[Federal Register Volume 89, Number 7 (Wednesday, January 10, 2024)]
[Rules and Regulations]
[Pages 1638-1743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00067]
[[Page 1637]]
Vol. 89
Wednesday,
No. 7
January 10, 2024
Part II
Department of Labor
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Wage and Hour Division
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29 CFR Parts 780, 788, and 795
Employee or Independent Contractor Classification Under the Fair Labor
Standards Act; Final Rule
Federal Register / Vol. 89 , No. 7 / Wednesday, January 10, 2024 /
Rules and Regulations
[[Page 1638]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Parts 780, 788, and 795
RIN 1235-AA43
Employee or Independent Contractor Classification Under the Fair
Labor Standards Act
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Final rule.
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SUMMARY: The U.S. Department of Labor (the Department) is modifying
Wage and Hour Division regulations to replace its analysis for
determining employee or independent contractor classification under the
Fair Labor Standards Act (FLSA or Act) with an analysis that is more
consistent with judicial precedent and the Act's text and purpose.
DATES: This final rule is effective on March 11, 2024.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a
toll-free number). Alternative formats are available upon request by
calling 1-866-487-9243. If you are deaf, hard of hearing, or have a
speech disability, please dial 7-1-1 to access telecommunications relay
services.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or logging onto WHD's website for a nationwide listing of WHD
district and area offices at https://www.dol.gov/whd/america2.htm.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
This final rule addresses how to determine whether a worker is
properly classified as an employee or independent contractor under the
Fair Labor Standards Act (FLSA or Act). Congress enacted the FLSA in
1938 to eliminate ``labor conditions detrimental to the maintenance of
the minimum standard of living necessary for health, efficiency, and
general well-being of workers.'' \1\ To this end, the FLSA generally
requires covered employers to pay nonexempt employees at least the
Federal minimum wage for all hours worked and at least one and one-half
times the employee's regular rate of pay for every hour worked over 40
in a workweek. The Act also requires covered employers to maintain
certain records regarding employees and prohibits retaliation against
employees who are discharged or discriminated against after, for
example, filing a complaint regarding their pay. However, the FLSA's
protections do not apply to independent contractors.
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\1\ 29 U.S.C. 202.
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As used in this rule, the term ``independent contractor'' refers to
workers who, as a matter of economic reality, are not economically
dependent on an employer for work and are in business for themselves.
Such workers play an important role in the economy and are commonly
referred to by different names, including independent contractor, self-
employed, and freelancer. This rule is not intended to disrupt the
businesses of independent contractors who are, as a matter of economic
reality, in business for themselves.
Determining whether an employment relationship exists under the
FLSA begins with the Act's definitions. Although the FLSA does not
define the term ``independent contractor,'' it contains expansive
definitions of ``employer,'' ``employee,'' and ``employ.'' ``Employer''
is defined to ``include[ ] any person acting directly or indirectly in
the interest of an employer in relation to an employee,'' ``employee''
is defined as ``any individual employed by an employer,'' and
``employ'' is defined to ``include[ ] to suffer or permit to work.''
\2\ As detailed below, courts have developed an analysis that
recognizes that independent contractors are not encompassed within
these definitions.
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\2\ 29 U.S.C. 203(d), (e)(1), (g).
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Since the 1940s, the Department and courts have applied an economic
reality test to determine whether a worker is an employee or an
independent contractor under the FLSA, grounded in the Act's broad
understanding of employment. The ultimate inquiry is whether, as a
matter of economic reality, the worker is economically dependent on the
employer for work (and is thus an employee) or is in business for
themself (and is thus an independent contractor). In assessing economic
dependence, courts and the Department have historically conducted a
totality-of-the-circumstances analysis, considering multiple factors to
determine whether a worker is an employee or an independent contractor,
with no factor or factors having predetermined weight. There is
significant and widespread uniformity among federal courts of appeals
in the adoption and application of the economic reality test, although
there is slight variation as to the number of factors considered or how
the factors are framed. These factors generally include the opportunity
for profit or loss, investment, permanency, control, whether the work
is an integral part of the employer's business, and skill and
initiative.
In January 2021, the Department published a rule titled
``Independent Contractor Status Under the Fair Labor Standards Act''
(2021 IC Rule), providing guidance on the classification of independent
contractors under the FLSA applicable to workers and businesses in any
industry.\3\ The 2021 IC Rule marked a departure from the consistent,
longstanding adoption and application of the economic reality test by
courts and the Department of how to determine whether a worker is an
employee or an independent contractor under the FLSA. It identified
five economic reality factors to guide the inquiry into a worker's
status as an employee or independent contractor.\4\ Two of the five
identified factors--the nature and degree of control over the work and
the worker's opportunity for profit or loss--were designated as ``core
factors'' that were the most probative and carried greater weight in
the analysis. The 2021 IC Rule stated that if these two core factors
pointed towards the same classification, there was a substantial
likelihood that it was the worker's accurate classification.\5\ The
2021 IC Rule also identified three less probative non-core factors: the
amount of skill required for the work, the degree of permanence of the
working relationship between the worker and the potential employer, and
whether the work is part of an integrated unit of production.\6\ The
2021 IC Rule stated that it was ``highly unlikely'' that these three
non-core factors could outweigh the combined probative value of the two
core factors.\7\ The 2021 IC Rule also
[[Page 1639]]
limited consideration of investment and initiative to the opportunity
for profit or loss factor in a way that narrowed, in at least some
circumstances, the extent to which investment and initiative are
considered. The facts to be considered under other factors (such as
control) were also narrowed, and the factor that considers whether the
work is integral to the employer's business was limited to whether the
work was part of an integrated unit of production.\8\ Finally, the 2021
IC Rule provided that the actual practice of the parties involved was
more relevant than what may be contractually or theoretically
possible.\9\
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\3\ 86 FR 1168. The Office of the Federal Register did not amend
the Code of Federal Regulations (CFR) to include the regulations
from the 2021 IC Rule because, as explained elsewhere in this
section, the Department first delayed and then withdrew the 2021 IC
Rule before it became effective. A district court decision later
vacated the Department's rules to delay and withdraw the 2021 IC
Rule, and the Department has (since that decision) conducted
enforcement in accordance with that decision while the 2021 IC Rule
has been in effect.
\4\ Id. at 1246-47 (Sec. 795.105(d)).
\5\ Id. at 1246 (Sec. 795.105(c)).
\6\ Id. at 1247 (Sec. 795.105(d)(2)).
\7\ Id. at 1246 (Sec. 795.105(c)).
\8\ Id. at 1246-47 (Sec. 795.105(d)(1) and (d)(2)(iii)).
\9\ Id. at 1247-48 (Sec. 795.110).
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The effective date of the 2021 IC Rule was March 8, 2021. On March
4, 2021, the Department published a rule delaying the effective date of
the 2021 IC Rule (Delay Rule) and on May 6, 2021, it published a rule
withdrawing the 2021 IC Rule (Withdrawal Rule). On March 14, 2022, in a
lawsuit challenging the Department's delay and withdrawal of the 2021
IC Rule, a Federal district court in the Eastern District of Texas
issued a decision vacating the Delay and Withdrawal Rules.\10\ The
district court concluded that the 2021 IC Rule became effective on the
original effective date of March 8, 2021.
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\10\ See Coal. for Workforce Innovation v. Walsh, No. 1:21-CV-
130, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022), appeal filed, No.
22-40316 (5th Cir. May 13, 2022) (``CWI v. Walsh'').
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On October 13, 2022, the Department published a Notice of Proposed
Rulemaking (NPRM) regarding employee or independent contractor
classification under the FLSA, proposing to rescind and replace the
2021 IC Rule.\11\ The Department explained in its proposal that upon
further consideration, the Department believed that the 2021 IC Rule
did not fully comport with the FLSA's text and purpose as interpreted
by courts and departed from decades of case law applying the economic
reality test. The NPRM identified provisions of the 2021 IC Rule that
were in tension with this case law--such as designating two ``core
factors'' as most probative and predetermining that they carry greater
weight in the analysis, considering investment and initiative only in
the opportunity for profit or loss factor, and excluding consideration
of whether the work performed is central or important to the employer's
business. The NPRM stated that these provisions narrowed the economic
reality test by limiting the facts that may be considered as part of
the test, facts which the Department believes are relevant in
determining whether a worker is economically dependent on the employer
for work or in business for themself.
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\11\ 87 FR 62218.
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After careful consideration, the Department decided it was
appropriate to move forward with a proposed rescission of the 2021 IC
Rule and a replacement regulation. As explained in the NPRM, the
Department believed that retaining the 2021 IC Rule would have a
confusing and disruptive effect on workers and businesses alike due to
its departure from case law describing and applying the multifactor
economic reality test as a totality-of-the-circumstances test. Further,
because the 2021 IC Rule departed from legal precedent, it was not
clear whether courts would adopt its analysis--a question that could
take years of appellate litigation in different federal courts of
appeals to sort out, resulting in more uncertainty as to the applicable
test. The Department also explained in the NPRM that it believed the
2021 IC Rule's departure from the longstanding test applied by the
courts could result in greater confusion among employers in applying
the new analysis, which could place workers at greater risk of
misclassification as independent contractors due to the new analysis
being applied improperly, and thus could negatively affect both the
workers and competing businesses that correctly classify their
employees.
The initial deadline for interested parties to submit comments on
the NPRM was November 28, 2022. In response to requests for an
extension of the time period for filing written comments, the
Department lengthened the comment period an additional 15 days to
December 13, 2022, resulting in a total comment period of 61 days.\12\
The Department received approximately 55,400 comments on the proposed
rule.
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\12\ 87 FR 64749.
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As described below, after considering the views expressed by
commenters, the Department is finalizing its proposal with some
modifications. For the reasons explained in the NPRM and detailed in
section III, the Department concludes that it is appropriate to rescind
the 2021 IC Rule and set forth an analysis for determining employee or
independent contractor status under the Act that is more consistent
with existing judicial precedent and the Department's longstanding
guidance prior to the 2021 IC Rule.
Summary of the Major Provisions of the Final Rule
In addition to rescinding the 2021 IC Rule, the Department is
adding part 795. Specifically, this final rule modifies the regulatory
text published on January 7, 2021, at 86 FR 1246 through 1248,
addressing whether workers are employees or independent contractors
under the FLSA. Instead of using the ``core factors'' set forth in the
2021 IC Rule, this final rule returns to a totality-of-the-
circumstances analysis of the economic reality test in which the
factors do not have a predetermined weight and are considered in view
of the economic reality of the whole activity. In addition to this
critical reversion to the longstanding analysis that preceded the 2021
IC Rule, this final rule returns to the longstanding framing of
investment as its own separate factor, and the integral factor as one
that looks to whether the work performed is an integral part of a
potential employer's business rather than part of an integrated unit of
production. The final rule also provides broader discussion of how
scheduling, remote supervision, price setting, and the ability to work
for others should be considered under the control factor, and it allows
for consideration of reserved rights while removing the provision in
the 2021 IC Rule that minimized the relevance of retained rights.
Further, the final rule discusses exclusivity in the context of the
permanency factor, and initiative in the context of the skill factor.
While the above modifications from the 2021 IC Rule were all
proposed in the NPRM, the Department also made several adjustments to
the proposed regulations after consideration of the comments received.
Notably, as discussed further below, the portion of the Department's
proposal for the control factor stating that control implemented for
purposes of complying with legal obligations may be indicative of
control generated many comments. The Department is modifying the
proposed language to address confusion and concern regarding potential
unintended consequences.
Additionally, the Department received many comments regarding the
investment factor. In response to a number of comments concerning the
Department's proposal to consider the relative investments of the
worker and the potential employer, the Department is clarifying in the
final rule that consideration of the relative investments of the worker
and the potential employer should be compared not only in terms of
dollar value or size of the investments, but should focus on whether
the worker is making similar types of investments as the employer
(albeit on a smaller scale) that would suggest that the worker is
operating independently. Further, in response to
[[Page 1640]]
comments regarding the unilateral nature of some costs imposed by
potential employers on workers, which could appear to be capital or
entrepreneurial in nature, the Department is including language
recognizing that costs that are unilaterally imposed are not indicative
of a worker's capital or entrepreneurial investment.
Further clarifications and adjustments to the regulatory text that
reflect a range of comments made by employers; workers; those who view
themselves as independent contractors, self-employed, or freelancers;
labor unions; legal services providers; policy and research
organizations; and counsel for both businesses and employees have been
made as well and are discussed under the section-by-section analysis
that follows.
The final rule reiterates that part 795 contains the Department's
general interpretations for determining whether workers are employees
or independent contractors under the FLSA. Further, it reiterates that
economic dependence is the ultimate inquiry, meaning that a worker is
an independent contractor as opposed to an employee under the Act if
the worker is, as a matter of economic reality, in business for
themself. The final rule explains that the economic reality test is
comprised of multiple factors that are tools or guides to conduct the
totality-of-the-circumstances analysis to determine economic
dependence. The six factors described in the regulatory text should
guide an assessment of the economic realities of the working
relationship, but no one factor or subset of factors is necessarily
dispositive. The final rule provides guidance on how six economic
reality factors should be considered--opportunity for profit or loss
depending on managerial skill, investments by the worker and the
potential employer, the degree of permanence of the work relationship,
the nature and degree of control, the extent to which the work
performed is an integral part of the potential employer's business, and
skill and initiative. Just as under the 2021 IC Rule, and in accordance
with longstanding precedent and guidance, additional factors may also
be considered if they are relevant to the overall question of economic
dependence.
The Department recognizes that this return to a totality-of-the-
circumstances analysis in which the economic reality factors are not
assigned a predetermined weight and each factor is given full
consideration represents a change from the 2021 IC Rule. However, the
Department believes that this approach is the most beneficial because
it is aligned with the Department's decades-long approach (prior to the
2021 IC Rule) as well as with federal appellate case law, and is more
consistent with the Act's text and purpose as interpreted by the
courts. The Department believes that this final rule will provide more
consistent guidance to employers as they determine whether workers are
economically dependent on the employer for work or are in business for
themselves, as well as useful guidance to workers on whether they are
correctly classified as employees or independent contractors.
Accordingly, the Department believes that the guidance provided in this
final rule will help protect employees from misclassification.
Moreover, this final rule recognizes that independent contractors serve
an important role in our economy and provides a consistent approach for
those businesses that engage (or wish to engage) independent
contractors as well as for those who wish to work as independent
contractors.
II. Background
A. Relevant FLSA Definitions
Enacted in 1938, the FLSA generally requires that covered employers
pay nonexempt employees at least the Federal minimum wage (presently
$7.25 per hour) for every hour worked, and at least one and one-half
times the employee's regular rate of pay for all hours worked beyond 40
in a workweek.\13\ Among other protections, the FLSA also regulates the
employment of children,\14\ prohibits employers from keeping employee
tips,\15\ and requires employers to provide reasonable break time and a
place for covered nursing employees to express breast milk at work.\16\
Finally, the FLSA requires covered employers to ``make, keep, and
preserve'' certain records regarding employees, and prohibits
retaliation against employees who engaged in protected activity, such
as filing a complaint regarding their pay.\17\
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\13\ 29 U.S.C. 206(a), 207(a).
\14\ 29 U.S.C. 212.
\15\ 29 U.S.C. 203(m)(2)(B).
\16\ See 29 U.S.C. 218d (added by the PUMP for Nursing Mothers
Act, Public Law 117-328, 136 Stat. 4459 (Dec. 29, 2022)).
\17\ 29 U.S.C. 211(c), 215(a)(3).
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The FLSA's wage-and-hour protections apply to employees. In
relevant part, section 3(e) of the Act defines the term ``employee'' as
``any individual employed by an employer.'' \18\ Section 3(d) defines
the term ``employer'' to ``includ[e] any person acting directly or
indirectly in the interest of an employer in relation to an employee.''
\19\ Finally, section 3(g) provides that the term `` `[e]mploy'
includes to suffer or permit to work.'' \20\
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\18\ 29 U.S.C. 203(e)(1).
\19\ 29 U.S.C. 203(d).
\20\ 29 U.S.C. 203(g).
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Interpreting these provisions, the U.S. Supreme Court has stated
that ``[a] broader or more comprehensive coverage of employees within
the stated categories would be difficult to frame,'' and that ``the
term `employee' under the FLSA had been given `the broadest definition
that has ever been included in any one act.' '' \21\ In particular, the
Court has noted the ``striking breadth'' of section 3(g)'s ``suffer or
permit'' language, observing that it ``stretches the meaning of
`employee' to cover some parties who might not qualify as such under a
strict application of traditional agency law principles.'' \22\ Thus,
the Court has repeatedly observed that the FLSA's scope of employment
is broader than the common law standard often applied to determine
employment status under other Federal laws.\23\
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\21\ United States v. Rosenwasser, 323 U.S. 360, 362, 363 n.3
(1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Hugo
Black)).
\22\ Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992).
\23\ Id.; see also, e.g., Walling v. Portland Terminal Co., 330
U.S. 148, 150-51 (1947) (``[I]n determining who are `employees'
under the Act, common law employee categories or employer-employee
classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall
within an employer-employee category.'') (citation omitted).
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At the same time, the Supreme Court has recognized that the Act was
``not intended to stamp all persons as employees.'' \24\ Among other
categories of workers excluded from FLSA coverage, the Court has
recognized that ``independent contractors'' fall outside the Act's
broad understanding of employment.\25\ Accordingly, the FLSA does not
require covered employers to pay an independent contractor the minimum
wage or overtime pay under sections 6(a) and 7(a) of the Act, or to
keep records regarding an independent contractor's work under section
11(c). However, merely ``putting on an `independent contractor' label
does not take [a] worker from the protection of the [FLSA].'' \26\
Courts have thus recognized a need to delineate between
[[Page 1641]]
employees, who fall under the protections of the FLSA, and independent
contractors, who do not.
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\24\ Portland Terminal, 330 U.S. at 152.
\25\ See, e.g., Rutherford Food Corp. v. McComb, 331 U.S. 722,
729 (1947) (noting that ``[t]here may be independent contractors who
take part in production or distribution who would alone be
responsible for the wages and hours of their own employees'').
\26\ Id.
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The FLSA does not define the term ``independent contractor.'' While
it is clear that section 3(g)'s ``suffer or permit'' language
contemplates a broader coverage of workers compared to what exists
under the common law, ``there is in the [FLSA] no definition that
solves problems as to the limits of the employer-employee relationship
under the Act.'' \27\ Therefore, in articulating the distinction
between FLSA-covered employees and independent contractors, courts rely
on a broad, multifactor ``economic reality'' analysis derived from
judicial precedent.\28\ Unlike the control-focused analysis for
independent contractors applied under the common law,\29\ the economic
reality test focuses more broadly on a worker's economic dependence on
an employer, considering the totality of the circumstances.
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\27\ Id. at 728.
\28\ Courts invoke the concept of ``economic reality'' in FLSA
employment contexts beyond independent contractor status. However,
as in prior rulemakings, this final rule refers to the ``economic
reality'' analysis or test for independent contractors as a
shorthand reference to the independent contractor analysis used by
courts for FLSA purposes.
\29\ In distinguishing between employees and independent
contractors under the common law, courts evaluate ``the hiring
party's right to control the manner and means by which the product
is accomplished.'' Community for Creative Non-Violence v. Reid, 490
U.S. 730, 751 (1989). ``Among the other factors relevant to this
inquiry are the skill required; the source of the instrumentalities
and tools; the location of the work; the duration of the
relationship between the parties; whether the hiring party has the
right to assign additional projects to the hired party; the extent
of the hired party's discretion over when and how long to work; the
method of payment; the hired party's role in hiring and paying
assistants; whether the work is part of the regular business of the
hiring party; whether the hiring party is in business; the provision
of employee benefits; and the tax treatment of the hired party.''
Id. (footnotes omitted).
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B. Development of the Economic Reality Test
1. Supreme Court Development of the Economic Reality Test
In a series of cases from 1944 to 1947, the U.S. Supreme Court
considered employee or independent contractor status under three
different Federal statutes that were enacted during the 1930s New Deal
Era--the FLSA, the National Labor Relations Act (NLRA), and the Social
Security Act (SSA)--and applied an economic reality test under all
three laws.
In the first of these cases, NLRB v. Hearst Publications, Inc., 322
U.S. 111 (1944), the Court considered the meaning of ``employee'' under
the NLRA, which defined the term to ``include any employee.'' \30\ In
relevant part, the Hearst Court rejected application of the common law
standard, noting that ``the broad language of the [NLRA's] definitions
. . . leaves no doubt that its applicability is to be determined
broadly, in doubtful situations, by underlying economic facts rather
than technically and exclusively by previously established legal
classifications.'' \31\
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\30\ 322 U.S. at 118-20; 29 U.S.C. 152(3).
\31\ Id. at 123-25, 129.
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On June 16, 1947, the Supreme Court decided United States v. Silk,
331 U.S. 704 (1947), addressing the distinction between employees and
independent contractors under the SSA. The Court favorably summarized
Hearst as setting forth ``economic reality,'' as opposed to ``technical
concepts'' of the common law standard alone, as the framework for
determining workers' classification, but acknowledged that not ``all
who render service to an industry are employees.'' \32\ Although the
Court found it to be ``quite impossible to extract from the [SSA] a
rule of thumb to define the limits of the employer-employe[e]
relationship,'' the Court identified five factors as ``important for
decision'': ``degrees of control, opportunities for profit or loss,
investment in facilities, permanency of relation[,] and skill required
in the claimed independent operation.'' \33\ The Court added that
``[n]o one [factor] is controlling nor is the list complete.'' \34\ The
Court went on to note that the workers in that case were ``from one
standpoint an integral part of the businesses'' of the employer,
supporting a conclusion that some of the workers in that case were
employees.\35\
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\32\ 331 U.S. at 712-14.
\33\ Id. at 716.
\34\ Id.
\35\ Id.
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The same day that the Supreme Court issued its decision in Silk, it
also issued Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947), in
which it affirmed a federal court of appeals decision that analyzed an
FLSA employment relationship based on its economic realities.\36\
Describing the FLSA as ``a part of the social legislation of the 1930s
of the same general character as the [NLRA] and the [SSA],'' the Court
opined that ``[d]ecisions that define the coverage of the employer-
Employee relationship under the Labor and Social Security acts are
persuasive in the consideration of a similar coverage under the
[FLSA].'' \37\ Accordingly, the Court rejected an approach based on
``isolated factors'' and again considered ``the circumstances of the
whole activity.'' \38\ The Court considered several of the factors that
it listed in Silk as they related to meat boners on a slaughterhouse's
production line, ultimately determining that the boners were
employees.\39\ The Court noted, among other things, that the boners did
a specialty job on the production line, had no business organization
that could shift to a different slaughter-house, and were best
characterized as ``part of the integrated unit of production under such
circumstances that the workers performing the task were employees of
the establishment.'' \40\
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\36\ 331 U.S. at 727.
\37\ Id. at 723-24.
\38\ Id. at 730.
\39\ See id.
\40\ Id. at 729-30.
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On June 23, 1947, one week after the Silk and Rutherford decisions,
the Court decided Bartels v. Birmingham, 332 U.S. 126 (1947), another
case involving employee or independent contractor status under the SSA.
Here again, the Court rejected application of the common law control
test, explaining that, under the SSA, employee status ``was not to be
determined solely by the idea of control which an alleged employer may
or could exercise over the details of the service rendered to his
business by the worker.'' \41\ Rather, employees under ``social
legislation'' such as the SSA are ``those who as a matter of economic
reality are dependent upon the business to which they render service.''
\42\ Thus, in addition to control, ``permanency of the relation, the
skill required, the investment [in] the facilities for work and
opportunities for profit or loss from the activities were also
factors'' to consider.\43\ Although the Court identified these specific
factors as relevant to the analysis, it explained that ``[i]t is the
total situation that controls'' the worker's classification under the
SSA.\44\
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\41\ 332 U.S. at 130.
\42\ Id.
\43\ Id.
\44\ Id.
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Following these Supreme Court decisions, Congress responded with
separate legislation to amend the NLRA and SSA's employment
definitions. First, in 1947, Congress amended the NLRA's definition of
``employee'' to clarify that the term ``shall not include any
individual having the status of an independent contractor.'' \45\ The
[[Page 1642]]
following year, Congress similarly amended the SSA to exclude from
employment ``any individual who, under the usual common-law rules
applicable in determining the employer-employee relationship, has the
status of an independent contractor.'' \46\ The Supreme Court
interpreted the amendments to the NLRA as having the same effect as the
explicit definition included in the SSA, which was to ensure that
employment status would be determined by common law agency principles,
rather than an economic reality test.\47\
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\45\ Labor Management Relations (Taft-Hartley) Act, 1947, Public
Law 80-101, sec. 101, 61 Stat. 136, 137-38 (1947) (codified as
amended at 29 U.S.C. 152(3)).
\46\ SSA of 1948, Public Law 80-642, sec. 2(a), 62 Stat. 438
(1948) (codified as amended at 26 U.S.C. 3121(d)).
\47\ See NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256
(1968) (noting that ``[t]he obvious purpose of'' the amendment to
the definition of employee under the NLRA ``was to have the Board
and the courts apply general agency principles in distinguishing
between employees and independent contractors under the Act'').
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Despite its amendments to the NLRA and SSA in response to Hearst
and Silk, Congress did not similarly amend the FLSA following the
Rutherford decision. Thus, when the Supreme Court revisited independent
contractor status under the FLSA several years later in Goldberg v.
Whitaker House Co-op., Inc., 366 U.S. 28 (1961), the Court affirmed
that `` `economic reality' rather than `technical concepts' '' remained
``the test of employment'' under the FLSA,\48\ quoting from its earlier
decisions in Silk and Rutherford. The Court in Whitaker House found
that certain homeworkers were ``not self-employed . . . [or]
independent, selling their products on the market for whatever price
they can command,'' but instead were ``regimented under one
organization, manufacturing what the organization desires and receiving
the compensation the organization dictates.'' \49\ Such facts, among
others, established that the homeworkers at issue were FLSA-covered
employees.
---------------------------------------------------------------------------
\48\ 366 U.S. at 33 (quoting from Silk, 331 U.S. at 713, and
Rutherford, 331 U.S. at 729).
\49\ Id. at 32.
---------------------------------------------------------------------------
Subsequently, in Nationwide Mutual Insurance Co. v. Darden, 503
U.S. 318 (1992), the Court again endorsed application of the economic
reality test to evaluate independent contractor status under the FLSA,
citing to Rutherford and emphasizing the broad ``suffer or permit''
language codified in section 3(g) of the Act.\50\
---------------------------------------------------------------------------
\50\ Darden, 503 U.S. at 325-26.
---------------------------------------------------------------------------
2. Application of the Economic Reality Test by Federal Courts of
Appeals
Since Rutherford, federal courts of appeals have applied the
economic reality test to distinguish independent contractors from
employees who are entitled to the FLSA's protections. Recognizing that
the ``suffer or permit'' language in section 3(g) of the FLSA provides
a more expansive scope of employment than that which exists at common
law, courts of appeals have followed the Supreme Court's instruction
that `` `employees are those who as a matter of economic realities are
dependent upon the business to which they render service.' '' \51\
---------------------------------------------------------------------------
\51\ Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir.
1976) (quoting Bartels, 332 U.S. at 130).
---------------------------------------------------------------------------
When determining whether a worker is an employee under the FLSA or
an independent contractor, federal courts of appeals apply an economic
reality test using the factors identified in Silk.\52\ No court of
appeals considers any one factor or combination of factors to
invariably predominate over the others.\53\ For example, the Eleventh
Circuit has explained that some of the factors ``which many courts have
used as guides in applying the economic reality test'' are: (1) the
degree of the alleged employer's right to control the manner in which
the work is to be performed; (2) the worker's opportunity for profit or
loss depending upon their managerial skill; (3) the worker's investment
in equipment or materials required for their task, or their employment
of helpers; (4) whether the service rendered requires a special skill;
(5) the degree of permanence of the working relationship; and (6) the
extent to which the service rendered is an integral part of the alleged
employer's business.\54\ Like other federal courts of appeals, the
Eleventh Circuit repeats the Supreme Court's explanation from Silk that
no one factor is controlling, nor is the list exhaustive.\55\
---------------------------------------------------------------------------
\52\ See Brock v. Superior Care, Inc., 840 F.2d 1054, 1058-59
(2d Cir. 1988); Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376,
1382-83 (3d Cir. 1985); McFeeley v. Jackson Street Ent., LLC, 825
F.3d 235, 241 (4th Cir. 2016); Pilgrim Equip., 527 F.2d at 1311;
Acosta v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th
Cir. 2019); Sec'y of Labor, U.S. Dep't of Labor v. Lauritzen, 835
F.2d 1529, 1534-35 (7th Cir. 1987); Walsh v. Alpha & Omega USA,
Inc., 39 F.4th 1078, 1082 (8th Cir. 2022); Real v. Driscoll
Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir. 1979); Acosta
v. Paragon Contractors Corp., 884 F.3d 1225, 1235 (10th Cir. 2018);
Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311-12 (11th Cir.
2013); Morrison v. Int'l Programs Consortium, Inc., 253 F.3d 5, 11
(D.C. Cir. 2001).
\53\ See, e.g., Parrish v. Premier Directional Drilling, L.P.,
917 F.3d 369, 380 (5th Cir. 2019) (stating that it ``is impossible
to assign to each of these factors a specific and invariably applied
weight'') (quoting Hickey v. Arkla Indus., Inc., 699 F.2d 748, 752
(5th Cir. 1983)); Scantland, 721 F.3d at 1312 n.2 (the relative
weight of each factor ``depends on the facts of the case'') (quoting
Santelices v. Cable Wiring, 147 F. Supp. 2d 1313, 1319 (S.D. Fla.
2001)); Martin v. Selker Bros., 949 F.2d 1286, 1293 (3d Cir. 1991)
(``It is a well-established principle that the determination of the
employment relationship does not depend on isolated factors . . .
neither the presence nor the absence of any particular factor is
dispositive.'').
\54\ Scantland, 721 F.3d at 1311-12.
\55\ Id. at 1312 n.2.
---------------------------------------------------------------------------
Some courts of appeals have applied the factors with some
variations. For example, the Fifth Circuit typically does not list the
``integral part'' factor as one of the considerations that guides its
analysis.\56\ However, recognizing that its list of enumerated factors
is not exhaustive, the Fifth Circuit has considered the extent to which
a worker's function is integral to a business as part of its economic
realities analysis.\57\ Similarly, the Second and D.C. Circuits vary in
that they describe the employee's opportunity for profit or loss and
the employee's investment as a single factor, but they still use the
same considerations as the other circuits to inform their economic
realities analysis.\58\
---------------------------------------------------------------------------
\56\ See Pilgrim Equip., 527 F.2d at 1311.
\57\ See Hobbs v. Petroplex Pipe & Constr., Inc., 946 F.3d 824,
836 (5th Cir. 2020) (considering ``the extent to which the pipe
welders' work was `an integral part' of Petroplex's business'').
Every other federal court of appeals that has decided an FLSA case
involving alleged independent contractors includes the ``integral
part'' factor among the list of enumerated economic reality factors.
See the cases cited supra at n.52 other than Pilgrim Equipment.
\58\ See, e.g., Franze v. Bimbo Bakeries USA, Inc., 826 F. App'x
74, 76 (2d Cir. 2020); Superior Care, 840 F.2d at 1058-59. The D.C.
Circuit has adopted the Second Circuit's articulation of the
factors, including treating opportunity for profit or loss and
investment as one factor. See Morrison, 253 F.3d at 11 (citing
Superior Care, 840 F.2d at 1058-59).
---------------------------------------------------------------------------
In sum, since the 1940s, federal courts have analyzed the question
of employee or independent contractor status under the FLSA using a
multifactor, totality-of-the-circumstances economic reality test, with
no factor or factors being dispositive. The courts have examined the
economic realities of the employment relationship to determine whether
the worker is economically dependent on the employer for work or is in
business for themself, even if they have varied slightly in their
articulations of the factors. Despite such variation, all courts have
looked to the factors first articulated in Silk as useful guideposts
while acknowledging that those factors are not exhaustive and should
not be applied mechanically.
3. The Department's Application of the Economic Reality Test
The Department has applied a multifactor economic reality test
since the Supreme Court's opinions in Rutherford and Silk. For example,
on June 23, 1949, the Wage and Hour Division (WHD) issued an opinion
letter
[[Page 1643]]
distilling six ``primary factors which the Court considered
significant'' in Rutherford and Silk: ``(1) the extent to which the
services in question are an integral part of the `employer[']s'
business; (2) the amount of the so-called `contractor's' investment in
facilities and equipment; (3) the nature and degree of control by the
principal; (4) opportunities for profit and loss; . . . (5) the amount
of initiative judgment or foresight required for the success of the
claimed independent enterprise[;] and [(6)] permanency of the
relation.'' \59\ The guidance cautioned that no single factor is
controlling, and ``[o]rdinarily a definite decision as to whether one
is an employee or an independent contractor under the [FLSA] cannot be
made in the absence of evidence as to [the worker's] actual day-to-day
working relationship with [their] principal. Clearly a written contract
does not always reflect the true situation.'' \60\
---------------------------------------------------------------------------
\59\ WHD Op. Ltr. (June 23, 1949).
\60\ Id.
---------------------------------------------------------------------------
Subsequent WHD opinion letters addressing employee or independent
contractor status under the FLSA have provided similar recitations of
the Silk factors, sometimes omitting one or more of the six factors
described in the 1949 opinion letter, and sometimes adding (or
substituting) a seventh factor: the worker's ``degree of independent
business organization and operation.'' \61\ Numerous opinion letters
have emphasized that employment status is ``not determined by the
common law standards relating to master and servant,'' and that ``[t]he
degree of control retained by the principal has been rejected as the
sole criterion to be applied.'' \62\
---------------------------------------------------------------------------
\61\ See, e.g., WHD Op. Ltr. (Oct. 12, 1965) (discussing degree
of independent business organization); WHD Op. Ltr. (Feb. 18, 1969)
(same); WHD Op. Ltr. FLSA-314 (Dec. 21, 1982) (discussing three of
the Silk factors); WHD Op. Ltr. FLSA-164 (Jan. 18, 1990) (discussing
four of the Silk factors).
\62\ See, e.g., WHD Op. Ltr. FLSA-106 (Feb. 8, 1956); WHD Op.
Ltr. (July 20, 1965); WHD Op. Ltr. (Sept. 1, 1967); WHD Op. Ltr.
(Feb. 18, 1969); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981); WHD Op. Ltr.
(June 5, 1995).
---------------------------------------------------------------------------
In 1962, the Department revised the regulations in 29 CFR part 788,
which generally provides interpretive guidance on the FLSA's exemption
for employees in small forestry or lumbering operations, and added a
provision addressing the distinction between employees and independent
contractors.\63\ Citing to Silk, Rutherford, and Bartels, the
regulation advised that ``an employee, as distinguished from a person
who is engaged in a business of his own, is one who `follows the usual
path of an employee' and is dependent on the business which he
serves.'' \64\ To ``aid in assessing the total situation,'' the
regulation then identified a partial list of ``characteristics of the
two classifications which should be considered,'' including ``the
extent to which the services rendered are an integral part of the
principal's business; the permanency of the relationship; the
opportunities for profit or loss; the initiative, judgment or foresight
exercised by the one who performs the services; the amount of
investment; and the degree of control which the principal has in the
situation.'' \65\ Implicitly referring to the Bartels decision, the
regulation advised that ``[t]he Court specifically rejected the degree
of control retained by the principal as the sole criterion to be
applied.'' \66\
---------------------------------------------------------------------------
\63\ See 27 FR 8032; 29 U.S.C. 213(b)(28) (previously codified
at 29 U.S.C. 213(a)(15)).
\64\ 27 FR 8033 (29 CFR 788.16(a)).
\65\ Id.
\66\ 27 FR 8033-34 (29 CFR 788.16(a)).
---------------------------------------------------------------------------
In 1972, the Department added similar guidance on independent
contractor status at 29 CFR 780.330(b), in a provision addressing the
employment status of sharecroppers and tenant farmers.\67\ This
regulation was nearly identical to the independent contractor guidance
for the logging and forestry industry previously codified at 29 CFR
788.16(a), including an identical description of the same six economic
reality factors.\68\ Both provisions--29 CFR 780.330(b) and 788.16(a)--
remained unchanged until 2021.
---------------------------------------------------------------------------
\67\ See 37 FR 12084, 12102 (introducing 29 CFR 780.330(b)).
\68\ Id.
---------------------------------------------------------------------------
In 1997, the Department promulgated a regulation applying a
multifactor economic reality analysis for distinguishing between
employees and independent contractors under the Migrant and Seasonal
Agricultural Worker Protection Act (MSPA), which notably incorporates
the FLSA's ``suffer or permit'' definition of employment by
reference.\69\ The regulation (which has not since been amended)
advises that 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. The regulation elaborates that ``[t]his
determination is based upon an evaluation of all of the circumstances,
including the following: (i) The nature and degree of the putative
employer's control as to the manner in which the work is performed;
(ii) The putative employee's opportunity for profit or loss depending
upon his/her managerial skill; (iii) The putative employee's investment
in equipment or materials required for the task, or the putative
employee's employment of other workers; (iv) Whether the services
rendered by the putative employee require special skill; (v) The degree
of permanency and duration of the working relationship; (vi) The extent
to which the services rendered by the putative employee are an integral
part of the putative employer's business.'' \70\ This description of
six economic reality factors was very similar to the earlier
description of six economic reality factors provided in 29 CFR
780.330(b) and 788.16(a).
---------------------------------------------------------------------------
\69\ See 62 FR 11734 (amending 29 CFR 500.20(h)(4)); see also 29
U.S.C. 1802(5) (``The term `employ' has the meaning given such term
under section 3(g) of the [FLSA]'').
\70\ 29 CFR 500.20(h)(4).
---------------------------------------------------------------------------
Also in 1997, WHD issued Fact Sheet #13, ``Employment Relationship
Under the Fair Labor Standards Act (FLSA).'' \71\ Like WHD opinion
letters, Fact Sheet #13 advises that an employee, as distinguished from
a person who is engaged in a business of their own, is one who, as a
matter of economic reality, follows the usual path of an employee and
is dependent on the business which they serve. The fact sheet
identifies the six familiar economic realities factors, as well as
consideration of the worker's degree of independent business
organization and operation.
---------------------------------------------------------------------------
\71\ See WHD Fact Sheet #13 (1997) https:/web.archive.org/web/19970112162517/http:/www.dol.gov/dol/esa/public/regs/compliance/whd/whdfs13.htm). WHD made minor revisions to Fact Sheet #13 in 2002 and
2008, before a more substantial revision in 2014. In 2018, WHD
reverted back to the 2008 version of Fact Sheet #13, which--apart
from the addition of an advisory note referring to the 2021 IC
Rule--is identical to the current March 2022 version (available at
https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship).
---------------------------------------------------------------------------
On July 15, 2015, WHD issued additional subregulatory guidance,
Administrator's Interpretation No. 2015-1, ``The Application of the
Fair Labor Standards Act's `Suffer or Permit' Standard in the
Identification of Employees Who Are Misclassified as Independent
Contractors'' (AI 2015-1).\72\ AI 2015-1 reiterated that the economic
realities of the relationship are determinative and that the ultimate
inquiry is whether the worker is economically dependent on the employer
or truly in business for themself. It identified six economic realities
factors that followed the six factors used by most federal courts of
[[Page 1644]]
appeals: (1) the extent to which the work performed is an integral part
of the employer's business; (2) the worker's opportunity for profit or
loss depending on their managerial skill; (3) the extent of the
relative investments of the employer and the worker; (4) whether the
work performed requires special skills and initiative; (5) the
permanency of the relationship; and (6) the degree of control exercised
or retained by the employer. AI 2015-1 further emphasized that the
factors should not be applied in a mechanical fashion and that no one
factor was determinative. AI 2015-1 was withdrawn on June 7, 2017.\73\
---------------------------------------------------------------------------
\72\ AI 2015-1 is available at 2015 WL 4449086 (withdrawn June
7, 2017).
\73\ See News Release 17-0807-NAT, ``US Secretary of Labor
Withdraws Joint Employment, Independent Contractor Informal
Guidance'' (June 7, 2017), https://www.dol.gov/newsroom/releases/opa/opa20170607 (last visited November 20, 2023).
---------------------------------------------------------------------------
In 2019, WHD issued an opinion letter, FLSA2019-6, regarding
whether workers who worked for companies operating self-described
``virtual marketplaces'' were employees covered under the FLSA or
independent contractors.\74\ Like the Department's prior guidance, the
letter stated that the determination depended on the economic realities
of the relationship and that the ultimate inquiry was whether the
workers depend on someone else's business or are in business for
themselves. The letter identified six economic realities factors that
differed slightly from the factors typically articulated by the
Department previously: (1) the nature and degree of the employer's
control; (2) the permanency of the worker's relationship with the
employer; (3) the amount of the worker's investment in facilities,
equipment, or helpers; (4) the amount of skill, initiative, judgment,
and foresight required for the worker's services; (5) the worker's
opportunities for profit or loss; and (6) the extent of the integration
of the worker's services into the employer's business.\75\ The
Department later withdrew Opinion Letter FLSA2019-6 on February 19,
2021.\76\
---------------------------------------------------------------------------
\74\ See WHD Op. Ltr. FLSA2019-6, 2019 WL 1977301 (Apr. 29,
2019) (withdrawn Feb. 19, 2021).
\75\ See id. at *4. Opinion Letter FLSA2019-6's ``extent of the
integration'' factor was a notable recharacterization of the factor
traditionally considered by courts and the Department regarding the
extent to which work is ``an integral part'' of an employer's
business.
\76\ See note at https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited November 20, 2023).
---------------------------------------------------------------------------
C. The Department's 2021 Independent Contractor Rule
1. Overview
On January 7, 2021, the Department published the 2021 IC Rule, with
an effective date of March 8, 2021.\77\ The 2021 IC Rule set forth
regulations to be added to a new part (part 795) in title 29 of the
Code of Federal Regulations titled ``Employee or Independent Contractor
Classification under the Fair Labor Standards Act,'' providing guidance
on the classification of independent contractors under the FLSA
applicable to workers and businesses in any industry.\78\ The 2021 IC
Rule also addressed the Department's prior interpretations of
independent contractor status in 29 CFR 780.330(b) and 788.16(a)--both
of which applied to specific industries--by cross-referencing part
795.\79\
---------------------------------------------------------------------------
\77\ See 86 FR 1168. The Department initially published a NPRM
soliciting public comment on September 25, 2020. See 85 FR 60600.
The final rule adopted ``the interpretive guidance set forth in the
[NPRM] largely as proposed.'' 86 FR 1168.
\78\ 86 FR 1246-48.
\79\ Id. at 1246.
---------------------------------------------------------------------------
The Department explained that the purpose of the 2021 IC Rule was
to establish a ``streamlined'' economic reality test that improved on
prior articulations described as ``unclear and unwieldy.'' \80\ It
stated that the existing economic reality test applied by the
Department and courts suffered from confusion regarding the meaning of
``economic dependence,'' a lack of focus in the multifactor balancing
test, and confusion and inefficiency caused by overlap between the
factors.\81\ The 2021 IC Rule asserted that shortcomings and
misconceptions associated with the economic reality test were more
apparent in the modern economy and that additional clarity would
promote innovation in work arrangements.
---------------------------------------------------------------------------
\80\ Id. at 1172, 1240.
\81\ Id. at 1172-75.
---------------------------------------------------------------------------
The 2021 IC Rule explained that independent contractors are not
employees under the FLSA and are therefore not subject to the Act's
minimum wage, overtime pay, or recordkeeping requirements. It adopted
an economic reality test under which a worker is an employee of an
employer if that worker is economically dependent on the employer for
work and is an independent contractor if the worker is in business for
themself.\82\
---------------------------------------------------------------------------
\82\ Id. at 1246 (Sec. 795.105(a)-(b)).
---------------------------------------------------------------------------
The 2021 IC Rule identified five economic realities factors to
guide the inquiry into a worker's status as an employee or independent
contractor, while acknowledging that the factors were not exhaustive,
no one factor was dispositive, and additional factors could be
considered if they ``in some way indicate whether the [worker] is in
business for him- or herself, as opposed to being economically
dependent on the potential employer for work.'' \83\ In contrast to
prior guidance and contrary to case law, the 2021 IC Rule designated
two of the five factors--the nature and degree of control over the work
and the worker's opportunity for profit or loss--as ``core factors''
that should carry greater weight in the analysis. Citing the goal of
providing greater certainty and predictability in the economic reality
test, the 2021 IC Rule determined that these two factors were more
probative of economic dependence than other economic realities factors.
If both of those core factors indicate the same classification, as
either an employee or an independent contractor, the 2021 IC Rule
stated that there was a ``substantial likelihood'' that the indicated
classification was the worker's correct classification.\84\
---------------------------------------------------------------------------
\83\ Id. at 1246-47 (Sec. 795.105(c) and (d)(2)(iv)).
\84\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------
The 2021 IC Rule's first core factor was the nature and degree of
control over the work, which indicated independent contractor status to
the extent that the worker exercised substantial control over key
aspects of the performance of the work, such as by setting their own
schedule, by selecting their projects, and/or through the ability to
work for others, which might include the potential employer's
competitors.\85\ The 2021 IC Rule provided that requiring the worker to
comply with specific legal obligations, satisfy health and safety
standards, carry insurance, meet contractually agreed upon deadlines or
quality control standards, or satisfy other similar terms that are
typical of contractual relationships between businesses (as opposed to
employment relationships) did not constitute control for purposes of
determining employee or independent contractor classification.\86\
---------------------------------------------------------------------------
\85\ Id. at 1246-47 (Sec. 795.105(d)(1)(i)).
\86\ Id.
---------------------------------------------------------------------------
The 2021 IC Rule's second core factor was the worker's opportunity
for profit or loss.\87\ The Rule stated that this factor indicates
independent contractor status to the extent the worker has an
opportunity to earn profits or incur losses based on either (1) their
exercise of initiative (such as managerial skill or business acumen or
judgment) or (2) their management of investment in or capital
expenditure on, for example, helpers or equipment or material to
further the work. While the effects of the worker's exercise of
initiative and management of investment were both considered under this
factor, the worker did not need to have an opportunity for profit or
loss based on both initiative
[[Page 1645]]
and management of investment for this factor to weigh towards the
worker being an independent contractor. This factor indicated employee
status to the extent that the worker was unable to affect their
earnings or was only able to do so by working more hours or faster.
---------------------------------------------------------------------------
\87\ Id. (Sec. 795.105(d)(1)(ii)).
---------------------------------------------------------------------------
The 2021 IC Rule also identified three other non-core factors: the
amount of skill required for the work, the degree of permanence of the
working relationship between the worker and the employer, and whether
the work is part of an integrated unit of production (which it
cautioned is ``different from the concept of the importance or
centrality of the individual's work to the potential employer's
business'').\88\ The 2021 IC Rule provided that these other factors
were ``less probative and, in some cases, may not be probative at all''
of economic dependence and were ``highly unlikely, either individually
or collectively, to outweigh the combined probative value of the two
core factors.'' \89\
---------------------------------------------------------------------------
\88\ Id. (Sec. 795.105(d)(2)).
\89\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------
The 2021 IC Rule also stated that the actual practice of the
parties involved is more relevant than what may be contractually or
theoretically possible, and provided five ``illustrative examples''
demonstrating how the analysis would apply in particular factual
circumstances.\90\ Finally, the 2021 IC Rule rescinded any ``prior
administrative rulings, interpretations, practices, or enforcement
policies relating to classification as an employee or independent
contractor under the FLSA'' to the extent that such items ``are
inconsistent or in conflict with the interpretations stated in this
part,'' and explained that the 2021 IC Rule would guide WHD's
enforcement of the FLSA.\91\
---------------------------------------------------------------------------
\90\ Id. at 1247-48 (Sec. Sec. 795.110-.115).
\91\ Id. at 1246 (Sec. 795.100).
---------------------------------------------------------------------------
On January 19, 2021, WHD issued Opinion Letters FLSA2021-8 and
FLSA2021-9 applying the Rule's analysis to specific factual scenarios.
WHD subsequently withdrew those opinion letters on January 26, 2021,
explaining that the letters were issued prematurely because they were
based on a rule that had yet to take effect.\92\
---------------------------------------------------------------------------
\92\ See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited November 20, 2023), noting the withdrawal
of Opinion Letters FLSA2021-8 and FLSA2021-9.
---------------------------------------------------------------------------
2. Delay and Withdrawal
On February 5, 2021, the Department published a proposal to delay
the 2021 IC Rule's effective date until May 7, 2021--60 days after the
Rule's original March 8, 2001, effective date.\93\ On March 4, 2021,
after considering the approximately 1,500 comments received in response
to that proposal, the Department published a final rule delaying the
effective date of the 2021 IC Rule as proposed.\94\
---------------------------------------------------------------------------
\93\ 86 FR 8326.
\94\ 86 FR 12535.
---------------------------------------------------------------------------
On March 12, 2021, the Department published a NPRM proposing to
withdraw the 2021 IC Rule.\95\ On May 5, 2021, after reviewing
approximately 1,000 comments submitted in response to the NPRM, the
Department announced a final rule withdrawing the 2021 IC Rule.\96\ In
explaining its decision to withdraw the 2021 IC Rule, the Department
stated that the Rule was inconsistent with the FLSA's text and purpose
and would have had a confusing and disruptive effect on workers and
businesses alike due to its departure from longstanding judicial
precedent. The Withdrawal Rule stated that it took effect immediately
upon its publication in the Federal Register on May 6, 2021.\97\
---------------------------------------------------------------------------
\95\ 86 FR 14027.
\96\ 86 FR 24303.
\97\ Id. at 24320.
---------------------------------------------------------------------------
3. Litigation
On March 14, 2022, in a lawsuit challenging the Department's Delay
and Withdrawal Rules under the Administrative Procedure Act (APA), a
district court in the Eastern District of Texas issued a decision
vacating the Department's Delay and Withdrawal Rules.\98\ While
acknowledging that the Department engaged in separate notice-and-
comment rulemakings in promulgating both of these rules, the district
court concluded that the Department ``failed to provide a meaningful
opportunity for comment in promulgating the Delay Rule,'' \99\ failed
to show ``good cause for making the [Delay Rule] effective immediately
upon publication,'' \100\ and acted in an arbitrary and capricious
manner in its Withdrawal Rule by ``fail[ing] to consider potential
alternatives to rescinding the Independent Contractor Rule.'' \101\
Accordingly, the district court vacated the Delay and Withdrawal Rules
and concluded that the 2021 IC Rule ``became effective as of March 8,
2021, the rule's original effective date, and remains in effect.''
\102\ The district court's ruling did not address the validity of the
2021 IC Rule; rather, the case was focused solely on the validity of
the Delay and Withdrawal Rules.
---------------------------------------------------------------------------
\98\ CWI v. Walsh, 2022 WL 1073346.
\99\ Id. at *9. The court specifically faulted the Department's
use of a shortened 19-day comment period in its proposal to delay of
the 2021 IC Rule's original effective date (instead of 30 days), and
for failing to consider comments beyond its proposal to delay the
2021 IC Rule's effective date. Id. at *7-10.
\100\ Id. at *11.
\101\ Id. at *13.
\102\ Id. at *20.
---------------------------------------------------------------------------
The Department filed a notice of appeal of the district court's
decision.\103\ In response to requests by the Department informing the
court of this rulemaking, the Fifth Circuit Court of Appeals has
entered successive orders staying the appeal. The Fifth Circuit's most
recent order was dated October 9, 2023 and stayed the appeal for an
additional 120 days.
---------------------------------------------------------------------------
\103\ See Fifth Circuit No. 22-40316 (appeal filed, May 13,
2022).
---------------------------------------------------------------------------
D. The Department's Proposal
Following a series of stakeholder forums on the classification of
workers as employees or independent contractors under the FLSA, the
Department published an NPRM on October 13, 2022 proposing to rescind
the 2021 IC Rule and replace it with new part 795 regulations.\104\ In
the NPRM, the Department proposed to add a new part 795 to Title 29 of
the Code of Federal Regulations providing guidance regarding whether
workers are employees or independent contractors, which would be
different in notable respects from the regulatory text in the 2021 IC
Rule, published at 86 FR 1246 through 1248. In contrast to the 2021 IC
Rule's creation of elevated ``core factors,'' the Department proposed
returning to a totality-of-the-circumstances analysis of the economic
reality test in which the factors do not have a predetermined weight
and are considered in view of the economic reality of the whole
activity. Additional proposed differences from the 2021 IC Rule
included restoring consideration of investment as a separate factor,
providing additional analysis of the control factor (including detailed
discussions of how scheduling, supervision, price-setting, and the
ability to work for others should be considered), and returning to the
longstanding interpretation of the integral factor, which considers
whether the work performed is integral to the employer's business.
---------------------------------------------------------------------------
\104\ See 87 FR 62218.
---------------------------------------------------------------------------
E. Comments
The initial deadline for interested parties to submit comments on
the NPRM was November 28, 2022. In response to requests for an
extension of the time period for filing written comments, the
Department lengthened the comment period an additional 15
[[Page 1646]]
days to December 13, 2022, resulting in a total comment period of 61
days.\105\
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\105\ 87 FR 64749. Although several commenters requested a
longer extension or otherwise objected that the comment period was
inadequately short, the resulting 61-day comment period was more
than twice as long as the 30-day comment period for the NPRM for the
2021 IC Rule, when the Department initially proposed regulatory
guidance on employee and independent contractor status under the
FLSA. See 85 FR 60600. The Department declined several requests to
extend the comment period for the 2020 NPRM. See https://www.regulations.gov/document/WHD-2020-0007-0193.
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The Department received approximately 55,400 comments on the NPRM.
Comments were submitted by a diverse array of stakeholders, including
employees, self-identified independent contractors, businesses, trade
associations, labor unions, advocacy groups, law firms, members of
Congress, state and local government officials, and other interested
members of the public. This section provides a high-level summary of
commenter views. Significant issues raised in the comments received are
discussed in subsequent sections of this preamble, along with the
Department's response to those comments and a discussion of resulting
changes that have been made in the final rule's regulatory text. All
comments received may be viewed on the http://www.regulations.gov
website, docket ID WHD-2022-0003.
Many of the comments the Department received can be characterized
in the following ways: (1) very general statements of support or
opposition; (2) personal anecdotes that did not address a specific
aspect of the proposal; or (3) identical or nearly identical
``campaign'' comments sent in response to comment initiatives sponsored
by various groups.\106\ Other comments provided specific data, views,
and arguments, which are described throughout this preamble. Commenters
expressed a wide variety of views on the merits of the Department's
proposal. Acknowledging that there are strong views on the issues
presented in this rulemaking, the Department has carefully considered
the comments submitted.
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\106\ Campaign comments, both in favor and opposed to the
proposal, were received from a variety of groups, including, for
example, court reporters, construction industry employers, DoorDash
workers, professional translators, truckers, financial advisors, and
healthcare professionals.
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As a general matter, most employees, labor unions, worker advocacy
groups, and other affiliated stakeholders generally expressed support
for the NPRM, asserting that its proposed guidance was more consistent
with judicial precedent and would better protect employees from
misclassification than the 2021 IC Rule. By contrast, most commenters
who identified as independent contractors, business entities, and
commenters affiliated with those constituencies generally expressed
opposition to the NPRM, criticizing the Department's proposed economic
reality test as ambiguous and biased against independent contracting.
The Department received several comments addressing topics that are
beyond the scope of this rulemaking. For example, numerous individuals
submitted comments expressing support or opposition to the ``Protecting
the Right to Organize Act'', H.R. 842, 117th Cong. (2021), proposed
legislation that would amend the NLRA. Other commenters expressed views
on possible legislative reforms to extend wage-and-hour protections and
other employment benefits to workers classified as independent
contractors. See, e.g., Center for Cultural Innovation (``CCI'')
(discussing collective bargaining rights and sector wage standards as
``two promising approaches to guaranteeing [wage-and-hour] protections
to independent workers''); DoorDash (``[L]aws should be updated to
preserve the independence workers like Dashers value, while clearing
the way for new protections and benefits that independent contractors
have historically lacked.''); Uber (``We look forward to working with
the Department to address the shortcomings of existing laws, including
unlocking access to benefits for independent contractors such as app-
based workers.''). Such legislative efforts are beyond the scope of
this rulemaking as they would require congressional action; the scope
of this regulation is limited to providing guidance regarding employee
or independent contractor classification under the FLSA as currently
enacted.
Some commenters addressed the rulemaking's potential effect on
workers other than those classified as independent contractors. For
example, the Labor Relations and Employment Law Society at St. John's
University School of Law requested the Department to apply the NPRM's
proposed economic reality test to evaluate the employment status of
unpaid student interns. Similarly, Boulette Golden & Marin L.L.P.
asserted that the NPRM's proposed guidance creates a ``false
dichotomy'' where ``every worker in the United States is either an
employee or an `independent business.' '' To clarify, this rulemaking
specifically addresses the legal distinction between FLSA-covered
employees and independent contractors; it does not replace or supplant
the analyses that courts and the Department apply when evaluating FLSA
coverage of other kinds of workers, such as unpaid interns, students,
trainees, or volunteers.\107\ Coverage for these types of workers is
not addressed in this rule.
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\107\ See, e.g., WHD Fact Sheet #71: Internship Programs Under
The Fair Labor Standards Act (describing the analysis applied by
courts and the Department to evaluate the FLSA employment status of
students and interns).
---------------------------------------------------------------------------
Finally, some commenters opined on potential compliance or
enforcement measures. For example, the Sheet Metal and Air Conditioning
Contractors' National Association (``SMACNA'') requested that the
Department introduce a mandatory ``Notice of Independent Contractor
Status'' form for businesses and independent contractors in the
construction industry, to notify ``true independent contractors'' of
their tax obligations and help enforcement against misclassification.
This suggestion, however, is outside the scope of this rulemaking,
which has not proposed any mandatory notice and focuses specifically on
the legal distinction between FLSA-covered employees and independent
contractors. Further, some commenters raised compliance with employment
verification requirements under the Immigration Reform and Control Act
(IRCA), both to note that some employers are incentivized to
misclassify immigrant workers as independent contractors in part
because they do not have to verify the work authorization of
independent contractors, see, e.g., Equal Justice Center; SMACNA, and
to note that being able to operate as an independent contractor or in
business for oneself provides economic opportunity for people who lack
work authorization, see TheDream.US. Because this rulemaking pertains
only to the question of employee classification under the FLSA, it does
not address employers' compliance obligations with respect to employees
as determined under other laws, such as IRCA. The FLSA's various worker
protections apply to FLSA-covered employees regardless of their
citizenship or immigration or work authorization status.
III. Need for Rulemaking
The Department recognizes that independent contractors and small
businesses play an important role in our economy. It is also
fundamental to the Department's obligation to administer and enforce
the FLSA that workers who should be covered under the Act are able to
receive its protections. In the FLSA context, employees misclassified
as independent contractors are denied
[[Page 1647]]
basic workplace protections, including the rights to minimum wage and
overtime pay.\108\ Meanwhile, employers that comply with the law are
placed at a competitive disadvantage compared to other businesses that
misclassify employees, contravening the FLSA's goal of eliminating
``unfair method[s] of competition in commerce.'' \109\
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\108\ Workers who are employees under the FLSA but are
misclassified as independent contractors remain legally entitled to
the Act's wage-and-hour protections and are protected from
retaliation for attempting to assert their rights under the Act. See
29 U.S.C. 215(a)(3). However, many misclassified employees may not
be aware that such rights and protections apply to them or face
obstacles when asserting those rights.
\109\ 29 U.S.C. 202; see also Tony & Susan Alamo Found. v. Sec'y
of Labor, 471 U.S. 290, 302 (1985) (noting that allowing workers who
are employees under the Act to work as non-employees ``would affect
many more people than those workers directly at issue . . . and
would be likely to exert a general downward pressure on wages in
competing businesses'').
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As explained in the NPRM, the Department believes that the 2021 IC
Rule did not fully comport with the FLSA's text and purpose as
interpreted by the courts. The Department further believes that leaving
the 2021 IC Rule in place would have a confusing and disruptive effect
on workers and businesses alike due to its departure from decades of
case law describing and applying the multifactor economic reality test
as a totality-of-the-circumstances test. While the Department agrees
that the 2021 IC Rule identified a need to further develop and center
the concept of economic dependence, the 2021 IC Rule included
provisions that are in tension with longstanding case law, such as
designating two ``core factors'' as most probative and predetermining
that they carry greater weight in the analysis; considering investment
and initiative only as part of the opportunity for profit or loss
factor; and excluding consideration of whether the work performed is
central or important to the potential employer's business. These and
other provisions in the 2021 IC Rule narrowed the economic reality test
by limiting the facts that may be considered as part of the test--facts
which the Department believes are relevant in determining whether a
worker is economically dependent on the employer for work or is in
business for themself. As the NPRM explained, this novel narrowing of
the test under which certain factors are always elevated and other
facts are essentially precluded from consideration may result in
misapplication of the economic reality test and an increased risk of
FLSA-covered employees being misclassified as independent contractors.
Moreover, the 2021 IC Rule did not address the potential risks to
workers of such misclassification.\110\
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\110\ 86 FR 1225; see also id. at 1206-07.
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The Department previously explained these concerns about the 2021
IC Rule at length in the Withdrawal Rule,\111\ which was vacated by a
district court (the Department's appeal of the district court's order
is pending). The Department now believes it is appropriate to rescind
the 2021 IC Rule and replace it with an analysis for determining
employee or independent contractor status under the Act that is more
consistent with existing judicial precedent and the Department's
longstanding guidance prior to the 2021 IC Rule. While prior to the
2021 IC Rule the Department primarily issued subregulatory guidance in
this area, the NPRM explained that rescinding the 2021 IC Rule and
replacing it with detailed regulations addressing the multifactor
economic reality test--in a way that both more fully reflects the case
law and continues to be relevant to the evolving economy--would be
helpful for workers and businesses alike. Specifically, the Department
explained that its proposed guidance would protect workers from
misclassification while at the same time provide a consistent approach
for those businesses that engage (or wish to engage) with properly
classified independent contractors.
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\111\ See 86 FR 24307-18.
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In the NPRM, the Department acknowledged that its proposal departed
from the approach taken in the 2021 IC Rule, and further discussed the
rationale used in the 2021 IC Rule and why the Department had carefully
reconsidered that reasoning and determined that modifications were
necessary.\112\ As the NPRM noted, the Department had identified four
reasons underlying the need to promulgate the 2021 IC Rule: (1)
confusion regarding the meaning of ``economic dependence'' because the
concept is ``underdeveloped''; (2) lack of focus in the multifactor
balancing test; (3) confusion and inefficiency due to overlapping
factors; and (4) the shortcomings of the economic reality test that are
more apparent in the modern economy.\113\ The 2021 IC Rule had also
suggested as a fifth reason that the economic reality test hindered
innovation in work arrangements.\114\ As discussed further below, the
Department explained in the NPRM that it believed that the proposed
rule's approach offers a better framework for understanding and
applying the concept of economic dependence by explaining how the
touchstone of whether an individual is in business for themself is
analyzed within each of the six economic realities factors. Further,
the Department believed that the proposal's discussion of how courts
and the Department's previous guidance apply the factors brings the
multifactor test into focus, reduces confusion as to the overlapping
factors, and provides a better basis for understanding how the test has
the flexibility to be applied to changes in the modern economy, such
that the Department no longer viewed the concerns articulated in the
2021 IC Rule as impediments to using the economic reality test
formulated by the courts and the Department's longstanding guidance.
---------------------------------------------------------------------------
\112\ See 87 FR 62226 (citing FCC v. Fox Television Stations,
Inc., 556 U.S. 502, 515 (2009)).
\113\ Id. (citing 86 FR 1172-75).
\114\ Id. (citing 86 FR 1175).
---------------------------------------------------------------------------
Thousands of commenters opined on this rulemaking. Most commenters
that expressed support for the NPRM--including labor unions, worker
advocacy organizations, and workers--were highly critical of the 2021
IC Rule, often referencing or attaching earlier comments filed in
opposition to that rule when it was proposed. See, e.g., American
Federation of Labor and Congress of Industrial Organizations (``AFL-
CIO''); National Women's Law Center (``NWLC''); Northwest Worker
Justice Project; United Brotherhood of Carpenters and Joiners of
America (``UBC''). Using common template language, several dozen
advocacy organizations and local unions affiliated with the United Food
and Commercial Workers (``UFCW'') characterized the 2021 IC Rule as an
``anti-worker rule'' which ``narrowed the scope of who is considered an
employee under the FLSA.'' Many of these commenters also asserted that
the 2021 IC Rule ``contravenes the [FLSA's] statutory definitions and
Supreme Court precedent.'' Additionally, numerous commenters supportive
of the Department's rulemaking asserted that replacing the 2021 IC Rule
with the NPRM's proposed economic reality test would reduce the
misclassification of employees as independent contractors, given the
proposed test's fuller consideration of facts that were minimized or
excluded under the 2021 IC Rule. See, e.g., AARP; Joint Comment of the
National Electrical Contractors Association and the International
Brotherhood of Electrical Workers (``NECA & IBEW''); REAL Women in
Trucking.
A number of commenters supportive of the NPRM also stated that the
economic reality test applied by courts is not only compatible with the
modern
[[Page 1648]]
economy, but preferable to the 2021 IC Rule's elevation of certain
factors as controlling. See, e.g., AARP (``It is precisely because work
arrangements are more varied and complex in today's economy that no one
factor should be controlling or exclusive to others.''); Coalition of
State Attorneys General and State Labor Departments (``State AGs'')
(``As State AGs who enforce and defend state wage and hour laws, we
know that a flexible standard that considers the totality of the
circumstances is required to address changing work arrangements.'').
Some business stakeholders expressed support for the NPRM, but for
different reasons. For example, some employers--including Alto
Experience, Inc., Gale Healthcare Solutions, IntelyCare, Inc., and
various union-affiliated contractor associations--expressed support for
the NPRM on the grounds that its guidance would better prevent rival
businesses from obtaining an unfair competitive advantage through the
misclassification of employees as independent contractors, consistent
with the FLSA's goal of eliminating unfair methods of competition in
commerce. Additionally, some business stakeholders stated that they
preferred the economic reality test applied by courts to the 2021 IC
Rule. See, e.g., Ho-Chunk Inc. (supporting the proposed analysis
because the 2021 IC Rule ``deviat[ed] from established case law'');
Small Business Legislative Council (``SBLC'') (``While the SBLC has not
taken a position on whether the economic realities test strikes the
right balance, applying a test like the economic realities test that
has been fleshed out over years through case law and administrative
guidance certainly makes this complex issue easier to navigate.''); see
also Opera America (``The `totality-of-the-circumstances' approach
allows for the nuance necessary to truly evaluate the nature of an
employment or contractor relationship''); Texas Association for Home
Care and Hospice (``We support the reiteration in the [NPRM] that the
enumerated factors should each be equally relevant, including any
additional relevant factors that indicate economic dependence or
independence.'').
Other commenters, including most business-affiliated stakeholders
and many self-identified independent contractors, disagreed with the
Department's proposal to rescind and replace the 2021 IC Rule. Many of
these commenters argued that the 2021 IC Rule was based on judicial
precedent. See e.g., Coalition for Workforce Innovation (``CWI'');
Independent Bakers Association (``IBA''); Pacific Legal Foundation.
Commenters opposed to this rulemaking further stated that the 2021 IC
Rule's analysis is clearer than the NPRM's proposed economic reality
test, asserting that returning to a totality-of-the-circumstances
analysis would increase litigation and deter businesses from engaging
with independent contractors. See, e.g., American Society of Travel
Advisors (``ASTA''); Financial Services Institute (``FSI''); U.S.
Chamber of Commerce (``U.S. Chamber''). While many commenters opposed
to the NPRM acknowledged that the misclassification of employees as
independent contractors might be a problem in some industries, several
commenters disputed the need for generally applicable guidance that (in
their view) could be disruptive to businesses and legitimate
independent contractors in their particular industries. See, e.g.,
American Translators Association; IMC Companies, LLC; see also HR
Policy Association. Finally, many self-identified independent
contractors and advocacy groups asserted that the Department's proposal
would ``misclassify'' independent contractors as employees. See, e.g.,
American Society of Journalists and Authors; Cambridge Investment
Research, Inc.; Fight for Freelancers; Transportation Intermediaries
Association (``TIA'').
Commenters opposed to this rulemaking agreed with the 2021 IC
Rule's assessment that the economic reality test traditionally applied
by courts is incompatible with the modern economy. See, e.g., Institute
for the American Worker (``I4AW''); Society for Human Resources
Management (``SHRM''); TIA. Several commenters pointed to differences
in the economy today compared to the 1930s and 1940s, when the FLSA was
enacted and the Supreme Court first endorsed the economic reality test.
See, e.g., Flex Association (``Flex'') (``It is no longer 1938, when
Congress enacted the FLSA. Today, independent contractors can leverage
app-based technology to build their own businesses in ways we could not
have conceived even 20, let alone 84, years ago.''); National
Association of Professional Insurance Agents (``[I]n many ways, the
1938 Congress could not have conceived of the present-day global
economy or the variations among worker statuses that have emerged and
continue to evolve therefrom.'').
Several commenters stated that the Department's proposal would
deter businesses from engaging with independent contractors, which in
turn would have disruptive economic consequences. In a joint comment,
33 business advocacy organizations and over 100 local Chambers of
Commerce (``Coalition of Business Stakeholders'') asserted that, under
the NPRM, ``the only scenario in which a hiring entity can be sure it
is safe from an enforcement action by the DOL is when it classifies, or
misclassifies, its workers as employees'' and concluded that the NPRM
would ``upend millions of legitimate, productive independent contractor
relationships.'' See also, e.g., California Association of Realtors
(C.A.R.) (``This proposal as is would seriously disrupt the current and
historical choices of the real estate industry that have been in place
for at least fifty years.''); FSI (``Changes in laws or regulations
that substantially limited or prohibited the use of independent
contracting in financial services would harm those who currently work
as independent contractors, harm consumers by reducing their financial
literacy and thus their ability to accumulate wealth and save for
retirement, and harm the economy overall.'').
Upon consideration of the comments and as described throughout this
preamble, the Department continues to believe that this final rule's
approach offers a better framework for understanding and applying the
concept of economic dependence by explaining how the touchstone of
whether an individual is in business for themself is analyzed within
each of the six economic reality factors. This rule's discussion of how
courts and the Department's previous guidance apply the factors brings
the multifactor test into focus, reduces confusion as to the
overlapping factors, and provides a more consistent basis for
understanding how the test has the flexibility to be applied to changes
in the modern economy. Accordingly, the Department no longer views the
concerns articulated in the 2021 IC Rule as impediments to using the
economic reality test formulated by the courts and the Department's
longstanding guidance.
The Department is, however, retaining its longstanding
interpretation, as it did in the 2021 IC Rule, that economic dependence
is the ultimate inquiry, and that an employee is someone who, as a
matter of economic reality, is economically dependent on an employer
for work--not for income.\115\
[[Page 1649]]
Consistent with the 2021 IC Rule and as explained in the NPRM, the
Department continues to believe that, as compared to the economic
realities analysis generally, the particular concept of economic
dependence is underdeveloped in the case law. As noted in the 2021 IC
Rule, the Department and most courts have historically applied a
``dependence-for-work'' approach which considers whether the worker is
dependent on the employer for work or depends on the worker's own
business for work. However, a minority of courts have applied a
``dependence-for-income'' approach that considers whether the worker
has other sources of income or wealth or is financially dependent on
the employer.\116\ Further, rather than giving primacy to only two
factors as indicators of economic dependence, the Department believes
that developing the concept of economic dependence is better
accomplished by, in addition to elaborating on the general meaning of
economic dependence, explaining how each of the six factors can
illuminate the distinction between economic dependence on the employer
for work and being in business for oneself. By focusing on that
distinction in its discussion of each factor, the Department expects
that this rule will provide clarity on the concept of economic
dependence that the 2021 IC Rule indicated would be welcomed by workers
and businesses, but will do so in a way that is consistent with case
law and the Department's prior guidance.
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\115\ See 86 FR 1246 (Sec. 795.105(b) (``An employer suffers or
permits an individual to work as an employee if, as a matter of
economic reality, the individual is economically dependent on that
employer for work.''); see also infra section V.B.; 29 CFR
795.105(b) (``An `employee' under the Act is an individual whom an
employer suffers, permits, or otherwise employs to work. . . . [This
is] meant to encompass as employees all workers who, as a matter of
economic reality, are economically dependent on an employer for
work. . . . Economic dependence does not focus on the amount of
income earned, or whether the worker has other sources of
income.'').
\116\ See 86 FR 1172-73.
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Regarding commenters that stated that the 2021 IC Rule provided
more clarity in distinguishing between factors, the Department
believes, upon further consideration, that any purported confusion and
inefficiency due to overlapping factors was overstated in the 2021 IC
Rule. Moreover, when each factor is viewed under the framework of
whether the worker is economically dependent or in business for
themself, the rationale for considering facts under more than one
factor is clearer. The Department explains in more detail in section V
why considering certain facts under more than one factor is consistent
with the totality-of-the-circumstances approach of the economic
realities analysis used by courts. And the Department provides guidance
regarding how to consider certain facts, such as the ability to work
for others and whether the working relationship is exclusive, under
more than one factor. The Department believes that this flexible
approach is supported by the case law and preferable to rigidly and
artificially limiting facts to only one factor, as the 2021 IC Rule
did.
Concerning comments that the 2021 IC Rule was better suited to the
modern economy, the Department believes that this final rule is well-
equipped to address a wide array of traditional and emerging work
relationships, as discussed throughout section V of this preamble. In
the 2021 IC Rule, the Department stated that ``technological and social
changes have made shortcomings of the economic realities test more
apparent in the modern economy,'' thus justifying the 2021 IC Rule's
characterization of the integral, investment, and permanence factors as
less important in determining a worker's classification.\117\ Upon
further consideration, however, the Department believes that the
multifactor economic reality test relied on by courts where no one
factor or set of factors is presumed to carry more weight is the most
helpful tool for evaluating modern work arrangements. The test's
vitality is confirmed by its application over seven decades that have
seen monumental shifts in the economy. Modern work arrangements
utilizing applications or other technology are best addressed using the
underlying economic reality test, which considers the totality of the
circumstances in each working arrangement and offers a flexible,
comprehensive, and appropriately nuanced approach which can be adapted
to disparate industries and occupations. It can also encompass
continued social changes because it does not presume which aspects of
the work relationship are most probative or relevant and leaves open
the possibility that changed circumstances may make certain factors
more important in certain cases or future scenarios.
---------------------------------------------------------------------------
\117\ 86 FR 1175.
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The Department's response to commenter feedback on the potential
economic consequences of this rulemaking is discussed in the regulatory
impact analysis provided in section VII. However, the Department
continues to believe that proper application of the FLSA in the modern
economy requires the flexibility of an economic reality test that does
not predetermine the probative value of particular factors and which is
adaptable to different industries and workers. As further explained in
sections III.C and VII, commenter assertions of economic disruption
related to this rulemaking are belied by the fact that this rulemaking
merely aligns the Department's interpretive guidance with the same
legal standard courts have been applying for decades--and are
continuing to apply today.
The discussion that follows sets forth the Department's explanation
of the need for this rulemaking and responds to relevant commenter
feedback.
A. The 2021 IC Rule's Test Is Not Supported by Judicial Precedent or
the Department's Historical Position and Is Not Fully Aligned With the
Act's Text as Interpreted by the Courts
In the NPRM, the Department explained that it was proposing to
rescind and replace the 2021 IC Rule in part because that rule was not
fully aligned with the FLSA's text as interpreted by the courts or the
Department's longstanding analysis, as well as decades of case law
describing and applying the multifactor economic reality test. In
relevant part, the NPRM explained that the Department had three primary
and overlapping legal concerns with the 2021 IC Rule: (1) its creation
of two ``core factors'' as the ``most probative'' in the economic
reality analysis; (2) the oversized role of the control factor in its
analysis; and (3) its altering of several economic reality factors to
minimize or exclude key facts commonly analyzed by courts.\118\
---------------------------------------------------------------------------
\118\ See 87 FR 62227-29. The Department had previously
identified and discussed these three concerns in its 2021 Withdrawal
Rule. See 86 FR 24307-15.
---------------------------------------------------------------------------
After considering the comments, the Department continues to believe
that the 2021 IC Rule marked a departure from the way in which courts
and the Department adopted and applied the multifactor, totality-of-
the-circumstances economic reality test in which the factors do not
have a predetermined weight and are considered in view of the economic
reality of the whole activity. The Department also continues to believe
that the 2021 IC Rule's departure from longstanding precedent unduly
narrowed the economic reality test by limiting facts that may be
considered as part of the test that are relevant in determining whether
a worker is economically dependent on the employer for work or is in
business for themself. By doing so, the 2021 IC Rule artificially
restricted the Act's expansive definitions of ``employer,''
``employee,'' and ``employ,'' undermining the Act's text and purposes,
as interpreted by courts and the Department's longstanding
interpretation of the economic reality test.
[[Page 1650]]
1. The 2021 IC Rule's Elevation of Control and Opportunity for Profit
or Loss as the ``Most Probative'' Factors in Determining Employee
Status Under the FLSA
As the NPRM explained, the 2021 IC Rule set forth a new
articulation of the economic reality test, elevating two factors
(control and opportunity for profit or loss) as ``core'' factors above
other factors, asserting that the two core factors have ``greater
probative value'' in determining a worker's economic dependence.\119\
Notably, the 2021 IC Rule further provided that if both core factors
point toward the same classification--either employee or independent
contractor--then there is a ``substantial likelihood'' that this is the
worker's correct classification.\120\ Although it identified three
other factors as additional guideposts and acknowledged that additional
factors may be considered, it made clear that non-core factors ``are
less probative and, in some cases, may not be probative at all, and
thus are highly unlikely, either individually or collectively, to
outweigh the combined probative value of the two core factors.'' \121\
The NPRM explained that the Department believes that the 2021 IC Rule's
elevation of the control and opportunity for profit or loss factors was
in tension with the language of the Act as well as the longstanding
judicial precedent, expressed by the Supreme Court and in appellate
cases from across the circuits, that no single factor is determinative
in the analysis of whether a worker is an employee or an independent
contractor, nor is any factor or set of factors necessarily more
probative of whether the worker is in fact economically dependent on
the employer for work as opposed to being in business for themself.
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\119\ 87 FR 62227 (citing 86 FR 1246 (Sec. 795.105(c) and
(d))).
\120\ 86 FR 1246 (Sec. 795.105(c)); see also id. at 1201
(advising that other factors would only outweigh the two core
factors ``in rare cases'').
\121\ Id. at 1246 (Sec. 795.105(c)).
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Many commenters expressed concerns about the 2021 IC Rule's
elevation of two ``core factors'' and supported the Department's
proposal to restore a totality-of-the-circumstances analysis where no
factor (or set of factors) is given a predetermined weight. Several
commenters asserted that the use of core factors was contrary to
Supreme Court precedent. See, e.g., International Association of
Machinists and Aerospace Workers, AFL-CIO; Laborers' International
Union of North America (``LIUNA''); National Employment Law Project
(``NELP'). The AFL-CIO and the North America's Building Trades Unions
(``NABTU'') further commented that the 2021 IC Rule's elevation of
control and opportunity for profit or loss effectively (and
impermissibly) adopted a common law test for independent contractor
status. The Signatory Wall and Ceiling Contractors Alliance
(``SWACCA'') stated that ``[b]y giving greater emphasis to these two
factors . . . the [2021 IC Rule] improperly narrows the analysis of the
facts and circumstances surrounding the business-worker relationship,
thereby reducing the scope of the FLSA's protections.'' See also State
AGs (commenting that the 2021 IC Rule's ``emphasis on two `core'
factors . . . negated the need to fully consider the remaining
factors''). Farmworker Justice commented that the 2021 IC Rule's use of
core factors could facilitate the misclassification of farmworkers,
whose employment status is particularly dependent on the economic
reality factors examining the skill and integrality of the work being
performed. See also Joint Comment from the Center for Law and Social
Policy & Governing for Impact (``CLASP & GFI'') (same).
Other commenters supported the 2021 IC Rule's use of core factors
and did not agree with the Department's proposal to change the 2021 IC
Rule's analysis. Pointing to the Department's review of appellate case
law described in the 2021 IC Rule preamble,\122\ several commenters
stated that the elevation of the control and opportunity for profit or
loss factors was fully consistent with the outcome of FLSA court
decisions, if not their explicit reasoning. See, e.g., Associated
Builders and Contractors (``ABC''); Coalition to Promote Independent
Entrepreneurs (``CPIE''); Flex; FSI. Several commenters, like the Club
for Growth, Flex, and Modern Economy Project (``MEP'') agreed with the
2021 IC Rule's determination that the control and the opportunity for
profit or loss factors ``drive at the heart'' of economic
dependence.\123\ CWI asserted that ``it is simply inaccurate that no
court has determined, as a general rule, that any core factor should be
afforded greater weight in determining whether an individual is an
[employee].'' See also CPIE.
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\122\ See 86 FR 1196-98.
\123\ Id. at 1196.
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Having considered the comments, the Department continues to believe
that the 2021 IC Rule was in tension with the Act, judicial precedent,
and congressional intent. As the Department explained in the NPRM,
there is no statutory basis for such a predetermined weighting of the
factors and the Department is concerned that prioritizing two core
factors over other factors may not fully account for the Act's broad
definition of ``employ,'' as interpreted by the courts. The Department
agrees with those commenters that noted that the elevation of two core
factors improperly narrowed the analysis of the relevant facts, thereby
reducing the scope of the FLSA's protections. For example, if facts
relevant to the control and opportunity for profit or loss factors both
point to independent contractor status for a particular worker but
weakly so, those factors should not be presumed to carry more weight
than stronger factual findings under other factors (e.g., the existence
of a lengthy working relationship under the ``permanence'' factor and
the performance of work that does not require specialized skills and is
an integral part of the business), which would indicate that the worker
is an employee.
Moreover, the Department is not aware of any court that has, as a
general rule, elevated any one economic reality factor or subset of
factors above others, despite receiving several comments suggesting
that there was such case law. The 2021 IC Rule did not cite or rely on
any particular decision where a court announced such a general rule
predetermining the weight of some of the economic reality factors.
Further, the Department has examined cases raised by commenters in
support of the core factor analysis and none stand for the proposition
that a predetermined elevation of any factor or set of factors is
appropriate under the economic reality analysis for worker
classification under the FLSA. Rather, the cases cited by commenters
are either relevant to a different statute such as the Americans with
Disabilities Act (``ADA'') or Title VII, reference a joint employment
analysis rather than an employee classification analysis, or have had
excerpts taken out of context.\124\ While
[[Page 1651]]
courts and the Department may focus on some relevant factors more than
others when analyzing a particular set of facts and circumstances, this
does not mean that it is possible or permissible to derive from these
fact-driven decisions universal rules regarding which factors deserve
more weight than the others when the courts themselves have not set
forth any such universal rules despite decades of opportunity.
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\124\ For example, although some commenters cited Walsh v.
Medical Staffing of America, that case explicitly stated that ``[n]o
single factor in the six-factor test is dispositive as `the test is
designed to capture the economic realities of the relationship
between the worker and the putative employer.' '' 580 F. Supp. 3d
216, 229 (E.D. Va. 2022) (quoting McFeeley, 825 F.3d at 241). The
Medical Staffing court's reference to Smith v. CSRA, 12 F.4th 396,
413 (4th Cir. 2021), is unpersuasive since that case addressed
employment status under the Americans with Disabilities Act, not the
FLSA. See CSRA, 12 F.4th at 412-13. Other cases cited by commenters
in support of core factors are inapposite. See Brown v. BCG Attorney
Search, No. 12 C 9596, 2013 WL 6096932, at *1 (N.D. Ill. Nov. 20,
2013) (citing Knight v. United Farm Bureau Mut. Ins. Co., 950 F.2d
377, 378 (7th Cir. 1991), which concerned Title VII not the FLSA);
Meyer v. U.S. Tennis Ass'n, No. 1:11-cv-06268 (ALC)(MHD), 2014 WL
4495185, at *6 (S.D.N.Y. Sept. 11, 2014) (citing Wadler v. Eastern
Coll. Athletic Conference, No. 00-civ-5671, 2003 WL 21961119, at *2
(S.D.N.Y. Aug. 14, 2003), a Title VII case not an FLSA case); see
also Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 135 (2d Cir.
1999) (joint employment not worker classification); Zheng v. Liberty
Apparel Co. Inc., 355 F.3d 61 (2d Cir. 2003) (joint employment not
worker classification); Razak v. Uber Technologies, Inc., 951 F.3d
137, 145 (3d Cir. 2020) (making the uncontroversial statement that
the control factor ``is highly relevant to the FLSA analysis'' while
also reaffirming the Third Circuit's statement that ``neither the
presence nor absence of any particular factor is dispositive'' and
that ``courts should examine the circumstances of the whole
activity'' (quoting DialAmerica, 757 F.2d at 1382)).
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The Supreme Court has emphasized that employment status under the
economic reality test turns upon ``the circumstances of the whole
activity,'' rather than ``isolated factors.'' \125\ Federal appellate
courts have repeatedly cautioned against a mechanical or formulaic
application of the economic reality test,\126\ and specifically warn
that it `` `is impossible to assign to each of these factors a specific
and invariably applied weight.' '' \127\ The 2021 IC Rule's elevation
of two ``core factors'' was also in tension with judicial precedent,
expressed by the Supreme Court and federal courts of appeals, that no
single factor in the analysis is dispositive.\128\ Thus, the 2021 IC
Rule's predetermined and mechanical weighting of factors was not
consistent with how courts have, for decades, applied the economic
reality analysis.\129\
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\125\ Rutherford, 331 U.S. at 730; see also Silk, 331 U.S. at
716, 719 (denying the existence of ``a rule of thumb to define the
limits of the employer-employee relationship'' and determining
employment status based on ``the total situation'').
\126\ See, e.g., Parrish, 917 F.3d at 380 (``And, obviously, the
factors should not `be applied mechanically.' '') (quoting Brock v.
Mr. W Fireworks, Inc., 814 F.2d 1042, 1043-44 (5th Cir. 1987));
Superior Care, 840 F.2d at 1059 (``Since the test concerns the
totality of the circumstances, any relevant evidence may be
considered, and mechanical application of the test is to be
avoided.'').
\127\ Parrish, 917 F.3d at 380 (quoting Hickey, 699 F.2d at
752); see also Scantland, 721 F.3d at 1312 n.2 (``The weight of each
factor depends on the light it sheds on the putative employee's
dependence on the alleged employer, which in turn depends on the
facts of the case.'') (quoting Santelices, 147 F. Supp. 2d at
1319)).
\128\ See, e.g., Silk, 331 U.S. at 716 (explaining that ``[n]o
one [factor] is controlling'' in the economic realities test);
Morrison, 253 F.3d at 11 (``No one factor standing alone is
dispositive and courts are directed to look at the totality of the
circumstances and consider any relevant evidence.''); Dole v. Snell,
875 F.2d 802, 805 (10th Cir. 1989) (``It is well established that no
one of these factors in isolation is dispositive; rather, the test
is based upon a totality of the circumstances.''); Lauritzen, 835
F.2d at 1534 (``Certain criteria have been developed to assist in
determining the true nature of the relationship, but no criterion is
by itself, or by its absence, dispositive or controlling.''); Selker
Bros., 949 F.2d at 1293 (``It is a well-established principle that
the determination of the employment relationship does not depend on
isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.'').
\129\ See McFeeley, 825 F.3d at 241 (``While a six-factor test
may lack the virtue of providing definitive guidance to those
affected, it allows for flexible application to the myriad different
working relationships that exist in the national economy. In other
words, the court must adapt its analysis to the particular working
relationship, the particular workplace, and the particular industry
in each FLSA case.'').
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Regarding comments relying on the 2021 IC Rule's reference to an
appellate case law analysis to support the elevation of core factors,
the Department has carefully reconsidered the cases cited in the 2020
NPRM and 2021 IC Rule in support.\130\ The appellate cases relied on in
the 2020 NPRM \131\ and 2021 IC Rule to support the 2021 IC Rule's
creation of ``core factors'' do not, themselves, elevate these two
factors--rather, the 2021 IC Rule made assumptions about the reasoning
behind the courts' decisions that are not clear from the decisions
themselves and in some cases are contrary to the decisions'
instructions that the test should not be applied in a mechanical
fashion.\132\ In fact, most of the decisions cited as supporting a
``core factor'' analysis based on the case law review explicitly deny
assigning any predetermined weight to these factors, and instead state
that they considered the factors as part of an analysis of the whole
activity, with no determinative single factor.\133\ Particularly when
viewed in the context of repeated statements from the courts that no
one factor in the economic reality test is dispositive, divining from
the cases a conclusion that is the exact opposite from what the courts
say that they are doing is not persuasive. The Department now believes
that the 2020 NPRM and 2021 IC Rule's discussion of the case law in
support of the core factors improperly simplified the courts' analysis
in an attempt to quantify the probative value of certain factors in a
manner that is facially inconsistent with the decisions themselves.
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\130\ The 2021 IC Rule referenced on several occasions a review
of appellate case law since 1975 to justify its elevation of two
``core'' factors. See 86 FR at 1194, 1196-97, 1198, 1202, 1240.
\131\ 85 FR 60619.
\132\ Federal courts of appeals have repeatedly cautioned
against the ``mechanical application'' of the economic reality
factors, including in the cases cited in support of the
predetermined elevation of core factions. See, e.g., Saleem v. Corp.
Transp. Grp., Ltd., 854 F.3d 131, 139 (2d Cir. 2017) (``Relevant
FLSA precedent, despite endorsing the Silk factors, cautions against
their `mechanical application.' '') (quoting Superior Care, 840 F.2d
at 1059). And as explained herein, courts of appeals make clear that
the analysis should draw from the totality of circumstances, with no
single factor being determinative by itself.
\133\ See, e.g., Hobbs, 946 F.3d at 829 (``No single factor is
determinative. 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.'') (quotation marks
omitted) (citing Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th
Cir. 2008)); Parrish, 917 F.3d at 380 (noting that no one factor is
determinative and ``obviously, the factors should not `be applied
mechanically' '') (quoting Mr. W Fireworks, 814 F.2d at 1043);
Saleem, 854 F.3d at 139-40 (explaining that employment relationships
are determined by the circumstances of the whole activity);
McFeeley, 825 F.3d at 241 (``No single factor is dispositive,--all
six are part of the totality of circumstances presented.'') (citing
Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d 668, 675
(1st Cir. 1998)) (internal citation and quotation marks omitted);
Barlow v. C.R. England, Inc., 703 F.3d 497, 506 (10th Cir. 2012) (``
`None of the factors alone is dispositive; instead, the court must
employ a totality-of-the-circumstances approach.' '') (citing Baker
v. Flint Eng'g & Const. Co., 137 F.3d 1436, 1440 (10th Cir. 1998));
Schultz v. Capital Int'l Sec., Inc., 466 F.3d 298, 305 (4th Cir.
2006) (``No single factor is dispositive; again, the test is
designed to capture the economic realities of the relationship
between the worker and the putative employer.'').
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Additionally, while there are certainly many cases in which the
classification decision made by the court aligns with the
classification indicated by the control and opportunity for profit or
loss factors, the 2021 IC Rule did not identify any cases stating that
those two factors are ``more probative'' of a worker's classification
than other factors. Rather, the 2021 IC Rule acknowledged that there
are cases in which the classification suggested by the control factor
did not align with the worker's classification as determined by the
courts.\134\ The Department has also identified appellate cases in
which the classification suggested by the profit or loss factor, for
example, did not align with the worker's classification as determined
by the courts or in which that factor was simply not addressed due to
the fact-specific nature of the analysis. See, e.g., Nieman v. Nat'l
Claims Adjusters, Inc., 775 F. App'x 622, 625 (11th Cir. 2019)
(concluding that worker was an independent contractor without
considering profit or loss or integral factors because facts were not
presented on those issues); Simpkins v. DuPage Hous. Auth., 893 F.3d
962, 967 (7th Cir. 2018) (reversing the district court's summary
judgment decision and remanding case for determination of employee
status without addressing opportunity for profit or loss); Thomas v.
TXX Servs., Inc., 663 F. App'x 86, 90 (2d Cir. 2016) (reversing summary
judgment on the issue of plaintiffs' status as employees
[[Page 1652]]
under the FLSA but not discussing opportunity for profit or loss);
Meyer v. U.S. Tennis Ass'n, 607 F. App'x 121, 123 (2d Cir. 2015)
(affirming summary judgment decision and concluding that district court
did not err in determining that plaintiffs were independent contractors
where district court found that the profit or loss factor ``cuts both
ways'') (quoting Meyer, 2014 WL 4495185, at *7); Johnson v. Unified
Gov't of Wyandotte Cnty./Kansas City, Kansas, 371 F.3d 723, 730 (10th
Cir. 2004) (affirming jury verdict that workers were independent
contractors despite concluding that ``[t]he jury could have viewed [the
profit or loss] factor as not favoring either side''); Donovan v.
Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981) (noting that the worker
``could elect to be paid by the hour or by the job and thus profit from
foresight'' but that this and other facts were not sufficient ``to
counterbalance the strong indicia of employee status''). As such, it is
clear that mechanically deconstructing certain court decisions and
considering what those courts have said about only two factors--even
when the courts did not present their analyses in this manner--ignores
the broader approach that most courts have taken in determining worker
classification.
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\134\ See 86 FR 1196-97.
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Moreover, it is necessarily the case when applying a multifactor
balancing test that when any two factors of that test both point toward
the same outcome, the probability of that indicated outcome aligning
with the ultimate outcome increases. The 2021 IC Rule did not address
whether a different combination of two factors would yield similar
results. Yet, an in-depth review of the case law indicates that it
would yield similar results, as most of the cases cited in the 2020
NPRM and 2021 IC Rule in support of its core factor analysis had
multiple factors pointing in the same direction.\135\ This further
underscores the unduly narrow focus on two ``core factors'' in the 2021
IC Rule.
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\135\ Unsurprisingly, most of the cases cited in support of the
core factor analysis had multiple factors pointing in the same
direction, not only control and opportunity for profit or loss. See,
e.g., Hobbs, 946 F.3d at 830-36 (all factors pointing in same
direction); Verma v. 3001 Castor, Inc., 937 F.3d 221, 230-32 (3d
Cir. 2019) (control, profit or loss, integral, skill, and investment
all pointing in same direction); Gayle v. Harry's Nurses Registry,
Inc., 594 F. App'x 714, 717-18 (2d Cir. 2014) (control, profit or
loss, and integral all pointing in same direction); Schultz, 466
F.3d at 307-09 (control, profit or loss, investment, permanence,
integral all pointing in same direction); Parrish, 917 F.3d at 379-
388 (control, profit or loss, skill, permanence all pointing same
direction); Saleem, 854 F.3d at 140-48 (control, profit or loss,
investment, permanence all pointing same direction); Mid-Atl.
Installation Servs., 16 F. App'x at 106-08 (control, profit or loss,
investment, skill all pointing same direction); Off Duty Police, 915
F.3d at 1059-1062 (profit or loss, investment, permanence, skill,
and integral all pointing in same direction); McFeeley, 825 F.3d at
243-44 (control, profit or loss, investment, skill, and integral all
pointing in same direction); Eberline v. Media Net, L.L.C., 636 F.
App'x 225, 228-29 (5th Cir. 2016) (control, profit or loss,
investment, and skill all pointing in same direction).
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In any event, the 2021 IC Rule significantly altered the
``control'' and ``opportunity for profit or loss'' factors, changing
what facts may be considered for each, as discussed more fully in
section V. For example, contrary to the approach taken by most courts,
the 2021 IC Rule placed a significant focus on the worker's control
rather than the potential employer's control and recast the opportunity
for profit or loss factor as indicating independent contractor status
based on the worker's initiative or investment. Thus, irrespective of
whether control and opportunity for profit or loss were more frequently
aligned with the ultimate result in prior appellate cases, the new
framing of these factors, as redefined in the 2021 IC Rule, set forth a
new standard for analysis that is unsupported by precedent.
2. The Role of Control in the 2021 IC Rule's Analysis
The 2021 IC Rule identified ``the nature and degree of control over
the work'' as one of two core factors given ``greater weight'' in the
independent contractor analysis.\136\ In the NPRM, the Department
expressed concern that elevating the importance of control in every
FLSA employee or independent contractor analysis brings the 2021 IC
Rule closer to the common law control test that courts have rejected
when interpreting the Act. Accordingly, the NPRM proposed restoring
control to one of six factors to be considered, with no single factor
being determinative.
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\136\ Id. at 1246-47 (Sec. 795.105(c), (d)).
---------------------------------------------------------------------------
Commenter views on the 2021 IC Rule's emphasis on control
overlapped with those responding to its creation of ``core factors.''
For example, several commenters in support of the NPRM asserted that
elevating the role of control makes the 2021 IC Rule's analysis too
similar to a common law control test. See, e.g., AFL-CIO; LIUNA; NABTU;
State AGs. Lawyers' Committee for Civil Rights Under Law & the
Washington Lawyers' Committee for Civil Rights and Urban Affairs
(``LCCRUL & WLC'') discussed court decisions where workers were found
to be misclassified employees under the economic reality test despite a
lack of ``actual control'' exercised by the employer, implying that the
outcomes might have been different if courts had applied the 2021 IC
Rule. NELP requested that the Department further deemphasize the
relevance of control, asserting that ``the `control' factor is furthest
removed from the statutory `suffer or permit' language, and that an
absence of control is not particularly telling given that language.''
Finally, several commenters asserted that the 2021 IC Rule's elevation
of control is doubly problematic in view of alterations to the control
factor which, in commenters' views, make the factor less likely to
indicate employee status. See NWLC (``[T]he 2021 Rule not only gave the
`control' factor outsized importance, but impermissibly narrowed the
concept of control itself by focusing on control over work exercised by
the individual worker, as opposed to the right to control by an
employer, and defining control primarily with reference to
considerations that are often disregarded as irrelevant by courts.'');
see also AFL-CIO; International Brotherhood of Teamsters (``IBT'').
As discussed earlier, commenters opposed to the NPRM stated that
the control factor should be given added weight in the economic reality
test (along with the opportunity for profit or loss factor), due to its
purported strong correlation with the ultimate outcomes of prior FLSA
court decisions. See, e.g., ABC; CPIE; Flex; FSI. CWI commented that
the 2021 IC Rule's elevation of control served a ``definitional
purpose,'' identifying control as a foundational aspect of the
``dependence'' in ``economic dependence.'' See also Club for Growth
(``[Because control is] virtually synonymous with what it means to be
an independent businessperson . . . it makes sense that [it] typically
matter[s] more than, for instance, the duration of a business
relationship or a worker's level of skill.''). The U.S. Chamber
commented that the 2021 IC Rule ``rightly elevated the importance of
control'' because ``courts and scholars have found . . . no functional
difference between'' the economic reality and common law control tests.
See also Club for Growth (``It would be odd to say that control, which
underpins the concept of employment and agency law generally, should
have no more weight than, say, whether the worker bought his own
boots.'').
As noted in the NPRM, although the 2021 IC Rule's analysis
regarding who is an employee and who is an independent contractor was
not the same as the common law control analysis, elevating the
importance of control in every FLSA employee or independent contractor
analysis brought the 2021 Rule closer to
[[Page 1653]]
the common law control test that courts have rejected when interpreting
the Act.\137\ The Supreme Court has repeatedly stated that the Act
establishes a broader scope of employment for FLSA purposes than under
a common law analysis focused on control.\138\ The Department remains
concerned that the outsized role of control under the 2021 IC Rule's
analysis was contrary to the Act's text and case law interpreting the
Act's definitions of employment and as such disagrees with commenters
who suggested that control is essentially synonymous with economic
dependence and should be given more weight. The Department, however,
also disagrees with NELP that the FLSA's ``suffer or permit'' standard
suggests that control should be afforded less weight than other
economic reality factors, as courts have similarly not adopted such an
approach.
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\137\ The Department previously identified this concern as one
of the primary reasons for the Withdrawal Rule. See 86 FR 24311.
\138\ See Darden, 503 U.S. at 324-26; Portland Terminal, 330
U.S. at 150-51; and Rutherford, 331 U.S. at 728.
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3. The 2021 IC Rule Improperly Altered Several Factors by Precluding
the Consideration of Relevant Facts
The NPRM stated that the Department remained concerned that the
2021 IC Rule's preclusion of certain facts from being considered under
the factors improperly narrowed the economic reality test and did not
allow for a full consideration of all facts which might be relevant to
determining whether a worker is economically dependent upon an employer
for work or in business for themself. Examples of such narrowing from
the 2021 IC Rule include: (1) stating that ``control'' indicative of an
employment relationship must involve an employer's ``substantial
control over key aspects of the performance of the work,'' excluding
requirements ``to comply with specific legal obligations, satisfy
health and safety standards, carry insurance, meet contractually
agreed-upon deadlines or quality control standards, or satisfy other
similar terms;'' \139\ (2) making the ``opportunity for profit or
loss'' factor indicate independent contractor status based on either
the worker's initiative or investment (even if either a lack of
initiative or lack of investment suggests that the worker is an
employee); \140\ (3) disregarding the employer's investments; \141\ (4)
disregarding the importance or centrality of a worker's work to the
employer's business; \142\ and (5) downplaying the employer's reserved
right or authority to control the worker.\143\ In each of these ways,
the 2021 IC Rule limited the scope of facts and considerations
comprising the analysis of whether the worker is an employee or
independent contractor.
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\139\ 86 FR 1246-47 (Sec. 795.105(d)(1)(i)).
\140\ Id. at 1247 (Sec. 795.105(d)(1)(ii)) (``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.'').
\141\ Id.; see also id. at 1188 (``[T]he Department reaffirms
its position that comparing the individual worker's investment to
the potential employer's investment should not be part of the
analysis of investment.'').
\142\ Id. at 1247 (Sec. 795.105(d)(2)(iii)); see also id. at
1248 (noting through an example in Sec. 795.115(b)(6)(ii) that
``[i]t is not relevant . . . that the writing of articles is an
important part of producing newspapers''); accord id. at 1195
(responding to commenters regarding the Department's decision to
shift to an ``integrated unit of production'' analysis).
\143\ See id. at 1246-47 (advising, in Sec. 795.105(d)(1)(i),
that the control factor indicates employment status if a potential
employer ``exercises substantial control over key aspects of the
performance of the work'') (emphasis added); id. at 1247 (advising,
in Sec. 795.110, that ``a business' contractual authority to
supervise or discipline an individual may be of little relevance if
in practice the business never exercises such authority''); see also
id. at 1203-04 (same in response to commenters).
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Numerous commenters opined on the 2021 IC Rule's general narrowing
of the economic reality test and the extent to which it justifies this
rulemaking. For example, IBT stated that ``[t]he current rule conflicts
with the intended broad definition and coverage of the [FLSA] and
adopts an impermissibly narrow test for determining employee status.''
See also, e.g., AFL-CIO (``Overall, the 2021 IC Rule contracted the
coverage of the FLSA, strongly contrary to congressional intent and
Supreme Court precedent.''); Outten & Golden LLP (``The January 2021
rule restricts FLSA coverage to a smaller subset of workers than those
whose work is `suffer[ed] or permit[ted]' under the statute's expansive
coverage.''). While some commenters focused on the 2021 IC Rule's
elevation of ``control'' as a core factor, other commenters
additionally addressed the rule's alteration of individual economic
factors. See, e.g., LCCRUL & WLC (describing the 2021 IC Rule as
``elevating facts tending to show independent contractor status, while
reducing the probative weight of other factors and downplaying facts
tending to show employee status''); NECA & IBEW (``The 2021 IC Rule
also narrowed the facts to be considered under the `non-core'
factors.''). The AFL-CIO and LCCRUL & WLC both identified two changes
to the factors from the 2021 IC Rule as particularly problematic: the
diminution of an employer's reserved right to control, and the
alteration of the ``integral part'' factor (excluding any consideration
of the importance or centrality of the work to the employer).
Other commenters defended the merit of the 2021 IC Rule's five
economic reality factors, as discussed in greater detail in section V.
As a general matter, these commenters praised the 2021 IC Rule's
description of the economic reality factors for reducing overlap and
redundancy compared to the approach taken by courts, stating that such
changes brought greater clarity to the regulated community. See, e.g.,
American Hotel & Lodging Association; Center for Workplace Compliance
(``CWC''); FSI; MEP; National Retail Federation and the National
Council of Chain Restaurants (``NRF & NCCR''). Discussing examples such
as the ``integrated unit'' factor's exclusion of the importance or
centrality of the individual's work to the potential employer's
business,\144\ CWI asserted that the 2021 IC Rule ``ensures that each
factor is properly tailored to address the ultimate determinant of
employee or independent contractor status--economic dependence.''
---------------------------------------------------------------------------
\144\ See 86 FR 1247 (Sec. 795.105(d)(2)(iii)).
---------------------------------------------------------------------------
Having considered the comments on this issue, the Department
believes that the 2021 IC Rule altered various economic reality factors
in ways that improperly narrowed the economic reality test, because
such alterations minimized or excluded facts which in many cases are
relevant for determining whether a worker is economically dependent
upon an employer for work or in business for themself. The Department
remains of the view that the 2021 IC Rule's alteration of several
economic reality factors provides another important justification for
this rulemaking. Commenter feedback on the proper articulation of each
factor in the economic reality test is described in greater detail in
section V.
B. Confusion and Uncertainty Introduced by the 2021 IC Rule
The 2021 IC Rule stated that it sought to ``significantly clarify
to stakeholders how to distinguish between employees and independent
contractors under the Act.'' \145\ However, as previously
discussed,\146\ the 2021 IC Rule introduced a new analysis regarding
employee or independent contractor classification that was materially
different from the longstanding analysis applied by courts and that
included
[[Page 1654]]
several new concepts that neither courts nor the Department had
previously applied. This final rule (and particularly rescission of the
2021 IC Rule) is needed in part because of the concern that the 2021 IC
Rule's new analysis and concepts did not provide the intended clarity.
---------------------------------------------------------------------------
\145\ Id. at 1168.
\146\ See supra section III.A.
---------------------------------------------------------------------------
First, as the Department explained in the NPRM, because the 2021 IC
Rule departed from courts' longstanding precedent, it is not clear
whether courts would have at some point adopted the Rule's analysis
were it not being rescinded as part of this rulemaking. The Department
further explained that this question could have taken years of
appellate litigation in different federal courts of appeals to sort
out, resulting in more uncertainty as to the applicable economic
reality test. Businesses operating nationwide would have had to
familiarize themselves with multiple standards for determining who is
an employee under the FLSA. This litigation and these multiple
standards would have likely caused confusion and uncertainty.\147\
---------------------------------------------------------------------------
\147\ See generally 87 FR 62229.
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Second, as the Department noted in the NPRM, the 2021 IC Rule would
have introduced several ambiguous terms and concepts into the analysis
for determining whether a worker is an employee under the FLSA or an
independent contractor. For example, those following the guidance
provided in the 2021 IC Rule had to grapple with what it means in
practice for two factors to be ``core'' factors and entitled to greater
weight. In addition, they had to determine, in cases where the two core
factors point to the same classification, how ``substantial'' the
likelihood is that they point toward the correct classification if the
additional factors point toward the other classification. Additionally,
as explained in the NPRM, the 2021 IC Rule did not specify whether the
``additional factors'' that could be considered under that rule had
less probative value (or weight) than the three non-``core'' factors.
Assuming that they did, the 2021 IC Rule would have essentially
resulted in a three-tiered multifactor balancing test, with the
``core'' factors given more weight than enumerated non-``core''
factors, and the enumerated non-``core'' factors given more weight than
the ``additional'' factors. The 2021 IC Rule would have also improperly
collapsed some factors into each other, so that, for example,
investment and initiative would have been considered only as a part of
the opportunity for profit or loss factor, requiring courts and the
regulated community to reconsider how they have long applied those
factors. These new concepts, this new weighing of the factors, and this
new treatment of the factors would have likely caused confusion and
uncertainty.\148\
---------------------------------------------------------------------------
\148\ See generally id.
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In sum, the NPRM explained that the 2021 IC Rule would have
complicated rather than simplified the analysis for determining whether
a worker is an employee or independent contractor under the FLSA, which
is further justification for this final rule to rescind and replace the
2021 IC Rule.
As a threshold matter, commenters disagreed over whether courts
would adopt and apply the 2021 IC Rule's analysis if it were left in
place. Multiple commenters agreed with the Department's concern, as
described in the NPRM, that courts might not adopt or apply the 2021 IC
Rule, which they criticized as an unlawfully narrow interpretation of
the FLSA. See, e.g., LIUNA (discussing ``the clear illegality of the
2021 Rule''); NELP (describing the 2021 IC Rule as ``a legally
incorrect standard'' that ``merits neither adherence, agency deference,
nor smallest persuasive effect''); UBC (``The 2021 Rule is so
abundantly flawed that it is ripe for challenge under the
Administrative Procedure Act.''). The State AGs commented that ``it
could take years of litigation to determine if and how courts will
adopt'' the 2021 IC Rule's analysis. See also SWACCA (``Judicial
disregard of the January 2021 Rule's interpretation of the FLSA would
create considerable confusion.''). UBC elaborated that uncertainty over
judicial adoption of the 2021 IC Rule poses a significant legal risk to
businesses, as ``any employer relying on the 2021 Rule faces the very
real possibility that their presumed compliance with the FLSA would in
fact be the opposite.'' See also NECA & IBEW (asserting that the 2021
IC Rule does not provide ``certainty and clarity'' for businesses
because courts will continue applying a broader economic reality test).
Notwithstanding their concerns with some aspects of the NPRM's proposed
guidance, some independent contractors and business stakeholders shared
the Department's concerns over whether courts would actually apply the
2021 IC Rule and the attendant risks that they would not. See, e.g.,
Ho-Chunk, Inc. (``Ho-Chunk supports the Department's revision of the
2021 IC Rule as we agree that [it] would have a confusing and
disruptive effect due to its deviation from established case law.'').
Commenters opposed to the NPRM, however, expressed confidence that,
if left in place, the 2021 IC Rule would be adopted by courts over time
and promote greater uniformity in the law. See, e.g., IMC Companies
(``After decades of uncertainty and imprecise applications of the law,
the [2021 IC Rule] was on the cusp of ushering in a new era of
streamlined analysis and consistent court decisions across all
jurisdictions.''); NRF & NCCR (``If left in place, [the 2021 IC Rule]
would undoubtedly increase consistency.''). Several of these commenters
asserted that the Department's concerns about the 2021 IC Rule's
reception by courts were speculative, unsupported by evidence, and
premature. See, e.g., American Bakers Association; CPIE; Freedom
Foundation. A comment from two fellows at the Heritage Foundation
asserted that courts would adopt the 2021 IC Rule given the deferential
standard of review afforded to agency rules that fill statutory gaps
under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
468 U.S. 837 (1984).\149\ Other commenters disputed the relevance of
the Department's concern over the 2021 IC Rule's adoption by courts,
asserting that courts were already applying different versions of the
economic reality test and arriving at different outcomes prior to the
2021 IC Rule. See, e.g., ASTA; Independent Women's Forum (``IWF''); see
also Club for Growth (``Without supporting experience, the critique is
no more than the same argument that could be leveled against virtually
any regulation.''). Finally, many commenters questioned the likelihood
that courts would adopt the NPRM's proposed guidance, which they viewed
as less consistent with the FLSA and judicial precedent than the 2021
IC Rule. See, e.g., CPIE; FSI; National Association of Manufacturers
(``NAM''); Workplace Policy Institute of Littler Mendelson, P.C.
(``WPI'').
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\149\ A far larger number of commenters--including those both
supportive and critical of the NPRM--asserted that any regulatory
guidance issued by the Department addressing employee or independent
contractor status under the FLSA would be a non-binding
``interpretive rule,'' given the Department's lack of explicit
rulemaking authority on the topic. See, e.g., Club for Growth; CWC;
NELP; Winebrake & Santillo, LLC; WPI.
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Having considered the comments, the Department continues to have
serious concerns about the extent to which federal courts would have
adopted the 2021 IC Rule, were it not being rescinded by this
rulemaking. The Department is unaware of a single federal court that
has applied the 2021 IC Rule's analysis. To the contrary, to the
Department's knowledge, only a few court decisions have even considered
the 2021 IC Rule and all expressly
[[Page 1655]]
declined to apply its analysis.\150\ Other courts that have considered
employee or independent contractor classification under the FLSA have
continued applying a broader economic reality test consistent with
their own longstanding precedent.\151\
---------------------------------------------------------------------------
\150\ See Wallen v. TendoNova Corp., No. 20-cv-790-SE, 2022 WL
17128983, at *4 (D.N.H. Nov. 22, 2022) (noting that the 2021 IC Rule
``is not controlling . . . and may not be valid''); Harris v.
Diamond Dolls of Nevada, LLC, No. 3:19-cv-00598-RCJ-CBC, 2022 WL
4125474, at *2 (D. Nev. July 26, 2022) (denying defendants' motion
to reconsider the court's earlier ruling that plaintiffs were FLSA-
covered employees in part because the 2021 IC Rule is ``not
binding''); Badillo-Rubio v. RF Constr., LLC, No. 18-CV-1092, 2022
WL 821421, at *13 (M.D. La. Mar. 17, 2022) (rejecting plaintiff's
argument that the court should apply the 2021 IC Rule's ``integrated
production'' factor as ``unnecessary'' in determining that plaintiff
was an employee). The Wallen decision is notable because, as the
court explained, the First Circuit has neither adopted nor rejected
a particular test, and thus the court was not bound by any prior
circuit-level precedent. Still, the Wallen court declined to apply
the 2021 IC Rule and applied ``the standard six-factor test.'' 2022
WL 17128983, at *3-4.
\151\ See, e.g., Acevedo v. McCalla, No. MJM-22-1157, 2023 WL
1070436, at *3-5 (D. Md. Jan. 27, 2023) (relying on the Fourth
Circuit's economic reality test to find that the worker failed to
state a claim for relief under the FLSA without reference to 2021 IC
Rule); Brunet v. GB Premium OCTG Servs. LLC, No. 4:21-CV-1600, 2022
WL 17730576, at *5-10 (S.D. Tex. Dec. 1, 2022) (applying the Fifth
Circuit's economic reality test without reference to 2021 IC Rule),
report and recommendation adopted, 2023 WL 2186441 (Feb. 23, 2023);
Ajquiixtos v. Rice & Noodles, Inc., No. 4:21-CV-01546, 2022 WL
7055396, at *2-4 (S.D. Tex. Oct. 12, 2022) (relying on the Fifth
Circuit's economic reality test and not referencing the 2021 IC Rule
to conclude that a worker was an employee and not an independent
contractor); Black v. 7714 Ent., Corp., No. 21-CV-4829, 2022 WL
4229260, at *6-8 (E.D.N.Y. July 29, 2022), report and recommendation
adopted, 2022 WL 3643969 (E.D.N.Y. Aug. 24, 2022) (relying on the
Second Circuit's economic reality test to conclude that a worker is
an employee and not an independent contractor without reference to
the 2021 IC Rule); Hill v. Pepperidge Farm, Inc., No. 3:22-CV-97-
HEH, 2022 WL 3371321, at *2-5 (E.D. Va. Aug. 16, 2022) (relying on
the Fourth Circuit's economic reality test to find that the worker
has stated a claim for relief under the FLSA without reference to
2021 IC Rule).
---------------------------------------------------------------------------
The Department disagrees with commenter assertions that the 2021 IC
Rule's analysis was more likely to be adopted by courts than the
analysis proposed in the NPRM. The Department's analysis in this
rulemaking is grounded in longstanding case law, while the new standard
and new concepts introduced by the 2021 IC Rule were a very significant
departure from that longstanding case law. For example, as previously
discussed, the 2021 IC Rule created ``core'' factors that were
automatically given greater weight in the analysis, contrary to how
every appellate court has described the economic reality test.\152\ In
line with the case law, this final rule has no ``core'' factors.
Similarly, while every federal court of appeals that has applied the
integral factor in an FLSA independent contractor case has examined
whether the worker's work is an ``integral part'' of the potential
employer's business,\153\ no circuit applies the 2021 IC Rule's
narrower inquiry into ``whether the work is part of an integrated unit
of production'' as the standard under this factor.\154\ And unlike the
2021 IC Rule, all but two circuits share the approach of listing
``investment'' and ``opportunity for profit and loss'' as separate
economic reality factors, consistent with the Supreme Court's original
listing of these factors in Silk.\155\
---------------------------------------------------------------------------
\152\ See supra section III.A.1.
\153\ See supra n.52.
\154\ See infra, section V.C.5.
\155\ 331 U.S. at 716. As discussed earlier, the Second and D.C.
Circuit Courts of Appeals describe ``investment'' and ``opportunity
for profit or loss'' as a single factor in the economic reality
test. See supra n.58.
---------------------------------------------------------------------------
Some commenters alleged that certain aspects of the NPRM's proposed
guidance were departures from judicial precedent, such as its proposal
that ``control implemented by the employer for purposes of complying
with legal obligations, safety standards, or contractual or customer
service standards may be indicative of control,'' \156\ and its
proposed consideration of investments made by the potential employer as
well as the worker.\157\ However, as the discussions of the control and
investments factors in section V explain, this final rule's guidance on
both issues is well-supported by the case law. Moreover, the Department
has made meaningful changes in this final rule to aspects of its
proposed guidance in response to comments, including the treatment of
control exercised to comply with legal obligations and the
consideration of investments made by the potential employer.\158\ The
Department believes that such changes further align this final rule's
guidance with the analysis presently applied by courts, providing
greater certainty for interested parties.
---------------------------------------------------------------------------
\156\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
\157\ 87 FR 62275 (proposed Sec. 795.110(b)(2)).
\158\ See infra, section V.C.
---------------------------------------------------------------------------
Apart from the 2021 IC Rule's reception by courts, commenters also
disagreed over whether the 2021 IC Rule's guidance brought clarity or
confusion as a standalone matter. Some commenters asserted that the
novelty of the 2021 IC Rule's analysis, for example, would have created
confusion as compared to the longstanding analysis applied by courts.
See, e.g., NELP (``By departing from decades of federal case law on the
scope of the Act's protections, and by downplaying relevant facts of an
employment relationship in the analysis, the 2021 IC Rule . . . creates
more confusion for employers and workers alike.''); SWACCA (asserting
that the ability to ``draw[] on 70 years of existing interpretations
from the courts and Department of Labor guidance'' under the NPRM's
guidance will ``save time and resources for all stakeholders compared
to the January 2021 Rule's novel, untested weighted framework.'').
In contrast, other commenters asserted that rescission and
replacement of the 2021 IC Rule would reduce certainty and clarity.
See, e.g., Americans for Prosperity Foundation (``AFPF''); Coalition of
Business Stakeholders; NAM; Republican Members of Congress; SHRM; U.S.
Chamber. Numerous commenters that preferred the 2021 IC Rule identified
its establishment of core factors as that rule's most clarifying
feature. See, e.g., Competitive Enterprise Institute (``CEI''); CWC;
IWF; Landmark Legal Foundation; National Association of Women Business
Owners (``NAWBO''); Raymond James Financial, Inc. (``Raymond James'').
Some commenters additionally supported the 2021 IC Rule's elimination
of purported redundant or overlapping considerations in various
economic reality factors. See, e.g., FSI (criticizing the NPRM's
proposed separation of the ``investment'' and ``opportunity for profit
or loss'' factors as ``yet another way in which the [NPRM] . . .
undo[es] the 2021 Rule's clarifying efforts to articulate an
appropriately weighted test with less overlapping redundancy''); MEP.
Having reviewed the comments, the Department continues to believe
that the 2021 IC Rule introduced uncertainty regarding the applicable
legal standard for determining whether a worker is an employee or an
independent contractor under the FLSA, contrary to its stated intent.
Prior to the 2021 IC Rule, there was certainty as to the applicable
legal standard for determining whether a worker was an employee or
independent contractor under the FLSA because federal courts of appeals
applied a totality-of-the-circumstances, economic reality test that did
not elevate any factors above the others. Despite slight variation in
the exact number and phrasing of specific economic reality factors,
courts and the Department generally examined the same economic reality
factors. The 2021 IC Rule, however, injected uncertainty into this area
of the law by putting forth new guidance that was at odds (for all of
the reasons discussed herein) with
[[Page 1656]]
the substantive standard applied by courts. As a result of the 2021 IC
Rule, the regulated community was confronted with inconsistent
standards for interested parties to apply to determine a worker's
status--the test from the 2021 IC Rule and the totality-of-the-
circumstances test in federal appellate case law.\159\ Leaving the 2021
IC Rule in place would have risked greater confusion regarding its
relation to well-settled circuit precedent. Thus, the 2021 IC Rule's
new standard introduced uncertainty that did not exist before.\160\
---------------------------------------------------------------------------
\159\ To the extent that there was any uncertainty around
outcomes when applying federal appellate case law beyond what would
be expected from any fact-specific test, the standard that courts
and the Department would apply prior to the 2021 IC Rule was known.
And with this rulemaking, the Department hopes to decrease any
uncertainty around outcomes by providing detailed guidance about the
application of each factor that is consistent with the case law, as
opposed to the new concepts that the 2021 IC Rule introduced.
\160\ The Department acknowledges that the 2021 IC Rule includes
several important principles from the case law, such as: economic
dependence is the ultimate inquiry, the list of economic reality
factors is not exhaustive, and no single factor is determinative.
However, as explained herein, the 2021 IC Rule was, on balance, a
departure from the case law to an extent that it introduced
uncertainty.
---------------------------------------------------------------------------
Additionally, the Department continues to believe that the aspects
of the 2021 IC Rule's analysis introduced confusion, making that rule's
guidance vulnerable to misapplication. Confusion about how to apply the
2021 IC Rule was evident in many of the comments submitted in
opposition to the Department's proposal to rescind and replace that
rule. For example, several commenters inaccurately described the 2021
IC Rule as establishing a ``two-factor test,'' see, e.g., CEI; National
Demolition Association (``NDA''), while others mistakenly assumed that
non-core factors were only considered when the two core factors pointed
to opposite classification outcomes. See, e.g., Information Technology
& Innovation Foundation; News/Media Alliance (``N/MA''); Professional
Golfers' Association of America (``PGA'').\161\ Some commenters
appeared to conflate the reduced importance of non-core factors under
the 2021 IC Rule's analysis with a reduced need to consider such
factors at all. See, e.g., National Federation of Independent
Businesses (``NFIB''); SHRM.\162\ Additionally, some commenters viewed
the 2021 IC Rule's economic reality test, in its totality, as
essentially the same as a common law control test.\163\ See The
National Council of Agricultural Employers (asserting that common law
definitions of independent contractor status ``are consistent with the
2021 IC Rule''); U.S. Chamber (asserting that ``despite the ostensible
variances between the economic realities and common law control tests,
`there is no functional difference between' these tests'').
---------------------------------------------------------------------------
\161\ The 2021 IC Rule explained that it rejected commenter
requests to ``state that if the two core factors point towards the
same classification, there is no need to consider any other
factors'' because ``in some circumstances, the core factors could be
outweighed by particularly probative facts related to other
factors.'' 86 FR 1202.
\162\ The 2021 IC Rule explained that ``there may be
circumstances where one or more of the non-core factors, upon
consideration, has little or no probative value.'' 86 FR 1202
(emphasis added).
\163\ Cf. 86 FR 1201 (``[T]he rule's standard for employment
remains broader than the common law.''); see also id. at 1239
(rejecting the adoption of a common law control test in the analysis
of regulatory alternatives).
---------------------------------------------------------------------------
Commenter confusion about the 2021 IC Rule is unsurprising because
that rule set forth a novel analysis which has not been applied by any
court. The confusion evident in the comments received reinforces the
Department's assessment, as explained in the NPRM, that the 2021 IC
Rule could have resulted in misapplication of the economic reality test
and may have conveyed to employers that more workers could be
classified as independent contractors than prior to the 2021 IC Rule.
C. Risks to Workers From the 2021 IC Rule
In the NPRM, the Department explained that to the extent the 2021
IC Rule's guidance resulted in the misclassification of employees as
independent contractors, the resulting denial of FLSA protections could
harm the affected workers. These protections include being paid at
least the federal minimum wage for all hours worked, overtime
compensation for hours worked over 40 in a workweek, and protection
against retaliation for complaining about, for example, a violation of
the FLSA. The Department further explained in the NPRM that the 2021 IC
Rule did not fully consider these potential consequences for workers.
The NPRM noted that this result could have a disproportionate impact on
women and people of color, to the extent such workers are
overrepresented in low-wage positions where misclassification is more
likely.\164\ The NPRM further noted that women and people of color
experience multiple types of economic inequities in the labor force,
including gender and racial wage gaps and occupational segregation, and
that the misclassification of these workers as independent contractors
deprives them of wage and hour protections that could help alleviate
some of this inequality.\165\
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\164\ See 87 FR 62230 (describing commenter feedback from the
Withdrawal Rule asserting that ``misclassification is rampant in
low-wage, labor-intensive industries where women and people of
color, including Black, Latinx, and AAPI workers, as
overrepresented'').
\165\ Id.
---------------------------------------------------------------------------
Many commenters, including worker advocacy groups, labor unions,
and other stakeholders, shared views about the 2021 IC Rule's effect on
employees vulnerable to misclassification. The Department also received
significant feedback regarding the potential effects of this rulemaking
on independent contractors, as well as from commenters who did not
agree that the 2021 IC Rule would or could increase the prevalence of
misclassification.
Many commenters agreed with the Department's assessment that the
misclassification of employees as independent contractors remains a
serious problem for workers, businesses, and the broader economy.
Several commenters referenced studies or data estimating a high
prevalence of misclassification in the economy, in addition to those
mentioned in the NPRM's regulatory impact analysis.\166\ See, e.g.,
NABTU (citing multiple studies estimating the misclassification of
construction workers in various states); State AGs (discussing a June
2022 report estimating that ``at least 10 percent of New York State's
workers are misclassified as independent contractors'' and a December
2022 report estimating that ``approximately 259,000 workers in
Pennsylvania are wrongly classified as independent contractors'').
CLASP & GFI asserted that the misclassification of employees as
independent contractors is ``occurring with increased frequency as
workplaces `fissure,' '' and ``firms . . . outsource bigger and bigger
portions of their workforces to other entities and to workers
themselves.'' Similarly, the UFCW asserted that misclassification is a
``pervasive and growing problem,'' citing one report showing that in
Washington state, misclassification increased from 5 percent of
employers misclassifying workers in 2008 to 14 percent of employers
misclassifying workers in 2017, with construction workers, clerical
workers, and hotel and restaurant workers the most likely to be
misclassified.'' Several commenters emphasized the prevalence of
misclassification in specific industries. See, e.g., American
Federation of State,
[[Page 1657]]
County and Municipal Employees (custodial work); Farmworker Justice
(agriculture); IntelyCare Inc. (nursing); National Domestic Workers
Alliance (``NDWA'') (domestic and home care); REAL Women in Trucking
(trucking); Service Employees International Union (janitorial and gig
work); SMACNA (construction).
---------------------------------------------------------------------------
\166\ See 87 FR 62266 (citing a 2020 study from NELP estimating
that ``10 to 30 percent of employers (or more) misclassify their
employees as independent contractors).
---------------------------------------------------------------------------
Many commenters discussed how the misclassification of employees as
independent contractors deprives workers of wages. SWACCA, for example,
commented that ``the estimated 20 percent of construction workers who
should be treated as employees (but are not) lose close to $1 billion
in wages annually.'' Commenters pointed out that misclassification
undercuts employers that comply with the law and causes a ``race to the
bottom'' in labor standards. See, e.g., AARP; Indiana, Illinois, Iowa
Foundation for Fair Contracting; SWACCA (estimating that ``construction
companies that treat their workforce as independent contractors save at
least 20 to 30 percent on labor costs''). Gale Healthcare Solutions
stated that ``[t]emporary staffing platform companies that hire nursing
staff as W2 employees lose talent to companies that use a 1099 model,
as 1099 agencies promote wages that appear higher because they do not
provide traditional protections of employment or account for
withholding taxes and additional expenses required by the W-2 model.''
Alto Experience Inc., a ridesharing company that classifies its drivers
as employees, asserted that the misclassification of employees as
independent contractors constitutes an ``unfair method of competition
in commerce'' that the FLSA was passed to prevent.
Beyond wage effects, commenters identified and discussed many other
consequences of worker misclassification. For example, the NWLC
asserted ``by strengthening the employment test to reduce
misclassification, the Department can ensure that more nursing mothers
will be able to hold their employers accountable for providing
appropriate facilities and adequate break time.'' See also A Better
Balance (``[W]e are pleased that this rule will help to ensure that
workers are able to access their rights under the Family and Medical
Leave Act and the Break Time for Nursing Mothers law.''). As discussed
more fully in section VII, commenters also raised other negative
consequences of misclassification for workers beyond those directly
related to the FLSA, such as: decreased access to employment benefits
such as health insurance or retirement benefits, inability to access
paid sick leave, unemployment insurance, and worker's compensation, a
lack of ability to take collective action to improve workplace
conditions, and a lack of anti-discrimination protections under various
civil rights laws. See, e.g., Smith Summerset & Associates LLC; UFCW.
Several commenters emphasized the uniquely harmful risks and
consequences of misclassification for workers in certain demographic
groups. See, e.g., AARP (senior workers); California Immigrant Policy
Center (immigrant workers); Equal Justice Center (low-income workers);
LCCRUL & WLC (workers of color); NWLC (women workers). In a joint
comment, the Action Center on Race and the Economy, Color of Change,
Liberation in a Generation, Unemployed Workers United, MediaJustice,
the National Black Worker Center, Muslims for Just Futures, Raise Up
South Florida, Human Impact Partners, ROC United, Interfaith Center on
Corporate Responsibility, HEAL Food Alliance, and the Public
Accountability Initiative/LittleSis.org (``ACRE et al.'') pointed to
the overrepresentation of workers of color in low-wage, labor-intensive
industries where misclassification is pervasive and asserted that they
``view misclassification as a critical racial justice issue that the
DOL must help address.''
Many commenters agreed with the Department's assessment that the
2021 IC Rule has increased the risk of misclassification. For example,
SWACCA asserted that challenges in enforcing misclassification in the
construction industry ``would be compounded if enforcement officials
had to pursue bad actors under the January 2021 Rule's novel
interpretation of the law that could require protracted litigation to
clarify and would permit more contractors to argue that their
classification of workers as independent contractors is permissible, or
at least defensible, under the FLSA.'' The International Association of
Machinists and Aerospace Workers asserted that the 2021 IC Rule
``creates perverse incentives for companies to misclassify workers,''
because ``[t]he more easily a company can misclassify its workforce,
the more incentive for other companies to do the same, creating a `race
to the bottom' in employment practices and social standards to the
detriment of workers.'' CLASP & GFI and Farmworker Justice both
commented that the 2021 IC Rule's elevation of the ``control'' and
``opportunity for profit or loss'' factors might exacerbate
misclassification among farmworkers, whose employment status is
particularly dependent on the consideration of factors other than the
2021 IC Rule's ``core'' factors.
Commenters opposed to this rulemaking generally did not dispute the
occurrence or importance of employee misclassification, at least in
certain industries. For example, a lawyer representing employers
acknowledged that ``independent contractor status can be abused.'' See
also, e.g., HR Policy Association (``The Association does not question
the fact that worker misclassification does occur and that individuals
may be deprived of rights and benefits crucial for their
livelihood.''); U.S. Black Chambers, Inc. (``[W]e agree that worker
misclassification is a pressing issue to be solved at the Federal
level[.]''). Some commenters, however, alleged that rescinding and
replacing the 2021 IC Rule would be an overbroad solution for a problem
that could be addressed with industry-specific measures. See H.R.
Policy Association; IMC Companies, LLC (trucking company) (``What we do
ask is that the WHD and legislators across our country recognize that
targeted regulation of these [app-based technology] companies is the
answer to this issue.''). Other commenters asserted that, in the NPRM,
the Department failed to explain how the 2021 IC Rule has increased the
risk of worker misclassification or otherwise hampered efforts to
reduce misclassification. See, e.g., IWF (``The Department has provided
no evidence that these drastic changes are necessary to prevent
misclassification, or even that widespread misclassification actually
occurred under the 2021 Rule.''); NAWBO. Some commenters referenced
Departmental press releases published after the March 2022 CWI v. Walsh
decision (which ruled that the 2021 IC Rule had taken effect in March
2021) as evidence that the Department is successfully using the 2021 IC
Rule to combat misclassification. See, e.g., Coalition of Business
Stakeholders (``DOL has repeatedly boasted about the cases it has
brought showing improper classification of independent contractors and
the amounts of back pay remedies it has secured.''); see also Flex;
U.S. Chamber.
Having considered the comments, the Department remains of the view
that the misclassification of employees as independent contractors is a
serious problem affecting workers who do not receive proper wages and
businesses that have to compete in the economy against businesses that
unlawfully misclassify their workers. As explained more fully in
section III.B., the 2021 IC
[[Page 1658]]
Rule increased the risk of worker misclassification by adding
considerable confusion and uncertainty over the proper analysis for
distinguishing between FLSA-covered employees and independent
contractors. By elevating certain factors, devaluing other factors, and
precluding the consideration of certain relevant facts, the novel--and
unprecedented--analysis in the 2021 IC Rule has improperly narrowed the
focus of the inquiry in a way that may have led employers to believe
the test no longer includes as many considerations; the comments
received evidenced such misunderstanding. If widespread misperceptions
about the 2021 IC Rule articulated by some of its supporters in the
comments are any indication, such confusion and misapplication of that
rule could deprive many workers of protections they are entitled to
under the FLSA.
The Department's 2022 press releases addressing misclassification
enforcement referenced by some commenters primarily involved
investigations by the Department that were initiated before the 2021 IC
Rule was published and/or covered a period of investigation prior to
March 8, 2021. In any event, the Department's ability to pursue some
enforcement actions involving misclassification while applying the 2021
IC Rule's guidance is not a persuasive reason to retain the 2021 IC
Rule. The Department is not promulgating this rule because the 2021 IC
Rule renders the Department powerless to enforce misclassification.
Rather, the 2021 IC Rule's guidance injected a new framework for
analyzing whether workers are employees or independent contractors
under the FLSA that is inconsistent with decades of case law
interpreting the Act. As explained earlier, the Department is further
concerned that widespread stakeholder confusion over the 2021 IC Rule
and its guidance regarding how its factors should be applied (as
discussed in section II.B.) may be causing some misclassification that
would not occur in the absence of the rule. For these reasons, the
Department believes that rescinding the 2021 IC Rule will likely both
reduce misclassification and restore the Department's ability to
consider all relevant facts under a totality-of-the-circumstances
economic reality test that does not predetermine the weight of certain
factors, consistent with the text of the FLSA and decades of judicial
precedent.
Other commenters expressed concern that rescinding the 2021 IC Rule
will result in the widespread reclassification of workers who should be
considered independent contractors. See Cambridge Investment Research,
Inc. (``[T]he practical result of the [NPRM] . . . will be that many
workers--including workers who want to be independent contractors--will
be reclassified as employees under the FLSA.''); SBA Office of Advocacy
(``Small businesses and independent contractors have told Advocacy that
this rule may be disruptive and detrimental to the millions of
businesses in industries that rely upon the independent contractor
model.''). This concern was also expressed by numerous self-identified
independent contractors, who feared reclassification or lost work
opportunities as an unintended consequence of the rulemaking.
Some commenters contended that the NPRM's guidance was
inappropriately broad and would encompass as employees individuals who
they assert are appropriately classified as independent contractors.
See, e.g., IBA (asserting that the NPRM would improperly ``broaden the
test and thereby expand the meaning of `employee' to encompass
individuals who under current law would qualify independent
contractors''); National Association of Insurance and Financial
Advisors (``NAIFA'') (``NAIFA believes that [the NPRM] wrongly
construes the scope of FLSA coverage and would thus misclassify many
independent insurance agents and brokers as employees.''). Other
commenters asserted that ambiguity inherent in reverting to a
``totality-of-the-circumstances'' analysis would deter businesses from
engaging with independent contractors. See, e.g., Beacon Center of
Tennessee (asserting that the NPRM would ``rob[ ] businesses of the
regulatory certainty needed to effectively operate and make personnel
decisions, which is likely to have a chilling effect on hiring new
employees or contractors''); NFIB (``Companies . . . will be less
likely to engage a contractor or consultant if there's uncertainty over
a worker's status since a finding of misclassification can result in
ruinous penalties''); Opportunity Solutions Project (``If implemented,
the proposal would make it more difficult for entrepreneurs and
independent workers to find companies willing to take on the risk of
becoming their client.'').
Other commenters disagreed that the Department's proposal would
result in the reclassification of appropriately classified independent
contractors. For example, an individual commenter wrote that
``[i]mproving classification rules and returning to a back-to-basics
approach used for over fifty years does not mean independent
contractors will automatically be classified as employees.'' Noting
that ``[t]he Proposed Rule is a restatement of decades of court
precedents and WHD guidance,'' UBC remarked that ``[a]ny employer who
has been correctly classifying its independent contractors has no worry
that the Proposed Rule will result in liability under the FLSA.''
Multiple business stakeholders and self-identified independent
contractors commented that they did not expect such reclassification
for workers in their industry. For example, LPL Financial stated that
it believes that the Department's proposal ``will not result in the
reclassification of independent financial professionals as employees''
and it ``commend[ed] the DOL for undertaking the rulemaking process and
proposing a rule that recognizes that entrepreneurs who establish and
build small businesses utilizing their managerial skills and
professional expertise can operate in an independent contractor model
to create multigenerational financial advising practices.'' Over 1,000
financial advisors affiliated with Ameriprise and LPL Financial
submitted separate campaign comments in support of the NPRM, asserting
that ``[the] proposal will allow me to continue to choose to be an
independent contractor.'' See also International Dale Carnegie
Franchise Association (``The IDCFA is confident that independent
instructors would not be reclassified as employees under the Proposed
IC Rule.'').
Having considered the comments, the Department continues to believe
that this rulemaking will not jeopardize legitimate independent
contracting arrangements. Fears to the contrary are not realistic given
that the Department is adopting guidance derived from the same analysis
that courts have applied for decades and have been continuing to apply
since the 2021 IC Rule took effect. There is no evidence that the
status quo prior to the 2021 IC Rule was hindering the use of
independent contractors.\167\
---------------------------------------------------------------------------
\167\ The 2021 IC Rule asserted that ``legal uncertainty arising
from . . . shortcomings of the multifactor economic reality test may
deter innovative, flexible work arrangements,'' but declined to
provide any evidence in response to comments questioning that claim,
explaining it was ``unclear what empirical data could measure
innovation that is not occurring due to legal uncertainty.'' 86 FR
1175.
---------------------------------------------------------------------------
Because the FLSA's economic reality test is broad and fact-
specific, the Department cannot categorically declare that individual
workers in particular occupations or industries will always qualify as
independent contractors applying the guidance provided in this rule.
However, keeping in mind that the Department is adopting guidance in
this
[[Page 1659]]
rule that is essentially identical to the standard it applied for
decades prior to the 2021 IC Rule, the Department agrees with those
commenters who stated that workers properly classified as independent
contractors prior to the 2021 IC Rule will likely continue to be
properly classified as independent contractors under this rule and
disagrees with other commenter assertions that this rule will ``cause
workers who have long been properly classified as independent
contractors . . . to improperly lose their independent status.'' ABC;
see also, e.g., Finseca (expressing concern that the NPRM ``could
materially disrupt long-standing, well-understood, and properly
classified independent contractor relationships''); National
Association of Chemical Distributors (asserting that the NPRM would
``disrupt longstanding business models''). Rather, because this final
rule is aligned with longstanding case law, the Department does not
anticipate that independent contractors (who sometimes also self-
identify as freelancers or small/micro business owners) who are
correctly classified as independent contractors under current circuit
case law would be reclassified applying the guidance provided in this
rule.
In sum, the Department's rulemaking to rescind and replace the 2021
IC Rule is motivated, in part, by an assessment that the guidance
provided here will likely benefit workers as a whole, including those
workers at risk of being misclassified as independent contractors as
well as those who are appropriately classified as independent
contractors.
D. The Benefits of Replacing the Part 795 Regulations on Employee or
Independent Contractor Status
Until the 2021 IC Rule, the Department had not previously
promulgated generally applicable regulations on independent contractor
classification in the FLSA's 83 years of existence. In light of the
consistency of the economic reality test as adopted by the circuits,
the Department had instead relied on subregulatory documents to provide
generally applicable guidance for the Department and the regulated
community on determining employee or independent contractor status
under the FLSA. In the NPRM, the Department explained that, although it
believes that its earlier subregulatory guidance provided appropriate
guidance to the regulated community, the Department upon further
consideration recognized that publishing regulatory guidance would be
beneficial for stakeholders, particularly because the Department had
published a regulation in 2021. The NPRM elaborated that detailed
federal regulations would be easier to locate and read for interested
stakeholders than applicable circuit case law, potentially helping
workers and businesses better understand the Department's
interpretation of their rights and responsibilities under the law.
Additionally, the NPRM explained that adopting detailed regulations
that are aligned with existing precedent could better protect workers,
who were placed at a greater risk of misclassification as a consequence
of the 2021 IC Rule.\168\
---------------------------------------------------------------------------
\168\ See generally 87 FR 62230.
---------------------------------------------------------------------------
Several commenters agreed with the Department's reasons for
replacing the 2021 IC Rule with alternative regulatory guidance. These
commenters generally asserted that detailed regulatory guidance brings
added clarity to interested parties. See, e.g., NELP (``[T]o address
confusion that can stem from a multifactor balancing test, the
commentary to the proposed rule clarifies how each of the factors
(described in more detail below) informs the economic dependence
analysis, i.e., how and why each factor helps to answer the question of
whether a worker is truly in business for themself.''); State AGs
(``Subregulatory guidance is not as robust as promulgating a new
rule.''); Winebrake & Santillo, LLC (supporting the NPRM for
``clarifying topics which had not been fully explored by all courts'').
LIUNA asserted that the regulatory guidance's ``expert synthesis of
complicated precedents will . . . clarify the FLSA and promote its
uniform application.''
Other commenters commended the accessibility of generally
applicable regulatory guidance. See UBC (``In one place, without
searching through WHD guidance and court cases, employers and workers
can go to the rule for information that will assist in correct
classification. This need for rulemaking, albeit for slightly different
reasons, is where the interest of the proponents of the 2021 Rule and
drafters of the NPRM are aligned.''). Some business stakeholders also
agreed with the potential benefits of regulatory guidance. See, e.g.,
Consumer Brands Association (``The CPG industry believes strongly in
the potential opportunities afforded through clear rulemaking''); CWC
(``We . . . concur with DOL's assessment that a clear explanation of
the test in easily accessible regulatory text is valuable.'').
Some labor unions and worker advocacy organizations opined that the
Department needs to promulgate regulatory guidance to counteract
confusion introduced by the 2021 IC Rule. See State AGs (asserting that
``a new rule is necessary because the 2021 Rule was such a drastic
departure from the status quo''); UBC (``The 2021 Rule's confusion and
encouragement of misclassification . . . creates the necessity for the
Proposed Rule with its adherence to the intent of Congress and judicial
precedents.''); see also NECA & IBEW.
Several commenters, however, disagreed that the Department should
issue regulations addressing independent contractor status under the
FLSA. Some of these commenters asserted that the Department has no
legal authority or expertise to do so. See, e.g., ArcBest (``Congress
has not delegated authority to DOL to define `independent contractor'--
a definition with far-reaching economic and political consequences.'');
Boulette Golden & Marin L.L.P. (``[W]hile the DOL may have authority to
issue guidance on its view of the term `employee,' the DOL does not
have any authority to offer guidance on the meaning of the term
`independent contractor.' ''); IBA (``The DOL has no special expertise
in interpreting Supreme Court precedent.''). Insight Association and
several individual commenters asserted that Congress should address the
distinction between FLSA-covered employees and independent contractors
rather than the Department. Finally, CPIE asserted that ``this area of
the law is one that is not appropriate for general regulatory
guidance,'' urging the Department to ``continue its policy of issuing
subregulatory guidance on the application of the economic reality test
to specific facts'' if it rescinded the 2021 IC Rule.
Having considered the comments, the Department continues to believe
not only in the benefits of adopting alternative guidance on the
distinction between FLSA-covered employees and independent contractors,
but also in the value of providing such guidance in easily-accessible
regulatory text. Although the Department previously issued regulatory
guidance on this issue specific to the sharecropping and lumber
industries in parts 780 and 788,\169\ the Department believes that
regulatory text that can be applied to workers in any industry is
beneficial to the regulated community.
---------------------------------------------------------------------------
\169\ See supra, nn.63 and accompanying text.
---------------------------------------------------------------------------
Further, as noted in the 2021 IC Rule, the Department ``without
question has relevant expertise in the area of what
[[Page 1660]]
constitutes an employment relationship under the FLSA, given its
responsibility for administering and enforcing the Act and its decades
of experience doing so.'' \170\ As also noted in the 2021 IC Rule, the
Department's ``authority to interpret the Act comes with its authority
to administer and enforce the Act.'' \171\ The Department issues
interpretations on a range of issues under the Act, and addressing
which workers are employees protected by the Act or independent
contractors not subject to the Act is one such issue. The Department's
attention to relevant judicial precedent interpreting the Act is key to
providing such guidance.
---------------------------------------------------------------------------
\170\ 86 FR 1176.
\171\ Id.
---------------------------------------------------------------------------
The Department acknowledges that some commenters would prefer
Congress to address this issue through legislation and to adopt one
uniform standard that would apply across federal laws. See, e.g., ASTA;
CPIE. However, in the absence of congressional legislation to amend the
FLSA, the Department believes that this final rule will provide
detailed guidance on employee or independent contractor status that is
not only consistent with the FLSA and the decades of case law
interpreting it, but clearer and more robust than the Department's
earlier subregulatory guidance on the topic.
E. Timing of the Rulemaking
Many of the commenters opposed to this rulemaking asserted that the
Department's rulemaking to rescind and replace the 2021 IC Rule is
premature or otherwise ill-timed. See, e.g., CPIE (``[CPIE] urges DOL
to defer action until courts have had an opportunity to apply the 2021
IC Rule.''); CWI (``The most obvious alternative action `within the
ambit of the existing policy' is simply to allow the 2021 IC Rule to go
into effect and study its results, rather than assume unproven
consequences.''); MEP (``MEP strongly believes WHD should allow the
courts to weigh in on the current rule before determining the analysis
does not work and replacing it with a standard that will clearly create
substantial confusion and uncertainty for the regulated community.'').
Some commenters noted the added costs and uncertainty attributable
to the Department promulgating the 2021 IC Rule and subsequently
proposing to rescind and replace it. See American Association of
Advertising Agencies (``4A's'') (``The regulatory whiplash here is
real, and costly, and should not be taken so lightly by DOL.''); see
also App Association; N/MA; Vegas Chamber.
Other commenters cited to various economic conditions that caution
(in their view) against any rulemaking that would deter independent
contracting. See, e.g., NRF & NCCR (``As the American economy and the
modern workplace continue to evolve in the wake of the COVID-19
pandemic, it is imperative that policymakers account for the wide range
of innovative and imaginative methods by which individuals engage in
the marketplace and feed their families.''); Scopelitis, Garvin, Light,
Hanson & Feary (``Scopelitis'') (``The Proposed Rule would add pressure
to already stressed supply chains.'').
The Department disagrees with the various timing arguments advanced
by commenters urging the Department to delay or withdraw this
rulemaking, though it is mindful of the impact that changes in the
Department's guidance may end up having on the regulated community. As
the Department has explained, there are compelling reasons to rescind
and replace the 2021 IC Rule, including its significant departure from
judicial precedent, the confusion it has introduced for affected
stakeholders, and the consequences for workers and competing businesses
attributable to an increased risk of misclassification. Allowing the
2021 IC Rule to stay in effect for a longer period would not ameliorate
any of those concerns. To the contrary, as NELP pointed out, ``over
time . . . negative consequences . . . will be exacerbated.'' The fact
that no court has applied the 2021 IC Rule in the year since the
district court's decision in CWI v. Walsh is not a justification for
its retention.
The Department further finds arguments about stakeholder reliance
on the 2021 IC Rule to be unpersuasive. Before the 2021 IC Rule's
effective date, the Department issued rules intending to delay the
effective date of and then withdraw the 2021 IC Rule, while also
identifying concerns with the 2021 IC Rule. The Department then
announced on June 3, 2022 that it was initiating a new rulemaking on
employee and independent contractor classification under the FLSA.\172\
Thus, the regulated community has been on notice since very soon after
the 2021 IC Rule's publication as to the Department's concerns
regarding the 2021 IC Rule, including the way in which it upset decades
of precedent the regulated community and workers had previously been
relying on to distinguish between employees and independent
contractors.
---------------------------------------------------------------------------
\172\ See Jessica Looman, ``Misclassification of Employees as
Independent Contractors Under the Fair Labor Standards Act,'' U.S.
Department of Labor Blog (June 3, 2022), https://blog.dol.gov/2022/06/03/misclassification-of-employees-as-independent-contractors-under-the-fair-labor-standards-act.
---------------------------------------------------------------------------
Finally, the Department disagrees with commenters that it is
obligated to wait for more time to gather data before rescinding the
2021 IC Rule and promulgating a new rule.\173\ As discussed in the
NPRM, the Department considered waiting for a longer period to monitor
the effects of the 2021 IC Rule but believed that the potential
confusion and disruption from the 2021 IC Rule outweighed any potential
benefit from this monitoring.\174\ In making the decision to proceed
with this final rule, the Department drew upon its extensive experience
in interpreting and enforcing the FLSA and its consideration of the
comments received.\175\ The Department believes that this rule, which
provides guidance that is consistent with longstanding precedent,
provides more consistency for stakeholders than the 2021 IC Rule.
---------------------------------------------------------------------------
\173\ ``[A]n agency need not--indeed cannot--base its every
action upon empirical data; depending upon the nature of the
problem, an agency may be entitled to conduct . . . a general
analysis based on informed conjecture.'' Chamber of Com. of U.S. v.
SEC, 412 F.3d 133, 142 (D.C. Cir. 2005) (internal quotation and
citation omitted).
\174\ See 87 FR 62219.
\175\ An agency's reliance on ``its own and its staff's
experience, the many comments received, and other evidence, in
addition to [ ] limited and conflicting empirical evidence'' meets
APA requirements. Chamber of Com., 412 F.3d at 142.
---------------------------------------------------------------------------
IV. Alternatives Considered
In the NPRM, the Department noted that it had considered four
alternatives to what it proposed.\176\ The Department further noted
that it had previously considered and rejected two of those
alternatives--issuing guidance adopting either the common law test or
the ABC test for determining FLSA employee or independent contractor
status--in the 2021 IC Rule.\177\
---------------------------------------------------------------------------
\176\ 87 FR 62230.
\177\ Id. (citing 86 FR 1238).
---------------------------------------------------------------------------
Regarding adoption of the common law test, as the Department
explained in the NPRM, that test is contrary to the ``suffer or
permit'' language in section 3(g) of the FLSA, which the Supreme Court
has interpreted as requiring a broader definition of employment than
under the common law. Accordingly, the Department stated that the
common law test is inconsistent with the FLSA because that test ``is
not sufficiently protective in assessing worker classification under
the FLSA.'' Regarding adoption of an ABC test, as the Department
explained, the Supreme Court has held that the economic reality test is
the applicable standard for determining workers' classification
[[Page 1661]]
under the FLSA as an employee or independent contractor, and ``the
existence of employment relationships under the FLSA `does not depend
on such isolated factors' as the three independently determinative
factors in the ABC test, `but rather upon the circumstances of the
whole activity.' '' Because an ABC test is, in the Department's view,
inconsistent with Supreme Court precedent interpreting the FLSA, the
Department explained that ``it could only implement an ABC test if the
Supreme Court revisits its precedent or if Congress passes legislation
that alters the applicable analysis under the FLSA.'' \178\
---------------------------------------------------------------------------
\178\ See generally id. at 62231.
---------------------------------------------------------------------------
As a third alternative, the Department considered proposing to only
partially rescind the 2021 IC Rule and instead retain some aspects of
it. In discussing this alternative, the Department listed numerous
instances in which its NPRM was consistent or in agreement with the
2021 IC Rule. The Department explained that it considered ``simply
removing the problematic `core factors' analysis from the 2021 IC Rule
and retaining the five factors as described in th[at] rule.'' However,
the Department rejected this approach because numerous ways in which
that rule described the factors were in tension with judicial precedent
and longstanding Department guidance and ``narrow[ed] the economic
reality test by limiting the facts that may be considered as part of
the test, facts which the Department believes are relevant in
determining whether a worker is economically dependent on the employer
for work or in business for themself.'' For those reasons, the
Department ``concluded that in order to provide clear, affirmative
regulatory guidance that aligns with case law and is consistent with
the text and purpose of the Act as interpreted by courts, a complete
rescission and replacement of the 2021 IC Rule is needed'' as opposed
to a partial rescission.\179\
---------------------------------------------------------------------------
\179\ See generally id. at 62231-32.
---------------------------------------------------------------------------
As a fourth alternative, the Department considered rescinding the
2021 IC Rule and, instead of promulgating new regulations, providing
guidance on employee or independent contractor classification through
subregulatory guidance. In discussing this alternative, the Department
reiterated the reasons why it believed that rescission of the 2021 IC
Rule was necessary. The Department acknowledged that prior to the 2021
IC Rule, it did not have general guidance published in the Code of
Federal Regulations on the classification of workers as employees or
independent contractors. The Department explained that issuing a new
rule rather than subregulatory guidance would allow the Department to
provide in-depth guidance that is more closely aligned with circuit
case law, allows the Department to formally collect and consider a wide
range of views by using the notice-and-comment process, and may further
improve consistency among courts regarding the classification of
workers because courts are accustomed to considering relevant agency
regulations. For these reasons, the Department decided not to propose
rescinding the 2021 IC Rule and providing only subregulatory guidance,
and to instead propose the regulations set forth in the NPRM.\180\
---------------------------------------------------------------------------
\180\ See generally id. at 62232.
---------------------------------------------------------------------------
A few commenters expressly addressed the first alternative--
adopting a common law control test.\181\ For example, State AGs agreed
with the Department's reasoning that the common law control test is
inconsistent with the FLSA. State AGs stated that ``[t]he common law
test, which focuses on control rather than economic dependence,
provides a narrower definition of employment than the broad `suffer or
permit' language of the FLSA'' and that the common law test therefore
``conflicts with the broad statutory definition of `employ' in the
FLSA.'' UFCW added: ``Correctly, the DOL's proposed rule does not
incorporate the narrower common law independent contractor standard
because Congress sought for the FLSA to guard against labor
exploitation by intentionally covering employment relationships that
may not have constituted employer and employees under common law''
(emphasis omitted). ASTA disagreed. Noting the various tests under
federal law for determining employment, it advocated for ``the adoption
of a single standard to evaluate worker status for all federal
purposes.'' The commenter acknowledged the Department's view that it
lacks the authority to do so, but asserted that ``the simplest means to
that end would be amendment of the FLSA to replace the economic reality
test with the right of control test.''
---------------------------------------------------------------------------
\181\ A number of commenters discussed the common law test in
their comments, but not in the context of consideration of the
common law test as an alternative. Instead, these commenters, for
example, compared the analysis in the 2021 IC Rule to the common law
test or compared the economic realities test generally to the common
law test.
---------------------------------------------------------------------------
Having considered the comments, the Department reaffirms its
position that the FLSA's definitions, as interpreted by courts, reflect
Congress' rejection of the common law test as determining employee
status under the Act. The Department continues to believe that adopting
the common law test would be contrary to FLSA section 3(g)'s ``suffer
or permit'' language, which under Supreme Court and federal appellate
precedent requires a broader definition of employment than the common
law test.\182\
---------------------------------------------------------------------------
\182\ See, e.g., Darden, 503 U.S. at 326; Portland Terminal, 330
U.S. at 150-51.
---------------------------------------------------------------------------
A number of commenters addressed the second alternative--adopting
an ABC test. Most commenters agreed with the Department's proposed
rejection of an ABC test as inconsistent with current precedent and/or
expressed opposition to an ABC test. For example, CCI stated that,
``[w]hile the ABC test may be appropriate in some circumstances (for
example collective bargaining rights), we believe the Department is
correct to return to a broader `totality-of-the-circumstances' analysis
for wage and overtime protections under the Fair Labor Standards Act.''
UBC described the rejection of an ABC test as an ``adherence to
precedent.'' State AGs stated that, although ``the ABC test arguably
protects against employee misclassification better than other tests in
use'' and ``several of the undersigned State AGs apply the ABC test,''
they ``understand the Department believes it is constrained under
current law from implementing the ABC test under the FLSA[.]''
SBLC ``applaud[ed] the DOL for declining calls to adopt an ABC
test, like what is currently used in California, or a similar test that
would apply a stringent requisite factor test rather than a balancing
test.'' The International Franchise Association (``IFA'') ``support[ed]
the DOL's explicit statement in its 2022 NPRM that the ABC test, which
is used in states like California and Massachusetts, is `inconsistent'
with controlling Supreme Court authority under the FLSA.'' The App
Association expressed concerns with the ABC test and ``discourage[d]
alignment in federal regulation with California's approach.'' The
Coalition of Trucking Stakeholders stated that the Department
``properly acknowledge[d] that the adoption of any ABC-like test, which
is not based upon an economic-realities assessment, would be contrary
to precedent'' (citation omitted). And noting that the ABC test
``assumes all workers are employees unless they can demonstrate that
they meet specific criteria,'' The Owner-Operator Independent Drivers
Association (``OOIDA'') stated that ``the Department is correct in its
assessment that the ABC
[[Page 1662]]
Test is not consistent with the history of the FLSA because it
establishes independently determinative factors.'' See also C.A.R.
(supporting the decision not to adopt the ABC test).
Some commenters advocated for adoption of an ABC test. For example,
the Los Angeles County Federation of Labor, AFL-CIO & Locals 396 and
848 of the International Brotherhood of Teamsters (``LA Fed & Teamsters
Locals'') acknowledged that ``the Department is correct in its
conclusion that the lower federal courts have developed a fairly
consistent version of what is referred to as the economic realities
test by identifying a list of six non-exclusive factors to frame their
analysis,'' but asserted that ``there is nothing in the FLSA's
legislative history nor in the Supreme Court's precedent that compels
this exact six-factor framing.'' Discussing Rutherford and Silk, the
commenter argued that Supreme Court precedent does not require a six-
factor economic realities test, prohibit adoption of an ABC test, or
prevent adoption of a test that includes dispositive factors or
presumes employee status unless the employer proves otherwise. See also
Blitman & King LLP; National Employment Lawyers Association (``NELA'');
Nichols Kaster.
Having considered the comments, the Department is not adopting an
ABC test. The Department continues to believe that an ABC test would be
inconsistent with Supreme Court and federal appellate precedent
interpreting and applying the FLSA, and therefore, this final rule
declines to adopt an ABC test. The Supreme Court has repeatedly
explained that ``economic reality'' is the applicable standard for
determining whether a worker is an employee or not under the FLSA.\183\
The Supreme Court has further explained that the existence of
employment relationships under the FLSA does not depend on ``isolated
factors but rather upon the circumstances of the whole activity,''
\184\ and that ``[n]o one [factor] is controlling nor is the list
complete.'' \185\ As explained in section II, federal courts of appeals
have consistently interpreted this Supreme Court precedent to apply a
nonexhaustive multifactor economic realities analysis in which there is
no presumption of employee status that must be rebutted, no one factor
is determinative, and all of the factors must be considered and
weighed.\186\ The Department is grounding the economic realities
analysis set forth in this final rule in the decades of federal
appellate case law applying such analyses and is rescinding the 2021 IC
Rule because of its deviations from that case law. An ABC test, on the
other hand, has a presumption of employee status, considers only three
factors--each of which can be determinative on its own--and does not
result in all of the factors being weighed or even necessarily
considered. Adopting the ABC test would be a similarly unsupported
deviation from that case law, would have no moorings in the case law
applying the FLSA or the Department's prior guidance, and could
undermine the Department's well-founded reasons for rescinding and
replacing the 2021 IC Rule.\187\ For all of these reasons, this final
rule does not adopt an ABC test.
---------------------------------------------------------------------------
\183\ See Tony & Susan Alamo, 471 U.S. at 301 (``The test of
employment under the Act is one of `economic reality.' ''); Whitaker
House, 366 U.S. at 33 (`` `economic reality' rather than `technical
concepts' is . . . the test of employment'' under the FLSA) (citing
Silk, 331 U.S. at 713; Rutherford, 331 U.S. at 729).
\184\ Rutherford, 331 U.S. at 730.
\185\ Silk, 331 U.S. at 716.
\186\ See supra section II.B.
\187\ The assertions of LA Fed & Teamsters Locals that Supreme
Court precedent could have been interpreted differently and that the
six traditional economic realities factors could be ``fit within the
three elements of the ABC Test'' are unavailing considering how
Supreme Court precedent has actually been interpreted and applied
for decades.
---------------------------------------------------------------------------
NABTU stated that, although it ``believes that the `ABC test' is
the better test for determining worker classification, NABTU
understands that absent congressional action, DOL must operate within
the parameters of the statute as defined by controlling Supreme Court
precedent'' (footnote omitted). NABTU nonetheless recommended that,
``for purposes of applying the economic reality test to the
construction industry, DOL adopt a rebuttable presumption that all
construction workers are employees.'' \188\ The Department declines
this recommendation for two reasons. First, the Department's intent in
promulgating this final rule is to provide as much as possible a
general analysis for determining employee or independent contractor
status. NABTU's recommendation, on the other hand, is specific to one
industry. Second, regardless of its scope, this recommendation
implicates the same concerns as discussed in the above paragraph.
Specifically, this approach would not be consistent with Supreme Court
precedent and federal appellate case law interpreting and applying that
precedent in part because that precedent and case law have not adopted
a rebuttable presumption of employee status when determining employee
or independent contractor status under the FLSA. Thus, the Department
believes that it is not an option to adopt a rebuttable presumption of
employee status in this context for the same reasons that the
Department also declines to adopt an ABC test.
---------------------------------------------------------------------------
\188\ LIUNA endorsed NABTU's recommendation. SMACNA similarly
recommended that ``[i]n the construction industry, the DOL should
create a rebuttable presumption that `laborers and mechanics' are
`employees' of the engaging business.''
---------------------------------------------------------------------------
A number of commenters objected that the Department's proposed test
(in particular the integral factor) might have the same effect--either
unintendedly or not--as an ABC test. See, e.g., CWI; FMI--The Food
Industry Association (``FMI''); Customized Logistics and Delivery
Association (``CLDA''); Erik Sherman; Western States Trucking
Association (``WSTA''). However, as discussed in section V.C.5, the
suggestion that this final rule's economic realities analysis
essentially implements an ABC test is baseless. As explained above, the
economic realities analysis considers multiple factors (no one of which
is dispositive) and weighs them as part of a totality-of-the-
circumstances analysis to determine if the worker is economically
dependent on the employer for work or in business for themself. An ABC
test, on the other hand, presumes that a worker is an employee unless
the employer can show that each of the three factors is satisfied. (In
other words, each factor is dispositive on its own and the other
factors need not be considered if one points to employee status.) In
sum, this final rule's economic realities test is not an ABC test, and
any concern that its economic realities analysis is or will become an
ABC test is thus unfounded.\189\
---------------------------------------------------------------------------
\189\ In any event, there are arguably some similarities between
an ABC test and most alternative analyses under the FLSA. For
example, the 2021 IC Rule provided that two factors were ``core''
factors and gave them near-dispositive weight if they both indicated
the same status, which was a step away from a multifactor totality-
of-the-circumstances analysis and a step closer to a test (like an
ABC test) where each factor is dispositive. And the 2021 IC Rule
considered control like an ABC test and considered control to be a
``core'' factor, giving it more weight and making it closer to the
dispositive factor that it is under the ABC test.
---------------------------------------------------------------------------
A few commenters addressed generally the NPRM's discussion of the
alternatives considered by the Department. State AGs, in addition to
commenting on the first and second alternatives, commented that
``retaining portions of the 2021 Rule that are consistent with the
Proposed Rule would not provide needed clarity because the governing
principle of the 2021 Rule was a marked departure from
[[Page 1663]]
the Department's longstanding position.'' In their view, the 2021 IC
Rule's ``emphasis on two `core' factors . . . negated the need to fully
consider the remaining factors,'' and therefore ``a full rescission of
the 2021 Rule is needed to provide clarity to workers, employers, and
the public.'' Regarding the fourth alternative, State AGs stated that
``merely rescinding the 2021 Rule and issuing subregulatory guidance
will not provide the direction necessary to achieve consistent
application of the economic reality test.'' In their view, ``a new rule
is necessary because the 2021 Rule was such a drastic departure from
the status quo'' and would ``provide needed regulatory guidance for the
consistent application of the economic reality test by courts and
employers.'' State AGs agreed with the Department's assessment of the
four alternatives and that ``a full rescission of the 2021 Rule and
replacement with the Proposed Rule is most appropriate for clarity and
consistency with the FLSA.''
WPI commented that it ``is well settled that agencies are required
to consider alternatives within the ambit of the regulation being
considered,'' including ``less restrictive rules than those proposed''
(citations omitted). WPI further commented that the district court in
CWI v. Walsh ``held that DOL failed to consider any alternatives in the
withdrawal of the 2021 IC Rule'' and asserted that ``[t]he Department
repeats this error and only pays lip service to these requirements by
`considering' four alternatives, two of which are not even legally
viable options.'' The commenter faulted the Department for
``conclud[ing] in identical fashion to the 2021 rule that codifying a
common law or ABC test would not be legally permissible, yet . . .
nevertheless continu[ing] to `analyze' these two alternatives despite
the knowledge that neither can be adopted.'' The commenter concluded
that the NPRM's ``consideration of only two viable alternatives falls
short of the requirements under the APA and is thus arbitrary and
capricious'' (citing the district court's decision in CWI v. Walsh).
As an initial matter, although the Department believes that the
common law control test and an ABC test are not feasible options in
this rulemaking, as discussed above, several commenters advocated for
the adoption of one or the other of those tests.\190\ In any event, the
district court's decision in CWI v. Walsh (which is on appeal to the
Fifth Circuit) does not support WPI's assertion that a rule's
consideration of ``only two viable alternatives'' makes a rule
arbitrary and capricious under the APA.\191\ The district court ruled
that ``agency action is arbitrary and capricious when the agency
considers only the binary choice of whether to retain or rescind a
policy, without also considering less disruptive alternatives.'' \192\
In this rulemaking, the Department considered less disruptive
alternatives than fully rescinding and replacing the 2021 IC Rule,
including a partial rescission of the 2021 IC Rule.\193\ In the
Department's judgment, however, only removing the 2021 IC Rule's
designation of two factors as the ``core'' factors would not undo the
numerous ways in which that rule's discussion of the factors were ``in
tension with judicial precedent and longstanding Department guidance''
and unjustifiably narrowed the facts that may be considered when
applying the factors.\194\ Thus, the Department concluded that, ``in
order to provide clear, affirmative regulatory guidance that aligns
with case law and is consistent with the text and purpose of the Act as
interpreted by courts, a complete rescission and replacement of the
2021 IC Rule is needed'' as opposed to a partial rescission.\195\ As
further detailed above, the Department also specifically considered
rescinding the 2021 IC Rule and providing guidance on employee or
independent contractor classification through subregulatory guidance
instead of through new regulations. The Department reiterated the
reasons why it believed that rescission of the 2021 IC Rule was
necessary and identified numerous benefits in favor of issuing a new
rule rather than relying on subregulatory guidance.\196\ Having
considered the comment, the Department continues to believe that, in
addition to rescinding the 2021 IC Rule, promulgating new regulations
is preferable to providing only subregulatory guidance. Although WPI
disagrees with the judgments that the Department is making, the
Department plainly considered less disruptive alternatives and made
reasonable judgments in not adopting those alternatives.\197\
---------------------------------------------------------------------------
\190\ In addition, discussing alternatives that an agency may be
legally constrained from adopting is permissible and encouraged
under OMB guidance. OMB Circular A-4 advises that agencies ``should
discuss the statutory requirements that affect the selection of
regulatory approaches. If legal constraints prevent the selection of
a regulatory action that best satisfies the philosophy and
principles of Executive Order 12866, [agencies] should identify
these constraints and estimate their opportunity cost. Such
information may be useful to Congress under the Regulatory Right-to-
Know Act.''
\191\ The 2021 IC Rule, which WPI urged be permitted by the
Department ``to remain in effect,'' considered only one viable
alternative if the commenter's logic applied. See 86 FR 1238
(considering three alternatives: ``[c]odification of the common law
control test,'' codification of a ``six-factor `economic reality'
balancing test,'' and ``[c]odification of the `ABC' test'').
\192\ 2022 WL 1073346, at *18 (internal quotation marks and
citation omitted).
\193\ As a general matter, agency action must be upheld in the
face of an arbitrary and capricious challenge if the agency
``articulate[s] a satisfactory explanation for [the] action
including a rational connection between the facts found and the
choice made.'' Little Sisters of the Poor Saints Peter & Paul Home
v. Pennsylvania, 140 S. Ct. 2367, 2383 (2020) (citation omitted);
see also City of Abilene v. EPA, 325 F.3d 657, 664 (5th Cir. 2003)
(``If the agency's reasons and policy choices conform to minimal
standards of rationality, then its actions are reasonable and must
be upheld.'') (citation omitted).
\194\ 87 FR 62232.
\195\ Id.
\196\ Id.
\197\ See City of Abilene, 325 F.3d at 664; see also California
v. Azar, 950 F.3d 1067, 1096 (9th Cir. 2020) (When reviewing agency
action under the arbitrary and capricious standard, a court ``cannot
`ask whether a regulatory decision is the best one possible or even
whether it is better than the alternatives' '' and is ``prohibited
from `second-guessing the [agency]'s weighing of risks and benefits
and penalizing [it] for departing from the . . . inferences and
assumptions' of others.'') (citations omitted).
---------------------------------------------------------------------------
Finally, WPI claimed that the NPRM did not consider ``simply
reverting to interpretive guidance already in place prior to the 2021
IC Rule'' and ``ignore[d] this option in a purported quest for
clarity.'' In the commenter's view, there is already clarity in the
economic reality test because of the case law explaining and
interpreting it, and the commenter added that the NPRM went ``beyond
any position the Department has taken historically'' and was not
``faithful to settled caselaw and analysis by courts upon which it
claims to base its proposed rule.'' As an initial matter, the
Department considered (as the fourth alternative) ``rescinding the 2021
IC Rule and providing guidance on employee or independent contractor
classification through subregulatory guidance instead of through new
regulations.'' \198\ As discussed in the NPRM and this final rule, the
Department concludes that issuing new regulations is the preferable
alternative to subregulatory guidance.\199\ Moreover, as explained
generally throughout the NPRM and this final rule and specifically in
their discussions of each economic reality factor, the Department's
regulatory text and accompanying guidance seek consistency with, and
are grounded in, existing case law. The 2021 IC Rule departed from case
law in numerous ways, and contrary to WPI's comment,
[[Page 1664]]
the Department's stated goal in promulgating this final rule is to
realign the Department's guidance with that case law. Moreover, to the
extent that commenters argued that the NPRM's proposed analysis was not
supported by applicable case law, the Department considered those
comments and, where appropriate, made changes in this final rule in
response.
---------------------------------------------------------------------------
\198\ 87 FR at 62232.
\199\ The Department in its 2021 IC Rule also reached the same
conclusion that the Department is reaching here: relying solely on
subregulatory guidance is not the preferable alternative.
---------------------------------------------------------------------------
As explained in section III, the Department believes that replacing
the 2021 IC Rule with regulations addressing the multifactor economic
reality test that more fully reflect the case law and continue to be
relevant to the modern economy is helpful for workers and employers in
understanding how to apply the law in this area. These regulations and
the explanatory preamble provide in-depth guidance, and because courts
are accustomed to considering relevant agency regulations, issuing
these regulations may further improve consistency among courts
regarding this issue. The Department is therefore rescinding the 2021
IC Rule and issuing this final rule to replace part 795; the provisions
of the regulation are discussed below.
V. Final Regulatory Provisions
Having reviewed commenter feedback submitted in response to the
proposed rule, the Department is finalizing the following regulations
to provide guidance regarding whether workers are employees or
independent contractors under the FLSA. The regulations include a new
part 795 and cross- references in 29 CFR 780.330(b) and 788.16(a) to
part 795. Of particular note, the regulations set forth in this final
rule do not use ``core factors'' and instead return to a totality-of-
the-circumstances analysis of the economic reality test in which the
factors do not have a predetermined weight and are considered in view
of the economic reality of the whole activity. Regarding the economic
reality factors, this final rule returns to the longstanding framing of
investment as a separate factor, and integral as an integral part of
the potential employer's business rather than an integrated unit of
production. The final rule also provides broader discussion of how
scheduling, remote supervision, price setting, and the ability to work
for others should be considered under the control factor, and it allows
for consideration of reserved rights while removing the provision in
the 2021 IC Rule that minimized the relevance of retained rights.
Further, the final rule discusses exclusivity in the context of the
permanency factor, and initiative in the context of the skill factor.
The Department also made several adjustments to the proposed
regulations after consideration of the comments received, including
revisions to the regulations regarding the investment factor and the
control factor (specifically addressing compliance with legal
obligations).
Additionally, in the 2021 IC Rule, the Department proposed not to
revise its regulation addressing employee or independent contractor
status under MSPA in 29 CFR 500.20(h)(4), stating, in part, that the
MSPA regulation and the 2021 IC Rule both applied an economic reality
test in which the ultimate inquiry was economic dependence. In the
NPRM, the Department similarly did not propose to make any revisions to
the MSPA regulation, which adopts by reference the FLSA's definition of
``employ,'' and considers ``whether or not an independent contractor or
employment relationship exists under the Fair Labor Standards Act'' to
interpret employee or independent contractor status under MSPA.\200\
The test contained in the MSPA regulation is substantially similar to
the proposed test here, and the comments received in this rulemaking
did not address MSPA. Accordingly, the Department is not revising the
MSPA regulation at this time.
---------------------------------------------------------------------------
\200\ 29 CFR 500.20(h)(1), (4).
---------------------------------------------------------------------------
Finally, the Department also proposed to formally rescind the 2021
IC Rule.\201\ In the Department's view, the operative effects of
rescinding the 2021 IC Rule are as follows. With this final rule, the
2021 IC Rule is formally rescinded. This rescission operates
independently of the new content in this final rule, as the Department
intends the rescission to be severable from the substantive regulatory
text added as part 795. For the reasons set forth in this final rule,
the Department believes that rescission of the 2021 IC Rule is
appropriate, regardless of the new regulations in this final rule.
Thus, even if the entirety of the part 795 regulations promulgated by
this final rule or any part thereof were invalidated, enjoined, or
otherwise not put into effect, the Department would not intend that the
2021 IC Rule remain in effect, and the Department would rely on federal
appellate case law and provide subregulatory guidance for stakeholders
as appropriate unless or until it decided to engage in additional
rulemaking.
---------------------------------------------------------------------------
\201\ Comments regarding this aspect of the NPRM are discussed
in section V.F. below.
---------------------------------------------------------------------------
The Department responds to commenters' feedback on the proposed
rule below.
A. Introductory Statement (Sec. 795.100)
Proposed Sec. 795.100 explained that the interpretations in part
795 will guide WHD's enforcement of the FLSA and are intended to be
used by employers, employees, workers, and courts to assess employment
status under the Act.\202\ Commenters did not generally address this
section, which is very similar to the 2021 IC Rule introductory
statement, except to note that these regulations would be interpretive
guidance. See, e.g., NELP; WPI. The Department is adopting this section
without change.
---------------------------------------------------------------------------
\202\ 87 FR 62233 (proposed Sec. 795.100).
---------------------------------------------------------------------------
B. Economic Dependence (Sec. 795.105)
In the NPRM, the Department proposed to simplify Sec. 795.105(a)
of the 2021 IC Rule and make additional clarifying edits to Sec.
795.105(b).\203\ Proposed Sec. 795.105(a) would continue to make
clear, as the 2021 IC Rule did, that independent contractors are not
``employees'' under the Act. The Department did not receive significant
comments regarding this and is adopting it without change.
---------------------------------------------------------------------------
\203\ 87 FR 62233 (proposed Sec. 795.105(a), (b)).
---------------------------------------------------------------------------
The Department proposed that paragraph Sec. 795.105(b) would
affirm that economic dependence is the ultimate inquiry for determining
whether a worker is an independent contractor or an employee; this
paragraph also makes clear that the plain language of the statute is
relevant to the analysis.\204\ The Department explained that this
proposed section would focus the analysis on whether the worker is in
business for themself and clarified that economic dependence does not
focus on the amount the worker earns or whether the worker has other
sources of income.
---------------------------------------------------------------------------
\204\ 87 FR 62233 (proposed Sec. 795.105(b)).
---------------------------------------------------------------------------
As a preliminary matter, Cetera Financial Group urged the
Department to ``recognize that economic dependence often does not exist
and certainly should not be presumed'' and that it ``should be the
subject of a threshold inquiry prior to applying the other factors in
the economic realities test, or, at a minimum, added as an additional
factor.'' As the Department explained in the NPRM, the question of
economic dependence is the ultimate inquiry, and the factors are tools
or guideposts for answering that inquiry, so it would not be
appropriate to make ``economic dependence'' an additional factor or a
threshold inquiry. The Department agrees, however, that economic
dependence should never be presumed and that when it does not exist,
that worker is not an employee.
[[Page 1665]]
Commenters generally agreed that economic dependence was the right
lens for evaluating whether an employment relationship exists under the
FLSA. See, e.g., CPIE; IBA; NELP; Outten & Golden. The AFL-CIO and
others, for example, noted that ``[c]ourts have interpreted the FLSA's
broad suffer or permit to work language as seeking to answer one
foundational question regarding the relationship between a worker and
the entity to whom that worker provides their labor--whether as a
matter of economic reality that worker is dependent upon the business
to which they render service.'' At least one commenter, however, stated
that using the idea of economic dependence as a ``litmus test'' is
``exceptionally challenging to prove or meet in today's complex world
of business operations for both large and small business.'' See Vegas
Chamber. Additionally, some self-identified freelancers questioned how
the definition of ``economic dependence'' would apply to a freelance
worker who may, for example, be a writer for multiple publications. One
freelancer explained that ``self-employed independent contractors do
not see it as having that many employers [but rather] view those
publications as customers.''
Some commenters stated that the Department's proposed language
broadened the definition of ``economic dependence'' and objected to
this perceived broadening. See, e.g., Goldwater Institute, Job Creators
Network Foundation. The Antonin Scalia Law School's Administrative Law
Clinic (``Scalia Law Clinic''), for instance, commented that the
Department's proposed definition of economic dependence ``wrongly
states that a worker can be an employee merely because she is dependent
in some way on a business, and it incorrectly says that a worker's
income is entirely irrelevant to whether a worker is dependent on a
business.'' Similarly, the Goldwater Institute stated that the proposal
``creates a broad new definition of `economic dependence' that does not
focus on the amount of income earned or whether the independent
contractor has other income streams.'' Several commenters further
stated that the Department had put forward a new definition of economic
dependence ``that a worker is an employee if they are merely
`economically dependent' on a business in a small or inconsequential
way.'' See, e.g., NAIFA. Smith Summerset and Associates did not
disagree with the content of Sec. 795.105(b) but suggested that the
provision be edited for clarity, noting that the regulatory language
referring to ``other income streams'' is ``unnecessarily abstract and
confusing'' and suggested incorporating alternative language from the
preamble that the Department will be adopting.
The Department notes that this concept of economic dependence--one
which does not focus on the amount of income earned or whether the
worker has other income streams--has been the Department's consistent
position. Although some commenters believed the Department was
proposing a different approach, the concept of economic dependence in
the NPRM and this final rule is identical to the 2021 IC Rule, which
stated that, ``other forms of dependence, such as dependence on income
or subsistence, do not count'' and that ``dependence of income or
subsistence, is not a relevant consideration in the economic reality
test.'' \205\ The Department continues to believe that this position is
correct and most consistent with the concept of economic dependence for
work. As noted in the 2021 IC Rule and raised again in comments
received in response to the NPRM, a minority of courts have applied a
``dependence-for-income'' approach that considers whether the worker
has other sources of income or wealth or is financially dependent on
the employer. Most courts, however, as well as the Department, believe
a ``dependence-for-work'' approach that considers whether the worker is
dependent on the employer for work or depends on the worker's own
business for work is the better interpretation. This approach focuses
the analysis on whether the worker is in business for themself (and
thus dependent upon themself for work), or whether the worker is
dependent upon the potential employer for work.\206\ This approach is
also consistent with the majority of case law. As the Eleventh Circuit
has explained, ``in considering economic dependence, the court focuses
on whether an individual is `in business for himself' or is `dependent
upon finding employment in the business of others.' '' \207\ Economic
dependence, however, ``does not concern whether the workers at issue
depend on the money they earn for obtaining the necessities of life . .
. . Rather, it examines whether the workers are dependent on a
particular business or organization for their continued employment.''
\208\ Additionally, consistent with the 2021 IC Rule, economic
dependence does not mean that a worker who works for other employers,
earns a very limited income from a particular employer, or is
independently wealthy cannot nevertheless be economically dependent on
any particular employer for purposes of the FLSA.\209\ As the Fifth
Circuit has explained, ``it is not dependence in the sense that one
could not survive without the income from the job that we examine, but
dependence for continued employment.'' \210\
---------------------------------------------------------------------------
\205\ 86 FR 1178.
\206\ See id. at 1172-73; see also Cornerstone Am., 545 F.3d at
343 (``To determine if a worker qualifies as an employee, we focus
on whether, as a matter of economic reality, the worker is
economically dependent upon the alleged employer or is instead in
business for himself.''); Flint Eng'g, 137 F.3d at 1440 (noting that
``the economic realities of the relationship govern, and the focal
point is whether the individual is economically dependent on the
business to which he renders service or is, as a matter of economic
fact, in business for himself''); Superior Care, 840 F.2d at 1059
(``The ultimate concern is whether, as a matter of economic reality,
the workers depend upon someone else's business . . . or are in
business for themselves.'').
\207\ Scantland, 721 F.3d at 1312 (quoting Mednick v. Albert
Enters., Inc., 508 F.2d 297, 301-02 (5th Cir. 1975)).
\208\ DialAmerica, 757 F.2d at 1385.
\209\ See 86 FR 1173; see also McLaughlin v. Seafood, Inc., 861
F.2d 450, 452 (5th Cir. 1988), modified on reh'g, 867 F.2d 875 (5th
Cir. 1989) (reasoning that ``[l]aborers who work for two different
employers on alternate days are no less economically dependent than
laborers who work for a single employer''); Halferty v. Pulse Drug
Co., Inc., 821 F.2d 261, 267-68 (5th Cir. 1987) (rejecting the
employer's argument that the worker's wages were too little to
constitute dependence).
\210\ See Halferty, 821 F.2d at 268.
---------------------------------------------------------------------------
Lastly, as a global matter, some commenters objected to the
Department's use of the word ``employer'' throughout the proposed
regulatory provisions and recommended that the Department use an
alternate term such as ``potential employer'' instead because it made
it seem as if the result of the analysis was predetermined in favor of
employee status. See, e.g., National Association of Convenience Stores
(``NACS''); National Home Delivery Association (``NHDA''); Scopelitis.
Having considered the comments, the Department is adopting Sec.
795.105(a) and (b) largely as proposed, explaining that economic
dependence is the ultimate inquiry, and that an employee is someone
who, as a matter of economic reality, is economically dependent on an
employer for work--not for income. The Department is also making three
clarifying edits. First, in response to comments, the Department uses
the phrase ``worker's potential employer'' or ``potential employer''
instead of the word ``employer'' in Sec. 795.105(a). The Department
did not intend for its use of the word ``employer'' to predetermine any
result and makes the change throughout the regulatory text. The
Department is using the terms
[[Page 1666]]
``employer,'' ``potential employer,'' and ``the worker's potential
employer'' throughout the preamble discussion, and the terms are not
intended to predetermine any result. Second, the Department is adding
the statutory definition of ``employer'' to Sec. 795.105(a) for
completeness. And third, consistent with the 2021 IC Rule and the
proposed regulatory text, the Department is finalizing language that
makes clear that other sources of income or amount of pay are not
relevant to economic dependence, although, in response to comments, the
Department is making some minor edits for additional clarity.
The Department also proposed to delete Sec. 795.105(c) and (d) of
the 2021 IC Rule because it believed that the factors of the economic
reality test should not be given a predetermined weight and designated
as ``core'' or ``additional guideposts.'' As discussed in section III
(Need for Rulemaking) as well as in section V.C., the Department is
proceeding with the removal of these paragraphs, and discussion of the
economic reality test and the individual factors is being moved to
Sec. 795.110. The comments regarding the discontinuation of ``core
factors'' and the Department's return to the economic reality test's
longstanding totality-of-the-circumstances analysis are discussed in
section V.C.
C. Economic Reality Test and Economic Reality Test Factors (Sec.
795.110)
In the NPRM, the Department proposed to replace Sec. 795.110
(Primacy of actual practice) from the 2021 IC Rule with a provision
discussing the economic reality test and the economic reality factors.
Proposed Sec. 795.110(a) introduced the economic reality test,
emphasizing that the economic reality factors are guides to be used to
conduct a totality-of-the-circumstances analysis. It also explained
that the factors are not exhaustive, and no single factor is
dispositive.\211\ The Department then proposed to address the economic
reality factors in Sec. 795.110(b).\212\
---------------------------------------------------------------------------
\211\ 87 FR 62234-37 (proposed Sec. 795.110).
\212\ Id.
---------------------------------------------------------------------------
Many commenters supported the Department's return to the
longstanding totality-of-the-circumstances economic reality analysis,
stating that it would provide clarity and align with the statutory text
and relevant case law. See, e.g., IBT; Leadership Conference on Civil
and Human Rights (``Leadership Conference''); NELP; REAL Women in
Trucking; State AGs; William E. Morris Institute for Justice. Outten &
Golden, for instance, commented that the NPRM ``properly establishes
that the purpose of the `economic reality' factors is to inform and
illuminate the `economic dependence' inquiry, while no one factor
independently drives the analysis.'' NECA and IBEW commented that they
``support returning to the long-standing six-factor balancing test,
which will ensure certainty and clarity for construction employers and
employees, provide protection to law-abiding responsible contractors
and workers in the construction industry, and reduce burdensome and
costly litigation.'' Securities Industry Financial Markets Association
(``SIFMA'') agreed that ``[t]he Department of Labor is correct to note
that it is the totality of the circumstances that one must look at to
properly determine status'' and observed that ``courts have found that
there is no `rule of thumb', but that they must instead look at `the
total situation.' '' Similarly, the Shriver Center on Poverty Law
commented that the ``proposed rule's six-factor `economy reality'
analysis is a sensible, totality-of-the circumstances approach that
takes into account all relevant aspects of the worker's relationship
with the hiring entity, is not easily manipulated by employers, and is
well-supported by Supreme Court and circuit court precedent.''
Regarding the Department's explanations accompanying each factor, NELP
commented that ``[b]y sharpening the focus of each factor, the proposed
rule provides greater clarity, which will encourage employer compliance
and reduce misclassification while still enabling true independent
contractors to run their businesses as they see fit.'' The Transport
Workers Union of America commented that the Department's proposal
``will ensure that the legal line between those realities matches the
facts on the ground. The six-factor test envisioned in this rule
accurately reflects the everyday relationship between workers and their
employers. None of our members would risk becoming independent
contractors under this rule (as they would have under the previous
administration's proposal).'' Likewise, SWACCA stated that the
Department's proposal ``will achieve more certainty than the January
2021 Rule because it reflects a standard that the courts have clarified
and explained in numerous specific contexts through decades of judicial
rulings. It is a well understood body of law that employers, workers,
enforcement officials, private attorneys, and the federal courts all
have considerable experience applying.''
Several commenters emphasized that the Act's definitions should
guide the analysis. The LA Fed & Teamsters Locals, for example,
observed that ``[c]ourts have interpreted the FLSA's broad suffer or
permit to work language as seeking to answer one foundational question
regarding the relationship between a worker and the entity to whom that
worker provides their labor.'' They added that the 2021 IC Rule
``improperly elevates certain factors and prevents consideration of
certain facts, would invite employers to find ways to cloak a worker's
dependence in a veneer of independence and would fail to account for
changes in working structures that come with societal progress.''
In contrast, other commenters stated that the Department's proposal
to replace the ``core factor'' analysis and return to the totality-of-
the-circumstances analysis undermined the clarity of the 2021 IC Rule,
creating more uncertainty and confusion. See, e.g., Consumer Brands
Association; CWI; Forest Resources Association; I4AW; NYS Movers and
Warehousemen's Association; WSTA. For example, the 4A's stated that the
Department's proposal to return to a ``totality-of-the-circumstances
analysis, in which the economic reality factors are no longer weighted
more heavily based on importance, represents a change from the 2021
Independent Contractor Rule that will inevitably bring uncertainty and
confusion for advertising agencies and the U.S. business community at
large.'' FSI commented that ``[b]y expanding the range of relevant
factors and expressly refusing to give guidance on how to weigh them
against each other, DOL actively undermines the clarifying improvements
of the 2021 Rule and works against its own stated objectives.'' Several
commenters objected to the Department's framing of the proposal as a
return to a longstanding analysis, instead opining that the NPRM set
forth a novel test. See, e.g., Mackinac Center for Public Policy; WPI.
Many of these commenters expressed concern that the proposed rule would
have detrimental effects on their industries, work opportunities, and
earnings. See, e.g., American Council of Life Insurers (``ACLI'')
(identifying aspects of the proposal that ``would be enormously
economically disruptive to the local businesses and preferred
livelihoods of these individuals''); Buckeye Institute (``[B]y making
it more expensive and more difficult to undertake independent work,
this rule will shrink the available labor pool for employers.''); PGA
(commenting that the proposal could ``[t]hreaten the source of income
of thousands of workers across the country
[[Page 1667]]
in a time of economic uncertainty''); National Pork Producers Council
(``As a result, pork producers and other business owners could be
subject to increased legal and tax issues.'').
Other commenters stated that the 2021 IC Rule's core factor
analysis was better suited to the issues of the current economy than
the Department's proposal. For instance, the Job Creators Network
Foundation commented that the Department's proposal ``conflicts with
the way America's economy works today'' and that the new economy would
be ``significantly diminished'' if the proposal were to move forward.
In contrast, other commenters stated that the NPRM ``accurately
analyzes modern workplace trends and provides detailed guidance on how
these changes to the nature of work itself must be integrated and
considered within those six identified factors (and within the
additional factors that may arise in particular factual scenarios).''
LA Fed & Teamsters Locals; see also LCCRUL & WLC (commenting that the
NPRM ``closely aligns with long-standing judicial precedent and that
has proven well-suited to adapt to the myriad forms of working
arrangements that have existed in the over 80 years since the FLSA's
passage, as well as to unforeseeable work structures that will appear
in the future'').
Some commenters stated that the Department's proposed factors were
too broad and not tethered to economic dependence. IBA and CPIE, for
example, commented that the proposed regulations ``are not faithful to
answering the question of economic dependence'' and instead
``consistently resolve alternative interpretations of a specific factor
in the direction of broadening the scope of the factor.'' Similarly,
some commenters stated that the Department's proposal expanded the
range of relevant factors and ``hold[s] a thumb on the analytical scale
towards employment.'' See SHRM. The U.S. Chamber stated that the
proposed rule ``would not only lead to significant reclassification of
independent contractors but would also lead to a considerable increase
in litigation. The bias in favor of employee status, which appears
throughout the Proposed Rule, makes the risk that independent
contractors would be misclassified as employees especially acute, with
potentially dramatic consequences for entire industries.'' See also
Boulette Golden & Marin LLP (commenting that the Department has
attempted ``to narrow the scope of the economic reality test and
suggests an individual is not an employee only if the employee has a
free-standing business''). Relatedly, other commenters requested that
``[i]f it is the Department's intent that this rule should uphold
practices that were in place for years before the 2021 Independent
Contractor Rule, then we believe any final rule should confidently
state that most workers would not see a change.'' See OOIDA.
Several commenters requested that the Department provide additional
guidance regarding how to weigh the factors in various scenarios. See,
e.g., Grantmakers in the Arts; National Small Business Association. NRF
& NCCR, for example, commented that ``[t]his approach provides little
guidance as to how individuals and businesses should apply those
factors when they do not all point in the same direction.'' Commenters
also stated that, in contrast to the 2021 IC Rule, potential overlap
among factors made this test more challenging to understand. For
example, the Club Management Association of America and the National
Club Association (``CMAA & NCA'') commented that ``[e]ach factor
includes multiple subjective elements for consideration that are not
distinct from other factors'' and the Alabama Trucking Association
stated that the proposal ``also create[ed] subtests that overlap at
least conceptually or completely with aspects of other parts of the
test.'' See also MEP (``Overlap makes it more difficult for the
regulated community to understand how to analyze the different elements
of the contractual relationship.'').
Various commenters requested that the Department state that workers
in their particular industry or occupation were bona fide independent
contractors. See, e.g., Insights Association (strongly urging ``the
addition of a clarification that market research participants receiving
incentives are independent contractors''); American Securities
Association (stating its belief ``that, consistent with this precedent,
there is wisdom in including in the Proposed Rule an exemption for the
financial services and insurance industries''); C.A.R. (``C.A.R. asks
the DOL to not apply any new rule to established industries whose
businesses have already addressed this long-standing issue.'');
National Alliance of Forest Owners (``NAFO'') (requesting ``a safe
harbor provision to provide forestry businesses a clear standard for
classifying workers as independent contractors'').
After considering all comments and as discussed in detail below,
the Department is adopting Sec. 795.110(a) as proposed.
Regarding comments that the Department's proposal is generally
biased in favor of employee status, or that its analysis of each factor
places a ``thumb on the scale'' toward employment, the Department
reiterates that its proposal is consistent with longstanding judicial
precedent and, critically, the plain language of the Act. The
Department agrees with those commenters who emphasized the Act's
relevant statutory definitions. As it has stated previously, the
Department believes that determining whether an employment relationship
exists under the FLSA begins with the Act's definitions.\213\ The Act's
text is expansive, defining ``employer'' to ``include[ ] any person
acting directly or indirectly in the interest of an employer in
relation to an employee,'' ``employee'' as ``any individual employed by
an employer,'' and ``employ'' to ``include[ ] to suffer or permit to
work.'' \214\ Prior to the FLSA's enactment, the phrasing ``suffer or
permit'' was commonly used in state laws regulating child labor. As the
Eleventh Circuit explained in Antenor v. D & S Farms, ``[t]he `suffer
or permit to work' standard derives from state child-labor laws
designed to reach businesses that used middlemen to illegally hire and
supervise children.'' \215\ In other words, the standard was designed
to ensure that an employer could be covered under the labor law even if
they did not directly control a worker or used an agent to supervise
the worker. The Supreme Court has explicitly and repeatedly recognized
that this ``suffer or permit'' language demonstrates Congress's intent
for the FLSA to apply broadly and more inclusively than the common law
standard.\216\ This textual breadth reflects Congress's stated intent.
Section 2 of the Act, Congress's ``declaration of policy,'' states that
the Act is intended to eliminate ``labor conditions detrimental to the
maintenance of the minimum standard of living necessary for health,
efficiency, and general well-being of workers.'' \217\ Particularly
relevant to misclassification, section 2 identifies ``unfair method[s]
of competition in commerce'' as an additional condition ``to correct
and as
[[Page 1668]]
rapidly as practicable . . . eliminate.'' \218\
---------------------------------------------------------------------------
\213\ 87 FR 62234.
\214\ 29 U.S.C. 203(d), (e)(1), (g).
\215\ 88 F.3d 925, 929 n.5 (11th Cir. 1996).
\216\ See, e.g., Darden, 503 U.S. at 326 (noting that ``employ''
is defined with ``striking breadth'' (citing Rutherford, 331 U.S. at
728)); Rosenwasser, 323 U.S. at 362 (``A broader or more
comprehensive coverage of employees . . . would be difficult to
frame.''); Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 665
(5th Cir. 1983) (``The term `employee' is thus used `in the broadest
sense `ever . . . included in any act.'' '' (quoting Donovan v. Am.
Airlines, Inc., 686 F.2d 267, 271 (5th Cir. 1982))).
\217\ 29 U.S.C. 202.
\218\ Id.; see also Rosenwasser, 323 U.S. at 361-62; Pilgrim
Equip., 527 F.2d at 1311 (``Given the remedial purposes of the
legislation, an expansive definition of `employee' has been adopted
by the courts.'').
---------------------------------------------------------------------------
In its 1947 brief before the Supreme Court in Rutherford, the
Department explained that the Act ``contains its own definitions,
comprehensive enough to require its application to many persons and
working relationships, which prior to this Act, were not deemed to fall
within an employer-employee category.'' \219\ The Department continued,
stating that ``[t]he purposes of this Act require a practical,
realistic construction of the employment relationship . . . and the
broad language of the statutory definitions is more than adequate to
support such a construction.'' \220\ The determination of whether a
worker is covered under the FLSA must be made in the context of the
Act's own definitions and the courts' expansive reading of its
scope.\221\ The FLSA's ``particularly broad'' definition of
``employee'' encompasses all workers who are, ``as a matter of economic
reality, . . . economically dependent upon the alleged employer.''
\222\ The Supreme Court agreed, reiterating the breadth and reach of
the Act's definitions to work relationships that were not previously
considered to constitute employment relationships and emphasizing that
the determination of an employment relationship under the FLSA depends
not on ``isolated factors but rather upon the circumstances of the
whole activity.'' \223\
---------------------------------------------------------------------------
\219\ Brief for the Administrator at 10, Rutherford Food Corp.
v. McComb, 331 U.S. 722 (1947) (No. 562), 1947 WL 43939, at *10
(quoting Portland Terminal, 330 U.S. at 150-51).
\220\ Id. at *10-11.
\221\ Some commenters contended that the Department's discussion
in this section of cases where the Supreme Court repeatedly
recognized that the definitions of ``employ,'' ``employee,'' and
``employer'' that establish who is entitled to the FLSA's
protections were written broadly and have been appropriately
interpreted broadly, failed to properly account for the Court's more
recent decision in Encino Motorcars v. Navarro, 138 S. Ct. 1134
(2018), which overturned a rule of interpretation that applied to
exemptions. See U.S. Chamber; FSI. In Encino, the Supreme Court
addressed an exemption from the FLSA's overtime pay requirements and
ruled that the ``narrow construction'' principle--that FLSA
exemptions should be narrowly construed--should no longer be used.
The Court explained that instead, such exemptions should be given a
fair reading, stating ``[b]ecause the FLSA gives no textual
indication that its exemptions should be construed narrowly, there
is no reason to give [them] anything other than a fair (rather than
a narrow) interpretation.'' Encino, 138 S. Ct. at 1142 (internal
quotations and citation omitted). Though this decision did not apply
to the Act's definitions (which have not been interpreted under the
``narrow construction'' principle), the Department recognizes that
some courts have gone beyond Encino and extended the ``fair
reading'' principle to other parts of the Act or to the Act
generally. See, e.g., McKay v. Miami-Dade Cnty., 36 F.4th 1128, 1133
(11th Cir. 2022). There is no need to rely on the ``fair reading''
principle here because there is a clear textual indication in the
Act's definitions, by the inclusion of the ``suffer or permit''
language, that broad coverage under the Act was intended. See 29
U.S.C. 203(g). Thus, even if it were applied, such broad coverage
would be a ``fair'' interpretation under Encino because the broad
scope of who is an employee under the FLSA comes from the
definitions themselves and not any ``narrow-construction''
principle. See id. Moreover, Encino did not hold that the FLSA's
remedial purpose may never be considered, it simply noted that it is
a ``flawed premise that the FLSA `pursues' its remedial purpose `at
all costs.' '' Id. at 1142 (quoting Am. Express Co. v. Italian
Colors Rest., 570 U.S. 228, 234 (2013)) (emphasis added). Indeed,
other courts have appropriately continued to consider the purpose of
the Act. See, e.g., Uronis v. Cabot Oil & Gas Corp., 49 F.4th 263,
269 (3d Cir. 2022) (``As a remedial statute, the FLSA . . . is
broadly construed, and `must not be interpreted or applied in a
narrow, grudging manner.' '') (quoting Brock v. Richardson, 812 F.2d
121, 124 (3d Cir. 1987)). The Department does not agree with the
commenters' views that any pre-Encino case law discussing the
remedial purpose of the Act has been abrogated, and it notes that
courts have not changed their application of the economic reality
test to determine employee status based on Encino. Finally, the
Department reiterates that, to the extent that the language in the
2021 IC Rule preamble implied that the Act's remedial purpose can
never be considered, including when determining whether an
individual is an employee or an independent contractor under the
FLSA, the Department clarifies that it believes that this would be
an unwarranted extension of the Supreme Court's decision. See, e.g.,
86 FR 1207-08 (discussing Encino's application in response to
commenters' concerns that the 2021 IC Rule conflicted with the
FLSA's remedial purpose).
\222\ Cornerstone Am., 545 F.3d at 343 (citing Darden, 503 U.S.
at 326; Herman v. Express Sixty-Minutes Delivery Serv., Inc., 161
F.3d 299, 303 (5th Cir. 1998)).
\223\ Rutherford, 331 U.S. at 728-30.
---------------------------------------------------------------------------
Thus, the Department's analysis does not place a ``thumb on the
scale'' for employment. Rather, it was Congress's clear intent in
fashioning the Act (which has been repeated by courts for decades) that
the statutory language sweep broader than the common law and encompass
all workers who are ``suffered or permitted'' to work, and the test for
employment must reflect that plain language and clear intent. The
Department emphasizes again, however, that there is a wide assortment
of bona fide independent contractors across industries and occupations,
and it believes that the regulations as finalized in this rule allow
for this range of work relationships--from employees to independent
contractors--to be appropriately classified.
The Department has also considered the comments opining that the
Department's totality-of-the-circumstances economic reality test will
cause confusion or uncertainty and that the 2021 IC Rule's core factors
analysis was clearer. The Department believes, however, that an
analysis that has been applied for decades and is aligned with the
breadth of the relevant statutory definitions and binding judicial
precedent is not only more faithful to the Act but also more familiar
to the regulated community, workers, and those enforcing the Act.
The economic reality test was developed by the Supreme Court in
interpreting and applying the social legislation of the 1930s,
including the FLSA.\224\ In 1947, the Supreme Court issued two
decisions, Silk and Rutherford, that used an economic reality test to
determine employment status.\225\ As explained in Rutherford, the
``economic reality'' test is designed to bring within such legislation
``persons and working relationships which, prior to this Act, were not
deemed to fall within an employer-employee category.'' \226\ Only a
worker who ``is instead in business for himself'' is an independent
contractor not covered by the Act.\227\ The ``focus'' and ``ultimate
concept'' of the determination of whether a worker is an employee or an
independent contractor, then, is ``the economic dependence of the
alleged employee.'' \228\ The statutory language thus frames the
central question that the economic reality test asks--whether the
worker is economically dependent on an employer who suffers or permits
the work or whether the worker is in business for themself.
---------------------------------------------------------------------------
\224\ Rosenwasser, 323 U.S. at 362.
\225\ See Silk, 331 U.S. at 716-18 (applying the test under the
SSA); Rutherford, 331 U.S. at 730 (same under the FLSA).
\226\ Rutherford, 331 U.S. at 729; see also Whitaker House, 366
U.S. at 31-32 (describing the same as it relates to homeworkers).
\227\ Cornerstone Am., 545 F.3d at 343 (citing Express Sixty-
Minutes, 161 F.3d at 303).
\228\ Id.; see also Pilgrim Equip., 527 F.2d at 1311-12 (``[T]he
final and determinative question must be whether the total of the
testing establishes the personnel are so dependent upon the business
with which they are connected that they come within the protection
of [the] FLSA or are sufficiently independent to lie outside its
ambit.'').
---------------------------------------------------------------------------
To aid in answering this ultimate inquiry of economic dependence,
several factors have been considered by courts and the Department as
particularly probative when conducting a totality-of-the-circumstances
analysis of whether a worker is an employee or an independent
contractor under the FLSA.\229\ In Silk, the Supreme Court suggested
that ``degrees of control, opportunities for profit or loss, investment
in facilities, permanency of relation and skill required in the claimed
independent operation are
[[Page 1669]]
important for decision.'' \230\ The Court also drew a distinction
between workers who are an integral part of the business but are not
the directors of their business, and workers who ``depend upon their
own initiative, judgment, and energy for a large part of their
success.'' \231\ The Court cautioned that no single factor is
controlling and that the list is not exhaustive.\232\ In Rutherford,
the Court used a similar analysis when concluding that the workers in
that case were employees, considering ``the circumstances of the whole
activity,'' and relied on the fact that the workers' work was ``a part
of the integrated unit of production.'' \233\
---------------------------------------------------------------------------
\229\ See, e.g., Flint Eng'g, 137 F.3d at 1441 (explaining that
``[n]one of the factors alone is dispositive; instead, the court
must employ a totality-of-the-circumstances approach'').
\230\ 331 U.S. at 716.
\231\ Id.
\232\ See id.
\233\ Rutherford, 331 U.S. at 729-30.
---------------------------------------------------------------------------
These considerations identified by the Supreme Court are the same
factors that the Department set forth in its NPRM. Courts, employers,
workers, and enforcement personnel have been considering these factors
for over 75 years. As such, the Department does not see a credible
basis for comments that predict sharply increased litigation, dramatic
curtailment of opportunities, or massive reclassification of workers.
This is the analysis that the Department (except for the 2021 IC Rule)
and courts have applied for more than 7 decades to classify workers
under the Act, and the predictions raised in the comments as concerns
have not been evident. Moreover, this final rule represents the
Department's most comprehensive guidance regarding the economic reality
test used by courts to determine employee or independent contractor
status. As such, to the extent there was litigation around this issue
due to a lack of clarity, that should be further alleviated by this
rulemaking. As explained further in the economic analysis in section
VII, because of this alignment with a longstanding analysis, the
Department does not expect widespread reclassification as a result of
this rule.
Rather, the economic reality test, the case law, and the
Department's position have remained remarkably consistent since the
1940s, and throughout this time the test has demonstrated its ability
to address evolving workplace trends. The test's focus has remained on
whether the worker is in business for themself, with the inquiry
directed toward the question of economic dependence. This consistency
is, at least in part, due to the fact that the analysis works for a
broad swath of work arrangements, both longstanding and emerging, and
its overarching rationale based on economic dependence makes common
sense. It is not surprising that some courts and the Department may
have used somewhat different iterations of the factors over the last
several decades, as the factors ``are aids--tools to be used to gauge
the degree of dependence of alleged employees on the business with
which they are connected.'' \234\ These factors are only guideposts,
and ``[i]t is dependence that indicates employee status. Each [factor]
must be applied with that ultimate notion in mind.'' \235\ This is why
most courts, and the Department, have long made clear that additional
factors may be relevant when applying the test to a particular case. It
is also expected that outcomes may vary somewhat among workers even in
the same profession, for example, because the test demands a fact-
specific analysis. Facts like job titles or whether a worker receives a
1099 form are not probative of the economic realities of the
relationship. Rather, in undertaking this analysis, each factor is
examined and analyzed in relation to one another and to the Act's
definitions. Importantly, ``[n]one of these factors is determinative on
its own, and each must be considered with an eye toward the ultimate
question--the worker's economic dependence on or independence from the
alleged employer.'' \236\
---------------------------------------------------------------------------
\234\ Pilgrim Equip., 527 F.2d at 1311.
\235\ Id.
\236\ Off Duty Police, 915 F.3d at 1055 (alterations and
internal quotations omitted).
---------------------------------------------------------------------------
While the Department appreciates, as some commenters noted, that
two factors (like any test with fewer factors) are simpler in some ways
than six factors, the Department believes that it would be a disservice
to stakeholders to present an analysis that is contrary to how courts
view the totality-of-the-circumstances analysis. Courts have repeatedly
admonished against a mechanical application of the factors and have
required a full analysis of all relevant factors, which is why the
Department believes that any clarity created by shrinking the test to
two core factors and artificially weighting them is illusory. As
addressed in the NPRM, since Silk and Rutherford, federal courts of
appeals have applied the economic reality test to distinguish
independent contractors from employees who are entitled to the FLSA's
protections. Federal appellate courts considering employee or
independent contractor status under the FLSA generally analyze the
economic realities of the work relationship using the factors
identified in Silk and Rutherford.\237\ There is significant and
widespread uniformity among the federal courts of appeals in the
application of the economic reality test, although there is slight
variation as to the number of factors considered or how the factors are
framed (for example, whether relative investment is considered within
the investment factor, or whether skill must be used with business-like
initiative).\238\ As the 2021 IC Rule explained, ``[m]ost courts of
appeals articulate a similar test,'' and these courts consistently
caution against the ``mechanical application'' of the economic reality
factors, view the factors as tools to ``gauge . . . economic
dependence,'' and ``make clear that the analysis should draw from the
totality of circumstances, with no single factor being determinative by
itself.'' \239\ All of the federal courts of appeals that have
addressed employee or independent contractor status under the FLSA
consider five of the same factors.\240\ Briefly, these factors include
the degree of control exercised by the employer over the worker, skill,
permanency, opportunity for profit or loss, and investment, although
the Second Circuit and the D.C. Circuit treat the worker's opportunity
for profit or loss and the worker's investment as a single factor.\241\
Nearly all federal courts of appeals expressly consider a sixth factor,
whether the work is an integral part of the employer's business. The
Fifth Circuit has not adopted the integral factor as an enumerated
factor but has at times assessed integrality as an additional relevant
factor.\242\ As such, courts can and do accord weight to different
factors depending upon the particular facts of a case. And because
courts are the ultimate arbiter of disputes regarding worker
classification, an analysis that is aligned with how courts view the
issue is the most beneficial guidance that the Department can provide
to stakeholders.
---------------------------------------------------------------------------
\237\ See generally supra n.52.
\238\ See, e.g., Cornerstone Am., 545 F.3d at 344 (discussing
relative investments); Superior Care, 840 F.2d at 1060 (discussing
the use of skill as it relates to business-like initiative).
\239\ 86 FR 1170; see also Saleem, 854 F.3d at 139-40;
Cornerstone Am., 545 F.3d at 343; Keller v. Miri Microsystems LLC,
781 F.3d 799, 807 (6th Cir. 2015); Flint Eng'g, 137 F.3d at 1440-41.
\240\ Superior Care, 840 F.2d at 1058-59; DialAmerica, 757 F.2d
at 1382-83; McFeeley, 825 F.3d at 241; Off Duty Police, 915 F.3d at
1055; Lauritzen, 835 F.2d at 1534-35; Alpha & Omega, 39 F.4th at
1082; Driscoll, 603 F.2d at 754-55; Paragon, 884 F.3d at 1235;
Scantland, 721 F.3d at 1311-12; Morrison, 253 F.3d at 11.
\241\ See, e.g., Superior Care, 840 F.2d at 1058-59; Morrison,
253 F.3d at 11 (citing Superior Care, 840 F.2d at 1058-59).
\242\ See, e.g., Hobbs, 946 F.3d at 836.
---------------------------------------------------------------------------
Regarding comments that the Department should provide additional
guidance regarding how to weigh the
[[Page 1670]]
factors, the Department believes that adding mechanistic rules for
analyzing the factors would be contrary to judicial precedent and would
limit the test's intended flexibility. As explained in the NPRM, this
totality-of-the-circumstances analysis considers all factors that may
be relevant and, in accordance with the case law, does not assign any
of the factors a predetermined weight. Limiting and weighting the
factors in a predetermined manner undermines the very purpose of the
test, which is to consider--based on the economic realities--whether a
worker is economically dependent on the employer for work or is in
business for themself.\243\ Importantly, each factor, considered in
isolation, does not determine whether a worker is economically
dependent on an employer for work or in business for themself. Rather,
the factors are tools or indicators and must be analyzed together in
order to answer this ultimate inquiry. This is the guidance that the
Department has tried to provide for each factor, as discussed in this
section below.\244\ Depending on the facts and circumstances of a case,
it is to be expected that one or more factors may be more probative
than the other factors. The analysis, however, cannot be conducted like
a scorecard or a checklist. For example, two factors that strongly
indicate independent contractor status in a particular case could
possibly outweigh other factors that indicate employee status, and vice
versa. But to assign a predetermined and immutable weight to certain
factors ignores the totality-of-the-circumstances, fact-specific nature
of the inquiry that is intended to reach a multitude of employment
relationships across occupations and industries and over time.
Similarly, it is possible that not every factor will be particularly
relevant in each case and that is also to be expected.\245\
Accordingly, the Department believes that the nuanced analysis that
accompanies each factor below is more appropriate guidance than rote
instructions for weighing the factors.
---------------------------------------------------------------------------
\243\ See, e.g., Scantland, 721 F.3d at 1312 (quoting Mednick,
508 F.2d at 301-02); see also Saleem, 854 F.3d at 139-140; Mr. W
Fireworks, 814 F.2d at 1054-55.
\244\ See, e.g., Scantland, 721 F.3d at 1312 (the economic
reality factors ``serve as guides, [and] the overarching focus of
the inquiry is economic dependence''); Pilgrim Equip., 527 F.2d at
1311 (The economic reality factors ``are aids--tools to be used to
gauge the degree of dependence of alleged employees on the business
with which they are connected. It is dependence that indicates
employee status. Each test must be applied with that ultimate notion
in mind.'').
\245\ See, e.g., Lauritzen, 835 F.2d at 1534 (referring to the
economic reality factors and stating that ``[c]ertain criteria have
been developed to assist in determining the true nature of the
relationship, but no criterion is by itself, or by its absence,
dispositive or controlling.'').
---------------------------------------------------------------------------
Regarding comments that certain relevant facts may overlap among
the factors, as explained in the NPRM, the Department believes that
emphasizing the discrete nature of each particular factor and
evaluating each factor in a vacuum fails to analyze the entire range of
potential employment relationships in the manner demanded by the Act's
text and accompanying case law. Additionally, the test must be able to
identify the vast variety of legitimate independent contractor
relationships.\246\ As such, the Department does not wish to be overly
prescriptive regarding overlap among factors, because doing so
encourages a more formulaic application of the factors as a checklist,
when instead the factors are guides to determining, by looking at all
relevant facts, the economic reality of the situation. Applying a
formulaic or rote analysis that isolates each factor is contrary to
decades of case law, decreases the utility of the economic reality
test, and makes it harder to analyze the ultimate inquiry of economic
dependence. Rather, the analysis needs to be flexible enough to apply
to all kinds of work, and all kinds of workers, from traditional
economy jobs to jobs in emerging business models. As the Supreme Court
stated in Silk, ``[p]robably it is quite impossible to extract from the
[SSA] a rule of thumb to define the limits of the employer-employe[e]
relationship'' but the Court identified factors as ``important'':
``degrees of control, opportunities for profit or loss, investment in
facilities, permanency of relation[,] and skill required in the claimed
independent operation'' and added that ``[n]o one is controlling, nor
is the list complete.'' \247\ With this rule, the Department is
providing its most detailed guidance to date regarding the application
of each of the considerations identified by the Supreme Court as being
important to the determination of whether a worker is an employee under
the Act.
---------------------------------------------------------------------------
\246\ Independent contractors are not ``employees'' for purposes
of the FLSA. See generally Portland Terminal, 330 U.S. at 152
(stating that the ``definition `suffer or permit to work' was
obviously not intended to stamp all persons as employees'').
\247\ Silk, 331 U.S. at 716.
---------------------------------------------------------------------------
As to those comments stating that the proposed rule was not well-
suited to the modern economy, the Department disagrees. The Department
notes that the cases addressing employee vs. independent contractor
status discussed in this rule and using the economic reality test apply
to a wide range of today's workers, from cable installers to exotic
dancers to health care workers, and the Department's enforcement
experience applying the economic reality test is similarly varied. With
this rulemaking, the Department describes the economic reality factors
that reflect the totality-of-the-circumstances approach that courts
have taken for decades and are still applying to today's workplaces,
and provides an analysis as to how the Department considers each factor
in today's workplaces, based on case law and the Department's
enforcement expertise in this area. For example, the investment factor
is returned to being a separate factor, considers facts such as whether
the investment is capital or entrepreneurial in nature, and considers
the worker's investments relative to the employer's investments.
Significant additional guidance is provided for the control factor,
including detailed discussions of how scheduling, supervision, price-
setting, and the ability to work for others should be considered when
analyzing the degree of control exerted over a worker. And the integral
factor is returned to its longstanding Departmental and judicial
interpretation, rather than the ``integrated unit of production''
approach that was included in the 2021 IC Rule.
The Department declines commenter requests to provide any industry-
specific or occupation-wide exemptions or carve-outs to this rule. As
explained elsewhere, the Department intends these regulations to apply
to a broad range of work relationships and will continue to assess the
need for more specific subregulatory guidance.
Finally, multiple commenters seemed to refer to worker
classification as a preference or suggested that the Department's
proposal would infringe upon workers' or businesses' choices. See,
e.g., Cambridge Investment Research (commenting that the result of the
NPRM ``will be that many workers--including workers who want to be
independent contractors--will be reclassified as employees under the
FLSA''); Transcend Software and Technology Solutions (commenting that
the proposal would create an environment ``where the freedom for
entrepreneurs to operate as independent contractors is significantly
diminished''). For instance, the NDA stated that it ``believes
employers and workers should have the freedom and flexibility to engage
in labor arrangements that meet the specific needs and preferences of
both parties involved,'' and Cetera Financial Group commented that the
``Department could
[[Page 1671]]
take a huge step toward . . . certainty [for stakeholders] by including
the expressed intention of the parties as a threshold criteria for the
existence of economic dependence.'' While businesses are certainly and
unequivocally able to organize their businesses as they prefer
consistent with applicable laws, and workers are free to choose which
work opportunities are most attractive to them, if a worker is an
employee under the FLSA, then those FLSA-protected rights cannot be
waived by either party.
The Supreme Court's ``decisions interpreting the FLSA have
frequently emphasized the nonwaivable nature of an individual
employee's right[s] . . . under the Act'' and ``have held that FLSA
rights cannot be abridged by contract or otherwise waived.'' \248\ The
Supreme Court has identified at least three reasons for this nonwaiver
rule. First, the Court has determined, based on the legislative history
of the FLSA, that the Act constituted ``a recognition of the fact that
due to the unequal bargaining power as between employer and employee,
certain segments of the population required federal compulsory
legislation to prevent private contracts on their part which endangered
national health and efficiency.'' \249\ According to the Court, the
protective purposes of the Act thus ``require that it be applied even
to those who would decline its protections''; otherwise, ``employers
might be able to use superior bargaining power to coerce employees to .
. . waive their protections under the Act.'' \250\ Second, in enacting
the FLSA, Congress sought to establish a ``uniform national policy of
guaranteeing compensation for all work'' performed by covered
employees.\251\ Consequently, ``[a]ny custom or contract falling short
of that basic policy, like an agreement to pay less than the minimum
wage . . . cannot be utilized to deprive employees of their statutory
rights.'' \252\ Third, the Court has held that permitting employees to
waive their FLSA rights is inconsistent with the explicit purpose of
the Act to protect employers against unfair methods of
competition.\253\ Accordingly, FLSA rights cannot be waived by either
party under the law.
---------------------------------------------------------------------------
\248\ Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S.
728, 740 (1981) (listing cases).
\249\ Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697, 706 (1945).
\250\ Tony & Susan Alamo, 471 U.S. at 302 (citing Barrentine,
450 U.S. 728 and Brooklyn Sav., 324 U.S. 697).
\251\ Jewell Ridge Coal Corp. v. UMWA Local 6167, 325 U.S. 161,
167 (1945).
\252\ Id. (internal quotation marks omitted).
\253\ 29 U.S.C. 202(a); Brooklyn Sav., 324 U.S. at 710.
---------------------------------------------------------------------------
The Department is finalizing Sec. 795.110(a) as proposed. In the
sections that follow, the Department is providing a detailed analysis
about the application of each factor based on case law and the
Department's enforcement experience as a guide for employers and
workers in determining whether a worker is an employee or an
independent contractor, with each factor discussed through the lens of
economic dependence.
1. Opportunity for Profit or Loss Depending on Managerial Skill (Sec.
795.110(b)(1))
Regarding the opportunity for profit or loss depending on
managerial skill factor, the Department proposed that this factor
consider ``whether the worker exercises managerial skill that affects
the worker's economic success or failure in performing the work.'' The
Department identified a nonexclusive list of facts that may be relevant
when considering this factor: whether the worker determines or can
meaningfully negotiate the charge or pay for the work provided; whether
the worker accepts or declines jobs or chooses the order and/or time in
which the jobs are performed; whether the worker engages in marketing,
advertising, or other efforts to expand their business or secure more
work; and whether the worker makes decisions to hire others, purchase
materials and equipment, and/or rent space. The Department added that,
if a worker has no opportunity for a profit or loss, then this factor
suggests that the worker is an employee. The Department said further
that some decisions by a worker that can affect the amount of pay that
a worker receives, such as the decision to work more hours or take more
jobs, generally do not reflect the exercise of managerial skill
indicating independent contractor status under this factor.\254\
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\254\ See generally 87 FR 62274-75 (proposed Sec.
795.110(b)(1)).
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The Department explained that the proposed regulatory text for this
factor focused the opportunity for profit or loss factor on whether the
worker exercises managerial skill that affects the worker's economic
success or failure in performing the work. The Department noted that
the 2021 IC Rule similarly considered managerial skill, but explained
that the proposed regulatory text more accurately reflects the
consideration of the profit or loss factor in the case law and reflects
the ultimate inquiry into the worker's economic dependence or
independence. The Department further explained that many federal courts
of appeals ``apply this factor with an eye to whether the worker is
using managerial skill to affect the worker's opportunity for profit or
loss'' and discussed that case law. The Department also noted that its
proposal would consider investment as a separate factor, unlike the
2021 IC Rule's consideration of investment within its opportunity for
profit or loss factor. Additionally, the Department explained that the
proposed regulatory text stating that the fact that a worker has no
opportunity for a loss indicates employee status is consistent with the
overall inquiry into economic dependence and is supported by the case
law. Finally, the Department discussed the case law and its prior
guidance supporting its view that a worker's decision to work more
hours (when paid hourly) or work more jobs (when paid a flat fee per
job) where the employer controls assignment of hours or jobs is similar
to decisions that employees routinely make and does not reflect
managerial skill.\255\
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\255\ See generally id. at 62237-39.
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In addition to the numerous comments generally supporting the
Department's six-factor analysis, a number of commenters expressed
support for the NPRM's discussion of the opportunity for profit or loss
depending on managerial skill factor. For example, Smith Summerset &
Associates LLC ``highly applaud[ed] inclusion of `managerial skill' in
the title line and in the first sentence of the proposed'' regulatory
text and stated that ``the exercise of managerial skill is a sine qua
non of independent contractor status.'' LA Fed & Teamsters Locals
agreed ``that it is managerial skill that matters when analyzing
whether a worker's earning ability is relevant to the employee status
analysis'' (emphasis omitted). Several commenters (including Farmworker
Justice, NWLC, and the Shriver Center) stated that ``a worker who has
the power to make key business decisions that affect their opportunity
for profit or loss is more likely to be an independent contractor than
a worker who does not have power over these decisions.'' Similarly,
NELP expressed agreement with the proposal ``to explicitly tie the
opportunity for profit or loss to a worker's managerial skill, not
their ability to work longer'' (emphasis omitted). See also Gale
HealthCare Solutions. OOIDA agreed with the Department's rejection of
how the 2021 IC Rule discussed this factor, commenting: ``We believe
that the 2021 Rule may have opened additional opportunities for
truckers to fall prey to lease-purchase schemes by stipulating that an
individual only needed to exhibit exercise of initiative or
[[Page 1672]]
management of investment for the factor to weigh towards the individual
being an independent contractor. The formulation of the factor may have
dismissed predatory leasing arrangements because an owner-operator
otherwise exercised some initiative in the management of their work.''
Regarding the Department's proposal that decisions to work more
hours or take more jobs ``generally do not reflect the exercise of
managerial skill indicating independent contractor status under this
factor,'' \256\ NDWA agreed, stating that ``a worker's ability to
impact their pay by working more hours or taking more jobs does not
show the exercise of managerial skill indicating independent contractor
status.'' IBT also agreed with the NPRM's ``rejection of the
proposition that a worker['s] decision to take additional hours or
tasks indicates `managerial skill.' '' See also Leadership Conference,
ROC United, UFCW.
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\256\ Id. at 62274-75 (proposed Sec. 795.110(b)(1)).
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Several commenters found the NPRM's listing of potentially relevant
facts when applying this factor to be helpful. Real Women in Trucking
noted that this factor can appropriately indicate employee or
independent contractor status for truck drivers and that the NPRM's
``addition of relevant facts to consider under this factor . . .
provides helpful context to differentiate between these scenarios.''
Smith Summerset & Associates LLC ``applaud[ed] the specific examples of
managerial skill listed in the [proposal].'' And UFCW stated that,
``[c]orrectly, the proposed rule highlights whether the worker can
meaningfully negotiate, accept or decline jobs, and engage in efforts
to expand their independent business.''
Some other commenters that generally supported the Department's
six-factor analysis requested changes to or clarifications of the
opportunity for profit or loss depending on managerial skill factor.
For example, UFCW cited agreements that it says are imposed by
companies like Instacart, Uber, and Lyft that prohibit workers from
connecting with or soliciting their customers and stated that
``actively prohibit[ing] workers from developing an independent
business is evidence of a lack of opportunity to profit or loss based
managerial skill.'' UFCW also stated that, ``when black-box algorithms
solely dictate their available work, pay, and other economic
conditions,'' ``[w]orkers are powerless to negotiate or make any
managerial decisions.'' The Department agrees that such facts would be
probative of whether a worker has an opportunity for profit or loss
depending on managerial skill but also reiterates that no one fact is
dispositive under this factor.
Real Women in Trucking requested that the Department address ``free
market'' load boards (load boards are matching systems where shippers
post freights that they need carried and carriers post their
availability), which, in the commenter's view, ``offer an opportunity
to control profit or loss (unlike internal load boards).'' Similarly,
OOIDA explained its view that ``the mere fact that an individual
purchases equipment or services from a business they work with does not
necessarily indicate an employee relationship.'' OOIDA further
explained that ``[t]here are many owner-operators who choose to make
purchases from the business they are leased to because it is a
profitable deal'' and provided an example involving a group discount on
tires. OOIDA ``believe[s] that the NPRM's totality-of-the-circumstances
approach should be able to distinguish between these types of
situations.'' The Department appreciates these concerns and agrees that
the test put forth is flexible enough to account for a wide variety of
situations, but its intent in promulgating this final rule is to
provide as much as possible a general standard for determining employee
or independent contractor status. The requested guidance is technical
and industry-specific and is better addressed outside of rulemaking
after this final rule takes effect.
Smith & Summerset recommended adding ``depending on managerial
skill'' to the third sentence of the regulatory text so that it reads:
``If a worker has no opportunity for profit or loss depending on
managerial skill, then this factor suggests that the worker is an
employee.'' The commenter stated that, ``[w]ithout the managerial skill
qualifier, the reader is invited to quickly think of working more or
fewer hours as an opportunity for profit or loss.'' However, the
subsequent sentence in the regulatory text addresses working more
hours. Moreover, the intent of the third sentence is to explain that,
where a worker who has no opportunity for profit or loss, this factor
indicates employee status. Qualifying that explanation with a reference
to managerial skill is unnecessary, because regardless of managerial
skill, the worker's lack of an opportunity for profit or loss points
this factor toward employee status.
NELA recommended a number of changes to this factor. It stated that
a ``worker who can experience `profit' with no attached risk of
business loss is not truly in business for themselves,'' and suggested
that the following language from the NPRM preamble be added to the
regulatory text: ``The fact that a worker has no opportunity for a loss
indicates employee status. Workers who incur little or no costs or
expenses, simply provide their labor, and/or are paid hourly, piece
rate, or flat rate are unlikely to experience a loss. This factor
suggests employee status in those circumstances.'' However, the third
sentence of the regulatory text already explains that this factor
indicates employee status where a worker has no opportunity for a loss.
NELA further suggested that the Department should ``incorporate the
flip side'' of its above suggestion and state that ``the chance for a
`loss' with no corresponding opportunity for profit is a sign of
dependence on the employer, which points toward employee status.''
Again, the third sentence of the regulatory text already covers
circumstances where the worker has ``no opportunity for a profit or
loss.'' NELA also suggested that the following language be added to the
regulatory text: ``The fact that an employer may impose fines,
penalties, or chargebacks on a worker for faulty performance does not
mean that the worker may experience a loss. These kinds of costs are
likely to make workers more dependent on their employers, and therefore
more like employees.'' (The first sentence is from the NPRM preamble,
and the second sentence is new language suggested by NELA.) The
Department declines to add this language to the regulatory text. The
Department notes that although fines, penalties, and chargebacks can
indicate a worker's economic dependence on the employer, whether they
indicate dependence may depend on the circumstances.
NELA additionally suggested changing the regulatory text
identifying accepting or declining jobs as a relevant factor so that it
would read: ``whether the worker exercises managerial skill in
accepting or declining jobs without employer input or chooses the order
and/or time in which the jobs are performed independent from employer
control.'' In the Department's view, however, adding a reference to
``managerial skill'' is unhelpful because accepting or declining jobs
is an underlying fact that is relevant to determining whether the
worker exercises managerial skill. And adding references to ``employer
input'' and ``employer control'' are unnecessary because the focus of
this factor is whether the worker has an opportunity
[[Page 1673]]
for profit or loss through managerial skill, and there are many aspects
of accepting/declining jobs and choosing the order/time to perform
jobs--not only ``employer input'' and ``employer control''--which may
shed light on whether those decisions and choices exemplify managerial
skills. Finally, NELA suggested adding two sentences to the regulatory
text. The first sentence would read: ``A worker's technical proficiency
in completing each job is not the type of managerial skill that would
indicate independent contractor status.'' This suggested sentence is,
in the Department's view, correct in the abstract. As the Department
explained in the NPRM, ``where a worker is paid by the job, the
worker's decision to work more jobs and the worker's technical
proficiency in completing each job are not the type of managerial skill
that would indicate independent contractor status under this factor.''
\257\ However, the Department also identifies in the regulatory text
instances of managerial skill, such as efforts to expand a business or
secure more work, hiring others, and purchasing materials and
equipment, that can affect a worker's opportunity for profit or loss
by, at least in part, increasing the worker's technical proficiency.
The focus of this factor should be the degree of managerial skill, and
the Department does not believe that adding a blanket statement
regarding technical proficiency to the regulatory text would be helpful
because doing so could distract from evaluating managerial skill.
Technical proficiency in completing a job, even if it affects a
worker's earnings, is alone insufficient for this factor to indicate
independent contractor status, but, ultimately, whether that technical
proficiency is the product of managerial skill is probative of employee
or independent contractor status. NELA's second suggested sentence
would read: ``Managerial skill will typically affect opportunity for
profit or loss beyond a given job, and will relate to the worker's
business as a whole.'' The Department believes that the second
suggested sentence is not necessarily probative of this factor and is
not a point emphasized in the case law.
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\257\ Id. at 62238; see also Scantland, 721 F.3d at 1316-17.
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Numerous commenters opposed, disagreed with, and/or requested
changes to or clarifications of the proposed opportunity for profit or
loss depending on managerial skill factor. For example, several
commenters raised concerns that certain of the facts in the
nonexclusive list of facts identified by the Department as relevant to
this factor cannot be satisfied in their particular industries. Texas
Association for Home Care & Hospice stated that, ``[i]n home care,
independent contractor clinicians cannot hire other workers for the
purposes of completing the contracted jobs (i.e., patient visits) they
have accepted from the home care agency'' because of ``stringent human
resources and patient care regulations from both state and federal
regulatory agencies.'' It added that workers ``purchase and maintain
their own equipment,'' but if the worker ``accepts a specialized
patient job, for instance a wound care patient, then the home care
agency must purchase and provide to the independent contractor
clinician the appropriate wound care supplies . . . as ordered by the
physician.'' The ACLI stated that, ``[w]ithout question, [insurance
agents'] profit or loss depends upon their own managerial skill,'' but
``insurance regulations, including New York Insurance Law Sec. 4228,
set strict limits on the commissions that insurers can pay to agents,
who are ``unable to negotiate or change their commission structure.''
And although it ``generally supports the Department's proposed
application'' of this factor, the American Securities Association
expressed concern that this factor ``globally suggests, without any
exceptions, that `whether the worker determines or can meaningfully
negotiate the charge or pay for the work provided' is a relevant
factor.'' Because ``insurance and financial services regulations . . .
set strict limits on the premiums that can be charged to customers and
on the commissions that can be paid to agents and advisors,'' it
asserted that financial professionals would not be seen as independent
under this factor. The American Securities Association suggested that
the Department ``eliminate from consideration whether the worker can
meaningfully negotiate his or her pay from the list of potentially
relevant facts under this factor,'' include a carveout, or ``clarify
that a brokerage firm establishing prices to meet regulatory
supervision obligations or considerations of its registered
representatives does not create an employee relationship and is at most
a neutral factor.'' ABC suggested that the NPRM ``improperly presumes
that independent contractors must have a staff and a marketed
`business' to `manage.' '' It stated that ``many independent
contractors deliberately offer their services to employers of their
choosing for the express purpose of avoiding negotiating costs'' and
``do not want to run a business that requires overhead for services,
advertising and hiring support staff.'' It added that ``[i]t should be
made clear that a worker who does solicit work from multiple clients
remains an independent contractor.'' Finally, although it ``generally
agree[d] with the description of this factor,'' the California Chamber
of Commerce (``CA Chamber'') expressed concern ``that this factor would
weigh against a gig worker being an independent contractor simply
because the company for which they perform work sets pricing.''
Having considered these comments, the Department adopts its
proposed list of facts that may be relevant when applying this factor.
The list is plainly nonexclusive, and neither any fact listed nor this
factor will be dispositive of a worker's status. As the regulatory text
provides, ``no one factor or subset of factors is necessarily
dispositive,'' and the ``outcome of the analysis does not depend on
isolated factors but rather upon the circumstances of the whole
activity.'' \258\ The status of the workers identified by these
comments will be determined by multiple facts bearing on their work
relationships, and accordingly, these commenters' concerns do not
reflect how the Department's analysis will be applied. Consistent with
a totality-of-the-circumstances analysis, not hiring others and not
advertising, for example, do not make the worker an employee or even
conclusively determine that this factor indicates employee status. (And
as discussed below, certain decisions to ``not'' take business actions
such as those listed in the regulatory text may be as indicative of
managerial skill as decisions to take those business actions.) In that
same vein, soliciting work from multiple clients, for example and while
of course relevant, does not guarantee that a worker is an independent
contractor or even that this factor points to independent contractor
status. In addition, the Department believes that the nonexclusive list
of facts that are potentially relevant to this factor provides helpful
guidance, as other commenters have stated. And even if a particular
fact is not probative or always points in one direction for a
particular worker in a particular industry, that does not mean that the
fact is not probative on a general level. The Department is striving to
provide a generally applicable regulation in this rulemaking and will
provide additional
[[Page 1674]]
guidance after this final rule takes effect.\259\
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\258\ 29 CFR 795.110(a)(1)-(2).
\259\ Fight for Freelancers commented that the Department does
``not define what constitutes marketing and advertising'' (one of
the listed facts) and asked: ``What, specifically, must we do to
satisfy your definition of marketing and advertising?'' The
Department believes that the terms ``marketing'' and ``advertising''
are well understood, and engaging in marketing or advertising are
just examples of types of managerial skill that may be relevant when
applying this factor. No worker needs to ``satisfy'' any of these
facts; all facts relevant to the worker's opportunity for profit or
loss depending on managerial skill should be considered.
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Although the U.S. Chamber agreed that the facts listed in the
regulatory text are ``relevant to whether workers are independent
contractors or employees,'' it stated that the NPRM was ``wrong to
require a worker to `exercise' these decisions to exemplify independent
contractor status.'' Analogizing to the NPRM's discussion of how
reserved rights can be relevant in addition to actual practice, the
U.S. Chamber asserted that ``the more important question is whether the
worker has the opportunity to impact their profits and losses by
engaging in various activities such as working for other companies,
regardless of whether the worker actually acts on that opportunity.''
CWI criticized the NPRM for, in its view, ``requir[ing] consideration
of whether the worker actually exercises his skill to impact economic
success.'' CWI asserted that the NPRM ``consistently references
`opportunity,' not actual exercise of that opportunity, as the relevant
touchstone'' and added that: ``Whether a worker chooses to exercise the
opportunities for profit and loss available to him is fundamentally his
own business decision. It is the ability to follow that business
judgment--even to his detriment--that is the hallmark of the
independence he is afforded.'' See also N/MA; NRF & NCCR.
Having considered the comments on this point, the Department is
revising the final regulatory text to emphasize the worker's
``opportunities'' for profit or loss based on managerial skill and to
delete the reference to whether the worker ``exercises'' managerial
skill. The Department concurs that the term ``opportunities,'' which
encompasses opportunity more broadly than ``whether the worker
exercises managerial skill,'' is more consistent conceptually with the
case law analyzing this factor and with the remainder of the regulatory
text. Although the Department did not intend for the ``exercises
managerial skill'' language to be limiting, focusing on
``opportunities'' should capture the facts relevant to a worker's
profit or loss and managerial skill, as explained further in the
discussion of comments in the following paragraph.
The Coalition of Business Stakeholders stated that ``[m]any
independent contractors offer their services to select employers for
the express purpose of avoiding negotiating costs for services,
advertising, and hiring support staff,'' and that the NPRM ``utterly
fails to account for workers' preference for having an independent
contractor relationship that avoids these costs.'' The commenter
asserted that this ``framework would virtually always weigh in favor of
employment status.'' NRF & NCCR stated 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.'' According to the commenter, for example, ``[a]
carpenter or plumber who chooses to market through word of mouth and to
complete one job at a time, and not hire helpers and make the
investments necessary to work on multiple job[s] simultaneously, is no
less an independent contractor than a carpenter or plumber who has made
different choices about how to operate his or her business.'' The
Department believes that the opportunity, for example, to hire others
or purchase materials and equipment, and a decision to not take such
action based on a consideration of possible costs and rewards, can
indicate managerial skill. For this to be the case, the worker must
have a real opportunity to take the action and make an independent
business decision indicating managerial skill to not take the action.
In other circumstances, not taking an action may not indicate
managerial skill. For example, if the action requires approval from the
employer (for example, the employer must approve any person hired by
the worker as a helper) or the action is not feasible financially (for
example, the worker is lower-paid and cannot hire others or make
purchases), then there is likely no opportunity for the worker to make
an independent business decision indicating managerial skill.
Regardless, no one action or lack of action should determine whether
this factor indicates employee or independent contractor status; the
Department identifies in the regulatory text a number of possibly
relevant facts, and other relevant facts may be considered too.
Several commenters expressed concern that the mention of
``managerial skill'' in the proposed regulatory text did not include
references to ``initiative,'' ``business acumen,'' and ``judgment.''
For example, CWI stated that the proposed regulatory text ``narrows the
inquiry'' as compared to the 2021 IC Rule, which referenced ``business
acumen or judgment'' in its discussion of this factor. CWI further
stated that the NPRM's preamble ``acknowledge[d] that `initiative,'
`business acumen,' and `judgment' are informative of the opportunity-
for-profit-or-loss factor'' (citing 87 FR 62238). CWI requested that
the Department ``retain the 2021 IC Rule's formulation of the
standard.'' See also N/MA. The U.S. Chamber added that the proposed
regulatory text ``wrongly narrows the inquiry to `whether the worker
exercises managerial skill,' as opposed to `managerial skill or
business acumen or judgment,' as stated in the 2021 IC Rule.'' The
Department did not intend to exclude initiative, judgment, or business
acumen from the inquiry under this factor. The NPRM's preamble
explained that considering initiative and judgment is very similar to
considering managerial skill.\260\ Accordingly, in light of the
comments and the discussion of managerial skill in the NPRM's preamble
and the cases cited therein, the Department is modifying the regulatory
text to clarify that managerial skill includes ``initiative or business
acumen or judgment.'' Thus, with this change and the change discussed
above, the first sentence of the regulatory text for this factor reads:
``This factor considers whether the worker has opportunities for profit
or loss based on managerial skill (including initiative or business
acumen or judgment) that affect the worker's economic success or
failure in performing the work.''
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\260\ 87 FR 62238 (citing, inter alia, Franze, 826 F. App'x at
76-78; Flint Eng'g, 137 F.3d at 1441; Superior Care, 840 F.2d at
1058-59; Snell, 875 F.2d at 810).
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CPIE commented that, although earlier court decisions ``properly
considered an individual's opportunity for loss in evaluating the
individual's economic dependence,'' the U.S. economy has changed, and
``[t]here are countless numbers of individuals today who operate
thriving businesses with their laptop computers and incur no risk of
loss whatsoever.'' The commenter asserted that ``[t]he fact that these
individuals operate a type of business that does not require a
substantial financial investment should not deny them their right to
offer their services as
[[Page 1675]]
independent contractors.'' Having considered this comment, the
Department stands by its position that ``the fact that a worker has no
opportunity for a loss indicates employee status.'' \261\ The
Department believes that the risk of a loss as a possible result of the
worker's managerial decisions indicates that the worker is in business
for themself. Although a worker need not experience a loss or even
likely experience a loss for this factor to indicate independent
contractor status, the scenario presented by the commenter--``no risk
of loss whatsoever''--does not suggest that the worker is an
independent contractor because at least some risk of a loss is inherent
in operating an independent business. Moreover, the Department's
position is grounded in the case law, which has recognized that the
lack of possibility of a loss indicates employee status.\262\ The
Department notes, however, that whether the worker in the scenario
presented by the commenter is an employee or independent contractor
depends on application of all of the factors and a consideration of the
totality of the circumstances because neither this factor nor any other
factor is necessarily dispositive. Thus, workers ``who operate thriving
businesses with their laptop computers and incur no risk of loss
whatsoever'' (the scenario presented by the commenter) may be employees
or independent contractors depending on all of the factors.
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\261\ Id.
\262\ Id. at 62239 (citing Off Duty Police, 915 F.3d at 1059;
Flint Eng'g, 137 F.3d at 1441; Selker Bros., 949 F.2d at 1294;
Snell, 875 F.2d at 810; Lauritzen, 835 F.2d at 1536; DialAmerica,
757 F.2d at 1386).
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A number of commenters expressed concerns with and/or sought
changes to the last sentence of the regulatory text: ``Some decisions
by a worker that can affect the amount of pay that a worker receives,
such as the decision to work more hours or take more jobs, generally do
not reflect the exercise of managerial skill indicating independent
contractor status under this factor.'' For example, NHDA stated that
each decision by a ``driver to accept or reject an opportunity (in this
case, a load) is a business decision that affects his/her economic
success'' and ``involves the weighing of an opportunity cost'' (i.e.,
``the cost of accepting that load versus the revenue to be earned and
also against the foregone opportunity to transport a different load'').
NHDA further stated that, for these reasons, this sentence ``is
misleading and susceptible to short-circuiting a proper analysis.'' See
also Scopelitis (same). Flex described this sentence as ``misleading''
and ``likely lead[ing] to the discounting of evidence that is, in fact,
highly relevant to a worker's `opportunity for profit or loss depending
on managerial skill.' '' It stated that, ``[i]f a cashier at a fast-
food restaurant voluntarily chooses to work overtime or pick up an
additional shift, that decision would not support independent
contractor status[,]'' but if a driver ``who was planning to drive
clients five days one week is solicited by a new client for a lucrative
opportunity on Saturday, the decision to accept that new client and
work an extra day is plainly an entrepreneurial decision that reflects
managerial decision making.'' Flex explained that ``technological
advances . . . have facilitated independent contractors' ability to
quickly determine what earnings opportunities and hours worked will
yield for them the biggest return on the investment of their time.''
SHRM added that ``[t]he economic reality is that a worker who can
profit by taking other jobs is more independent--and therefore less
economically dependent on the employer--than an employee who cannot,''
and that ``[t]he ability to make that choice should point to an
independent relationship.'' CWI stated that ``[t]he Department's
commentary even cites authority noting that choosing among `which jobs
were most profitable' is evidence of independent contractor status, but
the Proposed Rule contains no similar nuance.'' See also U.S. Chamber;
MEP.
Having considered these comments, the Department believes that the
last sentence of the proposed regulatory text for this factor can be
more precise. In the NPRM, the Department explained this concept as
follows: ``a worker's decision to work more hours (when paid hourly) or
work more jobs (when paid a flat fee per job) where the employer
controls assignment of hours or jobs is similar to decisions that
employees routinely make and does not reflect managerial skill.'' \263\
The proposed regulatory text, however, did not account for payment for
the hours and jobs at a fixed rate or the employer's control over the
flow of work. The NPRM recognized that courts have held that a worker's
ability to freely choose among jobs based on the worker's assessment of
the comparable profitability of those jobs can indicate independent
contractor status when applying the opportunity for profit or loss
factor.\264\ Other cases relied on by the Department in the NPRM
involved workers who were paid at set or fixed rates and/or situations
where more work was dictated by the employer's needs as opposed to the
worker's initiative.\265\ Based on the comments, the discussion in the
NPRM, and the case law, the Department is revising the last sentence of
the opportunity for profit or loss factor. In the NPRM, that sentence
read: ``Some decisions by a worker that can affect the amount of pay
that a worker receives, such as the decision to work more hours or take
more jobs, generally do not reflect the exercise of managerial skill
indicating independent contractor status under this factor.'' As
revised, that sentence reads (with the new language in italics): ``Some
decisions by a worker that can affect the amount of pay that a worker
receives, such as the decision to work more hours or take more jobs
when paid a fixed rate per hour or per job, generally do not reflect
the exercise of managerial skill indicating independent contractor
status under this factor.'' The Department also considered adding to
the regulatory text a reference to the employer's control of assignment
of the hours or jobs. Although such control may be relevant in this
context, the Department believes that the fact that the hours or jobs
are paid at a fixed rate is more indicative that the worker is not
exercising managerial skill by taking more such hours or jobs.
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\263\ 87 FR 62239.
\264\ Id. (citing Karlson v. Action Process Serv. & Private
Investigations, LLC, 860 F.3d 1089, 1095 (8th Cir. 2017)); Express
Sixty-Minutes, 161 F.3d at 304).
\265\ Id. (citing Off Duty Police, 915 F.3d at 1059; Scantland,
721 F.3d at 1316-17; Capital Int'l, 466 F.3d at 308; Snell, 875 F.2d
at 810).
---------------------------------------------------------------------------
Fight for Freelancers asserted that there was a conflict between
this provision regarding working more hours or jobs and the provision
stating that accepting or declining jobs can be a relevant fact when
applying this factor. The Coalition of Business Stakeholders commented
that the NPRM is ``unclear on whether, when assessing the opportunity
for profit or loss factor, a worker's ability to accept or decline work
weighs in favor of independent contractor status.'' The Department
believes these comments overlook the totality-of-the-circumstances
nature of the analysis; there is no particular factor to satisfy. In
addition, the text addresses two concepts that are not in conflict. The
last sentence of the regulatory text (as revised) addresses a worker
who can earn more by working more hours or taking more jobs. That
worker is working more to earn more but not exercising managerial skill
(at least in that regard). On the other hand, a worker may be able to
accept and
[[Page 1676]]
decline jobs where the jobs have varying degrees of potential
profitability and the worker must determine which jobs to pursue and
how much of the worker's time and resources should be devoted to the
various jobs. That worker is exercising managerial skill (at least in
that regard), which weighs in favor of independent contractor status.
MEP commented that ``managerial skill should be broadly defined''
and that ``managerial skill should include an individual's ability to
complete the work more efficiently or effectively.'' World Floor
Covering Association (``WFCA'') commented that, although it
``recognizes that merely working longer hours or more efficiently does
not distinguish an independent contractor from an employee,'' ``[a]n
individual who uses initiation or judgment to perform a job more
efficiently can generate greater profits, even if compensated by the
hour or by piecework rates.'' WFCA suggested that ``depending on
managerial skill'' be stricken from the title of this factor and that
the first sentence of the regulatory text be revised to state: ``This
factor considers whether the worker exercises managerial skills,
implements innovations, or uses other entrepreneurial concepts that
affects the worker's economic success or failure in performing the
work.'' For the reasons explained in the NPRM and in this section,
managerial skill is properly the focus of the opportunity for profit or
loss factor because it helps to distinguish between decisions that
affect a worker's earnings and the use of initiative, judgment, or
business acumen that may create opportunities for profit or loss. As
further explained in the NPRM, whether the worker's opportunity for
profit or loss depends on managerial skill (or initiative or judgment
as discussed above) is ingrained in the case law.\266\ Accordingly,
striking ``depending on managerial skill'' would not be supported. And
although being innovative and acting entrepreneurially are synonymous
with managerial skill, implementing innovations and using
entrepreneurial concepts are not necessarily synonymous with the
worker's managerial skill if those innovations and concepts are
developed and perfected by others. WFCA's suggested language would
detract the focus from, and not necessarily be consistent with,
managerial skill.
---------------------------------------------------------------------------
\266\ 87 FR 62237-38 (citing, inter alia, Franze, 826 F. App'x
at 76-78; Razak, 951 F.3d at 146; Verma, 937 F.3d at 229 (citing
Selker Bros., 949 F.2d at 1293); Off Duty Police, 915 F.3d at 1059;
Iontchev v. AAA Cab Serv., Inc., 685 F. App'x 548, 550 (9th Cir.
2017); McFeeley, 825 F.3d at 241 (citing Capital Int'l, 466 F.3d at
304-05); Keller, 781 F.3d at 812; Scantland, 721 F.3d at 1312; Flint
Eng'g, 137 F.3d at 1441; Snell, 875 F.2d at 810; Superior Care, 840
F.2d at 1058-59; Lauritzen, 835 F.2d at 1535; Driscoll, 603 F.2d at
754-55).
---------------------------------------------------------------------------
In addition, WFCA provided examples of workers who can ``install
complex wood or tile patterns'' and requested that implementing ``new
techniques or innovations'' and developing ``specialized or unique
skills'' be added to the nonexclusive list of facts that may be
relevant when applying this factor. However, as discussed in this
section, implementing techniques or innovations is not necessarily
indicative of managerial skill and may instead relate more to how the
worker performs the work. The same may be said about developing skills;
especially considering the examples provided by WFCA, these skills seem
more about performing particular work. As discussed above in response
to NELA's comment that technical proficiency in completing each job is
not managerial skill indicative of independent contractor status, the
focus of this factor is the worker's managerial skill and not the
worker's performance of particular jobs. Accordingly, the Department
declines to make the changes requested by WFCA.\267\
---------------------------------------------------------------------------
\267\ CPIE discussed technical proficiency and commented: ``An
individual's ability to maximize the profitability attributable to
the individual's technical proficiency will depend on the
individual's managerial skill and ability to persuasively
communicate to a potential client the value of such proficiency.''
The Department generally agrees with this statement to the extent
that it focuses the inquiry on the worker's managerial skill.
---------------------------------------------------------------------------
The Department is finalizing the opportunity for profit or loss
depending on managerial skill factor (Sec. 795.110(b)(1)) with the
modifications discussed herein.
Example: Opportunity for Profit or Loss Depending on Managerial Skill
A worker for a landscaping company performs assignments only as
determined by the company for its corporate clients. The worker does
not independently choose assignments, solicit additional work from
other clients, advertise the landscaping services, or endeavor to
reduce costs. The worker regularly agrees to work additional hours in
order to earn more. In this scenario, the worker does not exercise
managerial skill that affects their profit or loss. Rather, their
earnings may fluctuate based on the work available and their
willingness to work more. Because of this lack of managerial skill
affecting opportunity for profit or loss, these facts indicate employee
status under the opportunity for profit or loss factor.
In contrast, a worker provides landscaping services directly to
corporate clients. The worker produces their own advertising,
negotiates contracts, decides which jobs to perform and when to perform
them, and decides when and whether to hire helpers to assist with the
work. This worker exercises managerial skill that affects their
opportunity for profit or loss. Thus, these facts indicate independent
contractor status under the opportunity for profit or loss factor.
2. Investments by the Worker and the Potential Employer (Sec.
795.110(b)(2))
Regarding the investments factor, the Department proposed that this
factor consider ``whether any investments by a worker are capital or
entrepreneurial in nature.'' The provision stated that ``[c]osts borne
by a worker to perform their job,'' such as ``tools and equipment to
perform specific jobs and the worker's labor,'' ``are not evidence of
capital or entrepreneurial investment and indicate employee status.''
The provision further stated that investments that are capital or
entrepreneurial in nature and thus indicative of independent contractor
status are those that ``generally support an independent business and
serve a business-like function, such as increasing the worker's ability
to do different types of or more work, reducing costs, or extending
market reach.'' The Department also proposed that ``the worker's
investments should be considered on a relative basis with the
employer's investments in its overall business.'' The provision further
said that ``[t]he worker's investments need not be equal to the
employer's investments, but the worker's investments should support an
independent business or serve a business-like function for this factor
to indicate independent contractor status.'' \268\
---------------------------------------------------------------------------
\268\ See generally 87 FR 62275 (proposed Sec. 795.110(b)(2)).
---------------------------------------------------------------------------
The Department explained that its proposal to treat investments as
its own separate factor in the economic reality analysis is consistent
with its approach prior to the 2021 IC Rule and with the approach of
most courts. The Department further explained that considering
investments as part of the opportunity for profit or loss factor, as
the 2021 IC Rule did, is flawed because, among other reasons, it ``may
incorrectly tilt the analysis in favor of independent contractor
outcomes'' and ``have the effect in some cases of
[[Page 1677]]
preventing investment from affecting the analysis.'' The Department set
forth its reasons (and the supporting case law) for focusing on the
nature and reason for the worker's investment and why the worker's
investment must be capital in nature for it to indicate independent
contractor status. Consistent with that focus, the Department further
explained (with a discussion of supporting case law) that ``the use of
a personal vehicle that the worker already owns to perform work--or
that the worker leases as required by the employer to perform work--is
generally not an investment that is capital or entrepreneurial in
nature.'' \269\
---------------------------------------------------------------------------
\269\ See generally id. at 62240-41.
---------------------------------------------------------------------------
Finally, the Department explained that its proposal to evaluate the
worker's investment in relation to the employer's investment in its
business ``is not only consistent with the totality-of-the-
circumstances analysis that is at the heart of the economic reality
test, but it would also provide factfinders with an additional tool to
differentiate between a worker's economic dependence and independence
based on the particular facts of the case.'' The Department discussed
the federal appellate case law supporting its proposal and addressed
any contrary federal appellate case law.\270\
---------------------------------------------------------------------------
\270\ See generally id. at 62241-43.
---------------------------------------------------------------------------
In addition to the numerous comments generally supporting the
Department's six-factor analysis, a number of commenters expressed
support for the NPRM's treatment of investments as a separate factor in
the economic realities analysis. NWLC explained that, ``[c]onsistent
with the Department's guidance from its earliest applications of the
economic reality test until the 2021 Rule, the proposed rule considers
investments by the worker and the employer as a factor distinct from
opportunity for profit or loss.'' LA Fed & Teamsters Locals stated that
the 2021 IC Rule had ``improperly combine[d]'' the investments factor
with the opportunity for profit or loss factor and that the NPRM's
treatment of the investments factor as a separate factor ``more
faithfully adheres to the long history of jurisprudence defining how to
determine the economic reality.'' The State AGs agreed that treating
investments as a separate factor is ``consistent with the case law.''
Gale Healthcare Solutions expressed ``support [for] the proposal to
treat worker investment as a standalone factor in the economic reality
analysis rather than as part of [the] opportunity for profit or loss
analysis.'' Others, including NELP, Real Women in Trucking, IBT, and
AFL-CIO, expressed similar support.
A number of commenters also supported the substance of the NPRM's
discussion of the investments factor. For example, Leadership
Conference appreciated the clarification that the NPRM's investments
factor would provide, stating that ``[a] true independent contractor
should make significant capital or entrepreneurial investments in their
business, especially relative to the entity that hired them.'' The
Shriver Center agreed that the investments of ``a true independent
contractor . . . must be capital or entrepreneurial, as opposed to
tools that a worker is required by a business to have in order to
perform a job.'' Others, including Farmworker Justice, Real Women in
Trucking, and LIUNA, commented similarly. See also NELP, Winebrake &
Santillo, LLC, Gale Healthcare Solutions.
ROC United described as crucial the NPRM's clarification ``that
`the use of a personal vehicle that the worker already owns to perform
work--or that the worker leases as required by the employer to perform
work--is generally not an investment that is capital or entrepreneurial
in nature.' '' AFL-CIO ``strongly encourage[d] [the Department] to
include in the Final Rule its observation'' regarding a worker's use of
a personal vehicle. LA Fed & Teamsters Locals agreed that the NPRM's
approach to a worker's use of a personal vehicle was right and added
that evaluating the worker's investment relative to the employer's ``is
critical because even when employers push the cost of tools and
supplies onto the workers doing the work at the core of the employer's
business, the employers often have even larger investments.''
Some commenters that generally supported the Department's six-
factor analysis requested changes to or clarifications of the
investments factor. In particular, a number of commenters addressed
costs and expenses that employers require workers to bear or that they
otherwise impose on workers and argued that such costs and expenses are
not of a capital or entrepreneurial nature indicating independent
contractor status. For example, Intelycare asserted that when a nursing
agency shifts fees for malpractice insurance onto workers, those fees
are not an investment by the workers. Intelycare added: ``We urge the
Department to close such loopholes and instruct that companies cannot
shift or attempt to disguise their own investments in an effort to
avoid employee classification.'' Gale Healthcare Solutions likewise
requested that the Department ``clarify that when a company shifts its
`investment' cost or a typical cost of doing business to workers (e.g.,
. . . purchasing group malpractice insurance and deducting the cost
from workers' pay), this transferred cost does not constitute worker
investment.'' LA Fed & Teamsters Locals requested that the Department
make ``clear in its final rule that any investments that an employer
requires fall into th[e] category of non-probative investments, and
provide additional guidance to ensure that employers cannot find
additional ways to manipulate these factors.'' NELP similarly requested
that the Department ``clarify that investments made by a worker that
reflect a contractual demand by the hiring entity, rather than an
independent business investment decision or meaningful negotiation
between business parties, should not weigh towards independent
contractor status.'' NELP added: ``Without this clarification, hiring
entities may misclassify workers as independent contractors and require
or pressure them, as a condition of receiving work, to make
expenditures that appear large in comparison to an undercapitalized
hiring entity--such as a fly-by-night subcontractor or labor broker--to
avoid accountability.''
Having considered these comments, the Department agrees that costs
unilaterally imposed by an employer on a worker are not capital or
entrepreneurial in nature. Where the worker has no meaningful say
either in the fact that the cost will be imposed or the amount, the
cost cannot be an investment indicating that the worker is in business
for themself. Using malpractice insurance for nurses as an example, if
such insurance is required by law or regulation and a nursing staffing
agency purchases and maintains the insurance for the nurses and passes
that cost on to, or imposes a charge for insurance on, the nurses, that
cost does not indicate independent contractor status. But, if insurance
is required by law or regulation, and the nurse can choose among
policies based on their prices and coverages and does independently
procure a policy, then the cost of the insurance could be capital or
entrepreneurial in nature and indicative of independent contractor
status. For these reasons, the Department is modifying the relevant
sentence from the regulatory text regarding the investments factor to
add the following text: ``and costs that the
[[Page 1678]]
potential employer imposes unilaterally on the worker.'' \271\
---------------------------------------------------------------------------
\271\ NELP additionally commented that ``[c]larifying the
relationship between [the investments and opportunity for profit or
loss] factors will help identify situations (like the personal
vehicle example . . .) where a corporation may be transferring the
cost of doing business to its workers, who are required to make
expenditures that are not independent decisions impacting their
businesses' profits or losses.'' The Department believes that its
discussion in this paragraph and the following paragraph, as well as
its discussion below regarding the investments factor as it relates
to the opportunity for profit or loss factor, provide additional
clarity.
---------------------------------------------------------------------------
Relatedly, Real Women in Trucking stated that truck drivers who
wholly own or independently finance a truck are true owner-operators
because ``[t]his type of investment gives [them] the ability to keep
their truck if they decide to stop working for any particular company,
and accordingly some measure of economic independence.'' The commenter
further stated that, in contrast, ``employer-sponsored leases for work
equipment, including for trucks, are not investments of the kind that
weigh in favor of independent contractor classification.'' The
Department generally agrees with this distinction, although it is
hesitant to state that the existence of an employer-sponsored lease can
never indicate independent contractor status. Consistent with the
discussion of malpractice insurance in the previous paragraph, if a
driver is not required to lease a truck from the employer, is able to
consider independent financing options, is able to meaningfully
negotiate the terms of the lease with the employer, is not required by
the employer to work for it for a minimum period of time nor prohibited
by it from using the leased truck to work for others, and then decides
to lease from the employer, the cost of the truck leased from the
employer could be capital or entrepreneurial in nature, especially if
the lease could ultimately result in the driver's wholly owning the
truck.\272\
---------------------------------------------------------------------------
\272\ On the other hand, where a driver has ``the means to
engage in the freight-hauling business only because [the employer]
advanced a truck, equipment, and many other resources up front on
[the employer's] own credit'' and is charged for those costs, the
investment factor indicates employee status. Brant v. Schneider
Nat'l, 43 F.4th 656, 671 (7th Cir. 2022).
---------------------------------------------------------------------------
Regarding the proposed regulatory text's statement that the costs
to workers of tools to perform specific jobs are not capital or
entrepreneurial investments, LIUNA suggested the following addition:
``The mere utility of a worker's tools to perform similar work for
other employers does not render the worker's purchase of those tools an
entrepreneurial investment, especially where the pertinent employer
invests far more in facilitating or purchasing the employees' work.''
In support, LIUNA stated that ``[t]he weight of authority . . .
overwhelmingly suggests that the potential utility of a workers' tools
for other projects does not render those workers[] independent
contractors.'' This statement, however, overlooks that the economic
realities analysis considers the totality of the circumstances. A
worker's use of tools alone does not determine whether the worker is an
employee or independent contractor. Moreover, the Department believes
that a worker's purchase of tools and equipment for use performing
multiple jobs for multiple employers can be a capital or
entrepreneurial investment. The regulatory text already explains that
the nature of such purchases of tools and equipment needs to be
determined and that such costs to a worker and the worker's other
investments should be considered on a relative basis with the
employer's investments in its overall business. Accordingly, the
Department declines LIUNA's suggestion.
NELA stated that the NPRM ``correctly focuses on whether
investments are capital or entrepreneurial in nature'' but expressed
concerns that the ``Department's decision to separate the `investment'
prong from the `opportunities for profit and loss' prong . . . goes too
far, and detracts from . . . needed clarity.'' According to NELA,
``[a]n expenditure is only an `investment' when it may impact profit
and loss,'' and ``[i]f an employee has spent money for work but has no
opportunity for profit and loss as a result, then the conclusion should
be that they are not `investing' in anything.'' NELA requested that the
NPRM ``be edited to clarify that `investment' inherently implies the
possibility of profit and is only `capital or entrepreneurial in
nature' . . . when it has a nexus with profit and loss.'' The
Department agrees that whether the worker's expenditures may result in
profits or losses to the worker is highly relevant to whether those
expenditures are capital or entrepreneurial in nature. However,
because, as explained further below, the investment factor is not
synonymous with the opportunity for profit or loss factor and because
adding a ``nexus with profit or loss'' requirement is not supported by
the weight of the case law that has historically viewed the two factors
as analytically distinct under the economic reality test, the
Department declines to promulgate an absolute requirement that
expenditures have ``a nexus with profit and loss'' to be capital or
entrepreneurial in nature. Moreover, such a requirement could be viewed
as similar to the 2021 IC Rule's approach of combining the
consideration of investments with opportunity for profit or loss--an
approach that the Department is rejecting as discussed below. For all
the reasons stated herein, the Department is restoring investments as
its own separate factor. Although some overlaps between factors are
understandable, tying investments to profits and losses in the absolute
manner suggested by NELA would be contrary to the Department's goal of
rectifying the 2021 IC Rule's treatment of investments as part of the
opportunity for profit or loss factor.
NELA further stated that the NPRM was ``correct to incorporate a
relative-investment analysis'' in this factor, but that ``the
Department should explain that the relative-investment analysis is
qualitative, not quantitative, to better align this prong with the
overarching dependence/independence inquiry.'' According to NELA, ``[a]
qualitative review of relative investments helps determine whether the
investment is entrepreneurial in nature,'' but ``[a]n analysis that
instead focuses on a quantitative comparison of investments is rarely
conclusive, because not all industries are equally capital-intensive.''
NELA added that ``the threshold question of which expenditures are
entrepreneurial `investments' versus `tools' makes quantitative
comparison confusing and inconclusive.'' See also NELP (The Department
should ``clarify[] that the comparison of investments must be
qualitative.''); Real Women in Trucking (``While a single tractor
trailer is a relatively small investment compared to the fleets of
trucks owned by some firms, when wholly owned or independently
financed, it is sufficient to support a personal trucking business, and
thereby meets the standard discussed in the Proposed Rule.'').
Having considered these comments, the Department agrees that
focusing the comparison of the worker's and the employer's investments
on their qualitative natures is helpful. As NELA points out, different
industries may be more or less ``capital-intensive.'' Thus, focusing
only on the quantitative measures (e.g., dollar values or size) of the
investments may not achieve the full probative value of comparing the
investments. On the other hand, comparing the investments in a
qualitative manner (i.e., the types of investments) is a better
indicator of whether the worker is economically
[[Page 1679]]
dependent on the employer for work or is in business for themself. That
is because regardless of the amount or size of their investments, if
the worker is making similar types of investments as the employer or
investments of the type that allow the worker to operate independently
in the worker's industry or field, then that fact suggests that the
worker is in business for themself. The comment from Real Women in
Trucking captures this point well. Although the driver who wholly owns
or is independently financing a single truck is making a quantitatively
smaller investment (in dollars and size) than the employer that has a
fleet of trucks, the driver is making a similar type of investment as
the employer and a sufficient investment so that the driver can operate
independently in that industry--suggesting independent contractor
status. Another example is an individual photographer who has cameras
and related equipment, has software to edit photos, and works out of
their home. Although the individual may not have the extent of
equipment, software with every capability, or a leased office space
like a larger firm, the type of investments that the individual has
made are sufficient in this case for the individual to operate
independently in the photography field--suggesting independent
contractor status. Accordingly, the Department is revising the last
sentence of the proposed regulatory text for the investments factor to
be two sentences and to read: ``The worker's investments need not be
equal to the potential employer's investments and should not be
compared only in terms of the dollar values of investments or the sizes
of the worker and the potential employer. Instead, the focus should be
on comparing the investments to determine whether the worker is making
similar types of investments as the potential employer (even if on a
smaller scale) to suggest that the worker is operating independently,
which would indicate independent contractor status.'' \273\
---------------------------------------------------------------------------
\273\ IBT commented that, ``[a]s it is currently written, this
proposed factor could be misinterpreted as it unintentionally
excludes from consideration, many of the conditions workers who work
for platform-based companies are subject to.'' IBT added: ``By
overemphasizing workers' ability to increase earnings through
minimal investment or personal initiative, the proposed rule risks
inviting employers to engage in further tactics to exclude more of
their workers from the FLSA's protections.'' The Department
disagrees with this characterization, especially considering the
modifications that it has made to the investments factor. For all of
the reasons explained herein, the Department believes that it has
struck the right balance by focusing on the nature of the worker's
investment (it should be capital or entrepreneurial to indicate
independent contractor status) and by qualitatively comparing the
worker's investments to the employer's investments to determine if
the worker is making similar types of investments as the employer to
suggest that the worker is in business for themself.
---------------------------------------------------------------------------
Numerous commenters opposed, disagreed with, and/or requested
changes to or clarifications of the proposed investments factor. For
example, several commenters opposed the NPRM's proposed treatment of
investments as its own separate factor. NRF & NCCR stated that
``investments are so interrelated with profits and losses that
analyzing them separately is duplicative and unnecessary,'' and that
the 2021 IC Rule, ``following Second Circuit precedent,'' ``brings
clarity and helps reduce overlap to this analysis.'' N/MA stated that
``[i]nvestment by a worker in their own business creates an expense,
which by definition creates an equation whether the worker may
experience loss or profit depending on the worker's net profits.'' CWI
stated that, ``because the investment factor is already sufficiently
addressed in the opportunity-for-profit-or-loss factor, there is no
need for it to be addressed again as a standalone factor.'' CWI
disagreed with the Department's characterization of the 2021 IC Rule on
this point, stating that the 2021 IC Rule ``provides that both
initiative and investment must be considered, though both are not
required'' and thus ``provides that the satisfaction of either is a
necessary condition for the opportunity-for-profit-or-loss factor, but
not that either is per se sufficient'' (emphases added). See also
Coalition of Business Stakeholders. FSI stated that the NPRM
``introduces redundancy and double-counting by assessing a worker's
`investment' in the business as a `standalone factor.' '' The commenter
further stated that although the Supreme Court in Silk articulated
investment as a separate factor than opportunity for profit or loss,
the Court ``analyzed them together,'' which the commenter asserted that
the Department ``fail[ed] to address.'' Other commenters, such as ABC,
North American Meat Institute, and the U.S. Chamber, also disagreed
with the NPRM's treatment of investments as its own separate factor.
Having considered the comments, the Department agrees with the
comments discussed above from commenters including AFL-CIO, IBT, LA Fed
& Teamsters Locals, NELP, and NWLC, and is retaining investments as a
separate factor in the economic realities analysis. The Department's
approach is consistent with the overwhelming majority of federal
appellate case law and the Department's practice prior to the 2021 IC
Rule. Almost all of the federal courts of appeals consider investments
as a separate factor.\274\ In addition, the Department consistently
identified investments as a separate factor in the analysis prior to
the 2021 IC Rule.\275\ The Department understands that the Second and
D.C. Circuits consider investments and opportunity for profit or loss
as one factor.\276\ However, treating investments as a separate factor
is consistent with the approach taken by most federal appellate courts,
the Department's intent for this final rule to be as grounded as
possible in the case law, and the Department's prior guidance. And as
explained below, treating investments as a separate factor rather than
including it in the opportunity for profit or loss factor as the 2021
IC Rule ensures that investments are considered in each case and may
result in a fuller consideration of relevant facts.
---------------------------------------------------------------------------
\274\ See, e.g., DialAmerica, 757 F.2d at 1382; McFeeley, 825
F.3d at 241; Hobbs, 946 F.3d at 829; Off Duty Police, 915 F.3d at
1055; Brant, 43 F.4th at 665; Alpha & Omega, 39 F.4th at 1082;
Driscoll, 603 F.2d at 754; Paragon, 884 F.3d at 1235; Scantland, 721
F.3d at 1311.
\275\ See, e.g., WHD Op. Ltr. (Aug. 13, 1954); WHD Op. Ltr.
FLSA-795 (Sept. 30, 1964); WHD Op. Ltr. (Oct. 12, 1965); WHD Op.
Ltr. (Sept. 12, 1969); WHD Op. Ltr. WH-476, 1978 WL 51437, at *1
(Oct. 19, 1978); WHD Op. Ltr., 1986 WL 1171083, at *1 (Jan. 14,
1986); WHD Op. Ltr., 1986 WL 740454, at *1 (June 23, 1986); WHD Op.
Ltr., 1995 WL 1032469, at *1 (Mar. 2, 1995); WHD Op. Ltr., 1995 WL
1032489, at *1 (June 5, 1995); WHD Op. Ltr., 1999 WL 1788137, at *1
(July 12, 1999); WHD Op. Ltr., 2000 WL 34444352, at *1 (July 5,
2000); WHD Op. Ltr., 2000 WL 34444342, at *3 (Dec. 7, 2000); WHD Op.
Ltr., 2002 WL 32406602, at *2 (Sept. 5, 2002); WHD Fact Sheet #13,
``Employment Relationship Under the Fair Labor Standards Act
(FLSA)'' (July 2008); AI 2015-1,available at 2015 WL 4449086
(withdrawn June 7, 2017).
\276\ See, e.g., Franze, 826 F. App'x at 76; Superior Care, 840
F.2d at 1058-59; Morrison, 253 F.3d at 11 (citing Superior Care, 840
F.2d at 1058-59).
---------------------------------------------------------------------------
The Department recognizes that the consideration of investments may
be related to the consideration of the opportunity for profit or loss.
As explained above in response to a comment from NELA, whether the
worker's expenditures may result in profits or losses to the worker is
highly relevant to whether those expenditures are capital or
entrepreneurial in nature. The U.S. Chamber, for example, cited the
Fourth Circuit's decision in McFeeley to support its argument that
``[i]nvesting in one's business necessarily entails creating an
opportunity for profit or risking a loss on that investment.'' In
McFeeley, the court noted that the two factors ``relate logically to
one other'' \277\ but nonetheless articulated them
[[Page 1680]]
separately \278\ and ultimately made determinations on each factor as
it related to the workers' status as employees or independent
contractors.\279\ And even assuming that the Supreme Court in Silk
``analyzed them together'' as FSI argued, the Court did articulate the
two factors separately.\280\
---------------------------------------------------------------------------
\277\ 825 F.3d at 243.
\278\ Id. at 241.
\279\ Id. at 243 (``These two factors thus fail to tip the
scales in favor of classifying the dancers as independent
contractors.'').
\280\ 331 U.S. at 716. Whether the Court in Silk actually
analyzed the two factors together is questionable, particularly with
respect to the ``driver-owners.'' The Court concluded that ``[i]t is
the total situation, including the risk undertaken [a reference to
the facts that they ``own their own trucks'' and ``hire their own
helpers''], the control exercised, the opportunity for profit from
sound management, that marks these driver-owners as independent
contractors.'' Id. at 718.
---------------------------------------------------------------------------
Moreover, as decisions from the Fifth Circuit and other Circuits
demonstrate, investments may be relevant to whether the worker is
economically dependent on the employer separate and apart from the
worker's opportunity for profit or loss. For example, the Fifth Circuit
found in Parrish that the investment factor favored employee status
(although it merited ``little weight'' in that case given the nature of
the work) and that the opportunity for profit or loss factor favored
independent contractor status.\281\ In Cromwell, the Fifth Circuit
conversely found that the investment factor indicated independent
contractor status because the workers ``invested a relatively
substantial amount in their trucks, equipment, and tools'' but that
their opportunity for profit or loss was ``severely limit[ed].'' \282\
In Nieman, the Eleventh Circuit found that the investment factor
weighed in favor of independent contractor status while the opportunity
for profit or loss factor did ``not weigh in favor of either''
independent contractor or employee status.\283\ And in Scantland, the
Eleventh Circuit found that the opportunity for profit or loss factor
``point[ed] strongly toward employee status'' although the investment
factor weighed slightly in favor of independent contractor status.\284\
---------------------------------------------------------------------------
\281\ 917 F.3d at 382-85.
\282\ Cromwell v. Driftwood Elec. Contractors, Inc., 348 F.
App'x 57, 60-61 (5th Cir. 2009).
\283\ 775 F. App'x at 624-25.
\284\ 721 F.3d at 1316-18.
---------------------------------------------------------------------------
The 2021 IC Rule's treatment of investments as part of its
opportunity for profit or loss factor further reinforces the
Department's decision to treat investments as a separate factor. The
2021 IC Rule stated that its opportunity for profit or loss factor
indicates independent contractor status if the worker exercises
initiative or if the worker manages their investment in the
business.\285\ Although ``the effects of the [worker's] exercise of
initiative and management of investment are both considered'' under its
opportunity for profit or loss factor, the 2021 IC Rule clearly stated
that a worker ``does not need to have an opportunity for profit or loss
based on both for this factor to weigh towards the individual being an
independent contractor.'' \286\ Thus, contrary to, for example, the
argument of CWI that there would be a ``balancing test,'' the 2021 IC
Rule provided that, if either initiative or investment suggested
independent contractor status, the other could not change that outcome
even if it suggested employee status. The 2021 IC Rule's approach to
investments was accordingly flawed because it, in some cases,
eliminated the role of investments in helping to determine a worker's
status, particularly when the investments or the lack thereof indicated
that the worker was an employee.
---------------------------------------------------------------------------
\285\ 86 FR 1247 (``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.'').
\286\ Id.
---------------------------------------------------------------------------
In sum, nothing in this final rule forecloses consideration, in an
appropriate case, of investments as they relate to the worker's
opportunity for profit or loss. However, for all of the reasons set
forth above and consistent with this final rule's totality-of-the-
circumstances approach, treating investments as a separate factor in
the analysis ensures that investments are accorded, at least at the
outset of the analysis, the same considerations as the other factors
and that the probative value of the investments toward the worker's
dependence or independence will affect the ultimate outcome of the
analysis.
A few commenters objected to the proposed regulatory text's
statement that the investments factor ``considers whether any
investments by a worker are capital or entrepreneurial in nature.''
\287\ CWI commented that ``[n]othing in Silk or Rutherford construed
the factor so narrowly,'' and that ``limiting investments to those that
are `capital or entrepreneurial' would disproportionately impact
underserved communities'' because ``the standard imposes significant
barriers for individuals without the financial resources needed for
capital and entrepreneurial investments--i.e., it penalizes, and
removes freedom in choosing work arrangements, from those without pre-
existing financial resources.'' Flex made a similar point, stating that
``tools need not be `capital or entrepreneurial in nature' to have the
effect of helping the worker achieve economic independence.''
---------------------------------------------------------------------------
\287\ 87 FR 62275 (proposed Sec. 795.110(b)(2)).
---------------------------------------------------------------------------
Having considered these comments, the Department adopts the
proposal that whether the worker's investments are capital or
entrepreneurial in nature is probative of whether they indicate
employee or independent contractor status. Considering the worker's
investment in this manner is consistent with the overall inquiry of
determining whether the worker is economically dependent on the
employer for work or is in business for themself because a capital or
entrepreneurial investment indicates that the worker is operating as an
independent business. More specifically, capital or entrepreneurial
investments tend to help a worker work for multiple companies--a
characteristic of an independent business. Accordingly, the examples in
the regulatory text (``increasing the worker's ability to do different
types of or more work, reducing costs, or extending market reach'')
generally involve efforts to work independently for multiple companies.
Focusing on whether the worker's investments are capital or
entrepreneurial in nature does not construe the factor ``narrowly,'' as
CWI asserted. As explained below in response to specific comments
asserting that this factor is limiting, there are no minimum-dollar
thresholds or other requirements for investments to be capital or
entrepreneurial and thus indicate independent contractor status.
Instead, focusing on the nature of the worker's investments ties this
factor to the worker's economic dependence or independence.
Many federal appellate court decisions have emphasized how the
worker's investment must be capital in nature for it to indicate
independent contractor status. For example, the Seventh Circuit
determined in Lauritzen that migrant farm workers were not independent
contractors, but employees, due in part to the lack of capital
investments made by the workers.\288\ The court explained that
investments that establish a worker's status as an independent
contractor should be ``risk capital [or] capital investments, and not
negligible items or labor itself. . . . The workers here are
responsible only for providing their own gloves [which] do not
constitute a
[[Page 1681]]
capital investment.'' \289\ In Paragon, the Tenth Circuit explained
that ``the relevant `investment' is `the amount of large capital
expenditures, such as risk capital and capital investments, not
negligible items, or labor itself.' '' \290\ The Fifth Circuit has
focused on whether the worker has any ``risk capital'' in the work and
has found this factor to indicate employee status when all or an
overwhelming majority of the risk capital is provided by the
employer.\291\ And the Sixth Circuit has described this factor as the
``capital investment factor.'' \292\
---------------------------------------------------------------------------
\288\ See 835 F.2d at 1537.
\289\ Id.
\290\ 884 F.3d at 1236 (quoting Snell, 875 F.2d at 810).
\291\ See Mr. W Fireworks, 814 F.2d at 1052; Pilgrim Equip., 527
F.2d at 1314.
\292\ See Off Duty Police, 915 F.3d at 1056 (quoting Donovan v.
Brandel, 736 F.2d 1114, 1118-19 (6th Cir. 1984)).
---------------------------------------------------------------------------
Moreover, CWI's efforts to use Silk and Rutherford to undercut the
Department's approach are unpersuasive. In Silk, the unloaders
``provided only picks and shovels,'' and there was nothing to suggest
that their ``simple tools'' were capital or entrepreneurial in
nature.\293\ On the other hand, the ``driver-owners'' at issue in Silk
``own[ed] their own trucks'' and ``hire[d] their own helpers,'' and at
least some worked ``for any customer.'' \294\ The circumstances of the
driver-owners, and particularly the indication that their owned trucks
and hired helpers allowed them to manage their businesses, operate
independently, and work for multiple customers, suggest that their
investments were capital or entrepreneurial in nature. And Rutherford
is not instructive because the workers merely owned some tools specific
to their boning work--nothing that suggested any type of investment to
the Court indicating that they were independent contractors.\295\
Focusing on whether the worker's investments are capital or
entrepreneurial nature is thus consistent with Silk and Rutherford and
is not a narrowing of those decisions.
---------------------------------------------------------------------------
\293\ 331 U.S. at 717-18.
\294\ Id. at 719.
\295\ 331 U.S. at 725.
---------------------------------------------------------------------------
Appraisal Institute and Real Estate Evaluation Advocacy Association
asked whether ``an appraiser seeking out specialized education,
training, and certification'' is making a capital or entrepreneurial
investment ``even when those trainings or certifications are industry
requirements for certain categories of work.'' As a general matter and
as opposed to costs that a potential employer unilaterally imposes on a
worker, a worker's efforts to obtain specialized education, training,
and certification that are required by an industry can be capital or
entrepreneurial in nature if (for example and as explained in the
regulatory text) they increase the worker's ability to do different
types of or more work or extend market reach.
CLDA asserted that the ``rule commentary also states the investment
must be large, must be a capital expenditure, and must be
entrepreneurial in nature.'' It added: ``This ignores the practical
realities of starting a business. Few entrepreneurs can start a
business with multi-million-dollar investments in equipment,
technology, and real estate.'' Direct Selling Association (``DSA'')
similarly commented that focusing on whether the investment is capital
or entrepreneurial in nature ``would disproportionately impact
underserved communities that direct selling serves such as Hispanics.''
Stating that ``practically any individual can start [a direct selling
business] for an average of $82.50,'' it added that the Department
proposed ``a rule that would penalize this low-cost business by
requiring a large investment to point towards being an independent
contractor.'' TheDream.US commented that ``Dreamers certainly have
skills and initiative, but not the resources to make the level of
capital investment that the DOL seems to be proposing.'' Although the
NPRM cited cases discussing ``large'' expenditures,\296\ the NPRM
focused on the nature of the investments, did not propose any minimum-
dollar threshold, and absolutely did not suggest that ``multi-million-
dollar'' or even ``large'' investments are required for this factor to
indicate independent contractor status. As explained above, focusing on
the nature of the investments and whether they are capital or
entrepreneurial in nature is most probative of whether the worker is
economically dependent on the employer for work or in business for
themself. Consistent with that focus, there is no minimum-dollar
threshold or requirement that the investment be ``large'' or of a
certain level for a worker's investment to be capital or
entrepreneurial in nature.
---------------------------------------------------------------------------
\296\ 87 FR at 62241 (citing Paragon, 884 F.3d at 1236 (quoting
Snell, 875 F.2d at 810); Lauritzen, 835 F.2d at 1537).
---------------------------------------------------------------------------
MEP stated that the examples of capital or entrepreneurial
investments in the proposed regulatory text ``unnecessarily limit the
personal investments that should be considered in the analysis and seem
to suggest that independent contractors can only be those individuals
who want to expand their business, increase their workload, or extend
the business' market reach.'' These examples, however, are preceded in
the regulatory text by the words ``such as'' and are plainly a
nonexhaustive set of examples--none of which have to be satisfied.\297\
A worker's investments are most likely to be capital or entrepreneurial
in nature if they create or further the worker's ability to work for
multiple employers (as these examples suggest), but the examples are
not limiting as MEP asserted. Likewise, in response to comments
discussed below about particular types of investments, such as
computers, phones, and specialized software, the Department is not
suggesting that certain types of investments are always or can never be
capital or entrepreneurial. Instead, the focus should be on the nature
of the investment in the circumstances.
---------------------------------------------------------------------------
\297\ Id. at 62275 (proposed Sec. 795.110(b)(2)).
---------------------------------------------------------------------------
Numerous commenters raised concerns with the statement in the
proposed regulatory text that: ``Costs borne by a worker to perform
their job (e.g., tools and equipment to perform specific jobs and the
workers' labor) are not evidence of capital or entrepreneurial
investment and indicate employee status.'' \298\ For example, Coalition
of Business Stakeholders stated that the proposed provision ``is far
too broad of a directive to be of any use in conducting an independent
contractor analysis'' and that it would require factfinders to ``ignore
any amount of investment a worker made in his or her tools and
equipment, even if those tools and equipment were--as in the case of a
software security auditor who provides his own specially designed
laptop--highly specialized and expensive.'' CWI stated that, contrary
to the proposed regulatory text, ``such investments are plainly a
function of the business-like decisions that contractors must make in
choosing between the projects available to them'' because ``[t]hey may
purchase equipment that allows them to complete a particular job more
quickly--and thus more profitably--or may bypass projects requiring
discrete expenditures that would lower profitability.'' ABC added
``independent contractors in the construction industry who invest in
their own tools and equipment are in fact acting as entrepreneurs, and
such investment should continue to be recognized as indicative of
independent contractor status.'' The U.S. Chamber
[[Page 1682]]
stated this provision ``contradicts the weight of case law, which has
held that a worker's investment in the equipment necessary to perform a
discrete job is evidence of independent contractor status'' and that
``[e]ven the Fifth Circuit, which utilizes a `relative investment'
inquiry, has found this to be true''). The U.S. Chamber added that
``workers can be in business for themselves without having to expend
huge sums of money,'' and that ``[a] `knowledge-based' worker, such as
an IT worker, may be able to perform independent work with only a
laptop or tablet, which are seemingly ubiquitous and relatively
inexpensive.'' Relatedly, Fight for Freelancers asked whether ``the
investment in a computer, a cell phone and some specialized software
constitute a meaningful enough investment to indicate independent
contractor status under [the investments factor]?'' Moreover, although
WFCA agreed with evaluating the worker's ``capital expenditures,'' it
expressed concern that the NPRM ``eliminates one of the major capital
expenses of many independent contractors--tools and equipment.'' WFCA
identified ``specialty tools'' such as a ``floor scrapper'' and ``power
stretchers,'' and stated that `[t]hese tools and equipment are major
investments and should be recognized in evaluating whether the
installer is an independent contractor or an employee.'' WFCA suggested
modifying this provision in the regulatory text so that it provides
that ``investment in tools and equipment to perform specific jobs
(other than common household tools or equipment) are evidence of
capital or entrepreneurial investment and indicate independent
contractor status.'' Flex commented: ``When a worker's investment in
tools and equipment allows the worker to move from client to client,
the worker's investment in those tools and equipment makes the worker
less economically reliant on any one client.'' CPIE, noting that ``the
Tenth Circuit reasoned that `[t]he mere fact that workers supply their
own tools or equipment does not establish status as independent
contractors' '' (citing Paragon, 884 F.3d at 1236), commented that
``not establishing status as independent contractors is vastly
different from establishing status as employees,'' and that ``[a]t
most, a finding that an individual bears that costs of performing a
service would be neutral.'' OOIDA expressed concern that this provision
``might be construed as saying that the purchase or financing of
equipment like a truck or trailer does not weigh in favor of
independent contractor status since this equipment is used to complete
a job.'' It asked the Department to ``better clarify between the `tools
and equipment' that are used by a worker to perform specific jobs and
may not indicate independent contractor status with the `capital and
entrepreneurial' investments that do.'' NHDA expressed concern that a
``medium duty Class 6 box truck, which costs between $50,000--$90,000
on average . . . may not indicate independence under the Proposed Rule,
because . . . a medium duty truck is arguably expedient to perform the
business of home delivery transportation.''
---------------------------------------------------------------------------
\298\ Id. As explained above, the Department is modifying this
provision in response to comments to add ``and costs that are
unilaterally imposed by the potential employer on the worker.''
---------------------------------------------------------------------------
Having considered these comments, the Department continues to
believe that it is helpful to provide guidance regarding workers who
provide tools and equipment to perform a specific job, but acknowledges
that the ``to perform their job'' language in the proposed regulatory
text can be made more precise. Applying the general principle from the
regulatory text that the focus should be on whether the investment is
capital or entrepreneurial in nature and that capital or
entrepreneurial investments tend to increase the worker's ability to do
different types of or more work, reduce costs, or extend market reach,
investment in tools or equipment to perform a specific job would not
qualify as capital or entrepreneurial. As the Department explained in
the NPRM, ``an investment that is expedient to perform a particular job
(such as tools or equipment purchased to perform the job and that have
no broader use for the worker) does not indicate independence.'' \299\
On the other hand, a worker may invest in tools and equipment for
reasons beyond performing a particular job, such as to increase the
worker's ability to do different types of or more work, reduce costs,
or extend market reach. Such investments can be capital or
entrepreneurial in nature. To the extent that the ``to perform their
job'' language in the proposed regulatory text suggested otherwise, the
Department is removing that language. Accordingly, the Department is
further modifying the regulatory text so that this provision reads:
``Costs to a worker of tools and equipment to perform a specific job,
costs of workers' labor, and costs that the potential employer imposes
unilaterally on the worker, for example, are not evidence of capital or
entrepreneurial investment and indicate employee status.'' A worker may
have expenses to perform a specific job and also make investments that
generally support, expand, or extend the work performed which may be of
a capital or entrepreneurial nature. Thus, the existence of expenses to
perform a specific job will not prevent this factor from indicating
independent contractor status so long as there are also investments
that are capital or entrepreneurial in nature.
---------------------------------------------------------------------------
\299\ Id. at 62241.
---------------------------------------------------------------------------
A number of commenters expressed concerns with the statement in the
NPRM's preamble that ``the use of a personal vehicle that the worker
already owns to perform work--or that the worker leases as required by
the employer to perform work--is generally not an investment that is
capital or entrepreneurial in nature.'' \300\ Several of those
commenters, however, gave examples of vehicles that are plainly not the
type of vehicles identified in this statement. See, e.g., NHDA
(purchasing or leasing ``personal vehicles for the primary purpose of
starting a transportation business, whether full-time or part-time'');
U.S. Chamber (purchasing ``a car to use as a driver for a ride-sharing
application''); WFCA (purchasing ``a vehicle that is capable of
carrying the weight of flooring materials and tools''). The NPRM's
statement does not cover vehicles of the types in these examples that a
worker purchased for a business purpose--vehicles which can be
investments of a capital or entrepreneurial nature.\301\
---------------------------------------------------------------------------
\300\ Id.
\301\ N/MA, while commenting on this statement regarding
personal vehicles, gave as an example a ``photographer who purchases
more sophisticated special camera equipment expecting that he or she
will use it in their work.'' Again, purchasing specialized equipment
for use in work can be an investment that is capital or
entrepreneurial in nature.
---------------------------------------------------------------------------
CLDA commented that ``most entrepreneurs start their businesses
with what they already have,'' stating that ``[t]hey start with using .
. . their car as their delivery vehicle.'' CLDA added that ``[t]hose
items may have started as personal items, but they become critical
business tools and critical business investments when the entrepreneur
starts using them to build a business.'' The U.S. Chamber commented
that the NPRM's ``absolutist statement ignores the fact that
contractors may utilize their personal vehicles in a way that shows
entrepreneurial activity. For example, if workers forgo selling their
personal vehicle and, instead, choose to use their vehicle to drive for
a ridesharing platform, that is quintessentially entrepreneurial
activity. The fact that they had already owned their vehicle is
immaterial.'' Uber commented that ``[w]hile it is true that drivers on
platforms like Uber's
[[Page 1683]]
may be using vehicles they owned before they started driving, drivers
can, and some do, choose to invest in, for example, a luxury vehicle in
order to earn more by way of higher-end engagements . . . [or] a hybrid
or electric vehicle specifically to increase their fuel economy.'' MEP
stated that ``[i]ndividuals may not make . . . investments [in things
such as personal vehicles] for the purpose of performing work, but
individuals can choose to monetize those investments through
independent work arrangements, such as via the gig economy.'' It added
that ``[u]sing these pre-owned investments to engage in independent
work should reflect economic independence, which is the ultimate
inquiry in the worker classification analysis.'' CWI suggested that the
NPRM's ``discussion of vehicle investments should be withdrawn, and
that the weight that each investment is afforded should instead be
evaluated under the totality of the circumstances in which each such
investment occurred.''
Having considered the comments, the Department agrees with the
comments discussed above from commenters that supported the NPRM's
statement regarding personal vehicles, including AFL-CIO, LA Fed &
Teamsters Locals, and ROC United, and reaffirms this statement. Whether
a vehicle owned or leased by a worker and used to perform work is a
capital or entrepreneurial investment does depend on the totality of
the circumstances. In the scenario where a worker already owns a
vehicle and happens to then use it to perform work, the acquisition of
that vehicle was not for a business purpose and generally cannot be a
capital or entrepreneurial investment. As the Eleventh Circuit
explained in Scantland, the ``fact that most technicians will already
own a vehicle suitable for the work'' suggests that there is ``little
need for significant independent capital.'' \302\ If a worker already
owns a vehicle for personal use and then modifies, upgrades, or
customizes the vehicle to perform work, the worker's investment in
modifying, upgrading, or customizing the vehicle could be a capital or
entrepreneurial investment. In other scenarios, whether the vehicle is
a capital or entrepreneurial investment often depends on whether the
vehicle was purchased for a personal or business purpose. Where any
vehicle is suitable to perform the work, purchase of the vehicle is
generally not a capital or entrepreneurial investment. When the worker
owns a vehicle with certain specifications (such as a van or truck) to
perform the work and the worker also uses the vehicle for personal
reasons, that personal use is relevant, but the vehicle may still be a
capital or entrepreneurial investment. For example, the Sixth Circuit
has found that, where the workers' vehicles ``could be used for any
purpose, not just on the job,'' they did not indicate independent
contractor status.\303\ The Fifth Circuit has considered the purpose of
the vehicle and how the worker uses it, and in Mr. W Fireworks, it
noted that most of the workers in that case purchased vehicles for
personal and family reasons, not business reasons, in concluding that
the investment factor indicated employee status.\304\ The Fifth Circuit
has also noted that, ``[a]lthough the driver's investment of a vehicle
is no small matter, that investment is somewhat diluted when one
considers that the vehicle is also used by most drivers for personal
purposes.'' \305\ In sum, focusing on the purpose of the vehicle and
how it is used is consistent with the overarching inquiry of examining
the economic realities of the worker's relationship with the employer.
And the reality for a worker who already owns a vehicle for personal
use and then uses it (without any modifications) to perform work is
that the vehicle was not purchased for a business purpose and generally
is not a capital or entrepreneurial investment.\306\ Even where a
personal vehicle is not a capital investment indicating independent
contractor status, there may be other facts relevant to the investment
factor, and the worker's ultimate status will be determined by
application of all of the factors, consistent with the totality-of-the-
circumstances analysis.
---------------------------------------------------------------------------
\302\ 781 F.2d at 1318.
\303\ Off Duty Police, 915 F.3d at 1056.
\304\ 814 F.2d at 1052.
\305\ Express Sixty-Minutes, 161 F.3d at 304; see also Keller,
781 F.3d at 810-11 (fact that equipment could be used ``for both
personal and professional tasks'' weakens the indication of
independent contractor status).
\306\ WPI stated that ``the NPRM posits that a worker buying a
car is an immaterial investment for purposes of independent
contractor classification if they also use the car for personal
reasons.'' The commenter, however, mischaracterized the NPRM's
statement, which addressed a personal vehicle that the worker
already owns (and thus invested in for reasons other than a business
purpose) and then uses to perform work. In the different scenario
posited by the commenter, a car purchased by a worker may be an
investment of a capital or entrepreneurial nature if purchased for a
business purpose even if the worker also uses the car for personal
reasons. Coalition of Business Stakeholders similarly
mischaracterized the NPRM's statement, saying that the NPRM
``presumptively declares that a vehicle, should be considered
`generally not an investment that is capital or entrepreneurial in
nature' '' (quoting the NPRM). The NPRM's statement, however,
addressed only a vehicle already owned by a worker that the worker
then uses to perform work.
---------------------------------------------------------------------------
Finally, numerous commenters opposed the NPRM's proposal to
consider the worker's investments ``on a relative basis with the
employer's investments in its overall business.'' \307\ That proposed
regulatory text further provided that ``[t]he worker's investments need
not be equal to the employer's investments, but the worker's
investments should support an independent business or serve a business-
like function for this factor to indicate independent contractor
status.'' \308\
---------------------------------------------------------------------------
\307\ 87 FR 62275 (proposed Sec. 795.110(b)(2)).
\308\ Id.
---------------------------------------------------------------------------
For example, CWI expressed ``grave concerns'' with comparing
investments, stating that this approach ``is inconsistent with law,
uninformative to the economic realities test, and ultimately injects
nothing but further uncertainty into the analysis.'' CWI added that the
Supreme Court in Silk addressed only the workers' investments and not
the employer's investments, and that an ``employer investing in its own
business provides absolutely no insight into whether the worker is
economically dependent on that business.'' CWI further stated that
``[i]t is hardly surprising that virtually all workers--employees and
independent contractors alike--have fewer resources than businesses,''
but ``[t]hat fact, however, does not influence the question of economic
dependence for either group.'' NRF & NCCR requested that any
consideration of relative investments ``be stricken entirely,'' raising
similar concerns to CWI. NRF & NCCR added that consideration of
relative investments would create barriers to entry in businesses
because workers ``would effectively be excluded from contracting with
any but the smallest of companies.'' The IFA requested clarification in
the franchise context, noting that franchise opportunities require
varying upfront investments, but ``[t]his does not mean that someone
who invests in a lower-cost franchise opportunity is any less an
independent business person than someone with the means to invest a
million dollars in a franchise.'' N/MA argued that considering relative
investments is inconsistent with Silk because the Supreme Court in that
case ``addressed the investment of the worker as part of the economic
realities test only by reference to the worker's investment.'' The
commenter added: ``A putative employer's level of investment in its own
business provides no insight into
[[Page 1684]]
whether the worker is economically dependent on that business, as the
work and investment made by the worker may be in an entirely different
area of services than that even performed by the putative employer.''
FSI stated that the Department ``offers no reasoned explanation why
that relative inquiry is probative of independent contractor status,
contrary to the 2021 Rule's conclusion that it measures an irrelevant
comparison of respective organizational size.''
Club for Growth Foundation commented that the 2021 IC Rule was
correct to reject a relative investments analysis. It added: ``The size
of the hiring business has no relevance to whether the worker is a
contractor or an employee. Consider a talented translator who
translates a book, on the same terms and for the same fee, into French
for a local college press and into Spanish for a major commercial
publishing house. Why should she be considered more likely to be an
employee when doing the Spanish work?'' OOIDA similarly commented that
``it doesn't make sense that an owner-operator would be an independent
contractor if they are working with a three-truck carrier but then be
judged differently if they go to work for a carrier with hundreds or
thousands of trucks.'' The CA Chamber, CLDA, Flex, NACS, NHDA, and
Scopelitis, made similar points. See also ABC; CPIE; WFCA.
Having considered these comments, the Department continues to
believe that comparing the worker's investments to the employer's
investment is well-grounded in the case law and the Department's prior
guidance. The Department further believes that comparing types of
investments is indicative of whether a worker is economically dependent
on the employer for work or is in business for themself.
Although the Supreme Court in Silk did not make such a comparison,
federal courts of appeals applying the factors from Silk routinely make
that comparison. For example, the Fifth Circuit ``consider[s] the
relative investments'' and has explained that, ``[i]n considering this
factor, `we compare each worker's individual investment to that of the
alleged employer.' '' \309\ The Sixth Circuit has explained that
``[t]his factor requires comparison of the worker's total investment to
the `company's total investment, including office rental space,
advertising, software, phone systems, or insurance.' '' \310\ The
Fourth Circuit has similarly compared the employers' payment of rent,
bills, insurance, and advertising expenses to the workers' ``limited''
investment in their work.\311\ In addition, the Third,\312\ Ninth,\313\
and Tenth \314\ Circuits have compared the worker's investments to the
employer's investments. Moreover, the Department has previously
provided guidance that the worker's investments and the employer's
investments should be compared. In AI 2015-1, the Department explained
that a worker's investment ``should not be considered in isolation''
because ``it is the relative investments that matter.'' \315\ AI 2015-1
further explained that, in addition to ``the nature of the
investment,'' ``comparing the worker's investment to the employer's
investment helps determine whether the worker is an independent
business.'' \316\ The Department has also compared the worker's and the
employer's relative investments in opinion letters issued by WHD.\317\
In sum, the relative investments approach is firmly supported by the
case law and the Department's precedent.\318\
---------------------------------------------------------------------------
\309\ Hobbs, 946 F.3d at 831-32 (quoting Cornerstone Am., 545
F.3d at 344). In Parrish, the Fifth Circuit compared the relative
investments as part of its analysis but accorded the relative
investment factor ``little weight in the light of the other summary-
judgment-record evidence supporting IC-status.'' 917 F.3d at 382-83.
This does not support the conclusion that this factor is not useful;
instead, it simply reflects the Fifth Circuit's faithful application
in that case of a totality-of-the-circumstances approach considering
many factors, no one of which was dispositive.
\310\ Off Duty Police, 915 F.3d at 1056 (quoting Keller, 781
F.3d at 810).
\311\ McFeeley, 825 F.3d at 243.
\312\ Verma, 937 F.3d at 231 (summarizing how courts have viewed
this factor in cases examining the employment status of exotic
dancers: ``all concluded that `a dancer's investment is minor when
compared to the club's investment' '') (quoting the district court's
decision).
\313\ Driscoll, 603 F.2d at 755 (strawberry growers' investment
in light equipment, including hoes, shovels, and picking carts was
``minimal in comparison'' with employer's total investment in land
and heavy machinery).
\314\ Paragon, 884 F.3d at 1236 (``To analyze this factor, we
compare the investments of the worker and the alleged employer.'');
Flint Eng'g, 137 F.3d at 1442 (``In making a finding on this factor,
it is appropriate to compare the worker's individual investment to
the employer's investment in the overall operation.'').
\315\ 2015 WL 4449086, at *8 (withdrawn June 7, 2017).
\316\ Id.
\317\ See WHD Op. Ltr., 2002 WL 32406602, at *1-2 (Sept. 5,
2002) (workers' ``hand tools, which can cost between $5,000 and
$10,000,'' were ``small in comparison to [the employer's]
investment,'' but the ``amount is none the less substantial'' and
``thus indicative of an independent contractor relationship''); WHD
Op. Ltr., 2000 WL 34444342, at *4 (Dec. 7, 2000) (comparing ``the
relative investments'' of the worker and the employer is the correct
approach).
\318\ Flex stated that the Department's proposal to compare the
worker's and the employer's relative investments ``directly
contradicts the Department's subregulatory guidance in Fact Sheet
#13, which for decades has advised that `the amount of the alleged
contractor's investment in facilities and equipment' is not only
relevant to a worker's status but tends to support classification as
an independent contractor.'' Fact Sheet #13 has been revised several
times over the past years and will be revised to reflect this final
rule. Regardless, there is no basis for Flex's characterization that
the version of Fact Sheet #13 available at the time of the NPRM
advised that this factor ``tends to support classification as an
independent contractor'' as that language is not in the Fact Sheet.
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That said, the Department understands the concerns raised by many
commenters with merely comparing the size of and dollar expenditures by
the worker to those of the employer, especially for workers who are
sole proprietors. Accordingly, as explained above in response to
comments from NELA and others that suggested that the comparison of the
worker's and the employer's investments should focus on the
``qualitative'' nature of their respective investments, the Department
is modifying the last sentence of the proposed regulatory text for the
investments factor to be two sentences and to read: ``The worker's
investments need not be equal to the potential employer's investments
and should not be compared only in terms of the dollar values of
investments or the sizes of the worker and the potential employer.
Instead, the focus should be on comparing the investments to determine
whether the worker is making similar types of investments as the
potential employer (even if on a smaller scale) to suggest that the
worker is operating independently, which would indicate independent
contractor status.'' This modification should address commenters'
concerns that the size of and/or dollar investments of the employer
will determine the outcome when comparing the investments. As explained
above, comparing the qualitative (rather than primarily the
quantitative) value of the investments is a better indicator of whether
the worker is economically dependent on the employer for work or is in
business for themself. That is because, regardless of the amount or
size of their investments, if the worker is making similar types of
investments as the employer or investments of the type that allow the
worker to operate independently in the worker's industry or field, then
that fact suggests that the worker is in business for themself.\319\
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\319\ Comparing the investments qualitatively also addresses the
Eighth Circuit's ruling in Karlson that the district court was
correct to allow evidence of the worker's and the employer's
relative investments, but also correct to not allow the worker to
ask the employer about the dollar amount of its investment in order
to simply compare the dollar value of the employer's investment to
the worker's investment. See 860 F.3d at 1096.
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[[Page 1685]]
Applying this qualitative approach to, for example, the
hypothetical truck driver described by OOIDA is instructive. The
hypothetical suggests that a driver ``would be an independent
contractor if [the driver is] working with a three-truck carrier,'' but
the same driver would be an employee if the driver goes ``to work for a
carrier with hundreds or thousands of trucks.'' \320\ Comparing the
driver's investment qualitatively with each carrier, however, should
produce the same indicator of employee or independent contractor
status. With respect to either carrier, the focus should be on whether
the driver is making similar types of investments as the carrier (even
if on a smaller scale) so that the driver (like the carrier) can
operate independently in the industry. As the application of a
qualitative comparison to this hypothetical shows, this focus better
aligns the relative investment analysis with the ultimate inquiry of
whether the worker is dependent on the employer for work or in business
for themself.\321\
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\320\ This hypothetical and the hypotheticals offered by Club
for Growth Foundation, Flex, and other commenters overlook the
totality-of-the-circumstances nature of the economic realities
analysis. No one fact or factor (including comparing the worker's
investments to the employer's investments) will necessarily
determine a worker's status as an employee or independent
contractor.
\321\ ACLI commented that ``[n]othing in the Proposed Rule
explains whether the [relative investments] analysis is focused on
investments that the company made in the specific worker's business
(i.e., paying for the worker's staff, rent, tools or equipment) or
whether the analysis focuses on the overall investment of the
company in the entirety of its separate business operations (i.e.,
advertisements, branding, overhead for headquarters, etc.).'' See
also American Securities Association (``It is unclear whether the
analysis is focused on investments that the company made in the
specific worker's business (i.e., purchasing tools or equipment for
the individual worker) or whether the analysis focuses on the
overall investment of the company in its business operations (i.e.,
branding, marketing campaigns, etc.).''). The proposed and final
regulatory text, however, clearly indicate that the worker's
investments should be considered on a relative basis with ``the
employer's investments in its overall business.'' 29 CFR
795.110(b)(2). The ACLI also requested that the Department ``clarify
how the relative investments of the worker and the employer would be
measured.'' See also CPIE (``The NPRM offers no guidance on how to
distinguish between those arrangements for which its proposed
comparison of an individual's investment with a company's investment
in its overall businesses would be relevant and those arrangements
for which its proposed comparison should be disregarded.''). The
Department has provided additional guidance in the discussion above
and by modifying the regulatory text to convey that ``the focus
should be on comparing the investments qualitatively'' more than by
``comparing dollar values of investments or the sizes of the worker
and the employer.'' 29 CFR 795.110(b)(2). CPIE and IBA suggested
modifying the relative investments analysis to ``measure an
individual's investment in the specific items the individual
requires to perform the individual's services, or compare the
relative investment in those specific items by an individual and the
company.'' These commenters state that such a modification would
avoid the need to address the relative size and magnitude of the
worker and the employer and would be consistent with the ultimate
inquiry of economic dependence. For all of the reasons explained
above, however, the Department believes that those goals are better
accomplished by focusing relative investments on a qualitative
comparison.
---------------------------------------------------------------------------
ACLI commented that the proposed ``Relative Investment factor
conflicts with . . . the Ability to Profit or Loss Based On Managerial
Skill factor'' because the Department is ``saying that a worker's
effectiveness in managing their overhead and expenses to maximize
profit suggests independent contractor status, but that a worker's
failure to invest sizeable sums to offset the company's investment
suggests employment status.'' It added that the opportunity for profit
or loss factor ``should be given greater weight than the relative
investment factor so that workers who are skilled in managing their own
overhead expenses are not penalized and deemed employees simply because
they are better businesspeople and need to invest less and less over
time as their businesses mature.'' American Securities Association made
a similar point. As an initial matter, the Department is not giving any
factor any greater predetermined weight than any of the other factors
for all of the reasons explained in this final rule. And as reiterated
in this final rule, workers will not be ``deemed employees'' when
applying the economic realities analysis based on one fact or factor
because the analysis considers the totality of the circumstances. The
Department's modifications to the investments factor, and particularly
the emphasis on comparing the worker's investments and the employer's
investments qualitatively more than quantitatively, should address any
concern that ``a worker's failure to invest sizeable sums to offset the
company's investment suggests employment status.''
The Department is finalizing the investments factor (Sec.
795.110(b)(2)) with the revisions discussed herein.
Example Investments by the Worker and the Potential Employer
A graphic designer provides design services for a commercial design
firm. The firm provides software, a computer, office space, and all the
equipment and supplies for the worker. The company invests in marketing
and finding clients and maintains a central office from which to manage
services. The worker occasionally uses their own preferred drafting
tools for certain jobs. In this scenario, the worker's relatively minor
investment in supplies is not capital in nature and does little to
further a business beyond completing specific jobs. Thus, these facts
indicate employee status under the investment factor.
A graphic designer occasionally completes specialty design projects
for the same commercial design firm. The graphic designer purchases
their own design software, computer, drafting tools, and rents an
office in a shared workspace. The graphic designer also spends money to
market their services. These types of investments support an
independent business and are capital in nature (e.g., they allow the
worker to do more work and extend their market reach). Thus, these
facts indicate independent contractor status under the investment
factor.
3. Degree of Permanence of the Work Relationship (Sec. 795.110(b)(3))
For this factor, the Department proposed that the degree of
permanence of the work relationship would ``weigh[ ] in favor of the
worker being an employee when the work relationship is indefinite in
duration or continuous, which is often the case in exclusive working
relationships,'' and that this factor would ``weigh[ ] in favor of the
worker being an independent contractor when the work relationship is
definite in duration, non-exclusive, project-based, or sporadic based
on the worker being in business for themself and marketing their
services or labor to multiple entities.'' The Department noted that
independent contractors may have ``regularly occurring fixed periods of
work,'' but that ``the seasonal or temporary nature of work by itself
would not necessarily indicate independent contractor classification.''
To further clarify, the Department proposed that ``[w]here a lack of
permanence is due to operational characteristics that are unique or
intrinsic to particular businesses or industries and the workers they
employ, rather than the workers' own independent business initiative,''
this would not indicate that the workers are independent
contractors.\322\
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\322\ See generally 87 FR 62243-45, 62275 (proposed Sec.
795.110(b)(3)).
---------------------------------------------------------------------------
As the Department noted in the NPRM and in the 2021 IC Rule, courts
and the Department routinely consider the permanence of the work
relationship as part of the economic reality analysis under the FLSA to
determine employee
[[Page 1686]]
or independent contractor status.\323\ Courts typically describe this
factor's relevance as follows: `` `Independent contractors' often have
fixed employment periods and transfer from place to place as particular
work is offered to them, whereas `employees' usually work for only one
employer and such relationship is continuous and of indefinite
duration.'' \324\ For example, a typical employee often has an at-will
work relationship with the employer and works indefinitely until either
party decides to end that work relationship. Conversely, an independent
contractor does not usually seek such a permanent or indefinite
engagement with one entity. Because of these general characteristics of
work relationships, the length of time or duration of the work
relationship has long been considered under the ``permanence'' factor
as an indicator of employee or independent contractor status.\325\
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\323\ See 87 FR 62243; 86 FR 1192 (citing a variety of federal
appellate case law: Razak, 951 F.3d at 142; Hobbs, 946 F.3d at 829;
Karlson, 860 F.3d at 1092-93; McFeeley, 825 F.3d at 241; Keller, 781
F.3d at 807; Scantland, 721 F.3d at 1312); see also WHD Op. Ltr.,
2002 WL 32406602, at *3 (Sept. 5, 2002); WHD Op. Ltr., 2000 WL
34444342, at *5 (Dec. 7, 2000) ; WHD Fact Sheet #13.
\324\ Snell, 875 F.2d at 811 (citing Donovan v. Sureway
Cleaners, 656 F.2d 1368, 1372 (9th Cir. 1981)); see also Keller, 781
F.3d at 807 (same); WHD Op. Ltr., 2002 WL 32406602, at *3 (Sept. 5,
2002) (same).
\325\ See, e.g., Parrish, 917 F.3d at 386-87 (noting that one of
the relevant considerations under the permanency factor is the total
length of the working relationship between the parties); Capital
Int'l, 466 F.3d at 308-09 (in analyzing the degree of permanency of
the working relationship, the ``more permanent the relationship, the
more likely the worker is to be an employee''); DialAmerica, 757
F.2d at 1385 (finding that ``the permanence-of-working-relationship
factor indicates that the home researchers were `employees' ''
because they ``worked continuously for the defendant, and many did
so for long periods of time''); Pilgrim Equip., 527 F.2d at 1314
(``the permanent nature of the relations between [the employer] and
these operators indicates dependence''); see also Reyes v. Remington
Hybrid Seed Co., 495 F.3d 403, 408 (7th Cir. 2007) (describing an
independent contractor as an individual who ``appears, does a
discrete job, and leaves again''); Reich v. Circle C. Invs., Inc.,
998 F.2d 324, 328 (5th Cir. 1993) (``[a]lthough not determinative,
the impermanent relationship between the dancers and the [employer]
indicates non-employee status'').
---------------------------------------------------------------------------
Consistent with case law analyzing this factor, the Department
proposed to provide further specificity by noting that an indefinite or
continuous relationship is often consistent with an employment
relationship, but that a worker's lack of a permanent or indefinite
relationship with an employer is not necessarily indicative of
independent contractor status if it does not result from the worker's
own independent business initiative.\326\ The Department also proposed
to continue to recognize that a lack of permanence may be inherent in
certain jobs--such as temporary and seasonal work--and that this lack
of permanence does not necessarily mean that the worker is in business
for themself instead of being economically dependent on the employer
for work. For example, courts have also recognized that the temporary
or seasonal nature of some jobs may result in a ``lack of permanence .
. . due to operational characteristics intrinsic to the industry rather
than to the workers' own business initiative.'' \327\ In such
instances, a lack of permanence alone is not an indicator of
independent contractor status.
---------------------------------------------------------------------------
\326\ See, e.g., Superior Care, 840 F.2d at 1060-61; see also AI
2015-1, 2015 WL 4449086, at *10 (withdrawn June 7, 2017).
\327\ Superior Care, 840 F.2d at 1060-61 (citing Mr. W
Fireworks, 814 F.2d at 1053-54); see also Flint Eng'g, 137 F.3d at
1442 (finding short duration of work relationships in oil and gas
pipeline construction work to be intrinsic to the industry rather
than a ``choice or decision'' on the part of the workers).
---------------------------------------------------------------------------
Many commenters agreed with the Department's overall proposal for
this factor. See, e.g., AFL-CIO; IBT, LA Fed & Teamsters Locals; NDWA;
NELP; NWLC; REAL Women in Trucking; UFCW. The LA Fed & Teamsters Locals
noted in particular that by relegating the permanence factor to
``secondary status,'' the 2021 IC Rule had negated the significance of
``effectively indefinite working relationships'' and that the
Department's proposal ``corrects this issue'' by returning the factor
to ``an equal basis with all other factors.'' NELP concurred that ``[a]
worker whose work relationship is indefinite or continuous or who is
performing a job that is regularly required by the business is more
likely to be an employee than a worker who performs work that is
definite in duration, project-based, or sporadic.''
Many commenters also agreed with the portion of the Department's
proposal that addressed situations in which a lack of permanency is
inherent in the work, such as temporary or seasonal positions, which
the Department had proposed as not necessarily indicating independent
contractor status if it is not the result of the worker's own business
initiative. See, e.g., Gale Healthcare Solutions; LA Fed & Teamsters
Locals; LIUNA; NABTU; NELP. Gale Healthcare Solutions agreed that a
lack of permanence may be due to operational characteristics intrinsic
to the industry rather than the workers' own business initiative, and
it provided the example of temporary or seasonal forces such as ``flu
season'' that can drive temporary nursing demand in the healthcare
industry. It analogized this to the Second Circuit's decision in
Superior Care, where temporary nurses' lack of permanence did not
preclude them from being employees because ``this reflected `the nature
of their profession and not their success in marketing their skills
independently.' '' And commenters such as Farmworker Justice and the
New Mexico Center on Law and Poverty affirmed the importance of
recognizing that farmwork can be seasonal and/or temporary, but that
this does not weigh against employee status for farmworkers, as many
courts have recognized.\328\
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\328\ As noted in the NPRM, agriculture is an industry where
courts often view permanency as working continuously for the
duration of a harvest season or returning in multiple years. See,
e.g., Paragon, 884 F.3d at 1237 (permanence factor favored employee
status because the worker was hired temporarily for the harvest
season ``[b]ut his employment was permanent for the duration of each
harvest season''); Lauritzen, 835 F.2d at 1537 (agricultural
harvesters' relationship with employer was ``permanent and exclusive
for the duration of that harvest season'' and permanency was also
indicated by the fact that many of the same migrant workers returned
for the harvest each year; the court noted that ``[m]any seasonal
businesses necessarily hire only seasonal employees, but that fact
alone does not convert seasonal employees into seasonal independent
contractors'').
---------------------------------------------------------------------------
The primary concern commenters raised about the Department's
proposal to consider the degree of permanence of the work relationship
as an indicator of employee or independent contractor status is that a
long-term pattern of interaction is valued in business relationships,
and that it can indicate the vitality and stability of a business
where, for example, satisfied long-term clients or customers continue
to use their services or contract for particular work. See, e.g., CPIE;
Fight for Freelancers; N/MA; NRF & NCCR; OOIDA; SIFMA; SHRM; U.S.
Chamber. Similarly, commenters such as CWI and the U.S. Chamber noted
that independent contractors may have mutually beneficial business
relationships for a long or indefinite time period, which brings into
question whether an ``indefinite'' work relationship is probative of
employee status.\329\ Commenters raising such
[[Page 1687]]
concerns did not want the fact that an independent contractor had
fostered successful, long-term business relationships to indicate that
these economically-independent businesses were actually employees of
the entities that continued to use their services. They contended that
the analysis should be more nuanced, including CWI's comment that ``as
is the case with most aspects of the economic realities analysis,
`[t]he inferences gained from the length of time of the relationship
depend on the surrounding circumstances.' ''
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\329\ One of the cases relied on by these commenters is Donovan
v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984), where the court
determined that migrant farmworker families who sometimes returned
annually to harvest pickles during a 30-40 day harvest season and
``considered their jobs as migrant farm laborers to be opportunities
for supplementing their income if their family situation allowed''
were engaged in a ``mutually satisfactory arrangement'' that was
``no more indicative of the employment relationship than when a
businessman repeatedly uses the same subcontractors due to
satisfaction with past performance.'' The Department is careful to
note that Brandel is not necessarily representative of the way
courts have viewed the permanence factor or employment status of
agricultural workers who perform seasonal work, nor were these
commenters specifically criticizing the regulatory language proposed
by the Department that was almost identical to the language in the
2021 IC Rule recognizing that the short duration of seasonal work
such as in agriculture would not necessarily indicate independent
contractor classification. See 86 FR 1247 (Sec. 795.105(d)(2)(ii));
see also, e.g., Lauritzen, 835 F.2d at 1536-37 (noting that Brandel
has been ``narrowed and distinguished''); Cavazos v. Foster, 822 F.
Supp. 438, 441-42 (W.D. Mich. 1993) (collecting decisions issued
after Brandel holding that migrant farmworkers are employees).
---------------------------------------------------------------------------
The Department agrees that the permanence factor, like other
factors in the economic reality test, is best understood in the overall
context of the relationship between the parties where all relevant
aspects are considered. The Department also clearly recognizes and
appreciates that people who are in business for themselves often rely
on repeat business and long-term clients or customers in order for
their business to remain economically viable or successful. Thus, the
Department notes that the proposed regulatory text does not reduce the
permanence analysis to a simple long-term/short-term question. Instead,
it looks to the general characteristics historically identified by
courts and the Department regarding the permanency factor, which
indicate employee status where there is a longer-term, continuous, or
indefinite work relationship, and independent contractor status where
the work is definite in duration, nonexclusive, project-based, or
sporadic due to the worker being in business for themself. It
explicitly recognizes that an independent contractor may have
``regularly-occurring fixed periods of work.'' As shown in the example,
a 3-year relationship between a cook who provides specialty meals and
an entertainment venue does not automatically result in the cook being
an employee of the venue, particularly where the cook acts as a
``freelancer'' by providing meals intermittently to the venue while
marketing their meal preparation services to multiple customers and the
cook can determine whether to provide meals for specific events at the
venue based on any reason, including because the cook is too busy with
other work.
Several commenters expressed a mistaken belief that having a degree
of permanence in a work relationship would automatically make workers
employees, see, e.g., N/MA; SBA Office of Advocacy, or that the
Department was creating a ``per se'' rule that work of continuous or
indefinite duration equates to employee status, see, e.g., CWI; NRF &
NCCR. Commenters who raised this concern generally asked the Department
to either modify the regulatory text or eliminate this factor from
consideration. However, as the Department has repeatedly explained, the
economic reality test is a totality-of-the-circumstances test where no
one factor is dispositive. Even if the degree of permanence in a work
relationship indicates employee status, this is just one factor that
would be considered along with other factors such as control,
opportunity for profit or loss, investment, integral, and skill and
initiative. The Department does not believe there is a scenario in
which, for example, a worker who controls conditions of employment,
sets their own fees, hires helpers, and markets their business is
converted from an independent contractor to an employee solely because
they have long-lasting relationships with some clients.
Some commenters suggested clarifications to better capture the
permanency factor, in their view. For example, IBT and NELP suggested
that the Department focus on whether the worker's role or position in a
business is long-term, regular, or indefinite, rather than focusing on
the individual's tenure, because high turnover of individuals in a
particular position does not mean that the position or role within a
business is not long-term, but that the job may be economically
unsustainable or too dangerous for the worker. The Department agrees
that a short-term duration of work may not be indicative of independent
contractor status for these and other reasons. However, the Department
notes that while this factor is known as the ``permanency'' factor,
which could be observed literally by the length of an individual
worker's tenure, the regulatory text also provides guidance regarding
whether the work was on an indefinite or continuous basis. The
Department believes that this captures situations where a position
began as an indefinite or continuous one but was cut short--without the
need to focus on the nature of the position or role within a business.
Further, the commenters' suggestion is not, to the Department's
knowledge, an analysis that has been adopted for this factor by the
courts.
NELP also suggested that the Department note that an employer may
manipulate the permanence of a work relationship by firing or
terminating a worker, and that if a worker lacks the power to influence
their own permanence, this should weigh in favor of employee status.
The Department notes that consideration of whether this type of
manipulation to evade the obligations of the FLSA has occurred would
seem to be more appropriate in an enforcement situation than in the
regulatory text.
One commenter, CWI, objected to the Department's inclusion of
``[w]here a lack of permanence is due to operational characteristics
that are unique or intrinsic to particular businesses or industries and
the workers they employ, rather than the workers' own business
initiative, this factor is not indicative of independent contractor
status'' because it felt this language fails to account for the fact
that ``many types of independent contractor work are often limited or
sporadic in duration precisely because such work is only needed for a
discrete period of time'' and that ``the critical question is whether
the worker acted like a business.'' The U.S. Chamber also contended
that it ``makes no difference whether . . . project-to-project work
occurs as a result of `operational characteristics,' '' urging the
Department to more clearly identify that whether a worker is acting
independently is better viewed through the lens of whether the worker
chooses ``how, when, and the volume of services to provide.'' The
Department agrees with these commenters that the critical question is
whether the worker is in business for themself, which is why the
proposed regulatory language would require consideration of whether a
lack of permanence is due to the workers' own business initiative.
Commenters such as NABTU and the NDWA supported the Department's
proposal in this respect, noting that in industries like construction
and home care, employment can be temporary and sporadic, and that
consideration of whether the worker exercised independent business
initiative was important.
The Department continues to believe that it is consistent with the
case law and relevant to the overall question of economic reality to
consider whether short periods of work are due to workers acting
independently to obtain business opportunities or to the operational
characteristics of particular industries
[[Page 1688]]
and the workers they employ.\330\ However, after considering the
comments received, the Department finds that a clearer articulation of
the final sentence in the proposed regulatory text would be beneficial
to employees, employers, independent contractors, and the Department's
enforcement staff. Therefore, the last sentence of Sec. 795.110(b)(3)
has been rephrased to emphasize whether the worker is exercising their
own business initiative: ``Where a lack of permanence is due to
operational characteristics that are unique or intrinsic to particular
businesses or industries and the workers they employ, this factor is
not necessarily indicative of independent contractor status unless the
worker is exercising their own independent business initiative.''
(Emphasis added.) The Department believes this formulation makes it
clearer that the proper analysis is not categorically based on
operational characteristics of particular industries, as some
commenters seemed to have read into the proposal, and that it is
important to consider whether the worker is exercising independent
business initiative with respect to these periods of work.
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\330\ See, e.g., Flint Eng'g, 137 F.3d at 1442 (temporary rig
welders exhibited sufficient permanency because such temporary work
was intrinsic in the industry rather than a ``choice or decision''
by the workers); Superior Care, 840 F.2d at 1061 (lack of permanence
did not preclude temporary nurses from being employees because this
reflected ``the nature of their profession and not their success in
marketing their skills independently''), Mr. W Fireworks, 814 F.2d
at 1054 (``in applying the Silk factors courts must make allowances
for those operational characteristics that are unique or intrinsic
to the particular business or industry, and to the workers they
employ'').
---------------------------------------------------------------------------
Many commenters suggested industry-specific analyses for the
permanence factor. See, e.g., ACLI (insurance agents); AFL-CIO
(platform-based companies); American Securities Association and LPL
Financial (financial advisors); MEP (applications on smart phones);
NABTU (construction); NAFO (forestry); National Association of Realtors
(``NAR'') (real estate brokers). Because the Department is promulgating
a general rule, it believes that this type of industry-specific
guidance would be better suited to potential subregulatory guidance.
The Department agrees that these types of factual analyses would,
however, be highly relevant when applying the factors to particular
situations and should certainly be considered by parties and
factfinders. As some commenters noted, however, see, e.g., CWI and U.S.
Chamber, the operational characteristics of a particular business or
industry would not take precedence over the overall inquiry as to
whether, as a matter of economic reality, the worker is in business for
themself.
A smaller number of commenters addressed the Department's proposal
to recognize that the exclusivity of a work relationship is
appropriately considered under the permanency factor and to reject the
2021 IC Rule's approach of considering exclusivity just under the
control factor based on whether the worker has the ability to work for
others.\331\ IBT strongly supported the inclusion of this consideration
``because working exclusively for a particular employer clearly speaks
to the permanence of the work relationship.'' Farmworker Justice,
LIUNA, and NABTU highlighted the case law discussed in the NPRM where
courts found that working exclusively for a particular employer for the
duration of a seasonal or temporary job was indicative of employee
status, agreeing that this was the appropriate analysis.\332\
---------------------------------------------------------------------------
\331\ See 87 FR 62244-45; see, e.g., Parrish, 917 F.3d at 386-87
(noting that one of the relevant considerations under the permanency
factor is whether any plaintiff worked exclusively for the potential
employer); Keller, 781 F.3d at 807 (noting that ``even short,
exclusive relationships between the worker and the company may be
indicative of an employee-employer relationship''); Scantland, 721
F.3d at 1319 (noting that ``[e]xclusivity is relevant'' to the
permanency of the work relationship); see also WHD Op. Ltr., 2002 WL
32406602, at *3 (Sept. 5, 2002) (considering exclusivity under
permanence factor); WHD Op. Ltr., 2000 WL 34444342, at *5 (Dec. 7,
2000) (same).
\332\ See, e.g., Lauritzen, 835 F.2d at 1537 (agricultural
harvesters' relationship with employer was ``permanent and exclusive
for the duration of that harvest season''); Mr. W Fireworks, 814
F.2d at 1054 (the ``proper test for determining the permanency of
the relationship'' in a seasonal industry is ``whether the alleged
employees worked for the entire operative period of a particular
season''); see also Flint Eng'g, 137 F.3d at 1442 (temporary rig
welders' relationship with employer was `` `permanent and exclusive
for the duration of' the particular job for which they [were]
hired'') (quoting Lauritzen, 835 F.2d at 1537).
---------------------------------------------------------------------------
The Coalition of Business Stakeholders, NHDA, and NRF & NCCR
commented that they preferred to have exclusivity considered only under
the control factor, as in the 2021 IC Rule. Similarly, the American
Trucking Association contended that the permanence factor was redundant
with the control factor because the only relevant aspect of the tenure
of the parties' relationship is whether the entity contracting with the
worker exercised coercion to prevent them from pursuing other business.
Another commenter, FSI, objected that the Department had proposed to
include exclusivity under the permanence factor based in part on the
weight of the federal appellate case law rather than applying its own
independent reasoning.
The Department continues to believe, as discussed in the NPRM, that
when analyzing worker classification under the FLSA, all facts that may
be relevant to a particular factor should be considered, consistent
with the totality-of-the-circumstances approach taken by courts.\333\
The case law clearly indicates that facts regarding the exclusivity of
a work relationship are salient under both the permanence and control
factors. In many cases courts considered this under permanence,\334\
and in many cases courts consider this under both permanence and
control,\335\ while a smaller number of cases considered this only as
part of a control analysis.\336\ Because the weight of federal
appellate authority does not confine consideration of exclusivity to
the control factor, and because the Department has historically viewed
exclusivity as relevant to permanence,\337\ the Department does not
believe it is appropriate to silo these facts under the control
factor.\338\ For
[[Page 1689]]
example, in Keller the court considered the exclusivity of the work
relationship under the permanence factor because an exclusive work
relationship is a hallmark of the regularity of many employment
relationships, and under the control factor because an employer's
action that directly or indirectly prevents workers from working for
others (thereby imposing an exclusive relationship) is a relevant
mechanism of control.\339\ The Department believes it is appropriate to
consider the weight of the case law when providing guidance, as the
Department is doing consistently in this rule. For these reasons, the
Department concludes that exclusivity should remain in the permanence
factor and that it may also be considered under the control factor to
the extent it speaks to the employer's control.
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\333\ See 87 FR 62244-45.
\334\ See, e.g., Hobbs, 946 F.3d at 835; Henderson v. Inter-Chem
Coal Co., Inc., 41 F.3d 567, 570 (10th Cir. 1994); Carrell v.
Sunland Constr., Inc., 998 F.2d 330, 332, 334 (5th Cir. 1993);
Superior Care, 840 F.2d at 1060-61; Lauritzen, 835 F.2d at 1537;
DialAmerica, 757 F.2d at 1384.
\335\ See, e.g., Parrish, 917 F.3d at 382, 386-87; Keller, 781
F.3d at 807-09, 814; Scantland, 721 F.3d at 1314, 1319; Cornerstone
Am., 545 F.3d at 344, 346.
\336\ See, e.g., Razak, 951 F.3d at 145-46; Saleem, 854 F.3d at
141.
\337\ See, e.g., WHD Op. Ltr., 2002 WL 32406602, at *3 (Sept. 5,
2002); WHD Op. Ltr., 2000 WL 34444342, at *5 (Dec. 7, 2000).
\338\ The 2021 IC Rule also recognized that some courts analyze
the exclusivity of the work relationship as part of the permanence
factor, 86 FR 1192, and the Department considered in its NPRM for
that rule whether to include exclusivity under the permanence factor
and change the articulation to ``permanence and exclusivity of the
working relationship'' in order ``to be more accurate,'' 85 FR
60616, ultimately rejecting an approach that would ``blur[ ] the
lines'' between the factors, 86 FR 1193. As explained, upon further
consideration of the importance of a totality-of-the-circumstances
test where all relevant facts inform the economic dependence
determination, the Department believes it is more accurate to
consider the exclusivity of the work relationship under both
permanence and control factors, especially as it may contribute to a
fuller understanding of the parties' work relationship. See Keller,
781 F.3d at 807-09, 814 (explaining that consideration of the
control exercised by the business that precluded the worker's
ability to work for others ``informs our analysis of the permanency
and exclusivity of the relationship''); Scantland, 721 F.3d at 1319
(``looking through the lens of economic dependence vel non, long
tenure, along with control, and lack of opportunity for profit,
point strongly toward economic dependence''). Courts may find
exclusivity to be relevant under other factors as well, consistent
with the totality-of-the circumstances approach. See, e.g., Hobbs,
946 F.3d at 833, 835 (finding that the work schedule imposed by the
employer prevented workers from engaging in outside work, which was
relevant under the opportunity for profit or loss factor as well as
the permanence factor).
\339\ Keller, 781 F.3d at 807-09, 814-15.
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LIUNA suggested certain edits to the proposed regulatory text to
better capture, in its view, the case law discussed in the NPRM where
courts found that working exclusively for a particular employer for the
duration of a seasonal or temporary job was indicative of employee
status. LIUNA commented that the first sentence of the proposed
regulatory text did not properly reflect this case law because it could
be read solely as a characterization of work relationships that are
indefinite or continuous: ``This factor weighs in favor of the worker
being an employee when the work relationship is indefinite in duration
or continuous, which is often the case in exclusive working
relationships.'' It suggested that the Department better align the
regulatory text with the case law by substituting the language
regarding exclusivity in that sentence with the phrase ``or exclusive
of work for other employers.'' The Department agrees that the concept
of exclusivity should not be limited to work relationships that are
indefinite or continuous, and that it is more precise and aligned with
the case law to substitute the language suggested, which the Department
is adopting in this final rule. The Department wishes to emphasize,
however, that the disjunctive word ``or'' is used in the regulatory
text, and that it is intended to mean that exclusivity is not required
in order for this factor to weigh in favor of employee status.\340\
---------------------------------------------------------------------------
\340\ LIUNA recognized that the Department might be concerned
that ``more emphatically stating the relationship between permanency
and exclusivity would risk suggesting that a non-exclusive working
relationship never supports employee status,'' which it noted would
be inaccurate, as the Department discussed in the NPRM. The
Department concurs that this would be inaccurate for the reasons
discussed in the NPRM and herein, and that clarifying this aspect
should not be understood to require an exclusive relationship in
order to establish employee status.
---------------------------------------------------------------------------
LIUNA requested further clarifying edits that would remove
``project-based'' from the general description of work relationships
that weigh in favor of independent contractor status in order to add a
more specific sentence stating that exclusivity in definite-term,
project-based working relationships in industries that require project-
based work ``such as certain segments of the agricultural or
construction industries'' is probative of employee status. Similarly,
Outten & Golden noted that project-based work can be indicative of
employment when it is ``regular, repeated, or when it is project-based,
but still long-term'' and it recommended including in the regulatory
text the examples of seasonal or temporary work that were discussed in
the NPRM as being consistent with an employment relationship, such as
seasonal construction, agriculture, and retail work and temporary
staffing agencies. See also NELA; Nichols Kaster PLLP.\341\ The
Department declines to remove ``project-based'' from the general
description of work relationships that weigh in favor of independent
contractor status because courts and the Department have associated
project-based work with independent contractor status,\342\ but it
notes that ``project-based'' work alone is not dispositive of whether
this factor weighs in favor of independent contractor status because
all considerations relating to the permanence of the work should be
considered. The Department also declines to add a more specific
sentence or examples as requested because the Department has determined
that it is not appropriate to address particular industries in this
regulation of general applicability.
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\341\ Nichols Kaster also requested that the Department include
additional language from the preamble in the final regulatory text.
The Department declines this suggestion in the interest of providing
succinct statements regarding each factor of the economic reality
test in this final rule. The Department notes, however, that the
preamble will be accessible for additional information regarding the
rule.
\342\ See, e.g., Henderson, 41 F.3d at 570 (facts that supported
an inference that a mechanic was economically dependent on the
employer included that he ``primarily, if not exclusively'' worked
for the employer for over three years rather than being hired for a
specific repair project); Carrell, 998 F.2d at 332, 334 (finding
welders to be independent contractors where they worked for multiple
employers on a project-by-project basis rather than exclusively for
one employer); AI 2015-1, 2015 WL 4449086, at *10 (withdrawn June 7,
2017).
---------------------------------------------------------------------------
NHDA posited that whether a work relationship is exclusive is less
illustrative of whether a worker is in business for themself than the
reason for the exclusivity, and that where a worker freely chooses to
have an exclusive relationship with one transportation provider because
of a ``satisfying selection of routes or loads that permits the worker
to attain financial goals,'' that worker should ``not be judged as less
in business for themselves than a worker who contracts with multiple
transportation providers.'' The Department agrees that an exclusive
relationship alone would not be determinative of the economic reality
of the working relationship, and that it is important to look at all
relevant factors, including factors referenced by the comment such as
the worker's opportunity for profit or loss, to aid in the analysis.
The Department notes that by recognizing that exclusivity weighs in
favor of the worker being an employee, the Department is not stating
either that independent contractors can never have exclusive
relationships with other businesses or that employees who have
nonexclusive relationships with employers because they work multiple
jobs become independent contractors.
To the contrary, as discussed in the NPRM, although an exclusive
relationship is often associated with an employment relationship and a
sporadic or project-based, nonexclusive relationship is more frequently
associated with independent contractor classification, courts have
explained that simply having more than one job or working irregularly
for a particular employer does not remove a worker from employee status
and the protections of the FLSA. For example, in Silk, the
``unloaders'' came to the coal yard ``when and as they please[d] . . .
work[ing] when they wish and work[ing] for others at will.'' \343\ The
Court nevertheless determined that the unloaders were employees: ``That
the unloaders did not work regularly is not significant. They did work
in the course of the employer's trade or business. This brings them
under the coverage of the Act.'' \344\ Similarly, as the Second Circuit
explained in Superior Care, the fact that the temporary nurses
``typically work[ed] for several employers,'' was ``not dispositive of
independent contractor status'' as ``employees may work for more than
one employer
[[Page 1690]]
without losing their benefits under the FLSA.'' \345\
---------------------------------------------------------------------------
\343\ 331 U.S. at 706.
\344\ Id. at 718.
\345\ Superior Care, 814 F.2d at 1060; see also Saleem, 854 F.3d
at 142 n.24 (``It is certainly not unheard of for an individual to
maintain two jobs at the same time, and to be an `employee' in each
capacity.''); Keller, 781 F.3d at 808 (agreeing with the Second
Circuit that ``employees may work for more than one employer without
losing their benefits under the FLSA''); Circle C Invs., 998 F.2d at
328-29 (noting that ``[t]he transient nature of the work force is
not enough here to remove the dancers from the protections of the
FLSA''); McLaughlin v. Seafood, Inc., 867 F.2d 875, 877 (5th Cir.
1989) (per curiam) (``The only question, therefore, is whether the
fact that the workers moved frequently from plant to plant and from
employer to employer removed them from the protections of the FLSA.
We hold that it did not.''); Hart v. Rick's Cabaret Int'l, Inc., 967
F. Supp. 2d 901, 921 (S.D.N.Y. 2013) (noting that ``countless
workers . . . who are undeniably employees under the FLSA--for
example, waiters, ushers, and bartenders''--work for multiple
employers).
---------------------------------------------------------------------------
Courts have also determined that the fact that a worker does not
rely on the employer as their exclusive or primary source of income is
not indicative of whether an employment relationship exists.\346\ For
example, the Sixth Circuit explained: ``[W]hether a worker has more
than one source of income says little about that worker's employment
status. Many workers in the modern economy, including employees and
independent contractors alike, must routinely seek out more than one
source of income to make ends meet.'' \347\ Commenters supported the
Department's clarification in the NPRM, which the Department reiterates
here, that exclusivity is not required in order to find a degree of
permanence and that working multiple jobs does not necessarily favor
independent contractor status--particularly because, as the Sixth
Circuit noted, many workers' financial needs require them to have
multiple sources of income. See, e.g., IBT; LCCRUL & WLC; NELP. LCCRUL
& WLC described a current client who ``often has to work for a variety
of gig economy jobs simultaneously, such as Uber Eats, GoPuff,
Instacart, and Caviar, to keep her finances afloat.'' And NELP observed
that in ``low-wage industries, particularly in services such as
transportation, delivery, or home care, many workers juggle multiple
jobs with multiple entities not as an exercise of their own business
judgment but as a necessity to cobble together a living wage in an
underpaying economy.''
---------------------------------------------------------------------------
\346\ Superior Care, 814 F.2d at 1060; see also Halferty, 821
F.2d at 267-68 (``it is not dependence in the sense that one could
not survive without the income from the job that we examine, but
dependence for continued employment''); DialAmerica, 757 F.2d at
1385 (noting that ``[t]here is no legal basis'' to say that work
that constitutes a second source of income indicates a worker's lack
of economic dependence on a job because the proper analysis is
``whether the workers are dependent on a particular business or
organization for their continued employment'').
\347\ Off Duty Police, 915 F.3d at 1058. The 2021 IC Rule
correctly noted that a handful of cases improperly conflate having
multiple sources of income with a lack of economic dependence on the
potential employer. See 86 FR 1173, 1178. The 2021 IC Rule
characterized such a ``dependence-for-income'' analysis as incorrect
and a ``dependence-for-work'' analysis as correct. Id. at 1173. This
critique continues to be valid, as is the observation that ``[i]t is
possible for a worker to be an employee in one line of business and
an independent contractor in another.'' Id. at 1178 n.19.
---------------------------------------------------------------------------
Finally, the Department noted in the NPRM that where workers
provide services under a contract that is routinely or automatically
renewed, courts have determined that this indicates permanence and an
indefinite working arrangement associated with employment.\348\ The
proposed regulation noting that work relationships that are indefinite
in duration or continuous weigh in favor of employee status is
consistent with this case law. Some commenters mistakenly believed that
the regulatory text explicitly stated that contractual renewals equate
to employee status and objected for largely the same reasons commenters
objected to their reading of the proposed regulatory text to imply that
businesses could not have long-term relationships with clients without
being considered employees of their clients, to which the Department
responded above. See Fight for Freelancers; NRF & NCCR.
---------------------------------------------------------------------------
\348\ See, e.g., Brant, 43 F.4th at 672 (stating that
``[a]utomatic [contract] renewal would weigh more heavily in favor
of employee status''); Scantland, 721 F.3d at 1318 (finding one-year
contracts that were automatically renewed to ``suggest substantial
permanence of relationship''); Pilgrim Equip., 527 F.2d at 1314
(finding laundry operators' one-year contracts that were routinely
renewed indicated employee status); Acosta v. Senvoy, LLC, No. 3:16-
CV-2293-PK, 2018 WL 3722210, at *9 (D. Or. July 31, 2018) (noting
that one-year contracts that automatically renew are ``evidence that
a worker is an employee''); Solis v. Velocity Exp., Inc., No. CV 09-
864-MO, 2010 WL 3259917, at *9 (D. Or. Aug. 12, 2010) (the fact that
package delivery drivers understood their contracts to be of
indefinite duration and that contracts were routinely renewed
without renegotiation indicated employee status).
---------------------------------------------------------------------------
The Department is finalizing the permanence factor (Sec.
795.105(b)(3)) with the modifications discussed herein.
Example: Degree of Permanence of the Work Relationship
A cook has prepared meals for an entertainment venue continuously
for several years. The cook prepares meals as directed by the venue,
depending on the size and specifics of the event. The cook only
prepares food for the entertainment venue, which has regularly
scheduled events each week. The relationship between the cook and the
venue is characterized by a high degree of permanence and exclusivity.
These facts indicate employee status under the permanence factor.
A cook has prepared specialty meals intermittently for an
entertainment venue over the past 3 years for certain events. The cook
markets their meal preparation services to multiple venues and private
individuals and turns down work for any reason, including because the
cook is too busy with other meal preparation jobs. The cook has a
sporadic or project-based nonexclusive relationship with the
entertainment venue. These facts indicate independent contractor status
under the permanence factor.
4. Nature and Degree of Control (Sec. 795.110(b)(4))
In the NPRM, the Department proposed to modify Sec.
795.105(d)(1)(i), which considered control as a ``core'' factor in the
economic reality test. The 2021 IC Rule assessed the employer's and the
worker's ``substantial control over key aspects of the performance of
the work,'' which included setting schedules, selecting projects,
controlling workloads, and affecting the worker's ability to work for
others.\349\ The 2021 IC Rule also stated that ``[r]equiring the
individual to comply with specific legal obligations, satisfy health
and safety standards, carry insurance, meet contractually agreed-upon
deadlines or quality control standards, or satisfy other similar terms
that are typical of contractual relationships between businesses . . .
does not constitute control'' for purposes of the economic reality
test.\350\
---------------------------------------------------------------------------
\349\ See 86 FR 1246-47 (Sec. 795.105(d)(1)(i)).
\350\ Id. at 1247 (Sec. 795.105(d)(1)(i)).
---------------------------------------------------------------------------
In its proposal and consistent with the 2021 IC Rule, the
Department explained that it continues to believe that issues related
to scheduling, supervision over the performance of the work (including
the ability to assign work), and the worker's ability to work for
others are relevant considerations in evaluating the nature and degree
of control. The Department's proposal also considered additional
aspects of control in the workplace that have been identified in the
case law or through the Department's enforcement experience--such as
control mediated by technology or control over the economic aspects of
the work relationship. However, as noted above, the Department's
proposal did not elevate control as a ``core'' factor in the
analysis.\351\
---------------------------------------------------------------------------
\351\ See supra section III.A.
---------------------------------------------------------------------------
In addition, and contrary to the 2021 IC Rule, the Department's
proposed regulation included a sentence stating that an employer's
compliance with
[[Page 1691]]
legal obligations, safety or health standards, or requirements to meet
contractual or quality control obligations, for example, may indicate
that the employer is exerting control, suggesting that the worker is
economically dependent on the employer.
a. Overview of Control Factor
Commenters from across the spectrum agreed that control was a
highly relevant factor to the economic reality analysis. See, e.g., Gig
Workers Rising; U.S. Chamber. Some commenters objected to the
Department's proposed text that shifted the focus of this factor back
to the nature and degree of control exerted by the potential employer,
rather than by the worker. The 2021 IC Rule described the factor as
considering the worker's and the potential employer's nature and degree
of control, while the NPRM described the factor as considering
primarily the potential employer's nature and degree of control.\352\
N/MA, for example, commented that ``a worker's right to control the
manner and means by which a worker provides services is, and should
remain, a primary consideration in the Department's discussion of the
right to control factor.'' CWI described this aspect of the proposal as
``misguided'' because ``[f]ocusing on the individual's control ensures
that the totality of the worker's business are evaluated, including
control the worker may have over whether to subcontract, how to manage
his workforce, whether and how to advertise his services, and whether
to prioritize, stagger, or overlap projects.'' It added that such
``considerations are largely lost when the analysis is unduly narrowed
to an evaluation of an individual putative employer's alleged
control.'' See also NAM (``Instead of focusing on the control a worker
exercises over their work (which would evidence that they are in
business for themselves), the Department would rather determine
`employee' status on the employer's generally considered control over
the work.''). In contrast, other commenters agreed with the
Department's returned focus on the nature and degree of the potential
employer's control. For instance, the State AGs stated that the ``case
law is clear that the appropriate focus for this factor must be on the
employer's control over the worker, and not the worker's control over
the work.'' Similarly, Farmworker Justice commented that the NPRM
``helpfully clarifies that a hiring entity/employer who has the ability
to control key aspects of the work is likely an employer.''
---------------------------------------------------------------------------
\352\ 86 FR 1180; 87 FR 62275 (proposed Sec. 795.110(b)(4)).
---------------------------------------------------------------------------
Regarding the proposed scope of the factor, one commenter
criticized the Department's proposal for eliminating the 2021 IC Rule's
``express requirement of `substantial' control.'' See Scalia Law
Clinic. Additionally, business commenters generally disagreed with the
inclusion of reserved control, stating that that this broadened the
control factor and introduced additional uncertainty by using this
``undefined, vague terminology.'' U.S. Chamber; see also CWI. Other
commenters, however, such as the State AGs, noted that inclusion of
reserved control is ``the appropriate interpretation of the control
factor and properly accounts for the variety of today's work
arrangements.'' See also AFL-CIO (commenting that ``discounting
contractual or reserved control is inconsistent with congressional
intent to expand the coverage of the FLSA beyond the narrow confines of
common law employment'').
A very large proportion of the comments received regarding the
control factor addressed the proposal that an employer's compliance
with legal obligations, safety or health standards, or requirements to
meet contractual or quality control obligations may indicate control,
suggesting that the worker is economically dependent on the employer.
Many commenters objected to this proposal. For example, Flex commented:
``Legally required control is generally disregarded since that is
control imposed by the government, not by the client or hiring party.
The client or hiring party is not choosing to exercise legally required
control; it is required to do so.'' See also Richard Reibstein,
publisher of legal blog. The WFCA and others commented that
``[r]equiring an independent contractor to comply with legal
obligations, safety standards, contractual obligations, or industry
standards should not be indicative of control'' because ``[t]hese
requirements are standard in contracts and subcontracts.'' See also
Genesis Timber; National Association of Home Builders (``NAHB''); NRF &
NCCR.
Other commenters stated that the Department's proposal would
disincentivize employers to prioritize safety and other beneficial
policies, because employers would not want to risk workers being
classified as employees. See, e.g., Kentucky Trucking Association;
Southeastern Wood Producers Association, Inc. The U.S. Chamber
commented that workers and businesses should not be discouraged from
incorporating contractual terms that ``support sound, lawful, safe work
practices,'' as those terms do not evidence control over the worker by
the business under the Act's economic realities test. SHRM stated that
this aspect of the NPRM ``will deter some companies from upholding
their obligations in this respect by holding the specter of a
misclassification finding over their heads for simply trying to do
right by the people who make their businesses viable.'' See also CWI
(commenting that this aspect of the NPRM ``would effectively encourage
businesses to avoid measures encouraging legal compliance and the
safety of both independent workers and the public generally, so that
they do not increase their risk of misclassification claims''). WPI
noted that all businesses operate against regulatory backdrops and
posited the following example: ``a regulation might require all people
on a construction site to wear a hard hat. The builder might, therefore
require site visitors, including the eventual tenant, to wear hardhats.
Is the eventual tenant now the builder's employee based [on] the
exercise of control over a worksite?'' \353\ And multiple financial
advisors submitted identical comments stating that ``[t]he Department
should recognize that [supervision in order to comply with regulatory
requirements] . . . helps my firm and me stay compliant with securities
law and should not be viewed as a negative factor when determining my
status under the [FLSA].'' Flex opposed this proposed language as well,
and further commented that the proposed regulatory language ``lacks all
of the context provided in the preamble'' and that, ``[i]f the
Department's intent is to make clear that there `may' be `some cases'
in which compliance with legal, safety, or quality control obligations
`may' be relevant, then the rule should say that and should provide the
full context contained in the narrative.''
---------------------------------------------------------------------------
\353\ In its NPRM, the Department explicitly addressed this
scenario, stating that ``if an employer requires all individuals to
wear hard hats at a construction site for safety reasons, that is
less probative of control.'' 87 FR 62248.
---------------------------------------------------------------------------
Some heavily regulated industries in particular expressed concern
about this proposed provision, including the trucking, financial
services, insurance, and real estate industries. Scopelitis stated that
``the proposal to consider compliance with legal, safety, or quality
control obligations as employer-like control indicative of an employee
relationship is untenable in the highly regulated trucking and
logistics industries and any rollback of
[[Page 1692]]
requirements for owner-operators to comply with such obligations will
almost certainly lead to less safe roads in our Nation.'' \354\ SIFMA
commented that ``[i]t is important for the highly regulated securities
industry that independent contractors do not morph into employees
merely because they must remain in compliance with federal and state
securities, banking, and insurance laws.'' The ACLI stated that ``[i]t
also would place at risk the careful balance that the courts and
legislatures have fashioned in confirming the importance and viability
of independent contractor models while ensuring regulatory compliance
to protect the public.'' And NAR stated that ``[w]hile there may be
some degree of control over an individuals' work within broker-agent
relationship as required by state law, the manner in which that work is
completed--at the individuals' broad discretion, for example--is a
critical distinction that should not weigh in favor of classification
as an employee.'' Fight for Freelancers similarly explained that there
are basic legal obligations for anyone involved in publishing, such as
contract provisions that prohibit libel or theft of copyrighted
material, and that such terms are ``not indicative of a business's
control over how, when and where an article is written.''
---------------------------------------------------------------------------
\354\ Several commenters, such as the Pennsylvania Motor Truck
Association for example, included a number of contractual provisions
in their comment and stated that the Department ``has a duty to
address each one in the context of any final rule as to whether it
amounts to control.'' The Department cannot opine on a particular
employer's discrete contractual provisions in a final rule. As
stated in the 2021 IC Rule, ``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.'' 86 FR 1182.
---------------------------------------------------------------------------
Other commenters supported this proposed provision. The AFL-CIO
commented that the very fact that a government entity or court
``imposes an obligation on an entity to ensure a workplace or a set of
workers complies with law strongly suggests that responsible government
officials believe that the entity stands in a relationship with the
workers such that it is appropriate for it to do so.'' See also NELA
(``When the employer, rather than the worker, controls compliance with
legal, safety, or other obligations, it is evidence that the worker is
not in fact in business for themselves because they are not doing the
risk-management work involved in understanding and adhering to the
legal and other requirements that apply to the work they perform and
are not assuming the risk of noncompliance.''); NELP (``The Department
should explain that if a government agency or other entity looks to the
hiring entity for compliance, that fact alone suggests that the hiring
entity has the requisite control to demand compliance.''). ROC United
commented that it was ``an appropriate correction of the 2021 Rule''
because delivery companies tend to exert control with respect to
customer service standards and that ``monitoring of drivers' compliance
is indicative of the control [those companies] has over them.'' See
also A Better Balance; Outten & Golden (commenting that the regulation
should state that controls implemented by the employer to comply with
legal obligations, safety standards, or contractual or customer service
standards provides a strong indication of employee status). Finally,
Intelycare supported this provision of the proposed regulation and
further commented that the Department should explain that certain
industries ``are so highly regulated such that it is inherent in the
nature of the work that the company must comply, and exercise control
to require their workers to comply, with legal and safety regulations''
and that in such circumstances the use of independent contractors is
``likely inappropriate.''
Upon consideration, the Department is adopting proposed Sec.
795.110(b)(4) with several revisions in response to comments received.
For decades, courts and the Department have taken the view that the
control factor represents one facet of the economic reality test.\355\
As noted in the NPRM, the Department continues to believe that control
should be analyzed in the same manner as every other factor, rather
than take an outsized role when analyzing whether a worker is an
employee or independent contractor. As the Fifth Circuit stated in
2019, it ``is impossible to assign to each of these factors a specific
and invariably applied weight.'' \356\
---------------------------------------------------------------------------
\355\ See, e.g., WHD Op. Ltr. (Aug. 13, 1954) (applying six
factors, of which control was one, that are very similar to the six
economic reality factors currently used by almost all courts of
appeals); Shultz v. Hinojosa, 432 F.2d 259, 264-65 (5th Cir. 1970)
(affirming judgment in favor of Secretary of Labor that
slaughterhouse worker was an employee under the FLSA under a
multifactor economic reality test of which control was one of the
factors).
\356\ Parrish, 917 F.3d at 380 (quotation marks and citation
omitted). The federal courts of appeals have taken this position for
decades. See also, e.g., Scantland, 721 F.3d at 1312 n.2 (the
relative weight of each factor ``depends on the facts of the case'')
(citation omitted); Selker Bros., 949 F.2d at 1293 (``It is a well-
established principle that the determination of the employment
relationship does not depend on isolated factors . . . [, and]
neither the presence nor the absence of any particular factor is
dispositive.'').
---------------------------------------------------------------------------
Regarding comments critiquing the Department's proposed regulatory
text shifting the focus of this factor back to the nature and degree of
control exerted by the potential employer rather than by the worker,
the Department declines to make any alterations to this proposed text.
The control factor has its roots in the common law, where the inquiry
was whether the ``employer'' had the ``right to control the manner and
means by which [work] is accomplished.'' \357\ Courts have
consistently, and for decades, considered this factor with the focus on
the potential employer, not the worker. See, e.g., Saleem, 854 F.3d at
141 (``[A] company relinquishes control over its workers when it
permits them to work for its competitors.''); Razak, 951 F.3d at 142
(phrasing the factor as ``the degree of the alleged employer's right to
control the manner in which the work is to be performed''); McFeeley,
825 F.3d at 241 (phrasing the factor as the ``degree of control that
the putative employer has over the manner in which the work is
performed''); Karlson, 860 F.3d at 1093 (phrasing the factor as ``the
degree of control exercised by the alleged employer over the business
operations''); Flint Eng'g, 137 F.3d at 1440 (stating that, when
``applying the economic reality test, courts generally look at (1) the
degree of control exerted by the alleged employer over the worker'');
Scantland, 721 F.3d at 1316 (explaining that ``[t]he economic reality
inquiry requires us to examine the nature and degree of the alleged
employer's control''). Congress and the Department have also
historically focused on the control exerted by the potential employer
(until the 2021 IC Rule). In the House Report accompanying the 1966
FLSA Amendments, for example, Congress described the factor as ``[t]he
degree of control which the principal [potential employer] has in the
situation'' \358\ and then affirmed that the ``committee fully
subscribes to these criteria.'' In a 1968 Wage and Hour opinion letter,
the Department described the factor as ``[t]he nature and degree of
control retained or exercised by the principal;'' in a 1973 Wage and
Hour Publication, it described the factor as ``the nature and degree of
control by the principal;''
[[Page 1693]]
and in longstanding Fact Sheet #13, the factor is also described as
``[t]he nature and degree of control by the principal.'' \359\
Accordingly, the Department believes that the appropriate focus of this
factor should be on the potential employer.
---------------------------------------------------------------------------
\357\ Reid, 490 U.S. at 751.
\358\ See House Report No. 871, 89TH CONG., 1ST SESS., at 43
(1965). It is clear that Congress was referring to a potential
employer by the use of the term ``principal'' because its
articulation of the integral factor in the same section stated:
``The extent to which the services rendered are an integral part of
the principal's business.'' In contrast, its articulation of the
initiative factor stated: ``The initiative, judgment, or foresight
exercised by the one who performs the services.'' Id. (emphases
added).
\359\ WHD Op. Ltr. June 25, 1968; ``Employment Relationship
Under the Fair Labor Standards Act'', WHD Publication 1297, February
1973; WHD Fact Sheet #13 (July 2008).
---------------------------------------------------------------------------
Moreover, as explained in the NPRM and consistent with the economic
reality analysis, this factor should necessarily focus on whether the
employer controls meaningful economic aspects of the work relationship
because that focus is probative of whether the worker stands apart as
their own business. Simply assessing whether the employer lacks control
over discrete working conditions (e.g., scheduling) or whether the
employer exercises physical control over the workplace does not fully
address whether the employer controls meaningful economic aspects of
the work relationship.\360\ Specifically, the Fifth Circuit applied
this analytical approach in a case where an insurance sales firm not
only ``controlled the hiring, firing, assignment, and promotion of the
[workers' subordinates],'' but also controlled how the workers priced
the insurance products, received leads for sales, and defined the
territory in which the agents could sell products.\361\ These actions
made it clear that the employer, and not the workers, retained
meaningful control over the ``economic aspects of the business,''
suggesting that the workers were employees.\362\ The Third Circuit has
similarly held that even though dancers had some scheduling
flexibility, the control factor weighed in favor of employee status
because the employer, and not the workers, controlled the economic
aspects of the dancers' work, such as the price of services, the
clientele to be served, and the operations of the club in which they
worked.\363\
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\360\ See, e.g., Cornerstone Am., 545 F.3d at 343-44 (finding
that control weighs in favor of employee status even where the
employer disclaims control over ``day-to-day affairs'' of the
workers because the employer controlled the meaningful economic
aspects of the work). Other elements may also be included in this
examination of control, such as those identified by the Supreme
Court in Whitaker House. They include whether the worker could sell
their products or services ``on the market for whatever price they
can command;'' whether the worker's compensation was dictated by the
employer; and whether management could fire the worker for failure
to obey its regulations. 366 U.S. at 32-33.
\361\ Cornerstone Am., 545 F.3d at 343-44.
\362\ Id. at 343.
\363\ Verma, 937 F.3d at 230.
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Regarding the comments received addressing the scope of the control
factor such as whether reserved control should be included or whether
the regulation should require ``substantial'' control, the Department
declines to make the changes requested. First, the Department believes
that the reference to reserved control should remain in the regulation
as proposed. Control can certainly be exerted directly in the workplace
by an employer, such as when it sets a worker's schedule, compels
attendance, or directs or supervises the work.\364\ As explained in the
NPRM and addressed fully in section V.D. of this final rule, however,
the absence of these more apparent forms of control does not invariably
lead to the conclusion that the control factor weighs in favor of
independent contractor status.\365\ Employers may also exercise control
in other ways, including reserved rights to control, because such
reserved rights may, in some situations, be probative of the economic
reality of the total situation. Second, the Department declines to
modify the regulation to require ``substantial control'' as requested
by the Scalia Law Clinic. The Department does not believe such a
modifier is appropriate in the regulatory text because the totality of
the circumstances must be considered, and this heightened requirement
is not supported by case law. Of course, substantial control can be
indicative of employee status as several cases have held, but
``substantial control'' is not a predetermined requisite under the
economic reality test.\366\ Moreover, as the regulatory text provides,
``[m]ore indicia of control by the potential employer favors employee
status; more indicia of control by the worker favors independent
contractor status.'' \367\ Thus, substantial control by the employer
would clearly favor employee status, though it is not required.\368\
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\364\ See, e.g., Scantland, 721 F.3d at 1314 (finding workers to
be employees, in part, because they ``were subject to meaningful
supervision and monitoring by'' their employer).
\365\ See, e.g., Mr. W Fireworks, 814 F.2d at 1049 (``[T]he lack
of supervision over minor regular tasks cannot be bootstrapped into
an appearance of real independence.'') (citation omitted); Antenor,
88 F.3d at 934 (noting in FLSA joint employment case that the Act
reaches even those employers who ``[do] not directly supervise the
activities of putative employees''). This has been the Department's
perspective for almost 6 decades. See WHD Op. Ltr., FLSA-795, at 3
(Sept. 30, 1964) (determining that professional divers were
employees of a diving corporation, despite the lack of control over
their work, by noting ``that persons may be employees within the
meaning of the Act even though they are unsupervised in their work,
are not required to devote any particular amount of time to their
work, [and] are under no restriction not to work for competitors of
the employer'').
\366\ For example, in Driscoll, the Ninth Circuit described the
control factor as the ``degree of the alleged employer's right to
control the manner in which the work is to be performed'' but then
concluded that the employer possessed ``substantial control over
important aspects'' of the workers' work. 603 F.2d at 755.
\367\ 29 CFR 795.110(b)(4).
\368\ The Department also received comments urging it to delete
this sentence of the proposed regulatory text. See NELP; Outten &
Golden. These commenters expressed concern that the concluding
sentence suggested a relative weighing of facts relevant to control
in lieu of a ``totality of the circumstances'' analysis, and that
this ``implies a simple arithmetic tallying of the various listed
facts'' that would ``invite an unnecessary contest that threatens to
overshadow the purpose of the factor.'' The Department declines to
delete this sentence because it believes that considering the
various indicia of control and whether they weigh in favor of
employee or independent contractor status can be a helpful
analytical tool. However, the Department agrees that the correct
analysis is an overall, qualitative analysis, and that the
considerations described within the control factor should not be
used as a checklist or in a ``tallying'' fashion, just as the
economic reality factors should not be tallied but rather considered
based on the totality of the circumstances.
---------------------------------------------------------------------------
Finally, current Sec. 795.105(d)(1)(i) states that an employer
requiring a worker to ``comply with specific legal obligations, satisfy
health and safety standards, carry insurance, meet contractually
agreed-upon deadlines or quality control standards, or satisfy other
similar terms . . . does not constitute control that makes the [worker]
more or less likely to be an employee.'' \369\ In the NPRM, the
Department explained that a blanket prohibition on consideration of
compliance with legal or other obligations would not be appropriate,
and that certain instances of control should not be excluded as
irrelevant to the economic reality analysis only because they are
required by business needs, contractual requirements, quality control
standards, or legal obligations. Moreover, the Department recognized
that the ``case law is not uniform on this issue'' and undertook a
detailed discussion explaining why a complete bar to ever considering
such compliance with legal, safety, or health obligations, or quality
control measures would be inappropriate under the economic reality
test.
---------------------------------------------------------------------------
\369\ 86 FR 1247 (Sec. 795.105(d)(1)(i)).
---------------------------------------------------------------------------
The Department took a more nuanced approach in the preamble
discussion than some commenters recognized in their comments, and it
continues to find cases such as Scantland and others--which recognize
that compliance with legal or contractual obligations or quality
control may be relevant evidence of control--persuasive and more
consistent with a totality-of-the-circumstances, economic reality
analysis.\370\ The NPRM explained
[[Page 1694]]
explicitly and with detail that compliance with legal requirements may
not always be relevant to control, and that such compliance was only
one facet of control. However, the Department takes seriously the many
comments received from stakeholders about the proposed regulatory
language, the legitimate points they raised, and the concerns
commenters expressed, even though the Department does not necessarily
agree with all issues raised.
---------------------------------------------------------------------------
\370\ As the Eleventh Circuit explained in Scantland, the
``economic reality inquiry requires us to examine the nature and
degree of the alleged employer's control, not why the alleged
employer exercised such control.'' 721 F.3d at 1316 (emphasis
added). The court continued to explain that if ``the nature of a
business requires a company to exert control over workers to the
extent that [the employer] has allegedly done, then that company
must hire employees, not independent contractors.'' Id.; see also
Schultz v. Mistletoe Express Serv., Inc., 434 F.2d 1267, 1271 (10th
Cir. 1970) (noting that ``arguments that an independent contractor
relationship is shown by . . . the need to comply with the
regulations of federal and state agencies do not persuade us''
before affirming the conclusion that workers were employees under
the FLSA).
---------------------------------------------------------------------------
In the NPRM, the Department was cognizant of the challenge of
setting forth a regulation that would capture all of the facts relevant
to the nature and degree of a potential employer's control while
balancing the practical considerations of the way businesses,
particularly in some industries, must simultaneously comply with a host
of legal, regulatory, and business-related demands. While the
Department sought to strike the suitable balance between these two
concerns in the NPRM, the comments have persuaded the Department that
the provision as proposed may lead to unintended consequences due to
stakeholder confusion and uncertainty. The Department does not agree,
however, with commenters who stated that the Department's proposed
regulatory text would make compliance with the law a ``negative
factor.'' As noted by commenters, businesses already must comply with
various legal and regulatory requirements--for example, from the IRS,
state licensing boards, and city ordinances. Additionally, the
Department never had a blanket prohibition prior to the 2021 IC Rule on
the consideration of compliance with legal obligations, and none of the
mass uncertainty or noncompliance with legal norms suggested by
commenters were apparent.\371\ Nevertheless, the Department recognizes
the confusion evident in the comments regarding this provision. The
Department agrees with commenters, for example, that stated that a
publication's required compliance with libel law for a writer is not
probative of a worker's economic dependence on that publication but if
the publication instructed how, when, and where the work is performed,
that is relevant to the control analysis. To provide another example, a
home care agency requiring a criminal background check for all
individuals with patient contact in compliance with a specific Medicaid
regulation requiring such checks would not be indicative of control.
Accordingly, the Department is revising the regulation to state that
``actions taken by the potential employer for the sole purpose of
complying with a specific, applicable Federal, State, Tribal, or local
law or regulation are not indicative of control.''
---------------------------------------------------------------------------
\371\ For example, in a 2014 Administrator's Interpretation
``Joint employment of home care workers in consumer-directed,
Medicaid-funded programs by public entities under the Fair Labor
Standards Act'' (withdrawn in 2020), the Department stated that
``under an economic realities analysis, all of the facts and
circumstances of the relationship between a provider and the state
must be evaluated, and no single factor is determinative. Relevant
factors that must be considered when evaluating whether a state
administering a consumer-directed program is an employer include the
various legal requirements with which consumer-directed programs
must comply, and how programs choose to comply with those
requirements.'' See Administrator's Interpretation 2014-2, available
at 2014 WL 2816951, at *5; see also Administrator's Interpretation
2015-1, available at 2015 WL 4449086, at *12 (``Some employers
assert that the control that they exercise over workers is due to
the nature of their business, regulatory requirements, or the desire
to ensure that their customers are satisfied. However, control
exercised over a worker, even for any or all of those reasons, still
indicates that the worker is an employee.'').
---------------------------------------------------------------------------
The Department is further revising the regulation to state that
``actions taken by the potential employer that go beyond compliance
with a specific, applicable Federal, State, Tribal, or local law or
regulation and instead serve the potential employer's own compliance
methods, safety, quality control, or contractual or customer service
standards may be indicative of control.'' This part of the regulatory
text means that a potential employer's control over compliance methods,
safety, quality control, or contractual or customer service standards
that goes beyond what is required by specific, applicable Federal,
State, Tribal, or local law or regulation may in some--but not all--
cases be relevant to the analysis of a potential employer's control if
it is probative of a worker's economic dependence. For example, in
contrast to the background check example in the prior paragraph, a home
care agency's extensive provider qualifications, such as fulfilling
comprehensive training requirements (beyond training required for
relevant licenses), may be probative of control. The Department
continues to believe that control exerted by the employer to achieve
these ends may be relevant to the underlying analysis of whether the
worker is economically dependent on the employer, particularly where
the employer dictates and enforces the manner and circumstances of
compliance.
These instances of potential control, however, are relevant only if
probative of the worker's economic dependence, as with any other
consideration under the economic reality factors. For example, when an
employer, rather than a worker, imposes safety or customer service
obligations beyond what is required by specific, applicable Federal,
State, Tribal, or local law or regulations, it may be evidence that the
worker is not in fact in business for themself. In those instances,
they are not doing the entrepreneurial tasks that suggest that they are
responsible for understanding and adhering to requirements that apply
to the work or services they are performing such that they are assuming
the risk of noncompliance--a typical and expected risk that workers in
business for themselves regularly assume. Moreover, the Department
understands that parties representing a wide array of business
relationships enter into contracts, and this regulation should not
inhibit those practices. For example, if a potential employer requires
all workers to sign a contract acknowledging that the business's
general policy is that invoices for work projects must be submitted
within a particular timeframe, this is not indicative of control
because such a generally applicable contractual term does not itself
suggest that a worker is economically dependent on the employer for
work. In contrast, if a potential employer requires all workers to sign
a contract outlining specifically how, when, and where the work must be
performed, that specific direction would be indicative of control
because it suggests that the workers are not operating independently.
The Department believes that this revised text will be able to
encompass control that is relevant to the overall analysis of economic
dependence while providing businesses with a clear rule regarding
compliance with specific legal obligations.
As the Department emphasized in the NPRM and again emphasizes here,
the facts and circumstances of each case must be assessed, and the
manner in which the employer chooses to implement such obligations will
be highly relevant to the analysis. For example, under this final
regulatory text, it is not indicative of control if a potential
employer requires everyone who enters a construction site to wear a
hard hat as required by city ordinance.
[[Page 1695]]
However, if a potential employer chooses a specific time and location
for its own weekly safety briefings that are not specifically required
by law and requires all workers to attend, that may be probative of
control. Similarly, it is not probative of control if a potential
employer requires workers to provide proof of insurance required by
state law, but if a potential employer mandates what insurance carrier
workers must use, that may be probative of control.
The Department reminds stakeholders that this is merely one aspect
of one factor of a multifactor test. Even if compliance with specific
safety, contractual, customer service, or quality control requirements
is indicative of control in a specific case, this does not compel a
particular conclusion that the control factor favors employee status or
that the overall analysis requires a particular result.\372\ Thus, the
final rule does not preclude a finding that a worker is an independent
contractor where an employer obligates workers, for example, to comply
with its own safety standards or quality control measures, after also
considering other relevant factors in the economic reality analysis.
---------------------------------------------------------------------------
\372\ For example, a court can consider control exerted over
workers to comply with safety obligations as not indicative of
control and nevertheless conclude upon consideration of all of the
factors that such workers were employees under the FLSA. See Rick's
Cabaret, 967 F. Supp. 2d at 916, 922.
---------------------------------------------------------------------------
With these general principles in mind, the next sections address
the Department's proposals regarding several aspects of control to be
considered in determining whether the nature and degree of control
indicates that the worker is an employee or an independent contractor.
This discussion is intended to be an aid in assessing common aspects of
control--including scheduling, supervision, price setting, and ability
to work for others--but should not be considered an exhaustive list,
given the various ways in which an employer may control a worker or the
economic aspects of the work relationship. Additional changes to the
final regulatory text in response to comments are also discussed
throughout these sections.
b. Scheduling
As a consideration under the control factor, the Department
proposed that``[f]acts relevant to the employer's control over the
worker include whether the employer sets the worker's schedule[.]''
\373\ While the 2021 IC Rule similarly recognized that a potential
employer's control over ``key aspects of the performance of the work,
such as by controlling the individual's schedule'' is relevant to
determining employee or independent contractor status, the 2021 IC Rule
also suggested that the worker's ``substantial control over key aspects
of the performance of the work'' may be demonstrated simply by ``by
setting his or her own schedule.'' \374\ As explained in the NPRM,
after further consideration and review of the case law, the Department
considered that framing to be too narrow because it shifted focus away
from the employer's control--potentially allowing a finding of
independent contractor status under the control factor based solely on
a worker setting their own schedule, irrespective of other relevant
considerations under control--and did not encompass actions the
employer may take that would limit the significance of the worker's
ability to set their own schedule.
---------------------------------------------------------------------------
\373\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
\374\ 86 FR 1246-47 (Sec. 795.105(d)(1)(i)).
---------------------------------------------------------------------------
The Department recognizes that many independent contractor
relationships include the worker's ability to start and end work as
they see fit.\375\ And the Department noted that such scheduling
freedom may be probative of a worker's independent contractor
status.\376\ Yet, multiple courts of appeals have determined that
workers were employees, rather than independent contractors, even when
they had the flexibility to choose their work schedule.\377\ Further,
the Department noted that employers may still be able to limit the
number of hours available for a worker to choose or arrange the
sequence or pace of the work in such a way that it would not be
possible for the worker to have a truly flexible schedule, thus
exhibiting control that could indicate that a worker is an
employee.\378\
---------------------------------------------------------------------------
\375\ See, e.g., Franze, 826 F. App'x at 77 (noting that
schedule flexibility ``weigh[s] in favor of independent contractor
status''); Karlson, 860 F.3d at 1094-96 (affirming a jury verdict
finding a process server to be an independent contractor, in part,
because the worker ``was not required to report for work[,] . . .
did not punch a time clock,'' and did not have a set schedule,
report a daily schedule to the employer, or face discipline for not
working); Express Sixty-Minutes, 161 F.3d at 303 (determining that
the employer ``had minimal control'' over the delivery drivers in
part because the drivers ``set their own hours and days of work''
and could reject deliveries ``without retaliation,'' which was
evidence that the worker was an independent contractor).
\376\ 87 FR 62249 (citing Saleem, 854 F.3d at 146 (finding
drivers who were able to set schedules that ``were entirely of their
making'' were properly found to be independent contractors where,
among other factors, drivers could select routes, there was no
incentive structure for them to drive at certain times, and they
could exercise business-like initiative)).
\377\ See, e.g., Verma, 937 F.3d at 230, 232 (finding the
ability to set hours, select shifts, stay beyond a shift, and accept
or reject work to be ``narrow choices'' when evaluated against other
types of control exerted by the employer and that a ``holistic
assessment'' of all factors showed that the workers were not, ``as a
matter of economic reality, operating independent businesses for
themselves''); Paragon, 884 F.3d at 1235-38 (finding that even
though a worker could set his own schedule, he was an employee, in
part, because his flat rate of pay did not allow him profit based on
his performance); DialAmerica, 757 F.2d at 1384-86 (finding
telephone survey workers who set their own hours and were free from
supervision to be employees); Sureway, 656 F.2d at 1370-71
(``circumstances of the whole activity'' show that laundry company
``exercises control over the meaningful aspects of the cleaning
[work]'' despite the fact that workers could set their own hours).
\378\ 87 FR 62248 (citing Flint Eng'g, 137 F.3d at 1441 (``The
record indicates rig welders cannot perform their work on their own
schedule; rather, pipeline work has assembly line qualities in that
it requires orderly and sequential coordination of various crafts
and workers to construct a pipeline.''); Doty v. Elias, 733 F.2d
720, 723 (10th Cir. 1984) (``Since plaintiffs could wait tables only
during the restaurant's business hours, [the employer] essentially
established plaintiffs' work schedules.'')).
---------------------------------------------------------------------------
As the Department noted, courts have often found that a worker's
ability to set their own schedule, by itself, provides only minimal
evidence that a worker is an independent contractor, particularly when
the hiring entity exerts other types of control; therefore, the freedom
to set one's schedule should be evaluated against other forms of
control implemented by an employer.\379\ The Department also cited the
Tenth Circuit's common-sense observation that ``flexibility in work
schedules is common to many businesses and is not significant in and of
itself.'' \380\ For example, in Silk, the ``unloaders'' who came to the
coal yard ``when and as they please[d]'' were employees rather than
[[Page 1696]]
independent contractors.\381\ Flexibility that allows workers to use
time between tasks or jobs may also be an inherent component of some
business models, but such flexibility does not preclude a finding that
the employer has sufficient control over a worker in other ways to
weigh in favor of employee status. For instance, the Department noted
that ``the power to decline work, and thus maintain a flexible
schedule, is not alone persuasive evidence of independent contractor
status when the employer can discipline a worker for doing so.'' \382\
Moreover, both employees and independent contractors may possess
scheduling flexibility in their working relationships.
---------------------------------------------------------------------------
\379\ See, e.g., Verma, 937 F.3d at 230 (the Third Circuit found
the ability to set hours, select shifts, stay beyond a shift, and
accept or reject work to be ``narrow choices'' when evaluated
against other types of control by the employer, such as setting the
price for services); Hill v. Cobb, No. 3:13-CV-045-SA-SAA, 2014 WL
3810226, at *4-5 (N.D. Miss. Aug. 1, 2014) (finding that even though
workers had no specific hours or schedule and could ``come and go as
[they] pleased'' the employer ``maintained extensive control over
the remaining aspects'' of the business such that the control factor
weighed in favor of employee status); Wilson v. Guardian Angel
Nursing, Inc., No. 3:07-0069, 2008 WL 2944661, at *15-16 (M.D. Tenn.
July 31, 2008) (finding that although nurses could accept or reject
shifts the employer exercised substantial control in other respects,
such as over the manner in which nurses conducted their duties).
\380\ 87 FR 62249 (citing Snell, 875 F.2d at 806) (emphasis
added); see also Circle C. Invs., 998 F.2d at 327 (finding that the
employer had ``significant control'' over dancers indicating
employee status even though they had ``input . . . as to the days
that they wish to work''); Doty, 733 F.2d at 723 (``A relatively
flexible work schedule alone, however, does not make an individual
an independent contractor rather than an employee.''); Walling v.
Twyeffort, Inc., 158 F.2d 944, 947 (2d Cir. 1946) (holding that
workers who ``are at liberty to work or not as they choose'' were
employees under FLSA).
\381\ 331 U.S. at 706, 718.
\382\ 87 FR 62249; see, e.g., Off Duty Police, 915 F.3d at 1060-
62 (noting that ``[a]lthough workers could accept or reject
assignments, multiple workers testified that [the employer] would
discipline them if they declined a job,'' which supported a finding
that the control factor favored employee status for one set of
workers; testimony that another set of workers may not have been
punished for declining work did not clearly support either employee
or independent contractor status under the control factor '); see
also Parrish, 917 F.3d at 382 (ability to turn down projects without
negative repercussion was among the reasons the control factor
weighed in favor of independent contractor status).
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As the discussion in the NPRM concluded, control over a worker's
schedule exhibits just that: one form of control.\383\ Both employees
and independent contractors can take advantage of flexible work
arrangements, which is why such scheduling flexibility, on its own, may
not clearly indicate that the employer lacks control over the
worker.\384\ As the Department noted, this approach is consistent with
the economic realities, totality-of-the-circumstances approach, where
such scheduling flexibility should be weighed along with other aspects
of control the employer may be implementing.
---------------------------------------------------------------------------
\383\ See, e.g., Mr. W Fireworks, 814 F.2d at 1048 (noting that
work schedules compelled by the employer were, among other
considerations within control, evidence that, ``[a]s a matter of
economic reality'' the employer ``exercise[d] great control'' over
the workers and thus, ultimately employee status).
\384\ See 87 FR 62249 (citing Collinge, 2015 WL 1299369, at *4
(finding that the fact that on-demand ``[d]rivers are free to wait
at home for their first delivery of the day, and . . . are free to
`kill time' on a computer or run personal errands'' in between jobs
did not demonstrate lack of control ``because [it] merely show[s]
that [the employer] is unable to control its drivers when they are
not working, an irrelevant point.'') (footnotes omitted)).
---------------------------------------------------------------------------
Several commenters expressed general support for the NPRM's
discussion of scheduling flexibility. For example, the AFL-CIO noted
that ``[t]he NPRM . . . correctly makes clear that . . . `scheduling
flexibility is not necessarily indicative of independent contractor
status where other aspects of control are present[.]' '' In their
comments, ACRE et al. and the Washington Center for Equitable Growth
agreed that flexible work schedules can be common to employees and
independent contractors alike and ACRE et al. noted that ``flexible
schedules alone do not determine a worker's employment status.'' See
also NPWF. PowerSwitch Action supported the NPRM's discussion of
scheduling flexibility, commenting that the economic reality inquiry
``is not illuminated by whether a worker can choose to perform their
work at nights instead of days (or vice versa), in short several-hour
increments over a single day or several days, or in periods that vary
seasonally.'' It contended that workers classified as employees have
historically included workers with great scheduling flexibility across
various industries, indicating that such freedoms are not synonymous
with being an independent contractor. The LA Fed & Teamsters Locals
agreed, noting that scheduling flexibility, alone, is a ``poor
indicator[ ] of the economic realities of the contemporary working
relationship'' unless that fact can ``actually demonstrate the worker's
economic independence.'' NWLC noted that ``[t]he Department's guidance
here is consistent with court decisions finding, for instance, that
nurses, dancers, and delivery drivers . . . were employees even though
they had substantial control over their work hours, because their
employers retained control over prices for their services and/or other
important elements of their jobs.''
Some commenters addressed industry specific practices. For example,
ROC United noted that their members, who are restaurant workers,
``frequently decide when and how long to work,'' yet, ``once working,
they have very little control over how they actually do the work,''
suggesting their economic dependence. UFCW similarly commented that, in
their experience working with drivers, app-based companies ``threaten
to expel workers from the platform or reduce the availability of work
shifts, unless the worker continuously accepts jobs;'' a situation that
limits the benefit of flexibility.\385\ REAL Women in Trucking
applauded ``the Department's decision to broaden its framing of the
scheduling element from the 2021 Rule and to focus on whether apparent
scheduling flexibility actually provides for economic independence or
whether the worker is still functionally dependent.'' It noted that
truckers can be constrained by other forms of control--such as
retaliation for declining too many offered loads--and stated the
proposal's ``emphasis on whether apparent scheduling flexibility is
constrained by economic reality is accordingly well considered.''
---------------------------------------------------------------------------
\385\ The comment noted specific practices that erode the
benefit of scheduling flexibility, such as app-based platforms
offering first access to premium deliveries or allowing workers
first access to select shifts on the condition that they have
accepted enough jobs in the prior month.
---------------------------------------------------------------------------
The law firm Nichols Kaster noted that, in their experience,
``employers who misclassify their workers as independent contractors
rely on the workers' ability to decline work as evidence of lack of
control. But there is oftentimes no meaningful choice because declining
work can result in discipline or other consequences.'' It suggested
including language from the preamble in the final rule to emphasize
this point. NELA agreed with the Department's discussion of scheduling
flexibility and similarly suggested that the Department include more
information about scheduling flexibility in the final rule. Moreover,
Gale Healthcare Solutions noted that the term ``scheduling
flexibility'' needs further refinement, since workers in the healthcare
industry may have the flexibility to select their preferred shift from
a job board but do not have the flexibility to decide when the shift
starts and ends, and this ``inherently less `flexibility' '' would
indicate employee status. The Department declines commenters'
suggestions to include additional content in the final regulatory text
for this factor. The current proposal was intended to provide succinct
statements regarding each factor of the economic reality test with the
understanding that the preamble will be accessible for additional
information regarding the rule, as will future subregulatory guidance.
Several commenters also expressed concern with the Department's
approach, asserting that scheduling flexibility is a strong indicator
of independent contractor status. For instance, Uber stated that ``a
worker's ability to autonomously determine their own work schedule
(days, hours, time of day, and more) is a strong predictor of
independent status--on Uber, drivers and couriers can start and stop
work whenever and wherever they choose, accepting only those offers
they want to take[.]'' DoorDash asserted that ``[n]ot only is
scheduling flexibility a significant distinction between employment and
independent work: it gets to the very heart of the economic
[[Page 1697]]
reality test.'' See also National Propane Gas Association.
SHRM suggested that the Department's treatment of scheduling
flexibility is misguided because, for example, ``contract work may
provide [low-wage earners] with control over their schedules, providing
the ability to maximize their earnings and better attend to their
personal obligations.'' Multiple individuals, like one ``independent
healthcare professional,'' stressed that many people like them want
``the freedom to engage in flexible work arrangements that best meet
our needs.''
The Department recognizes that many workers need and desire
flexibility in their work schedules and seek out job opportunities that
provide that flexibility. And, in some cases, control over one's
schedule can be probative of an employer's lack of control over a
worker, indicating that they may be an independent contractor.\386\
However, case law has consistently held that scheduling flexibility may
be a relatively minor freedom, especially in those cases where a worker
is prevented from exercising true flexibility because of the pace or
timing of work or because the employer maintains other forms of
control, such as the ability to punish workers who may seek to exercise
flexibility on the job.\387\ In this way, the 2021 IC Rule's focus on
scheduling flexibility as a fact that demonstrates ``substantial
control over key aspects of the performance of the work'' misapplied
relevant cases that suggest the opposite conclusion.\388\ The proper
lens for the test is the totality-of-the-circumstances analysis, which
considers scheduling flexibility along with other forms of control the
employer might exert, as well as with other factors in the economic
reality test.\389\
---------------------------------------------------------------------------
\386\ See, e.g., Express Sixty-Minutes, 161 F.3d at 303
(determining that the employer ``had minimal control'' over the
delivery drivers in part because the drivers ``set their own hours
and days of work'' and could reject deliveries ``without
retaliation,'' which was evidence that the worker was an independent
contractor).
\387\ See, e.g., Verma, 937 F.3d at 230 (ability to set hours,
select shifts, stay beyond a shift, and accept or reject work were
``narrow choices'' when evaluated against other types of control by
the employer, such as setting the price for services); Off Duty
Police, 915 F.3d at 1060 (``Although workers could accept or reject
assignments, multiple workers testified that [the employer] would
discipline them if they declined a job,'' which was evidence of the
employer's ultimate control); Flint Eng'g, 137 F.3d at 1441 (``The
record indicates rig welders cannot perform their work on their own
schedule; rather, pipeline work has assembly line qualities in that
it requires orderly and sequential coordination of various crafts
and workers to construct a pipeline.'').
\388\ 86 FR 1247-48.
\389\ See, e.g., Pilgrim Equip., 527 F.2d at 1312 (``In the
total context of the relationship neither the [workers'] right to
hire employees nor the right to set hours indicates such lack of
control by [the employer] as would show these operators are
independent from it.'') (emphasis added).
---------------------------------------------------------------------------
Some commenters asserted that consideration of scheduling
flexibility should take into account specific industry and/or
contractual arrangements that limit its availability. For example, NRF
& NCCR commented that the Department's proposed approach ``ignores key
realities of business relationships common to retailers and
restaurants.'' Examples include individuals who rent retail space but
are constrained by limited operating hours of the building in which
they rent, food delivery workers who may only be able to deliver food
when a restaurant is open, or cleaning crews who can only do their work
at night. They asserted that these types of limitations do not
necessarily indicate that the worker lacks control over their schedule.
The CA Chamber echoed this sentiment, noting that ``[a] business
engaging a contractor to perform services is likely to have certain
dates or times that they would prefer or possibly need that work to be
performed,'' suggesting the Department did not take this reality into
account. See also AFPF (asserting that the control analysis is
complicated ``by adding to it such items of routine contractual terms''
like scheduling which ``cast no meaningful light on employer-employee
status.''). The PGA noted, specific to its industry, that ``[golf]
teaching professionals set their own schedules,'' yet ``their ability
to teach at a particular space may be limited by the space's operating
hours or conflicting events that require the use of the property.''
They asserted that this limitation ``should not be viewed as an example
of a lack of control by the teaching professional.''
Dart contended that if the Department's perspective is that limited
scheduling control by the worker indicates employee status, then many
drivers who independently ``elect to transport similar loads along the
same routes over a period of time, risk losing their status and
independence under this factor.'' They asserted that drivers who wish
to remain independent would thus have to ``arbitrarily switch routes
and carriers, and . . . bear whatever costs or inefficiencies such
switches may give rise to, simply to preserve their independent status
under this factor'' and requested that the Department adopt ``language
which specifically incorporates consideration of the reality of the
industry in question.''
In addition, DoorDash suggested that the type of flexibility its
workers possess is fundamentally different from the flexibility an
employee may obtain from an employer. For instance, ``[h]aving some
room to voice a preference about shifts or work remotely isn't true
scheduling flexibility, because the ultimate control still belongs to
their employers, who dictate things like deadlines and meeting
schedules that can't be shirked.'' In contrast, DoorDash noted that its
platform allows workers to work on their own time and walk away,
potentially for weeks or months at a time.
The Department disagrees that its formulation of the control factor
must explicitly consider unique contractual or industry-specific
scenarios that might affect scheduling flexibility. The language of the
proposed rule noted that ``[f]acts relevant to the employer's control
over the worker include whether the employer sets the worker's
schedule,'' or where the employer ``places demands on workers'' that do
not allow them to work . . . when they choose.'' \390\ To the extent a
potential employer is exerting control over when and for how long an
individual can work, that fact is indicative of the employer's control.
And even in those scenarios where the worker's schedule is constrained
by contract or employer requirements, such scheduling control is only
one fact among many that could be considered under the control factor.
---------------------------------------------------------------------------
\390\ 87 FR 62275.
---------------------------------------------------------------------------
Finally, some commenters asserted that the Department's shift in
focus to the employer's control was misguided. CWI suggested that
``where a result or service is perishable or deadline driven, based on
the consumer's desire or the nature of the product or service, it is
inappropriate to describe the final deadline as evidence of the
business setting the worker's schedule.'' In this way, CWI argued, a
focus on scheduling flexibility solely from the perspective of the
employer, ``prevents a counterbalancing of those separate actions by
the employee that, separate and apart from its direct interactions with
the putative employer, establish he is in business for himself.''
Similarly, N/MA noted that a shift in focus ``from the worker's right
to control the manner and means by which the work is performed to the
purported employer's control . . . [is] misdirected,'' and does not
consider ``the totality of the worker's business . . . including . . .
whether the worker . . . determines to prioritize, stagger, or overlap
projects from multiple entities'' as they see fit.
[[Page 1698]]
The Department's decision to present the control factor from the
perspective of the employer's control over the economic aspects of the
working relationship conforms to relevant case law describing the
factor and also represents a common-sense understanding that an
employer's ability to control a worker's time may be probative of the
worker's status.\391\ And as discussed earlier, where a worker has the
ability to set their own work schedule, courts have often found this to
be less significant relative to other ways in which the employer exerts
control. As such, scheduling flexibility should not be considered
potentially dispositive of the control factor as articulated in the
2021 IC Rule. Moreover, the rule does not eliminate the relevance of
the worker's ability to control their schedule in the analysis, as the
rule notes that ``more indicia of control by the worker,'' such as
control over one's schedule, may ``favor[ ] independent contractor
status.'' \392\
---------------------------------------------------------------------------
\391\ For discussion of this issue generally, see section
V.C.4(a).
\392\ Id.
---------------------------------------------------------------------------
The Department is finalizing the scheduling portion of the control
factor at Sec. 795.105(b)(4) as proposed.
c. Supervision
With respect to the consideration of supervision within the control
factor, the Department proposed that ``[f]acts relevant to the
employer's control over the worker include whether the employer . . .
supervises the performance of the work'' including ``whether the
employer uses technological means of supervision (such as by means of a
device or electronically)'' or ``reserves the right to supervise or
discipline workers.'' \393\ In describing its proposal, the Department
noted the common-sense observation that an employer's close supervision
of a worker on the job may be evidence of the employer's control over
the worker, which is indicative of employee status. Conversely, as the
Department noted, the lack of close supervision may be evidence that a
worker is free from control and is in business for themself.\394\
However, courts have found that traditional forms of in-person,
continuous supervision are not required to determine that this factor
weighs in favor of employee status.\395\
---------------------------------------------------------------------------
\393\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
\394\ Id. at 62249.
\395\ See, e.g., Driscoll, 603 F.2d at 756 (farmworkers could be
employees of a strawberry farming company even where the potential
employer exercised little direct supervision over them); Twyeffort,
158 F.2d at 947 (rejecting an employer's contentions that its
tailors are independent contractors because they are ``free from
supervision, are at liberty to work or not as they choose, and may
work for other employers if they wish'').
---------------------------------------------------------------------------
A lack of supervision is not alone indicative of independent
contractor status,\396\ such as when the employer's business or the
nature of the work make direct supervision unnecessary. For example, in
Off Duty Police, the Sixth Circuit determined that security officers
were employees although they were ``rarely if ever supervised'' on the
job, noting that ``the actual exercise of control `requires only such
supervision as the nature of the work requires.' '' \397\ Moreover,
``the level of supervision necessary in a given case is in part a
function of the skills required to complete the work at issue.'' \398\
As the court noted, there was a limited need to supervise where
officers in that case ``had far more experience and training than
necessary to perform the work assigned.'' \399\ And in DialAmerica, the
Third Circuit concluded that homeworkers were employees even though
they were subject to little direct supervision (a fact typical of
homeworkers generally).\400\ As the Second Circuit stated, ``[a]n
employer does not need to look over his workers' shoulders every day in
order to exercise control.'' \401\
---------------------------------------------------------------------------
\396\ 87 FR 62249 n.393 (noting that the legislative history of
the FLSA supports this point directly, since the definition of
``employ'' was explicitly intended to cover as employment
relationships those relationships where the employer turned a blind
eye to labor performed for its benefit) (citing Antenor, 88 F.3d at
934)).
\397\ 915 F.3d at 1061-62 (quoting Peno Trucking, Inc. v. Comm'r
of Internal Revenue, 296 F. App'x 449, 456 (6th Cir. 2008)).
\398\ Id. at 1061.
\399\ Id. at 1062.
\400\ 757 F.2d at 1383-84. See also McComb v. Homeworkers'
Handicraft Coop., 176 F.2d 633, 636 (4th Cir. 1949) (``It is true
that there is no supervision of [homeworkers'] work; but it is so
simple that it requires no supervision.'').
\401\ Superior Care, 840 F.2d at 1060; cf. Antenor 88 F.3d at
933 n.10 (explaining in an FLSA joint employment case that ``courts
have found economic dependence under a multitude of circumstances
where the alleged employer exercised little or no control or
supervision over the putative employees'').
---------------------------------------------------------------------------
In the NPRM, the Department also explained that employers may rely
on training and hiring systems that make direct supervision
unnecessary. As the Department noted, in Keller v. Miri Microsystems
LLC, an employer relied on pre-hire certification programs and
installation instructions when hiring their satellite dish
installers.\402\ The court noted that the employer had little day-to-
day control over the workers and did not supervise the performance of
their work, but that a factfinder could ``find that [the employer]
controlled [the installer's] job performance through its initial
training and hiring practices.'' \403\ The Department also highlighted,
from the Fifth Circuit's statement in Parrish, that the ``lack of
supervision [of the individual] over minor regular tasks cannot be
bootstrapped into an appearance of real independence.'' \404\ Yet, the
Department recognizes that a worker's ability to work without
supervision may be probative of their independent contractor status,
such as in Nieman, where the court affirmed a district court's
conclusion that an insurance claims investigator was properly
classified as an independent contractor, in part, because the
investigator worked largely without supervision when setting up
appointments, and deciding where to work and how and when to complete
his assignments.\405\
---------------------------------------------------------------------------
\402\ 781 F.3d at 814.
\403\ Id.
\404\ 917 F.3d at 381 (quoting Pilgrim Equip., 527 F.2d at 1312)
(alteration in original)).
\405\ Nieman, 775 F. App'x at 624-25.
---------------------------------------------------------------------------
Finally, the Department noted that supervision can come in many
different forms beyond physical ``over the shoulder'' supervision,
which may not be immediately apparent.\406\ For instance, supervision
can be maintained remotely through technology instead of, or in
addition to, being performed in person, such as when supervision is
implemented via monitoring systems that can track a worker's location
and productivity, and even generate automated reminders to check in
with supervisors.\407\ Additionally, an employer can remotely supervise
its workforce, for instance, by using electronic systems to verify
attendance, manage tasks, or assess performance.\408\
[[Page 1699]]
Thus, a totality-of-the-circumstances analysis properly includes not
only exploring ways in which supervision is expressly exercised, but
also those instances where supervision is not apparent but still used
by the employer--either through the job's structure, training, or the
use of technological tools.
---------------------------------------------------------------------------
\406\ 87 FR 62250.
\407\ Id. (citing, for example, Ruiz v. Affinity Logistics
Corp., 754 F.3d 1093, 1102-03 (9th Cir. 2014) (finding in a state
wage-and-hour case that techniques used by an employer to monitor
its furniture delivery drivers were a form of supervision that made
it more likely that the drivers were employees; as the court noted,
the employer ``closely monitored and supervised'' the drivers by,
among other things, ``conducting `follow-alongs'; requiring that
drivers call their . . . supervisor after every two or three stops;
monitoring the progress of each driver on the `route monitoring
screen'; and contacting drivers if . . . [they] were running late or
off course''). See also Scantland, 721 F.3d at 1314 (finding
``meaningful supervision and monitoring'' in part because the
employer required cable installers to log in and out of a service on
their cell phones to record when they arrived on a job, when they
completed a job, and what their estimated time of arrival was for
their next job).
\408\ See id. (relying on the Department's enforcement
experience in this area). For example, an employer's use of
electronic visitor verification (``EVV'') systems can be evidence of
an employment relationship, especially in those instances where the
employer uses the systems to set schedules, discipline staff, or run
payroll systems, for example. See Domestic Service Final Rule
Frequently Asked Questions (FAQs), U.S. Department of Labor (March
20, 2023, 4:30 p.m.), https://www.dol.gov/agencies/whd/direct-care/faq#g11 (discussing EVV systems at question #10 in relation to an
FLSA joint employment analysis).
---------------------------------------------------------------------------
Several commenters supported the Department's discussion of
supervision generally. For instance, LCCRUL & WLC noted that case law
confirms the fact that, ``direct, on-site supervision'' is not a
prerequisite to find that a worker is an employee. As LCCRUL & WLC
noted, the Department's approach toward supervision allows a ``more
accurate and comprehensive determination of the economic reality of the
parties' relationship.'' ACRE et al., PowerSwitch Action and other
commenters noted that the Department's description of supervision is
helpful, since it highlights the many ways in which a worker might be
controlled at work through direct management or technological
surveillance.
Commenters such as NELP and ROC United commended the Department's
decision to address technologically-mediated supervision, since, as
NELP noted, ``[m]any businesses today manage their workforces with
monitoring systems that track productivity, location, and attendance.''
Providing this focus, NELP explained, ``will ensure that supervision is
analyzed regardless of the medium used to accomplish it.'' As CLASP &
GFI commented, ``new technologies make[ ] it easier for employers to
keep close tabs on workers and simultaneously disengage from modes of
management that, in a pre-digital world, would likely have been
indicators of an employment relationship.'' The use of such technology,
they noted, may particularly effect low-wage workers whose jobs can be
easier to measure, such as warehouse workers whose efficiency in moving
material can be readily quantified, or delivery drivers, whose speed,
routes, and drop-off points can be managed digitally. As they describe,
in some industries, digital ``surveillance has completely supplanted
in-person supervision in cases where the nature of the work would
otherwise require an onsite supervisor.''
While some comments supported the overall approach to supervision
in the NPRM, others suggested that the Department go further, either by
adding additional context to the regulatory text or discussing
additional facets of supervision. For instance, Nichols Kaster
commented that the Department's approach is helpful since ``supervision
can take multiple forms'' and employers have often argued that their
workers are independent contractors by citing to the fact that they
don't engage in in-person supervision of their work. However, it, along
with NELA, called on the Department to include more information from
the preamble discussion in the final regulatory text, specifically
language addressing supervision via automated systems and that the lack
of apparent supervision would not necessarily be indicative of a
worker's independent contractor status.
Similarly, NELP requested that the Department include language in
the final regulatory text specifically clarifying ``that a lack of
direct supervision may still support a finding of an employer's right
to control if an employer can simply exert control when it deems it in
the employer's interest to do so.'' Outten & Golden noted that the text
of the final rule should also encompass the concept of ``monitoring,''
since ``many workers who work remotely . . . are primarily `supervised'
through digital monitoring.'' In addition, Gale Healthcare Solutions
and IntelyCare suggested that the Department include supervision
provided by onsite or related entities such as scenarios where
healthcare staff sent by an employer to a worksite receive
``supervisory-like feedback'' on their performance that can be
communicated back to their employer. Moreover, Gale Healthcare was
concerned that if the Department indicated in the final rule that
initial training--which some employers have deployed in lieu of direct
supervision--is indicative of control, and thus employee status, that
employers who wish to continue engaging independent contractors may
forego such training, which could harm individuals in the healthcare
industry.
The Department declines to adopt the additional regulatory language
suggested by commenters, as it believes additional discussion is more
appropriate for future subregulatory guidance. In response to NELP, the
Department understands its suggestion as requesting additional detail
regarding reserved control, which is discussed elsewhere in this final
rule. The Department also declines to add the phrase ``monitoring'' to
the final regulatory text as requested by Outten & Golden. As described
below, the Department agrees that supervision of a worker includes all
forms of supervision which go to the worker's performance of the work.
Thus, while the act of collecting data through monitoring systems could
be used to supervise the performance of work, it might instead serve
other operational needs of the employer not related to control.
Therefore, adding ``monitoring'' to the regulatory text would not be
helpful at highlighting this distinction. Moreover, to the extent
Outten & Golden's comments were intended to include monitoring to
capture situations where the employer would monitor a worker and then
exert supervisory control when needed or desired, the Department is
confident that this scenario is very similar to its discussion of
reserved control where an employer possesses supervisory control but
elects to exert it when it chooses.\409\ Where an employer reserves the
right to use electronic or digital means of supervision--rather than
traditional in-person supervision--to monitor a worker and thus correct
or direct the performance of the work when it deems necessary, then
this too would be relevant to the economic reality analysis.\410\
Accordingly, the Department concludes that the regulatory language
describing the control factor contains sufficient information to inform
stakeholders about the scope of this factor.
---------------------------------------------------------------------------
\409\ See section V(D).
\410\ See generally Superior Care, 840 F.2d at 1060 (finding
that the employer's reserved right to perform in-person supervision
of nursing staff was relevant to the economic reality analysis).
---------------------------------------------------------------------------
The Department also recognizes the situation that Gale Healthcare
Solutions and IntelyCare raise regarding supervision that may be
performed by other entities where the work is performed and relayed
back to a potential employer. However, the Department declines to add
specific language addressing this scenario, since this scenario would
require a fact-specific inquiry. For example, if a potential employer
is exercising control, but delegates it to a third party that is
conducting onsite supervision and then reports that to the employer,
then the same analysis regarding the employer's supervision would
apply. Finally, to Gale Healthcare's concern regarding training, while
it may be indicative of other factors in the economic reality test
(e.g., skill and initiative), its relevance for the purposes of this
portion of the control analysis is to simply highlight how training may
be used by some employers to avoid any necessary supervision once the
worker begins performing work. Such training that is not a replacement
for close supervision,
[[Page 1700]]
such as apprising workers of safety protocols, would not necessarily be
indicative of supervisory-like control.
UFCW commended the Department's focus on providing additional
context to the control factor analysis, specifically the ways in which
an employer might use technology to supervise its workforce. However,
as discussed in the section on examples used in the preamble, UFCW,
several of its locals, and the AFL-CIO would also have the Department
go further by providing additional examples of ways in which employers
use technology, including surveillance, data collection, and
algorithmic management tools, to supervise workers. According to UFCW,
since ``employers in all industries are rapidly exploiting electronic
surveillance to supervise workers,'' the final rule ``should
additionally explain that a company's use of nontransparent computer
algorithms (programming codes) to manage workers is evidence indicative
of employer control.''
The Department agrees with commenters like the AFL-CIO that control
over the performance of work that is exercised by means of data,
surveillance, or algorithmic supervision is relevant to the control
inquiry under the economic reality test. Such tools could be used
directly by the employer or on their behalf to supervise the
performance of the work. Digital tools are many times developed,
controlled, and deployed to assist in (or independently conduct)
supervision in ways that would have otherwise required in-person
oversight. However, the Department believes that such tools, including
algorithmic control, if used by the employer to supervise the
performance of the work, are already captured by the regulatory text
addressing a potential employer's use of ``technological means of
supervision (such as by means of a device or electronically).''
Relatedly, the Department declines to add additional language
suggesting actions like mere data collection would constitute
supervision for the purposes of control. Like monitoring, an employer
may collect data on business operations for purposes unrelated to its
relationship to workers. Yet, the Department recognizes that where the
employer collects information that then is used for the purposes of
supervision and thus goes beyond information collection, that may be
probative of an employer's control under this factor.
Several commenters disagreed with the Department's approach
regarding supervision. CWI noted that a lack of supervision may in fact
reflect that a worker is an independent contractor as independent
contractors are often ``retained precisely because they perform work
that the putative employer does not,'' which results in less
supervision. CWI further contended that a lack of supervision should
edge toward a finding of independent contractor status in most cases.
This concern was echoed by N/MA, which suggested that the Department's
approach ``turns the control factor upside down by effectively ignoring
a lack of putative employer control.'' Many independent contractors, N/
MA contended, function without supervision precisely because of the
specialized or technical services they render. N/MA asserted that
``work that does not require supervision by the hiring entity is
exactly the type of work that should be recognized as more likely to
result in a determination of a lack of control over the manner and
means by which the work is performed, and indicative of independence.''
The Department agrees with commenters that a lack of supervision
may be probative of a worker's independent contractor status. That fact
is reflected in case law as well as the Department's proposal.\411\ For
example, regarding N/MA's comment, the Department agrees that workers
who deliver technical or specialized services may use that technical
expertise to operate without supervision (either because the employer
need not supervise a technically-proficient worker or the employer does
not have the expertise themselves to meaningfully supervise). In such
circumstances, an employer's lack of supervision may support a finding
that the control factor weighs in favor of independent contractor
status. The Department notes however, also consistent with case law,
that the lack of supervision on its face should not halt a full
analysis.\412\ Lack of direct or in-person supervision may not indicate
that the control factor weighs in favor of independent contractor
status if there are other ways in which the employer is able to
accomplish the same manner of control that would have otherwise been
performed through close, in-person supervision over the performance of
the work. As the Department indicated, for example, the employer may
rely on detailed training or instructions, deploy electronic tools to
direct the performance of the work remotely, or retain the right to
conduct in-person supervision.
---------------------------------------------------------------------------
\411\ See, e.g., Chao v. Mid-Atlantic Installation Servs., Inc.,
16 F. App'x 104, 106-08 (4th Cir. 2001) (agreeing with the district
court's analysis that the ability to complete jobs in any order,
conduct personal affairs, and work independently is evidence that
leans toward identifying a worker as an independent contractor).
\412\ See, e.g., Superior Care, 840 F.2d at 1060 (``An employer
does not need to look over his workers' shoulders every day in order
to exercise control.''); Driscoll, 603 F.2d at 756 (farmworkers
could be employees of a strawberry farming company even where the
employer exercised little direct supervision over them); Twyeffort,
158 F.2d at 947 (rejecting an employer's contention that its tailors
are independent contractors because they are ``free from
supervision, are at liberty to work or not as they choose, and may
work for other employers if they wish'').
---------------------------------------------------------------------------
CWI further suggested that the Department's proposal missed a
critical distinction. By focusing merely on the fact that supervision
may be maintained by technological means, they asserted that the
proposal did not distinguish between supervision through technology
that is ``targeted toward the direction of the manner in and means by
which the worker performs his work'' and monitoring that is ``targeted
toward the particular goods or services at issue.'' \413\ The
California and U.S. Chambers of Commerce and WPI agreed, with WPI
similarly contending that electronic monitoring ``has little to no
impact on economic realities, and that it is an often-commonplace
component of normal arm's-length contracts.'' See also Cambridge
Investment Research, Raymond James, and WFCA. As Flex similarly noted,
technology is used to manage basic business functions and compliance
monitoring, as well as ``enhance[ ] the user experience for consumers''
such as noting a driver's location, arrival time, or facilitating the
exchange of money for the consumer. See also DSA; NHDA. Moreover, Flex
noted that federal regulations require electronic monitoring for safety
purposes in some industries, like trucking.\414\ See also; American
Trucking Association; State Trucking Associations; U.S. Chamber.
Therefore, to avoid confusion, Flex suggested that references to
technology should be stricken from the rule. See also DSA; PGA; Raymond
James.
---------------------------------------------------------------------------
\413\ The comment noted, for example, that distributors of
perishable goods like food and medicine use technological monitoring
``to ensure product integrity, compliance with customer and
regulatory commitments, and even the safety of the public at
large,'' not necessarily to exercise control over the worker as an
employee.
\414\ For discussion of comments related to actions taken to
comply with regulatory requirements see section V(C)(4)(a).
---------------------------------------------------------------------------
CWI also stated, however, that technological supervision ``coupled
with some manner of corrective direction about the means and manner of
performance may evidence employment,'' yet they commented that the
Department's proposal ``sweeps too broadly.'' The Coalition of Business
[[Page 1701]]
Stakeholders noted that the language in the proposal could encompass
the employer's or worker's use of everyday technologies that are used
to run a contemporary workplace. Finally, the CA Chamber noted that
independent contractors are also supervised, suggesting that it would
be ``nonsensical to assert that you would hire a contractor and never
oversee their services or check in on progress.''
The Department agrees with commenters such as CWI and WPI that
employers may at times use technology to track information critical to
their business or, as the CA Chamber notes, the mere status of work
performed by a worker. Such actions can be performed consistent with an
independent contractor relationship with a worker, even when the data
being collected is generated from the actions of the worker. The
Department thus agrees with CWI, for example, that the proposed
regulatory text missed this nuanced distinction. However, as CWI noted,
where such tracking is then paired with supervisory action on behalf of
the employer such that the performance of the work is being monitored
so it might then be directed or corrected, then this type of behavior
may suggest that the worker is under the employer's control. Thus, the
Department is adding additional language to the control factor to
clarify that the relevant consideration is not simply the employer's
use of technology to supervise, but the use of technology ``to
supervise the performance of the work.'' This is why the Department
disagrees with Flex's call to eliminate any reference to technology and
WPI's assertion that the use of technology never implicates the
analysis under the economic reality test. Such a complete bar would
suggest that a worker's performance of the work can never be controlled
or directed by technology, which is not correct, especially when such
tools are not only ubiquitous in many employment settings, but also are
specifically deployed by some employers to supervise and direct the
means through which a worker performs their job. Moreover, the
Department does not believe that the inclusion of a reference to
technology, as noted by the Coalition of Business Stakeholders, would
act as an unbounded factor, pulling in all forms of technology used in
modern workplaces. The only forms of technology referenced by the rule
are those that are deployed by the employer as a means of supervising
the performance of the work which are thus probative of economic
dependence, not all technologies that the employer might be using in
their business.
The Department notes that comments received regarding the
proposal's discussion of an employer's reserved control over the
worker, including reserved rights to supervise, are addressed in the
discussion of reserved rights in section V.D.
The Department is finalizing the supervision portion of the control
factor at Sec. 795.105(b)(4) with the revisions discussed herein.
d. Setting a Price or Rate for Goods or Services
Regarding the control factor's treatment of the ability to set a
price or rate for goods or services, the Department proposed that this
factor consider whether the ``employer controls economic aspects of the
working relationship . . . including control over prices or rates for
services.'' \415\ As the Department noted, facts related to the
employer's ability to set prices or rates of service relate directly to
whether the worker is economically dependent on the employer for work
and help answer the question whether the worker is in business for
themself.\416\
---------------------------------------------------------------------------
\415\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
\416\ 87 FR 62250.
---------------------------------------------------------------------------
At the outset, the Department noted that workers in business for
themselves are generally able to set (or at least negotiate) their own
prices for services rendered.\417\ The Department further noted that
one of the early Supreme Court cases applying the economic reality test
concluded that the workers were employees in part because they were not
``selling their products on the market for whatever price they can
command.'' \418\ The Court explained that, instead, the workers were
``regimented under one organization, manufacturing what the
organization desires and receiving the compensation the organization
dictates.'' \419\ The Department also cited multiple court of appeals
and district court decisions finding that an employer's command over
the price or rate for services indicated their control over the worker
and that the worker was thus less likely to be in business for
themself.\420\
---------------------------------------------------------------------------
\417\ Id.
\418\ Whitaker House, 366 U.S. at 32.
\419\ Id.
\420\ 87 FR 62250-51 (citing Verma, 937 F.3d at 230
(identifying, among other things, the employer's setting the price
and duration of private dances as indicative of ``overwhelming
control'' over the performance of the work); Off Duty Police, 915
F.3d at 1060 (concluding that certain security guards were
employees, in part, because ``[the employer] set the rate at which
the workers were paid''); McFeeley, 825 F.3d at 241-42 (affirming
that a nightclub owner was exercising significant control because,
among other things, it set the fees for private dances); Cornerstone
Am., 545 F.3d at 343-44 (finding the control factor weighed in favor
of employee status where employer controlled ``meaningful'' economic
aspects of the work, including pricing of products sold); Selker
Bros., 949 F.2d at 1294 (finding that, among other things, the fact
that the employer set the price of cash sales of gasoline reflected
the employer's ``pervasive control'' over the workers); Agerbrink v.
Model Serv., LLC, 787 F. App'x 22, 25-26 (2d Cir. 2019) (determining
that there were material facts in dispute regarding the worker's
``ability to negotiate her pay rate,'' which related to the degree
of control exerted by the employer, and rejecting the employer's
contention that the worker had control over her pay rate simply
because she could either work for the amount offered or not work for
that amount, stating that this ``says nothing of the power to
negotiate a rate of pay''); Karnes v. Happy Trails RV Park, LLC, 361
F. Supp. 3d 921, 929 (W.D. Mo. 2019) (finding park managers to be
employees in part because the park owners ``set all the prices'');
Hurst v. Youngelson, 354 F. Supp. 3d 1362, 1370 (N.D. Ga. 2019)
(finding relevant to the control analysis that the plaintiff was not
free to set the prices she charged customers and had no ability to
waive or alter cover charges for her customers).
---------------------------------------------------------------------------
Conversely, the Department noted that when a worker negotiates or
sets prices, those facts weigh in favor of independent contractor
status.\421\ For instance, in Eberline v. Media Net, LLC, the court
found that a jury had sufficient evidence to conclude that a worker
exerted control over meaningful aspects of his business in part due to
``testimony that installers could negotiate prices for custom work
directly with the customer and keep that money without consequence.''
\422\
---------------------------------------------------------------------------
\421\ Id. at 62251.
\422\ 636 F. App'x 225, 227 (5th Cir. 2016); see also Nelson v.
Texas Sugars, Inc., 838 F. App'x 39, 42 (5th Cir. 2020) (finding
that because ``the dancers set their own schedule, worked for other
clubs, chose their costume and routine, decided where to perform
(onstage or offstage), kept all the money that they earned, and even
chose how much to charge customers for dances, a reasonable jury
could conclude that the Club did not exercise significant control
over them'') (emphasis added).
---------------------------------------------------------------------------
The Department also noted that the price of goods and services may
sometimes be included in contracts between a business and an
independent contractor.\423\ The Department quoted McFeeley, where the
court observed that a worker doesn't ``automatically become[ ] an
employee covered by the FLSA the moment a company exercises any control
over him. After all, a company that engages an independent contractor
seeks to exert some control, whether expressed orally or in writing,
over the performance of the contractor's duties[.]'' \424\ Yet, the
Department cautioned that the presence of a contract does not obviate
the need for a complete analysis regarding the control exerted by the
employer, such as the worker's ability to negotiate and alter the terms
[[Page 1702]]
of the contract. As the discussion in the NPRM concluded, it is
evidence of employee status when an entity other than the worker sets a
price or rate for the goods or services offered by the worker, or where
the worker simply accepts a predetermined price or rate without
meaningfully being able to negotiate it.\425\
---------------------------------------------------------------------------
\423\ 87 FR 62251.
\424\ Id. n. 410 (quoting McFeeley, 825 F.3d at 242-43).
\425\ Id. (citing Scantland, 721 F.3d at 1315 (reversing summary
judgment for the employer based in part on evidence that the workers
``could not bid for jobs or negotiate the prices for jobs'')).
---------------------------------------------------------------------------
Multiple commenters supported the Department's inclusion and
description of price setting under the control factor. For example, the
LA Fed & Teamsters Locals stated that this inclusion is a ``recognition
of the great significance of an employer's control over setting prices
for services'' which is ``much more reliable indicia of entrepreneurial
status than less significant aspects of control.'' Such an approach, it
suggested, will prevent employers from ``offering [workers] minor forms
of control while effectively setting a ceiling on the workers' earnings
by maintaining control over the rates offered to customers.'' The law
firm Nichols Kaster noted that the proposal ``expounds on this
important point and provides focus and clarity on what `economic
aspects' means.'' NELP stated that the Department's discussion of price
setting appropriately recognized that price-setting is a form of
control, since an independent contractor ``controls, and has the right
to control, all important business decisions,'' including ``what good
or service to sell and at what price.'' As NELP further noted,
``without the power to set prices for goods or services, a worker will
likely be economically dependent on an employer for work, and if she
wants to increase earnings, her only option is to work longer, harder,
or more jobs.'' REAL Women in Trucking commended the Department for
providing ``helpful clarity'' regarding price setting generally,
providing an example of a worker's ability to negotiate rates where
drivers select jobs from a ``free-market load board'' where they can
negotiate the rates for their services and sign a rate contract
directly with brokers.
Some commenters suggested revisions to the proposed regulatory
language. For example, UFCW urged the Department to amend the
discussion regarding control to include a discussion of information
asymmetries, noting that where a company conceals pricing data, that
would indicate that a worker is not an independent contractor, since
the worker lacks key information regarding price that would affect
entrepreneurial decisions they might make. ACRE et al. similarly
suggested that the Department ``clarify in the rule that another factor
in determining if workers are considered employees must include if a
corporation exercises control over workers through pay structures,''
specifically bonus pay systems used by some transportation network
companies that encourage workers to drive more. ACRE et al. also
suggested that the Department clarify that price (or wage) setting is
so critical to the analysis that ``workers who can not independently
set their own wage rates are, per se, not independent contractors.''
See also Jobs With Justice; NELA; Outten & Golden; PowerSwitch Action.
The Department agrees that the lack of information regarding prices
may prevent a worker from negotiating prices to further their own
business. The Department believes that this concept was captured in the
proposed language that the Department is finalizing which states that
``[w]hether the employer controls economic aspects of the working
relationship'' should be considered, including ``control over prices or
rates for services.'' \426\ Control over price is one specific example
and is not meant to be exhaustive. Further, the Department believes
that defining the relationship in terms of ``information asymmetry''
would be less helpful to businesses that are trying to understand their
obligations, since that term is ambiguous. Moreover, the Department is
confident that situations in which the employer is controlling specific
payment terms or pay structures are captured by the proposed regulatory
language because the relevant inquiry focuses on an employer's control
of ``economic aspects of the working relationship,'' which can embrace
a nonexclusive set of considerations that may be relevant to a specific
working relationship. Finally, the Department declines to adopt
multiple commenters' suggestion to state that a worker's lack of
control over prices would suggest conclusively that they are not
independent contractors. As mentioned throughout this final rule, the
Department declines suggestions to predetermine the weight of certain
considerations, facts, or individual factors. The Department notes,
however, that in a particular case, after considering all the facts of
a particular relationship, control over pricing may be highly relevant
to whether the control factor weighs in favor of employee or
independent contractor status. This approach is consistent with case
law, where a court ``adapt[s] its analysis to the particular working
relationship, the particular workplace, and the particular industry in
each FLSA case.'' \427\
---------------------------------------------------------------------------
\426\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
\427\ McFeeley, 825 F.3d at 241.
---------------------------------------------------------------------------
Some commenters were opposed to the inclusion of price setting or
the extent to which it may be used to illuminate the control factor of
the economic reality test. For instance, the CA Chamber noted that
while it ``generally agree[s] with the description of this facet of the
control factor,'' it was concerned that it may receive too much weight
in the analysis because some employees, ``such as salaried white-collar
workers'' can negotiate their pay, while others, like an ``hourly
employee on an assembly line'' may not. Therefore, the CA Chamber
stated that considerations regarding price control, ``should have
limited use in the analysis because it is not a defining feature of
employment generally.'' See also AFPF; Richard Reibstein, publisher of
legal blog.
The IFA noted its concern with the Department's treatment of price
as it related to franchising relationships. IFA explained,
``[f]ranchisors commonly suggest resale prices for offerings across the
franchise system and, subject to applicable law, may set minimum or
maximum prices for products or services, or have uniform advertising
requirements for system-wide promotions.'' IFA requested that the
Department, ``expressly state that, in the franchise context, the fact
that a franchisor sets prices for goods or services is not probative of
an employment relationship.'' Similarly, ACLI shared that
considerations regarding price are misplaced for the insurance
industry, as ``neither insurers nor insurance agents have unlimited
discretion to adjust prices however they see fit.'' In fact,
``[c]onsistent with the requirement of financial solvency, insurance
agents and advisors have no say or influence over the price of the
products that they sell on behalf of firms, and they are prohibited by
law from `rebating' any of the commissions earned from those sales,'' a
fact that ``effectively bars them from getting involved in, or setting,
pricing.'' The Alternative and Direct Investment Securities Association
noted a similar arrangement among some investment advisors, who cannot
fully negotiate rates for commissions because such rates are, in part,
determined by the application of SEC regulations. Similarly, C.A.R.
noted that real estate industry commission payments in California are
required to be paid through a broker (with a written
[[Page 1703]]
agreement on how the commission will be shared between broker and
salesperson). And the Coalition of Cattle Associations stated that
cattle health processing crews, workers common in the cattle industry
that care for herds, are similarly paid indirectly by a cattle farm
that contracts for services of a company that engages crew members.
CWI commented that considerations around prices or rates are
superfluous because ``[a] worker's ability to negotiate or otherwise
impact the amounts that he earns for his work is already fully
incorporated in the opportunity-for-profit-or-loss factor.'' Thus, CWI
suggested that since this consideration should be withdrawn as it is
redundant. The N/MA similarly noted that such overlapping analysis
results in ``improper[ ] double counting.'' See also CMAA. & NRA.
The Department declines to adopt commenters' proposals to de-
emphasize the relevance of control over prices or rates of service.
Just as the Department declined the suggestion that it elevate the role
of control over prices, the Department concludes that giving this
consideration less weight would similarly undermine a totality-of-the-
circumstances analysis. An employer's control over pricing should be
one fact among all other facts considered under the control factor as
it may be probative of a worker's economic dependence on a potential
employer.
The Department recognizes that many industries, occupations, or
even business sectors set prices and rates for goods or services in
ways that are unique, as noted by commenters like ACLI and IFA.
However, workers who are truly in business for themselves will
generally control the fundamental economic components of their
business, including the prices to charge customers or clients for the
goods or services offered. As discussed in section V.C.4.a, the
Department is revising the final regulatory text of this factor to
state: ``Actions taken by the potential employer for the sole purpose
of complying with a specific, applicable Federal, State, Tribal, or
local law or regulation are not indicative of control.'' However,
beyond those obligations, where the potential employer exerts control
to set rates or prices for services, the worker is more likely to be
``receiving the compensation the organization dictates,'' and thus less
likely to be in business for themself.\428\
---------------------------------------------------------------------------
\428\ Whitaker House, 366 U.S. at 32.
---------------------------------------------------------------------------
In addition, the Department disagrees with commenters such as CWI
and N/MA contending that the discussion of price in both the nature and
degree of control and opportunity for profit and loss factors is not
warranted. In the former, the analysis is focused on the employer's
actions that would control the economic aspects of the working
relationship, while the discussion of the latter focuses on ways in
which the individual has opportunities for profit or loss based on
managerial skill (including initiative or business acumen or judgment)
that affect the worker's economic success or failure in performing the
work. Each discusses prices from different analytical points of view,
an effort that is consistent with this final rule's approach, which is
to analyze the working relationship in all its facets.
Finally, the Department declines commenter suggestions to omit any
discussion of price setting under the control factor. The Department
continues to believe, consistent with case law, that a potential
employer's general control over the prices or rates for services--paid
to the workers or set by the employer--is indicative of employee
status. When an entity other than the worker sets a price or rate for
the goods or services offered by the worker, or where the worker simply
accepts a predetermined price or rate without meaningfully being able
to negotiate it, this is relevant under the control factor. As such,
the Department declines to create a carve-out for certain business
models or industries, as requested by some commenters, although the
Department emphasizes that this position is intended to be consistent
with the case law on this issue and is not creating a novel
interpretation. Importantly, however, as with all considerations
discussed under all the factors, the Department does not intend for
this fact to presuppose the outcome of employment classification
decisions in any particular industry, occupation, or profession.
The Department is finalizing the price setting portion of the
control factor at Sec. 795.105(b)(4) as proposed.
e. Ability To Work for Others
Another consideration that the Department proposed under the
control factor was whether the employer ``explicitly limits the
worker's ability to work for others'' or ``places demands on workers'
time that do not allow them to work for others.'' \429\ This
consideration was consistent with the 2021 IC rule, which also
recognized that directly or indirectly requiring an individual to work
exclusively for an employer was indicative of an employer-employee
relationship.\430\
---------------------------------------------------------------------------
\429\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
\430\ See 86 FR 1247 (Sec. 795.105(d)(1)(i)).
---------------------------------------------------------------------------
As explained in the NPRM, where an employer exercises control over
a worker's ability to work for others, this is indicative of the type
of control over economic aspects of the work that is associated with an
employment relationship rather than an independent contractor
relationship.\431\ Control over a worker's ability to work for others
may be exercised by directly prohibiting other work--for example,
through a contractual provision.\432\ It may also be exercised
indirectly by, for example, making demands on workers' time such that
they are not able to work for other employers,\433\ or by imposing
other restrictions that make it not feasible for a worker to work for
others.\434\ For
[[Page 1704]]
example, in Scantland, the Eleventh Circuit determined that cable
technicians could not work for other companies, either because they
were told they could not do so or because the workers essentially had
an exclusive work relationship with the employer because they were
required to work 5 to 7 days a week and could not decline work without
risking termination or being refused subsequent work.\435\ Thus, the
employer controlled whether they could work for others, which suggested
that they were economically dependent on the employer.\436\
---------------------------------------------------------------------------
\431\ 87 FR 62251-52.
\432\ See Parrish, 917 F.3d at 382 (noting that the non-
disclosure agreement did not require exclusive employment, and was
therefore not an element of control that indicated employee status);
Off Duty Police, 915 F.3d at 1060-61 (non-compete clause preventing
workers from working for employer's customers for two years after
leaving employment was among evidence supporting finding that
control factor indicated employee status); Express Sixty-Minutes,
161 F.3d at 303 (``Independent Contractor Agreement'' did not
contain a ``covenant-not-to-compete'' and drivers could work for
other courier delivery providers, which indicated independent
contractor status); see also WHD Op. Ltr., 2000 WL 34444342, at *1,
4 (Dec. 7, 2000) (workers were required to sign an agreement that
prohibited them from working for other companies while driving for
the employer, which suggested employee status); but cf. Faludi v.
U.S. Shale Sols., LLC, 950 F.3d 269, 276-77 (5th Cir. 2020) (a non-
compete clause ``does not automatically negate independent
contractor status''); Franze, 826 F. App'x at 76-77 (although a non-
compete provision prohibited drivers from driving routes and
carrying products for competing companies, facts showed that the
drivers ``controlled the overall scope of their delivery
operations'' because of their control over distribution territories,
ability to hire others, schedule flexibility, and lack of
oversight).
\433\ See, e.g., Keller, 781 F.3d at 813-14 (although worker was
not prohibited from working for other companies, ``a reasonable jury
could find that the way that [the employer] scheduled [the worker's]
installation appointments made it impossible for [the worker] to
provide installation services for other companies''); Scantland, 721
F.3d at 1313-15 (finding even if workers were not prohibited from
working for other installation contractors their long hours and
inability to turn down work suggested that the employer controlled
whether they could work for others, which was in part why the
control factor favored employee status); Cromwell, 348 F. App'x at
61 (``Although it does not appear that [the workers] were actually
prohibited from taking other jobs while working for [the employers],
as a practical matter the work schedule established by [the
employers] precluded significant extra work.''); Flint Eng'g, 137
F.3d at 1441 (finding the hours the company required of the workers,
coupled with driving time between home and remote work sites every
day, made it ``practically impossible for them to offer services to
other employers'').
\434\ See Brant, 43 F.4th at 669-70 (despite having the
contractual ability to haul freight for other carriers, a driver
alleged that the company maintained a ``system for approving and
monitoring trips made for other carriers'' that was ``so complex and
onerous that Drivers could not, as a practical matter, carry loads
for anyone other than'' the company, which the court determined
weighed in favor of employee status).
\435\ 721 F.3d at 1313-15.
\436\ Id. at 1315.
---------------------------------------------------------------------------
The NPRM also recognized that some courts find that less control is
exercised by a potential employer where the worker is not prohibited
from working for others, particularly competitors, and that this may be
indicative of an independent contractor relationship.\437\ However, the
Department declined to include in the regulatory text for the control
factor a blanket statement that the ability to work for others is a
form of control exercised by the worker that indicates independent
contractor status. The Department was concerned that this framing,
which was in the 2021 IC Rule, fails to distinguish between work
relationships where a worker has multiple jobs in which they are
economically dependent on each potential employer and do not exercise
the control associated with being in business for oneself, and
relationships where the worker has sought out multiple clients in
furtherance of their business.\438\ As the Department noted, if one
worker holds multiple lower-paying jobs for which they are dependent on
each employer for work in order to earn a living, and a different
worker provides services to multiple clients due to their business
acumen and entrepreneurial skills, there are qualitative and legally
significant differences in how these two scenarios should be evaluated
under the economic reality test.
---------------------------------------------------------------------------
\437\ See, e.g., Razak, 951 F.3d at 145-46 (discussing disputed
facts regarding whether drivers could drive for other services--Uber
contended drivers could drive for other services but drivers
contended that they could not accept rides from other platforms
while online for Uber; drivers also noted that Uber's Driver
Deactivation Policy stated that soliciting rides outside the Uber
system leads to deactivation and that activities conducted outside
the Uber system, like ``anonymous pickups,'' were prohibited);
Paragon, 884 F.3d at 1235 (finding control factor favored
independent contractor status in part because worker could and did
work for other employers); Saleem, 854 F.3d at 141-43 (drivers'
ability to work for business rivals and transport personal clients
showed less control by and economic dependence on the employer);
Express Sixty-Minutes, 161 F.3d at 303 (control factor ``point[ed]
toward independent contractor status'' in part because the
``Independent Contractor Agreement'' did not contain a covenant-not-
to-compete and drivers could work for other courier delivery
providers).
\438\ 87 FR 62252.
---------------------------------------------------------------------------
Ultimately, as stated in the NPRM, the question is ``whether a
[worker's] freedom to work when she wants and for whomever she wants
reflects economic independence, or whether those freedoms merely mask
the economic reality of dependence.'' \439\ Dating back to Silk, the
``unloaders'' who came to the coal yard ``when and as they please[d] .
. . work[ing] when they wish and work[ing] for others at will'' were
deemed to be employees rather than independent contractors.\440\ And as
the Fifth Circuit has explained, ``[the] purposes [of the FLSA] are not
defeated merely because essentially fungible piece workers work from
time to time for neighboring competitors.'' \441\ For example, in
Seafood, Inc., the Fifth Circuit examined whether piece-rate workers
who peeled and picked crabmeat and crawfish for a seafood processor,
and who were allowed ``to come and go as they please . . . and even to
work for competitors on a regular basis'' were, as a matter of economic
reality, dependent on their employers and therefore employees under the
Act.\442\ The court determined that the workers' ability to work for
others was not dispositive, and that ``[l]aborers who work for two
different employers on alternate days are no less economically
dependent on their employers than laborers who work for a single
employer'' because ``that freedom is hardly the same as true economic
independence.'' \443\ The Sixth Circuit has further observed that
``[m]any workers in the modern economy, including employees and
independent contractors alike, must routinely seek out more than one
source of income to make ends meet.'' \444\
---------------------------------------------------------------------------
\439\ Reich v. Priba Corp., 890 F. Supp. 586, 592 (N.D. Tex.
1995) (citing Mednick, 508 F.2d at 300, 301-02).
\440\ 331 U.S. at 706, 718.
\441\ Seafood, Inc., 867 F.2d at 877.
\442\ 861 F.2d at 451-53.
\443\ Seafood, Inc., 867 F.2d at 877.
\444\ Off Duty Police, 915 F.3d at 1058.
---------------------------------------------------------------------------
Several commenters supported the way the Department's proposal
framed consideration of the ability to work for others within the
control factor, including both direct and indirect means of limiting
individuals' ability to work for others. See, e.g., LA Fed & Teamsters
Locals; NWLC; Real Women in Trucking; UFCW. For example, the LA Fed
contended that the 2021 IC Rule ``misapplies the law'' by stating that
workers could be found to exercise ``substantial control'' by having
the ability to work for others, because ``[f]or decades, employees have
been able to have multiple jobs . . . without losing the protections
the law bestows on employees.'' The LA Fed supported the Department's
proposal, explaining that it ``rightly recognizes that workers' ability
to . . . work for others does not support independent contractor status
unless . . . facts actually demonstrate the worker's economic
independence.'' Similarly, the NWLC stated that the 2021 IC Rule
``impermissibly narrow[ed] the concept of control itself by focusing on
control over work exercised by the individual worker, as opposed to the
right to control by an employer'' and by using as an example a worker's
``substantial control'' through the ability to work for others despite
many decisions finding workers to be employees even though they worked
for others.
Some commenters requested that the Department provide a description
of this aspect of the control factor that would address the workers'
ability to work for others, not just the employer's actions, and state
that where an individual has the ability to work for others, including
competitors, this weighs in favor of independent contractor status.
See, e.g., CPIE; DoorDash; N/MA. For example, DoorDash commented that
the proposed rule ``adopts a one-sided approach: if a hiring entity
limits a worker's ability to work for others, that counts toward
employee status, but if a worker has the freedom to work for others,
that doesn't count toward independent contractor status.'' However,
Outten & Golden observed that employer limitations on the ability to
work for others cannot be viewed simply as the converse of a worker's
ability to work for others: ``The fact that an employer entity does not
prohibit outside work does not suggest independent contractor status
because having multiple jobs is compatible with an employment
relationship. However, being prohibited from working for others clearly
indicates the control of an employer, rather than an independent
contractor relationship.''
CWI also contended that the ``employer-centric focus'' of the
proposed regulatory text addressing a worker's ability to work for
others was ``misguided'' because, as the Department noted in the NPRM,
there is appellate authority acknowledging ``a worker's ability to work
for others--and thus develop multiple sources of business--as evidence
of independent contractor status.'' CWI did not feel it
[[Page 1705]]
was sufficient to address this factor by stating that a business
placing a limitation on the ability to work for others was evidence of
employee status because this failed to take into account ``the fact
that a worker may be simultaneously (and in a multi-app situation,
potentially at the exact same time) working for others.'' Moreover,
referencing Saleem, CWI contended that the fact that a worker could
earn income through work for others meant that the worker was ``less
economically dependent on his putative employer.''
The Department notes that the mere fact that a worker earns income
from more than one employer does not mean that the worker is not
economically dependent on one or all of those employers, as a matter of
economic reality. Economic dependence is based on an analysis of the
multifactor economic reality test, not whether a worker is less
financially dependent on the income they earn from any one
employer.\445\ As discussed under this factor and the permanence factor
(section V.C.3), it is well established that having multiple jobs is
not inconsistent with employee status under the FLSA, and in fact,
workers are often required to take on more than one job just to make
ends meet. Moreover, in Saleem, the case referenced in CWI's comment,
the Second Circuit recognized that: ``a company relinquishes control
over its workers when it permits them to work for its competitors.''
\446\ This case supports the importance of looking to whether a
potential employer restricts a worker's ability to work for others.
---------------------------------------------------------------------------
\445\ See supra, section V.B.
\446\ Saleem, 854 F.3d at 141.
---------------------------------------------------------------------------
Similarly, N/MA argued that the focus should be on the worker's
right to control and not the employer's control, because ``a freelancer
may perform multiple projects among multiple separate (and sometimes
competing) entities,'' and N/MA felt that the right to control factor
should consider ``the totality of the worker's business . . . including
control over whether the worker subcontracts any part of the work
necessary to complete a project, whether and how the worker may
advertise their services, and whether the worker determines to
prioritize, stagger, or overlap projects from multiple entities.'' The
Department views N/MA's comment to be advocating for a totality-of-the-
circumstances test that is congruent with the economic reality test,
including consideration not just of control, but also factors like
opportunity for profit or loss, investment, and use of specialized
skills in connection with business-like initiative. Whether a potential
employer restricts a worker's ability to work for others would
certainly not be the only consideration under control, nor would it
preclude consideration of the other factors listed in N/MA's comment.
Further, the Department notes that even within the control factor, the
regulatory text acknowledges that ``more indicia of control by the
worker favors independent contractor status.'' \447\
---------------------------------------------------------------------------
\447\ 29 CFR 795.110(b)(4).
---------------------------------------------------------------------------
Several commenters pointed out the increased fluidity in terms of
working for others that can be associated with using applications or
platforms to access work. DoorDash explained with respect to its
business that workers ``are free to work with anyone they want,
including our competitors. Most importantly . . . they can do it in
real time--even while they're logged into our app. If [they] find a
better work opportunity (or work that's simply more appealing to them),
they can switch back and forth.'' CEI noted that ``rideshare drivers
often work for different app-based companies simultaneously. Anyone who
calls for a ride using [Uber] has noticed the driver's car also bearing
a Lyft sticker. . . This situation is common in gig work, where the
companies are, in effect, bidding for the same workers.'' CEI further
noted the Department's concern that the framing in the 2021 IC Rule,
which indicated independent contractor status if a worker had the
ability to work for others, fails to distinguish between work
relationships where a worker has multiple jobs in which they are
dependent on each employer and do not exercise the control associated
with being in business for oneself, and relationships where the worker
has sought out multiple clients in furtherance of their business. CEI
stated: ``The framing does not distinguish between the two scenarios
because there is no significant distinction. A worker who has `sought
out multiple clients in furtherance of their business' is no less
dependent on those clients than the hypothetical worker with multiple
jobs.'' CEI suggested that the only solution to this problem was beyond
the scope of this rulemaking and would require Congress to amend the
FLSA to ``carve out specific professions.'' UFCW, however, did not view
``multi-apping'' as a unique concept that could not be addressed within
the economic reality test, arguing that a ``worker who attempts to
leverage earnings between two app-based platforms (`multi-apping') [is]
now simply dependent on two platform companies for which the employee
is waiting around for work to perform. This is not indicative of the
worker exercising initiative to develop a business for themselves
independent of these platform companies.''
The Department does not believe that the ability to use
applications or platforms to access work necessitates changing how the
ability to work for others is weighed when determining employee or
independent contractor status. The Department reiterates that as
always, the overall test is economic dependence. Even if a worker has
the ability to more fluidly move among potential employers while
performing work by using multiple applications, this does not
necessarily mean that the entire control factor weighs in favor of
independent contractor status. Nor is it dispositive of whether the
worker is in business for themself rather than being subject to the
control of the entity for whom they are performing work at any given
time.\448\
---------------------------------------------------------------------------
\448\ See, e.g., Razak, 951 F.3d at 145-46 (discussing disputed
facts regarding whether drivers could drive for other services
simultaneously--Uber contended drivers could drive for other
services, but drivers contended that they could not accept rides
from other platforms while online for Uber).
---------------------------------------------------------------------------
While SHRM posited that the Department's proposal ``adopts an
antiquated view of economic independence in its consideration of a
worker's ability to work for others under the control factor'' because
``low-wage earners may, in fact, gain independence by maintaining the
flexibility to work with multiple hiring entities,'' NELP observed that
in ``low-wage industries, particularly in services such as
transportation, delivery, or home care, many workers juggle multiple
jobs with multiple entities not as an exercise of their own business
judgment but as a necessity to cobble together a living wage in an
underpaying economy.'' For example, the LCCRUL & WLC described a
current client who ``often has to work for a variety of gig economy
jobs simultaneously, such as Uber Eats, GoPuff, Instacart, and Caviar,
to keep her finances afloat.'' Further supporting the notion that the
ability to work for multiple employers simultaneously does not
necessarily indicate independent contractor status, the NDWA explained
that home care workers may work for more than one third-party agency at
the same time, ``given the scheduling irregularities and occasional
disruptions in assignments that are an unavoidable part of the in-home
personal care industry.'' However, it noted that ``[w]hile home care
workers may choose to have multiple employers at the same time, it does
not defeat the
[[Page 1706]]
conclusion that they are employees rather than independent
contractors.''
After considering these comments, the Department declines to add a
statement to the regulatory text stating that a worker's ability to
work for others indicates independent contractor status. The Department
believes that having multiple jobs can too often be necessary for
financial survival in the modern economy, as many commenters and courts
have noted.\449\ For example, an employee may have two jobs, several
part-time jobs, or a regularly-recurring seasonal job in addition to a
full-time employment situation, and an independent contractor may also
have multiple customers based on their exercise of business initiative.
Thus, the mere ability to work for others is not necessarily an
indicator of employee or independent contractor status.
---------------------------------------------------------------------------
\449\ See supra, section V.C.3.
---------------------------------------------------------------------------
Some commenters urged the Department to create an exception for
industries like trucking where legal requirements make it more
complicated for drivers to use the same equipment to work for another
motor carrier. See e.g., NHDA, Scopelitis, Garvin, Light, Hanson &
Feary. However, Real Women in Trucking observed that ``the ability to
work for others is key to whether a driver is economically dependent or
not,'' noting that ``the Department's emphasis that both direct
prohibitions on working for others and indirect barriers are relevant
to this factor'' was ``[e]specially important'' because their members
experienced working arrangements where they were nominally permitted to
carry loads for other carriers, but ``this flexibility is not available
in practice.''
This situation was addressed by the Seventh Circuit in a recent
decision where the company retained sole discretion to deny the
driver's request to haul freight for another carrier, and it also
reserved the right to arrange for third-party monitoring of compliance
with federal safety regulations at the driver's expense if he drove for
other carriers.\450\ Further, even if the driver received approval to
haul for another carrier and could have afforded to pay for third-party
compliance monitoring, he would have been required to remove or cover
the company's identification on his truck and to display his own or the
other company's information.\451\ The court determined that these
facts, showing that the company's ``system for approving and monitoring
trips made for other carriers was so complex and onerous that Drivers
could not, as a practical matter,'' haul loads for other carriers,
weighed in favor of employee status.\452\
---------------------------------------------------------------------------
\450\ Brant, 43 F.4th at 669-70.
\451\ Id.
\452\ Id. (analyzing the driver's ability to haul freight for
other carriers under the opportunity for profit or loss factor
because it was relevant to whether the driver could exercise his
managerial skill to increase profits by selecting more favorable
loads or by driving for other carriers) (internal quotation marks
omitted).
---------------------------------------------------------------------------
Although the Department is recognizing in this final rule that
actions taken by a potential employer for ``the sole purpose of
complying with a specific, applicable Federal, State, Tribal, or local
law or regulation'' are not indicative of control, the Department
continues to believe that where a business goes beyond compliance with
the law or regulation in a way that serves the business's own
compliance methods--for example, the system described in Brant that
imposed several restrictions on the driver's ability to haul freight
for others, including requiring the driver to pay for a third-party
monitor--this may be indicative of control. Therefore, the Department
declines to adopt a more blanket, imprecise provision pertaining to
industry-specific limitations on the ability to work for others.
Moreover, commenters and the Brant decision have prompted the
Department to conclude that the regulatory proposal addressed indirect
means of limiting workers' ability to work for others too narrowly, as
it only would have recognized situations in which the potential
employer ``places demands on workers' time'' that do not allow them to
work for others.\453\ As NELP noted, ``whether a worker is truly free
to work for others requires an examination of the facts on the ground;
businesses may place demands on time or monetary penalties that
effectively preclude a worker from seeking other work.'' Because
businesses may impose financial demands or other restrictions on
workers' ability to work for others such as the ``complex and onerous''
system in Brant--in addition to demands on time that do not allow them
to work for others--the Department is revising the regulatory language
in the final rule to encompass such situations. The revised text
removes the word ``time'' and adds the words ``or restrictions'' after
``or places demands'' to more accurately capture indirect means of
limiting workers' ability to work for others.
---------------------------------------------------------------------------
\453\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
---------------------------------------------------------------------------
UFCW urged the Department to add additional considerations that are
related to a potential employer limiting a worker's ability to work for
others. First, it contended that platform companies essentially coerce
workers to continuously accept work (which would preclude them from
working for others) by threatening to terminate workers from the
platform or reduce the availability of work shifts unless the worker
continuously accepts jobs. Additionally, it noted that an employer may
prohibit workers from developing their own business or customer base,
for example, by prohibiting a platform worker from doing any
independent work for customers they connect with through the app. The
LCCRUL & WLC also described clients--a tow truck driver and a cannabis
dispensary delivery driver--who similarly were not able to work for
others because they were expected to be on call all day waiting for
assignments. The Department agrees that these types of facts could be
relevant to whether a potential employer has either explicitly limited
the worker's ability to work for others or has placed demands or other
restrictions on workers that do not allow them to work for others.
However, the Department views these as encompassed within the final
regulatory text, such that there is no need to add additional language.
Finally, OOIDA encouraged the Department to view the ability to
work for others within a working arrangement as ``relevant, but not
determinative of the relationship'' and as ``one of several
considerations within the `control' factor.'' The Department reaffirms
that the ability to work for others is just one consideration within
the control factor and agrees with the commenter that it is relevant,
but not determinative, of whether the worker is an employee or
independent contractor. Moreover, the control factor itself is not
determinative of a worker's status--the economic reality test is a
totality-of-the-circumstances test where no one factor is
dispositive.\454\
---------------------------------------------------------------------------
\454\ See, e.g., Flint Eng'g, 137 F.3d at 1441 (``None of the
factors alone is dispositive; instead, the court must employ a
totality-of-the-circumstances approach.'').
---------------------------------------------------------------------------
The Department is finalizing the ability to work for others portion
of control factor at Sec. 795.105(b)(4) with the revisions discussed
herein.
Example: Nature and Degree of Control
A registered nurse provides nursing care for Alpha House, a nursing
home. The nursing home sets the work schedule with input from staff
regarding their preferences and determines where in the nursing home
each nurse will work. Alpha House's internal policies prohibit nurses
from working for other nursing homes while employed with
[[Page 1707]]
Alpha House in order to protect its residents. In addition, the nursing
staff are supervised by regular check-ins with managers, but nurses
generally perform their work without direct supervision. While nurses
at Alpha House work without close supervision and can express
preferences for their schedule, Alpha House maintains control over when
and where a nurse can work and whether a nurse can work for another
nursing home. These facts indicate employee status under the control
factor.
Another registered nurse provides specialty movement therapy to
residents at Beta House. The nurse maintains a website and was
contacted by Beta House to assist its residents. The nurse provides the
movement therapy for residents on a schedule agreed upon between the
nurse and the resident, without direction or supervision from Beta
House, and sets the price for services on the website. In addition, the
nurse simultaneously provides therapy sessions to residents at Beta
House as well as other nursing homes in the community. The facts--that
the nurse markets their specialized services to obtain work for
multiple clients, is not supervised by Beta House, sets their own
prices, and has the flexibility to select a work schedule-indicate
independent contractor status under the control factor.
5. Extent to Which the Work Performed Is an Integral Part of the
Potential Employer's Business (Sec. 795.110(b)(5))
In Sec. 795.110(b)(5), the Department proposed to return to
framing this factor as ``whether the work performed is an integral part
of the employer's business.'' \455\ The Department emphasized its
belief that its proposed articulation of the integral factor--which
considers whether the work is ``critical, necessary, or central to the
employer's principal business''--better reflects the economic reality
case law and is more consistent with the totality-of-the-circumstances
approach to determining whether a worker is an employee or an
independent contractor than the 2021 IC Rule's ``integrated unit of
production'' framing.\456\
---------------------------------------------------------------------------
\455\ 87 FR 62275 (proposed Sec. 795.110(b)(5)).
\456\ Id. at 62253.
---------------------------------------------------------------------------
The Department explained that the 2021 IC Rule's integral
formulation relied on a rigid reading of Rutherford (which noted that
the work was ``part of an integrated unit of production'' of the
employer).\457\ Having further considered the case law, the Department
concluded in the NPRM that the 2021 IC Rule's approach did not reflect
Supreme Court or federal appellate court precedent.\458\ As the 2021 IC
Rule acknowledged, the Supreme Court's decision in Silk determined that
coal ``unloaders'' were employees of a retail coal company as a matter
of economic reality in part because they were ``an integral part of the
business[ ] of retailing coal.'' \459\ The 2021 IC Rule interpreted
this language as merely articulating a part of the overall inquiry
rather than a specific factor useful for deciding the question of
economic dependence or independence. But as the Department explained in
the NPRM, the Court in Silk explicitly considered the fact that the
workers were an ``integral part'' of the business to be relevant to the
inquiry, and later courts likewise found this framing to be useful to
the economic reality analysis--so much so that most federal courts of
appeals routinely list ``integral'' as an enumerated factor, but no
court of appeals uses ``integrated unit'' for this factor.\460\
Additionally, the NPRM explained that the Department has also used this
proposed approach to the integral factor for decades and has
consistently found it to be a useful factor in the economic reality
analysis.\461\ For these reasons, the Department proposed to eliminate
the ``integrated unit'' factor as an enumerated factor and instead to
restore the integral factor, understood by courts as being focused on
whether the work is critical, necessary, or central to the potential
employer's business.\462\
---------------------------------------------------------------------------
\457\ Id. at 62254; Rutherford, 331 U.S. at 729.
\458\ 87 FR 62254; see Silk, 331 U.S. at 716 (unloaders were
``an integral part of the business[] of retailing coal''); see also
Off Duty Police, 915 F.3d at 1055; McFeeley, 825 F.3d at 244;
Scantland, 721 F.3d at 1319; Flint Eng'g, 137 F.3d at 1443; Superior
Care, 840 F.2d at 1060-61; Lauritzen, 835 F.2d at 1537-38;
DialAmerica, 757 F.2d at 1385; Driscoll, 603 F.2d at 755.
\459\ 331 U.S. at 716.
\460\ Id.; see supra section II.B.2.
\461\ See, e.g., WHD Fact Sheet #13 (July 2008) (listing ``[t]he
extent to which the services rendered are an integral part of the
principal's business'' as a factor).
\462\ 87 FR 62254.
---------------------------------------------------------------------------
The Department explained that most courts adopt a common-sense
approach to determining whether the work or service performed by a
worker is an integral part of a potential employer's business.\463\ For
example, if the potential employer could not function without the
service performed by the workers, then the service they provide is
integral.\464\ The Department noted that ``[s]uch workers are more
likely to be economically dependent on the potential employer because
their work depends on the existence of the employer's principal
business, rather than their having an independent business that would
exist with or without the employer.'' \465\ Additionally, courts also
look at whether the work is important, critical, primary, or necessary
to the potential employer's business.\466\ In most cases, if a
potential employer's primary business is to make a product or provide a
service, then the workers who are involved in making the product or
providing the service are performing work that is integral to the
potential employer's business.\467\
---------------------------------------------------------------------------
\463\ Id. at 62253.
\464\ See, e.g., Off Duty Police, 915 F.3d at 1055 (rejecting
employer's argument that it was merely an agent between its
customers and the officers because the company ``could not function
without the services its workers provide''); McFeeley, 825 F.3d at
244 (``[E]ven the clubs had to concede the point that an `exotic
dance club could [not] function, much less be profitable, without
exotic dancers.' '') (quoting Secretary of Labor's Amicus Br. in
Supp. of Appellees at 24); Capital Int'l, 466 F.3d at 309 (finding
security guards were integral to a business where company ``was
formed specifically for the purpose of supplying'' private
security); cf. Johnson, 371 F.3d at 730 (upholding jury verdict
finding independent contractor status for security guards working
for government housing authority and noting, with regard to integral
factor, that the housing authority ``had functioned for years before
and after the program'' under which security guards were hired).
\465\ 87 FR 62253. See, e.g., Brock v. Lauritzen, 624 F. Supp.
966, 969 (E.D. Wis. 1985), aff'd, 835 F.2d 1529 (7th Cir. 1987)
(finding that cucumber harvesters were integral to cucumber farmer's
business and were ``economically dependent upon Lauritzen's business
for their work during the cucumber harvest season'').
\466\ See, e.g., Alpha & Omega, 39 F.4th at 1085 (noting that
this factor ``turns `on whether workers' services are a necessary
component of the business' '') (quoting Paragon, 884 F.3d at 1237);
Flint Eng'g, 137 F.3d at 1443 (finding rig welders' work to be ``an
important, and indeed integral, component of oil and gas pipeline
construction work'' because their work is a critical step on every
transmission system construction project); Lauritzen, 835 F.2d at
1537-38 (``It does not take much of a record to demonstrate that
picking the pickles is a necessary and integral part of the pickle
business[.]''); cf. Paragon, 884 F.3d at 1237 (``Because [the
worker]'s management of the pecan grove was not integral to the bulk
of Paragon's [construction] business, this factor supports
consideration of [the worker] as an independent contractor.'').
\467\ See, e.g., Superior Care, 840 F.2d at 1059 (for business
that provided on-demand health care personnel, the nurses provided
were themselves integral to the business).
---------------------------------------------------------------------------
The Department emphasized that the judicial treatment of the
integral factor reflects the understanding that a worker who performs
work that is integral to an employer's business is more likely to be
employed by the business, whereas a worker who performs work that is
more peripheral to the employer's business is more likely to be
independent from the employer.\468\ Finally, the Department
[[Page 1708]]
noted that while it is only one part of the overall inquiry, courts
continue to find the integral factor useful for evaluating economic
dependence.
---------------------------------------------------------------------------
\468\ See, e.g., Keller, 781 F.3d 799 at 815 (``The more
integral the worker's services are to the business, then the more
likely it is that the parties have an employer-employee
relationship.''); DialAmerica, 757 F.2d at 1385 (``workers are more
likely to be `employees' under the FLSA if they perform the primary
work of the alleged employer'').
---------------------------------------------------------------------------
Many commenters expressed agreement with the Department's decision
to return to the framing of this factor as the extent to which the work
performed is an integral part of the potential employer's business.
See, e.g., AFL-CIO; Century Foundation; IBT; NDWA; NELP; NWLC; ROC
United; State AGs; Transport Workers Union of America. For example,
NELP commented that it agreed with the statement in the NPRM that ``if
the [employer] could not function without the service performed by the
workers, then the service they provide is integral,'' explaining that
this factor ``recognizes a simple truth: workers are more likely
employees under the FLSA if `they perform the primary work of the
alleged employer.' '' AFL-CIO similarly commented that it ``strongly
supports the return of this factor to its `longstanding Departmental
and judicial interpretation, rather than the `integrated unit of
production' approach that was included in the 2021 IC Rule.' '' The
Century Foundation commented that ``[t]his factor helpfully looks at
whether the work performed is an essential or critical aspect of the
business,--i.e., whether the work is critical to the main service or
product that the business provides.'' NWLC agreed with the NPRM's
rejection of the 2021 IC Rule's ``integrated unit'' framing of this
factor, stating that the Department's proposal ``appropriately
considers whether the work performed is an essential or critical aspect
of the business--i.e., whether the work is critical to the main service
or product that the business provides.'' NWLC explained that the NPRM's
``framing is consistent with the long line of court decisions finding a
worker's performance of work that is integral to the employer's
business to be an indicator of employee status, reflecting the
commonsense understanding that employers are more likely to hire
employees to perform the tasks involved in providing the core products
and/or services that their business offers.''
IBT expressed support for the Department's proposed articulation of
the integral factor and recommended ``that guidance for this factor
make explicitly clear the focus of the factor is on the work performed,
not the individual worker.'' Outten & Golden also stated that the final
regulatory text should incorporate the text from the NPRM stating that
``the focus of the integral factor is on the work performed, not the
individual worker.'' As the Department explained in the NPRM, this
approach evaluates whether the worker performs work that is central to
the employer's business, not whether the worker possesses some unique
qualities that render them indispensable as an individual.\469\ An
individual worker who performs the work that an employer is in business
to provide but is just one of hundreds or thousands who perform the
work is nonetheless an integral part of the employer's business even if
that one worker makes a minimal contribution to the business when
considered among the workers as a whole.\470\ The Department believes
that the proposed regulatory text, which states that ``[t]his factor
considers whether the work performed is an integral part of the
employer's business'' rather than ``whether any individual worker in
particular is an integral part of the business'' sufficiently captures
this understanding of the integral factor.
---------------------------------------------------------------------------
\469\ 87 FR 62254. See, e.g., Montoya v. S.C.C.P. Painting
Contractors, Inc., 589 F. Supp. 2d 569, 581 (D. Md. 2008)
(explaining that ``this factor does not turn on whether the
individual worker was integral to the business; rather, it depends
on whether the service the worker performed was integral to the
business'').
\470\ 87 FR 62254 (giving the example of one operator among many
in a call center).
---------------------------------------------------------------------------
Some commenters urged the Department to maintain the 2021 IC Rule's
framing of this factor as ``integrated unit of production,'' expressing
the view that the 2021 IC Rule's approach is more consistent with Silk
and Rutherford. See e.g., Freedom Foundation; Scalia Law Clinic; U.S.
Chamber; see also NELA; Outten & Golden. For example, Scalia Law Clinic
commented that Rutherford and Silk ``make clear that the `integral'
factor concerns whether a worker is part of an integrated unit of
production, not whether she is economically important to a business
operation.'' The U.S. Chamber commented that ``focusing the integral
prong on an integrated unit of production is fully supported by the
extant decisional law'' stating that ``[t]he Supreme Court has
described this prong as considering whether the worker is part of an
`integrated economic unit' in the putative employer's business.'' The
Freedom Foundation similarly commented that the Supreme Court in
Rutherford espoused the proper articulation of the factor as
``integrated unit of production'' explaining that `` `[i]ntegral' and
`integrated' could be described as near homonyms . . . they are
etymologically related words that sound similar but have different
meanings.'' The Freedom Foundation further explained that ``
`[i]ntegral,' in the sense described by the Department . . . means
`necessary to make a whole complete; essential, fundamental;' whereas
`integrated' in the sense used by the Supreme Court in Rutherford means
`with various parts linked or coordinated.' '' The Freedom Foundation
commented that it believes the Department misrelies on Silk to support
its proposed framing of the integral factor, noting that ``Silk did not
include integrality in its list of factors, nor did it apply it as a
factor of decision.'' See also I4AW (factor was originally articulated
as ``integrated unit of production'' but ``[o]ver the years . . .
morphed, without explanation, into whether a role was `integral' to the
business hiring the putative contractor. . . . [T]his scrivener's error
has created greater confusion for businesses that want to be or work
with ICs and has made it more difficult for courts to permit
independent contract work'').
NELP agreed with the Department's framing of the integral factor
but stated that ``[t]o provide further clarity on this factor, the DOL
should recognize that the question of integration is not an either/or
proposition'' noting that ``[w]hether the work is integral such that
the business could not offer its goods or services without it . . . is
important to consider'' but ``it does not define the outer limits of
this factor.'' NELP explained that ``[a]s the Supreme Court has
recognized[,] whether the work is part of an `integrated unit of
production' also informs whether the worker is more likely to be an
employee or independent contractor.''
After considering these comments, the Department is retaining the
approach proposed in the NPRM, which considers whether the work
performed by the worker is an integral part of the employer's business.
As discussed below, the Department believes that its proposed approach
to the integral factor is more consistent with longstanding judicial
precedent and decades of Department guidance than the 2021 IC Rule's
articulation of this factor, which focused on whether the worker is
part of a ``integrated unit of production.'' The Department notes,
however, that it does not intend to preclude consideration of the
potential relevance of the Supreme Court's discussion of the
``integrated unit of production'' in Rutherford. Consistent with the
totality-of-the-circumstances approach, under which all relevant facts
should be considered, the Department recognizes that the extent to
which a worker is
[[Page 1709]]
integrated into a business's production processes may be relevant to
the question of economic dependence or independence and may be
considered under any relevant enumerated factor, or as an additional
factor. For example, as the Department expressed in the NPRM,
indicators that a worker is integrated into an employer's main
production processes, such as whether the worker is required to work at
the employer's main workplace or wear the employer's uniform, may
illustrate an employer's control over the work being performed.\471\
---------------------------------------------------------------------------
\471\ 87 FR 62254.
---------------------------------------------------------------------------
Commenters' claims that the 2021 IC Rule's emphasis on the
``integrated unit of production'' is more consistent with applicable
judicial precedent than the approach proposed in the NPRM stands in
sharp contrast to decades of judicial precedent and Departmental
guidance. The Supreme Court's decision in Silk determined that coal
``unloaders'' were employees of a retail coal company as a matter of
economic reality in part because they were ``an integral part of the
business [ ] of retailing coal.'' \472\ Some commenters took the
position that the Court in Silk merely mentioned the integral nature of
the work performed but did not intend for it to be a factor considered
in the overall inquiry. However, the Supreme Court in Silk emphasized
that its list of factors was not intended to be exhaustive, but instead
consisted of factors the Court believed would be useful to courts and
agencies applying the economic reality test in the future. Moreover,
the Court explicitly considered it relevant to the determination of
employment status that the coal unloaders in Silk were an ``integral
part'' of the retail coal business, and the majority of federal courts
of appeals have likewise adopted this consideration as a relevant
factor for the inquiry into economic dependence or independence.\473\
---------------------------------------------------------------------------
\472\ 331 U.S. at 716.
\473\ See supra section II.B.2.
---------------------------------------------------------------------------
Commenters attempted to cast aside decades of judicial precedent by
employing an overly rigid understanding of Rutherford, an understanding
that no federal court of appeals has adopted as the standard for this
factor in the decades since Silk and Rutherford. As the Department has
emphasized, the approach in this final rule is underpinned by a desire
to bring consistency and clarity to the economic reality inquiry by
aligning this rule with the approach taken by the majority of federal
appellate case law. Nearly all the federal courts of appeals expressly
consider whether the work performed is an integral part of the
potential employer's business as a sixth enumerated factor in the
economic dependence or independence inquiry.\474\ The Fifth Circuit has
not expressly enumerated the integral factor but has at times assessed
integrality as an additional relevant factor.\475\ The Department has
also long considered whether the work performed is an integral part of
the employer's business as a factor in the economic realities'
inquiry.\476\ For example, in one of the Department's earliest
pronouncements of the economic reality factors--a 1949 WHD opinion
letter distilling the six ``primary factors which the Court considered
significant'' in Rutherford and Silk--the first factor enumerated was
``the extent to which the services in question are an integral part of
the `employer[']s' business.'' \477\
---------------------------------------------------------------------------
\474\ See e.g., Superior Care, 840 F.2d at 1058-59; DialAmerica,
757 F.2d at 1382-83; McFeeley, 825 F.3d at 241; Off Duty Police, 915
F.3d at 1055; Lauritzen, 835 F.2d at 1537-38; Alpha & Omega, 39
F.4th at 1082; Driscoll, 603 F.2d at 754; Sureway, 656 F.2d at 1368;
Paragon, 884 F.3d at 1235; Scantland, 721 F.3d at 1311-12; Morrison,
253 F.3d at 11.
\475\ See, e.g., Hobbs, 946 F.3d at 836.
\476\ See WHD Op. Ltr. (June 23, 1949); 27 FR 8033; WHD Fact
Sheet #13 (1997); WHD Fact Sheet #13 (July 2008); AI 2015-1,
available at 2015 WL 4449086.
\477\ WHD Op. Ltr. (June 23, 1949).
---------------------------------------------------------------------------
The Department disagrees with the commenters' contention that the
approach proposed by the Department and taken by nearly every federal
court of appeals is a result of a misunderstanding of Rutherford, Silk,
the FLSA, and the economic reality inquiry. The historical approach to
this factor by the Department and the courts stands in stark contrast
to the fact that not a single federal court of appeals identifies
``integrated unit of production'' as the standard for this enumerated
factor of the economic reality test. Commenters identified one federal
appellate decision that they contend applied Rutherford's ``integrated
unit of production'' as the standard for this factor in an independent
contractor inquiry under the FLSA, Tobin v. Anthony-Williams Mfg.
Co.\478\ See e.g., CPIE; CWI; DSA; IBA; N/MA. The decision in Tobin
does not, however, stand for the proposition that the relevant standard
for this factor under the enumerated factors of the economic reality
test is whether workers are part of an ``integrated unit of
production.'' Instead, Tobin was a factually analogous case to
Rutherford where the Eighth Circuit found it relevant to the overall
economic reality inquiry that the timber haulers and wood workers were
part of one integrated unit of production.\479\ Consistent with the
Department's discussion above, Tobin illustrates how Rutherford's
``integrated unit of production'' framing may be considered when
relevant to the question of economic dependence. Moreover, the Eighth
Circuit has elsewhere recognized that the extent to which the work
performed is integral to the employer's business is one of the
enumerated factors under the economic reality test.\480\
---------------------------------------------------------------------------
\478\ 196 F.2d 547, 550 (8th Cir. 1952) (analyzing whether
timber haulers and wood workers were ``an integrated part of
defendant's production set-up'').
\479\ Id.
\480\ Alpha & Omega, 39 F.4th at 1082 (stating ``[w]e assume
without deciding that the economic realities test is appropriate in
determining whether a worker is an employee or independent
contractor under the FLSA'' and articulating the sixth relevant
factor as ``the degree to which the alleged employee's tasks are
integral to the employer's business.'').
---------------------------------------------------------------------------
A number of commenters expressed concerns that the Department's
proposed articulation of the integral factor was an attempt to adopt
one of the prongs of the ABC test. See, e.g., 4A's; Club for Growth;
Fight for Freelancers; NRF & NCCR; U.S. Chamber; WSTA. For example, the
U.S. Chamber commented that ``it appears that the Proposed Rule's shift
away from the Supreme Court's focus on an `integrated unit' to whether
the work is `critical, necessary, or central' is a thinly veiled
attempt to inject Prong B of the ABC test--whether the work takes place
outside the usual course of the putative employer's business--into the
analysis.'' The Club for Growth, NRF & NCCR, and the U.S. Chamber
contended that the Department's proposal for the integral factor was at
odds with the Department's explanation elsewhere in the NPRM that the
Department believes the ABC test to be inconsistent with Supreme Court
precedent interpreting the FLSA, and as such, cannot be adopted without
Supreme Court or congressional alteration of the applicable analysis
under the FLSA. Fight for Freelancers also commented that ``[the
integral factor] is the most likely to misclassify legitimate
independent contractors as employees, because it is so similar to the
B-prong of the ABC Test.''
Although there may be conceptual overlap between the Department's
proposed integral factor and Prong B of the ABC test, as discussed
above, the Department is not adopting an ABC test. The assertion that
the Department's proposal regarding the integral factor is an attempt
to insert Prong B of an ABC test in this rule is baseless. First, the
integral factor is but one factor in a
[[Page 1710]]
multifactor inquiry, where no one factor is dispositive, and where the
totality of the circumstances is considered to determine the ultimate
question of whether a worker is economically dependent on the potential
employer for work or is in business for themself. The totality-of-the-
circumstances test thus stands in stark contrast to an ABC test, in
which each element of the test is dispositive. As the Department
expressly recognized in the NPRM, and reaffirms here, not all workers
who perform integral work are employees, and there may be times when
this factor misaligns with the ultimate result. This is entirely
consistent with the totality-of-the-circumstances approach.\481\ Prong
B of the ABC test, on the other hand, is dispositive of employment
status. If the hiring entity cannot show that the work being performed
by the worker is outside the usual course of the hiring entity's
business, employment status is found regardless of the other factors of
the ABC test.\482\ Thus, while a worker can perform work that is
integral to the potential employer's business and still be considered
an independent contractor under this final rule, a worker performing
work in the usual course of their potential employer's business will
always be an employee under the ABC test. In this final rule, the
Department is returning to the longstanding understanding of the
integral factor consistent with decades of court precedent and
Department guidance applying the economic reality test under the FLSA.
Again, the Department is not adopting an ABC test.
---------------------------------------------------------------------------
\481\ See, e.g., Meyer, 607 F. App'x at 123 (``Although tennis
umpires are an integral part of the U.S. Open,'' other factors
supported determination that umpires were independent contractors.);
Perdomo v. Ask 4 Realty & Mgmt., Inc., No. 07-20089, 2007 WL
9706364, at *4 (S.D. Fla. Dec. 19, 2007) (construction worker's work
was integral to remodeling business, but economic reality factors as
a whole indicated independent contractor status).
\482\ 87 FR 62231.
---------------------------------------------------------------------------
Several commenters expressed concerns that the integral factor
would lead to virtually every worker being classified as an employee
since most, if not all, work performed for a business could
theoretically be considered critical or necessary to an employer's
business. See, e.g., Alabama Forestry Association; FMI; Goldwater
Institute; MEP; NAFO; Scalia Law Clinic; U.S. Chamber. For example,
Scalia Law Clinic commented that ``[a]ll work for a business is in some
sense `critical, necessary, or central to . . . [a] business,' because
businesses only hire workers that add economic value.'' The U.S.
Chamber similarly commented that ``[t]he Department has mistakenly
equated `integral' with `critical, necessary, or central to the
employer's business'. . . . Taken literally, this could include every
independent contractor, because a business would not hire an
independent contractor unless it was `necessary' to do so.'' NAFO
similarly commented ``[t]his new interpretation makes it impossible to
understand or apply the `integral' factor'' noting that the
Department's rule ``would effectively subsume virtually every
contracting or subcontracting relationship because all subcontractors
perform a function that the entity deems `integral' to a product or a
service--otherwise, it would not contract with them.'' MEP further
explained that ``[t]his is particularly the case with small businesses
that need to rely on outside expertise.'' As an example, MEP noted that
IT, security, services, marketing, or legal consulting services, may
not be the main intent of the business, but they may be critical or
necessary to the business.
As a threshold matter, the Department reiterates that, as with the
other enumerated factors of the economic reality test, the integral
factor is just one area of inquiry that is considered along with the
other factors to reach the ultimate determination of economic
dependence or independence. The Department again emphasizes that it is
``not always true that workers whose work is integral are employees.''
\483\ Additionally, commenters' assertions that this factor would
subsume every contracting relationship and would always weigh in favor
of employee status are misguided. The commenters misapply the
Department's articulation of this factor by suggesting that virtually
every type of work commissioned by a business would be considered
integral, since businesses do not contract for work that isn't
necessary or critical to their functioning. The key limiting word that
commenters appear to overlook is ``principal.'' As illustrated by the
example the Department provided for this factor in the NPRM, which is
also part of this final rule, while it might in some sense be critical
or necessary for a business to hire an accountant to manage their tax
obligations, for example, this accounting work may nonetheless not be
critical, necessary, or central to the potential employer's principal
business. To further illustrate, a coffee shop's ``principal'' business
is making, selling, and serving coffee. A coffee shop might need window
washers to ensure clear views and a clean appearance for customers, but
the window washers are not generally integral to the principal business
of the coffee shop. Commenters maintaining that any work contracted by
a business is central, necessary, or critical to its functioning
overlook this important limitation of the integral factor--only work
that is critical, necessary, or central to the potential employer's
principal business is integral.
---------------------------------------------------------------------------
\483\ 87 FR 62253.
---------------------------------------------------------------------------
Some commenters requested clarification for their specific
industries, expressing concerns that in certain industries laws and
regulations mandate relationships such that the work performed would be
considered an integral part of the potential employer's business. For
example, NAR commented ``that the extent to which the work is performed
as an integral part of the employer's business within the real estate
industry context, is mandated by state laws and regulations.'' NAR
suggested the Department's rule ``should recognize such industry
nuances, understanding that compliance with state statutory and
regulatory provisions does not conflict with the ability to work as an
independent contractor under the test.'' ACLI similarly commented that
``if insurance and/or securities industry laws and regulations
compelling agents and registered representatives to affiliate with
licensed insurers and broker dealers were sufficient to negate
independent contractor status, this factor would perpetually weigh
against independent contractor status for insurance industry
relationships.'' ACLI requested the Department ``categorically affirm
that where laws or regulations dictate that an insurance worker must be
affiliated with a company in the same business . . . the integral part
of the business factor be viewed as at most a neutral factor.''
As the Department repeatedly states throughout this final rule, no
one factor is dispositive, and the ultimate question is whether as
matter of economic reality the worker is in business for themself or is
economically dependent on the potential employer for work. If the work
being performed is necessarily integral to the business of the
potential employer, the integral factor may weigh in favor of employee
status, but it is only one part of the inquiry. It is not dispositive.
Where the other factors weigh in favor of independent contractor
status, and the economic reality as a whole indicates the worker is in
business for themself, the overall conclusion may likely be that the
worker is an independent contractor; notably, compliance with specific,
applicable legal obligations is addressed in the discussion of the
control factor, section V.C.4.a of this preamble. This inquiry,
however, is specific to the
[[Page 1711]]
factual circumstances of a particular relationship, and the Department
cannot broadly make a determination about the status of an entire
sector of workers whose economic relationships are varied. Therefore,
the Department declines to provide exemptions from a particular factor
for certain industries.
After consideration of the comments received, the Department
reiterates its belief that the extent to which the work performed is an
integral part of the potential employer's business sheds light on the
ultimate inquiry of whether a worker is economically dependent on the
potential employer for work or is in business for themself. The
Department is returning to this framing of the integral factor in this
final rule because this approach is more consistent with Supreme Court
precedent, decades of judicial precedent in the federal courts of
appeals, and the totality-of-the-circumstances approach than the 2021
IC Rule's ``integrated unit of production'' framing of this factor. The
Department is adopting the integral factor as proposed in the NPRM with
minor wording changes to provide additional clarity (adding ``of the
business'' to the end of the second sentence of the regulatory text to
state ``whether the function they perform is an integral part of the
business'').
The Department is finalizing the integral factor (Sec.
795.110(b)(5)) as discussed herein.
Example: Extent to Which the Work Performed Is an Integral Part of the
Employer's Business
A large farm grows tomatoes that it sells to distributors. The farm
pays workers to pick the tomatoes during the harvest season. Because
picking tomatoes is an integral part of farming tomatoes, and the
company is in the business of farming tomatoes, the tomato pickers are
integral to the company's business. These facts indicate employee
status under the integral factor.
Alternatively, the same farm pays an accountant to provide non-
payroll accounting support, including filing its annual tax return.
This accounting support is not critical, necessary, or central to the
principal business of the farm (farming tomatoes), thus the
accountant's work is not integral to the business. Therefore, these
facts indicate independent contractor status under the integral factor.
6. Skill and Initiative (Sec. 795.110(b)(6))
The Department proposed that the skill and initiative factor
consider ``whether the worker uses specialized skills to perform the
work and whether those skills contribute to business-like initiative.''
The Department stated that ``[t]his factor indicates employee status
where the worker does not use specialized skills in performing the work
or where the worker is dependent on training from the employer to
perform the work.'' The Department further stated that, ``[w]here the
worker brings specialized skills to the work relationship, it is the
worker's use of those specialized skills in connection with business-
like initiative that indicates that the worker is an independent
contractor.'' \484\
---------------------------------------------------------------------------
\484\ See generally 87 FR 62275 (proposed Sec. 795.110(b)(6)).
---------------------------------------------------------------------------
The Department explained that the proposed regulatory text for this
factor would reaffirm the longstanding principle that this factor
indicates employee status where the worker lacks specialized skills.
The Department further explained that it believed that the application
of initiative in connection with specialized skills is useful in
answering the overarching inquiry of whether the worker is economically
dependent on the employer for work or is in business for themselves,
and that, as a result, it was ``proposing to reintegrate initiative
into this factor and no longer exclude consideration of initiative when
applying this factor, as provided in the 2021 IC Rule.'' The Department
then discussed the case law supporting its position that a worker's
lack of specialized skills when performing the work generally indicates
employee status, but also reiterated that no one factor is dispositive,
consistent with the overarching economic realities analysis. Because
both employees and independent contractors can be highly skilled and/or
bring specialized skills to the work relationship, the Department
discussed how focusing on whether the worker uses ``the specialized
skills in connection with business-like initiative'' is helpful in
distinguishing between the two classifications and further discussed
the case law and its prior guidance supporting such an approach.
Finally, the Department acknowledged that some facts showing an
exercise of initiative can be relevant under the skill factor and
another factor, and explained that considering facts showing an
exercise of initiative under more than one factor to the extent
appropriate depending on the facts of a case is consistent with and
furthers the totality-of-the-circumstances approach to assessing the
economic realities of the work relationship.\485\
---------------------------------------------------------------------------
\485\ See generally id. at 62254-57.
---------------------------------------------------------------------------
In addition to the numerous comments generally supporting the
Department's six-factor analysis, a number of commenters expressed
support for the NPRM's discussion of the skill and initiative factor.
For example, NDWA stated that the NPRM's analysis ``is helpful because
requiring initiative as well as skill better answers the questions of
whether a worker is in business for themselves.'' The Shriver Center
agreed. The Leadership Conference similarly stated that the NPRM's
analysis ``is helpful because we believe that all work is skilled work
in the colloquial sense of the term, and elevating the question of
whether a worker can exercise initiative as well as skill better
answers the question of whether a worker is in business for
themselves.'' Gale Healthcare Solutions advised that for nurses,
``adding business initiative to skill is an appropriate measure for
distinguishing workers who should be classified as independent
contractors . . . from those who, while they employ nursing skills in
the performance of their work, do not do so in combination with the
business-like initiative needed to grow a nursing practice.'' The LA
Fed & Teamsters Locals commented that the NPRM ``appropriately
recognizes that while a lack of specialized skills indicates employee
status, the exercise of such specialized skills does not indicate
independent contractor status absent the worker's using business-like
initiative in relation to those skills.'' And ROC United stated that
the NPRM's ``decision to include skill and initiative as a stand-alone
factor is another improvement over the 2021 Rule,'' and that the NPRM
``correctly recognizes that most work that does not require specialized
skills is not performed by independent contractors (e.g., security
guards, janitors, drivers, landscape workers, and call center
workers).'' See also NELP (expressing agreement with also including in
this factor ``an analysis of whether the worker uses those skills in
connection with `business-like initiative' ''); NWLC (commenting that
the NPRM would correctly restore consideration of initiative to this
factor and affirm that ``a true independent contractor is likely to
have specialized skills'' and use those skills to exercise ``business-
like initiative'').
Some other commenters that generally supported the Department's
proposal requested changes to or clarifications of the skill and
initiative factor. For example, SMACNA stated that ``[t]his is correct
as far as skills'' but added that, ``for workers who are highly
skilled, the `skill and initiative' factor should not be
[[Page 1712]]
used to weigh against employee status.'' The case law, however, does
not support the position that, for highly skilled workers, this factor
should not weigh against employee status.\486\ Real Women in Trucking
stated that it would appreciate clarification that, ``although truck
driving typically is not classified as `skilled' labor in other
contexts, it requires sufficient skill that, when combined with
business-like initiative, drivers are appropriately considered
independent contractors.'' The Department agrees that, consistent with
the analysis for this factor and its discussion of commercial drivers'
licenses (CDLs) below, this factor would indicate independent
contractor status for a worker who uses truck-driving skills in
connection with business-like initiative.
---------------------------------------------------------------------------
\486\ See id. (citing cases).
---------------------------------------------------------------------------
Farmworker Justice stated that ``courts have made clear that `most
farm labor jobs require little specialized skill' '' and ``encourage[d]
the DOL to include reference to such cases in the Final Rule, as it has
for workers in numerous other industries, such as janitors, security
guards, landscape workers, and call center workers.'' The Department
agrees with this characterization of the case law regarding ``most farm
labor jobs'' and notes that it has taken that position in its own
enforcement actions.\487\ IBT ``supports the Department's proposal for
this factor,'' ``applauds the Department's recognition that several
courts have already determined that certain workers including, drivers,
security guards, janitors, landscape workers, and call center workers
do not require specialized skills,'' and ``recommends that guidance for
this factor include specific instruction that asks courts to rely on
the previous decisions finding certain occupations do not require prior
experience; the workers are dependent on training from the employer to
perform the work; or that the work requires no training, and thus are
indicators that the relevant worker(s) lack(s) specialized skills.''
The Department declines to include that type of instruction as it is
unnecessary in light of these court decisions. Moreover, the Department
is not intending to identify any particular occupation as lacking
specialized skills in all cases.
---------------------------------------------------------------------------
\487\ See, e.g., Perez v. Howes, 7 F. Supp.3d 715, 724-25 (W.D.
Mich. 2014), aff'd, 790 F.3d 681 (6th Cir. 2015).
---------------------------------------------------------------------------
NELA stated that, ``[a]lthough the Proposed Rule correctly
reestablishes the link between skill and business-like initiative as
the raison d'etre of the factor, it does not make clear enough that the
factor only points to independent contractor status when such a link is
found.'' NELA suggested accordingly that the final rule ``would be
strengthened by incorporating a few key principles from the commentary
into the rule itself.'' NELA requested that sentences from the NPRM
stating that the ``fact that workers are skilled is not itself
indicative of independent contractor status'' and that ``[b]oth
employees and independent contractors may be skilled workers'' be added
to the regulatory text.\488\ The Department agrees that including
versions of these sentences in the regulatory text will help sharpen
the point that use of skills in connection with business-like
initiative is what distinguishes between independent contractors and
employees under this factor. Accordingly, the Department is revising
the last sentence of the proposed regulatory text for this factor to be
two sentences and to read (the italicized language is new as compared
to the NPRM): ``Where the worker brings specialized skills to the work
relationship, this fact is not itself indicative of independent
contractor status because both employees and independent contractors
may be skilled workers. It is the worker's use of those specialized
skills in connection with business-like initiative that indicates that
the worker is an independent contractor.''
---------------------------------------------------------------------------
\488\ The first sentence was at 87 FR 62255 (quoting Superior
Care, 840 F.2d at 1060); the second sentence was at 87 FR 62256.
---------------------------------------------------------------------------
The Department, however, believes that it is unnecessary to add the
following sentence that NELA suggested incorporating into the
regulatory text: ``To indicate possible independent contractor status,
the worker's skills should demonstrate that they exercise independent
business judgment.'' This sentence would be duplicative of the existing
regulatory text language that it ``is the worker's use of those
specialized skills in connection with business-like initiative that
indicates that the worker is an independent contractor.'' The
Department further believes that adding ``only'' to this existing
regulatory text language (as NELA requested) so that it would read that
it ``is only the worker's use . . .'' would not provide clarification,
especially considering the changes that the Department is making to the
regulatory text.
Numerous commenters opposed, disagreed with, and/or requested
changes to, or clarifications of, the proposed skill and initiative
factor. For example, CWI stated that, although it agrees that ``both
skill and initiative may play a role in the independent contractor
calculus,'' it ``fundamentally disagrees, however, that those
considerations should be treated as a standalone factor in the economic
realities calculus.'' And N/MA stated that ``[c]onsideration of skill
and initiative as a stand-alone factor creates confusion and ambiguity,
and results in the considerations under that factor being provided
outsized weight in the totality of the circumstances analysis.'' See
also Scalia Law Clinic (``The NPRM creates a new definition of the
`skill' factor that gives it greater weight, despite precedent to the
contrary.''). However, courts and the Department have invariably
included some version of skill and initiative as a separate and
distinct factor in their analyses for decades. Consistent with the
Department's repeated statements in this final rule, this factor should
not be given, as a predetermined matter, any different weight than any
of the other factors.\489\
---------------------------------------------------------------------------
\489\ See 29 CFR 795.110(a)(2) (``Consistent with a totality-of-
the-circumstances analysis, no one factor or subset of factors is
necessarily dispositive, and the weight to give each factor may
depend on the facts and circumstances of the particular case.'').
Scalia Law Clinic further commented that, ``[w]hile the 2021 [IC]
Rule did not prohibit considering a worker's skill, [it] rightly
excluded skill from its `core factors.' '' As explained in this
final rule and as the regulatory text provides, however, the
Department is rejecting the concept of ``core'' factors in favor of
not giving a predetermined weight to any factor. See id. The 2021 IC
Rule stated (and Scalia Law Clinic reiterated in its comment) that
skill should be given lesser weight because highly-skilled workers
can be employees and comparatively lesser-skilled workers can be
independent contractors. The Department believes, however, that this
is better addressed by reintegrating initiative into the skill
factor for the reasons explained in the NPRM and herein and by
reinforcing that all factors determine a worker's status.
---------------------------------------------------------------------------
SHRM commented that the NPRM ``purports to convert a standard
consideration utilized by myriad independent contractor classification
tests--the degree of skill required by the work--into an assessment of
a worker's business acumen.'' See also TheDream.US (describing a focus
on business-like initiative as an ``amorphous qualification to an
otherwise straightforward consideration''). SHRM expressed concern that
``[t]his is not only a drastic departure from a well-settled standard,
but it also negates the Proposed Rule's decree that a worker's
opportunity for profit or loss based on their managerial skill is
relevant to their classification as an employee or an independent
contractor.'' Many federal courts of appeals consider initiative as
part of this factor,\490\ and thus, it is by no means a
[[Page 1713]]
``drastic departure.'' Moreover, because both employees and independent
contractors may be skilled workers, considering whether a worker uses
specialized skills in connection with business-like initiative--rather
than considering only whether the worker has specialized skills--helps
to distinguish the worker's status and is probative of the ultimate
question of economic dependence.\491\ And there is no basis for
asserting that the skill and initiative factor ``negates'' the
relevance of the opportunity for profit or loss factor; both factors
are relevant to the analysis even if, as explained in the NPRM,\492\
some facts showing an exercise of initiative can be considered under
both factors.
---------------------------------------------------------------------------
\490\ See, e.g., Hobbs, 946 F.3d at 834; Parrish, 917 F.3d at
385; Cornerstone Am., 545 F.3d at 345; Express Sixty-Minutes, 161
F.3d at 305 (``The district court did not discuss initiative during
its evaluation of this factor. We agree with the Secretary that the
skill and initiative factor points toward employee status.''); Flint
Eng'g, 137 F.3d at 1443 (quoting Selker Bros., 949 F.2d at 1295);
Circle C. Invs., 998 F.2d at 328; Superior Care, 840 F.2d at 1060;
DialAmerica, 757 F.2d at 1387.
\491\ See, e.g., Scantland, 721 F.3d at 1318; Flint Eng'g, 137
F.3d at 1443; Selker Bros., 949 F.2d at 1295; Superior Care, 840
F.2d at 1060; DialAmerica, 757 F.2d at 1387.
\492\ See 87 FR 62256-57.
---------------------------------------------------------------------------
FSI, Coalition of Business Stakeholders, and NRF & NCCR similarly
objected to the inclusion of initiative in this factor. FSI stated that
including initiative in the skill factor contravenes Silk and that
``this alteration represents yet another way in which the Proposed Rule
repeatedly and improperly emphasizes `entrepreneurial drive' as an
overarching consideration across many factors.'' The Coalition of
Business Stakeholders and NRF & NCCR disagreed with the inclusion of
initiative in this factor and described it as ``inconsistent'' with
Silk. This factor, however, is consistent with Silk. The unloaders in
Silk performed ``simple tasks'' \493\ and were employees, in part, for
that reason; the Department's skill and initiative factor would
likewise point to employee status for such unloaders. The ``driver-
owners'' in Silk, on the other hand, seemed to use their truck-driving
skills in a business-like way, drove for multiple clients, and were
described by the Court as ``small businessmen.'' \494\ The Department's
skill and initiative factor would likewise point to independent
contractor status for such driver-owners.
---------------------------------------------------------------------------
\493\ 334 U.S. at 718.
\494\ Id. at 719.
---------------------------------------------------------------------------
FSI further stated that emphasizing ``entrepreneurial drive'' may
``lead to erroneous classification decisions because, among other
considerations, some workers may strongly prefer to work as independent
contractors, not for the flexibility to grow their businesses, but for
the flexibility to control their workloads and to work when they want
to.'' It added that, ``while initiative is an appropriate consideration
in favor of independent contractor status, its absence does not
indicate that a worker is not pursuing independence.'' 4A's similarly
stated that the ``the proposed rule could create uncertainty for
agencies that utilize legitimate independent contractor relationships
to carry out important business functions, but their freelance talent
does not have entrepreneurial drive or take personal initiative to
expand their business to working with other agencies or in house
marketing shops.'' The Department continues to believe that whether
workers with specialized skills use those skills in connection with
business-like initiative is probative of their status as employees or
independent contractors. Using such skills to ``grow'' or ``expand''
their work is a prime example of business-like initiative as the
commenters recognize, but there may be other ways in which workers can
use such skills in connection with business-like initiative. Of course,
the determination of a worker's status ultimately requires
consideration of the totality of the circumstances--not just the skill
and initiative factor.
DSA stated that ``[a]n individual could not have a specialized
skill, but still take the initiative of an independent business or vice
versa. If the rule were to go forward as proposed, and each factor
pointed in different directions, there could be confusion as to where a
ruling may come down on this one factor.'' The Department does not
believe this to be the case when applying the skill and initiative
factor. As explained in the NPRM, courts have often recognized that a
worker's lack of specialized skills to perform the work indicates that
the worker is an employee. As the Tenth Circuit, for example, has
explained, ``the lack of the requirement of specialized skills is
indicative of employee status.'' Flint Eng'g, 137 F.3d at 1443 (quoting
Snell, 875 F.2d at 811) (alteration omitted).\495\ When a worker lacks
specialized skills, this factor will indicate employee status even if
the worker exercises ``the initiative of an independent business.''
That initiative, of course, is very relevant to the overall analysis,
and the worker who lacks the specialized skills but exercises ``the
initiative of an independent business'' may very well be an independent
contractor after considering all of the factors. For those reasons,
there should be no confusion. The landscaper example in the NPRM's
discussion of the skill and initiative factor provides additional
explanation; the landscaper's landscaping work does not require
specialized skills, but the landscaper's use of initiative and other
facts may demonstrate that the landscaper is an independent
contractor.\496\
---------------------------------------------------------------------------
\495\ See also, e.g., Razak, 951 F.3d at 147; Off Duty Police,
915 F.3d at 1055-56; Iontchev, 685 F. App'x at 550; Walsh v. EM
Protective Servs. LLC, No. 3:19-cv-00700, 2021 WL 3490040, at *7
(M.D. Tenn. Aug. 9, 2021); Acosta v. New Image Landscaping, LLC, No.
1:18-cv-429, 2019 WL 6463512, at *6 (W.D. Mich. Dec. 2, 2019);
Acosta v. Wellfleet Commc'ns, LLC, No. 2:16-cv-02353-GMN-GWF, 2018
WL 4682316, at *7 (D. Nev. Sept. 29, 2018), aff'd sub nom. Walsh v.
Wellfleet Commc'ns, No. 20-16385, 2021 WL 4796537 (9th Cir. Oct. 14,
2021); Perez v. Super Maid, LLC, 55 F. Supp. 3d 1065, 1077-78 (N.D.
Ill. 2014); Harris v. Skokie Maid & Cleaning Serv., Ltd., No. 11 C
8688, 2013 WL 3506149, at *8 (N.D. Ill. July 11, 2013); Campos v.
Zopounidis, No. 3:09-cv-1138 (VLB), 2011 WL 2971298, at *7 (D. Conn.
July 20, 2011); Solis v. Int'l Detective & Protective Serv., Ltd.,
819 F. Supp. 2d 740, 752 (N.D. Ill. 2011).
\496\ 87 FR 62255 (``A landscaper, for example, may perform work
that does not require specialized skills, but application of the
other factors may demonstrate that the landscaper is an independent
contractor (for example, the landscaper may have a meaningful role
in determining the price charged for the work, make decisions
affecting opportunity for profit or loss, determine the extent of
capital investment, work for many clients, and/or perform work for
clients for which landscaping is not integral).''). DSA's statement
that the examples of welders in the NPRM's discussion of the skill
and initiative factor do not include the scenario where ``there is
no specialized skill, but the ability to independently market a
business'' overlooked the landscaper example that addresses that
scenario.
---------------------------------------------------------------------------
The U.S. Chamber similarly commented that the NPRM was ``wrong to
focus on `specialized skills' as probative in determining independent
contractor status.'' The U.S. Chamber further commented that ``a focus
on `the amount of skill required' separate from a worker's initiative
that impacts the worker's profits is an unnecessarily restrictive view
of independent work currently being performed in the U.S. economy.'' In
making these arguments, however, the U.S. Chamber did not rebut the
substantial case law relied on by the Department explaining that the
use of specialized skills in an independent or business-like way is
what makes this factor probative of employee or independent contractor
status. The Department grounds this factor in that case law. Citing
drivers among other occupations, the U.S. Chamber added that ``[e]ven
low-skilled workers can work as independent contractors if they have a
skill that they can market to customers.'' See also Scalia Law Clinic.
The Department agrees, as stated above, that workers lacking
specialized skills can be independent contractors when all of the
[[Page 1714]]
factors are considered. In addition, the Department continues to
believe that the landscaper example in the NPRM's discussion of this
factor, an example which the Department reaffirms, addresses that
scenario.\497\ Moreover, no one fact or factor determines whether a
worker of any skill level is an employee or independent contractor.
---------------------------------------------------------------------------
\497\ See also Iontchev, 685 F. App'x at 550-51 (finding that
the ``service rendered by the Drivers did not require a special
skill,'' but concluding that, ``[u]nder the totality of the
circumstances, the Drivers were not economically dependent upon [the
employer]'' and thus independent contractors).
---------------------------------------------------------------------------
MEP described the Department's articulation of this factor as
``unreasonably narrow'' and stated that the Department ``should
recognize a wide variety of skills that demonstrate an individual's
business-like initiative.'' It added that the Department ``should not
be in the business of judging which skills are considered specialized
or nonspecialized or place high or low value on the skills independent
contractors provide.'' As noted in the NPRM, courts have identified
some occupations where workers were found to lack specialized skills
(for example, security guards, traffic control officers, drivers,
janitorial work, landscaping, and call center workers).\498\ The
Department is seeking to ground this factor in that case law. Certain
occupations may often lack specialized skills, but the Department
cannot say that a particular occupation always lacks specialized
skills. For example, a explained below, drivers may often lack
specialized skills, but drivers with CDLs may have a specialized skill.
Moreover, determining whether a worker has specialized skills is just
one part of the inquiry, and workers who lack specialized skills may
still be independent contractors. The landscaper example referenced
above is one example of a worker who can be an independent contractor
even if the work is unskilled, and this outcome is possible in other
industries because a worker's classification is ultimately determined
by application of all of the factors.
---------------------------------------------------------------------------
\498\ See, e.g., Razak, 951 F.3d at 147 (noting that it ``is
generally accepted that `driving' is not itself a `special skill' ''
in determining that the skill factor weighs in favor of employee
status); Off Duty Police, 915 F.3d at 1055-56 (noting that ``[t]he
skills required to work for ODPS are far more limited than those of
a typical independent contractor'' in finding that the skill factor
weighed in favor of employee status for security guards and traffic
control workers); Iontchev, 685 F. App'x at 550 (``The service
rendered by the [taxi drivers] did not require a special skill.'');
EM Protective Servs., 2021 WL 3490040, at *7 (traffic control
officers require ``relatively little skill'' and security guards
require ``minimal skill,'' indicating employee status); New Image
Landscaping, 2019 WL 6463512, at *6 (facts that ``little or no skill
was required'' and ``prior landscaping experience'' was not required
meant that skill factor favored employee status for landscapers);
Wellfleet Commc'ns, 2018 WL 4682316, at *7 (explaining that skill
factor favored employee status for call center workers because ``all
that Defendants required was the ability to communicate well and
read a script''); Super Maid, 55 F. Supp. 3d at 1077-78 (noting, in
finding that skill factor favored employee status, that
``[m]aintenance work, such as cleaning, sweeping floors, mowing
grass, unclogging toilets, changing light fixtures, and cleaning
gutters, does not necessarily involve such specialized skills as
would support independent contractor status,'' and that ``cleaning
services, although difficult and demanding, were even less complex
than those maintenance services'') (internal quotation marks
omitted); Skokie Maid, 2013 WL 3506149, at *8 (``The maids' work may
be difficult and demanding, but it does not require special skill,''
indicating employee status.); Campos, 2011 WL 2971298, at *7
(``There is no evidence that Campos's job as a delivery person
required him to possess any particular degree of skill. Campos did
not need education or experience to perform his job. Although he
needed a driver's license in order to legally drive his vehicle for
deliveries, the possession of a driver's license and the ability to
drive an automobile is properly characterized as a `routine life
skill' that other courts have found to be indicative of employment
status rather than independent contractor status.''); Int'l
Detective & Protective Serv., 819 F. Supp. 2d at 752 (finding that
the ``vast majority of the Guards' work . . . did not require any
special skills'').
---------------------------------------------------------------------------
NRF & NCCR recommended that ``specialized skills'' be changed to
``skill, talent or creativity,'' referencing singers at restaurants
among other examples. Again, the Department is not seeking to limit the
types of work that involve skills or taking the position that any
particular occupation lacks specialized skills. Instead, consistent
with the bulk of case law, the Department is focusing this factor on
whether the worker uses their specialized skills in connection with
business-like initiative--rather than only considering whether the
worker has specialized skills--because that focus is probative of the
ultimate question of economic dependence.
Regarding the NPRM's statement that ``[n]umerous courts have found
that driving is not a specialized skill,'' NHDA commented that ``a
number of courts have found professional driving, including driving
that requires a commercial driver's license (CDL), involves specialized
skills'' (footnote omitted). See also Scopelitis. These commenters
added that ``[a] driver with a CDL is a clear indicator of an
individual pursuing a specialized skill to engage in a business.''
OOIDA commented similarly, stating that the cases relied on by the
Department in the NPRM ``were focused on automobile driving, not the
driving of a commercial motor vehicle,'' and that it was ``unclear
whether the Department believes the driving skills required for a Class
A Commercial Drivers License (CDL) are not specialized.'' Considering
these comments and the requests for clarification, the Department
clarifies that it recognizes the distinctive nature of CDLs and further
recognizes that drivers performing work requiring such licenses are
likely using specialized skills as compared to drivers generally.\499\
As with any worker, consideration of whether a driver with a CDL uses
that specialized skill in connection with business-like initiative
determines whether this factor indicates employee or independent
contractor status.
---------------------------------------------------------------------------
\499\ NRF & NCCR commented that ``[t]he fact that many people
have regular driver's licenses should not be viewed as in any way
negating or reducing the likelihood that a contractor who meets the
other factors will be properly treated as an independent
contractor.'' As the Department has clearly and repeatedly stated,
no one fact will determine a worker's status as an employee or
independent contractor.
---------------------------------------------------------------------------
CPIE stated that ``the NPRM's interpretation would ignore any
initiative that is not attributable to an individual's specialized
skill,'' expressed concern that this factor may not always align with
the ultimate outcome, and ``respectfully urges DOL to interpret this
factor to consider any business initiative that demonstrates an
individual's economic independence, regardless of whether the
initiative is attributable to any skills.'' As an initial matter, the
Department notes that it is not unusual when applying a multifactor
economic realities analysis for one factor to not align with the
ultimate outcome when the analysis is applied and the totality of the
circumstances is considered. Regardless, any business initiative by a
worker is plainly relevant to the analysis and may be considered under
the opportunity for profit or loss depending on managerial skill factor
and other factors, as the landscaper example in the NPRM's discussion
of the skill and initiative factor demonstrates. Accordingly, this
rulemaking accounts for IBA's comment that ``[a] true measure of
economic independence would not restrict the analysis of skill and
initiative to considering only specialized skills and only initiative
attributable to those skills but instead would consider `all major
components open to initiative,' such as `business management skills.'
'' If not under the skill and initiative factor, the factors comprising
the economic realities analysis certainly consider all types of
initiative and business management skills by the worker.
Fight for Freelancers asserted that, in the case of a highly
skilled worker who is asked by ``one of her regular clients'' to do ``a
task that requires far less skill''
[[Page 1715]]
than usual, the worker ``would now have to tell her client--with whom
she likes to work--that she cannot provide what the client needs for
this particular project, because it does not make use of her more
specialized skills.'' The Department recognizes that using specialized
skills in connection with business-like initiative does not preclude
(and, in fact, may often also include) performance of lower-skilled
tasks. Whether the worker uses specialized skills to perform the work
is not determined by isolating any one task performed by the worker;
instead, consistent with a totality-of-the-circumstances approach, the
worker's work on the whole should be considered to determine if the
worker uses specialized skills in connection with business-like
initiative.
Coalition of Business Stakeholders stated that the Department's
articulation of this factor ``dispenses with all independent
consideration of a worker's specialized skills obtained or developed
separate and apart from the hiring entity'' and ``all but ensures
consideration of this factor will preclude an independent contractor
finding.'' This comment overlooks the totality-of-the-circumstances
nature of the analysis; no one factor can preclude an independent
contractor or employee finding. Contrary to this commenter's assertion,
the Department believes that the worker's skills developed separate and
apart from the hiring entity are relevant. The regulatory text
providing that this factor indicates ``employee status . . . where the
work is dependent on training from the employer to perform the work''
reflects that bringing skills to the work relationship (i.e., skills
developed separate and apart from the employer) may indicate
independent contractor status if the skills contribute to business-like
initiative.
Regarding training, America Outdoors Association stated that it
``may benefit an outfitter to train an independent contractor, or pay
for a first aid certification class, in order for the contractor to
better serve out the terms of the contract.'' Referencing a labor
shortage in its industry, WFCA stated that ``the mere fact that a
contractor or dealer is willing to pay to train independent contractor
should not make the worker an employee'' and asked that the regulatory
text be revised to reflect that. See also ABC. As an initial matter,
some basic training in a workplace, such as paying for a first-aid
certification class, does not prevent a finding that a worker uses
specialized skills to perform the work. Instead, the analysis is more
general and, as the regulatory text states, should focus on whether the
worker is dependent on training from the employer to perform the work.
Finally, the revision requested by WFCA is unnecessary given that the
regulatory text already provides generally that ``the outcome of the
analysis does not depend on isolated factors but rather upon the
circumstances of the whole activity'' and, ``[c]onsistent with a
totality-of-the-circumstances analysis, no one factor or subset of
factors is necessarily dispositive.'' \500\
---------------------------------------------------------------------------
\500\ 29 CFR 795.110(a)(1) and (a)(2), respectively.
---------------------------------------------------------------------------
The Department is finalizing the skill and initiative factor (Sec.
795.110(b)(6)) as discussed herein.
Example: Skill and Initiative
A highly skilled welder provides welding services for a
construction firm. The welder does not make any independent judgments
at the job site beyond the decisions necessary to do the work assigned.
The welder does not determine the sequence of work, order additional
materials, think about bidding the next job, or use those skills to
obtain additional jobs, and is told what work to perform and where to
do it. In this scenario, the welder, although highly skilled
technically, is not using those skills in a manner that evidences
business-like initiative. These facts indicate employee status under
the skill and initiative factor.
A highly skilled welder provides a specialty welding service, such
as custom aluminum welding, for a variety of area construction
companies. The welder uses these skills for marketing purposes, to
generate new business, and to obtain work from multiple companies. The
welder is not only technically skilled, but also uses and markets those
skills in a manner that evidences business-like initiative. These facts
indicate independent contractor status under the skill and initiative
factor.
7. Additional Factors (Sec. 795.110(b)(7))
Section 795.105(d)(2)(iv) of the 2021 IC Rule stated that
additional factors may be considered if they are relevant to the
ultimate question of whether the workers are economically dependent on
the employer for work or in business for themselves.\501\ The
Department proposed to retain this provision with only minor editorial
changes, moving it to Sec. 795.110(b)(7). Specifically, the
Department's proposed regulatory text provided that ``[a]dditional
factors may be relevant in determining whether the worker is an
employee or independent contractor for purposes of the FLSA, if the
factors in some way indicate whether the worker is in business for
themself, as opposed to being economically dependent on the employer
for work.'' \502\
---------------------------------------------------------------------------
\501\ 86 FR 1247.
\502\ 87 FR 62275 (proposed Sec. 795.110(b)(7)).
---------------------------------------------------------------------------
The Department explained in the NPRM that retaining this provision
would ``reiterate[ ] that the enumerated factors are not to be applied
mechanically but should be viewed along with any other relevant facts
in light of whether they indicate economic dependence or
independence.'' \503\ Additionally, it reemphasized that ``only factors
that are relevant to the overall question of economic dependence or
independence should be considered.'' \504\ The Department explained
that this approach reflects the necessity of considering all facts that
are relevant to the question of economic dependence or independence,
regardless of whether those facts fit within one of the enumerated
factors. The Department reasoned that this approach is consistent with
the Supreme Court's guidance in Silk, where the Court cautioned that
its suggested factors are not intended to be exhaustive.\505\
Additionally, this approach is also consistent with the approach that
courts and the Department have used in the decades since Silk to
determine whether workers are employees or independent contractors
under the FLSA.\506\
---------------------------------------------------------------------------
\503\ Id. at 62257.
\504\ Id.
\505\ 331 U.S. at 716 (``No one [factor] is controlling nor is
the list complete.'').
\506\ See generally 87 FR 62257; infra n.512.
---------------------------------------------------------------------------
Like in the 2021 IC Rule, the Department proposed not to identify
any specific additional factors, and specifically declined to identify
the ``degree of independent business organization and operation,'' a
factor considered in prior departmental guidance, as a seventh factor
in the analysis. The Department explained that given the ``focus in
this proposed rulemaking on reflecting the economic reality factors
commonly used by the circuit courts of appeals, the Department chose
not to include the worker's `degree of independent business
organization and operation' as a seventh factor.'' \507\ The Department
noted that it was not aware of any court that has used this as a
standalone factor and expressed concerns that ``facts that may relate
to whether a worker has an independent business organization--such as
whether the worker has incorporated or receives an Internal
[[Page 1716]]
Revenue Service (IRS) Form 1099 from an potential employer--reflect
mere labels rather than the economic realities and are thus not
relevant.'' \508\
---------------------------------------------------------------------------
\507\ 87 FR 62257.
\508\ Id.
---------------------------------------------------------------------------
A few commenters expressed support for the Department's proposed
section on additional factors. See e.g., NWLC; AFL-CIO; DSA; and State
AGs. DSA commented that it ``agrees with the Department's retention of
the 2021 IC Rule that additional factors may be considered if they are
relevant to the ultimate question of economic dependence.'' The AFL-CIO
expressed support for the Department's additional factors provision,
noting that the Department correctly recognized that additional factors
should be considered when relevant to the economic reality.
Several commenters expressed concerns with a perceived vagueness
and lack of clarity arising from inclusion of additional factors, and
some requested that the Department delete the additional factors
section from the final rule entirely. For example, IEC commented that
``[t]he proposed rule does little to further define `additional
factors' which will only lead to employers, employees, and independent
contractors'' speculating about ``how to apply this in their
analysis.'' SBA expressed concerns with what it described as an ``open-
ended factor'' and recommended the Department delete it. Inline
Translation Services similarly commented that ``[t]he catch all phrase
`additional factors' should be removed entirely,'' stating that ``this
open ended clause could introduce innumerable other factors during
labor audits with very uncertain and unpredictable outcomes.'' AFPF
expressed concerns that ``[s]takeholders will have no clarity as to
what additional factors may be considered in any particular case.''
Goldwater Institute commented that ``[t]o the extent an employer
has concluded its economic dependence analysis and finds that the
worker is indeed an independent contractor, this final consideration
could ostensibly swallow the rule.'' The National Restaurant
Association also expressed concerns with the Department's decision not
to define specific additional factors, commenting that the undefined
additional factors section could create confusion as it offers ``little
guidance to the regulated community.'' \509\
---------------------------------------------------------------------------
\509\ The Department notes that it included the additional
factors provision in the 2021 IC Rule in response to the National
Restaurant Association's comment in that rulemaking expressing
concern about the lack of a specific regulatory provision
acknowledging that additional factors could be relevant.
Specifically, as explained in the 2021 IC Rule, the Restaurant
Association contended that ``facts and factors'' that were not
listed in the Department's 2020 proposal, which included two core
factors and three additional factors, ``may be relevant to the
question of economic dependence even if they would not be as
probative as the two core factors.'' They 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.'' 86 FR 1196.
---------------------------------------------------------------------------
NAFO commented that ``this catch-all factor provides [the
Department] a vague and highly discretionary means by which it can
determine whether there is something that `indicates' whether a worker
is economically dependent on an employer for work without historical
precedent or guidance.'' The Coalition of Business Stakeholders
similarly expressed that ``the [Department] inserts into the Proposed
Rule a mechanism whereby it can hinge its classification decision on
anything it deems to `indicate' that a worker is either in business for
themselves or economically dependent on an employer, regardless of
whether such consideration has historically, or ever, been considered
as part of the classification analysis.'' See also, e.g., MEP,
Promotional Products Association International.
Contrary to some of the commenters' assertions, the Department
reiterates that the proposed regulatory language on additional factors
is consistent with and reflects decades of Supreme Court and federal
appellate court precedent--as well as guidance from the Department
including the 2021 IC Rule--emphasizing that the enumerated economic
realities factors are not exhaustive. For example, the Supreme Court
explained in Silk that ``[n]o one [factor] is controlling nor is the
list complete.'' \510\ Many federal courts of appeals have also
emphasized that the enumerated factors are not exhaustive.\511\ Courts
have reiterated that ``[t]he determination of whether an employer-
employee relationship exists for purposes of the FLSA should be
grounded in `economic reality rather than technical concepts,' . . .
determined by reference not to `isolated factors but rather upon the
circumstances of the whole activity.' '' \512\ The Department's
guidance has emphasized a similar approach. For example, WHD Fact Sheet
#13 has indicated that its factors are not exhaustive and stated that
``the Supreme Court has held that it is the total activity or situation
which controls'' the inquiry and that ``[t]he employer-employee
relationship under the FLSA is tested by `economic reality' rather than
`technical concepts.' '' \513\ AI 2015-1 explained that courts
``routinely note that they may consider additional factors depending on
the circumstances.'' \514\
---------------------------------------------------------------------------
\510\ 331 U.S. at 716.
\511\ See Sureway, 656 F.2d at 1370 (stating that ``the courts
have identified a number of factors that should be considered'' when
determining if an individual is an employee under the FLSA but
noting that ``the list is not exhaustive''); Razak, 951 F.3d at 143
(noting that the Third Circuit agreed with Sureway ``that `neither
the presence nor absence of any particular factor is dispositive' ''
and explaining that `` `courts should examine the circumstances of
the whole activity,' determining whether, `as a matter of economic
reality, the individuals are dependent upon the business to which
they render service' '') (internal citation omitted); Hobbs, 946
F.3d at 836 (stating that ``[b]ecause the Silk factors are non-
exhaustive, we will also look to other factors to help gauge the
economic dependence of the pipe welders''); Parrish, 917 F.3d at 387
(stating that the ``Silk factors being `non-exhaustive', other
relevant factors may be in play in an employee vel non analysis'');
Karlson, 860 F.3d at 1092 (``No one [factor] is controlling nor is
the list complete.'') (quoting Silk, 331 U.S. at 716) (internal
quotations omitted); Scantland, 721 F.3d at 1312 (``We note,
however, that these six factors are not exclusive and no single
factor is dominant.''); Lauritzen, 835 F.2d at 1534 (``Certain
criteria have been developed to assist in determining the true
nature of the relationship, but no criterion is by itself, or by its
absence, dispositive or controlling.''); Superior Care, 814 F.2d at
1043 (explaining that ``[t]hese factors are not exhaustive'' and
``must always be aimed at an assessment of the `economic dependence'
of the putative employees, the touchstone for this totality of the
circumstances test'') (internal citation omitted).
\512\ Saleem, 854 F.3d at 140 (quoting Barfield v. New York City
Health & Hospitals Corp., 537 F.3d 132, 141 (2008) quoting Goldberg,
366 U.S. at 33, and Rutherford, 331 U.S. at 730)) (internal
quotation marks omitted).
\513\ See WHD Fact Sheet #13 (July 2008).
\514\ 2015 WL 4449086, at *3 n.4 (withdrawn June 7, 2017).
---------------------------------------------------------------------------
The Department continues to believe that the additional factors
section is entirely consistent with how the courts and the Department
have approached the economic realities inquiry for decades, including
in the 2021 IC Rule. Commenters expressing concerns that the
consideration of additional factors will lead to confusion and
uncertainty overlook several important considerations. First, as
mentioned, this has been the approach of the courts and the Department
for decades--the enumerated economic realities factors are not
exhaustive, all relevant facts should be considered, and the focus of
the determination should be grounded in the economic realities as
opposed to any isolated factors. There is no basis for the concern that
the retention of a regulatory provision stating what courts, the
Department, and the regulated community have understood to be part of
the economic reality test under the FLSA for over 75 years will result
in confusion and uncertainty as opposed to consistency and familiarity.
Second, the additional factors section is not
[[Page 1717]]
unbounded and includes clear constraining language in the regulatory
text, emphasizing that only those additional factors which indicate
that the worker is economically dependent on the potential employer for
work or in business for themself can be considered. This reflects the
necessity of considering all facts that are relevant to the question of
economic dependence or independence, regardless of whether those facts
fit within one of the six enumerated factors. While the department
declines to specify any particular additional factors, the language of
the regulatory text appropriately limits the scope of potentially
relevant additional facts or factors that might be considered.
Moreover, the Department recognizes that, in many instances,
consideration of additional factors will not be necessary because the
relevant factual considerations can and will be considered under one or
more of the enumerated factors. The additional factors section is
simply a recognition by the Department, consistent with decades of case
law, that a rule applying to varying economic relationships across
sectors of the economy must be applied in a non-mechanical fashion and
must focus on the totality of the circumstances.
The U.S. Chamber expressed concern that the additional factors
section ``has the potential to swallow the six defined factors,'' and
that ``[b]usinesses and workers alike are being asked to consider,
weigh, and make significant business decisions under a test that has
unlimited undefined possibilities.'' The U.S. Chamber distinguished the
NPRM's additional factors section from the 2021 IC Rule's section on
additional factors, asserting that the 2021 IC Rule constrained or
narrowed the additional factors application by, first, explicitly
assigning more weight to core factors than any potentially relevant
additional factors, and second, by identifying relevant additional
factors.
Some commenters suggested that the Department assign the category
of potentially relevant additional factors less weight than the
enumerated factors. See SHRM; U.S. Chamber. But as the Department
explained in the NPRM, ``to assign a predetermined and immutable weight
to certain factors ignores the totality-of-the-circumstances, fact-
specific nature of the inquiry that is intended to reach a multitude of
employment relationships across occupations and industries and over
time.'' \515\ This is true both in respect to the elevation of core
factors above non-core and additional factors in 2021 IC Rule, and with
respect to the suggested devaluation of potential additional factors
that some commenters urged here.
---------------------------------------------------------------------------
\515\ 87 FR 62236.
---------------------------------------------------------------------------
Other commenters asked the Department to specifically recognize
certain additional factors. For example, DSA suggested that the
Department identify as an additional factor ``the recognition of
independent contractor status for businesses under other statutes, such
as the Internal Revenue Code and numerous state statutes.'' TechServe
Alliance urged the Department to ``consider the degree of independent
business formalization (incorporation, licenses, taxes) in analyzing''
independent contractor status. ACRE et al. requested that the
Department consider the degree of transparency provided to a worker
about the nature of the work, such as the location, scope, and pay for
a particular task, as an additional factor. SIFMA commented that the
Department should recognize employment or independent contractor
agreements as an additional factor relevant to the economic reality
inquiry. ABC suggested the Department recognize as an additional factor
``whether it is a recognized, longstanding practice for a large segment
of the industry to treat certain types of workers as independent
contractors.'' A legal blogger urged the Department to clarify some
additional factors courts have used in determining whether there is an
employment relationship, stating that, for example, ``the courts have
considered whether the potential employer has the right to terminate
the worker for any reason at any time; whether the parties are subject
to an agreement indicating an intent to establish an independent
contractor relationship; and whether the worker operates in the form of
a corporate entity, including as a limited liability company.''
After further consideration, and consistent with the NPRM, the
Department declines to identify in this final rule any particular
additional factors that may be relevant. The Department believes that
the regulatory text addressing additional factors, which focuses on
whether the additional factors are indicative of whether the worker is
in business for themselves or is economically dependent on the
potential employer for work, is sufficiently constrained to narrow the
possible relevant considerations and sufficiently flexible to capture
potentially relevant factual considerations that fall outside the
enumerated factors. In light of this, the Department believes it is
unnecessary to specify any additional factors. The Department
previously identified the ``degree of independent business organization
and operation'' as a seventh factor that it considered in its
analysis.\516\ However, as noted in the NPRM, the Department is not
aware of any court that has used this as a standalone factor, and the
Department declines to identify this as a standalone factor in this
final rule. Additionally, as explained in the NPRM, the Department is
concerned that facts such as whether the worker has incorporated or
receives an IRS Form 1099 from a potential employer reflect mere labels
rather than the economic realities and are thus not relevant. The
Department has similar concerns that contractual provisions indicating
the intent of the parties to establish an independent contractor
relationship also may reflect mere labels rather than the economic
realities and are thus not relevant. To the extent facts such as the
worker having a business license or being incorporated may suggest that
the worker is in business for themself, they may be considered either
as an additional factor or under any enumerated factor to which they
are relevant. However, consistent with an economic reality analysis, it
is important to inquire into whether the worker's license or
incorporation are reflective of the worker being in business for
themselves as a matter of economic reality. For example, if a potential
employer requires a worker to obtain a certain license or adopt a
certain form of business as a condition for performing work, this may
be evidence of the potential employer's control, rather than a worker
who is independently operating a business.\517\
---------------------------------------------------------------------------
\516\ See WHD Fact Sheet #13 (July 2008).
\517\ See, e.g., Safarian v. American DG Energy Inc., 622 F.
App'x 149, 151 (3d Cir. 2015) (even where ``the parties structure[ ]
the relationship as an independent contractor, . . . the caselaw
counsels that, for purposes of the worker's rights under the FLSA,
we must look beyond the structure to the economic realities'').
---------------------------------------------------------------------------
Finally, Flex requested that the Department clarify whether it
still agrees with guidance as to the lack of relevance of certain
factors expressed in WHD Fact Sheet #13. Flex urged the Department to
``add guidance to the proposed rule that mirrors the subregulatory
guidance in Fact Sheet #13 and make clear that the same factors
previously deemed not relevant are still deemed not relevant.'' While
the Department declines to identify specific factors as never relevant
to the inquiry of whether a worker is economically dependent or in
business for themselves, the Department agrees that certain factors are
generally immaterial
[[Page 1718]]
in determining the existence of an employment relationship because they
reflect mere labels rather than the economic realities, and do not
indicate whether a worker is in business for themselves or is
economically dependent on a potential employer for work. As it has
stated previously, the Department continues to believe that ``such
facts as the place where work is performed, the absence of a formal
employment agreement, . . . whether an alleged independent contractor
is licensed by State/local government,'' and ``the time or mode of
pay'' do not generally indicate whether a worker is economically
dependent or in business for themself.\518\
---------------------------------------------------------------------------
\518\ WHD Fact Sheet #13 (July 2008).
---------------------------------------------------------------------------
The Department is finalizing the additional factors section (Sec.
795.110(b)(7)) as proposed with one minor editorial change as
explained.
D. Primacy of Actual Practice (2021 IC Rule Sec. 795.110)
The Department proposed to remove Sec. 795.110 of the 2021 IC Rule
and use that section for the discussion of the economic reality
factors.\519\ Section 795.110 of the 2021 IC Rule provided that in
determining economic dependence ``the actual practice of the parties
involved is more relevant than what may be contractually or
theoretically possible.'' \520\ In the NPRM, the Department explained
that this absolute rule ``is overly mechanical and does not allow for
appropriate weight to be given to contractual provisions in situations
in which they are crucial to understanding the economic realities of a
relationship.'' \521\ The Department expressed its belief that a less
prescriptive approach is more faithful to the totality-of-circumstances
economic reality analysis, such that contractual or other reserved
rights should be considered like any other fact under each factor to
the extent they indicate economic dependence.\522\
---------------------------------------------------------------------------
\519\ 87 FR 62257.
\520\ 86 FR 1247 (Sec. 795.110).
\521\ 87 FR 62258.
\522\ Id.
---------------------------------------------------------------------------
In its proposal, the Department acknowledged that contractual
authority may in some instances be less relevant, but noted that the
2021 IC Rule's position that actual practice is always more relevant is
incompatible with an approach that does not apply the factors
mechanically but looks to the totality of the circumstances in
evaluating the economic realities. The Department explained that the
focus is always on the economic realities rather than mere labels, but
contractual provisions are not always mere labels. Instead, contractual
provisions sometimes reflect and influence the economic realities of
the relationship. The Department explained that within each factor of
the test, there may be actual practices that are relevant, and there
may also be contractual provisions that are relevant and that this
examination will be specific to the facts of each economic relationship
and cannot be predetermined.\523\
---------------------------------------------------------------------------
\523\ See generally 87 FR 62258.
---------------------------------------------------------------------------
In the NPRM, the Department also discussed the 2021 IC Rule's
response to ``comments asserting that prioritizing actual practice
would make the economic reality test impermissibly narrower than the
common law control test.'' \524\ The 2021 IC Rule asserted that ``the
common law control test does not establish an irreducible baseline of
worker coverage for the broader economic reality test applied under the
FLSA.'' \525\ As the Department noted in the NPRM, this view of the
FLSA's scope of employment is inconsistent with the Supreme Court's
observations that ``[a] broader or more comprehensive coverage of
employees'' than under the FLSA ``would be difficult to frame,'' \526\
and that the FLSA ``stretches the meaning of `employee' to cover some
parties who might not qualify as such under a strict application of
traditional agency law principles.'' \527\ The Department further
explained that the ``2021 IC Rule's blanket diminishment of the
relevance of the right to control is inconsistent with the Supreme
Court's observations that the FLSA's scope of employee coverage is
exceedingly broad and broader than what exists under the common law.''
\528\ Finally, the Department recognized that the fact that the
employer's right to control is part of the common law test shows that
it is a useful indicator of employee status.\529\
---------------------------------------------------------------------------
\524\ 87 FR 62258.
\525\ 86 FR 1205.
\526\ Rosenwasser, 323 U.S. at 362-63.
\527\ Darden, 503 U.S. at 326.
\528\ 87 FR 62258.
\529\ Id. In Silk, the Supreme Court described this standard as
``power of control, whether exercised or not, over the manner of
performing service to the industry.'' 331 U.S. at 713 (citing
Restatement of the Law, Agency, sec. 220).
---------------------------------------------------------------------------
Multiple commenters expressed support for the Department's decision
to remove the 2021 IC Rule's provision on the primacy of actual
practice. For example, the State AGs agreed with the NPRM's reasoning,
noting ``that unexercised contractual powers among the parties may be
equally as relevant to determining economic dependence as exercised
powers'' and stating that ``[t]he Department rightly recognizes that
the parties' actual practice is not more relevant than any other factor
as to the question of economic dependence.'' The LA Fed & Teamsters
Locals stated ``a worker cannot be said to be acting independently in
running their own business if they are unable to make and effectuate
certain decisions because another entity has reserved power over those
decisions.'' Similarly, NELP commented that the NPRM rightly recognized
``that contractual provisions can be powerful silencers; a right that
is never exercised may be more significant evidence of control than a
right that is routinely ignored.'' Justice at Work Pennsylvania
commented that they support the Department's position on the primacy of
actual practice ``which would restore the broad, holistic test for FLSA
employment, as intended by Congress.'' Gale Healthcare Solutions
similarly commented that they ``agree with DOL's proposal to remove
Section 795.110 of the 2021 IC Rule, as every fact that is relevant to
economic dependence should be considered in the analysis of economic
dependence, and contractual possibilities--not just actual practices--
should be considered.''
A number of commenters, however, expressed disagreement with the
Department's proposal to remove this provision of the 2021 IC Rule. For
example, FMI commented that ``control has always been evaluated based
upon the actual exercise of control, that is, what the actual practice
of the business and worker is--not the theoretical reservation of
control.'' Cambridge Investment Research commented that ``[m]erely
because an independent contractor elects not to take advantage of his
or her independence or freedom says nothing about whether in fact the
worker is properly classified.'' The U.S. Chamber expressed concern
that the NPRM ``contradicts the principle that `[i]t is not significant
how one ``could have'' acted under the contract terms. The controlling
economic realities are reflected by the way one actually acts.' '' N/MA
urged the Department to maintain the 2021 IC Rule's position ``that
unexercised contractual rights are not irrelevant, they are simply not
as informative as the actual experience of the parties,'' expressed
concerns that the NPRM ``turns the economic realities test into a focus
on economic possibilities,'' and noted that ``[c]ontractual provisions
that are truly important necessarily manifest in the actual experiences
of the worker.'' CWI similarly commented: ``To be clear, the 2021 IC
Rule does not provide that unexercised rights are irrelevant. It merely
states the obvious:
[[Page 1719]]
that what the control a putative employer actually exercises is more
informative than the control it could exercise.'' See also CWC; MEP;
NRF& NCCR.
Upon considering the comments, the Department is finalizing the
removal of Sec. 795.110 of the 2021 IC Rule (Primacy of actual
practice). Consistent with case law and the Department's historical
position prior to the 2021 IC Rule, the Department declines to create a
novel bright line rule that assigns a predetermined and immutable
weight or level of importance to reserved rights. As explained in the
NPRM, the Department believes a less prescriptive approach is more
faithful to the totality-of-the-circumstances, economic-reality
analysis, and contractual or other reserved rights should be considered
like any other fact under each factor to the extent they indicate
economic dependence.\530\ The significance of each fact in the analysis
should be informed by its relevance to the economic realities and this
analysis will be specific to the facts of each economic relationship
and cannot be predetermined. Finally, the Department's approach to the
reserved right to control is more consistent with the historical bounds
of the control factor than the 2021 IC Rule's blanket diminishment of
the relevance of the right to control, which was inconsistent with the
Supreme Court's observations that the FLSA's scope of employee coverage
is exceedingly broad, even more so than under the common law.\531\ That
the common law test includes the employer's right to control shows that
it is a useful indicator of employee status.\532\ As such, the
Department believes that removal of this provision is appropriate.
Specific concerns raised in the comments relevant to this issue are
discussed and addressed in this section below.
---------------------------------------------------------------------------
\530\ 87 FR 62258.
\531\ Id.
\532\ Darden, 503 U.S. at 323 (common-law employment test
considers ``the hiring party's right to control the manner and means
by which the product is accomplished'') (quoting Reid, 490 U.S. at
751-52); Restatement (Third) of Agency, sec. 7.07, Comment (f)
(2006) (``For purposes of respondeat superior, an agent is an
employee only when the principal controls or has the right to
control the manner and means through which the agent performs
work.'').
---------------------------------------------------------------------------
Several commenters expressed concerns that the proposed removal of
the primacy of actual practice provision was inconsistent with
longstanding case law and previous guidance issued by the Department.
See, e.g., CWC; DSA; FSI; Scalia Law Clinic; U.S. Chamber. For example,
FMI expressed concerns that the NPRM was inconsistent with ``the
articulation of the control factor in Administrator's Interpretation
(AI) No. 2015-1 (July 15, 2015)'' which FMI contends ``debunked the
idea that reserved control should be a consideration.'' FMI also
suggested that the NPRM was inconsistent with case law cited in AI
2015-1 which expressed that a ``worker's control over meaningful
aspects of the work must be more than theoretical--the worker must
actually exercise it.'' See also CWC. DSA commented that the 2021 IC
Rule's elevation of actual practice as always more relevant than
contractual or theoretical possibilities was consistent with a 1949
Opinion Letter that stated ``ordinarily, a definite decision as to
whether one is an employee or independent contractor under the [FLSA]
cannot be made in the absence of evidence as to his actual day-to-day
working relationship with his principal.'' The U.S. Chamber commented
that the NPRM was inconsistent with decades of court precedent holding
that ``the focus is on economic reality, not contractual language.''
According to the U.S. Chamber, the NPRM ``would effectively elevate
reserved contractual rights above the actual practice of the parties''
and the ``economic realities test would be replaced by a contractual
reservation test.'' Similarly, MEP expressed its position that the 2021
IC Rule ``ensures the true nature of the contractual relationship is
considered above all but leaves room for theoretical possibilities to
still be considered,'' which it contended is consistent with court
precedent.
Contrary to these comments, the Department's approach to this issue
is consistent with both prior Departmental guidance as well as judicial
precedent. As the Department explained in the NPRM, AI 2015-1
recognized six economic realities factors that followed the six factors
used by most federal courts, including a control factor described as
``the degree of control exercised or retained by the employer.'' \533\
The NPRM also noted ``AI 2015-1 further emphasized that the factors
should not be applied in a mechanical fashion and that no one factor
was determinative.'' \534\ Thus, contrary to FMI's contention, the
NPRM's approach to the primacy of actual practice is consistent with AI
2015-1's non-mechanical, totality-of-the-circumstances approach to the
economic dependence inquiry and the potential relevance of the reserved
right to control as an indicator of economic reality.\535\
Additionally, the Department's approach to this issue is certainly not
in tension with the notion that the economic reality inquiry cannot be
made without evidence of the day-to-day working relationship between a
worker and their potential employer.\536\
---------------------------------------------------------------------------
\533\ 87 FR 62223.
\534\ Id.
\535\ AI 2015-1, 2015 WL 4449086, at *11 (withdrawn June 7,
2017). Additionally, AI 2015-1 cited, among other cases, Superior
Care, for the proposition that ``[a]n employer does not need to look
over his workers' shoulders every day in order to exercise
control.'' In Superior Care, even though the parties stipulated that
actual practice of the parties was to have infrequent supervisory
visits, the Second Circuit found more probative of control the fact
that the employer ``unequivocally expressed the right to supervise
the nurses' work, and the nurses were well aware that they were
subject to such checks as well as to regular review of their nursing
notes.'' Superior Care, 840 F.2d at 1060.
\536\ See WHD Op. Ltr. (June 23, 1949) (``Ordinarily a definite
decision as to whether one is an employee or an independent
contractor under the [FLSA] cannot be made in the absence of
evidence as to his actual day-to-day working relationship with his
principal.'').
---------------------------------------------------------------------------
As the Department emphasizes in this final rule, it in no way
intends to depart from case law which similarly emphasizes
consideration of the actual behavior of the parties in deciding the
economic reality inquiry.\537\ Indeed, the Department's position is
more consistent with the case law, which does not deem actual practice
and reserved rights to be mutually exclusive and instead requires a
nuanced consideration of all relevant facts.\538\ Some commenters
misconstrued the Department's proposal to remove the primacy of actual
practice provision from the regulatory text. To be clear, the
Department does not seek to elevate the weight of theoretical or
contractual rights above the weight of actual practice. Rather, the
Department affirms that actual practice is always relevant to the
economic reality test. Further, the Department agrees that in many--if
not most--circumstances the actual practices of the parties will be
more relevant to the economic reality than reserved rights or
unexercised contractual terms (as, for example, where an employer
theoretically or contractually permits workers to decline work
assignments, but in practice disciplines workers who decline
assignments).\539\ And, as the Department explained in the NPRM, it
does not intend to in any way minimize or disregard the longstanding
case law that considers the actual behavior of the parties in order to
determine the
[[Page 1720]]
economic reality.\540\ These cases reflect a bedrock principle about
the economic reality test, which looks to the reality of a situation
rather than assuming that a written label, contractual arrangement, or
form of business, is dispositive.
---------------------------------------------------------------------------
\537\ See infra n.541.
\538\ See discussion regarding the Seventh Circuit's decision in
Brant v. Schneider Nat'l, infra.
\539\ See Off Duty Police, 915 F.3d at 1060-61 (finding that,
among other things, officers' testimony that they were disciplined
for turning down assignments, despite having the right to do so,
supported employee status).
\540\ See, e.g., Parrish, 917 F.3d at 387 (``[T]he analysis is
focused on economic reality, not economic hypotheticals.''); Saleem,
854 F.3d at 142 (``[P]ursuant to the economic reality test, it is
not what [workers] could have done that counts, but as a matter of
economic reality what they actually do that is dispositive.'')
(internal quotation marks and citation omitted); Sureway, 656 F.2d
at 1371 (``[T]he fact that Sureway's `agents' possess, in theory,
the power to set prices, determine their own hours, and advertise to
a limited extent on their own is overshadowed by the fact that in
reality the `agents' work the same hours, charge the same prices,
and rely in the main on Sureway for advertising.'').
---------------------------------------------------------------------------
This case law, however, does not require or even support the
adoption of a generally applicable rule that in all circumstances
reserved or unexercised rights, such as the right to control, are in
every instance less indicative of the economic reality than the actual
practices of the parties. Such a rule would be inconsistent with
federal appellate court precedent recognizing that reserved rights may
be more probative, such as the temporary nurse staffing agency in
Superior Care that reserved the right to supervise the nurses even
though in actuality it did so infrequently.\541\ The 2021 IC Rule's
mandate regarding the primacy of actual practice effectively
established a bright line rule that has not been adopted by courts and
is in tension with longstanding instructions from courts that a
totality-of-the-circumstances analysis be applied in order to analyze a
worker's economic dependence. As such, rejecting the 2021 IC Rule's
prescriptive regulation is more consistent with a non-mechanical, fact-
specific approach to the economic dependence or independence inquiry
that has been adopted by the courts.\542\
---------------------------------------------------------------------------
\541\ See Superior Care, 840 F.2d at 1060.
\542\ See, e.g., Flint Eng'g, 137 F.3d at 1441 (``None of the
factors alone is dispositive; instead, the court must employ a
totality-of-the-circumstances approach.''); Superior Care, 840 F.2d
at 1059 (``Since the test concerns the totality of the
circumstances, any relevant evidence may be considered, and
mechanical application of the test is to be avoided.'').
---------------------------------------------------------------------------
Some commenters seemingly conflated the terms ``economic reality''
and ``actual practice.'' See, e.g., FSI (defining ``actual practice''
as ``the economic reality of the relationship at issue''). Again, the
Department's position is not departing from or minimizing case law
holding that the focus of the inquiry is on the ``economic reality, not
contractual language.'' \543\ Courts routinely consider both reserved
rights and actual practice in order to evaluate the overall question of
economic reality. For example, the Seventh Circuit recently addressed
both in Brant.\544\ In that case, the court examined the operating
agreement signed by the driver, which purported to grant the driver
broad authority over how to conduct their work, but also ``retain[ed]
the right to gather remotely and to monitor huge quantities of data
about how drivers conducted their work.'' The court rejected the
company's argument that the broad grant of authority in the agreement
was dispositive of independent contractor status because it found that
the company exercised complete control over meaningful aspects of the
transportation business, including by retaining the right to gather
data that could be used to terminate the driver for noncompliance,
which weighed in favor of employee status.\545\
---------------------------------------------------------------------------
\543\ See, e.g., Parrish, 917 F.3d at 388.
\544\ 43 F.4th 656 (7th Cir. 2022).
\545\ Id. at 666.
---------------------------------------------------------------------------
Moreover, none of the case law cited by commenters--and to the best
of the Department's knowledge, no existing case law--stands for the
proposition that reserved or unexercised rights cannot under any
circumstances be indicative of the economic realities, nor does the
2021 IC Rule's provision state that reserved rights are never relevant.
Rather, as discussed, the case law is more consistent with the approach
the Department is adopting in this final rule, which recognizes that
while mere contractual language is not generally driving the economic
reality inquiry, reserved contractual rights, like reserved control,
may in certain cases be equally as, or more, indicative of the economic
reality than the actual practice of the parties.
N/MA expressed their view that the Department ``failed to identify
any scenarios in which a contractual, but unexercised right would be
more relevant than the parties' actual practices in assessing a
worker's day-to-day economic realities.'' The NPRM illustrated how
reserved rights might be more indicative of the economic reality than
actual practice where, for example, a potential employer reserves the
right to supervise workers despite rarely making supervisory
visits.\546\ The mere existence of such reserved rights to control the
worker may strongly influence the behavior of the worker in their
performance of the work even absent the employer actually exercising
its contractual rights. As a result, this reserved right to supervise
may be more indicative of the reality of the economic relationship
between the worker and the potential employer than the potential
employer's apparent hands-off approach to supervision.
---------------------------------------------------------------------------
\546\ See Superior Care, 840 F.2d at 1060 (``Though visits to
the job sites occurred only once or twice a month, Superior Care
unequivocally expressed the right to supervise the nurses' work, and
the nurses were well aware that they were subject to such checks as
well as to regular review of their nursing notes. An employer does
not need to look over his workers' shoulders every day in order to
exercise control.'')
---------------------------------------------------------------------------
Several commentors also expressed concerns that the NPRM's approach
will lead to an inconsistent application of the economic reality test
and a lack of certainty and clarity for employers, workers, and
factfinders. For example, SHRM urged the Department to retain the
actual practice provision from the 2021 IC Rule, noting the NPRM
``implies that unexecuted contractual rights may be more important than
real-world practices'' and ``will require HR professionals to speculate
on how WHD or a court may interpret each individual criterion'' which
will ``surely result in inconsistencies in application and the
resulting confusion will lead to continued uncertainty for employers
and workers.'' NAHB expressed similar concerns about clarity, noting
that ``actual practice is more relevant than what may be contractually
or theoretically possible . . . and it provides a clearer and simpler
federal test for determining worker status for regulated employers and
small businesses.'' Because the entirety of the economic reality must
be considered in the analysis, the Department finds that it cannot
reduce the inquiry to only actual practice and that the 2021 IC Rule's
predetermined elevation of actual practice above unexercised or
reserved rights is not fully consistent with the economic reality
inquiry that the Department and courts have followed for decades.
The Coalition of Business Stakeholders expressed concerns that the
Department failed to ``specify just how important such `reserved
control' is'' and stated that the NPRM exacerbates ``the uncertainty
with which the Proposed Rule may be implemented'' and ``apparently
directs the factfinder to weigh the control factor in favor of employee
classification if a hiring entity merely possesses the ability to
exercise control of a worker, regardless of whether the hiring entity
ever has exercised such control.'' The Coalition of Business
Stakeholders also commented that by including ``the vague concept of
`reserved control', which is to be considered in some unstated
capacity, the Proposed Rule broadens the control factor far beyond its
historical bounds and creates such uncertainty that the definition of
`control' under the Proposed Rule is
[[Page 1721]]
unworkable and would all but preclude an independent contractor
finding.'' The Department notes again that reserved control was
included in the 2021 IC Rule.\547\ In any event, the Coalition of
Business Stakeholders misconstrues the Department's discussion of
reserved control. The Department does not take the position that
reserved rights are always indicative of economic dependence, and
certainly does not preclude the existence of factual circumstances
where this fact could be found to weigh in favor of independent
contractor status. Moreover, the Department reiterates, consistent with
decades of case law and guidance from the Department, that ``the
economic reality test is a multifactor test in which no one factor or
set of factors automatically carries more weight and that all relevant
factors must be considered.'' \548\ The notion that the Department's
position that the reserved right of control can be indicative of the
economic reality in some circumstances somehow makes the economic
reality test ``unworkable'' and ``all but precludes an independent
contractor finding'' is simply inconsistent with a multifactor
totality-of-the-circumstances approach in which this is but one
potentially relevant fact under one factor. That a potential employer's
reserved right to control might indicate an employment relationship
does not preclude a finding of independent contractor status based on
other factual indicators of the economic reality of the relationship.
---------------------------------------------------------------------------
\547\ 86 FR 1204 (``As emphasized in the NPRM, and as the plain
language of Sec. 795.110 makes clear, unexercised powers, rights,
and freedoms are not irrelevant in determining the employment status
of workers under the economic reality test.'').
\548\ 87 FR 62222; see, e.g., Scantland, 721 F.3d at 1312 n.2
(the relative weight of each factor ``depends on the facts of the
case'') (quoting Santelices, 147 F. Supp. 2d at 1319); Selker Bros.,
949 F.2d at 1293 (``It is a well-established principle that the
determination of the employment relationship does not depend on
isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.'').
---------------------------------------------------------------------------
IWF expressed concerns that NPRM's approach to the primacy of
actual practice was inconsistent, noting that ``even accepting the
Department's focus on theory, the proper application of this factor is
far from clear. . . . The Proposed Rule states both that (1) `[i]t is
often the case that the actual practice of the parties is more relevant
to the economic dependence inquiry than contractual or theoretical
possibilities,' and (2) `in other cases the contractual possibilities
may reveal more about the economic reality than the parties'
practices.' '' The Department's recognition that actual practice is
often more relevant to the economic dependence inquiry than contractual
possibilities is not at all inconsistent with its position that, in
some factual circumstances, reserved contractual rights can be more or
equally as indicative of the economic reality as the actual practices
of the parties. The Department is rejecting the overly broad and
mechanical approach that in all factual circumstances, for every worker
in every industry and occupation, actual practice is always more
indicative of the economic reality than reserved rights or contractual
possibilities. The Department's position is more consistent with the
case law, which does not deem these two concepts to be mutually
exclusive and instead requires a nuanced consideration of all relevant
facts.\549\
---------------------------------------------------------------------------
\549\ See discussion regarding the Seventh Circuit's decision in
Brant v. Schneider Nat'l, supra.
---------------------------------------------------------------------------
Some commenters felt that the Department was focusing solely on how
reserved rights might be used to find employee status. For example, IWF
stated that the Department was interested in reserved rights only to
the extent they support finding employee status. See also Coalition of
Business Stakeholders. Minnesota Trucking Association commented that it
would support the NPRM's logic on the relevance of reserved rights to
the economic realities test ``so long as the analysis also considers
the rights the worker possesses but also chooses not to exercise.'' See
also CLDA. The Department does not agree with the contention that its
approach to actual practice and reserved rights would always only be
used to indicate employee status.\550\ The inquiry should take every
aspect of the relationship into account if relevant to the economic
reality and the worker's dependence on their potential employer.\551\
---------------------------------------------------------------------------
\550\ See, e.g., Faludi 950 F.3d at 275-76 (determining that an
attorney was an independent contractor even though facts ``point[ed]
in both directions,'' such as the attorney's fairly lengthy tenure,
even though he had the right to leave whenever he wanted upon giving
15 days' notice, and a non-compete clause under which the attorney
worked exclusively for the company, but which the court found ``does
not automatically negate independent contractor status'').
\551\ See section V.C.4.a (discussing why the control factor is
discussed from the employer's perspective).
---------------------------------------------------------------------------
The Club for Growth Foundation expressed concerns with the
Department's statement that a reserved right to supervise workers, even
unexercised, ``may strongly influence the behavior of the worker in
[his or her] performance of the work,'' and this ``may be more
indicative of the reality of the economic relationship between the
worker and the company than the company's apparent hands-off
practice,'' noting that ``even under this example a company that does
not intervene is surely exercising less control than one that does.''
This comment misunderstands the relevant inquiry. The question is not
whether a potential employer who reserves the right to control their
workers can be said to exercise more control than a different potential
employer who in actual practice exercises control over their workers.
Rather, the inquiry is whether, as a matter of economic reality, a
potential employer's reserved right of control is probative of a
worker's economic dependence. The 2021 IC Rule mechanically provided
that actual practice is always more relevant than reserved control. By
removing that provision, this final rule takes the position that all
relevant aspects of the working relationship, including reserved
rights, should be considered, without placing a thumb on that scale.
The U.S. Chamber also raised concerns that having ``contractual
language eclipse actual practice would flip the economic realities on
its head'' and ``would also prohibit certain facts from being
introduced into evidence: namely, the actual practice of the parties,
which according to the Supreme Court is the touchstone of the
analysis.'' The Department reiterates firmly that this final rule
neither tips the scales in favor of contractual language over actual
practice nor excludes the consideration of any relevant facts
demonstrating economic dependence. Rather, the Department is merely
declining to adopt a bright-line rule predetermining how relevant facts
may be considered, recognizing that in some factual circumstances
reserved rights may be as indicative of the economic reality as the
actual practice of the parties. Additionally, the Department's final
rule does not prohibit any subset of facts from being introduced into
evidence before a factfinder, and certainly does not prohibit facts
about the actual practices of the parties from being introduced into
evidence. To the contrary, the purpose of eliminating the actual
practice provision from the 2021 IC Rule is to ensure that all facts
relevant to inquiry of economic dependence or independence may be
considered.\552\ Within each factor of the test, there may be actual
practices that are relevant, and there may also be
[[Page 1722]]
contractual provisions that are relevant. The examination is specific
to the facts of each economic relationship and cannot be predetermined.
---------------------------------------------------------------------------
\552\ See Superior Care, 840 F.2d at 1059 (``Since the test
concerns the totality of the circumstances, any relevant evidence
may be considered, and mechanical application of the test is to be
avoided.'').
---------------------------------------------------------------------------
For all of the foregoing reasons, the Department is finalizing the
removal of Sec. 795.110 of the 2021 IC Rule (Primacy of actual
practice). As discussed in section V.C, Sec. 795.110 of this rule
contains a new provision discussing the economic reality test and the
economic reality factors.
E. Examples of Analyzing Economic Reality Factors (2021 IC Rule Sec.
795.115)
Several commenters addressed the examples that the Department
provided in the proposed rule to illustrate the application of each
factor of the economic reality test as applied to various factual
scenarios. The Department provided these examples in the preamble of
the proposal rather than in the final text of the regulations--as was
the case with the 2021 IC Rule--to provide readers an application of
the proposed factor immediately following the detailed description of
each factor along with the discussion of the case law and
rationale.\553\ Each example provided two scenarios: one where the
facts indicated that a factor pointed toward employee status and one
where the facts indicated that a factor pointed toward independent
contractor status. As the Department cautioned in the NPRM, additional
facts or alterations to the examples could change the resulting
analysis.\554\ Moreover, no example attempted to determine the worker's
ultimate status, only which way a particular factor would point based
on the described facts.
---------------------------------------------------------------------------
\553\ 87 FR 62259.
\554\ Id.
---------------------------------------------------------------------------
Several commenters found the examples generally helpful or applied
them to their industry practices. For instance, the Advisor Group
applied the Department's skill and initiative example to financial
advisors. A freelance writer and editor found the examples provided in
the preamble to be reasonable, though they suggested that sections
describing each factor were narrower than the examples suggested. The
AFL-CIO commended the Department's ``decision to provide examples of
how each of the various factors have been applied in commonly-occurring
fact patterns.''
Other commenters had concerns regarding the examples or suggested
alterations to various examples. For instance, the CA Chamber suggested
that the investment factor example was confusing since the relative
investments of a graphic designer would be dwarfed by a design firm,
leading to different outcomes depending on whether the graphic designer
worked for a large firm or a sole proprietor. In addition, a comment
from two fellows at the Heritage Foundation suggested that this example
was ambiguous because it was unclear if all the facts in the example,
including the worker's investment in equipment, office space, and
marketing, were required for the analysis.
Regarding the investment factor example, the Department discussed
relative investments in the first scenario, where a worker occasionally
purchased and used their own drafting tools while working for a
commercial design firm. These tools were minor investments that do not
further the worker's independent business beyond completing specific
jobs for the commercial design firm. Regarding the CA Chamber's concern
that the size of the business would alter a relative investment
analysis, the example was not intended to alter the size of the
hypothetical employer. However, to avoid confusion, the Department is
aligning the examples to ensure that both feature a ``commercial design
firm'' as the hypothetical employer. Additionally, the regulatory text
for the investments factor explains that, in addition to comparing the
sizes of the worker's and the employer's investments, the focus should
be on comparing the nature of their investments to determine whether
the worker is making similar types of investments as the employer that
suggest that the worker is operating independently.\555\
---------------------------------------------------------------------------
\555\ The Department notes that it has edited the investment
example to omit the reference to a ``freelance graphic designer.''
While the department recognizes that indendent contractors may go by
many names, its intent is to ensure that the examples reflect
consistent terminology. Because the Department used the phrase
``independent contractor'' throughout the examples.
---------------------------------------------------------------------------
Further, commenters were concerned that the same facts that point
toward independent contractor status under the investment prong example
would point toward employee status under the integral prong. As the
Department stated in the NPRM, however, the examples are intended to be
aids to apply the discussion of each proposed factor; the examples are
not designed to illustrate the application of the full totality-of-the-
circumstances test. For instance, the Department's investment example
intentionally does not address whether the designer is integral to the
commercial design firm, which would necessitate a separate analysis.
Regarding the integral factor, IWF was concerned that the examples
were unhelpful because they covered two different industries and did
not illuminate what kinds of activities would be considered central or
important. The Department's intent regarding this factor was to
illuminate those tasks that are core to the functioning of the
business, e.g., jobs which the ``employer could not function without
the service performed by the workers.'' \556\ Here, a farm selling
tomatoes could not function without the work of those picking the
tomatoes. However, while a business is generally required to file their
tax returns, failure to do so would not immediately halt the operations
of the farm, suggesting that non-payroll accounting support is ``more
peripheral to the employer's business.'' \557\ The Department's intent
was to provide a comparison meant to highlight the ``common-sense
approach'' many courts have taken when evaluating this factor.\558\
---------------------------------------------------------------------------
\556\ 87 FR 62253.
\557\ Id.
\558\ Id.
---------------------------------------------------------------------------
Similarly, ABC was concerned that the example for the opportunity
for profit or loss factor did not differentiate the facts between the
two workers in a way that would demonstrate which facts were
determinative of the analysis. As they noted, even if a worker relies
on word of mouth instead of traditional advertising or only works for
one client at a time, they can still be found to be independent
contractors. However, the example of the landscaper includes a scenario
where the first landscaper does not actively market their services and
a second where the landscaper does market their services. The inclusion
of these facts in the example does not indicate that the Department
believes that traditional marketing is required for a worker to be
classified as an independent contractor, only that such affirmative
marketing may be probative of the worker acting in a way consistent
with being in business for themself. Put another way, the Department
intentionally drafted the examples to avoid giving the impression that
certain facts are always less or always more probative to the analysis
of any given factor.
SMACNA noted that the Department's second example for skill and
initiative featuring a welder should omit the fact that the welder has
specialty skills, since that should not change the general analysis
under this factor. Instead, it suggested that the example should
clarify how the welder `` `markets those skills in a manner that
evidences business-like initiative.' '' Similarly, the DSA's comment
noted that the skill and
[[Page 1723]]
initiative example (featuring a welder) only drew a distinction between
the two workers based on their ability to market their services where
both workers have specialized skill. It proposed including an example
where a worker has no specialized skill but can still market their
services to demonstrate initiative. Finally, ABC objected to the same
example, noting that the skills of the workers ``should not have to be
paired with independent business marketing skills'' to find that a
worker is an independent contractor.
The Department chose to display both workers as having high
technical skills to illuminate the discussion regarding skill in the
NPRM. Specialized skills are required for this factor to point to
independent contractor status, but specialized skills alone are not
sufficient; it is the use of those specialized skills to ``contribute
to business-like initiative that is consistent with the worker being in
business for themself instead of being economically dependent on the
employer.'' \559\ As the Department noted in the NPRM, ``workers who
lack specialized skills may be independent contractors even if this
factor is very unlikely to point in that direction in their
circumstances.'' \560\ Thus the existence of specialized skills or the
marketing of services, while relevant to the analysis under this
factor, would not necessarily resolve the ultimate inquiry of the
worker's classification.
---------------------------------------------------------------------------
\559\ 87 FR 62254.
\560\ Id. at 62255.
---------------------------------------------------------------------------
Several comments suggested that the Department include new
industry-specific examples for various factors. For instance, Gale
Healthcare Solutions requested that the Department provide an example
that would apply to on-demand nursing staffing scenarios. 4A's
requested that specific industries, such as ``video production
professionals, web designers, freelance writers, [and] fashion
workers'' be included as examples. And NAFO requested that a forestry
example be included in the section of the rule discussing the integral
factor.
The Department recognizes that examples specific to an industry can
provide helpful guidance for that segment of the regulated community.
As the Department explained, however, its intent is for the examples to
provide general guidance to regulated parties in this rulemaking.
Adding examples specific to commenter industries would reduce their
general applicability to other parties and would require more facts and
detail than can be included to create succinct, yet helpful, examples.
The Department mentions various industries or occupations in the
examples to provide recognizable context for the reader; the examples
do not provide the Department's definitive view on the ultimate outcome
of the totality-of-the-circumstances analysis.
Some commenters suggested that the Department add examples to
capture newer facets of the economic reality factors. For instance, one
commenter suggested that the Department should include an example to
show how an employer's collection of data related to how a worker
performs and use of that data to enhance their operations could be part
of the economic reality analysis. The AFL-CIO similarly suggested that
the Department should include an example where an employer implements
control using algorithms.
In addition, commenters suggested that the Department should
provide more examples of how current facets of the economic reality
test would be applied. For instance, LeadingAge requested more examples
of how the Department views reserved control and more examples
regarding situations in which a worker's ability to work for others is
constrained by the number of hours or days they need to work. Flex
suggested that if the Department were to retain language under the
control factor related to regulatory or contractual control, then the
Department should provide ``a comprehensive set of examples to
illustrate that such cases would be rarities.'' And CPIE requested
additional examples of where the Department would find a worker to be
properly classified as an independent contractor, particularly under
the control, investment, and skill and initiative factors.
The Department agrees with commenters like the AFL-CIO that topics
like control over data or algorithmic supervision are highly relevant
to some workers and could have an impact on the economic reality test.
However, as noted above, the purpose of the examples is to provide aids
to applying the information just discussed in the preamble as to each
factor. The Department intends for the examples to provide general
guidance to regulated parties and not to be tied to the specifics of
certain businesses or jobs. The examples reflect the Department's
enforcement experience in some of the most commonly occurring
scenarios.
In addition, the Department understands that commenters such as
LeadingAge would prefer more context regarding reserved control.
However, the Department declines to add that additional context to the
current examples, which were drafted to address common themes regarding
each factor to illuminate the preamble discussion, not present every
fact or issue presented in the proposed rule. The Department is also
concerned that additional results-oriented examples--such as those
requested by NAHB specifically addressing when a worker would be
classified as an independent contractor under certain factors--would
not be helpful to the broader public. Such examples could leave the
impression that the proper classification of workers rests on one or a
handful of factors. To the contrary, the Department believes the
current examples' focus on illustrating the basic analysis under a
single factor and noting that the results indicate potential
classification under each factor, but not the ultimate result, provides
more useful guidance for this rule. Moreover, industry- or profession-
specific examples relaying how a worker's ultimate classification would
be resolved are best addressed in subregulatory guidance after the
issuance of this final rule as necessary.
Commenters suggested that the Department provide examples that mix
and compare the factors together. For instance, Grantmakers in the Arts
suggested that the Department include examples that demonstrate the
resolution of a worker's status after applying multiple factors and
ArcBest Corporation provided an example applying the full economic
reality test to an owner operator in the trucking industry. The
Department declines to offer such examples in this rulemaking. While a
multifactor example might appear helpful, the Department is also
concerned that such an example could potentially prejudge a specific
case in a specific industry or occupation not yet before the Department
or a court, without adequate factual predicates. Moreover, such an
example would undermine the Department's efforts to align the economic
reality analysis with current precedent, which requires a consideration
of all the factors. Finally, any multifactor analysis would require a
larger number of facts to be useful, which may be less generally useful
to workers and businesses who may not be able to analogize the given
example to their current working relationships.
IBA commented that some examples were too similar to prior
withdrawn subregulatory guidance. The Department notes that it
assembled these examples, in part, by reviewing case law, opinion
letters, the 2021 IC Rule, and other subregulatory guidance. Each
source was consulted and helped the Department arrive at the examples
provided.
[[Page 1724]]
Other commenters requested that the Department keep examples that
were provided in the 2021 IC Rule. For instance, the Arizona Trucking
Association suggested that the Department keep the trucking example
from the 2021 IC Rule. Similarly, NAWBO noted how helpful the trucker
and home repair examples were in the 2021 IC Rule. As explained above,
some facets of the 2021 IC Rule's examples no longer align with the
approach in this final rule. For instance, the 2021 IC Rule's app-based
home repair example discusses investment as a component of the
opportunity for profit or loss factor. As proposed in the NPRM and
finalized here, however, the two factors are separate and evaluated
independently.
Finally, some commenters suggested that the Department include
examples in the final rule's regulatory text, as was done with the 2021
IC Rule. For instance, the author of an independent contractor legal
blog requested that more examples be provided in the regulatory text,
including those related to the integral factor. 4A's similarly requests
that examples be included in the regulatory text and that they better
correlate with modern trends in employment.
The Department recognizes that examples are helpful to workers and
businesses alike. The Department continues to believe, however, that
the examples provided in the NPRM currently provide the greatest value
by residing in the preamble to the final rule following the detailed
discussion of the relevant factor. In this way, the examples can
provide a capstone for each section's discussion of the relevant
economic reality factor, rather than being disconnected from that
discussion and appearing only in regulatory text. The Department is
confident that the examples initially provided in the NPRM preamble, as
modified in the preamble to this final rule in response to comments
received, serve this explanatory purpose. Over time, the Department
will continue providing guidance where necessary through subregulatory
guidance.
As it did in the NPRM, the Department is including examples of each
factor in the preamble to this final rule. As discussed above, the
example of the investment factor has been clarified. In addition, non-
substantive changes have been made to the final sentence of each
paragraph in each example to clearly indicate which factor is under
discussion and that the facts of each example indicate employee or
independent contractor status under that factor.
F. Severability (Sec. 795.115)
The Department proposed that the regulatory text include a
severability provision.\561\ Specifically, the Department proposed
that, if any provision of its regulation ``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 [the regulation] and shall not affect the remainder
thereof.'' \562\ The Department noted that the 2021 IC Rule contained a
severability provision and that it was not proposing any edits to that
provision.\563\
---------------------------------------------------------------------------
\561\ 87 FR 62275 (proposed Sec. 795.115).
\562\ Id.
\563\ Id. at 62259.
---------------------------------------------------------------------------
In addition, the Department explained in the NPRM that rescission
of the 2021 IC Rule would be separate from the new regulations
regarding employee and independent contractor status promulgated to
replace the 2021 IC Rule: ``That rescission would operate independently
of the new content in any new final rule, as the Department intends it
to be severable from the substantive proposal for adding a new part
795.'' The Department further explained that, even if the ``substantive
provisions'' (i.e., the new regulations) of a final rule were
invalidated, enjoined, or otherwise not put into effect, the Department
would not intend that the 2021 IC Rule become operative. Instead, in
such case, for all of the separate reasons for rescinding the 2021 IC
Rule set forth by the Department, the rescission would still take
effect, and ``the Department would rely on circuit case law and provide
subregulatory guidance for stakeholders through existing documents
(such as Fact Sheet #13) and new documents (for example, a Field
Assistance Bulletin).'' As the Department noted, relying on federal
appellate case law and subregulatory guidance consistent with that case
law for determining whether a worker is an employee or independent
contractor would accurately reflect the FLSA's text and purpose as
interpreted by the courts and offer a standard familiar to most
stakeholders.\564\
---------------------------------------------------------------------------
\564\ See generally id. at 62233.
---------------------------------------------------------------------------
Few commenters addressed severability, and the focus of their
comments was more on the severability of the rescission of the 2021 IC
Rule from the proposed regulations to replace it than the proposed
severability provision at 29 CFR 795.115. Several commenters supported
the Department's position that the rescission of the 2021 IC Rule is
severable from the proposed regulations to replace it. For example,
Farmworker Justice stated that ``[b]oth the rescission of the 2021 IC
Rule and the newly proposed portion of the [NPRM] are critical to
reinstating stability and clarity in the Department's approach to
defining an employee.'' It advocated that the ``Department should
expressly state that it intends for the rescission of the 2021 IC Rule
to be severable from the new portion of the [NPRM].'' The AFL-CIO
agreed that ``the severability clause and DOL's explanation of that
clause in the preamble to the NPRM make clear that, in the unlikely
event a court were to decide to enjoin some portion of the Final Rule
addressing the economic reality test, DOL intends that the rescission
of the 2021 IC Rule should still take effect.'' It described this
approach as ``cautious'' and ``prudent'' and added that ``the severance
clause makes clear that DOL intended that the rescission of the 2021 IC
Rule stands on its own.'' LIUNA also supported ``the Department's
decision to render rescission of the 2021 IC Rule severable from the
substantive proposal for adding further regulatory guidance.'' It added
that the Department was ``correct to conclude that, in the unlikely
event its substantive proposals are `invalidated, enjoined, or
otherwise not put into effect,' the 2021 IC Rule should still not
become operative.''
Several other commenters criticized the Department's position that
the rescission of the 2021 IC Rule is severable from the proposed
regulations to replace it. For example, Freedom Foundation stated that
``[t]he rescission of the [2021 IC Rule] and the adoption of the
proposed rule should not be severable'' and added that the Department's
``promise that in the absence of a regulation it would provide
subregulatory guidance has a hollow ring.'' Raymond James described the
Department's position as ``present[ing] workers and business with a
Hobson's Choice: either accept the new regulations, or there will be no
regulations at all.'' It stated that, ``[c]onsidering that the
Department will not even consider making discrete changes, it does not
seem appropriate to require businesses and workers to accept a
wholesale re-write or face the risks of having no rule at all.'' And
CWI asserted that the reference to `` `substantive' provisions'' in the
NPRM's severability discussion were
[[Page 1725]]
inconsistent with how, ``[e]lsewhere'' in the NPRM, ``the Department
present[ed] the Proposed Rule as only `interpretive guidance.' ''
Having considered the comments, the Department is finalizing the
severability provision in 29 CFR 795.115 as proposed and finalizing its
proposal that the rescission of the 2021 IC Rule set forth in this
final rule is separate and severable from the new part 795 regulations
for determining employee or independent contractor status under the
FLSA set forth in this final rule. No commenter questioned the well-
settled legal principle that one portion of a rule may remain operative
if another portion is deemed impermissible as long as the agency would
independently adopt the remaining portion and the remaining portion can
operate sensibly without the impermissible portion.\565\ The Department
continues to believe that rescission of the 2021 IC Rule is proper for
all of the reasons stated in this final rule, and its intent
accordingly is for the rescission to remain operative even if this
final rule's regulations replacing the 2021 IC Rule are invalidated for
any reason. In addition, the Department continues to believe that if
any particular provision or application of this final rule is
invalidated, the rest should continue in effect and can operate
sensibly. In such case, case law and the Department's subregulatory
guidance, as appropriate, would provide a familiar and longstanding
standard for businesses and workers. Freedom Foundation's assertion
that this ``has a hollow ring'' neglects the multiple forms of
subregulatory guidance, including fact sheets and field assistance
bulletins, that the Department may issue. And there was no ``Hobson's
Choice'' between the proposed rule and ``having no rule at all''; the
Department has carefully considered the many comments to the proposed
rule and, as reflected in this final rule, has made numerous changes as
a result of those comments. Finally, CWI took the Department's
reference to ``substantive provisions'' out of context. The
Department's reference to the proposed regulatory provisions as
``substantive'' was not a characterization of this rulemaking, but an
effort to distinguish promulgating the new part 795 regulations from
rescinding the 2021 IC Rule.
---------------------------------------------------------------------------
\565\ See, e.g., Carlson v. Postal Regulatory Comm'n, 938 F.3d
337, 351 (D.C. Cir. 2019).
---------------------------------------------------------------------------
G. Amendments to Regulatory Provisions at Sec. Sec. 780.330(b) and
788.16(a)
Finally, in addition to the proposed regulations at part 795, the
Department proposed to amend existing regulatory provisions addressing
employee or independent contractor status under the FLSA in particular
contexts at 29 CFR 780.330(b) (tenants and sharecroppers) and 29 CFR
788.16(a) (certain forestry and logging workers).\566\ Specifically,
the Department proposed to replace these provisions with cross-
references to the guidance provided in part 795. The Department did not
receive commenter feedback regarding the proposed amendments of these
provisions. Accordingly, the Department finalizes the amendments to
these provisions as proposed.
---------------------------------------------------------------------------
\566\ 87 FR 62274.
---------------------------------------------------------------------------
VI. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections, their
practical utility, the impact of paperwork and other information
collection burdens imposed on the public, and how to minimize those
burdens. This final rule does not contain a collection of information
subject to OMB approval under the PRA.
VII. Executive Order 12866, Regulatory Planning and Review; Executive
Order 13563, Improved Regulation and Regulatory Review
Under Executive Order 12866, as amended by Executive Order 14094,
the Office of Management and Budget's (OMB) Office of Information and
Regulatory Affairs (OIRA) determines whether a regulatory action is
significant and, therefore, subject to the requirements of the
Executive Order and OMB review.\567\ 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 $200 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; (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 legal or policy issues arising out of legal
mandates, the President's priorities, or the principles set forth in
the Executive Order. OIRA has determined that this rule is a
``significant regulatory action'' under section 3(f)(1) of Executive
Order 12866.
---------------------------------------------------------------------------
\567\ See 88 FR 21879 (Apr. 11, 2023); 58 FR 51735, 51741 (Oct.
4, 1993).
---------------------------------------------------------------------------
Executive Order 13563 directs agencies to, among other things,
propose or adopt a regulation only upon a reasoned determination that
its benefits justify its costs; that it is tailored to impose the least
burden on society, consistent with obtaining the regulatory objectives;
and that, in choosing among alternative regulatory approaches, the
agency has selected those approaches that maximize net benefits.\568\
Executive Order 13563 recognizes that some costs and benefits are
difficult to quantify and provides that, when appropriate and permitted
by law, agencies may consider and discuss qualitatively values that are
difficult or impossible to quantify, including equity, human dignity,
fairness, and distributive impacts. The analysis below outlines the
impacts that the Department anticipates may result from this rule and
was prepared pursuant to the above-mentioned executive orders.
---------------------------------------------------------------------------
\568\ See 76 FR 3821 (Jan. 21, 2011).
---------------------------------------------------------------------------
A. Introduction
In this rule, the Department is rescinding and replacing
regulations addressing the classification of workers as employees or
independent contractors under the Fair Labor Standards Act (FLSA or
Act) to be more consistent with judicial precedent and the Act's text
and purpose as interpreted by the courts. For decades, the Department
and courts have applied an economic reality test to determine whether a
worker is an employee or an independent contractor under the FLSA. The
ultimate inquiry is whether, as a matter of economic reality, the
worker is economically dependent on the employer for work (and is thus
an employee) or is in business for themself (and is thus an independent
contractor). To answer this ultimate inquiry of economic dependence,
the courts and the Department have historically conducted a multifactor
totality-of-the-circumstances analysis, considering multiple factors
with no factor or factors being dispositive to determine whether a
worker is an employee or an independent contractor under the FLSA.
In January 2021, the Department published a rule titled
``Independent Contractor Status Under the Fair Labor Standards Act''
(2021 IC Rule) that
[[Page 1726]]
provided guidance on the classification of independent contractors
under the FLSA.\569\ As explained in sections III, IV, and V above, the
Department believes that the 2021 IC Rule did not fully comport with
the FLSA's text and purpose as interpreted by the courts and, had it
been left in place, would have had a confusing and disruptive effect on
workers and businesses alike due to its departure from decades of case
law describing and applying the multifactor economic reality test as a
totality-of-the-circumstances test. The 2021 IC Rule included
provisions that were in tension with this longstanding case law--such
as designating two factors as most probative and predetermining that
they carry greater weight in the analysis, considering investment and
initiative only in the opportunity for profit or loss factor, and
excluding consideration of whether the work performed is central or
important to the employer's business. These and other provisions in the
2021 IC Rule narrowed the application of the economic reality test by
limiting the facts that may be considered as part of the test, facts
which the Department believes are relevant in determining whether a
worker is economically dependent on the employer for work or in
business for themself. The Department believes that retaining the 2021
IC Rule would have had a confusing and disruptive effect on workers and
businesses alike due to its departure from case law describing and
applying the multifactor economic reality test as a totality-of-the-
circumstances test. Departing from the longstanding test applied by the
courts also increases the risk of misapplication of the economic
reality test, which the Department believes could result in the
increased misclassification of workers as independent contractors.
---------------------------------------------------------------------------
\569\ See 86 FR 1168.
---------------------------------------------------------------------------
Therefore, the Department is rescinding the 2021 IC Rule and
replacing it with an analysis for determining employee or independent
contractor status under the Act that is more consistent with existing
judicial precedent and the Department's longstanding guidance prior to
the 2021 IC Rule. Of particular note, the regulations set forth in this
final rule do not use ``core factors'' and instead return to a
totality-of-the-circumstances analysis of the economic reality test in
which the factors do not have a predetermined weight and are considered
in view of the economic reality of the whole activity. Regarding the
economic reality factors, this final rule returns to the longstanding
framing of investment as its own separate factor, and integral as an
integral part of the potential employer's business rather than an
integrated unit of production. The final rule also provides broader
discussion of how scheduling, remote supervision, price setting, and
the ability to work for others should be considered under the control
factor, and it allows for consideration of reserved rights to control
while removing the provision in the 2021 IC Rule that minimized the
relevance of retained rights. Further, the final rule discusses
exclusivity in the context of the permanency factor, and initiative in
the context of the skill factor. The Department also made several
adjustments to the proposed regulations after consideration of the
comments received, including revisions to the regulations regarding the
investment factor and the control factor (specifically addressing
compliance with legal obligations).
The Department believes this rule is more grounded in the ultimate
inquiry of whether a worker is in business for themself or is
economically dependent on the employer for work. Workers, employers,
and independent businesses should benefit from affirmative regulatory
guidance from the Department further developing the concept of economic
dependence and how each economic reality factor is probative of whether
the worker is economically dependent on the employer for work or is in
business for themself.
When evaluating the economic impact of this rule, the Department
has considered the appropriate baseline with which to compare changes.
As discussed in section II.C.3., on March 14, 2022, in a lawsuit
challenging the Department's delay and withdrawal of the 2021 IC Rule,
a federal district court in the Eastern District of Texas issued a
decision vacating the delay and withdrawal of the 2021 IC Rule and
concluded that the 2021 IC Rule became effective on March 8, 2021.\570\
Because the 2021 IC Rule is in effect according to the district court
until this final rule takes effect and would continue to be in effect
in the absence of this rule, the Department believes that the 2021 IC
Rule is the proper baseline to compare against when estimating the
economic impact of this rule.\571\ Compared to the 2021 IC Rule, the
Department anticipates that this rule may reduce misclassification of
employees as independent contractors, because this rule is more
consistent with existing judicial precedent and the Department's
longstanding guidance. The 2021 IC Rule's elevation of certain factors,
devaluation of other factors, and its preclusion of consideration of
relevant facts under several factors could result in misapplication of
the economic reality test and may have conveyed to employers that it
might be easier than it was prior to the 2021 IC Rule to classify
workers as independent contractors rather than FLSA-covered employees.
As discussed in section III.B., the Department received comments
indicating confusion about how to apply the analysis in the 2021 IC
Rule, which could lead to misclassification of workers as independent
contractors. The issuance of this rule could reduce or prevent this
type of misclassification from occurring.
---------------------------------------------------------------------------
\570\ See CWI v. Walsh, 2022 WL 1073346.
\571\ OMB Circular A-4 notes that when agencies are developing a
baseline, ``[it] should be the best assessment of the way the world
would look absent the proposed action.''
---------------------------------------------------------------------------
Because the Department does not have data on the number of
misclassified workers and because there are inherent challenges in
determining the extent to which the rule would reduce this
misclassification, much of the analysis is presented qualitatively,
aside from rule familiarization costs, which are quantified.\572\ The
Department has therefore provided a qualitative analysis of the effects
(transfers and benefits) that could occur because of this reduced
misclassification.
---------------------------------------------------------------------------
\572\ The Department uses the term ``misclassification''
throughout this analysis to refer to workers who have been
classified as independent contractors but who, as a matter of
economic reality, are economically dependent on their employer for
work. These workers' legal status would not change under the 2021 IC
Rule or this rule--they would properly be classified as employees
under both rules. The Department notes that sources cited in this
analysis may use other misclassification standards which may not
align fully with the Department's use of the term.
---------------------------------------------------------------------------
As discussed above, the 2021 IC Rule is the appropriate baseline to
represent what the world could look like going forward in the absence
of this rule. However, this baseline may not fully reflect what the
world would look like absent this rule. Until March 2022, the
Department had not been using the framework for analysis from the 2021
IC Rule when assessing independent contractor status in its enforcement
and compliance assistance activities because the Department had
published final rules delaying the effective date of, and subsequently
withdrawing, the 2021 IC Rule. (As described in section II.C., a
federal district court in March 2022 vacated the Department's Delay and
Withdrawal Rules and ruled that the 2021 IC Rule had taken effect in
March
[[Page 1727]]
2021.) Further, as explained earlier in section III.B., the Department
is not aware of any federal district or appellate court that has
endorsed the 2021 IC Rule's analysis in the course of resolving a
dispute regarding the proper classification of a worker as an employee
or independent contractor. Therefore, if the Department were to instead
compare this final rule to the current economic and legal landscape
that continues to reflect the courts' longstanding multifactor economic
reality test, the economic impact would be much smaller, because this
rule is consistent with that landscape (i.e., the longstanding judicial
precedent and guidance that the Department was relying on prior to
March of 2022).
The Coalition to Promote Independent Entrepreneurs agreed that the
2021 IC Rule is the correct baseline to analyze the recission of the
rule, but not the separate issue of issuing new regulations
``containing a new interpretation of the multifactor economic reality
test.'' This commenter appeared to disagree with the Department's
explanation that ``under the current economic and legal landscape
baseline, the economic impact of DOL's proposed new iteration of the
test might, or might not, be `much smaller.' '' It asserted that the
direction of this economic impact would be negative, because the rule
would lead to increased uncertainty and confusion and would create an
adverse economic impact by ``denying individuals their right to be
recognized as independent contractors under the FLSA.'' The Department
addresses claims from this commenter and others on the potential costs
and benefits of this rule throughout this economic analysis.
The Department does not believe, as reflected in this analysis,
that this rule will result in widespread reclassification of workers.
That is, for workers who are properly classified as independent
contractors, the Department does not, for the most part, anticipate
that the guidance provided in this rule will result in these workers
being reclassified as employees. Especially compared to the guidance
that was in effect before the 2021 IC Rule, the test put forth in this
rule would not make independent contractor status significantly less
likely. Rather, impacts resulting from this rule will mainly be due to
a reduction in misclassification. If the 2021 IC Rule had been
retained, the risk of misclassification could have increased. As noted
previously in section III, the 2021 IC Rule's elevation of certain
factors and its preclusion of consideration of relevant facts under
several factors, which is a departure from judicial precedent applying
the economic reality test, could result in misapplication of the
economic reality test and may have conveyed to employers that it might
be easier than it was prior to the 2021 IC Rule to classify certain
workers as independent contractors rather than FLSA-covered employees.
This rule could therefore help prevent this misclassification by
providing employers with guidance that is more consistent with
longstanding precedent.
Many commenters who wrote in opposition to the proposed rule were
concerned that, because of this rule, many independent contractors
would be reclassified as employees, and that there would be a large
negative impact associated with this reclassification. For example, a
senior research fellow at the Mercatus Center said ``DOL implicitly
assumes that 100 percent of potential contracting jobs will be turned
into employment jobs; this assumption is extremely optimistic and
downplays very significant consequences in connection with the rule in
question.'' Cambridge Investment Research Inc. stated that the
practical result of the Proposed Rule would be that many workers will
be reclassified as employees, including those who want to be
independent contractors. However, the proposed rule explicitly noted
that the Department does not expect any widespread reclassification of
independent contractors as employees, and at no point assumed that 100
percent of contracting jobs would be turned into employment jobs. The
Department believes that concerns about widespread reclassification are
not realistic because the Department is adopting guidance in this rule
that is essentially identical to the standard it applied for decades
prior to the 2021 IC Rule, derived from the same analysis that courts
have applied for decades and have been continuing to apply since the
2021 IC Rule took effect.
The Department received multiple comments discussing the negative
impacts of widespread reclassification and citing research about
potential job losses and loss of earnings. For example, Littler's
Workplace Policy Institute says, ``[A] study published last April
concluded that widespread reclassification would destroy as many as
769,000 work opportunities and wipe out $9.1 billion in earnings.\573\
The proposed rule fails to take these effects into account.'' The
Chamber of Progress cites this same study, noting that, ``A national
rule reclassifying independent contractors as employees could result in
approximately 4.4 million people being involuntarily reclassified[.]''
However, the study that these data points come from is an analysis of
the potential impacts of a nationwide ABC test. The Chamber of Progress
release about the report states, ``Specifically, the study examines the
`ABC Test,' which is used in a variety of state and federal proposals
to determine whether a worker is an employee or an independent
contractor.'' The Department believes that the reclassification effects
raised by these commenters cannot be applied to this rule, because the
Department's economic reality test is not the ABC test.
---------------------------------------------------------------------------
\573\ ``New Study Finds Millions Could Lose Work if U.S.
Reclassifies Contractors,'' April 6, 2022. https://progresschamber.org/new-study-finds-millions-could-lose-work-if-u-s-reclassifies-contractors/.
---------------------------------------------------------------------------
While the Department responds throughout this economic analysis to
comments about the potential negative impacts of the rule from those
who are in opposition, it is important to note that any
reclassification or job loss estimates associated with a nationwide ABC
test are not appropriate to apply to this rule because this rule does
not adopt an ABC test and are therefore not included in the
Department's estimated impacts.
B. Estimated Number of Independent Contractors
To provide some context on the prevalence of independent
contracting, the Department first estimated the number of independent
contractors. There are a variety of estimates of the number of
independent contractors spanning a wide range depending on
methodologies and how the population is defined.\574\ There is no data
source on independent contractors that perfectly mirrors the definition
of independent contractor in the Department's regulations. There is
also no regularly published data source on the number of independent
contractors and data from the current year does not exist, making it
difficult to examine trends in independent contracting or to measure
how regulatory changes impact the number of independent contractors.
---------------------------------------------------------------------------
\574\ The Department uses the term ``independent contractor''
throughout this analysis to refer to workers who, as a matter of
economic reality, are not economically dependent on their employer
for work and are in business for themselves. The Department notes
that sources cited in this analysis may use other definitions of
independent contractors that may not align fully with the
Department's use of the term.
---------------------------------------------------------------------------
The Department believes that the Current Population Survey (CPS)
Contingent Worker Supplement (CWS) offers an appropriate lower bound
for
[[Page 1728]]
the number of independent contractors; however, there are potential
biases in these data that will be noted. This was the estimation method
used in the 2021 IC Rule and the proposed rule, and the Department has
not found any new data or analyses to indicate a need for any changes.
Some recent data sources provide an indication of how COVID-19 may have
impacted the number of independent contractors, but this is
inconclusive. Additionally, estimates from other sources will be
presented to demonstrate the potential range.
The U.S. Census Bureau conducts the CPS, and it is published
monthly by the Bureau of Labor Statistics (BLS). The sample includes
approximately 60,000 households and is nationally representative.
Periodically since 1995, and most recently in 2017, the CPS included a
supplement to the May survey to collect data on contingent and
alternative employment arrangements. Based on the CWS, there were 10.6
million independent contractors in 2017, amounting to 6.9 percent of
workers.\575\ 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.
---------------------------------------------------------------------------
\575\ Bureau of Labor Statistics, ``Contingent and Alternative
Employment Arrangements--May 2017,'' USDL-18-0942 (June 7, 2018),
https://www.bls.gov/news.release/pdf/conemp.pdf.
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The BLS's estimate of independent contractors includes ``[w]orkers
who are identified as independent contractors, independent consultants,
or freelance workers, regardless of whether they are self-employed or
wage and salary workers.'' BLS asks two questions to identify
independent contractors: \576\
---------------------------------------------------------------------------
\576\ The variables used are PES8IC=1 for self-employed and
PES7=1 for other workers.
---------------------------------------------------------------------------
Workers reporting that they are self-employed are asked:
``Are you self-employed as an independent contractor, independent
consultant, freelance worker, or something else (such as a shop or
restaurant owner)?'' (9.0 million independent contractors). We refer to
these workers as ``self-employed independent contractors'' in the
remainder of the analysis.
Workers reporting that they are wage and salary workers
are asked: ``Last week, were you working as an independent contractor,
an independent consultant, or a freelance worker? That is, someone who
obtains customers on their own to provide a product or service.'' (1.6
million independent contractors). We refer to these workers as ``other
independent contractors'' in the remainder of the analysis.
It is important to note that independent contractors are identified
in the CWS in the context of the respondent's ``main'' job (i.e., the
job with the most hours).\577\ Therefore, the estimate of independent
contractors does not include those who may be an employee for their
primary job, but may also work as an independent contractor.\578\ For
example, Lim et al. (2019) estimate that independent contracting work
is the primary source of income for 48 percent of independent
contractors.\579\ 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.\580\ However, because this survey only includes
independent contractors in one state, the Department has not used this
data to adjust its estimate of independent contractors.
---------------------------------------------------------------------------
\577\ 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 about the
respondent's main job.
\578\ 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).
\579\ K. Lim, A. Miller, M. Risch, and E. Wilking, ``Independent
Contractors in the U.S.: New Trends from 15 years of Administrative
Tax Data,'' Department of Treasury, p. 61 (Jul. 2019), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf. From table 5, the
total number of independent contractors across all categories is
13.81 million. The number of independent contractors in the
categories where these workers earn the majority of their labor
income from independent contractor earnings is 6.63 million. 6.63
million / 13.81 million = 0.48.
\580\ Washington Department of Commerce, ``Independent
Contractor Study,'' p. 21 (Jul. 2019), https://deptofcommerce.app.box.com/v/independent-contractor-study.
---------------------------------------------------------------------------
The CWS's large sample size results in small sampling error.
However, the questionnaire's design may result in some non-sampling
error. For example, one potential source of bias is that the CWS only
considers independent contractors during a single point in time--the
survey week (generally the week prior to the interview).
These numbers will thus underestimate the prevalence of independent
contracting over a longer timeframe, which may better capture the size
of the population.\581\ For example, Farrell and Greig (2016) used a
randomized sample of 1 million Chase customers to estimate prevalence
of the Online Platform Economy.\582\ 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.\583\
---------------------------------------------------------------------------
\581\ 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 1-week period as
independent contractors.
\582\ D. Farrell and F. Greig, ``Paychecks, Paydays, and the
Online Platform,'' JPMorgan Chase Institute (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911293. The authors
define the Online Platform Economy as ``economic activities
involving online intermediaries.'' This includes ``labor platforms''
that ``connect customers with freelance or contingent workers'' and
``capital platforms'' that ``connect customers with individuals who
rent assets or sell goods peer-to-peer.'' As such, this study
encompasses data on income sources that the Department acknowledges
might not be a one-to-one match with independent contracting and
could also include work that is part of an employment relationship.
However, the Department believes that including data on income
earned through online platforms is useful when discussing the
potential magnitude of independent contracting.
\583\ B. Collins, A. Garin, E. Jackson, D. Koustas, and M.
Payne, ``Is Gig Work Replacing Traditional Employment? Evidence from
Two Decades of Tax Returns,'' IRS SOI Joint Statistical Research
Program (2019) (unpublished paper), https://www.irs.gov/pub/irs-soi/19rpgigworkreplacingtraditionalemployment.pdf.
---------------------------------------------------------------------------
The CWS also uses proxy responses, which may underestimate the
number of independent contractors. The RAND
[[Page 1729]]
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).\584\ This
survey found that independent contractors comprise 7.2 percent of
workers.\585\ 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.\586\
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).587 588
---------------------------------------------------------------------------
\584\ See L. Katz and A. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,''
(2018).
\585\ Id. at 49. The estimate is 9.6 percent without correcting
for overrepresentation of self-employed workers or multiple job
holders. Id. at 31.
\586\ Id. at Addendum (``Reconciling the 2017 BLS Contingent
Worker Survey'').
\587\ 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.
\588\ 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, this may not entirely be a bias. It stems from
differences in independent contracting reported by proxy respondents
and actual respondents. As Katz and Krueger explain, this difference
may be due to a ``mode'' bias or proxy respondents may be less
likely to be independent contractors. Id. at Addendum p. 4.
---------------------------------------------------------------------------
Another potential source of bias in the CWS is that some
respondents may not self-identify as independent contractors. For
example, Abraham et al. (2020) estimated that 6.6 percent of workers in
their study initially responded that they are employees but were then
determined (by the researcher) to be independent contractors based on
their answers to follow-up questions.\589\ Additionally, individuals
who do what some researchers refer to as ``informal work'' may in fact
be independent contractors though they may not characterize themselves
as such.\590\ 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.\591\
---------------------------------------------------------------------------
\589\ K. Abraham, B. Hershbein, and S. Houseman, ``Contract Work
at Older Ages,'' NBER Working Paper 26612 (2020), http://www.nber.org/papers/w26612.
\590\ The Department believes that including data on what is
referred to in some studies as ``informal work'' is useful when
discussing the magnitude of independent contracting, although not
all informal work is done by independent contractors. The Survey of
Household Economics and Decision-making asked respondents whether
they engaged in informal work sometime in the prior month. It
categorized informal work into three broad categories: personal
services, on-line activities, and off-line sales and other
activities, which is broader than the scope of independent
contractors. These categories include activities like house sitting,
selling goods online through sites like eBay or craigslist, or
selling goods at a garage sale. The Department acknowledges that the
data discussed in this study might not be a one-to-one match with
independent contracting and could also include work that is part of
an employment relationship, but it nonetheless provides some useful
data for this purpose.
\591\ 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.jstor.org/stable/10.7758/rsf.2019.5.5.06.
---------------------------------------------------------------------------
Conversely, another source of bias in the CWS is that some workers
who self-identify as independent contractors may misunderstand their
status or may be misclassified by their employer. These workers may
answer the survey in the affirmative, despite not truly being
independent contractors. While precise and representative estimates of
nationwide misclassification are unavailable, multiple studies suggest
its prevalence in numerous sectors in the economy.\592\ See section
VII.D.2. for a more thorough discussion of the prevalence of
misclassification.
---------------------------------------------------------------------------
\592\ See, e.g., U.S. Gov't Accountability Off., GAO-09-717,
Employee Misclassification: Improved Coordination, Outreach, and
Targeting Could Better Ensure Detection and Prevention 10 (2008)
(``Although the national extent of employee misclassification is
unknown, earlier national studies and more recent, though not
comprehensive, studies suggest that employee misclassification could
be a significant problem with adverse consequences.'').
---------------------------------------------------------------------------
Because reliable data on the potential magnitude of the biases
discussed above are unavailable, and so the net direction of the biases
is unknown, the Department has not attempted to calculate how these
biases may impact the estimated number of independent contractors.
As noted above, integrating the estimated proportions of workers
who are independent contractors on secondary or otherwise excluded jobs
produces an estimate population of 22.1 million, representing the total
number of workers working as independent contractors in any job at a
given time. Given the prevalence of independent contractors who work
sporadically and earn minimal income, adjusting the estimate according
to these sources captures some of this population. It is likely that
this figure is still an underestimate of the true independent
contractor pool. This is because, in part, the CWS estimate represents
only the number of workers who worked as independent contractors on
their primary job during the survey reference week, which is why 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.
1. Range of Estimates in the Literature
To further consider the range of estimates available, the
Department conducted a literature review, the findings of which are
presented in Table 1. Other studies were also considered but are
excluded from this table because the study populations were broader
than just independent contractors, limited to one state, or include
workers outside of the United States.\593\ The RAND ALP,\594\ the
Gallup Survey,\595\ and the General Social Survey's (GSS's) Quality of
Worklife (QWL) \596\ supplement are
[[Page 1730]]
widely cited alternative estimates. However, the Department chose to
use sources with significantly larger sample sizes and/or more recent
data for the primary estimate.
---------------------------------------------------------------------------
\593\ Including, but not limited to: McKinsey Global Institute,
``Independent Work: Choice, Necessity, and the Gig Economy''
(2016),https://www.mckinsey.com/featured-insights/employment-and-growth/independent-work-choice-necessity-and-the-gig-economy; Kelly
Services, ``Agents of Change'' (2015), https://www.kellyservices.com/global/siteassets/3-kelly-global-services/uploadedfiles/3-kelly_global_services/content/sectionless_pages/kocg1047720freeagent20whitepaper20210x21020final2.pdf; Robles and
McGee, ``Exploring Online and Offline Informal Work: Findings from
the Enterprising and Informal Work Activities (EIWA) Survey''
(2016); Upwork, ``Freelancing in America'' (2019); Washington
Department of Commerce, ``Independent Contractor Study,'' (Jul.
2019), https://deptofcommerce.app.box.com/v/independent-contractor-study; 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; 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; 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; 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.
\594\ See L. Katz and A. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,''
(2018).
\595\ ``Gallup's Perspective on The Gig Economy and Alternative
Work Arrangements,'' Gallup (2018), https://www.gallup.com/workplace/240878/gig-economy-paper-2018.aspx.
\596\ See Abraham et al., ``Measuring the Gig Economy: Current
Knowledge and Open Issues'' (2018), https://www.nber.org/papers/w24950, Table 4.
---------------------------------------------------------------------------
Jackson et al. (2017) \597\ and Lim et al. (2019) \598\ 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.\599\ 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.).
---------------------------------------------------------------------------
\597\ 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.
\598\ 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.
\599\ In comparison to household survey data, tax data may
reduce certain types of biases (such as recall bias) while
increasing other types (such as underreporting bias). Because the
Department is unable to quantify this tradeoff, it could not
determine whether, on balance, survey or tax data are more reliable.
Table 1--Summary of Estimates of Independent Contracting
----------------------------------------------------------------------------------------------------------------
Percent of
Source Method \a\ Definition \b\ workers Sample size Year
----------------------------------------------------------------------------------------------------------------
CPS CWS........................ Survey........ Independent 6.9 50,392........... 2017
contractor,
consultant or
freelance worker
(main only).
ALP............................ Survey........ Independent 7.2 6,028............ 2015
contractor,
consultant or
freelance worker
(main only).
Gallup......................... Survey........ Independent contractor 14.7 5,025............ 2017
GSS QWL........................ Survey........ Independent 14.1 2,538............ 2014
contractor,
consultant or
freelancer (main
only).
Jackson et al.................. Tax data...... Independent \c\ 6.1 ~5.9 million \d\. 2014
contractor, household
worker.
Lim et al...................... Tax data...... Independent contractor 8.1 1% of 1099-MISC 2016
and 5% of 1099-K.
----------------------------------------------------------------------------------------------------------------
\a\ The CPS CWS and the GSS QWL are nationally representative, and the ALP CWS is approximately nationally
representative. The Gallup poll is demographically representative but does not explicitly claim to be
nationally representative. Lastly, the two tax data sets are very large random samples and consequently are
likely to be nationally representative, although the authors do not explicitly claim so.
\b\ The survey data only identify independent contractors on their main job. Jackson et al. include independent
contractors as long as at least 15 percent of their earnings were from self-employment income; thus, this
population is broader. If Jackson et al.'s estimate is adjusted to exclude those who are primary wage earners,
the rate is 4.0 percent. Lim et al. include independent contractors on all jobs. If Lim et al.'s estimate is
adjusted to only those who receive a majority of their labor income from independent contracting, the rate is
3.9 percent.
\c\ Summation of (1) 2,132,800 filers with earnings from both wages and sole proprietorships and expenses less
than $5,000, (2) 4,125,200 primarily sole proprietorships and with less than $5,000 in expenses, and (3)
3,416,300 primarily wage earners.
\d\ Estimate based on a 10 percent sample of self-employed workers and a 1 percent sample of W-2 recipients.
2. COVID-19 Adjustment to the Estimated Number of Independent
Contractors
The Department's estimate of the number of independent contractors,
22.1 million, is based primarily on 2017 data. Because COVID-19 has had
a substantial impact on the labor market, it is possible that this
estimate is not currently appropriate. The Department conducted a
search for more recent data to indicate any trends in the number of
independent contractors since 2017. The findings are inconclusive but
generally do not indicate an increase.
The Federal Reserve Board's annual Survey of Household Economics
and Decisionmaking (SHED) provides measures of the economic well-being
of U.S. households. The Federal Reserve Board publishes a report
``Economic Well-Being of U.S. Households'' summarizing the findings of
each survey.\600\ One subsection of the Employment section describes
the results of the questions related to ``The Gig Economy.'' While the
survey questions about work in the ``gig economy'' include more types
of work scenarios than just independent contracting, a decrease from 30
percent to 20 percent of adults answering ``yes'' from 2017 to 2020 may
indicate that the number of independent contractors in this industry
also decreased during that time period.\601\ The report summarizing the
2021 data is available, but unfortunately the gig economy questions
were revised substantially, so a comparable value is not available for
2021. Moreover, trends of potential independent contractors in one
industry are not necessarily indicative of trends across the economy.
---------------------------------------------------------------------------
\600\ Consumer and Community Research Section of the Federal
Reserve Board's Division of Consumer and Community Affairs,
``Economic Well-Being of U.S. Households in 2021,'' Board of
Governors of the Federal Reserve System (2022). Reports from all
years available at https://www.federalreserve.gov/publications/report-economic-well-being-us-households.htm.
\601\ The report defines gig work as including ``three types of
non-traditional activities: offline service activities, such as
child care or house cleaning; offline sales, such as selling items
at flea markets or thrift stores; and online services or sales, such
as driving using a ride-sharing app or selling items online.''
Consumer and Community Research Section of the Federal Reserve
Board's Division of Consumer and Community Affairs, ``Economic Well-
Being of U.S. Households in 2017,'' Board of Governors of the
Federal Reserve System (May 2018).
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MBO Partners, a company with the goal of connecting enterprise
organizations and top independent professionals, also conducts an
annual survey and prepares a research report of the findings.\602\ In
all groups of ``independent workers,'' MBO Partners
[[Page 1731]]
similarly found a decrease in the number from 2017 to 2020. Conversely,
in total, the 2021 report shows a large increase from 2020, enough that
the number of independent workers in 2021 is larger than the 2017
number. However, this increase occurs only in the ``occasional
independent'' workers category, described as those who work part-time
and regularly, but without set hours. Comparing the number of part-time
and full-time independent workers yields similar values in 2017 and
2021, so the Department believes that no adjustments are needed to the
2017 estimate of 22.1 million independent contractors.
---------------------------------------------------------------------------
\602\ MBO partners, ``The Great Realization: 11th Annual State
of Independence,'' (2021). Annual reports are available at https://www.mbopartners.com/state-of-independence/previous-reports/.
---------------------------------------------------------------------------
A few commenters said that the Department underestimated the number
of independent contractors in the U.S. because the estimate is based on
outdated data. Commenters such as the Coalition for Workforce
Innovation referenced a more recent study from Upwork, which found that
``59 million workers performed freelance work in the past 12 months,
representing 36%--or more than one-third--of the entire U.S.
workforce.'' \603\ As discussed above, the Department acknowledges that
its estimate of independent contractors could be an underestimate.
However, the estimates presented in the Upwork study could be an
overestimate because their definition of ``freelancer'' likely also
includes some workers who would be classified as employees under the
FLSA in addition to those who would be classified as independent
contractors.\604\ Furthermore, the Department was unable to verify
whether their sample of 6,000 workers was representative of all workers
in the U.S. While the Department appreciates this additional context on
the potential scope of independent contracting in the U.S., the
estimate of independent contractors in this analysis has not been
revised.
---------------------------------------------------------------------------
\603\ ``Upwork Study Finds 59 Million Americans Freelancing Amid
Turbulent Labor Market,'' Upwork, December 8, 2021. https://www.upwork.com/press/releases/upwork-study-finds-59-million-americans-freelancing-amid-turbulent-labor-market. Full study
available at https://www.upwork.com/research/freelance-forward-2021.
\604\ Their report defines freelancers as ``[i]ndividuals who
have engaged in supplemental, temporary, project- or contract-based
work, within the past 12 months.'' While many of these workers could
be independent contractors, some workers engaged in supplemental or
temporary work could likely be considered employees.
---------------------------------------------------------------------------
3. Demographics of Independent Contractors
The Department reviewed demographic information on independent
contractors using the CWS, which, as stated above, only measures those
who say that their independent contractor job is their primary job and
that they worked at the independent contractor job in the survey's
reference week. According to the CWS, these primary independent
contractors are most prevalent in the construction and professional and
business services industries. These two industries comprise 44 percent
of primary independent contractors. Independent contractors tend to be
older and predominately male (64 percent). Millennials (defined as
those born 1981-1996) have a significantly lower prevalence of primary
independent contracting than older generations: 4.2 percent for
Millennials compared to 7.2 percent for Generation X (defined as those
born 1965-1980) and 10.2 percent for Baby Boomers and Matures (defined
as individuals born before 1965).\605\ However, other surveys that
capture secondary independent contractors, or those who did informal
work as independent contractors show that the prevalence of informal
work is lower among older workers. Abraham and Houseman (2019), find
that among 18- to 24-year-olds, 41.3 percent did informal work over the
past month. The rate fell to 25.7 percent for 45- to 54-year-olds, and
13.4 percent for those 75 years and older.\606\ According to MBO
partners, the COVID-19 pandemic may have accelerated this trend; when
accounting for both primary and secondary independent work, 2021 marked
the first year that Millennials and members of Generation Z (34 percent
and 17 percent of independent workers respectively) outnumbered members
of Generation X and Baby Boomers (23 percent and 26 percent
respectively) as part of the independent workforce.\607\
---------------------------------------------------------------------------
\605\ The Department used the generational breakdown used in the
MBO Partners 2017 report, ``The State of Independence in America.''
``Millennials'' were defined as individuals born 1981-1996,
``Generation X'' were defined as individuals born 1965-1980, and
``Baby Boomers and Matures'' were defined as individuals born before
1965.
\606\ 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. Note that this informal work may be broader than what
would be considered independent contracting and includes activities
like babysitting/housesitting and selling goods online through sites
like eBay and Craigslist.
\607\ This data comes from the 2021 edition of the MBO Partners
report, ``The State of Independence in America.'' While maintaining
the generational breakdown used in the 2017 edition, ``Generation
Z'' was additionally defined as individuals born 1997-2012. https://info.mbopartners.com/rs/mbo/images/MBO_2021_State_of_Independence_Research_Report.pdf.
---------------------------------------------------------------------------
According to the CWS, 64 percent of primary independent contractors
are men. Additionally, Garin and Koustas (2021) find that men comprise
both a larger share of independent contractors who perform work through
traditional contracting arrangements and those who secure work through
online platforms.\608\ This study also found that a greater share of
men than women who earn income in this way are primarily self-employed;
women who perform online platform work are more likely to use that work
to supplement other income.\609\
---------------------------------------------------------------------------
\608\ Garin, A. and Koustas, D., ``The Distribution of
Independent Contractor Activity in the United States: Evidence from
Tax Filings,'' (2021). https://www.irs.gov/pub/irs-soi/21-rp-independent-contractor-activity.pdf.
\609\ Id.
---------------------------------------------------------------------------
According to the CWS, white workers are somewhat overrepresented
among primary independent contractors; they comprise 85 percent of this
population but only 79 percent of the population of workers.
Conversely, Black workers are somewhat underrepresented (comprising 8
percent and 13 percent, respectively).\610\ The opposite trends emerge
when evaluating the broader category of ``informal work'', where racial
minorities participate at a higher rate than white workers.\611\
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.\612\
---------------------------------------------------------------------------
\610\ These numbers are calculated by the Department and based
on the CWS respondents who state that their race is ``white only''
or ``black only'' as opposed to identifying as multi-racial.
\611\ 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.
\612\ Id.
[[Page 1732]]
Table 2--Characteristics of Workers, All Workers and Independent Contractors
----------------------------------------------------------------------------------------------------------------
Number of
Number of independent Percent of
Demographic workers Percent of contractors independent
(millions) workers (primary job) contractors
(millions)
----------------------------------------------------------------------------------------------------------------
Total................................................ 158.9 100 10.6 100
----------------------------------------------------------------------------------------------------------------
By Age
----------------------------------------------------------------------------------------------------------------
16-20 (Generation Z)................................. 8.2 5.1 0.1 0.7
21-37 (Millennials).................................. 59.2 37.3 2.5 23.4
38-52 (Generation X)................................. 49.8 31.3 3.6 33.8
53+ (Baby Boomers and Matures)....................... 43.6 27.5 4.5 42.1
----------------------------------------------------------------------------------------------------------------
By Sex
----------------------------------------------------------------------------------------------------------------
Female............................................... 75.4 47.4 3.8 35.7
Male................................................. 85.4 53.7 6.8 64.3
----------------------------------------------------------------------------------------------------------------
By Race
----------------------------------------------------------------------------------------------------------------
White only........................................... 125.6 79.1 9.0 84.6
Black only........................................... 20.3 12.8 0.9 8.3
All other races...................................... 14.9 9.4 0.8 7.1
----------------------------------------------------------------------------------------------------------------
By Ethnicity
----------------------------------------------------------------------------------------------------------------
Hispanic............................................. 27.0 17.0 1.6 14.8
Not Hispanic......................................... 133.8 84.2 9.0 85.2
----------------------------------------------------------------------------------------------------------------
By Industry
----------------------------------------------------------------------------------------------------------------
Agr, forestry, fishing, and hunting.................. 2.6 1.6 0.2 2.0
Mining............................................... 0.8 0.5 0.0 0.1
Construction......................................... 11.0 6.9 2.0 19.3
Manufacturing........................................ 16.5 10.4 0.2 2.2
Wholesale and retail trade........................... 20.5 12.9 0.8 7.9
Transportation and utilities......................... 8.0 5.1 0.6 5.7
Information.......................................... 3.0 1.9 0.2 2.2
Financial activities................................. 10.9 6.9 1.0 9.6
Professional and business services................... 19.3 12.2 2.7 25.1
Educational and health services...................... 36.2 22.8 1.0 9.6
Leisure and hospitality.............................. 15.1 9.5 0.7 6.2
Other services....................................... 7.8 4.9 1.0 9.7
Public administration................................ 7.2 4.6 0.0 0.4
----------------------------------------------------------------------------------------------------------------
By Education
----------------------------------------------------------------------------------------------------------------
Less than high school diploma........................ 14.3 9.0 1.0 9.3
High school diploma or equivalent.................... 41.9 26.4 2.6 24.4
Less than Bachelor's degree.......................... 45.3 28.5 2.8 26.5
Bachelor's degree.................................... 37.3 23.5 2.7 25.5
Master's degree or higher............................ 21.9 13.8 1.5 14.5
----------------------------------------------------------------------------------------------------------------
Note: Estimates based on the 2017 CPS Contingent Worker Survey.
An individual commenter wrote that because the COVID-19 pandemic
created specific burdens for women and people of color and resulted in
the increased participation of both groups in self-employment, the use
of 2017 data reduces the inclusion of these workers. The commenter
cited a study from the Center for Economic Policy and Research (CEPR),
which found ``[t]he share of employed women who report being self-
employed rose from 7.5 percent in the pre-pandemic period to 8.2
percent: an increase of 0.7 percentage points. By contrast, the share
of employed men who report being self-employed rose by just 0.3
percentage points (from 12.1 percent to 12.4 percent).'' \613\ The
study also found ``[t]he share of employed Blacks who reported being
self-employed rose from 5.8 percent to 6.8 percent: an increase of 1.0
percentage point. . . . For Hispanics, there was a 1.5 percentage point
rise in shares from 8.4 percent to 9.9 percent . . . . By contrast, the
rise in self-employment among whites was just 0.2 percent, from 11.3 to
11.5 percent.'' While the Department acknowledges that the demographic
makeup of independent contractors could have shifted following the
COVID-19 pandemic, the data cited in the CEPR study includes all self-
employed persons, which is a broader population than independent
contractors. It is possible that this data may also reflect the
demographic trends of the more specific population of
[[Page 1733]]
independent contractors, but the Department has not made any
adjustments to its overall estimate of the number of independent
contractors.
---------------------------------------------------------------------------
\613\ Annabel Utz, Julie Yixia Cai, & Dean Baker, ``The Pandemic
Rise in Self-Employment: Who is Working for Themselves Now,'' Center
for Economic and Policy Research. (August 2022). https://cepr.net/the-pandemic-rise-in-self-employment-who-is-working-for-themselves-now/.
---------------------------------------------------------------------------
C. Costs
1. Rule Familiarization Costs
Regulatory familiarization costs represent direct costs to
businesses and current independent contractors associated with
reviewing the new regulation. To estimate the total regulatory
familiarization costs, the Department used (1) the number of
establishments and government entities using independent contractors,
and the current number of independent contractors; (2) the wage rates
for the employees and for the independent contractors reviewing the
rule; and (3) the number of hours that it estimates employers and
independent contractors will spend reviewing the rule. This section
presents the calculation for establishments first and then the
calculation for independent contractors.
Regulatory familiarization costs may be a function of the number of
establishments or the number of firms.\614\ Presumably, the
headquarters of a firm will conduct the regulatory review for
businesses with multiple locations and may require some locations to
familiarize themselves with the regulation at the establishment level.
Other firms may either review the rule to consolidate key takeaways for
their affiliates or they may rely entirely on 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.
---------------------------------------------------------------------------
\614\ An establishment is commonly understood as a single
economic unit, such as a farm, a mine, a factory, or a store, that
produces goods or services. Establishments are typically at one
physical location and engaged in one, or predominantly one, type of
economic activity for which a single industrial classification may
be applied. An establishment contrasts with a firm, or a company,
which is a business and may consist of one or more establishments.
See BLS, ``Quarterly Census of Employment and Wages: Concepts,''
https://www.bls.gov/opub/hom/cew/concepts.htm.
---------------------------------------------------------------------------
To estimate the number of establishments incurring regulatory
familiarization costs, the Department began by using the Statistics of
U.S. Businesses (SUSB) to define the total pool of establishments in
the United States.\615\ In 2019, the most recent year available, there
were 7.96 million establishments. These data were supplemented with the
2017 Census of Government that reports 90,075 local government
entities, and 51 state and federal government entities.\616\ The total
number of establishments and governments in the universe used for this
analysis is 8,049,229.
---------------------------------------------------------------------------
\615\ U.S. Census Bureau, 2019 SUSB Annual Datasets by
Establishment Industry. https://www.census.gov/data/datasets/2019/econ/susb/2019-susb.html.
\616\ U.S. Census Bureau, 2017 Census of Governments. https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
---------------------------------------------------------------------------
This universe is then restricted to the subset of establishments
that engage independent contractors. In 2019, Lim et al. used extensive
IRS data to model the independent contractor market and found that 34.7
percent of firms hire independent contractors.\617\ These data are
based on annual tax filings, so the dataset includes firms that may
contract for only parts of a year. Multiplying the universe of
establishments and governments by 35 percent results in 2.8 million
entities.
---------------------------------------------------------------------------
\617\ Lim et al., supra n.512, Table 10: Firm sample summary
statistics by year (2001-2015), https://www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf.
---------------------------------------------------------------------------
The Department assumes that a Compensation, Benefits, and Job
Analysis Specialist (SOC 13-1141) (or a staff member in a similar
position) will review the rule.\618\ According to the Occupational
Employment and Wage Statistics (OEWS), these workers had a median wage
of $32.59 per hour in 2022 (most recent data available).\619\ Assuming
benefits are paid at a rate of 45 percent of the base wage,\620\ and
overhead costs are 17 percent of the base wage, the reviewer's
effective hourly rate is $52.80. The Department assumes that it will
take on average about 1 hour to review the rule. In the proposed rule,
the Department assumed a review time of 30 minutes, but has increased
this estimate in response to concerns from commenters that the
regulatory familiarization costs were understated. The Department has
provided a discussion of these comments at the end of this section. The
Department believes that 1 hour, on average, is appropriate, because
while some establishments will spend longer to review the rule, many
establishments may rely on third-party summaries of the changes or
spend little or no time reviewing the rule. Furthermore, the analysis
outlined in this rule aligns with existing judicial precedent and
previous guidance released by the Department, with which much of the
regulated community is already familiar. Total regulatory
familiarization costs to businesses in Year 1 are estimated to be
$148,749,744 ($52.80 x 1 hour x 2,817,230) in 2022 dollars.
---------------------------------------------------------------------------
\618\ 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.
\619\ The 2021 IC Rule used the mean wage rate to calculate rule
familiarization costs, but the Department has used the median wage
rate here, because it is more consistent with cost analyses in other
Wage and Hour Division rulemakings. The Department used the median
wage rate in the Withdrawal Rule. 86 FR 24321. Generally, the
Department uses median wage rates to calculate costs, because the
mean wage rate has the potential to be biased upward by high-earning
outlier wage observations.
\620\ Calculated using BLS Employer Costs for Employee
Compensation data. The Department took the average of the most
recent four quarters of Total Benefits per Hour Worked for Civilian
Workers (Series ID CMU1030000000000D) divided it by the average of
the most recent four quarters of Wages and Salaries Cost per Hour
Worked for Civilian Workers (Series ID CMU1020000000000D). https://www.bls.gov/ncs/data.htm.
---------------------------------------------------------------------------
For regulatory familiarization costs for independent contractors,
the Department used its estimate of 22.1 million independent
contractors and assumed each independent contractor will spend 30
minutes to review the regulation. In the proposed rule, the Department
assumed that it would take independent contractors an average of 15
minutes to review the regulation but has also increased this estimate
in the final rule in response to commenters' concerns. The average time
spent by independent contractors is estimated to be shorter than for
establishments and governments. This difference is in part because the
Department believes independent contractors are likely to rely on
summaries of the key elements of the rule change published by the
Department, worker advocacy groups, media outlets, and accountancy and
consultancy firms, as has occurred with other rulemakings. This time is
valued at $23.46, which is the median hourly wage rate for independent
contractors in the CWS of $19.45 updated to 2022 dollars using the
gross domestic product (GDP) deflator.621 622 Therefore,
regulatory familiarization costs to
[[Page 1734]]
independent contractors in Year 1 are estimated to be $259,233,000
($23.46 x 0.5 hour x 22.1 million).
---------------------------------------------------------------------------
\621\ Based on Department calculations using the individual
level data. The Department also calculated the mean hourly wage for
independent contractors using the CWS data and found that the mean
wage in 2017 was $27.29, which would be $32.92 updated to 2022
dollars using the GDP deflator.
\622\ In the 2021 IC rule the Department included an additional
45 percent for benefits and 17 percent for overhead. These
adjustments have been removed here, because independent contractors
do not usually receive employer-provided benefits and generally have
overhead costs built into their hourly rate.
---------------------------------------------------------------------------
The total one-time regulatory familiarization costs for
establishments, governments, and independent contractors are estimated
to be $408 million. Regulatory familiarization costs in future years
are assumed to be de minimis. Employers and independent contractors
would continue to familiarize themselves with the applicable legal
framework in the absence of the rule, so this rulemaking is not
expected to impose costs after the first year. This amounts to a 10-
year annualized cost of $56.4 million at a discount rate of 3 percent
or $54.3 million at a discount rate of 7 percent.
Multiple commenters said that they were concerned that the
Department's rule familiarization cost estimate was too low. Commenters
asserted that the Department's initial estimate of 30 minutes to review
the rule was too short, and that it would take firms much longer to
read and understand the final rule. For example, a comment from two
fellows at the Heritage Foundation estimated that ``[e]ven individuals
with very high rates of reading and comprehension'' would need more
than two hours to read the full proposal. The Coalition for Workforce
Innovation said that while a person could simply read the rule in 30
minutes, it wouldn't be enough time to understand the rule and
translate the understanding into advice to be communicated within the
organization. The U.S. Chamber of Commerce commented, ``[a]n
economically appropriate approach for gauging the scale of
familiarization costs is to assume no less than one hour of
familiarization time for both affected workers and hiring
establishments.'' The Modern Economy Project commented that the
complexity of the rulemaking and of the issue of worker classification
necessitates more time for review. Other commenters echoed similar
sentiments. In response to all the comments received on this topic, the
Department reconsidered the time for rule familiarization and doubled
its original estimates, increasing them to 1 hour for potentially
affected firms and 30 minutes for independent contractors. The
Department believes that a longer time estimate would not be
appropriate because this estimate represents an average of the firms
who may spend more time for review, and those who will not spend any
time reviewing the rule.
Some commenters also expressed concerns with the Department's
assumption that the rule would be read by a Compensation, Benefits, and
Job Analysis Specialist. For example, the Coalition for Workforce
Innovation stated, ``businesses task their high-level, well-trained
human resources workers, in-house attorneys, and outside counsel with
this responsibility at an hourly rate well exceeding $50.'' The U.S.
Chamber of Commerce wrote that the ``Department's selection of
`Compensation, Benefits and Job Analysis Specialist' as the model
reviewer for its calculation of familiarization costs misunderstands
and misrepresents the seriousness and complexity of the regulation
being proposed.'' The Department acknowledges that in some cases,
higher-paid senior workers could be charged with reading this rule, but
believes that the use of the Compensation, Benefits, and Job Analysis
Specialist hourly wage is consistent with other rules released by the
Wage and Hour Division and the Department, including the 2021 IC
Rule.\623\ The Department notes that it did not receive any comments
objecting to the use of this occupation in its rule familiarization
calculation in the 2021 IC Rule.
---------------------------------------------------------------------------
\623\ 86 FR 1228 (``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.'').
---------------------------------------------------------------------------
2. Comments Received on the Department's Cost Analysis
Some commenters asserted that the Department did not properly
consider all of the potential costs of the regulation. For example,
commenters such as the Financial Services Institute said that the
Department did not consider substantial costs of the rule, such as the
cost that will arise from businesses being forced to provide health
insurance and other benefits to their former independent contractors or
the indirect costs of higher taxes. The Department notes that these
costs would be considered transfers and are discussed in section VII.E
of this economic analysis. Other commenters mentioned that the rule
would lead to significant compliance costs for firms. For example, two
fellows from the Heritage Foundation commented that in addition to
familiarizing themselves with the rule, the firm would have to perform
an individualized assessment of the economic relationship with each of
their contractors, renegotiate or cancel existing contracts, spend time
converting independent contractors into employees, engage with labor
unions and elections, and deal with enforcement actions. The Cetera
Financial Group said that the ongoing cost of compliance for employers
is considerable. They stated that applying this rule only to
independent financial professionals would create an obligation for
employers to track the earnings and hours worked for more than 140,000
independent financial professionals in the U.S. As discussed above, the
Department does not believe that this rule will lead to widespread
reclassification (and additional tracking of hours and earnings), and
for the limited cases in which reclassification could occur, many of
these costs should already be incurred by firms. For example, as a
matter of good practice, firms should already be assessing the economic
relationship of contractors when they engage in business with them.
Other commenters wrote that the rule would actually reduce
compliance costs. For example, the Laborers' International Union of
North America (LIUNA) urged the Department to consider reduced
compliance costs as an important impact of the rule. They stated that
the rule will improve public understanding of legal obligations because
it codifies judicial precedent in a comprehensive, accessible, and
reliable format.
D. Benefits and Transfers
1. Increased Consistency
This rule presents a detailed analysis for determining employee or
independent contractor status under the Act that is more consistent
with existing judicial precedent and the Department's longstanding
guidance prior to the 2021 IC Rule. This analysis will provide more
consistent guidance to employers in properly classifying workers as
employees or independent contractors, as well as useful guidance to
workers on whether they are correctly classified as employees or
independent contractors. The analysis will provide a consistent
approach for those businesses that engage (or wish to engage)
independent contractors, who the Department recognizes play an
important role in the economy. The rule's consistency with judicial
precedent could also help to reduce legal disputes.
2. Reduced Misclassification
This rule will provide consistent guidance to employers in properly
classifying workers as employees or independent contractors, as well as
useful guidance to workers on whether they are correctly classified as
employees or independent contractors. This clear guidance could help
reduce the occurrence of misclassification.
[[Page 1735]]
The prevalence of misclassification of employees as independent
contractors is unclear, but the literature indicates it is substantial.
A 2020 National Employment Law Project (NELP) report, for example,
reviewed state audits and concluded that ``these state reports show
that 10 to 30 percent of employers (or more) misclassify their
employees as independent contractors.'' \624\ Similarly, a 2000
Department of Labor study also found that among audits from nine
states, ``employers with misclassified workers ranged from
approximately 10% to 30%.'' \625\ This same report found that depending
on the state, between 1 percent and 9 percent of workers are
misclassified as independent contractors.
---------------------------------------------------------------------------
\624\ NELP, ``Independent Contractor Misclassification Imposes
Huge Costs on Workers and Federal and State Treasuries,'' (Oct.
2020), https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-federal-state-treasuries-update-october-2020.
\625\ Lalith de Silva, Adrian Millett, Dominic Rotondi, and
William F. Sullivan, ``Independent Contractors: Prevalence and
Implications for Unemployment Insurance Programs'' Report of
Planmatics, Inc., for U.S. Department of Labor Employment and
Training Administration (2000), https://wdr.doleta.gov/owsdrr/00-5/00-5.pdf.
---------------------------------------------------------------------------
Misclassification disproportionately affects Black, indigenous, and
people of color (BIPOC) because of the disparity in occupations
affected by misclassification.\626\ Commenters echoed these concerns
and provided additional supporting information. For example, a joint
comment from the Lawyers Committee for Civil Rights Under Law (LCCRUL)
and The Washington Lawyer's Committee for Civil Rights and Urban
Affairs (WLC) stated, ``[d]ue to occupational segregation, the sectors
in which misclassification is most prevalent are comprised
disproportionately [of] BIPOC workers, especially Black and immigrant
workers.'' \627\ Looking at 2021 BLS data, LCCRUL and WLC noted that
41% of workers in the construction industry identify as Black, Asian,
or Hispanic. As discussed in the section below, research has shown that
misclassification is prevalent in the construction industry. LCCRUL and
WLC also point out, ``[i]n gig-based jobs, where the classification of
workers as independent contractors is a defining characteristic of the
industry, people of color and immigrants are also overrepresented: 30%
of Latinx adults, 20% of Black adults, and 19% of Asian adults work in
such jobs, compared to 12% of white adults.'' \628\ NELP also agreed,
stating, ``[i]ndependent contractor misclassification by companies is
also strikingly racialized, occurring disproportionately in occupations
in which people of color, including Black, Latinx, and Asian workers,
are overrepresented.'' NELP analyzed the March 2022 Current Population
Survey Annual Social and Economic Supplement (CPS ASEC) data and found
that workers of color comprise just over a third of workers overall but
comprise between 47 and 91 percent of workers in industries such as
construction, trucking, delivery, home care, agricultural, personal
care, ride-hail, and janitorial and building service.\629\
---------------------------------------------------------------------------
\626\ NELP, Independent Contractor Misclassification Imposes
Huge Costs on Workers and Federal and State Treasuries, (Oct. 2020)
(describing how misclassification rates are higher in certain
industries such as construction, trucking, janitorial, and home care
work), https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-federal-state-treasuries-update-october-2020.
\627\ Marina Zhavoronkova et al., Occupational Segregation in
America, Center for American Progress (Mar. 29, 2022), https://www.americanprogress.org/article/occupational-segregation-in-america/.
\628\ Risa Gelles-Watnick & Monica Anderson, Racial and Ethnic
Differences Stand Out in the U.S. Gig Workforce, PEW RSCH. CTR.
(Dec. 15, 2021), https://www.pewresearch.org/fact-tank/2021/12/15/racial-and-ethnic-differencesstand-out-in-the-u-s-gig-workforce/.
\629\ NELP analysis of March 2022 Current Population Survey
Annual Social and Economic Supplement microdata. For underlying
data, see CPS Annual Social and Economic Supplement, U.S. Census
Bureau, https://data.census.gov/mdat/#/search?ds=CPSASEC2022.
---------------------------------------------------------------------------
Misclassification contravenes one of the purposes of the FLSA:
eliminating ``unfair method[s] of competition in commerce.'' \630\ When
employers misclassify employees as independent contractors, they
illegally cut labor costs, undermining law-abiding competitors.\631\
While the services offered may be comparable at face value, the
employer engaging in misclassification is able to offer lower estimates
and employers following the rules are left at a disadvantage.
---------------------------------------------------------------------------
\630\ 29 U.S.C. 202(a), (b).
\631\ Id.
---------------------------------------------------------------------------
Multiple commenters also provided data on the prevalence and harms
of misclassification, specifically in the construction industry. For
example, the Illinois Economic Policy Institute (ILEPI), the National
Electrical Contractors Association (NECA) and the International
Brotherhood of Electrical Workers (IBEW), the United Brotherhood of
Carpenters and Joiners (UBC), and North America's Building Trades
Unions (NABTU), among others, all cite to a study from Russell Ormiston
et al., which found that between 12 and 21 percent of the construction
industry workforce were either misclassified as independent contractors
or working ``off-the-books.'' \632\ The paper notes that these results
suggest that ``between 1.30 and 2.16 million workers were misclassified
or working in cash-only arrangements.'' Although the impacts discussed
in this study involve broader labor violations than independent
contractor misclassification, its results are still useful for
understanding the extent of the problem. Commenters asserted that not
only is misclassification prevalent in the construction industry, but
it is also harmful to workers and to employers who do not misclassify
their workers. For example, SWACCA noted that when construction
companies misclassify their workers, they avoid costs such as overtime,
workers' compensation, unemployment insurance, employment taxes, and
compliance with health and safety requirements. They explained that
when ``high road'' employers are unable to compete with contractors who
are misclassifying their workers, it leads to a ``race to the bottom,''
which further degrades working conditions in construction. UBC
discussed a report on the number of construction worker families in the
U.S. enrolled in safety net programs, such as Medicaid, Temporary
Assistance for Needy Families (TANF), and the Supplemental Nutrition
Assistance Program (SNAP). UBC noted that the report found,
``[s]hockingly, 3 million families, or 39 percent of construction
worker families, are enrolled in at least one safety net program,
costing state and federal taxpayers $28 billion a year.'' \633\ They
further explained that ``[t]he authors of the report attributed the
high degree of reliance on public assistance to a number of factors.
Chief among those were low pay, wage theft, misclassification as
independent contractors, off-the-books payments, and `payroll fraud.'
'' While the costs discussed in that report reflect a variety of
factors, if misclassification contributes to just a share of this
overall cost, the costs of misclassification could still be
significant, especially for just one industry. If this final rule s
then able to reduce a fraction of overall misclassification in the
U.S., the
[[Page 1736]]
Department would anticipate benefits for affected workers and
businesses in competition.
---------------------------------------------------------------------------
\632\ Russel Ormiston, Dale Belman, & Mark Erlich, ``An
Empirical Methodology to Estimate the Incidence and Costs of Payroll
Fraud in the Construction Industry,'' (Jan. 2020), available at
https://stoptaxfraud.net/wp-content/uploads/2020/03/National-Carpenters-Study-Methodology-for-Wage-and-Tax-Fraud-Report-FINAL.pdf.
\633\ Ken Jacobs, Kuichih Huang, Jenifer MacGillvary and Enrique
Lopezlira, ``The Public Cost of Low-Wage Jobs in the US Construction
Industry,'' UC Berkeley Labor Center (January 2022), https://laborcenter.berkeley.edu/the-public-cost-of-low-wage-jobs-in-the-us-construction-industry/.
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E. Additional Discussion of Transfers
1. Employer-Provided Fringe Benefits
Misclassification of independent contractors culminates in a
reduced social safety net starting with the individual and cascading
out through the local, state, and federal programs. Employees who are
misclassified as independent contractors generally do not receive
employer-sponsored health and retirement benefits, potentially
resulting in or contributing to long-term financial insecurity.
Employees are more likely than independent contractors to have
health insurance. According to the CWS, 75.4 percent of independent
contractors have health insurance, compared to 84.0 percent of
employees. This gap between independent contractors and employees is
also true for low-income workers. Using CWS data, the Department
compared health insurance rates for workers earning less than $15 per
hour and found that 71.0 percent of independent contractors have health
insurance compared with 78.5 percent of employees. Lastly, the
Department considered whether this gap could be larger for
traditionally underserved groups or minorities. Considering the subsets
of independent contractors who are female, Hispanic, or Black, only the
Hispanic independent contractors have a statistically significant
difference in the percentage of workers with health insurance
(estimated to be about 18 percentage points lower).\634\
---------------------------------------------------------------------------
\634\ To measure if the difference between these proportions is
statistically significant, the Department used the replicate weights
for the CWS. At a 0.05 significance level, the proportion of
Hispanic independent contractors with any health insurance is lower
than the proportion for all independent contractors.
---------------------------------------------------------------------------
Additionally, a major source of retirement savings is employer-
sponsored retirement accounts. According to the CWS, 55.5 percent of
employees have a retirement account with their current employer; in
addition, the BLS Employer Costs for Employee Compensation (ECEC) found
that in 2022, employers paid 5.1 percent of employees' total
compensation in retirement benefits on average ($2.16/$42.48).\635\ A
2017 Treasury study found that in 2014, while forty two percent of wage
earners made contributions to an individual retirement account (IRA) or
employer plan, only eight percent of self-employed individuals made any
retirement contribution.\636\ Smaller retirement savings could result
in a long-term tax burden to all Americans due to increased reliance
upon social assistance programs.
---------------------------------------------------------------------------
\635\ BLS Employer Costs for Employee Compensation--December
2022. https://www.bls.gov/news.release/pdf/ecec.pdf.
\636\ Jackson, E., Looney, A., & Ramnath, S., Department of
Treasury, The Rise of Alternative Work Arrangements: Evidence and
Implications for Tax Filing and Benefit Coverage, Working Paper #114
(Jan. 2017), https://home.treasury.gov/system/files/131/WP-114.pdf.
As discussed in the 2021 IC Rule, this study defines retirement
accounts as ``employer-sponsored plans,'' which may not encompass
all of the possible long-term saving methods. See 86 FR 1217.
---------------------------------------------------------------------------
To the extent that this rule would reduce misclassification, it
could result in transfers to workers in the form of employer-provided
benefits like health care and retirement benefits. The National Retail
Federation questioned this assumption, asserting that ``it does not
take into account the myriad of insurance arrangements that are
available to individuals and their families.'' While some independent
contractors do have health insurance, as evidenced in the data
discussed above, they are insured at a lower rate than employees.
As shown in Table 3 below, using data from BLS Employer Costs for
Employee Compensation, the Department has calculated the average cost
to employers for various benefits as a percentage of the average cost
to employers for wages and salaries. This share was then applied to the
median weekly wage of both full-time and part-time independent
contractors to estimate the value of these benefits to an average
independent contractor if they were to begin receiving these benefits.
The Department estimated that the value of these benefits could average
more than $15,000 annually for full-time independent contractors and
more than $6,000 annually for part-time independent contractors. This
example transfer estimate could be reduced if there is a downward
adjustment in the worker's wage rate to offset a portion of the
employer's cost associated with these new benefits.
Table 3--Potential Transfers Associated With Employer-Provided Fringe Benefits
----------------------------------------------------------------------------------------------------------------
Value of benefit Value of benefit
Employer cost for for the median for the median
benefit as a share weekly wage of a weekly wage of a
Employer-provided benefit of employer cost full-time part-time
for wages and independent independent
salaries (%) (Q4 contractor ($1017) contractor ($398)
2022) \a\ \d\ \d\
----------------------------------------------------------------------------------------------------------------
Health Insurance................................... 11.2 $113.90 $44.58
Retirement \b\..................................... 7.4 75.26 29.45
Paid Leave \c\..................................... 10.8 109.84 42.98
------------------------------------------------------------
Total Annual Value of Benefits................. ................... 15,547.90 6,084.62
----------------------------------------------------------------------------------------------------------------
\a\ The share for each benefit is calculated as the cost per hour for civilian workers divided by the wages and
salaries cost per hour for civilian workers. Series IDs CMU1150000000000D, CMU1180000000000D, and
CMU1040000000000D divided by Series ID CMU1020000000000D.
\b\ Includes defined benefit and defined contribution retirement plans.
\c\ Includes vacation, holiday, sick and personal leave.
\d\ Earnings data from the 2017 CWS (https://www.bls.gov/news.release/conemp.t13.htm) were inflated to Q3 2022
using GDP Deflator.
2. Tax Liabilities
As self-employed workers, independent contractors are legally
obligated to pay both the employee and employer shares of the Federal
Insurance Contributions Act (FICA) taxes. Thus, if workers'
classifications change from independent contractors to employees, there
could be a transfer in federal tax liabilities from workers to
employers.\637\ Although this rule only addresses whether a worker is
an employee or an independent contractor under the FLSA, the Department
assumes in this analysis that employers are likely to keep the status
of most workers the same across all benefits and requirements,
including for tax
[[Page 1737]]
purposes.\638\ These payroll taxes include the 6.2 percent employer
component of the Social Security tax and the 1.45 percent employer
component of the Medicare tax.\639\ In sum, independent contractors are
legally responsible for an additional 7.65 percent of their earnings in
FICA taxes (less the applicable tax deduction for this additional
payment). Some of this increased tax liability may be partially or
wholly paid for by the individuals and companies that engage
independent contractors, to the extent that the compensation paid to
independent contractors accounts for this added tax liability. However,
changes in compensation are discussed separately below. Changes in
benefits, tax liability, and earnings must be considered in tandem to
identify how the standard of living may change.
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\637\ See 86 FR 1218.
\638\ Courts have noted that the FLSA has the broadest
conception of employment under federal law. See, e.g., Darden, 503
U.S. at 326. To the extent that businesses making employment status
determinations base their decisions on the most demanding federal
standard, a rulemaking addressing the standard for determining
classification of worker as an employee or an independent contractor
under the FLSA may affect the businesses' classification decisions
for purposes of benefits and legal requirements under other federal
laws.
\639\ Internal Revenue Service, ``Publication 15, (Circular E),
Employer's Tax Guide'' (2023 https://www.irs.gov/publications/p15.
The social security tax has a wage base limit of $160,200 in 2023.
There is no wage base limit for Medicare Tax.
---------------------------------------------------------------------------
The Coalition to Promote Independent Entrepreneurs contended that
the Department's analysis of transfers is problematic and that the
claim that employers are likely to keep the status of most workers the
same across all benefits and requirements is legally incorrect. In the
Department's enforcement experience, employers generally classify
workers as employees or independent contractors for all purposes. The
Department is not making any statement regarding employers' compliance
with other laws that use different standards for employee
classification than the FLSA.
In addition to affecting tax liabilities for workers, this rule
could have an impact on state tax revenue and budgets.
Misclassification results in lost revenue and increased costs for
states because states receive less tax revenue than they otherwise
would from payroll taxes, and they have reduced funds to unemployment
insurance, workers' compensation, and paid leave programs.\640\
Although it has not been updated more recently, the IRS conducted a
comprehensive worker misclassification estimate in 1984 using data
collected by auditors. At the time, the IRS found misclassification
resulted in an estimated total tax loss of $1.6 billion in Social
Security taxes, Medicare taxes, Federal unemployment taxes, and Federal
income taxes (for Tax Year 1984).641 642 To the extent
workers were incorrectly classified due to misapplication of the 2021
IC Rule, that could have led to reduced tax revenues.
---------------------------------------------------------------------------
\640\ See, e.g., Lisa Xu and Mark Erlich, Economic Consequence
of Misclassification in the State of Washington, Harvard Labor and
Worklife Program, 2 (2019), https://lwp.law.harvard.edu/files/lwp/files/wa_study_dec_2019_final.pdf; Karl A. Racine, Issue Brief and
Economic Report, Illegal Worker Misclassification: Payroll Fraud in
the District's Construction Industry, 13 (September 2019), https://oag.dc.gov/sites/default/files/2019-09/OAG-Illegal-Worker-Misclassification-Report.pdf.
\641\ Treasury Inspector General for Tax Inspection 2013,
Employers Do Not Always Follow Internal Revenue Service Worker
Determination Rulings, https://www.oversight.gov/sites/default/files/oig-reports/TIGTA/201330058fr_0.pdf.
\642\ Adjusted for inflation using the CPI-U, the current value
of this tax loss would be $4.5 billion.
---------------------------------------------------------------------------
Generally, employer requirements pertaining to unemployment
insurance, disability insurance, or worker's compensation are on behalf
of employees, therefore independent contractors do not have access to
those benefits. Reduced unemployment insurance, disability insurance,
and worker's compensation contributions result in reduced disbursement
capabilities. Misclassification of employees as independent contractors
thus impacts the funds paid into such state programs. Even if the
misclassified worker is unaffected because they need no assistance, the
employer has not paid into the programs as required. As a result, the
state has diminished funds for those who require the benefits. For
example, in Tennessee, from September 2017 to October 2018, the
Uninsured Employers Fund unit ``assessed 234 penalties against
employers for not maintaining workers' compensation insurance, for a
total assessment amount of $2,730,269.60.'' \643\ This amount
represents only what was discovered by the taskforce in thirteen months
and in just one state. By rescinding the 2021 IC Rule, this rule could
prevent this increased burden on government entities.
---------------------------------------------------------------------------
\643\ NELP, supra n.553.
---------------------------------------------------------------------------
3. FLSA Protections
When workers are properly classified as independent contractors,
the minimum wage, overtime pay, and other requirements of the FLSA no
longer apply. The 2017 CWS data indicate that independent contractors
are more likely than employees to report earning less than the FLSA
minimum wage of $7.25 per hour (8 percent for self-employed independent
contractors, 5 percent for other independent contractors, and 2 percent
for employees). Concerning overtime pay, not only do independent
contractors not receive the overtime pay premium, but the number of
overtime hours worked (more than 40 hours in a workweek) by independent
contractors is also higher. Analysis of the CWS data indicated that,
before conditioning on covariates, primary self-employed independent
contractors are more likely to work overtime at their main job than
employees, as 29 percent of self-employed independent contractors
reported working overtime versus just 17 percent for employees.\644\
Additionally, independent contractors who work overtime tend to work
more hours of overtime than employees. According to the Department's
analysis of CWS data, among those who usually work overtime, the mean
usual number of overtime hours for independent contractors is 15.4 and
the mean for employees is 11.8 hours. Independent contractors are also
not protected by other provisions in the FLSA that are centered on
ensuring that women are treated fairly at work, including employer-
provided accommodations for breastfeeding workers and protections
against pay discrimination.
---------------------------------------------------------------------------
\644\ The Department based this calculation on the percentage of
workers in the CWS data who respond to the PEHRUSL1 variable (``How
many hours per week do you usually work at your main job?'') with
hours greater than 40. Workers who answer that hours vary were
excluded from the calculation. The Department also applied the
exclusion criteria used by Katz and Krueger (exclude workers
reporting weekly earnings less than $50 and workers whose calculated
hourly rate (weekly earnings divided by usual hours worked per week)
is either less than $1 or more than $1,000).
---------------------------------------------------------------------------
As discussed above, compared to the 2021 IC Rule, this rule could
result in reduced misclassification of employees as independent
contractors. Any reduction in misclassification that occurs because of
this rule would lead to an increase in the applicability of these FLSA
protections for workers and subsequently may result in transfers
relating to minimum wage and overtime pay. Specifically, to the extent
misclassified workers were not earning the minimum wage, reduced
misclassification would increase hourly wages for these workers to the
federal minimum wage. Similarly, to the extent misclassified workers
were not receiving the applicable overtime pay, reduced
misclassification would increase overtime pay for any overtime hours
they continued to work. However, compared to the current economic and
legal landscape where courts and parties outside the Department are not
necessarily using the 2021 IC Rule's framework for analyzing employee
or independent contractor classification
[[Page 1738]]
and are instead continuing to use longstanding judicial precedent and
guidance that the Department was relying on prior to March of 2022,
these transfers (and the other transfers discussed above) would be less
likely to occur.
4. Hourly Wages, Bonuses, and Related Compensation
In addition to increased compliance with minimum wage and overtime
pay requirements, potential transfers may also result from this
rulemaking as a consequence of differences in earnings between
employees and independent contractors.\645\ Independent contractors are
generally expected to earn a wage premium relative to employees who
perform similar work to compensate for their reduced access to benefits
and increased tax liability. However, this may not always be the case
in practice. The Department compared the average hourly wages of
current employees and independent contractors to provide some
indication of the impact on wages of a worker who is reclassified from
an independent contractor to an employee.
---------------------------------------------------------------------------
\645\ The discussion of data on the differences in earnings
between employees and independent contractors in the 2021 IC Rule
was potentially confusing and included some evidence that was not
statistically significant, so the findings and methodology are
discussed again here.
---------------------------------------------------------------------------
The Department used an approach similar to Katz and Krueger
(2018).\646\ Both regressed hourly wages on independent contractor
status \647\ and observable differences between independent contractors
and employees (e.g., occupation, sex, potential experience, education,
race, and ethnicity) to help isolate the impact of independent
contractor status on hourly wages. Katz and Krueger used the 2005 CWS
and the 2015 RAND American Life Panel (ALP) (the 2017 CWS was not
available at the time of their analysis). The Department used the 2017
CWS.\648\
---------------------------------------------------------------------------
\646\ L. Katz and A. Krueger, ``The Rise and Nature of
Alternative Work Arrangements in the United States, 1995-2015,''
(2018).
\647\ On-call workers, temporary help agency workers, and
workers provided by contract firms are excluded from the base group
of ``traditional'' employees.
\648\ In both Katz and Krueger's regression results and the
Department's calculations, the following outlying values were
removed: workers reporting earning less than $50 per week, less than
$1 per hour, or more than $1,000 per hour. Choice of exclusionary
criteria from Katz and Krueger (2018).
---------------------------------------------------------------------------
Both analyses found similar results. A simple comparison of mean
hourly wages showed that independent contractors tend to earn more per
hour than employees (e.g., $27.29 per hour for all independent
contractors versus $24.07 per hour for employees using the 2017 CWS).
However, when controlling for observable differences between workers,
Katz and Krueger found no statistically significant difference between
independent contractors' and employees' hourly wages in the 2005 CWS
data. Although their analysis of the 2015 ALP data found that primary
independent contractors earned more per hour than traditional
employees, they recommended caution in interpreting these results due
to the imprecision of the estimates.\649\ The Department found no
statistically significant difference between independent contractors'
and employees' hourly wages in the 2017 CWS data.
---------------------------------------------------------------------------
\649\ See top of page 20, ``Given the imprecision of the
estimates, we recommend caution in interpreting the estimates from
the [ALP].'' The standard error on the estimated coefficient on the
independent contractor variable in Katz and Kreuger's regression
based on the 2015 ALP is more than 2.5 times larger than the
standard error of the coefficient using the 2017 CWS.
---------------------------------------------------------------------------
Based on these results, the Department believes it is inappropriate
to conclude independent contractors generally earn a higher hourly wage
than employees. The Department ran another hourly wage rate regression
including additional variables to determine if independent contractors
in underserved groups are impacted differently by including interaction
terms for female independent contractors, Hispanic independent
contractors, and Black independent contractors. The results indicate
that in addition to the lower wages earned by Black workers in general,
Black independent contractors also earn less per hour than independent
contractors of other races; however, this is not statistically
significant at the most commonly used significance level.\650\
---------------------------------------------------------------------------
\650\ The coefficient for Black independent contractors was
negative and statistically significant at a 0.10 level (with a p-
value of 0.067). However, a significance level of 0.05 is more
commonly used.
---------------------------------------------------------------------------
A group of DC economists provided a comment discussing an analysis
they performed using aggregate data and analysis from individual-level
IRS tax data from Washington, DC.\651\ In their study, they found that
taxpayers who switched from employment to self-employment saw a
decrease in income and vice versa. They found, ``[b]etween 2013-2018
switching from a typical wage-earning job to self-employment, was
associated with a 20-50 percent drop in income, while switching away
from self-employment was associated with an income increase of 65-85
percent.'' They also note that low-income tax filers who switched from
self-employment to a wage-earning job approximately doubled their
income from 2013-2018. However, this analysis is specifically focused
on workers in Washington, DC, and the definition of self-employment may
differ from independent contractor classification under the FLSA.
---------------------------------------------------------------------------
\651\ This analysis can also be found at: https://ora-cfo.dc.gov/blog/self-employment-income-drop.
---------------------------------------------------------------------------
The Coalition for Workforce Innovation asserted that the Department
failed to consider additional studies reconfirming that independent
contractors earn more than traditional employees. They cite the Upwork
study, saying ``[t]he number of freelancers who earn more by
freelancing than in their traditional jobs continues to grow: 44% of
freelancers say they earn more freelancing than with a traditional job
in 2021, . . . up from 39% in 2020 and 32% in 2019.'' \652\ The
Department notes that even if 44% of freelancers say that they earn
more than they would under traditional employment, that would still
mean that a larger share of freelancers (56%) either report earning the
same or less than with traditional employment. Also, as discussed in
section VII.B.1, the nature of this study and its definition of
freelancing may not be applicable to how independent contracting is
discussed in this rule.
---------------------------------------------------------------------------
\652\ ``Upwork Study Finds 59 Million Americans Freelancing Amid
Turbulent Labor Market,'' Upwork, December 8, 2021, https://www.upwork.com/press/releases/upwork-study-finds-59-million-americans-freelancing-amid-turbulent-labor-market. Full study
available at https://www.upwork.com/research/freelance-forward-2021.
---------------------------------------------------------------------------
The Economic Policy Institute (EPI) also submitted a comment with a
quantitative analysis of the difference in the value of a job to a
worker who is classified as an independent contractor rather than as an
employee. Their analysis reviewed data for workers in 11 occupations
identified as particularly vulnerable to misclassification:
construction workers, truck drivers, janitors and cleaners, home health
and personal care aides, retail sales workers, housekeeping cleaners,
landscaping workers, call center workers, security guards, light truck
delivery drivers, and manicurists and pedicurists.
F. Analysis of Regulatory Alternatives
Pursuant to its obligations under Executive Order 12866,\653\ the
Department assessed four regulatory alternatives to this rule.
---------------------------------------------------------------------------
\653\ E.O. 12866 section 6(a)(3)(C)(iii), 58 FR 51741.
---------------------------------------------------------------------------
The Department had previously considered and rejected two of these
alternatives in the 2021 IC Rule--adopting either a common law or ABC
test for determining employee or independent contractor status.\654\
The Department reaches the same
[[Page 1739]]
conclusion in this final rule. Section IV above discusses why legal
constraints prevent the Department from adopting either of these
alternatives and the comments received regarding these alternatives.
---------------------------------------------------------------------------
\654\ See 86 FR 1238.
---------------------------------------------------------------------------
For a third alternative, the Department considered a rule that
would not fully rescind the 2021 IC Rule and instead retain some
aspects of that rule. As the Department has noted throughout this final
rule, there are multiple instances in which it is consistent or in
agreement with the 2021 IC Rule. However, the numerous ways in which
the 2021 IC Rule described the factors were in tension with judicial
precedent and longstanding Department guidance and narrowed the
economic reality test by limiting the facts that may be considered as
part of the test, facts which the Department believes are relevant in
determining whether a worker is economically dependent on the employer
for work or in business for themself. For these reasons, and as
discussed in sections III and IV above, the Department has ultimately
concluded that a complete recission and replacement of the 2021 IC Rule
is needed.
For a fourth alternative, the Department considered rescinding the
2021 IC Rule and providing guidance on employee and independent
contractor classification through subregulatory guidance. For more than
80 years prior to the 2021 IC Rule, the Department primarily issued
subregulatory guidance in this area and did not have generally
applicable regulations on the classification of workers as employees or
independent contractors. The Department considered rescinding the 2021
IC Rule and continuing to provide subregulatory guidance for
stakeholders through existing documents (such as Fact Sheet #13) and
new documents (for example a Field Assistance Bulletin). Rescinding the
2021 IC Rule without issuing a new regulation would have lowered the
regulatory familiarity costs associated with this rulemaking. As
explained in sections III, IV, and V above, however, the Department
continues to believe that replacing the 2021 IC Rule with regulations
addressing the multifactor economic reality test that more fully
reflect the case law and continue to be relevant to the modern economy
will be helpful for both workers and employers. Specifically, issuing
regulations with an explanatory preamble allows the Department to
provide in-depth guidance. Additionally, issuing regulations allowed
the Department to formally collect and consider a wide range of views
from stakeholders by electing to use the notice-and-comment process.
Finally, because courts are accustomed to considering relevant agency
regulations, providing guidance in this format may further improve
consistency among courts regarding this issue. Therefore, the
Department is not rescinding the 2021 IC Rule and providing only
subregulatory guidance.
VIII. Final Regulatory Flexibility Act (FRFA) Analysis
The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601 et seq.,
as amended by the Small Business Regulatory Enforcement Fairness Act of
1996, Public Law 104-121 (March 29, 1996), requires Federal agencies
engaged in rulemaking to consider the impact of their rules 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. Agencies must perform a review to determine whether a
proposed or final rule would have a significant economic impact on a
substantial number of small entities.
A. Need for Rulemaking and Objectives of the Rule
As discussed in section II.C.3., on March 14, 2022, a district
court in the Eastern District of Texas issued a decision vacating the
Department's delay and withdrawal of the 2021 IC Rule and concluding
that the 2021 IC Rule became effective on March 8, 2021. The Department
believes that the 2021 IC Rule does not fully comport with the FLSA's
text and purpose as interpreted by the courts and, had it been left in
place, would have had a confusing and disruptive effect on workers and
businesses alike due to its departure from decades of case law
describing and applying the multifactor economic reality test.
Therefore, the Department believes it is appropriate to rescind the
2021 IC Rule and set forth an analysis for determining employee or
independent contractor status under the Act that is more consistent
with existing judicial precedent and the Department's longstanding
guidance prior to the 2021 IC Rule.
The Department is rescinding and replacing regulations addressing
whether workers are employees or independent contractors under the
FLSA. Of particular note, the regulations set forth in this final rule
do not use ``core factors'' and instead return to a totality-of-the-
circumstances analysis of the economic reality test in which the
factors do not have a predetermined weight and are considered in view
of the economic reality of the whole activity. Regarding the economic
reality factors, this final rule returns to the longstanding framing of
investment as a separate factor, and integral as an integral part of
the potential employer's business rather than an integrated unit of
production. The final rule also provides broader discussion of how
scheduling, remote supervision, price setting, and the ability to work
for others should be considered under the control factor, and it allows
for consideration of reserved rights while removing the provision in
the 2021 IC Rule that minimized the relevance of retained rights.
Further, the final rule discusses exclusivity in the context of the
permanency factor, and initiative in the context of the skill factor.
The Department also made several adjustments to the proposed
regulations after consideration of the comments received, including
revisions to the regulations regarding the investment factor and the
control factor (specifically addressing compliance with legal
obligations).
The Department believes that rescinding the 2021 IC Rule and
replacing it with regulations addressing the multifactor economic
reality test--in a way that both more fully reflects the case law and
continues to be relevant to the evolving economy--will be helpful for
both workers and employers. The Department believes this rule will help
protect employees from misclassification while at the same time
providing a consistent approach for those businesses that engage (or
wish to engage) independent contractors as well as for those who wish
to work as independent contractors.
B. Significant Issues Raised in Public Comments, Including by the Small
Business Administration Office of Advocacy
Several commenters submitted feedback in response to the NPRM's
Initial Regulatory Flexibility Analysis (IRFA) or otherwise addressing
the potential impact of this rulemaking on small entities. Commenters,
including the Small Business Administration Office of Advocacy (SBA)
contended that the Department has severely underestimated the economic
impacts of this rule on small businesses and independent contractors.
For example, several commenters criticized the rule familiarization
time estimates referenced in the IRFA, with the Independent Electrical
Contractors, the Small Business & Entrepreneurship
[[Page 1740]]
Council (``SBE Council''), and SBA citing the length of the NPRM as
evidence that the Department was providing an underestimate. By
contrast, the SWACCA asserted that the ``well understood framework'' of
the NPRM's proposed guidance would reduce regulatory familiarization
costs for stakeholders ``compared to the January 2021 Rule's novel,
untested weighted framework.''
As explained in section VII.C., the Department considered all of
the comments received on this topic and has increased the regulatory
familiarization cost estimate for this rule to 1 hour for firms and 30
minutes for independent contractors, who may be small businesses
themselves. The Department believes that this time estimate is
appropriate because it represents an average, in which some small
businesses will spend more time reviewing the rule and others will
spend no time reviewing.
Some commenters asserted that the Department failed to identify
other potential costs of this rulemaking. For example, SBA wrote that
``DOL has failed to estimate any costs for small businesses and
independent contractors to reclassify workers as independent
contractors, for lost work, and for business disruptions.'' Similarly,
SBE Council wrote that the IRFA did ``not include the cost to a small
business or small entity if an independent contractor is determined to
be `misclassified,' or if a small business or small entity loses
business revenue due to the loss of human capital, or the cost to
comply with the new rule, or if an independent contractor loses
business due to potential or actual misclassification.'' As discussed
in greater detail in section III(C) and VII(A), the Department does not
believe that this rule will lead to widespread reclassification.
SBA claimed that the IRFA for failed to address certain employment-
related costs related to the reclassification of independent
contractors as employees (e.g., payroll tax obligations, employment
benefits costs, etc.) that were mentioned in the NPRM's Regulatory
Impact Analysis; see also American First Legal Foundation (``AFL'')
(``The Department failed to consider that small businesses
reclassifying independent contractors as employees under the Proposed
Rule will substantially increase their respective tax burdens.'');
Engine (asserting that ``startups that err on the side of caution and
hire or shift to full-time workers'' may have to ``offer more robust
compensation packages'' to compete with larger competitors). The
Department's Regulatory Impact Analysis only provides a qualitative
discussion of these potential transfers and explains that these
transfers may result from reduced misclassification resulting from this
rule. The Department does not believe that coming into compliance with
the law would be a ``cost'' for the purposes of the economic analyses
of this rulemaking.
SBA also commented that ``many independent contractors or freelance
workers, who may also be small businesses, believe they will lose work
because of this rule.'' The Department does not believe that this rule
will lead to job losses because most workers who were properly
classified as independent contractors before the 2021 IC Rule will
continue to retain their status as independent contractors.
Finally, AFL was concerned about the Department ``treating small
businesses the same as all other entities'' and asserted that Section
223 of the Small Business Regulatory Enforcement Fairness Act of 1996
(``SBREFA'') requires the Department to creation an exemption waiving
the application of civil money penalties for small entities ``that will
inevitably misapply the confusing and inconsistent `economic reality'
test.'' See also Engine (``It is unclear how the proposed rule, if
implemented, will be enforced consistent with SBREFA, if the Department
does not accommodate differing compliance requirements by waiving or
reducing penalties when circumstances warrant.''). In response to these
comments, the Department notes that courts apply the same economic
reality test when evaluating the FLSA employment status of any worker
alleged to be an independent contractor, regardless of the size of the
potential employer.\655\ Similarly, the Department is striving to
provide a generally-applicable regulation in this rulemaking. As with
other enforcement-related requests from commenters described in section
II.E., whether the Department should reduce or waive certain civil
money penalties for small entities found to have violated the FLSA is
an enforcement issue that is beyond the scope of this rulemaking.
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\655\ See, e.g., Rutherford, 331 U.S. at 724 (noting that the
slaughterhouse involved in the case ``had one hourly paid employee''
prior to hiring the alleged independent contractors at issue); Silk,
331 U.S. at 706 (describing the employer at issue as an individual
named ``Albert Silk, doing business as the Albert Silk Coal Co.,''
who ``owns no trucks himself, but contracts with workers who own
their own trucks to deliver coal'').
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C. Estimating the Number of Small Businesses Affected by the Rulemaking
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.\656\ The
Department then applied these thresholds to the U.S. Census Bureau's
2017 Economic Census to obtain the number of establishments with
employment or sales/receipts below the small business threshold in the
industry.\657\ These ratios of small to large establishments were then
applied to the more recent 2019 Statistics of United States Businesses
(SUSB) data on number of establishments.\658\ Next, the Department
estimated the number of small governments, defined as having population
less than 50,000, from the 2017 Census of Governments.\659\ In total,
the Department estimated there are 6.5 million small establishments or
governments who could potentially have independent contractors, and who
could be affected by this rulemaking. However, not all of these
establishments will have independent contractors, and so only a share
of this number will actually be affected. The impact of this rule could
also differ by industry. As shown in Table 2 of the regulatory impact
analysis, the industries with the highest number of independent
contractors are the professional and business services and construction
industries.
---------------------------------------------------------------------------
\656\ SBA, Summary of Size Standards by Industry Sector, 2017,
https://www.sba.gov/sites/default/files/2018-05/Size_Standards_Table_2017.xlsx. The most recent size standards were
issued in 2022. However, the Department used the 2017 standards for
consistency with the older Economic Census data.
\657\ The 2017 data are the most recently available with revenue
data.
\658\ 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.
\659\ 2017 Census of Governments. https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
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Additionally, as discussed in section VII.B., the Department
estimates that there are 22.1 million independent contractors. Some of
these independent contractors may be considered small businesses and
may also be impacted by this rule.
D. Compliance Requirements of the Final Rule, Including Reporting and
Recordkeeping
This rule provides guidance for analyzing employee or independent
contractor status under the FLSA. It does not create any new reporting
or
[[Page 1741]]
recordkeeping requirements for businesses.
In the Regulatory Impact Analysis, the Department estimates that
regulatory familiarization to be one hour per entity and one-half hour
per independent contractor. The per-entity cost for small business
employers is the regulatory familiarization cost of $52.80, or the
fully loaded median hourly wage of a Compensation, Benefits, and Job
Analysis Specialist multiplied by 1 hour. The per-entity rule
familiarization cost for independent contractors, some of whom would be
small businesses, is $11.73 or the median hourly wage of independent
contractors in the CWS multiplied by 0.5 hour.
E. Steps the Department Has Taken To Minimize the Significant Economic
Impact on Small Entities
The RFA requires agencies to discuss ``any significant alternatives
to the proposed rule which accomplish the stated objectives of
applicable statutes and which minimize any significant economic impact
of the proposed rule on small entities.'' \660\ As discussed earlier in
section VII.F., the Department does not believe that it has the legal
authority to adopt either a common law or ``ABC'' test to determine
employee or independent contractor status under the FLSA, foreclosing
the consideration of these alternatives for purposes of the RFA.
---------------------------------------------------------------------------
\660\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------
As explained in section VII.F., the Department considered two other
regulatory alternatives: a rule that would not fully rescind the 2021
IC Rule and instead retain some aspects of that rule in the new rule;
and completely rescinding the 2021 IC Rule and providing guidance on
employee or independent contractor classification through subregulatory
guidance, as the Department had done for over 80 years prior to the
2021 IC Rule. The Department believes that the overall economic impact
of retaining some portions of the 2021 IC Rule while issuing a rule to
revise other portions of the rule would not minimize the economic
impact on small entitles as they would incur costs to familiarize
themselves with the new regulation. Similarly, the Department believes
that the overall economic impact of fully rescinding the 2021 IC Rule
and providing subregulatory guidance, would not necessarily minimize
the economic impact on small entities as they would incur some costs to
familiarize themselves with any subregulatory guidance. Moreover, as
explained in sections III, IV, and V above, the Department believes
that replacing the 2021 IC Rule with regulations addressing the
multifactor economic reality test that more fully reflect the case law
and continue to be relevant to the modern economy will be helpful for
both workers and employers, particularly over the long term.
IX. Unfunded Mandates Reform Act of 1995
The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532, requires
agencies to prepare a written statement, which includes an assessment
of anticipated costs and benefits, before proposing any unfunded
Federal mandate that may result in excess of $100 million (adjusted
annually for inflation) in expenditures in any one year by State,
local, and tribal governments in the aggregate, or by the private
sector. Adjusting the threshold for inflation using the GDP deflator,
using a recent annual result (2021), yields a threshold of $165
million. Therefore, this rulemaking is expected to create unfunded
mandates that exceed that threshold. See section VII for an assessment
of anticipated costs and benefits.
X. Executive Order 13132, Federalism
The Department has reviewed this rule in accordance with Executive
Order 13132 regarding federalism and determined that it does not have
federalism implications. The rule will not have substantial direct
effects on the States, on the relationship between the National
Government and the States, or on the distribution of power and
responsibilities among the various levels of government.
XI. Executive Order 13175, Indian Tribal Governments
This rule will not have tribal implications under Executive Order
13175 that require a tribal summary impact statement. The rule will not
have substantial direct effects on one or more Indian tribes, on the
relationship between the Federal Government and Indian tribes, or on
the distribution of power and responsibilities between the Federal
Government and Indian tribes.
List of Subjects
29 CFR Part 780
Agriculture, Child labor, Wages.
29 CFR Part 788
Forests and forest products, Wages.
29 CFR Part 795
Employment, Wages.
For the reasons set out in the preamble, the Wage and Hour
Division, Department of Labor amends Title 29 CFR chapter V, as
follows:
PART 780--EXEMPTIONS APPLICABLE TO AGRICULTURE, PROCESSING OF
AGRICULTURAL COMMODITIES, AND RELATED SUBJECTS UNDER THE FAIR LABOR
STANDARDS ACT
0
1. The authority citation for part 780 continues to read as follows:
Authority: Secs. 1-19, 52 Stat. 1060, as amended; 75 Stat. 65;
29 U.S.C. 201-219. Pub. L. 105-78, 111 Stat. 1467.
0
2. Amend Sec. 780.330 by revising paragraph (b) to read as follows:
Sec. 780.330 Sharecroppers and tenant farmers.
* * * * *
(b) In determining whether such individuals are employees or
independent contractors, the criteria set forth in Sec. Sec. 795.100
through 795.110 of this chapter are used.
* * * * *
PART 788--FORESTRY OR LOGGING OPERATIONS IN WHICH NOT MORE THAN
EIGHT EMPLOYEES ARE EMPLOYED
0
3. The authority citation for part 788 continues to read as follows:
Authority: Secs. 1-19, 52 Stat. 1060, as amended; 29 U.S.C.
201-219.
0
4. Amend Sec. 788.16 by revising paragraph (a) to read as follows:
Sec. 788.16 Employment relationship.
(a) In determining whether individuals are employees or independent
contractors, the criteria set forth in Sec. Sec. 795.100 through
795.110 of this chapter are used.
* * * * *
0
5. Add part 795 to read as follows:
PART 795--EMPLOYEE OR INDEPENDENT CONTRACTOR CLASSIFICATION UNDER
THE FAIR LABOR STANDARDS ACT
Sec.
795.100 Introductory statement.
795.105 Determining employee or independent contractor
classification under the FLSA.
795.110 Economic reality test to determine economic dependence.
795.115 Severability.
Authority: 29 U.S.C. 201-219.
Sec. 795.100 Introductory statement.
This part contains the Department of Labor's (the Department)
general interpretations for determining whether workers are employees
or independent
[[Page 1742]]
contractors under the Fair Labor Standards Act (FLSA or Act). See 29
U.S.C. 201-19. These interpretations are intended to serve as a
``practical guide to employers and employees'' as to how the Department
will seek to apply the Act. Skidmore v. Swift & Co., 323 U.S. 134, 138
(1944). The Administrator of the Department's Wage and Hour Division
will use these interpretations to guide the performance of their duties
under the Act, unless and until the Administrator is otherwise directed
by authoritative decisions of the courts or the Administrator concludes
upon reexamination of an interpretation that it is incorrect. To the
extent that prior administrative rulings, interpretations, practices,
or enforcement policies relating to determining who is an employee or
independent contractor under the Act are inconsistent or in conflict
with the interpretations stated in this part, they are hereby
rescinded. The interpretations stated in this part may be relied upon
in accordance with section 10 of the Portal-to-Portal Act, 29 U.S.C.
251-262, notwithstanding that after any act or omission in the course
of such reliance, the interpretation is modified or rescinded or is
determined by judicial authority to be invalid or of no legal effect.
29 U.S.C. 259.
Sec. 795.105 Determining employee or independent contractor
classification under the FLSA.
(a) Relevance of independent contractor or employee status under
the Act. The Act's minimum wage, overtime pay, and recordkeeping
obligations apply only to workers who are covered employees. Workers
who are independent contractors are not covered by these protections.
Labeling employees as ``independent contractors'' does not make these
protections inapplicable. A determination of whether a worker is an
employee or independent contractor under the Act focuses on the
economic realities of the worker's relationship with the worker's
potential employer and whether the worker is either economically
dependent on the potential employer for work or in business for
themself.
(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). ``Employer'' is
defined to ``include[ ] any person acting directly or indirectly in the
interest of an employer in relation to an employee.'' 29 U.S.C. 203(d).
The Act's definitions are meant to encompass as employees all workers
who, as a matter of economic reality, are economically dependent on an
employer for work. A worker is an independent contractor, as
distinguished from an ``employee'' under the Act, if the worker is, as
a matter of economic reality, in business for themself. Economic
dependence does not focus on the amount of income the worker earns, or
whether the worker has other sources of income.
Sec. 795.110 Economic reality test to determine economic dependence.
(a) Economic reality test. (1) In order to determine economic
dependence, multiple factors assessing the economic realities of the
working relationship are used. These factors are tools or guides to
conduct a totality-of-the-circumstances analysis. This means that the
outcome of the analysis does not depend on isolated factors but rather
upon the circumstances of the whole activity to answer the question of
whether the worker is economically dependent on the potential employer
for work or is in business for themself.
(2) The six factors described in paragraphs (b)(1) through (6) of
this section should guide an assessment of the economic realities of
the working relationship and the question of economic dependence.
Consistent with a totality-of-the-circumstances analysis, no one factor
or subset of factors is necessarily dispositive, and the weight to give
each factor may depend on the facts and circumstances of the particular
relationship. Moreover, these six factors are not exhaustive. As
explained in paragraph (b)(7) of this section, additional factors may
be considered.
(b) Economic reality factors--(1) Opportunity for profit or loss
depending on managerial skill. This factor considers whether the worker
has opportunities for profit or loss based on managerial skill
(including initiative or business acumen or judgment) that affect the
worker's economic success or failure in performing the work. The
following facts, among others, can be relevant: whether the worker
determines or can meaningfully negotiate the charge or pay for the work
provided; whether the worker accepts or declines jobs or chooses the
order and/or time in which the jobs are performed; whether the worker
engages in marketing, advertising, or other efforts to expand their
business or secure more work; and whether the worker makes decisions to
hire others, purchase materials and equipment, and/or rent space. If a
worker has no opportunity for a profit or loss, then this factor
suggests that the worker is an employee. Some decisions by a worker
that can affect the amount of pay that a worker receives, such as the
decision to work more hours or take more jobs when paid a fixed rate
per hour or per job, generally do not reflect the exercise of
managerial skill indicating independent contractor status under this
factor.
(2) Investments by the worker and the potential employer. This
factor considers whether any investments by a worker are capital or
entrepreneurial in nature. Costs to a worker of tools and equipment to
perform a specific job, costs of workers' labor, and costs that the
potential employer imposes unilaterally on the worker, for example, are
not evidence of capital or entrepreneurial investment and indicate
employee status. Investments that are capital or entrepreneurial in
nature and thus indicate independent contractor status generally
support an independent business and serve a business-like function,
such as increasing the worker's ability to do different types of or
more work, reducing costs, or extending market reach. Additionally, the
worker's investments should be considered on a relative basis with the
potential employer's investments in its overall business. The worker's
investments need not be equal to the potential employer's investments
and should not be compared only in terms of the dollar values of
investments or the sizes of the worker and the potential employer.
Instead, the focus should be on comparing the investments to determine
whether the worker is making similar types of investments as the
potential employer (even if on a smaller scale) to suggest that the
worker is operating independently, which would indicate independent
contractor status.
(3) Degree of permanence of the work relationship. This factor
weighs in favor of the worker being an employee when the work
relationship is indefinite in duration, continuous, or exclusive of
work for other employers. This factor weighs in favor of the worker
being an independent contractor when the work relationship is definite
in duration, non-exclusive, project-based, or sporadic based on the
worker being in business for themself and marketing their services or
labor to multiple entities. This may include regularly occurring fixed
periods of work, although the seasonal or temporary nature of work by
itself would not necessarily indicate independent contractor
classification. Where a lack of permanence is due to operational
characteristics that are unique or intrinsic to particular businesses
or industries and the workers they employ, this factor is not
necessarily indicative of independent contractor status unless the
worker is
[[Page 1743]]
exercising their own independent business initiative.
(4) Nature and degree of control. This factor considers the
potential employer's control, including reserved control, over the
performance of the work and the economic aspects of the working
relationship. Facts relevant to the potential employer's control over
the worker include whether the potential employer sets the worker's
schedule, supervises the performance of the work, or explicitly limits
the worker's ability to work for others. Additionally, facts relevant
to the potential employer's control over the worker include whether the
potential employer uses technological means to supervise the
performance of the work (such as by means of a device or
electronically), reserves the right to supervise or discipline workers,
or places demands or restrictions on workers that do not allow them to
work for others or work when they choose. Whether the potential
employer controls economic aspects of the working relationship should
also be considered, including control over prices or rates for services
and the marketing of the services or products provided by the worker.
Actions taken by the potential employer for the sole purpose of
complying with a specific, applicable Federal, State, Tribal, or local
law or regulation are not indicative of control. Actions taken by the
potential employer that go beyond compliance with a specific,
applicable Federal, State, Tribal, or local law or regulation and
instead serve the potential employer's own compliance methods, safety,
quality control, or contractual or customer service standards may be
indicative of control. More indicia of control by the potential
employer favors employee status; more indicia of control by the worker
favors independent contractor status.
(5) Extent to which the work performed is an integral part of the
potential employer's business. This factor considers whether the work
performed is an integral part of the potential employer's business.
This factor does not depend on whether any individual worker in
particular is an integral part of the business, but rather whether the
function they perform is an integral part of the business. This factor
weighs in favor of the worker being an employee when the work they
perform is critical, necessary, or central to the potential employer's
principal business. This factor weighs in favor of the worker being an
independent contractor when the work they perform is not critical,
necessary, or central to the potential employer's principal business.
(6) Skill and initiative. This factor considers whether the worker
uses specialized skills to perform the work and whether those skills
contribute to business-like initiative. This factor indicates employee
status where the worker does not use specialized skills in performing
the work or where the worker is dependent on training from the
potential employer to perform the work. Where the worker brings
specialized skills to the work relationship, this fact is not itself
indicative of independent contractor status because both employees and
independent contractors may be skilled workers. It is the worker's use
of those specialized skills in connection with business-like initiative
that indicates that the worker is an independent contractor.
(7) Additional factors. Additional factors may be relevant in
determining whether the worker is an employee or independent contractor
for purposes of the FLSA, if the factors in some way indicate whether
the worker is in business for themself, as opposed to being
economically dependent on the potential employer for work.
Sec. 795.115 Severability.
If any provision of this part is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further agency action, the provision
shall be construed so as to continue to give the maximum effect to the
provision permitted by law, unless such holding shall be one of utter
invalidity or unenforceability, in which event the provision shall be
severable from this part and shall not affect the remainder thereof.
Signed this 2nd day of January, 2024.
Jessica Looman,
Administrator, Wage and Hour Division.
[FR Doc. 2024-00067 Filed 1-9-24; 8:45 am]
BILLING CODE 4510-27-P