Independent Contractor Status Under the Fair Labor Standards Act, 1168-1248 [2020-29274]
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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
Wage and Hour Division,
Department of Labor.
ACTION: Final rule.
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 the Act) to promote
certainty for stakeholders, reduce
litigation, and encourage innovation in
the economy.
DATES: This final rule is effective on
March 8, 2021.
FOR FURTHER INFORMATION CONTACT:
Amy DeBisschop, Division of
Regulations, Legislation, and
Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room
S–3502, 200 Constitution Avenue NW,
Washington, DC 20210; telephone: (202)
693–0406 (this is not a toll-free
number). Copies of this final rule may
be obtained in alternative formats (Large
Print, Braille, Audio Tape, or Disc),
upon request, by calling (202) 693–0675
(this is not a toll-free number). TTY/
TDD callers may dial toll-free 1–877–
889–5627 to obtain information or
request materials in alternative formats.
Questions of interpretation and/or
enforcement of the agency’s regulations
may be directed to the nearest WHD
district office. Locate the nearest office
by calling WHD’s toll-free help line at
(866) 4US–WAGE ((866) 487–9243)
between 8 a.m. and 5 p.m. in your local
time zone, or logging onto WHD’s
website for a nationwide listing of WHD
district and area offices at https://
www.dol.gov/whd/america2.htm.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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I. Executive Summary
The FLSA requires covered employers
to pay their nonexempt employees at
least the Federal minimum wage for
every hour worked and overtime pay for
every hour worked over 40 in a
workweek, and it mandates that
employers keep certain records
regarding their employees. A worker
who performs services for an individual
or entity (‘‘person’’ as defined in the
Act) as an independent contractor,
however, is not that person’s employee
under the Act. Thus, the FLSA does not
require such person to pay an
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independent contractor either the
minimum wage or overtime pay, nor
does it require that person to keep
records regarding that independent
contractor. The Act does not define the
term ‘‘independent contractor,’’ but it
defines ‘‘employer’’ as ‘‘any person
acting directly or indirectly in the
interest of an employer in relation to an
employee,’’ 29 U.S.C. 203(d),
‘‘employee’’ as ‘‘any individual
employed by an employer,’’ id. at 203(e)
(subject to certain exceptions), and
‘‘employ’’ as ‘‘includ[ing] to suffer or
permit to work,’’ id. at 203(g). Courts
and the Department have long
interpreted the ‘‘suffer or permit’’
standard to require an evaluation of the
extent of the worker’s economic
dependence on the potential
employer—i.e., the putative employer or
alleged employer—and have developed
a multifactor test to analyze whether a
worker is an employee or an
independent contractor under the FLSA.
The ultimate inquiry is whether, as a
matter of economic reality, the worker is
dependent on a particular individual,
business, or organization for work (and
is thus an employee) or is in business
for him- or herself (and is thus an
independent contractor).
This economic realities test and its
component factors have not always been
sufficiently explained or consistently
articulated by courts or the Department,
resulting in uncertainty among the
regulated community. The Department
believes that a clear articulation will
lead to increased precision and
predictability in the economic reality
test’s application, which will in turn
benefit workers and businesses and
encourage innovation and flexibility in
the economy. Accordingly, earlier this
year the Department proposed to
introduce a new part to Title 29 of the
Code of Federal Regulations setting
forth its interpretation of whether
workers are ‘‘employees’’ or
independent contractors under the Act.
Having received and reviewed the
comments to its proposal, the
Department now adopts as a final rule
the interpretive guidance set forth in the
Notice of Proposed Rulemaking (NPRM)
(85 FR 60600) largely as proposed. This
regulatory guidance adopts general
interpretations to which courts and the
Department have long adhered. For
example, the final rule explains that
independent contractors are workers
who, as a matter of economic reality, are
in business for themselves as opposed to
being economically dependent on the
potential employer for work. The final
rule also explains that the inquiry into
economic dependence is conducted by
applying several factors, with no one
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factor being dispositive, and that actual
practices are entitled to greater weight
than what may be contractually or
theoretically possible. The final rule
sharpens this inquiry into five distinct
factors, instead of the five or more
overlapping factors used by most courts
and previously the Department.
Moreover, consistent with the FLSA’s
text, its purpose, and the Department’s
experience administering and enforcing
the Act, the final rule explains that two
of those factors—(1) the nature and
degree of the worker’s control over the
work and (2) the worker’s opportunity
for profit or loss—are more probative of
the question of economic dependence or
lack thereof than other factors, and thus
typically carry greater weight in the
analysis than any others.
The regulatory guidance promulgated
in this final rule regarding independent
contractor status under the FLSA is
generally applicable across all
industries. As such, it replaces the
Department’s previous interpretations of
independent contractor status under the
FLSA which applied only in certain
contexts, found at 29 CFR 780.330(b)
(interpreting independent contractor
status under the FLSA for tenants and
sharecroppers) and 29 CFR 788.16(a)
(interpreting independent contractor
status under the FLSA for certain
forestry and logging workers). The
Department believes this final rule will
significantly clarify to stakeholders how
to distinguish between employees and
independent contractors under the Act.
This final rule is considered to be an
Executive Order 13771 deregulatory
action. Details on the estimated
increased efficiency and cost savings of
this rule can be found in the regulatory
impact analysis (RIA) in section VI.
II. Background
A. Relevant FLSA Definitions
Enacted in 1938, the FLSA requires
that, among other things, covered
employers pay their nonexempt
employees at least the Federal minimum
wage for every hour worked and
overtime pay for every hour worked
over 40 in a workweek, and it mandates
that employers keep certain records
regarding their employees. See 29 U.S.C.
206(a), 207(a) (minimum wage and
overtime pay requirements); 29 U.S.C.
211(c) (recordkeeping requirements).
The FLSA does not define the term
‘‘independent contractor.’’ The Act
defines ‘‘employer’’ in section 3(d) to
‘‘include[ ] any person acting directly or
indirectly in the interest of an employer
in relation to an employee,’’
‘‘employee’’ in section 3(e)(1) to mean,
subject to certain exceptions, ‘‘any
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individual employed by an employer,’’
and ‘‘employ’’ in section 3(g) to include
‘‘to suffer or permit to work.’’ 1 The
Supreme Court has recognized that
‘‘there is in the [FLSA] no definition
that solves problems as to the limits of
the employer-employee relationship
under the Act.’’ Rutherford Food Corp.
v. McComb, 331 U.S. 722, 728 (1947).
The Supreme Court has interpreted
the ‘‘suffer or permit’’ language to define
FLSA employment to be broad and more
inclusive than the common law
standard. See Nationwide Mut. Ins. Co.
v. Darden, 503 U.S. 318, 326 (1992).
However, the Court also recognized that
the Act’s ‘‘statutory definition[s] . . .
have [their] limits.’’ Tony & Susan
Alamo Found. v. Sec’y of Labor, 471
U.S. 290, 295 (1985) (internal citation
omitted); see also Walling v. Portland
Terminal Co., 330 U.S. 148, 152 (1947)
(‘‘The definition ‘suffer or permit to
work’ was obviously not intended to
stamp all persons as employees.’’). The
Supreme Court specifically recognized
that ‘‘[t]here may be independent
contractors who take part in production
or distribution who would alone be
responsible for the wages and hours of
their own employees.’’ Rutherford Food,
331 U.S. at 729. Accordingly, Federal
courts of appeals have uniformly held,
and the Department has consistently
maintained, that independent
contractors are not ‘‘employees’’ for
purposes of the FLSA. See, e.g., Saleem
v. Corporate Transp. Group, Ltd., 854
F.3d 131, 139–40 (2d Cir. 2017); Karlson
v. Action Process Serv. & Private
Investigation, LLC, 860 F.3d 1089, 1092
(8th Cir. 2017).
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B. Economic Dependence and the
Economic Reality Test
1. Supreme Court Development of the
Economic Reality Test
As the NPRM explained, the U.S.
Supreme Court explored the limits of
the employer-employee relationship in a
series of cases from 1944 to 1947 under
three different Federal statutes: The
FLSA, the National Labor Relations Act
(NLRA), and the Social Security Act
(SSA). 85 FR 60601 (summarizing NLRB
v. Hearst Publications, Inc., 322 U.S.
111 (1944); United States v. Silk, 331
U.S. 704 (1947); Bartels v. Birmingham,
332 U.S. 126 (1947); and Rutherford
Food, 331 U.S. 722)).
In Hearst, the Supreme Court held
that the NLRA’s definition of
employment was broader than that of
1 29 U.S.C. 203(d), (e), (g). The Act defines a
‘‘person’’ as ‘‘an individual, partnership,
association, corporation, business trust, legal
representative, or any organized group of persons.’’
29 U.S.C. 203(a).
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the common law. 322 U.S. 123–25.
Congress responded by amending the
definition of employment under the
NLRA on June 23, 1947, ‘‘with the
obvious purpose of hav[ing] the
[National Labor Relations] Board and
the courts apply general agency
principles in distinguishing between
employees and independent contractors
under the [NLRA].’’ NLRB v. United Ins.
Co. of Am., 390 U.S. 254, 256 (1968).
On June 16, 1947, one week before
Congress amended the NLRA in
response to Hearst, the Supreme Court
decided Silk, which addressed the
distinction between employees and
independent contractors under the SSA.
In that case, the Court relied on Hearst
to hold that ‘‘economic reality,’’ as
opposed to ‘‘technical concepts’’ of the
common law standard alone, determines
workers’ classification. 331 U.S. at 712–
14. Although the Court found it to be
‘‘quite impossible to extract from the
[SSA] a rule of thumb to define the
limits of the employer-employe[e]
relationship,’’ it identified five factors as
‘‘important for decision’’: ‘‘degrees of
control, opportunities for profit or loss,
investment in facilities, permanency of
relation[,] and skill required in the
claimed independent operation.’’ Id. at
716. The Court added that ‘‘[n]o one
[factor] is controlling nor is the list
complete.’’ Id. One week after Silk and
on the same day Congress amended the
NLRA, the Court reiterated these five
factors in Bartels, another case involving
employee or independent contractor
status under the SSA. In Bartels, the
Court explained that under the SSA,
employee status ‘‘was not to be
determined solely by the idea of control
which an alleged employer may or
could exercise over the details of the
service rendered to his business by the
worker.’’ Id. Although ‘‘control is
characteristically associated with the
employer-employee relationship,’’
employees under ‘‘social legislation’’
such as the SSA are ‘‘those who as a
matter of economic reality are
dependent upon the business to which
they render service.’’ Id.
The same day as it decided Silk, the
Court ruled in Rutherford Food that
certain workers at a slaughterhouse
were employees under the FLSA, and
not independent contractors, by
examining facts pertaining to the five
factors identified in Silk.2 The Court
2 For example, the Court noted that the
slaughterhouse workers performed unskilled work
‘‘on the production line.’’ 331 U.S. at 730. ‘‘The
premises and equipment of [the employer] were
used for the work,’’ indicating little investment by
the workers. Id. ‘‘The group had no business
organization that could or did shift as a unit from
one slaughter-house to another,’’ indicating a
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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.
In November 1947, five months after
Silk and Rutherford Food, the
Department of the Treasury (Treasury)
proposed regulations r defining when an
individual was an independent
contractor or employee under the SSA,
which used a test that balanced the
following factors:
1. Degree of control of the individual;
2. Permanency of relation;
3. Integration of the individual’s work
in the business to which he renders
service;
4. Skill required by the individual;
5. Investment by the individual in
facilities for work; and
6. Opportunity of the individual for
profit or loss.
12 FR 7966. Factors one, two, and four
through six corresponded directly with
the five factors identified as being
‘‘important for decision’’ in Silk, 331
U.S. at 716, and the third factor
corresponded with Rutherford Food’s
consideration of the fact that the
workers were ‘‘part of an integrated unit
of production.’’ 331 U.S. at 729. The
Treasury proposal further relied on
Bartels, 332 U.S. at 130, to apply these
factors to determine whether a worker
was ‘‘dependent as a matter of economic
reality upon the business to which he
renders services.’’ 12 FR 7966.3
Congress replaced the interpretations
of the definitions of ‘‘employee’’
adopted in Hearst for the NLRA and in
Silk and Bartels for the SSA ‘‘to
demonstrate that the usual common-law
principles were the keys to meaning.’’
Darden, 503 U.S. at 324–25. However,
Congress did not similarly amend the
FLSA. Thus, the Supreme Court stated
in Darden that the scope of employment
under the FLSA remains broader than
that under common law and is
determined not by the common law but
instead by the economic reality of the
relationship at issue. See id. Since
implicitly doing so in Rutherford Food,
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.
3 The Treasury proposal was never finalized
because Congress amended the SSA to foreclose the
proposal.
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the Court has not again applied (or
rejected the application of) the Silk
factors to an FLSA classification
question.
2. Application of the Economic Reality
Test by Federal Courts of Appeals
As the NPRM explained, in the 1970s
and 1980s Federal courts of appeals
began to adopt versions of a multifactor
‘‘economic reality’’ test based on Silk,
Rutherford Food, and Bartels and
similar to Treasury’s 1947 proposed
SSA regulation to analyze whether a
worker was an employee or an
independent contractor under the FLSA.
See 85 FR 60603.4 Drawing on the
Supreme Court precedent discussed
above, courts have recognized that the
heart of the inquiry is whether ‘‘as a
matter of economic reality’’ the workers
are ‘‘dependent upon the business to
which they render service.’’ Usery v.
Pilgrim Equip. Co., 527 F.2d 1308, 1311
(5th Cir. 1976) (quoting Bartels, 332 U.S.
at 130). Some courts have clarified that
this question of economic dependence
may be boiled down to asking ‘‘whether,
as a matter of economic reality, the
workers depend upon someone else’s
business for the opportunity to render
service or are in business for
themselves.’’ Saleem, 854 F.3d at 139
(internal quotation marks and citations
omitted). Courts have also explained
that a non-exhaustive set of factors—
derived from Silk and Rutherford
Food—shape and guide this inquiry.
See, e.g., Usery, 527 F.2d at 1311
(identifying ‘‘[f]ive considerations
[which] have been set out as aids to
making the determination of
dependence, vel non’’); Real v. Driscoll
Strawberry Assocs., Inc., 603 F.2d 748,
754 (9th Cir. 1979) (articulating a sixfactor 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.
4 As explained below, versions of this multifactor
economic realty test have also been enforced and
articulated by the Department in subregulatory
guidance since the 1950s.
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Most courts of appeals articulate a
similar test, but application between
courts may vary significantly. Compare,
e.g., Sec’y of Labor v. Lauritzen, 835
F.2d 1529, 1534–35 (7th Cir. 1987)
(applying six-factor economic reality
test to hold that pickle pickers were
employees under the FLSA), with
Donovan v. Brandel, 736 F.2d 1114,
1117 (6th Cir. 1984) (applying the same
six-factor economic reality test to hold
that pickle pickers were not employees
under the FLSA). For example, the
Second Circuit has analyzed
opportunity for profit or loss and
investment (the second and third factors
listed above) together as one factor. See,
e.g., Brock v. Superior Care, Inc., 840
F.2d 1054, 1058 (2d Cir. 1988). The
Fifth Circuit has not adopted the sixth
factor listed above, which analyzes the
integrality of the work, as part of its
standard, see, e.g., Usery, 527 F.2d at
1311, but has at times assessed
integrality as an additional factor, see,
e.g. Hobbs v. Petroplex Pipe & Constr.,
Inc., 946 F.3d 824, 836 (5th Cir. 2020).
The NPRM highlighted noteworthy
modifications some courts of appeals
have made to the economic reality
factors as originally articulated in 1947
by the Supreme Court. See 85 FR
60603–04. First, the ‘‘skill required’’
factor identified in Silk, 331 U.S. at 716,
is now articulated more expansively by
some courts to include ‘‘initiative.’’ See,
e.g., Parrish, 917 F.3d at 379 (‘‘the skill
and initiative required in performing the
job’’); Karlson, 860 F.3d at 1093 (same);
Superior Care, 840 F.2d at 1058–59
(‘‘the degree of skill and independent
initiative required to perform the
work’’).
Second, Silk analyzed workers’
investments, 331 U.S. at 717–19.
However, the Fifth Circuit has revised
the ‘‘investment’’ factor to instead
consider ‘‘the extent of the relative
investments of the worker and the
alleged employer.’’ Hopkins, 545 F.3d at
343. Some other circuits have adopted
this ‘‘relative investment’’ approach but
continue to use the phrase ‘‘worker’s
investment’’ to describe the factor. See,
e.g., Keller v. Miri Microsystems LLC,
781 F.3d 799, 810 (6th Cir. 2015); Dole
v. Snell, 875 F.2d 802, 805 (10th Cir.
1989).
Third, although the permanence
factor under Silk was understood to
mean the continuity and duration of
working relationships, see 12 FR 7967,
some courts of appeals have expanded
this factor to also consider the
exclusivity of such relationships. See,
e.g., Scantland, 721 F.3d at 1319; Keller,
781 F.3d at 807.
Finally, Rutherford Food’s
consideration of whether work is ‘‘part
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of an integrated unit of production,’’ 331
U.S. at 729, has now been replaced by
many courts of appeals by consideration
of whether the service rendered is
‘‘integral,’’ which those courts have
applied as meaning important or central
to the potential employer’s business.
See, e.g., Verma v. 3001 Castor, Inc., 937
F.3d 221, 229 (3rd Cir. 2019)
(concluding that workers’ services were
integral because they were the providers
of the business’s ‘‘primary offering’’);
Acosta v. Off Duty Police Servs., Inc.,
915 F.3d 1050, 1055 (6th Cir. 2019)
(concluding that services provided by
workers were ‘‘integral’’ because the
putative employer ‘‘built its business
around’’ those services); McFeeley v.
Jackson Street Entertainment, LLC, 825
F.3d 235, 244 (4th Cir. 2016)
(considering ‘‘the importance of the
services rendered to the company’s
business’’).
Courts of appeals have cautioned
against the ‘‘mechanical application’’ of
the economic reality factors. See, e.g.,
Saleem, 854 F.3d at 139. ‘‘Rather, each
factor is a tool used to gauge the
economic dependence of the alleged
employee, and each must be applied
with this ultimate concept in mind.’’
Hopkins, 545 F.3d at 343. Further,
courts of appeals make clear that the
analysis should draw from the totality of
circumstances, with no single factor
being determinative by itself. See, e.g.,
Keller, 781 F.3d at 807 (‘‘No one factor
is determinative.’’); Baker, 137 F.3d at
1440 (‘‘None of the factors alone is
dispositive; instead, the court must
employ a totality-of-the-circumstances
approach.’’).
3. Application of the Economic Reality
Test by WHD
Since at least 1954, WHD has applied
variations of this multifactor analysis
when considering whether a worker is
an employee under the FLSA or an
independent contractor. See WHD
Opinion Letter (Aug. 13, 1954)
(applying six factors very similar to the
six economic reality factors currently
used by courts of appeals). In 1964,
WHD stated, ‘‘The Supreme Court has
made it clear that an employee, as
distinguished from a person who is
engaged in a business of his own, is one
who as a matter of economic reality
follows the usual path of an employee
and is dependent on the business which
he serves.’’ WHD Opinion Letter FLSA–
795 (Sept. 30, 1964).
Over the years since, WHD has issued
numerous opinion letters applying a
multifactor analysis very similar to the
multifactor economic reality test courts
use (with some variation) to determine
whether workers are employees or
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independent contractors.5 WHD has also
promulgated regulations applying a
multifactor analysis for independent
contractor status under the FLSA in
certain specific industries. See, e.g., 29
CFR 780.330(b) (applying a six factor
economic reality test to determine
whether a sharecropper or tenant is an
independent contractor or employee
under the Act); 29 CFR 788.16(a)
(applying a six factor economic reality
test in forestry and logging operations
with no more than eight employees).
Further, WHD has promulgated a
regulation applying a multifactor
economic reality analysis for
determining independent contractor
status under the Migrant and Seasonal
Agricultural Worker Protection Act
(MSPA). 29 CFR 500.20(h)(4).
The Department’s sub-regulatory
guidance, WHD Fact Sheet #13,
‘‘Employment Relationship under the
Fair Labor Standards Act (FLSA)’’ (Jul.
2008), similarly stated that, when
determining whether an employment
relationship exists under the FLSA,
common law control is not the exclusive
consideration. Instead, ‘‘it is the total
activity or situation which controls’’;
and ‘‘an employee, as distinguished
from a person who is engaged in a
business of his or her own, is one who,
as a matter of economic reality, follows
the usual path of an employee and is
dependent on the business which he or
she serves.’’ 6 The fact sheet identified
seven economic reality factors; in
addition to factors that are similar to the
six factors identified above, it also
considered the worker’s ‘‘degree of
independent business organization and
operation.’’ On July 15, 2015, WHD
issued Administrator’s Interpretation
No. 2015–1, ‘‘The Application of the
Fair Labor Standards Act’s ‘Suffer or
Permit’ Standard in the Identification of
Employees Who Are Misclassified as
Independent Contractors’’ (AI 2015–1).
AI 2015–1 provided guidance regarding
the employment relationship under the
FLSA and the application of the six
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.
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economic realities factors. AI 2015–1
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 ‘‘independent business
organization’’ factor because it did not
add to the analysis as a separate factor
and was ‘‘[e]ncompassed within’’ the
other factors. It also stated that the
investment factor should focus on the
‘‘amount of the worker’s investment in
facilities, equipment, or helpers.’’ The
opinion letter addressed the FLSA
classification of service providers who
used a virtual marketplace company to
be referred to end-market consumers to
whom the services were actually
provided. WHD concluded that the
service providers appeared to be
independent contractors and not
employees of the virtual marketplace
company. See WHD Opinion Letter
FLSA2019–6 at 7. WHD found that it
was ‘‘inherently difficult to
conceptualize the service providers’
‘working relationship’ with [the virtual
marketplace company], because as a
matter of economic reality, they are
working for the consumer, not [the
company].’’ Id. Because ‘‘[t]he facts . . .
demonstrate economic independence,
rather than economic dependence, in
the working relationship between [the
virtual marketplace company] and its
service providers,’’ WHD opined that
they were not employees of the
company under the FLSA but rather
were independent contractors. Id. at 9.
As explained below, the Department’s
prior interpretations of independent
contractor status, which themselves
have evolved over time, are subject to
similar limitations as that of court
opinions, and the Department believes
that stakeholders would benefit from
clarification. For these reasons, the
Department proposed promulgating a
clearer and more consistent standard for
evaluating whether a worker is an
employee or independent contractor
under the FLSA and is now finalizing
that proposal, with some modifications
based on comments received.
C. The Department’s Proposal
On September 25, 2020, the
Department published the NPRM in the
Federal Register. The Department
proposed to adopt an ‘‘economic
reality’’ test to determine a worker’s
status as an FLSA employee or an
independent contractor. The test
considers whether a worker is in
business for himself or herself
(independent contractor) or is instead
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1171
economically dependent on an
employer for work (employee). The
Department further identified two ‘‘core
factors’’: The nature and degree of the
worker’s control over the work; and the
worker’s opportunity for profit or loss
based on initiative, investment, or both.
The Department explained it was
proposing to emphasize these factors
because they are the most probative of
whether workers are economically
dependent on someone else’s business
or are in business for themselves. The
proposal identified three other factors to
also be considered, though they are less
probative than the core factors: The
amount of skill required for the work,
the degree of permanence of the
working relationship between the
individual and the potential employer,
and whether the work is part of an
integrated unit of production. The
Department further proposed to advise
that the actual practice is more
probative than what may be
contractually or theoretically possible in
determining whether a worker is an
employee or an independent contractor.
D. Comments
The Department solicited comments
on all aspects of the proposed rule.
More than 1800 individuals and
organizations timely commented on the
Department’s NPRM during the thirtyday comment period that ended on
October 26, 2020. The Department
received comments from employers,
workers, industry associations, worker
advocacy groups, and unions, among
others. All timely comments may be
viewed at the website
www.regulations.gov, docket ID WHD–
2020–0007.
Of the comments received, the
Department received approximately 230
comments from workers who identified
themselves as independent contractors
(not including the over 900 comments
received from Uber drivers discussed
below). Of those, the overwhelming
majority expressed support for the
NPRM. These individuals identified
themselves as freelancers or
independent contractors in jobs
including translator, journalist,
consultant, musician, and many others.
Among this group of commenters, over
200 expressed support for the proposed
rule, while only 8 opposed it. The
remaining individuals in this group did
not express a specific position. Uber
drivers submitted over 900 comments.
While many expressed views on Uber
corporate policies and not on the NPRM
itself, the majority of these drivers who
addressed the NRPM supported the
Department’s proposal. The Department
also received a number of other
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comments that are beyond the scope of
this rulemaking. For example, several
commenters expressed opinions related
to the issues addressed in the
Department’s proposal but that were
specific to state legislation or employer
policies. Significant issues raised in the
timely comments received are discussed
below, along with the Department’s
response to those comments.
III. Need for Rulemaking
The NPRM explained that the
Department has never promulgated a
generally-applicable regulation
addressing who is an independent
contractor and thus not an employee
under the FLSA. Instead, as described
above, the Department has issued and
revised guidance since at least 1954,
using different variations of a
multifactor economic reality test that
analyzes economic dependence to
distinguish independent contractors
from employees. Such guidance reflects,
in large part, application of the general
principles of the economic reality test
by Federal courts of appeals. Such
guidance, however, did not reflect any
public input. Indeed, the NPRM kicked
off the Department’s first ever noticeand-comment rulemaking to provide a
generally applicable interpretation of
independent contractor status under the
FLSA. As recounted just above, the
Department received many comments
from stakeholders who are actually
impacted by FLSA classification
decisions, which are valuable
information and insight that the
Department has not previously gathered
and many of which reinforced the
Department’s view that more clarity is
needed in this area.
The Department explained in the
NPRM preamble that prior articulations
of the test have proven to be unclear and
unwieldy for the four following reasons.
First, the test’s overarching concept of
‘‘economic dependence’’ is underdeveloped and sometimes
inconsistently applied, rendering it a
source of confusion. Second, the test is
indefinite in that it makes all facts
potentially relevant without guidance
on how to prioritize or balance different
and sometimes competing
considerations. Third, inefficiency and
lack of structure in the test further stem
from blurred boundaries between the
factors. Fourth, these shortcomings have
become more apparent over time as
technology, economic conditions, and
work relationships have evolved.
The Department thus proposed to
promulgate a regulation that would
clarify and sharpen the contours of the
economic reality test used to determine
independent contractor classification
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under the FLSA. The NPRM explained
that such a regulation would provide
much needed clarity and encourage (or
at least stop deterring) flexible work
arrangements that benefit both
businesses and workers.
Commenters in the business
community and freelance workers
generally agreed with the Department
that the multifactor balancing test is
confusing and needs clarification. The
National Retail Federation (NRF)
complained that ‘‘existing tests for
independent contractor status tend to
have a large number of factors which
can be nebulous, overlapping, and even
irrelevant to the ultimate inquiry.’’ The
Workplace Policy Institute of Littler
Mendelson, P.C. (WPI) stated that
‘‘[b]oth the Department and the courts
have struggled to define ‘dependence’ ’’
in the modern economy—resulting in
confusion, unpredictability and
inconsistent results.’’ The Society for
Human Resource Management (SHRM)
echoed this sentiment, writing ‘‘the
business community and workers are
left applying numerous factors in a
variety of ways that is mired in
uncertainty and, therefore, unnecessary
risk.’’ The U.S. Chamber of Commerce
stated that ‘‘[t]he confusion regarding
whether a worker is properly classified
as an employee or an independent
contractor has long been a vexing
problem for the business community,
across many different industries and
work settings.’’ See also, e.g., World
Floor Covering Association (WFCA)
(‘‘The current test has resulted in
inconsistent decisions, much confusion,
and unnecessary costs.’’). Numerous
individual freelancers and organizations
that represent freelance workers also
stated they would welcome ‘‘greater
clarity and predictability in the
application of the ‘economic realities’
test.’’ Coalition to Promote Independent
Entrepreneurs (CPIE); see also Coalition
of Practicing Translators & Interpreters
of California (CoPTIC) (requesting
‘‘greater clarity in Federal law’’).
Individual freelancers generally
welcomed greater legal clarity. For
example, one individual commenter
wrote ‘‘to express [her] support for this
proposed rule. As someone who has
enjoyed freedom and flexibility as a
freelancer for 20 years, this would be a
welcome clarification.’’ Another
individual freelancer stated that ‘‘[t]he
clarity and updating of [the FLSA]
through this NPRM is long overdue and
the DOL should issue ruling on
independent contracting. . . .’’
These supportive commenters
generally agreed with the Department
that additional clarity would encourage
flexible work arrangements that benefit
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businesses and workers alike. For
example, the Coalition for Workforce
Innovation (CWI) asserted that
additional clarity of the economic
reality test would ‘‘allow workers and
businesses to pursue [ ] mutually
beneficial opportunities as the United
States economy evolves with
technology.’’ Fight for Freelancers
explained that its members value
flexibility that comes with working as
independent contractors and supported
the Department’s ‘‘efforts to protect [its
members’] classification.’’
Some commenters who opposed this
rulemaking questioned the need for a
regulation on this topic. The Southwest
Regional Council of Carpenters
(SWRCC) stated that the ‘‘[t]he first of
the Rule’s shortcomings is its
assumption that a new rule is necessary
in the first place,’’ and the American
Federation of Labor & Congress of
Industrial Organization (AFL–CIO)
asserted that the Department’s ‘‘quest
for certainty . . . is quixotic.’’ Mr.
Edward Tuddenham, an attorney,
contended that the current test is
‘‘generally consistent and predictable’’
and thus does not need further
clarification. He and others repeatedly
questioned the Department’s reasons for
rulemaking by asserting that the
Department did not identify cases where
courts reached incorrect outcomes.
Rather than focus on the outcomes in
particular cases, the NPRM highlighted
inconsistent or confusing reasoning in
many decisions to explain why the
regulated community would benefit
from regulatory clarity. See 85 FR
60605. Mr. Tuddenham and others also
provided thoughtful and detailed
comments criticizing specific aspects of
the reasons presented in the NPRM’s
need for rulemaking discussion. The
following discussion retraces those
reasons and responds to these
criticisms.
A. Confusion Regarding the Meaning of
Economic Dependence
The NPRM explained that
undeveloped analysis and inconsistency
cloud the application of ‘‘economic
dependence,’’ the touchstone of the
economic reality test. 85 FR 60605. The
Department and some courts have
attempted to furnish a measure of clarity
by explaining, for example, that the
proper inquiry is ‘‘ ‘whether the workers
are dependent on a particular business
or organization for their continued
employment’ in that line of business,’’
Brock v. Mr. W Fireworks, Inc., 814 F.2d
1042, 1054 (5th Cir. 1987) (quoting
DialAmerica, 757 F.2d at 1385), or
instead ‘‘are in business for
themselves,’’ Saleem, 854 F.3d at 139.
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But the Department and many courts
have often applied the test without
helpful clarification of the meaning of
the economic dependency that they are
seeking.
The NPRM explained that the lack of
explanation of economic dependence
has sometimes led to inconsistent
approaches and results and highlighted
as an example the apparently
inconsistent results in Cromwell v.
Driftwood Elec. Contractor, Inc., 348 F.
App’x 57 (5th Cir. 2009) (holding that
cable splicers hired by Bellsouth to
perform post-Katrina repairs were
employees), and Thibault v. BellSouth
Telecommunication, 612 F.3d 843 (5th
Cir. 2010) (holding that cable splicer
hired by same company under a very
similar arrangement was an
independent contractor). See 85 FR
60605. The Thibault court distinguished
its result from Cromwell in part by
highlighting Mr. Thibault’s significant
income from (1) his own sales company
that had profits of approximately
$500,000, (2) ‘‘eight drag-race cars [that]
generated $1,478 in income from racing
professionally[,]’’ and (3) ‘‘commercial
rental property that generated some
income.’’ Thibault, 612 F.3d at 849.
While these facts indicate that Mr.
Thibault may have been in business for
himself as a manager of a sales business,
drag-race cars, and commercial
properties, they are irrelevant as to
whether he was in business for himself
as a cable splicer.7 The Thibault court
nonetheless assigned these facts
substantial weight because it
understood economic dependence to
mean dependence for income or wealth,
which is incompatible with the
dependence-for-work approach that
other courts and the Department
apply.8 See, e.g., Off Duty Police, 915
F.3d at 1058 (‘‘[W]hether a worker has
more than one source of income says
little about that worker’s employment
status.’’); Halferty, 821 F.2d at 268 (‘‘[I]t
is not dependence in the sense that one
could not survive without the income
from the job that we examine, but
dependence for continued
employment’’); DialAmerica, 757 F.2d
at 1385 (‘‘The economic-dependence
aspect of the [economic reality] test does
7 The Thibault court also highlighted the fact that
Mr. Thibault worked for only 3 months—although
he intended to work for 7 or 8 months—before
being fired. See 612 F.3d at 846, 849. In contrast,
the splicers in Cromwell worked approximately 11
months. See 348 F. App’x at 58.
8 The Thibault case recognized that ‘‘[a]n
individual’s wealth is not a solely dispositive factor
in the economic dependence question.’’ 612 F.3d at
849 n.4. This confirms that wealth was in fact a
meaningful consideration, which runs against other
cases explaining that dependence on wealth is an
inappropriate lens.
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not concern whether the workers at
issue depend on the money they earn
for obtaining the necessities of life.’’).
As the DialAmerica court explained, the
dependence-for-income approach
‘‘would lead to a senseless result’’
because a wealthy individual who had
an independent source of income would
be an independent contractor even
though a poorer individual who worked
for the same company under the same
work arrangement is an employee. 757
F.2d at 1385 n.11. Mr. Tuddenham
initially defended the reasoning in
Thibault, but later listed that case as an
example of ‘‘the occasional erroneous
application of the [economic reality]
test.’’
The NPRM also highlighted the
decision in Parrish v. Premier
Directional Drilling, 917 F.3d 369, as an
example of inconsistent articulation of
economic dependence. In that case, the
court first applied a dependence-forwork concept to analyze the control
factor and then explicitly departed from
that framework in favor of a
dependence-for-income analysis of the
opportunity factor. See 85 FR 60606.
The Parrish court impliedly took a third
concept of dependence to analyze the
investment factor through a ‘‘side-byside comparison’’ of each worker’s
individual investment to that of the
alleged employer.’’ 917 F.3d at 383. AI
2015–1 took the same approach and
explained that ‘‘it is the relative
investments that matter’’ because ‘‘[i]f
the worker’s investment is relatively
minor, that suggests that the worker and
the employer are not on similar footing
and that the worker may be
economically dependent on the
employer.’’ The comparative analysis of
investments thus appears to rely on a
concept of economic dependence that
means ‘‘not on a similar footing,’’ which
is different from the ‘‘dependence for
work’’ concept that the Department
believes to be correct.
In summary, courts and the
Department typically economic
dependence as ‘‘dependence for work,’’
but have sometimes applied other
concepts of dependence to analyze
certain factors, such as ‘‘dependence for
income’’ and ‘‘not on similar footing.’’
Because economic dependence is the
ultimate inquiry of FLSA employment,
these different conceptions result in
essentially different tests that confuse
the regulated community. Accordingly,
the economic reality test needs a more
developed and dependable touchstone
at its heart.
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1173
B. Lack of Focus in the Multifactor
Balancing Test
The NPRM explained that the
versions of the multifactor economic
reality test used by courts since at least
the 1980s and the Department since the
1950s lack clear, generally applicable
guidance about how to balance the
multiple factors and the countless facts
encompassed therein. See 85 FR
60606.The test’s lack of guidance leads
to uncertainty regarding ‘‘which aspects
of ‘economic reality’ matter, and why.’’
Lauritzen, 835 F.2d at 1539 (Easterbrook
J., concurring).
As examples of such uncertainty, the
NPRM highlighted court decisions
analyzing economic reality factors to
reach an overall decision about a
worker’s classification without
meaningful explanation of how they
balanced the factors to reach the final
decision. 85 FR 60606 (citing, e.g.,
Parrish, 917 F.3d at 380; Chao v. MidAtl. Installation Servs., Inc., 16 F. App’x
104, 108 (4th Cir. 2001); and Snell, 875
F.2d at 912). Even where many facts and
factors support both sides of the
classification inquiry, courts have not
explained how they balanced the
competing considerations. See, e.g.,
Acosta v. Paragon Contractors Corp.,
884 F.3d 1225, 1238 (10th Cir. 2018);
Iontchev v. AAA Cab. Services, 685 F.
App’x 548, 550 (9th Cir. 2017). The
NPRM thus identified a need for
guidance on which factors are most
probative.
Even some commenters critical of the
Department’s approach in the NPRM
conceded that the test as currently
applied can create considerable
ambiguity. Mr. Tuddenham asserted
that the lack of general guidance
regarding how to balance factors is ‘‘an
unavoidable function of determining
something as nebulous as ‘economic
dependence.’ ’’ See also Farmworker
Justice (‘‘[T]he test, as currently applied,
creates necessary ambiguity.’’). The
Department disagrees that the concept
of ‘‘economic dependence’’ is
necessarily ‘‘nebulous.’’ FLSA
employment itself depends on economic
dependence, and nothing in the statute
requires that this standard be nebulous
and thus unmanageable. See Usery, 527
F.2d at 1311 (‘‘It is dependence that
indicates employee status.’’). Instead,
the Department believes the correct
concept of economic dependence
tangibly defines FLSA employment to
include individuals who are dependent
on others for work, and to exclude
individuals who are, as a matter of
economic reality, in business for
themselves. See Saleem, 854 F.3d at
139. The Department thus believes it is
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possible to provide generally applicable
guidance regarding how to consider and
balance the economic reality factors to
assess this concept of economic
dependence.
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C. Confusion and Inefficiency Due to
Overlapping Factors
The NPRM next explained that courts
and the Department have articulated the
economic reality factors such that they
have overlapping coverage, which
undermines the structural benefits of a
multifactor test. See 85 FR 60607. The
NPRM noted that most of these overlaps
did not exist in the Supreme Court’s
original articulation of the economic
reality factors in Silk and were instead
introduced by subsequent court of
appeals decisions. The NPRM then
explained several ways in which
extensive overlaps may lead to
inefficiency and confusion for the
regulated community.
First, the ‘‘skill required’’ factor
articulated in Silk, 331 U.S. at 716, has
been expanded by the Department and
some courts to analyze ‘‘skill and
initiative.’’ See, e.g., Superior Care, 840
F.2d at 1060; WHD Fact Sheet WHD
#13. Because the capacity for on-the-job
initiative is already part of the control
factor, the NPRM explained that this
approach essentially imports control
analysis into the skill factor. Indeed, the
presence of control appears to overrides
the existence of skill,9 effectively
transforming the skill factor into an
extension of the control factor in some
circuits, but not others.10 The ‘‘skill and
initiative’’ factor also overlaps with the
opportunity factor, which considers the
impact of initiative on worker’s
earnings, resulting in initiative being
analyzed under three different factors.
As an illustration of confusion resulting
from this overlap, the NPRM
highlighted a case in which a court
found that workers exercised enough
on-the-job initiative for the control and
opportunity factors to point towards
9 See, e.g., Selker Bros., 949 F.2d at 1295
(concluding that the skill factor weighed towards
employee classification due to ‘‘the degree of
control exercised by [the potential employer] over
the day-to-day operation’’); Baker, 137 F.3d at 1443
(finding that the skill factor weighed towards
employee classification where skilled welders ‘‘are
told what to do and when to do it’’); Superior Care,
840 F.2d at 1060 (finding that the skill factor
weighed towards employee classification for skilled
nurses because ‘‘Superior Care in turn controlled
the terms and conditions of the employment
relationship’’).
10 Some courts of appeal continue to analyze skill
rather than control as part of the skill factor. See,
e.g., Paragon, 884 F3d at 1235 (considering ‘‘the
degree of skill required to perform the work’’); see
also Iontchev, 685 F. App’x at 550 (asking ‘‘whether
services rendered . . . require[d] a special skill’’);
Keller, 791 F.3d at 807 (analyzing ‘‘the degree of
skill required’’).
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independent contractor status, but
nonetheless found the ‘skill and
initiative factor points towards
employee status’ due to ‘the key missing
ingredient . . . of initiative.’ ’’ 85 FR
60607 (quoting Express Sixty-Minutes
Delivery, 161 F.3d at 303).
Next, the permanence factor originally
concerned the continuity and duration
of a working relationship but has since
been expanded by some courts and the
Department to also consider the
exclusivity of that relationship. See 85
FR 60608 (citing Parrish 917 F.3d at
386–87; Keller, 781 F.3d at 807–09;
Scantland, 721 F.3d at 1319; WHD
Opinion Letter FLSA 2019–6 at 8). But
exclusivity—the ability or inability for a
worker to offer services to different
companies—is already a part of the
control factor. This overlap results in
exclusivity being analyzed twice and
causes the actual consideration of
permanence being potentially subsumed
by control.
Third, the ‘‘integral part’’ factor is
used by some courts to be merely a
proxy of control. As one such court
explained: ‘‘It is presumed that, with
respect to vital or integral parts of the
business, the employer will prefer to
engage an employee rather than an
independent contractor. This is so
because the employer retains control
over the employee and can compel
attendan[ce] at work on a consistent
basis.’’ Baker v. Dataphase, Inc., 781 F.
Supp. 724, 735 (D. Utah 1992). But the
control factor already directly analyzes
whether a business can compel
attendance on a consistent basis. It is
unclear what additional value can be
gained by indirectly analyzing that same
consideration a second time under the
‘‘integral part’’ factor.11
Finally, while Silk articulated the
opportunity for profit and loss and
investment as separate factors, it
analyzed the two together in concluding
that truck drivers in that case were
independent contractors in part because
they ‘‘invested in their own trucks and
had ‘‘an opportunity for profit from
sound management’’ of that investment.
11 As the NPRM explained, this presumption that
firms would control all important services on which
they rely may rest on a mistaken premise because,
for example, manufacturers routinely have critical
parts and components produced and delivered by
wholly separate companies. 85 FR 60608. And
companies whose business is to connect
independent service providers with customers
would find those service providers to be important
even though they are independent from the
company’s business. See State Dep’t of
Employment, Training & Rehab., Employment Sec.
Div. v. Reliable Health Care Servs. of S. Nevada,
Inc., 983 P.2d 414, 419 (Nev. 1999) (‘‘[W]e cannot
ignore the simple fact that providing patient care
and brokering workers are two distinct
businesses.’ ’’)
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331 U.S. at 719. The Second Circuit
recognized such clear overlap, noting
that ‘‘[e]conomic investment, by
definition, creates the opportunity for
loss, [and] investors take such a risk
with an eye to profit.’’ Saleem, 854 F.3d
at 145 n.29. Nonetheless, most courts
and Department have analyzed
opportunity for profit and loss and
investment as separate factors. When
done right, separate analysis leads to
redundancy. See, e.g., Mid-Atlantic
Installation Servs., 16 F. App’x at 106–
07. When done wrong, it leads to
analysis of investment without regard
for the worker’s profit or loss, such as
by comparing the dollar value of a
worker’s personal investments against
the total investment of a large company
that, for example, ‘‘maintain[s]
corporate offices.’’ Hopkins 545 F.3d at
344. The NPRM explained that such a
comparison says nothing about whether
the worker is in business for himself, as
opposed to being economically
dependent on that company for work,
and is therefore not probative and
potentially misleading. 85 FR 60608.
The NRPM concluded that reducing the
above-mentioned overlaps would make
the economic reality test easier to
understand and apply.
The SWRCC contended that
‘‘overlapping factors [have] never been
the source of—and the DOL cannot
point to—any credible criticism,’’ but
did not question or even acknowledge
the above criticism discussed at length
in the NRPM. In contrast, commenters
that are significantly impacted by the
FLSA’s obligations generally agreed
with the Department that overlapping
factors have created confusion. For
example, the Association of General
Contractors stated that ‘‘[n]avigating and
complying with the various overlapping
and inconsistent standards are
confusing and costly,’’ and WPI
‘‘agree[d] with the Department that such
overlap and blurring of factors is
confusing and inefficient.’’ See also,
e.g., Center for Workplace Compliance
(CWC); NRF; U.S. Chamber of
Commerce.
A multifactor test is a useful
framework for determining FLSA
employment in part because it organizes
the many facts that are part of economic
reality into distinct categories, thus
providing some structure to an
otherwise roving inquiry. However, this
benefit is lost if the lines between those
factors blur. Under prior articulations of
the test, considerations within the
control factor—capacity for on-the-job
initiative, exclusivity, and ability to
compel attendance—have been
imported into analysis of three other
factors: Skill, permanence, and integral
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part. Indeed, those control-based
considerations appear to be the most
important aspect of the other factors,
which obscures those factors’ distinctive
probative values. Moreover,
considerations under the opportunity
factor—the ability to affect profits
through initiative—have been imported
into the skill factor. And the ability to
earn profits through investment
overlaps completely with the
investment factor. The Department
continues to believe these overlapping
coverages contribute to confusion and
should be reduced where practicable.
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D. The Shortcomings and
Misconceptions That This Rulemaking
Seeks To Remedy Are More Apparent in
the Modern Economy
The NPRM explained that certain
technological and social changes have
made shortcomings of the economic
reality test more apparent in the modern
economy. It highlighted the effects of
three types of change. First, falling
transaction costs in many industries
makes it more cost effective for firms to
hire independent contractors rather than
employees to perform core functions.12
This in turn means analyzing the
importance of the work through the
‘‘integral part’’ factor, which the
Supreme Court never endorsed, is more
likely to result in misleading signals
regarding an individual’s employment
status. Second, the transition from a
more industrial-based to a more
knowledge-based economy reduces the
probative value of the investment factor
in certain industries because
individuals can be in business for
themselves in those industries with
minimal physical capital. Third, shorter
job tenures among employees dull the
ability of the permanence factor to
distinguish between employees and
independence contractor. See 85 FR
60608–09.
Several commenters agreed with the
Department’s assessments of modern
trends. See, e.g., TechNet (‘‘Given
falling transaction costs, companies are
12 Ronald Coase, Nature of the Firm, 4 Economica
386 (1937), https://onlinelibrary.wiley.com/doi/
epdf/10.1111/j.1468-0335.1937.tb00002.x. See also
Nobel Prizes and Laureates, Oct., 15, 1991, https://
www.nobelprize.org/prizes/economic-sciences/
1991/press-release/ (explaining The Nature of the
Firm’s contribution to economics literature as a
central reason for Coase’s receipt of the 1991 Nobel
Prize in Economics); Katz and A. Krueger, ‘‘The
Rise and Nature of Alternative Work Arrangements
in the United States, 1995–2015,’’ p. 25 (2018)
(‘‘Coase’s (1937) classic explanation for the
boundary of firms rested on the minimization of
transaction costs within firm-employee
relationships. Technological changes may be
reducing the transaction costs associated with
contracting out job tasks, however, and thus
supporting the disintermediation of work.’’).
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more willing to allocate certain pieces of
their production, even integrated parts,
to independent contractors.’’); Food
Industry Association (‘‘societal changes
have resulted in innovative work
arrangements and changes in job tenure
expectation’’). Former Deputy Under
Secretary of Labor and retired law
professor Henry H. Perritt, Jr. found the
discussion of modern trends to be
‘‘particularly insightful and should be
retained and expanded in the preamble
to any final rule.’’ Other commenters
disagreed. The AFL–CIO, for instance,
theorized that lower transaction costs
‘‘might just as easily result in employers
not taking steps to retain employees
who perform work central to their
business, but instead tolerate frequent
turnover in such positions’’ and that the
‘‘job tenure of independent contractors
may have fallen more’’ than for
employees—though it did not provide
evidence in support of its hypotheses.13
The Department continues to believe
that each of the above shortcomings of
the previously applied economic reality
test provides sufficient reason for this
rulemaking and that technological and
societal changes have made these
shortcomings even more apparent.
E. Effects of Additional Regulatory
Clarity on Innovation
The NPRM expressed concern that the
legal uncertainty arising from the abovedescribed shortcomings of the
multifactor economic reality test may
deter innovative, flexible work
arrangements that benefit businesses
and workers alike. Some commenters
questioned this assumption. The
Coalition of State Attorneys General,
Cities, and Municipal Agencies (State
AGs), for instance, contended that the
Department ‘‘provides no empirical
evidence or data demonstrating that
employers now hesitate to engage in
innovative arrangements’’ and further
argued that because ‘‘digital platforms
have become part of the modern
economy . . . they have not been stifled
by the current test.’’ But the mere
existence of certain types of businesses
is insufficient evidence that other such
businesses are not being stifled, and it
13 The Department notes that it is unlikely that
job tenures of independent contractors have fallen
by more than employees because average job tenure
for employees have dropped by many years, which
is greater than the total duration of a typical
independent contractor relationship. See Julie
Hotchkiss and Christopher Macpherson, Falling Job
Tenure: It’s Not Just about Millennials, Federal
Reserve Bank of Atlanta, June 8, 2015, https://
www.frbatlanta.org/blogs/macroblog/2015/06/08/
falling-job-tenure-its-not-just-aboutmillennials.aspx. (showing that median job tenure
for individuals born in 1933 was ten years or longer
while median job tenure for individuals born after
1983 was three years or less).
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is unclear what empirical data could
measure innovation that is not occurring
due to legal uncertainty. Commenters
who represent technology companies
stated that legal uncertainty regarding
worker classification in fact deters them
from developing innovative and flexible
work arrangements. See, e.g., CWI;
TechNet. In addition, economists who
study the impact of labor regulation on
entrepreneurship also commented that
clear independent contractor regulations
would assist startup companies. Dr. Liya
Palagashvilli (‘‘71 percent of startups
relied on independent contractors and
thought it was necessary to use contract
labor during their early stages’’); Dr.
Michael Farren and Trace Mitchell
(‘‘[G]reater legal clarity to employers
and workers will allow for more
efficient production processes and will
reduce the resources wasted on
determining a worker’s employment
classification through the legal
process.’’).
For the reasons mentioned above, the
Department continues to believe that,
unless revised, the multifactor economic
reality test suffers because the analytical
lens through which all the factors are
filtered remains inconsistent; there is no
clear principle regarding how to balance
the multiple factors; the lines between
many of the factors are blurred; and
these shortcomings have become more
apparent in the modern economy. The
resulting legal uncertainty obscures
workers’ and businesses’ respective
rights and obligations under the FLSA
and deters innovative work
arrangements, thus inhibiting the
development of new job opportunities
or eliminating existing jobs. The
Department is therefore issuing this
final rule to increase legal certainty.
IV. Final Regulatory Provisions
Having reviewed commenter feedback
submitted in response to the proposed
rule, the Department is finalizing the
addition of a new part 795 to Title 29
of the Code of Federal Regulations,
which will address whether particular
workers are ‘‘employees’’ or
independent contractors under the
FLSA. In relevant part, and as discussed
in greater detail below, the part
includes:
• An introductory provision at
§ 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 and clarifying
that the concept of economic
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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 § 795.105(c) and (d)
describing factors examined as part of
the economic reality test, including two
‘‘core’’ factors—the nature and degree of
the worker’s control over the work and
the worker’s opportunity for profit or
loss—which typically carry greater
weight in the analysis, as well as three
other factors that may serve as
additional guideposts in the analysis;
• a provision at § 795.110 advising
that the parties’ actual practice is more
probative than what may be
contractually or theoretically possible;
• fact-specific examples at § 795.115;
and
• a severability provision at
§ 795.120.
The Department responds to
commenter feedback on the proposed
rule below.
A. The Purpose of Part 795
Proposed § 795.100 explained that the
interpretations in part 795 will guide
WHD’s enforcement of the FLSA and are
intended to be used by employers,
businesses, the public sector,
employees, workers, and courts to
assess employment status classifications
under the Act. See 85 FR 60638.
Proposed § 795.100 further clarified
that, if proposed part 795 is adopted,
employers may safely rely upon the
interpretations in part 795 under section
10 of the Portal-to-Portal Act, unless and
until any such interpretation ‘‘is
modified or rescinded or is determined
by judicial authority to be invalid or of
no legal effect.’’ Id. (quoting 29 U.S.C.
259).
Few commenters specifically
addressed proposed § 795.100, but
several discussed issues relevant to its
content. For example, a few commenters
questioned the Department’s legal
authority to promulgate any regulation
addressing independent contractor
status under the FLSA. See Northern
California Carpenters Regional Council
(‘‘At no time since the FLSA was passed
has Congress made substantive
amendments to the definitions of
employee, employer, or the ‘suffer or
permit to work’ standard . . . nor has it
directed any changes in the controlling
regulations.’’); Rep. Bobby Scott et al.
(‘‘Congress has not delegated
rulemaking authority to the DOL with
respect to the scope of the employment
relationship under the FLSA.’’). A few
commenters requested that the
Department explain its source of
rulemaking authority and the level of
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deference it expects to receive from
courts interpreting its proposed
regulation. A diverse collection of
commenters, including the American
Trucking Association (ATA), the
National Home Delivery Association
(NHDA), the Northwest Workers Justice
Project (NWJP), and Winebrake &
Santillo, LLC, opined that the
Department’s proposed regulation
would be entitled to Skidmore
deference from courts, though these
commenters diverged on the proposed
rule’s ‘‘power to persuade.’’ Skidmore v.
Swift & Co., 323 US 134, 140 (1944).
Finally, the AFL–CIO asserted that
‘‘[t]he proposed rule is based on
considerations that did not motivate
Congress when it adopted the FLSA,
that the Department of Labor is not
authorized to consider in construing the
terms of the FLSA, and that the
Department has no expertise regarding,’’
thus placing the proposed rule ‘‘outside
the ‘limits of the delegation’ from
Congress to the Department contained
in the Act.’’ (quoting Chevron, U.S.A.,
Inc. v. NRDC, Inc., 467 U.S. 837, 865
(1984)).
The Department appreciates
commenter interest in these issues. The
Department without question has
relevant expertise in the area of what
constitutes an employment relationship
under the FLSA, given its responsibility
for administering and enforcing the
Act 14 and its decades of experience
doing so. The Department’s authority to
interpret the Act comes with its
authority to administer and enforce the
Act. See Herman v. Fabri-Centers of
Am., Inc., 308 F.3d 580, 592–93 (6th Cir.
2002) (noting that ‘‘[t]he Wage and Hour
Division of the Department of Labor was
created to administer the Act’’ while
agreeing with the Department’s
interpretation of one of the Act’s
provisions); Dufrene v. Browning-Ferris,
Inc., 207 F.3d 264, 267 (5th Cir. 2000)
(‘‘By granting the Secretary of Labor the
power to administer the FLSA, Congress
implicitly granted him the power to
interpret.’’); Condo v. Sysco Corp., 1
F.3d 599, 603 (7th Cir. 1993) (same).
The Department believes a clear
explanation of the test for whether a
worker is an employee under the FLSA
or an independent contractor not
entitled to the protections of the Act in
easily accessible regulatory text is
valuable to potential employers, to
workers, and to other stakeholders. It
has a long history of offering
interpretations in this area and believes
14 See 29 U.S.C. 204, 211(a), 212(b), 216(c), 217;
see also Fernandez v. Zoni Language Centers, Inc.,
858 F.3d 45, 48–49 (2d Cir. 2017) (noting that ‘‘[t]he
DOL . . . administers the FLSA’’).
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this rulemaking has great value
regardless of what deference courts
ultimately give to it.
While proposed § 795.100
emphasized that part 795 would state
the Department’s interpretation of
independent contractor status under the
FLSA, some commenters expressed
concern that it would affect the scope of
employment under other Federal laws.
The United Food and Commercial
Workers International Union (UFCW)
believed that the proposal may narrow
the coverage of the ‘‘Title VII of the Civil
Rights Act of 1964, Americans with
Disabilities Act, Age Discrimination in
Employment Act (ADEA), and the Equal
Pay Act.’’ See also National Women’s
Law Center (NWLC); CLASP. The
Department reaffirms that the rule
concerns the distinction between
employees and independent contractors
solely for the purposes of the FLSA, and
as such, would not affect the scope of
employment under other Federal
laws.15
Many commenters requested that the
Department promulgate a standard more
broadly applicable across other state
and Federal employment laws. See, e.g.,
American Society of Travel Advisors,
Inc. (‘‘[The NPRM . . . represents
something of a missed opportunity
insofar as it fails to address the
longstanding difficulty associated with
the continued use of multiple tests at
the Federal level to determine worker
status.’’); Cambridge Investment
Research, Inc. (‘‘[W]ithout a more
encompassing Department position or
guidance addressing different state
standards, some of the current
uncertainty and unpredictability
remain.’’); Chun Fung Kevin Chiu
(‘‘[I]nconsistent Federal and state
standards with regards to classification
may render the DOL rules ineffective in
practice for those independent
contractors and businesses affected.’’).
While several commenters
acknowledged the Department’s lack of
authority to interpret the scope of laws
outside of its jurisdiction, the National
Association of Manufacturers and the
Mechanical Contractors Association of
America (MCAA) urged the Department
to collaborate with other Federal
agencies to harmonize the varying
employment definitions under Federal
law. Finally, the Zobrist Law Group
‘‘urge[d] the Department to prohibit
states from using classification tests that
15 Additionally and as explained in greater detail
below, this rule does not narrow the longstanding
standard for distinguishing between FLSA
employees and independent contractors; employees
are economically dependent on another for work,
and independent contractors are in business for
themselves as matter of economic reality.
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conflict with the proposed rule,’’
asserting that ‘‘state law not preempted
by the FLSA is narrow’’ and that state
laws ‘‘shifting an independent
contractor under the FLSA to an
employee under state law . . . [impose]
greater obligations upon those workers.’’
But see Truckload Carriers Association
(‘‘TCA understands that, due to our
nation’s federalist system, individual
states such as California can pursue
misguided statues that are more
stringent than the Federal standard the
Department is seeking to clarify[.]’’).
While the Department appreciates the
desire to achieve uniformity across the
various state and Federal laws which
may govern work arrangements,
requests to modify definitions and tests
under different laws are outside the
scope of this rulemaking.
Some commenters supportive of the
proposed rule requested that the
Department make conforming edits to
its MSPA regulation at 29 CFR
500.20(h)(4), addressing whether or not
a farm labor contractor engaged by an
agricultural employer/association is an
independent contractor or an employee
under MSPA. See Americans for
Prosperity Foundation (AFPF) (‘‘To
further the Department’s goal of
clarification, simplification, and
consistency . . . the same criteria used
in the NPRM to define independent
contractors for purposes of the FLSA
also should apply to the MSPA, and to
any other provision that references the
FLSA.’’); Administrative Law Clinic at
the Antonin Scalia Law School (‘‘[T]he
Department should simply use its
proposed regulations in 29 CFR 795.100,
et seq., to determine employee status
under MSPA, and repeal [29 CFR
500.20(h)] as duplicative.’’). Relatedly,
Texas RioGrande Legal Aid (TRLA),
which expressed opposition to the
proposed rule, asserted that ‘‘the
proposed rule will lead to considerable
confusion among both employers and
workers . . . because the proposed rule
at odds with the Department’s [MSPA]
regulations,’’ but opined that any effort
to revise 29 CFR 500.20(h) ‘‘would be in
direct contravention of Congressional
directives regarding the interpretation of
the MSPA.’’
As noted in the NPRM preamble, the
Department acknowledges that MSPA
adopts by reference the FLSA’s
definition of ‘‘employ,’’ see 18 U.S.C.
1802(5), and that 29 CFR 500.20(h)(4)
considers ‘‘whether or not an
independent contractor or employment
relationship exists under the Fair Labor
Standards Act’’ to interpret independent
contractor status under MSPA. At this
time, however, the Department does not
see a compelling need to revise 29 CFR
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500.20(h)(4), as we are unsure whether
application of the six factor economic
reality test described in that regulation
has resulted in confusion and
uncertainty in the more limited MSPA
context similar to that described in the
FLSA context. Importantly, the
regulatory standard for determining an
individual’s classification status under
MSPA is generally consistent with the
FLSA guidance finalized in this rule:
‘‘In determining if the farm labor
contractor or worker is an employee or
an independent contractor, the ultimate
question is the economic reality of the
relationship—whether there is
economic dependence upon the
agricultural employer/association or
farm labor contractor, as appropriate.’’
29 CFR 500.20(h)(4). Therefore, as
explained in the NPRM, the Department
prefers to proceed incrementally at this
time by leaving the MSPA regulation at
29 CFR 500.20(h)(4) unchanged.16 17
The American Network of Community
Options and Resources (ANCOR)
expressed concern about the
Department’s statement in proposed
§ 795.100 that, if finalized, the proposed
rule ‘‘would contain the Department’s
sole and authoritative interpretation of
independent contractor status under the
FLSA,’’ fearing that the statement could
be interpreted to ‘‘render obsolete the
Department’s specific guidance on the
application of the FLSA to shared living
in Fact Sheet #79G and Administrator’s
Interpretation No. 2014–1.’’ The
Department disagrees with this
interpretation, noting that § 795.100
only rescinds earlier WHD guidance
addressing independent contractor
16See, e.g., Pharm. Research & Mfrs. of Am. v.
FTC, 790 F.3d 198, 203 (D.C. Cir. 2015) (affirming
that agency had discretion to ‘‘proceeding
incrementally’’ in promulgating rules that were
directed to one industry but no others); Inv. Co.
Inst. v. Commodity Futures Trading Comm’n, 720
F.3d 370, 378 (D.C. 2013) (observing that ‘‘[n]othing
prohibits Federal agencies from moving in an
incremental manner’’ (quoting FCC v. Fox
Television Stations, Inc., 556 U.S. 502, 522 (2009));
City of Las Vegas v. Lujan, 891 F.2d 927,935 (D.C.
Cir. 1989) (noting that ‘‘agencies have great
discretion to treat a problem partially’’).
17 Similar to the MSPA regulation at 29 CFR
500.20(h)(4), a regulation promulgated by the
Department’s Veterans’ Employment & Training
Service (VETS) at 20 CFR 1002.44 articulates a sixfactor balancing test based on the tests used by
courts under the FLSA for determining whether an
individual is an employee or an independent
contractor under the Uniformed Services
Employment and Reemployment Rights Act
(USERRA). See 70 FR 75254 (‘‘The independent
contractor provision in this rule is based on
Congress’s intent that USERRA’s definition of
‘employee’ be interpreted in the same expansive
manner as the term is defined under the [FSLA].’’
(citing H.R. Rep. No. 103–65, Pt. I, at 29 (1993); S.
Rep. No. 103–58, at 40 (1993))). Consistent with this
rulemaking’s incremental focus of the FLSA
context, the Department declines to amend 20 CFR
1002.44 at this time.
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1177
status under the FLSA ‘‘[t]o the extent
. . . [that such guidance is] inconsistent
or in conflict with the interpretations
stated in this part.’’ As explained in the
NPRM, the Department engaged in this
rulemaking to ‘‘clarify the existing
standard, not radically transform it,’’ 85
FR 60636, and none of the industryspecific guidance in Administrator’s
Interpretation No. 2014–1 is
meaningfully affected by this final rule.
For similar reasons, we believe that the
assertion by the Nebraska Appleseed
Center for Law in the Public Interest
(Appleseed Center) that this rulemaking
will ‘‘rescind years of [Departmental]
guidance’’ is an overstatement. This rule
is premised on familiar FLSA concepts
that courts, employers, workers, and the
Department have applied for years
while providing updated and clearer
explanations of what the concepts mean
and how they are considered. Although
this rule will change the Department’s
analysis for classifying workers as
employees or independent contractors
in some respect, those changes do not
favor independent contractor
classification (i.e., the ultimate legal
outcome) relative to the status quo, but
rather offer greater clarity as to workers’
proper classifications.
B. Clarification That Independent
Contractors Are Not Employees Under
the Act
Proposed § 795.105(a) explained that
an independent contractor who renders
services to a person is not an employee
of that person under the FLSA, and that
the Act’s wage and hour requirements
do not apply with respect to a person’s
independent contractors. See 85 FR
60638–39. Proposed 795.105(a)
similarly explained that the
recordkeeping obligations for employers
under section 11 of the Act do not apply
to a person with respect to services
received from an independent
contractor. Id.
The vast majority of substantive
comments agreed with proposed
§ 795.105(a). One anonymous
commenter suggested that the
Department interpret the FLSA’s
minimum wage and overtime pay
requirements to apply to independent
contractors because the Act’s
‘‘declaration of policy’’ at 29 U.S.C. 202
‘‘suggests the purpose of the FLSA is to
protect workers.’’ The Department does
not adopt this interpretation because
Federal courts of appeals have
uniformly held, and the Department has
consistently maintained, that ‘‘FLSA
wage and hour requirements do not
apply to true independent contractors.’’
Karlson, 860 F.3d at 1092; see also, e.g.,
Parrish, 917 F.3d at 384; Saleem, 854
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F.3d at 139–40; Express Sixty-Minutes
Delivery, 161 F.3d at 305; see also
Portland Terminal, 330 U.S. at 152
(holding that the FLSA ‘‘was obviously
not intended to stamp all persons as
employees’’).
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C. Adopting the Economic Reality Test
To Determine a Worker’s Employee or
Independent Contractor Status Under
the Act
Proposed § 795.105(b) would adopt
the economic reality test to determine a
worker’s status as an employee or an
independent contractor under the Act.
As the proposal explained, the inquiry
of whether an individual is an employee
or independent contractor under the Act
is whether, as a matter of economic
reality, the individual is economically
dependent on the potential employer for
work. See 85 FR 60611; see also Pilgrim
Equip., 527 F.2d at 1311 (‘‘It is
dependence that indicates employee
status.’’). The proposal and this final
rule provide further clarity as to the
economic reality test’s touchstone—
economic dependence.
The NPRM preamble explained that
clarifying the test requires putting the
question of economic dependence in the
proper context. ‘‘Economic dependence
is not conditioned reliance on an
alleged employer for one’s primary
source of income, for the necessities of
life.’’ Mr. W Fireworks, 814 F.2d at 1054.
Rather, courts have framed the question
as ‘‘ ‘whether, as a matter of economic
reality, the workers depend upon
someone else’s business for the
opportunity to render service or are in
business for themselves.’ ’’ Saleem, 854
F.3d at 139 (quoting Superior Care, 840
F.2d at 1059). This conception of
economic dependence comports with
the FLSA’s definition of employ as
‘‘includ[ing] to suffer or permit to
work.’’ See 29 U.S.C. 203(g). An
individual who depends on a potential
employer for work is able to work only
by the sufferance or permission of the
potential employer. Such an individual
is therefore an employee under the Act.
In contrast, an independent contractor
does not work at the sufferance or
permission of others because, as a
matter of economic reality, he or she is
in business for him- or herself. In other
words, an independent contractor is an
entrepreneur who works for him- or
herself, as opposed to for an employer.18
18 The Department’s prior guidance has stated
that ‘‘an employee, as distinguished from a person
who is engaged in a business of his or her own, is
one who, as a matter of economic reality, follows
the usual path of an employee.’’ Fact Sheet #13; see
also WHD Opinion Letter FLSA–795 (Sept. 30,
1964). Upon consideration, however, the
Department believes that describing an employee as
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The Department did not receive any
substantive comments disputing this
distinction between employee and
independent contractor classification
under the Act.
The Department observed in the
NPRM preamble that some courts have
relied on a worker’s entrepreneurship
with respect to one type of work to
conclude that the worker was also in
business for him- or herself in a second,
unrelated type of work. See, e.g.,
Parrish, 917 F.3d at 384 (considering
‘‘plaintiff’s enterprise, such as the goat
farm, as part of the overall analysis of
how dependent plaintiffs were on
[defendant]’’ for working as
consultants); Thibault, 612 F.3d at 849
(concluding that plaintiff was an
independent contractor as a cable
splicer in part because he managed
unrelated commercial operations and
properties in a different state). This
approach is inconsistent with the
Supreme Court’s instruction that the
economic reality analysis be limited to
‘‘the claimed independent operation.’’
Silk, 331 U.S. at 716. Thus, the relevant
question in this context is whether the
worker providing certain service to a
potential employer is an entrepreneur
‘‘in that line of business.’’ Mr. W
Fireworks, 814 F.2d at 1054. Otherwise,
businesses must make worker
classification decisions based on facts
outside the working relationship.19
At bottom, the phrase ‘‘economic
dependence’’ may mean many different
things. But in the context of the
economic reality test, ‘‘economic
dependence’’ is best understood in
terms of what it is not. The phrase
excludes individuals who, as a matter of
economic reality, are in business for
themselves. Such individuals work for
themselves rather than at the sufferance
or permission of a potential employer,
see 29 U.S.C. 203(g), and thus are not
dependent on that potential employer
for work. Section 795.105(b) therefore
recognizes the principle that, as a matter
of economic reality, workers who are in
business for themselves with respect to
work being performed are independent
contractors for that work.
Many commenters supported the
Department’s decision to implement the
economic reality test applying the
above-described approach to economic
dependence. WPI applauded the
‘‘decision to retain the long-standing
economic reality test while sharpening
the factors used to apply that test.’’ The
someone who ‘‘follows the usual path of an
employee’’ is circular and unhelpful.
19 It is possible for a worker to be an employee
in one line of business and an independent
contractor in another.
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NRF stated that the economic reality test
‘‘is the proper basis for distinguishing
independent contractors from
employees under the FLSA as
articulated by the U.S. Supreme Court.’’
ATA) found that the economic
dependence framework ‘‘comports with
a thoughtful reading of decades of court
precedent.’’ See also Americans for
Prosperity Foundation; Cetera Financial
Group; Center for Workplace
Compliance (‘‘DOL is correct to propose
using the economic dependence
standard for determining whether an
individual is an employee or
independent contractor’’).
The majority of commenters agreed
with the Department’s proposal to adopt
the economic reality test using the
above-mentioned definition of economic
dependence, including commenters that
were generally critical of the proposed
rule. For example, the State AGs
approvingly stated that ‘‘[f]or nearly
three-quarters of a century, the Supreme
Court has held that whether a worker is
a covered ‘‘employee’’ under the FLSA
is governed by the economic reality
test.’’ See also National Employment
Law Project (NELP); Signatory Wall and
Ceiling Contractors Alliance (SWACCA)
(recommending adopting an economic
reality test with a different number of
factors). While objecting commenters
challenged various aspects of the
proposed rule, they did not dispute the
sharpened explanation of the economic
dependence inquiry. Commenters, both
supportive and objecting, made a
number of thoughtful suggestions,
which are addressed below.
The Administrative Law Clinic at the
Antonin Scalia Law School suggested
further clarifying the test by adding
‘‘[a]n individual is not an ‘employee’
merely because he or she is
economically dependent in some way
on the potential employer.’’ Such
additional language may be redundant
in § 795.105(b) because that section
already articulates economic
dependence as dependence on a
potential employer for work, as opposed
to being in business for oneself. As
explained above, other forms of
dependence, such as dependence on
income or subsistence, do not count.
However, given how important it is to
apply the correct concept of economic
dependence, the Department believes
this point bears emphasis through a
concrete, fact-specific example in the
regulatory text. The Department is thus
adding an example in § 795.115 to
demonstrate that a different form of
dependence, i.e., dependence of income
or subsistence, is not a relevant
consideration in the economic reality
test.
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A number of individual commenters
who generally support this rule
requested that the Department allow
workers who voluntarily agree to be
independent contractors to be classified
as such, regardless of other facts. For
example, Farren and Mitchell urged the
Department to ‘‘allow the parties
themselves to explicitly define the
nature of their labor relationship,’’
asserting that such an approach would
respect worker autonomy, maximize
legal certainty, and promote greater
flexibility in work arrangements. This
requested approach would allow
voluntary agreements to supersede the
economic reality test in determining
classification as an employee or
independent contractor. The Supreme
Court, however, held in Tony & Susan
Alamo, 471 U.S. at 302, that the FLSA
must be ‘‘applied even to those who
would decline its protections.’’ In other
words, an individual may not waive
application of the Act through voluntary
agreement. See Barrentine v. ArkansasBest Freight Sys., Inc., 450 U.S. 728, 740
(1981) (‘‘FLSA rights cannot be abridged
by contract or otherwise waived,
because this would ‘nullify the
purposes’ of the statute and thwart the
legislative policies it was designed to
effectuate.’’) (quoting Brooklyn Savings
Bank v. O’Neil, 324 U.S. 697, 707
(1945)); Lauritzen, 835 F.2d at 1544–45
(‘‘The FLSA is designed to defeat rather
than implement contractual
arrangements. If employees voluntarily
contract to accept $2.00 per hour, the
agreement is ineffectual.’’) (Easterbrook
J., concurring). Because this request
would contradict this precedent by
allowing the possibility of workers who
are employees under the facts and law
to waive the FLSA’s protections by
classifying themselves as independent
contractors, the Department declines to
implement it in the final rule.
Some commenters, including the
Minnesota State Building &
Construction Trades Council, PJC, and
SWRCC, suggested that the rule include
a presumption of employee status. The
Supreme Court has said and the
Department agrees that this is a totality
of the circumstances analysis, based on
the facts. The Department thus declines
to create a presumption in favor of
employee status.
NELA, Farmworker Justice (FJ), and
several other commenters requested that
the Department abandon the economic
reality test in favor of the ABC test
adopted by the California Supreme
Court in Dynamex Operations West v.
Superior Court, 416 P.3d 1 (2018). By
contrast, other commenters, such as the
American Society of Travel Advisors
(ASTA) and National Federation of
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Independent Business (NFIB), urged the
Department to adopt the common law
standard used to distinguish between
employees and independent contractors
under the Internal Revenue Code and
other Federal laws. These requests are
addressed in the discussion of
regulatory alternatives in Section VI,
which explains why the Department is
not adopting either the common law
control test or the ABC test for
employment under the FLSA.
For the reasons discussed above, the
Department adopts § 795.105(b) as
proposed to adopt the economic realty
test to determine whether an individual
is an employee or independent
contractor under the FLSA. Under that
test, an individual is an employee if he
or she is dependent on an employer for
work, and is an independent contractor
if that he or she is, as a matter of
economic reality, in business for him- or
herself.
D. Applying the Economic Reality
Factors To Determine a Worker’s
Independent Contractor or Employee
Status
Proposed § 795.105(c) explained that
certain nonexclusive economic reality
factors guide the determination of
whether an individual is, on one hand,
economically dependent on a potential
employer for work and therefore an
employee or, on the other hand, in
business for him- or herself and
therefore an independent contractor.
See 85 FR 60639. These factors were
listed in proposed § 795.105(d), based
on the factors currently used by the
Department and most Federal courts of
appeals, with certain proposed
reformulations. Id.
First, the Department proposed to
follow the Second Circuit’s approach of
analyzing the worker’s investment as
part of the opportunity factor. The
combined factor asked whether the
worker has an opportunity to earn
profits or incur losses based on his or
her exercise of initiative or management
of investments. See 85 FR 60613–15,
60639. Second, the Department
proposed to clarify that the ‘‘skill
required’’ factor originally articulated by
the Supreme Court should be used, as
opposed to the ‘‘skill and initiative’’
factor currently used in some circuits,
because considering initiative as part of
the skill factor creates unnecessary and
confusing overlaps with the control and
opportunity factors. See 85 FR 60615,
60639. Third, the Department proposed
to further reduce overlap by analyzing
the exclusivity of the relationship as a
part of the control factor only, as
opposed to both the control and
permanence factors. See 85 FR 60615–
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16, 60639. Lastly, the Department
proposed to reframe the ‘‘whether the
service rendered is an integral part of
the alleged employer’s business’’ factor
in accordance with the Supreme Court’s
original inquiry in Rutherford Food, 331
U.S. at 729, of whether the work is ‘‘part
of an integrated unit of production.’’ See
85 FR 60616–18, 60639.20
Proposed § 795.105(c) further aimed
to improve the certainty and
predictability of the test by focusing it
on two core factors: (1) The nature and
degree of the worker’s control over the
work; and (2) the worker’s opportunity
for profit or loss. The proposed rule
explained that if both proposed core
factors point towards the same
classification—whether employee or
independent contractor—there is a
substantial likelihood that that
classification is appropriate. See 85 FR
60618–20, 60639.
The following discussion addresses
commenter feedback on the five
proposed economic reality factors.
1. The ‘‘Nature and Degree of the
Individual’s Control Over the Work’’
Factor
The first core factor identified in the
proposed regulatory text was the
‘‘nature and degree of the individual’s
control over the work.’’ 85 FR 60639.
Proposed § 795.105(d)(1)(i) explained
that this factor ‘‘weighs towards the
individual being an independent
contractor to the extent the individual,
as opposed to the potential employer,
exercises substantial control over key
aspects of the performance of the work,
such as by setting his or her own
schedule, by selecting his or her
projects, and/or through the ability to
work for others, which might include
the potential employer’s competitors.’’
Proposed § 795.105(d)(1)(i) further
explained that, in contrast, this factor
‘‘weighs in favor of the individual being
an employee under the Act to the extent
the potential employer, as opposed to
the individual, exercises substantial
control over key aspects of the
performance of the work, such as by
controlling the individual’s schedule or
workload and/or by directly or
indirectly requiring the individual to
20 Consistent with WHD Opinion Letter
FLSA2019–6, the Department’s proposal did not
include the ‘‘independent business organization’’
factor mentioned in Fact Sheet #13. The opinion
letter explained that the ‘‘independent business
organization’’ factor was ‘‘[e]ncompassed within’’
the other factors. Because the ultimate inquiry of
the economic dependence test is whether workers
are ‘‘in business for themselves,’’ Saleem, 854 F.3d
at 139, analyzing the worker’s degree of
‘‘independent business organization’’ restates the
inquiry and adds little, if anything, to the analysis
that is not already covered by the other factors.
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work exclusively for the potential
employer.’’ In addition, the proposal
stated that the following actions by the
potential employer ‘‘do[ ] not
constitute control that makes the
individual more or less likely to be an
employee under the Act’’: ‘‘[r]equiring
the individual to comply with specific
legal obligations, satisfy health and
safety standards, carry insurance, meet
contractually agreed-upon deadlines or
quality control standards, or satisfy
other similar terms that are typical of
contractual relationships between
businesses (as opposed to employment
relationships).’’ Numerous commenters
requested changes to the proposed
control section regarding (1) the
perspective from which control is
framed; (2) the examples of control that
are relevant to the economic
dependence inquiry; and (3) examples
of control that are not.
a. Responses to Requests Regarding the
Framing of Control
Some commenters asserted that the
control factor should focus on the
potential employer’s substantial control
over the worker instead of the worker’s
substantial control over the work. For
example, the State AGs said that the
‘‘proposed control factor incorrectly
focuses on the worker’s control over the
work’’ and that ‘‘[w]ell-established
precedent makes clear that the proper
focus is the employer’s control over the
worker.’’ According to NELA, ‘‘the
control analysis has historically been,
and should continue to be, on the
control that the employer has over the
employee, not that the employee has
over their work.’’ NELA added that the
Department ‘‘cannot deny that its
proposal casts the control inquiry
differently than the Supreme Court,
courts of appeals, and the Department
have in the past.’’ And the United
Brotherhood of Carpenters and Joiners
of America stated that the proposal’s
‘‘focus on the individual’s control over
the work turns the ‘suffer or permit’
standard on its head’’ because that
standard ‘‘references the purported
employer’s behavior—not the worker’s.’’
See also Northern California Carpenters
Regional Council (noting that ‘‘[b]ecause
the ‘nature and degree of the
individual’s control over the work’ . . .
focuses on the individual’s control, as
opposed to the employer’s control, the
factor skews towards most skilled
tradespeople being classified as
independent cont[r]actors’’). Relatedly,
attorney Richard Reibstein suggested
that the title of the control subsection
‘‘be re-drafted in a manner that does not
suggest it favors independent contractor
status because the remaining text
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regarding [the control factor] is neutral.’’
Mr. Reibstein suggested that the title be
changed from the ‘‘nature and degree of
the individual’s control over the work’’
to the ‘‘nature and degree of each party’s
control over the work.’’ Finally, WPI
expected that some commenters would
object to the Department’s proposed
articulation of the control factor, and it
supported the Department’s approach
by saying that ‘‘the economic reality test
focuses on the individual—whether the
individual is economically dependent
on another business or in business for
him or herself,’’ and that, ‘‘[t]hus, the
focus of each factor should also be on
the economic realities of the individual,
not the businesses with which [he or
she] contracts.’’ See also CPIE
(supporting ‘‘the NPRM’s articulation of
this factor’’).
Notwithstanding differing commenter
preferences over the primary
articulation of the control factor, the
proposed (and final) regulatory text at
§ 795.105(d)(1)(i) discusses both the
individual worker’s control and the
potential employer’s control.21 This
approach is consistent with that of
courts, which also generally consider
both the individual’s control and the
potential employer’s control. See, e.g.,
Razak, 951 F.3d at 142; Hobbs, 946 F.3d
at 829; Saleem, 854 F.3d at 144–45;
Karlson, 860 F.3d at 1096. The
Department explained in the NPRM
preamble that whether the control factor
is articulated with reference to the
individual worker’s control or the
potential employer’s control is a
‘‘distinction . . . of no consequence,’’
and that both ‘‘the nature and degree of
control over the work by the worker and
by the potential employer are
considered to determine whether
control indicates employee or
independent contractor status.’’ 85 FR
60612 n.34. The Department reaffirms
that statement now and reiterates that
both the worker’s control and the
potential employer’s control should be
considered. To remove any ambiguity
on this point, the Department has
modified the title of subsection
795.105(d)(1)(i) to ‘‘[t]he nature and
degree of control over the work,’’
removing the proposed rule’s reference
to ‘‘the individual’s control over the
work.’’ This revised articulation is
closer to the Supreme Court’s
description of the economic reality test’s
control factor in Silk, 331 U.S. at 716
(‘‘degrees of control’’), which does not
21 As Mr. Reibstein acknowledged, the proposed
regulatory text beyond the title of the control
section was written in a ‘‘neutral’’ manner. The
final regulatory text is written in a similarly neutral
manner.
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indicate a focus on either the individual
worker or the potential employer.
Mr. Reibstein also suggested that the
control factor ‘‘should be drafted in a
manner that focuses attention on the key
to control, which is control over the
manner and means by which the work
in question is performed.’’ He asserted
that, as proposed, the control section ‘‘is
ambiguous at best and may be
misleading at worst,’’ and suggested that
‘‘control over the work’’ should be
changed to ‘‘control over the
performance of the work, particularly
how the work is to be performed.’’ The
Department, however, prefers to retain
the ‘‘control over the work’’ articulation.
It is purposefully broad to encompass
various different types of control that
the individual worker and the potential
employer may exercise over the working
relationship. Moreover, the Department
agrees that who controls the manner and
means by which the work is performed
is a key component of the control
analysis, and the Department believes
that both the proposed and final
regulatory text reflect the importance of
the manner and means by which the
work is performed.
b. Responses to Comments Regarding
Examples of Relevant Control
A number of comments addressed the
proposed regulatory text’s three nonexhaustive examples of control that may
indicate employee or independent
contractor status, which were setting
schedules, selecting projects, and
working exclusively for the employer or
working for others.
Several commenters sought
clarification that these examples may
not always be probative of an
employment or independent contracting
relationship. For instance, NRF stated
‘‘there may be limits on schedules that
are consistent with business
relationships that should not be treated
as impacting the analysis,’’ such as
delivery workers who can deliver only
during the restaurant’s operating hours
and a retailer that arranges for afterhours cleaning services. The
Department agrees that there are
examples of impacts on a workers
schedule that are not probative of the
type of control that indicates economic
dependence and that NRF has identified
two such examples by pointing to the
fact that a delivery worker can deliver
for a restaurant only when the
restaurant is open and a cleaning worker
can clean a retailer only when it is
closed. But the Department does not
think any change to the regulatory text
is warranted to clarify this point, as the
regulatory text merely provides a few
examples of facets of control that may—
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or may not—be probative in any given
case depending on the facts. NHDA
sought clarification of the working for
others example because, in its view, ‘‘it
is not enough for the individual to claim
he/she never turned down projects or
never worked for others. Rather, the
individual must demonstrate some
action, implementation, or execution (in
other words, act or conduct) by the
potential employer that prevented the
individual from turning down projects
or working for others.’’ In response, the
Department notes its statement in the
NPRM preamble that ‘‘a potential
employer may exercise substantial
control, for example, where it explicitly
requires an exclusive working
relationship or where it imposes
restrictions that effectively prevent an
individual from working with others.’’
85 FR 60613 (citing cases where the
employer’s schedule made it
‘‘impossible’’ or ‘‘practically
impossible’’ for the worker to work for
others). Where a worker could work for
others, meaning the potential employer
is not explicitly or effectively
preventing the worker from doing so,
the worker retains control over this
aspect of his or her work. That he or she
exercises this control by choosing to
work only for one potential employer
does not necessarily shift the control to
the potential employer. Further, the
parties’ actions, including whether the
potential employer enforced an explicit
bar on working for others or has
imposed working conditions that make
doing so impracticable, are stronger
evidence of control than contractual or
theoretical ability or inability to control
this aspect of the working
relationship.22
Some commenters interpreted the few
examples of control in the proposal as
an effort to limit the types of control
that may be considered. For example,
Farmworker Justice stated that the
proposal ‘‘improperly and erroneously
tries to narrow the relevant
considerations for the [control] factor.’’
According to Edward Tuddenham, the
proposal ‘‘lists some ‘key’ elements of
control that . . . may have little or no
significance whatsoever’’ and ‘‘[s]uch a
rigid approach to the question of control
22 The Department received related feedback from
commenters asking for proposed § 795.110 to
discount the relevance of voluntary worker
practices (e.g., choosing to work exclusively for one
business, declining to negotiate prices, etc.); as
explained in greater detail in Section IV(F), coercive
behavior by a potential employer (e.g., vigilant
enforcement of a non-compete clause, punishing
workers for turning down available work, etc.)
constitutes stronger evidence of employment status
than such voluntary worker practices, but is not a
prerequisite for such worker practices to have
import under the FLSA’s economic reality test.
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can only wreak havoc with the
established common law of FLSA
employer/employee relationships.’’
However, the examples of types of
control identified in the proposal were
not an attempt to narrow or limit the
control factor analysis. The Department
cannot provide an exhaustive list of
types of control and so instead focused
on several key examples of types of
control. Any type of control over the
work by the individual worker or the
potential employer may be considered.
Such considerations should not be
‘‘mechanical,’’ Saleem, 854 F.3d at 140,
and instead must focus on whether the
control exercised by either the
individual or the potential employer
answers the ultimate inquiry of
‘‘whether the individual is, as a matter
of economic reality, in business for
himself,’’ as opposed to being
economically dependent on the
potential employer for work. In any
event, as explained below, the
Department is clarifying types of control
that may be relevant to the analysis.
Numerous other commenters
suggested the addition of dozens of
examples of types of control that
indicate employee or independent
contractor status. For example, WPI
suggested that the following types of
control by the individual worker are
indicative of independent contractor
status: Controlling whether to work at
all; controlling the location of where to
perform the work; controlling how the
work is performed; setting prices or
choosing between work opportunities
based on prices; and hiring employees
or engaging subcontractors. It suggested,
conversely, that the following types of
control by the potential employer are
indicative of employee status: Requiring
the individual worker to comply with
company specific procedures regarding
how the work is performed; requiring a
set schedule or minimum hours;
controlling when the individual can
take meal and rest breaks; and
controlling when the individual can
take time off. CWI recommended
addition of the following as examples of
the individual worker’s control over the
work that are indicative of independent
contractor status: The worker’s ability to
make decisions with respect to the
details of how the work is performed,
including the staging and sequencing of
aspects of the work; the worker’s
selection of supplies, tools, or
equipment to be used (or not used) by
the worker; the worker’s control over
when the work is conducted (e.g.,
worker flexibility in start and end times)
where flexibility exists in the result to
be accomplished or the time periods
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available to a worker to offer their
services; the worker’s control over
where certain aspects of the services can
be performed where the subparts do not
change the results provided by the
worker; and the worker’s discretion to
use the services of others to perform the
work in whole or in part, or to support
the worker’s performance of services
(including performing some of the
contracted work and/or performing
supporting services such as accounting,
legal, administrative, or financial
services to support the worker or
services to support equipment or tools
used by the worker to perform services).
UPS stated that the proposal ‘‘fails to
provide examples beyond controlling
the worker’s schedule or workload and
restricting the worker’s ability to work
with other entities,’’ and that ‘‘courts
have properly widened the lens when
assessing control, looking at factors such
as background checks, authority to hire
and fire, training, advertising, licensing,
uniforms, monitoring, supervision,
evaluation, and discipline.’’
Farmworker Justice commented that the
proposal did ‘‘not acknowledge other
examples of employer control that
unquestionably shape a worker’s
experience and performance of daily
tasks’’ and provided as examples
‘‘[r]equirements about how a worker
must dress, what language or tone she
may use in a professional setting, or
what prices she must charge
customers.’’ Likewise, Sen. Sherrod
Brown and 22 other senators
commented that the proposal ‘‘ignore[s]
other critical matters of control that an
employer typically exercises or retains
the right to, including setting the rate of
pay and the manner in which the work
must be performed and disciplining
workers who do not meet their
standards.’’ And Human Rights Watch
commented that the proposed control
factor ‘‘potentially omits other ways that
gig companies control their workers,
such as the ways in which they
unilaterally change the formula for
calculating base earnings, the setting of
default tip options, and restrictions on
the range of assignments that are offered
to workers at a specific time or in a
specific locale.’’ Other commenters
provided various industry-specific
examples that they viewed as indicative
of control by the individual worker or
the potential employer.
The Department has considered the
various comments regarding additional
examples of types of control that can be
indicative of employee or independent
contractor status and declines to make
changes to the proposed regulatory text
in response. While this preamble and
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the regulatory test cannot (and should
not) address each and every potential
scenario and example, they clarify and
articulate principles related to the
control factor that can be applied to an
array of fact patterns as they arise.
As an initial matter, a number of
commenters’ examples fall within the
general categories of control already
identified in the regulatory text. For
example, the worker’s controlling
whether to work at all, controlling when
the work is conducted, and choosing
between work opportunities based on
prices are all examples of the worker’s
setting his or her schedule or selecting
his or her projects, which the regulatory
text identifies as examples of the
worker’s control over the work.
Similarly, the potential employer’s
requiring a set schedule or minimum
hours, controlling when the individual
can take meal and rest breaks,
controlling when the individual can
take time off, and restricting the range
of assignments that are offered to the
worker are all examples of the potential
employer’s control over the worker’s
schedule, workload, or both, which the
regulatory text identifies as examples of
the potential employer’s control over
the work.
Moreover, as explained in the NPRM
preamble, the Department is concerned
that application of the economic reality
factors has resulted in certain overlaps
between the factors. See 85 FR 60607–
08 (identifying ways in which the
former skill/initiative, permanence, and
‘‘integral’’ factors considered control).
Consistent with that discussion and in
the interest of further clarification, the
Department reiterates that the worker’s
ability to exercise significant initiative,
whether the potential employer directly
or indirectly requires the worker to
work exclusively for it, and the
potential employer’s ability to compel
the worker’s attendance to work on a
consistent basis or otherwise closely
supervise and manage performance of
the work are examples of relevant types
of control and are part of the control
analysis. And as stated above, the
Department agrees that who controls the
manner and means by which the work
is performed is a key component of the
control analysis. In addition, the
Department approvingly cited in the
NPRM preamble cases in which the
workers’ ability to accept or reject
projects or deliveries without negative
repercussions or retaliation,23 the
potential employer’s lack of close
supervision or specifications how the
23 See 85 FR 60612 n.35 (citing Parrish, 917 F.3d
at 382; Express Sixty-Minutes Delivery, 161 F.3d at
303).
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workers should do the work,24 and the
potential employer’s allowing the
workers broad discretion in the manner
in which to complete their work 25
indicated substantial control over the
work by the workers. Finally, the
Department agrees that the various
examples of types of control identified
by the commenters above may, at least
in some factual circumstances, be
relevant to the control analysis.
Ultimately, however, it is not
possible—and would be
counterproductive—to identify in the
regulatory text every type of control
(especially industry-specific types of
control) that can be relevant when
determining under the FLSA whether a
worker is an employee or independent
contractor. As explained above, the
Department purposefully articulated the
control analysis in a general manner to
encompass various different types of
control that the individual worker and
the potential employer may exercise
over the working relationship, and to
avoid any unintended inferences
regarding omitted types of control.
Accordingly, any type of control over
the work by the individual worker or
the potential employer may be
considered, although some types of
control are not probative of economic
dependence as set forth in the final
regulatory text (and discussed below).
The Owner-Operator Independent
Drivers Association (OOIDA) objected
that the proposal ‘‘offers no guidance on
how’’ the examples of types of control
‘‘should be weighed against each other’’
and asked whether the Department
intends ‘‘that a worker must satisfy all
of the criteria that it mentions in order
to be an independent contractor,’’ or if
there is ‘‘some other balance when
evaluating this factor.’’ OOIDA noted
that although the proposal stated that no
single factor of the economic reality test
is dispositive, ‘‘it does not offer the
same clarification when considering the
details within a single factor.’’ As
explained above, any type of control
over the work by the individual worker
or the potential employer may be
considered to the extent it is probative
as to whether the individual is, as a
matter of economic reality, in business
for himself, as opposed to being
economically dependent on the
potential employer for work. No single
example of control, if present or not
present, is necessarily dispositive as to
whether the control factor indicates
economic dependence. The examples
are simply that: Examples.
24 See
id. (citing Thibault, 612 F.3d at 847).
85 FR 60612–13 (citing Mid-Atl.
Installation, 16 F. App’x at 106).
25 See
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c. Responses to Comments Regarding
Examples of Requirements That Are Not
Probative
Despite the final rule’s broad
articulation of the control factor, not
every requirement or limitation on the
means of doing business constitutes
control for the purpose of analyzing
whether a worker is an employee under
the FLSA. The proposed regulatory text
contained examples of requirements by
a potential employer that do not
constitute control and thus are not
probative to the ultimate inquiry of
whether the individual is, as a matter of
economic reality, in business for
himself. These are requirements to
‘‘comply with specific legal obligations,
satisfy health and safety standards, carry
insurance, meet contractually agreedupon deadlines or quality control
standards, or satisfy other similar terms
that are typical of contractual
relationships between businesses (as
opposed to employment relationships).’’
In other words, insisting on adherence
to certain rules to which the worker is
already legally bound would not make
the worker more or less likely to be an
employee.
NELA challenged the Department’s
‘‘claims that case law supports this
approach’’ and asserted that ‘‘[t]he
majority view among courts . . . is that
evidence of a business compelling its
workers to comply with certain legal
obligations or customer requirements is
probative of control over the work
relationship’’ (citing Scantland v. Jeffry
Knight, Inc., 721 F.3d 1308, 1316 (11th
Cir. 2013), among other cases). NELA
added that ‘‘[c]ourts have routinely held
that employer guidelines put in place to
ensure that workers conform with the
law or follow safety regulations
constitute control over employees’’
(citing Narayan v. EGL, Inc., 616 F.3d
895, 902 (9th Cir. 2010), among other
cases). The National Women’s Law
Center similarly stated that ‘‘courts have
regularly rejected arguments that
external requirements imposed by the
defendant company’s customers are
irrelevant to the right to control factor’’
(citing cases). NELP asserted that the
Department’s ‘‘attempts to take away
consideration of certain employer
controls based on the source of the
control’’ is ‘‘nonsense’’ because ‘‘if
legislators or regulators have placed an
obligation on employers to comply with
certain laws, that makes the worker less
independent and more dependent on
that employer, and this should be
accorded weight.’’ AFL–CIO commented
that the ‘‘categorical exclusion of
evidence of control based solely on the
reasons why the employer exercises the
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control is both irrational and contrary to
Supreme Court precedent and Congress’
intent.’’ And the United Brotherhood of
Carpenters and Joiners of America
asserted that the Department’s proposal
would ‘‘create[ ] a gaping hole that is
fertile ground for exploitation by
irresponsible employers like the ones
we find in the construction industry.’’
On the other hand, the Coalition to
Promote Independent Entrepreneurs
‘‘strongly agree[d]’’ with this proposal
and ‘‘agree[d] that these types of
requirements frequently apply to work
performed by employees and
independent contractors alike and thus
are not probative of whether an
individual is economically dependent
on a company.’’ In addition, NRF
asserted that ‘‘this clarification is
important, as there is a difference
between ‘control’ and ‘quality control’
and/or other performance standards.’’
And the Independent Bakers
Association ‘‘strongly support[ed] the
proposed clarification that requiring an
individual to comply with specific legal
obligations typical of business
relationships would not constitute
evidence of control or make an
individual more or less likely to be an
employee.’’ See also SHRM
(‘‘support[ing] the [p]roposed . . .
recognition that contracting parties
should be able to build compliance
with, for example, specific legal
obligations, satisfy health and safety
standards, and the carrying of insurance
into the contractual relationship’’).
The Department understands that
some courts have found requirements
that workers comply with specific legal
obligations or meet quality control
standards to be indicative of employee
status. In particular, the Eleventh
Circuit in Scantland stated that it
examines ‘‘the nature and degree of the
alleged employer’s control, not why the
alleged employer exercised such
control’’ and that ‘‘a company must hire
employees, not independent
contractors’’ if ‘‘the nature of [its]
business requires [the] company to exert
control over workers to the extent that
[the defendant] has allegedly done.’’ 721
F.3d at 1316. The Scantland court
correctly recognized that the ultimate
inquiry in the economic reality test is
‘‘whether an individual is in business
for himself or is dependent upon
finding employment in the business of
others.’’ 721 F.3d at 1312 (quotation
marks omitted). But to answer that
question it is necessary to consider
‘‘why’’ the potential employer imposed
a requirement. If the reason for a
requirement applies equally to
individuals who are in business for
themselves and those who are
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employees, imposing the requirement is
not probative. See Parrish, 917 F.3d at
379 (‘‘although requiring safety training
and drug testing is an exercise of control
in the most basic sense of the word, . . .
[r]equiring . . . safety training and drug
testing, when working at an oil-drilling
site, is not the type of control that
counsels in favor of employee status.’’).
The Scantland court’s discussion of
the control factor included the fact that
‘‘[t]echnicians could also be . . . fired,
for consistently misbilling, fraudulently
billing, stealing, . . . [and] having
consistently low quality control ratings’’
as evidence that the control factor
weighed in favored employee
classification. 721 F.3d at 1314 (11th
Cir. 2013).26 However, employees and
independent contractors alike are
routinely terminated for fraud, theft,
and substandard work. Such dismissal
are therefore not probative as to whether
and the dismissed workers were in
business for themselves, as opposed to
being economically dependent on the
potential employer. In contrast,
dismissals for failing to work mandatory
hours or for disregarding close
supervision would be probative because
mandatory hours and close supervision
are typically not imposed on
individuals who are in business for
themselves. At bottom, the question of
‘‘why’’ workers were dismissed matters
a great deal.
In any event, Scantland’s reasoning
appears to be in the minority among
courts of appeals.27 As explained in the
NPRM preamble, other courts have
concluded that requiring such types of
compliance is not probative of an
employment relationship. See, e.g.,
Parrish 917 F.3d at 379; Iontchev v.
AAA Cab Serv., Inc., 685 F. App’x 548,
550 (9th Cir. 2017) (noting that the
potential employer’s ‘‘disciplinary
policy primarily enforced the Airport’s
rules and [the city’s] regulations
governing the [drivers’] operations and
conduct’’ in finding that the potential
employer ‘‘had relatively little control
over the manner in which the [d]rivers
performed their work’’); Mid-Atl.
Installation, 16 F. App’x at 106
(rejecting an argument that backcharging
26 The court also relied on the employers’ close
supervision, control over schedules, and ability to
prevent technicians from hiring helpers or working
for others to conclude that the control factors
weighed in favor of employee classification.
Scantland, 721 F.3d at 1314–15.
27 In Narayan, the Ninth Circuit applied
California law—not the FLSA—and merely recited
requirements imposed by the potential employer to
comply with certain legal obligations among a
litany of examples of control that precluded
summary judgment on the employee versus
independent contractor issue in that case. See 616
F.3d at 900–02.
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the workers ‘‘for failing to comply with
various local regulations or with
technical specifications demonstrates
the type of control characteristic of an
employment relationship,’’ and noting
that withholding money in such
circumstances is common in contractual
relationships); cf. Mr. W Fireworks, 814
F.2d at 1048 (finding that, because a
scheduling requirement was imposed by
the potential employer and not by state
law, it suggested control over the
workers). And courts have reached
analogous conclusions in joint employer
cases. See, e.g., Zheng v. Liberty Apparel
Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003)
(finding that control with respect to
‘‘contractual warranties of quality and
time of delivery has no bearing on the
joint employment inquiry’’ because
such control is ‘‘perfectly consistent
with a typical, legitimate subcontracting
relationship’’); Moreau v. Air France,
356 F.3d 942, 950–51 (9th Cir. 2003)
(noting that control exercised by
potential joint employer over
contractor’s employees to ‘‘ensure
compliance with various safety and
security regulations’’ is ‘‘qualitatively
different’’ from control that indicates
employer status).
In addition to the supportive case law,
the extent to which courts take differing
approaches to the probative value of
such requirements is yet another
example of the need identified by the
Department for a clear and uniform
standard under the FLSA to distinguish
between employees and independent
contractors. Moreover, the Department
believes that these types of requirements
are generally imposed by employers on
both employees and independent
contractors (as some commenters
indicated). Employers expect and often
require all of their workers to, for
example, comply with the law, satisfy
health and safety standards, and meet
deadlines and quality standards. Thus,
the existence of the requirements
themselves are not probative of whether
the worker is an employee or
independent contractor. Other indicia of
control over the work, including the
indicia of control identified in the final
regulatory text, are more probative of
the worker’s economic dependence or
independence. Accordingly, the
Department retains in the final
regulatory text’s statement that
requirements by the potential employer
that the worker ‘‘comply with specific
legal obligations, satisfy health and
safety standards, carry insurance, meet
contractually agreed-upon deadlines or
quality control standards, or satisfy
other similar terms that are typical of
contractual relationships between
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businesses (as opposed to employment
relationships)’’ are not ‘‘control that
makes the individual more or less likely
to be an employee under the Act.’’
Although the ATA ‘‘strongly agrees’’
with the Department’s proposal that
requirements by the potential employer
that the worker ‘‘comply with specific
legal obligations’’ would not be ‘‘control
that makes the individual more or less
likely to be an employee under the Act,’’
it suggested that ‘‘specific’’ be changed
to ‘‘any’’ in the final regulatory text.
ATA explained that referring to
‘‘specific’’ legal obligations ‘‘may
unfortunately result in a great deal of
litigation over whether any particular
aspect of a contract is ‘specifically’
mandated by law.’’ It cited, as examples,
laws that impose general safety
standards with which employers
determine the specifics of how to
comply. See also NHDA (‘‘The proposal
carves out compliance with specific
legal obligations. However, not all legal
obligations are specific, making other
language in the proposal unnecessarily
problematic.’’).
After careful consideration, the
Department declines to adopt the
suggested change. As an initial matter,
the Department used the ‘‘specific legal
obligations’’ language in its recent Joint
Employer Status under the Fair Labor
Standards Act final rule. See 85 FR 2859
(finalizing 29 CFR 791.2(d)(3)).28 The
Department noted there that the
obligations include compliance with the
FLSA or other similar laws, sexual
harassment policies, background
checks, or workplace safety practices
and protocols. See id. The Department
did not intend a high degree of
specificity there and intends the same
meaning here. Moreover, a potential
employer’s requirement that a worker
comply with legal obligations without
any further specificity as to the law or
the actual obligations is unlikely to be
probative of control in the first place.
Accordingly, retaining the word
‘‘specific’’ is consistent with the
Department’s position that, although
requiring workers to comply with legal
obligations could be some manner of
control, such requirements reflect the
applicable legal regime more than the
potential employer’s control, and
encouraging such requirements in
contractual work relationships has
28 The Department’s Joint Employer final rule was
mostly vacated by the U.S. District Court for the
Southern District of New York for reasons unrelated
to the ‘‘specific legal obligations’’ language. See
New York v. Scalia, No. 1:20–cv–1689–GHW, 2020
WL 5370871 (S.D.N.Y. Sept. 8, 2020). The
Department appealed the decision to the U.S. Court
of Appeals for the Second Circuit on November 6,
2020.
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obvious benefits for employers, workers,
and society generally.
Other commenters expressed support
for the Department’s proposal to carve
out from the control analysis the
identified employer actions toward
individual workers, but also requested
that the Department expand its proposal
by identifying many additional
employer requirements as not types of
control that make the individual more
or less likely to be an employee under
the Act. For example, SHRM asserted
that ‘‘the Final Rule must emphasize
that all workers, regardless of their
formal employment status, should be
able to benefit from the training,
resources, and positive workplace
practices as those who are directly
employed in the same workplace,’’ and
it gave examples of workplace trainings
and audit measures. The U.S. Chamber
of Commerce stated that the Department
‘‘should expand this concept’’ and
‘‘explicitly state that workers and
businesses should not be discouraged
from incorporating terms (and audit and
other certification processes) into their
relationship that support sound, lawful,
safe work practices.’’ It suggested the
following examples of such terms:
‘‘Incorporation of an obligation that the
work be performed pursuant to
acceptable professional, industry and
customer service standards, as well as
commonly accepted safety, ethics,
licensure and other standards and
recommendations (such as compliance
with limitations or control imposed or
necessitated by law, regulation, order or
ordinance).’’ See also Seyfarth Shaw
(requesting that the following employer
actions toward workers be excluded
from the control analysis: ‘‘(1)
compliance with professional
obligations and ethics standards; (2)
compliance with regulatory obligations,
including over health and safety; (3)
compliance with other published
industry standards; (4) compliance with
applicable local, state, and national
licensure standards and rules; and (5)
additional contractual term examples of
agreed upon results and deadlines’’); 29
29 In a separate section of its comment, Seyfarth
Shaw recommended that the Department state that
the following are not evidence of a potential
employer’s control over the work of the worker: The
business provides information regarding the final
result to be accomplished by the worker; the
business provides customer specifications/details
and feedback relating to the work (including
requesting confirmation that the customer feedback
has been addressed); the business provides time
frames within which services can be provided in
light of the services contracted for, and/or the time
sensitivity or perishable nature of the services/
products; the business’ right to enforce contractual
obligations; the business provides the worker
suggestions, recommendations, guidance, and/or
tips that are not mandated but informational
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WPI (asserting that the potential
employer’s practice or ability to do the
following are not probative: Requiring
the individual to comply with or pass
down contractual and legal obligations
to subcontractors and employees;
requiring the individual to comply with
customer requirements; tracking and
monitoring data related to the
individual; providing the individual
with market data on pricing;
establishing default pricing that the
individual may change; providing the
individual with information related to
the establishment or running of a
business; providing the individual with
emergency assistance (e.g., protective
equipment during a public-health
crisis); and complying with Federal,
state or locals laws related to a
contracting relationship). Likewise, the
Financial Services Institute requested
that the Department carve out from the
control analysis requirements that
‘‘Independent Broker-Dealers’’ (IBDs)
place on their ‘‘financial advisors’’ to
‘‘comply with requirements imposed by
FINRA, the SEC, and state securities
regulators’’ and exclusivity
requirements that IBDs place on their
financial advisors to comply with ‘‘the
extensive supervisory obligations
imposed by the SEC and FINRA.’’
OOIDA also expressed concerns about
exclusivity requirements and sought
clarification that a potential employer’s
compliance with ‘‘Federal regulations
requir[ing] that an owner-operator
lease[ ] his or her equipment exclusively
to a carrier for the duration of the lease’’
not affect the control analysis. Finally,
CPIE asked the Department to ‘‘make
clear that duties or requirements
imposed by any third party, whether it
be a government agency or a third-party
customer, . . . be disregarded’’ when
applying the control factor. See also
NHDA (‘‘[C]ontrol weighing in favor of
employee status should be control
exercised by the potential employer that
originates with the potential employer
and does not originate from outside,
independent forces or circumstances,
such as customer requirements or
governmental regulations.’’).
The Department does not agree with
CPIE that any requirement stemming
from ‘‘duties or requirements imposed
by any third party’’ be ‘‘disregarded’’ or
with NHDA that only control ‘‘that
originates with the potential employer’’
can indicate employee status. This is
because a third party may explicitly or
impliedly encourage businesses to
relating to the services; and the business pays the
worker by the hour where it is customary in the
particular business/trade to do so (e.g., attorneys,
physical trainers).
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impose requirements on workers that
signify employee classification. For
example, clients of a home cleaning
company may prefer that the company’s
workers wear uniforms, use the same
equipment, and be closely supervised.
Imposing such requirements, even to
satisfy client preferences, makes the
workers more likely to be classified as
employees because those requirements
are inconsistent with the workers being
in business for themselves. A company
may also require that workers it hires
perform timely and high-quality work,
as clients surely prefer. But
contractually agreed-upon deadlines
and quality standards do not signify
employee classification because
independent businesses routinely agree
to meet deadlines and quality standards
as part of their businesses.
In response to comments requesting
that the Department identify many
additional employer requirements as not
types of control that make the
individual more or less likely to be an
employee under the Act, the
Department declines to change its
proposed regulatory text. As an initial
matter, many of the requested additions
are already covered by the proposed
text. For example, the following
requested additions are requirements to
‘‘comply with specific legal obligations’’
and thus already covered: Requirements
to comply with limitations or control
imposed or necessitated by law,
regulation, order, or ordinance;
regulatory obligations; Federal, state, or
local laws related to a contracting
relationship; requirements imposed by
FINRA, the SEC, and state securities
regulators; and Federal regulations
requiring that an owner-operator lease
his or her equipment exclusively to a
carrier for the duration of the lease.30
Other requested additions may fall into
the ‘‘satisfy health and safety standards’’
category (for example: Requiring that
the work be performed pursuant to
commonly accepted safety standards;
and providing the individual emergency
assistance such as protective equipment
during a public-health crisis) or the
‘‘meet contractually agreed-upon
deadlines or quality control standards’’
category (for example: Agreements that
the work be performed pursuant to
acceptable professional, industry, or
30 Uber requested that the Department clarify that
background checks are not an indicia of control:
‘‘Where a business is required by law to engage in
certain activities (such as screening potential
workers for violent crime history), the Department
should make clear that this required screening is
not an indicia of control.’’ However, requiring a
worker to undergo and pass a background check
when the law requires it falls in the ‘‘comply with
specific legal obligations’’ category. No further
clarification is necessary.
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published industry standards;
agreements to comply with applicable
local, state, and national licensure
standards and rules; and agreed upon
results and deadlines). Other requested
additions are narrow or industryspecific in nature, and the Department
prefers general guidance that may be
used by as many employers and workers
as possible.
In any event, it is not possible to
identify in the regulation every
employer requirement that is not the
type of control that makes the
individual more or less likely to be an
employee under the Act. The regulatory
text accounts for this with a broader
final category: Requiring the worker to
‘‘satisfy other similar terms that are
typical of contractual relationships
between businesses (as opposed to
employment relationships).’’ This
category recognizes that contractual
work relationships currently vary and
will evolve going forward, and provides
that additional employer requirements
that are not expressly identified in the
regulatory text but which are similar to
those identified and are typical of such
relationships do ‘‘not constitute control
that makes the individual more or less
likely to be an employee under the Act.’’
SHRM requested that the Department
exclude from the control analysis the
offering of benefits such as ‘‘health
insurance, bonuses, or retirement
savings.’’ According to SHRM, ‘‘the
modern workplace would suffer if
businesses were effectively barred from
providing workplace enhancements that
all workers should enjoy like healthcare
or retirement savings.’’ Other
commenters made overlapping requests,
although not necessarily in the context
of applying the control factor. For
example, TechNet requested that the
Department add a ‘‘safe harbor’’ stating
that ‘‘a worker does not lose his or her
independent status solely because a
network platform provides the worker
with emergency aid or benefits allowed
or required under state law.’’ Similarly,
WPI requested a general ‘‘safe harbor’’
with respect to the provision of
‘‘protections or benefits as allowed or
required by Federal, state or local laws,
including but not limited to minimum
guaranteed earnings, health insurance,
retirement benefits, health or retirement
subsidies, life insurance, workers
compensation or similar insurance,
unemployment insurance, sick or other
paid leave, training and expense
reimbursement.’’
The Department declines to change
the regulatory text in response to these
comments. The offering of health,
retirement, and other benefits is not
necessarily indicative of employment
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status. For example, payment of
proceeds owed into a worker’s own
health plan or retirement account would
not indicate an employment
relationship. This is because it is
reasonable for an independent
contractor to have a personal health or
retirement plan, and the precise method
of compensation—whether cash,
contributions to an account, or some
other method—is not relevant to the
question of economic dependence.
However, providing a worker with the
same employer-provided health or
retirement plans on the terms that a
business also gives its own employees
may indicate the worker is not an
independent contractor but rather an
employee. Certain other benefits could
also suggest employee status. For
example, sick or other paid leave,
especially the potential employer’s
administration and authorization of the
leave, could be indicative of the
potential employer’s control over the
worker’s schedule. Finally, offering a
bonus to a worker may or may not be
indicative of employee status. For
example, a worker’s participation in a
bonus or profit sharing plan in which he
or she receives a bonus depending on
the employer’s, a division of the
employer’s, or his or her own
performance over a period of time could
limit the worker’s ability to affect his or
her profit or loss through initiative or
investment—suggesting economic
dependence and thus employee status.
But a contractual agreement to provide
a worker with a fixed bonus if the
worker completes a job by a certain
deadline or completes a certain number
of tasks over a fixed period is typical of
contractual relationships between
businesses and itself does not make the
worker more or less likely to be an
employee under the Act. Even if, based
on the circumstances of a particular
case, the provision of certain health,
retirement, or other benefits suggests
classification as an employee, that fact
is not determinative by itself because
other facts and factors must also be
considered.
2. The ‘‘Opportunity for Profit or Loss’’
Factor
The second core factor identified in
the proposed regulatory text was the
‘‘individual’s opportunity for profit or
loss.’’ 85 FR 60639. This factor,
included at proposed § 795.105(d)(1)(ii),
‘‘weighs towards the individual being
an independent contractor to the extent
the individual has an opportunity to
earn profits or incur losses based on his
or her exercise of initiative (such as
managerial skill or business acumen or
judgment) or management of his or her
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investment in or capital expenditure on,
for example, helpers or equipment or
material to further his or her work.’’
Proposed § 795.105(d)(1)(ii) further
explained that, ‘‘[w]hile the effects of
the individual’s exercise of initiative
and management of investment are both
considered under this factor, the
individual does not need to have an
opportunity for profit or loss based on
both for this factor to weigh towards the
individual being an independent
contractor.’’ In addition, under the
proposal, this factor ‘‘weighs towards
the individual being an employee to the
extent the individual is unable to affect
his or her earnings or is only able to do
so by working more hours or more
efficiently.’’ Numerous comments were
submitted regarding the proposals to
analyze investment through the lens of
opportunity for profit or loss and to
focus that analysis on the worker’s
investment rather than comparing the
worker’s investment to the potential
employer’s investment. One commenter
requested eliminating this factor
altogether, and several commenters
requested changes to the other aspects
of the proposed opportunity factor
section.
a. Whether To Analyze Investment
Through the Lens of Opportunity for
Profit or Loss
Some commenters opposed the
proposal to consider the individual
worker’s ‘‘management of his or her
investment in or capital expenditure on,
for example, helpers or equipment or
material to further his or her work’’ as
part of the opportunity factor. For
example, NELA stated that a worker’s
investment has ‘‘been a critically
important factor in the economic
realities test analysis’’ and that
‘‘[d]iscounting this important piece of
the economic reality test, as the
Department has done here, plainly
makes it easier for businesses to require
workers to make significant financial
investments without risking a finding of
employee status.’’ The State AGs
similarly commented that the proposed
approach of considering investment
only in the context of opportunity for
profit or loss ‘‘inappropriately
subordinates the investment factor to
the opportunity for profit or loss’’ factor.
According to the State AGs, ‘‘[c]ourts
consider both factors, often together, but
investment ‘is, itself, indicative of
independent contractor status’
especially in smaller businesses’’
(quoting Saleem v. Corp. Transp. Group,
Ltd., 854 F.3d 131, 144 n.29 (2d Cir.
2017)). UPS said that ‘‘workers [who]
make little or no monetary investment
toward completion of the work . . . are
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more likely to be dependent on the
company,’’ but that the Department’s
proposal ‘‘ignores that reality’’ by
suggesting that initiative and investment
‘‘are on equal footing.’’ NELP stated
that, although opportunity for profit or
loss and investment ‘‘are linked, they
are hardly duplicative and separately
serve as useful indicia of an entity’s
status under the FLSA, as the Supreme
Court’s tests note.’’
On the other hand, some commenters
supported the proposal to consider
investment in the opportunity factor.
For example, according to WPI, ‘‘[t]he
Department’s proposal to combine
[opportunity for profit or loss] with an
individual’s investment in facilities and
equipment, following Second Circuit
precedent, is a welcome change that
will bring clarity and reduce overlap.’’
It added that ‘‘[w]ise decisions about
investments are perhaps the clearest
path to increasing profits or suffering
losses.’’ CPIE supported the proposed
‘‘adoption of the Second Circuit’s
approach of combining the factors
‘opportunity for profit or loss’ and
‘investment,’ and not treating them as
separate factors.’’ According to CPIE, the
proposal ‘‘better captures both the
manufacturing-based independent
contractor (who likely has a tangible
capital business investment) and the
new-economy independent contractor
(who likely does not).’’
Having carefully considered the
comments on this issue, the Department
adopts its proposal, consistent with
Second Circuit case law, to consider
investment as part of the opportunity
factor. Some courts have acknowledged
that the two concepts are related while
still keeping the factors separate. See
McFeeley, 825 F.3d at 243; Lauritzen,
835 F.2d at 1537. Other courts do not
expressly acknowledge that they are
related but consider investment when
evaluating opportunity for profit or
loss—resulting in unnecessary and
duplicative analysis of the same facts
under two factors. See, e.g., Mid-Atl.
Installation, 16 F. App’x at 106–07
(finding that the worker’s capital
investments in tools, equipment, and a
truck indicated independent contractor
status under both the opportunity and
the investment factors). And
consideration of investment separately
has caused other courts to discuss the
worker’s involvement in outside
businesses in the context of opportunity
for profit or loss. See, e.g., Parrish, 917
F.3d at 384 (considering consultant’s
management of a goat farm). After
considering these varying approaches,
the Department believes that adopting
the Second Circuit’s approach best
furthers the Department’s goal: A clear
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and non-duplicative analysis for
determining employee versus
independent contractor status. In sum,
the individual worker’s meaningful
capital investments may evince
opportunity for profit or loss:
‘‘[e]conomic investment, by definition,
creates the opportunity for loss, [and]
investors take such a risk with an eye to
profit.’’ Saleem, 854 F.3d at 145 n.29;
see also Superior Care, 840 F.2d at 1060
(identifying ‘‘the workers’ opportunity
for profit or loss and their investment in
the business’’ as a single factor).
Moreover, considering investment as
part of opportunity for profit or loss is
consistent with the Supreme Court’s
opinion in Silk which articulated the
two factors separately but analyzed
them together. In particular, the Court
found that coal unloaders were
employees because they had ‘‘no
opportunity to gain or lose except from
the work of their hands and [ ] simple
tools,’’ while truck drivers who invested
in their own vehicles had ‘‘opportunity
for profit from sound management’’ of
that investment by, for instance, hauling
for different customers. Id. at 719. Thus,
it framed the analysis as whether
workers are more like unloaders whose
profits were based solely on ‘‘the work
of their hands and [ ] simple tools’’ or
the drivers whose profits depended on
their initiative and investments. See id.
As the Court explained decades ago and
as the Second Circuit noted much more
recently in Saleem, investment is a
pathway to opportunity for profit or
loss.
In response to NELA and likeminded
commenters’ concern that employers
may require significant investments by
their workers to avoid employee status,
the Department reiterates that the
investment must be capital in nature
and consistent with the worker being in
business for him/herself for the
investment to indicate an opportunity
for profit or loss. Senator Sherrod
Brown and 22 other senators stated that
‘‘[r]equiring [workers] to purchase a
franchise or their own equipment,
including a vehicle’’ or otherwise ‘‘take
on financial risk as a condition of
employment does not convert an
employee into an independent
contractor under the FLSA.’’ While no
single fact or factor may ‘‘convert an
employee into an independent
contractor,’’ the prospect of financial
risk and reward plays an important role
in distinguishing ‘‘wage earners toiling
for a living’’ from ‘‘independent
entrepreneurs seeking a return on their
risky capital investments.’’ Mr. W.
Fireworks, 814 F.2d at 1051. Moreover,
it matters why certain investments are
required. If certain capital investments
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are necessary to perform the job for
which the contractor is hired, then
requiring a contractor to make such
investments would be consistent with
the contractor being in business for himor herself. For example, a company that
hires independent contractors to haul
freight may obviously require that
drivers bring their own vehicles. Silk
331 U.S at 719. In contrast, a
requirement to ‘‘invest’’ in specific,
company-provided equipment would
not be consistent with the worker being
in business for him- or herself, and may
constitute a consideration under the
control factor that points towards
employee status. See Scantland, 721
F.3d at 1318 (concluding that
technicians’ ‘‘expenditures [in
equipment and materials] detract little
from the[ir] economic dependence on
Knight’’ in part because ‘‘many
technicians purchased specialty tools
from Knight directly via payroll
withholdings’’). As such, OOIDA’s
concern ‘‘that any requirement that a
worker must purchase services or
equipment from the business for which
they work [w]ould weigh in favor of
employee status’’ is misplaced. See also
SWRCC (‘‘[T]his standard would
provide a perverse incentive for
companies to require putative
employees to maintain their own
equipment in an effort to steer those
employees to independent contractor
status.’’). Consistent with the economic
dependence inquiry, an investment
must indicate an independent business
by the worker, as opposed to merely
being required by the potential
employer, for it to indicate an
opportunity for profit or loss.
In response to the State AGs, the
Department’s approach does not
subordinate investment; it can still
separately indicate independent
contractor status as they suggest.
Finally, the Department’s approach is
not contrary to UPS’ assertion that
workers who make little or no
investment ‘‘are more likely to be
dependent’’ on the potential
employer.31 Workers who make little or
no investment are more likely to be
employees than workers who make
significant investments, but of course,
such a worker’s ultimate status as an
employee or independent contractor
will also depend on other factors. As the
Department explained in the NPRM
preamble, workers who do not make
31 The American Society of Travel Advisors
disagreed at least in part, commenting that
‘‘workers in many service industries may make only
a minimal investment in equipment or materials
and in such situations this consideration, by itself,
should not be taken to weigh in favor of employee
status.’’
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significant investments may still be
independent contractors: ‘‘while the
presence of significant capital
investment is still probative, its absence
may be less so in more knowledge-based
occupations and industries. Indeed,
technological advances enable, for
example, freelance journalists, graphic
designers, or consultants to be
entrepreneurs with little more than a
personal computer and smartphone.’’ 85
FR 60609 (citing Faludi v. U.S. Shale
Sols., L.L.C., 950 F.3d 269, 276 (5th Cir.
2020)); see also Meyer v. United States
Tennis Ass’n, 607 F. App’x 121, 123 (2d
Cir. 2015) (concluding that workers who
invested little were independent
contractors primarily because of their
control over the work and their
initiative); Lauritzen, 835 F.2d at 1540–
41 (Easterbrook, J. concurring)
(‘‘[P]ossess[ing] little or no physical
capital . . . is true of many workers we
would call independent contractors.
Think of lawyers, many of whom do not
even own books. The bar sells human
capital rather than physical capital, but
this does not imply that lawyers are
‘employees’ of their clients under the
FLSA.’’).32
b. Whether To Analyze the Worker’s
Investment or Compare the Worker’s
Investment With That of the Potential
Employer
The Department noted in the NPRM
preamble that, when considering
investment, some courts use ‘‘a side-byside comparison method’’ that directly
compares the worker’s individual
investment to the investment by the
potential employer. See 85 FR 60614
(citing cases). The Department
explained that ‘‘such a ‘side-by-side
comparison method’ does not illuminate
the ultimate question of economic
32 LocumTenens, an online company that
specializes in the temporary placement of
physicians and other health clinicians, requested
that the Department eliminate from the economic
reality test consideration of whether an individual
has an opportunity for profit or loss. According to
LocumTenens, its physicians and clinicians who
provide temporary healthcare services ‘‘do not have
an obvious investment or opportunity for profit
when they step in’’ for another physician or
clinician. However, as explained later, the
Department believes that opportunity for profit or
loss is very predictive of a worker’s status as an
employee or independent contractor. In addition,
the rule requires a worker to exercise personal
initiative or manage capital investments, but not
necessarily both, for the opportunity factor to
indicate independent contractor status. In other
words, an absence of capital investment does not
prevent an individual from having an opportunity
for profit or loss, because such opportunity can be
based on the individual’s initiative. Nor does such
absence necessarily prevent an individual from
being properly classified an independent
contractor, particularly in knowledge-based
industries such as medicine where human capital
matters more than physical capital.
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dependence,’’ but instead ‘‘merely
highlights the obvious and unhelpful
fact that individual workers—whether
employees or independent contractors—
likely have fewer resources than
businesses’’ that, for example, maintain
corporate offices. Id. (citing cases). The
Department received a number of
comments addressing its proposed
rejection of the relative investment
approach.
For example, UPS stated that the
Department’s proposal ‘‘undervalues
comparative analysis of investment’’
and noted that courts ‘‘have evaluated
investment comparatively—correctly
measuring the worker’s investment
against the company’s’’ (citing cases).
NELA added that ‘‘comparing workers’
investments to the employer’s
investments’’ has been ‘‘a critically
important factor in the economic
realities test analysis’’ and ‘‘must be
done in the context of the working
relationship.’’ TRLA objected that ‘‘the
proposed test does not include the Fifth
Circuit’s ‘extent of the relative
investments of the worker and alleged
employer’ factor’’ and asserted that,
while its usefulness may vary
‘‘depending on the facts of individual
cases,’’ ‘‘its wholesale exclusion from
the test factors is not warranted,
especially given the Supreme Court’s
caution against an exhaustive list’’
(citing Silk, 331 U.S. at 716). The
Southwest Regional Council of
Carpenters described the relative
investment approach as simple and
efficient by ‘‘lining up the expenses
between worker and company’’ and thus
‘‘advanc[ing] the key interest of all
parties concerned with the
predictability of this part of the
independent contractor test.’’ According
to the Pacific Northwest Regional
Council of Carpenters, the Department
acted ‘‘arbitrarily’’ in proposing to
eliminate consideration of relative
investments and asserted that, because
‘‘virtually every craftsperson who works
in the various carpentry trades owns his
or her own tools,’’ the proposal would
make ‘‘all of those individuals more
susceptible to being classified as’’
independent contractors regardless
whether the investment is small or
extensive.
Other commenters supported the
Department’s proposed position. For
example, the ATA, the Arkansas
Trucking Association, NHDA, and
Scopelitis, Garvin, Light, Hanson &
Feary (on behalf of various
transportation companies) each agreed
with the Department’s proposal ‘‘that
the relative investment test fashioned by
the Fifth Circuit ‘does not illuminate the
ultimate question of economic
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dependence’ ’’ (quoting 85 FR 60614).
TechNet explained that ‘‘the relative
sizes of the parties’ investments’’ are not
relevant to the analysis, asserting that
‘‘[l]arge businesses may contract with
small businesses,’’ make investments
that ‘‘typically exceed their smaller
partners’ investments by orders of
magnitude . . . because of their size,’’
and ‘‘not endanger [their] partners’
independence merely because [they are]
bigger than [their partners] are.’’ CPIE
stated that ‘‘the determinative inquiry
relative to investment should be
whether the individual has a sufficient
investment in his or her trade or
business as to enable the individual to
operate independently,’’ asserting that
‘‘[t]he investment of a potential client
has no discernible relevance to this
inquiry.’’ See also WFCA (‘‘The issue is
whether a worker invested in his or her
business, not how that investment
compares to the employing company’s
investment.’’).
Having carefully considered the
comments, the Department reaffirms its
position that comparing the individual
worker’s investment to the potential
employer’s investment should not be
part of the analysis of investment.
Comparing their respective investments
does little more than compare their
respective sizes and resources. In
Hopkins v. Cornerstone America, 545
F.3d 338, 344 (5th Cir. 2008), it was of
course ‘‘clear that [the insurance
company’s] investment—including
maintaining corporate offices, printing
brochures and contracts, providing
accounting services, and developing and
underwriting insurance products—
outweighs the personal investment of
any one Sales Leader.’’ The court,
however, never explained how this fact
indicated the Sales Leaders’ economic
dependence. See id. Tellingly, when
summing up the entirety of the facts and
analyzing whether the workers were
economically dependent on the
insurance company as a matter of
economic reality, the court did not even
mention the insurance company’s larger
investment. See id. at 346. And in
Karlson, 860 F.3d at 1096, the court
found that comparing the worker’s
investment with the potential
employer’s total operating expenses had
little relevance because ‘‘[l]arge
corporations can hire independent
contractors, and small businesses can
hire employees.’’ Cf. Parrish, 917 F.3d at
383 (comparing relative investments,
but noting that ‘‘[o]bviously, [the oil
drilling company] invested more money
at a drill site compared to each
plaintiff’s investments’’ and according
the factor little weight in light of the
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other evidence). In sum, comparing the
relative investments does not illuminate
the worker’s economic dependence or
independence. By contrast, as explained
herein, analyzing the extent to which
the individual worker has an
opportunity for profit or loss because of
his or her investment in, or capital
expenditure on, helpers or equipment or
material to further his or her work is
probative of the worker’s economic
dependence or independence.
c. Other Comments Concerning the
Opportunity Factor
WFCA agreed that ‘‘an evaluation of
a worker’s investment and capital
expenditures are relevant factors in
determining whether he or she is an
independent contractor’’ and suggested
including of ‘‘a definition of what
constitutes an investment or capital
expense.’’ WFCA suggested the
following: ‘‘Investments and capital
expenditure shall include: The purchase
or rental of tools, equipment, material,
and office or work facilities; the
payment for marketing and
administrative expenses; the payment of
costs incurred hiring or using other
workers; and similar expenditures.’’
However, the regulatory text already
identifies investment in ‘‘helpers or
equipment or material’’ as relevant, and
the ‘‘for example’’ preceding them in the
regulatory text makes clear that the list
is non-exhaustive. The Department
believes that general and nonexhaustive examples are more helpful
than trying to precisely identify as many
examples of relevant investments as
possible.
NRF commented that ‘‘it is important
to emphasize that it is the ‘opportunity’
or ‘ability’ to earn profits or incur losses
based on investment and/or initiative,
as opposed to the actual level of
investment or initiative shown by the
individual.’’ Relatedly, NRF expressed
concern whether this factor squares
with the discussion in proposed
§ 795.110 that the actual practice of the
parties involved is more relevant than
what may be contractually or
theoretically possible, asserting that
‘‘the fact that someone might not engage
in certain practices or take on certain
risks that would further impact the level
of profit or loss should not result in a
finding that the individual is not an
independent contractor, unless that
person is prevented from doing so by
the entity with whom the individual
contracts.’’ Here, the Department
believes that NRF is conflating the
ultimate outcome of independent
entrepreneurship (profit or loss) with
the actions indicative of
entrepreneurship (initiative and/or
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investment) that largely determine that
outcome. While profits are hardly
guaranteed for anyone in business for
him/herself, the text at
§ 795.105(d)(1)(ii) makes clear that
independent contractors typically
‘‘exercise . . . initiative’’ and/or
‘‘manag[e] . . . investment,’’ (emphasis
added). Thus, a lack of profit viewed in
hindsight says little about a worker’s
economic independence; instead, the
focus is the degree to which the worker
actually exercised initiative or actually
managed investments. A worker’s
theoretical ability to, for example,
exercise initiative is weaker evidence
than the worker’s actual practices. See
e.g., Sureway Cleaners, 656 F.2d at 1371
(‘‘[T]he fact that Sureway’s ‘agents’
possess, in theory, the power to set
prices . . . and advertise to a limited
extent on their own is overshadowed by
the fact that in reality the ‘agents’ . . .
charge the same prices, and rely in the
main on Sureway for advertising.’’).
However, a worker’s conscious decision
to not make a particular investment
(especially when choosing among a
range of investments) or to not take a
particular action (especially when
choosing among a range of options) may
constitute an affirmative exercise of
initiative to consider among others
when evaluating opportunity for profit
or loss. In sum, in the context of the
opportunity factor, the focus is the
individual worker’s opportunity for
profit or loss, as shown by meaningful
investments or the exercise of personal
initiative; actual profits or losses are less
relevant.
OOIDA expressed ‘‘concern[ ] that the
timeline for determining profit or loss is
not clarified in the NPRM’’ and
explained that certain ‘‘[m]otor carriers
that take advantage of drivers through a
lease-purchase agreement are likely to
argue that a driver’s opportunity for
profit is merely a few years in the
future, and that this full timeline must
be considered.’’ The Department agrees
with OOIDA that ‘‘[t]his is a fallacy’’;
the opportunity for profit or loss must
be reasonably current to indicate
independent contractor status.
Regarding the Department’s proposal
to include initiative as a consideration
in the opportunity factor, NRF agreed
that ‘‘[t]he ability to impact profits or
losses also may be dependent on
business acumen and managerial skills,
regardless of the ‘skill level’ of the work
or the level of investment.’’ NRF added
that ‘‘identifying ‘business acumen’ or
‘management skill’ as part of the profit
or loss factor is appropriate and
consistent with the FLSA.’’ Senator
Sherrod Brown and 22 other senators
disagreed, commenting: ‘‘Just because
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employees can increase their wages by
exercising skill or initiative does not
mean they are running a separate,
independent business, particularly if
they cannot pass along costs to
customers.’’ They added that ‘‘[t]he rule
does not include additional, critical
considerations of skill and initiative that
are necessary to define an employment
relationship.’’ And Seyfarth Shaw
requested that the Department state that
‘‘a worker’s business acumen is to be
interpreted to cover acumen relevant to
the wide range of business endeavors in
the U.S. economy, including, for
example: Sales, managerial, customer
service, marketing, distribution,
communications, and other
professional, trade, technical, and other
learned skills, as well as other unique
business abilities and acumen,
including acumen that impacts a
worker’s ability to profitably run their
own independent business.’’
Having carefully considered the
comments, the Department continues to
believe that a worker’s initiative, such
as managerial skill or business acumen
or judgment, is an appropriate measure
of a worker’s opportunity to earn profits
or incur losses. See, e.g., Karlson, 860
F.3d at 1094–95 (discussing how the
worker’s decisions and choices
regarding assignments and customers
affected his profits); Saleem, 854 F.3d at
145 (noting in support of independent
contractor status that the degree to
which the worker’s relationship with
the potential employer ‘‘yielded returns
was a function . . . of the business
acumen of each [worker]’’); McFeeley,
825 F.3d at 243 (‘‘The more the worker’s
earnings depend on his own managerial
capacity rather than the company’s . . .
the less the worker is economically
dependent on the business and the more
he is in business for himself and hence
an independent contractor.’’) (internal
quotation marks omitted); Express SixtyMinutes Delivery, 161 F.3d at 304
(agreeing with district court that
‘‘driver’s profit or loss is determined
largely on his or her skill, initiative,
ability to cut costs, and understanding
of the courier business’’); WHD Opinion
Letter FLSA2019–6 at 6 (‘‘These
opportunities typically exist where the
worker receives additional
compensation based, not [merely] on
greater efficiency, but on the exercise of
initiative, judgment, or foresight.’’).
Commenters did not seriously dispute
the relevance of initiative to a worker’s
opportunity for profit or loss. In
response to the comment by Senator
Sherrod Brown and 22 other senators,
the Department agrees that a worker is
not necessarily an independent
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contractor because he or she can use
initiative to affect his or her opportunity
for profit or loss but maintains that yet
initiative is indicative of—or weighs
towards—independent contractor status
in the multifactor analysis. And the
Department agrees that a worker’s
ability to cut costs, including by passing
them along to customers, is relevant to
determining initiative. See Express
Sixty-Minutes Delivery, 161 F.3d at 304.
Finally, the Department agrees with
Seyfarth Shaw that a worker’s business
acumen can ‘‘cover acumen relevant to
the wide range of business endeavors in
the U.S. economy’’—initiative is not
limited to or automatically present in
any particular type of job.
Regarding the last sentence of the
proposed opportunity factor regulatory
text (‘‘This factor weighs towards the
individual being an employee to the
extent the individual is unable to affect
his or her earnings or is only able to do
so by working more hours or more
efficiently.’’), WFCA expressed the
concern that the sentence means that a
worker who starts his or her own
business and seeks to develop
efficiencies in so doing will be an
employee under the analysis. WFCA
suggested that the sentence be deleted.
WPI also asked that the last sentence be
deleted because ‘‘[a]n individual who
uses initiative, skill or judgment to
perform a job more efficiently can
generate greater profits, even if
compensated by the hour or piece rate.’’
It asserted: ‘‘The ability to use
managerial skill, expertise, market
experience, or business acumen to
perform work more efficiently is
indicative of independent contractor
status.’’ The Department agrees that
such use of initiative can indicate
independent contractor status when it
affects opportunity for profit or loss.
The word ‘‘efficiently’’ was used in
proposed § 795.105(d)(2)(ii) to mean
working faster to perform rote tasks
more quickly. See 85 FR 60614 n.38
(identifying piece-rate workers as ‘‘an
example of workers who are able to
affect their earnings only through
working more hours or more
efficiently.’’). Higher earnings that result
solely from this ‘‘working faster’’
concept of efficiency do not by
themselves indicate independent
contractor status. However, as WFCA
and WPI note, efficiency may also mean
effective management based on business
acumen, which is indicative of being in
business for oneself if it results in
increased earnings. For instance, the
Fifth Circuit found that the opportunity
factor ‘‘points towards independent
contractor status’’ where ‘‘a driver’s
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profit or loss is determined largely on
his or her skill, initiative, ability to cut
costs, and understanding of the courier
business,’’ observing that ‘‘drivers who
made the most money appeared to be
the most experienced and most
concerned with efficiency, while the
less successful drivers tended to be
inexperienced and less concerned with
efficiency.’’ Express Sixty-Minutes
Delivery Serv. 161 F.3d at 304. To avoid
confusion between multiple potential
meanings of ‘‘more efficiently,’’ the
Department is revising
§ 795.105(d)(2)(ii) to replace that term
with ‘‘faster.’’ Relatedly, ATA and other
transportation commenters objected to
the Department’s statements in the
NPRM preamble that ‘‘[w]orkers who
are paid on a piece-rate basis are an
example of workers who . . . lack
meaningful opportunity for profit or
loss.’’ They asserted that the statements
may result in some judges refraining
from engaging in the actual analysis set
forth in the rule as to opportunity for
profit or loss. They further asserted that
truck drivers paid on a piece-rate basis
may be independent contractors based
on their management decisions or
ability to cut costs. The Department’s
statements in the NPRM preamble
regarding workers paid on a piece-rate
basis were general observations
supported by case law 33 and not a
categorical rule or the complete
analysis. The fact that a worker is paid
on a piece-rate basis set by the potential
employer does not indicate an
opportunity for profit or loss, but
whether that worker has an opportunity
for profit or loss indicative of
independent contractor status is
determined by a fuller analysis of the
worker’s circumstances.
Some commenters requested
additional examples that are indicative
33 See Goldberg v. Whitaker House Co-op., Inc.,
366 U.S. 28, 33 (1961) (plaintiffs who manufactured
knitted goods at home were employees under the
FLSA, in part, because ‘‘[t]he management fixes the
piece rates at which they work’’); Rutherford Food,
331 U.S. at 730 (because workers’ earnings
‘‘depended upon the efficiency of their work, it was
more like piecework than an enterprise that actually
depended for success upon the initiative, judgment
or foresight of the typical independent contractor’’);
Hodgson v. Cactus Craft of Arizona, 481 F.2d 464,
467 (9th Cir. 1973) (persons who manufacture
novelty and souvenir gift items at homes and were
compensated at a piece rate were employees under
the FLSA). And in Donovan v. DialAmerica
Marketing, Inc., the court held that homeworkers
who were paid on a piece-rate basis to perform the
simple service of researching telephone numbers
were employees who lacked meaningful
opportunity for profit or loss. See 757 F.2d 1376,
1385 (3rd Cir. 1985). In contrast, distributors who
recruited and managed researchers and were paid
based on the productivity of those they managed
were independent contractors, in part, because
distributors’ earnings depended on ‘‘business-like
initiative.’’ Id. at 1387.
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of an opportunity for profit or loss
(many of the suggested examples
overlapped with each other). TechNet
asked for ‘‘concrete examples’’ and
suggested the following: ‘‘[d]rivers who
can set their own hours, choose which
jobs to accept or reject, and use their
judgment in how to best complete jobs,’’
as well as ‘‘[a]pp-based opportunities—
including opportunities to provide
personal transportation, parcel
deliveries, shopping services, or food
delivery, among other types of service.’’
The U.S. Chamber of Commerce offered
eleven ‘‘additional examples of a
worker’s initiative or investment that
may impact a worker’s profit or loss.’’ 34
The U.S. Chamber of Commerce also
suggested ‘‘examples of fact situations
which are neutral in the analysis of
whether the worker controls their
profits and losses.’’ 35 SHRM requested
numerous ‘‘additional examples of
worker investment and initiative that
impact profit and loss.’’ 36 SHRM also
34 The U.S. Chamber of Commerce’s suggested
examples were: ‘‘(1) The worker’s own decisionmaking with respect to the details and means by
which they make use of, secure, and pay helpers,
substitutes, and related labor or specialties . . . (2)
The worker’s own decision-making with respect to
the details and means by which they purchase, rent,
or otherwise obtain and use tools . . . ; (3) The
worker’s own decision-making with respect to the
details and means by which they purchase or
otherwise obtain and use supplies . . . ; (4) The
worker’s own decision-making with respect to the
details and means by which they purchase, rent, or
otherwise obtain and use equipment . . . ; (5) The
worker’s initiative and decisions they implement in
connection with their own performance of services
through higher service fees, incentives, charges, and
other ways; (6) The worker’s initiative to invest in
the development of skills, competencies, and trades
. . . ; (7) The worker’s expertise in delivery of
services/products that result in enhanced profits,
for example through tips and other incentives as a
result of providing quality customer service; (8) The
worker’s losses incurred as a result of customer
complaints or other charges where the worker’s
results were below customer or contractual
expectations and obligations; (9) The worker’s
flexibility to choose amongst work opportunities
offered that impact profits and losses; (10) The
worker’s contractual or other losses if they do not
provide the accepted services or the worker
provides substandard services, and are engaged to
provide time-sensitive, often perishable services
and products; and (11) The worker’s avoidance of
liquidated damages charges or indemnification
obligations in the parties’ agreement relating to
various provisions, including material breaches of
the parties’ agreement.’’
35 These suggested examples were: ‘‘(1) The
business pays the worker by the hour where it is
customary in the particular business/trade to do so
(e.g., attorneys, physical trainers); (2) The business
sets the price of goods and services offered by a
worker to customers where the worker controls the
amount of time, date and place they provide the
services as well as the amount of services they
choose to provide and the price is set to facilitate
the time sensitive transaction as a result of the time
sensitive or perishable nature of the service the
customer desires[;] and (3) The business’s
facilitation of payments from the customer to the
worker.’’
36 SHRM’s suggested examples were: ‘‘[t]he
worker’s decisions in choosing amongst
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requested that the final rule make ‘‘the
following explicit statements regarding
facts that do not support a finding of
dependency: [w]orkers may experience
financial losses as a result of
cancellations of their service or the
provision of service that does not meet
customer expectations when the worker
has flexibility to choose between work
opportunities; and [e]ven if the business
sets the price of goods provided by the
worker, that does not negate the
worker’s initiative when the worker
controls the amount of time, when, and
where they provide the services as well
as the amount of the same service they
chose to provide.’’ Seyfarth Shaw asked
the Department to ‘‘expand upon the
examples of ways that workers impact
their own profitability as well as their
losses (by impacting their profits and
their costs)’’ and to include numerous
examples.37 And Mr. Reibstein
commented that ‘‘[e]xamples of loss
should be identified . . . so it is clear
[that this factor] does not focus only on
profit.’’ He offered the following
opportunities offered that impact profit and loss;
[t]he worker’s losses suffered from receipt of
customer complaints where the worker’s results
were below customer or contractual expectations;
[t]he worker’s decisions in avoiding liquidated
damages charges or indemnification obligations in
the parties’ agreement; [t]he worker’s own decisionmaking on whether to use other workers or services
as helpers or substitutes as well as the use of related
labor or specialties to assist in either the services
provided, the tools and equipment used, or the
maintenance of the worker’s business structure;
[t]he worker’s acumen regarding the delivery of
services/products that result in enhanced profits
through tips and other incentives; [t]he worker’s
decision-making regarding the details and means by
which they obtain supplies, tools, and equipment
for use in their business, including choices
regarding from whom to purchase these goods, how
much of the goods are obtained at any one time, the
quality of the goods, and the negotiated prices
regarding said goods; and [t]he worker’s decisionmaking regarding investment in skills they deem
necessary to achieve the desired results from their
work, including education, certificates, or classes.’’
37 Seyfarth Shaw’s suggested examples were
‘‘[t]he worker’s own decision-making regarding the
use of helpers, substitutes, and related labor or
specialties to assist in the services provided, the
tools and equipment used, or the maintenance of
the worker’s business structure . . . to the extent
those decisions impact the worker’s costs and
overall profitability; [t]he worker’s initiative and the
decisions they implement in connection with the
performance of services and/or capital expenditures
on equipment, supplies, and tools . . . ; [t]he
worker’s initiative to invest in the development of
skills, competencies, and trades (including
education, training, licenses, certifications, and
classes) . . . ; [t]he worker’s expertise in delivery
of services/products that result in enhanced profits
through tips and other incentives as a result of great
customer service and exceptional skills, for
example[; t]he worker’s losses incurred as a result
of customer complaint or other charges where the
worker’s results were below customer or contractual
expectations and obligations; and [t]he worker’s
avoidance of liquidated damages charges or
indemnification obligations in the parties’
agreement relating to various provisions, including
material breaches of the parties’ agreement.’’
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examples: ‘‘He or she has to re-do work
that is not consistent with industry
standards or does not meet a customer’s
expectations; is potentially liable to the
potential employer in the event his or
her actions or inactions cause harm or
legal expense to the potential employer;
or fails to render services in a costefficient manner by not managing
expenses or investing far too much time
on activities that are unproductive.’’
The Department has considered the
various requests for additional examples
of initiative and investment that can
indicate a worker’s opportunity for
profit or loss, but declines to change to
the proposed regulatory text. The
regulatory text already broadly describes
initiative as including managerial skill
and business acumen or judgment, and
explains that investment is the worker’s
management of his or her investment in
or capital expenditure on, for example,
helpers or equipment or material to
further his or her work. Many of the
suggested examples seem to fall into one
of these categories, and some of them
effectively repeat concepts already
identified in the regulatory text—
especially the ones involving helpers,
tools, supplies, and equipment. The
Department does not believe that (even
after culling out all of the overlap)
additional examples of initiative and
investment would benefit employers or
workers. It is not possible or productive
to seek to identify in the regulatory text
every example of initiative and
investment that may be relevant to the
opportunity for profit or loss analysis.
The Department purposefully described
both initiative and investment in a
broad and general manner to provide
helpful guidance to as many employers
and workers as possible. The
Department believes that this approach,
along with the further clarification
provided throughout this preamble
section as well as the examples added
in § 795.115, will be more helpful and
functional for employers and workers as
they apply the analysis.
3. The ‘‘Skill Required’’ Factor
In the NPRM, the Department
identified three other factors that may
serve as ‘‘additional guideposts’’ in the
analysis to determine whether a worker
is an employee or independent
contractor. The first of these other
factors, included at proposed
§ 795.105(d)(2)(i), is the amount of skill
required for the work. 85 FR 60639. The
Department’s proposed regulatory text
stated that this factor would weigh in
favor of the individual being an
independent contractor to the extent the
work at issue requires specialized
training or skill that the potential
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employer does not provide; conversely,
the factor would weigh in favor of the
individual being an employee to the
extent the work at issue requires no
specialized training or skill and/or the
individual is dependent upon the
potential employer to equip him or her
with any skills or training necessary to
perform the job. As explained in the
NPRM, the Department proposed to
clarify that this factor should focus on
the amount of skill required because
importing aspects of the control factor
into the skill factor has diluted the
consideration of actual skill to the point
of near irrelevance, and such dilution
generates confusion regarding the
relevance and weight of the worker’s
skill in evaluating economic
dependence.
Employer representatives were
generally supportive of the
Department’s clarification and
relegation of this factor as an
‘‘additional guidepost’’ but provided
additional commentary and requests for
modification. Several commenters
suggested that this factor be eliminated
entirely. The National Restaurant
Association commented that this factor
‘‘does not add much clarity to the
analysis’’ and ‘‘unnecessarily
discriminates against individuals who
operate businesses that do not require
advanced degrees.’’ WPI stated that
‘‘[s]o narrowed, this factor has little
probative value in determining
economic dependence and should be
eliminated as a separate factor.’’
Other commenters suggested that the
factor be included within the core,
‘‘profit and loss’’ factor or otherwise
minimized. CWI suggested that the
factor be incorporated into the profit
and loss factor because ‘‘[w]here
specialized skills are required to
perform work, workers unquestionably
have taken the initiative to invest time
and money into developing those
skills.’’ SHRM and U.S. Chamber of
Commerce agreed that this factor should
not be a stand-alone factor, but rather
should be incorporated into the
opportunity factor, to ensure that
workers who desire the flexibility and
freedom of independent contractor
status—but who provide services that
may not require specialized training—
are not negatively impacted. See also
WFCA (requesting that lack of skill
should not weigh in favor of the worker
being an employee). Commenters also
stated that this additional factor should
be minimized further in the analysis,
commenting that the factor places too
much emphasis on the importance of
skill, and requested that ‘‘the final rule
should at least indicate that this may be
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a relevant factor in some but not all
instances.’’ Reibstein.
After considering these comments, the
Department declines both the request to
eliminate this factor from consideration
entirely and the request to include it as
part of the opportunity factor. The
Department agrees with commenters
that the concepts of initiative and
judgment are sufficiently analyzed in
multiple ways under the control and
opportunity core factors, but believes
that longstanding case law militates in
favor of considering this additional
factor—skill required—when relevant
under the particular circumstances of
each situation. As explained in the
NPRM, the Supreme Court articulated
the factor as ‘‘skill required’’ in Silk, 331
U.S. at 716, and multiple courts of
appeals continue to consider as ‘‘the
degree of skill required to perform the
work.’’ Paragon Contractors, 884 F.3d at
1235; see also Iontchev, 685 F. App’x at
550; Keller, 781 F.3d at 807. The
Department believes that sharpening
this factor to focus solely on skill
clarifies the analysis. Moreover,
analyzing the worker’s ability to
exercise initiative under the control
factor, a core factor that is given more
weight than the skill factor,
appropriately reflects that that the
presence or absence of initiative is
usually more important than the
presence or absence of skill. Similarly,
the effect of the worker’s initiative is
analyzed under the opportunity factor,
another core factor that, for the reasons
explained above, is usually more
probative than the skill factor.
Commenters such as the National
Restaurant Association and NRF
suggested that the regulation should
focus not on whether the skill required
is specialized, but rather the extent to
which a worker relies on the potential
employer for training needed to perform
the work. The Wood Flooring Covering
Association, however, stated that the
regulation as proposed may create
unintended limits on training and
employers should not be discouraged
from funding needed training for
workers, particularly in view of its
industry’s labor shortage. With respect
to these requests, the Department
declines to eliminate the modifier
‘‘specialized’’ from the regulation. This
type of consideration is supported by
discussions of this factor in case law.
See, e.g., Simpkins v. DuPage Hous.
Auth., 893 F.3d 962, 966 (7th Cir. 2018)
(‘‘whether Simpkins had specialized
skills, as well as the extent to which he
employed them in performing his work,
are [material] issues’’); Carrell v.
Sunland Const., Inc., 998 F.2d 330, 333
(5th Cir. 1993) (finding it relevant that
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‘‘[p]ipe welding, unlike other types of
welding, requires specialized skills’’).
The Department also declines to adjust
the regulatory text to directly address
who provides the training because such
facts are not necessarily probative in
every circumstance; the Department
notes, however, that it can be suggests
employee status if a worker receives all
specialized skills from the employer.
See, e.g., Keller, 781 F.3d at 809
(explaining that if ‘‘the company
provides all workers with the skills
necessary to perform the job,’’ that
suggests employee status); Scantland,
721 F.3d at 1318; Hughes v. Family Life
Care Inc., 117 F. Supp. 3d 1365, 1372
(N.D. Fla. 2015) (‘‘The relevant inquiry
[for the skill factor] is whether [the
worker] is dependent upon [the
company] to equip her with the skills
necessary to perform her job.’’). This is
because an individual who is in
business for him- or herself typically
brings his or her own skills to the job,
rather than relying on the client to
provide training.
While the WFCA generally supports
this factor, it also requested that the
Department include examples of
specialized training or skill that focused
on indicators such as certifications and
licensing. Scopelitis, Garvin, Light,
Hanson & Feary, a law firm commenting
on behalf of several unnamed
transportation providers, agreed that
credentials such as testing to earn a
Commercial Driver’s License can
demonstrate specialized skill, but also
noted that skills needed to successfully
operate a business should also be
considered specialized skills to help
distinguish independent contractors
from employees. The Department notes
that the opportunity factor already
considers whether workers have an
opportunity for profit or loss based on
their business acumen or managerial
expertise. It would be redundant to
analyze ‘‘skills needed to successfully
operate a business’’ as part of the skill
factor. As to requests for examples or
additional clarification as to what
constitutes ‘‘specialized’’ skills, the
Department agrees that credentials such
as certifications and licenses can be
helpful indicators of specialized skill,
though they are by no means the only
indicators of such skill. The Department
does not believe any change to the
regulatory text to clarify this point is
warranted, however.
Employee representatives such as the
AFL–CIO expressed concern that deemphasizing the skill factor would
‘‘place considerable competitive
pressure on law-abiding employers
employing employees at the bottom of
the wage scale, thus undermining the
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national minimum wage standard.’’ The
AFL–CIO further asserted that the
proposed regulation would make it
more likely that unskilled workers such
as home care workers, delivery drivers,
and janitors will be classified as
independent contractors, and thus such
workers will be unprotected by the
FLSA’s minimum wage and overtime
pay standards. See AFL–CIO. The
National Employment Lawyers
Association (NELA) commented that the
Department’s proposed regulation
‘‘seeks to constrict and demote’’ the skill
factor, and, relying on case law, noted
that ‘‘courts typically assess whether
workers are required to use specialized
skills, beyond those typically acquired
through occupational or technical
training, in an independent way to
perform their job’’ but that this factor,
‘‘which often favors employee status,
does not suit the Department’s
purposes.’’
Regarding farmworkers specifically,
TRLA stated that whether the services
rendered by an employee require special
skills has often been probative in the
farm labor context, and that by largely
eliminating consideration of this factor,
the proposed rule makes the proper
classification of farmworkers harder to
determine. See Texas Rio Grande Legal
Aid. This ‘‘will lead to more
farmworkers being classified as
independent contractors, thereby
denying the protections of the FLSA to
one of the most vulnerable classes of
workers’’; moreover, ‘‘[t]o the extent that
the proposed rule purports to be
descriptive of the current state of the
law, it is flatly inaccurate.’’
The Department has considered these
comments but continues to believe that
its proposal with respect to this factor
is logical and helpful. Although many
courts consider the skill factor, courts
appear to find the core factors to be
more dispositive than the skill factor
when such factors conflict. See 85 FR
60621–22 (listing cases). Continuing to
take it into account, but not as one of
the core factors, adds clarity to the
economic realities test. The
Department’s formulation of the test
does not preclude the possibility that in
some circumstances, such as with
respect to farmworkers, that this factor
could be particularly probative.
The Department adopts
§ 795.105(d)(2)(i) as proposed.
4. The ‘‘Permanence of the Working
Relationship’’ Factor
The second additional guidepost
factor, described in the regulatory text at
§ 795.105(d)(2)(ii), is the degree of
permanence of the working relationship
between the individual and the
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potential employer. The Department
proposed that this factor would weigh
in favor of the individual being an
independent contractor to the extent the
work relationship is by design definite
in duration or sporadic, which may
include regularly occurring fixed
periods of work, although the seasonal
nature of work by itself would not
necessarily indicate independent
contractor classification. In particular,
the Department explained that the
seasonal nature of work would not
indicate independent contractor status
where the worker’s position is
permanent for the duration of the
relevant season and where the worker
has done the same work for multiple
seasons. See Paragon Contractors, 884
F.3d at 1236–37. The proposal also
provided that this factor would weigh in
favor of the individual being an
employee to the extent the work
relationship is instead by design
indefinite in duration or continuous. As
noted in the NPRM, courts and the
Department routinely consider this
factor when applying the economic
reality analysis under the FLSA to
determine employee or independent
contractor status. See, e.g., WHD
Opinion Letter FLSA2019–6 at 4; Razak,
951 F.3d at 142; Hobbs, 946 F.3d at 829;
Karlson, 860 F.3d at 1092–93; McFeeley,
825 F.3d at 241; Keller, 781 F.3d at 807;
Scantland, 721 F.3d at 1312.
Multiple commenters urged the
Department to focus this factor further
on the indefiniteness of a working
relationship. For example, the U.S.
Chamber of Commerce commented that
independent contractors often enter into
multiple, long-term contracts with the
same business. It suggested that the
Department clarify that such contracts
do not indicate employee status merely
because of their length, but that only
contracts of an indefinite length would
be indicative of employee status. CWI
similarly requested that this factor focus
only on the length of the relationship as
reflected in contractual agreements,
regardless of how long the relationship
is in reality.
The Department considered adding
clarifying language to the regulation
indicating that a relationship whose
length is indefinite is more indicative of
employee status than a relationship that
is merely long. However, because the
focus of the economic realities test is
not on technical formalities, it may be
that a long relationship could be
evidence of permanence despite a
contract with a definite end. For
example, an employer may have a
permanent relationship with an
employee despite requiring the
employee to enter into annual
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employment contracts. Or a potential
employer may have a long-term
relationship reflected in several shortterm contracts. The Department has
therefore retained the proposed
regulatory text because, although
indefiniteness is a stronger indicator of
permanence, the length of a working
relationship is still relevant to this
factor.
One commenter urged the Department
to consider the exclusivity of a
relationship as part of the permanence
factor, an approach taken by some
courts. Specifically, CPIE commented
that permanence does not indicate an
employment relationship unless it is
due to the potential employer’s
requirement of exclusivity rather than
the worker’s choice. The Department
agrees that exclusivity most strongly
indicates an employment relationship
when the exclusivity is required by the
potential employer. However, as the
Department discussed in the NPRM, an
exclusivity requirement more strongly
relates to the control exercised over the
worker than the permanence of the
relationship. As explained in the
discussion of the control factor, that
factor already considers whether a
worker has freedom to pursue external
opportunities by working for others,
including a potential employer’s rivals.
See, e.g., Freund, 185 F. App’x at 783
(affirming district court’s finding that
‘‘Hi–Tech exerted very little control
over Mr. Freund,’’ in part, because
‘‘Freund was free to perform
installations for other companies’’).38
The same concept of exclusivity is then
re-analyzed as part of the permanence
factor. Compare id. (‘‘Freund’s
relationship with Hi–Tech was not one
with a significant degree of permanence
. . . [because] Freund was able to take
jobs from other installation brokers.’’),
with Scantland, 721 F.3d at 1319
(finding installation technicians’
relationships with the potential
employer were permanent because they
‘‘could not work for other companies’’).
Such duplicative analysis of exclusivity
under the permanence factor, however,
is not supported by the Supreme Court’s
original articulation of that factor in
Silk. See 331 U.S. at 716 (analyzing the
38 In addition, as also noted in the NPRM, the
opportunity factor considers whether a worker’s
decisions to work for others affects profits or losses.
See, e.g., Freund, 185 F. App’x at 783 (affirming the
district court’s finding that the ‘‘looseness of the
relationship between Hi–Tech and Freund
permitted him great ability to profit,’’ in part,
because ‘‘Freund could have accepted installation
jobs from other companies.’’). The Department does
not believe this consideration overlaps with the
control factor. While the control factor concerns the
ability to work for others, the opportunity factor
concerns the effects of doing so.
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‘‘regularity’’ of unloaders’ work); id. at
719 (analyzing truck drivers’ ability to
work ‘‘for any customer’’ as an aspect of
‘‘the control exercised’’ but not
permanence); see also 12 FR 7967
(describing the permanence factor as
pertaining to ‘‘continuity of the
relation’’ but with no reference to
exclusivity). Nor is the concept of
exclusivity part of the common
understanding of the word
‘‘permanent.’’ 39 In a similar vein to the
Department’s analysis of the concept of
initiative, the Department believes
analysis of exclusivity as part of the
permanence factor dilutes the
significance of actual permanence
within that factor, blurs the lines
between the economic reality factors,
and creates confusion by incorporating
a concept that is distinct from
permanence.
Because the worker’s ability to work
for others is already analyzed as part of
the control factor, proposed
§ 795.105(d)(2)(ii) articulated the
permanence factor without referencing
the exclusivity of the relationship
between the worker and potential
employer, and the Department retains
the same language in the final rule.
Commenters also requested that the
Department clarify that long-term
relationships that are based on the
workers’ choice to continue working for
the same business rather than the
potential employer’s requirements
should not indicate employee status
under this factor. NRF commented that
an independent contractor may choose
to focus on a particular client for
reasons of the contractor’s own rather
than the client’s requirements,
suggesting that the worker’s choice does
not indicate employee status. The
Department does not believe that further
explanation in the regulatory text is
necessary, though it agrees that a longterm relationship may not always
indicate an employee relationship. This
factor is not always probative to the
analysis, and the scenarios described by
the commenters may be situations
where the length of the relationship is
not a useful indicator. However,
explicitly stating that a relationship is
not permanent whenever the worker
chooses for it to be long-term is not
accurate. After all, every employee to
some extent chooses whether to
continue working for their employer,
39 See Merriam-Webster Dictionary, https://
www.merriam-webster.com/dictionary/permanent
(defining permanent as ‘‘continuing or enduring
without fundamental or marked change’’); see also
Oxford American Dictionary 1980 (defining
permanent as ‘‘lasting or meant to last
indefinitely’’); Merriam-Webster Pocket Dictionary
1947 (defining permanent as ‘‘Lasting; enduring’’).
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and the FLSA’s definition of ‘‘employ’’
includes to passively ‘‘suffer or permit
to work.’’ 29 U.S.C. 203(g). A long-term
relationship is always the result of
choices by both the potential employer
and the worker, but it is sometimes a
helpful indicator of employee status.
Edward Tuddenham urged the
Department to give examples
relationships that may or may not be
viewed as permanent, such as a contract
that is repeatedly renewed or an
industry that is generally itinerant.
Although the Department has added one
example regarding this factor to new
§ 795.115 to help illustrate how the
factor is to be considered, the
Department does not believe it is
possible to address all of the possible
working relationships and contractual
arrangements in a useful fashion.
Certain general principles should
inform any analysis of work
relationships. The Department reiterates
that it is not contractual formalities that
are relevant to the inquiry, but
economic reality. A potential
employer’s attempts to use contractual
technicalities to label a relationship as
temporary even though it is indefinite in
reality should not affect whether this
factor indicates employee or
independent contractor status. Again,
this factor will not always be probative,
and, for example, in certain industries
where employees are often employed for
short periods, a short term of
employment would not indicate
independent contractor status.
SWCCA pointed out that a recent
WHD opinion letter included language
stating that ‘‘the existence of a long-term
working relationship may indirectly
indicate permanence.’’ WHD Opinion
Letter FLSA 2019–06 (April 29, 2019).
The Alliance requested that this
language be added to § 795.105(d)(2)(ii).
Though the quoted language and the
case law from which it is drawn remain
useful guidance for employers, the
Department does not believe it is
necessary to add this language to the
regulation, which already indicates that
a long-term relationship points toward
an employment relationship.
Accordingly, the Department finalizes
§ 795.105(d)(2)(ii) as proposed.
5. The ‘‘Integrated Unit’’ Factor
The final additional guidepost factor,
described in § 795.105(d)(2)(iii), is
whether the work is part of an
integrated unit of production. The
Department proposed that this factor
would weigh in favor of the individual
being an employee to the extent his or
her work is a component of the potential
employer’s integrated production
process for a good or service. The
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proposed regulatory text further
explained that this factor would weigh
in favor of an individual being an
independent contractor to the extent his
or her work is segregable from the
potential employer’s production
process. The Department proposed to
clarify that this factor is different from
the concept of the importance or
centrality of the individual’s work to the
potential employer’s business.
As noted in the NPRM, the
Department and courts outside of the
Fifth Circuit have typically articulated
the sixth factor of the economic reality
test as ‘‘the extent to which services
rendered are an integral part of the
[potential employer’s] business.’’ WHD
Fact Sheet #13. Under this articulation,
the ‘‘integral part’’ factor considers ‘‘the
importance of the services rendered to
the company’s business.’’ McFeeley, 825
F.3d at 244. In line with this thinking,
courts generally state that this factor
favors employee status if the work
performed is so important that it is
central to or at ‘‘[t]he heart of [the
potential employer’s] business.’’ Werner
v. Bell Family Med. Ctr., Inc., 529 F.
App’x 541, 545 (6th Cir. 2013); see also
Baker, 137 F.3d at 1443 (‘‘[R]ig welders’
work is an important, and indeed
integral, component of oil and gas
pipeline construction work.’’);
Lauritzen, 835 F.2d at 1537–38
(‘‘[P]icking the pickles is a necessary
and integral part of the pickle
business[.]’’); DialAmerica, 757 F.2d at
1385 (‘‘[W]orkers are more likely to be
‘employees’ under the FLSA if they
perform the primary work of the alleged
employer.’’).
The Department explained in the
NPRM that it is concerned that this
focus on importance or centrality
departs from the Supreme Court’s
original articulation of the economic
reality test, has limited probative value
regarding the ultimate question of
economic dependence, and may be
misleading in some instances. As such,
the Department proposed that
§ 795.105(d)(2)(iii) would clarify that
the ‘‘integral part’’ factor should instead
consider ‘‘whether the work is part of an
integrated unit of production,’’ which
aligns with the Supreme Court’s
analysis in Rutherford Food, 331 U.S. at
729.
Many commenters representing
workers urged the Department to retain
the ‘‘integral part’’ factor used by courts
as part of the economic realities test,
rather than replacing it with the
‘‘integrated unit’’ factor articulated in
the proposed rule. This ‘‘integral part’’
factor would consider the importance or
centrality of the work performed to the
purported employer’s business. In
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particular, several commenters,
including United Food and Commercial
Workers, Senator Patty Murray, and the
State AGs contended that removing the
‘‘integral’’ factor would be contrary to
established circuit court precedent. The
UFCW asserted that ‘‘[w]hether a
worker’s service is an integral part of the
company’s business may not be a
relevant factor in all situations, but it
may be in some and some courts have
found value in analyzing this fact.’’ It
commented that if the Department
stated that integrality is not relevant to
the economic realities test, the
Department’s proposed rule would
unduly limit the inquiry. One
commenter, the Greenlining Institute,
commented that eliminating an
‘‘integral part’’ factor disfavors workers
‘‘performing physical tasks instead of
stereotypically ‘intellectual’ pursuits,’’
who are disproportionately racial or
ethnic minorities.
Many commenters agreed with the
Department’s proposal to eliminate the
‘‘integral part’’ factor or any similar
factor focused on the importance of the
work. The U.S. Chamber of Commerce,
for example, commented, ‘‘In today’s
economy, independent workers provide
services in all aspects of the economy
and all aspects of individual businesses,
including core and non-core functions,
as well as in the same or different lines
of business.’’ The Society for Human
Resource Management similarly
commented that the ‘‘analysis
concerning the ‘integrated unit’ factor
should not focus on the ‘importance of
services’ provided.’’
Though circuit courts have applied an
‘‘integral part’’ factor, it was not one of
the factors analyzed by the Supreme
Court in Rutherford Food. Rather, the
Court considered whether the worker
was part of an ‘‘integrated unit of
production,’’ 331 U.S. at 729, as this
final rule does. The Department believes
that circuit courts—and even the
Department itself—have deviated from
the Supreme Court’s guidance and, in
doing so, have introduced an ‘‘integral
part’’ factor that can be misleading. As
explained in the NPRM, the ‘‘integral
part’’ factor was not one of the distinct
factors identified in Silk as being
‘‘important for decision.’’ 331 U.S. at
716. The ‘‘integrated unit’’ factor instead
derives from Rutherford Food, where
the Supreme Court observed that the
work at issue was ‘‘part of an integrated
unit of production’’ in the potential
employer’s business and concluded that
workers were employees in part because
they ‘‘work[ed] alongside admitted
employees of the plant operator at their
tasks.’’ 331 U.S. at 729. As the NPRM
explained, the Department began using
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the ‘‘integral part’’ factor in
subregulatory guidance in the 1950s.
See WHD Opinion Letter (Aug. 13,
1954); WHD Opinion Letter (Feb. 8,
1956).40 And circuit courts in the 1980s
began referring to it as the ‘‘integral
part’’ factor and analyzing it in terms of
the ‘‘importance’’ of the work to the
potential employer. See, e.g., Lauritzen,
835 F.2d 1529, 1534–35; DialAmerica
Mktg., 757 F.2d at 1386.
The NPRM explained the reasons that
the Department now believes the
Supreme Court’s original ‘‘integrated
unit’’ formulation is more probative
than the ‘‘integral part’’ (meaning
‘‘important’’) approach. As Judge
Easterbrook pointed out in his
concurrence in Lauritzen, ‘‘[e]verything
the employer does is ‘integral’ to its
business—why else do it?’’ Lauritzen,
835 F.2d at 1541 (Easterbrook J.,
concurring); see also Zheng, 355 F.3d at
73 (cautioning in the joint employer
context that interpreting the factor to
focus on importance ‘‘could be said to
be implicated in every subcontracting
relationship, because all subcontractors
perform a function that a general
contractor deems ‘integral’ to a product
or a service’’).
The Department’s review of appellate
cases since 1975 involving independent
contractor disputes under the FLSA
supports this criticism. The Department
generally found that, in cases where the
‘‘integral part’’ factor was addressed, the
factor aligned with the ultimate
classification when the ultimate
classification was employee.41 However,
courts’ analyses of the ‘‘integral part’’
factor—again, if it was analyzed at
all 42—were misaligned more frequently
than they were aligned with the
ultimate classification when the
ultimate classification was independent
contractor status. Compare Iontchev,
685 F. App’x at 551; Meyer, 607 F.
App’x at 123; Freund, 185 F. App’x at
784–85; Mid-Atl. Installation, 16 F.
App’x at 107–08; Brandel, 736 F.2d at
1120, with Werner, 529 F. App’x at 545–
46; DialAmerica Mktg., 757 F.2d at
40 A 2002 opinion letter interpreted the factor to
focus on the importance of the work, explaining
that ‘‘[w]hen workers play a crucial role in a
company’s operation, they are more likely to be
employees than independent contractors.’’ WHD
Opinion Letter, 2002 WL 32406602, at *3 (Sept. 5,
2002). However, the Department’s most recent
opinion letter on this subject characterized the
factor as ‘‘the extent of the integration of the
worker’s services into the potential employer’s
business.’’ WHD Opinion Letter FLSA2019–6 at 6
(emphasis added).
41 The only appellate case the Department found
of misalignment in this scenario is Paragon
Contractors, 884 F.3d at 1237–38.
42 As explained elsewhere, the Fifth Circuit does
not usually consider the ‘‘integral part’’ factor in its
analysis.
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1387. This higher rate of misalignment
is precisely what Judge Easterbrook’s
criticism would have predicted: If
‘‘[e]verything the employer does is
‘integral,’ ’’ that factor would point
towards employee status for workers
who are employees, but also for workers
who are independent contractors.
The NPRM further explained that ‘‘the
relative importance of the worker’s task
to the business of the potential
employer says nothing about whether
the worker economically depends on
that business for work.’’ 85 FR 60617.
While some courts assumed that
business may desire to exert more
control over workers who provide
important services, there is no need to
use importance as an indirect proxy for
control because control is already a
separate factor. Id. (citing Dataphase,
781 F. Supp. at 735, and Barnard Const.,
860 F. Supp. at 777, aff’d sub nom.
Baker v. Flint Eng’g & Const. Co., 137
F.3d 1436 (10th Cir. 1998)). And this
assumption may not always be valid.
Modern manufacturers, for example,
commonly assemble critical parts and
components that are produced and
delivered by wholly separate companies
through contract rather than
employment arrangements. And low
transaction costs in many of today’s
industries make it cost-effective for
firms to hire contractors to perform
routine tasks.
The Department considered salvaging
the ‘‘integral part’’ factor by
deemphasizing ‘‘integral’’ and
emphasizing ‘‘part.’’ Instead of focusing
on whether the work is important ‘‘to’’
a potential employer’s business, the
factor would focus on whether the work
is an important ‘‘part’’ of that business.
This approach would more closely align
with how ‘‘integral part’’ was used by
the Supreme Court in Silk, which asked
whether workers were ‘‘an integral part
of [defendants’] businesses,’’ as opposed
to operating their own businesses. 331
U.S. 716. But as the NPRM noted, the
Silk Court framed that question as the
ultimate inquiry, and not as a factor that
is useful to guide the inquiry. See 85 FR
60616 n.41. Asking whether a worker is
part of—integral or otherwise—a
potential employer’s business is not
useful because it simply restates the
ultimate inquiry: If a worker were part
of the potential employer’s business,
then he or she could not be in business
for him- or herself and therefore would
be economically dependent. As an
added complication, new technologies
have led to the emergence of platform
companies that connect consumers
directly with service providers, and it is
often difficult to determine whether
those platform companies are in
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business of supporting service
providers’ own businesses or are in the
business of hiring service providers to
serve customers. Compare Razak, 951
F.3d at 147 n.12 (‘‘We also believe
[there] could be a disputed material
fact’’ whether Uber is ‘‘a technology
company that supports drivers’
transportation businesses, and not a
transportation company that employs
drivers.’’), with O’Connor v. Uber
Techs., Inc., 82 F. Supp. 3d 1133, 1153
(N.D. Cal. 2015) (‘‘it is clear that Uber
is most certainly a transportation
company’’). For the reasons explained,
the final rule retains the ‘‘integrated
unit’’ approach.
The Department does not share the
Greenlining Institute’s concern that the
final rule’s ‘‘integrated unit’’ factor
would result in workers who perform
‘‘physical tasks’’ being classified as
independent contractors more than
workers who perform white collar,
‘‘intellectual’’ work. Meat deboning is a
physical task, but deboners were found
to be part of an integrated unit of
production in Rutherford Food. 331 U.S.
at 729. On the other hand, freelance
writers perform a white collar task, but
they generally are not integrated into a
publication’s production process
because they are not involved in, for
instance, assigning, editing, or
determining the layout of articles. Both
white collar and physical labor jobs may
be part of an integrated unit of
production. The Department has added
one example in new § 795.115 showing
that a newspaper editor—who performs
primarily white collar tasks—may be
part of an integrated unit of production.
Another commenter, the Arkansas
Trucking Association, agreed that the
‘‘integrated unit’’ factor was superior to
‘‘integral part,’’ but suggested an
alternative formulation based on
whether the business’s activities would
cease or be severely impacted by the
absence of the worker. However, this
approach has the same limitations as the
approaches that emphasize
‘‘importance.’’ Almost every worker
performs work that is in some sense
important to the business that has hired
the worker; otherwise, the business
would not hire the worker. Moreover, as
explained in the NPRM, easily-replaced
workers are often more dependent on a
particular business for work precisely
because they are so easily replaced.
Focusing on the impact of a worker’s
absence turns the economic dependence
analysis on its head by essentially
looking at the business’s dependence on
the worker. As a result, it sends
misleading signals about employee
status.
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Another group of commenters
suggested that the factor should include
an explicit consideration of the location
of the work performed. The U.S.
Chamber of Commerce, for example,
suggested that the factor should
consider whether the worker is
performing work ‘‘the majority of which
is performed off the physical premises
of the business.’’
Whether the work is performed on the
business’s physical premises may be a
consideration under the ‘‘integrated
unit’’ factor, as it may indicate the
extent to which the worker is part of an
integrated unit of production. However,
the Department does not believe it is
necessary to include this consideration
as an explicit part of the ‘‘integrated
unit’’ factor. Many businesses have no
physical location but nevertheless
employ employees. In other instances,
an employee may be part of an
integrated unit despite performing work
at a different location than other
employees. See, e.g., Goldberg v.
Whitaker House Cooperative, Inc., 366
US 28, 32 (1961) (holding that workers
who produced copies of a sample
product at home were employees). Some
workers perform work on a business’s
physical premises but perform discrete,
segregable services unrelated to any
integrated process or unified purpose.
Thus, although the location of the work
may be a fact that is relevant to the
‘‘integrated unit’’ factor, it is not so
probative that it would be useful to
elevate it above other facts that may be
more relevant in a particular case.
Several commenters asked that the
Department clarify that the relevant
inquiry is whether the worker is part of
an integrated unit of production that is
part of the potential employer’s own
processes rather than part of a broader
supply chain. NRF suggested clarifying
language that would ‘‘expressly state
that merely serving as a link in the
chain of a company’s provision of goods
or services’’ does not indicate employee
status. It suggested that such language
would make it clear that this factor does
not indicate employee status where a
worker is merely one, segregable step in
the process of delivering a product to a
consumer.
The Department does not believe such
a clarification is needed, because the
text of the final rule states that this
factor points toward employee status
only when the worker performs ‘‘a
component of the potential employer’s
integrated production process.’’ The
relevant process is the potential
employer’s process, not the broader
supply chain. A worker who performs a
segregable step in the process of
delivering a product but who is not
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integrated into the employer’s own
production process is not part of an
integrated unit of production. Multiple
businesses, including independent
contractors, may perform steps in the
same supply chain.
Some commenters suggested that the
description of this factor in the
preamble should define the scope of the
‘‘unified purpose’’ toward which the
potential employer’s processes work.
WPI requested that the Department
clarify that the ‘‘unified purpose’’
cannot be broader than the potential
employer’s ‘‘core or primary business
purpose.’’ On the other hand,
Farmworker Justice urged a broad
definition of ‘‘unified purpose’’ to
prevent gamesmanship by which an
employer may attempt to artificially
separate its production process into
separate units in order to claim that they
are segregable rather than parts of a
unified whole. It cited a hypothetical
tomato farmer who could label its
tomato harvesters as a separate unit
rather than as part of the process of
growing tomatoes.
The Department rejects these
suggestions, because the final rule’s
rejection of the ‘‘integral part’’ factor
and the question of ‘‘importance’’ or
‘‘centrality’’ makes clear that the
relevant facts are the integration of the
worker into the potential employer’s
production processes, rather than the
nature of the work performed. As
explained above, identifying the ‘‘core
or primary business purpose’’ is not a
useful inquiry in the modern economy.
Falling transaction costs and other
factors described above allow
businesses to hire independent
contractors to carry out tasks that are
part of the businesses’ core functions,
while keeping those functions separate
from its own production processes. At
the same time, seemingly peripheral
functions may be integrated into an
employer’s own processes, indicating
employee status. What matters is the
extent of such integration rather than
the importance or centrality of the
functions performed, which the
Department does not find to be a useful
indicator of employee or independent
contractor status.
As noted in the NPRM, the
Department recognizes that it may be
difficult to determine the extent to
which a worker is part of an integrated
unit of production. For this reason, this
factor is not always useful to the
economic realities inquiry, and it is less
likely than the core factors to be
determinative. For example, this factor
would not indicate independent
contractor status for Farmworker
Justice’s hypothetical tomato harvesters
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merely because the farmer artificially
labeled them a separate unit. As has
been the case since the concepts
underlying the economic realities test
was articulated, the test does not
depend on labels assigned to workers.
Rutherford Food, 331 U.S. at 729
(‘‘Where the work done, in its essence,
follows the usual path of an employee,
putting on an ‘independent contractor’
label does not take the worker from the
protection of the Act.’’). The factor may
indicate either employee or
independent contractor status based on
the extent to which the harvesters are
integrated into the farmer’s production
process as a matter of fact, but most
likely the ultimate determination would
depend more on other factors, such as
control and opportunity for profit or
loss.
WPI also suggested that the
Department clarify language in the
preamble to the proposed rule stating
that employee status would be indicated
for a worker who performs work closely
alongside conceded employees. WPI
expressed concern that this language
could wrongly imply that a worker
performing different tasks than the
conceded employees but in close
proximity to them would indicate
employee status. The Department does
not believe such clarification is
necessary, because the preamble stated
that employee status is indicated where
the worker ‘‘performs identical or
closely interrelated tasks as those
employees.’’ In other words, WPI is
correct that if a worker works physically
close to conceded employees but
performs unrelated tasks, that fact alone
would not indicate employee status.
Finally, many commenters requested
that the Department add examples
explaining how this factor would apply
to specific industries, including
trucking, construction, financial
advising, and personal shopping. Others
wanted examples to address certain
types of contractual arrangements, such
as multi-sided platforms, franchisees,
and buy/sell agreements. In response to
these requests, the Department notes
that the facts that inform the ‘‘integrated
unit’’ factor are too circumstancespecific to apply blanket statements to
entire industries or broad types of
employment arrangements. Any
particular task that is common in a
particular industry may be performed in
one instance by a worker who is part of
an integrated unit of production or by a
segregable unit. In other words, this
factor may point in a different direction
for workers who perform similar duties
in the same industry but who are more
or less integrated into their potential
employer’s processes based on the
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potential employer’s business model.
Moreover, contractual formalities such
as a buy/sell agreement or contracts
formed using multi-sided platforms
could memorialize either employment
or independent contractor
arrangements; the determination would
not depend on the labels assigned but
on the various economic realities
factors, including the worker’s
integration into the potential employer’s
production process.
That said, as explained elsewhere in
this preamble, although the Department
cannot address all industries or all
possible factual scenarios, it does
appreciate that examples are helpful to
understanding how each factor operates.
The new regulatory provision added in
this final rule to further illustrate
several factors, § 795.115, includes two
examples specifically meant to
demonstrate how facts about whether a
worker is part of an integrated unit of
production should be considered as part
of the employment relationship
analysis.
For the reasons explained, the
Department finalizes § 795.105(d)(2)(iii)
as proposed.
6. Additional Unlisted Factors
The National Restaurant Association
stated that facts and factors not listed in
§ 795.105(d) may be relevant to the
question of economic dependence even
though they would not be as probative
as the two core factors. This commenter
expressed concern that future courts
may ignore these unlisted but
potentially relevant considerations in
response to this rulemaking and
requested that the Department revise the
regulatory text to explicitly recognize
that unlisted factors may be relevant.
While proposed § 795.105(c) already
states that the five factors listed in
§ 795.105(d) are ‘‘not exhaustive,’’ 43 the
Department agrees that it may be helpful
to make this point more explicit. The
Department is thus adding
§ 795.105(d)(2)(iv), which states that
additional factors not listed in
§ 795.105(d) may be relevant to
determine whether an individual is an
employee or an independent contractor
under the FLSA. As with any fact or
factor, such additional factors are
relevant only to the extent that they
help answer whether the individual is
in business for him- or herself, as
opposed to being economically
dependent on an employer for work.
Factors that do not bear on this
question, such as whether an individual
has alternate sources of wealth or
43 See Silk, 331 U.S. at 716 (‘‘No one [factor] is
controlling nor is the list complete.’’).
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income and the size of the hiring
company, are not relevant. These
unlisted factors are less probative than
the core factors listed in § 795.105(d)(1),
while their precise weight depends on
the circumstances of each case and is
unlikely to outweigh either of the core
factors .
E. Focusing the Economic Reality Test
on Two Core Factors
Proposed § 795.105(c) was intended to
improve the certainty and predictability
of the economic reality test by focusing
the test on two core factors: (1) The
nature and degree of the worker’s
control over the work; and (2) the
worker’s opportunity for profit or loss.
This focus is an important corollary of
the sharpened definition of economic
dependence to include individuals who
are dependent on a potential employer
for work and to exclude individuals
who are in business for themselves. The
NPRM explained that these core factors,
listed in proposed § 795.105(d)(1), drive
at the heart of what is meant by being
in business for oneself: Such a person
typically controls the work performed in
his or her business and enjoys a
meaningful opportunity for profit or risk
of loss through personal initiative or
investment. The other economic reality
factors—skill, permanence, and
integration—are also relevant as to
whether an individual is in business for
him- or herself. But they are less
probative to that determination. For
instance, it is not uncommon for
comparatively high skilled
individuals—such as software
engineers—to work as employees, and
for comparatively low skill
individuals—such as drivers—to be in
business for themselves. See, e.g.,
Saleem, 854 F 3d at 140; Express SixtyMinutes Delivery, 161 F.3d at 306. In
contrast, ‘‘[i]n ordinary circumstances,
an individual ‘who is in business for
him- or herself’ will have meaningful
control over the work performed and a
meaningful opportunity to profit (or risk
loss).’’ 85 FR 60618. As such, ‘‘it is not
possible to properly assess whether
workers are in business for themselves
or are instead dependent on another’s
business without analyzing their control
over the work and profit or loss
opportunities.’’ Id.
The NPRM further explained that
focusing on the two core factors is also
supported by the Department’s review
of case law. The NPRM presented a
remarkably consistent trend based on
the Department’s review of the results of
appellate decisions since 1975 applying
the economic reality test. Among those
cases, the classification favored by the
control factor aligned with the worker’s
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ultimate classification in all except a
handful where the opportunity factor
pointed in the opposite direction. And
the classification favored by the
opportunity factor aligned with the
ultimate classification in every case.44
These two findings imply that whenever
the control and opportunity factors both
pointed to the same classification—
whether employee or independent
contractor—that was the court’s
conclusion regarding the worker’s
ultimate classification.45 See 85 FR
60619. In other words, the Department
did not uncover a single court decision
where the combined weight of the
control and opportunity factors was
outweighed by the other economic
reality factors. In contrast, the
classification supported by other
economic reality factors was
occasionally misaligned with the
worker’s ultimate classification,
particularly when the control factor, the
opportunity factor, or both, favored a
different classification. See id. at 60621.
The NPRM thus provided that, given
their greater probative value, if both
proposed core factors point towards the
same classification—whether employee
or independent contractor—there is a
substantial likelihood that is the
individual’s correct classification. This
is because it is quite unlikely for the
other, less probative factors to outweigh
the combined weight of the core factors.
In other words, where the two core
factors align, the bulk of the analysis is
complete, and anyone who is assessing
the classification may approach the
remaining factors and circumstances
with skepticism, as only in unusual
cases would such considerations
outweigh the combination of the two
core factors.
Numerous commenters welcomed
proposed § 795.105(c)’s sharpening of
the economic reality test by recognizing
the two core factors’ greater probative
value on whether an individual is in
business for him- or herself. For
instance, the U.S. Chamber of
Commerce stated that ‘‘[t]he
Department’s straightforward focus on
two core factors presents a concise
interpretation of ‘economic dependency’
grounded in the Act’s statutory
definition of ‘employ’ and ‘employer,’
consistent with Supreme Court
44 This is not to imply that the opportunity factor
necessarily aligns with the ultimate classification,
but rather that the Department is not aware of an
appellate case in which misalignment occurred.
45 The only cases in which an appellate court’s
ruling on a worker’s classification was contrary to
the court’s conclusions as to the control factor were
cases in which the opportunity factor pointed in the
opposite direction. See 85 FR 60619 (citing Paragon
Contractors, 884 F.3d at 1235–36, and Cromwell,
348 F. App’x at 61).
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precedent, and well-reasoned courts of
appeals’ decisions.’’ The American
Bakers Association (ABA) likewise
‘‘supports the Department’s position
that the two most probative ‘core’
factors for determining independent
contractor status under the FLSA are the
degree and nature of an individual’s
control over their work, and the
opportunity for profit (or loss).’’ See
also, e.g., ATA; CPIE; National
Restaurant Association; SHRM. Even
one commenter who did not generally
support this rulemaking ‘‘agreed with
the Department that the two main
factors, control and opportunity for
profit or loss, should be given greater
weight.’’ Owner-Operator Independent
Driver Association (OOIDA).
Many commenters objected to
focusing on the two core factors.
Broadly speaking, they raised three
interrelated concerns. First, commenters
contended that elevating the two core
factors is inconsistent with the
economic reality test, which they
asserted requires that factors be either
unweighted or weighted equally. See,
e.g., NELP (objecting to ‘‘elevating two
narrow ‘core’ factors’’); SWACCA;
Commissioner Slaughter of the Federal
Trade Commission (FTC). Second,
commenters contended that focusing on
two core factors would narrow the scope
of who is an employee (as opposed to
an independent contractor) under the
FLSA. See, e.g., NELP (‘‘The NPRM
narrows the FLSA test for employee
coverage[.]’’); State AGs (‘‘The Proposed
Rule’s interpretation of [employment
under] the FLSA is unlawfully
narrow.’’); Appleseed Center (‘‘The
Department of Labor is trying to
impermissibly narrow this definition’’);
NCFW (objecting to ‘‘agency’s proposed
attempt to narrow the definition of
employee’’). Third, commenters asserted
that focusing on two core factors would
impermissibly restrict the set of
circumstances that may be considered
when assessing whether a worker is an
employee or independent contractor
under the FLSA. TRLA (‘‘proposed
reformulation would eliminate . . . any
consideration of [the skill and
permanence] factors’’); NELA (objecting
to ‘‘a narrow, control-dominated
inquiry’’); State AGs (objecting to
proposed rule because it ‘‘narrows
several areas of inquiry.’’).46 The
46 There are two distinct concepts within the
economic reality test—and any test for employment
status—that can be broad or narrow. The first
concept is the test’s standard for employment,
which is economic dependence. See Bartels, 332
U.S. at 130. The second concept is the set of
circumstances that may be considered as part of the
test, which is the ‘‘circumstances of the whole
activity.’’ See Rutherford Food, 331 U.S at 730. The
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Department responds to each of the
above concerns below, and then
addresses other requests relating to the
focus on the two factors.
1. Focusing on Two Core Factors is
Consistent With the Economic Reality
Test
Many commenters contended that
emphasizing core factors over others
would violate a requirement that
economic reality factors be unweighted
or weighted equally. According to
SWACCA, ‘‘[t]he proposed weighted
rule is a novel concept and a departure
from existing caselaw.’’ See also, e.g.,
NELA (objecting to ‘‘emphasizing
certain factors over what should be the
‘ultimate inquiry’ ’’). FTC Commissioner
Slaughter likewise objected that ‘‘[t]he
Proposal takes the Supreme Court’s five
factor test, where all five factors are
given equal weight, and narrows it
down to focus on only two [core]
factors.’’ See also Appleseed Center
(‘‘[A]ll are given equal weight.’’);
Senator Patty Murray (suggesting that
‘‘DOL afford [factors] equal weight’’).
NELP appeared to agree with the
Department that the economic reality
test may focus on certain factors over
others, but asserted that ‘‘the factor of
integration into the business of another
should be weighed heavily,’’ rather than
the proposed rule’s two core factors.
Several commenters further relied on an
age discrimination case to contend that
the economic reality test ‘‘cannot be
rigidly applied’’ and that ‘‘[i]t is
impossible to assign to each of these
factors a specific and invariably applied
weight.’’ NELP (quoting Hickley v. Arkla
Indus., Inc., 699 F.2d 748, 752 (5th Cir.
1983)); see also Michigan Regional
Council of Carpenters (MRCC) (same).
The Department disagrees that the
economic reality test requires factors to
be unweighted or equally weighted.
Each time the Department or a court
applies the test, it must balance
potentially competing factors based on
their respective probative value to the
ultimate inquiry of economic
dependence. In the very case that
announced the economic reality factors,
the Supreme Court listed five factors
that are ‘‘important for decision’’ but
breadth of these two concepts are not always
logically related. For instance, the ABC test states
that a worker is an employee unless the hiring party
can establish that three criteria are met, see, e.g.,
Dynamex, 416 P.3d at 35; thus, the ABC test
considers a relatively narrow set of circumstances
while imposing a broad standard for employment.
While most commenters that objected to the
narrowing of the economic reality test did not
present the standard of employment and
circumstance that may be considered as separate
concepts, the Department addresses them
separately.
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did not treat them equally. Silk, 331
U.S. at 716. It instead emphasized the
most probative factors, while deemphasizing less probative ones in that
case. The Court focused on the fact that
coal unloaders ‘‘had no opportunity to
gain or lose’’ to conclude they were
employees under the SSA, while
explaining the fact ‘‘[t]hat the unloaders
did not work regularly was not
significant.’’ Id. at 717–18. The Court
further focused on ‘‘the control
exercised [and] the opportunity for
profit from sound management’’ to
conclude that truck drivers were
independent contractors, without
discussing any of the other economic
reality factors. Id. at 719. Similarly, the
Court in Whitaker House concluded that
workers at issue in that case were
employees based primary on
considerations relating to control (e.g.,
the workers were ‘‘regimented under
one organization, manufacturing what
the organization desires’’) and
opportunity for profit (e.g., the workers
were ‘‘receiving the [piece rate]
compensation the organization dictates’’
rather than ‘‘selling their products on
the market for whatever price they can
command’’). 366 U.S. at 32–33.
As discussed in the NPRM, courts of
appeals also emphasized facts and
factors that are more probative of the
economic dependence inquiry. See 85
FR 60620. In Saleem, the Second Circuit
focused on facts relating to drivers’
control over their work and their
opportunity for profit or loss based on
initiative or investment to conclude that
they were independent contractors.47
854 F.3d at 138–39; see also Agerbrink
v. Model Service LLC, 787 F. App’x 22,
25–27 (2d Cir. 2019) (denying summary
judgement based solely on disputed
facts regarding plaintiff’s ‘‘control over
her work schedule, whether she had the
ability to negotiate her pay rate, and,
relatedly, her ability to accept or decline
work’’). The Third Circuit in Razak v.
Uber Technologies took a similar
approach by emphasizing disputed facts
regarding ‘‘whether Uber exercises
control over drivers’’ ’ and had ‘‘the
opportunity for profit or loss depending
on managerial skill’’ to deny summary
judgment. 951 F.3d at 145–47.48 And
47 In particular, the Saleem court focused on:
drivers’ ‘‘considerable discretion in choosing the
nature and parameters of their relationship with the
defendant,’’ ‘‘significant control over essential
determinants of profits in [the] business,’’ how they
‘‘invested heavily in their driving businesses,’’ and
the ‘‘ability to choose how much work to perform.’’
854 F.3d at 137–49.
48 The Razak decision also briefly addressed
other factors, including a footnote on the ‘‘integral’’
factor and a discussion that was nominally about
the permanence factor but actually concerned
control: ‘‘On one hand, Uber can take drivers
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the Eight Circuit recently emphasized a
process server’s ability to determine his
own profits by controlling hours, which
assignments to take, and for which
company to work, to affirm a jury
verdict that he was an independent
contractor. See Karlson, 860 F.3d at
1095.
Courts have repeatedly warned
against the ‘‘mechanical application’’ of
the economic reality factors when
determining whether an individual is an
employee or independent contractor.
See, e.g., Saleem, 854 F.3d at 139;
Superior Care, 840 F.2d at 1059. Rather,
the factors should be analyzed with the
aim of answering the ultimate inquiry
under the FLSA: ‘‘Whether an
individual is ‘in business for himself’ or
is ‘dependent upon finding employment
in the business of others.’ ’’ Scantland,
721 F.3d at 1312 (quoting Mednick, 508
F.2d at 301–02). Commenters who
object to focusing on the two core
factors do not dispute this principle,
and some affirmatively support it. For
instance, NELA and the State AGs both
stated that economic reality ‘‘factors ‘are
aids—tools to be used to gauge the
degree of dependence of alleged
employees on the business with which
they are connected’ ’’ (quoting Pilgrim
Equip., 527 F.2d at 1311). NELA
nonetheless believed that it would be
inappropriate to ‘‘emphasiz[e] certain
factors over what should be the
‘ultimate inquiry’: The worker’s
economic dependence on the putative
employer.’’ Emphasizing certain factors,
however, would dilute the ultimate
inquiry of economic dependence only if
those factors were less probative of
economic dependence than others. In
contrast, emphasizing factors that are
more probative would not dilute but
rather focus the analysis on the ultimate
inquiry under the FLSA. If NELA and
the State AGs are correct that the
economic reality factors must be ‘‘used
to gauge the degree of dependence,’’
then focusing on factors that are more
probative measures of economic
dependence is not only permitted but
preferred.
The Department’s review of case law
indicates that courts of appeals have
effectively been affording the control
and opportunity factors greater weight,
even if they did not always explicitly
acknowledge doing so.49 See 85 FR
offline, and on the other hand, Plaintiffs can drive
whenever they choose to turn on the Driver App,
with no minimum amount of driving time
required.’’ 951 F.3d at 147 n.12.
49 Some courts have explicitly acknowledged that
facts related to the control factor were more
probative than facts related to other factors. For
instance, the court in Saleem stated that ‘‘whatever
‘the permanence or duration’ of Plaintiffs’ affiliation
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60619. Among the appellate decisions
since 1975 that the Department
reviewed, whenever the control factor
and the opportunity factor both pointed
towards the same classification—
whether employee or independent
contractor—that was the worker’s
ultimate classification. Put another way:
In those cases where the control factor
and opportunity factor aligned, had the
courts hypothetically limited their
analysis to just those two factors, it
appears to the Department that the
overall results would have been the
same. One commenter attempted to
dispute this finding. TRLA asserted that,
in the following four cases, farmworkers
who were found to be employees ‘‘might
be reclassified as independent
contractors based on the NPRM’s two
core factors:’’ Driscoll, 603 F.2d 748;
Lauritzen, 835 F.2d 1529; Perez v.
Howes, 7 F. Supp. 3d 715 (W.D. Mich.
2014); and Cavazos v. Foster, 822 F.
Supp. 438 (W.D. Mich. 1993). However,
the court in each of these cases actually
concluded that the control and
opportunity factors both favored
employee classification,50 and thus the
farmworkers would have been found to
be employees even if those courts had
hypothetically based is decision solely
on the core factors. These cases
therefore reinforce the Department’s
conclusion that the control and
opportunity factors have been
consistently afforded significant weight
in the economic dependence inquiry.
The consistent empirical trend
indicating that the control and
opportunity factors have been afforded
with Defendants, both its length and the ‘regularity’
of work was entirely of Plaintiffs’ choosing.’’ 854 F.
3d at 147 (citation omitted). When discussing ‘‘the
use of special skills,’’ the court in Selker Brothers
similarly explained that, ‘‘[g]iven the degree of
control exercised by Selker over the day-to-day
operations of the stations, this criterion cannot be
said to support a conclusion of independent
contractor status.’’ 949 F.2d at 1295.
50 Driscoll, 603 F.2d at 755 (‘‘The appellants’
affidavits, which must be taken as true for summary
judgment purposes, plainly disclose that
[defendant] possesses substantial control over
important aspects of the appellants’ work’’); id.
(‘‘The appellants’ opportunity for profit or loss
appears to depend more upon the managerial skills
of [defendant]’’); Lauritzen, 835 F.2d at 1536 (‘‘The
defendants exercise pervasive control over the
operation as a whole.’’); id. (‘‘The Sixth Circuit [in
a prior case] found that the migrant workers had the
opportunity to increase their profits through the
management of their pickle fields. . . .We do not
agree.’’); Howes 7 F. Supp. 3d at 726, aff’d sub nom.
Perez v. D. Howes LLC, 790 F.3d 681 (6th Cir. 2015);
(‘‘Accordingly, [the control] factor weighs in favor
of a finding that the workers were employees.’’); id.
(‘‘[W]orkers could simply increase their wages by
working longer, harder, and smarter—this does not
constitute an opportunity for profit.’’); Cavazos, 822
F. Supp. at 442 (‘‘Their lack of control supports
plaintiffs’ claim that they are employees.’’); id. at
443 (noting that the work relationship ‘‘does not
afford plaintiffs an opportunity for profits’’).
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greater weight should be unsurprising
given their greater probative value. As
the NPRM explained, those two factors
‘‘strike at the core’’ of what it means to
be in business for oneself, 85 FR 60612,
and therefore they are more probative of
the ultimate inquiry under the FLSA:
‘‘whether an individual is ‘in business
for himself’ or is ‘dependent upon
finding employment in the business of
others.’ ’’ Scantland, 721 F.3d at 1312
(quoting Mednick, 508 F.2d at 301–02).
No commenters offered a persuasive
counterargument to the commonsense
logic that, when determining whether
an individual is in business for him- or
herself, the extent of the individual’s
control over his or her work is more
useful information than, for example,
the skill required for that work. Nor did
any commenters effectively rebut that
the extent of an individual’s ability to
earn profits (or suffers losses) through
initiative or investment is more useful
information than, for example, how long
that individual has worked for a
particular company.
NELP appeared to agree with the
Department that emphasis should be
given to factors that are most probative
to the ultimate inquiry of whether an
individual is in business for him- or
herself, but disagrees as to what those
factors should be. In particular, NELP
asserted that ‘‘the factor of integration
into the business of another should be
weighed heavily and in fact is
ultimately the test. If the work is
integrated this leads to the conclusion
that the worker is not independently
running a business.’’ 51
NELP correctly defines the economic
dependence inquiry as ‘‘whether a
person is in business for themselves and
therefore independent, or works instead
in the business of another and
dependent on that business for work.’’
If a worker is economically dependent
on an employer for work, the worker is
not in business for him- or herself.
NELP then defines the ‘‘integration
factor’’ to mean the exact same thing: ‘‘If
the work is integrated this leads to the
conclusion that the worker is not
independently running a business.’’
NELP is correct that, when defined as
such, ‘‘the factor of integration . . . in
fact is the ultimate test,’’ but that factor
would not be helpful in ascertaining a
worker’s employment status because it
simply restates the question. The
Department, courts, and the regulated
community would still have to
determine which factors to analyze to
51 According to NELP, this language is a quotation
from AI 2015–1 that was withdrawn in 2017. But
that withdrawn guidance does not contain the
quoted language.
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determine whether an individual is in
business for him- or herself. The
Department therefore declines to create
and give greater weight to NELP’s
concept of the ‘‘integration factor’’ and
continues to believe that the control and
opportunity factors are the most
probative as to whether an individual is
in business for him- or herself as a
matter of economic reality.
NELP and MRCC quoted dicta from an
age-discrimination case that ‘‘[i]t is
impossible to assign to each of [the
economic reality] factors a specific and
invariably applied weight.’’ Hickley, 699
F.2d at 752.52 This proposed rule,
however, does not run afoul of Hickley’s
dicta. As an initial matter, neither core
factor individually has ‘‘a specific and
invariably applied weight’’ because the
proposed rule does not state that one
necessarily outweighs the other. The
Department nonetheless recognizes that
proposed § 795.105(c)’ statement that
‘‘each [core factor] is afforded greater
weight in the analysis than is any other
factor’’ may be overly rigid. For reasons
explained above, certain types of facts—
i.e., those falling within the control and
opportunity factors—are more probative
than others regarding whether an
individual is in business for him- or
herself. But that does not necessarily
mean the control or opportunity factors
are entitle to greater weight in all cases.
For example, it may be the case that,
after all the circumstances have been
considered, a core factor does not weigh
very strongly towards a particular
classification because considerations
within that factor point in different
directions. See Cromwell, 348 F. App’x
at 61 (finding that ‘‘defendants here did
not control the details of how the
plaintiffs performed their assign jobs’’
but did have ‘‘complete control over
[their] schedule and pay’’). A core factor
could even be at equipoise, in which
case it would not weigh at all in favor
of a classification. See Johnson, 371 F.
3d at 730 (concluding that competing
facts regarding plaintiffs’ opportunity
for profit or loss meant that the ‘‘jury
could have viewed this factor as not
favoring either side’’). In short, there is
52 The
court in Hickley applied the economic
reality test in the context of the Age Discrimination
in Employment Act of 1967, 29 U.S.C. 621–34,
without opining whether that was the correct test
under the ADEA. 699 F.2d at 752 (‘‘Finding . . .
there was no evidence . . . that Hickey was an
employee under the more liberal ‘economic
realities’ test used in FLSA cases, [but] express[ing]
no opinion on whether it or one of the tests used
in Title VII cases should ultimately be used to
determine employee status in ADEA cases.’’).
Hickley’s ‘‘specific and invariably applied weight’’
dicta appears in one FLSA case, Parrish, 719 F.3d
at 380, as a see also parenthetical to support the
proposition that economic reality factors should not
be applied mechanically.
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1199
a subtle but important distinction that
was not fully reflected in the NPRM’s
language between a factor’s probative
value as a general matter and its specific
weight in a particular case. Probative
value refers to the extent to which a
factor encapsulates types of facts that
illuminate the ultimate inquiry of
whether workers are in business for
themselves, as opposed to being
dependent on an employer for work.
The weight assigned to a factor in a
particular case refers to how strongly
specific facts within the factor, on
balance, favors a particular
classification. Considerations within a
core factor may have significant
probative value even though that factor,
on balance, does not weigh heavily
towards a classification in a specific
case. The Department therefore revises
§ 795.105(c) to more clearly distinguish
between a core factor’s probative value
as a general matter and its’ weight in a
specific case and to clarify that the core
factors’ greater probative value means
that they typically (but not necessarily)
carry greater weight . Thus it should be
clear that the rule does not assign any
factor a specific or invariable weight. In
contrast, the approach favored by some
commenters, including the Appleseed
Center and Commission Slaughter, to
give each factor ‘‘equal weight’’ would
‘‘assign to each of the factors a specific
and invariably applied weight.’’
Hickley, 699 F.2d at 752.
At bottom, the final rule’s focus on
two core factors thus does not depart
from the economic reality test—it
merely elucidates the factors’ respective
probative values that have always
existed but never been explained. Cf.
Lauritzen, 835 F.2d at 1539 (‘‘Why keep
[employers] in the dark about the legal
consequences of their deeds.’’
(Easterbrook, J., concurring)). As
explained in more detail below,
providing such clarification for the
regulated community would not narrow
the scope of who is an FLSA employee
as opposed to an independent
contractor. Nor would it narrow the
circumstances that may be considered
under the economic reality test.
2. The Proposed Rule Would Not
Narrow the Standard for FLSA
Employment
A number of commenters argued that
focusing the economic reality test on the
control and opportunity factors would
narrow the standard for employment
under the FLSA. The FLSA defines
‘‘employ’’ as including ‘‘to suffer or
permit to work,’’ 29 U.S.C. 203(g), and
these commenters argued this definition
should be interpreted to provide broad
coverage in light of the Act’s remedial
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purpose. See, e.g., AFL–CIO; NELA;
NELP; Senator Patty Murray; State AGs.
Most of these commenters argued that
the proposed rule is incompatible with
the Act’s broad definition of
employment because focusing on the
control factor would effectively adopt
the narrower scope of employment
under the common law control test. One
commenter, however, had a different
view: UPS argued that the proposed rule
would adopt a narrower standard for
employment by giving the control factor
too little weight.
Discussing the proposed rule’s
consistency with the FLSA’s standard
for employment first requires an
understanding of the Act’s definitions.
Commenters point out that the Act
defines ‘‘employ’’ as including ‘‘to
suffer or permit to work,’’ 29 U.S.C.
203(g), but the Supreme Court has
observed that, although broad, the Act’s
definitions are not clear regarding the
scope of relationships that are included.
Rutherford Food, 331 U.S. at 728
(‘‘[T]here is in the [FLSA’s text] no
definition that solves problems as to the
limits of the employer-employee
relationship under the Act.’’). Courts of
appeals have likewise found the
definitions not to clearly indicate the
precise contours of FLSA employment.
See, e.g., Solis v. Laurelbrook
Sanitarium & Sch., Inc., 642 F.3d 518,
522 (6th Cir. 2011); Steelman v. Hirsch,
473 F.3d 124, 128 (4th Cir. 2007).
As commenters also noted, the
Supreme Court relied on the FLSA’s
purpose and legislative history to
interpret the ‘‘suffer and permit’’
language to encompass a more inclusive
definition of employment than that of
the common law. Rutherford Food, 331
U.S. at 727 (affirming that FLSA
employment is not limited to the
‘‘common law test of control, as the act
concerns itself with the correction of
economic evils through remedies which
were unknown at common law’’); see
also Darden, 503 U.S. at 326. The
Supreme Court has ‘‘consistently
construed the Act liberally in
recognition that broad coverage is
essential to accomplish [its] goal,’’ Tony
& Susan Alamo, 471 U.S. at 296, but at
the same time, the Court also recognized
that the ‘‘suffer or permit’’ definition
‘‘does have its limits.’’ Id. at 295; see
also Portland Terminal, 330 U.S. at 152
(‘‘The definition ‘suffer or permit to
work’ was obviously not intended to
stamp all persons as employees.’’). No
court has suggested that applying such
limits (including the limit that bona fide
independent contractors are not
employees under the Act) cannot be
reconciled with the Act’s remedial
purpose. Cf. Encino Motorcars, LLC v.
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(Encino II) (warning against relying on
‘‘flawed premise that the FLSA
‘pursues’ its remedial purpose ‘at all
costs’’’ when interpreting the Act).
Ultimately, ‘‘[t]he test of employment
under the Act is one of ‘economic
reality.’’’ Tony & Susan Alamo, 471 U.S.
at 301 (quoting Whitaker House, 366
U.S. at 33)). This rule applies such a test
and does so with sufficient breadth
consistent with the Act’s remedial
purpose.
While the phrase ‘‘economic reality’’
is on its face no clearer than the ‘‘suffer
or permit’’ language, see Lauritzen, 835
F.2d at 1539 (Easterbrook J.,
concurring), decades of case law has
refined its meaning. The Court
determined that employees include
‘‘those who as a matter of economic
reality are dependent upon the business
to which they render service.’’ Bartels,
332 U.S. at 130. Courts of appeals have
subsequently used Bartels’s concept of
economic dependence to determine
employment under the FLSA. See, e.g.,
Saleem, 854 F.3d at 139; Mr. W
Fireworks, 814 F.2d at 1054;
DialAmerica, 757 F.2d at 1385. Thus,
the courts have interpreted the scope of
employment under the Act’s definition
to include any individual who is
‘‘dependent upon finding employment
in the business of others,’’ and to
exclude any individual who is ‘‘in
business for himself.’’ Scantland, 721
F.3d at 1312.53 However, as noted in the
need for rulemaking discussion, this
principle has not always been applied
consistently.
The Department agrees with this
interpretation and further believes that
the economic dependence standard
developed by courts comports with the
‘‘suffer or permit’’ statutory text. As the
NPRM explained: ‘‘An individual who
depends on a potential employer for
work is an employee whom the
employer suffers or permits to work. In
contrast, an independent contractor
does not work at the sufferance or
permission of an employer because, as
a matter of economic reality, he or she
is in business for him- or herself.’’ 85 FR
60606 (citing Saleem, 854 F.3d at 139).
Commenters generally agreed that
employee versus independent
contractor status under the FLSA is
determined by the worker’s economic
dependence, and several of the abovementioned commenters affirmatively
supported this standard. For example,
NELA stated that ‘‘[i]t is dependence
53 Courts apply this economic dependence
standard for employment in the employee-versusindependent contractor context, but use different
approaches in other contexts. See, e.g., Glatt v. Fox
Searchlight Pictures, 811 F.3d 528 (2d Cir. 2016).
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that indicates employee status’’ (quoting
Usery, 527 F.2d at 1311). And the State
AGs explain that ‘‘[t]he ultimate
concern is whether, as a matter of
economic reality, the workers depend
on someone else’s business . . . or are
in business for themselves’’ (quoting
Superior Care, 840 F.2d at 1059).
Most commenters who objected to
focusing the economic reality test on the
two core factors were concerned that
such an approach would narrow FLSA
employment to the common law
standard. For instance, NELA stated that
‘‘[b]y affording the control factor greater
weight in the economic reality analysis,
the Department slides back toward the
common law agency test.’’ See, e.g.,
AFL–CIO (‘‘[T]he proposed rule
effectively collapses the FLSA’s
definition into the common law
definition by giving primacy and
controlling weight to the two factors of
control and opportunity for profit and
loss.’’). The implied logic behind this
concern is that if one test gives greater
weight to a factor that is also given
greater weight by a second test, the two
tests necessarily have an equal scope of
employment. But that does not follow.
A comparison with the ABC test is
illustrative. That test creates a
presumption of employee status, which
can be overridden only if all three
factors are established. One of the ABC
test’s factors is ‘‘whether the worker is
free from the control and direction of
the hiring entity.’’ This factor is given
dispositive weight under certain
circumstances: If the worker is
controlled by the hiring party, then he
or she is automatically an employee,
regardless of other considerations. The
common law control test also gives
control dispositive weight. While both
tests afford control greater weight than
the economic reality test, one test (ABC)
has a broader scope of employment than
the economic reality test and the other
(common law) has a narrower scope.
The relative weight attached to a
particular factor does not, by itself,
determine whether the ultimate scope of
employment is broad or narrow.
Accordingly, it is not possible to
compare the breadth of the standards for
employment used by two tests simply
by comparing the weight attached to a
shared factor. Rather, it is necessary to
consider how each test’s factors are
actually applied.
Under the common law control test,
control is the ultimate inquiry: If an
individual controls the work, then he or
she would be an independent contractor
rather than an employee. However, such
control by itself would be insufficient to
establish the worker as an independent
contractor under the Department’s rule.
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Other considerations, including the
second core factor of opportunity for
profit or loss, can outweigh the control
factor and result in a classification of
employee status. That is precisely what
happened in Paragon Contractors,
wherein the control and integral part
factors weighed in favor of independent
contractor classification but the court
nonetheless held that the worker was an
employee because the remaining factors,
including opportunity for profit or loss,
favored classification as an employee.
See 884 F.3d at 1238. And even if the
individual both controls the work and
has a meaningful opportunity for profit
or loss, he or she still would not
necessarily be classified as an
independent contractor under the
Department’s rule because other factors
may outweigh those two core factors in
rare cases. In short, because the ultimate
inquiry under the common law control
test is the worker’s right to control the
manner and means by which the work
is performed, such control by the
worker disqualifies the worker from
being an employee under that test, but
more is needed under the rule’s
articulation of the economic reality test
because economic dependence is the
ultimate inquiry. Thus, the rule’s
standard for employment remains
broader than the common law standard.
Nor does the rule ‘‘slide[ ] back toward
the common law agency test,’’ as NELA
contends, or otherwise narrow the
standard of employment under the
FLSA. As explained above, the standard
for determining whether an individual
is an employee under the FLSA or an
independent contractor has always been
economic dependence. The two core
factors are more probative than other
factors regarding whether an individual
is in business for him- or herself, as
opposed to being dependent on an
employer for work. Neither NELA nor
likeminded commenters dispute this
specific claim. NELA further recognized
that economic reality factors must be
‘‘used to gauge the degree of
dependence.’’ If so, the test should focus
on core factors that are more probative
measures of dependence. Doing
otherwise would serve no purpose other
than to make regulations more
confusing, thereby reducing compliance
and driving up the transaction cost of a
lawful business practice.
UPS expressed the opposite concern
as NELA and likeminded commenters,
asserting that the proposed rule did not
give enough weight to the control factor.
According to UPS, treating control as a
factor to be balanced rather than giving
it dispositive weight ‘‘leaves open the
possibility that a worker could be
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classified as an ‘independent contractor’
even when the common-law control
factor indicated employee status.’’ The
potential for such an outcome implies
that FLSA employment may be
narrower than the common law
standard in certain circumstances.
As an initial matter, UPS’s concern
that the control factor may be
outweighed by other considerations
even when it indicates employee status
also applies to every prior articulation
of the economic reality test—indeed
more so—because none of them gave the
control factor greater weight, much less
dispositive weight. The rule addresses
UPS’s concern because it explicitly
identifies control as a core factor that is
less likely to be outweighed by other
factors. More importantly, UPS’s
concern could materialize only if the
control factor were balanced against
other factors without regard for the
ultimate inquiry for FLSA employment.
Courts have cautioned against such
‘‘mechanical application’’ of the
economic reality factors and have
instead instructed that all factors should
guide the analysis of whether the
individual is in business for him or
herself or is dependent on others for
work. See, e.g., Saleem, 854 F.3d at 140.
For these reasons, the Department does
not share UPS’s concern that not giving
dispositive weight to the control factor
results in a standard for employment
that is narrower than the common law.54
3. The Rulemaking Will Not Restrict the
Range of Considerations Within
Economic Reality Test
A number of commenters contend
that the proposed rule’s focus on the
two core factors is inconsistent with
case law requiring the ‘‘circumstances of
the whole activity’’ to be considered as
part of the inquiry into economic
dependence. State AGs (quoting
Rutherford Food, 331 U.S. at 730); see
also, e.g., NELA (‘‘The economic reality
inquiry therefore cannot be answered
without ‘employ[ing] a totality-of-thecircumstances approach.’ ’’ (quoting
Baker, 137 F.3d at 1441)); see also
Senator Patty Murray (‘‘No one test
factor is controlling, nor is the list
exhaustive.’’); TRLA (same).
The Department agrees with
commenters that the circumstances of
the whole activity should be considered
as part of the economic reality inquiry.
See 85 FR 60621 (‘‘Other factors may
54 In any event, courts have foreclosed UPS’s
requested remedy of giving the control factor
dispositive weight to determine employee status.
See, e.g., Silk, 331 U.S. at 716 (‘‘No one factor is
controlling); Keller, 781 F.3d at 807 (‘‘No one factor
is determinative.’’); Baker, 37 F.3d at 1440 (‘‘None
of the factors alone is dispositive.’’).
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1201
also be probative as part of the
circumstances of the whole activity’’).
While all circumstances must be
considered, it does not follow that all
circumstances or categories of
circumstance, i.e., factors, must also be
‘‘given equal weight.’’ See e.g., FTC
Commissioner Slaughter; Appleseed
Center. Assigning one factor less weight
than another does not restrict the
circumstances being considered because
the very act of determining relative
weight requires considering both
factors.
As explained above, each factor
should be analyzed in accordance with
its probative value to the ultimate
inquiry of whether an individual is in
business for him or her-self. To be sure,
the specific weight of the factors
depends on specific circumstances. The
control and opportunity factors are
nonetheless more probative than other
factors in determining whether an
individual is in business for him- or
herself. As such, it is appropriate to
recognize, as the proposed rule does,
that these two more probative factors
should typically carry greater weight
than other factors. Doing so would not,
as TRLA contends, ‘‘eliminate . . . any
consideration of [other] factors that have
often been regarded as probative in the
farm labor context.’’ The proposed rule
explicitly permits other factors to
outweigh the two core factors if the
specific circumstances of the case—
whether in the farm labor context or
another contexts—warrants such a
result. In order to determine whether
the combined weight of the two core
factors are outweighed or not by other
factors, it is necessary to consider both
sets of factors. Nor would it make any
‘‘single factor determinative by itself.’’
Hopkins, 545 F.3d at 343. Neither of the
core factors can be ‘‘determinative by
itself’’ because there is a second core
factor against which each is balanced.
Even when both core factors align, they
are not ‘‘controlling’’ because their
combined weight can still be
outweighed by other considerations.
4. Other Comments Regarding the Focus
on the Two Core Factors
PAM and Global Tranz requested that
the Department create a ‘‘bright-line
test’’ that ‘‘would be limited to the two
‘core factors’ already identified in the
Proposed Rule: (1) the nature and degree
of the individual’s control over the
work, and (2) the individual’s
opportunity for profit or loss.’’ See also
Cetera Financial Group (CFG) (‘‘we
believe it would be appropriate for the
Department to limit the criteria
employed in the economic dependence
analysis to the two Core factors and
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eliminate the others’’). According to
these commenters, a two-factor test
would be even clearer and simpler than
the proposal to focus the test on the two
core factors, while still considering
other factors. Other commenters
requested that the Department eliminate
one or more of the non-core factors
listed in § 795.105(d)(2) from the
economic reality test because such
factors have little to no probative value
in some circumstance, and may
sometimes send misleading signals
regarding an individual’s classification.
CWI and the National Restaurant
Association asked the Department to
eliminate the skill required factor;
SHRM and the U.S. Chamber of
Commerce were among several
commenters who suggested that the
Department eliminate the permanence
factor; and ATA, NDHA, and others
requested eliminating the integrated
unit factor.
The Department believes that the two
core factors of control and opportunity
are always probative as to whether an
individual is in business for him- or
herself. The Department further agrees
with the above commenters that the
other factors are less probative and may
have little to no probative value in some
circumstances. See, e.g., Silk, 331 U.S.
at 718 (‘‘That the unloaders did not
work regularly is not significant.’’).
However, ‘‘circumstances of the whole
activity should be examined’’ as part of
the economic reality test, meaning that
the other factors should be considered
in all cases even if they are not always
probative once considered. DialAmerica
Mktg., Inc., 757 F.2d at 1382. If a factor
is probative in some situations but not
in others, there is still a need to
consider that factor to determine
whether it is probative in a particular
case. Eliminating the non-core factors
from consideration would therefore be
warranted only if those factors lacked
probative value in all circumstances—
that is, if there was never a need to even
consider whether they had probative
value.
Because non-core factors are probative
in many circumstances, the Department
believes it would be inappropriate to
eliminate them. In response to
commenters’ concern that non-core
factors may not always be probative, the
Department is making non-substantive
revisions to clarify that the two core
factors are always probative as to
whether an individual is in business for
him- or herself, but there may be
circumstances where one or more of the
non-core factors, upon consideration,
has little or no probative value.
Several commenters requested that
the Department revise § 795.105(c) to
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state that if the two core factors point
towards the same classification, there is
no need to consider any other factors.
See e.g., NRF (‘‘if both of the core factors
point in the same direction, then a court
may consider only those two factors and
end the analysis without examining the
three additional possible factors
identified by DOL’’); SHRM (requesting
revision ‘‘to ensure that if the Core
Factors indicate the same status of the
worker, no further analysis is
necessary’’). According to the SHRM,
such an approach would ‘‘create clear
expectations and stable grounds to build
working relationships.’’
The Department believes that the
economic reality test cannot be rigidly
applied and concludes that its approach
of giving certain factors greater weight
and other factors lesser weight while
retaining flexibility as to the degree of
weight depending on the facts of the
case best accounts for all of the
circumstances that work relationships
present. Commenters’ requests would
require the Department to state that the
combined probative value of the two
core factors—whatever that might be—
always outweighs the combined
probative value of other factors. The
Department believes that will usually be
the case, but does not rule out the
possibility that, in some circumstances,
the core factors could be outweighed by
particularly probative facts related to
other factors.
Several commenters effectively
requested that the Department assign a
specific relative weight to one core
factor as compared to the other. CWI
requested that the Department always
weigh the two core factors equally,
while the HR Policy Institute requested
that the control factor always be given
greater weight than the opportunity
factor. The Department declines to
implement both requests. The
Department’s review of U.S. Courts of
Appeals cases since 1975 did not
indicate that the control and
opportunity factors should be weighed
equally. Nor did that review indicate
that the control factor should always
outweigh the opportunity factor. Indeed,
in the few cases reviewed by the
Department where the control and
opportunity factors pointed towards
different classifications, the ultimate
classification aligned with the
opportunity for factor. See 85 FR 60619
(citing Paragon Contractors, 884 F.3d at
1235–36, and Cromwell, 348 F. App’x at
61). Ultimately, the Department is
confident in its conclusion that the two
core factors are more probative than all
other factors and that framework is
logical, as described above. But the
Department declines to assign an
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invariable relative weight between the
two core factors.
Several commenters requested that
the Department revise § 795.105(c) to
establish a rebuttable presumption of
employee or independent contractor
status if both core factors indicate the
same classification. Such a presumption
would be rebuttable only by
‘‘substantial evidence to the contrary
under all three [other factors].’’ ATA.
According to ATA, a rebuttable
presumption ‘‘[w]ould further reduce
the possibility of courts unnecessarily
and potentially selectively applying and
weighing the three additional factors for
preferred policy outcomes, which has
been a concern with regard to the
current test in some instances.’’ As the
NPRM explained, the Department
considered but did not propose a
rebuttable presumption based on
alignment of the two core factors
because it was concerned a formal
presumption may be needlessly
complex or burdensome. See 85 FR
60621. The Department further believes
that emphasizing the importance of the
two core factors provides sufficient
clarity. As such, the Department
declines to adopt a presumption-based
framework.
CWI requested that the ‘‘the Final
Rule spell out specifically that each of
the Core Factors should be analyzed
independently of the other, without
overlap.’’ The Department agrees with
CWI that overlaps between economic
reality factors, core or otherwise, should
be minimized. As discussed in the
NPRM and in this preamble, reducing
such overlap is one of the reasons for
this rulemaking. That said, the
Department believes specific regulatory
instructions against overlapping
analysis of the two core factors is not
necessary and may be confusing. The
Department believes proposed
§ 795.105(d)(1) articulates the two core
factors without apparent overlap, and
CWI does not identity any specific
considerations that risk being analyzed
under both factors. Language in the
regulatory text warning against
overlapping analysis may therefore
confuse members of the regulated
community by priming them to look for
potential overlapping considerations
when there are none. The Department
therefore declines to add CWI’s
requested language.
In summary, the economic reality test
examines the circumstances of the
whole activity to determine whether an
individual is in business for him- or
herself, as opposed to being
economically deponent on others for
work. Not all facts or factors are equally
probative (if they are probative at all) as
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to whether, as a matter of economic
reality, an individual is in business for
him- or herself. Treating them all as
equal would not focus the inquiry on
economic dependence, but rather would
distort that analysis. In contrast,
highlighting factors that are more
probative would sharpen the test’s focus
on economic dependence.
The NPRM presented reasoning and
evidence based on the Department’s
review of case law indicating that
control and opportunity factors are more
probative to whether an individual is in
business for him- or herself, as opposed
to being economically dependent. While
not all commenters agree with this
approach, commenters who object to it
have not convinced the Department to
change its original assessment. The
Department therefore believes that it is
appropriate to focus the economic
reality test on the two core factors that
are more probative to the test’s ultimate
inquiry. Such focus appropriately
guides how factors should be balanced,
while retaining flexibility in the test.
F. Proposed Guidance Regarding the
Primacy of Actual Practice
Proposed § 795.110 stated that the
actual practice of the parties involved—
both of the worker (or workers) at issue
and of the potential employer—is more
relevant than what may be contractually
or theoretically possible. The proposed
rule explained that this principle is
derived from the Supreme Court’s
holding that ‘‘ ‘economic reality’ rather
than ‘technical concepts’ is to be the test
of employment’’ under the FLSA.
Whitaker House, 366 U.S. at 33; see also
Tony & Susan Alamo, 471 U.S. at 301
(‘‘The test of employment under the
[FLSA] is one of ‘economic reality’ ’’
(citing Whitaker House, 366 U.S. at 33)).
Several commenters expressed
support for proposed § 795.110. For
example, ATA wrote that ‘‘[t]he general
principle also is almost black letter
law—substance is always more
important than form—under virtually
every regulation WHD enforces.’’ The
Center for Workplace Compliance
described the language as ‘‘consistent
with historical interpretation of the
economic reality test by Federal courts
and DOL.’’ Other commenters
complimented the proposal with little
or no further explanation, see NHDA;
New Jersey Civil Justice Institute; WPI,
while HR Policy Association urged the
final rule to go further by entirely
disregarding the relevance of
unexercised contractual or theoretical
possibilities. WFCA supported proposed
§ 795.110, but asked the Department to
elaborate in the final rule that ‘‘best
indicator of the actual practices is
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whether a significant segment of the
industry has traditionally treated similar
workers as independent contractors or
employees.’’
No worker advocacy organizations
specifically commented in support of
the provision, but several groups,
including NELA, the Pacific Northwest
Regional Council of Carpenters, and the
Public Justice Center, quoted Judge
Frank Easterbrook’s observation from
Lauritzen, 835 F.2d at 1545, that ‘‘[t]he
FLSA is designed to defeat rather than
implement contractual arrangements.’’
The International Brotherhood of
Teamsters similarly asserted that
Congress ‘‘chose to define ‘employment’
in a manner that would allow the Act
to be applied flexibly so that employers
could not simply recalibrate their
contractual arrangements with workers
to evade coverage.’’ Finally, NELP and
32 other organizations quoted Judge
Learned Hand’s observation from Lehigh
Valley Coal Co. v. Yensavage, 218 F.
547 (2d Cir. 1914), cert. denied, 235 U.S.
705 (1915), that employment statutes
from the early 20th century were
intended to ‘‘upset the freedom of
contract’’ between workers and
businesses. Id. at 553.
Some business commenters expressed
general support for proposed § 795.110,
but requested edits to discount the
relevance of voluntary choices on the
part of an individual worker that
implicate one or more of the economic
reality factors described in proposed
§ 795.105(d), such as choosing to work
exclusively for one business, accepting
all available work assignments from the
business, or declining to negotiate
prices. See, e.g., American Bakers
Association; ATA; New Jersey
Warehousemen & Movers Association
(NJWMA); NRF; Private Care
Association; Scopelitis, Garvin, Light,
Hanson & Feary; U.S. Chamber of
Commerce (‘‘[T]he Chamber urges the
Department clarify that so long as a
business does not take actions to
foreclose an individual from exercising
certain rights, that the individual’s
choice to not exercise those rights does
not diminish their indicia of
independence in the relationship.’’).
Some of these commenters asserted that
allowing voluntary worker practices to
influence classification outcomes would
lead to costly and inefficient business
decisions. See Dart Transit Company
(‘‘[T]he practical effect of [proposed
§ 795.110] is to require independent
contractors to arbitrarily switch routes
and carriers . . . simply in order to
preserve their independent status’’);
Minnesota Trucking Association (‘‘In
effect, the motor carrier would have to
restrict offering to the independent
PO 00000
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1203
owner operator a route both find
beneficial in order to ensure that the
independent owner operator performs
services for other motor carriers.’’).
Others asserted that considering
voluntary worker practices would lead
to classification discrepancies between
workers with similar contractual
freedoms. See NRF; SHRM.
Some business commenters were
flatly opposed to proposed § 795.110.
SHRM wrote that ‘‘[a] focus on ‘practice’
as opposed to the contractual ‘rights,’ of
the parties . . . unnecessarily deemphasizes voluntariness of the
contract itself and places ambiguity over
parties’ negotiations.’’ The Customized
Logistics and Delivery Association
objected that worker classifications
could turn on voluntary worker
practices that a business may not know
about (e.g., whether particular workers
perform labor for other companies),
asserting that proposed § 795.110
‘‘essentially shift[s] the burden of proof
to the alleged employer to establish a
worker’s status as an IC’’ and ‘‘could
force mass reclassifications of ICs for
motor carriers, and many other
industries.’’
Finally, several commenters
representing workers, as well as Senator
Patty Murray and the State AGs, voiced
opposition to proposed § 795.110 on the
basis that emphasizing the primacy of
an alleged employer’s practices would
establish an employee classification
standard impermissibly narrower than
the common law, which evaluates an
alleged employer’s ‘‘right to control.’’ 55
In this regard, the State AGs compared
proposed § 795.110 to the Department’s
interpretation in its recent Joint
Employer final rule that ‘‘[a] potential
joint employer must actually exercise—
directly or indirectly—one or more . . .
indicia of control to be jointly liable’’
(85 FR 2859). Winebrake & Santillo, LLC
asserted that proposed § 795.110
conflicts with a statement from a recent
Third Circuit opinion that ‘‘actual
control of the manner of work is not
essential; rather, it is the right to control
which is determinative,’’ Razak, 951
F.3d at 145, while Edward. Tuddenham
commented that ‘‘[a]ll of the cases [the
Department cited in its NPRM] to
support the primacy of ‘actual practice’
are referring to the actual practices of
workers and are not discussing analysis
of employer controls.’’ In rejecting the
proposed rule’s distinction between a
potential employer’s contractual
55 Restatement (Second) of Agency § 2(3); see also
Commun. for Non-Violence v. Reid, 490 U.S. 730,
751 (1989) (describing ‘‘the hiring party’s right to
control the manner and means by which the
product is accomplished’’ as the overarching focus
of the common law standard).
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authority to control workers and control
that they actually exercise, Senator
Murray asserted that contractual
authority ‘‘provides a potential
employer an incredible amount of de
facto control over a worker . . .
induc[ing] a worker to perform the work
in the manner the employer prefers,
suggests, recommends, or hints at, even
if the employer does not ever command
it.’’ See also State AGs (‘‘[R]eserved
authority in an agreement, like the
looming sword of Damocles, will often
influence what the parties do[.]’’).
The Department has carefully
considered the views and arguments
expressed by commenters and decided
to implement § 795.110 as proposed. As
emphasized in the NPRM, and as the
plain language of § 795.110 makes clear,
unexercised powers, rights, and
freedoms are not irrelevant in
determining the employment status of
workers under the economic reality
test; 56 such possibilities are merely less
relevant than powers, rights, and
freedoms which are actually exercised
under the economic reality test.57
Affording equal relevance to reserved
control and control that is actually
exercised—by either party—would
ignore the Supreme Court’s command to
focus on the ‘‘reality’’ of the work
arrangement, Silk, 331 U.S. at 713,
which places a greater importance on
what actually happens than what a
contract suggests may happen. Several
Federal courts of appeals decisions have
explicitly made this observation. See,
e.g., Saleem, 854 F.3d at 142
(‘‘[P]ursuant to the economic reality test,
it is not what [Plaintiffs] could have
done that counts, but as a matter of
economic reality what they actually do
that is dispositive.’’) (citations omitted);
Parrish, 917 F.3d at 387 (‘‘The analysis
is focused on economic reality, not
economic hypotheticals.’’); Scantland,
721 F.3d at 1311 (‘‘It is not significant
how one ‘could have’ acted under the
56 Entirely disregarding unexercised contractual
rights and authorities would not be consistent with
the Supreme Court’s instruction in Rutherford Food
to evaluate ‘‘the circumstances of the whole
activity.’’ 331 U.S. at 730; see also Mid-Atl.
Installation, 16 F. App’x at 107 (determining that
cable installers were independent contractors in
part because they had a ‘‘right to employ [their
own] workers’’); Keller, 781 F.3d at 813 (citing as
relevant ‘‘the fact that Miri never explicitly
prohibited Keller from performing installation
services for other companies’’ and finding ‘‘a
material dispute as to whether Keller could have
increased his profitability had he improved his
efficiency or requested more assignments’’).
57 In this respect, § 795.110’s emphasis on actual
practice differs from the treatment of control in the
Department’s partially invalidated Joint Employer
rule, which provided that ‘‘[a] potential joint
employer must actually exercise—directly or
indirectly—one or more . . . indicia of control to
be jointly liable.’’ 85 FR 2859 (emphasis added).
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contract terms. The controlling
economic realities are reflected by the
way one actually acts.’’ (citations
omitted)). Moreover, as some
commenters pointed out, prioritizing
substance over form is consistent with
the Department’s general interpretation
and enforcement of the FLSA. See, e.g.,
29 CFR 541.2 (‘‘A job title alone is
insufficient to establish the exempt
status of an employee.’’); 29 CFR
541.603(a) (providing that employers
violate the salary basis requirement for
certain employees exempt under Sec.
13(a)(1) of the Act only when they
demonstrate ‘‘an actual practice of
making improper deductions’’); 58 29
CFR 778.414 (‘‘[W]hether a contract
which purports to qualify an employee
for exemption under section 7(f) meets
the requirements . . . will in all cases
depend not merely on the wording of
the contract but upon the actual practice
of the parties thereunder.’’).
The Department disagrees with
commenters who assert that prioritizing
the actual practice of the parties
involved makes the economic reality
test impermissibly narrower than the
common law control test. In many
instances, the actual practices of the
parties will establish the existence of an
employment relationship despite what a
‘‘skillfully devised’’ contract might
suggest on paper. Silk, 331 U.S. at 715;
see, e.g., Scantland, 721 F.3d at 1313–
14 (‘‘Though plaintiffs’ ‘Independent
Contractor Service Agreements’
provided that they could ‘decline any
work assignments,’ plaintiffs testified
that they could not reject a route or a
work order within their route without
threat of termination or being refused
work in the following days.’’); Hobbs,
946 F.3d at 833 (dismissing the fact that
welders determined to be employees
‘‘could hypothetically negotiate their
rate of pay’’). In any event, because the
ultimate inquiry of the economic reality
test is ‘‘economic dependence,’’ the test
ensures coverage over more workers in
the aggregate than the common law
control test, notwithstanding its more
nuanced interpretation of the control
factor itself. See Silk, 331 U.S. at 716
(listing ‘‘degrees of control’’ as one of
several non-dispositive factors in the
economic reality test) (emphasis added).
58 In a 2004 final rule amending this language, the
Department rejected commenter arguments that the
mere existence of a policy permitting improper
deductions should disqualify an employer from
claiming the Section 13(a)(1) exemption for salaried
employees whose earnings and job duties otherwise
qualify for exemption. ‘‘[Such an] approach . . .
would provide a windfall to employees who have
not even arguably been harmed by a ‘policy’ that
a manager has never applied and may never intend
to apply[.]’’ 69 FR 22122, 22180.
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It is true that, under the economic
reality test, some workers subject to a
potential employer’s ‘‘right to control’’
may nevertheless qualify as bona fide
independent contractors for other
reasons. To the extent that this excludes
some workers who might qualify as
‘‘employees’’ under a traditional
common law test,59 this is the logical
outcome of a multifactor test where ‘‘no
one [factor] is controlling.’’ Silk, 331
U.S. at 716; see also, e.g., Selker Bros.,
949 F.2d at 1293 (‘‘It is a wellestablished principle that . . . neither
the presence nor the absence of any
particular factor is dispositive.’’).
Moreover, the Supreme Court arrived at
precisely this outcome in two of its
seminal cases applying the economic
reality test.
First, in Silk, the Court evaluated the
employment status of owner-operator
truck drivers who contracted to perform
services exclusively for a motor carrier
company, subject to a ‘‘manual of
instructions . . . purport[ing] to
regulate in detail the conduct of the
truckmen in the performance of their
duties.’’ 331 U.S. at 709–710. Before
reaching its own conclusion, the Court
excerpted an analysis from the appellate
court below noting that, ‘‘[w]hile many
provisions of the manual, if strictly
enforced, would go far to establish an
employer-employee relationship
between the Company and its truckmen
. . . there was evidence to justify the
[district] court’s disregarding of it,’’
including testimony that the manual
was ‘‘impractical and was not adhered
to.’’ Id. at 716 n.11 (quoting Greyvan
Lines v. Harrison, 156 F.2d 412, 415 (7th
Cir. 1946)). Although the Court
acknowledged ‘‘cases . . . where driverowners of trucks or wagons have been
held employees in accident suits at tort’’
(under the common law), the Court said
it ‘‘agree[d] with the decisions below’’
that the owner-operator truck drivers
were independent contractors, as ‘‘the
total situation, including . . . the
control exercised . . . marks these
driver-owners as independent
contractors.’’ Id. at 718–19 (emphasis
added).
The Court in Bartels, even more
clearly illustrated of how the economic
reality test’s emphasis on actual practice
may indicate independent contractor.
There, the Court found that band
members were not employees of a
public dance hall that hired them for
59 See Commun. for Non-Violence v. Reid, 490
U.S. 730, 751 (1989) (‘‘In determining whether a
hired party is an employee under the general
common law of agency, we consider the hiring
party’s right to control the manner and means by
which the product is accomplished.’’) (emphasis
added).
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short-term gigs, despite a contract
provision stipulating that the dance hall
‘‘shall at all times have complete control
of the services which the [band
members] will render under the
specifications of this contract.’’ 332 U.S.
at 128. Again applying the economic
reality test, the Court noted that a
worker’s employment status ‘‘was not to
be determined solely by the idea of
control which an alleged employer may
or could exercise over the details of the
service rendered to his business by the
worker or workers.’’ Id. at 130
(emphasis added). While the Court
made clear that other economic reality
factors (e.g., skill, permanence, profit)
indicated that the band members were
independent contractors, id. at 132, the
Court implicitly found that the control
factor did as well, noting that it was the
band leader (and not the dance hall)
which ‘‘organizes and trains the band
. . . [and] selects [its] members.’’ Id. at
132. In other words, notwithstanding
the dance hall’s contractual authority to
‘‘complete[ly] control’’ the band
members, the actual practice of the
parties made clear that the band
members themselves controlled the
work, as a matter of economic reality.
Contrary to the argument put forth by
several worker advocacy commenters,
the outcome and reasoning of the
Supreme Court’s decisions in Silk and
Bartels show that the common law
control test does not establish an
irreducible baseline of worker coverage
for the broader economic reality test
applied under the FLSA. In other words,
while the economic reality test is broad
in the sense that it covers more workers
as a general matter, it does not
necessarily include every worker
considered an employee under the
common law.
At the same time, the Department
disagrees with the interpretation
suggested by various business
commenters that only worker practices
which are affirmatively coerced by a
potential employer may indicate
employee status. Such a reading
conflicts with the definition of
‘‘employ’’ in section 3(g) of the Act,
which makes clear that the FLSA was
intended to cover employers who
passively ‘‘suffer or permit’’ work from
individuals.60 Accordingly, courts
applying the economic reality test have
not hesitated to consider voluntary
worker practices where such practices
indicate economic dependence. See
Keller, 781 F.3d at 814 (‘‘[A] reasonable
jury could find that the way that [the
60 29 U.S.C. 203(g). See also 83 C.J.S. Suffer
(1953) (‘‘[T]o suffer work requires no affirmative act
by a putative employer.’’).
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defendant] scheduled [the worker’s]
installation appointments made it
impossible for [the worker] to provide
installation services for other
companies.’’). To be sure, the
Department agrees that coercive
behavior by a potential employer (e.g.,
vigilant enforcement of a non-compete
clause, punishing workers for turning
down available work, etc.) constitutes
stronger evidence of employment status
than voluntary worker practices (e.g.,
the mere existence of an exclusive work
arrangement, the fact that a worker
rarely turn down available work, etc.),
but coercive action on the part of the
potential employer is not a prerequisite
for such worker practices to have
import.
The Department believes that
commenters’ concerns that proposed
§ 795.110 will cause workers with
similar contractual freedoms to be
classified differently are overstated.
Consistent with evaluating the ‘‘the
circumstances of the whole activity’’ in
a work arrangement, Rutherford Food,
331 U.S. at 730, courts have often
considered the rights and practices of
similarly situated workers affiliated
with a particular business, arriving at a
single classification outcome for the
group of workers at issue. See, e.g.,
Freund, 185 F. App’x. at 784 (finding
independent contractor status in part
because ‘‘although Freund did not hire
any workers, other of Hi-Tech’s
installers did’’); Express Sixty-Minutes
Delivery, 161 F.3d at 305 (finding
independent contractor status in part
because ‘‘[t]he majority of drivers work
for Express for a short period of time’’);
cf. Mr. W Fireworks, 814 F.2d at 1048–
51 (finding employee status in part
because ‘‘the overwhelming majority of
operators did not engage in independent
advertising’’ and ‘‘the vast majority of
operators made only minor investments
in the business’’). Even where
meaningful factual differences exist
between workers, courts may separate
them into multiple groups for separate
collective analyses instead of making
individualized determinations. See, e.g.,
Off Duty Police, 915 F.3d at 1055–1062
(separate collective analyses of ‘‘sworn
officers’’ and ‘‘nonsworn officers’’ who
provide security and traffic control
services); DialAmerica, 757 F.2d at
1383–88 (separate collective analyses of
home researchers and distributors).
Judicial application of the economic
reality test to groups of workers has
shown that classification outcomes
cannot turn on one factor alone. See,
e.g., Silk, 331 U.S. at 719 (‘‘In one
instance they haul for a single business,
in the other for any customer. The
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distinction, though important, is not
controlling. It is the total situation . . .
that marks these driver-owners as
independent contractors.’’).
In summary, finalized § 795.110’s
emphasis on the actual practices of the
parties involved is not a one-way
ratchet, applying selectively either for or
against a finding of independent
contractor status. Instead, as the
examples in § 795.110 illustrate, the
principle applies to every potentially
relevant factor, and can weigh in favor
of either an employee or independent
contractor relationship. In some cases,
the actual practice of the parties
involved may suggest that the worker or
workers are employees. See, e.g.,
Sureway Cleaners, 656 F.2d at 1371
(‘‘[T]he fact that Sureway’s ‘agents’
possess, in theory, the power to set
prices, determine their own hours, and
advertise to a limited extent on their
own is overshadowed by the fact that in
reality the ‘agents’ work the same hours,
charge the same prices, and rely in the
main on Sureway for advertising.’’);
DialAmerica, 757 F.2d at 1387
(concluding that evidence showing
workers were not doing similar work for
any other businesses ‘‘although they
were free to do so’’ indicates employee
status). In other cases, it may suggest
that the worker or workers at issue are
independent contractors. See Saleem,
854 F.3d at 143 (concluding that blackcar drivers were independent
contractors in part because ‘‘many
Plaintiffs . . . picked up passengers via
street hail, despite TLC’s (apparently
under-enforced) prohibition of this
practice’’); see also Silk, 331 U.S. at
718–19; Bartels, 332 U.S. at 129. Section
795.110’s focus on actual practice is a
neutral interpretive principle, consistent
with the way courts and the Department
have long applied the FLSA’s economic
reality test. Accordingly, and contrary to
the concerns expressed by some
commenters, it should not disrupt
specific industries or result in
substantial worker reclassifications in
either direction (i.e., from employee to
independent contractor status, or vice
versa).
G. Other Comments
Many substantive comments were not
directed towards a specific provision of
the proposed rule but rather the rule as
a whole. These comments addressed the
following topics: (1) Whether the
proposed rule would create confusion or
clarity for the regulated community; (2)
whether the proposed rule would
exacerbate or ameliorate
misclassification of employees; (3)
whether the rule is consistent with the
FLSA’s purpose; (4) whether
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Congressional inaction prohibits this
rulemaking; and (5) whether the
Department may depart from its prior
practice.
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1. Whether the Rulemaking Will Create
Confusion or Clarity
Commenters from the business and
freelance community generally
expressed the view that the proposed
rule would improve clarity regarding
which workers are independent
contractors versus employees under the
FLSA. For example, the U.S. Chamber of
Commerce stated that ‘‘[t]he Proposed
Rule would provide long-awaited and
much needed structure and clarity to
the evaluation of worker relationships
under the Act.’’ SHRM agreed that
‘‘[t]he Proposed Rule is necessary to
provide certainty and consistency to
businesses and workers.’’ See also CWI;
WPI; ATA; NRF; National Restaurant
Association. Freelancers and groups that
represent them echoed this message,
with the CPIE, for instance, stating that
‘‘[w]e believe the proposed guidance
would provide greater clarity and
predictability in the application of the
‘economic realities’ test to independent
entrepreneurs and their clients.’’ See
also Fight for Freelancers. Individual
commenters who identified themselves
as freelancers or small business owners
overwhelmingly agreed that the rule
would improve legal clarity. For
example, one individual commenter
who believed that ‘‘independent
contracting . . . kept [her] family afloat
when [she] unexpectedly became a
single mom’’ stated that ‘‘[t]his
proposed rule is simple to understand
and provides necessary clarity for both
employers and individuals like myself
that want to engage in freelancing.’’
Another individual who identified
himself as a small business owner
believed that ‘‘[t]he regulations
proposed seem to provide clarity for
determining an individual’s status as an
employee or independent contractor
under the Fair Labor Standards Act.’’
Some government and union
commenters took the opposite view. The
State AGs, for instance, asserted that
‘‘this rule will create confusion, not
clarity’’ in part because they believe it
‘‘departs from the statutory text and
Supreme Court precedent and is
contrary to established application of
the economic reality test.’’ FTC
Commissioner Slaughter expressed
concern that the proposed rule would
‘‘create legal confusion around the labor
exemption to the antitrust laws.’’ The
AFL–CIO argued that ‘‘the proposal is
likely to increase rather than decrease
confusion because it does not clearly
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define ‘an integrated unit of
production.’ ’’
The Department continues to believe
that the rule will improve clarity
because it clarifies the meaning of
economic dependence, which
determines FLSA employment, and
aligns the economic reality test to more
accurately analyze that concept by,
among other things, highlighting the
two core factors that are most probative
to the inquiry. The rule does not depart
from the statutory text, which courts
have interpreted to define FLSA
employment based on the concept of
economic dependence on which this
rule focuses. Nor does the rule depart
from any Supreme Court precedent
because it continues to consider the
circumstances of the activity as a whole
to analyze whether workers, as a matter
of economic reality, depend on another
business for work, or are in business for
themselves. The Department further
disagrees with the State AGs that the
rule departs from the ‘‘established
application of the economic reality
test.’’ The final rule takes into account
facts and factors that have historically
been part of the economic reality test,
and decades of appellate decisions
indicating that the two core factors
frequently align with the ultimate
determination of economic dependence
or lack thereof. See 85 FR 60619–21. As
one comment stated, the rulemaking
‘‘synthesizes previous understandings of
the independent contractor rule,’’ as
opposed to departing from them. See
Farren and Mitchell.
The Department does not believe this
final rule will cause confusion regarding
the labor exemption to antitrust laws
because, as explained by FTC
Commissioner Slaughter, that
exemption is governed ‘‘[u]nder the
Clayton Act and the Norris-La Guardia
Act.’’ In contrast, this rule’s application
is limited to the FLSA, and therefore,
would not affect the labor exemption to
antitrust laws established by other
statutes. Finally, for reasons explained
in the NPRM and this preamble, the
Department believes this rule’s
articulation of the ‘‘integrated unit’’ is
clearer than the prior ‘‘integral part’’
articulation. For added clarity, the
Department added a pair of examples in
§ 795.115 to further illustrate
application of the ‘‘integrated unit’’
factor.
For these reasons, the Department
believes the final rule will result in
greater clarity.
2. Whether the Rulemaking Exacerbates
or Ameliorates Misclassification
Many commenters expressed concern
that the proposed rule would exacerbate
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the misclassification of employees as
independent contractors. See, e.g., Equal
Justice Center; Employee Rights Center;
NELP; State AGs; TRLA. According to
these commenters, the proposed rule
would make it easier for an
unscrupulous employer to classify its
employees as independent contractors,
and they cite statistics that purport to
show high rates of misclassification in
support of that contention. Several other
commenters took the opposite position
and asserted, for example, that
‘‘[c]larifying the application of the test
for independent contractor status will
promote compliance with labor
standards under the FLSA and, in turn,
reduce worker misclassification.’’
Opportunity Solutions Project (OSP);
see also, e.g., TCA (‘‘[t]he increased
clarity provided by the [proposed rule]
would likely lead to reduced
misclassification.’’); IAW (‘‘This rule
will clear up misclassifications’’);
Financial Services Institute (‘‘we agree
that it will reduce worker
misclassification and litigation’’). These
commenters also presented reports that
dispute the widespread occurrence of
misclassification. See, e.g. CWI; U.S.
Chamber of Commerce; WPI.
FLSA employee versus independent
contractor status is determined in terms
of economic dependence.
Misclassification occurs when an
individual who is economically
dependent on a business is classified by
that business as an independent
contractor and treated as such. This can
occur inadvertently because the
business misunderstands the concept of
economic dependence or incorrectly
analyzes factors to assess the concept. It
can also occur intentionally. This final
rule clearly defines economic
dependence and explains how to assess
facts and factors to evaluate whether
that dependence exists. It discards
misleading and confusing
interpretations of that concept
developed over the years and
emphasizes the essential aspects. A
clearer test means more businesses will
better understand their obligations
under the FLSA and thereby
inadvertently misclassify fewer workers.
As one commenter who identified
himself as a small business owner
explained: ‘‘We want to comply [with
the FLSA] but we need guidance that
allows us to know how to comply.’’ A
clearer test also means more workers
will understand their rights under the
FLSA and thereby will be better
positioned to combat intentional
misclassification through, for example,
private litigation or complaints to the
Department. Unscrupulous employers
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may also be deterred from intentional
misclassification in the first place if
workers better understand their legal
rights. For these reasons, the
Department believes the final rule is
likely to reduce both inadvertent and
intentional FLSA misclassification.
While several commenters asserted
that the proposed rule will facilitate
misclassification, the Department does
not agree. The Department’s final rule
makes clear that a business may classify
a worker as an independent contractor
with greater confidence if the worker
has control over key aspects of the work
and a meaningful opportunity for profit
or loss based on initiative or investment.
Except in unusual cases, a worker who
enjoys substantial control over the work
and has opportunity for profit in
abundant measures is, as a matter of
economic reality, in business for him- or
herself, and thus properly classified as
an independent contractor. The rule
thus makes it easier for a business and
its workers to structure their work
arrangements to create bona fide
independent contractor relationships.
But that effect of the final rule will help
avoid misclassification, not encourage
it.
As discussed in greater detail in the
RIA at Section VI(D)(6), the Department
has concerns regarding the reliability of
statistics cited by commenters regarding
the prevalence of misclassification.
Even assuming commenters’ statistics
are accurate, however, they would
merely estimate the current rate of
misclassification rather than how that
rate would change as a result of this
rule. Insofar as the final rule will reduce
misclassification, these statistics make
this rulemaking even more urgent.
For the above reasons, the Department
believes this rule will ameliorate rather
than exacerbate misclassification of
employees under the FLSA.
3. Whether the Rulemaking Is
Consistent With the FLSA’s Remedial
Purpose
A number of commenters asserted
that this rule ‘‘conflicts with the FLSA’s
remedial purposes of protecting
workers.’’ State AGs; see also, e.g.,
Pacific Northwest Council of Carpenters
(‘‘the Proposed Rule . . . is contrary to
the statutory definitions and remedial
purpose of the FLSA’’). NELP, for
instance, stated that ‘‘DOL’s proposed
test would leave behind workers in high
growth sectors with high rates of wage
theft, contrary to the purposes of the
FLSA.’’ And NELA indicated that,
because ‘‘the FLSA is a remedial
statute’’ its coverage should be
construed liberally to adopt a standard
for employment that is even broader
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than economic dependence.61
Commenters that supported the
proposed rule pointed that the FLSA is
not intended to cover all workers and
that ‘‘Congress intended to cut off [the
FLSA’s] coverage at a certain point to
preserve the freedom of workers to
operate as independent contractors.’’
Scalia School; see also WPI (‘‘Nothing in
the text or legislative history of any
Federal employment law indicates that
Congress intended to supplant or
displace independent work and require
instead for all workers to be
employees.’’).
The Supreme Court has cautioned
against the ‘‘flawed premise that the
FLSA ‘pursues’ its remedial purpose ‘at
all costs’ ’’ when interpreting the Act.
Encino, 138 S. Ct. at 1142. The Encino
II Court rejected the principle that
FLSA’s remedial purpose required
exemptions to be narrowly construed,
id, and courts of appeal have followed
that logic to reject the corollary
principle, articulated above by NELA,
that the Act’s remedial purpose requires
its coverage to be construed broadly. See
Sec’y United States Dep’t of Labor v.
Bristol Excavating, Inc., 935 F.3d 122,
135 (3d Cir. 2019) (rejecting broad
reading of the FLSA based its remedial
purpose); Diaz v. Longcore, 751 F.
App’x 755, 758 (6th Cir. 2018) (same).
Rather, ‘‘ ‘a fair reading’ of the FLSA,
neither narrow nor broad, is what is
called for.’’ Bristol, 935 F.3d at 135
(quoting Encino, 138 S. Ct. at 1142);
Diaz, 751 F. App’x at 758 (‘‘We must
instead give the FLSA a ‘fair’
interpretation.’’).
‘‘The principal congressional purpose
in enacting the Fair Labor Standards Act
of 1938 was to protect all covered
workers from substandard wages and
oppressive working hours.’’ Barrentine
v. Arkansas-Best Freight Sys., Inc., 450
U.S. 728, 739 (1981) (emphasis added).
The Supreme Court, however, has long
recognized held that the FLSA ‘‘was
obviously not intended to stamp all
persons as employees.’’ Portland
Terminal Co., 330 U.S. at 152. As the
State AGs stated, the ‘‘the FLSA must be
interpreted with its ‘remedial and
humanitarian purpose . . . purpose’ in
mind to protect ‘those who sacrifices a
full measure of their freedom and
talents to the use and profit of others.’ ’’
State AGs (quoting Tenn. Coal, Iron. R.
Co. v. Muscoda Local No. 123, 321 U.S.
590, 598 (1944)). Workers who are
61 NELA specifically urged the Department to
adopt the ‘‘ABC’’ test to determine whether a
worker is an independent contractor or an
employee under the FLSA. The Regulatory
Alternative discussion at Section VI(G) provide
further explanation why the Department is not
adopting that test.
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economically dependent on an
employer for work have sacrificed
‘‘freedom and talents to the use of
profits of others,’’ and therefore are
covered by the Act as employees. But
independent contractors use their
‘‘freedom and talents’’ to operate their
own businesses, and thus fall outside of
the FLSA’s coverage. See Saleem, 854
F.3d 131, 139–40 (2d Cir. 2017) (noting
that independent contractors are
separate from employees in the context
of the FLSA); Karlson, 860 F.3d 1089,
1092 (8th Cir. 2017) (‘‘FLSA wage and
hour requirements do not apply to true
independent contractors.’’); Scantland,
721 F.3d at 1311 (‘‘[The Act’s] ‘broad’
definitions do not, however, bring
‘independent contractors’ within the
FLSA’s ambit.’’); Hopkins, 545 F.3d at
342 (observing that the ‘‘FLSA applies
to employees but not to independent
contractors’’).
The Department believes the line
between economically dependent
workers who are covered by the FLSA
and independent contractors who are
not comports with the Act’s purpose to
‘‘protect all covered workers from
substandard wages and oppressive
working hours.’’ Barrentine, 450 U.S. at
739. Independent contractors who are in
business for themselves do not need
protection against ‘‘oppressive working
hours’’ because they are not
economically dependent on any
employer who could oppress them. Nor
do they need protection from
‘‘substandard wages’’ because they are
not economically dependent on an
employer that sets wages. Forcing
workers who are in business of
themselves into the FLSA’s coverage
would not protect them, and would
instead unduly restrict their ability to
operate their own businesses. Indeed,
numerous individuals who identified as
freelancers or independent contractors
commented that being classified as an
employee would undermine their ability
to operate their own business. For
example, one freelance translator
lamented that ‘‘many of my clients
became unwilling to work with me’’
when a state law required her to be
classified as clients’ employee. Another
commenter identified himself ‘‘[a]s a
self employed professional [who] do[es]
NOT want to be forced into
employment.’’ As a final illustrative
example, another commenter stated that
‘‘I have no desire to be an employee
. . . . If I was required to be an
employee, I would no longer be able to
make money for my family from my
home on my own schedule.’’
The Supreme Court has explained
that the FLSA’s ‘‘exemptions are as
much a part of the FLSA’s purpose as
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the [Act’s] requirement[s].’’ Encino, 138
S. Ct. at 1134. By the same logic,
respecting the independence of workers
whom the FLSA does not cover is as
much a part of the Act’s purpose as
extending the Act’s coverage to workers
who need its protection. Denying FLSA
coverage to workers who are
economically dependent on an
employer for work would result in
workers loosing needed protection
‘‘from substandard wages and
oppressive working hours.’’ Barrentine,
450 U.S. at 739. But extending the Act’s
coverage to workers who, as a matter of
economic reality, are in business for
themselves would unduly restrict
independent workers who neither need
nor benefit from the Act’s provisions.
This rule sharpens the distinction
between these two categories of worker
and thereby furthers the Act’s purpose
to protect employee who need
protection without burdening
independent contractors who do not.
4. Whether Congressional Inaction
Prohibits This Rulemaking
The American Federation of State,
County, and Municipal Employees,
AFL–CIO (AFSCME) asserted that,
‘‘[b]ecause Congress has legislatively
ratified the existing six-factor Economic
Reality test, the Secretary and
Administrator are powerless to alter the
standard. This also means the Proposed
Rule would fail the first step of the
Chevron deference analysis and would
be entitled to no deference by the
courts.’’ According to AFSCME, ‘‘when
Congress re-enacts a statute without
change, it is presumed to be aware of
administrative and judicial
interpretation of that statute and to have
adopted those interpretations.’’ Based
on this principle, AFSCME reasoned
that, because Congress did not revise the
definition of ‘‘employ’’ when it
amended the FLSA in 1966, it must
have adopted the ‘‘integrated unit of
production’’ factor articulated in
Rutherford Food, 331. U.S. 730.
Additionally, AFSCME asserted that
Congress’s 1983 decision to adopt the
FLSA’s definition of ‘‘employ’’ without
revision in MSPA indicates that
Congress implicitly adopted the ‘‘sixfactor test [that] was well embedded as
the interpretation of the FLSA’s
‘employ.’ ’’
AFSCME’s ratification argument is
based entirely on the fact that Congress
has not amended the FLSA’s definition
of ‘‘employ.’’ The Supreme Court,
however, has ‘‘criticized . . . reliance
on congressional inaction’’ as a tool of
statutory interpretation, cautioning that,
‘‘[a]s a general matter . . . these
arguments deserve little weight in the
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interpretive process.’’ Central Bank of
Denver, N.A. v. First Interstate Bank of
Denver, N. A., 511 U.S. 164, 187 (1994).
‘‘And when . . . Congress has not
comprehensively revised a statutory
scheme but has made only isolated
amendments, [the Court has] spoken
more bluntly: ‘It is impossible to assert
with any degree of assurance that
congressional failure to act represents
affirmative congressional approval of
the Court’s statutory interpretation.’ ’’
Alexander v. Sandoval, 532 U.S. 275,
292, (2001) (quoting Patterson v.
McLean Credit Union, 491 U.S. 164, 175
n.1 (1989)). Congress has not
‘‘comprehensively revised’’ the Act’s
statutory scheme in a manner that
would indicate Congressional approval
of a judicially created six-factor test as
the standard for FLSA employment.
Even if some insight could be gleaned
from Congressional inaction, that
insight would not support ratifying a
specific and definitive six-factor test
because there has never been a uniform
test for Congress to ratify. The Supreme
Court has never articulated a six-factor
test, and courts of appeals articulate the
test differently. As discussed earlier, the
Second Circuit combines two of the
factors. The Fifth Circuit omits one
factor, while the remaining circuits use
a sixth, ‘‘integral part’’ factor that
departs from the Supreme Court’s
consideration of ‘‘integrated unit of
production.’’ Some circuits analyze a
‘‘skill and initiative’’ factor, while
others consider just ‘‘skill required.’’
Some circuits analyze the investment
factor by comparing the dollar value of
the worker’s investment against that of
the hiring entity, while others analyze
whether the worker’s investment creates
opportunities for profit or loss. Simply
put, there is no single test that Congress
could have impliedly ratified, nor did
AFSCME suggest one.
For these reasons, Congress’s inaction
does not demonstrate that it ratified a
specific six-factor economic reality test.
5. Whether the Rulemaking Improperly
Departs From Prior Practice
Several commenters, including NELA,
contended that the proposed rule would
be an improper departure from the
Department’s prior practice. The rule is
consistent with the Department’s prior
position that the ultimate inquiry for
determining employee versus
independent contractor status under the
FLSA is whether an individual is, as a
matter of economic reality,
economically dependent on another for
work or is instead in business for himor herself. The rule is further consistent
with the Department’s longstanding
position that all economic reality factors
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should be analyzed when answering
that ultimate inquiry.
The Department acknowledges that
the rule’s focus on two core factors that
are most probative to that ultimate
inquiry is different from how the
Department articulated the economic
reality test in the past. ‘‘Agencies are
free to change their existing policies as
long as they provide a reasoned
explanation for the change.’’ Encino
Motorcars, LLC v. Navarro, 136 S. Ct.
2117, 2125 (2016). The Department has
explained its reasoning for focusing the
economic reality test on two core factors
throughout the NPRM and this
preamble. The Department further
acknowledges that the rule lists
economic reality factors in § 795.105(d)
that correspond with how the
Department has articulated those factors
in the past, with a few modifications.
The Department explained its reasons
for these modifications in the NPRM
and in this preamble. This rule does not
improperly depart from the
Department’s prior positions.
H. Examples
As discussed above, many
commenters requested that the
regulatory text contain examples of how
the economic reality test would apply in
the context of their specific industries or
practices. The Department, however,
prefers to adopt generally applicable
principles as opposed to attempting to
provide guidance for every potential
scenario. The later approach would
require the regulation be drafted as an
exhaustive treatise that is neither
accessible nor helpful for most members
of the regulated community. It would
also invariably omit many important
types of circumstances and be more
difficult to adapt to future industries
and practices that neither the
Department nor commenters could have
conceived.
While the Department cannot provide
examples for every conceivable
scenario, it is adding § 795.115 to
provide six illustrative examples that
involve a variety of industries and
specific facts. Due to the complexities of
balancing multiple factors that
encompass countless facts that are part
of the totality of the circumstances, the
Department does not believe it would be
helpful to provide examples that make
conclusions regarding workers’ ultimate
classifications. Rather, each illustrative
example focuses on the classification
favored by a specific economic reality
factor within the context of the factspecific scenario. The first example
concerns the control factor in the
context of the long-haul transportation
industry. The second example concerns
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the opportunity factor in the context of
the gig economy. The third example
concerns the opportunity factor in the
context of the construction industry and
clarifies the concept of economic
dependence. The fourth example
concerns the permanence factor within
the context of a seasonal hospitality
industry. The fifth example concerns
the reframed ‘‘integrated unit’’ factor
within the context of the journalism
industry. The sixth example also
concerns the new ‘‘integrated unit’’
factor within the context of the
journalism industry and is designed to
work with the fifth example to elucidate
the distinction between when this factor
favors classification as an employee
versus independent contractor.
I. Severability
The Department proposed to include
a severability provision in part 795 so
that, if one or more of the provisions of
part 795 is held invalid or stayed
pending further agency action, the
remaining provisions would remain
effective and operative. The Department
did not receive any comments on this
provision, and finalizes it as proposed.
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J. Amendments to Existing Regulatory
Provisions at §§ 780.330(b) and
788.16(a)
Finally, in addition to the proposed
addition of part 795, the Department
proposed to amend existing regulatory
provisions addressing independent
contractor status under the FLSA in
narrower contexts at 29 CFR 780.330(b)
(tenants and sharecroppers) and 29 CFR
788.16(a) (certain forestry and logging
workers). Specifically, the Department
proposed to replace descriptions of the
six economic reality factors WHD has
historically used to evaluate
independent contractor status under the
FLSA with a cross-reference to the
guidance provided in new part 795.
While some commenters invoked the
existing provisions at §§ 780.330(b) and
788.16(a) to justify opposition to
proposed part 795, the Department did
not receive any commenter feedback
regarding the proposed amendment of
these provisions. Accordingly, the
Department finalizes amendments to
these provisions as proposed.
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA), 44 U.S.C. 3501 et seq., and its
attendant regulations, 5 CFR part 1320,
require the Department to consider the
agency’s need for its information
collections, their practical utility, the
impact of paperwork and other
information collection burdens imposed
on the public, and how to minimize
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those burdens. In the NPRM, the
Department invited public comment on
its determination that the proposal did
not contain a collection of information
subject to OMB approval under the
PRA. A few commenters, while not
referencing the PRA directly, discussed
records in their public comments.
However, this was merely to note
agreement that section 11 of the FLSA
does not require the keeping of records
regarding workers who are independent
contractors. This final rule does not
contain a collection of information
subject to OMB approval under the
PRA.
VI. Executive Order 12866, Regulatory
Planning and Review; and Executive
Order 13563, Improved Regulation and
Regulatory Review
A. Introduction
Under Executive Order 12866, OMB’s
Office of Information and Regulatory
Affairs determines whether a regulatory
action is significant and, therefore,
subject to the requirements of the
Executive Order and OMB review.62
Section 3(f) of Executive Order 12866
defines a ‘‘significant regulatory action’’
as a regulatory action that is likely to
result in a rule that may: (1) Have an
annual effect on the economy of $100
million or more, or adversely affect in
a material way a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
state, local or tribal governments or
communities (also referred to as
economically significant); (2) create
serious inconsistency or otherwise
interfere with an action taken or
planned by another agency; (3)
materially alter the budgetary impact of
entitlements, grants, user fees or loan
programs or the rights and obligations of
recipients thereof; or (4) raise novel
legal or policy issues arising out of legal
mandates, the President’s priorities, or
the principles set forth in the Executive
Order. Because the annual effect of this
rule is estimated to be greater than $100
million, this rule will be economically
significant under section 3(f) of
Executive Order 12866.63
Executive Order 13563 directs
agencies to, among other things, propose
or adopt a regulation only upon a
reasoned determination that its benefits
justify its costs; that it is tailored to
62 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 $495.8 million per year, accruing to
the same parties that face the familiarization costs.
63 The
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1209
impose the least burden on society,
consistent with obtaining the regulatory
objectives; and that, in choosing among
alternative regulatory approaches, the
agency has selected those approaches
that maximize net benefits. Executive
Order 13563 recognizes that some costs
and benefits are difficult to quantify and
provides that, when appropriate and
permitted by law, agencies may
consider and discuss qualitatively
values that are difficult or impossible to
quantify, including equity, human
dignity, fairness, and distributive
impacts.
B. Overview of Analysis
The Department believes this rule is
likely to improve the welfare of both
workers and businesses on the whole.
With respect to businesses, the
Department believes that the improved
clarity offered by the rule will increase
the efficiency of the labor market,
allowing businesses to be more
productive and decreasing their
litigation burden. With respect to
workers, broadly speaking, this rule is
likely to have four categories of
potential effects.
First, this rulemaking makes it easier
for the millions of individuals who
currently work as independent
contractors and those who hire them to
comply with the law. See Farren and
Mitchell (‘‘The proposed rule will likely
reduce the cost of complying with the
relevant Federal regulations.’’).
Compliance cost savings will be shared
between the independent contractors
and businesses for which they work. Id.
(‘‘labor regulations are generally paid for
by reductions in workers’ total
compensation’’).
Second, as explained above, the legal
clarity from this rule is likely to reduce
occurrences of misclassification by
enabling firms and workers to better
understand their respective obligations
and rights under the FLSA. The
Department agrees with commenters
that misclassification harms workers
and believes this rule will reduce those
harms by facilitating compliance.
Third, legal clarity may encourage
firms to create independent contractor
arrangements for roles that did not
previously exist, which may attract
workers who otherwise would not work
in that field. Such job creation
unambiguously benefits workers and
firms alike. See Dr. Liya Palagashvili
(‘‘[W]e got the impression from our
interviews that the primary concern for
startups in terms of labor regulation or
policy is mostly with regulation of
independent contractors.’’), and Fuller
et al. (‘‘[M]ore than two-thirds of
[women with advanced degrees or high-
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honors BAs] who drop out of the
workforce would not have done so if
they’d had access to more-flexible job
arrangements.’’).64
Fourth, as a result of the improved
clarity of the rule, businesses might
convert existing positions from
employee to independent contractor.
This rule provides the most legal
certainty to employers classifying a
worker as an independent contractor if
the worker substantially controls the
work and has a meaningful opportunity
for profit or loss based on initiative or
investment. As such, a job conversion
attributable to the legal clarity provided
by this rule is likely to satisfy the
control and opportunity criteria.65
Businesses could reclassify existing
employees as independent contractors
by modifying their working relationship
under the criteria of this rule, and
would only be expected to do so upon
determination that the clarity provided
by this rule materially shifts the balance
of tradeoffs. Business could also
reclassify positions because the
increased clarity of the rule confirms
that their workers are actually already
effectively independent contractors
because their workers have substantial
control over the work and have an
opportunity for profit.66 Any benefit to
businesses of modified classifications
would need to outweigh the costs,
including any autonomy they cede to
workers in such arrangements and any
costs associated with implementation or
modifying the classification itself, and
such a relationship would need to be
compatible with their business models.
Further, generally speaking, workers
have a choice of whether to agree to the
new independent contractor
arrangement. The overall effect of job
conversion on workers is ambiguous
and could vary from worker to worker,
as discussed in more detail in section
VI(D)(7) below. Impacts resulting from
litigation avoidance due to increased
clarity are discussed in section VI(F)(2).
The Department did not attempt to
quantify all aspects of these four
64 Joseph B. Fuller, et al., Rethinking the OnDemand Workforce, Harvard Business Review (Oct.
20, 2020).
65 Section 795.105(c) indicates that a worker who
lacks both control and opportunity is most likely an
employee. As such, the Department believes this
rule would discourage employers from converting
such workers from employee to independent
contractor status. Section 795.105(c) would not give
an employer sufficient confidence that it could
change the classification of a worker who has only
control but not opportunity, or vice versa.
66 The Department notes that the final rule does
not, by its operation, change the classification of
any employee. Notwithstanding the assertions of
several commentators, as explained throughout the
analysis, the rule does not narrow the definition of
who is an employee under the FLSA.
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categories of potential impacts. In
particular, the Department believes that
significant uncertainty surrounds any
attempt to quantify the number or
nature of new independent contractor
relationships that could arise as a result
of this rule. Although the Department
assumes that there will be an increase
in the number of independent
contracting relationships, the
Department did not attempt to put a
specific number on this figure and did
not attempt to estimate how new
independent contractors might differ
from existing independent contractors.
The Department is uncertain with
respect to several key questions,
including how many new workers will
be added and what their characteristics
will be, how many existing employee
relationships may be converted to
independent contractor status, and
which industries, type or sizes of
employers would be most impacted.
Absent these data, the Department is not
well positioned to generate a
constructive estimate or model of
impact on the change in independent
contracting relationships due to the
rule. Notwithstanding, the Department
quantified certain other impacts
associated with the final rule, including
those to current independent
contractors and businesses where
sufficient data and theory afforded
greater confidence in the resulting
estimates.
Regarding the employees who may be
negatively impacted by this rule, the
Department has ascertained certain
characteristics that it expects will be
representative across this group. This
rule provides a sharpening of the
economic realities test, which is a
marginal change that may impact firms’
assessment of legal risk, leading to an
increased chance that some employers
will choose to reclassify certain
positions from employee to independent
contractor relationships. Because this
analysis attempts to quantify the
marginal impacts of this rule, if the only
change is increased legal clarity, any
resulting change in classification will
most likely be limited to workers who
already possess characteristics
associated with independent contractor
status, including control and
opportunity for profit or loss.67 Due to
the customary negotiation between
firms and workers, most workers whose
positions are converted will be in a
position to influence the tradeoffs
between employee and independent
contractor status. The one group of
67 For greater discussion on this and other points
in this summary, please see Section XXXX on Job
Conversion.
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workers for whom these assumptions
may not apply is those workers paid the
minimum wage, and whose positions
already resemble characteristics of
independent contractors. Workers
earning the minimum wage may lack
the bargaining power to fully offset the
adverse effects triggered by the job
conversion; however, independent
contractor status often carries
flexibilities that may further offset some
of these effects, albeit non-monetarily.
Further, on one hand, these workers
likely do not have extensive benefits
coverage, but on the other hand, they
may qualify for access to benefits from
other means. There are approximately
370,000 workers over the age of 19 who
earn the minimum wage, which
represents 0.24 percent of the
workforce. It is unclear how many of
these jobs could be converted to
independent contractor status without
material modifications to the position or
substantive negotiation on overall
compensation, but it is not likely to be
many. Further, many of these workers
may have access to health insurance
coverage via a spouse or partner, a
parent, or a government program
(Medicaid, Medicare, Tricare, etc.). For
these reasons, the Department does not
expect there to be many current
employees whose positions are
converted to independent contractor
relationships without meaningful ability
to influence the terms of the new
position in a way that mitigates
deleterious impacts of the resulting
tradeoffs.
The Department estimates there were
10.6 million workers who worked at any
given time as independent contractors
as their primary jobs in the United
States in 2017 (6.9 percent of all
workers), the most recent year of data
available. Including independent
contracting on secondary jobs results in
an estimate of 18.9 million independent
contractors (12.3 percent of all workers).
The Department discusses other studies
estimating the total number of
independent contractors, ranging from
6.1 percent to 14.1 percent of workers
(see Table 2 in VI.C.2). Due to
uncertainties regarding magnitude and
other factors, the Department has not
quantified the potential change to the
aggregate number of independent
contractors that may occur as a result of
this rule. Furthermore, the Department’s
analysis relies on data collected prior to
2020, which reflects the state of the
economy prior to the COVID–19
pandemic. The Department
acknowledges that data on independent
contractors could look different during
the pandemic and following its
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economic effects, but does not yet have
information to determine how the
number of independent contractors
could change nor whether these changes
would be lasting or a near term market
distortion.68
The Department estimates regulatory
familiarization costs to be $370.9
million in the first year. The Department
estimates cost savings due to increased
clarity to be $447.1 million per year,
and cost savings due to reduced
litigation to be $48.7 million per year.
This results in a 10-year annualized net
cost savings of $452.4 million using a 3
percent discount rate and $443.0
million using a 7 percent discount
rate.69 For purposes of Executive Order
13771, the Department calculated the
difference between the total cost savings
and the total costs in $2016, discounted
over a perpetual time horizon using a 7
percent discount rate beginning in 2021
when the rule will take effect. This
results in an annualized net cost savings
over a perpetual time horizon of $315.5
million.70 Other anticipated costs,
benefits, and cost savings are discussed
qualitatively.
TABLE 1—SUMMARY OF RULE IMPACTS
[$2019 Millions]
Annualized values a
Impact
Year 1
Years 2–10
7% Discount
Regulatory Familiarization Costs:
Establishments .........................................................................................
Independent Contractors ..........................................................................
$152.3
218.6
$0.0
0.0
$21.7
31.1
$17.9
25.6
Total ...................................................................................................
Cost Savings from Increased Clarity:
Employers .................................................................................................
Independent Contractors ..........................................................................
370.9
0.0
52.8
43.5
369.0
78.1
369.0
78.1
369.0
78.1
369.0
78.1
Total ...................................................................................................
Cost Savings from Reduced Litigation ............................................................
Total Cost Savings ..........................................................................................
Net Cost Savings (Cost Savings—Costs) .......................................................
447.1
48.7
495.8
125.0
447.1
48.7
495.8
495.8
447.1
48.7
495.8
443.0
447.1
48.7
495.8
452.4
a Annualized
over 10-years.
C. Independent Contractors: Size and
Demographics
The Department extrapolated from
U.S. Census Bureau data to estimate that
there are 15.6 to 22.1 million
individuals who work as independent
contractors as either a primary or
secondary job. This estimated figure
could be higher or lower depending on
different data sources and
methodologies discussed below. The
Department used the median of the
above range, 18.9 million, for its
estimates to avoid overestimation by
accounting for a number of criteria,
which are presented in this section.
1. Current Number of Independent
Contractors
The Department estimated the
number of independent contractors.
There are a variety of estimates of the
number of independent contractors
spanning a wide range depending on
methodologies and how the population
is defined. The Department believes that
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3% Discount
68 Recent studies and news reports suggest that
more individuals are working under freelance or
independent contractor arrangements during the
pandemic. See, e.g., Press Release, New Upword
Study Finds 36% of the U.S. Workforce Freelance
Amid the COVID–19 Pandemic, Sep. 15, 2020,
available at https://www.upwork.com/press/
releases/new-upwork-study-finds-36-of-the-usworkforce-freelance-amid-the-covid-19-pandemic;
Kim Mackrael, In the Covid Economy, Laid-Off
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the Current Population Survey (CPS)
Contingent Worker Supplement (CWS)
offers an appropriate lower bound for
the number of independent contractors;
however, there are potential biases in
these data that will be noted.
Additionally, estimates from other
sources will be presented to
demonstrate the potential range.
The U.S. Census Bureau conducts the
CPS and it is published monthly by the
Bureau of Labor Statistics (BLS). The
sample includes approximately 60,000
households and is nationally
representative. Periodically since 1995,
and most recently in 2017, the CPS has
included a supplement to the May
survey to collect data on contingent and
alternative employment arrangements.
Based on the CWS, there were 10.6
million independent contractors in
2017, amounting to 6.9 percent of
workers.71 The CWS measures those
who say that their independent
contractor job is their primary job and
that they worked at the independent
contractor job in the survey’s reference
week. However, while the Department
refers to the CWS measure of
independent contractors throughout this
analysis, due to the survey’s design it
should be uniformly recognized as
representing a constrained subsection of
the entire independent contractor pool.
Due to its clear methodological
constraints, the CWS measure should be
differentiated from other, more
comprehensive measures.
The BLS’s estimate of independent
contractors includes ‘‘[w]orkers who are
identified as independent contractors,
independent consultants, or freelance
workers, regardless of whether they are
self-employed or wage and salary
workers.’’ BLS asks two questions to
identify independent contractors: 72
• 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
Employees become New Entrepreneurs, Wall Street
Journal, Nov. 18, 2020; Uri Berliner, Jobs in the
Pandemic: More Are Freelance and may stay that
way forever, NPR, Sep. 16, 2020; Jon Younger, A
New Payoneer Report Shows Covid 19 is
Accelerating Freelance Growth, Forbes, Sep. 1.,
2020.
69 Discount rates are directed by OMB. See
Circular A–4, OMB (Sept. 17, 2003).
70 $332.9 million¥$17.4 million = $315.5
million. Per OMB guidelines, Executive Order
13771 data is represented in 2016 dollars, inflationadjusted for when the rule will take effect.
71 Bureau of Labor Statistics, ‘‘Contingent and
Alternative Employment Arrangements—May
2017,’’ USDL–18–0942 (June 7, 2018), https://
www.bls.gov/news.release/pdf/conemp.pdf.
72 The variables used are PES8IC=1 for selfemployed and PES7=1 for other workers.
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independent contractors’’ in the
remainder of the analysis.
• Workers reporting that they are
wage and salary workers are asked:
‘‘Last week, were you working as an
independent contractor, an independent
consultant, or a freelance worker? That
is, someone who obtains customers on
their own to provide a product or
service.’’ (1.6 million independent
contractors.) We refer to these workers
as ‘‘other independent contractors’’ in
the remainder of the analysis.
It is important to note that
independent contractors are identified
in the CWS in the context of the
respondent’s ‘‘main’’ job (i.e., the job
with the most hours).73 Therefore, the
estimate of independent contractors
does not include those who may be
defined as an employee for their
primary job, but may work as an
independent contractor for a secondary
or tertiary job.74 For example, Lim et al.
(2019) estimate that independent
contracting work is the primary source
of income for 48 percent of independent
contractors.75 Applying this estimate to
the 10.6 million independent
contractors estimated from the CWS,
results in 22.1 million independent
contractors (10.6 million ÷ 0.48).
Alternatively, a survey of independent
contractors in Washington found that 68
percent of respondents reported that
independent contract work was their
73 While self-employed independent contractors
are identified by the worker’s main job, other
independent contractors answered yes to the CWS
question about working as an independent
contractor last week. Although the survey question
does not ask explicitly about the respondent’s main
job, it follows questions asked in reference to the
respondent’s main job.
74 Even among independent contractors, failure to
report multiple jobs in response to survey questions
is common. For example, Katz and Krueger (2019)
asked Amazon Mechanical Turk participants the
CPS-style question ‘‘Last week did you have more
than one job or business, including part time,
evening or weekend work?’’ In total, 39 percent of
respondents responded affirmatively. However,
these participants were asked the follow-up
question ‘‘Did you work on any gigs, HITs or other
small paid jobs last week that you did not include
in your response to the previous question?’’ After
this question, which differs from the CPS, 61
percent of those who indicated that they did not
hold multiple jobs on the CPS-style question
acknowledged that they failed to report other work
in the previous week. As Katz and Krueger write,
‘‘If these workers are added to the multiple job
holders, the percent of workers who are multiple
job holders would almost double from 39 percent
to 77 percent.’’ See L. Katz and A. Krueger,
‘‘Understanding Trends in Alternative Work
Arrangements in the United States,’’ RSF: The
Russell Sage Foundation Journal of the Social
Sciences 5(5), p. 132–46 (2019).
75 K. Lim, A. Miller, M. Risch, and E. Wilking,
‘‘Independent Contractors in the U.S.: New Trends
from 15 years of Administrative Tax Data,’’
Department of Treasury, p. 61 (Jul. 2019), https://
www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
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primary source of income.76 Applying
that estimate to the 10.6 million
independent contractors from the CWS
results in an estimated 15.6 million
independent contractors (10.6 million ÷
0.68).
The Coalition for Workforce
Innovation (CWI) submitted a survey
they conducted of 600 self-identified
independent contractors. The survey
found that independent contracting is
the primary source of income for 71
percent of respondents.77 This is
consistent with the prior estimate from
Washington State. Applying this
estimate to the 10.6 million primary
independent contractors estimated from
the CWS, results in 14.9 million
independent contractors (10.6 million ÷
0.71).
The CWS’s large sample size results
in small sampling error. However, the
questionnaire’s design may result in
some non-sampling error. For example,
one potential source of bias is that the
CWS only considers independent
contractors during a single point in
time—the survey week (generally the
week prior to the interview).
These numbers will thus
underestimate the prevalence of
independent contracting over a longer
timeframe, which may better capture the
size of the population.78 For example,
Farrell and Greig (2016) used a
randomized sample of 1 million Chase
customers to estimate prevalence of the
Online Platform Economy.79 They
found that ‘‘[a]lthough 1 percent of
adults earned income from the Online
Platform Economy in a given month,
more than 4 percent participated over
the three-year period.’’ Additionally,
Collins et al. (2019) examined tax data
from 2000 through 2016 and found that
the number of workers who filed a form
1099 grew substantially over that
period, and that fewer than half of these
workers earned more than $2,500 from
76 Washington Department of Commerce,
‘‘Independent Contractor Study,’’ p. 21 (Jul. 2019),
https://deptofcommerce.app.box.com/v/
independent-contractor-study.
77 Coalition for Workforce Innovation. ‘‘National
Survey of 600 Self-Identified Independent
Contractors’’ (January 2020), https://
rilastagemedia.blob.core.windows.net/rila-web/
rila.web/media/media/pdfs/letters%20to%20hill/
hr/cwi-report-final.pdf.
78 In any given week, the total number of
independent contractors would have been roughly
the same, but the identity of the individuals who
do it for less than the full year would likely vary.
Thus, the number of unique individuals who work
at some point in a year as independent contractors
would exceed the number of independent
contractors who work within any one-week period
as independent contractors.
79 D. Farrell and F. Greig, ‘‘Paychecks, Paydays,
and the Online Platform,’’ JPMorgan Chase Institute
(2016), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2911293.
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1099 work in 2016. The prevalence of
lower annual earnings implies that most
workers who received a 1099 did not
work as an independent contractor
every week.80
The CWS also uses proxy responses,
which may underestimate the number of
independent contractors. The RAND
American Life Panel (ALP) survey
conducted a supplement in 2015 to
mimic the CWS questionnaire, but used
self-responses only. The results of the
survey were summarized by Katz and
Krueger (2018).81 This survey found that
independent contractors comprise 7.2
percent of workers.82 Katz and Krueger
identified that the 0.5 percentage point
difference in magnitude between the
CWS and the ALP was due to both
cyclical conditions, and the lack of
proxy responses in the ALP.83
Therefore, the Department believes a
reasonable upper-bound on the
potential bias due to the use of proxy
responses in the CWS is 0.5 percentage
points (7.2 versus 6.7).84 85
Another potential source of bias in the
CWS is that some respondents may not
self-identify as independent contractors,
and others who self-identify may
themselves be improperly classified.
There are reasons to believe that some
workers, who are legally considered
independent contractors, would not
self-identify as such. For example, if the
worker has only one employer/client, or
did not actively pursue the employer/
client, then they may not agree that they
‘‘[obtain] customers on their own to
provide a product or service.’’
Additionally, individuals who do only
80 B. Collins, A. Garin, E. Jackson, D. Koustas, and
M. Payne, ‘‘Is Gig Work Replacing Traditional
Employment? Evidence from Two Decades of Tax
Returns,’’ IRS SOI Joint Statistical Research
Program (2019) (unpublished paper), https://
www.irs.gov/pub/irs-soi/
19rpgigworkreplacingtraditionalemployment.pdf.
81 See Katz and Krueger (2018), supra note 12.
82 Id. at 49. The estimate is 9.6 percent without
correcting for overrepresentation of self-employed
workers or multiple job holders. Id. at 31.
83 Id. at Addendum (‘‘Reconciling the 2017 BLS
Contingent Worker Survey’’).
84 Note that they estimate 6.7 percent of employed
workers are independent contractors using the
CWS, as opposed to 6.9 percent as estimated by the
BLS. This difference is attributable to changes to the
sample to create consistency.
85 In addition to the use of proxy responses, this
difference is also due to cyclical conditions. The
impacts of these two are not disaggregated for
independent contractors, but if we applied the
relative sizes reported for all alternative work
arrangements, we would get 0.36 percentage point
difference due to proxy responses. Additionally, it
should be noted that this may not entirely be a bias.
It stems from differences in independent
contracting reported by proxy respondents and
actual respondents. As Katz and Krueger explain,
this difference may be due to a ‘‘mode’’ bias or
proxy respondents may be less likely to be
independent contractors. Id. at Addendum p. 4.
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informal work may not view themselves
as independent contractors.86 This
population could be substantial.
Abraham and Houseman (2019)
confirmed this in their examination of
the Survey of Household Economics and
Decision-making. They found that 28
percent of respondents reported doing
informal work for money over the past
month.87 Conversely, some workers
who are improperly classified by their
employers as independent contractors
may answer in the affirmative, despite
not truly being independent contractors.
The prevalence of misclassification is
unknown, but it likely occurs across
numerous sectors in the economy.88
Because reliable data on the potential
magnitude of these biases are
unavailable, and so the net direction of
the biases is unknown, the Department
has not attempted to calculate how
these biases may impact the estimated
number of independent contractors.
Because the CWS estimate represents
only the number of workers who
worked as independent contractors on
their primary job during the survey
reference week, the Department applied
the research literature and adjusted this
measure to include workers who are
independent contractors in a secondary
job or who were excluded from the CWS
estimate due to other factors. As noted
above, integrating the estimated
proportions of workers who are
independent contractors on secondary
or otherwise excluded jobs produces
estimates of 15.6 million and 22.1
million. The Department uses the
average of these two estimates, 18.9
million, as the estimated total number of
workers working as independent
contractors in any job at a given time.
Given the prevalence of independent
contractors who work sporadically and
earn minimal income, adjusting the
estimate according to these sources
captures some of this population. It is
likely that this figure is still an
underestimate of the true independent
contractor pool.
2. Range of Estimates in the Literature
To further consider the range of
estimates available, the Department
conducted a literature review, the
findings of which are presented in Table
2. Other studies were also considered
but are excluded from this table because
the study populations were broader than
just independent contractors or limited
to one state.89 The RAND ALP 90 and the
General Social Survey’s (GSS’s) Quality
of Worklife (QWL) 91 supplement are
widely cited alternative estimates.
However, the Department chose to use
sources with significantly larger sample
sizes and more recent data for the
primary estimate.
1213
Jackson et al. (2017) 92 and Lim et al.
(2019) 93 use tax information to estimate
the prevalence of independent
contracting. In general, studies using tax
data tend to show an increase in
prevalence of independent contracting
over time. The use of tax data has some
advantages and disadvantages over
survey data. Advantages include large
sample sizes, the ability to link
information reported on different
records, the reduction in certain biases
such as reporting bias, records of all
activity throughout the calendar year
(the CWS only references one week),
and inclusion of both primary and
secondary independent contractors.
Disadvantages are that independent
contractor status needs to be inferred;
there is likely an underreporting bias
(i.e., some workers do not file taxes);
researchers are generally trying to match
the IRS definition of independent
contractor, which does not mirror the
scope of independent contractors under
the FLSA; and the estimates include
misclassified independent contractors.94
A major disadvantage of using tax data
for this analysis is that the detailed
source data are not publicly available
and thus the analyses cannot be directly
verified or adjusted as necessary (e.g., to
describe characteristics of independent
contractors, etc.).
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TABLE 2—SUMMARY OF ESTIMATES OF INDEPENDENT CONTRACTING
Source
Method
CPS CWS ......
Survey ....
ALP ................
Survey ....
Independent contractor,
freelance worker (main
Independent contractor,
freelance worker (main
86 The Department believes that including data on
informal work is useful when discussing the
magnitude of independent contracting, although not
all informal work is done by independent
contractors. The Survey of Household Economics
and Decision-making asked respondents whether
they engaged in informal work sometime in the
prior month. It categorized informal work into three
broad categories: Personal services, on-line
activities, and off-line sales and other activities,
which is broader than the scope of independent
contractors. These categories include activities like
house sitting, selling goods online through sites like
eBay or craigslist, or selling goods at a garage sale.
The Department acknowledges that the data
discussed in this study might not be a one-to-one
match with independent contracting, but it
nonetheless provides useful data for this purpose.
87 K. Abraham, and S. Houseman. ‘‘Making Ends
Meet: The Role of Informal Work in Supplementing
Americans’ Income.’’ RSF: The Russell Sage
Foundation Journal of the Social Sciences 5(5):
110–31 (2019), https://www.aeaweb.org/conference/
2019/preliminary/paper/QreAaS2h.
88 See, e.g., U.S. Gov’t Accountability Off., GAO–
09–717, Employee Misclassification: Improved
Coordination, Outreach, and Targeting Could Better
Ensure Detection and Prevention 10 (2008)
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Percent of workers
(%)
Definition a
19:58 Jan 06, 2021
Jkt 253001
consultant or
only).
consultant or
only).
Sample size
6.9
50,392 .....................................................
2017
7.2
6,028 .......................................................
2015
(‘‘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.’’).
89 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), https://www.kellyservices.com/
global/siteassets/3-kelly-global-services/
uploadedfiles/3-kelly_global_services/content/
sectionless_pages/kocg1047720freeagent
20whitepaper20210x21020final2.pdf; Robles and
McGee, ‘‘Exploring Online and Offline Informal
Work: Findings from the Enterprising and Informal
Work Activities (EIWA) Survey’’ (2016); Upwork,
‘‘Freelancing in America’’ (2019); Washington
Department of Commerce, supra note 76; Farrell
and Greig, supra note 79; MBO Partners, ‘‘State of
Independence in America’’ (2016); Abraham et al.,
‘‘Measuring the Gig Economy: Current Knowledge
and Open Issues’’ (2018), https://www.nber.org/
papers/w24950; Collins et al. (2019), supra note 80;
Gitis et al., ‘‘The Gig Economy: Research and Policy
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Fmt 4701
Sfmt 4700
Year
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.
90 See Katz and Krueger (2018), supra note 12.
91 See Abraham et al. (2018), supra note 89, Table
4.
92 E. Jackson, A. Looney, and S. Ramnath, ‘‘The
Rise of Alternative Work Arrangements: Evidence
and Implications for Tax Filing and Benefit
Coverage,’’ OTA Working Paper 114 (2017), https://
www.treasury.gov/resource-center/tax-policy/taxanalysis/Documents/WP-114.pdf.
93 Lim et al., supra note 75.
94 In comparison to household survey data, tax
data may reduce certain types of biases (such as
recall bias) while increasing other types (such as
underreporting bias). Because the Department is
unable to quantify this tradeoff, it could not
determine whether, on balance, survey or tax data
are more reliable.
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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations
TABLE 2—SUMMARY OF ESTIMATES OF INDEPENDENT CONTRACTING—Continued
Percent of workers
(%)
Source
Method
Definition a
GSS QWL ......
Survey ....
Jackson et al
Tax data
Lim et al .........
Tax data
Independent contractor, consultant or
freelancer (main only).
Independent
contractor,
household
worker.
Independent contractor ...........................
Sample size
Year
14.1
2,538 .......................................................
2014
b 6.1
∼5.9 million c ...........................................
2014
8.1
1% of 1099–MISC and 5% of 1099–K ...
2016
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.
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3. Demographics of Independent
Contractors
The Department reviewed
demographic information on
independent contractors using the CWS,
which, as stated above, only measures
those who say that their independent
contractor job is their primary job and
that they worked at the independent
contractor job in the survey’s reference
week. According to the CWS, these
primary independent contractors are
most prevalent in the construction and
professional and business services
industries. These two industries employ
44 percent of primary independent
contractors. Independent contractors
tend to be older and predominately
male (65 percent). Millennials have a
significantly lower prevalence of
primary independent contracting than
older generations: 3.6 percent for
Millennials compared to 6.0 percent for
Generation X and 8.8 percent for Baby
Boomers and Matures.95 However,
surveys suggest that this trend is
reversed when secondary independent
contractors, or those who did informal
work as independent contractors, are
included. These divergent data suggest
that younger workers are more likely to
use contractor work sporadically and/or
for supplemental income.96 White
workers are somewhat overrepresented
among primary independent
contractors; they comprise 85 percent of
this population but only 79 percent of
the population of workers. Conversely,
95 The Department used the generational
breakdown used in the MBO Partner’s 2017 report,
‘‘The State of Independence in America.’’
‘‘Millennials’’ were defined as individuals born
1980–1996, ‘‘Generation X’’ were defined as
individuals born 1965–1980, and ‘‘Baby Boomers
and Matures’’ were defined as individuals born
before 1965.
96 Abraham and Houseman (2019), supra note 87,
find that informal work decreases as a worker’s age
increases. Among 18 to 24 years olds, 41.3 percent
did informal work over the past month. The rate fell
to 25.7 percent for 45 to 54 year olds, and 13.4
percent for those 75 years and older. See also
Upwork (2019), supra note 89.
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black workers are somewhat
underrepresented (comprising 9 percent
and 13 percent, respectively).97 The
opposite trends emerge when evaluating
informal work, where racial minorities
participate at a higher rate than white
workers.98 Primary independent
contractors are spread across the
educational spectrum, with no group
especially overrepresented. The same
trend in education attainment holds for
workers who participate in informal
work.99
D. Potential Transfers
Given the current universe of
independent contractors and the
possibility that more individuals may
become independent contractors after
the rule is finalized, the Department
here identifies the possible transfers
among workers and between workers
and businesses, which may occur. These
transfer effects are discussed
qualitatively and include effects relating
to employer provided benefits, tax
liability, earnings, minimum wage and
overtime pay, accurate classification of
workers, and conversions of employee
jobs to independent contractor jobs.
In evaluating potential transfers that
could be occasioned by the rule, the
Department notes at the outset that the
substantive effect of the rule is not
intended to favor independent
contractor or employee classification
relative to the status quo of the
Department’s existing guidance and
precedent from courts. However, the
Department assumes in this RIA that the
increased legal certainty associated with
this final rule could lead to an increase
in the number of independent
contractor arrangements by reducing the
transaction and compliance costs
inherent in structuring such an
97 These numbers are based on the respondents
who state that their race is ‘‘white only’’ or ‘‘black
only’’ as opposed to identifying as multi-racial.
98 Abraham and Houseman (2019), supra note 87.
99 Id.
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arrangement. The Department has not
attempted to estimate the magnitude of
this change, primarily because there are
not objective tools for quantifying the
clarity, simplification, and enhanced
probative value of the Department’s
proposals for sharpening and focusing
the economic reality test.100 Several
commenters assumed the increase in
independent contractors would be 5
percent, although none provided
substantive support to bolster the
assumption. See EPI, Washington
Center. Due to the lack of certainty and
data to support a reliable estimate, the
Department does not attempt to estimate
the increase in independent contractor
relationships that would result due to
this rule. Therefore, potential transfers
are discussed qualitatively with some
numbers presented on a per worker
basis. Potential transfers may result
from differences in benefits, tax
liabilities, and earnings between
employees and independent contractors.
Although employment benefits could
decrease, and tax liabilities could
increase, the Department believes the
net impact on total compensation
should be small in either direction.
Furthermore, to attract qualified
workers, companies must offer
competitive compensation. Therefore,
100 Another uncertainty limiting the Department’s
ability to quantify the possible increase in
independent contracting is the nature and effect of
state wage and hour laws. Some states, such as
California, have laws that place more stringent
limitations on who may qualify as independent
contractors than the FLSA. See Cal. Labor Code
2775 (establishing a demanding ‘‘ABC’’ test
applicable to most workers when determining
independent contractor status under California
law). Because the FLSA does not preclude states
and localities from establishing broader wage and
hour protections than those that exist under the
FLSA, see 29 U.S.C. 218(a), workers in some states
may be unaffected by this final rule. However,
because the Department is not well positioned to
interpret the precise scope of each state’s wage and
hour laws, the Department is unable to definitively
determine the degree to which workers in particular
states would or would not be affected by this final
rule.
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for workers in a competitive labor
market, any reduction in benefits and
increase in taxes are expected to be
offset by higher base earnings. This
concept is discussed further below in
the Earnings section.
Assuming that independent
contractor arrangements increase
following this final rule, it is unclear the
extent to which this would occur as a
result of current employees being
subsequently classified as independent
contractors or as a result of the hiring of
new workers as independent
contractors. This will have implications
for transfers. If current employees
change classifications, then there may
be transfers. Employers could change
the classification of current employees
only if those workers could already have
been classified as independent
contractors or if the working conditions
are modified such that the relationship
becomes a true independent contractor
relationship, assuming doing so is
consistent with any applicable
employment contracts, collective
bargaining agreement, or other
applicable laws.101 Lim et al. (2019)
found in the status quo that there was
‘‘little evidence that firms are
increasingly reclassifying existing
employee relationships as [independent
contractor] relationships,’’ however,
they found that ‘‘firms are hiring more
new workers as [independent
contractors] rather than as
employees.’’ 102 The Department does
not anticipate this phenomenon will
cease occurring in the presence of the
final rule. As discussed below, the
limited number of businesses with
employees whose roles would meet the
requirements to be independent
contractors likely face incentives to
maintain the status quo for those
workers, but there will likely be some
degree of innovation in the labor market
in response to the rule that compounds
the current trend towards greater
numbers of independent contractors.
For more discussion on how employees
may be affected by transfers, see the Job
Conversion discussion in Section
VI(D)(7).
By decreasing uncertainty and thus
potentially opening new opportunities
for firms, companies may hire
independent contractors who they
otherwise would not have hired. In this
case, there may be a decrease in
unemployment, an increase in the size
of the labor force, or both. In a study of
respondents from both Europe and the
101 Under the final rule, a worker may be
classified only if the job meets the requirements of
section 795.105.
102 Lim et al., supra note 75 at 3.
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U.S., McKinsey Global Institute found
that 15 percent of those not working are
interested in becoming an independent
contractor as their primary job.103
Attracting these individuals to join the
labor force would be classified as a
societal benefit, rather than a transfer.
These impacts are evaluated more fully
below as part of the discussion on Cost
Savings and Benefits.
The Department requested comments
on its assumption that use of
independent contractors will increase if
the proposed rule is finalized. Most
commenters took the view that,
consistent with the Department’s
assumption, the final rule will lead to
an increase in the number and
proportion of workers who are
independent contractors. Some
commenters, such as the Signatory Wall
and Ceiling Contractors Alliance
(SWACCA) and other construction
workers’ unions commented that the
rule could lead to increases in the
percentage of independent contractors
in the workforce by narrowing the
standard for FLSA employment. But as
explained above in Section IV(E)(2) and
later in the discussion of regulatory
alternatives in Section VI(G)(2), the final
rule does not narrow or expand the
standard for FLSA employment. Rather,
the Department agrees with many
commenters representing businesses
and freelance workers that the final rule
serves only to make that standard
clearer, enabling businesses and
individuals to structure their work
relationships to comply with the law.
See Section III (discussing commenter
feedback). While this could lead to a
greater incidence of independent
contracting—as businesses and workers
will be able to more freely adopt
independent worker arrangements
without fear of FLSA liability—the final
rule does not narrow the standard for
FLSA employment.104
Some commenters disagreed with the
Department’s decision not to
specifically quantify a change in the
number of independent contractors.
Furthermore, most of the commenters
103 McKinsey
Global Institute, supra note 89 at
71.
104 The fact that the final rule is not an expansion
or narrowing of the FLSA’s scope of employment
is not to say that courts have never in the past
misapplied the economic reality test in particular
cases. For example, some courts have expressly
disagreed on the meaning of the ‘‘integral/
integrated’’ factor in the test. The existence of
seemingly contradictory and inconsistent case law
is one of the reasons why the Department sees a
need to issue this final rule. However, as discussed
extensively above, the Department believes that the
statement of the economic reality test in the final
rule is consistent with precedent and the FLSA as
a whole, even if it is in tension with particular
cases.
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1215
who included assumptions of growing
numbers of independent contractors
also assumed that those workers were
drawn from the existing pool of
employees, not from the otherwise
unemployed or those outside the labor
market.105 The Washington Center for
Equitable Growth (Washington Center),
for instance, simply assumed a 5
percent increase in the number of
independent contractors (corresponding
to an equivalent decline in
employees); 106 however, it neither
provided explanation why that
percentage was reasonable nor justified
its assumption that the percentage
would entirely represent a shift of
existing employment relationships to
independent contractor relationships.
Many commenters asserting and
estimating a sizable shift from
employment to independent contracting
relationships seem to have based their
estimates on the false impression that
the final rule would narrow the FLSA
scope of employment. As explained
above, this is not the case—the final rule
does not shift the definition of who is
an employee under the FLSA. Any shift,
the Department believes, would have to
result from increased certainty, reduced
overhead, and reduced
misclassification. Conversely, the
Americans for Prosperity Foundation
(AFPF) agreed with the Department’s
decision to not quantify potential
changes in the aggregate number of
independent contractors and supported
the Department’s analysis.
The Department continues to believe
that the necessary data and information
are not available to quantify either any
shift in independent contracting away
from employee relationships or the
number of new independent contractors
who may enter the workforce in
response to the rule and the impact of
such a shift on workers and businesses.
As explained in the NPRM, any attempt
to produce a useful estimate for the
impact of an increase in independent
contractors requires ascertaining a
105 Some commenters and reports (See e.g.,
Palagashvili; Fuller et al.,) cited data that indicate
increased regulatory clarity would likely result in
workers entering the workforce due to the greater
flexibility and control provided by independent
contracting relationships. This would expand the
workforce rather than transfer workers between
classifications.
106 EPI, Washington Center, and other
commenters who use this 5 percent estimate
assume the entire increase to independent
contractors consists of workers whose overall
compensation will decline and whose jobs
otherwise remain the same. See EPI (characterizing
converted workers as having ‘‘the same job for
substantially less compensation’’). The Department
finds this highly unlikely. For more discussion on
this topic, see the Job Conversion topic in Section
II.D.6.
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number of additional variables,
including how this reduction in
administrative overhead and
misclassification would impact
independent contracting. See 85 FR
60626. The approach taken by some
commenters of simply choosing a
number without support and applying it
across the entire economy, given the
extremely large number of employment
relationships in the United States, the
differences in how a worker may value
certain ‘‘benefits,’’ 107 and the unique
relationships between different types of
independent contractors and different
businesses, could create a misleading
and uncertain estimate of the impact of
the rule without lending any additional
clarity because of the lack of the basis
for such a figure and likely differences
between the current independent
contractor population and the
population likely to arise as a result of
this rule. Since commenters, including
those in support and those in
opposition, did not proffer sufficient
data upon which to build more accurate
assumptions, the Department has not
attempted to quantify this impact.
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1. Impact of COVID–19 on the Rule
The Department also requested data
and comment on the possible impacts
resulting from the COVID–19 pandemic
as it relates to the composition of the
labor market, the share and scope of
independent contractors in the
workforce, and any associated wage
effects. Several commenters noted the
importance of independent contracting
in weathering the pandemic. For
example, the Center for Growth and
Opportunity at Utah State University
(CGO) wrote that the benefits of
independent contracting ‘‘are likely to
grow if the United States labor market
adapts to the recession spurred by the
COVID–19 pandemic similarly as it did
to the financial crisis of 2008.’’ They
note that during an economic downturn,
workers can turn to alternative work
arrangements such as independent
contracting to supplement their income.
The view is supported by a recent
Harvard Business Review article that
describes how firms have increasingly
relied on freelancing and platforms that
allow access to the growing supply of
on-demand workers to identify
innovative solutions more flexibly and
quickly than relying solely on their
107 If, for example, a state mandates that
employees receive paid parental leave, but the
worker does not have and intends not to have
children, this ‘‘benefit’’ is of no value to that
worker. Estimating how an individual worker
values a particular ‘‘benefit’’ or even a tax liability
would require a worker-by-worker analysis for
which the Department lacks necessary data.
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fulltime workforce, noting that ‘‘Early
signs suggest that Covid–19 will also
speed up this shift.’’ 108 It is also
supported by a range of recent news
reports indicating that freelance
opportunities provide an important path
for individuals to return to the
workforce who lost their jobs due to the
pandemic.109 Women Employed
claimed that this rule will degrade jobs,
and that doing so in the midst of a
pandemic would be harmful, basing this
claim on assumptions that this rule
would ‘‘undermine the FLSA’’ and
increase misclassification of workers.
But as explained above, this rule does
not undermine the FLSA; it sharpens
the focus of the economic reality test
and clarifies the meaning of economic
dependence that courts, the Department,
and most commenters agree is the
standard for employment under the Act.
This clearer standard is likely to reduce
rather than increase occurrences of
misclassification.
2. Employer Provided Benefits
In the context of transfers, the
Department attempted to evaluate how
an increase in independent contracting
relationships could affect employer
provided benefits. Although this rule
only addresses workers’ independent
contractor status under the FLSA, the
Department assumes in this analysis
that employers are likely to keep the
status of most workers the same across
all benefits and requirements.110 To the
extent that employers currently provide
employees benefits such as health
insurance, retirement contributions, and
paid time off, these would likely
decrease with an increase in the use of
108 Fuller, et al., supra note 64 (‘‘Many freelance
platforms offer access to workers from around the
world with a wide variety of skills, and payment
is often per completed task. Covid-19 is accelerating
the move toward these platforms. . ..’’); see also
Press Release, New Upwork Study Finds 36% of the
U.S. Workforce Freelance Amid the COVID–19
Pandemic, Sep. 15, 2020, available at https://
www.upwork.com/press/releases/new-upworkstudy-finds-36-of-the-us-workforce-freelance-amidthe-covid-19-pandemic.
109 See, e.g., Kim Mackrael, In the Covid
Economy, Laid-Off Employees become New
Entrepreneurs, Wall Street Journal, Nov. 18, 2020;
Uri Berliner, Jobs in the Pandemic: More Are
Freelance and may stay that way forever, NPR, Sep.
16, 2020; Jon Younger, A New Payoneer Report
Shows Covid 19 is Accelerating Freelance Growth,
Forbes, Sep. 1. 2020.
110 Courts have noted that the FLSA has the
broadest conception of employment under Federal
law. See, e.g., Darden, 503 U.S. at 326. To the extent
that businesses making employment status
determinations base their decisions on the most
demanding Federal standard, a rulemaking
addressing the FLSA’s distinction between
employees and independent contractors may affect
the businesses’ classification decisions for purposes
of benefits and legal requirements under other
Federal and state laws.
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independent contractors because
independent contractors generally do
not receive these benefits directly
(although independent contractors are
able to purchase at least some of these
benefits for themselves and, as
explained in the preamble, the offering
of health, retirement, and other benefits
to workers is not necessarily indicative
of employee status). Employer-provided
benefits are often a significant share of
workers’ compensation. According to
the BLS’s Employer Costs for Employee
Compensation (ECEC), the value of
employer benefits that directly benefit
employees average 21 percent of total
compensation.111 The Department notes
that this 21 percent figure is an average
for all employees and may not be
representative of the subset of
employees whose classification may be
impacted by this rule. Since the 21
percent figure includes paid leave (7.2
percentage points) and retirement
benefits (5.3 percentage points), and
workers may value these benefits at very
different levels, applying these elements
does not seem reasonable in the context
of this analysis.112
The Department used the CWS to
compare prevalence of health insurance
and retirement benefits across
employees and independent contractors
to produce a highly generalized picture.
However, it should be noted that these
two populations may differ in other
ways than just their employment
classification and the particular
elements of their compensation
packages discussed in the preceding
paragraph which may impact benefit
amounts. For instance, an employee
shifting to independent contractor status
who already receives health benefits
through a partner’s benefit plan would
not be impacted by losing heath benefit
eligibility. Additionally, lower benefits
may be offset by increased base pay to
attract workers because workers
consider the full package of pay and
benefits when accepting a job.
According to the CWS’s relatively
narrow definition of independent
contractor:
111 BLS, ‘‘Employer Costs for Employee
Compensation News Release’’ (Sept. 2019), https://
www.bls.gov/news.release/archives/ecec_
12182019.htm. For Civilian Workers, this includes
paid leave ($2.68), insurance ($3.22), and retirement
and savings benefits ($1.96). It does not include
overtime and premium pay, shift differential pay,
nonproduction bonuses, or legally required
benefits. Calculated as ($2.68 + $3.22 + $1.96)/
$37.03.
112 The average economy-wide provision of
insurance benefits, which represent 8.7 percentage
points of the 21 percent figure, is also likely to be
an overestimate for the average percentage of
compensation offered to the workers most likely to
be impacted by this rule.
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• 79.4 percent of self-employed
independent contractors have health
insurance. Most of these workers either
purchased insurance on their own (31.5
percent) or have access through their
spouse (28.6 percent).
• 80.7 percent of other independent
contractors have health insurance.
There are three main ways these
workers receive health insurance:
Through their spouse (25.1 percent),
through an employer (24.2), or on their
own (20.1 percent).
• 88.3 percent of employees have
health insurance. Most of these workers
receive health insurance through their
work (64.1 percent). Furthermore,
according to the ECEC, employers pay
on average 12 percent of an employee’s
base compensation in health insurance
premiums.
Several commenters estimated the
prevalence of health insurance among
independent contractors. In early 2020,
CWI commissioned a national survey of
600 self-identified independent
contractors. Their survey found that 84
percent of independent contractors have
healthcare coverage.113 The Workplace
Policy Institute of Littler Mendelson,
P.C. (WPI) pointed to a study that found
about 90 percent of gig workers have
health insurance.114 The study also
found that less than one-third of 1099–
MISC workers purchase their own
health insurance, ‘‘and most indicate
that health insurance does not affect
their decision to work as an
independent contractor.’’ It also notes
that the businesses interviewed believe
that workers may have ‘‘made an
economic decision with their spouse—
where one spouse works without
benefits for higher pay and the other
receives lower pay with benefits—
resulting in a higher total income and
health benefits for the household.’’
From these data, it is unclear exactly
how health insurance coverage would
change if the number of independent
contractors increased, but the data
suggest that independent contractors, on
average, may be less likely to have
health insurance coverage. That said,
employment is not a guarantee of health
insurance, nor do independent
contractors generally lack health
insurance. Additionally, simply
comparing rates between independent
contractors and employees may be
misleading. As the U.S. Chamber of
113 Coalition for Workforce Innovation (2020),
supra note 77.
114 A. Yildirmaz, M. Goldar, S. Klein,
‘‘Illuminating the Shadow Workforce: Insights Into
the Gig Workforce in Businesses,’’ ADP Research
Institute (February 2020), https://www.adpri.org/
research/illuminating-the-shadow-workforce/
?release=illuminating-the-shadow-workforce-2020.
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Commerce pointed out, many
independent contractors would not be
eligible for benefits even if they were
employees due to the short-term and/or
part-time nature of such an employment
relationship.
Women Employed noted that the
although the Department showed high
rates of health insurance among
independent contractors in general, the
Department did not show that low-wage
independent contractors have access to
health insurance. In response, the
Department compared health insurance
rates for workers earning less than $15
per hour and found that 71.0 percent of
such independent contractors have
health insurance compared with 78.5
percent of such employees. Health
insurance rates are lower for both
independent contractors and employees
when limited to low-wage workers.
However, the gap in coverage between
low-wage employees and independent
contractors remains comparable to that
for all workers: 7.5 percentage points for
low-wage workers compared to 8.1
percentage points for all workers.
A major source of retirement savings
is employer sponsored retirement
accounts. According to the CWS, 55.5
percent of employees have a retirement
account with their current employer; in
addition, the ECEC found that
employers pay 5.3 percent of
employees’ total compensation in
retirement benefits on average ($1.96/
$37.03). If a worker shifts from
employee to independent contractor
status, that worker may no longer
receive employer-provided retirement
benefits, but may choose alternate
personal investment options. As with
health insurance, it is not clear whether
retirement savings for such a worker
would increase or decrease, but such a
worker would likely need to take a more
active role in saving for retirement visa`-vis an employee with an employersponsored retirement plan.115
Commenters pointed out that
independent contractors generally have
retirement accounts. CWIs survey of
independent contractors found that 73
percent have a retirement savings plan.
The WPI pointed to a study by T. Rowe
Price that found that more than half of
independent contractors are saving for
retirement.116 Conversely, commenters
115 Access to such benefits might be similar for
both employees and independent contractors, but it
is unlikely that the business will contribute similar
sums to benefits for an independent contractor and
employee.
116 T. Rowe Price, ‘‘Press Release: The Majority of
Independent Workers are Actively Saving for
Retirement’’ (March 25, 2019), https://
www.troweprice.com/corporate/en/press/t-roweprice-the-majority-of-independent-workersareactively-.html
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such as the Washington Center cited a
study showing that independent
contractors are ‘‘less likely . . . to make
contributions to a retirement
account.’’ 117 However, that study
narrowly defines retirement accounts to
include ‘‘employer-sponsored plans’’
while excluding other common longterm saving methods, which biases the
comparison between independent
contractors and employees. This
hampers the ability to substantively
compare this commenter’s position with
those of other commenters, such as CWI
and WPI, listed above.
Some commenters asserted the
Department should quantify the impact
of the rule on benefits such as health
insurance and retirement savings. This
includes a letter from 107 U.S.
Representatives and separate letters
from Rep. Donald Norcross and Rep.
Pramila Jayapal. The Texas RioGrande
Legal Aid (TRLA) claimed that because
the Department did not estimate the
‘‘financial impact on the health and
retirement accounts of workers’’ it
violated the Administrative Procedure
Act. However, the Department does not
believe that these impacts could be
usefully quantified. First, quantifying
these impacts necessarily requires
estimating any increase in the
prevalence of independent contracting
relationships. As explained previously,
the Department does not believe that
this figure can be meaningfully
estimated. Second, classification under
the FLSA does not directly determine
whether workers qualify for these
benefit programs, and as such, it is
difficult to assess how the specific
workers who are converted from
employee to independent contractor
status under the FLSA could have their
individual benefits affected. If an
employer provides health and
retirement benefits to employees, but
does not provide them to the same
workers upon conversion of the
positions into independent contractor
relationships, overall compensation will
be negatively impacted unless offset by
sufficiently higher earnings. However,
this could happen only in noncompetitive labor markets in which
employers have the ability to set
compensation without regard for worker
preferences. While some employers may
desire to save the costs of providing
certain benefits to employees by
engaging independent contractors, if the
relevant labor markets are even
somewhat competitive, they likely will
need to increase monetary
compensation, give up, for example,
117 Jackson, Looney, and Ramnath (2017), supra
note 92.
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certain elements of control (i.e., nonpecuniary compensation), or both to
recruit workers for providing the same
work. The impacts of the rule would not
be uniform across workers, especially
with respect to those workers that may
become independent contractors.
Furthermore and as explained further in
Section VI(D)(7), the Department
believes the ability for firms to deny
benefits by converting their workers into
independent contractors is constrained.
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3. Tax Liability
Another potentially important source
of transfers affected by the prevalence of
independent contracting is tax liability.
Payroll tax liability is generally divided
between the employer and the employee
in the United States. Most economists
believe that the ‘‘incidence’’ of the
payroll tax, regardless of liability, falls
on the employee.118 As self-employed
workers, independent contractors are
legally obligated to pay both the
employee and employer shares of the
Federal Insurance Contributions Act
(FICA) taxes. Thus, if workers’
classifications change from employees
to independent contractors, there may
be a transfer in Federal tax liabilities
from employers to workers (regardless
of whether this affects the actual cost of
these taxes to the worker). These payroll
taxes include: 119
• Social Security tax: The 6.2 percent
employer component (half of the 12.4
percent total).120
• Medicare tax: The 1.45 percent
employer component (half of the 2.9
percent total).121
In sum, vis-a`-vis an employee,
independent contractors are legally
responsible for an additional 7.65
percent of their earnings in FICA taxes
(less the applicable tax deduction for
this additional payment). However, any
tax-related transfers from employers to
workers would likely be offset by higher
wages employers pay independent
118 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
Institute of Labor Economics Discussion Paper
Series IZA DP No. 11598 (June 2018), https://
ftp.iza.org/dp11598.pdf. Further information is
available by the Tax Foundation, https://
taxfoundation.org/what-are-payroll-taxes-and-whopays-them/.
119 Internal Revenue Service, ‘‘Publication 15,
(Circular E), Employer’s Tax Guide’’ (Dec. 23, 2019),
https://www.irs.gov/pub/irs-pdf/p15.pdf.
120 The social security tax has a wage base limit
of $137,700 in 2020.
121 An additional Medicare Tax of 0.9 percent
applies to wages paid in excess of $200,000 in a
calendar year for individual filers.
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contractors. Employers will not pay
payroll taxes for work transferred to
workers classified as independent
contractors and market forces could
compel them to pass the full wage (wage
+ payroll tax) to the independent
contractors. That is not the only reason
we expect independent contractors will
earn higher hourly earnings, but is the
focus here. For discussion on other
expected wage effects, see Section
VI(D)(4) below.
Companies also cover unemployment
insurance and workers’ compensation
taxes for their employees. Independent
contractors may choose to pay for
comparable insurance protection offered
in the private market, but are not
obligated to. The resulting regulatory
effect (experienced as savings, either by
companies or employees, depending on
who ultimately bears the cost of the tax)
combines societal cost savings (the
lessened administrative cost of
incrementally lower participation in
unemployment insurance and workers’
compensation programs) and transfers
(from individuals whose unemployment
insurance or workers’ compensation
payments decline, to entities paying less
in taxes). Independent contractors may
recoup some or all of the employer
portion of these taxes and insurance
premiums in the form of increased
wages. This rule could decrease
employers’ tax liabilities and increase
independent contractors’ take-home
compensation. However, there are costs
to independent contractors if they are
out of work or injured or ill on the job
because they no longer are protected,
unless they purchase their own private
insurance.122 Many of these impacts
will depend on the individual risk
tolerances of the workers. It is likely
that workers who are more comfortable
taking risks will be attracted to the
potentially higher take-home
compensation of independent contractor
status, while workers who are risk
averse will likely prefer the
predictability of traditional employee
relationships. It is uncertain how the
universe of workers is dispersed,
beyond theoretical generalizations. It is
further unclear how workers’ risk
preferences will be distributed across
the market for insurance products. The
Department was not able to identify
economy-wide distributional data on
worker preferences and projected
purchasing dynamics. That is likely
because worker preferences are difficult
122 The Department did not undertake to
comprehensively review state law on
unemployment insurance in this area, but notes that
some states do not use the economic reality test to
determine which individuals are covered by state
unemployment insurance.
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to accurately measure and capture in
datasets due to their high variability
worker to worker and ambiguity of
sorting across economic sectors.
Without access to such data, the
Department did not attempt to quantify
the cost of changes in coverage or
whether the net effect is a benefit or
cost.
4. Earnings
Potential transfers could also occur
through changes to earnings as a result
of an increase in independent
contracting. These transfers could occur
if workers who were employees
experience a change in earnings by
becoming independent contractors, or if
workers who are out of the labor market
enter in order to become independent
contractors. Although the minimum
wage and overtime pay requirements of
the FLSA would no longer apply to
workers who shift from employee status
to independent contractor status, as
discussed below, this does not
sufficiently explain the potential
transfers that could occur as a result of
such a shift. Furthermore, the
Department anticipates an increase in
labor force activity, but for the reasons
stated above, the Department does not
attempt to quantify the magnitude of
any increase or decrease in earnings as
a result of increased labor force activity.
If currently unemployed workers or
individuals who are out of the labor
market become independent contractors
due to this rule, their earnings will
increase as they currently have no workrelated earnings other than possibly
unemployment benefits. The impact on
earnings is more ambiguous if
employees’ classifications change to
independent contractors. In theory,
because independent contractors likely
prefer to have at least similar levels of
total compensation as they would earn
if they were employees, companies
would likely have to pay more per hour
to independent contractors than to
employees because independent
contractors generally do not receive
company-provided benefits and have
higher tax liabilities. Data show an
hourly wage premium for independent
contractors when comparing unadjusted
mean averages. But as the analysis
below illustrates, when controlling for
certain differences in worker
characteristics, this expected wage
premium may not always be observable
at a statistically significant level. It
should be noted, however, that these
estimates do not attempt to incorporate
the value of flexibility and satisfaction
that many independent contractors cite
as key factors in their preference of
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independent contracting arrangements
over traditional employment.
Comparing the average earnings,
hourly wages, and hours of current
employees and independent contractors
may provide some indication of the
impact on wages of a worker who
transitions from an employee to
independent contractor classification. A
regression analysis that controls for
observable differences between
independent contractors and employees
may help isolate the impact on earning,
hourly wages, and usual hours of being
an independent contractor. Katz and
Krueger (2018) 123 regressed the natural
log of hourly wages on independent
contractor status,124 occupation, sex,
potential experience, potential
experience squared, education, race,
and ethnicity. They use the 2005 CWS
and the 2015 RAND ALP (the 2017 CWS
was not available at the time of their
analysis). The Department conducted a
similar regression using the 2017 CWS.
In both Katz and Krueger’s regression
results and the Department’s
calculations, the following outlying
values were removed: Workers reporting
earning less than $50 per week, less
than $1 per hour, or more than $1,000
per hour.125
The Department combined the CWS
data on usual earnings per week and
hours worked per week to estimate
hourly wage rates to normalize the
comparison between independent
contractors and employees.126 The
Department found that independent
contractors tend to earn more per hour:
Employees earned an average of $24.07
per hour, self-employed independent
123 See
Katz and Krueger (2018), supra note 12.
workers, temporary help agency
workers, and workers provided by contract firms
are excluded from the base group of ‘‘traditional’’
employees.
125 Choice of exclusionary criteria from Katz and
Krueger (2018), supra note 12.
126 The CWS data, based on its relatively narrow
definition of independent contractors, indicated
that employees worked more hours per week in
comparison to primary independent contractors.
The Department found that 81 percent of employees
worked full-time, compared to 72 percent for 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.
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124 On-call
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contractors earned an average of $27.43
per hour, and other independent
contractors earned an average of $26.71
per hour (the average hourly wage is
$27.29 when combining the two types of
independent contractors).127 Katz and
Krueger conducted similar hourly
earnings estimates based on 2005 CWS
and 2015 ALP data. Their analysis of the
2005 CWS data indicated that ‘‘[b]efore
conditioning on covariates, the 2005
and 2015 results are similar: freelancers
and contract workers are paid more per
hour than traditional employees.’’ 128
When controlling for education,
potential experience, potential
experience squared, race, ethnicity, sex
and occupation, independent
contractors’ higher hourly wages in the
2005 CWS data remained higher but
were not statistically significant. But
Katz and Krueger’s analysis of the 2015
ALP data under the same specifications
found that primary independent
contractors earned more per hour than
traditional employees, and the estimates
were statistically significant.129
Conceptually, the Department expects
that independent contractors would
earn more per hour than traditional
employees in base compensation as an
offset to employer-provided benefits and
increases in tax liabilities. Katz and
Krueger’s analysis of the 2015 RAND
ALP data appears to support this
prediction.130 However, they
recommend caution in interpreting the
estimates from the ALP due to the
relatively small sample size. Their
analysis of the 2005 CWS data and the
Department’s similar analysis of 2017
CWS data did not show a statistically
significant difference. But as previously
noted, comparing current employees to
current primary independent
contractors may not be indicative of
how earnings would change for current
employees who became independent
contractors. Nor do such wage-based
comparisons reflect the non-pecuniary
attributes of employees and
independent contractors.131
127 The Department followed Katz and Krueger’s
methodology in excluding observations with
weekly earnings less than $50, hourly wages less
than $1, or with hourly wages above $1,000.
Additionally, workers with weekly earnings above
$2,885 are topcoded at $2,885. Weekly earnings are
used to calculate imputed hourly wages.
128 Id. at 19.
129 Id. at 34.
130 See Katz and Kreuger (2018), supra note 12 at
20 (‘‘A positive hourly wage premium for
independent contractors could reflect a
compensating differential for lower benefits and the
need to pay self-employment taxes.’’).
131 In particular, at least some research reveals
significant non-pecuniary advantages to
independent contracting, including through
increased job satisfaction. See ‘‘The State of
Independence in America,’’ MBO Partners (2019),
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1219
One potential reason for the variance
among the estimates for independent
contractor wages could be error in the
measurement of independent contractor
status and earnings, a factor that is
present throughout every analysis in
this area. As a recent analysis
concluded, ‘‘different data sources
provide quite different answers to the
simple question of what is the level and
trend of self-employment in the U.S.
economy,’’ which suggest substantial
measurement error in at least some data
sources.132 As noted above, reporting
errors by survey respondents may
contribute to measurement error in CWS
data.133 Additionally, CWS questions
‘‘were asked only about people who had
already been identified as employed in
response to the survey’s standard
employment questions and only about
their main jobs,’’ and therefore may
miss important segments of the
population. BLS has recently
acknowledged limitations in the 2017
CWS survey in response to a GAO audit
and is reevaluating how it would
measure independent contractors in the
future.134
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
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 89; Upwork
(2019), supra note 89.
132 Abraham et al. (2018), supra note 89 at 15.
Generally, ‘‘[h]ousehold surveys consistently show
lower levels of self-employment than tax data and
a relatively flat or declining long-term trend in selfemployment as contrasted with the upward trend
that is evident in tax data.’’ Id.; see also id. at 45.
133 ‘‘For example, a household survey respondent
might fail to mention informal work that they do
not think of as a job, something that further probing
might uncover. To take another example, a
household member who is doing work for a
business may be reported as an employee of that
business, even in cases where further probing might
reveal that the person is in fact an independent
contractor or freelancer.’’ Id. at 15.
134 Specifically, BLS recognized that: (1) The
‘‘CWS measures only respondents’ main jobs . . .,
thus potentially missing workers with
nontraditional second or supplementary income
jobs’’; (2) ‘‘CWS only asks respondents about their
work in the past week and may fail to capture
seasonal workers or workers that supplement their
income with occasional work’’; and (3) ‘‘added
questions regarding electronically-mediated
employment resulted in a large number of false
positive answers.’’ Government Accountability
Office, Contingent Workforce: BLS is Reassessing
Measurement of Nontraditional Workers, Jan. 29,
2019, https://www.gao.gov/assets/700/696643.pdf.
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occupation dummy variables but did
not control for a worker’s job position
within any of the occupations (although
it did control for ‘‘potential
experience’’). However, as the
Department’s guidance indicates, a
statistical comparison of earnings
between workers generally must control
for ‘‘job level or grade’’ in addition to
experience to ensure the comparison is
for workers in similar jobs.135 If,
hypothetically, independent contractors
on average have lower job levels (or
equivalents) than traditional employees
within each occupation,136 the
Department’s analysis would not be
comparing the hourly earnings of
primary independent contractors and
employees who have the same jobs.
Instead, the Department would be
comparing a population of relatively
low-level independent contractors with
a population that includes both 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 that may
accompany independent contractor
status, which would obscure the
observability of an earnings premium
for independent contractors.137 Nonpecuniary benefits of independent
contracting, often including workplace
flexibility, may impact the occurrence of
an earnings premium, measured strictly
in monetary terms, but may contribute
to workers’ evaluation of the merits of
in engaging as independent contractors.
Independent contractors’ hourly
earnings premium may be best observed
at the margin, such as comparing a
worker’s behavior when deciding
between two similar positions, one as an
employee and one as an independent
contractor. However, the Department
could not find data on such situations
to allow for an economy-wide estimate,
nor did commenters provide such data.
Some commenters expressed concern
that the Department did not sufficiently
justify its claim that independent
135 Department of Labor, Office of Federal
Contracting Compliance Programs, Directive 2018–
5, (Aug. 24, 2018), https://www.dol.gov/agencies/
ofccp/directives/2018-05#ftn.id10.
136 For example, because individuals working in
that occupation as independent contractors are less
likely to be in positions with managerial
responsibilities over other workers than are
employees.
137 He, H. et al. (2019), supra note 131.
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contractors earn an earnings premium.
Other commenters cited evidence
purporting to show that workers
misclassified as independent
contractors earn less than employees.
Much of this evidence, however, relates
only to total take-home pay, which may
reflect mere variation in hours-worked,
rather than indicate any relation to the
existence of an earnings premium. Some
other evidence on lower earnings relates
to misclassified workers—but the final
rule is expected to reduce
misclassifications by increasing
certainty, and as explained further
below, the Department does not believe
that evidence relating to misclassified
workers is applicable to the
independent contracting population as a
whole. For example, the Coalition of
State Attorneys General, Cities, and
Municipal Agencies (State AGs) cited
recent state data on awards to workers
who were misclassified and evidence
that the misclassified workers face
higher rates of wage theft and wage
suppression.138 139 They additionally
cited evidence produced by another
critical commenter of this rule, the
National Employment Law Project
(NELP), that the State AGs claimed
shows that once controls are
implemented to account for taxes,
business expenses, and legal risks,
workers who have been misclassified as
independent contractors often earn
significantly less than similar workers
paid as employees.140 The Department
expects the rule to reduce
misclassification, which based on these
above commenters’ analyses will result
in significant cost savings.
A number of other commenters made
similar claims that the Department did
138 California Labor Commissioner’s Office, 2017–
2018 Fiscal Year Report on the Effectiveness of the
Bureau of Field Enforcement (2018), https://
www.dir.ca.gov/dlse/BOFE_LegReport2018.pdf.
Massachusetts Council on the Underground
Economy, 2017 Annual Report, (2017), https://
www.mass.gov/doc/cue-annual-report-2017-0/
download. Written Testimony of Jennifer L. Berrier,
Deputy Secretary, Department of Labor & Industry
Before the House Labor & Industry Committee
(April 29, 2019).
139 C. Ruckelshaus and C. Gao, ‘‘Who’s the Boss:
Restoring Accountability for Labor Standards in
Outsourced Work,’’ National Employment Law
Project, 9–27, (2014), https://www.nelp.org/wpcontent/uploads/2015/02/Whos-the-Boss-RestoringAccountability-Labor-Standards-Outsourced-WorkReport.pdf.
140 S. Leberstein and C. Ruckelshaus,
‘‘Independent Contractor vs. Employee: Why
Independent Contractor Misclassification Matters
and What We Can Do to Stop It,’’ National
Employment Law Project, (2016), https://
s27147.pcdn.co/wp-content/uploads/Policy-BriefIndependent-Contractor-vs-Employee.pdf. Bureau
of Labor Statistics, ‘‘Contingent and Alternative
Employment Arrangements—May 2017,’’ (2018),
https://www.bls.gov/news.release/archives/
conemp_06072018.htm.
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not adequately address the
misclassification of workers, and
posited this would impose costs. In each
case, the commenter did not
demonstrate how the rule would
increase the frequency of
misclassification. North America’s
Building Trades Unions made similar
claims. Its comment cited a number of
studies, including a GAO study finding
contingent workers (workers who lack
an explicit or implicit contract for longterm employment, but who can be
employees or independent contractors
under the FLSA) have lower earnings
than those who are not contingent
workers; a DC Office of Attorney
General study that estimated
misclassified construction workers in
DC may earn 11.5 percent less in takehome pay than employees, based on
implied findings that result from a
series of selected assumptions; and a
sampling of studies on construction
workers that claimed significant losses
in net pay for construction workers
misclassified as independent
contractors compared to employees.141
The United Brotherhood of Carpenters
and Joiners of America asserted that
many construction companies
misclassify workers as independent
contractors in order to pay them less
than employees and cited estimates of
the magnitude of the difference, and
claims that the Department’s rule ‘‘does
nothing to stem the abuse.’’ 142
Commenter Matt Brown cited a
Washington Center report that claims
low- and middle-wage gig workers make
less than comparable employees.143 The
same commenter noted that, applied
appropriately, ‘‘Independent contracting
is a critical part of the economy.’’ NELP
and the National Women’s Law Center
(NWLC) cited a study, notably from a
report for New York’s taxi and
limousine industry, claiming that while
independent contractors in New York in
a subset of industries (construction,
retail, personal care, and others)
141 U.S. Government Accountability Office,
‘‘Contingent Workforce,’’ GAO–15–168R. DC,
(2018). Office of Attorney General, ‘‘Illegal Worker
Misclassification: Payroll Fraud in the District’s
Construction Industry,’’ (2019). Ormiston, R.,
Belman, D., Brockman, J., and M. Hinkel,
‘‘Rebuilding Residential Construction,’’ in Creating
Good Jobs: An Industry-Based Strategy 75, 80 (Paul
Osterman ed., MIT Press 2020).
142 R. Ormiston et al. (2020), supra note 141. Liu,
Y.Y., Flaming, D. and P. Burns, ‘‘Sinking
Underground: The Growing Informal Economy in
California Construction,’’ Economic Roundtable, 2
(2014), https://economicrt.org/publication/sinkingunderground.
143 C. Husak, ‘‘How U.S. Companies Harm
Workers by Making them Independent
Contractors,’’ Washington Center for Equitable
Growth, (2019), https://equitablegrowth.org/how-us-companies-harm-workers-by-making-themindependent-contractors/.
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experienced positive wage growth, they
had lower increases in their real annual
earnings from 2013 to 2018 than the
counterpart employees.144 PA L&I
claimed that the Department provided
‘‘no evidence’’ to support other claims
about compensation premiums.
However, the Department offered a
significant data-backed rationale for
those sections, and in fact notes that PA
L&I’s own comment refers to some of
these sources in its critique, though it
offers no data of its own. Some
commenters asserted that companies
make workers independent contractors
specifically because they can pay them
less due to a lack of bargaining power,
but they do not offer substantive data to
demonstrate that this is the case
throughout the economy. Since the
failure to pay misclassified workers the
wages that are due them is already
prohibited by law, the Department
determined comments on the topic fall
outside the scope of this rule and
analysis. As stated elsewhere, the
Department expects that
misclassification will be reduced
because of this rule. Further, because
meeting the proper standards for
legitimate independent contracting will
generally entail a substantively different
relationship between a worker and a
business beyond a simple change in
classification, and no commenters nor
the Department’s own review of past
court cases yielded any examples of this
phenomenon in practice, the
Department has not attempted to
quantify it. For most discussion, see the
Job Conversion discussion at Section
(VI)(D)(7).
The data employed in the comments
and the reports commenters cite to
support their claims on impacts to
earnings are not strictly based on
independent contractors. In fact, several
of them focus explicitly on contingent
workers, who are defined as ‘‘persons
who do not expect their jobs to last or
who report that their jobs are
temporary.’’ 145 These persons can be
employees or independent contractors,
and may not include all independent
contractors, depending on the nature of
the contractor’s work. Estimates based
on these definitions are not useful for
the purpose of evaluating the universe
144 J.A. Parrott and M. Reich, ‘‘An Earnings
Standard for New York City’s App-based Drivers:
Economic Analysis and Policy Assessment,’’ Report
for the New York City Taxi and Limousine
Commission, (2018), https://
static1.squarespace.com/static/
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5b3a3aaa0e2e72ca74079142/1530542764109/
ParrottReich+NYC+App+Drivers+TLC+Jul+2018jul1.pdf.
145 BLS, https://www.bls.gov/news.release/
conemp.nr0.htm.
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of independent contractors. The nonrepresentative data sources preclude
widespread applicability. Further, these
commenters and their cited sources
largely focused on misclassified
workers, who are defined as workers
unlawfully classified as independent
contractors in order to limit employers’
monetary and legal liabilities. Selection
bias causes the estimates of the impacts
on this group to be unreliable; the
sample likely includes illicit actors. The
Department recognizes that some illicit
actors intentionally evade the law, but
its analysis of this rule’s impact
naturally focuses on employers,
employees, and independent contractors
that would follow the rule to the best of
their ability. While these comments and
the sources upon which they rely
highlight important worker issues, the
non-representative data presented
cannot be extrapolated to the universe
of individuals classified as independent
contractors, for whom the literature
offers strong evidence of an earnings
premium.
Some commenters provided specific
concerns with the Department’s
numbers. SWACCA disputes the
Department’s justification of the
assertion that independent contractors
earn more than employees because the
unconditional mean hourly rate of
independent contractors is higher than
the unconditional mean hourly rate of
employees. They note that the 11 to 14
percent higher hourly wage ($26.71 and
$27.43 per hour for independent
contractors versus $24.07 per hour for
employees) is insufficient to cover the
average of 21 percent of total
compensation that employees receive in
employer-provided benefits. While
SWACCA correctly identified that the
hourly wage premium independent
contractors enjoy economy-wide may be
less than employer’s total cost of
providing benefits, such a comparison
may not accurately reflect the value the
employee places on the employerprovided benefits. If, for example, a
worker already has access to health
insurance as a military veteran, that
worker will not value the employer’s
provision of health insurance. Further,
even assuming the worker values these
benefits at the same level as the
employer’s cost for the benefits, the
analysis cited earnings premiums and
benefits which are based on all
employees and independent contractors
in the economy and may not reflect the
narrower universe of employees whose
classification is most likely be affected
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1221
by this rule.146 Employing economywide averages to compare niche subsets
of the economy is not a sound approach.
As such, it is inappropriate to assume,
as SWACCA did, that the average
employee who is converted to
independent contractor status as a result
of the rule would gain the same earnings
premium enjoyed by the average
economy-wide independent contractor,
or lose benefits equal to the benefits
enjoyed by the average economy-wide
employee. The Department believes that
many workers who are most likely to be
converted due to this rule likely do not
presently receive benefits or, if they do
receive fringe benefits, their value (both
as measured by the worker and as an
absolute cost to the employer) falls
below the economy-wide average.147
Due to the highly individualized
impacts that vary across numerous
undefined variables (risk tolerances;
specifics regarding level of position,
industry, location; access to other means
of benefits provision; etc.), the
Department did not attempt to quantify
such an impact. Considered
qualitatively, the Department notes that
employees who make more than the
minimum wage implicitly display a
measure of bargaining power because
their employer could lawfully reduce
their wages but has not. If employees
have bargaining power—meaning labor
market conditions require employers to
account for workers’ preferences— they
would be positioned to negotiate an
earnings premium that could offset a
reduction in benefits that may result
from being converted to independent
contractors, which may be higher or
lower than the economy-wide average.
Similarly, a worker without bargaining
power would be unlikely to receive the
11 to 14 percent earnings premium if
converted from employee to
independent contractor status—but such
no-bargaining-power employees are also
much less likely to have any companyprovided benefits to lose as a result of
the conversion. Ultimately, there is no
reason to believe employees whose
classification may be affected by the
rule are likely to have the same benefits
as an average employee or, if converted
to independent contractors, would
receive the same earnings premium that
the average independent contractor has
over the average employee. As
explained below further in Section
146 The 11 to 14 percent earnings premium for
independent contractors is also an economy-wide
finding.
147 The Department expects that many new
independent contractor jobs will be created due to
this rule, but does not anticipate many existing
employee positions to be converted to independent
contractor relationships because of it.
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VI(D)(7), the Department expects that
most workers whose classification may
be affected by this rule will have a
measure of bargaining power that could
allow them to offset reductions in
benefits with higher earnings, better
working conditions, or both.
The Washington Center asserted that
the population of independent
contractors is very diverse and that
comparing mean wages is not
appropriate, expounding that the
independent contractor market includes
both high-wage workers with adequate
bargaining power and low-wage workers
with little bargaining power. The
commenter did not explain how this
point meaningfully applies to the
Department’s analysis, which addressed
the diversity of the labor market in its
regression specifications, controlling for
many more variables than simply
income. Nonetheless, in response to this
comment the Department conducted
two additional regression analyses as a
proxy for the labor market for low-wage
workers. The results were largely
consistent with the initial conclusions
presented in the NPRM. The
Department ran its regression model
including only low-education workers
(a high school diploma or less). In this
case, independent contractors had an
average wage about 9 percent higher,
and the results were statistically
significant. The Department also ran a
regression including only workers in
low-wage occupations (12 occupations
with mean hourly rate less than the
overall mean), for which the coefficient
on independent contractor was positive,
although small.148
The Economic Policy Institute (EPI)
estimated annual transfers from workers
to employers of $3.3 billion in
supplemental pay, paid leave, insurance
and retirement benefits, and the
employer share of Social Security and
Medicare taxes. Its estimate is based on
the primary assumptions that (1)
employees reclassified as independent
contractors will be paid the same in
nominal wages and (2) there will be an
increase of 5 percent in the number of
independent contractors. EPI states that
the first assumption is based on sources
demonstrating that perfect competition
in labor markets is rare, a claim stated
by several other commenters. However,
Alan Manning, the author of the
foundational source referenced to make
this case (cited by EPI, sources cited by
EPI in the same section, and other
commenters), explicitly caveats that the
wage-setting assumption should not be
148 The result is statistically significant at the 90
percent confidence level but not at the 95 percent
level.
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applied to the self-employed (under
which category independent contractors
fall).149 Manning states, ‘‘In this book it
is assumed that firms set wages. This is
a more appropriate assumption in some
labour markets than others. For
example, it would not seem to be
appropriate [. . .] for the selfemployed.’’ 150 The sources that EPI
cites thus do not support its ultimate
conclusion. Rather, EPI’s
methodological assumptions appear to
run counter to a widely-cited source
that EPI itself relies on. Finally, the EPI
analysis also relied on firms’ wagesetting power to be absolute, that labor
supply is perfectly inelastic. EPI’s
analysis proceeds from the premise that
‘‘perfect competition is rare,’’ but then
jumps to the claim that ‘‘most labor
markets do not function competitively,’’
and that worker are particularly ‘‘likely
to lack the power to bargain for higher
wages to compensate for their loss of
benefits and increase in taxes when they
become independent contractors.’’
However, each of the sources the EPI
cites for this proposition, which are
discussed above, clearly show that firms
do not possess or exert such absolute
wage-setting power. These flaws
fundamentally undermine EPI’s
estimates and yet go unaddressed by EPI
and other commenters that reference
EPI’s estimates. The Department,
therefore, declined to integrate these
unreliable estimates into its analysis
due to such methodological concerns.
EPI’s analysis states that ‘‘it is
difficult to imagine that there are a
149 EPI cites three sources alongside its claim,
Manning (2003), Dube et al. (2018), and a literature
review by the Washington Center, which also
submitted a comment opposing this rule. The
Manning book is cited by both other commenters,
with the Washington Center’s analysis drawing on
it in numerous sections of its review as
fundamental support. The Dube et al study focused
exclusively on users of a specific online task portal
(Amazon Mechanical Turk), which is a niche
market of independent contractors and is a
marketplace accessible to 49 countries, which
makes it difficult to apply the findings with
confidence to the U.S. market and the whole
independent contractor universe. The Washington
Center citation was a literature review of work in
the field of monopsony in labor markets; its
findings did not offer direct applications to the
independent contractor universe. Furthermore, its
review concluded, ‘‘our results provide evidence on
the elasticity of labor supply to the firm and the
implied degree of firms’ wage-setting power, but not
necessarily whether the firms are able to exercise
this power,’’ explaining that it appears other forces
rein in firms’ wage-setting power to some degree.
150 A. Manning, Monopsony in Motion: Imperfect
Competition in Labor Markets, Princeton, N.J.:
Princeton University Press, (2003). A. Sokolova and
T. Sorensen, ‘‘Monopsony in Labor Markets: A
Meta-Analysis,’’ Washington Center for Equitable
Growth, (February 2020). A. Dube, J. Jacobs, S.
Naidu, and S. Suri, ‘‘Monopsony in Online Labor
Markets,’’ American Economic Review: Insights
2(1): 33–46 (March 2020), https://www.aeaweb.org/
articles?id=10.1257/aeri.20180150.
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meaningful number of workers who
would get more satisfaction from doing
the same job for substantially less
compensation as an independent
contractor than for substantially more
compensation as a payroll employee.’’
But this statement exposes what appears
to be a flawed assumption in EPI’s
analysis. Under the economic reality
test, an employee typically cannot
possess the ‘‘same job’’ as an
independent contractor. Rather, for the
worker to be classified as an
independent contractor, the worker
must, on the whole, possess the
characteristics of an independent
contractor, which often include
meaningful control over the work or
meaningful opportunity for profit. EPI’s
analysis assumes, however, that the
employer can and will simply reclassify
a worker as an independent contractor
without regard for the features of the
working relationship.
EPI’s analysis considers only
monetary compensation as part of the
‘‘value of a job to a worker.’’ In the May
2017 Contingent Worker Supplement
(CWS) to the Current Population Survey
(CPS) workers classified as independent
contractors were asked about their
preferences toward employment
arrangement. Their responses are
indicative of non-monetary value
derived from independent contractor
status. When asked, ‘‘Would you prefer
to work for someone else?’’ independent
contractors resoundingly stated ‘‘No’’
over ‘‘Yes’’ by a ratio of nearly 8 to 1.
Furthermore, the two most noted
responses to the question, ‘‘What is the
main reason you are self-employed/an
independent contractor?’’ were
‘‘Flexibility of schedule’’ and ‘‘Enjoys
being own boss/independent.’’ It is
evident that most independent
contractors strongly value the nonpecuniary compensation they receive.
EPI does not address how these nonpecuniary benefits factor into worker
compensation.
Arguing against the Department’s
inclusion of flexibility and satisfaction
as important non-pecuniary
compensation factors in the NPRM, EPI
states that ‘‘employers are able to
provide a huge amount of flexibility to
payroll employees if they choose to; the
‘inherent’ tradeoff between flexibility
and payroll employment is greatly
exaggerated.’’ 151
151 Some sources have argued that businesses, in
fact, use scheduling in a way that negatively affect
worker flexibility. See e.g., L. Golden, ‘‘Irregular
Work Scheduling and Its Consequences,’’ Economic
Policy Institute, (April 2015), https://files.epi.org/
pdf/82524.pdf (‘‘Facilitated by new software
technology, many employers are adopting a human
resource strategy of hiring a cadre of part-time
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EPI’s argument is less than persuasive
for a number of reasons. First,
economists have long recognized that
workers value leisure as well as the
remuneration of labor. As such, any
worker selecting between jobs is likely
to consider the flexibility of work
schedules, the compensation package,
fringe benefits, and a host of nonpecuniary compensation factors when
deciding both whether to work at a
particular company and how many
hours to spend working at that
company. Second, the fact that some
employees have flexibility does not
imply that those employees do not value
the flexibility or that greater flexibility
is not something employees would trade
for lower compensation. Third, in many
jobs, employee flexibility is necessarily
limited because the business requires a
certain number of employees working
together to accomplish a task, and so
granting significant flexibility to
employees would result in less
productivity for the business which
would likely result in lower
compensation for the workers. Fourth,
some employers do offer employees
flexibility, but often that flexibility
comes at a cost to the workers (of note,
payroll employees generally have less
control over their own schedules than
similarly-situated independent
contractors).
EPI, however, fails to explain why an
employer would, all things equal, allow
its employees to work for direct
competitors, let them choose
assignments, or set their own hours. The
point of hiring employees is to have
workers that an employer can call upon
and direct to perform desired tasks, as
opposed to contractors who operate
their own businesses. While some
employers may provide a measure of
flexibility they generally would not offer
the same degree of flexibility enjoyed by
individuals who are in business for
themselves. The Department believes,
based on data in the CWS survey and
beyond, that independent contractors
experience significantly more flexibility
than employees and that such a feature
is a core motivator.152
The Department notes several other
key weaknesses in EPI’s estimate that
undermine its assertions. EPI’s estimate
employees whose work schedules are modified,
often on short notice, to match the employer’s
staffing with customer demand at the moment.’’).
152 Bureau of Labor Statistics, ‘‘Contingent and
Alternative Employment Arrangements—May
2017,’’ USDL–18–0942 (June 7, 2018), https://
www.bls.gov/news.release/pdf/conemp.pdf. MBO
Partners, The State of Independence in America:
2018: The New Normal, 2018, 7. James Manyika et
al., Independent Work: Choice, Necessity, and the
Gig Economy (New York: McKinsey Global
Institute, October 2016).
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of transfers from workers to employers
is an estimate of the gross transfer
without taking into account that the
independent contractors also have the
ability to deduct some of their
additional expenses on their income
taxes and thus is not a comprehensive
comparison of the net earnings of
employees and independent contractors.
EPI’s estimate is based on applying a net
loss in income for every new
independent contractor, yet the data
resoundingly show that workers pursue
independent contract work voluntarily
and in vast numbers, suggesting that
other factors, unmentioned by the
commenter, are significant to worker
decisions in this field. EPI nonetheless
assumes a blanket negative impact will
be felt economy-wide for all new
independent contractors—an
assumption the Department believes is
unsupportable in the face of the existing
evidence.
Ultimately, based on the assumption
that the final rule will increase
independent contracting arrangements,
the Department acknowledges that there
may be transfers between employers and
employees, and some of those transfers
may come about as a result of changes
in earnings. However, for the reasons
stated above, the Department does not
believe that these transfers can be
quantified with a reasonable degree of
certainty for purposes of this rule. The
Department also does not believe that
independent contracting roles are
usefully compared by focusing solely on
earnings to employee roles—under the
economic reality test embraced by the
final rule, control and an opportunity
for profit are core considerations for
determining who is an independent
contractor. The Department believes
that these factors are often valued by
workers in ways that are difficult to
quantify. Furthermore, the Department
believes that workers as a whole will
benefit from this rule, both from
increased labor force participation as a
result of the enhanced certainty
provided by the rule, and from the
substantial other benefits detailed
below.
5. Minimum Wage and Overtime Pay
As noted above, an additional
consideration in the discussion of
transfers is that minimum wage and
overtime pay requirements would no
longer apply if workers shift from
employee status to independent
contractor status. The 2017 CWS data
indicate that, before conditioning on
covariates, primary independent
contractors are more likely than
employees to report earning less than
the FLSA minimum wage of $7.25 per
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1223
hour (8 percent for self-employed
independent contractors, 5 percent for
other independent contractors, and 2
percent for employees).
Several commenters highlighted this
possibility that independent contractors
could earn below the minimum wage.
The Washington Center cited a report by
the Center of American Progress that
estimated that almost 10 percent of
independent contractors earn less than
the Federal minimum wage.153
Representative Mark Takano pointed to
literature finding that in California and
New York many gig drivers receive
significantly less than the state
minimum wage.154 A letter from 107
U.S. Representatives referenced an
instance where the Wage and Hour
Division (WHD) recovered roughly
$250,000 in unpaid overtime and
minimum wages for 75 workers
misclassified as independent
contractors by a cleaning company.155
EPI stated in its comment, ‘‘The workers
most likely to be affected by this rule are
workers in lower-wage occupations in
labor-intensive industries, such as
delivery workers, transportation
workers like taxi drivers and some
truckers, logistics workers including
warehouse workers, home care workers,
housecleaners, construction laborers
and carpenters, agricultural workers,
janitors, call center workers, and staffing
agency workers in lower-paid
placements.’’ However, EPI did not
provide a source for this important
assumption, and the Department was
unable to verify EPI’s assertion in the
Department’s own research. The nature
of the work done by workers across the
diverse fields EPI identified is
uncertain, although many roles in the
153 K. Walter and K. Bahn, ‘‘Raising Pay and
Providing Benefits for Workers in a Disruptive
Economy.’’ Washington: Center for American
Progress (2017), https://www.americanprogress.org/
issues/economy/reports/2017/10/13/440483/
raising-pay-providing-benefits-workers-disruptiveeconomy/.
154 M. Reich. ‘‘Pay, Passengers and Profits: Effects
of Employee Status for California TNC Drivers.’’
University of California, Berkeley (October 5, 2020),
https://irle.berkeley.edu/files/2020/10/PayPassengers-and-Profits.pdf; L. Moe, et al. ‘‘The
Magnitude of Low-Paid Gig and Independent
Contract Work in New York State,’’ The New
School Center for New York City Affairs (February
2020), https://static1.squarespace.com/static/
53ee4f0be4b015b9c3690d84/t/
5e424affd767af4f34c0d9a9/1581402883035/
Feb112020_GigReport.pdf.
155 ‘‘Skokie Cleaning Business Must Pay $500K In
Unpaid Wages, Damages to Workers,’’
CHICAGO.CBSLOCAL.COM (May 5, 2012), https://
chicago.cbslocal.com/2012/05/05/skokie-cleaningbusiness-must-pay-500k-in-unpaid-wages-damagesto-workers/. The Department believes that
misclassification is an important concern that the
rule addresses, and that the rule will reduce the
ability of employers to misclassify its workers by
rendering the test more clear and understandable.
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above fields could lack features that
would facilitate a position conversion to
independent contractor status.
With respect to overtime, CWS has
further indicated that, before
conditioning on covariates, primary
independent contractors are more likely
to work overtime or extra hours beyond
what they usually work at their main job
(30 percent for self-employed
independent contractors and 19 percent
for other independent contractors versus
18 percent for employees). The
Department was unable to determine
whether these differences were the
result of differences in worker
classification, as opposed to other
factors. The Department has cited many
sources throughout this analysis that
point to a wide range of income for
independent contractors, and does not
believe that this rule will be especially
applicable to any particular income
segment of independent contractors.
Accordingly, the Department believes it
prudent to rely on the numerous sources
it has drawn on in the development of
this rule, rather than to focus on any
particular slice of the income
distribution. And while independent
contractors are not, by definition,
subject to the minimum wage
requirements of the FLSA, none of the
evidence cited by commenters suggests
that the final rule is likely to
significantly impact this issue, and if so,
to what extent. Accordingly, the
Department did not attempt to quantify
these potential transfers.
6. Misclassification
Many commenters expressed
concerns regarding misclassification of
employees as independent contractors,
which occurs when an individual who
is economically dependent on an
employer is classified by that employer
as an independent contractor. FLSA
misclassification may be inadvertent or
intentional and its direct effects could
include a transfer from the worker to the
employer if the employer fails to pay
minimum wage and overtime pay to
which the worker is entitled.
Conversely, reducing misclassification
could result in a transfer from
employers to workers.
Several commenters believe that
‘‘[c]larifying the application of the test
for independent contractor status will
promote compliance with labor
standards under the FLSA and, in turn,
reduce worker misclassification.’’
Opportunity Solutions Project (OSP);
see also, e.g., Truckload Carriers
Association (‘‘[t]he increased clarity
provided by the [proposed rule] would
likely lead to reduced
misclassification.’’); IAW (‘‘This rule
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will clear up misclassifications’’);
Financial Services Institute (‘‘we agree
that it will reduce worker
misclassification and litigation’’). Other
commenters believe this rule may make
it easier for employers to misclassify
employees as independent contractors.
See, e.g., Equal Justice Center; Employee
Rights Center; NELP; State AGs; TRLA.
These commenters cited reports
purporting to show extremely high rates
of misclassification. For example, a
2020 NELP report cited by many
commenters reviewed state audits and
concluded that ‘‘these state reports
show that 10 to 30 percent of employers
(or more) misclassify their employees as
independent contractors.’’ 156 The
Washington Center also cited a study
conducted by the Department of Labor
in 2000 to claim that ‘‘between 10
percent and 30 percent of employers
audited in 9 states misclassified workers
as independent contractors.’’ 157
These estimates, however, appear to
be unreliable for at least two reasons.
First, they make generalized
conclusions regarding rates of
misclassification using nonrepresentative audit data. For example,
the Department’s 2000 study cited by
the Washington Center states that audits
were ‘‘selected on a targeted basis
because of some prior evidence of
possible non-compliance.’’ 158 The 2020
NELP report likewise explained that
‘‘[m]ost studies [on misclassification]
rely on audit data from unemployment
insurance and workers’ compensation
audits, targeted or random.’’ 159 As a
2015 EPI report explained, ‘‘[a]udit
methods vary across states in the extent
to which they target employers for
audit: They can base the audits on
specific criteria (e.g., a record of prior
violation), or use a random sample of
employers within industries prone to
misclassification, or a mix of both
156 NELP, Independent Contractor
Misclassification Imposes Huge Costs on Workers
and Federal and State Treasuries, Oct. 2020,
available at https://www.nelp.org/publication/
independent-contractor-misclassification-imposeshuge-costs-workers-Federal-state-treasuries-updateoctober-2020.
157 Lalith de Silva, Adrian Millett, Dominic
Rotondi, and William F. Sullivan, ‘‘Independent
Contractors: Prevalence and Implications for
Unemployment Insurance Programs’’ Report of
Planmatics, Inc., for U.S. Department of Labor
Employment and Training Administration (2000),
available at https://wdr.doleta.gov/owsdrr/00-5/005.pdf.
158 Id. (emphasis added).
159 NELP, Independent Contractor
Misclassification Imposes Huge Costs on Workers
and Federal and State Treasuries, Policy Brief Oct.
2020, available at https://www.nelp.org/
publication/independent-contractormisclassification-imposes-huge-costs-workersFederal-state-treasuries-update-october-2020/.
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methods.’’ 160 Thus, even ‘‘random’’
audits are not necessarily representative
because they target industries with high
rates of misclassification. Because
audits focus on groups of businesses or
industries in which misclassification
rates are the highest, their results would
not support generalized conclusions
regarding the wider population. As
such, the reports’ generalized
conclusion lack reliable and
representative evidence, and are almost
certainly significant overestimates.
Second, the audit data cited by NELP
and others do not necessarily focus on
misclassification of employees as
independent contractors; some states’
data are evaluated based on prevalence
of employer violations, which is not
representative of percentages of workers
misclassified as independent
contractors. For example, the 2020
NELP report appears to state that audits
conducted by Ohio found a
misclassification rate of 45 percent, but
the cited Ohio report stated otherwise.
The report explained that the audits
searched for unemployment insurance
violations, not just misclassifications,
and that ‘‘45% of the audits produce
findings, in many cases for workers
misclassification.’’ 161 In other words,
the Ohio audits found 45% of audited
employers failed to comply with some
unemployment insurance requirement,
with an unspecified subset committing
misclassification. This and other
misunderstandings of state audit
findings may result in a misleading
estimate of the frequency with which
employers misclassify employees as
independent contractors. Furthermore,
the reporting is based on
misclassification (or other issues, as
documented above) on a per employer
basis. The employer rate of
misclassification may not necessarily
correspond to the rate of employee
misclassification. For example, if an
employer employs 100 employees and
misclassifies only one of them, the
employer is recorded as a misclassifying
employer in the aggregated results.162
160 Employment Policy Institute. Carre, Francoise,
(In)dependent Contractor Misclassification. https://
www.epi.org/publication/independent-contractormisclassification.
161 Report of the Ohio Attorney General on the
Economic Impact of Misclassified Workers for State
and Local Governments in Ohio 16–17 (Feb. 18,
2009), available at https://iiiffc.org/images/pdf/
employee_classification/OH%20AG%20Rpt%20on
%20Misclass.Workers.2009.pdf.
162 If 11 percent of businesses misclassify only
one worker as an independent contractor, there are
100 businesses, and each employer has 20 workers,
then the total percentage of these misclassified
workers is actually 0.5 percent. To find that 11
percent of workers are misclassified as independent
contractors, all of the businesses who misclassified
workers as independent contractors would need to
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This binary approach to data collection
on a per employer basis prevents a
disambiguation to analyze the actual
number of misclassified workers in the
labor force. This phenomenon is present
is another study conducted by the
Wisconsin Department of Revenue cited
by NELP, which claimed that ‘‘In 2018,
44% of audited employers were found
to be misclassifying workers.’’ 163
However, that data seems to be
misleading for multiple reasons. First,
the quotation does not appear to match
the cited source. Appendix 2 of the
Wisconsin Workforce Report states that
in 2019 the ‘‘percentage of audited
employers with misclassified workers’’
was 33.3 percent (divergent from the
‘‘44 percent’’ that NELP stated). Second,
the number of businesses found to be
misclassifying workers does not address
how many workers were misclassified.
The percentage of workers misclassified
was 10.6, across all of the audited
employers, which is much smaller than
either 33 or 44 percent. Finally, all of
these estimates are compounded by the
targeting bias described earlier, namely
that the results only reflect businesses
specifically targeted for audits, which
presents only a partial picture of the
incidence of such misclassification
economy-wide.
Ultimately, and as explained above in
Section VI(G)(2), commenters’ estimates
regarding current rates of
misclassification—whether accurate or
not—have little bearing on how
misclassification rates are likely to
change as a result of this rule. This rule
establishes a clearer test for when a
worker is an independent contractor
rather than an employee under the
FLSA. As such, it would reduce
inadvertent misclassification by
employers who are confused by the
prior test, particularly small businesses
that lack resources to hire expensive
attorneys. For example, one small
business owner commented to explain
that ‘‘the ability to understand and
properly determine worker status under
the FSLA is paramount for small
businesses who cannot afford the cost of
litigation . . . I believe that with the
proper transparency within the
regulations, the better the outcome not
only for small businesses, but the
worker, and ultimately the care
recipient. We want to comply, and I
have confidence that the proposed [rule]
. . . will be highly effective in
have misclassified 100 percent of their workforce as
independent contractors.
163 Wisconsin Department of Workforce
Development, Payroll Fraud and Worker
Misclassification Report 16 (2020), available at:
https://dwd.wisconsin.gov/misclassification/pdf/
2019-2020-misclassification-task-force-report.pdf.
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achieving the desired clarity and
certainty.’’ A clearer test also means
more workers will better understand
their rights under the FLSA and can
defend those rights through private
litigation or complaints to the
Department, which should deter
unscrupulous employers from
intentionally misclassifying them.
In summary, the Department believes
that the simplicity and clarity this rule
provides will reduce both inadvertent
and intentional misclassification, which
could produce transfers from employers
to employees who are more likely to be
correctly classified and given minimum
wage and overtime pay. The Department
is unable to calculate the exact transfer
amount because it lacks reliable metrics
on, for example, the existing
misclassification rates in the general
economy, the precise extent to which
this rule improves legal clarity, and how
firms will respond to that clarity.
7. Job Conversion
Many commentators expressed
concerns that the rule would cause
businesses to reclassify their workers as
independent contractors, causing those
workers to lose the benefits of the FLSA
with little gain in return. See, e.g.,
Washington Center (asserting that
‘‘independent contractors tend to be
worse-off than their wage-and-salary
counterparts’’); National Women’s Law
Center (‘‘if finalized, this rule will cost
workers . . . in the form of reduced
compensation’’); EPI (estimating that
converted ‘‘workers would lose $6,963
per year’’). Some of these issues are
discussed above. For example, the
Department discussed possible earnings
effects of workers converting from
employee to independent contractor
extensively in this section VI(D) and
concluded it could not definitively
determine whether overall
compensation—i.e., earnings plus
benefits—for a job that is converted
from employee to independent
contractor classification in response to
this rule is likely to rise or fall on
average. Regardless, the Department
acknowledges that whether the overall
effect of job conversion is likely to be,
on balance, positive depends on the
individual, reclassified worker, the
unique circumstances of the business,
and whether or not the working
conditions were changed in order to
reclassify the worker.
If the converted position is an entirely
new position, it is more likely to be
filled by one of the many individuals
who desire to work as an independent
contractor, for example because they
value the ‘‘flexibility to choose when
and where to work’’ that the position
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may provide more than ‘‘access to a
steady income and benefits.’’ 164 Such
an individual may, for example,
discount the value of certain types of
compensation associated with employee
classification, such as health insurance,
that he or she might already enjoy from
a different source. The individual may
also simply prefer to trade overall
compensation for the greater flexibility
that often accompanies independent
contractor roles. Thus, the lower paid
converted new jobs do not necessarily
reduce such workers’ welfare because
they could offer tradeoffs that may be
preferable to the workers who are most
likely to sort themselves into those
positions. On balance, the Department
believes conversion of new jobs will
have an overall positive impact on
workers.
The second category of job conversion
discussed above occurs when employers
modify their working relationship with
existing employees such that they are
rendered independent contractors under
this rule. As explained above, to act on
the legal certainty provided by this rule,
the converted position likely would
have to provide the worker with
substantial control over the work and a
meaningful opportunity for profit or
loss. The Department believes such
conversions will be less common than
conversion of future positions because
the marginal cost of restructuring an
existing work arrangement is greater
than altering the arrangement of an
unfilled position. And such
restructuring would disrupt the
preexisting working relationships,
which risks negatively impacting
worker morale, productivity, and
retention. Nonetheless, some conversion
of existing positions may occur, and
some converted workers may prefer the
additional flexibility and earn more by
taking advantage of the opportunity for
profit or loss that may accompany the
conversion. The effect of the rule would
be positive for these workers. Other
converted workers may prefer the
security, stability, and other features of
an employment relationship or earn less
due to, for example, reduction of
employer-provided benefits,
employment taxes, and loss of the
FLSA’s minimum wage and overtime
pay. The effect of the rule would be
negative for these converted workers,
but, as explained above, the Department
believes this type of conversion will be
rare.
Finally, an employer may reclassify
an existing employee position to an
independent contractor position
164 See Coalition for Workforce Innovation (2020),
supra note 77.
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without meaningfully changing the
nature of the job in response to the
added legal clarity provided by this
rule. Employers could be most confident
of such reclassification under this rule
if the preexisting job already provided
the worker with substantial control over
the work and a meaningful opportunity
for profit or loss. The Department
believes this phenomenon is likely to be
rare because the current position would
have to be held by an individual who
is in business for him- or herself as an
economic reality but is nonetheless
presently classified as an employee.
While many commenters warned that
economically dependent employees
may be improperly classified as
independent contractors, none
expressed concern that there is
widespread classification of individuals
who are in business for themselves as
employees.165 Such employees may
nonetheless exist and be converted into
independent contractors as a result of
this rule. Features of these converted
workers’ work, for example the level of
flexibility and stability, would remain
unchanged because the job remains the
same. Firms could potentially reclassify
existing workers who are already in
business for themselves in a manner
that reduces overall compensation, but
their ability do to so would be
constrained because such reduction
could negatively impact worker morale,
productivity, and retention.166
Nonetheless, the sharpening of the
economic reality test may negatively
impact some current employees who
could be reclassified as independent
contractors in a manner that results in
reduced overall compensation but are
165 Commenters in the business and freelancer
community indicated that—rather than classify
independent entrepreneurs as employee in response
to legal uncertainty regarding classification—
business simply decline to do business with those
entrepreneurs in the first place. See, e.g., ASTA
(‘‘The prospect of inconsistent determinations has
had a chilling effect on the growth of businesses in
industries reliant on contract workers which has
resulted in fewer opportunities for individuals who
choose to offer their services as independent
entrepreneurs.’’); CPIE (‘‘uncertainty associated
with worker classification under the FLSA . . .
discourages companies from doing business with
independent entrepreneurs’’). The effects described
by these commenters are unsurprising. For
example, it makes little sense for a business to
classify a worker as an employee, thus obligating
themselves to pay a premium rate for overtime work
under the FLSA, if it is the worker and not the
business who determines how many hours to work
each week. Rather, the business likely would either
not hire the worker at all or hire him or her as an
employee but insist on controlling hours worked.
166 Most firms can already reduce the overall
compensation of their employees whose wages
exceed the minimum wage through more direct
means than reclassification as independent
contractors but do not do so because of risks
regarding morale, productivity, and retention.
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not afforded non-pecuniary benefits, for
example additional flexibility, in
return.167 EPI and likeminded
commenters believe these workers
would be ‘‘doing the same job for
substantially less compensation as an
independent contractor,’’ and that this
class of worker comprises the majority
or even all of the workers impacted by
this rule. The Department agrees that
some workers could be impacted in this
manner, but believes such occasions are
likely to be rare because two necessary
conditions limit the number of such
workers.
First, in order for conversion to have
an unambiguously negative affect, a
converted worker’s overall
compensation must be at the minimum
wage. Generally, firms impacted by the
rule can already directly reduce wages
and benefits of their employees—they
do not need to convert those employees
to independent contractor to achieve
these labor cost savings. However, most
firms do not reduce their employees’
compensation due to the risk of
lowering morale, reducing productivity,
and causing turnover. That is to say, the
labor markets in which most firms
operate prevents them from setting
compensation without regard for worker
preferences. The Department believes
that a firms’ ability and willingness to
reduce its employees’ compensation is
shaped by the tradeoff between labor
savings, on one hand, and the risk of
lower productivity and higher turnover,
on the other. Clarifying the legal
requirement for firms to convert a
position from employee to independent
contractor status would not make firms
any more willing or able to reduce
compensation unless the worker was
already earning the minimum wage and
receiving no benefits. According to BLS,
based on CPS data, in 2017 there were
370,000 adult 168 employees paid at the
minimum wage, which comprise 0.24
percent of the U.S. labor force.169
167 Employers and employees could make similar
conversions to independent contractor status for
reasons outside the sharpening of the economic
reality test this rule provides. Such shifts would not
be identified as impacts in this analysis because the
impetus for such conversion is due to factors other
than this rule.
168 This figure excludes workers under the age of
19. If excluding workers under the age of 24, this
figure drops over 40 percent to 221,000. This figure
does not include workers who make less than the
minimum wage, a vast majority of whom work in
the restaurant industry and receive tips for their
work. The average earnings of a restaurant worker
who receives tips is significantly above the
minimum wage. The figure includes part time
workers, who would not likely receive overtime
compensation due to the limited number of hours
they work.
169 In 2017, there were approximately
152,000,000 workers in the U.S., according to the
U.S. Bureau of Labor Statistics.
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Second and as explained above, the
converted worker whose job remains
unchanged is likely to already have
substantial control over the work and a
meaningful opportunity for profit or loss
such that he or she can be classified as
independent contractor with the most
legal certainty this rule can provide.
The Department was unable to
determine how many of the 370,000
current minimum wage employees also
meet these two criteria, although it
expects the number to be low. The
Department attempted to identify
examples of minimum wage employees
who enjoy substantial control over their
work and a meaningful opportunity for
profit or loss, but was unable to do so.
Nor did commenters provide specific
data or examples of minimum wage
employees who would meet these
criteria. Several commenters argued that
the Department failed to adequately
consider the effects of these possible
conversions from employee to
independent contractor, or the potential
negative effects of misclassification on
workers. NELA, for instance, asserted
that the NPRM’s cost-benefit analysis
focused solely on companies rather than
workers and further claimed that the
Department ‘‘ignores the massive cost to
misclassified workers.’’ Other
commenters stated that the final rule
would harm workers by either
increasing the rate of misclassification
or by allowing employers to reduce
wages and benefits of employees who
are converted into independent
contractors. See, e.g., Washington
Center for Equitable Growth
(Washington Center) (asserting that
‘‘independent contractors tend to be
worse-off than their wage-and-salary
counterparts’’); Appleseed Center
(expressing concern that rule ‘‘will harm
workers across a broad spectrum, [but]
will have a disproportionate impact on
Black and Hispanic workers who are
overrepresented in the low-paying jobs
where independent contractor
misclassification is common’’); National
Women Law Center (‘‘if finalized, this
rule will cost workers . . . in the form
of reduced compensation’’); EPI
(estimating that individual ‘‘workers
would lose $6,963 per year’’).
As is explained in greater detail
below, the Department disagrees with
these comments that the rule will
broadly harm workers. The Department
agrees with the numerous commenters,
including nearly all individual
commenters who self-identified as
freelancer workers, who asserted that
the rule would encourage flexible work
arrangements and thereby create
meaningful—though not easily
measurable— value for workers. One
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commenter explained that ‘‘[b]eing an
independent worker allows for me to do
what I can as a single mother, have
flexibility.’’ Another stated that
‘‘[f]reelancing has afforded me
independence and flexibility and the
opportunity to be a productive member
of society, and do my best work.’’ As a
final illustrative example, another
commenter asserted that ‘‘[t]he primary
value for myself as an independent
contractor for my services is the
freedom to negotiate, to choose, and the
freedom to limit what services I provide,
the days, and hours of work, and the
price of my labor, unencumbered by the
less flexible but more secure employer
employee relationship.’’ Although some
workers in positions converted from
employees to independent contractor
relationships may receive fewer benefits
traditionally associated with
classification as employees, the
Department believes that this would
likely be infrequent and their net effect
would not necessarily be negative.170
Moreover, the Department believes any
negative effects would be outweighed by
the significant value the rule delivers to
other workers and businesses by
clarifying, simplifying, and reducing
transaction costs around independent
contractor arrangements.
No commenter provided evidence or
specific cases in which individuals or
types of workers would, as a result of
this rule, be converted from employees
to independent contractors. Because the
rule does not change the classification
of any employee, any jobs converted
without meaningful change would have
had to already have satisfied the
requirements of bona fide independent
contracting arrangements under this
rule, with the only change likely being
a lower assessed litigation risk for
certain businesses. While the number of
workers for whom reclassification
occurs without bringing them
meaningful benefits may not be zero, the
Department believes such cases will be
rare exceptions. Even if the
classification of a worker were to
change, the business could face market
forces that would likely hold overall
compensation steady. Furthermore,
businesses would need to take caution
that any new contract relationship
would neither damage worker relations
170 As explained in more detailed above, this is
because most workers can be converted from
employee into independent contractor classification
only if they are provided with greater control over
their work and opportunity for profit or loss based
on their initiative or investment. Such flexibility
and entrepreneurial opportunities may be more
valuable to such workers than potential reduction
in benefits associated with classification as
employees.
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nor its underlying business model, both
of which would likely negatively impact
productivity.
In summary, the most common
categories of job conversions—e.g., new
positions—are likely to positively
impact workers. And the category of job
conversions that is likely to produce
negative impacts—i.e., reclassification
of workers without changes to the job—
is most likely the rarest. For these
reasons, the Department believes
benefits to workers from job conversions
will, on balance, exceed costs.
E. Costs
The Department considered several
costs in evaluating the rule. The
Department quantified regulatory
familiarization costs and estimated that
they will total $370.9 million in Year 1.
Other potential costs, including those
raised by commentators, were not
quantified, for reasons explained in the
sections that follow.
1. Regulatory Familiarization Costs
Regulatory familiarization costs
represent direct costs to businesses and
current independent contractors
associated with reviewing the new
regulation. To estimate the total
regulatory familiarization costs, the
Department used (1) the number of
establishments, government entities,
and current independent contractors; (2)
the wage rates for the employees and for
the independent contractors reviewing
the rule; and (3) the number of hours
that it estimates employers and
independent contractors will spend
reviewing the rule. This section presents
the calculation for establishments first
and then the calculation for
independent contractors.
For a rule like this one, it is not clear
whether regulatory familiarization costs
are a function of the number of
establishments or the number of
firms.171 Presumably, the headquarters
of a firm will conduct the regulatory
review for businesses with multiple
locations, and also may require some
locations to familiarize themselves with
the regulation at the establishment level.
Other firms may either review the rule
to consolidate key takeaways for their
affiliates or they may rely entirely on
171 An
establishment is commonly understood as
a single economic unit, such as a farm, a mine, a
factory, or a store, that produces goods or services.
Establishments are typically at one physical
location and engaged in one, or predominantly one,
type of economic activity for which a single
industrial classification may be applied. An
establishment contrasts with a firm, or a company,
which is a business and may consist of one or more
establishments. See BLS, ‘‘Quarterly Census of
Employment and Wages: Concepts,’’ https://
www.bls.gov/opub/hom/cew/concepts.htm.
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outside experts to evaluate the rule and
relay the relevant information to their
organization (e.g., a chamber of
commerce). The Department used the
number of establishments to estimate
the fundamental pool of regulated
entities—which is larger than the
number of firms. This assumes that
regulatory familiarization occurs at both
the headquarters and establishment
levels.
There may be differences in
familiarization cost by the size of
establishments; however, the analysis
does not compute different costs for
establishments of different sizes.
Furthermore, the analysis does not
revise down for states where the laws
may more stringently limit who
qualifies as an independent contractor
(such as California) and thus the new
rule will have little to no effect on
classifications. To estimate the number
of establishments incurring regulatory
familiarization costs, the Department
began by using the Statistics of U.S.
Businesses (SUSB) to define the total
pool of establishments in the United
States.172 In 2017, the most recent year
available, there were 7.86 million
establishments. These data were
supplemented with the 2017 Census of
Government that reports 90,075 local
government entities, and 51 state and
Federal government entities.173 The
total number of establishments and
governments in the universe used for
this analysis is 7,950,800.
The applicable universe used by the
Department for assessing familiarization
costs of this final rule is all
establishments that engage independent
contractors, which is a subset of the
universe of all establishments. In its
analyses, the Department estimates the
impact of regulatory familiarization
based upon assessment of the regulated
universe. In several recent rulemakings,
the Department estimated that the
regulated universe comprised all
establishments because the rules were
broadly applicable to every employer.174
For those rules, the Department
estimated familiarization costs by
assuming each establishment would
review each rule. Because this final rule
affects only some establishments, i.e.,
172 U.S. Census Bureau, 2017 SUSB Annual Data
Tables by Establishment Industry. https://
www.census.gov/data/tables/2017/econ/susb/2017susb-annual.html.
173 U.S. Census Bureau, 2017 Census of
Governments. https://www.census.gov/data/tables/
2017/econ/gus/2017-governments.html.
174 These include Joint Employer Status under the
Fair Labor Standards Act; Defining and Delimiting
the Exemptions for Executive, Administrative,
Professional, Outside Sales and Computer
Employees; and Regular Rate Under the Fair Labor
Standards Act.
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those that currently or may in short
order face an independent contractor
versus employee classification
determination, the Department
accordingly reduces the estimated pool
to better estimate the establishments
affected by the rule by assessing
regulatory familiarity costs only for
those establishments that engage
independent contractors.
In 2019, Lim et al. used extensive IRS
data to model the independent
contractor market, finding that 34.7
percent of firms hire independent
contractors.175 These data are based on
annual tax filings, so the dataset
includes firms that may contract for
only parts of a year. The 34.7 percent of
establishments provides a figure of
2,758,928, which forms the foundation
of the multiplier used in this analysis.
The Department did not estimate
familiarization costs for companies that
may decide to work with independent
contractors only after the new rule is
finalized, because they would need to
familiarize themselves with the current
legal framework even in the absence of
this rule.176 Although firms that do not
currently use independent contractors
are not counted in this universe of
employers, to allow for an error margin,
the Department is using a rounded 35
percent of the total number of
establishments defined above
(7,950,800), resulting in 2,782,780
establishments estimated to incur
familiarization costs.
The Pennsylvania Department of
Labor & Industry (PA L&I) commented
that the Department underestimated the
cost of the rule by failing to include
businesses that are newly incentivized
to consider reclassifying workers to
independent contractors. As stated
above, even without the new rule any
firm that does not currently engage any
independent contractors but chooses to
do so in the future would have already
had to familiarize itself in the baseline
case, so this rule does not impact those
firms. Since the commenter’s point is
premised on the fact that the firm may
be incentivized to investigate the
regulation, it would be reasonable to
assume that any firm without
independent contractors that reviews
the new rule and ultimately decides to
175 Table
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10: Firm sample summary statistics by
year (2001–2015), https://www.irs.gov/pub/irs-soi/
19rpindcontractorinus.pdf.
176 An added dimension is that the final rule is
expected to provide significant clarity, which
would result in time and cost savings (net of
regulatory familiarization costs) for those outside
the pool of firms with existing independent
contractor relationships. These (net) cost savings
are not included in this analysis, consistent with
this analysis’ treatment of resulting growth in the
independent contractor universe.
hire independent contractors is doing so
because the firm believes the new
relationship will be beneficial to itself
and the independent contractor also
believes that the new relationship will
be beneficial to him or herself. Such a
situation would result in net benefits to
the employer that more than fully
compensate for any familiarization
costs. Notably, and for comparability in
estimates, the Department does not add
these potential firms to the Benefits
section either.
The Department assumes that a
Compensation, Benefits, and Job
Analysis Specialist (SOC 13–1141) (or a
staff member in a similar position) will
review the rule.177 According to the
Occupational Employment Statistics
(OES), these workers had a mean wage
of $33.58 per hour in 2019 (most recent
data available). Given the proposed
clarification to the Department’s
interpretation of who is an employee
and who is an independent contractor
under the FLSA, the Department
assumes that it will take on average
about 1 hour to review the rule as
proposed. The Department believes that
an hour, on average, is appropriate,
because while some establishments will
spend longer than one hour to review
the rule, many establishments may rely
on third-party summaries of the changes
or spend little or no time reviewing the
rule. Assuming benefits are paid at a
rate of 46 percent of the base wage, and
overhead costs are 17 percent of the
base wage, the reviewer’s effective
hourly rate is $54.74; thus, the average
cost per establishment conducting
regulatory familiarization is $54.74.
Therefore, regulatory familiarization
costs to businesses in Year 1 are
estimated to be $152.3 million ($54.74
× 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 average time spent by
independent contractors is estimated to
be smaller than for establishments. This
difference is in part because the
Department believes independent
contractors are likely to rely on
summaries of the key elements of the
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177 A Compensation/Benefits Specialist ensures
company compliance with Federal and state laws,
including reporting requirements; evaluates job
positions, determining classification, exempt or
non-exempt status, and salary; plans, develops,
evaluates, improves, and communicates methods
and techniques for selecting, promoting,
compensating, evaluating, and training workers. See
BLS, ‘‘13–1141 Compensation, Benefits, and Job
Analysis Specialists,’’ https://www.bls.gov/oes/
current/oes131141.htm.
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rule change published by the
Department, worker advocacy groups,
media outlets, and accountancy and
consultancy firms, as has occurred with
other rulemakings. Furthermore, the
repercussions for independent
contractors are smaller (i.e., the
litigation costs, damages, and penalties
associated with misclassification tend to
fall on establishments).178 This time is
valued at $46.36, which is the mean
hourly wage rate for independent
contractors in the CWS, $27.27, with an
additional 46 percent benefits and 17
percent for overhead, then updated to
2019 dollars. Therefore, regulatory
familiarization costs to independent
contractors in Year 1 are estimated to be
$218.6 million ($46.36 × 15 minutes ×
18.9 million).
The estimate of 18.9 million
independent contractors captures the
universe of workers over a one-year
period. Using this figure for the overall
cost estimate results in an artificially
high value because it includes workers
who would have otherwise been
included in the baseline case without
the rule and thus spent time
familiarizing themselves with the legal
framework in the matter of course,
without incurring a supplementary cost.
Furthermore, the Department believes
that it is probable that independent
contractors would review the regulation
only when they had reason to believe
that the benefits would outweigh the
costs incurred in familiarizing
themselves with the rule, and since this
analysis does not attempt to calculate
those economic benefits it is possible
that the costs presented in this section
are overestimated.179
The total one-time regulatory
familiarization costs for establishments
and independent contractors are
estimated to be $370.9 million.
Regulatory familiarization costs in
future years are assumed to be de
minimis. Similar to the baseline case for
employers, independent contractors
would continue to familiarize
themselves with the applicable legal
framework in the absence of the rule, so
this rulemaking—anticipated to provide
more clarity—is not expected to impose
costs after the first year.180 This
178 An independent contractor that hires
independent contractors would already be captured
in the ‘‘establishment’’ calculation.
179 For example, independent contractors in states
with classification frameworks that are known to be
more stringent than the existing FLSA classification
framework, such as in California, may not review
the rule since it would be unlikely to affect their
classification.
180 As explained below, the Department considers
that the regulation may produce benefits along this
dimension in future years by simplifying the
regulatory environment.
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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.
SWACCA commented that regulatory
familiarization costs were
underestimated because they ‘‘would
not only be imposed upon adoption of
a final rule but would be ongoing as
stakeholders begin to understand
whether and how it will be applied.’’
Additionally, they asserted the costs for
businesses to familiarize themselves
with the new guidance would exceed
the cost of familiarization for the
existing guidance, a claim that the
commenter did not substantiate with
data. The Department disagrees with
this assertion. The rule is expected to
reduce the time spent analyzing how the
economic reality test’s factors interact.
Accordingly, the Department reiterates
that incremental regulatory
familiarization costs in future years are
expected to be de minimis.
A number of commenters expressed
support for the cost estimates. The CGO
states that, ‘‘As currently written, the
proposed rule carefully quantifies the
cost savings of reduced litigation and
increased clarity.’’ AFPF posited that, if
anything, the calculations would tend to
reflect ‘‘an overstatement of regulatory
familiarization costs.’’
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2. Other Costs 181
It is possible this rule will result in
costs beyond the above described
familiarization costs. In the NPRM, the
Department invited comments and data
on potential other costs of this rule. The
Department received comments
responsive to these requests which
generally fell into seven categories:
Impacts to workers; impacts to tax
revenues; impacts on competition;
impacts on income inequality and to
minorities and women; tax filing;
implementation; and impacts on income
stability. The Department evaluated all
of the potential costs that were
identified, and examined many of the
citations provided. In general, the
commenters did not provide ample data
or other evidence to support their
claims, and, upon review, the
Department was unable to confirm or
substantiate the proposed cost
categories in its own research.
Therefore, in this section of the analysis,
the Department addresses the points
181 Various commenters to the NPRM raised
points that they considered ‘‘costs,’’ although those
points may more accurately be defined as transfers
under Executive Order 12866. To clearly address
these points, the Department decided to address the
following areas with the language used by
commenters. For further discussion of related
impacts, please see the Potential Transfers section.
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raised and discusses the qualitative
merits, but does not quantify estimates
for inclusion in its top line figures.182
Detailed explanations are presented in
each category below, including
discussion of the range of uncertainties
and data limitations identified.
a. Additional Impacts to Workers
Several commenters asserted that the
NPRM’s discussion of costs did not
include a discussion of effects on
workers beyond minimum wage and
overtime pay. Ironworkers Local Union
7 stressed the importance of benefits
such as workers’ compensation for the
dangerous nature of the work of their
members and other construction
workers. The Center for Law and Social
Policy (CLASP) noted that the rule
could also impact other benefits based
on the FLSA’s definition of
employment, such as access to paid sick
leave in general and under the Families
First Coronavirus Response Act
(FFCRA). The Washington Center,
among others, contended it may also
impact workers’ rights to join a union.
The International Brotherhood of
Teamsters commented that the
liquidated damages remedy for willful
or bad faith violations of the FLSA is
not available to workers who are
classified as independent contractors.
Other commenters asserted that
independent contractors are also not
protected by the Federal antidiscrimination and health and safety
statutes, and that the Department failed
to consider this effect.183
These potential impacts do not
change the Department’s overarching
view that workers as a whole will be
better off as a result of this rule, even
if some workers may not be better off.
Generally speaking, the above
commenters raise points that
fundamentally rest on the assumption
182 In some cases, commenters raised points that
may very well impact certain individuals in
specialized circumstances, but which are not, when
aggregated across the economy as a whole,
cumulatively significant or representative.
183 The Department has not conducted a thorough
review of discrimination law at the Federal or state
level for the purposes of this rulemaking, but notes
that independent contractors are protected by at
least some Federal anti-discrimination laws. See,
e.g., 42 U.S.C. 1981. Further, the scope of these laws
is not dependent on employee status under the
FLSA. See, e.g., Gulino v. New York State Educ.
Dep’t, 460 F.3d 361, 379 (2d Cir. 2006) (‘‘[T]he
Supreme Court has given us guidelines for
discerning the existence of an employment
relationship [in the race-discrimination context]:
Traditional indicators of employment under the
common law of agency.’’); Weary v. Cochran, 377
F.3d 522, 524 (6th Cir. 2004) (‘‘[T]he proper test to
apply in determining whether a hired party is an
employee or an independent contractor under the
[Age Discrimination in Employment] Act is the
‘common law agency test.’ ’’).
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that independent contractors cannot
adequately assess their risks, needs, and
goals. Furthermore, these commentators
seem to assume that the listed features
could be obtained by workers with no
cost to the worker. The Department does
not agree with such assessments. The
Independent Women’s Forum stated
that the flexibility afforded by
independent contracting is especially
‘‘crucial for women who are the primary
caregivers in their households.’’
Palagashvili; Independent Women’s
Forum (‘‘Women find independent
contracting appealing because of the
flexibility, autonomy, and freedom it
provides.’’). Nor did individual
freelancer commenters, who repeatedly
affirmed their ability to make rational
decisions for themselves and their own
businesses. One such commenter stated
that ‘‘I prefer the option to make my
own schedule and decide how I want to
proceed in making my money at my
own discretion.’’ Another explained
that, ‘‘[a]s an independent contractor I
am free to choose when and where I
work. This is important to me as a
caregiver for elderly relatives.’’ As a
final illustrative example, a freelancer
stated that ‘‘I have chosen this
profession because of the freedom and
flexibility it affords me. I also can earn
more freelancing than I could working
in a similar full-time job [. . .]. I am a
far better judge of what is good for me
than a politician in Washington.’’
Independent workers are a bedrock of
the U.S. economy and are acutely aware
of their own values and needs.
Fundamental to being an independent
contractor is the ability to control one’s
own work, which enables workers to be
the deciding factor in accepting or
declining work that may be risky or not
as rewarding. The commenters above
did not cite or offer data to support their
assumption that employees covered by
the FLSA are intrinsically better off
compared to genuine independent
contractors who are not covered by the
FLSA. Several commenters, notably
CLASP and NWLC, who submitted
comments related to the pandemic do
not address the abundant data
demonstrating that access to
independent contracting has been
essential for many workers attempting
to balance responsibilities, especially
for women and caregivers. Accordingly,
to the extent the final rule will increase
the frequency of independent
contracting, the Department believes
that workers will, on net, benefit from
that option.
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b. Impacts to Tax Revenue and Public
Assistance
Some commenters asserted that the
rule will either reduce tax revenue or
increase public assistance. For example,
some commenters pointed out that lowincome workers who are classified as
independent contractors are often forced
to rely on public assistance programs.
The UFCW cites a study finding 15
percent of platform workers in the San
Francisco area receive some form of
public support (e.g. food stamps,
housing assistance) and 30 percent were
on state public-access health
insurance.184 This report did not,
however, compare this finding with the
extent to which low-income employees
rely on public assistance. The
Department notes that public assistance
is available to low-income individual
whether they are employees or
independent contractors. An increase in
independent contracting will not
necessarily lead to increased public
assistance expenditures. To the
contrary, if independent contracting,
even at a low income, is the alternative
to unemployment or nonparticipation in
the labor force, then it would reduce
means-tested public assistance
expenditures. Several individual
commenters suggested that they would
not be working at all but for
independent contractor opportunities.
One commenter said, ‘‘I am an
independent contractor, i.e. business
owner; I am self-employed. I would not
be able to work in any capacity, other
than self-employed.’’ Another
explained, ‘‘I am 71 years old and
cannot (and will not) take regular
employment. Earning an income from
my home is safer, more effective and
more satisfying.’’ As a final illustrative
example, a woman explained that ‘‘[a]s
a single mother trying to go back to
school I have day and night classes.
Having a regular job during this time be
[sic] very challenging to meet my school
hours.’’ Thus, making it easier for
individuals to work as independent
contractors may reduce the burden on
public assistance. Furthermore, since
this RIA focuses on the changes at the
margin based on increased clarity of the
classification factors, the concerns
raised by the studies cited by these
commenters would not necessarily
apply to those this rule impacts.
Several commenters noted that
taxpayers funded unemployment
payments for independent contractors
184 C. Benner, E. Johansson, K. Feng, and H. Witt.
‘‘On-Demand and On the Edge: Ride-Hailing &
Delivery Workers in San Francisco’’ (May 5, 2020),
https://transform.ucsc.edu/on-demand-and-on-theedge.
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through the Pandemic Unemployment
Assistance (PUA) program. SWACCA
noted that more than 11 million selfemployed individuals have received
assistance from PUA.185 The nationwide
response to the COVID–19 pandemic
was intentionally robust. PUA
assistance was funded by Congress in
the CARES Act.
Several commenters noted that any
shift from employees to independent
contractors will result in lost tax
revenue. Specifically, the Michigan
Regional Council of Carpenters cites
estimates of the loss in taxes in
Michigan and other states due to
misclassification.186 Notably,
misclassified workers are not the same
as independent contractors. In fact, this
rule clarifies the classification of
workers and is expected to result in
fewer total cases of misclassified
workers. The Department does not agree
with the assumptions about the U.S.
labor market held by commenters to this
rule that reference studies on the cost of
misclassified workers. EPI estimated
that the increase in workers classified as
independent contractors will lead to a
transfer of at least $750 million annually
from social insurance funds. EPI’s
estimate is predicated on an assumption
that eligibility for independent
contractors to receive unemployment
benefits ‘‘will occur in future
recessions.’’ The unprecedented CARES
Act funded unemployment benefits
through PUA for the first time in
history. EPI’s entire estimate rests on
such unprecedented relief becoming
commonplace, a view which the
Department does not share. The
Washington Center cites a study by
Harvard Law School’s Labor and
Worklife program that ‘‘found that
between 2013 and 2017, the state of
Washington lost $152 million in
unemployment taxes and the Federal
government lost $299 million in payroll
taxes due to worker misclassification in
the state.’’ 187 Again, worker
185 Unemployment Insurance Weekly Claims
Report (October 15, 2020), https://oui.doleta.gov/
press/2020/101520.pdf.
186 D. Belman and R. Block, ‘‘Informing the
Debate: The Social and Economic Costs of
Misclassification in the Michigan Construction
Industry,’’ Institute for Public Policy and Social
Research, Michigan State University (2008), https://
ippsr.msu.edu/publications/ARMisClass.pdf. F.
Carre, ‘‘(In)dependent Contractor
Misclassification,’’ EPI Briefing Paper #403 (June 8,
2015), https://files.epi.org/pdf/87595.pdf. O. Cooke,
D. Figart, J. Froonjian, and K. Sloane, ‘‘The
Underground Construction Economy in New
Jersey,’’ Stockton University (2016), https://
www.mcofnj.org/wp-content/uploads/2018/05/
Underground-Construction-Economy-SummaryJune-2016.pdf.
187 L. Xu and M. Erlich, ‘‘Economic Consequences
of Misclassification in the State of Washington.’’
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misclassification is erroneously
compared to independent contractors.
Further, the majority of these estimates
of lost revenue are due to an assumption
that freelance workers do not report
their full earnings, which is a criminal
offense. A letter from seven
Congressional Representatives cited a
1984 IRS estimate that misclassification
cost the Federal government $3.72
billion (adjusted to 2019 dollars), nearly
60 percent of which was from
misclassified workers failing to pay
income taxes and the remainder was
due to failure to pay taxes used to fund
social insurance programs. Once again,
this comment failed to meaningfully
explain how the studies it cites can be
extrapolated across independent
contractors.
The Department notes that certain
employer required taxes, such as
unemployment insurance and workers’
compensation, are not required for
independent contractors, and thus the
associated tax revenue will decrease if
more individuals choose to work as
independent contractors. However, the
lack of transfer means that the worker
keeps more money, which may be saved
to provide for periods of
unemployment. Additionally, these are
transfer programs where the benefits are
paid to the workers who pay into the
program through their employers. Thus,
if independent contractors are not
eligible to participate in these program,
government expenditures would also
decrease. Therefore, providing
unemployment benefit or workers’
compensation to independent
contractors is generally not a cost to
state and local governments. To
demonstrate, consider unemployment
programs, which are a type of insurance.
Reduced unemployment taxes are
generally offset by reduced
unemployment benefits. The only direct
cost would be if workers who no longer
pay into these programs continue to
receive benefits. These direct costs are
expected to be small.
Government revenue from other taxes,
such as income and Medicare taxes,
may go up or down as a result of this
rulemaking depending on the total
income of employers, employees, and
independent contractors. However, a
decrease in tax revenue due to a failure
of some independent contractors to fully
pay their required taxes is not a cost
attributable to the Department’s
rulemaking revising the standards for
independent contractor status under a
Harvard Law School Labor and Worklife Program
(2019), https://lwp.law.harvard.edu/news/workermisclassification-washington-state-leads-millionsrevenue-losses-new-harvard-report.
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Federal law separate and apart from any
tax law.
Finally, the Department notes that
overall state and local tax revenue may
increase as a result of the efficiency and
flexibility this rule promotes. The
Department believes that legal clarity
provided by this rule will result in,
among other things, lower regulatory
compliance and litigation costs, more
efficient and innovative work
arrangements, and new jobs for
individuals who otherwise would not
work. All of this could increase firms’
profits and workers’ incomes, which
results in a larger pool from which state
and local taxes are drawn. The overall
positive effect on state and local tax
revenue may dwarf, for example, any
reduction in unemployment insurance
or workers compensation taxes. The
Department, however, declines to
quantify net effects on state and local
tax revenue because it believe any such
attempt to do so would require too
many assumptions.
c. Fair Competition
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Several commenters stated that
expanding the scope of independent
contractors will ‘‘fuel a race to the
bottom,’’ where companies will feel
pressure to classify workers as
independent contractor to reduce labor
costs in order to compete in their
market. UPS claimed that companies
misclassifying workers as independent
contractors externalize their costs and
hurt other businesses through unfair
competition.188 The Department
believes that this will be unlikely
because the risks of losing workers
likely prevents businesses from
reducing overall compensation, which
includes the fully burdened wage rate
(i.e., with taxes and benefits included).
Any decrease in compensation below
this level would likely result in firms
not being able to hire adequate labor
(either quantity or quality). This rule
does not, as some commenters claimed,
expand the scope of permissible
independent contracting arrangements
but rather clarifies and sharpens the test
for determining proper classification,
which is expected to benefit both
workers and firms.
188 UPS does not use independent contractors for
some of the roles or occupations that its largest
competitor, FedEx, does. FedEx relies heavily on
independent contractors for its business model, and
recently won a legal case against the National Labor
Relations Board, in which the court found that
certain FedEx drivers were legitimately classified as
independent contractors under the NLRA. See
FedEx Home Delivery v. NLRB, 893 F.3d 1123No.
14–1196 (D.C. Cir. 2017).
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d. Income Inequality and Impacts on
Minorities and Women
Some commenters asserted that the
rule could increase racial and gender
income inequality. NWLC wrote that
additional protections other than
minimum wage and overtime pay
afforded by the FLSA were particularly
important for working women, such as
‘‘employer obligations to accommodate
breastfeeding workers’’ 189 and
‘‘protections against pay
discrimination.’’ The Washington
Center cited a study on outsourcing that
it believed shows independent
contracting ‘‘has contributed to
increased wage inequality in the United
States.’’ 190 But the cited study actually
found something different: ‘‘the
increased concentration of typically
low-wage occupations over time can be
explained by changes in the
characteristics of establishments
employing these occupations.’’ 191 In
other words, the study linked wage
inequality to employers outsourcing
jobs to other employers that paid lower
wages, and made no attempt to isolate
the effects of independent contracting.
The evidence discussed in this analysis
shows that independent contractors
often earn more than their employee
counterparts further undermines the
commenter’s assertion.
UFCW wrote that ‘‘[t]he proposed
regulation fails to address its potential
impact on people of color who are
overrepresented in low-wage
independent contractor positions such
as app-based platform work.’’ This rule
clarifies for app-based platforms how to
properly classify workers, thereby
reducing regulatory compliance,
litigation, and transaction costs. Some of
these cost savings could be shared by
app-based workers in the form of
increased earnings, bonuses, or more job
opportunities.192 To the extent that
certain racial groups make up a
disproportionate share of app-based
workers, those groups will also enjoy a
disproportionate share of benefits.
Regarding gender-based inequality in
189 Independent contractor relationships provide
flexibility to accommodate individual worker
needs, such as child care and breastfeeding.
190 Including E. Handwerker and others.
‘‘Increased Concentration of Occupations,
Outsourcing, and Growing Wage Inequality in the
United States,’’ (2015), https://
www.semanticscholar.org/paper/IncreasedConcentration-of-Occupations%2C-and-GrowingHandwerker-Abraham/
f7d0d2c9cfcbf53f961bb07a2542abefe4be84c0?p2df.
191 Id. at 13 (emphasis added).
192 If, for example, the platform were to transfer
some of these increased earnings to consumers in
the form of discounts, the demand quantity for the
services (and thus the job opportunities for the ICs)
could increase.
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the gig economy, a recent NBER study
found that the gender wage gap among
on-demand rideshare workers is lower
than that of the rest of the economy and
is ‘‘entirely attributed’’ to differences in
experience and preferences.193 The
NBER study specifically found that
‘‘discrimination is not creating a gender
gap in this setting,’’ and ‘‘no other paper
has ever estimated such a precise ‘zero’
gender gap in any setting.’’ 194 Several
commenters cited other studies that
document measurable benefits of
independent contractor opportunities
for women. Dr. Liya Palagashvili
provided a lengthy review of the
literature on the beneficial impacts of
independent contract work for women.
She cited a study that finds that women
are the main caregivers at home, and 96
percent of women ‘‘indicate that the
primary benefit of engaging in platformeconomy work is the flexible working
hours.’’ See also Independent Women’s
Forum (‘‘Women find independent
contracting appealing because of the
flexibility, autonomy, and freedom it
provides.’’). A McKinsey Global
Institute study, discussed in an earlier
section, found that independent work
offers caregivers, who are
predominantly women, access to
economic opportunity they would
otherwise not have, concluding that
‘‘[t]his type of flexibility can ease the
burden on financially stressed
households facing logistical
challenges.’’ Dr. Palagashvili cited
numerous other studies that are
consistent in their findings: Women are
very much attracted to work
arrangements that offer flexibility,
including one that finds ‘‘75 percent of
self-identified homemakers, or stay-athome mothers in the United States,
indicated they would be likely to return
to work if they were to have flexible
options.’’ These studies offer data based
on primary research, and several
sources are based on economy-wide
survey data.
Dr. Palagashvili’s comments are
supported by many individual women
who commented to affirm that
independent contracting provides
necessary flexibility to balance their
work and life priorities. One woman
explained that ‘‘[a]s a work-at-home
mom, I ramped up my business to
coincide with the time I had available
while raising my kids. I worked during
their nap times, and then added more
hours as they went to school.’’ Another
193 Cody Cook, et al., The Gender Earnings Gap
in the Gig Economy: Evidence From Over a Million
Rideshare Drivers, NBER Working Paper No. 24732,
June 2018, available at https://www.nber.org/
system/files/working_papers/w24732/w24732.pdf.
194 Id. at 14.
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stated, ‘‘I have been a military spouse
for 17 years and the ability to work as
an independent contractor has been
invaluable to my family. Through every
move, my job comes with me; all I need
is a computer and access to the internet.
Had I been forced to find a new job with
each [change of station], our family
would have had some very tough
times.’’ As a final illustrative example,
a woman informed the Department that,
‘‘I have been an independent contractor
for more than 3 decades; it helped me
as a single mother and now it helps me
help the kids with my granddaughter.’’
The Department agrees with the above
commenters and data indicating that
women would benefit from greater
access to independent contracting
opportunities. By clarifying how
workers can be properly classified as an
independent contractor, this rule
promotes the formation of such
opportunities.
e. Tax Filing Costs
The AFL–CIO and the Washington
Center commented that independent
contractors have more time-intensive
accounting and tax filing processes, and
the Department should address these
costs. The Washington Center claims
that it is inappropriate to quantify time
savings from increased clarity but not to
quantify the increased time necessary to
file taxes, which they estimate to
amount to $832.3 million annually.
Even assuming independent contractors
spent more on their tax filings than
employees, the Washington Center’s
estimate is based on average costs for all
business filers in the country, drawn
from the IRS’s ‘‘Estimated Average
Taxpayer Burden for Individuals by
Activity’’ Table in its 2019 instructions
on form 1040.195 This group of business
filers includes anyone with income from
rental property, royalties, S corporation
earnings, farming, and other business
ventures, which dramatically expands
the scope beyond independent
contractors. The Washington Center
neither attempts to adjust for this
overestimate nor explain how one might
disentangle the conflated grouping, so
the Department was unable to assess
whether a real impact can be expected.
The Department noted in the NPRM that
it did not attempt to quantify the
numerous benefits that it expects from
the increased clarity regarding
classification. Instead, it assumed that
market actors operate in their own best
195 Based on the difference in estimates of
burdens for businesses and nonbusinesses from the
table ‘‘Estimated Average Taxpayer Burden for
Individuals by Activity’’ in U.S. Internal Revenue
Services, ‘‘1040 and 1040–SR Instructions,’’ p. 101,
(2019), https://www.irs.gov/pub/irs-pdf/i1040gi.pdf.
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interest, noting that for those workers
that choose to pursue work as an
independent contractor, as opposed to
an employee, and file taxes as such it
can be assumed that they have correctly
determined for themselves that the
benefits outweigh the costs, including
any costs associated with increased time
spent on tax filings.196
f. Implementation Costs
The PA L&I asserted that the
Department ‘‘provided zero estimates
for the cost of actual implementation of
the regulation.’’ PA L&I also claimed
that implementation costs include
reclassifying current workers and
identifying the employment status of
new hires. Concerning the first, the
Department maintains that workers will
only be reclassified when the benefits to
businesses outweigh the costs.
Concerning the later, the Department
believes there will be a cost savings
when new employment relationships
must be analyzed (see following section
on cost savings). The Department
believes the implementation costs will
be de minimis.
g. Income Stability
Several commenters asserted that
independent contracting is associated
with more volatile earnings. The
Washington Center asserted that income
stability is important for these workers
and their families. UFCW cited
literature finding that inconsistent
earnings are one of the most reported
disadvantages to gig work.197
The Department agrees that income
volatility may be problematic for some
workers and may require better money
management to smooth consumption
over periods of higher and lower
income. However, as stated above, the
Department assumes that market actors
operate in their own best interest, and
if a worker chooses to pursue work as
an independent contractor, as opposed
to an employee, it can be assumed that
the worker has determined for himself
or herself that the benefits outweigh the
costs. The Department also believes
income security is best achieved by
removing barriers that prevent laid-off
Americans from finding paid work,
including as independent contractors.
This lesson may be more important in
the wake of the COVID–19 emergency,
196 All workers are required to file with the IRS
regardless of classification. The time and cost of tax
filing is highly dependent on the individual
circumstances of the workers. The Department
believes workers are able to best assess the costs
and benefits of tax filing.
197 Prudential Research, ‘‘Gig Workers in
America’’ (2017), https://www.prudential.com/
media/managed/documents/rp/Gig_Economy_
Whitepaper.pdf.
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a point that has been presented by
hundreds of academics.198 Additionally,
some literature indicates that many
independent contractors value
flexibility over income stability. CWI
submitted a survey they conducted that
found 61 percent of independent
contractors prefer the ‘‘flexibility to
choose when and where to work’’ over
‘‘having access to a steady income and
benefits.’’ 199
F. Cost Savings
This final rule is expected to result in
cost savings to firms and workers. While
the Department believes that there are
multiple areas where firms and workers
may experience cost savings, the
Department has quantified only two:
The cost savings from increased clarity
and reduced litigation. The Department
estimates that annual cost savings
associated with this rule would be
$495.9 million ($447.2 million in
increased clarity + $48.7 million in
avoided litigation costs). Other areas of
anticipated cost savings were not
estimated due to uncertainties or data
limitations. The Department believe the
rule will result in the following
additional cost savings, which are
discussed qualitatively: Making labor
market more efficient; improving worker
autonomy satisfaction; providing an
alternate source of income for some
workers during the pandemic; and
facilitating independent contractors’
ability to work for multiple customers.
While public comments specific to
parts of the calculations are addressed at
the corresponding location throughout
this section, some commenters
submitted general comments about the
cost savings estimates. Several
commenters offered supportive
comments. The CGO said that ‘‘the
proposed rule carefully quantifies the
cost savings of reduced litigation and
increased clarity.’’ The AFPF also
expressed support but suggested that
cost-savings may be underestimated.
Conversely, other commenters objected
to the estimated cost savings, including
that it was inappropriate to quantify the
potential cost savings from this rule but
not quantify the costs to workers.
Representative Pramila Jayapal asserted
that the Department’s analysis did not
include ‘‘any serious, fact-based
argument as to why this rules change
would be of benefit to the workers who
would be most impacted by this rule
change.’’ Other commenters offered
equivocal comments, including one
198 See 151 Ph.D. Economists and Political
Scientists in California, ‘‘Open Letter to Suspend
California AB–5’’ (April 14, 2020).
199 Coalition for Workforce Innovation (2020),
supra note 77.
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individual who noted that ‘‘point made
about less litigation is a valid one,’’ but
countered that the ‘‘cost-savings pointed
out seem to fall only on the side of the
business/employer.’’
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1. Increased Clarity
This final rule is expected to increase
clarity concerning whether a worker is
classified as an employee or as an
independent contractor under the FLSA.
This would reduce the burden faced by
employers, potential employers, and
workers in understanding the
distinction and how the working
relationship should be classified. It is
unclear exactly how much time would
be saved, but the Department provides
some quantitative estimates to provide a
sense of the magnitude.
The importance of increased clarity is
noted by a study coauthored and cited
by the Society for Human Resource
Management (SHRM) that found human
resources professionals’ largest
challenge concerning external workers
that they would like to see resolved is
the legal ambiguity regarding the use
and management of external workers.200
Commenters from the business
community agreed with the Department
that the rule would improve legal
clarity. See, e.g., U.S. Chamber of
Commerce; CWI; WPI; ATA; NRF;
National Restaurant Association. Groups
that represent freelancers and
individual freelancers who commented
also believe this rule would improve
legal clarity. See, e.g., CPIE; Fight for
Freelancers. However, several
commenters dispute the Department’s
claim that the rule will increase clarity,
with some focusing on specific
industries. The TRLA stated that ‘‘the
proposed rule unnecessarily muddies
the waters with respect to the farm labor
market’’ because they believe it
contradicts ‘‘Federal courts’
interpretation of a Federal statute.’’ The
State AGs also stated this rule will
create confusion because ‘‘many
jurisdictions have applied the economic
reality test’’ to distinguish between
employees and independent contractors
for decades.201
The Department expects this rule to
produce beneficial cost savings by
200 SHRM and SAP SuccessFactors. ‘‘Want Your
Business to Thrive? Cultivate Your External Talent’’
(2019), https://www.shrm.org/hr-today/trends-andforecasting/research-and-surveys/pages/externalworkers.aspx.
201 While state-imposed requirements may
influence the use of flexibilities provided by this
rule, and could impact the number of entities and
workers affected, the Department does not possess
the requisite data to estimate the number of states
that would implement measures or the magnitude
of their impact on the universe of independent
contractors considered in this analysis.
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clarifying the classification process. To
quantify this benefit, the following
variables need to be defined and
estimated: (1) The number of new
employer-worker relationships being
assessed to determine the appropriate
classification; (2) the amount of time
saved per assessment; and (3) an average
wage rate for the time spent. The
Department estimates this will result in
a $447.2 million in savings annually.
The Department began with its
estimate of the number of current
independent contractors as the basis for
estimating the number of new
relationships. As discussed in section
VI(C), according to the CWS, there are
10.6 million workers who are
independent contractors on their
primary job. Adjusting this figure to
account for independent contractors on
their secondary job results in 18.9
million independent contractors.
According to Lim et al. (2019), in 2016
the average number of 1099–MISC forms
issued per independent contractor was
1.43. Therefore, the Department
assumes the average independent
contractor has 1.43 jobs per year.202
This number does not account for the
workers who do not file taxes, a
recognized limitation in the cited study.
Because it is unclear whether those who
do not file taxes would have a higher or
lower number of jobs per year, the
Department does not believe that this
limitation biases the estimate in either
direction. Multiplying these two
numbers results in an estimated 27.0
million new independent contractor
relationships each year.203
The independent contracting sector is
characterized by churn. In their annual
State of Independence in America 2019
report, MBO Partners, a leading
American staffing firm, finds that 47.8
percent of U.S. adults reported working
as an independent contractor at some
point in their career; they estimate that
figure will reach 53 percent in the next
five years.204 This fits with the range of
estimates for the size of the independent
contractor universe presented in section
VI(C). Thus, it is assumed that over the
ten-year time horizon of this analysis,
millions of Americans will choose
independent contractor work either for
202 Lim
et al., supra note 75, at 61.
Department did not incorporate estimates
of potential growth in independent contracting due
to uncertainty. For example, the trend in
independent contracting varies significantly based
on the source. Additionally, the impact of this rule
on the prevalence of independent contracting is
uncertain. Lastly, state laws, such as those in
California discussed below, may have significant
impacts on the prevalence of independent
contracting, which would make historical growth
rates potentially inappropriate.
204 MBO Partners (2019), supra note 131.
203 The
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1233
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.
A subset of new independent
contractor relationships may have time
savings associated with the final rule.
Such a reduction is difficult to quantify
because it is unclear how many
establishments and independent
contractors will realize benefits of
increased clarity. It is also possible that
the increased clarity of the classification
process will lead to compound effects
that generate far greater benefits over
time. Nonetheless, because it is possible
that only a subset of contracts would
receive the cost savings associated with
increased clarity, the Department has
reduced the number of contracts in the
estimate by 25 percent. This results in
20.2 million contracts with cost savings
to both the employer and the
independent contractor.205
In her comment, Representative
Pramila Jayapal questioned the breadth
of the time savings benefit. She claimed
that the only beneficiaries of this
rulemaking would be large, repeat
players that frequently misclassify
workers. It is unclear what data
Representative Jayapal relied on to come
to this conclusion. Furthermore,
Representative Jayapal largely ignores
the millions of properly classified
independent contractors that will
benefit from added regulatory clarity.
The Department disagrees that the cost
savings benefits will be limited to large,
repeat players. Other comments concur
with the Department’s view, supported
by data-backed arguments that the
expect the rule to enable access to
flexible work for caregivers responding
to the pandemic, enable workers to
readily supplement their income, and
unlock the potential of the growing tech
sector. Farren and Mitchell, of the
Mercatus Center, assert that the rule,
‘‘builds on existing precedent and
serves largely as a synthesis and
clarification of previous economic
reality tests, rather than implementing
any sort of radical change,’’ adding that
independent contractors will likely
‘‘develop more productive economic
relationships.’’
Per each new contract with time
savings, the Department has assumed
that employers would save 20 minutes
of time and independent contractors
205 18.9 million independent contractors × 1.43
contracts per year × (1¥0.25 possible reduction in
clarity benefits) = 20.2 million.
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would save 5 minutes.206 These
numbers are small because they
represent the marginal time savings for
each contract, not the entire time
necessary to identify whether an
independent contractor relationship
holds.
The Washington Center commented,
‘‘[t]here is no transparency into what
surveys or studies were used to quantify
the current amount of time individuals
and businesses currently spend on
independent contractor regulatory
familiarization. Further, there was no
attempt to explain with any degree of
accuracy how this rule will change that
time spent.’’ The Washington Center
seems to misunderstand the analysis
presented. The time savings variables
are estimates of how the clarity
provided in the rule will facilitate the
contracting process. Estimating
administrative time spend due to
comply with government laws and
regulations is a typical component of
economic analyses and is often
informed by consultation with subject
matter experts. The Department
requested data to further refine its
estimate, but did not receive any.
Notwithstanding, numerous
commenters expressed support of the
analysis the Department presented.
The UFCW believes that there will be
an increase in time to assess
employment status because employers
and independent contractors will now
evaluate the classification under both
current precedent and the definition
laid out in this rule; ‘‘courts may decide
to ignore the DOL’s new interpretation,
meaning that companies and workers
would now analyze their FLSA
independent contractor determinations
under current precedent and also the
agency’s proposed non-binding new
test.’’ The Department disagrees that
courts will ignore the final rule. The
RIA already includes a familiarization
cost for the new rule, and, in the
baseline, establishments are assumed to
be familiar with the status quo
environment. Accordingly, additional
costs as stated in this comment are
likely to be insignificant.
To estimate the cost savings due to
the increased clarity this rule provides,
the Department applies the following
estimates. For employers, this time is
valued at a loaded hourly wage rate of
$54.74. This is the mean hourly rate of
Compensation, Benefits & Job Analysis
Specialists (13–1141) from the OES
multiplied by 1.63 to account for
benefits and overhead. For independent
206 These
time savings are based on a 33 percent
assumed reduction in the estimated familiarization
time per contract for both independent contractors
(15 minutes) and employers (1 hour).
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contractors, this time is valued at $46.36
per hour (mean wage rate for
independent contractors in the CWS of
$27.29 with the amount of benefits and
overhead paid by employers for
employees, then adjusted to 2019
dollars using the GDP deflator).
Using these numbers, the Department
estimates that employers will save
$369.0 million annually and
independent contractors will save $78.1
million annually due to increased
clarity (Table 3). In sum, this is
estimated to be a $447.1 million savings.
The Department assumes the parameters
used in this cost savings estimate will
remain constant over time. This
assumes no growth in independent
contracting, no real wage growth, and
no subsequent innovation in the
employer-worker relationship. These
assumptions facilitate simplicity of
calculation.207 The annualized savings
over both a 10-year horizon and in
perpetuity, with both the 3 percent and
7 percent discount rates is $447.1
million.
TABLE 3—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
Adjustment factor .........................
18,858,000
1.43
26,966,940
75%
Total .........................................
20,225,205
Time savings per job (minutes):
Employers ....................................
Independent contractors ..............
Value of time:
Employers ................................
Independent contractors ..........
Total savings:
Employers ................................
Independent contractors ..........
$369,011,556
$78,137,248
Total .........................................
$447,148,804
20
5
$54.74
$46.36
In addition to increased clarity when
assessing whether each relationship
qualifies as an independent contractor
or employment relationship, there may
also be upfront time savings for new
entrants who must familiarize
themselves with the standard for being
an employee as compared to an
independent contractor, and who now
have clearer guidance to aid in that
understanding. This would apply to
new independent contractors, new
establishments, and current
establishments that are considering
207 By applying these assumptions to the
Department’s estimates, instead of incorporating
anticipated growth and innovation impacts, the
results may be an underestimate of total cost
savings.
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hiring independent contractors for the
first time. The Department did not
quantify this benefit due to uncertainty
and the difficulty of determining
reliable variables for the number of new
relationships that might occur due to
the rule. However, such benefits are
expected to be real and significant.
2. Reduced Litigation
The changes included in this rule are
expected to result in decreased litigation
due to increased clarity and reduced
misclassification. The methodology of
this section mirrors previous final rules
promulgated in recent years.208 The rule
would clarify to stakeholders how to
distinguish between employees and
independent contractors under the Act.
The increased clarity is expected to
result in fewer independent contractor
misclassification legal disputes, and
lower litigation costs. The Department
estimates that $48.7 million in litigation
costs related to independent contractor
disputes will be avoided per year as a
result of this rule. This may be a lowerbound estimate, reasons for which are
described in more detail below.
The Department estimates litigation
cost savings as being equal to an
estimate of the number of cases avoided
as a result of the rule multiplied by the
average litigation cost per case.
Number of Cases Avoided
According to the Public Access to
Court Records (PACER) system, there
were 7,238 Federal cases relating to the
FLSA closed in 2019.209 The
Department estimates that 9.4 percent of
these cases relate to independent
contractor status.210
For the NPRM, to determine this
percentage of cases relating to
independent contracting, the
Department reviewed a previous
random sample of FLSA cases closed in
2014.211 For this final rule, the
208 For example, the Department applied a similar
approach to litigation costs in the 2019 final rule
Defining and Delimiting the Exemptions for
Executive, Administrative, Professional, Outside
Sales and Computer Employees, 81 FR 51230
(2019).
209 Downloaded from Public Access to Court
Electronic Records (PACER).
210 PACER does not provide a granular
classification of FLSA case types to identify the
number of cases specific to independent contractor
disputes, so the Department performed a keyword
analysis with spot checking of a random sample of
500 cases closed in 2019, determining that 9.4
percent of cases were related to independent
contractor status (47/500 = 9.4 percent).
211 The Department used data from 2014 already
obtained for use in the analyses performed for the
2019 overtime and regular rate final rules. See 84
FR 51230, 51280–81 (reduced litigation estimate for
the final rule updating the FLSA’s white collar
exemptions at 29 CFR part 541); 84 FR 68736,
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Department updated its dataset, using a
sample that included 500 cases closed
in 2019. Of those cases, the Department
identified 47 cases within this sample
that related to independent contractor
status. This ratio was applied to the
7,238 FLSA cases closed in 2019 to
estimate 680 cases related to
independent contractor status. The
Department assumes that the increased
clarity of the rule would reduce the
number of Federal FLSA cases involving
independent contractor classification
disputes by 10 percent as stakeholders
would better understand and be better
able to agree on classification
determinations without having to
litigate.212 Multiplying these variables
results in an estimated 68 cases related
to independent contractor disputes
avoided annually. This estimate of the
reduction in the number of independent
contractor disputes filed does not take
into account any reduction in the
number of FLSA cases related to
independent contractor disputes heard
in state courts (e.g., where the state has
adopted the FLSA standards for
classifying workers), nor does it take
into account any reduction in filings
resolved before litigation or by
alternative dispute resolution, neither of
which are captured in PACER data.
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Average Litigation Cost per Case
The Department applied a previous
estimate of litigation costs of $654,182
per case. To obtain this estimate, the
Department conducted a search for
FLSA cases concluded between 2012
and 2015 in the Westlaw Case Evaluator
tool and on PACER and identified 56
cases that contained sufficient litigation
cost information to estimate the average
costs of litigation.213 214 The Department
68767–68 (reduced litigation estimate for the final
rule updating the FLSA’s ‘‘regular rate’’ regulations
at 29 CFR part 778).
212 This aligns with the methodology the
Department has applied in a number of rulemakings
(See e.g., Regular Rate Under the Fair Labor
Standards Act), and in the NPRM for this rule. In
each rulemaking with this assumption, the
Department requested comments and data on this
point, which yielded no substantive data or
critiques on its merit. Therefore, the Department
believes this is an appropriate assumption in this
analysis.
213 Litigation costs are not tracked in a systematic
way by any publicly available source. Individual
case records are available through various sources
(e.g. PACER and Westlaw), but litigation costs are
often not reported because of undisclosed
settlement agreements or because attorney fees are
not included in verdict judgements. However,
because the FLSA entitles prevailing plaintiffs to
litigation cost awards, the Department was able to
ascertain costs for 56 relevant cases.
214 The 56 cases used for this analysis were
retrieved from Westlaw’s Case Evaluator database
using a keyword search for case summaries between
2012 and 2015 mentioning the terms ‘‘FLSA’’ and
‘‘fees.’’ This was not limited to cases associated
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looked at records of court filings in the
Westlaw Case Evaluator tool and on
PACER to ascertain how much plaintiffs
in these cases were paid for attorney
fees, administrative fees, and/or other
costs, apart from any monetary damages
attributable to the alleged FLSA
violations. After determining the
plaintiff’s total litigation costs for each
case, the Department then doubled the
figures to account for litigation costs
that the defendant employers incurred.
According to this analysis, the average
litigation cost for FLSA cases concluded
between 2012 and 2015 was $654,182.
Adjusting for inflation, using the GDP
deflator, results in a value of $715,637
in 2019 dollars.215
Applying these figures to the
estimated 68 cases that could be
prevented each year due to this
rulemaking, the Department estimates
that avoided litigation costs resulting
from the rule total $48.7 million per
year (2019 dollars).216 217
3. Improved Labor Market Conditions
The Department anticipates the final
rule will produce benefits by reducing
uncertainty and improving labor market
conditions. Removing uncertainty
improves labor market efficiency by
reducing deadweight loss. As discussed
in the need for rulemaking, the
Department believes emerging and
innovative economic arrangements that
benefit both workers and business
with independent contracting. Although the initial
search yielded 64 responsive cases, the Department
excluded one duplicate case, one case resolving
litigation costs through a confidential settlement
agreement, and six cases where the defendant
employer(s) ultimately prevailed. Because the FLSA
only entitles prevailing plaintiffs to litigation cost
awards, information about litigation costs was only
available for the remaining 56 FLSA cases that
ended in settlement agreements or court verdicts
favoring the plaintiff employees.
215 This average litigation cost per case may
underestimate total average costs because some
attorneys representing FLSA plaintiffs may take a
contingency fee atop their statutorily awarded fees
and costs.
216 Using the median litigation cost, rather than
the mean, results in a value of $122,341 (2019
dollars) per case, which for the estimated 68 annual
cases produces a total annual litigation cost savings
of $8.3 million. However, the median values do not
adequately capture the magnitude of the impact
resulting from the large-scale litigation cases that
are expected to benefit from the clarity provided in
this final rule. Therefore, the mean average is used
for this analysis.
217 The Department’s approach to estimating
litigation cost savings takes into account the impact
of the rule on the number of relevant cases filed.
The approach does not take into account the impact
of the rule on promoting settlements in the future
among cases that are filed. Clarifying a rule may
increase the settlement rate among cases filed,
reducing litigation costs further (see Gelbach, J.,
‘‘The Reduced Form of Litigation Models and the
Plaintiff’s Win Rate,’’ J. Law & Economics 61(1),
(2018), https://www.journals.uchicago.edu/doi/
10.1086/699151).
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require reasonable certainty regarding
the worker’s classification as an
independent contractor. The current
legal uncertainty may deter businesses
from offering these arrangements or
developing them in the first place.218 If
so, the result would be economic
deadweight loss: Legal uncertainty
prevents mutually beneficial
independent contractor arrangements.
This final rule may produce cost savings
by reducing deadweight loss.
Nonetheless, due to the abundance of
variables at play, the Department has
not attempted to quantify the precise
amount of that reduction.
The CGO concurred in its public
comment, emphasizing that an
important benefit of this rule will likely
be increased labor market flexibility.
They note that ‘‘most labor models
suggest flexibility is crucial in allowing
labor markets to efficiently match
workers with jobs, spur
entrepreneurship, and act as an
important source of countercyclical
income during a recession.’’ They cite a
study showing that a 10 percent
increase in the freelance workforce is
correlated with a 1 percent increase in
entrepreneurial activity.219 Similarly,
CWI submitted their report that finds
independent workers ‘‘can be an
important part of improving business
performance, such as by increasing
speed to market, increasing
organizational agility, improving overall
financial performance, and allowing
firms to compete in a digital world
where increasingly relevant, highlyskilled talent is in short-supply.’’ 220 By
decreasing uncertainty and thus
potentially opening new opportunities
for firms, this final rule may encourage
companies to hire independent
contractors whom they otherwise would
not have hired. Eisenach (2010) outlines
the potential costs of curtailing
independent contracting.221 If
218 See Griffin Toronjo Pivateau, The Prism of
Entrepreneurship: Creating A New Lens for Worker
Classification, 70 Baylor L. Rev. 595, 628 (2018)
(‘‘The continued demand for innovative work
solutions requires a new classification test. Without
clarification, parties will be unwilling to engage in
new or innovative work arrangements.’’); see also R.
Hollrah and P. Hollrah, ‘‘The Time Has Come for
Congress to Finish Its Work on Harmonizing the
Definition of ‘Employee,’ ’’ J. L. & Pol’y 26(2), p. 439
(2018), https://brooklynworks.brooklaw.edu/jlp/
vol26/iss2/1/.
219 A. Burke, I. Zawwar, and S. Hussels. ‘‘Do
Freelance Independent Contractors Promote
Entrepreneurship?’’ Small Business Economics
55(2), 415–27 (2019), https://doi.org/10.1007/
s11187-019-00242-w.
220 J. Langenfeld and C. Ring. ‘‘Analysis of
Literature on Technology and Alternative
Workforce Arrangements.’’ Ankura (October 2020).
221 J. Eisenach, ‘‘The Role of Independent
Contractors in The U.S. Economy,’’ Navigant
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independent contracting is expanded
due to this rule, this could generate
benefits that may include:
• Increased job creation and small
business formation.
• Increased competition and
decreased prices.
• A more flexible and dynamic work
force, where workers are able to more
easily move to locations or to employers
where their labor and skills are needed.
Eisenach explains several channels
through which these efficiency gains
may be achieved. First, by avoiding
some fixed employment costs, it is
easier for firms to adjust their labor
needs based on fluctuations in demand.
Second, by using pay-for-preference,
independent contractors are
incentivized to increase production and
quality. Third, ‘‘contracting can be an
important mechanism for overcoming
legal and regulatory barriers to
economically efficient employment
arrangements.’’ The analysis of these
benefits assumes that businesses,
especially in other industries, would
like to increase their use of independent
contractors, but have refrained from
doing so because of uncertainty
regarding who can appropriately be
engaged as an independent contractor
under the FLSA. Conversely, significant
use of independent contractors may not
be suitable for all industries, thus
limiting the growth in its utilization.
Some commenters agreed that
expanding independent contracting can
lead to employment gains. For example,
Dr. Palagashvili discussed the literature
showing how restricting independent
contracting can lead to loss of jobs. This
final rule, by expanding independent
contracting, could conversely increase
employment. She also noted the
importance of independent contracting
for unemployed workers, referencing a
paper that found workers who ‘‘suffered
a spell of unemployment are 7 to 17
percentage points more likely than
observationally similar workers to be
employed in an alternative work
arrangement when surveyed 1 to 2.5
years later.’’ 222 223
She also emphasized the importance
of independent contracting to startup
firms. She references her work
conducting interviews and a survey of
technology startup executives. During
these interviews they found that ‘‘71
percent of startups relied on
independent contractors and thought it
was necessary to use contract labor
during their early stages.’’ Independent
contractors are important to startups
because ‘‘during unpredictable times,
when startups are trying to find their
market and build their product, they
need flexible labor and need to be able
to hire and fire easily.’’
Several commenters disagreed that
the rule would improve outcomes in the
labor market. FTC Commissioner
Rebecca Kelly Slaughter commented
that it is inappropriate to conclude ‘‘that
‘competition will increase and prices
will decrease’ when more workers are
classified as independent contractors’’
because, according to the commenter,
the only support offered in the NPRM
was a 2010 non-peer-reviewed article
providing little evidence of this claim.
The Department maintains that
economic laws generally apply to labor
markets, and that as supply increases
then prices can be expected to decrease.
UFCW contested the Department’s claim
that this rule will lead to increased
productivity. They presented an
example of how independent
contracting hurts efficiency: ‘‘Instead of
ecommerce fulfil[l]ment carried out by a
team of output-optimizing role players,
the ‘independent contractor’ item
selection and packing is carried out by
the same individual who does the
delivery, adding unnecessary and time
consuming steps to the process. The
‘independent contractor’ must first park
his or her car, walk into the store, orient
him or herself to the store layout, select
and pack the items, transact the
payment, then carry the packed items
back to the car.’’ The Department does
not think UFCW’s claims are valid
across the incredibly dynamic range of
independent contractor jobs, and further
questions UFCW’s unsupported
assertion that the expansive emergence
Economics (2010), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1717932.
222 L. Katz and A. Krueger, ‘‘The Role of
Unemployment in the Rise in Alternative Work
Arrangements,’’ American Economic Review,
107(5), p. 388 (2017), https://www.aeaweb.org/
articles?id=10.1257/aer.p20171092.
223 It should be noted that government-mandated
coverage is not free. The total value that a worker
provides a business must be at least as large as the
wage, any provided benefits, and government (state
or Federal) mandates combined. Congress and/or
state governments may conclude that the value of
mandating certain coverages outweighs the costs of
such coverage, but that does not necessarily mean
that all covered workers receive significant benefits
from such coverage or value such coverage
compared to other compensation. In fact, in some
cases workers may be able to strike a better deal
with a business than would be provided under the
terms of an employee relationship that operates
under the associated mandates. Such as in a
situation where a worker has clusters of available
time to work punctuated by extended periods of
inability to work, such as a long-haul shipper who
spends a month at sea and then a month at home
or a divorced parent who has five kids to care for
every other week but is fully available on the off
weeks to work as many hours as needed. In these
cases, independent contractor relationships may be
pivotal in mutually benefiting workers and business
owners.
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of mobile customer-service-focused
delivery applications ‘‘reduces the
opportunity for productivity-enhancing
innovation.’’ Further, even the example
ignores that efficiencies will likely be
gained over time as the independent
contractor fulfils additional orders each
day, week, and month. The Department
does not believe that these commenters
provided reliable data to revise its
analysis, especially in light of the data
provided to its support by other
commenters.
4. Improved Worker Satisfaction and
Flexibility
The Department believes this
rulemaking may also result in greater
autonomy and job satisfaction for
workers. Several surveys have shown
that independent contractors have high
job satisfaction.224 Using the CWS,
which only considers primary, active
contractors, the Department estimates
that of independent contractors with
valid responses, 83 percent prefer their
current arrangement rather than being
an employee, compared with only 9
percent who would prefer an
employment arrangement (the
remaining 8 percent responded that it
depends).
Additionally, the main reasons
individuals work as independent
contractors demonstrate that being an
independent contractor often has
valuable benefits. The 2017 CWS asked,
‘‘What is the main reason you are selfemployed/an independent contractor?’’
The two most popular reasons were (1)
being their own boss, and (2) scheduling
flexibility.225 In fact, these two choices
were each selected over three times
more often than any of the other
options.226 Additionally, McKinsey
Global Institute found that
‘‘[i]ndependent workers report higher
levels of satisfaction on many aspects of
their work life than traditional
workers.’’ 227 The McKinsey Global
Institute examined workers who work
224 See,
e.g., MBO Partners (2019), supra note 131.
Department used PES26IC to identify
preferred work arrangement and PES26IR to
identify the reason they work as an independent
contractor.
226 The third most commonly selected reason was
‘‘Money is better,’’ supporting the Department’s
view that monetary and non-pecuniary benefits are
central motivations of most independent
contractors.
227 McKinsey Global Institute, supra note 89 at
11. A 2009 Pew survey similarly found that selfemployed workers are ‘‘significantly more satisfied
with their jobs than other workers.’’ Rich Morin,
‘‘Job Satisfaction among the Self-Employed,’’ Pew
Research Center, (September 2009), https://
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.
225 The
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independently by choice and those who
do so by necessity (such as needing
supplemental income) and found that
both groups report being happy with the
flexibility and autonomy of their
work.228 Similarly, Kelly Services found
that ‘‘free agents’’—i.e., workers who
‘‘derive their primary income from
independent work and actively prefer
it’’—report higher satisfaction than
traditional workers concerning overall
employment situation; work-life
balance; opportunities to expand skills;
and opportunities to advance career.229
Many commenters agreed that the
scheduling flexibility afforded to
independent contractors is of
importance to many of these workers.
WPI pointed out that many independent
contractors require flexibility to balance
work and other obligations. They cite a
recent report that found ‘‘48 percent of
freelancers report being caregivers,
while 33 percent report having a
disability in their household.’’ 230 Dr.
Palagashvili discussed the significance
of independent contracting work for
women, who tend to be the primary
caregiver, and thus value scheduling
flexibility. She cited several papers
demonstrating the importance of
flexible work arrangements for women.
For example, a survey by HyperWallet
found that ‘‘96 percent of women
indicate that the primary benefit of
engaging in platform-economy work is
the flexible working hours.231 SHRM
pointed to their survey that found that
49 percent of external workers chose
that work arrangement for the ability to
set their own hours.232
Conversely, other commenters
asserted that valuing flexibility is not
relevant as a benefit to a worker who is
classified as an independent contractor.
The Department believes that non228 McKinsey Global Institute, supra note 89 at
10. The McKinsey survey found that, while ‘‘those
working independently out of necessity report
being happier with the flexibility and content of the
work,’’ they also report being ‘‘less satisfied with
their level of income level and their income
security.’’ Id. The Department believes this
rulemaking is unlikely to negatively impact the
average income level of such workers by
encouraging independent contractor opportunities.
As discussed above, there are data indicating that
independent contractors, on average, may earn
higher hourly wages than employees. Nor is
rulemaking likely to negatively impact workers’
income security, on average (see Section
VI(E)(2)(viii)).
229 Kelly Services (2015), supra note 89.
230 Upwork, Freelance Forward 2020: The U.S.
Independent Workforce Report (September 2020).
231 HyperWallet. ‘‘The Future of Gig Work Is
Female: A Study on the Behaviors and Career
Aspirations of Women in the Gig Economy,’’ (2017),
https://www.hyperwallet.com/app/uploads/HW_
The_Future_of_Gig_Work_is_Female.pdf.
232 SHRM and SAP SuccessFactors (2019), supra
note 200.
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pecuniary benefits like flexibility are
very important to workers and should
receive adequate attention in this RIA.
Research has shown that flexibility is a
criterion workers consider when
evaluating job offers.233
The PA L&I wrote that it is
inappropriate to present flexibility for
independent contractors as a
‘‘replacement for lower wages and no
benefits.’’ PA L&I also stated that the
Department does not discuss
independent contractors’ counteracting
loss of stability in income, location of
work, and frequency and schedule of
work and instead simply ‘‘presumes that
workers prize flexibility over stability’’
without citing any evidence. The
Department notes that it examined
numerous studies that directly address,
and provide evidence regarding, the
tradeoffs many independent contractors
voluntarily make to attain flexibility. To
that point, a survey submitted by CWI
found 61 percent of independent
contractors prefer the ‘‘flexibility to
choose when and where to work’’ over
‘‘having access to a steady income and
benefits.’’ 234 Additionally, the workers
who value flexibility will be the ones
drawn to those independent contracting
arrangements that provide flexibility.
The Washington Center posited that
in many industries, such as trucking
and deliveries, the flexibility benefits
for independent contractors are small
because workers often do not have
control over their routes or work hours.
This was echoed by the UFCW, who
pointed out that in retail the use of justin-time scheduling limits the scheduling
flexibility for workers classified as
independent contractors. The
Department acknowledges that the
flexibility benefits may differ across
industries, but that they tend to exist in
all industries to some degree.
UFCW contended that although
current independent contractors may be
satisfied with their employment status,
this will not necessarily hold for newly
classified workers. The Department
acknowledges that new independent
contractors may differ from current
independent contractors but lacks any
data to show how their satisfaction
levels would differ. Lacking such data,
which commenters did not provide, the
best predictor of job satisfaction for new
independent contractors is job
satisfaction among current independent
contractors. Further, the Department
notes, as explained above, that this rule
will not directly reclassify any workers
but rather provides clarity regarding the
233 He,
H. et al. (2019), supra note 131.
234 Coalition for Workforce Innovation (2020),
supra note.
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1237
current process for determining worker
classification.
UFCW used a 2017 report from
Prudential Research, specifically
regarding gig workers, to dispute the
Department’s claim that independent
contractors are more satisfied than
employees. UFCW excerpted from the
report that, ‘‘on-demand independent
contractors who work full-time hours
are less satisfied with their current work
situation than full-time employees (44
percent vs. 55 percent).’’ 235 However,
the commenter did not include all of the
findings in the source it cited; the same
Prudential study notes that for gig
workers who also have other jobs, their
job satisfaction rate is 86 percent.
Notably, UFCW focused on gig workers
in its comment, but conflates such
workers with the entire universe of
independent contractors. The
Department acknowledges that although
there may be lower job satisfaction for
some subsets of independent
contractors, studies that consider all
independent contractors generally find
that independent contractors report
similar or higher job satisfaction than
employees. For example, CWI submitted
a survey they conducted finding that 94
percent of independent workers are
satisfied with their work
arrangements.236
By clarifying that control and
opportunity for profit or loss are the
core economic reality factors, this final
rule is likely to encourage the creation
of independent contractor jobs that
provide autonomy and entrepreneurial
opportunities that many workers find
satisfying. For the same reason, this
final rule likely will diminish the
incidence of independent contractor
jobs that lack these widely desired
characteristics. Thus, the Department
expects this final rule to result in more
independent contractor opportunities
which bring with them autonomy and
job satisfaction. The benefits of worker
autonomy and satisfaction obviously
‘‘are difficult or impossible to quantify,’’
but they nonetheless merit
consideration.
5. Income Smoothing
Several commenters asserted that
independent contracting plays a key
role in smoothing income during
recessions by providing an alternative
source of income. Commenters cited to
a JPMorgan Chase Institute study that
makes this case.237 Other commenters
235 Prudential
236 Coalition
Research (2017), supra note.
for Workforce Innovation (2020),
supra note.
237 D. Farrell, F. Greig, and A. Hamoudi, ‘‘The
Online Platform Economy in 27 Metro Areas:
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held the opposite view and highlighted
the economic downturn related to
COVID–19. For example, the Center for
Innovation in Worker Organization
claimed that high unemployment
increases the likelihood that employers
fail to pay minimum wage. Because this
rule is focused on independent
contractors, even assuming the premise
of the comment from the Center for
Innovation in Worker Organization is
correct, this concern does not directly
apply. Further, this commenter did not
provide clear evidence that independent
contracting does not help workers
supplement their income.
6. Opportunities To Work for Multiple
Customers
In the NPRM, the Department noted
that independent contractors may more
easily work for multiple companies
simultaneously. The Washington Center
disputed this claim, asserting that
‘‘economists have found that about 75
percent of workers receiving nonemployee compensation are tied to one
employer’’ and the likelihood of being
tied to a single employer is similar for
wage earners and contractors.238 But the
economists whom the Washington
Center cites in support of their assertion
explicitly noted that the independent
contractors in their study ‘‘include[ ]
those who are primarily employed at a
W2 job, and vice versa.’’ 239 This overlap
prevents meaningful comparisons
between independent contractors and
W2 employees for the purpose of this
RIA. Rebecca Kelly Slaughter, a
Commissioner at the FTC wrote:
‘‘Independent contractor status is not
what allows a worker to work for two
rivals. Indeed, many hourly workers are
employed at more than one job,
including for two employers who are
rivals in the same industry.’’
Commissioner Slaughter gave an
example of a worker who holds two jobs
at competing fast food restaurants, but
this does not undermine the
Department’s discussion of independent
contractors being able to use mobile
applications to pick which tasks they
choose to perform in real time on a jobby-job basis. That fast food worker
cannot always decide which job he
wants to work for each shift of the day.
Additionally, Slaughter commented that
working for multiple employers may
demonstrate a worker’s need to hold
multiple jobs to pay bills rather than
being indicative of flexibility. This
JPMorgan Chase Institute,’’ JPMorgan Chase
Institute (2019), https://www.jpmorganchase.com/
institute/research/labor-markets/report-opecities.htm.
238 Collins et al. (2019), supra note 80.
239 Id. at 14 n.7.
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point, however, was not substantiated
by data showing that such a critique can
effectively be applied across the
universe of millions of independent
contractors who cite flexibility as a core
motivator. And as explained in Sections
III(A) and IV(C), courts have repeatedly
explained that need for income is not
the correct legal lens through which to
analyze whether a worker is an
independent contractor or employee
under the FLSA.240 Lastly, she noted
that ‘‘Uber has been known to
discourage multi-apping by monitoring
whether drivers were logging into more
than one platform simultaneously and
penalizing those that did not
exclusively take Uber customers.’’ 241
Under this rule, Uber’s monitoring and
controlling certain drivers’ ability to
multi-app would be a consideration
under the control factors of the
economic reality test as applied to those
drivers. See Razak, 951 F.3d at 145–46
(including drivers’ contention ‘‘that
while ‘online’ for Uber, they cannot also
accept rides through other platforms’’ in
list of ‘‘disputed facts regarding
control’’). But it appears that the
majority of rideshare drivers are able to
multi-app.242 The Department believes
that economy-wide data reveal that
many independent contractors hold
multiple jobs,243 and they resoundingly
prize the flexibility to work when,
where, and how they choose.244
G. Regulatory Alternatives
Pursuant to its obligations under
Executive Order 12866,245 the
Department assessed three regulatory
alternatives to the standard promulgated
in this final rule. These three
240 See, e.g., Halferty, 821 F.2d at 268 (‘‘[I]t is not
dependence in the sense that one could not survive
without the income from the job that we examine,
but dependence for continued employment’’);
DialAmerica, 757 F.2d at 1385 (‘‘The economicdependence aspect of the [economic reality] test
does not concern whether the workers at issue
depend on the money they earn for obtaining the
necessities of life.’’).
241 Commissioner Slaughter cited a note
submitted as background material for an OECD
meeting and a law review article to support this
contention. See M. Steinbaum, Monopsony and the
Business Model of Gig Economy Platforms, OECD
7 (Sept. 17, 2020), https://one.oecd.org/document/
DAF/COMP/WD(2019)66/en/pdf; M. Steinbaum,
‘‘Antitrust, the Gig Economy, and Labor Market
Power,’’ 82 Law and Contemp. Probs. 45, 55 (2019),
https://scholarship.law.duke.edu/cgi/
viewcontent.cgi?article=4918&context=lcp.
242 See This App Lets Drivers Juggle Competing
Uber and Lyft Rides, Wired (Feb. 15, 2018)
(estimating that over 70 percent of rideshare drivers
multi-app), https://www.wired.com/story/this-applets-drivers-juggle-competing-uber-and-lyft-rides/.
243 Lim et al., supra note 75, at 61.
244 See the May 2017 CWS supplement to the
CPS.
245 Exec. Order No. 12866 § 6(a)(3)(C)(iii), 58 FR
51741.
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alternatives are the same as those
analyzed in the NPRM,246 listed below
in order from least to most restrictive of
independent contracting: 247
(1) Codification of the common law
control test, which applies in
distinguishing between employees and
independent contractors under various
other Federal laws; 248
(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).249
Although the Department believes that
legal limitations preclude adoption of
the ‘‘common law’’ and ‘‘ABC’’ test
alternatives listed above, the
Department notes that Congress is
presently considering separate bills that
would amend the FLSA to adopt these
alternatives,250 and accordingly presents
them for the benefit of the public as
recommended by OMB guidance.251 All
246 See 85 FR 60634 (discussing regulatory
alternative to the proposed rule).
247 OMB guidance advises that, where possible,
agencies should analyze at least one ‘‘more
stringent option’’ and one ‘‘less stringent option’’ to
the proposed approach. OMB Circular A–4 at 16.
248 See 26 U.S.C. 3121(d)(2) (generally defining
the term ‘‘employee’’ under the Internal Revenue
Code as ‘‘any individual who, under the usual
common law rules applicable in determining the
employer-employee relationship, has the status of
an employee’’); 42 U.S.C. 410(j) (similarly defining
‘‘employee’’ under the Social Security Act); see
also, e.g., Community for Creative Non-Violence v.
Reid, 490 U.S. 730, 751 (1989) (applying
‘‘principles of general common law of agency’’ to
determine ‘‘whether . . . work was prepared by an
employee or an independent contractor’’ under the
Copyright Act of 1976); Darden, 503 U.S. 318
(holding that ‘‘a common-law test’’ should resolve
employee/independent contractor disputes under
ERISA).
249 See also Hargrove v. Sleepy’s, LLC, 106 A.3d
449, 465 (N.J. 2015) (extending the ABC test to state
wage claims in New Jersey).
250 The Modern Worker Empowerment Act, H.R.
4069, 116th Cong. (2019) (introduced by Rep. Elise
Stefanik), would amend Sec. 3(e) of the FLSA
statute to clarify that the term ‘‘employee’’ is
‘‘determined under the usual common law rules (as
applied for purposes of section 3121(d) of the
Internal Revenue Code of 1986).’’ See also S. 2973,
116th Cong. (2019) (companion Senate bill
introduced by Sen. Tim Scott). By contrast, the
Worker Flexibility and Small Business Protection
Act, H.R. 8375, 116th Cong. (2020) (introduced by
Rep. Rosa DeLauro) would, among other provisions,
amend the FLSA and other labor statutes to clarify
that ‘‘[a]n individual performing any labor for
remuneration shall be considered an employee and
not an independent contractor’’ unless such
individual passes the ‘‘ABC’’ test discussed in this
analysis. See also S. 4738, 116th Cong. (2020)
(companion bill introduced by Senators Patty
Murray and Sherrod Brown).
251 OMB Circular A–4 advises that agencies
‘‘should discuss the statutory requirements that
affect the selection of regulatory approach. If legal
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three regulatory alternatives are
analyzed in qualitative terms, due to
data constraints and inherent
uncertainty in measuring the exact
stringency of multi-factor legal tests and
likely responses from the regulated
community. The Department
appreciates the feedback it received on
these regulatory alternatives from
commenters, which is described and
addressed below.
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1. Codifying a Common Law Control
Test
The least stringent alternative to the
final rule’s streamlined ‘‘economic
reality’’ test would be to adopt a
common law control test, as is generally
used to determine independent
contractor classification questions
arising under the Internal Revenue Code
and various other Federal laws.252 The
overarching focus of the common law
control test is ‘‘the hiring party’s right
to control the manner and means by
which [work] is accomplished,’’ Reid,
490 U.S. at 751, but the Supreme Court
has explained that ‘‘other factors
relevant to the inquiry [include] the
skill required; the source of the
instrumentalities and tools; the location
of the work; the duration of the parties’
relationship; whether the hiring party
has the right to assign additional
projects to the hired party; the extent of
the hired party’s discretion over when
and how long to work; the method of
payment; the hired party’s role in hiring
and paying assistants; whether the work
is part of the regular business of the
hiring party; whether the hiring party is
in business; the provision of employee
benefits; and the tax treatment of the
hired party.’’ Id. at 751–52.
Although the common law control
test considers many of the same factors
as those identified in the final rule’s
‘‘economic reality’’ test (e.g., skill,
length of the working relationship, the
source of equipment and materials, etc.),
courts generally recognize that, because
of its focus on control, the common law
test is more permissive of independent
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.’’
252 See supra note 248. The Supreme Court has
explained that the common law standard of
employment applies by default under Federal law
‘‘unless [Congress] clearly indicates otherwise.’’
Darden, 503 U.S. at 325; see also Community for
Creative Non-Violence v. Reid, 490 US 730, 739–40
(1989) (‘‘[W]hen Congress has used the term
‘employee’ without defining it, we have concluded
that Congress intended to describe the conventional
master-servant relationship as understood by
common-law agency doctrine.’’).
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contracting arrangements than the
economic reality test, which more
broadly examines the economic
dependence of the worker. See, e.g.,
Diggs v. Harris Hospital-Methodist, Inc.,
847 F.2d 270, 272 n.1 (5th Cir. 1988)
(observing that ‘‘[t]he ‘economic
realities’ test is a more expansive
standard for determining employee
status’’ than the common law control
test). Thus, if a common law control test
determined independent contractor
status under the FLSA, it is possible that
some workers presently classified as
FLSA employees could be reclassified
as independent contractors, increasing
the overall number of independent
contractors and reducing the overall
number of employees. The Department
is unable to estimate the exact
magnitude of such a reclassification
effect, but believes that the vast majority
of FLSA employees would remain FLSA
employees even under a common law
control test.
As discussed in the NPRM, codifying
a common law control test that is used
for purposes of at least some other
Federal statutes would create a simpler
legal regime for regulated entities
interested in receiving services from an
independent contractor, thereby
reducing confusion, compliance costs,
and legal risk for entities interested in
doing business with independent
contractors. Entities would not have to
understand and apply a different
employment classification standard for
FLSA purposes. Thus, adopting the
common law control test would likely
increase perpetual cost savings for
regulated entities attributable to
improved clarity and reduced litigation
as compared to the final rule. It could,
on the other hand, impose burdens on
workers who might prefer to be
employees subject to FLSA protections.
Moreover, the Supreme Court has
interpreted the ‘‘suffer or permit’’
language in section 3(g) of the FLSA as
establishing a broader definition of
employment than the common law. See,
e.g., Darden, 503 U.S. at 326; Portland
Terminal Co., 330 at 150–51.
A handful of business commenters
addressed the merits of the common law
control test as a regulatory alternative.
In a joint comment, Vanliner Insurance
Company and the Great American
Trucking Division implicitly requested
adoption of the common law standard
presently used under the National Labor
Relations Act (NLRA) and the Social
Security Act (SSA), as they urged the
Department to ‘‘foster efficiency and
consistency by creating uniformity for
compliance with the FLSA, the [NLRA],
and the [SSA].’’ The American Society
of Travel Advisors, Inc. (ASTA) asserted
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that ‘‘the simplest means to accomplish
[a uniform classification standard under
Federal law] would be to revise the
FLSA, either legislatively or through
regulation, to replace the economic
reality test with the right of control
test.’’ While appearing to support the
common law control test on substance,
the Workplace Policy Institute warned
that ‘‘any attempt by the Department to
depart from the economic reality test
likely would result in a successful legal
challenge to this rulemaking,’’
expressing support for the Department’s
proposed economic reality test ‘‘in the
spirit of ‘don’t let the perfect be the
enemy of the good.’ ’’ See also Dr.
Palagashvili (‘‘[A]lthough the DOL is
constrained in adopting a common law
control test, I suggest that lawmakers
amend the FLSA to allow for
codification thereof.’’). By contrast, the
National Federation of Independent
Business (NFIB) criticized the
Department’s conclusion in the NPRM
that it lacks the legal authority to
implement a common law standard
through rulemaking as ‘‘unfortunate’’
and ‘‘questionable.’’
The Department appreciates the
policy appeal of establishing a uniform
Federal classification standard, and
understands that the standard most
familiar to the regulated community is
likely the common law control test used
for tax and other purposes. However,
such an approach would be inconsistent
with the Supreme Court’s statement that
FLSA employment is more inclusive
than the common law control test. See,
e.g., Walling v. Portland Terminal Co.,
330 U.S. 148, 150 (1947) (‘‘[I]n
determining who are ‘employees under
the [FLSA], common law employee
categories . . . are not of controlling
significance.’’). The overwhelming
majority of commenters who mentioned
the common law standard in their
comment, including business
commenters inclined to favor the
relative permissiveness of a common
law standard, expressed agreement with
that conclusion.
2. Codifying the Six-Factor ‘‘Economic
Reality’’ Balancing Test
As discussed earlier in section II(B),
WHD has long applied a multifactor
‘‘economic reality’’ balancing test to
distinguish between employees and
independent contractors in enforcement
actions and subregulatory guidance. The
six factors in WHD’s multifactor
balancing test, as recently articulated in
WHD Opinion Letter FLSA2019–6, are
as follows:
(1) The nature and degree of the
potential employer’s control;
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(2) The permanency of the worker’s
relationship with the potential
employer;
(3) The amount of the worker’s
investment in facilities, equipment, or
helpers;
(4) The amount of skill, initiative,
judgment, or foresight required for the
worker’s services;
(5) The worker’s opportunities for
profit or loss; and
(6) The extent of integration of the
worker’s services into the potential
employer’s business.
WHD Opinion Letter FLSA2019–6 at 4
(citing Rutherford Food, 331 U.S. at 730,
and Silk, 331 U.S. at 716).
As discussed in the NPRM, the
Department believes that this six-factor
balancing test is neither more nor less
permissive of independent contractor
relationships as compared to the
streamlined test finalized in this
rulemaking. Both tests describe the
‘‘economic dependence’’ of the worker
at issue as the ultimate inquiry; both
emphasize the primacy of actual
practice over contractual or theoretical
possibilities (i.e., the ‘‘economic reality’’
of the work arrangement); and both
evaluate the same set of underlying
factors, notwithstanding an emphasis
and consolidation of certain factors
under this rule’s streamlined test.
Notably, like § 795.105(d)(1)(i) of the
final rule, WHD Opinion Letter
FLSA2019–6 advised that certain safety
measures and quality control standards
do not constitute ‘‘control’’ indicative of
an FLSA employment relationship. See
id. at 8 n.4. However, the Department
explained in the NPRM that the sixfactor balancing test used by WHD and
most courts, with some significant
variations, would benefit from
clarification, sharpening, and
streamlining.
A number of commenters urged the
Department to codify a six-factor
balancing test. Several commenters,
including NELP, Eastern Atlantic States
Regional Council of Carpenters
(EASRCC), and the United Brotherhood
of Carpenters, specifically requested
that the Department reinstate AI 2015–
1, which was withdrawn in 2017.
SWACCA asserted that ‘‘codification of
the six-factor balancing test may well
achieve more consistency of application
from the courts as it pushes them to
develop their similar precedents to align
with the Department’s views,’’
criticizing the proposed rule as ‘‘a novel
weighted test that will result in more
litigation and less certain outcomes[.]’’
SWACCA also disputed the
Department’s assumption in the NPRM
that codifying the six-factor balancing
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test would not reduce initial regulatory
familiarization costs or provide greater
per-contract cost savings compared to
the proposed rule, see 85 FR 60635,
arguing that this assumption ‘‘overlooks
the fact that codifying the six-factor
balancing test would simply incorporate
what is now subregulatory guidance at
the regulatory level.’’ Finally, NELP,
NWLC, and the State AGs asserted that
the Department has no legal authority to
promulgate any regulatory standard
except the traditional six-factor
balancing test, citing to Kimble v.
Marvel Entm’t, LLC, 576 U.S. 446 (2015),
for the proposition that the six-factor
balancing test derived from Silk and
Rutherford Food has effectively become
part of the FLSA’s ‘‘statutory scheme.’’
See id. at 456 (‘‘All [of the Supreme
Court’s] interpretive decisions, in
whatever way reasoned, effectively
become part of the statutory scheme,
subject (just like the rest) to
congressional change.’’).
While the Department agrees with
NELP, NWLC, and the State AGs that
Supreme Court precedent requires
application of an ‘‘economic reality’’
test to evaluate independent contractor
claims under the FLSA, we disagree that
the Court has definitively prescribed the
specific components of such a test. As
explained earlier, courts in different
Federal circuits have articulated the
number and nature of relevant factors in
different ways, so any formulation
endorsed by the Department would be at
least marginally ‘‘novel’’ to courts and
affected stakeholders across
jurisdictions in some respect. Moreover,
many commenters are overstating the
degree to which the standard finalized
in this rule meaningfully departs from
existing precedent. If anything, by
elevating the two factors that are most
probative to what courts have
established as the ultimate inquiry of
the test—i.e., whether workers ‘‘are in
business for themselves,’’ Saleem, 854
F.3d at 139—the Department’s approach
is more faithful to courts’ instruction
that the factors ‘‘must be applied with
that ultimate notion in mind.’’ Usery,
527 F.2d at 1311. Moreover, because the
Department’s analysis of appellate case
law since 1975 has found workers’
control and opportunity for profit or
loss to be most predictive of a worker’s
classification status, the finalized
standard provides more accurate
guidance.
To the extent that some businesses
and independent contractors familiar
with the Department’s earlier
subregulatory guidance might spend
less time reviewing new regulatory
language on the topic under this
alternative, any reduction in initial
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regulatory familiarization costs
compared to the streamlined test
adopted in this final rule would likely
be minimal. By contrast, and as we
explained in the NPRM, codification of
the traditional six-factor balancing test
would yield smaller recurring benefits
and cost savings over the long term, as
the Department continues to believe in
the added clarity of an appropriately
weighted test with less overlapping
redundancy.
The Department further believes that
reinstatement of AI 2015–1’s specific
articulation of the six-factor test would
be inappropriate because that
withdrawn guidance exacerbates the
very shortcomings that this rule
remedies. As discussed in Section III(A),
the first such shortcoming is the need
for consistent application of economic
dependence. While the AI 2015–1
correctly stated that ‘‘[t]he ultimate
inquiry under the FLSA is whether the
worker is economically dependent on
the employer or truly in business for
him or herself,’’ it failed to apply that
concept consistently. Notably, it
explained that the investment factor
should be analyzed by comparing the
amount of the worker’s investments
with the amount the potential employer
invests because ‘‘[i]f the worker’s
investment is relatively minor, that
suggests that the worker and the
[potential] employer are not on similar
footings and that the worker may be
economically dependent on the
employer.’’ But the correct concept of
economic dependence is not an inquiry
into whether two entities are on a
‘‘similar footing,’’ but rather whether an
individual is in business for him- or
herself.253 Such an approach to the
investment factor is misleading by
placing the focus on the worker’s
financial means instead of the worker’s
relationship with the purported
employer. Several cases explicitly or
implicitly reject the ‘‘similar footing’’
analysis, most plainly because
independent contractors routinely work
for companies with whom they are not
on a ‘‘similar footing.’’ See Karlson, 860
F.3d at 1096 (‘‘Large corporations can
hire independent contractors’’). The
‘‘similar footing’’ concept of economic
dependence is also inconsistent with
the Supreme Court’s analysis in Silk,
331 U.S. 718, which found that truck
drivers who invested in their own
vehicles were independent contractors
who transported coal for a coal
company. The Court did not compare
253 The Department is also concerned that the
phrase ‘‘similar footing’’ lacks a clear meaning and
therefore may be confusing to the regulated
community.
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the relative investment of the drivers
with that of the coal company or ask
whether they were on a ‘‘similar
footing’’—they obviously were not.
Instead, the Court ruled that the drivers
were independent contractors, in part
because they had ‘‘the opportunity for
profit from sound management’’ of their
investment. Id. at 719. What matters is
not the relative size of a worker’s
investment, but whether the worker has
a meaningful opportunity for profit or
loss based on that investment.
The second shortcoming discussed at
Section III(B) is the need for guidance
regarding which economic reality
factors are more probative. AI 2015–1
exacerbates this shortcoming by
relegating the more probative control
factor while elevating the less probative
‘‘integral part’’ factor. In particular, AI–
2015 stated that ‘‘[t]he control factor
should not overtake the other factors of
the economic realities test.’’ Such
guidance is plainly inconsistent with
cases in which control explicitly
‘‘overtakes’’ other factors. See, e.g.,
Saleem; 854 F.3d at 147 (‘‘whatever ‘the
permanence or duration’ of Plaintiffs’
affiliation with Defendants, both its
length and the ‘regularity’ of work was
entirely of Plaintiffs’ choosing’’ (citation
omitted)); Selker Bros. 84 F.3d at 147
(‘‘Given the degree of control exercised
by Selker over the day-to-day operations
of the stations, this [use of special skills]
cannot be said to support a conclusion
of independent contractor status.’’).
Deemphasizing the control factor is also
at odds with commonsense logic;
control over the work seems to be
extremely probative as to whether an
individual is in business for him- or
herself. In addition to de-emphasizing a
highly probative factor, AI–2015 also
states that ‘‘[c]ourts have found the
‘integral’ factor to be compelling,’’ citing
Snell, 875 F.2d at 811 and Lauritzen,
F.2d at 1537–38 for support. But both
cited cases actually analyzed the
‘‘integral part’’ factor as an afterthought:
Each devoted only a few conclusory
sentences to this factor after more in
depth analysis of the other factors Snell,
875 F.2d at 811 and Lauritzen, 835 F.2d
at 1537–38. The ‘‘integral part’’ factor
falls short of even an afterthought in the
Fifth Circuit, which typically does not
analyze it at all. As explained in Section
IV(D)(5), the ‘‘integral part’’ factor—as
used in AI 2015–1 to mean a worker’s
importance to a business—is not
supported by Supreme Court precedent
and may send misleading signals in
many cases.
The third shortcoming discussed at
Section III(C) is overlaps between
economic reality factors, which
undermines the structural benefits of a
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multifactor test by blurring the lines
between factors. One type of overlap
highlighted by the NPRM is the
importation of the analysis of initiative
and business judgment, which are
already part of the control and
opportunity factors, into the skill factor,
thus ‘‘dilut[ing] the consideration of
actual skill to the point of irrelevance.’’
85 FR 60607. Id. AI 2015–1 reinforces
this problem by focusing the skill factor
entirely on initiative and business
judgment, thus eliminating
consideration of skill: ‘‘A worker’s
business skills, judgment, and initiative,
not his or her technical skills, will aid
in determining whether the worker is
economically independent.’’ The
withdrawn guidance makes clear that it
is not simply that skill matters less than
initiative, but that skill matters not at
all, because it unequivocally states that
‘‘specialized skill do not indicate that
workers are in business for themselves.’’
This categorical statement, however, is
supported by more circumspect case
law explaining that ‘‘skill is not itself
indicative of independent contractor
status.’’ AI 2015–1 (quoting Superior
Care, 84 F.2d at 1060 (emphasis
added)); see also id. (‘‘the use of special
skills is not itself indicative of
independent contractor status’’ (quoting
Selker Bros. 949 F.d at 1295) (emphasis
added)). AI 2015–1’s categorical
position is also at odds with the
Supreme Court’s instruction in Silk that
‘‘skill required’’ may be ‘‘important for
decision.’’ 331 U.S. at 716; see also
Simpkins, 893 F.3d at 966 (‘‘whether
Simpkins had specialized skills, as well
as the extent to which he employed
them in performing his work, are
[material] issues’’).
Further, reinstating AI 2015–1 or
otherwise adopting a six-factor test with
overlapping factors and without
guidance regarding the factors’ relative
probative value would negate the
overall beneficial effects that would
likely result from this rule, which are
discussed above.
For these reasons, the Department
declines commenters’ requests to
reinstate AI 2015–1.The Department
further notes that, unlike this rule, AI
2015–1 was issued without notice and
comment and thus did not benefit from
helpful input from the regulated
community.
3. Codifying California’s ‘‘ABC’’ Test
The most stringent regulatory
alternative to the Department’s
proposed rule would be to codify the
‘‘ABC’’ test recently adopted under
California’s state wage and hour law to
distinguish between employee/
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independent contractor statuses.254 As
described by the California Supreme
Court in Dynamex, ‘‘[t]he ABC test
presumptively considers all workers to
be employees, and permits workers to
be classified as independent contractors
only if the hiring business demonstrates
that the worker in question satisfies
each of three conditions: (a) That the
worker is free from the control and
direction of the hirer in connection with
the performance of the work, both under
the contract for the performance of the
work and in fact; and (b) that the worker
performs work that is outside the usual
course of the hiring entity’s business;
and (c) that the worker is customarily
engaged in an independently
established trade, occupation, or
business of the same nature as that
involved in the work performed.’’ 416
P.3d at 34.255 In justifying the adoption
of such a stringent test, the Dynamex
court noted the existence of an
‘‘exceptionally broad suffer or permit to
work standard’’ in California’s wage and
hour statute, id. at 31,256 as well as ‘‘the
more general principle that wage orders
are the type of remedial legislation that
must be liberally construed in a manner
that serves its remedial purposes.’’ Id. at
32.
On its face, California’s ABC test is far
more restrictive of independent
contracting arrangements than any
formulation of an ‘‘economic reality’’
254 See Dynamex, 416 P.3d 1; Assembly Bill
(‘‘A.B.’’) 5, Ch. 296, 2019–2020 Reg. Sess. (Cal.
2019) (codifying the ABC test articulated in
Dynamex); A.B. 2257, Ch. 38, 2019–2020 Reg. Sess.
(Cal. 2020) (exempting certain professions,
occupations, and industries from the ABC test that
A.B. 5 had codified). The ABC test originated in
state unemployment insurance statutes, but some
state courts and legislatures have recently extended
the test to govern employee/independent contractor
disputes under state wage and hour laws. See Keith
Cunningham-Parmeter, Gig-Dependence: Finding
the Real Independent Contractors of Platform Work,
39 N. Ill. U. L. Rev. 379, 408–11 (2019) (discussing
the origins and recent expansion of the ABC test).
255 California’s ABC test is slightly more stringent
than versions of the ABC test adopted (or presently
under consideration) in other states. For example,
New Jersey provides that a hiring entity may satisfy
the ABC test’s ‘‘B’’ prong by establishing either: (1)
That the work provided is outside the usual course
of the business for which the work is performed, or
(2) that the work performed is outside all the places
of business of the hiring entity. N.J. Stat. Ann.
§ 43:21–19(i)(6)(A–C). The Department has chosen
to analyze California’s ABC test as a regulatory
alternative because businesses subject to multiple
standards, including nationwide businesses, are
likely to comply with the most demanding standard
if they wish to make consistent classification
determinations.
256 See Cal. Code Regs., tit. 8, § 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.
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balancing test, including the proposed
rule. Whereas no single factor
necessarily disqualifies a worker from
independent contractor status under an
economic reality test, each of the ABC
test’s three factors may alone disqualify
the worker from independent contractor
status. Thus, the NPRM stated that
adoption of an ABC test to govern
independent contractor status under the
FLSA would directly result in a largescale reclassification of many workers
presently classified as independent
contractors into FLSA-covered
employees, particularly those in
industries that depend on independent
contracting arrangements within the
‘‘usual course of the hiring entity’s
business.’’ Dynamex, 416 P.3d at 34.
While some independent contractors
might benefit from reclassification by
newly receiving overtime pay or a
guaranteed minimum wage, these
workers might also experience a
reduction in work hours or diminished
scheduling flexibility as their new
employers attempt to avoid incurring
additional expenses for overtime work.
Others workers, particularly off-site
workers who operate free from the
business’ direct control and supervision,
might see their work arrangements
terminated by businesses unwilling or
unable to assume the financial burden
and legal risk of the FLSA’s overtime
pay requirement. After highlighting
some of the reports of adverse
consequences experienced by workers
and businesses in California following
the passage A.B. 5, the Department
concluded that adopting the ABC test as
the FLSA’s generally applicable
standard for distinguishing employees
from independent contractors would be
unduly restrictive and disruptive to the
economy. Finally, as a matter of law, the
Department asserted that adoption of
California’s ABC test would be
inconsistent with the more flexible
economic reality test adopted by the
Supreme Court, as it would cover
workers who have been held by the
Supreme Court to be independent
contractors under the economic reality
test. See Silk, 331 U.S. at 719; Bartels,
332 U.S. at 130.
The Department received a large
volume of commenter feedback on the
merits of California’s ABC test. While
the majority of these comments were
highly critical of the standard, it did
have several supporters. Commenters in
favor of the ABC test asserted that, as
the regulatory alternative most
restrictive of independent contracting
considered by the Department, it would
best effectuate Congress’ intent to
extend FLSA coverage broadly and
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reduce unlawful misclassification of
employees as independent contractors.
See, e.g., Matt Brown; National
Domestic Workers Alliance; Public
Justice Center; SEIU. Numerous
commenters asserted that the ABC test,
with its three individually
determinative factors, was also the
clearest and most predictable approach
considered. See, e.g., International
Brotherhood of Teamsters; Writers
Guild of America, East, AFL–CIO. New
York University’s People’s Parity Project
argued that ‘‘[g]iven the importance of
the California market to the national
economy and the fact that it follows the
more stringent ABC standard, any
business that wishes to operate in
California, and any national business,
will have economic motivation to follow
the ABC standard.’’ NELA similarly
disputed concerns that adoption of the
ABC test would be unduly disruptive,
asserting that Massachusetts wage and
hour law has used an ABC test since
2004 and that ‘‘[m]any other states,
including New Jersey, Illinois,
Connecticut, and Hawaii, use an ABC
test for certain [other] purposes, and
have similarly suffered no disruption to
their economies.’’ Finally, regarding the
Department’s legal authority to adopt
the ABC test, NELA asserted that ‘‘none
of the cases on which the Department
relies suggest that the multi-factor test is
the only way to test ‘economic reality’
or that the ABC test ignores ‘economic
reality.’ ’’
A diverse array of commenters voiced
strong opposition to adopting an ABC
test under the FLSA, including law
firms, trade associations, advocacy
organizations, academics, and
individual freelancers. Several
commenters dedicated the entirety or
vast majority of their comment towards
criticizing California’s ABC test. See,
e.g., American Consumer Institute
Center for Citizen Research (ACI); Fight
for Freelancers USA; Institute for the
American Worker; Joint Comment of the
Pacific Legal Foundation (PLF), the
American Society of Journalists and
Authors, Inc. (ASJA), and the National
Press Photographers Association
(NPPA); Dr. Palagashvili; The People v.
AB5. The primary objection voiced by
commenters critical of the ABC test
regarded the disruptive economic effects
of implementing such a stringent
standard, with several asserting that an
ABC test would devastate their industry.
See, e.g., American Council of Life
Insurers (‘‘Thousands of jobs would
likely have been lost had the California
legislature failed to create [an
exemption for insurance
professionals].’’); Coalition of Practicing
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Translators & Interpreters of California
(CoPTIC) (‘‘[A.B. 5] posed an existential
threat to the survival of our
profession.’’); Intermodal Association of
North America (IANA)) (‘‘The ABC test
essentially eliminates the independent
contractor model for motor carriers
involved in intermodal drayage.’’).
Several commenters invoked the
numerous exemptions to the ABC test
that California lawmakers initially
adopted in A.B. 5 and subsequently
expanded in A.B. 2257 as evidence of
the standard’s overreach. See, e.g.,
California Chamber of Commerce
(‘‘During the first few months of the
2020 Legislative Session, more than 30
bills were introduced to add a myriad of
exemptions to the ABC test. . . . As a
result of the adoption of AB 2257,
which was signed into law in
September, there are now 109
exemptions to the ABC test.’’); Rep.
Virginia Foxx et al. (‘‘Rather than setting
a dependable and workable standard,
the AB 5 framework results in arbitrary
treatment of industries based on
political considerations to the detriment
of workers.’’); Joint Comment of PLF,
ASJA, and NPPA (‘‘If a law requires
dozens of exceptions to avoid
destroying the careers of successful
independent professionals, it is a strong
indication that the law’s basic
premise—the ABC test—is flawed.’’).
Some individual freelancers, including
writer Karen Kroll, filmmaker/actor
Margarita Reyes, unspecified
professional Chun Fung Kevin Chiu,
and unspecified professional Carola
Berger, asserted that the ABC test is
falsely premised on the assumption that
all independent contractors, or at least
those who provide services in a client’s
usual course of business, feel exploited
and would prefer to be employees. The
Independent Women’s Forum and Dr.
Palagashvili asserted that the ABC test
implemented in California
disproportionately burdened female
workers with caregiving responsibilities,
who are less able to find adequately
flexible work schedules through
traditional employment. Finally, some
commenters agreed with the
Department’s conclusion in the NPRM
that Supreme Court precedent precludes
the Department from adopting an ABC
test under the FLSA. See NRF; FMI—
The Food Industry Association.
After reviewing commenter feedback,
the Department continues to believe that
the ABC test would be infeasible,
difficult to administer, and disruptive to
the economy if adopted as the FLSA
standard. The weight of data,
arguments, and anecdotes that
commenters shared about the ABC test’s
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effects in California support the NPRM’s
conclusion that adopting an ABC test
would have unacceptably disruptive
economic effects. For instance, a selfemployed ‘‘professional handyman with
technical skills in furniture assembly
and home repair’’ stated that ‘‘[a]s a
California resident, it has been
concerning to watch the way AB–5 has
affected our state. I don’t believe
legislators should make decisions that
make it harder for people like me to find
work and earn a living the way we want
to.’’ A medical translator stated that
‘‘ABC test simply doesn’t work in my
field and it is not a fair standard to
measure my situation. The original AB5
law in California was destructive to the
livelihood of many of my colleagues in
that state.’’ And as a final illustrative
example, a freelance journalist in
California characterized that state’s
adoption of the ABC test as an ‘‘attempt
to legislate an entire class of
entrepreneurs out of business.’’ See
also, e.g., People vs. AB5; Fight for
Freelancers; NPPA; WPI.
Moreover, as commenters pointed out,
the numerous exemptions initially and
subsequently passed by the California
legislature indicate the ABC test’s
inadequacy as a generally applicable
standard, as well as its unpopularity
with affected stakeholders. An ‘‘owner
of a small, one-woman business in
California’’ explained in her comment
that ‘‘[t]he absurdity and overreach of
AB5 is evidenced by the numerous
attempts at clean-up bills in California
(SB 875, SB 1039, SB 900, AB 1850, AB
2257 . . .) that clogged the CA
legislative landscape for months,
culminating in the now adopted AB
2257, which lists too many exemptions
to count.’’ The recent passage of the
high-profile Proposition 22 ballot
initiative in California,257 which
occurred shortly after the end of the
comment period for this rulemaking and
exempted numerous gig workers from
the ABC test, is further evidence in this
regard.
While California retains the ABC test
for some industries but not others, the
Department is required to apply the
FLSA consistently for all covered
industries (absent explicit statutory
authority to do otherwise). Thus, if the
Department adopted the ABC test, that
standard would apply to virtually all
industries nationwide, including
numerous industries that the
Californian legislature and voters
exempted because they would suffer
257 See Kate Conger, ‘‘Uber and Lyft Drivers in
California Will Remain Contractors,’’ NY Times
(Nov. 4, 2020), https://www.nytimes.com/2020/11/
04/technology/california-uber-lyft-prop-22.html.
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undue disruption under that standard.
NELA contended that adoption of the
ABC test by Massachusetts has not led
to the same type of disruption
experienced in California, which is
disputed by some commenters from
Massachusetts. See e.g., New Jobs for
Massachusetts; IFA; Fight for
Freelancers. But even if NELA were
correct, a nationwide ABC test would
still disrupt California, the state with
the largest population and economy,
and likely many others. In the
Department’s view, the fact that a legal
standard may be disruptive in only
some states (e.g., California) but not
others (e.g., Massachusetts) is not a
persuasive reason for nationwide
adoption.
Additionally, the Department
continues to believe that it lacks legal
authority to adopt the ABC test under
the FLSA because that test is far too
rigid and restrictive of independent
contracting arrangements. As a
threshold matter, each of the ABC test’s
three independently determinative
factors would contradict binding
Supreme Court precedent applying the
economic reality test, where ‘‘[n]o one
[factor] is controlling.’’ Silk, 331 U.S. at
716. In particular, the test’s ‘‘B’’ prong—
denying independent contractor status
unless the contractor ‘‘performs work
that is outside the usual course of the
hiring entity’s business’’—would
contradict the Court’s recognition in
Silk that ‘‘[f]ew businesses are so
completely integrated that they can
themselves produce the raw material,
manufacture and distribute the finished
product to the ultimate consumer
without assistance from independent
contractors.’’ 331 U.S. at 714; see also
Rutherford Food, 331 U.S. at 729
(recognizing that ‘‘[t]here may be
independent contractors who take part
in [the] production or distribution’’ of a
hiring party). Indeed, application of
California’s ABC test would result in
different classification outcomes than
those the Supreme Court arrived at
applying the economic reality test in
Silk, 331 U.S. at 719 (ruling that
truckers who were ‘‘an integral part of
the businesses of retailing coal or
transporting freight’’ were independent
contractors), and Bartels, 332 U.S. at 130
(concluding that musicians were
independent contractors rather than
employees of the music hall where they
played). Absent revised guidance from
the Supreme Court or Congressional
legislation amending the FLSA statute,
the Department continues to believe that
it lacks the legal authority to implement
a California-style ‘‘ABC’’ test through
administrative rulemaking.
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1243
NELA contended that ‘‘an ABC test is
more faithful to the broad, remedial
purpose of the FLSA.’’ According to
NELA, ‘‘[a]t its core, the FLSA is a
remedial statute’’ and therefore, the
Department should interpret the FLSA’s
standard of employment to be broader
than economic dependence. However,
the Supreme Court warned against
relying on ‘‘flawed premise that the
FLSA ‘pursues’ its remedial purpose ‘at
all costs’ ’’ when interpreting the Act.
Encino, 138 S. Ct. at 1142; see also
Bristol, 935 F.3d 122 (‘‘ ‘[A] fair reading’
of the FLSA, neither narrow nor broad,
is what is called for.’’ (quoting Encino,
138 S. Ct. at 1142)); Diaz, 751 F. App’x
at, 758 (rejecting request to interpret
FLSA provisions to provide ‘‘broad’’
coverage because ‘‘[w]e must instead
give the FLSA a ‘fair’ interpretation.’’).
Furthermore, even if remedial statutes
should be liberally construed, the ABC
test still runs afoul of the Supreme
Court’s stated limits on the extent of the
FLSA’s definition of employment, as
explained above. As such, the
Department may not (and no court has
ever suggested that it could) replace the
economic reality test with the ABC test
to be faithful to the FLSA’s remedial
purpose.
In sum, legal constraints and the
disruptive economic effects of adopting
the ABC test in the FLSA context. As we
stated in the NPRM, the Department
engaged in this rulemaking to clarify the
existing standard, not to radically
transform it.
H. Summary of Impacts
In summary, the Department believes
that this rule will increase clarity
regarding whether a worker is classified
as an employee or an independent
contractor under the FLSA. This clarity
could result in an increased use of
independent contractors. The costs and
benefits to a worker being classified as
an independent contractor are discussed
throughout this analysis, and are
summarized below.
The Department believes that there
are real benefits to the use of
independent contractor status, for both
workers and employers. Independent
contractors generally have greater
autonomy and more flexibility in their
hours, providing them more control
over the management of their time. The
use of independent contracting for
employers allows for a more flexible
and dynamic workforce, where workers
provide labor and skills where and
when they are needed. Independent
contractors may more easily work for
multiple companies simultaneously,
have more control over their laborleisure balance, and more explicitly
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define the nature of their work.
Independent contractors also appear to
have higher job satisfaction.
An increase in the number of job
openings for independent contractors
can also have benefits for the economy
as a whole. Increased job creation and
enhanced flexibility in work
arrangements are critical benefits during
periods of economic uncertainty, such
as the current COVID–19 pandemic.
There are also certain challenges that
face independent contractors compared
to employees subject to the FLSA.
Independent contractors are not subject
to the protections of the FLSA, such as
minimum wage and overtime pay.
Independent contractors generally do
not receive the same employer-provided
benefits as employees, such as health
insurance, retirement contributions, and
paid time off.258 Independent
contractors may have a higher tax
liability than employees, as they are
legally obligated to pay both the
employee and employer shares of the
Federal Insurance Contributions Act
(FICA) taxes. However, economists
recognize that payroll taxes generally
are subtracted from the wage rate of
employees. Employers also cover
unemployment insurance and workers’
compensation taxes for their employees.
These costs are also components of
businesses’ worker costs, and employee
wages are expected to reflect that
accordingly. Independent contractors do
not pay these taxes nor are they
generally protected by these insurance
programs, but there are private
insurance companies that offer
equivalent coverage.
Because the Department does not
know how many workers may shift from
employee status to independent
contractor status, or how many people
who were previously unemployed or
out of the labor force will gain work as
an independent contractor, these costs
and benefits have not been quantified.
VII. Regulatory Flexibility Act
The Regulatory Flexibility Act of 1980
(RFA), 5 U.S.C. 601 et seq., as amended
by the Small Business Regulatory
Enforcement Fairness Act of 1996,
Public Law 104–121 (1996), requires
Federal agencies engaged in rulemaking
to consider the impact of their proposals
on small entities, consider alternatives
to minimize that impact, and solicit
public comment on their analyses. The
RFA requires the assessment of the
impact of a regulation on a wide range
of small entities, including small
258 In
some situations, independent contractors
may be provided with benefits similar to those
provided to employees.
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businesses, not-for-profit organizations,
and small governmental jurisdictions.
Accordingly, the Department examined
the regulatory requirements of this final
rule to determine whether they would
have a significant economic impact on
a substantial number of small entities.
Because both costs and cost savings are
minimal for small business entities, the
Department certifies that this final rule
will not have a significant economic
impact on a substantial number of small
entities.
The Department used the Small
Business Administration size standards,
which determine whether a business
qualifies for small-business status, to
estimate the number of small
entities.259 260 The Department then
applied these thresholds to the U.S.
Census Bureau’s 2012 Economic Census
to obtain the number of establishments
with employment or sales/receipts
below the small business threshold in
the industry.261 These ratios of small to
large establishments were then applied
to the more recent 2017 Economic
Census data on number of
establishments.262 Next, the Department
estimated the number of small
governments, defined as having
population less than 50,000, from the
2017 Census of Governments.263 In
total, the Department estimated there
are 6.4 million small establishments or
governments.
The Department assumes that a
Compensation, Benefits, and Job
Analysis Specialist (SOC 13–1141) (or a
staff member in a similar position) will
review the rule.264 According to the
Occupational Employment Statistics
(OES), these workers had a mean wage
of $33.58 per hour in 2019 (most recent
data available). Given the proposed
259 SBA, Summary of Size Standards by Industry
Sector, 2017, www.sba.gov/document/support—
table-size-standards.
260 The most recent size standards were issued in
2019. However, the Department used the 2017
standards for consistency with the older Economic
Census data.
261 The 2012 data are the most recently available
with revenue data.
262 For this analysis, the Department excluded
independent contractors who are not registered as
small businesses, and who are generally not
captured in the Economic Census, from the
calculation of small establishments.
263 2017 Census of Governments. https://
www.census.gov/data/tables/2017/econ/gus/2017governments.html.
264 A Compensation/Benefits Specialist ensures
company compliance with Federal and state laws,
including reporting requirements; evaluates job
positions, determining classification, exempt or
non-exempt status, and salary; plans, develops,
evaluates, improves, and communicates methods
and techniques for selecting, promoting,
compensating, evaluating, and training workers. See
BLS, ‘‘13–1141 Compensation, Benefits, and Job
Analysis Specialists,’’ https://www.bls.gov/oes/
current/oes131141.htm.
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clarification to the Department’s
interpretation of who is an employee
and who is an independent contractor
under the FLSA, the Department
assumes that it will take on average
about 1 hour to review the rule as
proposed. The Department believes that
an hour, on average, is appropriate,
because while some establishments will
spend longer than one hour to review
the rule, many establishments may rely
on third-party summaries of the changes
or spend little or no time reviewing the
rule. Assuming benefits are paid at a
rate of 46 percent of the base wage, and
overhead costs are 17 percent of the
base wage, the reviewer’s effective
hourly rate is $54.74; thus, the average
cost per establishment conducting
regulatory familiarization is $54.74. The
per-entity rule familiarization cost for
independent contractors, some of whom
would be small businesses, is $11.59, or
the fully loaded mean hourly wage of
independent contractors in the CWS
($46.36) multiplied by 0.25 hour. The
Department believes that 15 minutes, on
average, is appropriate, because while
some independent contractors will
spend longer than one hour to review
the rule, many will spend little or no
time reviewing the rule.
The cost savings due to increased
clarity estimated per year for each small
business employer is $18.25, or the fully
loaded mean hourly wage of a
Compensation, Benefits, and Job
Analysis Specialist multiplied by 0.33
hours. The cost savings due to increased
clarity for each independent contractor,
some of whom would be a small
business, is $4.14 per year, or the fully
loaded mean hourly wage of
independent contractors in the CWS
multiplied by 0.89 hours.265 Because
regulatory familiarization is a one-time
cost and the cost savings from clarity
recur each year, the Department expects
cost savings to outweigh regulatory
familiarization costs in the long run.
Because both costs and cost savings are
minimal for small business entities, and
well below one percent of their gross
annual revenues, which is typically at
least $100,000 per year for the smallest
businesses, the Department certifies that
this final rule will not have a significant
economic impact on a substantial
number of small entities.
There is some evidence that small
firms use independent contractors for a
greater proportion of their workforce
than large firms.266 If so, then it may be
reasonable to assume that the increased
265 Note that the NPRM reported $3.86 which is
the cost per job, rather than the cost per
independent contractor.
266 Lim et al, supra note 75 at 51.
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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.
AFL–CIO disagreed with including
cost savings from increased clarity for
independent contractors. They argue
that ‘‘the independent contractors at
issue—those who falls [sic] close to the
line separating independent contractors
from employees are not themselves
employers, they provide services solely
as individuals and they have no need to
determine if they are themselves
independent contractors.’’ They
additionally stated that the analysis
failed to include compliance costs for
the new small businesses created—the
workers newly classified as
independent contractors. Specifically,
these new independent contractors will
have increased regulatory burden due to
additional accounting and tax filing
costs. The Department believes it did
address this because workers who
choose to pursue independent
contractor roles will not take them
unless they believe the gains will offset
the costs.
The AFL–CIO asserts that the
Department failed to conduct the
outreach to small businesses as required
by Section 609(a) of the RFA. The
Department notes that these
requirements only apply when the rule
will have a significant economic impact
on a substantial number of small
entities, which is not the case for this
rulemaking.
VIII. Unfunded Mandates Reform Act
Analysis
The Unfunded Mandates Reform Act
of 1995 (UMRA) 267 requires agencies to
prepare a written statement for rules
with a Federal mandate that may result
in increased expenditures by state,
local, and tribal governments, in the
aggregate, or by the private sector, of
$156 million ($100 million in 1995
dollars adjusted for inflation) or more in
at least one year.268 This statement
must: (1) Identify the authorizing
legislation; (2) present the estimated
costs and benefits of the rule and, to the
extent that such estimates are feasible
and relevant, its estimated effects on the
national economy; (3) summarize and
evaluate state, local, and tribal
government input; and (4) identify
267 See
2 U.S.C. 1501.
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.
268 Calculated
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1245
have any measurable effect on the
economy.
Many commenters claim that the rule
will result in costs to Federal and state
governments in the form of increased
A. Authorizing Legislation
public assistance and decreased tax
revenue. The Department discussed
This final rule is issued pursuant to
these potential costs in the RIA and
the Fair Labor Standards Act, 29 U.S.C.
directs the reader to Section VI(E)(2)(ii).
201, et seq.
The State AGs stated that the
B. Assessment of Costs and Benefits
Department failed to include the
increased administrative and
For purposes of the UMRA, this rule
enforcement costs to states due to the
includes a Federal mandate that is
change in the standard for determining
expected to result in increased
independent contractor status under the
expenditures by the private sector of
FLSA. They wrote that states ‘‘would
more than $156 million in at least one
need to invest time and resources into
year, but will not result in increased
training agency employees and
expenditures by state, local, and tribal
educating the public,’’ particularly in
governments, in the aggregate, of $156
states with laws that are more restrictive
million or more in any one year.
than the economic reality test. States do
Based on the cost analysis from this
not enforce Federal laws and therefore
final rule, the Department determined
have no need to train their personnel in
that it will result in Year 1 total costs
the enforcement of the FLSA or the
for state and local governments totaling
Department’s regulations. There is also
$1.7 million, all for regulatory
no need for states to be ‘‘educating’’ the
familiarization. There will be no
public about FLSA regulations—aside
additional costs incurred in subsequent
from pointing out that Federal law may
years.
impose different requirements than state
The Department determined that the
labor laws. Finally, under the nation’s
rule will result in Year 1 total costs for
federalist system, states may and often
the private sector of $369.2 million, all
do enact and enforce labor standards
of them incurred for regulatory
and are more restrictive than Federal
familiarization. The Department
included all independent contractors in standards. A state’s decision to do so,
however, rests with the state because no
the private sector total regulatory
state is forced to enact labor standards
familiarization costs. There will be no
that are stricter than the Federal
additional costs incurred in subsequent
standard. Any costs associated with
years.
implementing a stricter standard,
UMRA requires agencies to estimate
the effect of a regulation on the national including training and education, reflect
the free choice of the individual state,
economy if such estimates are
and not the existence of a different
reasonably feasible and the effect is
269
relevant and material.
However, OMB Federal standard. As such, costs that a
guidance on this requirement notes that state choose to bear in enacting and
enforcing their own laws are the result
such macroeconomic effects tend to be
of the state’s own decision, and are
measurable in nationwide econometric
outside the scope of the unfunded
models only if the economic effect of
mandate concept.
the regulation reaches 0.25 percent to
0.5 percent of Gross Domestic Product
C. Least Burdensome Option Explained
(GDP), or in the range of $53.6 billion
The Department believes that it has
to $107.2 billion (using 2019 GDP).270 A chosen the least burdensome but still
regulation with a smaller aggregate
cost-effective methodology to clarify the
effect is not likely to have a measurable
FLSA’s distinction between employees
effect in macroeconomic terms, unless it and independent contractors. Although
is highly focused on a particular
the regulation will impose costs for
geographic region or economic sector,
regulatory familiarization, the
which is not the case with this rule.
Department believes that its proposal
The Department’s RIA estimates that
would reduce the overall burden on
the total costs of the final rule will be
organizations by simplifying and
$369.2 million. Given OMB’s guidance,
clarifying the analysis for determining
the Department has determined that a
whether a worker is classified as an
full macroeconomic analysis is not
employee or an independent contractor
likely to show that these costs would
under the FLSA. The Department
believes that, after familiarization, this
269 See 2 U.S.C. 1532(a)(4).
rule will reduce the time spent by
270 According to the Bureau of Economic
organizations to determine whether a
Analysis, 2019 GDP was $21.43 trillion. https://
worker is an independent contractor.
www.bea.gov/system/files/2020-02/gdp4q19_2nd_
0.pdf.
Moreover, the additional clarification
reasonable alternatives and select, or
explain the non-selection, of the least
costly, most cost-effective, or least
burdensome alternative.
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could promote innovation and certainty
in business relationships. The AFPF
agreed ‘‘that the Department has
adequately analyzed potential
alternatives as well as selected the least
burdensome option under the Unfunded
Mandates Reform Act of 1995.’’
IX. Effects on Families
The undersigned hereby certifies that
the proposed rule would not adversely
affect the well-being of families, as
discussed under section 654 of the
Treasury and General Government
Appropriations Act, 1999.
29 CFR Part 780
Agriculture, Child labor, Wages.
29 CFR Part 788
Forests and forest products, Wages.
29 CFR Part 795
Employment, Wages.
For the reasons set out in the
preamble, the Department of Labor
amends 29 CFR chapter V as follows:
PART 780—EXEMPTIONS
APPLICABLE TO AGRICULTURE,
PROCESSING OF AGRICULTURAL
COMMODITIES, AND RELATED
SUBJECTS UNDER THE FAIR LABOR
STANDARDS ACT
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) to read as follows:
■
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.
*
*
*
*
*
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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) to read as follows:
■
19:58 Jan 06, 2021
PART 795—EMPLOYEE OR
INDEPENDENT CONTRACTOR
CLASSIFICATION UNDER THE FAIR
LABOR STANDARDS ACT
Authority: 52 Stat. 1060, as amended; 29
U.S.C. 201–219.
Signed at Washington, DC, this 31st day of
December, 2020.
Cheryl M. Stanton,
Administrator, Wage and Hour Division.
VerDate Sep<11>2014
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 subchapter B to
read as follows:
Sec.
795.100 Introductory statement.
795.105 Determining employee and
independent contractor classification
under the FLSA.
795.110 Primacy of actual practice.
795.115 Examples of analyzing economic
reality factors.
795.120 Severability.
List of Subjects
§ 780.330
farmers.
§ 788.16
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§ 795.100
Introductory statement.
This part contains the Department of
Labor’s general interpretations of the
text governing individuals’
classification as employees or
independent contractors under the Fair
Labor Standards Act (FLSA or Act). See
29 U.S.C. 201–19. The Administrator of
the Wage and Hour Division will use
these interpretations to guide the
performance of his or her duties under
the Act, and intends the interpretations
to be used by employers, employees,
and courts to understand employers’
obligations and employees’ rights under
the Act. To the extent that prior
administrative rulings, interpretations,
practices, or enforcement policies
relating to classification as an employee
or independent contractor under the Act
are inconsistent or in conflict with the
interpretations stated in this part, they
are hereby rescinded. The
interpretations stated in this part may be
relied upon in accordance with section
10 of the Portal-to-Portal Act, 29 U.S.C.
251–262, notwithstanding that after any
such act or omission in the course of
such reliance, any such interpretation in
this part ‘‘is modified or rescinded or is
determined by judicial authority to be
invalid or of no legal effect.’’ 29 U.S.C.
259.
§ 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
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employer’s employee under the Act. As
such, sections 6, 7, and 11 of the Act,
which impose obligations on employers
regarding their employees, are
inapplicable. Accordingly, the Act does
not require a potential employer to pay
an independent contractor either the
minimum wage or overtime pay under
sections 6 or 7. Nor does section 11 of
the Act require a potential employer to
keep records regarding an independent
contractor’s activities.
(b) Economic dependence as the
ultimate inquiry. An ‘‘employee’’ under
the Act is an individual whom an
employer suffers, permits, or otherwise
employs to work. 29 U.S.C. 203(e)(1),
(g). An employer suffers or permits an
individual to work as an employee if, as
a matter of economic reality, the
individual is economically dependent
on that employer for work. Rutherford
Food Corp. v. McComb, 331 U.S. 722,
727 (1947); Bartels v. Birmingham, 332
U.S. 126, 130 (1947). An individual is
an independent contractor, as
distinguished from an ‘‘employee’’
under the Act, if the individual is, as a
matter of economic reality, in business
for him- or herself.
(c) Determining economic
dependence. The economic reality
factors in paragraph (d) of this section
guide the determination of whether the
relationship between an individual and
a potential employer is one of economic
dependence and therefore whether an
individual is properly classified as an
employee or independent contractor.
These factors are not exhaustive, and no
single factor is dispositive. However, the
two core factors listed in paragraph
(d)(1) of this section are the most
probative as to whether or not an
individual is an economically
dependent ‘‘employee,’’ 29 U.S.C.
203(e)(1), and each therefore typically
carries greater weight in the analysis
than any other factor. Given these two
core factors’ greater probative value, if
they both point towards the same
classification, whether employee or
independent contractor, there is a
substantial likelihood that is the
individual’s accurate classification. This
is because other factors are less
probative and, in some cases, may not
be probative at all, and thus are highly
unlikely, either individually or
collectively, to outweigh the combined
probative value of the two core factors.
(d) Economic reality factors—(1) Core
factors—(i) The nature and degree of
control over the work. This factor
weighs towards the individual being an
independent contractor to the extent the
individual, as opposed to the potential
employer, exercises substantial control
over key aspects of the performance of
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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 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 faster.
(2) Other factors—(i) The amount of
skill required for the work. This factor
weighs in favor of the individual being
an independent contractor to the extent
the work at issue requires specialized
training or skill that the potential
employer does not provide. This factor
weighs in favor of the individual being
an employee to the extent the work at
issue requires no specialized training or
skill and/or the individual is dependent
upon the potential employer to equip
him or her with any skills or training
necessary to perform the job.
(ii) The degree of permanence of the
working relationship between the
individual and the potential employer.
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This factor weighs in favor of the
individual being an independent
contractor to the extent the work
relationship is by design definite in
duration or sporadic, which may
include regularly occurring fixed
periods of work, although the seasonal
nature of work by itself would not
necessarily indicate independent
contractor classification. This factor
weighs in favor of the individual being
an employee to the extent the work
relationship is instead by design
indefinite in duration or continuous.
(iii) Whether the work is part of an
integrated unit of production. This
factor weighs in favor of the individual
being an employee to the extent his or
her work is a component of the potential
employer’s integrated production
process for a good or service. This factor
weighs in favor of an individual being
an independent contractor to the extent
his or her work is segregable from the
potential employer’s production
process. This factor is different from the
concept of the importance or centrality
of the individual’s work to the potential
employer’s business.
(iv) Additional factors. Additional
factors may be relevant in determining
whether an individual is an employee or
independent contractor for purposes of
the FLSA, but only if the factors in some
way indicate whether the individual is
in business for him- or herself, as
opposed to being economically
dependent on the potential employer for
work.
§ 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 Examples of analyzing economic
reality factors.
(a) The following illustrative
examples demonstrate how the factors
listed in § 795.105(d) may be analyzed
under the facts presented and are
limited to substantially similar factual
situations.
(b)(1)(i) Example. An individual is the
owner and operator of a tractor-trailer
and performs transportation services for
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1247
a logistics company. The owneroperator substantially controls the key
aspects of the work. However, the
logistics company has installed, at its
own expense, a device that limits the
maximum speed of the owner-operator’s
vehicle and monitors the speed through
GPS. The company limits the owneroperator’s speed in order to comply
with federally mandated motor carrier
safety regulations and to ensure that she
complies with local traffic laws. The
company also requires the owneroperator to meet certain contractually
agreed-upon delivery deadlines, and her
contract includes agreed-upon
incentives for meeting, and penalties for
missing, the deadlines.
(ii) Application. The owner-operator
exercises substantial control over key
aspects of her work, indicating
independent contractor status. The fact
that the company has installed a device
that limits and monitors the speed of the
owner-operator’s vehicle does not
change the above conclusion. This
measure is implemented in order to
comply with specific legal obligations
and to ensure safety, and thus under
§ 795.105(d)(1)(i) would not constitute
control that makes the owner-operator
more or less likely to be an employee
under the Act. The contractually agreedupon delivery deadlines, incentives,
and penalties are typical of contractual
relationships between businesses and
likewise would not constitute control
that makes the owner-operator more or
less likely to be an employee under the
Act.
(2)(i) Example. An individual accepts
assignments from a company that
provides an app-based service linking
those who need home-repair work with
those who perform home-repair work.
The individual is able to meaningful
increase his earnings by exercising
initiative and business acumen and by
investing in his own equipment. The
company, however, has invested
millions of dollars in developing and
maintaining the app, marketing itself,
maintaining the security of information
submitted by actual and prospective
customers and workers, and monitoring
customer satisfaction with the work
performed.
(ii) Application. The opportunity for
profit or loss factor favors independent
contractor status for the individual,
despite the substantial difference in the
monetary value of the investments made
by each party. While the company may
have invested substantially more in its
business, the value of that investment is
not relevant in determining whether the
individual has a meaningful
opportunity for profit or loss through
his initiative, investment, or both.
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(3)(i) Example. An individual worker
works full time performing home
renovation and repair services for a
residential construction company. She
is also the part owner of a food truck,
which she operates on weekends. In
performing the construction work, the
worker is paid a fixed hourly rate, and
the company determines how many and
which tasks she performs. Her food
truck recently became very popular and
has generated substantial profits for her.
(ii) Application. With regard to the
construction work, the worker does not
have a meaningful opportunity for profit
or loss based on her exercise of
initiative or investment, indicating
employee status. She is unable to profit,
i.e., increase her earnings, by exercising
initiative or managing investments
because she is paid a fixed hourly rate
and the company determines the
assignment of work. While she earns
substantial profits through her food
truck, that is a separate business from
her work in the construction industry,
and therefore is not relevant to the
question of whether she is an employee
of the construction company or in
business for herself in the construction
industry.
(4)(i) Example. A housekeeper works
for a ski resort every winter. At the end
of each winter, he stops working for the
ski resort because the resort shuts down.
At the beginning of each of the past
several winters, the housekeeper
returned to his prior position at the ski
resort without formally applying or
interviewing.
(ii) Application. The housekeeper has
a long-term and indefinite work
relationship with the ski resort under
the permanence factor, which weighs in
favor of classification as an employee.
That his periods of working for the ski
resort end at the end of each winter is
a result of the seasonal nature of the ski
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industry and is thus not indicative of a
sporadic relationship. The fact that the
housekeeper returns to his prior
position each new season indicates that
his relationship with ski resort does not
end and is indefinite as a matter of
economic reality.
(5)(i) Example. An editor works parttime for a newspaper. The editor works
from home and is responsible for
assigning and reviewing many articles
published by the newspaper. Sometimes
she also writes or rewrites articles. The
editor is responsible for determining the
layout and order in which all articles
appear in the newspaper’s print and
online editions. She makes assignment
and lay-out decisions in coordination
with several full-time editors who make
similar decisions with respect to
different articles in the same publication
and who are employees of the
newspaper.
(ii) Application. The editor is part of
an integrated unit of production of the
newspaper because she is involved in
the entire production process of the
newspaper, including assigning,
reviewing, drafting, and laying out
articles. This factor points in the
direction of her being an employee of
the newspaper. This conclusion is
further supported by the fact that the
editor performs the same work as
employees of the newspaper in
coordination with those employees. The
fact that she does not physically work
at the newspaper’s office does not
outweigh these more probative
considerations of the integrated unit
factor.
(6)(i) Example. A journalist writes
articles for a newspaper on a freelance
basis. The journalist does not have an
office and generally works from home.
He submits an article to the newspaper
once every 2 to 3 weeks, which the
newspaper may accept or reject. The
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journalist sometimes corresponds with
the newspaper’s editor regarding what
to write about or regarding revisions to
the articles that he submits, but he does
not otherwise communicate or work
with any of the newspaper’s employees.
The journalist never assigns articles to
others nor does he review or revise
articles that others submit. He is not
responsible for determining where his
article or any other articles appear in the
newspaper’s print and online editions.
(ii) Application. The journalist is not
part of an integrated unit of production
of the newspaper, indicating
independent contractor status. His work
is limited to the specific articles that he
submits and is completely segregated
from other parts of the newspaper’s
processes that serve its specific, unified
purpose of producing newspapers. It is
not relevant in analyzing this factor that
the writing of articles is an important
part of producing newspapers. Likewise,
the fact that he works at home does not
strongly indicate either status, because
the nature of the journalist’s work is
such that the physical location where it
is performed is largely irrelevant.
§ 795.120
Severability.
If any provision of this part is held to
be invalid or unenforceable by its terms,
or as applied to any person or
circumstance, or stayed pending further
agency action, the provision shall be
construed so as to continue to give the
maximum effect to the provision
permitted by law, unless such holding
shall be one of utter invalidity or
unenforceability, in which event the
provision shall be severable from this
part and shall not affect the remainder
thereof.
[FR Doc. 2020–29274 Filed 1–6–21; 8:45 am]
BILLING CODE 4510–27–P
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Agencies
[Federal Register Volume 86, Number 4 (Thursday, January 7, 2021)]
[Rules and Regulations]
[Pages 1168-1248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-29274]
[[Page 1167]]
Vol. 86
Thursday,
No. 4
January 7, 2021
Part III
Department of Labor
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Wage and Hour Division
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29 CFR Parts 780, 788 and 795
Independent Contractor Status Under the Fair Labor Standards Act; Final
Rule
Federal Register / Vol. 86 , No. 4 / Thursday, January 7, 2021 /
Rules and Regulations
[[Page 1168]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Parts 780, 788 and 795
RIN 1235-AA34
Independent Contractor Status Under the Fair Labor Standards Act
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The U.S. Department of Labor (the Department) is revising its
interpretation of independent contractor status under the Fair Labor
Standards Act (FLSA or the Act) to promote certainty for stakeholders,
reduce litigation, and encourage innovation in the economy.
DATES: This final rule is effective on March 8, 2021.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a
toll-free number). Copies of this final rule may be obtained in
alternative formats (Large Print, Braille, Audio Tape, or Disc), upon
request, by calling (202) 693-0675 (this is not a toll-free number).
TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information
or request materials in alternative formats.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or logging onto WHD's website for a nationwide listing of WHD
district and area offices at https://www.dol.gov/whd/america2.htm.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The FLSA requires covered employers to pay their nonexempt
employees at least the Federal minimum wage for every hour worked and
overtime pay for every hour worked over 40 in a workweek, and it
mandates that employers keep certain records regarding their employees.
A worker who performs services for an individual or entity (``person''
as defined in the Act) as an independent contractor, however, is not
that person's employee under the Act. Thus, the FLSA does not require
such person to pay an independent contractor either the minimum wage or
overtime pay, nor does it require that person to keep records regarding
that independent contractor. The Act does not define the term
``independent contractor,'' but it defines ``employer'' as ``any person
acting directly or indirectly in the interest of an employer in
relation to an employee,'' 29 U.S.C. 203(d), ``employee'' as ``any
individual employed by an employer,'' id. at 203(e) (subject to certain
exceptions), and ``employ'' as ``includ[ing] to suffer or permit to
work,'' id. at 203(g). Courts and the Department have long interpreted
the ``suffer or permit'' standard to require an evaluation of the
extent of the worker's economic dependence on the potential employer--
i.e., the putative employer or alleged employer--and have developed a
multifactor test to analyze whether a worker is an employee or an
independent contractor under the FLSA. The ultimate inquiry is whether,
as a matter of economic reality, the worker is dependent on a
particular individual, business, or organization for work (and is thus
an employee) or is in business for him- or herself (and is thus an
independent contractor).
This economic realities test and its component factors have not
always been sufficiently explained or consistently articulated by
courts or the Department, resulting in uncertainty among the regulated
community. The Department believes that a clear articulation will lead
to increased precision and predictability in the economic reality
test's application, which will in turn benefit workers and businesses
and encourage innovation and flexibility in the economy. Accordingly,
earlier this year the Department proposed to introduce a new part to
Title 29 of the Code of Federal Regulations setting forth its
interpretation of whether workers are ``employees'' or independent
contractors under the Act.
Having received and reviewed the comments to its proposal, the
Department now adopts as a final rule the interpretive guidance set
forth in the Notice of Proposed Rulemaking (NPRM) (85 FR 60600) largely
as proposed. This regulatory guidance adopts general interpretations to
which courts and the Department have long adhered. For example, the
final rule explains that independent contractors are workers who, as a
matter of economic reality, are in business for themselves as opposed
to being economically dependent on the potential employer for work. The
final rule also explains that the inquiry into economic dependence is
conducted by applying several factors, with no one factor being
dispositive, and that actual practices are entitled to greater weight
than what may be contractually or theoretically possible. The final
rule sharpens this inquiry into five distinct factors, instead of the
five or more overlapping factors used by most courts and previously the
Department. Moreover, consistent with the FLSA's text, its purpose, and
the Department's experience administering and enforcing the Act, the
final rule explains that two of those factors--(1) the nature and
degree of the worker's control over the work and (2) the worker's
opportunity for profit or loss--are more probative of the question of
economic dependence or lack thereof than other factors, and thus
typically carry greater weight in the analysis than any others.
The regulatory guidance promulgated in this final rule regarding
independent contractor status under the FLSA is generally applicable
across all industries. As such, it replaces the Department's previous
interpretations of independent contractor status under the FLSA which
applied only in certain contexts, found at 29 CFR 780.330(b)
(interpreting independent contractor status under the FLSA for tenants
and sharecroppers) and 29 CFR 788.16(a) (interpreting independent
contractor status under the FLSA for certain forestry and logging
workers). The Department believes this final rule will significantly
clarify to stakeholders how to distinguish between employees and
independent contractors under the Act.
This final rule is considered to be an Executive Order 13771
deregulatory action. Details on the estimated increased efficiency and
cost savings of this rule can be found in the regulatory impact
analysis (RIA) in section VI.
II. Background
A. Relevant FLSA Definitions
Enacted in 1938, the FLSA requires that, among other things,
covered employers pay their nonexempt employees at least the Federal
minimum wage for every hour worked and overtime pay for every hour
worked over 40 in a workweek, and it mandates that employers keep
certain records regarding their employees. See 29 U.S.C. 206(a), 207(a)
(minimum wage and overtime pay requirements); 29 U.S.C. 211(c)
(recordkeeping requirements). The FLSA does not define the term
``independent contractor.'' The Act defines ``employer'' in section
3(d) to ``include[ ] any person acting directly or indirectly in the
interest of an employer in relation to an employee,'' ``employee'' in
section 3(e)(1) to mean, subject to certain exceptions, ``any
[[Page 1169]]
individual employed by an employer,'' and ``employ'' in section 3(g) to
include ``to suffer or permit to work.'' \1\ The Supreme Court has
recognized that ``there is in the [FLSA] no definition that solves
problems as to the limits of the employer-employee relationship under
the Act.'' Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947).
---------------------------------------------------------------------------
\1\ 29 U.S.C. 203(d), (e), (g). The Act defines a ``person'' as
``an individual, partnership, association, corporation, business
trust, legal representative, or any organized group of persons.'' 29
U.S.C. 203(a).
---------------------------------------------------------------------------
The Supreme Court has interpreted the ``suffer or permit'' language
to define FLSA employment to be broad and more inclusive than the
common law standard. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S.
318, 326 (1992). However, the Court also recognized that the Act's
``statutory definition[s] . . . have [their] limits.'' Tony & Susan
Alamo Found. v. Sec'y of Labor, 471 U.S. 290, 295 (1985) (internal
citation omitted); see also Walling v. Portland Terminal Co., 330 U.S.
148, 152 (1947) (``The definition `suffer or permit to work' was
obviously not intended to stamp all persons as employees.''). The
Supreme Court specifically recognized that ``[t]here may be independent
contractors who take part in production or distribution who would alone
be responsible for the wages and hours of their own employees.''
Rutherford Food, 331 U.S. at 729. Accordingly, Federal courts of
appeals have uniformly held, and the Department has consistently
maintained, that independent contractors are not ``employees'' for
purposes of the FLSA. See, e.g., Saleem v. Corporate Transp. Group,
Ltd., 854 F.3d 131, 139-40 (2d Cir. 2017); Karlson v. Action Process
Serv. & Private Investigation, LLC, 860 F.3d 1089, 1092 (8th Cir.
2017).
B. Economic Dependence and the Economic Reality Test
1. Supreme Court Development of the Economic Reality Test
As the NPRM explained, the U.S. Supreme Court explored the limits
of the employer-employee relationship in a series of cases from 1944 to
1947 under three different Federal statutes: The FLSA, the National
Labor Relations Act (NLRA), and the Social Security Act (SSA). 85 FR
60601 (summarizing NLRB v. Hearst Publications, Inc., 322 U.S. 111
(1944); United States v. Silk, 331 U.S. 704 (1947); Bartels v.
Birmingham, 332 U.S. 126 (1947); and Rutherford Food, 331 U.S. 722)).
In Hearst, the Supreme Court held that the NLRA's definition of
employment was broader than that of the common law. 322 U.S. 123-25.
Congress responded by amending the definition of employment under the
NLRA on June 23, 1947, ``with the obvious purpose of hav[ing] the
[National Labor Relations] Board and the courts apply general agency
principles in distinguishing between employees and independent
contractors under the [NLRA].'' NLRB v. United Ins. Co. of Am., 390
U.S. 254, 256 (1968).
On June 16, 1947, one week before Congress amended the NLRA in
response to Hearst, the Supreme Court decided Silk, which addressed the
distinction between employees and independent contractors under the
SSA. In that case, the Court relied on Hearst to hold that ``economic
reality,'' as opposed to ``technical concepts'' of the common law
standard alone, determines workers' classification. 331 U.S. at 712-14.
Although the Court found it to be ``quite impossible to extract from
the [SSA] a rule of thumb to define the limits of the employer-
employe[e] relationship,'' it identified five factors as ``important
for decision'': ``degrees of control, opportunities for profit or loss,
investment in facilities, permanency of relation[,] and skill required
in the claimed independent operation.'' Id. at 716. The Court added
that ``[n]o one [factor] is controlling nor is the list complete.'' Id.
One week after Silk and on the same day Congress amended the NLRA, the
Court reiterated these five factors in Bartels, another case involving
employee or independent contractor status under the SSA. In Bartels,
the Court explained that under the SSA, employee status ``was not to be
determined solely by the idea of control which an alleged employer may
or could exercise over the details of the service rendered to his
business by the worker.'' Id. Although ``control is characteristically
associated with the employer-employee relationship,'' employees under
``social legislation'' such as the SSA are ``those who as a matter of
economic reality are dependent upon the business to which they render
service.'' Id.
The same day as it decided Silk, the Court ruled in Rutherford Food
that certain workers at a slaughterhouse were employees under the FLSA,
and not independent contractors, by examining facts pertaining to the
five factors identified in Silk.\2\ The Court also considered whether
the work was ``a part of the integrated unit of production'' (meaning
whether the putative independent contractors were integrated into the
assembly line alongside the company's employees) to assess whether they
were employees or independent contractors under the FLSA. Id. at 729-
730.
---------------------------------------------------------------------------
\2\ For example, the Court noted that the slaughterhouse workers
performed unskilled work ``on the production line.'' 331 U.S. at
730. ``The premises and equipment of [the employer] were used for
the work,'' indicating little investment by the workers. Id. ``The
group had no business organization that could or did shift as a unit
from one slaughter-house to another,'' indicating a permanent work
arrangement. Id. ``The managing official of the plant kept close
touch on the operation,'' indicating control by the alleged
employer. Id. And ``[w]hile profits to the boners depended upon the
efficiency of their work, it was more like piecework than an
enterprise that actually depended for success upon the initiative,
judgment or foresight of the typical independent contractor.'' Id.
---------------------------------------------------------------------------
In November 1947, five months after Silk and Rutherford Food, the
Department of the Treasury (Treasury) proposed regulations r defining
when an individual was an independent contractor or employee under the
SSA, which used a test that balanced the following factors:
1. Degree of control of the individual;
2. Permanency of relation;
3. Integration of the individual's work in the business to which he
renders service;
4. Skill required by the individual;
5. Investment by the individual in facilities for work; and
6. Opportunity of the individual for profit or loss.
12 FR 7966. Factors one, two, and four through six corresponded
directly with the five factors identified as being ``important for
decision'' in Silk, 331 U.S. at 716, and the third factor corresponded
with Rutherford Food's consideration of the fact that the workers were
``part of an integrated unit of production.'' 331 U.S. at 729. The
Treasury proposal further relied on Bartels, 332 U.S. at 130, to apply
these factors to determine whether a worker was ``dependent as a matter
of economic reality upon the business to which he renders services.''
12 FR 7966.\3\
---------------------------------------------------------------------------
\3\ The Treasury proposal was never finalized because Congress
amended the SSA to foreclose the proposal.
---------------------------------------------------------------------------
Congress replaced the interpretations of the definitions of
``employee'' adopted in Hearst for the NLRA and in Silk and Bartels for
the SSA ``to demonstrate that the usual common-law principles were the
keys to meaning.'' Darden, 503 U.S. at 324-25. However, Congress did
not similarly amend the FLSA. Thus, the Supreme Court stated in Darden
that the scope of employment under the FLSA remains broader than that
under common law and is determined not by the common law but instead by
the economic reality of the relationship at issue. See id. Since
implicitly doing so in Rutherford Food,
[[Page 1170]]
the Court has not again applied (or rejected the application of) the
Silk factors to an FLSA classification question.
2. Application of the Economic Reality Test by Federal Courts of
Appeals
As the NPRM explained, in the 1970s and 1980s Federal courts of
appeals began to adopt versions of a multifactor ``economic reality''
test based on Silk, Rutherford Food, and Bartels and similar to
Treasury's 1947 proposed SSA regulation to analyze whether a worker was
an employee or an independent contractor under the FLSA. See 85 FR
60603.\4\ Drawing on the Supreme Court precedent discussed above,
courts have recognized that the heart of the inquiry is whether ``as a
matter of economic reality'' the workers are ``dependent upon the
business to which they render service.'' Usery v. Pilgrim Equip. Co.,
527 F.2d 1308, 1311 (5th Cir. 1976) (quoting Bartels, 332 U.S. at 130).
Some courts have clarified that this question of economic dependence
may be boiled down to asking ``whether, as a matter of economic
reality, the workers depend upon someone else's business for the
opportunity to render service or are in business for themselves.''
Saleem, 854 F.3d at 139 (internal quotation marks and citations
omitted). Courts have also explained that a non-exhaustive set of
factors--derived from Silk and Rutherford Food--shape and guide this
inquiry. See, e.g., Usery, 527 F.2d at 1311 (identifying ``[f]ive
considerations [which] have been set out as aids to making the
determination of dependence, vel non''); Real v. Driscoll Strawberry
Assocs., Inc., 603 F.2d 748, 754 (9th Cir. 1979) (articulating a six-
factor test).
---------------------------------------------------------------------------
\4\ As explained below, versions of this multifactor economic
realty test have also been enforced and articulated by the
Department in subregulatory guidance since the 1950s.
---------------------------------------------------------------------------
In Driscoll, the Ninth Circuit Court of Appeals described its six-
factor test as follows:
1. The degree of the alleged employer's right to control the manner
in which the work is to be performed;
2. the alleged employee's opportunity for profit or loss depending
on his managerial skill;
3. the alleged employee's investment in equipment or materials
required for his task, or his employment of helpers;
4. whether the service rendered requires a special skill;
5. the degree of permanency of the working relationship; and
6. whether the service rendered is an integral part of the alleged
employer's business. Id. at 754.
Most courts of appeals articulate a similar test, but application
between courts may vary significantly. Compare, e.g., Sec'y of Labor v.
Lauritzen, 835 F.2d 1529, 1534-35 (7th Cir. 1987) (applying six-factor
economic reality test to hold that pickle pickers were employees under
the FLSA), with Donovan v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984)
(applying the same six-factor economic reality test to hold that pickle
pickers were not employees under the FLSA). For example, the Second
Circuit has analyzed opportunity for profit or loss and investment (the
second and third factors listed above) together as one factor. See,
e.g., Brock v. Superior Care, Inc., 840 F.2d 1054, 1058 (2d Cir. 1988).
The Fifth Circuit has not adopted the sixth factor listed above, which
analyzes the integrality of the work, as part of its standard, see,
e.g., Usery, 527 F.2d at 1311, but has at times assessed integrality as
an additional factor, see, e.g. Hobbs v. Petroplex Pipe & Constr.,
Inc., 946 F.3d 824, 836 (5th Cir. 2020).
The NPRM highlighted noteworthy modifications some courts of
appeals have made to the economic reality factors as originally
articulated in 1947 by the Supreme Court. See 85 FR 60603-04. First,
the ``skill required'' factor identified in Silk, 331 U.S. at 716, is
now articulated more expansively by some courts to include
``initiative.'' See, e.g., Parrish, 917 F.3d at 379 (``the skill and
initiative required in performing the job''); Karlson, 860 F.3d at 1093
(same); Superior Care, 840 F.2d at 1058-59 (``the degree of skill and
independent initiative required to perform the work'').
Second, Silk analyzed workers' investments, 331 U.S. at 717-19.
However, the Fifth Circuit has revised the ``investment'' factor to
instead consider ``the extent of the relative investments of the worker
and the alleged employer.'' Hopkins, 545 F.3d at 343. Some other
circuits have adopted this ``relative investment'' approach but
continue to use the phrase ``worker's investment'' to describe the
factor. See, e.g., Keller v. Miri Microsystems LLC, 781 F.3d 799, 810
(6th Cir. 2015); Dole v. Snell, 875 F.2d 802, 805 (10th Cir. 1989).
Third, although the permanence factor under Silk was understood to
mean the continuity and duration of working relationships, see 12 FR
7967, some courts of appeals have expanded this factor to also consider
the exclusivity of such relationships. See, e.g., Scantland, 721 F.3d
at 1319; Keller, 781 F.3d at 807.
Finally, Rutherford Food's consideration of whether work is ``part
of an integrated unit of production,'' 331 U.S. at 729, has now been
replaced by many courts of appeals by consideration of whether the
service rendered is ``integral,'' which those courts have applied as
meaning important or central to the potential employer's business. See,
e.g., Verma v. 3001 Castor, Inc., 937 F.3d 221, 229 (3rd Cir. 2019)
(concluding that workers' services were integral because they were the
providers of the business's ``primary offering''); Acosta v. Off Duty
Police Servs., Inc., 915 F.3d 1050, 1055 (6th Cir. 2019) (concluding
that services provided by workers were ``integral'' because the
putative employer ``built its business around'' those services);
McFeeley v. Jackson Street Entertainment, LLC, 825 F.3d 235, 244 (4th
Cir. 2016) (considering ``the importance of the services rendered to
the company's business'').
Courts of appeals have cautioned against the ``mechanical
application'' of the economic reality factors. See, e.g., Saleem, 854
F.3d at 139. ``Rather, each factor is a tool used to gauge the economic
dependence of the alleged employee, and each must be applied with this
ultimate concept in mind.'' Hopkins, 545 F.3d at 343. Further, courts
of appeals make clear that the analysis should draw from the totality
of circumstances, with no single factor being determinative by itself.
See, e.g., Keller, 781 F.3d at 807 (``No one factor is
determinative.''); Baker, 137 F.3d at 1440 (``None of the factors alone
is dispositive; instead, the court must employ a totality-of-the-
circumstances approach.'').
3. Application of the Economic Reality Test by WHD
Since at least 1954, WHD has applied variations of this multifactor
analysis when considering whether a worker is an employee under the
FLSA or an independent contractor. See WHD Opinion Letter (Aug. 13,
1954) (applying six factors very similar to the six economic reality
factors currently used by courts of appeals). In 1964, WHD stated,
``The Supreme Court has made it clear that an employee, as
distinguished from a person who is engaged in a business of his own, is
one who as a matter of economic reality follows the usual path of an
employee and is dependent on the business which he serves.'' WHD
Opinion Letter FLSA-795 (Sept. 30, 1964).
Over the years since, WHD has issued numerous opinion letters
applying a multifactor analysis very similar to the multifactor
economic reality test courts use (with some variation) to determine
whether workers are employees or
[[Page 1171]]
independent contractors.\5\ WHD has also promulgated regulations
applying a multifactor analysis for independent contractor status under
the FLSA in certain specific industries. See, e.g., 29 CFR 780.330(b)
(applying a six factor economic reality test to determine whether a
sharecropper or tenant is an independent contractor or employee under
the Act); 29 CFR 788.16(a) (applying a six factor economic reality test
in forestry and logging operations with no more than eight employees).
Further, WHD has promulgated a regulation applying a multifactor
economic reality analysis for determining independent contractor status
under the Migrant and Seasonal Agricultural Worker Protection Act
(MSPA). 29 CFR 500.20(h)(4).
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
The Department's sub-regulatory guidance, WHD Fact Sheet #13,
``Employment Relationship under the Fair Labor Standards Act (FLSA)''
(Jul. 2008), similarly stated that, when determining whether an
employment relationship exists under the FLSA, common law control is
not the exclusive consideration. Instead, ``it is the total activity or
situation which controls''; and ``an employee, as distinguished from a
person who is engaged in a business of his or her own, is one who, as a
matter of economic reality, follows the usual path of an employee and
is dependent on the business which he or she serves.'' \6\ The fact
sheet identified seven economic reality factors; in addition to factors
that are similar to the six factors identified above, it also
considered the worker's ``degree of independent business organization
and operation.'' On July 15, 2015, WHD issued Administrator's
Interpretation No. 2015-1, ``The Application of the Fair Labor
Standards Act's `Suffer or Permit' Standard in the Identification of
Employees Who Are Misclassified as Independent Contractors'' (AI 2015-
1). AI 2015-1 provided guidance regarding the employment relationship
under the FLSA and the application of the six economic realities
factors. AI 2015-1 was withdrawn on June 7, 2017 and is no longer in
effect.
---------------------------------------------------------------------------
\6\ Fact Sheet #13 is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf.
---------------------------------------------------------------------------
WHD's most recent opinion letter addressing this issue, from 2019,
generally applied the principles and factors similar to those described
in the prior opinion letters and Fact Sheet #13, but not the
``independent business organization'' factor because it did not add to
the analysis as a separate factor and was ``[e]ncompassed within'' the
other factors. It also stated that the investment factor should focus
on the ``amount of the worker's investment in facilities, equipment, or
helpers.'' The opinion letter addressed the FLSA classification of
service providers who used a virtual marketplace company to be referred
to end-market consumers to whom the services were actually provided.
WHD concluded that the service providers appeared to be independent
contractors and not employees of the virtual marketplace company. See
WHD Opinion Letter FLSA2019-6 at 7. WHD found that it was ``inherently
difficult to conceptualize the service providers' `working
relationship' with [the virtual marketplace company], because as a
matter of economic reality, they are working for the consumer, not [the
company].'' Id. Because ``[t]he facts . . . demonstrate economic
independence, rather than economic dependence, in the working
relationship between [the virtual marketplace company] and its service
providers,'' WHD opined that they were not employees of the company
under the FLSA but rather were independent contractors. Id. at 9.
As explained below, the Department's prior interpretations of
independent contractor status, which themselves have evolved over time,
are subject to similar limitations as that of court opinions, and the
Department believes that stakeholders would benefit from clarification.
For these reasons, the Department proposed promulgating a clearer and
more consistent standard for evaluating whether a worker is an employee
or independent contractor under the FLSA and is now finalizing that
proposal, with some modifications based on comments received.
C. The Department's Proposal
On September 25, 2020, the Department published the NPRM in the
Federal Register. The Department proposed to adopt an ``economic
reality'' test to determine a worker's status as an FLSA employee or an
independent contractor. The test considers whether a worker is in
business for himself or herself (independent contractor) or is instead
economically dependent on an employer for work (employee). The
Department further identified two ``core factors'': The nature and
degree of the worker's control over the work; and the worker's
opportunity for profit or loss based on initiative, investment, or
both. The Department explained it was proposing to emphasize these
factors because they are the most probative of whether workers are
economically dependent on someone else's business or are in business
for themselves. The proposal identified three other factors to also be
considered, though they are less probative than the core factors: The
amount of skill required for the work, the degree of permanence of the
working relationship between the individual and the potential employer,
and whether the work is part of an integrated unit of production. The
Department further proposed to advise that the actual practice is more
probative than what may be contractually or theoretically possible in
determining whether a worker is an employee or an independent
contractor.
D. Comments
The Department solicited comments on all aspects of the proposed
rule. More than 1800 individuals and organizations timely commented on
the Department's NPRM during the thirty-day comment period that ended
on October 26, 2020. The Department received comments from employers,
workers, industry associations, worker advocacy groups, and unions,
among others. All timely comments may be viewed at the website
www.regulations.gov, docket ID WHD-2020-0007.
Of the comments received, the Department received approximately 230
comments from workers who identified themselves as independent
contractors (not including the over 900 comments received from Uber
drivers discussed below). Of those, the overwhelming majority expressed
support for the NPRM. These individuals identified themselves as
freelancers or independent contractors in jobs including translator,
journalist, consultant, musician, and many others. Among this group of
commenters, over 200 expressed support for the proposed rule, while
only 8 opposed it. The remaining individuals in this group did not
express a specific position. Uber drivers submitted over 900 comments.
While many expressed views on Uber corporate policies and not on the
NPRM itself, the majority of these drivers who addressed the NRPM
supported the Department's proposal. The Department also received a
number of other
[[Page 1172]]
comments that are beyond the scope of this rulemaking. For example,
several commenters expressed opinions related to the issues addressed
in the Department's proposal but that were specific to state
legislation or employer policies. Significant issues raised in the
timely comments received are discussed below, along with the
Department's response to those comments.
III. Need for Rulemaking
The NPRM explained that the Department has never promulgated a
generally-applicable regulation addressing who is an independent
contractor and thus not an employee under the FLSA. Instead, as
described above, the Department has issued and revised guidance since
at least 1954, using different variations of a multifactor economic
reality test that analyzes economic dependence to distinguish
independent contractors from employees. Such guidance reflects, in
large part, application of the general principles of the economic
reality test by Federal courts of appeals. Such guidance, however, did
not reflect any public input. Indeed, the NPRM kicked off the
Department's first ever notice-and-comment rulemaking to provide a
generally applicable interpretation of independent contractor status
under the FLSA. As recounted just above, the Department received many
comments from stakeholders who are actually impacted by FLSA
classification decisions, which are valuable information and insight
that the Department has not previously gathered and many of which
reinforced the Department's view that more clarity is needed in this
area.
The Department explained in the NPRM preamble that prior
articulations of the test have proven to be unclear and unwieldy for
the four following reasons. First, the test's overarching concept of
``economic dependence'' is under-developed and sometimes inconsistently
applied, rendering it a source of confusion. Second, the test is
indefinite in that it makes all facts potentially relevant without
guidance on how to prioritize or balance different and sometimes
competing considerations. Third, inefficiency and lack of structure in
the test further stem from blurred boundaries between the factors.
Fourth, these shortcomings have become more apparent over time as
technology, economic conditions, and work relationships have evolved.
The Department thus proposed to promulgate a regulation that would
clarify and sharpen the contours of the economic reality test used to
determine independent contractor classification under the FLSA. The
NPRM explained that such a regulation would provide much needed clarity
and encourage (or at least stop deterring) flexible work arrangements
that benefit both businesses and workers.
Commenters in the business community and freelance workers
generally agreed with the Department that the multifactor balancing
test is confusing and needs clarification. The National Retail
Federation (NRF) complained that ``existing tests for independent
contractor status tend to have a large number of factors which can be
nebulous, overlapping, and even irrelevant to the ultimate inquiry.''
The Workplace Policy Institute of Littler Mendelson, P.C. (WPI) stated
that ``[b]oth the Department and the courts have struggled to define
`dependence' '' in the modern economy--resulting in confusion,
unpredictability and inconsistent results.'' The Society for Human
Resource Management (SHRM) echoed this sentiment, writing ``the
business community and workers are left applying numerous factors in a
variety of ways that is mired in uncertainty and, therefore,
unnecessary risk.'' The U.S. Chamber of Commerce stated that ``[t]he
confusion regarding whether a worker is properly classified as an
employee or an independent contractor has long been a vexing problem
for the business community, across many different industries and work
settings.'' See also, e.g., World Floor Covering Association (WFCA)
(``The current test has resulted in inconsistent decisions, much
confusion, and unnecessary costs.''). Numerous individual freelancers
and organizations that represent freelance workers also stated they
would welcome ``greater clarity and predictability in the application
of the `economic realities' test.'' Coalition to Promote Independent
Entrepreneurs (CPIE); see also Coalition of Practicing Translators &
Interpreters of California (CoPTIC) (requesting ``greater clarity in
Federal law''). Individual freelancers generally welcomed greater legal
clarity. For example, one individual commenter wrote ``to express [her]
support for this proposed rule. As someone who has enjoyed freedom and
flexibility as a freelancer for 20 years, this would be a welcome
clarification.'' Another individual freelancer stated that ``[t]he
clarity and updating of [the FLSA] through this NPRM is long overdue
and the DOL should issue ruling on independent contracting. . . .''
These supportive commenters generally agreed with the Department
that additional clarity would encourage flexible work arrangements that
benefit businesses and workers alike. For example, the Coalition for
Workforce Innovation (CWI) asserted that additional clarity of the
economic reality test would ``allow workers and businesses to pursue [
] mutually beneficial opportunities as the United States economy
evolves with technology.'' Fight for Freelancers explained that its
members value flexibility that comes with working as independent
contractors and supported the Department's ``efforts to protect [its
members'] classification.''
Some commenters who opposed this rulemaking questioned the need for
a regulation on this topic. The Southwest Regional Council of
Carpenters (SWRCC) stated that the ``[t]he first of the Rule's
shortcomings is its assumption that a new rule is necessary in the
first place,'' and the American Federation of Labor & Congress of
Industrial Organization (AFL-CIO) asserted that the Department's
``quest for certainty . . . is quixotic.'' Mr. Edward Tuddenham, an
attorney, contended that the current test is ``generally consistent and
predictable'' and thus does not need further clarification. He and
others repeatedly questioned the Department's reasons for rulemaking by
asserting that the Department did not identify cases where courts
reached incorrect outcomes. Rather than focus on the outcomes in
particular cases, the NPRM highlighted inconsistent or confusing
reasoning in many decisions to explain why the regulated community
would benefit from regulatory clarity. See 85 FR 60605. Mr. Tuddenham
and others also provided thoughtful and detailed comments criticizing
specific aspects of the reasons presented in the NPRM's need for
rulemaking discussion. The following discussion retraces those reasons
and responds to these criticisms.
A. Confusion Regarding the Meaning of Economic Dependence
The NPRM explained that undeveloped analysis and inconsistency
cloud the application of ``economic dependence,'' the touchstone of the
economic reality test. 85 FR 60605. The Department and some courts have
attempted to furnish a measure of clarity by explaining, for example,
that the proper inquiry is `` `whether the workers are dependent on a
particular business or organization for their continued employment' in
that line of business,'' Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042,
1054 (5th Cir. 1987) (quoting DialAmerica, 757 F.2d at 1385), or
instead ``are in business for themselves,'' Saleem, 854 F.3d at 139.
[[Page 1173]]
But the Department and many courts have often applied the test without
helpful clarification of the meaning of the economic dependency that
they are seeking.
The NPRM explained that the lack of explanation of economic
dependence has sometimes led to inconsistent approaches and results and
highlighted as an example the apparently inconsistent results in
Cromwell v. Driftwood Elec. Contractor, Inc., 348 F. App'x 57 (5th Cir.
2009) (holding that cable splicers hired by Bellsouth to perform post-
Katrina repairs were employees), and Thibault v. BellSouth
Telecommunication, 612 F.3d 843 (5th Cir. 2010) (holding that cable
splicer hired by same company under a very similar arrangement was an
independent contractor). See 85 FR 60605. The Thibault court
distinguished its result from Cromwell in part by highlighting Mr.
Thibault's significant income from (1) his own sales company that had
profits of approximately $500,000, (2) ``eight drag-race cars [that]
generated $1,478 in income from racing professionally[,]'' and (3)
``commercial rental property that generated some income.'' Thibault,
612 F.3d at 849. While these facts indicate that Mr. Thibault may have
been in business for himself as a manager of a sales business, drag-
race cars, and commercial properties, they are irrelevant as to whether
he was in business for himself as a cable splicer.\7\ The Thibault
court nonetheless assigned these facts substantial weight because it
understood economic dependence to mean dependence for income or wealth,
which is incompatible with the dependence-for-work approach that other
courts and the Department apply.\8\ See, e.g., Off Duty Police, 915
F.3d at 1058 (``[W]hether a worker has more than one source of income
says little about that worker's employment status.''); Halferty, 821
F.2d at 268 (``[I]t is not dependence in the sense that one could not
survive without the income from the job that we examine, but dependence
for continued employment''); DialAmerica, 757 F.2d at 1385 (``The
economic-dependence aspect of the [economic reality] test does not
concern whether the workers at issue depend on the money they earn for
obtaining the necessities of life.''). As the DialAmerica court
explained, the dependence-for-income approach ``would lead to a
senseless result'' because a wealthy individual who had an independent
source of income would be an independent contractor even though a
poorer individual who worked for the same company under the same work
arrangement is an employee. 757 F.2d at 1385 n.11. Mr. Tuddenham
initially defended the reasoning in Thibault, but later listed that
case as an example of ``the occasional erroneous application of the
[economic reality] test.''
---------------------------------------------------------------------------
\7\ The Thibault court also highlighted the fact that Mr.
Thibault worked for only 3 months--although he intended to work for
7 or 8 months--before being fired. See 612 F.3d at 846, 849. In
contrast, the splicers in Cromwell worked approximately 11 months.
See 348 F. App'x at 58.
\8\ The Thibault case recognized that ``[a]n individual's wealth
is not a solely dispositive factor in the economic dependence
question.'' 612 F.3d at 849 n.4. This confirms that wealth was in
fact a meaningful consideration, which runs against other cases
explaining that dependence on wealth is an inappropriate lens.
---------------------------------------------------------------------------
The NPRM also highlighted the decision in Parrish v. Premier
Directional Drilling, 917 F.3d 369, as an example of inconsistent
articulation of economic dependence. In that case, the court first
applied a dependence-for-work concept to analyze the control factor and
then explicitly departed from that framework in favor of a dependence-
for-income analysis of the opportunity factor. See 85 FR 60606. The
Parrish court impliedly took a third concept of dependence to analyze
the investment factor through a ``side-by-side comparison'' of each
worker's individual investment to that of the alleged employer.'' 917
F.3d at 383. AI 2015-1 took the same approach and explained that ``it
is the relative investments that matter'' because ``[i]f the worker's
investment is relatively minor, that suggests that the worker and the
employer are not on similar footing and that the worker may be
economically dependent on the employer.'' The comparative analysis of
investments thus appears to rely on a concept of economic dependence
that means ``not on a similar footing,'' which is different from the
``dependence for work'' concept that the Department believes to be
correct.
In summary, courts and the Department typically economic dependence
as ``dependence for work,'' but have sometimes applied other concepts
of dependence to analyze certain factors, such as ``dependence for
income'' and ``not on similar footing.'' Because economic dependence is
the ultimate inquiry of FLSA employment, these different conceptions
result in essentially different tests that confuse the regulated
community. Accordingly, the economic reality test needs a more
developed and dependable touchstone at its heart.
B. Lack of Focus in the Multifactor Balancing Test
The NPRM explained that the versions of the multifactor economic
reality test used by courts since at least the 1980s and the Department
since the 1950s lack clear, generally applicable guidance about how to
balance the multiple factors and the countless facts encompassed
therein. See 85 FR 60606.The test's lack of guidance leads to
uncertainty regarding ``which aspects of `economic reality' matter, and
why.'' Lauritzen, 835 F.2d at 1539 (Easterbrook J., concurring).
As examples of such uncertainty, the NPRM highlighted court
decisions analyzing economic reality factors to reach an overall
decision about a worker's classification without meaningful explanation
of how they balanced the factors to reach the final decision. 85 FR
60606 (citing, e.g., Parrish, 917 F.3d at 380; Chao v. Mid-Atl.
Installation Servs., Inc., 16 F. App'x 104, 108 (4th Cir. 2001); and
Snell, 875 F.2d at 912). Even where many facts and factors support both
sides of the classification inquiry, courts have not explained how they
balanced the competing considerations. See, e.g., Acosta v. Paragon
Contractors Corp., 884 F.3d 1225, 1238 (10th Cir. 2018); Iontchev v.
AAA Cab. Services, 685 F. App'x 548, 550 (9th Cir. 2017). The NPRM thus
identified a need for guidance on which factors are most probative.
Even some commenters critical of the Department's approach in the
NPRM conceded that the test as currently applied can create
considerable ambiguity. Mr. Tuddenham asserted that the lack of general
guidance regarding how to balance factors is ``an unavoidable function
of determining something as nebulous as `economic dependence.' '' See
also Farmworker Justice (``[T]he test, as currently applied, creates
necessary ambiguity.''). The Department disagrees that the concept of
``economic dependence'' is necessarily ``nebulous.'' FLSA employment
itself depends on economic dependence, and nothing in the statute
requires that this standard be nebulous and thus unmanageable. See
Usery, 527 F.2d at 1311 (``It is dependence that indicates employee
status.''). Instead, the Department believes the correct concept of
economic dependence tangibly defines FLSA employment to include
individuals who are dependent on others for work, and to exclude
individuals who are, as a matter of economic reality, in business for
themselves. See Saleem, 854 F.3d at 139. The Department thus believes
it is
[[Page 1174]]
possible to provide generally applicable guidance regarding how to
consider and balance the economic reality factors to assess this
concept of economic dependence.
C. Confusion and Inefficiency Due to Overlapping Factors
The NPRM next explained that courts and the Department have
articulated the economic reality factors such that they have
overlapping coverage, which undermines the structural benefits of a
multifactor test. See 85 FR 60607. The NPRM noted that most of these
overlaps did not exist in the Supreme Court's original articulation of
the economic reality factors in Silk and were instead introduced by
subsequent court of appeals decisions. The NPRM then explained several
ways in which extensive overlaps may lead to inefficiency and confusion
for the regulated community.
First, the ``skill required'' factor articulated in Silk, 331 U.S.
at 716, has been expanded by the Department and some courts to analyze
``skill and initiative.'' See, e.g., Superior Care, 840 F.2d at 1060;
WHD Fact Sheet WHD #13. Because the capacity for on-the-job initiative
is already part of the control factor, the NPRM explained that this
approach essentially imports control analysis into the skill factor.
Indeed, the presence of control appears to overrides the existence of
skill,\9\ effectively transforming the skill factor into an extension
of the control factor in some circuits, but not others.\10\ The ``skill
and initiative'' factor also overlaps with the opportunity factor,
which considers the impact of initiative on worker's earnings,
resulting in initiative being analyzed under three different factors.
As an illustration of confusion resulting from this overlap, the NPRM
highlighted a case in which a court found that workers exercised enough
on-the-job initiative for the control and opportunity factors to point
towards independent contractor status, but nonetheless found the `skill
and initiative factor points towards employee status' due to `the key
missing ingredient . . . of initiative.' '' 85 FR 60607 (quoting
Express Sixty-Minutes Delivery, 161 F.3d at 303).
---------------------------------------------------------------------------
\9\ See, e.g., Selker Bros., 949 F.2d at 1295 (concluding that
the skill factor weighed towards employee classification due to
``the degree of control exercised by [the potential employer] over
the day-to-day operation''); Baker, 137 F.3d at 1443 (finding that
the skill factor weighed towards employee classification where
skilled welders ``are told what to do and when to do it''); Superior
Care, 840 F.2d at 1060 (finding that the skill factor weighed
towards employee classification for skilled nurses because
``Superior Care in turn controlled the terms and conditions of the
employment relationship'').
\10\ Some courts of appeal continue to analyze skill rather than
control as part of the skill factor. See, e.g., Paragon, 884 F3d at
1235 (considering ``the degree of skill required to perform the
work''); see also Iontchev, 685 F. App'x at 550 (asking ``whether
services rendered . . . require[d] a special skill''); Keller, 791
F.3d at 807 (analyzing ``the degree of skill required'').
---------------------------------------------------------------------------
Next, the permanence factor originally concerned the continuity and
duration of a working relationship but has since been expanded by some
courts and the Department to also consider the exclusivity of that
relationship. See 85 FR 60608 (citing Parrish 917 F.3d at 386-87;
Keller, 781 F.3d at 807-09; Scantland, 721 F.3d at 1319; WHD Opinion
Letter FLSA 2019-6 at 8). But exclusivity--the ability or inability for
a worker to offer services to different companies--is already a part of
the control factor. This overlap results in exclusivity being analyzed
twice and causes the actual consideration of permanence being
potentially subsumed by control.
Third, the ``integral part'' factor is used by some courts to be
merely a proxy of control. As one such court explained: ``It is
presumed that, with respect to vital or integral parts of the business,
the employer will prefer to engage an employee rather than an
independent contractor. This is so because the employer retains control
over the employee and can compel attendan[ce] at work on a consistent
basis.'' Baker v. Dataphase, Inc., 781 F. Supp. 724, 735 (D. Utah
1992). But the control factor already directly analyzes whether a
business can compel attendance on a consistent basis. It is unclear
what additional value can be gained by indirectly analyzing that same
consideration a second time under the ``integral part'' factor.\11\
---------------------------------------------------------------------------
\11\ As the NPRM explained, this presumption that firms would
control all important services on which they rely may rest on a
mistaken premise because, for example, manufacturers routinely have
critical parts and components produced and delivered by wholly
separate companies. 85 FR 60608. And companies whose business is to
connect independent service providers with customers would find
those service providers to be important even though they are
independent from the company's business. See State Dep't of
Employment, Training & Rehab., Employment Sec. Div. v. Reliable
Health Care Servs. of S. Nevada, Inc., 983 P.2d 414, 419 (Nev. 1999)
(``[W]e cannot ignore the simple fact that providing patient care
and brokering workers are two distinct businesses.' '')
---------------------------------------------------------------------------
Finally, while Silk articulated the opportunity for profit and loss
and investment as separate factors, it analyzed the two together in
concluding that truck drivers in that case were independent contractors
in part because they ``invested in their own trucks and had ``an
opportunity for profit from sound management'' of that investment. 331
U.S. at 719. The Second Circuit recognized such clear overlap, noting
that ``[e]conomic investment, by definition, creates the opportunity
for loss, [and] investors take such a risk with an eye to profit.''
Saleem, 854 F.3d at 145 n.29. Nonetheless, most courts and Department
have analyzed opportunity for profit and loss and investment as
separate factors. When done right, separate analysis leads to
redundancy. See, e.g., Mid-Atlantic Installation Servs., 16 F. App'x at
106-07. When done wrong, it leads to analysis of investment without
regard for the worker's profit or loss, such as by comparing the dollar
value of a worker's personal investments against the total investment
of a large company that, for example, ``maintain[s] corporate
offices.'' Hopkins 545 F.3d at 344. The NPRM explained that such a
comparison says nothing about whether the worker is in business for
himself, as opposed to being economically dependent on that company for
work, and is therefore not probative and potentially misleading. 85 FR
60608. The NRPM concluded that reducing the above-mentioned overlaps
would make the economic reality test easier to understand and apply.
The SWRCC contended that ``overlapping factors [have] never been
the source of--and the DOL cannot point to--any credible criticism,''
but did not question or even acknowledge the above criticism discussed
at length in the NRPM. In contrast, commenters that are significantly
impacted by the FLSA's obligations generally agreed with the Department
that overlapping factors have created confusion. For example, the
Association of General Contractors stated that ``[n]avigating and
complying with the various overlapping and inconsistent standards are
confusing and costly,'' and WPI ``agree[d] with the Department that
such overlap and blurring of factors is confusing and inefficient.''
See also, e.g., Center for Workplace Compliance (CWC); NRF; U.S.
Chamber of Commerce.
A multifactor test is a useful framework for determining FLSA
employment in part because it organizes the many facts that are part of
economic reality into distinct categories, thus providing some
structure to an otherwise roving inquiry. However, this benefit is lost
if the lines between those factors blur. Under prior articulations of
the test, considerations within the control factor--capacity for on-
the-job initiative, exclusivity, and ability to compel attendance--have
been imported into analysis of three other factors: Skill, permanence,
and integral
[[Page 1175]]
part. Indeed, those control-based considerations appear to be the most
important aspect of the other factors, which obscures those factors'
distinctive probative values. Moreover, considerations under the
opportunity factor--the ability to affect profits through initiative--
have been imported into the skill factor. And the ability to earn
profits through investment overlaps completely with the investment
factor. The Department continues to believe these overlapping coverages
contribute to confusion and should be reduced where practicable.
D. The Shortcomings and Misconceptions That This Rulemaking Seeks To
Remedy Are More Apparent in the Modern Economy
The NPRM explained that certain technological and social changes
have made shortcomings of the economic reality test more apparent in
the modern economy. It highlighted the effects of three types of
change. First, falling transaction costs in many industries makes it
more cost effective for firms to hire independent contractors rather
than employees to perform core functions.\12\ This in turn means
analyzing the importance of the work through the ``integral part''
factor, which the Supreme Court never endorsed, is more likely to
result in misleading signals regarding an individual's employment
status. Second, the transition from a more industrial-based to a more
knowledge-based economy reduces the probative value of the investment
factor in certain industries because individuals can be in business for
themselves in those industries with minimal physical capital. Third,
shorter job tenures among employees dull the ability of the permanence
factor to distinguish between employees and independence contractor.
See 85 FR 60608-09.
---------------------------------------------------------------------------
\12\ Ronald Coase, Nature of the Firm, 4 Economica 386 (1937),
https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1468-0335.1937.tb00002.x. See also Nobel Prizes and Laureates, Oct., 15,
1991, https://www.nobelprize.org/prizes/economic-sciences/1991/press-release/ (explaining The Nature of the Firm's contribution to
economics literature as a central reason for Coase's receipt of the
1991 Nobel Prize in Economics); Katz and A. Krueger, ``The Rise and
Nature of Alternative Work Arrangements in the United States, 1995-
2015,'' p. 25 (2018) (``Coase's (1937) classic explanation for the
boundary of firms rested on the minimization of transaction costs
within firm-employee relationships. Technological changes may be
reducing the transaction costs associated with contracting out job
tasks, however, and thus supporting the disintermediation of
work.'').
---------------------------------------------------------------------------
Several commenters agreed with the Department's assessments of
modern trends. See, e.g., TechNet (``Given falling transaction costs,
companies are more willing to allocate certain pieces of their
production, even integrated parts, to independent contractors.''); Food
Industry Association (``societal changes have resulted in innovative
work arrangements and changes in job tenure expectation''). Former
Deputy Under Secretary of Labor and retired law professor Henry H.
Perritt, Jr. found the discussion of modern trends to be ``particularly
insightful and should be retained and expanded in the preamble to any
final rule.'' Other commenters disagreed. The AFL-CIO, for instance,
theorized that lower transaction costs ``might just as easily result in
employers not taking steps to retain employees who perform work central
to their business, but instead tolerate frequent turnover in such
positions'' and that the ``job tenure of independent contractors may
have fallen more'' than for employees--though it did not provide
evidence in support of its hypotheses.\13\ The Department continues to
believe that each of the above shortcomings of the previously applied
economic reality test provides sufficient reason for this rulemaking
and that technological and societal changes have made these
shortcomings even more apparent.
---------------------------------------------------------------------------
\13\ The Department notes that it is unlikely that job tenures
of independent contractors have fallen by more than employees
because average job tenure for employees have dropped by many years,
which is greater than the total duration of a typical independent
contractor relationship. See Julie Hotchkiss and Christopher
Macpherson, Falling Job Tenure: It's Not Just about Millennials,
Federal Reserve Bank of Atlanta, June 8, 2015, https://www.frbatlanta.org/blogs/macroblog/2015/06/08/falling-job-tenure-its-not-just-about-millennials.aspx. (showing that median job tenure
for individuals born in 1933 was ten years or longer while median
job tenure for individuals born after 1983 was three years or less).
---------------------------------------------------------------------------
E. Effects of Additional Regulatory Clarity on Innovation
The NPRM expressed concern that the legal uncertainty arising from
the above-described shortcomings of the multifactor economic reality
test may deter innovative, flexible work arrangements that benefit
businesses and workers alike. Some commenters questioned this
assumption. The Coalition of State Attorneys General, Cities, and
Municipal Agencies (State AGs), for instance, contended that the
Department ``provides no empirical evidence or data demonstrating that
employers now hesitate to engage in innovative arrangements'' and
further argued that because ``digital platforms have become part of the
modern economy . . . they have not been stifled by the current test.''
But the mere existence of certain types of businesses is insufficient
evidence that other such businesses are not being stifled, and it is
unclear what empirical data could measure innovation that is not
occurring due to legal uncertainty. Commenters who represent technology
companies stated that legal uncertainty regarding worker classification
in fact deters them from developing innovative and flexible work
arrangements. See, e.g., CWI; TechNet. In addition, economists who
study the impact of labor regulation on entrepreneurship also commented
that clear independent contractor regulations would assist startup
companies. Dr. Liya Palagashvilli (``71 percent of startups relied on
independent contractors and thought it was necessary to use contract
labor during their early stages''); Dr. Michael Farren and Trace
Mitchell (``[G]reater legal clarity to employers and workers will allow
for more efficient production processes and will reduce the resources
wasted on determining a worker's employment classification through the
legal process.'').
For the reasons mentioned above, the Department continues to
believe that, unless revised, the multifactor economic reality test
suffers because the analytical lens through which all the factors are
filtered remains inconsistent; there is no clear principle regarding
how to balance the multiple factors; the lines between many of the
factors are blurred; and these shortcomings have become more apparent
in the modern economy. The resulting legal uncertainty obscures
workers' and businesses' respective rights and obligations under the
FLSA and deters innovative work arrangements, thus inhibiting the
development of new job opportunities or eliminating existing jobs. The
Department is therefore issuing this final rule to increase legal
certainty.
IV. Final Regulatory Provisions
Having reviewed commenter feedback submitted in response to the
proposed rule, the Department is finalizing the addition of a new part
795 to Title 29 of the Code of Federal Regulations, which will address
whether particular workers are ``employees'' or independent contractors
under the FLSA. In relevant part, and as discussed in greater detail
below, the part includes:
An introductory provision at Sec. 795.100 explaining the
purpose and legal authority for the new part;
a provision at Sec. 795.105(a) explaining that
independent contractors are not employees under the FLSA;
a provision at Sec. 795.105(b) discussing the ``economic
reality'' test for distinguishing FLSA employees from independent
contractors and clarifying that the concept of economic
[[Page 1176]]
dependence turns on whether a worker is in business for him- or herself
(independent contractor) or is economically dependent on a potential
employer for work (employee);
provisions at Sec. 795.105(c) and (d) describing factors
examined as part of the economic reality test, including two ``core''
factors--the nature and degree of the worker's control over the work
and the worker's opportunity for profit or loss--which typically carry
greater weight in the analysis, as well as three other factors that may
serve as additional guideposts in the analysis;
a provision at Sec. 795.110 advising that the parties'
actual practice is more probative than what may be contractually or
theoretically possible;
fact-specific examples at Sec. 795.115; and
a severability provision at Sec. 795.120.
The Department responds to commenter feedback on the proposed rule
below.
A. The Purpose of Part 795
Proposed Sec. 795.100 explained that the interpretations in part
795 will guide WHD's enforcement of the FLSA and are intended to be
used by employers, businesses, the public sector, employees, workers,
and courts to assess employment status classifications under the Act.
See 85 FR 60638. Proposed Sec. 795.100 further clarified that, if
proposed part 795 is adopted, employers may safely rely upon the
interpretations in part 795 under section 10 of the Portal-to-Portal
Act, unless and until any such interpretation ``is modified or
rescinded or is determined by judicial authority to be invalid or of no
legal effect.'' Id. (quoting 29 U.S.C. 259).
Few commenters specifically addressed proposed Sec. 795.100, but
several discussed issues relevant to its content. For example, a few
commenters questioned the Department's legal authority to promulgate
any regulation addressing independent contractor status under the FLSA.
See Northern California Carpenters Regional Council (``At no time since
the FLSA was passed has Congress made substantive amendments to the
definitions of employee, employer, or the `suffer or permit to work'
standard . . . nor has it directed any changes in the controlling
regulations.''); Rep. Bobby Scott et al. (``Congress has not delegated
rulemaking authority to the DOL with respect to the scope of the
employment relationship under the FLSA.''). A few commenters requested
that the Department explain its source of rulemaking authority and the
level of deference it expects to receive from courts interpreting its
proposed regulation. A diverse collection of commenters, including the
American Trucking Association (ATA), the National Home Delivery
Association (NHDA), the Northwest Workers Justice Project (NWJP), and
Winebrake & Santillo, LLC, opined that the Department's proposed
regulation would be entitled to Skidmore deference from courts, though
these commenters diverged on the proposed rule's ``power to persuade.''
Skidmore v. Swift & Co., 323 US 134, 140 (1944). Finally, the AFL-CIO
asserted that ``[t]he proposed rule is based on considerations that did
not motivate Congress when it adopted the FLSA, that the Department of
Labor is not authorized to consider in construing the terms of the
FLSA, and that the Department has no expertise regarding,'' thus
placing the proposed rule ``outside the `limits of the delegation' from
Congress to the Department contained in the Act.'' (quoting Chevron,
U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 865 (1984)).
The Department appreciates commenter interest in these issues. The
Department without question has relevant expertise in the area of what
constitutes an employment relationship under the FLSA, given its
responsibility for administering and enforcing the Act \14\ and its
decades of experience doing so. The Department's authority to interpret
the Act comes with its authority to administer and enforce the Act. See
Herman v. Fabri-Centers of Am., Inc., 308 F.3d 580, 592-93 (6th Cir.
2002) (noting that ``[t]he Wage and Hour Division of the Department of
Labor was created to administer the Act'' while agreeing with the
Department's interpretation of one of the Act's provisions); Dufrene v.
Browning-Ferris, Inc., 207 F.3d 264, 267 (5th Cir. 2000) (``By granting
the Secretary of Labor the power to administer the FLSA, Congress
implicitly granted him the power to interpret.''); Condo v. Sysco
Corp., 1 F.3d 599, 603 (7th Cir. 1993) (same). The Department believes
a clear explanation of the test for whether a worker is an employee
under the FLSA or an independent contractor not entitled to the
protections of the Act in easily accessible regulatory text is valuable
to potential employers, to workers, and to other stakeholders. It has a
long history of offering interpretations in this area and believes this
rulemaking has great value regardless of what deference courts
ultimately give to it.
---------------------------------------------------------------------------
\14\ See 29 U.S.C. 204, 211(a), 212(b), 216(c), 217; see also
Fernandez v. Zoni Language Centers, Inc., 858 F.3d 45, 48-49 (2d
Cir. 2017) (noting that ``[t]he DOL . . . administers the FLSA'').
---------------------------------------------------------------------------
While proposed Sec. 795.100 emphasized that part 795 would state
the Department's interpretation of independent contractor status under
the FLSA, some commenters expressed concern that it would affect the
scope of employment under other Federal laws. The United Food and
Commercial Workers International Union (UFCW) believed that the
proposal may narrow the coverage of the ``Title VII of the Civil Rights
Act of 1964, Americans with Disabilities Act, Age Discrimination in
Employment Act (ADEA), and the Equal Pay Act.'' See also National
Women's Law Center (NWLC); CLASP. The Department reaffirms that the
rule concerns the distinction between employees and independent
contractors solely for the purposes of the FLSA, and as such, would not
affect the scope of employment under other Federal laws.\15\
---------------------------------------------------------------------------
\15\ Additionally and as explained in greater detail below, this
rule does not narrow the longstanding standard for distinguishing
between FLSA employees and independent contractors; employees are
economically dependent on another for work, and independent
contractors are in business for themselves as matter of economic
reality.
---------------------------------------------------------------------------
Many commenters requested that the Department promulgate a standard
more broadly applicable across other state and Federal employment laws.
See, e.g., American Society of Travel Advisors, Inc. (``[The NPRM . . .
represents something of a missed opportunity insofar as it fails to
address the longstanding difficulty associated with the continued use
of multiple tests at the Federal level to determine worker status.'');
Cambridge Investment Research, Inc. (``[W]ithout a more encompassing
Department position or guidance addressing different state standards,
some of the current uncertainty and unpredictability remain.''); Chun
Fung Kevin Chiu (``[I]nconsistent Federal and state standards with
regards to classification may render the DOL rules ineffective in
practice for those independent contractors and businesses affected.'').
While several commenters acknowledged the Department's lack of
authority to interpret the scope of laws outside of its jurisdiction,
the National Association of Manufacturers and the Mechanical
Contractors Association of America (MCAA) urged the Department to
collaborate with other Federal agencies to harmonize the varying
employment definitions under Federal law. Finally, the Zobrist Law
Group ``urge[d] the Department to prohibit states from using
classification tests that
[[Page 1177]]
conflict with the proposed rule,'' asserting that ``state law not
preempted by the FLSA is narrow'' and that state laws ``shifting an
independent contractor under the FLSA to an employee under state law .
. . [impose] greater obligations upon those workers.'' But see
Truckload Carriers Association (``TCA understands that, due to our
nation's federalist system, individual states such as California can
pursue misguided statues that are more stringent than the Federal
standard the Department is seeking to clarify[.]'').
While the Department appreciates the desire to achieve uniformity
across the various state and Federal laws which may govern work
arrangements, requests to modify definitions and tests under different
laws are outside the scope of this rulemaking.
Some commenters supportive of the proposed rule requested that the
Department make conforming edits to its MSPA regulation at 29 CFR
500.20(h)(4), addressing whether or not a farm labor contractor engaged
by an agricultural employer/association is an independent contractor or
an employee under MSPA. See Americans for Prosperity Foundation (AFPF)
(``To further the Department's goal of clarification, simplification,
and consistency . . . the same criteria used in the NPRM to define
independent contractors for purposes of the FLSA also should apply to
the MSPA, and to any other provision that references the FLSA.'');
Administrative Law Clinic at the Antonin Scalia Law School (``[T]he
Department should simply use its proposed regulations in 29 CFR
795.100, et seq., to determine employee status under MSPA, and repeal
[29 CFR 500.20(h)] as duplicative.''). Relatedly, Texas RioGrande Legal
Aid (TRLA), which expressed opposition to the proposed rule, asserted
that ``the proposed rule will lead to considerable confusion among both
employers and workers . . . because the proposed rule at odds with the
Department's [MSPA] regulations,'' but opined that any effort to revise
29 CFR 500.20(h) ``would be in direct contravention of Congressional
directives regarding the interpretation of the MSPA.''
As noted in the NPRM preamble, the Department acknowledges that
MSPA adopts by reference the FLSA's definition of ``employ,'' see 18
U.S.C. 1802(5), and that 29 CFR 500.20(h)(4) considers ``whether or not
an independent contractor or employment relationship exists under the
Fair Labor Standards Act'' to interpret independent contractor status
under MSPA. At this time, however, the Department does not see a
compelling need to revise 29 CFR 500.20(h)(4), as we are unsure whether
application of the six factor economic reality test described in that
regulation has resulted in confusion and uncertainty in the more
limited MSPA context similar to that described in the FLSA context.
Importantly, the regulatory standard for determining an individual's
classification status under MSPA is generally consistent with the FLSA
guidance finalized in this rule: ``In determining if the farm labor
contractor or worker is an employee or an independent contractor, the
ultimate question is the economic reality of the relationship--whether
there is economic dependence upon the agricultural employer/association
or farm labor contractor, as appropriate.'' 29 CFR 500.20(h)(4).
Therefore, as explained in the NPRM, the Department prefers to proceed
incrementally at this time by leaving the MSPA regulation at 29 CFR
500.20(h)(4) unchanged.16 17
---------------------------------------------------------------------------
\16\See, e.g., Pharm. Research & Mfrs. of Am. v. FTC, 790 F.3d
198, 203 (D.C. Cir. 2015) (affirming that agency had discretion to
``proceeding incrementally'' in promulgating rules that were
directed to one industry but no others); Inv. Co. Inst. v. Commodity
Futures Trading Comm'n, 720 F.3d 370, 378 (D.C. 2013) (observing
that ``[n]othing prohibits Federal agencies from moving in an
incremental manner'' (quoting FCC v. Fox Television Stations, Inc.,
556 U.S. 502, 522 (2009)); City of Las Vegas v. Lujan, 891 F.2d
927,935 (D.C. Cir. 1989) (noting that ``agencies have great
discretion to treat a problem partially'').
\17\ Similar to the MSPA regulation at 29 CFR 500.20(h)(4), a
regulation promulgated by the Department's Veterans' Employment &
Training Service (VETS) at 20 CFR 1002.44 articulates a six-factor
balancing test based on the tests used by courts under the FLSA for
determining whether an individual is an employee or an independent
contractor under the Uniformed Services Employment and Reemployment
Rights Act (USERRA). See 70 FR 75254 (``The independent contractor
provision in this rule is based on Congress's intent that USERRA's
definition of `employee' be interpreted in the same expansive manner
as the term is defined under the [FSLA].'' (citing H.R. Rep. No.
103-65, Pt. I, at 29 (1993); S. Rep. No. 103-58, at 40 (1993))).
Consistent with this rulemaking's incremental focus of the FLSA
context, the Department declines to amend 20 CFR 1002.44 at this
time.
---------------------------------------------------------------------------
The American Network of Community Options and Resources (ANCOR)
expressed concern about the Department's statement in proposed Sec.
795.100 that, if finalized, the proposed rule ``would contain the
Department's sole and authoritative interpretation of independent
contractor status under the FLSA,'' fearing that the statement could be
interpreted to ``render obsolete the Department's specific guidance on
the application of the FLSA to shared living in Fact Sheet #79G and
Administrator's Interpretation No. 2014-1.'' The Department disagrees
with this interpretation, noting that Sec. 795.100 only rescinds
earlier WHD guidance addressing independent contractor status under the
FLSA ``[t]o the extent . . . [that such guidance is] inconsistent or in
conflict with the interpretations stated in this part.'' As explained
in the NPRM, the Department engaged in this rulemaking to ``clarify the
existing standard, not radically transform it,'' 85 FR 60636, and none
of the industry-specific guidance in Administrator's Interpretation No.
2014-1 is meaningfully affected by this final rule. For similar
reasons, we believe that the assertion by the Nebraska Appleseed Center
for Law in the Public Interest (Appleseed Center) that this rulemaking
will ``rescind years of [Departmental] guidance'' is an overstatement.
This rule is premised on familiar FLSA concepts that courts, employers,
workers, and the Department have applied for years while providing
updated and clearer explanations of what the concepts mean and how they
are considered. Although this rule will change the Department's
analysis for classifying workers as employees or independent
contractors in some respect, those changes do not favor independent
contractor classification (i.e., the ultimate legal outcome) relative
to the status quo, but rather offer greater clarity as to workers'
proper classifications.
B. Clarification That Independent Contractors Are Not Employees Under
the Act
Proposed Sec. 795.105(a) explained that an independent contractor
who renders services to a person is not an employee of that person
under the FLSA, and that the Act's wage and hour requirements do not
apply with respect to a person's independent contractors. See 85 FR
60638-39. Proposed 795.105(a) similarly explained that the
recordkeeping obligations for employers under section 11 of the Act do
not apply to a person with respect to services received from an
independent contractor. Id.
The vast majority of substantive comments agreed with proposed
Sec. 795.105(a). One anonymous commenter suggested that the Department
interpret the FLSA's minimum wage and overtime pay requirements to
apply to independent contractors because the Act's ``declaration of
policy'' at 29 U.S.C. 202 ``suggests the purpose of the FLSA is to
protect workers.'' The Department does not adopt this interpretation
because Federal courts of appeals have uniformly held, and the
Department has consistently maintained, that ``FLSA wage and hour
requirements do not apply to true independent contractors.'' Karlson,
860 F.3d at 1092; see also, e.g., Parrish, 917 F.3d at 384; Saleem, 854
[[Page 1178]]
F.3d at 139-40; Express Sixty-Minutes Delivery, 161 F.3d at 305; see
also Portland Terminal, 330 U.S. at 152 (holding that the FLSA ``was
obviously not intended to stamp all persons as employees'').
C. Adopting the Economic Reality Test To Determine a Worker's Employee
or Independent Contractor Status Under the Act
Proposed Sec. 795.105(b) would adopt the economic reality test to
determine a worker's status as an employee or an independent contractor
under the Act. As the proposal explained, the inquiry of whether an
individual is an employee or independent contractor under the Act is
whether, as a matter of economic reality, the individual is
economically dependent on the potential employer for work. See 85 FR
60611; see also Pilgrim Equip., 527 F.2d at 1311 (``It is dependence
that indicates employee status.''). The proposal and this final rule
provide further clarity as to the economic reality test's touchstone--
economic dependence.
The NPRM preamble explained that clarifying the test requires
putting the question of economic dependence in the proper context.
``Economic dependence is not conditioned reliance on an alleged
employer for one's primary source of income, for the necessities of
life.'' Mr. W Fireworks, 814 F.2d at 1054. Rather, courts have framed
the question as `` `whether, as a matter of economic reality, the
workers depend upon someone else's business for the opportunity to
render service or are in business for themselves.' '' Saleem, 854 F.3d
at 139 (quoting Superior Care, 840 F.2d at 1059). This conception of
economic dependence comports with the FLSA's definition of employ as
``includ[ing] to suffer or permit to work.'' See 29 U.S.C. 203(g). An
individual who depends on a potential employer for work is able to work
only by the sufferance or permission of the potential employer. Such an
individual is therefore an employee under the Act. In contrast, an
independent contractor does not work at the sufferance or permission of
others because, as a matter of economic reality, he or she is in
business for him- or herself. In other words, an independent contractor
is an entrepreneur who works for him- or herself, as opposed to for an
employer.\18\ The Department did not receive any substantive comments
disputing this distinction between employee and independent contractor
classification under the Act.
---------------------------------------------------------------------------
\18\ The Department's prior guidance has stated that ``an
employee, as distinguished from a person who is engaged in a
business of his or her own, is one who, as a matter of economic
reality, follows the usual path of an employee.'' Fact Sheet #13;
see also WHD Opinion Letter FLSA-795 (Sept. 30, 1964). Upon
consideration, however, the Department believes that describing an
employee as someone who ``follows the usual path of an employee'' is
circular and unhelpful.
---------------------------------------------------------------------------
The Department observed in the NPRM preamble that some courts have
relied on a worker's entrepreneurship with respect to one type of work
to conclude that the worker was also in business for him- or herself in
a second, unrelated type of work. See, e.g., Parrish, 917 F.3d at 384
(considering ``plaintiff's enterprise, such as the goat farm, as part
of the overall analysis of how dependent plaintiffs were on
[defendant]'' for working as consultants); Thibault, 612 F.3d at 849
(concluding that plaintiff was an independent contractor as a cable
splicer in part because he managed unrelated commercial operations and
properties in a different state). This approach is inconsistent with
the Supreme Court's instruction that the economic reality analysis be
limited to ``the claimed independent operation.'' Silk, 331 U.S. at
716. Thus, the relevant question in this context is whether the worker
providing certain service to a potential employer is an entrepreneur
``in that line of business.'' Mr. W Fireworks, 814 F.2d at 1054.
Otherwise, businesses must make worker classification decisions based
on facts outside the working relationship.\19\
---------------------------------------------------------------------------
\19\ It is possible for a worker to be an employee in one line
of business and an independent contractor in another.
---------------------------------------------------------------------------
At bottom, the phrase ``economic dependence'' may mean many
different things. But in the context of the economic reality test,
``economic dependence'' is best understood in terms of what it is not.
The phrase excludes individuals who, as a matter of economic reality,
are in business for themselves. Such individuals work for themselves
rather than at the sufferance or permission of a potential employer,
see 29 U.S.C. 203(g), and thus are not dependent on that potential
employer for work. Section 795.105(b) therefore recognizes the
principle that, as a matter of economic reality, workers who are in
business for themselves with respect to work being performed are
independent contractors for that work.
Many commenters supported the Department's decision to implement
the economic reality test applying the above-described approach to
economic dependence. WPI applauded the ``decision to retain the long-
standing economic reality test while sharpening the factors used to
apply that test.'' The NRF stated that the economic reality test ``is
the proper basis for distinguishing independent contractors from
employees under the FLSA as articulated by the U.S. Supreme Court.''
ATA) found that the economic dependence framework ``comports with a
thoughtful reading of decades of court precedent.'' See also Americans
for Prosperity Foundation; Cetera Financial Group; Center for Workplace
Compliance (``DOL is correct to propose using the economic dependence
standard for determining whether an individual is an employee or
independent contractor'').
The majority of commenters agreed with the Department's proposal to
adopt the economic reality test using the above-mentioned definition of
economic dependence, including commenters that were generally critical
of the proposed rule. For example, the State AGs approvingly stated
that ``[f]or nearly three-quarters of a century, the Supreme Court has
held that whether a worker is a covered ``employee'' under the FLSA is
governed by the economic reality test.'' See also National Employment
Law Project (NELP); Signatory Wall and Ceiling Contractors Alliance
(SWACCA) (recommending adopting an economic reality test with a
different number of factors). While objecting commenters challenged
various aspects of the proposed rule, they did not dispute the
sharpened explanation of the economic dependence inquiry. Commenters,
both supportive and objecting, made a number of thoughtful suggestions,
which are addressed below.
The Administrative Law Clinic at the Antonin Scalia Law School
suggested further clarifying the test by adding ``[a]n individual is
not an `employee' merely because he or she is economically dependent in
some way on the potential employer.'' Such additional language may be
redundant in Sec. 795.105(b) because that section already articulates
economic dependence as dependence on a potential employer for work, as
opposed to being in business for oneself. As explained above, other
forms of dependence, such as dependence on income or subsistence, do
not count. However, given how important it is to apply the correct
concept of economic dependence, the Department believes this point
bears emphasis through a concrete, fact-specific example in the
regulatory text. The Department is thus adding an example in Sec.
795.115 to demonstrate that a different form of dependence, i.e.,
dependence of income or subsistence, is not a relevant consideration in
the economic reality test.
[[Page 1179]]
A number of individual commenters who generally support this rule
requested that the Department allow workers who voluntarily agree to be
independent contractors to be classified as such, regardless of other
facts. For example, Farren and Mitchell urged the Department to ``allow
the parties themselves to explicitly define the nature of their labor
relationship,'' asserting that such an approach would respect worker
autonomy, maximize legal certainty, and promote greater flexibility in
work arrangements. This requested approach would allow voluntary
agreements to supersede the economic reality test in determining
classification as an employee or independent contractor. The Supreme
Court, however, held in Tony & Susan Alamo, 471 U.S. at 302, that the
FLSA must be ``applied even to those who would decline its
protections.'' In other words, an individual may not waive application
of the Act through voluntary agreement. See Barrentine v. Arkansas-Best
Freight Sys., Inc., 450 U.S. 728, 740 (1981) (``FLSA rights cannot be
abridged by contract or otherwise waived, because this would `nullify
the purposes' of the statute and thwart the legislative policies it was
designed to effectuate.'') (quoting Brooklyn Savings Bank v. O'Neil,
324 U.S. 697, 707 (1945)); Lauritzen, 835 F.2d at 1544-45 (``The FLSA
is designed to defeat rather than implement contractual arrangements.
If employees voluntarily contract to accept $2.00 per hour, the
agreement is ineffectual.'') (Easterbrook J., concurring). Because this
request would contradict this precedent by allowing the possibility of
workers who are employees under the facts and law to waive the FLSA's
protections by classifying themselves as independent contractors, the
Department declines to implement it in the final rule.
Some commenters, including the Minnesota State Building &
Construction Trades Council, PJC, and SWRCC, suggested that the rule
include a presumption of employee status. The Supreme Court has said
and the Department agrees that this is a totality of the circumstances
analysis, based on the facts. The Department thus declines to create a
presumption in favor of employee status.
NELA, Farmworker Justice (FJ), and several other commenters
requested that the Department abandon the economic reality test in
favor of the ABC test adopted by the California Supreme Court in
Dynamex Operations West v. Superior Court, 416 P.3d 1 (2018). By
contrast, other commenters, such as the American Society of Travel
Advisors (ASTA) and National Federation of Independent Business (NFIB),
urged the Department to adopt the common law standard used to
distinguish between employees and independent contractors under the
Internal Revenue Code and other Federal laws. These requests are
addressed in the discussion of regulatory alternatives in Section VI,
which explains why the Department is not adopting either the common law
control test or the ABC test for employment under the FLSA.
For the reasons discussed above, the Department adopts Sec.
795.105(b) as proposed to adopt the economic realty test to determine
whether an individual is an employee or independent contractor under
the FLSA. Under that test, an individual is an employee if he or she is
dependent on an employer for work, and is an independent contractor if
that he or she is, as a matter of economic reality, in business for
him- or herself.
D. Applying the Economic Reality Factors To Determine a Worker's
Independent Contractor or Employee Status
Proposed Sec. 795.105(c) explained that certain nonexclusive
economic reality factors guide the determination of whether an
individual is, on one hand, economically dependent on a potential
employer for work and therefore an employee or, on the other hand, in
business for him- or herself and therefore an independent contractor.
See 85 FR 60639. These factors were listed in proposed Sec.
795.105(d), based on the factors currently used by the Department and
most Federal courts of appeals, with certain proposed reformulations.
Id.
First, the Department proposed to follow the Second Circuit's
approach of analyzing the worker's investment as part of the
opportunity factor. The combined factor asked whether the worker has an
opportunity to earn profits or incur losses based on his or her
exercise of initiative or management of investments. See 85 FR 60613-
15, 60639. Second, the Department proposed to clarify that the ``skill
required'' factor originally articulated by the Supreme Court should be
used, as opposed to the ``skill and initiative'' factor currently used
in some circuits, because considering initiative as part of the skill
factor creates unnecessary and confusing overlaps with the control and
opportunity factors. See 85 FR 60615, 60639. Third, the Department
proposed to further reduce overlap by analyzing the exclusivity of the
relationship as a part of the control factor only, as opposed to both
the control and permanence factors. See 85 FR 60615-16, 60639. Lastly,
the Department proposed to reframe the ``whether the service rendered
is an integral part of the alleged employer's business'' factor in
accordance with the Supreme Court's original inquiry in Rutherford
Food, 331 U.S. at 729, of whether the work is ``part of an integrated
unit of production.'' See 85 FR 60616-18, 60639.\20\
---------------------------------------------------------------------------
\20\ Consistent with WHD Opinion Letter FLSA2019-6, the
Department's proposal did not include the ``independent business
organization'' factor mentioned in Fact Sheet #13. The opinion
letter explained that the ``independent business organization''
factor was ``[e]ncompassed within'' the other factors. Because the
ultimate inquiry of the economic dependence test is whether workers
are ``in business for themselves,'' Saleem, 854 F.3d at 139,
analyzing the worker's degree of ``independent business
organization'' restates the inquiry and adds little, if anything, to
the analysis that is not already covered by the other factors.
---------------------------------------------------------------------------
Proposed Sec. 795.105(c) further aimed to improve the certainty
and predictability of the test by focusing it on two core factors: (1)
The nature and degree of the worker's control over the work; and (2)
the worker's opportunity for profit or loss. The proposed rule
explained that if both proposed core factors point towards the same
classification--whether employee or independent contractor--there is a
substantial likelihood that that classification is appropriate. See 85
FR 60618-20, 60639.
The following discussion addresses commenter feedback on the five
proposed economic reality factors.
1. The ``Nature and Degree of the Individual's Control Over the Work''
Factor
The first core factor identified in the proposed regulatory text
was the ``nature and degree of the individual's control over the
work.'' 85 FR 60639. Proposed Sec. 795.105(d)(1)(i) explained that
this factor ``weighs towards the individual being an independent
contractor to the extent the individual, as opposed to the potential
employer, exercises substantial control over key aspects of the
performance of the work, such as by setting his or her own schedule, by
selecting his or her projects, and/or through the ability to work for
others, which might include the potential employer's competitors.''
Proposed Sec. 795.105(d)(1)(i) further explained that, in contrast,
this factor ``weighs in favor of the individual being an employee under
the Act to the extent the potential employer, as opposed to the
individual, exercises substantial control over key aspects of the
performance of the work, such as by controlling the individual's
schedule or workload and/or by directly or indirectly requiring the
individual to
[[Page 1180]]
work exclusively for the potential employer.'' In addition, the
proposal stated that the following actions by the potential employer
``do[ ] not constitute control that makes the individual more or less
likely to be an employee under the Act'': ``[r]equiring the individual
to comply with specific legal obligations, satisfy health and safety
standards, carry insurance, meet contractually agreed-upon deadlines or
quality control standards, or satisfy other similar terms that are
typical of contractual relationships between businesses (as opposed to
employment relationships).'' Numerous commenters requested changes to
the proposed control section regarding (1) the perspective from which
control is framed; (2) the examples of control that are relevant to the
economic dependence inquiry; and (3) examples of control that are not.
a. Responses to Requests Regarding the Framing of Control
Some commenters asserted that the control factor should focus on
the potential employer's substantial control over the worker instead of
the worker's substantial control over the work. For example, the State
AGs said that the ``proposed control factor incorrectly focuses on the
worker's control over the work'' and that ``[w]ell-established
precedent makes clear that the proper focus is the employer's control
over the worker.'' According to NELA, ``the control analysis has
historically been, and should continue to be, on the control that the
employer has over the employee, not that the employee has over their
work.'' NELA added that the Department ``cannot deny that its proposal
casts the control inquiry differently than the Supreme Court, courts of
appeals, and the Department have in the past.'' And the United
Brotherhood of Carpenters and Joiners of America stated that the
proposal's ``focus on the individual's control over the work turns the
`suffer or permit' standard on its head'' because that standard
``references the purported employer's behavior--not the worker's.'' See
also Northern California Carpenters Regional Council (noting that
``[b]ecause the `nature and degree of the individual's control over the
work' . . . focuses on the individual's control, as opposed to the
employer's control, the factor skews towards most skilled tradespeople
being classified as independent cont[r]actors''). Relatedly, attorney
Richard Reibstein suggested that the title of the control subsection
``be re-drafted in a manner that does not suggest it favors independent
contractor status because the remaining text regarding [the control
factor] is neutral.'' Mr. Reibstein suggested that the title be changed
from the ``nature and degree of the individual's control over the
work'' to the ``nature and degree of each party's control over the
work.'' Finally, WPI expected that some commenters would object to the
Department's proposed articulation of the control factor, and it
supported the Department's approach by saying that ``the economic
reality test focuses on the individual--whether the individual is
economically dependent on another business or in business for him or
herself,'' and that, ``[t]hus, the focus of each factor should also be
on the economic realities of the individual, not the businesses with
which [he or she] contracts.'' See also CPIE (supporting ``the NPRM's
articulation of this factor'').
Notwithstanding differing commenter preferences over the primary
articulation of the control factor, the proposed (and final) regulatory
text at Sec. 795.105(d)(1)(i) discusses both the individual worker's
control and the potential employer's control.\21\ This approach is
consistent with that of courts, which also generally consider both the
individual's control and the potential employer's control. See, e.g.,
Razak, 951 F.3d at 142; Hobbs, 946 F.3d at 829; Saleem, 854 F.3d at
144-45; Karlson, 860 F.3d at 1096. The Department explained in the NPRM
preamble that whether the control factor is articulated with reference
to the individual worker's control or the potential employer's control
is a ``distinction . . . of no consequence,'' and that both ``the
nature and degree of control over the work by the worker and by the
potential employer are considered to determine whether control
indicates employee or independent contractor status.'' 85 FR 60612
n.34. The Department reaffirms that statement now and reiterates that
both the worker's control and the potential employer's control should
be considered. To remove any ambiguity on this point, the Department
has modified the title of subsection 795.105(d)(1)(i) to ``[t]he nature
and degree of control over the work,'' removing the proposed rule's
reference to ``the individual's control over the work.'' This revised
articulation is closer to the Supreme Court's description of the
economic reality test's control factor in Silk, 331 U.S. at 716
(``degrees of control''), which does not indicate a focus on either the
individual worker or the potential employer.
---------------------------------------------------------------------------
\21\ As Mr. Reibstein acknowledged, the proposed regulatory text
beyond the title of the control section was written in a ``neutral''
manner. The final regulatory text is written in a similarly neutral
manner.
---------------------------------------------------------------------------
Mr. Reibstein also suggested that the control factor ``should be
drafted in a manner that focuses attention on the key to control, which
is control over the manner and means by which the work in question is
performed.'' He asserted that, as proposed, the control section ``is
ambiguous at best and may be misleading at worst,'' and suggested that
``control over the work'' should be changed to ``control over the
performance of the work, particularly how the work is to be
performed.'' The Department, however, prefers to retain the ``control
over the work'' articulation. It is purposefully broad to encompass
various different types of control that the individual worker and the
potential employer may exercise over the working relationship.
Moreover, the Department agrees that who controls the manner and means
by which the work is performed is a key component of the control
analysis, and the Department believes that both the proposed and final
regulatory text reflect the importance of the manner and means by which
the work is performed.
b. Responses to Comments Regarding Examples of Relevant Control
A number of comments addressed the proposed regulatory text's three
non-exhaustive examples of control that may indicate employee or
independent contractor status, which were setting schedules, selecting
projects, and working exclusively for the employer or working for
others.
Several commenters sought clarification that these examples may not
always be probative of an employment or independent contracting
relationship. For instance, NRF stated ``there may be limits on
schedules that are consistent with business relationships that should
not be treated as impacting the analysis,'' such as delivery workers
who can deliver only during the restaurant's operating hours and a
retailer that arranges for after-hours cleaning services. The
Department agrees that there are examples of impacts on a workers
schedule that are not probative of the type of control that indicates
economic dependence and that NRF has identified two such examples by
pointing to the fact that a delivery worker can deliver for a
restaurant only when the restaurant is open and a cleaning worker can
clean a retailer only when it is closed. But the Department does not
think any change to the regulatory text is warranted to clarify this
point, as the regulatory text merely provides a few examples of facets
of control that may--
[[Page 1181]]
or may not--be probative in any given case depending on the facts. NHDA
sought clarification of the working for others example because, in its
view, ``it is not enough for the individual to claim he/she never
turned down projects or never worked for others. Rather, the individual
must demonstrate some action, implementation, or execution (in other
words, act or conduct) by the potential employer that prevented the
individual from turning down projects or working for others.'' In
response, the Department notes its statement in the NPRM preamble that
``a potential employer may exercise substantial control, for example,
where it explicitly requires an exclusive working relationship or where
it imposes restrictions that effectively prevent an individual from
working with others.'' 85 FR 60613 (citing cases where the employer's
schedule made it ``impossible'' or ``practically impossible'' for the
worker to work for others). Where a worker could work for others,
meaning the potential employer is not explicitly or effectively
preventing the worker from doing so, the worker retains control over
this aspect of his or her work. That he or she exercises this control
by choosing to work only for one potential employer does not
necessarily shift the control to the potential employer. Further, the
parties' actions, including whether the potential employer enforced an
explicit bar on working for others or has imposed working conditions
that make doing so impracticable, are stronger evidence of control than
contractual or theoretical ability or inability to control this aspect
of the working relationship.\22\
---------------------------------------------------------------------------
\22\ The Department received related feedback from commenters
asking for proposed Sec. 795.110 to discount the relevance of
voluntary worker practices (e.g., choosing to work exclusively for
one business, declining to negotiate prices, etc.); as explained in
greater detail in Section IV(F), coercive behavior by a potential
employer (e.g., vigilant enforcement of a non-compete clause,
punishing workers for turning down available work, etc.) constitutes
stronger evidence of employment status than such voluntary worker
practices, but is not a prerequisite for such worker practices to
have import under the FLSA's economic reality test.
---------------------------------------------------------------------------
Some commenters interpreted the few examples of control in the
proposal as an effort to limit the types of control that may be
considered. For example, Farmworker Justice stated that the proposal
``improperly and erroneously tries to narrow the relevant
considerations for the [control] factor.'' According to Edward
Tuddenham, the proposal ``lists some `key' elements of control that . .
. may have little or no significance whatsoever'' and ``[s]uch a rigid
approach to the question of control can only wreak havoc with the
established common law of FLSA employer/employee relationships.''
However, the examples of types of control identified in the proposal
were not an attempt to narrow or limit the control factor analysis. The
Department cannot provide an exhaustive list of types of control and so
instead focused on several key examples of types of control. Any type
of control over the work by the individual worker or the potential
employer may be considered. Such considerations should not be
``mechanical,'' Saleem, 854 F.3d at 140, and instead must focus on
whether the control exercised by either the individual or the potential
employer answers the ultimate inquiry of ``whether the individual is,
as a matter of economic reality, in business for himself,'' as opposed
to being economically dependent on the potential employer for work. In
any event, as explained below, the Department is clarifying types of
control that may be relevant to the analysis.
Numerous other commenters suggested the addition of dozens of
examples of types of control that indicate employee or independent
contractor status. For example, WPI suggested that the following types
of control by the individual worker are indicative of independent
contractor status: Controlling whether to work at all; controlling the
location of where to perform the work; controlling how the work is
performed; setting prices or choosing between work opportunities based
on prices; and hiring employees or engaging subcontractors. It
suggested, conversely, that the following types of control by the
potential employer are indicative of employee status: Requiring the
individual worker to comply with company specific procedures regarding
how the work is performed; requiring a set schedule or minimum hours;
controlling when the individual can take meal and rest breaks; and
controlling when the individual can take time off. CWI recommended
addition of the following as examples of the individual worker's
control over the work that are indicative of independent contractor
status: The worker's ability to make decisions with respect to the
details of how the work is performed, including the staging and
sequencing of aspects of the work; the worker's selection of supplies,
tools, or equipment to be used (or not used) by the worker; the
worker's control over when the work is conducted (e.g., worker
flexibility in start and end times) where flexibility exists in the
result to be accomplished or the time periods available to a worker to
offer their services; the worker's control over where certain aspects
of the services can be performed where the subparts do not change the
results provided by the worker; and the worker's discretion to use the
services of others to perform the work in whole or in part, or to
support the worker's performance of services (including performing some
of the contracted work and/or performing supporting services such as
accounting, legal, administrative, or financial services to support the
worker or services to support equipment or tools used by the worker to
perform services). UPS stated that the proposal ``fails to provide
examples beyond controlling the worker's schedule or workload and
restricting the worker's ability to work with other entities,'' and
that ``courts have properly widened the lens when assessing control,
looking at factors such as background checks, authority to hire and
fire, training, advertising, licensing, uniforms, monitoring,
supervision, evaluation, and discipline.'' Farmworker Justice commented
that the proposal did ``not acknowledge other examples of employer
control that unquestionably shape a worker's experience and performance
of daily tasks'' and provided as examples ``[r]equirements about how a
worker must dress, what language or tone she may use in a professional
setting, or what prices she must charge customers.'' Likewise, Sen.
Sherrod Brown and 22 other senators commented that the proposal
``ignore[s] other critical matters of control that an employer
typically exercises or retains the right to, including setting the rate
of pay and the manner in which the work must be performed and
disciplining workers who do not meet their standards.'' And Human
Rights Watch commented that the proposed control factor ``potentially
omits other ways that gig companies control their workers, such as the
ways in which they unilaterally change the formula for calculating base
earnings, the setting of default tip options, and restrictions on the
range of assignments that are offered to workers at a specific time or
in a specific locale.'' Other commenters provided various industry-
specific examples that they viewed as indicative of control by the
individual worker or the potential employer.
The Department has considered the various comments regarding
additional examples of types of control that can be indicative of
employee or independent contractor status and declines to make changes
to the proposed regulatory text in response. While this preamble and
[[Page 1182]]
the regulatory test cannot (and should not) address each and every
potential scenario and example, they clarify and articulate principles
related to the control factor that can be applied to an array of fact
patterns as they arise.
As an initial matter, a number of commenters' examples fall within
the general categories of control already identified in the regulatory
text. For example, the worker's controlling whether to work at all,
controlling when the work is conducted, and choosing between work
opportunities based on prices are all examples of the worker's setting
his or her schedule or selecting his or her projects, which the
regulatory text identifies as examples of the worker's control over the
work. Similarly, the potential employer's requiring a set schedule or
minimum hours, controlling when the individual can take meal and rest
breaks, controlling when the individual can take time off, and
restricting the range of assignments that are offered to the worker are
all examples of the potential employer's control over the worker's
schedule, workload, or both, which the regulatory text identifies as
examples of the potential employer's control over the work.
Moreover, as explained in the NPRM preamble, the Department is
concerned that application of the economic reality factors has resulted
in certain overlaps between the factors. See 85 FR 60607-08
(identifying ways in which the former skill/initiative, permanence, and
``integral'' factors considered control). Consistent with that
discussion and in the interest of further clarification, the Department
reiterates that the worker's ability to exercise significant
initiative, whether the potential employer directly or indirectly
requires the worker to work exclusively for it, and the potential
employer's ability to compel the worker's attendance to work on a
consistent basis or otherwise closely supervise and manage performance
of the work are examples of relevant types of control and are part of
the control analysis. And as stated above, the Department agrees that
who controls the manner and means by which the work is performed is a
key component of the control analysis. In addition, the Department
approvingly cited in the NPRM preamble cases in which the workers'
ability to accept or reject projects or deliveries without negative
repercussions or retaliation,\23\ the potential employer's lack of
close supervision or specifications how the workers should do the
work,\24\ and the potential employer's allowing the workers broad
discretion in the manner in which to complete their work \25\ indicated
substantial control over the work by the workers. Finally, the
Department agrees that the various examples of types of control
identified by the commenters above may, at least in some factual
circumstances, be relevant to the control analysis.
---------------------------------------------------------------------------
\23\ See 85 FR 60612 n.35 (citing Parrish, 917 F.3d at 382;
Express Sixty-Minutes Delivery, 161 F.3d at 303).
\24\ See id. (citing Thibault, 612 F.3d at 847).
\25\ See 85 FR 60612-13 (citing Mid-Atl. Installation, 16 F.
App'x at 106).
---------------------------------------------------------------------------
Ultimately, however, it is not possible--and would be
counterproductive--to identify in the regulatory text every type of
control (especially industry-specific types of control) that can be
relevant when determining under the FLSA whether a worker is an
employee or independent contractor. As explained above, the Department
purposefully articulated the control analysis in a general manner to
encompass various different types of control that the individual worker
and the potential employer may exercise over the working relationship,
and to avoid any unintended inferences regarding omitted types of
control. Accordingly, any type of control over the work by the
individual worker or the potential employer may be considered, although
some types of control are not probative of economic dependence as set
forth in the final regulatory text (and discussed below).
The Owner-Operator Independent Drivers Association (OOIDA) objected
that the proposal ``offers no guidance on how'' the examples of types
of control ``should be weighed against each other'' and asked whether
the Department intends ``that a worker must satisfy all of the criteria
that it mentions in order to be an independent contractor,'' or if
there is ``some other balance when evaluating this factor.'' OOIDA
noted that although the proposal stated that no single factor of the
economic reality test is dispositive, ``it does not offer the same
clarification when considering the details within a single factor.'' As
explained above, any type of control over the work by the individual
worker or the potential employer may be considered to the extent it is
probative as to whether the individual is, as a matter of economic
reality, in business for himself, as opposed to being economically
dependent on the potential employer for work. No single example of
control, if present or not present, is necessarily dispositive as to
whether the control factor indicates economic dependence. The examples
are simply that: Examples.
c. Responses to Comments Regarding Examples of Requirements That Are
Not Probative
Despite the final rule's broad articulation of the control factor,
not every requirement or limitation on the means of doing business
constitutes control for the purpose of analyzing whether a worker is an
employee under the FLSA. The proposed regulatory text contained
examples of requirements by a potential employer that do not constitute
control and thus are not probative to the ultimate inquiry of whether
the individual is, as a matter of economic reality, in business for
himself. These are requirements to ``comply with specific legal
obligations, satisfy health and safety standards, carry insurance, meet
contractually agreed-upon deadlines or quality control standards, or
satisfy other similar terms that are typical of contractual
relationships between businesses (as opposed to employment
relationships).'' In other words, insisting on adherence to certain
rules to which the worker is already legally bound would not make the
worker more or less likely to be an employee.
NELA challenged the Department's ``claims that case law supports
this approach'' and asserted that ``[t]he majority view among courts .
. . is that evidence of a business compelling its workers to comply
with certain legal obligations or customer requirements is probative of
control over the work relationship'' (citing Scantland v. Jeffry
Knight, Inc., 721 F.3d 1308, 1316 (11th Cir. 2013), among other cases).
NELA added that ``[c]ourts have routinely held that employer guidelines
put in place to ensure that workers conform with the law or follow
safety regulations constitute control over employees'' (citing Narayan
v. EGL, Inc., 616 F.3d 895, 902 (9th Cir. 2010), among other cases).
The National Women's Law Center similarly stated that ``courts have
regularly rejected arguments that external requirements imposed by the
defendant company's customers are irrelevant to the right to control
factor'' (citing cases). NELP asserted that the Department's ``attempts
to take away consideration of certain employer controls based on the
source of the control'' is ``nonsense'' because ``if legislators or
regulators have placed an obligation on employers to comply with
certain laws, that makes the worker less independent and more dependent
on that employer, and this should be accorded weight.'' AFL-CIO
commented that the ``categorical exclusion of evidence of control based
solely on the reasons why the employer exercises the
[[Page 1183]]
control is both irrational and contrary to Supreme Court precedent and
Congress' intent.'' And the United Brotherhood of Carpenters and
Joiners of America asserted that the Department's proposal would
``create[ ] a gaping hole that is fertile ground for exploitation by
irresponsible employers like the ones we find in the construction
industry.''
On the other hand, the Coalition to Promote Independent
Entrepreneurs ``strongly agree[d]'' with this proposal and ``agree[d]
that these types of requirements frequently apply to work performed by
employees and independent contractors alike and thus are not probative
of whether an individual is economically dependent on a company.'' In
addition, NRF asserted that ``this clarification is important, as there
is a difference between `control' and `quality control' and/or other
performance standards.'' And the Independent Bakers Association
``strongly support[ed] the proposed clarification that requiring an
individual to comply with specific legal obligations typical of
business relationships would not constitute evidence of control or make
an individual more or less likely to be an employee.'' See also SHRM
(``support[ing] the [p]roposed . . . recognition that contracting
parties should be able to build compliance with, for example, specific
legal obligations, satisfy health and safety standards, and the
carrying of insurance into the contractual relationship'').
The Department understands that some courts have found requirements
that workers comply with specific legal obligations or meet quality
control standards to be indicative of employee status. In particular,
the Eleventh Circuit in Scantland stated that it examines ``the nature
and degree of the alleged employer's control, not why the alleged
employer exercised such control'' and that ``a company must hire
employees, not independent contractors'' if ``the nature of [its]
business requires [the] company to exert control over workers to the
extent that [the defendant] has allegedly done.'' 721 F.3d at 1316. The
Scantland court correctly recognized that the ultimate inquiry in the
economic reality test is ``whether an individual is in business for
himself or is dependent upon finding employment in the business of
others.'' 721 F.3d at 1312 (quotation marks omitted). But to answer
that question it is necessary to consider ``why'' the potential
employer imposed a requirement. If the reason for a requirement applies
equally to individuals who are in business for themselves and those who
are employees, imposing the requirement is not probative. See Parrish,
917 F.3d at 379 (``although requiring safety training and drug testing
is an exercise of control in the most basic sense of the word, . . .
[r]equiring . . . safety training and drug testing, when working at an
oil-drilling site, is not the type of control that counsels in favor of
employee status.'').
The Scantland court's discussion of the control factor included the
fact that ``[t]echnicians could also be . . . fired, for consistently
misbilling, fraudulently billing, stealing, . . . [and] having
consistently low quality control ratings'' as evidence that the control
factor weighed in favored employee classification. 721 F.3d at 1314
(11th Cir. 2013).\26\ However, employees and independent contractors
alike are routinely terminated for fraud, theft, and substandard work.
Such dismissal are therefore not probative as to whether and the
dismissed workers were in business for themselves, as opposed to being
economically dependent on the potential employer. In contrast,
dismissals for failing to work mandatory hours or for disregarding
close supervision would be probative because mandatory hours and close
supervision are typically not imposed on individuals who are in
business for themselves. At bottom, the question of ``why'' workers
were dismissed matters a great deal.
---------------------------------------------------------------------------
\26\ The court also relied on the employers' close supervision,
control over schedules, and ability to prevent technicians from
hiring helpers or working for others to conclude that the control
factors weighed in favor of employee classification. Scantland, 721
F.3d at 1314-15.
---------------------------------------------------------------------------
In any event, Scantland's reasoning appears to be in the minority
among courts of appeals.\27\ As explained in the NPRM preamble, other
courts have concluded that requiring such types of compliance is not
probative of an employment relationship. See, e.g., Parrish 917 F.3d at
379; Iontchev v. AAA Cab Serv., Inc., 685 F. App'x 548, 550 (9th Cir.
2017) (noting that the potential employer's ``disciplinary policy
primarily enforced the Airport's rules and [the city's] regulations
governing the [drivers'] operations and conduct'' in finding that the
potential employer ``had relatively little control over the manner in
which the [d]rivers performed their work''); Mid-Atl. Installation, 16
F. App'x at 106 (rejecting an argument that backcharging the workers
``for failing to comply with various local regulations or with
technical specifications demonstrates the type of control
characteristic of an employment relationship,'' and noting that
withholding money in such circumstances is common in contractual
relationships); cf. Mr. W Fireworks, 814 F.2d at 1048 (finding that,
because a scheduling requirement was imposed by the potential employer
and not by state law, it suggested control over the workers). And
courts have reached analogous conclusions in joint employer cases. See,
e.g., Zheng v. Liberty Apparel Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003)
(finding that control with respect to ``contractual warranties of
quality and time of delivery has no bearing on the joint employment
inquiry'' because such control is ``perfectly consistent with a
typical, legitimate subcontracting relationship''); Moreau v. Air
France, 356 F.3d 942, 950-51 (9th Cir. 2003) (noting that control
exercised by potential joint employer over contractor's employees to
``ensure compliance with various safety and security regulations'' is
``qualitatively different'' from control that indicates employer
status).
---------------------------------------------------------------------------
\27\ In Narayan, the Ninth Circuit applied California law--not
the FLSA--and merely recited requirements imposed by the potential
employer to comply with certain legal obligations among a litany of
examples of control that precluded summary judgment on the employee
versus independent contractor issue in that case. See 616 F.3d at
900-02.
---------------------------------------------------------------------------
In addition to the supportive case law, the extent to which courts
take differing approaches to the probative value of such requirements
is yet another example of the need identified by the Department for a
clear and uniform standard under the FLSA to distinguish between
employees and independent contractors. Moreover, the Department
believes that these types of requirements are generally imposed by
employers on both employees and independent contractors (as some
commenters indicated). Employers expect and often require all of their
workers to, for example, comply with the law, satisfy health and safety
standards, and meet deadlines and quality standards. Thus, the
existence of the requirements themselves are not probative of whether
the worker is an employee or independent contractor. Other indicia of
control over the work, including the indicia of control identified in
the final regulatory text, are more probative of the worker's economic
dependence or independence. Accordingly, the Department retains in the
final regulatory text's statement that requirements by the potential
employer that the worker ``comply with specific legal obligations,
satisfy health and safety standards, carry insurance, meet
contractually agreed-upon deadlines or quality control standards, or
satisfy other similar terms that are typical of contractual
relationships between
[[Page 1184]]
businesses (as opposed to employment relationships)'' are not ``control
that makes the individual more or less likely to be an employee under
the Act.''
Although the ATA ``strongly agrees'' with the Department's proposal
that requirements by the potential employer that the worker ``comply
with specific legal obligations'' would not be ``control that makes the
individual more or less likely to be an employee under the Act,'' it
suggested that ``specific'' be changed to ``any'' in the final
regulatory text. ATA explained that referring to ``specific'' legal
obligations ``may unfortunately result in a great deal of litigation
over whether any particular aspect of a contract is `specifically'
mandated by law.'' It cited, as examples, laws that impose general
safety standards with which employers determine the specifics of how to
comply. See also NHDA (``The proposal carves out compliance with
specific legal obligations. However, not all legal obligations are
specific, making other language in the proposal unnecessarily
problematic.'').
After careful consideration, the Department declines to adopt the
suggested change. As an initial matter, the Department used the
``specific legal obligations'' language in its recent Joint Employer
Status under the Fair Labor Standards Act final rule. See 85 FR 2859
(finalizing 29 CFR 791.2(d)(3)).\28\ The Department noted there that
the obligations include compliance with the FLSA or other similar laws,
sexual harassment policies, background checks, or workplace safety
practices and protocols. See id. The Department did not intend a high
degree of specificity there and intends the same meaning here.
Moreover, a potential employer's requirement that a worker comply with
legal obligations without any further specificity as to the law or the
actual obligations is unlikely to be probative of control in the first
place. Accordingly, retaining the word ``specific'' is consistent with
the Department's position that, although requiring workers to comply
with legal obligations could be some manner of control, such
requirements reflect the applicable legal regime more than the
potential employer's control, and encouraging such requirements in
contractual work relationships has obvious benefits for employers,
workers, and society generally.
---------------------------------------------------------------------------
\28\ The Department's Joint Employer final rule was mostly
vacated by the U.S. District Court for the Southern District of New
York for reasons unrelated to the ``specific legal obligations''
language. See New York v. Scalia, No. 1:20-cv-1689-GHW, 2020 WL
5370871 (S.D.N.Y. Sept. 8, 2020). The Department appealed the
decision to the U.S. Court of Appeals for the Second Circuit on
November 6, 2020.
---------------------------------------------------------------------------
Other commenters expressed support for the Department's proposal to
carve out from the control analysis the identified employer actions
toward individual workers, but also requested that the Department
expand its proposal by identifying many additional employer
requirements as not types of control that make the individual more or
less likely to be an employee under the Act. For example, SHRM asserted
that ``the Final Rule must emphasize that all workers, regardless of
their formal employment status, should be able to benefit from the
training, resources, and positive workplace practices as those who are
directly employed in the same workplace,'' and it gave examples of
workplace trainings and audit measures. The U.S. Chamber of Commerce
stated that the Department ``should expand this concept'' and
``explicitly state that workers and businesses should not be
discouraged from incorporating terms (and audit and other certification
processes) into their relationship that support sound, lawful, safe
work practices.'' It suggested the following examples of such terms:
``Incorporation of an obligation that the work be performed pursuant to
acceptable professional, industry and customer service standards, as
well as commonly accepted safety, ethics, licensure and other standards
and recommendations (such as compliance with limitations or control
imposed or necessitated by law, regulation, order or ordinance).'' See
also Seyfarth Shaw (requesting that the following employer actions
toward workers be excluded from the control analysis: ``(1) compliance
with professional obligations and ethics standards; (2) compliance with
regulatory obligations, including over health and safety; (3)
compliance with other published industry standards; (4) compliance with
applicable local, state, and national licensure standards and rules;
and (5) additional contractual term examples of agreed upon results and
deadlines''); \29\ WPI (asserting that the potential employer's
practice or ability to do the following are not probative: Requiring
the individual to comply with or pass down contractual and legal
obligations to subcontractors and employees; requiring the individual
to comply with customer requirements; tracking and monitoring data
related to the individual; providing the individual with market data on
pricing; establishing default pricing that the individual may change;
providing the individual with information related to the establishment
or running of a business; providing the individual with emergency
assistance (e.g., protective equipment during a public-health crisis);
and complying with Federal, state or locals laws related to a
contracting relationship). Likewise, the Financial Services Institute
requested that the Department carve out from the control analysis
requirements that ``Independent Broker-Dealers'' (IBDs) place on their
``financial advisors'' to ``comply with requirements imposed by FINRA,
the SEC, and state securities regulators'' and exclusivity requirements
that IBDs place on their financial advisors to comply with ``the
extensive supervisory obligations imposed by the SEC and FINRA.'' OOIDA
also expressed concerns about exclusivity requirements and sought
clarification that a potential employer's compliance with ``Federal
regulations requir[ing] that an owner-operator lease[ ] his or her
equipment exclusively to a carrier for the duration of the lease'' not
affect the control analysis. Finally, CPIE asked the Department to
``make clear that duties or requirements imposed by any third party,
whether it be a government agency or a third-party customer, . . . be
disregarded'' when applying the control factor. See also NHDA
(``[C]ontrol weighing in favor of employee status should be control
exercised by the potential employer that originates with the potential
employer and does not originate from outside, independent forces or
circumstances, such as customer requirements or governmental
regulations.'').
---------------------------------------------------------------------------
\29\ In a separate section of its comment, Seyfarth Shaw
recommended that the Department state that the following are not
evidence of a potential employer's control over the work of the
worker: The business provides information regarding the final result
to be accomplished by the worker; the business provides customer
specifications/details and feedback relating to the work (including
requesting confirmation that the customer feedback has been
addressed); the business provides time frames within which services
can be provided in light of the services contracted for, and/or the
time sensitivity or perishable nature of the services/products; the
business' right to enforce contractual obligations; the business
provides the worker suggestions, recommendations, guidance, and/or
tips that are not mandated but informational relating to the
services; and the business pays the worker by the hour where it is
customary in the particular business/trade to do so (e.g.,
attorneys, physical trainers).
---------------------------------------------------------------------------
The Department does not agree with CPIE that any requirement
stemming from ``duties or requirements imposed by any third party'' be
``disregarded'' or with NHDA that only control ``that originates with
the potential employer'' can indicate employee status. This is because
a third party may explicitly or impliedly encourage businesses to
[[Page 1185]]
impose requirements on workers that signify employee classification.
For example, clients of a home cleaning company may prefer that the
company's workers wear uniforms, use the same equipment, and be closely
supervised. Imposing such requirements, even to satisfy client
preferences, makes the workers more likely to be classified as
employees because those requirements are inconsistent with the workers
being in business for themselves. A company may also require that
workers it hires perform timely and high-quality work, as clients
surely prefer. But contractually agreed-upon deadlines and quality
standards do not signify employee classification because independent
businesses routinely agree to meet deadlines and quality standards as
part of their businesses.
In response to comments requesting that the Department identify
many additional employer requirements as not types of control that make
the individual more or less likely to be an employee under the Act, the
Department declines to change its proposed regulatory text. As an
initial matter, many of the requested additions are already covered by
the proposed text. For example, the following requested additions are
requirements to ``comply with specific legal obligations'' and thus
already covered: Requirements to comply with limitations or control
imposed or necessitated by law, regulation, order, or ordinance;
regulatory obligations; Federal, state, or local laws related to a
contracting relationship; requirements imposed by FINRA, the SEC, and
state securities regulators; and Federal regulations requiring that an
owner-operator lease his or her equipment exclusively to a carrier for
the duration of the lease.\30\ Other requested additions may fall into
the ``satisfy health and safety standards'' category (for example:
Requiring that the work be performed pursuant to commonly accepted
safety standards; and providing the individual emergency assistance
such as protective equipment during a public-health crisis) or the
``meet contractually agreed-upon deadlines or quality control
standards'' category (for example: Agreements that the work be
performed pursuant to acceptable professional, industry, or published
industry standards; agreements to comply with applicable local, state,
and national licensure standards and rules; and agreed upon results and
deadlines). Other requested additions are narrow or industry-specific
in nature, and the Department prefers general guidance that may be used
by as many employers and workers as possible.
---------------------------------------------------------------------------
\30\ Uber requested that the Department clarify that background
checks are not an indicia of control: ``Where a business is required
by law to engage in certain activities (such as screening potential
workers for violent crime history), the Department should make clear
that this required screening is not an indicia of control.''
However, requiring a worker to undergo and pass a background check
when the law requires it falls in the ``comply with specific legal
obligations'' category. No further clarification is necessary.
---------------------------------------------------------------------------
In any event, it is not possible to identify in the regulation
every employer requirement that is not the type of control that makes
the individual more or less likely to be an employee under the Act. The
regulatory text accounts for this with a broader final category:
Requiring the worker to ``satisfy other similar terms that are typical
of contractual relationships between businesses (as opposed to
employment relationships).'' This category recognizes that contractual
work relationships currently vary and will evolve going forward, and
provides that additional employer requirements that are not expressly
identified in the regulatory text but which are similar to those
identified and are typical of such relationships do ``not constitute
control that makes the individual more or less likely to be an employee
under the Act.''
SHRM requested that the Department exclude from the control
analysis the offering of benefits such as ``health insurance, bonuses,
or retirement savings.'' According to SHRM, ``the modern workplace
would suffer if businesses were effectively barred from providing
workplace enhancements that all workers should enjoy like healthcare or
retirement savings.'' Other commenters made overlapping requests,
although not necessarily in the context of applying the control factor.
For example, TechNet requested that the Department add a ``safe
harbor'' stating that ``a worker does not lose his or her independent
status solely because a network platform provides the worker with
emergency aid or benefits allowed or required under state law.''
Similarly, WPI requested a general ``safe harbor'' with respect to the
provision of ``protections or benefits as allowed or required by
Federal, state or local laws, including but not limited to minimum
guaranteed earnings, health insurance, retirement benefits, health or
retirement subsidies, life insurance, workers compensation or similar
insurance, unemployment insurance, sick or other paid leave, training
and expense reimbursement.''
The Department declines to change the regulatory text in response
to these comments. The offering of health, retirement, and other
benefits is not necessarily indicative of employment status. For
example, payment of proceeds owed into a worker's own health plan or
retirement account would not indicate an employment relationship. This
is because it is reasonable for an independent contractor to have a
personal health or retirement plan, and the precise method of
compensation--whether cash, contributions to an account, or some other
method--is not relevant to the question of economic dependence.
However, providing a worker with the same employer-provided health or
retirement plans on the terms that a business also gives its own
employees may indicate the worker is not an independent contractor but
rather an employee. Certain other benefits could also suggest employee
status. For example, sick or other paid leave, especially the potential
employer's administration and authorization of the leave, could be
indicative of the potential employer's control over the worker's
schedule. Finally, offering a bonus to a worker may or may not be
indicative of employee status. For example, a worker's participation in
a bonus or profit sharing plan in which he or she receives a bonus
depending on the employer's, a division of the employer's, or his or
her own performance over a period of time could limit the worker's
ability to affect his or her profit or loss through initiative or
investment--suggesting economic dependence and thus employee status.
But a contractual agreement to provide a worker with a fixed bonus if
the worker completes a job by a certain deadline or completes a certain
number of tasks over a fixed period is typical of contractual
relationships between businesses and itself does not make the worker
more or less likely to be an employee under the Act. Even if, based on
the circumstances of a particular case, the provision of certain
health, retirement, or other benefits suggests classification as an
employee, that fact is not determinative by itself because other facts
and factors must also be considered.
2. The ``Opportunity for Profit or Loss'' Factor
The second core factor identified in the proposed regulatory text
was the ``individual's opportunity for profit or loss.'' 85 FR 60639.
This factor, included at proposed Sec. 795.105(d)(1)(ii), ``weighs
towards the individual being an independent contractor to the extent
the individual has an opportunity to earn profits or incur losses based
on his or her exercise of initiative (such as managerial skill or
business acumen or judgment) or management of his or her
[[Page 1186]]
investment in or capital expenditure on, for example, helpers or
equipment or material to further his or her work.'' Proposed Sec.
795.105(d)(1)(ii) further explained that, ``[w]hile the effects of the
individual's exercise of initiative and management of investment are
both considered under this factor, the individual does not need to have
an opportunity for profit or loss based on both for this factor to
weigh towards the individual being an independent contractor.'' In
addition, under the proposal, this factor ``weighs towards the
individual being an employee to the extent the individual is unable to
affect his or her earnings or is only able to do so by working more
hours or more efficiently.'' Numerous comments were submitted regarding
the proposals to analyze investment through the lens of opportunity for
profit or loss and to focus that analysis on the worker's investment
rather than comparing the worker's investment to the potential
employer's investment. One commenter requested eliminating this factor
altogether, and several commenters requested changes to the other
aspects of the proposed opportunity factor section.
a. Whether To Analyze Investment Through the Lens of Opportunity for
Profit or Loss
Some commenters opposed the proposal to consider the individual
worker's ``management of his or her investment in or capital
expenditure on, for example, helpers or equipment or material to
further his or her work'' as part of the opportunity factor. For
example, NELA stated that a worker's investment has ``been a critically
important factor in the economic realities test analysis'' and that
``[d]iscounting this important piece of the economic reality test, as
the Department has done here, plainly makes it easier for businesses to
require workers to make significant financial investments without
risking a finding of employee status.'' The State AGs similarly
commented that the proposed approach of considering investment only in
the context of opportunity for profit or loss ``inappropriately
subordinates the investment factor to the opportunity for profit or
loss'' factor. According to the State AGs, ``[c]ourts consider both
factors, often together, but investment `is, itself, indicative of
independent contractor status' especially in smaller businesses''
(quoting Saleem v. Corp. Transp. Group, Ltd., 854 F.3d 131, 144 n.29
(2d Cir. 2017)). UPS said that ``workers [who] make little or no
monetary investment toward completion of the work . . . are more likely
to be dependent on the company,'' but that the Department's proposal
``ignores that reality'' by suggesting that initiative and investment
``are on equal footing.'' NELP stated that, although opportunity for
profit or loss and investment ``are linked, they are hardly duplicative
and separately serve as useful indicia of an entity's status under the
FLSA, as the Supreme Court's tests note.''
On the other hand, some commenters supported the proposal to
consider investment in the opportunity factor. For example, according
to WPI, ``[t]he Department's proposal to combine [opportunity for
profit or loss] with an individual's investment in facilities and
equipment, following Second Circuit precedent, is a welcome change that
will bring clarity and reduce overlap.'' It added that ``[w]ise
decisions about investments are perhaps the clearest path to increasing
profits or suffering losses.'' CPIE supported the proposed ``adoption
of the Second Circuit's approach of combining the factors `opportunity
for profit or loss' and `investment,' and not treating them as separate
factors.'' According to CPIE, the proposal ``better captures both the
manufacturing-based independent contractor (who likely has a tangible
capital business investment) and the new-economy independent contractor
(who likely does not).''
Having carefully considered the comments on this issue, the
Department adopts its proposal, consistent with Second Circuit case
law, to consider investment as part of the opportunity factor. Some
courts have acknowledged that the two concepts are related while still
keeping the factors separate. See McFeeley, 825 F.3d at 243; Lauritzen,
835 F.2d at 1537. Other courts do not expressly acknowledge that they
are related but consider investment when evaluating opportunity for
profit or loss--resulting in unnecessary and duplicative analysis of
the same facts under two factors. See, e.g., Mid-Atl. Installation, 16
F. App'x at 106-07 (finding that the worker's capital investments in
tools, equipment, and a truck indicated independent contractor status
under both the opportunity and the investment factors). And
consideration of investment separately has caused other courts to
discuss the worker's involvement in outside businesses in the context
of opportunity for profit or loss. See, e.g., Parrish, 917 F.3d at 384
(considering consultant's management of a goat farm). After considering
these varying approaches, the Department believes that adopting the
Second Circuit's approach best furthers the Department's goal: A clear
and non-duplicative analysis for determining employee versus
independent contractor status. In sum, the individual worker's
meaningful capital investments may evince opportunity for profit or
loss: ``[e]conomic investment, by definition, creates the opportunity
for loss, [and] investors take such a risk with an eye to profit.''
Saleem, 854 F.3d at 145 n.29; see also Superior Care, 840 F.2d at 1060
(identifying ``the workers' opportunity for profit or loss and their
investment in the business'' as a single factor).
Moreover, considering investment as part of opportunity for profit
or loss is consistent with the Supreme Court's opinion in Silk which
articulated the two factors separately but analyzed them together. In
particular, the Court found that coal unloaders were employees because
they had ``no opportunity to gain or lose except from the work of their
hands and [ ] simple tools,'' while truck drivers who invested in their
own vehicles had ``opportunity for profit from sound management'' of
that investment by, for instance, hauling for different customers. Id.
at 719. Thus, it framed the analysis as whether workers are more like
unloaders whose profits were based solely on ``the work of their hands
and [ ] simple tools'' or the drivers whose profits depended on their
initiative and investments. See id. As the Court explained decades ago
and as the Second Circuit noted much more recently in Saleem,
investment is a pathway to opportunity for profit or loss.
In response to NELA and likeminded commenters' concern that
employers may require significant investments by their workers to avoid
employee status, the Department reiterates that the investment must be
capital in nature and consistent with the worker being in business for
him/herself for the investment to indicate an opportunity for profit or
loss. Senator Sherrod Brown and 22 other senators stated that
``[r]equiring [workers] to purchase a franchise or their own equipment,
including a vehicle'' or otherwise ``take on financial risk as a
condition of employment does not convert an employee into an
independent contractor under the FLSA.'' While no single fact or factor
may ``convert an employee into an independent contractor,'' the
prospect of financial risk and reward plays an important role in
distinguishing ``wage earners toiling for a living'' from ``independent
entrepreneurs seeking a return on their risky capital investments.''
Mr. W. Fireworks, 814 F.2d at 1051. Moreover, it matters why certain
investments are required. If certain capital investments
[[Page 1187]]
are necessary to perform the job for which the contractor is hired,
then requiring a contractor to make such investments would be
consistent with the contractor being in business for him- or herself.
For example, a company that hires independent contractors to haul
freight may obviously require that drivers bring their own vehicles.
Silk 331 U.S at 719. In contrast, a requirement to ``invest'' in
specific, company-provided equipment would not be consistent with the
worker being in business for him- or herself, and may constitute a
consideration under the control factor that points towards employee
status. See Scantland, 721 F.3d at 1318 (concluding that technicians'
``expenditures [in equipment and materials] detract little from the[ir]
economic dependence on Knight'' in part because ``many technicians
purchased specialty tools from Knight directly via payroll
withholdings''). As such, OOIDA's concern ``that any requirement that a
worker must purchase services or equipment from the business for which
they work [w]ould weigh in favor of employee status'' is misplaced. See
also SWRCC (``[T]his standard would provide a perverse incentive for
companies to require putative employees to maintain their own equipment
in an effort to steer those employees to independent contractor
status.''). Consistent with the economic dependence inquiry, an
investment must indicate an independent business by the worker, as
opposed to merely being required by the potential employer, for it to
indicate an opportunity for profit or loss.
In response to the State AGs, the Department's approach does not
subordinate investment; it can still separately indicate independent
contractor status as they suggest. Finally, the Department's approach
is not contrary to UPS' assertion that workers who make little or no
investment ``are more likely to be dependent'' on the potential
employer.\31\ Workers who make little or no investment are more likely
to be employees than workers who make significant investments, but of
course, such a worker's ultimate status as an employee or independent
contractor will also depend on other factors. As the Department
explained in the NPRM preamble, workers who do not make significant
investments may still be independent contractors: ``while the presence
of significant capital investment is still probative, its absence may
be less so in more knowledge-based occupations and industries. Indeed,
technological advances enable, for example, freelance journalists,
graphic designers, or consultants to be entrepreneurs with little more
than a personal computer and smartphone.'' 85 FR 60609 (citing Faludi
v. U.S. Shale Sols., L.L.C., 950 F.3d 269, 276 (5th Cir. 2020)); see
also Meyer v. United States Tennis Ass'n, 607 F. App'x 121, 123 (2d
Cir. 2015) (concluding that workers who invested little were
independent contractors primarily because of their control over the
work and their initiative); Lauritzen, 835 F.2d at 1540-41
(Easterbrook, J. concurring) (``[P]ossess[ing] little or no physical
capital . . . is true of many workers we would call independent
contractors. Think of lawyers, many of whom do not even own books. The
bar sells human capital rather than physical capital, but this does not
imply that lawyers are `employees' of their clients under the
FLSA.'').\32\
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\31\ The American Society of Travel Advisors disagreed at least
in part, commenting that ``workers in many service industries may
make only a minimal investment in equipment or materials and in such
situations this consideration, by itself, should not be taken to
weigh in favor of employee status.''
\32\ LocumTenens, an online company that specializes in the
temporary placement of physicians and other health clinicians,
requested that the Department eliminate from the economic reality
test consideration of whether an individual has an opportunity for
profit or loss. According to LocumTenens, its physicians and
clinicians who provide temporary healthcare services ``do not have
an obvious investment or opportunity for profit when they step in''
for another physician or clinician. However, as explained later, the
Department believes that opportunity for profit or loss is very
predictive of a worker's status as an employee or independent
contractor. In addition, the rule requires a worker to exercise
personal initiative or manage capital investments, but not
necessarily both, for the opportunity factor to indicate independent
contractor status. In other words, an absence of capital investment
does not prevent an individual from having an opportunity for profit
or loss, because such opportunity can be based on the individual's
initiative. Nor does such absence necessarily prevent an individual
from being properly classified an independent contractor,
particularly in knowledge-based industries such as medicine where
human capital matters more than physical capital.
---------------------------------------------------------------------------
b. Whether To Analyze the Worker's Investment or Compare the Worker's
Investment With That of the Potential Employer
The Department noted in the NPRM preamble that, when considering
investment, some courts use ``a side-by-side comparison method'' that
directly compares the worker's individual investment to the investment
by the potential employer. See 85 FR 60614 (citing cases). The
Department explained that ``such a `side-by-side comparison method'
does not illuminate the ultimate question of economic dependence,'' but
instead ``merely highlights the obvious and unhelpful fact that
individual workers--whether employees or independent contractors--
likely have fewer resources than businesses'' that, for example,
maintain corporate offices. Id. (citing cases). The Department received
a number of comments addressing its proposed rejection of the relative
investment approach.
For example, UPS stated that the Department's proposal
``undervalues comparative analysis of investment'' and noted that
courts ``have evaluated investment comparatively--correctly measuring
the worker's investment against the company's'' (citing cases). NELA
added that ``comparing workers' investments to the employer's
investments'' has been ``a critically important factor in the economic
realities test analysis'' and ``must be done in the context of the
working relationship.'' TRLA objected that ``the proposed test does not
include the Fifth Circuit's `extent of the relative investments of the
worker and alleged employer' factor'' and asserted that, while its
usefulness may vary ``depending on the facts of individual cases,''
``its wholesale exclusion from the test factors is not warranted,
especially given the Supreme Court's caution against an exhaustive
list'' (citing Silk, 331 U.S. at 716). The Southwest Regional Council
of Carpenters described the relative investment approach as simple and
efficient by ``lining up the expenses between worker and company'' and
thus ``advanc[ing] the key interest of all parties concerned with the
predictability of this part of the independent contractor test.''
According to the Pacific Northwest Regional Council of Carpenters, the
Department acted ``arbitrarily'' in proposing to eliminate
consideration of relative investments and asserted that, because
``virtually every craftsperson who works in the various carpentry
trades owns his or her own tools,'' the proposal would make ``all of
those individuals more susceptible to being classified as'' independent
contractors regardless whether the investment is small or extensive.
Other commenters supported the Department's proposed position. For
example, the ATA, the Arkansas Trucking Association, NHDA, and
Scopelitis, Garvin, Light, Hanson & Feary (on behalf of various
transportation companies) each agreed with the Department's proposal
``that the relative investment test fashioned by the Fifth Circuit
`does not illuminate the ultimate question of economic
[[Page 1188]]
dependence' '' (quoting 85 FR 60614). TechNet explained that ``the
relative sizes of the parties' investments'' are not relevant to the
analysis, asserting that ``[l]arge businesses may contract with small
businesses,'' make investments that ``typically exceed their smaller
partners' investments by orders of magnitude . . . because of their
size,'' and ``not endanger [their] partners' independence merely
because [they are] bigger than [their partners] are.'' CPIE stated that
``the determinative inquiry relative to investment should be whether
the individual has a sufficient investment in his or her trade or
business as to enable the individual to operate independently,''
asserting that ``[t]he investment of a potential client has no
discernible relevance to this inquiry.'' See also WFCA (``The issue is
whether a worker invested in his or her business, not how that
investment compares to the employing company's investment.'').
Having carefully considered the comments, the Department reaffirms
its position that comparing the individual worker's investment to the
potential employer's investment should not be part of the analysis of
investment. Comparing their respective investments does little more
than compare their respective sizes and resources. In Hopkins v.
Cornerstone America, 545 F.3d 338, 344 (5th Cir. 2008), it was of
course ``clear that [the insurance company's] investment--including
maintaining corporate offices, printing brochures and contracts,
providing accounting services, and developing and underwriting
insurance products--outweighs the personal investment of any one Sales
Leader.'' The court, however, never explained how this fact indicated
the Sales Leaders' economic dependence. See id. Tellingly, when summing
up the entirety of the facts and analyzing whether the workers were
economically dependent on the insurance company as a matter of economic
reality, the court did not even mention the insurance company's larger
investment. See id. at 346. And in Karlson, 860 F.3d at 1096, the court
found that comparing the worker's investment with the potential
employer's total operating expenses had little relevance because
``[l]arge corporations can hire independent contractors, and small
businesses can hire employees.'' Cf. Parrish, 917 F.3d at 383
(comparing relative investments, but noting that ``[o]bviously, [the
oil drilling company] invested more money at a drill site compared to
each plaintiff's investments'' and according the factor little weight
in light of the other evidence). In sum, comparing the relative
investments does not illuminate the worker's economic dependence or
independence. By contrast, as explained herein, analyzing the extent to
which the individual worker has an opportunity for profit or loss
because of his or her investment in, or capital expenditure on, helpers
or equipment or material to further his or her work is probative of the
worker's economic dependence or independence.
c. Other Comments Concerning the Opportunity Factor
WFCA agreed that ``an evaluation of a worker's investment and
capital expenditures are relevant factors in determining whether he or
she is an independent contractor'' and suggested including of ``a
definition of what constitutes an investment or capital expense.'' WFCA
suggested the following: ``Investments and capital expenditure shall
include: The purchase or rental of tools, equipment, material, and
office or work facilities; the payment for marketing and administrative
expenses; the payment of costs incurred hiring or using other workers;
and similar expenditures.'' However, the regulatory text already
identifies investment in ``helpers or equipment or material'' as
relevant, and the ``for example'' preceding them in the regulatory text
makes clear that the list is non-exhaustive. The Department believes
that general and non-exhaustive examples are more helpful than trying
to precisely identify as many examples of relevant investments as
possible.
NRF commented that ``it is important to emphasize that it is the
`opportunity' or `ability' to earn profits or incur losses based on
investment and/or initiative, as opposed to the actual level of
investment or initiative shown by the individual.'' Relatedly, NRF
expressed concern whether this factor squares with the discussion in
proposed Sec. 795.110 that the actual practice of the parties involved
is more relevant than what may be contractually or theoretically
possible, asserting that ``the fact that someone might not engage in
certain practices or take on certain risks that would further impact
the level of profit or loss should not result in a finding that the
individual is not an independent contractor, unless that person is
prevented from doing so by the entity with whom the individual
contracts.'' Here, the Department believes that NRF is conflating the
ultimate outcome of independent entrepreneurship (profit or loss) with
the actions indicative of entrepreneurship (initiative and/or
investment) that largely determine that outcome. While profits are
hardly guaranteed for anyone in business for him/herself, the text at
Sec. 795.105(d)(1)(ii) makes clear that independent contractors
typically ``exercise . . . initiative'' and/or ``manag[e] . . .
investment,'' (emphasis added). Thus, a lack of profit viewed in
hindsight says little about a worker's economic independence; instead,
the focus is the degree to which the worker actually exercised
initiative or actually managed investments. A worker's theoretical
ability to, for example, exercise initiative is weaker evidence than
the worker's actual practices. See e.g., Sureway Cleaners, 656 F.2d at
1371 (``[T]he fact that Sureway's `agents' possess, in theory, the
power to set prices . . . and advertise to a limited extent on their
own is overshadowed by the fact that in reality the `agents' . . .
charge the same prices, and rely in the main on Sureway for
advertising.''). However, a worker's conscious decision to not make a
particular investment (especially when choosing among a range of
investments) or to not take a particular action (especially when
choosing among a range of options) may constitute an affirmative
exercise of initiative to consider among others when evaluating
opportunity for profit or loss. In sum, in the context of the
opportunity factor, the focus is the individual worker's opportunity
for profit or loss, as shown by meaningful investments or the exercise
of personal initiative; actual profits or losses are less relevant.
OOIDA expressed ``concern[ ] that the timeline for determining
profit or loss is not clarified in the NPRM'' and explained that
certain ``[m]otor carriers that take advantage of drivers through a
lease-purchase agreement are likely to argue that a driver's
opportunity for profit is merely a few years in the future, and that
this full timeline must be considered.'' The Department agrees with
OOIDA that ``[t]his is a fallacy''; the opportunity for profit or loss
must be reasonably current to indicate independent contractor status.
Regarding the Department's proposal to include initiative as a
consideration in the opportunity factor, NRF agreed that ``[t]he
ability to impact profits or losses also may be dependent on business
acumen and managerial skills, regardless of the `skill level' of the
work or the level of investment.'' NRF added that ``identifying
`business acumen' or `management skill' as part of the profit or loss
factor is appropriate and consistent with the FLSA.'' Senator Sherrod
Brown and 22 other senators disagreed, commenting: ``Just because
[[Page 1189]]
employees can increase their wages by exercising skill or initiative
does not mean they are running a separate, independent business,
particularly if they cannot pass along costs to customers.'' They added
that ``[t]he rule does not include additional, critical considerations
of skill and initiative that are necessary to define an employment
relationship.'' And Seyfarth Shaw requested that the Department state
that ``a worker's business acumen is to be interpreted to cover acumen
relevant to the wide range of business endeavors in the U.S. economy,
including, for example: Sales, managerial, customer service, marketing,
distribution, communications, and other professional, trade, technical,
and other learned skills, as well as other unique business abilities
and acumen, including acumen that impacts a worker's ability to
profitably run their own independent business.''
Having carefully considered the comments, the Department continues
to believe that a worker's initiative, such as managerial skill or
business acumen or judgment, is an appropriate measure of a worker's
opportunity to earn profits or incur losses. See, e.g., Karlson, 860
F.3d at 1094-95 (discussing how the worker's decisions and choices
regarding assignments and customers affected his profits); Saleem, 854
F.3d at 145 (noting in support of independent contractor status that
the degree to which the worker's relationship with the potential
employer ``yielded returns was a function . . . of the business acumen
of each [worker]''); McFeeley, 825 F.3d at 243 (``The more the worker's
earnings depend on his own managerial capacity rather than the
company's . . . the less the worker is economically dependent on the
business and the more he is in business for himself and hence an
independent contractor.'') (internal quotation marks omitted); Express
Sixty-Minutes Delivery, 161 F.3d at 304 (agreeing with district court
that ``driver's profit or loss is determined largely on his or her
skill, initiative, ability to cut costs, and understanding of the
courier business''); WHD Opinion Letter FLSA2019-6 at 6 (``These
opportunities typically exist where the worker receives additional
compensation based, not [merely] on greater efficiency, but on the
exercise of initiative, judgment, or foresight.''). Commenters did not
seriously dispute the relevance of initiative to a worker's opportunity
for profit or loss. In response to the comment by Senator Sherrod Brown
and 22 other senators, the Department agrees that a worker is not
necessarily an independent contractor because he or she can use
initiative to affect his or her opportunity for profit or loss but
maintains that yet initiative is indicative of--or weighs towards--
independent contractor status in the multifactor analysis. And the
Department agrees that a worker's ability to cut costs, including by
passing them along to customers, is relevant to determining initiative.
See Express Sixty-Minutes Delivery, 161 F.3d at 304. Finally, the
Department agrees with Seyfarth Shaw that a worker's business acumen
can ``cover acumen relevant to the wide range of business endeavors in
the U.S. economy''--initiative is not limited to or automatically
present in any particular type of job.
Regarding the last sentence of the proposed opportunity factor
regulatory text (``This factor weighs towards the individual being an
employee to the extent the individual is unable to affect his or her
earnings or is only able to do so by working more hours or more
efficiently.''), WFCA expressed the concern that the sentence means
that a worker who starts his or her own business and seeks to develop
efficiencies in so doing will be an employee under the analysis. WFCA
suggested that the sentence be deleted. WPI also asked that the last
sentence be deleted because ``[a]n individual who uses initiative,
skill or judgment to perform a job more efficiently can generate
greater profits, even if compensated by the hour or piece rate.'' It
asserted: ``The ability to use managerial skill, expertise, market
experience, or business acumen to perform work more efficiently is
indicative of independent contractor status.'' The Department agrees
that such use of initiative can indicate independent contractor status
when it affects opportunity for profit or loss. The word
``efficiently'' was used in proposed Sec. 795.105(d)(2)(ii) to mean
working faster to perform rote tasks more quickly. See 85 FR 60614 n.38
(identifying piece-rate workers as ``an example of workers who are able
to affect their earnings only through working more hours or more
efficiently.''). Higher earnings that result solely from this ``working
faster'' concept of efficiency do not by themselves indicate
independent contractor status. However, as WFCA and WPI note,
efficiency may also mean effective management based on business acumen,
which is indicative of being in business for oneself if it results in
increased earnings. For instance, the Fifth Circuit found that the
opportunity factor ``points towards independent contractor status''
where ``a driver's profit or loss is determined largely on his or her
skill, initiative, ability to cut costs, and understanding of the
courier business,'' observing that ``drivers who made the most money
appeared to be the most experienced and most concerned with efficiency,
while the less successful drivers tended to be inexperienced and less
concerned with efficiency.'' Express Sixty-Minutes Delivery Serv. 161
F.3d at 304. To avoid confusion between multiple potential meanings of
``more efficiently,'' the Department is revising Sec.
795.105(d)(2)(ii) to replace that term with ``faster.'' Relatedly, ATA
and other transportation commenters objected to the Department's
statements in the NPRM preamble that ``[w]orkers who are paid on a
piece-rate basis are an example of workers who . . . lack meaningful
opportunity for profit or loss.'' They asserted that the statements may
result in some judges refraining from engaging in the actual analysis
set forth in the rule as to opportunity for profit or loss. They
further asserted that truck drivers paid on a piece-rate basis may be
independent contractors based on their management decisions or ability
to cut costs. The Department's statements in the NPRM preamble
regarding workers paid on a piece-rate basis were general observations
supported by case law \33\ and not a categorical rule or the complete
analysis. The fact that a worker is paid on a piece-rate basis set by
the potential employer does not indicate an opportunity for profit or
loss, but whether that worker has an opportunity for profit or loss
indicative of independent contractor status is determined by a fuller
analysis of the worker's circumstances.
---------------------------------------------------------------------------
\33\ See Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28,
33 (1961) (plaintiffs who manufactured knitted goods at home were
employees under the FLSA, in part, because ``[t]he management fixes
the piece rates at which they work''); Rutherford Food, 331 U.S. at
730 (because workers' earnings ``depended upon the efficiency of
their work, it was more like piecework than an enterprise that
actually depended for success upon the initiative, judgment or
foresight of the typical independent contractor''); Hodgson v.
Cactus Craft of Arizona, 481 F.2d 464, 467 (9th Cir. 1973) (persons
who manufacture novelty and souvenir gift items at homes and were
compensated at a piece rate were employees under the FLSA). And in
Donovan v. DialAmerica Marketing, Inc., the court held that
homeworkers who were paid on a piece-rate basis to perform the
simple service of researching telephone numbers were employees who
lacked meaningful opportunity for profit or loss. See 757 F.2d 1376,
1385 (3rd Cir. 1985). In contrast, distributors who recruited and
managed researchers and were paid based on the productivity of those
they managed were independent contractors, in part, because
distributors' earnings depended on ``business-like initiative.'' Id.
at 1387.
---------------------------------------------------------------------------
Some commenters requested additional examples that are indicative
[[Page 1190]]
of an opportunity for profit or loss (many of the suggested examples
overlapped with each other). TechNet asked for ``concrete examples''
and suggested the following: ``[d]rivers who can set their own hours,
choose which jobs to accept or reject, and use their judgment in how to
best complete jobs,'' as well as ``[a]pp-based opportunities--including
opportunities to provide personal transportation, parcel deliveries,
shopping services, or food delivery, among other types of service.''
The U.S. Chamber of Commerce offered eleven ``additional examples of a
worker's initiative or investment that may impact a worker's profit or
loss.'' \34\ The U.S. Chamber of Commerce also suggested ``examples of
fact situations which are neutral in the analysis of whether the worker
controls their profits and losses.'' \35\ SHRM requested numerous
``additional examples of worker investment and initiative that impact
profit and loss.'' \36\ SHRM also requested that the final rule make
``the following explicit statements regarding facts that do not support
a finding of dependency: [w]orkers may experience financial losses as a
result of cancellations of their service or the provision of service
that does not meet customer expectations when the worker has
flexibility to choose between work opportunities; and [e]ven if the
business sets the price of goods provided by the worker, that does not
negate the worker's initiative when the worker controls the amount of
time, when, and where they provide the services as well as the amount
of the same service they chose to provide.'' Seyfarth Shaw asked the
Department to ``expand upon the examples of ways that workers impact
their own profitability as well as their losses (by impacting their
profits and their costs)'' and to include numerous examples.\37\ And
Mr. Reibstein commented that ``[e]xamples of loss should be identified
. . . so it is clear [that this factor] does not focus only on
profit.'' He offered the following examples: ``He or she has to re-do
work that is not consistent with industry standards or does not meet a
customer's expectations; is potentially liable to the potential
employer in the event his or her actions or inactions cause harm or
legal expense to the potential employer; or fails to render services in
a cost-efficient manner by not managing expenses or investing far too
much time on activities that are unproductive.''
---------------------------------------------------------------------------
\34\ The U.S. Chamber of Commerce's suggested examples were:
``(1) The worker's own decision-making with respect to the details
and means by which they make use of, secure, and pay helpers,
substitutes, and related labor or specialties . . . (2) The worker's
own decision-making with respect to the details and means by which
they purchase, rent, or otherwise obtain and use tools . . . ; (3)
The worker's own decision-making with respect to the details and
means by which they purchase or otherwise obtain and use supplies .
. . ; (4) The worker's own decision-making with respect to the
details and means by which they purchase, rent, or otherwise obtain
and use equipment . . . ; (5) The worker's initiative and decisions
they implement in connection with their own performance of services
through higher service fees, incentives, charges, and other ways;
(6) The worker's initiative to invest in the development of skills,
competencies, and trades . . . ; (7) The worker's expertise in
delivery of services/products that result in enhanced profits, for
example through tips and other incentives as a result of providing
quality customer service; (8) The worker's losses incurred as a
result of customer complaints or other charges where the worker's
results were below customer or contractual expectations and
obligations; (9) The worker's flexibility to choose amongst work
opportunities offered that impact profits and losses; (10) The
worker's contractual or other losses if they do not provide the
accepted services or the worker provides substandard services, and
are engaged to provide time-sensitive, often perishable services and
products; and (11) The worker's avoidance of liquidated damages
charges or indemnification obligations in the parties' agreement
relating to various provisions, including material breaches of the
parties' agreement.''
\35\ These suggested examples were: ``(1) The business pays the
worker by the hour where it is customary in the particular business/
trade to do so (e.g., attorneys, physical trainers); (2) The
business sets the price of goods and services offered by a worker to
customers where the worker controls the amount of time, date and
place they provide the services as well as the amount of services
they choose to provide and the price is set to facilitate the time
sensitive transaction as a result of the time sensitive or
perishable nature of the service the customer desires[;] and (3) The
business's facilitation of payments from the customer to the
worker.''
\36\ SHRM's suggested examples were: ``[t]he worker's decisions
in choosing amongst opportunities offered that impact profit and
loss; [t]he worker's losses suffered from receipt of customer
complaints where the worker's results were below customer or
contractual expectations; [t]he worker's decisions in avoiding
liquidated damages charges or indemnification obligations in the
parties' agreement; [t]he worker's own decision-making on whether to
use other workers or services as helpers or substitutes as well as
the use of related labor or specialties to assist in either the
services provided, the tools and equipment used, or the maintenance
of the worker's business structure; [t]he worker's acumen regarding
the delivery of services/products that result in enhanced profits
through tips and other incentives; [t]he worker's decision-making
regarding the details and means by which they obtain supplies,
tools, and equipment for use in their business, including choices
regarding from whom to purchase these goods, how much of the goods
are obtained at any one time, the quality of the goods, and the
negotiated prices regarding said goods; and [t]he worker's decision-
making regarding investment in skills they deem necessary to achieve
the desired results from their work, including education,
certificates, or classes.''
\37\ Seyfarth Shaw's suggested examples were ``[t]he worker's
own decision-making regarding the use of helpers, substitutes, and
related labor or specialties to assist in the services provided, the
tools and equipment used, or the maintenance of the worker's
business structure . . . to the extent those decisions impact the
worker's costs and overall profitability; [t]he worker's initiative
and the decisions they implement in connection with the performance
of services and/or capital expenditures on equipment, supplies, and
tools . . . ; [t]he worker's initiative to invest in the development
of skills, competencies, and trades (including education, training,
licenses, certifications, and classes) . . . ; [t]he worker's
expertise in delivery of services/products that result in enhanced
profits through tips and other incentives as a result of great
customer service and exceptional skills, for example[; t]he worker's
losses incurred as a result of customer complaint or other charges
where the worker's results were below customer or contractual
expectations and obligations; and [t]he worker's avoidance of
liquidated damages charges or indemnification obligations in the
parties' agreement relating to various provisions, including
material breaches of the parties' agreement.''
---------------------------------------------------------------------------
The Department has considered the various requests for additional
examples of initiative and investment that can indicate a worker's
opportunity for profit or loss, but declines to change to the proposed
regulatory text. The regulatory text already broadly describes
initiative as including managerial skill and business acumen or
judgment, and explains that investment is the worker's management of
his or her investment in or capital expenditure on, for example,
helpers or equipment or material to further his or her work. Many of
the suggested examples seem to fall into one of these categories, and
some of them effectively repeat concepts already identified in the
regulatory text--especially the ones involving helpers, tools,
supplies, and equipment. The Department does not believe that (even
after culling out all of the overlap) additional examples of initiative
and investment would benefit employers or workers. It is not possible
or productive to seek to identify in the regulatory text every example
of initiative and investment that may be relevant to the opportunity
for profit or loss analysis. The Department purposefully described both
initiative and investment in a broad and general manner to provide
helpful guidance to as many employers and workers as possible. The
Department believes that this approach, along with the further
clarification provided throughout this preamble section as well as the
examples added in Sec. 795.115, will be more helpful and functional
for employers and workers as they apply the analysis.
3. The ``Skill Required'' Factor
In the NPRM, the Department identified three other factors that may
serve as ``additional guideposts'' in the analysis to determine whether
a worker is an employee or independent contractor. The first of these
other factors, included at proposed Sec. 795.105(d)(2)(i), is the
amount of skill required for the work. 85 FR 60639. The Department's
proposed regulatory text stated that this factor would weigh in favor
of the individual being an independent contractor to the extent the
work at issue requires specialized training or skill that the potential
[[Page 1191]]
employer does not provide; conversely, the factor would weigh in favor
of the individual being an employee to the extent the work at issue
requires no specialized training or skill and/or the individual is
dependent upon the potential employer to equip him or her with any
skills or training necessary to perform the job. As explained in the
NPRM, the Department proposed to clarify that this factor should focus
on the amount of skill required because importing aspects of the
control factor into the skill factor has diluted the consideration of
actual skill to the point of near irrelevance, and such dilution
generates confusion regarding the relevance and weight of the worker's
skill in evaluating economic dependence.
Employer representatives were generally supportive of the
Department's clarification and relegation of this factor as an
``additional guidepost'' but provided additional commentary and
requests for modification. Several commenters suggested that this
factor be eliminated entirely. The National Restaurant Association
commented that this factor ``does not add much clarity to the
analysis'' and ``unnecessarily discriminates against individuals who
operate businesses that do not require advanced degrees.'' WPI stated
that ``[s]o narrowed, this factor has little probative value in
determining economic dependence and should be eliminated as a separate
factor.''
Other commenters suggested that the factor be included within the
core, ``profit and loss'' factor or otherwise minimized. CWI suggested
that the factor be incorporated into the profit and loss factor because
``[w]here specialized skills are required to perform work, workers
unquestionably have taken the initiative to invest time and money into
developing those skills.'' SHRM and U.S. Chamber of Commerce agreed
that this factor should not be a stand-alone factor, but rather should
be incorporated into the opportunity factor, to ensure that workers who
desire the flexibility and freedom of independent contractor status--
but who provide services that may not require specialized training--are
not negatively impacted. See also WFCA (requesting that lack of skill
should not weigh in favor of the worker being an employee). Commenters
also stated that this additional factor should be minimized further in
the analysis, commenting that the factor places too much emphasis on
the importance of skill, and requested that ``the final rule should at
least indicate that this may be a relevant factor in some but not all
instances.'' Reibstein.
After considering these comments, the Department declines both the
request to eliminate this factor from consideration entirely and the
request to include it as part of the opportunity factor. The Department
agrees with commenters that the concepts of initiative and judgment are
sufficiently analyzed in multiple ways under the control and
opportunity core factors, but believes that longstanding case law
militates in favor of considering this additional factor--skill
required--when relevant under the particular circumstances of each
situation. As explained in the NPRM, the Supreme Court articulated the
factor as ``skill required'' in Silk, 331 U.S. at 716, and multiple
courts of appeals continue to consider as ``the degree of skill
required to perform the work.'' Paragon Contractors, 884 F.3d at 1235;
see also Iontchev, 685 F. App'x at 550; Keller, 781 F.3d at 807. The
Department believes that sharpening this factor to focus solely on
skill clarifies the analysis. Moreover, analyzing the worker's ability
to exercise initiative under the control factor, a core factor that is
given more weight than the skill factor, appropriately reflects that
that the presence or absence of initiative is usually more important
than the presence or absence of skill. Similarly, the effect of the
worker's initiative is analyzed under the opportunity factor, another
core factor that, for the reasons explained above, is usually more
probative than the skill factor.
Commenters such as the National Restaurant Association and NRF
suggested that the regulation should focus not on whether the skill
required is specialized, but rather the extent to which a worker relies
on the potential employer for training needed to perform the work. The
Wood Flooring Covering Association, however, stated that the regulation
as proposed may create unintended limits on training and employers
should not be discouraged from funding needed training for workers,
particularly in view of its industry's labor shortage. With respect to
these requests, the Department declines to eliminate the modifier
``specialized'' from the regulation. This type of consideration is
supported by discussions of this factor in case law. See, e.g.,
Simpkins v. DuPage Hous. Auth., 893 F.3d 962, 966 (7th Cir. 2018)
(``whether Simpkins had specialized skills, as well as the extent to
which he employed them in performing his work, are [material]
issues''); Carrell v. Sunland Const., Inc., 998 F.2d 330, 333 (5th Cir.
1993) (finding it relevant that ``[p]ipe welding, unlike other types of
welding, requires specialized skills''). The Department also declines
to adjust the regulatory text to directly address who provides the
training because such facts are not necessarily probative in every
circumstance; the Department notes, however, that it can be suggests
employee status if a worker receives all specialized skills from the
employer. See, e.g., Keller, 781 F.3d at 809 (explaining that if ``the
company provides all workers with the skills necessary to perform the
job,'' that suggests employee status); Scantland, 721 F.3d at 1318;
Hughes v. Family Life Care Inc., 117 F. Supp. 3d 1365, 1372 (N.D. Fla.
2015) (``The relevant inquiry [for the skill factor] is whether [the
worker] is dependent upon [the company] to equip her with the skills
necessary to perform her job.''). This is because an individual who is
in business for him- or herself typically brings his or her own skills
to the job, rather than relying on the client to provide training.
While the WFCA generally supports this factor, it also requested
that the Department include examples of specialized training or skill
that focused on indicators such as certifications and licensing.
Scopelitis, Garvin, Light, Hanson & Feary, a law firm commenting on
behalf of several unnamed transportation providers, agreed that
credentials such as testing to earn a Commercial Driver's License can
demonstrate specialized skill, but also noted that skills needed to
successfully operate a business should also be considered specialized
skills to help distinguish independent contractors from employees. The
Department notes that the opportunity factor already considers whether
workers have an opportunity for profit or loss based on their business
acumen or managerial expertise. It would be redundant to analyze
``skills needed to successfully operate a business'' as part of the
skill factor. As to requests for examples or additional clarification
as to what constitutes ``specialized'' skills, the Department agrees
that credentials such as certifications and licenses can be helpful
indicators of specialized skill, though they are by no means the only
indicators of such skill. The Department does not believe any change to
the regulatory text to clarify this point is warranted, however.
Employee representatives such as the AFL-CIO expressed concern that
de-emphasizing the skill factor would ``place considerable competitive
pressure on law-abiding employers employing employees at the bottom of
the wage scale, thus undermining the
[[Page 1192]]
national minimum wage standard.'' The AFL-CIO further asserted that the
proposed regulation would make it more likely that unskilled workers
such as home care workers, delivery drivers, and janitors will be
classified as independent contractors, and thus such workers will be
unprotected by the FLSA's minimum wage and overtime pay standards. See
AFL-CIO. The National Employment Lawyers Association (NELA) commented
that the Department's proposed regulation ``seeks to constrict and
demote'' the skill factor, and, relying on case law, noted that
``courts typically assess whether workers are required to use
specialized skills, beyond those typically acquired through
occupational or technical training, in an independent way to perform
their job'' but that this factor, ``which often favors employee status,
does not suit the Department's purposes.''
Regarding farmworkers specifically, TRLA stated that whether the
services rendered by an employee require special skills has often been
probative in the farm labor context, and that by largely eliminating
consideration of this factor, the proposed rule makes the proper
classification of farmworkers harder to determine. See Texas Rio Grande
Legal Aid. This ``will lead to more farmworkers being classified as
independent contractors, thereby denying the protections of the FLSA to
one of the most vulnerable classes of workers''; moreover, ``[t]o the
extent that the proposed rule purports to be descriptive of the current
state of the law, it is flatly inaccurate.''
The Department has considered these comments but continues to
believe that its proposal with respect to this factor is logical and
helpful. Although many courts consider the skill factor, courts appear
to find the core factors to be more dispositive than the skill factor
when such factors conflict. See 85 FR 60621-22 (listing cases).
Continuing to take it into account, but not as one of the core factors,
adds clarity to the economic realities test. The Department's
formulation of the test does not preclude the possibility that in some
circumstances, such as with respect to farmworkers, that this factor
could be particularly probative.
The Department adopts Sec. 795.105(d)(2)(i) as proposed.
4. The ``Permanence of the Working Relationship'' Factor
The second additional guidepost factor, described in the regulatory
text at Sec. 795.105(d)(2)(ii), is the degree of permanence of the
working relationship between the individual and the potential employer.
The Department proposed that this factor would weigh in favor of the
individual being an independent contractor to the extent the work
relationship is by design definite in duration or sporadic, which may
include regularly occurring fixed periods of work, although the
seasonal nature of work by itself would not necessarily indicate
independent contractor classification. In particular, the Department
explained that the seasonal nature of work would not indicate
independent contractor status where the worker's position is permanent
for the duration of the relevant season and where the worker has done
the same work for multiple seasons. See Paragon Contractors, 884 F.3d
at 1236-37. The proposal also provided that this factor would weigh in
favor of the individual being an employee to the extent the work
relationship is instead by design indefinite in duration or continuous.
As noted in the NPRM, courts and the Department routinely consider this
factor when applying the economic reality analysis under the FLSA to
determine employee or independent contractor status. See, e.g., WHD
Opinion Letter FLSA2019-6 at 4; Razak, 951 F.3d at 142; Hobbs, 946 F.3d
at 829; Karlson, 860 F.3d at 1092-93; McFeeley, 825 F.3d at 241;
Keller, 781 F.3d at 807; Scantland, 721 F.3d at 1312.
Multiple commenters urged the Department to focus this factor
further on the indefiniteness of a working relationship. For example,
the U.S. Chamber of Commerce commented that independent contractors
often enter into multiple, long-term contracts with the same business.
It suggested that the Department clarify that such contracts do not
indicate employee status merely because of their length, but that only
contracts of an indefinite length would be indicative of employee
status. CWI similarly requested that this factor focus only on the
length of the relationship as reflected in contractual agreements,
regardless of how long the relationship is in reality.
The Department considered adding clarifying language to the
regulation indicating that a relationship whose length is indefinite is
more indicative of employee status than a relationship that is merely
long. However, because the focus of the economic realities test is not
on technical formalities, it may be that a long relationship could be
evidence of permanence despite a contract with a definite end. For
example, an employer may have a permanent relationship with an employee
despite requiring the employee to enter into annual employment
contracts. Or a potential employer may have a long-term relationship
reflected in several short-term contracts. The Department has therefore
retained the proposed regulatory text because, although indefiniteness
is a stronger indicator of permanence, the length of a working
relationship is still relevant to this factor.
One commenter urged the Department to consider the exclusivity of a
relationship as part of the permanence factor, an approach taken by
some courts. Specifically, CPIE commented that permanence does not
indicate an employment relationship unless it is due to the potential
employer's requirement of exclusivity rather than the worker's choice.
The Department agrees that exclusivity most strongly indicates an
employment relationship when the exclusivity is required by the
potential employer. However, as the Department discussed in the NPRM,
an exclusivity requirement more strongly relates to the control
exercised over the worker than the permanence of the relationship. As
explained in the discussion of the control factor, that factor already
considers whether a worker has freedom to pursue external opportunities
by working for others, including a potential employer's rivals. See,
e.g., Freund, 185 F. App'x at 783 (affirming district court's finding
that ``Hi-Tech exerted very little control over Mr. Freund,'' in part,
because ``Freund was free to perform installations for other
companies'').\38\ The same concept of exclusivity is then re-analyzed
as part of the permanence factor. Compare id. (``Freund's relationship
with Hi-Tech was not one with a significant degree of permanence . . .
[because] Freund was able to take jobs from other installation
brokers.''), with Scantland, 721 F.3d at 1319 (finding installation
technicians' relationships with the potential employer were permanent
because they ``could not work for other companies''). Such duplicative
analysis of exclusivity under the permanence factor, however, is not
supported by the Supreme Court's original articulation of that factor
in Silk. See 331 U.S. at 716 (analyzing the
[[Page 1193]]
``regularity'' of unloaders' work); id. at 719 (analyzing truck
drivers' ability to work ``for any customer'' as an aspect of ``the
control exercised'' but not permanence); see also 12 FR 7967
(describing the permanence factor as pertaining to ``continuity of the
relation'' but with no reference to exclusivity). Nor is the concept of
exclusivity part of the common understanding of the word ``permanent.''
\39\ In a similar vein to the Department's analysis of the concept of
initiative, the Department believes analysis of exclusivity as part of
the permanence factor dilutes the significance of actual permanence
within that factor, blurs the lines between the economic reality
factors, and creates confusion by incorporating a concept that is
distinct from permanence.
---------------------------------------------------------------------------
\38\ In addition, as also noted in the NPRM, the opportunity
factor considers whether a worker's decisions to work for others
affects profits or losses. See, e.g., Freund, 185 F. App'x at 783
(affirming the district court's finding that the ``looseness of the
relationship between Hi-Tech and Freund permitted him great ability
to profit,'' in part, because ``Freund could have accepted
installation jobs from other companies.''). The Department does not
believe this consideration overlaps with the control factor. While
the control factor concerns the ability to work for others, the
opportunity factor concerns the effects of doing so.
\39\ See Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/permanent (defining permanent as ``continuing
or enduring without fundamental or marked change''); see also Oxford
American Dictionary 1980 (defining permanent as ``lasting or meant
to last indefinitely''); Merriam-Webster Pocket Dictionary 1947
(defining permanent as ``Lasting; enduring'').
---------------------------------------------------------------------------
Because the worker's ability to work for others is already analyzed
as part of the control factor, proposed Sec. 795.105(d)(2)(ii)
articulated the permanence factor without referencing the exclusivity
of the relationship between the worker and potential employer, and the
Department retains the same language in the final rule.
Commenters also requested that the Department clarify that long-
term relationships that are based on the workers' choice to continue
working for the same business rather than the potential employer's
requirements should not indicate employee status under this factor. NRF
commented that an independent contractor may choose to focus on a
particular client for reasons of the contractor's own rather than the
client's requirements, suggesting that the worker's choice does not
indicate employee status. The Department does not believe that further
explanation in the regulatory text is necessary, though it agrees that
a long-term relationship may not always indicate an employee
relationship. This factor is not always probative to the analysis, and
the scenarios described by the commenters may be situations where the
length of the relationship is not a useful indicator. However,
explicitly stating that a relationship is not permanent whenever the
worker chooses for it to be long-term is not accurate. After all, every
employee to some extent chooses whether to continue working for their
employer, and the FLSA's definition of ``employ'' includes to passively
``suffer or permit to work.'' 29 U.S.C. 203(g). A long-term
relationship is always the result of choices by both the potential
employer and the worker, but it is sometimes a helpful indicator of
employee status.
Edward Tuddenham urged the Department to give examples
relationships that may or may not be viewed as permanent, such as a
contract that is repeatedly renewed or an industry that is generally
itinerant. Although the Department has added one example regarding this
factor to new Sec. 795.115 to help illustrate how the factor is to be
considered, the Department does not believe it is possible to address
all of the possible working relationships and contractual arrangements
in a useful fashion. Certain general principles should inform any
analysis of work relationships. The Department reiterates that it is
not contractual formalities that are relevant to the inquiry, but
economic reality. A potential employer's attempts to use contractual
technicalities to label a relationship as temporary even though it is
indefinite in reality should not affect whether this factor indicates
employee or independent contractor status. Again, this factor will not
always be probative, and, for example, in certain industries where
employees are often employed for short periods, a short term of
employment would not indicate independent contractor status.
SWCCA pointed out that a recent WHD opinion letter included
language stating that ``the existence of a long-term working
relationship may indirectly indicate permanence.'' WHD Opinion Letter
FLSA 2019-06 (April 29, 2019). The Alliance requested that this
language be added to Sec. 795.105(d)(2)(ii). Though the quoted
language and the case law from which it is drawn remain useful guidance
for employers, the Department does not believe it is necessary to add
this language to the regulation, which already indicates that a long-
term relationship points toward an employment relationship.
Accordingly, the Department finalizes Sec. 795.105(d)(2)(ii) as
proposed.
5. The ``Integrated Unit'' Factor
The final additional guidepost factor, described in Sec.
795.105(d)(2)(iii), is whether the work is part of an integrated unit
of production. The Department proposed that this factor would weigh in
favor of the individual being an employee to the extent his or her work
is a component of the potential employer's integrated production
process for a good or service. The proposed regulatory text further
explained that this factor would weigh in favor of an individual being
an independent contractor to the extent his or her work is segregable
from the potential employer's production process. The Department
proposed to clarify that this factor is different from the concept of
the importance or centrality of the individual's work to the potential
employer's business.
As noted in the NPRM, the Department and courts outside of the
Fifth Circuit have typically articulated the sixth factor of the
economic reality test as ``the extent to which services rendered are an
integral part of the [potential employer's] business.'' WHD Fact Sheet
#13. Under this articulation, the ``integral part'' factor considers
``the importance of the services rendered to the company's business.''
McFeeley, 825 F.3d at 244. In line with this thinking, courts generally
state that this factor favors employee status if the work performed is
so important that it is central to or at ``[t]he heart of [the
potential employer's] business.'' Werner v. Bell Family Med. Ctr.,
Inc., 529 F. App'x 541, 545 (6th Cir. 2013); see also Baker, 137 F.3d
at 1443 (``[R]ig welders' work is an important, and indeed integral,
component of oil and gas pipeline construction work.''); Lauritzen, 835
F.2d at 1537-38 (``[P]icking the pickles is a necessary and integral
part of the pickle business[.]''); DialAmerica, 757 F.2d at 1385
(``[W]orkers are more likely to be `employees' under the FLSA if they
perform the primary work of the alleged employer.'').
The Department explained in the NPRM that it is concerned that this
focus on importance or centrality departs from the Supreme Court's
original articulation of the economic reality test, has limited
probative value regarding the ultimate question of economic dependence,
and may be misleading in some instances. As such, the Department
proposed that Sec. 795.105(d)(2)(iii) would clarify that the
``integral part'' factor should instead consider ``whether the work is
part of an integrated unit of production,'' which aligns with the
Supreme Court's analysis in Rutherford Food, 331 U.S. at 729.
Many commenters representing workers urged the Department to retain
the ``integral part'' factor used by courts as part of the economic
realities test, rather than replacing it with the ``integrated unit''
factor articulated in the proposed rule. This ``integral part'' factor
would consider the importance or centrality of the work performed to
the purported employer's business. In
[[Page 1194]]
particular, several commenters, including United Food and Commercial
Workers, Senator Patty Murray, and the State AGs contended that
removing the ``integral'' factor would be contrary to established
circuit court precedent. The UFCW asserted that ``[w]hether a worker's
service is an integral part of the company's business may not be a
relevant factor in all situations, but it may be in some and some
courts have found value in analyzing this fact.'' It commented that if
the Department stated that integrality is not relevant to the economic
realities test, the Department's proposed rule would unduly limit the
inquiry. One commenter, the Greenlining Institute, commented that
eliminating an ``integral part'' factor disfavors workers ``performing
physical tasks instead of stereotypically `intellectual' pursuits,''
who are disproportionately racial or ethnic minorities.
Many commenters agreed with the Department's proposal to eliminate
the ``integral part'' factor or any similar factor focused on the
importance of the work. The U.S. Chamber of Commerce, for example,
commented, ``In today's economy, independent workers provide services
in all aspects of the economy and all aspects of individual businesses,
including core and non-core functions, as well as in the same or
different lines of business.'' The Society for Human Resource
Management similarly commented that the ``analysis concerning the
`integrated unit' factor should not focus on the `importance of
services' provided.''
Though circuit courts have applied an ``integral part'' factor, it
was not one of the factors analyzed by the Supreme Court in Rutherford
Food. Rather, the Court considered whether the worker was part of an
``integrated unit of production,'' 331 U.S. at 729, as this final rule
does. The Department believes that circuit courts--and even the
Department itself--have deviated from the Supreme Court's guidance and,
in doing so, have introduced an ``integral part'' factor that can be
misleading. As explained in the NPRM, the ``integral part'' factor was
not one of the distinct factors identified in Silk as being ``important
for decision.'' 331 U.S. at 716. The ``integrated unit'' factor instead
derives from Rutherford Food, where the Supreme Court observed that the
work at issue was ``part of an integrated unit of production'' in the
potential employer's business and concluded that workers were employees
in part because they ``work[ed] alongside admitted employees of the
plant operator at their tasks.'' 331 U.S. at 729. As the NPRM
explained, the Department began using the ``integral part'' factor in
subregulatory guidance in the 1950s. See WHD Opinion Letter (Aug. 13,
1954); WHD Opinion Letter (Feb. 8, 1956).\40\ And circuit courts in the
1980s began referring to it as the ``integral part'' factor and
analyzing it in terms of the ``importance'' of the work to the
potential employer. See, e.g., Lauritzen, 835 F.2d 1529, 1534-35;
DialAmerica Mktg., 757 F.2d at 1386.
---------------------------------------------------------------------------
\40\ A 2002 opinion letter interpreted the factor to focus on
the importance of the work, explaining that ``[w]hen workers play a
crucial role in a company's operation, they are more likely to be
employees than independent contractors.'' WHD Opinion Letter, 2002
WL 32406602, at *3 (Sept. 5, 2002). However, the Department's most
recent opinion letter on this subject characterized the factor as
``the extent of the integration of the worker's services into the
potential employer's business.'' WHD Opinion Letter FLSA2019-6 at 6
(emphasis added).
---------------------------------------------------------------------------
The NPRM explained the reasons that the Department now believes the
Supreme Court's original ``integrated unit'' formulation is more
probative than the ``integral part'' (meaning ``important'') approach.
As Judge Easterbrook pointed out in his concurrence in Lauritzen,
``[e]verything the employer does is `integral' to its business--why
else do it?'' Lauritzen, 835 F.2d at 1541 (Easterbrook J., concurring);
see also Zheng, 355 F.3d at 73 (cautioning in the joint employer
context that interpreting the factor to focus on importance ``could be
said to be implicated in every subcontracting relationship, because all
subcontractors perform a function that a general contractor deems
`integral' to a product or a service'').
The Department's review of appellate cases since 1975 involving
independent contractor disputes under the FLSA supports this criticism.
The Department generally found that, in cases where the ``integral
part'' factor was addressed, the factor aligned with the ultimate
classification when the ultimate classification was employee.\41\
However, courts' analyses of the ``integral part'' factor--again, if it
was analyzed at all \42\--were misaligned more frequently than they
were aligned with the ultimate classification when the ultimate
classification was independent contractor status. Compare Iontchev, 685
F. App'x at 551; Meyer, 607 F. App'x at 123; Freund, 185 F. App'x at
784-85; Mid-Atl. Installation, 16 F. App'x at 107-08; Brandel, 736 F.2d
at 1120, with Werner, 529 F. App'x at 545-46; DialAmerica Mktg., 757
F.2d at 1387. This higher rate of misalignment is precisely what Judge
Easterbrook's criticism would have predicted: If ``[e]verything the
employer does is `integral,' '' that factor would point towards
employee status for workers who are employees, but also for workers who
are independent contractors.
---------------------------------------------------------------------------
\41\ The only appellate case the Department found of
misalignment in this scenario is Paragon Contractors, 884 F.3d at
1237-38.
\42\ As explained elsewhere, the Fifth Circuit does not usually
consider the ``integral part'' factor in its analysis.
---------------------------------------------------------------------------
The NPRM further explained that ``the relative importance of the
worker's task to the business of the potential employer says nothing
about whether the worker economically depends on that business for
work.'' 85 FR 60617. While some courts assumed that business may desire
to exert more control over workers who provide important services,
there is no need to use importance as an indirect proxy for control
because control is already a separate factor. Id. (citing Dataphase,
781 F. Supp. at 735, and Barnard Const., 860 F. Supp. at 777, aff'd sub
nom. Baker v. Flint Eng'g & Const. Co., 137 F.3d 1436 (10th Cir.
1998)). And this assumption may not always be valid. Modern
manufacturers, for example, commonly assemble critical parts and
components that are produced and delivered by wholly separate companies
through contract rather than employment arrangements. And low
transaction costs in many of today's industries make it cost-effective
for firms to hire contractors to perform routine tasks.
The Department considered salvaging the ``integral part'' factor by
deemphasizing ``integral'' and emphasizing ``part.'' Instead of
focusing on whether the work is important ``to'' a potential employer's
business, the factor would focus on whether the work is an important
``part'' of that business. This approach would more closely align with
how ``integral part'' was used by the Supreme Court in Silk, which
asked whether workers were ``an integral part of [defendants']
businesses,'' as opposed to operating their own businesses. 331 U.S.
716. But as the NPRM noted, the Silk Court framed that question as the
ultimate inquiry, and not as a factor that is useful to guide the
inquiry. See 85 FR 60616 n.41. Asking whether a worker is part of--
integral or otherwise--a potential employer's business is not useful
because it simply restates the ultimate inquiry: If a worker were part
of the potential employer's business, then he or she could not be in
business for him- or herself and therefore would be economically
dependent. As an added complication, new technologies have led to the
emergence of platform companies that connect consumers directly with
service providers, and it is often difficult to determine whether those
platform companies are in
[[Page 1195]]
business of supporting service providers' own businesses or are in the
business of hiring service providers to serve customers. Compare Razak,
951 F.3d at 147 n.12 (``We also believe [there] could be a disputed
material fact'' whether Uber is ``a technology company that supports
drivers' transportation businesses, and not a transportation company
that employs drivers.''), with O'Connor v. Uber Techs., Inc., 82 F.
Supp. 3d 1133, 1153 (N.D. Cal. 2015) (``it is clear that Uber is most
certainly a transportation company''). For the reasons explained, the
final rule retains the ``integrated unit'' approach.
The Department does not share the Greenlining Institute's concern
that the final rule's ``integrated unit'' factor would result in
workers who perform ``physical tasks'' being classified as independent
contractors more than workers who perform white collar,
``intellectual'' work. Meat deboning is a physical task, but deboners
were found to be part of an integrated unit of production in Rutherford
Food. 331 U.S. at 729. On the other hand, freelance writers perform a
white collar task, but they generally are not integrated into a
publication's production process because they are not involved in, for
instance, assigning, editing, or determining the layout of articles.
Both white collar and physical labor jobs may be part of an integrated
unit of production. The Department has added one example in new Sec.
795.115 showing that a newspaper editor--who performs primarily white
collar tasks--may be part of an integrated unit of production.
Another commenter, the Arkansas Trucking Association, agreed that
the ``integrated unit'' factor was superior to ``integral part,'' but
suggested an alternative formulation based on whether the business's
activities would cease or be severely impacted by the absence of the
worker. However, this approach has the same limitations as the
approaches that emphasize ``importance.'' Almost every worker performs
work that is in some sense important to the business that has hired the
worker; otherwise, the business would not hire the worker. Moreover, as
explained in the NPRM, easily-replaced workers are often more dependent
on a particular business for work precisely because they are so easily
replaced. Focusing on the impact of a worker's absence turns the
economic dependence analysis on its head by essentially looking at the
business's dependence on the worker. As a result, it sends misleading
signals about employee status.
Another group of commenters suggested that the factor should
include an explicit consideration of the location of the work
performed. The U.S. Chamber of Commerce, for example, suggested that
the factor should consider whether the worker is performing work ``the
majority of which is performed off the physical premises of the
business.''
Whether the work is performed on the business's physical premises
may be a consideration under the ``integrated unit'' factor, as it may
indicate the extent to which the worker is part of an integrated unit
of production. However, the Department does not believe it is necessary
to include this consideration as an explicit part of the ``integrated
unit'' factor. Many businesses have no physical location but
nevertheless employ employees. In other instances, an employee may be
part of an integrated unit despite performing work at a different
location than other employees. See, e.g., Goldberg v. Whitaker House
Cooperative, Inc., 366 US 28, 32 (1961) (holding that workers who
produced copies of a sample product at home were employees). Some
workers perform work on a business's physical premises but perform
discrete, segregable services unrelated to any integrated process or
unified purpose. Thus, although the location of the work may be a fact
that is relevant to the ``integrated unit'' factor, it is not so
probative that it would be useful to elevate it above other facts that
may be more relevant in a particular case.
Several commenters asked that the Department clarify that the
relevant inquiry is whether the worker is part of an integrated unit of
production that is part of the potential employer's own processes
rather than part of a broader supply chain. NRF suggested clarifying
language that would ``expressly state that merely serving as a link in
the chain of a company's provision of goods or services'' does not
indicate employee status. It suggested that such language would make it
clear that this factor does not indicate employee status where a worker
is merely one, segregable step in the process of delivering a product
to a consumer.
The Department does not believe such a clarification is needed,
because the text of the final rule states that this factor points
toward employee status only when the worker performs ``a component of
the potential employer's integrated production process.'' The relevant
process is the potential employer's process, not the broader supply
chain. A worker who performs a segregable step in the process of
delivering a product but who is not integrated into the employer's own
production process is not part of an integrated unit of production.
Multiple businesses, including independent contractors, may perform
steps in the same supply chain.
Some commenters suggested that the description of this factor in
the preamble should define the scope of the ``unified purpose'' toward
which the potential employer's processes work. WPI requested that the
Department clarify that the ``unified purpose'' cannot be broader than
the potential employer's ``core or primary business purpose.'' On the
other hand, Farmworker Justice urged a broad definition of ``unified
purpose'' to prevent gamesmanship by which an employer may attempt to
artificially separate its production process into separate units in
order to claim that they are segregable rather than parts of a unified
whole. It cited a hypothetical tomato farmer who could label its tomato
harvesters as a separate unit rather than as part of the process of
growing tomatoes.
The Department rejects these suggestions, because the final rule's
rejection of the ``integral part'' factor and the question of
``importance'' or ``centrality'' makes clear that the relevant facts
are the integration of the worker into the potential employer's
production processes, rather than the nature of the work performed. As
explained above, identifying the ``core or primary business purpose''
is not a useful inquiry in the modern economy. Falling transaction
costs and other factors described above allow businesses to hire
independent contractors to carry out tasks that are part of the
businesses' core functions, while keeping those functions separate from
its own production processes. At the same time, seemingly peripheral
functions may be integrated into an employer's own processes,
indicating employee status. What matters is the extent of such
integration rather than the importance or centrality of the functions
performed, which the Department does not find to be a useful indicator
of employee or independent contractor status.
As noted in the NPRM, the Department recognizes that it may be
difficult to determine the extent to which a worker is part of an
integrated unit of production. For this reason, this factor is not
always useful to the economic realities inquiry, and it is less likely
than the core factors to be determinative. For example, this factor
would not indicate independent contractor status for Farmworker
Justice's hypothetical tomato harvesters
[[Page 1196]]
merely because the farmer artificially labeled them a separate unit. As
has been the case since the concepts underlying the economic realities
test was articulated, the test does not depend on labels assigned to
workers. Rutherford Food, 331 U.S. at 729 (``Where the work done, in
its essence, follows the usual path of an employee, putting on an
`independent contractor' label does not take the worker from the
protection of the Act.''). The factor may indicate either employee or
independent contractor status based on the extent to which the
harvesters are integrated into the farmer's production process as a
matter of fact, but most likely the ultimate determination would depend
more on other factors, such as control and opportunity for profit or
loss.
WPI also suggested that the Department clarify language in the
preamble to the proposed rule stating that employee status would be
indicated for a worker who performs work closely alongside conceded
employees. WPI expressed concern that this language could wrongly imply
that a worker performing different tasks than the conceded employees
but in close proximity to them would indicate employee status. The
Department does not believe such clarification is necessary, because
the preamble stated that employee status is indicated where the worker
``performs identical or closely interrelated tasks as those
employees.'' In other words, WPI is correct that if a worker works
physically close to conceded employees but performs unrelated tasks,
that fact alone would not indicate employee status.
Finally, many commenters requested that the Department add examples
explaining how this factor would apply to specific industries,
including trucking, construction, financial advising, and personal
shopping. Others wanted examples to address certain types of
contractual arrangements, such as multi-sided platforms, franchisees,
and buy/sell agreements. In response to these requests, the Department
notes that the facts that inform the ``integrated unit'' factor are too
circumstance-specific to apply blanket statements to entire industries
or broad types of employment arrangements. Any particular task that is
common in a particular industry may be performed in one instance by a
worker who is part of an integrated unit of production or by a
segregable unit. In other words, this factor may point in a different
direction for workers who perform similar duties in the same industry
but who are more or less integrated into their potential employer's
processes based on the potential employer's business model. Moreover,
contractual formalities such as a buy/sell agreement or contracts
formed using multi-sided platforms could memorialize either employment
or independent contractor arrangements; the determination would not
depend on the labels assigned but on the various economic realities
factors, including the worker's integration into the potential
employer's production process.
That said, as explained elsewhere in this preamble, although the
Department cannot address all industries or all possible factual
scenarios, it does appreciate that examples are helpful to
understanding how each factor operates. The new regulatory provision
added in this final rule to further illustrate several factors, Sec.
795.115, includes two examples specifically meant to demonstrate how
facts about whether a worker is part of an integrated unit of
production should be considered as part of the employment relationship
analysis.
For the reasons explained, the Department finalizes Sec.
795.105(d)(2)(iii) as proposed.
6. Additional Unlisted Factors
The National Restaurant Association stated that facts and factors
not listed in Sec. 795.105(d) may be relevant to the question of
economic dependence even though they would not be as probative as the
two core factors. This commenter expressed concern that future courts
may ignore these unlisted but potentially relevant considerations in
response to this rulemaking and requested that the Department revise
the regulatory text to explicitly recognize that unlisted factors may
be relevant.
While proposed Sec. 795.105(c) already states that the five
factors listed in Sec. 795.105(d) are ``not exhaustive,'' \43\ the
Department agrees that it may be helpful to make this point more
explicit. The Department is thus adding Sec. 795.105(d)(2)(iv), which
states that additional factors not listed in Sec. 795.105(d) may be
relevant to determine whether an individual is an employee or an
independent contractor under the FLSA. As with any fact or factor, such
additional factors are relevant only to the extent that they help
answer whether the individual is in business for him- or herself, as
opposed to being economically dependent on an employer for work.
Factors that do not bear on this question, such as whether an
individual has alternate sources of wealth or income and the size of
the hiring company, are not relevant. These unlisted factors are less
probative than the core factors listed in Sec. 795.105(d)(1), while
their precise weight depends on the circumstances of each case and is
unlikely to outweigh either of the core factors .
---------------------------------------------------------------------------
\43\ See Silk, 331 U.S. at 716 (``No one [factor] is controlling
nor is the list complete.'').
---------------------------------------------------------------------------
E. Focusing the Economic Reality Test on Two Core Factors
Proposed Sec. 795.105(c) was intended to improve the certainty and
predictability of the economic reality test by focusing the test on two
core factors: (1) The nature and degree of the worker's control over
the work; and (2) the worker's opportunity for profit or loss. This
focus is an important corollary of the sharpened definition of economic
dependence to include individuals who are dependent on a potential
employer for work and to exclude individuals who are in business for
themselves. The NPRM explained that these core factors, listed in
proposed Sec. 795.105(d)(1), drive at the heart of what is meant by
being in business for oneself: Such a person typically controls the
work performed in his or her business and enjoys a meaningful
opportunity for profit or risk of loss through personal initiative or
investment. The other economic reality factors--skill, permanence, and
integration--are also relevant as to whether an individual is in
business for him- or herself. But they are less probative to that
determination. For instance, it is not uncommon for comparatively high
skilled individuals--such as software engineers--to work as employees,
and for comparatively low skill individuals--such as drivers--to be in
business for themselves. See, e.g., Saleem, 854 F 3d at 140; Express
Sixty-Minutes Delivery, 161 F.3d at 306. In contrast, ``[i]n ordinary
circumstances, an individual `who is in business for him- or herself'
will have meaningful control over the work performed and a meaningful
opportunity to profit (or risk loss).'' 85 FR 60618. As such, ``it is
not possible to properly assess whether workers are in business for
themselves or are instead dependent on another's business without
analyzing their control over the work and profit or loss
opportunities.'' Id.
The NPRM further explained that focusing on the two core factors is
also supported by the Department's review of case law. The NPRM
presented a remarkably consistent trend based on the Department's
review of the results of appellate decisions since 1975 applying the
economic reality test. Among those cases, the classification favored by
the control factor aligned with the worker's
[[Page 1197]]
ultimate classification in all except a handful where the opportunity
factor pointed in the opposite direction. And the classification
favored by the opportunity factor aligned with the ultimate
classification in every case.\44\ These two findings imply that
whenever the control and opportunity factors both pointed to the same
classification--whether employee or independent contractor--that was
the court's conclusion regarding the worker's ultimate
classification.\45\ See 85 FR 60619. In other words, the Department did
not uncover a single court decision where the combined weight of the
control and opportunity factors was outweighed by the other economic
reality factors. In contrast, the classification supported by other
economic reality factors was occasionally misaligned with the worker's
ultimate classification, particularly when the control factor, the
opportunity factor, or both, favored a different classification. See
id. at 60621.
---------------------------------------------------------------------------
\44\ This is not to imply that the opportunity factor
necessarily aligns with the ultimate classification, but rather that
the Department is not aware of an appellate case in which
misalignment occurred.
\45\ The only cases in which an appellate court's ruling on a
worker's classification was contrary to the court's conclusions as
to the control factor were cases in which the opportunity factor
pointed in the opposite direction. See 85 FR 60619 (citing Paragon
Contractors, 884 F.3d at 1235-36, and Cromwell, 348 F. App'x at 61).
---------------------------------------------------------------------------
The NPRM thus provided that, given their greater probative value,
if both proposed core factors point towards the same classification--
whether employee or independent contractor--there is a substantial
likelihood that is the individual's correct classification. This is
because it is quite unlikely for the other, less probative factors to
outweigh the combined weight of the core factors. In other words, where
the two core factors align, the bulk of the analysis is complete, and
anyone who is assessing the classification may approach the remaining
factors and circumstances with skepticism, as only in unusual cases
would such considerations outweigh the combination of the two core
factors.
Numerous commenters welcomed proposed Sec. 795.105(c)'s sharpening
of the economic reality test by recognizing the two core factors'
greater probative value on whether an individual is in business for
him- or herself. For instance, the U.S. Chamber of Commerce stated that
``[t]he Department's straightforward focus on two core factors presents
a concise interpretation of `economic dependency' grounded in the Act's
statutory definition of `employ' and `employer,' consistent with
Supreme Court precedent, and well-reasoned courts of appeals'
decisions.'' The American Bakers Association (ABA) likewise ``supports
the Department's position that the two most probative `core' factors
for determining independent contractor status under the FLSA are the
degree and nature of an individual's control over their work, and the
opportunity for profit (or loss).'' See also, e.g., ATA; CPIE; National
Restaurant Association; SHRM. Even one commenter who did not generally
support this rulemaking ``agreed with the Department that the two main
factors, control and opportunity for profit or loss, should be given
greater weight.'' Owner-Operator Independent Driver Association
(OOIDA).
Many commenters objected to focusing on the two core factors.
Broadly speaking, they raised three interrelated concerns. First,
commenters contended that elevating the two core factors is
inconsistent with the economic reality test, which they asserted
requires that factors be either unweighted or weighted equally. See,
e.g., NELP (objecting to ``elevating two narrow `core' factors'');
SWACCA; Commissioner Slaughter of the Federal Trade Commission (FTC).
Second, commenters contended that focusing on two core factors would
narrow the scope of who is an employee (as opposed to an independent
contractor) under the FLSA. See, e.g., NELP (``The NPRM narrows the
FLSA test for employee coverage[.]''); State AGs (``The Proposed Rule's
interpretation of [employment under] the FLSA is unlawfully narrow.'');
Appleseed Center (``The Department of Labor is trying to impermissibly
narrow this definition''); NCFW (objecting to ``agency's proposed
attempt to narrow the definition of employee''). Third, commenters
asserted that focusing on two core factors would impermissibly restrict
the set of circumstances that may be considered when assessing whether
a worker is an employee or independent contractor under the FLSA. TRLA
(``proposed reformulation would eliminate . . . any consideration of
[the skill and permanence] factors''); NELA (objecting to ``a narrow,
control-dominated inquiry''); State AGs (objecting to proposed rule
because it ``narrows several areas of inquiry.'').\46\ The Department
responds to each of the above concerns below, and then addresses other
requests relating to the focus on the two factors.
---------------------------------------------------------------------------
\46\ There are two distinct concepts within the economic reality
test--and any test for employment status--that can be broad or
narrow. The first concept is the test's standard for employment,
which is economic dependence. See Bartels, 332 U.S. at 130. The
second concept is the set of circumstances that may be considered as
part of the test, which is the ``circumstances of the whole
activity.'' See Rutherford Food, 331 U.S at 730. The breadth of
these two concepts are not always logically related. For instance,
the ABC test states that a worker is an employee unless the hiring
party can establish that three criteria are met, see, e.g., Dynamex,
416 P.3d at 35; thus, the ABC test considers a relatively narrow set
of circumstances while imposing a broad standard for employment.
While most commenters that objected to the narrowing of the economic
reality test did not present the standard of employment and
circumstance that may be considered as separate concepts, the
Department addresses them separately.
---------------------------------------------------------------------------
1. Focusing on Two Core Factors is Consistent With the Economic Reality
Test
Many commenters contended that emphasizing core factors over others
would violate a requirement that economic reality factors be unweighted
or weighted equally. According to SWACCA, ``[t]he proposed weighted
rule is a novel concept and a departure from existing caselaw.'' See
also, e.g., NELA (objecting to ``emphasizing certain factors over what
should be the `ultimate inquiry' ''). FTC Commissioner Slaughter
likewise objected that ``[t]he Proposal takes the Supreme Court's five
factor test, where all five factors are given equal weight, and narrows
it down to focus on only two [core] factors.'' See also Appleseed
Center (``[A]ll are given equal weight.''); Senator Patty Murray
(suggesting that ``DOL afford [factors] equal weight''). NELP appeared
to agree with the Department that the economic reality test may focus
on certain factors over others, but asserted that ``the factor of
integration into the business of another should be weighed heavily,''
rather than the proposed rule's two core factors. Several commenters
further relied on an age discrimination case to contend that the
economic reality test ``cannot be rigidly applied'' and that ``[i]t is
impossible to assign to each of these factors a specific and invariably
applied weight.'' NELP (quoting Hickley v. Arkla Indus., Inc., 699 F.2d
748, 752 (5th Cir. 1983)); see also Michigan Regional Council of
Carpenters (MRCC) (same).
The Department disagrees that the economic reality test requires
factors to be unweighted or equally weighted. Each time the Department
or a court applies the test, it must balance potentially competing
factors based on their respective probative value to the ultimate
inquiry of economic dependence. In the very case that announced the
economic reality factors, the Supreme Court listed five factors that
are ``important for decision'' but
[[Page 1198]]
did not treat them equally. Silk, 331 U.S. at 716. It instead
emphasized the most probative factors, while de-emphasizing less
probative ones in that case. The Court focused on the fact that coal
unloaders ``had no opportunity to gain or lose'' to conclude they were
employees under the SSA, while explaining the fact ``[t]hat the
unloaders did not work regularly was not significant.'' Id. at 717-18.
The Court further focused on ``the control exercised [and] the
opportunity for profit from sound management'' to conclude that truck
drivers were independent contractors, without discussing any of the
other economic reality factors. Id. at 719. Similarly, the Court in
Whitaker House concluded that workers at issue in that case were
employees based primary on considerations relating to control (e.g.,
the workers were ``regimented under one organization, manufacturing
what the organization desires'') and opportunity for profit (e.g., the
workers were ``receiving the [piece rate] compensation the organization
dictates'' rather than ``selling their products on the market for
whatever price they can command''). 366 U.S. at 32-33.
As discussed in the NPRM, courts of appeals also emphasized facts
and factors that are more probative of the economic dependence inquiry.
See 85 FR 60620. In Saleem, the Second Circuit focused on facts
relating to drivers' control over their work and their opportunity for
profit or loss based on initiative or investment to conclude that they
were independent contractors.\47\ 854 F.3d at 138-39; see also
Agerbrink v. Model Service LLC, 787 F. App'x 22, 25-27 (2d Cir. 2019)
(denying summary judgement based solely on disputed facts regarding
plaintiff's ``control over her work schedule, whether she had the
ability to negotiate her pay rate, and, relatedly, her ability to
accept or decline work''). The Third Circuit in Razak v. Uber
Technologies took a similar approach by emphasizing disputed facts
regarding ``whether Uber exercises control over drivers'' ' and had
``the opportunity for profit or loss depending on managerial skill'' to
deny summary judgment. 951 F.3d at 145-47.\48\ And the Eight Circuit
recently emphasized a process server's ability to determine his own
profits by controlling hours, which assignments to take, and for which
company to work, to affirm a jury verdict that he was an independent
contractor. See Karlson, 860 F.3d at 1095.
---------------------------------------------------------------------------
\47\ In particular, the Saleem court focused on: drivers'
``considerable discretion in choosing the nature and parameters of
their relationship with the defendant,'' ``significant control over
essential determinants of profits in [the] business,'' how they
``invested heavily in their driving businesses,'' and the ``ability
to choose how much work to perform.'' 854 F.3d at 137-49.
\48\ The Razak decision also briefly addressed other factors,
including a footnote on the ``integral'' factor and a discussion
that was nominally about the permanence factor but actually
concerned control: ``On one hand, Uber can take drivers offline, and
on the other hand, Plaintiffs can drive whenever they choose to turn
on the Driver App, with no minimum amount of driving time
required.'' 951 F.3d at 147 n.12.
---------------------------------------------------------------------------
Courts have repeatedly warned against the ``mechanical
application'' of the economic reality factors when determining whether
an individual is an employee or independent contractor. See, e.g.,
Saleem, 854 F.3d at 139; Superior Care, 840 F.2d at 1059. Rather, the
factors should be analyzed with the aim of answering the ultimate
inquiry under the FLSA: ``Whether an individual is `in business for
himself' or is `dependent upon finding employment in the business of
others.' '' Scantland, 721 F.3d at 1312 (quoting Mednick, 508 F.2d at
301-02). Commenters who object to focusing on the two core factors do
not dispute this principle, and some affirmatively support it. For
instance, NELA and the State AGs both stated that economic reality
``factors `are aids--tools to be used to gauge the degree of dependence
of alleged employees on the business with which they are connected' ''
(quoting Pilgrim Equip., 527 F.2d at 1311). NELA nonetheless believed
that it would be inappropriate to ``emphasiz[e] certain factors over
what should be the `ultimate inquiry': The worker's economic dependence
on the putative employer.'' Emphasizing certain factors, however, would
dilute the ultimate inquiry of economic dependence only if those
factors were less probative of economic dependence than others. In
contrast, emphasizing factors that are more probative would not dilute
but rather focus the analysis on the ultimate inquiry under the FLSA.
If NELA and the State AGs are correct that the economic reality factors
must be ``used to gauge the degree of dependence,'' then focusing on
factors that are more probative measures of economic dependence is not
only permitted but preferred.
The Department's review of case law indicates that courts of
appeals have effectively been affording the control and opportunity
factors greater weight, even if they did not always explicitly
acknowledge doing so.\49\ See 85 FR 60619. Among the appellate
decisions since 1975 that the Department reviewed, whenever the control
factor and the opportunity factor both pointed towards the same
classification--whether employee or independent contractor--that was
the worker's ultimate classification. Put another way: In those cases
where the control factor and opportunity factor aligned, had the courts
hypothetically limited their analysis to just those two factors, it
appears to the Department that the overall results would have been the
same. One commenter attempted to dispute this finding. TRLA asserted
that, in the following four cases, farmworkers who were found to be
employees ``might be reclassified as independent contractors based on
the NPRM's two core factors:'' Driscoll, 603 F.2d 748; Lauritzen, 835
F.2d 1529; Perez v. Howes, 7 F. Supp. 3d 715 (W.D. Mich. 2014); and
Cavazos v. Foster, 822 F. Supp. 438 (W.D. Mich. 1993). However, the
court in each of these cases actually concluded that the control and
opportunity factors both favored employee classification,\50\ and thus
the farmworkers would have been found to be employees even if those
courts had hypothetically based is decision solely on the core factors.
These cases therefore reinforce the Department's conclusion that the
control and opportunity factors have been consistently afforded
significant weight in the economic dependence inquiry.
---------------------------------------------------------------------------
\49\ Some courts have explicitly acknowledged that facts related
to the control factor were more probative than facts related to
other factors. For instance, the court in Saleem stated that
``whatever `the permanence or duration' of Plaintiffs' affiliation
with Defendants, both its length and the `regularity' of work was
entirely of Plaintiffs' choosing.'' 854 F. 3d at 147 (citation
omitted). When discussing ``the use of special skills,'' the court
in Selker Brothers similarly explained that, ``[g]iven the degree of
control exercised by Selker over the day-to-day operations of the
stations, this criterion cannot be said to support a conclusion of
independent contractor status.'' 949 F.2d at 1295.
\50\ Driscoll, 603 F.2d at 755 (``The appellants' affidavits,
which must be taken as true for summary judgment purposes, plainly
disclose that [defendant] possesses substantial control over
important aspects of the appellants' work''); id. (``The appellants'
opportunity for profit or loss appears to depend more upon the
managerial skills of [defendant]''); Lauritzen, 835 F.2d at 1536
(``The defendants exercise pervasive control over the operation as a
whole.''); id. (``The Sixth Circuit [in a prior case] found that the
migrant workers had the opportunity to increase their profits
through the management of their pickle fields. . . .We do not
agree.''); Howes 7 F. Supp. 3d at 726, aff'd sub nom. Perez v. D.
Howes LLC, 790 F.3d 681 (6th Cir. 2015); (``Accordingly, [the
control] factor weighs in favor of a finding that the workers were
employees.''); id. (``[W]orkers could simply increase their wages by
working longer, harder, and smarter--this does not constitute an
opportunity for profit.''); Cavazos, 822 F. Supp. at 442 (``Their
lack of control supports plaintiffs' claim that they are
employees.''); id. at 443 (noting that the work relationship ``does
not afford plaintiffs an opportunity for profits'').
---------------------------------------------------------------------------
The consistent empirical trend indicating that the control and
opportunity factors have been afforded
[[Page 1199]]
greater weight should be unsurprising given their greater probative
value. As the NPRM explained, those two factors ``strike at the core''
of what it means to be in business for oneself, 85 FR 60612, and
therefore they are more probative of the ultimate inquiry under the
FLSA: ``whether an individual is `in business for himself' or is
`dependent upon finding employment in the business of others.' ''
Scantland, 721 F.3d at 1312 (quoting Mednick, 508 F.2d at 301-02). No
commenters offered a persuasive counterargument to the commonsense
logic that, when determining whether an individual is in business for
him- or herself, the extent of the individual's control over his or her
work is more useful information than, for example, the skill required
for that work. Nor did any commenters effectively rebut that the extent
of an individual's ability to earn profits (or suffers losses) through
initiative or investment is more useful information than, for example,
how long that individual has worked for a particular company.
NELP appeared to agree with the Department that emphasis should be
given to factors that are most probative to the ultimate inquiry of
whether an individual is in business for him- or herself, but disagrees
as to what those factors should be. In particular, NELP asserted that
``the factor of integration into the business of another should be
weighed heavily and in fact is ultimately the test. If the work is
integrated this leads to the conclusion that the worker is not
independently running a business.'' \51\
---------------------------------------------------------------------------
\51\ According to NELP, this language is a quotation from AI
2015-1 that was withdrawn in 2017. But that withdrawn guidance does
not contain the quoted language.
---------------------------------------------------------------------------
NELP correctly defines the economic dependence inquiry as ``whether
a person is in business for themselves and therefore independent, or
works instead in the business of another and dependent on that business
for work.'' If a worker is economically dependent on an employer for
work, the worker is not in business for him- or herself. NELP then
defines the ``integration factor'' to mean the exact same thing: ``If
the work is integrated this leads to the conclusion that the worker is
not independently running a business.'' NELP is correct that, when
defined as such, ``the factor of integration . . . in fact is the
ultimate test,'' but that factor would not be helpful in ascertaining a
worker's employment status because it simply restates the question. The
Department, courts, and the regulated community would still have to
determine which factors to analyze to determine whether an individual
is in business for him- or herself. The Department therefore declines
to create and give greater weight to NELP's concept of the
``integration factor'' and continues to believe that the control and
opportunity factors are the most probative as to whether an individual
is in business for him- or herself as a matter of economic reality.
NELP and MRCC quoted dicta from an age-discrimination case that
``[i]t is impossible to assign to each of [the economic reality]
factors a specific and invariably applied weight.'' Hickley, 699 F.2d
at 752.\52\ This proposed rule, however, does not run afoul of
Hickley's dicta. As an initial matter, neither core factor individually
has ``a specific and invariably applied weight'' because the proposed
rule does not state that one necessarily outweighs the other. The
Department nonetheless recognizes that proposed Sec. 795.105(c)'
statement that ``each [core factor] is afforded greater weight in the
analysis than is any other factor'' may be overly rigid. For reasons
explained above, certain types of facts--i.e., those falling within the
control and opportunity factors--are more probative than others
regarding whether an individual is in business for him- or herself. But
that does not necessarily mean the control or opportunity factors are
entitle to greater weight in all cases. For example, it may be the case
that, after all the circumstances have been considered, a core factor
does not weigh very strongly towards a particular classification
because considerations within that factor point in different
directions. See Cromwell, 348 F. App'x at 61 (finding that ``defendants
here did not control the details of how the plaintiffs performed their
assign jobs'' but did have ``complete control over [their] schedule and
pay''). A core factor could even be at equipoise, in which case it
would not weigh at all in favor of a classification. See Johnson, 371
F. 3d at 730 (concluding that competing facts regarding plaintiffs'
opportunity for profit or loss meant that the ``jury could have viewed
this factor as not favoring either side''). In short, there is a subtle
but important distinction that was not fully reflected in the NPRM's
language between a factor's probative value as a general matter and its
specific weight in a particular case. Probative value refers to the
extent to which a factor encapsulates types of facts that illuminate
the ultimate inquiry of whether workers are in business for themselves,
as opposed to being dependent on an employer for work. The weight
assigned to a factor in a particular case refers to how strongly
specific facts within the factor, on balance, favors a particular
classification. Considerations within a core factor may have
significant probative value even though that factor, on balance, does
not weigh heavily towards a classification in a specific case. The
Department therefore revises Sec. 795.105(c) to more clearly
distinguish between a core factor's probative value as a general matter
and its' weight in a specific case and to clarify that the core
factors' greater probative value means that they typically (but not
necessarily) carry greater weight . Thus it should be clear that the
rule does not assign any factor a specific or invariable weight. In
contrast, the approach favored by some commenters, including the
Appleseed Center and Commission Slaughter, to give each factor ``equal
weight'' would ``assign to each of the factors a specific and
invariably applied weight.'' Hickley, 699 F.2d at 752.
---------------------------------------------------------------------------
\52\ The court in Hickley applied the economic reality test in
the context of the Age Discrimination in Employment Act of 1967, 29
U.S.C. 621-34, without opining whether that was the correct test
under the ADEA. 699 F.2d at 752 (``Finding . . . there was no
evidence . . . that Hickey was an employee under the more liberal
`economic realities' test used in FLSA cases, [but] express[ing] no
opinion on whether it or one of the tests used in Title VII cases
should ultimately be used to determine employee status in ADEA
cases.''). Hickley's ``specific and invariably applied weight''
dicta appears in one FLSA case, Parrish, 719 F.3d at 380, as a see
also parenthetical to support the proposition that economic reality
factors should not be applied mechanically.
---------------------------------------------------------------------------
At bottom, the final rule's focus on two core factors thus does not
depart from the economic reality test--it merely elucidates the
factors' respective probative values that have always existed but never
been explained. Cf. Lauritzen, 835 F.2d at 1539 (``Why keep [employers]
in the dark about the legal consequences of their deeds.''
(Easterbrook, J., concurring)). As explained in more detail below,
providing such clarification for the regulated community would not
narrow the scope of who is an FLSA employee as opposed to an
independent contractor. Nor would it narrow the circumstances that may
be considered under the economic reality test.
2. The Proposed Rule Would Not Narrow the Standard for FLSA Employment
A number of commenters argued that focusing the economic reality
test on the control and opportunity factors would narrow the standard
for employment under the FLSA. The FLSA defines ``employ'' as including
``to suffer or permit to work,'' 29 U.S.C. 203(g), and these commenters
argued this definition should be interpreted to provide broad coverage
in light of the Act's remedial
[[Page 1200]]
purpose. See, e.g., AFL-CIO; NELA; NELP; Senator Patty Murray; State
AGs. Most of these commenters argued that the proposed rule is
incompatible with the Act's broad definition of employment because
focusing on the control factor would effectively adopt the narrower
scope of employment under the common law control test. One commenter,
however, had a different view: UPS argued that the proposed rule would
adopt a narrower standard for employment by giving the control factor
too little weight.
Discussing the proposed rule's consistency with the FLSA's standard
for employment first requires an understanding of the Act's
definitions. Commenters point out that the Act defines ``employ'' as
including ``to suffer or permit to work,'' 29 U.S.C. 203(g), but the
Supreme Court has observed that, although broad, the Act's definitions
are not clear regarding the scope of relationships that are included.
Rutherford Food, 331 U.S. at 728 (``[T]here is in the [FLSA's text] no
definition that solves problems as to the limits of the employer-
employee relationship under the Act.''). Courts of appeals have
likewise found the definitions not to clearly indicate the precise
contours of FLSA employment. See, e.g., Solis v. Laurelbrook Sanitarium
& Sch., Inc., 642 F.3d 518, 522 (6th Cir. 2011); Steelman v. Hirsch,
473 F.3d 124, 128 (4th Cir. 2007).
As commenters also noted, the Supreme Court relied on the FLSA's
purpose and legislative history to interpret the ``suffer and permit''
language to encompass a more inclusive definition of employment than
that of the common law. Rutherford Food, 331 U.S. at 727 (affirming
that FLSA employment is not limited to the ``common law test of
control, as the act concerns itself with the correction of economic
evils through remedies which were unknown at common law''); see also
Darden, 503 U.S. at 326. The Supreme Court has ``consistently construed
the Act liberally in recognition that broad coverage is essential to
accomplish [its] goal,'' Tony & Susan Alamo, 471 U.S. at 296, but at
the same time, the Court also recognized that the ``suffer or permit''
definition ``does have its limits.'' Id. at 295; see also Portland
Terminal, 330 U.S. at 152 (``The definition `suffer or permit to work'
was obviously not intended to stamp all persons as employees.''). No
court has suggested that applying such limits (including the limit that
bona fide independent contractors are not employees under the Act)
cannot be reconciled with the Act's remedial purpose. Cf. Encino
Motorcars, LLC v. Navarro, 138 S. Ct. 1134, 1142 (2018) (Encino II)
(warning against relying on ``flawed premise that the FLSA `pursues'
its remedial purpose `at all costs''' when interpreting the Act).
Ultimately, ``[t]he test of employment under the Act is one of
`economic reality.''' Tony & Susan Alamo, 471 U.S. at 301 (quoting
Whitaker House, 366 U.S. at 33)). This rule applies such a test and
does so with sufficient breadth consistent with the Act's remedial
purpose.
While the phrase ``economic reality'' is on its face no clearer
than the ``suffer or permit'' language, see Lauritzen, 835 F.2d at 1539
(Easterbrook J., concurring), decades of case law has refined its
meaning. The Court determined that employees include ``those who as a
matter of economic reality are dependent upon the business to which
they render service.'' Bartels, 332 U.S. at 130. Courts of appeals have
subsequently used Bartels's concept of economic dependence to determine
employment under the FLSA. See, e.g., Saleem, 854 F.3d at 139; Mr. W
Fireworks, 814 F.2d at 1054; DialAmerica, 757 F.2d at 1385. Thus, the
courts have interpreted the scope of employment under the Act's
definition to include any individual who is ``dependent upon finding
employment in the business of others,'' and to exclude any individual
who is ``in business for himself.'' Scantland, 721 F.3d at 1312.\53\
However, as noted in the need for rulemaking discussion, this principle
has not always been applied consistently.
---------------------------------------------------------------------------
\53\ Courts apply this economic dependence standard for
employment in the employee-versus-independent contractor context,
but use different approaches in other contexts. See, e.g., Glatt v.
Fox Searchlight Pictures, 811 F.3d 528 (2d Cir. 2016).
---------------------------------------------------------------------------
The Department agrees with this interpretation and further believes
that the economic dependence standard developed by courts comports with
the ``suffer or permit'' statutory text. As the NPRM explained: ``An
individual who depends on a potential employer for work is an employee
whom the employer suffers or permits to work. In contrast, an
independent contractor does not work at the sufferance or permission of
an employer because, as a matter of economic reality, he or she is in
business for him- or herself.'' 85 FR 60606 (citing Saleem, 854 F.3d at
139). Commenters generally agreed that employee versus independent
contractor status under the FLSA is determined by the worker's economic
dependence, and several of the above-mentioned commenters affirmatively
supported this standard. For example, NELA stated that ``[i]t is
dependence that indicates employee status'' (quoting Usery, 527 F.2d at
1311). And the State AGs explain that ``[t]he ultimate concern is
whether, as a matter of economic reality, the workers depend on someone
else's business . . . or are in business for themselves'' (quoting
Superior Care, 840 F.2d at 1059).
Most commenters who objected to focusing the economic reality test
on the two core factors were concerned that such an approach would
narrow FLSA employment to the common law standard. For instance, NELA
stated that ``[b]y affording the control factor greater weight in the
economic reality analysis, the Department slides back toward the common
law agency test.'' See, e.g., AFL-CIO (``[T]he proposed rule
effectively collapses the FLSA's definition into the common law
definition by giving primacy and controlling weight to the two factors
of control and opportunity for profit and loss.''). The implied logic
behind this concern is that if one test gives greater weight to a
factor that is also given greater weight by a second test, the two
tests necessarily have an equal scope of employment. But that does not
follow.
A comparison with the ABC test is illustrative. That test creates a
presumption of employee status, which can be overridden only if all
three factors are established. One of the ABC test's factors is
``whether the worker is free from the control and direction of the
hiring entity.'' This factor is given dispositive weight under certain
circumstances: If the worker is controlled by the hiring party, then he
or she is automatically an employee, regardless of other
considerations. The common law control test also gives control
dispositive weight. While both tests afford control greater weight than
the economic reality test, one test (ABC) has a broader scope of
employment than the economic reality test and the other (common law)
has a narrower scope. The relative weight attached to a particular
factor does not, by itself, determine whether the ultimate scope of
employment is broad or narrow. Accordingly, it is not possible to
compare the breadth of the standards for employment used by two tests
simply by comparing the weight attached to a shared factor. Rather, it
is necessary to consider how each test's factors are actually applied.
Under the common law control test, control is the ultimate inquiry:
If an individual controls the work, then he or she would be an
independent contractor rather than an employee. However, such control
by itself would be insufficient to establish the worker as an
independent contractor under the Department's rule.
[[Page 1201]]
Other considerations, including the second core factor of opportunity
for profit or loss, can outweigh the control factor and result in a
classification of employee status. That is precisely what happened in
Paragon Contractors, wherein the control and integral part factors
weighed in favor of independent contractor classification but the court
nonetheless held that the worker was an employee because the remaining
factors, including opportunity for profit or loss, favored
classification as an employee. See 884 F.3d at 1238. And even if the
individual both controls the work and has a meaningful opportunity for
profit or loss, he or she still would not necessarily be classified as
an independent contractor under the Department's rule because other
factors may outweigh those two core factors in rare cases. In short,
because the ultimate inquiry under the common law control test is the
worker's right to control the manner and means by which the work is
performed, such control by the worker disqualifies the worker from
being an employee under that test, but more is needed under the rule's
articulation of the economic reality test because economic dependence
is the ultimate inquiry. Thus, the rule's standard for employment
remains broader than the common law standard. Nor does the rule
``slide[ ] back toward the common law agency test,'' as NELA contends,
or otherwise narrow the standard of employment under the FLSA. As
explained above, the standard for determining whether an individual is
an employee under the FLSA or an independent contractor has always been
economic dependence. The two core factors are more probative than other
factors regarding whether an individual is in business for him- or
herself, as opposed to being dependent on an employer for work. Neither
NELA nor likeminded commenters dispute this specific claim. NELA
further recognized that economic reality factors must be ``used to
gauge the degree of dependence.'' If so, the test should focus on core
factors that are more probative measures of dependence. Doing otherwise
would serve no purpose other than to make regulations more confusing,
thereby reducing compliance and driving up the transaction cost of a
lawful business practice.
UPS expressed the opposite concern as NELA and likeminded
commenters, asserting that the proposed rule did not give enough weight
to the control factor. According to UPS, treating control as a factor
to be balanced rather than giving it dispositive weight ``leaves open
the possibility that a worker could be classified as an `independent
contractor' even when the common-law control factor indicated employee
status.'' The potential for such an outcome implies that FLSA
employment may be narrower than the common law standard in certain
circumstances.
As an initial matter, UPS's concern that the control factor may be
outweighed by other considerations even when it indicates employee
status also applies to every prior articulation of the economic reality
test--indeed more so--because none of them gave the control factor
greater weight, much less dispositive weight. The rule addresses UPS's
concern because it explicitly identifies control as a core factor that
is less likely to be outweighed by other factors. More importantly,
UPS's concern could materialize only if the control factor were
balanced against other factors without regard for the ultimate inquiry
for FLSA employment. Courts have cautioned against such ``mechanical
application'' of the economic reality factors and have instead
instructed that all factors should guide the analysis of whether the
individual is in business for him or herself or is dependent on others
for work. See, e.g., Saleem, 854 F.3d at 140. For these reasons, the
Department does not share UPS's concern that not giving dispositive
weight to the control factor results in a standard for employment that
is narrower than the common law.\54\
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\54\ In any event, courts have foreclosed UPS's requested remedy
of giving the control factor dispositive weight to determine
employee status. See, e.g., Silk, 331 U.S. at 716 (``No one factor
is controlling); Keller, 781 F.3d at 807 (``No one factor is
determinative.''); Baker, 37 F.3d at 1440 (``None of the factors
alone is dispositive.'').
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3. The Rulemaking Will Not Restrict the Range of Considerations Within
Economic Reality Test
A number of commenters contend that the proposed rule's focus on
the two core factors is inconsistent with case law requiring the
``circumstances of the whole activity'' to be considered as part of the
inquiry into economic dependence. State AGs (quoting Rutherford Food,
331 U.S. at 730); see also, e.g., NELA (``The economic reality inquiry
therefore cannot be answered without `employ[ing] a totality-of-the-
circumstances approach.' '' (quoting Baker, 137 F.3d at 1441)); see
also Senator Patty Murray (``No one test factor is controlling, nor is
the list exhaustive.''); TRLA (same).
The Department agrees with commenters that the circumstances of the
whole activity should be considered as part of the economic reality
inquiry. See 85 FR 60621 (``Other factors may also be probative as part
of the circumstances of the whole activity''). While all circumstances
must be considered, it does not follow that all circumstances or
categories of circumstance, i.e., factors, must also be ``given equal
weight.'' See e.g., FTC Commissioner Slaughter; Appleseed Center.
Assigning one factor less weight than another does not restrict the
circumstances being considered because the very act of determining
relative weight requires considering both factors.
As explained above, each factor should be analyzed in accordance
with its probative value to the ultimate inquiry of whether an
individual is in business for him or her-self. To be sure, the specific
weight of the factors depends on specific circumstances. The control
and opportunity factors are nonetheless more probative than other
factors in determining whether an individual is in business for him- or
herself. As such, it is appropriate to recognize, as the proposed rule
does, that these two more probative factors should typically carry
greater weight than other factors. Doing so would not, as TRLA
contends, ``eliminate . . . any consideration of [other] factors that
have often been regarded as probative in the farm labor context.'' The
proposed rule explicitly permits other factors to outweigh the two core
factors if the specific circumstances of the case--whether in the farm
labor context or another contexts--warrants such a result. In order to
determine whether the combined weight of the two core factors are
outweighed or not by other factors, it is necessary to consider both
sets of factors. Nor would it make any ``single factor determinative by
itself.'' Hopkins, 545 F.3d at 343. Neither of the core factors can be
``determinative by itself'' because there is a second core factor
against which each is balanced. Even when both core factors align, they
are not ``controlling'' because their combined weight can still be
outweighed by other considerations.
4. Other Comments Regarding the Focus on the Two Core Factors
PAM and Global Tranz requested that the Department create a
``bright-line test'' that ``would be limited to the two `core factors'
already identified in the Proposed Rule: (1) the nature and degree of
the individual's control over the work, and (2) the individual's
opportunity for profit or loss.'' See also Cetera Financial Group (CFG)
(``we believe it would be appropriate for the Department to limit the
criteria employed in the economic dependence analysis to the two Core
factors and
[[Page 1202]]
eliminate the others''). According to these commenters, a two-factor
test would be even clearer and simpler than the proposal to focus the
test on the two core factors, while still considering other factors.
Other commenters requested that the Department eliminate one or more of
the non-core factors listed in Sec. 795.105(d)(2) from the economic
reality test because such factors have little to no probative value in
some circumstance, and may sometimes send misleading signals regarding
an individual's classification. CWI and the National Restaurant
Association asked the Department to eliminate the skill required
factor; SHRM and the U.S. Chamber of Commerce were among several
commenters who suggested that the Department eliminate the permanence
factor; and ATA, NDHA, and others requested eliminating the integrated
unit factor.
The Department believes that the two core factors of control and
opportunity are always probative as to whether an individual is in
business for him- or herself. The Department further agrees with the
above commenters that the other factors are less probative and may have
little to no probative value in some circumstances. See, e.g., Silk,
331 U.S. at 718 (``That the unloaders did not work regularly is not
significant.''). However, ``circumstances of the whole activity should
be examined'' as part of the economic reality test, meaning that the
other factors should be considered in all cases even if they are not
always probative once considered. DialAmerica Mktg., Inc., 757 F.2d at
1382. If a factor is probative in some situations but not in others,
there is still a need to consider that factor to determine whether it
is probative in a particular case. Eliminating the non-core factors
from consideration would therefore be warranted only if those factors
lacked probative value in all circumstances--that is, if there was
never a need to even consider whether they had probative value.
Because non-core factors are probative in many circumstances, the
Department believes it would be inappropriate to eliminate them. In
response to commenters' concern that non-core factors may not always be
probative, the Department is making non-substantive revisions to
clarify that the two core factors are always probative as to whether an
individual is in business for him- or herself, but there may be
circumstances where one or more of the non-core factors, upon
consideration, has little or no probative value.
Several commenters requested that the Department revise Sec.
795.105(c) to state that if the two core factors point towards the same
classification, there is no need to consider any other factors. See
e.g., NRF (``if both of the core factors point in the same direction,
then a court may consider only those two factors and end the analysis
without examining the three additional possible factors identified by
DOL''); SHRM (requesting revision ``to ensure that if the Core Factors
indicate the same status of the worker, no further analysis is
necessary''). According to the SHRM, such an approach would ``create
clear expectations and stable grounds to build working relationships.''
The Department believes that the economic reality test cannot be
rigidly applied and concludes that its approach of giving certain
factors greater weight and other factors lesser weight while retaining
flexibility as to the degree of weight depending on the facts of the
case best accounts for all of the circumstances that work relationships
present. Commenters' requests would require the Department to state
that the combined probative value of the two core factors--whatever
that might be--always outweighs the combined probative value of other
factors. The Department believes that will usually be the case, but
does not rule out the possibility that, in some circumstances, the core
factors could be outweighed by particularly probative facts related to
other factors.
Several commenters effectively requested that the Department assign
a specific relative weight to one core factor as compared to the other.
CWI requested that the Department always weigh the two core factors
equally, while the HR Policy Institute requested that the control
factor always be given greater weight than the opportunity factor. The
Department declines to implement both requests. The Department's review
of U.S. Courts of Appeals cases since 1975 did not indicate that the
control and opportunity factors should be weighed equally. Nor did that
review indicate that the control factor should always outweigh the
opportunity factor. Indeed, in the few cases reviewed by the Department
where the control and opportunity factors pointed towards different
classifications, the ultimate classification aligned with the
opportunity for factor. See 85 FR 60619 (citing Paragon Contractors,
884 F.3d at 1235-36, and Cromwell, 348 F. App'x at 61). Ultimately, the
Department is confident in its conclusion that the two core factors are
more probative than all other factors and that framework is logical, as
described above. But the Department declines to assign an invariable
relative weight between the two core factors.
Several commenters requested that the Department revise Sec.
795.105(c) to establish a rebuttable presumption of employee or
independent contractor status if both core factors indicate the same
classification. Such a presumption would be rebuttable only by
``substantial evidence to the contrary under all three [other
factors].'' ATA. According to ATA, a rebuttable presumption ``[w]ould
further reduce the possibility of courts unnecessarily and potentially
selectively applying and weighing the three additional factors for
preferred policy outcomes, which has been a concern with regard to the
current test in some instances.'' As the NPRM explained, the Department
considered but did not propose a rebuttable presumption based on
alignment of the two core factors because it was concerned a formal
presumption may be needlessly complex or burdensome. See 85 FR 60621.
The Department further believes that emphasizing the importance of the
two core factors provides sufficient clarity. As such, the Department
declines to adopt a presumption-based framework.
CWI requested that the ``the Final Rule spell out specifically that
each of the Core Factors should be analyzed independently of the other,
without overlap.'' The Department agrees with CWI that overlaps between
economic reality factors, core or otherwise, should be minimized. As
discussed in the NPRM and in this preamble, reducing such overlap is
one of the reasons for this rulemaking. That said, the Department
believes specific regulatory instructions against overlapping analysis
of the two core factors is not necessary and may be confusing. The
Department believes proposed Sec. 795.105(d)(1) articulates the two
core factors without apparent overlap, and CWI does not identity any
specific considerations that risk being analyzed under both factors.
Language in the regulatory text warning against overlapping analysis
may therefore confuse members of the regulated community by priming
them to look for potential overlapping considerations when there are
none. The Department therefore declines to add CWI's requested
language.
In summary, the economic reality test examines the circumstances of
the whole activity to determine whether an individual is in business
for him- or herself, as opposed to being economically deponent on
others for work. Not all facts or factors are equally probative (if
they are probative at all) as
[[Page 1203]]
to whether, as a matter of economic reality, an individual is in
business for him- or herself. Treating them all as equal would not
focus the inquiry on economic dependence, but rather would distort that
analysis. In contrast, highlighting factors that are more probative
would sharpen the test's focus on economic dependence.
The NPRM presented reasoning and evidence based on the Department's
review of case law indicating that control and opportunity factors are
more probative to whether an individual is in business for him- or
herself, as opposed to being economically dependent. While not all
commenters agree with this approach, commenters who object to it have
not convinced the Department to change its original assessment. The
Department therefore believes that it is appropriate to focus the
economic reality test on the two core factors that are more probative
to the test's ultimate inquiry. Such focus appropriately guides how
factors should be balanced, while retaining flexibility in the test.
F. Proposed Guidance Regarding the Primacy of Actual Practice
Proposed Sec. 795.110 stated that the actual practice of the
parties involved--both of the worker (or workers) at issue and of the
potential employer--is more relevant than what may be contractually or
theoretically possible. The proposed rule explained that this principle
is derived from the Supreme Court's holding that `` `economic reality'
rather than `technical concepts' is to be the test of employment''
under the FLSA. Whitaker House, 366 U.S. at 33; see also Tony & Susan
Alamo, 471 U.S. at 301 (``The test of employment under the [FLSA] is
one of `economic reality' '' (citing Whitaker House, 366 U.S. at 33)).
Several commenters expressed support for proposed Sec. 795.110.
For example, ATA wrote that ``[t]he general principle also is almost
black letter law--substance is always more important than form--under
virtually every regulation WHD enforces.'' The Center for Workplace
Compliance described the language as ``consistent with historical
interpretation of the economic reality test by Federal courts and
DOL.'' Other commenters complimented the proposal with little or no
further explanation, see NHDA; New Jersey Civil Justice Institute; WPI,
while HR Policy Association urged the final rule to go further by
entirely disregarding the relevance of unexercised contractual or
theoretical possibilities. WFCA supported proposed Sec. 795.110, but
asked the Department to elaborate in the final rule that ``best
indicator of the actual practices is whether a significant segment of
the industry has traditionally treated similar workers as independent
contractors or employees.''
No worker advocacy organizations specifically commented in support
of the provision, but several groups, including NELA, the Pacific
Northwest Regional Council of Carpenters, and the Public Justice
Center, quoted Judge Frank Easterbrook's observation from Lauritzen,
835 F.2d at 1545, that ``[t]he FLSA is designed to defeat rather than
implement contractual arrangements.'' The International Brotherhood of
Teamsters similarly asserted that Congress ``chose to define
`employment' in a manner that would allow the Act to be applied
flexibly so that employers could not simply recalibrate their
contractual arrangements with workers to evade coverage.'' Finally,
NELP and 32 other organizations quoted Judge Learned Hand's observation
from Lehigh Valley Coal Co. v. Yensavage, 218 F. 547 (2d Cir. 1914),
cert. denied, 235 U.S. 705 (1915), that employment statutes from the
early 20th century were intended to ``upset the freedom of contract''
between workers and businesses. Id. at 553.
Some business commenters expressed general support for proposed
Sec. 795.110, but requested edits to discount the relevance of
voluntary choices on the part of an individual worker that implicate
one or more of the economic reality factors described in proposed Sec.
795.105(d), such as choosing to work exclusively for one business,
accepting all available work assignments from the business, or
declining to negotiate prices. See, e.g., American Bakers Association;
ATA; New Jersey Warehousemen & Movers Association (NJWMA); NRF; Private
Care Association; Scopelitis, Garvin, Light, Hanson & Feary; U.S.
Chamber of Commerce (``[T]he Chamber urges the Department clarify that
so long as a business does not take actions to foreclose an individual
from exercising certain rights, that the individual's choice to not
exercise those rights does not diminish their indicia of independence
in the relationship.''). Some of these commenters asserted that
allowing voluntary worker practices to influence classification
outcomes would lead to costly and inefficient business decisions. See
Dart Transit Company (``[T]he practical effect of [proposed Sec.
795.110] is to require independent contractors to arbitrarily switch
routes and carriers . . . simply in order to preserve their independent
status''); Minnesota Trucking Association (``In effect, the motor
carrier would have to restrict offering to the independent owner
operator a route both find beneficial in order to ensure that the
independent owner operator performs services for other motor
carriers.''). Others asserted that considering voluntary worker
practices would lead to classification discrepancies between workers
with similar contractual freedoms. See NRF; SHRM.
Some business commenters were flatly opposed to proposed Sec.
795.110. SHRM wrote that ``[a] focus on `practice' as opposed to the
contractual `rights,' of the parties . . . unnecessarily de-emphasizes
voluntariness of the contract itself and places ambiguity over parties'
negotiations.'' The Customized Logistics and Delivery Association
objected that worker classifications could turn on voluntary worker
practices that a business may not know about (e.g., whether particular
workers perform labor for other companies), asserting that proposed
Sec. 795.110 ``essentially shift[s] the burden of proof to the alleged
employer to establish a worker's status as an IC'' and ``could force
mass reclassifications of ICs for motor carriers, and many other
industries.''
Finally, several commenters representing workers, as well as
Senator Patty Murray and the State AGs, voiced opposition to proposed
Sec. 795.110 on the basis that emphasizing the primacy of an alleged
employer's practices would establish an employee classification
standard impermissibly narrower than the common law, which evaluates an
alleged employer's ``right to control.'' \55\ In this regard, the State
AGs compared proposed Sec. 795.110 to the Department's interpretation
in its recent Joint Employer final rule that ``[a] potential joint
employer must actually exercise--directly or indirectly--one or more .
. . indicia of control to be jointly liable'' (85 FR 2859). Winebrake &
Santillo, LLC asserted that proposed Sec. 795.110 conflicts with a
statement from a recent Third Circuit opinion that ``actual control of
the manner of work is not essential; rather, it is the right to control
which is determinative,'' Razak, 951 F.3d at 145, while Edward.
Tuddenham commented that ``[a]ll of the cases [the Department cited in
its NPRM] to support the primacy of `actual practice' are referring to
the actual practices of workers and are not discussing analysis of
employer controls.'' In rejecting the proposed rule's distinction
between a potential employer's contractual
[[Page 1204]]
authority to control workers and control that they actually exercise,
Senator Murray asserted that contractual authority ``provides a
potential employer an incredible amount of de facto control over a
worker . . . induc[ing] a worker to perform the work in the manner the
employer prefers, suggests, recommends, or hints at, even if the
employer does not ever command it.'' See also State AGs (``[R]eserved
authority in an agreement, like the looming sword of Damocles, will
often influence what the parties do[.]'').
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\55\ Restatement (Second) of Agency Sec. 2(3); see also Commun.
for Non-Violence v. Reid, 490 U.S. 730, 751 (1989) (describing ``the
hiring party's right to control the manner and means by which the
product is accomplished'' as the overarching focus of the common law
standard).
---------------------------------------------------------------------------
The Department has carefully considered the views and arguments
expressed by commenters and decided to implement Sec. 795.110 as
proposed. As emphasized in the NPRM, and as the plain language of Sec.
795.110 makes clear, unexercised powers, rights, and freedoms are not
irrelevant in determining the employment status of workers under the
economic reality test; \56\ such possibilities are merely less relevant
than powers, rights, and freedoms which are actually exercised under
the economic reality test.\57\ Affording equal relevance to reserved
control and control that is actually exercised--by either party--would
ignore the Supreme Court's command to focus on the ``reality'' of the
work arrangement, Silk, 331 U.S. at 713, which places a greater
importance on what actually happens than what a contract suggests may
happen. Several Federal courts of appeals decisions have explicitly
made this observation. See, e.g., Saleem, 854 F.3d at 142 (``[P]ursuant
to the economic reality test, it is not what [Plaintiffs] could have
done that counts, but as a matter of economic reality what they
actually do that is dispositive.'') (citations omitted); Parrish, 917
F.3d at 387 (``The analysis is focused on economic reality, not
economic hypotheticals.''); Scantland, 721 F.3d at 1311 (``It is not
significant how one `could have' acted under the contract terms. The
controlling economic realities are reflected by the way one actually
acts.'' (citations omitted)). Moreover, as some commenters pointed out,
prioritizing substance over form is consistent with the Department's
general interpretation and enforcement of the FLSA. See, e.g., 29 CFR
541.2 (``A job title alone is insufficient to establish the exempt
status of an employee.''); 29 CFR 541.603(a) (providing that employers
violate the salary basis requirement for certain employees exempt under
Sec. 13(a)(1) of the Act only when they demonstrate ``an actual
practice of making improper deductions''); \58\ 29 CFR 778.414
(``[W]hether a contract which purports to qualify an employee for
exemption under section 7(f) meets the requirements . . . will in all
cases depend not merely on the wording of the contract but upon the
actual practice of the parties thereunder.'').
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\56\ Entirely disregarding unexercised contractual rights and
authorities would not be consistent with the Supreme Court's
instruction in Rutherford Food to evaluate ``the circumstances of
the whole activity.'' 331 U.S. at 730; see also Mid-Atl.
Installation, 16 F. App'x at 107 (determining that cable installers
were independent contractors in part because they had a ``right to
employ [their own] workers''); Keller, 781 F.3d at 813 (citing as
relevant ``the fact that Miri never explicitly prohibited Keller
from performing installation services for other companies'' and
finding ``a material dispute as to whether Keller could have
increased his profitability had he improved his efficiency or
requested more assignments'').
\57\ In this respect, Sec. 795.110's emphasis on actual
practice differs from the treatment of control in the Department's
partially invalidated Joint Employer rule, which provided that ``[a]
potential joint employer must actually exercise--directly or
indirectly--one or more . . . indicia of control to be jointly
liable.'' 85 FR 2859 (emphasis added).
\58\ In a 2004 final rule amending this language, the Department
rejected commenter arguments that the mere existence of a policy
permitting improper deductions should disqualify an employer from
claiming the Section 13(a)(1) exemption for salaried employees whose
earnings and job duties otherwise qualify for exemption. ``[Such an]
approach . . . would provide a windfall to employees who have not
even arguably been harmed by a `policy' that a manager has never
applied and may never intend to apply[.]'' 69 FR 22122, 22180.
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The Department disagrees with commenters who assert that
prioritizing the actual practice of the parties involved makes the
economic reality test impermissibly narrower than the common law
control test. In many instances, the actual practices of the parties
will establish the existence of an employment relationship despite what
a ``skillfully devised'' contract might suggest on paper. Silk, 331
U.S. at 715; see, e.g., Scantland, 721 F.3d at 1313-14 (``Though
plaintiffs' `Independent Contractor Service Agreements' provided that
they could `decline any work assignments,' plaintiffs testified that
they could not reject a route or a work order within their route
without threat of termination or being refused work in the following
days.''); Hobbs, 946 F.3d at 833 (dismissing the fact that welders
determined to be employees ``could hypothetically negotiate their rate
of pay''). In any event, because the ultimate inquiry of the economic
reality test is ``economic dependence,'' the test ensures coverage over
more workers in the aggregate than the common law control test,
notwithstanding its more nuanced interpretation of the control factor
itself. See Silk, 331 U.S. at 716 (listing ``degrees of control'' as
one of several non-dispositive factors in the economic reality test)
(emphasis added).
It is true that, under the economic reality test, some workers
subject to a potential employer's ``right to control'' may nevertheless
qualify as bona fide independent contractors for other reasons. To the
extent that this excludes some workers who might qualify as
``employees'' under a traditional common law test,\59\ this is the
logical outcome of a multifactor test where ``no one [factor] is
controlling.'' Silk, 331 U.S. at 716; see also, e.g., Selker Bros., 949
F.2d at 1293 (``It is a well-established principle that . . . neither
the presence nor the absence of any particular factor is
dispositive.''). Moreover, the Supreme Court arrived at precisely this
outcome in two of its seminal cases applying the economic reality test.
---------------------------------------------------------------------------
\59\ See Commun. for Non-Violence v. Reid, 490 U.S. 730, 751
(1989) (``In determining whether a hired party is an employee under
the general common law of agency, we consider the hiring party's
right to control the manner and means by which the product is
accomplished.'') (emphasis added).
---------------------------------------------------------------------------
First, in Silk, the Court evaluated the employment status of owner-
operator truck drivers who contracted to perform services exclusively
for a motor carrier company, subject to a ``manual of instructions . .
. purport[ing] to regulate in detail the conduct of the truckmen in the
performance of their duties.'' 331 U.S. at 709-710. Before reaching its
own conclusion, the Court excerpted an analysis from the appellate
court below noting that, ``[w]hile many provisions of the manual, if
strictly enforced, would go far to establish an employer-employee
relationship between the Company and its truckmen . . . there was
evidence to justify the [district] court's disregarding of it,''
including testimony that the manual was ``impractical and was not
adhered to.'' Id. at 716 n.11 (quoting Greyvan Lines v. Harrison, 156
F.2d 412, 415 (7th Cir. 1946)). Although the Court acknowledged ``cases
. . . where driver-owners of trucks or wagons have been held employees
in accident suits at tort'' (under the common law), the Court said it
``agree[d] with the decisions below'' that the owner-operator truck
drivers were independent contractors, as ``the total situation,
including . . . the control exercised . . . marks these driver-owners
as independent contractors.'' Id. at 718-19 (emphasis added).
The Court in Bartels, even more clearly illustrated of how the
economic reality test's emphasis on actual practice may indicate
independent contractor. There, the Court found that band members were
not employees of a public dance hall that hired them for
[[Page 1205]]
short-term gigs, despite a contract provision stipulating that the
dance hall ``shall at all times have complete control of the services
which the [band members] will render under the specifications of this
contract.'' 332 U.S. at 128. Again applying the economic reality test,
the Court noted that a worker's employment status ``was not to be
determined solely by the idea of control which an alleged employer may
or could exercise over the details of the service rendered to his
business by the worker or workers.'' Id. at 130 (emphasis added). While
the Court made clear that other economic reality factors (e.g., skill,
permanence, profit) indicated that the band members were independent
contractors, id. at 132, the Court implicitly found that the control
factor did as well, noting that it was the band leader (and not the
dance hall) which ``organizes and trains the band . . . [and] selects
[its] members.'' Id. at 132. In other words, notwithstanding the dance
hall's contractual authority to ``complete[ly] control'' the band
members, the actual practice of the parties made clear that the band
members themselves controlled the work, as a matter of economic
reality.
Contrary to the argument put forth by several worker advocacy
commenters, the outcome and reasoning of the Supreme Court's decisions
in Silk and Bartels show that the common law control test does not
establish an irreducible baseline of worker coverage for the broader
economic reality test applied under the FLSA. In other words, while the
economic reality test is broad in the sense that it covers more workers
as a general matter, it does not necessarily include every worker
considered an employee under the common law.
At the same time, the Department disagrees with the interpretation
suggested by various business commenters that only worker practices
which are affirmatively coerced by a potential employer may indicate
employee status. Such a reading conflicts with the definition of
``employ'' in section 3(g) of the Act, which makes clear that the FLSA
was intended to cover employers who passively ``suffer or permit'' work
from individuals.\60\ Accordingly, courts applying the economic reality
test have not hesitated to consider voluntary worker practices where
such practices indicate economic dependence. See Keller, 781 F.3d at
814 (``[A] reasonable jury could find that the way that [the defendant]
scheduled [the worker's] installation appointments made it impossible
for [the worker] to provide installation services for other
companies.''). To be sure, the Department agrees that coercive behavior
by a potential employer (e.g., vigilant enforcement of a non-compete
clause, punishing workers for turning down available work, etc.)
constitutes stronger evidence of employment status than voluntary
worker practices (e.g., the mere existence of an exclusive work
arrangement, the fact that a worker rarely turn down available work,
etc.), but coercive action on the part of the potential employer is not
a prerequisite for such worker practices to have import.
---------------------------------------------------------------------------
\60\ 29 U.S.C. 203(g). See also 83 C.J.S. Suffer (1953) (``[T]o
suffer work requires no affirmative act by a putative employer.'').
---------------------------------------------------------------------------
The Department believes that commenters' concerns that proposed
Sec. 795.110 will cause workers with similar contractual freedoms to
be classified differently are overstated. Consistent with evaluating
the ``the circumstances of the whole activity'' in a work arrangement,
Rutherford Food, 331 U.S. at 730, courts have often considered the
rights and practices of similarly situated workers affiliated with a
particular business, arriving at a single classification outcome for
the group of workers at issue. See, e.g., Freund, 185 F. App'x. at 784
(finding independent contractor status in part because ``although
Freund did not hire any workers, other of Hi-Tech's installers did'');
Express Sixty-Minutes Delivery, 161 F.3d at 305 (finding independent
contractor status in part because ``[t]he majority of drivers work for
Express for a short period of time''); cf. Mr. W Fireworks, 814 F.2d at
1048-51 (finding employee status in part because ``the overwhelming
majority of operators did not engage in independent advertising'' and
``the vast majority of operators made only minor investments in the
business''). Even where meaningful factual differences exist between
workers, courts may separate them into multiple groups for separate
collective analyses instead of making individualized determinations.
See, e.g., Off Duty Police, 915 F.3d at 1055-1062 (separate collective
analyses of ``sworn officers'' and ``nonsworn officers'' who provide
security and traffic control services); DialAmerica, 757 F.2d at 1383-
88 (separate collective analyses of home researchers and distributors).
Judicial application of the economic reality test to groups of workers
has shown that classification outcomes cannot turn on one factor alone.
See, e.g., Silk, 331 U.S. at 719 (``In one instance they haul for a
single business, in the other for any customer. The distinction, though
important, is not controlling. It is the total situation . . . that
marks these driver-owners as independent contractors.'').
In summary, finalized Sec. 795.110's emphasis on the actual
practices of the parties involved is not a one-way ratchet, applying
selectively either for or against a finding of independent contractor
status. Instead, as the examples in Sec. 795.110 illustrate, the
principle applies to every potentially relevant factor, and can weigh
in favor of either an employee or independent contractor relationship.
In some cases, the actual practice of the parties involved may suggest
that the worker or workers are employees. See, e.g., Sureway Cleaners,
656 F.2d at 1371 (``[T]he fact that Sureway's `agents' possess, in
theory, the power to set prices, determine their own hours, and
advertise to a limited extent on their own is overshadowed by the fact
that in reality the `agents' work the same hours, charge the same
prices, and rely in the main on Sureway for advertising.'');
DialAmerica, 757 F.2d at 1387 (concluding that evidence showing workers
were not doing similar work for any other businesses ``although they
were free to do so'' indicates employee status). In other cases, it may
suggest that the worker or workers at issue are independent
contractors. See Saleem, 854 F.3d at 143 (concluding that black-car
drivers were independent contractors in part because ``many Plaintiffs
. . . picked up passengers via street hail, despite TLC's (apparently
under-enforced) prohibition of this practice''); see also Silk, 331
U.S. at 718-19; Bartels, 332 U.S. at 129. Section 795.110's focus on
actual practice is a neutral interpretive principle, consistent with
the way courts and the Department have long applied the FLSA's economic
reality test. Accordingly, and contrary to the concerns expressed by
some commenters, it should not disrupt specific industries or result in
substantial worker reclassifications in either direction (i.e., from
employee to independent contractor status, or vice versa).
G. Other Comments
Many substantive comments were not directed towards a specific
provision of the proposed rule but rather the rule as a whole. These
comments addressed the following topics: (1) Whether the proposed rule
would create confusion or clarity for the regulated community; (2)
whether the proposed rule would exacerbate or ameliorate
misclassification of employees; (3) whether the rule is consistent with
the FLSA's purpose; (4) whether
[[Page 1206]]
Congressional inaction prohibits this rulemaking; and (5) whether the
Department may depart from its prior practice.
1. Whether the Rulemaking Will Create Confusion or Clarity
Commenters from the business and freelance community generally
expressed the view that the proposed rule would improve clarity
regarding which workers are independent contractors versus employees
under the FLSA. For example, the U.S. Chamber of Commerce stated that
``[t]he Proposed Rule would provide long-awaited and much needed
structure and clarity to the evaluation of worker relationships under
the Act.'' SHRM agreed that ``[t]he Proposed Rule is necessary to
provide certainty and consistency to businesses and workers.'' See also
CWI; WPI; ATA; NRF; National Restaurant Association. Freelancers and
groups that represent them echoed this message, with the CPIE, for
instance, stating that ``[w]e believe the proposed guidance would
provide greater clarity and predictability in the application of the
`economic realities' test to independent entrepreneurs and their
clients.'' See also Fight for Freelancers. Individual commenters who
identified themselves as freelancers or small business owners
overwhelmingly agreed that the rule would improve legal clarity. For
example, one individual commenter who believed that ``independent
contracting . . . kept [her] family afloat when [she] unexpectedly
became a single mom'' stated that ``[t]his proposed rule is simple to
understand and provides necessary clarity for both employers and
individuals like myself that want to engage in freelancing.'' Another
individual who identified himself as a small business owner believed
that ``[t]he regulations proposed seem to provide clarity for
determining an individual's status as an employee or independent
contractor under the Fair Labor Standards Act.''
Some government and union commenters took the opposite view. The
State AGs, for instance, asserted that ``this rule will create
confusion, not clarity'' in part because they believe it ``departs from
the statutory text and Supreme Court precedent and is contrary to
established application of the economic reality test.'' FTC
Commissioner Slaughter expressed concern that the proposed rule would
``create legal confusion around the labor exemption to the antitrust
laws.'' The AFL-CIO argued that ``the proposal is likely to increase
rather than decrease confusion because it does not clearly define `an
integrated unit of production.' ''
The Department continues to believe that the rule will improve
clarity because it clarifies the meaning of economic dependence, which
determines FLSA employment, and aligns the economic reality test to
more accurately analyze that concept by, among other things,
highlighting the two core factors that are most probative to the
inquiry. The rule does not depart from the statutory text, which courts
have interpreted to define FLSA employment based on the concept of
economic dependence on which this rule focuses. Nor does the rule
depart from any Supreme Court precedent because it continues to
consider the circumstances of the activity as a whole to analyze
whether workers, as a matter of economic reality, depend on another
business for work, or are in business for themselves. The Department
further disagrees with the State AGs that the rule departs from the
``established application of the economic reality test.'' The final
rule takes into account facts and factors that have historically been
part of the economic reality test, and decades of appellate decisions
indicating that the two core factors frequently align with the ultimate
determination of economic dependence or lack thereof. See 85 FR 60619-
21. As one comment stated, the rulemaking ``synthesizes previous
understandings of the independent contractor rule,'' as opposed to
departing from them. See Farren and Mitchell.
The Department does not believe this final rule will cause
confusion regarding the labor exemption to antitrust laws because, as
explained by FTC Commissioner Slaughter, that exemption is governed
``[u]nder the Clayton Act and the Norris-La Guardia Act.'' In contrast,
this rule's application is limited to the FLSA, and therefore, would
not affect the labor exemption to antitrust laws established by other
statutes. Finally, for reasons explained in the NPRM and this preamble,
the Department believes this rule's articulation of the ``integrated
unit'' is clearer than the prior ``integral part'' articulation. For
added clarity, the Department added a pair of examples in Sec. 795.115
to further illustrate application of the ``integrated unit'' factor.
For these reasons, the Department believes the final rule will
result in greater clarity.
2. Whether the Rulemaking Exacerbates or Ameliorates Misclassification
Many commenters expressed concern that the proposed rule would
exacerbate the misclassification of employees as independent
contractors. See, e.g., Equal Justice Center; Employee Rights Center;
NELP; State AGs; TRLA. According to these commenters, the proposed rule
would make it easier for an unscrupulous employer to classify its
employees as independent contractors, and they cite statistics that
purport to show high rates of misclassification in support of that
contention. Several other commenters took the opposite position and
asserted, for example, that ``[c]larifying the application of the test
for independent contractor status will promote compliance with labor
standards under the FLSA and, in turn, reduce worker
misclassification.'' Opportunity Solutions Project (OSP); see also,
e.g., TCA (``[t]he increased clarity provided by the [proposed rule]
would likely lead to reduced misclassification.''); IAW (``This rule
will clear up misclassifications''); Financial Services Institute (``we
agree that it will reduce worker misclassification and litigation'').
These commenters also presented reports that dispute the widespread
occurrence of misclassification. See, e.g. CWI; U.S. Chamber of
Commerce; WPI.
FLSA employee versus independent contractor status is determined in
terms of economic dependence. Misclassification occurs when an
individual who is economically dependent on a business is classified by
that business as an independent contractor and treated as such. This
can occur inadvertently because the business misunderstands the concept
of economic dependence or incorrectly analyzes factors to assess the
concept. It can also occur intentionally. This final rule clearly
defines economic dependence and explains how to assess facts and
factors to evaluate whether that dependence exists. It discards
misleading and confusing interpretations of that concept developed over
the years and emphasizes the essential aspects. A clearer test means
more businesses will better understand their obligations under the FLSA
and thereby inadvertently misclassify fewer workers. As one commenter
who identified himself as a small business owner explained: ``We want
to comply [with the FLSA] but we need guidance that allows us to know
how to comply.'' A clearer test also means more workers will understand
their rights under the FLSA and thereby will be better positioned to
combat intentional misclassification through, for example, private
litigation or complaints to the Department. Unscrupulous employers
[[Page 1207]]
may also be deterred from intentional misclassification in the first
place if workers better understand their legal rights. For these
reasons, the Department believes the final rule is likely to reduce
both inadvertent and intentional FLSA misclassification.
While several commenters asserted that the proposed rule will
facilitate misclassification, the Department does not agree. The
Department's final rule makes clear that a business may classify a
worker as an independent contractor with greater confidence if the
worker has control over key aspects of the work and a meaningful
opportunity for profit or loss based on initiative or investment.
Except in unusual cases, a worker who enjoys substantial control over
the work and has opportunity for profit in abundant measures is, as a
matter of economic reality, in business for him- or herself, and thus
properly classified as an independent contractor. The rule thus makes
it easier for a business and its workers to structure their work
arrangements to create bona fide independent contractor relationships.
But that effect of the final rule will help avoid misclassification,
not encourage it.
As discussed in greater detail in the RIA at Section VI(D)(6), the
Department has concerns regarding the reliability of statistics cited
by commenters regarding the prevalence of misclassification. Even
assuming commenters' statistics are accurate, however, they would
merely estimate the current rate of misclassification rather than how
that rate would change as a result of this rule. Insofar as the final
rule will reduce misclassification, these statistics make this
rulemaking even more urgent.
For the above reasons, the Department believes this rule will
ameliorate rather than exacerbate misclassification of employees under
the FLSA.
3. Whether the Rulemaking Is Consistent With the FLSA's Remedial
Purpose
A number of commenters asserted that this rule ``conflicts with the
FLSA's remedial purposes of protecting workers.'' State AGs; see also,
e.g., Pacific Northwest Council of Carpenters (``the Proposed Rule . .
. is contrary to the statutory definitions and remedial purpose of the
FLSA''). NELP, for instance, stated that ``DOL's proposed test would
leave behind workers in high growth sectors with high rates of wage
theft, contrary to the purposes of the FLSA.'' And NELA indicated that,
because ``the FLSA is a remedial statute'' its coverage should be
construed liberally to adopt a standard for employment that is even
broader than economic dependence.\61\ Commenters that supported the
proposed rule pointed that the FLSA is not intended to cover all
workers and that ``Congress intended to cut off [the FLSA's] coverage
at a certain point to preserve the freedom of workers to operate as
independent contractors.'' Scalia School; see also WPI (``Nothing in
the text or legislative history of any Federal employment law indicates
that Congress intended to supplant or displace independent work and
require instead for all workers to be employees.'').
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\61\ NELA specifically urged the Department to adopt the ``ABC''
test to determine whether a worker is an independent contractor or
an employee under the FLSA. The Regulatory Alternative discussion at
Section VI(G) provide further explanation why the Department is not
adopting that test.
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The Supreme Court has cautioned against the ``flawed premise that
the FLSA `pursues' its remedial purpose `at all costs' '' when
interpreting the Act. Encino, 138 S. Ct. at 1142. The Encino II Court
rejected the principle that FLSA's remedial purpose required exemptions
to be narrowly construed, id, and courts of appeal have followed that
logic to reject the corollary principle, articulated above by NELA,
that the Act's remedial purpose requires its coverage to be construed
broadly. See Sec'y United States Dep't of Labor v. Bristol Excavating,
Inc., 935 F.3d 122, 135 (3d Cir. 2019) (rejecting broad reading of the
FLSA based its remedial purpose); Diaz v. Longcore, 751 F. App'x 755,
758 (6th Cir. 2018) (same). Rather, `` `a fair reading' of the FLSA,
neither narrow nor broad, is what is called for.'' Bristol, 935 F.3d at
135 (quoting Encino, 138 S. Ct. at 1142); Diaz, 751 F. App'x at 758
(``We must instead give the FLSA a `fair' interpretation.'').
``The principal congressional purpose in enacting the Fair Labor
Standards Act of 1938 was to protect all covered workers from
substandard wages and oppressive working hours.'' Barrentine v.
Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739 (1981) (emphasis
added). The Supreme Court, however, has long recognized held that the
FLSA ``was obviously not intended to stamp all persons as employees.''
Portland Terminal Co., 330 U.S. at 152. As the State AGs stated, the
``the FLSA must be interpreted with its `remedial and humanitarian
purpose . . . purpose' in mind to protect `those who sacrifices a full
measure of their freedom and talents to the use and profit of others.'
'' State AGs (quoting Tenn. Coal, Iron. R. Co. v. Muscoda Local No.
123, 321 U.S. 590, 598 (1944)). Workers who are economically dependent
on an employer for work have sacrificed ``freedom and talents to the
use of profits of others,'' and therefore are covered by the Act as
employees. But independent contractors use their ``freedom and
talents'' to operate their own businesses, and thus fall outside of the
FLSA's coverage. See Saleem, 854 F.3d 131, 139-40 (2d Cir. 2017)
(noting that independent contractors are separate from employees in the
context of the FLSA); Karlson, 860 F.3d 1089, 1092 (8th Cir. 2017)
(``FLSA wage and hour requirements do not apply to true independent
contractors.''); Scantland, 721 F.3d at 1311 (``[The Act's] `broad'
definitions do not, however, bring `independent contractors' within the
FLSA's ambit.''); Hopkins, 545 F.3d at 342 (observing that the ``FLSA
applies to employees but not to independent contractors'').
The Department believes the line between economically dependent
workers who are covered by the FLSA and independent contractors who are
not comports with the Act's purpose to ``protect all covered workers
from substandard wages and oppressive working hours.'' Barrentine, 450
U.S. at 739. Independent contractors who are in business for themselves
do not need protection against ``oppressive working hours'' because
they are not economically dependent on any employer who could oppress
them. Nor do they need protection from ``substandard wages'' because
they are not economically dependent on an employer that sets wages.
Forcing workers who are in business of themselves into the FLSA's
coverage would not protect them, and would instead unduly restrict
their ability to operate their own businesses. Indeed, numerous
individuals who identified as freelancers or independent contractors
commented that being classified as an employee would undermine their
ability to operate their own business. For example, one freelance
translator lamented that ``many of my clients became unwilling to work
with me'' when a state law required her to be classified as clients'
employee. Another commenter identified himself ``[a]s a self employed
professional [who] do[es] NOT want to be forced into employment.'' As a
final illustrative example, another commenter stated that ``I have no
desire to be an employee . . . . If I was required to be an employee, I
would no longer be able to make money for my family from my home on my
own schedule.''
The Supreme Court has explained that the FLSA's ``exemptions are as
much a part of the FLSA's purpose as
[[Page 1208]]
the [Act's] requirement[s].'' Encino, 138 S. Ct. at 1134. By the same
logic, respecting the independence of workers whom the FLSA does not
cover is as much a part of the Act's purpose as extending the Act's
coverage to workers who need its protection. Denying FLSA coverage to
workers who are economically dependent on an employer for work would
result in workers loosing needed protection ``from substandard wages
and oppressive working hours.'' Barrentine, 450 U.S. at 739. But
extending the Act's coverage to workers who, as a matter of economic
reality, are in business for themselves would unduly restrict
independent workers who neither need nor benefit from the Act's
provisions. This rule sharpens the distinction between these two
categories of worker and thereby furthers the Act's purpose to protect
employee who need protection without burdening independent contractors
who do not.
4. Whether Congressional Inaction Prohibits This Rulemaking
The American Federation of State, County, and Municipal Employees,
AFL-CIO (AFSCME) asserted that, ``[b]ecause Congress has legislatively
ratified the existing six-factor Economic Reality test, the Secretary
and Administrator are powerless to alter the standard. This also means
the Proposed Rule would fail the first step of the Chevron deference
analysis and would be entitled to no deference by the courts.''
According to AFSCME, ``when Congress re-enacts a statute without
change, it is presumed to be aware of administrative and judicial
interpretation of that statute and to have adopted those
interpretations.'' Based on this principle, AFSCME reasoned that,
because Congress did not revise the definition of ``employ'' when it
amended the FLSA in 1966, it must have adopted the ``integrated unit of
production'' factor articulated in Rutherford Food, 331. U.S. 730.
Additionally, AFSCME asserted that Congress's 1983 decision to adopt
the FLSA's definition of ``employ'' without revision in MSPA indicates
that Congress implicitly adopted the ``six-factor test [that] was well
embedded as the interpretation of the FLSA's `employ.' ''
AFSCME's ratification argument is based entirely on the fact that
Congress has not amended the FLSA's definition of ``employ.'' The
Supreme Court, however, has ``criticized . . . reliance on
congressional inaction'' as a tool of statutory interpretation,
cautioning that, ``[a]s a general matter . . . these arguments deserve
little weight in the interpretive process.'' Central Bank of Denver,
N.A. v. First Interstate Bank of Denver, N. A., 511 U.S. 164, 187
(1994). ``And when . . . Congress has not comprehensively revised a
statutory scheme but has made only isolated amendments, [the Court has]
spoken more bluntly: `It is impossible to assert with any degree of
assurance that congressional failure to act represents affirmative
congressional approval of the Court's statutory interpretation.' ''
Alexander v. Sandoval, 532 U.S. 275, 292, (2001) (quoting Patterson v.
McLean Credit Union, 491 U.S. 164, 175 n.1 (1989)). Congress has not
``comprehensively revised'' the Act's statutory scheme in a manner that
would indicate Congressional approval of a judicially created six-
factor test as the standard for FLSA employment.
Even if some insight could be gleaned from Congressional inaction,
that insight would not support ratifying a specific and definitive six-
factor test because there has never been a uniform test for Congress to
ratify. The Supreme Court has never articulated a six-factor test, and
courts of appeals articulate the test differently. As discussed
earlier, the Second Circuit combines two of the factors. The Fifth
Circuit omits one factor, while the remaining circuits use a sixth,
``integral part'' factor that departs from the Supreme Court's
consideration of ``integrated unit of production.'' Some circuits
analyze a ``skill and initiative'' factor, while others consider just
``skill required.'' Some circuits analyze the investment factor by
comparing the dollar value of the worker's investment against that of
the hiring entity, while others analyze whether the worker's investment
creates opportunities for profit or loss. Simply put, there is no
single test that Congress could have impliedly ratified, nor did AFSCME
suggest one.
For these reasons, Congress's inaction does not demonstrate that it
ratified a specific six-factor economic reality test.
5. Whether the Rulemaking Improperly Departs From Prior Practice
Several commenters, including NELA, contended that the proposed
rule would be an improper departure from the Department's prior
practice. The rule is consistent with the Department's prior position
that the ultimate inquiry for determining employee versus independent
contractor status under the FLSA is whether an individual is, as a
matter of economic reality, economically dependent on another for work
or is instead in business for him- or herself. The rule is further
consistent with the Department's longstanding position that all
economic reality factors should be analyzed when answering that
ultimate inquiry.
The Department acknowledges that the rule's focus on two core
factors that are most probative to that ultimate inquiry is different
from how the Department articulated the economic reality test in the
past. ``Agencies are free to change their existing policies as long as
they provide a reasoned explanation for the change.'' Encino Motorcars,
LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016). The Department has
explained its reasoning for focusing the economic reality test on two
core factors throughout the NPRM and this preamble. The Department
further acknowledges that the rule lists economic reality factors in
Sec. 795.105(d) that correspond with how the Department has
articulated those factors in the past, with a few modifications. The
Department explained its reasons for these modifications in the NPRM
and in this preamble. This rule does not improperly depart from the
Department's prior positions.
H. Examples
As discussed above, many commenters requested that the regulatory
text contain examples of how the economic reality test would apply in
the context of their specific industries or practices. The Department,
however, prefers to adopt generally applicable principles as opposed to
attempting to provide guidance for every potential scenario. The later
approach would require the regulation be drafted as an exhaustive
treatise that is neither accessible nor helpful for most members of the
regulated community. It would also invariably omit many important types
of circumstances and be more difficult to adapt to future industries
and practices that neither the Department nor commenters could have
conceived.
While the Department cannot provide examples for every conceivable
scenario, it is adding Sec. 795.115 to provide six illustrative
examples that involve a variety of industries and specific facts. Due
to the complexities of balancing multiple factors that encompass
countless facts that are part of the totality of the circumstances, the
Department does not believe it would be helpful to provide examples
that make conclusions regarding workers' ultimate classifications.
Rather, each illustrative example focuses on the classification favored
by a specific economic reality factor within the context of the fact-
specific scenario. The first example concerns the control factor in the
context of the long-haul transportation industry. The second example
concerns
[[Page 1209]]
the opportunity factor in the context of the gig economy. The third
example concerns the opportunity factor in the context of the
construction industry and clarifies the concept of economic dependence.
The fourth example concerns the permanence factor within the context of
a seasonal hospitality industry. The fifth example concerns the
reframed ``integrated unit'' factor within the context of the
journalism industry. The sixth example also concerns the new
``integrated unit'' factor within the context of the journalism
industry and is designed to work with the fifth example to elucidate
the distinction between when this factor favors classification as an
employee versus independent contractor.
I. Severability
The Department proposed to include a severability provision in part
795 so that, if one or more of the provisions of part 795 is held
invalid or stayed pending further agency action, the remaining
provisions would remain effective and operative. The Department did not
receive any comments on this provision, and finalizes it as proposed.
J. Amendments to Existing Regulatory Provisions at Sec. Sec.
780.330(b) and 788.16(a)
Finally, in addition to the proposed addition of part 795, the
Department proposed to amend existing regulatory provisions addressing
independent contractor status under the FLSA in narrower contexts at 29
CFR 780.330(b) (tenants and sharecroppers) and 29 CFR 788.16(a)
(certain forestry and logging workers). Specifically, the Department
proposed to replace descriptions of the six economic reality factors
WHD has historically used to evaluate independent contractor status
under the FLSA with a cross-reference to the guidance provided in new
part 795. While some commenters invoked the existing provisions at
Sec. Sec. 780.330(b) and 788.16(a) to justify opposition to proposed
part 795, the Department did not receive any commenter feedback
regarding the proposed amendment of these provisions. Accordingly, the
Department finalizes amendments to these provisions as proposed.
V. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections, their
practical utility, the impact of paperwork and other information
collection burdens imposed on the public, and how to minimize those
burdens. In the NPRM, the Department invited public comment on its
determination that the proposal did not contain a collection of
information subject to OMB approval under the PRA. A few commenters,
while not referencing the PRA directly, discussed records in their
public comments. However, this was merely to note agreement that
section 11 of the FLSA does not require the keeping of records
regarding workers who are independent contractors. This final rule does
not contain a collection of information subject to OMB approval under
the PRA.
VI. Executive Order 12866, Regulatory Planning and Review; and
Executive Order 13563, Improved Regulation and Regulatory Review
A. Introduction
Under Executive Order 12866, OMB's Office of Information and
Regulatory Affairs determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
Executive Order and OMB review.\62\ Section 3(f) of Executive Order
12866 defines a ``significant regulatory action'' as a regulatory
action that is likely to result in a rule that may: (1) Have an annual
effect on the economy of $100 million or more, or adversely affect in a
material way a sector of the economy, productivity, competition, jobs,
the environment, public health or safety, or state, local or tribal
governments or communities (also referred to as economically
significant); (2) create serious inconsistency or otherwise interfere
with an action taken or planned by another agency; (3) materially alter
the budgetary impact of entitlements, grants, user fees or loan
programs or the rights and obligations of recipients thereof; or (4)
raise novel legal or policy issues arising out of legal mandates, the
President's priorities, or the principles set forth in the Executive
Order. Because the annual effect of this rule is estimated to be
greater than $100 million, this rule will be economically significant
under section 3(f) of Executive Order 12866.\63\
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\62\ See 58 FR 51735 (Sept. 30, 1993).
\63\ The entirety of the estimated costs from this deregulatory
action, which exceed the $100 million threshold and relate strictly
to familiarization, fall in the first year alone. The Department's
Regulatory Impact Analysis further explains that these one-year
costs are more than offset by continuing annual cost-savings of
$495.8 million per year, accruing to the same parties that face the
familiarization costs.
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Executive Order 13563 directs agencies to, among other things,
propose or adopt a regulation only upon a reasoned determination that
its benefits justify its costs; that it is tailored to impose the least
burden on society, consistent with obtaining the regulatory objectives;
and that, in choosing among alternative regulatory approaches, the
agency has selected those approaches that maximize net benefits.
Executive Order 13563 recognizes that some costs and benefits are
difficult to quantify and provides that, when appropriate and permitted
by law, agencies may consider and discuss qualitatively values that are
difficult or impossible to quantify, including equity, human dignity,
fairness, and distributive impacts.
B. Overview of Analysis
The Department believes this rule is likely to improve the welfare
of both workers and businesses on the whole. With respect to
businesses, the Department believes that the improved clarity offered
by the rule will increase the efficiency of the labor market, allowing
businesses to be more productive and decreasing their litigation
burden. With respect to workers, broadly speaking, this rule is likely
to have four categories of potential effects.
First, this rulemaking makes it easier for the millions of
individuals who currently work as independent contractors and those who
hire them to comply with the law. See Farren and Mitchell (``The
proposed rule will likely reduce the cost of complying with the
relevant Federal regulations.''). Compliance cost savings will be
shared between the independent contractors and businesses for which
they work. Id. (``labor regulations are generally paid for by
reductions in workers' total compensation'').
Second, as explained above, the legal clarity from this rule is
likely to reduce occurrences of misclassification by enabling firms and
workers to better understand their respective obligations and rights
under the FLSA. The Department agrees with commenters that
misclassification harms workers and believes this rule will reduce
those harms by facilitating compliance.
Third, legal clarity may encourage firms to create independent
contractor arrangements for roles that did not previously exist, which
may attract workers who otherwise would not work in that field. Such
job creation unambiguously benefits workers and firms alike. See Dr.
Liya Palagashvili (``[W]e got the impression from our interviews that
the primary concern for startups in terms of labor regulation or policy
is mostly with regulation of independent contractors.''), and Fuller et
al. (``[M]ore than two-thirds of [women with advanced degrees or high-
[[Page 1210]]
honors BAs] who drop out of the workforce would not have done so if
they'd had access to more-flexible job arrangements.'').\64\
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\64\ Joseph B. Fuller, et al., Rethinking the On-Demand
Workforce, Harvard Business Review (Oct. 20, 2020).
---------------------------------------------------------------------------
Fourth, as a result of the improved clarity of the rule, businesses
might convert existing positions from employee to independent
contractor. This rule provides the most legal certainty to employers
classifying a worker as an independent contractor if the worker
substantially controls the work and has a meaningful opportunity for
profit or loss based on initiative or investment. As such, a job
conversion attributable to the legal clarity provided by this rule is
likely to satisfy the control and opportunity criteria.\65\ Businesses
could reclassify existing employees as independent contractors by
modifying their working relationship under the criteria of this rule,
and would only be expected to do so upon determination that the clarity
provided by this rule materially shifts the balance of tradeoffs.
Business could also reclassify positions because the increased clarity
of the rule confirms that their workers are actually already
effectively independent contractors because their workers have
substantial control over the work and have an opportunity for
profit.\66\ Any benefit to businesses of modified classifications would
need to outweigh the costs, including any autonomy they cede to workers
in such arrangements and any costs associated with implementation or
modifying the classification itself, and such a relationship would need
to be compatible with their business models. Further, generally
speaking, workers have a choice of whether to agree to the new
independent contractor arrangement. The overall effect of job
conversion on workers is ambiguous and could vary from worker to
worker, as discussed in more detail in section VI(D)(7) below. Impacts
resulting from litigation avoidance due to increased clarity are
discussed in section VI(F)(2).
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\65\ Section 795.105(c) indicates that a worker who lacks both
control and opportunity is most likely an employee. As such, the
Department believes this rule would discourage employers from
converting such workers from employee to independent contractor
status. Section 795.105(c) would not give an employer sufficient
confidence that it could change the classification of a worker who
has only control but not opportunity, or vice versa.
\66\ The Department notes that the final rule does not, by its
operation, change the classification of any employee.
Notwithstanding the assertions of several commentators, as explained
throughout the analysis, the rule does not narrow the definition of
who is an employee under the FLSA.
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The Department did not attempt to quantify all aspects of these
four categories of potential impacts. In particular, the Department
believes that significant uncertainty surrounds any attempt to quantify
the number or nature of new independent contractor relationships that
could arise as a result of this rule. Although the Department assumes
that there will be an increase in the number of independent contracting
relationships, the Department did not attempt to put a specific number
on this figure and did not attempt to estimate how new independent
contractors might differ from existing independent contractors. The
Department is uncertain with respect to several key questions,
including how many new workers will be added and what their
characteristics will be, how many existing employee relationships may
be converted to independent contractor status, and which industries,
type or sizes of employers would be most impacted. Absent these data,
the Department is not well positioned to generate a constructive
estimate or model of impact on the change in independent contracting
relationships due to the rule. Notwithstanding, the Department
quantified certain other impacts associated with the final rule,
including those to current independent contractors and businesses where
sufficient data and theory afforded greater confidence in the resulting
estimates.
Regarding the employees who may be negatively impacted by this
rule, the Department has ascertained certain characteristics that it
expects will be representative across this group. This rule provides a
sharpening of the economic realities test, which is a marginal change
that may impact firms' assessment of legal risk, leading to an
increased chance that some employers will choose to reclassify certain
positions from employee to independent contractor relationships.
Because this analysis attempts to quantify the marginal impacts of this
rule, if the only change is increased legal clarity, any resulting
change in classification will most likely be limited to workers who
already possess characteristics associated with independent contractor
status, including control and opportunity for profit or loss.\67\ Due
to the customary negotiation between firms and workers, most workers
whose positions are converted will be in a position to influence the
tradeoffs between employee and independent contractor status. The one
group of workers for whom these assumptions may not apply is those
workers paid the minimum wage, and whose positions already resemble
characteristics of independent contractors. Workers earning the minimum
wage may lack the bargaining power to fully offset the adverse effects
triggered by the job conversion; however, independent contractor status
often carries flexibilities that may further offset some of these
effects, albeit non-monetarily. Further, on one hand, these workers
likely do not have extensive benefits coverage, but on the other hand,
they may qualify for access to benefits from other means. There are
approximately 370,000 workers over the age of 19 who earn the minimum
wage, which represents 0.24 percent of the workforce. It is unclear how
many of these jobs could be converted to independent contractor status
without material modifications to the position or substantive
negotiation on overall compensation, but it is not likely to be many.
Further, many of these workers may have access to health insurance
coverage via a spouse or partner, a parent, or a government program
(Medicaid, Medicare, Tricare, etc.). For these reasons, the Department
does not expect there to be many current employees whose positions are
converted to independent contractor relationships without meaningful
ability to influence the terms of the new position in a way that
mitigates deleterious impacts of the resulting tradeoffs.
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\67\ For greater discussion on this and other points in this
summary, please see Section XXXX on Job Conversion.
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The Department estimates there were 10.6 million workers who worked
at any given time as independent contractors as their primary jobs in
the United States in 2017 (6.9 percent of all workers), the most recent
year of data available. Including independent contracting on secondary
jobs results in an estimate of 18.9 million independent contractors
(12.3 percent of all workers). The Department discusses other studies
estimating the total number of independent contractors, ranging from
6.1 percent to 14.1 percent of workers (see Table 2 in VI.C.2). Due to
uncertainties regarding magnitude and other factors, the Department has
not quantified the potential change to the aggregate number of
independent contractors that may occur as a result of this rule.
Furthermore, the Department's analysis relies on data collected prior
to 2020, which reflects the state of the economy prior to the COVID-19
pandemic. The Department acknowledges that data on independent
contractors could look different during the pandemic and following its
[[Page 1211]]
economic effects, but does not yet have information to determine how
the number of independent contractors could change nor whether these
changes would be lasting or a near term market distortion.\68\
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\68\ Recent studies and news reports suggest that more
individuals are working under freelance or independent contractor
arrangements during the pandemic. See, e.g., Press Release, New
Upword Study Finds 36% of the U.S. Workforce Freelance Amid the
COVID-19 Pandemic, Sep. 15, 2020, available at https://www.upwork.com/press/releases/new-upwork-study-finds-36-of-the-us-workforce-freelance-amid-the-covid-19-pandemic; Kim Mackrael, In the
Covid Economy, Laid-Off Employees become New Entrepreneurs, Wall
Street Journal, Nov. 18, 2020; Uri Berliner, Jobs in the Pandemic:
More Are Freelance and may stay that way forever, NPR, Sep. 16,
2020; Jon Younger, A New Payoneer Report Shows Covid 19 is
Accelerating Freelance Growth, Forbes, Sep. 1., 2020.
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The Department estimates regulatory familiarization costs to be
$370.9 million in the first year. The Department estimates cost savings
due to increased clarity to be $447.1 million per year, and cost
savings due to reduced litigation to be $48.7 million per year. This
results in a 10-year annualized net cost savings of $452.4 million
using a 3 percent discount rate and $443.0 million using a 7 percent
discount rate.\69\ For purposes of Executive Order 13771, the
Department calculated the difference between the total cost savings and
the total costs in $2016, discounted over a perpetual time horizon
using a 7 percent discount rate beginning in 2021 when the rule will
take effect. This results in an annualized net cost savings over a
perpetual time horizon of $315.5 million.\70\ Other anticipated costs,
benefits, and cost savings are discussed qualitatively.
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\69\ Discount rates are directed by OMB. See Circular A-4, OMB
(Sept. 17, 2003).
\70\ $332.9 million-$17.4 million = $315.5 million. Per OMB
guidelines, Executive Order 13771 data is represented in 2016
dollars, inflation-adjusted for when the rule will take effect.
Table 1--Summary of Rule Impacts
[$2019 Millions]
----------------------------------------------------------------------------------------------------------------
Annualized values \a\
Impact Year 1 Years 2-10 -------------------------------
7% Discount 3% Discount
----------------------------------------------------------------------------------------------------------------
Regulatory Familiarization Costs:
Establishments.............................. $152.3 $0.0 $21.7 $17.9
Independent Contractors..................... 218.6 0.0 31.1 25.6
---------------------------------------------------------------
Total................................... 370.9 0.0 52.8 43.5
Cost Savings from Increased Clarity:
Employers................................... 369.0 369.0 369.0 369.0
Independent Contractors..................... 78.1 78.1 78.1 78.1
---------------------------------------------------------------
Total................................... 447.1 447.1 447.1 447.1
Cost Savings from Reduced Litigation............ 48.7 48.7 48.7 48.7
Total Cost Savings.............................. 495.8 495.8 495.8 495.8
Net Cost Savings (Cost Savings--Costs).......... 125.0 495.8 443.0 452.4
----------------------------------------------------------------------------------------------------------------
\a\ Annualized over 10-years.
C. Independent Contractors: Size and Demographics
The Department extrapolated from U.S. Census Bureau data to
estimate that there are 15.6 to 22.1 million individuals who work as
independent contractors as either a primary or secondary job. This
estimated figure could be higher or lower depending on different data
sources and methodologies discussed below. The Department used the
median of the above range, 18.9 million, for its estimates to avoid
overestimation by accounting for a number of criteria, which are
presented in this section.
1. Current Number of Independent Contractors
The Department estimated the number of independent contractors.
There are a variety of estimates of the number of independent
contractors spanning a wide range depending on methodologies and how
the population is defined. The Department believes that the Current
Population Survey (CPS) Contingent Worker Supplement (CWS) offers an
appropriate lower bound for the number of independent contractors;
however, there are potential biases in these data that will be noted.
Additionally, estimates from other sources will be presented to
demonstrate the potential range.
The U.S. Census Bureau conducts the CPS and it is published monthly
by the Bureau of Labor Statistics (BLS). The sample includes
approximately 60,000 households and is nationally representative.
Periodically since 1995, and most recently in 2017, the CPS has
included a supplement to the May survey to collect data on contingent
and alternative employment arrangements. Based on the CWS, there were
10.6 million independent contractors in 2017, amounting to 6.9 percent
of workers.\71\ The CWS measures those who say that their independent
contractor job is their primary job and that they worked at the
independent contractor job in the survey's reference week. However,
while the Department refers to the CWS measure of independent
contractors throughout this analysis, due to the survey's design it
should be uniformly recognized as representing a constrained subsection
of the entire independent contractor pool. Due to its clear
methodological constraints, the CWS measure should be differentiated
from other, more comprehensive measures.
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\71\ Bureau of Labor Statistics, ``Contingent and Alternative
Employment Arrangements--May 2017,'' USDL-18-0942 (June 7, 2018),
https://www.bls.gov/news.release/pdf/conemp.pdf.
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The BLS's estimate of independent contractors includes ``[w]orkers
who are identified as independent contractors, independent consultants,
or freelance workers, regardless of whether they are self-employed or
wage and salary workers.'' BLS asks two questions to identify
independent contractors: \72\
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\72\ The variables used are PES8IC=1 for self-employed and
PES7=1 for other workers.
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Workers reporting that they are self-employed are asked:
``Are you self-employed as an independent contractor, independent
consultant, freelance worker, or something else (such as a shop or
restaurant owner)?'' (9.0 million independent contractors.) We refer to
these workers as ``self-employed
[[Page 1212]]
independent contractors'' in the remainder of the analysis.
Workers reporting that they are wage and salary workers
are asked: ``Last week, were you working as an independent contractor,
an independent consultant, or a freelance worker? That is, someone who
obtains customers on their own to provide a product or service.'' (1.6
million independent contractors.) We refer to these workers as ``other
independent contractors'' in the remainder of the analysis.
It is important to note that independent contractors are identified
in the CWS in the context of the respondent's ``main'' job (i.e., the
job with the most hours).\73\ Therefore, the estimate of independent
contractors does not include those who may be defined as an employee
for their primary job, but may work as an independent contractor for a
secondary or tertiary job.\74\ For example, Lim et al. (2019) estimate
that independent contracting work is the primary source of income for
48 percent of independent contractors.\75\ Applying this estimate to
the 10.6 million independent contractors estimated from the CWS,
results in 22.1 million independent contractors (10.6 million / 0.48).
Alternatively, a survey of independent contractors in Washington found
that 68 percent of respondents reported that independent contract work
was their primary source of income.\76\ Applying that estimate to the
10.6 million independent contractors from the CWS results in an
estimated 15.6 million independent contractors (10.6 million / 0.68).
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\73\ While self-employed independent contractors are identified
by the worker's main job, other independent contractors answered yes
to the CWS question about working as an independent contractor last
week. Although the survey question does not ask explicitly about the
respondent's main job, it follows questions asked in reference to
the respondent's main job.
\74\ Even among independent contractors, failure to report
multiple jobs in response to survey questions is common. For
example, Katz and Krueger (2019) asked Amazon Mechanical Turk
participants the CPS-style question ``Last week did you have more
than one job or business, including part time, evening or weekend
work?'' In total, 39 percent of respondents responded affirmatively.
However, these participants were asked the follow-up question ``Did
you work on any gigs, HITs or other small paid jobs last week that
you did not include in your response to the previous question?''
After this question, which differs from the CPS, 61 percent of those
who indicated that they did not hold multiple jobs on the CPS-style
question acknowledged that they failed to report other work in the
previous week. As Katz and Krueger write, ``If these workers are
added to the multiple job holders, the percent of workers who are
multiple job holders would almost double from 39 percent to 77
percent.'' See L. Katz and A. Krueger, ``Understanding Trends in
Alternative Work Arrangements in the United States,'' RSF: The
Russell Sage Foundation Journal of the Social Sciences 5(5), p. 132-
46 (2019).
\75\ K. Lim, A. Miller, M. Risch, and E. Wilking, ``Independent
Contractors in the U.S.: New Trends from 15 years of Administrative
Tax Data,'' Department of Treasury, p. 61 (Jul. 2019), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
\76\ Washington Department of Commerce, ``Independent Contractor
Study,'' p. 21 (Jul. 2019), https://deptofcommerce.app.box.com/v/independent-contractor-study.
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The Coalition for Workforce Innovation (CWI) submitted a survey
they conducted of 600 self-identified independent contractors. The
survey found that independent contracting is the primary source of
income for 71 percent of respondents.\77\ This is consistent with the
prior estimate from Washington State. Applying this estimate to the
10.6 million primary independent contractors estimated from the CWS,
results in 14.9 million independent contractors (10.6 million / 0.71).
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\77\ Coalition for Workforce Innovation. ``National Survey of
600 Self-Identified Independent Contractors'' (January 2020),
https://rilastagemedia.blob.core.windows.net/rila-web/rila.web/media/media/pdfs/letters%20to%20hill/hr/cwi-report-final.pdf.
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The CWS's large sample size results in small sampling error.
However, the questionnaire's design may result in some non-sampling
error. For example, one potential source of bias is that the CWS only
considers independent contractors during a single point in time--the
survey week (generally the week prior to the interview).
These numbers will thus underestimate the prevalence of independent
contracting over a longer timeframe, which may better capture the size
of the population.\78\ For example, Farrell and Greig (2016) used a
randomized sample of 1 million Chase customers to estimate prevalence
of the Online Platform Economy.\79\ They found that ``[a]lthough 1
percent of adults earned income from the Online Platform Economy in a
given month, more than 4 percent participated over the three-year
period.'' Additionally, Collins et al. (2019) examined tax data from
2000 through 2016 and found that the number of workers who filed a form
1099 grew substantially over that period, and that fewer than half of
these workers earned more than $2,500 from 1099 work in 2016. The
prevalence of lower annual earnings implies that most workers who
received a 1099 did not work as an independent contractor every
week.\80\
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\78\ In any given week, the total number of independent
contractors would have been roughly the same, but the identity of
the individuals who do it for less than the full year would likely
vary. Thus, the number of unique individuals who work at some point
in a year as independent contractors would exceed the number of
independent contractors who work within any one-week period as
independent contractors.
\79\ D. Farrell and F. Greig, ``Paychecks, Paydays, and the
Online Platform,'' JPMorgan Chase Institute (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911293.
\80\ B. Collins, A. Garin, E. Jackson, D. Koustas, and M. Payne,
``Is Gig Work Replacing Traditional Employment? Evidence from Two
Decades of Tax Returns,'' IRS SOI Joint Statistical Research Program
(2019) (unpublished paper), https://www.irs.gov/pub/irs-soi/19rpgigworkreplacingtraditionalemployment.pdf.
---------------------------------------------------------------------------
The CWS also uses proxy responses, which may underestimate the
number of independent contractors. The RAND American Life Panel (ALP)
survey conducted a supplement in 2015 to mimic the CWS questionnaire,
but used self-responses only. The results of the survey were summarized
by Katz and Krueger (2018).\81\ This survey found that independent
contractors comprise 7.2 percent of workers.\82\ Katz and Krueger
identified that the 0.5 percentage point difference in magnitude
between the CWS and the ALP was due to both cyclical conditions, and
the lack of proxy responses in the ALP.\83\ Therefore, the Department
believes a reasonable upper-bound on the potential bias due to the use
of proxy responses in the CWS is 0.5 percentage points (7.2 versus
6.7).84 85
---------------------------------------------------------------------------
\81\ See Katz and Krueger (2018), supra note 12.
\82\ Id. at 49. The estimate is 9.6 percent without correcting
for overrepresentation of self-employed workers or multiple job
holders. Id. at 31.
\83\ Id. at Addendum (``Reconciling the 2017 BLS Contingent
Worker Survey'').
\84\ Note that they estimate 6.7 percent of employed workers are
independent contractors using the CWS, as opposed to 6.9 percent as
estimated by the BLS. This difference is attributable to changes to
the sample to create consistency.
\85\ In addition to the use of proxy responses, this difference
is also due to cyclical conditions. The impacts of these two are not
disaggregated for independent contractors, but if we applied the
relative sizes reported for all alternative work arrangements, we
would get 0.36 percentage point difference due to proxy responses.
Additionally, it should be noted that this may not entirely be a
bias. It stems from differences in independent contracting reported
by proxy respondents and actual respondents. As Katz and Krueger
explain, this difference may be due to a ``mode'' bias or proxy
respondents may be less likely to be independent contractors. Id. at
Addendum p. 4.
---------------------------------------------------------------------------
Another potential source of bias in the CWS is that some
respondents may not self-identify as independent contractors, and
others who self-identify may themselves be improperly classified. There
are reasons to believe that some workers, who are legally considered
independent contractors, would not self-identify as such. For example,
if the worker has only one employer/client, or did not actively pursue
the employer/client, then they may not agree that they ``[obtain]
customers on their own to provide a product or service.'' Additionally,
individuals who do only
[[Page 1213]]
informal work may not view themselves as independent contractors.\86\
This population could be substantial. Abraham and Houseman (2019)
confirmed this in their examination of the Survey of Household
Economics and Decision-making. They found that 28 percent of
respondents reported doing informal work for money over the past
month.\87\ Conversely, some workers who are improperly classified by
their employers as independent contractors may answer in the
affirmative, despite not truly being independent contractors. The
prevalence of misclassification is unknown, but it likely occurs across
numerous sectors in the economy.\88\ Because reliable data on the
potential magnitude of these biases are unavailable, and so the net
direction of the biases is unknown, the Department has not attempted to
calculate how these biases may impact the estimated number of
independent contractors.
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\86\ The Department believes that including data on informal
work is useful when discussing the magnitude of independent
contracting, although not all informal work is done by independent
contractors. The Survey of Household Economics and Decision-making
asked respondents whether they engaged in informal work sometime in
the prior month. It categorized informal work into three broad
categories: Personal services, on-line activities, and off-line
sales and other activities, which is broader than the scope of
independent contractors. These categories include activities like
house sitting, selling goods online through sites like eBay or
craigslist, or selling goods at a garage sale. The Department
acknowledges that the data discussed in this study might not be a
one-to-one match with independent contracting, but it nonetheless
provides useful data for this purpose.
\87\ K. Abraham, and S. Houseman. ``Making Ends Meet: The Role
of Informal Work in Supplementing Americans' Income.'' RSF: The
Russell Sage Foundation Journal of the Social Sciences 5(5): 110-31
(2019), https://www.aeaweb.org/conference/2019/preliminary/paper/QreAaS2h.
\88\ See, e.g., U.S. Gov't Accountability Off., GAO-09-717,
Employee Misclassification: Improved Coordination, Outreach, and
Targeting Could Better Ensure Detection and Prevention 10 (2008)
(``Although the national extent of employee misclassification is
unknown, earlier national studies and more recent, though not
comprehensive, studies suggest that employee misclassification could
be a significant problem with adverse consequences.'').
---------------------------------------------------------------------------
Because the CWS estimate represents only the number of workers who
worked as independent contractors on their primary job during the
survey reference week, the Department applied the research literature
and adjusted this measure to include workers who are independent
contractors in a secondary job or who were excluded from the CWS
estimate due to other factors. As noted above, integrating the
estimated pr