Proposed Rule2022-21454
Employee or Independent Contractor Classification Under the Fair Labor Standards Act
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 13, 2022
Issuing agencies
Labor DepartmentWage and Hour Division
Abstract
The U.S. Department of Labor (the Department) is proposing to modify Wage and Hour Division regulations to revise its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA or Act) to be more consistent with judicial precedent and the Act's text and purpose.
Full Text
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<title>Federal Register, Volume 87 Issue 197 (Thursday, October 13, 2022)</title>
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[Federal Register Volume 87, Number 197 (Thursday, October 13, 2022)]
[Proposed Rules]
[Pages 62218-62275]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-21454]
[[Page 62217]]
Vol. 87
Thursday,
No. 197
October 13, 2022
Part III
Department of Labor
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Wage and Hour Division
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29 CFR Parts 780, 788 and 795
Employee or Independent Contractor Classification Under the Fair Labor
Standards Act; Proposed Rule
Federal Register / Vol. 87 , No. 197 / Thursday, October 13, 2022 /
Proposed Rules
[[Page 62218]]
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DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Parts 780, 788, and 795
RIN 1235-AA43
Employee or Independent Contractor Classification Under the Fair
Labor Standards Act
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The U.S. Department of Labor (the Department) is proposing to
modify Wage and Hour Division regulations to revise its analysis for
determining employee or independent contractor classification under the
Fair Labor Standards Act (FLSA or Act) to be more consistent with
judicial precedent and the Act's text and purpose.
DATES: Submit written comments on or before November 28, 2022.
ADDRESSES: You may submit comments, identified by Regulation Identifier
Number (RIN) 1235-AA43, by either of the following methods:
<bullet> Electronic Comments: Submit comments through the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Follow the
instructions for submitting comments.
<bullet> Mail: Address written submissions to Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210.
Instructions: Please submit only one copy of your comments by only
one method. Of the two methods, the Department strongly recommends that
commenters submit their comments electronically via <a href="https://www.regulations.gov">https://www.regulations.gov</a> to ensure timely receipt prior to the close of the
comment period, as the Department continues to experience delays in the
receipt of mail. All comments must be received by 11:59 p.m. ET on
November 28, 2022, for consideration in this rulemaking; comments
received after the comment period closes will not be considered.
Commenters submitting file attachments on <a href="https://www.regulations.gov">https://www.regulations.gov</a> are advised that uploading text-recognized
documents--i.e., documents in a native file format or documents which
have undergone optical character recognition (OCR)--enable staff at the
Department to more easily search and retrieve specific content included
in your comment for consideration. This recommendation applies
particularly to mass comment submissions, when a single sponsoring
individual or organization submits multiple comments on behalf of
members or other affiliated third parties. The Wage and Hour Division
(WHD) posts such comments as a group under a single document ID number
on <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Anyone who submits a comment (including duplicate comments) should
understand and expect that the comment will become a matter of public
record and will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>, including any personal information provided.
Accordingly, the Department requests that no business proprietary
information, copyrighted information, or personally identifiable
information be submitted in response to this notice of proposed
rulemaking (NPRM).
Docket: For access to the docket to read background documents or
comments, go to the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a
toll-free number). Alternative formats are available upon request by
calling 1-866-487-9243. If you are deaf, hard of hearing, or have a
speech disability, please dial 7-1-1 to access telecommunications relay
services.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or logging onto WHD's website for a nationwide listing of WHD
district and area offices at <a href="https://www.dol.gov/whd/america2.htm">https://www.dol.gov/whd/america2.htm</a>.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
Congress enacted the FLSA in 1938 to eliminate ``labor conditions
detrimental to the maintenance of the minimum standard of living
necessary for health, efficiency, and general well-being of workers.''
\1\ To this end, the FLSA generally requires covered employers to pay
nonexempt employees at least the Federal minimum wage for all hours
worked and at least one and one-half times the employee's regular rate
of pay for every hour worked over 40 in a workweek. The Act also
requires covered employers to maintain certain records regarding
employees and prohibits retaliation against employees who are
discharged or discriminated against after, for example, inquiring about
their pay or filing a complaint with the U.S. Department of Labor.
However, the FLSA's minimum wage and overtime pay protections do not
apply to independent contractors. As explained below, as used in this
proposal, the term ``independent contractor'' refers to workers who, as
a matter of economic reality, are not economically dependent on their
employer for work and are in business for themselves. Such workers play
an important role in the economy and are commonly referred to by
different names, including independent contractor, self-employed, and
freelancer. Regardless of the name or title used, the test for whether
the worker is an employee or independent contractor under the FLSA
remains the same. This proposed rulemaking is not intended to disrupt
the businesses of independent contractors who are, as a matter of
economic reality, in business for themselves.
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\1\ 29 U.S.C. 202(a).
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Determining whether an employment relationship exists under the
FLSA begins with the Act's definitions. Although the FLSA does not
define the term ``independent contractor,'' it contains expansive
definitions of ``employer,'' ``employee,'' and ``employ.'' ``Employer''
is defined to ``include[ ] any person acting directly or indirectly in
the interest of an employer in relation to an employee,'' ``employee''
is defined as ``any individual employed by an employer,'' and
``employ'' is defined to ``include[] to suffer or permit to work.'' \2\
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\2\ 29 U.S.C. 203(d), (e)(1), (g).
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For more than 7 decades, the Department and courts have applied an
economic reality test to determine whether a worker is an employee or
an independent contractor under the FLSA. The ultimate inquiry is
whether, as a matter of economic reality, the worker is either
economically dependent on the employer for work (and is thus an
employee) or is in business for themself (and is thus an independent
contractor). To answer this ultimate inquiry of economic dependence,
the courts and the Department have historically conducted a totality-
of-the-circumstances analysis, considering multiple factors to
determine whether a worker is an employee or an independent contractor
under the FLSA. There is significant and widespread uniformity among
the circuit courts in
[[Page 62219]]
the application of the economic reality test, although there is slight
variation as to the number of factors considered or how the factors are
framed. These factors generally include the opportunity for profit or
loss, investment, permanency, the degree of control by the employer
over the worker, whether the work is an integral part of the employer's
business, and skill and initiative.
In January 2021, the Department published a rule titled
``Independent Contractor Status Under the Fair Labor Standards Act''
(2021 IC Rule), providing guidance on the classification of independent
contractors under the FLSA applicable to workers and businesses in any
industry.\3\ The 2021 IC Rule identified five economic reality factors
to guide the inquiry into a worker's status as an employee or
independent contractor.\4\ Two of the five identified factors--the
nature and degree of control over the work and the worker's opportunity
for profit or loss--were designated as ``core factors'' that are the
most probative and carry greater weight in the analysis. The 2021 IC
Rule stated that if these two core factors point towards the same
classification, there is a substantial likelihood that it is the
worker's accurate classification.\5\ The 2021 IC Rule also identified
three less probative non-core factors: the amount of skill required for
the work, the degree of permanence of the working relationship between
the worker and the employer, and whether the work is part of an
integrated unit of production.\6\ The 2021 IC Rule stated that it is
``highly unlikely'' that these three non-core factors can outweigh the
combined probative value of the two core factors.\7\ The 2021 IC Rule
also limited consideration of investment and initiative to the
opportunity for profit or loss factor in a way that narrows in at least
some circumstances the extent to which investment and initiative are
considered. The facts to be considered under other factors (such as
control) were also narrowed, and the factor that considers whether the
work is integral to the employer's business was limited to whether the
work is part of an integrated unit of production.\8\ Finally, the 2021
IC Rule provided that the actual practice of the parties involved is
more relevant than what may be contractually or theoretically possible
and provided illustrative examples demonstrating how the analysis would
apply in particular factual circumstances.\9\
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\3\ 86 FR 1168. The Office of the Federal Register did not amend
the Code of Federal Regulations (CFR) to include the regulations
from the 2021 IC Rule because, as explained elsewhere in this
section, the Department first delayed and then withdrew the 2021 IC
Rule before it became effective. A district court decision later
vacated the Department's rules to delay and withdraw the 2021 IC
Rule, and the Department has (since that decision) conducted
enforcement in accordance with that decision.
\4\ Id. at 1246-47 (Sec. 795.105(d)).
\5\ Id. at 1246 (Sec. 795.105(c)).
\6\ Id. at 1247 (Sec. 795.105(d)(2)).
\7\ Id. at 1246 (Sec. 795.105(c)).
\8\ Id. at 1246-47 (Sec. 795.105(d)(1) and (d)(2)(iii)).
\9\ Id. at 1247-48 (Sec. Sec. 795.110, 795.115).
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The effective date of the 2021 IC Rule was March 8, 2021. On March
4, 2021, the Department published a rule delaying the effective date of
the 2021 IC Rule (Delay Rule) and on May 6, 2021, it published a rule
withdrawing the 2021 IC Rule (Withdrawal Rule). On March 14, 2022, in a
lawsuit challenging the Department's delay and withdrawal of the 2021
IC Rule, a Federal district court in the Eastern District of Texas
issued a decision vacating the Delay and Withdrawal Rules.\10\ The
district court concluded that the 2021 IC Rule became effective on the
original effective date of March 8, 2021.
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\10\ See Coalition for Workforce Innovation v. Walsh, No. 1:21-
CV-130, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022).
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After further consideration, the Department believes that the 2021
IC Rule does not fully comport with the FLSA's text and purpose as
interpreted by courts and departs from decades of case law applying the
economic reality test. The 2021 IC Rule included provisions that are in
tension with this case law--such as designating two factors as most
probative and predetermining that they carry greater weight in the
analysis, considering investment and initiative only in the opportunity
for profit or loss factor, and excluding consideration of whether the
work performed is central or important to the employer's business.
These provisions narrow the economic reality test by limiting the facts
that may be considered as part of the test, facts which the Department
believes are relevant in determining whether a worker is economically
dependent on the employer for work or in business for themself.
While the Department considered waiting for a longer period of time
in order to monitor the effects of the 2021 IC Rule, after careful
consideration, it has decided it is appropriate to move forward with
this proposed regulation. The Department believes that retaining the
2021 IC Rule would have a confusing and disruptive effect on workers
and businesses alike due to its departure from case law describing and
applying the multifactor economic reality test as a totality-of-the-
circumstances test. Because the 2021 IC Rule departed from legal
precedent, it is not clear whether courts will adopt its analysis--a
question that could take years of appellate litigation in different
Federal circuits to sort out and will result in more uncertainty as to
the applicable test. The Department also believes that departing from
the longstanding test applied by the courts may result in greater
confusion among employers in applying the new analysis, which could in
some situations place workers at greater risk of misclassification as
independent contractors due to the new analysis being applied
improperly, and thus may negatively affect both the workers and
competing businesses that correctly classify their employees.
Therefore, the Department believes it is appropriate to rescind the
2021 IC Rule and set forth an analysis for determining employee or
independent contractor status under the Act that is more consistent
with existing judicial precedent and the Department's longstanding
guidance prior to the 2021 IC Rule. While prior to the 2021 IC Rule the
Department primarily issued subregulatory guidance in this area under
the FLSA, it believes that its proposal to both rescind the 2021 IC
Rule and replace it with detailed regulations addressing the
multifactor economic reality test--in a way that more fully reflects
the case law and provides the flexibility needed for application to the
entire economy--would be helpful for both workers and employers. And as
the 2021 IC Rule explained, workers and employers should benefit from
affirmative regulatory guidance from the Department further developing
the concept of economic dependence.
Accordingly, the Department is now proposing, in addition to
rescinding the 2021 IC Rule, to again add part 795. Specifically, the
Department proposes to modify the text of part 795 as published on
January 7, 2021, at 86 FR 1246 through 1248, addressing whether workers
are employees or independent contractors under the FLSA. As discussed
below, the Department is not proposing the use of ``core factors'' but
instead proposes to return to a totality-of-the-circumstances analysis
of the economic reality test in which the factors do not have a
predetermined weight and are considered in view of the economic reality
of the whole activity. The Department is further proposing to return
the consideration of investment to a standalone factor, provide
additional analysis of the control factor (including detailed
[[Page 62220]]
discussions of how scheduling, supervision, price-setting, and the
ability to work for others should be considered), and return to the
longstanding interpretation of the integral factor, which considers
whether the work is integral to the employer's business.
The Department recognizes that this return to a totality-of-the-
circumstances analysis in which the economic reality factors are not
assigned a predetermined weight and each factor is given full
consideration represents a change from the 2021 IC Rule. As discussed
below, however, it believes that this approach is the option that would
be most beneficial for stakeholders because this proposal provides
guidance that is aligned with the Department's decades-long approach
(prior to the 2021 IC Rule) as well as circuit case law. The Department
believes that this proposal, if finalized, will provide more consistent
guidance to employers as they determine whether workers are
economically dependent on the employer for work or are in business for
themselves, as well as useful guidance to workers on whether they are
correctly classified as employees or independent contractors.
Accordingly, the Department believes this proposal will help protect
workers from misclassification while at the same time recognizing that
independent contractors serve an important role in our economy and
providing a consistent approach for those businesses that engage (or
wish to engage) independent contractors.
II. Background
A. Relevant FLSA Definitions
Enacted in 1938, the FLSA generally requires that covered employers
pay nonexempt employees at least the Federal minimum wage (presently
$7.25 per hour) for every hour worked,\11\ and at least one and one-
half times the employee's regular rate of pay for all hours worked
beyond 40 in a workweek.\12\ The FLSA also requires covered employers
to ``make, keep, and preserve'' certain records regarding
employees.\13\
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\11\ 29 U.S.C. 206(a).
\12\ 29 U.S.C. 207(a).
\13\ 29 U.S.C. 211(c).
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The FLSA's wage and hour protections apply to employees. In
relevant part, section 3(e) of the Act defines the term ``employee'' as
``any individual employed by an employer.'' \14\ Section 3(d) defines
the term ``employer'' to ``includ[e] any person acting directly or
indirectly in the interest of an employer in relation to an employee.''
\15\ Finally, section 3(g) provides that the term `` `[e]mploy'
includes to suffer or permit to work.'' \16\
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\14\ 29 U.S.C. 203(e)(1).
\15\ 29 U.S.C. 203(d).
\16\ 29 U.S.C. 203(g).
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Interpreting these provisions, the U.S. Supreme Court has stated
that ``[a] broader or more comprehensive coverage of employees within
the stated categories would be difficult to frame,'' and that ``the
term `employee' had been given `the broadest definition that has ever
been included in any one act.' '' \17\ In particular, the Court has
noted the ``striking breadth'' of section 3(g)'s ``suffer or permit''
language, observing that it ``stretches the meaning of `employee' to
cover some parties who might not qualify as such under a strict
application of traditional agency law principles.'' \18\ Thus, the
Court has repeatedly observed that the FLSA's scope of employment is
broader than the common law standard often applied to determine
employment status under other Federal laws.\19\
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\17\ United States v. Rosenwasser, 323 U.S. 360, 362, 363 n.3
(1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Hugo
Black)).
\18\ Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992).
\19\ Id. at 326; see also, e.g., Walling v. Portland Terminal
Co., 330 U.S. 148, 150-51 (1947) (``[I]n determining who are
`employees' under the Act, common law employee categories or
employer-employee classifications under other statutes are not of
controlling significance. This Act contains its own definitions,
comprehensive enough to require its application to many persons and
working relationships, which prior to this Act, were not deemed to
fall within an employer-employee category.'') (citation omitted).
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At the same time, the Supreme Court has recognized that the Act was
``not intended to stamp all persons as employees.'' \20\ Among other
categories of workers excluded from FLSA coverage, the Court has
recognized that ``independent contractors'' fall outside the Act's
broad understanding of employment.\21\ Accordingly, the FLSA does not
require covered employers to pay an independent contractor the minimum
wage or overtime pay under sections 6(a) and 7(a) of the Act, or to
keep records regarding an independent contractor's work under section
11(c). However, merely ``putting on an `independent contractor' label
does not take [a] worker from the protection of the [FLSA].'' \22\
Courts have thus recognized a need to delineate between employees, who
fall under the protections of the FLSA, and independent contractors,
who do not.
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\20\ Portland Terminal, 330 U.S. at 152.
\21\ See, e.g., Rutherford Food Corp. v. McComb, 331 U.S. 722,
729 (1947) (noting that ``[t]here may be independent contractors who
take part in production or distribution who would alone be
responsible for the wages and hours of their own employees'').
\22\ Id.
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The FLSA does not define the term ``independent contractor.'' While
it is clear that section 3(g)'s ``suffer or permit'' language
contemplates a broader coverage of workers compared to what exists
under the common law, ``there is in the [FLSA] no definition that
solves problems as to the limits of the employer-employee relationship
under the Act.'' \23\ Therefore, in articulating the distinction
between FLSA-covered employees and independent contractors, courts rely
on a broad, multifactor ``economic reality'' analysis derived from
judicial precedent.\24\ Unlike the control-focused analysis for
independent contractors applied under the common law,\25\ the economic
reality test focuses more broadly on a worker's economic dependence on
an employer, considering the totality of the circumstances.
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\23\ Id. at 728.
\24\ Courts invoke the concept of ``economic reality'' in FLSA
employment contexts beyond independent contractor status. However,
as in prior rulemakings, this NPRM refers to the ``economic
reality'' analysis or test for independent contractors as a
shorthand reference to the independent contractor analysis used by
courts for FLSA purposes.
\25\ In distinguishing between employees and independent
contractors under the common law, courts evaluate ``the hiring
party's right to control the manner and means by which the product
is accomplished.'' Community for Creative Non-Violence v. Reid, 490
U. S. 730, 751 (1989). ``Among the other factors relevant to this
inquiry are the skill required; the source of the instrumentalities
and tools; the location of the work; the duration of the
relationship between the parties; whether the hiring party has the
right to assign additional projects to the hired party; the extent
of the hired party's discretion over when and how long to work; the
method of payment; the hired party's role in hiring and paying
assistants; whether the work is part of the regular business of the
hiring party; whether the hiring party is in business; the provision
of employee benefits; and the tax treatment of the hired party.''
Id. (footnotes omitted).
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B. Judicial Development of the Economic Reality Test
1. Supreme Court Development of the Economic Reality Test
In a series of cases from 1944 to 1947, the U.S. Supreme Court
considered employee or independent contractor status under three
different Federal statutes that were enacted during the 1930s New Deal
Era--the FLSA, the National Labor Relations Act (NLRA), and the Social
Security Act (SSA)--and applied an economic reality test under all
three laws.
In the first of these cases, NLRB v. Hearst Publications, Inc., 322
U.S. 111 (1944), the Court considered the meaning of ``employee'' under
the NLRA, which defined the term to
[[Page 62221]]
``include any employee.'' \26\ In relevant part, the Hearst Court
rejected application of the common law standard,\27\ noting that ``the
broad language of the [NLRA's] definitions . . . leaves no doubt that
its applicability is to be determined broadly, in doubtful situations,
by underlying economic facts rather than technically and exclusively by
previously established legal classifications.'' \28\
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\26\ 322 U.S. at 118-20; 29 U.S.C. 152(3).
\27\ 322 U.S. at 123-25.
\28\ Id. at 129.
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On June 16, 1947, the Supreme Court decided United States v. Silk,
331 U.S. 704 (1947), addressing the distinction between employees and
independent contractors under the SSA. In that case, the Court
favorably summarized Hearst as setting forth ``economic reality,'' as
opposed to ``technical concepts'' of the common law standard alone, as
the framework for determining workers' classification.\29\ But it also
acknowledged that not ``all who render service to an industry are
employees.'' \30\ Although the Court found it to be ``quite impossible
to extract from the [SSA] a rule of thumb to define the limits of the
employer-employe[e] relationship,'' the Court identified five factors
as ``important for decision'': ``degrees of control, opportunities for
profit or loss, investment in facilities, permanency of relation[,] and
skill required in the claimed independent operation.'' \31\ The Court
added that ``[n]o one [factor] is controlling nor is the list
complete.'' \32\ The Court went on to note that the workers in that
case were ``from one standpoint an integral part of the businesses'' of
the employer, supporting a conclusion that some of the workers in that
case were employees.\33\
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\29\ 331 U.S. at 712-14.
\30\ Id. at 712.
\31\ Id. at 716.
\32\ Id.
\33\ Id.
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The same day that the Supreme Court issued its decision in Silk, it
also issued Rutherford Food Corp. v. McComb, 331 U.S. 722, in which it
affirmed a circuit court decision that analyzed an FLSA employment
relationship based on its economic realities.\34\ Describing the FLSA
as ``a part of the social legislation of the 1930s of the same general
character as the [NLRA] and the [SSA],'' the Court opined that
``[d]ecisions that define the coverage of the employer-Employee
relationship under the Labor and Social Security acts are persuasive in
the consideration of a similar coverage under the [FLSA].'' \35\
Accordingly, the Court rejected an approach based on ``isolated
factors'' and again considered ``the circumstances of the whole
activity.'' \36\ The Court considered several of the factors that it
listed in Silk as they related to meat boners on a slaughterhouse's
production line, ultimately determining that the boners were
employees.\37\ The Court noted, among other things, that the boners did
a specialty job on the production line, had no business organization
that could shift to a different slaughter-house, and were best
characterized as ``part of the integrated unit of production under such
circumstances that the workers performing the task were employees of
the establishment.'' \38\
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\34\ 331 U.S. at 727.
\35\ Id. at 723-24.
\36\ Id. at 730.
\37\ See id.
\38\ Id. at 729-30.
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On June 23, 1947, one week after the Silk and Rutherford decisions,
the Court decided Bartels v. Birmingham, 332 U.S. 126 (1947), another
case involving employee or independent contractor status under the SSA.
Here again, the Court rejected application of the common law control
test, explaining that, under the SSA, employee status ``was not to be
determined solely by the idea of control which an alleged employer may
or could exercise over the details of the service rendered to his
business by the worker.'' \39\ Rather, employees under ``social
legislation'' such as the SSA are ``those who as a matter of economic
reality are dependent upon the business to which they render service.''
\40\ Thus, in addition to control, ``permanency of the relation, the
skill required, the investment [in] the facilities for work and
opportunities for profit or loss from the activities were also
factors'' to consider.\41\ Although the Court identified these specific
factors as relevant to the analysis, it explained that ``[i]t is the
total situation that controls'' the worker's classification under the
SSA.\42\
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\39\ 332 U.S. at 130.
\40\ Id.
\41\ Id.
\42\ Id.
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Following these Supreme Court decisions, Congress responded with
separate legislation to amend the NLRA and SSA's employment
definitions. First, in 1947, Congress amended the NLRA's definition of
``employee'' to clarify that the term ``shall not include any
individual having the status of an independent contractor.'' \43\ The
following year, Congress similarly amended the SSA to exclude from
employment ``any individual who, under the usual common-law rules
applicable in determining the employer-employee relationship, has the
status of an independent contractor.'' \44\ The Supreme Court
interpreted the amendments to the NLRA as having the same effect as the
explicit definition included in the SSA, which was to ensure that
employment status would be determined by common law agency principles,
rather than an economic reality test.\45\
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\43\ Labor Management Relations (Taft-Hartley) Act, 1947, Public
Law 80-101, sec. 101, 61 Stat. 136, 137-38 (1947) (codified as
amended at 29 U.S.C. 152(3)).
\44\ Social Security Act of 1948, Public Law 80-642, sec. 2(a),
62 Stat. 438 (1948) (codified as amended at 26 U.S.C. 3121(d)).
\45\ See NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256
(1968) (noting that ``[t]he obvious purpose of'' the amendment to
the definition of employee under the NLRA ``was to have the Board
and the courts apply general agency principles in distinguishing
between employees and independent contractors under the Act'').
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Despite its amendments to the NLRA and SSA in response to Hearst
and Silk, Congress did not similarly amend the FLSA following the
Rutherford decision. Thus, when the Supreme Court revisited independent
contractor status under the FLSA several years later in Goldberg v.
Whitaker House Co-op., Inc., 366 U.S. 28 (1961), the Court affirmed
that `` `economic reality' rather than `technical concepts' '' remained
``the test of employment'' under the FLSA,\46\ quoting from its earlier
decisions in Silk and Rutherford. The Court in Whitaker House found
that certain homeworkers were ``not self-employed . . . [or]
independent, selling their products on the market for whatever price
they can command,'' but instead were ``regimented under one
organization, manufacturing what the organization desires and receiving
the compensation the organization dictates.'' \47\ Such facts, among
others, established that the homeworkers at issue were FLSA-covered
employees.\48\
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\46\ 366 U.S. at 33 (quoting from Silk, 331 U.S. at 713, and
Rutherford, 331 U.S. at 729).
\47\ Id. at 32.
\48\ Id. at 33.
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Most recently, in Nationwide Mutual Insurance Co. v. Darden, 503
U.S. 318 (1992), the Court again endorsed application of the economic
reality test to evaluate independent contractor status under the FLSA,
citing to Rutherford and emphasizing the broad ``suffer or permit''
language codified in section 3(g) of the Act.\49\
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\49\ Darden, 503 U.S. at 325-26.
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2. Application of the Economic Reality Test by Federal Courts of
Appeals
Since Rutherford, Federal courts of appeals have applied the
economic
[[Page 62222]]
reality test to distinguish independent contractors from employees who
are entitled to the FLSA's protections. Recognizing that the common law
concept of ``employee'' had been rejected for FLSA purposes, courts of
appeals followed the Supreme Court's instruction that `` `employees are
those who as a matter of economic realities are dependent upon the
business to which they render service.' '' \50\
---------------------------------------------------------------------------
\50\ Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir.
1976) (quoting Bartels, 332 U.S. at 130).
---------------------------------------------------------------------------
When determining whether a worker is an employee under the FLSA or
an independent contractor, Federal circuit courts of appeals apply an
economic reality test using the factors identified in Silk.\51\ No
court of appeals considers any one factor or combination of factors to
predominate over the others in every case.\52\ For example, the
Eleventh Circuit has explained that some of the factors ``which many
courts have used as guides in applying the economic reality test'' are:
(1) the degree of the alleged employer's right to control the manner in
which the work is to be performed; (2) the worker's opportunity for
profit or loss depending upon their managerial skill; (3) the worker's
investment in equipment or materials required for their task, or their
employment of helpers; (4) whether the service rendered requires a
special skill; (5) the degree of permanence of the working
relationship; and (6) the extent to which the service rendered is an
integral part of the alleged employer's business.\53\ Like other
circuits, the Eleventh Circuit repeats the Supreme Court's explanation
from Silk that no one factor is controlling, nor is the list
exhaustive.\54\
---------------------------------------------------------------------------
\51\ See Brock v. Superior Care, Inc., 840 F.2d 1054, 1058-59
(2d Cir. 1988); Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376,
1382-83 (3d Cir. 1985); McFeeley v. Jackson Street Ent., LLC, 825
F.3d 235, 241 (4th Cir. 2016); Pilgrim Equip., 527 F.2d at 1311;
Acosta v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th
Cir. 2019); Sec'y of Labor, U.S. Dep't of Labor v. Lauritzen, 835
F.2d 1529, 1534-35 (7th Cir. 1987); Walsh v. Alpha & Omega USA,
Inc., 39 F.4th 1078, 1082 (8th Cir. 2022); Real v. Driscoll
Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir. 1979); Acosta
v. Paragon Contractors Corp., 884 F.3d 1225, 1235 (10th Cir. 2018);
Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311-12 (11th Cir.
2013); Morrison v. Int'l Programs Consortium, Inc., 253 F.3d 5, 11
(DC Cir. 2001).
\52\ See, e.g., Parrish v. Premier Directional Drilling, L.P.,
917 F.3d 369, 380 (5th Cir. 2019) (stating that it ``is impossible
to assign to each of these factors a specific and invariably applied
weight'') (quoting Hickey v. Arkla Indus., Inc., 699 F.2d 748, 752
(5th Cir. 1983) (applying economic realities test in Age
Discrimination in Employment Act case)); Martin v. Selker Bros., 949
F.2d 1286, 1293 (3d Cir. 1991) (``It is a well-established principle
that the determination of the employment relationship does not
depend on isolated factors . . . neither the presence nor the
absence of any particular factor is dispositive.''); Scantland, 721
F.3d at 1312 n.2 (the relative weight of each factor ``depends on
the facts of the case'') (quoting Santelices v. Cable Wiring, 147 F.
Supp. 2d 1313, 1319 (S.D. Fla. 2001)).
\53\ Scantland, 721 F.3d at 1311-12.
\54\ Id. at 1312 n.2.
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Some courts of appeals have applied the factors with some
variations. For example, the Fifth Circuit typically does not list the
``integral part'' factor as one of the considerations that guides the
analysis.\55\ Nevertheless, the Fifth Circuit, recognizing that the
listed factors are not exhaustive, has considered the extent to which a
worker's function is integral to a business as part of its economic
realities analysis.\56\ The Second and D.C. Circuits vary in that they
treat the employee's opportunity for profit or loss and the employee's
investment as a single factor, but they still use the same
considerations as the other circuits to inform their economic realities
analysis.\57\
---------------------------------------------------------------------------
\55\ See Pilgrim Equip., 527 F.2d at 1311.
\56\ See Hobbs v. Petroplex Pipe & Constr., Inc., 946 F.3d 824,
836 (5th Cir. 2020).
\57\ See, e.g., Franze v. Bimbo Bakeries USA, Inc., 826 F. App'x
74, 76 (2d Cir. 2020); Superior Care, 840 F.2d at 1058-59. The D.C.
Circuit has adopted the Second Circuit's articulation of the
factors, including treating opportunity for profit or loss and
investment as one factor. See Morrison, 253 F.3d at 11 (citing
Superior Care, 840 F.2d at 1058-59).
---------------------------------------------------------------------------
In sum, since the 1940s, Federal courts have analyzed the question
of employee or independent contractor status under the FLSA by
examining the economic realities of the employment relationship to
determine whether the worker is economically dependent on the employer
for work or is in business for themself, even if they have varied
slightly in their articulations of the factors. Nevertheless, all
courts have looked to the factors first articulated in Silk as useful
guideposts while acknowledging that those factors are not exhaustive
and should not be applied mechanically.\58\
---------------------------------------------------------------------------
\58\ See, e.g., Superior Care, 840 F.2d at 1059.
---------------------------------------------------------------------------
C. The Department's Application of the Economic Reality Test
The Department has applied a multifactor economic reality test
since the Supreme Court's opinions in Rutherford and Silk. For example,
on June 23, 1949, the Wage and Hour Division (WHD) issued an opinion
letter distilling six ``primary factors which the Court considered
significant'' in Rutherford and Silk: ``(1) the extent to which the
services in question are an integral part of the `employer[']s'
business; (2) the amount of the so-called `contractor's' investment in
facilities and equipment; (3) the nature and degree of control by the
principal; (4) opportunities for profit and loss; . . . (5) the amount
of initiative judgment or foresight required for the success of the
claimed independent enterprise[;] and [(6)] permanency of the
relation.'' \59\ The guidance cautioned that no single factor is
controlling, and ``[o]rdinarily a definite decision as to whether one
is an employee or an independent contractor under the [FLSA] cannot be
made in the absence of evidence as to his actual day-to-day working
relationship with his principal. Clearly a written contract does not
always reflect the true situation.'' \60\
---------------------------------------------------------------------------
\59\ WHD Op. Ltr. (June 23, 1949).
\60\ Id.
---------------------------------------------------------------------------
Subsequent WHD opinion letters addressing employee or independent
contractor status under the FLSA have provided similar recitations of
the Silk factors, sometimes omitting one or more of the six factors
described in the 1949 opinion letter,\61\ and sometimes adding (or
substituting) a seventh factor: the worker's ``degree of independent
business organization and operation.'' \62\ Numerous opinion letters
have emphasized that employment status is ``not determined by the
common law standards relating to master and servant,'' \63\ and that
``[t]he degree of control retained by the principal has been rejected
as the sole criterion to be applied.'' \64\
---------------------------------------------------------------------------
\61\ See, e.g., WHD Op. Ltr. FLSA-314 (Dec. 21, 1982)
(discussing three of the Silk factors); WHD Op. Ltr. FLSA-164 (Jan.
18, 1990) (discussing four of the Silk factors).
\62\ See WHD Op. Ltr. (Oct. 12, 1965); WHD Op. Ltr. (Feb. 18,
1969).
\63\ See, e.g., WHD Op. Ltr. (Feb. 18, 1969); WHD Op. Ltr.
(Sept. 1, 1967); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981); WHD Op. Ltr.
(June 5, 1995).
\64\ See, e.g., WHD Op. Ltr. FLSA-106 (Feb. 8, 1956); WHD Op.
Ltr. (July 20, 1965); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981).
---------------------------------------------------------------------------
In 1962, the Department revised the regulations in 29 CFR part
788,\65\ which generally provides interpretive guidance on the FLSA's
exemption for employees in small forestry or lumbering operations, and
added a provision addressing the distinction between employees and
independent contractors.\66\ Citing to Silk, Rutherford, and Bartels,
the regulation advised that ``an employee, as distinguished from a
person who is engaged in a business of his own, is one who `follows the
usual path of an employee' and is dependent on the business which he
serves.'' \67\ To ``aid in assessing the total situation,'' the
regulation then identified a partial list of ``characteristics of the
two classifications which should be considered,'' including ``the
extent to
[[Page 62223]]
which the services rendered are an integral part of the principal's
business; the permanency of the relationship; the opportunities for
profit or loss; the initiative, judgment or foresight exercised by the
one who performs the services; the amount of investment; and the degree
of control which the principal has in the situation.'' \68\ Implicitly
referring to the Bartels decision, the regulation advised that ``[t]he
Court specifically rejected the degree of control retained by the
principal as the sole criterion to be applied.'' \69\
---------------------------------------------------------------------------
\65\ See 27 FR 8032.
\66\ See 29 U.S.C. 213(b)(28) (previously codified at 29 U.S.C.
213(a)(15)).
\67\ 27 FR 8033 (29 CFR 788.16(a)).
\68\ Id.
\69\ 27 FR 8033-34 (29 CFR 788.16(a)).
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In 1972, the Department added similar guidance on independent
contractor status at 29 CFR 780.330(b), in a provision addressing the
employment status of sharecroppers and tenant farmers.\70\ This
regulation was nearly identical to the independent contractor guidance
for the logging and forestry industry previously codified at 29 CFR
788.16(a), including an identical description of the same six economic
reality factors.\71\ Both provisions--29 CFR 780.330(b) and 788.16(a)--
remained unchanged until 2021.
---------------------------------------------------------------------------
\70\ See 37 FR 12084, 12102 (introducing 29 CFR 780.330(b)).
\71\ Id.
---------------------------------------------------------------------------
In 1997, the Department promulgated a regulation applying a
multifactor economic reality analysis for distinguishing between
employees and independent contractors under the Migrant and Seasonal
Agricultural Worker Protection Act (MSPA),\72\ which notably
incorporates the FLSA's ``suffer or permit'' definition of employment
by reference.\73\ The regulation (which has not since been amended)
advises that ``[i]n determining if the farm labor contractor or worker
is an employee or an independent contractor, the ultimate question is
the economic reality of the relationship--whether there is economic
dependence upon the agricultural employer/association or farm labor
contractor, as appropriate.'' \74\ The regulation elaborates that
``[t]his determination is based upon an evaluation of all of the
circumstances, including the following: (i) The nature and degree of
the putative employer's control as to the manner in which the work is
performed; (ii) The putative employee's opportunity for profit or loss
depending upon his/her managerial skill; (iii) The putative employee's
investment in equipment or materials required for the task, or the
putative employee's employment of other workers; (iv) Whether the
services rendered by the putative employee require special skill; (v)
The degree of permanency and duration of the working relationship; (vi)
The extent to which the services rendered by the putative employee are
an integral part of the putative employer's business.'' \75\ This
description of six economic reality factors was very similar to the
earlier description of six economic reality factors provided in 29 CFR
780.330(b) and 788.16(a).
---------------------------------------------------------------------------
\72\ See 62 FR 11734 (amending 29 CFR 500.20(h)(4)); see also 29
U.S.C. 1861 (explicitly providing that ``[t]he Secretary may issue
such rules and regulations as are necessary to carry out this
chapter'').
\73\ See 29 U.S.C. 1802(5) (``The term `employ' has the meaning
given such term under section 3(g) of the [FLSA]'').
\74\ 29 CFR 500.20(h)(4).
\75\ Id.
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Also in 1997, WHD issued Fact Sheet #13, ``Employment Relationship
Under the Fair Labor Standards Act (FLSA).'' \76\ Like WHD opinion
letters, Fact Sheet #13 advises that ``an employee, as distinguished
from a person who is engaged in a business of his or her own, is one
who, as a matter of economic reality, follows the usual path of an
employee and is dependent on the business which he or she serves.''
\77\ The fact sheet identifies the six familiar economic realities
factors, as well as consideration of the worker's ``degree of
independent business organization and operation.'' \78\
---------------------------------------------------------------------------
\76\ See WHD Fact Sheet #13 (1997) <a href="https://web.archive.org/web/19970112162517/http:/www.dol.gov/dol/esa/public/regs/compliance/whd/whdfs13.htm">https://web.archive.org/web/19970112162517/http:/www.dol.gov/dol/esa/public/regs/compliance/whd/whdfs13.htm</a>). WHD made minor revisions to Fact Sheet #13 in 2002 and
2008, before a more substantial revision in 2014. In 2018, WHD
reverted back to the 2008 version of Fact Sheet #13, which remains
the current version (available at <a href="https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf">https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf</a>).
\77\ Id.
\78\ Id.
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On July 15, 2015, WHD issued additional subregulatory guidance,
Administrator's Interpretation No. 2015-1, ``The Application of the
Fair Labor Standards Act's `Suffer or Permit' Standard in the
Identification of Employees Who Are Misclassified as Independent
Contractors'' (AI 2015-1).\79\ AI 2015-1 reiterated that the economic
realities of the relationship are determinative and that the ultimate
inquiry is whether the worker is economically dependent on the employer
or truly in business for him or herself. It identified six economic
realities factors that followed the six factors used by most Federal
courts of appeals: (1) the extent to which the work performed is an
integral part of the employer's business; (2) the worker's opportunity
for profit or loss depending on his or her managerial skill; (3) the
extent of the relative investments of the employer and the worker; (4)
whether the work performed requires special skills and initiative; (5)
the permanency of the relationship; and (6) the degree of control
exercised or retained by the employer. AI 2015-1 further emphasized
that the factors should not be applied in a mechanical fashion and that
no one factor was determinative. AI 2015-1 was withdrawn on June 7,
2017.\80\
---------------------------------------------------------------------------
\79\ AI 2015-1 is available at 2015 WL 4449086.
\80\ See News Release 17-0807-NAT, ``US Secretary of Labor
Withdraws Joint Employment, Independent Contractor Informal
Guidance'' (June 7, 2017), <a href="https://www.dol.gov/newsroom/releases/opa/opa20170607">https://www.dol.gov/newsroom/releases/opa/opa20170607</a> (last visited June 30, 2022).
---------------------------------------------------------------------------
In 2019, WHD issued an opinion letter, FLSA2019-6, regarding
whether workers who worked for companies operating self-described
``virtual marketplaces'' were employees covered under the FLSA or
independent contractors.\81\ Like the Department's prior guidance, the
letter stated that the determination depended on the economic realities
of the relationship and that the ultimate inquiry was whether the
workers depend on someone else's business or are in business for
themselves.\82\ The letter identified six economic realities factors
that differed slightly from the factors typically articulated by the
Department previously: (1) the nature and degree of the employer's
control; (2) the permanency of the worker's relationship with the
employer; (3) the amount of the worker's investment in facilities,
equipment, or helpers; (4) the amount of skill, initiative, judgment,
and foresight required for the worker's services; (5) the worker's
opportunities for profit or loss; and (6) the extent of the integration
of the worker's services into the employer's business.\83\ Opinion
Letter FLSA2019-6 was withdrawn on February 19, 2021.\84\
---------------------------------------------------------------------------
\81\ See WHD Op. Ltr. FLSA2019-6, 2019 WL 1977301 (Apr. 29,
2019) (withdrawn Feb. 19, 2021).
\82\ See id. at *3.
\83\ See id. at *4. Opinion Letter FLSA2019-6's ``extent of the
integration'' factor was a notable recharacterization of the factor
traditionally considered by courts and the Department regarding the
extent to which work is ``an integral part'' of an employer's
business.
\84\ See note at <a href="https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA">https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA</a> (last visited June 30, 2022).
---------------------------------------------------------------------------
D. The Department's 2021 Independent Contractor Rule
On January 7, 2021, the Department published a final rule titled
``Independent Contractor Status Under the Fair Labor Standards Act,''
with an effective date of March 8, 2021 (2021 IC
[[Page 62224]]
Rule).\85\ The 2021 IC Rule set forth regulations to be added to a new
part (part 795) in title 29 of the Code of Federal Regulations titled
``Employee or Independent Contractor Classification under the Fair
Labor Standards Act,'' providing guidance on the classification of
independent contractors under the FLSA applicable to workers and
businesses in any industry.\86\ The 2021 IC Rule also addressed the
Department's prior interpretations of independent contractor status in
29 CFR 780.330(b) and 788.16(a)--both of which applied to specific
industries--by cross-referencing part 795.\87\
---------------------------------------------------------------------------
\85\ See 86 FR 1168. The Department initially published a notice
of proposed rulemaking (NPRM) soliciting public comment on September
25, 2020. See 85 FR 60600. The final rule adopted ``the interpretive
guidance set forth in the [NPRM] largely as proposed.'' 86 FR 1168.
\86\ 86 FR 1246-48.
\87\ Id. at 1246.
---------------------------------------------------------------------------
The Department explained that the purpose of the 2021 IC Rule was
to establish a ``streamlined'' economic reality test that improved on
prior articulations described as ``unclear and unwieldy.'' \88\ It
stated that the existing economic reality test applied by the
Department and courts suffered from confusion regarding the meaning of
``economic dependence'' because the concept is ``underdeveloped,'' a
lack of focus in the multifactor balancing test, and confusion and
inefficiency caused by overlap between the factors.\89\ The 2021 IC
Rule asserted that shortcomings and misconceptions associated with the
economic reality test were more apparent in the modern economy and that
additional clarity would promote innovation in work arrangements.\90\
---------------------------------------------------------------------------
\88\ Id. at 1172, 1240.
\89\ Id. at 1172-75.
\90\ Id. at 1175.
---------------------------------------------------------------------------
The 2021 IC Rule explained that independent contractors are not
employees under the FLSA and are therefore not subject to the Act's
minimum wage, overtime pay, or recordkeeping requirements.\91\ It
adopted an economic reality test under which a worker is an employee of
an employer if that worker is economically dependent on the employer
for work.\92\ By contrast, the worker is an independent contractor if
the worker is in business for themself.
---------------------------------------------------------------------------
\91\ Id. at 1246 (Sec. 795.105(a)).
\92\ Id. at 1168, 1246 (Sec. 795.105(b)).
---------------------------------------------------------------------------
The 2021 IC Rule identified five economic realities factors to
guide the inquiry into a worker's status as an employee or independent
contractor,\93\ while acknowledging that the factors are not
exhaustive, no one factor is dispositive, and additional factors may be
considered if they ``in some way indicate whether the [worker] is in
business for him- or herself, as opposed to being economically
dependent on the potential employer for work.'' \94\ But in contrast to
prior guidance and contrary to case law, the 2021 IC Rule designated
two of the five factors--the nature and degree of control over the work
and the worker's opportunity for profit or loss--as ``core factors''
that should carry greater weight in the analysis. Citing the need for
greater certainty and predictability in the economic reality test, and
in an effort to sharpen the concept of economic dependence, the 2021 IC
Rule determined that these two factors were more probative of economic
dependence than the other economic realities factors. If both of those
core factors indicate the same classification, as either an employee or
an independent contractor, the 2021 IC Rule stated that there is a
``substantial likelihood'' that the indicated classification is the
worker's correct classification.\95\
---------------------------------------------------------------------------
\93\ Id. at 1246 (Sec. 795.105(c)).
\94\ Id. at 1246-47 (Sec. 795.105(c) and (d)(2)(iv)).
\95\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------
The 2021 IC Rule's first core factor is the nature and degree of
control over the work, which indicates independent contractor status to
the extent that the worker exercised substantial control over key
aspects of the performance of the work, such as by setting their own
schedule, by selecting their projects, and/or through the ability to
work for others, which might include the potential employer's
competitors.\96\ The 2021 IC Rule provides that requiring the worker to
comply with specific legal obligations, satisfy health and safety
standards, carry insurance, meet contractually agreed upon deadlines or
quality control standards, or satisfy other similar terms that are
typical of contractual relationships between businesses (as opposed to
employment relationships) does not constitute control.\97\
---------------------------------------------------------------------------
\96\ Id. at 1246-47 (Sec. 795.105(d)(1)(i)).
\97\ Id. at 1247 (Sec. 795.105(d)(i)).
---------------------------------------------------------------------------
The 2021 IC Rule's second core factor is the worker's opportunity
for profit or loss.\98\ The Rule states that this factor indicates
independent contractor status to the extent the worker has an
opportunity to earn profits or incur losses based on either (1) their
exercise of initiative (such as managerial skill or business acumen or
judgment) or (2) their management of investment in or capital
expenditure on, for example, helpers or equipment or material to
further the work.\99\ While the effects of the worker's exercise of
initiative and management of investment are both considered under this
factor, the worker does not need to have an opportunity for profit or
loss based on both initiative and management of investment for this
factor to weigh towards the worker being an independent
contractor.\100\ This factor indicates employment status to the extent
that the worker is unable to affect his or her earnings or is only able
to do so by working more hours or faster.\101\
---------------------------------------------------------------------------
\98\ Id. (Sec. 795.105(d)(1)(ii)).
\99\ Id.
\100\ Id.
\101\ Id.
---------------------------------------------------------------------------
The 2021 IC Rule also identified three other non-core factors: the
amount of skill required for the work, the degree of permanence of the
working relationship between the worker and the employer, and whether
the work is part of an integrated unit of production (which it
cautioned is ``different from the concept of the importance or
centrality of the individual's work to the potential employer's
business'').\102\ The 2021 IC Rule provided that these other factors
are ``less probative and, in some cases, may not be probative at all''
of economic dependence and are ``highly unlikely, either individually
or collectively, to outweigh the combined probative value of the two
core factors.'' \103\
---------------------------------------------------------------------------
\102\ Id. (Sec. 795.105(d)(2)).
\103\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------
The 2021 IC Rule also stated that the actual practice of the
parties involved is more relevant than what may be contractually or
theoretically possible,\104\ and provided five ``illustrative
examples'' demonstrating how the analysis would apply in particular
factual circumstances.\105\ Finally, the 2021 IC Rule rescinded any
``prior administrative rulings, interpretations, practices, or
enforcement policies relating to classification as an employee or
independent contractor under the FLSA'' to the extent that such items
``are inconsistent or in conflict with the interpretations stated in
this part,'' \106\ and explained that the 2021 IC Rule would guide
WHD's enforcement of the FLSA.\107\
---------------------------------------------------------------------------
\104\ Id. at 1247 (Sec. 795.110).
\105\ Id. at 1247-48 (Sec. 795.115).
\106\ Id. at 1246 (Sec. 795.100).
\107\ Id.
---------------------------------------------------------------------------
On January 19, 2021, WHD issued Opinion Letters FLSA2021-8 and
FLSA2021-9 applying the Rule's analysis to specific factual scenarios.
WHD subsequently withdrew those opinion letters on January 26, 2021,
explaining that the letters were issued
[[Page 62225]]
prematurely because they were based on a rule that had yet to take
effect.\108\
---------------------------------------------------------------------------
\108\ See <a href="https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA">https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA</a> (last visited June 30, 2022), noting the withdrawal of
Opinion Letters FLSA2021-8 and FLSA2021-9.
---------------------------------------------------------------------------
E. Delay and Withdrawal of the 2021 Independent Contractor Rule
On February 5, 2021, the Department published a proposal to delay
the 2021 IC Rule's effective date until May 7, 2021--60 days after the
Rule's original March 8, 2001, effective date.\109\ On March 4, 2021,
after considering the approximately 1,500 comments received in response
to that proposal, the Department published a final rule delaying the
effective date of the 2021 IC Rule as proposed (``Delay Rule'').\110\
---------------------------------------------------------------------------
\109\ 86 FR 8326.
\110\ Id. at 12535.
---------------------------------------------------------------------------
On March 12, 2021, the Department published a notice of proposed
rulemaking (NPRM) proposing to withdraw the 2021 IC Rule.\111\ On May
5, 2021, after reviewing approximately 1,000 comments submitted in
response to the NPRM, the Department announced a final rule withdrawing
the 2021 IC Rule (``Withdrawal Rule'').\112\ In explaining its decision
to withdraw the 2021 IC Rule, the Department stated that the Rule was
inconsistent with the FLSA's text and purpose and would have had a
confusing and disruptive effect on workers and businesses alike due to
its departure from longstanding judicial precedent.\113\ The Withdrawal
Rule stated that it took effect immediately upon its publication in the
Federal Register on May 6, 2021.\114\
---------------------------------------------------------------------------
\111\ Id. at 14027.
\112\ Id. at 24303.
\113\ Id. at 24307.
\114\ Id. at 24320.
---------------------------------------------------------------------------
F. Litigation Over the 2021 Independent Contractor Rule
On March 14, 2022, in a lawsuit challenging the Department's Delay
and Withdrawal Rules under the Administrative Procedure Act (APA), a
district court in the Eastern District of Texas issued a decision
vacating the Department's Delay and Withdrawal Rules.\115\ While
acknowledging that the Department engaged in separate notice-and-
comment rulemakings in promulgating both of these rules, the district
court concluded that the Department ``failed to provide a meaningful
opportunity for comment in promulgating the Delay Rule,'' \116\ failed
to show ``good cause for making the [Delay Rule] effective immediately
upon publication,'' \117\ and acted in an arbitrary and capricious
manner in its Withdrawal Rule by ``fail[ing] to consider potential
alternatives to rescinding the Independent Contractor Rule.'' \118\
Accordingly, the district court vacated the Delay and Withdrawal Rules
and concluded that the 2021 IC Rule ``became effective as of March 8,
2021, the rule's original effective date, and remains in effect.''
\119\ The district court's ruling did not address the validity of the
2021 IC Rule; rather, the case was focused solely on the validity of
the Delay and Withdrawal Rules.
---------------------------------------------------------------------------
\115\ Coalition for Workforce Innovation, 2022 WL 1073346.
\116\ Id. at *9. The court specifically faulted the Department's
use of a shortened 19-day comment period in its proposal to delay of
the 2021 IC Rule's original effective date (instead of 30 days), and
for failing to consider comments beyond its proposal to delay the
2021 IC Rule's effective date. Id. at *7-10.
\117\ Id. at *11.
\118\ Id. at *13.
\119\ Id. at *20.
---------------------------------------------------------------------------
The Department filed a notice of appeal of the district court's
decision.\120\ In response to a request by the Department informing the
court of this rulemaking, the Fifth Circuit Court of Appeals entered an
order staying the appeal until December 7, 2022 (subject to considering
a further stay at that time).
---------------------------------------------------------------------------
\120\ See Fifth Circuit No. 22-40316 (appeal filed, May 13,
2022).
---------------------------------------------------------------------------
III. Need for Rulemaking
The Department recognizes that independent contractors and small
businesses play an important role in our economy. It is fundamental to
the Department's obligation to administer and enforce the FLSA,
however, that workers who should be covered under the Act are able to
receive its protections, as the misclassification of employees as
independent contractors remains one of the most serious problems facing
workers, businesses, and the broader economy. In the FLSA context,
misclassified workers are denied basic workplace protections including
rights to minimum wage and overtime pay.\121\ Meanwhile, employers that
comply with the law are placed at a competitive disadvantage compared
to other businesses that misclassify employees, contravening the FLSA's
goal of eliminating ``unfair method[s] of competition in commerce.''
\122\
---------------------------------------------------------------------------
\121\ Workers who are employees under the FLSA but are
misclassified as independent contractors remain legally entitled to
the Act's wage and hour protections and are protected from
retaliation for attempting to assert their rights under the Act. See
29 U.S.C. 215(a)(3). However, many misclassified employees may not
be aware that such rights and protections apply to them or face
obstacles when asserting those rights.
\122\ 29 U.S.C. 202(a)(3); see also Tony & Susan Alamo Found. v.
Sec'y of Labor, 471 U.S. 290, 302 (1985) (noting that the
misclassification of employees ``affect[s] many more people than
those workers directly at issue . . . [because it] exert[s] a
general downward pressure on wages in competing businesses'').
---------------------------------------------------------------------------
After further consideration, the Department believes that the 2021
IC Rule does not fully comport with the FLSA's text and purpose as
interpreted by the courts. The Department believes that retaining the
2021 IC Rule would have a confusing and disruptive effect on workers
and businesses alike due to its departure from decades of case law
describing and applying the multifactor economic reality test as a
totality-of-the-circumstances test. While the 2021 IC Rule recognized
the need to further develop the concept of economic dependence, the
rule includes provisions that are in tension with this longstanding
case law--such as designating two factors as most probative and
predetermining that they carry greater weight in the analysis,
considering investment and initiative only in the opportunity for
profit or loss factor, and excluding consideration of whether the work
performed is central or important to the employer's business. These
provisions narrow the economic reality test by limiting the facts that
may be considered as part of the test, facts which the Department
believes are relevant in determining whether a worker is economically
dependent on the employer for work or in business for themself.
The 2021 IC Rule's elevation of certain factors and its preclusion
of consideration of relevant facts under several factors may result in
misapplication of the economic reality test and may have conveyed to
employers that it might be easier than it used to be to classify
certain workers as independent contractors rather than FLSA-covered
employees. Elevating certain factors and precluding consideration of
relevant facts may increase the risk of misclassification of employees
as independent contractors. The 2021 IC Rule did not address the
potential risks to workers of such misclassification.
Therefore, in light of the vacatur of the Withdrawal Rule, the
Department believes it is appropriate to rescind the 2021 IC Rule and
set forth an analysis for determining employee or independent
contractor status under the Act that is more consistent with existing
judicial precedent and the Department's longstanding guidance prior to
the 2021 IC Rule. While prior to the 2021 IC Rule the Department
primarily issued subregulatory guidance in this area, as explained in
greater detail below, it believes that rescinding the 2021 IC
[[Page 62226]]
Rule and replacing it with detailed regulations addressing the
multifactor economic reality test--in a way that both more fully
reflects the case law and continues to be relevant to the evolving
economy--would be helpful for both workers and employers. The
Department further believes that this proposal will protect workers
from misclassification while at the same time providing a consistent
approach for those businesses that engage (or wish to engage) with
properly classified independent contractors, who the Department
recognizes play an important role in the economy.
As noted in the 2021 IC Rule, the Department ``without question has
relevant expertise in the area of what constitutes an employment
relationship under the FLSA, given its responsibility for administering
and enforcing the Act and its decades of experience doing so.'' \123\
The Department continues to believe, as it stated in the 2021 IC Rule,
that ``a clear explanation of the test for whether a worker is an
employee under the FLSA or an independent contractor not entitled to
the protections of the Act in easily accessible regulatory text is
valuable to potential employers, to workers, and to other
stakeholders.'' \124\ Upon further consideration, however, the
Department believes that the most valuable approach for stakeholders
would be an accessible regulation that is more consistent with case
law. As the 2021 IC Rule noted, rulemaking regarding employee or
independent contractor status can have ``great value regardless of what
deference courts ultimately give to it.'' \125\ The Department also
believes, however, that this proposal is more likely to have such value
because it is better aligned with judicial precedent and longstanding
principles used by circuit courts and the Department.
---------------------------------------------------------------------------
\123\ 86 FR 1176 (internal citations omitted).
\124\ Id.
\125\ Id.
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The Department acknowledges that it is changing the approach taken
in the 2021 IC Rule, and that this warrants further discussion of the
rationale used in that rule and why the Department has carefully
reconsidered that reasoning and determined that modifications are
necessary.\126\ As noted above, the Department identified in the 2021
IC Rule four reasons underlying the need to promulgate the rule: (1)
confusion regarding the meaning of ``economic dependence'' because the
concept is ``underdeveloped''; (2) lack of focus in the multifactor
balancing test; (3) confusion and inefficiency due to overlapping
factors; and (4) the shortcomings of the economic reality test that are
more apparent in the modern economy.\127\ Moreover, the Department
suggested as a fifth reason for the 2021 IC Rule that legal uncertainty
based on the concerns identified with the economic reality test
hindered innovation in work arrangements.\128\ The Department believes
that this proposed rule's approach offers a better framework for
understanding and applying the concept of economic dependence by
explaining how the touchstone of whether an individual is in business
for themself is analyzed within each of the six economic realities
factors. The proposal's discussion of how courts and the Department's
previous guidance apply the factors brings the multifactor test into
focus, reduces confusion as to the overlapping factors, and provides a
better basis for understanding how the test has the flexibility to be
applied to changes in the modern economy, such that the Department no
longer views the concerns articulated in the 2021 IC Rule as
impediments to using the economic reality test formulated by the courts
and the Department's longstanding guidance.
---------------------------------------------------------------------------
\126\ See FCC v. Fox Television Stations, Inc., 556 U.S. 502,
515 (2009).
\127\ 86 FR 1172-75.
\128\ Id. at 1175.
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The Department continues to believe that the concept of economic
dependence is underdeveloped in the case law. As noted in the 2021 IC
Rule, a minority of courts have applied a ``dependence-for-income''
approach that considers whether the worker has other sources of income
or wealth or is financially dependent on the employer instead of a
``dependence-for-work'' approach used by the majority of courts and the
Department that appropriately considers whether the worker is dependent
on the employer for work or depends on the worker's own business for
work.\129\ The Department is therefore proposing to continue to include
its interpretation, as it did in the 2021 IC Rule, that economic
dependence is the ultimate inquiry, and that an employee is someone
who, as a matter of economic reality, is economically dependent on an
employer for work--not for income.\130\
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\129\ See id. at 1172-73.
\130\ See id. at 1246 (Sec. 795.105(b) (``An employer suffers
or permits an individual to work as an employee if, as a matter of
economic reality, the individual is economically dependent on that
employer for work.'')); see also infra section V.B.; proposed Sec.
795.105(b) (``An `employee' under the Act is an individual whom an
employer suffers, permits, or otherwise employs to work. . . . [This
is] meant to encompass as employees all workers who, as a matter of
economic reality, are economically dependent on an employer for
work. . . . Economic dependence does not focus on the amount of
income earned, or whether the worker has other income streams.'').
---------------------------------------------------------------------------
Rather than give primacy to only two factors as indicators of
economic dependence, upon further consideration, the Department
believes that developing the concept of economic dependence is better
accomplished by, in addition to elaborating on the general meaning of
economic dependence, sharpening the focus of each of the six factors'
probative value as to the distinction between economic dependence on
the employer for work and being in business for oneself. By focusing on
that distinction in its discussion of each factor, this proposal would
provide the further development of the concept of economic dependence
that the 2021 IC Rule indicated would be welcomed by workers and
employers, but would do so in a way that is generally consistent with
case law and the Department's prior guidance.
To address what the Department viewed as a ``lack of focus in the
multifactor balancing test'' that led to uncertainty as to how a court
would balance the factors and which would be deemed more probative, the
2021 IC Rule identified two factors as more probative than the
others.\131\ The Department now finds that giving extra weight to two
factors cannot be harmonized with decades of case law and guidance from
the Department explaining that the economic reality test is a
multifactor test in which no one factor or set of factors automatically
carries more weight and that all relevant factors must be considered.
Regardless of the rationale for elevating two factors, there is no
legal support for doing so.\132\ Moreover, elevating certain factors in
such a predetermined fashion overlooks that each factor can be
probative of the distinction between a worker who is economically
dependent on the employer for work and a worker who is in business for
themself. Thus, the Department believes that refining the factors with
this distinction in mind and consistent with case law is a better
approach to giving the multifactor test more focus than the novel
approach of elevating two factors.
---------------------------------------------------------------------------
\131\ 86 FR 1173.
\132\ See infra section III.A.
---------------------------------------------------------------------------
The Department believes upon further consideration that any
purported ``confusion and inefficiency due to overlapping factors'' was
overstated in the 2021 IC Rule and that, in any event, when each factor
is viewed under the framework of whether the worker is economically
dependent or in business
[[Page 62227]]
for themself, the rationale for considering facts under more than one
factor is clearer. The Department explains in more detail below why
considering certain facts under more than one factor is consistent with
the totality-of-the-circumstances approach of the economic realities
analysis used by courts. And the Department provides guidance below
regarding how to consider certain facts, such as the ability to work
for others and whether the working relationship is exclusive, under
more than one factor. The Department believes that this flexible
approach is supported by the case law and preferable to rigidly and
artificially limiting facts to only one factor, as the 2021 IC Rule
did. Finally, in the 2021 IC Rule, the Department stated that
``technological and social changes have made shortcomings of the
economic realities test more apparent in the modern economy,'' thus
justifying the 2021 IC Rule's characterization of the integral,
investment, and permanence factors as less important in determining a
worker's classification.\133\ However, upon further consideration, the
Department believes that the multifactor economic reality test relied
on by courts where no one factor or set of factors is presumed to carry
more weight remains a helpful tool when evaluating modern work
arrangements. The test's vitality is confirmed by its application over
seven decades that have seen monumental shifts in the economy. Modern
work arrangements utilizing applications or other technology must be
addressed, but the underlying economic reality test, which considers
the totality of the circumstances in each working arrangement, offers
the most flexible, comprehensive, and appropriately nuanced approach
which can be adapted to disparate industries and occupations. It can
also encompass continued social changes because it does not presume
which aspects of the work relationship are most probative or relevant
and leaves open the possibility that changed circumstances may make
certain factors more important in certain cases or future scenarios.
---------------------------------------------------------------------------
\133\ 86 FR 1175.
---------------------------------------------------------------------------
A. The 2021 IC Rule's Test Is Not Supported by Judicial Precedent or
the Department's Historical Position and Is Not Fully Aligned With the
Act's Text as Interpreted by the Courts
Among other reasons the Department is proposing to rescind and
replace the 2021 IC Rule, the Department does not believe that the Rule
is fully aligned with the FLSA's text as interpreted by the courts or
the Department's longstanding analysis, as well as decades of case law
describing and applying the multifactor economic reality test.
1. The 2021 IC Rule's Elevation of Control and Opportunity for Profit
or Loss as the ``Most Probative'' Factors in Determining Employee
Status Under the FLSA
The 2021 IC Rule set forth a new articulation of the economic
reality test, elevating two factors (control and opportunity for profit
or loss) as ``core'' factors above other factors, asserting that the
two core factors have ``greater probative value'' in determining a
worker's economic dependence.\134\ Notably, the 2021 IC Rule further
provides that if both core factors point towards the same
classification--either employee or independent contractor--then there
is a ``substantial likelihood'' that this is the worker's correct
classification.\135\ Although it identifies three other factors as
additional guideposts and acknowledges that additional factors may be
considered, it makes clear that non-core factors ``are less probative
and, in some cases, may not be probative at all, and thus are highly
unlikely, either individually or collectively, to outweigh the combined
probative value of the two core factors.'' \136\ In justifying this
stratified analysis, the 2021 IC Rule disagreed that, as a general
matter, the economic reality test ``requires factors to be unweighted
or weighted equally,'' \137\ asserting that ``[t]he Department's review
of case law indicates that courts of appeals have effectively been
affording the control and opportunity factors greater weight, even if
they did not always explicitly acknowledge doing so.'' \138\
---------------------------------------------------------------------------
\134\ 86 FR 1246 (Sec. 795.105(c) and (d)).
\135\ Id. (Sec. 795.105(c)); see also id. at 1201 (advising
that other factors would only outweigh the two core factors ``in
rare cases'').
\136\ Id. at 1246 (Sec. 795.105(c)).
\137\ Id. at 1197.
\138\ Id. at 1198.
---------------------------------------------------------------------------
Upon further review of judicial precedent, the Department is not
aware of any court that has, as a general and fixed rule, elevated any
one economic reality factor or subset of factors above others, and
there is no statutory basis for such a predetermined weighting of the
factors. To the contrary, the Supreme Court has emphasized that
employment status under the economic reality test turns upon ``the
circumstances of the whole activity,'' rather than ``isolated
factors.'' \139\ Federal appellate courts have repeatedly cautioned
against a mechanical or formulaic application of the economic reality
test,\140\ and specifically warn that it `` `is impossible to assign to
each of these factors a specific and invariably applied weight.' ''
\141\ The 2021 IC Rule's elevation of two ``core factors'' is also in
tension with the position, expressed by the Supreme Court and Federal
courts of appeals, that no single factor in the analysis is
dispositive.\142\ Thus, the Department recognizes that the 2021 IC
Rule's predetermined and mechanical weighting of factors is not
consistent with how courts have, for decades, applied the economic
reality analysis.\143\
---------------------------------------------------------------------------
\139\ Rutherford, 331 U.S. at 730; see also Silk, 331 U.S. at
716, 719 (denying the existence of ``a rule of thumb to define the
limits of the employer-employee relationship'' and determining
employment status based on ``the total situation'').
\140\ See, e.g., Superior Care, 840 F.2d at 1059 (``Since the
test concerns the totality of the circumstances, any relevant
evidence may be considered, and mechanical application of the test
is to be avoided.'').
\141\ Parrish, 917 F.3d at 380 (quoting Hickey, 699 F.2d at
752); see also Scantland, 721 F.3d at 1312 n.2 (the relative weight
of each factor ``depends on the facts of the case'' (quoting
Santelices, 147 F. Supp. 2d at 1319)).
\142\ See, e.g., Silk, 331 U.S. at 716 (explaining that ``[n]o
one [factor] is controlling'' in the economic realities test);
Selker Bros., 949 F.2d at 1293 (``It is a well-established principle
that the determination of the employment relationship does not
depend on isolated factors . . . neither the presence nor the
absence of any particular factor is dispositive.''); Morrison, 253
F.3d at 11 (``No one factor standing alone is dispositive and courts
are directed to look at the totality of the circumstances and
consider any relevant evidence.''); Dole v. Snell, 875 F.2d 802, 805
(10th Cir. 1989) (``It is well established that no one of these
factors in isolation is dispositive; rather, the test is based upon
a totality of the circumstances.''); Lauritzen, 835 F.2d at 1534
(``Certain criteria have been developed to assist in determining the
true nature of the relationship, but no criterion is by itself, or
by its absence, dispositive or controlling.'').
\143\ See McFeeley, 825 F.3d at 241 (``While a six-factor test
may lack the virtue of providing definitive guidance to those
affected, it allows for flexible application to the myriad different
working relationships that exist in the national economy. In other
words, the court must adapt its analysis to the particular working
relationship, the particular workplace, and the particular industry
in each FLSA case.'').
---------------------------------------------------------------------------
As explained in the Withdrawal Rule, the Department believes that
the review of appellate cases \144\ relied on to support the 2021 IC
Rule's creation of ``core factors'' is not complete and makes
assumptions about the reasoning behind the courts' decisions that are
not clear from the decisions themselves.\145\ For example, the 2021 IC
Rule's discussion of the case law review did not provide full
documentation or citations, did not make clear what the scope of the
review entailed (e.g.,
[[Page 62228]]
whether it included only published circuit court decisions or all
cases, whether it included cases that were simply remanded to the
district court for any reason, etc.), and oversimplified the analysis
provided by the courts because court decisions regarding classification
under the FLSA generally emphasize the fact-specific nature of the
totality-of-circumstances analysis. Mechanically deconstructing court
decisions and considering what courts have said about only two
factors--even when courts did present their analyses in this manner--
ignores the broader approach that most courts have taken in determining
worker classification.
---------------------------------------------------------------------------
\144\ The 2021 IC Rule references on several occasions a review
of appellate case law since 1975 to justify its elevation of two
``core'' factors. 86 FR 1196, 1198, 1202, 1240.
\145\ See 86 FR 24309-10.
---------------------------------------------------------------------------
In fact, many decisions explicitly deny assigning any predetermined
weight to these factors, but instead state that they considered the
factors as part of an analysis of the whole activity.\146\ While there
are many cases in which the classification decision made by the court
aligns with the classification indicated by the control and opportunity
for profit or loss factors, the 2021 IC Rule did not identify any cases
stating that those two factors are ``more probative'' of a worker's
classification than other factors. Moreover, the 2021 IC Rule concedes
that there are cases in which the classification suggested by the
control factor did not align with the worker's classification as
determined by the courts.\147\ It is necessarily the case that if any
two factors of a multifactor balancing test point toward the same
outcome, then that outcome becomes increasingly likely to be the
ultimate outcome. However, the 2021 IC Rule did not address whether a
different combination of factors would yield similar results.
Particularly when viewed in the context of repeated statements from the
courts that no one factor in the economic reality test is dispositive,
the selective reading of an undefined set of cases to support the
opposite conclusion is not persuasive.
---------------------------------------------------------------------------
\146\ See supra nn.139-142.
\147\ See 86 FR 1197 n.45.
---------------------------------------------------------------------------
In any event, the 2021 IC Rule significantly altered both these
factors, changing what may be considered for each. For example,
contrary to the approach taken by most courts, the 2021 IC Rule
downplays the employer's right to control the work and recasts the
opportunity for profit or loss factor as indicating independent
contractor status based on the worker's initiative or investment. Thus,
irrespective of whether control and opportunity for profit or loss were
more frequently aligned with the ultimate result in prior appellate
cases, the new framing of these factors, as redefined in the 2021 IC
Rule, sets forth a new standard for analysis without precedent.
Finally, the Department has concerns that prioritizing two ``core
factors'' over other factors may not fully account for the Act's broad
definition of ``employ,'' as interpreted by the courts. For example, if
facts relevant to the control and opportunity for profit or loss
factors both point to independent contractor status for a particular
worker but weakly so, those factors should not be presumed to carry
more weight than stronger factual findings under other factors (e.g.,
the existence of a lengthy working relationship under the
``permanence'' factor and the performance of work that does not require
specialized skills). Courts and the Department may focus on some
relevant factors more than others when analyzing a particular set of
facts and circumstances, but that does not mean that it is possible or
permissible to derive from these fact-driven decisions universal rules
regarding which factors deserve more weight than the others when the
courts themselves have not set forth any such universal rules despite
decades of opportunity. Numerous commenters responding to the
Department's proposed withdrawal of the 2021 IC Rule voiced similar
concerns.\148\
---------------------------------------------------------------------------
\148\ Id. at 24307-11.
---------------------------------------------------------------------------
In sum, the Department believes that the 2021 IC Rule's elevation
of the control and opportunity for profit or loss factors is in tension
with the language of the Act as well as the position, expressed by the
Supreme Court and in appellate cases from across the circuits, that no
single factor is determinative in the analysis of whether a worker is
an employee or an independent contractor and does not better determine
who is in fact economically dependent on their employer for work as
opposed to being in business for themself.
2. The Role of Control in the 2021 IC Rule's Analysis
As explained above, the 2021 IC Rule identifies ``the nature and
degree of control over the work'' as one of two core factors given
``greater weight'' in the independent contractor analysis.\149\ The
2021 IC Rule addressed and rejected comments which opined that focusing
the analysis on two core factors--one of which would be control--would
narrow the analysis to a common law control test.\150\
---------------------------------------------------------------------------
\149\ Id. at 1246-47 (Sec. 795.105(c), (d)).
\150\ Id. at 1200-01.
---------------------------------------------------------------------------
Although the 2021 IC Rule's standard for determining who is an
employee and who is an independent contractor is not the same as the
common law control analysis, the Department continues to believe, as
expressed in the Withdrawal Rule, that elevating the importance of
control in every FLSA employee or independent contractor analysis
brings the Rule closer to the common law control test that courts have
rejected when interpreting the Act. As previously noted, section 3(g)
of the FLSA expansively defines the term ``employ'' to include ``to
suffer or permit to work.'' \151\ The Supreme Court has repeatedly
stated that this provision establishes a broader scope of employment
for FLSA purposes than under a common law (i.e., agency) analysis
focused on control.\152\ In light of this directive, the Department
remains concerned that the outsized role of control under the 2021 IC
Rule's analysis is contrary to the Act's text and case law interpreting
the Act's definitions of employment.
---------------------------------------------------------------------------
\151\ 29 U.S.C. 203(g).
\152\ See Darden, 503 U.S. at 324-26; Portland Terminal, 330
U.S. at 150-51; and Rutherford, 331 U.S. at 728.
---------------------------------------------------------------------------
3. The 2021 IC Rule Improperly Altered Several Factors by Precluding
the Consideration of Relevant Facts
As previously discussed in the Withdrawal Rule, the Department
remains concerned that the 2021 IC Rule's preclusion of certain facts
from being considered under the factors improperly narrows the economic
reality test and does not allow for a full consideration of all facts
which might be relevant to determining whether a worker is economically
dependent upon an employer for work or in business for themself.
Examples include: (1) advising that ``control'' indicative of an
employment relationship must involve an employer's ``substantial
control over key aspects of the performance of the work,'' excluding
requirements ``to comply with specific legal obligations, satisfy
health and safety standards, carry insurance, meet contractually
agreed-upon deadlines or quality control standards, or satisfy other
similar terms;'' \153\ (2) making the ``opportunity for profit or
loss'' factor indicate independent contractor status based on the
worker's initiative or investment (not both); \154\ (3) disregarding
the employer's investments; \155\ (4) disregarding the importance or
[[Page 62229]]
centrality of a worker's work to the employer's business; \156\ and (5)
downplaying the employer's reserved right or authority to control the
worker.\157\ In each of these ways--as explained in greater detail
below--the 2021 IC Rule limits the scope of facts and considerations
comprising the analysis of whether the worker is an employee or
independent contractor.
---------------------------------------------------------------------------
\153\ 86 FR 1246-47 (Sec. 795.105(d)(1)(i)).
\154\ Id. at 1247 (Sec. 795.105(d)(1)(ii)).
\155\ Id.; see also id. at 1188 (``[T]he Department reaffirms
its position that comparing the individual worker's investment to
the potential employer's investment should not be part of the
analysis of investment.'').
\156\ Id. at 1247 (Sec. 795.105(d)(2)(iii)); see also id. at
1248 (noting through an example in Sec. 795.115(b)(6)(ii) that
``[i]t is not relevant . . . that the writing of articles is an
important part of producing newspapers''); accord id. at 1195
(responding to commenters regarding the Department's decision to
shift to an ``integrated unit of production'' analysis).
\157\ See id. at 1246-47 (advising, in Sec. 795.105(d)(1)(i),
that the control factor indicates employment status if a potential
employer ``exercises substantial control over key aspects of the
performance of the work'') (emphasis added); id. at 1247 (advising,
in Sec. 795.110, that ``a business' contractual authority to
supervise or discipline an individual may be of little relevance if
in practice the business never exercises such authority''); see also
id. at 1203-04 (same in response to commenters).
---------------------------------------------------------------------------
As further explained below, the 2021 IC Rule's narrowing of certain
economic realities factors by precluding consideration of certain facts
provides another justification for the Rule's rescission and
replacement.
B. Confusion and Uncertainty Introduced by the 2021 IC Rule
One of the 2021 IC Rule's primary goals was to ``significantly
clarify to stakeholders how to distinguish between employees and
independent contractors under the Act.'' \158\ Although the stated
intent was to provide clarity, it has introduced several concepts to
the analysis that neither courts nor the Department have previously
applied, as discussed above.\159\ This rulemaking arises in part from a
concern that these changes will not provide clarity because of the
inconsistency with circuit court case law, and that the conflict
between the 2021 IC Rule's analysis and circuit precedent will
inevitably lead to greater uncertainty as well as lead to inconsistent
outcomes, rather than increase clarity or certainty.
---------------------------------------------------------------------------
\158\ Id. at 1168.
\159\ See supra section III.A.
---------------------------------------------------------------------------
As a threshold matter, because the 2021 IC Rule departed from
courts' longstanding precedent, if left in place, it is not clear
whether courts would adopt its analysis--a question that could take
years of appellate litigation in different Federal circuits to sort
out. If some courts try to reconcile the 2021 IC Rule's analysis with
their precedent and the statute and some courts do not, it will create
conflicts among courts and between courts and the Department, resulting
in more uncertainty as to the applicable economic reality test.
Businesses operating nationwide will have had to familiarize themselves
with multiple standards for determining who is an employee under the
FLSA across different jurisdictions.\160\
---------------------------------------------------------------------------
\160\ See, e.g., 86 FR 1241 n.255 (noting, while rejecting the
``ABC'' test for worker classification, that companies operating
``nationwide businesses[ ] are likely to comply with the most
demanding standard if they wish to make consistent classification
determinations'').
---------------------------------------------------------------------------
In addition to uncertainty resulting from the 2021 IC Rule's
reception by courts, the Rule introduces several ambiguous terms and
concepts into the analysis for determining whether a worker is an
employee under the FLSA or an independent contractor. For example,
courts and regulated parties now must grapple with what it means in
practice for two factors to be ``core'' factors and entitled to greater
weight. In addition, they must determine, in cases where the two
``core'' factors point to the same classification, how ``substantial''
the likelihood is that they point toward the correct classification if
the additional factors point toward the other classification.
Additionally, the 2021 IC Rule cautions that its list of factors is
``not exhaustive,'' \161\ but does not specify whether the ``additional
factors'' referenced in Sec. 795.105(d)(2)(iv) have less probative
value (or weight) than the three ``other factors'' listed in Sec.
795.105(d)(2)(i) through (iii).\162\ Assuming that they do, the 2021 IC
Rule has essentially transformed the analysis that courts and the
Department have previously applied into a three-tiered multifactor
balancing test, with ``core'' factors given more weight than enumerated
``other'' factors, and enumerated ``other'' factors given more weight
than unspecified ``additional'' factors. Rather than weighing all
factors against each other depending on the facts of a particular work
arrangement, courts and the regulated community must evaluate factors
within and across groups in a new hierarchical structure, which will
likely cause confusion and inconsistency. Adding to the confusion, the
Rule improperly collapses some factors into each other, so that
investment and initiative are only considered as a part of the
opportunity for profit or loss factor, requiring courts and the
regulated community to reconsider how they have long applied those
factors.\163\
---------------------------------------------------------------------------
\161\ Id. at 1246 (Sec. 795.105(c)).
\162\ Id. at 1247.
\163\ Id. (Sec. 795.105(d)(1)(ii)).
---------------------------------------------------------------------------
The Department believes that the 2021 IC Rule has complicated
rather than simplified the analysis for determining whether a worker is
an employee or independent contractor under the FLSA and does not
provide clarity behind the meaning of economic dependence or reduce
confusion.\164\ For the reasons explained above, the Department
believes that the 2021 IC Rule has introduced substantial confusion and
uncertainty on the topic of independent contractor status, to the
detriment of workers and businesses alike.
---------------------------------------------------------------------------
\164\ The 2021 IC Rule includes several important principles
from the case law, such as that economic dependence is the ultimate
inquiry, that the list of economic reality factors is not exhaustive
and that no single factor is determinative--principles that the
Department continues to agree with and has included in this NPRM.
The 2021 IC Rule, however, also incorporates provisions that are in
tension with these well-established judicial principles, such as the
predetermined elevating of two factors. The Department is also
concerned with this internal inconsistency in the 2021 IC Rule.
---------------------------------------------------------------------------
C. Risks to Workers From the 2021 IC Rule
As part of its regulatory impact analysis, the 2021 IC Rule
quantified some possible costs (regulatory familiarization) and some
possible cost savings (increased clarity and reduced litigation).\165\
It identified and discussed--but did not quantify--numerous other
costs, transfers, and benefits possibly resulting from the 2021 IC
Rule, including ``possible transfers among workers and between workers
and businesses.'' \166\ The 2021 IC Rule ``acknowledge[d] that there
may be transfers between employers and employees, and some of those
transfers may come about as a result of changes in earnings,'' but
determined that these transfers cannot ``be quantified with a
reasonable degree of certainty for purposes of [the Rule].'' \167\ The
2021 IC Rule concluded that ``workers as a whole will benefit from [the
Rule], both from increased labor force participation as a result of the
enhanced certainty provided by [the Rule], and from the substantial
other benefits detailed [in the Rule].'' \168\
---------------------------------------------------------------------------
\165\ 86 FR 1211.
\166\ Id. at 1214-16.
\167\ Id. at 1223.
\168\ Id.
---------------------------------------------------------------------------
The preliminary regulatory impact analysis for this proposed rule
is provided below in section VII. As a general matter, the Department
notes here that it does not believe that the 2021 IC Rule fully
considered the likely costs, transfers, and benefits that could result
from the Rule. This concern is premised in part on WHD's role as the
agency responsible for enforcing the FLSA and its experience with cases
involving the misclassification of employees as independent
contractors.
[[Page 62230]]
The consequence for a worker of being misclassified as an independent
contractor is that the worker is excluded from the protections of the
FLSA to which they are entitled. These protections include being paid
at least the Federal minimum wage for all hours worked, overtime
compensation for hours worked over 40 in a workweek, and protection
against retaliation for complaining about, for example, a violation of
the FLSA. The Department concludes that, to the extent the 2021 IC Rule
results in the reclassification or misclassification of employees as
independent contractors, the resulting denial of FLSA protections would
harm the affected workers. To the extent that women and people of color
are overrepresented in low-wage positions where misclassification as
independent contractors is more likely, this result could have a
disproportionate impact on these workers. In comments on the Withdrawal
Rule, several commenters cited a study finding that seven of the eight
occupations with the highest rate of misclassification were held
disproportionately by women and/or workers of color, asserting that
``misclassification is rampant in low-wage, labor-intensive industries
where women and people of color, including Black, Latinx, and AAPI
workers, are overrepresented.'' \169\ These workers already experience
multiple types of economic inequities in the labor force, including
gender and racial wage gaps and occupational segregation. When
comparing the median wages of women who worked full-time, year-round to
the wages of men who worked full-time, year-round, women were paid 83
cents to every dollar paid to men.\170\ For women of color, this wage
gap is even greater--Black women were paid 64%, and Hispanic women (of
any race) were paid 57% of what white non-Hispanic men were paid. The
misclassification of these workers as independent contractors deprives
them of the minimum wage and overtime protections that could help
alleviate some of this inequality.
---------------------------------------------------------------------------
\169\ Id. at 24312.
\170\ U.S. Department of Labor, Women's Bureau. Connecting the
Dots: ``Women's Work'' and the Wage Gap (2022) <a href="https://blog.dol.gov/2022/03/15/connecting-the-dots-womens-work-and-the-wage-gap?_ga=2.244962629.155756293.1655992165-662785877.1655992165">https://blog.dol.gov/2022/03/15/connecting-the-dots-womens-work-and-the-wage-gap?_ga=2.244962629.155756293.1655992165-662785877.1655992165</a>.
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In sum, the Department's proposal to rescind and replace the 2021
IC Rule is motivated, in part, by an assessment that doing so will
benefit workers as a whole, including those workers at risk of being
misclassified as independent contractors as well as those who are
appropriately classified as independent contractors.
D. The Benefits of Replacing the Part 795 Regulations on Employee or
Independent Contractor Status
In its rulemaking last year to withdraw the 2021 IC Rule, the
Department declined to propose alternative regulations.\171\ The
Department had not previously promulgated generally applicable
regulations on independent contractor classification in the FLSA's 83
years of existence.\172\ Particularly in light of the consistency of
the economic reality test as adopted by the circuits, the Department
had for decades relied on subregulatory documents to provide generally
applicable guidance for the Department and the regulated community on
determining employee or independent contractor status under the
FLSA.\173\
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\171\ See 86 FR 24307.
\172\ The FLSA was enacted in 1938. 29 U.S.C. 201. Until 2021,
the Department had not promulgated generally applicable regulations
regarding the classification of workers as employees or independent
contractors.
\173\ See, e.g., 86 FR 24318-20.
---------------------------------------------------------------------------
In its decision invalidating the Withdrawal Rule, the Eastern
District of Texas faulted the Department for failing to consider ``less
disruptive alternatives'' to withdrawal, such as ``promulgat[ing] a
regulation that enumerated six factors instead of five'' or ``adopting
the seven factors that the Department previously set forth in Fact
Sheet #13 as the applicable economic realities test.'' \174\ While the
Department believes that its subregulatory guidance provided
appropriate guidance to the regulated community, upon further
consideration, it recognizes that publishing regulatory guidance on the
distinction between FLSA-covered employees and independent contractors
is beneficial for stakeholders, particularly because the Department
published a regulation in 2021. In addition, detailed Federal
regulations would be easier to locate and read for interested
stakeholders than applicable circuit caselaw, potentially helping
workers and businesses better understand the Department's
interpretation of their rights and responsibilities under the law. In
contrast to WHD's earlier opinion letters on independent contractor
status and its prior regulations on the topic located in parts 780 and
788, new part 795 would also provide guidance to workers and businesses
in any industry.
---------------------------------------------------------------------------
\174\ Coalition for Workforce Innovation, 2022 WL 1073346, at
*18.
---------------------------------------------------------------------------
Adopting detailed regulations aligned with existing precedent that
help workers and businesses to better understand their rights and
responsibilities under the law could also better protect workers, who
have been placed at a greater risk of misclassification as a
consequence of the 2021 IC Rule. As described in sections III.A. and
B., the 2021 IC Rule's elevation of certain factors and its preclusion
of consideration of relevant facts under several factors may result in
misapplication of the economic reality test and may have conveyed to
employers that it might be easier than it used to be to classify
certain workers as independent contractors rather than FLSA-covered
employees. Elevating certain factors and precluding consideration of
relevant facts may increase the risk of misclassification of employees
as independent contractors. Because the Department has serious concerns
about the 2021 IC Rule, it is proposing to rescind and replace it with
regulations that are fully aligned with the text of the FLSA as
interpreted by the courts, the Department's longstanding subregulatory
guidance, and decades of court cases interpreting the Act while still
providing additional clarity to workers and employers on the concept of
economic dependence.
IV. Alternatives Considered
The Department assessed four regulatory alternatives to this
proposed rule below in section VII.F. of the regulatory impact
analysis. The Department previously considered and rejected, on legal
viability grounds, the first two alternatives--codifying either a
common law or ABC test for determining employee or independent
contractor status--in the 2021 IC Rule.\175\ The Department continues
to believe that legal limitations prevent the Department from adopting
either of those alternatives.
---------------------------------------------------------------------------
\175\ See 86 FR 1238.
---------------------------------------------------------------------------
For the first alternative, the Department considered codifying the
common law control test, which is used to distinguish between employees
and independent contractors under other Federal laws, such as the
Internal Revenue Code.\176\ The focus of the
[[Page 62231]]
common law control test is ``the hiring party's right to control the
manner and means by which [work] is accomplished,'' \177\ but the
Supreme Court has explained that ``other factors relevant to the
inquiry [include] the skill required; the source of the
instrumentalities and tools; the location of the work; the duration of
the relationship between the parties; whether the hiring party has the
right to assign additional projects to the hired party; the extent of
the hired party's discretion over when and how long to work; the method
of payment; the hired party's role in hiring and paying assistants;
whether the work is part of the regular business of the hiring party;
whether the hiring party is in business; the provision of employee
benefits; and the tax treatment of the hired party.'' \178\
---------------------------------------------------------------------------
\176\ See 26 U.S.C. 3121(d)(2) (generally defining the term
``employee'' under the Internal Revenue Code as ``any individual
who, under the usual common law rules applicable in determining the
employer-employee relationship, has the status of an employee'').
The Supreme Court has advised that the common law control test
applies by default under Federal law unless a statute specifies an
alternative standard. See Darden, 503 U.S. at 322-23 (`` `[W]hen
Congress has used the term `employee' without defining it, we have
concluded that Congress intended to describe the conventional
master-servant relationship as understood by common-law agency
doctrine.' '') (quoting Reid, 490 U. S. at 739-40).
\177\ Reid, 490 U.S. at 751.
\178\ Id. at 751-52.
---------------------------------------------------------------------------
Although the common law control test considers some of the same
factors as those identified in the proposed rule's ``economic reality''
test (e.g., skill, length of the working relationship, the source of
equipment and materials, etc.), courts generally recognize that,
because of its focus on control, the common law test is more permissive
of independent contracting arrangements than the economic reality test,
which examines the economic dependence of the worker.\179\
---------------------------------------------------------------------------
\179\ See, e.g., Baker v. Flint Eng'g & Const. Co., 137 F.3d
1436, 1440 (10th Cir. 1998) (recognizing that the ``economic
realities'' test is a more expansive standard for determining
employee status than the common law test).
---------------------------------------------------------------------------
Codifying a common law control test for the FLSA could create a
more uniform legal framework among Federal statutes, in the sense that
entities would not, for example, have to understand and apply one
employment classification standard for tax purposes and a different
employment classification standard for FLSA purposes. However, the
Department does not believe that adopting a common law control test for
determining employee or independent contractor status under the FLSA
would, in fact, simplify the analysis for the regulated community
because courts and enforcement agencies applying a common law test for
independent contractors have considered a greater number and different
variation of factors than the six or so factors commonly considered
under the economic reality test.\180\
---------------------------------------------------------------------------
\180\ See RESTATEMENT (THIRD) OF AGENCY sec. 7.07, Comment (f)
(2006) (identifying 10 factors); IRS Tax Topic No. 762 Independent
Contractor vs. Employee (May 19, 2022), <a href="https://www.irs.gov/taxtopics/tc762">https://www.irs.gov/taxtopics/tc762</a> (explaining the common law analysis through three
main categories: behavioral control, financial control, and the
relationship of the parties); Reid, 490 U.S. at 751-52 (identifying
13 factors).
---------------------------------------------------------------------------
Regardless, applying the common law test would be contrary to the
``suffer or permit'' language in section 3(g) of the FLSA, which the
Supreme Court has interpreted as demanding a broader definition of
employment than that which exists under the common law.\181\
Accordingly, the Department believes it is legally constrained from
adopting the common law control test and that the common law test is
not sufficiently protective in assessing worker classification under
the FLSA.
---------------------------------------------------------------------------
\181\ See, e.g., Darden, 503 U.S. at 326; Portland Terminal, 330
at 150-51.
---------------------------------------------------------------------------
For the second alternative, the Department considered codifying an
ABC test to determine independent contractor status under the FLSA,
similar to the ABC test recently adopted under California's state wage
and hour law.\182\ As described by the California Supreme Court in
Dynamex Operations W., Inc. v. Superior Court, ``[t]he ABC test
presumptively considers all workers to be employees, and permits
workers to be classified as independent contractors only if the hiring
business demonstrates that the worker in question satisfies each of
three conditions: (a) that the worker is free from the control and
direction of the hirer in connection with the performance of the work,
both under the contract for the performance of the work and in fact;
and (b) that the worker performs work that is outside the usual course
of the hiring entity's business; and (c) that the worker is customarily
engaged in an independently established trade, occupation, or business
of the same nature as that involved in the work performed.'' \183\
---------------------------------------------------------------------------
\182\ See Dynamex Operations W., Inc. v. Superior Court, 416
P.3d 1 (Cal. 2018); Assembly Bill (``A.B.'') 5, Ch. 296, 2019-2020
Reg. Sess. (Cal. 2019) (codifying the ABC test articulated in
Dynamex); A.B. 2257, Ch. 38, 2019-2020 Reg. Sess. (Cal. 2020)
(retroactively exempting certain professions, occupations, and
industries from the ABC test that A.B. 5 had codified). The ABC test
originated in state unemployment insurance statutes, but some state
courts and legislatures have recently extended the test to govern
employee/independent contractor disputes under state wage and hour
laws. See Keith Cunningham-Parmeter, Gig-Dependence: Finding the
Real Independent Contractors of Platform Work, 39 N. Ill. U. L. Rev.
379, 408-11 (2019) (discussing the origins and recent expansion of
the ABC test).
\183\ 416 P.3d at 34 (emphasis in original). California's ABC
test is slightly different than versions of the ABC test adopted (or
presently under consideration) in other states. For example, New
Jersey provides that a hiring entity may satisfy the ABC test's
``B'' prong by establishing either: (1) that the work provided is
outside the usual course of the business for which the work is
performed, or (2) that the work performed is outside all the places
of business of the hiring entity. N.J. Stat. Ann. sec. 43:21-
19(i)(6)(A-C). The Department has chosen to analyze California's ABC
test as a regulatory alternative because businesses subject to
multiple standards, including nationwide businesses, are likely to
comply with the most demanding standard if they wish to make
consistent classification determinations.
---------------------------------------------------------------------------
Codifying an ABC test could establish a simpler and clearer
standard for determining whether workers are employees or independent
contractors. The ABC test only has three criteria, and no balancing of
the criteria is required; all three prongs must be satisfied for a
worker to qualify as an independent contractor. However, the Department
believes it is legally constrained from adopting an ABC test because
the Supreme Court has held that the economic reality test is the
applicable standard for determining workers' classification under the
FLSA as an employee or independent contractor.\184\ Moreover, the
Supreme Court has stated that the existence of employment relationships
under the FLSA ``does not depend on such isolated factors'' as the
three independently determinative factors in the ABC test, ``but rather
upon the circumstances of the whole activity.'' \185\ Because the ABC
test is inconsistent with Supreme Court precedent interpreting the
FLSA, the Department believes that it could only implement an ABC test
if the Supreme Court revisits its precedent or if Congress passes
legislation that alters the applicable analysis under the FLSA.
---------------------------------------------------------------------------
\184\ See Tony & Susan Alamo, 471 U.S. at 301 (``The test of
employment under the Act is one of `economic reality.' ''); Whitaker
House, 366 U.S. at 33 (`` `economic reality' rather than `technical
concepts' is . . . the test of employment'' under the FLSA) (citing
Silk, 331 U.S. at 713; Rutherford, 331 U.S. at 729). ABC tests are
not the same as the FLSA economic realities test. For example, the
ABC test does not consider the totality of the circumstances of the
working relationship between the employer and the worker; instead,
it considers three specific circumstances. In addition, the ABC test
does not weigh or balance the various considerations; instead, the
test results in a finding of employee status if any one factor is
not met regardless how close the facts are on that factor and
regardless what the other two factors indicate.
\185\ Rutherford, 331 U.S. at 730.
---------------------------------------------------------------------------
For the third alternative, the Department considered a proposed
rule that would not fully rescind the 2021 IC Rule and instead retain
some aspects of that rule. As the Department has noted throughout this
proposal, there are multiple instances in which this NPRM is consistent
or in agreement with the 2021 IC Rule. Specifically, the Department has
noted its agreement with the following aspects of the 2021 IC Rule: a
totality of the circumstances test should be applied to appropriately
determine classification as an employee or independent contractor; the
concept of economic dependence needs further
[[Page 62232]]
development; and a clear explanation of the test for whether a worker
is an employee or independent contractor in easily accessible
regulatory text is valuable. This proposal also includes several other
important principles from the case law that were included in the 2021
IC Rule: economic dependence is the ultimate inquiry; the list of
economic reality factors is not exhaustive; and no single factor is
determinative. Further, with respect to specific factors, this proposal
reinforces certain aspects addressed in the 2021 IC Rule such as that
an exclusivity requirement imposed by the employer is a strong
indicator of control, and that issues related to scheduling and
supervision over the performance of the work (including the ability to
assign work) are relevant considerations under the control factor.
Despite these areas of agreement, the governing principle of the
2021 IC Rule is that two of the economic reality factors are
predetermined to be more probative and therefore carry more weight,
which may obviate the need to meaningfully consider the remaining
factors. Upon further consideration, as discussed in this proposal, the
Department believes that this departure from decades of case law and
the Department's own longstanding position that no one factor or subset
of factors should carry more or less weight would have a confusing and
disruptive effect on employers and workers alike. The Department
considered simply removing the problematic ``core factors'' analysis
from the 2021 IC Rule and retaining the five factors as described in
the rule. However, the Department rejected this approach because other
aspects of the rule such as considering investment and initiative only
in the opportunity for profit or loss factor and excluding
consideration of whether the work performed is central or important to
the employer's business are also in tension with judicial precedent and
longstanding Department guidance. These provisions narrow the economic
reality test by limiting the facts that may be considered as part of
the test, facts which the Department believes are relevant in
determining whether a worker is economically dependent on the employer
for work or in business for themself. Therefore, after considering all
of the common aspects of the 2021 IC Rule and whether to retain some
portions of that rule, the Department has concluded that in order to
provide clear, affirmative regulatory guidance that aligns with case
law and is consistent with the text and purpose of the Act as
interpreted by courts, a complete rescission and replacement of the
2021 IC Rule is needed. For these reasons, the Department is not
proposing a partial rescission of the 2021 IC Rule.
For the fourth alternative, the Department considered rescinding
the 2021 IC Rule and providing guidance on employee or independent
contractor classification through subregulatory guidance instead of
through new regulations. To begin with, for the reasons set forth in
this NPRM, the Department believes that rescission of the 2021 IC Rule
is appropriate, regardless of the new content proposed for its
replacement. Specifically, the Department believes that the 2021 IC
Rule does not fully comport with the FLSA's text as interpreted by the
courts, and that retaining the 2021 IC Rule would have a confusing and
disruptive effect on workers and businesses alike due to its departure
from decades of case law describing and applying the multifactor
economic reality test as a totality-of-the-circumstances test. The 2021
IC Rule's provisions--such as designating two factors as most probative
and predetermining that they carry greater weight in the analysis,
considering investment and initiative only in the opportunity for
profit or loss factor, and excluding consideration of whether the work
performed is central or important to the employer's business--are in
tension with this longstanding case law.
The Department recognizes that the 2021 IC Rule sought to ``clarify
and sharpen the contours of the economic reality test used to determine
independent contractor classification under the FLSA.'' \186\ However,
as noted above, although the stated intent was to provide clarity, the
2021 IC Rule introduced several concepts to the analysis that neither
courts nor the Department have previously applied.\187\ The Department
believes that these changes will not provide clarity because of the
inconsistency with circuit court case law, and that the conflict
between the 2021 IC Rule's analysis and circuit precedent will
inevitably lead to greater uncertainty as well as lead to inconsistent
outcomes, rather than increase clarity or certainty.
---------------------------------------------------------------------------
\186\ 86 FR 1172.
\187\ See supra sections III.A, B.
---------------------------------------------------------------------------
Given the substantial uniformity among the circuit courts in the
application of the economic reality test prior to the 2021 IC Rule, the
Department believes that rescinding the 2021 IC Rule would provide
greater clarity than retaining the 2021 IC Rule. For more than 80 years
prior to the 2021 IC Rule, the Department primarily issued
subregulatory guidance in this area and did not have generally
applicable regulations on the classification of workers as employees or
independent contractors. This subregulatory guidance was informed by
the case law and set forth a multifactor economic reality test to
answer the ultimate question of economic dependence. However, as
explained in section III above, the Department believes that replacing
the 2021 IC Rule with regulations addressing the multifactor economic
reality test that more fully reflect the case law and continue to be
relevant to the modern economy will be helpful for both workers and
employers in understanding how to apply the law in this area.
Specifically, issuing regulations allows the Department to provide in-
depth guidance that is more closely aligned with circuit case law,
rather than the regulations set forth in the 2021 IC Rule which have
created a dissonance between the Department's regulations and judicial
precedent. Additionally, issuing regulations allows the Department to
formally collect and consider a wide range of views from stakeholders
by electing to use the notice-and-comment process. Finally, because
courts are accustomed to considering relevant agency regulations,
providing guidance in this format may further improve consistency among
courts regarding this issue. Therefore, the Department has decided not
to rescind the 2021 IC Rule and provide only subregulatory guidance,
but to instead propose these regulations.
V. Discussion of Proposed Rule
In view of the foregoing concerns and considerations, the
Department is proposing modifications to title 29 of the Code of
Federal Regulations addressing whether workers are employees or
independent contractors under the FLSA. In relevant part, and as
discussed in greater detail below, the Department proposes:
<bullet> Not using ``core factors'' and instead returning to a
totality-of-the-circumstances analysis of the economic reality test
that has a refined focus on whether each factor shows the worker is
economically dependent upon the employer for work versus being in
business for themself, does not use predetermined weighting of factors,
and that considers the factors comprehensively instead of as discrete
and unrelated.
<bullet> Returning the consideration of investment to a standalone
factor, focusing on whether the worker's investment is capital or
entrepreneurial in nature, and considering the worker's
[[Page 62233]]
investments on a relative basis with the employer's investment.
<bullet> Providing additional analysis of the control factor,
including detailed discussions of how scheduling, supervision, price-
setting, and the ability to work for others should be considered when
analyzing the degree of control over a worker, and not limiting control
to control that is actually exerted.
<bullet> Returning to the longstanding Departmental interpretation
of the integral factor, which considers whether the work is integral to
the employer's business rather than whether it is exclusively part of
an ``integrated unit of production.''
As in the 2021 IC Rule, the Department is proposing to include
cross-references to the interpretations set forth in this proposed rule
in 29 CFR 780.330(b) and 788.16(a); these provisions contain industry-
specific guidance. Additionally, in the 2021 IC Rule, the Department
declined to revise its regulation addressing employee or independent
contractor status under MSPA in 29 CFR 500.20(h)(4), stating, in part,
that the MSPA regulation and the 2021 IC Rule both applied an economic
reality test in which the ultimate inquiry was economic
dependence.\188\ Although the Department has again considered revising
the MSPA regulation, it proposes the same approach that it took in
2021--which is to not make any revisions at this time. The Department
continues to recognize that MSPA adopts by reference the FLSA's
definition of ``employ,'' \189\ and that 29 CFR 500.20(h)(4) considers
``whether or not an independent contractor or employment relationship
exists under the Fair Labor Standards Act'' to interpret employee or
independent contractor status under MSPA.\190\ The test contained in
the MSPA regulation is substantially similar to the proposed test here,
so the Department believes that there is not a need to revise the MSPA
regulation at this time. The Department, however, welcomes comments
regarding whether 29 CFR 500.20(h)(4) should be revised to more fully
reflect the interpretation of employee or independent contractor status
set forth in this proposed rule.
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\188\ See 86 FR 1177.
\189\ 29 U.S.C. 1802(5).
\190\ The MSPA regulations consider, for example, whether a
worker is economically dependent upon an agricultural association or
farm labor contractor. See 29 CFR 500.20(h)(4).
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Finally, the Department is also proposing to formally rescind the
2021 IC Rule and to add a new part 795. In the Department's view, the
operative effects of proposing to rescind the 2021 IC Rule follow. If
finalized, the proposed rule would formally rescind the 2021 IC Rule.
That rescission would operate independently of the new content in any
new final rule, as the Department intends it to be severable from the
substantive proposal for adding a new part 795. For the reasons set
forth in this NPRM, the Department believes that rescission of the 2021
IC Rule is appropriate, regardless of the new content proposed in this
rulemaking. Thus, even if the substantive provisions of a new final
rule were invalidated, enjoined, or otherwise not put into effect, the
Department would not intend that the 2021 IC Rule become operative.
Since the passage of the FLSA until the 2021 IC Rule, the
Department primarily issued subregulatory guidance in this area and did
not have generally applicable regulations addressing the classification
of workers as employees or independent contractors. The Department's
subregulatory guidance was informed by the case law and set forth a
multifactor economic reality test to answer the ultimate question of
economic dependence that is consistent with the analysis set forth in
this proposal. Should the 2021 IC Rule be rescinded without any
replacement regulations, the Department would rely on circuit case law
and provide subregulatory guidance for stakeholders through existing
documents (such as Fact Sheet #13) and new documents (for example, a
Field Assistance Bulletin). As explained below, there is widespread
uniformity among the circuit courts in the application of the economic
reality test, with slight variation as to the number of factors
considered or how the factors are framed.\191\ The well-known
multifactor, totality-of-the-circumstances analysis that had been in
place prior to the 2021 IC Rule has been reflected in the Department's
subregulatory guidance for many years and accurately represents this
case law. Thus, the Department believes reliance on this case law and
subregulatory guidance, rather than the 2021 IC Rule, would be
preferable due to the 2021 IC Rule's divergence from well-established
precedent and potential effects on workers, as previously discussed. In
sum, should a new final rule adding a new part 795 not go into effect
for any reason, reverting to reliance on circuit case law and
subregulatory guidance consistent with that case law for determining
whether a worker is an employee or independent contractor would
accurately reflect the Act's text and purpose as interpreted by the
courts and offer a standard familiar to most stakeholders.
---------------------------------------------------------------------------
\191\ See generally infra section V.C.
---------------------------------------------------------------------------
The Department welcomes comments on all aspects of its proposal.
A. Introductory Statement (Proposed Sec. 795.100)
Section 795.100 of the 2021 IC Rule generally explains that the
interpretations in part 795 will guide WHD's enforcement of the FLSA
and are intended to be used by employers, employees, workers, and
courts to assess employment status under the Act.\192\ The Department
is proposing only clarifying edits to this section.
---------------------------------------------------------------------------
\192\ 86 FR 1246.
---------------------------------------------------------------------------
B. Economic Reality Test (Proposed Sec. 795.105)
Section 795.105(a) of the 2021 IC Rule states that independent
contractors are not employees under the FLSA. Section 795.105(b)
explains that economic dependence is the ultimate inquiry in
determining whether a worker is an independent contractor or employee
under the Act, and Sec. 795.105(c) addresses how to determine economic
dependence, including the elevation of two ``core'' economic reality
factors.\193\ Section 795.105(d) discusses the economic reality
factors.\194\
---------------------------------------------------------------------------
\193\ Id.
\194\ Id. at 1246-47.
---------------------------------------------------------------------------
The Department is proposing to simplify paragraph (a) and make
additional clarifying edits to paragraph (b). Proposed Sec. 795.105(a)
would continue to make clear that independent contractors are not
``employees'' under the Act. Proposed Sec. 795.105(b) would affirm
that economic dependence is the ultimate inquiry for determining
whether a worker is an independent contractor or an employee and makes
clear that the plain language of the statute is relevant to the
analysis. This section focuses the analysis on whether the worker is in
business for themself and clarifies that economic dependence does not
focus on the amount the worker earns or whether the worker has other
sources of income. The Department is proposing to delete Sec.
795.105(c) because it believes, as previously discussed in section
III.A.1. of this preamble, that the factors of the economic reality
test should not be given a predetermined weight. The Department is also
proposing to delete Sec. 795.105(d) and move discussion of the
economic reality test and the individual factors to Sec. 795.110.
[[Page 62234]]
C. Economic Reality Test and Economic Reality Test Factors (Proposed
Sec. 795.110)
The Department is proposing to replace Sec. 795.110 of the 2021 IC
Rule (Primacy of actual practice) with a provision discussing the
economic reality test and the economic reality factors. Proposed Sec.
795.110(a) introduces the economic reality test, emphasizing that the
economic reality factors are guides to be used to conduct a totality-
of-the-circumstances analysis. It also explains that the factors are
not exhaustive, and no single factor is dispositive. The Department is
proposing to address the economic reality factors in Sec. 795.110(b).
Before addressing the specific changes proposed, the Department
believes that it is helpful to discuss the overarching framework of the
economic reality test and how it should be considered.
Determining whether an employment relationship exists under the
FLSA begins with the Act's definitions. The Act's text is expansive,
defining ``employer'' to ``include[ ] any person acting directly or
indirectly in the interest of an employer in relation to an employee,''
``employee'' as ``any individual employed by an employer,'' and
``employ'' to ``include[ ] to suffer or permit to work.'' \195\ In its
1947 brief before the Supreme Court in Rutherford, the Department
explained that the Act `` `contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall within
an employer-employee category.' '' \196\ The Department continued,
stating that ``[t]he purposes of this Act require a practical,
realistic construction of the employment relationship . . . and the
broad language of the statutory definitions is more than adequate to
support such a construction.'' \197\ The Supreme Court agreed,
reiterating the breadth and reach of the Act's definitions to work
relationships that were not previously considered to constitute
employment relationships, and emphasizing that the determination of an
employment relationship under the FLSA depends not on ``isolated
factors but rather upon the circumstances of the whole activity.''
\198\ The same need for a practical, realistic construction of the
employment relationship under the FLSA exists today. As explained
below, the long-standing economic reality test, applied in view of the
statutory language of the Act, is nimble enough to continue to provide
a useful analysis for the broad range of potential employment
relationships that exist today.
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\195\ 29 U.S.C. 203(d), (e)(1), (g).
\196\ Brief for the Administrator at 10, Rutherford Food Corp.
v. McComb, 331 U.S. 722 (1947) (No. 562), 1947 WL 43939, at *10
(quoting Portland Terminal, 330 U.S. at 152).
\197\ Id.
\198\ Rutherford, 331 U.S. at 728-30.
---------------------------------------------------------------------------
Prior to the FLSA's enactment, the phrasing ``suffer or permit''
was commonly used in state laws regulating child labor. As the Eleventh
Circuit explained in Antenor v. D & S Farms, ``[t]he `suffer or permit
to work' standard derives from state child-labor laws designed to reach
businesses that used middlemen to illegally hire and supervise
children.'' \199\ In other words, the standard was designed to ensure
that an employer could be covered under the labor law even if they did
not directly control a worker or used an agent to provide supervision.
The Supreme Court has explicitly and repeatedly recognized that this
``suffer or permit'' language demonstrates Congress's intent for the
FLSA to apply broadly and more inclusively than the common law
standard.\200\ This textual breadth reflects Congress's stated intent.
Section 2 of the Act, Congress's ``declaration of policy,'' states that
the Act is intended to eliminate ``labor conditions detrimental to the
maintenance of the minimum standard of living necessary for health,
efficiency, and general well-being of workers.'' \201\ Particularly
relevant to misclassification, section 2 identifies ``unfair method[s]
of competition in commerce'' as an additional condition ``to correct
and as rapidly as practicable . . . eliminate.'' \202\
---------------------------------------------------------------------------
\199\ 88 F.3d 925, 929 n.5 (11th Cir. 1996).
\200\ See, e.g., Darden, 503 U.S. at 326 (noting that ``employ''
is defined with ``striking breadth'' (citing Rutherford, 331 U.S. at
728)); Rosenwasser, 323 U.S. at 362 (``A broader or more
comprehensive coverage of employees . . . would be difficult to
frame.''); Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 665
(5th Cir. 1983) (``The term `employee' is thus used `in the broadest
sense `ever . . . included in any act.' '' (quoting Donovan v. Am.
Airlines, Inc., 686 F.2d 267, 271 (5th Cir. 1982))).
\201\ 29 U.S.C. 202(a).
\202\ See id. at sec. 202(a), (b); see also Rosenwasser, 323
U.S. at 361-62; Pilgrim Equip., 527 F.2d at 1311 (``Given the
remedial purposes of the legislation, an expansive definition of
`employee' has been adopted by the courts.'').
---------------------------------------------------------------------------
For decades, the Department and courts have applied an economic
reality test to determine whether a worker is an employee or an
independent contractor under the Act. The test was developed by the
Supreme Court in interpreting and applying the social legislation of
the 1930s, including the Fair Labor Standards Act, which defines the
employment relationship in broad and comprehensive terms.\203\ In 1947,
the Supreme Court issued two decisions, Silk and Rutherford, that used
an economic reality test to determine employment status.\204\ As
explained in Rutherford, the ``economic reality'' test is designed to
bring within such legislation ``persons and working relationships
which, prior to this Act, were not deemed to fall within an employer-
employee category.'' \205\ In applying this economic reality test, it
is essential to consider the Act's statutory language. The
determination of whether a worker is covered under the FLSA must be
made in the context of the Act's own definitions and the courts'
expansive reading of its scope.\206\ The
[[Page 62235]]
FLSA's ``particularly broad'' definition of ``employee'' encompasses
all workers who are, ``as a matter of economic reality, . . .
economically dependent upon the alleged employer.'' \207\ Only a worker
who ``is instead in business for himself'' is an independent contractor
not covered by the Act.\208\ The ``focus'' and ``ultimate concept'' of
the determination of whether a worker is an employee or an independent
contractor, then, is ``the economic dependence of the alleged
employee.'' \209\ The statutory language thus frames the central
question that the economic reality test asks--whether the worker is
economically dependent on an employer who suffers or permits the work
or whether the worker is in business for themself.
---------------------------------------------------------------------------
\203\ Rosenwasser, 323 U.S. at 362.
\204\ See Silk, 331 U.S. at 716-18 (applying the test under the
Social Security Act); Rutherford, 331 U.S. at 730 (same under the
FLSA).
\205\ Rutherford, 331 U.S. at 729; see also Whitaker House, 366
U.S. at 31-32 (describing the same as it relates to homeworkers).
\206\ The line of cases in which the Supreme Court has
repeatedly recognized that the definitions of ``employ,''
``employee,'' and ``employer'' that establish who is entitled to the
FLSA's protections were written broadly and have appropriately been
interpreted broadly are premised on the statutory text itself, not
on any principle of how to interpret remedial legislation. Because
these cases addressing the Act's definitions do not address
exemptions from the Act's pay requirements, they have not been
called into question by Encino Motorcars v. Navarro, 138 S. Ct. 1134
(2018), which overturned a rule of interpretation based on the
FLSA's remedial purpose that applied to the Act's exemptions. In
Encino, the Supreme Court addressed an exemption from the FLSA's
overtime pay requirements and ruled that the ``narrow construction''
principle--that FLSA exemptions should be narrowly construed in
favor of employee status--should no longer be used. The Court
explained that instead, such exemptions should be given a fair
reading, stating ``[b]ecause the FLSA gives no textual indication
that its exemptions should be construed narrowly, there is no reason
to give [them] anything other than a fair (rather than a narrow)
interpretation.'' Encino, 138 S. Ct. at 1142 (internal quotations
and citation omitted). This decision did not apply to the Act's
definitions, and, crucially, there is no need to rely on such an
interpretive principle here because there is a clear textual
indication in the Act's definitions, by the inclusion of the
``suffer or permit'' language, that broad coverage under the Act was
intended. See 29 U.S.C. 203(g). Thus, the broad scope of who is an
employee under the FLSA comes from the statutory text itself and not
any ``narrow-construction'' principle. Moreover, Encino did not hold
that the FLSA's remedial purpose may never be considered, it simply
noted that it is a ``flawed premise that the FLSA `pursues' its
remedial purpose `at all costs.' '' Id. at 1142 (quoting American
Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 234 (2013))
(emphasis added). To the extent that the language in the 2021 IC
Rule preamble implied that the Act's remedial purpose can never be
considered, including when determining whether an individual is an
employee or an independent contractor under the FLSA, the Department
clarifies that it believes that this would be an unwarranted
extension of the Supreme Court's decision. See, e.g., 86 FR 1207-08
(discussing Encino's application in response to commenters' concerns
that the 2021 IC Rule conflicted with the FLSA's remedial purpose).
Finally, courts have not changed their application of the economic
reality test to determine employee status based on Encino.
\207\ Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir.
2008) (citing Darden, 503 U.S. at 326; Herman v. Express Sixty-
Minutes Delivery Serv., Inc., 161 F.3d 299, 303 (5th Cir. 1998)).
\208\ Id. (citing Express Sixty-Minutes, 161 F.3d at 303).
\209\ Id. (emphasis in the original); see also Pilgrim Equip.,
527 F.2d at 1311-12 (``[T]he final and determinative question must
be whether the total of the testing establishes the personnel are so
dependent upon the business with which they are connected that they
come within the protection of [the] FLSA or are sufficiently
independent to lie outside its ambit.'').
---------------------------------------------------------------------------
To aid in answering this ultimate inquiry of economic dependence,
several factors have been considered by courts and the Department as
particularly probative when conducting a totality-of-the-circumstances
analysis of whether a worker is an employee or an independent
contractor under the FLSA.\210\ In Silk, the Supreme Court suggested
that ``degrees of control, opportunities for profit or loss, investment
in facilities, permanency of relation and skill required in the claimed
independent operation are important for decision.'' \211\ The Court
cautioned that no single factor is controlling and that the list is not
exhaustive.\212\ In Rutherford, the Court used a similar analysis
considering ``the circumstances of the whole activity,'' and relied on
the fact that the workers' work was ``a part of the integrated unit of
production.'' \213\ Since Silk and Rutherford, Federal courts of
appeals have applied the economic reality test to distinguish
independent contractors from employees who are entitled to the FLSA's
protections. Federal appellate courts considering employee or
independent contractor status under the FLSA generally analyze the
economic realities of the work relationship using the factors
identified in Silk and Rutherford.\214\ There is significant and
widespread uniformity among the circuit courts in the application of
the economic reality test, although there is slight variation as to the
number of factors considered or how the factors are framed (for
example, whether relative investment is considered within the
investment factor, or whether skill must be used with business-like
initiative).\215\ As the 2021 IC Rule explained, ``[m]ost courts of
appeals articulate a similar test,'' and these courts consistently
caution against the ``mechanical application'' of the economic reality
factors, view the factors as tools to ``gauge . . . economic
dependence,'' and ``make clear that the analysis should draw from the
totality of circumstances, with no single factor being determinative by
itself.'' \216\ All of the circuit courts that have addressed employee
or independent contractor status consider five of the same
factors.\217\ Briefly, these factors include the degree of control
exercised by the employer over the worker, skill, permanency,
opportunity for profit or loss, and investment, although the Second
Circuit and the D.C. Circuit treat the worker's opportunity for profit
or loss and the worker's investment as a single factor.\218\ Nearly all
circuit courts expressly consider a sixth factor, whether the work is
an integral part of the employer's business. The Fifth Circuit has not
adopted the integral factor but has at times assessed integrality as an
additional relevant factor.\219\
---------------------------------------------------------------------------
\210\ See, e.g., Flint Eng'g, 137 F.3d at 1441 (explaining that
``[n]one of the factors alone is dispositive; instead, the court
must employ a totality-of-the-circumstances approach'').
\211\ 331 U.S. at 716.
\212\ See id.
\213\ Rutherford, 331 U.S. at 729-30.
\214\ See generally supra nn. 51-52.
\215\ See, e.g., Cornerstone Am., 545 F.3d at 344 (discussing
relative investments); Superior Care, 840 F.2d at 1060 (discussing
the use of skill as it relates to business-like initiative).
\216\ 86 FR 1170; see also Saleem v. Corporate Transp. Grp.,
Ltd., 854 F.3d 131,139-40 (2d Cir. 2020); Cornerstone Am., 545 F.3d
at 343; Keller v. Miri Microsystems LLC, 781 F.3d 799, 807 (6th Cir.
2015); Flint Eng'g, 137 F.3d at 1440-41.
\217\ Superior Care, Inc., 840 F.2d at 1058-59; DialAmerica, 757
F.2d at 1382-83; McFeeley, 825 F.3d at 241; Off Duty Police, 915
F.3d at 1055; Lauritzen, 835 F.2d at 1534-35; Alpha & Omega, 39
F.4th at 1082; Driscoll, 603 F.2d at 754-55; Paragon, 884 F.3d at
1235; Scantland, 721 F.3d at 1311-12; Morrison, 253 F.3d at 11.
\218\ See, e.g., Superior Care, 840 F.2d at 1058-59; Morrison,
253 F.3d at 11 (citing Superior Care, 840 F.2d at 1058-59).
\219\ See, e.g., Hobbs, 946 F.3d at 836.
---------------------------------------------------------------------------
Because the 2021 IC Rule focused on these slight variations among
some of the factors or how to apply certain factors, it overlooked both
the broader fact that the ultimate inquiry has remained unchanged as
well as the extent of the consistency in use of the economic reality
test among the courts of appeals. The economic reality test, the case
law, and the Department's position have remained remarkably consistent
since the 1940's--the test's focus has remained on whether the worker
is in business for themself, with the inquiry directed toward the
question of economic dependence. It is not surprising that some courts
and the Department may have used slightly different iterations of the
factors over the last several decades, as the factors ``are aids--tools
to be used to gauge the degree of dependence of alleged employees on
the business with which they are connected.'' \220\ These factors are
only guideposts, and ``[i]t is dependence that indicates employee
status. Each [factor] must be applied with that ultimate notion in
mind.'' \221\ This is why most courts, and the Department, have long
made clear that additional factors may be relevant when applying the
test to a particular case. It is also expected that outcomes may vary
somewhat among workers in the same profession, for example, because the
test demands a fact-specific analysis and facts like job titles may not
be probative of the economic realities of the relationship. In
undertaking this analysis, each factor is examined and analyzed in
relation to one another and to the Act's definitions. The test should
not be approached in a formulaic manner, neglecting to consider the
statutory framework upon which the test is based. Importantly, ``[n]one
of these factors is determinative on its own, and each must be
considered with an eye toward the ultimate question--the worker's
economic dependence on or independence from the alleged employer.''
\222\
---------------------------------------------------------------------------
\220\ Pilgrim Equip., 527 F.2d at 1311.
\221\ Id.
\222\ Off Duty Police, 915 F.3d at 1055 (alterations and
internal quotations omitted).
---------------------------------------------------------------------------
With this proposed rulemaking, the Department describes the
economic reality factors that reflect the totality-of-the-circumstances
approach that courts have taken for decades, and provides an analysis
as to how the Department considers each factor in today's workplaces,
based on case law and the Department's enforcement expertise in this
area. For example, the proposed investment factor is returned to being
a standalone factor, considers facts such as whether the investment is
capital or entrepreneurial in nature, and considers the worker's
investments relative to the employer's investments. Significant
additional guidance is provided for the
[[Page 62236]]
proposed control factor, including detailed discussions of how
scheduling, supervision, price-setting, and the ability to work for
others should be considered when analyzing the degree of control
exerted over a worker. And the proposed integral factor is returned to
its longstanding Departmental and judicial interpretation, rather than
the ``integrated unit of production'' approach that was included in the
2021 IC Rule.
This totality-of-the-circumstances analysis considers all factors
that may be relevant and, in accordance with the case law, does not
assign any of the factors a predetermined weight. While the 2021 IC
Rule aspired to provide a clearer test, the Department believes, upon
further consideration, that the weighted analysis in the 2021 IC Rule,
which could have the effect of winnowing the test to two ``core''
factors--control and opportunity for profit or loss--sits in tension
with decades of instruction from the Supreme Court and the circuit
courts of appeals, as well as the Department's own longstanding
position that no factor or subset of factors should carry more or less
weight in all cases. The 2021 IC Rule also errs in bringing the test
closer to the common law test, which is inconsistent with the plain
text of the Act and the case law interpreting it.\223\ Limiting and
weighting the factors in such a predetermined manner undermines the
very purpose of the test, which is to consider--based on the economic
realities--whether a worker is economically dependent on the employer
for work or is in business for themself.\224\ Importantly, each factor,
considered in isolation, does not determine whether a worker is
economically dependent on an employer for work or in business for
themself. Rather, the factors are merely tools or indicators and must
be analyzed together in order to answer this ultimate inquiry.\225\
---------------------------------------------------------------------------
\223\ See supra section III.A.2.
\224\ See, e.g., Scantland, 721 F.3d at 1312 (quoting Mednick v.
Albert Enters., Inc., 508 F.2d 297, 301-02 (5th Cir. 1975)); see
also Saleem, 854 F.3d at 139-140; Brock v. Mr. W Fireworks, Inc.,
814 F.2d 1042, 1054-55 (5th Cir. 1987).
\225\ See, e.g., Scantland, 721 F.3d at 1312 (the economic
reality factors ``serve as guides, [and] the overarching focus of
the inquiry is economic dependence''); Pilgrim Equip., 527 F.2d at
1311 (The economic reality factors ``are aids--tools to be used to
gauge the degree of dependence of alleged employees on the business
with which they are connected. It is dependence that indicates
employee status. Each test must be applied with that ultimate notion
in mind.'').
---------------------------------------------------------------------------
This is not to say that in a particular case one factor may not be
more or less probative than others--this is to be expected in each
fact-specific analysis. One or more factors may be more probative than
the other factors depending on the facts and circumstances of a case;
the analysis, however, cannot be conducted like a scorecard or a
checklist. For example, two factors that strongly indicate employment
status in a particular case could possibly outweigh other factors that
indicate independent contractor status. But to assign a predetermined
and immutable weight to certain factors ignores the totality-of-the-
circumstances, fact-specific nature of the inquiry that is intended to
reach a multitude of employment relationships across occupations and
industries and over time. Similarly, it is possible that not every
factor will be particularly relevant in each case and that is also to
be expected.\226\
---------------------------------------------------------------------------
\226\ See, e.g., Lauritzen, 835 F.2d at 1534 (referring to the
economic reality factors and stating that ``[c]ertain criteria have
been developed to assist in determining the true nature of the
relationship, but no criterion is by itself, or by its absence,
dispositive or controlling.'').
---------------------------------------------------------------------------
Thus, the economic reality factors help determine whether a worker
is in business for themself or is instead economically dependent on the
employer for work.\227\ ``Ultimately, in considering economic
dependence, the court focuses on whether an individual is `in business
for himself' or is `dependent upon finding employment in the business
of others.' '' \228\ Economic dependence, however, ``does not concern
whether the workers at issue depend on the money they earn for
obtaining the necessities of life . . . . Rather, it examines whether
the workers are dependent on a particular business or organization for
their continued employment.'' \229\ Additionally, consistent with the
2021 IC Rule, economic dependence does not mean that a worker who works
for other employers, earns a very limited income from a particular
employer, or is independently wealthy, cannot nevertheless be
economically dependent on that employer for purposes of the FLSA.\230\
As the Fifth Circuit has explained, ``it is not dependence in the sense
that one could not survive without the income from the job that we
examine, but dependence for continued employment.'' \231\
---------------------------------------------------------------------------
\227\ See, e.g., Cornerstone Am., 545 F.3d at 343 (``To
determine if a worker qualifies as an employee, we focus on whether,
as a matter of economic reality, the worker is economically
dependent upon the alleged employer or is instead in business for
himself.''); Flint Eng'g, 137 F.3d at 1440 (noting that the economic
realities of the relationship govern, and the focal point is whether
the individual is economically dependent on the business to which he
renders service or is, as a matter of economic fact, in business for
himself); Superior Care, 840 F.2d at 1059 (``The ultimate concern is
whether, as a matter of economic reality, the workers depend upon
someone else's business . . . or are in business for themselves.'').
\228\ Scantland, 721 F.3d at 1312 (quoting Mednick, 508 F.2d at
301-02).
\229\ DialAmerica, 757 F.2d at 1385.
\230\ See 86 FR 1173; see also McLaughlin v. Seafood, Inc., 861
F.2d 450, 452-53 (5th Cir. 1988) (reasoning that ``[l]aborers who
work for two different employers on alternate days are no less
economically dependent than laborers who work for a single
employer''); Halferty v. Pulse Drug Co., 821 F.2d 261, 267-68 (5th
Cir. 1987) (rejecting the employer's argument that the worker's
wages were too little to constitute dependence).
\231\ See Halferty, 821 F.2d at 268.
---------------------------------------------------------------------------
The 2021 IC Rule stated that one of the reasons for that rulemaking
was to reduce ``overlap'' between factors.\232\ In the effort to
eliminate redundancy, the 2021 IC Rule limits full consideration of how
the factors may interrelate or be more relevant in certain factual
scenarios than others. Upon further consideration, the Department
believes that emphasizing the discrete nature of each particular factor
and evaluating each factor in a vacuum fails to analyze potential
employment relationships in the manner demanded by the Act's text and
accompanying case law. The Act's definitions envision a broad range of
potential employment relationships--defining ``employer'' as including
``any person acting directly or indirectly in the interest of an
employer in relation to an employee'' and using the ``suffer or
permit'' standard--and the test needs to be applicable to all of those
potential relationships.\233\ The Department recognizes that there are
a variety of bona fide independent contractor relationships that need
to be adequately addressed by the test as well.\234\
---------------------------------------------------------------------------
\232\ 86 FR 1202.
\233\ See 29 U.S.C. 203(d), (g).
\234\ Independent contractors are not ``employees'' for purposes
of the FLSA. See generally Portland Terminal, 330 U.S. at 152
(stating that the ``definition `suffer or permit to work' was
obviously not intended to stamp all persons as employees'').
---------------------------------------------------------------------------
Applying a formulaic or rote analysis that isolates each factor is
contrary to decades of case law, decreases the utility of the economic
reality test, and makes it harder to analyze the ultimate inquiry of
economic dependence. Rather, the analysis needs to be flexible enough
to work for all kinds of jobs, all kinds of workers, from traditional
economy jobs to jobs in emerging business models. A multifactor,
totality-of-the-circumstances test provides that flexibility, which is
why it has been used for more than 75 years to determine which workers
receive the Act's basic labor protections. Making the test facially
simpler by, for example, limiting consideration of the employment
relationship to only two ``core'' factors (as the 2021 IC Rule in
[[Page 62237]]
effect does in some cases), ranking all of the factors, or creating a
checklist, is unfaithful to the text of the Act and decades of case
law. It also ignores what the test is required to do, which is to
provide a totality-of-the-circumstances analysis to determine, in a
wide variety of settings, which workers are economically dependent on
their employers for work and should receive the basic labor protections
of the Act. The FLSA applies to an extremely broad scope of employment
relationships, and only workers who are in business for themselves are
excluded from its coverage as independent contractors. The economic
reality test, applied in view of the Act's definitions and with a focus
on economic dependence, is able to assess that scope of potential
employment relationships.
The Department is providing a detailed analysis about the
application of each factor in this NPRM based on case law and the
Department's enforcement experience as a guide for employers and
workers in determining whether a worker is an employee or an
independent contractor. Each factor is reviewed with the ultimate
inquiry in mind: whether the worker is economically dependent on the
employer for work or in business for themself. The following discussion
addresses each of the economic reality factors, including proposed
revisions made to each to better reflect the weight of legal authority
throughout the country.
1. Opportunity for Profit or Loss Depending on Managerial Skill
(Proposed Sec. 795.110(b)(1))
Section 795.105(d)(1)(ii) of the 2021 IC Rule states that the
opportunity for profit or loss factor ``weighs towards the individual
being an independent contractor to the extent the individual has an
opportunity to earn profits or incur losses based on his or her
exercise of initiative (such as managerial skill or business acumen or
judgment) or management of his or her investment in or capital
expenditure on, for example, helpers or equipment or material to
further his or her work.'' \235\ The provision also states that,
``[w]hile the effects of the individual's exercise of initiative and
management of investment are both considered under this factor, the
individual does not need to have an opportunity for profit or loss
based on both for this factor to weigh towards the individual being an
independent contractor.'' \236\ Finally, the provision provides that
``[t]his factor weighs towards the individual being an employee to the
extent the individual is unable to affect his or her earnings or is
only able to do so by working more hours or faster.'' \237\
---------------------------------------------------------------------------
\235\ 86 FR 1247.
\236\ Id.
\237\ Id.
---------------------------------------------------------------------------
Proposed Sec. 795.110(b)(1) focuses the opportunity for profit or
loss factor on whether the worker exercises managerial skill that
affects the worker's economic success or failure in performing the
work. The 2021 IC Rule similarly considered managerial skill, as noted
above. As discussed below, however, the Department is proposing to
consider investment as a separate factor in the analysis, unlike the
approach in the 2021 IC Rule. The proposed provision provides guidance
on the application of this factor, including a non-exhaustive list of
relevant facts to consider. And the proposed provision states that if a
worker has no opportunity for a profit or loss, then that fact suggests
that the worker is an employee. Similar to the 2021 IC Rule, the
proposal states that some decisions by a worker that can affect the
amount of pay that a worker receives, such as the decision to work more
hours or take more jobs, generally do not reflect the exercise of
managerial skill indicating independent contractor status under this
factor. Compared to the 2021 IC Rule, proposed Sec. 795.110(b)(1) more
accurately reflects the consideration of the profit or loss factor in
the case law and reflects the ultimate inquiry into the worker's
economic dependence or independence.
Many circuit courts of appeals apply this factor with an eye to
whether the worker is using managerial skill to affect the worker's
opportunity for profit or loss. For example, the Third Circuit
describes the factor as the opportunity for profit or loss depending on
managerial skill.\238\ In Razak v. Uber Technologies, Inc., the Third
Circuit reversed the district court's ruling that this factor indicated
independent contractor status, holding that, because the employer
``decides (1) the fare[,] (2) which driver receives a trip request[,]
(3) whether to refund or cancel a passenger's fare[,] and (4) a
driver's territory,'' ``a reasonable fact-finder'' could ``rule in
favor of'' employee status on this factor.\239\ In Verma v. 3001
Castor, Inc., the Third Circuit acknowledged that each exotic dancer
``had some degree of control over her profits and losses'' by
attracting followers to the club, but explained that managerial skill
is ``the relevant factor here.'' \240\ After cataloguing the numerous
ways in which the employer determined and managed the dancers'
opportunity for profit or loss (such as determining the hours of
operation, deciding whether to charge an admission fee, setting the
length and price of dances on stage and in private rooms, and managing
the club's atmosphere, operations, and advertising), the court
ultimately found that any managerial skills exercised by the dancers
had ``minimal influence,'' and ruled that this factor weighed in favor
of employee status.\241\
---------------------------------------------------------------------------
\238\ See, e.g., Razak v. Uber Techs., Inc., 951 F.3d 137, 146
(3d Cir.), amended, 979 F.3d 192 (3d Cir. 2020), and cert. denied,
141 S. Ct. 2629 (2021); Verma v. 3001 Castor, Inc., 937 F.3d 221,
229 (3d Cir. 2019) (citing Selker Bros., 949 F.2d at 1293).
\239\ 951 F.3d at 146-47.
\240\ 937 F.3d at 230-31.
\241\ Id. at 231.
---------------------------------------------------------------------------
Other courts likewise consider whether the workers' opportunities
for profit or loss depend on their managerial skill.\242\ In McFeeley
v. Jackson Street Entertainment, LLC, the Fourth Circuit found that the
dancers' ``opportunities for profit or loss depended far more on [the
employer's] management and decision-making than on their own'' because
the employer controlled the client base, handled all advertising,
managed the club's atmosphere, and determined pricing.\243\ And in
Schultz v. Capital International Security, Inc., the court concluded
that ``[t]here is no evidence the agents could exercise or hone their
managerial skill to increase their pay.'' \244\ The Sixth Circuit
likewise assesses whether the workers' opportunities for profit or loss
depend on their managerial skill.\245\ For example, in Acosta v. Off
Duty Police Services, Inc., the Sixth Circuit ruled that this factor
favored employee status because the workers ``earned a set hourly wage
regardless of'' the managerial skill they exercised, and the employer
required them to work fixed hourly shifts ``regardless of what skills
they exercised, so workers could not complete jobs more or less
efficiently than their counterparts.'' \246\ The Seventh, Ninth, and
Eleventh Circuits also describe this factor as the worker's
[[Page 62238]]
opportunity for profit or loss depending on the worker's managerial
skill.\247\
---------------------------------------------------------------------------
\242\ See, e.g., McFeeley, 825 F.3d at 241 (citing Schultz v.
Capital Int'l Sec., Inc., 466 F.3d 298, 304-05 (4th Cir. 2006)).
\243\ 825 F.3d at 243.
\244\ 466 F.3d at 308.
\245\ See, e.g., Off Duty Police, 915 F.3d at 1059; Keller, 781
F.3d at 812 (describing this factor as whether the worker ``had an
opportunity for greater profits based on his management and
technical skills'').
\246\ 915 F.3d at 1059. In response to the employer's argument
that the workers could accept or reject shifts, the court explained
that ``[w]hile the decision to accept or reject work is a type of
managerial action, the relevant question is whether workers could
increase profits through managerial skill.'' Id. (emphases in
original).
\247\ See, e.g., Lauritzen, 835 F.2d at 1535; Iontchev v. AAA
Cab Serv., Inc., 685 F. App'x 548, 550 (9th Cir. 2017) (finding that
the workers' ``opportunity for profit or loss depended upon their
managerial skill''); Driscoll, 603 F.2d at 754-55; Scantland, 721
F.3d at 1312. And the Eighth Circuit recently described this factor
as ``whether workers had control over profits and losses depending
on their `managerial skill.' '' Alpha & Omega, 39 F.4th at 1084.
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Other circuits do not articulate this factor by expressly using the
words ``managerial skill,'' but they nonetheless apply the factor in a
very similar way by focusing on whether the worker has an opportunity
to use ``initiative'' or ``judgment'' to affect profits or losses. For
example, the Tenth Circuit has found that this factor favored employee
status because the workers' ``earnings did not depend upon their
judgment or initiative, but on the [employer's] need for their work.''
\248\ And when affirming a ruling that this factor indicated employee
status in another case, the Tenth Circuit explained that the workers
``exercise independent initiative only in locating new work
assignments,'' and ``[w]hile working on a particular assignment, there
is little or no room for initiative (certainly none related to profit
or loss).'' \249\ The Second Circuit, although it considers the
workers' opportunities for profit or loss along with their investment
as one factor,\250\ similarly evaluates the extent to which the
workers' business judgment or acumen affects their opportunity for
profit or loss. In Franze v. Bimbo Bakeries USA, Inc., the Second
Circuit found this factor to favor independent contractor status
because the workers purchased delivery territories that could
ultimately be sold again and the overall value of their territories
``primarily depended on their own business judgment and foresight in
modifying their territories and managing day-to-day costs, suggesting
that they bore the risks of their decisions.'' \251\ And in Saleem v.
Corporate Transportation Group, Ltd., the Second Circuit found that the
workers ``possessed considerable independence in maximizing their
income through a variety of means'' and their profits increased through
their initiative, judgment, and foresight--indicating independent
contractor status.\252\
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\248\ Snell, 875 F.2d at 810.
\249\ Flint Eng'g, 137 F.3d at 1441.
\250\ See, e.g., Franze, 826 F. App'x at 76; Superior Care, 840
F.2d at 1058-59.
\251\ 826 F. App'x at 77-78 (internal quotations omitted).
\252\ 854 F.3d at 143-44.
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By concentrating on the degree to which the worker's opportunity
for profit or loss is determined by the employer,\253\ the Fifth
Circuit focuses on whether the worker exercises judgment or initiative
vis-a-vis the employer to affect profit or loss and thus takes a
related approach to this factor. In Hobbs v. Petroplex Pipe &
Construction, Inc., for example, the Fifth Circuit relied on the facts
that the workers never negotiated their rates of pay (the employer set
a fixed hourly rate) and ``the work schedule imposed by [the employer]
severely limited the [workers'] opportunity for profit or loss''
(meaning that ``it would have been unrealistic for them to have worked
for other companies'') to affirm a finding that this factor indicated
employee status.\254\ In Hopkins v. Cornerstone America, the Fifth
Circuit found that this factor weighed in favor of employee status
because ``[t]he major determinants of the Sales Leaders' profit or loss
were controlled almost exclusively by [the employer],'' including ``the
hiring, firing, and assignment of subordinate agents,'' the ``overwrite
commissions,'' the ``distribution of sales leads,'' which products they
could sell, and their territories.\255\ In Parrish v. Premier
Directional Drilling, L.P., the Fifth Circuit found that the workers
had ``enough control over their profits and losses to have this factor
support [independent contractor] status,'' including by making
``decisions affecting their expenses.'' \256\ And in Herman v. Express
Sixty-Minutes Delivery Service, Inc., the Fifth Circuit affirmed the
district court's finding that this factor favored independent
contractor status because ``a driver's profit or loss is determined
largely on his or her skill, initiative, ability to cut costs, and
understanding of the courier business.'' \257\
---------------------------------------------------------------------------
\253\ See, e.g., Hobbs, 946 F.3d at 832-34; Parrish., 917 F.3d
at 384-85.
\254\ 946 F.3d at 833-34.
\255\ 545 F.3d 338, 344-45 (5th Cir. 2008).
\256\ 917 F.3d at 384-85. The workers could also turn down work
and negotiate their pay. See id. at 376.
\257\ 161 F.3d at 304.
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In AI 2015-1, the Department described this factor as whether the
worker's managerial skill affects the worker's opportunity for profit
or loss and explained that this factor focuses ``on whether the worker
has the ability to make decisions and use his or her managerial skill
and initiative to affect opportunity for profit or loss.'' \258\
Section 795.105(d)(1)(ii) of the 2021 IC Rule similarly considers the
impact of the worker's initiative and managerial skill on the
opportunity for profits or losses, discussing the worker's ``exercise
of initiative (such as managerial skill or business acumen or
judgment).'' \259\ It also considers the impact of the worker's
``management of his or her investment in or capital expenditure on, for
example, helpers or equipment or material to further his or her work''
on the worker's opportunity for profit or loss.\260\ For the reasons
explained below, however, the Department is proposing that investment
be a separate, standalone factor in the analysis.\261\
---------------------------------------------------------------------------
\258\ AI 2015-1, 2015 WL 4449086, at *6 & n.7 (withdrawn June 7,
2017).
\259\ 86 FR 1247.
\260\ Id.
\261\ See infra, section V.C.2. In addition to the explanation
set forth infra, the Department is concerned by situations where
workers are required to make a significant upfront payment in order
to be allowed to perform work as non-employees but they exercise
little, if any, managerial skill. In those situations, application
of the opportunity for profit or loss factor should indicate
employee status because of the lack of managerial skills affecting
the opportunity for profit or loss.
---------------------------------------------------------------------------
Focusing on managerial skill, proposed Sec. 795.110(b)(1) sets
forth the following facts, which among others, can be relevant to
assessing the degree to which the worker's managerial skill affects the
worker's economic success or failure in performing the work: whether
the worker determines the charge or pay for the work provided (or at
least can meaningfully negotiate it); whether the worker accepts or
declines jobs or chooses or can meaningfully negotiate the order and/or
time in which the jobs are performed; whether the worker engages in
marketing, advertising, or other efforts to expand their business or
secure more work; and whether the worker makes decisions to hire
others, purchase materials and equipment, and/or rent space (as opposed
to the amount and nature of the worker's investment).
In addition to those facts, whether the worker actually has an
opportunity for a loss should be considered. Consistent with the
overall inquiry of determining whether a worker is economically
dependent on the employer or in business for themself, the fact that a
worker has no opportunity for a loss indicates employee status. On the
other hand, workers who are in business for themselves face the
possibility of experiencing a loss, and the risk of a loss as a
possible result of the worker's managerial decisions indicates
independent contractor status. Workers who incur little or no costs or
expenses, simply provide their labor, and/or are paid an hourly or flat
rate are unlikely to possibly experience a loss, and this factor may
suggest employee status in those circumstances. The fact that workers
may earn more or less at times (and their earnings may decline)
[[Page 62239]]
depending on how much they work is not the equivalent of experiencing a
financial loss.
For example, the Third Circuit has explained that certain workers
whose earnings ``derived primarily from their fixed commission'' from
the employer and ``were not tied to price levels and resale profit
margins'' had ``no meaningful opportunities for profit nor any
significant risk of financial loss,'' indicating employee status.\262\
Yet, a finding that workers ``risked financial loss'' indicates
independent contractor status.\263\ The Tenth Circuit has explained, in
a case finding that this factor favored employee status, that the
workers ``did not undertake the risks usually associated with an
independent business,'' ``there was no way that [they] could experience
a business loss,'' and ``[a] reduction in money earned by the [workers]
is not a `loss' sufficient to satisfy the criteria for independent
contractor status.'' \264\ The Seventh Circuit has explained, in a case
involving migrant farm workers, that they had no possibility of a loss
and that ``[a]ny reduction in earnings due to a poor pickle crop is a
loss of wages, and not of an investment.'' \265\ And the Sixth Circuit
has explained in a case involving workers paid by the hour that they
did not ``appear to have been at risk of a loss based on their decision
to work or not'' and that ``[d]ecreased pay from working fewer hours
does not qualify as a loss.'' \266\ Relatedly, the fact that an
employer may impose fines, penalties, or chargebacks on a worker for
faulty performance does not mean that the worker may experience a loss.
The Eleventh Circuit has explained that the ``argument that plaintiffs
could control losses by avoiding chargebacks is unpersuasive,''
elaborating that ``[c]hargebacks relate to the quality of a
technician's skill, not his managerial or entrepreneurial prowess.''
\267\
---------------------------------------------------------------------------
\262\ Selker Bros., 949 F.2d at 1294 (emphasis added).
\263\ DialAmerica, 757 F.2d at 1386.
\264\ Snell, 875 F.2d at 810. See also Flint Eng'g, 137 F.3d at
1441 (``[P]laintiffs are hired on a per-hour basis rather than on a
flat-rate-per-job basis. There is no incentive for plaintiffs to
work faster or more efficiently in order to increase their
opportunity for profit. Moreover, there is absolutely no risk of
loss on plaintiffs' part.'').
\265\ Lauritzen, 835 F.2d at 1536.
\266\ Off Duty Police, 915 F.3d at 1059.
\267\ Scantland, 721 F.3d at 1317.
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Some decisions by a worker that may affect the worker's earnings do
not necessarily reflect managerial skill. Accordingly, proposed Sec.
795.110(b)(1) explains that a worker's decision to work more hours
(when paid hourly) or work more jobs (when paid a flat fee per job)
where the employer controls assignment of hours or jobs is similar to
decisions that employees routinely make and does not reflect managerial
skill.
The Eleventh Circuit explained in a case involving cable installers
that their ``opportunity for profit was largely limited to their
ability to complete more jobs than assigned, which is analogous to an
employee's ability to take on overtime work or an efficient piece-rate
worker's ability to produce more pieces.'' \268\ The court further
explained that a worker's ``ability to earn more by being more
technically proficient is unrelated to [the worker's] ability to earn
or lose profit via his managerial skill, and it does not indicate that
he operates his own business.'' \269\ The Fourth Circuit similarly
explained in a case involving security guards that the guards could not
``exercise or hone their managerial skill to increase their pay''
because the employer ``paid [them] a set rate for each shift worked''
and the customer's ``schedule and security needs dictated the number of
shifts available and the hours worked.'' \270\ And the Sixth Circuit
explained in a case involving workers paid by the hour that they
``earned a set hourly wage regardless of the skill they exercised.''
\271\ By comparison, the Eighth Circuit found in a case involving a
process server that, because the worker decided where and how often to
work and ``decided which assignments he was willing to accept'' based
on the worker's own decisions regarding which jobs were more or less
profitable and without any negative consequences imposed by the
employer, this factor indicated independent contractor status.\272\
Thus, where a worker is paid by the job, the worker's decision to work
more jobs and the worker's technical proficiency in completing each job
are not the type of managerial skill that would indicate independent
contractor status under this factor.
---------------------------------------------------------------------------
\268\ Id. at 1316-17.
\269\ Id. at 1317.
\270\ Capital Int'l, 466 F.3d at 308.
\271\ Off Duty Police, 915 F.3d at 1059. See also Snell, 875
F.2d at 810 (cake decorators' ``earnings did not depend upon their
judgment or initiative, but on the [employer's] need for their
work''); Collinge v. IntelliQuick Delivery, Inc., No. 2:12-cv-00824
JWS, 2015 WL 1299369, at *4-5 (D. Ariz. Mar. 23, 2015) (workers
could not increase profit by taking on more work, noting that ``a
worker's ability to simply work more is irrelevant'' because
``[m]ore work may lead to more revenue, but not necessarily more
profit''); Solis v. Kansas City Transp. Grp., No. 10-0887-CV-W-REL,
2012 WL 3753736, at *9 (W.D. Mo. Aug. 28, 2012) (``The driver's
ability to make more money by driving additional routes is akin to a
waiter making more money by taking another shift.''); Solis v.
Cascom, No. 3:09-cv-257, 2011 WL 10501391, at *6 (S.D. Ohio Sept.
21, 2011) (explaining that there was no opportunity for increased
profit based on the workers' managerial skills; although they could
work additional hours to increase their income, they made no
decisions regarding routes, acquisition of materials, ``or any facet
normally associated with operating an independent business'').
\272\ See Karlson v. Action Process Serv. & Priv. Investigation,
LLC, 860 F.3d 1089, 1095 (8th Cir. 2017). See also Express Sixty-
Minutes, 161 F.3d at 304 (opportunity for profit or loss factor
indicated independent contractor status because the drivers could
choose among ``which jobs were most profitable'').
---------------------------------------------------------------------------
Proposed Sec. 795.110(b)(1) is consistent on this point with 2021
IC Rule Sec. 795.105(d)(1)(ii), which states that the opportunity for
profit or loss factor ``weighs towards the individual being an employee
to the extent the individual is unable to affect his or her earnings or
is only able to do so by working more hours or faster.'' \273\ The
Department likewise stated in AI 2015-1 that a ``worker's ability to
work more hours and the amount of work available from the employer have
nothing to do with the worker's managerial skill and do little to
separate employees from independent contractors--both of whom are
likely to earn more if they work more and if there is more work
available.'' \274\ Thus, the Department's proposed regulation on this
point is consistent with its prior guidance in addition to being
supported by case law.\275\
---------------------------------------------------------------------------
\273\ 86 FR 1247.
\274\ 2015 WL 4449086, at *6 (withdrawn June 7, 2017).
\275\ The Department notes, as it explains elsewhere in this
proposal, that the fact that a worker has a business in an industry
separate from the business in which the worker is working for the
employer has little relevance when applying this factor.
---------------------------------------------------------------------------
The Department welcomes comments on all aspects of this factor.
Example: Opportunity for Profit or Loss Depending on Managerial Skill
\276\
---------------------------------------------------------------------------
\276\ The Department is providing examples at the end of the
discussion of each factor for the benefit of the public, and the
addition or alteration of any of the facts in any of the examples
may change the resulting analysis. Additionally, while the examples
help illustrate the application of particular factors of the
economic reality test, no one factor is determinative of whether a
worker is an employee or independent contractor.
---------------------------------------------------------------------------
A worker for a landscaping company performs assignments only as
determined by the company for its corporate clients. The worker does
not independently choose assignments, solicit additional work from
other clients, advertise their services, or endeavor to reduce costs.
The worker regularly agrees to work additional hours in order to earn
more. In this scenario, the worker does not exercise managerial skill
that affects their profit or loss. Rather, their earnings may fluctuate
based on the work available and their willingness to work more.
[[Page 62240]]
Because of this lack of managerial skill affecting opportunity for
profit or loss, this factor indicates employee status.
In contrast, a worker provides landscaping services directly to
corporate clients, including Company A. The worker produces their own
advertising, negotiates contracts, decides which jobs to perform and
when to perform them, and decides when and whether to hire helpers to
assist with the work. This worker exercises managerial skill that
affects their opportunity for profit or loss, indicating independent
contractor status.
2. Investments by the Worker and the Employer (Proposed Sec.
795.110(b)(2))
The Department is proposing to treat investment as a standalone
factor in the economic reality analysis (consistent with the
Department's approach prior to the 2021 IC Rule and with the approach
of most courts) instead of considering investment within the
opportunity for profit or loss factor (as Sec. 795.105(d)(1)(ii) in
the 2021 IC Rule does). Proposed Sec. 795.110(b)(2) states that an
investment borne by the worker must be capital or entrepreneurial in
nature to indicate independent contractor status. Such investments, for
example, generally support an independent business and serve a
business-like function, such as increasing the worker's ability to do
different types of or more work, reducing costs, or extending market
reach, thus suggesting that the worker is in business for themself.
Proposed Sec. 795.110(b)(2) further notes that costs borne by the
worker simply to perform their job (e.g., tools and equipment to
perform a specific job and the worker's labor) are not evidence of
capital or entrepreneurial investment. Finally, proposed Sec.
795.110(b)(2) provides that the worker's investments should be
evaluated on a relative basis with the employer's investments, a
position taken by many circuit courts of appeals.
From its earliest applications of the economic reality analysis
until the 2021 IC Rule, the Department consistently identified the
worker's investment as a separate factor in the analysis.\277\
Beginning with the Supreme Court's decision in Silk,\278\ courts with
the exception of the Second and D.C. Circuits have almost universally
identified the worker's investment as a separate factor.\279\ Breaking
from this longstanding approach, the 2021 IC Rule stated that
investment is considered as part of the opportunity for profit or loss
factor: ``[T]he Department adopts its proposal, consistent with Second
Circuit caselaw, to consider investment as part of the opportunity
factor.'' \280\ The Department further stated in the 2021 IC Rule that
courts consider opportunity for profit or loss and investment to be
related and combining them into one factor eliminates duplicative
analyses.\281\
---------------------------------------------------------------------------
\277\ See, e.g., WHD Op. Ltr. (Aug. 13, 1954); WHD Op. Ltr.
FLSA-795 (Sept. 30, 1964); WHD Op. Ltr. (Oct. 12, 1965); WHD Op.
Ltr. (Sept. 12, 1969); WHD Op. Ltr. WH-476, 1978 WL 51437, at *1
(Oct. 19, 1978); WHD Op. Ltr., 1986 WL 1171083, at *1 (Jan. 14,
1986); WHD Op. Ltr., 1986 WL 740454, at *1 (June 23, 1986); WHD Op.
Ltr., 1995 WL 1032469, at *1 (Mar. 2, 1995); WHD Op. Ltr., 1995 WL
1032489, at *1 (June 5, 1995); WHD Op. Ltr., 1999 WL 1788137, at *1
(July 12, 1999); WHD Op. Ltr., 2000 WL 34444352, at *1 (July 5,
2000); WHD Op. Ltr., 2000 WL 34444342, at *3 (Dec. 7, 2000); WHD Op.
Ltr., 2002 WL 32406602, at *2 (Sept. 5, 2002); WHD Fact Sheet #13,
``Employment Relationship Under the Fair Labor Standards Act
(FLSA)'' (July 2008); AI 2015-1 (available at 2015 WL 4449086)
(withdrawn June 7, 2017).
\278\ 331 U.S. 704 (1947).
\279\ See, e.g., DialAmerica, 757 F.2d at 1382; McFeeley, 825
F.3d at 241; Hobbs, 946 F.3d at 829; Off Duty Police, 915 F.3d at
1055; Lauritzen, 835 F.2d at 1534-35; Alpha & Omega, 39 F.4th at
1082; Driscoll, 603 F.2d at 754; Paragon, 884 F.3d at 1235;
Scantland,721 F.3d at 1311. The Second Circuit and the D.C. Circuit
are alone among the circuit courts of appeals in treating the
worker's opportunity for profit or loss and the worker's investment
as a single factor. See, e.g., Franze, 826 F. App'x at 76; Superior
Care, 840 F.2d at 1058-59; Morrison, 253 F.3d at 11 (citing Superior
Care, 840 F.2d at 1058-59).
\280\ 86 FR 1186.
\281\ Id. The 2021 IC Rule also cited Silk. Id. (citing Silk,
331 U.S. at 719). However, the Court in Silk merely decided that
case based on its facts, 331 U.S. at 716-19, and in no way indicated
that ``opportunities for profit or loss'' and ``investment in
facilities'' must be combined into one factor when reciting each of
the relevant factors separately, id. at 716.
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The Department believes that the 2021 IC Rule's approach of
considering investment ``as part of'' the opportunity for profit or
loss factor is flawed. Section 795.105(d)(1)(ii) of the 2021 IC Rule
states that the opportunity for profit or loss factor indicates
independent contractor status if the worker exercises initiative or if
the worker manages their investment in the business.\282\ Under the
provision, the worker ``does not need to have an opportunity for profit
or loss based on both for this factor to weigh towards the individual
being an independent contractor.'' \283\ Thus, if either initiative or
investment suggests independent contractor status, the other cannot
change that outcome even if it suggests employee status. For example,
under the 2021 IC Rule, if the worker makes no investment in the work
but exercises initiative, then the opportunity for profit or loss
factor indicates independent contractor status. In effect, that the
worker makes no capital or entrepreneurial investment (a fact that
indicates employee status) is eliminated from the analysis under that
rule. Put another way, if a worker has an opportunity for profit or
loss based on initiative, the opportunity for profit or loss factor
under the 2021 IC Rule indicates independent contractor status, and the
investment factor cannot reverse o
[…truncated; see source link]Indexed from Federal Register on October 13, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.