Independent Contractor Status Under the Fair Labor Standards Act; Withdrawal, 14027-14038 [2021-05256]
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Federal Register / Vol. 86, No. 47 / Friday, March 12, 2021 / Proposed Rules
navigation information for the
instrument procedures at this airport.
Class E airspace designations are
published in paragraph 6005 of FAA
Order 7400.11E, dated July 21, 2020,
and effective September 15, 2020, which
is incorporated by reference in 14 CFR
71.1. The Class E airspace designations
listed in this document will be
published subsequently in the Order.
FAA Order 7400.11, Airspace
Designations and Reporting Points, is
published yearly and effective on
September 15.
Regulatory Notices and Analyses
The FAA has determined that this
regulation only involves an established
body of technical regulations for which
frequent and routine amendments are
necessary to keep them operationally
current, is non-controversial and
unlikely to result in adverse or negative
comments. It, therefore: (1) Is not a
‘‘significant regulatory action’’ under
Executive Order 12866; (2) is not a
‘‘significant rule’’ under DOT
Regulatory Policies and Procedures (44
FR 11034; February 26, 1979); and (3)
does not warrant preparation of a
regulatory evaluation as the anticipated
impact is so minimal. Since this is a
routine matter that will only affect air
traffic procedures and air navigation, it
is certified that this rule, when
promulgated, would not have a
significant economic impact on a
substantial number of small entities
under the criteria of the Regulatory
Flexibility Act.
Environmental Review
This proposal will be subject to an
environmental analysis in accordance
with FAA Order 1050.1F,
‘‘Environmental Impacts: Policies and
Procedures’’ prior to any FAA final
regulatory action.
Airspace, Incorporation by reference,
Navigation (air).
The Proposed Amendment
Accordingly, pursuant to the
authority delegated to me, the Federal
Aviation Administration proposes to
amend 14 CFR part 71 as follows:
PART 71—DESIGNATION OF CLASS A,
B, C, D, AND E AIRSPACE AREAS; AIR
TRAFFIC SERVICE ROUTES; AND
REPORTING POINTS
1. The authority citation for 14 CFR
part 71 continues to read as follows:
■
Authority: 49 U.S.C. 106(f), 106(g); 40103,
40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR,
1959–1963 Comp., p. 389.
16:38 Mar 11, 2021
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[Amended]
2. The incorporation by reference in
14 CFR 71.1 of FAA Order 7400.11E,
Airspace Designations and Reporting
Points, dated July 21, 2020, and
effective September 15, 2020, is
amended as follows:
■
Paragraph 6005 Class E Airspace Areas
Extending Upward From 700 Feet or More
Above the Surface of the Earth.
*
*
*
*
*
ASW TX E5 Yoakum, TX [Amended]
Yoakum Municipal Airport, TX
(Lat. 29°18′47″ N, long. 97°08′18″ W)
That airspace extending upward from 700
feet above the surface within a 6.3-mile
radius of Yoakum Municipal Airport.
Issued in Fort Worth, Texas, on March 8,
2021.
Martin A. Skinner,
Manager, Operations Support Group, ATO
Central Service Center.
[FR Doc. 2021–05139 Filed 3–11–21; 8:45 am]
BILLING CODE 4910–13–P
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;
Withdrawal
Wage and Hour Division,
Department of Labor.
ACTION: Notice of proposed rulemaking;
request for comments.
AGENCY:
This notice of proposed
rulemaking (NPRM) proposes to
withdraw the final rule titled
‘‘Independent Contractor Status under
the Fair Labor Standards Act,’’ which
was published on January 7, 2021 and
the effective date of which is currently
May 7, 2021.
DATES: Submit written comments on or
before April 12, 2021.
ADDRESSES: You may submit comments,
identified by Regulatory Information
Number (RIN) 1235–AA34, by either of
the following methods: Electronic
Comments: Submit comments through
the Federal eRulemaking Portal at
http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Address written submissions to
Division of Regulations, Legislation, and
Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S–
3502, 200 Constitution Avenue, NW,
Washington, DC 20210. Instructions:
Please submit only one copy of your
SUMMARY:
List of Subjects in 14 CFR Part 71
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comments by only one method.
Commenters submitting file attachments
on www.regulations.gov are advised that
uploading text-recognized documents—
i.e., documents in a native file format or
documents which have undergone
optical character recognition (OCR)—
enable staff at the Department to more
easily search and retrieve specific
content included in your comment for
consideration. Anyone who submits a
comment (including duplicate
comments) should understand and
expect that the comment will become a
matter of public record and will be
posted without change to https://
www.regulations.gov, including any
personal information provided. The
Department will post comments
gathered and submitted by a third-party
organization as a group under a single
document ID number on https://
www.regulations.gov. All comments
must be received by 11:59 p.m. EST on
April 12, 2021 for consideration. The
Department strongly recommends that
commenters submit their comments
electronically via http://
www.regulations.gov to ensure timely
receipt prior to the close of the comment
period, as the Department continues to
experience delays in the receipt of mail.
Submit only one copy of your comments
by only one method. Docket: For access
to the docket to read background
documents or comments, go to the
Federal eRulemaking Portal at http://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Amy DeBisschop, Division of
Regulations, Legislation, and
Interpretation, Wage and Hour Division,
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 proposal 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.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory and Legal Background
The Fair Labor Standards Act (FLSA
or Act) requires all covered employers
to pay nonexempt employees at least the
federal minimum wage for every hour
worked in a non-overtime workweek.1
In an overtime workweek, for all hours
worked in excess of 40 in a workweek,
covered employers must pay a
1 29
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nonexempt employee at least one and
one-half times the employee’s regular
rate.2 The FLSA also requires covered
employers to make, keep, and preserve
certain records regarding employees.3
The FLSA’s minimum wage and
overtime pay requirements apply only
to employees.4 Section 3(e) generally
defines ‘‘employee’’ to mean ‘‘any
individual employed by an employer.’’ 5
Section 3(d) of the Act defines
‘‘employer’’ to ‘‘include[ ] any person
acting directly or indirectly in the
interest of an employer in relation to an
employee.’’ 6 Section 3(g) defines
‘‘employ’’ to ‘‘include[ ] to suffer or
permit to work.’’ 7
The Supreme Court, in interpreting
these definitions, has stated that ‘‘[a]
broader or more comprehensive
coverage of employees within the stated
categories would be difficult to frame,’’
and that ‘‘the term ‘employee’ had been
given ‘the broadest definition that has
ever been included in any one act.’ ’’ 8
The Supreme Court has further stated
that the ‘‘striking breadth’’ of the FLSA’s
definition of ‘‘employ’’—‘‘to suffer or
permit to work’’—‘‘stretches the
meaning of ‘employee’ to cover some
parties who might not qualify as such
under a strict application of traditional
agency law principles.’’ 9 Thus, the
FLSA expressly rejects the common law
standard for determining whether a
worker is an employee.10
Though the FLSA’s definition of
employee is broader than the common
law definition, the Supreme Court has
also recognized that the Act was ‘‘not
intended to stamp all persons as
employees.’’ 11 The Supreme Court has
acknowledged that even a broad
definition of employee ‘‘does not mean
2 29
U.S.C. 207(a).
U.S.C. 211(c).
4 See 29 U.S.C. 206 (minimum wage) and 207
(overtime pay).
5 29 U.S.C. 203(e)(1).
6 29 U.S.C. 203(d).
7 29 U.S.C. 203(g).
8 United States v. Rosenwasser, 323 U.S. 360, 362,
363 n.3 (1945) (quoting 81 Cong. Rec. 7657
(statement of Senator Black)).
9 Nationwide Mut. Ins. v. Darden, 503 U.S. 318,
326 (1992).
10 See id.; Walling v. Portland Terminal Co., 330
U.S. 148, 150–51 (1947) (‘‘But in determining who
are ‘employees’ under the Act, common law
employee categories or employer-employee
classifications under other statutes are not of
controlling significance. This Act contains its own
definitions, comprehensive enough to require its
application to many persons and working
relationships, which prior to this Act, were not
deemed to fall within an employer-employee
category.’’ (citation omitted)).
11 Portland Terminal, 330 U.S. at 152; see also
Rutherford Food Corp. v. McComb, 331 U.S. 722,
729 (1947) (workers may not be employees when
their work does not ‘‘in its essence . . . follow[ ] the
usual path of an employee’’).
3 29
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that all who render service to an
industry are employees.’’ 12 One
category of workers that has been
recognized as being outside the FLSA’s
broad definition of ‘‘employees’’ is
‘‘independent contractors.’’ 13 Courts
have thus recognized a need to delineate
between employees, who fall under the
protections of the FLSA, and
independent contractors, who do not.
The Supreme Court has repeatedly
emphasized that the test for whether an
individual is an employee under the
FLSA is one of ‘‘economic reality.’’ 14
Under this test, the ‘‘technical
concepts’’ used to label a worker as an
employee or independent contractor do
not drive the analysis, but rather it is the
economic realities of the relationship
between the worker and the employer
that is determinative.15
In United States v. Silk, 331 U.S. 704,
712 (1947), an early case applying an
economic realities test under the Social
Security Act, the Supreme Court
acknowledged that ‘‘[p]robably it is
quite impossible to extract from the
statute a rule of thumb’’ regarding the
distinction between employees and
independent contractors.16 The Court
suggested that federal agencies and
courts ‘‘will find that degrees of control,
opportunities for profit or loss,
investment in facilities, permanency of
relation and skill required in the
claimed independent operation are
important for decision.’’ 17 The Court
cautioned that no single factor is
controlling and that the list is not
exhaustive.18 The Court went on to note
that the workers in that case were ‘‘from
one standpoint an integral part of the
businesses’’ of the employer, supporting
a conclusion that some of the workers
in that case were employees.19
The same day that the Supreme Court
issued its decision in Silk, it also issued
Rutherford Food Corp. v. McComb, 331
12 United States v. Silk, 331 U.S. 704, 712 (1947)
(analyzing the definition of employee under the
Social Security Act).
13 Rutherford Food, 331 U.S. at 729 (‘‘There may
be independent contractors who take part in
production or distribution who would alone be
responsible for the wages and hours of their own
employees.’’).
14 Tony & Susan Alamo Found. v. Sec’y of Labor,
471 U.S. 290, 301 (1985) (quoting Goldberg v.
Whitaker House Coop., Inc., 366 U.S. 28, 33 (1961)).
15 Goldberg, 366 U.S. at 32–33.
16 331 U.S. at 716. At the time, the Supreme Court
noted that ‘‘[d]ecisions that define the coverage of
the employer-[e]mployee relationship under the
Labor and Social Security acts are persuasive in the
consideration of a similar coverage under the Fair
Labor Standards Act.’’ Rutherford Food Corp. v.
McComb, 331 U.S. 722, 723–23 (1947). However,
Congress amended the Social Security Act in 1948.
17 331 U.S. at 716.
18 See id.
19 Id.
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U.S. 722 (1947), in which it affirmed a
circuit court decision that analyzed an
FLSA employment relationship based
on its economic realities.20 The Court
rejected an approach based on ‘‘isolated
factors’’ and again considered ‘‘the
circumstances of the whole activity.’’ 21
The Court considered several of the
factors that it listed in Silk as they
related to meat boners on a
slaughterhouse’s production line,
ultimately determining that the boners
were employees.22 The Court noted,
among other things, that the boners did
a specialty job on the production line,
had no business organization that could
shift to a different slaughter-house, and
were best characterized as ‘‘part of the
integrated unit of production under
such circumstances that the workers
performing the task were employees of
the establishment.’’ 23
Since Silk and Rutherford Food,
federal courts of appeals have applied
the economic realities test to distinguish
independent contractors from
employees who are entitled to the
FLSA’s protections. Recognizing that
the common law concept of ‘‘employee’’
had been rejected for FLSA purposes,
courts of appeals followed the Supreme
Court’s instruction that ‘‘‘employees are
those who as a matter of economic
realities are dependent upon the
business to which they render
service.’ ’’ 24
All of the courts of appeals have
followed the economic realities test, and
nearly all of them analyze the economic
realities of an employment relationship
using the factors identified in Silk.25 No
court of appeals considers any factor or
combination of factors to universally
predominate over the others in every
case.26 For example, the Ninth Circuit
20 See
Rutherford Food, 331 U.S. at 727.
at 730.
22 See id.
23 Id. at 729–30.
24 Usery v. Pilgrim Equip. Co., 527 F.2d 1308,
1311 (5th Cir. 1976) (quoting Bartels v.
Birmingham, 332 U.S. 126, 130 (1947)).
25 See Baystate Alternative Staffing, Inc. v.
Herman, 163 F.3d 668, 675 (1st Cir. 1998); Brock
v. Superior Care, Inc., 840 F.2d 1054, 1058–59 (2d
Cir. 1988); Donovan v. DialAmerica Mktg., Inc., 757
F.2d 1376, 1382–83 (3d Cir. 1985); McFeeley v.
Jackson Street Entm’t, LLC, 825 F.3d 235, 241 (4th
Cir. 2016); Acosta v. Off Duty Police Services, Inc.,
915 F.3d 1050, 1055 (6th Cir. 2019); Secretary of
Labor, U.S. Dep’t of Labor v. Lauritzen, 835 F.2d
1529, 1534 (7th Cir. 1987); Karlson v. Action
Process Service & Private Investigation, LLC, 860
F.3d 1089, 1092 (8th Cir. 2017); Real v. Driscoll
Strawberry Associates, Inc., 603 F.2d 748, 754 (9th
Cir. 1979); Acosta v. Paragon Contractors Corp., 884
F.3d 1225, 1235 (10th Cir. 2018); Scantland v. Jeffry
Knight, Inc., 721 F.3d 1308, 1311 (11th Cir. 2013);
Morrison v. Int’l Programs Consortium, Inc., 253
F.3d 5, 11 (D.C. Cir. 2001).
26 See, e.g., Parrish v. Premier Directional
Drilling, L.P., 917 F.3d 369, 380 (5th Cir. 2019)
21 Id.
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has explained that some of the factors
‘‘which may be useful in distinguishing
employees from independent
contractors for purposes of social
legislation such as the FLSA’’ are: (1)
The degree of the employer’s right to
control the manner in which the work
is to be performed; (2) the worker’s
opportunity for profit or loss depending
upon his or her managerial skill; (3) the
worker’s investment in equipment or
materials required for his or her task, or
employment of helpers; (4) whether the
service rendered requires a special skill;
(5) the degree of permanence of the
working relationship; and (6) whether
the service rendered is an integral part
of the employer’s business.27 The Ninth
Circuit repeated the Supreme Court’s
instruction that no individual factor is
conclusive and that the ultimate
determination depends upon the
circumstances of the whole activity.28
Some courts of appeals have applied
the factors with some variations. For
example, the Fifth Circuit typically does
not list the ‘‘integral part’’ factor as one
of the considerations that guides the
analysis.29 Nevertheless, the Fifth
Circuit—recognizing that the listed
factors are not exhaustive—has
considered the extent to which a
worker’s function is integral to a
business as part of its economic realities
analysis.30 The Second Circuit varies in
that it treats the employee’s opportunity
for profit or loss and the employee’s
investment as a single factor, but it still
uses the same considerations as the
other circuits to inform its economic
realities analysis.31
In sum, since the 1940s, federal courts
have consistently analyzed the question
of employee status under the FLSA by
examining the economic realities of the
employment relationship to determine
whether the worker is dependent on the
employer for work or is in business for
him or herself.32 In doing so, courts
have looked to the six factors first
(stating that it ‘‘is impossible to assign to each of
these factors a specific and invariably applied
weight’’ (citation omitted)); Martin v. Selker Bros.,
949 F.2d 1286, 1293 (3d Cir. 1991) (‘‘It is a wellestablished principle that the determination of the
employment relationship does not depend on
isolated factors . . . neither the presence nor the
absence of any particular factor is dispositive.’’);
Scantland, 721 F.3d at 1312 n.2 (the relative weight
of each factor ‘‘depends on the facts of the case’’).
27 Real, 603 F.2d at 754.
28 See id.
29 See Usery, 527 F.2d at 1311.
30 See Hobbs v. Petroplex Pipe and Constr., Inc.,
946 F.3d 824, 836 (5th Cir. 2020).
31 See, e.g., Franze v. Bimbo Bakeries USA, Inc.,
826 F. App’x 74, 76 (2d Cir. 2020).
32 See, e.g., Franze, 826 F. App’x at 76; Razak v.
Uber Techs., Inc., 951 F.3d 137, 142–43 (3d Cir.
2020); Gilbo v. Agment, LLC, 831 F. App’x 772, 775
(6th Cir. 2020).
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articulated in Silk as useful guideposts
while acknowledging that those factors
are not exhaustive and should not be
applied mechanically.33
B. Prior Wage and Hour Division
Guidance
Since at least 1954, the Wage and
Hour Division (WHD) has applied
variations of this multifactor analysis
when considering whether a worker is
an employee under the FLSA or an
independent contractor.34 In a guidance
document issued in 1964, WHD stated,
‘‘The Supreme Court has made it clear
that an employee, as distinguished from
a person who is engaged in a business
of his own, is one who as a matter of
economic reality follows the usual path
of an employee and is dependent on the
business which he serves.’’ 35 Like the
courts, WHD has consistently applied a
multifactor economic realities analysis
when determining whether a worker is
an employee under the FLSA or an
independent contractor.36
The Department’s primary subregulatory guidance addressing this
topic, WHD Fact Sheet #13,
‘‘Employment Relationship Under the
Fair Labor Standards Act (FLSA),’’
similarly states that, when determining
whether an employment relationship
exists under the FLSA, the test is the
‘‘economic reality’’ rather than an
application of ‘‘technical concepts,’’ and
that status ‘‘is not determined by
common law standards relating to
master and servant.’’ 37 Instead, ‘‘it is the
total activity or situation which
controls,’’ and ‘‘an employee, as
distinguished from a person who is
engaged in a business of his or her own,
is one who, as a matter of economic
reality, follows the usual path of an
employee and is dependent on the
business which he or she serves.’’ The
33 See,
e.g., Superior Care, 840 F.2d at 1054.
WHD Opinion Letter (Aug. 13, 1954)
(applying six factors very similar to the six
economic realities factors currently used by courts
of appeals).
35 WHD Opinion Letter FLSA–795 (Sept. 30,
1964).
36 See, e.g., WHD Opinion Letter, 2002 WL
32406602, at *2 (Sept. 5, 2002); WHD Opinion
Letter, 2000 WL 34444342, at *3 (Dec. 7, 2000);
WHD Opinion Letter, 2000 WL 34444352, at *1 (Jul.
5, 2000); WHD Opinion Letter, 1999 WL 1788137,
at *1 (Jul. 12, 1999); WHD Opinion Letter, 1995 WL
1032489, at *1 (June 5, 1995); WHD Opinion Letter,
1995 WL 1032469, at *1 (Mar. 2, 1995); WHD
Opinion Letter, 1986 WL 740454, at *1 (June 23,
1986); WHD Opinion Letter, 1986 WL 1171083, at
*1 (Jan. 14, 1986); WHD Opinion Letter WH–476,
1978 WL 51437, at *2 (Oct. 19, 1978); WHD
Opinion Letter WH–361, 1975 WL 40984, at *1
(Oct. 1, 1975); WHD Opinion Letter (Sept. 12, 1969);
WHD Opinion Letter (Oct. 12, 1965).
37 Fact Sheet #13 is available at https://
www.dol.gov/sites/dolgov/files/WHD/legacy/files/
whdfs13.pdf (last visited March 9, 2021).
34 See
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fact sheet identifies seven economic
realities factors; in addition to factors
that are similar to the six factors used
by the federal courts of appeals and
discussed above, it also identifies the
worker’s ‘‘degree of independent
business organization and operation.’’
The fact sheet identifies certain other
factors that are immaterial to
determining whether a worker is an
employee covered under the FLSA or
independent contractor, including the
place where work is performed, the
absence of a formal employment
agreement, and whether an alleged
independent contractor is licensed by a
State or local government.38
In 1969 and 1972, WHD promulgated
regulations relevant to specific
industries after Congress amended the
FLSA to change the way it applied to
those industries.39 Those regulations
applied a multifactor analysis under the
FLSA for determining whether a worker
is an employee or independent
contractor in those specific contexts.40
Further, WHD promulgated a regulation
in 1997 applying a multifactor economic
realities analysis for distinguishing
between employees and independent
contractors under the Migrant and
Seasonal Agricultural Worker Protection
Act (MSPA).41
On July 15, 2015, WHD issued
Administrator’s Interpretation No.
2015–1, ‘‘The Application of the Fair
Labor Standards Act’s ‘Suffer or Permit’
38 WHD maintains additional sub-regulatory
guidance addressing whether a worker is an
employee or independent contractor under the
FLSA. For example, WHD’s Field Operations
Handbook, in its section titled ‘‘Test of the
employment relationship,’’ cross-references Fact
Sheet #13. See Section 10b05 of Chapter 10 (‘‘FLSA
Coverage: Employment Relationship, Statutory
Exclusions, Geographical Limits’’) of WHD’s Field
Operations Handbook, available at https://
www.dol.gov/sites/dolgov/files/WHD/legacy/files/
FOH_Ch10.pdf (last visited March9, 2021); see also
https://www.dol.gov/sites/dolgov/files/WHD/legacy/
files/misclassification-facts.pdf (last visited
March9, 2021). And the section of WHD’s elaws
Advisor compliance-assistance materials addressing
independent contractors provides guidance very
similar to that of Fact Sheet #13. See https://
webapps.dol.gov/elaws/whd/flsa/scope/ee14.asp
(last visited March9, 2021).
39 See 37 FR 12084 (explaining that Part 780 was
revised in order to adapt to the changes made by
the Fair Labor Standards Amendments of 1966 (80
Stat. 830) and implementing 29 CFR 780.330(b) to
apply a six-factor economic realities test to
determine whether a sharecropper or tenant is an
employee under the Act or an independent
contractor); 34 FR 15794 (explaining that Part 788
was revised in order to adapt to the changes made
by the 1966 Amendments and implementing 29
CFR 788.16(a) to apply a six-factor economic
realities test to determine whether workers in
certain forestry and logging operations are
employees under the Act or independent
contractors).
40 See id.
41 See 62 FR 11734 (amending 29 CFR
500.20(h)(4)).
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Standard in the Identification of
Employees Who Are Misclassified as
Independent Contractors’’ (AI 2015–
1).42 AI 2015–1 reiterated that the
economic realities of the relationship
are determinative and that the ultimate
inquiry is whether the worker is
economically dependent on the
employer or truly in business for him or
herself. It identified six economic
realities factors that followed the six
factors used by most federal courts of
appeals: (1) The extent to which the
work performed is an integral part of the
employer’s business; (2) the worker’s
opportunity for profit or loss depending
on his or her managerial skill; (3) the
extent of the relative investments of the
employer and the worker; (4) whether
the work performed requires special
skills and initiative; (5) the permanency
of the relationship; and (6) the degree of
control exercised or retained by the
employer. AI–2015–1 further
emphasized that the factors should not
be applied in a mechanical fashion and
that no one factor was determinative. AI
2015–1 was withdrawn on June 7,
2017.43
In 2019, WHD issued an opinion
letter, FLSA2019–6, regarding whether
workers who worked for companies
operating self-described ‘‘virtual
marketplaces’’ were employees covered
under the FLSA or independent
contractors.44 Like WHD’s prior
guidance, the letter stated that the
determination depended on the
economic realities of the relationship
and that the ultimate inquiry was
whether the workers depend on
someone else’s business or are in
business for themselves.45 The letter
identified six economic realities factors
that differed slightly from the factors
typically articulated by WHD
previously: (1) The nature and degree of
the employer’s control; (2) the
permanency of the worker’s relationship
with the employer; (3) the amount of the
worker’s investment in facilities,
equipment, or helpers; (4) the amount of
skill, initiative, judgment, and foresight
required for the worker’s services; (5)
the worker’s opportunities for profit or
loss; and (6) the extent of the integration
of the worker’s services into the
employer’s business.46 Opinion Letter
42 AI
2015–1 is available at 2015 WL 4449086.
News Release 17–0807–NAT, ‘‘US
Secretary of Labor Withdraws Joint Employment,
Independent Contractor Informal Guidance’’ (Jun. 7,
2017), available at https://www.dol.gov/newsroom/
releases/opa/opa20170607 (last visited March9,
2021).
44 See WHD Opinion Letter FLSA2019–6, 2019
WL 1977301 (Apr. 29, 2019) (withdrawn February
19, 2021).
45 See id. at *3.
46 See id. at *4.
43 See
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FLSA2019–6 was withdrawn for further
review on February 19, 2021.47
C. The January 2021 Independent
Contractor Rule
On January 7, 2021, the Department
published a final rule entitled
‘‘Independent Contractor Status under
the Fair Labor Standards Act’’ with an
effective date of March 8, 2021
(Independent Contractor Rule or
Rule).48 The Independent Contractor
Rule would introduce into Title 29 of
the Code of Federal Regulations a new
part (Part 795) titled ‘‘Employee or
Independent Contractor Classification
under the Fair Labor Standards Act’’
that would provide a new generally
applicable interpretation of employee or
independent contractor status under the
FLSA.49 The Rule would also revise
WHD’s prior interpretations of
independent contractor status in 29 CFR
780.330(b) and 29 CFR 788.16(a), both
of which apply in limited contexts.50
The Department explained that the
purpose of the Independent Contractor
Rule would be to establish an economic
realities test that improved on prior
articulations that the Rule viewed as
‘‘unclear and unwieldy.’’ 51 It stated that
the existing economic realities test
applied by WHD and courts suffered
from confusion regarding the meaning
of ‘‘economic dependence,’’ a lack of
focus in the multifactor balancing test,
and confusion and inefficiency caused
by overlap between the factors.52 The
Rule explained that the shortcomings
and misconceptions associated with the
test were more apparent in the modern
economy and that additional clarity
would promote innovation in work
arrangements.53
The Independent Contractor Rule
explained that independent contractors
are not employees under the FLSA and
are therefore not subject to the Act’s
minimum wage, overtime pay, or
recordkeeping requirements.54 The Rule
would adopt an ‘‘economic
dependence’’ test under which a worker
is an employee of an employer if that
worker is economically dependent on
47 See note at https://www.dol.gov/agencies/whd/
opinion-letters/search?FLSA (last visited March 9,
2021).
48 See 86 FR 1168. WHD had published a notice
of proposed rulemaking requesting comments on a
proposal. See 85 FR 60600 (Sept. 25, 2020). The
final rule adopted ‘‘the interpretive guidance set
forth in [that proposal] largely as proposed.’’ 86 FR
1168.
49 See id.
50 See id.
51 86 FR 1172.
52 86 FR 1172–75.
53 See 86 FR 1175.
54 See 86 FR 1246 (section 795.105(a)).
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the employer for work.55 In contrast, the
worker would be an independent
contractor if the worker is in business
for him or herself.56
The Rule’s new economic realities test
would identify five economic realities
factors that would guide the inquiry into
a worker’s status as an employee or
independent contractor.57 These factors
would not be exhaustive, no one factor
would be dispositive, and additional
factors would be considered if they ‘‘in
some way indicate whether the [worker]
is in business for him- or herself, as
opposed to being economically
dependent on the potential employer for
work.’’ 58 Two of the identified factors
would be designated as ‘‘core factors’’
that would carry greater weight in the
analysis. If both of those factors
indicated the same classification, as
either an employee or an independent
contractor, there would be a
‘‘substantial likelihood’’ that
classification is the worker’s correct
classification.59
The first core factor would be the
nature and degree of control over the
work, which would indicate
independent contractor status to the
extent that the worker exercised
substantial control over key aspects of
the performance of the work, such as by
setting his or her own schedule, by
selecting his or her projects, and/or
through the ability to work for others,
which might include the potential
employer’s competitors.60 Requiring the
worker to comply with specific legal
obligations, satisfy health and safety
standards, carry insurance, meet
contractually agreed upon deadlines or
quality control standards, or satisfy
other similar terms that are typical of
contractual relationships between
businesses (as opposed to employment
relationships) would not constitute
control.61
The second core factor would be the
worker’s opportunity for profit or loss.62
This factor would weigh towards the
worker being an independent contractor
to the extent the worker has an
opportunity to earn profits or incur
losses based on either his or her exercise
of initiative (such as managerial skill or
business acumen or judgment) or his or
her management of investment in or
capital expenditure on, for example,
helpers or equipment or material to
55 See
86 FR 1246 (section 795.105(b)).
id.
57 See 86 FR 1246 (section 795.105(c)).
58 86 FR 1246–47 (sections 795.105(c) &
(d)(2)(iv)).
59 86 FR 1246 (section 795.105(c)).
60 See 86 FR 1246–47 (section 795.105(d)(1)(i)).
61 See id.
62 See 86 FR 1247 (section 795.105(d)(1)(ii)).
56 See
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further the work.63 While the effects of
the worker’s exercise of initiative and
management of investment would both
be considered under this factor, the
worker would not need to have an
opportunity for profit or loss based on
both initiative and management of
investment for this factor to weigh
towards the worker being an
independent contractor.64 This factor
would weigh towards the worker being
an employee to the extent the worker is
unable to affect his or her earnings or is
only able to do so by working more
hours or faster.65
The Rule would also identify three
other factors: The amount of skill
required for the work, the degree of
permanence of the working relationship
between the worker and the employer,
and whether the work is part of an
integrated unit of production (which is
distinct from the concept of the
importance or centrality of the worker’s
work to the employer’s business).66 The
Rule would provide that these other
factors would be ‘‘less probative and, in
some cases, [would] not be probative at
all’’ and would be ‘‘highly unlikely,
either individually or collectively, to
outweigh the combined probative value
of the two core factors.’’ 67
The Rule would further provide that
the actual practice of the parties
involved is more relevant than what
may be contractually or theoretically
possible.68 The Rule would also provide
five examples illustrating how different
factors would inform the analysis.69
WHD issued Opinion Letters
FLSA2021–8 and FLSA2021–9 on
January 19, 2021 applying the Rule’s
analysis to specific factual scenarios,
and then withdrew those opinion letters
on January 26, 2021, explaining that the
letters were issued prematurely because
they were based on a Rule that had yet
to take effect.70
D. Delay of Rule’s Effective Date
On February 5, 2021, the Department
published a proposal to delay the
Independent Contractor Rule’s effective
date until May 7, 2021, 60 days after the
original effective date of March 8,
2021.71 On March 4, 2021, after
considering the approximately 1,500
63 See
id.
id.
65 See id.
66 See 86 FR 1247 (section 795.105(d)(2)).
67 86 FR 1246 (section 795.105(c)).
68 See 86 FR 1247 (section 795.110).
69 See 86 FR 1247–48 (section 795.115).
70 See https://www.dol.gov/agencies/whd/
opinion-letters/search?FLSA (last visited March 9,
2021), noting the withdrawal of Opinion Letters
FLSA2021–8 and FLSA2021–9.
71 See 86 FR 8326.
64 See
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comments received in response to that
proposal, the Department published a
final rule delaying the effective date of
the Independent Contractor Rule as
proposed.72 The Department explained
that the delay was consistent with a
January 20, 2021 memorandum from the
Assistant to the President and Chief of
Staff, titled ‘‘Regulatory Freeze Pending
Review.’’ 73 The Department further
explained that a delay would allow it
additional time to consider ‘‘significant
and complex’’ issues associated with the
Rule, including whether the rule
effectuates the FLSA’s purpose to
broadly cover workers as employees as
well as the costs and benefits attributed
to the rule, including its effect on
workers.74
standard ‘‘stretches the meaning of
‘employee’ [under the FLSA] to cover
some parties who might not qualify as
such under a strict application of
traditional agency law principles.’’ 79
The FLSA’s overarching inquiry of
economic dependence thus establishes a
broader scope of employment than that
which exists under the common law of
agency.
Among the reasons the Department is
proposing to withdraw the Rule is that,
upon further review and consideration
of the Rule, the Department questions
whether the Rule is fully aligned with
the FLSA’s text and purpose or case law
describing and applying the economic
realities test.
II. Proposal To Withdraw
The Department proposes to
withdraw the Independent Contractor
Rule, which has not yet taken effect.
The Department’s reasons for proposing
to withdraw the Rule are explained
below, and the Department requests
comments on its proposal.
1. The Choice To Elevate Control and
Opportunity for Profit or Loss as the
‘‘Most Probative’’ Factors in
Determining Employee Status Under the
FLSA
A. The Rule’s Standard Has Never Been
Used by Any Court or by WHD, and Is
Not Supported by the Act’s Text or Case
Law
WHD recognizes that the cornerstone
of the FLSA is the Act’s broad definition
of ‘‘employ,’’ which provides that an
employee under the Act is any
individual whom an employer suffers,
permits, or otherwise employs to
work.75 Rather than being derived from
the common law of agency, the FLSA’s
‘‘suffer or permit’’ definition of
‘‘employ’’ originally came from state
laws regulating child labor.76 This
standard was intended to expand
coverage beyond employers who
controlled the means and manner of
performance.77 The FLSA’s breadth in
defining the employment relationship,
as well as its clear remedial purpose,
comes from the statutory text itself as
well as the legislative history.78 This
72 86
FR 12535.
(citing January 20, 2021 memo from the
Assistant to the President and Chief of Staff, titled
‘‘Regulatory Freeze Pending Review,’’ 86 FR 7424).
74 Id.
75 See 29 U.S.C. 203(e)(1), (g).
76 See Rutherford Food, 331 U.S. at 728 & n.7.
77 See generally People ex rel. Price v. Sheffield
Farms-Slawson-Decker Co., 225 N.Y. 25, 29–31
(N.Y. 1918).
78 See, e.g., Parrish, 917 F.3d at 378 (‘‘Given the
remedial purposes of the [FLSA], an expansive
definition of ‘employee’ has been adopted by the
courts.’’ (citation omitted)); Off Duty Police, 915
F.3d at 1054–55 (noting, directly under the heading
‘‘Employment Relationship,’’ that ‘‘[t]he FLSA is ‘a
broadly remedial and humanitarian statute . . .
designed to correct labor conditions detrimental to
the maintenance of the minimum standard of living
73 Id.
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The Rule would elevate two ‘‘core’’
factors, control and opportunity for
profit or loss, above all other factors,
and would provide that only in ‘‘rare’’
cases would the other factors outweigh
the core factors.80 For decades, WHD,
consistent with case law, has applied a
multi-factor balancing test to assess
whether the worker, as a matter of
economic reality, is economically
dependent on the employer or is in
business for him or herself.81 Courts
universally apply this analysis as well
and have explained that ‘‘economic
reality’’ rather than ‘‘technical
concepts’’ is the test of employment
necessary for health, efficiency, and general wellbeing of workers’’’ (quoting Donovan v. Brandel,
736 F.2d 1114, 1116 (6th Cir. 1984) (some internal
quotation marks omitted)). The FLSA’s broad scope
of employment, broader than the common law, was
not changed by the Supreme Court’s decision in
Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134
(2018), which explained that the Act’s statutory
exemptions should be interpreted fairly because
there is no textual indication that the exemptions
should be construed narrowly. See 138 S. Ct. at
1142. Here, the Act’s definition of ‘‘employ’’ as
including ‘‘to suffer or permit to work’’ gives a clear
textual basis for the breadth of employment under
the FLSA. 29 U.S.C. 203(g); see Off Duty Police, 915
F.3d at 1062 (‘‘[T]hese [economic reality] factors
must be balanced in light of the FLSA’s strikingly
broad definition of employee.’’ (quotations and
citation omitted)).
79 Darden, 503 U.S. at 326; see also Portland
Terminal, 330 U.S. at 150 (in determining employee
status under the FLSA, ‘‘common law employee
categories or employer-employee classifications
under other statutes are not of controlling
significance’’).
80 86 FR 1201, 1246–47 (sections 795.105(c) and
(d)).
81 See, e.g., Fact Sheet #13 (July 2008), available
at https://www.dol.gov/sites/dolgov/files/WHD/
legacy/files/whdfs13.pdf (last visited March 9,
2021).
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under the FLSA.82 WHD and the courts
of appeals generally consider and
balance the following economic realities
factors—derived from the Supreme
Court’s decisions in Silk, 331 U.S. at
716, and Rutherford Food, 331 U.S. at
729–30: The nature and degree of the
employer’s control over the work; the
permanency of the worker’s relationship
with the employer; the degree of skill,
initiative, and judgment required for the
work; the worker’s investment in
equipment or materials necessary for the
work; the worker’s opportunity for
profit or loss; whether the service
rendered by the worker is an integral
part of the employer’s business; and the
degree of independent business
organization and operation.83
The Rule would set forth a new
analysis elevating two factors (control
and opportunity for profit or loss) as
‘‘core’’ factors above the other factors,
and designating them as having greater
probative value.84 The Rule would
further provide that if both core factors
point towards the same classification—
that the worker is either an employee or
an independent contractor—then there
would be a substantial likelihood that
this is the worker’s correct
classification.85 In addition, the
preamble to the Rule disagreed that the
economic realities test ‘‘requires factors
to be unweighted or equally
weighted.’’ 86 Although the Rule did
identify three other factors, it made
clear that these ‘‘other factors are less
probative and, in some cases, may not
be probative at all, and thus are highly
unlikely, either individually or
collectively, to outweigh the combined
probative value of the two core
factors.’’ 87 The Rule underscored that 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
82 Goldberg, 366 U.S. at 33; see also Tony & Susan
Alamo, 471 U.S. at 301 (‘‘The test of employment
under the Act is one of ‘economic reality.’ ’’)
(quoting Goldberg, 366 U.S. at 33).
83 See, e.g., Razak, 951 F.3d at 142–43; Karlson,
860 F.3d at 1092; Keller v. Miri Microsystems LLC,
781 F.3d 799, 807 (6th Cir. 2015); Lauritzen, 835
F.2d at 1534; Real, 603 F.2d at 754; Fact Sheet #13
(July 2008), available at https://www.dol.gov/sites/
dolgov/files/WHD/legacy/files/whdfs13.pdf (last
visited March [insert], 2021).
84 86 FR 1246–47 (sections 795.105(c) & (d)).
85 See id.
86 Id. at 1197.
87 Id. at 1246 (section 795.105(c)).
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core factors.’’ 88 Similarly, the Rule
would provide that unlisted additional
factors may be considered, but that they
are ‘‘unlikely to outweigh either of the
core factors.’’ 89 The Rule noted that
‘‘[w]hile all circumstances must be
considered, it does not follow that all
circumstances or categories of
circumstance, i.e., factors, must also be
given equal weight.’’ 90 Rather, the Rule
would emphasize the control and
opportunity for profit or loss factors as
more probative than other factors in
determining whether an individual is in
business for him or herself, and provide
that ‘‘other factors are less probative and
may have little to no probative value in
some circumstances.’’ 91
WHD understands that no court has
taken the Rule’s approach in analyzing
whether a worker is an employee or an
independent contractor under the FLSA,
and that the Rule would mark a
departure from WHD’s own
longstanding approach. In view of this
elevation of only two factors, the
Department is concerned that the Rule’s
approach may be inconsistent with the
position, expressed by the Supreme
Court and federal courts of appeals, that
no single factor in the analysis is
dispositive.92 WHD is not aware of any
court that has, as a general and fixed
rule, elevated a subset of the economic
realities factors, and there is no clear
statutory basis for such a predetermined
weighting of the factors. Rather, WHD is
cognizant of the voluminous case law
that emphasizes that it ‘‘ ‘is impossible
to assign to each of these factors a
specific and invariably applied
weight.’ ’’ 93 Undeniably, courts have
generally refused to assign universal
weights to certain factors; rather, courts
emphasize that the analysis considers
the totality of the circumstances and
neither the presence nor absence of any
particular factor is dispositive.94
88 Id.
at 1197 (referencing the NPRM).
89 Id.
90 Id.
at 1201 (internal quotation marks omitted).
at 1202.
92 See, e.g., Silk, 331 U.S. at 716 (explaining that
‘‘[n]o one [factor] is controlling’’ in the economic
realities test, including ‘‘degrees of control’’);
Parrish, 917 F.3d at 380 (stating that it ‘‘is
impossible to assign to each of these factors a
specific and invariably applied weight’’ (citation
omitted)); Selker Bros., 949 F.2d at 1293 (‘‘It is a
well-established principle that the determination of
the employment relationship does not depend on
isolated factors . . . neither the presence nor the
absence of any particular factor is dispositive.’’).
93 Parrish, 917 F.3d at 380 (quoting Hickey v.
Arkla Indus., Inc., 699 F.2d 748, 752 (5th Cir.
1983)); see also Scantland, 721 F.3d at 1312 n.2 (the
relative weight of each factor ‘‘depends on the facts
of the case’’).
94 See Razak, 951 F.3d at 143 (citing DialAmerica
Mktg., 757 F.2d at 1382); see also McFeeley, 825
F.3d at 241 (‘‘While a six-factor test may lack the
virtue of providing definitive guidance to those
91 Id.
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Accordingly, the Department is
concerned that the Rule’s approach is in
tension with the language of the Act as
well as the position, expressed by the
Supreme Court and in appellate cases
from across the Circuits, that no single
factor is determinative in the analysis of
whether a worker is an employee or
independent contractor and, as such,
questions whether the Rule’s ‘‘core
factor’’ approach is supportable.
2. The Role of Control in the Rule’s
Analysis
As explained, the Independent
Contractor Rule would identify two
factors as ‘‘core’’ factors, would
designate them as ‘‘the most probative’’
of whether a worker is an employee or
independent contractor, and would
provide that each core factor ‘‘typically
carries greater weight in the analysis
than any other factor.’’ 95 The nature and
degree of control over the work would
be one of the two core factors.96
According to the Rule, ‘‘review of case
law indicates that courts of appeals have
effectively been affording the control
and opportunity factors greater weight,
even if they did not always explicitly
acknowledge doing so.’’ 97 The Rule
affected, it allows for flexible application to the
myriad different working relationships that exist in
the national economy. In other words, the court
must adapt its analysis to the particular working
relationship, the particular workplace, and the
particular industry in each FLSA case.’’); Ellington
v. City of East Cleveland, 689 F.3d 549, 555 (6th Cir.
2012) (‘‘This ‘economic reality’ standard, however,
is not a precise test susceptible to formulaic
application. . . . It prescribes a case-by-case
approach, whereby the court considers the
‘circumstances of the whole business activity.’ ’’)
(quoting Brandel, 736 F.2d at 1116); Morrison v.
Int’l Programs Consortium, Inc., 253 F.3d 5, 11 (D.C.
Cir. 2001) (‘‘No one factor standing alone is
dispositive and courts are directed to look at the
totality of the circumstances and consider any
relevant evidence.’’); Dole v. Snell, 875 F.2d 802,
805 (10th Cir. 1989) (‘‘It is well established that no
one of these factors in isolation is dispositive;
rather, the test is based upon a totality of the
circumstances.’’); Superior Care, 840 F.2d at 1059
(‘‘No one of these factors is dispositive; rather, the
test is based on a totality of the circumstances. . . .
Since the test concerns the totality of the
circumstances, any relevant evidence may be
considered, and mechanical application of the test
is to be avoided.’’); Lauritzen, 835 F.2d at 1534
(‘‘Certain criteria have been developed to assist in
determining the true nature of the relationship, but
no criterion is by itself, or by its absence,
dispositive or controlling.’’); Hickey, 699 F.2d at
752 (‘‘It is impossible to assign to each of these
factors a specific and invariably applied weight.’’);
Usery, 527 F.2d at 1311–12 (‘‘No one of these
considerations can become the final determinant,
nor can the collective answers to all of the inquiries
produce a resolution which submerges
consideration of the dominant factor—economic
dependence.’’).
95 86 FR 1246 (section 795.105(c)).
96 See id. at 1246–47 (section 795.105(d)(1)). The
worker’s opportunity for profit or loss would be the
other core factor.
97 Id. at 1198 (citing 85 FR 60619).
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addressed and rejected comments which
opined that focusing the analysis on two
core factors—one of which would be
control—would narrow the analysis to a
common law control test.98
Although the standard for
determining who is an employee and
who is an independent contractor under
the Rule is not the same as the common
law control analysis, the Department is
concerned that significant legal and
policy implications could result from
making control one of only two factors
that would be ascribed greater weight.
For example, the Supreme Court has
repeatedly stated that the FLSA’s
definition of ‘‘employ’’ in section 3(g)
means that the scope of employment
under the Act is broader than under a
common law control (i.e., agency)
analysis.99 In light of the directive to
consider as employment relationships
under the FLSA a broader scope of
relationships than those where the
employer sufficiently controls the work,
the outsized—even if not exclusive—
role that control would have if the
Rule’s analysis were to apply may be
contrary to the Act’s text and case law.
These considerations are further reasons
the Department is proposing to
withdraw the Rule.
3. The Rule’s Narrowing of the Factors
The Department is also concerned
that the Independent Contractor Rule’s
treatment of the factors would
improperly narrow the application of
the economic realities test. For example,
the Rule would provide that the
opportunity for profit or loss factor
indicates independent contractor status
if the worker has that opportunity based
on either his or her exercise of initiative
(such as managerial skill or business
judgment) or management of his or her
investment in or capital expenditure on
helpers or equipment or material to
98 See
id. at 1200–01.
Darden, 503 U.S. at 326 (‘‘[T]he FLSA . . .
defines the verb ‘employ’ expansively to mean
‘suffer or permit to work.’ This . . . definition,
whose striking breadth we have previously noted,
stretches the meaning of ‘employee’ to cover some
parties who might not qualify as such under a strict
application of traditional agency law principles.’’
(citations omitted)); Portland Terminal, 330 U.S. at
150–51 (‘‘But in determining who are ‘employees’
under the Act, common law employee categories or
employer-employee classifications under other
statutes are not of controlling significance. This Act
contains its own definitions, comprehensive
enough to require its application to many persons
and working relationships, which prior to this Act,
were not deemed to fall within an employeremployee category.’’ (citations omitted)); Rutherford
Food, 331 U.S. at 728 (‘‘The [FLSA] definition of
‘employ’ is broad.’’); Rosenwasser, 323 U.S. at 362–
63 (‘‘A broader or more comprehensive coverage of
employees [than that of the FLSA] . . . would be
difficult to frame.’’).
99 See
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further his or her work.100 The worker
‘‘does not need to have an opportunity
for profit or loss based on both for this
factor to weigh towards the individual
being an independent contractor.’’ 101 In
other words, the factor would indicate
independent contractor status if the
worker either: (1) Made no capital
investment but exercised managerial
skill or (2) had a capital investment but
exercised no managerial skill. The Rule
would therefore erase from the analysis
in certain situations the worker’s lack of
capital investment or lack of managerial
skill—both of which are longstanding
and well-settled indicators of employee
status. The worker’s investment and
managerial skill would be considered
only as the two prongs comprising the
opportunity for profit or loss factor
under the Rule, so if one indicates an
opportunity for profit or loss, the other
could not reverse or weigh against that
finding even if it indicates employee
status as a matter of economic reality.
In addition, the preamble to the Rule
provided that ‘‘comparing the
individual worker’s investment to the
potential employer’s investment should
not be part of the analysis of
investment.’’ 102 In support, the Rule
cited decisions from the Fifth and
Eighth Circuits in which courts gave
little weight to the comparison of the
potential employer’s investment in its
business to the worker’s investment in
the work in light of the facts presented
in those cases.103 However, the
decisions cited did make the
comparison of the investments a part of
the analysis, but found that the
comparison had little relevance or
accorded it little weight under those
particular facts.104 In any event,
100 See
86 FR 1247 (section 795.105(d)(1)(ii)).
101 Id.
102 Id.
at 1188.
id. The Fifth Circuit decisions cited were
Parrish v. Premier Directional Drilling, L.P., 917
F.3d 369, 383 (5th Cir. 2019), and Hopkins v.
Cornerstone America, 545 F.3d 338, 344–46 (5th
Cir. 2008).
104 See Parrish, 917 F.3d at 383; Hopkins, 545
F.3d at 344–46. Indeed, the Fifth Circuit recently
again articulated the investment factor as ‘‘‘the
extent of the relative investments of the worker and
the alleged employer.’’’ Hobbs, 946 F.3d at 829
(quoting Hopkins, 545 F.3d at 343). In Hobbs, the
Fifth Circuit affirmed the district court’s finding
that the relative investments—the potential
employer’s ‘‘overall investment in the pipe
construction projects’’ as compared to the workers’
individual investments—favored employee status.
Id. at 831–32. The Fifth Circuit agreed with the
district court’s conclusion to give the factor ‘‘little
weight in its analysis’’ in that case given the nature
of the industry and work involved. Id. at 832 (citing
Parrish, 917 F.3d at 383). In sum and contrary to
what the Rule would provide, the Fifth Circuit
routinely considers the relative investments of the
worker and the potential employer even if the factor
may ultimately be accorded little weight depending
on the circumstances.
103 See
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numerous other courts of appeals
consider the worker’s investment in the
work in comparison to the potential
employer’s investment in its
business,105 as does WHD in
enforcement actions. Despite this
authority, the Rule would preclude
comparing the worker’s investment to
the potential employer’s investment.
The Rule would also recast the factor
examining whether the worker’s work
‘‘is an integral part’’ of the employer’s
business as whether the work ‘‘is part of
an integrated unit of production.’’ 106
The Rule would reject as irrelevant to
this factor whether the work is
important or central (i.e., integral) to the
employer’s business.107 Instead, the
Rule would provide that ‘‘the relevant
facts are the integration of the worker
into the potential employer’s production
processes’’ because ‘‘[w]hat matters is
the extent of such integration rather
than the importance or centrality of the
functions performed’’ by the worker.108
The Rule asserted that this recast
articulation is supported by Supreme
Court precedent,109 but WHD and courts
often consider whether the work is
important or central, as the Rule
acknowledges.110
Finally, in stressing the primacy of
actual practice by providing that ‘‘the
actual practice of the parties involved is
105 See, e.g., McFeeley, 825 F.3d at 243
(comparing the potential employers’ payment of
rent, bills, insurance, and advertising expenses to
the workers’ ‘‘limited’’ investment in their work);
Keller, 781 F.3d at 810 (‘‘We agree that courts must
compare the worker’s investment in the equipment
to perform his job with the company’s total
investment, including office rental space,
advertising, software, phone systems, or
insurance.’’); Baker v. Flint Eng’g & Constr. Co., 137
F.3d 1436, 1442 (10th Cir. 1998) (‘‘In making a
finding on this factor, it is appropriate to compare
the worker’s individual investment to the
employer’s investment in the overall operation.’’);
Lauritzen, 835 F.2d at 1537 (disagreeing that ‘‘the
overall size of the investment by the employer
relative to that by the worker is irrelevant’’ and
finding that ‘‘that the migrant workers’
disproportionately small stake in the pickle-farming
operation is an indication that their work is not
independent of the defendants’’); see also Iontchev
v. AAA Cab Service, Inc., 685 Fed. Appx. 548, 550
(9th Cir. 2017) (noting that the drivers ‘‘invested in
equipment or materials and employed helpers to
perform their work’’ but concluding that the
investment factor was ‘‘neutral’’ because the cab
company ‘‘leased taxicabs and credit card machines
to most of the [drivers]’’).
106 See 86 FR at 1193–96, 1247 (section
795.105(d)(2)(iii)).
107 See id. at 1193–95.
108 Id. at 1195.
109 See id. at 1193–94. The Rule’s discussion of
precedent failed to consider a passage from the
Supreme Court’s decision in Silk, finding that
‘‘unloaders’’ were employees of a retail coal
company as a matter of economic reality in part
because they were ‘‘an integral part of the
businesses of retailing coal or transporting freight.’’
331 U.S. at 716 (emphasis added).
110 See id. at 1193.
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more relevant than what may be
contractually or theoretically
possible,’’ 111 the Rule would advise that
‘‘a business’ contractual authority to
supervise or discipline an individual
may be of little relevance if in practice
the business never exercises such
authority.’’ 112 In support of this
guidance, the Rule’s preamble asserted
that ‘‘the common law control test does
not establish an irreducible baseline of
worker coverage for the broader
economic reality test applied under the
FLSA,’’ and that the FLSA ‘‘does not
necessarily include every worker
considered an employee under the
common law.’’ 113 This understanding of
the FLSA’s scope of employment seems
inconsistent with the Supreme Court’s
observations that ‘‘[a] broader or more
comprehensive coverage of employees’’
than that contemplated under the FLSA
‘‘would be difficult to frame,’ ’’ 114 and
that the FLSA ‘‘stretches the meaning of
‘employee’ to cover some parties who
might not qualify as such under a strict
application of traditional agency law
principles.’’ 115
In the each of the ways identified
above, the Rule would narrow the scope
of facts and considerations comprising
the analysis of whether the worker is an
employee or independent contractor.
The Department proposes to withdraw
the Rule in part because it eliminates
from the economic realities test several
facts and concepts that have deep roots
in both the courts’ and WHD’s
application of the analysis. The
Department is further concerned that for
this reason, the Rule’s approach is
inconsistent with the court-mandated
totality-of-the-circumstances approach
to determining whether a worker is an
employee or an independent
contractor.116 In addition to these legal
concerns, the Department is concerned,
as a policy matter, that the Rule’s
narrowing of the analysis would result
in more workers being classified as
independent contractors not entitled to
the FLSA’s protections, contrary to the
Act’s purpose of broadly covering
workers as employees. To the extent
that women and people of color are
overrepresented in low-wage
independent contractor positions, as
some commenters asserted as part of the
Independent Contractor Rule
rulemaking, this result could have a
111 Id.
at 1247 (section 795.110).
112 Id.; but see Razak, 951 F.3d at 145 (‘‘[A]ctual
control of the manner of work is not essential;
rather, it is the right to control which is
determinative.’’).
113 86 FR 1205.
114 Rosenwasser, 323 U.S. at 362.
115 Darden, 503 U.S. at 326.
116 See footnote 94, supra.
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disproportionate impact on low-wage
and vulnerable workers. For example, a
report from the U.S. Treasury
Department Office of Tax Analysis
shows that independent contractors are
more likely to be low-income than those
who are primarily employees. The
report finds that 42 percent of what it
calls ‘‘gig economy or platform workers’’
and 45 percent of ‘‘self-employed sole
proprietors’’ make less than $20,000 a
year, compared to 14 percent of those
who are employees earning wages.117
B. Whether the Rule Would Provide the
Intended Clarity
One of the Independent Contractor
Rule’s primary stated purposes would
be to ‘‘significantly clarify to
stakeholders how to distinguish
between employees and independent
contractors under the Act.’’ 118 Although
the intent of the Rule would be to
provide clarity, it would also (as
discussed above) introduce several
concepts to the analysis that neither
courts nor WHD have previously
applied. The Department’s proposal to
withdraw the Rule arises in part from a
concern regarding the possibility that
these changes will cause confusion or
lead to inconsistent outcomes rather
than provide clarity or certainty, as
intended.
For example, the Rule would identify
two factors as ‘‘core’’ factors, would
designate them as ‘‘the most probative,’’
and would provide that they carry
‘‘greater weight’’ than other factors.119
The Rule would also provide that, if
both core factors ‘‘point towards the
same classification . . . , there is a
substantial likelihood that is the
individual’s accurate classification,’’
and other factors would be ‘‘highly
unlikely, either individually or
collectively, to outweigh’’ the core
factors.120 Because neither courts nor
WHD have previously pre-assigned
certain factors a greater weight than
other factors or grouped the factors into
categories of ‘‘core’’ and ‘‘other’’ factors,
it may not be clear to courts, WHD, and/
or the regulated community how the
analysis and weighing of factors would
work, and there could be inconsistent
approaches and/or outcomes as a result.
In addition, the Rule would recast
several factors as discussed above. As
117 Emilie Jackson, Adam Looney, and Shanthi
Ramnath, ‘‘The Rise of Alternative Work
Arrangements: Evidence and Implications for Tax
Filing and Benefit Coverage,’’ The Department of
the Treasury; Office of Tax Analysis (January 2017),
available at https://home.treasury.gov/system/files/
131/WP-114.pdf (last visited March 9, 2021).
118 86 FR 1168.
119 Id. at 1246 (section 795.105(c)).
120 Id.
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one example, the factor that many
courts articulate as whether the work ‘‘is
an integral part’’ of the employer’s
business would be recast as whether the
work ‘‘is part of an integrated unit of
production.’’ 121 The Rule asserts that
this revision is supported by Supreme
Court precedent.122 However, as the
Rule acknowledges,123 this more limited
articulation has not generally been
applied by courts or WHD and would
thus be unfamiliar to employers,
workers, courts, and WHD. As a result,
there could be inconsistent approaches
and/or outcomes in its application.
In sum, the Rule would make
numerous changes to an economic
realities test that courts and WHD are
familiar with applying. Given that
courts and WHD could struggle with
applying the new concepts introduced
by the Rule, the Department is uncertain
whether the Rule would provide the
clarity that it intends.
C. The Costs and Benefits of the Rule,
Particularly the Assertion That the Rule
Will Benefit Workers as a Whole
As part of its analysis of possible
costs, transfers, and benefits, the
Independent Contractor Rule quantified
some possible costs (regulatory
familiarization) and some possible cost
savings (increased clarity and reduced
litigation).124 The Rule identified and
discussed—but did not quantify—
numerous other costs, transfers, and
benefits possibly resulting from the
Rule, including ‘‘possible transfers
among workers and between workers
and businesses.’’ 125 The Rule
‘‘acknowledge[d] that there may be
transfers between employers and
employees, and some of those transfers
may come about as a result of changes
in earnings,’’ but determined that these
transfers cannot ‘‘be quantified with a
reasonable degree of certainty for
purposes of [the Rule].’’ 126 The
Economic Policy Institute (EPI) had
submitted a comment during the
rulemaking estimating that the annual
transfers from workers to employers as
a result of the Rule would be $3.3
billion in pay, benefits, and tax
payments.127 The Rule discussed its
disagreements with various assumptions
underlying EPI’s estimate and explained
its reasons for not adopting the
estimate.128 The Rule concluded that
121 See id. at 1170, 1193–96, 1247 (section
795.105(d)(2)(iii)).
122 See id. at 1193–94.
123 See id. at 1193.
124 See id. at 1211.
125 Id. at 1214–16.
126 Id. at 1223.
127 See id. at 1222.
128 See id. at 1222–23.
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‘‘workers as a whole will benefit from
[the Rule], both from increased labor
force participation as a result of the
enhanced certainty provided by [the
Rule], and from the substantial other
benefits detailed [in the Rule].’’ 129
Although the Rule did not use EPI’s
analysis to quantify transfers, upon
further consideration, the Department
believes that the analysis may be useful
in illustrating the types of impacts that
the Rule would have on workers.
Upon review, the Department does
not believe the Rule fully considered the
likely costs, transfers, and benefits that
could result from the Rule. This concern
is premised in part on WHD’s role as the
agency responsible for enforcing the
FLSA and its experience with cases
involving the misclassification of
employees as independent contractors.
The consequence for a worker of being
classified as an independent contractor
is that the worker is excluded from the
protections of the FLSA. Without the
protections of the FLSA, workers need
not be paid at least the federal minimum
wage for all hours worked, and are not
entitled to overtime compensation for
hours worked over 40 in a workweek.
These impacts can be significant and
must be evaluated further. In addition,
a recent Presidential Memorandum
began a process for agencies to better
‘‘take into account the distributional
consequences of regulations.’’ 130 WHD
also questions whether a rule that could
increase the number of independent
contractors,131 effectuates the FLSA’s
purpose, recognized repeatedly by the
Supreme Court, to broadly provide
employees with its protections.132 These
concerns are an additional reason that
the Department is proposing to
withdraw the Rule.
D. Withdrawal Would Not Be Disruptive
Because the Rule Has Yet to Take Effect
Because the Independent Contractor
Rule has yet to take effect, the
Department does not believe that
withdrawing it would be disruptive.
Courts have not applied the Rule in
deciding cases. Moreover, WHD has not
implemented the Rule. For example,
129 Id.
at 1223.
130 Modernizing
Regulatory Review:
Memorandum for the Heads of Executive
Departments and Agencies (Jan. 20, 2021),
published at 86 FR 7223 (Jan. 26, 2021).
131 See 86 FR 1210.
132 See, e.g., Rutherford Food, 331 U.S. at 729
(‘‘‘This Act contains its own definitions,
comprehensive enough to require its application to
many persons and working relationships, which
prior to this Act, were not deemed to fall within an
employer-employee category.’’’) (quoting Portland
Terminal, 330 U.S. at 150); Rosenwasser, 323 U.S.
at 362–63 (‘‘A broader or more comprehensive
coverage of employees [than that of the FLSA] . . .
would be difficult to frame.’’).
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WHD’s Fact Sheet #13, titled
‘‘Employment Relationship Under the
Fair Labor Standards Act (FLSA)’’ and
dated July 2008, does not contain the
Rule’s analysis for determining whether
a worker is an employee or independent
contractor.133 WHD’s Field Operations
Handbook addresses independent
contractor status by simply crossreferencing Fact Sheet #13 and likewise
does not contain the Rule’s new
economic realities test.134 WHD’s elaws
Advisor compliance-assistance
information regarding independent
contractors likewise does not contain
the Rule’s analysis.135 And on January
26, 2021, Wage and Hour withdrew two
opinion letters that it had issued on
January 19, 2021 applying the Rule’s
analysis to several factual scenarios.136
WHD explained that the letters were
‘‘issued prematurely because they are
based on [a Rule] that ha[s] not gone
into effect.’’ 137 Accordingly, the
regulated community has been
functioning under the current state of
the law and the Department does not
believe that it would be negatively
affected by continuing to do so were the
Rule to be withdrawn. In particular, any
businesses currently engaging
independent contractors or individuals
who are now independent contractors
would be able to continue to operate
without any effect brought about by the
absence of new regulations. Even if the
Department withdraws the Rule,
businesses that had taken steps in
preparation for the Rule taking effect
will not be precluded from adjusting
their relationships with workers or
paying for new services from workers,
and can rely on past court decisions and
WHD guidance to determine whether
those workers are employees under the
FLSA or independent contractors.
introduced and Part 795 will be
reserved; and (2) the revisions that the
Rule would have made to 29 CFR
780.330(b) and 29 CFR 788.16(a) will
not occur and their text will remain
unchanged. The Department is not
proposing any regulatory guidance to
replace the guidance that the
Independent Contractor Rule would
have introduced as Part 795, so any
commenter feedback addressing or
suggesting such a replacement or
otherwise requesting that the
Department adopt any specific guidance
if the Rule is withdrawn will be
considered to be outside the scope of
this NPRM. In addition to the reasons
for the proposed withdrawal explained
above, withdrawal of the Rule would
allow WHD an additional opportunity to
consider legal and policy issues relating
to the FLSA and independent
contractors.
E. Effect of Proposed Withdrawal
If the Independent Contractor Rule is
withdrawn as proposed: (1) The
guidance that the Rule would have
introduced as Part 795 of Title 29 of the
Code of Federal Regulations will not be
A. Introduction
133 Fact Sheet #13 is available at https://
www.dol.gov/sites/dolgov/files/WHD/legacy/files/
whdfs13.pdf (last visited March 9, 2021).
134 Chapter 10 of Wage and Hour’s Field
Operations Handbook, entitled ‘‘FLSA Coverage:
Employment Relationship, Statutory Exclusions,
Geographical Limits’’, is available at https://
www.dol.gov/sites/dolgov/files/WHD/legacy/files/
FOH_Ch10.pdf (last visited March 9, 2021). The
relevant provision, Section 10b05 (‘‘Test of the
employment relationship’’), is on page 6.
135 See https://webapps.dol.gov/elaws/whd/flsa/
scope/ee14.asp (last visited March 9, 2021).
136 See https://www.dol.gov/agencies/whd/
opinion-letters/search?FLSA (last visited March 9,
2021), noting the withdrawal of Opinion Letters
FLSA2021–8 and FLSA2021–9.
137 Id.
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III. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) and its attendant regulations
require an agency to consider its need
for any information collections, their
practical utility, as well as the impact of
paperwork and other information
collection burdens imposed on the
public, and how to minimize those
burdens. The PRA typically requires an
agency to provide notice and seek
public comments on any proposed
collection of information contained in a
proposed rule. This NPRM does not
contain a collection of information
subject to Office of Management and
Budget approval under the PRA.
IV. Executive Order 12866, Regulatory
Planning and Review; and Executive
Order 13563, Improved Regulation and
Regulatory Review
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.138
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
138 See
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interfere with an action taken or
planned by another agency; (3)
materially alter the budgetary impact of
entitlements, grants, user fees or loan
programs or the rights and obligations of
recipients thereof; or (4) raise novel
legal or policy issues arising out of legal
mandates, the President’s priorities, or
the principles set forth in the Executive
Order. This proposed withdrawal will
be economically significant under
section 3(f) of Executive Order 12866
because it is withdrawing an
economically significant rule.
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.139 Executive
Order 13563 recognizes that some costs
and benefits are difficult to quantify and
provides that, when appropriate and
permitted by law, agencies may
consider and discuss qualitatively
values that are difficult or impossible to
quantify, including equity, human
dignity, fairness, and distributive
impacts. The analysis below outlines
the impacts that the Department
anticipates may result from this
proposed withdrawal and was prepared
pursuant to the above-mentioned
executive orders.
B. Background
On January 7, 2021, WHD published
a final rule titled ‘‘Independent
Contractor Status under the Fair Labor
Standards Act’’ (Independent Contractor
Rule or Rule).140 The Department is
proposing to withdraw the Rule, which
has not taken effect. If this withdrawal
goes forward as proposed, the Rule will
never have been in effect. Aside from
minimal rule familiarization costs, the
Department also provides below a
qualitative discussion of the transfers
that may be avoided by withdrawing the
Rule.
C. Costs
1. Rule Familiarization Costs
Withdrawing the Independent
Contractor Rule would impose direct
costs on businesses that will need to
review the withdrawal. To estimate
139 See
76 FR 3821 (Jan. 21, 2011).
140 See 86 FR 1168. WHD had published a notice
of proposed rulemaking requesting comments on a
proposal. See 85 FR 60600 (Sept. 25, 2020). The
final rule adopted ‘‘the interpretive guidance set
forth in [that proposal] largely as proposed.’’ 86 FR
1168.
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these regulatory familiarization costs,
the Department determined: (1) The
number of potentially affected entities,
(2) the average hourly wage rate of the
employees reviewing the withdrawal,
and (3) the amount of time required to
review the withdrawal. It is uncertain
whether these entities would incur
regulatory familiarization costs at the
firm or the establishment level.141 For
example, in smaller businesses there
might be just one specialist reviewing
the withdrawal, while larger businesses
might review it at corporate
headquarters and determine policy for
all establishments owned by the
business. To avoid underestimating the
costs of the withdrawal, the Department
uses both the number of establishments
and the number of firms to estimate a
potential range for regulatory
familiarization costs. The lower bound
of the range is calculated assuming that
one specialist per firm will review the
withdrawal, and the upper bound of the
range assumes one specialist per
establishment.
The most recent data on private sector
entities at the time this NPRM was
drafted are from the 2017 Statistics of
U.S. Businesses (SUSB), which reports
5,996,900 private firms and 7,860,674
private establishments with paid
employees.142 Because the Department
is unable to determine how many of
these businesses are interested in using
independent contractors, this analysis
assumes all businesses will undertake
review.
The Department believes ten minutes
per entity, on average, to be an
appropriate review time here. This
rulemaking would withdraw the
Independent Contractor Rule and would
not set forth any new regulations in its
place. Additionally, the Department
believes that many entities do not use
independent contractors and thus
would not spend any time reviewing the
withdrawal. Therefore, the ten-minute
review time represents an average of no
time for the entities that do not use
independent contractors, and
potentially more than ten minutes for
review by some entities that might use
independent contractors.
The Department’s analysis assumes
that the withdrawal would be reviewed
by Compensation, Benefits, and Job
Analysis Specialists (SOC 13–1141) or
employees of similar status and
141 An establishment is a single physical location
where one predominant activity occurs. A firm is
an establishment or a combination of
establishments.
142 Statistics of U.S. Businesses 2017, https://
www.census.gov/data/tables/2017/econ/susb/2017susb-annual.html, 2016 SUSB Annual Data Tables
by Establishment Industry.
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comparable pay. The median hourly
wage for these workers was $31.04 per
hour in 2019, the most recent year of
data available.143 The Department also
assumes that benefits are paid at a rate
of 46 percent 144 and overhead costs are
paid at a rate of 17 percent of the base
wage, resulting in a fully loaded hourly
rate of $50.60.
The Department estimates that the
lower bound of regulatory
familiarization cost range would be
$50,675,004 (5,996,900 firms × $50.60 ×
0.167 hours), and the upper bound,
$66,424,267 (7,860,674 establishments ×
$50.60 × 0.167 hours). The Department
estimates that all regulatory
familiarization costs would occur in
Year 1.
Additionally, the Department
estimated average annualized costs of
this proposed withdrawal over 10 years.
Over 10 years, it would have an average
annual cost of $6.7 million to $8.8
million, calculated at a 7 percent
discount rate ($5.8 million to $7.6
million calculated at a 3 percent
discount rate). All costs are in 2019
dollars.
2. Other Costs
In the Independent Contractor Rule,
the Department estimated cost savings
associated with increased clarity, as
well as cost savings associated with
reduced litigation. The Department does
not anticipate that this withdrawal
would increase costs in these areas, or
result in greater costs as compared to
the Rule. Although the intent of the
Rule would be to provide clarity, it
would also introduce several concepts
to the analysis that neither courts nor
WHD have previously applied. Because
the Rule would be unfamiliar and could
lead to inconsistent approaches and/or
outcomes, and because withdrawal
would maintain the status quo, the
Department does not believe that a
withdrawal of the Independent
Contractor Rule would result in
decreased clarity for stakeholders.
One of the main benefits discussed in
the Rule was the increased flexibility
associated with independent contractor
status. The Department acknowledges
that although many independent
contractors report that they value the
flexibility in hours and work,
employment and flexibility are not
mutually exclusive. Many employees
143 Occupational Employment and Wages, May
2019, https://www.bls.gov/oes/current/
oes131141.htm.
144 The benefits-earnings ratio is derived from the
Bureau of Labor Statistics’ Employer Costs for
Employee Compensation data using variables
CMU1020000000000D and CMU1030000000000D.
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similarly value and enjoy such
flexibility.
The Department welcomes any
comments and data on other costs
associated with this proposed
withdrawal.
D. Transfers
The Department believes that it is
important to provide a qualitative
discussion of the transfers that would
have occurred under the Rule. In the
economic analysis accompanying the
Rule, the Department assumed that the
Rule would lead to an increase in the
number of independent contractor
arrangements, and acknowledged that
some of this increase could be due to
businesses reclassifying employees as
independent contractors. As discussed
in the Rule and again below, an increase
in independent contracting could have
resulted in transfers associated with
employer-provided fringe benefits, tax
liabilities, and minimum wage and
overtime pay. By withdrawing the Rule,
these transfers from employees (and, in
some cases, from state or local
governments) to employers are avoided.
The Department welcomes any
comments and data on the transfer
impacts associated with this proposed
withdrawal.
1. Employer Provided Fringe Benefits
The reclassification of employees as
independent contractors, or the use of
independent contracting relationships
as opposed to employment, decreases
access to employer-provided fringe
benefits such as health care or
retirement benefits. According to the
BLS Current Population Survey (CPS)
Contingent Worker Supplement (CWS),
79.4 percent of self-employed
independent contractors have health
insurance, compared to 88.3 percent of
employees.145 This gap between
independent contractors and employees
is also true for low-income workers.
Using CWS data, the Department
compared health insurance rates for
workers earning less than $15 per hour
and found that 71.0 percent of
independent contractors have health
insurance compared with 78.5 percent
of employees.
Additionally, a major source of
retirement savings is employersponsored retirement accounts.
According to the CWS, 55.5 percent of
employees have a retirement account
with their current employer; in
addition, the BLS Employer Costs for
Employee Compensation (ECEC) found
145 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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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.
2. Tax Liabilities
As self-employed workers,
independent contractors are legally
obligated to pay both the employee and
employer shares of the Federal
Insurance Contributions Act (FICA)
taxes. Thus, as discussed in the Rule, if
workers’ classifications change from
employees to independent contractors,
there may be a transfer in federal tax
liabilities from employers to workers.146
Although the Rule only addressed
whether a worker is an employee or an
independent contractor under the FLSA,
the Department assumes in this analysis
that employers are likely to keep the
status of most workers the same across
all benefits and requirements, including
for tax purposes.147 These payroll taxes
include the 6.2 percent employer
component of the Social Security tax
and the 1.45 percent employer
component of the Medicare tax.148 In
sum, independent contractors are
legally responsible for an additional
7.65 percent of their earnings in FICA
taxes (less the applicable tax deduction
for this additional payment).
In addition to affecting tax liabilities
for workers, some commenters claimed
that the Rule would have an impact on
state tax revenue and budgets. In their
comment to the NPRM proposing the
Independent Contractor Rule, several
States’ Attorneys General asserted that
misclassifying employees as
independent contractors leads to losses
in unemployment insurance and
workers’ compensation funds, as well as
increases in the cost of providing health
care coverage to uninsured workers.
Because independent contractors do not
receive benefits like health insurance,
146 See
86 FR 1218.
have noted that the FLSA has the
broadest conception of employment under federal
law. See, e.g., Darden, 503 U.S. at 326. To the extent
that businesses making employment status
determinations base their decisions on the most
demanding federal standard, a rulemaking
addressing the standard for determining whether a
worker is an FLSA employee or an independent
contractor may affect the businesses’ classification
decisions for purposes of benefits and legal
requirements under other federal laws.
148 Internal Revenue Service, ‘‘Publication 15,
(Circular E), Employer’s Tax Guide’’ (Dec. 23, 2019),
https://www.irs.gov/pub/irs-pdf/p15.pdf. The social
security tax has a wage base limit of $137,700 in
2020. An additional Medicare Tax of 0.9 percent
applies to wages paid in excess of $200,000 in a
calendar year for individual filers.
147 Courts
PO 00000
Frm 00021
Fmt 4702
Sfmt 4702
14037
workers compensation, and retirement
plans from an employer, these
commenters suggested that a rule that
increases the prevalence of independent
contracting could shift this burden to
State and Federal governments.
3. Minimum Wage and Overtime
Requirements
When workers are shifted from
employee to independent contractor
status, the minimum wage and overtime
pay requirements of the FLSA no longer
apply. Independent contractors are more
likely to earn less than the minimum
wage: The 2017 CWS data indicate that
independent contractors are more likely
than employees to report earning less
than the FLSA minimum wage of $7.25
per hour (8 percent for self-employed
independent contractors, 5 percent for
other independent contractors, and 2
percent for employees). Research on
drivers who work for online
transportation companies in California
and New York also finds that many
drivers receive significantly less than
the applicable state minimum wages.149
V. Regulatory Flexibility Act (RFA)
Analysis
The Regulatory Flexibility Act of 1980
(RFA), 5 U.S.C. 601 et seq., as amended
by the Small Business Regulatory
Enforcement Fairness Act of 1996,
Public Law 104–121 (1996), requires
federal agencies engaged in rulemaking
to consider the impact of their proposals
on small entities, consider alternatives
to minimize that impact, and solicit
public comment on their analyses. The
RFA requires the assessment of the
impact of a regulation on a wide range
of small entities, including small
businesses, not-for-profit organizations,
and small governmental jurisdictions.
Accordingly, the Department examined
this proposed withdrawal to determine
whether it would have a significant
economic impact on a substantial
number of small entities.
The most recent data on private sector
entities at the time this NPRM was
drafted are from the 2017 Statistics of
U.S. Businesses (SUSB), which reports
5,996,900 private firms and 7,860,674
private establishments with paid
149 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/5e424affd767af
4f34c0d9a9/1581402883035/Feb112020_
GigReport.pdf.
E:\FR\FM\12MRP1.SGM
12MRP1
14038
Federal Register / Vol. 86, No. 47 / Friday, March 12, 2021 / Proposed Rules
employees.150 Of these, 5,976,761 firms
and 6,512,802 establishments have
fewer than 500 employees. The perentity cost for small business employers
is the regulatory familiarization cost of
$8.43, or the fully loaded mean hourly
wage of a Compensation, Benefits, and
Job Analysis Specialist ($50.60)
multiplied by 1⁄6 hour (ten minutes).
Because this cost is minimal for small
business entities, and well below one
percent of their gross annual revenues,
which is typically at least $100,000 per
year for the smallest businesses, the
Department certifies that this proposed
withdrawal would not have a significant
economic impact on a substantial
number of small entities. The
Department welcomes any comments
and data on this Regulatory Flexibility
Act Analysis, including the costs and
benefits of this proposed withdrawal on
small entities.
VI. Unfunded Mandates Reform Act of
1995
The Unfunded Mandates Reform Act
of 1995 (UMRA) 151 requires agencies to
prepare a written statement for rules
with a federal mandate that may result
in increased expenditures by state,
local, and tribal governments, in the
aggregate, or by the private sector, of
$165 million ($100 million in 1995
dollars adjusted for inflation) or more in
at least one year.152 This statement
must: (1) Identify the authorizing
legislation; (2) present the estimated
costs and benefits of the rule and, to the
extent that such estimates are feasible
and relevant, its estimated effects on the
national economy; (3) summarize and
evaluate state, local, and tribal
government input; and (4) identify
reasonable alternatives and select, or
explain the non-selection, of the least
costly, most cost-effective, or least
burdensome alternative. This proposed
withdrawal is not expected to result in
increased expenditures by the private
sector or by state, local, and tribal
governments of $165 million or more in
any one year.
VII. Executive Order 13132, Federalism
The Department has (1) reviewed this
proposed withdrawal in accordance
with Executive Order 13132 regarding
federalism and (2) determined that it
does not have federalism implications.
150 Statistics of U.S. Businesses 2017, https://
www.census.gov/data/tables/2017/econ/susb/2017susb-annual.html, 2016 SUSB Annual Data Tables
by Establishment Industry.
151 See 2 U.S.C. 1501.
152 Calculated using growth in the Gross Domestic
Product deflator from 1995 to 2019. Bureau of
Economic Analysis. Table 1.1.9. Implicit Price
Deflators for Gross Domestic Product.
VerDate Sep<11>2014
16:38 Mar 11, 2021
Jkt 253001
The proposed withdrawal would not
have substantial direct effects on the
States, on the relationship between the
national government and the States, or
on the distribution of power and
responsibilities among the various
levels of government.
VIII. Executive Order 13175, Indian
Tribal Governments
This proposed withdrawal would not
have substantial direct effects on one or
more Indian tribes, on the relationship
between the Federal Government and
Indian tribes, or on the distribution of
power and responsibilities between the
Federal Government and Indian tribes.
Signed this 10th day of March, 2021.
Jessica Looman,
Principal Deputy Administrator, Wage and
Hour Division.
[FR Doc. 2021–05256 Filed 3–11–21; 8:45 am]
BILLING CODE 4510–27–P
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Part 791
RIN 1235–AA37
Rescission of Joint Employer Status
Under the Fair Labor Standards Act
Rule
Wage and Hour Division,
Department of Labor.
ACTION: Notice of proposed rulemaking;
request for comments.
AGENCY:
This notice of proposed
rulemaking (NPRM) proposes to rescind
the final rule entitled ‘‘Joint Employer
Status Under the Fair Labor Standards
Act,’’ which published on January 16,
2020 and took effect on March 16, 2020.
The proposed rescission would remove
the regulations established by that rule.
DATES: Submit written comments on or
before April 12, 2021.
ADDRESSES: You may submit comments,
identified by Regulatory Information
Number (RIN) 1235–AA37 by either of
the following methods: Electronic
Comments: Submit comments through
the Federal eRulemaking Portal at
http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Address written submissions to
Division of Regulations, Legislation, and
Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S–
3502, 200 Constitution Avenue NW,
Washington, DC 20210. Instructions:
Please submit only one copy of your
comments by only one method.
Commenters submitting file attachments
SUMMARY:
PO 00000
Frm 00022
Fmt 4702
Sfmt 4702
on www.regulations.gov are advised that
uploading text-recognized documents—
i.e., documents in a native file format or
documents which have undergone
optical character recognition (OCR)—
enable staff at the Department to more
easily search and retrieve specific
content included in your comment for
consideration. Anyone who submits a
comment (including duplicate
comments) should understand and
expect that the comment will become a
matter of public record and will be
posted without change to https://
www.regulations.gov, including any
personal information provided. The
Department will post comments
gathered and submitted by a third-party
organization as a group under a single
document ID number on https://
www.regulations.gov. All comments
must be received by 11:59 p.m. EST on
April 12, 2021 for consideration. The
Department strongly recommends that
commenters submit their comments
electronically via http://
www.regulations.gov to ensure timely
receipt prior to the close of the comment
period, as the Department continues to
experience delays in the receipt of mail.
Submit only one copy of your comments
by only one method. Docket: For access
to the docket to read background
documents or comments, go to the
Federal eRulemaking Portal at http://
www.regulations.gov.
FOR FURTHER INFORMATION CONTACT:
Amy DeBisschop, Division of
Regulations, Legislation, and
Interpretation, Wage and Hour Division,
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 NPRM may be
obtained in alternative formats (Large
Print, Braille, Audio Tape or Disc), upon
request, by calling (202) 693–0675 (this
is not a toll-free number). TTY/TDD
callers may dial toll-free 1–877–889–
5627 to obtain information or request
materials in alternative formats.
SUPPLEMENTARY INFORMATION:
I. Background
The Fair Labor Standards Act (FLSA
or Act) requires all covered employers
to pay nonexempt employees at least the
federal minimum wage for every hour
worked in a non-overtime workweek.1
In an overtime workweek, for all hours
worked in excess of 40 in a workweek,
covered employers must pay a
nonexempt employee at least one and
one-half times the employee’s regular
1 See
E:\FR\FM\12MRP1.SGM
29 U.S.C. 206(a).
12MRP1
Agencies
[Federal Register Volume 86, Number 47 (Friday, March 12, 2021)]
[Proposed Rules]
[Pages 14027-14038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05256]
=======================================================================
-----------------------------------------------------------------------
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;
Withdrawal
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking; request for comments.
-----------------------------------------------------------------------
SUMMARY: This notice of proposed rulemaking (NPRM) proposes to withdraw
the final rule titled ``Independent Contractor Status under the Fair
Labor Standards Act,'' which was published on January 7, 2021 and the
effective date of which is currently May 7, 2021.
DATES: Submit written comments on or before April 12, 2021.
ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA34, by either of the following methods:
Electronic Comments: Submit comments through the Federal eRulemaking
Portal at http://www.regulations.gov. Follow the instructions for
submitting comments. Mail: Address written submissions to Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, NW,
Washington, DC 20210. Instructions: Please submit only one copy of your
comments by only one method. Commenters submitting file attachments on
www.regulations.gov are advised that uploading text-recognized
documents--i.e., documents in a native file format or documents which
have undergone optical character recognition (OCR)--enable staff at the
Department to more easily search and retrieve specific content included
in your comment for consideration. Anyone who submits a comment
(including duplicate comments) should understand and expect that the
comment will become a matter of public record and will be posted
without change to https://www.regulations.gov, including any personal
information provided. The Department will post comments gathered and
submitted by a third-party organization as a group under a single
document ID number on https://www.regulations.gov. All comments must be
received by 11:59 p.m. EST on April 12, 2021 for consideration. The
Department strongly recommends that commenters submit their comments
electronically via http://www.regulations.gov to ensure timely receipt
prior to the close of the comment period, as the Department continues
to experience delays in the receipt of mail. Submit only one copy of
your comments by only one method. Docket: For access to the docket to
read background documents or comments, go to the Federal eRulemaking
Portal at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
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 proposal 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.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory and Legal Background
The Fair Labor Standards Act (FLSA or Act) requires all covered
employers to pay nonexempt employees at least the federal minimum wage
for every hour worked in a non-overtime workweek.\1\ In an overtime
workweek, for all hours worked in excess of 40 in a workweek, covered
employers must pay a
[[Page 14028]]
nonexempt employee at least one and one-half times the employee's
regular rate.\2\ The FLSA also requires covered employers to make,
keep, and preserve certain records regarding employees.\3\
---------------------------------------------------------------------------
\1\ 29 U.S.C. 206(a).
\2\ 29 U.S.C. 207(a).
\3\ 29 U.S.C. 211(c).
---------------------------------------------------------------------------
The FLSA's minimum wage and overtime pay requirements apply only to
employees.\4\ Section 3(e) generally defines ``employee'' to mean ``any
individual employed by an employer.'' \5\ Section 3(d) of the Act
defines ``employer'' to ``include[ ] any person acting directly or
indirectly in the interest of an employer in relation to an employee.''
\6\ Section 3(g) defines ``employ'' to ``include[ ] to suffer or permit
to work.'' \7\
---------------------------------------------------------------------------
\4\ See 29 U.S.C. 206 (minimum wage) and 207 (overtime pay).
\5\ 29 U.S.C. 203(e)(1).
\6\ 29 U.S.C. 203(d).
\7\ 29 U.S.C. 203(g).
---------------------------------------------------------------------------
The Supreme Court, in interpreting these definitions, has stated
that ``[a] broader or more comprehensive coverage of employees within
the stated categories would be difficult to frame,'' and that ``the
term `employee' had been given `the broadest definition that has ever
been included in any one act.' '' \8\ The Supreme Court has further
stated that the ``striking breadth'' of the FLSA's definition of
``employ''--``to suffer or permit to work''--``stretches the meaning of
`employee' to cover some parties who might not qualify as such under a
strict application of traditional agency law principles.'' \9\ Thus,
the FLSA expressly rejects the common law standard for determining
whether a worker is an employee.\10\
---------------------------------------------------------------------------
\8\ United States v. Rosenwasser, 323 U.S. 360, 362, 363 n.3
(1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Black)).
\9\ Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992).
\10\ See id.; Walling v. Portland Terminal Co., 330 U.S. 148,
150-51 (1947) (``But in determining who are `employees' under the
Act, common law employee categories or employer-employee
classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall
within an employer-employee category.'' (citation omitted)).
---------------------------------------------------------------------------
Though the FLSA's definition of employee is broader than the common
law definition, the Supreme Court has also recognized that the Act was
``not intended to stamp all persons as employees.'' \11\ The Supreme
Court has acknowledged that even a broad definition of employee ``does
not mean that all who render service to an industry are employees.''
\12\ One category of workers that has been recognized as being outside
the FLSA's broad definition of ``employees'' is ``independent
contractors.'' \13\ Courts have thus recognized a need to delineate
between employees, who fall under the protections of the FLSA, and
independent contractors, who do not.
---------------------------------------------------------------------------
\11\ Portland Terminal, 330 U.S. at 152; see also Rutherford
Food Corp. v. McComb, 331 U.S. 722, 729 (1947) (workers may not be
employees when their work does not ``in its essence . . . follow[ ]
the usual path of an employee'').
\12\ United States v. Silk, 331 U.S. 704, 712 (1947) (analyzing
the definition of employee under the Social Security Act).
\13\ Rutherford Food, 331 U.S. at 729 (``There may be
independent contractors who take part in production or distribution
who would alone be responsible for the wages and hours of their own
employees.'').
---------------------------------------------------------------------------
The Supreme Court has repeatedly emphasized that the test for
whether an individual is an employee under the FLSA is one of
``economic reality.'' \14\ Under this test, the ``technical concepts''
used to label a worker as an employee or independent contractor do not
drive the analysis, but rather it is the economic realities of the
relationship between the worker and the employer that is
determinative.\15\
---------------------------------------------------------------------------
\14\ Tony & Susan Alamo Found. v. Sec'y of Labor, 471 U.S. 290,
301 (1985) (quoting Goldberg v. Whitaker House Coop., Inc., 366 U.S.
28, 33 (1961)).
\15\ Goldberg, 366 U.S. at 32-33.
---------------------------------------------------------------------------
In United States v. Silk, 331 U.S. 704, 712 (1947), an early case
applying an economic realities test under the Social Security Act, the
Supreme Court acknowledged that ``[p]robably it is quite impossible to
extract from the statute a rule of thumb'' regarding the distinction
between employees and independent contractors.\16\ The Court suggested
that federal agencies and courts ``will find that degrees of control,
opportunities for profit or loss, investment in facilities, permanency
of relation and skill required in the claimed independent operation are
important for decision.'' \17\ The Court cautioned that no single
factor is controlling and that the list is not exhaustive.\18\ The
Court went on to note that the workers in that case were ``from one
standpoint an integral part of the businesses'' of the employer,
supporting a conclusion that some of the workers in that case were
employees.\19\
---------------------------------------------------------------------------
\16\ 331 U.S. at 716. At the time, the Supreme Court noted that
``[d]ecisions that define the coverage of the employer-[e]mployee
relationship under the Labor and Social Security acts are persuasive
in the consideration of a similar coverage under the Fair Labor
Standards Act.'' Rutherford Food Corp. v. McComb, 331 U.S. 722, 723-
23 (1947). However, Congress amended the Social Security Act in
1948.
\17\ 331 U.S. at 716.
\18\ See id.
\19\ Id.
---------------------------------------------------------------------------
The same day that the Supreme Court issued its decision in Silk, it
also issued Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947), in
which it affirmed a circuit court decision that analyzed an FLSA
employment relationship based on its economic realities.\20\ The Court
rejected an approach based on ``isolated factors'' and again considered
``the circumstances of the whole activity.'' \21\ The Court considered
several of the factors that it listed in Silk as they related to meat
boners on a slaughterhouse's production line, ultimately determining
that the boners were employees.\22\ The Court noted, among other
things, that the boners did a specialty job on the production line, had
no business organization that could shift to a different slaughter-
house, and were best characterized as ``part of the integrated unit of
production under such circumstances that the workers performing the
task were employees of the establishment.'' \23\
---------------------------------------------------------------------------
\20\ See Rutherford Food, 331 U.S. at 727.
\21\ Id. at 730.
\22\ See id.
\23\ Id. at 729-30.
---------------------------------------------------------------------------
Since Silk and Rutherford Food, federal courts of appeals have
applied the economic realities test to distinguish independent
contractors from employees who are entitled to the FLSA's protections.
Recognizing that the common law concept of ``employee'' had been
rejected for FLSA purposes, courts of appeals followed the Supreme
Court's instruction that ```employees are those who as a matter of
economic realities are dependent upon the business to which they render
service.' '' \24\
---------------------------------------------------------------------------
\24\ Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir.
1976) (quoting Bartels v. Birmingham, 332 U.S. 126, 130 (1947)).
---------------------------------------------------------------------------
All of the courts of appeals have followed the economic realities
test, and nearly all of them analyze the economic realities of an
employment relationship using the factors identified in Silk.\25\ No
court of appeals considers any factor or combination of factors to
universally predominate over the others in every case.\26\ For example,
the Ninth Circuit
[[Page 14029]]
has explained that some of the factors ``which may be useful in
distinguishing employees from independent contractors for purposes of
social legislation such as the FLSA'' are: (1) The degree of the
employer's right to control the manner in which the work is to be
performed; (2) the worker's opportunity for profit or loss depending
upon his or her managerial skill; (3) the worker's investment in
equipment or materials required for his or her task, or employment of
helpers; (4) whether the service rendered requires a special skill; (5)
the degree of permanence of the working relationship; and (6) whether
the service rendered is an integral part of the employer's
business.\27\ The Ninth Circuit repeated the Supreme Court's
instruction that no individual factor is conclusive and that the
ultimate determination depends upon the circumstances of the whole
activity.\28\
---------------------------------------------------------------------------
\25\ See Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d
668, 675 (1st Cir. 1998); Brock v. Superior Care, Inc., 840 F.2d
1054, 1058-59 (2d Cir. 1988); Donovan v. DialAmerica Mktg., Inc.,
757 F.2d 1376, 1382-83 (3d Cir. 1985); McFeeley v. Jackson Street
Entm't, LLC, 825 F.3d 235, 241 (4th Cir. 2016); Acosta v. Off Duty
Police Services, Inc., 915 F.3d 1050, 1055 (6th Cir. 2019);
Secretary of Labor, U.S. Dep't of Labor v. Lauritzen, 835 F.2d 1529,
1534 (7th Cir. 1987); Karlson v. Action Process Service & Private
Investigation, LLC, 860 F.3d 1089, 1092 (8th Cir. 2017); Real v.
Driscoll Strawberry Associates, Inc., 603 F.2d 748, 754 (9th Cir.
1979); Acosta v. Paragon Contractors Corp., 884 F.3d 1225, 1235
(10th Cir. 2018); Scantland v. Jeffry Knight, Inc., 721 F.3d 1308,
1311 (11th Cir. 2013); Morrison v. Int'l Programs Consortium, Inc.,
253 F.3d 5, 11 (D.C. Cir. 2001).
\26\ See, e.g., Parrish v. Premier Directional Drilling, L.P.,
917 F.3d 369, 380 (5th Cir. 2019) (stating that it ``is impossible
to assign to each of these factors a specific and invariably applied
weight'' (citation omitted)); Martin v. Selker Bros., 949 F.2d 1286,
1293 (3d Cir. 1991) (``It is a well-established principle that the
determination of the employment relationship does not depend on
isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.''); Scantland, 721 F.3d at 1312
n.2 (the relative weight of each factor ``depends on the facts of
the case'').
\27\ Real, 603 F.2d at 754.
\28\ See id.
---------------------------------------------------------------------------
Some courts of appeals have applied the factors with some
variations. For example, the Fifth Circuit typically does not list the
``integral part'' factor as one of the considerations that guides the
analysis.\29\ Nevertheless, the Fifth Circuit--recognizing that the
listed factors are not exhaustive--has considered the extent to which a
worker's function is integral to a business as part of its economic
realities analysis.\30\ The Second Circuit varies in that it treats the
employee's opportunity for profit or loss and the employee's investment
as a single factor, but it still uses the same considerations as the
other circuits to inform its economic realities analysis.\31\
---------------------------------------------------------------------------
\29\ See Usery, 527 F.2d at 1311.
\30\ See Hobbs v. Petroplex Pipe and Constr., Inc., 946 F.3d
824, 836 (5th Cir. 2020).
\31\ See, e.g., Franze v. Bimbo Bakeries USA, Inc., 826 F. App'x
74, 76 (2d Cir. 2020).
---------------------------------------------------------------------------
In sum, since the 1940s, federal courts have consistently analyzed
the question of employee status under the FLSA by examining the
economic realities of the employment relationship to determine whether
the worker is dependent on the employer for work or is in business for
him or herself.\32\ In doing so, courts have looked to the six factors
first articulated in Silk as useful guideposts while acknowledging that
those factors are not exhaustive and should not be applied
mechanically.\33\
---------------------------------------------------------------------------
\32\ See, e.g., Franze, 826 F. App'x at 76; Razak v. Uber
Techs., Inc., 951 F.3d 137, 142-43 (3d Cir. 2020); Gilbo v. Agment,
LLC, 831 F. App'x 772, 775 (6th Cir. 2020).
\33\ See, e.g., Superior Care, 840 F.2d at 1054.
---------------------------------------------------------------------------
B. Prior Wage and Hour Division Guidance
Since at least 1954, the Wage and Hour Division (WHD) has applied
variations of this multifactor analysis when considering whether a
worker is an employee under the FLSA or an independent contractor.\34\
In a guidance document issued in 1964, WHD stated, ``The Supreme Court
has made it clear that an employee, as distinguished from a person who
is engaged in a business of his own, is one who as a matter of economic
reality follows the usual path of an employee and is dependent on the
business which he serves.'' \35\ Like the courts, WHD has consistently
applied a multifactor economic realities analysis when determining
whether a worker is an employee under the FLSA or an independent
contractor.\36\
---------------------------------------------------------------------------
\34\ See WHD Opinion Letter (Aug. 13, 1954) (applying six
factors very similar to the six economic realities factors currently
used by courts of appeals).
\35\ WHD Opinion Letter FLSA-795 (Sept. 30, 1964).
\36\ See, e.g., WHD Opinion Letter, 2002 WL 32406602, at *2
(Sept. 5, 2002); WHD Opinion Letter, 2000 WL 34444342, at *3 (Dec.
7, 2000); WHD Opinion Letter, 2000 WL 34444352, at *1 (Jul. 5,
2000); WHD Opinion Letter, 1999 WL 1788137, at *1 (Jul. 12, 1999);
WHD Opinion Letter, 1995 WL 1032489, at *1 (June 5, 1995); WHD
Opinion Letter, 1995 WL 1032469, at *1 (Mar. 2, 1995); WHD Opinion
Letter, 1986 WL 740454, at *1 (June 23, 1986); WHD Opinion Letter,
1986 WL 1171083, at *1 (Jan. 14, 1986); WHD Opinion Letter WH-476,
1978 WL 51437, at *2 (Oct. 19, 1978); WHD Opinion Letter WH-361,
1975 WL 40984, at *1 (Oct. 1, 1975); WHD Opinion Letter (Sept. 12,
1969); WHD Opinion Letter (Oct. 12, 1965).
---------------------------------------------------------------------------
The Department's primary sub-regulatory guidance addressing this
topic, WHD Fact Sheet #13, ``Employment Relationship Under the Fair
Labor Standards Act (FLSA),'' similarly states that, when determining
whether an employment relationship exists under the FLSA, the test is
the ``economic reality'' rather than an application of ``technical
concepts,'' and that status ``is not determined by common law standards
relating to master and servant.'' \37\ Instead, ``it is the total
activity or situation which controls,'' and ``an employee, as
distinguished from a person who is engaged in a business of his or her
own, is one who, as a matter of economic reality, follows the usual
path of an employee and is dependent on the business which he or she
serves.'' The fact sheet identifies seven economic realities factors;
in addition to factors that are similar to the six factors used by the
federal courts of appeals and discussed above, it also identifies the
worker's ``degree of independent business organization and operation.''
The fact sheet identifies certain other factors that are immaterial to
determining whether a worker is an employee covered under the FLSA or
independent contractor, including the place where work is performed,
the absence of a formal employment agreement, and whether an alleged
independent contractor is licensed by a State or local government.\38\
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\37\ Fact Sheet #13 is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf (last visited March 9,
2021).
\38\ WHD maintains additional sub-regulatory guidance addressing
whether a worker is an employee or independent contractor under the
FLSA. For example, WHD's Field Operations Handbook, in its section
titled ``Test of the employment relationship,'' cross-references
Fact Sheet #13. See Section 10b05 of Chapter 10 (``FLSA Coverage:
Employment Relationship, Statutory Exclusions, Geographical
Limits'') of WHD's Field Operations Handbook, available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/FOH_Ch10.pdf (last
visited March9, 2021); see also https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/misclassification-facts.pdf (last visited
March9, 2021). And the section of WHD's elaws Advisor compliance-
assistance materials addressing independent contractors provides
guidance very similar to that of Fact Sheet #13. See https://webapps.dol.gov/elaws/whd/flsa/scope/ee14.asp (last visited March9,
2021).
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In 1969 and 1972, WHD promulgated regulations relevant to specific
industries after Congress amended the FLSA to change the way it applied
to those industries.\39\ Those regulations applied a multifactor
analysis under the FLSA for determining whether a worker is an employee
or independent contractor in those specific contexts.\40\ Further, WHD
promulgated a regulation in 1997 applying a multifactor economic
realities analysis for distinguishing between employees and independent
contractors under the Migrant and Seasonal Agricultural Worker
Protection Act (MSPA).\41\
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\39\ See 37 FR 12084 (explaining that Part 780 was revised in
order to adapt to the changes made by the Fair Labor Standards
Amendments of 1966 (80 Stat. 830) and implementing 29 CFR 780.330(b)
to apply a six-factor economic realities test to determine whether a
sharecropper or tenant is an employee under the Act or an
independent contractor); 34 FR 15794 (explaining that Part 788 was
revised in order to adapt to the changes made by the 1966 Amendments
and implementing 29 CFR 788.16(a) to apply a six-factor economic
realities test to determine whether workers in certain forestry and
logging operations are employees under the Act or independent
contractors).
\40\ See id.
\41\ See 62 FR 11734 (amending 29 CFR 500.20(h)(4)).
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On July 15, 2015, WHD issued Administrator's Interpretation No.
2015-1, ``The Application of the Fair Labor Standards Act's `Suffer or
Permit'
[[Page 14030]]
Standard in the Identification of Employees Who Are Misclassified as
Independent Contractors'' (AI 2015-1).\42\ AI 2015-1 reiterated that
the economic realities of the relationship are determinative and that
the ultimate inquiry is whether the worker is economically dependent on
the employer or truly in business for him or herself. It identified six
economic realities factors that followed the six factors used by most
federal courts of appeals: (1) The extent to which the work performed
is an integral part of the employer's business; (2) the worker's
opportunity for profit or loss depending on his or her managerial
skill; (3) the extent of the relative investments of the employer and
the worker; (4) whether the work performed requires special skills and
initiative; (5) the permanency of the relationship; and (6) the degree
of control exercised or retained by the employer. AI-2015-1 further
emphasized that the factors should not be applied in a mechanical
fashion and that no one factor was determinative. AI 2015-1 was
withdrawn on June 7, 2017.\43\
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\42\ AI 2015-1 is available at 2015 WL 4449086.
\43\ See News Release 17-0807-NAT, ``US Secretary of Labor
Withdraws Joint Employment, Independent Contractor Informal
Guidance'' (Jun. 7, 2017), available at https://www.dol.gov/newsroom/releases/opa/opa20170607 (last visited March9, 2021).
---------------------------------------------------------------------------
In 2019, WHD issued an opinion letter, FLSA2019-6, regarding
whether workers who worked for companies operating self-described
``virtual marketplaces'' were employees covered under the FLSA or
independent contractors.\44\ Like WHD's prior guidance, the letter
stated that the determination depended on the economic realities of the
relationship and that the ultimate inquiry was whether the workers
depend on someone else's business or are in business for
themselves.\45\ The letter identified six economic realities factors
that differed slightly from the factors typically articulated by WHD
previously: (1) The nature and degree of the employer's control; (2)
the permanency of the worker's relationship with the employer; (3) the
amount of the worker's investment in facilities, equipment, or helpers;
(4) the amount of skill, initiative, judgment, and foresight required
for the worker's services; (5) the worker's opportunities for profit or
loss; and (6) the extent of the integration of the worker's services
into the employer's business.\46\ Opinion Letter FLSA2019-6 was
withdrawn for further review on February 19, 2021.\47\
---------------------------------------------------------------------------
\44\ See WHD Opinion Letter FLSA2019-6, 2019 WL 1977301 (Apr.
29, 2019) (withdrawn February 19, 2021).
\45\ See id. at *3.
\46\ See id. at *4.
\47\ See note at https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited March 9, 2021).
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C. The January 2021 Independent Contractor Rule
On January 7, 2021, the Department published a final rule entitled
``Independent Contractor Status under the Fair Labor Standards Act''
with an effective date of March 8, 2021 (Independent Contractor Rule or
Rule).\48\ The Independent Contractor Rule would introduce into Title
29 of the Code of Federal Regulations a new part (Part 795) titled
``Employee or Independent Contractor Classification under the Fair
Labor Standards Act'' that would provide a new generally applicable
interpretation of employee or independent contractor status under the
FLSA.\49\ The Rule would also revise WHD's prior interpretations of
independent contractor status in 29 CFR 780.330(b) and 29 CFR
788.16(a), both of which apply in limited contexts.\50\
---------------------------------------------------------------------------
\48\ See 86 FR 1168. WHD had published a notice of proposed
rulemaking requesting comments on a proposal. See 85 FR 60600 (Sept.
25, 2020). The final rule adopted ``the interpretive guidance set
forth in [that proposal] largely as proposed.'' 86 FR 1168.
\49\ See id.
\50\ See id.
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The Department explained that the purpose of the Independent
Contractor Rule would be to establish an economic realities test that
improved on prior articulations that the Rule viewed as ``unclear and
unwieldy.'' \51\ It stated that the existing economic realities test
applied by WHD and courts suffered from confusion regarding the meaning
of ``economic dependence,'' a lack of focus in the multifactor
balancing test, and confusion and inefficiency caused by overlap
between the factors.\52\ The Rule explained that the shortcomings and
misconceptions associated with the test were more apparent in the
modern economy and that additional clarity would promote innovation in
work arrangements.\53\
---------------------------------------------------------------------------
\51\ 86 FR 1172.
\52\ 86 FR 1172-75.
\53\ See 86 FR 1175.
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The Independent Contractor Rule explained that independent
contractors are not employees under the FLSA and are therefore not
subject to the Act's minimum wage, overtime pay, or recordkeeping
requirements.\54\ The Rule would adopt an ``economic dependence'' test
under which a worker is an employee of an employer if that worker is
economically dependent on the employer for work.\55\ In contrast, the
worker would be an independent contractor if the worker is in business
for him or herself.\56\
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\54\ See 86 FR 1246 (section 795.105(a)).
\55\ See 86 FR 1246 (section 795.105(b)).
\56\ See id.
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The Rule's new economic realities test would identify five economic
realities factors that would guide the inquiry into a worker's status
as an employee or independent contractor.\57\ These factors would not
be exhaustive, no one factor would be dispositive, and additional
factors would be considered if they ``in some way indicate whether the
[worker] is in business for him- or herself, as opposed to being
economically dependent on the potential employer for work.'' \58\ Two
of the identified factors would be designated as ``core factors'' that
would carry greater weight in the analysis. If both of those factors
indicated the same classification, as either an employee or an
independent contractor, there would be a ``substantial likelihood''
that classification is the worker's correct classification.\59\
---------------------------------------------------------------------------
\57\ See 86 FR 1246 (section 795.105(c)).
\58\ 86 FR 1246-47 (sections 795.105(c) & (d)(2)(iv)).
\59\ 86 FR 1246 (section 795.105(c)).
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The first core factor would be the nature and degree of control
over the work, which would indicate independent contractor status to
the extent that the worker exercised substantial control over key
aspects of the performance of the work, such as by setting his or her
own schedule, by selecting his or her projects, and/or through the
ability to work for others, which might include the potential
employer's competitors.\60\ Requiring the worker to comply with
specific legal obligations, satisfy health and safety standards, carry
insurance, meet contractually agreed upon deadlines or quality control
standards, or satisfy other similar terms that are typical of
contractual relationships between businesses (as opposed to employment
relationships) would not constitute control.\61\
---------------------------------------------------------------------------
\60\ See 86 FR 1246-47 (section 795.105(d)(1)(i)).
\61\ See id.
---------------------------------------------------------------------------
The second core factor would be the worker's opportunity for profit
or loss.\62\ This factor would weigh towards the worker being an
independent contractor to the extent the worker has an opportunity to
earn profits or incur losses based on either his or her exercise of
initiative (such as managerial skill or business acumen or judgment) or
his or her management of investment in or capital expenditure on, for
example, helpers or equipment or material to
[[Page 14031]]
further the work.\63\ While the effects of the worker's exercise of
initiative and management of investment would both be considered under
this factor, the worker would not need to have an opportunity for
profit or loss based on both initiative and management of investment
for this factor to weigh towards the worker being an independent
contractor.\64\ This factor would weigh towards the worker being an
employee to the extent the worker is unable to affect his or her
earnings or is only able to do so by working more hours or faster.\65\
---------------------------------------------------------------------------
\62\ See 86 FR 1247 (section 795.105(d)(1)(ii)).
\63\ See id.
\64\ See id.
\65\ See id.
---------------------------------------------------------------------------
The Rule would also identify three other factors: The amount of
skill required for the work, the degree of permanence of the working
relationship between the worker and the employer, and whether the work
is part of an integrated unit of production (which is distinct from the
concept of the importance or centrality of the worker's work to the
employer's business).\66\ The Rule would provide that these other
factors would be ``less probative and, in some cases, [would] not be
probative at all'' and would be ``highly unlikely, either individually
or collectively, to outweigh the combined probative value of the two
core factors.'' \67\
---------------------------------------------------------------------------
\66\ See 86 FR 1247 (section 795.105(d)(2)).
\67\ 86 FR 1246 (section 795.105(c)).
---------------------------------------------------------------------------
The Rule would further provide that the actual practice of the
parties involved is more relevant than what may be contractually or
theoretically possible.\68\ The Rule would also provide five examples
illustrating how different factors would inform the analysis.\69\
---------------------------------------------------------------------------
\68\ See 86 FR 1247 (section 795.110).
\69\ See 86 FR 1247-48 (section 795.115).
---------------------------------------------------------------------------
WHD issued Opinion Letters FLSA2021-8 and FLSA2021-9 on January 19,
2021 applying the Rule's analysis to specific factual scenarios, and
then withdrew those opinion letters on January 26, 2021, explaining
that the letters were issued prematurely because they were based on a
Rule that had yet to take effect.\70\
---------------------------------------------------------------------------
\70\ See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited March 9, 2021), noting the withdrawal of
Opinion Letters FLSA2021-8 and FLSA2021-9.
---------------------------------------------------------------------------
D. Delay of Rule's Effective Date
On February 5, 2021, the Department published a proposal to delay
the Independent Contractor Rule's effective date until May 7, 2021, 60
days after the original effective date of March 8, 2021.\71\ On March
4, 2021, after considering the approximately 1,500 comments received in
response to that proposal, the Department published a final rule
delaying the effective date of the Independent Contractor Rule as
proposed.\72\ The Department explained that the delay was consistent
with a January 20, 2021 memorandum from the Assistant to the President
and Chief of Staff, titled ``Regulatory Freeze Pending Review.'' \73\
The Department further explained that a delay would allow it additional
time to consider ``significant and complex'' issues associated with the
Rule, including whether the rule effectuates the FLSA's purpose to
broadly cover workers as employees as well as the costs and benefits
attributed to the rule, including its effect on workers.\74\
---------------------------------------------------------------------------
\71\ See 86 FR 8326.
\72\ 86 FR 12535.
\73\ Id. (citing January 20, 2021 memo from the Assistant to the
President and Chief of Staff, titled ``Regulatory Freeze Pending
Review,'' 86 FR 7424).
\74\ Id.
---------------------------------------------------------------------------
II. Proposal To Withdraw
The Department proposes to withdraw the Independent Contractor
Rule, which has not yet taken effect. The Department's reasons for
proposing to withdraw the Rule are explained below, and the Department
requests comments on its proposal.
A. The Rule's Standard Has Never Been Used by Any Court or by WHD, and
Is Not Supported by the Act's Text or Case Law
WHD recognizes that the cornerstone of the FLSA is the Act's broad
definition of ``employ,'' which provides that an employee under the Act
is any individual whom an employer suffers, permits, or otherwise
employs to work.\75\ Rather than being derived from the common law of
agency, the FLSA's ``suffer or permit'' definition of ``employ''
originally came from state laws regulating child labor.\76\ This
standard was intended to expand coverage beyond employers who
controlled the means and manner of performance.\77\ The FLSA's breadth
in defining the employment relationship, as well as its clear remedial
purpose, comes from the statutory text itself as well as the
legislative history.\78\ This standard ``stretches the meaning of
`employee' [under the FLSA] to cover some parties who might not qualify
as such under a strict application of traditional agency law
principles.'' \79\ The FLSA's overarching inquiry of economic
dependence thus establishes a broader scope of employment than that
which exists under the common law of agency.
---------------------------------------------------------------------------
\75\ See 29 U.S.C. 203(e)(1), (g).
\76\ See Rutherford Food, 331 U.S. at 728 & n.7.
\77\ See generally People ex rel. Price v. Sheffield Farms-
Slawson-Decker Co., 225 N.Y. 25, 29-31 (N.Y. 1918).
\78\ See, e.g., Parrish, 917 F.3d at 378 (``Given the remedial
purposes of the [FLSA], an expansive definition of `employee' has
been adopted by the courts.'' (citation omitted)); Off Duty Police,
915 F.3d at 1054-55 (noting, directly under the heading ``Employment
Relationship,'' that ``[t]he FLSA is `a broadly remedial and
humanitarian statute . . . designed to correct labor conditions
detrimental to the maintenance of the minimum standard of living
necessary for health, efficiency, and general well-being of
workers''' (quoting Donovan v. Brandel, 736 F.2d 1114, 1116 (6th
Cir. 1984) (some internal quotation marks omitted)). The FLSA's
broad scope of employment, broader than the common law, was not
changed by the Supreme Court's decision in Encino Motorcars, LLC v.
Navarro, 138 S. Ct. 1134 (2018), which explained that the Act's
statutory exemptions should be interpreted fairly because there is
no textual indication that the exemptions should be construed
narrowly. See 138 S. Ct. at 1142. Here, the Act's definition of
``employ'' as including ``to suffer or permit to work'' gives a
clear textual basis for the breadth of employment under the FLSA. 29
U.S.C. 203(g); see Off Duty Police, 915 F.3d at 1062 (``[T]hese
[economic reality] factors must be balanced in light of the FLSA's
strikingly broad definition of employee.'' (quotations and citation
omitted)).
\79\ Darden, 503 U.S. at 326; see also Portland Terminal, 330
U.S. at 150 (in determining employee status under the FLSA, ``common
law employee categories or employer-employee classifications under
other statutes are not of controlling significance'').
---------------------------------------------------------------------------
Among the reasons the Department is proposing to withdraw the Rule
is that, upon further review and consideration of the Rule, the
Department questions whether the Rule is fully aligned with the FLSA's
text and purpose or case law describing and applying the economic
realities test.
1. The Choice To Elevate Control and Opportunity for Profit or Loss as
the ``Most Probative'' Factors in Determining Employee Status Under the
FLSA
The Rule would elevate two ``core'' factors, control and
opportunity for profit or loss, above all other factors, and would
provide that only in ``rare'' cases would the other factors outweigh
the core factors.\80\ For decades, WHD, consistent with case law, has
applied a multi-factor balancing test to assess whether the worker, as
a matter of economic reality, is economically dependent on the employer
or is in business for him or herself.\81\ Courts universally apply this
analysis as well and have explained that ``economic reality'' rather
than ``technical concepts'' is the test of employment
[[Page 14032]]
under the FLSA.\82\ WHD and the courts of appeals generally consider
and balance the following economic realities factors--derived from the
Supreme Court's decisions in Silk, 331 U.S. at 716, and Rutherford
Food, 331 U.S. at 729-30: The nature and degree of the employer's
control over the work; the permanency of the worker's relationship with
the employer; the degree of skill, initiative, and judgment required
for the work; the worker's investment in equipment or materials
necessary for the work; the worker's opportunity for profit or loss;
whether the service rendered by the worker is an integral part of the
employer's business; and the degree of independent business
organization and operation.\83\
---------------------------------------------------------------------------
\80\ 86 FR 1201, 1246-47 (sections 795.105(c) and (d)).
\81\ See, e.g., Fact Sheet #13 (July 2008), available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf (last
visited March 9, 2021).
\82\ Goldberg, 366 U.S. at 33; see also Tony & Susan Alamo, 471
U.S. at 301 (``The test of employment under the Act is one of
`economic reality.' '') (quoting Goldberg, 366 U.S. at 33).
\83\ See, e.g., Razak, 951 F.3d at 142-43; Karlson, 860 F.3d at
1092; Keller v. Miri Microsystems LLC, 781 F.3d 799, 807 (6th Cir.
2015); Lauritzen, 835 F.2d at 1534; Real, 603 F.2d at 754; Fact
Sheet #13 (July 2008), available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf (last visited March
[insert], 2021).
---------------------------------------------------------------------------
The Rule would set forth a new analysis elevating two factors
(control and opportunity for profit or loss) as ``core'' factors above
the other factors, and designating them as having greater probative
value.\84\ The Rule would further provide that if both core factors
point towards the same classification--that the worker is either an
employee or an independent contractor--then there would be a
substantial likelihood that this is the worker's correct
classification.\85\ In addition, the preamble to the Rule disagreed
that the economic realities test ``requires factors to be unweighted or
equally weighted.'' \86\ Although the Rule did identify three other
factors, it made clear that these ``other factors are less probative
and, in some cases, may not be probative at all, and thus are highly
unlikely, either individually or collectively, to outweigh the combined
probative value of the two core factors.'' \87\ The Rule underscored
that 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.'' \88\ Similarly, the Rule would provide that unlisted
additional factors may be considered, but that they are ``unlikely to
outweigh either of the core factors.'' \89\ The Rule noted that
``[w]hile all circumstances must be considered, it does not follow that
all circumstances or categories of circumstance, i.e., factors, must
also be given equal weight.'' \90\ Rather, the Rule would emphasize the
control and opportunity for profit or loss factors as more probative
than other factors in determining whether an individual is in business
for him or herself, and provide that ``other factors are less probative
and may have little to no probative value in some circumstances.'' \91\
---------------------------------------------------------------------------
\84\ 86 FR 1246-47 (sections 795.105(c) & (d)).
\85\ See id.
\86\ Id. at 1197.
\87\ Id. at 1246 (section 795.105(c)).
\88\ Id. at 1197 (referencing the NPRM).
\89\ Id.
\90\ Id. at 1201 (internal quotation marks omitted).
\91\ Id. at 1202.
---------------------------------------------------------------------------
WHD understands that no court has taken the Rule's approach in
analyzing whether a worker is an employee or an independent contractor
under the FLSA, and that the Rule would mark a departure from WHD's own
longstanding approach. In view of this elevation of only two factors,
the Department is concerned that the Rule's approach may be
inconsistent with the position, expressed by the Supreme Court and
federal courts of appeals, that no single factor in the analysis is
dispositive.\92\ WHD is not aware of any court that has, as a general
and fixed rule, elevated a subset of the economic realities factors,
and there is no clear statutory basis for such a predetermined
weighting of the factors. Rather, WHD is cognizant of the voluminous
case law that emphasizes that it `` `is impossible to assign to each of
these factors a specific and invariably applied weight.' '' \93\
Undeniably, courts have generally refused to assign universal weights
to certain factors; rather, courts emphasize that the analysis
considers the totality of the circumstances and neither the presence
nor absence of any particular factor is dispositive.\94\
---------------------------------------------------------------------------
\92\ See, e.g., Silk, 331 U.S. at 716 (explaining that ``[n]o
one [factor] is controlling'' in the economic realities test,
including ``degrees of control''); Parrish, 917 F.3d at 380 (stating
that it ``is impossible to assign to each of these factors a
specific and invariably applied weight'' (citation omitted)); Selker
Bros., 949 F.2d at 1293 (``It is a well-established principle that
the determination of the employment relationship does not depend on
isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.'').
\93\ Parrish, 917 F.3d at 380 (quoting Hickey v. Arkla Indus.,
Inc., 699 F.2d 748, 752 (5th Cir. 1983)); see also Scantland, 721
F.3d at 1312 n.2 (the relative weight of each factor ``depends on
the facts of the case'').
\94\ See Razak, 951 F.3d at 143 (citing DialAmerica Mktg., 757
F.2d at 1382); see also McFeeley, 825 F.3d at 241 (``While a six-
factor test may lack the virtue of providing definitive guidance to
those affected, it allows for flexible application to the myriad
different working relationships that exist in the national economy.
In other words, the court must adapt its analysis to the particular
working relationship, the particular workplace, and the particular
industry in each FLSA case.''); Ellington v. City of East Cleveland,
689 F.3d 549, 555 (6th Cir. 2012) (``This `economic reality'
standard, however, is not a precise test susceptible to formulaic
application. . . . It prescribes a case-by-case approach, whereby
the court considers the `circumstances of the whole business
activity.' '') (quoting Brandel, 736 F.2d at 1116); Morrison v.
Int'l Programs Consortium, Inc., 253 F.3d 5, 11 (D.C. Cir. 2001)
(``No one factor standing alone is dispositive and courts are
directed to look at the totality of the circumstances and consider
any relevant evidence.''); Dole v. Snell, 875 F.2d 802, 805 (10th
Cir. 1989) (``It is well established that no one of these factors in
isolation is dispositive; rather, the test is based upon a totality
of the circumstances.''); Superior Care, 840 F.2d at 1059 (``No one
of these factors is dispositive; rather, the test is based on a
totality of the circumstances. . . . Since the test concerns the
totality of the circumstances, any relevant evidence may be
considered, and mechanical application of the test is to be
avoided.''); Lauritzen, 835 F.2d at 1534 (``Certain criteria have
been developed to assist in determining the true nature of the
relationship, but no criterion is by itself, or by its absence,
dispositive or controlling.''); Hickey, 699 F.2d at 752 (``It is
impossible to assign to each of these factors a specific and
invariably applied weight.''); Usery, 527 F.2d at 1311-12 (``No one
of these considerations can become the final determinant, nor can
the collective answers to all of the inquiries produce a resolution
which submerges consideration of the dominant factor--economic
dependence.'').
---------------------------------------------------------------------------
Accordingly, the Department is concerned that the Rule's approach
is in tension with the language of the Act as well as the position,
expressed by the Supreme Court and in appellate cases from across the
Circuits, that no single factor is determinative in the analysis of
whether a worker is an employee or independent contractor and, as such,
questions whether the Rule's ``core factor'' approach is supportable.
2. The Role of Control in the Rule's Analysis
As explained, the Independent Contractor Rule would identify two
factors as ``core'' factors, would designate them as ``the most
probative'' of whether a worker is an employee or independent
contractor, and would provide that each core factor ``typically carries
greater weight in the analysis than any other factor.'' \95\ The nature
and degree of control over the work would be one of the two core
factors.\96\ According to the Rule, ``review of case law indicates that
courts of appeals have effectively been affording the control and
opportunity factors greater weight, even if they did not always
explicitly acknowledge doing so.'' \97\ The Rule
[[Page 14033]]
addressed and rejected comments which opined that focusing the analysis
on two core factors--one of which would be control--would narrow the
analysis to a common law control test.\98\
---------------------------------------------------------------------------
\95\ 86 FR 1246 (section 795.105(c)).
\96\ See id. at 1246-47 (section 795.105(d)(1)). The worker's
opportunity for profit or loss would be the other core factor.
\97\ Id. at 1198 (citing 85 FR 60619).
\98\ See id. at 1200-01.
---------------------------------------------------------------------------
Although the standard for determining who is an employee and who is
an independent contractor under the Rule is not the same as the common
law control analysis, the Department is concerned that significant
legal and policy implications could result from making control one of
only two factors that would be ascribed greater weight. For example,
the Supreme Court has repeatedly stated that the FLSA's definition of
``employ'' in section 3(g) means that the scope of employment under the
Act is broader than under a common law control (i.e., agency)
analysis.\99\ In light of the directive to consider as employment
relationships under the FLSA a broader scope of relationships than
those where the employer sufficiently controls the work, the outsized--
even if not exclusive--role that control would have if the Rule's
analysis were to apply may be contrary to the Act's text and case law.
These considerations are further reasons the Department is proposing to
withdraw the Rule.
---------------------------------------------------------------------------
\99\ See Darden, 503 U.S. at 326 (``[T]he FLSA . . . defines the
verb `employ' expansively to mean `suffer or permit to work.' This .
. . definition, whose striking breadth we have previously noted,
stretches the meaning of `employee' to cover some parties who might
not qualify as such under a strict application of traditional agency
law principles.'' (citations omitted)); Portland Terminal, 330 U.S.
at 150-51 (``But in determining who are `employees' under the Act,
common law employee categories or employer-employee classifications
under other statutes are not of controlling significance. This Act
contains its own definitions, comprehensive enough to require its
application to many persons and working relationships, which prior
to this Act, were not deemed to fall within an employer-employee
category.'' (citations omitted)); Rutherford Food, 331 U.S. at 728
(``The [FLSA] definition of `employ' is broad.''); Rosenwasser, 323
U.S. at 362-63 (``A broader or more comprehensive coverage of
employees [than that of the FLSA] . . . would be difficult to
frame.'').
---------------------------------------------------------------------------
3. The Rule's Narrowing of the Factors
The Department is also concerned that the Independent Contractor
Rule's treatment of the factors would improperly narrow the application
of the economic realities test. For example, the Rule would provide
that the opportunity for profit or loss factor indicates independent
contractor status if the worker has that opportunity based on either
his or her exercise of initiative (such as managerial skill or business
judgment) or management of his or her investment in or capital
expenditure on helpers or equipment or material to further his or her
work.\100\ The worker ``does not need to have an opportunity for profit
or loss based on both for this factor to weigh towards the individual
being an independent contractor.'' \101\ In other words, the factor
would indicate independent contractor status if the worker either: (1)
Made no capital investment but exercised managerial skill or (2) had a
capital investment but exercised no managerial skill. The Rule would
therefore erase from the analysis in certain situations the worker's
lack of capital investment or lack of managerial skill--both of which
are longstanding and well-settled indicators of employee status. The
worker's investment and managerial skill would be considered only as
the two prongs comprising the opportunity for profit or loss factor
under the Rule, so if one indicates an opportunity for profit or loss,
the other could not reverse or weigh against that finding even if it
indicates employee status as a matter of economic reality.
---------------------------------------------------------------------------
\100\ See 86 FR 1247 (section 795.105(d)(1)(ii)).
\101\ Id.
---------------------------------------------------------------------------
In addition, the preamble to the Rule provided that ``comparing the
individual worker's investment to the potential employer's investment
should not be part of the analysis of investment.'' \102\ In support,
the Rule cited decisions from the Fifth and Eighth Circuits in which
courts gave little weight to the comparison of the potential employer's
investment in its business to the worker's investment in the work in
light of the facts presented in those cases.\103\ However, the
decisions cited did make the comparison of the investments a part of
the analysis, but found that the comparison had little relevance or
accorded it little weight under those particular facts.\104\ In any
event, numerous other courts of appeals consider the worker's
investment in the work in comparison to the potential employer's
investment in its business,\105\ as does WHD in enforcement actions.
Despite this authority, the Rule would preclude comparing the worker's
investment to the potential employer's investment.
---------------------------------------------------------------------------
\102\ Id. at 1188.
\103\ See id. The Fifth Circuit decisions cited were Parrish v.
Premier Directional Drilling, L.P., 917 F.3d 369, 383 (5th Cir.
2019), and Hopkins v. Cornerstone America, 545 F.3d 338, 344-46 (5th
Cir. 2008).
\104\ See Parrish, 917 F.3d at 383; Hopkins, 545 F.3d at 344-46.
Indeed, the Fifth Circuit recently again articulated the investment
factor as ```the extent of the relative investments of the worker
and the alleged employer.''' Hobbs, 946 F.3d at 829 (quoting
Hopkins, 545 F.3d at 343). In Hobbs, the Fifth Circuit affirmed the
district court's finding that the relative investments--the
potential employer's ``overall investment in the pipe construction
projects'' as compared to the workers' individual investments--
favored employee status. Id. at 831-32. The Fifth Circuit agreed
with the district court's conclusion to give the factor ``little
weight in its analysis'' in that case given the nature of the
industry and work involved. Id. at 832 (citing Parrish, 917 F.3d at
383). In sum and contrary to what the Rule would provide, the Fifth
Circuit routinely considers the relative investments of the worker
and the potential employer even if the factor may ultimately be
accorded little weight depending on the circumstances.
\105\ See, e.g., McFeeley, 825 F.3d at 243 (comparing the
potential employers' payment of rent, bills, insurance, and
advertising expenses to the workers' ``limited'' investment in their
work); Keller, 781 F.3d at 810 (``We agree that courts must compare
the worker's investment in the equipment to perform his job with the
company's total investment, including office rental space,
advertising, software, phone systems, or insurance.''); Baker v.
Flint Eng'g & Constr. Co., 137 F.3d 1436, 1442 (10th Cir. 1998)
(``In making a finding on this factor, it is appropriate to compare
the worker's individual investment to the employer's investment in
the overall operation.''); Lauritzen, 835 F.2d at 1537 (disagreeing
that ``the overall size of the investment by the employer relative
to that by the worker is irrelevant'' and finding that ``that the
migrant workers' disproportionately small stake in the pickle-
farming operation is an indication that their work is not
independent of the defendants''); see also Iontchev v. AAA Cab
Service, Inc., 685 Fed. Appx. 548, 550 (9th Cir. 2017) (noting that
the drivers ``invested in equipment or materials and employed
helpers to perform their work'' but concluding that the investment
factor was ``neutral'' because the cab company ``leased taxicabs and
credit card machines to most of the [drivers]'').
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The Rule would also recast the factor examining whether the
worker's work ``is an integral part'' of the employer's business as
whether the work ``is part of an integrated unit of production.'' \106\
The Rule would reject as irrelevant to this factor whether the work is
important or central (i.e., integral) to the employer's business.\107\
Instead, the Rule would provide that ``the relevant facts are the
integration of the worker into the potential employer's production
processes'' because ``[w]hat matters is the extent of such integration
rather than the importance or centrality of the functions performed''
by the worker.\108\ The Rule asserted that this recast articulation is
supported by Supreme Court precedent,\109\ but WHD and courts often
consider whether the work is important or central, as the Rule
acknowledges.\110\
---------------------------------------------------------------------------
\106\ See 86 FR at 1193-96, 1247 (section 795.105(d)(2)(iii)).
\107\ See id. at 1193-95.
\108\ Id. at 1195.
\109\ See id. at 1193-94. The Rule's discussion of precedent
failed to consider a passage from the Supreme Court's decision in
Silk, finding that ``unloaders'' were employees of a retail coal
company as a matter of economic reality in part because they were
``an integral part of the businesses of retailing coal or
transporting freight.'' 331 U.S. at 716 (emphasis added).
\110\ See id. at 1193.
---------------------------------------------------------------------------
Finally, in stressing the primacy of actual practice by providing
that ``the actual practice of the parties involved is
[[Page 14034]]
more relevant than what may be contractually or theoretically
possible,'' \111\ the Rule would advise that ``a business' contractual
authority to supervise or discipline an individual may be of little
relevance if in practice the business never exercises such authority.''
\112\ In support of this guidance, the Rule's preamble asserted that
``the common law control test does not establish an irreducible
baseline of worker coverage for the broader economic reality test
applied under the FLSA,'' and that the FLSA ``does not necessarily
include every worker considered an employee under the common law.''
\113\ This understanding of the FLSA's scope of employment seems
inconsistent with the Supreme Court's observations that ``[a] broader
or more comprehensive coverage of employees'' than that contemplated
under the FLSA ``would be difficult to frame,' '' \114\ and that the
FLSA ``stretches the meaning of `employee' to cover some parties who
might not qualify as such under a strict application of traditional
agency law principles.'' \115\
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\111\ Id. at 1247 (section 795.110).
\112\ Id.; but see Razak, 951 F.3d at 145 (``[A]ctual control of
the manner of work is not essential; rather, it is the right to
control which is determinative.'').
\113\ 86 FR 1205.
\114\ Rosenwasser, 323 U.S. at 362.
\115\ Darden, 503 U.S. at 326.
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In the each of the ways identified above, the Rule would narrow the
scope of facts and considerations comprising the analysis of whether
the worker is an employee or independent contractor. The Department
proposes to withdraw the Rule in part because it eliminates from the
economic realities test several facts and concepts that have deep roots
in both the courts' and WHD's application of the analysis. The
Department is further concerned that for this reason, the Rule's
approach is inconsistent with the court-mandated totality-of-the-
circumstances approach to determining whether a worker is an employee
or an independent contractor.\116\ In addition to these legal concerns,
the Department is concerned, as a policy matter, that the Rule's
narrowing of the analysis would result in more workers being classified
as independent contractors not entitled to the FLSA's protections,
contrary to the Act's purpose of broadly covering workers as employees.
To the extent that women and people of color are overrepresented in
low-wage independent contractor positions, as some commenters asserted
as part of the Independent Contractor Rule rulemaking, this result
could have a disproportionate impact on low-wage and vulnerable
workers. For example, a report from the U.S. Treasury Department Office
of Tax Analysis shows that independent contractors are more likely to
be low-income than those who are primarily employees. The report finds
that 42 percent of what it calls ``gig economy or platform workers''
and 45 percent of ``self-employed sole proprietors'' make less than
$20,000 a year, compared to 14 percent of those who are employees
earning wages.\117\
---------------------------------------------------------------------------
\116\ See footnote 94, supra.
\117\ Emilie Jackson, Adam Looney, and Shanthi Ramnath, ``The
Rise of Alternative Work Arrangements: Evidence and Implications for
Tax Filing and Benefit Coverage,'' The Department of the Treasury;
Office of Tax Analysis (January 2017), available at https://home.treasury.gov/system/files/131/WP-114.pdf (last visited March 9,
2021).
---------------------------------------------------------------------------
B. Whether the Rule Would Provide the Intended Clarity
One of the Independent Contractor Rule's primary stated purposes
would be to ``significantly clarify to stakeholders how to distinguish
between employees and independent contractors under the Act.'' \118\
Although the intent of the Rule would be to provide clarity, it would
also (as discussed above) introduce several concepts to the analysis
that neither courts nor WHD have previously applied. The Department's
proposal to withdraw the Rule arises in part from a concern regarding
the possibility that these changes will cause confusion or lead to
inconsistent outcomes rather than provide clarity or certainty, as
intended.
---------------------------------------------------------------------------
\118\ 86 FR 1168.
---------------------------------------------------------------------------
For example, the Rule would identify two factors as ``core''
factors, would designate them as ``the most probative,'' and would
provide that they carry ``greater weight'' than other factors.\119\ The
Rule would also provide that, if both core factors ``point towards the
same classification . . . , there is a substantial likelihood that is
the individual's accurate classification,'' and other factors would be
``highly unlikely, either individually or collectively, to outweigh''
the core factors.\120\ Because neither courts nor WHD have previously
pre-assigned certain factors a greater weight than other factors or
grouped the factors into categories of ``core'' and ``other'' factors,
it may not be clear to courts, WHD, and/or the regulated community how
the analysis and weighing of factors would work, and there could be
inconsistent approaches and/or outcomes as a result.
---------------------------------------------------------------------------
\119\ Id. at 1246 (section 795.105(c)).
\120\ Id.
---------------------------------------------------------------------------
In addition, the Rule would recast several factors as discussed
above. As one example, the factor that many courts articulate as
whether the work ``is an integral part'' of the employer's business
would be recast as whether the work ``is part of an integrated unit of
production.'' \121\ The Rule asserts that this revision is supported by
Supreme Court precedent.\122\ However, as the Rule acknowledges,\123\
this more limited articulation has not generally been applied by courts
or WHD and would thus be unfamiliar to employers, workers, courts, and
WHD. As a result, there could be inconsistent approaches and/or
outcomes in its application.
---------------------------------------------------------------------------
\121\ See id. at 1170, 1193-96, 1247 (section
795.105(d)(2)(iii)).
\122\ See id. at 1193-94.
\123\ See id. at 1193.
---------------------------------------------------------------------------
In sum, the Rule would make numerous changes to an economic
realities test that courts and WHD are familiar with applying. Given
that courts and WHD could struggle with applying the new concepts
introduced by the Rule, the Department is uncertain whether the Rule
would provide the clarity that it intends.
C. The Costs and Benefits of the Rule, Particularly the Assertion That
the Rule Will Benefit Workers as a Whole
As part of its analysis of possible costs, transfers, and benefits,
the Independent Contractor Rule quantified some possible costs
(regulatory familiarization) and some possible cost savings (increased
clarity and reduced litigation).\124\ The Rule identified and
discussed--but did not quantify--numerous other costs, transfers, and
benefits possibly resulting from the Rule, including ``possible
transfers among workers and between workers and businesses.'' \125\ The
Rule ``acknowledge[d] that there may be transfers between employers and
employees, and some of those transfers may come about as a result of
changes in earnings,'' but determined that these transfers cannot ``be
quantified with a reasonable degree of certainty for purposes of [the
Rule].'' \126\ The Economic Policy Institute (EPI) had submitted a
comment during the rulemaking estimating that the annual transfers from
workers to employers as a result of the Rule would be $3.3 billion in
pay, benefits, and tax payments.\127\ The Rule discussed its
disagreements with various assumptions underlying EPI's estimate and
explained its reasons for not adopting the estimate.\128\ The Rule
concluded that
[[Page 14035]]
``workers as a whole will benefit from [the Rule], both from increased
labor force participation as a result of the enhanced certainty
provided by [the Rule], and from the substantial other benefits
detailed [in the Rule].'' \129\ Although the Rule did not use EPI's
analysis to quantify transfers, upon further consideration, the
Department believes that the analysis may be useful in illustrating the
types of impacts that the Rule would have on workers.
---------------------------------------------------------------------------
\124\ See id. at 1211.
\125\ Id. at 1214-16.
\126\ Id. at 1223.
\127\ See id. at 1222.
\128\ See id. at 1222-23.
\129\ Id. at 1223.
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Upon review, the Department does not believe the Rule fully
considered the likely costs, transfers, and benefits that could result
from the Rule. This concern is premised in part on WHD's role as the
agency responsible for enforcing the FLSA and its experience with cases
involving the misclassification of employees as independent
contractors. The consequence for a worker of being classified as an
independent contractor is that the worker is excluded from the
protections of the FLSA. Without the protections of the FLSA, workers
need not be paid at least the federal minimum wage for all hours
worked, and are not entitled to overtime compensation for hours worked
over 40 in a workweek. These impacts can be significant and must be
evaluated further. In addition, a recent Presidential Memorandum began
a process for agencies to better ``take into account the distributional
consequences of regulations.'' \130\ WHD also questions whether a rule
that could increase the number of independent contractors,\131\
effectuates the FLSA's purpose, recognized repeatedly by the Supreme
Court, to broadly provide employees with its protections.\132\ These
concerns are an additional reason that the Department is proposing to
withdraw the Rule.
---------------------------------------------------------------------------
\130\ Modernizing Regulatory Review: Memorandum for the Heads of
Executive Departments and Agencies (Jan. 20, 2021), published at 86
FR 7223 (Jan. 26, 2021).
\131\ See 86 FR 1210.
\132\ See, e.g., Rutherford Food, 331 U.S. at 729 (```This Act
contains its own definitions, comprehensive enough to require its
application to many persons and working relationships, which prior
to this Act, were not deemed to fall within an employer-employee
category.''') (quoting Portland Terminal, 330 U.S. at 150);
Rosenwasser, 323 U.S. at 362-63 (``A broader or more comprehensive
coverage of employees [than that of the FLSA] . . . would be
difficult to frame.'').
---------------------------------------------------------------------------
D. Withdrawal Would Not Be Disruptive Because the Rule Has Yet to Take
Effect
Because the Independent Contractor Rule has yet to take effect, the
Department does not believe that withdrawing it would be disruptive.
Courts have not applied the Rule in deciding cases. Moreover, WHD has
not implemented the Rule. For example, WHD's Fact Sheet #13, titled
``Employment Relationship Under the Fair Labor Standards Act (FLSA)''
and dated July 2008, does not contain the Rule's analysis for
determining whether a worker is an employee or independent
contractor.\133\ WHD's Field Operations Handbook addresses independent
contractor status by simply cross-referencing Fact Sheet #13 and
likewise does not contain the Rule's new economic realities test.\134\
WHD's elaws Advisor compliance-assistance information regarding
independent contractors likewise does not contain the Rule's
analysis.\135\ And on January 26, 2021, Wage and Hour withdrew two
opinion letters that it had issued on January 19, 2021 applying the
Rule's analysis to several factual scenarios.\136\ WHD explained that
the letters were ``issued prematurely because they are based on [a
Rule] that ha[s] not gone into effect.'' \137\ Accordingly, the
regulated community has been functioning under the current state of the
law and the Department does not believe that it would be negatively
affected by continuing to do so were the Rule to be withdrawn. In
particular, any businesses currently engaging independent contractors
or individuals who are now independent contractors would be able to
continue to operate without any effect brought about by the absence of
new regulations. Even if the Department withdraws the Rule, businesses
that had taken steps in preparation for the Rule taking effect will not
be precluded from adjusting their relationships with workers or paying
for new services from workers, and can rely on past court decisions and
WHD guidance to determine whether those workers are employees under the
FLSA or independent contractors.
---------------------------------------------------------------------------
\133\ Fact Sheet #13 is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf (last visited March 9,
2021).
\134\ Chapter 10 of Wage and Hour's Field Operations Handbook,
entitled ``FLSA Coverage: Employment Relationship, Statutory
Exclusions, Geographical Limits'', is available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/FOH_Ch10.pdf (last
visited March 9, 2021). The relevant provision, Section 10b05
(``Test of the employment relationship''), is on page 6.
\135\ See https://webapps.dol.gov/elaws/whd/flsa/scope/ee14.asp
(last visited March 9, 2021).
\136\ See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited March 9, 2021), noting the withdrawal of
Opinion Letters FLSA2021-8 and FLSA2021-9.
\137\ Id.
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E. Effect of Proposed Withdrawal
If the Independent Contractor Rule is withdrawn as proposed: (1)
The guidance that the Rule would have introduced as Part 795 of Title
29 of the Code of Federal Regulations will not be introduced and Part
795 will be reserved; and (2) the revisions that the Rule would have
made to 29 CFR 780.330(b) and 29 CFR 788.16(a) will not occur and their
text will remain unchanged. The Department is not proposing any
regulatory guidance to replace the guidance that the Independent
Contractor Rule would have introduced as Part 795, so any commenter
feedback addressing or suggesting such a replacement or otherwise
requesting that the Department adopt any specific guidance if the Rule
is withdrawn will be considered to be outside the scope of this NPRM.
In addition to the reasons for the proposed withdrawal explained above,
withdrawal of the Rule would allow WHD an additional opportunity to
consider legal and policy issues relating to the FLSA and independent
contractors.
III. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) and its attendant
regulations require an agency to consider its need for any information
collections, their practical utility, as well as the impact of
paperwork and other information collection burdens imposed on the
public, and how to minimize those burdens. The PRA typically requires
an agency to provide notice and seek public comments on any proposed
collection of information contained in a proposed rule. This NPRM does
not contain a collection of information subject to Office of Management
and Budget approval under the PRA.
IV. Executive Order 12866, Regulatory Planning and Review; and
Executive Order 13563, Improved Regulation and Regulatory Review
A. Introduction
Under Executive Order 12866, OMB's Office of Information and
Regulatory Affairs determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
Executive Order and OMB review.\138\ 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
[[Page 14036]]
interfere with an action taken or planned by another agency; (3)
materially alter the budgetary impact of entitlements, grants, user
fees or loan programs or the rights and obligations of recipients
thereof; or (4) raise novel legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
the Executive Order. This proposed withdrawal will be economically
significant under section 3(f) of Executive Order 12866 because it is
withdrawing an economically significant rule.
---------------------------------------------------------------------------
\138\ See 58 FR 51735 (Sept. 30, 1993).
---------------------------------------------------------------------------
Executive Order 13563 directs agencies to, among other things,
propose or adopt a regulation only upon a reasoned determination that
its benefits justify its costs; that it is tailored to impose the least
burden on society, consistent with obtaining the regulatory objectives;
and that, in choosing among alternative regulatory approaches, the
agency has selected those approaches that maximize net benefits.\139\
Executive Order 13563 recognizes that some costs and benefits are
difficult to quantify and provides that, when appropriate and permitted
by law, agencies may consider and discuss qualitatively values that are
difficult or impossible to quantify, including equity, human dignity,
fairness, and distributive impacts. The analysis below outlines the
impacts that the Department anticipates may result from this proposed
withdrawal and was prepared pursuant to the above-mentioned executive
orders.
---------------------------------------------------------------------------
\139\ See 76 FR 3821 (Jan. 21, 2011).
---------------------------------------------------------------------------
B. Background
On January 7, 2021, WHD published a final rule titled ``Independent
Contractor Status under the Fair Labor Standards Act'' (Independent
Contractor Rule or Rule).\140\ The Department is proposing to withdraw
the Rule, which has not taken effect. If this withdrawal goes forward
as proposed, the Rule will never have been in effect. Aside from
minimal rule familiarization costs, the Department also provides below
a qualitative discussion of the transfers that may be avoided by
withdrawing the Rule.
---------------------------------------------------------------------------
\140\ See 86 FR 1168. WHD had published a notice of proposed
rulemaking requesting comments on a proposal. See 85 FR 60600 (Sept.
25, 2020). The final rule adopted ``the interpretive guidance set
forth in [that proposal] largely as proposed.'' 86 FR 1168.
---------------------------------------------------------------------------
C. Costs
1. Rule Familiarization Costs
Withdrawing the Independent Contractor Rule would impose direct
costs on businesses that will need to review the withdrawal. To
estimate these regulatory familiarization costs, the Department
determined: (1) The number of potentially affected entities, (2) the
average hourly wage rate of the employees reviewing the withdrawal, and
(3) the amount of time required to review the withdrawal. It is
uncertain whether these entities would incur regulatory familiarization
costs at the firm or the establishment level.\141\ For example, in
smaller businesses there might be just one specialist reviewing the
withdrawal, while larger businesses might review it at corporate
headquarters and determine policy for all establishments owned by the
business. To avoid underestimating the costs of the withdrawal, the
Department uses both the number of establishments and the number of
firms to estimate a potential range for regulatory familiarization
costs. The lower bound of the range is calculated assuming that one
specialist per firm will review the withdrawal, and the upper bound of
the range assumes one specialist per establishment.
---------------------------------------------------------------------------
\141\ An establishment is a single physical location where one
predominant activity occurs. A firm is an establishment or a
combination of establishments.
---------------------------------------------------------------------------
The most recent data on private sector entities at the time this
NPRM was drafted are from the 2017 Statistics of U.S. Businesses
(SUSB), which reports 5,996,900 private firms and 7,860,674 private
establishments with paid employees.\142\ Because the Department is
unable to determine how many of these businesses are interested in
using independent contractors, this analysis assumes all businesses
will undertake review.
---------------------------------------------------------------------------
\142\ Statistics of U.S. Businesses 2017, https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html,
2016 SUSB Annual Data Tables by Establishment Industry.
---------------------------------------------------------------------------
The Department believes ten minutes per entity, on average, to be
an appropriate review time here. This rulemaking would withdraw the
Independent Contractor Rule and would not set forth any new regulations
in its place. Additionally, the Department believes that many entities
do not use independent contractors and thus would not spend any time
reviewing the withdrawal. Therefore, the ten-minute review time
represents an average of no time for the entities that do not use
independent contractors, and potentially more than ten minutes for
review by some entities that might use independent contractors.
The Department's analysis assumes that the withdrawal would be
reviewed by Compensation, Benefits, and Job Analysis Specialists (SOC
13-1141) or employees of similar status and comparable pay. The median
hourly wage for these workers was $31.04 per hour in 2019, the most
recent year of data available.\143\ The Department also assumes that
benefits are paid at a rate of 46 percent \144\ and overhead costs are
paid at a rate of 17 percent of the base wage, resulting in a fully
loaded hourly rate of $50.60.
---------------------------------------------------------------------------
\143\ Occupational Employment and Wages, May 2019, https://www.bls.gov/oes/current/oes131141.htm.
\144\ The benefits-earnings ratio is derived from the Bureau of
Labor Statistics' Employer Costs for Employee Compensation data
using variables CMU1020000000000D and CMU1030000000000D.
---------------------------------------------------------------------------
The Department estimates that the lower bound of regulatory
familiarization cost range would be $50,675,004 (5,996,900 firms x
$50.60 x 0.167 hours), and the upper bound, $66,424,267 (7,860,674
establishments x $50.60 x 0.167 hours). The Department estimates that
all regulatory familiarization costs would occur in Year 1.
Additionally, the Department estimated average annualized costs of
this proposed withdrawal over 10 years. Over 10 years, it would have an
average annual cost of $6.7 million to $8.8 million, calculated at a 7
percent discount rate ($5.8 million to $7.6 million calculated at a 3
percent discount rate). All costs are in 2019 dollars.
2. Other Costs
In the Independent Contractor Rule, the Department estimated cost
savings associated with increased clarity, as well as cost savings
associated with reduced litigation. The Department does not anticipate
that this withdrawal would increase costs in these areas, or result in
greater costs as compared to the Rule. Although the intent of the Rule
would be to provide clarity, it would also introduce several concepts
to the analysis that neither courts nor WHD have previously applied.
Because the Rule would be unfamiliar and could lead to inconsistent
approaches and/or outcomes, and because withdrawal would maintain the
status quo, the Department does not believe that a withdrawal of the
Independent Contractor Rule would result in decreased clarity for
stakeholders.
One of the main benefits discussed in the Rule was the increased
flexibility associated with independent contractor status. The
Department acknowledges that although many independent contractors
report that they value the flexibility in hours and work, employment
and flexibility are not mutually exclusive. Many employees
[[Page 14037]]
similarly value and enjoy such flexibility.
The Department welcomes any comments and data on other costs
associated with this proposed withdrawal.
D. Transfers
The Department believes that it is important to provide a
qualitative discussion of the transfers that would have occurred under
the Rule. In the economic analysis accompanying the Rule, the
Department assumed that the Rule would lead to an increase in the
number of independent contractor arrangements, and acknowledged that
some of this increase could be due to businesses reclassifying
employees as independent contractors. As discussed in the Rule and
again below, an increase in independent contracting could have resulted
in transfers associated with employer-provided fringe benefits, tax
liabilities, and minimum wage and overtime pay. By withdrawing the
Rule, these transfers from employees (and, in some cases, from state or
local governments) to employers are avoided. The Department welcomes
any comments and data on the transfer impacts associated with this
proposed withdrawal.
1. Employer Provided Fringe Benefits
The reclassification of employees as independent contractors, or
the use of independent contracting relationships as opposed to
employment, decreases access to employer-provided fringe benefits such
as health care or retirement benefits. According to the BLS Current
Population Survey (CPS) Contingent Worker Supplement (CWS), 79.4
percent of self-employed independent contractors have health insurance,
compared to 88.3 percent of employees.\145\ This gap between
independent contractors and employees is also true for low-income
workers. Using CWS data, the Department compared health insurance rates
for workers earning less than $15 per hour and found that 71.0 percent
of independent contractors have health insurance compared with 78.5
percent of employees.
---------------------------------------------------------------------------
\145\ 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.
---------------------------------------------------------------------------
Additionally, a major source of retirement savings is employer-
sponsored retirement accounts. According to the CWS, 55.5 percent of
employees have a retirement account with their current employer; in
addition, the BLS Employer Costs for Employee Compensation (ECEC) found
that employers pay 5.3 percent of employees' total compensation in
retirement benefits on average ($1.96/$37.03). If a worker shifts from
employee to independent contractor status, that worker may no longer
receive employer-provided retirement benefits.
2. Tax Liabilities
As self-employed workers, independent contractors are legally
obligated to pay both the employee and employer shares of the Federal
Insurance Contributions Act (FICA) taxes. Thus, as discussed in the
Rule, if workers' classifications change from employees to independent
contractors, there may be a transfer in federal tax liabilities from
employers to workers.\146\ Although the Rule only addressed whether a
worker is an employee or an independent contractor under the FLSA, the
Department assumes in this analysis that employers are likely to keep
the status of most workers the same across all benefits and
requirements, including for tax purposes.\147\ These payroll taxes
include the 6.2 percent employer component of the Social Security tax
and the 1.45 percent employer component of the Medicare tax.\148\ In
sum, independent contractors are legally responsible for an additional
7.65 percent of their earnings in FICA taxes (less the applicable tax
deduction for this additional payment).
---------------------------------------------------------------------------
\146\ See 86 FR 1218.
\147\ Courts have noted that the FLSA has the broadest
conception of employment under federal law. See, e.g., Darden, 503
U.S. at 326. To the extent that businesses making employment status
determinations base their decisions on the most demanding federal
standard, a rulemaking addressing the standard for determining
whether a worker is an FLSA employee or an independent contractor
may affect the businesses' classification decisions for purposes of
benefits and legal requirements under other federal laws.
\148\ Internal Revenue Service, ``Publication 15, (Circular E),
Employer's Tax Guide'' (Dec. 23, 2019), https://www.irs.gov/pub/irs-pdf/p15.pdf. The social security tax has a wage base limit of
$137,700 in 2020. An additional Medicare Tax of 0.9 percent applies
to wages paid in excess of $200,000 in a calendar year for
individual filers.
---------------------------------------------------------------------------
In addition to affecting tax liabilities for workers, some
commenters claimed that the Rule would have an impact on state tax
revenue and budgets. In their comment to the NPRM proposing the
Independent Contractor Rule, several States' Attorneys General asserted
that misclassifying employees as independent contractors leads to
losses in unemployment insurance and workers' compensation funds, as
well as increases in the cost of providing health care coverage to
uninsured workers. Because independent contractors do not receive
benefits like health insurance, workers compensation, and retirement
plans from an employer, these commenters suggested that a rule that
increases the prevalence of independent contracting could shift this
burden to State and Federal governments.
3. Minimum Wage and Overtime Requirements
When workers are shifted from employee to independent contractor
status, the minimum wage and overtime pay requirements of the FLSA no
longer apply. Independent contractors are more likely to earn less than
the minimum wage: The 2017 CWS data indicate that independent
contractors are more likely than employees to report earning less than
the FLSA minimum wage of $7.25 per hour (8 percent for self-employed
independent contractors, 5 percent for other independent contractors,
and 2 percent for employees). Research on drivers who work for online
transportation companies in California and New York also finds that
many drivers receive significantly less than the applicable state
minimum wages.\149\
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\149\ M. Reich. ``Pay, Passengers and Profits: Effects of
Employee Status for California TNC Drivers.'' University of
California, Berkeley (October 5, 2020), https://irle.berkeley.edu/files/2020/10/Pay-Passengers-and-Profits.pdf; L. Moe, et al. ``The
Magnitude of Low-Paid Gig and Independent Contract Work in New York
State,'' The New School Center for New York City Affairs (February
2020), https://static1.squarespace.com/static/53ee4f0be4b015b9c3690d84/t/5e424affd767af4f34c0d9a9/1581402883035/Feb112020_GigReport.pdf.
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V. Regulatory Flexibility Act (RFA) Analysis
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, Public Law 104-121 (1996), requires federal agencies engaged in
rulemaking to consider the impact of their proposals on small entities,
consider alternatives to minimize that impact, and solicit public
comment on their analyses. The RFA requires the assessment of the
impact of a regulation on a wide range of small entities, including
small businesses, not-for-profit organizations, and small governmental
jurisdictions. Accordingly, the Department examined this proposed
withdrawal to determine whether it would have a significant economic
impact on a substantial number of small entities.
The most recent data on private sector entities at the time this
NPRM was drafted are from the 2017 Statistics of U.S. Businesses
(SUSB), which reports 5,996,900 private firms and 7,860,674 private
establishments with paid
[[Page 14038]]
employees.\150\ Of these, 5,976,761 firms and 6,512,802 establishments
have fewer than 500 employees. The per-entity cost for small business
employers is the regulatory familiarization cost of $8.43, or the fully
loaded mean hourly wage of a Compensation, Benefits, and Job Analysis
Specialist ($50.60) multiplied by \1/6\ hour (ten minutes). Because
this cost is minimal for small business entities, and well below one
percent of their gross annual revenues, which is typically at least
$100,000 per year for the smallest businesses, the Department certifies
that this proposed withdrawal would not have a significant economic
impact on a substantial number of small entities. The Department
welcomes any comments and data on this Regulatory Flexibility Act
Analysis, including the costs and benefits of this proposed withdrawal
on small entities.
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\150\ Statistics of U.S. Businesses 2017, https://www.census.gov/data/tables/2017/econ/susb/2017-susb-annual.html,
2016 SUSB Annual Data Tables by Establishment Industry.
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VI. Unfunded Mandates Reform Act of 1995
The Unfunded Mandates Reform Act of 1995 (UMRA) \151\ requires
agencies to prepare a written statement for rules with a federal
mandate that may result in increased expenditures by state, local, and
tribal governments, in the aggregate, or by the private sector, of $165
million ($100 million in 1995 dollars adjusted for inflation) or more
in at least one year.\152\ This statement must: (1) Identify the
authorizing legislation; (2) present the estimated costs and benefits
of the rule and, to the extent that such estimates are feasible and
relevant, its estimated effects on the national economy; (3) summarize
and evaluate state, local, and tribal government input; and (4)
identify reasonable alternatives and select, or explain the non-
selection, of the least costly, most cost-effective, or least
burdensome alternative. This proposed withdrawal is not expected to
result in increased expenditures by the private sector or by state,
local, and tribal governments of $165 million or more in any one year.
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\151\ See 2 U.S.C. 1501.
\152\ Calculated using growth in the Gross Domestic Product
deflator from 1995 to 2019. Bureau of Economic Analysis. Table
1.1.9. Implicit Price Deflators for Gross Domestic Product.
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VII. Executive Order 13132, Federalism
The Department has (1) reviewed this proposed withdrawal in
accordance with Executive Order 13132 regarding federalism and (2)
determined that it does not have federalism implications. The proposed
withdrawal would not have substantial direct effects on the States, on
the relationship between the national government and the States, or on
the distribution of power and responsibilities among the various levels
of government.
VIII. Executive Order 13175, Indian Tribal Governments
This proposed withdrawal would not have substantial direct effects
on one or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.
Signed this 10th day of March, 2021.
Jessica Looman,
Principal Deputy Administrator, Wage and Hour Division.
[FR Doc. 2021-05256 Filed 3-11-21; 8:45 am]
BILLING CODE 4510-27-P