Domestic Product.
---------------------------------------------------------------------------

A. Authorizing Legislation

This proposed rule is issued pursuant to the Fair Labor Standards
Act, 29 U.S.C. 201, et seq.

B. Assessment of Costs and Benefits

For purposes of the UMRA, this rule includes a federal mandate that
is expected to result in increased expenditures by the private sector
of more than $156 million in at least one year, but will not result in
increased expenditures by state, local, and tribal governments, in the
aggregate, of $156 million or more in any one year.
Based on the cost analysis from this proposed rule, the Department
determined that the proposed rule will result in Year 1 total costs for
state and local governments totaling $1.7 million, all for regulatory
familiarization. There

[[Page 60638]]

will be no additional costs incurred in subsequent years.
The Department determined that the proposed rule will result in
Year 1 total costs for the private sector of $369.2 million, all of
them incurred for regulatory familiarization. The Department included
all independent contractors in the private sector total regulatory
familiarization costs. There will be no additional costs incurred in
subsequent years.
UMRA requires agencies to estimate the effect of a regulation on
the national economy if such estimates are reasonably feasible and the
effect is relevant and material.\162\ However, OMB guidance on this
requirement notes that such macroeconomic effects tend to be measurable
in nationwide econometric models only if the economic effect of the
regulation reaches 0.25 percent to 0.5 percent of Gross Domestic
Product (GDP), or in the range of $53.6 billion to $107.2 billion
(using 2019 GDP).\163\ A regulation with a smaller aggregate effect is
not likely to have a measurable effect in macroeconomic terms, unless
it is highly focused on a particular geographic region or economic
sector, which is not the case with this proposed rule.
---------------------------------------------------------------------------

\162\ See 2 U.S.C. 1532(a)(4).
\163\ According to the Bureau of Economic Analysis, 2019 GDP was
$21.43 trillion. https://www.bea.gov/system/files/2020-02/gdp4q19_2nd_0.pdf.
---------------------------------------------------------------------------

The Department's PRIA estimates that the total costs of the
proposed rule will be $369.2 million. Given OMB's guidance, the
Department has determined that a full macroeconomic analysis is not
likely to show that these costs would have any measurable effect on the
economy.

C. Least Burdensome Option Explained

This Department believes that it has chosen the least burdensome
but still cost-effective methodology to clarify its interpretation of
the FLSA's distinction between employees and independent contractors.
Although the proposed regulation would impose costs for regulatory
familiarization, the Department believes that its proposal would reduce
the overall burden on organizations by simplifying and clarifying the
analysis for determining whether a worker is classified as an employee
or an independent contractor under the FLSA. The Department believes
that, after familiarization, this rule will reduce the time spent by
organizations to determine whether a worker is an independent
contractor. Additionally, revising the Department's guidance to provide
more clarity could promote innovation and certainty in business
relationships.

IX. Effects on Families

The undersigned hereby certifies that the proposed rule would not
adversely affect the well-being of families, as discussed under section
654 of the Treasury and General Government Appropriations Act, 1999.

List of Subjects

29 CFR Part 780

Agriculture, Child labor, Wages.

29 CFR Part 788

Forests and forest products, Wages.

29 CFR Part 795

Employment, Wages.

Signed at Washington, DC, this 18th day of September, 2020.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.

For the reasons set out in the preamble, the Department of Labor
proposes to amend Title 29 of the Code of Federal Regulations parts 780
and 788 and add part 795, as follows:

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

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

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

0
2. Amend Sec. 780.330 by revising paragraph (b) as follows:

Sec. 780.330 Sharecroppers and tenant farmers.

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

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

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

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

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

Sec. 788.16 Employment relationship.

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

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

Sec.
795.100 Introductory statement.
795.105 Determining employee and independent contractor
classification under the FLSA.
795.110 Primacy of actual practice.
795.115 Severability.

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

Sec. 791.100 Introductory statement.

This part contains the Department of Labor's general
interpretations of the text governing individuals' classification as
employees or independent contractors under the Fair Labor Standards Act
(FLSA or Act). See 29 U.S.C. 201-19. The Administrator of the Wage and
Hour Division will use these interpretations to guide the performance
of his or her duties under the Act, and intends the interpretations to
be used by employers, employees, and courts to understand employers'
obligations and employees' rights under the Act. To the extent that
prior administrative rulings, interpretations, practices, or
enforcement policies relating to classification as an employee or
independent contractor under the Act are inconsistent or in conflict
with the interpretations stated in this part, they are hereby
rescinded. The interpretations stated in this part may be relied upon
in accordance with section 10 of the Portal-to-Portal Act, 29 U.S.C.
251-262, notwithstanding that after any such act or omission in the
course of such reliance, any such interpretation in this part ``is
modified or rescinded or is determined by judicial authority to be
invalid or of no legal effect.'' 29 U.S.C. 259.

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

(a) Independent contractors are not employees under the Act. An
individual who renders services to a potential employer--i.e., a
putative employer or alleged employer-- as an independent contractor is
not that potential employer's employee under the Act. As such, sections
6, 7, and 11 of the Act, which impose obligations on employers

[[Page 60639]]

regarding their employees, are inapplicable. Accordingly, the Act does
not require a potential employer to pay an independent contractor
either the minimum wage or overtime pay under sections 6 or 7. Nor does
section 11 of the Act require a potential employer to keep records
regarding an independent contractor's activities.
(b) Economic dependence as the ultimate inquiry. An ``employee''
under the Act is an individual whom an employer suffers, permits, or
otherwise employs to work. 29 U.S.C. 203(e)(1), (g). An employer
suffers or permits an individual to work as an employee if, as a matter
of economic reality, the individual is economically dependent on that
employer for work. Rutherford Food Corp. v. McComb, 331 U.S. 722, 727
(1947); Bartels v. Birmingham, 332 U.S. 126, 130 (1947). An individual
is an independent contractor, as distinguished from an ``employee''
under the Act, if the individual is, as a matter of economic reality,
in business for him- or herself.
(c) Determining economic dependence. The economic reality factors
in paragraph (d) of this section guide the determination of whether the
relationship between an individual and a potential employer is one of
economic dependence and therefore whether an individual is properly
classified as an employee or independent contractor. These factors are
not exhaustive, and no single factor is dispositive. However, the two
core factors listed in paragraph (d)(1) of this section are the most
probative as to whether or not an individual is an economically
dependent ``employee,'' 29 U.S.C. 203(e)(1), and each is therefore
afforded greater weight in the analysis than is any other factor. Given
the greater weight afforded each of these two core factors, if they
both point towards the same classification, whether employee or
independent contractor, there is a substantial likelihood that is the
individual's accurate classification. This is because other factors,
which are less probative and afforded less weight, are highly unlikely,
either individually or collectively, to outweigh the combined weight of
the two core factors.
(d) Economic reality factors--(1) Core factors--(i) The nature and
degree of the individual's control over the work. This factor weighs
towards the individual being an independent contractor to the extent
the individual, as opposed to the potential employer, exercises
substantial control over key aspects of the performance of the work,
such as by setting his or her own schedule, by selecting his or her
projects, and/or through the ability to work for others, which might
include the potential employer's competitors. In contrast, this factor
weighs in favor of the individual being an employee under the Act to
the extent the potential employer, as opposed to the individual,
exercises substantial control over key aspects of the performance of
the work, such as by controlling the individual's schedule or workload
and/or by directly or indirectly requiring the individual to work
exclusively for the potential employer. Requiring the individual to
comply with specific legal obligations, satisfy health and safety
standards, carry insurance, meet contractually agreed-upon deadlines or
quality control standards, or satisfy other similar terms that are
typical of contractual relationships between businesses (as opposed to
employment relationships) does not constitute control that makes the
individual more or less likely to be an employee under the Act.
(ii) The individual's opportunity for profit or loss. This factor
weighs towards the individual being an independent contractor to the
extent the individual has an opportunity to earn profits or incur
losses based on his or her exercise of initiative (such as managerial
skill or business acumen or judgment) or management of his or her
investment in or capital expenditure on, for example, helpers or
equipment or material to further his or her work. While the effects of
the individual's exercise of initiative and management of investment
are both considered under this factor, the individual does not need to
have an opportunity for profit or loss based on both for this factor to
weigh towards the individual being an independent contractor. This
factor weighs towards the individual being an employee to the extent
the individual is unable to affect his or her earnings or is only able
to do so by working more hours or more efficiently.
(2) Other factors--(i) The amount of skill required for the work.
This factor weighs in favor of the individual being an independent
contractor to the extent the work at issue requires specialized
training or skill that the potential employer does not provide. This
factor weighs in favor of the individual being an employee to the
extent the work at issue requires no specialized training or skill and/
or the individual is dependent upon the potential employer to equip him
or her with any skills or training necessary to perform the job.
(ii) The degree of permanence of the working relationship between
the individual and the potential employer. This factor weighs in favor
of the individual being an independent contractor to the extent the
work relationship is by design definite in duration or sporadic, which
may include regularly occurring fixed periods of work, although the
seasonal nature of work by itself would not necessarily indicate
independent contractor classification. This factor weighs in favor of
the individual being an employee to the extent the work relationship is
instead by design indefinite in duration or continuous.
(iii) Whether the work is part of an integrated unit of production.
This factor weighs in favor of the individual being an employee to the
extent his or her work is a component of the potential employer's
integrated production process for a good or service. This factor weighs
in favor of an individual being an independent contractor to the extent
his or her work is segregable from the potential employer's production
process. This factor is different from the concept of the importance or
centrality of the individual's work to the potential employer's
business.

Sec. 795.110 Primacy of actual practice.

In evaluating the individual's economic dependence on the potential
employer, the actual practice of the parties involved is more relevant
than what may be contractually or theoretically possible. For example,
an individual's theoretical abilities to negotiate prices or to work
for competing businesses are less meaningful if, as a practical matter,
the individual is prevented from exercising such rights. Likewise, a
business' contractual authority to supervise or discipline an
individual may be of little relevance if in practice the business never
exercises such authority.

Sec. 795.115 Severability.

If any provision of this part is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further agency action, the provision
shall be construed so as to continue to give the maximum effect to the
provision permitted by law, unless such holding shall be one of utter
invalidity or unenforceability, in which event the provision shall be
severable from part 795 and shall not affect the remainder thereof.

[FR Doc. 2020-21018 Filed 9-24-20; 8:45 am]
BILLING CODE 4510-27-P