1168 Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations

DEPARTMENT OF LABOR independent contractor either the factor being dispositive, and that actual minimum wage or overtime pay, nor practices are entitled to greater weight Wage and Hour Division does it require that person to keep than what may be contractually or records regarding that independent theoretically possible. The final rule 29 CFR Parts 780, 788 and 795 contractor. The Act does not define the sharpens this inquiry into five distinct RIN 1235–AA34 term ‘‘independent contractor,’’ but it factors, instead of the five or more defines ‘‘employer’’ as ‘‘any person overlapping factors used by most courts Independent Contractor Status Under acting directly or indirectly in the and previously the Department. the Fair Labor Standards Act interest of an employer in relation to an Moreover, consistent with the FLSA’s employee,’’ 29 U.S.C. 203(d), text, its purpose, and the Department’s AGENCY: Wage and Hour Division, ‘‘employee’’ as ‘‘any individual experience administering and enforcing Department of Labor. employed by an employer,’’ id. at 203(e) the Act, the final rule explains that two ACTION: Final rule. (subject to certain exceptions), and of those factors—(1) the nature and ‘‘employ’’ as ‘‘includ[ing] to suffer or degree of the worker’s control over the SUMMARY: The U.S. Department of Labor permit to work,’’ id. at 203(g). Courts work and (2) the worker’s opportunity (the Department) is revising its and the Department have long for profit or loss—are more probative of interpretation of independent contractor interpreted the ‘‘suffer or permit’’ the question of economic dependence or status under the Fair Labor Standards standard to require an evaluation of the lack thereof than other factors, and thus Act (FLSA or the Act) to promote extent of the worker’s economic typically carry greater weight in the certainty for stakeholders, reduce dependence on the potential analysis than any others. litigation, and encourage innovation in employer—i.e., the putative employer or The regulatory guidance promulgated the economy. alleged employer—and have developed in this final rule regarding independent DATES: This final rule is effective on a multifactor test to analyze whether a contractor status under the FLSA is March 8, 2021. worker is an employee or an generally applicable across all FOR FURTHER INFORMATION CONTACT: independent contractor under the FLSA. industries. As such, it replaces the Amy DeBisschop, Division of The ultimate inquiry is whether, as a Department’s previous interpretations of Regulations, Legislation, and matter of economic reality, the worker is independent contractor status under the Interpretation, Wage and Hour Division dependent on a particular individual, FLSA which applied only in certain (WHD), U.S. Department of Labor, Room business, or organization for work (and contexts, found at 29 CFR 780.330(b) S–3502, 200 Constitution Avenue NW, is thus an employee) or is in business (interpreting independent contractor Washington, DC 20210; telephone: (202) for him- or herself (and is thus an status under the FLSA for tenants and 693–0406 (this is not a toll-free independent contractor). sharecroppers) and 29 CFR 788.16(a) This economic realities test and its number). Copies of this final rule may (interpreting independent contractor component factors have not always been be obtained in alternative formats (Large status under the FLSA for certain sufficiently explained or consistently Print, Braille, Audio Tape, or Disc), forestry and logging workers). The articulated by courts or the Department, upon request, by calling (202) 693–0675 Department believes this final rule will resulting in uncertainty among the (this is not a toll-free number). TTY/ significantly clarify to stakeholders how regulated community. The Department TDD callers may dial toll-free 1–877– to distinguish between employees and believes that a clear articulation will independent contractors under the Act. 889–5627 to obtain information or lead to increased precision and request materials in alternative formats. This final rule is considered to be an predictability in the economic reality Executive Order 13771 deregulatory Questions of interpretation and/or test’s application, which will in turn enforcement of the agency’s regulations action. Details on the estimated benefit workers and businesses and increased efficiency and cost savings of may be directed to the nearest WHD encourage innovation and flexibility in district office. Locate the nearest office this rule can be found in the regulatory the economy. Accordingly, earlier this impact analysis (RIA) in section VI. by calling WHD’s toll-free help line at year the Department proposed to (866) 4US–WAGE ((866) 487–9243) introduce a new part to Title 29 of the II. Background between 8 a.m. and 5 p.m. in your local Code of Federal Regulations setting A. Relevant FLSA Definitions time zone, or logging onto WHD’s forth its interpretation of whether website for a nationwide listing of WHD workers are ‘‘employees’’ or Enacted in 1938, the FLSA requires district and area offices at http:// independent contractors under the Act. that, among other things, covered www.dol.gov/whd/america2.htm. Having received and reviewed the employers pay their nonexempt SUPPLEMENTARY INFORMATION: comments to its proposal, the employees at least the Federal minimum Department now adopts as a final rule wage for every hour worked and I. Executive Summary the interpretive guidance set forth in the overtime pay for every hour worked The FLSA requires covered employers Notice of Proposed Rulemaking (NPRM) over 40 in a workweek, and it mandates to pay their nonexempt employees at (85 FR 60600) largely as proposed. This that employers keep certain records least the Federal minimum wage for regulatory guidance adopts general regarding their employees. See 29 U.S.C. every hour worked and overtime pay for interpretations to which courts and the 206(a), 207(a) (minimum wage and every hour worked over 40 in a Department have long adhered. For overtime pay requirements); 29 U.S.C. workweek, and it mandates that example, the final rule explains that 211(c) (recordkeeping requirements). employers keep certain records independent contractors are workers The FLSA does not define the term regarding their employees. A worker who, as a matter of economic reality, are ‘‘independent contractor.’’ The Act who performs services for an individual in business for themselves as opposed to defines ‘‘employer’’ in section 3(d) to or entity (‘‘person’’ as defined in the being economically dependent on the ‘‘include[ ] any person acting directly or Act) as an independent contractor, potential employer for work. The final indirectly in the interest of an employer however, is not that person’s employee rule also explains that the inquiry into in relation to an employee,’’ under the Act. Thus, the FLSA does not economic dependence is conducted by ‘‘employee’’ in section 3(e)(1) to mean, require such person to pay an applying several factors, with no one subject to certain exceptions, ‘‘any

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individual employed by an employer,’’ the common law. 322 U.S. 123–25. also considered whether the work was and ‘‘employ’’ in section 3(g) to include Congress responded by amending the ‘‘a part of the integrated unit of ‘‘to suffer or permit to work.’’ 1 The definition of employment under the production’’ (meaning whether the Supreme Court has recognized that NLRA on June 23, 1947, ‘‘with the putative independent contractors were ‘‘there is in the [FLSA] no definition obvious purpose of hav[ing] the integrated into the assembly line that solves problems as to the limits of [National Labor Relations] Board and alongside the company’s employees) to the employer-employee relationship the courts apply general agency assess whether they were employees or under the Act.’’ Rutherford Food Corp. principles in distinguishing between independent contractors under the v. McComb, 331 U.S. 722, 728 (1947). employees and independent contractors FLSA. Id. at 729–730. The Supreme Court has interpreted under the [NLRA].’’ NLRB v. United Ins. In November 1947, five months after the ‘‘suffer or permit’’ language to define Co. of Am., 390 U.S. 254, 256 (1968). Silk and Rutherford Food, the FLSA employment to be broad and more On June 16, 1947, one week before Department of the Treasury (Treasury) inclusive than the common law Congress amended the NLRA in proposed regulations r defining when an standard. See Nationwide Mut. Ins. Co. response to Hearst, the Supreme Court individual was an independent v. Darden, 503 U.S. 318, 326 (1992). decided Silk, which addressed the contractor or employee under the SSA, However, the Court also recognized that distinction between employees and which used a test that balanced the the Act’s ‘‘statutory definition[s] . . . independent contractors under the SSA. following factors: have [their] limits.’’ Tony & Susan In that case, the Court relied on Hearst 1. Degree of control of the individual; Alamo Found. v. Sec’y of Labor, 471 to hold that ‘‘economic reality,’’ as 2. Permanency of relation; U.S. 290, 295 (1985) (internal citation opposed to ‘‘technical concepts’’ of the 3. Integration of the individual’s work omitted); see also Walling v. Portland common law standard alone, determines in the business to which he renders Terminal Co., 330 U.S. 148, 152 (1947) workers’ classification. 331 U.S. at 712– service; (‘‘The definition ‘suffer or permit to 14. Although the Court found it to be 4. Skill required by the individual; 5. Investment by the individual in work’ was obviously not intended to ‘‘quite impossible to extract from the facilities for work; and stamp all persons as employees.’’). The [SSA] a rule of thumb to define the 6. Opportunity of the individual for Supreme Court specifically recognized limits of the employer-employe[e] profit or loss. that ‘‘[t]here may be independent relationship,’’ it identified five factors as contractors who take part in production ‘‘important for decision’’: ‘‘degrees of 12 FR 7966. Factors one, two, and four or distribution who would alone be control, opportunities for profit or loss, through six corresponded directly with responsible for the wages and hours of investment in facilities, permanency of the five factors identified as being their own employees.’’ Rutherford Food, relation[,] and skill required in the ‘‘important for decision’’ in Silk, 331 331 U.S. at 729. Accordingly, Federal claimed independent operation.’’ Id. at U.S. at 716, and the third factor courts of appeals have uniformly held, 716. The Court added that ‘‘[n]o one corresponded with Rutherford Food’s and the Department has consistently [factor] is controlling nor is the list consideration of the fact that the maintained, that independent complete.’’ Id. One week after Silk and workers were ‘‘part of an integrated unit contractors are not ‘‘employees’’ for on the same day Congress amended the of production.’’ 331 U.S. at 729. The purposes of the FLSA. See, e.g., Saleem NLRA, the Court reiterated these five Treasury proposal further relied on v. Corporate Transp. Group, Ltd., 854 factors in Bartels, another case involving Bartels, 332 U.S. at 130, to apply these F.3d 131, 139–40 (2d Cir. 2017); Karlson employee or independent contractor factors to determine whether a worker v. Action Process Serv. & Private status under the SSA. In Bartels, the was ‘‘dependent as a matter of economic Court explained that under the SSA, reality upon the business to which he Investigation, LLC, 860 F.3d 1089, 1092 3 (8th Cir. 2017). employee status ‘‘was not to be renders services.’’ 12 FR 7966. determined solely by the idea of control Congress replaced the interpretations B. Economic Dependence and the which an alleged employer may or of the definitions of ‘‘employee’’ Economic Reality Test could exercise over the details of the adopted in Hearst for the NLRA and in Silk and Bartels for the SSA ‘‘to 1. Supreme Court Development of the service rendered to his business by the demonstrate that the usual common-law Economic Reality Test worker.’’ Id. Although ‘‘control is principles were the keys to meaning.’’ As the NPRM explained, the U.S. characteristically associated with the employer-employee relationship,’’ Darden, 503 U.S. at 324–25. However, Supreme Court explored the limits of Congress did not similarly amend the the employer-employee relationship in a employees under ‘‘social legislation’’ such as the SSA are ‘‘those who as a FLSA. Thus, the Supreme Court stated series of cases from 1944 to 1947 under in Darden that the scope of employment three different Federal statutes: The matter of economic reality are dependent upon the business to which under the FLSA remains broader than FLSA, the National Labor Relations Act that under common law and is (NLRA), and the Social Security Act they render service.’’ Id. The same day as it decided Silk, the determined not by the common law but (SSA). 85 FR 60601 (summarizing NLRB instead by the economic reality of the v. Hearst Publications, Inc., 322 U.S. Court ruled in Rutherford Food that certain workers at a slaughterhouse relationship at issue. See id. Since 111 (1944); United States v. Silk, 331 implicitly doing so in Rutherford Food, U.S. 704 (1947); Bartels v. Birmingham, were employees under the FLSA, and not independent contractors, by 332 U.S. 126 (1947); and Rutherford permanent work arrangement. Id. ‘‘The managing examining facts pertaining to the five official of the plant kept close touch on the Food, 331 U.S. 722)). 2 In Hearst, the Supreme Court held factors identified in Silk. The Court operation,’’ indicating control by the alleged that the NLRA’s definition of employer. Id. And ‘‘[w]hile profits to the boners 2 For example, the Court noted that the depended upon the efficiency of their work, it was employment was broader than that of slaughterhouse workers performed unskilled work more like piecework than an enterprise that actually ‘‘on the production line.’’ 331 U.S. at 730. ‘‘The depended for success upon the initiative, judgment 1 29 U.S.C. 203(d), (e), (g). The Act defines a premises and equipment of [the employer] were or foresight of the typical independent contractor.’’ ‘‘person’’ as ‘‘an individual, partnership, used for the work,’’ indicating little investment by Id. association, corporation, business trust, legal the workers. Id. ‘‘The group had no business 3 The Treasury proposal was never finalized representative, or any organized group of persons.’’ organization that could or did shift as a unit from because Congress amended the SSA to foreclose the 29 U.S.C. 203(a). one slaughter-house to another,’’ indicating a proposal.

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the Court has not again applied (or Most courts of appeals articulate a of an integrated unit of production,’’ 331 rejected the application of) the Silk similar test, but application between U.S. at 729, has now been replaced by factors to an FLSA classification courts may vary significantly. Compare, many courts of appeals by consideration question. e.g., Sec’y of Labor v. Lauritzen, 835 of whether the service rendered is F.2d 1529, 1534–35 (7th Cir. 1987) ‘‘integral,’’ which those courts have 2. Application of the Economic Reality (applying six-factor economic reality applied as meaning important or central Test by Federal Courts of Appeals test to hold that pickle pickers were to the potential employer’s business. As the NPRM explained, in the 1970s employees under the FLSA), with See, e.g., Verma v. 3001 Castor, Inc., 937 and 1980s Federal courts of appeals Donovan v. Brandel, 736 F.2d 1114, F.3d 221, 229 (3rd Cir. 2019) began to adopt versions of a multifactor 1117 (6th Cir. 1984) (applying the same (concluding that workers’ services were ‘‘economic reality’’ test based on Silk, six-factor economic reality test to hold integral because they were the providers Rutherford Food, and Bartels and that pickle pickers were not employees of the business’s ‘‘primary offering’’); similar to Treasury’s 1947 proposed under the FLSA). For example, the Acosta v. Off Duty Police Servs., Inc., SSA regulation to analyze whether a Second Circuit has analyzed 915 F.3d 1050, 1055 (6th Cir. 2019) worker was an employee or an opportunity for profit or loss and (concluding that services provided by independent contractor under the FLSA. investment (the second and third factors workers were ‘‘integral’’ because the See 85 FR 60603.4 Drawing on the listed above) together as one factor. See, putative employer ‘‘built its business Supreme Court precedent discussed e.g., Brock v. Superior Care, Inc., 840 around’’ those services); McFeeley v. above, courts have recognized that the F.2d 1054, 1058 (2d Cir. 1988). The Jackson Street Entertainment, LLC, 825 heart of the inquiry is whether ‘‘as a Fifth Circuit has not adopted the sixth F.3d 235, 244 (4th Cir. 2016) matter of economic reality’’ the workers factor listed above, which analyzes the (considering ‘‘the importance of the are ‘‘dependent upon the business to integrality of the work, as part of its services rendered to the company’s which they render service.’’ Usery v. standard, see, e.g., Usery, 527 F.2d at business’’). Pilgrim Equip. Co., 527 F.2d 1308, 1311 1311, but has at times assessed Courts of appeals have cautioned (5th Cir. 1976) (quoting Bartels, 332 U.S. integrality as an additional factor, see, against the ‘‘mechanical application’’ of at 130). Some courts have clarified that e.g. Hobbs v. Petroplex Pipe & Constr., the economic reality factors. See, e.g., this question of economic dependence Inc., 946 F.3d 824, 836 (5th Cir. 2020). Saleem, 854 F.3d at 139. ‘‘Rather, each may be boiled down to asking ‘‘whether, The NPRM highlighted noteworthy factor is a tool used to gauge the as a matter of economic reality, the modifications some courts of appeals economic dependence of the alleged workers depend upon someone else’s have made to the economic reality employee, and each must be applied business for the opportunity to render factors as originally articulated in 1947 with this ultimate concept in mind.’’ service or are in business for by the Supreme Court. See 85 FR Hopkins, 545 F.3d at 343. Further, themselves.’’ Saleem, 854 F.3d at 139 60603–04. First, the ‘‘skill required’’ courts of appeals make clear that the (internal quotation marks and citations factor identified in Silk, 331 U.S. at 716, analysis should draw from the totality of omitted). Courts have also explained is now articulated more expansively by circumstances, with no single factor that a non-exhaustive set of factors— some courts to include ‘‘initiative.’’ See, being determinative by itself. See, e.g., derived from Silk and Rutherford e.g., Parrish, 917 F.3d at 379 (‘‘the skill Keller, 781 F.3d at 807 (‘‘No one factor Food—shape and guide this inquiry. and initiative required in performing the is determinative.’’); Baker, 137 F.3d at See, e.g., Usery, 527 F.2d at 1311 job’’); Karlson, 860 F.3d at 1093 (same); 1440 (‘‘None of the factors alone is (identifying ‘‘[f]ive considerations Superior Care, 840 F.2d at 1058–59 dispositive; instead, the court must [which] have been set out as aids to (‘‘the degree of skill and independent employ a totality-of-the-circumstances making the determination of initiative required to perform the approach.’’). dependence, vel non’’); Real v. Driscoll work’’). Strawberry Assocs., Inc., 603 F.2d 748, Second, Silk analyzed workers’ 3. Application of the Economic Reality 754 (9th Cir. 1979) (articulating a six- investments, 331 U.S. at 717–19. Test by WHD factor test). However, the Fifth Circuit has revised Since at least 1954, WHD has applied In Driscoll, the Ninth Circuit Court of the ‘‘investment’’ factor to instead variations of this multifactor analysis Appeals described its six-factor test as consider ‘‘the extent of the relative when considering whether a worker is follows: investments of the worker and the an employee under the FLSA or an 1. The degree of the alleged alleged employer.’’ Hopkins, 545 F.3d at independent contractor. See WHD employer’s right to control the manner 343. Some other circuits have adopted Opinion Letter (Aug. 13, 1954) in which the work is to be performed; this ‘‘relative investment’’ approach but (applying six factors very similar to the 2. the alleged employee’s opportunity continue to use the phrase ‘‘worker’s six economic reality factors currently for profit or loss depending on his investment’’ to describe the factor. See, used by courts of appeals). In 1964, managerial skill; e.g., Keller v. Miri Microsystems LLC, WHD stated, ‘‘The Supreme Court has 3. the alleged employee’s investment 781 F.3d 799, 810 (6th Cir. 2015); Dole made it clear that an employee, as in equipment or materials required for v. Snell, 875 F.2d 802, 805 (10th Cir. distinguished from a person who is his task, or his employment of helpers; 1989). engaged in a business of his own, is one 4. whether the service rendered Third, although the permanence who as a matter of economic reality requires a special skill; factor under Silk was understood to follows the usual path of an employee 5. the degree of permanency of the mean the continuity and duration of and is dependent on the business which working relationship; and working relationships, see 12 FR 7967, he serves.’’ WHD Opinion Letter FLSA– 6. whether the service rendered is an some courts of appeals have expanded 795 (Sept. 30, 1964). integral part of the alleged employer’s this factor to also consider the Over the years since, WHD has issued business. Id. at 754. exclusivity of such relationships. See, numerous opinion letters applying a e.g., Scantland, 721 F.3d at 1319; Keller, multifactor analysis very similar to the 4 As explained below, versions of this multifactor economic realty test have also been enforced and 781 F.3d at 807. multifactor economic reality test courts articulated by the Department in subregulatory Finally, Rutherford Food’s use (with some variation) to determine guidance since the 1950s. consideration of whether work is ‘‘part whether workers are employees or

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independent contractors.5 WHD has also economic realities factors. AI 2015–1 economically dependent on an promulgated regulations applying a was withdrawn on June 7, 2017 and is employer for work (employee). The multifactor analysis for independent no longer in effect. Department further identified two ‘‘core contractor status under the FLSA in WHD’s most recent opinion letter factors’’: The nature and degree of the certain specific industries. See, e.g., 29 addressing this issue, from 2019, worker’s control over the work; and the CFR 780.330(b) (applying a six factor generally applied the principles and worker’s opportunity for profit or loss economic reality test to determine factors similar to those described in the based on initiative, investment, or both. whether a sharecropper or tenant is an prior opinion letters and Fact Sheet #13, The Department explained it was independent contractor or employee but not the ‘‘independent business proposing to emphasize these factors under the Act); 29 CFR 788.16(a) organization’’ factor because it did not because they are the most probative of (applying a six factor economic reality add to the analysis as a separate factor whether workers are economically test in forestry and logging operations and was ‘‘[e]ncompassed within’’ the dependent on someone else’s business with no more than eight employees). other factors. It also stated that the or are in business for themselves. The Further, WHD has promulgated a investment factor should focus on the proposal identified three other factors to regulation applying a multifactor ‘‘amount of the worker’s investment in also be considered, though they are less economic reality analysis for facilities, equipment, or helpers.’’ The probative than the core factors: The determining independent contractor opinion letter addressed the FLSA amount of skill required for the work, status under the Migrant and Seasonal classification of service providers who the degree of permanence of the Agricultural Worker Protection Act used a virtual marketplace company to working relationship between the (MSPA). 29 CFR 500.20(h)(4). be referred to end-market consumers to individual and the potential employer, The Department’s sub-regulatory whom the services were actually and whether the work is part of an guidance, WHD Fact Sheet #13, provided. WHD concluded that the integrated unit of production. The ‘‘Employment Relationship under the service providers appeared to be Department further proposed to advise Fair Labor Standards Act (FLSA)’’ (Jul. independent contractors and not that the actual practice is more 2008), similarly stated that, when employees of the virtual marketplace probative than what may be determining whether an employment company. See WHD Opinion Letter contractually or theoretically possible in relationship exists under the FLSA, FLSA2019–6 at 7. WHD found that it determining whether a worker is an common law control is not the exclusive was ‘‘inherently difficult to employee or an independent contractor. consideration. Instead, ‘‘it is the total conceptualize the service providers’ D. Comments activity or situation which controls’’; ‘working relationship’ with [the virtual and ‘‘an employee, as distinguished marketplace company], because as a The Department solicited comments from a person who is engaged in a matter of economic reality, they are on all aspects of the proposed rule. business of his or her own, is one who, working for the consumer, not [the More than 1800 individuals and as a matter of economic reality, follows company].’’ Id. Because ‘‘[t]he facts . . . organizations timely commented on the the usual path of an employee and is demonstrate economic independence, Department’s NPRM during the thirty- dependent on the business which he or rather than economic dependence, in day comment period that ended on she serves.’’ 6 The fact sheet identified the working relationship between [the October 26, 2020. The Department seven economic reality factors; in virtual marketplace company] and its received comments from employers, addition to factors that are similar to the service providers,’’ WHD opined that workers, industry associations, worker six factors identified above, it also they were not employees of the advocacy groups, and unions, among considered the worker’s ‘‘degree of company under the FLSA but rather others. All timely comments may be independent business organization and were independent contractors. Id. at 9. viewed at the website operation.’’ On July 15, 2015, WHD As explained below, the Department’s www.regulations.gov, docket ID WHD– issued Administrator’s Interpretation prior interpretations of independent 2020–0007. No. 2015–1, ‘‘The Application of the contractor status, which themselves Of the comments received, the Fair Labor Standards Act’s ‘Suffer or have evolved over time, are subject to Department received approximately 230 comments from workers who identified Permit’ Standard in the Identification of similar limitations as that of court themselves as independent contractors Employees Who Are Misclassified as opinions, and the Department believes (not including the over 900 comments Independent Contractors’’ (AI 2015–1). that stakeholders would benefit from received from Uber drivers discussed AI 2015–1 provided guidance regarding clarification. For these reasons, the below). Of those, the overwhelming the employment relationship under the Department proposed promulgating a majority expressed support for the FLSA and the application of the six clearer and more consistent standard for evaluating whether a worker is an NPRM. These individuals identified themselves as freelancers or 5 See, e.g., WHD Opinion Letter FLSA2019–6 at employee or independent contractor 4 (Apr. 29, 2019); WHD Opinion Letter, 2002 WL under the FLSA and is now finalizing independent contractors in jobs 32406602, at *2 (Sept. 5, 2002); WHD Opinion that proposal, with some modifications including translator, journalist, Letter, 2000 WL 34444342, at *3 (Dec. 7, 2000); based on comments received. consultant, musician, and many others. WHD Opinion Letter, 2000 WL 34444352, at *1 (Jul. Among this group of commenters, over 5, 2000); WHD Opinion Letter, 1999 WL 1788137, C. The Department’s Proposal at *1 (Jul. 12, 1999); WHD Opinion Letter, 1995 WL 200 expressed support for the proposed 1032489, at *1 (June 5, 1995); WHD Opinion Letter, On September 25, 2020, the rule, while only 8 opposed it. The 1995 WL 1032469, at *1 (Mar. 2, 1995); WHD Department published the NPRM in the remaining individuals in this group did Opinion Letter, 1986 WL 740454, at *1 (June 23, Federal Register. The Department not express a specific position. Uber 1986); WHD Opinion Letter, 1986 WL 1171083, at *1 (Jan. 14, 1986); WHD Opinion Letter WH–476, proposed to adopt an ‘‘economic drivers submitted over 900 comments. 1978 WL 51437, at *2 (Oct. 19, 1978); WHD reality’’ test to determine a worker’s While many expressed views on Uber Opinion Letter WH–361, 1975 WL 40984, at *1 status as an FLSA employee or an corporate policies and not on the NPRM (Oct. 1, 1975); WHD Opinion Letter (Sept. 12, 1969); independent contractor. The test itself, the majority of these drivers who WHD Opinion Letter (Oct. 12, 1965). 6 Fact Sheet #13 is available at https:// considers whether a worker is in addressed the NRPM supported the www.dol.gov/sites/dolgov/files/WHD/legacy/files/ business for himself or herself Department’s proposal. The Department whdfs13.pdf. (independent contractor) or is instead also received a number of other

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comments that are beyond the scope of under the FLSA. The NPRM explained businesses and workers alike. For this rulemaking. For example, several that such a regulation would provide example, the Coalition for Workforce commenters expressed opinions related much needed clarity and encourage (or Innovation (CWI) asserted that to the issues addressed in the at least stop deterring) flexible work additional clarity of the economic Department’s proposal but that were arrangements that benefit both reality test would ‘‘allow workers and specific to state legislation or employer businesses and workers. businesses to pursue [ ] mutually policies. Significant issues raised in the Commenters in the business beneficial opportunities as the United timely comments received are discussed community and freelance workers States economy evolves with below, along with the Department’s generally agreed with the Department technology.’’ Fight for Freelancers response to those comments. that the multifactor balancing test is explained that its members value confusing and needs clarification. The flexibility that comes with working as III. Need for Rulemaking National Retail Federation (NRF) independent contractors and supported The NPRM explained that the complained that ‘‘existing tests for the Department’s ‘‘efforts to protect [its Department has never promulgated a independent contractor status tend to members’] classification.’’ generally-applicable regulation have a large number of factors which Some commenters who opposed this addressing who is an independent can be nebulous, overlapping, and even rulemaking questioned the need for a contractor and thus not an employee irrelevant to the ultimate inquiry.’’ The regulation on this topic. The Southwest under the FLSA. Instead, as described Workplace Policy Institute of Littler Regional Council of Carpenters above, the Department has issued and Mendelson, P.C. (WPI) stated that (SWRCC) stated that the ‘‘[t]he first of revised guidance since at least 1954, ‘‘[b]oth the Department and the courts the Rule’s shortcomings is its using different variations of a have struggled to define ‘dependence’ ’’ assumption that a new rule is necessary multifactor economic reality test that in the modern economy—resulting in in the first place,’’ and the American analyzes economic dependence to confusion, unpredictability and Federation of Labor & Congress of distinguish independent contractors inconsistent results.’’ The Society for Industrial Organization (AFL–CIO) from employees. Such guidance reflects, Human Resource Management (SHRM) asserted that the Department’s ‘‘quest in large part, application of the general echoed this sentiment, writing ‘‘the for certainty . . . is quixotic.’’ Mr. principles of the economic reality test business community and workers are Edward Tuddenham, an attorney, by Federal courts of appeals. Such left applying numerous factors in a contended that the current test is guidance, however, did not reflect any variety of ways that is mired in ‘‘generally consistent and predictable’’ public input. Indeed, the NPRM kicked uncertainty and, therefore, unnecessary and thus does not need further off the Department’s first ever notice- risk.’’ The U.S. Chamber of Commerce clarification. He and others repeatedly and-comment rulemaking to provide a stated that ‘‘[t]he confusion regarding questioned the Department’s reasons for generally applicable interpretation of whether a worker is properly classified rulemaking by asserting that the independent contractor status under the as an employee or an independent Department did not identify cases where FLSA. As recounted just above, the contractor has long been a vexing courts reached incorrect outcomes. Department received many comments problem for the business community, Rather than focus on the outcomes in from stakeholders who are actually across many different industries and particular cases, the NPRM highlighted impacted by FLSA classification work settings.’’ See also, e.g., World inconsistent or confusing reasoning in decisions, which are valuable Floor Covering Association (WFCA) many decisions to explain why the information and insight that the (‘‘The current test has resulted in regulated community would benefit Department has not previously gathered inconsistent decisions, much confusion, from regulatory clarity. See 85 FR and many of which reinforced the and unnecessary costs.’’). Numerous 60605. Mr. Tuddenham and others also Department’s view that more clarity is individual freelancers and organizations provided thoughtful and detailed needed in this area. that represent freelance workers also comments criticizing specific aspects of The Department explained in the stated they would welcome ‘‘greater the reasons presented in the NPRM’s NPRM preamble that prior articulations clarity and predictability in the need for rulemaking discussion. The of the test have proven to be unclear and application of the ‘economic realities’ following discussion retraces those unwieldy for the four following reasons. test.’’ Coalition to Promote Independent reasons and responds to these First, the test’s overarching concept of Entrepreneurs (CPIE); see also Coalition criticisms. ‘‘economic dependence’’ is under- of Practicing Translators & Interpreters A. Confusion Regarding the Meaning of developed and sometimes of California (CoPTIC) (requesting Economic Dependence inconsistently applied, rendering it a ‘‘greater clarity in Federal law’’). source of confusion. Second, the test is Individual freelancers generally The NPRM explained that indefinite in that it makes all facts welcomed greater legal clarity. For undeveloped analysis and inconsistency potentially relevant without guidance example, one individual commenter cloud the application of ‘‘economic on how to prioritize or balance different wrote ‘‘to express [her] support for this dependence,’’ the touchstone of the and sometimes competing proposed rule. As someone who has economic reality test. 85 FR 60605. The considerations. Third, inefficiency and enjoyed freedom and flexibility as a Department and some courts have lack of structure in the test further stem freelancer for 20 years, this would be a attempted to furnish a measure of clarity from blurred boundaries between the welcome clarification.’’ Another by explaining, for example, that the factors. Fourth, these shortcomings have individual freelancer stated that ‘‘[t]he proper inquiry is ‘‘ ‘whether the workers become more apparent over time as clarity and updating of [the FLSA] are dependent on a particular business technology, economic conditions, and through this NPRM is long overdue and or organization for their continued work relationships have evolved. the DOL should issue ruling on employment’ in that line of business,’’ The Department thus proposed to independent contracting. . . .’’ Brock v. Mr. W Fireworks, Inc., 814 F.2d promulgate a regulation that would These supportive commenters 1042, 1054 (5th Cir. 1987) (quoting clarify and sharpen the contours of the generally agreed with the Department DialAmerica, 757 F.2d at 1385), or economic reality test used to determine that additional clarity would encourage instead ‘‘are in business for independent contractor classification flexible work arrangements that benefit themselves,’’ Saleem, 854 F.3d at 139.

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But the Department and many courts not concern whether the workers at B. Lack of Focus in the Multifactor have often applied the test without issue depend on the money they earn Balancing Test helpful clarification of the meaning of for obtaining the necessities of life.’’). The NPRM explained that the the economic dependency that they are As the DialAmerica court explained, the versions of the multifactor economic seeking. dependence-for-income approach reality test used by courts since at least The NPRM explained that the lack of ‘‘would lead to a senseless result’’ the 1980s and the Department since the explanation of economic dependence because a wealthy individual who had 1950s lack clear, generally applicable has sometimes led to inconsistent an independent source of income would guidance about how to balance the approaches and results and highlighted be an independent contractor even multiple factors and the countless facts as an example the apparently though a poorer individual who worked encompassed therein. See 85 FR inconsistent results in Cromwell v. 60606.The test’s lack of guidance leads Driftwood Elec. Contractor, Inc., 348 F. for the same company under the same to uncertainty regarding ‘‘which aspects App’x 57 (5th Cir. 2009) (holding that work arrangement is an employee. 757 cable splicers hired by Bellsouth to F.2d at 1385 n.11. Mr. Tuddenham of ‘economic reality’ matter, and why.’’ perform post-Katrina repairs were initially defended the reasoning in Lauritzen, 835 F.2d at 1539 (Easterbrook employees), and Thibault v. BellSouth Thibault, but later listed that case as an J., concurring). As examples of such uncertainty, the Telecommunication, 612 F.3d 843 (5th example of ‘‘the occasional erroneous NPRM highlighted court decisions Cir. 2010) (holding that cable splicer application of the [economic reality] analyzing economic reality factors to hired by same company under a very test.’’ reach an overall decision about a similar arrangement was an The NPRM also highlighted the worker’s classification without independent contractor). See 85 FR decision in Parrish v. Premier 60605. The Thibault court distinguished meaningful explanation of how they Directional Drilling, 917 F.3d 369, as an balanced the factors to reach the final its result from Cromwell in part by example of inconsistent articulation of highlighting Mr. Thibault’s significant decision. 85 FR 60606 (citing, e.g., economic dependence. In that case, the income from (1) his own sales company Parrish, 917 F.3d at 380; Chao v. Mid- court first applied a dependence-for- that had profits of approximately Atl. Installation Servs., Inc., 16 F. App’x $500,000, (2) ‘‘eight drag-race cars [that] work concept to analyze the control 104, 108 (4th Cir. 2001); and Snell, 875 generated $1,478 in income from racing factor and then explicitly departed from F.2d at 912). Even where many facts and professionally[,]’’ and (3) ‘‘commercial that framework in favor of a factors support both sides of the rental property that generated some dependence-for-income analysis of the classification inquiry, courts have not income.’’ Thibault, 612 F.3d at 849. opportunity factor. See 85 FR 60606. explained how they balanced the While these facts indicate that Mr. The Parrish court impliedly took a third competing considerations. See, e.g., Thibault may have been in business for concept of dependence to analyze the Acosta v. Paragon Contractors Corp., himself as a manager of a sales business, investment factor through a ‘‘side-by- 884 F.3d 1225, 1238 (10th Cir. 2018); drag-race cars, and commercial side comparison’’ of each worker’s Iontchev v. AAA Cab. Services, 685 F. properties, they are irrelevant as to individual investment to that of the App’x 548, 550 (9th Cir. 2017). The whether he was in business for himself alleged employer.’’ 917 F.3d at 383. AI NPRM thus identified a need for as a cable splicer.7 The Thibault court 2015–1 took the same approach and guidance on which factors are most probative. nonetheless assigned these facts explained that ‘‘it is the relative substantial weight because it Even some commenters critical of the investments that matter’’ because ‘‘[i]f Department’s approach in the NPRM understood economic dependence to the worker’s investment is relatively mean dependence for income or wealth, conceded that the test as currently minor, that suggests that the worker and applied can create considerable which is incompatible with the the employer are not on similar footing dependence-for-work approach that ambiguity. Mr. Tuddenham asserted and that the worker may be that the lack of general guidance other courts and the Department economically dependent on the apply.8 See, e.g., Off Duty Police, 915 regarding how to balance factors is ‘‘an employer.’’ The comparative analysis of F.3d at 1058 (‘‘[W]hether a worker has unavoidable function of determining investments thus appears to rely on a more than one source of income says something as nebulous as ‘economic concept of economic dependence that little about that worker’s employment dependence.’ ’’ See also Farmworker status.’’); Halferty, 821 F.2d at 268 (‘‘[I]t means ‘‘not on a similar footing,’’ which Justice (‘‘[T]he test, as currently applied, is not dependence in the sense that one is different from the ‘‘dependence for creates necessary ambiguity.’’). The could not survive without the income work’’ concept that the Department Department disagrees that the concept from the job that we examine, but believes to be correct. of ‘‘economic dependence’’ is dependence for continued In summary, courts and the necessarily ‘‘nebulous.’’ FLSA employment’’); DialAmerica, 757 F.2d Department typically economic employment itself depends on economic at 1385 (‘‘The economic-dependence dependence as ‘‘dependence for work,’’ dependence, and nothing in the statute requires that this standard be nebulous aspect of the [economic reality] test does but have sometimes applied other and thus unmanageable. See Usery, 527 concepts of dependence to analyze 7 F.2d at 1311 (‘‘It is dependence that The Thibault court also highlighted the fact that certain factors, such as ‘‘dependence for Mr. Thibault worked for only 3 months—although indicates employee status.’’). Instead, he intended to work for 7 or 8 months—before income’’ and ‘‘not on similar footing.’’ the Department believes the correct being fired. See 612 F.3d at 846, 849. In contrast, Because economic dependence is the concept of economic dependence the splicers in Cromwell worked approximately 11 ultimate inquiry of FLSA employment, tangibly defines FLSA employment to months. See 348 F. App’x at 58. these different conceptions result in 8 The Thibault case recognized that ‘‘[a]n include individuals who are dependent individual’s wealth is not a solely dispositive factor essentially different tests that confuse on others for work, and to exclude in the economic dependence question.’’ 612 F.3d at the regulated community. Accordingly, individuals who are, as a matter of 849 n.4. This confirms that wealth was in fact a the economic reality test needs a more meaningful consideration, which runs against other economic reality, in business for cases explaining that dependence on wealth is an developed and dependable touchstone themselves. See Saleem, 854 F.3d at inappropriate lens. at its heart. 139. The Department thus believes it is

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possible to provide generally applicable independent contractor status, but 331 U.S. at 719. The Second Circuit guidance regarding how to consider and nonetheless found the ‘skill and recognized such clear overlap, noting balance the economic reality factors to initiative factor points towards that ‘‘[e]conomic investment, by assess this concept of economic employee status’ due to ‘the key missing definition, creates the opportunity for dependence. ingredient . . . of initiative.’ ’’ 85 FR loss, [and] investors take such a risk 60607 (quoting Express Sixty-Minutes with an eye to profit.’’ Saleem, 854 F.3d C. Confusion and Inefficiency Due to Delivery, 161 F.3d at 303). at 145 n.29. Nonetheless, most courts Overlapping Factors Next, the permanence factor originally and Department have analyzed The NPRM next explained that courts concerned the continuity and duration opportunity for profit and loss and and the Department have articulated the of a working relationship but has since investment as separate factors. When economic reality factors such that they been expanded by some courts and the done right, separate analysis leads to have overlapping coverage, which Department to also consider the redundancy. See, e.g., Mid-Atlantic undermines the structural benefits of a exclusivity of that relationship. See 85 Installation Servs., 16 F. App’x at 106– multifactor test. See 85 FR 60607. The FR 60608 (citing Parrish 917 F.3d at 07. When done wrong, it leads to NPRM noted that most of these overlaps 386–87; Keller, 781 F.3d at 807–09; analysis of investment without regard did not exist in the Supreme Court’s Scantland, 721 F.3d at 1319; WHD for the worker’s profit or loss, such as original articulation of the economic Opinion Letter FLSA 2019–6 at 8). But by comparing the dollar value of a reality factors in Silk and were instead exclusivity—the ability or inability for a worker’s personal investments against introduced by subsequent court of worker to offer services to different the total investment of a large company appeals decisions. The NPRM then companies—is already a part of the that, for example, ‘‘maintain[s] explained several ways in which control factor. This overlap results in corporate offices.’’ Hopkins 545 F.3d at extensive overlaps may lead to exclusivity being analyzed twice and 344. The NPRM explained that such a inefficiency and confusion for the causes the actual consideration of comparison says nothing about whether regulated community. permanence being potentially subsumed the worker is in business for himself, as First, the ‘‘skill required’’ factor by control. opposed to being economically articulated in Silk, 331 U.S. at 716, has Third, the ‘‘integral part’’ factor is dependent on that company for work, been expanded by the Department and used by some courts to be merely a and is therefore not probative and some courts to analyze ‘‘skill and proxy of control. As one such court potentially misleading. 85 FR 60608. initiative.’’ See, e.g., Superior Care, 840 explained: ‘‘It is presumed that, with The NRPM concluded that reducing the F.2d at 1060; WHD Fact Sheet WHD respect to vital or integral parts of the above-mentioned overlaps would make #13. Because the capacity for on-the-job business, the employer will prefer to the economic reality test easier to initiative is already part of the control engage an employee rather than an understand and apply. factor, the NPRM explained that this independent contractor. This is so The SWRCC contended that approach essentially imports control because the employer retains control ‘‘overlapping factors [have] never been analysis into the skill factor. Indeed, the over the employee and can compel the source of—and the DOL cannot presence of control appears to overrides attendan[ce] at work on a consistent point to—any credible criticism,’’ but the existence of skill,9 effectively basis.’’ Baker v. Dataphase, Inc., 781 F. did not question or even acknowledge transforming the skill factor into an Supp. 724, 735 (D. Utah 1992). But the the above criticism discussed at length extension of the control factor in some control factor already directly analyzes in the NRPM. In contrast, commenters circuits, but not others.10 The ‘‘skill and whether a business can compel that are significantly impacted by the initiative’’ factor also overlaps with the attendance on a consistent basis. It is FLSA’s obligations generally agreed opportunity factor, which considers the unclear what additional value can be with the Department that overlapping impact of initiative on worker’s gained by indirectly analyzing that same factors have created confusion. For earnings, resulting in initiative being consideration a second time under the example, the Association of General analyzed under three different factors. ‘‘integral part’’ factor.11 Contractors stated that ‘‘[n]avigating and As an illustration of confusion resulting Finally, while Silk articulated the complying with the various overlapping from this overlap, the NPRM opportunity for profit and loss and and inconsistent standards are highlighted a case in which a court investment as separate factors, it confusing and costly,’’ and WPI found that workers exercised enough analyzed the two together in concluding ‘‘agree[d] with the Department that such on-the-job initiative for the control and that truck drivers in that case were overlap and blurring of factors is opportunity factors to point towards independent contractors in part because confusing and inefficient.’’ See also, they ‘‘invested in their own trucks and e.g., Center for Workplace Compliance 9 See, e.g., Selker Bros., 949 F.2d at 1295 had ‘‘an opportunity for profit from (CWC); NRF; U.S. Chamber of (concluding that the skill factor weighed towards employee classification due to ‘‘the degree of sound management’’ of that investment. Commerce. control exercised by [the potential employer] over A multifactor test is a useful the day-to-day operation’’); Baker, 137 F.3d at 1443 11 As the NPRM explained, this presumption that framework for determining FLSA (finding that the skill factor weighed towards firms would control all important services on which employment in part because it organizes employee classification where skilled welders ‘‘are they rely may rest on a mistaken premise because, the many facts that are part of economic told what to do and when to do it’’); Superior Care, for example, manufacturers routinely have critical 840 F.2d at 1060 (finding that the skill factor parts and components produced and delivered by reality into distinct categories, thus weighed towards employee classification for skilled wholly separate companies. 85 FR 60608. And providing some structure to an nurses because ‘‘Superior Care in turn controlled companies whose business is to connect otherwise roving inquiry. However, this the terms and conditions of the employment independent service providers with customers benefit is lost if the lines between those relationship’’). would find those service providers to be important 10 Some courts of appeal continue to analyze skill even though they are independent from the factors blur. Under prior articulations of rather than control as part of the skill factor. See, company’s business. See State Dep’t of the test, considerations within the e.g., Paragon, 884 F3d at 1235 (considering ‘‘the Employment, Training & Rehab., Employment Sec. control factor—capacity for on-the-job degree of skill required to perform the work’’); see Div. v. Reliable Health Care Servs. of S. Nevada, initiative, exclusivity, and ability to also Iontchev, 685 F. App’x at 550 (asking ‘‘whether Inc., 983 P.2d 414, 419 (Nev. 1999) (‘‘[W]e cannot services rendered . . . require[d] a special skill’’); ignore the simple fact that providing patient care compel attendance—have been Keller, 791 F.3d at 807 (analyzing ‘‘the degree of and brokering workers are two distinct imported into analysis of three other skill required’’). businesses.’ ’’) factors: Skill, permanence, and integral

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part. Indeed, those control-based more willing to allocate certain pieces of is unclear what empirical data could considerations appear to be the most their production, even integrated parts, measure innovation that is not occurring important aspect of the other factors, to independent contractors.’’); Food due to legal uncertainty. Commenters which obscures those factors’ distinctive Industry Association (‘‘societal changes who represent technology companies probative values. Moreover, have resulted in innovative work stated that legal uncertainty regarding considerations under the opportunity arrangements and changes in job tenure worker classification in fact deters them factor—the ability to affect profits expectation’’). Former Deputy Under from developing innovative and flexible through initiative—have been imported Secretary of Labor and retired law work arrangements. See, e.g., CWI; into the skill factor. And the ability to professor Henry H. Perritt, Jr. found the TechNet. In addition, economists who earn profits through investment discussion of modern trends to be study the impact of labor regulation on overlaps completely with the ‘‘particularly insightful and should be entrepreneurship also commented that investment factor. The Department retained and expanded in the preamble clear independent contractor regulations continues to believe these overlapping to any final rule.’’ Other commenters would assist startup companies. Dr. Liya coverages contribute to confusion and disagreed. The AFL–CIO, for instance, Palagashvilli (‘‘71 percent of startups should be reduced where practicable. theorized that lower transaction costs relied on independent contractors and ‘‘might just as easily result in employers thought it was necessary to use contract D. The Shortcomings and not taking steps to retain employees labor during their early stages’’); Dr. Misconceptions That This Rulemaking who perform work central to their Michael Farren and Trace Mitchell Seeks To Remedy Are More Apparent in business, but instead tolerate frequent (‘‘[G]reater legal clarity to employers the Modern Economy turnover in such positions’’ and that the and workers will allow for more The NPRM explained that certain ‘‘job tenure of independent contractors efficient production processes and will technological and social changes have may have fallen more’’ than for reduce the resources wasted on made shortcomings of the economic employees—though it did not provide determining a worker’s employment reality test more apparent in the modern evidence in support of its hypotheses.13 classification through the legal economy. It highlighted the effects of The Department continues to believe process.’’). three types of change. First, falling that each of the above shortcomings of For the reasons mentioned above, the transaction costs in many industries the previously applied economic reality Department continues to believe that, makes it more cost effective for firms to test provides sufficient reason for this unless revised, the multifactor economic hire independent contractors rather than rulemaking and that technological and reality test suffers because the analytical employees to perform core functions.12 societal changes have made these lens through which all the factors are This in turn means analyzing the shortcomings even more apparent. filtered remains inconsistent; there is no clear principle regarding how to balance importance of the work through the E. Effects of Additional Regulatory the multiple factors; the lines between ‘‘integral part’’ factor, which the Clarity on Innovation Supreme Court never endorsed, is more many of the factors are blurred; and likely to result in misleading signals The NPRM expressed concern that the these shortcomings have become more regarding an individual’s employment legal uncertainty arising from the above- apparent in the modern economy. The status. Second, the transition from a described shortcomings of the resulting legal uncertainty obscures more industrial-based to a more multifactor economic reality test may workers’ and businesses’ respective knowledge-based economy reduces the deter innovative, flexible work rights and obligations under the FLSA probative value of the investment factor arrangements that benefit businesses and deters innovative work in certain industries because and workers alike. Some commenters arrangements, thus inhibiting the individuals can be in business for questioned this assumption. The development of new job opportunities themselves in those industries with Coalition of State Attorneys General, or eliminating existing jobs. The minimal physical capital. Third, shorter Cities, and Municipal Agencies (State Department is therefore issuing this job tenures among employees dull the AGs), for instance, contended that the final rule to increase legal certainty. Department ‘‘provides no empirical ability of the permanence factor to IV. Final Regulatory Provisions distinguish between employees and evidence or data demonstrating that independence contractor. See 85 FR employers now hesitate to engage in Having reviewed commenter feedback 60608–09. innovative arrangements’’ and further submitted in response to the proposed Several commenters agreed with the argued that because ‘‘digital platforms rule, the Department is finalizing the Department’s assessments of modern have become part of the modern addition of a new part 795 to Title 29 trends. See, e.g., TechNet (‘‘Given economy . . . they have not been stifled of the Code of Federal Regulations, falling transaction costs, companies are by the current test.’’ But the mere which will address whether particular existence of certain types of businesses workers are ‘‘employees’’ or 12 Ronald Coase, Nature of the Firm, 4 Economica is insufficient evidence that other such independent contractors under the 386 (1937), https://onlinelibrary.wiley.com/doi/ businesses are not being stifled, and it FLSA. In relevant part, and as discussed epdf/10.1111/j.1468-0335.1937.tb00002.x. See also in greater detail below, the part Nobel Prizes and Laureates, Oct., 15, 1991, https:// 13 The Department notes that it is unlikely that www.nobelprize.org/prizes/economic-sciences/ includes: job tenures of independent contractors have fallen • An introductory provision at 1991/press-release/ (explaining The Nature of the by more than employees because average job tenure Firm’s contribution to economics literature as a for employees have dropped by many years, which § 795.100 explaining the purpose and central reason for Coase’s receipt of the 1991 Nobel is greater than the total duration of a typical legal authority for the new part; Prize in Economics); Katz and A. Krueger, ‘‘The independent contractor relationship. See Julie • a provision at § 795.105(a) Rise and Nature of Alternative Work Arrangements Hotchkiss and Christopher Macpherson, Falling Job explaining that independent contractors in the United States, 1995–2015,’’ p. 25 (2018) Tenure: It’s Not Just about Millennials, Federal (‘‘Coase’s (1937) classic explanation for the Reserve Bank of Atlanta, June 8, 2015, https:// are not employees under the FLSA; boundary of firms rested on the minimization of www.frbatlanta.org/blogs/macroblog/2015/06/08/ • a provision at § 795.105(b) transaction costs within firm-employee falling-job-tenure-its-not-just-about- discussing the ‘‘economic reality’’ test relationships. Technological changes may be millennials.aspx. (showing that median job tenure for distinguishing FLSA employees from reducing the transaction costs associated with for individuals born in 1933 was ten years or longer contracting out job tasks, however, and thus while median job tenure for individuals born after independent contractors and clarifying supporting the disintermediation of work.’’). 1983 was three years or less). that the concept of economic

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dependence turns on whether a worker deference it expects to receive from this rulemaking has great value is in business for him- or herself courts interpreting its proposed regardless of what deference courts (independent contractor) or is regulation. A diverse collection of ultimately give to it. economically dependent on a potential commenters, including the American While proposed § 795.100 employer for work (employee); Trucking Association (ATA), the emphasized that part 795 would state • provisions at § 795.105(c) and (d) National Home Delivery Association the Department’s interpretation of describing factors examined as part of (NHDA), the Northwest Workers Justice independent contractor status under the the economic reality test, including two Project (NWJP), and Winebrake & FLSA, some commenters expressed ‘‘core’’ factors—the nature and degree of Santillo, LLC, opined that the concern that it would affect the scope of the worker’s control over the work and Department’s proposed regulation employment under other Federal laws. the worker’s opportunity for profit or would be entitled to Skidmore The United Food and Commercial loss—which typically carry greater deference from courts, though these Workers International Union (UFCW) weight in the analysis, as well as three commenters diverged on the proposed believed that the proposal may narrow other factors that may serve as rule’s ‘‘power to persuade.’’ Skidmore v. the coverage of the ‘‘Title VII of the Civil additional guideposts in the analysis; Swift & Co., 323 US 134, 140 (1944). Rights Act of 1964, Americans with • a provision at § 795.110 advising Finally, the AFL–CIO asserted that Disabilities Act, Age Discrimination in that the parties’ actual practice is more ‘‘[t]he proposed rule is based on Employment Act (ADEA), and the Equal probative than what may be considerations that did not motivate Pay Act.’’ See also National Women’s contractually or theoretically possible; Congress when it adopted the FLSA, Law Center (NWLC); CLASP. The • fact-specific examples at § 795.115; that the Department of Labor is not Department reaffirms that the rule and concerns the distinction between • authorized to consider in construing the a severability provision at terms of the FLSA, and that the employees and independent contractors § 795.120. Department has no expertise regarding,’’ solely for the purposes of the FLSA, and The Department responds to thus placing the proposed rule ‘‘outside as such, would not affect the scope of commenter feedback on the proposed the ‘limits of the delegation’ from employment under other Federal rule below. Congress to the Department contained laws.15 A. The Purpose of Part 795 in the Act.’’ (quoting Chevron, U.S.A., Many commenters requested that the Department promulgate a standard more Proposed § 795.100 explained that the Inc. v. NRDC, Inc., 467 U.S. 837, 865 (1984)). broadly applicable across other state interpretations in part 795 will guide and Federal employment laws. See, e.g., WHD’s enforcement of the FLSA and are The Department appreciates commenter interest in these issues. The American Society of Travel Advisors, intended to be used by employers, Inc. (‘‘[The NPRM . . . represents businesses, the public sector, Department without question has relevant expertise in the area of what something of a missed opportunity employees, workers, and courts to insofar as it fails to address the assess employment status classifications constitutes an employment relationship under the FLSA, given its responsibility longstanding difficulty associated with under the Act. See 85 FR 60638. the continued use of multiple tests at Proposed § 795.100 further clarified for administering and enforcing the Act 14 and its decades of experience the Federal level to determine worker that, if proposed part 795 is adopted, status.’’); Cambridge Investment employers may safely rely upon the doing so. The Department’s authority to interpret the Act comes with its Research, Inc. (‘‘[W]ithout a more interpretations in part 795 under section encompassing Department position or 10 of the Portal-to-Portal Act, unless and authority to administer and enforce the Act. See Herman v. Fabri-Centers of guidance addressing different state until any such interpretation ‘‘is standards, some of the current modified or rescinded or is determined Am., Inc., 308 F.3d 580, 592–93 (6th Cir. 2002) (noting that ‘‘[t]he Wage and Hour uncertainty and unpredictability by judicial authority to be invalid or of remain.’’); Chun Fung Kevin Chiu no legal effect.’’ Id. (quoting 29 U.S.C. Division of the Department of Labor was created to administer the Act’’ while (‘‘[I]nconsistent Federal and state 259). standards with regards to classification Few commenters specifically agreeing with the Department’s interpretation of one of the Act’s may render the DOL rules ineffective in addressed proposed § 795.100, but practice for those independent several discussed issues relevant to its provisions); Dufrene v. Browning-Ferris, Inc., 207 F.3d 264, 267 (5th Cir. 2000) contractors and businesses affected.’’). content. For example, a few commenters While several commenters questioned the Department’s legal (‘‘By granting the Secretary of Labor the power to administer the FLSA, Congress acknowledged the Department’s lack of authority to promulgate any regulation authority to interpret the scope of laws addressing independent contractor implicitly granted him the power to interpret.’’); Condo v. Sysco Corp., 1 outside of its jurisdiction, the National status under the FLSA. See Northern Association of Manufacturers and the California Carpenters Regional Council F.3d 599, 603 (7th Cir. 1993) (same). The Department believes a clear Mechanical Contractors Association of (‘‘At no time since the FLSA was passed America (MCAA) urged the Department has Congress made substantive explanation of the test for whether a worker is an employee under the FLSA to collaborate with other Federal amendments to the definitions of agencies to harmonize the varying employee, employer, or the ‘suffer or or an independent contractor not entitled to the protections of the Act in employment definitions under Federal permit to work’ standard . . . nor has it law. Finally, the Zobrist Law Group directed any changes in the controlling easily accessible regulatory text is valuable to potential employers, to ‘‘urge[d] the Department to prohibit regulations.’’); Rep. Bobby Scott et al. states from using classification tests that (‘‘Congress has not delegated workers, and to other stakeholders. It has a long history of offering rulemaking authority to the DOL with 15 Additionally and as explained in greater detail respect to the scope of the employment interpretations in this area and believes below, this rule does not narrow the longstanding relationship under the FLSA.’’). A few standard for distinguishing between FLSA 14 See 29 U.S.C. 204, 211(a), 212(b), 216(c), 217; employees and independent contractors; employees commenters requested that the see also Fernandez v. Zoni Language Centers, Inc., are economically dependent on another for work, Department explain its source of 858 F.3d 45, 48–49 (2d Cir. 2017) (noting that ‘‘[t]he and independent contractors are in business for rulemaking authority and the level of DOL . . . administers the FLSA’’). themselves as matter of economic reality.

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conflict with the proposed rule,’’ 500.20(h)(4), as we are unsure whether status under the FLSA ‘‘[t]o the extent asserting that ‘‘state law not preempted application of the six factor economic . . . [that such guidance is] inconsistent by the FLSA is narrow’’ and that state reality test described in that regulation or in conflict with the interpretations laws ‘‘shifting an independent has resulted in confusion and stated in this part.’’ As explained in the contractor under the FLSA to an uncertainty in the more limited MSPA NPRM, the Department engaged in this employee under state law . . . [impose] context similar to that described in the rulemaking to ‘‘clarify the existing greater obligations upon those workers.’’ FLSA context. Importantly, the standard, not radically transform it,’’ 85 But see Truckload Carriers Association regulatory standard for determining an FR 60636, and none of the industry- (‘‘TCA understands that, due to our individual’s classification status under specific guidance in Administrator’s nation’s federalist system, individual MSPA is generally consistent with the Interpretation No. 2014–1 is states such as California can pursue FLSA guidance finalized in this rule: meaningfully affected by this final rule. misguided statues that are more ‘‘In determining if the farm labor For similar reasons, we believe that the stringent than the Federal standard the contractor or worker is an employee or assertion by the Nebraska Appleseed Department is seeking to clarify[.]’’). an independent contractor, the ultimate Center for Law in the Public Interest While the Department appreciates the question is the economic reality of the (Appleseed Center) that this rulemaking desire to achieve uniformity across the relationship—whether there is will ‘‘rescind years of [Departmental] various state and Federal laws which economic dependence upon the guidance’’ is an overstatement. This rule may govern work arrangements, agricultural employer/association or is premised on familiar FLSA concepts requests to modify definitions and tests farm labor contractor, as appropriate.’’ that courts, employers, workers, and the under different laws are outside the 29 CFR 500.20(h)(4). Therefore, as Department have applied for years scope of this rulemaking. explained in the NPRM, the Department while providing updated and clearer Some commenters supportive of the prefers to proceed incrementally at this explanations of what the concepts mean proposed rule requested that the time by leaving the MSPA regulation at and how they are considered. Although Department make conforming edits to 29 CFR 500.20(h)(4) unchanged.16 17 this rule will change the Department’s its MSPA regulation at 29 CFR The American Network of Community analysis for classifying workers as 500.20(h)(4), addressing whether or not Options and Resources (ANCOR) employees or independent contractors a farm labor contractor engaged by an expressed concern about the in some respect, those changes do not agricultural employer/association is an Department’s statement in proposed favor independent contractor independent contractor or an employee § 795.100 that, if finalized, the proposed classification (i.e., the ultimate legal under MSPA. See Americans for rule ‘‘would contain the Department’s outcome) relative to the status quo, but Prosperity Foundation (AFPF) (‘‘To sole and authoritative interpretation of rather offer greater clarity as to workers’ further the Department’s goal of independent contractor status under the proper classifications. clarification, simplification, and FLSA,’’ fearing that the statement could consistency . . . the same criteria used be interpreted to ‘‘render obsolete the B. Clarification That Independent in the NPRM to define independent Department’s specific guidance on the Contractors Are Not Employees Under contractors for purposes of the FLSA application of the FLSA to shared living the Act also should apply to the MSPA, and to in Fact Sheet #79G and Administrator’s Proposed § 795.105(a) explained that any other provision that references the Interpretation No. 2014–1.’’ The an independent contractor who renders FLSA.’’); Administrative Law Clinic at Department disagrees with this services to a person is not an employee the Antonin Scalia Law School (‘‘[T]he interpretation, noting that § 795.100 of that person under the FLSA, and that Department should simply use its only rescinds earlier WHD guidance the Act’s wage and hour requirements proposed regulations in 29 CFR 795.100, addressing independent contractor do not apply with respect to a person’s et seq., to determine employee status independent contractors. See 85 FR under MSPA, and repeal [29 CFR 16See, e.g., Pharm. Research & Mfrs. of Am. v. 60638–39. Proposed 795.105(a) 500.20(h)] as duplicative.’’). Relatedly, FTC, 790 F.3d 198, 203 (D.C. Cir. 2015) (affirming similarly explained that the Texas RioGrande Legal Aid (TRLA), that agency had discretion to ‘‘proceeding recordkeeping obligations for employers incrementally’’ in promulgating rules that were which expressed opposition to the directed to one industry but no others); Inv. Co. under section 11 of the Act do not apply proposed rule, asserted that ‘‘the Inst. v. Commodity Futures Trading Comm’n, 720 to a person with respect to services proposed rule will lead to considerable F.3d 370, 378 (D.C. 2013) (observing that ‘‘[n]othing received from an independent confusion among both employers and prohibits Federal agencies from moving in an contractor. Id. incremental manner’’ (quoting FCC v. Fox workers . . . because the proposed rule Television Stations, Inc., 556 U.S. 502, 522 (2009)); The vast majority of substantive at odds with the Department’s [MSPA] City of Las Vegas v. Lujan, 891 F.2d 927,935 (D.C. comments agreed with proposed regulations,’’ but opined that any effort Cir. 1989) (noting that ‘‘agencies have great § 795.105(a). One anonymous discretion to treat a problem partially’’). commenter suggested that the to revise 29 CFR 500.20(h) ‘‘would be in 17 Similar to the MSPA regulation at 29 CFR Department interpret the FLSA’s direct contravention of Congressional 500.20(h)(4), a regulation promulgated by the directives regarding the interpretation of Department’s Veterans’ Employment & Training minimum wage and overtime pay the MSPA.’’ Service (VETS) at 20 CFR 1002.44 articulates a six- requirements to apply to independent As noted in the NPRM preamble, the factor balancing test based on the tests used by contractors because the Act’s courts under the FLSA for determining whether an Department acknowledges that MSPA individual is an employee or an independent ‘‘declaration of policy’’ at 29 U.S.C. 202 adopts by reference the FLSA’s contractor under the Uniformed Services ‘‘suggests the purpose of the FLSA is to definition of ‘‘employ,’’ see 18 U.S.C. Employment and Reemployment Rights Act protect workers.’’ The Department does 1802(5), and that 29 CFR 500.20(h)(4) (USERRA). See 70 FR 75254 (‘‘The independent not adopt this interpretation because contractor provision in this rule is based on considers ‘‘whether or not an Congress’s intent that USERRA’s definition of Federal courts of appeals have independent contractor or employment ‘employee’ be interpreted in the same expansive uniformly held, and the Department has relationship exists under the Fair Labor manner as the term is defined under the [FSLA].’’ consistently maintained, that ‘‘FLSA Standards Act’’ to interpret independent (citing H.R. Rep. No. 103–65, Pt. I, at 29 (1993); S. wage and hour requirements do not Rep. No. 103–58, at 40 (1993))). Consistent with this contractor status under MSPA. At this rulemaking’s incremental focus of the FLSA apply to true independent contractors.’’ time, however, the Department does not context, the Department declines to amend 20 CFR Karlson, 860 F.3d at 1092; see also, e.g., see a compelling need to revise 29 CFR 1002.44 at this time. Parrish, 917 F.3d at 384; Saleem, 854

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F.3d at 139–40; Express Sixty-Minutes The Department did not receive any NRF stated that the economic reality test Delivery, 161 F.3d at 305; see also substantive comments disputing this ‘‘is the proper basis for distinguishing Portland Terminal, 330 U.S. at 152 distinction between employee and independent contractors from (holding that the FLSA ‘‘was obviously independent contractor classification employees under the FLSA as not intended to stamp all persons as under the Act. articulated by the U.S. Supreme Court.’’ employees’’). The Department observed in the ATA) found that the economic NPRM preamble that some courts have dependence framework ‘‘comports with C. Adopting the Economic Reality Test relied on a worker’s entrepreneurship a thoughtful reading of decades of court To Determine a Worker’s Employee or with respect to one type of work to precedent.’’ See also Americans for Independent Contractor Status Under conclude that the worker was also in Prosperity Foundation; Cetera Financial the Act business for him- or herself in a second, Group; Center for Workplace Proposed § 795.105(b) would adopt unrelated type of work. See, e.g., Compliance (‘‘DOL is correct to propose the economic reality test to determine a Parrish, 917 F.3d at 384 (considering using the economic dependence worker’s status as an employee or an ‘‘plaintiff’s enterprise, such as the goat standard for determining whether an independent contractor under the Act. farm, as part of the overall analysis of individual is an employee or As the proposal explained, the inquiry how dependent plaintiffs were on independent contractor’’). of whether an individual is an employee [defendant]’’ for working as The majority of commenters agreed or independent contractor under the Act consultants); Thibault, 612 F.3d at 849 with the Department’s proposal to adopt is whether, as a matter of economic (concluding that plaintiff was an the economic reality test using the reality, the individual is economically independent contractor as a cable above-mentioned definition of economic dependent on the potential employer for splicer in part because he managed dependence, including commenters that work. See 85 FR 60611; see also Pilgrim unrelated commercial operations and were generally critical of the proposed Equip., 527 F.2d at 1311 (‘‘It is properties in a different state). This rule. For example, the State AGs dependence that indicates employee approach is inconsistent with the approvingly stated that ‘‘[f]or nearly status.’’). The proposal and this final Supreme Court’s instruction that the three-quarters of a century, the Supreme rule provide further clarity as to the economic reality analysis be limited to Court has held that whether a worker is economic reality test’s touchstone— ‘‘the claimed independent operation.’’ a covered ‘‘employee’’ under the FLSA economic dependence. Silk, 331 U.S. at 716. Thus, the relevant is governed by the economic reality The NPRM preamble explained that question in this context is whether the test.’’ See also National Employment clarifying the test requires putting the worker providing certain service to a Law Project (NELP); Signatory Wall and question of economic dependence in the potential employer is an entrepreneur Ceiling Contractors Alliance (SWACCA) proper context. ‘‘Economic dependence ‘‘in that line of business.’’ Mr. W (recommending adopting an economic is not conditioned reliance on an Fireworks, 814 F.2d at 1054. Otherwise, reality test with a different number of alleged employer for one’s primary businesses must make worker factors). While objecting commenters source of income, for the necessities of classification decisions based on facts challenged various aspects of the life.’’ Mr. W Fireworks, 814 F.2d at 1054. outside the working relationship.19 proposed rule, they did not dispute the Rather, courts have framed the question At bottom, the phrase ‘‘economic sharpened explanation of the economic as ‘‘ ‘whether, as a matter of economic dependence’’ may mean many different dependence inquiry. Commenters, both supportive and objecting, made a reality, the workers depend upon things. But in the context of the number of thoughtful suggestions, someone else’s business for the economic reality test, ‘‘economic opportunity to render service or are in which are addressed below. dependence’’ is best understood in The Administrative Law Clinic at the business for themselves.’ ’’ Saleem, 854 terms of what it is not. The phrase F.3d at 139 (quoting Superior Care, 840 Antonin Scalia Law School suggested excludes individuals who, as a matter of further clarifying the test by adding F.2d at 1059). This conception of economic reality, are in business for economic dependence comports with ‘‘[a]n individual is not an ‘employee’ themselves. Such individuals work for merely because he or she is the FLSA’s definition of employ as themselves rather than at the sufferance ‘‘includ[ing] to suffer or permit to economically dependent in some way or permission of a potential employer, on the potential employer.’’ Such work.’’ See 29 U.S.C. 203(g). An see 29 U.S.C. 203(g), and thus are not individual who depends on a potential additional language may be redundant dependent on that potential employer in § 795.105(b) because that section employer for work is able to work only for work. Section 795.105(b) therefore by the sufferance or permission of the already articulates economic recognizes the principle that, as a matter dependence as dependence on a potential employer. Such an individual of economic reality, workers who are in is therefore an employee under the Act. potential employer for work, as opposed business for themselves with respect to to being in business for oneself. As In contrast, an independent contractor work being performed are independent does not work at the sufferance or explained above, other forms of contractors for that work. dependence, such as dependence on permission of others because, as a Many commenters supported the matter of economic reality, he or she is income or subsistence, do not count. Department’s decision to implement the However, given how important it is to in business for him- or herself. In other economic reality test applying the words, an independent contractor is an apply the correct concept of economic above-described approach to economic dependence, the Department believes entrepreneur who works for him- or dependence. WPI applauded the herself, as opposed to for an employer.18 this point bears emphasis through a ‘‘decision to retain the long-standing concrete, fact-specific example in the economic reality test while sharpening 18 The Department’s prior guidance has stated regulatory text. The Department is thus that ‘‘an employee, as distinguished from a person the factors used to apply that test.’’ The adding an example in § 795.115 to who is engaged in a business of his or her own, is demonstrate that a different form of one who, as a matter of economic reality, follows someone who ‘‘follows the usual path of an dependence, i.e., dependence of income the usual path of an employee.’’ Fact Sheet #13; see employee’’ is circular and unhelpful. also WHD Opinion Letter FLSA–795 (Sept. 30, 19 It is possible for a worker to be an employee or subsistence, is not a relevant 1964). Upon consideration, however, the in one line of business and an independent consideration in the economic reality Department believes that describing an employee as contractor in another. test.

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A number of individual commenters Independent Business (NFIB), urged the 16, 60639. Lastly, the Department who generally support this rule Department to adopt the common law proposed to reframe the ‘‘whether the requested that the Department allow standard used to distinguish between service rendered is an integral part of workers who voluntarily agree to be employees and independent contractors the alleged employer’s business’’ factor independent contractors to be classified under the Internal Revenue Code and in accordance with the Supreme Court’s as such, regardless of other facts. For other Federal laws. These requests are original inquiry in Rutherford Food, 331 example, Farren and Mitchell urged the addressed in the discussion of U.S. at 729, of whether the work is ‘‘part Department to ‘‘allow the parties regulatory alternatives in Section VI, of an integrated unit of production.’’ See themselves to explicitly define the which explains why the Department is 85 FR 60616–18, 60639.20 nature of their labor relationship,’’ not adopting either the common law Proposed § 795.105(c) further aimed asserting that such an approach would control test or the ABC test for to improve the certainty and respect worker autonomy, maximize employment under the FLSA. predictability of the test by focusing it legal certainty, and promote greater For the reasons discussed above, the on two core factors: (1) The nature and flexibility in work arrangements. This Department adopts § 795.105(b) as degree of the worker’s control over the requested approach would allow proposed to adopt the economic realty work; and (2) the worker’s opportunity voluntary agreements to supersede the test to determine whether an individual for profit or loss. The proposed rule economic reality test in determining is an employee or independent explained that if both proposed core classification as an employee or contractor under the FLSA. Under that factors point towards the same independent contractor. The Supreme test, an individual is an employee if he classification—whether employee or Court, however, held in Tony & Susan or she is dependent on an employer for independent contractor—there is a Alamo, 471 U.S. at 302, that the FLSA work, and is an independent contractor substantial likelihood that that must be ‘‘applied even to those who if that he or she is, as a matter of classification is appropriate. See 85 FR would decline its protections.’’ In other economic reality, in business for him- or 60618–20, 60639. words, an individual may not waive herself. The following discussion addresses application of the Act through voluntary D. Applying the Economic Reality commenter feedback on the five agreement. See Barrentine v. Arkansas- Factors To Determine a Worker’s proposed economic reality factors. Best Freight Sys., Inc., 450 U.S. 728, 740 Independent Contractor or Employee 1. The ‘‘Nature and Degree of the (1981) (‘‘FLSA rights cannot be abridged Status by contract or otherwise waived, Individual’s Control Over the Work’’ because this would ‘nullify the Proposed § 795.105(c) explained that Factor purposes’ of the statute and thwart the certain nonexclusive economic reality The first core factor identified in the legislative policies it was designed to factors guide the determination of proposed regulatory text was the effectuate.’’) (quoting Brooklyn Savings whether an individual is, on one hand, ‘‘nature and degree of the individual’s Bank v. O’Neil, 324 U.S. 697, 707 economically dependent on a potential control over the work.’’ 85 FR 60639. (1945)); Lauritzen, 835 F.2d at 1544–45 employer for work and therefore an Proposed § 795.105(d)(1)(i) explained (‘‘The FLSA is designed to defeat rather employee or, on the other hand, in that this factor ‘‘weighs towards the than implement contractual business for him- or herself and individual being an independent arrangements. If employees voluntarily therefore an independent contractor. contractor to the extent the individual, contract to accept $2.00 per hour, the See 85 FR 60639. These factors were as opposed to the potential employer, agreement is ineffectual.’’) (Easterbrook listed in proposed § 795.105(d), based exercises substantial control over key J., concurring). Because this request on the factors currently used by the aspects of the performance of the work, would contradict this precedent by Department and most Federal courts of such as by setting his or her own allowing the possibility of workers who appeals, with certain proposed schedule, by selecting his or her are employees under the facts and law reformulations. Id. projects, and/or through the ability to to waive the FLSA’s protections by First, the Department proposed to work for others, which might include classifying themselves as independent follow the Second Circuit’s approach of the potential employer’s competitors.’’ contractors, the Department declines to analyzing the worker’s investment as Proposed § 795.105(d)(1)(i) further implement it in the final rule. part of the opportunity factor. The explained that, in contrast, this factor Some commenters, including the combined factor asked whether the ‘‘weighs in favor of the individual being Minnesota State Building & worker has an opportunity to earn an employee under the Act to the extent Construction Trades Council, PJC, and profits or incur losses based on his or the potential employer, as opposed to SWRCC, suggested that the rule include her exercise of initiative or management the individual, exercises substantial a presumption of employee status. The of investments. See 85 FR 60613–15, control over key aspects of the Supreme Court has said and the 60639. Second, the Department performance of the work, such as by Department agrees that this is a totality proposed to clarify that the ‘‘skill controlling the individual’s schedule or of the circumstances analysis, based on required’’ factor originally articulated by workload and/or by directly or the facts. The Department thus declines the Supreme Court should be used, as indirectly requiring the individual to to create a presumption in favor of opposed to the ‘‘skill and initiative’’ employee status. factor currently used in some circuits, 20 Consistent with WHD Opinion Letter NELA, Farmworker Justice (FJ), and because considering initiative as part of FLSA2019–6, the Department’s proposal did not several other commenters requested that the skill factor creates unnecessary and include the ‘‘independent business organization’’ the Department abandon the economic confusing overlaps with the control and factor mentioned in Fact Sheet #13. The opinion letter explained that the ‘‘independent business reality test in favor of the ABC test opportunity factors. See 85 FR 60615, organization’’ factor was ‘‘[e]ncompassed within’’ adopted by the California Supreme 60639. Third, the Department proposed the other factors. Because the ultimate inquiry of Court in Dynamex Operations West v. to further reduce overlap by analyzing the economic dependence test is whether workers Superior Court, 416 P.3d 1 (2018). By the exclusivity of the relationship as a are ‘‘in business for themselves,’’ Saleem, 854 F.3d at 139, analyzing the worker’s degree of contrast, other commenters, such as the part of the control factor only, as ‘‘independent business organization’’ restates the American Society of Travel Advisors opposed to both the control and inquiry and adds little, if anything, to the analysis (ASTA) and National Federation of permanence factors. See 85 FR 60615– that is not already covered by the other factors.

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work exclusively for the potential regarding [the control factor] is neutral.’’ indicate a focus on either the individual employer.’’ In addition, the proposal Mr. Reibstein suggested that the title be worker or the potential employer. stated that the following actions by the changed from the ‘‘nature and degree of Mr. Reibstein also suggested that the potential employer ‘‘do[ ] not the individual’s control over the work’’ control factor ‘‘should be drafted in a constitute control that makes the to the ‘‘nature and degree of each party’s manner that focuses attention on the key individual more or less likely to be an control over the work.’’ Finally, WPI to control, which is control over the employee under the Act’’: ‘‘[r]equiring expected that some commenters would manner and means by which the work the individual to comply with specific object to the Department’s proposed in question is performed.’’ He asserted legal obligations, satisfy health and articulation of the control factor, and it that, as proposed, the control section ‘‘is safety standards, carry insurance, meet supported the Department’s approach ambiguous at best and may be contractually agreed-upon deadlines or by saying that ‘‘the economic reality test misleading at worst,’’ and suggested that quality control standards, or satisfy focuses on the individual—whether the ‘‘control over the work’’ should be other similar terms that are typical of individual is economically dependent changed to ‘‘control over the contractual relationships between on another business or in business for performance of the work, particularly businesses (as opposed to employment him or herself,’’ and that, ‘‘[t]hus, the how the work is to be performed.’’ The relationships).’’ Numerous commenters focus of each factor should also be on Department, however, prefers to retain requested changes to the proposed the economic realities of the individual, the ‘‘control over the work’’ articulation. control section regarding (1) the not the businesses with which [he or It is purposefully broad to encompass perspective from which control is she] contracts.’’ See also CPIE various different types of control that framed; (2) the examples of control that (supporting ‘‘the NPRM’s articulation of the individual worker and the potential are relevant to the economic this factor’’). employer may exercise over the working dependence inquiry; and (3) examples Notwithstanding differing commenter relationship. Moreover, the Department of control that are not. preferences over the primary agrees that who controls the manner and articulation of the control factor, the means by which the work is performed a. Responses to Requests Regarding the is a key component of the control Framing of Control proposed (and final) regulatory text at § 795.105(d)(1)(i) discusses both the analysis, and the Department believes Some commenters asserted that the individual worker’s control and the that both the proposed and final control factor should focus on the potential employer’s control.21 This regulatory text reflect the importance of potential employer’s substantial control approach is consistent with that of the manner and means by which the over the worker instead of the worker’s courts, which also generally consider work is performed. substantial control over the work. For both the individual’s control and the example, the State AGs said that the b. Responses to Comments Regarding potential employer’s control. See, e.g., ‘‘proposed control factor incorrectly Examples of Relevant Control Razak, 951 F.3d at 142; Hobbs, 946 F.3d focuses on the worker’s control over the A number of comments addressed the at 829; Saleem, 854 F.3d at 144–45; work’’ and that ‘‘[w]ell-established proposed regulatory text’s three non- Karlson, 860 F.3d at 1096. The precedent makes clear that the proper exhaustive examples of control that may Department explained in the NPRM focus is the employer’s control over the indicate employee or independent preamble that whether the control factor worker.’’ According to NELA, ‘‘the contractor status, which were setting is articulated with reference to the control analysis has historically been, schedules, selecting projects, and and should continue to be, on the individual worker’s control or the working exclusively for the employer or control that the employer has over the potential employer’s control is a working for others. employee, not that the employee has ‘‘distinction . . . of no consequence,’’ Several commenters sought over their work.’’ NELA added that the and that both ‘‘the nature and degree of clarification that these examples may Department ‘‘cannot deny that its control over the work by the worker and not always be probative of an proposal casts the control inquiry by the potential employer are employment or independent contracting differently than the Supreme Court, considered to determine whether relationship. For instance, NRF stated courts of appeals, and the Department control indicates employee or ‘‘there may be limits on schedules that have in the past.’’ And the United independent contractor status.’’ 85 FR are consistent with business Brotherhood of Carpenters and Joiners 60612 n.34. The Department reaffirms relationships that should not be treated of America stated that the proposal’s that statement now and reiterates that as impacting the analysis,’’ such as ‘‘focus on the individual’s control over both the worker’s control and the delivery workers who can deliver only the work turns the ‘suffer or permit’ potential employer’s control should be during the restaurant’s operating hours standard on its head’’ because that considered. To remove any ambiguity and a retailer that arranges for after- standard ‘‘references the purported on this point, the Department has hours cleaning services. The employer’s behavior—not the worker’s.’’ modified the title of subsection Department agrees that there are See also Northern California Carpenters 795.105(d)(1)(i) to ‘‘[t]he nature and examples of impacts on a workers Regional Council (noting that ‘‘[b]ecause degree of control over the work,’’ schedule that are not probative of the the ‘nature and degree of the removing the proposed rule’s reference type of control that indicates economic individual’s control over the work’ . . . to ‘‘the individual’s control over the dependence and that NRF has identified focuses on the individual’s control, as work.’’ This revised articulation is two such examples by pointing to the opposed to the employer’s control, the closer to the Supreme Court’s fact that a delivery worker can deliver factor skews towards most skilled description of the economic reality test’s for a restaurant only when the tradespeople being classified as control factor in Silk, 331 U.S. at 716 restaurant is open and a cleaning worker independent cont[r]actors’’). Relatedly, (‘‘degrees of control’’), which does not can clean a retailer only when it is attorney Richard Reibstein suggested closed. But the Department does not that the title of the control subsection 21 As Mr. Reibstein acknowledged, the proposed think any change to the regulatory text regulatory text beyond the title of the control ‘‘be re-drafted in a manner that does not section was written in a ‘‘neutral’’ manner. The is warranted to clarify this point, as the suggest it favors independent contractor final regulatory text is written in a similarly neutral regulatory text merely provides a few status because the remaining text manner. examples of facets of control that may—

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or may not—be probative in any given can only wreak havoc with the available to a worker to offer their case depending on the facts. NHDA established common law of FLSA services; the worker’s control over sought clarification of the working for employer/employee relationships.’’ where certain aspects of the services can others example because, in its view, ‘‘it However, the examples of types of be performed where the subparts do not is not enough for the individual to claim control identified in the proposal were change the results provided by the he/she never turned down projects or not an attempt to narrow or limit the worker; and the worker’s discretion to never worked for others. Rather, the control factor analysis. The Department use the services of others to perform the individual must demonstrate some cannot provide an exhaustive list of work in whole or in part, or to support action, implementation, or execution (in types of control and so instead focused the worker’s performance of services other words, act or conduct) by the on several key examples of types of (including performing some of the potential employer that prevented the control. Any type of control over the contracted work and/or performing individual from turning down projects work by the individual worker or the supporting services such as accounting, or working for others.’’ In response, the potential employer may be considered. legal, administrative, or financial Department notes its statement in the Such considerations should not be services to support the worker or NPRM preamble that ‘‘a potential ‘‘mechanical,’’ Saleem, 854 F.3d at 140, services to support equipment or tools employer may exercise substantial and instead must focus on whether the used by the worker to perform services). control, for example, where it explicitly control exercised by either the UPS stated that the proposal ‘‘fails to requires an exclusive working individual or the potential employer provide examples beyond controlling relationship or where it imposes answers the ultimate inquiry of the worker’s schedule or workload and restrictions that effectively prevent an ‘‘whether the individual is, as a matter restricting the worker’s ability to work individual from working with others.’’ of economic reality, in business for with other entities,’’ and that ‘‘courts 85 FR 60613 (citing cases where the himself,’’ as opposed to being have properly widened the lens when employer’s schedule made it economically dependent on the assessing control, looking at factors such ‘‘impossible’’ or ‘‘practically potential employer for work. In any as background checks, authority to hire impossible’’ for the worker to work for event, as explained below, the and fire, training, advertising, licensing, others). Where a worker could work for Department is clarifying types of control uniforms, monitoring, supervision, others, meaning the potential employer that may be relevant to the analysis. evaluation, and discipline.’’ is not explicitly or effectively Numerous other commenters Farmworker Justice commented that the preventing the worker from doing so, suggested the addition of dozens of proposal did ‘‘not acknowledge other the worker retains control over this examples of types of control that examples of employer control that aspect of his or her work. That he or she indicate employee or independent unquestionably shape a worker’s exercises this control by choosing to contractor status. For example, WPI experience and performance of daily work only for one potential employer suggested that the following types of tasks’’ and provided as examples does not necessarily shift the control to control by the individual worker are ‘‘[r]equirements about how a worker the potential employer. Further, the indicative of independent contractor must dress, what language or tone she parties’ actions, including whether the status: Controlling whether to work at may use in a professional setting, or potential employer enforced an explicit all; controlling the location of where to what prices she must charge bar on working for others or has perform the work; controlling how the customers.’’ Likewise, Sen. Sherrod imposed working conditions that make work is performed; setting prices or Brown and 22 other senators doing so impracticable, are stronger choosing between work opportunities commented that the proposal ‘‘ignore[s] evidence of control than contractual or based on prices; and hiring employees other critical matters of control that an theoretical ability or inability to control or engaging subcontractors. It suggested, employer typically exercises or retains this aspect of the working conversely, that the following types of the right to, including setting the rate of relationship.22 control by the potential employer are pay and the manner in which the work Some commenters interpreted the few indicative of employee status: Requiring must be performed and disciplining examples of control in the proposal as the individual worker to comply with workers who do not meet their an effort to limit the types of control company specific procedures regarding standards.’’ And Human Rights Watch that may be considered. For example, how the work is performed; requiring a commented that the proposed control Farmworker Justice stated that the set schedule or minimum hours; factor ‘‘potentially omits other ways that proposal ‘‘improperly and erroneously controlling when the individual can gig companies control their workers, tries to narrow the relevant take meal and rest breaks; and such as the ways in which they considerations for the [control] factor.’’ controlling when the individual can unilaterally change the formula for According to Edward Tuddenham, the take time off. CWI recommended calculating base earnings, the setting of proposal ‘‘lists some ‘key’ elements of addition of the following as examples of default tip options, and restrictions on control that . . . may have little or no the individual worker’s control over the the range of assignments that are offered significance whatsoever’’ and ‘‘[s]uch a work that are indicative of independent to workers at a specific time or in a rigid approach to the question of control contractor status: The worker’s ability to specific locale.’’ Other commenters provided various industry-specific 22 make decisions with respect to the The Department received related feedback from examples that they viewed as indicative commenters asking for proposed § 795.110 to details of how the work is performed, discount the relevance of voluntary worker including the staging and sequencing of of control by the individual worker or practices (e.g., choosing to work exclusively for one aspects of the work; the worker’s the potential employer. business, declining to negotiate prices, etc.); as The Department has considered the explained in greater detail in Section IV(F), coercive selection of supplies, tools, or behavior by a potential employer (e.g., vigilant equipment to be used (or not used) by various comments regarding additional enforcement of a non-compete clause, punishing the worker; the worker’s control over examples of types of control that can be workers for turning down available work, etc.) when the work is conducted (e.g., indicative of employee or independent constitutes stronger evidence of employment status contractor status and declines to make than such voluntary worker practices, but is not a worker flexibility in start and end times) prerequisite for such worker practices to have where flexibility exists in the result to changes to the proposed regulatory text import under the FLSA’s economic reality test. be accomplished or the time periods in response. While this preamble and

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the regulatory test cannot (and should workers should do the work,24 and the c. Responses to Comments Regarding not) address each and every potential potential employer’s allowing the Examples of Requirements That Are Not scenario and example, they clarify and workers broad discretion in the manner Probative 25 articulate principles related to the in which to complete their work Despite the final rule’s broad control factor that can be applied to an indicated substantial control over the articulation of the control factor, not array of fact patterns as they arise. work by the workers. Finally, the every requirement or limitation on the As an initial matter, a number of Department agrees that the various means of doing business constitutes commenters’ examples fall within the examples of types of control identified control for the purpose of analyzing general categories of control already by the commenters above may, at least whether a worker is an employee under identified in the regulatory text. For in some factual circumstances, be the FLSA. The proposed regulatory text example, the worker’s controlling relevant to the control analysis. contained examples of requirements by whether to work at all, controlling when Ultimately, however, it is not a potential employer that do not the work is conducted, and choosing possible—and would be constitute control and thus are not between work opportunities based on counterproductive—to identify in the probative to the ultimate inquiry of prices are all examples of the worker’s regulatory text every type of control whether the individual is, as a matter of setting his or her schedule or selecting (especially industry-specific types of economic reality, in business for his or her projects, which the regulatory control) that can be relevant when himself. These are requirements to text identifies as examples of the determining under the FLSA whether a ‘‘comply with specific legal obligations, worker’s control over the work. worker is an employee or independent satisfy health and safety standards, carry Similarly, the potential employer’s contractor. As explained above, the insurance, meet contractually agreed- requiring a set schedule or minimum Department purposefully articulated the upon deadlines or quality control hours, controlling when the individual control analysis in a general manner to standards, or satisfy other similar terms can take meal and rest breaks, encompass various different types of that are typical of contractual controlling when the individual can control that the individual worker and relationships between businesses (as take time off, and restricting the range the potential employer may exercise opposed to employment relationships).’’ of assignments that are offered to the over the working relationship, and to In other words, insisting on adherence worker are all examples of the potential avoid any unintended inferences to certain rules to which the worker is employer’s control over the worker’s regarding omitted types of control. already legally bound would not make schedule, workload, or both, which the Accordingly, any type of control over the worker more or less likely to be an regulatory text identifies as examples of the work by the individual worker or employee. the potential employer’s control over the potential employer may be NELA challenged the Department’s the work. considered, although some types of ‘‘claims that case law supports this Moreover, as explained in the NPRM control are not probative of economic approach’’ and asserted that ‘‘[t]he preamble, the Department is concerned dependence as set forth in the final majority view among courts . . . is that that application of the economic reality regulatory text (and discussed below). evidence of a business compelling its factors has resulted in certain overlaps The Owner-Operator Independent workers to comply with certain legal between the factors. See 85 FR 60607– Drivers Association (OOIDA) objected obligations or customer requirements is 08 (identifying ways in which the that the proposal ‘‘offers no guidance on probative of control over the work former skill/initiative, permanence, and how’’ the examples of types of control relationship’’ (citing Scantland v. Jeffry ‘‘integral’’ factors considered control). ‘‘should be weighed against each other’’ Knight, Inc., 721 F.3d 1308, 1316 (11th Consistent with that discussion and in and asked whether the Department Cir. 2013), among other cases). NELA the interest of further clarification, the intends ‘‘that a worker must satisfy all added that ‘‘[c]ourts have routinely held Department reiterates that the worker’s of the criteria that it mentions in order that employer guidelines put in place to ability to exercise significant initiative, to be an independent contractor,’’ or if ensure that workers conform with the whether the potential employer directly there is ‘‘some other balance when law or follow safety regulations or indirectly requires the worker to evaluating this factor.’’ OOIDA noted constitute control over employees’’ work exclusively for it, and the that although the proposal stated that no (citing Narayan v. EGL, Inc., 616 F.3d potential employer’s ability to compel single factor of the economic reality test 895, 902 (9th Cir. 2010), among other the worker’s attendance to work on a is dispositive, ‘‘it does not offer the cases). The National Women’s Law consistent basis or otherwise closely same clarification when considering the Center similarly stated that ‘‘courts have supervise and manage performance of details within a single factor.’’ As regularly rejected arguments that the work are examples of relevant types explained above, any type of control external requirements imposed by the of control and are part of the control over the work by the individual worker defendant company’s customers are analysis. And as stated above, the or the potential employer may be irrelevant to the right to control factor’’ Department agrees that who controls the considered to the extent it is probative (citing cases). NELP asserted that the manner and means by which the work as to whether the individual is, as a Department’s ‘‘attempts to take away is performed is a key component of the matter of economic reality, in business consideration of certain employer control analysis. In addition, the for himself, as opposed to being controls based on the source of the Department approvingly cited in the economically dependent on the control’’ is ‘‘nonsense’’ because ‘‘if NPRM preamble cases in which the potential employer for work. No single legislators or regulators have placed an workers’ ability to accept or reject example of control, if present or not obligation on employers to comply with projects or deliveries without negative present, is necessarily dispositive as to certain laws, that makes the worker less repercussions or retaliation,23 the whether the control factor indicates independent and more dependent on potential employer’s lack of close economic dependence. The examples that employer, and this should be supervision or specifications how the are simply that: Examples. accorded weight.’’ AFL–CIO commented 23 See 85 FR 60612 n.35 (citing Parrish, 917 F.3d 24 See id. (citing Thibault, 612 F.3d at 847). that the ‘‘categorical exclusion of at 382; Express Sixty-Minutes Delivery, 161 F.3d at 25 See 85 FR 60612–13 (citing Mid-Atl. evidence of control based solely on the 303). Installation, 16 F. App’x at 106). reasons why the employer exercises the

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control is both irrational and contrary to employees, imposing the requirement is the workers ‘‘for failing to comply with Supreme Court precedent and Congress’ not probative. See Parrish, 917 F.3d at various local regulations or with intent.’’ And the United Brotherhood of 379 (‘‘although requiring safety training technical specifications demonstrates Carpenters and Joiners of America and drug testing is an exercise of control the type of control characteristic of an asserted that the Department’s proposal in the most basic sense of the word, . . . employment relationship,’’ and noting would ‘‘create[ ] a gaping hole that is [r]equiring . . . safety training and drug that withholding money in such fertile ground for exploitation by testing, when working at an oil-drilling circumstances is common in contractual irresponsible employers like the ones site, is not the type of control that relationships); cf. Mr. W Fireworks, 814 we find in the construction industry.’’ counsels in favor of employee status.’’). F.2d at 1048 (finding that, because a On the other hand, the Coalition to The Scantland court’s discussion of scheduling requirement was imposed by Promote Independent Entrepreneurs the control factor included the fact that the potential employer and not by state ‘‘strongly agree[d]’’ with this proposal ‘‘[t]echnicians could also be . . . fired, law, it suggested control over the and ‘‘agree[d] that these types of for consistently misbilling, fraudulently workers). And courts have reached requirements frequently apply to work billing, stealing, . . . [and] having analogous conclusions in joint employer performed by employees and consistently low quality control ratings’’ cases. See, e.g., Zheng v. Liberty Apparel independent contractors alike and thus as evidence that the control factor Co. Inc., 355 F.3d 61, 75 (2d Cir. 2003) are not probative of whether an weighed in favored employee (finding that control with respect to individual is economically dependent classification. 721 F.3d at 1314 (11th ‘‘contractual warranties of quality and on a company.’’ In addition, NRF Cir. 2013).26 However, employees and time of delivery has no bearing on the asserted that ‘‘this clarification is independent contractors alike are joint employment inquiry’’ because important, as there is a difference routinely terminated for fraud, theft, such control is ‘‘perfectly consistent between ‘control’ and ‘quality control’ and substandard work. Such dismissal with a typical, legitimate subcontracting and/or other performance standards.’’ are therefore not probative as to whether relationship’’); Moreau v. Air France, And the Independent Bakers and the dismissed workers were in 356 F.3d 942, 950–51 (9th Cir. 2003) Association ‘‘strongly support[ed] the business for themselves, as opposed to (noting that control exercised by proposed clarification that requiring an being economically dependent on the potential joint employer over individual to comply with specific legal potential employer. In contrast, contractor’s employees to ‘‘ensure obligations typical of business dismissals for failing to work mandatory compliance with various safety and relationships would not constitute hours or for disregarding close security regulations’’ is ‘‘qualitatively evidence of control or make an supervision would be probative because different’’ from control that indicates individual more or less likely to be an mandatory hours and close supervision employer status). employee.’’ See also SHRM are typically not imposed on In addition to the supportive case law, (‘‘support[ing] the [p]roposed . . . individuals who are in business for recognition that contracting parties the extent to which courts take differing themselves. At bottom, the question of approaches to the probative value of should be able to build compliance ‘‘why’’ workers were dismissed matters with, for example, specific legal such requirements is yet another a great deal. example of the need identified by the obligations, satisfy health and safety In any event, Scantland’s reasoning standards, and the carrying of insurance Department for a clear and uniform appears to be in the minority among standard under the FLSA to distinguish into the contractual relationship’’). 27 courts of appeals. As explained in the between employees and independent The Department understands that NPRM preamble, other courts have some courts have found requirements contractors. Moreover, the Department concluded that requiring such types of believes that these types of requirements that workers comply with specific legal compliance is not probative of an obligations or meet quality control are generally imposed by employers on employment relationship. See, e.g., both employees and independent standards to be indicative of employee Parrish 917 F.3d at 379; Iontchev v. status. In particular, the Eleventh contractors (as some commenters AAA Cab Serv., Inc., 685 F. App’x 548, indicated). Employers expect and often Circuit in Scantland stated that it 550 (9th Cir. 2017) (noting that the examines ‘‘the nature and degree of the require all of their workers to, for potential employer’s ‘‘disciplinary example, comply with the law, satisfy alleged employer’s control, not why the policy primarily enforced the Airport’s alleged employer exercised such health and safety standards, and meet rules and [the city’s] regulations deadlines and quality standards. Thus, control’’ and that ‘‘a company must hire governing the [drivers’] operations and employees, not independent the existence of the requirements conduct’’ in finding that the potential themselves are not probative of whether contractors’’ if ‘‘the nature of [its] employer ‘‘had relatively little control business requires [the] company to exert the worker is an employee or over the manner in which the [d]rivers independent contractor. Other indicia of control over workers to the extent that performed their work’’); Mid-Atl. [the defendant] has allegedly done.’’ 721 control over the work, including the Installation, 16 F. App’x at 106 indicia of control identified in the final F.3d at 1316. The Scantland court (rejecting an argument that backcharging correctly recognized that the ultimate regulatory text, are more probative of inquiry in the economic reality test is the worker’s economic dependence or 26 The court also relied on the employers’ close ‘‘whether an individual is in business supervision, control over schedules, and ability to independence. Accordingly, the for himself or is dependent upon prevent technicians from hiring helpers or working Department retains in the final finding employment in the business of for others to conclude that the control factors regulatory text’s statement that others.’’ 721 F.3d at 1312 (quotation weighed in favor of employee classification. requirements by the potential employer Scantland, 721 F.3d at 1314–15. marks omitted). But to answer that 27 In Narayan, the Ninth Circuit applied that the worker ‘‘comply with specific question it is necessary to consider California law—not the FLSA—and merely recited legal obligations, satisfy health and ‘‘why’’ the potential employer imposed requirements imposed by the potential employer to safety standards, carry insurance, meet a requirement. If the reason for a comply with certain legal obligations among a contractually agreed-upon deadlines or litany of examples of control that precluded requirement applies equally to summary judgment on the employee versus quality control standards, or satisfy individuals who are in business for independent contractor issue in that case. See 616 other similar terms that are typical of themselves and those who are F.3d at 900–02. contractual relationships between

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businesses (as opposed to employment obvious benefits for employers, workers, WPI (asserting that the potential relationships)’’ are not ‘‘control that and society generally. employer’s practice or ability to do the makes the individual more or less likely Other commenters expressed support following are not probative: Requiring to be an employee under the Act.’’ for the Department’s proposal to carve the individual to comply with or pass Although the ATA ‘‘strongly agrees’’ out from the control analysis the down contractual and legal obligations with the Department’s proposal that identified employer actions toward to subcontractors and employees; requirements by the potential employer individual workers, but also requested requiring the individual to comply with that the worker ‘‘comply with specific that the Department expand its proposal customer requirements; tracking and legal obligations’’ would not be ‘‘control by identifying many additional monitoring data related to the that makes the individual more or less employer requirements as not types of individual; providing the individual likely to be an employee under the Act,’’ control that make the individual more with market data on pricing; it suggested that ‘‘specific’’ be changed or less likely to be an employee under establishing default pricing that the to ‘‘any’’ in the final regulatory text. the Act. For example, SHRM asserted individual may change; providing the ATA explained that referring to that ‘‘the Final Rule must emphasize individual with information related to ‘‘specific’’ legal obligations ‘‘may that all workers, regardless of their the establishment or running of a unfortunately result in a great deal of formal employment status, should be business; providing the individual with litigation over whether any particular able to benefit from the training, emergency assistance (e.g., protective aspect of a contract is ‘specifically’ resources, and positive workplace equipment during a public-health mandated by law.’’ It cited, as examples, practices as those who are directly crisis); and complying with Federal, laws that impose general safety employed in the same workplace,’’ and state or locals laws related to a standards with which employers it gave examples of workplace trainings contracting relationship). Likewise, the determine the specifics of how to and audit measures. The U.S. Chamber Financial Services Institute requested comply. See also NHDA (‘‘The proposal of Commerce stated that the Department that the Department carve out from the carves out compliance with specific ‘‘should expand this concept’’ and control analysis requirements that legal obligations. However, not all legal ‘‘explicitly state that workers and ‘‘Independent Broker-Dealers’’ (IBDs) obligations are specific, making other businesses should not be discouraged place on their ‘‘financial advisors’’ to language in the proposal unnecessarily from incorporating terms (and audit and ‘‘comply with requirements imposed by problematic.’’). other certification processes) into their FINRA, the SEC, and state securities After careful consideration, the relationship that support sound, lawful, regulators’’ and exclusivity Department declines to adopt the safe work practices.’’ It suggested the requirements that IBDs place on their suggested change. As an initial matter, following examples of such terms: financial advisors to comply with ‘‘the the Department used the ‘‘specific legal ‘‘Incorporation of an obligation that the extensive supervisory obligations obligations’’ language in its recent Joint work be performed pursuant to imposed by the SEC and FINRA.’’ Employer Status under the Fair Labor acceptable professional, industry and OOIDA also expressed concerns about Standards Act final rule. See 85 FR 2859 customer service standards, as well as exclusivity requirements and sought (finalizing 29 CFR 791.2(d)(3)).28 The commonly accepted safety, ethics, clarification that a potential employer’s Department noted there that the licensure and other standards and compliance with ‘‘Federal regulations obligations include compliance with the recommendations (such as compliance requir[ing] that an owner-operator FLSA or other similar laws, sexual with limitations or control imposed or lease[ ] his or her equipment exclusively harassment policies, background necessitated by law, regulation, order or to a carrier for the duration of the lease’’ checks, or workplace safety practices ordinance).’’ See also Seyfarth Shaw not affect the control analysis. Finally, and protocols. See id. The Department (requesting that the following employer CPIE asked the Department to ‘‘make did not intend a high degree of actions toward workers be excluded clear that duties or requirements specificity there and intends the same from the control analysis: ‘‘(1) imposed by any third party, whether it meaning here. Moreover, a potential compliance with professional be a government agency or a third-party employer’s requirement that a worker obligations and ethics standards; (2) customer, . . . be disregarded’’ when comply with legal obligations without compliance with regulatory obligations, applying the control factor. See also any further specificity as to the law or including over health and safety; (3) NHDA (‘‘[C]ontrol weighing in favor of the actual obligations is unlikely to be compliance with other published employee status should be control probative of control in the first place. industry standards; (4) compliance with exercised by the potential employer that Accordingly, retaining the word applicable local, state, and national originates with the potential employer ‘‘specific’’ is consistent with the licensure standards and rules; and (5) and does not originate from outside, Department’s position that, although additional contractual term examples of 29 independent forces or circumstances, requiring workers to comply with legal agreed upon results and deadlines’’); such as customer requirements or obligations could be some manner of governmental regulations.’’). 29 In a separate section of its comment, Seyfarth control, such requirements reflect the Shaw recommended that the Department state that The Department does not agree with applicable legal regime more than the the following are not evidence of a potential CPIE that any requirement stemming potential employer’s control, and employer’s control over the work of the worker: The from ‘‘duties or requirements imposed encouraging such requirements in business provides information regarding the final by any third party’’ be ‘‘disregarded’’ or result to be accomplished by the worker; the contractual work relationships has business provides customer specifications/details with NHDA that only control ‘‘that and feedback relating to the work (including originates with the potential employer’’ 28 The Department’s Joint Employer final rule was requesting confirmation that the customer feedback can indicate employee status. This is mostly vacated by the U.S. District Court for the has been addressed); the business provides time because a third party may explicitly or Southern District of New York for reasons unrelated frames within which services can be provided in to the ‘‘specific legal obligations’’ language. See light of the services contracted for, and/or the time impliedly encourage businesses to New York v. Scalia, No. 1:20–cv–1689–GHW, 2020 sensitivity or perishable nature of the services/ WL 5370871 (S.D.N.Y. Sept. 8, 2020). The products; the business’ right to enforce contractual relating to the services; and the business pays the Department appealed the decision to the U.S. Court obligations; the business provides the worker worker by the hour where it is customary in the of Appeals for the Second Circuit on November 6, suggestions, recommendations, guidance, and/or particular business/trade to do so (e.g., attorneys, 2020. tips that are not mandated but informational physical trainers).

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impose requirements on workers that published industry standards; status. For example, payment of signify employee classification. For agreements to comply with applicable proceeds owed into a worker’s own example, clients of a home cleaning local, state, and national licensure health plan or retirement account would company may prefer that the company’s standards and rules; and agreed upon not indicate an employment workers wear uniforms, use the same results and deadlines). Other requested relationship. This is because it is equipment, and be closely supervised. additions are narrow or industry- reasonable for an independent Imposing such requirements, even to specific in nature, and the Department contractor to have a personal health or satisfy client preferences, makes the prefers general guidance that may be retirement plan, and the precise method workers more likely to be classified as used by as many employers and workers of compensation—whether cash, employees because those requirements as possible. contributions to an account, or some are inconsistent with the workers being In any event, it is not possible to other method—is not relevant to the in business for themselves. A company identify in the regulation every question of economic dependence. may also require that workers it hires employer requirement that is not the However, providing a worker with the perform timely and high-quality work, type of control that makes the same employer-provided health or as clients surely prefer. But individual more or less likely to be an retirement plans on the terms that a contractually agreed-upon deadlines employee under the Act. The regulatory business also gives its own employees and quality standards do not signify text accounts for this with a broader may indicate the worker is not an employee classification because final category: Requiring the worker to independent contractor but rather an independent businesses routinely agree ‘‘satisfy other similar terms that are employee. Certain other benefits could to meet deadlines and quality standards typical of contractual relationships also suggest employee status. For as part of their businesses. between businesses (as opposed to example, sick or other paid leave, In response to comments requesting employment relationships).’’ This especially the potential employer’s that the Department identify many category recognizes that contractual administration and authorization of the additional employer requirements as not work relationships currently vary and leave, could be indicative of the types of control that make the will evolve going forward, and provides potential employer’s control over the individual more or less likely to be an that additional employer requirements worker’s schedule. Finally, offering a employee under the Act, the that are not expressly identified in the bonus to a worker may or may not be Department declines to change its regulatory text but which are similar to indicative of employee status. For proposed regulatory text. As an initial those identified and are typical of such example, a worker’s participation in a matter, many of the requested additions relationships do ‘‘not constitute control bonus or profit sharing plan in which he are already covered by the proposed that makes the individual more or less or she receives a bonus depending on text. For example, the following likely to be an employee under the Act.’’ the employer’s, a division of the requested additions are requirements to SHRM requested that the Department employer’s, or his or her own ‘‘comply with specific legal obligations’’ exclude from the control analysis the performance over a period of time could and thus already covered: Requirements offering of benefits such as ‘‘health limit the worker’s ability to affect his or to comply with limitations or control insurance, bonuses, or retirement her profit or loss through initiative or imposed or necessitated by law, savings.’’ According to SHRM, ‘‘the investment—suggesting economic regulation, order, or ordinance; modern workplace would suffer if dependence and thus employee status. regulatory obligations; Federal, state, or businesses were effectively barred from But a contractual agreement to provide local laws related to a contracting providing workplace enhancements that a worker with a fixed bonus if the relationship; requirements imposed by all workers should enjoy like healthcare worker completes a job by a certain FINRA, the SEC, and state securities or retirement savings.’’ Other deadline or completes a certain number regulators; and Federal regulations commenters made overlapping requests, of tasks over a fixed period is typical of requiring that an owner-operator lease although not necessarily in the context contractual relationships between his or her equipment exclusively to a of applying the control factor. For businesses and itself does not make the carrier for the duration of the lease.30 example, TechNet requested that the worker more or less likely to be an Other requested additions may fall into Department add a ‘‘safe harbor’’ stating employee under the Act. Even if, based the ‘‘satisfy health and safety standards’’ that ‘‘a worker does not lose his or her on the circumstances of a particular category (for example: Requiring that independent status solely because a case, the provision of certain health, the work be performed pursuant to network platform provides the worker retirement, or other benefits suggests commonly accepted safety standards; with emergency aid or benefits allowed classification as an employee, that fact and providing the individual emergency or required under state law.’’ Similarly, is not determinative by itself because assistance such as protective equipment WPI requested a general ‘‘safe harbor’’ other facts and factors must also be during a public-health crisis) or the with respect to the provision of considered. ‘‘meet contractually agreed-upon ‘‘protections or benefits as allowed or deadlines or quality control standards’’ required by Federal, state or local laws, 2. The ‘‘Opportunity for Profit or Loss’’ category (for example: Agreements that including but not limited to minimum Factor the work be performed pursuant to guaranteed earnings, health insurance, The second core factor identified in acceptable professional, industry, or retirement benefits, health or retirement the proposed regulatory text was the subsidies, life insurance, workers ‘‘individual’s opportunity for profit or 30 Uber requested that the Department clarify that compensation or similar insurance, loss.’’ 85 FR 60639. This factor, background checks are not an indicia of control: unemployment insurance, sick or other included at proposed § 795.105(d)(1)(ii), ‘‘Where a business is required by law to engage in ‘‘weighs towards the individual being certain activities (such as screening potential paid leave, training and expense workers for violent crime history), the Department reimbursement.’’ an independent contractor to the extent should make clear that this required screening is The Department declines to change the individual has an opportunity to not an indicia of control.’’ However, requiring a the regulatory text in response to these earn profits or incur losses based on his worker to undergo and pass a background check comments. The offering of health, or her exercise of initiative (such as when the law requires it falls in the ‘‘comply with specific legal obligations’’ category. No further retirement, and other benefits is not managerial skill or business acumen or clarification is necessary. necessarily indicative of employment judgment) or management of his or her

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investment in or capital expenditure on, more likely to be dependent on the and non-duplicative analysis for for example, helpers or equipment or company,’’ but that the Department’s determining employee versus material to further his or her work.’’ proposal ‘‘ignores that reality’’ by independent contractor status. In sum, Proposed § 795.105(d)(1)(ii) further suggesting that initiative and investment the individual worker’s meaningful explained that, ‘‘[w]hile the effects of ‘‘are on equal footing.’’ NELP stated capital investments may evince the individual’s exercise of initiative that, although opportunity for profit or opportunity for profit or loss: and management of investment are both loss and investment ‘‘are linked, they ‘‘[e]conomic investment, by definition, considered under this factor, the are hardly duplicative and separately creates the opportunity for loss, [and] individual does not need to have an serve as useful indicia of an entity’s investors take such a risk with an eye to opportunity for profit or loss based on status under the FLSA, as the Supreme profit.’’ Saleem, 854 F.3d at 145 n.29; both for this factor to weigh towards the Court’s tests note.’’ see also Superior Care, 840 F.2d at 1060 individual being an independent On the other hand, some commenters (identifying ‘‘the workers’ opportunity contractor.’’ In addition, under the supported the proposal to consider for profit or loss and their investment in proposal, this factor ‘‘weighs towards investment in the opportunity factor. the business’’ as a single factor). the individual being an employee to the For example, according to WPI, ‘‘[t]he Moreover, considering investment as extent the individual is unable to affect Department’s proposal to combine part of opportunity for profit or loss is his or her earnings or is only able to do [opportunity for profit or loss] with an consistent with the Supreme Court’s so by working more hours or more individual’s investment in facilities and opinion in Silk which articulated the efficiently.’’ Numerous comments were equipment, following Second Circuit two factors separately but analyzed submitted regarding the proposals to precedent, is a welcome change that them together. In particular, the Court analyze investment through the lens of will bring clarity and reduce overlap.’’ found that coal unloaders were opportunity for profit or loss and to It added that ‘‘[w]ise decisions about employees because they had ‘‘no focus that analysis on the worker’s investments are perhaps the clearest opportunity to gain or lose except from investment rather than comparing the path to increasing profits or suffering the work of their hands and [ ] simple worker’s investment to the potential losses.’’ CPIE supported the proposed tools,’’ while truck drivers who invested employer’s investment. One commenter ‘‘adoption of the Second Circuit’s in their own vehicles had ‘‘opportunity requested eliminating this factor approach of combining the factors for profit from sound management’’ of altogether, and several commenters ‘opportunity for profit or loss’ and that investment by, for instance, hauling requested changes to the other aspects ‘investment,’ and not treating them as for different customers. Id. at 719. Thus, of the proposed opportunity factor separate factors.’’ According to CPIE, the it framed the analysis as whether section. proposal ‘‘better captures both the workers are more like unloaders whose manufacturing-based independent profits were based solely on ‘‘the work a. Whether To Analyze Investment contractor (who likely has a tangible of their hands and [ ] simple tools’’ or Through the Lens of Opportunity for capital business investment) and the the drivers whose profits depended on Profit or Loss new-economy independent contractor their initiative and investments. See id. Some commenters opposed the (who likely does not).’’ As the Court explained decades ago and proposal to consider the individual Having carefully considered the as the Second Circuit noted much more worker’s ‘‘management of his or her comments on this issue, the Department recently in Saleem, investment is a investment in or capital expenditure on, adopts its proposal, consistent with pathway to opportunity for profit or for example, helpers or equipment or Second Circuit case law, to consider loss. material to further his or her work’’ as investment as part of the opportunity In response to NELA and likeminded part of the opportunity factor. For factor. Some courts have acknowledged commenters’ concern that employers example, NELA stated that a worker’s that the two concepts are related while may require significant investments by investment has ‘‘been a critically still keeping the factors separate. See their workers to avoid employee status, important factor in the economic McFeeley, 825 F.3d at 243; Lauritzen, the Department reiterates that the realities test analysis’’ and that 835 F.2d at 1537. Other courts do not investment must be capital in nature ‘‘[d]iscounting this important piece of expressly acknowledge that they are and consistent with the worker being in the economic reality test, as the related but consider investment when business for him/herself for the Department has done here, plainly evaluating opportunity for profit or investment to indicate an opportunity makes it easier for businesses to require loss—resulting in unnecessary and for profit or loss. Senator Sherrod workers to make significant financial duplicative analysis of the same facts Brown and 22 other senators stated that investments without risking a finding of under two factors. See, e.g., Mid-Atl. ‘‘[r]equiring [workers] to purchase a employee status.’’ The State AGs Installation, 16 F. App’x at 106–07 franchise or their own equipment, similarly commented that the proposed (finding that the worker’s capital including a vehicle’’ or otherwise ‘‘take approach of considering investment investments in tools, equipment, and a on financial risk as a condition of only in the context of opportunity for truck indicated independent contractor employment does not convert an profit or loss ‘‘inappropriately status under both the opportunity and employee into an independent subordinates the investment factor to the investment factors). And contractor under the FLSA.’’ While no the opportunity for profit or loss’’ factor. consideration of investment separately single fact or factor may ‘‘convert an According to the State AGs, ‘‘[c]ourts has caused other courts to discuss the employee into an independent consider both factors, often together, but worker’s involvement in outside contractor,’’ the prospect of financial investment ‘is, itself, indicative of businesses in the context of opportunity risk and reward plays an important role independent contractor status’ for profit or loss. See, e.g., Parrish, 917 in distinguishing ‘‘wage earners toiling especially in smaller businesses’’ F.3d at 384 (considering consultant’s for a living’’ from ‘‘independent (quoting Saleem v. Corp. Transp. Group, management of a goat farm). After entrepreneurs seeking a return on their Ltd., 854 F.3d 131, 144 n.29 (2d Cir. considering these varying approaches, risky capital investments.’’ Mr. W. 2017)). UPS said that ‘‘workers [who] the Department believes that adopting Fireworks, 814 F.2d at 1051. Moreover, make little or no monetary investment the Second Circuit’s approach best it matters why certain investments are toward completion of the work . . . are furthers the Department’s goal: A clear required. If certain capital investments

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are necessary to perform the job for significant investments may still be dependence,’’ but instead ‘‘merely which the contractor is hired, then independent contractors: ‘‘while the highlights the obvious and unhelpful requiring a contractor to make such presence of significant capital fact that individual workers—whether investments would be consistent with investment is still probative, its absence employees or independent contractors— the contractor being in business for him- may be less so in more knowledge-based likely have fewer resources than or herself. For example, a company that occupations and industries. Indeed, businesses’’ that, for example, maintain hires independent contractors to haul technological advances enable, for corporate offices. Id. (citing cases). The freight may obviously require that example, freelance journalists, graphic Department received a number of drivers bring their own vehicles. Silk designers, or consultants to be comments addressing its proposed 331 U.S at 719. In contrast, a entrepreneurs with little more than a rejection of the relative investment requirement to ‘‘invest’’ in specific, personal computer and smartphone.’’ 85 approach. company-provided equipment would FR 60609 (citing Faludi v. U.S. Shale For example, UPS stated that the not be consistent with the worker being Sols., L.L.C., 950 F.3d 269, 276 (5th Cir. Department’s proposal ‘‘undervalues in business for him- or herself, and may 2020)); see also Meyer v. United States comparative analysis of investment’’ constitute a consideration under the Tennis Ass’n, 607 F. App’x 121, 123 (2d and noted that courts ‘‘have evaluated control factor that points towards Cir. 2015) (concluding that workers who investment comparatively—correctly employee status. See Scantland, 721 invested little were independent measuring the worker’s investment F.3d at 1318 (concluding that contractors primarily because of their against the company’s’’ (citing cases). technicians’ ‘‘expenditures [in control over the work and their NELA added that ‘‘comparing workers’ equipment and materials] detract little initiative); Lauritzen, 835 F.2d at 1540– investments to the employer’s from the[ir] economic dependence on 41 (Easterbrook, J. concurring) investments’’ has been ‘‘a critically Knight’’ in part because ‘‘many (‘‘[P]ossess[ing] little or no physical important factor in the economic technicians purchased specialty tools capital . . . is true of many workers we realities test analysis’’ and ‘‘must be from Knight directly via payroll would call independent contractors. done in the context of the working withholdings’’). As such, OOIDA’s Think of lawyers, many of whom do not relationship.’’ TRLA objected that ‘‘the concern ‘‘that any requirement that a even own books. The bar sells human proposed test does not include the Fifth worker must purchase services or capital rather than physical capital, but Circuit’s ‘extent of the relative equipment from the business for which this does not imply that lawyers are investments of the worker and alleged they work [w]ould weigh in favor of ‘employees’ of their clients under the employer’ factor’’ and asserted that, employee status’’ is misplaced. See also FLSA.’’).32 while its usefulness may vary SWRCC (‘‘[T]his standard would ‘‘depending on the facts of individual b. Whether To Analyze the Worker’s provide a perverse incentive for cases,’’ ‘‘its wholesale exclusion from Investment or Compare the Worker’s companies to require putative the test factors is not warranted, Investment With That of the Potential employees to maintain their own especially given the Supreme Court’s Employer equipment in an effort to steer those caution against an exhaustive list’’ employees to independent contractor The Department noted in the NPRM (citing Silk, 331 U.S. at 716). The status.’’). Consistent with the economic preamble that, when considering Southwest Regional Council of dependence inquiry, an investment investment, some courts use ‘‘a side-by- Carpenters described the relative must indicate an independent business side comparison method’’ that directly investment approach as simple and by the worker, as opposed to merely compares the worker’s individual efficient by ‘‘lining up the expenses being required by the potential investment to the investment by the between worker and company’’ and thus employer, for it to indicate an potential employer. See 85 FR 60614 ‘‘advanc[ing] the key interest of all opportunity for profit or loss. (citing cases). The Department parties concerned with the In response to the State AGs, the explained that ‘‘such a ‘side-by-side predictability of this part of the Department’s approach does not comparison method’ does not illuminate independent contractor test.’’ According subordinate investment; it can still the ultimate question of economic to the Pacific Northwest Regional separately indicate independent Council of Carpenters, the Department contractor status as they suggest. 32 LocumTenens, an online company that acted ‘‘arbitrarily’’ in proposing to Finally, the Department’s approach is specializes in the temporary placement of eliminate consideration of relative physicians and other health clinicians, requested not contrary to UPS’ assertion that that the Department eliminate from the economic investments and asserted that, because workers who make little or no reality test consideration of whether an individual ‘‘virtually every craftsperson who works investment ‘‘are more likely to be has an opportunity for profit or loss. According to in the various carpentry trades owns his dependent’’ on the potential LocumTenens, its physicians and clinicians who or her own tools,’’ the proposal would 31 provide temporary healthcare services ‘‘do not have employer. Workers who make little or an obvious investment or opportunity for profit make ‘‘all of those individuals more no investment are more likely to be when they step in’’ for another physician or susceptible to being classified as’’ employees than workers who make clinician. However, as explained later, the independent contractors regardless significant investments, but of course, Department believes that opportunity for profit or whether the investment is small or loss is very predictive of a worker’s status as an extensive. such a worker’s ultimate status as an employee or independent contractor. In addition, employee or independent contractor the rule requires a worker to exercise personal Other commenters supported the will also depend on other factors. As the initiative or manage capital investments, but not Department’s proposed position. For Department explained in the NPRM necessarily both, for the opportunity factor to example, the ATA, the Arkansas indicate independent contractor status. In other Trucking Association, NHDA, and preamble, workers who do not make words, an absence of capital investment does not prevent an individual from having an opportunity Scopelitis, Garvin, Light, Hanson & 31 The American Society of Travel Advisors for profit or loss, because such opportunity can be Feary (on behalf of various disagreed at least in part, commenting that based on the individual’s initiative. Nor does such transportation companies) each agreed ‘‘workers in many service industries may make only absence necessarily prevent an individual from with the Department’s proposal ‘‘that a minimal investment in equipment or materials being properly classified an independent and in such situations this consideration, by itself, contractor, particularly in knowledge-based the relative investment test fashioned by should not be taken to weigh in favor of employee industries such as medicine where human capital the Fifth Circuit ‘does not illuminate the status.’’ matters more than physical capital. ultimate question of economic

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dependence’ ’’ (quoting 85 FR 60614). other evidence). In sum, comparing the investment) that largely determine that TechNet explained that ‘‘the relative relative investments does not illuminate outcome. While profits are hardly sizes of the parties’ investments’’ are not the worker’s economic dependence or guaranteed for anyone in business for relevant to the analysis, asserting that independence. By contrast, as explained him/herself, the text at ‘‘[l]arge businesses may contract with herein, analyzing the extent to which § 795.105(d)(1)(ii) makes clear that small businesses,’’ make investments the individual worker has an independent contractors typically that ‘‘typically exceed their smaller opportunity for profit or loss because of ‘‘exercise . . . initiative’’ and/or partners’ investments by orders of his or her investment in, or capital ‘‘manag[e] . . . investment,’’ (emphasis magnitude . . . because of their size,’’ expenditure on, helpers or equipment or added). Thus, a lack of profit viewed in and ‘‘not endanger [their] partners’ material to further his or her work is hindsight says little about a worker’s independence merely because [they are] probative of the worker’s economic economic independence; instead, the bigger than [their partners] are.’’ CPIE dependence or independence. focus is the degree to which the worker actually exercised initiative or actually stated that ‘‘the determinative inquiry c. Other Comments Concerning the managed investments. A worker’s relative to investment should be Opportunity Factor whether the individual has a sufficient theoretical ability to, for example, investment in his or her trade or WFCA agreed that ‘‘an evaluation of exercise initiative is weaker evidence business as to enable the individual to a worker’s investment and capital than the worker’s actual practices. See operate independently,’’ asserting that expenditures are relevant factors in e.g., Sureway Cleaners, 656 F.2d at 1371 ‘‘[t]he investment of a potential client determining whether he or she is an (‘‘[T]he fact that Sureway’s ‘agents’ has no discernible relevance to this independent contractor’’ and suggested possess, in theory, the power to set inquiry.’’ See also WFCA (‘‘The issue is including of ‘‘a definition of what prices . . . and advertise to a limited whether a worker invested in his or her constitutes an investment or capital extent on their own is overshadowed by business, not how that investment expense.’’ WFCA suggested the the fact that in reality the ‘agents’ . . . compares to the employing company’s following: ‘‘Investments and capital charge the same prices, and rely in the investment.’’). expenditure shall include: The purchase main on Sureway for advertising.’’). or rental of tools, equipment, material, However, a worker’s conscious decision Having carefully considered the and office or work facilities; the to not make a particular investment comments, the Department reaffirms its payment for marketing and (especially when choosing among a position that comparing the individual administrative expenses; the payment of range of investments) or to not take a worker’s investment to the potential costs incurred hiring or using other particular action (especially when employer’s investment should not be workers; and similar expenditures.’’ choosing among a range of options) may part of the analysis of investment. However, the regulatory text already constitute an affirmative exercise of Comparing their respective investments identifies investment in ‘‘helpers or initiative to consider among others does little more than compare their equipment or material’’ as relevant, and when evaluating opportunity for profit respective sizes and resources. In the ‘‘for example’’ preceding them in the or loss. In sum, in the context of the Hopkins v. Cornerstone America, 545 regulatory text makes clear that the list opportunity factor, the focus is the F.3d 338, 344 (5th Cir. 2008), it was of is non-exhaustive. The Department individual worker’s opportunity for course ‘‘clear that [the insurance believes that general and non- profit or loss, as shown by meaningful company’s] investment—including exhaustive examples are more helpful investments or the exercise of personal maintaining corporate offices, printing than trying to precisely identify as many initiative; actual profits or losses are less brochures and contracts, providing examples of relevant investments as relevant. accounting services, and developing and possible. OOIDA expressed ‘‘concern[ ] that the underwriting insurance products— NRF commented that ‘‘it is important timeline for determining profit or loss is outweighs the personal investment of to emphasize that it is the ‘opportunity’ not clarified in the NPRM’’ and any one Sales Leader.’’ The court, or ‘ability’ to earn profits or incur losses explained that certain ‘‘[m]otor carriers however, never explained how this fact based on investment and/or initiative, that take advantage of drivers through a indicated the Sales Leaders’ economic as opposed to the actual level of lease-purchase agreement are likely to dependence. See id. Tellingly, when investment or initiative shown by the argue that a driver’s opportunity for summing up the entirety of the facts and individual.’’ Relatedly, NRF expressed profit is merely a few years in the analyzing whether the workers were concern whether this factor squares future, and that this full timeline must economically dependent on the with the discussion in proposed be considered.’’ The Department agrees insurance company as a matter of § 795.110 that the actual practice of the with OOIDA that ‘‘[t]his is a fallacy’’; economic reality, the court did not even parties involved is more relevant than the opportunity for profit or loss must mention the insurance company’s larger what may be contractually or be reasonably current to indicate investment. See id. at 346. And in theoretically possible, asserting that independent contractor status. Karlson, 860 F.3d at 1096, the court ‘‘the fact that someone might not engage Regarding the Department’s proposal found that comparing the worker’s in certain practices or take on certain to include initiative as a consideration investment with the potential risks that would further impact the level in the opportunity factor, NRF agreed employer’s total operating expenses had of profit or loss should not result in a that ‘‘[t]he ability to impact profits or little relevance because ‘‘[l]arge finding that the individual is not an losses also may be dependent on corporations can hire independent independent contractor, unless that business acumen and managerial skills, contractors, and small businesses can person is prevented from doing so by regardless of the ‘skill level’ of the work hire employees.’’ Cf. Parrish, 917 F.3d at the entity with whom the individual or the level of investment.’’ NRF added 383 (comparing relative investments, contracts.’’ Here, the Department that ‘‘identifying ‘business acumen’ or but noting that ‘‘[o]bviously, [the oil believes that NRF is conflating the ‘management skill’ as part of the profit drilling company] invested more money ultimate outcome of independent or loss factor is appropriate and at a drill site compared to each entrepreneurship (profit or loss) with consistent with the FLSA.’’ Senator plaintiff’s investments’’ and according the actions indicative of Sherrod Brown and 22 other senators the factor little weight in light of the entrepreneurship (initiative and/or disagreed, commenting: ‘‘Just because

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employees can increase their wages by contractor because he or she can use profit or loss is determined largely on exercising skill or initiative does not initiative to affect his or her opportunity his or her skill, initiative, ability to cut mean they are running a separate, for profit or loss but maintains that yet costs, and understanding of the courier independent business, particularly if initiative is indicative of—or weighs business,’’ observing that ‘‘drivers who they cannot pass along costs to towards—independent contractor status made the most money appeared to be customers.’’ They added that ‘‘[t]he rule in the multifactor analysis. And the the most experienced and most does not include additional, critical Department agrees that a worker’s concerned with efficiency, while the considerations of skill and initiative that ability to cut costs, including by passing less successful drivers tended to be are necessary to define an employment them along to customers, is relevant to inexperienced and less concerned with relationship.’’ And Seyfarth Shaw determining initiative. See Express efficiency.’’ Express Sixty-Minutes requested that the Department state that Sixty-Minutes Delivery, 161 F.3d at 304. Delivery Serv. 161 F.3d at 304. To avoid ‘‘a worker’s business acumen is to be Finally, the Department agrees with confusion between multiple potential interpreted to cover acumen relevant to Seyfarth Shaw that a worker’s business meanings of ‘‘more efficiently,’’ the the wide range of business endeavors in acumen can ‘‘cover acumen relevant to Department is revising the U.S. economy, including, for the wide range of business endeavors in § 795.105(d)(2)(ii) to replace that term example: Sales, managerial, customer the U.S. economy’’—initiative is not with ‘‘faster.’’ Relatedly, ATA and other service, marketing, distribution, limited to or automatically present in transportation commenters objected to communications, and other any particular type of job. the Department’s statements in the professional, trade, technical, and other Regarding the last sentence of the NPRM preamble that ‘‘[w]orkers who learned skills, as well as other unique proposed opportunity factor regulatory are paid on a piece-rate basis are an business abilities and acumen, text (‘‘This factor weighs towards the example of workers who . . . lack including acumen that impacts a individual being an employee to the meaningful opportunity for profit or worker’s ability to profitably run their extent the individual is unable to affect loss.’’ They asserted that the statements own independent business.’’ his or her earnings or is only able to do may result in some judges refraining from engaging in the actual analysis set Having carefully considered the so by working more hours or more forth in the rule as to opportunity for comments, the Department continues to efficiently.’’), WFCA expressed the profit or loss. They further asserted that believe that a worker’s initiative, such concern that the sentence means that a truck drivers paid on a piece-rate basis as managerial skill or business acumen worker who starts his or her own may be independent contractors based or judgment, is an appropriate measure business and seeks to develop on their management decisions or of a worker’s opportunity to earn profits efficiencies in so doing will be an ability to cut costs. The Department’s or incur losses. See, e.g., Karlson, 860 employee under the analysis. WFCA statements in the NPRM preamble F.3d at 1094–95 (discussing how the suggested that the sentence be deleted. regarding workers paid on a piece-rate worker’s decisions and choices WPI also asked that the last sentence be basis were general observations regarding assignments and customers deleted because ‘‘[a]n individual who supported by case law 33 and not a affected his profits); Saleem, 854 F.3d at uses initiative, skill or judgment to categorical rule or the complete perform a job more efficiently can 145 (noting in support of independent analysis. The fact that a worker is paid contractor status that the degree to generate greater profits, even if on a piece-rate basis set by the potential which the worker’s relationship with compensated by the hour or piece rate.’’ employer does not indicate an the potential employer ‘‘yielded returns It asserted: ‘‘The ability to use opportunity for profit or loss, but was a function . . . of the business managerial skill, expertise, market whether that worker has an opportunity acumen of each [worker]’’); McFeeley, experience, or business acumen to for profit or loss indicative of 825 F.3d at 243 (‘‘The more the worker’s perform work more efficiently is independent contractor status is earnings depend on his own managerial indicative of independent contractor determined by a fuller analysis of the capacity rather than the company’s . . . status.’’ The Department agrees that worker’s circumstances. the less the worker is economically such use of initiative can indicate Some commenters requested dependent on the business and the more independent contractor status when it additional examples that are indicative he is in business for himself and hence affects opportunity for profit or loss. an independent contractor.’’) (internal The word ‘‘efficiently’’ was used in 33 See Goldberg v. Whitaker House Co-op., Inc., quotation marks omitted); Express Sixty- proposed § 795.105(d)(2)(ii) to mean 366 U.S. 28, 33 (1961) (plaintiffs who manufactured Minutes Delivery, 161 F.3d at 304 working faster to perform rote tasks knitted goods at home were employees under the FLSA, in part, because ‘‘[t]he management fixes the (agreeing with district court that more quickly. See 85 FR 60614 n.38 piece rates at which they work’’); Rutherford Food, ‘‘driver’s profit or loss is determined (identifying piece-rate workers as ‘‘an 331 U.S. at 730 (because workers’ earnings largely on his or her skill, initiative, example of workers who are able to ‘‘depended upon the efficiency of their work, it was ability to cut costs, and understanding affect their earnings only through more like piecework than an enterprise that actually depended for success upon the initiative, judgment of the courier business’’); WHD Opinion working more hours or more or foresight of the typical independent contractor’’); Letter FLSA2019–6 at 6 (‘‘These efficiently.’’). Higher earnings that result Hodgson v. Cactus Craft of Arizona, 481 F.2d 464, opportunities typically exist where the solely from this ‘‘working faster’’ 467 (9th Cir. 1973) (persons who manufacture worker receives additional concept of efficiency do not by novelty and souvenir gift items at homes and were compensated at a piece rate were employees under compensation based, not [merely] on themselves indicate independent the FLSA). And in Donovan v. DialAmerica greater efficiency, but on the exercise of contractor status. However, as WFCA Marketing, Inc., the court held that homeworkers initiative, judgment, or foresight.’’). and WPI note, efficiency may also mean who were paid on a piece-rate basis to perform the Commenters did not seriously dispute effective management based on business simple service of researching telephone numbers were employees who lacked meaningful the relevance of initiative to a worker’s acumen, which is indicative of being in opportunity for profit or loss. See 757 F.2d 1376, opportunity for profit or loss. In business for oneself if it results in 1385 (3rd Cir. 1985). In contrast, distributors who response to the comment by Senator increased earnings. For instance, the recruited and managed researchers and were paid Sherrod Brown and 22 other senators, Fifth Circuit found that the opportunity based on the productivity of those they managed were independent contractors, in part, because the Department agrees that a worker is factor ‘‘points towards independent distributors’ earnings depended on ‘‘business-like not necessarily an independent contractor status’’ where ‘‘a driver’s initiative.’’ Id. at 1387.

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of an opportunity for profit or loss requested that the final rule make ‘‘the examples: ‘‘He or she has to re-do work (many of the suggested examples following explicit statements regarding that is not consistent with industry overlapped with each other). TechNet facts that do not support a finding of standards or does not meet a customer’s asked for ‘‘concrete examples’’ and dependency: [w]orkers may experience expectations; is potentially liable to the suggested the following: ‘‘[d]rivers who financial losses as a result of potential employer in the event his or can set their own hours, choose which cancellations of their service or the her actions or inactions cause harm or jobs to accept or reject, and use their provision of service that does not meet legal expense to the potential employer; judgment in how to best complete jobs,’’ customer expectations when the worker or fails to render services in a cost- as well as ‘‘[a]pp-based opportunities— has flexibility to choose between work efficient manner by not managing including opportunities to provide opportunities; and [e]ven if the business expenses or investing far too much time personal transportation, parcel sets the price of goods provided by the on activities that are unproductive.’’ deliveries, shopping services, or food worker, that does not negate the The Department has considered the delivery, among other types of service.’’ worker’s initiative when the worker various requests for additional examples The U.S. Chamber of Commerce offered controls the amount of time, when, and of initiative and investment that can eleven ‘‘additional examples of a where they provide the services as well indicate a worker’s opportunity for worker’s initiative or investment that as the amount of the same service they profit or loss, but declines to change to may impact a worker’s profit or loss.’’ 34 chose to provide.’’ Seyfarth Shaw asked the proposed regulatory text. The The U.S. Chamber of Commerce also the Department to ‘‘expand upon the regulatory text already broadly describes suggested ‘‘examples of fact situations examples of ways that workers impact initiative as including managerial skill which are neutral in the analysis of their own profitability as well as their and business acumen or judgment, and whether the worker controls their losses (by impacting their profits and explains that investment is the worker’s profits and losses.’’ 35 SHRM requested their costs)’’ and to include numerous management of his or her investment in numerous ‘‘additional examples of examples.37 And Mr. Reibstein or capital expenditure on, for example, worker investment and initiative that commented that ‘‘[e]xamples of loss helpers or equipment or material to impact profit and loss.’’ 36 SHRM also should be identified . . . so it is clear further his or her work. Many of the [that this factor] does not focus only on suggested examples seem to fall into one 34 The U.S. Chamber of Commerce’s suggested profit.’’ He offered the following of these categories, and some of them examples were: ‘‘(1) The worker’s own decision- effectively repeat concepts already making with respect to the details and means by which they make use of, secure, and pay helpers, opportunities offered that impact profit and loss; identified in the regulatory text— substitutes, and related labor or specialties . . . (2) [t]he worker’s losses suffered from receipt of especially the ones involving helpers, The worker’s own decision-making with respect to customer complaints where the worker’s results were below customer or contractual expectations; tools, supplies, and equipment. The the details and means by which they purchase, rent, Department does not believe that (even or otherwise obtain and use tools . . . ; (3) The [t]he worker’s decisions in avoiding liquidated worker’s own decision-making with respect to the damages charges or indemnification obligations in after culling out all of the overlap) details and means by which they purchase or the parties’ agreement; [t]he worker’s own decision- additional examples of initiative and otherwise obtain and use supplies . . . ; (4) The making on whether to use other workers or services as helpers or substitutes as well as the use of related investment would benefit employers or worker’s own decision-making with respect to the workers. It is not possible or productive details and means by which they purchase, rent, or labor or specialties to assist in either the services otherwise obtain and use equipment . . . ; (5) The provided, the tools and equipment used, or the to seek to identify in the regulatory text worker’s initiative and decisions they implement in maintenance of the worker’s business structure; every example of initiative and connection with their own performance of services [t]he worker’s acumen regarding the delivery of investment that may be relevant to the through higher service fees, incentives, charges, and services/products that result in enhanced profits other ways; (6) The worker’s initiative to invest in through tips and other incentives; [t]he worker’s opportunity for profit or loss analysis. the development of skills, competencies, and trades decision-making regarding the details and means by The Department purposefully described . . . ; (7) The worker’s expertise in delivery of which they obtain supplies, tools, and equipment both initiative and investment in a services/products that result in enhanced profits, for use in their business, including choices broad and general manner to provide for example through tips and other incentives as a regarding from whom to purchase these goods, how result of providing quality customer service; (8) The much of the goods are obtained at any one time, the helpful guidance to as many employers worker’s losses incurred as a result of customer quality of the goods, and the negotiated prices and workers as possible. The complaints or other charges where the worker’s regarding said goods; and [t]he worker’s decision- Department believes that this approach, results were below customer or contractual making regarding investment in skills they deem along with the further clarification expectations and obligations; (9) The worker’s necessary to achieve the desired results from their flexibility to choose amongst work opportunities work, including education, certificates, or classes.’’ provided throughout this preamble offered that impact profits and losses; (10) The 37 Seyfarth Shaw’s suggested examples were section as well as the examples added worker’s contractual or other losses if they do not ‘‘[t]he worker’s own decision-making regarding the in § 795.115, will be more helpful and provide the accepted services or the worker use of helpers, substitutes, and related labor or provides substandard services, and are engaged to specialties to assist in the services provided, the functional for employers and workers as provide time-sensitive, often perishable services tools and equipment used, or the maintenance of they apply the analysis. and products; and (11) The worker’s avoidance of the worker’s business structure . . . to the extent liquidated damages charges or indemnification those decisions impact the worker’s costs and 3. The ‘‘Skill Required’’ Factor obligations in the parties’ agreement relating to overall profitability; [t]he worker’s initiative and the In the NPRM, the Department various provisions, including material breaches of decisions they implement in connection with the the parties’ agreement.’’ performance of services and/or capital expenditures identified three other factors that may 35 These suggested examples were: ‘‘(1) The on equipment, supplies, and tools . . . ; [t]he serve as ‘‘additional guideposts’’ in the business pays the worker by the hour where it is worker’s initiative to invest in the development of analysis to determine whether a worker customary in the particular business/trade to do so skills, competencies, and trades (including is an employee or independent (e.g., attorneys, physical trainers); (2) The business education, training, licenses, certifications, and sets the price of goods and services offered by a classes) . . . ; [t]he worker’s expertise in delivery contractor. The first of these other worker to customers where the worker controls the of services/products that result in enhanced profits factors, included at proposed amount of time, date and place they provide the through tips and other incentives as a result of great § 795.105(d)(2)(i), is the amount of skill services as well as the amount of services they customer service and exceptional skills, for required for the work. 85 FR 60639. The choose to provide and the price is set to facilitate example[; t]he worker’s losses incurred as a result the time sensitive transaction as a result of the time of customer complaint or other charges where the Department’s proposed regulatory text sensitive or perishable nature of the service the worker’s results were below customer or contractual stated that this factor would weigh in customer desires[;] and (3) The business’s expectations and obligations; and [t]he worker’s favor of the individual being an facilitation of payments from the customer to the avoidance of liquidated damages charges or independent contractor to the extent the worker.’’ indemnification obligations in the parties’ 36 SHRM’s suggested examples were: ‘‘[t]he agreement relating to various provisions, including work at issue requires specialized worker’s decisions in choosing amongst material breaches of the parties’ agreement.’’ training or skill that the potential

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employer does not provide; conversely, a relevant factor in some but not all ‘‘[p]ipe welding, unlike other types of the factor would weigh in favor of the instances.’’ Reibstein. welding, requires specialized skills’’). individual being an employee to the After considering these comments, the The Department also declines to adjust extent the work at issue requires no Department declines both the request to the regulatory text to directly address specialized training or skill and/or the eliminate this factor from consideration who provides the training because such individual is dependent upon the entirely and the request to include it as facts are not necessarily probative in potential employer to equip him or her part of the opportunity factor. The every circumstance; the Department with any skills or training necessary to Department agrees with commenters notes, however, that it can be suggests perform the job. As explained in the that the concepts of initiative and employee status if a worker receives all NPRM, the Department proposed to judgment are sufficiently analyzed in specialized skills from the employer. clarify that this factor should focus on multiple ways under the control and See, e.g., Keller, 781 F.3d at 809 the amount of skill required because opportunity core factors, but believes (explaining that if ‘‘the company importing aspects of the control factor that longstanding case law militates in provides all workers with the skills into the skill factor has diluted the favor of considering this additional necessary to perform the job,’’ that consideration of actual skill to the point factor—skill required—when relevant suggests employee status); Scantland, of near irrelevance, and such dilution under the particular circumstances of 721 F.3d at 1318; Hughes v. Family Life generates confusion regarding the each situation. As explained in the Care Inc., 117 F. Supp. 3d 1365, 1372 relevance and weight of the worker’s NPRM, the Supreme Court articulated (N.D. Fla. 2015) (‘‘The relevant inquiry skill in evaluating economic the factor as ‘‘skill required’’ in Silk, 331 [for the skill factor] is whether [the dependence. U.S. at 716, and multiple courts of worker] is dependent upon [the Employer representatives were appeals continue to consider as ‘‘the company] to equip her with the skills generally supportive of the degree of skill required to perform the necessary to perform her job.’’). This is Department’s clarification and work.’’ Paragon Contractors, 884 F.3d at because an individual who is in relegation of this factor as an 1235; see also Iontchev, 685 F. App’x at business for him- or herself typically ‘‘additional guidepost’’ but provided 550; Keller, 781 F.3d at 807. The brings his or her own skills to the job, additional commentary and requests for Department believes that sharpening rather than relying on the client to modification. Several commenters this factor to focus solely on skill provide training. suggested that this factor be eliminated clarifies the analysis. Moreover, While the WFCA generally supports analyzing the worker’s ability to this factor, it also requested that the entirely. The National Restaurant exercise initiative under the control Department include examples of Association commented that this factor factor, a core factor that is given more specialized training or skill that focused ‘‘does not add much clarity to the weight than the skill factor, on indicators such as certifications and analysis’’ and ‘‘unnecessarily appropriately reflects that that the licensing. Scopelitis, Garvin, Light, discriminates against individuals who presence or absence of initiative is Hanson & Feary, a law firm commenting operate businesses that do not require usually more important than the on behalf of several unnamed advanced degrees.’’ WPI stated that presence or absence of skill. Similarly, transportation providers, agreed that ‘‘[s]o narrowed, this factor has little the effect of the worker’s initiative is credentials such as testing to earn a probative value in determining analyzed under the opportunity factor, Commercial Driver’s License can economic dependence and should be another core factor that, for the reasons demonstrate specialized skill, but also eliminated as a separate factor.’’ explained above, is usually more noted that skills needed to successfully Other commenters suggested that the probative than the skill factor. operate a business should also be factor be included within the core, Commenters such as the National considered specialized skills to help ‘‘profit and loss’’ factor or otherwise Restaurant Association and NRF distinguish independent contractors minimized. CWI suggested that the suggested that the regulation should from employees. The Department notes factor be incorporated into the profit focus not on whether the skill required that the opportunity factor already and loss factor because ‘‘[w]here is specialized, but rather the extent to considers whether workers have an specialized skills are required to which a worker relies on the potential opportunity for profit or loss based on perform work, workers unquestionably employer for training needed to perform their business acumen or managerial have taken the initiative to invest time the work. The Wood Flooring Covering expertise. It would be redundant to and money into developing those Association, however, stated that the analyze ‘‘skills needed to successfully skills.’’ SHRM and U.S. Chamber of regulation as proposed may create operate a business’’ as part of the skill Commerce agreed that this factor should unintended limits on training and factor. As to requests for examples or not be a stand-alone factor, but rather employers should not be discouraged additional clarification as to what should be incorporated into the from funding needed training for constitutes ‘‘specialized’’ skills, the opportunity factor, to ensure that workers, particularly in view of its Department agrees that credentials such workers who desire the flexibility and industry’s labor shortage. With respect as certifications and licenses can be freedom of independent contractor to these requests, the Department helpful indicators of specialized skill, status—but who provide services that declines to eliminate the modifier though they are by no means the only may not require specialized training— ‘‘specialized’’ from the regulation. This indicators of such skill. The Department are not negatively impacted. See also type of consideration is supported by does not believe any change to the WFCA (requesting that lack of skill discussions of this factor in case law. regulatory text to clarify this point is should not weigh in favor of the worker See, e.g., Simpkins v. DuPage Hous. warranted, however. being an employee). Commenters also Auth., 893 F.3d 962, 966 (7th Cir. 2018) Employee representatives such as the stated that this additional factor should (‘‘whether Simpkins had specialized AFL–CIO expressed concern that de- be minimized further in the analysis, skills, as well as the extent to which he emphasizing the skill factor would commenting that the factor places too employed them in performing his work, ‘‘place considerable competitive much emphasis on the importance of are [material] issues’’); Carrell v. pressure on law-abiding employers skill, and requested that ‘‘the final rule Sunland Const., Inc., 998 F.2d 330, 333 employing employees at the bottom of should at least indicate that this may be (5th Cir. 1993) (finding it relevant that the wage scale, thus undermining the

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national minimum wage standard.’’ The potential employer. The Department employment contracts. Or a potential AFL–CIO further asserted that the proposed that this factor would weigh employer may have a long-term proposed regulation would make it in favor of the individual being an relationship reflected in several short- more likely that unskilled workers such independent contractor to the extent the term contracts. The Department has as home care workers, delivery drivers, work relationship is by design definite therefore retained the proposed and janitors will be classified as in duration or sporadic, which may regulatory text because, although independent contractors, and thus such include regularly occurring fixed indefiniteness is a stronger indicator of workers will be unprotected by the periods of work, although the seasonal permanence, the length of a working FLSA’s minimum wage and overtime nature of work by itself would not relationship is still relevant to this pay standards. See AFL–CIO. The necessarily indicate independent factor. National Employment Lawyers contractor classification. In particular, One commenter urged the Department Association (NELA) commented that the the Department explained that the to consider the exclusivity of a Department’s proposed regulation seasonal nature of work would not relationship as part of the permanence ‘‘seeks to constrict and demote’’ the skill indicate independent contractor status factor, an approach taken by some factor, and, relying on case law, noted where the worker’s position is courts. Specifically, CPIE commented that ‘‘courts typically assess whether permanent for the duration of the that permanence does not indicate an workers are required to use specialized relevant season and where the worker employment relationship unless it is skills, beyond those typically acquired has done the same work for multiple due to the potential employer’s through occupational or technical seasons. See Paragon Contractors, 884 requirement of exclusivity rather than training, in an independent way to F.3d at 1236–37. The proposal also the worker’s choice. The Department perform their job’’ but that this factor, provided that this factor would weigh in agrees that exclusivity most strongly ‘‘which often favors employee status, favor of the individual being an indicates an employment relationship does not suit the Department’s employee to the extent the work when the exclusivity is required by the purposes.’’ relationship is instead by design potential employer. However, as the Regarding farmworkers specifically, indefinite in duration or continuous. As Department discussed in the NPRM, an TRLA stated that whether the services noted in the NPRM, courts and the exclusivity requirement more strongly rendered by an employee require special Department routinely consider this relates to the control exercised over the skills has often been probative in the factor when applying the economic worker than the permanence of the farm labor context, and that by largely reality analysis under the FLSA to relationship. As explained in the eliminating consideration of this factor, determine employee or independent discussion of the control factor, that the proposed rule makes the proper contractor status. See, e.g., WHD factor already considers whether a classification of farmworkers harder to Opinion Letter FLSA2019–6 at 4; Razak, worker has freedom to pursue external determine. See Texas Rio Grande Legal 951 F.3d at 142; Hobbs, 946 F.3d at 829; opportunities by working for others, Aid. This ‘‘will lead to more Karlson, 860 F.3d at 1092–93; McFeeley, including a potential employer’s rivals. farmworkers being classified as 825 F.3d at 241; Keller, 781 F.3d at 807; See, e.g., Freund, 185 F. App’x at 783 independent contractors, thereby Scantland, 721 F.3d at 1312. (affirming district court’s finding that denying the protections of the FLSA to Multiple commenters urged the ‘‘Hi–Tech exerted very little control one of the most vulnerable classes of Department to focus this factor further over Mr. Freund,’’ in part, because workers’’; moreover, ‘‘[t]o the extent that on the indefiniteness of a working ‘‘Freund was free to perform the proposed rule purports to be relationship. For example, the U.S. installations for other companies’’).38 descriptive of the current state of the Chamber of Commerce commented that The same concept of exclusivity is then law, it is flatly inaccurate.’’ independent contractors often enter into re-analyzed as part of the permanence The Department has considered these multiple, long-term contracts with the factor. Compare id. (‘‘Freund’s comments but continues to believe that same business. It suggested that the relationship with Hi–Tech was not one its proposal with respect to this factor Department clarify that such contracts with a significant degree of permanence is logical and helpful. Although many do not indicate employee status merely . . . [because] Freund was able to take courts consider the skill factor, courts because of their length, but that only jobs from other installation brokers.’’), appear to find the core factors to be contracts of an indefinite length would with Scantland, 721 F.3d at 1319 more dispositive than the skill factor be indicative of employee status. CWI (finding installation technicians’ when such factors conflict. See 85 FR similarly requested that this factor focus relationships with the potential 60621–22 (listing cases). Continuing to only on the length of the relationship as employer were permanent because they take it into account, but not as one of reflected in contractual agreements, ‘‘could not work for other companies’’). the core factors, adds clarity to the regardless of how long the relationship Such duplicative analysis of exclusivity economic realities test. The is in reality. under the permanence factor, however, Department’s formulation of the test The Department considered adding is not supported by the Supreme Court’s does not preclude the possibility that in clarifying language to the regulation original articulation of that factor in some circumstances, such as with indicating that a relationship whose Silk. See 331 U.S. at 716 (analyzing the respect to farmworkers, that this factor length is indefinite is more indicative of could be particularly probative. employee status than a relationship that 38 In addition, as also noted in the NPRM, the The Department adopts is merely long. However, because the opportunity factor considers whether a worker’s § 795.105(d)(2)(i) as proposed. focus of the economic realities test is decisions to work for others affects profits or losses. not on technical formalities, it may be See, e.g., Freund, 185 F. App’x at 783 (affirming the 4. The ‘‘Permanence of the Working that a long relationship could be district court’s finding that the ‘‘looseness of the Relationship’’ Factor relationship between Hi–Tech and Freund evidence of permanence despite a permitted him great ability to profit,’’ in part, The second additional guidepost contract with a definite end. For because ‘‘Freund could have accepted installation factor, described in the regulatory text at example, an employer may have a jobs from other companies.’’). The Department does not believe this consideration overlaps with the § 795.105(d)(2)(ii), is the degree of permanent relationship with an control factor. While the control factor concerns the permanence of the working relationship employee despite requiring the ability to work for others, the opportunity factor between the individual and the employee to enter into annual concerns the effects of doing so.

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‘‘regularity’’ of unloaders’ work); id. at and the FLSA’s definition of ‘‘employ’’ proposed regulatory text further 719 (analyzing truck drivers’ ability to includes to passively ‘‘suffer or permit explained that this factor would weigh work ‘‘for any customer’’ as an aspect of to work.’’ 29 U.S.C. 203(g). A long-term in favor of an individual being an ‘‘the control exercised’’ but not relationship is always the result of independent contractor to the extent his permanence); see also 12 FR 7967 choices by both the potential employer or her work is segregable from the (describing the permanence factor as and the worker, but it is sometimes a potential employer’s production pertaining to ‘‘continuity of the helpful indicator of employee status. process. The Department proposed to relation’’ but with no reference to Edward Tuddenham urged the clarify that this factor is different from exclusivity). Nor is the concept of Department to give examples the concept of the importance or exclusivity part of the common relationships that may or may not be centrality of the individual’s work to the understanding of the word viewed as permanent, such as a contract potential employer’s business. ‘‘permanent.’’ 39 In a similar vein to the that is repeatedly renewed or an As noted in the NPRM, the Department’s analysis of the concept of industry that is generally itinerant. Department and courts outside of the initiative, the Department believes Although the Department has added one Fifth Circuit have typically articulated analysis of exclusivity as part of the example regarding this factor to new the sixth factor of the economic reality permanence factor dilutes the § 795.115 to help illustrate how the test as ‘‘the extent to which services significance of actual permanence factor is to be considered, the rendered are an integral part of the within that factor, blurs the lines Department does not believe it is [potential employer’s] business.’’ WHD between the economic reality factors, possible to address all of the possible Fact Sheet #13. Under this articulation, and creates confusion by incorporating working relationships and contractual the ‘‘integral part’’ factor considers ‘‘the a concept that is distinct from arrangements in a useful fashion. importance of the services rendered to permanence. Certain general principles should the company’s business.’’ McFeeley, 825 Because the worker’s ability to work inform any analysis of work F.3d at 244. In line with this thinking, for others is already analyzed as part of relationships. The Department reiterates courts generally state that this factor the control factor, proposed that it is not contractual formalities that favors employee status if the work § 795.105(d)(2)(ii) articulated the are relevant to the inquiry, but performed is so important that it is permanence factor without referencing economic reality. A potential central to or at ‘‘[t]he heart of [the the exclusivity of the relationship employer’s attempts to use contractual potential employer’s] business.’’ Werner between the worker and potential technicalities to label a relationship as v. Bell Family Med. Ctr., Inc., 529 F. employer, and the Department retains temporary even though it is indefinite in App’x 541, 545 (6th Cir. 2013); see also the same language in the final rule. reality should not affect whether this Baker, 137 F.3d at 1443 (‘‘[R]ig welders’ Commenters also requested that the factor indicates employee or work is an important, and indeed Department clarify that long-term independent contractor status. Again, integral, component of oil and gas relationships that are based on the this factor will not always be probative, pipeline construction work.’’); workers’ choice to continue working for and, for example, in certain industries Lauritzen, 835 F.2d at 1537–38 the same business rather than the where employees are often employed for (‘‘[P]icking the pickles is a necessary potential employer’s requirements short periods, a short term of and integral part of the pickle should not indicate employee status employment would not indicate business[.]’’); DialAmerica, 757 F.2d at under this factor. NRF commented that independent contractor status. 1385 (‘‘[W]orkers are more likely to be an independent contractor may choose SWCCA pointed out that a recent ‘employees’ under the FLSA if they to focus on a particular client for WHD opinion letter included language perform the primary work of the alleged reasons of the contractor’s own rather stating that ‘‘the existence of a long-term employer.’’). than the client’s requirements, working relationship may indirectly The Department explained in the suggesting that the worker’s choice does indicate permanence.’’ WHD Opinion NPRM that it is concerned that this not indicate employee status. The Letter FLSA 2019–06 (April 29, 2019). focus on importance or centrality Department does not believe that further The Alliance requested that this departs from the Supreme Court’s explanation in the regulatory text is language be added to § 795.105(d)(2)(ii). original articulation of the economic necessary, though it agrees that a long- Though the quoted language and the reality test, has limited probative value term relationship may not always case law from which it is drawn remain regarding the ultimate question of indicate an employee relationship. This useful guidance for employers, the economic dependence, and may be factor is not always probative to the Department does not believe it is misleading in some instances. As such, analysis, and the scenarios described by necessary to add this language to the the Department proposed that the commenters may be situations regulation, which already indicates that § 795.105(d)(2)(iii) would clarify that where the length of the relationship is a long-term relationship points toward the ‘‘integral part’’ factor should instead not a useful indicator. However, an employment relationship. consider ‘‘whether the work is part of an explicitly stating that a relationship is Accordingly, the Department finalizes integrated unit of production,’’ which not permanent whenever the worker § 795.105(d)(2)(ii) as proposed. aligns with the Supreme Court’s analysis in Rutherford Food, 331 U.S. at chooses for it to be long-term is not 5. The ‘‘Integrated Unit’’ Factor accurate. After all, every employee to 729. The final additional guidepost factor, Many commenters representing some extent chooses whether to described in § 795.105(d)(2)(iii), is workers urged the Department to retain continue working for their employer, whether the work is part of an the ‘‘integral part’’ factor used by courts 39 See Merriam-Webster Dictionary, https:// integrated unit of production. The as part of the economic realities test, www.merriam-webster.com/dictionary/permanent Department proposed that this factor rather than replacing it with the (defining permanent as ‘‘continuing or enduring would weigh in favor of the individual ‘‘integrated unit’’ factor articulated in without fundamental or marked change’’); see also being an employee to the extent his or the proposed rule. This ‘‘integral part’’ Oxford American Dictionary 1980 (defining permanent as ‘‘lasting or meant to last her work is a component of the potential factor would consider the importance or indefinitely’’); Merriam-Webster Pocket Dictionary employer’s integrated production centrality of the work performed to the 1947 (defining permanent as ‘‘Lasting; enduring’’). process for a good or service. The purported employer’s business. In

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particular, several commenters, the ‘‘integral part’’ factor in 1387. This higher rate of misalignment including United Food and Commercial subregulatory guidance in the 1950s. is precisely what Judge Easterbrook’s Workers, Senator Patty Murray, and the See WHD Opinion Letter (Aug. 13, criticism would have predicted: If State AGs contended that removing the 1954); WHD Opinion Letter (Feb. 8, ‘‘[e]verything the employer does is ‘‘integral’’ factor would be contrary to 1956).40 And circuit courts in the 1980s ‘integral,’ ’’ that factor would point established circuit court precedent. The began referring to it as the ‘‘integral towards employee status for workers UFCW asserted that ‘‘[w]hether a part’’ factor and analyzing it in terms of who are employees, but also for workers worker’s service is an integral part of the the ‘‘importance’’ of the work to the who are independent contractors. company’s business may not be a potential employer. See, e.g., Lauritzen, The NPRM further explained that ‘‘the relevant factor in all situations, but it 835 F.2d 1529, 1534–35; DialAmerica relative importance of the worker’s task may be in some and some courts have Mktg., 757 F.2d at 1386. to the business of the potential found value in analyzing this fact.’’ It The NPRM explained the reasons that employer says nothing about whether commented that if the Department the Department now believes the the worker economically depends on stated that integrality is not relevant to Supreme Court’s original ‘‘integrated that business for work.’’ 85 FR 60617. the economic realities test, the unit’’ formulation is more probative While some courts assumed that Department’s proposed rule would than the ‘‘integral part’’ (meaning business may desire to exert more unduly limit the inquiry. One ‘‘important’’) approach. As Judge control over workers who provide commenter, the Greenlining Institute, Easterbrook pointed out in his important services, there is no need to commented that eliminating an concurrence in Lauritzen, ‘‘[e]verything use importance as an indirect proxy for ‘‘integral part’’ factor disfavors workers the employer does is ‘integral’ to its control because control is already a ‘‘performing physical tasks instead of business—why else do it?’’ Lauritzen, separate factor. Id. (citing Dataphase, stereotypically ‘intellectual’ pursuits,’’ 835 F.2d at 1541 (Easterbrook J., 781 F. Supp. at 735, and Barnard Const., who are disproportionately racial or concurring); see also Zheng, 355 F.3d at 860 F. Supp. at 777, aff’d sub nom. ethnic minorities. 73 (cautioning in the joint employer Baker v. Flint Eng’g & Const. Co., 137 Many commenters agreed with the context that interpreting the factor to F.3d 1436 (10th Cir. 1998)). And this Department’s proposal to eliminate the focus on importance ‘‘could be said to assumption may not always be valid. ‘‘integral part’’ factor or any similar be implicated in every subcontracting Modern manufacturers, for example, factor focused on the importance of the relationship, because all subcontractors commonly assemble critical parts and work. The U.S. Chamber of Commerce, perform a function that a general components that are produced and for example, commented, ‘‘In today’s contractor deems ‘integral’ to a product delivered by wholly separate companies economy, independent workers provide or a service’’). through contract rather than services in all aspects of the economy The Department’s review of appellate employment arrangements. And low and all aspects of individual businesses, cases since 1975 involving independent transaction costs in many of today’s including core and non-core functions, contractor disputes under the FLSA industries make it cost-effective for as well as in the same or different lines supports this criticism. The Department firms to hire contractors to perform of business.’’ The Society for Human generally found that, in cases where the routine tasks. Resource Management similarly ‘‘integral part’’ factor was addressed, the The Department considered salvaging commented that the ‘‘analysis factor aligned with the ultimate the ‘‘integral part’’ factor by concerning the ‘integrated unit’ factor classification when the ultimate deemphasizing ‘‘integral’’ and should not focus on the ‘importance of classification was employee.41 However, emphasizing ‘‘part.’’ Instead of focusing services’ provided.’’ courts’ analyses of the ‘‘integral part’’ on whether the work is important ‘‘to’’ Though circuit courts have applied an factor—again, if it was analyzed at a potential employer’s business, the ‘‘integral part’’ factor, it was not one of all 42—were misaligned more frequently factor would focus on whether the work the factors analyzed by the Supreme than they were aligned with the is an important ‘‘part’’ of that business. Court in Rutherford Food. Rather, the ultimate classification when the This approach would more closely align Court considered whether the worker ultimate classification was independent with how ‘‘integral part’’ was used by was part of an ‘‘integrated unit of contractor status. Compare Iontchev, the Supreme Court in Silk, which asked production,’’ 331 U.S. at 729, as this 685 F. App’x at 551; Meyer, 607 F. whether workers were ‘‘an integral part final rule does. The Department believes App’x at 123; Freund, 185 F. App’x at of [defendants’] businesses,’’ as opposed that circuit courts—and even the 784–85; Mid-Atl. Installation, 16 F. to operating their own businesses. 331 Department itself—have deviated from App’x at 107–08; Brandel, 736 F.2d at U.S. 716. But as the NPRM noted, the the Supreme Court’s guidance and, in 1120, with Werner, 529 F. App’x at 545– Silk Court framed that question as the doing so, have introduced an ‘‘integral 46; DialAmerica Mktg., 757 F.2d at ultimate inquiry, and not as a factor that part’’ factor that can be misleading. As is useful to guide the inquiry. See 85 FR explained in the NPRM, the ‘‘integral 40 A 2002 opinion letter interpreted the factor to 60616 n.41. Asking whether a worker is part’’ factor was not one of the distinct focus on the importance of the work, explaining part of—integral or otherwise—a factors identified in Silk as being that ‘‘[w]hen workers play a crucial role in a potential employer’s business is not company’s operation, they are more likely to be ‘‘important for decision.’’ 331 U.S. at employees than independent contractors.’’ WHD useful because it simply restates the 716. The ‘‘integrated unit’’ factor instead Opinion Letter, 2002 WL 32406602, at *3 (Sept. 5, ultimate inquiry: If a worker were part derives from Rutherford Food, where 2002). However, the Department’s most recent of the potential employer’s business, the Supreme Court observed that the opinion letter on this subject characterized the then he or she could not be in business factor as ‘‘the extent of the integration of the work at issue was ‘‘part of an integrated worker’s services into the potential employer’s for him- or herself and therefore would unit of production’’ in the potential business.’’ WHD Opinion Letter FLSA2019–6 at 6 be economically dependent. As an employer’s business and concluded that (emphasis added). added complication, new technologies workers were employees in part because 41 The only appellate case the Department found have led to the emergence of platform they ‘‘work[ed] alongside admitted of misalignment in this scenario is Paragon companies that connect consumers Contractors, 884 F.3d at 1237–38. employees of the plant operator at their 42 As explained elsewhere, the Fifth Circuit does directly with service providers, and it is tasks.’’ 331 U.S. at 729. As the NPRM not usually consider the ‘‘integral part’’ factor in its often difficult to determine whether explained, the Department began using analysis. those platform companies are in

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business of supporting service Another group of commenters integrated into the employer’s own providers’ own businesses or are in the suggested that the factor should include production process is not part of an business of hiring service providers to an explicit consideration of the location integrated unit of production. Multiple serve customers. Compare Razak, 951 of the work performed. The U.S. businesses, including independent F.3d at 147 n.12 (‘‘We also believe Chamber of Commerce, for example, contractors, may perform steps in the [there] could be a disputed material suggested that the factor should same supply chain. fact’’ whether Uber is ‘‘a technology consider whether the worker is Some commenters suggested that the company that supports drivers’ performing work ‘‘the majority of which description of this factor in the transportation businesses, and not a is performed off the physical premises preamble should define the scope of the transportation company that employs of the business.’’ ‘‘unified purpose’’ toward which the drivers.’’), with O’Connor v. Uber Whether the work is performed on the potential employer’s processes work. Techs., Inc., 82 F. Supp. 3d 1133, 1153 business’s physical premises may be a WPI requested that the Department (N.D. Cal. 2015) (‘‘it is clear that Uber consideration under the ‘‘integrated clarify that the ‘‘unified purpose’’ is most certainly a transportation unit’’ factor, as it may indicate the cannot be broader than the potential company’’). For the reasons explained, extent to which the worker is part of an employer’s ‘‘core or primary business the final rule retains the ‘‘integrated integrated unit of production. However, purpose.’’ On the other hand, unit’’ approach. the Department does not believe it is Farmworker Justice urged a broad The Department does not share the necessary to include this consideration definition of ‘‘unified purpose’’ to Greenlining Institute’s concern that the as an explicit part of the ‘‘integrated prevent gamesmanship by which an final rule’s ‘‘integrated unit’’ factor unit’’ factor. Many businesses have no employer may attempt to artificially would result in workers who perform physical location but nevertheless separate its production process into ‘‘physical tasks’’ being classified as employ employees. In other instances, separate units in order to claim that they independent contractors more than an employee may be part of an are segregable rather than parts of a workers who perform white collar, integrated unit despite performing work unified whole. It cited a hypothetical ‘‘intellectual’’ work. Meat deboning is a at a different location than other tomato farmer who could label its physical task, but deboners were found employees. See, e.g., Goldberg v. tomato harvesters as a separate unit to be part of an integrated unit of Whitaker House Cooperative, Inc., 366 rather than as part of the process of production in Rutherford Food. 331 U.S. US 28, 32 (1961) (holding that workers growing tomatoes. who produced copies of a sample The Department rejects these at 729. On the other hand, freelance product at home were employees). Some suggestions, because the final rule’s writers perform a white collar task, but workers perform work on a business’s rejection of the ‘‘integral part’’ factor they generally are not integrated into a physical premises but perform discrete, and the question of ‘‘importance’’ or publication’s production process segregable services unrelated to any ‘‘centrality’’ makes clear that the because they are not involved in, for integrated process or unified purpose. relevant facts are the integration of the instance, assigning, editing, or Thus, although the location of the work worker into the potential employer’s determining the layout of articles. Both may be a fact that is relevant to the production processes, rather than the white collar and physical labor jobs may ‘‘integrated unit’’ factor, it is not so nature of the work performed. As be part of an integrated unit of probative that it would be useful to explained above, identifying the ‘‘core production. The Department has added elevate it above other facts that may be or primary business purpose’’ is not a one example in new § 795.115 showing more relevant in a particular case. useful inquiry in the modern economy. that a newspaper editor—who performs Several commenters asked that the Falling transaction costs and other primarily white collar tasks—may be Department clarify that the relevant factors described above allow part of an integrated unit of production. inquiry is whether the worker is part of businesses to hire independent Another commenter, the Arkansas an integrated unit of production that is contractors to carry out tasks that are Trucking Association, agreed that the part of the potential employer’s own part of the businesses’ core functions, ‘‘integrated unit’’ factor was superior to processes rather than part of a broader while keeping those functions separate ‘‘integral part,’’ but suggested an supply chain. NRF suggested clarifying from its own production processes. At alternative formulation based on language that would ‘‘expressly state the same time, seemingly peripheral whether the business’s activities would that merely serving as a link in the functions may be integrated into an cease or be severely impacted by the chain of a company’s provision of goods employer’s own processes, indicating absence of the worker. However, this or services’’ does not indicate employee employee status. What matters is the approach has the same limitations as the status. It suggested that such language extent of such integration rather than approaches that emphasize would make it clear that this factor does the importance or centrality of the ‘‘importance.’’ Almost every worker not indicate employee status where a functions performed, which the performs work that is in some sense worker is merely one, segregable step in Department does not find to be a useful important to the business that has hired the process of delivering a product to a indicator of employee or independent the worker; otherwise, the business consumer. contractor status. would not hire the worker. Moreover, as The Department does not believe such As noted in the NPRM, the explained in the NPRM, easily-replaced a clarification is needed, because the Department recognizes that it may be workers are often more dependent on a text of the final rule states that this difficult to determine the extent to particular business for work precisely factor points toward employee status which a worker is part of an integrated because they are so easily replaced. only when the worker performs ‘‘a unit of production. For this reason, this Focusing on the impact of a worker’s component of the potential employer’s factor is not always useful to the absence turns the economic dependence integrated production process.’’ The economic realities inquiry, and it is less analysis on its head by essentially relevant process is the potential likely than the core factors to be looking at the business’s dependence on employer’s process, not the broader determinative. For example, this factor the worker. As a result, it sends supply chain. A worker who performs a would not indicate independent misleading signals about employee segregable step in the process of contractor status for Farmworker status. delivering a product but who is not Justice’s hypothetical tomato harvesters

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merely because the farmer artificially potential employer’s business model. income and the size of the hiring labeled them a separate unit. As has Moreover, contractual formalities such company, are not relevant. These been the case since the concepts as a buy/sell agreement or contracts unlisted factors are less probative than underlying the economic realities test formed using multi-sided platforms the core factors listed in § 795.105(d)(1), was articulated, the test does not could memorialize either employment while their precise weight depends on depend on labels assigned to workers. or independent contractor the circumstances of each case and is Rutherford Food, 331 U.S. at 729 arrangements; the determination would unlikely to outweigh either of the core (‘‘Where the work done, in its essence, not depend on the labels assigned but factors . follows the usual path of an employee, on the various economic realities E. Focusing the Economic Reality Test putting on an ‘independent contractor’ factors, including the worker’s on Two Core Factors label does not take the worker from the integration into the potential employer’s protection of the Act.’’). The factor may production process. Proposed § 795.105(c) was intended to indicate either employee or That said, as explained elsewhere in improve the certainty and predictability independent contractor status based on this preamble, although the Department of the economic reality test by focusing the extent to which the harvesters are cannot address all industries or all the test on two core factors: (1) The integrated into the farmer’s production possible factual scenarios, it does nature and degree of the worker’s process as a matter of fact, but most appreciate that examples are helpful to control over the work; and (2) the likely the ultimate determination would understanding how each factor operates. worker’s opportunity for profit or loss. depend more on other factors, such as The new regulatory provision added in This focus is an important corollary of control and opportunity for profit or this final rule to further illustrate the sharpened definition of economic loss. several factors, § 795.115, includes two dependence to include individuals who WPI also suggested that the examples specifically meant to are dependent on a potential employer Department clarify language in the demonstrate how facts about whether a for work and to exclude individuals preamble to the proposed rule stating worker is part of an integrated unit of who are in business for themselves. The that employee status would be indicated production should be considered as part NPRM explained that these core factors, for a worker who performs work closely of the employment relationship listed in proposed § 795.105(d)(1), drive alongside conceded employees. WPI analysis. at the heart of what is meant by being expressed concern that this language For the reasons explained, the in business for oneself: Such a person could wrongly imply that a worker Department finalizes § 795.105(d)(2)(iii) typically controls the work performed in performing different tasks than the as proposed. his or her business and enjoys a conceded employees but in close meaningful opportunity for profit or risk proximity to them would indicate 6. Additional Unlisted Factors of loss through personal initiative or employee status. The Department does The National Restaurant Association investment. The other economic reality not believe such clarification is stated that facts and factors not listed in factors—skill, permanence, and necessary, because the preamble stated § 795.105(d) may be relevant to the integration—are also relevant as to that employee status is indicated where question of economic dependence even whether an individual is in business for the worker ‘‘performs identical or though they would not be as probative him- or herself. But they are less closely interrelated tasks as those as the two core factors. This commenter probative to that determination. For employees.’’ In other words, WPI is expressed concern that future courts instance, it is not uncommon for correct that if a worker works physically may ignore these unlisted but comparatively high skilled close to conceded employees but potentially relevant considerations in individuals—such as software performs unrelated tasks, that fact alone response to this rulemaking and engineers—to work as employees, and would not indicate employee status. requested that the Department revise the for comparatively low skill Finally, many commenters requested regulatory text to explicitly recognize individuals—such as drivers—to be in that the Department add examples that unlisted factors may be relevant. business for themselves. See, e.g., explaining how this factor would apply While proposed § 795.105(c) already Saleem, 854 F 3d at 140; Express Sixty- to specific industries, including states that the five factors listed in Minutes Delivery, 161 F.3d at 306. In trucking, construction, financial § 795.105(d) are ‘‘not exhaustive,’’ 43 the contrast, ‘‘[i]n ordinary circumstances, advising, and personal shopping. Others Department agrees that it may be helpful an individual ‘who is in business for wanted examples to address certain to make this point more explicit. The him- or herself’ will have meaningful types of contractual arrangements, such Department is thus adding control over the work performed and a as multi-sided platforms, franchisees, § 795.105(d)(2)(iv), which states that meaningful opportunity to profit (or risk and buy/sell agreements. In response to additional factors not listed in loss).’’ 85 FR 60618. As such, ‘‘it is not these requests, the Department notes § 795.105(d) may be relevant to possible to properly assess whether that the facts that inform the ‘‘integrated determine whether an individual is an workers are in business for themselves unit’’ factor are too circumstance- employee or an independent contractor or are instead dependent on another’s specific to apply blanket statements to under the FLSA. As with any fact or business without analyzing their control entire industries or broad types of factor, such additional factors are over the work and profit or loss employment arrangements. Any relevant only to the extent that they opportunities.’’ Id. particular task that is common in a help answer whether the individual is The NPRM further explained that particular industry may be performed in in business for him- or herself, as focusing on the two core factors is also one instance by a worker who is part of opposed to being economically supported by the Department’s review an integrated unit of production or by a dependent on an employer for work. of case law. The NPRM presented a segregable unit. In other words, this Factors that do not bear on this remarkably consistent trend based on factor may point in a different direction question, such as whether an individual the Department’s review of the results of for workers who perform similar duties has alternate sources of wealth or appellate decisions since 1975 applying in the same industry but who are more the economic reality test. Among those or less integrated into their potential 43 See Silk, 331 U.S. at 716 (‘‘No one [factor] is cases, the classification favored by the employer’s processes based on the controlling nor is the list complete.’’). control factor aligned with the worker’s

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ultimate classification in all except a precedent, and well-reasoned courts of Department responds to each of the handful where the opportunity factor appeals’ decisions.’’ The American above concerns below, and then pointed in the opposite direction. And Bakers Association (ABA) likewise addresses other requests relating to the the classification favored by the ‘‘supports the Department’s position focus on the two factors. opportunity factor aligned with the that the two most probative ‘core’ 1. Focusing on Two Core Factors is ultimate classification in every case.44 factors for determining independent Consistent With the Economic Reality These two findings imply that whenever contractor status under the FLSA are the Test the control and opportunity factors both degree and nature of an individual’s pointed to the same classification— control over their work, and the Many commenters contended that whether employee or independent opportunity for profit (or loss).’’ See emphasizing core factors over others contractor—that was the court’s also, e.g., ATA; CPIE; National would violate a requirement that conclusion regarding the worker’s Restaurant Association; SHRM. Even economic reality factors be unweighted ultimate classification.45 See 85 FR one commenter who did not generally or weighted equally. According to 60619. In other words, the Department support this rulemaking ‘‘agreed with SWACCA, ‘‘[t]he proposed weighted did not uncover a single court decision the Department that the two main rule is a novel concept and a departure where the combined weight of the factors, control and opportunity for from existing caselaw.’’ See also, e.g., control and opportunity factors was profit or loss, should be given greater NELA (objecting to ‘‘emphasizing outweighed by the other economic weight.’’ Owner-Operator Independent certain factors over what should be the reality factors. In contrast, the Driver Association (OOIDA). ‘ultimate inquiry’ ’’). FTC Commissioner classification supported by other Many commenters objected to Slaughter likewise objected that ‘‘[t]he economic reality factors was focusing on the two core factors. Proposal takes the Supreme Court’s five occasionally misaligned with the Broadly speaking, they raised three factor test, where all five factors are worker’s ultimate classification, interrelated concerns. First, commenters given equal weight, and narrows it particularly when the control factor, the contended that elevating the two core down to focus on only two [core] opportunity factor, or both, favored a factors is inconsistent with the factors.’’ See also Appleseed Center different classification. See id. at 60621. economic reality test, which they (‘‘[A]ll are given equal weight.’’); The NPRM thus provided that, given asserted requires that factors be either Senator Patty Murray (suggesting that their greater probative value, if both unweighted or weighted equally. See, ‘‘DOL afford [factors] equal weight’’). proposed core factors point towards the e.g., NELP (objecting to ‘‘elevating two NELP appeared to agree with the same classification—whether employee narrow ‘core’ factors’’); SWACCA; Department that the economic reality or independent contractor—there is a Commissioner Slaughter of the Federal test may focus on certain factors over substantial likelihood that is the Trade Commission (FTC). Second, others, but asserted that ‘‘the factor of individual’s correct classification. This commenters contended that focusing on integration into the business of another is because it is quite unlikely for the two core factors would narrow the scope should be weighed heavily,’’ rather than other, less probative factors to outweigh of who is an employee (as opposed to the proposed rule’s two core factors. the combined weight of the core factors. an independent contractor) under the Several commenters further relied on an In other words, where the two core FLSA. See, e.g., NELP (‘‘The NPRM age discrimination case to contend that factors align, the bulk of the analysis is narrows the FLSA test for employee the economic reality test ‘‘cannot be complete, and anyone who is assessing coverage[.]’’); State AGs (‘‘The Proposed rigidly applied’’ and that ‘‘[i]t is the classification may approach the Rule’s interpretation of [employment impossible to assign to each of these remaining factors and circumstances under] the FLSA is unlawfully factors a specific and invariably applied with skepticism, as only in unusual narrow.’’); Appleseed Center (‘‘The weight.’’ NELP (quoting Hickley v. Arkla cases would such considerations Department of Labor is trying to Indus., Inc., 699 F.2d 748, 752 (5th Cir. outweigh the combination of the two impermissibly narrow this definition’’); 1983)); see also Michigan Regional core factors. NCFW (objecting to ‘‘agency’s proposed Council of Carpenters (MRCC) (same). Numerous commenters welcomed attempt to narrow the definition of The Department disagrees that the proposed § 795.105(c)’s sharpening of employee’’). Third, commenters asserted economic reality test requires factors to the economic reality test by recognizing that focusing on two core factors would be unweighted or equally weighted. the two core factors’ greater probative impermissibly restrict the set of Each time the Department or a court value on whether an individual is in circumstances that may be considered applies the test, it must balance business for him- or herself. For when assessing whether a worker is an potentially competing factors based on instance, the U.S. Chamber of employee or independent contractor their respective probative value to the Commerce stated that ‘‘[t]he ultimate inquiry of economic Department’s straightforward focus on under the FLSA. TRLA (‘‘proposed reformulation would eliminate . . . any dependence. In the very case that two core factors presents a concise announced the economic reality factors, interpretation of ‘economic dependency’ consideration of [the skill and permanence] factors’’); NELA (objecting the Supreme Court listed five factors grounded in the Act’s statutory that are ‘‘important for decision’’ but definition of ‘employ’ and ‘employer,’ to ‘‘a narrow, control-dominated consistent with Supreme Court inquiry’’); State AGs (objecting to proposed rule because it ‘‘narrows breadth of these two concepts are not always 46 logically related. For instance, the ABC test states 44 This is not to imply that the opportunity factor several areas of inquiry.’’). The that a worker is an employee unless the hiring party necessarily aligns with the ultimate classification, can establish that three criteria are met, see, e.g., but rather that the Department is not aware of an 46 There are two distinct concepts within the Dynamex, 416 P.3d at 35; thus, the ABC test appellate case in which misalignment occurred. economic reality test—and any test for employment considers a relatively narrow set of circumstances 45 The only cases in which an appellate court’s status—that can be broad or narrow. The first while imposing a broad standard for employment. ruling on a worker’s classification was contrary to concept is the test’s standard for employment, While most commenters that objected to the the court’s conclusions as to the control factor were which is economic dependence. See Bartels, 332 narrowing of the economic reality test did not cases in which the opportunity factor pointed in the U.S. at 130. The second concept is the set of present the standard of employment and opposite direction. See 85 FR 60619 (citing Paragon circumstances that may be considered as part of the circumstance that may be considered as separate Contractors, 884 F.3d at 1235–36, and Cromwell, test, which is the ‘‘circumstances of the whole concepts, the Department addresses them 348 F. App’x at 61). activity.’’ See Rutherford Food, 331 U.S at 730. The separately.

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did not treat them equally. Silk, 331 the Eight Circuit recently emphasized a 60619. Among the appellate decisions U.S. at 716. It instead emphasized the process server’s ability to determine his since 1975 that the Department most probative factors, while de- own profits by controlling hours, which reviewed, whenever the control factor emphasizing less probative ones in that assignments to take, and for which and the opportunity factor both pointed case. The Court focused on the fact that company to work, to affirm a jury towards the same classification— coal unloaders ‘‘had no opportunity to verdict that he was an independent whether employee or independent gain or lose’’ to conclude they were contractor. See Karlson, 860 F.3d at contractor—that was the worker’s employees under the SSA, while 1095. ultimate classification. Put another way: explaining the fact ‘‘[t]hat the unloaders Courts have repeatedly warned In those cases where the control factor did not work regularly was not against the ‘‘mechanical application’’ of and opportunity factor aligned, had the significant.’’ Id. at 717–18. The Court the economic reality factors when courts hypothetically limited their further focused on ‘‘the control determining whether an individual is an analysis to just those two factors, it exercised [and] the opportunity for employee or independent contractor. appears to the Department that the profit from sound management’’ to See, e.g., Saleem, 854 F.3d at 139; overall results would have been the conclude that truck drivers were Superior Care, 840 F.2d at 1059. Rather, same. One commenter attempted to independent contractors, without the factors should be analyzed with the dispute this finding. TRLA asserted that, discussing any of the other economic aim of answering the ultimate inquiry in the following four cases, farmworkers reality factors. Id. at 719. Similarly, the under the FLSA: ‘‘Whether an who were found to be employees ‘‘might Court in Whitaker House concluded that individual is ‘in business for himself’ or be reclassified as independent workers at issue in that case were is ‘dependent upon finding employment contractors based on the NPRM’s two employees based primary on in the business of others.’ ’’ Scantland, core factors:’’ Driscoll, 603 F.2d 748; considerations relating to control (e.g., 721 F.3d at 1312 (quoting Mednick, 508 Lauritzen, 835 F.2d 1529; Perez v. the workers were ‘‘regimented under F.2d at 301–02). Commenters who Howes, 7 F. Supp. 3d 715 (W.D. Mich. one organization, manufacturing what object to focusing on the two core 2014); and Cavazos v. Foster, 822 F. the organization desires’’) and factors do not dispute this principle, Supp. 438 (W.D. Mich. 1993). However, opportunity for profit (e.g., the workers and some affirmatively support it. For the court in each of these cases actually were ‘‘receiving the [piece rate] instance, NELA and the State AGs both concluded that the control and compensation the organization dictates’’ stated that economic reality ‘‘factors ‘are opportunity factors both favored rather than ‘‘selling their products on aids—tools to be used to gauge the employee classification,50 and thus the the market for whatever price they can degree of dependence of alleged farmworkers would have been found to command’’). 366 U.S. at 32–33. employees on the business with which be employees even if those courts had As discussed in the NPRM, courts of they are connected’ ’’ (quoting Pilgrim hypothetically based is decision solely appeals also emphasized facts and Equip., 527 F.2d at 1311). NELA on the core factors. These cases factors that are more probative of the nonetheless believed that it would be therefore reinforce the Department’s economic dependence inquiry. See 85 inappropriate to ‘‘emphasiz[e] certain conclusion that the control and FR 60620. In Saleem, the Second Circuit factors over what should be the opportunity factors have been focused on facts relating to drivers’ ‘ultimate inquiry’: The worker’s consistently afforded significant weight control over their work and their economic dependence on the putative in the economic dependence inquiry. opportunity for profit or loss based on employer.’’ Emphasizing certain factors, The consistent empirical trend initiative or investment to conclude that however, would dilute the ultimate indicating that the control and they were independent contractors.47 inquiry of economic dependence only if opportunity factors have been afforded 854 F.3d at 138–39; see also Agerbrink those factors were less probative of v. Model Service LLC, 787 F. App’x 22, economic dependence than others. In with Defendants, both its length and the ‘regularity’ 25–27 (2d Cir. 2019) (denying summary of work was entirely of Plaintiffs’ choosing.’’ 854 F. contrast, emphasizing factors that are 3d at 147 (citation omitted). When discussing ‘‘the judgement based solely on disputed more probative would not dilute but use of special skills,’’ the court in Selker Brothers facts regarding plaintiff’s ‘‘control over rather focus the analysis on the ultimate similarly explained that, ‘‘[g]iven the degree of her work schedule, whether she had the inquiry under the FLSA. If NELA and control exercised by Selker over the day-to-day ability to negotiate her pay rate, and, operations of the stations, this criterion cannot be the State AGs are correct that the said to support a conclusion of independent relatedly, her ability to accept or decline economic reality factors must be ‘‘used contractor status.’’ 949 F.2d at 1295. work’’). The Third Circuit in Razak v. to gauge the degree of dependence,’’ 50 Driscoll, 603 F.2d at 755 (‘‘The appellants’ Uber Technologies took a similar then focusing on factors that are more affidavits, which must be taken as true for summary approach by emphasizing disputed facts judgment purposes, plainly disclose that probative measures of economic [defendant] possesses substantial control over regarding ‘‘whether Uber exercises dependence is not only permitted but important aspects of the appellants’ work’’); id. control over drivers’’ ’ and had ‘‘the preferred. (‘‘The appellants’ opportunity for profit or loss opportunity for profit or loss depending The Department’s review of case law appears to depend more upon the managerial skills on managerial skill’’ to deny summary indicates that courts of appeals have of [defendant]’’); Lauritzen, 835 F.2d at 1536 (‘‘The 48 defendants exercise pervasive control over the judgment. 951 F.3d at 145–47. And effectively been affording the control operation as a whole.’’); id. (‘‘The Sixth Circuit [in and opportunity factors greater weight, a prior case] found that the migrant workers had the 47 In particular, the Saleem court focused on: even if they did not always explicitly opportunity to increase their profits through the drivers’ ‘‘considerable discretion in choosing the 49 management of their pickle fields....We do not nature and parameters of their relationship with the acknowledge doing so. See 85 FR agree.’’); Howes 7 F. Supp. 3d at 726, aff’d sub nom. defendant,’’ ‘‘significant control over essential Perez v. D. Howes LLC, 790 F.3d 681 (6th Cir. 2015); determinants of profits in [the] business,’’ how they offline, and on the other hand, Plaintiffs can drive (‘‘Accordingly, [the control] factor weighs in favor ‘‘invested heavily in their driving businesses,’’ and whenever they choose to turn on the Driver App, of a finding that the workers were employees.’’); id. the ‘‘ability to choose how much work to perform.’’ with no minimum amount of driving time (‘‘[W]orkers could simply increase their wages by 854 F.3d at 137–49. required.’’ 951 F.3d at 147 n.12. working longer, harder, and smarter—this does not 48 The Razak decision also briefly addressed 49 Some courts have explicitly acknowledged that constitute an opportunity for profit.’’); Cavazos, 822 other factors, including a footnote on the ‘‘integral’’ facts related to the control factor were more F. Supp. at 442 (‘‘Their lack of control supports factor and a discussion that was nominally about probative than facts related to other factors. For plaintiffs’ claim that they are employees.’’); id. at the permanence factor but actually concerned instance, the court in Saleem stated that ‘‘whatever 443 (noting that the work relationship ‘‘does not control: ‘‘On one hand, Uber can take drivers ‘the permanence or duration’ of Plaintiffs’ affiliation afford plaintiffs an opportunity for profits’’).

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greater weight should be unsurprising determine whether an individual is in a subtle but important distinction that given their greater probative value. As business for him- or herself. The was not fully reflected in the NPRM’s the NPRM explained, those two factors Department therefore declines to create language between a factor’s probative ‘‘strike at the core’’ of what it means to and give greater weight to NELP’s value as a general matter and its specific be in business for oneself, 85 FR 60612, concept of the ‘‘integration factor’’ and weight in a particular case. Probative and therefore they are more probative of continues to believe that the control and value refers to the extent to which a the ultimate inquiry under the FLSA: opportunity factors are the most factor encapsulates types of facts that ‘‘whether an individual is ‘in business probative as to whether an individual is illuminate the ultimate inquiry of for himself’ or is ‘dependent upon in business for him- or herself as a whether workers are in business for finding employment in the business of matter of economic reality. themselves, as opposed to being others.’ ’’ Scantland, 721 F.3d at 1312 NELP and MRCC quoted dicta from an dependent on an employer for work. (quoting Mednick, 508 F.2d at 301–02). age-discrimination case that ‘‘[i]t is The weight assigned to a factor in a No commenters offered a persuasive impossible to assign to each of [the particular case refers to how strongly counterargument to the commonsense economic reality] factors a specific and specific facts within the factor, on logic that, when determining whether invariably applied weight.’’ Hickley, 699 balance, favors a particular an individual is in business for him- or F.2d at 752.52 This proposed rule, classification. Considerations within a herself, the extent of the individual’s however, does not run afoul of Hickley’s core factor may have significant control over his or her work is more dicta. As an initial matter, neither core probative value even though that factor, useful information than, for example, factor individually has ‘‘a specific and on balance, does not weigh heavily the skill required for that work. Nor did invariably applied weight’’ because the towards a classification in a specific any commenters effectively rebut that proposed rule does not state that one case. The Department therefore revises the extent of an individual’s ability to necessarily outweighs the other. The § 795.105(c) to more clearly distinguish earn profits (or suffers losses) through Department nonetheless recognizes that between a core factor’s probative value initiative or investment is more useful proposed § 795.105(c)’ statement that as a general matter and its’ weight in a information than, for example, how long ‘‘each [core factor] is afforded greater specific case and to clarify that the core that individual has worked for a weight in the analysis than is any other factors’ greater probative value means particular company. factor’’ may be overly rigid. For reasons that they typically (but not necessarily) NELP appeared to agree with the explained above, certain types of facts— carry greater weight . Thus it should be Department that emphasis should be i.e., those falling within the control and clear that the rule does not assign any given to factors that are most probative opportunity factors—are more probative factor a specific or invariable weight. In to the ultimate inquiry of whether an than others regarding whether an contrast, the approach favored by some individual is in business for him- or individual is in business for him- or commenters, including the Appleseed herself, but disagrees as to what those herself. But that does not necessarily Center and Commission Slaughter, to factors should be. In particular, NELP mean the control or opportunity factors give each factor ‘‘equal weight’’ would asserted that ‘‘the factor of integration are entitle to greater weight in all cases. ‘‘assign to each of the factors a specific into the business of another should be For example, it may be the case that, and invariably applied weight.’’ weighed heavily and in fact is after all the circumstances have been Hickley, 699 F.2d at 752. ultimately the test. If the work is considered, a core factor does not weigh At bottom, the final rule’s focus on integrated this leads to the conclusion very strongly towards a particular two core factors thus does not depart that the worker is not independently classification because considerations from the economic reality test—it running a business.’’ 51 within that factor point in different merely elucidates the factors’ respective NELP correctly defines the economic directions. See Cromwell, 348 F. App’x probative values that have always dependence inquiry as ‘‘whether a at 61 (finding that ‘‘defendants here did existed but never been explained. Cf. person is in business for themselves and not control the details of how the Lauritzen, 835 F.2d at 1539 (‘‘Why keep therefore independent, or works instead plaintiffs performed their assign jobs’’ [employers] in the dark about the legal in the business of another and but did have ‘‘complete control over consequences of their deeds.’’ dependent on that business for work.’’ [their] schedule and pay’’). A core factor (Easterbrook, J., concurring)). As If a worker is economically dependent could even be at equipoise, in which explained in more detail below, on an employer for work, the worker is case it would not weigh at all in favor providing such clarification for the not in business for him- or herself. of a classification. See Johnson, 371 F. regulated community would not narrow NELP then defines the ‘‘integration 3d at 730 (concluding that competing the scope of who is an FLSA employee factor’’ to mean the exact same thing: ‘‘If facts regarding plaintiffs’ opportunity as opposed to an independent the work is integrated this leads to the for profit or loss meant that the ‘‘jury contractor. Nor would it narrow the conclusion that the worker is not could have viewed this factor as not circumstances that may be considered favoring either side’’). In short, there is independently running a business.’’ under the economic reality test. NELP is correct that, when defined as 2. The Proposed Rule Would Not 52 The court in Hickley applied the economic such, ‘‘the factor of integration . . . in reality test in the context of the Age Discrimination Narrow the Standard for FLSA fact is the ultimate test,’’ but that factor in Employment Act of 1967, 29 U.S.C. 621–34, Employment would not be helpful in ascertaining a without opining whether that was the correct test A number of commenters argued that worker’s employment status because it under the ADEA. 699 F.2d at 752 (‘‘Finding . . . there was no evidence . . . that Hickey was an focusing the economic reality test on the simply restates the question. The employee under the more liberal ‘economic control and opportunity factors would Department, courts, and the regulated realities’ test used in FLSA cases, [but] express[ing] narrow the standard for employment community would still have to no opinion on whether it or one of the tests used in Title VII cases should ultimately be used to under the FLSA. The FLSA defines determine which factors to analyze to determine employee status in ADEA cases.’’). ‘‘employ’’ as including ‘‘to suffer or Hickley’s ‘‘specific and invariably applied weight’’ permit to work,’’ 29 U.S.C. 203(g), and 51 According to NELP, this language is a quotation dicta appears in one FLSA case, Parrish, 719 F.3d these commenters argued this definition from AI 2015–1 that was withdrawn in 2017. But at 380, as a see also parenthetical to support the that withdrawn guidance does not contain the proposition that economic reality factors should not should be interpreted to provide broad quoted language. be applied mechanically. coverage in light of the Act’s remedial

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purpose. See, e.g., AFL–CIO; NELA; Navarro, 138 S. Ct. 1134, 1142 (2018) that indicates employee status’’ (quoting NELP; Senator Patty Murray; State AGs. (Encino II) (warning against relying on Usery, 527 F.2d at 1311). And the State Most of these commenters argued that ‘‘flawed premise that the FLSA AGs explain that ‘‘[t]he ultimate the proposed rule is incompatible with ‘pursues’ its remedial purpose ‘at all concern is whether, as a matter of the Act’s broad definition of costs’’’ when interpreting the Act). economic reality, the workers depend employment because focusing on the Ultimately, ‘‘[t]he test of employment on someone else’s business . . . or are control factor would effectively adopt under the Act is one of ‘economic in business for themselves’’ (quoting the narrower scope of employment reality.’’’ Tony & Susan Alamo, 471 U.S. Superior Care, 840 F.2d at 1059). under the common law control test. One at 301 (quoting Whitaker House, 366 Most commenters who objected to commenter, however, had a different U.S. at 33)). This rule applies such a test focusing the economic reality test on the view: UPS argued that the proposed rule and does so with sufficient breadth two core factors were concerned that would adopt a narrower standard for consistent with the Act’s remedial such an approach would narrow FLSA employment by giving the control factor purpose. employment to the common law too little weight. While the phrase ‘‘economic reality’’ standard. For instance, NELA stated that Discussing the proposed rule’s is on its face no clearer than the ‘‘suffer ‘‘[b]y affording the control factor greater consistency with the FLSA’s standard or permit’’ language, see Lauritzen, 835 weight in the economic reality analysis, for employment first requires an F.2d at 1539 (Easterbrook J., the Department slides back toward the understanding of the Act’s definitions. concurring), decades of case law has common law agency test.’’ See, e.g., Commenters point out that the Act refined its meaning. The Court AFL–CIO (‘‘[T]he proposed rule defines ‘‘employ’’ as including ‘‘to determined that employees include effectively collapses the FLSA’s suffer or permit to work,’’ 29 U.S.C. ‘‘those who as a matter of economic definition into the common law 203(g), but the Supreme Court has reality are dependent upon the business definition by giving primacy and observed that, although broad, the Act’s to which they render service.’’ Bartels, controlling weight to the two factors of definitions are not clear regarding the 332 U.S. at 130. Courts of appeals have control and opportunity for profit and scope of relationships that are included. subsequently used Bartels’s concept of loss.’’). The implied logic behind this Rutherford Food, 331 U.S. at 728 economic dependence to determine concern is that if one test gives greater (‘‘[T]here is in the [FLSA’s text] no employment under the FLSA. See, e.g., weight to a factor that is also given definition that solves problems as to the Saleem, 854 F.3d at 139; Mr. W greater weight by a second test, the two limits of the employer-employee Fireworks, 814 F.2d at 1054; tests necessarily have an equal scope of relationship under the Act.’’). Courts of DialAmerica, 757 F.2d at 1385. Thus, employment. But that does not follow. appeals have likewise found the the courts have interpreted the scope of A comparison with the ABC test is definitions not to clearly indicate the employment under the Act’s definition illustrative. That test creates a precise contours of FLSA employment. to include any individual who is presumption of employee status, which See, e.g., Solis v. Laurelbrook ‘‘dependent upon finding employment can be overridden only if all three Sanitarium & Sch., Inc., 642 F.3d 518, in the business of others,’’ and to factors are established. One of the ABC 522 (6th Cir. 2011); Steelman v. Hirsch, exclude any individual who is ‘‘in test’s factors is ‘‘whether the worker is 473 F.3d 124, 128 (4th Cir. 2007). business for himself.’’ Scantland, 721 free from the control and direction of As commenters also noted, the F.3d at 1312.53 However, as noted in the the hiring entity.’’ This factor is given Supreme Court relied on the FLSA’s need for rulemaking discussion, this dispositive weight under certain purpose and legislative history to principle has not always been applied circumstances: If the worker is interpret the ‘‘suffer and permit’’ consistently. controlled by the hiring party, then he language to encompass a more inclusive The Department agrees with this or she is automatically an employee, definition of employment than that of interpretation and further believes that regardless of other considerations. The the common law. Rutherford Food, 331 the economic dependence standard common law control test also gives U.S. at 727 (affirming that FLSA developed by courts comports with the control dispositive weight. While both employment is not limited to the ‘‘suffer or permit’’ statutory text. As the tests afford control greater weight than ‘‘common law test of control, as the act NPRM explained: ‘‘An individual who the economic reality test, one test (ABC) concerns itself with the correction of depends on a potential employer for has a broader scope of employment than economic evils through remedies which work is an employee whom the the economic reality test and the other were unknown at common law’’); see employer suffers or permits to work. In (common law) has a narrower scope. also Darden, 503 U.S. at 326. The contrast, an independent contractor The relative weight attached to a Supreme Court has ‘‘consistently does not work at the sufferance or particular factor does not, by itself, construed the Act liberally in permission of an employer because, as determine whether the ultimate scope of recognition that broad coverage is a matter of economic reality, he or she employment is broad or narrow. essential to accomplish [its] goal,’’ Tony is in business for him- or herself.’’ 85 FR Accordingly, it is not possible to & Susan Alamo, 471 U.S. at 296, but at 60606 (citing Saleem, 854 F.3d at 139). compare the breadth of the standards for the same time, the Court also recognized Commenters generally agreed that employment used by two tests simply that the ‘‘suffer or permit’’ definition employee versus independent by comparing the weight attached to a ‘‘does have its limits.’’ Id. at 295; see contractor status under the FLSA is shared factor. Rather, it is necessary to also Portland Terminal, 330 U.S. at 152 determined by the worker’s economic consider how each test’s factors are (‘‘The definition ‘suffer or permit to dependence, and several of the above- actually applied. work’ was obviously not intended to mentioned commenters affirmatively Under the common law control test, stamp all persons as employees.’’). No supported this standard. For example, control is the ultimate inquiry: If an court has suggested that applying such NELA stated that ‘‘[i]t is dependence individual controls the work, then he or limits (including the limit that bona fide she would be an independent contractor independent contractors are not 53 Courts apply this economic dependence rather than an employee. However, such employees under the Act) cannot be standard for employment in the employee-versus- control by itself would be insufficient to independent contractor context, but use different reconciled with the Act’s remedial approaches in other contexts. See, e.g., Glatt v. Fox establish the worker as an independent purpose. Cf. Encino Motorcars, LLC v. Searchlight Pictures, 811 F.3d 528 (2d Cir. 2016). contractor under the Department’s rule.

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Other considerations, including the classified as an ‘independent contractor’ also be probative as part of the second core factor of opportunity for even when the common-law control circumstances of the whole activity’’). profit or loss, can outweigh the control factor indicated employee status.’’ The While all circumstances must be factor and result in a classification of potential for such an outcome implies considered, it does not follow that all employee status. That is precisely what that FLSA employment may be circumstances or categories of happened in Paragon Contractors, narrower than the common law circumstance, i.e., factors, must also be wherein the control and integral part standard in certain circumstances. ‘‘given equal weight.’’ See e.g., FTC factors weighed in favor of independent As an initial matter, UPS’s concern Commissioner Slaughter; Appleseed contractor classification but the court that the control factor may be Center. Assigning one factor less weight nonetheless held that the worker was an outweighed by other considerations than another does not restrict the employee because the remaining factors, even when it indicates employee status circumstances being considered because including opportunity for profit or loss, also applies to every prior articulation the very act of determining relative favored classification as an employee. of the economic reality test—indeed weight requires considering both See 884 F.3d at 1238. And even if the more so—because none of them gave the factors. individual both controls the work and control factor greater weight, much less As explained above, each factor has a meaningful opportunity for profit dispositive weight. The rule addresses should be analyzed in accordance with or loss, he or she still would not UPS’s concern because it explicitly its probative value to the ultimate necessarily be classified as an identifies control as a core factor that is inquiry of whether an individual is in independent contractor under the less likely to be outweighed by other business for him or her-self. To be sure, Department’s rule because other factors factors. More importantly, UPS’s the specific weight of the factors may outweigh those two core factors in concern could materialize only if the depends on specific circumstances. The rare cases. In short, because the ultimate control factor were balanced against control and opportunity factors are inquiry under the common law control other factors without regard for the nonetheless more probative than other test is the worker’s right to control the ultimate inquiry for FLSA employment. factors in determining whether an manner and means by which the work Courts have cautioned against such individual is in business for him- or is performed, such control by the ‘‘mechanical application’’ of the herself. As such, it is appropriate to worker disqualifies the worker from economic reality factors and have recognize, as the proposed rule does, being an employee under that test, but instead instructed that all factors should that these two more probative factors more is needed under the rule’s guide the analysis of whether the should typically carry greater weight articulation of the economic reality test individual is in business for him or than other factors. Doing so would not, because economic dependence is the herself or is dependent on others for as TRLA contends, ‘‘eliminate . . . any ultimate inquiry. Thus, the rule’s work. See, e.g., Saleem, 854 F.3d at 140. consideration of [other] factors that have standard for employment remains For these reasons, the Department does often been regarded as probative in the broader than the common law standard. not share UPS’s concern that not giving farm labor context.’’ The proposed rule Nor does the rule ‘‘slide[ ] back toward dispositive weight to the control factor explicitly permits other factors to the common law agency test,’’ as NELA results in a standard for employment outweigh the two core factors if the contends, or otherwise narrow the that is narrower than the common law.54 specific circumstances of the case— whether in the farm labor context or standard of employment under the 3. The Rulemaking Will Not Restrict the FLSA. As explained above, the standard another contexts—warrants such a Range of Considerations Within result. In order to determine whether for determining whether an individual Economic Reality Test the combined weight of the two core is an employee under the FLSA or an A number of commenters contend factors are outweighed or not by other independent contractor has always been that the proposed rule’s focus on the factors, it is necessary to consider both economic dependence. The two core two core factors is inconsistent with sets of factors. Nor would it make any factors are more probative than other case law requiring the ‘‘circumstances of ‘‘single factor determinative by itself.’’ factors regarding whether an individual the whole activity’’ to be considered as Hopkins, 545 F.3d at 343. Neither of the is in business for him- or herself, as part of the inquiry into economic core factors can be ‘‘determinative by opposed to being dependent on an dependence. State AGs (quoting itself’’ because there is a second core employer for work. Neither NELA nor Rutherford Food, 331 U.S. at 730); see factor against which each is balanced. likeminded commenters dispute this also, e.g., NELA (‘‘The economic reality Even when both core factors align, they specific claim. NELA further recognized inquiry therefore cannot be answered are not ‘‘controlling’’ because their that economic reality factors must be without ‘employ[ing] a totality-of-the- combined weight can still be ‘‘used to gauge the degree of circumstances approach.’ ’’ (quoting outweighed by other considerations. dependence.’’ If so, the test should focus Baker, 137 F.3d at 1441)); see also on core factors that are more probative 4. Other Comments Regarding the Focus Senator Patty Murray (‘‘No one test measures of dependence. Doing on the Two Core Factors factor is controlling, nor is the list otherwise would serve no purpose other exhaustive.’’); TRLA (same). PAM and Global Tranz requested that than to make regulations more The Department agrees with the Department create a ‘‘bright-line confusing, thereby reducing compliance commenters that the circumstances of test’’ that ‘‘would be limited to the two and driving up the transaction cost of a the whole activity should be considered ‘core factors’ already identified in the lawful business practice. as part of the economic reality inquiry. Proposed Rule: (1) the nature and degree UPS expressed the opposite concern See 85 FR 60621 (‘‘Other factors may of the individual’s control over the as NELA and likeminded commenters, work, and (2) the individual’s asserting that the proposed rule did not 54 In any event, courts have foreclosed UPS’s opportunity for profit or loss.’’ See also give enough weight to the control factor. requested remedy of giving the control factor Cetera Financial Group (CFG) (‘‘we According to UPS, treating control as a dispositive weight to determine employee status. believe it would be appropriate for the See, e.g., Silk, 331 U.S. at 716 (‘‘No one factor is factor to be balanced rather than giving controlling); Keller, 781 F.3d at 807 (‘‘No one factor Department to limit the criteria it dispositive weight ‘‘leaves open the is determinative.’’); Baker, 37 F.3d at 1440 (‘‘None employed in the economic dependence possibility that a worker could be of the factors alone is dispositive.’’). analysis to the two Core factors and

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eliminate the others’’). According to state that if the two core factors point invariable relative weight between the these commenters, a two-factor test towards the same classification, there is two core factors. would be even clearer and simpler than no need to consider any other factors. Several commenters requested that the proposal to focus the test on the two See e.g., NRF (‘‘if both of the core factors the Department revise § 795.105(c) to core factors, while still considering point in the same direction, then a court establish a rebuttable presumption of other factors. Other commenters may consider only those two factors and employee or independent contractor requested that the Department eliminate end the analysis without examining the status if both core factors indicate the one or more of the non-core factors three additional possible factors same classification. Such a presumption listed in § 795.105(d)(2) from the identified by DOL’’); SHRM (requesting would be rebuttable only by economic reality test because such revision ‘‘to ensure that if the Core ‘‘substantial evidence to the contrary factors have little to no probative value Factors indicate the same status of the under all three [other factors].’’ ATA. in some circumstance, and may worker, no further analysis is According to ATA, a rebuttable sometimes send misleading signals necessary’’). According to the SHRM, presumption ‘‘[w]ould further reduce regarding an individual’s classification. such an approach would ‘‘create clear the possibility of courts unnecessarily CWI and the National Restaurant expectations and stable grounds to build and potentially selectively applying and Association asked the Department to working relationships.’’ weighing the three additional factors for eliminate the skill required factor; The Department believes that the preferred policy outcomes, which has SHRM and the U.S. Chamber of economic reality test cannot be rigidly been a concern with regard to the Commerce were among several applied and concludes that its approach current test in some instances.’’ As the commenters who suggested that the of giving certain factors greater weight NPRM explained, the Department Department eliminate the permanence and other factors lesser weight while considered but did not propose a factor; and ATA, NDHA, and others retaining flexibility as to the degree of rebuttable presumption based on requested eliminating the integrated weight depending on the facts of the alignment of the two core factors unit factor. case best accounts for all of the because it was concerned a formal The Department believes that the two circumstances that work relationships presumption may be needlessly core factors of control and opportunity present. Commenters’ requests would complex or burdensome. See 85 FR are always probative as to whether an require the Department to state that the 60621. The Department further believes individual is in business for him- or combined probative value of the two that emphasizing the importance of the herself. The Department further agrees core factors—whatever that might be— two core factors provides sufficient with the above commenters that the always outweighs the combined clarity. As such, the Department other factors are less probative and may probative value of other factors. The declines to adopt a presumption-based have little to no probative value in some Department believes that will usually be framework. circumstances. See, e.g., Silk, 331 U.S. the case, but does not rule out the CWI requested that the ‘‘the Final at 718 (‘‘That the unloaders did not possibility that, in some circumstances, Rule spell out specifically that each of work regularly is not significant.’’). the core factors could be outweighed by the Core Factors should be analyzed However, ‘‘circumstances of the whole particularly probative facts related to independently of the other, without activity should be examined’’ as part of other factors. overlap.’’ The Department agrees with the economic reality test, meaning that Several commenters effectively CWI that overlaps between economic the other factors should be considered requested that the Department assign a reality factors, core or otherwise, should in all cases even if they are not always specific relative weight to one core be minimized. As discussed in the probative once considered. DialAmerica factor as compared to the other. CWI NPRM and in this preamble, reducing Mktg., Inc., 757 F.2d at 1382. If a factor requested that the Department always such overlap is one of the reasons for is probative in some situations but not weigh the two core factors equally, this rulemaking. That said, the in others, there is still a need to while the HR Policy Institute requested Department believes specific regulatory consider that factor to determine that the control factor always be given instructions against overlapping whether it is probative in a particular greater weight than the opportunity analysis of the two core factors is not case. Eliminating the non-core factors factor. The Department declines to necessary and may be confusing. The from consideration would therefore be implement both requests. The Department believes proposed warranted only if those factors lacked Department’s review of U.S. Courts of § 795.105(d)(1) articulates the two core probative value in all circumstances— Appeals cases since 1975 did not factors without apparent overlap, and that is, if there was never a need to even indicate that the control and CWI does not identity any specific consider whether they had probative opportunity factors should be weighed considerations that risk being analyzed value. equally. Nor did that review indicate under both factors. Language in the Because non-core factors are probative that the control factor should always regulatory text warning against in many circumstances, the Department outweigh the opportunity factor. Indeed, overlapping analysis may therefore believes it would be inappropriate to in the few cases reviewed by the confuse members of the regulated eliminate them. In response to Department where the control and community by priming them to look for commenters’ concern that non-core opportunity factors pointed towards potential overlapping considerations factors may not always be probative, the different classifications, the ultimate when there are none. The Department Department is making non-substantive classification aligned with the therefore declines to add CWI’s revisions to clarify that the two core opportunity for factor. See 85 FR 60619 requested language. factors are always probative as to (citing Paragon Contractors, 884 F.3d at In summary, the economic reality test whether an individual is in business for 1235–36, and Cromwell, 348 F. App’x at examines the circumstances of the him- or herself, but there may be 61). Ultimately, the Department is whole activity to determine whether an circumstances where one or more of the confident in its conclusion that the two individual is in business for him- or non-core factors, upon consideration, core factors are more probative than all herself, as opposed to being has little or no probative value. other factors and that framework is economically deponent on others for Several commenters requested that logical, as described above. But the work. Not all facts or factors are equally the Department revise § 795.105(c) to Department declines to assign an probative (if they are probative at all) as

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to whether, as a matter of economic whether a significant segment of the owner operator a route both find reality, an individual is in business for industry has traditionally treated similar beneficial in order to ensure that the him- or herself. Treating them all as workers as independent contractors or independent owner operator performs equal would not focus the inquiry on employees.’’ services for other motor carriers.’’). economic dependence, but rather would No worker advocacy organizations Others asserted that considering distort that analysis. In contrast, specifically commented in support of voluntary worker practices would lead highlighting factors that are more the provision, but several groups, to classification discrepancies between probative would sharpen the test’s focus including NELA, the Pacific Northwest workers with similar contractual on economic dependence. Regional Council of Carpenters, and the freedoms. See NRF; SHRM. The NPRM presented reasoning and Public Justice Center, quoted Judge Some business commenters were evidence based on the Department’s Frank Easterbrook’s observation from flatly opposed to proposed § 795.110. review of case law indicating that Lauritzen, 835 F.2d at 1545, that ‘‘[t]he SHRM wrote that ‘‘[a] focus on ‘practice’ control and opportunity factors are more FLSA is designed to defeat rather than as opposed to the contractual ‘rights,’ of probative to whether an individual is in implement contractual arrangements.’’ the parties . . . unnecessarily de- business for him- or herself, as opposed The International Brotherhood of emphasizes voluntariness of the to being economically dependent. While Teamsters similarly asserted that contract itself and places ambiguity over not all commenters agree with this Congress ‘‘chose to define ‘employment’ parties’ negotiations.’’ The Customized approach, commenters who object to it in a manner that would allow the Act Logistics and Delivery Association have not convinced the Department to to be applied flexibly so that employers objected that worker classifications change its original assessment. The could not simply recalibrate their could turn on voluntary worker Department therefore believes that it is contractual arrangements with workers practices that a business may not know appropriate to focus the economic to evade coverage.’’ Finally, NELP and about (e.g., whether particular workers reality test on the two core factors that 32 other organizations quoted Judge perform labor for other companies), are more probative to the test’s ultimate Learned Hand’s observation from Lehigh asserting that proposed § 795.110 inquiry. Such focus appropriately Valley Coal Co. v. Yensavage, 218 F. ‘‘essentially shift[s] the burden of proof guides how factors should be balanced, 547 (2d Cir. 1914), cert. denied, 235 U.S. to the alleged employer to establish a while retaining flexibility in the test. 705 (1915), that employment statutes worker’s status as an IC’’ and ‘‘could from the early 20th century were force mass reclassifications of ICs for F. Proposed Guidance Regarding the intended to ‘‘upset the freedom of motor carriers, and many other Primacy of Actual Practice contract’’ between workers and industries.’’ Proposed § 795.110 stated that the businesses. Id. at 553. Finally, several commenters actual practice of the parties involved— Some business commenters expressed representing workers, as well as Senator both of the worker (or workers) at issue general support for proposed § 795.110, Patty Murray and the State AGs, voiced and of the potential employer—is more but requested edits to discount the opposition to proposed § 795.110 on the relevant than what may be contractually relevance of voluntary choices on the basis that emphasizing the primacy of or theoretically possible. The proposed part of an individual worker that an alleged employer’s practices would rule explained that this principle is implicate one or more of the economic establish an employee classification derived from the Supreme Court’s reality factors described in proposed standard impermissibly narrower than holding that ‘‘ ‘economic reality’ rather § 795.105(d), such as choosing to work the common law, which evaluates an than ‘technical concepts’ is to be the test exclusively for one business, accepting alleged employer’s ‘‘right to control.’’ 55 of employment’’ under the FLSA. all available work assignments from the In this regard, the State AGs compared Whitaker House, 366 U.S. at 33; see also business, or declining to negotiate proposed § 795.110 to the Department’s Tony & Susan Alamo, 471 U.S. at 301 prices. See, e.g., American Bakers interpretation in its recent Joint (‘‘The test of employment under the Association; ATA; New Jersey Employer final rule that ‘‘[a] potential [FLSA] is one of ‘economic reality’ ’’ Warehousemen & Movers Association joint employer must actually exercise— (citing Whitaker House, 366 U.S. at 33)). (NJWMA); NRF; Private Care directly or indirectly—one or more . . . Several commenters expressed Association; Scopelitis, Garvin, Light, indicia of control to be jointly liable’’ support for proposed § 795.110. For Hanson & Feary; U.S. Chamber of (85 FR 2859). Winebrake & Santillo, LLC example, ATA wrote that ‘‘[t]he general Commerce (‘‘[T]he Chamber urges the asserted that proposed § 795.110 principle also is almost black letter Department clarify that so long as a conflicts with a statement from a recent law—substance is always more business does not take actions to Third Circuit opinion that ‘‘actual important than form—under virtually foreclose an individual from exercising control of the manner of work is not every regulation WHD enforces.’’ The certain rights, that the individual’s essential; rather, it is the right to control Center for Workplace Compliance choice to not exercise those rights does which is determinative,’’ Razak, 951 described the language as ‘‘consistent not diminish their indicia of F.3d at 145, while Edward. Tuddenham with historical interpretation of the independence in the relationship.’’). commented that ‘‘[a]ll of the cases [the economic reality test by Federal courts Some of these commenters asserted that Department cited in its NPRM] to and DOL.’’ Other commenters allowing voluntary worker practices to support the primacy of ‘actual practice’ complimented the proposal with little influence classification outcomes would are referring to the actual practices of or no further explanation, see NHDA; lead to costly and inefficient business workers and are not discussing analysis New Jersey Civil Justice Institute; WPI, decisions. See Dart Transit Company of employer controls.’’ In rejecting the while HR Policy Association urged the (‘‘[T]he practical effect of [proposed proposed rule’s distinction between a final rule to go further by entirely § 795.110] is to require independent potential employer’s contractual disregarding the relevance of contractors to arbitrarily switch routes unexercised contractual or theoretical and carriers . . . simply in order to 55 Restatement (Second) of Agency § 2(3); see also possibilities. WFCA supported proposed preserve their independent status’’); Commun. for Non-Violence v. Reid, 490 U.S. 730, 751 (1989) (describing ‘‘the hiring party’s right to § 795.110, but asked the Department to Minnesota Trucking Association (‘‘In control the manner and means by which the elaborate in the final rule that ‘‘best effect, the motor carrier would have to product is accomplished’’ as the overarching focus indicator of the actual practices is restrict offering to the independent of the common law standard).

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authority to control workers and control contract terms. The controlling It is true that, under the economic that they actually exercise, Senator economic realities are reflected by the reality test, some workers subject to a Murray asserted that contractual way one actually acts.’’ (citations potential employer’s ‘‘right to control’’ authority ‘‘provides a potential omitted)). Moreover, as some may nevertheless qualify as bona fide employer an incredible amount of de commenters pointed out, prioritizing independent contractors for other facto control over a worker . . . substance over form is consistent with reasons. To the extent that this excludes induc[ing] a worker to perform the work the Department’s general interpretation some workers who might qualify as in the manner the employer prefers, and enforcement of the FLSA. See, e.g., ‘‘employees’’ under a traditional suggests, recommends, or hints at, even 29 CFR 541.2 (‘‘A job title alone is common law test,59 this is the logical if the employer does not ever command insufficient to establish the exempt outcome of a multifactor test where ‘‘no it.’’ See also State AGs (‘‘[R]eserved status of an employee.’’); 29 CFR one [factor] is controlling.’’ Silk, 331 authority in an agreement, like the 541.603(a) (providing that employers U.S. at 716; see also, e.g., Selker Bros., looming sword of Damocles, will often violate the salary basis requirement for 949 F.2d at 1293 (‘‘It is a well- influence what the parties do[.]’’). certain employees exempt under Sec. established principle that . . . neither The Department has carefully 13(a)(1) of the Act only when they the presence nor the absence of any considered the views and arguments demonstrate ‘‘an actual practice of particular factor is dispositive.’’). expressed by commenters and decided making improper deductions’’); 58 29 Moreover, the Supreme Court arrived at to implement § 795.110 as proposed. As CFR 778.414 (‘‘[W]hether a contract precisely this outcome in two of its emphasized in the NPRM, and as the which purports to qualify an employee seminal cases applying the economic plain language of § 795.110 makes clear, for exemption under section 7(f) meets reality test. unexercised powers, rights, and the requirements . . . will in all cases First, in Silk, the Court evaluated the freedoms are not irrelevant in depend not merely on the wording of employment status of owner-operator determining the employment status of the contract but upon the actual practice truck drivers who contracted to perform workers under the economic reality of the parties thereunder.’’). services exclusively for a motor carrier 56 test; such possibilities are merely less The Department disagrees with company, subject to a ‘‘manual of relevant than powers, rights, and commenters who assert that prioritizing instructions . . . purport[ing] to freedoms which are actually exercised regulate in detail the conduct of the 57 the actual practice of the parties under the economic reality test. involved makes the economic reality truckmen in the performance of their Affording equal relevance to reserved test impermissibly narrower than the duties.’’ 331 U.S. at 709–710. Before control and control that is actually reaching its own conclusion, the Court common law control test. In many exercised—by either party—would excerpted an analysis from the appellate instances, the actual practices of the ignore the Supreme Court’s command to court below noting that, ‘‘[w]hile many parties will establish the existence of an focus on the ‘‘reality’’ of the work provisions of the manual, if strictly employment relationship despite what a arrangement, Silk, 331 U.S. at 713, enforced, would go far to establish an ‘‘skillfully devised’’ contract might which places a greater importance on employer-employee relationship suggest on paper. Silk, 331 U.S. at 715; what actually happens than what a between the Company and its truckmen see, e.g., Scantland, 721 F.3d at 1313– contract suggests may happen. Several . . . there was evidence to justify the 14 (‘‘Though plaintiffs’ ‘Independent Federal courts of appeals decisions have [district] court’s disregarding of it,’’ Contractor Service Agreements’ explicitly made this observation. See, including testimony that the manual e.g., Saleem, 854 F.3d at 142 provided that they could ‘decline any was ‘‘impractical and was not adhered (‘‘[P]ursuant to the economic reality test, work assignments,’ plaintiffs testified to.’’ Id. at 716 n.11 (quoting Greyvan it is not what [Plaintiffs] could have that they could not reject a route or a Lines v. Harrison, 156 F.2d 412, 415 (7th done that counts, but as a matter of work order within their route without Cir. 1946)). Although the Court economic reality what they actually do threat of termination or being refused acknowledged ‘‘cases . . . where driver- that is dispositive.’’) (citations omitted); work in the following days.’’); Hobbs, owners of trucks or wagons have been Parrish, 917 F.3d at 387 (‘‘The analysis 946 F.3d at 833 (dismissing the fact that held employees in accident suits at tort’’ is focused on economic reality, not welders determined to be employees (under the common law), the Court said economic hypotheticals.’’); Scantland, ‘‘could hypothetically negotiate their it ‘‘agree[d] with the decisions below’’ 721 F.3d at 1311 (‘‘It is not significant rate of pay’’). In any event, because the that the owner-operator truck drivers how one ‘could have’ acted under the ultimate inquiry of the economic reality were independent contractors, as ‘‘the test is ‘‘economic dependence,’’ the test total situation, including . . . the 56 Entirely disregarding unexercised contractual ensures coverage over more workers in control exercised . . . marks these rights and authorities would not be consistent with the aggregate than the common law driver-owners as independent the Supreme Court’s instruction in Rutherford Food control test, notwithstanding its more contractors.’’ Id. at 718–19 (emphasis to evaluate ‘‘the circumstances of the whole nuanced interpretation of the control activity.’’ 331 U.S. at 730; see also Mid-Atl. added). Installation, 16 F. App’x at 107 (determining that factor itself. See Silk, 331 U.S. at 716 The Court in Bartels, even more cable installers were independent contractors in (listing ‘‘degrees of control’’ as one of clearly illustrated of how the economic part because they had a ‘‘right to employ [their several non-dispositive factors in the own] workers’’); Keller, 781 F.3d at 813 (citing as reality test’s emphasis on actual practice relevant ‘‘the fact that Miri never explicitly economic reality test) (emphasis added). may indicate independent contractor. prohibited Keller from performing installation There, the Court found that band services for other companies’’ and finding ‘‘a 58 In a 2004 final rule amending this language, the members were not employees of a material dispute as to whether Keller could have Department rejected commenter arguments that the increased his profitability had he improved his mere existence of a policy permitting improper public dance hall that hired them for efficiency or requested more assignments’’). deductions should disqualify an employer from 57 In this respect, § 795.110’s emphasis on actual claiming the Section 13(a)(1) exemption for salaried 59 See Commun. for Non-Violence v. Reid, 490 practice differs from the treatment of control in the employees whose earnings and job duties otherwise U.S. 730, 751 (1989) (‘‘In determining whether a Department’s partially invalidated Joint Employer qualify for exemption. ‘‘[Such an] approach . . . hired party is an employee under the general rule, which provided that ‘‘[a] potential joint would provide a windfall to employees who have common law of agency, we consider the hiring employer must actually exercise—directly or not even arguably been harmed by a ‘policy’ that party’s right to control the manner and means by indirectly—one or more . . . indicia of control to a manager has never applied and may never intend which the product is accomplished.’’) (emphasis be jointly liable.’’ 85 FR 2859 (emphasis added). to apply[.]’’ 69 FR 22122, 22180. added).

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short-term gigs, despite a contract defendant] scheduled [the worker’s] distinction, though important, is not provision stipulating that the dance hall installation appointments made it controlling. It is the total situation . . . ‘‘shall at all times have complete control impossible for [the worker] to provide that marks these driver-owners as of the services which the [band installation services for other independent contractors.’’). members] will render under the companies.’’). To be sure, the In summary, finalized § 795.110’s specifications of this contract.’’ 332 U.S. Department agrees that coercive emphasis on the actual practices of the at 128. Again applying the economic behavior by a potential employer (e.g., parties involved is not a one-way reality test, the Court noted that a vigilant enforcement of a non-compete ratchet, applying selectively either for or worker’s employment status ‘‘was not to clause, punishing workers for turning against a finding of independent be determined solely by the idea of down available work, etc.) constitutes contractor status. Instead, as the control which an alleged employer may stronger evidence of employment status examples in § 795.110 illustrate, the or could exercise over the details of the than voluntary worker practices (e.g., principle applies to every potentially service rendered to his business by the the mere existence of an exclusive work relevant factor, and can weigh in favor worker or workers.’’ Id. at 130 arrangement, the fact that a worker of either an employee or independent (emphasis added). While the Court rarely turn down available work, etc.), contractor relationship. In some cases, made clear that other economic reality but coercive action on the part of the the actual practice of the parties factors (e.g., skill, permanence, profit) potential employer is not a prerequisite involved may suggest that the worker or indicated that the band members were for such worker practices to have workers are employees. See, e.g., independent contractors, id. at 132, the import. Sureway Cleaners, 656 F.2d at 1371 (‘‘[T]he fact that Sureway’s ‘agents’ Court implicitly found that the control The Department believes that possess, in theory, the power to set factor did as well, noting that it was the commenters’ concerns that proposed prices, determine their own hours, and band leader (and not the dance hall) § 795.110 will cause workers with advertise to a limited extent on their which ‘‘organizes and trains the band similar contractual freedoms to be own is overshadowed by the fact that in . . . [and] selects [its] members.’’ Id. at classified differently are overstated. reality the ‘agents’ work the same hours, 132. In other words, notwithstanding Consistent with evaluating the ‘‘the charge the same prices, and rely in the the dance hall’s contractual authority to circumstances of the whole activity’’ in main on Sureway for advertising.’’); ‘‘complete[ly] control’’ the band a work arrangement, Rutherford Food, members, the actual practice of the DialAmerica, 757 F.2d at 1387 331 U.S. at 730, courts have often (concluding that evidence showing parties made clear that the band considered the rights and practices of members themselves controlled the workers were not doing similar work for similarly situated workers affiliated any other businesses ‘‘although they work, as a matter of economic reality. with a particular business, arriving at a Contrary to the argument put forth by were free to do so’’ indicates employee single classification outcome for the several worker advocacy commenters, status). In other cases, it may suggest group of workers at issue. See, e.g., the outcome and reasoning of the that the worker or workers at issue are Freund, 185 F. App’x. at 784 (finding Supreme Court’s decisions in Silk and independent contractors. See Saleem, independent contractor status in part Bartels show that the common law 854 F.3d at 143 (concluding that black- because ‘‘although Freund did not hire control test does not establish an car drivers were independent any workers, other of Hi-Tech’s irreducible baseline of worker coverage contractors in part because ‘‘many installers did’’); Express Sixty-Minutes for the broader economic reality test Plaintiffs . . . picked up passengers via Delivery, 161 F.3d at 305 (finding applied under the FLSA. In other words, street hail, despite TLC’s (apparently independent contractor status in part while the economic reality test is broad under-enforced) prohibition of this because ‘‘[t]he majority of drivers work in the sense that it covers more workers practice’’); see also Silk, 331 U.S. at for Express for a short period of time’’); as a general matter, it does not 718–19; Bartels, 332 U.S. at 129. Section cf. Mr. W Fireworks, 814 F.2d at 1048– necessarily include every worker 795.110’s focus on actual practice is a 51 (finding employee status in part considered an employee under the neutral interpretive principle, consistent because ‘‘the overwhelming majority of common law. with the way courts and the Department operators did not engage in independent At the same time, the Department have long applied the FLSA’s economic advertising’’ and ‘‘the vast majority of disagrees with the interpretation reality test. Accordingly, and contrary to operators made only minor investments suggested by various business the concerns expressed by some in the business’’). Even where commenters that only worker practices commenters, it should not disrupt meaningful factual differences exist which are affirmatively coerced by a specific industries or result in between workers, courts may separate potential employer may indicate substantial worker reclassifications in them into multiple groups for separate employee status. Such a reading either direction (i.e., from employee to collective analyses instead of making conflicts with the definition of independent contractor status, or vice individualized determinations. See, e.g., ‘‘employ’’ in section 3(g) of the Act, versa). Off Duty Police, 915 F.3d at 1055–1062 which makes clear that the FLSA was (separate collective analyses of ‘‘sworn G. Other Comments intended to cover employers who officers’’ and ‘‘nonsworn officers’’ who Many substantive comments were not passively ‘‘suffer or permit’’ work from provide security and traffic control directed towards a specific provision of individuals.60 Accordingly, courts services); DialAmerica, 757 F.2d at the proposed rule but rather the rule as applying the economic reality test have 1383–88 (separate collective analyses of a whole. These comments addressed the not hesitated to consider voluntary home researchers and distributors). following topics: (1) Whether the worker practices where such practices Judicial application of the economic proposed rule would create confusion or indicate economic dependence. See reality test to groups of workers has clarity for the regulated community; (2) Keller, 781 F.3d at 814 (‘‘[A] reasonable shown that classification outcomes whether the proposed rule would jury could find that the way that [the cannot turn on one factor alone. See, exacerbate or ameliorate 60 29 U.S.C. 203(g). See also 83 C.J.S. Suffer e.g., Silk, 331 U.S. at 719 (‘‘In one misclassification of employees; (3) (1953) (‘‘[T]o suffer work requires no affirmative act instance they haul for a single business, whether the rule is consistent with the by a putative employer.’’). in the other for any customer. The FLSA’s purpose; (4) whether

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Congressional inaction prohibits this define ‘an integrated unit of the misclassification of employees as rulemaking; and (5) whether the production.’ ’’ independent contractors. See, e.g., Equal Department may depart from its prior The Department continues to believe Justice Center; Employee Rights Center; practice. that the rule will improve clarity NELP; State AGs; TRLA. According to because it clarifies the meaning of these commenters, the proposed rule 1. Whether the Rulemaking Will Create economic dependence, which would make it easier for an Confusion or Clarity determines FLSA employment, and unscrupulous employer to classify its Commenters from the business and aligns the economic reality test to more employees as independent contractors, freelance community generally accurately analyze that concept by, and they cite statistics that purport to expressed the view that the proposed among other things, highlighting the show high rates of misclassification in rule would improve clarity regarding two core factors that are most probative support of that contention. Several other which workers are independent to the inquiry. The rule does not depart commenters took the opposite position contractors versus employees under the from the statutory text, which courts and asserted, for example, that FLSA. For example, the U.S. Chamber of have interpreted to define FLSA ‘‘[c]larifying the application of the test Commerce stated that ‘‘[t]he Proposed employment based on the concept of for independent contractor status will Rule would provide long-awaited and economic dependence on which this promote compliance with labor much needed structure and clarity to rule focuses. Nor does the rule depart standards under the FLSA and, in turn, the evaluation of worker relationships from any Supreme Court precedent reduce worker misclassification.’’ under the Act.’’ SHRM agreed that because it continues to consider the Opportunity Solutions Project (OSP); ‘‘[t]he Proposed Rule is necessary to circumstances of the activity as a whole see also, e.g., TCA (‘‘[t]he increased provide certainty and consistency to to analyze whether workers, as a matter clarity provided by the [proposed rule] businesses and workers.’’ See also CWI; of economic reality, depend on another would likely lead to reduced WPI; ATA; NRF; National Restaurant business for work, or are in business for misclassification.’’); IAW (‘‘This rule Association. Freelancers and groups that themselves. The Department further will clear up misclassifications’’); represent them echoed this message, disagrees with the State AGs that the Financial Services Institute (‘‘we agree with the CPIE, for instance, stating that rule departs from the ‘‘established that it will reduce worker ‘‘[w]e believe the proposed guidance application of the economic reality misclassification and litigation’’). These would provide greater clarity and test.’’ The final rule takes into account commenters also presented reports that predictability in the application of the facts and factors that have historically dispute the widespread occurrence of ‘economic realities’ test to independent been part of the economic reality test, misclassification. See, e.g. CWI; U.S. entrepreneurs and their clients.’’ See and decades of appellate decisions Chamber of Commerce; WPI. indicating that the two core factors also Fight for Freelancers. Individual FLSA employee versus independent commenters who identified themselves frequently align with the ultimate determination of economic dependence contractor status is determined in terms as freelancers or small business owners or lack thereof. See 85 FR 60619–21. As of economic dependence. overwhelmingly agreed that the rule one comment stated, the rulemaking Misclassification occurs when an would improve legal clarity. For ‘‘synthesizes previous understandings of individual who is economically example, one individual commenter the independent contractor rule,’’ as dependent on a business is classified by who believed that ‘‘independent opposed to departing from them. See that business as an independent contracting . . . kept [her] family afloat Farren and Mitchell. contractor and treated as such. This can when [she] unexpectedly became a The Department does not believe this occur inadvertently because the single mom’’ stated that ‘‘[t]his final rule will cause confusion regarding business misunderstands the concept of proposed rule is simple to understand the labor exemption to antitrust laws economic dependence or incorrectly and provides necessary clarity for both because, as explained by FTC analyzes factors to assess the concept. It employers and individuals like myself Commissioner Slaughter, that can also occur intentionally. This final that want to engage in freelancing.’’ exemption is governed ‘‘[u]nder the rule clearly defines economic Another individual who identified Clayton Act and the Norris-La Guardia dependence and explains how to assess himself as a small business owner Act.’’ In contrast, this rule’s application facts and factors to evaluate whether believed that ‘‘[t]he regulations is limited to the FLSA, and therefore, that dependence exists. It discards proposed seem to provide clarity for would not affect the labor exemption to misleading and confusing determining an individual’s status as an antitrust laws established by other interpretations of that concept employee or independent contractor statutes. Finally, for reasons explained developed over the years and under the Fair Labor Standards Act.’’ in the NPRM and this preamble, the emphasizes the essential aspects. A Some government and union Department believes this rule’s clearer test means more businesses will commenters took the opposite view. The articulation of the ‘‘integrated unit’’ is better understand their obligations State AGs, for instance, asserted that clearer than the prior ‘‘integral part’’ under the FLSA and thereby ‘‘this rule will create confusion, not articulation. For added clarity, the inadvertently misclassify fewer workers. clarity’’ in part because they believe it Department added a pair of examples in As one commenter who identified ‘‘departs from the statutory text and § 795.115 to further illustrate himself as a small business owner Supreme Court precedent and is application of the ‘‘integrated unit’’ explained: ‘‘We want to comply [with contrary to established application of factor. the FLSA] but we need guidance that the economic reality test.’’ FTC For these reasons, the Department allows us to know how to comply.’’ A Commissioner Slaughter expressed believes the final rule will result in clearer test also means more workers concern that the proposed rule would greater clarity. will understand their rights under the ‘‘create legal confusion around the labor FLSA and thereby will be better exemption to the antitrust laws.’’ The 2. Whether the Rulemaking Exacerbates positioned to combat intentional AFL–CIO argued that ‘‘the proposal is or Ameliorates Misclassification misclassification through, for example, likely to increase rather than decrease Many commenters expressed concern private litigation or complaints to the confusion because it does not clearly that the proposed rule would exacerbate Department. Unscrupulous employers

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may also be deterred from intentional than economic dependence.61 economically dependent on an misclassification in the first place if Commenters that supported the employer for work have sacrificed workers better understand their legal proposed rule pointed that the FLSA is ‘‘freedom and talents to the use of rights. For these reasons, the not intended to cover all workers and profits of others,’’ and therefore are Department believes the final rule is that ‘‘Congress intended to cut off [the covered by the Act as employees. But likely to reduce both inadvertent and FLSA’s] coverage at a certain point to independent contractors use their intentional FLSA misclassification. preserve the freedom of workers to ‘‘freedom and talents’’ to operate their While several commenters asserted operate as independent contractors.’’ own businesses, and thus fall outside of that the proposed rule will facilitate Scalia School; see also WPI (‘‘Nothing in the FLSA’s coverage. See Saleem, 854 misclassification, the Department does the text or legislative history of any F.3d 131, 139–40 (2d Cir. 2017) (noting not agree. The Department’s final rule Federal employment law indicates that that independent contractors are makes clear that a business may classify Congress intended to supplant or separate from employees in the context a worker as an independent contractor displace independent work and require of the FLSA); Karlson, 860 F.3d 1089, with greater confidence if the worker instead for all workers to be 1092 (8th Cir. 2017) (‘‘FLSA wage and has control over key aspects of the work employees.’’). hour requirements do not apply to true and a meaningful opportunity for profit The Supreme Court has cautioned independent contractors.’’); Scantland, or loss based on initiative or investment. against the ‘‘flawed premise that the 721 F.3d at 1311 (‘‘[The Act’s] ‘broad’ Except in unusual cases, a worker who FLSA ‘pursues’ its remedial purpose ‘at definitions do not, however, bring enjoys substantial control over the work all costs’ ’’ when interpreting the Act. ‘independent contractors’ within the and has opportunity for profit in Encino, 138 S. Ct. at 1142. The Encino FLSA’s ambit.’’); Hopkins, 545 F.3d at abundant measures is, as a matter of II Court rejected the principle that 342 (observing that the ‘‘FLSA applies economic reality, in business for him- or FLSA’s remedial purpose required to employees but not to independent herself, and thus properly classified as exemptions to be narrowly construed, contractors’’). an independent contractor. The rule id, and courts of appeal have followed The Department believes the line thus makes it easier for a business and that logic to reject the corollary between economically dependent its workers to structure their work principle, articulated above by NELA, workers who are covered by the FLSA arrangements to create bona fide that the Act’s remedial purpose requires and independent contractors who are independent contractor relationships. its coverage to be construed broadly. See not comports with the Act’s purpose to But that effect of the final rule will help Sec’y United States Dep’t of Labor v. ‘‘protect all covered workers from avoid misclassification, not encourage Bristol Excavating, Inc., 935 F.3d 122, substandard wages and oppressive it. 135 (3d Cir. 2019) (rejecting broad working hours.’’ Barrentine, 450 U.S. at As discussed in greater detail in the reading of the FLSA based its remedial 739. Independent contractors who are in RIA at Section VI(D)(6), the Department purpose); Diaz v. Longcore, 751 F. business for themselves do not need has concerns regarding the reliability of App’x 755, 758 (6th Cir. 2018) (same). protection against ‘‘oppressive working statistics cited by commenters regarding Rather, ‘‘ ‘a fair reading’ of the FLSA, hours’’ because they are not the prevalence of misclassification. neither narrow nor broad, is what is economically dependent on any Even assuming commenters’ statistics called for.’’ Bristol, 935 F.3d at 135 employer who could oppress them. Nor are accurate, however, they would (quoting Encino, 138 S. Ct. at 1142); do they need protection from merely estimate the current rate of Diaz, 751 F. App’x at 758 (‘‘We must ‘‘substandard wages’’ because they are misclassification rather than how that instead give the FLSA a ‘fair’ not economically dependent on an rate would change as a result of this interpretation.’’). employer that sets wages. Forcing rule. Insofar as the final rule will reduce ‘‘The principal congressional purpose workers who are in business of misclassification, these statistics make in enacting the Fair Labor Standards Act themselves into the FLSA’s coverage this rulemaking even more urgent. of 1938 was to protect all covered would not protect them, and would For the above reasons, the Department workers from substandard wages and instead unduly restrict their ability to believes this rule will ameliorate rather oppressive working hours.’’ Barrentine operate their own businesses. Indeed, than exacerbate misclassification of v. Arkansas-Best Freight Sys., Inc., 450 numerous individuals who identified as employees under the FLSA. U.S. 728, 739 (1981) (emphasis added). freelancers or independent contractors 3. Whether the Rulemaking Is The Supreme Court, however, has long commented that being classified as an Consistent With the FLSA’s Remedial recognized held that the FLSA ‘‘was employee would undermine their ability to operate their own business. For Purpose obviously not intended to stamp all persons as employees.’’ Portland example, one freelance translator A number of commenters asserted Terminal Co., 330 U.S. at 152. As the lamented that ‘‘many of my clients that this rule ‘‘conflicts with the FLSA’s State AGs stated, the ‘‘the FLSA must be became unwilling to work with me’’ remedial purposes of protecting interpreted with its ‘remedial and when a state law required her to be workers.’’ State AGs; see also, e.g., humanitarian purpose . . . purpose’ in classified as clients’ employee. Another Pacific Northwest Council of Carpenters mind to protect ‘those who sacrifices a commenter identified himself ‘‘[a]s a (‘‘the Proposed Rule . . . is contrary to full measure of their freedom and self employed professional [who] do[es] the statutory definitions and remedial talents to the use and profit of others.’ ’’ NOT want to be forced into purpose of the FLSA’’). NELP, for State AGs (quoting Tenn. Coal, Iron. R. employment.’’ As a final illustrative instance, stated that ‘‘DOL’s proposed Co. v. Muscoda Local No. 123, 321 U.S. example, another commenter stated that test would leave behind workers in high 590, 598 (1944)). Workers who are ‘‘I have no desire to be an employee growth sectors with high rates of wage .... If I was required to be an theft, contrary to the purposes of the 61 NELA specifically urged the Department to employee, I would no longer be able to FLSA.’’ And NELA indicated that, adopt the ‘‘ABC’’ test to determine whether a make money for my family from my because ‘‘the FLSA is a remedial worker is an independent contractor or an home on my own schedule.’’ employee under the FLSA. The Regulatory statute’’ its coverage should be Alternative discussion at Section VI(G) provide The Supreme Court has explained construed liberally to adopt a standard further explanation why the Department is not that the FLSA’s ‘‘exemptions are as for employment that is even broader adopting that test. much a part of the FLSA’s purpose as

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the [Act’s] requirement[s].’’ Encino, 138 interpretive process.’’ Central Bank of should be analyzed when answering S. Ct. at 1134. By the same logic, Denver, N.A. v. First Interstate Bank of that ultimate inquiry. respecting the independence of workers Denver, N. A., 511 U.S. 164, 187 (1994). The Department acknowledges that whom the FLSA does not cover is as ‘‘And when . . . Congress has not the rule’s focus on two core factors that much a part of the Act’s purpose as comprehensively revised a statutory are most probative to that ultimate extending the Act’s coverage to workers scheme but has made only isolated inquiry is different from how the who need its protection. Denying FLSA amendments, [the Court has] spoken Department articulated the economic coverage to workers who are more bluntly: ‘It is impossible to assert reality test in the past. ‘‘Agencies are economically dependent on an with any degree of assurance that free to change their existing policies as employer for work would result in congressional failure to act represents long as they provide a reasoned workers loosing needed protection affirmative congressional approval of explanation for the change.’’ Encino ‘‘from substandard wages and the Court’s statutory interpretation.’ ’’ Motorcars, LLC v. Navarro, 136 S. Ct. oppressive working hours.’’ Barrentine, Alexander v. Sandoval, 532 U.S. 275, 2117, 2125 (2016). The Department has 450 U.S. at 739. But extending the Act’s 292, (2001) (quoting Patterson v. explained its reasoning for focusing the coverage to workers who, as a matter of McLean Credit Union, 491 U.S. 164, 175 economic reality test on two core factors economic reality, are in business for n.1 (1989)). Congress has not throughout the NPRM and this themselves would unduly restrict ‘‘comprehensively revised’’ the Act’s preamble. The Department further independent workers who neither need statutory scheme in a manner that acknowledges that the rule lists nor benefit from the Act’s provisions. would indicate Congressional approval economic reality factors in § 795.105(d) This rule sharpens the distinction of a judicially created six-factor test as that correspond with how the between these two categories of worker the standard for FLSA employment. Department has articulated those factors and thereby furthers the Act’s purpose Even if some insight could be gleaned in the past, with a few modifications. to protect employee who need from Congressional inaction, that The Department explained its reasons protection without burdening insight would not support ratifying a for these modifications in the NPRM independent contractors who do not. specific and definitive six-factor test and in this preamble. This rule does not because there has never been a uniform improperly depart from the 4. Whether Congressional Inaction test for Congress to ratify. The Supreme Department’s prior positions. Prohibits This Rulemaking Court has never articulated a six-factor H. Examples The American Federation of State, test, and courts of appeals articulate the County, and Municipal Employees, test differently. As discussed earlier, the As discussed above, many AFL–CIO (AFSCME) asserted that, Second Circuit combines two of the commenters requested that the ‘‘[b]ecause Congress has legislatively factors. The Fifth Circuit omits one regulatory text contain examples of how ratified the existing six-factor Economic factor, while the remaining circuits use the economic reality test would apply in Reality test, the Secretary and a sixth, ‘‘integral part’’ factor that the context of their specific industries or Administrator are powerless to alter the departs from the Supreme Court’s practices. The Department, however, standard. This also means the Proposed consideration of ‘‘integrated unit of prefers to adopt generally applicable Rule would fail the first step of the production.’’ Some circuits analyze a principles as opposed to attempting to Chevron deference analysis and would ‘‘skill and initiative’’ factor, while provide guidance for every potential be entitled to no deference by the others consider just ‘‘skill required.’’ scenario. The later approach would courts.’’ According to AFSCME, ‘‘when Some circuits analyze the investment require the regulation be drafted as an Congress re-enacts a statute without factor by comparing the dollar value of exhaustive treatise that is neither change, it is presumed to be aware of the worker’s investment against that of accessible nor helpful for most members administrative and judicial the hiring entity, while others analyze of the regulated community. It would interpretation of that statute and to have whether the worker’s investment creates also invariably omit many important adopted those interpretations.’’ Based opportunities for profit or loss. Simply types of circumstances and be more on this principle, AFSCME reasoned put, there is no single test that Congress difficult to adapt to future industries that, because Congress did not revise the could have impliedly ratified, nor did and practices that neither the definition of ‘‘employ’’ when it AFSCME suggest one. Department nor commenters could have amended the FLSA in 1966, it must For these reasons, Congress’s inaction conceived. have adopted the ‘‘integrated unit of does not demonstrate that it ratified a While the Department cannot provide production’’ factor articulated in specific six-factor economic reality test. examples for every conceivable Rutherford Food, 331. U.S. 730. scenario, it is adding § 795.115 to Additionally, AFSCME asserted that 5. Whether the Rulemaking Improperly provide six illustrative examples that Congress’s 1983 decision to adopt the Departs From Prior Practice involve a variety of industries and FLSA’s definition of ‘‘employ’’ without Several commenters, including NELA, specific facts. Due to the complexities of revision in MSPA indicates that contended that the proposed rule would balancing multiple factors that Congress implicitly adopted the ‘‘six- be an improper departure from the encompass countless facts that are part factor test [that] was well embedded as Department’s prior practice. The rule is of the totality of the circumstances, the the interpretation of the FLSA’s consistent with the Department’s prior Department does not believe it would be ‘employ.’ ’’ position that the ultimate inquiry for helpful to provide examples that make AFSCME’s ratification argument is determining employee versus conclusions regarding workers’ ultimate based entirely on the fact that Congress independent contractor status under the classifications. Rather, each illustrative has not amended the FLSA’s definition FLSA is whether an individual is, as a example focuses on the classification of ‘‘employ.’’ The Supreme Court, matter of economic reality, favored by a specific economic reality however, has ‘‘criticized . . . reliance economically dependent on another for factor within the context of the fact- on congressional inaction’’ as a tool of work or is instead in business for him- specific scenario. The first example statutory interpretation, cautioning that, or herself. The rule is further consistent concerns the control factor in the ‘‘[a]s a general matter . . . these with the Department’s longstanding context of the long-haul transportation arguments deserve little weight in the position that all economic reality factors industry. The second example concerns

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the opportunity factor in the context of those burdens. In the NPRM, the impose the least burden on society, the gig economy. The third example Department invited public comment on consistent with obtaining the regulatory concerns the opportunity factor in the its determination that the proposal did objectives; and that, in choosing among context of the construction industry and not contain a collection of information alternative regulatory approaches, the clarifies the concept of economic subject to OMB approval under the agency has selected those approaches dependence. The fourth example PRA. A few commenters, while not that maximize net benefits. Executive concerns the permanence factor within referencing the PRA directly, discussed Order 13563 recognizes that some costs the context of a seasonal hospitality records in their public comments. and benefits are difficult to quantify and industry. The fifth example concerns However, this was merely to note provides that, when appropriate and the reframed ‘‘integrated unit’’ factor agreement that section 11 of the FLSA permitted by law, agencies may within the context of the journalism does not require the keeping of records consider and discuss qualitatively industry. The sixth example also regarding workers who are independent values that are difficult or impossible to concerns the new ‘‘integrated unit’’ contractors. This final rule does not quantify, including equity, human factor within the context of the contain a collection of information dignity, fairness, and distributive journalism industry and is designed to subject to OMB approval under the impacts. work with the fifth example to elucidate PRA. B. Overview of Analysis the distinction between when this factor VI. Executive Order 12866, Regulatory favors classification as an employee The Department believes this rule is Planning and Review; and Executive versus independent contractor. likely to improve the welfare of both Order 13563, Improved Regulation and workers and businesses on the whole. I. Severability Regulatory Review With respect to businesses, the The Department proposed to include A. Introduction Department believes that the improved a severability provision in part 795 so clarity offered by the rule will increase Under Executive Order 12866, OMB’s that, if one or more of the provisions of the efficiency of the labor market, Office of Information and Regulatory part 795 is held invalid or stayed allowing businesses to be more Affairs determines whether a regulatory pending further agency action, the productive and decreasing their action is significant and, therefore, remaining provisions would remain litigation burden. With respect to subject to the requirements of the effective and operative. The Department workers, broadly speaking, this rule is Executive Order and OMB review.62 likely to have four categories of did not receive any comments on this Section 3(f) of Executive Order 12866 provision, and finalizes it as proposed. potential effects. defines a ‘‘significant regulatory action’’ First, this rulemaking makes it easier J. Amendments to Existing Regulatory as a regulatory action that is likely to for the millions of individuals who Provisions at §§ 780.330(b) and result in a rule that may: (1) Have an currently work as independent 788.16(a) annual effect on the economy of $100 contractors and those who hire them to Finally, in addition to the proposed million or more, or adversely affect in comply with the law. See Farren and addition of part 795, the Department a material way a sector of the economy, Mitchell (‘‘The proposed rule will likely proposed to amend existing regulatory productivity, competition, jobs, the reduce the cost of complying with the provisions addressing independent environment, public health or safety, or relevant Federal regulations.’’). contractor status under the FLSA in state, local or tribal governments or Compliance cost savings will be shared communities (also referred to as narrower contexts at 29 CFR 780.330(b) between the independent contractors economically significant); (2) create (tenants and sharecroppers) and 29 CFR and businesses for which they work. Id. serious inconsistency or otherwise 788.16(a) (certain forestry and logging (‘‘labor regulations are generally paid for interfere with an action taken or workers). Specifically, the Department by reductions in workers’ total planned by another agency; (3) proposed to replace descriptions of the compensation’’). materially alter the budgetary impact of six economic reality factors WHD has Second, as explained above, the legal entitlements, grants, user fees or loan historically used to evaluate clarity from this rule is likely to reduce programs or the rights and obligations of independent contractor status under the occurrences of misclassification by recipients thereof; or (4) raise novel FLSA with a cross-reference to the enabling firms and workers to better legal or policy issues arising out of legal understand their respective obligations guidance provided in new part 795. mandates, the President’s priorities, or While some commenters invoked the and rights under the FLSA. The the principles set forth in the Executive Department agrees with commenters existing provisions at §§ 780.330(b) and Order. Because the annual effect of this 788.16(a) to justify opposition to that misclassification harms workers rule is estimated to be greater than $100 and believes this rule will reduce those proposed part 795, the Department did million, this rule will be economically not receive any commenter feedback harms by facilitating compliance. significant under section 3(f) of Third, legal clarity may encourage regarding the proposed amendment of Executive Order 12866.63 these provisions. Accordingly, the firms to create independent contractor Executive Order 13563 directs arrangements for roles that did not Department finalizes amendments to agencies to, among other things, propose these provisions as proposed. previously exist, which may attract or adopt a regulation only upon a workers who otherwise would not work V. Paperwork Reduction Act reasoned determination that its benefits in that field. Such job creation The Paperwork Reduction Act of 1995 justify its costs; that it is tailored to unambiguously benefits workers and (PRA), 44 U.S.C. 3501 et seq., and its firms alike. See Dr. Liya Palagashvili 62 See 58 FR 51735 (Sept. 30, 1993). attendant regulations, 5 CFR part 1320, 63 The entirety of the estimated costs from this (‘‘[W]e got the impression from our require the Department to consider the deregulatory action, which exceed the $100 million interviews that the primary concern for agency’s need for its information threshold and relate strictly to familiarization, fall startups in terms of labor regulation or collections, their practical utility, the in the first year alone. The Department’s Regulatory policy is mostly with regulation of Impact Analysis further explains that these one-year impact of paperwork and other costs are more than offset by continuing annual independent contractors.’’), and Fuller information collection burdens imposed cost-savings of $495.8 million per year, accruing to et al. (‘‘[M]ore than two-thirds of on the public, and how to minimize the same parties that face the familiarization costs. [women with advanced degrees or high-

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honors BAs] who drop out of the categories of potential impacts. In workers for whom these assumptions workforce would not have done so if particular, the Department believes that may not apply is those workers paid the they’d had access to more-flexible job significant uncertainty surrounds any minimum wage, and whose positions arrangements.’’).64 attempt to quantify the number or already resemble characteristics of Fourth, as a result of the improved nature of new independent contractor independent contractors. Workers clarity of the rule, businesses might relationships that could arise as a result earning the minimum wage may lack convert existing positions from of this rule. Although the Department the bargaining power to fully offset the employee to independent contractor. assumes that there will be an increase adverse effects triggered by the job This rule provides the most legal in the number of independent conversion; however, independent certainty to employers classifying a contracting relationships, the contractor status often carries worker as an independent contractor if Department did not attempt to put a flexibilities that may further offset some the worker substantially controls the specific number on this figure and did of these effects, albeit non-monetarily. work and has a meaningful opportunity not attempt to estimate how new Further, on one hand, these workers for profit or loss based on initiative or independent contractors might differ likely do not have extensive benefits investment. As such, a job conversion from existing independent contractors. coverage, but on the other hand, they attributable to the legal clarity provided The Department is uncertain with may qualify for access to benefits from by this rule is likely to satisfy the respect to several key questions, other means. There are approximately control and opportunity criteria.65 including how many new workers will 370,000 workers over the age of 19 who Businesses could reclassify existing be added and what their characteristics earn the minimum wage, which employees as independent contractors will be, how many existing employee represents 0.24 percent of the by modifying their working relationship relationships may be converted to workforce. It is unclear how many of under the criteria of this rule, and independent contractor status, and these jobs could be converted to would only be expected to do so upon which industries, type or sizes of independent contractor status without determination that the clarity provided employers would be most impacted. material modifications to the position or by this rule materially shifts the balance Absent these data, the Department is not substantive negotiation on overall of tradeoffs. Business could also well positioned to generate a compensation, but it is not likely to be reclassify positions because the constructive estimate or model of many. Further, many of these workers increased clarity of the rule confirms impact on the change in independent may have access to health insurance that their workers are actually already contracting relationships due to the coverage via a spouse or partner, a effectively independent contractors rule. Notwithstanding, the Department parent, or a government program because their workers have substantial quantified certain other impacts (Medicaid, Medicare, Tricare, etc.). For control over the work and have an associated with the final rule, including these reasons, the Department does not 66 opportunity for profit. Any benefit to those to current independent expect there to be many current businesses of modified classifications contractors and businesses where employees whose positions are would need to outweigh the costs, sufficient data and theory afforded converted to independent contractor including any autonomy they cede to greater confidence in the resulting relationships without meaningful ability workers in such arrangements and any estimates. to influence the terms of the new costs associated with implementation or Regarding the employees who may be position in a way that mitigates modifying the classification itself, and negatively impacted by this rule, the deleterious impacts of the resulting such a relationship would need to be Department has ascertained certain tradeoffs. compatible with their business models. characteristics that it expects will be The Department estimates there were Further, generally speaking, workers representative across this group. This 10.6 million workers who worked at any have a choice of whether to agree to the rule provides a sharpening of the given time as independent contractors new independent contractor economic realities test, which is a as their primary jobs in the United arrangement. The overall effect of job marginal change that may impact firms’ States in 2017 (6.9 percent of all conversion on workers is ambiguous assessment of legal risk, leading to an workers), the most recent year of data and could vary from worker to worker, increased chance that some employers available. Including independent as discussed in more detail in section will choose to reclassify certain contracting on secondary jobs results in VI(D)(7) below. Impacts resulting from positions from employee to independent an estimate of 18.9 million independent litigation avoidance due to increased contractor relationships. Because this contractors (12.3 percent of all workers). clarity are discussed in section VI(F)(2). analysis attempts to quantify the The Department discusses other studies The Department did not attempt to marginal impacts of this rule, if the only estimating the total number of quantify all aspects of these four change is increased legal clarity, any independent contractors, ranging from resulting change in classification will 64 6.1 percent to 14.1 percent of workers Joseph B. Fuller, et al., Rethinking the On- most likely be limited to workers who Demand Workforce, Harvard Business Review (Oct. (see Table 2 in VI.C.2). Due to already possess characteristics 20, 2020). uncertainties regarding magnitude and 65 associated with independent contractor Section 795.105(c) indicates that a worker who other factors, the Department has not lacks both control and opportunity is most likely an status, including control and quantified the potential change to the employee. As such, the Department believes this opportunity for profit or loss.67 Due to aggregate number of independent rule would discourage employers from converting the customary negotiation between such workers from employee to independent contractors that may occur as a result of firms and workers, most workers whose contractor status. Section 795.105(c) would not give this rule. Furthermore, the Department’s an employer sufficient confidence that it could positions are converted will be in a analysis relies on data collected prior to change the classification of a worker who has only position to influence the tradeoffs 2020, which reflects the state of the control but not opportunity, or vice versa. between employee and independent 66 The Department notes that the final rule does economy prior to the COVID–19 contractor status. The one group of not, by its operation, change the classification of pandemic. The Department any employee. Notwithstanding the assertions of several commentators, as explained throughout the 67 For greater discussion on this and other points acknowledges that data on independent analysis, the rule does not narrow the definition of in this summary, please see Section XXXX on Job contractors could look different during who is an employee under the FLSA. Conversion. the pandemic and following its

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economic effects, but does not yet have clarity to be $447.1 million per year, and the total costs in $2016, discounted information to determine how the and cost savings due to reduced over a perpetual time horizon using a 7 number of independent contractors litigation to be $48.7 million per year. percent discount rate beginning in 2021 could change nor whether these changes This results in a 10-year annualized net when the rule will take effect. This would be lasting or a near term market cost savings of $452.4 million using a 3 results in an annualized net cost savings distortion.68 percent discount rate and $443.0 over a perpetual time horizon of $315.5 The Department estimates regulatory million using a 7 percent discount million.70 Other anticipated costs, 69 familiarization costs to be $370.9 rate. For purposes of Executive Order benefits, and cost savings are discussed million in the first year. The Department 13771, the Department calculated the qualitatively. estimates cost savings due to increased difference between the total cost savings

TABLE 1—SUMMARY OF RULE IMPACTS [$2019 Millions]

Annualized values a Impact Year 1 Years 2–10 7% Discount 3% Discount

Regulatory Familiarization Costs: Establishments ...... $152.3 $0.0 $21.7 $17.9 Independent Contractors ...... 218.6 0.0 31.1 25.6

Total ...... 370.9 0.0 52.8 43.5 Cost Savings from Increased Clarity: Employers ...... 369.0 369.0 369.0 369.0 Independent Contractors ...... 78.1 78.1 78.1 78.1

Total ...... 447.1 447.1 447.1 447.1 Cost Savings from Reduced Litigation ...... 48.7 48.7 48.7 48.7 Total Cost Savings...... 495.8 495.8 495.8 495.8 Net Cost Savings (Cost Savings—Costs) ...... 125.0 495.8 443.0 452.4 a Annualized over 10-years.

C. Independent Contractors: Size and the Current Population Survey (CPS) week. However, while the Department Demographics Contingent Worker Supplement (CWS) refers to the CWS measure of offers an appropriate lower bound for independent contractors throughout this The Department extrapolated from the number of independent contractors; analysis, due to the survey’s design it U.S. Census Bureau data to estimate that however, there are potential biases in should be uniformly recognized as there are 15.6 to 22.1 million these data that will be noted. representing a constrained subsection of individuals who work as independent Additionally, estimates from other the entire independent contractor pool. contractors as either a primary or sources will be presented to Due to its clear methodological secondary job. This estimated figure demonstrate the potential range. constraints, the CWS measure should be could be higher or lower depending on The U.S. Census Bureau conducts the differentiated from other, more different data sources and CPS and it is published monthly by the comprehensive measures. methodologies discussed below. The Bureau of Labor Statistics (BLS). The The BLS’s estimate of independent Department used the median of the sample includes approximately 60,000 contractors includes ‘‘[w]orkers who are above range, 18.9 million, for its households and is nationally identified as independent contractors, estimates to avoid overestimation by representative. Periodically since 1995, independent consultants, or freelance accounting for a number of criteria, and most recently in 2017, the CPS has workers, regardless of whether they are which are presented in this section. included a supplement to the May self-employed or wage and salary 1. Current Number of Independent survey to collect data on contingent and workers.’’ BLS asks two questions to Contractors alternative employment arrangements. identify independent contractors: 72 Based on the CWS, there were 10.6 • Workers reporting that they are self- The Department estimated the million independent contractors in employed are asked: ‘‘Are you self- number of independent contractors. 2017, amounting to 6.9 percent of employed as an independent contractor, There are a variety of estimates of the workers.71 The CWS measures those independent consultant, freelance number of independent contractors who say that their independent worker, or something else (such as a spanning a wide range depending on contractor job is their primary job and shop or restaurant owner)?’’ (9.0 million methodologies and how the population that they worked at the independent independent contractors.) We refer to is defined. The Department believes that contractor job in the survey’s reference these workers as ‘‘self-employed

68 Recent studies and news reports suggest that Employees become New Entrepreneurs, Wall Street 70 $332.9 million¥$17.4 million = $315.5 more individuals are working under freelance or Journal, Nov. 18, 2020; Uri Berliner, Jobs in the million. Per OMB guidelines, Executive Order independent contractor arrangements during the Pandemic: More Are Freelance and may stay that 13771 data is represented in 2016 dollars, inflation- pandemic. See, e.g., Press Release, New Upword way forever, NPR, Sep. 16, 2020; Jon Younger, A adjusted for when the rule will take effect. Study Finds 36% of the U.S. Workforce Freelance New Payoneer Report Shows Covid 19 is 71 Bureau of Labor Statistics, ‘‘Contingent and Amid the COVID–19 Pandemic, Sep. 15, 2020, Accelerating Freelance Growth, Forbes, Sep. 1., Alternative Employment Arrangements—May available at https://www.upwork.com/press/ 2020. 2017,’’ USDL–18–0942 (June 7, 2018), https:// releases/new-upwork-study-finds-36-of-the-us- www.bls.gov/news.release/pdf/conemp.pdf. 69 Discount rates are directed by OMB. See workforce-freelance-amid-the-covid-19-pandemic; 72 The variables used are PES8IC=1 for self- Kim Mackrael, In the Covid Economy, Laid-Off Circular A–4, OMB (Sept. 17, 2003). employed and PES7=1 for other workers.

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independent contractors’’ in the primary source of income.76 Applying 1099 work in 2016. The prevalence of remainder of the analysis. that estimate to the 10.6 million lower annual earnings implies that most • Workers reporting that they are independent contractors from the CWS workers who received a 1099 did not wage and salary workers are asked: results in an estimated 15.6 million work as an independent contractor ‘‘Last week, were you working as an independent contractors (10.6 million ÷ every week.80 independent contractor, an independent 0.68). The CWS also uses proxy responses, consultant, or a freelance worker? That The Coalition for Workforce which may underestimate the number of is, someone who obtains customers on Innovation (CWI) submitted a survey independent contractors. The RAND their own to provide a product or they conducted of 600 self-identified American Life Panel (ALP) survey service.’’ (1.6 million independent independent contractors. The survey conducted a supplement in 2015 to contractors.) We refer to these workers found that independent contracting is mimic the CWS questionnaire, but used as ‘‘other independent contractors’’ in the primary source of income for 71 self-responses only. The results of the 77 the remainder of the analysis. percent of respondents. This is survey were summarized by Katz and consistent with the prior estimate from 81 It is important to note that Krueger (2018). This survey found that Washington State. Applying this independent contractors are identified independent contractors comprise 7.2 estimate to the 10.6 million primary 82 in the CWS in the context of the percent of workers. Katz and Krueger independent contractors estimated from respondent’s ‘‘main’’ job (i.e., the job identified that the 0.5 percentage point 73 the CWS, results in 14.9 million difference in magnitude between the with the most hours). Therefore, the ÷ independent contractors (10.6 million CWS and the ALP was due to both estimate of independent contractors 0.71). does not include those who may be cyclical conditions, and the lack of The CWS’s large sample size results proxy responses in the ALP.83 defined as an employee for their in small sampling error. However, the primary job, but may work as an Therefore, the Department believes a questionnaire’s design may result in reasonable upper-bound on the independent contractor for a secondary some non-sampling error. For example, 74 potential bias due to the use of proxy or tertiary job. For example, Lim et al. one potential source of bias is that the (2019) estimate that independent responses in the CWS is 0.5 percentage CWS only considers independent 84 85 contracting work is the primary source points (7.2 versus 6.7). contractors during a single point in Another potential source of bias in the of income for 48 percent of independent time—the survey week (generally the contractors.75 Applying this estimate to CWS is that some respondents may not week prior to the interview). self-identify as independent contractors, the 10.6 million independent These numbers will thus and others who self-identify may contractors estimated from the CWS, underestimate the prevalence of themselves be improperly classified. results in 22.1 million independent independent contracting over a longer There are reasons to believe that some contractors (10.6 million ÷ 0.48). timeframe, which may better capture the workers, who are legally considered Alternatively, a survey of independent size of the population.78 For example, independent contractors, would not contractors in Washington found that 68 Farrell and Greig (2016) used a percent of respondents reported that randomized sample of 1 million Chase self-identify as such. For example, if the independent contract work was their customers to estimate prevalence of the worker has only one employer/client, or Online Platform Economy.79 They did not actively pursue the employer/ client, then they may not agree that they 73 While self-employed independent contractors found that ‘‘[a]lthough 1 percent of are identified by the worker’s main job, other adults earned income from the Online ‘‘[obtain] customers on their own to independent contractors answered yes to the CWS Platform Economy in a given month, provide a product or service.’’ question about working as an independent Additionally, individuals who do only contractor last week. Although the survey question more than 4 percent participated over does not ask explicitly about the respondent’s main the three-year period.’’ Additionally, 80 job, it follows questions asked in reference to the Collins et al. (2019) examined tax data B. Collins, A. Garin, E. Jackson, D. Koustas, and respondent’s main job. M. Payne, ‘‘Is Gig Work Replacing Traditional from 2000 through 2016 and found that Employment? Evidence from Two Decades of Tax 74 Even among independent contractors, failure to Returns,’’ IRS SOI Joint Statistical Research report multiple jobs in response to survey questions the number of workers who filed a form Program (2019) (unpublished paper), https:// is common. For example, Katz and Krueger (2019) 1099 grew substantially over that www.irs.gov/pub/irs-soi/ asked Amazon Mechanical Turk participants the period, and that fewer than half of these 19rpgigworkreplacingtraditionalemployment.pdf. CPS-style question ‘‘Last week did you have more workers earned more than $2,500 from 81 than one job or business, including part time, See Katz and Krueger (2018), supra note 12. evening or weekend work?’’ In total, 39 percent of 82 Id. at 49. The estimate is 9.6 percent without respondents responded affirmatively. However, 76 Washington Department of Commerce, correcting for overrepresentation of self-employed these participants were asked the follow-up ‘‘Independent Contractor Study,’’ p. 21 (Jul. 2019), workers or multiple job holders. Id. at 31. question ‘‘Did you work on any gigs, HITs or other https://deptofcommerce.app.box.com/v/ 83 Id. at Addendum (‘‘Reconciling the 2017 BLS small paid jobs last week that you did not include independent-contractor-study. Contingent Worker Survey’’). in your response to the previous question?’’ After 77 Coalition for Workforce Innovation. ‘‘National 84 Note that they estimate 6.7 percent of employed this question, which differs from the CPS, 61 Survey of 600 Self-Identified Independent workers are independent contractors using the percent of those who indicated that they did not Contractors’’ (January 2020), https:// CWS, as opposed to 6.9 percent as estimated by the hold multiple jobs on the CPS-style question rilastagemedia.blob.core.windows.net/rila-web/ BLS. This difference is attributable to changes to the acknowledged that they failed to report other work rila.web/media/media/pdfs/letters%20to%20hill/ sample to create consistency. in the previous week. As Katz and Krueger write, hr/cwi-report-final.pdf. 85 In addition to the use of proxy responses, this ‘‘If these workers are added to the multiple job 78 In any given week, the total number of difference is also due to cyclical conditions. The holders, the percent of workers who are multiple independent contractors would have been roughly impacts of these two are not disaggregated for job holders would almost double from 39 percent the same, but the identity of the individuals who independent contractors, but if we applied the to 77 percent.’’ See L. Katz and A. Krueger, do it for less than the full year would likely vary. relative sizes reported for all alternative work ‘‘Understanding Trends in Alternative Work Thus, the number of unique individuals who work arrangements, we would get 0.36 percentage point Arrangements in the United States,’’ RSF: The at some point in a year as independent contractors difference due to proxy responses. Additionally, it Russell Sage Foundation Journal of the Social would exceed the number of independent should be noted that this may not entirely be a bias. Sciences 5(5), p. 132–46 (2019). contractors who work within any one-week period It stems from differences in independent 75 K. Lim, A. Miller, M. Risch, and E. Wilking, as independent contractors. contracting reported by proxy respondents and ‘‘Independent Contractors in the U.S.: New Trends 79 D. Farrell and F. Greig, ‘‘Paychecks, Paydays, actual respondents. As Katz and Krueger explain, from 15 years of Administrative Tax Data,’’ and the Online Platform,’’ JPMorgan Chase Institute this difference may be due to a ‘‘mode’’ bias or Department of Treasury, p. 61 (Jul. 2019), https:// (2016), https://papers.ssrn.com/sol3/ proxy respondents may be less likely to be www.irs.gov/pub/irs-soi/19rpindcontractorinus.pdf. papers.cfm?abstract_id=2911293. independent contractors. Id. at Addendum p. 4.

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informal work may not view themselves proportions of workers who are Jackson et al. (2017) 92 and Lim et al. as independent contractors.86 This independent contractors on secondary (2019) 93 use tax information to estimate population could be substantial. or otherwise excluded jobs produces the prevalence of independent Abraham and Houseman (2019) estimates of 15.6 million and 22.1 contracting. In general, studies using tax confirmed this in their examination of million. The Department uses the data tend to show an increase in the Survey of Household Economics and average of these two estimates, 18.9 prevalence of independent contracting Decision-making. They found that 28 million, as the estimated total number of over time. The use of tax data has some percent of respondents reported doing workers working as independent advantages and disadvantages over informal work for money over the past contractors in any job at a given time. survey data. Advantages include large month.87 Conversely, some workers Given the prevalence of independent sample sizes, the ability to link who are improperly classified by their contractors who work sporadically and information reported on different employers as independent contractors earn minimal income, adjusting the records, the reduction in certain biases may answer in the affirmative, despite estimate according to these sources such as reporting bias, records of all not truly being independent contractors. captures some of this population. It is activity throughout the calendar year The prevalence of misclassification is likely that this figure is still an (the CWS only references one week), unknown, but it likely occurs across underestimate of the true independent and inclusion of both primary and numerous sectors in the economy.88 contractor pool. secondary independent contractors. Because reliable data on the potential 2. Range of Estimates in the Literature Disadvantages are that independent magnitude of these biases are contractor status needs to be inferred; unavailable, and so the net direction of To further consider the range of the biases is unknown, the Department estimates available, the Department there is likely an underreporting bias has not attempted to calculate how conducted a literature review, the (i.e., some workers do not file taxes); these biases may impact the estimated findings of which are presented in Table researchers are generally trying to match number of independent contractors. 2. Other studies were also considered the IRS definition of independent Because the CWS estimate represents but are excluded from this table because contractor, which does not mirror the only the number of workers who the study populations were broader than scope of independent contractors under worked as independent contractors on just independent contractors or limited the FLSA; and the estimates include their primary job during the survey to one state.89 The RAND ALP 90 and the misclassified independent contractors.94 reference week, the Department applied General Social Survey’s (GSS’s) Quality A major disadvantage of using tax data the research literature and adjusted this of Worklife (QWL) 91 supplement are for this analysis is that the detailed measure to include workers who are widely cited alternative estimates. source data are not publicly available independent contractors in a secondary However, the Department chose to use and thus the analyses cannot be directly job or who were excluded from the CWS sources with significantly larger sample verified or adjusted as necessary (e.g., to estimate due to other factors. As noted sizes and more recent data for the describe characteristics of independent above, integrating the estimated primary estimate. contractors, etc.).

TABLE 2—SUMMARY OF ESTIMATES OF INDEPENDENT CONTRACTING

a Percent of workers Source Method Definition (%) Sample size Year

CPS CWS...... Survey .... Independent contractor, consultant or 6.9 50,392 ...... 2017 freelance worker (main only). ALP ...... Survey .... Independent contractor, consultant or 7.2 6,028 ...... 2015 freelance worker (main only).

86 The Department believes that including data on (‘‘Although the national extent of employee Implications of Regional, Economic, and informal work is useful when discussing the misclassification is unknown, earlier national Demographic Trends,’’ American Action Forum magnitude of independent contracting, although not studies and more recent, though not (2017), https://www.americanactionforum.org/ all informal work is done by independent comprehensive, studies suggest that employee research/gig-economy-research-policy-implications- contractors. The Survey of Household Economics misclassification could be a significant problem regional-economic-demographic-trends/ and Decision-making asked respondents whether with adverse consequences.’’). #ixzz5IpbJp79a; Dourado and Koopman, they engaged in informal work sometime in the 89 Including, but not limited to: McKinsey Global ‘‘Evaluating the Growth of the 1099 Workforce,’’ prior month. It categorized informal work into three Institute, ‘‘Independent Work: Choice, Necessity, Mercatus Center (2015), https://www.mercatus.org/ broad categories: Personal services, on-line and the Gig Economy’’ (2016), https:// publication/evaluating-growth-1099-workforce. activities, and off-line sales and other activities, www.mckinsey.com/featured-insights/employment- 90 which is broader than the scope of independent and-growth/independent-work-choice-necessity- See Katz and Krueger (2018), supra note 12. contractors. These categories include activities like and-the-gig-economy; Kelly Services, ‘‘Agents of 91 See Abraham et al. (2018), supra note 89, Table house sitting, selling goods online through sites like Change’’ (2015), https://www.kellyservices.com/ 4. eBay or craigslist, or selling goods at a garage sale. global/siteassets/3-kelly-global-services/ 92 E. Jackson, A. Looney, and S. Ramnath, ‘‘The The Department acknowledges that the data uploadedfiles/3-kelly_global_services/content/ Rise of Alternative Work Arrangements: Evidence discussed in this study might not be a one-to-one sectionless_pages/kocg1047720freeagent and Implications for Tax Filing and Benefit match with independent contracting, but it 20whitepaper20210x21020final2.pdf; Robles and Coverage,’’ OTA Working Paper 114 (2017), https:// nonetheless provides useful data for this purpose. McGee, ‘‘Exploring Online and Offline Informal www.treasury.gov/resource-center/tax-policy/tax- 87 K. Abraham, and S. Houseman. ‘‘Making Ends Work: Findings from the Enterprising and Informal analysis/Documents/WP-114.pdf. Meet: The Role of Informal Work in Supplementing Work Activities (EIWA) Survey’’ (2016); Upwork, 93 Lim et al., supra note 75. Americans’ Income.’’ RSF: The Russell Sage ‘‘Freelancing in America’’ (2019); Washington 94 Foundation Journal of the Social Sciences 5(5): Department of Commerce, supra note 76; Farrell In comparison to household survey data, tax 110–31 (2019), https://www.aeaweb.org/conference/ and Greig, supra note 79; MBO Partners, ‘‘State of data may reduce certain types of biases (such as 2019/preliminary/paper/QreAaS2h. Independence in America’’ (2016); Abraham et al., recall bias) while increasing other types (such as 88 See, e.g., U.S. Gov’t Accountability Off., GAO– ‘‘Measuring the Gig Economy: Current Knowledge underreporting bias). Because the Department is 09–717, Employee Misclassification: Improved and Open Issues’’ (2018), https://www.nber.org/ unable to quantify this tradeoff, it could not Coordination, Outreach, and Targeting Could Better papers/w24950; Collins et al. (2019), supra note 80; determine whether, on balance, survey or tax data Ensure Detection and Prevention 10 (2008) Gitis et al., ‘‘The Gig Economy: Research and Policy are more reliable.

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TABLE 2—SUMMARY OF ESTIMATES OF INDEPENDENT CONTRACTING—Continued

a Percent of workers Source Method Definition (%) Sample size Year

GSS QWL...... Survey .... Independent contractor, consultant or 14.1 2,538 ...... 2014 freelancer (main only). Jackson et al Tax data Independent contractor, household b 6.1 ∼5.9 million c ...... 2014 worker. Lim et al ...... Tax data Independent contractor ...... 8.1 1% of 1099–MISC and 5% of 1099–K ... 2016 a The survey data only identify independent contractors on their main job. Jackson et al. include independent contractors as long as at least 15 percent of their earnings were from self-employment income; thus, this population is broader. If Jackson et al.’s estimate is adjusted to exclude those who are primary wage earners, the rate is 4.0 percent. Lim et al. include independent contractors on all jobs. If Lim et al.’s estimate is ad- justed to only those who receive a majority of their labor income from independent contracting, the rate is 3.9 percent. b Summation of (1) 2,132,800 filers with earnings from both wages and sole proprietorships and expenses less than $5,000, (2) 4,125,200 pri- marily sole proprietorships and with less than $5,000 in expenses, and (3) 3,416,300 primarily wage earners. c Estimate based on a 10 percent sample of self-employed workers and a 1 percent sample of W–2 recipients.

3. Demographics of Independent black workers are somewhat arrangement. The Department has not Contractors underrepresented (comprising 9 percent attempted to estimate the magnitude of 97 The Department reviewed and 13 percent, respectively). The this change, primarily because there are demographic information on opposite trends emerge when evaluating not objective tools for quantifying the independent contractors using the CWS, informal work, where racial minorities clarity, simplification, and enhanced which, as stated above, only measures participate at a higher rate than white probative value of the Department’s those who say that their independent workers.98 Primary independent proposals for sharpening and focusing contractor job is their primary job and contractors are spread across the the economic reality test.100 Several that they worked at the independent educational spectrum, with no group commenters assumed the increase in contractor job in the survey’s reference especially overrepresented. The same independent contractors would be 5 week. According to the CWS, these trend in education attainment holds for percent, although none provided primary independent contractors are workers who participate in informal substantive support to bolster the most prevalent in the construction and work.99 assumption. See EPI, Washington Center. Due to the lack of certainty and professional and business services D. Potential Transfers industries. These two industries employ data to support a reliable estimate, the 44 percent of primary independent Given the current universe of Department does not attempt to estimate contractors. Independent contractors independent contractors and the the increase in independent contractor tend to be older and predominately possibility that more individuals may relationships that would result due to male (65 percent). Millennials have a become independent contractors after this rule. Therefore, potential transfers significantly lower prevalence of the rule is finalized, the Department are discussed qualitatively with some primary independent contracting than here identifies the possible transfers numbers presented on a per worker older generations: 3.6 percent for among workers and between workers basis. Potential transfers may result Millennials compared to 6.0 percent for and businesses, which may occur. These from differences in benefits, tax Generation X and 8.8 percent for Baby transfer effects are discussed liabilities, and earnings between Boomers and Matures.95 However, qualitatively and include effects relating employees and independent contractors. surveys suggest that this trend is to employer provided benefits, tax Although employment benefits could reversed when secondary independent liability, earnings, minimum wage and decrease, and tax liabilities could contractors, or those who did informal overtime pay, accurate classification of increase, the Department believes the work as independent contractors, are workers, and conversions of employee net impact on total compensation included. These divergent data suggest jobs to independent contractor jobs. should be small in either direction. that younger workers are more likely to In evaluating potential transfers that Furthermore, to attract qualified use contractor work sporadically and/or could be occasioned by the rule, the workers, companies must offer for supplemental income.96 White Department notes at the outset that the competitive compensation. Therefore, workers are somewhat overrepresented substantive effect of the rule is not among primary independent intended to favor independent 100 Another uncertainty limiting the Department’s contractors; they comprise 85 percent of contractor or employee classification ability to quantify the possible increase in this population but only 79 percent of relative to the status quo of the independent contracting is the nature and effect of Department’s existing guidance and state wage and hour laws. Some states, such as the population of workers. Conversely, California, have laws that place more stringent precedent from courts. However, the limitations on who may qualify as independent 95 The Department used the generational Department assumes in this RIA that the contractors than the FLSA. See Cal. Labor Code breakdown used in the MBO Partner’s 2017 report, increased legal certainty associated with 2775 (establishing a demanding ‘‘ABC’’ test ‘‘The State of Independence in America.’’ this final rule could lead to an increase applicable to most workers when determining ‘‘Millennials’’ were defined as individuals born independent contractor status under California 1980–1996, ‘‘Generation X’’ were defined as in the number of independent law). Because the FLSA does not preclude states individuals born 1965–1980, and ‘‘Baby Boomers contractor arrangements by reducing the and localities from establishing broader wage and and Matures’’ were defined as individuals born transaction and compliance costs hour protections than those that exist under the before 1965. inherent in structuring such an FLSA, see 29 U.S.C. 218(a), workers in some states 96 Abraham and Houseman (2019), supra note 87, may be unaffected by this final rule. However, find that informal work decreases as a worker’s age because the Department is not well positioned to 97 increases. Among 18 to 24 years olds, 41.3 percent These numbers are based on the respondents interpret the precise scope of each state’s wage and did informal work over the past month. The rate fell who state that their race is ‘‘white only’’ or ‘‘black hour laws, the Department is unable to definitively to 25.7 percent for 45 to 54 year olds, and 13.4 only’’ as opposed to identifying as multi-racial. determine the degree to which workers in particular percent for those 75 years and older. See also 98 Abraham and Houseman (2019), supra note 87. states would or would not be affected by this final Upwork (2019), supra note 89. 99 Id. rule.

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for workers in a competitive labor U.S., McKinsey Global Institute found who included assumptions of growing market, any reduction in benefits and that 15 percent of those not working are numbers of independent contractors increase in taxes are expected to be interested in becoming an independent also assumed that those workers were offset by higher base earnings. This contractor as their primary job.103 drawn from the existing pool of concept is discussed further below in Attracting these individuals to join the employees, not from the otherwise the Earnings section. labor force would be classified as a unemployed or those outside the labor Assuming that independent societal benefit, rather than a transfer. market.105 The Washington Center for contractor arrangements increase These impacts are evaluated more fully Equitable Growth (Washington Center), following this final rule, it is unclear the below as part of the discussion on Cost for instance, simply assumed a 5 extent to which this would occur as a Savings and Benefits. percent increase in the number of result of current employees being The Department requested comments independent contractors (corresponding subsequently classified as independent on its assumption that use of to an equivalent decline in contractors or as a result of the hiring of independent contractors will increase if employees); 106 however, it neither new workers as independent the proposed rule is finalized. Most provided explanation why that contractors. This will have implications commenters took the view that, percentage was reasonable nor justified for transfers. If current employees consistent with the Department’s its assumption that the percentage change classifications, then there may assumption, the final rule will lead to would entirely represent a shift of be transfers. Employers could change an increase in the number and existing employment relationships to the classification of current employees proportion of workers who are independent contractor relationships. only if those workers could already have independent contractors. Some Many commenters asserting and been classified as independent commenters, such as the Signatory Wall estimating a sizable shift from contractors or if the working conditions and Ceiling Contractors Alliance employment to independent contracting are modified such that the relationship (SWACCA) and other construction relationships seem to have based their becomes a true independent contractor workers’ unions commented that the estimates on the false impression that relationship, assuming doing so is rule could lead to increases in the the final rule would narrow the FLSA consistent with any applicable percentage of independent contractors scope of employment. As explained employment contracts, collective in the workforce by narrowing the above, this is not the case—the final rule bargaining agreement, or other standard for FLSA employment. But as does not shift the definition of who is applicable laws.101 Lim et al. (2019) explained above in Section IV(E)(2) and an employee under the FLSA. Any shift, found in the status quo that there was later in the discussion of regulatory the Department believes, would have to ‘‘little evidence that firms are alternatives in Section VI(G)(2), the final result from increased certainty, reduced increasingly reclassifying existing rule does not narrow or expand the overhead, and reduced employee relationships as [independent standard for FLSA employment. Rather, misclassification. Conversely, the contractor] relationships,’’ however, the Department agrees with many Americans for Prosperity Foundation they found that ‘‘firms are hiring more commenters representing businesses (AFPF) agreed with the Department’s new workers as [independent and freelance workers that the final rule decision to not quantify potential contractors] rather than as serves only to make that standard changes in the aggregate number of employees.’’ 102 The Department does clearer, enabling businesses and independent contractors and supported not anticipate this phenomenon will individuals to structure their work the Department’s analysis. cease occurring in the presence of the relationships to comply with the law. The Department continues to believe final rule. As discussed below, the See Section III (discussing commenter that the necessary data and information limited number of businesses with feedback). While this could lead to a are not available to quantify either any employees whose roles would meet the greater incidence of independent shift in independent contracting away requirements to be independent contracting—as businesses and workers from employee relationships or the contractors likely face incentives to will be able to more freely adopt number of new independent contractors maintain the status quo for those independent worker arrangements who may enter the workforce in workers, but there will likely be some without fear of FLSA liability—the final response to the rule and the impact of degree of innovation in the labor market rule does not narrow the standard for such a shift on workers and businesses. 104 in response to the rule that compounds FLSA employment. As explained in the NPRM, any attempt Some commenters disagreed with the the current trend towards greater to produce a useful estimate for the Department’s decision not to numbers of independent contractors. impact of an increase in independent specifically quantify a change in the For more discussion on how employees contractors requires ascertaining a number of independent contractors. may be affected by transfers, see the Job Furthermore, most of the commenters Conversion discussion in Section 105 Some commenters and reports (See e.g., VI(D)(7). Palagashvili; Fuller et al.,) cited data that indicate 103 McKinsey Global Institute, supra note 89 at increased regulatory clarity would likely result in By decreasing uncertainty and thus 71. workers entering the workforce due to the greater potentially opening new opportunities 104 The fact that the final rule is not an expansion flexibility and control provided by independent for firms, companies may hire or narrowing of the FLSA’s scope of employment contracting relationships. This would expand the independent contractors who they is not to say that courts have never in the past workforce rather than transfer workers between otherwise would not have hired. In this misapplied the economic reality test in particular classifications. cases. For example, some courts have expressly 106 EPI, Washington Center, and other case, there may be a decrease in disagreed on the meaning of the ‘‘integral/ commenters who use this 5 percent estimate unemployment, an increase in the size integrated’’ factor in the test. The existence of assume the entire increase to independent of the labor force, or both. In a study of seemingly contradictory and inconsistent case law contractors consists of workers whose overall respondents from both Europe and the is one of the reasons why the Department sees a compensation will decline and whose jobs need to issue this final rule. However, as discussed otherwise remain the same. See EPI (characterizing extensively above, the Department believes that the converted workers as having ‘‘the same job for 101 Under the final rule, a worker may be statement of the economic reality test in the final substantially less compensation’’). The Department classified only if the job meets the requirements of rule is consistent with precedent and the FLSA as finds this highly unlikely. For more discussion on section 795.105. a whole, even if it is in tension with particular this topic, see the Job Conversion topic in Section 102 Lim et al., supra note 75 at 3. cases. II.D.6.

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number of additional variables, fulltime workforce, noting that ‘‘Early independent contractors because including how this reduction in signs suggest that Covid–19 will also independent contractors generally do administrative overhead and speed up this shift.’’ 108 It is also not receive these benefits directly misclassification would impact supported by a range of recent news (although independent contractors are independent contracting. See 85 FR reports indicating that freelance able to purchase at least some of these 60626. The approach taken by some opportunities provide an important path benefits for themselves and, as commenters of simply choosing a for individuals to return to the explained in the preamble, the offering number without support and applying it workforce who lost their jobs due to the of health, retirement, and other benefits across the entire economy, given the pandemic.109 Women Employed to workers is not necessarily indicative extremely large number of employment claimed that this rule will degrade jobs, of employee status). Employer-provided relationships in the United States, the and that doing so in the midst of a benefits are often a significant share of differences in how a worker may value pandemic would be harmful, basing this workers’ compensation. According to certain ‘‘benefits,’’ 107 and the unique claim on assumptions that this rule the BLS’s Employer Costs for Employee relationships between different types of would ‘‘undermine the FLSA’’ and Compensation (ECEC), the value of independent contractors and different increase misclassification of workers. employer benefits that directly benefit businesses, could create a misleading But as explained above, this rule does employees average 21 percent of total and uncertain estimate of the impact of not undermine the FLSA; it sharpens compensation.111 The Department notes the rule without lending any additional the focus of the economic reality test that this 21 percent figure is an average clarity because of the lack of the basis and clarifies the meaning of economic for all employees and may not be for such a figure and likely differences dependence that courts, the Department, representative of the subset of between the current independent and most commenters agree is the employees whose classification may be contractor population and the standard for employment under the Act. impacted by this rule. Since the 21 population likely to arise as a result of This clearer standard is likely to reduce percent figure includes paid leave (7.2 this rule. Since commenters, including rather than increase occurrences of percentage points) and retirement those in support and those in misclassification. benefits (5.3 percentage points), and opposition, did not proffer sufficient workers may value these benefits at very 2. Employer Provided Benefits data upon which to build more accurate different levels, applying these elements assumptions, the Department has not In the context of transfers, the does not seem reasonable in the context attempted to quantify this impact. Department attempted to evaluate how of this analysis.112 1. Impact of COVID–19 on the Rule an increase in independent contracting The Department used the CWS to relationships could affect employer compare prevalence of health insurance The Department also requested data provided benefits. Although this rule and retirement benefits across and comment on the possible impacts only addresses workers’ independent employees and independent contractors resulting from the COVID–19 pandemic contractor status under the FLSA, the to produce a highly generalized picture. as it relates to the composition of the Department assumes in this analysis However, it should be noted that these labor market, the share and scope of that employers are likely to keep the two populations may differ in other independent contractors in the status of most workers the same across ways than just their employment workforce, and any associated wage all benefits and requirements.110 To the classification and the particular effects. Several commenters noted the extent that employers currently provide elements of their compensation importance of independent contracting employees benefits such as health packages discussed in the preceding in weathering the pandemic. For insurance, retirement contributions, and paragraph which may impact benefit example, the Center for Growth and paid time off, these would likely amounts. For instance, an employee Opportunity at Utah State University decrease with an increase in the use of shifting to independent contractor status (CGO) wrote that the benefits of who already receives health benefits independent contracting ‘‘are likely to 108 Fuller, et al., supra note 64 (‘‘Many freelance through a partner’s benefit plan would grow if the United States labor market platforms offer access to workers from around the not be impacted by losing heath benefit adapts to the recession spurred by the world with a wide variety of skills, and payment is often per completed task. Covid-19 is accelerating eligibility. Additionally, lower benefits COVID–19 pandemic similarly as it did the move toward these platforms. . ..’’); see also may be offset by increased base pay to to the financial crisis of 2008.’’ They Press Release, New Upwork Study Finds 36% of the attract workers because workers note that during an economic downturn, U.S. Workforce Freelance Amid the COVID–19 consider the full package of pay and workers can turn to alternative work Pandemic, Sep. 15, 2020, available at https:// www.upwork.com/press/releases/new-upwork- benefits when accepting a job. arrangements such as independent study-finds-36-of-the-us-workforce-freelance-amid- According to the CWS’s relatively contracting to supplement their income. the-covid-19-pandemic. narrow definition of independent The view is supported by a recent 109 See, e.g., Kim Mackrael, In the Covid contractor: Harvard Business Review article that Economy, Laid-Off Employees become New describes how firms have increasingly Entrepreneurs, Wall Street Journal, Nov. 18, 2020; Uri Berliner, Jobs in the Pandemic: More Are 111 BLS, ‘‘Employer Costs for Employee relied on freelancing and platforms that Freelance and may stay that way forever, NPR, Sep. Compensation News Release’’ (Sept. 2019), https:// allow access to the growing supply of 16, 2020; Jon Younger, A New Payoneer Report www.bls.gov/news.release/archives/ecec_ on-demand workers to identify Shows Covid 19 is Accelerating Freelance Growth, 12182019.htm. For Civilian Workers, this includes innovative solutions more flexibly and Forbes, Sep. 1. 2020. paid leave ($2.68), insurance ($3.22), and retirement 110 Courts have noted that the FLSA has the and savings benefits ($1.96). It does not include quickly than relying solely on their broadest conception of employment under Federal overtime and premium pay, shift differential pay, law. See, e.g., Darden, 503 U.S. at 326. To the extent nonproduction bonuses, or legally required 107 If, for example, a state mandates that that businesses making employment status benefits. Calculated as ($2.68 + $3.22 + $1.96)/ employees receive paid parental leave, but the determinations base their decisions on the most $37.03. worker does not have and intends not to have demanding Federal standard, a rulemaking 112 The average economy-wide provision of children, this ‘‘benefit’’ is of no value to that addressing the FLSA’s distinction between insurance benefits, which represent 8.7 percentage worker. Estimating how an individual worker employees and independent contractors may affect points of the 21 percent figure, is also likely to be values a particular ‘‘benefit’’ or even a tax liability the businesses’ classification decisions for purposes an overestimate for the average percentage of would require a worker-by-worker analysis for of benefits and legal requirements under other compensation offered to the workers most likely to which the Department lacks necessary data. Federal and state laws. be impacted by this rule.

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• 79.4 percent of self-employed Commerce pointed out, many such as the Washington Center cited a independent contractors have health independent contractors would not be study showing that independent insurance. Most of these workers either eligible for benefits even if they were contractors are ‘‘less likely . . . to make purchased insurance on their own (31.5 employees due to the short-term and/or contributions to a retirement percent) or have access through their part-time nature of such an employment account.’’ 117 However, that study spouse (28.6 percent). relationship. narrowly defines retirement accounts to • 80.7 percent of other independent Women Employed noted that the include ‘‘employer-sponsored plans’’ contractors have health insurance. although the Department showed high while excluding other common long- There are three main ways these rates of health insurance among term saving methods, which biases the workers receive health insurance: independent contractors in general, the comparison between independent Through their spouse (25.1 percent), Department did not show that low-wage contractors and employees. This through an employer (24.2), or on their independent contractors have access to hampers the ability to substantively own (20.1 percent). health insurance. In response, the compare this commenter’s position with • 88.3 percent of employees have Department compared health insurance those of other commenters, such as CWI health insurance. Most of these workers rates for workers earning less than $15 and WPI, listed above. receive health insurance through their per hour and found that 71.0 percent of Some commenters asserted the work (64.1 percent). Furthermore, such independent contractors have Department should quantify the impact according to the ECEC, employers pay health insurance compared with 78.5 of the rule on benefits such as health on average 12 percent of an employee’s percent of such employees. Health insurance and retirement savings. This base compensation in health insurance insurance rates are lower for both includes a letter from 107 U.S. premiums. independent contractors and employees Representatives and separate letters Several commenters estimated the when limited to low-wage workers. from Rep. Donald Norcross and Rep. prevalence of health insurance among However, the gap in coverage between Pramila Jayapal. The Texas RioGrande independent contractors. In early 2020, low-wage employees and independent Legal Aid (TRLA) claimed that because CWI commissioned a national survey of contractors remains comparable to that the Department did not estimate the 600 self-identified independent for all workers: 7.5 percentage points for ‘‘financial impact on the health and contractors. Their survey found that 84 low-wage workers compared to 8.1 retirement accounts of workers’’ it percent of independent contractors have percentage points for all workers. violated the Administrative Procedure healthcare coverage.113 The Workplace A major source of retirement savings Act. However, the Department does not Policy Institute of Littler Mendelson, is employer sponsored retirement believe that these impacts could be P.C. (WPI) pointed to a study that found accounts. According to the CWS, 55.5 usefully quantified. First, quantifying about 90 percent of gig workers have percent of employees have a retirement these impacts necessarily requires health insurance.114 The study also account with their current employer; in estimating any increase in the found that less than one-third of 1099– addition, the ECEC found that prevalence of independent contracting MISC workers purchase their own employers pay 5.3 percent of relationships. As explained previously, health insurance, ‘‘and most indicate employees’ total compensation in the Department does not believe that that health insurance does not affect retirement benefits on average ($1.96/ this figure can be meaningfully their decision to work as an $37.03). If a worker shifts from estimated. Second, classification under independent contractor.’’ It also notes employee to independent contractor the FLSA does not directly determine that the businesses interviewed believe status, that worker may no longer whether workers qualify for these that workers may have ‘‘made an receive employer-provided retirement benefit programs, and as such, it is economic decision with their spouse— benefits, but may choose alternate difficult to assess how the specific where one spouse works without personal investment options. As with workers who are converted from benefits for higher pay and the other health insurance, it is not clear whether employee to independent contractor receives lower pay with benefits— retirement savings for such a worker status under the FLSA could have their resulting in a higher total income and would increase or decrease, but such a individual benefits affected. If an health benefits for the household.’’ worker would likely need to take a more employer provides health and From these data, it is unclear exactly active role in saving for retirement vis- retirement benefits to employees, but how health insurance coverage would a`-vis an employee with an employer- does not provide them to the same change if the number of independent sponsored retirement plan.115 workers upon conversion of the contractors increased, but the data Commenters pointed out that positions into independent contractor suggest that independent contractors, on independent contractors generally have relationships, overall compensation will average, may be less likely to have retirement accounts. CWIs survey of be negatively impacted unless offset by health insurance coverage. That said, independent contractors found that 73 sufficiently higher earnings. However, employment is not a guarantee of health percent have a retirement savings plan. this could happen only in non- insurance, nor do independent The WPI pointed to a study by T. Rowe competitive labor markets in which contractors generally lack health Price that found that more than half of employers have the ability to set insurance. Additionally, simply independent contractors are saving for compensation without regard for worker 116 comparing rates between independent retirement. Conversely, commenters preferences. While some employers may contractors and employees may be desire to save the costs of providing 115 Access to such benefits might be similar for certain benefits to employees by misleading. As the U.S. Chamber of both employees and independent contractors, but it is unlikely that the business will contribute similar engaging independent contractors, if the 113 Coalition for Workforce Innovation (2020), sums to benefits for an independent contractor and relevant labor markets are even supra note 77. employee. somewhat competitive, they likely will 114 A. Yildirmaz, M. Goldar, S. Klein, 116 T. Rowe Price, ‘‘Press Release: The Majority of need to increase monetary ‘‘Illuminating the Shadow Workforce: Insights Into Independent Workers are Actively Saving for the Gig Workforce in Businesses,’’ ADP Research Retirement’’ (March 25, 2019), https:// compensation, give up, for example, Institute (February 2020), https://www.adpri.org/ www.troweprice.com/corporate/en/press/t-rowe- research/illuminating-the-shadow-workforce/ price-the-majority-of-independent-workersare- 117 Jackson, Looney, and Ramnath (2017), supra ?release=illuminating-the-shadow-workforce-2020. actively-.html note 92.

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certain elements of control (i.e., non- contractors. Employers will not pay to accurately measure and capture in pecuniary compensation), or both to payroll taxes for work transferred to datasets due to their high variability recruit workers for providing the same workers classified as independent worker to worker and ambiguity of work. The impacts of the rule would not contractors and market forces could sorting across economic sectors. be uniform across workers, especially compel them to pass the full wage (wage Without access to such data, the with respect to those workers that may + payroll tax) to the independent Department did not attempt to quantify become independent contractors. contractors. That is not the only reason the cost of changes in coverage or Furthermore and as explained further in we expect independent contractors will whether the net effect is a benefit or Section VI(D)(7), the Department earn higher hourly earnings, but is the cost. believes the ability for firms to deny focus here. For discussion on other benefits by converting their workers into expected wage effects, see Section 4. Earnings independent contractors is constrained. VI(D)(4) below. Potential transfers could also occur Companies also cover unemployment 3. Tax Liability through changes to earnings as a result insurance and workers’ compensation of an increase in independent Another potentially important source taxes for their employees. Independent contracting. These transfers could occur of transfers affected by the prevalence of contractors may choose to pay for if workers who were employees independent contracting is tax liability. comparable insurance protection offered experience a change in earnings by Payroll tax liability is generally divided in the private market, but are not becoming independent contractors, or if between the employer and the employee obligated to. The resulting regulatory workers who are out of the labor market in the United States. Most economists effect (experienced as savings, either by enter in order to become independent believe that the ‘‘incidence’’ of the companies or employees, depending on contractors. Although the minimum payroll tax, regardless of liability, falls who ultimately bears the cost of the tax) 118 wage and overtime pay requirements of on the employee. As self-employed combines societal cost savings (the the FLSA would no longer apply to workers, independent contractors are lessened administrative cost of workers who shift from employee status legally obligated to pay both the incrementally lower participation in to independent contractor status, as employee and employer shares of the unemployment insurance and workers’ discussed below, this does not Federal Insurance Contributions Act compensation programs) and transfers sufficiently explain the potential (FICA) taxes. Thus, if workers’ (from individuals whose unemployment transfers that could occur as a result of classifications change from employees insurance or workers’ compensation such a shift. Furthermore, the to independent contractors, there may payments decline, to entities paying less Department anticipates an increase in be a transfer in Federal tax liabilities in taxes). Independent contractors may labor force activity, but for the reasons from employers to workers (regardless recoup some or all of the employer stated above, the Department does not of whether this affects the actual cost of portion of these taxes and insurance attempt to quantify the magnitude of these taxes to the worker). These payroll premiums in the form of increased any increase or decrease in earnings as taxes include: 119 wages. This rule could decrease a result of increased labor force activity. • Social Security tax: The 6.2 percent employers’ tax liabilities and increase employer component (half of the 12.4 independent contractors’ take-home If currently unemployed workers or percent total).120 compensation. However, there are costs individuals who are out of the labor • Medicare tax: The 1.45 percent to independent contractors if they are market become independent contractors employer component (half of the 2.9 out of work or injured or ill on the job due to this rule, their earnings will percent total).121 because they no longer are protected, increase as they currently have no work- In sum, vis-a`-vis an employee, unless they purchase their own private related earnings other than possibly independent contractors are legally insurance.122 Many of these impacts unemployment benefits. The impact on responsible for an additional 7.65 will depend on the individual risk earnings is more ambiguous if percent of their earnings in FICA taxes tolerances of the workers. It is likely employees’ classifications change to (less the applicable tax deduction for that workers who are more comfortable independent contractors. In theory, this additional payment). However, any taking risks will be attracted to the because independent contractors likely tax-related transfers from employers to potentially higher take-home prefer to have at least similar levels of workers would likely be offset by higher compensation of independent contractor total compensation as they would earn wages employers pay independent status, while workers who are risk if they were employees, companies averse will likely prefer the would likely have to pay more per hour 118 The share of payroll taxes borne by employees predictability of traditional employee to independent contractors than to versus firms is unknown but economists generally employees because independent believe that employer payroll taxes are partially-to- relationships. It is uncertain how the completely shifted to employees in the long run. universe of workers is dispersed, contractors generally do not receive For a detailed review of the literature see J. beyond theoretical generalizations. It is company-provided benefits and have Deslauriers, B. Dostie, R. Gagne´, and J. Pare´, further unclear how workers’ risk higher tax liabilities. Data show an ‘‘Estimating the Impacts of Payroll Taxes: Evidence hourly wage premium for independent from Canadian Employer-Employee Tax Data,’’ IZA preferences will be distributed across Institute of Labor Economics Discussion Paper the market for insurance products. The contractors when comparing unadjusted Series IZA DP No. 11598 (June 2018), http:// Department was not able to identify mean averages. But as the analysis ftp.iza.org/dp11598.pdf. Further information is economy-wide distributional data on below illustrates, when controlling for available by the Tax Foundation, https:// certain differences in worker taxfoundation.org/what-are-payroll-taxes-and-who- worker preferences and projected pays-them/. purchasing dynamics. That is likely characteristics, this expected wage 119 Internal Revenue Service, ‘‘Publication 15, because worker preferences are difficult premium may not always be observable (Circular E), Employer’s Tax Guide’’ (Dec. 23, 2019), at a statistically significant level. It https://www.irs.gov/pub/irs-pdf/p15.pdf. 122 The Department did not undertake to should be noted, however, that these 120 The social security tax has a wage base limit comprehensively review state law on estimates do not attempt to incorporate of $137,700 in 2020. unemployment insurance in this area, but notes that the value of flexibility and satisfaction 121 An additional Medicare Tax of 0.9 percent some states do not use the economic reality test to applies to wages paid in excess of $200,000 in a determine which individuals are covered by state that many independent contractors cite calendar year for individual filers. unemployment insurance. as key factors in their preference of

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independent contracting arrangements contractors earned an average of $27.43 One potential reason for the variance over traditional employment. per hour, and other independent among the estimates for independent Comparing the average earnings, contractors earned an average of $26.71 contractor wages could be error in the hourly wages, and hours of current per hour (the average hourly wage is measurement of independent contractor employees and independent contractors $27.29 when combining the two types of status and earnings, a factor that is may provide some indication of the independent contractors).127 Katz and present throughout every analysis in impact on wages of a worker who Krueger conducted similar hourly this area. As a recent analysis transitions from an employee to earnings estimates based on 2005 CWS concluded, ‘‘different data sources independent contractor classification. A and 2015 ALP data. Their analysis of the provide quite different answers to the regression analysis that controls for 2005 CWS data indicated that ‘‘[b]efore simple question of what is the level and observable differences between conditioning on covariates, the 2005 trend of self-employment in the U.S. independent contractors and employees and 2015 results are similar: freelancers economy,’’ which suggest substantial may help isolate the impact on earning, and contract workers are paid more per measurement error in at least some data hourly wages, and usual hours of being hour than traditional employees.’’ 128 sources.132 As noted above, reporting an independent contractor. Katz and When controlling for education, errors by survey respondents may Krueger (2018) 123 regressed the natural potential experience, potential contribute to measurement error in CWS log of hourly wages on independent experience squared, race, ethnicity, sex data.133 Additionally, CWS questions contractor status,124 occupation, sex, and occupation, independent ‘‘were asked only about people who had potential experience, potential contractors’ higher hourly wages in the already been identified as employed in experience squared, education, race, 2005 CWS data remained higher but response to the survey’s standard and ethnicity. They use the 2005 CWS were not statistically significant. But employment questions and only about and the 2015 RAND ALP (the 2017 CWS Katz and Krueger’s analysis of the 2015 their main jobs,’’ and therefore may was not available at the time of their ALP data under the same specifications miss important segments of the analysis). The Department conducted a found that primary independent population. BLS has recently similar regression using the 2017 CWS. contractors earned more per hour than acknowledged limitations in the 2017 In both Katz and Krueger’s regression traditional employees, and the estimates CWS survey in response to a GAO audit results and the Department’s were statistically significant.129 and is reevaluating how it would calculations, the following outlying Conceptually, the Department expects measure independent contractors in the values were removed: Workers reporting that independent contractors would future.134 earning less than $50 per week, less earn more per hour than traditional Another potential bias in the than $1 per hour, or more than $1,000 employees in base compensation as an Department’s results could be due to the per hour.125 offset to employer-provided benefits and exclusion of relevant explanatory The Department combined the CWS increases in tax liabilities. Katz and variables from the model specification, data on usual earnings per week and Krueger’s analysis of the 2015 RAND including the omission of observable hours worked per week to estimate ALP data appears to support this variables that correlate with hourly hourly wage rates to normalize the prediction.130 However, they earnings. For example, the Department’s comparison between independent recommend caution in interpreting the analysis of 2017 CWS data used 22 contractors and employees.126 The estimates from the ALP due to the Department found that independent relatively small sample size. Their https://www.mbopartners.com/state-of- contractors tend to earn more per hour: analysis of the 2005 CWS data and the independence/; Chen et al., ‘‘The Value of Flexible Employees earned an average of $24.07 Work: Evidence from Uber Drivers,’’ Journal of Department’s similar analysis of 2017 Political Economy 127:6, 2735–794 (2019); He, H. per hour, self-employed independent CWS data did not show a statistically et al., ‘‘Do Workers Value Flexible Jobs? A Field significant difference. But as previously Experiment,’’ NBER Working Paper No. w25423, 123 See Katz and Krueger (2018), supra note 12. noted, comparing current employees to (2019), https://ssrn.com/abstract=3311395; 124 On-call workers, temporary help agency current primary independent McKinsey Global Institute, supra note 89; Upwork workers, and workers provided by contract firms (2019), supra note 89. are excluded from the base group of ‘‘traditional’’ contractors may not be indicative of 132 Abraham et al. (2018), supra note 89 at 15. employees. how earnings would change for current Generally, ‘‘[h]ousehold surveys consistently show 125 Choice of exclusionary criteria from Katz and employees who became independent lower levels of self-employment than tax data and Krueger (2018), supra note 12. a relatively flat or declining long-term trend in self- contractors. Nor do such wage-based employment as contrasted with the upward trend 126 The CWS data, based on its relatively narrow comparisons reflect the non-pecuniary definition of independent contractors, indicated that is evident in tax data.’’ Id.; see also id. at 45. 133 that employees worked more hours per week in attributes of employees and ‘‘For example, a household survey respondent comparison to primary independent contractors. independent contractors.131 might fail to mention informal work that they do The Department found that 81 percent of employees not think of as a job, something that further probing might uncover. To take another example, a worked full-time, compared to 72 percent for self- 127 The Department followed Katz and Krueger’s household member who is doing work for a employed independent contractors and 69 percent methodology in excluding observations with for other independent contractors. Katz and Krueger business may be reported as an employee of that weekly earnings less than $50, hourly wages less business, even in cases where further probing might similarly found that independent contractors work than $1, or with hourly wages above $1,000. fewer hours per week than employees (statistically reveal that the person is in fact an independent Additionally, workers with weekly earnings above contractor or freelancer.’’ Id. at 15. significant at the 1 percent level of significance in $2,885 are topcoded at $2,885. Weekly earnings are 134 Specifically, BLS recognized that: (1) The all specifications with both datasets). Despite used to calculate imputed hourly wages. working fewer hours per week than employees, self- ‘‘CWS measures only respondents’ main jobs . . ., 128 Id. at 19. employed independent contractors earned more per thus potentially missing workers with 129 week on average ($980 per week compared to $943 Id. at 34. nontraditional second or supplementary income per week). Other independent contractors, on 130 See Katz and Kreuger (2018), supra note 12 at jobs’’; (2) ‘‘CWS only asks respondents about their average, worked fewer hours per week and earned 20 (‘‘A positive hourly wage premium for work in the past week and may fail to capture less per week than employees ($869 per week independent contractors could reflect a seasonal workers or workers that supplement their compared to $943 per week). Given the difference compensating differential for lower benefits and the income with occasional work’’; and (3) ‘‘added between hours worked by primary independent need to pay self-employment taxes.’’). questions regarding electronically-mediated contractors and employees, and the appeal of 131 In particular, at least some research reveals employment resulted in a large number of false flexibility cited by many independent contractors, significant non-pecuniary advantages to positive answers.’’ Government Accountability average weekly earnings may be an inadequate independent contracting, including through Office, Contingent Workforce: BLS is Reassessing measure. Accordingly, the Department’s analysis increased job satisfaction. See ‘‘The State of Measurement of Nontraditional Workers, Jan. 29, focuses on hourly wages. Independence in America,’’ MBO Partners (2019), 2019, https://www.gao.gov/assets/700/696643.pdf.

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occupation dummy variables but did contractors earn an earnings premium. not adequately address the not control for a worker’s job position Other commenters cited evidence misclassification of workers, and within any of the occupations (although purporting to show that workers posited this would impose costs. In each it did control for ‘‘potential misclassified as independent case, the commenter did not experience’’). However, as the contractors earn less than employees. demonstrate how the rule would Department’s guidance indicates, a Much of this evidence, however, relates increase the frequency of statistical comparison of earnings only to total take-home pay, which may misclassification. North America’s between workers generally must control reflect mere variation in hours-worked, Building Trades Unions made similar for ‘‘job level or grade’’ in addition to rather than indicate any relation to the claims. Its comment cited a number of experience to ensure the comparison is existence of an earnings premium. Some studies, including a GAO study finding for workers in similar jobs.135 If, other evidence on lower earnings relates contingent workers (workers who lack hypothetically, independent contractors to misclassified workers—but the final an explicit or implicit contract for long- on average have lower job levels (or rule is expected to reduce term employment, but who can be equivalents) than traditional employees misclassifications by increasing employees or independent contractors within each occupation,136 the certainty, and as explained further under the FLSA) have lower earnings Department’s analysis would not be below, the Department does not believe than those who are not contingent comparing the hourly earnings of that evidence relating to misclassified workers; a DC Office of Attorney primary independent contractors and workers is applicable to the General study that estimated employees who have the same jobs. independent contracting population as a misclassified construction workers in Instead, the Department would be whole. For example, the Coalition of DC may earn 11.5 percent less in take- comparing a population of relatively State Attorneys General, Cities, and home pay than employees, based on low-level independent contractors with Municipal Agencies (State AGs) cited implied findings that result from a a population that includes both low- recent state data on awards to workers series of selected assumptions; and a and high-level employees. who were misclassified and evidence sampling of studies on construction The existence of unobservable that the misclassified workers face workers that claimed significant losses differences between independent higher rates of wage theft and wage in net pay for construction workers contractors and employees that are suppression.138 139 They additionally misclassified as independent correlated with earnings, such as cited evidence produced by another contractors compared to employees.141 productivity, skill, and preference for critical commenter of this rule, the The United Brotherhood of Carpenters flexibility also bias comparison of National Employment Law Project and Joiners of America asserted that hourly earnings. For example, (NELP), that the State AGs claimed many construction companies independent contractors may be on shows that once controls are misclassify workers as independent average more willing than employees to implemented to account for taxes, contractors in order to pay them less trade monetary compensation for business expenses, and legal risks, than employees and cited estimates of increased workplace flexibility that may workers who have been misclassified as the magnitude of the difference, and accompany independent contractor independent contractors often earn claims that the Department’s rule ‘‘does 142 status, which would obscure the significantly less than similar workers nothing to stem the abuse.’’ observability of an earnings premium paid as employees.140 The Department Commenter Matt Brown cited a for independent contractors.137 Non- expects the rule to reduce Washington Center report that claims pecuniary benefits of independent misclassification, which based on these low- and middle-wage gig workers make 143 contracting, often including workplace above commenters’ analyses will result less than comparable employees. The flexibility, may impact the occurrence of in significant cost savings. same commenter noted that, applied an earnings premium, measured strictly A number of other commenters made appropriately, ‘‘Independent contracting in monetary terms, but may contribute similar claims that the Department did is a critical part of the economy.’’ NELP to workers’ evaluation of the merits of and the National Women’s Law Center in engaging as independent contractors. 138 California Labor Commissioner’s Office, 2017– (NWLC) cited a study, notably from a 2018 Fiscal Year Report on the Effectiveness of the Independent contractors’ hourly report for New York’s taxi and Bureau of Field Enforcement (2018), https:// limousine industry, claiming that while earnings premium may be best observed www.dir.ca.gov/dlse/BOFE_LegReport2018.pdf. at the margin, such as comparing a Massachusetts Council on the Underground independent contractors in New York in worker’s behavior when deciding Economy, 2017 Annual Report, (2017), https:// a subset of industries (construction, www.mass.gov/doc/cue-annual-report-2017-0/ retail, personal care, and others) between two similar positions, one as an download. Written Testimony of Jennifer L. Berrier, employee and one as an independent Deputy Secretary, Department of Labor & Industry 141 U.S. Government Accountability Office, Before the House Labor & Industry Committee contractor. However, the Department ‘‘Contingent Workforce,’’ GAO–15–168R. DC, (April 29, 2019). could not find data on such situations (2018). Office of Attorney General, ‘‘Illegal Worker 139 to allow for an economy-wide estimate, C. Ruckelshaus and C. Gao, ‘‘Who’s the Boss: Misclassification: Payroll Fraud in the District’s Restoring Accountability for Labor Standards in Construction Industry,’’ (2019). Ormiston, R., nor did commenters provide such data. Outsourced Work,’’ National Employment Law Belman, D., Brockman, J., and M. Hinkel, Some commenters expressed concern Project, 9–27, (2014), https://www.nelp.org/wp- ‘‘Rebuilding Residential Construction,’’ in Creating that the Department did not sufficiently content/uploads/2015/02/Whos-the-Boss-Restoring- Good Jobs: An Industry-Based Strategy 75, 80 (Paul justify its claim that independent Accountability-Labor-Standards-Outsourced-Work- Osterman ed., MIT Press 2020). Report.pdf. 142 R. Ormiston et al. (2020), supra note 141. Liu, 140 S. Leberstein and C. Ruckelshaus, Y.Y., Flaming, D. and P. Burns, ‘‘Sinking 135 Department of Labor, Office of Federal ‘‘Independent Contractor vs. Employee: Why Underground: The Growing Informal Economy in Contracting Compliance Programs, Directive 2018– Independent Contractor Misclassification Matters California Construction,’’ Economic Roundtable, 2 5, (Aug. 24, 2018), https://www.dol.gov/agencies/ and What We Can Do to Stop It,’’ National (2014), https://economicrt.org/publication/sinking- ofccp/directives/2018-05#ftn.id10. Employment Law Project, (2016), https:// underground. 136 For example, because individuals working in s27147.pcdn.co/wp-content/uploads/Policy-Brief- 143 C. Husak, ‘‘How U.S. Companies Harm that occupation as independent contractors are less Independent-Contractor-vs-Employee.pdf. Bureau Workers by Making them Independent likely to be in positions with managerial of Labor Statistics, ‘‘Contingent and Alternative Contractors,’’ Washington Center for Equitable responsibilities over other workers than are Employment Arrangements—May 2017,’’ (2018), Growth, (2019), https://equitablegrowth.org/how-u- employees. https://www.bls.gov/news.release/archives/ s-companies-harm-workers-by-making-them- 137 He, H. et al. (2019), supra note 131. conemp_06072018.htm. independent-contractors/.

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experienced positive wage growth, they of independent contractors. The non- by this rule.146 Employing economy- had lower increases in their real annual representative data sources preclude wide averages to compare niche subsets earnings from 2013 to 2018 than the widespread applicability. Further, these of the economy is not a sound approach. counterpart employees.144 PA L&I commenters and their cited sources As such, it is inappropriate to assume, claimed that the Department provided largely focused on misclassified as SWACCA did, that the average ‘‘no evidence’’ to support other claims workers, who are defined as workers employee who is converted to about compensation premiums. unlawfully classified as independent independent contractor status as a result However, the Department offered a contractors in order to limit employers’ of the rule would gain the same earnings significant data-backed rationale for monetary and legal liabilities. Selection premium enjoyed by the average those sections, and in fact notes that PA economy-wide independent contractor, bias causes the estimates of the impacts L&I’s own comment refers to some of or lose benefits equal to the benefits on this group to be unreliable; the these sources in its critique, though it enjoyed by the average economy-wide offers no data of its own. Some sample likely includes illicit actors. The employee. The Department believes that commenters asserted that companies Department recognizes that some illicit many workers who are most likely to be make workers independent contractors actors intentionally evade the law, but converted due to this rule likely do not specifically because they can pay them its analysis of this rule’s impact presently receive benefits or, if they do less due to a lack of bargaining power, naturally focuses on employers, receive fringe benefits, their value (both but they do not offer substantive data to employees, and independent contractors as measured by the worker and as an demonstrate that this is the case that would follow the rule to the best of absolute cost to the employer) falls throughout the economy. Since the their ability. While these comments and below the economy-wide average.147 failure to pay misclassified workers the the sources upon which they rely Due to the highly individualized wages that are due them is already highlight important worker issues, the impacts that vary across numerous prohibited by law, the Department non-representative data presented undefined variables (risk tolerances; determined comments on the topic fall cannot be extrapolated to the universe specifics regarding level of position, outside the scope of this rule and of individuals classified as independent industry, location; access to other means analysis. As stated elsewhere, the contractors, for whom the literature of benefits provision; etc.), the Department expects that offers strong evidence of an earnings Department did not attempt to quantify misclassification will be reduced premium. such an impact. Considered because of this rule. Further, because qualitatively, the Department notes that meeting the proper standards for Some commenters provided specific employees who make more than the legitimate independent contracting will concerns with the Department’s minimum wage implicitly display a generally entail a substantively different numbers. SWACCA disputes the measure of bargaining power because relationship between a worker and a Department’s justification of the their employer could lawfully reduce business beyond a simple change in assertion that independent contractors their wages but has not. If employees classification, and no commenters nor earn more than employees because the have bargaining power—meaning labor the Department’s own review of past unconditional mean hourly rate of market conditions require employers to court cases yielded any examples of this independent contractors is higher than account for workers’ preferences— they phenomenon in practice, the the unconditional mean hourly rate of would be positioned to negotiate an Department has not attempted to employees. They note that the 11 to 14 earnings premium that could offset a quantify it. For most discussion, see the percent higher hourly wage ($26.71 and reduction in benefits that may result Job Conversion discussion at Section $27.43 per hour for independent from being converted to independent (VI)(D)(7). contractors versus $24.07 per hour for contractors, which may be higher or The data employed in the comments employees) is insufficient to cover the lower than the economy-wide average. and the reports commenters cite to average of 21 percent of total Similarly, a worker without bargaining support their claims on impacts to compensation that employees receive in power would be unlikely to receive the earnings are not strictly based on 11 to 14 percent earnings premium if employer-provided benefits. While independent contractors. In fact, several converted from employee to SWACCA correctly identified that the of them focus explicitly on contingent independent contractor status—but such hourly wage premium independent workers, who are defined as ‘‘persons no-bargaining-power employees are also who do not expect their jobs to last or contractors enjoy economy-wide may be much less likely to have any company- who report that their jobs are less than employer’s total cost of provided benefits to lose as a result of temporary.’’ 145 These persons can be providing benefits, such a comparison the conversion. Ultimately, there is no employees or independent contractors, may not accurately reflect the value the reason to believe employees whose and may not include all independent employee places on the employer- classification may be affected by the contractors, depending on the nature of provided benefits. If, for example, a rule are likely to have the same benefits the contractor’s work. Estimates based worker already has access to health as an average employee or, if converted on these definitions are not useful for insurance as a military veteran, that to independent contractors, would the purpose of evaluating the universe worker will not value the employer’s receive the same earnings premium that provision of health insurance. Further, the average independent contractor has 144 J.A. Parrott and M. Reich, ‘‘An Earnings even assuming the worker values these over the average employee. As Standard for New York City’s App-based Drivers: Economic Analysis and Policy Assessment,’’ Report benefits at the same level as the explained below further in Section for the New York City Taxi and Limousine employer’s cost for the benefits, the Commission, (2018), https:// analysis cited earnings premiums and 146 The 11 to 14 percent earnings premium for static1.squarespace.com/static/ independent contractors is also an economy-wide 53ee4f0be4b015b9c3690d84/t/ benefits which are based on all finding. 5b3a3aaa0e2e72ca74079142/1530542764109/ employees and independent contractors 147 The Department expects that many new Parrott- in the economy and may not reflect the independent contractor jobs will be created due to Reich+NYC+App+Drivers+TLC+Jul+2018jul1.pdf. narrower universe of employees whose this rule, but does not anticipate many existing 145 BLS, https://www.bls.gov/news.release/ employee positions to be converted to independent conemp.nr0.htm. classification is most likely be affected contractor relationships because of it.

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VI(D)(7), the Department expects that applied to the self-employed (under meaningful number of workers who most workers whose classification may which category independent contractors would get more satisfaction from doing be affected by this rule will have a fall).149 Manning states, ‘‘In this book it the same job for substantially less measure of bargaining power that could is assumed that firms set wages. This is compensation as an independent allow them to offset reductions in a more appropriate assumption in some contractor than for substantially more benefits with higher earnings, better labour markets than others. For compensation as a payroll employee.’’ working conditions, or both. example, it would not seem to be But this statement exposes what appears The Washington Center asserted that appropriate [. . .] for the self- to be a flawed assumption in EPI’s the population of independent employed.’’ 150 The sources that EPI analysis. Under the economic reality contractors is very diverse and that cites thus do not support its ultimate test, an employee typically cannot comparing mean wages is not conclusion. Rather, EPI’s possess the ‘‘same job’’ as an appropriate, expounding that the methodological assumptions appear to independent contractor. Rather, for the independent contractor market includes run counter to a widely-cited source worker to be classified as an both high-wage workers with adequate that EPI itself relies on. Finally, the EPI independent contractor, the worker bargaining power and low-wage workers analysis also relied on firms’ wage- must, on the whole, possess the with little bargaining power. The setting power to be absolute, that labor characteristics of an independent commenter did not explain how this supply is perfectly inelastic. EPI’s contractor, which often include point meaningfully applies to the analysis proceeds from the premise that meaningful control over the work or Department’s analysis, which addressed ‘‘perfect competition is rare,’’ but then meaningful opportunity for profit. EPI’s the diversity of the labor market in its jumps to the claim that ‘‘most labor analysis assumes, however, that the regression specifications, controlling for markets do not function competitively,’’ employer can and will simply reclassify many more variables than simply and that worker are particularly ‘‘likely a worker as an independent contractor income. Nonetheless, in response to this to lack the power to bargain for higher without regard for the features of the comment the Department conducted wages to compensate for their loss of working relationship. two additional regression analyses as a benefits and increase in taxes when they EPI’s analysis considers only proxy for the labor market for low-wage become independent contractors.’’ monetary compensation as part of the workers. The results were largely However, each of the sources the EPI ‘‘value of a job to a worker.’’ In the May consistent with the initial conclusions cites for this proposition, which are 2017 Contingent Worker Supplement presented in the NPRM. The discussed above, clearly show that firms (CWS) to the Current Population Survey Department ran its regression model do not possess or exert such absolute (CPS) workers classified as independent including only low-education workers wage-setting power. These flaws contractors were asked about their (a high school diploma or less). In this fundamentally undermine EPI’s preferences toward employment case, independent contractors had an estimates and yet go unaddressed by EPI arrangement. Their responses are average wage about 9 percent higher, and other commenters that reference indicative of non-monetary value and the results were statistically EPI’s estimates. The Department, derived from independent contractor significant. The Department also ran a therefore, declined to integrate these status. When asked, ‘‘Would you prefer regression including only workers in unreliable estimates into its analysis to work for someone else?’’ independent low-wage occupations (12 occupations due to such methodological concerns. contractors resoundingly stated ‘‘No’’ with mean hourly rate less than the EPI’s analysis states that ‘‘it is over ‘‘Yes’’ by a ratio of nearly 8 to 1. overall mean), for which the coefficient difficult to imagine that there are a Furthermore, the two most noted on independent contractor was positive, responses to the question, ‘‘What is the although small.148 149 EPI cites three sources alongside its claim, main reason you are self-employed/an Manning (2003), Dube et al. (2018), and a literature The Economic Policy Institute (EPI) review by the Washington Center, which also independent contractor?’’ were estimated annual transfers from workers submitted a comment opposing this rule. The ‘‘Flexibility of schedule’’ and ‘‘Enjoys to employers of $3.3 billion in Manning book is cited by both other commenters, being own boss/independent.’’ It is supplemental pay, paid leave, insurance with the Washington Center’s analysis drawing on it in numerous sections of its review as evident that most independent and retirement benefits, and the fundamental support. The Dube et al study focused contractors strongly value the non- employer share of Social Security and exclusively on users of a specific online task portal pecuniary compensation they receive. Medicare taxes. Its estimate is based on (Amazon Mechanical Turk), which is a niche EPI does not address how these non- the primary assumptions that (1) market of independent contractors and is a marketplace accessible to 49 countries, which pecuniary benefits factor into worker employees reclassified as independent makes it difficult to apply the findings with compensation. contractors will be paid the same in confidence to the U.S. market and the whole Arguing against the Department’s nominal wages and (2) there will be an independent contractor universe. The Washington inclusion of flexibility and satisfaction Center citation was a literature review of work in increase of 5 percent in the number of the field of monopsony in labor markets; its as important non-pecuniary independent contractors. EPI states that findings did not offer direct applications to the compensation factors in the NPRM, EPI the first assumption is based on sources independent contractor universe. Furthermore, its states that ‘‘employers are able to demonstrating that perfect competition review concluded, ‘‘our results provide evidence on the elasticity of labor supply to the firm and the provide a huge amount of flexibility to in labor markets is rare, a claim stated implied degree of firms’ wage-setting power, but not payroll employees if they choose to; the by several other commenters. However, necessarily whether the firms are able to exercise ‘inherent’ tradeoff between flexibility Alan Manning, the author of the this power,’’ explaining that it appears other forces and payroll employment is greatly rein in firms’ wage-setting power to some degree. foundational source referenced to make 151 150 A. Manning, Monopsony in Motion: Imperfect exaggerated.’’ this case (cited by EPI, sources cited by Competition in Labor Markets, Princeton, N.J.: EPI in the same section, and other Princeton University Press, (2003). A. Sokolova and 151 Some sources have argued that businesses, in commenters), explicitly caveats that the T. Sorensen, ‘‘Monopsony in Labor Markets: A fact, use scheduling in a way that negatively affect Meta-Analysis,’’ Washington Center for Equitable worker flexibility. See e.g., L. Golden, ‘‘Irregular wage-setting assumption should not be Growth, (February 2020). A. Dube, J. Jacobs, S. Work Scheduling and Its Consequences,’’ Economic Naidu, and S. Suri, ‘‘Monopsony in Online Labor Policy Institute, (April 2015), https://files.epi.org/ 148 The result is statistically significant at the 90 Markets,’’ American Economic Review: Insights pdf/82524.pdf (‘‘Facilitated by new software percent confidence level but not at the 95 percent 2(1): 33–46 (March 2020), https://www.aeaweb.org/ technology, many employers are adopting a human level. articles?id=10.1257/aeri.20180150. resource strategy of hiring a cadre of part-time

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EPI’s argument is less than persuasive of transfers from workers to employers hour (8 percent for self-employed for a number of reasons. First, is an estimate of the gross transfer independent contractors, 5 percent for economists have long recognized that without taking into account that the other independent contractors, and 2 workers value leisure as well as the independent contractors also have the percent for employees). remuneration of labor. As such, any ability to deduct some of their Several commenters highlighted this worker selecting between jobs is likely additional expenses on their income possibility that independent contractors to consider the flexibility of work taxes and thus is not a comprehensive could earn below the minimum wage. schedules, the compensation package, comparison of the net earnings of The Washington Center cited a report by fringe benefits, and a host of non- employees and independent contractors. the Center of American Progress that pecuniary compensation factors when EPI’s estimate is based on applying a net estimated that almost 10 percent of deciding both whether to work at a loss in income for every new independent contractors earn less than particular company and how many independent contractor, yet the data the Federal minimum wage.153 hours to spend working at that resoundingly show that workers pursue Representative Mark Takano pointed to company. Second, the fact that some independent contract work voluntarily literature finding that in California and employees have flexibility does not and in vast numbers, suggesting that New York many gig drivers receive imply that those employees do not value other factors, unmentioned by the significantly less than the state the flexibility or that greater flexibility commenter, are significant to worker minimum wage.154 A letter from 107 is not something employees would trade decisions in this field. EPI nonetheless U.S. Representatives referenced an for lower compensation. Third, in many assumes a blanket negative impact will instance where the Wage and Hour jobs, employee flexibility is necessarily be felt economy-wide for all new Division (WHD) recovered roughly limited because the business requires a independent contractors—an $250,000 in unpaid overtime and certain number of employees working assumption the Department believes is minimum wages for 75 workers together to accomplish a task, and so unsupportable in the face of the existing misclassified as independent granting significant flexibility to evidence. contractors by a cleaning company.155 employees would result in less Ultimately, based on the assumption EPI stated in its comment, ‘‘The workers productivity for the business which that the final rule will increase most likely to be affected by this rule are would likely result in lower independent contracting arrangements, workers in lower-wage occupations in compensation for the workers. Fourth, the Department acknowledges that there labor-intensive industries, such as some employers do offer employees may be transfers between employers and delivery workers, transportation flexibility, but often that flexibility employees, and some of those transfers workers like taxi drivers and some comes at a cost to the workers (of note, may come about as a result of changes truckers, logistics workers including payroll employees generally have less in earnings. However, for the reasons warehouse workers, home care workers, control over their own schedules than stated above, the Department does not housecleaners, construction laborers similarly-situated independent believe that these transfers can be and carpenters, agricultural workers, contractors). quantified with a reasonable degree of janitors, call center workers, and staffing EPI, however, fails to explain why an certainty for purposes of this rule. The agency workers in lower-paid employer would, all things equal, allow Department also does not believe that placements.’’ However, EPI did not its employees to work for direct independent contracting roles are provide a source for this important competitors, let them choose usefully compared by focusing solely on assumption, and the Department was assignments, or set their own hours. The earnings to employee roles—under the unable to verify EPI’s assertion in the point of hiring employees is to have economic reality test embraced by the Department’s own research. The nature workers that an employer can call upon final rule, control and an opportunity of the work done by workers across the and direct to perform desired tasks, as for profit are core considerations for diverse fields EPI identified is opposed to contractors who operate determining who is an independent uncertain, although many roles in the their own businesses. While some contractor. The Department believes employers may provide a measure of that these factors are often valued by 153 K. Walter and K. Bahn, ‘‘Raising Pay and flexibility they generally would not offer workers in ways that are difficult to Providing Benefits for Workers in a Disruptive the same degree of flexibility enjoyed by quantify. Furthermore, the Department Economy.’’ Washington: Center for American Progress (2017), https://www.americanprogress.org/ individuals who are in business for believes that workers as a whole will issues/economy/reports/2017/10/13/440483/ themselves. The Department believes, benefit from this rule, both from raising-pay-providing-benefits-workers-disruptive- based on data in the CWS survey and increased labor force participation as a economy/. beyond, that independent contractors result of the enhanced certainty 154 M. Reich. ‘‘Pay, Passengers and Profits: Effects experience significantly more flexibility provided by the rule, and from the of Employee Status for California TNC Drivers.’’ University of California, Berkeley (October 5, 2020), than employees and that such a feature substantial other benefits detailed https://irle.berkeley.edu/files/2020/10/Pay- is a core motivator.152 below. Passengers-and-Profits.pdf; L. Moe, et al. ‘‘The The Department notes several other Magnitude of Low-Paid Gig and Independent 5. Minimum Wage and Overtime Pay key weaknesses in EPI’s estimate that Contract Work in New York State,’’ The New As noted above, an additional School Center for New York City Affairs (February undermine its assertions. EPI’s estimate 2020), https://static1.squarespace.com/static/ consideration in the discussion of 53ee4f0be4b015b9c3690d84/t/ employees whose work schedules are modified, transfers is that minimum wage and 5e424affd767af4f34c0d9a9/1581402883035/ often on short notice, to match the employer’s overtime pay requirements would no Feb112020_GigReport.pdf. staffing with customer demand at the moment.’’). longer apply if workers shift from 155 ‘‘Skokie Cleaning Business Must Pay $500K In 152 Bureau of Labor Statistics, ‘‘Contingent and Unpaid Wages, Damages to Workers,’’ Alternative Employment Arrangements—May employee status to independent CHICAGO.CBSLOCAL.COM (May 5, 2012), https:// 2017,’’ USDL–18–0942 (June 7, 2018), https:// contractor status. The 2017 CWS data chicago.cbslocal.com/2012/05/05/skokie-cleaning- www.bls.gov/news.release/pdf/conemp.pdf. MBO indicate that, before conditioning on business-must-pay-500k-in-unpaid-wages-damages- Partners, The State of Independence in America: covariates, primary independent to-workers/. The Department believes that 2018: The New Normal, 2018, 7. James Manyika et misclassification is an important concern that the al., Independent Work: Choice, Necessity, and the contractors are more likely than rule addresses, and that the rule will reduce the Gig Economy (New York: McKinsey Global employees to report earning less than ability of employers to misclassify its workers by Institute, October 2016). the FLSA minimum wage of $7.25 per rendering the test more clear and understandable.

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above fields could lack features that will clear up misclassifications’’); methods.’’ 160 Thus, even ‘‘random’’ would facilitate a position conversion to Financial Services Institute (‘‘we agree audits are not necessarily representative independent contractor status. that it will reduce worker because they target industries with high With respect to overtime, CWS has misclassification and litigation’’). Other rates of misclassification. Because further indicated that, before commenters believe this rule may make audits focus on groups of businesses or conditioning on covariates, primary it easier for employers to misclassify industries in which misclassification independent contractors are more likely employees as independent contractors. rates are the highest, their results would to work overtime or extra hours beyond See, e.g., Equal Justice Center; Employee not support generalized conclusions what they usually work at their main job Rights Center; NELP; State AGs; TRLA. regarding the wider population. As (30 percent for self-employed These commenters cited reports such, the reports’ generalized independent contractors and 19 percent purporting to show extremely high rates conclusion lack reliable and for other independent contractors versus of misclassification. For example, a representative evidence, and are almost 18 percent for employees). The 2020 NELP report cited by many certainly significant overestimates. Department was unable to determine commenters reviewed state audits and Second, the audit data cited by NELP whether these differences were the concluded that ‘‘these state reports and others do not necessarily focus on result of differences in worker show that 10 to 30 percent of employers misclassification of employees as classification, as opposed to other (or more) misclassify their employees as independent contractors; some states’ factors. The Department has cited many independent contractors.’’ 156 The data are evaluated based on prevalence sources throughout this analysis that Washington Center also cited a study of employer violations, which is not point to a wide range of income for conducted by the Department of Labor representative of percentages of workers independent contractors, and does not in 2000 to claim that ‘‘between 10 misclassified as independent believe that this rule will be especially percent and 30 percent of employers contractors. For example, the 2020 applicable to any particular income audited in 9 states misclassified workers NELP report appears to state that audits segment of independent contractors. as independent contractors.’’ 157 conducted by Ohio found a Accordingly, the Department believes it misclassification rate of 45 percent, but These estimates, however, appear to prudent to rely on the numerous sources the cited Ohio report stated otherwise. be unreliable for at least two reasons. it has drawn on in the development of The report explained that the audits First, they make generalized this rule, rather than to focus on any searched for unemployment insurance conclusions regarding rates of particular slice of the income violations, not just misclassifications, distribution. And while independent misclassification using non- and that ‘‘45% of the audits produce contractors are not, by definition, representative audit data. For example, findings, in many cases for workers subject to the minimum wage the Department’s 2000 study cited by misclassification.’’ 161 In other words, requirements of the FLSA, none of the the Washington Center states that audits the Ohio audits found 45% of audited evidence cited by commenters suggests were ‘‘selected on a targeted basis employers failed to comply with some that the final rule is likely to because of some prior evidence of unemployment insurance requirement, 158 significantly impact this issue, and if so, possible non-compliance.’’ The 2020 with an unspecified subset committing to what extent. Accordingly, the NELP report likewise explained that misclassification. This and other Department did not attempt to quantify ‘‘[m]ost studies [on misclassification] misunderstandings of state audit these potential transfers. rely on audit data from unemployment findings may result in a misleading insurance and workers’ compensation estimate of the frequency with which 6. Misclassification 159 audits, targeted or random.’’ As a employers misclassify employees as Many commenters expressed 2015 EPI report explained, ‘‘[a]udit independent contractors. Furthermore, concerns regarding misclassification of methods vary across states in the extent the reporting is based on employees as independent contractors, to which they target employers for misclassification (or other issues, as which occurs when an individual who audit: They can base the audits on documented above) on a per employer is economically dependent on an specific criteria (e.g., a record of prior basis. The employer rate of employer is classified by that employer violation), or use a random sample of misclassification may not necessarily as an independent contractor. FLSA employers within industries prone to correspond to the rate of employee misclassification may be inadvertent or misclassification, or a mix of both misclassification. For example, if an intentional and its direct effects could employer employs 100 employees and include a transfer from the worker to the 156 NELP, Independent Contractor misclassifies only one of them, the employer if the employer fails to pay Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries, Oct. 2020, employer is recorded as a misclassifying minimum wage and overtime pay to 162 available at https://www.nelp.org/publication/ employer in the aggregated results. which the worker is entitled. independent-contractor-misclassification-imposes- Conversely, reducing misclassification huge-costs-workers-Federal-state-treasuries-update- 160 Employment Policy Institute. Carre, Francoise, could result in a transfer from october-2020. (In)dependent Contractor Misclassification. https:// employers to workers. 157 Lalith de Silva, Adrian Millett, Dominic www.epi.org/publication/independent-contractor- Several commenters believe that Rotondi, and William F. Sullivan, ‘‘Independent misclassification. Contractors: Prevalence and Implications for 161 Report of the Ohio Attorney General on the ‘‘[c]larifying the application of the test Unemployment Insurance Programs’’ Report of Economic Impact of Misclassified Workers for State for independent contractor status will Planmatics, Inc., for U.S. Department of Labor and Local Governments in Ohio 16–17 (Feb. 18, promote compliance with labor Employment and Training Administration (2000), 2009), available at https://iiiffc.org/images/pdf/ standards under the FLSA and, in turn, available at https://wdr.doleta.gov/owsdrr/00-5/00- employee_classification/OH%20AG%20Rpt%20on 5.pdf. %20Misclass.Workers.2009.pdf. reduce worker misclassification.’’ 158 Id. (emphasis added). 162 If 11 percent of businesses misclassify only Opportunity Solutions Project (OSP); 159 NELP, Independent Contractor one worker as an independent contractor, there are see also, e.g., Truckload Carriers Misclassification Imposes Huge Costs on Workers 100 businesses, and each employer has 20 workers, Association (‘‘[t]he increased clarity and Federal and State Treasuries, Policy Brief Oct. then the total percentage of these misclassified 2020, available at https://www.nelp.org/ workers is actually 0.5 percent. To find that 11 provided by the [proposed rule] would publication/independent-contractor- percent of workers are misclassified as independent likely lead to reduced misclassification-imposes-huge-costs-workers- contractors, all of the businesses who misclassified misclassification.’’); IAW (‘‘This rule Federal-state-treasuries-update-october-2020/. workers as independent contractors would need to

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This binary approach to data collection achieving the desired clarity and may provide more than ‘‘access to a on a per employer basis prevents a certainty.’’ A clearer test also means steady income and benefits.’’ 164 Such disambiguation to analyze the actual more workers will better understand an individual may, for example, number of misclassified workers in the their rights under the FLSA and can discount the value of certain types of labor force. This phenomenon is present defend those rights through private compensation associated with employee is another study conducted by the litigation or complaints to the classification, such as health insurance, Wisconsin Department of Revenue cited Department, which should deter that he or she might already enjoy from by NELP, which claimed that ‘‘In 2018, unscrupulous employers from a different source. The individual may 44% of audited employers were found intentionally misclassifying them. also simply prefer to trade overall to be misclassifying workers.’’ 163 In summary, the Department believes compensation for the greater flexibility However, that data seems to be that the simplicity and clarity this rule that often accompanies independent misleading for multiple reasons. First, provides will reduce both inadvertent contractor roles. Thus, the lower paid the quotation does not appear to match and intentional misclassification, which converted new jobs do not necessarily the cited source. Appendix 2 of the could produce transfers from employers reduce such workers’ welfare because Wisconsin Workforce Report states that to employees who are more likely to be they could offer tradeoffs that may be in 2019 the ‘‘percentage of audited correctly classified and given minimum preferable to the workers who are most employers with misclassified workers’’ wage and overtime pay. The Department likely to sort themselves into those was 33.3 percent (divergent from the is unable to calculate the exact transfer positions. On balance, the Department ‘‘44 percent’’ that NELP stated). Second, amount because it lacks reliable metrics believes conversion of new jobs will the number of businesses found to be on, for example, the existing have an overall positive impact on misclassifying workers does not address misclassification rates in the general workers. how many workers were misclassified. economy, the precise extent to which The second category of job conversion The percentage of workers misclassified this rule improves legal clarity, and how discussed above occurs when employers was 10.6, across all of the audited firms will respond to that clarity. modify their working relationship with existing employees such that they are employers, which is much smaller than 7. Job Conversion either 33 or 44 percent. Finally, all of rendered independent contractors under these estimates are compounded by the Many commentators expressed this rule. As explained above, to act on targeting bias described earlier, namely concerns that the rule would cause the legal certainty provided by this rule, that the results only reflect businesses businesses to reclassify their workers as the converted position likely would specifically targeted for audits, which independent contractors, causing those have to provide the worker with presents only a partial picture of the workers to lose the benefits of the FLSA substantial control over the work and a incidence of such misclassification with little gain in return. See, e.g., meaningful opportunity for profit or economy-wide. Washington Center (asserting that loss. The Department believes such Ultimately, and as explained above in ‘‘independent contractors tend to be conversions will be less common than Section VI(G)(2), commenters’ estimates worse-off than their wage-and-salary conversion of future positions because regarding current rates of counterparts’’); National Women’s Law the marginal cost of restructuring an misclassification—whether accurate or Center (‘‘if finalized, this rule will cost existing work arrangement is greater not—have little bearing on how workers . . . in the form of reduced than altering the arrangement of an misclassification rates are likely to compensation’’); EPI (estimating that unfilled position. And such change as a result of this rule. This rule converted ‘‘workers would lose $6,963 restructuring would disrupt the establishes a clearer test for when a per year’’). Some of these issues are preexisting working relationships, worker is an independent contractor discussed above. For example, the which risks negatively impacting rather than an employee under the Department discussed possible earnings worker morale, productivity, and FLSA. As such, it would reduce effects of workers converting from retention. Nonetheless, some conversion inadvertent misclassification by employee to independent contractor of existing positions may occur, and employers who are confused by the extensively in this section VI(D) and some converted workers may prefer the prior test, particularly small businesses concluded it could not definitively additional flexibility and earn more by that lack resources to hire expensive determine whether overall taking advantage of the opportunity for attorneys. For example, one small compensation—i.e., earnings plus profit or loss that may accompany the business owner commented to explain benefits—for a job that is converted conversion. The effect of the rule would that ‘‘the ability to understand and from employee to independent be positive for these workers. Other properly determine worker status under contractor classification in response to converted workers may prefer the the FSLA is paramount for small this rule is likely to rise or fall on security, stability, and other features of businesses who cannot afford the cost of average. Regardless, the Department an employment relationship or earn less litigation . . . I believe that with the acknowledges that whether the overall due to, for example, reduction of proper transparency within the effect of job conversion is likely to be, employer-provided benefits, regulations, the better the outcome not on balance, positive depends on the employment taxes, and loss of the only for small businesses, but the individual, reclassified worker, the FLSA’s minimum wage and overtime worker, and ultimately the care unique circumstances of the business, pay. The effect of the rule would be recipient. We want to comply, and I and whether or not the working negative for these converted workers, have confidence that the proposed [rule] conditions were changed in order to but, as explained above, the Department . . . will be highly effective in reclassify the worker. believes this type of conversion will be If the converted position is an entirely rare. have misclassified 100 percent of their workforce as new position, it is more likely to be Finally, an employer may reclassify independent contractors. filled by one of the many individuals an existing employee position to an 163 Wisconsin Department of Workforce who desire to work as an independent Development, Payroll Fraud and Worker independent contractor position Misclassification Report 16 (2020), available at: contractor, for example because they https://dwd.wisconsin.gov/misclassification/pdf/ value the ‘‘flexibility to choose when 164 See Coalition for Workforce Innovation (2020), 2019-2020-misclassification-task-force-report.pdf. and where to work’’ that the position supra note 77.

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without meaningfully changing the not afforded non-pecuniary benefits, for Second and as explained above, the nature of the job in response to the example additional flexibility, in converted worker whose job remains added legal clarity provided by this return.167 EPI and likeminded unchanged is likely to already have rule. Employers could be most confident commenters believe these workers substantial control over the work and a of such reclassification under this rule would be ‘‘doing the same job for meaningful opportunity for profit or loss if the preexisting job already provided substantially less compensation as an such that he or she can be classified as the worker with substantial control over independent contractor,’’ and that this independent contractor with the most the work and a meaningful opportunity class of worker comprises the majority legal certainty this rule can provide. for profit or loss. The Department or even all of the workers impacted by The Department was unable to believes this phenomenon is likely to be this rule. The Department agrees that determine how many of the 370,000 rare because the current position would some workers could be impacted in this current minimum wage employees also have to be held by an individual who manner, but believes such occasions are meet these two criteria, although it is in business for him- or herself as an likely to be rare because two necessary expects the number to be low. The economic reality but is nonetheless conditions limit the number of such Department attempted to identify presently classified as an employee. workers. examples of minimum wage employees While many commenters warned that First, in order for conversion to have who enjoy substantial control over their economically dependent employees an unambiguously negative affect, a work and a meaningful opportunity for may be improperly classified as converted worker’s overall profit or loss, but was unable to do so. independent contractors, none compensation must be at the minimum Nor did commenters provide specific expressed concern that there is wage. Generally, firms impacted by the data or examples of minimum wage widespread classification of individuals rule can already directly reduce wages employees who would meet these who are in business for themselves as and benefits of their employees—they criteria. Several commenters argued that employees.165 Such employees may do not need to convert those employees the Department failed to adequately nonetheless exist and be converted into to independent contractor to achieve consider the effects of these possible independent contractors as a result of these labor cost savings. However, most conversions from employee to this rule. Features of these converted firms do not reduce their employees’ independent contractor, or the potential workers’ work, for example the level of compensation due to the risk of negative effects of misclassification on flexibility and stability, would remain lowering morale, reducing productivity, workers. NELA, for instance, asserted unchanged because the job remains the and causing turnover. That is to say, the that the NPRM’s cost-benefit analysis same. Firms could potentially reclassify labor markets in which most firms focused solely on companies rather than existing workers who are already in operate prevents them from setting workers and further claimed that the business for themselves in a manner compensation without regard for worker Department ‘‘ignores the massive cost to that reduces overall compensation, but preferences. The Department believes misclassified workers.’’ Other their ability do to so would be that a firms’ ability and willingness to commenters stated that the final rule constrained because such reduction reduce its employees’ compensation is would harm workers by either could negatively impact worker morale, shaped by the tradeoff between labor increasing the rate of misclassification productivity, and retention.166 savings, on one hand, and the risk of or by allowing employers to reduce Nonetheless, the sharpening of the lower productivity and higher turnover, wages and benefits of employees who economic reality test may negatively on the other. Clarifying the legal are converted into independent requirement for firms to convert a contractors. See, e.g., Washington impact some current employees who position from employee to independent Center for Equitable Growth could be reclassified as independent contractor status would not make firms (Washington Center) (asserting that contractors in a manner that results in any more willing or able to reduce ‘‘independent contractors tend to be reduced overall compensation but are compensation unless the worker was worse-off than their wage-and-salary already earning the minimum wage and counterparts’’); Appleseed Center 165 Commenters in the business and freelancer community indicated that—rather than classify receiving no benefits. According to BLS, (expressing concern that rule ‘‘will harm independent entrepreneurs as employee in response based on CPS data, in 2017 there were workers across a broad spectrum, [but] to legal uncertainty regarding classification— 370,000 adult 168 employees paid at the will have a disproportionate impact on business simply decline to do business with those minimum wage, which comprise 0.24 Black and Hispanic workers who are entrepreneurs in the first place. See, e.g., ASTA 169 (‘‘The prospect of inconsistent determinations has percent of the U.S. labor force. overrepresented in the low-paying jobs had a chilling effect on the growth of businesses in where independent contractor industries reliant on contract workers which has 167 Employers and employees could make similar misclassification is common’’); National resulted in fewer opportunities for individuals who conversions to independent contractor status for Women Law Center (‘‘if finalized, this choose to offer their services as independent reasons outside the sharpening of the economic entrepreneurs.’’); CPIE (‘‘uncertainty associated reality test this rule provides. Such shifts would not rule will cost workers . . . in the form with worker classification under the FLSA . . . be identified as impacts in this analysis because the of reduced compensation’’); EPI discourages companies from doing business with impetus for such conversion is due to factors other (estimating that individual ‘‘workers independent entrepreneurs’’). The effects described than this rule. would lose $6,963 per year’’). by these commenters are unsurprising. For 168 This figure excludes workers under the age of As is explained in greater detail example, it makes little sense for a business to 19. If excluding workers under the age of 24, this classify a worker as an employee, thus obligating figure drops over 40 percent to 221,000. This figure below, the Department disagrees with themselves to pay a premium rate for overtime work does not include workers who make less than the these comments that the rule will under the FLSA, if it is the worker and not the minimum wage, a vast majority of whom work in broadly harm workers. The Department business who determines how many hours to work the restaurant industry and receive tips for their agrees with the numerous commenters, each week. Rather, the business likely would either work. The average earnings of a restaurant worker not hire the worker at all or hire him or her as an who receives tips is significantly above the including nearly all individual employee but insist on controlling hours worked. minimum wage. The figure includes part time commenters who self-identified as 166 Most firms can already reduce the overall workers, who would not likely receive overtime freelancer workers, who asserted that compensation of their employees whose wages compensation due to the limited number of hours the rule would encourage flexible work exceed the minimum wage through more direct they work. means than reclassification as independent 169 In 2017, there were approximately arrangements and thereby create contractors but do not do so because of risks 152,000,000 workers in the U.S., according to the meaningful—though not easily regarding morale, productivity, and retention. U.S. Bureau of Labor Statistics. measurable— value for workers. One

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commenter explained that ‘‘[b]eing an nor its underlying business model, both outside experts to evaluate the rule and independent worker allows for me to do of which would likely negatively impact relay the relevant information to their what I can as a single mother, have productivity. organization (e.g., a chamber of flexibility.’’ Another stated that In summary, the most common commerce). The Department used the ‘‘[f]reelancing has afforded me categories of job conversions—e.g., new number of establishments to estimate independence and flexibility and the positions—are likely to positively the fundamental pool of regulated opportunity to be a productive member impact workers. And the category of job entities—which is larger than the of society, and do my best work.’’ As a conversions that is likely to produce number of firms. This assumes that final illustrative example, another negative impacts—i.e., reclassification regulatory familiarization occurs at both commenter asserted that ‘‘[t]he primary of workers without changes to the job— the headquarters and establishment value for myself as an independent is most likely the rarest. For these levels. contractor for my services is the reasons, the Department believes There may be differences in freedom to negotiate, to choose, and the benefits to workers from job conversions familiarization cost by the size of freedom to limit what services I provide, will, on balance, exceed costs. establishments; however, the analysis does not compute different costs for the days, and hours of work, and the E. Costs price of my labor, unencumbered by the establishments of different sizes. less flexible but more secure employer The Department considered several Furthermore, the analysis does not employee relationship.’’ Although some costs in evaluating the rule. The revise down for states where the laws workers in positions converted from Department quantified regulatory may more stringently limit who employees to independent contractor familiarization costs and estimated that qualifies as an independent contractor relationships may receive fewer benefits they will total $370.9 million in Year 1. (such as California) and thus the new traditionally associated with Other potential costs, including those rule will have little to no effect on classification as employees, the raised by commentators, were not classifications. To estimate the number Department believes that this would quantified, for reasons explained in the of establishments incurring regulatory likely be infrequent and their net effect sections that follow. familiarization costs, the Department began by using the Statistics of U.S. would not necessarily be negative.170 1. Regulatory Familiarization Costs Moreover, the Department believes any Businesses (SUSB) to define the total Regulatory familiarization costs negative effects would be outweighed by pool of establishments in the United represent direct costs to businesses and 172 the significant value the rule delivers to States. In 2017, the most recent year current independent contractors other workers and businesses by available, there were 7.86 million associated with reviewing the new clarifying, simplifying, and reducing establishments. These data were regulation. To estimate the total transaction costs around independent supplemented with the 2017 Census of regulatory familiarization costs, the contractor arrangements. Government that reports 90,075 local Department used (1) the number of No commenter provided evidence or government entities, and 51 state and establishments, government entities, 173 specific cases in which individuals or Federal government entities. The and current independent contractors; (2) types of workers would, as a result of total number of establishments and the wage rates for the employees and for this rule, be converted from employees governments in the universe used for the independent contractors reviewing to independent contractors. Because the this analysis is 7,950,800. the rule; and (3) the number of hours The applicable universe used by the rule does not change the classification that it estimates employers and Department for assessing familiarization of any employee, any jobs converted independent contractors will spend costs of this final rule is all without meaningful change would have reviewing the rule. This section presents establishments that engage independent had to already have satisfied the the calculation for establishments first contractors, which is a subset of the requirements of bona fide independent and then the calculation for universe of all establishments. In its contracting arrangements under this independent contractors. analyses, the Department estimates the rule, with the only change likely being For a rule like this one, it is not clear impact of regulatory familiarization a lower assessed litigation risk for whether regulatory familiarization costs based upon assessment of the regulated certain businesses. While the number of are a function of the number of universe. In several recent rulemakings, workers for whom reclassification establishments or the number of the Department estimated that the occurs without bringing them firms.171 Presumably, the headquarters regulated universe comprised all meaningful benefits may not be zero, the of a firm will conduct the regulatory establishments because the rules were Department believes such cases will be review for businesses with multiple broadly applicable to every employer.174 rare exceptions. Even if the locations, and also may require some For those rules, the Department classification of a worker were to locations to familiarize themselves with estimated familiarization costs by change, the business could face market the regulation at the establishment level. assuming each establishment would forces that would likely hold overall Other firms may either review the rule review each rule. Because this final rule compensation steady. Furthermore, to consolidate key takeaways for their affects only some establishments, i.e., businesses would need to take caution affiliates or they may rely entirely on that any new contract relationship 172 U.S. Census Bureau, 2017 SUSB Annual Data would neither damage worker relations 171 An establishment is commonly understood as Tables by Establishment Industry. https:// a single economic unit, such as a farm, a mine, a www.census.gov/data/tables/2017/econ/susb/2017- 170 As explained in more detailed above, this is factory, or a store, that produces goods or services. susb-annual.html. because most workers can be converted from Establishments are typically at one physical 173 U.S. Census Bureau, 2017 Census of employee into independent contractor classification location and engaged in one, or predominantly one, Governments. https://www.census.gov/data/tables/ only if they are provided with greater control over type of economic activity for which a single 2017/econ/gus/2017-governments.html. their work and opportunity for profit or loss based industrial classification may be applied. An 174 These include Joint Employer Status under the on their initiative or investment. Such flexibility establishment contrasts with a firm, or a company, Fair Labor Standards Act; Defining and Delimiting and entrepreneurial opportunities may be more which is a business and may consist of one or more the Exemptions for Executive, Administrative, valuable to such workers than potential reduction establishments. See BLS, ‘‘Quarterly Census of Professional, Outside Sales and Computer in benefits associated with classification as Employment and Wages: Concepts,’’ https:// Employees; and Regular Rate Under the Fair Labor employees. www.bls.gov/opub/hom/cew/concepts.htm. Standards Act.

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those that currently or may in short hire independent contractors is doing so rule change published by the order face an independent contractor because the firm believes the new Department, worker advocacy groups, versus employee classification relationship will be beneficial to itself media outlets, and accountancy and determination, the Department and the independent contractor also consultancy firms, as has occurred with accordingly reduces the estimated pool believes that the new relationship will other rulemakings. Furthermore, the to better estimate the establishments be beneficial to him or herself. Such a repercussions for independent affected by the rule by assessing situation would result in net benefits to contractors are smaller (i.e., the regulatory familiarity costs only for the employer that more than fully litigation costs, damages, and penalties those establishments that engage compensate for any familiarization associated with misclassification tend to independent contractors. costs. Notably, and for comparability in fall on establishments).178 This time is In 2019, Lim et al. used extensive IRS estimates, the Department does not add valued at $46.36, which is the mean data to model the independent these potential firms to the Benefits hourly wage rate for independent contractor market, finding that 34.7 section either. contractors in the CWS, $27.27, with an percent of firms hire independent The Department assumes that a additional 46 percent benefits and 17 contractors.175 These data are based on Compensation, Benefits, and Job percent for overhead, then updated to annual tax filings, so the dataset Analysis Specialist (SOC 13–1141) (or a 2019 dollars. Therefore, regulatory includes firms that may contract for staff member in a similar position) will familiarization costs to independent only parts of a year. The 34.7 percent of review the rule.177 According to the contractors in Year 1 are estimated to be establishments provides a figure of Occupational Employment Statistics $218.6 million ($46.36 × 15 minutes × 2,758,928, which forms the foundation (OES), these workers had a mean wage 18.9 million). of the multiplier used in this analysis. of $33.58 per hour in 2019 (most recent The estimate of 18.9 million The Department did not estimate data available). Given the proposed independent contractors captures the familiarization costs for companies that clarification to the Department’s universe of workers over a one-year may decide to work with independent interpretation of who is an employee period. Using this figure for the overall contractors only after the new rule is and who is an independent contractor cost estimate results in an artificially finalized, because they would need to under the FLSA, the Department high value because it includes workers familiarize themselves with the current assumes that it will take on average who would have otherwise been legal framework even in the absence of about 1 hour to review the rule as included in the baseline case without this rule.176 Although firms that do not proposed. The Department believes that the rule and thus spent time currently use independent contractors an hour, on average, is appropriate, familiarizing themselves with the legal are not counted in this universe of because while some establishments will framework in the matter of course, employers, to allow for an error margin, spend longer than one hour to review without incurring a supplementary cost. the Department is using a rounded 35 the rule, many establishments may rely Furthermore, the Department believes percent of the total number of on third-party summaries of the changes that it is probable that independent establishments defined above or spend little or no time reviewing the contractors would review the regulation (7,950,800), resulting in 2,782,780 rule. Assuming benefits are paid at a only when they had reason to believe establishments estimated to incur rate of 46 percent of the base wage, and that the benefits would outweigh the familiarization costs. overhead costs are 17 percent of the costs incurred in familiarizing The Pennsylvania Department of base wage, the reviewer’s effective themselves with the rule, and since this Labor & Industry (PA L&I) commented hourly rate is $54.74; thus, the average analysis does not attempt to calculate that the Department underestimated the cost per establishment conducting those economic benefits it is possible cost of the rule by failing to include regulatory familiarization is $54.74. that the costs presented in this section businesses that are newly incentivized Therefore, regulatory familiarization are overestimated.179 to consider reclassifying workers to costs to businesses in Year 1 are The total one-time regulatory independent contractors. As stated estimated to be $152.3 million ($54.74 familiarization costs for establishments above, even without the new rule any × 2,782,780) in 2019 dollars. and independent contractors are firm that does not currently engage any For regulatory familiarization costs for estimated to be $370.9 million. independent contractors but chooses to independent contractors, the Regulatory familiarization costs in do so in the future would have already Department used its estimate of 18.9 future years are assumed to be de had to familiarize itself in the baseline million independent contractors and minimis. Similar to the baseline case for case, so this rule does not impact those assumed each independent contractor employers, independent contractors firms. Since the commenter’s point is will spend 15 minutes to review the would continue to familiarize premised on the fact that the firm may regulation. The average time spent by themselves with the applicable legal be incentivized to investigate the independent contractors is estimated to framework in the absence of the rule, so regulation, it would be reasonable to be smaller than for establishments. This this rulemaking—anticipated to provide assume that any firm without difference is in part because the more clarity—is not expected to impose independent contractors that reviews Department believes independent costs after the first year.180 This the new rule and ultimately decides to contractors are likely to rely on summaries of the key elements of the 178 An independent contractor that hires 175 Table 10: Firm sample summary statistics by independent contractors would already be captured year (2001–2015), https://www.irs.gov/pub/irs-soi/ 177 A Compensation/Benefits Specialist ensures in the ‘‘establishment’’ calculation. 19rpindcontractorinus.pdf. company compliance with Federal and state laws, 179 For example, independent contractors in states 176 An added dimension is that the final rule is including reporting requirements; evaluates job with classification frameworks that are known to be expected to provide significant clarity, which positions, determining classification, exempt or more stringent than the existing FLSA classification would result in time and cost savings (net of non-exempt status, and salary; plans, develops, framework, such as in California, may not review regulatory familiarization costs) for those outside evaluates, improves, and communicates methods the rule since it would be unlikely to affect their the pool of firms with existing independent and techniques for selecting, promoting, classification. contractor relationships. These (net) cost savings compensating, evaluating, and training workers. See 180 As explained below, the Department considers are not included in this analysis, consistent with BLS, ‘‘13–1141 Compensation, Benefits, and Job that the regulation may produce benefits along this this analysis’ treatment of resulting growth in the Analysis Specialists,’’ https://www.bls.gov/oes/ dimension in future years by simplifying the independent contractor universe. current/oes131141.htm. regulatory environment.

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amounts to a 10-year annualized cost of raised and discusses the qualitative that independent contractors cannot $43.5 million at a discount rate of 3 merits, but does not quantify estimates adequately assess their risks, needs, and percent or $52.8 million at a discount for inclusion in its top line figures.182 goals. Furthermore, these commentators rate of 7 percent. Detailed explanations are presented in seem to assume that the listed features SWACCA commented that regulatory each category below, including could be obtained by workers with no familiarization costs were discussion of the range of uncertainties cost to the worker. The Department does underestimated because they ‘‘would and data limitations identified. not agree with such assessments. The not only be imposed upon adoption of a. Additional Impacts to Workers Independent Women’s Forum stated a final rule but would be ongoing as that the flexibility afforded by Several commenters asserted that the stakeholders begin to understand independent contracting is especially whether and how it will be applied.’’ NPRM’s discussion of costs did not ‘‘crucial for women who are the primary Additionally, they asserted the costs for include a discussion of effects on caregivers in their households.’’ businesses to familiarize themselves workers beyond minimum wage and with the new guidance would exceed overtime pay. Ironworkers Local Union Palagashvili; Independent Women’s the cost of familiarization for the 7 stressed the importance of benefits Forum (‘‘Women find independent existing guidance, a claim that the such as workers’ compensation for the contracting appealing because of the commenter did not substantiate with dangerous nature of the work of their flexibility, autonomy, and freedom it data. The Department disagrees with members and other construction provides.’’). Nor did individual this assertion. The rule is expected to workers. The Center for Law and Social freelancer commenters, who repeatedly reduce the time spent analyzing how the Policy (CLASP) noted that the rule affirmed their ability to make rational economic reality test’s factors interact. could also impact other benefits based decisions for themselves and their own Accordingly, the Department reiterates on the FLSA’s definition of businesses. One such commenter stated that incremental regulatory employment, such as access to paid sick that ‘‘I prefer the option to make my familiarization costs in future years are leave in general and under the Families own schedule and decide how I want to expected to be de minimis. First Coronavirus Response Act proceed in making my money at my A number of commenters expressed (FFCRA). The Washington Center, own discretion.’’ Another explained support for the cost estimates. The CGO among others, contended it may also that, ‘‘[a]s an independent contractor I states that, ‘‘As currently written, the impact workers’ rights to join a union. am free to choose when and where I proposed rule carefully quantifies the The International Brotherhood of work. This is important to me as a cost savings of reduced litigation and Teamsters commented that the caregiver for elderly relatives.’’ As a increased clarity.’’ AFPF posited that, if liquidated damages remedy for willful final illustrative example, a freelancer anything, the calculations would tend to or bad faith violations of the FLSA is stated that ‘‘I have chosen this reflect ‘‘an overstatement of regulatory not available to workers who are profession because of the freedom and familiarization costs.’’ classified as independent contractors. flexibility it affords me. I also can earn Other commenters asserted that 2. Other Costs 181 more freelancing than I could working independent contractors are also not It is possible this rule will result in protected by the Federal anti- in a similar full-time job [. . .]. I am a costs beyond the above described discrimination and health and safety far better judge of what is good for me familiarization costs. In the NPRM, the statutes, and that the Department failed than a politician in Washington.’’ Department invited comments and data to consider this effect.183 Independent workers are a bedrock of on potential other costs of this rule. The These potential impacts do not the U.S. economy and are acutely aware Department received comments change the Department’s overarching of their own values and needs. responsive to these requests which view that workers as a whole will be Fundamental to being an independent generally fell into seven categories: better off as a result of this rule, even contractor is the ability to control one’s Impacts to workers; impacts to tax if some workers may not be better off. own work, which enables workers to be revenues; impacts on competition; Generally speaking, the above the deciding factor in accepting or impacts on income inequality and to commenters raise points that declining work that may be risky or not minorities and women; tax filing; fundamentally rest on the assumption as rewarding. The commenters above implementation; and impacts on income did not cite or offer data to support their stability. The Department evaluated all 182 In some cases, commenters raised points that assumption that employees covered by of the potential costs that were may very well impact certain individuals in the FLSA are intrinsically better off identified, and examined many of the specialized circumstances, but which are not, when aggregated across the economy as a whole, compared to genuine independent citations provided. In general, the cumulatively significant or representative. contractors who are not covered by the commenters did not provide ample data 183 The Department has not conducted a thorough FLSA. Several commenters, notably or other evidence to support their review of discrimination law at the Federal or state CLASP and NWLC, who submitted claims, and, upon review, the level for the purposes of this rulemaking, but notes that independent contractors are protected by at comments related to the pandemic do Department was unable to confirm or least some Federal anti-discrimination laws. See, not address the abundant data substantiate the proposed cost e.g., 42 U.S.C. 1981. Further, the scope of these laws demonstrating that access to categories in its own research. is not dependent on employee status under the Therefore, in this section of the analysis, FLSA. See, e.g., Gulino v. New York State Educ. independent contracting has been the Department addresses the points Dep’t, 460 F.3d 361, 379 (2d Cir. 2006) (‘‘[T]he essential for many workers attempting Supreme Court has given us guidelines for to balance responsibilities, especially discerning the existence of an employment 181 Various commenters to the NPRM raised relationship [in the race-discrimination context]: for women and caregivers. Accordingly, points that they considered ‘‘costs,’’ although those Traditional indicators of employment under the to the extent the final rule will increase points may more accurately be defined as transfers common law of agency.’’); Weary v. Cochran, 377 the frequency of independent under Executive Order 12866. To clearly address F.3d 522, 524 (6th Cir. 2004) (‘‘[T]he proper test to these points, the Department decided to address the apply in determining whether a hired party is an contracting, the Department believes following areas with the language used by employee or an independent contractor under the that workers will, on net, benefit from commenters. For further discussion of related [Age Discrimination in Employment] Act is the that option. impacts, please see the Potential Transfers section. ‘common law agency test.’ ’’).

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b. Impacts to Tax Revenue and Public through the Pandemic Unemployment misclassification is erroneously Assistance Assistance (PUA) program. SWACCA compared to independent contractors. Some commenters asserted that the noted that more than 11 million self- Further, the majority of these estimates rule will either reduce tax revenue or employed individuals have received of lost revenue are due to an assumption 185 increase public assistance. For example, assistance from PUA. The nationwide that freelance workers do not report some commenters pointed out that low- response to the COVID–19 pandemic their full earnings, which is a criminal income workers who are classified as was intentionally robust. PUA offense. A letter from seven independent contractors are often forced assistance was funded by Congress in Congressional Representatives cited a to rely on public assistance programs. the CARES Act. 1984 IRS estimate that misclassification The UFCW cites a study finding 15 Several commenters noted that any cost the Federal government $3.72 percent of platform workers in the San shift from employees to independent billion (adjusted to 2019 dollars), nearly Francisco area receive some form of contractors will result in lost tax 60 percent of which was from public support (e.g. food stamps, revenue. Specifically, the Michigan misclassified workers failing to pay housing assistance) and 30 percent were Regional Council of Carpenters cites income taxes and the remainder was on state public-access health estimates of the loss in taxes in due to failure to pay taxes used to fund insurance.184 This report did not, Michigan and other states due to social insurance programs. Once again, however, compare this finding with the misclassification.186 Notably, this comment failed to meaningfully extent to which low-income employees misclassified workers are not the same explain how the studies it cites can be rely on public assistance. The as independent contractors. In fact, this extrapolated across independent Department notes that public assistance rule clarifies the classification of contractors. is available to low-income individual workers and is expected to result in The Department notes that certain whether they are employees or fewer total cases of misclassified employer required taxes, such as independent contractors. An increase in workers. The Department does not agree unemployment insurance and workers’ independent contracting will not with the assumptions about the U.S. compensation, are not required for necessarily lead to increased public labor market held by commenters to this independent contractors, and thus the assistance expenditures. To the rule that reference studies on the cost of associated tax revenue will decrease if contrary, if independent contracting, misclassified workers. EPI estimated more individuals choose to work as even at a low income, is the alternative that the increase in workers classified as independent contractors. However, the to unemployment or nonparticipation in independent contractors will lead to a lack of transfer means that the worker the labor force, then it would reduce transfer of at least $750 million annually keeps more money, which may be saved means-tested public assistance from social insurance funds. EPI’s to provide for periods of expenditures. Several individual estimate is predicated on an assumption unemployment. Additionally, these are commenters suggested that they would that eligibility for independent transfer programs where the benefits are not be working at all but for contractors to receive unemployment paid to the workers who pay into the independent contractor opportunities. benefits ‘‘will occur in future program through their employers. Thus, One commenter said, ‘‘I am an recessions.’’ The unprecedented CARES if independent contractors are not independent contractor, i.e. business Act funded unemployment benefits eligible to participate in these program, owner; I am self-employed. I would not through PUA for the first time in government expenditures would also be able to work in any capacity, other history. EPI’s entire estimate rests on decrease. Therefore, providing than self-employed.’’ Another such unprecedented relief becoming unemployment benefit or workers’ explained, ‘‘I am 71 years old and commonplace, a view which the compensation to independent cannot (and will not) take regular Department does not share. The contractors is generally not a cost to employment. Earning an income from Washington Center cites a study by state and local governments. To my home is safer, more effective and Harvard Law School’s Labor and demonstrate, consider unemployment more satisfying.’’ As a final illustrative Worklife program that ‘‘found that programs, which are a type of insurance. example, a woman explained that ‘‘[a]s between 2013 and 2017, the state of Reduced unemployment taxes are a single mother trying to go back to Washington lost $152 million in generally offset by reduced school I have day and night classes. unemployment taxes and the Federal unemployment benefits. The only direct Having a regular job during this time be government lost $299 million in payroll cost would be if workers who no longer [sic] very challenging to meet my school taxes due to worker misclassification in pay into these programs continue to hours.’’ Thus, making it easier for the state.’’ 187 Again, worker receive benefits. These direct costs are individuals to work as independent expected to be small. contractors may reduce the burden on 185 Unemployment Insurance Weekly Claims Government revenue from other taxes, Report (October 15, 2020), https://oui.doleta.gov/ public assistance. Furthermore, since such as income and Medicare taxes, press/2020/101520.pdf. may go up or down as a result of this this RIA focuses on the changes at the 186 D. Belman and R. Block, ‘‘Informing the margin based on increased clarity of the Debate: The Social and Economic Costs of rulemaking depending on the total classification factors, the concerns Misclassification in the Michigan Construction income of employers, employees, and raised by the studies cited by these Industry,’’ Institute for Public Policy and Social independent contractors. However, a Research, Michigan State University (2008), http:// decrease in tax revenue due to a failure commenters would not necessarily ippsr.msu.edu/publications/ARMisClass.pdf. F. apply to those this rule impacts. Carre, ‘‘(In)dependent Contractor of some independent contractors to fully Several commenters noted that Misclassification,’’ EPI Briefing Paper #403 (June 8, pay their required taxes is not a cost taxpayers funded unemployment 2015), https://files.epi.org/pdf/87595.pdf. O. Cooke, attributable to the Department’s D. Figart, J. Froonjian, and K. Sloane, ‘‘The rulemaking revising the standards for payments for independent contractors Underground Construction Economy in New Jersey,’’ Stockton University (2016), https:// independent contractor status under a 184 C. Benner, E. Johansson, K. Feng, and H. Witt. www.mcofnj.org/wp-content/uploads/2018/05/ ‘‘On-Demand and On the Edge: Ride-Hailing & Underground-Construction-Economy-Summary- Harvard Law School Labor and Worklife Program Delivery Workers in San Francisco’’ (May 5, 2020), June-2016.pdf. (2019), https://lwp.law.harvard.edu/news/worker- https://transform.ucsc.edu/on-demand-and-on-the- 187 L. Xu and M. Erlich, ‘‘Economic Consequences misclassification-washington-state-leads-millions- edge. of Misclassification in the State of Washington.’’ revenue-losses-new-harvard-report.

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Federal law separate and apart from any d. Income Inequality and Impacts on the gig economy, a recent NBER study tax law. Minorities and Women found that the gender wage gap among Finally, the Department notes that Some commenters asserted that the on-demand rideshare workers is lower overall state and local tax revenue may rule could increase racial and gender than that of the rest of the economy and increase as a result of the efficiency and income inequality. NWLC wrote that is ‘‘entirely attributed’’ to differences in experience and preferences.193 The flexibility this rule promotes. The additional protections other than NBER study specifically found that Department believes that legal clarity minimum wage and overtime pay afforded by the FLSA were particularly ‘‘discrimination is not creating a gender provided by this rule will result in, gap in this setting,’’ and ‘‘no other paper among other things, lower regulatory important for working women, such as ‘‘employer obligations to accommodate has ever estimated such a precise ‘zero’ compliance and litigation costs, more 194 breastfeeding workers’’ 189 and gender gap in any setting.’’ Several efficient and innovative work commenters cited other studies that arrangements, and new jobs for ‘‘protections against pay discrimination.’’ The Washington document measurable benefits of individuals who otherwise would not independent contractor opportunities work. All of this could increase firms’ Center cited a study on outsourcing that it believed shows independent for women. Dr. Liya Palagashvili profits and workers’ incomes, which contracting ‘‘has contributed to provided a lengthy review of the results in a larger pool from which state increased wage inequality in the United literature on the beneficial impacts of and local taxes are drawn. The overall States.’’ 190 But the cited study actually independent contract work for women. positive effect on state and local tax found something different: ‘‘the She cited a study that finds that women revenue may dwarf, for example, any increased concentration of typically are the main caregivers at home, and 96 reduction in unemployment insurance low-wage occupations over time can be percent of women ‘‘indicate that the or workers compensation taxes. The explained by changes in the primary benefit of engaging in platform- Department, however, declines to characteristics of establishments economy work is the flexible working hours.’’ See also Independent Women’s quantify net effects on state and local employing these occupations.’’ 191 In Forum (‘‘Women find independent tax revenue because it believe any such other words, the study linked wage contracting appealing because of the attempt to do so would require too inequality to employers outsourcing flexibility, autonomy, and freedom it many assumptions. jobs to other employers that paid lower provides.’’). A McKinsey Global wages, and made no attempt to isolate c. Fair Competition Institute study, discussed in an earlier the effects of independent contracting. section, found that independent work The evidence discussed in this analysis Several commenters stated that offers caregivers, who are shows that independent contractors expanding the scope of independent predominantly women, access to often earn more than their employee contractors will ‘‘fuel a race to the economic opportunity they would bottom,’’ where companies will feel counterparts further undermines the otherwise not have, concluding that pressure to classify workers as commenter’s assertion. ‘‘[t]his type of flexibility can ease the UFCW wrote that ‘‘[t]he proposed independent contractor to reduce labor burden on financially stressed regulation fails to address its potential costs in order to compete in their households facing logistical impact on people of color who are market. UPS claimed that companies challenges.’’ Dr. Palagashvili cited overrepresented in low-wage misclassifying workers as independent numerous other studies that are independent contractor positions such contractors externalize their costs and consistent in their findings: Women are as app-based platform work.’’ This rule hurt other businesses through unfair very much attracted to work competition.188 The Department clarifies for app-based platforms how to arrangements that offer flexibility, believes that this will be unlikely properly classify workers, thereby including one that finds ‘‘75 percent of reducing regulatory compliance, because the risks of losing workers self-identified homemakers, or stay-at- litigation, and transaction costs. Some of likely prevents businesses from home mothers in the United States, these cost savings could be shared by reducing overall compensation, which indicated they would be likely to return app-based workers in the form of includes the fully burdened wage rate to work if they were to have flexible increased earnings, bonuses, or more job (i.e., with taxes and benefits included). options.’’ These studies offer data based opportunities.192 To the extent that Any decrease in compensation below on primary research, and several certain racial groups make up a this level would likely result in firms sources are based on economy-wide disproportionate share of app-based survey data. not being able to hire adequate labor workers, those groups will also enjoy a (either quantity or quality). This rule Dr. Palagashvili’s comments are disproportionate share of benefits. supported by many individual women does not, as some commenters claimed, Regarding gender-based inequality in expand the scope of permissible who commented to affirm that independent contracting provides independent contracting arrangements 189 Independent contractor relationships provide necessary flexibility to balance their but rather clarifies and sharpens the test flexibility to accommodate individual worker work and life priorities. One woman for determining proper classification, needs, such as child care and breastfeeding. 190 explained that ‘‘[a]s a work-at-home which is expected to benefit both Including E. Handwerker and others. ‘‘Increased Concentration of Occupations, mom, I ramped up my business to workers and firms. Outsourcing, and Growing Wage Inequality in the coincide with the time I had available United States,’’ (2015), https:// while raising my kids. I worked during 188 www.semanticscholar.org/paper/Increased- UPS does not use independent contractors for their nap times, and then added more some of the roles or occupations that its largest Concentration-of-Occupations%2C-and-Growing- competitor, FedEx, does. FedEx relies heavily on Handwerker-Abraham/ hours as they went to school.’’ Another independent contractors for its business model, and f7d0d2c9cfcbf53f961bb07a2542abefe4be84c0?p2df. recently won a legal case against the National Labor 191 Id. at 13 (emphasis added). 193 Cody Cook, et al., The Gender Earnings Gap Relations Board, in which the court found that 192 If, for example, the platform were to transfer in the Gig Economy: Evidence From Over a Million certain FedEx drivers were legitimately classified as some of these increased earnings to consumers in Rideshare Drivers, NBER Working Paper No. 24732, independent contractors under the NLRA. See the form of discounts, the demand quantity for the June 2018, available at https://www.nber.org/ FedEx Home Delivery v. NLRB, 893 F.3d 1123No. services (and thus the job opportunities for the ICs) system/files/working_papers/w24732/w24732.pdf. 14–1196 (D.C. Cir. 2017). could increase. 194 Id. at 14.

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stated, ‘‘I have been a military spouse interest, noting that for those workers a point that has been presented by for 17 years and the ability to work as that choose to pursue work as an hundreds of academics.198 Additionally, an independent contractor has been independent contractor, as opposed to some literature indicates that many invaluable to my family. Through every an employee, and file taxes as such it independent contractors value move, my job comes with me; all I need can be assumed that they have correctly flexibility over income stability. CWI is a computer and access to the internet. determined for themselves that the submitted a survey they conducted that Had I been forced to find a new job with benefits outweigh the costs, including found 61 percent of independent each [change of station], our family any costs associated with increased time contractors prefer the ‘‘flexibility to would have had some very tough spent on tax filings.196 choose when and where to work’’ over times.’’ As a final illustrative example, ‘‘having access to a steady income and f. Implementation Costs a woman informed the Department that, benefits.’’ 199 ‘‘I have been an independent contractor The PA L&I asserted that the F. Cost Savings for more than 3 decades; it helped me Department ‘‘provided zero estimates as a single mother and now it helps me for the cost of actual implementation of This final rule is expected to result in help the kids with my granddaughter.’’ the regulation.’’ PA L&I also claimed cost savings to firms and workers. While The Department agrees with the above that implementation costs include the Department believes that there are commenters and data indicating that reclassifying current workers and multiple areas where firms and workers women would benefit from greater identifying the employment status of may experience cost savings, the access to independent contracting new hires. Concerning the first, the Department has quantified only two: opportunities. By clarifying how Department maintains that workers will The cost savings from increased clarity workers can be properly classified as an only be reclassified when the benefits to and reduced litigation. The Department independent contractor, this rule businesses outweigh the costs. estimates that annual cost savings promotes the formation of such Concerning the later, the Department associated with this rule would be opportunities. believes there will be a cost savings $495.9 million ($447.2 million in when new employment relationships increased clarity + $48.7 million in e. Tax Filing Costs must be analyzed (see following section avoided litigation costs). Other areas of The AFL–CIO and the Washington on cost savings). The Department anticipated cost savings were not Center commented that independent believes the implementation costs will estimated due to uncertainties or data contractors have more time-intensive be de minimis. limitations. The Department believe the accounting and tax filing processes, and rule will result in the following g. Income Stability the Department should address these additional cost savings, which are costs. The Washington Center claims Several commenters asserted that discussed qualitatively: Making labor that it is inappropriate to quantify time independent contracting is associated market more efficient; improving worker savings from increased clarity but not to with more volatile earnings. The autonomy satisfaction; providing an quantify the increased time necessary to Washington Center asserted that income alternate source of income for some file taxes, which they estimate to stability is important for these workers workers during the pandemic; and amount to $832.3 million annually. and their families. UFCW cited facilitating independent contractors’ Even assuming independent contractors literature finding that inconsistent ability to work for multiple customers. spent more on their tax filings than earnings are one of the most reported While public comments specific to employees, the Washington Center’s disadvantages to gig work.197 parts of the calculations are addressed at estimate is based on average costs for all The Department agrees that income the corresponding location throughout business filers in the country, drawn volatility may be problematic for some this section, some commenters from the IRS’s ‘‘Estimated Average workers and may require better money submitted general comments about the Taxpayer Burden for Individuals by management to smooth consumption cost savings estimates. Several Activity’’ Table in its 2019 instructions over periods of higher and lower commenters offered supportive on form 1040.195 This group of business income. However, as stated above, the comments. The CGO said that ‘‘the filers includes anyone with income from Department assumes that market actors proposed rule carefully quantifies the rental property, royalties, S corporation operate in their own best interest, and cost savings of reduced litigation and earnings, farming, and other business if a worker chooses to pursue work as increased clarity.’’ The AFPF also ventures, which dramatically expands an independent contractor, as opposed expressed support but suggested that the scope beyond independent to an employee, it can be assumed that cost-savings may be underestimated. contractors. The Washington Center the worker has determined for himself Conversely, other commenters objected neither attempts to adjust for this or herself that the benefits outweigh the to the estimated cost savings, including overestimate nor explain how one might costs. The Department also believes that it was inappropriate to quantify the disentangle the conflated grouping, so income security is best achieved by potential cost savings from this rule but the Department was unable to assess removing barriers that prevent laid-off not quantify the costs to workers. whether a real impact can be expected. Americans from finding paid work, Representative Pramila Jayapal asserted The Department noted in the NPRM that including as independent contractors. that the Department’s analysis did not it did not attempt to quantify the This lesson may be more important in include ‘‘any serious, fact-based numerous benefits that it expects from the wake of the COVID–19 emergency, argument as to why this rules change the increased clarity regarding would be of benefit to the workers who classification. Instead, it assumed that 196 All workers are required to file with the IRS would be most impacted by this rule regardless of classification. The time and cost of tax market actors operate in their own best filing is highly dependent on the individual change.’’ Other commenters offered circumstances of the workers. The Department equivocal comments, including one 195 Based on the difference in estimates of believes workers are able to best assess the costs burdens for businesses and nonbusinesses from the and benefits of tax filing. 198 See 151 Ph.D. Economists and Political table ‘‘Estimated Average Taxpayer Burden for 197 Prudential Research, ‘‘Gig Workers in Scientists in California, ‘‘Open Letter to Suspend Individuals by Activity’’ in U.S. Internal Revenue America’’ (2017), https://www.prudential.com/ California AB–5’’ (April 14, 2020). Services, ‘‘1040 and 1040–SR Instructions,’’ p. 101, media/managed/documents/rp/Gig_Economy_ 199 Coalition for Workforce Innovation (2020), (2019), https://www.irs.gov/pub/irs-pdf/i1040gi.pdf. Whitepaper.pdf. supra note 77.

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individual who noted that ‘‘point made clarifying the classification process. To the first time or return to it. This churn about less litigation is a valid one,’’ but quantify this benefit, the following is not explicitly estimated for use in this countered that the ‘‘cost-savings pointed variables need to be defined and analysis, but it provides a qualitative out seem to fall only on the side of the estimated: (1) The number of new rationale for not attempting to taper the business/employer.’’ employer-worker relationships being expected size of the independent assessed to determine the appropriate 1. Increased Clarity contractor universe over time. classification; (2) the amount of time This final rule is expected to increase A subset of new independent saved per assessment; and (3) an average contractor relationships may have time clarity concerning whether a worker is wage rate for the time spent. The savings associated with the final rule. classified as an employee or as an Department estimates this will result in Such a reduction is difficult to quantify independent contractor under the FLSA. a $447.2 million in savings annually. This would reduce the burden faced by The Department began with its because it is unclear how many employers, potential employers, and estimate of the number of current establishments and independent workers in understanding the independent contractors as the basis for contractors will realize benefits of distinction and how the working estimating the number of new increased clarity. It is also possible that relationship should be classified. It is relationships. As discussed in section the increased clarity of the classification unclear exactly how much time would VI(C), according to the CWS, there are process will lead to compound effects be saved, but the Department provides 10.6 million workers who are that generate far greater benefits over some quantitative estimates to provide a independent contractors on their time. Nonetheless, because it is possible sense of the magnitude. primary job. Adjusting this figure to that only a subset of contracts would The importance of increased clarity is account for independent contractors on receive the cost savings associated with noted by a study coauthored and cited their secondary job results in 18.9 increased clarity, the Department has by the Society for Human Resource million independent contractors. reduced the number of contracts in the Management (SHRM) that found human According to Lim et al. (2019), in 2016 estimate by 25 percent. This results in resources professionals’ largest the average number of 1099–MISC forms 20.2 million contracts with cost savings challenge concerning external workers issued per independent contractor was to both the employer and the that they would like to see resolved is 1.43. Therefore, the Department independent contractor.205 the legal ambiguity regarding the use assumes the average independent In her comment, Representative and management of external workers.200 contractor has 1.43 jobs per year.202 Pramila Jayapal questioned the breadth Commenters from the business This number does not account for the of the time savings benefit. She claimed community agreed with the Department workers who do not file taxes, a that the only beneficiaries of this that the rule would improve legal recognized limitation in the cited study. rulemaking would be large, repeat clarity. See, e.g., U.S. Chamber of Because it is unclear whether those who players that frequently misclassify Commerce; CWI; WPI; ATA; NRF; do not file taxes would have a higher or workers. It is unclear what data National Restaurant Association. Groups lower number of jobs per year, the Representative Jayapal relied on to come that represent freelancers and Department does not believe that this to this conclusion. Furthermore, individual freelancers who commented limitation biases the estimate in either Representative Jayapal largely ignores also believe this rule would improve direction. Multiplying these two the millions of properly classified legal clarity. See, e.g., CPIE; Fight for numbers results in an estimated 27.0 independent contractors that will million new independent contractor Freelancers. However, several benefit from added regulatory clarity. commenters dispute the Department’s relationships each year.203 The independent contracting sector is The Department disagrees that the cost claim that the rule will increase clarity, savings benefits will be limited to large, with some focusing on specific characterized by churn. In their annual State of Independence in America 2019 repeat players. Other comments concur industries. The TRLA stated that ‘‘the with the Department’s view, supported proposed rule unnecessarily muddies report, MBO Partners, a leading American staffing firm, finds that 47.8 by data-backed arguments that the the waters with respect to the farm labor expect the rule to enable access to market’’ because they believe it percent of U.S. adults reported working as an independent contractor at some flexible work for caregivers responding contradicts ‘‘Federal courts’ to the pandemic, enable workers to interpretation of a Federal statute.’’ The point in their career; they estimate that readily supplement their income, and State AGs also stated this rule will figure will reach 53 percent in the next unlock the potential of the growing tech create confusion because ‘‘many five years.204 This fits with the range of sector. Farren and Mitchell, of the jurisdictions have applied the economic estimates for the size of the independent Mercatus Center, assert that the rule, reality test’’ to distinguish between contractor universe presented in section ‘‘builds on existing precedent and employees and independent contractors VI(C). Thus, it is assumed that over the serves largely as a synthesis and for decades.201 ten-year time horizon of this analysis, The Department expects this rule to millions of Americans will choose clarification of previous economic produce beneficial cost savings by independent contractor work either for reality tests, rather than implementing any sort of radical change,’’ adding that 200 SHRM and SAP SuccessFactors. ‘‘Want Your 202 Lim et al., supra note 75, at 61. independent contractors will likely Business to Thrive? Cultivate Your External Talent’’ 203 The Department did not incorporate estimates ‘‘develop more productive economic (2019), https://www.shrm.org/hr-today/trends-and- of potential growth in independent contracting due relationships.’’ forecasting/research-and-surveys/pages/external- to uncertainty. For example, the trend in workers.aspx. independent contracting varies significantly based Per each new contract with time 201 While state-imposed requirements may on the source. Additionally, the impact of this rule savings, the Department has assumed influence the use of flexibilities provided by this on the prevalence of independent contracting is that employers would save 20 minutes rule, and could impact the number of entities and uncertain. Lastly, state laws, such as those in of time and independent contractors workers affected, the Department does not possess California discussed below, may have significant the requisite data to estimate the number of states impacts on the prevalence of independent that would implement measures or the magnitude contracting, which would make historical growth 205 18.9 million independent contractors × 1.43 of their impact on the universe of independent rates potentially inappropriate. contracts per year × (1¥0.25 possible reduction in contractors considered in this analysis. 204 MBO Partners (2019), supra note 131. clarity benefits) = 20.2 million.

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would save 5 minutes.206 These contractors, this time is valued at $46.36 hiring independent contractors for the numbers are small because they per hour (mean wage rate for first time. The Department did not represent the marginal time savings for independent contractors in the CWS of quantify this benefit due to uncertainty each contract, not the entire time $27.29 with the amount of benefits and and the difficulty of determining necessary to identify whether an overhead paid by employers for reliable variables for the number of new independent contractor relationship employees, then adjusted to 2019 relationships that might occur due to holds. dollars using the GDP deflator). the rule. However, such benefits are The Washington Center commented, Using these numbers, the Department expected to be real and significant. ‘‘[t]here is no transparency into what estimates that employers will save surveys or studies were used to quantify $369.0 million annually and 2. Reduced Litigation independent contractors will save $78.1 the current amount of time individuals The changes included in this rule are and businesses currently spend on million annually due to increased expected to result in decreased litigation independent contractor regulatory clarity (Table 3). In sum, this is due to increased clarity and reduced familiarization. Further, there was no estimated to be a $447.1 million savings. misclassification. The methodology of attempt to explain with any degree of The Department assumes the parameters this section mirrors previous final rules accuracy how this rule will change that used in this cost savings estimate will promulgated in recent years.208 The rule time spent.’’ The Washington Center remain constant over time. This would clarify to stakeholders how to seems to misunderstand the analysis assumes no growth in independent distinguish between employees and presented. The time savings variables contracting, no real wage growth, and independent contractors under the Act. are estimates of how the clarity no subsequent innovation in the The increased clarity is expected to provided in the rule will facilitate the employer-worker relationship. These result in fewer independent contractor contracting process. Estimating assumptions facilitate simplicity of misclassification legal disputes, and administrative time spend due to calculation.207 The annualized savings lower litigation costs. The Department comply with government laws and over both a 10-year horizon and in estimates that $48.7 million in litigation regulations is a typical component of perpetuity, with both the 3 percent and costs related to independent contractor economic analyses and is often 7 percent discount rates is $447.1 disputes will be avoided per year as a informed by consultation with subject million. result of this rule. This may be a lower- matter experts. The Department bound estimate, reasons for which are requested data to further refine its TABLE 3—COST SAVINGS FOR IN- described in more detail below. estimate, but did not receive any. CREASED CLARITY TO EMPLOYERS Notwithstanding, numerous AND INDEPENDENT CONTRACTORS The Department estimates litigation commenters expressed support of the cost savings as being equal to an analysis the Department presented. Parameter Value estimate of the number of cases avoided The UFCW believes that there will be as a result of the rule multiplied by the Number of new relationships (per an increase in time to assess year): average litigation cost per case. employment status because employers Independent contractors ...... 18,858,000 Number of Cases Avoided and independent contractors will now Number of jobs per contractor ..... 1.43 New independent contractor jobs 26,966,940 evaluate the classification under both Adjustment factor ...... 75% According to the Public Access to current precedent and the definition Court Records (PACER) system, there laid out in this rule; ‘‘courts may decide Total ...... 20,225,205 were 7,238 Federal cases relating to the to ignore the DOL’s new interpretation, 209 Time savings per job (minutes): FLSA closed in 2019. The meaning that companies and workers Employers ...... 20 Department estimates that 9.4 percent of would now analyze their FLSA Independent contractors ...... 5 these cases relate to independent independent contractor determinations Value of time: contractor status.210 under current precedent and also the Employers ...... $54.74 Independent contractors ...... $46.36 For the NPRM, to determine this agency’s proposed non-binding new Total savings: percentage of cases relating to test.’’ The Department disagrees that Employers ...... $369,011,556 Independent contractors ...... $78,137,248 independent contracting, the courts will ignore the final rule. The Department reviewed a previous RIA already includes a familiarization Total ...... $447,148,804 random sample of FLSA cases closed in cost for the new rule, and, in the 2014.211 For this final rule, the baseline, establishments are assumed to In addition to increased clarity when be familiar with the status quo assessing whether each relationship 208 For example, the Department applied a similar environment. Accordingly, additional qualifies as an independent contractor approach to litigation costs in the 2019 final rule costs as stated in this comment are or employment relationship, there may Defining and Delimiting the Exemptions for likely to be insignificant. Executive, Administrative, Professional, Outside also be upfront time savings for new Sales and Computer Employees, 81 FR 51230 To estimate the cost savings due to entrants who must familiarize (2019). the increased clarity this rule provides, themselves with the standard for being 209 Downloaded from Public Access to Court the Department applies the following an employee as compared to an Electronic Records (PACER). estimates. For employers, this time is independent contractor, and who now 210 PACER does not provide a granular valued at a loaded hourly wage rate of classification of FLSA case types to identify the have clearer guidance to aid in that number of cases specific to independent contractor $54.74. This is the mean hourly rate of understanding. This would apply to disputes, so the Department performed a keyword Compensation, Benefits & Job Analysis new independent contractors, new analysis with spot checking of a random sample of Specialists (13–1141) from the OES establishments, and current 500 cases closed in 2019, determining that 9.4 multiplied by 1.63 to account for percent of cases were related to independent establishments that are considering contractor status (47/500 = 9.4 percent). benefits and overhead. For independent 211 The Department used data from 2014 already 207 By applying these assumptions to the obtained for use in the analyses performed for the 206 These time savings are based on a 33 percent Department’s estimates, instead of incorporating 2019 overtime and regular rate final rules. See 84 assumed reduction in the estimated familiarization anticipated growth and innovation impacts, the FR 51230, 51280–81 (reduced litigation estimate for time per contract for both independent contractors results may be an underestimate of total cost the final rule updating the FLSA’s white collar (15 minutes) and employers (1 hour). savings. exemptions at 29 CFR part 541); 84 FR 68736,

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Department updated its dataset, using a looked at records of court filings in the require reasonable certainty regarding sample that included 500 cases closed Westlaw Case Evaluator tool and on the worker’s classification as an in 2019. Of those cases, the Department PACER to ascertain how much plaintiffs independent contractor. The current identified 47 cases within this sample in these cases were paid for attorney legal uncertainty may deter businesses that related to independent contractor fees, administrative fees, and/or other from offering these arrangements or status. This ratio was applied to the costs, apart from any monetary damages developing them in the first place.218 If 7,238 FLSA cases closed in 2019 to attributable to the alleged FLSA so, the result would be economic estimate 680 cases related to violations. After determining the deadweight loss: Legal uncertainty independent contractor status. The plaintiff’s total litigation costs for each prevents mutually beneficial Department assumes that the increased case, the Department then doubled the independent contractor arrangements. clarity of the rule would reduce the figures to account for litigation costs This final rule may produce cost savings number of Federal FLSA cases involving that the defendant employers incurred. by reducing deadweight loss. independent contractor classification According to this analysis, the average Nonetheless, due to the abundance of disputes by 10 percent as stakeholders litigation cost for FLSA cases concluded variables at play, the Department has would better understand and be better between 2012 and 2015 was $654,182. not attempted to quantify the precise able to agree on classification Adjusting for inflation, using the GDP amount of that reduction. determinations without having to deflator, results in a value of $715,637 The CGO concurred in its public litigate.212 Multiplying these variables in 2019 dollars.215 comment, emphasizing that an results in an estimated 68 cases related Applying these figures to the important benefit of this rule will likely to independent contractor disputes estimated 68 cases that could be be increased labor market flexibility. avoided annually. This estimate of the prevented each year due to this They note that ‘‘most labor models reduction in the number of independent rulemaking, the Department estimates suggest flexibility is crucial in allowing contractor disputes filed does not take that avoided litigation costs resulting labor markets to efficiently match into account any reduction in the from the rule total $48.7 million per workers with jobs, spur number of FLSA cases related to year (2019 dollars).216 217 entrepreneurship, and act as an important source of countercyclical independent contractor disputes heard 3. Improved Labor Market Conditions in state courts (e.g., where the state has income during a recession.’’ They cite a adopted the FLSA standards for The Department anticipates the final study showing that a 10 percent classifying workers), nor does it take rule will produce benefits by reducing increase in the freelance workforce is into account any reduction in filings uncertainty and improving labor market correlated with a 1 percent increase in resolved before litigation or by conditions. Removing uncertainty entrepreneurial activity.219 Similarly, alternative dispute resolution, neither of improves labor market efficiency by CWI submitted their report that finds which are captured in PACER data. reducing deadweight loss. As discussed independent workers ‘‘can be an in the need for rulemaking, the important part of improving business Average Litigation Cost per Case Department believes emerging and performance, such as by increasing The Department applied a previous innovative economic arrangements that speed to market, increasing estimate of litigation costs of $654,182 benefit both workers and business organizational agility, improving overall per case. To obtain this estimate, the financial performance, and allowing Department conducted a search for with independent contracting. Although the initial firms to compete in a digital world FLSA cases concluded between 2012 search yielded 64 responsive cases, the Department excluded one duplicate case, one case resolving where increasingly relevant, highly- 220 and 2015 in the Westlaw Case Evaluator litigation costs through a confidential settlement skilled talent is in short-supply.’’ By tool and on PACER and identified 56 agreement, and six cases where the defendant decreasing uncertainty and thus cases that contained sufficient litigation employer(s) ultimately prevailed. Because the FLSA potentially opening new opportunities cost information to estimate the average only entitles prevailing plaintiffs to litigation cost for firms, this final rule may encourage 213 214 awards, information about litigation costs was only costs of litigation. The Department available for the remaining 56 FLSA cases that companies to hire independent ended in settlement agreements or court verdicts contractors whom they otherwise would 68767–68 (reduced litigation estimate for the final favoring the plaintiff employees. not have hired. Eisenach (2010) outlines rule updating the FLSA’s ‘‘regular rate’’ regulations 215 This average litigation cost per case may the potential costs of curtailing at 29 CFR part 778). underestimate total average costs because some 221 212 This aligns with the methodology the attorneys representing FLSA plaintiffs may take a independent contracting. If Department has applied in a number of rulemakings contingency fee atop their statutorily awarded fees (See e.g., Regular Rate Under the Fair Labor and costs. 218 See Griffin Toronjo Pivateau, The Prism of Standards Act), and in the NPRM for this rule. In 216 Using the median litigation cost, rather than Entrepreneurship: Creating A New Lens for Worker each rulemaking with this assumption, the the mean, results in a value of $122,341 (2019 Classification, 70 Baylor L. Rev. 595, 628 (2018) Department requested comments and data on this dollars) per case, which for the estimated 68 annual (‘‘The continued demand for innovative work point, which yielded no substantive data or cases produces a total annual litigation cost savings solutions requires a new classification test. Without critiques on its merit. Therefore, the Department of $8.3 million. However, the median values do not clarification, parties will be unwilling to engage in believes this is an appropriate assumption in this adequately capture the magnitude of the impact new or innovative work arrangements.’’); see also R. analysis. resulting from the large-scale litigation cases that Hollrah and P. Hollrah, ‘‘The Time Has Come for 213 Litigation costs are not tracked in a systematic are expected to benefit from the clarity provided in Congress to Finish Its Work on Harmonizing the way by any publicly available source. Individual this final rule. Therefore, the mean average is used Definition of ‘Employee,’ ’’ J. L. & Pol’y 26(2), p. 439 case records are available through various sources for this analysis. (2018), https://brooklynworks.brooklaw.edu/jlp/ (e.g. PACER and Westlaw), but litigation costs are 217 The Department’s approach to estimating vol26/iss2/1/. often not reported because of undisclosed litigation cost savings takes into account the impact 219 A. Burke, I. Zawwar, and S. Hussels. ‘‘Do settlement agreements or because attorney fees are of the rule on the number of relevant cases filed. Freelance Independent Contractors Promote not included in verdict judgements. However, The approach does not take into account the impact Entrepreneurship?’’ Small Business Economics because the FLSA entitles prevailing plaintiffs to of the rule on promoting settlements in the future 55(2), 415–27 (2019), https://doi.org/10.1007/ litigation cost awards, the Department was able to among cases that are filed. Clarifying a rule may s11187-019-00242-w. ascertain costs for 56 relevant cases. increase the settlement rate among cases filed, 220 J. Langenfeld and C. Ring. ‘‘Analysis of 214 The 56 cases used for this analysis were reducing litigation costs further (see Gelbach, J., Literature on Technology and Alternative retrieved from Westlaw’s Case Evaluator database ‘‘The Reduced Form of Litigation Models and the Workforce Arrangements.’’ Ankura (October 2020). using a keyword search for case summaries between Plaintiff’s Win Rate,’’ J. Law & Economics 61(1), 221 J. Eisenach, ‘‘The Role of Independent 2012 and 2015 mentioning the terms ‘‘FLSA’’ and (2018), https://www.journals.uchicago.edu/doi/ Contractors in The U.S. Economy,’’ Navigant ‘‘fees.’’ This was not limited to cases associated 10.1086/699151). Continued

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independent contracting is expanded She also emphasized the importance of mobile customer-service-focused due to this rule, this could generate of independent contracting to startup delivery applications ‘‘reduces the benefits that may include: firms. She references her work opportunity for productivity-enhancing • Increased job creation and small conducting interviews and a survey of innovation.’’ Further, even the example business formation. technology startup executives. During ignores that efficiencies will likely be • Increased competition and these interviews they found that ‘‘71 gained over time as the independent decreased prices. percent of startups relied on contractor fulfils additional orders each • A more flexible and dynamic work independent contractors and thought it day, week, and month. The Department force, where workers are able to more was necessary to use contract labor does not believe that these commenters easily move to locations or to employers during their early stages.’’ Independent provided reliable data to revise its where their labor and skills are needed. contractors are important to startups analysis, especially in light of the data Eisenach explains several channels because ‘‘during unpredictable times, provided to its support by other through which these efficiency gains when startups are trying to find their commenters. market and build their product, they may be achieved. First, by avoiding 4. Improved Worker Satisfaction and need flexible labor and need to be able some fixed employment costs, it is Flexibility easier for firms to adjust their labor to hire and fire easily.’’ needs based on fluctuations in demand. Several commenters disagreed that The Department believes this rulemaking may also result in greater Second, by using pay-for-preference, the rule would improve outcomes in the autonomy and job satisfaction for independent contractors are labor market. FTC Commissioner workers. Several surveys have shown incentivized to increase production and Rebecca Kelly Slaughter commented that independent contractors have high quality. Third, ‘‘contracting can be an that it is inappropriate to conclude ‘‘that job satisfaction.224 Using the CWS, important mechanism for overcoming ‘competition will increase and prices which only considers primary, active legal and regulatory barriers to will decrease’ when more workers are contractors, the Department estimates economically efficient employment classified as independent contractors’’ that of independent contractors with arrangements.’’ The analysis of these because, according to the commenter, valid responses, 83 percent prefer their benefits assumes that businesses, the only support offered in the NPRM current arrangement rather than being especially in other industries, would was a 2010 non-peer-reviewed article providing little evidence of this claim. an employee, compared with only 9 like to increase their use of independent The Department maintains that percent who would prefer an contractors, but have refrained from economic laws generally apply to labor employment arrangement (the doing so because of uncertainty markets, and that as supply increases remaining 8 percent responded that it regarding who can appropriately be then prices can be expected to decrease. depends). engaged as an independent contractor UFCW contested the Department’s claim Additionally, the main reasons under the FLSA. Conversely, significant that this rule will lead to increased individuals work as independent use of independent contractors may not productivity. They presented an contractors demonstrate that being an be suitable for all industries, thus example of how independent independent contractor often has limiting the growth in its utilization. contracting hurts efficiency: ‘‘Instead of valuable benefits. The 2017 CWS asked, Some commenters agreed that ecommerce fulfil[l]ment carried out by a ‘‘What is the main reason you are self- expanding independent contracting can team of output-optimizing role players, employed/an independent contractor?’’ lead to employment gains. For example, the ‘independent contractor’ item The two most popular reasons were (1) Dr. Palagashvili discussed the literature selection and packing is carried out by being their own boss, and (2) scheduling showing how restricting independent the same individual who does the flexibility.225 In fact, these two choices contracting can lead to loss of jobs. This delivery, adding unnecessary and time were each selected over three times final rule, by expanding independent consuming steps to the process. The more often than any of the other contracting, could conversely increase ‘independent contractor’ must first park options.226 Additionally, McKinsey employment. She also noted the his or her car, walk into the store, orient Global Institute found that importance of independent contracting him or herself to the store layout, select ‘‘[i]ndependent workers report higher for unemployed workers, referencing a and pack the items, transact the levels of satisfaction on many aspects of paper that found workers who ‘‘suffered payment, then carry the packed items their work life than traditional a spell of unemployment are 7 to 17 back to the car.’’ The Department does workers.’’ 227 The McKinsey Global percentage points more likely than not think UFCW’s claims are valid Institute examined workers who work observationally similar workers to be across the incredibly dynamic range of employed in an alternative work independent contractor jobs, and further 224 See, e.g., MBO Partners (2019), supra note 131. arrangement when surveyed 1 to 2.5 questions UFCW’s unsupported 225 The Department used PES26IC to identify years later.’’ 222 223 preferred work arrangement and PES26IR to assertion that the expansive emergence identify the reason they work as an independent contractor. Economics (2010), https://papers.ssrn.com/sol3/ 226 _ from such coverage or value such coverage The third most commonly selected reason was papers.cfm?abstract id=1717932. compared to other compensation. In fact, in some ‘‘Money is better,’’ supporting the Department’s 222 L. Katz and A. Krueger, ‘‘The Role of cases workers may be able to strike a better deal view that monetary and non-pecuniary benefits are Unemployment in the Rise in Alternative Work with a business than would be provided under the central motivations of most independent Arrangements,’’ American Economic Review, terms of an employee relationship that operates contractors. 107(5), p. 388 (2017), https://www.aeaweb.org/ under the associated mandates. Such as in a 227 McKinsey Global Institute, supra note 89 at articles?id=10.1257/aer.p20171092. situation where a worker has clusters of available 11. A 2009 Pew survey similarly found that self- 223 It should be noted that government-mandated time to work punctuated by extended periods of employed workers are ‘‘significantly more satisfied coverage is not free. The total value that a worker inability to work, such as a long-haul shipper who with their jobs than other workers.’’ Rich Morin, provides a business must be at least as large as the spends a month at sea and then a month at home ‘‘Job Satisfaction among the Self-Employed,’’ Pew wage, any provided benefits, and government (state or a divorced parent who has five kids to care for Research Center, (September 2009), http:// or Federal) mandates combined. Congress and/or every other week but is fully available on the off pewsocialtrends.org/pubs/743/job-satisfaction- state governments may conclude that the value of weeks to work as many hours as needed. In these highest-among-self-employed. In particular, 39 mandating certain coverages outweighs the costs of cases, independent contractor relationships may be percent of self-employed workers reported being such coverage, but that does not necessarily mean pivotal in mutually benefiting workers and business ‘‘completely satisfied’’ with their jobs, compared that all covered workers receive significant benefits owners. with 28 percent of employees. Id.

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independently by choice and those who pecuniary benefits like flexibility are current process for determining worker do so by necessity (such as needing very important to workers and should classification. supplemental income) and found that receive adequate attention in this RIA. UFCW used a 2017 report from both groups report being happy with the Research has shown that flexibility is a Prudential Research, specifically flexibility and autonomy of their criterion workers consider when regarding gig workers, to dispute the work.228 Similarly, Kelly Services found evaluating job offers.233 Department’s claim that independent that ‘‘free agents’’—i.e., workers who The PA L&I wrote that it is contractors are more satisfied than ‘‘derive their primary income from inappropriate to present flexibility for employees. UFCW excerpted from the independent work and actively prefer independent contractors as a report that, ‘‘on-demand independent it’’—report higher satisfaction than ‘‘replacement for lower wages and no contractors who work full-time hours traditional workers concerning overall benefits.’’ PA L&I also stated that the are less satisfied with their current work employment situation; work-life Department does not discuss situation than full-time employees (44 balance; opportunities to expand skills; independent contractors’ counteracting percent vs. 55 percent).’’ 235 However, and opportunities to advance career.229 loss of stability in income, location of the commenter did not include all of the Many commenters agreed that the work, and frequency and schedule of findings in the source it cited; the same scheduling flexibility afforded to work and instead simply ‘‘presumes that Prudential study notes that for gig independent contractors is of workers prize flexibility over stability’’ workers who also have other jobs, their importance to many of these workers. without citing any evidence. The job satisfaction rate is 86 percent. WPI pointed out that many independent Department notes that it examined Notably, UFCW focused on gig workers contractors require flexibility to balance numerous studies that directly address, in its comment, but conflates such work and other obligations. They cite a and provide evidence regarding, the workers with the entire universe of recent report that found ‘‘48 percent of tradeoffs many independent contractors independent contractors. The freelancers report being caregivers, voluntarily make to attain flexibility. To Department acknowledges that although while 33 percent report having a that point, a survey submitted by CWI there may be lower job satisfaction for disability in their household.’’ 230 Dr. found 61 percent of independent some subsets of independent Palagashvili discussed the significance contractors prefer the ‘‘flexibility to contractors, studies that consider all of independent contracting work for choose when and where to work’’ over independent contractors generally find women, who tend to be the primary ‘‘having access to a steady income and that independent contractors report caregiver, and thus value scheduling benefits.’’ 234 Additionally, the workers similar or higher job satisfaction than flexibility. She cited several papers who value flexibility will be the ones employees. For example, CWI submitted demonstrating the importance of drawn to those independent contracting a survey they conducted finding that 94 flexible work arrangements for women. arrangements that provide flexibility. percent of independent workers are For example, a survey by HyperWallet The Washington Center posited that satisfied with their work 236 found that ‘‘96 percent of women in many industries, such as trucking arrangements. indicate that the primary benefit of and deliveries, the flexibility benefits By clarifying that control and engaging in platform-economy work is for independent contractors are small opportunity for profit or loss are the the flexible working hours.231 SHRM because workers often do not have core economic reality factors, this final pointed to their survey that found that control over their routes or work hours. rule is likely to encourage the creation 49 percent of external workers chose This was echoed by the UFCW, who of independent contractor jobs that that work arrangement for the ability to pointed out that in retail the use of just- provide autonomy and entrepreneurial opportunities that many workers find set their own hours.232 in-time scheduling limits the scheduling Conversely, other commenters flexibility for workers classified as satisfying. For the same reason, this asserted that valuing flexibility is not independent contractors. The final rule likely will diminish the relevant as a benefit to a worker who is Department acknowledges that the incidence of independent contractor classified as an independent contractor. flexibility benefits may differ across jobs that lack these widely desired The Department believes that non- industries, but that they tend to exist in characteristics. Thus, the Department all industries to some degree. expects this final rule to result in more independent contractor opportunities 228 McKinsey Global Institute, supra note 89 at UFCW contended that although 10. The McKinsey survey found that, while ‘‘those current independent contractors may be which bring with them autonomy and working independently out of necessity report satisfied with their employment status, job satisfaction. The benefits of worker being happier with the flexibility and content of the this will not necessarily hold for newly autonomy and satisfaction obviously work,’’ they also report being ‘‘less satisfied with ‘‘are difficult or impossible to quantify,’’ their level of income level and their income classified workers. The Department security.’’ Id. The Department believes this acknowledges that new independent but they nonetheless merit rulemaking is unlikely to negatively impact the contractors may differ from current consideration. average income level of such workers by independent contractors but lacks any encouraging independent contractor opportunities. 5. Income Smoothing data to show how their satisfaction As discussed above, there are data indicating that Several commenters asserted that independent contractors, on average, may earn levels would differ. Lacking such data, higher hourly wages than employees. Nor is which commenters did not provide, the independent contracting plays a key rulemaking likely to negatively impact workers’ best predictor of job satisfaction for new role in smoothing income during income security, on average (see Section independent contractors is job recessions by providing an alternative VI(E)(2)(viii)). source of income. Commenters cited to 229 Kelly Services (2015), supra note 89. satisfaction among current independent 230 a JPMorgan Chase Institute study that Upwork, Freelance Forward 2020: The U.S. contractors. Further, the Department 237 Independent Workforce Report (September 2020). notes, as explained above, that this rule makes this case. Other commenters 231 HyperWallet. ‘‘The Future of Gig Work Is will not directly reclassify any workers Female: A Study on the Behaviors and Career 235 Prudential Research (2017), supra note. Aspirations of Women in the Gig Economy,’’ (2017), but rather provides clarity regarding the 236 Coalition for Workforce Innovation (2020), https://www.hyperwallet.com/app/uploads/HW_ supra note. The_Future_of_Gig_Work_is_Female.pdf. 233 He, H. et al. (2019), supra note 131. 237 D. Farrell, F. Greig, and A. Hamoudi, ‘‘The 232 SHRM and SAP SuccessFactors (2019), supra 234 Coalition for Workforce Innovation (2020), Online Platform Economy in 27 Metro Areas: note 200. supra note. Continued

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held the opposite view and highlighted point, however, was not substantiated alternatives are the same as those the economic downturn related to by data showing that such a critique can analyzed in the NPRM,246 listed below COVID–19. For example, the Center for effectively be applied across the in order from least to most restrictive of Innovation in Worker Organization universe of millions of independent independent contracting: 247 claimed that high unemployment contractors who cite flexibility as a core (1) Codification of the common law increases the likelihood that employers motivator. And as explained in Sections control test, which applies in fail to pay minimum wage. Because this III(A) and IV(C), courts have repeatedly distinguishing between employees and rule is focused on independent explained that need for income is not independent contractors under various contractors, even assuming the premise the correct legal lens through which to other Federal laws; 248 of the comment from the Center for analyze whether a worker is an (2) Codification of the traditional six- Innovation in Worker Organization is independent contractor or employee factor ‘‘economic reality’’ balancing test, correct, this concern does not directly under the FLSA.240 Lastly, she noted as recently articulated in WHD Opinion apply. Further, this commenter did not that ‘‘Uber has been known to Letter FLSA2019–6; and provide clear evidence that independent discourage multi-apping by monitoring (3) Codification of the ‘‘ABC’’ test, as contracting does not help workers whether drivers were logging into more adopted by the California Supreme supplement their income. than one platform simultaneously and Court in Dynamex Operations W., Inc. v. penalizing those that did not 6. Opportunities To Work for Multiple Superior Court, 416 P.3d 1 (Cal. exclusively take Uber customers.’’ 241 249 Customers 2018). Under this rule, Uber’s monitoring and In the NPRM, the Department noted Although the Department believes that controlling certain drivers’ ability to legal limitations preclude adoption of that independent contractors may more multi-app would be a consideration easily work for multiple companies the ‘‘common law’’ and ‘‘ABC’’ test under the control factors of the alternatives listed above, the simultaneously. The Washington Center economic reality test as applied to those disputed this claim, asserting that Department notes that Congress is drivers. See Razak, 951 F.3d at 145–46 presently considering separate bills that ‘‘economists have found that about 75 (including drivers’ contention ‘‘that percent of workers receiving non- would amend the FLSA to adopt these while ‘online’ for Uber, they cannot also 250 employee compensation are tied to one alternatives, and accordingly presents accept rides through other platforms’’ in them for the benefit of the public as employer’’ and the likelihood of being list of ‘‘disputed facts regarding recommended by OMB guidance.251 All tied to a single employer is similar for control’’). But it appears that the wage earners and contractors.238 But the majority of rideshare drivers are able to 246 See 85 FR 60634 (discussing regulatory economists whom the Washington multi-app.242 The Department believes alternative to the proposed rule). Center cites in support of their assertion that economy-wide data reveal that 247 OMB guidance advises that, where possible, explicitly noted that the independent many independent contractors hold agencies should analyze at least one ‘‘more contractors in their study ‘‘include[ ] multiple jobs,243 and they resoundingly stringent option’’ and one ‘‘less stringent option’’ to those who are primarily employed at a the proposed approach. OMB Circular A–4 at 16. prize the flexibility to work when, 248 See 26 U.S.C. 3121(d)(2) (generally defining W2 job, and vice versa.’’ 239 This overlap 244 where, and how they choose. the term ‘‘employee’’ under the Internal Revenue prevents meaningful comparisons Code as ‘‘any individual who, under the usual between independent contractors and G. Regulatory Alternatives common law rules applicable in determining the W2 employees for the purpose of this Pursuant to its obligations under employer-employee relationship, has the status of RIA. Rebecca Kelly Slaughter, a 245 an employee’’); 42 U.S.C. 410(j) (similarly defining Executive Order 12866, the ‘‘employee’’ under the Social Security Act); see Commissioner at the FTC wrote: Department assessed three regulatory also, e.g., Community for Creative Non-Violence v. ‘‘Independent contractor status is not alternatives to the standard promulgated Reid, 490 U.S. 730, 751 (1989) (applying what allows a worker to work for two in this final rule. These three ‘‘principles of general common law of agency’’ to rivals. Indeed, many hourly workers are determine ‘‘whether . . . work was prepared by an employee or an independent contractor’’ under the employed at more than one job, 240 See, e.g., Halferty, 821 F.2d at 268 (‘‘[I]t is not Copyright Act of 1976); Darden, 503 U.S. 318 including for two employers who are dependence in the sense that one could not survive (holding that ‘‘a common-law test’’ should resolve rivals in the same industry.’’ without the income from the job that we examine, employee/independent contractor disputes under but dependence for continued employment’’); ERISA). Commissioner Slaughter gave an DialAmerica, 757 F.2d at 1385 (‘‘The economic- example of a worker who holds two jobs 249 See also Hargrove v. Sleepy’s, LLC, 106 A.3d dependence aspect of the [economic reality] test 449, 465 (N.J. 2015) (extending the ABC test to state at competing fast food restaurants, but does not concern whether the workers at issue wage claims in New Jersey). depend on the money they earn for obtaining the this does not undermine the 250 The Modern Worker Empowerment Act, H.R. necessities of life.’’). Department’s discussion of independent 4069, 116th Cong. (2019) (introduced by Rep. Elise 241 Commissioner Slaughter cited a note contractors being able to use mobile Stefanik), would amend Sec. 3(e) of the FLSA submitted as background material for an OECD statute to clarify that the term ‘‘employee’’ is applications to pick which tasks they meeting and a law review article to support this ‘‘determined under the usual common law rules (as choose to perform in real time on a job- contention. See M. Steinbaum, Monopsony and the applied for purposes of section 3121(d) of the by-job basis. That fast food worker Business Model of Gig Economy Platforms, OECD Internal Revenue Code of 1986).’’ See also S. 2973, 7 (Sept. 17, 2020), https://one.oecd.org/document/ 116th Cong. (2019) (companion Senate bill cannot always decide which job he DAF/COMP/WD(2019)66/en/pdf; M. Steinbaum, wants to work for each shift of the day. introduced by Sen. Tim Scott). By contrast, the ‘‘Antitrust, the Gig Economy, and Labor Market Worker Flexibility and Small Business Protection Additionally, Slaughter commented that Power,’’ 82 Law and Contemp. Probs. 45, 55 (2019), Act, H.R. 8375, 116th Cong. (2020) (introduced by working for multiple employers may https://scholarship.law.duke.edu/cgi/ Rep. Rosa DeLauro) would, among other provisions, demonstrate a worker’s need to hold viewcontent.cgi?article=4918&context=lcp. amend the FLSA and other labor statutes to clarify 242 See This App Lets Drivers Juggle Competing multiple jobs to pay bills rather than that ‘‘[a]n individual performing any labor for Uber and Lyft Rides, Wired (Feb. 15, 2018) remuneration shall be considered an employee and being indicative of flexibility. This (estimating that over 70 percent of rideshare drivers not an independent contractor’’ unless such multi-app), https://www.wired.com/story/this-app- individual passes the ‘‘ABC’’ test discussed in this JPMorgan Chase Institute,’’ JPMorgan Chase lets-drivers-juggle-competing-uber-and-lyft-rides/. analysis. See also S. 4738, 116th Cong. (2020) Institute (2019), https://www.jpmorganchase.com/ 243 Lim et al., supra note 75, at 61. (companion bill introduced by Senators Patty institute/research/labor-markets/report-ope- 244 See the May 2017 CWS supplement to the Murray and Sherrod Brown). cities.htm. CPS. 251 OMB Circular A–4 advises that agencies 238 Collins et al. (2019), supra note 80. 245 Exec. Order No. 12866 § 6(a)(3)(C)(iii), 58 FR ‘‘should discuss the statutory requirements that 239 Id. at 14 n.7. 51741. affect the selection of regulatory approach. If legal

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three regulatory alternatives are contracting arrangements than the that ‘‘the simplest means to accomplish analyzed in qualitative terms, due to economic reality test, which more [a uniform classification standard under data constraints and inherent broadly examines the economic Federal law] would be to revise the uncertainty in measuring the exact dependence of the worker. See, e.g., FLSA, either legislatively or through stringency of multi-factor legal tests and Diggs v. Harris Hospital-Methodist, Inc., regulation, to replace the economic likely responses from the regulated 847 F.2d 270, 272 n.1 (5th Cir. 1988) reality test with the right of control community. The Department (observing that ‘‘[t]he ‘economic test.’’ While appearing to support the appreciates the feedback it received on realities’ test is a more expansive common law control test on substance, these regulatory alternatives from standard for determining employee the Workplace Policy Institute warned commenters, which is described and status’’ than the common law control that ‘‘any attempt by the Department to addressed below. test). Thus, if a common law control test depart from the economic reality test determined independent contractor 1. Codifying a Common Law Control likely would result in a successful legal status under the FLSA, it is possible that Test challenge to this rulemaking,’’ some workers presently classified as expressing support for the Department’s The least stringent alternative to the FLSA employees could be reclassified proposed economic reality test ‘‘in the final rule’s streamlined ‘‘economic as independent contractors, increasing spirit of ‘don’t let the perfect be the reality’’ test would be to adopt a the overall number of independent enemy of the good.’ ’’ See also Dr. common law control test, as is generally contractors and reducing the overall Palagashvili (‘‘[A]lthough the DOL is used to determine independent number of employees. The Department constrained in adopting a common law contractor classification questions is unable to estimate the exact control test, I suggest that lawmakers arising under the Internal Revenue Code magnitude of such a reclassification amend the FLSA to allow for 252 and various other Federal laws. The effect, but believes that the vast majority codification thereof.’’). By contrast, the overarching focus of the common law of FLSA employees would remain FLSA National Federation of Independent control test is ‘‘the hiring party’s right employees even under a common law Business (NFIB) criticized the to control the manner and means by control test. Department’s conclusion in the NPRM which [work] is accomplished,’’ Reid, As discussed in the NPRM, codifying that it lacks the legal authority to 490 U.S. at 751, but the Supreme Court a common law control test that is used implement a common law standard has explained that ‘‘other factors for purposes of at least some other through rulemaking as ‘‘unfortunate’’ relevant to the inquiry [include] the Federal statutes would create a simpler and ‘‘questionable.’’ skill required; the source of the legal regime for regulated entities The Department appreciates the instrumentalities and tools; the location interested in receiving services from an policy appeal of establishing a uniform of the work; the duration of the parties’ independent contractor, thereby Federal classification standard, and relationship; whether the hiring party reducing confusion, compliance costs, understands that the standard most has the right to assign additional and legal risk for entities interested in familiar to the regulated community is projects to the hired party; the extent of doing business with independent likely the common law control test used the hired party’s discretion over when contractors. Entities would not have to for tax and other purposes. However, and how long to work; the method of understand and apply a different such an approach would be inconsistent payment; the hired party’s role in hiring employment classification standard for with the Supreme Court’s statement that and paying assistants; whether the work FLSA purposes. Thus, adopting the FLSA employment is more inclusive is part of the regular business of the common law control test would likely than the common law control test. See, hiring party; whether the hiring party is increase perpetual cost savings for e.g., Walling v. Portland Terminal Co., in business; the provision of employee regulated entities attributable to 330 U.S. 148, 150 (1947) (‘‘[I]n benefits; and the tax treatment of the improved clarity and reduced litigation determining who are ‘employees under hired party.’’ Id. at 751–52. as compared to the final rule. It could, the [FLSA], common law employee Although the common law control on the other hand, impose burdens on categories . . . are not of controlling test considers many of the same factors workers who might prefer to be significance.’’). The overwhelming as those identified in the final rule’s employees subject to FLSA protections. majority of commenters who mentioned ‘‘economic reality’’ test (e.g., skill, Moreover, the Supreme Court has the common law standard in their length of the working relationship, the interpreted the ‘‘suffer or permit’’ comment, including business source of equipment and materials, etc.), language in section 3(g) of the FLSA as commenters inclined to favor the courts generally recognize that, because establishing a broader definition of relative permissiveness of a common of its focus on control, the common law employment than the common law. See, law standard, expressed agreement with test is more permissive of independent e.g., Darden, 503 U.S. at 326; Portland Terminal Co., 330 at 150–51. that conclusion. constraints prevent the selection of a regulatory A handful of business commenters 2. Codifying the Six-Factor ‘‘Economic action that best satisfies the philosophy and addressed the merits of the common law Reality’’ Balancing Test principles of Executive Order 12866, [agencies] control test as a regulatory alternative. should identify these constraints and estimate their In a joint comment, Vanliner Insurance As discussed earlier in section II(B), opportunity cost. Such information may be useful to Congress under the Regulatory Right-to-Know Company and the Great American WHD has long applied a multifactor Act.’’ Trucking Division implicitly requested ‘‘economic reality’’ balancing test to 252 See supra note 248. The Supreme Court has adoption of the common law standard distinguish between employees and explained that the common law standard of presently used under the National Labor independent contractors in enforcement employment applies by default under Federal law actions and subregulatory guidance. The ‘‘unless [Congress] clearly indicates otherwise.’’ Relations Act (NLRA) and the Social Darden, 503 U.S. at 325; see also Community for Security Act (SSA), as they urged the six factors in WHD’s multifactor Creative Non-Violence v. Reid, 490 US 730, 739–40 Department to ‘‘foster efficiency and balancing test, as recently articulated in (1989) (‘‘[W]hen Congress has used the term consistency by creating uniformity for WHD Opinion Letter FLSA2019–6, are ‘employee’ without defining it, we have concluded as follows: that Congress intended to describe the conventional compliance with the FLSA, the [NLRA], master-servant relationship as understood by and the [SSA].’’ The American Society (1) The nature and degree of the common-law agency doctrine.’’). of Travel Advisors, Inc. (ASTA) asserted potential employer’s control;

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(2) The permanency of the worker’s test would not reduce initial regulatory regulatory familiarization costs relationship with the potential familiarization costs or provide greater compared to the streamlined test employer; per-contract cost savings compared to adopted in this final rule would likely (3) The amount of the worker’s the proposed rule, see 85 FR 60635, be minimal. By contrast, and as we investment in facilities, equipment, or arguing that this assumption ‘‘overlooks explained in the NPRM, codification of helpers; the fact that codifying the six-factor the traditional six-factor balancing test (4) The amount of skill, initiative, balancing test would simply incorporate would yield smaller recurring benefits judgment, or foresight required for the what is now subregulatory guidance at and cost savings over the long term, as worker’s services; the regulatory level.’’ Finally, NELP, the Department continues to believe in (5) The worker’s opportunities for NWLC, and the State AGs asserted that the added clarity of an appropriately profit or loss; and the Department has no legal authority to weighted test with less overlapping (6) The extent of integration of the promulgate any regulatory standard redundancy. worker’s services into the potential except the traditional six-factor The Department further believes that employer’s business. balancing test, citing to Kimble v. reinstatement of AI 2015–1’s specific WHD Opinion Letter FLSA2019–6 at 4 Marvel Entm’t, LLC, 576 U.S. 446 (2015), articulation of the six-factor test would (citing Rutherford Food, 331 U.S. at 730, for the proposition that the six-factor be inappropriate because that and Silk, 331 U.S. at 716). balancing test derived from Silk and withdrawn guidance exacerbates the As discussed in the NPRM, the Rutherford Food has effectively become very shortcomings that this rule Department believes that this six-factor part of the FLSA’s ‘‘statutory scheme.’’ remedies. As discussed in Section III(A), balancing test is neither more nor less See id. at 456 (‘‘All [of the Supreme the first such shortcoming is the need permissive of independent contractor Court’s] interpretive decisions, in for consistent application of economic relationships as compared to the whatever way reasoned, effectively dependence. While the AI 2015–1 streamlined test finalized in this become part of the statutory scheme, correctly stated that ‘‘[t]he ultimate rulemaking. Both tests describe the subject (just like the rest) to inquiry under the FLSA is whether the ‘‘economic dependence’’ of the worker congressional change.’’). worker is economically dependent on While the Department agrees with at issue as the ultimate inquiry; both the employer or truly in business for NELP, NWLC, and the State AGs that emphasize the primacy of actual him or herself,’’ it failed to apply that Supreme Court precedent requires concept consistently. Notably, it practice over contractual or theoretical application of an ‘‘economic reality’’ possibilities (i.e., the ‘‘economic reality’’ explained that the investment factor test to evaluate independent contractor should be analyzed by comparing the of the work arrangement); and both claims under the FLSA, we disagree that evaluate the same set of underlying amount of the worker’s investments the Court has definitively prescribed the with the amount the potential employer factors, notwithstanding an emphasis specific components of such a test. As and consolidation of certain factors invests because ‘‘[i]f the worker’s explained earlier, courts in different investment is relatively minor, that under this rule’s streamlined test. Federal circuits have articulated the Notably, like § 795.105(d)(1)(i) of the suggests that the worker and the number and nature of relevant factors in [potential] employer are not on similar final rule, WHD Opinion Letter different ways, so any formulation FLSA2019–6 advised that certain safety footings and that the worker may be endorsed by the Department would be at economically dependent on the measures and quality control standards least marginally ‘‘novel’’ to courts and do not constitute ‘‘control’’ indicative of employer.’’ But the correct concept of affected stakeholders across economic dependence is not an inquiry an FLSA employment relationship. See jurisdictions in some respect. Moreover, id. at 8 n.4. However, the Department into whether two entities are on a many commenters are overstating the ‘‘similar footing,’’ but rather whether an explained in the NPRM that the six- degree to which the standard finalized factor balancing test used by WHD and individual is in business for him- or in this rule meaningfully departs from 253 most courts, with some significant herself. Such an approach to the existing precedent. If anything, by investment factor is misleading by variations, would benefit from elevating the two factors that are most clarification, sharpening, and placing the focus on the worker’s probative to what courts have financial means instead of the worker’s streamlining. established as the ultimate inquiry of A number of commenters urged the relationship with the purported the test—i.e., whether workers ‘‘are in employer. Several cases explicitly or Department to codify a six-factor business for themselves,’’ Saleem, 854 balancing test. Several commenters, implicitly reject the ‘‘similar footing’’ F.3d at 139—the Department’s approach analysis, most plainly because including NELP, Eastern Atlantic States is more faithful to courts’ instruction Regional Council of Carpenters independent contractors routinely work that the factors ‘‘must be applied with for companies with whom they are not (EASRCC), and the United Brotherhood that ultimate notion in mind.’’ Usery, on a ‘‘similar footing.’’ See Karlson, 860 of Carpenters, specifically requested 527 F.2d at 1311. Moreover, because the F.3d at 1096 (‘‘Large corporations can that the Department reinstate AI 2015– Department’s analysis of appellate case hire independent contractors’’). The 1, which was withdrawn in 2017. law since 1975 has found workers’ ‘‘similar footing’’ concept of economic SWACCA asserted that ‘‘codification of control and opportunity for profit or dependence is also inconsistent with the six-factor balancing test may well loss to be most predictive of a worker’s the Supreme Court’s analysis in Silk, achieve more consistency of application classification status, the finalized 331 U.S. 718, which found that truck from the courts as it pushes them to standard provides more accurate drivers who invested in their own develop their similar precedents to align guidance. with the Department’s views,’’ To the extent that some businesses vehicles were independent contractors criticizing the proposed rule as ‘‘a novel and independent contractors familiar who transported coal for a coal weighted test that will result in more with the Department’s earlier company. The Court did not compare litigation and less certain outcomes[.]’’ subregulatory guidance might spend 253 The Department is also concerned that the SWACCA also disputed the less time reviewing new regulatory phrase ‘‘similar footing’’ lacks a clear meaning and Department’s assumption in the NPRM language on the topic under this therefore may be confusing to the regulated that codifying the six-factor balancing alternative, any reduction in initial community.

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the relative investment of the drivers multifactor test by blurring the lines independent contractor statuses.254 As with that of the coal company or ask between factors. One type of overlap described by the California Supreme whether they were on a ‘‘similar highlighted by the NPRM is the Court in Dynamex, ‘‘[t]he ABC test footing’’—they obviously were not. importation of the analysis of initiative presumptively considers all workers to Instead, the Court ruled that the drivers and business judgment, which are be employees, and permits workers to were independent contractors, in part already part of the control and be classified as independent contractors because they had ‘‘the opportunity for opportunity factors, into the skill factor, only if the hiring business demonstrates profit from sound management’’ of their thus ‘‘dilut[ing] the consideration of that the worker in question satisfies investment. Id. at 719. What matters is actual skill to the point of irrelevance.’’ each of three conditions: (a) That the not the relative size of a worker’s 85 FR 60607. Id. AI 2015–1 reinforces worker is free from the control and investment, but whether the worker has this problem by focusing the skill factor direction of the hirer in connection with a meaningful opportunity for profit or entirely on initiative and business the performance of the work, both under loss based on that investment. judgment, thus eliminating the contract for the performance of the The second shortcoming discussed at consideration of skill: ‘‘A worker’s work and in fact; and (b) that the worker Section III(B) is the need for guidance business skills, judgment, and initiative, performs work that is outside the usual regarding which economic reality not his or her technical skills, will aid course of the hiring entity’s business; factors are more probative. AI 2015–1 in determining whether the worker is and (c) that the worker is customarily exacerbates this shortcoming by economically independent.’’ The engaged in an independently relegating the more probative control withdrawn guidance makes clear that it established trade, occupation, or factor while elevating the less probative is not simply that skill matters less than business of the same nature as that ‘‘integral part’’ factor. In particular, AI– initiative, but that skill matters not at involved in the work performed.’’ 416 2015 stated that ‘‘[t]he control factor all, because it unequivocally states that P.3d at 34.255 In justifying the adoption should not overtake the other factors of ‘‘specialized skill do not indicate that of such a stringent test, the Dynamex the economic realities test.’’ Such workers are in business for themselves.’’ court noted the existence of an guidance is plainly inconsistent with This categorical statement, however, is ‘‘exceptionally broad suffer or permit to cases in which control explicitly supported by more circumspect case work standard’’ in California’s wage and ‘‘overtakes’’ other factors. See, e.g., law explaining that ‘‘skill is not itself hour statute, id. at 31,256 as well as ‘‘the Saleem; 854 F.3d at 147 (‘‘whatever ‘the indicative of independent contractor more general principle that wage orders permanence or duration’ of Plaintiffs’ status.’’ AI 2015–1 (quoting Superior are the type of remedial legislation that affiliation with Defendants, both its Care, 84 F.2d at 1060 (emphasis must be liberally construed in a manner length and the ‘regularity’ of work was added)); see also id. (‘‘the use of special that serves its remedial purposes.’’ Id. at entirely of Plaintiffs’ choosing’’ (citation skills is not itself indicative of 32. omitted)); Selker Bros. 84 F.3d at 147 independent contractor status’’ (quoting On its face, California’s ABC test is far (‘‘Given the degree of control exercised Selker Bros. 949 F.d at 1295) (emphasis more restrictive of independent by Selker over the day-to-day operations added)). AI 2015–1’s categorical contracting arrangements than any of the stations, this [use of special skills] position is also at odds with the formulation of an ‘‘economic reality’’ cannot be said to support a conclusion Supreme Court’s instruction in Silk that of independent contractor status.’’). 254 See Dynamex, 416 P.3d 1; Assembly Bill ‘‘skill required’’ may be ‘‘important for (‘‘A.B.’’) 5, Ch. 296, 2019–2020 Reg. Sess. (Cal. Deemphasizing the control factor is also decision.’’ 331 U.S. at 716; see also at odds with commonsense logic; 2019) (codifying the ABC test articulated in Simpkins, 893 F.3d at 966 (‘‘whether Dynamex); A.B. 2257, Ch. 38, 2019–2020 Reg. Sess. control over the work seems to be Simpkins had specialized skills, as well (Cal. 2020) (exempting certain professions, extremely probative as to whether an as the extent to which he employed occupations, and industries from the ABC test that individual is in business for him- or A.B. 5 had codified). The ABC test originated in them in performing his work, are herself. In addition to de-emphasizing a state unemployment insurance statutes, but some [material] issues’’). state courts and legislatures have recently extended highly probative factor, AI–2015 also the test to govern employee/independent contractor states that ‘‘[c]ourts have found the Further, reinstating AI 2015–1 or otherwise adopting a six-factor test with disputes under state wage and hour laws. See Keith ‘integral’ factor to be compelling,’’ citing Cunningham-Parmeter, Gig-Dependence: Finding Snell, 875 F.2d at 811 and Lauritzen, overlapping factors and without the Real Independent Contractors of Platform Work, F.2d at 1537–38 for support. But both guidance regarding the factors’ relative 39 N. Ill. U. L. Rev. 379, 408–11 (2019) (discussing probative value would negate the the origins and recent expansion of the ABC test). cited cases actually analyzed the 255 overall beneficial effects that would California’s ABC test is slightly more stringent ‘‘integral part’’ factor as an afterthought: than versions of the ABC test adopted (or presently Each devoted only a few conclusory likely result from this rule, which are under consideration) in other states. For example, sentences to this factor after more in discussed above. New Jersey provides that a hiring entity may satisfy the ABC test’s ‘‘B’’ prong by establishing either: (1) depth analysis of the other factors Snell, For these reasons, the Department declines commenters’ requests to That the work provided is outside the usual course 875 F.2d at 811 and Lauritzen, 835 F.2d of the business for which the work is performed, or at 1537–38. The ‘‘integral part’’ factor reinstate AI 2015–1.The Department (2) that the work performed is outside all the places falls short of even an afterthought in the further notes that, unlike this rule, AI of business of the hiring entity. N.J. Stat. Ann. Fifth Circuit, which typically does not 2015–1 was issued without notice and § 43:21–19(i)(6)(A–C). The Department has chosen comment and thus did not benefit from to analyze California’s ABC test as a regulatory analyze it at all. As explained in Section alternative because businesses subject to multiple IV(D)(5), the ‘‘integral part’’ factor—as helpful input from the regulated standards, including nationwide businesses, are used in AI 2015–1 to mean a worker’s community. likely to comply with the most demanding standard if they wish to make consistent classification importance to a business—is not 3. Codifying California’s ‘‘ABC’’ Test determinations. supported by Supreme Court precedent 256 See Cal. Code Regs., tit. 8, § 11090, subd. 2(D) and may send misleading signals in The most stringent regulatory (‘‘‘Employ’ means to engage, suffer, or permit to many cases. alternative to the Department’s work.’’). The Dynamex court noted that California’s The third shortcoming discussed at proposed rule would be to codify the adoption of the ‘‘suffer or permit to work’’ standard ‘‘ABC’’ test recently adopted under predated the enactment of the FLSA and was Section III(C) is overlaps between therefore ‘‘not intended to embrace the Federal economic reality factors, which California’s state wage and hour law to economic reality test’’ that subsequently developed. undermines the structural benefits of a distinguish between employee/ 416 P.3d at 35.

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balancing test, including the proposed reduce unlawful misclassification of Translators & Interpreters of California rule. Whereas no single factor employees as independent contractors. (CoPTIC) (‘‘[A.B. 5] posed an existential necessarily disqualifies a worker from See, e.g., Matt Brown; National threat to the survival of our independent contractor status under an Domestic Workers Alliance; Public profession.’’); Intermodal Association of economic reality test, each of the ABC Justice Center; SEIU. Numerous North America (IANA)) (‘‘The ABC test test’s three factors may alone disqualify commenters asserted that the ABC test, essentially eliminates the independent the worker from independent contractor with its three individually contractor model for motor carriers status. Thus, the NPRM stated that determinative factors, was also the involved in intermodal drayage.’’). adoption of an ABC test to govern clearest and most predictable approach Several commenters invoked the independent contractor status under the considered. See, e.g., International numerous exemptions to the ABC test FLSA would directly result in a large- Brotherhood of Teamsters; Writers that California lawmakers initially scale reclassification of many workers Guild of America, East, AFL–CIO. New adopted in A.B. 5 and subsequently presently classified as independent York University’s People’s Parity Project expanded in A.B. 2257 as evidence of contractors into FLSA-covered argued that ‘‘[g]iven the importance of the standard’s overreach. See, e.g., employees, particularly those in the California market to the national California Chamber of Commerce industries that depend on independent economy and the fact that it follows the (‘‘During the first few months of the contracting arrangements within the more stringent ABC standard, any 2020 Legislative Session, more than 30 ‘‘usual course of the hiring entity’s business that wishes to operate in bills were introduced to add a myriad of business.’’ Dynamex, 416 P.3d at 34. California, and any national business, exemptions to the ABC test.... As a While some independent contractors will have economic motivation to follow result of the adoption of AB 2257, might benefit from reclassification by the ABC standard.’’ NELA similarly which was signed into law in newly receiving overtime pay or a disputed concerns that adoption of the September, there are now 109 guaranteed minimum wage, these ABC test would be unduly disruptive, exemptions to the ABC test.’’); Rep. workers might also experience a asserting that Massachusetts wage and Virginia Foxx et al. (‘‘Rather than setting reduction in work hours or diminished hour law has used an ABC test since a dependable and workable standard, scheduling flexibility as their new 2004 and that ‘‘[m]any other states, the AB 5 framework results in arbitrary employers attempt to avoid incurring including New Jersey, Illinois, treatment of industries based on additional expenses for overtime work. Connecticut, and Hawaii, use an ABC political considerations to the detriment Others workers, particularly off-site test for certain [other] purposes, and of workers.’’); Joint Comment of PLF, workers who operate free from the have similarly suffered no disruption to ASJA, and NPPA (‘‘If a law requires business’ direct control and supervision, their economies.’’ Finally, regarding the dozens of exceptions to avoid might see their work arrangements Department’s legal authority to adopt destroying the careers of successful terminated by businesses unwilling or the ABC test, NELA asserted that ‘‘none independent professionals, it is a strong unable to assume the financial burden of the cases on which the Department indication that the law’s basic and legal risk of the FLSA’s overtime relies suggest that the multi-factor test is premise—the ABC test—is flawed.’’). pay requirement. After highlighting the only way to test ‘economic reality’ Some individual freelancers, including some of the reports of adverse or that the ABC test ignores ‘economic writer Karen Kroll, filmmaker/actor consequences experienced by workers reality.’ ’’ Margarita Reyes, unspecified and businesses in California following A diverse array of commenters voiced professional Chun Fung Kevin Chiu, the passage A.B. 5, the Department strong opposition to adopting an ABC and unspecified professional Carola concluded that adopting the ABC test as test under the FLSA, including law Berger, asserted that the ABC test is the FLSA’s generally applicable firms, trade associations, advocacy falsely premised on the assumption that standard for distinguishing employees organizations, academics, and all independent contractors, or at least from independent contractors would be individual freelancers. Several those who provide services in a client’s unduly restrictive and disruptive to the commenters dedicated the entirety or usual course of business, feel exploited economy. Finally, as a matter of law, the vast majority of their comment towards and would prefer to be employees. The Department asserted that adoption of criticizing California’s ABC test. See, Independent Women’s Forum and Dr. California’s ABC test would be e.g., American Consumer Institute Palagashvili asserted that the ABC test inconsistent with the more flexible Center for Citizen Research (ACI); Fight implemented in California economic reality test adopted by the for Freelancers USA; Institute for the disproportionately burdened female Supreme Court, as it would cover American Worker; Joint Comment of the workers with caregiving responsibilities, workers who have been held by the Pacific Legal Foundation (PLF), the who are less able to find adequately Supreme Court to be independent American Society of Journalists and flexible work schedules through contractors under the economic reality Authors, Inc. (ASJA), and the National traditional employment. Finally, some test. See Silk, 331 U.S. at 719; Bartels, Press Photographers Association commenters agreed with the 332 U.S. at 130. (NPPA); Dr. Palagashvili; The People v. Department’s conclusion in the NPRM The Department received a large AB5. The primary objection voiced by that Supreme Court precedent precludes volume of commenter feedback on the commenters critical of the ABC test the Department from adopting an ABC merits of California’s ABC test. While regarded the disruptive economic effects test under the FLSA. See NRF; FMI— the majority of these comments were of implementing such a stringent The Food Industry Association. highly critical of the standard, it did standard, with several asserting that an After reviewing commenter feedback, have several supporters. Commenters in ABC test would devastate their industry. the Department continues to believe that favor of the ABC test asserted that, as See, e.g., American Council of Life the ABC test would be infeasible, the regulatory alternative most Insurers (‘‘Thousands of jobs would difficult to administer, and disruptive to restrictive of independent contracting likely have been lost had the California the economy if adopted as the FLSA considered by the Department, it would legislature failed to create [an standard. The weight of data, best effectuate Congress’ intent to exemption for insurance arguments, and anecdotes that extend FLSA coverage broadly and professionals].’’); Coalition of Practicing commenters shared about the ABC test’s

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effects in California support the NPRM’s undue disruption under that standard. NELA contended that ‘‘an ABC test is conclusion that adopting an ABC test NELA contended that adoption of the more faithful to the broad, remedial would have unacceptably disruptive ABC test by Massachusetts has not led purpose of the FLSA.’’ According to economic effects. For instance, a self- to the same type of disruption NELA, ‘‘[a]t its core, the FLSA is a employed ‘‘professional handyman with experienced in California, which is remedial statute’’ and therefore, the technical skills in furniture assembly disputed by some commenters from Department should interpret the FLSA’s and home repair’’ stated that ‘‘[a]s a Massachusetts. See e.g., New Jobs for standard of employment to be broader California resident, it has been Massachusetts; IFA; Fight for than economic dependence. However, concerning to watch the way AB–5 has Freelancers. But even if NELA were the Supreme Court warned against affected our state. I don’t believe correct, a nationwide ABC test would relying on ‘‘flawed premise that the legislators should make decisions that still disrupt California, the state with FLSA ‘pursues’ its remedial purpose ‘at make it harder for people like me to find the largest population and economy, all costs’ ’’ when interpreting the Act. work and earn a living the way we want and likely many others. In the Encino, 138 S. Ct. at 1142; see also to.’’ A medical translator stated that Department’s view, the fact that a legal Bristol, 935 F.3d 122 (‘‘ ‘[A] fair reading’ ‘‘ABC test simply doesn’t work in my standard may be disruptive in only of the FLSA, neither narrow nor broad, field and it is not a fair standard to some states (e.g., California) but not is what is called for.’’ (quoting Encino, measure my situation. The original AB5 others (e.g., Massachusetts) is not a 138 S. Ct. at 1142)); Diaz, 751 F. App’x law in California was destructive to the persuasive reason for nationwide at, 758 (rejecting request to interpret livelihood of many of my colleagues in adoption. FLSA provisions to provide ‘‘broad’’ that state.’’ And as a final illustrative Additionally, the Department coverage because ‘‘[w]e must instead example, a freelance journalist in continues to believe that it lacks legal give the FLSA a ‘fair’ interpretation.’’). California characterized that state’s authority to adopt the ABC test under Furthermore, even if remedial statutes adoption of the ABC test as an ‘‘attempt the FLSA because that test is far too should be liberally construed, the ABC to legislate an entire class of rigid and restrictive of independent test still runs afoul of the Supreme entrepreneurs out of business.’’ See contracting arrangements. As a Court’s stated limits on the extent of the FLSA’s definition of employment, as also, e.g., People vs. AB5; Fight for threshold matter, each of the ABC test’s explained above. As such, the Freelancers; NPPA; WPI. three independently determinative Department may not (and no court has Moreover, as commenters pointed out, factors would contradict binding ever suggested that it could) replace the the numerous exemptions initially and Supreme Court precedent applying the economic reality test with the ABC test subsequently passed by the California economic reality test, where ‘‘[n]o one to be faithful to the FLSA’s remedial legislature indicate the ABC test’s [factor] is controlling.’’ Silk, 331 U.S. at inadequacy as a generally applicable purpose. 716. In particular, the test’s ‘‘B’’ prong— In sum, legal constraints and the standard, as well as its unpopularity denying independent contractor status with affected stakeholders. An ‘‘owner disruptive economic effects of adopting unless the contractor ‘‘performs work the ABC test in the FLSA context. As we of a small, one-woman business in that is outside the usual course of the California’’ explained in her comment stated in the NPRM, the Department hiring entity’s business’’—would engaged in this rulemaking to clarify the that ‘‘[t]he absurdity and overreach of contradict the Court’s recognition in AB5 is evidenced by the numerous existing standard, not to radically Silk that ‘‘[f]ew businesses are so transform it. attempts at clean-up bills in California completely integrated that they can (SB 875, SB 1039, SB 900, AB 1850, AB themselves produce the raw material, H. Summary of Impacts 2257 . . .) that clogged the CA manufacture and distribute the finished In summary, the Department believes legislative landscape for months, product to the ultimate consumer that this rule will increase clarity culminating in the now adopted AB without assistance from independent regarding whether a worker is classified 2257, which lists too many exemptions contractors.’’ 331 U.S. at 714; see also as an employee or an independent to count.’’ The recent passage of the Rutherford Food, 331 U.S. at 729 contractor under the FLSA. This clarity high-profile Proposition 22 ballot (recognizing that ‘‘[t]here may be could result in an increased use of 257 initiative in California, which independent contractors who take part independent contractors. The costs and occurred shortly after the end of the in [the] production or distribution’’ of a benefits to a worker being classified as comment period for this rulemaking and hiring party). Indeed, application of an independent contractor are discussed exempted numerous gig workers from California’s ABC test would result in throughout this analysis, and are the ABC test, is further evidence in this different classification outcomes than summarized below. regard. those the Supreme Court arrived at The Department believes that there While California retains the ABC test applying the economic reality test in are real benefits to the use of for some industries but not others, the Silk, 331 U.S. at 719 (ruling that independent contractor status, for both Department is required to apply the truckers who were ‘‘an integral part of workers and employers. Independent FLSA consistently for all covered the businesses of retailing coal or contractors generally have greater industries (absent explicit statutory transporting freight’’ were independent autonomy and more flexibility in their authority to do otherwise). Thus, if the contractors), and Bartels, 332 U.S. at 130 hours, providing them more control Department adopted the ABC test, that (concluding that musicians were over the management of their time. The standard would apply to virtually all independent contractors rather than use of independent contracting for industries nationwide, including employees of the music hall where they employers allows for a more flexible numerous industries that the played). Absent revised guidance from and dynamic workforce, where workers Californian legislature and voters the Supreme Court or Congressional provide labor and skills where and exempted because they would suffer legislation amending the FLSA statute, when they are needed. Independent the Department continues to believe that contractors may more easily work for 257 See Kate Conger, ‘‘Uber and Lyft Drivers in multiple companies simultaneously, California Will Remain Contractors,’’ NY Times it lacks the legal authority to implement (Nov. 4, 2020), https://www.nytimes.com/2020/11/ a California-style ‘‘ABC’’ test through have more control over their labor- 04/technology/california-uber-lyft-prop-22.html. administrative rulemaking. leisure balance, and more explicitly

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define the nature of their work. businesses, not-for-profit organizations, clarification to the Department’s Independent contractors also appear to and small governmental jurisdictions. interpretation of who is an employee have higher job satisfaction. Accordingly, the Department examined and who is an independent contractor An increase in the number of job the regulatory requirements of this final under the FLSA, the Department openings for independent contractors rule to determine whether they would assumes that it will take on average can also have benefits for the economy have a significant economic impact on about 1 hour to review the rule as as a whole. Increased job creation and a substantial number of small entities. proposed. The Department believes that enhanced flexibility in work Because both costs and cost savings are an hour, on average, is appropriate, arrangements are critical benefits during minimal for small business entities, the because while some establishments will periods of economic uncertainty, such Department certifies that this final rule spend longer than one hour to review as the current COVID–19 pandemic. will not have a significant economic the rule, many establishments may rely There are also certain challenges that impact on a substantial number of small on third-party summaries of the changes face independent contractors compared entities. or spend little or no time reviewing the to employees subject to the FLSA. The Department used the Small rule. Assuming benefits are paid at a Independent contractors are not subject Business Administration size standards, rate of 46 percent of the base wage, and to the protections of the FLSA, such as which determine whether a business overhead costs are 17 percent of the minimum wage and overtime pay. qualifies for small-business status, to base wage, the reviewer’s effective Independent contractors generally do estimate the number of small hourly rate is $54.74; thus, the average not receive the same employer-provided entities.259 260 The Department then cost per establishment conducting benefits as employees, such as health applied these thresholds to the U.S. regulatory familiarization is $54.74. The insurance, retirement contributions, and Census Bureau’s 2012 Economic Census per-entity rule familiarization cost for paid time off.258 Independent to obtain the number of establishments independent contractors, some of whom contractors may have a higher tax with employment or sales/receipts would be small businesses, is $11.59, or liability than employees, as they are below the small business threshold in the fully loaded mean hourly wage of legally obligated to pay both the the industry.261 These ratios of small to independent contractors in the CWS employee and employer shares of the large establishments were then applied ($46.36) multiplied by 0.25 hour. The Federal Insurance Contributions Act to the more recent 2017 Economic Department believes that 15 minutes, on (FICA) taxes. However, economists Census data on number of average, is appropriate, because while recognize that payroll taxes generally establishments.262 Next, the Department some independent contractors will are subtracted from the wage rate of estimated the number of small spend longer than one hour to review employees. Employers also cover governments, defined as having the rule, many will spend little or no unemployment insurance and workers’ population less than 50,000, from the time reviewing the rule. compensation taxes for their employees. 2017 Census of Governments.263 In The cost savings due to increased These costs are also components of total, the Department estimated there clarity estimated per year for each small businesses’ worker costs, and employee are 6.4 million small establishments or business employer is $18.25, or the fully wages are expected to reflect that governments. loaded mean hourly wage of a accordingly. Independent contractors do The Department assumes that a Compensation, Benefits, and Job not pay these taxes nor are they Compensation, Benefits, and Job Analysis Specialist multiplied by 0.33 generally protected by these insurance Analysis Specialist (SOC 13–1141) (or a hours. The cost savings due to increased staff member in a similar position) will clarity for each independent contractor, programs, but there are private 264 insurance companies that offer review the rule. According to the some of whom would be a small equivalent coverage. Occupational Employment Statistics business, is $4.14 per year, or the fully Because the Department does not (OES), these workers had a mean wage loaded mean hourly wage of know how many workers may shift from of $33.58 per hour in 2019 (most recent independent contractors in the CWS employee status to independent data available). Given the proposed multiplied by 0.89 hours.265 Because contractor status, or how many people regulatory familiarization is a one-time 259 SBA, Summary of Size Standards by Industry who were previously unemployed or Sector, 2017, www.sba.gov/document/support— cost and the cost savings from clarity out of the labor force will gain work as table-size-standards. recur each year, the Department expects an independent contractor, these costs 260 The most recent size standards were issued in cost savings to outweigh regulatory and benefits have not been quantified. 2019. However, the Department used the 2017 familiarization costs in the long run. standards for consistency with the older Economic Because both costs and cost savings are VII. Regulatory Flexibility Act Census data. 261 The 2012 data are the most recently available minimal for small business entities, and The Regulatory Flexibility Act of 1980 with revenue data. well below one percent of their gross (RFA), 5 U.S.C. 601 et seq., as amended 262 For this analysis, the Department excluded annual revenues, which is typically at by the Small Business Regulatory independent contractors who are not registered as least $100,000 per year for the smallest Enforcement Fairness Act of 1996, small businesses, and who are generally not captured in the Economic Census, from the businesses, the Department certifies that Public Law 104–121 (1996), requires calculation of small establishments. this final rule will not have a significant Federal agencies engaged in rulemaking 263 2017 Census of Governments. https:// economic impact on a substantial to consider the impact of their proposals www.census.gov/data/tables/2017/econ/gus/2017- number of small entities. on small entities, consider alternatives governments.html. There is some evidence that small to minimize that impact, and solicit 264 A Compensation/Benefits Specialist ensures company compliance with Federal and state laws, firms use independent contractors for a public comment on their analyses. The including reporting requirements; evaluates job greater proportion of their workforce RFA requires the assessment of the positions, determining classification, exempt or than large firms.266 If so, then it may be impact of a regulation on a wide range non-exempt status, and salary; plans, develops, reasonable to assume that the increased evaluates, improves, and communicates methods of small entities, including small and techniques for selecting, promoting, compensating, evaluating, and training workers. See 265 Note that the NPRM reported $3.86 which is 258 In some situations, independent contractors BLS, ‘‘13–1141 Compensation, Benefits, and Job the cost per job, rather than the cost per may be provided with benefits similar to those Analysis Specialists,’’ https://www.bls.gov/oes/ independent contractor. provided to employees. current/oes131141.htm. 266 Lim et al, supra note 75 at 51.

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use of independent contractors may also reasonable alternatives and select, or have any measurable effect on the favor smaller companies. In which case, explain the non-selection, of the least economy. costs and benefits and cost savings may costly, most cost-effective, or least Many commenters claim that the rule be larger for these small firms. Because burdensome alternative. will result in costs to Federal and state benefits and cost savings are expected to governments in the form of increased A. Authorizing Legislation outweigh costs, the Department does not public assistance and decreased tax expect this rule will result in an undue This final rule is issued pursuant to revenue. The Department discussed hardship for small businesses. the Fair Labor Standards Act, 29 U.S.C. these potential costs in the RIA and AFL–CIO disagreed with including 201, et seq. directs the reader to Section VI(E)(2)(ii). cost savings from increased clarity for The State AGs stated that the independent contractors. They argue B. Assessment of Costs and Benefits Department failed to include the that ‘‘the independent contractors at For purposes of the UMRA, this rule increased administrative and issue—those who falls [sic] close to the includes a Federal mandate that is enforcement costs to states due to the line separating independent contractors expected to result in increased change in the standard for determining from employees are not themselves expenditures by the private sector of independent contractor status under the employers, they provide services solely more than $156 million in at least one FLSA. They wrote that states ‘‘would as individuals and they have no need to year, but will not result in increased need to invest time and resources into determine if they are themselves expenditures by state, local, and tribal training agency employees and independent contractors.’’ They governments, in the aggregate, of $156 educating the public,’’ particularly in additionally stated that the analysis million or more in any one year. states with laws that are more restrictive failed to include compliance costs for Based on the cost analysis from this than the economic reality test. States do the new small businesses created—the final rule, the Department determined not enforce Federal laws and therefore workers newly classified as that it will result in Year 1 total costs have no need to train their personnel in independent contractors. Specifically, for state and local governments totaling the enforcement of the FLSA or the these new independent contractors will $1.7 million, all for regulatory Department’s regulations. There is also have increased regulatory burden due to familiarization. There will be no no need for states to be ‘‘educating’’ the additional accounting and tax filing additional costs incurred in subsequent public about FLSA regulations—aside costs. The Department believes it did years. from pointing out that Federal law may address this because workers who The Department determined that the impose different requirements than state choose to pursue independent rule will result in Year 1 total costs for labor laws. Finally, under the nation’s contractor roles will not take them the private sector of $369.2 million, all federalist system, states may and often unless they believe the gains will offset of them incurred for regulatory do enact and enforce labor standards the costs. familiarization. The Department and are more restrictive than Federal The AFL–CIO asserts that the included all independent contractors in standards. A state’s decision to do so, Department failed to conduct the the private sector total regulatory however, rests with the state because no outreach to small businesses as required familiarization costs. There will be no state is forced to enact labor standards by Section 609(a) of the RFA. The additional costs incurred in subsequent that are stricter than the Federal Department notes that these years. standard. Any costs associated with requirements only apply when the rule UMRA requires agencies to estimate implementing a stricter standard, will have a significant economic impact the effect of a regulation on the national including training and education, reflect on a substantial number of small economy if such estimates are the free choice of the individual state, entities, which is not the case for this reasonably feasible and the effect is and not the existence of a different rulemaking. relevant and material.269 However, OMB Federal standard. As such, costs that a state choose to bear in enacting and VIII. Unfunded Mandates Reform Act guidance on this requirement notes that enforcing their own laws are the result Analysis such macroeconomic effects tend to be of the state’s own decision, and are The Unfunded Mandates Reform Act measurable in nationwide econometric models only if the economic effect of outside the scope of the unfunded of 1995 (UMRA) 267 requires agencies to mandate concept. prepare a written statement for rules the regulation reaches 0.25 percent to with a Federal mandate that may result 0.5 percent of Gross Domestic Product C. Least Burdensome Option Explained in increased expenditures by state, (GDP), or in the range of $53.6 billion 270 The Department believes that it has local, and tribal governments, in the to $107.2 billion (using 2019 GDP). A chosen the least burdensome but still aggregate, or by the private sector, of regulation with a smaller aggregate cost-effective methodology to clarify the $156 million ($100 million in 1995 effect is not likely to have a measurable FLSA’s distinction between employees dollars adjusted for inflation) or more in effect in macroeconomic terms, unless it and independent contractors. Although at least one year.268 This statement is highly focused on a particular the regulation will impose costs for must: (1) Identify the authorizing geographic region or economic sector, regulatory familiarization, the legislation; (2) present the estimated which is not the case with this rule. Department believes that its proposal costs and benefits of the rule and, to the The Department’s RIA estimates that would reduce the overall burden on extent that such estimates are feasible the total costs of the final rule will be organizations by simplifying and and relevant, its estimated effects on the $369.2 million. Given OMB’s guidance, clarifying the analysis for determining national economy; (3) summarize and the Department has determined that a whether a worker is classified as an evaluate state, local, and tribal full macroeconomic analysis is not employee or an independent contractor government input; and (4) identify likely to show that these costs would under the FLSA. The Department believes that, after familiarization, this 267 See 2 U.S.C. 1501. 269 See 2 U.S.C. 1532(a)(4). rule will reduce the time spent by 270 268 Calculated using growth in the Gross Domestic According to the Bureau of Economic organizations to determine whether a Product deflator from 1995 to 2019. Bureau of Analysis, 2019 GDP was $21.43 trillion. https:// Economic Analysis. Table 1.1.9. Implicit Price www.bea.gov/system/files/2020-02/gdp4q19_2nd_ worker is an independent contractor. Deflators for Gross Domestic Product. 0.pdf. Moreover, the additional clarification

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could promote innovation and certainty § 788.16 Employment relationship. employer’s employee under the Act. As in business relationships. The AFPF (a) In determining whether such, sections 6, 7, and 11 of the Act, agreed ‘‘that the Department has individuals are employees or which impose obligations on employers adequately analyzed potential independent contractors, the criteria regarding their employees, are alternatives as well as selected the least laid down in §§ 795.100 through inapplicable. Accordingly, the Act does burdensome option under the Unfunded 795.110 of this chapter are used. not require a potential employer to pay Mandates Reform Act of 1995.’’ * * * * * an independent contractor either the minimum wage or overtime pay under IX. Effects on Families ■ 5. Add part 795 to subchapter B to read as follows: sections 6 or 7. Nor does section 11 of The undersigned hereby certifies that the Act require a potential employer to the proposed rule would not adversely PART 795—EMPLOYEE OR keep records regarding an independent affect the well-being of families, as INDEPENDENT CONTRACTOR contractor’s activities. discussed under section 654 of the CLASSIFICATION UNDER THE FAIR (b) Economic dependence as the Treasury and General Government LABOR STANDARDS ACT ultimate inquiry. An ‘‘employee’’ under Appropriations Act, 1999. the Act is an individual whom an Sec. employer suffers, permits, or otherwise List of Subjects 795.100 Introductory statement. employs to work. 29 U.S.C. 203(e)(1), 29 CFR Part 780 795.105 Determining employee and (g). An employer suffers or permits an independent contractor classification individual to work as an employee if, as Agriculture, Child labor, Wages. under the FLSA. a matter of economic reality, the 29 CFR Part 788 795.110 Primacy of actual practice. 795.115 Examples of analyzing economic individual is economically dependent Forests and forest products, Wages. reality factors. on that employer for work. Rutherford 795.120 Severability. Food Corp. v. McComb, 331 U.S. 722, 29 CFR Part 795 Authority: 52 Stat. 1060, as amended; 29 727 (1947); Bartels v. Birmingham, 332 Employment, Wages. U.S.C. 201–219. U.S. 126, 130 (1947). An individual is Signed at Washington, DC, this 31st day of an independent contractor, as December, 2020. § 795.100 Introductory statement. distinguished from an ‘‘employee’’ Cheryl M. Stanton, This part contains the Department of under the Act, if the individual is, as a Administrator, Wage and Hour Division. Labor’s general interpretations of the matter of economic reality, in business text governing individuals’ for him- or herself. For the reasons set out in the classification as employees or (c) Determining economic preamble, the Department of Labor independent contractors under the Fair dependence. The economic reality amends 29 CFR chapter V as follows: Labor Standards Act (FLSA or Act). See factors in paragraph (d) of this section 29 U.S.C. 201–19. The Administrator of guide the determination of whether the PART 780—EXEMPTIONS the Wage and Hour Division will use relationship between an individual and APPLICABLE TO AGRICULTURE, these interpretations to guide the a potential employer is one of economic PROCESSING OF AGRICULTURAL performance of his or her duties under dependence and therefore whether an COMMODITIES, AND RELATED the Act, and intends the interpretations individual is properly classified as an SUBJECTS UNDER THE FAIR LABOR to be used by employers, employees, employee or independent contractor. STANDARDS ACT and courts to understand employers’ These factors are not exhaustive, and no ■ 1. The authority citation for part 780 obligations and employees’ rights under single factor is dispositive. However, the two core factors listed in paragraph continues to read as follows: the Act. To the extent that prior administrative rulings, interpretations, (d)(1) of this section are the most Authority: Secs. 1–19, 52 Stat. 1060, as probative as to whether or not an amended; 29 U.S.C. 201–219. practices, or enforcement policies relating to classification as an employee individual is an economically ■ 2. Amend § 780.330 by revising or independent contractor under the Act dependent ‘‘employee,’’ 29 U.S.C. paragraph (b) to read as follows: are inconsistent or in conflict with the 203(e)(1), and each therefore typically interpretations stated in this part, they carries greater weight in the analysis § 780.330 Sharecroppers and tenant than any other factor. Given these two farmers. are hereby rescinded. The interpretations stated in this part may be core factors’ greater probative value, if * * * * * they both point towards the same (b) In determining whether such relied upon in accordance with section 10 of the Portal-to-Portal Act, 29 U.S.C. classification, whether employee or individuals are employees or independent contractor, there is a independent contractors, the criteria 251–262, notwithstanding that after any such act or omission in the course of substantial likelihood that is the laid down in §§ 795.100 through individual’s accurate classification. This 795.110 of this chapter are used. such reliance, any such interpretation in this part ‘‘is modified or rescinded or is is because other factors are less * * * * * determined by judicial authority to be probative and, in some cases, may not be probative at all, and thus are highly PART 788—FORESTRY OR LOGGING invalid or of no legal effect.’’ 29 U.S.C. 259. unlikely, either individually or OPERATIONS IN WHICH NOT MORE collectively, to outweigh the combined THAN EIGHT EMPLOYEES ARE § 795.105 Determining employee and probative value of the two core factors. EMPLOYED independent contractor classification under (d) Economic reality factors—(1) Core the FLSA. factors—(i) The nature and degree of ■ 3. The authority citation for part 788 (a) Independent contractors are not control over the work. This factor continues to read as follows: employees under the Act. An individual weighs towards the individual being an Authority: Secs. 1–19, 52 Stat. 1060, as who renders services to a potential independent contractor to the extent the amended; 29 U.S.C. 201–219. employer—i.e., a putative employer or individual, as opposed to the potential ■ 4. Amend § 788.16 by revising alleged employer—as an independent employer, exercises substantial control paragraph (a) to read as follows: contractor is not that potential over key aspects of the performance of

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the work, such as by setting his or her This factor weighs in favor of the a logistics company. The owner- own schedule, by selecting his or her individual being an independent operator substantially controls the key projects, and/or through the ability to contractor to the extent the work aspects of the work. However, the work for others, which might include relationship is by design definite in logistics company has installed, at its the potential employer’s competitors. In duration or sporadic, which may own expense, a device that limits the contrast, this factor weighs in favor of include regularly occurring fixed maximum speed of the owner-operator’s the individual being an employee under periods of work, although the seasonal vehicle and monitors the speed through the Act to the extent the potential nature of work by itself would not GPS. The company limits the owner- employer, as opposed to the individual, necessarily indicate independent operator’s speed in order to comply exercises substantial control over key contractor classification. This factor with federally mandated motor carrier aspects of the performance of the work, weighs in favor of the individual being safety regulations and to ensure that she such as by controlling the individual’s an employee to the extent the work complies with local traffic laws. The schedule or workload and/or by directly relationship is instead by design company also requires the owner- or indirectly requiring the individual to indefinite in duration or continuous. operator to meet certain contractually work exclusively for the potential (iii) Whether the work is part of an agreed-upon delivery deadlines, and her employer. Requiring the individual to integrated unit of production. This contract includes agreed-upon comply with specific legal obligations, factor weighs in favor of the individual incentives for meeting, and penalties for satisfy health and safety standards, carry being an employee to the extent his or missing, the deadlines. insurance, meet contractually agreed- her work is a component of the potential (ii) Application. The owner-operator upon deadlines or quality control employer’s integrated production exercises substantial control over key standards, or satisfy other similar terms process for a good or service. This factor aspects of her work, indicating that are typical of contractual weighs in favor of an individual being independent contractor status. The fact relationships between businesses (as an independent contractor to the extent that the company has installed a device opposed to employment relationships) his or her work is segregable from the that limits and monitors the speed of the does not constitute control that makes potential employer’s production owner-operator’s vehicle does not the individual more or less likely to be process. This factor is different from the change the above conclusion. This an employee under the Act. concept of the importance or centrality measure is implemented in order to (ii) The individual’s opportunity for of the individual’s work to the potential comply with specific legal obligations profit or loss. This factor weighs employer’s business. and to ensure safety, and thus under towards the individual being an (iv) Additional factors. Additional § 795.105(d)(1)(i) would not constitute independent contractor to the extent the factors may be relevant in determining control that makes the owner-operator individual has an opportunity to earn whether an individual is an employee or more or less likely to be an employee profits or incur losses based on his or independent contractor for purposes of under the Act. The contractually agreed- her exercise of initiative (such as the FLSA, but only if the factors in some upon delivery deadlines, incentives, managerial skill or business acumen or way indicate whether the individual is and penalties are typical of contractual judgment) or management of his or her in business for him- or herself, as relationships between businesses and investment in or capital expenditure on, opposed to being economically likewise would not constitute control for example, helpers or equipment or dependent on the potential employer for that makes the owner-operator more or material to further his or her work. work. less likely to be an employee under the While the effects of the individual’s Act. exercise of initiative and management of § 795.110 Primacy of actual practice. (2)(i) Example. An individual accepts investment are both considered under In evaluating the individual’s assignments from a company that this factor, the individual does not need economic dependence on the potential provides an app-based service linking to have an opportunity for profit or loss employer, the actual practice of the those who need home-repair work with based on both for this factor to weigh parties involved is more relevant than those who perform home-repair work. towards the individual being an what may be contractually or The individual is able to meaningful independent contractor. This factor theoretically possible. For example, an increase his earnings by exercising weighs towards the individual being an individual’s theoretical abilities to initiative and business acumen and by employee to the extent the individual is negotiate prices or to work for investing in his own equipment. The unable to affect his or her earnings or is competing businesses are less company, however, has invested only able to do so by working more meaningful if, as a practical matter, the millions of dollars in developing and hours or faster. individual is prevented from exercising maintaining the app, marketing itself, (2) Other factors—(i) The amount of such rights. Likewise, a business’ maintaining the security of information skill required for the work. This factor contractual authority to supervise or submitted by actual and prospective weighs in favor of the individual being discipline an individual may be of little customers and workers, and monitoring an independent contractor to the extent relevance if in practice the business customer satisfaction with the work the work at issue requires specialized never exercises such authority. performed. training or skill that the potential (ii) Application. The opportunity for employer does not provide. This factor § 795.115 Examples of analyzing economic profit or loss factor favors independent weighs in favor of the individual being reality factors. contractor status for the individual, an employee to the extent the work at (a) The following illustrative despite the substantial difference in the issue requires no specialized training or examples demonstrate how the factors monetary value of the investments made skill and/or the individual is dependent listed in § 795.105(d) may be analyzed by each party. While the company may upon the potential employer to equip under the facts presented and are have invested substantially more in its him or her with any skills or training limited to substantially similar factual business, the value of that investment is necessary to perform the job. situations. not relevant in determining whether the (ii) The degree of permanence of the (b)(1)(i) Example. An individual is the individual has a meaningful working relationship between the owner and operator of a tractor-trailer opportunity for profit or loss through individual and the potential employer. and performs transportation services for his initiative, investment, or both.

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(3)(i) Example. An individual worker industry and is thus not indicative of a journalist sometimes corresponds with works full time performing home sporadic relationship. The fact that the the newspaper’s editor regarding what renovation and repair services for a housekeeper returns to his prior to write about or regarding revisions to residential construction company. She position each new season indicates that the articles that he submits, but he does is also the part owner of a food truck, his relationship with ski resort does not not otherwise communicate or work which she operates on weekends. In end and is indefinite as a matter of with any of the newspaper’s employees. performing the construction work, the economic reality. The journalist never assigns articles to worker is paid a fixed hourly rate, and (5)(i) Example. An editor works part- others nor does he review or revise the company determines how many and time for a newspaper. The editor works articles that others submit. He is not which tasks she performs. Her food from home and is responsible for responsible for determining where his truck recently became very popular and assigning and reviewing many articles article or any other articles appear in the has generated substantial profits for her. published by the newspaper. Sometimes newspaper’s print and online editions. (ii) Application. With regard to the she also writes or rewrites articles. The construction work, the worker does not editor is responsible for determining the (ii) Application. The journalist is not have a meaningful opportunity for profit layout and order in which all articles part of an integrated unit of production or loss based on her exercise of appear in the newspaper’s print and of the newspaper, indicating initiative or investment, indicating online editions. She makes assignment independent contractor status. His work employee status. She is unable to profit, and lay-out decisions in coordination is limited to the specific articles that he i.e., increase her earnings, by exercising with several full-time editors who make submits and is completely segregated initiative or managing investments similar decisions with respect to from other parts of the newspaper’s because she is paid a fixed hourly rate different articles in the same publication processes that serve its specific, unified and the company determines the and who are employees of the purpose of producing newspapers. It is assignment of work. While she earns newspaper. not relevant in analyzing this factor that substantial profits through her food (ii) Application. The editor is part of the writing of articles is an important truck, that is a separate business from an integrated unit of production of the part of producing newspapers. Likewise, her work in the construction industry, newspaper because she is involved in the fact that he works at home does not and therefore is not relevant to the the entire production process of the strongly indicate either status, because question of whether she is an employee newspaper, including assigning, the nature of the journalist’s work is of the construction company or in reviewing, drafting, and laying out such that the physical location where it business for herself in the construction articles. This factor points in the is performed is largely irrelevant. industry. direction of her being an employee of (4)(i) Example. A housekeeper works the newspaper. This conclusion is § 795.120 Severability. for a ski resort every winter. At the end further supported by the fact that the If any provision of this part is held to of each winter, he stops working for the editor performs the same work as be invalid or unenforceable by its terms, ski resort because the resort shuts down. employees of the newspaper in or as applied to any person or At the beginning of each of the past coordination with those employees. The circumstance, or stayed pending further fact that she does not physically work several winters, the housekeeper agency action, the provision shall be returned to his prior position at the ski at the newspaper’s office does not construed so as to continue to give the resort without formally applying or outweigh these more probative maximum effect to the provision interviewing. considerations of the integrated unit permitted by law, unless such holding (ii) Application. The housekeeper has factor. a long-term and indefinite work (6)(i) Example. A journalist writes shall be one of utter invalidity or relationship with the ski resort under articles for a newspaper on a freelance unenforceability, in which event the the permanence factor, which weighs in basis. The journalist does not have an provision shall be severable from this favor of classification as an employee. office and generally works from home. part and shall not affect the remainder That his periods of working for the ski He submits an article to the newspaper thereof. resort end at the end of each winter is once every 2 to 3 weeks, which the [FR Doc. 2020–29274 Filed 1–6–21; 8:45 am] a result of the seasonal nature of the ski newspaper may accept or reject. The BILLING CODE 4510–27–P

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