Independent Contractor Status Under the Fair Labor Standards Act

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 780, 788 and 795

RIN 1235–AA34

Independent Contractor Status Under

the Fair Labor Standards Act

AGENCY

: Wage and Hour Division,

Department of Labor.

ACTION

: Final rule.

SUMMARY

: The U.S. Department of Labor

(the Department) is revising its

interpretation of independent contractor

status under the Fair Labor Standards

Act (FLSA or the Act) to promote

certainty for stakeholders, reduce

litigation, and encourage innovation in

the economy.

DATES

: This final rule is effective on

March 8, 2021.

FOR FURTHER INFORMATION CONTACT

:

Amy DeBisschop, Division of

Regulations, Legislation, and

Interpretation, Wage and Hour Division

(WHD), U.S. Department of Labor, Room

S–3502, 200 Constitution Avenue NW,

Washington, DC 20210; telephone: (202)

693–0406 (this is not a toll-free

number). Copies of this final rule may

be obtained in alternative formats (Large

Print, Braille, Audio Tape, or Disc),

upon request, by calling (202) 693–0675

(this is not a toll-free number). TTY/

TDD callers may dial toll-free 1–877–

889–5627 to obtain information or

request materials in alternative formats.

Questions of interpretation and/or

enforcement of the agency’s regulations

may be directed to the nearest WHD

district office. Locate the nearest office

by calling WHD’s toll-free help line at

(866) 4US–WAGE ((866) 487–9243)

between 8 a.m. and 5 p.m. in your local

time zone, or logging onto WHD’s

website for a nationwide listing of WHD

district and area offices at http://

www.dol.gov/whd/america2.htm.

SUPPLEMENTARY INFORMATION

:

I. Executive Summary

The FLSA requires covered employers

to pay their nonexempt employees at

least the Federal minimum wage for

every hour worked and overtime pay for

every hour worked over 40 in a

workweek, and it mandates that

employers keep certain records

regarding their employees. A worker

who performs services for an individual

or entity (‘‘person’’ as defined in the

Act) as an independent contractor,

however, is not that person’s employee

under the Act. Thus, the FLSA does not

require such person to pay an

independent contractor either the

minimum wage or overtime pay, nor

does it require that person to keep

records regarding that independent

contractor. The Act does not define the

term ‘‘independent contractor,’’ but it

defines ‘‘employer’’ as ‘‘any person

acting directly or indirectly in the

interest of an employer in relation to an

employee,’’ 29 U.S.C. 203(d),

‘‘employee’’ as ‘‘any individual

employed by an employer,’’ id. at 203(e)

(subject to certain exceptions), and

‘‘employ’’ as ‘‘includ[ing] to suffer or

permit to work,’’ id. at 203(g). Courts

and the Department have long

interpreted the ‘‘suffer or permit’’

standard to require an evaluation of the

extent of the worker’s economic

dependence on the potential

employer—i.e., the putative employer or

alleged employer—and have developed

a multifactor test to analyze whether a

worker is an employee or an

independent contractor under the FLSA.

The ultimate inquiry is whether, as a

matter of economic reality, the worker is

dependent on a particular individual,

business, or organization for work (and

is thus an employee) or is in business

for him- or herself (and is thus an

independent contractor).

This economic realities test and its

component factors have not always been

sufficiently explained or consistently

articulated by courts or the Department,

resulting in uncertainty among the

regulated community. The Department

believes that a clear articulation will

lead to increased precision and

predictability in the economic reality

test’s application, which will in turn

benefit workers and businesses and

encourage innovation and flexibility in

the economy. Accordingly, earlier this

year the Department proposed to

introduce a new part to Title 29 of the

Code of Federal Regulations setting

forth its interpretation of whether

workers are ‘‘employees’’ or

independent contractors under the Act.

Having received and reviewed the

comments to its proposal, the

Department now adopts as a final rule

the interpretive guidance set forth in the

Notice of Proposed Rulemaking (NPRM)

(85 FR 60600) largely as proposed. This

regulatory guidance adopts general

interpretations to which courts and the

Department have long adhered. For

example, the final rule explains that

independent contractors are workers

who, as a matter of economic reality, are

in business for themselves as opposed to

being economically dependent on the

potential employer for work. The final

rule also explains that the inquiry into

economic dependence is conducted by

applying several factors, with no one

factor being dispositive, and that actual

practices are entitled to greater weight

than what may be contractually or

theoretically possible. The final rule

sharpens this inquiry into five distinct

factors, instead of the five or more

overlapping factors used by most courts

and previously the Department.

Moreover, consistent with the FLSA’s

text, its purpose, and the Department’s

experience administering and enforcing

the Act, the final rule explains that two

of those factors—(1) the nature and

degree of the worker’s control over the

work and (2) the worker’s opportunity

for profit or loss—are more probative of

the question of economic dependence or

lack thereof than other factors, and thus

typically carry greater weight in the

analysis than any others.

The regulatory guidance promulgated

in this final rule regarding independent

contractor status under the FLSA is

generally applicable across all

industries. As such, it replaces the

Department’s previous interpretations of

independent contractor status under the

FLSA which applied only in certain

contexts, found at 29 CFR 780.330(b)

(interpreting independent contractor

status under the FLSA for tenants and

sharecroppers) and 29 CFR 788.16(a)

(interpreting independent contractor

status under the FLSA for certain

forestry and logging workers). The

Department believes this final rule will

significantly clarify to stakeholders how

to distinguish between employees and

independent contractors under the Act.

This final rule is considered to be an

Executive Order 13771 deregulatory

action. Details on the estimated

increased efficiency and cost savings of

this rule can be found in the regulatory

impact analysis (RIA) in section VI.

II. Background

A. Relevant FLSA Definitions

Enacted in 1938, the FLSA requires

that, among other things, covered

employers pay their nonexempt

employees at least the Federal minimum

wage for every hour worked and

overtime pay for every hour worked

over 40 in a workweek, and it mandates

that employers keep certain records

regarding their employees. See 29 U.S.C.

206(a), 207(a) (minimum wage and

overtime pay requirements); 29 U.S.C.

211(c) (recordkeeping requirements).

The FLSA does not define the term

‘‘independent contractor.’’ The Act

defines ‘‘employer’’ in section 3(d) to

‘‘include[ ] any person acting directly or

indirectly in the interest of an employer

in relation to an employee,’’

‘‘employee’’ in section 3(e)(1) to mean,

subject to certain exceptions, ‘‘any

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29 U.S.C. 203(d), (e), (g). The Act defines a

‘‘person’’ as ‘‘an individual, partnership,

association, corporation, business trust, legal

representative, or any organized group of persons.’’

29 U.S.C. 203(a).

2

For example, the Court noted that the

slaughterhouse workers performed unskilled work

‘‘on the production line.’’ 331 U.S. at 730. ‘‘The

premises and equipment of [the employer] were

used for the work,’’ indicating little investment by

the workers. Id. ‘‘The group had no business

organization that could or did shift as a unit from

one slaughter-house to another,’’ indicating a

permanent work arrangement. Id. ‘‘The managing

official of the plant kept close touch on the

operation,’’ indicating control by the alleged

employer. Id. And ‘‘[w]hile profits to the boners

depended upon the efficiency of their work, it was

more like piecework than an enterprise that actually

depended for success upon the initiative, judgment

or foresight of the typical independent contractor.’’

Id.

3

The Treasury proposal was never finalized

because Congress amended the SSA to foreclose the

proposal.

individual employed by an employer,’’

and ‘‘employ’’ in section 3(g) to include

‘‘to suffer or permit to work.’’

1

The

Supreme Court has recognized that

‘‘there is in the [FLSA] no definition

that solves problems as to the limits of

the employer-employee relationship

under the Act.’’ Rutherford Food Corp.

v. McComb, 331 U.S. 722, 728 (1947).

The Supreme Court has interpreted

the ‘‘suffer or permit’’ language to define

FLSA employment to be broad and more

inclusive than the common law

standard. See Nationwide Mut. Ins. Co.

v. Darden, 503 U.S. 318, 326 (1992).

However, the Court also recognized that

the Act’s ‘‘statutory definition[s] . . .

have [their] limits.’’ Tony & Susan

Alamo Found. v. Sec’y of Labor, 471

U.S. 290, 295 (1985) (internal citation

omitted); see also Walling v. Portland

Terminal Co., 330 U.S. 148, 152 (1947)

(‘‘The definition ‘suffer or permit to

work’ was obviously not intended to

stamp all persons as employees.’’). The

Supreme Court specifically recognized

that ‘‘[t]here may be independent

contractors who take part in production

or distribution who would alone be

responsible for the wages and hours of

their own employees.’’ Rutherford Food,

331 U.S. at 729. Accordingly, Federal

courts of appeals have uniformly held,

and the Department has consistently

maintained, that independent

contractors are not ‘‘employees’’ for

purposes of the FLSA. See, e.g., Saleem

v. Corporate Transp. Group, Ltd., 854

F.3d 131, 139–40 (2d Cir. 2017); Karlson

v. Action Process Serv. & Private

Investigation, LLC, 860 F.3d 1089, 1092

(8th Cir. 2017).

B. Economic Dependence and the

Economic Reality Test

1. Supreme Court Development of the

Economic Reality Test

As the NPRM explained, the U.S.

Supreme Court explored the limits of

the employer-employee relationship in a

series of cases from 1944 to 1947 under

three different Federal statutes: The

FLSA, the National Labor Relations Act

(NLRA), and the Social Security Act

(SSA). 85 FR 60601 (summarizing NLRB

v. Hearst Publications, Inc., 322 U.S.

111 (1944); United States v. Silk, 331

U.S. 704 (1947); Bartels v. Birmingham,

332 U.S. 126 (1947); and Rutherford

Food, 331 U.S. 722)).

In Hearst, the Supreme Court held

that the NLRA’s definition of

employment was broader than that of

the common law. 322 U.S. 123–25.

Congress responded by amending the

definition of employment under the

NLRA on June 23, 1947, ‘‘with the

obvious purpose of hav[ing] the

[National Labor Relations] Board and

the courts apply general agency

principles in distinguishing between

employees and independent contractors

under the [NLRA].’’ NLRB v. United Ins.

Co. of Am., 390 U.S. 254, 256 (1968).

On June 16, 1947, one week before

Congress amended the NLRA in

response to Hearst, the Supreme Court

decided Silk, which addressed the

distinction between employees and

independent contractors under the SSA.

In that case, the Court relied on Hearst

to hold that ‘‘economic reality,’’ as

opposed to ‘‘technical concepts’’ of the

common law standard alone, determines

workers’ classification. 331 U.S. at 712–

14. Although the Court found it to be

‘‘quite impossible to extract from the

[SSA] a rule of thumb to define the

limits of the employer-employe[e]

relationship,’’ it identified five factors as

‘‘important for decision’’: ‘‘degrees of

control, opportunities for profit or loss,

investment in facilities, permanency of

relation[,] and skill required in the

claimed independent operation.’’ Id. at

716. The Court added that ‘‘[n]o one

[factor] is controlling nor is the list

complete.’’ Id. One week after Silk and

on the same day Congress amended the

NLRA, the Court reiterated these five

factors in Bartels, another case involving

employee or independent contractor

status under the SSA. In Bartels, the

Court explained that under the SSA,

employee status ‘‘was not to be

determined solely by the idea of control

which an alleged employer may or

could exercise over the details of the

service rendered to his business by the

worker.’’ Id. Although ‘‘control is

characteristically associated with the

employer-employee relationship,’’

employees under ‘‘social legislation’’

such as the SSA are ‘‘those who as a

matter of economic reality are

dependent upon the business to which

they render service.’’ Id.

The same day as it decided Silk, the

Court ruled in Rutherford Food that

certain workers at a slaughterhouse

were employees under the FLSA, and

not independent contractors, by

examining facts pertaining to the five

factors identified in Silk.

2

The Court

also considered whether the work was

‘‘a part of the integrated unit of

production’’ (meaning whether the

putative independent contractors were

integrated into the assembly line

alongside the company’s employees) to

assess whether they were employees or

independent contractors under the

FLSA. Id. at 729–730.

In November 1947, five months after

Silk and Rutherford Food, the

Department of the Treasury (Treasury)

proposed regulations r defining when an

individual was an independent

contractor or employee under the SSA,

which used a test that balanced the

following factors:

1. Degree of control of the individual;

2. Permanency of relation;

3. Integration of the individual’s work

in the business to which he renders

service;

4. Skill required by the individual;

5. Investment by the individual in

facilities for work; and

6. Opportunity of the individual for

profit or loss.

12 FR 7966. Factors one, two, and four

through six corresponded directly with

the five factors identified as being

‘‘important for decision’’ in Silk, 331

U.S. at 716, and the third factor

corresponded with Rutherford Food’s

consideration of the fact that the

workers were ‘‘part of an integrated unit

of production.’’ 331 U.S. at 729. The

Treasury proposal further relied on

Bartels, 332 U.S. at 130, to apply these

factors to determine whether a worker

was ‘‘dependent as a matter of economic

reality upon the business to which he

renders services.’’ 12 FR 7966.

3

Congress replaced the interpretations

of the definitions of ‘‘employee’’

adopted in Hearst for the NLRA and in

Silk and Bartels for the SSA ‘‘to

demonstrate that the usual common-law

principles were the keys to meaning.’’

Darden, 503 U.S. at 324–25. However,

Congress did not similarly amend the

FLSA. Thus, the Supreme Court stated

in Darden that the scope of employment

under the FLSA remains broader than

that under common law and is

determined not by the common law but

instead by the economic reality of the

relationship at issue. See id. Since

implicitly doing so in Rutherford Food,

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As explained below, versions of this multifactor

economic realty test have also been enforced and

articulated by the Department in subregulatory

guidance since the 1950s.

the Court has not again applied (or

rejected the application of) the Silk

factors to an FLSA classification

question.

2. Application of the Economic Reality

Test by Federal Courts of Appeals

As the NPRM explained, in the 1970s

and 1980s Federal courts of appeals

began to adopt versions of a multifactor

‘‘economic reality’’ test based on Silk,

Rutherford Food, and Bartels and

similar to Treasury’s 1947 proposed

SSA regulation to analyze whether a

worker was an employee or an

independent contractor under the FLSA.

See 85 FR 60603.

4

Drawing on the

Supreme Court precedent discussed

above, courts have recognized that the

heart of the inquiry is whether ‘‘as a

matter of economic reality’’ the workers

are ‘‘dependent upon the business to

which they render service.’’ Usery v.

Pilgrim Equip. Co., 527 F.2d 1308, 1311

(5th Cir. 1976) (quoting Bartels, 332 U.S.

at 130). Some courts have clarified that

this question of economic dependence

may be boiled down to asking ‘‘whether,

as a matter of economic reality, the

workers depend upon someone else’s

business for the opportunity to render

service or are in business for

themselves.’’ Saleem, 854 F.3d at 139

(internal quotation marks and citations

omitted). Courts have also explained

that a non-exhaustive set of factors—

derived from Silk and Rutherford

Food—shape and guide this inquiry.

See, e.g., Usery, 527 F.2d at 1311

(identifying ‘‘[f]ive considerations

[which] have been set out as aids to

making the determination of

dependence, vel non’’); Real v. Driscoll

Strawberry Assocs., Inc., 603 F.2d 748,

754 (9th Cir. 1979) (articulating a six-

factor test).

In Driscoll, the Ninth Circuit Court of

Appeals described its six-factor test as

follows:

1. The degree of the alleged

employer’s right to control the manner

in which the work is to be performed;

2. the alleged employee’s opportunity

for profit or loss depending on his

managerial skill;

3. the alleged employee’s investment

in equipment or materials required for

his task, or his employment of helpers;

4. whether the service rendered

requires a special skill;

5. the degree of permanency of the

working relationship; and

6. whether the service rendered is an

integral part of the alleged employer’s

business. Id. at 754.

Most courts of appeals articulate a

similar test, but application between

courts may vary significantly. Compare,

e.g., Sec’y of Labor v. Lauritzen, 835

F.2d 1529, 1534–35 (7th Cir. 1987)

(applying six-factor economic reality

test to hold that pickle pickers were

employees under the FLSA), with

Donovan v. Brandel, 736 F.2d 1114,

1117 (6th Cir. 1984) (applying the same

six-factor economic reality test to hold

that pickle pickers were not employees

under the FLSA). For example, the

Second Circuit has analyzed

opportunity for profit or loss and

investment (the second and third factors

listed above) together as one factor. See,

e.g., Brock v. Superior Care, Inc., 840

F.2d 1054, 1058 (2d Cir. 1988). The

Fifth Circuit has not adopted the sixth

factor listed above, which analyzes the

integrality of the work, as part of its

standard, see, e.g., Usery, 527 F.2d at

1311, but has at times assessed

integrality as an additional factor, see,

e.g. Hobbs v. Petroplex Pipe & Constr.,

Inc., 946 F.3d 824, 836 (5th Cir. 2020).

The NPRM highlighted noteworthy

modifications some courts of appeals

have made to the economic reality

factors as originally articulated in 1947

by the Supreme Court. See 85 FR

60603–04. First, the ‘‘skill required’’

factor identified in Silk, 331 U.S. at 716,

is now articulated more expansively by

some courts to include ‘‘initiative.’’ See,

e.g., Parrish, 917 F.3d at 379 (‘‘the skill

and initiative required in performing the

job’’); Karlson, 860 F.3d at 1093 (same);

Superior Care, 840 F.2d at 1058–59

(‘‘the degree of skill and independent

initiative required to perform the

work’’).

Second, Silk analyzed workers’

investments, 331 U.S. at 717–19.

However, the Fifth Circuit has revised

the ‘‘investment’’ factor to instead

consider ‘‘the extent of the relative

investments of the worker and the

alleged employer.’’ Hopkins, 545 F.3d at

343. Some other circuits have adopted

this ‘‘relative investment’’ approach but

continue to use the phrase ‘‘worker’s

investment’’ to describe the factor. See,

e.g., Keller v. Miri Microsystems LLC,

781 F.3d 799, 810 (6th Cir. 2015); Dole

v. Snell, 875 F.2d 802, 805 (10th Cir.

1989).

Third, although the permanence

factor under Silk was understood to

mean the continuity and duration of

working relationships, see 12 FR 7967,

some courts of appeals have expanded

this factor to also consider the

exclusivity of such relationships. See,

e.g., Scantland, 721 F.3d at 1319; Keller,

781 F.3d at 807.

Finally, Rutherford Food’s

consideration of whether work is ‘‘part

of an integrated unit of production,’’ 331

U.S. at 729, has now been replaced by

many courts of appeals by consideration

of whether the service rendered is

‘‘integral,’’ which those courts have

applied as meaning important or central

to the potential employer’s business.

See, e.g., Verma v. 3001 Castor, Inc., 937

F.3d 221, 229 (3rd Cir. 2019)

(concluding that workers’ services were

integral because they were the providers

of the business’s ‘‘primary offering’’);

Acosta v. Off Duty Police Servs., Inc.,

915 F.3d 1050, 1055 (6th Cir. 2019)

(concluding that services provided by

workers were ‘‘integral’’ because the

putative employer ‘‘built its business

around’’ those services); McFeeley v.

Jackson Street Entertainment, LLC, 825

F.3d 235, 244 (4th Cir. 2016)

(considering ‘‘the importance of the

services rendered to the company’s

business’’).

Courts of appeals have cautioned

against the ‘‘mechanical application’’ of

the economic reality factors. See, e.g.,

Saleem, 854 F.3d at 139. ‘‘Rather, each

factor is a tool used to gauge the

economic dependence of the alleged

employee, and each must be applied

with this ultimate concept in mind.’’

Hopkins, 545 F.3d at 343. Further,

courts of appeals make clear that the

analysis should draw from the totality of

circumstances, with no single factor

being determinative by itself. See, e.g.,

Keller, 781 F.3d at 807 (‘‘No one factor

is determinative.’’); Baker, 137 F.3d at

1440 (‘‘None of the factors alone is

dispositive; instead, the court must

employ a totality-of-the-circumstances

approach.’’).

3. Application of the Economic Reality

Test by WHD

Since at least 1954, WHD has applied

variations of this multifactor analysis

when considering whether a worker is

an employee under the FLSA or an

independent contractor. See WHD

Opinion Letter (Aug. 13, 1954)

(applying six factors very similar to the

six economic reality factors currently

used by courts of appeals). In 1964,

WHD stated, ‘‘The Supreme Court has

made it clear that an employee, as

distinguished from a person who is

engaged in a business of his own, is one

who as a matter of economic reality

follows the usual path of an employee

and is dependent on the business which

he serves.’’ WHD Opinion Letter FLSA–

795 (Sept. 30, 1964).

Over the years since, WHD has issued

numerous opinion letters applying a

multifactor analysis very similar to the

multifactor economic reality test courts

use (with some variation) to determine

whether workers are employees or

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See, e.g., WHD Opinion Letter FLSA2019–6 at

4 (Apr. 29, 2019); WHD Opinion Letter, 2002 WL

32406602, at *2 (Sept. 5, 2002); WHD Opinion

Letter, 2000 WL 34444342, at *3 (Dec. 7, 2000);

WHD Opinion Letter, 2000 WL 34444352, at *1 (Jul.

5, 2000); WHD Opinion Letter, 1999 WL 1788137,

at *1 (Jul. 12, 1999); WHD Opinion Letter, 1995 WL

1032489, at *1 (June 5, 1995); WHD Opinion Letter,

1995 WL 1032469, at *1 (Mar. 2, 1995); WHD

Opinion Letter, 1986 WL 740454, at *1 (June 23,

1986); WHD Opinion Letter, 1986 WL 1171083, at

*1 (Jan. 14, 1986); WHD Opinion Letter WH–476,

1978 WL 51437, at *2 (Oct. 19, 1978); WHD

Opinion Letter WH–361, 1975 WL 40984, at *1

(Oct. 1, 1975); WHD Opinion Letter (Sept. 12, 1969);

WHD Opinion Letter (Oct. 12, 1965).

6

Fact Sheet #13 is available at https://

www.dol.gov/sites/dolgov/files/WHD/legacy/files/

whdfs13.pdf.

independent contractors.

5

WHD has also

promulgated regulations applying a

multifactor analysis for independent

contractor status under the FLSA in

certain specific industries. See, e.g., 29

CFR 780.330(b) (applying a six factor

economic reality test to determine

whether a sharecropper or tenant is an

independent contractor or employee

under the Act); 29 CFR 788.16(a)

(applying a six factor economic reality

test in forestry and logging operations

with no more than eight employees).

Further, WHD has promulgated a

regulation applying a multifactor

economic reality analysis for

determining independent contractor

status under the Migrant and Seasonal

Agricultural Worker Protection Act

(MSPA). 29 CFR 500.20(h)(4).

The Department’s sub-regulatory

guidance, WHD Fact Sheet #13,

‘‘Employment Relationship under the

Fair Labor Standards Act (FLSA)’’ (Jul.

2008), similarly stated that, when

determining whether an employment

relationship exists under the FLSA,

common law control is not the exclusive

consideration. Instead, ‘‘it is the total

activity or situation which controls’’;

and ‘‘an employee, as distinguished

from a person who is engaged in a

business of his or her own, is one who,

as a matter of economic reality, follows

the usual path of an employee and is

dependent on the business which he or

she serves.’’

6

The fact sheet identified

seven economic reality factors; in

addition to factors that are similar to the

six factors identified above, it also

considered the worker’s ‘‘degree of

independent business organization and

operation.’’ On July 15, 2015, WHD

issued Administrator’s Interpretation

No. 2015–1, ‘‘The Application of the

Fair Labor Standards Act’s ‘Suffer or

Permit’ Standard in the Identification of

Employees Who Are Misclassified as

Independent Contractors’’ (AI 2015–1).

AI 2015–1 provided guidance regarding

the employment relationship under the

FLSA and the application of the six

economic realities factors. AI 2015–1

was withdrawn on June 7, 2017 and is

no longer in effect.

WHD’s most recent opinion letter

addressing this issue, from 2019,

generally applied the principles and

factors similar to those described in the

prior opinion letters and Fact Sheet #13,

but not the ‘‘independent business

organization’’ factor because it did not

add to the analysis as a separate factor

and was ‘‘[e]ncompassed within’’ the

other factors. It also stated that the

investment factor should focus on the

‘‘amount of the worker’s investment in

facilities, equipment, or helpers.’’ The

opinion letter addressed the FLSA

classification of service providers who

used a virtual marketplace company to

be referred to end-market consumers to

whom the services were actually

provided. WHD concluded that the

service providers appeared to be

independent contractors and not

employees of the virtual marketplace

company. See WHD Opinion Letter

FLSA2019–6 at 7. WHD found that it

was ‘‘inherently difficult to

conceptualize the service providers’

‘working relationship’ with [the virtual

marketplace company], because as a

matter of economic reality, they are

working for the consumer, not [the

company].’’ Id. Because ‘‘[t]he facts . . .

demonstrate economic independence,

rather than economic dependence, in

the working relationship between [the

virtual marketplace company] and its

service providers,’’ WHD opined that

they were not employees of the

company under the FLSA but rather

were independent contractors. Id. at 9.

As explained below, the Department’s

prior interpretations of independent

contractor status, which themselves

have evolved over time, are subject to

similar limitations as that of court

opinions, and the Department believes

that stakeholders would benefit from

clarification. For these reasons, the

Department proposed promulgating a

clearer and more consistent standard for

evaluating whether a worker is an

employee or independent contractor

under the FLSA and is now finalizing

that proposal, with some modifications

based on comments received.

C. The Department’s Proposal

On September 25, 2020, the

Department published the NPRM in the

Federal Register. The Department

proposed to adopt an ‘‘economic

reality’’ test to determine a worker’s

status as an FLSA employee or an

independent contractor. The test

considers whether a worker is in

business for himself or herself

(independent contractor) or is instead

economically dependent on an

employer for work (employee). The

Department further identified two ‘‘core

factors’’: The nature and degree of the

worker’s control over the work; and the

worker’s opportunity for profit or loss

based on initiative, investment, or both.

The Department explained it was

proposing to emphasize these factors

because they are the most probative of

whether workers are economically

dependent on someone else’s business

or are in business for themselves. The

proposal identified three other factors to

also be considered, though they are less

probative than the core factors: The

amount of skill required for the work,

the degree of permanence of the

working relationship between the

individual and the potential employer,

and whether the work is part of an

integrated unit of production. The

Department further proposed to advise

that the actual practice is more

probative than what may be

contractually or theoretically possible in

determining whether a worker is an

employee or an independent contractor.

D. Comments

The Department solicited comments

on all aspects of the proposed rule.

More than 1800 individuals and

organizations timely commented on the

Department’s NPRM during the thirty-

day comment period that ended on

October 26, 2020. The Department

received comments from employers,

workers, industry associations, worker

advocacy groups, and unions, among

others. All timely comments may be

viewed at the website

www.regulations.gov, docket ID WHD–

2020–0007.

Of the comments received, the

Department received approximately 230

comments from workers who identified

themselves as independent contractors

(not including the over 900 comments

received from Uber drivers discussed

below). Of those, the overwhelming

majority expressed support for the

NPRM. These individuals identified

themselves as freelancers or

independent contractors in jobs

including translator, journalist,

consultant, musician, and many others.

Among this group of commenters, over

200 expressed support for the proposed

rule, while only 8 opposed it. The

remaining individuals in this group did

not express a specific position. Uber

drivers submitted over 900 comments.

While many expressed views on Uber

corporate policies and not on the NPRM

itself, the majority of these drivers who

addressed the NRPM supported the

Department’s proposal. The Department

also received a number of other

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comments that are beyond the scope of

this rulemaking. For example, several

commenters expressed opinions related

to the issues addressed in the

Department’s proposal but that were

specific to state legislation or employer

policies. Significant issues raised in the

timely comments received are discussed

below, along with the Department’s

response to those comments.

III. Need for Rulemaking

The NPRM explained that the

Department has never promulgated a

generally-applicable regulation

addressing who is an independent

contractor and thus not an employee

under the FLSA. Instead, as described

above, the Department has issued and

revised guidance since at least 1954,

using different variations of a

multifactor economic reality test that

analyzes economic dependence to

distinguish independent contractors

from employees. Such guidance reflects,

in large part, application of the general

principles of the economic reality test

by Federal courts of appeals. Such

guidance, however, did not reflect any

public input. Indeed, the NPRM kicked

off the Department’s first ever notice-

and-comment rulemaking to provide a

generally applicable interpretation of

independent contractor status under the

FLSA. As recounted just above, the

Department received many comments

from stakeholders who are actually

impacted by FLSA classification

decisions, which are valuable

information and insight that the

Department has not previously gathered

and many of which reinforced the

Department’s view that more clarity is

needed in this area.

The Department explained in the

NPRM preamble that prior articulations

of the test have proven to be unclear and

unwieldy for the four following reasons.

First, the test’s overarching concept of

‘‘economic dependence’’ is under-

developed and sometimes

inconsistently applied, rendering it a

source of confusion. Second, the test is

indefinite in that it makes all facts

potentially relevant without guidance

on how to prioritize or balance different

and sometimes competing

considerations. Third, inefficiency and

lack of structure in the test further stem

from blurred boundaries between the

factors. Fourth, these shortcomings have

become more apparent over time as

technology, economic conditions, and

work relationships have evolved.

The Department thus proposed to

promulgate a regulation that would

clarify and sharpen the contours of the

economic reality test used to determine

independent contractor classification

under the FLSA. The NPRM explained

that such a regulation would provide

much needed clarity and encourage (or

at least stop deterring) flexible work

arrangements that benefit both

businesses and workers.

Commenters in the business

community and freelance workers

generally agreed with the Department

that the multifactor balancing test is

confusing and needs clarification. The

National Retail Federation (NRF)

complained that ‘‘existing tests for

independent contractor status tend to

have a large number of factors which

can be nebulous, overlapping, and even

irrelevant to the ultimate inquiry.’’ The

Workplace Policy Institute of Littler

Mendelson, P.C. (WPI) stated that

‘‘[b]oth the Department and the courts

have struggled to define ‘dependence’ ’’

in the modern economy—resulting in

confusion, unpredictability and

inconsistent results.’’ The Society for

Human Resource Management (SHRM)

echoed this sentiment, writing ‘‘the

business community and workers are

left applying numerous factors in a

variety of ways that is mired in

uncertainty and, therefore, unnecessary

risk.’’ The U.S. Chamber of Commerce

stated that ‘‘[t]he confusion regarding

whether a worker is properly classified

as an employee or an independent

contractor has long been a vexing

problem for the business community,

across many different industries and

work settings.’’ See also, e.g., World

Floor Covering Association (WFCA)

(‘‘The current test has resulted in

inconsistent decisions, much confusion,

and unnecessary costs.’’). Numerous

individual freelancers and organizations

that represent freelance workers also

stated they would welcome ‘‘greater

clarity and predictability in the

application of the ‘economic realities’

test.’’ Coalition to Promote Independent

Entrepreneurs (CPIE); see also Coalition

of Practicing Translators & Interpreters

of California (CoPTIC) (requesting

‘‘greater clarity in Federal law’’).

Individual freelancers generally

welcomed greater legal clarity. For

example, one individual commenter

wrote ‘‘to express [her] support for this

proposed rule. As someone who has

enjoyed freedom and flexibility as a

freelancer for 20 years, this would be a

welcome clarification.’’ Another

individual freelancer stated that ‘‘[t]he

clarity and updating of [the FLSA]

through this NPRM is long overdue and

the DOL should issue ruling on

independent contracting. . . .’’

These supportive commenters

generally agreed with the Department

that additional clarity would encourage

flexible work arrangements that benefit

businesses and workers alike. For

example, the Coalition for Workforce

Innovation (CWI) asserted that

additional clarity of the economic

reality test would ‘‘allow workers and

businesses to pursue [ ] mutually

beneficial opportunities as the United

States economy evolves with

technology.’’ Fight for Freelancers

explained that its members value

flexibility that comes with working as

independent contractors and supported

the Department’s ‘‘efforts to protect [its

members’] classification.’’

Some commenters who opposed this

rulemaking questioned the need for a

regulation on this topic. The Southwest

Regional Council of Carpenters

(SWRCC) stated that the ‘‘[t]he first of

the Rule’s shortcomings is its

assumption that a new rule is necessary

in the first place,’’ and the American

Federation of Labor & Congress of

Industrial Organization (AFL–CIO)

asserted that the Department’s ‘‘quest

for certainty . . . is quixotic.’’ Mr.

Edward Tuddenham, an attorney,

contended that the current test is

‘‘generally consistent and predictable’’

and thus does not need further

clarification. He and others repeatedly

questioned the Department’s reasons for

rulemaking by asserting that the

Department did not identify cases where

courts reached incorrect outcomes.

Rather than focus on the outcomes in

particular cases, the NPRM highlighted

inconsistent or confusing reasoning in

many decisions to explain why the

regulated community would benefit

from regulatory clarity. See 85 FR

60605. Mr. Tuddenham and others also

provided thoughtful and detailed

comments criticizing specific aspects of

the reasons presented in the NPRM’s

need for rulemaking discussion. The

following discussion retraces those

reasons and responds to these

criticisms.

A. Confusion Regarding the Meaning of

Economic Dependence

The NPRM explained that

undeveloped analysis and inconsistency

cloud the application of ‘‘economic

dependence,’’ the touchstone of the

economic reality test. 85 FR 60605. The

Department and some courts have

attempted to furnish a measure of clarity

by explaining, for example, that the

proper inquiry is ‘‘ ‘whether the workers

are dependent on a particular business

or organization for their continued

employment’ in that line of business,’’

Brock v. Mr. W Fireworks, Inc., 814 F.2d

1042, 1054 (5th Cir. 1987) (quoting

DialAmerica, 757 F.2d at 1385), or

instead ‘‘are in business for

themselves,’’ Saleem, 854 F.3d at 139.

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7

The Thibault court also highlighted the fact that

Mr. Thibault worked for only 3 months—although

he intended to work for 7 or 8 months—before

being fired. See 612 F.3d at 846, 849. In contrast,

the splicers in Cromwell worked approximately 11

months. See 348 F. App’x at 58.

8

The Thibault case recognized that ‘‘[a]n

individual’s wealth is not a solely dispositive factor

in the economic dependence question.’’ 612 F.3d at

849 n.4. This confirms that wealth was in fact a

meaningful consideration, which runs against other

cases explaining that dependence on wealth is an

inappropriate lens.

But the Department and many courts

have often applied the test without

helpful clarification of the meaning of

the economic dependency that they are

seeking.

The NPRM explained that the lack of

explanation of economic dependence

has sometimes led to inconsistent

approaches and results and highlighted

as an example the apparently

inconsistent results in Cromwell v.

Driftwood Elec. Contractor, Inc., 348 F.

App’x 57 (5th Cir. 2009) (holding that

cable splicers hired by Bellsouth to

perform post-Katrina repairs were

employees), and Thibault v. BellSouth

Telecommunication, 612 F.3d 843 (5th

Cir. 2010) (holding that cable splicer

hired by same company under a very

similar arrangement was an

independent contractor). See 85 FR

60605. The Thibault court distinguished

its result from Cromwell in part by

highlighting Mr. Thibault’s significant

income from (1) his own sales company

that had profits of approximately

$500,000, (2) ‘‘eight drag-race cars [that]

generated $1,478 in income from racing

professionally[,]’’ and (3) ‘‘commercial

rental property that generated some

income.’’ Thibault, 612 F.3d at 849.

While these facts indicate that Mr.

Thibault may have been in business for

himself as a manager of a sales business,

drag-race cars, and commercial

properties, they are irrelevant as to

whether he was in business for himself

as a cable splicer.

7

The Thibault court

nonetheless assigned these facts

substantial weight because it

understood economic dependence to

mean dependence for income or wealth,

which is incompatible with the

dependence-for-work approach that

other courts and the Department

apply.

8

See, e.g., Off Duty Police, 915

F.3d at 1058 (‘‘[W]hether a worker has

more than one source of income says

little about that worker’s employment

status.’’); Halferty, 821 F.2d at 268 (‘‘[I]t

is not dependence in the sense that one

could not survive without the income

from the job that we examine, but

dependence for continued

employment’’); DialAmerica, 757 F.2d

at 1385 (‘‘The economic-dependence

aspect of the [economic reality] test does

not concern whether the workers at

issue depend on the money they earn

for obtaining the necessities of life.’’).

As the DialAmerica court explained, the

dependence-for-income approach

‘‘would lead to a senseless result’’

because a wealthy individual who had

an independent source of income would

be an independent contractor even

though a poorer individual who worked

for the same company under the same

work arrangement is an employee. 757

F.2d at 1385 n.11. Mr. Tuddenham

initially defended the reasoning in

Thibault, but later listed that case as an

example of ‘‘the occasional erroneous

application of the [economic reality]

test.’’

The NPRM also highlighted the

decision in Parrish v. Premier

Directional Drilling, 917 F.3d 369, as an

example of inconsistent articulation of

economic dependence. In that case, the

court first applied a dependence-for-

work concept to analyze the control

factor and then explicitly departed from

that framework in favor of a

dependence-for-income analysis of the

opportunity factor. See 85 FR 60606.

The Parrish court impliedly took a third

concept of dependence to analyze the

investment factor through a ‘‘side-by-

side comparison’’ of each worker’s

individual investment to that of the

alleged employer.’’ 917 F.3d at 383. AI

2015–1 took the same approach and

explained that ‘‘it is the relative

investments that matter’’ because ‘‘[i]f

the worker’s investment is relatively

minor, that suggests that the worker and

the employer are not on similar footing

and that the worker may be

economically dependent on the

employer.’’ The comparative analysis of

investments thus appears to rely on a

concept of economic dependence that

means ‘‘not on a similar footing,’’ which

is different from the ‘‘dependence for

work’’ concept that the Department

believes to be correct.

In summary, courts and the

Department typically economic

dependence as ‘‘dependence for work,’’

but have sometimes applied other

concepts of dependence to analyze

certain factors, such as ‘‘dependence for

income’’ and ‘‘not on similar footing.’’

Because economic dependence is the

ultimate inquiry of FLSA employment,

these different conceptions result in

essentially different tests that confuse

the regulated community. Accordingly,

the economic reality test needs a more

developed and dependable touchstone

at its heart.

B. Lack of Focus in the Multifactor

Balancing Test

The NPRM explained that the

versions of the multifactor economic

reality test used by courts since at least

the 1980s and the Department since the

1950s lack clear, generally applicable

guidance about how to balance the

multiple factors and the countless facts

encompassed therein. See 85 FR

60606.The test’s lack of guidance leads

to uncertainty regarding ‘‘which aspects

of ‘economic reality’ matter, and why.’’

Lauritzen, 835 F.2d at 1539 (Easterbrook

J., concurring).

As examples of such uncertainty, the

NPRM highlighted court decisions

analyzing economic reality factors to

reach an overall decision about a

worker’s classification without

meaningful explanation of how they

balanced the factors to reach the final

decision. 85 FR 60606 (citing, e.g.,

Parrish, 917 F.3d at 380; Chao v. Mid-

Atl. Installation Servs., Inc., 16 F. App’x

104, 108 (4th Cir. 2001); and Snell, 875

F.2d at 912). Even where many facts and

factors support both sides of the

classification inquiry, courts have not

explained how they balanced the

competing considerations. See, e.g.,

Acosta v. Paragon Contractors Corp.,

884 F.3d 1225, 1238 (10th Cir. 2018);

Iontchev v. AAA Cab. Services, 685 F.

App’x 548, 550 (9th Cir. 2017). The

NPRM thus identified a need for

guidance on which factors are most

probative.

Even some commenters critical of the

Department’s approach in the NPRM

conceded that the test as currently

applied can create considerable

ambiguity. Mr. Tuddenham asserted

that the lack of general guidance

regarding how to balance factors is ‘‘an

unavoidable function of determining

something as nebulous as ‘economic

dependence.’ ’’ See also Farmworker

Justice (‘‘[T]he test, as currently applied,

creates necessary ambiguity.’’). The

Department disagrees that the concept

of ‘‘economic dependence’’ is

necessarily ‘‘nebulous.’’ FLSA

employment itself depends on economic

dependence, and nothing in the statute

requires that this standard be nebulous

and thus unmanageable. See Usery, 527

F.2d at 1311 (‘‘It is dependence that

indicates employee status.’’). Instead,

the Department believes the correct

concept of economic dependence

tangibly defines FLSA employment to

include individuals who are dependent

on others for work, and to exclude

individuals who are, as a matter of

economic reality, in business for

themselves. See Saleem, 854 F.3d at

139. The Department thus believes it is

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9

See, e.g., Selker Bros., 949 F.2d at 1295

(concluding that the skill factor weighed towards

employee classification due to ‘‘the degree of

control exercised by [the potential employer] over

the day-to-day operation’’); Baker, 137 F.3d at 1443

(finding that the skill factor weighed towards

employee classification where skilled welders ‘‘are

told what to do and when to do it’’); Superior Care,

840 F.2d at 1060 (finding that the skill factor

weighed towards employee classification for skilled

nurses because ‘‘Superior Care in turn controlled

the terms and conditions of the employment

relationship’’).

10

Some courts of appeal continue to analyze skill

rather than control as part of the skill factor. See,

e.g., Paragon, 884 F3d at 1235 (considering ‘‘the

degree of skill required to perform the work’’); see

also Iontchev, 685 F. App’x at 550 (asking ‘‘whether

services rendered . . . require[d] a special skill’’);

Keller, 791 F.3d at 807 (analyzing ‘‘the degree of

skill required’’).

11

As the NPRM explained, this presumption that

firms would control all important services on which

they rely may rest on a mistaken premise because,

for example, manufacturers routinely have critical

parts and components produced and delivered by

wholly separate companies. 85 FR 60608. And

companies whose business is to connect

independent service providers with customers

would find those service providers to be important

even though they are independent from the

company’s business. See State Dep’t of

Employment, Training & Rehab., Employment Sec.

Div. v. Reliable Health Care Servs. of S. Nevada,

Inc., 983 P.2d 414, 419 (Nev. 1999) (‘‘[W]e cannot

ignore the simple fact that providing patient care

and brokering workers are two distinct

businesses.’’’)

possible to provide generally applicable

guidance regarding how to consider and

balance the economic reality factors to

assess this concept of economic

dependence.

C. Confusion and Inefficiency Due to

Overlapping Factors

The NPRM next explained that courts

and the Department have articulated the

economic reality factors such that they

have overlapping coverage, which

undermines the structural benefits of a

multifactor test. See 85 FR 60607. The

NPRM noted that most of these overlaps

did not exist in the Supreme Court’s

original articulation of the economic

reality factors in Silk and were instead

introduced by subsequent court of

appeals decisions. The NPRM then

explained several ways in which

extensive overlaps may lead to

inefficiency and confusion for the

regulated community.

First, the ‘‘skill required’’ factor

articulated in Silk, 331 U.S. at 716, has

been expanded by the Department and

some courts to analyze ‘‘skill and

initiative.’’ See, e.g., Superior Care, 840

F.2d at 1060; WHD Fact Sheet WHD

#13. Because the capacity for on-the-job

initiative is already part of the control

factor, the NPRM explained that this

approach essentially imports control

analysis into the skill factor. Indeed, the

presence of control appears to overrides

the existence of skill,

9

effectively

transforming the skill factor into an

extension of the control factor in some

circuits, but not others.

10

The ‘‘skill and

initiative’’ factor also overlaps with the

opportunity factor, which considers the

impact of initiative on worker’s

earnings, resulting in initiative being

analyzed under three different factors.

As an illustration of confusion resulting

from this overlap, the NPRM

highlighted a case in which a court

found that workers exercised enough

on-the-job initiative for the control and

opportunity factors to point towards

independent contractor status, but

nonetheless found the ‘skill and

initiative factor points towards

employee status’ due to ‘the key missing

ingredient . . . of initiative.’ ’’ 85 FR

60607 (quoting Express Sixty-Minutes

Delivery, 161 F.3d at 303).

Next, the permanence factor originally

concerned the continuity and duration

of a working relationship but has since

been expanded by some courts and the

Department to also consider the

exclusivity of that relationship. See 85

FR 60608 (citing Parrish 917 F.3d at

386–87; Keller, 781 F.3d at 807–09;

Scantland, 721 F.3d at 1319; WHD

Opinion Letter FLSA 2019–6 at 8). But

exclusivity—the ability or inability for a

worker to offer services to different

companies—is already a part of the

control factor. This overlap results in

exclusivity being analyzed twice and

causes the actual consideration of

permanence being potentially subsumed

by control.

Third, the ‘‘integral part’’ factor is

used by some courts to be merely a

proxy of control. As one such court

explained: ‘‘It is presumed that, with

respect to vital or integral parts of the

business, the employer will prefer to

engage an employee rather than an

independent contractor. This is so

because the employer retains control

over the employee and can compel

attendan[ce] at work on a consistent

basis.’’ Baker v. Dataphase, Inc., 781 F.

Supp. 724, 735 (D. Utah 1992). But the

control factor already directly analyzes

whether a business can compel

attendance on a consistent basis. It is

unclear what additional value can be

gained by indirectly analyzing that same

consideration a second time under the

‘‘integral part’’ factor.

11

Finally, while Silk articulated the

opportunity for profit and loss and

investment as separate factors, it

analyzed the two together in concluding

that truck drivers in that case were

independent contractors in part because

they ‘‘invested in their own trucks and

had ‘‘an opportunity for profit from

sound management’’ of that investment.

331 U.S. at 719. The Second Circuit

recognized such clear overlap, noting

that ‘‘[e]conomic investment, by

definition, creates the opportunity for

loss, [and] investors take such a risk

with an eye to profit.’’ Saleem, 854 F.3d

at 145 n.29. Nonetheless, most courts

and Department have analyzed

opportunity for profit and loss and

investment as separate factors. When

done right, separate analysis leads to

redundancy. See, e.g., Mid-Atlantic

Installation Servs., 16 F. App’x at 106–

07. When done wrong, it leads to

analysis of investment without regard

for the worker’s profit or loss, such as

by comparing the dollar value of a

worker’s personal investments against

the total investment of a large company

that, for example, ‘‘maintain[s]

corporate offices.’’ Hopkins 545 F.3d at

344. The NPRM explained that such a

comparison says nothing about whether

the worker is in business for himself, as

opposed to being economically

dependent on that company for work,

and is therefore not probative and

potentially misleading. 85 FR 60608.

The NRPM concluded that reducing the

above-mentioned overlaps would make

the economic reality test easier to

understand and apply.

The SWRCC contended that

‘‘overlapping factors [have] never been

the source of—and the DOL cannot

point to—any credible criticism,’’ but

did not question or even acknowledge

the above criticism discussed at length

in the NRPM. In contrast, commenters

that are significantly impacted by the

FLSA’s obligations generally agreed

with the Department that overlapping

factors have created confusion. For

example, the Association of General

Contractors stated that ‘‘[n]avigating and

complying with the various overlapping

and inconsistent standards are

confusing and costly,’’ and WPI

‘‘agree[d] with the Department that such

overlap and blurring of factors is

confusing and inefficient.’’ See also,

e.g., Center for Workplace Compliance

(CWC); NRF; U.S. Chamber of

Commerce.

A multifactor test is a useful

framework for determining FLSA

employment in part because it organizes

the many facts that are part of economic

reality into distinct categories, thus

providing some structure to an

otherwise roving inquiry. However, this

benefit is lost if the lines between those

factors blur. Under prior articulations of

the test, considerations within the

control factor—capacity for on-the-job

initiative, exclusivity, and ability to

compel attendance—have been

imported into analysis of three other

factors: Skill, permanence, and integral

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Ronald Coase, Nature of the Firm, 4 Economica

386 (1937), https://onlinelibrary.wiley.com/doi/

epdf/10.1111/j.1468-0335.1937.tb00002.x. See also

Nobel Prizes and Laureates, Oct., 15, 1991, https://

www.nobelprize.org/prizes/economic-sciences/

1991/press-release/ (explaining The Nature of the

Firm’s contribution to economics literature as a

central reason for Coase’s receipt of the 1991 Nobel

Prize in Economics); Katz and A. Krueger, ‘‘The

Rise and Nature of Alternative Work Arrangements

in the United States, 1995–2015,’’ p. 25 (2018)

(‘‘Coase’s (1937) classic explanation for the

boundary of firms rested on the minimization of

transaction costs within firm-employee

relationships. Technological changes may be

reducing the transaction costs associated with

contracting out job tasks, however, and thus

supporting the disintermediation of work.’’).

13

The Department notes that it is unlikely that

job tenures of independent contractors have fallen

by more than employees because average job tenure

for employees have dropped by many years, which

is greater than the total duration of a typical

independent contractor relationship. See Julie

Hotchkiss and Christopher Macpherson, Falling Job

Tenure: It’s Not Just about Millennials, Federal

Reserve Bank of Atlanta, June 8, 2015, https://

www.frbatlanta.org/blogs/macroblog/2015/06/08/

falling-job-tenure-its-not-just-about-

millennials.aspx. (showing that median job tenure

for individuals born in 1933 was ten years or longer

while median job tenure for individuals born after

1983 was three years or less).

part. Indeed, those control-based

considerations appear to be the most

important aspect of the other factors,

which obscures those factors’ distinctive

probative values. Moreover,

considerations under the opportunity

factor—the ability to affect profits

through initiative—have been imported

into the skill factor. And the ability to

earn profits through investment

overlaps completely with the

investment factor. The Department

continues to believe these overlapping

coverages contribute to confusion and

should be reduced where practicable.

D. The Shortcomings and

Misconceptions That This Rulemaking

Seeks To Remedy Are More Apparent in

the Modern Economy

The NPRM explained that certain

technological and social changes have

made shortcomings of the economic

reality test more apparent in the modern

economy. It highlighted the effects of

three types of change. First, falling

transaction costs in many industries

makes it more cost effective for firms to

hire independent contractors rather than

employees to perform core functions.

12

This in turn means analyzing the

importance of the work through the

‘‘integral part’’ factor, which the

Supreme Court never endorsed, is more

likely to result in misleading signals

regarding an individual’s employment

status. Second, the transition from a

more industrial-based to a more

knowledge-based economy reduces the

probative value of the investment factor

in certain industries because

individuals can be in business for

themselves in those industries with

minimal physical capital. Third, shorter

job tenures among employees dull the

ability of the permanence factor to

distinguish between employees and

independence contractor. See 85 FR

60608–09.

Several commenters agreed with the

Department’s assessments of modern

trends. See, e.g., TechNet (‘‘Given

falling transaction costs, companies are

more willing to allocate certain pieces of

their production, even integrated parts,

to independent contractors.’’); Food

Industry Association (‘‘societal changes

have resulted in innovative work

arrangements and changes in job tenure

expectation’’). Former Deputy Under

Secretary of Labor and retired law

professor Henry H. Perritt, Jr. found the

discussion of modern trends to be

‘‘particularly insightful and should be

retained and expanded in the preamble

to any final rule.’’ Other commenters

disagreed. The AFL–CIO, for instance,

theorized that lower transaction costs

‘‘might just as easily result in employers

not taking steps to retain employees

who perform work central to their

business, but instead tolerate frequent

turnover in such positions’’ and that the

‘‘job tenure of independent contractors

may have fallen more’’ than for

employees—though it did not provide

evidence in support of its hypotheses.

13

The Department continues to believe

that each of the above shortcomings of

the previously applied economic reality

test provides sufficient reason for this

rulemaking and that technological and

societal changes have made these

shortcomings even more apparent.

E. Effects of Additional Regulatory

Clarity on Innovation

The NPRM expressed concern that the

legal uncertainty arising from the above-

described shortcomings of the

multifactor economic reality test may

deter innovative, flexible work

arrangements that benefit businesses

and workers alike. Some commenters

questioned this assumption. The

Coalition of State Attorneys General,

Cities, and Municipal Agencies (State

AGs), for instance, contended that the

Department ‘‘provides no empirical

evidence or data demonstrating that

employers now hesitate to engage in

innovative arrangements’’ and further

argued that because ‘‘digital platforms

have become part of the modern

economy . . . they have not been stifled

by the current test.’’ But the mere

existence of certain types of businesses

is insufficient evidence that other such

businesses are not being stifled, and it

is unclear what empirical data could

measure innovation that is not occurring

due to legal uncertainty. Commenters

who represent technology companies

stated that legal uncertainty regarding

worker classification in fact deters them

from developing innovative and flexible

work arrangements. See, e.g., CWI;

TechNet. In addition, economists who

study the impact of labor regulation on

entrepreneurship also commented that

clear independent contractor regulations

would assist startup companies. Dr. Liya

Palagashvilli (‘‘71 percent of startups

relied on independent contractors and

thought it was necessary to use contract

labor during their early stages’’); Dr.

Michael Farren and Trace Mitchell

(‘‘[G]reater legal clarity to employers

and workers will allow for more

efficient production processes and will

reduce the resources wasted on

determining a worker’s employment

classification through the legal

process.’’).

For the reasons mentioned above, the

Department continues to believe that,

unless revised, the multifactor economic

reality test suffers because the analytical

lens through which all the factors are

filtered remains inconsistent; there is no

clear principle regarding how to balance

the multiple factors; the lines between

many of the factors are blurred; and

these shortcomings have become more

apparent in the modern economy. The

resulting legal uncertainty obscures

workers’ and businesses’ respective

rights and obligations under the FLSA

and deters innovative work

arrangements, thus inhibiting the

development of new job opportunities

or eliminating existing jobs. The

Department is therefore issuing this

final rule to increase legal certainty.

IV. Final Regulatory Provisions

Having reviewed commenter feedback

submitted in response to the proposed

rule, the Department is finalizing the

addition of a new part 795 to Title 29

of the Code of Federal Regulations,

which will address whether particular

workers are ‘‘employees’’ or

independent contractors under the

FLSA. In relevant part, and as discussed

in greater detail below, the part

includes:

•An introductory provision at

§ 795.100 explaining the purpose and

legal authority for the new part;

•a provision at § 795.105(a)

explaining that independent contractors

are not employees under the FLSA;

•a provision at § 795.105(b)

discussing the ‘‘economic reality’’ test

for distinguishing FLSA employees from

independent contractors and clarifying

that the concept of economic

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See 29 U.S.C. 204, 211(a), 212(b), 216(c), 217;

see also Fernandez v. Zoni Language Centers, Inc.,

858 F.3d 45, 48–49 (2d Cir. 2017) (noting that ‘‘[t]he

DOL . . . administers the FLSA’’).

15

Additionally and as explained in greater detail

below, this rule does not narrow the longstanding

standard for distinguishing between FLSA

employees and independent contractors; employees

are economically dependent on another for work,

and independent contractors are in business for

themselves as matter of economic reality.

dependence turns on whether a worker

is in business for him- or herself

(independent contractor) or is

economically dependent on a potential

employer for work (employee);

•provisions at § 795.105(c) and (d)

describing factors examined as part of

the economic reality test, including two

‘‘core’’ factors—the nature and degree of

the worker’s control over the work and

the worker’s opportunity for profit or

loss—which typically carry greater

weight in the analysis, as well as three

other factors that may serve as

additional guideposts in the analysis;

•a provision at § 795.110 advising

that the parties’ actual practice is more

probative than what may be

contractually or theoretically possible;

•fact-specific examples at § 795.115;

and

•a severability provision at

§ 795.120.

The Department responds to

commenter feedback on the proposed

rule below.

A. The Purpose of Part 795

Proposed § 795.100 explained that the

interpretations in part 795 will guide

WHD’s enforcement of the FLSA and are

intended to be used by employers,

businesses, the public sector,

employees, workers, and courts to

assess employment status classifications

under the Act. See 85 FR 60638.

Proposed § 795.100 further clarified

that, if proposed part 795 is adopted,

employers may safely rely upon the

interpretations in part 795 under section

10 of the Portal-to-Portal Act, unless and

until any such interpretation ‘‘is

modified or rescinded or is determined

by judicial authority to be invalid or of

no legal effect.’’ Id. (quoting 29 U.S.C.

259).

Few commenters specifically

addressed proposed § 795.100, but

several discussed issues relevant to its

content. For example, a few commenters

questioned the Department’s legal

authority to promulgate any regulation

addressing independent contractor

status under the FLSA. See Northern

California Carpenters Regional Council

(‘‘At no time since the FLSA was passed

has Congress made substantive

amendments to the definitions of

employee, employer, or the ‘suffer or

permit to work’ standard . . . nor has it

directed any changes in the controlling

regulations.’’); Rep. Bobby Scott et al.

(‘‘Congress has not delegated

rulemaking authority to the DOL with

respect to the scope of the employment

relationship under the FLSA.’’). A few

commenters requested that the

Department explain its source of

rulemaking authority and the level of

deference it expects to receive from

courts interpreting its proposed

regulation. A diverse collection of

commenters, including the American

Trucking Association (ATA), the

National Home Delivery Association

(NHDA), the Northwest Workers Justice

Project (NWJP), and Winebrake &

Santillo, LLC, opined that the

Department’s proposed regulation

would be entitled to Skidmore

deference from courts, though these

commenters diverged on the proposed

rule’s ‘‘power to persuade.’’ Skidmore v.

Swift & Co., 323 US 134, 140 (1944).

Finally, the AFL–CIO asserted that

‘‘[t]he proposed rule is based on

considerations that did not motivate

Congress when it adopted the FLSA,

that the Department of Labor is not

authorized to consider in construing the

terms of the FLSA, and that the

Department has no expertise regarding,’’

thus placing the proposed rule ‘‘outside

the ‘limits of the delegation’ from

Congress to the Department contained

in the Act.’’ (quoting Chevron, U.S.A.,

Inc. v. NRDC, Inc., 467 U.S. 837, 865

(1984)).

The Department appreciates

commenter interest in these issues. The

Department without question has

relevant expertise in the area of what

constitutes an employment relationship

under the FLSA, given its responsibility

for administering and enforcing the

Act

14

and its decades of experience

doing so. The Department’s authority to

interpret the Act comes with its

authority to administer and enforce the

Act. See Herman v. Fabri-Centers of

Am., Inc., 308 F.3d 580, 592–93 (6th Cir.

2002) (noting that ‘‘[t]he Wage and Hour

Division of the Department of Labor was

created to administer the Act’’ while

agreeing with the Department’s

interpretation of one of the Act’s

provisions); Dufrene v. Browning-Ferris,

Inc., 207 F.3d 264, 267 (5th Cir. 2000)

(‘‘By granting the Secretary of Labor the

power to administer the FLSA, Congress

implicitly granted him the power to

interpret.’’); Condo v. Sysco Corp., 1

F.3d 599, 603 (7th Cir. 1993) (same).

The Department believes a clear

explanation of the test for whether a

worker is an employee under the FLSA

or an independent contractor not

entitled to the protections of the Act in

easily accessible regulatory text is

valuable to potential employers, to

workers, and to other stakeholders. It

has a long history of offering

interpretations in this area and believes

this rulemaking has great value

regardless of what deference courts

ultimately give to it.

While proposed § 795.100

emphasized that part 795 would state

the Department’s interpretation of

independent contractor status under the

FLSA, some commenters expressed

concern that it would affect the scope of

employment under other Federal laws.

The United Food and Commercial

Workers International Union (UFCW)

believed that the proposal may narrow

the coverage of the ‘‘Title VII of the Civil

Rights Act of 1964, Americans with

Disabilities Act, Age Discrimination in

Employment Act (ADEA), and the Equal

Pay Act.’’ See also National Women’s

Law Center (NWLC); CLASP. The

Department reaffirms that the rule

concerns the distinction between

employees and independent contractors

solely for the purposes of the FLSA, and

as such, would not affect the scope of

employment under other Federal

laws.

15

Many commenters requested that the

Department promulgate a standard more

broadly applicable across other state

and Federal employment laws. See, e.g.,

American Society of Travel Advisors,

Inc. (‘‘[The NPRM . . . represents

something of a missed opportunity

insofar as it fails to address the

longstanding difficulty associated with

the continued use of multiple tests at

the Federal level to determine worker

status.’’); Cambridge Investment

Research, Inc. (‘‘[W]ithout a more

encompassing Department position or

guidance addressing different state

standards, some of the current

uncertainty and unpredictability

remain.’’); Chun Fung Kevin Chiu

(‘‘[I]nconsistent Federal and state

standards with regards to classification

may render the DOL rules ineffective in

practice for those independent

contractors and businesses affected.’’).

While several commenters

acknowledged the Department’s lack of

authority to interpret the scope of laws

outside of its jurisdiction, the National

Association of Manufacturers and the

Mechanical Contractors Association of

America (MCAA) urged the Department

to collaborate with other Federal

agencies to harmonize the varying

employment definitions under Federal

law. Finally, the Zobrist Law Group

‘‘urge[d] the Department to prohibit

states from using classification tests that

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See, e.g., Pharm. Research & Mfrs. of Am. v.

FTC, 790 F.3d 198, 203 (D.C. Cir. 2015) (affirming

that agency had discretion to ‘‘proceeding

incrementally’’ in promulgating rules that were

directed to one industry but no others); Inv. Co.

Inst. v. Commodity Futures Trading Comm’n, 720

F.3d 370, 378 (D.C. 2013) (observing that ‘‘[n]othing

prohibits Federal agencies from moving in an

incremental manner’’ (quoting FCC v. Fox

Television Stations, Inc., 556 U.S. 502, 522 (2009));

City of Las Vegas v. Lujan, 891 F.2d 927,935 (D.C.

Cir. 1989) (noting that ‘‘agencies have great

discretion to treat a problem partially’’).

17

Similar to the MSPA regulation at 29 CFR

500.20(h)(4), a regulation promulgated by the

Department’s Veterans’ Employment & Training

Service (VETS) at 20 CFR 1002.44 articulates a six-

factor balancing test based on the tests used by

courts under the FLSA for determining whether an

individual is an employee or an independent

contractor under the Uniformed Services

Employment and Reemployment Rights Act

(USERRA). See 70 FR 75254 (‘‘The independent

contractor provision in this rule is based on

Congress’s intent that USERRA’s definition of

‘employee’ be interpreted in the same expansive

manner as the term is defined under the [FSLA].’’

(citing H.R. Rep. No. 103–65, Pt. I, at 29 (1993); S.

Rep. No. 103–58, at 40 (1993))). Consistent with this

rulemaking’s incremental focus of the FLSA

context, the Department declines to amend 20 CFR

1002.44 at this time.

conflict with the proposed rule,’’

asserting that ‘‘state law not preempted

by the FLSA is narrow’’ and that state

laws ‘‘shifting an independent

contractor under the FLSA to an

employee under state law . . . [impose]

greater obligations upon those workers.’’

But see Truckload Carriers Association

(‘‘TCA understands that, due to our

nation’s federalist system, individual

states such as California can pursue

misguided statues that are more

stringent than the Federal standard the

Department is seeking to clarify[.]’’).

While the Department appreciates the

desire to achieve uniformity across the

various state and Federal laws which

may govern work arrangements,

requests to modify definitions and tests

under different laws are outside the

scope of this rulemaking.

Some commenters supportive of the

proposed rule requested that the

Department make conforming edits to

its MSPA regulation at 29 CFR

500.20(h)(4), addressing whether or not

a farm labor contractor engaged by an

agricultural employer/association is an

independent contractor or an employee

under MSPA. See Americans for

Prosperity Foundation (AFPF) (‘‘To

further the Department’s goal of

clarification, simplification, and

consistency . . . the same criteria used

in the NPRM to define independent

contractors for purposes of the FLSA

also should apply to the MSPA, and to

any other provision that references the

FLSA.’’); Administrative Law Clinic at

the Antonin Scalia Law School (‘‘[T]he

Department should simply use its

proposed regulations in 29 CFR 795.100,

et seq., to determine employee status

under MSPA, and repeal [29 CFR

500.20(h)] as duplicative.’’). Relatedly,

Texas RioGrande Legal Aid (TRLA),

which expressed opposition to the

proposed rule, asserted that ‘‘the

proposed rule will lead to considerable

confusion among both employers and

workers . . . because the proposed rule

at odds with the Department’s [MSPA]

regulations,’’ but opined that any effort

to revise 29 CFR 500.20(h) ‘‘would be in

direct contravention of Congressional

directives regarding the interpretation of

the MSPA.’’

As noted in the NPRM preamble, the

Department acknowledges that MSPA

adopts by reference the FLSA’s

definition of ‘‘employ,’’ see 18 U.S.C.

1802(5), and that 29 CFR 500.20(h)(4)

considers ‘‘whether or not an

independent contractor or employment

relationship exists under the Fair Labor

Standards Act’’ to interpret independent

contractor status under MSPA. At this

time, however, the Department does not

see a compelling need to revise 29 CFR

500.20(h)(4), as we are unsure whether

application of the six factor economic

reality test described in that regulation

has resulted in confusion and

uncertainty in the more limited MSPA

context similar to that described in the

FLSA context. Importantly, the

regulatory standard for determining an

individual’s classification status under

MSPA is generally consistent with the

FLSA guidance finalized in this rule:

‘‘In determining if the farm labor

contractor or worker is an employee or

an independent contractor, the ultimate

question is the economic reality of the

relationship—whether there is

economic dependence upon the

agricultural employer/association or

farm labor contractor, as appropriate.’’

29 CFR 500.20(h)(4). Therefore, as

explained in the NPRM, the Department

prefers to proceed incrementally at this

time by leaving the MSPA regulation at

29 CFR 500.20(h)(4) unchanged.

16 17

The American Network of Community

Options and Resources (ANCOR)

expressed concern about the

Department’s statement in proposed

§ 795.100 that, if finalized, the proposed

rule ‘‘would contain the Department’s

sole and authoritative interpretation of

independent contractor status under the

FLSA,’’ fearing that the statement could

be interpreted to ‘‘render obsolete the

Department’s specific guidance on the

application of the FLSA to shared living

in Fact Sheet #79G and Administrator’s

Interpretation No. 2014–1.’’ The

Department disagrees with this

interpretation, noting that § 795.100

only rescinds earlier WHD guidance

addressing independent contractor

status under the FLSA ‘‘[t]o the extent

. . . [that such guidance is] inconsistent

or in conflict with the interpretations

stated in this part.’’ As explained in the

NPRM, the Department engaged in this

rulemaking to ‘‘clarify the existing

standard, not radically transform it,’’ 85

FR 60636, and none of the industry-

specific guidance in Administrator’s

Interpretation No. 2014–1 is

meaningfully affected by this final rule.

For similar reasons, we believe that the

assertion by the Nebraska Appleseed

Center for Law in the Public Interest

(Appleseed Center) that this rulemaking

will ‘‘rescind years of [Departmental]

guidance’’ is an overstatement. This rule

is premised on familiar FLSA concepts

that courts, employers, workers, and the

Department have applied for years

while providing updated and clearer

explanations of what the concepts mean

and how they are considered. Although

this rule will change the Department’s

analysis for classifying workers as

employees or independent contractors

in some respect, those changes do not

favor independent contractor

classification (i.e., the ultimate legal

outcome) relative to the status quo, but

rather offer greater clarity as to workers’

proper classifications.

B. Clarification That Independent

Contractors Are Not Employees Under

the Act

Proposed § 795.105(a) explained that

an independent contractor who renders

services to a person is not an employee

of that person under the FLSA, and that

the Act’s wage and hour requirements

do not apply with respect to a person’s

independent contractors. See 85 FR

60638–39. Proposed 795.105(a)

similarly explained that the

recordkeeping obligations for employers

under section 11 of the Act do not apply

to a person with respect to services

received from an independent

contractor. Id.

The vast majority of substantive

comments agreed with proposed

§ 795.105(a). One anonymous

commenter suggested that the

Department interpret the FLSA’s

minimum wage and overtime pay

requirements to apply to independent

contractors because the Act’s

‘‘declaration of policy’’ at 29 U.S.C. 202

‘‘suggests the purpose of the FLSA is to

protect workers.’’ The Department does

not adopt this interpretation because

Federal courts of appeals have

uniformly held, and the Department has

consistently maintained, that ‘‘FLSA

wage and hour requirements do not

apply to true independent contractors.’’

Karlson, 860 F.3d at 1092; see also, e.g.,

Parrish, 917 F.3d at 384; Saleem, 854

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The Department’s prior guidance has stated

that ‘‘an employee, as distinguished from a person

who is engaged in a business of his or her own, is

one who, as a matter of economic reality, follows

the usual path of an employee.’’ Fact Sheet #13; see

also WHD Opinion Letter FLSA–795 (Sept. 30,

1964). Upon consideration, however, the

Department believes that describing an employee as

someone who ‘‘follows the usual path of an

employee’’ is circular and unhelpful.

19

It is possible for a worker to be an employee

in one line of business and an independent

contractor in another.

F.3d at 139–40; Express Sixty-Minutes

Delivery, 161 F.3d at 305; see also

Portland Terminal, 330 U.S. at 152

(holding that the FLSA ‘‘was obviously

not intended to stamp all persons as

employees’’).

C. Adopting the Economic Reality Test

To Determine a Worker’s Employee or

Independent Contractor Status Under

the Act

Proposed § 795.105(b) would adopt

the economic reality test to determine a

worker’s status as an employee or an

independent contractor under the Act.

As the proposal explained, the inquiry

of whether an individual is an employee

or independent contractor under the Act

is whether, as a matter of economic

reality, the individual is economically

dependent on the potential employer for

work. See 85 FR 60611; see also Pilgrim

Equip., 527 F.2d at 1311 (‘‘It is

dependence that indicates employee

status.’’). The proposal and this final

rule provide further clarity as to the

economic reality test’s touchstone—

economic dependence.

The NPRM preamble explained that

clarifying the test requires putting the

question of economic dependence in the

proper context. ‘‘Economic dependence

is not conditioned reliance on an

alleged employer for one’s primary

source of income, for the necessities of

life.’’ Mr. W Fireworks, 814 F.2d at 1054.

Rather, courts have framed the question

as ‘‘ ‘whether, as a matter of economic

reality, the workers depend upon

someone else’s business for the

opportunity to render service or are in

business for themselves.’ ’’ Saleem, 854

F.3d at 139 (quoting Superior Care, 840

F.2d at 1059). This conception of

economic dependence comports with

the FLSA’s definition of employ as

‘‘includ[ing] to suffer or permit to

work.’’ See 29 U.S.C. 203(g). An

individual who depends on a potential

employer for work is able to work only

by the sufferance or permission of the

potential employer. Such an individual

is therefore an employee under the Act.

In contrast, an independent contractor

does not work at the sufferance or

permission of others because, as a

matter of economic reality, he or she is

in business for him- or herself. In other

words, an independent contractor is an

entrepreneur who works for him- or

herself, as opposed to for an employer.

18

The Department did not receive any

substantive comments disputing this

distinction between employee and

independent contractor classification

under the Act.

The Department observed in the

NPRM preamble that some courts have

relied on a worker’s entrepreneurship

with respect to one type of work to

conclude that the worker was also in

business for him- or herself in a second,

unrelated type of work. See, e.g.,

Parrish, 917 F.3d at 384 (considering

‘‘plaintiff’s enterprise, such as the goat

farm, as part of the overall analysis of

how dependent plaintiffs were on

[defendant]’’ for working as

consultants); Thibault, 612 F.3d at 849

(concluding that plaintiff was an

independent contractor as a cable

splicer in part because he managed

unrelated commercial operations and

properties in a different state). This

approach is inconsistent with the

Supreme Court’s instruction that the

economic reality analysis be limited to

‘‘the claimed independent operation.’’

Silk, 331 U.S. at 716. Thus, the relevant

question in this context is whether the

worker providing certain service to a

potential employer is an entrepreneur

‘‘in that line of business.’’ Mr. W

Fireworks, 814 F.2d at 1054. Otherwise,

businesses must make worker

classification decisions based on facts

outside the working relationship.

19

At bottom, the phrase ‘‘economic

dependence’’ may mean many different

things. But in the context of the

economic reality test, ‘‘economic

dependence’’ is best understood in

terms of what it is not. The phrase

excludes individuals who, as a matter of

economic reality, are in business for

themselves. Such individuals work for

themselves rather than at the sufferance

or permission of a potential employer,

see 29 U.S.C. 203(g), and thus are not

dependent on that potential employer

for work. Section 795.105(b) therefore

recognizes the principle that, as a matter

of economic reality, workers who are in

business for themselves with respect to

work being performed are independent

contractors for that work.

Many commenters supported the

Department’s decision to implement the

economic reality test applying the

above-described approach to economic

dependence. WPI applauded the

‘‘decision to retain the long-standing

economic reality test while sharpening

the factors used to apply that test.’’ The

NRF stated that the economic reality test

‘‘is the proper basis for distinguishing

independent contractors from

employees under the FLSA as

articulated by the U.S. Supreme Court.’’

ATA) found that the economic

dependence framework ‘‘comports with

a thoughtful reading of decades of court

precedent.’’ See also Americans for

Prosperity Foundation; Cetera Financial

Group; Center for Workplace

Compliance (‘‘DOL is correct to propose

using the economic dependence

standard for determining whether an

individual is an employee or

independent contractor’’).

The majority of commenters agreed

with the Department’s proposal to adopt

the economic reality test using the

above-mentioned definition of economic

dependence, including commenters that

were generally critical of the proposed

rule. For example, the State AGs

approvingly stated that ‘‘[f]or nearly

three-quarters of a century, the Supreme

Court has held that whether a worker is

a covered ‘‘employee’’ under the FLSA

is governed by the economic reality

test.’’ See also National Employment

Law Project (NELP); Signatory Wall and

Ceiling Contractors Alliance (SWACCA)

(recommending adopting an economic

reality test with a different number of

factors). While objecting commenters

challenged various aspects of the

proposed rule, they did not dispute the

sharpened explanation of the economic

dependence inquiry. Commenters, both

supportive and objecting, made a

number of thoughtful suggestions,

which are addressed below.

The Administrative Law Clinic at the

Antonin Scalia Law School suggested

further clarifying the test by adding

‘‘[a]n individual is not an ‘employee’

merely because he or she is

economically dependent in some way

on the potential employer.’’ Such

additional language may be redundant

in § 795.105(b) because that section

already articulates economic

dependence as dependence on a

potential employer for work, as opposed

to being in business for oneself. As

explained above, other forms of

dependence, such as dependence on

income or subsistence, do not count.

However, given how important it is to

apply the correct concept of economic

dependence, the Department believes

this point bears emphasis through a

concrete, fact-specific example in the

regulatory text. The Department is thus

adding an example in § 795.115 to

demonstrate that a different form of

dependence, i.e., dependence of income

or subsistence, is not a relevant

consideration in the economic reality

test.

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Consistent with WHD Opinion Letter

FLSA2019–6, the Department’s proposal did not

include the ‘‘independent business organization’’

factor mentioned in Fact Sheet #13. The opinion

letter explained that the ‘‘independent business

organization’’ factor was ‘‘[e]ncompassed within’’

the other factors. Because the ultimate inquiry of

the economic dependence test is whether workers

are ‘‘in business for themselves,’’ Saleem, 854 F.3d

at 139, analyzing the worker’s degree of

‘‘independent business organization’’ restates the

inquiry and adds little, if anything, to the analysis

that is not already covered by the other factors.

A number of individual commenters

who generally support this rule

requested that the Department allow

workers who voluntarily agree to be

independent contractors to be classified

as such, regardless of other facts. For

example, Farren and Mitchell urged the

Department to ‘‘allow the parties

themselves to explicitly define the

nature of their labor relationship,’’

asserting that such an approach would

respect worker autonomy, maximize

legal certainty, and promote greater

flexibility in work arrangements. This

requested approach would allow

voluntary agreements to supersede the

economic reality test in determining

classification as an employee or

independent contractor. The Supreme

Court, however, held in Tony & Susan

Alamo, 471 U.S. at 302, that the FLSA

must be ‘‘applied even to those who

would decline its protections.’’ In other

words, an individual may not waive

application of the Act through voluntary

agreement. See Barrentine v. Arkansas-

Best Freight Sys., Inc., 450 U.S. 728, 740

(1981) (‘‘FLSA rights cannot be abridged

by contract or otherwise waived,

because this would ‘nullify the

purposes’ of the statute and thwart the

legislative policies it was designed to

effectuate.’’) (quoting Brooklyn Savings

Bank v. O’Neil, 324 U.S. 697, 707

(1945)); Lauritzen, 835 F.2d at 1544–45

(‘‘The FLSA is designed to defeat rather

than implement contractual

arrangements. If employees voluntarily

contract to accept $2.00 per hour, the

agreement is ineffectual.’’) (Easterbrook

J., concurring). Because this request

would contradict this precedent by

allowing the possibility of workers who

are employees under the facts and law

to waive the FLSA’s protections by

classifying themselves as independent

contractors, the Department declines to

implement it in the final rule.

Some commenters, including the

Minnesota State Building &

Construction Trades Council, PJC, and

SWRCC, suggested that the rule include

a presumption of employee status. The

Supreme Court has said and the

Department agrees that this is a totality

of the circumstances analysis, based on

the facts. The Department thus declines

to create a presumption in favor of

employee status.

NELA, Farmworker Justice (FJ), and

several other commenters requested that

the Department abandon the economic

reality test in favor of the ABC test

adopted by the California Supreme

Court in Dynamex Operations West v.

Superior Court, 416 P.3d 1 (2018). By

contrast, other commenters, such as the

American Society of Travel Advisors

(ASTA) and National Federation of

Independent Business (NFIB), urged the

Department to adopt the common law

standard used to distinguish between

employees and independent contractors

under the Internal Revenue Code and

other Federal laws. These requests are

addressed in the discussion of

regulatory alternatives in Section VI,

which explains why the Department is

not adopting either the common law

control test or the ABC test for

employment under the FLSA.

For the reasons discussed above, the

Department adopts § 795.105(b) as

proposed to adopt the economic realty

test to determine whether an individual

is an employee or independent

contractor under the FLSA. Under that

test, an individual is an employee if he

or she is dependent on an employer for

work, and is an independent contractor

if that he or she is, as a matter of

economic reality, in business for him- or

herself.

D. Applying the Economic Reality

Factors To Determine a Worker’s

Independent Contractor or Employee

Status

Proposed § 795.105(c) explained that

certain nonexclusive economic reality

factors guide the determination of

whether an individual is, on one hand,

economically dependent on a potential

employer for work and therefore an

employee or, on the other hand, in

business for him- or herself and

therefore an independent contractor.

See 85 FR 60639. These factors were

listed in proposed § 795.105(d), based

on the factors currently used by the

Department and most Federal courts of

appeals, with certain proposed

reformulations. Id.

First, the Department proposed to

follow the Second Circuit’s approach of

analyzing the worker’s investment as

part of the opportunity factor. The

combined factor asked whether the

worker has an opportunity to earn

profits or incur losses based on his or

her exercise of initiative or management

of investments. See 85 FR 60613–15,

60639. Second, the Department

proposed to clarify that the ‘‘skill

required’’ factor originally articulated by

the Supreme Court should be used, as

opposed to the ‘‘skill and initiative’’

factor currently used in some circuits,

because considering initiative as part of

the skill factor creates unnecessary and

confusing overlaps with the control and

opportunity factors. See 85 FR 60615,

60639. Third, the Department proposed

to further reduce overlap by analyzing

the exclusivity of the relationship as a

part of the control factor only, as

opposed to both the control and

permanence factors. See 85 FR 60615–

16, 60639. Lastly, the Department

proposed to reframe the ‘‘whether the

service rendered is an integral part of

the alleged employer’s business’’ factor

in accordance with the Supreme Court’s

original inquiry in Rutherford Food, 331

U.S. at 729, of whether the work is ‘‘part

of an integrated unit of production.’’ See

85 FR 60616–18, 60639.

20

Proposed § 795.105(c) further aimed

to improve the certainty and

predictability of the test by focusing it

on two core factors: (1) The nature and

degree of the worker’s control over the

work; and (2) the worker’s opportunity

for profit or loss. The proposed rule

explained that if both proposed core

factors point towards the same

classification—whether employee or

independent contractor—there is a

substantial likelihood that that

classification is appropriate. See 85 FR

60618–20, 60639.

The following discussion addresses

commenter feedback on the five

proposed economic reality factors.

1. The ‘‘Nature and Degree of the

Individual’s Control Over the Work’’

Factor

The first core factor identified in the

proposed regulatory text was the

‘‘nature and degree of the individual’s

control over the work.’’ 85 FR 60639.

Proposed § 795.105(d)(1)(i) explained

that this factor ‘‘weighs towards the

individual being an independent

contractor to the extent the individual,

as opposed to the potential employer,

exercises substantial control over key

aspects of the performance of the work,

such as by setting his or her own

schedule, by selecting his or her

projects, and/or through the ability to

work for others, which might include

the potential employer’s competitors.’’

Proposed § 795.105(d)(1)(i) further

explained that, in contrast, this factor

‘‘weighs in favor of the individual being

an employee under the Act to the extent

the potential employer, as opposed to

the individual, exercises substantial

control over key aspects of the

performance of the work, such as by

controlling the individual’s schedule or

workload and/or by directly or

indirectly requiring the individual to

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As Mr. Reibstein acknowledged, the proposed

regulatory text beyond the title of the control

section was written in a ‘‘neutral’’ manner. The

final regulatory text is written in a similarly neutral

manner.

work exclusively for the potential

employer.’’ In addition, the proposal

stated that the following actions by the

potential employer ‘‘do[ ] not

constitute control that makes the

individual more or less likely to be an

employee under the Act’’: ‘‘[r]equiring

the individual to comply with specific

legal obligations, satisfy health and

safety standards, carry insurance, meet

contractually agreed-upon deadlines or

quality control standards, or satisfy

other similar terms that are typical of

contractual relationships between

businesses (as opposed to employment

relationships).’’ Numerous commenters

requested changes to the proposed

control section regarding (1) the

perspective from which control is

framed; (2) the examples of control that

are relevant to the economic

dependence inquiry; and (3) examples

of control that are not.

a. Responses to Requests Regarding the

Framing of Control

Some commenters asserted that the

control factor should focus on the

potential employer’s substantial control

over the worker instead of the worker’s

substantial control over the work. For

example, the State AGs said that the

‘‘proposed control factor incorrectly

focuses on the worker’s control over the

work’’ and that ‘‘[w]ell-established

precedent makes clear that the proper

focus is the employer’s control over the

worker.’’ According to NELA, ‘‘the

control analysis has historically been,

and should continue to be, on the

control that the employer has over the

employee, not that the employee has

over their work.’’ NELA added that the

Department ‘‘cannot deny that its

proposal casts the control inquiry

differently than the Supreme Court,

courts of appeals, and the Department

have in the past.’’ And the United

Brotherhood of Carpenters and Joiners

of America stated that the proposal’s

‘‘focus on the individual’s control over

the work turns the ‘suffer or permit’

standard on its head’’ because that

standard ‘‘references the purported

employer’s behavior—not the worker’s.’’

See also Northern California Carpenters

Regional Council (noting that ‘‘[b]ecause

the ‘nature and degree of the

individual’s control over the work’ . . .

focuses on the individual’s control, as

opposed to the employer’s control, the

factor skews towards most skilled

tradespeople being classified as

independent cont[r]actors’’). Relatedly,

attorney Richard Reibstein suggested

that the title of the control subsection

‘‘be re-drafted in a manner that does not

suggest it favors independent contractor

status because the remaining text

regarding [the control factor] is neutral.’’

Mr. Reibstein suggested that the title be

changed from the ‘‘nature and degree of

the individual’s control over the work’’

to the ‘‘nature and degree of each party’s

control over the work.’’ Finally, WPI

expected that some commenters would

object to the Department’s proposed

articulation of the control factor, and it

supported the Department’s approach

by saying that ‘‘the economic reality test

focuses on the individual—whether the

individual is economically dependent

on another business or in business for

him or herself,’’ and that, ‘‘[t]hus, the

focus of each factor should also be on

the economic realities of the individual,

not the businesses with which [he or

she] contracts.’’ See also CPIE

(supporting ‘‘the NPRM’s articulation of

this factor’’).

Notwithstanding differing commenter

preferences over the primary

articulation of the control factor, the

proposed (and final) regulatory text at

§ 795.105(d)(1)(i) discusses both the

individual worker’s control and the

potential employer’s control.

21

This

approach is consistent with that of

courts, which also generally consider

both the individual’s control and the

potential employer’s control. See, e.g.,

Razak, 951 F.3d at 142; Hobbs, 946 F.3d

at 829; Saleem, 854 F.3d at 144–45;

Karlson, 860 F.3d at 1096. The

Department explained in the NPRM

preamble that whether the control factor

is articulated with reference to the

individual worker’s control or the

potential employer’s control is a

‘‘distinction . . . of no consequence,’’

and that both ‘‘the nature and degree of

control over the work by the worker and

by the potential employer are

considered to determine whether

control indicates employee or

independent contractor status.’’ 85 FR

60612 n.34. The Department reaffirms

that statement now and reiterates that

both the worker’s control and the

potential employer’s control should be

considered. To remove any ambiguity

on this point, the Department has

modified the title of subsection

795.105(d)(1)(i) to ‘‘[t]he nature and

degree of control over the work,’’

removing the proposed rule’s reference

to ‘‘the individual’s control over the

work.’’ This revised articulation is

closer to the Supreme Court’s

description of the economic reality test’s

control factor in Silk, 331 U.S. at 716

(‘‘degrees of control’’), which does not

indicate a focus on either the individual

worker or the potential employer.

Mr. Reibstein also suggested that the

control factor ‘‘should be drafted in a

manner that focuses attention on the key

to control, which is control over the

manner and means by which the work

in question is performed.’’ He asserted

that, as proposed, the control section ‘‘is

ambiguous at best and may be

misleading at worst,’’ and suggested that

‘‘control over the work’’ should be

changed to ‘‘control over the

performance of the work, particularly

how the work is to be performed.’’ The

Department, however, prefers to retain

the ‘‘control over the work’’ articulation.

It is purposefully broad to encompass

various different types of control that

the individual worker and the potential

employer may exercise over the working

relationship. Moreover, the Department

agrees that who controls the manner and

means by which the work is performed

is a key component of the control

analysis, and the Department believes

that both the proposed and final

regulatory text reflect the importance of

the manner and means by which the

work is performed.

b. Responses to Comments Regarding

Examples of Relevant Control

A number of comments addressed the

proposed regulatory text’s three non-

exhaustive examples of control that may

indicate employee or independent

contractor status, which were setting

schedules, selecting projects, and

working exclusively for the employer or

working for others.

Several commenters sought

clarification that these examples may

not always be probative of an

employment or independent contracting

relationship. For instance, NRF stated

‘‘there may be limits on schedules that

are consistent with business

relationships that should not be treated

as impacting the analysis,’’ such as

delivery workers who can deliver only

during the restaurant’s operating hours

and a retailer that arranges for after-

hours cleaning services. The

Department agrees that there are

examples of impacts on a workers

schedule that are not probative of the

type of control that indicates economic

dependence and that NRF has identified

two such examples by pointing to the

fact that a delivery worker can deliver

for a restaurant only when the

restaurant is open and a cleaning worker

can clean a retailer only when it is

closed. But the Department does not

think any change to the regulatory text

is warranted to clarify this point, as the

regulatory text merely provides a few

examples of facets of control that may—

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The Department received related feedback from

commenters asking for proposed §795.110 to

discount the relevance of voluntary worker

practices (e.g., choosing to work exclusively for one

business, declining to negotiate prices, etc.); as

explained in greater detail in Section IV(F), coercive

behavior by a potential employer (e.g., vigilant

enforcement of a non-compete clause, punishing

workers for turning down available work, etc.)

constitutes stronger evidence of employment status

than such voluntary worker practices, but is not a

prerequisite for such worker practices to have

import under the FLSA’s economic reality test.

or may not—be probative in any given

case depending on the facts. NHDA

sought clarification of the working for

others example because, in its view, ‘‘it

is not enough for the individual to claim

he/she never turned down projects or

never worked for others. Rather, the

individual must demonstrate some

action, implementation, or execution (in

other words, act or conduct) by the

potential employer that prevented the

individual from turning down projects

or working for others.’’ In response, the

Department notes its statement in the

NPRM preamble that ‘‘a potential

employer may exercise substantial

control, for example, where it explicitly

requires an exclusive working

relationship or where it imposes

restrictions that effectively prevent an

individual from working with others.’’

85 FR 60613 (citing cases where the

employer’s schedule made it

‘‘impossible’’ or ‘‘practically

impossible’’ for the worker to work for

others). Where a worker could work for

others, meaning the potential employer

is not explicitly or effectively

preventing the worker from doing so,

the worker retains control over this

aspect of his or her work. That he or she

exercises this control by choosing to

work only for one potential employer

does not necessarily shift the control to

the potential employer. Further, the

parties’ actions, including whether the

potential employer enforced an explicit

bar on working for others or has

imposed working conditions that make

doing so impracticable, are stronger

evidence of control than contractual or

theoretical ability or inability to control

this aspect of the working

relationship.

22

Some commenters interpreted the few

examples of control in the proposal as

an effort to limit the types of control

that may be considered. For example,

Farmworker Justice stated that the

proposal ‘‘improperly and erroneously

tries to narrow the relevant

considerations for the [control] factor.’’

According to Edward Tuddenham, the

proposal ‘‘lists some ‘key’ elements of

control that . . . may have little or no

significance whatsoever’’ and ‘‘[s]uch a

rigid approach to the question of control

can only wreak havoc with the

established common law of FLSA

employer/employee relationships.’’

However, the examples of types of

control identified in the proposal were

not an attempt to narrow or limit the

control factor analysis. The Department

cannot provide an exhaustive list of

types of control and so instead focused

on several key examples of types of

control. Any type of control over the

work by the individual worker or the

potential employer may be considered.

Such considerations should not be

‘‘mechanical,’’ Saleem, 854 F.3d at 140,

and instead must focus on whether the

control exercised by either the

individual or the potential employer

answers the ultimate inquiry of

‘‘whether the individual is, as a matter

of economic reality, in business for

himself,’’ as opposed to being

economically dependent on the

potential employer for work. In any

event, as explained below, the

Department is clarifying types of control

that may be relevant to the analysis.

Numerous other commenters

suggested the addition of dozens of

examples of types of control that

indicate employee or independent

contractor status. For example, WPI

suggested that the following types of

control by the individual worker are

indicative of independent contractor

status: Controlling whether to work at

all; controlling the location of where to

perform the work; controlling how the

work is performed; setting prices or

choosing between work opportunities

based on prices; and hiring employees

or engaging subcontractors. It suggested,

conversely, that the following types of

control by the potential employer are

indicative of employee status: Requiring

the individual worker to comply with

company specific procedures regarding

how the work is performed; requiring a

set schedule or minimum hours;

controlling when the individual can

take meal and rest breaks; and

controlling when the individual can

take time off. CWI recommended

addition of the following as examples of

the individual worker’s control over the

work that are indicative of independent

contractor status: The worker’s ability to

make decisions with respect to the

details of how the work is performed,

including the staging and sequencing of

aspects of the work; the worker’s

selection of supplies, tools, or

equipment to be used (or not used) by

the worker; the worker’s control over

when the work is conducted (e.g.,

worker flexibility in start and end times)

where flexibility exists in the result to

be accomplished or the time periods

available to a worker to offer their

services; the worker’s control over

where certain aspects of the services can

be performed where the subparts do not

change the results provided by the

worker; and the worker’s discretion to

use the services of others to perform the

work in whole or in part, or to support

the worker’s performance of services

(including performing some of the

contracted work and/or performing

supporting services such as accounting,

legal, administrative, or financial

services to support the worker or

services to support equipment or tools

used by the worker to perform services).

UPS stated that the proposal ‘‘fails to

provide examples beyond controlling

the worker’s schedule or workload and

restricting the worker’s ability to work

with other entities,’’ and that ‘‘courts

have properly widened the lens when

assessing control, looking at factors such

as background checks, authority to hire

and fire, training, advertising, licensing,

uniforms, monitoring, supervision,

evaluation, and discipline.’’

Farmworker Justice commented that the

proposal did ‘‘not acknowledge other

examples of employer control that

unquestionably shape a worker’s

experience and performance of daily

tasks’’ and provided as examples

‘‘[r]equirements about how a worker

must dress, what language or tone she

may use in a professional setting, or

what prices she must charge

customers.’’ Likewise, Sen. Sherrod

Brown and 22 other senators

commented that the proposal ‘‘ignore[s]

other critical matters of control that an

employer typically exercises or retains

the right to, including setting the rate of

pay and the manner in which the work

must be performed and disciplining

workers who do not meet their

standards.’’ And Human Rights Watch

commented that the proposed control

factor ‘‘potentially omits other ways that

gig companies control their workers,

such as the ways in which they

unilaterally change the formula for

calculating base earnings, the setting of

default tip options, and restrictions on

the range of assignments that are offered

to workers at a specific time or in a

specific locale.’’ Other commenters

provided various industry-specific

examples that they viewed as indicative

of control by the individual worker or

the potential employer.

The Department has considered the

various comments regarding additional

examples of types of control that can be

indicative of employee or independent

contractor status and declines to make

changes to the proposed regulatory text

in response. While this preamble and

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See 85 FR 60612 n.35 (citing Parrish, 917 F.3d

at 382; Express Sixty-Minutes Delivery, 161 F.3d at

303).

24

See id. (citing Thibault, 612 F.3d at 847).

25

See 85 FR 60612–13 (citing Mid-Atl.

Installation, 16 F. App’x at 106).

the regulatory test cannot (and should

not) address each and every potential

scenario and example, they clarify and

articulate principles related to the

control factor that can be applied to an

array of fact patterns as they arise.

As an initial matter, a number of

commenters’ examples fall within the

general categories of control already

identified in the regulatory text. For

example, the worker’s controlling

whether to work at all, controlling when

the work is conducted, and choosing

between work opportunities based on

prices are all examples of the worker’s

setting his or her schedule or selecting

his or her projects, which the regulatory

text identifies as examples of the

worker’s control over the work.

Similarly, the potential employer’s

requiring a set schedule or minimum

hours, controlling when the individual

can take meal and rest breaks,

controlling when the individual can

take time off, and restricting the range

of assignments that are offered to the

worker are all examples of the potential

employer’s control over the worker’s

schedule, workload, or both, which the

regulatory text identifies as examples of

the potential employer’s control over

the work.

Moreover, as explained in the NPRM

preamble, the Department is concerned

that application of the economic reality

factors has resulted in certain overlaps

between the factors. See 85 FR 60607–

08 (identifying ways in which the

former skill/initiative, permanence, and

‘‘integral’’ factors considered control).

Consistent with that discussion and in

the interest of further clarification, the

Department reiterates that the worker’s

ability to exercise significant initiative,

whether the potential employer directly

or indirectly requires the worker to

work exclusively for it, and the

potential employer’s ability to compel

the worker’s attendance to work on a

consistent basis or otherwise closely

supervise and manage performance of

the work are examples of relevant types

of control and are part of the control

analysis. And as stated above, the

Department agrees that who controls the

manner and means by which the work

is performed is a key component of the

control analysis. In addition, the

Department approvingly cited in the

NPRM preamble cases in which the

workers’ ability to accept or reject

projects or deliveries without negative

repercussions or retaliation,

23

the

potential employer’s lack of close

supervision or specifications how the

workers should do the work,

24

and the

potential employer’s allowing the

workers broad discretion in the manner

in which to complete their work

25

indicated substantial control over the

work by the workers. Finally, the

Department agrees that the various

examples of types of control identified

by the commenters above may, at least

in some factual circumstances, be

relevant to the control analysis.

Ultimately, however, it is not

possible—and would be

counterproductive—to identify in the

regulatory text every type of control

(especially industry-specific types of

control) that can be relevant when

determining under the FLSA whether a

worker is an employee or independent

contractor. As explained above, the

Department purposefully articulated the

control analysis in a general manner to

encompass various different types of

control that the individual worker and

the potential employer may exercise

over the working relationship, and to

avoid any unintended inferences

regarding omitted types of control.

Accordingly, any type of control over

the work by the individual worker or

the potential employer may be

considered, although some types of

control are not probative of economic

dependence as set forth in the final

regulatory text (and discussed below).

The Owner-Operator Independent

Drivers Association (OOIDA) objected

that the proposal ‘‘offers no guidance on

how’’ the examples of types of control

‘‘should be weighed against each other’’

and asked whether the Department

intends ‘‘that a worker must satisfy all

of the criteria that it mentions in order

to be an independent contractor,’’ or if

there is ‘‘some other balance when

evaluating this factor.’’ OOIDA noted

that although the proposal stated that no

single factor of the economic reality test

is dispositive, ‘‘it does not offer the

same clarification when considering the

details within a single factor.’’ As

explained above, any type of control

over the work by the individual worker

or the potential employer may be

considered to the extent it is probative

as to whether the individual is, as a

matter of economic reality, in business

for himself, as opposed to being

economically dependent on the

potential employer for work. No single

example of control, if present or not

present, is necessarily dispositive as to

whether the control factor indicates

economic dependence. The examples

are simply that: Examples.

c. Responses to Comments Regarding

Examples of Requirements That Are Not

Probative

Despite the final rule’s broad

articulation of the control factor, not

every requirement or limitation on the

means of doing business constitutes

control for the purpose of analyzing

whether a worker is an employee under

the FLSA. The proposed regulatory text

contained examples of requirements by

a potential employer that do not

constitute control and thus are not

probative to the ultimate inquiry of

whether the individual is, as a matter of

economic reality, in business for

himself. These are requirements to

‘‘comply with specific legal obligations,

satisfy health and safety standards, carry

insurance, meet contractually agreed-

upon deadlines or quality control

standards, or satisfy other similar terms

that are typical of contractual

relationships between businesses (as

opposed to employment relationships).’’

In other words, insisting on adherence

to certain rules to which the worker is

already legally bound would not make

the worker more or less likely to be an

employee.

NELA challenged the Department’s

‘‘claims that case law supports this

approach’’ and asserted that ‘‘[t]he

majority view among courts . . . is that

evidence of a business compelling its

workers to comply with certain legal

obligations or customer requirements is

probative of control over the work

relationship’’ (citing Scantland v. Jeffry

Knight, Inc., 721 F.3d 1308, 1316 (11th

Cir. 2013), among other cases). NELA

added that ‘‘[c]ourts have routinely held

that employer guidelines put in place to

ensure that workers conform with the

law or follow safety regulations

constitute control over employees’’

(citing Narayan v. EGL, Inc., 616 F.3d

895, 902 (9th Cir. 2010), among other

cases). The National Women’s Law

Center similarly stated that ‘‘courts have

regularly rejected arguments that

external requirements imposed by the

defendant company’s customers are

irrelevant to the right to control factor’’

(citing cases). NELP asserted that the

Department’s ‘‘attempts to take away

consideration of certain employer

controls based on the source of the

control’’ is ‘‘nonsense’’ because ‘‘if

legislators or regulators have placed an

obligation on employers to comply with

certain laws, that makes the worker less

independent and more dependent on

that employer, and this should be

accorded weight.’’ AFL–CIO commented

that the ‘‘categorical exclusion of

evidence of control based solely on the

reasons why the employer exercises the

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The court also relied on the employers’ close

supervision, control over schedules, and ability to

prevent technicians from hiring helpers or working

for others to conclude that the control factors

weighed in favor of employee classification.

Scantland, 721 F.3d at 1314–15.

27

In Narayan, the Ninth Circuit applied

California law—not the FLSA—and merely recited

requirements imposed by the potential employer to

comply with certain legal obligations among a

litany of examples of control that precluded

summary judgment on the employee versus

independent contractor issue in that case. See 616

F.3d at 900–02.

control is both irrational and contrary to

Supreme Court precedent and Congress’

intent.’’ And the United Brotherhood of

Carpenters and Joiners of America

asserted that the Department’s proposal

would ‘‘create[ ] a gaping hole that is

fertile ground for exploitation by

irresponsible employers like the ones

we find in the construction industry.’’

On the other hand, the Coalition to

Promote Independent Entrepreneurs

‘‘strongly agree[d]’’ with this proposal

and ‘‘agree[d] that these types of

requirements frequently apply to work

performed by employees and

independent contractors alike and thus

are not probative of whether an

individual is economically dependent

on a company.’’ In addition, NRF

asserted that ‘‘this clarification is

important, as there is a difference

between ‘control’ and ‘quality control’

and/or other performance standards.’’

And the Independent Bakers

Association ‘‘strongly support[ed] the

proposed clarification that requiring an

individual to comply with specific legal

obligations typical of business

relationships would not constitute

evidence of control or make an

individual more or less likely to be an

employee.’’ See also SHRM

(‘‘support[ing] the [p]roposed . . .

recognition that contracting parties

should be able to build compliance

with, for example, specific legal

obligations, satisfy health and safety

standards, and the carrying of insurance

into the contractual relationship’’).

The Department understands that

some courts have found requirements

that workers comply with specific legal

obligations or meet quality control

standards to be indicative of employee

status. In particular, the Eleventh

Circuit in Scantland stated that it

examines ‘‘the nature and degree of the

alleged employer’s control, not why the

alleged employer exercised such

control’’ and that ‘‘a company must hire

employees, not independent

contractors’’ if ‘‘the nature of [its]

business requires [the] company to exert

control over workers to the extent that

[the defendant] has allegedly done.’’ 721

F.3d at 1316. The Scantland court

correctly recognized that the ultimate

inquiry in the economic reality test is

‘‘whether an individual is in business

for himself or is dependent upon

finding employment in the business of

others.’’ 721 F.3d at 1312 (quotation

marks omitted). But to answer that

question it is necessary to consider

‘‘why’’ the potential employer imposed

a requirement. If the reason for a

requirement applies equally to

individuals who are in business for

themselves and those who are

employees, imposing the requirement is

not probative. See Parrish, 917 F.3d at

379 (‘‘although requiring safety training

and drug testing is an exercise of control

in the most basic sense of the word, . . .

[r]equiring . . . safety training and drug

testing, when working at an oil-drilling

site, is not the type of control that

counsels in favor of employee status.’’).

The Scantland court’s discussion of

the control factor included the fact that

‘‘[t]echnicians could also be . . . fired,

for consistently misbilling, fraudulently

billing, stealing, . . . [and] having

consistently low quality control ratings’’

as evidence that the control factor

weighed in favored employee

classification. 721 F.3d at 1314 (11th

Cir. 2013).

26

However, employees and

independent contractors alike are

routinely terminated for fraud, theft,

and substandard work. Such dismissal

are therefore not probative as to whether

and the dismissed workers were in

business for themselves, as opposed to

being economically dependent on the

potential employer. In contrast,

dismissals for failing to work mandatory

hours or for disregarding close

supervision would be probative because

mandatory hours and close supervision

are typically not imposed on

individuals who are in business for

themselves. At bottom, the question of

‘‘why’’ workers were dismissed matters

a great deal.

In any event, Scantland’s reasoning

appears to be in the minority among

courts of appeals.

27

As explained in the

NPRM preamble, other courts have

concluded that requiring such types of

compliance is not probative of an

employment relationship. See, e.g.,

Parrish 917 F.3d at 379; Iontchev v.

AAA Cab Serv., Inc., 685 F. App’x 548,

550 (9th Cir. 2017) (noting that the

potential employer’s ‘‘disciplinary

policy primarily enforced the Airport’s

rules and [the city’s] regulations

governing the [drivers’] operations and

conduct’’ in finding that the potential

employer ‘‘had relatively little control

over the manner in which the [d]rivers

performed their work’’); Mid-Atl.

Installation, 16 F. App’x at 106

(rejecting an argument that backcharging

the workers ‘‘for failing to comply with

various local regulations or with

technical specifications demonstrates

the type of control characteristic of an

employment relationship,’’ and noting

that withholding money in such

circumstances is common in contractual

relationships); cf. Mr. W Fireworks, 814

F.2d at 1048 (finding that, because a

scheduling requirement was imposed by

the potential employer and not by state

law, it suggested control over the

workers). And courts have reached

analogous conclusions in joint employer

cases. See, e.g., Zheng v. Liberty Apparel

Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003)

(finding that control with respect to

‘‘contractual warranties of quality and

time of delivery has no bearing on the

joint employment inquiry’’ because

such control is ‘‘perfectly consistent

with a typical, legitimate subcontracting

relationship’’); Moreau v. Air France,

356 F.3d 942, 950–51 (9th Cir. 2003)

(noting that control exercised by

potential joint employer over

contractor’s employees to ‘‘ensure

compliance with various safety and

security regulations’’ is ‘‘qualitatively

different’’ from control that indicates

employer status).

In addition to the supportive case law,

the extent to which courts take differing

approaches to the probative value of

such requirements is yet another

example of the need identified by the

Department for a clear and uniform

standard under the FLSA to distinguish

between employees and independent

contractors. Moreover, the Department

believes that these types of requirements

are generally imposed by employers on

both employees and independent

contractors (as some commenters

indicated). Employers expect and often

require all of their workers to, for

example, comply with the law, satisfy

health and safety standards, and meet

deadlines and quality standards. Thus,

the existence of the requirements

themselves are not probative of whether

the worker is an employee or

independent contractor. Other indicia of

control over the work, including the

indicia of control identified in the final

regulatory text, are more probative of

the worker’s economic dependence or

independence. Accordingly, the

Department retains in the final

regulatory text’s statement that

requirements by the potential employer

that the worker ‘‘comply with specific

legal obligations, satisfy health and

safety standards, carry insurance, meet

contractually agreed-upon deadlines or

quality control standards, or satisfy

other similar terms that are typical of

contractual relationships between

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The Department’s Joint Employer final rule was

mostly vacated by the U.S. District Court for the

Southern District of New York for reasons unrelated

to the ‘‘specific legal obligations’’ language. See

New York v. Scalia, No. 1:20–cv–1689–GHW, 2020

WL 5370871 (S.D.N.Y. Sept. 8, 2020). The

Department appealed the decision to the U.S. Court

of Appeals for the Second Circuit on November 6,

2020.

29

In a separate section of its comment, Seyfarth

Shaw recommended that the Department state that

the following are not evidence of a potential

employer’s control over the work of the worker: The

business provides information regarding the final

result to be accomplished by the worker; the

business provides customer specifications/details

and feedback relating to the work (including

requesting confirmation that the customer feedback

has been addressed); the business provides time

frames within which services can be provided in

light of the services contracted for, and/or the time

sensitivity or perishable nature of the services/

products; the business’ right to enforce contractual

obligations; the business provides the worker

suggestions, recommendations, guidance, and/or

tips that are not mandated but informational

relating to the services; and the business pays the

worker by the hour where it is customary in the

particular business/trade to do so (e.g., attorneys,

physical trainers).

businesses (as opposed to employment

relationships)’’ are not ‘‘control that

makes the individual more or less likely

to be an employee under the Act.’’

Although the ATA ‘‘strongly agrees’’

with the Department’s proposal that

requirements by the potential employer

that the worker ‘‘comply with specific

legal obligations’’ would not be ‘‘control

that makes the individual more or less

likely to be an employee under the Act,’’

it suggested that ‘‘specific’’ be changed

to ‘‘any’’ in the final regulatory text.

ATA explained that referring to

‘‘specific’’ legal obligations ‘‘may

unfortunately result in a great deal of

litigation over whether any particular

aspect of a contract is ‘specifically’

mandated by law.’’ It cited, as examples,

laws that impose general safety

standards with which employers

determine the specifics of how to

comply. See also NHDA (‘‘The proposal

carves out compliance with specific

legal obligations. However, not all legal

obligations are specific, making other

language in the proposal unnecessarily

problematic.’’).

After careful consideration, the

Department declines to adopt the

suggested change. As an initial matter,

the Department used the ‘‘specific legal

obligations’’ language in its recent Joint

Employer Status under the Fair Labor

Standards Act final rule. See 85 FR 2859

(finalizing 29 CFR 791.2(d)(3)).

28

The

Department noted there that the

obligations include compliance with the

FLSA or other similar laws, sexual

harassment policies, background

checks, or workplace safety practices

and protocols. See id. The Department

did not intend a high degree of

specificity there and intends the same

meaning here. Moreover, a potential

employer’s requirement that a worker

comply with legal obligations without

any further specificity as to the law or

the actual obligations is unlikely to be

probative of control in the first place.

Accordingly, retaining the word

‘‘specific’’ is consistent with the

Department’s position that, although

requiring workers to comply with legal

obligations could be some manner of

control, such requirements reflect the

applicable legal regime more than the

potential employer’s control, and

encouraging such requirements in

contractual work relationships has

obvious benefits for employers, workers,

and society generally.

Other commenters expressed support

for the Department’s proposal to carve

out from the control analysis the

identified employer actions toward

individual workers, but also requested

that the Department expand its proposal

by identifying many additional

employer requirements as not types of

control that make the individual more

or less likely to be an employee under

the Act. For example, SHRM asserted

that ‘‘the Final Rule must emphasize

that all workers, regardless of their

formal employment status, should be

able to benefit from the training,

resources, and positive workplace

practices as those who are directly

employed in the same workplace,’’ and

it gave examples of workplace trainings

and audit measures. The U.S. Chamber

of Commerce stated that the Department

‘‘should expand this concept’’ and

‘‘explicitly state that workers and

businesses should not be discouraged

from incorporating terms (and audit and

other certification processes) into their

relationship that support sound, lawful,

safe work practices.’’ It suggested the

following examples of such terms:

‘‘Incorporation of an obligation that the

work be performed pursuant to

acceptable professional, industry and

customer service standards, as well as

commonly accepted safety, ethics,

licensure and other standards and

recommendations (such as compliance

with limitations or control imposed or

necessitated by law, regulation, order or

ordinance).’’ See also Seyfarth Shaw

(requesting that the following employer

actions toward workers be excluded

from the control analysis: ‘‘(1)

compliance with professional

obligations and ethics standards; (2)

compliance with regulatory obligations,

including over health and safety; (3)

compliance with other published

industry standards; (4) compliance with

applicable local, state, and national

licensure standards and rules; and (5)

additional contractual term examples of

agreed upon results and deadlines’’);

29

WPI (asserting that the potential

employer’s practice or ability to do the

following are not probative: Requiring

the individual to comply with or pass

down contractual and legal obligations

to subcontractors and employees;

requiring the individual to comply with

customer requirements; tracking and

monitoring data related to the

individual; providing the individual

with market data on pricing;

establishing default pricing that the

individual may change; providing the

individual with information related to

the establishment or running of a

business; providing the individual with

emergency assistance (e.g., protective

equipment during a public-health

crisis); and complying with Federal,

state or locals laws related to a

contracting relationship). Likewise, the

Financial Services Institute requested

that the Department carve out from the

control analysis requirements that

‘‘Independent Broker-Dealers’’ (IBDs)

place on their ‘‘financial advisors’’ to

‘‘comply with requirements imposed by

FINRA, the SEC, and state securities

regulators’’ and exclusivity

requirements that IBDs place on their

financial advisors to comply with ‘‘the

extensive supervisory obligations

imposed by the SEC and FINRA.’’

OOIDA also expressed concerns about

exclusivity requirements and sought

clarification that a potential employer’s

compliance with ‘‘Federal regulations

requir[ing] that an owner-operator

lease[ ] his or her equipment exclusively

to a carrier for the duration of the lease’’

not affect the control analysis. Finally,

CPIE asked the Department to ‘‘make

clear that duties or requirements

imposed by any third party, whether it

be a government agency or a third-party

customer, . . . be disregarded’’ when

applying the control factor. See also

NHDA (‘‘[C]ontrol weighing in favor of

employee status should be control

exercised by the potential employer that

originates with the potential employer

and does not originate from outside,

independent forces or circumstances,

such as customer requirements or

governmental regulations.’’).

The Department does not agree with

CPIE that any requirement stemming

from ‘‘duties or requirements imposed

by any third party’’ be ‘‘disregarded’’ or

with NHDA that only control ‘‘that

originates with the potential employer’’

can indicate employee status. This is

because a third party may explicitly or

impliedly encourage businesses to

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Uber requested that the Department clarify that

background checks are not an indicia of control:

‘‘Where a business is required by law to engage in

certain activities (such as screening potential

workers for violent crime history), the Department

should make clear that this required screening is

not an indicia of control.’’ However, requiring a

worker to undergo and pass a background check

when the law requires it falls in the ‘‘comply with

specific legal obligations’’ category. No further

clarification is necessary.

impose requirements on workers that

signify employee classification. For

example, clients of a home cleaning

company may prefer that the company’s

workers wear uniforms, use the same

equipment, and be closely supervised.

Imposing such requirements, even to

satisfy client preferences, makes the

workers more likely to be classified as

employees because those requirements

are inconsistent with the workers being

in business for themselves. A company

may also require that workers it hires

perform timely and high-quality work,

as clients surely prefer. But

contractually agreed-upon deadlines

and quality standards do not signify

employee classification because

independent businesses routinely agree

to meet deadlines and quality standards

as part of their businesses.

In response to comments requesting

that the Department identify many

additional employer requirements as not

types of control that make the

individual more or less likely to be an

employee under the Act, the

Department declines to change its

proposed regulatory text. As an initial

matter, many of the requested additions

are already covered by the proposed

text. For example, the following

requested additions are requirements to

‘‘comply with specific legal obligations’’

and thus already covered: Requirements

to comply with limitations or control

imposed or necessitated by law,

regulation, order, or ordinance;

regulatory obligations; Federal, state, or

local laws related to a contracting

relationship; requirements imposed by

FINRA, the SEC, and state securities

regulators; and Federal regulations

requiring that an owner-operator lease

his or her equipment exclusively to a

carrier for the duration of the lease.

30

Other requested additions may fall into

the ‘‘satisfy health and safety standards’’

category (for example: Requiring that

the work be performed pursuant to

commonly accepted safety standards;

and providing the individual emergency

assistance such as protective equipment

during a public-health crisis) or the

‘‘meet contractually agreed-upon

deadlines or quality control standards’’

category (for example: Agreements that

the work be performed pursuant to

acceptable professional, industry, or

published industry standards;

agreements to comply with applicable

local, state, and national licensure

standards and rules; and agreed upon

results and deadlines). Other requested

additions are narrow or industry-

specific in nature, and the Department

prefers general guidance that may be

used by as many employers and workers

as possible.

In any event, it is not possible to

identify in the regulation every

employer requirement that is not the

type of control that makes the

individual more or less likely to be an

employee under the Act. The regulatory

text accounts for this with a broader

final category: Requiring the worker to

‘‘satisfy other similar terms that are

typical of contractual relationships

between businesses (as opposed to

employment relationships).’’ This

category recognizes that contractual

work relationships currently vary and

will evolve going forward, and provides

that additional employer requirements

that are not expressly identified in the

regulatory text but which are similar to

those identified and are typical of such

relationships do ‘‘not constitute control

that makes the individual more or less

likely to be an employee under the Act.’’

SHRM requested that the Department

exclude from the control analysis the

offering of benefits such as ‘‘health

insurance, bonuses, or retirement

savings.’’ According to SHRM, ‘‘the

modern workplace would suffer if

businesses were effectively barred from

providing workplace enhancements that

all workers should enjoy like healthcare

or retirement savings.’’ Other

commenters made overlapping requests,

although not necessarily in the context

of applying the control factor. For

example, TechNet requested that the

Department add a ‘‘safe harbor’’ stating

that ‘‘a worker does not lose his or her

independent status solely because a

network platform provides the worker

with emergency aid or benefits allowed

or required under state law.’’ Similarly,

WPI requested a general ‘‘safe harbor’’

with respect to the provision of

‘‘protections or benefits as allowed or

required by Federal, state or local laws,

including but not limited to minimum

guaranteed earnings, health insurance,

retirement benefits, health or retirement

subsidies, life insurance, workers

compensation or similar insurance,

unemployment insurance, sick or other

paid leave, training and expense

reimbursement.’’

The Department declines to change

the regulatory text in response to these

comments. The offering of health,

retirement, and other benefits is not

necessarily indicative of employment

status. For example, payment of

proceeds owed into a worker’s own

health plan or retirement account would

not indicate an employment

relationship. This is because it is

reasonable for an independent

contractor to have a personal health or

retirement plan, and the precise method

of compensation—whether cash,

contributions to an account, or some

other method—is not relevant to the

question of economic dependence.

However, providing a worker with the

same employer-provided health or

retirement plans on the terms that a

business also gives its own employees

may indicate the worker is not an

independent contractor but rather an

employee. Certain other benefits could

also suggest employee status. For

example, sick or other paid leave,

especially the potential employer’s

administration and authorization of the

leave, could be indicative of the

potential employer’s control over the

worker’s schedule. Finally, offering a

bonus to a worker may or may not be

indicative of employee status. For

example, a worker’s participation in a

bonus or profit sharing plan in which he

or she receives a bonus depending on

the employer’s, a division of the

employer’s, or his or her own

performance over a period of time could

limit the worker’s ability to affect his or

her profit or loss through initiative or

investment—suggesting economic

dependence and thus employee status.

But a contractual agreement to provide

a worker with a fixed bonus if the

worker completes a job by a certain

deadline or completes a certain number

of tasks over a fixed period is typical of

contractual relationships between

businesses and itself does not make the

worker more or less likely to be an

employee under the Act. Even if, based

on the circumstances of a particular

case, the provision of certain health,

retirement, or other benefits suggests

classification as an employee, that fact

is not determinative by itself because

other facts and factors must also be

considered.

2. The ‘‘Opportunity for Profit or Loss’’

Factor

The second core factor identified in

the proposed regulatory text was the

‘‘individual’s opportunity for profit or

loss.’’ 85 FR 60639. This factor,

included at proposed § 795.105(d)(1)(ii),

‘‘weighs towards the individual being

an independent contractor to the extent

the individual has an opportunity to

earn profits or incur losses based on his

or her exercise of initiative (such as

managerial skill or business acumen or

judgment) or management of his or her

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investment in or capital expenditure on,

for example, helpers or equipment or

material to further his or her work.’’

Proposed § 795.105(d)(1)(ii) further

explained that, ‘‘[w]hile the effects of

the individual’s exercise of initiative

and management of investment are both

considered under this factor, the

individual does not need to have an

opportunity for profit or loss based on

both for this factor to weigh towards the

individual being an independent

contractor.’’ In addition, under the

proposal, this factor ‘‘weighs towards

the individual being an employee to the

extent the individual is unable to affect

his or her earnings or is only able to do

so by working more hours or more

efficiently.’’ Numerous comments were

submitted regarding the proposals to

analyze investment through the lens of

opportunity for profit or loss and to

focus that analysis on the worker’s

investment rather than comparing the

worker’s investment to the potential

employer’s investment. One commenter

requested eliminating this factor

altogether, and several commenters

requested changes to the other aspects

of the proposed opportunity factor

section.

a. Whether To Analyze Investment

Through the Lens of Opportunity for

Profit or Loss

Some commenters opposed the

proposal to consider the individual

worker’s ‘‘management of his or her

investment in or capital expenditure on,

for example, helpers or equipment or

material to further his or her work’’ as

part of the opportunity factor. For

example, NELA stated that a worker’s

investment has ‘‘been a critically

important factor in the economic

realities test analysis’’ and that

‘‘[d]iscounting this important piece of

the economic reality test, as the

Department has done here, plainly

makes it easier for businesses to require

workers to make significant financial

investments without risking a finding of

employee status.’’ The State AGs

similarly commented that the proposed

approach of considering investment

only in the context of opportunity for

profit or loss ‘‘inappropriately

subordinates the investment factor to

the opportunity for profit or loss’’ factor.

According to the State AGs, ‘‘[c]ourts

consider both factors, often together, but

investment ‘is, itself, indicative of

independent contractor status’

especially in smaller businesses’’

(quoting Saleem v. Corp. Transp. Group,

Ltd., 854 F.3d 131, 144 n.29 (2d Cir.

2017)). UPS said that ‘‘workers [who]

make little or no monetary investment

toward completion of the work . . . are

more likely to be dependent on the

company,’’ but that the Department’s

proposal ‘‘ignores that reality’’ by

suggesting that initiative and investment

‘‘are on equal footing.’’ NELP stated

that, although opportunity for profit or

loss and investment ‘‘are linked, they

are hardly duplicative and separately

serve as useful indicia of an entity’s

status under the FLSA, as the Supreme

Court’s tests note.’’

On the other hand, some commenters

supported the proposal to consider

investment in the opportunity factor.

For example, according to WPI, ‘‘[t]he

Department’s proposal to combine

[opportunity for profit or loss] with an

individual’s investment in facilities and

equipment, following Second Circuit

precedent, is a welcome change that

will bring clarity and reduce overlap.’’

It added that ‘‘[w]ise decisions about

investments are perhaps the clearest

path to increasing profits or suffering

losses.’’ CPIE supported the proposed

‘‘adoption of the Second Circuit’s

approach of combining the factors

‘opportunity for profit or loss’ and

‘investment,’ and not treating them as

separate factors.’’ According to CPIE, the

proposal ‘‘better captures both the

manufacturing-based independent

contractor (who likely has a tangible

capital business investment) and the

new-economy independent contractor

(who likely does not).’’

Having carefully considered the

comments on this issue, the Department

adopts its proposal, consistent with

Second Circuit case law, to consider

investment as part of the opportunity

factor. Some courts have acknowledged

that the two concepts are related while

still keeping the factors separate. See

McFeeley, 825 F.3d at 243; Lauritzen,

835 F.2d at 1537. Other courts do not

expressly acknowledge that they are

related but consider investment when

evaluating opportunity for profit or

loss—resulting in unnecessary and

duplicative analysis of the same facts

under two factors. See, e.g., Mid-Atl.

Installation, 16 F. App’x at 106–07

(finding that the worker’s capital

investments in tools, equipment, and a

truck indicated independent contractor

status under both the opportunity and

the investment factors). And

consideration of investment separately

has caused other courts to discuss the

worker’s involvement in outside

businesses in the context of opportunity

for profit or loss. See, e.g., Parrish, 917

F.3d at 384 (considering consultant’s

management of a goat farm). After

considering these varying approaches,

the Department believes that adopting

the Second Circuit’s approach best

furthers the Department’s goal: A clear

and non-duplicative analysis for

determining employee versus

independent contractor status. In sum,

the individual worker’s meaningful

capital investments may evince

opportunity for profit or loss:

‘‘[e]conomic investment, by definition,

creates the opportunity for loss, [and]

investors take such a risk with an eye to

profit.’’ Saleem, 854 F.3d at 145 n.29;

see also Superior Care, 840 F.2d at 1060

(identifying ‘‘the workers’ opportunity

for profit or loss and their investment in

the business’’ as a single factor).

Moreover, considering investment as

part of opportunity for profit or loss is

consistent with the Supreme Court’s

opinion in Silk which articulated the

two factors separately but analyzed

them together. In particular, the Court

found that coal unloaders were

employees because they had ‘‘no

opportunity to gain or lose except from

the work of their hands and [ ] simple

tools,’’ while truck drivers who invested

in their own vehicles had ‘‘opportunity

for profit from sound management’’ of

that investment by, for instance, hauling

for different customers. Id. at 719. Thus,

it framed the analysis as whether

workers are more like unloaders whose

profits were based solely on ‘‘the work

of their hands and [ ] simple tools’’ or

the drivers whose profits depended on

their initiative and investments. See id.

As the Court explained decades ago and

as the Second Circuit noted much more

recently in Saleem, investment is a

pathway to opportunity for profit or

loss.

In response to NELA and likeminded

commenters’ concern that employers

may require significant investments by

their workers to avoid employee status,

the Department reiterates that the

investment must be capital in nature

and consistent with the worker being in

business for him/herself for the

investment to indicate an opportunity

for profit or loss. Senator Sherrod

Brown and 22 other senators stated that

‘‘[r]equiring [workers] to purchase a

franchise or their own equipment,

including a vehicle’’ or otherwise ‘‘take

on financial risk as a condition of

employment does not convert an

employee into an independent

contractor under the FLSA.’’ While no

single fact or factor may ‘‘convert an

employee into an independent

contractor,’’ the prospect of financial

risk and reward plays an important role

in distinguishing ‘‘wage earners toiling

for a living’’ from ‘‘independent

entrepreneurs seeking a return on their

risky capital investments.’’ Mr. W.

Fireworks, 814 F.2d at 1051. Moreover,

it matters why certain investments are

required. If certain capital investments

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31

The American Society of Travel Advisors

disagreed at least in part, commenting that

‘‘workers in many service industries may make only

a minimal investment in equipment or materials

and in such situations this consideration, by itself,

should not be taken to weigh in favor of employee

status.’’

32

LocumTenens, an online company that

specializes in the temporary placement of

physicians and other health clinicians, requested

that the Department eliminate from the economic

reality test consideration of whether an individual

has an opportunity for profit or loss. According to

LocumTenens, its physicians and clinicians who

provide temporary healthcare services ‘‘do not have

an obvious investment or opportunity for profit

when they step in’’ for another physician or

clinician. However, as explained later, the

Department believes that opportunity for profit or

loss is very predictive of a worker’s status as an

employee or independent contractor. In addition,

the rule requires a worker to exercise personal

initiative or manage capital investments, but not

necessarily both, for the opportunity factor to

indicate independent contractor status. In other

words, an absence of capital investment does not

prevent an individual from having an opportunity

for profit or loss, because such opportunity can be

based on the individual’s initiative. Nor does such

absence necessarily prevent an individual from

being properly classified an independent

contractor, particularly in knowledge-based

industries such as medicine where human capital

matters more than physical capital.

are necessary to perform the job for

which the contractor is hired, then

requiring a contractor to make such

investments would be consistent with

the contractor being in business for him-

or herself. For example, a company that

hires independent contractors to haul

freight may obviously require that

drivers bring their own vehicles. Silk

331 U.S at 719. In contrast, a

requirement to ‘‘invest’’ in specific,

company-provided equipment would

not be consistent with the worker being

in business for him- or herself, and may

constitute a consideration under the

control factor that points towards

employee status. See Scantland, 721

F.3d at 1318 (concluding that

technicians’ ‘‘expenditures [in

equipment and materials] detract little

from the[ir] economic dependence on

Knight’’ in part because ‘‘many

technicians purchased specialty tools

from Knight directly via payroll

withholdings’’). As such, OOIDA’s

concern ‘‘that any requirement that a

worker must purchase services or

equipment from the business for which

they work [w]ould weigh in favor of

employee status’’ is misplaced. See also

SWRCC (‘‘[T]his standard would

provide a perverse incentive for

companies to require putative

employees to maintain their own

equipment in an effort to steer those

employees to independent contractor

status.’’). Consistent with the economic

dependence inquiry, an investment

must indicate an independent business

by the worker, as opposed to merely

being required by the potential

employer, for it to indicate an

opportunity for profit or loss.

In response to the State AGs, the

Department’s approach does not

subordinate investment; it can still

separately indicate independent

contractor status as they suggest.

Finally, the Department’s approach is

not contrary to UPS’ assertion that

workers who make little or no

investment ‘‘are more likely to be

dependent’’ on the potential

employer.

31

Workers who make little or

no investment are more likely to be

employees than workers who make

significant investments, but of course,

such a worker’s ultimate status as an

employee or independent contractor

will also depend on other factors. As the

Department explained in the NPRM

preamble, workers who do not make

significant investments may still be

independent contractors: ‘‘while the

presence of significant capital

investment is still probative, its absence

may be less so in more knowledge-based

occupations and industries. Indeed,

technological advances enable, for

example, freelance journalists, graphic

designers, or consultants to be

entrepreneurs with little more than a

personal computer and smartphone.’’ 85

FR 60609 (citing Faludi v. U.S. Shale

Sols., L.L.C., 950 F.3d 269, 276 (5th Cir.

2020)); see also Meyer v. United States

Tennis Ass’n, 607 F. App’x 121, 123 (2d

Cir. 2015) (concluding that workers who

invested little were independent

contractors primarily because of their

control over the work and their

initiative); Lauritzen, 835 F.2d at 1540–

41 (Easterbrook, J. concurring)

(‘‘[P]ossess[ing] little or no physical

capital . . . is true of many workers we

would call independent contractors.

Think of lawyers, many of whom do not

even own books. The bar sells human

capital rather than physical capital, but

this does not imply that lawyers are

‘employees’ of their clients under the

FLSA.’’).

32

b. Whether To Analyze the Worker’s

Investment or Compare the Worker’s

Investment With That of the Potential

Employer

The Department noted in the NPRM

preamble that, when considering

investment, some courts use ‘‘a side-by-

side comparison method’’ that directly

compares the worker’s individual

investment to the investment by the

potential employer. See 85 FR 60614

(citing cases). The Department

explained that ‘‘such a ‘side-by-side

comparison method’ does not illuminate

the ultimate question of economic

dependence,’’ but instead ‘‘merely

highlights the obvious and unhelpful

fact that individual workers—whether

employees or independent contractors—

likely have fewer resources than

businesses’’ that, for example, maintain

corporate offices. Id. (citing cases). The

Department received a number of

comments addressing its proposed

rejection of the relative investment

approach.

For example, UPS stated that the

Department’s proposal ‘‘undervalues

comparative analysis of investment’’

and noted that courts ‘‘have evaluated

investment comparatively—correctly

measuring the worker’s investment

against the company’s’’ (citing cases).

NELA added that ‘‘comparing workers’

investments to the employer’s

investments’’ has been ‘‘a critically

important factor in the economic

realities test analysis’’ and ‘‘must be

done in the context of the working

relationship.’’ TRLA objected that ‘‘the

proposed test does not include the Fifth

Circuit’s ‘extent of the relative

investments of the worker and alleged

employer’ factor’’ and asserted that,

while its usefulness may vary

‘‘depending on the facts of individual

cases,’’ ‘‘its wholesale exclusion from

the test factors is not warranted,

especially given the Supreme Court’s

caution against an exhaustive list’’

(citing Silk, 331 U.S. at 716). The

Southwest Regional Council of

Carpenters described the relative

investment approach as simple and

efficient by ‘‘lining up the expenses

between worker and company’’ and thus

‘‘advanc[ing] the key interest of all

parties concerned with the

predictability of this part of the

independent contractor test.’’ According

to the Pacific Northwest Regional

Council of Carpenters, the Department

acted ‘‘arbitrarily’’ in proposing to

eliminate consideration of relative

investments and asserted that, because

‘‘virtually every craftsperson who works

in the various carpentry trades owns his

or her own tools,’’ the proposal would

make ‘‘all of those individuals more

susceptible to being classified as’’

independent contractors regardless

whether the investment is small or

extensive.

Other commenters supported the

Department’s proposed position. For

example, the ATA, the Arkansas

Trucking Association, NHDA, and

Scopelitis, Garvin, Light, Hanson &

Feary (on behalf of various

transportation companies) each agreed

with the Department’s proposal ‘‘that

the relative investment test fashioned by

the Fifth Circuit ‘does not illuminate the

ultimate question of economic

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dependence’ ’’ (quoting 85 FR 60614).

TechNet explained that ‘‘the relative

sizes of the parties’ investments’’ are not

relevant to the analysis, asserting that

‘‘[l]arge businesses may contract with

small businesses,’’ make investments

that ‘‘typically exceed their smaller

partners’ investments by orders of

magnitude . . . because of their size,’’

and ‘‘not endanger [their] partners’

independence merely because [they are]

bigger than [their partners] are.’’ CPIE

stated that ‘‘the determinative inquiry

relative to investment should be

whether the individual has a sufficient

investment in his or her trade or

business as to enable the individual to

operate independently,’’ asserting that

‘‘[t]he investment of a potential client

has no discernible relevance to this

inquiry.’’ See also WFCA (‘‘The issue is

whether a worker invested in his or her

business, not how that investment

compares to the employing company’s

investment.’’).

Having carefully considered the

comments, the Department reaffirms its

position that comparing the individual

worker’s investment to the potential

employer’s investment should not be

part of the analysis of investment.

Comparing their respective investments

does little more than compare their

respective sizes and resources. In

Hopkins v. Cornerstone America, 545

F.3d 338, 344 (5th Cir. 2008), it was of

course ‘‘clear that [the insurance

company’s] investment—including

maintaining corporate offices, printing

brochures and contracts, providing

accounting services, and developing and

underwriting insurance products—

outweighs the personal investment of

any one Sales Leader.’’ The court,

however, never explained how this fact

indicated the Sales Leaders’ economic

dependence. See id. Tellingly, when

summing up the entirety of the facts and

analyzing whether the workers were

economically dependent on the

insurance company as a matter of

economic reality, the court did not even

mention the insurance company’s larger

investment. See id. at 346. And in

Karlson, 860 F.3d at 1096, the court

found that comparing the worker’s

investment with the potential

employer’s total operating expenses had

little relevance because ‘‘[l]arge

corporations can hire independent

contractors, and small businesses can

hire employees.’’ Cf. Parrish, 917 F.3d at

383 (comparing relative investments,

but noting that ‘‘[o]bviously, [the oil

drilling company] invested more money

at a drill site compared to each

plaintiff’s investments’’ and according

the factor little weight in light of the

other evidence). In sum, comparing the

relative investments does not illuminate

the worker’s economic dependence or

independence. By contrast, as explained

herein, analyzing the extent to which

the individual worker has an

opportunity for profit or loss because of

his or her investment in, or capital

expenditure on, helpers or equipment or

material to further his or her work is

probative of the worker’s economic

dependence or independence.

c. Other Comments Concerning the

Opportunity Factor

WFCA agreed that ‘‘an evaluation of

a worker’s investment and capital

expenditures are relevant factors in

determining whether he or she is an

independent contractor’’ and suggested

including of ‘‘a definition of what

constitutes an investment or capital

expense.’’ WFCA suggested the

following: ‘‘Investments and capital

expenditure shall include: The purchase

or rental of tools, equipment, material,

and office or work facilities; the

payment for marketing and

administrative expenses; the payment of

costs incurred hiring or using other

workers; and similar expenditures.’’

However, the regulatory text already

identifies investment in ‘‘helpers or

equipment or material’’ as relevant, and

the ‘‘for example’’ preceding them in the

regulatory text makes clear that the list

is non-exhaustive. The Department

believes that general and non-

exhaustive examples are more helpful

than trying to precisely identify as many

examples of relevant investments as

possible.

NRF commented that ‘‘it is important

to emphasize that it is the ‘opportunity’

or ‘ability’ to earn profits or incur losses

based on investment and/or initiative,

as opposed to the actual level of

investment or initiative shown by the

individual.’’ Relatedly, NRF expressed

concern whether this factor squares

with the discussion in proposed

§ 795.110 that the actual practice of the

parties involved is more relevant than

what may be contractually or

theoretically possible, asserting that

‘‘the fact that someone might not engage

in certain practices or take on certain

risks that would further impact the level

of profit or loss should not result in a

finding that the individual is not an

independent contractor, unless that

person is prevented from doing so by

the entity with whom the individual

contracts.’’ Here, the Department

believes that NRF is conflating the

ultimate outcome of independent

entrepreneurship (profit or loss) with

the actions indicative of

entrepreneurship (initiative and/or

investment) that largely determine that

outcome. While profits are hardly

guaranteed for anyone in business for

him/herself, the text at

§ 795.105(d)(1)(ii) makes clear that

independent contractors typically

‘‘exercise . . . initiative’’ and/or

‘‘manag[e] . . . investment,’’ (emphasis

added). Thus, a lack of profit viewed in

hindsight says little about a worker’s

economic independence; instead, the

focus is the degree to which the worker

actually exercised initiative or actually

managed investments. A worker’s

theoretical ability to, for example,

exercise initiative is weaker evidence

than the worker’s actual practices. See

e.g., Sureway Cleaners, 656 F.2d at 1371

(‘‘[T]he fact that Sureway’s ‘agents’

possess, in theory, the power to set

prices . . . and advertise to a limited

extent on their own is overshadowed by

the fact that in reality the ‘agents’ . . .

charge the same prices, and rely in the

main on Sureway for advertising.’’).

However, a worker’s conscious decision

to not make a particular investment

(especially when choosing among a

range of investments) or to not take a

particular action (especially when

choosing among a range of options) may

constitute an affirmative exercise of

initiative to consider among others

when evaluating opportunity for profit

or loss. In sum, in the context of the

opportunity factor, the focus is the

individual worker’s opportunity for

profit or loss, as shown by meaningful

investments or the exercise of personal

initiative; actual profits or losses are less

relevant.

OOIDA expressed ‘‘concern[ ] that the

timeline for determining profit or loss is

not clarified in the NPRM’’ and

explained that certain ‘‘[m]otor carriers

that take advantage of drivers through a

lease-purchase agreement are likely to

argue that a driver’s opportunity for

profit is merely a few years in the

future, and that this full timeline must

be considered.’’ The Department agrees

with OOIDA that ‘‘[t]his is a fallacy’’;

the opportunity for profit or loss must

be reasonably current to indicate

independent contractor status.

Regarding the Department’s proposal

to include initiative as a consideration

in the opportunity factor, NRF agreed

that ‘‘[t]he ability to impact profits or

losses also may be dependent on

business acumen and managerial skills,

regardless of the ‘skill level’ of the work

or the level of investment.’’ NRF added

that ‘‘identifying ‘business acumen’ or

‘management skill’ as part of the profit

or loss factor is appropriate and

consistent with the FLSA.’’ Senator

Sherrod Brown and 22 other senators

disagreed, commenting: ‘‘Just because

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33

See Goldberg v. Whitaker House Co-op., Inc.,

366 U.S. 28, 33 (1961) (plaintiffs who manufactured

knitted goods at home were employees under the

FLSA, in part, because ‘‘[t]he management fixes the

piece rates at which they work’’); Rutherford Food,

331 U.S. at 730 (because workers’ earnings

‘‘depended upon the efficiency of their work, it was

more like piecework than an enterprise that actually

depended for success upon the initiative, judgment

or foresight of the typical independent contractor’’);

Hodgson v. Cactus Craft of Arizona, 481 F.2d 464,

467 (9th Cir. 1973) (persons who manufacture

novelty and souvenir gift items at homes and were

compensated at a piece rate were employees under

the FLSA). And in Donovan v. DialAmerica

Marketing, Inc., the court held that homeworkers

who were paid on a piece-rate basis to perform the

simple service of researching telephone numbers

were employees who lacked meaningful

opportunity for profit or loss. See 757 F.2d 1376,

1385 (3rd Cir. 1985). In contrast, distributors who

recruited and managed researchers and were paid

based on the productivity of those they managed

were independent contractors, in part, because

distributors’ earnings depended on ‘‘business-like

initiative.’’ Id. at 1387.

employees can increase their wages by

exercising skill or initiative does not

mean they are running a separate,

independent business, particularly if

they cannot pass along costs to

customers.’’ They added that ‘‘[t]he rule

does not include additional, critical

considerations of skill and initiative that

are necessary to define an employment

relationship.’’ And Seyfarth Shaw

requested that the Department state that

‘‘a worker’s business acumen is to be

interpreted to cover acumen relevant to

the wide range of business endeavors in

the U.S. economy, including, for

example: Sales, managerial, customer

service, marketing, distribution,

communications, and other

professional, trade, technical, and other

learned skills, as well as other unique

business abilities and acumen,

including acumen that impacts a

worker’s ability to profitably run their

own independent business.’’

Having carefully considered the

comments, the Department continues to

believe that a worker’s initiative, such

as managerial skill or business acumen

or judgment, is an appropriate measure

of a worker’s opportunity to earn profits

or incur losses. See, e.g., Karlson, 860

F.3d at 1094–95 (discussing how the

worker’s decisions and choices

regarding assignments and customers

affected his profits); Saleem, 854 F.3d at

145 (noting in support of independent

contractor status that the degree to

which the worker’s relationship with

the potential employer ‘‘yielded returns

was a function . . . of the business

acumen of each [worker]’’); McFeeley,

825 F.3d at 243 (‘‘The more the worker’s

earnings depend on his own managerial

capacity rather than the company’s . . .

the less the worker is economically

dependent on the business and the more

he is in business for himself and hence

an independent contractor.’’) (internal

quotation marks omitted); Express Sixty-

Minutes Delivery, 161 F.3d at 304

(agreeing with district court that

‘‘driver’s profit or loss is determined

largely on his or her skill, initiative,

ability to cut costs, and understanding

of the courier business’’); WHD Opinion

Letter FLSA2019–6 at 6 (‘‘These

opportunities typically exist where the

worker receives additional

compensation based, not [merely] on

greater efficiency, but on the exercise of

initiative, judgment, or foresight.’’).

Commenters did not seriously dispute

the relevance of initiative to a worker’s

opportunity for profit or loss. In

response to the comment by Senator

Sherrod Brown and 22 other senators,

the Department agrees that a worker is

not necessarily an independent

contractor because he or she can use

initiative to affect his or her opportunity

for profit or loss but maintains that yet

initiative is indicative of—or weighs

towards—independent contractor status

in the multifactor analysis. And the

Department agrees that a worker’s

ability to cut costs, including by passing

them along to customers, is relevant to

determining initiative. See Express

Sixty-Minutes Delivery, 161 F.3d at 304.

Finally, the Department agrees with

Seyfarth Shaw that a worker’s business

acumen can ‘‘cover acumen relevant to

the wide range of business endeavors in

the U.S. economy’’—initiative is not

limited to or automatically present in

any particular type of job.

Regarding the last sentence of the

proposed opportunity factor regulatory

text (‘‘This factor weighs towards the

individual being an employee to the

extent the individual is unable to affect

his or her earnings or is only able to do

so by working more hours or more

efficiently.’’), WFCA expressed the

concern that the sentence means that a

worker who starts his or her own

business and seeks to develop

efficiencies in so doing will be an

employee under the analysis. WFCA

suggested that the sentence be deleted.

WPI also asked that the last sentence be

deleted because ‘‘[a]n individual who

uses initiative, skill or judgment to

perform a job more efficiently can

generate greater profits, even if

compensated by the hour or piece rate.’’

It asserted: ‘‘The ability to use

managerial skill, expertise, market

experience, or business acumen to

perform work more efficiently is

indicative of independent contractor

status.’’ The Department agrees that

such use of initiative can indicate

independent contractor status when it

affects opportunity for profit or loss.

The word ‘‘efficiently’’ was used in

proposed § 795.105(d)(2)(ii) to mean

working faster to perform rote tasks

more quickly. See 85 FR 60614 n.38

(identifying piece-rate workers as ‘‘an

example of workers who are able to

affect their earnings only through

working more hours or more

efficiently.’’). Higher earnings that result

solely from this ‘‘working faster’’

concept of efficiency do not by

themselves indicate independent

contractor status. However, as WFCA

and WPI note, efficiency may also mean

effective management based on business

acumen, which is indicative of being in

business for oneself if it results in

increased earnings. For instance, the

Fifth Circuit found that the opportunity

factor ‘‘points towards independent

contractor status’’ where ‘‘a driver’s

profit or loss is determined largely on

his or her skill, initiative, ability to cut

costs, and understanding of the courier

business,’’ observing that ‘‘drivers who

made the most money appeared to be

the most experienced and most

concerned with efficiency, while the

less successful drivers tended to be

inexperienced and less concerned with

efficiency.’’ Express Sixty-Minutes

Delivery Serv. 161 F.3d at 304. To avoid

confusion between multiple potential

meanings of ‘‘more efficiently,’’ the

Department is revising

§ 795.105(d)(2)(ii) to replace that term

with ‘‘faster.’’ Relatedly, ATA and other

transportation commenters objected to

the Department’s statements in the

NPRM preamble that ‘‘[w]orkers who

are paid on a piece-rate basis are an

example of workers who . . . lack

meaningful opportunity for profit or

loss.’’ They asserted that the statements

may result in some judges refraining

from engaging in the actual analysis set

forth in the rule as to opportunity for

profit or loss. They further asserted that

truck drivers paid on a piece-rate basis

may be independent contractors based

on their management decisions or

ability to cut costs. The Department’s

statements in the NPRM preamble

regarding workers paid on a piece-rate

basis were general observations

supported by case law

33

and not a

categorical rule or the complete

analysis. The fact that a worker is paid

on a piece-rate basis set by the potential

employer does not indicate an

opportunity for profit or loss, but

whether that worker has an opportunity

for profit or loss indicative of

independent contractor status is

determined by a fuller analysis of the

worker’s circumstances.

Some commenters requested

additional examples that are indicative

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The U.S. Chamber of Commerce’s suggested

examples were: ‘‘(1) The worker’s own decision-

making with respect to the details and means by

which they make use of, secure, and pay helpers,

substitutes, and related labor or specialties . . . (2)

The worker’s own decision-making with respect to

the details and means by which they purchase, rent,

or otherwise obtain and use tools . . . ; (3) The

worker’s own decision-making with respect to the

details and means by which they purchase or

otherwise obtain and use supplies . . . ; (4) The

worker’s own decision-making with respect to the

details and means by which they purchase, rent, or

otherwise obtain and use equipment . . . ; (5) The

worker’s initiative and decisions they implement in

connection with their own performance of services

through higher service fees, incentives, charges, and

other ways; (6) The worker’s initiative to invest in

the development of skills, competencies, and trades

. . . ; (7) The worker’s expertise in delivery of

services/products that result in enhanced profits,

for example through tips and other incentives as a

result of providing quality customer service; (8) The

worker’s losses incurred as a result of customer

complaints or other charges where the worker’s

results were below customer or contractual

expectations and obligations; (9) The worker’s

flexibility to choose amongst work opportunities

offered that impact profits and losses; (10) The

worker’s contractual or other losses if they do not

provide the accepted services or the worker

provides substandard services, and are engaged to

provide time-sensitive, often perishable services

and products; and (11) The worker’s avoidance of

liquidated damages charges or indemnification

obligations in the parties’ agreement relating to

various provisions, including material breaches of

the parties’ agreement.’’

35

These suggested examples were: ‘‘(1) The

business pays the worker by the hour where it is

customary in the particular business/trade to do so

(e.g., attorneys, physical trainers); (2) The business

sets the price of goods and services offered by a

worker to customers where the worker controls the

amount of time, date and place they provide the

services as well as the amount of services they

choose to provide and the price is set to facilitate

the time sensitive transaction as a result of the time

sensitive or perishable nature of the service the

customer desires[;] and (3) The business’s

facilitation of payments from the customer to the

worker.’’

36

SHRM’s suggested examples were: ‘‘[t]he

worker’s decisions in choosing amongst

opportunities offered that impact profit and loss;

[t]he worker’s losses suffered from receipt of

customer complaints where the worker’s results

were below customer or contractual expectations;

[t]he worker’s decisions in avoiding liquidated

damages charges or indemnification obligations in

the parties’ agreement; [t]he worker’s own decision-

making on whether to use other workers or services

as helpers or substitutes as well as the use of related

labor or specialties to assist in either the services

provided, the tools and equipment used, or the

maintenance of the worker’s business structure;

[t]he worker’s acumen regarding the delivery of

services/products that result in enhanced profits

through tips and other incentives; [t]he worker’s

decision-making regarding the details and means by

which they obtain supplies, tools, and equipment

for use in their business, including choices

regarding from whom to purchase these goods, how

much of the goods are obtained at any one time, the

quality of the goods, and the negotiated prices

regarding said goods; and [t]he worker’s decision-

making regarding investment in skills they deem

necessary to achieve the desired results from their

work, including education, certificates, or classes.’’

37

Seyfarth Shaw’s suggested examples were

‘‘[t]he worker’s own decision-making regarding the

use of helpers, substitutes, and related labor or

specialties to assist in the services provided, the

tools and equipment used, or the maintenance of

the worker’s business structure . . . to the extent

those decisions impact the worker’s costs and

overall profitability; [t]he worker’s initiative and the

decisions they implement in connection with the

performance of services and/or capital expenditures

on equipment, supplies, and tools . . . ; [t]he

worker’s initiative to invest in the development of

skills, competencies, and trades (including

education, training, licenses, certifications, and

classes) . . . ; [t]he worker’s expertise in delivery

of services/products that result in enhanced profits

through tips and other incentives as a result of great

customer service and exceptional skills, for

example[; t]he worker’s losses incurred as a result

of customer complaint or other charges where the

worker’s results were below customer or contractual

expectations and obligations; and [t]he worker’s

avoidance of liquidated damages charges or

indemnification obligations in the parties’

agreement relating to various provisions, including

material breaches of the parties’ agreement.’’

of an opportunity for profit or loss

(many of the suggested examples

overlapped with each other). TechNet

asked for ‘‘concrete examples’’ and

suggested the following: ‘‘[d]rivers who

can set their own hours, choose which

jobs to accept or reject, and use their

judgment in how to best complete jobs,’’

as well as ‘‘[a]pp-based opportunities—

including opportunities to provide

personal transportation, parcel

deliveries, shopping services, or food

delivery, among other types of service.’’

The U.S. Chamber of Commerce offered

eleven ‘‘additional examples of a

worker’s initiative or investment that

may impact a worker’s profit or loss.’’

34

The U.S. Chamber of Commerce also

suggested ‘‘examples of fact situations

which are neutral in the analysis of

whether the worker controls their

profits and losses.’’

35

SHRM requested

numerous ‘‘additional examples of

worker investment and initiative that

impact profit and loss.’’

36

SHRM also

requested that the final rule make ‘‘the

following explicit statements regarding

facts that do not support a finding of

dependency: [w]orkers may experience

financial losses as a result of

cancellations of their service or the

provision of service that does not meet

customer expectations when the worker

has flexibility to choose between work

opportunities; and [e]ven if the business

sets the price of goods provided by the

worker, that does not negate the

worker’s initiative when the worker

controls the amount of time, when, and

where they provide the services as well

as the amount of the same service they

chose to provide.’’ Seyfarth Shaw asked

the Department to ‘‘expand upon the

examples of ways that workers impact

their own profitability as well as their

losses (by impacting their profits and

their costs)’’ and to include numerous

examples.

37

And Mr. Reibstein

commented that ‘‘[e]xamples of loss

should be identified . . . so it is clear

[that this factor] does not focus only on

profit.’’ He offered the following

examples: ‘‘He or she has to re-do work

that is not consistent with industry

standards or does not meet a customer’s

expectations; is potentially liable to the

potential employer in the event his or

her actions or inactions cause harm or

legal expense to the potential employer;

or fails to render services in a cost-

efficient manner by not managing

expenses or investing far too much time

on activities that are unproductive.’’

The Department has considered the

various requests for additional examples

of initiative and investment that can

indicate a worker’s opportunity for

profit or loss, but declines to change to

the proposed regulatory text. The

regulatory text already broadly describes

initiative as including managerial skill

and business acumen or judgment, and

explains that investment is the worker’s

management of his or her investment in

or capital expenditure on, for example,

helpers or equipment or material to

further his or her work. Many of the

suggested examples seem to fall into one

of these categories, and some of them

effectively repeat concepts already

identified in the regulatory text—

especially the ones involving helpers,

tools, supplies, and equipment. The

Department does not believe that (even

after culling out all of the overlap)

additional examples of initiative and

investment would benefit employers or

workers. It is not possible or productive

to seek to identify in the regulatory text

every example of initiative and

investment that may be relevant to the

opportunity for profit or loss analysis.

The Department purposefully described

both initiative and investment in a

broad and general manner to provide

helpful guidance to as many employers

and workers as possible. The

Department believes that this approach,

along with the further clarification

provided throughout this preamble

section as well as the examples added

in § 795.115, will be more helpful and

functional for employers and workers as

they apply the analysis.

3. The ‘‘Skill Required’’ Factor

In the NPRM, the Department

identified three other factors that may

serve as ‘‘additional guideposts’’ in the

analysis to determine whether a worker

is an employee or independent

contractor. The first of these other

factors, included at proposed

§ 795.105(d)(2)(i), is the amount of skill

required for the work. 85 FR 60639. The

Department’s proposed regulatory text

stated that this factor would weigh in

favor of the individual being an

independent contractor to the extent the

work at issue requires specialized

training or skill that the potential

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employer does not provide; conversely,

the factor would weigh in favor of the

individual being an employee to the

extent the work at issue requires no

specialized training or skill and/or the

individual is dependent upon the

potential employer to equip him or her

with any skills or training necessary to

perform the job. As explained in the

NPRM, the Department proposed to

clarify that this factor should focus on

the amount of skill required because

importing aspects of the control factor

into the skill factor has diluted the

consideration of actual skill to the point

of near irrelevance, and such dilution

generates confusion regarding the

relevance and weight of the worker’s

skill in evaluating economic

dependence.

Employer representatives were

generally supportive of the

Department’s clarification and

relegation of this factor as an

‘‘additional guidepost’’ but provided

additional commentary and requests for

modification. Several commenters

suggested that this factor be eliminated

entirely. The National Restaurant

Association commented that this factor

‘‘does not add much clarity to the

analysis’’ and ‘‘unnecessarily

discriminates against individuals who

operate businesses that do not require

advanced degrees.’’ WPI stated that

‘‘[s]o narrowed, this factor has little

probative value in determining

economic dependence and should be

eliminated as a separate factor.’’

Other commenters suggested that the

factor be included within the core,

‘‘profit and loss’’ factor or otherwise

minimized. CWI suggested that the

factor be incorporated into the profit

and loss factor because ‘‘[w]here

specialized skills are required to

perform work, workers unquestionably

have taken the initiative to invest time

and money into developing those

skills.’’ SHRM and U.S. Chamber of

Commerce agreed that this factor should

not be a stand-alone factor, but rather

should be incorporated into the

opportunity factor, to ensure that

workers who desire the flexibility and

freedom of independent contractor

status—but who provide services that

may not require specialized training—

are not negatively impacted. See also

WFCA (requesting that lack of skill

should not weigh in favor of the worker

being an employee). Commenters also

stated that this additional factor should

be minimized further in the analysis,

commenting that the factor places too

much emphasis on the importance of

skill, and requested that ‘‘the final rule

should at least indicate that this may be

a relevant factor in some but not all

instances.’’ Reibstein.

After considering these comments, the

Department declines both the request to

eliminate this factor from consideration

entirely and the request to include it as

part of the opportunity factor. The

Department agrees with commenters

that the concepts of initiative and

judgment are sufficiently analyzed in

multiple ways under the control and

opportunity core factors, but believes

that longstanding case law militates in

favor of considering this additional

factor—skill required—when relevant

under the particular circumstances of

each situation. As explained in the

NPRM, the Supreme Court articulated

the factor as ‘‘skill required’’ in Silk, 331

U.S. at 716, and multiple courts of

appeals continue to consider as ‘‘the

degree of skill required to perform the

work.’’ Paragon Contractors, 884 F.3d at

1235; see also Iontchev, 685 F. App’x at

550; Keller, 781 F.3d at 807. The

Department believes that sharpening

this factor to focus solely on skill

clarifies the analysis. Moreover,

analyzing the worker’s ability to

exercise initiative under the control

factor, a core factor that is given more

weight than the skill factor,

appropriately reflects that that the

presence or absence of initiative is

usually more important than the

presence or absence of skill. Similarly,

the effect of the worker’s initiative is

analyzed under the opportunity factor,

another core factor that, for the reasons

explained above, is usually more

probative than the skill factor.

Commenters such as the National

Restaurant Association and NRF

suggested that the regulation should

focus not on whether the skill required

is specialized, but rather the extent to

which a worker relies on the potential

employer for training needed to perform

the work. The Wood Flooring Covering

Association, however, stated that the

regulation as proposed may create

unintended limits on training and

employers should not be discouraged

from funding needed training for

workers, particularly in view of its

industry’s labor shortage. With respect

to these requests, the Department

declines to eliminate the modifier

‘‘specialized’’ from the regulation. This

type of consideration is supported by

discussions of this factor in case law.

See, e.g., Simpkins v. DuPage Hous.

Auth., 893 F.3d 962, 966 (7th Cir. 2018)

(‘‘whether Simpkins had specialized

skills, as well as the extent to which he

employed them in performing his work,

are [material] issues’’); Carrell v.

Sunland Const., Inc., 998 F.2d 330, 333

(5th Cir. 1993) (finding it relevant that

‘‘[p]ipe welding, unlike other types of

welding, requires specialized skills’’).

The Department also declines to adjust

the regulatory text to directly address

who provides the training because such

facts are not necessarily probative in

every circumstance; the Department

notes, however, that it can be suggests

employee status if a worker receives all

specialized skills from the employer.

See, e.g., Keller, 781 F.3d at 809

(explaining that if ‘‘the company

provides all workers with the skills

necessary to perform the job,’’ that

suggests employee status); Scantland,

721 F.3d at 1318; Hughes v. Family Life

Care Inc., 117 F. Supp. 3d 1365, 1372

(N.D. Fla. 2015) (‘‘The relevant inquiry

[for the skill factor] is whether [the

worker] is dependent upon [the

company] to equip her with the skills

necessary to perform her job.’’). This is

because an individual who is in

business for him- or herself typically

brings his or her own skills to the job,

rather than relying on the client to

provide training.

While the WFCA generally supports

this factor, it also requested that the

Department include examples of

specialized training or skill that focused

on indicators such as certifications and

licensing. Scopelitis, Garvin, Light,

Hanson & Feary, a law firm commenting

on behalf of several unnamed

transportation providers, agreed that

credentials such as testing to earn a

Commercial Driver’s License can

demonstrate specialized skill, but also

noted that skills needed to successfully

operate a business should also be

considered specialized skills to help

distinguish independent contractors

from employees. The Department notes

that the opportunity factor already

considers whether workers have an

opportunity for profit or loss based on

their business acumen or managerial

expertise. It would be redundant to

analyze ‘‘skills needed to successfully

operate a business’’ as part of the skill

factor. As to requests for examples or

additional clarification as to what

constitutes ‘‘specialized’’ skills, the

Department agrees that credentials such

as certifications and licenses can be

helpful indicators of specialized skill,

though they are by no means the only

indicators of such skill. The Department

does not believe any change to the

regulatory text to clarify this point is

warranted, however.

Employee representatives such as the

AFL–CIO expressed concern that de-

emphasizing the skill factor would

‘‘place considerable competitive

pressure on law-abiding employers

employing employees at the bottom of

the wage scale, thus undermining the

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In addition, as also noted in the NPRM, the

opportunity factor considers whether a worker’s

decisions to work for others affects profits or losses.

See, e.g., Freund, 185 F. App’x at 783 (affirming the

district court’s finding that the ‘‘looseness of the

relationship between Hi–Tech and Freund

permitted him great ability to profit,’’ in part,

because ‘‘Freund could have accepted installation

jobs from other companies.’’). The Department does

not believe this consideration overlaps with the

control factor. While the control factor concerns the

ability to work for others, the opportunity factor

concerns the effects of doing so.

national minimum wage standard.’’ The

AFL–CIO further asserted that the

proposed regulation would make it

more likely that unskilled workers such

as home care workers, delivery drivers,

and janitors will be classified as

independent contractors, and thus such

workers will be unprotected by the

FLSA’s minimum wage and overtime

pay standards. See AFL–CIO. The

National Employment Lawyers

Association (NELA) commented that the

Department’s proposed regulation

‘‘seeks to constrict and demote’’ the skill

factor, and, relying on case law, noted

that ‘‘courts typically assess whether

workers are required to use specialized

skills, beyond those typically acquired

through occupational or technical

training, in an independent way to

perform their job’’ but that this factor,

‘‘which often favors employee status,

does not suit the Department’s

purposes.’’

Regarding farmworkers specifically,

TRLA stated that whether the services

rendered by an employee require special

skills has often been probative in the

farm labor context, and that by largely

eliminating consideration of this factor,

the proposed rule makes the proper

classification of farmworkers harder to

determine. See Texas Rio Grande Legal

Aid. This ‘‘will lead to more

farmworkers being classified as

independent contractors, thereby

denying the protections of the FLSA to

one of the most vulnerable classes of

workers’’; moreover, ‘‘[t]o the extent that

the proposed rule purports to be

descriptive of the current state of the

law, it is flatly inaccurate.’’

The Department has considered these

comments but continues to believe that

its proposal with respect to this factor

is logical and helpful. Although many

courts consider the skill factor, courts

appear to find the core factors to be

more dispositive than the skill factor

when such factors conflict. See 85 FR

60621–22 (listing cases). Continuing to

take it into account, but not as one of

the core factors, adds clarity to the

economic realities test. The

Department’s formulation of the test

does not preclude the possibility that in

some circumstances, such as with

respect to farmworkers, that this factor

could be particularly probative.

The Department adopts

§ 795.105(d)(2)(i) as proposed.

4. The ‘‘Permanence of the Working

Relationship’’ Factor

The second additional guidepost

factor, described in the regulatory text at

§ 795.105(d)(2)(ii), is the degree of

permanence of the working relationship

between the individual and the

potential employer. The Department

proposed that this factor would weigh

in favor of the individual being an

independent contractor to the extent the

work relationship is by design definite

in duration or sporadic, which may

include regularly occurring fixed

periods of work, although the seasonal

nature of work by itself would not

necessarily indicate independent

contractor classification. In particular,

the Department explained that the

seasonal nature of work would not

indicate independent contractor status

where the worker’s position is

permanent for the duration of the

relevant season and where the worker

has done the same work for multiple

seasons. See Paragon Contractors, 884

F.3d at 1236–37. The proposal also

provided that this factor would weigh in

favor of the individual being an

employee to the extent the work

relationship is instead by design

indefinite in duration or continuous. As

noted in the NPRM, courts and the

Department routinely consider this

factor when applying the economic

reality analysis under the FLSA to

determine employee or independent

contractor status. See, e.g., WHD

Opinion Letter FLSA2019–6 at 4; Razak,

951 F.3d at 142; Hobbs, 946 F.3d at 829;

Karlson, 860 F.3d at 1092–93; McFeeley,

825 F.3d at 241; Keller, 781 F.3d at 807;

Scantland, 721 F.3d at 1312.

Multiple commenters urged the

Department to focus this factor further

on the indefiniteness of a working

relationship. For example, the U.S.

Chamber of Commerce commented that

independent contractors often enter into

multiple, long-term contracts with the

same business. It suggested that the

Department clarify that such contracts

do not indicate employee status merely

because of their length, but that only

contracts of an indefinite length would

be indicative of employee status. CWI

similarly requested that this factor focus

only on the length of the relationship as

reflected in contractual agreements,

regardless of how long the relationship

is in reality.

The Department considered adding

clarifying language to the regulation

indicating that a relationship whose

length is indefinite is more indicative of

employee status than a relationship that

is merely long. However, because the

focus of the economic realities test is

not on technical formalities, it may be

that a long relationship could be

evidence of permanence despite a

contract with a definite end. For

example, an employer may have a

permanent relationship with an

employee despite requiring the

employee to enter into annual

employment contracts. Or a potential

employer may have a long-term

relationship reflected in several short-

term contracts. The Department has

therefore retained the proposed

regulatory text because, although

indefiniteness is a stronger indicator of

permanence, the length of a working

relationship is still relevant to this

factor.

One commenter urged the Department

to consider the exclusivity of a

relationship as part of the permanence

factor, an approach taken by some

courts. Specifically, CPIE commented

that permanence does not indicate an

employment relationship unless it is

due to the potential employer’s

requirement of exclusivity rather than

the worker’s choice. The Department

agrees that exclusivity most strongly

indicates an employment relationship

when the exclusivity is required by the

potential employer. However, as the

Department discussed in the NPRM, an

exclusivity requirement more strongly

relates to the control exercised over the

worker than the permanence of the

relationship. As explained in the

discussion of the control factor, that

factor already considers whether a

worker has freedom to pursue external

opportunities by working for others,

including a potential employer’s rivals.

See, e.g., Freund, 185 F. App’x at 783

(affirming district court’s finding that

‘‘Hi–Tech exerted very little control

over Mr. Freund,’’ in part, because

‘‘Freund was free to perform

installations for other companies’’).

38

The same concept of exclusivity is then

re-analyzed as part of the permanence

factor. Compare id. (‘‘Freund’s

relationship with Hi–Tech was not one

with a significant degree of permanence

. . . [because] Freund was able to take

jobs from other installation brokers.’’),

with Scantland, 721 F.3d at 1319

(finding installation technicians’

relationships with the potential

employer were permanent because they

‘‘could not work for other companies’’).

Such duplicative analysis of exclusivity

under the permanence factor, however,

is not supported by the Supreme Court’s

original articulation of that factor in

Silk. See 331 U.S. at 716 (analyzing the

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See Merriam-Webster Dictionary, https://

www.merriam-webster.com/dictionary/permanent

(defining permanent as ‘‘continuing or enduring

without fundamental or marked change’’); see also

Oxford American Dictionary 1980 (defining

permanent as ‘‘lasting or meant to last

indefinitely’’); Merriam-Webster Pocket Dictionary

1947 (defining permanent as ‘‘Lasting; enduring’’).

‘‘regularity’’ of unloaders’ work); id. at

719 (analyzing truck drivers’ ability to

work ‘‘for any customer’’ as an aspect of

‘‘the control exercised’’ but not

permanence); see also 12 FR 7967

(describing the permanence factor as

pertaining to ‘‘continuity of the

relation’’ but with no reference to

exclusivity). Nor is the concept of

exclusivity part of the common

understanding of the word

‘‘permanent.’’

39

In a similar vein to the

Department’s analysis of the concept of

initiative, the Department believes

analysis of exclusivity as part of the

permanence factor dilutes the

significance of actual permanence

within that factor, blurs the lines

between the economic reality factors,

and creates confusion by incorporating

a concept that is distinct from

permanence.

Because the worker’s ability to work

for others is already analyzed as part of

the control factor, proposed

§ 795.105(d)(2)(ii) articulated the

permanence factor without referencing

the exclusivity of the relationship

between the worker and potential

employer, and the Department retains

the same language in the final rule.

Commenters also requested that the

Department clarify that long-term

relationships that are based on the

workers’ choice to continue working for

the same business rather than the

potential employer’s requirements

should not indicate employee status

under this factor. NRF commented that

an independent contractor may choose

to focus on a particular client for

reasons of the contractor’s own rather

than the client’s requirements,

suggesting that the worker’s choice does

not indicate employee status. The

Department does not believe that further

explanation in the regulatory text is

necessary, though it agrees that a long-

term relationship may not always

indicate an employee relationship. This

factor is not always probative to the

analysis, and the scenarios described by

the commenters may be situations

where the length of the relationship is

not a useful indicator. However,

explicitly stating that a relationship is

not permanent whenever the worker

chooses for it to be long-term is not

accurate. After all, every employee to

some extent chooses whether to

continue working for their employer,

and the FLSA’s definition of ‘‘employ’’

includes to passively ‘‘suffer or permit

to work.’’ 29 U.S.C. 203(g). A long-term

relationship is always the result of

choices by both the potential employer

and the worker, but it is sometimes a

helpful indicator of employee status.

Edward Tuddenham urged the

Department to give examples

relationships that may or may not be

viewed as permanent, such as a contract

that is repeatedly renewed or an

industry that is generally itinerant.

Although the Department has added one

example regarding this factor to new

§ 795.115 to help illustrate how the

factor is to be considered, the

Department does not believe it is

possible to address all of the possible

working relationships and contractual

arrangements in a useful fashion.

Certain general principles should

inform any analysis of work

relationships. The Department reiterates

that it is not contractual formalities that

are relevant to the inquiry, but

economic reality. A potential

employer’s attempts to use contractual

technicalities to label a relationship as

temporary even though it is indefinite in

reality should not affect whether this

factor indicates employee or

independent contractor status. Again,

this factor will not always be probative,

and, for example, in certain industries

where employees are often employed for

short periods, a short term of

employment would not indicate

independent contractor status.

SWCCA pointed out that a recent

WHD opinion letter included language

stating that ‘‘the existence of a long-term

working relationship may indirectly

indicate permanence.’’ WHD Opinion

Letter FLSA 2019–06 (April 29, 2019).

The Alliance requested that this

language be added to § 795.105(d)(2)(ii).

Though the quoted language and the

case law from which it is drawn remain

useful guidance for employers, the

Department does not believe it is

necessary to add this language to the

regulation, which already indicates that

a long-term relationship points toward

an employment relationship.

Accordingly, the Department finalizes

§ 795.105(d)(2)(ii) as proposed.

5. The ‘‘Integrated Unit’’ Factor

The final additional guidepost factor,

described in § 795.105(d)(2)(iii), is

whether the work is part of an

integrated unit of production. The

Department proposed that this factor

would weigh in favor of the individual

being an employee to the extent his or

her work is a component of the potential

employer’s integrated production

process for a good or service. The

proposed regulatory text further

explained that this factor would weigh

in favor of an individual being an

independent contractor to the extent his

or her work is segregable from the

potential employer’s production

process. The Department proposed to

clarify that this factor is different from

the concept of the importance or

centrality of the individual’s work to the

potential employer’s business.

As noted in the NPRM, the

Department and courts outside of the

Fifth Circuit have typically articulated

the sixth factor of the economic reality

test as ‘‘the extent to which services

rendered are an integral part of the

[potential employer’s] business.’’ WHD

Fact Sheet #13. Under this articulation,

the ‘‘integral part’’ factor considers ‘‘the

importance of the services rendered to

the company’s business.’’ McFeeley, 825

F.3d at 244. In line with this thinking,

courts generally state that this factor

favors employee status if the work

performed is so important that it is

central to or at ‘‘[t]he heart of [the

potential employer’s] business.’’ Werner

v. Bell Family Med. Ctr., Inc., 529 F.

App’x 541, 545 (6th Cir. 2013); see also

Baker, 137 F.3d at 1443 (‘‘[R]ig welders’

work is an important, and indeed

integral, component of oil and gas

pipeline construction work.’’);

Lauritzen, 835 F.2d at 1537–38

(‘‘[P]icking the pickles is a necessary

and integral part of the pickle

business[.]’’); DialAmerica, 757 F.2d at

1385 (‘‘[W]orkers are more likely to be

‘employees’ under the FLSA if they

perform the primary work of the alleged

employer.’’).

The Department explained in the

NPRM that it is concerned that this

focus on importance or centrality

departs from the Supreme Court’s

original articulation of the economic

reality test, has limited probative value

regarding the ultimate question of

economic dependence, and may be

misleading in some instances. As such,

the Department proposed that

§ 795.105(d)(2)(iii) would clarify that

the ‘‘integral part’’ factor should instead

consider ‘‘whether the work is part of an

integrated unit of production,’’ which

aligns with the Supreme Court’s

analysis in Rutherford Food, 331 U.S. at

729.

Many commenters representing

workers urged the Department to retain

the ‘‘integral part’’ factor used by courts

as part of the economic realities test,

rather than replacing it with the

‘‘integrated unit’’ factor articulated in

the proposed rule. This ‘‘integral part’’

factor would consider the importance or

centrality of the work performed to the

purported employer’s business. In

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A 2002 opinion letter interpreted the factor to

focus on the importance of the work, explaining

that ‘‘[w]hen workers play a crucial role in a

company’s operation, they are more likely to be

employees than independent contractors.’’ WHD

Opinion Letter, 2002 WL 32406602, at *3 (Sept. 5,

2002). However, the Department’s most recent

opinion letter on this subject characterized the

factor as ‘‘the extent of the integration of the

worker’s services into the potential employer’s

business.’’ WHD Opinion Letter FLSA2019–6 at 6

(emphasis added).

41

The only appellate case the Department found

of misalignment in this scenario is Paragon

Contractors, 884 F.3d at 1237–38.

42

As explained elsewhere, the Fifth Circuit does

not usually consider the ‘‘integral part’’ factor in its

analysis.

particular, several commenters,

including United Food and Commercial

Workers, Senator Patty Murray, and the

State AGs contended that removing the

‘‘integral’’ factor would be contrary to

established circuit court precedent. The

UFCW asserted that ‘‘[w]hether a

worker’s service is an integral part of the

company’s business may not be a

relevant factor in all situations, but it

may be in some and some courts have

found value in analyzing this fact.’’ It

commented that if the Department

stated that integrality is not relevant to

the economic realities test, the

Department’s proposed rule would

unduly limit the inquiry. One

commenter, the Greenlining Institute,

commented that eliminating an

‘‘integral part’’ factor disfavors workers

‘‘performing physical tasks instead of

stereotypically ‘intellectual’ pursuits,’’

who are disproportionately racial or

ethnic minorities.

Many commenters agreed with the

Department’s proposal to eliminate the

‘‘integral part’’ factor or any similar

factor focused on the importance of the

work. The U.S. Chamber of Commerce,

for example, commented, ‘‘In today’s

economy, independent workers provide

services in all aspects of the economy

and all aspects of individual businesses,

including core and non-core functions,

as well as in the same or different lines

of business.’’ The Society for Human

Resource Management similarly

commented that the ‘‘analysis

concerning the ‘integrated unit’ factor

should not focus on the ‘importance of

services’ provided.’’

Though circuit courts have applied an

‘‘integral part’’ factor, it was not one of

the factors analyzed by the Supreme

Court in Rutherford Food. Rather, the

Court considered whether the worker

was part of an ‘‘integrated unit of

production,’’ 331 U.S. at 729, as this

final rule does. The Department believes

that circuit courts—and even the

Department itself—have deviated from

the Supreme Court’s guidance and, in

doing so, have introduced an ‘‘integral

part’’ factor that can be misleading. As

explained in the NPRM, the ‘‘integral

part’’ factor was not one of the distinct

factors identified in Silk as being

‘‘important for decision.’’ 331 U.S. at

716. The ‘‘integrated unit’’ factor instead

derives from Rutherford Food, where

the Supreme Court observed that the

work at issue was ‘‘part of an integrated

unit of production’’ in the potential

employer’s business and concluded that

workers were employees in part because

they ‘‘work[ed] alongside admitted

employees of the plant operator at their

tasks.’’ 331 U.S. at 729. As the NPRM

explained, the Department began using

the ‘‘integral part’’ factor in

subregulatory guidance in the 1950s.

See WHD Opinion Letter (Aug. 13,

1954); WHD Opinion Letter (Feb. 8,

1956).

40

And circuit courts in the 1980s

began referring to it as the ‘‘integral

part’’ factor and analyzing it in terms of

the ‘‘importance’’ of the work to the

potential employer. See, e.g., Lauritzen,

835 F.2d 1529, 1534–35; DialAmerica

Mktg., 757 F.2d at 1386.

The NPRM explained the reasons that

the Department now believes the

Supreme Court’s original ‘‘integrated

unit’’ formulation is more probative

than the ‘‘integral part’’ (meaning

‘‘important’’) approach. As Judge

Easterbrook pointed out in his

concurrence in Lauritzen, ‘‘[e]verything

the employer does is ‘integral’ to its

business—why else do it?’’ Lauritzen,

835 F.2d at 1541 (Easterbrook J.,

concurring); see also Zheng, 355 F.3d at

73 (cautioning in the joint employer

context that interpreting the factor to

focus on importance ‘‘could be said to

be implicated in every subcontracting

relationship, because all subcontractors

perform a function that a general

contractor deems ‘integral’ to a product

or a service’’).

The Department’s review of appellate

cases since 1975 involving independent

contractor disputes under the FLSA

supports this criticism. The Department

generally found that, in cases where the

‘‘integral part’’ factor was addressed, the

factor aligned with the ultimate

classification when the ultimate

classification was employee.

41

However,

courts’ analyses of the ‘‘integral part’’

factor—again, if it was analyzed at

all

42

—were misaligned more frequently

than they were aligned with the

ultimate classification when the

ultimate classification was independent

contractor status. Compare Iontchev,

685 F. App’x at 551; Meyer, 607 F.

App’x at 123; Freund, 185 F. App’x at

784–85; Mid-Atl. Installation, 16 F.

App’x at 107–08; Brandel, 736 F.2d at

1120, with Werner, 529 F. App’x at 545–

46; DialAmerica Mktg., 757 F.2d at

1387. This higher rate of misalignment

is precisely what Judge Easterbrook’s

criticism would have predicted: If

‘‘[e]verything the employer does is

‘integral,’ ’’ that factor would point

towards employee status for workers

who are employees, but also for workers

who are independent contractors.

The NPRM further explained that ‘‘the

relative importance of the worker’s task

to the business of the potential

employer says nothing about whether

the worker economically depends on

that business for work.’’ 85 FR 60617.

While some courts assumed that

business may desire to exert more

control over workers who provide

important services, there is no need to

use importance as an indirect proxy for

control because control is already a

separate factor. Id. (citing Dataphase,

781 F. Supp. at 735, and Barnard Const.,

860 F. Supp. at 777, aff’d sub nom.

Baker v. Flint Eng’g & Const. Co., 137

F.3d 1436 (10th Cir. 1998)). And this

assumption may not always be valid.

Modern manufacturers, for example,

commonly assemble critical parts and

components that are produced and

delivered by wholly separate companies

through contract rather than

employment arrangements. And low

transaction costs in many of today’s

industries make it cost-effective for

firms to hire contractors to perform

routine tasks.

The Department considered salvaging

the ‘‘integral part’’ factor by

deemphasizing ‘‘integral’’ and

emphasizing ‘‘part.’’ Instead of focusing

on whether the work is important ‘‘to’’

a potential employer’s business, the

factor would focus on whether the work

is an important ‘‘part’’ of that business.

This approach would more closely align

with how ‘‘integral part’’ was used by

the Supreme Court in Silk, which asked

whether workers were ‘‘an integral part

of [defendants’] businesses,’’ as opposed

to operating their own businesses. 331

U.S. 716. But as the NPRM noted, the

Silk Court framed that question as the

ultimate inquiry, and not as a factor that

is useful to guide the inquiry. See 85 FR

60616 n.41. Asking whether a worker is

part of—integral or otherwise—a

potential employer’s business is not

useful because it simply restates the

ultimate inquiry: If a worker were part

of the potential employer’s business,

then he or she could not be in business

for him- or herself and therefore would

be economically dependent. As an

added complication, new technologies

have led to the emergence of platform

companies that connect consumers

directly with service providers, and it is

often difficult to determine whether

those platform companies are in

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business of supporting service

providers’ own businesses or are in the

business of hiring service providers to

serve customers. Compare Razak, 951

F.3d at 147 n.12 (‘‘We also believe

[there] could be a disputed material

fact’’ whether Uber is ‘‘a technology

company that supports drivers’

transportation businesses, and not a

transportation company that employs

drivers.’’), with O’Connor v. Uber

Techs., Inc., 82 F. Supp. 3d 1133, 1153

(N.D. Cal. 2015) (‘‘it is clear that Uber

is most certainly a transportation

company’’). For the reasons explained,

the final rule retains the ‘‘integrated

unit’’ approach.

The Department does not share the

Greenlining Institute’s concern that the

final rule’s ‘‘integrated unit’’ factor

would result in workers who perform

‘‘physical tasks’’ being classified as

independent contractors more than

workers who perform white collar,

‘‘intellectual’’ work. Meat deboning is a

physical task, but deboners were found

to be part of an integrated unit of

production in Rutherford Food. 331 U.S.

at 729. On the other hand, freelance

writers perform a white collar task, but

they generally are not integrated into a

publication’s production process

because they are not involved in, for

instance, assigning, editing, or

determining the layout of articles. Both

white collar and physical labor jobs may

be part of an integrated unit of

production. The Department has added

one example in new § 795.115 showing

that a newspaper editor—who performs

primarily white collar tasks—may be

part of an integrated unit of production.

Another commenter, the Arkansas

Trucking Association, agreed that the

‘‘integrated unit’’ factor was superior to

‘‘integral part,’’ but suggested an

alternative formulation based on

whether the business’s activities would

cease or be severely impacted by the

absence of the worker. However, this

approach has the same limitations as the

approaches that emphasize

‘‘importance.’’ Almost every worker

performs work that is in some sense

important to the business that has hired

the worker; otherwise, the business

would not hire the worker. Moreover, as

explained in the NPRM, easily-replaced

workers are often more dependent on a

particular business for work precisely

because they are so easily replaced.

Focusing on the impact of a worker’s

absence turns the economic dependence

analysis on its head by essentially

looking at the business’s dependence on

the worker. As a result, it sends

misleading signals about employee

status.

Another group of commenters

suggested that the factor should include

an explicit consideration of the location

of the work performed. The U.S.

Chamber of Commerce, for example,

suggested that the factor should

consider whether the worker is

performing work ‘‘the majority of which

is performed off the physical premises

of the business.’’

Whether the work is performed on the

business’s physical premises may be a

consideration under the ‘‘integrated

unit’’ factor, as it may indicate the

extent to which the worker is part of an

integrated unit of production. However,

the Department does not believe it is

necessary to include this consideration

as an explicit part of the ‘‘integrated

unit’’ factor. Many businesses have no

physical location but nevertheless

employ employees. In other instances,

an employee may be part of an

integrated unit despite performing work

at a different location than other

employees. See, e.g., Goldberg v.

Whitaker House Cooperative, Inc., 366

US 28, 32 (1961) (holding that workers

who produced copies of a sample

product at home were employees). Some

workers perform work on a business’s

physical premises but perform discrete,

segregable services unrelated to any

integrated process or unified purpose.

Thus, although the location of the work

may be a fact that is relevant to the

‘‘integrated unit’’ factor, it is not so

probative that it would be useful to

elevate it above other facts that may be

more relevant in a particular case.

Several commenters asked that the

Department clarify that the relevant

inquiry is whether the worker is part of

an integrated unit of production that is

part of the potential employer’s own

processes rather than part of a broader

supply chain. NRF suggested clarifying

language that would ‘‘expressly state

that merely serving as a link in the

chain of a company’s provision of goods

or services’’ does not indicate employee

status. It suggested that such language

would make it clear that this factor does

not indicate employee status where a

worker is merely one, segregable step in

the process of delivering a product to a

consumer.

The Department does not believe such

a clarification is needed, because the

text of the final rule states that this

factor points toward employee status

only when the worker performs ‘‘a

component of the potential employer’s

integrated production process.’’ The

relevant process is the potential

employer’s process, not the broader

supply chain. A worker who performs a

segregable step in the process of

delivering a product but who is not

integrated into the employer’s own

production process is not part of an

integrated unit of production. Multiple

businesses, including independent

contractors, may perform steps in the

same supply chain.

Some commenters suggested that the

description of this factor in the

preamble should define the scope of the

‘‘unified purpose’’ toward which the

potential employer’s processes work.

WPI requested that the Department

clarify that the ‘‘unified purpose’’

cannot be broader than the potential

employer’s ‘‘core or primary business

purpose.’’ On the other hand,

Farmworker Justice urged a broad

definition of ‘‘unified purpose’’ to

prevent gamesmanship by which an

employer may attempt to artificially

separate its production process into

separate units in order to claim that they

are segregable rather than parts of a

unified whole. It cited a hypothetical

tomato farmer who could label its

tomato harvesters as a separate unit

rather than as part of the process of

growing tomatoes.

The Department rejects these

suggestions, because the final rule’s

rejection of the ‘‘integral part’’ factor

and the question of ‘‘importance’’ or

‘‘centrality’’ makes clear that the

relevant facts are the integration of the

worker into the potential employer’s

production processes, rather than the

nature of the work performed. As

explained above, identifying the ‘‘core

or primary business purpose’’ is not a

useful inquiry in the modern economy.

Falling transaction costs and other

factors described above allow

businesses to hire independent

contractors to carry out tasks that are

part of the businesses’ core functions,

while keeping those functions separate

from its own production processes. At

the same time, seemingly peripheral

functions may be integrated into an

employer’s own processes, indicating

employee status. What matters is the

extent of such integration rather than

the importance or centrality of the

functions performed, which the

Department does not find to be a useful

indicator of employee or independent

contractor status.

As noted in the NPRM, the

Department recognizes that it may be

difficult to determine the extent to

which a worker is part of an integrated

unit of production. For this reason, this

factor is not always useful to the

economic realities inquiry, and it is less

likely than the core factors to be

determinative. For example, this factor

would not indicate independent

contractor status for Farmworker

Justice’s hypothetical tomato harvesters

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43

See Silk, 331 U.S. at 716 (‘‘No one [factor] is

controlling nor is the list complete.’’).

merely because the farmer artificially

labeled them a separate unit. As has

been the case since the concepts

underlying the economic realities test

was articulated, the test does not

depend on labels assigned to workers.

Rutherford Food, 331 U.S. at 729

(‘‘Where the work done, in its essence,

follows the usual path of an employee,

putting on an ‘independent contractor’

label does not take the worker from the

protection of the Act.’’). The factor may

indicate either employee or

independent contractor status based on

the extent to which the harvesters are

integrated into the farmer’s production

process as a matter of fact, but most

likely the ultimate determination would

depend more on other factors, such as

control and opportunity for profit or

loss.

WPI also suggested that the

Department clarify language in the

preamble to the proposed rule stating

that employee status would be indicated

for a worker who performs work closely

alongside conceded employees. WPI

expressed concern that this language

could wrongly imply that a worker

performing different tasks than the

conceded employees but in close

proximity to them would indicate

employee status. The Department does

not believe such clarification is

necessary, because the preamble stated

that employee status is indicated where

the worker ‘‘performs identical or

closely interrelated tasks as those

employees.’’ In other words, WPI is

correct that if a worker works physically

close to conceded employees but

performs unrelated tasks, that fact alone

would not indicate employee status.

Finally, many commenters requested

that the Department add examples

explaining how this factor would apply

to specific industries, including

trucking, construction, financial

advising, and personal shopping. Others

wanted examples to address certain

types of contractual arrangements, such

as multi-sided platforms, franchisees,

and buy/sell agreements. In response to

these requests, the Department notes

that the facts that inform the ‘‘integrated

unit’’ factor are too circumstance-

specific to apply blanket statements to

entire industries or broad types of

employment arrangements. Any

particular task that is common in a

particular industry may be performed in

one instance by a worker who is part of

an integrated unit of production or by a

segregable unit. In other words, this

factor may point in a different direction

for workers who perform similar duties

in the same industry but who are more

or less integrated into their potential

employer’s processes based on the

potential employer’s business model.

Moreover, contractual formalities such

as a buy/sell agreement or contracts

formed using multi-sided platforms

could memorialize either employment

or independent contractor

arrangements; the determination would

not depend on the labels assigned but

on the various economic realities

factors, including the worker’s

integration into the potential employer’s

production process.

That said, as explained elsewhere in

this preamble, although the Department

cannot address all industries or all

possible factual scenarios, it does

appreciate that examples are helpful to

understanding how each factor operates.

The new regulatory provision added in

this final rule to further illustrate

several factors, § 795.115, includes two

examples specifically meant to

demonstrate how facts about whether a

worker is part of an integrated unit of

production should be considered as part

of the employment relationship

analysis.

For the reasons explained, the

Department finalizes § 795.105(d)(2)(iii)

as proposed.

6. Additional Unlisted Factors

The National Restaurant Association

stated that facts and factors not listed in

§ 795.105(d) may be relevant to the

question of economic dependence even

though they would not be as probative

as the two core factors. This commenter

expressed concern that future courts

may ignore these unlisted but

potentially relevant considerations in

response to this rulemaking and

requested that the Department revise the

regulatory text to explicitly recognize

that unlisted factors may be relevant.

While proposed § 795.105(c) already

states that the five factors listed in

§ 795.105(d) are ‘‘not exhaustive,’’

43

the

Department agrees that it may be helpful

to make this point more explicit. The

Department is thus adding

§ 795.105(d)(2)(iv), which states that

additional factors not listed in

§ 795.105(d) may be relevant to

determine whether an individual is an

employee or an independent contractor

under the FLSA. As with any fact or

factor, such additional factors are

relevant only to the extent that they

help answer whether the individual is

in business for him- or herself, as

opposed to being economically

dependent on an employer for work.

Factors that do not bear on this

question, such as whether an individual

has alternate sources of wealth or

income and the size of the hiring

company, are not relevant. These

unlisted factors are less probative than

the core factors listed in § 795.105(d)(1),

while their precise weight depends on

the circumstances of each case and is

unlikely to outweigh either of the core

factors .

E. Focusing the Economic Reality Test

on Two Core Factors

Proposed § 795.105(c) was intended to

improve the certainty and predictability

of the economic reality test by focusing

the test on two core factors: (1) The

nature and degree of the worker’s

control over the work; and (2) the

worker’s opportunity for profit or loss.

This focus is an important corollary of

the sharpened definition of economic

dependence to include individuals who

are dependent on a potential employer

for work and to exclude individuals

who are in business for themselves. The

NPRM explained that these core factors,

listed in proposed § 795.105(d)(1), drive

at the heart of what is meant by being

in business for oneself: Such a person

typically controls the work performed in

his or her business and enjoys a

meaningful opportunity for profit or risk

of loss through personal initiative or

investment. The other economic reality

factors—skill, permanence, and

integration—are also relevant as to

whether an individual is in business for

him- or herself. But they are less

probative to that determination. For

instance, it is not uncommon for

comparatively high skilled

individuals—such as software

engineers—to work as employees, and

for comparatively low skill

individuals—such as drivers—to be in

business for themselves. See, e.g.,

Saleem, 854 F 3d at 140; Express Sixty-

Minutes Delivery, 161 F.3d at 306. In

contrast, ‘‘[i]n ordinary circumstances,

an individual ‘who is in business for

him- or herself’ will have meaningful

control over the work performed and a

meaningful opportunity to profit (or risk

loss).’’ 85 FR 60618. As such, ‘‘it is not

possible to properly assess whether

workers are in business for themselves

or are instead dependent on another’s

business without analyzing their control

over the work and profit or loss

opportunities.’’ Id.

The NPRM further explained that

focusing on the two core factors is also

supported by the Department’s review

of case law. The NPRM presented a

remarkably consistent trend based on

the Department’s review of the results of

appellate decisions since 1975 applying

the economic reality test. Among those

cases, the classification favored by the

control factor aligned with the worker’s

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44

This is not to imply that the opportunity factor

necessarily aligns with the ultimate classification,

but rather that the Department is not aware of an

appellate case in which misalignment occurred.

45

The only cases in which an appellate court’s

ruling on a worker’s classification was contrary to

the court’s conclusions as to the control factor were

cases in which the opportunity factor pointed in the

opposite direction. See 85 FR 60619 (citing Paragon

Contractors, 884 F.3d at 1235–36, and Cromwell,

348 F. App’x at 61).

46

There are two distinct concepts within the

economic reality test—and any test for employment

status—that can be broad or narrow. The first

concept is the test’s standard for employment,

which is economic dependence. See Bartels, 332

U.S. at 130. The second concept is the set of

circumstances that may be considered as part of the

test, which is the ‘‘circumstances of the whole

activity.’’ See Rutherford Food, 331 U.S at 730. The

breadth of these two concepts are not always

logically related. For instance, the ABC test states

that a worker is an employee unless the hiring party

can establish that three criteria are met, see, e.g.,

Dynamex, 416 P.3d at 35; thus, the ABC test

considers a relatively narrow set of circumstances

while imposing a broad standard for employment.

While most commenters that objected to the

narrowing of the economic reality test did not

present the standard of employment and

circumstance that may be considered as separate

concepts, the Department addresses them

separately.

ultimate classification in all except a

handful where the opportunity factor

pointed in the opposite direction. And

the classification favored by the

opportunity factor aligned with the

ultimate classification in every case.

44

These two findings imply that whenever

the control and opportunity factors both

pointed to the same classification—

whether employee or independent

contractor—that was the court’s

conclusion regarding the worker’s

ultimate classification.

45

See 85 FR

60619. In other words, the Department

did not uncover a single court decision

where the combined weight of the

control and opportunity factors was

outweighed by the other economic

reality factors. In contrast, the

classification supported by other

economic reality factors was

occasionally misaligned with the

worker’s ultimate classification,

particularly when the control factor, the

opportunity factor, or both, favored a

different classification. See id. at 60621.

The NPRM thus provided that, given

their greater probative value, if both

proposed core factors point towards the

same classification—whether employee

or independent contractor—there is a

substantial likelihood that is the

individual’s correct classification. This

is because it is quite unlikely for the

other, less probative factors to outweigh

the combined weight of the core factors.

In other words, where the two core

factors align, the bulk of the analysis is

complete, and anyone who is assessing

the classification may approach the

remaining factors and circumstances

with skepticism, as only in unusual

cases would such considerations

outweigh the combination of the two

core factors.

Numerous commenters welcomed

proposed § 795.105(c)’s sharpening of

the economic reality test by recognizing

the two core factors’ greater probative

value on whether an individual is in

business for him- or herself. For

instance, the U.S. Chamber of

Commerce stated that ‘‘[t]he

Department’s straightforward focus on

two core factors presents a concise

interpretation of ‘economic dependency’

grounded in the Act’s statutory

definition of ‘employ’ and ‘employer,’

consistent with Supreme Court

precedent, and well-reasoned courts of

appeals’ decisions.’’ The American

Bakers Association (ABA) likewise

‘‘supports the Department’s position

that the two most probative ‘core’

factors for determining independent

contractor status under the FLSA are the

degree and nature of an individual’s

control over their work, and the

opportunity for profit (or loss).’’ See

also, e.g., ATA; CPIE; National

Restaurant Association; SHRM. Even

one commenter who did not generally

support this rulemaking ‘‘agreed with

the Department that the two main

factors, control and opportunity for

profit or loss, should be given greater

weight.’’ Owner-Operator Independent

Driver Association (OOIDA).

Many commenters objected to

focusing on the two core factors.

Broadly speaking, they raised three

interrelated concerns. First, commenters

contended that elevating the two core

factors is inconsistent with the

economic reality test, which they

asserted requires that factors be either

unweighted or weighted equally. See,

e.g., NELP (objecting to ‘‘elevating two

narrow ‘core’ factors’’); SWACCA;

Commissioner Slaughter of the Federal

Trade Commission (FTC). Second,

commenters contended that focusing on

two core factors would narrow the scope

of who is an employee (as opposed to

an independent contractor) under the

FLSA. See, e.g., NELP (‘‘The NPRM

narrows the FLSA test for employee

coverage[.]’’); State AGs (‘‘The Proposed

Rule’s interpretation of [employment

under] the FLSA is unlawfully

narrow.’’); Appleseed Center (‘‘The

Department of Labor is trying to

impermissibly narrow this definition’’);

NCFW (objecting to ‘‘agency’s proposed

attempt to narrow the definition of

employee’’). Third, commenters asserted

that focusing on two core factors would

impermissibly restrict the set of

circumstances that may be considered

when assessing whether a worker is an

employee or independent contractor

under the FLSA. TRLA (‘‘proposed

reformulation would eliminate . . . any

consideration of [the skill and

permanence] factors’’); NELA (objecting

to ‘‘a narrow, control-dominated

inquiry’’); State AGs (objecting to

proposed rule because it ‘‘narrows

several areas of inquiry.’’).

46

The

Department responds to each of the

above concerns below, and then

addresses other requests relating to the

focus on the two factors.

1. Focusing on Two Core Factors is

Consistent With the Economic Reality

Test

Many commenters contended that

emphasizing core factors over others

would violate a requirement that

economic reality factors be unweighted

or weighted equally. According to

SWACCA, ‘‘[t]he proposed weighted

rule is a novel concept and a departure

from existing caselaw.’’ See also, e.g.,

NELA (objecting to ‘‘emphasizing

certain factors over what should be the

‘ultimate inquiry’ ’’). FTC Commissioner

Slaughter likewise objected that ‘‘[t]he

Proposal takes the Supreme Court’s five

factor test, where all five factors are

given equal weight, and narrows it

down to focus on only two [core]

factors.’’ See also Appleseed Center

(‘‘[A]ll are given equal weight.’’);

Senator Patty Murray (suggesting that

‘‘DOL afford [factors] equal weight’’).

NELP appeared to agree with the

Department that the economic reality

test may focus on certain factors over

others, but asserted that ‘‘the factor of

integration into the business of another

should be weighed heavily,’’ rather than

the proposed rule’s two core factors.

Several commenters further relied on an

age discrimination case to contend that

the economic reality test ‘‘cannot be

rigidly applied’’ and that ‘‘[i]t is

impossible to assign to each of these

factors a specific and invariably applied

weight.’’ NELP (quoting Hickley v. Arkla

Indus., Inc., 699 F.2d 748, 752 (5th Cir.

1983)); see also Michigan Regional

Council of Carpenters (MRCC) (same).

The Department disagrees that the

economic reality test requires factors to

be unweighted or equally weighted.

Each time the Department or a court

applies the test, it must balance

potentially competing factors based on

their respective probative value to the

ultimate inquiry of economic

dependence. In the very case that

announced the economic reality factors,

the Supreme Court listed five factors

that are ‘‘important for decision’’ but

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In particular, the Saleem court focused on:

drivers’ ‘‘considerable discretion in choosing the

nature and parameters of their relationship with the

defendant,’’ ‘‘significant control over essential

determinants of profits in [the] business,’’ how they

‘‘invested heavily in their driving businesses,’’ and

the ‘‘ability to choose how much work to perform.’’

854 F.3d at 137–49.

48

The Razak decision also briefly addressed

other factors, including a footnote on the ‘‘integral’’

factor and a discussion that was nominally about

the permanence factor but actually concerned

control: ‘‘On one hand, Uber can take drivers

offline, and on the other hand, Plaintiffs can drive

whenever they choose to turn on the Driver App,

with no minimum amount of driving time

required.’’ 951 F.3d at 147 n.12.

49

Some courts have explicitly acknowledged that

facts related to the control factor were more

probative than facts related to other factors. For

instance, the court in Saleem stated that ‘‘whatever

‘the permanence or duration’ of Plaintiffs’ affiliation

with Defendants, both its length and the ‘regularity’

of work was entirely of Plaintiffs’ choosing.’’ 854 F.

3d at 147 (citation omitted). When discussing ‘‘the

use of special skills,’’ the court in Selker Brothers

similarly explained that, ‘‘[g]iven the degree of

control exercised by Selker over the day-to-day

operations of the stations, this criterion cannot be

said to support a conclusion of independent

contractor status.’’ 949 F.2d at 1295.

50

Driscoll, 603 F.2d at 755 (‘‘The appellants’

affidavits, which must be taken as true for summary

judgment purposes, plainly disclose that

[defendant] possesses substantial control over

important aspects of the appellants’ work’’); id.

(‘‘The appellants’ opportunity for profit or loss

appears to depend more upon the managerial skills

of [defendant]’’); Lauritzen, 835 F.2d at 1536 (‘‘The

defendants exercise pervasive control over the

operation as a whole.’’); id. (‘‘The Sixth Circuit [in

a prior case] found that the migrant workers had the

opportunity to increase their profits through the

management of their pickle fields....We do not

agree.’’); Howes 7 F. Supp. 3d at 726, aff’d sub nom.

Perez v. D. Howes LLC, 790 F.3d 681 (6th Cir. 2015);

(‘‘Accordingly, [the control] factor weighs in favor

of a finding that the workers were employees.’’); id.

(‘‘[W]orkers could simply increase their wages by

working longer, harder, and smarter—this does not

constitute an opportunity for profit.’’); Cavazos, 822

F. Supp. at 442 (‘‘Their lack of control supports

plaintiffs’ claim that they are employees.’’); id. at

443 (noting that the work relationship ‘‘does not

afford plaintiffs an opportunity for profits’’).

did not treat them equally. Silk, 331

U.S. at 716. It instead emphasized the

most probative factors, while de-

emphasizing less probative ones in that

case. The Court focused on the fact that

coal unloaders ‘‘had no opportunity to

gain or lose’’ to conclude they were

employees under the SSA, while

explaining the fact ‘‘[t]hat the unloaders

did not work regularly was not

significant.’’ Id. at 717–18. The Court

further focused on ‘‘the control

exercised [and] the opportunity for

profit from sound management’’ to

conclude that truck drivers were

independent contractors, without

discussing any of the other economic

reality factors. Id. at 719. Similarly, the

Court in Whitaker House concluded that

workers at issue in that case were

employees based primary on

considerations relating to control (e.g.,

the workers were ‘‘regimented under

one organization, manufacturing what

the organization desires’’) and

opportunity for profit (e.g., the workers

were ‘‘receiving the [piece rate]

compensation the organization dictates’’

rather than ‘‘selling their products on

the market for whatever price they can

command’’). 366 U.S. at 32–33.

As discussed in the NPRM, courts of

appeals also emphasized facts and

factors that are more probative of the

economic dependence inquiry. See 85

FR 60620. In Saleem, the Second Circuit

focused on facts relating to drivers’

control over their work and their

opportunity for profit or loss based on

initiative or investment to conclude that

they were independent contractors.

47

854 F.3d at 138–39; see also Agerbrink

v. Model Service LLC, 787 F. App’x 22,

25–27 (2d Cir. 2019) (denying summary

judgement based solely on disputed

facts regarding plaintiff’s ‘‘control over

her work schedule, whether she had the

ability to negotiate her pay rate, and,

relatedly, her ability to accept or decline

work’’). The Third Circuit in Razak v.

Uber Technologies took a similar

approach by emphasizing disputed facts

regarding ‘‘whether Uber exercises

control over drivers’’ ’ and had ‘‘the

opportunity for profit or loss depending

on managerial skill’’ to deny summary

judgment. 951 F.3d at 145–47.

48

And

the Eight Circuit recently emphasized a

process server’s ability to determine his

own profits by controlling hours, which

assignments to take, and for which

company to work, to affirm a jury

verdict that he was an independent

contractor. See Karlson, 860 F.3d at

1095.

Courts have repeatedly warned

against the ‘‘mechanical application’’ of

the economic reality factors when

determining whether an individual is an

employee or independent contractor.

See, e.g., Saleem, 854 F.3d at 139;

Superior Care, 840 F.2d at 1059. Rather,

the factors should be analyzed with the

aim of answering the ultimate inquiry

under the FLSA: ‘‘Whether an

individual is ‘in business for himself’ or

is ‘dependent upon finding employment

in the business of others.’ ’’ Scantland,

721 F.3d at 1312 (quoting Mednick, 508

F.2d at 301–02). Commenters who

object to focusing on the two core

factors do not dispute this principle,

and some affirmatively support it. For

instance, NELA and the State AGs both

stated that economic reality ‘‘factors ‘are

aids—tools to be used to gauge the

degree of dependence of alleged

employees on the business with which

they are connected’ ’’ (quoting Pilgrim

Equip., 527 F.2d at 1311). NELA

nonetheless believed that it would be

inappropriate to ‘‘emphasiz[e] certain

factors over what should be the

‘ultimate inquiry’: The worker’s

economic dependence on the putative

employer.’’ Emphasizing certain factors,

however, would dilute the ultimate

inquiry of economic dependence only if

those factors were less probative of

economic dependence than others. In

contrast, emphasizing factors that are

more probative would not dilute but

rather focus the analysis on the ultimate

inquiry under the FLSA. If NELA and

the State AGs are correct that the

economic reality factors must be ‘‘used

to gauge the degree of dependence,’’

then focusing on factors that are more

probative measures of economic

dependence is not only permitted but

preferred.

The Department’s review of case law

indicates that courts of appeals have

effectively been affording the control

and opportunity factors greater weight,

even if they did not always explicitly

acknowledge doing so.

49

See 85 FR

60619. Among the appellate decisions

since 1975 that the Department

reviewed, whenever the control factor

and the opportunity factor both pointed

towards the same classification—

whether employee or independent

contractor—that was the worker’s

ultimate classification. Put another way:

In those cases where the control factor

and opportunity factor aligned, had the

courts hypothetically limited their

analysis to just those two factors, it

appears to the Department that the

overall results would have been the

same. One commenter attempted to

dispute this finding. TRLA asserted that,

in the following four cases, farmworkers

who were found to be employees ‘‘might

be reclassified as independent

contractors based on the NPRM’s two

core factors:’’ Driscoll, 603 F.2d 748;

Lauritzen, 835 F.2d 1529; Perez v.

Howes, 7 F. Supp. 3d 715 (W.D. Mich.

2014); and Cavazos v. Foster, 822 F.

Supp. 438 (W.D. Mich. 1993). However,

the court in each of these cases actually

concluded that the control and

opportunity factors both favored

employee classification,

50

and thus the

farmworkers would have been found to

be employees even if those courts had

hypothetically based is decision solely

on the core factors. These cases

therefore reinforce the Department’s

conclusion that the control and

opportunity factors have been

consistently afforded significant weight

in the economic dependence inquiry.

The consistent empirical trend

indicating that the control and

opportunity factors have been afforded

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According to NELP, this language is a quotation

from AI 2015–1 that was withdrawn in 2017. But

that withdrawn guidance does not contain the

quoted language.

52

The court in Hickley applied the economic

reality test in the context of the Age Discrimination

in Employment Act of 1967, 29 U.S.C. 621–34,

without opining whether that was the correct test

under the ADEA. 699 F.2d at 752 (‘‘Finding . . .

there was no evidence . . . that Hickey was an

employee under the more liberal ‘economic

realities’ test used in FLSA cases, [but] express[ing]

no opinion on whether it or one of the tests used

in Title VII cases should ultimately be used to

determine employee status in ADEA cases.’’).

Hickley’s ‘‘specific and invariably applied weight’’

dicta appears in one FLSA case, Parrish, 719 F.3d

at 380, as a see also parenthetical to support the

proposition that economic reality factors should not

be applied mechanically.

greater weight should be unsurprising

given their greater probative value. As

the NPRM explained, those two factors

‘‘strike at the core’’ of what it means to

be in business for oneself, 85 FR 60612,

and therefore they are more probative of

the ultimate inquiry under the FLSA:

‘‘whether an individual is ‘in business

for himself’ or is ‘dependent upon

finding employment in the business of

others.’ ’’ Scantland, 721 F.3d at 1312

(quoting Mednick, 508 F.2d at 301–02).

No commenters offered a persuasive

counterargument to the commonsense

logic that, when determining whether

an individual is in business for him- or

herself, the extent of the individual’s

control over his or her work is more

useful information than, for example,

the skill required for that work. Nor did

any commenters effectively rebut that

the extent of an individual’s ability to

earn profits (or suffers losses) through

initiative or investment is more useful

information than, for example, how long

that individual has worked for a

particular company.

NELP appeared to agree with the

Department that emphasis should be

given to factors that are most probative

to the ultimate inquiry of whether an

individual is in business for him- or

herself, but disagrees as to what those

factors should be. In particular, NELP

asserted that ‘‘the factor of integration

into the business of another should be

weighed heavily and in fact is

ultimately the test. If the work is

integrated this leads to the conclusion

that the worker is not independently

running a business.’’

51

NELP correctly defines the economic

dependence inquiry as ‘‘whether a

person is in business for themselves and

therefore independent, or works instead

in the business of another and

dependent on that business for work.’’

If a worker is economically dependent

on an employer for work, the worker is

not in business for him- or herself.

NELP then defines the ‘‘integration

factor’’ to mean the exact same thing: ‘‘If

the work is integrated this leads to the

conclusion that the worker is not

independently running a business.’’

NELP is correct that, when defined as

such, ‘‘the factor of integration . . . in

fact is the ultimate test,’’ but that factor

would not be helpful in ascertaining a

worker’s employment status because it

simply restates the question. The

Department, courts, and the regulated

community would still have to

determine which factors to analyze to

determine whether an individual is in

business for him- or herself. The

Department therefore declines to create

and give greater weight to NELP’s

concept of the ‘‘integration factor’’ and

continues to believe that the control and

opportunity factors are the most

probative as to whether an individual is

in business for him- or herself as a

matter of economic reality.

NELP and MRCC quoted dicta from an

age-discrimination case that ‘‘[i]t is

impossible to assign to each of [the

economic reality] factors a specific and

invariably applied weight.’’ Hickley, 699

F.2d at 752.

52

This proposed rule,

however, does not run afoul of Hickley’s

dicta. As an initial matter, neither core

factor individually has ‘‘a specific and

invariably applied weight’’ because the

proposed rule does not state that one

necessarily outweighs the other. The

Department nonetheless recognizes that

proposed § 795.105(c)’ statement that

‘‘each [core factor] is afforded greater

weight in the analysis than is any other

factor’’ may be overly rigid. For reasons

explained above, certain types of facts—

i.e., those falling within the control and

opportunity factors—are more probative

than others regarding whether an

individual is in business for him- or

herself. But that does not necessarily

mean the control or opportunity factors

are entitle to greater weight in all cases.

For example, it may be the case that,

after all the circumstances have been

considered, a core factor does not weigh

very strongly towards a particular

classification because considerations

within that factor point in different

directions. See Cromwell, 348 F. App’x

at 61 (finding that ‘‘defendants here did

not control the details of how the

plaintiffs performed their assign jobs’’

but did have ‘‘complete control over

[their] schedule and pay’’). A core factor

could even be at equipoise, in which

case it would not weigh at all in favor

of a classification. See Johnson, 371 F.

3d at 730 (concluding that competing

facts regarding plaintiffs’ opportunity

for profit or loss meant that the ‘‘jury

could have viewed this factor as not

favoring either side’’). In short, there is

a subtle but important distinction that

was not fully reflected in the NPRM’s

language between a factor’s probative

value as a general matter and its specific

weight in a particular case. Probative

value refers to the extent to which a

factor encapsulates types of facts that

illuminate the ultimate inquiry of

whether workers are in business for

themselves, as opposed to being

dependent on an employer for work.

The weight assigned to a factor in a

particular case refers to how strongly

specific facts within the factor, on

balance, favors a particular

classification. Considerations within a

core factor may have significant

probative value even though that factor,

on balance, does not weigh heavily

towards a classification in a specific

case. The Department therefore revises

§ 795.105(c) to more clearly distinguish

between a core factor’s probative value

as a general matter and its’ weight in a

specific case and to clarify that the core

factors’ greater probative value means

that they typically (but not necessarily)

carry greater weight . Thus it should be

clear that the rule does not assign any

factor a specific or invariable weight. In

contrast, the approach favored by some

commenters, including the Appleseed

Center and Commission Slaughter, to

give each factor ‘‘equal weight’’ would

‘‘assign to each of the factors a specific

and invariably applied weight.’’

Hickley, 699 F.2d at 752.

At bottom, the final rule’s focus on

two core factors thus does not depart

from the economic reality test—it

merely elucidates the factors’ respective

probative values that have always

existed but never been explained. Cf.

Lauritzen, 835 F.2d at 1539 (‘‘Why keep

[employers] in the dark about the legal

consequences of their deeds.’’

(Easterbrook, J., concurring)). As

explained in more detail below,

providing such clarification for the

regulated community would not narrow

the scope of who is an FLSA employee

as opposed to an independent

contractor. Nor would it narrow the

circumstances that may be considered

under the economic reality test.

2. The Proposed Rule Would Not

Narrow the Standard for FLSA

Employment

A number of commenters argued that

focusing the economic reality test on the

control and opportunity factors would

narrow the standard for employment

under the FLSA. The FLSA defines

‘‘employ’’ as including ‘‘to suffer or

permit to work,’’ 29 U.S.C. 203(g), and

these commenters argued this definition

should be interpreted to provide broad

coverage in light of the Act’s remedial

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Courts apply this economic dependence

standard for employment in the employee-versus-

independent contractor context, but use different

approaches in other contexts. See, e.g., Glatt v. Fox

Searchlight Pictures, 811 F.3d 528 (2d Cir. 2016).

purpose. See, e.g., AFL–CIO; NELA;

NELP; Senator Patty Murray; State AGs.

Most of these commenters argued that

the proposed rule is incompatible with

the Act’s broad definition of

employment because focusing on the

control factor would effectively adopt

the narrower scope of employment

under the common law control test. One

commenter, however, had a different

view: UPS argued that the proposed rule

would adopt a narrower standard for

employment by giving the control factor

too little weight.

Discussing the proposed rule’s

consistency with the FLSA’s standard

for employment first requires an

understanding of the Act’s definitions.

Commenters point out that the Act

defines ‘‘employ’’ as including ‘‘to

suffer or permit to work,’’ 29 U.S.C.

203(g), but the Supreme Court has

observed that, although broad, the Act’s

definitions are not clear regarding the

scope of relationships that are included.

Rutherford Food, 331 U.S. at 728

(‘‘[T]here is in the [FLSA’s text] no

definition that solves problems as to the

limits of the employer-employee

relationship under the Act.’’). Courts of

appeals have likewise found the

definitions not to clearly indicate the

precise contours of FLSA employment.

See, e.g., Solis v. Laurelbrook

Sanitarium & Sch., Inc., 642 F.3d 518,

522 (6th Cir. 2011); Steelman v. Hirsch,

473 F.3d 124, 128 (4th Cir. 2007).

As commenters also noted, the

Supreme Court relied on the FLSA’s

purpose and legislative history to

interpret the ‘‘suffer and permit’’

language to encompass a more inclusive

definition of employment than that of

the common law. Rutherford Food, 331

U.S. at 727 (affirming that FLSA

employment is not limited to the

‘‘common law test of control, as the act

concerns itself with the correction of

economic evils through remedies which

were unknown at common law’’); see

also Darden, 503 U.S. at 326. The

Supreme Court has ‘‘consistently

construed the Act liberally in

recognition that broad coverage is

essential to accomplish [its] goal,’’ Tony

& Susan Alamo, 471 U.S. at 296, but at

the same time, the Court also recognized

that the ‘‘suffer or permit’’ definition

‘‘does have its limits.’’ Id. at 295; see

also Portland Terminal, 330 U.S. at 152

(‘‘The definition ‘suffer or permit to

work’ was obviously not intended to

stamp all persons as employees.’’). No

court has suggested that applying such

limits (including the limit that bona fide

independent contractors are not

employees under the Act) cannot be

reconciled with the Act’s remedial

purpose. Cf. Encino Motorcars, LLC v.

Navarro, 138 S. Ct. 1134, 1142 (2018)

(Encino II) (warning against relying on

‘‘flawed premise that the FLSA

‘pursues’ its remedial purpose ‘at all

costs’’’ when interpreting the Act).

Ultimately, ‘‘[t]he test of employment

under the Act is one of ‘economic

reality.’’’ Tony & Susan Alamo, 471 U.S.

at 301 (quoting Whitaker House, 366

U.S. at 33)). This rule applies such a test

and does so with sufficient breadth

consistent with the Act’s remedial

purpose.

While the phrase ‘‘economic reality’’

is on its face no clearer than the ‘‘suffer

or permit’’ language, see Lauritzen, 835

F.2d at 1539 (Easterbrook J.,

concurring), decades of case law has

refined its meaning. The Court

determined that employees include

‘‘those who as a matter of economic

reality are dependent upon the business

to which they render service.’’ Bartels,

332 U.S. at 130. Courts of appeals have

subsequently used Bartels’s concept of

economic dependence to determine

employment under the FLSA. See, e.g.,

Saleem, 854 F.3d at 139; Mr. W

Fireworks, 814 F.2d at 1054;

DialAmerica, 757 F.2d at 1385. Thus,

the courts have interpreted the scope of

employment under the Act’s definition

to include any individual who is

‘‘dependent upon finding employment

in the business of others,’’ and to

exclude any individual who is ‘‘in

business for himself.’’ Scantland, 721

F.3d at 1312.

53

However, as noted in the

need for rulemaking discussion, this

principle has not always been applied

consistently.

The Department agrees with this

interpretation and further believes that

the economic dependence standard

developed by courts comports with the

‘‘suffer or permit’’ statutory text. As the

NPRM explained: ‘‘An individual who

depends on a potential employer for

work is an employee whom the

employer suffers or permits to work. In

contrast, an independent contractor

does not work at the sufferance or

permission of an employer because, as

a matter of economic reality, he or she

is in business for him- or herself.’’ 85 FR

60606 (citing Saleem, 854 F.3d at 139).

Commenters generally agreed that

employee versus independent

contractor status under the FLSA is

determined by the worker’s economic

dependence, and several of the above-

mentioned commenters affirmatively

supported this standard. For example,

NELA stated that ‘‘[i]t is dependence

that indicates employee status’’ (quoting

Usery, 527 F.2d at 1311). And the State

AGs explain that ‘‘[t]he ultimate

concern is whether, as a matter of

economic reality, the workers depend

on someone else’s business . . . or are

in business for themselves’’ (quoting

Superior Care, 840 F.2d at 1059).

Most commenters who objected to

focusing the economic reality test on the

two core factors were concerned that

such an approach would narrow FLSA

employment to the common law

standard. For instance, NELA stated that

‘‘[b]y affording the control factor greater

weight in the economic reality analysis,

the Department slides back toward the

common law agency test.’’ See, e.g.,

AFL–CIO (‘‘[T]he proposed rule

effectively collapses the FLSA’s

definition into the common law

definition by giving primacy and

controlling weight to the two factors of

control and opportunity for profit and

loss.’’). The implied logic behind this

concern is that if one test gives greater

weight to a factor that is also given

greater weight by a second test, the two

tests necessarily have an equal scope of

employment. But that does not follow.

A comparison with the ABC test is

illustrative. That test creates a

presumption of employee status, which

can be overridden only if all three

factors are established. One of the ABC

test’s factors is ‘‘whether the worker is

free from the control and direction of

the hiring entity.’’ This factor is given

dispositive weight under certain

circumstances: If the worker is

controlled by the hiring party, then he

or she is automatically an employee,

regardless of other considerations. The

common law control test also gives

control dispositive weight. While both

tests afford control greater weight than

the economic reality test, one test (ABC)

has a broader scope of employment than

the economic reality test and the other

(common law) has a narrower scope.

The relative weight attached to a

particular factor does not, by itself,

determine whether the ultimate scope of

employment is broad or narrow.

Accordingly, it is not possible to

compare the breadth of the standards for

employment used by two tests simply

by comparing the weight attached to a

shared factor. Rather, it is necessary to

consider how each test’s factors are

actually applied.

Under the common law control test,

control is the ultimate inquiry: If an

individual controls the work, then he or

she would be an independent contractor

rather than an employee. However, such

control by itself would be insufficient to

establish the worker as an independent

contractor under the Department’s rule.

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In any event, courts have foreclosed UPS’s

requested remedy of giving the control factor

dispositive weight to determine employee status.

See, e.g., Silk, 331 U.S. at 716 (‘‘No one factor is

controlling); Keller, 781 F.3d at 807 (‘‘No one factor

is determinative.’’); Baker, 37 F.3d at 1440 (‘‘None

of the factors alone is dispositive.’’).

Other considerations, including the

second core factor of opportunity for

profit or loss, can outweigh the control

factor and result in a classification of

employee status. That is precisely what

happened in Paragon Contractors,

wherein the control and integral part

factors weighed in favor of independent

contractor classification but the court

nonetheless held that the worker was an

employee because the remaining factors,

including opportunity for profit or loss,

favored classification as an employee.

See 884 F.3d at 1238. And even if the

individual both controls the work and

has a meaningful opportunity for profit

or loss, he or she still would not

necessarily be classified as an

independent contractor under the

Department’s rule because other factors

may outweigh those two core factors in

rare cases. In short, because the ultimate

inquiry under the common law control

test is the worker’s right to control the

manner and means by which the work

is performed, such control by the

worker disqualifies the worker from

being an employee under that test, but

more is needed under the rule’s

articulation of the economic reality test

because economic dependence is the

ultimate inquiry. Thus, the rule’s

standard for employment remains

broader than the common law standard.

Nor does the rule ‘‘slide[ ] back toward

the common law agency test,’’ as NELA

contends, or otherwise narrow the

standard of employment under the

FLSA. As explained above, the standard

for determining whether an individual

is an employee under the FLSA or an

independent contractor has always been

economic dependence. The two core

factors are more probative than other

factors regarding whether an individual

is in business for him- or herself, as

opposed to being dependent on an

employer for work. Neither NELA nor

likeminded commenters dispute this

specific claim. NELA further recognized

that economic reality factors must be

‘‘used to gauge the degree of

dependence.’’ If so, the test should focus

on core factors that are more probative

measures of dependence. Doing

otherwise would serve no purpose other

than to make regulations more

confusing, thereby reducing compliance

and driving up the transaction cost of a

lawful business practice.

UPS expressed the opposite concern

as NELA and likeminded commenters,

asserting that the proposed rule did not

give enough weight to the control factor.

According to UPS, treating control as a

factor to be balanced rather than giving

it dispositive weight ‘‘leaves open the

possibility that a worker could be

classified as an ‘independent contractor’

even when the common-law control

factor indicated employee status.’’ The

potential for such an outcome implies

that FLSA employment may be

narrower than the common law

standard in certain circumstances.

As an initial matter, UPS’s concern

that the control factor may be

outweighed by other considerations

even when it indicates employee status

also applies to every prior articulation

of the economic reality test—indeed

more so—because none of them gave the

control factor greater weight, much less

dispositive weight. The rule addresses

UPS’s concern because it explicitly

identifies control as a core factor that is

less likely to be outweighed by other

factors. More importantly, UPS’s

concern could materialize only if the

control factor were balanced against

other factors without regard for the

ultimate inquiry for FLSA employment.

Courts have cautioned against such

‘‘mechanical application’’ of the

economic reality factors and have

instead instructed that all factors should

guide the analysis of whether the

individual is in business for him or

herself or is dependent on others for

work. See, e.g., Saleem, 854 F.3d at 140.

For these reasons, the Department does

not share UPS’s concern that not giving

dispositive weight to the control factor

results in a standard for employment

that is narrower than the common law.

54

3. The Rulemaking Will Not Restrict the

Range of Considerations Within

Economic Reality Test

A number of commenters contend

that the proposed rule’s focus on the

two core factors is inconsistent with

case law requiring the ‘‘circumstances of

the whole activity’’ to be considered as

part of the inquiry into economic

dependence. State AGs (quoting

Rutherford Food, 331 U.S. at 730); see

also, e.g., NELA (‘‘The economic reality

inquiry therefore cannot be answered

without ‘employ[ing] a totality-of-the-

circumstances approach.’ ’’ (quoting

Baker, 137 F.3d at 1441)); see also

Senator Patty Murray (‘‘No one test

factor is controlling, nor is the list

exhaustive.’’); TRLA (same).

The Department agrees with

commenters that the circumstances of

the whole activity should be considered

as part of the economic reality inquiry.

See 85 FR 60621 (‘‘Other factors may

also be probative as part of the

circumstances of the whole activity’’).

While all circumstances must be

considered, it does not follow that all

circumstances or categories of

circumstance, i.e., factors, must also be

‘‘given equal weight.’’ See e.g., FTC

Commissioner Slaughter; Appleseed

Center. Assigning one factor less weight

than another does not restrict the

circumstances being considered because

the very act of determining relative

weight requires considering both

factors.

As explained above, each factor

should be analyzed in accordance with

its probative value to the ultimate

inquiry of whether an individual is in

business for him or her-self. To be sure,

the specific weight of the factors

depends on specific circumstances. The

control and opportunity factors are

nonetheless more probative than other

factors in determining whether an

individual is in business for him- or

herself. As such, it is appropriate to

recognize, as the proposed rule does,

that these two more probative factors

should typically carry greater weight

than other factors. Doing so would not,

as TRLA contends, ‘‘eliminate . . . any

consideration of [other] factors that have

often been regarded as probative in the

farm labor context.’’ The proposed rule

explicitly permits other factors to

outweigh the two core factors if the

specific circumstances of the case—

whether in the farm labor context or

another contexts—warrants such a

result. In order to determine whether

the combined weight of the two core

factors are outweighed or not by other

factors, it is necessary to consider both

sets of factors. Nor would it make any

‘‘single factor determinative by itself.’’

Hopkins, 545 F.3d at 343. Neither of the

core factors can be ‘‘determinative by

itself’’ because there is a second core

factor against which each is balanced.

Even when both core factors align, they

are not ‘‘controlling’’ because their

combined weight can still be

outweighed by other considerations.

4. Other Comments Regarding the Focus

on the Two Core Factors

PAM and Global Tranz requested that

the Department create a ‘‘bright-line

test’’ that ‘‘would be limited to the two

‘core factors’ already identified in the

Proposed Rule: (1) the nature and degree

of the individual’s control over the

work, and (2) the individual’s

opportunity for profit or loss.’’ See also

Cetera Financial Group (CFG) (‘‘we

believe it would be appropriate for the

Department to limit the criteria

employed in the economic dependence

analysis to the two Core factors and

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eliminate the others’’). According to

these commenters, a two-factor test

would be even clearer and simpler than

the proposal to focus the test on the two

core factors, while still considering

other factors. Other commenters

requested that the Department eliminate

one or more of the non-core factors

listed in § 795.105(d)(2) from the

economic reality test because such

factors have little to no probative value

in some circumstance, and may

sometimes send misleading signals

regarding an individual’s classification.

CWI and the National Restaurant

Association asked the Department to

eliminate the skill required factor;

SHRM and the U.S. Chamber of

Commerce were among several

commenters who suggested that the

Department eliminate the permanence

factor; and ATA, NDHA, and others

requested eliminating the integrated

unit factor.

The Department believes that the two

core factors of control and opportunity

are always probative as to whether an

individual is in business for him- or

herself. The Department further agrees

with the above commenters that the

other factors are less probative and may

have little to no probative value in some

circumstances. See, e.g., Silk, 331 U.S.

at 718 (‘‘That the unloaders did not

work regularly is not significant.’’).

However, ‘‘circumstances of the whole

activity should be examined’’ as part of

the economic reality test, meaning that

the other factors should be considered

in all cases even if they are not always

probative once considered. DialAmerica

Mktg., Inc., 757 F.2d at 1382. If a factor

is probative in some situations but not

in others, there is still a need to

consider that factor to determine

whether it is probative in a particular

case. Eliminating the non-core factors

from consideration would therefore be

warranted only if those factors lacked

probative value in all circumstances—

that is, if there was never a need to even

consider whether they had probative

value.

Because non-core factors are probative

in many circumstances, the Department

believes it would be inappropriate to

eliminate them. In response to

commenters’ concern that non-core

factors may not always be probative, the

Department is making non-substantive

revisions to clarify that the two core

factors are always probative as to

whether an individual is in business for

him- or herself, but there may be

circumstances where one or more of the

non-core factors, upon consideration,

has little or no probative value.

Several commenters requested that

the Department revise § 795.105(c) to

state that if the two core factors point

towards the same classification, there is

no need to consider any other factors.

See e.g., NRF (‘‘if both of the core factors

point in the same direction, then a court

may consider only those two factors and

end the analysis without examining the

three additional possible factors

identified by DOL’’); SHRM (requesting

revision ‘‘to ensure that if the Core

Factors indicate the same status of the

worker, no further analysis is

necessary’’). According to the SHRM,

such an approach would ‘‘create clear

expectations and stable grounds to build

working relationships.’’

The Department believes that the

economic reality test cannot be rigidly

applied and concludes that its approach

of giving certain factors greater weight

and other factors lesser weight while

retaining flexibility as to the degree of

weight depending on the facts of the

case best accounts for all of the

circumstances that work relationships

present. Commenters’ requests would

require the Department to state that the

combined probative value of the two

core factors—whatever that might be—

always outweighs the combined

probative value of other factors. The

Department believes that will usually be

the case, but does not rule out the

possibility that, in some circumstances,

the core factors could be outweighed by

particularly probative facts related to

other factors.

Several commenters effectively

requested that the Department assign a

specific relative weight to one core

factor as compared to the other. CWI

requested that the Department always

weigh the two core factors equally,

while the HR Policy Institute requested

that the control factor always be given

greater weight than the opportunity

factor. The Department declines to

implement both requests. The

Department’s review of U.S. Courts of

Appeals cases since 1975 did not

indicate that the control and

opportunity factors should be weighed

equally. Nor did that review indicate

that the control factor should always

outweigh the opportunity factor. Indeed,

in the few cases reviewed by the

Department where the control and

opportunity factors pointed towards

different classifications, the ultimate

classification aligned with the

opportunity for factor. See 85 FR 60619

(citing Paragon Contractors, 884 F.3d at

1235–36, and Cromwell, 348 F. App’x at

61). Ultimately, the Department is

confident in its conclusion that the two

core factors are more probative than all

other factors and that framework is

logical, as described above. But the

Department declines to assign an

invariable relative weight between the

two core factors.

Several commenters requested that

the Department revise § 795.105(c) to

establish a rebuttable presumption of

employee or independent contractor

status if both core factors indicate the

same classification. Such a presumption

would be rebuttable only by

‘‘substantial evidence to the contrary

under all three [other factors].’’ ATA.

According to ATA, a rebuttable

presumption ‘‘[w]ould further reduce

the possibility of courts unnecessarily

and potentially selectively applying and

weighing the three additional factors for

preferred policy outcomes, which has

been a concern with regard to the

current test in some instances.’’ As the

NPRM explained, the Department

considered but did not propose a

rebuttable presumption based on

alignment of the two core factors

because it was concerned a formal

presumption may be needlessly

complex or burdensome. See 85 FR

60621. The Department further believes

that emphasizing the importance of the

two core factors provides sufficient

clarity. As such, the Department

declines to adopt a presumption-based

framework.

CWI requested that the ‘‘the Final

Rule spell out specifically that each of

the Core Factors should be analyzed

independently of the other, without

overlap.’’ The Department agrees with

CWI that overlaps between economic

reality factors, core or otherwise, should

be minimized. As discussed in the

NPRM and in this preamble, reducing

such overlap is one of the reasons for

this rulemaking. That said, the

Department believes specific regulatory

instructions against overlapping

analysis of the two core factors is not

necessary and may be confusing. The

Department believes proposed

§ 795.105(d)(1) articulates the two core

factors without apparent overlap, and

CWI does not identity any specific

considerations that risk being analyzed

under both factors. Language in the

regulatory text warning against

overlapping analysis may therefore

confuse members of the regulated

community by priming them to look for

potential overlapping considerations

when there are none. The Department

therefore declines to add CWI’s

requested language.

In summary, the economic reality test

examines the circumstances of the

whole activity to determine whether an

individual is in business for him- or

herself, as opposed to being

economically deponent on others for

work. Not all facts or factors are equally

probative (if they are probative at all) as

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55

Restatement (Second) of Agency §2(3); see also

Commun. for Non-Violence v. Reid, 490 U.S. 730,

751 (1989) (describing ‘‘the hiring party’s right to

control the manner and means by which the

product is accomplished’’ as the overarching focus

of the common law standard).

to whether, as a matter of economic

reality, an individual is in business for

him- or herself. Treating them all as

equal would not focus the inquiry on

economic dependence, but rather would

distort that analysis. In contrast,

highlighting factors that are more

probative would sharpen the test’s focus

on economic dependence.

The NPRM presented reasoning and

evidence based on the Department’s

review of case law indicating that

control and opportunity factors are more

probative to whether an individual is in

business for him- or herself, as opposed

to being economically dependent. While

not all commenters agree with this

approach, commenters who object to it

have not convinced the Department to

change its original assessment. The

Department therefore believes that it is

appropriate to focus the economic

reality test on the two core factors that

are more probative to the test’s ultimate

inquiry. Such focus appropriately

guides how factors should be balanced,

while retaining flexibility in the test.

F. Proposed Guidance Regarding the

Primacy of Actual Practice

Proposed § 795.110 stated that the

actual practice of the parties involved—

both of the worker (or workers) at issue

and of the potential employer—is more

relevant than what may be contractually

or theoretically possible. The proposed

rule explained that this principle is

derived from the Supreme Court’s

holding that ‘‘ ‘economic reality’ rather

than ‘technical concepts’ is to be the test

of employment’’ under the FLSA.

Whitaker House, 366 U.S. at 33; see also

Tony & Susan Alamo, 471 U.S. at 301

(‘‘The test of employment under the

[FLSA] is one of ‘economic reality’ ’’

(citing Whitaker House, 366 U.S. at 33)).

Several commenters expressed

support for proposed § 795.110. For

example, ATA wrote that ‘‘[t]he general

principle also is almost black letter

law—substance is always more

important than form—under virtually

every regulation WHD enforces.’’ The

Center for Workplace Compliance

described the language as ‘‘consistent

with historical interpretation of the

economic reality test by Federal courts

and DOL.’’ Other commenters

complimented the proposal with little

or no further explanation, see NHDA;

New Jersey Civil Justice Institute; WPI,

while HR Policy Association urged the

final rule to go further by entirely

disregarding the relevance of

unexercised contractual or theoretical

possibilities. WFCA supported proposed

§ 795.110, but asked the Department to

elaborate in the final rule that ‘‘best

indicator of the actual practices is

whether a significant segment of the

industry has traditionally treated similar

workers as independent contractors or

employees.’’

No worker advocacy organizations

specifically commented in support of

the provision, but several groups,

including NELA, the Pacific Northwest

Regional Council of Carpenters, and the

Public Justice Center, quoted Judge

Frank Easterbrook’s observation from

Lauritzen, 835 F.2d at 1545, that ‘‘[t]he

FLSA is designed to defeat rather than

implement contractual arrangements.’’

The International Brotherhood of

Teamsters similarly asserted that

Congress ‘‘chose to define ‘employment’

in a manner that would allow the Act

to be applied flexibly so that employers

could not simply recalibrate their

contractual arrangements with workers

to evade coverage.’’ Finally, NELP and

32 other organizations quoted Judge

Learned Hand’s observation from Lehigh

Valley Coal Co. v. Yensavage, 218 F.

547 (2d Cir. 1914), cert. denied, 235 U.S.

705 (1915), that employment statutes

from the early 20th century were

intended to ‘‘upset the freedom of

contract’’ between workers and

businesses. Id. at 553.

Some business commenters expressed

general support for proposed § 795.110,

but requested edits to discount the

relevance of voluntary choices on the

part of an individual worker that

implicate one or more of the economic

reality factors described in proposed

§ 795.105(d), such as choosing to work

exclusively for one business, accepting

all available work assignments from the

business, or declining to negotiate

prices. See, e.g., American Bakers

Association; ATA; New Jersey

Warehousemen & Movers Association

(NJWMA); NRF; Private Care

Association; Scopelitis, Garvin, Light,

Hanson & Feary; U.S. Chamber of

Commerce (‘‘[T]he Chamber urges the

Department clarify that so long as a

business does not take actions to

foreclose an individual from exercising

certain rights, that the individual’s

choice to not exercise those rights does

not diminish their indicia of

independence in the relationship.’’).

Some of these commenters asserted that

allowing voluntary worker practices to

influence classification outcomes would

lead to costly and inefficient business

decisions. See Dart Transit Company

(‘‘[T]he practical effect of [proposed

§ 795.110] is to require independent

contractors to arbitrarily switch routes

and carriers . . . simply in order to

preserve their independent status’’);

Minnesota Trucking Association (‘‘In

effect, the motor carrier would have to

restrict offering to the independent

owner operator a route both find

beneficial in order to ensure that the

independent owner operator performs

services for other motor carriers.’’).

Others asserted that considering

voluntary worker practices would lead

to classification discrepancies between

workers with similar contractual

freedoms. See NRF; SHRM.

Some business commenters were

flatly opposed to proposed § 795.110.

SHRM wrote that ‘‘[a] focus on ‘practice’

as opposed to the contractual ‘rights,’ of

the parties . . . unnecessarily de-

emphasizes voluntariness of the

contract itself and places ambiguity over

parties’ negotiations.’’ The Customized

Logistics and Delivery Association

objected that worker classifications

could turn on voluntary worker

practices that a business may not know

about (e.g., whether particular workers

perform labor for other companies),

asserting that proposed § 795.110

‘‘essentially shift[s] the burden of proof

to the alleged employer to establish a

worker’s status as an IC’’ and ‘‘could

force mass reclassifications of ICs for

motor carriers, and many other

industries.’’

Finally, several commenters

representing workers, as well as Senator

Patty Murray and the State AGs, voiced

opposition to proposed § 795.110 on the

basis that emphasizing the primacy of

an alleged employer’s practices would

establish an employee classification

standard impermissibly narrower than

the common law, which evaluates an

alleged employer’s ‘‘right to control.’’

55

In this regard, the State AGs compared

proposed § 795.110 to the Department’s

interpretation in its recent Joint

Employer final rule that ‘‘[a] potential

joint employer must actually exercise—

directly or indirectly—one or more . . .

indicia of control to be jointly liable’’

(85 FR 2859). Winebrake & Santillo, LLC

asserted that proposed § 795.110

conflicts with a statement from a recent

Third Circuit opinion that ‘‘actual

control of the manner of work is not

essential; rather, it is the right to control

which is determinative,’’ Razak, 951

F.3d at 145, while Edward. Tuddenham

commented that ‘‘[a]ll of the cases [the

Department cited in its NPRM] to

support the primacy of ‘actual practice’

are referring to the actual practices of

workers and are not discussing analysis

of employer controls.’’ In rejecting the

proposed rule’s distinction between a

potential employer’s contractual

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Entirely disregarding unexercised contractual

rights and authorities would not be consistent with

the Supreme Court’s instruction in Rutherford Food

to evaluate ‘‘the circumstances of the whole

activity.’’ 331 U.S. at 730; see also Mid-Atl.

Installation, 16 F. App’x at 107 (determining that

cable installers were independent contractors in

part because they had a ‘‘right to employ [their

own] workers’’); Keller, 781 F.3d at 813 (citing as

relevant ‘‘the fact that Miri never explicitly

prohibited Keller from performing installation

services for other companies’’ and finding ‘‘a

material dispute as to whether Keller could have

increased his profitability had he improved his

efficiency or requested more assignments’’).

57

In this respect, §795.110’s emphasis on actual

practice differs from the treatment of control in the

Department’s partially invalidated Joint Employer

rule, which provided that ‘‘[a] potential joint

employer must actually exercise—directly or

indirectly—one or more . . . indicia of control to

be jointly liable.’’ 85 FR 2859 (emphasis added).

58

In a 2004 final rule amending this language, the

Department rejected commenter arguments that the

mere existence of a policy permitting improper

deductions should disqualify an employer from

claiming the Section 13(a)(1) exemption for salaried

employees whose earnings and job duties otherwise

qualify for exemption. ‘‘[Such an] approach . . .

would provide a windfall to employees who have

not even arguably been harmed by a ‘policy’ that

a manager has never applied and may never intend

to apply[.]’’ 69 FR 22122, 22180.

59

See Commun. for Non-Violence v. Reid, 490

U.S. 730, 751 (1989) (‘‘In determining whether a

hired party is an employee under the general

common law of agency, we consider the hiring

party’s right to control the manner and means by

which the product is accomplished.’’) (emphasis

added).

authority to control workers and control

that they actually exercise, Senator

Murray asserted that contractual

authority ‘‘provides a potential

employer an incredible amount of de

facto control over a worker . . .

induc[ing] a worker to perform the work

in the manner the employer prefers,

suggests, recommends, or hints at, even

if the employer does not ever command

it.’’ See also State AGs (‘‘[R]eserved

authority in an agreement, like the

looming sword of Damocles, will often

influence what the parties do[.]’’).

The Department has carefully

considered the views and arguments

expressed by commenters and decided

to implement § 795.110 as proposed. As

emphasized in the NPRM, and as the

plain language of § 795.110 makes clear,

unexercised powers, rights, and

freedoms are not irrelevant in

determining the employment status of

workers under the economic reality

test;

56

such possibilities are merely less

relevant than powers, rights, and

freedoms which are actually exercised

under the economic reality test.

57

Affording equal relevance to reserved

control and control that is actually

exercised—by either party—would

ignore the Supreme Court’s command to

focus on the ‘‘reality’’ of the work

arrangement, Silk, 331 U.S. at 713,

which places a greater importance on

what actually happens than what a

contract suggests may happen. Several

Federal courts of appeals decisions have

explicitly made this observation. See,

e.g., Saleem, 854 F.3d at 142

(‘‘[P]ursuant to the economic reality test,

it is not what [Plaintiffs] could have

done that counts, but as a matter of

economic reality what they actually do

that is dispositive.’’) (citations omitted);

Parrish, 917 F.3d at 387 (‘‘The analysis

is focused on economic reality, not

economic hypotheticals.’’); Scantland,

721 F.3d at 1311 (‘‘It is not significant

how one ‘could have’ acted under the

contract terms. The controlling

economic realities are reflected by the

way one actually acts.’’ (citations

omitted)). Moreover, as some

commenters pointed out, prioritizing

substance over form is consistent with

the Department’s general interpretation

and enforcement of the FLSA. See, e.g.,

29 CFR 541.2 (‘‘A job title alone is

insufficient to establish the exempt

status of an employee.’’); 29 CFR

541.603(a) (providing that employers

violate the salary basis requirement for

certain employees exempt under Sec.

13(a)(1) of the Act only when they

demonstrate ‘‘an actual practice of

making improper deductions’’);

58

29

CFR 778.414 (‘‘[W]hether a contract

which purports to qualify an employee

for exemption under section 7(f) meets

the requirements . . . will in all cases

depend not merely on the wording of

the contract but upon the actual practice

of the parties thereunder.’’).

The Department disagrees with

commenters who assert that prioritizing

the actual practice of the parties

involved makes the economic reality

test impermissibly narrower than the

common law control test. In many

instances, the actual practices of the

parties will establish the existence of an

employment relationship despite what a

‘‘skillfully devised’’ contract might

suggest on paper. Silk, 331 U.S. at 715;

see, e.g., Scantland, 721 F.3d at 1313–

14 (‘‘Though plaintiffs’ ‘Independent

Contractor Service Agreements’

provided that they could ‘decline any

work assignments,’ plaintiffs testified

that they could not reject a route or a

work order within their route without

threat of termination or being refused

work in the following days.’’); Hobbs,

946 F.3d at 833 (dismissing the fact that

welders determined to be employees

‘‘could hypothetically negotiate their

rate of pay’’). In any event, because the

ultimate inquiry of the economic reality

test is ‘‘economic dependence,’’ the test

ensures coverage over more workers in

the aggregate than the common law

control test, notwithstanding its more

nuanced interpretation of the control

factor itself. See Silk, 331 U.S. at 716

(listing ‘‘degrees of control’’ as one of

several non-dispositive factors in the

economic reality test) (emphasis added).

It is true that, under the economic

reality test, some workers subject to a

potential employer’s ‘‘right to control’’

may nevertheless qualify as bona fide

independent contractors for other

reasons. To the extent that this excludes

some workers who might qualify as

‘‘employees’’ under a traditional

common law test,

59

this is the logical

outcome of a multifactor test where ‘‘no

one [factor] is controlling.’’ Silk, 331

U.S. at 716; see also, e.g., Selker Bros.,

949 F.2d at 1293 (‘‘It is a well-

established principle that . . . neither

the presence nor the absence of any

particular factor is dispositive.’’).

Moreover, the Supreme Court arrived at

precisely this outcome in two of its

seminal cases applying the economic

reality test.

First, in Silk, the Court evaluated the

employment status of owner-operator

truck drivers who contracted to perform

services exclusively for a motor carrier

company, subject to a ‘‘manual of

instructions . . . purport[ing] to

regulate in detail the conduct of the

truckmen in the performance of their

duties.’’ 331 U.S. at 709–710. Before

reaching its own conclusion, the Court

excerpted an analysis from the appellate

court below noting that, ‘‘[w]hile many

provisions of the manual, if strictly

enforced, would go far to establish an

employer-employee relationship

between the Company and its truckmen

. . . there was evidence to justify the

[district] court’s disregarding of it,’’

including testimony that the manual

was ‘‘impractical and was not adhered

to.’’ Id. at 716 n.11 (quoting Greyvan

Lines v. Harrison, 156 F.2d 412, 415 (7th

Cir. 1946)). Although the Court

acknowledged ‘‘cases . . . where driver-

owners of trucks or wagons have been

held employees in accident suits at tort’’

(under the common law), the Court said

it ‘‘agree[d] with the decisions below’’

that the owner-operator truck drivers

were independent contractors, as ‘‘the

total situation, including . . . the

control exercised . . . marks these

driver-owners as independent

contractors.’’ Id. at 718–19 (emphasis

added).

The Court in Bartels, even more

clearly illustrated of how the economic

reality test’s emphasis on actual practice

may indicate independent contractor.

There, the Court found that band

members were not employees of a

public dance hall that hired them for

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29 U.S.C. 203(g). See also 83 C.J.S. Suffer

(1953) (‘‘[T]o suffer work requires no affirmative act

by a putative employer.’’).

short-term gigs, despite a contract

provision stipulating that the dance hall

‘‘shall at all times have complete control

of the services which the [band

members] will render under the

specifications of this contract.’’ 332 U.S.

at 128. Again applying the economic

reality test, the Court noted that a

worker’s employment status ‘‘was not to

be determined solely by the idea of

control which an alleged employer may

or could exercise over the details of the

service rendered to his business by the

worker or workers.’’ Id. at 130

(emphasis added). While the Court

made clear that other economic reality

factors (e.g., skill, permanence, profit)

indicated that the band members were

independent contractors, id. at 132, the

Court implicitly found that the control

factor did as well, noting that it was the

band leader (and not the dance hall)

which ‘‘organizes and trains the band

. . . [and] selects [its] members.’’ Id. at

132. In other words, notwithstanding

the dance hall’s contractual authority to

‘‘complete[ly] control’’ the band

members, the actual practice of the

parties made clear that the band

members themselves controlled the

work, as a matter of economic reality.

Contrary to the argument put forth by

several worker advocacy commenters,

the outcome and reasoning of the

Supreme Court’s decisions in Silk and

Bartels show that the common law

control test does not establish an

irreducible baseline of worker coverage

for the broader economic reality test

applied under the FLSA. In other words,

while the economic reality test is broad

in the sense that it covers more workers

as a general matter, it does not

necessarily include every worker

considered an employee under the

common law.

At the same time, the Department

disagrees with the interpretation

suggested by various business

commenters that only worker practices

which are affirmatively coerced by a

potential employer may indicate

employee status. Such a reading

conflicts with the definition of

‘‘employ’’ in section 3(g) of the Act,

which makes clear that the FLSA was

intended to cover employers who

passively ‘‘suffer or permit’’ work from

individuals.

60

Accordingly, courts

applying the economic reality test have

not hesitated to consider voluntary

worker practices where such practices

indicate economic dependence. See

Keller, 781 F.3d at 814 (‘‘[A] reasonable

jury could find that the way that [the

defendant] scheduled [the worker’s]

installation appointments made it

impossible for [the worker] to provide

installation services for other

companies.’’). To be sure, the

Department agrees that coercive

behavior by a potential employer (e.g.,

vigilant enforcement of a non-compete

clause, punishing workers for turning

down available work, etc.) constitutes

stronger evidence of employment status

than voluntary worker practices (e.g.,

the mere existence of an exclusive work

arrangement, the fact that a worker

rarely turn down available work, etc.),

but coercive action on the part of the

potential employer is not a prerequisite

for such worker practices to have

import.

The Department believes that

commenters’ concerns that proposed

§ 795.110 will cause workers with

similar contractual freedoms to be

classified differently are overstated.

Consistent with evaluating the ‘‘the

circumstances of the whole activity’’ in

a work arrangement, Rutherford Food,

331 U.S. at 730, courts have often

considered the rights and practices of

similarly situated workers affiliated

with a particular business, arriving at a

single classification outcome for the

group of workers at issue. See, e.g.,

Freund, 185 F. App’x. at 784 (finding

independent contractor status in part

because ‘‘although Freund did not hire

any workers, other of Hi-Tech’s

installers did’’); Express Sixty-Minutes

Delivery, 161 F.3d at 305 (finding

independent contractor status in part

because ‘‘[t]he majority of drivers work

for Express for a short period of time’’);

cf. Mr. W Fireworks, 814 F.2d at 1048–

51 (finding employee status in part

because ‘‘the overwhelming majority of

operators did not engage in independent

advertising’’ and ‘‘the vast majority of

operators made only minor investments

in the business’’). Even where

meaningful factual differences exist

between workers, courts may separate

them into multiple groups for separate

collective analyses instead of making

individualized determinations. See, e.g.,

Off Duty Police, 915 F.3d at 1055–1062

(separate collective analyses of ‘‘sworn

officers’’ and ‘‘nonsworn officers’’ who

provide security and traffic control

services); DialAmerica, 757 F.2d at

1383–88 (separate collective analyses of

home researchers and distributors).

Judicial application of the economic

reality test to groups of workers has

shown that classification outcomes

cannot turn on one factor alone. See,

e.g., Silk, 331 U.S. at 719 (‘‘In one

instance they haul for a single business,

in the other for any customer. The

distinction, though important, is not

controlling. It is the total situation . . .

that marks these driver-owners as

independent contractors.’’).

In summary, finalized § 795.110’s

emphasis on the actual practices of the

parties involved is not a one-way

ratchet, applying selectively either for or

against a finding of independent

contractor status. Instead, as the

examples in § 795.110 illustrate, the

principle applies to every potentially

relevant factor, and can weigh in favor

of either an employee or independent

contractor relationship. In some cases,

the actual practice of the parties

involved may suggest that the worker or

workers are employees. See, e.g.,

Sureway Cleaners, 656 F.2d at 1371

(‘‘[T]he fact that Sureway’s ‘agents’

possess, in theory, the power to set

prices, determine their own hours, and

advertise to a limited extent on their

own is overshadowed by the fact that in

reality the ‘agents’ work the same hours,

charge the same prices, and rely in the

main on Sureway for advertising.’’);

DialAmerica, 757 F.2d at 1387

(concluding that evidence showing

workers were not doing similar work for

any other businesses ‘‘although they

were free to do so’’ indicates employee

status). In other cases, it may suggest

that the worker or workers at issue are

independent contractors. See Saleem,

854 F.3d at 143 (concluding that black-

car drivers were independent

contractors in part because ‘‘many

Plaintiffs . . . picked up passengers via

street hail, despite TLC’s (apparently

under-enforced) prohibition of this

practice’’); see also Silk, 331 U.S. at

718–19; Bartels, 332 U.S. at 129. Section

795.110’s focus on actual practice is a

neutral interpretive principle, consistent

with the way courts and the Department

have long applied the FLSA’s economic

reality test. Accordingly, and contrary to

the concerns expressed by some

commenters, it should not disrupt

specific industries or result in

substantial worker reclassifications in

either direction (i.e., from employee to

independent contractor status, or vice

versa).

G. Other Comments

Many substantive comments were not

directed towards a specific provision of

the proposed rule but rather the rule as

a whole. These comments addressed the

following topics: (1) Whether the

proposed rule would create confusion or

clarity for the regulated community; (2)

whether the proposed rule would

exacerbate or ameliorate

misclassification of employees; (3)

whether the rule is consistent with the

FLSA’s purpose; (4) whether

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Congressional inaction prohibits this

rulemaking; and (5) whether the

Department may depart from its prior

practice.

1. Whether the Rulemaking Will Create

Confusion or Clarity

Commenters from the business and

freelance community generally

expressed the view that the proposed

rule would improve clarity regarding

which workers are independent

contractors versus employees under the

FLSA. For example, the U.S. Chamber of

Commerce stated that ‘‘[t]he Proposed

Rule would provide long-awaited and

much needed structure and clarity to

the evaluation of worker relationships

under the Act.’’ SHRM agreed that

‘‘[t]he Proposed Rule is necessary to

provide certainty and consistency to

businesses and workers.’’ See also CWI;

WPI; ATA; NRF; National Restaurant

Association. Freelancers and groups that

represent them echoed this message,

with the CPIE, for instance, stating that

‘‘[w]e believe the proposed guidance

would provide greater clarity and

predictability in the application of the

‘economic realities’ test to independent

entrepreneurs and their clients.’’ See

also Fight for Freelancers. Individual

commenters who identified themselves

as freelancers or small business owners

overwhelmingly agreed that the rule

would improve legal clarity. For

example, one individual commenter

who believed that ‘‘independent

contracting . . . kept [her] family afloat

when [she] unexpectedly became a

single mom’’ stated that ‘‘[t]his

proposed rule is simple to understand

and provides necessary clarity for both

employers and individuals like myself

that want to engage in freelancing.’’

Another individual who identified

himself as a small business owner

believed that ‘‘[t]he regulations

proposed seem to provide clarity for

determining an individual’s status as an

employee or independent contractor

under the Fair Labor Standards Act.’’

Some government and union

commenters took the opposite view. The

State AGs, for instance, asserted that

‘‘this rule will create confusion, not

clarity’’ in part because they believe it

‘‘departs from the statutory text and

Supreme Court precedent and is

contrary to established application of

the economic reality test.’’ FTC

Commissioner Slaughter expressed

concern that the proposed rule would

‘‘create legal confusion around the labor

exemption to the antitrust laws.’’ The

AFL–CIO argued that ‘‘the proposal is

likely to increase rather than decrease

confusion because it does not clearly

define ‘an integrated unit of

production.’ ’’

The Department continues to believe

that the rule will improve clarity

because it clarifies the meaning of

economic dependence, which

determines FLSA employment, and

aligns the economic reality test to more

accurately analyze that concept by,

among other things, highlighting the

two core factors that are most probative

to the inquiry. The rule does not depart

from the statutory text, which courts

have interpreted to define FLSA

employment based on the concept of

economic dependence on which this

rule focuses. Nor does the rule depart

from any Supreme Court precedent

because it continues to consider the

circumstances of the activity as a whole

to analyze whether workers, as a matter

of economic reality, depend on another

business for work, or are in business for

themselves. The Department further

disagrees with the State AGs that the

rule departs from the ‘‘established

application of the economic reality

test.’’ The final rule takes into account

facts and factors that have historically

been part of the economic reality test,

and decades of appellate decisions

indicating that the two core factors

frequently align with the ultimate

determination of economic dependence

or lack thereof. See 85 FR 60619–21. As

one comment stated, the rulemaking

‘‘synthesizes previous understandings of

the independent contractor rule,’’ as

opposed to departing from them. See

Farren and Mitchell.

The Department does not believe this

final rule will cause confusion regarding

the labor exemption to antitrust laws

because, as explained by FTC

Commissioner Slaughter, that

exemption is governed ‘‘[u]nder the

Clayton Act and the Norris-La Guardia

Act.’’ In contrast, this rule’s application

is limited to the FLSA, and therefore,

would not affect the labor exemption to

antitrust laws established by other

statutes. Finally, for reasons explained

in the NPRM and this preamble, the

Department believes this rule’s

articulation of the ‘‘integrated unit’’ is

clearer than the prior ‘‘integral part’’

articulation. For added clarity, the

Department added a pair of examples in

§ 795.115 to further illustrate

application of the ‘‘integrated unit’’

factor.

For these reasons, the Department

believes the final rule will result in

greater clarity.

2. Whether the Rulemaking Exacerbates

or Ameliorates Misclassification

Many commenters expressed concern

that the proposed rule would exacerbate

the misclassification of employees as

independent contractors. See, e.g., Equal

Justice Center; Employee Rights Center;

NELP; State AGs; TRLA. According to

these commenters, the proposed rule

would make it easier for an

unscrupulous employer to classify its

employees as independent contractors,

and they cite statistics that purport to

show high rates of misclassification in

support of that contention. Several other

commenters took the opposite position

and asserted, for example, that

‘‘[c]larifying the application of the test

for independent contractor status will

promote compliance with labor

standards under the FLSA and, in turn,

reduce worker misclassification.’’

Opportunity Solutions Project (OSP);

see also, e.g., TCA (‘‘[t]he increased

clarity provided by the [proposed rule]

would likely lead to reduced

misclassification.’’); IAW (‘‘This rule

will clear up misclassifications’’);

Financial Services Institute (‘‘we agree

that it will reduce worker

misclassification and litigation’’). These

commenters also presented reports that

dispute the widespread occurrence of

misclassification. See, e.g. CWI; U.S.

Chamber of Commerce; WPI.

FLSA employee versus independent

contractor status is determined in terms

of economic dependence.

Misclassification occurs when an

individual who is economically

dependent on a business is classified by

that business as an independent

contractor and treated as such. This can

occur inadvertently because the

business misunderstands the concept of

economic dependence or incorrectly

analyzes factors to assess the concept. It

can also occur intentionally. This final

rule clearly defines economic

dependence and explains how to assess

facts and factors to evaluate whether

that dependence exists. It discards

misleading and confusing

interpretations of that concept

developed over the years and

emphasizes the essential aspects. A

clearer test means more businesses will

better understand their obligations

under the FLSA and thereby

inadvertently misclassify fewer workers.

As one commenter who identified

himself as a small business owner

explained: ‘‘We want to comply [with

the FLSA] but we need guidance that

allows us to know how to comply.’’ A

clearer test also means more workers

will understand their rights under the

FLSA and thereby will be better

positioned to combat intentional

misclassification through, for example,

private litigation or complaints to the

Department. Unscrupulous employers

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61

NELA specifically urged the Department to

adopt the ‘‘ABC’’ test to determine whether a

worker is an independent contractor or an

employee under the FLSA. The Regulatory

Alternative discussion at Section VI(G) provide

further explanation why the Department is not

adopting that test.

may also be deterred from intentional

misclassification in the first place if

workers better understand their legal

rights. For these reasons, the

Department believes the final rule is

likely to reduce both inadvertent and

intentional FLSA misclassification.

While several commenters asserted

that the proposed rule will facilitate

misclassification, the Department does

not agree. The Department’s final rule

makes clear that a business may classify

a worker as an independent contractor

with greater confidence if the worker

has control over key aspects of the work

and a meaningful opportunity for profit

or loss based on initiative or investment.

Except in unusual cases, a worker who

enjoys substantial control over the work

and has opportunity for profit in

abundant measures is, as a matter of

economic reality, in business for him- or

herself, and thus properly classified as

an independent contractor. The rule

thus makes it easier for a business and

its workers to structure their work

arrangements to create bona fide

independent contractor relationships.

But that effect of the final rule will help

avoid misclassification, not encourage

it.

As discussed in greater detail in the

RIA at Section VI(D)(6), the Department

has concerns regarding the reliability of

statistics cited by commenters regarding

the prevalence of misclassification.

Even assuming commenters’ statistics

are accurate, however, they would

merely estimate the current rate of

misclassification rather than how that

rate would change as a result of this

rule. Insofar as the final rule will reduce

misclassification, these statistics make

this rulemaking even more urgent.

For the above reasons, the Department

believes this rule will ameliorate rather

than exacerbate misclassification of

employees under the FLSA.

3. Whether the Rulemaking Is

Consistent With the FLSA’s Remedial

Purpose

A number of commenters asserted

that this rule ‘‘conflicts with the FLSA’s

remedial purposes of protecting

workers.’’ State AGs; see also, e.g.,

Pacific Northwest Council of Carpenters

(‘‘the Proposed Rule . . . is contrary to

the statutory definitions and remedial

purpose of the FLSA’’). NELP, for

instance, stated that ‘‘DOL’s proposed

test would leave behind workers in high

growth sectors with high rates of wage

theft, contrary to the purposes of the

FLSA.’’ And NELA indicated that,

because ‘‘the FLSA is a remedial

statute’’ its coverage should be

construed liberally to adopt a standard

for employment that is even broader

than economic dependence.

61

Commenters that supported the

proposed rule pointed that the FLSA is

not intended to cover all workers and

that ‘‘Congress intended to cut off [the

FLSA’s] coverage at a certain point to

preserve the freedom of workers to

operate as independent contractors.’’

Scalia School; see also WPI (‘‘Nothing in

the text or legislative history of any

Federal employment law indicates that

Congress intended to supplant or

displace independent work and require

instead for all workers to be

employees.’’).

The Supreme Court has cautioned

against the ‘‘flawed premise that the

FLSA ‘pursues’ its remedial purpose ‘at

all costs’ ’’ when interpreting the Act.

Encino, 138 S. Ct. at 1142. The Encino

II Court rejected the principle that

FLSA’s remedial purpose required

exemptions to be narrowly construed,

id, and courts of appeal have followed

that logic to reject the corollary

principle, articulated above by NELA,

that the Act’s remedial purpose requires

its coverage to be construed broadly. See

Sec’y United States Dep’t of Labor v.

Bristol Excavating, Inc., 935 F.3d 122,

135 (3d Cir. 2019) (rejecting broad

reading of the FLSA based its remedial

purpose); Diaz v. Longcore, 751 F.

App’x 755, 758 (6th Cir. 2018) (same).

Rather, ‘‘ ‘a fair reading’ of the FLSA,

neither narrow nor broad, is what is

called for.’’ Bristol, 935 F.3d at 135

(quoting Encino, 138 S. Ct. at 1142);

Diaz, 751 F. App’x at 758 (‘‘We must

instead give the FLSA a ‘fair’

interpretation.’’).

‘‘The principal congressional purpose

in enacting the Fair Labor Standards Act

of 1938 was to protect all covered

workers from substandard wages and

oppressive working hours.’’ Barrentine

v. Arkansas-Best Freight Sys., Inc., 450

U.S. 728, 739 (1981) (emphasis added).

The Supreme Court, however, has long

recognized held that the FLSA ‘‘was

obviously not intended to stamp all

persons as employees.’’ Portland

Terminal Co., 330 U.S. at 152. As the

State AGs stated, the ‘‘the FLSA must be

interpreted with its ‘remedial and

humanitarian purpose . . . purpose’ in

mind to protect ‘those who sacrifices a

full measure of their freedom and

talents to the use and profit of others.’ ’’

State AGs (quoting Tenn. Coal, Iron. R.

Co. v. Muscoda Local No. 123, 321 U.S.

590, 598 (1944)). Workers who are

economically dependent on an

employer for work have sacrificed

‘‘freedom and talents to the use of

profits of others,’’ and therefore are

covered by the Act as employees. But

independent contractors use their

‘‘freedom and talents’’ to operate their

own businesses, and thus fall outside of

the FLSA’s coverage. See Saleem, 854

F.3d 131, 139–40 (2d Cir. 2017) (noting

that independent contractors are

separate from employees in the context

of the FLSA); Karlson, 860 F.3d 1089,

1092 (8th Cir. 2017) (‘‘FLSA wage and

hour requirements do not apply to true

independent contractors.’’); Scantland,

721 F.3d at 1311 (‘‘[The Act’s] ‘broad’

definitions do not, however, bring

‘independent contractors’ within the

FLSA’s ambit.’’); Hopkins, 545 F.3d at

342 (observing that the ‘‘FLSA applies

to employees but not to independent

contractors’’).

The Department believes the line

between economically dependent

workers who are covered by the FLSA

and independent contractors who are

not comports with the Act’s purpose to

‘‘protect all covered workers from

substandard wages and oppressive

working hours.’’ Barrentine, 450 U.S. at

739. Independent contractors who are in

business for themselves do not need

protection against ‘‘oppressive working

hours’’ because they are not

economically dependent on any

employer who could oppress them. Nor

do they need protection from

‘‘substandard wages’’ because they are

not economically dependent on an

employer that sets wages. Forcing

workers who are in business of

themselves into the FLSA’s coverage

would not protect them, and would

instead unduly restrict their ability to

operate their own businesses. Indeed,

numerous individuals who identified as

freelancers or independent contractors

commented that being classified as an

employee would undermine their ability

to operate their own business. For

example, one freelance translator

lamented that ‘‘many of my clients

became unwilling to work with me’’

when a state law required her to be

classified as clients’ employee. Another

commenter identified himself ‘‘[a]s a

self employed professional [who] do[es]

NOT want to be forced into

employment.’’ As a final illustrative

example, another commenter stated that

‘‘I have no desire to be an employee

.... If I was required to be an

employee, I would no longer be able to

make money for my family from my

home on my own schedule.’’

The Supreme Court has explained

that the FLSA’s ‘‘exemptions are as

much a part of the FLSA’s purpose as

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the [Act’s] requirement[s].’’ Encino, 138

S. Ct. at 1134. By the same logic,

respecting the independence of workers

whom the FLSA does not cover is as

much a part of the Act’s purpose as

extending the Act’s coverage to workers

who need its protection. Denying FLSA

coverage to workers who are

economically dependent on an

employer for work would result in

workers loosing needed protection

‘‘from substandard wages and

oppressive working hours.’’ Barrentine,

450 U.S. at 739. But extending the Act’s

coverage to workers who, as a matter of

economic reality, are in business for

themselves would unduly restrict

independent workers who neither need

nor benefit from the Act’s provisions.

This rule sharpens the distinction

between these two categories of worker

and thereby furthers the Act’s purpose

to protect employee who need

protection without burdening

independent contractors who do not.

4. Whether Congressional Inaction

Prohibits This Rulemaking

The American Federation of State,

County, and Municipal Employees,

AFL–CIO (AFSCME) asserted that,

‘‘[b]ecause Congress has legislatively

ratified the existing six-factor Economic

Reality test, the Secretary and

Administrator are powerless to alter the

standard. This also means the Proposed

Rule would fail the first step of the

Chevron deference analysis and would

be entitled to no deference by the

courts.’’ According to AFSCME, ‘‘when

Congress re-enacts a statute without

change, it is presumed to be aware of

administrative and judicial

interpretation of that statute and to have

adopted those interpretations.’’ Based

on this principle, AFSCME reasoned

that, because Congress did not revise the

definition of ‘‘employ’’ when it

amended the FLSA in 1966, it must

have adopted the ‘‘integrated unit of

production’’ factor articulated in

Rutherford Food, 331. U.S. 730.

Additionally, AFSCME asserted that

Congress’s 1983 decision to adopt the

FLSA’s definition of ‘‘employ’’ without

revision in MSPA indicates that

Congress implicitly adopted the ‘‘six-

factor test [that] was well embedded as

the interpretation of the FLSA’s

‘employ.’ ’’

AFSCME’s ratification argument is

based entirely on the fact that Congress

has not amended the FLSA’s definition

of ‘‘employ.’’ The Supreme Court,

however, has ‘‘criticized . . . reliance

on congressional inaction’’ as a tool of

statutory interpretation, cautioning that,

‘‘[a]s a general matter . . . these

arguments deserve little weight in the

interpretive process.’’ Central Bank of

Denver, N.A. v. First Interstate Bank of

Denver, N. A., 511 U.S. 164, 187 (1994).

‘‘And when . . . Congress has not

comprehensively revised a statutory

scheme but has made only isolated

amendments, [the Court has] spoken

more bluntly: ‘It is impossible to assert

with any degree of assurance that

congressional failure to act represents

affirmative congressional approval of

the Court’s statutory interpretation.’ ’’

Alexander v. Sandoval, 532 U.S. 275,

292, (2001) (quoting Patterson v.

McLean Credit Union, 491 U.S. 164, 175

n.1 (1989)). Congress has not

‘‘comprehensively revised’’ the Act’s

statutory scheme in a manner that

would indicate Congressional approval

of a judicially created six-factor test as

the standard for FLSA employment.

Even if some insight could be gleaned

from Congressional inaction, that

insight would not support ratifying a

specific and definitive six-factor test

because there has never been a uniform

test for Congress to ratify. The Supreme

Court has never articulated a six-factor

test, and courts of appeals articulate the

test differently. As discussed earlier, the

Second Circuit combines two of the

factors. The Fifth Circuit omits one

factor, while the remaining circuits use

a sixth, ‘‘integral part’’ factor that

departs from the Supreme Court’s

consideration of ‘‘integrated unit of

production.’’ Some circuits analyze a

‘‘skill and initiative’’ factor, while

others consider just ‘‘skill required.’’

Some circuits analyze the investment

factor by comparing the dollar value of

the worker’s investment against that of

the hiring entity, while others analyze

whether the worker’s investment creates

opportunities for profit or loss. Simply

put, there is no single test that Congress

could have impliedly ratified, nor did

AFSCME suggest one.

For these reasons, Congress’s inaction

does not demonstrate that it ratified a

specific six-factor economic reality test.

5. Whether the Rulemaking Improperly

Departs From Prior Practice

Several commenters, including NELA,

contended that the proposed rule would

be an improper departure from the

Department’s prior practice. The rule is

consistent with the Department’s prior

position that the ultimate inquiry for

determining employee versus

independent contractor status under the

FLSA is whether an individual is, as a

matter of economic reality,

economically dependent on another for

work or is instead in business for him-

or herself. The rule is further consistent

with the Department’s longstanding

position that all economic reality factors

should be analyzed when answering

that ultimate inquiry.

The Department acknowledges that

the rule’s focus on two core factors that

are most probative to that ultimate

inquiry is different from how the

Department articulated the economic

reality test in the past. ‘‘Agencies are

free to change their existing policies as

long as they provide a reasoned

explanation for the change.’’ Encino

Motorcars, LLC v. Navarro, 136 S. Ct.

2117, 2125 (2016). The Department has

explained its reasoning for focusing the

economic reality test on two core factors

throughout the NPRM and this

preamble. The Department further

acknowledges that the rule lists

economic reality factors in § 795.105(d)

that correspond with how the

Department has articulated those factors

in the past, with a few modifications.

The Department explained its reasons

for these modifications in the NPRM

and in this preamble. This rule does not

improperly depart from the

Department’s prior positions.

H. Examples

As discussed above, many

commenters requested that the

regulatory text contain examples of how

the economic reality test would apply in

the context of their specific industries or

practices. The Department, however,

prefers to adopt generally applicable

principles as opposed to attempting to

provide guidance for every potential

scenario. The later approach would

require the regulation be drafted as an

exhaustive treatise that is neither

accessible nor helpful for most members

of the regulated community. It would

also invariably omit many important

types of circumstances and be more

difficult to adapt to future industries

and practices that neither the

Department nor commenters could have

conceived.

While the Department cannot provide

examples for every conceivable

scenario, it is adding § 795.115 to

provide six illustrative examples that

involve a variety of industries and

specific facts. Due to the complexities of

balancing multiple factors that

encompass countless facts that are part

of the totality of the circumstances, the

Department does not believe it would be

helpful to provide examples that make

conclusions regarding workers’ ultimate

classifications. Rather, each illustrative

example focuses on the classification

favored by a specific economic reality

factor within the context of the fact-

specific scenario. The first example

concerns the control factor in the

context of the long-haul transportation

industry. The second example concerns

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See 58 FR 51735 (Sept. 30, 1993).

63

The entirety of the estimated costs from this

deregulatory action, which exceed the $100 million

threshold and relate strictly to familiarization, fall

in the first year alone. The Department’s Regulatory

Impact Analysis further explains that these one-year

costs are more than offset by continuing annual

cost-savings of $495.8 million per year, accruing to

the same parties that face the familiarization costs.

the opportunity factor in the context of

the gig economy. The third example

concerns the opportunity factor in the

context of the construction industry and

clarifies the concept of economic

dependence. The fourth example

concerns the permanence factor within

the context of a seasonal hospitality

industry. The fifth example concerns

the reframed ‘‘integrated unit’’ factor

within the context of the journalism

industry. The sixth example also

concerns the new ‘‘integrated unit’’

factor within the context of the

journalism industry and is designed to

work with the fifth example to elucidate

the distinction between when this factor

favors classification as an employee

versus independent contractor.

I. Severability

The Department proposed to include

a severability provision in part 795 so

that, if one or more of the provisions of

part 795 is held invalid or stayed

pending further agency action, the

remaining provisions would remain

effective and operative. The Department

did not receive any comments on this

provision, and finalizes it as proposed.

J. Amendments to Existing Regulatory

Provisions at §§ 780.330(b) and

788.16(a)

Finally, in addition to the proposed

addition of part 795, the Department

proposed to amend existing regulatory

provisions addressing independent

contractor status under the FLSA in

narrower contexts at 29 CFR 780.330(b)

(tenants and sharecroppers) and 29 CFR

788.16(a) (certain forestry and logging

workers). Specifically, the Department

proposed to replace descriptions of the

six economic reality factors WHD has

historically used to evaluate

independent contractor status under the

FLSA with a cross-reference to the

guidance provided in new part 795.

While some commenters invoked the

existing provisions at §§ 780.330(b) and

788.16(a) to justify opposition to

proposed part 795, the Department did

not receive any commenter feedback

regarding the proposed amendment of

these provisions. Accordingly, the

Department finalizes amendments to

these provisions as proposed.

V. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(PRA), 44 U.S.C. 3501 et seq., and its

attendant regulations, 5 CFR part 1320,

require the Department to consider the

agency’s need for its information

collections, their practical utility, the

impact of paperwork and other

information collection burdens imposed

on the public, and how to minimize

those burdens. In the NPRM, the

Department invited public comment on

its determination that the proposal did

not contain a collection of information

subject to OMB approval under the

PRA. A few commenters, while not

referencing the PRA directly, discussed

records in their public comments.

However, this was merely to note

agreement that section 11 of the FLSA

does not require the keeping of records

regarding workers who are independent

contractors. This final rule does not

contain a collection of information

subject to OMB approval under the

PRA.

VI. Executive Order 12866, Regulatory

Planning and Review; and Executive

Order 13563, Improved Regulation and

Regulatory Review

A. Introduction

Under Executive Order 12866, OMB’s

Office of Information and Regulatory

Affairs determines whether a regulatory

action is significant and, therefore,

subject to the requirements of the

Executive Order and OMB review.

62

Section 3(f) of Executive Order 12866

defines a ‘‘significant regulatory action’’

as a regulatory action that is likely to

result in a rule that may: (1) Have an

annual effect on the economy of $100

million or more, or adversely affect in

a material way a sector of the economy,

productivity, competition, jobs, the

environment, public health or safety, or

state, local or tribal governments or

communities (also referred to as

economically significant); (2) create

serious inconsistency or otherwise

interfere with an action taken or

planned by another agency; (3)

materially alter the budgetary impact of

entitlements, grants, user fees or loan

programs or the rights and obligations of

recipients thereof; or (4) raise novel

legal or policy issues arising out of legal

mandates, the President’s priorities, or

the principles set forth in the Executive

Order. Because the annual effect of this

rule is estimated to be greater than $100

million, this rule will be economically

significant under section 3(f) of

Executive Order 12866.

63

Executive Order 13563 directs

agencies to, among other things, propose

or adopt a regulation only upon a

reasoned determination that its benefits

justify its costs; that it is tailored to

impose the least burden on society,

consistent with obtaining the regulatory

objectives; and that, in choosing among

alternative regulatory approaches, the

agency has selected those approaches

that maximize net benefits. Executive

Order 13563 recognizes that some costs

and benefits are difficult to quantify and

provides that, when appropriate and

permitted by law, agencies may

consider and discuss qualitatively

values that are difficult or impossible to

quantify, including equity, human

dignity, fairness, and distributive

impacts.

B. Overview of Analysis

The Department believes this rule is

likely to improve the welfare of both

workers and businesses on the whole.

With respect to businesses, the

Department believes that the improved

clarity offered by the rule will increase

the efficiency of the labor market,

allowing businesses to be more

productive and decreasing their

litigation burden. With respect to

workers, broadly speaking, this rule is

likely to have four categories of

potential effects.

First, this rulemaking makes it easier

for the millions of individuals who

currently work as independent

contractors and those who hire them to

comply with the law. See Farren and

Mitchell (‘‘The proposed rule will likely

reduce the cost of complying with the

relevant Federal regulations.’’).

Compliance cost savings will be shared

between the independent contractors

and businesses for which they work. Id.

(‘‘labor regulations are generally paid for

by reductions in workers’ total

compensation’’).

Second, as explained above, the legal

clarity from this rule is likely to reduce

occurrences of misclassification by

enabling firms and workers to better

understand their respective obligations

and rights under the FLSA. The

Department agrees with commenters

that misclassification harms workers

and believes this rule will reduce those

harms by facilitating compliance.

Third, legal clarity may encourage

firms to create independent contractor

arrangements for roles that did not

previously exist, which may attract

workers who otherwise would not work

in that field. Such job creation

unambiguously benefits workers and

firms alike. See Dr. Liya Palagashvili

(‘‘[W]e got the impression from our

interviews that the primary concern for

startups in terms of labor regulation or

policy is mostly with regulation of

independent contractors.’’), and Fuller

et al. (‘‘[M]ore than two-thirds of

[women with advanced degrees or high-

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Joseph B. Fuller, et al., Rethinking the On-

Demand Workforce, Harvard Business Review (Oct.

20, 2020).

65

Section 795.105(c) indicates that a worker who

lacks both control and opportunity is most likely an

employee. As such, the Department believes this

rule would discourage employers from converting

such workers from employee to independent

contractor status. Section 795.105(c) would not give

an employer sufficient confidence that it could

change the classification of a worker who has only

control but not opportunity, or vice versa.

66

The Department notes that the final rule does

not, by its operation, change the classification of

any employee. Notwithstanding the assertions of

several commentators, as explained throughout the

analysis, the rule does not narrow the definition of

who is an employee under the FLSA.

67

For greater discussion on this and other points

in this summary, please see Section XXXX on Job

Conversion.

honors BAs] who drop out of the

workforce would not have done so if

they’d had access to more-flexible job

arrangements.’’).

64

Fourth, as a result of the improved

clarity of the rule, businesses might

convert existing positions from

employee to independent contractor.

This rule provides the most legal

certainty to employers classifying a

worker as an independent contractor if

the worker substantially controls the

work and has a meaningful opportunity

for profit or loss based on initiative or

investment. As such, a job conversion

attributable to the legal clarity provided

by this rule is likely to satisfy the

control and opportunity criteria.

65

Businesses could reclassify existing

employees as independent contractors

by modifying their working relationship

under the criteria of this rule, and

would only be expected to do so upon

determination that the clarity provided

by this rule materially shifts the balance

of tradeoffs. Business could also

reclassify positions because the

increased clarity of the rule confirms

that their workers are actually already

effectively independent contractors

because their workers have substantial

control over the work and have an

opportunity for profit.

66

Any benefit to

businesses of modified classifications

would need to outweigh the costs,

including any autonomy they cede to

workers in such arrangements and any

costs associated with implementation or

modifying the classification itself, and

such a relationship would need to be

compatible with their business models.

Further, generally speaking, workers

have a choice of whether to agree to the

new independent contractor

arrangement. The overall effect of job

conversion on workers is ambiguous

and could vary from worker to worker,

as discussed in more detail in section

VI(D)(7) below. Impacts resulting from

litigation avoidance due to increased

clarity are discussed in section VI(F)(2).

The Department did not attempt to

quantify all aspects of these four

categories of potential impacts. In

particular, the Department believes that

significant uncertainty surrounds any

attempt to quantify the number or

nature of new independent contractor

relationships that could arise as a result

of this rule. Although the Department

assumes that there will be an increase

in the number of independent

contracting relationships, the

Department did not attempt to put a

specific number on this figure and did

not attempt to estimate how new

independent contractors might differ

from existing independent contractors.

The Department is uncertain with

respect to several key questions,

including how many new workers will

be added and what their characteristics

will be, how many existing employee

relationships may be converted to

independent contractor status, and

which industries, type or sizes of

employers would be most impacted.

Absent these data, the Department is not

well positioned to generate a

constructive estimate or model of

impact on the change in independent

contracting relationships due to the

rule. Notwithstanding, the Department

quantified certain other impacts

associated with the final rule, including

those to current independent

contractors and businesses where

sufficient data and theory afforded

greater confidence in the resulting

estimates.

Regarding the employees who may be

negatively impacted by this rule, the

Department has ascertained certain

characteristics that it expects will be

representative across this group. This

rule provides a sharpening of the

economic realities test, which is a

marginal change that may impact firms’

assessment of legal risk, leading to an

increased chance that some employers

will choose to reclassify certain

positions from employee to independent

contractor relationships. Because this

analysis attempts to quantify the

marginal impacts of this rule, if the only

change is increased legal clarity, any

resulting change in classification will

most likely be limited to workers who

already possess characteristics

associated with independent contractor

status, including control and

opportunity for profit or loss.

67

Due to

the customary negotiation between

firms and workers, most workers whose

positions are converted will be in a

position to influence the tradeoffs

between employee and independent

contractor status. The one group of

workers for whom these assumptions

may not apply is those workers paid the

minimum wage, and whose positions

already resemble characteristics of

independent contractors. Workers

earning the minimum wage may lack

the bargaining power to fully offset the

adverse effects triggered by the job

conversion; however, independent

contractor status often carries

flexibilities that may further offset some

of these effects, albeit non-monetarily.

Further, on one hand, these workers

likely do not have extensive benefits

coverage, but on the other hand, they

may qualify for access to benefits from

other means. There are approximately

370,000 workers over the age of 19 who

earn the minimum wage, which

represents 0.24 percent of the

workforce. It is unclear how many of

these jobs could be converted to

independent contractor status without

material modifications to the position or

substantive negotiation on overall

compensation, but it is not likely to be

many. Further, many of these workers

may have access to health insurance

coverage via a spouse or partner, a

parent, or a government program

(Medicaid, Medicare, Tricare, etc.). For

these reasons, the Department does not

expect there to be many current

employees whose positions are

converted to independent contractor

relationships without meaningful ability

to influence the terms of the new

position in a way that mitigates

deleterious impacts of the resulting

tradeoffs.

The Department estimates there were

10.6 million workers who worked at any

given time as independent contractors

as their primary jobs in the United

States in 2017 (6.9 percent of all

workers), the most recent year of data

available. Including independent

contracting on secondary jobs results in

an estimate of 18.9 million independent

contractors (12.3 percent of all workers).

The Department discusses other studies

estimating the total number of

independent contractors, ranging from

6.1 percent to 14.1 percent of workers

(see Table 2 in VI.C.2). Due to

uncertainties regarding magnitude and

other factors, the Department has not

quantified the potential change to the

aggregate number of independent

contractors that may occur as a result of

this rule. Furthermore, the Department’s

analysis relies on data collected prior to

2020, which reflects the state of the

economy prior to the COVID–19

pandemic. The Department

acknowledges that data on independent

contractors could look different during

the pandemic and following its

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Recent studies and news reports suggest that

more individuals are working under freelance or

independent contractor arrangements during the

pandemic. See, e.g., Press Release, New Upword

Study Finds 36% of the U.S. Workforce Freelance

Amid the COVID–19 Pandemic, Sep. 15, 2020,

available at https://www.upwork.com/press/

releases/new-upwork-study-finds-36-of-the-us-

workforce-freelance-amid-the-covid-19-pandemic;

Kim Mackrael, In the Covid Economy, Laid-Off

Employees become New Entrepreneurs, Wall Street

Journal, Nov. 18, 2020; Uri Berliner, Jobs in the

Pandemic: More Are Freelance and may stay that

way forever, NPR, Sep. 16, 2020; Jon Younger, A

New Payoneer Report Shows Covid 19 is

Accelerating Freelance Growth, Forbes, Sep. 1.,

2020.

69

Discount rates are directed by OMB. See

Circular A–4, OMB (Sept. 17, 2003).

70

$332.9 million¥$17.4 million = $315.5

million. Per OMB guidelines, Executive Order

13771 data is represented in 2016 dollars, inflation-

adjusted for when the rule will take effect.

71

Bureau of Labor Statistics, ‘‘Contingent and

Alternative Employment Arrangements—May

2017,’’ USDL–18–0942 (June 7, 2018), https://

www.bls.gov/news.release/pdf/conemp.pdf.

72

The variables used are PES8IC=1 for self-

employed and PES7=1 for other workers.

economic effects, but does not yet have

information to determine how the

number of independent contractors

could change nor whether these changes

would be lasting or a near term market

distortion.

68

The Department estimates regulatory

familiarization costs to be $370.9

million in the first year. The Department

estimates cost savings due to increased

clarity to be $447.1 million per year,

and cost savings due to reduced

litigation to be $48.7 million per year.

This results in a 10-year annualized net

cost savings of $452.4 million using a 3

percent discount rate and $443.0

million using a 7 percent discount

rate.

69

For purposes of Executive Order

13771, the Department calculated the

difference between the total cost savings

and the total costs in $2016, discounted

over a perpetual time horizon using a 7

percent discount rate beginning in 2021

when the rule will take effect. This

results in an annualized net cost savings

over a perpetual time horizon of $315.5

million.

70

Other anticipated costs,

benefits, and cost savings are discussed

qualitatively.

T

ABLE

1—S

UMMARY OF

R

ULE

I

MPACTS

[$2019 Millions]

Impact Year 1 Years 2–10 Annualized values

a

7% Discount 3% Discount

Regulatory Familiarization Costs:

Establishments ......................................................................................... $152.3 $0.0 $21.7 $17.9

Independent Contractors .......................................................................... 218.6 0.0 31.1 25.6

Total ................................................................................................... 370.9 0.0 52.8 43.5

Cost Savings from Increased Clarity:

Employers ................................................................................................. 369.0 369.0 369.0 369.0

Independent Contractors .......................................................................... 78.1 78.1 78.1 78.1

Total ................................................................................................... 447.1 447.1 447.1 447.1

Cost Savings from Reduced Litigation ............................................................ 48.7 48.7 48.7 48.7

Total Cost Savings .......................................................................................... 495.8 495.8 495.8 495.8

Net Cost Savings (Cost Savings—Costs) ....................................................... 125.0 495.8 443.0 452.4

a

Annualized over 10-years.

C. Independent Contractors: Size and

Demographics

The Department extrapolated from

U.S. Census Bureau data to estimate that

there are 15.6 to 22.1 million

individuals who work as independent

contractors as either a primary or

secondary job. This estimated figure

could be higher or lower depending on

different data sources and

methodologies discussed below. The

Department used the median of the

above range, 18.9 million, for its

estimates to avoid overestimation by

accounting for a number of criteria,

which are presented in this section.

1. Current Number of Independent

Contractors

The Department estimated the

number of independent contractors.

There are a variety of estimates of the

number of independent contractors

spanning a wide range depending on

methodologies and how the population

is defined. The Department believes that

the Current Population Survey (CPS)

Contingent Worker Supplement (CWS)

offers an appropriate lower bound for

the number of independent contractors;

however, there are potential biases in

these data that will be noted.

Additionally, estimates from other

sources will be presented to

demonstrate the potential range.

The U.S. Census Bureau conducts the

CPS and it is published monthly by the

Bureau of Labor Statistics (BLS). The

sample includes approximately 60,000

households and is nationally

representative. Periodically since 1995,

and most recently in 2017, the CPS has

included a supplement to the May

survey to collect data on contingent and

alternative employment arrangements.

Based on the CWS, there were 10.6

million independent contractors in

2017, amounting to 6.9 percent of

workers.

71

The CWS measures those

who say that their independent

contractor job is their primary job and

that they worked at the independent

contractor job in the survey’s reference

week. However, while the Department

refers to the CWS measure of

independent contractors throughout this

analysis, due to the survey’s design it

should be uniformly recognized as

representing a constrained subsection of

the entire independent contractor pool.

Due to its clear methodological

constraints, the CWS measure should be

differentiated from other, more

comprehensive measures.

The BLS’s estimate of independent

contractors includes ‘‘[w]orkers who are

identified as independent contractors,

independent consultants, or freelance

workers, regardless of whether they are

self-employed or wage and salary

workers.’’ BLS asks two questions to

identify independent contractors:

72

•Workers reporting that they are self-

employed are asked: ‘‘Are you self-

employed as an independent contractor,

independent consultant, freelance

worker, or something else (such as a

shop or restaurant owner)?’’ (9.0 million

independent contractors.) We refer to

these workers as ‘‘self-employed

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While self-employed independent contractors

are identified by the worker’s main job, other

independent contractors answered yes to the CWS

question about working as an independent

contractor last week. Although the survey question

does not ask explicitly about the respondent’s main

job, it follows questions asked in reference to the

respondent’s main job.

74

Even among independent contractors, failure to

report multiple jobs in response to survey questions

is common. For example, Katz and Krueger (2019)

asked Amazon Mechanical Turk participants the

CPS-style question ‘‘Last week did you have more

than one job or business, including part time,

evening or weekend work?’’ In total, 39 percent of

respondents responded affirmatively. However,

these participants were asked the follow-up

question ‘‘Did you work on any gigs, HITs or other

small paid jobs last week that you did not include

in your response to the previous question?’’ After

this question, which differs from the CPS, 61

percent of those who indicated that they did not

hold multiple jobs on the CPS-style question

acknowledged that they failed to report other work

in the previous week. As Katz and Krueger write,

‘‘If these workers are added to the multiple job

holders, the percent of workers who are multiple

job holders would almost double from 39 percent

to 77 percent.’’ See L. Katz and A. Krueger,

‘‘Understanding Trends in Alternative Work

Arrangements in the United States,’’ RSF: The

Russell Sage Foundation Journal of the Social

Sciences 5(5), p. 132–46 (2019).

75

K. Lim, A. Miller, M. Risch, and E. Wilking,

‘‘Independent Contractors in the U.S.: New Trends

from 15 years of Administrative Tax Data,’’

Department of Treasury, p. 61 (Jul. 2019), https://

www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.

76

Washington Department of Commerce,

‘‘Independent Contractor Study,’’ p. 21 (Jul. 2019),

https://deptofcommerce.app.box.com/v/

independent-contractor-study.

77

Coalition for Workforce Innovation. ‘‘National

Survey of 600 Self-Identified Independent

Contractors’’ (January 2020), https://

rilastagemedia.blob.core.windows.net/rila-web/

rila.web/media/media/pdfs/letters%20to%20hill/

hr/cwi-report-final.pdf.

78

In any given week, the total number of

independent contractors would have been roughly

the same, but the identity of the individuals who

do it for less than the full year would likely vary.

Thus, the number of unique individuals who work

at some point in a year as independent contractors

would exceed the number of independent

contractors who work within any one-week period

as independent contractors.

79

D. Farrell and F. Greig, ‘‘Paychecks, Paydays,

and the Online Platform,’’ JPMorgan Chase Institute

(2016), https://papers.ssrn.com/sol3/

papers.cfm?abstract_id=2911293.

80

B. Collins, A. Garin, E. Jackson, D. Koustas, and

M. Payne, ‘‘Is Gig Work Replacing Traditional

Employment? Evidence from Two Decades of Tax

Returns,’’ IRS SOI Joint Statistical Research

Program (2019) (unpublished paper), https://

www.irs.gov/pub/irs-soi/

19rpgigworkreplacingtraditionalemployment.pdf.

81

See Katz and Krueger (2018), supra note 12.

82

Id. at 49. The estimate is 9.6 percent without

correcting for overrepresentation of self-employed

workers or multiple job holders. Id. at 31.

83

Id. at Addendum (‘‘Reconciling the 2017 BLS

Contingent Worker Survey’’).

84

Note that they estimate 6.7 percent of employed

workers are independent contractors using the

CWS, as opposed to 6.9 percent as estimated by the

BLS. This difference is attributable to changes to the

sample to create consistency.

85

In addition to the use of proxy responses, this

difference is also due to cyclical conditions. The

impacts of these two are not disaggregated for

independent contractors, but if we applied the

relative sizes reported for all alternative work

arrangements, we would get 0.36 percentage point

difference due to proxy responses. Additionally, it

should be noted that this may not entirely be a bias.

It stems from differences in independent

contracting reported by proxy respondents and

actual respondents. As Katz and Krueger explain,

this difference may be due to a ‘‘mode’’ bias or

proxy respondents may be less likely to be

independent contractors. Id. at Addendum p. 4.

independent contractors’’ in the

remainder of the analysis.

•Workers reporting that they are

wage and salary workers are asked:

‘‘Last week, were you working as an

independent contractor, an independent

consultant, or a freelance worker? That

is, someone who obtains customers on

their own to provide a product or

service.’’ (1.6 million independent

contractors.) We refer to these workers

as ‘‘other independent contractors’’ in

the remainder of the analysis.

It is important to note that

independent contractors are identified

in the CWS in the context of the

respondent’s ‘‘main’’ job (i.e., the job

with the most hours).

73

Therefore, the

estimate of independent contractors

does not include those who may be

defined as an employee for their

primary job, but may work as an

independent contractor for a secondary

or tertiary job.

74

For example, Lim et al.

(2019) estimate that independent

contracting work is the primary source

of income for 48 percent of independent

contractors.

75

Applying this estimate to

the 10.6 million independent

contractors estimated from the CWS,

results in 22.1 million independent

contractors (10.6 million ÷ 0.48).

Alternatively, a survey of independent

contractors in Washington found that 68

percent of respondents reported that

independent contract work was their

primary source of income.

76

Applying

that estimate to the 10.6 million

independent contractors from the CWS

results in an estimated 15.6 million

independent contractors (10.6 million ÷

0.68).

The Coalition for Workforce

Innovation (CWI) submitted a survey

they conducted of 600 self-identified

independent contractors. The survey

found that independent contracting is

the primary source of income for 71

percent of respondents.

77

This is

consistent with the prior estimate from

Washington State. Applying this

estimate to the 10.6 million primary

independent contractors estimated from

the CWS, results in 14.9 million

independent contractors (10.6 million ÷

0.71).

The CWS’s large sample size results

in small sampling error. However, the

questionnaire’s design may result in

some non-sampling error. For example,

one potential source of bias is that the

CWS only considers independent

contractors during a single point in

time—the survey week (generally the

week prior to the interview).

These numbers will thus

underestimate the prevalence of

independent contracting over a longer

timeframe, which may better capture the

size of the population.

78

For example,

Farrell and Greig (2016) used a

randomized sample of 1 million Chase

customers to estimate prevalence of the

Online Platform Economy.

79

They

found that ‘‘[a]lthough 1 percent of

adults earned income from the Online

Platform Economy in a given month,

more than 4 percent participated over

the three-year period.’’ Additionally,

Collins et al. (2019) examined tax data

from 2000 through 2016 and found that

the number of workers who filed a form

1099 grew substantially over that

period, and that fewer than half of these

workers earned more than $2,500 from

1099 work in 2016. The prevalence of

lower annual earnings implies that most

workers who received a 1099 did not

work as an independent contractor

every week.

80

The CWS also uses proxy responses,

which may underestimate the number of

independent contractors. The RAND

American Life Panel (ALP) survey

conducted a supplement in 2015 to

mimic the CWS questionnaire, but used

self-responses only. The results of the

survey were summarized by Katz and

Krueger (2018).

81

This survey found that

independent contractors comprise 7.2

percent of workers.

82

Katz and Krueger

identified that the 0.5 percentage point

difference in magnitude between the

CWS and the ALP was due to both

cyclical conditions, and the lack of

proxy responses in the ALP.

83

Therefore, the Department believes a

reasonable upper-bound on the

potential bias due to the use of proxy

responses in the CWS is 0.5 percentage

points (7.2 versus 6.7).

84 85

Another potential source of bias in the

CWS is that some respondents may not

self-identify as independent contractors,

and others who self-identify may

themselves be improperly classified.

There are reasons to believe that some

workers, who are legally considered

independent contractors, would not

self-identify as such. For example, if the

worker has only one employer/client, or

did not actively pursue the employer/

client, then they may not agree that they

‘‘[obtain] customers on their own to

provide a product or service.’’

Additionally, individuals who do only

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86

The Department believes that including data on

informal work is useful when discussing the

magnitude of independent contracting, although not

all informal work is done by independent

contractors. The Survey of Household Economics

and Decision-making asked respondents whether

they engaged in informal work sometime in the

prior month. It categorized informal work into three

broad categories: Personal services, on-line

activities, and off-line sales and other activities,

which is broader than the scope of independent

contractors. These categories include activities like

house sitting, selling goods online through sites like

eBay or craigslist, or selling goods at a garage sale.

The Department acknowledges that the data

discussed in this study might not be a one-to-one

match with independent contracting, but it

nonetheless provides useful data for this purpose.

87

K. Abraham, and S. Houseman. ‘‘Making Ends

Meet: The Role of Informal Work in Supplementing

Americans’ Income.’’ RSF: The Russell Sage

Foundation Journal of the Social Sciences 5(5):

110–31 (2019), https://www.aeaweb.org/conference/

2019/preliminary/paper/QreAaS2h.

88

See, e.g., U.S. Gov’t Accountability Off., GAO–

09–717, Employee Misclassification: Improved

Coordination, Outreach, and Targeting Could Better

Ensure Detection and Prevention 10 (2008)

(‘‘Although the national extent of employee

misclassification is unknown, earlier national

studies and more recent, though not

comprehensive, studies suggest that employee

misclassification could be a significant problem

with adverse consequences.’’).

89

Including, but not limited to: McKinsey Global

Institute, ‘‘Independent Work: Choice, Necessity,

and the Gig Economy’’ (2016), https://

www.mckinsey.com/featured-insights/employment-

and-growth/independent-work-choice-necessity-

and-the-gig-economy; Kelly Services, ‘‘Agents of

Change’’ (2015), https://www.kellyservices.com/

global/siteassets/3-kelly-global-services/

uploadedfiles/3-kelly_global_services/content/

sectionless_pages/kocg1047720freeagent

20whitepaper20210x21020final2.pdf; Robles and

McGee, ‘‘Exploring Online and Offline Informal

Work: Findings from the Enterprising and Informal

Work Activities (EIWA) Survey’’ (2016); Upwork,

‘‘Freelancing in America’’ (2019); Washington

Department of Commerce, supra note 76; Farrell

and Greig, supra note 79; MBO Partners, ‘‘State of

Independence in America’’ (2016); Abraham et al.,

‘‘Measuring the Gig Economy: Current Knowledge

and Open Issues’’ (2018), https://www.nber.org/

papers/w24950; Collins et al. (2019), supra note 80;

Gitis et al., ‘‘The Gig Economy: Research and Policy

Implications of Regional, Economic, and

Demographic Trends,’’ American Action Forum

(2017), https://www.americanactionforum.org/

research/gig-economy-research-policy-implications-

regional-economic-demographic-trends/

#ixzz5IpbJp79a; Dourado and Koopman,

‘‘Evaluating the Growth of the 1099 Workforce,’’

Mercatus Center (2015), https://www.mercatus.org/

publication/evaluating-growth-1099-workforce.

90

See Katz and Krueger (2018), supra note 12.

91

See Abraham et al. (2018), supra note 89, Table

4.

92

E. Jackson, A. Looney, and S. Ramnath, ‘‘The

Rise of Alternative Work Arrangements: Evidence

and Implications for Tax Filing and Benefit

Coverage,’’ OTA Working Paper 114 (2017), https://

www.treasury.gov/resource-center/tax-policy/tax-

analysis/Documents/WP-114.pdf.

93

Lim et al., supra note 75.

94

In comparison to household survey data, tax

data may reduce certain types of biases (such as

recall bias) while increasing other types (such as

underreporting bias). Because the Department is

unable to quantify this tradeoff, it could not

determine whether, on balance, survey or tax data

are more reliable.

informal work may not view themselves

as independent contractors.

86

This

population could be substantial.

Abraham and Houseman (2019)

confirmed this in their examination of

the Survey of Household Economics and

Decision-making. They found that 28

percent of respondents reported doing

informal work for money over the past

month.

87

Conversely, some workers

who are improperly classified by their

employers as independent contractors

may answer in the affirmative, despite

not truly being independent contractors.

The prevalence of misclassification is

unknown, but it likely occurs across

numerous sectors in the economy.

88

Because reliable data on the potential

magnitude of these biases are

unavailable, and so the net direction of

the biases is unknown, the Department

has not attempted to calculate how

these biases may impact the estimated

number of independent contractors.

Because the CWS estimate represents

only the number of workers who

worked as independent contractors on

their primary job during the survey

reference week, the Department applied

the research literature and adjusted this

measure to include workers who are

independent contractors in a secondary

job or who were excluded from the CWS

estimate due to other factors. As noted

above, integrating the estimated

proportions of workers who are

independent contractors on secondary

or otherwise excluded jobs produces

estimates of 15.6 million and 22.1

million. The Department uses the

average of these two estimates, 18.9

million, as the estimated total number of

workers working as independent

contractors in any job at a given time.

Given the prevalence of independent

contractors who work sporadically and

earn minimal income, adjusting the

estimate according to these sources

captures some of this population. It is

likely that this figure is still an

underestimate of the true independent

contractor pool.

2. Range of Estimates in the Literature

To further consider the range of

estimates available, the Department

conducted a literature review, the

findings of which are presented in Table

2. Other studies were also considered

but are excluded from this table because

the study populations were broader than

just independent contractors or limited

to one state.

89

The RAND ALP

90

and the

General Social Survey’s (GSS’s) Quality

of Worklife (QWL)

91

supplement are

widely cited alternative estimates.

However, the Department chose to use

sources with significantly larger sample

sizes and more recent data for the

primary estimate.

Jackson et al. (2017)

92

and Lim et al.

(2019)

93

use tax information to estimate

the prevalence of independent

contracting. In general, studies using tax

data tend to show an increase in

prevalence of independent contracting

over time. The use of tax data has some

advantages and disadvantages over

survey data. Advantages include large

sample sizes, the ability to link

information reported on different

records, the reduction in certain biases

such as reporting bias, records of all

activity throughout the calendar year

(the CWS only references one week),

and inclusion of both primary and

secondary independent contractors.

Disadvantages are that independent

contractor status needs to be inferred;

there is likely an underreporting bias

(i.e., some workers do not file taxes);

researchers are generally trying to match

the IRS definition of independent

contractor, which does not mirror the

scope of independent contractors under

the FLSA; and the estimates include

misclassified independent contractors.

94

A major disadvantage of using tax data

for this analysis is that the detailed

source data are not publicly available

and thus the analyses cannot be directly

verified or adjusted as necessary (e.g., to

describe characteristics of independent

contractors, etc.).

T

ABLE

2—S

UMMARY OF

E

STIMATES OF

I

NDEPENDENT

C

ONTRACTING

Source Method Definition

a

Percent of workers

(%) Sample size Year

CPS CWS ...... Survey .... Independent contractor, consultant or

freelance worker (main only). 6.9 50,392 ..................................................... 2017

ALP ................ Survey .... Independent contractor, consultant or

freelance worker (main only). 7.2 6,028 ....................................................... 2015

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95

The Department used the generational

breakdown used in the MBO Partner’s 2017 report,

‘‘The State of Independence in America.’’

‘‘Millennials’’ were defined as individuals born

1980–1996, ‘‘Generation X’’ were defined as

individuals born 1965–1980, and ‘‘Baby Boomers

and Matures’’ were defined as individuals born

before 1965.

96

Abraham and Houseman (2019), supra note 87,

find that informal work decreases as a worker’s age

increases. Among 18 to 24 years olds, 41.3 percent

did informal work over the past month. The rate fell

to 25.7 percent for 45 to 54 year olds, and 13.4

percent for those 75 years and older. See also

Upwork (2019), supra note 89.

97

These numbers are based on the respondents

who state that their race is ‘‘white only’’ or ‘‘black

only’’ as opposed to identifying as multi-racial.

98

Abraham and Houseman (2019), supra note 87.

99

Id.

100

Another uncertainty limiting the Department’s

ability to quantify the possible increase in

independent contracting is the nature and effect of

state wage and hour laws. Some states, such as

California, have laws that place more stringent

limitations on who may qualify as independent

contractors than the FLSA. See Cal. Labor Code

2775 (establishing a demanding ‘‘ABC’’ test

applicable to most workers when determining

independent contractor status under California

law). Because the FLSA does not preclude states

and localities from establishing broader wage and

hour protections than those that exist under the

FLSA, see 29 U.S.C. 218(a), workers in some states

may be unaffected by this final rule. However,

because the Department is not well positioned to

interpret the precise scope of each state’s wage and

hour laws, the Department is unable to definitively

determine the degree to which workers in particular

states would or would not be affected by this final

rule.

T

ABLE

2—S

UMMARY OF

E

STIMATES OF

I

NDEPENDENT

C

ONTRACTING

—Continued

Source Method Definition

a

Percent of workers

(%) Sample size Year

GSS QWL ...... Survey .... Independent contractor, consultant or

freelancer (main only). 14.1 2,538 ....................................................... 2014

Jackson et al Tax data Independent contractor, household

worker.

b

6.1 ∼5.9 million

c

........................................... 2014

Lim et al ......... Tax data Independent contractor ........................... 8.1 1% of 1099–MISC and 5% of 1099–K ... 2016

a

The survey data only identify independent contractors on their main job. Jackson et al. include independent contractors as long as at least 15

percent of their earnings were from self-employment income; thus, this population is broader. If Jackson et al.’s estimate is adjusted to exclude

those who are primary wage earners, the rate is 4.0 percent. Lim et al. include independent contractors on all jobs. If Lim et al.’s estimate is ad-

justed to only those who receive a majority of their labor income from independent contracting, the rate is 3.9 percent.

b

Summation of (1) 2,132,800 filers with earnings from both wages and sole proprietorships and expenses less than $5,000, (2) 4,125,200 pri-

marily sole proprietorships and with less than $5,000 in expenses, and (3) 3,416,300 primarily wage earners.

c

Estimate based on a 10 percent sample of self-employed workers and a 1 percent sample of W–2 recipients.

3. Demographics of Independent

Contractors

The Department reviewed

demographic information on

independent contractors using the CWS,

which, as stated above, only measures

those who say that their independent

contractor job is their primary job and

that they worked at the independent

contractor job in the survey’s reference

week. According to the CWS, these

primary independent contractors are

most prevalent in the construction and

professional and business services

industries. These two industries employ

44 percent of primary independent

contractors. Independent contractors

tend to be older and predominately

male (65 percent). Millennials have a

significantly lower prevalence of

primary independent contracting than

older generations: 3.6 percent for

Millennials compared to 6.0 percent for

Generation X and 8.8 percent for Baby

Boomers and Matures.

95

However,

surveys suggest that this trend is

reversed when secondary independent

contractors, or those who did informal

work as independent contractors, are

included. These divergent data suggest

that younger workers are more likely to

use contractor work sporadically and/or

for supplemental income.

96

White

workers are somewhat overrepresented

among primary independent

contractors; they comprise 85 percent of

this population but only 79 percent of

the population of workers. Conversely,

black workers are somewhat

underrepresented (comprising 9 percent

and 13 percent, respectively).

97

The

opposite trends emerge when evaluating

informal work, where racial minorities

participate at a higher rate than white

workers.

98

Primary independent

contractors are spread across the

educational spectrum, with no group

especially overrepresented. The same

trend in education attainment holds for

workers who participate in informal

work.

99

D. Potential Transfers

Given the current universe of

independent contractors and the

possibility that more individuals may

become independent contractors after

the rule is finalized, the Department

here identifies the possible transfers

among workers and between workers

and businesses, which may occur. These

transfer effects are discussed

qualitatively and include effects relating

to employer provided benefits, tax

liability, earnings, minimum wage and

overtime pay, accurate classification of

workers, and conversions of employee

jobs to independent contractor jobs.

In evaluating potential transfers that

could be occasioned by the rule, the

Department notes at the outset that the

substantive effect of the rule is not

intended to favor independent

contractor or employee classification

relative to the status quo of the

Department’s existing guidance and

precedent from courts. However, the

Department assumes in this RIA that the

increased legal certainty associated with

this final rule could lead to an increase

in the number of independent

contractor arrangements by reducing the

transaction and compliance costs

inherent in structuring such an

arrangement. The Department has not

attempted to estimate the magnitude of

this change, primarily because there are

not objective tools for quantifying the

clarity, simplification, and enhanced

probative value of the Department’s

proposals for sharpening and focusing

the economic reality test.

100

Several

commenters assumed the increase in

independent contractors would be 5

percent, although none provided

substantive support to bolster the

assumption. See EPI, Washington

Center. Due to the lack of certainty and

data to support a reliable estimate, the

Department does not attempt to estimate

the increase in independent contractor

relationships that would result due to

this rule. Therefore, potential transfers

are discussed qualitatively with some

numbers presented on a per worker

basis. Potential transfers may result

from differences in benefits, tax

liabilities, and earnings between

employees and independent contractors.

Although employment benefits could

decrease, and tax liabilities could

increase, the Department believes the

net impact on total compensation

should be small in either direction.

Furthermore, to attract qualified

workers, companies must offer

competitive compensation. Therefore,

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Under the final rule, a worker may be

classified only if the job meets the requirements of

section 795.105.

102

Lim et al., supra note 75 at 3.

103

McKinsey Global Institute, supra note 89 at

71.

104

The fact that the final rule is not an expansion

or narrowing of the FLSA’s scope of employment

is not to say that courts have never in the past

misapplied the economic reality test in particular

cases. For example, some courts have expressly

disagreed on the meaning of the ‘‘integral/

integrated’’ factor in the test. The existence of

seemingly contradictory and inconsistent case law

is one of the reasons why the Department sees a

need to issue this final rule. However, as discussed

extensively above, the Department believes that the

statement of the economic reality test in the final

rule is consistent with precedent and the FLSA as

a whole, even if it is in tension with particular

cases.

105

Some commenters and reports (See e.g.,

Palagashvili; Fuller et al.,) cited data that indicate

increased regulatory clarity would likely result in

workers entering the workforce due to the greater

flexibility and control provided by independent

contracting relationships. This would expand the

workforce rather than transfer workers between

classifications.

106

EPI, Washington Center, and other

commenters who use this 5 percent estimate

assume the entire increase to independent

contractors consists of workers whose overall

compensation will decline and whose jobs

otherwise remain the same. See EPI (characterizing

converted workers as having ‘‘the same job for

substantially less compensation’’). The Department

finds this highly unlikely. For more discussion on

this topic, see the Job Conversion topic in Section

II.D.6.

for workers in a competitive labor

market, any reduction in benefits and

increase in taxes are expected to be

offset by higher base earnings. This

concept is discussed further below in

the Earnings section.

Assuming that independent

contractor arrangements increase

following this final rule, it is unclear the

extent to which this would occur as a

result of current employees being

subsequently classified as independent

contractors or as a result of the hiring of

new workers as independent

contractors. This will have implications

for transfers. If current employees

change classifications, then there may

be transfers. Employers could change

the classification of current employees

only if those workers could already have

been classified as independent

contractors or if the working conditions

are modified such that the relationship

becomes a true independent contractor

relationship, assuming doing so is

consistent with any applicable

employment contracts, collective

bargaining agreement, or other

applicable laws.

101

Lim et al. (2019)

found in the status quo that there was

‘‘little evidence that firms are

increasingly reclassifying existing

employee relationships as [independent

contractor] relationships,’’ however,

they found that ‘‘firms are hiring more

new workers as [independent

contractors] rather than as

employees.’’

102

The Department does

not anticipate this phenomenon will

cease occurring in the presence of the

final rule. As discussed below, the

limited number of businesses with

employees whose roles would meet the

requirements to be independent

contractors likely face incentives to

maintain the status quo for those

workers, but there will likely be some

degree of innovation in the labor market

in response to the rule that compounds

the current trend towards greater

numbers of independent contractors.

For more discussion on how employees

may be affected by transfers, see the Job

Conversion discussion in Section

VI(D)(7).

By decreasing uncertainty and thus

potentially opening new opportunities

for firms, companies may hire

independent contractors who they

otherwise would not have hired. In this

case, there may be a decrease in

unemployment, an increase in the size

of the labor force, or both. In a study of

respondents from both Europe and the

U.S., McKinsey Global Institute found

that 15 percent of those not working are

interested in becoming an independent

contractor as their primary job.

103

Attracting these individuals to join the

labor force would be classified as a

societal benefit, rather than a transfer.

These impacts are evaluated more fully

below as part of the discussion on Cost

Savings and Benefits.

The Department requested comments

on its assumption that use of

independent contractors will increase if

the proposed rule is finalized. Most

commenters took the view that,

consistent with the Department’s

assumption, the final rule will lead to

an increase in the number and

proportion of workers who are

independent contractors. Some

commenters, such as the Signatory Wall

and Ceiling Contractors Alliance

(SWACCA) and other construction

workers’ unions commented that the

rule could lead to increases in the

percentage of independent contractors

in the workforce by narrowing the

standard for FLSA employment. But as

explained above in Section IV(E)(2) and

later in the discussion of regulatory

alternatives in Section VI(G)(2), the final

rule does not narrow or expand the

standard for FLSA employment. Rather,

the Department agrees with many

commenters representing businesses

and freelance workers that the final rule

serves only to make that standard

clearer, enabling businesses and

individuals to structure their work

relationships to comply with the law.

See Section III (discussing commenter

feedback). While this could lead to a

greater incidence of independent

contracting—as businesses and workers

will be able to more freely adopt

independent worker arrangements

without fear of FLSA liability—the final

rule does not narrow the standard for

FLSA employment.

104

Some commenters disagreed with the

Department’s decision not to

specifically quantify a change in the

number of independent contractors.

Furthermore, most of the commenters

who included assumptions of growing

numbers of independent contractors

also assumed that those workers were

drawn from the existing pool of

employees, not from the otherwise

unemployed or those outside the labor

market.

105

The Washington Center for

Equitable Growth (Washington Center),

for instance, simply assumed a 5

percent increase in the number of

independent contractors (corresponding

to an equivalent decline in

employees);

106

however, it neither

provided explanation why that

percentage was reasonable nor justified

its assumption that the percentage

would entirely represent a shift of

existing employment relationships to

independent contractor relationships.

Many commenters asserting and

estimating a sizable shift from

employment to independent contracting

relationships seem to have based their

estimates on the false impression that

the final rule would narrow the FLSA

scope of employment. As explained

above, this is not the case—the final rule

does not shift the definition of who is

an employee under the FLSA. Any shift,

the Department believes, would have to

result from increased certainty, reduced

overhead, and reduced

misclassification. Conversely, the

Americans for Prosperity Foundation

(AFPF) agreed with the Department’s

decision to not quantify potential

changes in the aggregate number of

independent contractors and supported

the Department’s analysis.

The Department continues to believe

that the necessary data and information

are not available to quantify either any

shift in independent contracting away

from employee relationships or the

number of new independent contractors

who may enter the workforce in

response to the rule and the impact of

such a shift on workers and businesses.

As explained in the NPRM, any attempt

to produce a useful estimate for the

impact of an increase in independent

contractors requires ascertaining a

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107

If, for example, a state mandates that

employees receive paid parental leave, but the

worker does not have and intends not to have

children, this ‘‘benefit’’ is of no value to that

worker. Estimating how an individual worker

values a particular ‘‘benefit’’ or even a tax liability

would require a worker-by-worker analysis for

which the Department lacks necessary data.

108

Fuller, et al., supra note 64 (‘‘Many freelance

platforms offer access to workers from around the

world with a wide variety of skills, and payment

is often per completed task. Covid-19 is accelerating

the move toward these platforms. . ..’’); see also

Press Release, New Upwork Study Finds 36% of the

U.S. Workforce Freelance Amid the COVID–19

Pandemic, Sep. 15, 2020, available at https://

www.upwork.com/press/releases/new-upwork-

study-finds-36-of-the-us-workforce-freelance-amid-

the-covid-19-pandemic.

109

See, e.g., Kim Mackrael, In the Covid

Economy, Laid-Off Employees become New

Entrepreneurs, Wall Street Journal, Nov. 18, 2020;

Uri Berliner, Jobs in the Pandemic: More Are

Freelance and may stay that way forever, NPR, Sep.

16, 2020; Jon Younger, A New Payoneer Report

Shows Covid 19 is Accelerating Freelance Growth,

Forbes, Sep. 1. 2020.

110

Courts have noted that the FLSA has the

broadest conception of employment under Federal

law. See, e.g., Darden, 503 U.S. at 326. To the extent

that businesses making employment status

determinations base their decisions on the most

demanding Federal standard, a rulemaking

addressing the FLSA’s distinction between

employees and independent contractors may affect

the businesses’ classification decisions for purposes

of benefits and legal requirements under other

Federal and state laws.

111

BLS, ‘‘Employer Costs for Employee

Compensation News Release’’ (Sept. 2019), https://

www.bls.gov/news.release/archives/ecec_

12182019.htm. For Civilian Workers, this includes

paid leave ($2.68), insurance ($3.22), and retirement

and savings benefits ($1.96). It does not include

overtime and premium pay, shift differential pay,

nonproduction bonuses, or legally required

benefits. Calculated as ($2.68 + $3.22 + $1.96)/

$37.03.

112

The average economy-wide provision of

insurance benefits, which represent 8.7 percentage

points of the 21 percent figure, is also likely to be

an overestimate for the average percentage of

compensation offered to the workers most likely to

be impacted by this rule.

number of additional variables,

including how this reduction in

administrative overhead and

misclassification would impact

independent contracting. See 85 FR

60626. The approach taken by some

commenters of simply choosing a

number without support and applying it

across the entire economy, given the

extremely large number of employment

relationships in the United States, the

differences in how a worker may value

certain ‘‘benefits,’’

107

and the unique

relationships between different types of

independent contractors and different

businesses, could create a misleading

and uncertain estimate of the impact of

the rule without lending any additional

clarity because of the lack of the basis

for such a figure and likely differences

between the current independent

contractor population and the

population likely to arise as a result of

this rule. Since commenters, including

those in support and those in

opposition, did not proffer sufficient

data upon which to build more accurate

assumptions, the Department has not

attempted to quantify this impact.

1. Impact of COVID–19 on the Rule

The Department also requested data

and comment on the possible impacts

resulting from the COVID–19 pandemic

as it relates to the composition of the

labor market, the share and scope of

independent contractors in the

workforce, and any associated wage

effects. Several commenters noted the

importance of independent contracting

in weathering the pandemic. For

example, the Center for Growth and

Opportunity at Utah State University

(CGO) wrote that the benefits of

independent contracting ‘‘are likely to

grow if the United States labor market

adapts to the recession spurred by the

COVID–19 pandemic similarly as it did

to the financial crisis of 2008.’’ They

note that during an economic downturn,

workers can turn to alternative work

arrangements such as independent

contracting to supplement their income.

The view is supported by a recent

Harvard Business Review article that

describes how firms have increasingly

relied on freelancing and platforms that

allow access to the growing supply of

on-demand workers to identify

innovative solutions more flexibly and

quickly than relying solely on their

fulltime workforce, noting that ‘‘Early

signs suggest that Covid–19 will also

speed up this shift.’’

108

It is also

supported by a range of recent news

reports indicating that freelance

opportunities provide an important path

for individuals to return to the

workforce who lost their jobs due to the

pandemic.

109

Women Employed

claimed that this rule will degrade jobs,

and that doing so in the midst of a

pandemic would be harmful, basing this

claim on assumptions that this rule

would ‘‘undermine the FLSA’’ and

increase misclassification of workers.

But as explained above, this rule does

not undermine the FLSA; it sharpens

the focus of the economic reality test

and clarifies the meaning of economic

dependence that courts, the Department,

and most commenters agree is the

standard for employment under the Act.

This clearer standard is likely to reduce

rather than increase occurrences of

misclassification.

2. Employer Provided Benefits

In the context of transfers, the

Department attempted to evaluate how

an increase in independent contracting

relationships could affect employer

provided benefits. Although this rule

only addresses workers’ independent

contractor status under the FLSA, the

Department assumes in this analysis

that employers are likely to keep the

status of most workers the same across

all benefits and requirements.

110

To the

extent that employers currently provide

employees benefits such as health

insurance, retirement contributions, and

paid time off, these would likely

decrease with an increase in the use of

independent contractors because

independent contractors generally do

not receive these benefits directly

(although independent contractors are

able to purchase at least some of these

benefits for themselves and, as

explained in the preamble, the offering

of health, retirement, and other benefits

to workers is not necessarily indicative

of employee status). Employer-provided

benefits are often a significant share of

workers’ compensation. According to

the BLS’s Employer Costs for Employee

Compensation (ECEC), the value of

employer benefits that directly benefit

employees average 21 percent of total

compensation.

111

The Department notes

that this 21 percent figure is an average

for all employees and may not be

representative of the subset of

employees whose classification may be

impacted by this rule. Since the 21

percent figure includes paid leave (7.2

percentage points) and retirement

benefits (5.3 percentage points), and

workers may value these benefits at very

different levels, applying these elements

does not seem reasonable in the context

of this analysis.

112

The Department used the CWS to

compare prevalence of health insurance

and retirement benefits across

employees and independent contractors

to produce a highly generalized picture.

However, it should be noted that these

two populations may differ in other

ways than just their employment

classification and the particular

elements of their compensation

packages discussed in the preceding

paragraph which may impact benefit

amounts. For instance, an employee

shifting to independent contractor status

who already receives health benefits

through a partner’s benefit plan would

not be impacted by losing heath benefit

eligibility. Additionally, lower benefits

may be offset by increased base pay to

attract workers because workers

consider the full package of pay and

benefits when accepting a job.

According to the CWS’s relatively

narrow definition of independent

contractor:

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113

Coalition for Workforce Innovation (2020),

supra note 77.

114

A. Yildirmaz, M. Goldar, S. Klein,

‘‘Illuminating the Shadow Workforce: Insights Into

the Gig Workforce in Businesses,’’ ADP Research

Institute (February 2020), https://www.adpri.org/

research/illuminating-the-shadow-workforce/

?release=illuminating-the-shadow-workforce-2020.

115

Access to such benefits might be similar for

both employees and independent contractors, but it

is unlikely that the business will contribute similar

sums to benefits for an independent contractor and

employee.

116

T. Rowe Price, ‘‘Press Release: The Majority of

Independent Workers are Actively Saving for

Retirement’’ (March 25, 2019), https://

www.troweprice.com/corporate/en/press/t-rowe-

price-the-majority-of-independent-workersare-

actively-.html

117

Jackson, Looney, and Ramnath (2017), supra

note 92.

•79.4 percent of self-employed

independent contractors have health

insurance. Most of these workers either

purchased insurance on their own (31.5

percent) or have access through their

spouse (28.6 percent).

•80.7 percent of other independent

contractors have health insurance.

There are three main ways these

workers receive health insurance:

Through their spouse (25.1 percent),

through an employer (24.2), or on their

own (20.1 percent).

•88.3 percent of employees have

health insurance. Most of these workers

receive health insurance through their

work (64.1 percent). Furthermore,

according to the ECEC, employers pay

on average 12 percent of an employee’s

base compensation in health insurance

premiums.

Several commenters estimated the

prevalence of health insurance among

independent contractors. In early 2020,

CWI commissioned a national survey of

600 self-identified independent

contractors. Their survey found that 84

percent of independent contractors have

healthcare coverage.

113

The Workplace

Policy Institute of Littler Mendelson,

P.C. (WPI) pointed to a study that found

about 90 percent of gig workers have

health insurance.

114

The study also

found that less than one-third of 1099–

MISC workers purchase their own

health insurance, ‘‘and most indicate

that health insurance does not affect

their decision to work as an

independent contractor.’’ It also notes

that the businesses interviewed believe

that workers may have ‘‘made an

economic decision with their spouse—

where one spouse works without

benefits for higher pay and the other

receives lower pay with benefits—

resulting in a higher total income and

health benefits for the household.’’

From these data, it is unclear exactly

how health insurance coverage would

change if the number of independent

contractors increased, but the data

suggest that independent contractors, on

average, may be less likely to have

health insurance coverage. That said,

employment is not a guarantee of health

insurance, nor do independent

contractors generally lack health

insurance. Additionally, simply

comparing rates between independent

contractors and employees may be

misleading. As the U.S. Chamber of

Commerce pointed out, many

independent contractors would not be

eligible for benefits even if they were

employees due to the short-term and/or

part-time nature of such an employment

relationship.

Women Employed noted that the

although the Department showed high

rates of health insurance among

independent contractors in general, the

Department did not show that low-wage

independent contractors have access to

health insurance. In response, the

Department compared health insurance

rates for workers earning less than $15

per hour and found that 71.0 percent of

such independent contractors have

health insurance compared with 78.5

percent of such employees. Health

insurance rates are lower for both

independent contractors and employees

when limited to low-wage workers.

However, the gap in coverage between

low-wage employees and independent

contractors remains comparable to that

for all workers: 7.5 percentage points for

low-wage workers compared to 8.1

percentage points for all workers.

A major source of retirement savings

is employer sponsored retirement

accounts. According to the CWS, 55.5

percent of employees have a retirement

account with their current employer; in

addition, the ECEC found that

employers pay 5.3 percent of

employees’ total compensation in

retirement benefits on average ($1.96/

$37.03). If a worker shifts from

employee to independent contractor

status, that worker may no longer

receive employer-provided retirement

benefits, but may choose alternate

personal investment options. As with

health insurance, it is not clear whether

retirement savings for such a worker

would increase or decrease, but such a

worker would likely need to take a more

active role in saving for retirement vis-

a

`-vis an employee with an employer-

see also, e.g., Truckload Carriers

Association (‘‘[t]he increased clarity

provided by the [proposed rule] would

likely lead to reduced

misclassification.’’); IAW (‘‘This rule

will clear up misclassifications’’);

Financial Services Institute (‘‘we agree

that it will reduce worker

misclassification and litigation’’). Other

commenters believe this rule may make

it easier for employers to misclassify

employees as independent contractors.

See, e.g., Equal Justice Center; Employee

Rights Center; NELP; State AGs; TRLA.

These commenters cited reports

purporting to show extremely high rates

of misclassification. For example, a

2020 NELP report cited by many

commenters reviewed state audits and

concluded that ‘‘these state reports

show that 10 to 30 percent of employers

(or more) misclassify their employees as

independent contractors.’’

156

The

Washington Center also cited a study

conducted by the Department of Labor

in 2000 to claim that ‘‘between 10

percent and 30 percent of employers

audited in 9 states misclassified workers

as independent contractors.’’

157

These estimates, however, appear to

be unreliable for at least two reasons.

First, they make generalized

conclusions regarding rates of

misclassification using non-

representative audit data. For example,

the Department’s 2000 study cited by

the Washington Center states that audits

were ‘‘selected on a targeted basis

because of some prior evidence of

possible non-compliance.’’

158

The 2020

NELP report likewise explained that

‘‘[m]ost studies [on misclassification]

rely on audit data from unemployment

insurance and workers’ compensation

audits, targeted or random.’’

159

As a

2015 EPI report explained, ‘‘[a]udit

methods vary across states in the extent

to which they target employers for

audit: They can base the audits on

specific criteria (e.g., a record of prior

violation), or use a random sample of

employers within industries prone to

misclassification, or a mix of both

methods.’’

160

Thus, even ‘‘random’’

audits are not necessarily representative

because they target industries with high

rates of misclassification. Because

audits focus on groups of businesses or

industries in which misclassification

rates are the highest, their results would

not support generalized conclusions

regarding the wider population. As

such, the reports’ generalized

conclusion lack reliable and

representative evidence, and are almost

certainly significant overestimates.

Second, the audit data cited by NELP

and others do not necessarily focus on

misclassification of employees as

independent contractors; some states’

data are evaluated based on prevalence

of employer violations, which is not

representative of percentages of workers

misclassified as independent

contractors. For example, the 2020

NELP report appears to state that audits

conducted by Ohio found a

misclassification rate of 45 percent, but

the cited Ohio report stated otherwise.

The report explained that the audits

searched for unemployment insurance

violations, not just misclassifications,

and that ‘‘45% of the audits produce

findings, in many cases for workers

misclassification.’’

161

In other words,

the Ohio audits found 45% of audited

employers failed to comply with some

unemployment insurance requirement,

with an unspecified subset committing

misclassification. This and other

misunderstandings of state audit

findings may result in a misleading

estimate of the frequency with which

employers misclassify employees as

independent contractors. Furthermore,

the reporting is based on

misclassification (or other issues, as

documented above) on a per employer

basis. The employer rate of

misclassification may not necessarily

correspond to the rate of employee

misclassification. For example, if an

employer employs 100 employees and

misclassifies only one of them, the

employer is recorded as a misclassifying

employer in the aggregated results.

162

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have misclassified 100 percent of their workforce as

independent contractors.

163

Wisconsin Department of Workforce

Development, Payroll Fraud and Worker

Misclassification Report 16 (2020), available at:

https://dwd.wisconsin.gov/misclassification/pdf/

2019-2020-misclassification-task-force-report.pdf.

164

See Coalition for Workforce Innovation (2020),

supra note 77.

This binary approach to data collection

on a per employer basis prevents a

disambiguation to analyze the actual

number of misclassified workers in the

labor force. This phenomenon is present

is another study conducted by the

Wisconsin Department of Revenue cited

by NELP, which claimed that ‘‘In 2018,

44% of audited employers were found

to be misclassifying workers.’’

163

However, that data seems to be

misleading for multiple reasons. First,

the quotation does not appear to match

the cited source. Appendix 2 of the

Wisconsin Workforce Report states that

in 2019 the ‘‘percentage of audited

employers with misclassified workers’’

was 33.3 percent (divergent from the

‘‘44 percent’’ that NELP stated). Second,

the number of businesses found to be

misclassifying workers does not address

how many workers were misclassified.

The percentage of workers misclassified

was 10.6, across all of the audited

employers, which is much smaller than

either 33 or 44 percent. Finally, all of

these estimates are compounded by the

targeting bias described earlier, namely

that the results only reflect businesses

specifically targeted for audits, which

presents only a partial picture of the

incidence of such misclassification

economy-wide.

Ultimately, and as explained above in

Section VI(G)(2), commenters’ estimates

regarding current rates of

misclassification—whether accurate or

not—have little bearing on how

misclassification rates are likely to

change as a result of this rule. This rule

establishes a clearer test for when a

worker is an independent contractor

rather than an employee under the

FLSA. As such, it would reduce

inadvertent misclassification by

employers who are confused by the

prior test, particularly small businesses

that lack resources to hire expensive

attorneys. For example, one small

business owner commented to explain

that ‘‘the ability to understand and

properly determine worker status under

the FSLA is paramount for small

businesses who cannot afford the cost of

litigation . . . I believe that with the

proper transparency within the

regulations, the better the outcome not

only for small businesses, but the

worker, and ultimately the care

recipient. We want to comply, and I

have confidence that the proposed [rule]

. . . will be highly effective in

achieving the desired clarity and

certainty.’’ A clearer test also means

more workers will better understand

their rights under the FLSA and can

defend those rights through private

litigation or complaints to the

Department, which should deter

unscrupulous employers from

intentionally misclassifying them.

In summary, the Department believes

that the simplicity and clarity this rule

provides will reduce both inadvertent

and intentional misclassification, which

could produce transfers from employers

to employees who are more likely to be

correctly classified and given minimum

wage and overtime pay. The Department

is unable to calculate the exact transfer

amount because it lacks reliable metrics

on, for example, the existing

misclassification rates in the general

economy, the precise extent to which

this rule improves legal clarity, and how

firms will respond to that clarity.

7. Job Conversion

Many commentators expressed

concerns that the rule would cause

businesses to reclassify their workers as

independent contractors, causing those

workers to lose the benefits of the FLSA

with little gain in return. See, e.g.,

Washington Center (asserting that

‘‘independent contractors tend to be

worse-off than their wage-and-salary

counterparts’’); National Women’s Law

Center (‘‘if finalized, this rule will cost

workers . . . in the form of reduced

compensation’’); EPI (estimating that

converted ‘‘workers would lose $6,963

per year’’). Some of these issues are

discussed above. For example, the

Department discussed possible earnings

effects of workers converting from

employee to independent contractor

extensively in this section VI(D) and

concluded it could not definitively

determine whether overall

compensation—i.e., earnings plus

benefits—for a job that is converted

from employee to independent

contractor classification in response to

this rule is likely to rise or fall on

average. Regardless, the Department

acknowledges that whether the overall

effect of job conversion is likely to be,

on balance, positive depends on the

individual, reclassified worker, the

unique circumstances of the business,

and whether or not the working

conditions were changed in order to

reclassify the worker.

If the converted position is an entirely

new position, it is more likely to be

filled by one of the many individuals

who desire to work as an independent

contractor, for example because they

value the ‘‘flexibility to choose when

and where to work’’ that the position

may provide more than ‘‘access to a

steady income and benefits.’’

164

Such

an individual may, for example,

discount the value of certain types of

compensation associated with employee

classification, such as health insurance,

that he or she might already enjoy from

a different source. The individual may

also simply prefer to trade overall

compensation for the greater flexibility

that often accompanies independent

contractor roles. Thus, the lower paid

converted new jobs do not necessarily

reduce such workers’ welfare because

they could offer tradeoffs that may be

preferable to the workers who are most

likely to sort themselves into those

positions. On balance, the Department

believes conversion of new jobs will

have an overall positive impact on

workers.

The second category of job conversion

discussed above occurs when employers

modify their working relationship with

existing employees such that they are

rendered independent contractors under

this rule. As explained above, to act on

the legal certainty provided by this rule,

the converted position likely would

have to provide the worker with

substantial control over the work and a

meaningful opportunity for profit or

loss. The Department believes such

conversions will be less common than

conversion of future positions because

the marginal cost of restructuring an

existing work arrangement is greater

than altering the arrangement of an

unfilled position. And such

restructuring would disrupt the

preexisting working relationships,

which risks negatively impacting

worker morale, productivity, and

retention. Nonetheless, some conversion

of existing positions may occur, and

some converted workers may prefer the

additional flexibility and earn more by

taking advantage of the opportunity for

profit or loss that may accompany the

conversion. The effect of the rule would

be positive for these workers. Other

converted workers may prefer the

security, stability, and other features of

an employment relationship or earn less

due to, for example, reduction of

employer-provided benefits,

employment taxes, and loss of the

FLSA’s minimum wage and overtime

pay. The effect of the rule would be

negative for these converted workers,

but, as explained above, the Department

believes this type of conversion will be

rare.

Finally, an employer may reclassify

an existing employee position to an

independent contractor position

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165

Commenters in the business and freelancer

community indicated that—rather than classify

independent entrepreneurs as employee in response

to legal uncertainty regarding classification—

business simply decline to do business with those

entrepreneurs in the first place. See, e.g., ASTA

(‘‘The prospect of inconsistent determinations has

had a chilling effect on the growth of businesses in

industries reliant on contract workers which has

resulted in fewer opportunities for individuals who

choose to offer their services as independent

entrepreneurs.’’); CPIE (‘‘uncertainty associated

with worker classification under the FLSA . . .

discourages companies from doing business with

independent entrepreneurs’’). The effects described

by these commenters are unsurprising. For

example, it makes little sense for a business to

classify a worker as an employee, thus obligating

themselves to pay a premium rate for overtime work

under the FLSA, if it is the worker and not the

business who determines how many hours to work

each week. Rather, the business likely would either

not hire the worker at all or hire him or her as an

employee but insist on controlling hours worked.

166

Most firms can already reduce the overall

compensation of their employees whose wages

exceed the minimum wage through more direct

means than reclassification as independent

contractors but do not do so because of risks

regarding morale, productivity, and retention.

167

Employers and employees could make similar

conversions to independent contractor status for

reasons outside the sharpening of the economic

reality test this rule provides. Such shifts would not

be identified as impacts in this analysis because the

impetus for such conversion is due to factors other

than this rule.

168

This figure excludes workers under the age of

19. If excluding workers under the age of 24, this

figure drops over 40 percent to 221,000. This figure

does not include workers who make less than the

minimum wage, a vast majority of whom work in

the restaurant industry and receive tips for their

work. The average earnings of a restaurant worker

who receives tips is significantly above the

minimum wage. The figure includes part time

workers, who would not likely receive overtime

compensation due to the limited number of hours

they work.

169

In 2017, there were approximately

152,000,000 workers in the U.S., according to the

U.S. Bureau of Labor Statistics.

without meaningfully changing the

nature of the job in response to the

added legal clarity provided by this

rule. Employers could be most confident

of such reclassification under this rule

if the preexisting job already provided

the worker with substantial control over

the work and a meaningful opportunity

for profit or loss. The Department

believes this phenomenon is likely to be

rare because the current position would

have to be held by an individual who

is in business for him- or herself as an

economic reality but is nonetheless

presently classified as an employee.

While many commenters warned that

economically dependent employees

may be improperly classified as

independent contractors, none

expressed concern that there is

widespread classification of individuals

who are in business for themselves as

employees.

165

Such employees may

nonetheless exist and be converted into

independent contractors as a result of

this rule. Features of these converted

workers’ work, for example the level of

flexibility and stability, would remain

unchanged because the job remains the

same. Firms could potentially reclassify

existing workers who are already in

business for themselves in a manner

that reduces overall compensation, but

their ability do to so would be

constrained because such reduction

could negatively impact worker morale,

productivity, and retention.

166

Nonetheless, the sharpening of the

economic reality test may negatively

impact some current employees who

could be reclassified as independent

contractors in a manner that results in

reduced overall compensation but are

not afforded non-pecuniary benefits, for

example additional flexibility, in

return.

167

EPI and likeminded

commenters believe these workers

would be ‘‘doing the same job for

substantially less compensation as an

independent contractor,’’ and that this

class of worker comprises the majority

or even all of the workers impacted by

this rule. The Department agrees that

some workers could be impacted in this

manner, but believes such occasions are

likely to be rare because two necessary

conditions limit the number of such

workers.

First, in order for conversion to have

an unambiguously negative affect, a

converted worker’s overall

compensation must be at the minimum

wage. Generally, firms impacted by the

rule can already directly reduce wages

and benefits of their employees—they

do not need to convert those employees

to independent contractor to achieve

these labor cost savings. However, most

firms do not reduce their employees’

compensation due to the risk of

lowering morale, reducing productivity,

and causing turnover. That is to say, the

labor markets in which most firms

operate prevents them from setting

compensation without regard for worker

preferences. The Department believes

that a firms’ ability and willingness to

reduce its employees’ compensation is

shaped by the tradeoff between labor

savings, on one hand, and the risk of

lower productivity and higher turnover,

on the other. Clarifying the legal

requirement for firms to convert a

position from employee to independent

contractor status would not make firms

any more willing or able to reduce

compensation unless the worker was

already earning the minimum wage and

receiving no benefits. According to BLS,

based on CPS data, in 2017 there were

370,000 adult

168

employees paid at the

minimum wage, which comprise 0.24

percent of the U.S. labor force.

169

Second and as explained above, the

converted worker whose job remains

unchanged is likely to already have

substantial control over the work and a

meaningful opportunity for profit or loss

such that he or she can be classified as

independent contractor with the most

legal certainty this rule can provide.

The Department was unable to

determine how many of the 370,000

current minimum wage employees also

meet these two criteria, although it

expects the number to be low. The

Department attempted to identify

examples of minimum wage employees

who enjoy substantial control over their

work and a meaningful opportunity for

profit or loss, but was unable to do so.

Nor did commenters provide specific

data or examples of minimum wage

employees who would meet these

criteria. Several commenters argued that

the Department failed to adequately

consider the effects of these possible

conversions from employee to

independent contractor, or the potential

negative effects of misclassification on

workers. NELA, for instance, asserted

that the NPRM’s cost-benefit analysis

focused solely on companies rather than

workers and further claimed that the

Department ‘‘ignores the massive cost to

misclassified workers.’’ Other

commenters stated that the final rule

would harm workers by either

increasing the rate of misclassification

or by allowing employers to reduce

wages and benefits of employees who

are converted into independent

contractors. See, e.g., Washington

Center for Equitable Growth

(Washington Center) (asserting that

‘‘independent contractors tend to be

worse-off than their wage-and-salary

counterparts’’); Appleseed Center

(expressing concern that rule ‘‘will harm

workers across a broad spectrum, [but]

will have a disproportionate impact on

Black and Hispanic workers who are

overrepresented in the low-paying jobs

where independent contractor

misclassification is common’’); National

Women Law Center (‘‘if finalized, this

rule will cost workers . . . in the form

of reduced compensation’’); EPI

(estimating that individual ‘‘workers

would lose $6,963 per year’’).

As is explained in greater detail

below, the Department disagrees with

these comments that the rule will

broadly harm workers. The Department

agrees with the numerous commenters,

including nearly all individual

commenters who self-identified as

freelancer workers, who asserted that

the rule would encourage flexible work

arrangements and thereby create

meaningful—though not easily

measurable— value for workers. One

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170

As explained in more detailed above, this is

because most workers can be converted from

employee into independent contractor classification

only if they are provided with greater control over

their work and opportunity for profit or loss based

on their initiative or investment. Such flexibility

and entrepreneurial opportunities may be more

valuable to such workers than potential reduction

in benefits associated with classification as

employees.

171

An establishment is commonly understood as

a single economic unit, such as a farm, a mine, a

factory, or a store, that produces goods or services.

Establishments are typically at one physical

location and engaged in one, or predominantly one,

type of economic activity for which a single

industrial classification may be applied. An

establishment contrasts with a firm, or a company,

which is a business and may consist of one or more

establishments. See BLS, ‘‘Quarterly Census of

Employment and Wages: Concepts,’’ https://

www.bls.gov/opub/hom/cew/concepts.htm.

172

U.S. Census Bureau, 2017 SUSB Annual Data

Tables by Establishment Industry. https://

www.census.gov/data/tables/2017/econ/susb/2017-

susb-annual.html.

173

U.S. Census Bureau, 2017 Census of

Governments. https://www.census.gov/data/tables/

2017/econ/gus/2017-governments.html.

174

These include Joint Employer Status under the

Fair Labor Standards Act; Defining and Delimiting

the Exemptions for Executive, Administrative,

Professional, Outside Sales and Computer

Employees; and Regular Rate Under the Fair Labor

Standards Act.

commenter explained that ‘‘[b]eing an

independent worker allows for me to do

what I can as a single mother, have

flexibility.’’ Another stated that

‘‘[f]reelancing has afforded me

independence and flexibility and the

opportunity to be a productive member

of society, and do my best work.’’ As a

final illustrative example, another

commenter asserted that ‘‘[t]he primary

value for myself as an independent

contractor for my services is the

freedom to negotiate, to choose, and the

freedom to limit what services I provide,

the days, and hours of work, and the

price of my labor, unencumbered by the

less flexible but more secure employer

employee relationship.’’ Although some

workers in positions converted from

employees to independent contractor

relationships may receive fewer benefits

traditionally associated with

classification as employees, the

Department believes that this would

likely be infrequent and their net effect

would not necessarily be negative.

170

Moreover, the Department believes any

negative effects would be outweighed by

the significant value the rule delivers to

other workers and businesses by

clarifying, simplifying, and reducing

transaction costs around independent

contractor arrangements.

No commenter provided evidence or

specific cases in which individuals or

types of workers would, as a result of

this rule, be converted from employees

to independent contractors. Because the

rule does not change the classification

of any employee, any jobs converted

without meaningful change would have

had to already have satisfied the

requirements of bona fide independent

contracting arrangements under this

rule, with the only change likely being

a lower assessed litigation risk for

certain businesses. While the number of

workers for whom reclassification

occurs without bringing them

meaningful benefits may not be zero, the

Department believes such cases will be

rare exceptions. Even if the

classification of a worker were to

change, the business could face market

forces that would likely hold overall

compensation steady. Furthermore,

businesses would need to take caution

that any new contract relationship

would neither damage worker relations

nor its underlying business model, both

of which would likely negatively impact

productivity.

In summary, the most common

categories of job conversions—e.g., new

positions—are likely to positively

impact workers. And the category of job

conversions that is likely to produce

negative impacts—i.e., reclassification

of workers without changes to the job—

is most likely the rarest. For these

reasons, the Department believes

benefits to workers from job conversions

will, on balance, exceed costs.

E. Costs

The Department considered several

costs in evaluating the rule. The

Department quantified regulatory

familiarization costs and estimated that

they will total $370.9 million in Year 1.

Other potential costs, including those

raised by commentators, were not

quantified, for reasons explained in the

sections that follow.

1. Regulatory Familiarization Costs

Regulatory familiarization costs

represent direct costs to businesses and

current independent contractors

associated with reviewing the new

regulation. To estimate the total

regulatory familiarization costs, the

Department used (1) the number of

establishments, government entities,

and current independent contractors; (2)

the wage rates for the employees and for

the independent contractors reviewing

the rule; and (3) the number of hours

that it estimates employers and

independent contractors will spend

reviewing the rule. This section presents

the calculation for establishments first

and then the calculation for

independent contractors.

For a rule like this one, it is not clear

whether regulatory familiarization costs

are a function of the number of

establishments or the number of

firms.

171

Presumably, the headquarters

of a firm will conduct the regulatory

review for businesses with multiple

locations, and also may require some

locations to familiarize themselves with

the regulation at the establishment level.

Other firms may either review the rule

to consolidate key takeaways for their

affiliates or they may rely entirely on

outside experts to evaluate the rule and

relay the relevant information to their

organization (e.g., a chamber of

commerce). The Department used the

number of establishments to estimate

the fundamental pool of regulated

entities—which is larger than the

number of firms. This assumes that

regulatory familiarization occurs at both

the headquarters and establishment

levels.

There may be differences in

familiarization cost by the size of

establishments; however, the analysis

does not compute different costs for

establishments of different sizes.

Furthermore, the analysis does not

revise down for states where the laws

may more stringently limit who

qualifies as an independent contractor

(such as California) and thus the new

rule will have little to no effect on

classifications. To estimate the number

of establishments incurring regulatory

familiarization costs, the Department

began by using the Statistics of U.S.

Businesses (SUSB) to define the total

pool of establishments in the United

States.

172

In 2017, the most recent year

available, there were 7.86 million

establishments. These data were

supplemented with the 2017 Census of

Government that reports 90,075 local

government entities, and 51 state and

Federal government entities.

173

The

total number of establishments and

governments in the universe used for

this analysis is 7,950,800.

The applicable universe used by the

Department for assessing familiarization

costs of this final rule is all

establishments that engage independent

contractors, which is a subset of the

universe of all establishments. In its

analyses, the Department estimates the

impact of regulatory familiarization

based upon assessment of the regulated

universe. In several recent rulemakings,

the Department estimated that the

regulated universe comprised all

establishments because the rules were

broadly applicable to every employer.

174

For those rules, the Department

estimated familiarization costs by

assuming each establishment would

review each rule. Because this final rule

affects only some establishments, i.e.,

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175

Table 10: Firm sample summary statistics by

year (2001–2015), https://www.irs.gov/pub/irs-soi/

19rpindcontractorinus.pdf.

176

An added dimension is that the final rule is

expected to provide significant clarity, which

would result in time and cost savings (net of

regulatory familiarization costs) for those outside

the pool of firms with existing independent

contractor relationships. These (net) cost savings

are not included in this analysis, consistent with

this analysis’ treatment of resulting growth in the

independent contractor universe.

177

A Compensation/Benefits Specialist ensures

company compliance with Federal and state laws,

including reporting requirements; evaluates job

positions, determining classification, exempt or

non-exempt status, and salary; plans, develops,

evaluates, improves, and communicates methods

and techniques for selecting, promoting,

compensating, evaluating, and training workers. See

BLS, ‘‘13–1141 Compensation, Benefits, and Job

Analysis Specialists,’’ https://www.bls.gov/oes/

current/oes131141.htm.

178

An independent contractor that hires

independent contractors would already be captured

in the ‘‘establishment’’ calculation.

179

For example, independent contractors in states

with classification frameworks that are known to be

more stringent than the existing FLSA classification

framework, such as in California, may not review

the rule since it would be unlikely to affect their

classification.

180

As explained below, the Department considers

that the regulation may produce benefits along this

dimension in future years by simplifying the

regulatory environment.

those that currently or may in short

order face an independent contractor

versus employee classification

determination, the Department

accordingly reduces the estimated pool

to better estimate the establishments

affected by the rule by assessing

regulatory familiarity costs only for

those establishments that engage

independent contractors.

In 2019, Lim et al. used extensive IRS

data to model the independent

contractor market, finding that 34.7

percent of firms hire independent

contractors.

175

These data are based on

annual tax filings, so the dataset

includes firms that may contract for

only parts of a year. The 34.7 percent of

establishments provides a figure of

2,758,928, which forms the foundation

of the multiplier used in this analysis.

The Department did not estimate

familiarization costs for companies that

may decide to work with independent

contractors only after the new rule is

finalized, because they would need to

familiarize themselves with the current

legal framework even in the absence of

this rule.

176

Although firms that do not

currently use independent contractors

are not counted in this universe of

employers, to allow for an error margin,

the Department is using a rounded 35

percent of the total number of

establishments defined above

(7,950,800), resulting in 2,782,780

establishments estimated to incur

familiarization costs.

The Pennsylvania Department of

Labor & Industry (PA L&I) commented

that the Department underestimated the

cost of the rule by failing to include

businesses that are newly incentivized

to consider reclassifying workers to

independent contractors. As stated

above, even without the new rule any

firm that does not currently engage any

independent contractors but chooses to

do so in the future would have already

had to familiarize itself in the baseline

case, so this rule does not impact those

firms. Since the commenter’s point is

premised on the fact that the firm may

be incentivized to investigate the

regulation, it would be reasonable to

assume that any firm without

independent contractors that reviews

the new rule and ultimately decides to

hire independent contractors is doing so

because the firm believes the new

relationship will be beneficial to itself

and the independent contractor also

believes that the new relationship will

be beneficial to him or herself. Such a

situation would result in net benefits to

the employer that more than fully

compensate for any familiarization

costs. Notably, and for comparability in

estimates, the Department does not add

these potential firms to the Benefits

section either.

The Department assumes that a

Compensation, Benefits, and Job

Analysis Specialist (SOC 13–1141) (or a

staff member in a similar position) will

review the rule.

177

According to the

Occupational Employment Statistics

(OES), these workers had a mean wage

of $33.58 per hour in 2019 (most recent

data available). Given the proposed

clarification to the Department’s

interpretation of who is an employee

and who is an independent contractor

under the FLSA, the Department

assumes that it will take on average

about 1 hour to review the rule as

proposed. The Department believes that

an hour, on average, is appropriate,

because while some establishments will

spend longer than one hour to review

the rule, many establishments may rely

on third-party summaries of the changes

or spend little or no time reviewing the

rule. Assuming benefits are paid at a

rate of 46 percent of the base wage, and

overhead costs are 17 percent of the

base wage, the reviewer’s effective

hourly rate is $54.74; thus, the average

cost per establishment conducting

regulatory familiarization is $54.74.

Therefore, regulatory familiarization

costs to businesses in Year 1 are

estimated to be $152.3 million ($54.74

× 2,782,780) in 2019 dollars.

For regulatory familiarization costs for

independent contractors, the

Department used its estimate of 18.9

million independent contractors and

assumed each independent contractor

will spend 15 minutes to review the

regulation. The average time spent by

independent contractors is estimated to

be smaller than for establishments. This

difference is in part because the

Department believes independent

contractors are likely to rely on

summaries of the key elements of the

rule change published by the

Department, worker advocacy groups,

media outlets, and accountancy and

consultancy firms, as has occurred with

other rulemakings. Furthermore, the

repercussions for independent

contractors are smaller (i.e., the

litigation costs, damages, and penalties

associated with misclassification tend to

fall on establishments).

178

This time is

valued at $46.36, which is the mean

hourly wage rate for independent

contractors in the CWS, $27.27, with an

additional 46 percent benefits and 17

percent for overhead, then updated to

2019 dollars. Therefore, regulatory

familiarization costs to independent

contractors in Year 1 are estimated to be

$218.6 million ($46.36 × 15 minutes ×

18.9 million).

The estimate of 18.9 million

independent contractors captures the

universe of workers over a one-year

period. Using this figure for the overall

cost estimate results in an artificially

high value because it includes workers

who would have otherwise been

included in the baseline case without

the rule and thus spent time

familiarizing themselves with the legal

framework in the matter of course,

without incurring a supplementary cost.

Furthermore, the Department believes

that it is probable that independent

contractors would review the regulation

only when they had reason to believe

that the benefits would outweigh the

costs incurred in familiarizing

themselves with the rule, and since this

analysis does not attempt to calculate

those economic benefits it is possible

that the costs presented in this section

are overestimated.

179

The total one-time regulatory

familiarization costs for establishments

and independent contractors are

estimated to be $370.9 million.

Regulatory familiarization costs in

future years are assumed to be de

minimis. Similar to the baseline case for

employers, independent contractors

would continue to familiarize

themselves with the applicable legal

framework in the absence of the rule, so

this rulemaking—anticipated to provide

more clarity—is not expected to impose

costs after the first year.

180

This

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181

Various commenters to the NPRM raised

points that they considered ‘‘costs,’’ although those

points may more accurately be defined as transfers

under Executive Order 12866. To clearly address

these points, the Department decided to address the

following areas with the language used by

commenters. For further discussion of related

impacts, please see the Potential Transfers section.

182

In some cases, commenters raised points that

may very well impact certain individuals in

specialized circumstances, but which are not, when

aggregated across the economy as a whole,

cumulatively significant or representative.

183

The Department has not conducted a thorough

review of discrimination law at the Federal or state

level for the purposes of this rulemaking, but notes

that independent contractors are protected by at

least some Federal anti-discrimination laws. See,

e.g., 42 U.S.C. 1981. Further, the scope of these laws

is not dependent on employee status under the

FLSA. See, e.g., Gulino v. New York State Educ.

Dep’t, 460 F.3d 361, 379 (2d Cir. 2006) (‘‘[T]he

Supreme Court has given us guidelines for

discerning the existence of an employment

relationship [in the race-discrimination context]:

Traditional indicators of employment under the

common law of agency.’’); Weary v. Cochran, 377

F.3d 522, 524 (6th Cir. 2004) (‘‘[T]he proper test to

apply in determining whether a hired party is an

employee or an independent contractor under the

[Age Discrimination in Employment] Act is the

‘common law agency test.’’’).

amounts to a 10-year annualized cost of

$43.5 million at a discount rate of 3

percent or $52.8 million at a discount

rate of 7 percent.

SWACCA commented that regulatory

familiarization costs were

underestimated because they ‘‘would

not only be imposed upon adoption of

a final rule but would be ongoing as

stakeholders begin to understand

whether and how it will be applied.’’

Additionally, they asserted the costs for

businesses to familiarize themselves

with the new guidance would exceed

the cost of familiarization for the

existing guidance, a claim that the

commenter did not substantiate with

data. The Department disagrees with

this assertion. The rule is expected to

reduce the time spent analyzing how the

economic reality test’s factors interact.

Accordingly, the Department reiterates

that incremental regulatory

familiarization costs in future years are

expected to be de minimis.

A number of commenters expressed

support for the cost estimates. The CGO

states that, ‘‘As currently written, the

proposed rule carefully quantifies the

cost savings of reduced litigation and

increased clarity.’’ AFPF posited that, if

anything, the calculations would tend to

reflect ‘‘an overstatement of regulatory

familiarization costs.’’

2. Other Costs

181

It is possible this rule will result in

costs beyond the above described

familiarization costs. In the NPRM, the

Department invited comments and data

on potential other costs of this rule. The

Department received comments

responsive to these requests which

generally fell into seven categories:

Impacts to workers; impacts to tax

revenues; impacts on competition;

impacts on income inequality and to

minorities and women; tax filing;

implementation; and impacts on income

stability. The Department evaluated all

of the potential costs that were

identified, and examined many of the

citations provided. In general, the

commenters did not provide ample data

or other evidence to support their

claims, and, upon review, the

Department was unable to confirm or

substantiate the proposed cost

categories in its own research.

Therefore, in this section of the analysis,

the Department addresses the points

raised and discusses the qualitative

merits, but does not quantify estimates

for inclusion in its top line figures.

182

Detailed explanations are presented in

each category below, including

discussion of the range of uncertainties

and data limitations identified.

a. Additional Impacts to Workers

Several commenters asserted that the

NPRM’s discussion of costs did not

include a discussion of effects on

workers beyond minimum wage and

overtime pay. Ironworkers Local Union

7 stressed the importance of benefits

such as workers’ compensation for the

dangerous nature of the work of their

members and other construction

workers. The Center for Law and Social

Policy (CLASP) noted that the rule

could also impact other benefits based

on the FLSA’s definition of

employment, such as access to paid sick

leave in general and under the Families

First Coronavirus Response Act

(FFCRA). The Washington Center,

among others, contended it may also

impact workers’ rights to join a union.

The International Brotherhood of

Teamsters commented that the

liquidated damages remedy for willful

or bad faith violations of the FLSA is

not available to workers who are

classified as independent contractors.

Other commenters asserted that

independent contractors are also not

protected by the Federal anti-

discrimination and health and safety

statutes, and that the Department failed

to consider this effect.

183

These potential impacts do not

change the Department’s overarching

view that workers as a whole will be

better off as a result of this rule, even

if some workers may not be better off.

Generally speaking, the above

commenters raise points that

fundamentally rest on the assumption

that independent contractors cannot

adequately assess their risks, needs, and

goals. Furthermore, these commentators

seem to assume that the listed features

could be obtained by workers with no

cost to the worker. The Department does

not agree with such assessments. The

Independent Women’s Forum stated

that the flexibility afforded by

independent contracting is especially

‘‘crucial for women who are the primary

caregivers in their households.’’

Palagashvili; Independent Women’s

Forum (‘‘Women find independent

contracting appealing because of the

flexibility, autonomy, and freedom it

provides.’’). Nor did individual

freelancer commenters, who repeatedly

affirmed their ability to make rational

decisions for themselves and their own

businesses. One such commenter stated

that ‘‘I prefer the option to make my

own schedule and decide how I want to

proceed in making my money at my

own discretion.’’ Another explained

that, ‘‘[a]s an independent contractor I

am free to choose when and where I

work. This is important to me as a

caregiver for elderly relatives.’’ As a

final illustrative example, a freelancer

stated that ‘‘I have chosen this

profession because of the freedom and

flexibility it affords me. I also can earn

more freelancing than I could working

in a similar full-time job [. . .]. I am a

far better judge of what is good for me

than a politician in Washington.’’

Independent workers are a bedrock of

the U.S. economy and are acutely aware

of their own values and needs.

Fundamental to being an independent

contractor is the ability to control one’s

own work, which enables workers to be

the deciding factor in accepting or

declining work that may be risky or not

as rewarding. The commenters above

did not cite or offer data to support their

assumption that employees covered by

the FLSA are intrinsically better off

compared to genuine independent

contractors who are not covered by the

FLSA. Several commenters, notably

CLASP and NWLC, who submitted

comments related to the pandemic do

not address the abundant data

demonstrating that access to

independent contracting has been

essential for many workers attempting

to balance responsibilities, especially

for women and caregivers. Accordingly,

to the extent the final rule will increase

the frequency of independent

contracting, the Department believes

that workers will, on net, benefit from

that option.

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184

C. Benner, E. Johansson, K. Feng, and H. Witt.

‘‘On-Demand and On the Edge: Ride-Hailing &

Delivery Workers in San Francisco’’ (May 5, 2020),

https://transform.ucsc.edu/on-demand-and-on-the-

edge.

185

Unemployment Insurance Weekly Claims

Report (October 15, 2020), https://oui.doleta.gov/

press/2020/101520.pdf.

186

D. Belman and R. Block, ‘‘Informing the

Debate: The Social and Economic Costs of

Misclassification in the Michigan Construction

Industry,’’ Institute for Public Policy and Social

Research, Michigan State University (2008), http://

ippsr.msu.edu/publications/ARMisClass.pdf. F.

Carre, ‘‘(In)dependent Contractor

Misclassification,’’ EPI Briefing Paper #403 (June 8,

2015), https://files.epi.org/pdf/87595.pdf. O. Cooke,

D. Figart, J. Froonjian, and K. Sloane, ‘‘The

Underground Construction Economy in New

Jersey,’’ Stockton University (2016), https://

www.mcofnj.org/wp-content/uploads/2018/05/

Underground-Construction-Economy-Summary-

June-2016.pdf.

187

L. Xu and M. Erlich, ‘‘Economic Consequences

of Misclassification in the State of Washington.’’

Harvard Law School Labor and Worklife Program

(2019), https://lwp.law.harvard.edu/news/worker-

misclassification-washington-state-leads-millions-

revenue-losses-new-harvard-report.

b. Impacts to Tax Revenue and Public

Assistance

Some commenters asserted that the

rule will either reduce tax revenue or

increase public assistance. For example,

some commenters pointed out that low-

income workers who are classified as

independent contractors are often forced

to rely on public assistance programs.

The UFCW cites a study finding 15

percent of platform workers in the San

Francisco area receive some form of

public support (e.g. food stamps,

housing assistance) and 30 percent were

on state public-access health

insurance.

184

This report did not,

however, compare this finding with the

extent to which low-income employees

rely on public assistance. The

Department notes that public assistance

is available to low-income individual

whether they are employees or

independent contractors. An increase in

independent contracting will not

necessarily lead to increased public

assistance expenditures. To the

contrary, if independent contracting,

even at a low income, is the alternative

to unemployment or nonparticipation in

the labor force, then it would reduce

means-tested public assistance

expenditures. Several individual

commenters suggested that they would

not be working at all but for

independent contractor opportunities.

One commenter said, ‘‘I am an

independent contractor, i.e. business

owner; I am self-employed. I would not

be able to work in any capacity, other

than self-employed.’’ Another

explained, ‘‘I am 71 years old and

cannot (and will not) take regular

employment. Earning an income from

my home is safer, more effective and

more satisfying.’’ As a final illustrative

example, a woman explained that ‘‘[a]s

a single mother trying to go back to

school I have day and night classes.

Having a regular job during this time be

[sic] very challenging to meet my school

hours.’’ Thus, making it easier for

individuals to work as independent

contractors may reduce the burden on

public assistance. Furthermore, since

this RIA focuses on the changes at the

margin based on increased clarity of the

classification factors, the concerns

raised by the studies cited by these

commenters would not necessarily

apply to those this rule impacts.

Several commenters noted that

taxpayers funded unemployment

payments for independent contractors

through the Pandemic Unemployment

Assistance (PUA) program. SWACCA

noted that more than 11 million self-

employed individuals have received

assistance from PUA.

185

The nationwide

response to the COVID–19 pandemic

was intentionally robust. PUA

assistance was funded by Congress in

the CARES Act.

Several commenters noted that any

shift from employees to independent

contractors will result in lost tax

revenue. Specifically, the Michigan

Regional Council of Carpenters cites

estimates of the loss in taxes in

Michigan and other states due to

misclassification.

186

Notably,

misclassified workers are not the same

as independent contractors. In fact, this

rule clarifies the classification of

workers and is expected to result in

fewer total cases of misclassified

workers. The Department does not agree

with the assumptions about the U.S.

labor market held by commenters to this

rule that reference studies on the cost of

misclassified workers. EPI estimated

that the increase in workers classified as

independent contractors will lead to a

transfer of at least $750 million annually

from social insurance funds. EPI’s

estimate is predicated on an assumption

that eligibility for independent

contractors to receive unemployment

benefits ‘‘will occur in future

recessions.’’ The unprecedented CARES

Act funded unemployment benefits

through PUA for the first time in

history. EPI’s entire estimate rests on

such unprecedented relief becoming

commonplace, a view which the

Department does not share. The

Washington Center cites a study by

Harvard Law School’s Labor and

Worklife program that ‘‘found that

between 2013 and 2017, the state of

Washington lost $152 million in

unemployment taxes and the Federal

government lost $299 million in payroll

taxes due to worker misclassification in

the state.’’

187

Again, worker

misclassification is erroneously

compared to independent contractors.

Further, the majority of these estimates

of lost revenue are due to an assumption

that freelance workers do not report

their full earnings, which is a criminal

offense. A letter from seven

Congressional Representatives cited a

1984 IRS estimate that misclassification

cost the Federal government $3.72

billion (adjusted to 2019 dollars), nearly

60 percent of which was from

misclassified workers failing to pay

income taxes and the remainder was

due to failure to pay taxes used to fund

social insurance programs. Once again,

this comment failed to meaningfully

explain how the studies it cites can be

extrapolated across independent

contractors.

The Department notes that certain

employer required taxes, such as

unemployment insurance and workers’

compensation, are not required for

independent contractors, and thus the

associated tax revenue will decrease if

more individuals choose to work as

independent contractors. However, the

lack of transfer means that the worker

keeps more money, which may be saved

to provide for periods of

unemployment. Additionally, these are

transfer programs where the benefits are

paid to the workers who pay into the

program through their employers. Thus,

if independent contractors are not

eligible to participate in these program,

government expenditures would also

decrease. Therefore, providing

unemployment benefit or workers’

compensation to independent

contractors is generally not a cost to

state and local governments. To

demonstrate, consider unemployment

programs, which are a type of insurance.

Reduced unemployment taxes are

generally offset by reduced

unemployment benefits. The only direct

cost would be if workers who no longer

pay into these programs continue to

receive benefits. These direct costs are

expected to be small.

Government revenue from other taxes,

such as income and Medicare taxes,

may go up or down as a result of this

rulemaking depending on the total

income of employers, employees, and

independent contractors. However, a

decrease in tax revenue due to a failure

of some independent contractors to fully

pay their required taxes is not a cost

attributable to the Department’s

rulemaking revising the standards for

independent contractor status under a

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188

UPS does not use independent contractors for

some of the roles or occupations that its largest

competitor, FedEx, does. FedEx relies heavily on

independent contractors for its business model, and

recently won a legal case against the National Labor

Relations Board, in which the court found that

certain FedEx drivers were legitimately classified as

independent contractors under the NLRA. See

FedEx Home Delivery v. NLRB, 893 F.3d 1123No.

14–1196 (D.C. Cir. 2017).

189

Independent contractor relationships provide

flexibility to accommodate individual worker

needs, such as child care and breastfeeding.

190

Including E. Handwerker and others.

‘‘Increased Concentration of Occupations,

Outsourcing, and Growing Wage Inequality in the

United States,’’ (2015), https://

www.semanticscholar.org/paper/Increased-

Concentration-of-Occupations%2C-and-Growing-

Handwerker-Abraham/

f7d0d2c9cfcbf53f961bb07a2542abefe4be84c0?p2df.

191

Id. at 13 (emphasis added).

192

If, for example, the platform were to transfer

some of these increased earnings to consumers in

the form of discounts, the demand quantity for the

services (and thus the job opportunities for the ICs)

could increase.

193

Cody Cook, et al., The Gender Earnings Gap

in the Gig Economy: Evidence From Over a Million

Rideshare Drivers, NBER Working Paper No. 24732,

June 2018, available at https://www.nber.org/

system/files/working_papers/w24732/w24732.pdf.

194

Id. at 14.

Federal law separate and apart from any

tax law.

Finally, the Department notes that

overall state and local tax revenue may

increase as a result of the efficiency and

flexibility this rule promotes. The

Department believes that legal clarity

provided by this rule will result in,

among other things, lower regulatory

compliance and litigation costs, more

efficient and innovative work

arrangements, and new jobs for

individuals who otherwise would not

work. All of this could increase firms’

profits and workers’ incomes, which

results in a larger pool from which state

and local taxes are drawn. The overall

positive effect on state and local tax

revenue may dwarf, for example, any

reduction in unemployment insurance

or workers compensation taxes. The

Department, however, declines to

quantify net effects on state and local

tax revenue because it believe any such

attempt to do so would require too

many assumptions.

c. Fair Competition

Several commenters stated that

expanding the scope of independent

contractors will ‘‘fuel a race to the

bottom,’’ where companies will feel

pressure to classify workers as

independent contractor to reduce labor

costs in order to compete in their

market. UPS claimed that companies

misclassifying workers as independent

contractors externalize their costs and

hurt other businesses through unfair

competition.

188

The Department

believes that this will be unlikely

because the risks of losing workers

likely prevents businesses from

reducing overall compensation, which

includes the fully burdened wage rate

(i.e., with taxes and benefits included).

Any decrease in compensation below

this level would likely result in firms

not being able to hire adequate labor

(either quantity or quality). This rule

does not, as some commenters claimed,

expand the scope of permissible

independent contracting arrangements

but rather clarifies and sharpens the test

for determining proper classification,

which is expected to benefit both

workers and firms.

d. Income Inequality and Impacts on

Minorities and Women

Some commenters asserted that the

rule could increase racial and gender

income inequality. NWLC wrote that

additional protections other than

minimum wage and overtime pay

afforded by the FLSA were particularly

important for working women, such as

‘‘employer obligations to accommodate

breastfeeding workers’’

189

and

‘‘protections against pay

discrimination.’’ The Washington

Center cited a study on outsourcing that

it believed shows independent

contracting ‘‘has contributed to

increased wage inequality in the United

States.’’

190

But the cited study actually

found something different: ‘‘the

increased concentration of typically

low-wage occupations over time can be

explained by changes in the

characteristics of establishments

employing these occupations.’’

191

In

other words, the study linked wage

inequality to employers outsourcing

jobs to other employers that paid lower

wages, and made no attempt to isolate

the effects of independent contracting.

The evidence discussed in this analysis

shows that independent contractors

often earn more than their employee

counterparts further undermines the

commenter’s assertion.

UFCW wrote that ‘‘[t]he proposed

regulation fails to address its potential

impact on people of color who are

overrepresented in low-wage

independent contractor positions such

as app-based platform work.’’ This rule

clarifies for app-based platforms how to

properly classify workers, thereby

reducing regulatory compliance,

litigation, and transaction costs. Some of

these cost savings could be shared by

app-based workers in the form of

increased earnings, bonuses, or more job

opportunities.

192

To the extent that

certain racial groups make up a

disproportionate share of app-based

workers, those groups will also enjoy a

disproportionate share of benefits.

Regarding gender-based inequality in

the gig economy, a recent NBER study

found that the gender wage gap among

on-demand rideshare workers is lower

than that of the rest of the economy and

is ‘‘entirely attributed’’ to differences in

experience and preferences.

193

The

NBER study specifically found that

‘‘discrimination is not creating a gender

gap in this setting,’’ and ‘‘no other paper

has ever estimated such a precise ‘zero’

gender gap in any setting.’’

194

Several

commenters cited other studies that

document measurable benefits of

independent contractor opportunities

for women. Dr. Liya Palagashvili

provided a lengthy review of the

literature on the beneficial impacts of

independent contract work for women.

She cited a study that finds that women

are the main caregivers at home, and 96

percent of women ‘‘indicate that the

primary benefit of engaging in platform-

economy work is the flexible working

hours.’’ See also Independent Women’s

Forum (‘‘Women find independent

contracting appealing because of the

flexibility, autonomy, and freedom it

provides.’’). A McKinsey Global

Institute study, discussed in an earlier

section, found that independent work

offers caregivers, who are

predominantly women, access to

economic opportunity they would

otherwise not have, concluding that

‘‘[t]his type of flexibility can ease the

burden on financially stressed

households facing logistical

challenges.’’ Dr. Palagashvili cited

numerous other studies that are

consistent in their findings: Women are

very much attracted to work

arrangements that offer flexibility,

including one that finds ‘‘75 percent of

self-identified homemakers, or stay-at-

home mothers in the United States,

indicated they would be likely to return

to work if they were to have flexible

options.’’ These studies offer data based

on primary research, and several

sources are based on economy-wide

survey data.

Dr. Palagashvili’s comments are

supported by many individual women

who commented to affirm that

independent contracting provides

necessary flexibility to balance their

work and life priorities. One woman

explained that ‘‘[a]s a work-at-home

mom, I ramped up my business to

coincide with the time I had available

while raising my kids. I worked during

their nap times, and then added more

hours as they went to school.’’ Another

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195

Based on the difference in estimates of

burdens for businesses and nonbusinesses from the

table ‘‘Estimated Average Taxpayer Burden for

Individuals by Activity’’ in U.S. Internal Revenue

Services, ‘‘1040 and 1040–SR Instructions,’’ p. 101,

(2019), https://www.irs.gov/pub/irs-pdf/i1040gi.pdf.

196

All workers are required to file with the IRS

regardless of classification. The time and cost of tax

filing is highly dependent on the individual

circumstances of the workers. The Department

believes workers are able to best assess the costs

and benefits of tax filing.

197

Prudential Research, ‘‘Gig Workers in

America’’ (2017), https://www.prudential.com/

media/managed/documents/rp/Gig_Economy_

Whitepaper.pdf.

198

See 151 Ph.D. Economists and Political

Scientists in California, ‘‘Open Letter to Suspend

California AB–5’’ (April 14, 2020).

199

Coalition for Workforce Innovation (2020),

supra note 77.

stated, ‘‘I have been a military spouse

for 17 years and the ability to work as

an independent contractor has been

invaluable to my family. Through every

move, my job comes with me; all I need

is a computer and access to the internet.

Had I been forced to find a new job with

each [change of station], our family

would have had some very tough

times.’’ As a final illustrative example,

a woman informed the Department that,

‘‘I have been an independent contractor

for more than 3 decades; it helped me

as a single mother and now it helps me

help the kids with my granddaughter.’’

The Department agrees with the above

commenters and data indicating that

women would benefit from greater

access to independent contracting

opportunities. By clarifying how

workers can be properly classified as an

independent contractor, this rule

promotes the formation of such

opportunities.

e. Tax Filing Costs

The AFL–CIO and the Washington

Center commented that independent

contractors have more time-intensive

accounting and tax filing processes, and

the Department should address these

costs. The Washington Center claims

that it is inappropriate to quantify time

savings from increased clarity but not to

quantify the increased time necessary to

file taxes, which they estimate to

amount to $832.3 million annually.

Even assuming independent contractors

spent more on their tax filings than

employees, the Washington Center’s

estimate is based on average costs for all

business filers in the country, drawn

from the IRS’s ‘‘Estimated Average

Taxpayer Burden for Individuals by

Activity’’ Table in its 2019 instructions

on form 1040.

195

This group of business

filers includes anyone with income from

rental property, royalties, S corporation

earnings, farming, and other business

ventures, which dramatically expands

the scope beyond independent

contractors. The Washington Center

neither attempts to adjust for this

overestimate nor explain how one might

disentangle the conflated grouping, so

the Department was unable to assess

whether a real impact can be expected.

The Department noted in the NPRM that

it did not attempt to quantify the

numerous benefits that it expects from

the increased clarity regarding

classification. Instead, it assumed that

market actors operate in their own best

interest, noting that for those workers

that choose to pursue work as an

independent contractor, as opposed to

an employee, and file taxes as such it

can be assumed that they have correctly

determined for themselves that the

benefits outweigh the costs, including

any costs associated with increased time

spent on tax filings.

196

f. Implementation Costs

The PA L&I asserted that the

Department ‘‘provided zero estimates

for the cost of actual implementation of

the regulation.’’ PA L&I also claimed

that implementation costs include

reclassifying current workers and

identifying the employment status of

new hires. Concerning the first, the

Department maintains that workers will

only be reclassified when the benefits to

businesses outweigh the costs.

Concerning the later, the Department

believes there will be a cost savings

when new employment relationships

must be analyzed (see following section

on cost savings). The Department

believes the implementation costs will

be de minimis.

g. Income Stability

Several commenters asserted that

independent contracting is associated

with more volatile earnings. The

Washington Center asserted that income

stability is important for these workers

and their families. UFCW cited

literature finding that inconsistent

earnings are one of the most reported

disadvantages to gig work.

197

The Department agrees that income

volatility may be problematic for some

workers and may require better money

management to smooth consumption

over periods of higher and lower

income. However, as stated above, the

Department assumes that market actors

operate in their own best interest, and

if a worker chooses to pursue work as

an independent contractor, as opposed

to an employee, it can be assumed that

the worker has determined for himself

or herself that the benefits outweigh the

costs. The Department also believes

income security is best achieved by

removing barriers that prevent laid-off

Americans from finding paid work,

including as independent contractors.

This lesson may be more important in

the wake of the COVID–19 emergency,

a point that has been presented by

hundreds of academics.

198

Additionally,

some literature indicates that many

independent contractors value

flexibility over income stability. CWI

submitted a survey they conducted that

found 61 percent of independent

contractors prefer the ‘‘flexibility to

choose when and where to work’’ over

‘‘having access to a steady income and

benefits.’’

199

F. Cost Savings

This final rule is expected to result in

cost savings to firms and workers. While

the Department believes that there are

multiple areas where firms and workers

may experience cost savings, the

Department has quantified only two:

The cost savings from increased clarity

and reduced litigation. The Department

estimates that annual cost savings

associated with this rule would be

$495.9 million ($447.2 million in

increased clarity + $48.7 million in

avoided litigation costs). Other areas of

anticipated cost savings were not

estimated due to uncertainties or data

limitations. The Department believe the

rule will result in the following

additional cost savings, which are

discussed qualitatively: Making labor

market more efficient; improving worker

autonomy satisfaction; providing an

alternate source of income for some

workers during the pandemic; and

facilitating independent contractors’

ability to work for multiple customers.

While public comments specific to

parts of the calculations are addressed at

the corresponding location throughout

this section, some commenters

submitted general comments about the

cost savings estimates. Several

commenters offered supportive

comments. The CGO said that ‘‘the

proposed rule carefully quantifies the

cost savings of reduced litigation and

increased clarity.’’ The AFPF also

expressed support but suggested that

cost-savings may be underestimated.

Conversely, other commenters objected

to the estimated cost savings, including

that it was inappropriate to quantify the

potential cost savings from this rule but

not quantify the costs to workers.

Representative Pramila Jayapal asserted

that the Department’s analysis did not

include ‘‘any serious, fact-based

argument as to why this rules change

would be of benefit to the workers who

would be most impacted by this rule

change.’’ Other commenters offered

equivocal comments, including one

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200

SHRM and SAP SuccessFactors. ‘‘Want Your

Business to Thrive? Cultivate Your External Talent’’

(2019), https://www.shrm.org/hr-today/trends-and-

forecasting/research-and-surveys/pages/external-

workers.aspx.

201

While state-imposed requirements may

influence the use of flexibilities provided by this

rule, and could impact the number of entities and

workers affected, the Department does not possess

the requisite data to estimate the number of states

that would implement measures or the magnitude

of their impact on the universe of independent

contractors considered in this analysis.

202

Lim et al., supra note 75, at 61.

203

The Department did not incorporate estimates

of potential growth in independent contracting due

to uncertainty. For example, the trend in

independent contracting varies significantly based

on the source. Additionally, the impact of this rule

on the prevalence of independent contracting is

uncertain. Lastly, state laws, such as those in

California discussed below, may have significant

impacts on the prevalence of independent

contracting, which would make historical growth

rates potentially inappropriate.

204

MBO Partners (2019), supra note 131.

205

18.9 million independent contractors × 1.43

contracts per year × (1¥0.25 possible reduction in

clarity benefits) = 20.2 million.

individual who noted that ‘‘point made

about less litigation is a valid one,’’ but

countered that the ‘‘cost-savings pointed

out seem to fall only on the side of the

business/employer.’’

1. Increased Clarity

This final rule is expected to increase

clarity concerning whether a worker is

classified as an employee or as an

independent contractor under the FLSA.

This would reduce the burden faced by

employers, potential employers, and

workers in understanding the

distinction and how the working

relationship should be classified. It is

unclear exactly how much time would

be saved, but the Department provides

some quantitative estimates to provide a

sense of the magnitude.

The importance of increased clarity is

noted by a study coauthored and cited

by the Society for Human Resource

Management (SHRM) that found human

resources professionals’ largest

challenge concerning external workers

that they would like to see resolved is

the legal ambiguity regarding the use

and management of external workers.

200

Commenters from the business

community agreed with the Department

that the rule would improve legal

clarity. See, e.g., U.S. Chamber of

Commerce; CWI; WPI; ATA; NRF;

National Restaurant Association. Groups

that represent freelancers and

individual freelancers who commented

also believe this rule would improve

legal clarity. See, e.g., CPIE; Fight for

Freelancers. However, several

commenters dispute the Department’s

claim that the rule will increase clarity,

with some focusing on specific

industries. The TRLA stated that ‘‘the

proposed rule unnecessarily muddies

the waters with respect to the farm labor

market’’ because they believe it

contradicts ‘‘Federal courts’

interpretation of a Federal statute.’’ The

State AGs also stated this rule will

create confusion because ‘‘many

jurisdictions have applied the economic

reality test’’ to distinguish between

employees and independent contractors

for decades.

201

The Department expects this rule to

produce beneficial cost savings by

clarifying the classification process. To

quantify this benefit, the following

variables need to be defined and

estimated: (1) The number of new

employer-worker relationships being

assessed to determine the appropriate

classification; (2) the amount of time

saved per assessment; and (3) an average

wage rate for the time spent. The

Department estimates this will result in

a $447.2 million in savings annually.

The Department began with its

estimate of the number of current

independent contractors as the basis for

estimating the number of new

relationships. As discussed in section

VI(C), according to the CWS, there are

10.6 million workers who are

independent contractors on their

primary job. Adjusting this figure to

account for independent contractors on

their secondary job results in 18.9

million independent contractors.

According to Lim et al. (2019), in 2016

the average number of 1099–MISC forms

issued per independent contractor was

1.43. Therefore, the Department

assumes the average independent

contractor has 1.43 jobs per year.

202

This number does not account for the

workers who do not file taxes, a

recognized limitation in the cited study.

Because it is unclear whether those who

do not file taxes would have a higher or

lower number of jobs per year, the

Department does not believe that this

limitation biases the estimate in either

direction. Multiplying these two

numbers results in an estimated 27.0

million new independent contractor

relationships each year.

203

The independent contracting sector is

characterized by churn. In their annual

State of Independence in America 2019

report, MBO Partners, a leading

American staffing firm, finds that 47.8

percent of U.S. adults reported working

as an independent contractor at some

point in their career; they estimate that

figure will reach 53 percent in the next

five years.

204

This fits with the range of

estimates for the size of the independent

contractor universe presented in section

VI(C). Thus, it is assumed that over the

ten-year time horizon of this analysis,

millions of Americans will choose

independent contractor work either for

the first time or return to it. This churn

is not explicitly estimated for use in this

analysis, but it provides a qualitative

rationale for not attempting to taper the

expected size of the independent

contractor universe over time.

A subset of new independent

contractor relationships may have time

savings associated with the final rule.

Such a reduction is difficult to quantify

because it is unclear how many

establishments and independent

contractors will realize benefits of

increased clarity. It is also possible that

the increased clarity of the classification

process will lead to compound effects

that generate far greater benefits over

time. Nonetheless, because it is possible

that only a subset of contracts would

receive the cost savings associated with

increased clarity, the Department has

reduced the number of contracts in the

estimate by 25 percent. This results in

20.2 million contracts with cost savings

to both the employer and the

independent contractor.

205

In her comment, Representative

Pramila Jayapal questioned the breadth

of the time savings benefit. She claimed

that the only beneficiaries of this

rulemaking would be large, repeat

players that frequently misclassify

workers. It is unclear what data

Representative Jayapal relied on to come

to this conclusion. Furthermore,

Representative Jayapal largely ignores

the millions of properly classified

independent contractors that will

benefit from added regulatory clarity.

The Department disagrees that the cost

savings benefits will be limited to large,

repeat players. Other comments concur

with the Department’s view, supported

by data-backed arguments that the

expect the rule to enable access to

flexible work for caregivers responding

to the pandemic, enable workers to

readily supplement their income, and

unlock the potential of the growing tech

sector. Farren and Mitchell, of the

Mercatus Center, assert that the rule,

‘‘builds on existing precedent and

serves largely as a synthesis and

clarification of previous economic

reality tests, rather than implementing

any sort of radical change,’’ adding that

independent contractors will likely

‘‘develop more productive economic

relationships.’’

Per each new contract with time

savings, the Department has assumed

that employers would save 20 minutes

of time and independent contractors

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These time savings are based on a 33 percent

assumed reduction in the estimated familiarization

time per contract for both independent contractors

(15 minutes) and employers (1 hour).

207

By applying these assumptions to the

Department’s estimates, instead of incorporating

anticipated growth and innovation impacts, the

results may be an underestimate of total cost

savings.

208

For example, the Department applied a similar

approach to litigation costs in the 2019 final rule

Defining and Delimiting the Exemptions for

Executive, Administrative, Professional, Outside

Sales and Computer Employees, 81 FR 51230

(2019).

209

Downloaded from Public Access to Court

Electronic Records (PACER).

210

PACER does not provide a granular

classification of FLSA case types to identify the

number of cases specific to independent contractor

disputes, so the Department performed a keyword

analysis with spot checking of a random sample of

500 cases closed in 2019, determining that 9.4

percent of cases were related to independent

contractor status (47/500 = 9.4 percent).

211

The Department used data from 2014 already

obtained for use in the analyses performed for the

2019 overtime and regular rate final rules. See 84

FR 51230, 51280–81 (reduced litigation estimate for

the final rule updating the FLSA’s white collar

exemptions at 29 CFR part 541); 84 FR 68736,

would save 5 minutes.

206

These

numbers are small because they

represent the marginal time savings for

each contract, not the entire time

necessary to identify whether an

independent contractor relationship

holds.

The Washington Center commented,

‘‘[t]here is no transparency into what

surveys or studies were used to quantify

the current amount of time individuals

and businesses currently spend on

independent contractor regulatory

familiarization. Further, there was no

attempt to explain with any degree of

accuracy how this rule will change that

time spent.’’ The Washington Center

seems to misunderstand the analysis

presented. The time savings variables

are estimates of how the clarity

provided in the rule will facilitate the

contracting process. Estimating

administrative time spend due to

comply with government laws and

regulations is a typical component of

economic analyses and is often

informed by consultation with subject

matter experts. The Department

requested data to further refine its

estimate, but did not receive any.

Notwithstanding, numerous

commenters expressed support of the

analysis the Department presented.

The UFCW believes that there will be

an increase in time to assess

employment status because employers

and independent contractors will now

evaluate the classification under both

current precedent and the definition

laid out in this rule; ‘‘courts may decide

to ignore the DOL’s new interpretation,

meaning that companies and workers

would now analyze their FLSA

independent contractor determinations

under current precedent and also the

agency’s proposed non-binding new

test.’’ The Department disagrees that

courts will ignore the final rule. The

RIA already includes a familiarization

cost for the new rule, and, in the

baseline, establishments are assumed to

be familiar with the status quo

environment. Accordingly, additional

costs as stated in this comment are

likely to be insignificant.

To estimate the cost savings due to

the increased clarity this rule provides,

the Department applies the following

estimates. For employers, this time is

valued at a loaded hourly wage rate of

$54.74. This is the mean hourly rate of

Compensation, Benefits & Job Analysis

Specialists (13–1141) from the OES

multiplied by 1.63 to account for

benefits and overhead. For independent

contractors, this time is valued at $46.36

per hour (mean wage rate for

independent contractors in the CWS of

$27.29 with the amount of benefits and

overhead paid by employers for

employees, then adjusted to 2019

dollars using the GDP deflator).

Using these numbers, the Department

estimates that employers will save

$369.0 million annually and

independent contractors will save $78.1

million annually due to increased

clarity (Table 3). In sum, this is

estimated to be a $447.1 million savings.

The Department assumes the parameters

used in this cost savings estimate will

remain constant over time. This

assumes no growth in independent

contracting, no real wage growth, and

no subsequent innovation in the

employer-worker relationship. These

assumptions facilitate simplicity of

calculation.

207

The annualized savings

over both a 10-year horizon and in

perpetuity, with both the 3 percent and

7 percent discount rates is $447.1

million.

T

ABLE

3—C

OST

S

AVINGS FOR

I

N

-

CREASED

C

LARITY TO

E

MPLOYERS

AND

I

NDEPENDENT

C

ONTRACTORS

Parameter Value

Number of new relationships (per

year):

Independent contractors .............. 18,858,000

Number of jobs per contractor ..... 1.43

New independent contractor jobs 26,966,940

Adjustment factor ......................... 75%

Total ......................................... 20,225,205

Time savings per job (minutes):

Employers .................................... 20

Independent contractors .............. 5

Value of time:

Employers ................................ $54.74

Independent contractors .......... $46.36

Total savings:

Employers ................................ $369,011,556

Independent contractors .......... $78,137,248

Total ......................................... $447,148,804

In addition to increased clarity when

assessing whether each relationship

qualifies as an independent contractor

or employment relationship, there may

also be upfront time savings for new

entrants who must familiarize

themselves with the standard for being

an employee as compared to an

independent contractor, and who now

have clearer guidance to aid in that

understanding. This would apply to

new independent contractors, new

establishments, and current

establishments that are considering

hiring independent contractors for the

first time. The Department did not

quantify this benefit due to uncertainty

and the difficulty of determining

reliable variables for the number of new

relationships that might occur due to

the rule. However, such benefits are

expected to be real and significant.

2. Reduced Litigation

The changes included in this rule are

expected to result in decreased litigation

due to increased clarity and reduced

misclassification. The methodology of

this section mirrors previous final rules

promulgated in recent years.

208

The rule

would clarify to stakeholders how to

distinguish between employees and

independent contractors under the Act.

The increased clarity is expected to

result in fewer independent contractor

misclassification legal disputes, and

lower litigation costs. The Department

estimates that $48.7 million in litigation

costs related to independent contractor

disputes will be avoided per year as a

result of this rule. This may be a lower-

bound estimate, reasons for which are

described in more detail below.

The Department estimates litigation

cost savings as being equal to an

estimate of the number of cases avoided

as a result of the rule multiplied by the

average litigation cost per case.

Number of Cases Avoided

According to the Public Access to

Court Records (PACER) system, there

were 7,238 Federal cases relating to the

FLSA closed in 2019.

209

The

Department estimates that 9.4 percent of

these cases relate to independent

contractor status.

210

For the NPRM, to determine this

percentage of cases relating to

independent contracting, the

Department reviewed a previous

random sample of FLSA cases closed in

2014.

211

For this final rule, the

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68767–68 (reduced litigation estimate for the final

rule updating the FLSA’s ‘‘regular rate’’ regulations

at 29 CFR part 778).

212

This aligns with the methodology the

Department has applied in a number of rulemakings

(See e.g., Regular Rate Under the Fair Labor

Standards Act), and in the NPRM for this rule. In

each rulemaking with this assumption, the

Department requested comments and data on this

point, which yielded no substantive data or

critiques on its merit. Therefore, the Department

believes this is an appropriate assumption in this

analysis.

213

Litigation costs are not tracked in a systematic

way by any publicly available source. Individual

case records are available through various sources

(e.g. PACER and Westlaw), but litigation costs are

often not reported because of undisclosed

settlement agreements or because attorney fees are

not included in verdict judgements. However,

because the FLSA entitles prevailing plaintiffs to

litigation cost awards, the Department was able to

ascertain costs for 56 relevant cases.

214

The 56 cases used for this analysis were

retrieved from Westlaw’s Case Evaluator database

using a keyword search for case summaries between

2012 and 2015 mentioning the terms ‘‘FLSA’’ and

‘‘fees.’’ This was not limited to cases associated

with independent contracting. Although the initial

search yielded 64 responsive cases, the Department

excluded one duplicate case, one case resolving

litigation costs through a confidential settlement

agreement, and six cases where the defendant

employer(s) ultimately prevailed. Because the FLSA

only entitles prevailing plaintiffs to litigation cost

awards, information about litigation costs was only

available for the remaining 56 FLSA cases that

ended in settlement agreements or court verdicts

favoring the plaintiff employees.

215

This average litigation cost per case may

underestimate total average costs because some

attorneys representing FLSA plaintiffs may take a

contingency fee atop their statutorily awarded fees

and costs.

216

Using the median litigation cost, rather than

the mean, results in a value of $122,341 (2019

dollars) per case, which for the estimated 68 annual

cases produces a total annual litigation cost savings

of $8.3 million. However, the median values do not

adequately capture the magnitude of the impact

resulting from the large-scale litigation cases that

are expected to benefit from the clarity provided in

this final rule. Therefore, the mean average is used

for this analysis.

217

The Department’s approach to estimating

litigation cost savings takes into account the impact

of the rule on the number of relevant cases filed.

The approach does not take into account the impact

of the rule on promoting settlements in the future

among cases that are filed. Clarifying a rule may

increase the settlement rate among cases filed,

reducing litigation costs further (see Gelbach, J.,

‘‘The Reduced Form of Litigation Models and the

Plaintiff’s Win Rate,’’ J. Law & Economics 61(1),

(2018), https://www.journals.uchicago.edu/doi/

10.1086/699151).

218

See Griffin Toronjo Pivateau, The Prism of

Entrepreneurship: Creating A New Lens for Worker

Classification, 70 Baylor L. Rev. 595, 628 (2018)

(‘‘The continued demand for innovative work

solutions requires a new classification test. Without

clarification, parties will be unwilling to engage in

new or innovative work arrangements.’’); see also R.

Hollrah and P. Hollrah, ‘‘The Time Has Come for

Congress to Finish Its Work on Harmonizing the

Definition of ‘Employee,’’’ J. L. & Pol’y 26(2), p. 439

(2018), https://brooklynworks.brooklaw.edu/jlp/

vol26/iss2/1/.

219

A. Burke, I. Zawwar, and S. Hussels. ‘‘Do

Freelance Independent Contractors Promote

Entrepreneurship?’’ Small Business Economics

55(2), 415–27 (2019), https://doi.org/10.1007/

s11187-019-00242-w.

220

J. Langenfeld and C. Ring. ‘‘Analysis of

Literature on Technology and Alternative

Workforce Arrangements.’’ Ankura (October 2020).

221

J. Eisenach, ‘‘The Role of Independent

Contractors in The U.S. Economy,’’ Navigant

Continued

Department updated its dataset, using a

sample that included 500 cases closed

in 2019. Of those cases, the Department

identified 47 cases within this sample

that related to independent contractor

status. This ratio was applied to the

7,238 FLSA cases closed in 2019 to

estimate 680 cases related to

independent contractor status. The

Department assumes that the increased

clarity of the rule would reduce the

number of Federal FLSA cases involving

independent contractor classification

disputes by 10 percent as stakeholders

would better understand and be better

able to agree on classification

determinations without having to

litigate.

212

Multiplying these variables

results in an estimated 68 cases related

to independent contractor disputes

avoided annually. This estimate of the

reduction in the number of independent

contractor disputes filed does not take

into account any reduction in the

number of FLSA cases related to

independent contractor disputes heard

in state courts (e.g., where the state has

adopted the FLSA standards for

classifying workers), nor does it take

into account any reduction in filings

resolved before litigation or by

alternative dispute resolution, neither of

which are captured in PACER data.

Average Litigation Cost per Case

The Department applied a previous

estimate of litigation costs of $654,182

per case. To obtain this estimate, the

Department conducted a search for

FLSA cases concluded between 2012

and 2015 in the Westlaw Case Evaluator

tool and on PACER and identified 56

cases that contained sufficient litigation

cost information to estimate the average

costs of litigation.

213 214

The Department

looked at records of court filings in the

Westlaw Case Evaluator tool and on

PACER to ascertain how much plaintiffs

in these cases were paid for attorney

fees, administrative fees, and/or other

costs, apart from any monetary damages

attributable to the alleged FLSA

violations. After determining the

plaintiff’s total litigation costs for each

case, the Department then doubled the

figures to account for litigation costs

that the defendant employers incurred.

According to this analysis, the average

litigation cost for FLSA cases concluded

between 2012 and 2015 was $654,182.

Adjusting for inflation, using the GDP

deflator, results in a value of $715,637

in 2019 dollars.

215

Applying these figures to the

estimated 68 cases that could be

prevented each year due to this

rulemaking, the Department estimates

that avoided litigation costs resulting

from the rule total $48.7 million per

year (2019 dollars).

216 217

3. Improved Labor Market Conditions

The Department anticipates the final

rule will produce benefits by reducing

uncertainty and improving labor market

conditions. Removing uncertainty

improves labor market efficiency by

reducing deadweight loss. As discussed

in the need for rulemaking, the

Department believes emerging and

innovative economic arrangements that

benefit both workers and business

require reasonable certainty regarding

the worker’s classification as an

independent contractor. The current

legal uncertainty may deter businesses

from offering these arrangements or

developing them in the first place.

218

If

so, the result would be economic

deadweight loss: Legal uncertainty

prevents mutually beneficial

independent contractor arrangements.

This final rule may produce cost savings

by reducing deadweight loss.

Nonetheless, due to the abundance of

variables at play, the Department has

not attempted to quantify the precise

amount of that reduction.

The CGO concurred in its public

comment, emphasizing that an

important benefit of this rule will likely

be increased labor market flexibility.

They note that ‘‘most labor models

suggest flexibility is crucial in allowing

labor markets to efficiently match

workers with jobs, spur

entrepreneurship, and act as an

important source of countercyclical

income during a recession.’’ They cite a

study showing that a 10 percent

increase in the freelance workforce is

correlated with a 1 percent increase in

entrepreneurial activity.

219

Similarly,

CWI submitted their report that finds

independent workers ‘‘can be an

important part of improving business

performance, such as by increasing

speed to market, increasing

organizational agility, improving overall

financial performance, and allowing

firms to compete in a digital world

where increasingly relevant, highly-

skilled talent is in short-supply.’’

220

By

decreasing uncertainty and thus

potentially opening new opportunities

for firms, this final rule may encourage

companies to hire independent

contractors whom they otherwise would

not have hired. Eisenach (2010) outlines

the potential costs of curtailing

independent contracting.

221

If

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Economics (2010), https://papers.ssrn.com/sol3/

papers.cfm?abstract_id=1717932.

222

L. Katz and A. Krueger, ‘‘The Role of

Unemployment in the Rise in Alternative Work

Arrangements,’’ American Economic Review,

107(5), p. 388 (2017), https://www.aeaweb.org/

articles?id=10.1257/aer.p20171092.

223

It should be noted that government-mandated

coverage is not free. The total value that a worker

provides a business must be at least as large as the

wage, any provided benefits, and government (state

or Federal) mandates combined. Congress and/or

state governments may conclude that the value of

mandating certain coverages outweighs the costs of

such coverage, but that does not necessarily mean

that all covered workers receive significant benefits

from such coverage or value such coverage

compared to other compensation. In fact, in some

cases workers may be able to strike a better deal

with a business than would be provided under the

terms of an employee relationship that operates

under the associated mandates. Such as in a

situation where a worker has clusters of available

time to work punctuated by extended periods of

inability to work, such as a long-haul shipper who

spends a month at sea and then a month at home

or a divorced parent who has five kids to care for

every other week but is fully available on the off

weeks to work as many hours as needed. In these

cases, independent contractor relationships may be

pivotal in mutually benefiting workers and business

owners.

224

See, e.g., MBO Partners (2019), supra note 131.

225

The Department used PES26IC to identify

preferred work arrangement and PES26IR to

identify the reason they work as an independent

contractor.

226

The third most commonly selected reason was

‘‘Money is better,’’ supporting the Department’s

view that monetary and non-pecuniary benefits are

central motivations of most independent

contractors.

227

McKinsey Global Institute, supra note 89 at

11. A 2009 Pew survey similarly found that self-

employed workers are ‘‘significantly more satisfied

with their jobs than other workers.’’ Rich Morin,

‘‘Job Satisfaction among the Self-Employed,’’ Pew

Research Center, (September 2009), http://

pewsocialtrends.org/pubs/743/job-satisfaction-

highest-among-self-employed. In particular, 39

percent of self-employed workers reported being

‘‘completely satisfied’’ with their jobs, compared

with 28 percent of employees. Id.

independent contracting is expanded

due to this rule, this could generate

benefits that may include:

•Increased job creation and small

business formation.

•Increased competition and

decreased prices.

•A more flexible and dynamic work

force, where workers are able to more

easily move to locations or to employers

where their labor and skills are needed.

Eisenach explains several channels

through which these efficiency gains

may be achieved. First, by avoiding

some fixed employment costs, it is

easier for firms to adjust their labor

needs based on fluctuations in demand.

Second, by using pay-for-preference,

independent contractors are

incentivized to increase production and

quality. Third, ‘‘contracting can be an

important mechanism for overcoming

legal and regulatory barriers to

economically efficient employment

arrangements.’’ The analysis of these

benefits assumes that businesses,

especially in other industries, would

like to increase their use of independent

contractors, but have refrained from

doing so because of uncertainty

regarding who can appropriately be

engaged as an independent contractor

under the FLSA. Conversely, significant

use of independent contractors may not

be suitable for all industries, thus

limiting the growth in its utilization.

Some commenters agreed that

expanding independent contracting can

lead to employment gains. For example,

Dr. Palagashvili discussed the literature

showing how restricting independent

contracting can lead to loss of jobs. This

final rule, by expanding independent

contracting, could conversely increase

employment. She also noted the

importance of independent contracting

for unemployed workers, referencing a

paper that found workers who ‘‘suffered

a spell of unemployment are 7 to 17

percentage points more likely than

observationally similar workers to be

employed in an alternative work

arrangement when surveyed 1 to 2.5

years later.’’

222 223

She also emphasized the importance

of independent contracting to startup

firms. She references her work

conducting interviews and a survey of

technology startup executives. During

these interviews they found that ‘‘71

percent of startups relied on

independent contractors and thought it

was necessary to use contract labor

during their early stages.’’ Independent

contractors are important to startups

because ‘‘during unpredictable times,

when startups are trying to find their

market and build their product, they

need flexible labor and need to be able

to hire and fire easily.’’

Several commenters disagreed that

the rule would improve outcomes in the

labor market. FTC Commissioner

Rebecca Kelly Slaughter commented

that it is inappropriate to conclude ‘‘that

‘competition will increase and prices

will decrease’ when more workers are

classified as independent contractors’’

because, according to the commenter,

the only support offered in the NPRM

was a 2010 non-peer-reviewed article

providing little evidence of this claim.

The Department maintains that

economic laws generally apply to labor

markets, and that as supply increases

then prices can be expected to decrease.

UFCW contested the Department’s claim

that this rule will lead to increased

productivity. They presented an

example of how independent

contracting hurts efficiency: ‘‘Instead of

ecommerce fulfil[l]ment carried out by a

team of output-optimizing role players,

the ‘independent contractor’ item

selection and packing is carried out by

the same individual who does the

delivery, adding unnecessary and time

consuming steps to the process. The

‘independent contractor’ must first park

his or her car, walk into the store, orient

him or herself to the store layout, select

and pack the items, transact the

payment, then carry the packed items

back to the car.’’ The Department does

not think UFCW’s claims are valid

across the incredibly dynamic range of

independent contractor jobs, and further

questions UFCW’s unsupported

assertion that the expansive emergence

of mobile customer-service-focused

delivery applications ‘‘reduces the

opportunity for productivity-enhancing

innovation.’’ Further, even the example

ignores that efficiencies will likely be

gained over time as the independent

contractor fulfils additional orders each

day, week, and month. The Department

does not believe that these commenters

provided reliable data to revise its

analysis, especially in light of the data

provided to its support by other

commenters.

4. Improved Worker Satisfaction and

Flexibility

The Department believes this

rulemaking may also result in greater

autonomy and job satisfaction for

workers. Several surveys have shown

that independent contractors have high

job satisfaction.

224

Using the CWS,

which only considers primary, active

contractors, the Department estimates

that of independent contractors with

valid responses, 83 percent prefer their

current arrangement rather than being

an employee, compared with only 9

percent who would prefer an

employment arrangement (the

remaining 8 percent responded that it

depends).

Additionally, the main reasons

individuals work as independent

contractors demonstrate that being an

independent contractor often has

valuable benefits. The 2017 CWS asked,

‘‘What is the main reason you are self-

employed/an independent contractor?’’

The two most popular reasons were (1)

being their own boss, and (2) scheduling

flexibility.

225

In fact, these two choices

were each selected over three times

more often than any of the other

options.

226

Additionally, McKinsey

Global Institute found that

‘‘[i]ndependent workers report higher

levels of satisfaction on many aspects of

their work life than traditional

workers.’’

227

The McKinsey Global

Institute examined workers who work

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228

McKinsey Global Institute, supra note 89 at

10. The McKinsey survey found that, while ‘‘those

working independently out of necessity report

being happier with the flexibility and content of the

work,’’ they also report being ‘‘less satisfied with

their level of income level and their income

security.’’ Id. The Department believes this

rulemaking is unlikely to negatively impact the

average income level of such workers by

encouraging independent contractor opportunities.

As discussed above, there are data indicating that

independent contractors, on average, may earn

higher hourly wages than employees. Nor is

rulemaking likely to negatively impact workers’

income security, on average (see Section

VI(E)(2)(viii)).

229

Kelly Services (2015), supra note 89.

230

Upwork, Freelance Forward 2020: The U.S.

Independent Workforce Report (September 2020).

231

HyperWallet. ‘‘The Future of Gig Work Is

Female: A Study on the Behaviors and Career

Aspirations of Women in the Gig Economy,’’ (2017),

https://www.hyperwallet.com/app/uploads/HW_

The_Future_of_Gig_Work_is_Female.pdf.

232

SHRM and SAP SuccessFactors (2019), supra

note 200.

233

He, H. et al. (2019), supra note 131.

234

Coalition for Workforce Innovation (2020),

supra note.

235

Prudential Research (2017), supra note.

236

Coalition for Workforce Innovation (2020),

supra note.

237

D. Farrell, F. Greig, and A. Hamoudi, ‘‘The

Online Platform Economy in 27 Metro Areas:

Continued

independently by choice and those who

do so by necessity (such as needing

supplemental income) and found that

both groups report being happy with the

flexibility and autonomy of their

work.

228

Similarly, Kelly Services found

that ‘‘free agents’’—i.e., workers who

‘‘derive their primary income from

independent work and actively prefer

it’’—report higher satisfaction than

traditional workers concerning overall

employment situation; work-life

balance; opportunities to expand skills;

and opportunities to advance career.

229

Many commenters agreed that the

scheduling flexibility afforded to

independent contractors is of

importance to many of these workers.

WPI pointed out that many independent

contractors require flexibility to balance

work and other obligations. They cite a

recent report that found ‘‘48 percent of

freelancers report being caregivers,

while 33 percent report having a

disability in their household.’’

230

Dr.

Palagashvili discussed the significance

of independent contracting work for

women, who tend to be the primary

caregiver, and thus value scheduling

flexibility. She cited several papers

demonstrating the importance of

flexible work arrangements for women.

For example, a survey by HyperWallet

found that ‘‘96 percent of women

indicate that the primary benefit of

engaging in platform-economy work is

the flexible working hours.

231

SHRM

pointed to their survey that found that

49 percent of external workers chose

that work arrangement for the ability to

set their own hours.

232

Conversely, other commenters

asserted that valuing flexibility is not

relevant as a benefit to a worker who is

classified as an independent contractor.

The Department believes that non-

pecuniary benefits like flexibility are

very important to workers and should

receive adequate attention in this RIA.

Research has shown that flexibility is a

criterion workers consider when

evaluating job offers.

233

The PA L&I wrote that it is

inappropriate to present flexibility for

independent contractors as a

‘‘replacement for lower wages and no

benefits.’’ PA L&I also stated that the

Department does not discuss

independent contractors’ counteracting

loss of stability in income, location of

work, and frequency and schedule of

work and instead simply ‘‘presumes that

workers prize flexibility over stability’’

without citing any evidence. The

Department notes that it examined

numerous studies that directly address,

and provide evidence regarding, the

tradeoffs many independent contractors

voluntarily make to attain flexibility. To

that point, a survey submitted by CWI

found 61 percent of independent

contractors prefer the ‘‘flexibility to

choose when and where to work’’ over

‘‘having access to a steady income and

benefits.’’

234

Additionally, the workers

who value flexibility will be the ones

drawn to those independent contracting

arrangements that provide flexibility.

The Washington Center posited that

in many industries, such as trucking

and deliveries, the flexibility benefits

for independent contractors are small

because workers often do not have

control over their routes or work hours.

This was echoed by the UFCW, who

pointed out that in retail the use of just-

in-time scheduling limits the scheduling

flexibility for workers classified as

independent contractors. The

Department acknowledges that the

flexibility benefits may differ across

industries, but that they tend to exist in

all industries to some degree.

UFCW contended that although

current independent contractors may be

satisfied with their employment status,

this will not necessarily hold for newly

classified workers. The Department

acknowledges that new independent

contractors may differ from current

independent contractors but lacks any

data to show how their satisfaction

levels would differ. Lacking such data,

which commenters did not provide, the

best predictor of job satisfaction for new

independent contractors is job

satisfaction among current independent

contractors. Further, the Department

notes, as explained above, that this rule

will not directly reclassify any workers

but rather provides clarity regarding the

current process for determining worker

classification.

UFCW used a 2017 report from

Prudential Research, specifically

regarding gig workers, to dispute the

Department’s claim that independent

contractors are more satisfied than

employees. UFCW excerpted from the

report that, ‘‘on-demand independent

contractors who work full-time hours

are less satisfied with their current work

situation than full-time employees (44

percent vs. 55 percent).’’

235

However,

the commenter did not include all of the

findings in the source it cited; the same

Prudential study notes that for gig

workers who also have other jobs, their

job satisfaction rate is 86 percent.

Notably, UFCW focused on gig workers

in its comment, but conflates such

workers with the entire universe of

independent contractors. The

Department acknowledges that although

there may be lower job satisfaction for

some subsets of independent

contractors, studies that consider all

independent contractors generally find

that independent contractors report

similar or higher job satisfaction than

employees. For example, CWI submitted

a survey they conducted finding that 94

percent of independent workers are

satisfied with their work

arrangements.

236

By clarifying that control and

opportunity for profit or loss are the

core economic reality factors, this final

rule is likely to encourage the creation

of independent contractor jobs that

provide autonomy and entrepreneurial

opportunities that many workers find

satisfying. For the same reason, this

final rule likely will diminish the

incidence of independent contractor

jobs that lack these widely desired

characteristics. Thus, the Department

expects this final rule to result in more

independent contractor opportunities

which bring with them autonomy and

job satisfaction. The benefits of worker

autonomy and satisfaction obviously

‘‘are difficult or impossible to quantify,’’

but they nonetheless merit

consideration.

5. Income Smoothing

Several commenters asserted that

independent contracting plays a key

role in smoothing income during

recessions by providing an alternative

source of income. Commenters cited to

a JPMorgan Chase Institute study that

makes this case.

237

Other commenters

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JPMorgan Chase Institute,’’ JPMorgan Chase

Institute (2019), https://www.jpmorganchase.com/

institute/research/labor-markets/report-ope-

cities.htm.

238

Collins et al. (2019), supra note 80.

239

Id. at 14 n.7.

240

See, e.g., Halferty, 821 F.2d at 268 (‘‘[I]t is not

dependence in the sense that one could not survive

without the income from the job that we examine,

but dependence for continued employment’’);

DialAmerica, 757 F.2d at 1385 (‘‘The economic-

dependence aspect of the [economic reality] test

does not concern whether the workers at issue

depend on the money they earn for obtaining the

necessities of life.’’).

241

Commissioner Slaughter cited a note

submitted as background material for an OECD

meeting and a law review article to support this

contention. See M. Steinbaum, Monopsony and the

Business Model of Gig Economy Platforms, OECD

7 (Sept. 17, 2020), https://one.oecd.org/document/

DAF/COMP/WD(2019)66/en/pdf; M. Steinbaum,

‘‘Antitrust, the Gig Economy, and Labor Market

Power,’’ 82 Law and Contemp. Probs. 45, 55 (2019),

https://scholarship.law.duke.edu/cgi/

viewcontent.cgi?article=4918&context=lcp.

242

See This App Lets Drivers Juggle Competing

Uber and Lyft Rides, Wired (Feb. 15, 2018)

(estimating that over 70 percent of rideshare drivers

multi-app), https://www.wired.com/story/this-app-

lets-drivers-juggle-competing-uber-and-lyft-rides/.

243

Lim et al., supra note 75, at 61.

244

See the May 2017 CWS supplement to the

CPS.

245

Exec. Order No. 12866 § 6(a)(3)(C)(iii), 58 FR

51741.

246

See 85 FR 60634 (discussing regulatory

alternative to the proposed rule).

247

OMB guidance advises that, where possible,

agencies should analyze at least one ‘‘more

stringent option’’ and one ‘‘less stringent option’’ to

the proposed approach. OMB Circular A–4 at 16.

248

See 26 U.S.C. 3121(d)(2) (generally defining

the term ‘‘employee’’ under the Internal Revenue

Code as ‘‘any individual who, under the usual

common law rules applicable in determining the

employer-employee relationship, has the status of

an employee’’); 42 U.S.C. 410(j) (similarly defining

‘‘employee’’ under the Social Security Act); see

also, e.g., Community for Creative Non-Violence v.

Reid, 490 U.S. 730, 751 (1989) (applying

‘‘principles of general common law of agency’’ to

determine ‘‘whether . . . work was prepared by an

employee or an independent contractor’’ under the

Copyright Act of 1976); Darden, 503 U.S. 318

(holding that ‘‘a common-law test’’ should resolve

employee/independent contractor disputes under

ERISA).

249

See also Hargrove v. Sleepy’s, LLC, 106 A.3d

449, 465 (N.J. 2015) (extending the ABC test to state

wage claims in New Jersey).

250

The Modern Worker Empowerment Act, H.R.

4069, 116th Cong. (2019) (introduced by Rep. Elise

Stefanik), would amend Sec. 3(e) of the FLSA

statute to clarify that the term ‘‘employee’’ is

‘‘determined under the usual common law rules (as

applied for purposes of section 3121(d) of the

Internal Revenue Code of 1986).’’ See also S. 2973,

116th Cong. (2019) (companion Senate bill

introduced by Sen. Tim Scott). By contrast, the

Worker Flexibility and Small Business Protection

Act, H.R. 8375, 116th Cong. (2020) (introduced by

Rep. Rosa DeLauro) would, among other provisions,

amend the FLSA and other labor statutes to clarify

that ‘‘[a]n individual performing any labor for

remuneration shall be considered an employee and

not an independent contractor’’ unless such

individual passes the ‘‘ABC’’ test discussed in this

analysis. See also S. 4738, 116th Cong. (2020)

(companion bill introduced by Senators Patty

Murray and Sherrod Brown).

251

OMB Circular A–4 advises that agencies

‘‘should discuss the statutory requirements that

affect the selection of regulatory approach. If legal

held the opposite view and highlighted

the economic downturn related to

COVID–19. For example, the Center for

Innovation in Worker Organization

claimed that high unemployment

increases the likelihood that employers

fail to pay minimum wage. Because this

rule is focused on independent

contractors, even assuming the premise

of the comment from the Center for

Innovation in Worker Organization is

correct, this concern does not directly

apply. Further, this commenter did not

provide clear evidence that independent

contracting does not help workers

supplement their income.

6. Opportunities To Work for Multiple

Customers

In the NPRM, the Department noted

that independent contractors may more

easily work for multiple companies

simultaneously. The Washington Center

disputed this claim, asserting that

‘‘economists have found that about 75

percent of workers receiving non-

employee compensation are tied to one

employer’’ and the likelihood of being

tied to a single employer is similar for

wage earners and contractors.

238

But the

economists whom the Washington

Center cites in support of their assertion

explicitly noted that the independent

contractors in their study ‘‘include[ ]

those who are primarily employed at a

W2 job, and vice versa.’’

239

This overlap

prevents meaningful comparisons

between independent contractors and

W2 employees for the purpose of this

RIA. Rebecca Kelly Slaughter, a

Commissioner at the FTC wrote:

‘‘Independent contractor status is not

what allows a worker to work for two

rivals. Indeed, many hourly workers are

employed at more than one job,

including for two employers who are

rivals in the same industry.’’

Commissioner Slaughter gave an

example of a worker who holds two jobs

at competing fast food restaurants, but

this does not undermine the

Department’s discussion of independent

contractors being able to use mobile

applications to pick which tasks they

choose to perform in real time on a job-

by-job basis. That fast food worker

cannot always decide which job he

wants to work for each shift of the day.

Additionally, Slaughter commented that

working for multiple employers may

demonstrate a worker’s need to hold

multiple jobs to pay bills rather than

being indicative of flexibility. This

point, however, was not substantiated

by data showing that such a critique can

effectively be applied across the

universe of millions of independent

contractors who cite flexibility as a core

motivator. And as explained in Sections

III(A) and IV(C), courts have repeatedly

explained that need for income is not

the correct legal lens through which to

analyze whether a worker is an

independent contractor or employee

under the FLSA.

240

Lastly, she noted

that ‘‘Uber has been known to

discourage multi-apping by monitoring

whether drivers were logging into more

than one platform simultaneously and

penalizing those that did not

exclusively take Uber customers.’’

241

Under this rule, Uber’s monitoring and

controlling certain drivers’ ability to

multi-app would be a consideration

under the control factors of the

economic reality test as applied to those

drivers. See Razak, 951 F.3d at 145–46

(including drivers’ contention ‘‘that

while ‘online’ for Uber, they cannot also

accept rides through other platforms’’ in

list of ‘‘disputed facts regarding

control’’). But it appears that the

majority of rideshare drivers are able to

multi-app.

242

The Department believes

that economy-wide data reveal that

many independent contractors hold

multiple jobs,

243

and they resoundingly

prize the flexibility to work when,

where, and how they choose.

244

G. Regulatory Alternatives

Pursuant to its obligations under

Executive Order 12866,

245

the

Department assessed three regulatory

alternatives to the standard promulgated

in this final rule. These three

alternatives are the same as those

analyzed in the NPRM,

246

listed below

in order from least to most restrictive of

independent contracting:

247

(1) Codification of the common law

control test, which applies in

distinguishing between employees and

independent contractors under various

other Federal laws;

248

(2) Codification of the traditional six-

factor ‘‘economic reality’’ balancing test,

as recently articulated in WHD Opinion

Letter FLSA2019–6; and

(3) Codification of the ‘‘ABC’’ test, as

adopted by the California Supreme

Court in Dynamex Operations W., Inc. v.

Superior Court, 416 P.3d 1 (Cal.

2018).

249

Although the Department believes that

legal limitations preclude adoption of

the ‘‘common law’’ and ‘‘ABC’’ test

alternatives listed above, the

Department notes that Congress is

presently considering separate bills that

would amend the FLSA to adopt these

alternatives,

250

and accordingly presents

them for the benefit of the public as

recommended by OMB guidance.

251

All

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constraints prevent the selection of a regulatory

action that best satisfies the philosophy and

principles of Executive Order 12866, [agencies]

should identify these constraints and estimate their

opportunity cost. Such information may be useful

to Congress under the Regulatory Right-to-Know

Act.’’

252

See supra note 248. The Supreme Court has

explained that the common law standard of

employment applies by default under Federal law

‘‘unless [Congress] clearly indicates otherwise.’’

Darden, 503 U.S. at 325; see also Community for

Creative Non-Violence v. Reid, 490 US 730, 739–40

(1989) (‘‘[W]hen Congress has used the term

‘employee’ without defining it, we have concluded

that Congress intended to describe the conventional

master-servant relationship as understood by

common-law agency doctrine.’’).

three regulatory alternatives are

analyzed in qualitative terms, due to

data constraints and inherent

uncertainty in measuring the exact

stringency of multi-factor legal tests and

likely responses from the regulated

community. The Department

appreciates the feedback it received on

these regulatory alternatives from

commenters, which is described and

addressed below.

1. Codifying a Common Law Control

Test

The least stringent alternative to the

final rule’s streamlined ‘‘economic

reality’’ test would be to adopt a

common law control test, as is generally

used to determine independent

contractor classification questions

arising under the Internal Revenue Code

and various other Federal laws.

252

The

overarching focus of the common law

control test is ‘‘the hiring party’s right

to control the manner and means by

which [work] is accomplished,’’ Reid,

490 U.S. at 751, but the Supreme Court

has explained that ‘‘other factors

relevant to the inquiry [include] the

skill required; the source of the

instrumentalities and tools; the location

of the work; the duration of the parties’

relationship; whether the hiring party

has the right to assign additional

projects to the hired party; the extent of

the hired party’s discretion over when

and how long to work; the method of

payment; the hired party’s role in hiring

and paying assistants; whether the work

is part of the regular business of the

hiring party; whether the hiring party is

in business; the provision of employee

benefits; and the tax treatment of the

hired party.’’ Id. at 751–52.

Although the common law control

test considers many of the same factors

as those identified in the final rule’s

‘‘economic reality’’ test (e.g., skill,

length of the working relationship, the

source of equipment and materials, etc.),

courts generally recognize that, because

of its focus on control, the common law

test is more permissive of independent

contracting arrangements than the

economic reality test, which more

broadly examines the economic

dependence of the worker. See, e.g.,

Diggs v. Harris Hospital-Methodist, Inc.,

847 F.2d 270, 272 n.1 (5th Cir. 1988)

(observing that ‘‘[t]he ‘economic

realities’ test is a more expansive

standard for determining employee

status’’ than the common law control

test). Thus, if a common law control test

determined independent contractor

status under the FLSA, it is possible that

some workers presently classified as

FLSA employees could be reclassified

as independent contractors, increasing

the overall number of independent

contractors and reducing the overall

number of employees. The Department

is unable to estimate the exact

magnitude of such a reclassification

effect, but believes that the vast majority

of FLSA employees would remain FLSA

employees even under a common law

control test.

As discussed in the NPRM, codifying

a common law control test that is used

for purposes of at least some other

Federal statutes would create a simpler

legal regime for regulated entities

interested in receiving services from an

independent contractor, thereby

reducing confusion, compliance costs,

and legal risk for entities interested in

doing business with independent

contractors. Entities would not have to

understand and apply a different

employment classification standard for

FLSA purposes. Thus, adopting the

common law control test would likely

increase perpetual cost savings for

regulated entities attributable to

improved clarity and reduced litigation

as compared to the final rule. It could,

on the other hand, impose burdens on

workers who might prefer to be

employees subject to FLSA protections.

Moreover, the Supreme Court has

interpreted the ‘‘suffer or permit’’

language in section 3(g) of the FLSA as

establishing a broader definition of

employment than the common law. See,

e.g., Darden, 503 U.S. at 326; Portland

Terminal Co., 330 at 150–51.

A handful of business commenters

addressed the merits of the common law

control test as a regulatory alternative.

In a joint comment, Vanliner Insurance

Company and the Great American

Trucking Division implicitly requested

adoption of the common law standard

presently used under the National Labor

Relations Act (NLRA) and the Social

Security Act (SSA), as they urged the

Department to ‘‘foster efficiency and

consistency by creating uniformity for

compliance with the FLSA, the [NLRA],

and the [SSA].’’ The American Society

of Travel Advisors, Inc. (ASTA) asserted

that ‘‘the simplest means to accomplish

[a uniform classification standard under

Federal law] would be to revise the

FLSA, either legislatively or through

regulation, to replace the economic

reality test with the right of control

test.’’ While appearing to support the

common law control test on substance,

the Workplace Policy Institute warned

that ‘‘any attempt by the Department to

depart from the economic reality test

likely would result in a successful legal

challenge to this rulemaking,’’

expressing support for the Department’s

proposed economic reality test ‘‘in the

spirit of ‘don’t let the perfect be the

enemy of the good.’ ’’ See also Dr.

Palagashvili (‘‘[A]lthough the DOL is

constrained in adopting a common law

control test, I suggest that lawmakers

amend the FLSA to allow for

codification thereof.’’). By contrast, the

National Federation of Independent

Business (NFIB) criticized the

Department’s conclusion in the NPRM

that it lacks the legal authority to

implement a common law standard

through rulemaking as ‘‘unfortunate’’

and ‘‘questionable.’’

The Department appreciates the

policy appeal of establishing a uniform

Federal classification standard, and

understands that the standard most

familiar to the regulated community is

likely the common law control test used

for tax and other purposes. However,

such an approach would be inconsistent

with the Supreme Court’s statement that

FLSA employment is more inclusive

than the common law control test. See,

e.g., Walling v. Portland Terminal Co.,

330 U.S. 148, 150 (1947) (‘‘[I]n

determining who are ‘employees under

the [FLSA], common law employee

categories . . . are not of controlling

significance.’’). The overwhelming

majority of commenters who mentioned

the common law standard in their

comment, including business

commenters inclined to favor the

relative permissiveness of a common

law standard, expressed agreement with

that conclusion.

2. Codifying the Six-Factor ‘‘Economic

Reality’’ Balancing Test

As discussed earlier in section II(B),

WHD has long applied a multifactor

‘‘economic reality’’ balancing test to

distinguish between employees and

independent contractors in enforcement

actions and subregulatory guidance. The

six factors in WHD’s multifactor

balancing test, as recently articulated in

WHD Opinion Letter FLSA2019–6, are

as follows:

(1) The nature and degree of the

potential employer’s control;

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253

The Department is also concerned that the

phrase ‘‘similar footing’’ lacks a clear meaning and

therefore may be confusing to the regulated

community.

(2) The permanency of the worker’s

relationship with the potential

employer;

(3) The amount of the worker’s

investment in facilities, equipment, or

helpers;

(4) The amount of skill, initiative,

judgment, or foresight required for the

worker’s services;

(5) The worker’s opportunities for

profit or loss; and

(6) The extent of integration of the

worker’s services into the potential

employer’s business.

WHD Opinion Letter FLSA2019–6 at 4

(citing Rutherford Food, 331 U.S. at 730,

and Silk, 331 U.S. at 716).

As discussed in the NPRM, the

Department believes that this six-factor

balancing test is neither more nor less

permissive of independent contractor

relationships as compared to the

streamlined test finalized in this

rulemaking. Both tests describe the

‘‘economic dependence’’ of the worker

at issue as the ultimate inquiry; both

emphasize the primacy of actual

practice over contractual or theoretical

possibilities (i.e., the ‘‘economic reality’’

of the work arrangement); and both

evaluate the same set of underlying

factors, notwithstanding an emphasis

and consolidation of certain factors

under this rule’s streamlined test.

Notably, like § 795.105(d)(1)(i) of the

final rule, WHD Opinion Letter

FLSA2019–6 advised that certain safety

measures and quality control standards

do not constitute ‘‘control’’ indicative of

an FLSA employment relationship. See

id. at 8 n.4. However, the Department

explained in the NPRM that the six-

factor balancing test used by WHD and

most courts, with some significant

variations, would benefit from

clarification, sharpening, and

streamlining.

A number of commenters urged the

Department to codify a six-factor

balancing test. Several commenters,

including NELP, Eastern Atlantic States

Regional Council of Carpenters

(EASRCC), and the United Brotherhood

of Carpenters, specifically requested

that the Department reinstate AI 2015–

1, which was withdrawn in 2017.

SWACCA asserted that ‘‘codification of

the six-factor balancing test may well

achieve more consistency of application

from the courts as it pushes them to

develop their similar precedents to align

with the Department’s views,’’

criticizing the proposed rule as ‘‘a novel

weighted test that will result in more

litigation and less certain outcomes[.]’’

SWACCA also disputed the

Department’s assumption in the NPRM

that codifying the six-factor balancing

test would not reduce initial regulatory

familiarization costs or provide greater

per-contract cost savings compared to

the proposed rule, see 85 FR 60635,

arguing that this assumption ‘‘overlooks

the fact that codifying the six-factor

balancing test would simply incorporate

what is now subregulatory guidance at

the regulatory level.’’ Finally, NELP,

NWLC, and the State AGs asserted that

the Department has no legal authority to

promulgate any regulatory standard

except the traditional six-factor

balancing test, citing to Kimble v.

Marvel Entm’t, LLC, 576 U.S. 446 (2015),

for the proposition that the six-factor

balancing test derived from Silk and

Rutherford Food has effectively become

part of the FLSA’s ‘‘statutory scheme.’’

See id. at 456 (‘‘All [of the Supreme

Court’s] interpretive decisions, in

whatever way reasoned, effectively

become part of the statutory scheme,

subject (just like the rest) to

congressional change.’’).

While the Department agrees with

NELP, NWLC, and the State AGs that

Supreme Court precedent requires

application of an ‘‘economic reality’’

test to evaluate independent contractor

claims under the FLSA, we disagree that

the Court has definitively prescribed the

specific components of such a test. As

explained earlier, courts in different

Federal circuits have articulated the

number and nature of relevant factors in

different ways, so any formulation

endorsed by the Department would be at

least marginally ‘‘novel’’ to courts and

affected stakeholders across

jurisdictions in some respect. Moreover,

many commenters are overstating the

degree to which the standard finalized

in this rule meaningfully departs from

existing precedent. If anything, by

elevating the two factors that are most

probative to what courts have

established as the ultimate inquiry of

the test—i.e., whether workers ‘‘are in

business for themselves,’’ Saleem, 854

F.3d at 139—the Department’s approach

is more faithful to courts’ instruction

that the factors ‘‘must be applied with

that ultimate notion in mind.’’ Usery,

527 F.2d at 1311. Moreover, because the

Department’s analysis of appellate case

law since 1975 has found workers’

control and opportunity for profit or

loss to be most predictive of a worker’s

classification status, the finalized

standard provides more accurate

guidance.

To the extent that some businesses

and independent contractors familiar

with the Department’s earlier

subregulatory guidance might spend

less time reviewing new regulatory

language on the topic under this

alternative, any reduction in initial

regulatory familiarization costs

compared to the streamlined test

adopted in this final rule would likely

be minimal. By contrast, and as we

explained in the NPRM, codification of

the traditional six-factor balancing test

would yield smaller recurring benefits

and cost savings over the long term, as

the Department continues to believe in

the added clarity of an appropriately

weighted test with less overlapping

redundancy.

The Department further believes that

reinstatement of AI 2015–1’s specific

articulation of the six-factor test would

be inappropriate because that

withdrawn guidance exacerbates the

very shortcomings that this rule

remedies. As discussed in Section III(A),

the first such shortcoming is the need

for consistent application of economic

dependence. While the AI 2015–1

correctly stated that ‘‘[t]he ultimate

inquiry under the FLSA is whether the

worker is economically dependent on

the employer or truly in business for

him or herself,’’ it failed to apply that

concept consistently. Notably, it

explained that the investment factor

should be analyzed by comparing the

amount of the worker’s investments

with the amount the potential employer

invests because ‘‘[i]f the worker’s

investment is relatively minor, that

suggests that the worker and the

[potential] employer are not on similar

footings and that the worker may be

economically dependent on the

employer.’’ But the correct concept of

economic dependence is not an inquiry

into whether two entities are on a

‘‘similar footing,’’ but rather whether an

individual is in business for him- or

herself.

253

Such an approach to the

investment factor is misleading by

placing the focus on the worker’s

financial means instead of the worker’s

relationship with the purported

employer. Several cases explicitly or

implicitly reject the ‘‘similar footing’’

analysis, most plainly because

independent contractors routinely work

for companies with whom they are not

on a ‘‘similar footing.’’ See Karlson, 860

F.3d at 1096 (‘‘Large corporations can

hire independent contractors’’). The

‘‘similar footing’’ concept of economic

dependence is also inconsistent with

the Supreme Court’s analysis in Silk,

331 U.S. 718, which found that truck

drivers who invested in their own

vehicles were independent contractors

who transported coal for a coal

company. The Court did not compare

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254

See Dynamex, 416 P.3d 1; Assembly Bill

(‘‘A.B.’’) 5, Ch. 296, 2019–2020 Reg. Sess. (Cal.

2019) (codifying the ABC test articulated in

Dynamex); A.B. 2257, Ch. 38, 2019–2020 Reg. Sess.

(Cal. 2020) (exempting certain professions,

occupations, and industries from the ABC test that

A.B. 5 had codified). The ABC test originated in

state unemployment insurance statutes, but some

state courts and legislatures have recently extended

the test to govern employee/independent contractor

disputes under state wage and hour laws. See Keith

Cunningham-Parmeter, Gig-Dependence: Finding

the Real Independent Contractors of Platform Work,

39 N. Ill. U. L. Rev. 379, 408–11 (2019) (discussing

the origins and recent expansion of the ABC test).

255

California’s ABC test is slightly more stringent

than versions of the ABC test adopted (or presently

under consideration) in other states. For example,

New Jersey provides that a hiring entity may satisfy

the ABC test’s ‘‘B’’ prong by establishing either: (1)

That the work provided is outside the usual course

of the business for which the work is performed, or

(2) that the work performed is outside all the places

of business of the hiring entity. N.J. Stat. Ann.

§43:21–19(i)(6)(A–C). The Department has chosen

to analyze California’s ABC test as a regulatory

alternative because businesses subject to multiple

standards, including nationwide businesses, are

likely to comply with the most demanding standard

if they wish to make consistent classification

determinations.

256

See Cal. Code Regs., tit. 8, §11090, subd. 2(D)

(‘‘‘Employ’ means to engage, suffer, or permit to

work.’’). The Dynamex court noted that California’s

adoption of the ‘‘suffer or permit to work’’ standard

predated the enactment of the FLSA and was

therefore ‘‘not intended to embrace the Federal

economic reality test’’ that subsequently developed.

416 P.3d at 35.

the relative investment of the drivers

with that of the coal company or ask

whether they were on a ‘‘similar

footing’’—they obviously were not.

Instead, the Court ruled that the drivers

were independent contractors, in part

because they had ‘‘the opportunity for

profit from sound management’’ of their

investment. Id. at 719. What matters is

not the relative size of a worker’s

investment, but whether the worker has

a meaningful opportunity for profit or

loss based on that investment.

The second shortcoming discussed at

Section III(B) is the need for guidance

regarding which economic reality

factors are more probative. AI 2015–1

exacerbates this shortcoming by

relegating the more probative control

factor while elevating the less probative

‘‘integral part’’ factor. In particular, AI–

2015 stated that ‘‘[t]he control factor

should not overtake the other factors of

the economic realities test.’’ Such

guidance is plainly inconsistent with

cases in which control explicitly

‘‘overtakes’’ other factors. See, e.g.,

Saleem; 854 F.3d at 147 (‘‘whatever ‘the

permanence or duration’ of Plaintiffs’

affiliation with Defendants, both its

length and the ‘regularity’ of work was

entirely of Plaintiffs’ choosing’’ (citation

omitted)); Selker Bros. 84 F.3d at 147

(‘‘Given the degree of control exercised

by Selker over the day-to-day operations

of the stations, this [use of special skills]

cannot be said to support a conclusion

of independent contractor status.’’).

Deemphasizing the control factor is also

at odds with commonsense logic;

control over the work seems to be

extremely probative as to whether an

individual is in business for him- or

herself. In addition to de-emphasizing a

highly probative factor, AI–2015 also

states that ‘‘[c]ourts have found the

‘integral’ factor to be compelling,’’ citing

Snell, 875 F.2d at 811 and Lauritzen,

F.2d at 1537–38 for support. But both

cited cases actually analyzed the

‘‘integral part’’ factor as an afterthought:

Each devoted only a few conclusory

sentences to this factor after more in

depth analysis of the other factors Snell,

875 F.2d at 811 and Lauritzen, 835 F.2d

at 1537–38. The ‘‘integral part’’ factor

falls short of even an afterthought in the

Fifth Circuit, which typically does not

analyze it at all. As explained in Section

IV(D)(5), the ‘‘integral part’’ factor—as

used in AI 2015–1 to mean a worker’s

importance to a business—is not

supported by Supreme Court precedent

and may send misleading signals in

many cases.

The third shortcoming discussed at

Section III(C) is overlaps between

economic reality factors, which

undermines the structural benefits of a

multifactor test by blurring the lines

between factors. One type of overlap

highlighted by the NPRM is the

importation of the analysis of initiative

and business judgment, which are

already part of the control and

opportunity factors, into the skill factor,

thus ‘‘dilut[ing] the consideration of

actual skill to the point of irrelevance.’’

85 FR 60607. Id. AI 2015–1 reinforces

this problem by focusing the skill factor

entirely on initiative and business

judgment, thus eliminating

consideration of skill: ‘‘A worker’s

business skills, judgment, and initiative,

not his or her technical skills, will aid

in determining whether the worker is

economically independent.’’ The

withdrawn guidance makes clear that it

is not simply that skill matters less than

initiative, but that skill matters not at

all, because it unequivocally states that

‘‘specialized skill do not indicate that

workers are in business for themselves.’’

This categorical statement, however, is

supported by more circumspect case

law explaining that ‘‘skill is not itself

indicative of independent contractor

status.’’ AI 2015–1 (quoting Superior

Care, 84 F.2d at 1060 (emphasis

added)); see also id. (‘‘the use of special

skills is not itself indicative of

independent contractor status’’ (quoting

Selker Bros. 949 F.d at 1295) (emphasis

added)). AI 2015–1’s categorical

position is also at odds with the

Supreme Court’s instruction in Silk that

‘‘skill required’’ may be ‘‘important for

decision.’’ 331 U.S. at 716; see also

Simpkins, 893 F.3d at 966 (‘‘whether

Simpkins had specialized skills, as well

as the extent to which he employed

them in performing his work, are

[material] issues’’).

Further, reinstating AI 2015–1 or

otherwise adopting a six-factor test with

overlapping factors and without

guidance regarding the factors’ relative

probative value would negate the

overall beneficial effects that would

likely result from this rule, which are

discussed above.

For these reasons, the Department

declines commenters’ requests to

reinstate AI 2015–1.The Department

further notes that, unlike this rule, AI

2015–1 was issued without notice and

comment and thus did not benefit from

helpful input from the regulated

community.

3. Codifying California’s ‘‘ABC’’ Test

The most stringent regulatory

alternative to the Department’s

proposed rule would be to codify the

‘‘ABC’’ test recently adopted under

California’s state wage and hour law to

distinguish between employee/

independent contractor statuses.

254

As

described by the California Supreme

Court in Dynamex, ‘‘[t]he ABC test

presumptively considers all workers to

be employees, and permits workers to

be classified as independent contractors

only if the hiring business demonstrates

that the worker in question satisfies

each of three conditions: (a) That the

worker is free from the control and

direction of the hirer in connection with

the performance of the work, both under

the contract for the performance of the

work and in fact; and (b) that the worker

performs work that is outside the usual

course of the hiring entity’s business;

and (c) that the worker is customarily

engaged in an independently

established trade, occupation, or

business of the same nature as that

involved in the work performed.’’ 416

P.3d at 34.

255

In justifying the adoption

of such a stringent test, the Dynamex

court noted the existence of an

‘‘exceptionally broad suffer or permit to

work standard’’ in California’s wage and

hour statute, id. at 31,

256

as well as ‘‘the

more general principle that wage orders

are the type of remedial legislation that

must be liberally construed in a manner

that serves its remedial purposes.’’ Id. at

32.

On its face, California’s ABC test is far

more restrictive of independent

contracting arrangements than any

formulation of an ‘‘economic reality’’

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balancing test, including the proposed

rule. Whereas no single factor

necessarily disqualifies a worker from

independent contractor status under an

economic reality test, each of the ABC

test’s three factors may alone disqualify

the worker from independent contractor

status. Thus, the NPRM stated that

adoption of an ABC test to govern

independent contractor status under the

FLSA would directly result in a large-

scale reclassification of many workers

presently classified as independent

contractors into FLSA-covered

employees, particularly those in

industries that depend on independent

contracting arrangements within the

‘‘usual course of the hiring entity’s

business.’’ Dynamex, 416 P.3d at 34.

While some independent contractors

might benefit from reclassification by

newly receiving overtime pay or a

guaranteed minimum wage, these

workers might also experience a

reduction in work hours or diminished

scheduling flexibility as their new

employers attempt to avoid incurring

additional expenses for overtime work.

Others workers, particularly off-site

workers who operate free from the

business’ direct control and supervision,

might see their work arrangements

terminated by businesses unwilling or

unable to assume the financial burden

and legal risk of the FLSA’s overtime

pay requirement. After highlighting

some of the reports of adverse

consequences experienced by workers

and businesses in California following

the passage A.B. 5, the Department

concluded that adopting the ABC test as

the FLSA’s generally applicable

standard for distinguishing employees

from independent contractors would be

unduly restrictive and disruptive to the

economy. Finally, as a matter of law, the

Department asserted that adoption of

California’s ABC test would be

inconsistent with the more flexible

economic reality test adopted by the

Supreme Court, as it would cover

workers who have been held by the

Supreme Court to be independent

contractors under the economic reality

test. See Silk, 331 U.S. at 719; Bartels,

332 U.S. at 130.

The Department received a large

volume of commenter feedback on the

merits of California’s ABC test. While

the majority of these comments were

highly critical of the standard, it did

have several supporters. Commenters in

favor of the ABC test asserted that, as

the regulatory alternative most

restrictive of independent contracting

considered by the Department, it would

best effectuate Congress’ intent to

extend FLSA coverage broadly and

reduce unlawful misclassification of

employees as independent contractors.

See, e.g., Matt Brown; National

Domestic Workers Alliance; Public

Justice Center; SEIU. Numerous

commenters asserted that the ABC test,

with its three individually

determinative factors, was also the

clearest and most predictable approach

considered. See, e.g., International

Brotherhood of Teamsters; Writers

Guild of America, East, AFL–CIO. New

York University’s People’s Parity Project

argued that ‘‘[g]iven the importance of

the California market to the national

economy and the fact that it follows the

more stringent ABC standard, any

business that wishes to operate in

California, and any national business,

will have economic motivation to follow

the ABC standard.’’ NELA similarly

disputed concerns that adoption of the

ABC test would be unduly disruptive,

asserting that Massachusetts wage and

hour law has used an ABC test since

2004 and that ‘‘[m]any other states,

including New Jersey, Illinois,

Connecticut, and Hawaii, use an ABC

test for certain [other] purposes, and

have similarly suffered no disruption to

their economies.’’ Finally, regarding the

Department’s legal authority to adopt

the ABC test, NELA asserted that ‘‘none

of the cases on which the Department

relies suggest that the multi-factor test is

the only way to test ‘economic reality’

or that the ABC test ignores ‘economic

reality.’ ’’

A diverse array of commenters voiced

strong opposition to adopting an ABC

test under the FLSA, including law

firms, trade associations, advocacy

organizations, academics, and

individual freelancers. Several

commenters dedicated the entirety or

vast majority of their comment towards

criticizing California’s ABC test. See,

e.g., American Consumer Institute

Center for Citizen Research (ACI); Fight

for Freelancers USA; Institute for the

American Worker; Joint Comment of the

Pacific Legal Foundation (PLF), the

American Society of Journalists and

Authors, Inc. (ASJA), and the National

Press Photographers Association

(NPPA); Dr. Palagashvili; The People v.

AB5. The primary objection voiced by

commenters critical of the ABC test

regarded the disruptive economic effects

of implementing such a stringent

standard, with several asserting that an

ABC test would devastate their industry.

See, e.g., American Council of Life

Insurers (‘‘Thousands of jobs would

likely have been lost had the California

legislature failed to create [an

exemption for insurance

professionals].’’); Coalition of Practicing

Translators & Interpreters of California

(CoPTIC) (‘‘[A.B. 5] posed an existential

threat to the survival of our

profession.’’); Intermodal Association of

North America (IANA)) (‘‘The ABC test

essentially eliminates the independent

contractor model for motor carriers

involved in intermodal drayage.’’).

Several commenters invoked the

numerous exemptions to the ABC test

that California lawmakers initially

adopted in A.B. 5 and subsequently

expanded in A.B. 2257 as evidence of

the standard’s overreach. See, e.g.,

California Chamber of Commerce

(‘‘During the first few months of the

2020 Legislative Session, more than 30

bills were introduced to add a myriad of

exemptions to the ABC test.... As a

result of the adoption of AB 2257,

which was signed into law in

September, there are now 109

exemptions to the ABC test.’’); Rep.

Virginia Foxx et al. (‘‘Rather than setting

a dependable and workable standard,

the AB 5 framework results in arbitrary

treatment of industries based on

political considerations to the detriment

of workers.’’); Joint Comment of PLF,

ASJA, and NPPA (‘‘If a law requires

dozens of exceptions to avoid

destroying the careers of successful

independent professionals, it is a strong

indication that the law’s basic

premise—the ABC test—is flawed.’’).

Some individual freelancers, including

writer Karen Kroll, filmmaker/actor

Margarita Reyes, unspecified

professional Chun Fung Kevin Chiu,

and unspecified professional Carola

Berger, asserted that the ABC test is

falsely premised on the assumption that

all independent contractors, or at least

those who provide services in a client’s

usual course of business, feel exploited

and would prefer to be employees. The

Independent Women’s Forum and Dr.

Palagashvili asserted that the ABC test

implemented in California

disproportionately burdened female

workers with caregiving responsibilities,

who are less able to find adequately

flexible work schedules through

traditional employment. Finally, some

commenters agreed with the

Department’s conclusion in the NPRM

that Supreme Court precedent precludes

the Department from adopting an ABC

test under the FLSA. See NRF; FMI—

The Food Industry Association.

After reviewing commenter feedback,

the Department continues to believe that

the ABC test would be infeasible,

difficult to administer, and disruptive to

the economy if adopted as the FLSA

standard. The weight of data,

arguments, and anecdotes that

commenters shared about the ABC test’s

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257

See Kate Conger, ‘‘Uber and Lyft Drivers in

California Will Remain Contractors,’’ NY Times

(Nov. 4, 2020), https://www.nytimes.com/2020/11/

04/technology/california-uber-lyft-prop-22.html.

effects in California support the NPRM’s

conclusion that adopting an ABC test

would have unacceptably disruptive

economic effects. For instance, a self-

employed ‘‘professional handyman with

technical skills in furniture assembly

and home repair’’ stated that ‘‘[a]s a

California resident, it has been

concerning to watch the way AB–5 has

affected our state. I don’t believe

legislators should make decisions that

make it harder for people like me to find

work and earn a living the way we want

to.’’ A medical translator stated that

‘‘ABC test simply doesn’t work in my

field and it is not a fair standard to

measure my situation. The original AB5

law in California was destructive to the

livelihood of many of my colleagues in

that state.’’ And as a final illustrative

example, a freelance journalist in

California characterized that state’s

adoption of the ABC test as an ‘‘attempt

to legislate an entire class of

entrepreneurs out of business.’’ See

also, e.g., People vs. AB5; Fight for

Freelancers; NPPA; WPI.

Moreover, as commenters pointed out,

the numerous exemptions initially and

subsequently passed by the California

legislature indicate the ABC test’s

inadequacy as a generally applicable

standard, as well as its unpopularity

with affected stakeholders. An ‘‘owner

of a small, one-woman business in

California’’ explained in her comment

that ‘‘[t]he absurdity and overreach of

AB5 is evidenced by the numerous

attempts at clean-up bills in California

(SB 875, SB 1039, SB 900, AB 1850, AB

2257 . . .) that clogged the CA

legislative landscape for months,

culminating in the now adopted AB

2257, which lists too many exemptions

to count.’’ The recent passage of the

high-profile Proposition 22 ballot

initiative in California,

257

which

occurred shortly after the end of the

comment period for this rulemaking and

exempted numerous gig workers from

the ABC test, is further evidence in this

regard.

While California retains the ABC test

for some industries but not others, the

Department is required to apply the

FLSA consistently for all covered

industries (absent explicit statutory

authority to do otherwise). Thus, if the

Department adopted the ABC test, that

standard would apply to virtually all

industries nationwide, including

numerous industries that the

Californian legislature and voters

exempted because they would suffer

undue disruption under that standard.

NELA contended that adoption of the

ABC test by Massachusetts has not led

to the same type of disruption

experienced in California, which is

disputed by some commenters from

Massachusetts. See e.g., New Jobs for

Massachusetts; IFA; Fight for

Freelancers. But even if NELA were

correct, a nationwide ABC test would

still disrupt California, the state with

the largest population and economy,

and likely many others. In the

Department’s view, the fact that a legal

standard may be disruptive in only

some states (e.g., California) but not

others (e.g., Massachusetts) is not a

persuasive reason for nationwide

adoption.

Additionally, the Department

continues to believe that it lacks legal

authority to adopt the ABC test under

the FLSA because that test is far too

rigid and restrictive of independent

contracting arrangements. As a

threshold matter, each of the ABC test’s

three independently determinative

factors would contradict binding

Supreme Court precedent applying the

economic reality test, where ‘‘[n]o one

[factor] is controlling.’’ Silk, 331 U.S. at

716. In particular, the test’s ‘‘B’’ prong—

denying independent contractor status

unless the contractor ‘‘performs work

that is outside the usual course of the

hiring entity’s business’’—would

contradict the Court’s recognition in

Silk that ‘‘[f]ew businesses are so

completely integrated that they can

themselves produce the raw material,

manufacture and distribute the finished

product to the ultimate consumer

without assistance from independent

contractors.’’ 331 U.S. at 714; see also

Rutherford Food, 331 U.S. at 729

(recognizing that ‘‘[t]here may be

independent contractors who take part

in [the] production or distribution’’ of a

hiring party). Indeed, application of

California’s ABC test would result in

different classification outcomes than

those the Supreme Court arrived at

applying the economic reality test in

Silk, 331 U.S. at 719 (ruling that

truckers who were ‘‘an integral part of

the businesses of retailing coal or

transporting freight’’ were independent

contractors), and Bartels, 332 U.S. at 130

(concluding that musicians were

independent contractors rather than

employees of the music hall where they

played). Absent revised guidance from

the Supreme Court or Congressional

legislation amending the FLSA statute,

the Department continues to believe that

it lacks the legal authority to implement

a California-style ‘‘ABC’’ test through

administrative rulemaking.

NELA contended that ‘‘an ABC test is

more faithful to the broad, remedial

purpose of the FLSA.’’ According to

NELA, ‘‘[a]t its core, the FLSA is a

remedial statute’’ and therefore, the

Department should interpret the FLSA’s

standard of employment to be broader

than economic dependence. However,

the Supreme Court warned against

relying on ‘‘flawed premise that the

FLSA ‘pursues’ its remedial purpose ‘at

all costs’ ’’ when interpreting the Act.

Encino, 138 S. Ct. at 1142; see also

Bristol, 935 F.3d 122 (‘‘ ‘[A] fair reading’

of the FLSA, neither narrow nor broad,

is what is called for.’’ (quoting Encino,

138 S. Ct. at 1142)); Diaz, 751 F. App’x

at, 758 (rejecting request to interpret

FLSA provisions to provide ‘‘broad’’

coverage because ‘‘[w]e must instead

give the FLSA a ‘fair’ interpretation.’’).

Furthermore, even if remedial statutes

should be liberally construed, the ABC

test still runs afoul of the Supreme

Court’s stated limits on the extent of the

FLSA’s definition of employment, as

explained above. As such, the

Department may not (and no court has

ever suggested that it could) replace the

economic reality test with the ABC test

to be faithful to the FLSA’s remedial

purpose.

In sum, legal constraints and the

disruptive economic effects of adopting

the ABC test in the FLSA context. As we

stated in the NPRM, the Department

engaged in this rulemaking to clarify the

existing standard, not to radically

transform it.

H. Summary of Impacts

In summary, the Department believes

that this rule will increase clarity

regarding whether a worker is classified

as an employee or an independent

contractor under the FLSA. This clarity

could result in an increased use of

independent contractors. The costs and

benefits to a worker being classified as

an independent contractor are discussed

throughout this analysis, and are

summarized below.

The Department believes that there

are real benefits to the use of

independent contractor status, for both

workers and employers. Independent

contractors generally have greater

autonomy and more flexibility in their

hours, providing them more control

over the management of their time. The

use of independent contracting for

employers allows for a more flexible

and dynamic workforce, where workers

provide labor and skills where and

when they are needed. Independent

contractors may more easily work for

multiple companies simultaneously,

have more control over their labor-

leisure balance, and more explicitly

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In some situations, independent contractors

may be provided with benefits similar to those

provided to employees.

259

SBA, Summary of Size Standards by Industry

Sector, 2017, www.sba.gov/document/support—

table-size-standards.

260

The most recent size standards were issued in

2019. However, the Department used the 2017

standards for consistency with the older Economic

Census data.

261

The 2012 data are the most recently available

with revenue data.

262

For this analysis, the Department excluded

independent contractors who are not registered as

small businesses, and who are generally not

captured in the Economic Census, from the

calculation of small establishments.

263

2017 Census of Governments. https://

www.census.gov/data/tables/2017/econ/gus/2017-

governments.html.

264

A Compensation/Benefits Specialist ensures

company compliance with Federal and state laws,

including reporting requirements; evaluates job

positions, determining classification, exempt or

non-exempt status, and salary; plans, develops,

evaluates, improves, and communicates methods

and techniques for selecting, promoting,

compensating, evaluating, and training workers. See

BLS, ‘‘13–1141 Compensation, Benefits, and Job

Analysis Specialists,’’ https://www.bls.gov/oes/

current/oes131141.htm.

265

Note that the NPRM reported $3.86 which is

the cost per job, rather than the cost per

independent contractor.

266

Lim et al, supra note 75 at 51.

define the nature of their work.

Independent contractors also appear to

have higher job satisfaction.

An increase in the number of job

openings for independent contractors

can also have benefits for the economy

as a whole. Increased job creation and

enhanced flexibility in work

arrangements are critical benefits during

periods of economic uncertainty, such

as the current COVID–19 pandemic.

There are also certain challenges that

face independent contractors compared

to employees subject to the FLSA.

Independent contractors are not subject

to the protections of the FLSA, such as

minimum wage and overtime pay.

Independent contractors generally do

not receive the same employer-provided

benefits as employees, such as health

insurance, retirement contributions, and

paid time off.

258

Independent

contractors may have a higher tax

liability than employees, as they are

legally obligated to pay both the

employee and employer shares of the

Federal Insurance Contributions Act

(FICA) taxes. However, economists

recognize that payroll taxes generally

are subtracted from the wage rate of

employees. Employers also cover

unemployment insurance and workers’

compensation taxes for their employees.

These costs are also components of

businesses’ worker costs, and employee

wages are expected to reflect that

accordingly. Independent contractors do

not pay these taxes nor are they

generally protected by these insurance

programs, but there are private

insurance companies that offer

equivalent coverage.

Because the Department does not

know how many workers may shift from

employee status to independent

contractor status, or how many people

who were previously unemployed or

out of the labor force will gain work as

an independent contractor, these costs

and benefits have not been quantified.

VII. Regulatory Flexibility Act

The Regulatory Flexibility Act of 1980

(RFA), 5 U.S.C. 601 et seq., as amended

by the Small Business Regulatory

Enforcement Fairness Act of 1996,

Public Law 104–121 (1996), requires

Federal agencies engaged in rulemaking

to consider the impact of their proposals

on small entities, consider alternatives

to minimize that impact, and solicit

public comment on their analyses. The

RFA requires the assessment of the

impact of a regulation on a wide range

of small entities, including small

businesses, not-for-profit organizations,

and small governmental jurisdictions.

Accordingly, the Department examined

the regulatory requirements of this final

rule to determine whether they would

have a significant economic impact on

a substantial number of small entities.

Because both costs and cost savings are

minimal for small business entities, the

Department certifies that this final rule

will not have a significant economic

impact on a substantial number of small

entities.

The Department used the Small

Business Administration size standards,

which determine whether a business

qualifies for small-business status, to

estimate the number of small

entities.

259 260

The Department then

applied these thresholds to the U.S.

Census Bureau’s 2012 Economic Census

to obtain the number of establishments

with employment or sales/receipts

below the small business threshold in

the industry.

261

These ratios of small to

large establishments were then applied

to the more recent 2017 Economic

Census data on number of

establishments.

262

Next, the Department

estimated the number of small

governments, defined as having

population less than 50,000, from the

2017 Census of Governments.

263

In

total, the Department estimated there

are 6.4 million small establishments or

governments.

The Department assumes that a

Compensation, Benefits, and Job

Analysis Specialist (SOC 13–1141) (or a

staff member in a similar position) will

review the rule.

264

According to the

Occupational Employment Statistics

(OES), these workers had a mean wage

of $33.58 per hour in 2019 (most recent

data available). Given the proposed

clarification to the Department’s

interpretation of who is an employee

and who is an independent contractor

under the FLSA, the Department

assumes that it will take on average

about 1 hour to review the rule as

proposed. The Department believes that

an hour, on average, is appropriate,

because while some establishments will

spend longer than one hour to review

the rule, many establishments may rely

on third-party summaries of the changes

or spend little or no time reviewing the

rule. Assuming benefits are paid at a

rate of 46 percent of the base wage, and

overhead costs are 17 percent of the

base wage, the reviewer’s effective

hourly rate is $54.74; thus, the average

cost per establishment conducting

regulatory familiarization is $54.74. The

per-entity rule familiarization cost for

independent contractors, some of whom

would be small businesses, is $11.59, or

the fully loaded mean hourly wage of

independent contractors in the CWS

($46.36) multiplied by 0.25 hour. The

Department believes that 15 minutes, on

average, is appropriate, because while

some independent contractors will

spend longer than one hour to review

the rule, many will spend little or no

time reviewing the rule.

The cost savings due to increased

clarity estimated per year for each small

business employer is $18.25, or the fully

loaded mean hourly wage of a

Compensation, Benefits, and Job

Analysis Specialist multiplied by 0.33

hours. The cost savings due to increased

clarity for each independent contractor,

some of whom would be a small

business, is $4.14 per year, or the fully

loaded mean hourly wage of

independent contractors in the CWS

multiplied by 0.89 hours.

265

Because

regulatory familiarization is a one-time

cost and the cost savings from clarity

recur each year, the Department expects

cost savings to outweigh regulatory

familiarization costs in the long run.

Because both costs and cost savings are

minimal for small business entities, and

well below one percent of their gross

annual revenues, which is typically at

least $100,000 per year for the smallest

businesses, the Department certifies that

this final rule will not have a significant

economic impact on a substantial

number of small entities.

There is some evidence that small

firms use independent contractors for a

greater proportion of their workforce

than large firms.

266

If so, then it may be

reasonable to assume that the increased

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See 2 U.S.C. 1501.

268

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.

269

See 2 U.S.C. 1532(a)(4).

270

According to the Bureau of Economic

Analysis, 2019 GDP was $21.43 trillion. https://

www.bea.gov/system/files/2020-02/gdp4q19_2nd_

0.pdf.

use of independent contractors may also

favor smaller companies. In which case,

costs and benefits and cost savings may

be larger for these small firms. Because

benefits and cost savings are expected to

outweigh costs, the Department does not

expect this rule will result in an undue

hardship for small businesses.

AFL–CIO disagreed with including

cost savings from increased clarity for

independent contractors. They argue

that ‘‘the independent contractors at

issue—those who falls [sic] close to the

line separating independent contractors

from employees are not themselves

employers, they provide services solely

as individuals and they have no need to

determine if they are themselves

independent contractors.’’ They

additionally stated that the analysis

failed to include compliance costs for

the new small businesses created—the

workers newly classified as

independent contractors. Specifically,

these new independent contractors will

have increased regulatory burden due to

additional accounting and tax filing

costs. The Department believes it did

address this because workers who

choose to pursue independent

contractor roles will not take them

unless they believe the gains will offset

the costs.

The AFL–CIO asserts that the

Department failed to conduct the

outreach to small businesses as required

by Section 609(a) of the RFA. The

Department notes that these

requirements only apply when the rule

will have a significant economic impact

on a substantial number of small

entities, which is not the case for this

rulemaking.

VIII. Unfunded Mandates Reform Act

Analysis

The Unfunded Mandates Reform Act

of 1995 (UMRA)

267

requires agencies to

prepare a written statement for rules

with a Federal mandate that may result

in increased expenditures by state,

local, and tribal governments, in the

aggregate, or by the private sector, of

$156 million ($100 million in 1995

dollars adjusted for inflation) or more in

at least one year.

268

This statement

must: (1) Identify the authorizing

legislation; (2) present the estimated

costs and benefits of the rule and, to the

extent that such estimates are feasible

and relevant, its estimated effects on the

national economy; (3) summarize and

evaluate state, local, and tribal

government input; and (4) identify

reasonable alternatives and select, or

explain the non-selection, of the least

costly, most cost-effective, or least

burdensome alternative.

A. Authorizing Legislation

This final rule is issued pursuant to

the Fair Labor Standards Act, 29 U.S.C.

201, et seq.

B. Assessment of Costs and Benefits

For purposes of the UMRA, this rule

includes a Federal mandate that is

expected to result in increased

expenditures by the private sector of

more than $156 million in at least one

year, but will not result in increased

expenditures by state, local, and tribal

governments, in the aggregate, of $156

million or more in any one year.

Based on the cost analysis from this

final rule, the Department determined

that it will result in Year 1 total costs

for state and local governments totaling

$1.7 million, all for regulatory

familiarization. There will be no

additional costs incurred in subsequent

years.

The Department determined that the

rule will result in Year 1 total costs for

the private sector of $369.2 million, all

of them incurred for regulatory

familiarization. The Department

included all independent contractors in

the private sector total regulatory

familiarization costs. There will be no

additional costs incurred in subsequent

years.

UMRA requires agencies to estimate

the effect of a regulation on the national

economy if such estimates are

reasonably feasible and the effect is

relevant and material.

269

However, OMB

guidance on this requirement notes that

such macroeconomic effects tend to be

measurable in nationwide econometric

models only if the economic effect of

the regulation reaches 0.25 percent to

0.5 percent of Gross Domestic Product

(GDP), or in the range of $53.6 billion

to $107.2 billion (using 2019 GDP).

270

A

regulation with a smaller aggregate

effect is not likely to have a measurable

effect in macroeconomic terms, unless it

is highly focused on a particular

geographic region or economic sector,

which is not the case with this rule.

The Department’s RIA estimates that

the total costs of the final rule will be

$369.2 million. Given OMB’s guidance,

the Department has determined that a

full macroeconomic analysis is not

likely to show that these costs would

have any measurable effect on the

economy.

Many commenters claim that the rule

will result in costs to Federal and state

governments in the form of increased

public assistance and decreased tax

revenue. The Department discussed

these potential costs in the RIA and

directs the reader to Section VI(E)(2)(ii).

The State AGs stated that the

Department failed to include the

increased administrative and

enforcement costs to states due to the

change in the standard for determining

independent contractor status under the

FLSA. They wrote that states ‘‘would

need to invest time and resources into

training agency employees and

educating the public,’’ particularly in

states with laws that are more restrictive

than the economic reality test. States do

not enforce Federal laws and therefore

have no need to train their personnel in

the enforcement of the FLSA or the

Department’s regulations. There is also

no need for states to be ‘‘educating’’ the

public about FLSA regulations—aside

from pointing out that Federal law may

impose different requirements than state

labor laws. Finally, under the nation’s

federalist system, states may and often

do enact and enforce labor standards

and are more restrictive than Federal

standards. A state’s decision to do so,

however, rests with the state because no

state is forced to enact labor standards

that are stricter than the Federal

standard. Any costs associated with

implementing a stricter standard,

including training and education, reflect

the free choice of the individual state,

and not the existence of a different

Federal standard. As such, costs that a

state choose to bear in enacting and

enforcing their own laws are the result

of the state’s own decision, and are

outside the scope of the unfunded

mandate concept.

C. Least Burdensome Option Explained

The Department believes that it has

chosen the least burdensome but still

cost-effective methodology to clarify the

FLSA’s distinction between employees

and independent contractors. Although

the regulation will impose costs for

regulatory familiarization, the

Department believes that its proposal

would reduce the overall burden on

organizations by simplifying and

clarifying the analysis for determining

whether a worker is classified as an

employee or an independent contractor

under the FLSA. The Department

believes that, after familiarization, this

rule will reduce the time spent by

organizations to determine whether a

worker is an independent contractor.

Moreover, the additional clarification

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could promote innovation and certainty

in business relationships. The AFPF

agreed ‘‘that the Department has

adequately analyzed potential

alternatives as well as selected the least

burdensome option under the Unfunded

Mandates Reform Act of 1995.’’

IX. Effects on Families

The undersigned hereby certifies that

the proposed rule would not adversely

affect the well-being of families, as

discussed under section 654 of the

Treasury and General Government

Appropriations Act, 1999.

List of Subjects

29 CFR Part 780

Agriculture, Child labor, Wages.

29 CFR Part 788

Forests and forest products, Wages.

29 CFR Part 795

Employment, Wages.

Signed at Washington, DC, this 31st day of

December, 2020.

Cheryl M. Stanton,

Administrator, Wage and Hour Division.

For the reasons set out in the

preamble, the Department of Labor

amends 29 CFR chapter V as follows:

PART 780—EXEMPTIONS

APPLICABLE TO AGRICULTURE,

PROCESSING OF AGRICULTURAL

COMMODITIES, AND RELATED

SUBJECTS UNDER THE FAIR LABOR

STANDARDS ACT

■1. The authority citation for part 780

continues to read as follows:

Authority: Secs. 1–19, 52 Stat. 1060, as

amended; 29 U.S.C. 201–219.

■2. Amend § 780.330 by revising

paragraph (b) to read as follows:

§ 780.330 Sharecroppers and tenant

farmers.

* * * * *

(b) In determining whether such

individuals are employees or

independent contractors, the criteria

laid down in §§ 795.100 through

795.110 of this chapter are used.

* * * * *

PART 788—FORESTRY OR LOGGING

OPERATIONS IN WHICH NOT MORE

THAN EIGHT EMPLOYEES ARE

EMPLOYED

■3. The authority citation for part 788

continues to read as follows:

Authority: Secs. 1–19, 52 Stat. 1060, as

amended; 29 U.S.C. 201–219.

■4. Amend § 788.16 by revising

paragraph (a) to read as follows:

§ 788.16 Employment relationship.

(a) In determining whether

individuals are employees or

independent contractors, the criteria

laid down in §§ 795.100 through

795.110 of this chapter are used.

* * * * *

■5. Add part 795 to subchapter B to

read as follows:

PART 795—EMPLOYEE OR

INDEPENDENT CONTRACTOR

CLASSIFICATION UNDER THE FAIR

LABOR STANDARDS ACT

Sec.

795.100 Introductory statement.

795.105 Determining employee and

independent contractor classification

under the FLSA.

795.110 Primacy of actual practice.

795.115 Examples of analyzing economic

reality factors.

795.120 Severability.

Authority: 52 Stat. 1060, as amended; 29

U.S.C. 201–219.

§ 795.100 Introductory statement.

This part contains the Department of

Labor’s general interpretations of the

text governing individuals’

classification as employees or

independent contractors under the Fair

Labor Standards Act (FLSA or Act). See

29 U.S.C. 201–19. The Administrator of

the Wage and Hour Division will use

these interpretations to guide the

performance of his or her duties under

the Act, and intends the interpretations

to be used by employers, employees,

and courts to understand employers’

obligations and employees’ rights under

the Act. To the extent that prior

administrative rulings, interpretations,

practices, or enforcement policies

relating to classification as an employee

or independent contractor under the Act

are inconsistent or in conflict with the

interpretations stated in this part, they

are hereby rescinded. The

interpretations stated in this part may be

relied upon in accordance with section

10 of the Portal-to-Portal Act, 29 U.S.C.

251–262, notwithstanding that after any

such act or omission in the course of

such reliance, any such interpretation in

this part ‘‘is modified or rescinded or is

determined by judicial authority to be

invalid or of no legal effect.’’ 29 U.S.C.

259.

§ 795.105 Determining employee and

independent contractor classification under

the FLSA.

(a) Independent contractors are not

employees under the Act. An individual

who renders services to a potential

employer—i.e., a putative employer or

alleged employer—as an independent

contractor is not that potential

employer’s employee under the Act. As

such, sections 6, 7, and 11 of the Act,

which impose obligations on employers

regarding their employees, are

inapplicable. Accordingly, the Act does

not require a potential employer to pay

an independent contractor either the

minimum wage or overtime pay under

sections 6 or 7. Nor does section 11 of

the Act require a potential employer to

keep records regarding an independent

contractor’s activities.

(b) Economic dependence as the

ultimate inquiry. An ‘‘employee’’ under

the Act is an individual whom an

employer suffers, permits, or otherwise

employs to work. 29 U.S.C. 203(e)(1),

(g). An employer suffers or permits an

individual to work as an employee if, as

a matter of economic reality, the

individual is economically dependent

on that employer for work. Rutherford

Food Corp. v. McComb, 331 U.S. 722,

727 (1947); Bartels v. Birmingham, 332

U.S. 126, 130 (1947). An individual is

an independent contractor, as

distinguished from an ‘‘employee’’

under the Act, if the individual is, as a

matter of economic reality, in business

for him- or herself.

(c) Determining economic

dependence. The economic reality

factors in paragraph (d) of this section

guide the determination of whether the

relationship between an individual and

a potential employer is one of economic

dependence and therefore whether an

individual is properly classified as an

employee or independent contractor.

These factors are not exhaustive, and no

single factor is dispositive. However, the

two core factors listed in paragraph

(d)(1) of this section are the most

probative as to whether or not an

individual is an economically

dependent ‘‘employee,’’ 29 U.S.C.

203(e)(1), and each therefore typically

carries greater weight in the analysis

than any other factor. Given these two

core factors’ greater probative value, if

they both point towards the same

classification, whether employee or

independent contractor, there is a

substantial likelihood that is the

individual’s accurate classification. This

is because other factors are less

probative and, in some cases, may not

be probative at all, and thus are highly

unlikely, either individually or

collectively, to outweigh the combined

probative value of the two core factors.

(d) Economic reality factors—(1) Core

factors—(i) The nature and degree of

control over the work. This factor

weighs towards the individual being an

independent contractor to the extent the

individual, as opposed to the potential

employer, exercises substantial control

over key aspects of the performance of

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the work, such as by setting his or her

own schedule, by selecting his or her

projects, and/or through the ability to

work for others, which might include

the potential employer’s competitors. In

contrast, this factor weighs in favor of

the individual being an employee under

the Act to the extent the potential

employer, as opposed to the individual,

exercises substantial control over key

aspects of the performance of the work,

such as by controlling the individual’s

schedule or workload and/or by directly

or indirectly requiring the individual to

work exclusively for the potential

employer. Requiring the individual to

comply with specific legal obligations,

satisfy health and safety standards, carry

insurance, meet contractually agreed-

upon deadlines or quality control

standards, or satisfy other similar terms

that are typical of contractual

relationships between businesses (as

opposed to employment relationships)

does not constitute control that makes

the individual more or less likely to be

an employee under the Act.

(ii) The individual’s opportunity for

profit or loss. This factor weighs

towards the individual being an

independent contractor to the extent the

individual has an opportunity to earn

profits or incur losses based on his or

her exercise of initiative (such as

managerial skill or business acumen or

judgment) or management of his or her

investment in or capital expenditure on,

for example, helpers or equipment or

material to further his or her work.

While the effects of the individual’s

exercise of initiative and management of

investment are both considered under

this factor, the individual does not need

to have an opportunity for profit or loss

based on both for this factor to weigh

towards the individual being an

independent contractor. This factor

weighs towards the individual being an

employee to the extent the individual is

unable to affect his or her earnings or is

only able to do so by working more

hours or faster.

(2) Other factors—(i) The amount of

skill required for the work. This factor

weighs in favor of the individual being

an independent contractor to the extent

the work at issue requires specialized

training or skill that the potential

employer does not provide. This factor

weighs in favor of the individual being

an employee to the extent the work at

issue requires no specialized training or

skill and/or the individual is dependent

upon the potential employer to equip

him or her with any skills or training

necessary to perform the job.

(ii) The degree of permanence of the

working relationship between the

individual and the potential employer.

This factor weighs in favor of the

individual being an independent

contractor to the extent the work

relationship is by design definite in

duration or sporadic, which may

include regularly occurring fixed

periods of work, although the seasonal

nature of work by itself would not

necessarily indicate independent

contractor classification. This factor

weighs in favor of the individual being

an employee to the extent the work

relationship is instead by design

indefinite in duration or continuous.

(iii) Whether the work is part of an

integrated unit of production. This

factor weighs in favor of the individual

being an employee to the extent his or

her work is a component of the potential

employer’s integrated production

process for a good or service. This factor

weighs in favor of an individual being

an independent contractor to the extent

his or her work is segregable from the

potential employer’s production

process. This factor is different from the

concept of the importance or centrality

of the individual’s work to the potential

employer’s business.

(iv) Additional factors. Additional

factors may be relevant in determining

whether an individual is an employee or

independent contractor for purposes of

the FLSA, but only if the factors in some

way indicate whether the individual is

in business for him- or herself, as

opposed to being economically

dependent on the potential employer for

work.

§ 795.110 Primacy of actual practice.

In evaluating the individual’s

economic dependence on the potential

employer, the actual practice of the

parties involved is more relevant than

what may be contractually or

theoretically possible. For example, an

individual’s theoretical abilities to

negotiate prices or to work for

competing businesses are less

meaningful if, as a practical matter, the

individual is prevented from exercising

such rights. Likewise, a business’

contractual authority to supervise or

discipline an individual may be of little

relevance if in practice the business

never exercises such authority.

§ 795.115 Examples of analyzing economic

reality factors.

(a) The following illustrative

examples demonstrate how the factors

listed in § 795.105(d) may be analyzed

under the facts presented and are

limited to substantially similar factual

situations.

(b)(1)(i) Example. An individual is the

owner and operator of a tractor-trailer

and performs transportation services for

a logistics company. The owner-

operator substantially controls the key

aspects of the work. However, the

logistics company has installed, at its

own expense, a device that limits the

maximum speed of the owner-operator’s

vehicle and monitors the speed through

GPS. The company limits the owner-

operator’s speed in order to comply

with federally mandated motor carrier

safety regulations and to ensure that she

complies with local traffic laws. The

company also requires the owner-

operator to meet certain contractually

agreed-upon delivery deadlines, and her

contract includes agreed-upon

incentives for meeting, and penalties for

missing, the deadlines.

(ii) Application. The owner-operator

exercises substantial control over key

aspects of her work, indicating

independent contractor status. The fact

that the company has installed a device

that limits and monitors the speed of the

owner-operator’s vehicle does not

change the above conclusion. This

measure is implemented in order to

comply with specific legal obligations

and to ensure safety, and thus under

§ 795.105(d)(1)(i) would not constitute

control that makes the owner-operator

more or less likely to be an employee

under the Act. The contractually agreed-

upon delivery deadlines, incentives,

and penalties are typical of contractual

relationships between businesses and

likewise would not constitute control

that makes the owner-operator more or

less likely to be an employee under the

Act.

(2)(i) Example. An individual accepts

assignments from a company that

provides an app-based service linking

those who need home-repair work with

those who perform home-repair work.

The individual is able to meaningful

increase his earnings by exercising

initiative and business acumen and by

investing in his own equipment. The

company, however, has invested

millions of dollars in developing and

maintaining the app, marketing itself,

maintaining the security of information

submitted by actual and prospective

customers and workers, and monitoring

customer satisfaction with the work

performed.

(ii) Application. The opportunity for

profit or loss factor favors independent

contractor status for the individual,

despite the substantial difference in the

monetary value of the investments made

by each party. While the company may

have invested substantially more in its

business, the value of that investment is

not relevant in determining whether the

individual has a meaningful

opportunity for profit or loss through

his initiative, investment, or both.

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(3)(i) Example. An individual worker

works full time performing home

renovation and repair services for a

residential construction company. She

is also the part owner of a food truck,

which she operates on weekends. In

performing the construction work, the

worker is paid a fixed hourly rate, and

the company determines how many and

which tasks she performs. Her food

truck recently became very popular and

has generated substantial profits for her.

(ii) Application. With regard to the

construction work, the worker does not

have a meaningful opportunity for profit

or loss based on her exercise of

initiative or investment, indicating

employee status. She is unable to profit,

i.e., increase her earnings, by exercising

initiative or managing investments

because she is paid a fixed hourly rate

and the company determines the

assignment of work. While she earns

substantial profits through her food

truck, that is a separate business from

her work in the construction industry,

and therefore is not relevant to the

question of whether she is an employee

of the construction company or in

business for herself in the construction

industry.

(4)(i) Example. A housekeeper works

for a ski resort every winter. At the end

of each winter, he stops working for the

ski resort because the resort shuts down.

At the beginning of each of the past

several winters, the housekeeper

returned to his prior position at the ski

resort without formally applying or

interviewing.

(ii) Application. The housekeeper has

a long-term and indefinite work

relationship with the ski resort under

the permanence factor, which weighs in

favor of classification as an employee.

That his periods of working for the ski

resort end at the end of each winter is

a result of the seasonal nature of the ski

industry and is thus not indicative of a

sporadic relationship. The fact that the

housekeeper returns to his prior

position each new season indicates that

his relationship with ski resort does not

end and is indefinite as a matter of

economic reality.

(5)(i) Example. An editor works part-

time for a newspaper. The editor works

from home and is responsible for

assigning and reviewing many articles

published by the newspaper. Sometimes

she also writes or rewrites articles. The

editor is responsible for determining the

layout and order in which all articles

appear in the newspaper’s print and

online editions. She makes assignment

and lay-out decisions in coordination

with several full-time editors who make

similar decisions with respect to

different articles in the same publication

and who are employees of the

newspaper.

(ii) Application. The editor is part of

an integrated unit of production of the

newspaper because she is involved in

the entire production process of the

newspaper, including assigning,

reviewing, drafting, and laying out

articles. This factor points in the

direction of her being an employee of

the newspaper. This conclusion is

further supported by the fact that the

editor performs the same work as

employees of the newspaper in

coordination with those employees. The

fact that she does not physically work

at the newspaper’s office does not

outweigh these more probative

considerations of the integrated unit

factor.

(6)(i) Example. A journalist writes

articles for a newspaper on a freelance

basis. The journalist does not have an

office and generally works from home.

He submits an article to the newspaper

once every 2 to 3 weeks, which the

newspaper may accept or reject. The

journalist sometimes corresponds with

the newspaper’s editor regarding what

to write about or regarding revisions to

the articles that he submits, but he does

not otherwise communicate or work

with any of the newspaper’s employees.

The journalist never assigns articles to

others nor does he review or revise

articles that others submit. He is not

responsible for determining where his

article or any other articles appear in the

newspaper’s print and online editions.

(ii) Application. The journalist is not

part of an integrated unit of production

of the newspaper, indicating

independent contractor status. His work

is limited to the specific articles that he

submits and is completely segregated

from other parts of the newspaper’s

processes that serve its specific, unified

purpose of producing newspapers. It is

not relevant in analyzing this factor that

the writing of articles is an important

part of producing newspapers. Likewise,

the fact that he works at home does not

strongly indicate either status, because

the nature of the journalist’s work is

such that the physical location where it

is performed is largely irrelevant.

§ 795.120 Severability.

If any provision of this part is held to

be invalid or unenforceable by its terms,

or as applied to any person or

circumstance, or stayed pending further

agency action, the provision shall be

construed so as to continue to give the

maximum effect to the provision

permitted by law, unless such holding

shall be one of utter invalidity or

unenforceability, in which event the

provision shall be severable from this

part and shall not affect the remainder

thereof.

[FR Doc. 2020–29274 Filed 1–6–21; 8:45 am]

BILLING CODE 4510–27–P

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Citation	86 FR 1168
Record Number	2020-29274
Published date	07 January 2021
Section	Rules and Regulations
Court	Labor Department,Wage And Hour Division

Independent Contractor Status Under the Fair Labor Standards Act

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