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Rule2024-00067

Employee or Independent Contractor Classification Under the Fair Labor Standards Act

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Published

January 10, 2024

Effective

March 11, 2024

Issuing agencies

Labor DepartmentWage and Hour Division

Abstract

The U.S. Department of Labor (the Department) is modifying Wage and Hour Division regulations to replace its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA or Act) with an analysis that is more consistent with judicial precedent and the Act's text and purpose.

Full Text

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<title>Federal Register, Volume 89 Issue 7 (Wednesday, January 10, 2024)</title>
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[Federal Register Volume 89, Number 7 (Wednesday, January 10, 2024)]
[Rules and Regulations]
[Pages 1638-1743]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-00067]

[[Page 1637]]

Vol. 89

Wednesday,

No. 7

January 10, 2024

Part II

Department of Labor

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Wage and Hour Division

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29 CFR Parts 780, 788, and 795

Employee or Independent Contractor Classification Under the Fair Labor
Standards Act; Final Rule

Federal Register / Vol. 89 , No. 7 / Wednesday, January 10, 2024 /
Rules and Regulations

[[Page 1638]]

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 780, 788, and 795

RIN 1235-AA43

Employee or Independent Contractor Classification Under the Fair
Labor Standards Act

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Final rule.

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SUMMARY: The U.S. Department of Labor (the Department) is modifying
Wage and Hour Division regulations to replace its analysis for
determining employee or independent contractor classification under the
Fair Labor Standards Act (FLSA or Act) with an analysis that is more
consistent with judicial precedent and the Act's text and purpose.

DATES: This final rule is effective on March 11, 2024.

FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division
(WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue
NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a
toll-free number). Alternative formats are available upon request by
calling 1-866-487-9243. If you are deaf, hard of hearing, or have a
speech disability, please dial 7-1-1 to access telecommunications relay
services.
Questions of interpretation and/or enforcement of the agency's
regulations may be directed to the nearest WHD district office. Locate
the nearest office by calling WHD's toll-free help line at (866) 4US-
WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time
zone, or logging onto WHD's website for a nationwide listing of WHD
district and area offices at <a href="https://www.dol.gov/whd/america2.htm">https://www.dol.gov/whd/america2.htm</a>.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

This final rule addresses how to determine whether a worker is
properly classified as an employee or independent contractor under the
Fair Labor Standards Act (FLSA or Act). Congress enacted the FLSA in
1938 to eliminate ``labor conditions detrimental to the maintenance of
the minimum standard of living necessary for health, efficiency, and
general well-being of workers.'' \1\ To this end, the FLSA generally
requires covered employers to pay nonexempt employees at least the
Federal minimum wage for all hours worked and at least one and one-half
times the employee's regular rate of pay for every hour worked over 40
in a workweek. The Act also requires covered employers to maintain
certain records regarding employees and prohibits retaliation against
employees who are discharged or discriminated against after, for
example, filing a complaint regarding their pay. However, the FLSA's
protections do not apply to independent contractors.
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\1\ 29 U.S.C. 202.
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As used in this rule, the term ``independent contractor'' refers to
workers who, as a matter of economic reality, are not economically
dependent on an employer for work and are in business for themselves.
Such workers play an important role in the economy and are commonly
referred to by different names, including independent contractor, self-
employed, and freelancer. This rule is not intended to disrupt the
businesses of independent contractors who are, as a matter of economic
reality, in business for themselves.
Determining whether an employment relationship exists under the
FLSA begins with the Act's definitions. Although the FLSA does not
define the term ``independent contractor,'' it contains expansive
definitions of ``employer,'' ``employee,'' and ``employ.'' ``Employer''
is defined to ``include[ ] any person acting directly or indirectly in
the interest of an employer in relation to an employee,'' ``employee''
is defined as ``any individual employed by an employer,'' and
``employ'' is defined to ``include[ ] to suffer or permit to work.''
\2\ As detailed below, courts have developed an analysis that
recognizes that independent contractors are not encompassed within
these definitions.
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\2\ 29 U.S.C. 203(d), (e)(1), (g).
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Since the 1940s, the Department and courts have applied an economic
reality test to determine whether a worker is an employee or an
independent contractor under the FLSA, grounded in the Act's broad
understanding of employment. The ultimate inquiry is whether, as a
matter of economic reality, the worker is economically dependent on the
employer for work (and is thus an employee) or is in business for
themself (and is thus an independent contractor). In assessing economic
dependence, courts and the Department have historically conducted a
totality-of-the-circumstances analysis, considering multiple factors to
determine whether a worker is an employee or an independent contractor,
with no factor or factors having predetermined weight. There is
significant and widespread uniformity among federal courts of appeals
in the adoption and application of the economic reality test, although
there is slight variation as to the number of factors considered or how
the factors are framed. These factors generally include the opportunity
for profit or loss, investment, permanency, control, whether the work
is an integral part of the employer's business, and skill and
initiative.
In January 2021, the Department published a rule titled
``Independent Contractor Status Under the Fair Labor Standards Act''
(2021 IC Rule), providing guidance on the classification of independent
contractors under the FLSA applicable to workers and businesses in any
industry.\3\ The 2021 IC Rule marked a departure from the consistent,
longstanding adoption and application of the economic reality test by
courts and the Department of how to determine whether a worker is an
employee or an independent contractor under the FLSA. It identified
five economic reality factors to guide the inquiry into a worker's
status as an employee or independent contractor.\4\ Two of the five
identified factors--the nature and degree of control over the work and
the worker's opportunity for profit or loss--were designated as ``core
factors'' that were the most probative and carried greater weight in
the analysis. The 2021 IC Rule stated that if these two core factors
pointed towards the same classification, there was a substantial
likelihood that it was the worker's accurate classification.\5\ The
2021 IC Rule also identified three less probative non-core factors: the
amount of skill required for the work, the degree of permanence of the
working relationship between the worker and the potential employer, and
whether the work is part of an integrated unit of production.\6\ The
2021 IC Rule stated that it was ``highly unlikely'' that these three
non-core factors could outweigh the combined probative value of the two
core factors.\7\ The 2021 IC Rule also

[[Page 1639]]

limited consideration of investment and initiative to the opportunity
for profit or loss factor in a way that narrowed, in at least some
circumstances, the extent to which investment and initiative are
considered. The facts to be considered under other factors (such as
control) were also narrowed, and the factor that considers whether the
work is integral to the employer's business was limited to whether the
work was part of an integrated unit of production.\8\ Finally, the 2021
IC Rule provided that the actual practice of the parties involved was
more relevant than what may be contractually or theoretically
possible.\9\
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\3\ 86 FR 1168. The Office of the Federal Register did not amend
the Code of Federal Regulations (CFR) to include the regulations
from the 2021 IC Rule because, as explained elsewhere in this
section, the Department first delayed and then withdrew the 2021 IC
Rule before it became effective. A district court decision later
vacated the Department's rules to delay and withdraw the 2021 IC
Rule, and the Department has (since that decision) conducted
enforcement in accordance with that decision while the 2021 IC Rule
has been in effect.
\4\ Id. at 1246-47 (Sec. 795.105(d)).
\5\ Id. at 1246 (Sec. 795.105(c)).
\6\ Id. at 1247 (Sec. 795.105(d)(2)).
\7\ Id. at 1246 (Sec. 795.105(c)).
\8\ Id. at 1246-47 (Sec. 795.105(d)(1) and (d)(2)(iii)).
\9\ Id. at 1247-48 (Sec. 795.110).
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The effective date of the 2021 IC Rule was March 8, 2021. On March
4, 2021, the Department published a rule delaying the effective date of
the 2021 IC Rule (Delay Rule) and on May 6, 2021, it published a rule
withdrawing the 2021 IC Rule (Withdrawal Rule). On March 14, 2022, in a
lawsuit challenging the Department's delay and withdrawal of the 2021
IC Rule, a Federal district court in the Eastern District of Texas
issued a decision vacating the Delay and Withdrawal Rules.\10\ The
district court concluded that the 2021 IC Rule became effective on the
original effective date of March 8, 2021.
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\10\ See Coal. for Workforce Innovation v. Walsh, No. 1:21-CV-
130, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022), appeal filed, No.
22-40316 (5th Cir. May 13, 2022) (``CWI v. Walsh'').
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On October 13, 2022, the Department published a Notice of Proposed
Rulemaking (NPRM) regarding employee or independent contractor
classification under the FLSA, proposing to rescind and replace the
2021 IC Rule.\11\ The Department explained in its proposal that upon
further consideration, the Department believed that the 2021 IC Rule
did not fully comport with the FLSA's text and purpose as interpreted
by courts and departed from decades of case law applying the economic
reality test. The NPRM identified provisions of the 2021 IC Rule that
were in tension with this case law--such as designating two ``core
factors'' as most probative and predetermining that they carry greater
weight in the analysis, considering investment and initiative only in
the opportunity for profit or loss factor, and excluding consideration
of whether the work performed is central or important to the employer's
business. The NPRM stated that these provisions narrowed the economic
reality test by limiting the facts that may be considered as part of
the test, facts which the Department believes are relevant in
determining whether a worker is economically dependent on the employer
for work or in business for themself.
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\11\ 87 FR 62218.
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After careful consideration, the Department decided it was
appropriate to move forward with a proposed rescission of the 2021 IC
Rule and a replacement regulation. As explained in the NPRM, the
Department believed that retaining the 2021 IC Rule would have a
confusing and disruptive effect on workers and businesses alike due to
its departure from case law describing and applying the multifactor
economic reality test as a totality-of-the-circumstances test. Further,
because the 2021 IC Rule departed from legal precedent, it was not
clear whether courts would adopt its analysis--a question that could
take years of appellate litigation in different federal courts of
appeals to sort out, resulting in more uncertainty as to the applicable
test. The Department also explained in the NPRM that it believed the
2021 IC Rule's departure from the longstanding test applied by the
courts could result in greater confusion among employers in applying
the new analysis, which could place workers at greater risk of
misclassification as independent contractors due to the new analysis
being applied improperly, and thus could negatively affect both the
workers and competing businesses that correctly classify their
employees.
The initial deadline for interested parties to submit comments on
the NPRM was November 28, 2022. In response to requests for an
extension of the time period for filing written comments, the
Department lengthened the comment period an additional 15 days to
December 13, 2022, resulting in a total comment period of 61 days.\12\
The Department received approximately 55,400 comments on the proposed
rule.
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\12\ 87 FR 64749.
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As described below, after considering the views expressed by
commenters, the Department is finalizing its proposal with some
modifications. For the reasons explained in the NPRM and detailed in
section III, the Department concludes that it is appropriate to rescind
the 2021 IC Rule and set forth an analysis for determining employee or
independent contractor status under the Act that is more consistent
with existing judicial precedent and the Department's longstanding
guidance prior to the 2021 IC Rule.

Summary of the Major Provisions of the Final Rule

In addition to rescinding the 2021 IC Rule, the Department is
adding part 795. Specifically, this final rule modifies the regulatory
text published on January 7, 2021, at 86 FR 1246 through 1248,
addressing whether workers are employees or independent contractors
under the FLSA. Instead of using the ``core factors'' set forth in the
2021 IC Rule, this final rule returns to a totality-of-the-
circumstances analysis of the economic reality test in which the
factors do not have a predetermined weight and are considered in view
of the economic reality of the whole activity. In addition to this
critical reversion to the longstanding analysis that preceded the 2021
IC Rule, this final rule returns to the longstanding framing of
investment as its own separate factor, and the integral factor as one
that looks to whether the work performed is an integral part of a
potential employer's business rather than part of an integrated unit of
production. The final rule also provides broader discussion of how
scheduling, remote supervision, price setting, and the ability to work
for others should be considered under the control factor, and it allows
for consideration of reserved rights while removing the provision in
the 2021 IC Rule that minimized the relevance of retained rights.
Further, the final rule discusses exclusivity in the context of the
permanency factor, and initiative in the context of the skill factor.
While the above modifications from the 2021 IC Rule were all
proposed in the NPRM, the Department also made several adjustments to
the proposed regulations after consideration of the comments received.
Notably, as discussed further below, the portion of the Department's
proposal for the control factor stating that control implemented for
purposes of complying with legal obligations may be indicative of
control generated many comments. The Department is modifying the
proposed language to address confusion and concern regarding potential
unintended consequences.
Additionally, the Department received many comments regarding the
investment factor. In response to a number of comments concerning the
Department's proposal to consider the relative investments of the
worker and the potential employer, the Department is clarifying in the
final rule that consideration of the relative investments of the worker
and the potential employer should be compared not only in terms of
dollar value or size of the investments, but should focus on whether
the worker is making similar types of investments as the employer
(albeit on a smaller scale) that would suggest that the worker is
operating independently. Further, in response to

[[Page 1640]]

comments regarding the unilateral nature of some costs imposed by
potential employers on workers, which could appear to be capital or
entrepreneurial in nature, the Department is including language
recognizing that costs that are unilaterally imposed are not indicative
of a worker's capital or entrepreneurial investment.
Further clarifications and adjustments to the regulatory text that
reflect a range of comments made by employers; workers; those who view
themselves as independent contractors, self-employed, or freelancers;
labor unions; legal services providers; policy and research
organizations; and counsel for both businesses and employees have been
made as well and are discussed under the section-by-section analysis
that follows.
The final rule reiterates that part 795 contains the Department's
general interpretations for determining whether workers are employees
or independent contractors under the FLSA. Further, it reiterates that
economic dependence is the ultimate inquiry, meaning that a worker is
an independent contractor as opposed to an employee under the Act if
the worker is, as a matter of economic reality, in business for
themself. The final rule explains that the economic reality test is
comprised of multiple factors that are tools or guides to conduct the
totality-of-the-circumstances analysis to determine economic
dependence. The six factors described in the regulatory text should
guide an assessment of the economic realities of the working
relationship, but no one factor or subset of factors is necessarily
dispositive. The final rule provides guidance on how six economic
reality factors should be considered--opportunity for profit or loss
depending on managerial skill, investments by the worker and the
potential employer, the degree of permanence of the work relationship,
the nature and degree of control, the extent to which the work
performed is an integral part of the potential employer's business, and
skill and initiative. Just as under the 2021 IC Rule, and in accordance
with longstanding precedent and guidance, additional factors may also
be considered if they are relevant to the overall question of economic
dependence.
The Department recognizes that this return to a totality-of-the-
circumstances analysis in which the economic reality factors are not
assigned a predetermined weight and each factor is given full
consideration represents a change from the 2021 IC Rule. However, the
Department believes that this approach is the most beneficial because
it is aligned with the Department's decades-long approach (prior to the
2021 IC Rule) as well as with federal appellate case law, and is more
consistent with the Act's text and purpose as interpreted by the
courts. The Department believes that this final rule will provide more
consistent guidance to employers as they determine whether workers are
economically dependent on the employer for work or are in business for
themselves, as well as useful guidance to workers on whether they are
correctly classified as employees or independent contractors.
Accordingly, the Department believes that the guidance provided in this
final rule will help protect employees from misclassification.
Moreover, this final rule recognizes that independent contractors serve
an important role in our economy and provides a consistent approach for
those businesses that engage (or wish to engage) independent
contractors as well as for those who wish to work as independent
contractors.

II. Background

A. Relevant FLSA Definitions

Enacted in 1938, the FLSA generally requires that covered employers
pay nonexempt employees at least the Federal minimum wage (presently
$7.25 per hour) for every hour worked, and at least one and one-half
times the employee's regular rate of pay for all hours worked beyond 40
in a workweek.\13\ Among other protections, the FLSA also regulates the
employment of children,\14\ prohibits employers from keeping employee
tips,\15\ and requires employers to provide reasonable break time and a
place for covered nursing employees to express breast milk at work.\16\
Finally, the FLSA requires covered employers to ``make, keep, and
preserve'' certain records regarding employees, and prohibits
retaliation against employees who engaged in protected activity, such
as filing a complaint regarding their pay.\17\
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\13\ 29 U.S.C. 206(a), 207(a).
\14\ 29 U.S.C. 212.
\15\ 29 U.S.C. 203(m)(2)(B).
\16\ See 29 U.S.C. 218d (added by the PUMP for Nursing Mothers
Act, Public Law 117-328, 136 Stat. 4459 (Dec. 29, 2022)).
\17\ 29 U.S.C. 211(c), 215(a)(3).
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The FLSA's wage-and-hour protections apply to employees. In
relevant part, section 3(e) of the Act defines the term ``employee'' as
``any individual employed by an employer.'' \18\ Section 3(d) defines
the term ``employer'' to ``includ[e] any person acting directly or
indirectly in the interest of an employer in relation to an employee.''
\19\ Finally, section 3(g) provides that the term `` `[e]mploy'
includes to suffer or permit to work.'' \20\
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\18\ 29 U.S.C. 203(e)(1).
\19\ 29 U.S.C. 203(d).
\20\ 29 U.S.C. 203(g).
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Interpreting these provisions, the U.S. Supreme Court has stated
that ``[a] broader or more comprehensive coverage of employees within
the stated categories would be difficult to frame,'' and that ``the
term `employee' under the FLSA had been given `the broadest definition
that has ever been included in any one act.' '' \21\ In particular, the
Court has noted the ``striking breadth'' of section 3(g)'s ``suffer or
permit'' language, observing that it ``stretches the meaning of
`employee' to cover some parties who might not qualify as such under a
strict application of traditional agency law principles.'' \22\ Thus,
the Court has repeatedly observed that the FLSA's scope of employment
is broader than the common law standard often applied to determine
employment status under other Federal laws.\23\
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\21\ United States v. Rosenwasser, 323 U.S. 360, 362, 363 n.3
(1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Hugo
Black)).
\22\ Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992).
\23\ Id.; see also, e.g., Walling v. Portland Terminal Co., 330
U.S. 148, 150-51 (1947) (``[I]n determining who are `employees'
under the Act, common law employee categories or employer-employee
classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive
enough to require its application to many persons and working
relationships, which prior to this Act, were not deemed to fall
within an employer-employee category.'') (citation omitted).
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At the same time, the Supreme Court has recognized that the Act was
``not intended to stamp all persons as employees.'' \24\ Among other
categories of workers excluded from FLSA coverage, the Court has
recognized that ``independent contractors'' fall outside the Act's
broad understanding of employment.\25\ Accordingly, the FLSA does not
require covered employers to pay an independent contractor the minimum
wage or overtime pay under sections 6(a) and 7(a) of the Act, or to
keep records regarding an independent contractor's work under section
11(c). However, merely ``putting on an `independent contractor' label
does not take [a] worker from the protection of the [FLSA].'' \26\
Courts have thus recognized a need to delineate between

[[Page 1641]]

employees, who fall under the protections of the FLSA, and independent
contractors, who do not.
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\24\ Portland Terminal, 330 U.S. at 152.
\25\ See, e.g., Rutherford Food Corp. v. McComb, 331 U.S. 722,
729 (1947) (noting that ``[t]here may be independent contractors who
take part in production or distribution who would alone be
responsible for the wages and hours of their own employees'').
\26\ Id.
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The FLSA does not define the term ``independent contractor.'' While
it is clear that section 3(g)'s ``suffer or permit'' language
contemplates a broader coverage of workers compared to what exists
under the common law, ``there is in the [FLSA] no definition that
solves problems as to the limits of the employer-employee relationship
under the Act.'' \27\ Therefore, in articulating the distinction
between FLSA-covered employees and independent contractors, courts rely
on a broad, multifactor ``economic reality'' analysis derived from
judicial precedent.\28\ Unlike the control-focused analysis for
independent contractors applied under the common law,\29\ the economic
reality test focuses more broadly on a worker's economic dependence on
an employer, considering the totality of the circumstances.
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\27\ Id. at 728.
\28\ Courts invoke the concept of ``economic reality'' in FLSA
employment contexts beyond independent contractor status. However,
as in prior rulemakings, this final rule refers to the ``economic
reality'' analysis or test for independent contractors as a
shorthand reference to the independent contractor analysis used by
courts for FLSA purposes.
\29\ In distinguishing between employees and independent
contractors under the common law, courts evaluate ``the hiring
party's right to control the manner and means by which the product
is accomplished.'' Community for Creative Non-Violence v. Reid, 490
U.S. 730, 751 (1989). ``Among the other factors relevant to this
inquiry are the skill required; the source of the instrumentalities
and tools; the location of the work; the duration of the
relationship between the parties; whether the hiring party has the
right to assign additional projects to the hired party; the extent
of the hired party's discretion over when and how long to work; the
method of payment; the hired party's role in hiring and paying
assistants; whether the work is part of the regular business of the
hiring party; whether the hiring party is in business; the provision
of employee benefits; and the tax treatment of the hired party.''
Id. (footnotes omitted).
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B. Development of the Economic Reality Test

1. Supreme Court Development of the Economic Reality Test
In a series of cases from 1944 to 1947, the U.S. Supreme Court
considered employee or independent contractor status under three
different Federal statutes that were enacted during the 1930s New Deal
Era--the FLSA, the National Labor Relations Act (NLRA), and the Social
Security Act (SSA)--and applied an economic reality test under all
three laws.
In the first of these cases, NLRB v. Hearst Publications, Inc., 322
U.S. 111 (1944), the Court considered the meaning of ``employee'' under
the NLRA, which defined the term to ``include any employee.'' \30\ In
relevant part, the Hearst Court rejected application of the common law
standard, noting that ``the broad language of the [NLRA's] definitions
. . . leaves no doubt that its applicability is to be determined
broadly, in doubtful situations, by underlying economic facts rather
than technically and exclusively by previously established legal
classifications.'' \31\
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\30\ 322 U.S. at 118-20; 29 U.S.C. 152(3).
\31\ Id. at 123-25, 129.
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On June 16, 1947, the Supreme Court decided United States v. Silk,
331 U.S. 704 (1947), addressing the distinction between employees and
independent contractors under the SSA. The Court favorably summarized
Hearst as setting forth ``economic reality,'' as opposed to ``technical
concepts'' of the common law standard alone, as the framework for
determining workers' classification, but acknowledged that not ``all
who render service to an industry are employees.'' \32\ Although the
Court found it to be ``quite impossible to extract from the [SSA] a
rule of thumb to define the limits of the employer-employe[e]
relationship,'' the Court identified five factors as ``important for
decision'': ``degrees of control, opportunities for profit or loss,
investment in facilities, permanency of relation[,] and skill required
in the claimed independent operation.'' \33\ The Court added that
``[n]o one [factor] is controlling nor is the list complete.'' \34\ The
Court went on to note that the workers in that case were ``from one
standpoint an integral part of the businesses'' of the employer,
supporting a conclusion that some of the workers in that case were
employees.\35\
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\32\ 331 U.S. at 712-14.
\33\ Id. at 716.
\34\ Id.
\35\ Id.
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The same day that the Supreme Court issued its decision in Silk, it
also issued Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947), in
which it affirmed a federal court of appeals decision that analyzed an
FLSA employment relationship based on its economic realities.\36\
Describing the FLSA as ``a part of the social legislation of the 1930s
of the same general character as the [NLRA] and the [SSA],'' the Court
opined that ``[d]ecisions that define the coverage of the employer-
Employee relationship under the Labor and Social Security acts are
persuasive in the consideration of a similar coverage under the
[FLSA].'' \37\ Accordingly, the Court rejected an approach based on
``isolated factors'' and again considered ``the circumstances of the
whole activity.'' \38\ The Court considered several of the factors that
it listed in Silk as they related to meat boners on a slaughterhouse's
production line, ultimately determining that the boners were
employees.\39\ The Court noted, among other things, that the boners did
a specialty job on the production line, had no business organization
that could shift to a different slaughter-house, and were best
characterized as ``part of the integrated unit of production under such
circumstances that the workers performing the task were employees of
the establishment.'' \40\
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\36\ 331 U.S. at 727.
\37\ Id. at 723-24.
\38\ Id. at 730.
\39\ See id.
\40\ Id. at 729-30.
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On June 23, 1947, one week after the Silk and Rutherford decisions,
the Court decided Bartels v. Birmingham, 332 U.S. 126 (1947), another
case involving employee or independent contractor status under the SSA.
Here again, the Court rejected application of the common law control
test, explaining that, under the SSA, employee status ``was not to be
determined solely by the idea of control which an alleged employer may
or could exercise over the details of the service rendered to his
business by the worker.'' \41\ Rather, employees under ``social
legislation'' such as the SSA are ``those who as a matter of economic
reality are dependent upon the business to which they render service.''
\42\ Thus, in addition to control, ``permanency of the relation, the
skill required, the investment [in] the facilities for work and
opportunities for profit or loss from the activities were also
factors'' to consider.\43\ Although the Court identified these specific
factors as relevant to the analysis, it explained that ``[i]t is the
total situation that controls'' the worker's classification under the
SSA.\44\
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\41\ 332 U.S. at 130.
\42\ Id.
\43\ Id.
\44\ Id.
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Following these Supreme Court decisions, Congress responded with
separate legislation to amend the NLRA and SSA's employment
definitions. First, in 1947, Congress amended the NLRA's definition of
``employee'' to clarify that the term ``shall not include any
individual having the status of an independent contractor.'' \45\ The

[[Page 1642]]

following year, Congress similarly amended the SSA to exclude from
employment ``any individual who, under the usual common-law rules
applicable in determining the employer-employee relationship, has the
status of an independent contractor.'' \46\ The Supreme Court
interpreted the amendments to the NLRA as having the same effect as the
explicit definition included in the SSA, which was to ensure that
employment status would be determined by common law agency principles,
rather than an economic reality test.\47\
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\45\ Labor Management Relations (Taft-Hartley) Act, 1947, Public
Law 80-101, sec. 101, 61 Stat. 136, 137-38 (1947) (codified as
amended at 29 U.S.C. 152(3)).
\46\ SSA of 1948, Public Law 80-642, sec. 2(a), 62 Stat. 438
(1948) (codified as amended at 26 U.S.C. 3121(d)).
\47\ See NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256
(1968) (noting that ``[t]he obvious purpose of'' the amendment to
the definition of employee under the NLRA ``was to have the Board
and the courts apply general agency principles in distinguishing
between employees and independent contractors under the Act'').
---------------------------------------------------------------------------

Despite its amendments to the NLRA and SSA in response to Hearst
and Silk, Congress did not similarly amend the FLSA following the
Rutherford decision. Thus, when the Supreme Court revisited independent
contractor status under the FLSA several years later in Goldberg v.
Whitaker House Co-op., Inc., 366 U.S. 28 (1961), the Court affirmed
that `` `economic reality' rather than `technical concepts' '' remained
``the test of employment'' under the FLSA,\48\ quoting from its earlier
decisions in Silk and Rutherford. The Court in Whitaker House found
that certain homeworkers were ``not self-employed . . . [or]
independent, selling their products on the market for whatever price
they can command,'' but instead were ``regimented under one
organization, manufacturing what the organization desires and receiving
the compensation the organization dictates.'' \49\ Such facts, among
others, established that the homeworkers at issue were FLSA-covered
employees.
---------------------------------------------------------------------------

\48\ 366 U.S. at 33 (quoting from Silk, 331 U.S. at 713, and
Rutherford, 331 U.S. at 729).
\49\ Id. at 32.
---------------------------------------------------------------------------

Subsequently, in Nationwide Mutual Insurance Co. v. Darden, 503
U.S. 318 (1992), the Court again endorsed application of the economic
reality test to evaluate independent contractor status under the FLSA,
citing to Rutherford and emphasizing the broad ``suffer or permit''
language codified in section 3(g) of the Act.\50\
---------------------------------------------------------------------------

\50\ Darden, 503 U.S. at 325-26.
---------------------------------------------------------------------------

2. Application of the Economic Reality Test by Federal Courts of
Appeals
Since Rutherford, federal courts of appeals have applied the
economic reality test to distinguish independent contractors from
employees who are entitled to the FLSA's protections. Recognizing that
the ``suffer or permit'' language in section 3(g) of the FLSA provides
a more expansive scope of employment than that which exists at common
law, courts of appeals have followed the Supreme Court's instruction
that `` `employees are those who as a matter of economic realities are
dependent upon the business to which they render service.' '' \51\
---------------------------------------------------------------------------

\51\ Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir.
1976) (quoting Bartels, 332 U.S. at 130).
---------------------------------------------------------------------------

When determining whether a worker is an employee under the FLSA or
an independent contractor, federal courts of appeals apply an economic
reality test using the factors identified in Silk.\52\ No court of
appeals considers any one factor or combination of factors to
invariably predominate over the others.\53\ For example, the Eleventh
Circuit has explained that some of the factors ``which many courts have
used as guides in applying the economic reality test'' are: (1) the
degree of the alleged employer's right to control the manner in which
the work is to be performed; (2) the worker's opportunity for profit or
loss depending upon their managerial skill; (3) the worker's investment
in equipment or materials required for their task, or their employment
of helpers; (4) whether the service rendered requires a special skill;
(5) the degree of permanence of the working relationship; and (6) the
extent to which the service rendered is an integral part of the alleged
employer's business.\54\ Like other federal courts of appeals, the
Eleventh Circuit repeats the Supreme Court's explanation from Silk that
no one factor is controlling, nor is the list exhaustive.\55\
---------------------------------------------------------------------------

\52\ See Brock v. Superior Care, Inc., 840 F.2d 1054, 1058-59
(2d Cir. 1988); Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376,
1382-83 (3d Cir. 1985); McFeeley v. Jackson Street Ent., LLC, 825
F.3d 235, 241 (4th Cir. 2016); Pilgrim Equip., 527 F.2d at 1311;
Acosta v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th
Cir. 2019); Sec'y of Labor, U.S. Dep't of Labor v. Lauritzen, 835
F.2d 1529, 1534-35 (7th Cir. 1987); Walsh v. Alpha & Omega USA,
Inc., 39 F.4th 1078, 1082 (8th Cir. 2022); Real v. Driscoll
Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir. 1979); Acosta
v. Paragon Contractors Corp., 884 F.3d 1225, 1235 (10th Cir. 2018);
Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311-12 (11th Cir.
2013); Morrison v. Int'l Programs Consortium, Inc., 253 F.3d 5, 11
(D.C. Cir. 2001).
\53\ See, e.g., Parrish v. Premier Directional Drilling, L.P.,
917 F.3d 369, 380 (5th Cir. 2019) (stating that it ``is impossible
to assign to each of these factors a specific and invariably applied
weight'') (quoting Hickey v. Arkla Indus., Inc., 699 F.2d 748, 752
(5th Cir. 1983)); Scantland, 721 F.3d at 1312 n.2 (the relative
weight of each factor ``depends on the facts of the case'') (quoting
Santelices v. Cable Wiring, 147 F. Supp. 2d 1313, 1319 (S.D. Fla.
2001)); Martin v. Selker Bros., 949 F.2d 1286, 1293 (3d Cir. 1991)
(``It is a well-established principle that the determination of the
employment relationship does not depend on isolated factors . . .
neither the presence nor the absence of any particular factor is
dispositive.'').
\54\ Scantland, 721 F.3d at 1311-12.
\55\ Id. at 1312 n.2.
---------------------------------------------------------------------------

Some courts of appeals have applied the factors with some
variations. For example, the Fifth Circuit typically does not list the
``integral part'' factor as one of the considerations that guides its
analysis.\56\ However, recognizing that its list of enumerated factors
is not exhaustive, the Fifth Circuit has considered the extent to which
a worker's function is integral to a business as part of its economic
realities analysis.\57\ Similarly, the Second and D.C. Circuits vary in
that they describe the employee's opportunity for profit or loss and
the employee's investment as a single factor, but they still use the
same considerations as the other circuits to inform their economic
realities analysis.\58\
---------------------------------------------------------------------------

\56\ See Pilgrim Equip., 527 F.2d at 1311.
\57\ See Hobbs v. Petroplex Pipe & Constr., Inc., 946 F.3d 824,
836 (5th Cir. 2020) (considering ``the extent to which the pipe
welders' work was `an integral part' of Petroplex's business'').
Every other federal court of appeals that has decided an FLSA case
involving alleged independent contractors includes the ``integral
part'' factor among the list of enumerated economic reality factors.
See the cases cited supra at n.52 other than Pilgrim Equipment.
\58\ See, e.g., Franze v. Bimbo Bakeries USA, Inc., 826 F. App'x
74, 76 (2d Cir. 2020); Superior Care, 840 F.2d at 1058-59. The D.C.
Circuit has adopted the Second Circuit's articulation of the
factors, including treating opportunity for profit or loss and
investment as one factor. See Morrison, 253 F.3d at 11 (citing
Superior Care, 840 F.2d at 1058-59).
---------------------------------------------------------------------------

In sum, since the 1940s, federal courts have analyzed the question
of employee or independent contractor status under the FLSA using a
multifactor, totality-of-the-circumstances economic reality test, with
no factor or factors being dispositive. The courts have examined the
economic realities of the employment relationship to determine whether
the worker is economically dependent on the employer for work or is in
business for themself, even if they have varied slightly in their
articulations of the factors. Despite such variation, all courts have
looked to the factors first articulated in Silk as useful guideposts
while acknowledging that those factors are not exhaustive and should
not be applied mechanically.
3. The Department's Application of the Economic Reality Test
The Department has applied a multifactor economic reality test
since the Supreme Court's opinions in Rutherford and Silk. For example,
on June 23, 1949, the Wage and Hour Division (WHD) issued an opinion
letter

[[Page 1643]]

distilling six ``primary factors which the Court considered
significant'' in Rutherford and Silk: ``(1) the extent to which the
services in question are an integral part of the `employer[']s'
business; (2) the amount of the so-called `contractor's' investment in
facilities and equipment; (3) the nature and degree of control by the
principal; (4) opportunities for profit and loss; . . . (5) the amount
of initiative judgment or foresight required for the success of the
claimed independent enterprise[;] and [(6)] permanency of the
relation.'' \59\ The guidance cautioned that no single factor is
controlling, and ``[o]rdinarily a definite decision as to whether one
is an employee or an independent contractor under the [FLSA] cannot be
made in the absence of evidence as to [the worker's] actual day-to-day
working relationship with [their] principal. Clearly a written contract
does not always reflect the true situation.'' \60\
---------------------------------------------------------------------------

\59\ WHD Op. Ltr. (June 23, 1949).
\60\ Id.
---------------------------------------------------------------------------

Subsequent WHD opinion letters addressing employee or independent
contractor status under the FLSA have provided similar recitations of
the Silk factors, sometimes omitting one or more of the six factors
described in the 1949 opinion letter, and sometimes adding (or
substituting) a seventh factor: the worker's ``degree of independent
business organization and operation.'' \61\ Numerous opinion letters
have emphasized that employment status is ``not determined by the
common law standards relating to master and servant,'' and that ``[t]he
degree of control retained by the principal has been rejected as the
sole criterion to be applied.'' \62\
---------------------------------------------------------------------------

\61\ See, e.g., WHD Op. Ltr. (Oct. 12, 1965) (discussing degree
of independent business organization); WHD Op. Ltr. (Feb. 18, 1969)
(same); WHD Op. Ltr. FLSA-314 (Dec. 21, 1982) (discussing three of
the Silk factors); WHD Op. Ltr. FLSA-164 (Jan. 18, 1990) (discussing
four of the Silk factors).
\62\ See, e.g., WHD Op. Ltr. FLSA-106 (Feb. 8, 1956); WHD Op.
Ltr. (July 20, 1965); WHD Op. Ltr. (Sept. 1, 1967); WHD Op. Ltr.
(Feb. 18, 1969); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981); WHD Op. Ltr.
(June 5, 1995).
---------------------------------------------------------------------------

In 1962, the Department revised the regulations in 29 CFR part 788,
which generally provides interpretive guidance on the FLSA's exemption
for employees in small forestry or lumbering operations, and added a
provision addressing the distinction between employees and independent
contractors.\63\ Citing to Silk, Rutherford, and Bartels, the
regulation advised that ``an employee, as distinguished from a person
who is engaged in a business of his own, is one who `follows the usual
path of an employee' and is dependent on the business which he
serves.'' \64\ To ``aid in assessing the total situation,'' the
regulation then identified a partial list of ``characteristics of the
two classifications which should be considered,'' including ``the
extent to which the services rendered are an integral part of the
principal's business; the permanency of the relationship; the
opportunities for profit or loss; the initiative, judgment or foresight
exercised by the one who performs the services; the amount of
investment; and the degree of control which the principal has in the
situation.'' \65\ Implicitly referring to the Bartels decision, the
regulation advised that ``[t]he Court specifically rejected the degree
of control retained by the principal as the sole criterion to be
applied.'' \66\
---------------------------------------------------------------------------

\63\ See 27 FR 8032; 29 U.S.C. 213(b)(28) (previously codified
at 29 U.S.C. 213(a)(15)).
\64\ 27 FR 8033 (29 CFR 788.16(a)).
\65\ Id.
\66\ 27 FR 8033-34 (29 CFR 788.16(a)).
---------------------------------------------------------------------------

In 1972, the Department added similar guidance on independent
contractor status at 29 CFR 780.330(b), in a provision addressing the
employment status of sharecroppers and tenant farmers.\67\ This
regulation was nearly identical to the independent contractor guidance
for the logging and forestry industry previously codified at 29 CFR
788.16(a), including an identical description of the same six economic
reality factors.\68\ Both provisions--29 CFR 780.330(b) and 788.16(a)--
remained unchanged until 2021.
---------------------------------------------------------------------------

\67\ See 37 FR 12084, 12102 (introducing 29 CFR 780.330(b)).
\68\ Id.
---------------------------------------------------------------------------

In 1997, the Department promulgated a regulation applying a
multifactor economic reality analysis for distinguishing between
employees and independent contractors under the Migrant and Seasonal
Agricultural Worker Protection Act (MSPA), which notably incorporates
the FLSA's ``suffer or permit'' definition of employment by
reference.\69\ The regulation (which has not since been amended)
advises that in determining if the farm labor contractor or worker is
an employee or an independent contractor, the ultimate question is the
economic reality of the relationship--whether there is economic
dependence upon the agricultural employer/association or farm labor
contractor, as appropriate. The regulation elaborates that ``[t]his
determination is based upon an evaluation of all of the circumstances,
including the following: (i) The nature and degree of the putative
employer's control as to the manner in which the work is performed;
(ii) The putative employee's opportunity for profit or loss depending
upon his/her managerial skill; (iii) The putative employee's investment
in equipment or materials required for the task, or the putative
employee's employment of other workers; (iv) Whether the services
rendered by the putative employee require special skill; (v) The degree
of permanency and duration of the working relationship; (vi) The extent
to which the services rendered by the putative employee are an integral
part of the putative employer's business.'' \70\ This description of
six economic reality factors was very similar to the earlier
description of six economic reality factors provided in 29 CFR
780.330(b) and 788.16(a).
---------------------------------------------------------------------------

\69\ See 62 FR 11734 (amending 29 CFR 500.20(h)(4)); see also 29
U.S.C. 1802(5) (``The term `employ' has the meaning given such term
under section 3(g) of the [FLSA]'').
\70\ 29 CFR 500.20(h)(4).
---------------------------------------------------------------------------

Also in 1997, WHD issued Fact Sheet #13, ``Employment Relationship
Under the Fair Labor Standards Act (FLSA).'' \71\ Like WHD opinion
letters, Fact Sheet #13 advises that an employee, as distinguished from
a person who is engaged in a business of their own, is one who, as a
matter of economic reality, follows the usual path of an employee and
is dependent on the business which they serve. The fact sheet
identifies the six familiar economic realities factors, as well as
consideration of the worker's degree of independent business
organization and operation.
---------------------------------------------------------------------------

\71\ See WHD Fact Sheet #13 (1997) https:/<a href="http://web.archive.org/web/19970112162517/http:/www.dol.gov/dol/esa/public/regs/compliance/whd/whdfs13.htm">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--apart
from the addition of an advisory note referring to the 2021 IC
Rule--is identical to the current March 2022 version (available at
<a href="https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship">https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship</a>).
---------------------------------------------------------------------------

On July 15, 2015, WHD issued additional subregulatory guidance,
Administrator's Interpretation No. 2015-1, ``The Application of the
Fair Labor Standards Act's `Suffer or Permit' Standard in the
Identification of Employees Who Are Misclassified as Independent
Contractors'' (AI 2015-1).\72\ AI 2015-1 reiterated that the economic
realities of the relationship are determinative and that the ultimate
inquiry is whether the worker is economically dependent on the employer
or truly in business for themself. It identified six economic realities
factors that followed the six factors used by most federal courts of

[[Page 1644]]

appeals: (1) the extent to which the work performed is an integral part
of the employer's business; (2) the worker's opportunity for profit or
loss depending on their managerial skill; (3) the extent of the
relative investments of the employer and the worker; (4) whether the
work performed requires special skills and initiative; (5) the
permanency of the relationship; and (6) the degree of control exercised
or retained by the employer. AI 2015-1 further emphasized that the
factors should not be applied in a mechanical fashion and that no one
factor was determinative. AI 2015-1 was withdrawn on June 7, 2017.\73\
---------------------------------------------------------------------------

\72\ AI 2015-1 is available at 2015 WL 4449086 (withdrawn June
7, 2017).
\73\ See News Release 17-0807-NAT, ``US Secretary of Labor
Withdraws Joint Employment, Independent Contractor Informal
Guidance'' (June 7, 2017), <a href="https://www.dol.gov/newsroom/releases/opa/opa20170607">https://www.dol.gov/newsroom/releases/opa/opa20170607</a> (last visited November 20, 2023).
---------------------------------------------------------------------------

In 2019, WHD issued an opinion letter, FLSA2019-6, regarding
whether workers who worked for companies operating self-described
``virtual marketplaces'' were employees covered under the FLSA or
independent contractors.\74\ Like the Department's prior guidance, the
letter stated that the determination depended on the economic realities
of the relationship and that the ultimate inquiry was whether the
workers depend on someone else's business or are in business for
themselves. The letter identified six economic realities factors that
differed slightly from the factors typically articulated by the
Department previously: (1) the nature and degree of the employer's
control; (2) the permanency of the worker's relationship with the
employer; (3) the amount of the worker's investment in facilities,
equipment, or helpers; (4) the amount of skill, initiative, judgment,
and foresight required for the worker's services; (5) the worker's
opportunities for profit or loss; and (6) the extent of the integration
of the worker's services into the employer's business.\75\ The
Department later withdrew Opinion Letter FLSA2019-6 on February 19,
2021.\76\
---------------------------------------------------------------------------

\74\ See WHD Op. Ltr. FLSA2019-6, 2019 WL 1977301 (Apr. 29,
2019) (withdrawn Feb. 19, 2021).
\75\ See id. at *4. Opinion Letter FLSA2019-6's ``extent of the
integration'' factor was a notable recharacterization of the factor
traditionally considered by courts and the Department regarding the
extent to which work is ``an integral part'' of an employer's
business.
\76\ See note at <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 November 20, 2023).
---------------------------------------------------------------------------

C. The Department's 2021 Independent Contractor Rule

1. Overview
On January 7, 2021, the Department published the 2021 IC Rule, with
an effective date of March 8, 2021.\77\ The 2021 IC Rule set forth
regulations to be added to a new part (part 795) in title 29 of the
Code of Federal Regulations titled ``Employee or Independent Contractor
Classification under the Fair Labor Standards Act,'' providing guidance
on the classification of independent contractors under the FLSA
applicable to workers and businesses in any industry.\78\ The 2021 IC
Rule also addressed the Department's prior interpretations of
independent contractor status in 29 CFR 780.330(b) and 788.16(a)--both
of which applied to specific industries--by cross-referencing part
795.\79\
---------------------------------------------------------------------------

\77\ See 86 FR 1168. The Department initially published a NPRM
soliciting public comment on September 25, 2020. See 85 FR 60600.
The final rule adopted ``the interpretive guidance set forth in the
[NPRM] largely as proposed.'' 86 FR 1168.
\78\ 86 FR 1246-48.
\79\ Id. at 1246.
---------------------------------------------------------------------------

The Department explained that the purpose of the 2021 IC Rule was
to establish a ``streamlined'' economic reality test that improved on
prior articulations described as ``unclear and unwieldy.'' \80\ It
stated that the existing economic reality test applied by the
Department and courts suffered from confusion regarding the meaning of
``economic dependence,'' a lack of focus in the multifactor balancing
test, and confusion and inefficiency caused by overlap between the
factors.\81\ The 2021 IC Rule asserted that shortcomings and
misconceptions associated with the economic reality test were more
apparent in the modern economy and that additional clarity would
promote innovation in work arrangements.
---------------------------------------------------------------------------

\80\ Id. at 1172, 1240.
\81\ Id. at 1172-75.
---------------------------------------------------------------------------

The 2021 IC Rule explained that independent contractors are not
employees under the FLSA and are therefore not subject to the Act's
minimum wage, overtime pay, or recordkeeping requirements. It adopted
an economic reality test under which a worker is an employee of an
employer if that worker is economically dependent on the employer for
work and is an independent contractor if the worker is in business for
themself.\82\
---------------------------------------------------------------------------

\82\ Id. at 1246 (Sec. 795.105(a)-(b)).
---------------------------------------------------------------------------

The 2021 IC Rule identified five economic realities factors to
guide the inquiry into a worker's status as an employee or independent
contractor, while acknowledging that the factors were not exhaustive,
no one factor was dispositive, and additional factors could be
considered if they ``in some way indicate whether the [worker] is in
business for him- or herself, as opposed to being economically
dependent on the potential employer for work.'' \83\ In contrast to
prior guidance and contrary to case law, the 2021 IC Rule designated
two of the five factors--the nature and degree of control over the work
and the worker's opportunity for profit or loss--as ``core factors''
that should carry greater weight in the analysis. Citing the goal of
providing greater certainty and predictability in the economic reality
test, the 2021 IC Rule determined that these two factors were more
probative of economic dependence than other economic realities factors.
If both of those core factors indicate the same classification, as
either an employee or an independent contractor, the 2021 IC Rule
stated that there was a ``substantial likelihood'' that the indicated
classification was the worker's correct classification.\84\
---------------------------------------------------------------------------

\83\ Id. at 1246-47 (Sec. 795.105(c) and (d)(2)(iv)).
\84\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------

The 2021 IC Rule's first core factor was the nature and degree of
control over the work, which indicated independent contractor status to
the extent that the worker exercised substantial control over key
aspects of the performance of the work, such as by setting their own
schedule, by selecting their projects, and/or through the ability to
work for others, which might include the potential employer's
competitors.\85\ The 2021 IC Rule provided that requiring the worker to
comply with specific legal obligations, satisfy health and safety
standards, carry insurance, meet contractually agreed upon deadlines or
quality control standards, or satisfy other similar terms that are
typical of contractual relationships between businesses (as opposed to
employment relationships) did not constitute control for purposes of
determining employee or independent contractor classification.\86\
---------------------------------------------------------------------------

\85\ Id. at 1246-47 (Sec. 795.105(d)(1)(i)).
\86\ Id.
---------------------------------------------------------------------------

The 2021 IC Rule's second core factor was the worker's opportunity
for profit or loss.\87\ The Rule stated that this factor indicates
independent contractor status to the extent the worker has an
opportunity to earn profits or incur losses based on either (1) their
exercise of initiative (such as managerial skill or business acumen or
judgment) or (2) their management of investment in or capital
expenditure on, for example, helpers or equipment or material to
further the work. While the effects of the worker's exercise of
initiative and management of investment were both considered under this
factor, the worker did not need to have an opportunity for profit or
loss based on both initiative

[[Page 1645]]

and management of investment for this factor to weigh towards the
worker being an independent contractor. This factor indicated employee
status to the extent that the worker was unable to affect their
earnings or was only able to do so by working more hours or faster.
---------------------------------------------------------------------------

\87\ Id. (Sec. 795.105(d)(1)(ii)).
---------------------------------------------------------------------------

The 2021 IC Rule also identified three other non-core factors: the
amount of skill required for the work, the degree of permanence of the
working relationship between the worker and the employer, and whether
the work is part of an integrated unit of production (which it
cautioned is ``different from the concept of the importance or
centrality of the individual's work to the potential employer's
business'').\88\ The 2021 IC Rule provided that these other factors
were ``less probative and, in some cases, may not be probative at all''
of economic dependence and were ``highly unlikely, either individually
or collectively, to outweigh the combined probative value of the two
core factors.'' \89\
---------------------------------------------------------------------------

\88\ Id. (Sec. 795.105(d)(2)).
\89\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------

The 2021 IC Rule also stated that the actual practice of the
parties involved is more relevant than what may be contractually or
theoretically possible, and provided five ``illustrative examples''
demonstrating how the analysis would apply in particular factual
circumstances.\90\ Finally, the 2021 IC Rule rescinded any ``prior
administrative rulings, interpretations, practices, or enforcement
policies relating to classification as an employee or independent
contractor under the FLSA'' to the extent that such items ``are
inconsistent or in conflict with the interpretations stated in this
part,'' and explained that the 2021 IC Rule would guide WHD's
enforcement of the FLSA.\91\
---------------------------------------------------------------------------

\90\ Id. at 1247-48 (Sec. Sec. 795.110-.115).
\91\ Id. at 1246 (Sec. 795.100).
---------------------------------------------------------------------------

On January 19, 2021, WHD issued Opinion Letters FLSA2021-8 and
FLSA2021-9 applying the Rule's analysis to specific factual scenarios.
WHD subsequently withdrew those opinion letters on January 26, 2021,
explaining that the letters were issued prematurely because they were
based on a rule that had yet to take effect.\92\
---------------------------------------------------------------------------

\92\ See <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 November 20, 2023), noting the withdrawal
of Opinion Letters FLSA2021-8 and FLSA2021-9.
---------------------------------------------------------------------------

2. Delay and Withdrawal
On February 5, 2021, the Department published a proposal to delay
the 2021 IC Rule's effective date until May 7, 2021--60 days after the
Rule's original March 8, 2001, effective date.\93\ On March 4, 2021,
after considering the approximately 1,500 comments received in response
to that proposal, the Department published a final rule delaying the
effective date of the 2021 IC Rule as proposed.\94\
---------------------------------------------------------------------------

\93\ 86 FR 8326.
\94\ 86 FR 12535.
---------------------------------------------------------------------------

On March 12, 2021, the Department published a NPRM proposing to
withdraw the 2021 IC Rule.\95\ On May 5, 2021, after reviewing
approximately 1,000 comments submitted in response to the NPRM, the
Department announced a final rule withdrawing the 2021 IC Rule.\96\ In
explaining its decision to withdraw the 2021 IC Rule, the Department
stated that the Rule was inconsistent with the FLSA's text and purpose
and would have had a confusing and disruptive effect on workers and
businesses alike due to its departure from longstanding judicial
precedent. The Withdrawal Rule stated that it took effect immediately
upon its publication in the Federal Register on May 6, 2021.\97\
---------------------------------------------------------------------------

\95\ 86 FR 14027.
\96\ 86 FR 24303.
\97\ Id. at 24320.
---------------------------------------------------------------------------

3. Litigation
On March 14, 2022, in a lawsuit challenging the Department's Delay
and Withdrawal Rules under the Administrative Procedure Act (APA), a
district court in the Eastern District of Texas issued a decision
vacating the Department's Delay and Withdrawal Rules.\98\ While
acknowledging that the Department engaged in separate notice-and-
comment rulemakings in promulgating both of these rules, the district
court concluded that the Department ``failed to provide a meaningful
opportunity for comment in promulgating the Delay Rule,'' \99\ failed
to show ``good cause for making the [Delay Rule] effective immediately
upon publication,'' \100\ and acted in an arbitrary and capricious
manner in its Withdrawal Rule by ``fail[ing] to consider potential
alternatives to rescinding the Independent Contractor Rule.'' \101\
Accordingly, the district court vacated the Delay and Withdrawal Rules
and concluded that the 2021 IC Rule ``became effective as of March 8,
2021, the rule's original effective date, and remains in effect.''
\102\ The district court's ruling did not address the validity of the
2021 IC Rule; rather, the case was focused solely on the validity of
the Delay and Withdrawal Rules.
---------------------------------------------------------------------------

\98\ CWI v. Walsh, 2022 WL 1073346.
\99\ Id. at *9. The court specifically faulted the Department's
use of a shortened 19-day comment period in its proposal to delay of
the 2021 IC Rule's original effective date (instead of 30 days), and
for failing to consider comments beyond its proposal to delay the
2021 IC Rule's effective date. Id. at *7-10.
\100\ Id. at *11.
\101\ Id. at *13.
\102\ Id. at *20.
---------------------------------------------------------------------------

The Department filed a notice of appeal of the district court's
decision.\103\ In response to requests by the Department informing the
court of this rulemaking, the Fifth Circuit Court of Appeals has
entered successive orders staying the appeal. The Fifth Circuit's most
recent order was dated October 9, 2023 and stayed the appeal for an
additional 120 days.
---------------------------------------------------------------------------

\103\ See Fifth Circuit No. 22-40316 (appeal filed, May 13,
2022).
---------------------------------------------------------------------------

D. The Department's Proposal

Following a series of stakeholder forums on the classification of
workers as employees or independent contractors under the FLSA, the
Department published an NPRM on October 13, 2022 proposing to rescind
the 2021 IC Rule and replace it with new part 795 regulations.\104\ In
the NPRM, the Department proposed to add a new part 795 to Title 29 of
the Code of Federal Regulations providing guidance regarding whether
workers are employees or independent contractors, which would be
different in notable respects from the regulatory text in the 2021 IC
Rule, published at 86 FR 1246 through 1248. In contrast to the 2021 IC
Rule's creation of elevated ``core factors,'' the Department proposed
returning to a totality-of-the-circumstances analysis of the economic
reality test in which the factors do not have a predetermined weight
and are considered in view of the economic reality of the whole
activity. Additional proposed differences from the 2021 IC Rule
included restoring consideration of investment as a separate factor,
providing additional analysis of the control factor (including detailed
discussions of how scheduling, supervision, price-setting, and the
ability to work for others should be considered), and returning to the
longstanding interpretation of the integral factor, which considers
whether the work performed is integral to the employer's business.
---------------------------------------------------------------------------

\104\ See 87 FR 62218.
---------------------------------------------------------------------------

E. Comments

The initial deadline for interested parties to submit comments on
the NPRM was November 28, 2022. In response to requests for an
extension of the time period for filing written comments, the
Department lengthened the comment period an additional 15

[[Page 1646]]

days to December 13, 2022, resulting in a total comment period of 61
days.\105\
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\105\ 87 FR 64749. Although several commenters requested a
longer extension or otherwise objected that the comment period was
inadequately short, the resulting 61-day comment period was more
than twice as long as the 30-day comment period for the NPRM for the
2021 IC Rule, when the Department initially proposed regulatory
guidance on employee and independent contractor status under the
FLSA. See 85 FR 60600. The Department declined several requests to
extend the comment period for the 2020 NPRM. See <a href="https://www.regulations.gov/document/WHD-2020-0007-0193">https://www.regulations.gov/document/WHD-2020-0007-0193</a>.
---------------------------------------------------------------------------

The Department received approximately 55,400 comments on the NPRM.
Comments were submitted by a diverse array of stakeholders, including
employees, self-identified independent contractors, businesses, trade
associations, labor unions, advocacy groups, law firms, members of
Congress, state and local government officials, and other interested
members of the public. This section provides a high-level summary of
commenter views. Significant issues raised in the comments received are
discussed in subsequent sections of this preamble, along with the
Department's response to those comments and a discussion of resulting
changes that have been made in the final rule's regulatory text. All
comments received may be viewed on the <a href="http://www.regulations.gov">http://www.regulations.gov</a>
website, docket ID WHD-2022-0003.
Many of the comments the Department received can be characterized
in the following ways: (1) very general statements of support or
opposition; (2) personal anecdotes that did not address a specific
aspect of the proposal; or (3) identical or nearly identical
``campaign'' comments sent in response to comment initiatives sponsored
by various groups.\106\ Other comments provided specific data, views,
and arguments, which are described throughout this preamble. Commenters
expressed a wide variety of views on the merits of the Department's
proposal. Acknowledging that there are strong views on the issues
presented in this rulemaking, the Department has carefully considered
the comments submitted.
---------------------------------------------------------------------------

\106\ Campaign comments, both in favor and opposed to the
proposal, were received from a variety of groups, including, for
example, court reporters, construction industry employers, DoorDash
workers, professional translators, truckers, financial advisors, and
healthcare professionals.
---------------------------------------------------------------------------

As a general matter, most employees, labor unions, worker advocacy
groups, and other affiliated stakeholders generally expressed support
for the NPRM, asserting that its proposed guidance was more consistent
with judicial precedent and would better protect employees from
misclassification than the 2021 IC Rule. By contrast, most commenters
who identified as independent contractors, business entities, and
commenters affiliated with those constituencies generally expressed
opposition to the NPRM, criticizing the Department's proposed economic
reality test as ambiguous and biased against independent contracting.
The Department received several comments addressing topics that are
beyond the scope of this rulemaking. For example, numerous individuals
submitted comments expressing support or opposition to the ``Protecting
the Right to Organize Act'', H.R. 842, 117th Cong. (2021), proposed
legislation that would amend the NLRA. Other commenters expressed views
on possible legislative reforms to extend wage-and-hour protections and
other employment benefits to workers classified as independent
contractors. See, e.g., Center for Cultural Innovation (``CCI'')
(discussing collective bargaining rights and sector wage standards as
``two promising approaches to guaranteeing [wage-and-hour] protections
to independent workers''); DoorDash (``[L]aws should be updated to
preserve the independence workers like Dashers value, while clearing
the way for new protections and benefits that independent contractors
have historically lacked.''); Uber (``We look forward to working with
the Department to address the shortcomings of existing laws, including
unlocking access to benefits for independent contractors such as app-
based workers.''). Such legislative efforts are beyond the scope of
this rulemaking as they would require congressional action; the scope
of this regulation is limited to providing guidance regarding employee
or independent contractor classification under the FLSA as currently
enacted.
Some commenters addressed the rulemaking's potential effect on
workers other than those classified as independent contractors. For
example, the Labor Relations and Employment Law Society at St. John's
University School of Law requested the Department to apply the NPRM's
proposed economic reality test to evaluate the employment status of
unpaid student interns. Similarly, Boulette Golden & Marin L.L.P.
asserted that the NPRM's proposed guidance creates a ``false
dichotomy'' where ``every worker in the United States is either an
employee or an `independent business.' '' To clarify, this rulemaking
specifically addresses the legal distinction between FLSA-covered
employees and independent contractors; it does not replace or supplant
the analyses that courts and the Department apply when evaluating FLSA
coverage of other kinds of workers, such as unpaid interns, students,
trainees, or volunteers.\107\ Coverage for these types of workers is
not addressed in this rule.
---------------------------------------------------------------------------

\107\ See, e.g., WHD Fact Sheet #71: Internship Programs Under
The Fair Labor Standards Act (describing the analysis applied by
courts and the Department to evaluate the FLSA employment status of
students and interns).
---------------------------------------------------------------------------

Finally, some commenters opined on potential compliance or
enforcement measures. For example, the Sheet Metal and Air Conditioning
Contractors' National Association (``SMACNA'') requested that the
Department introduce a mandatory ``Notice of Independent Contractor
Status'' form for businesses and independent contractors in the
construction industry, to notify ``true independent contractors'' of
their tax obligations and help enforcement against misclassification.
This suggestion, however, is outside the scope of this rulemaking,
which has not proposed any mandatory notice and focuses specifically on
the legal distinction between FLSA-covered employees and independent
contractors. Further, some commenters raised compliance with employment
verification requirements under the Immigration Reform and Control Act
(IRCA), both to note that some employers are incentivized to
misclassify immigrant workers as independent contractors in part
because they do not have to verify the work authorization of
independent contractors, see, e.g., Equal Justice Center; SMACNA, and
to note that being able to operate as an independent contractor or in
business for oneself provides economic opportunity for people who lack
work authorization, see TheDream.US. Because this rulemaking pertains
only to the question of employee classification under the FLSA, it does
not address employers' compliance obligations with respect to employees
as determined under other laws, such as IRCA. The FLSA's various worker
protections apply to FLSA-covered employees regardless of their
citizenship or immigration or work authorization status.

III. Need for Rulemaking

The Department recognizes that independent contractors and small
businesses play an important role in our economy. It is also
fundamental to the Department's obligation to administer and enforce
the FLSA that workers who should be covered under the Act are able to
receive its protections. In the FLSA context, employees misclassified
as independent contractors are denied

[[Page 1647]]

basic workplace protections, including the rights to minimum wage and
overtime pay.\108\ Meanwhile, employers that comply with the law are
placed at a competitive disadvantage compared to other businesses that
misclassify employees, contravening the FLSA's goal of eliminating
``unfair method[s] of competition in commerce.'' \109\
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\108\ Workers who are employees under the FLSA but are
misclassified as independent contractors remain legally entitled to
the Act's wage-and-hour protections and are protected from
retaliation for attempting to assert their rights under the Act. See
29 U.S.C. 215(a)(3). However, many misclassified employees may not
be aware that such rights and protections apply to them or face
obstacles when asserting those rights.
\109\ 29 U.S.C. 202; see also Tony & Susan Alamo Found. v. Sec'y
of Labor, 471 U.S. 290, 302 (1985) (noting that allowing workers who
are employees under the Act to work as non-employees ``would affect
many more people than those workers directly at issue . . . and
would be likely to exert a general downward pressure on wages in
competing businesses'').
---------------------------------------------------------------------------

As explained in the NPRM, the Department believes that the 2021 IC
Rule did not fully comport with the FLSA's text and purpose as
interpreted by the courts. The Department further believes that leaving
the 2021 IC Rule in place would have a confusing and disruptive effect
on workers and businesses alike due to its departure from decades of
case law describing and applying the multifactor economic reality test
as a totality-of-the-circumstances test. While the Department agrees
that the 2021 IC Rule identified a need to further develop and center
the concept of economic dependence, the 2021 IC Rule included
provisions that are in tension with longstanding case law, such as
designating two ``core factors'' as most probative and predetermining
that they carry greater weight in the analysis; considering investment
and initiative only as part of the opportunity for profit or loss
factor; and excluding consideration of whether the work performed is
central or important to the potential employer's business. These and
other provisions in the 2021 IC Rule narrowed the economic reality test
by limiting the facts that may be considered as part of the test--facts
which the Department believes are relevant in determining whether a
worker is economically dependent on the employer for work or is in
business for themself. As the NPRM explained, this novel narrowing of
the test under which certain factors are always elevated and other
facts are essentially precluded from consideration may result in
misapplication of the economic reality test and an increased risk of
FLSA-covered employees being misclassified as independent contractors.
Moreover, the 2021 IC Rule did not address the potential risks to
workers of such misclassification.\110\
---------------------------------------------------------------------------

\110\ 86 FR 1225; see also id. at 1206-07.
---------------------------------------------------------------------------

The Department previously explained these concerns about the 2021
IC Rule at length in the Withdrawal Rule,\111\ which was vacated by a
district court (the Department's appeal of the district court's order
is pending). The Department now believes it is appropriate to rescind
the 2021 IC Rule and replace it with an analysis for determining
employee or independent contractor status under the Act that is more
consistent with existing judicial precedent and the Department's
longstanding guidance prior to the 2021 IC Rule. While prior to the
2021 IC Rule the Department primarily issued subregulatory guidance in
this area, the NPRM explained that rescinding the 2021 IC Rule and
replacing it with detailed regulations addressing the multifactor
economic reality test--in a way that both more fully reflects the case
law and continues to be relevant to the evolving economy--would be
helpful for workers and businesses alike. Specifically, the Department
explained that its proposed guidance would protect workers from
misclassification while at the same time provide a consistent approach
for those businesses that engage (or wish to engage) with properly
classified independent contractors.
---------------------------------------------------------------------------

\111\ See 86 FR 24307-18.
---------------------------------------------------------------------------

In the NPRM, the Department acknowledged that its proposal departed
from the approach taken in the 2021 IC Rule, and further discussed the
rationale used in the 2021 IC Rule and why the Department had carefully
reconsidered that reasoning and determined that modifications were
necessary.\112\ As the NPRM noted, the Department had identified four
reasons underlying the need to promulgate the 2021 IC Rule: (1)
confusion regarding the meaning of ``economic dependence'' because the
concept is ``underdeveloped''; (2) lack of focus in the multifactor
balancing test; (3) confusion and inefficiency due to overlapping
factors; and (4) the shortcomings of the economic reality test that are
more apparent in the modern economy.\113\ The 2021 IC Rule had also
suggested as a fifth reason that the economic reality test hindered
innovation in work arrangements.\114\ As discussed further below, the
Department explained in the NPRM that it believed that the proposed
rule's approach offers a better framework for understanding and
applying the concept of economic dependence by explaining how the
touchstone of whether an individual is in business for themself is
analyzed within each of the six economic realities factors. Further,
the Department believed that the proposal's discussion of how courts
and the Department's previous guidance apply the factors brings the
multifactor test into focus, reduces confusion as to the overlapping
factors, and provides a better basis for understanding how the test has
the flexibility to be applied to changes in the modern economy, such
that the Department no longer viewed the concerns articulated in the
2021 IC Rule as impediments to using the economic reality test
formulated by the courts and the Department's longstanding guidance.
---------------------------------------------------------------------------

\112\ See 87 FR 62226 (citing FCC v. Fox Television Stations,
Inc., 556 U.S. 502, 515 (2009)).
\113\ Id. (citing 86 FR 1172-75).
\114\ Id. (citing 86 FR 1175).
---------------------------------------------------------------------------

Thousands of commenters opined on this rulemaking. Most commenters
that expressed support for the NPRM--including labor unions, worker
advocacy organizations, and workers--were highly critical of the 2021
IC Rule, often referencing or attaching earlier comments filed in
opposition to that rule when it was proposed. See, e.g., American
Federation of Labor and Congress of Industrial Organizations (``AFL-
CIO''); National Women's Law Center (``NWLC''); Northwest Worker
Justice Project; United Brotherhood of Carpenters and Joiners of
America (``UBC''). Using common template language, several dozen
advocacy organizations and local unions affiliated with the United Food
and Commercial Workers (``UFCW'') characterized the 2021 IC Rule as an
``anti-worker rule'' which ``narrowed the scope of who is considered an
employee under the FLSA.'' Many of these commenters also asserted that
the 2021 IC Rule ``contravenes the [FLSA's] statutory definitions and
Supreme Court precedent.'' Additionally, numerous commenters supportive
of the Department's rulemaking asserted that replacing the 2021 IC Rule
with the NPRM's proposed economic reality test would reduce the
misclassification of employees as independent contractors, given the
proposed test's fuller consideration of facts that were minimized or
excluded under the 2021 IC Rule. See, e.g., AARP; Joint Comment of the
National Electrical Contractors Association and the International
Brotherhood of Electrical Workers (``NECA & IBEW''); REAL Women in
Trucking.
A number of commenters supportive of the NPRM also stated that the
economic reality test applied by courts is not only compatible with the
modern

[[Page 1648]]

economy, but preferable to the 2021 IC Rule's elevation of certain
factors as controlling. See, e.g., AARP (``It is precisely because work
arrangements are more varied and complex in today's economy that no one
factor should be controlling or exclusive to others.''); Coalition of
State Attorneys General and State Labor Departments (``State AGs'')
(``As State AGs who enforce and defend state wage and hour laws, we
know that a flexible standard that considers the totality of the
circumstances is required to address changing work arrangements.'').
Some business stakeholders expressed support for the NPRM, but for
different reasons. For example, some employers--including Alto
Experience, Inc., Gale Healthcare Solutions, IntelyCare, Inc., and
various union-affiliated contractor associations--expressed support for
the NPRM on the grounds that its guidance would better prevent rival
businesses from obtaining an unfair competitive advantage through the
misclassification of employees as independent contractors, consistent
with the FLSA's goal of eliminating unfair methods of competition in
commerce. Additionally, some business stakeholders stated that they
preferred the economic reality test applied by courts to the 2021 IC
Rule. See, e.g., Ho-Chunk Inc. (supporting the proposed analysis
because the 2021 IC Rule ``deviat[ed] from established case law'');
Small Business Legislative Council (``SBLC'') (``While the SBLC has not
taken a position on whether the economic realities test strikes the
right balance, applying a test like the economic realities test that
has been fleshed out over years through case law and administrative
guidance certainly makes this complex issue easier to navigate.''); see
also Opera America (``The `totality-of-the-circumstances' approach
allows for the nuance necessary to truly evaluate the nature of an
employment or contractor relationship''); Texas Association for Home
Care and Hospice (``We support the reiteration in the [NPRM] that the
enumerated factors should each be equally relevant, including any
additional relevant factors that indicate economic dependence or
independence.'').
Other commenters, including most business-affiliated stakeholders
and many self-identified independent contractors, disagreed with the
Department's proposal to rescind and replace the 2021 IC Rule. Many of
these commenters argued that the 2021 IC Rule was based on judicial
precedent. See e.g., Coalition for Workforce Innovation (``CWI'');
Independent Bakers Association (``IBA''); Pacific Legal Foundation.
Commenters opposed to this rulemaking further stated that the 2021 IC
Rule's analysis is clearer than the NPRM's proposed economic reality
test, asserting that returning to a totality-of-the-circumstances
analysis would increase litigation and deter businesses from engaging
with independent contractors. See, e.g., American Society of Travel
Advisors (``ASTA''); Financial Services Institute (``FSI''); U.S.
Chamber of Commerce (``U.S. Chamber''). While many commenters opposed
to the NPRM acknowledged that the misclassification of employees as
independent contractors might be a problem in some industries, several
commenters disputed the need for generally applicable guidance that (in
their view) could be disruptive to businesses and legitimate
independent contractors in their particular industries. See, e.g.,
American Translators Association; IMC Companies, LLC; see also HR
Policy Association. Finally, many self-identified independent
contractors and advocacy groups asserted that the Department's proposal
would ``misclassify'' independent contractors as employees. See, e.g.,
American Society of Journalists and Authors; Cambridge Investment
Research, Inc.; Fight for Freelancers; Transportation Intermediaries
Association (``TIA'').
Commenters opposed to this rulemaking agreed with the 2021 IC
Rule's assessment that the economic reality test traditionally applied
by courts is incompatible with the modern economy. See, e.g., Institute
for the American Worker (``I4AW''); Society for Human Resources
Management (``SHRM''); TIA. Several commenters pointed to differences
in the economy today compared to the 1930s and 1940s, when the FLSA was
enacted and the Supreme Court first endorsed the economic reality test.
See, e.g., Flex Association (``Flex'') (``It is no longer 1938, when
Congress enacted the FLSA. Today, independent contractors can leverage
app-based technology to build their own businesses in ways we could not
have conceived even 20, let alone 84, years ago.''); National
Association of Professional Insurance Agents (``[I]n many ways, the
1938 Congress could not have conceived of the present-day global
economy or the variations among worker statuses that have emerged and
continue to evolve therefrom.'').
Several commenters stated that the Department's proposal would
deter businesses from engaging with independent contractors, which in
turn would have disruptive economic consequences. In a joint comment,
33 business advocacy organizations and over 100 local Chambers of
Commerce (``Coalition of Business Stakeholders'') asserted that, under
the NPRM, ``the only scenario in which a hiring entity can be sure it
is safe from an enforcement action by the DOL is when it classifies, or
misclassifies, its workers as employees'' and concluded that the NPRM
would ``upend millions of legitimate, productive independent contractor
relationships.'' See also, e.g., California Association of Realtors
(C.A.R.) (``This proposal as is would seriously disrupt the current and
historical choices of the real estate industry that have been in place
for at least fifty years.''); FSI (``Changes in laws or regulations
that substantially limited or prohibited the use of independent
contracting in financial services would harm those who currently work
as independent contractors, harm consumers by reducing their financial
literacy and thus their ability to accumulate wealth and save for
retirement, and harm the economy overall.'').
Upon consideration of the comments and as described throughout this
preamble, the Department continues to believe that this final rule's
approach offers a better framework for understanding and applying the
concept of economic dependence by explaining how the touchstone of
whether an individual is in business for themself is analyzed within
each of the six economic reality factors. This rule's discussion of how
courts and the Department's previous guidance apply the factors brings
the multifactor test into focus, reduces confusion as to the
overlapping factors, and provides a more consistent basis for
understanding how the test has the flexibility to be applied to changes
in the modern economy. Accordingly, the Department no longer views the
concerns articulated in the 2021 IC Rule as impediments to using the
economic reality test formulated by the courts and the Department's
longstanding guidance.
The Department is, however, retaining its longstanding
interpretation, as it did in the 2021 IC Rule, that economic dependence
is the ultimate inquiry, and that an employee is someone who, as a
matter of economic reality, is economically dependent on an employer
for work--not for income.\115\

[[Page 1649]]

Consistent with the 2021 IC Rule and as explained in the NPRM, the
Department continues to believe that, as compared to the economic
realities analysis generally, the particular concept of economic
dependence is underdeveloped in the case law. As noted in the 2021 IC
Rule, the Department and most courts have historically applied a
``dependence-for-work'' approach which considers whether the worker is
dependent on the employer for work or depends on the worker's own
business for work. However, a minority of courts have applied a
``dependence-for-income'' approach that considers whether the worker
has other sources of income or wealth or is financially dependent on
the employer.\116\ Further, rather than giving primacy to only two
factors as indicators of economic dependence, the Department believes
that developing the concept of economic dependence is better
accomplished by, in addition to elaborating on the general meaning of
economic dependence, explaining how each of the six factors can
illuminate the distinction between economic dependence on the employer
for work and being in business for oneself. By focusing on that
distinction in its discussion of each factor, the Department expects
that this rule will provide clarity on the concept of economic
dependence that the 2021 IC Rule indicated would be welcomed by workers
and businesses, but will do so in a way that is consistent with case
law and the Department's prior guidance.
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\115\ See 86 FR 1246 (Sec. 795.105(b) (``An employer suffers or
permits an individual to work as an employee if, as a matter of
economic reality, the individual is economically dependent on that
employer for work.''); see also infra section V.B.; 29 CFR
795.105(b) (``An `employee' under the Act is an individual whom an
employer suffers, permits, or otherwise employs to work. . . . [This
is] meant to encompass as employees all workers who, as a matter of
economic reality, are economically dependent on an employer for
work. . . . Economic dependence does not focus on the amount of
income earned, or whether the worker has other sources of
income.'').
\116\ See 86 FR 1172-73.
---------------------------------------------------------------------------

Regarding commenters that stated that the 2021 IC Rule provided
more clarity in distinguishing between factors, the Department
believes, upon further consideration, that any purported confusion and
inefficiency due to overlapping factors was overstated in the 2021 IC
Rule. Moreover, when each factor is viewed under the framework of
whether the worker is economically dependent or in business for
themself, the rationale for considering facts under more than one
factor is clearer. The Department explains in more detail in section V
why considering certain facts under more than one factor is consistent
with the totality-of-the-circumstances approach of the economic
realities analysis used by courts. And the Department provides guidance
regarding how to consider certain facts, such as the ability to work
for others and whether the working relationship is exclusive, under
more than one factor. The Department believes that this flexible
approach is supported by the case law and preferable to rigidly and
artificially limiting facts to only one factor, as the 2021 IC Rule
did.
Concerning comments that the 2021 IC Rule was better suited to the
modern economy, the Department believes that this final rule is well-
equipped to address a wide array of traditional and emerging work
relationships, as discussed throughout section V of this preamble. In
the 2021 IC Rule, the Department stated that ``technological and social
changes have made shortcomings of the economic realities test more
apparent in the modern economy,'' thus justifying the 2021 IC Rule's
characterization of the integral, investment, and permanence factors as
less important in determining a worker's classification.\117\ Upon
further consideration, however, the Department believes that the
multifactor economic reality test relied on by courts where no one
factor or set of factors is presumed to carry more weight is the most
helpful tool for evaluating modern work arrangements. The test's
vitality is confirmed by its application over seven decades that have
seen monumental shifts in the economy. Modern work arrangements
utilizing applications or other technology are best addressed using the
underlying economic reality test, which considers the totality of the
circumstances in each working arrangement and offers a flexible,
comprehensive, and appropriately nuanced approach which can be adapted
to disparate industries and occupations. It can also encompass
continued social changes because it does not presume which aspects of
the work relationship are most probative or relevant and leaves open
the possibility that changed circumstances may make certain factors
more important in certain cases or future scenarios.
---------------------------------------------------------------------------

\117\ 86 FR 1175.
---------------------------------------------------------------------------

The Department's response to commenter feedback on the potential
economic consequences of this rulemaking is discussed in the regulatory
impact analysis provided in section VII. However, the Department
continues to believe that proper application of the FLSA in the modern
economy requires the flexibility of an economic reality test that does
not predetermine the probative value of particular factors and which is
adaptable to different industries and workers. As further explained in
sections III.C and VII, commenter assertions of economic disruption
related to this rulemaking are belied by the fact that this rulemaking
merely aligns the Department's interpretive guidance with the same
legal standard courts have been applying for decades--and are
continuing to apply today.
The discussion that follows sets forth the Department's explanation
of the need for this rulemaking and responds to relevant commenter
feedback.

A. The 2021 IC Rule's Test Is Not Supported by Judicial Precedent or
the Department's Historical Position and Is Not Fully Aligned With the
Act's Text as Interpreted by the Courts

In the NPRM, the Department explained that it was proposing to
rescind and replace the 2021 IC Rule in part because that rule was not
fully aligned with the FLSA's text as interpreted by the courts or the
Department's longstanding analysis, as well as decades of case law
describing and applying the multifactor economic reality test. In
relevant part, the NPRM explained that the Department had three primary
and overlapping legal concerns with the 2021 IC Rule: (1) its creation
of two ``core factors'' as the ``most probative'' in the economic
reality analysis; (2) the oversized role of the control factor in its
analysis; and (3) its altering of several economic reality factors to
minimize or exclude key facts commonly analyzed by courts.\118\
---------------------------------------------------------------------------

\118\ See 87 FR 62227-29. The Department had previously
identified and discussed these three concerns in its 2021 Withdrawal
Rule. See 86 FR 24307-15.
---------------------------------------------------------------------------

After considering the comments, the Department continues to believe
that the 2021 IC Rule marked a departure from the way in which courts
and the Department adopted and applied the multifactor, totality-of-
the-circumstances economic reality test in which the factors do not
have a predetermined weight and are considered in view of the economic
reality of the whole activity. The Department also continues to believe
that the 2021 IC Rule's departure from longstanding precedent unduly
narrowed the economic reality test by limiting facts that may be
considered as part of the test that are relevant in determining whether
a worker is economically dependent on the employer for work or is in
business for themself. By doing so, the 2021 IC Rule artificially
restricted the Act's expansive definitions of ``employer,''
``employee,'' and ``employ,'' undermining the Act's text and purposes,
as interpreted by courts and the Department's longstanding
interpretation of the economic reality test.

[[Page 1650]]

1. The 2021 IC Rule's Elevation of Control and Opportunity for Profit
or Loss as the ``Most Probative'' Factors in Determining Employee
Status Under the FLSA
As the NPRM explained, the 2021 IC Rule set forth a new
articulation of the economic reality test, elevating two factors
(control and opportunity for profit or loss) as ``core'' factors above
other factors, asserting that the two core factors have ``greater
probative value'' in determining a worker's economic dependence.\119\
Notably, the 2021 IC Rule further provided that if both core factors
point toward the same classification--either employee or independent
contractor--then there is a ``substantial likelihood'' that this is the
worker's correct classification.\120\ Although it identified three
other factors as additional guideposts and acknowledged that additional
factors may be considered, it made clear that non-core factors ``are
less probative and, in some cases, may not be probative at all, and
thus are highly unlikely, either individually or collectively, to
outweigh the combined probative value of the two core factors.'' \121\
The NPRM explained that the Department believes that the 2021 IC Rule's
elevation of the control and opportunity for profit or loss factors was
in tension with the language of the Act as well as the longstanding
judicial precedent, expressed by the Supreme Court and in appellate
cases from across the circuits, that no single factor is determinative
in the analysis of whether a worker is an employee or an independent
contractor, nor is any factor or set of factors necessarily more
probative of whether the worker is in fact economically dependent on
the employer for work as opposed to being in business for themself.
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\119\ 87 FR 62227 (citing 86 FR 1246 (Sec. 795.105(c) and
(d))).
\120\ 86 FR 1246 (Sec. 795.105(c)); see also id. at 1201
(advising that other factors would only outweigh the two core
factors ``in rare cases'').
\121\ Id. at 1246 (Sec. 795.105(c)).
---------------------------------------------------------------------------

Many commenters expressed concerns about the 2021 IC Rule's
elevation of two ``core factors'' and supported the Department's
proposal to restore a totality-of-the-circumstances analysis where no
factor (or set of factors) is given a predetermined weight. Several
commenters asserted that the use of core factors was contrary to
Supreme Court precedent. See, e.g., International Association of
Machinists and Aerospace Workers, AFL-CIO; Laborers' International
Union of North America (``LIUNA''); National Employment Law Project
(``NELP'). The AFL-CIO and the North America's Building Trades Unions
(``NABTU'') further commented that the 2021 IC Rule's elevation of
control and opportunity for profit or loss effectively (and
impermissibly) adopted a common law test for independent contractor
status. The Signatory Wall and Ceiling Contractors Alliance
(``SWACCA'') stated that ``[b]y giving greater emphasis to these two
factors . . . the [2021 IC Rule] improperly narrows the analysis of the
facts and circumstances surrounding the business-worker relationship,
thereby reducing the scope of the FLSA's protections.'' See also State
AGs (commenting that the 2021 IC Rule's ``emphasis on two `core'
factors . . . negated the need to fully consider the remaining
factors''). Farmworker Justice commented that the 2021 IC Rule's use of
core factors could facilitate the misclassification of farmworkers,
whose employment status is particularly dependent on the economic
reality factors examining the skill and integrality of the work being
performed. See also Joint Comment from the Center for Law and Social
Policy & Governing for Impact (``CLASP & GFI'') (same).
Other commenters supported the 2021 IC Rule's use of core factors
and did not agree with the Department's proposal to change the 2021 IC
Rule's analysis. Pointing to the Department's review of appellate case
law described in the 2021 IC Rule preamble,\122\ several commenters
stated that the elevation of the control and opportunity for profit or
loss factors was fully consistent with the outcome of FLSA court
decisions, if not their explicit reasoning. See, e.g., Associated
Builders and Contractors (``ABC''); Coalition to Promote Independent
Entrepreneurs (``CPIE''); Flex; FSI. Several commenters, like the Club
for Growth, Flex, and Modern Economy Project (``MEP'') agreed with the
2021 IC Rule's determination that the control and the opportunity for
profit or loss factors ``drive at the heart'' of economic
dependence.\123\ CWI asserted that ``it is simply inaccurate that no
court has determined, as a general rule, that any core factor should be
afforded greater weight in determining whether an individual is an
[employee].'' See also CPIE.
---------------------------------------------------------------------------

\122\ See 86 FR 1196-98.
\123\ Id. at 1196.
---------------------------------------------------------------------------

Having considered the comments, the Department continues to believe
that the 2021 IC Rule was in tension with the Act, judicial precedent,
and congressional intent. As the Department explained in the NPRM,
there is no statutory basis for such a predetermined weighting of the
factors and the Department is concerned that prioritizing two core
factors over other factors may not fully account for the Act's broad
definition of ``employ,'' as interpreted by the courts. The Department
agrees with those commenters that noted that the elevation of two core
factors improperly narrowed the analysis of the relevant facts, thereby
reducing the scope of the FLSA's protections. For example, if facts
relevant to the control and opportunity for profit or loss factors both
point to independent contractor status for a particular worker but
weakly so, those factors should not be presumed to carry more weight
than stronger factual findings under other factors (e.g., the existence
of a lengthy working relationship under the ``permanence'' factor and
the performance of work that does not require specialized skills and is
an integral part of the business), which would indicate that the worker
is an employee.
Moreover, the Department is not aware of any court that has, as a
general rule, elevated any one economic reality factor or subset of
factors above others, despite receiving several comments suggesting
that there was such case law. The 2021 IC Rule did not cite or rely on
any particular decision where a court announced such a general rule
predetermining the weight of some of the economic reality factors.
Further, the Department has examined cases raised by commenters in
support of the core factor analysis and none stand for the proposition
that a predetermined elevation of any factor or set of factors is
appropriate under the economic reality analysis for worker
classification under the FLSA. Rather, the cases cited by commenters
are either relevant to a different statute such as the Americans with
Disabilities Act (``ADA'') or Title VII, reference a joint employment
analysis rather than an employee classification analysis, or have had
excerpts taken out of context.\124\ While

[[Page 1651]]

courts and the Department may focus on some relevant factors more than
others when analyzing a particular set of facts and circumstances, this
does not mean that it is possible or permissible to derive from these
fact-driven decisions universal rules regarding which factors deserve
more weight than the others when the courts themselves have not set
forth any such universal rules despite decades of opportunity.
---------------------------------------------------------------------------

\124\ For example, although some commenters cited Walsh v.
Medical Staffing of America, that case explicitly stated that ``[n]o
single factor in the six-factor test is dispositive as `the test is
designed to capture the economic realities of the relationship
between the worker and the putative employer.' '' 580 F. Supp. 3d
216, 229 (E.D. Va. 2022) (quoting McFeeley, 825 F.3d at 241). The
Medical Staffing court's reference to Smith v. CSRA, 12 F.4th 396,
413 (4th Cir. 2021), is unpersuasive since that case addressed
employment status under the Americans with Disabilities Act, not the
FLSA. See CSRA, 12 F.4th at 412-13. Other cases cited by commenters
in support of core factors are inapposite. See Brown v. BCG Attorney
Search, No. 12 C 9596, 2013 WL 6096932, at *1 (N.D. Ill. Nov. 20,
2013) (citing Knight v. United Farm Bureau Mut. Ins. Co., 950 F.2d
377, 378 (7th Cir. 1991), which concerned Title VII not the FLSA);
Meyer v. U.S. Tennis Ass'n, No. 1:11-cv-06268 (ALC)(MHD), 2014 WL
4495185, at *6 (S.D.N.Y. Sept. 11, 2014) (citing Wadler v. Eastern
Coll. Athletic Conference, No. 00-civ-5671, 2003 WL 21961119, at *2
(S.D.N.Y. Aug. 14, 2003), a Title VII case not an FLSA case); see
also Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 135 (2d Cir.
1999) (joint employment not worker classification); Zheng v. Liberty
Apparel Co. Inc., 355 F.3d 61 (2d Cir. 2003) (joint employment not
worker classification); Razak v. Uber Technologies, Inc., 951 F.3d
137, 145 (3d Cir. 2020) (making the uncontroversial statement that
the control factor ``is highly relevant to the FLSA analysis'' while
also reaffirming the Third Circuit's statement that ``neither the
presence nor absence of any particular factor is dispositive'' and
that ``courts should examine the circumstances of the whole
activity'' (quoting DialAmerica, 757 F.2d at 1382)).
---------------------------------------------------------------------------

The Supreme Court has emphasized that employment status under the
economic reality test turns upon ``the circumstances of the whole
activity,'' rather than ``isolated factors.'' \125\ Federal appellate
courts have repeatedly cautioned against a mechanical or formulaic
application of the economic reality test,\126\ and specifically warn
that it `` `is impossible to assign to each of these factors a specific
and invariably applied weight.' '' \127\ The 2021 IC Rule's elevation
of two ``core factors'' was also in tension with judicial precedent,
expressed by the Supreme Court and federal courts of appeals, that no
single factor in the analysis is dispositive.\128\ Thus, the 2021 IC
Rule's predetermined and mechanical weighting of factors was not
consistent with how courts have, for decades, applied the economic
reality analysis.\129\
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\125\ Rutherford, 331 U.S. at 730; see also Silk, 331 U.S. at
716, 719 (denying the existence of ``a rule of thumb to define the
limits of the employer-employee relationship'' and determining
employment status based on ``the total situation'').
\126\ See, e.g., Parrish, 917 F.3d at 380 (``And, obviously, the
factors should not `be applied mechanically.' '') (quoting Brock v.
Mr. W Fireworks, Inc., 814 F.2d 1042, 1043-44 (5th Cir. 1987));
Superior Care, 840 F.2d at 1059 (``Since the test concerns the
totality of the circumstances, any relevant evidence may be
considered, and mechanical application of the test is to be
avoided.'').
\127\ Parrish, 917 F.3d at 380 (quoting Hickey, 699 F.2d at
752); see also Scantland, 721 F.3d at 1312 n.2 (``The weight of each
factor depends on the light it sheds on the putative employee's
dependence on the alleged employer, which in turn depends on the
facts of the case.'') (quoting Santelices, 147 F. Supp. 2d at
1319)).
\128\ See, e.g., Silk, 331 U.S. at 716 (explaining that ``[n]o
one [factor] is controlling'' in the economic realities test);
Morrison, 253 F.3d at 11 (``No one factor standing alone is
dispositive and courts are directed to look at the totality of the
circumstances and consider any relevant evidence.''); Dole v. Snell,
875 F.2d 802, 805 (10th Cir. 1989) (``It is well established that no
one of these factors in isolation is dispositive; rather, the test
is based upon a totality of the circumstances.''); Lauritzen, 835
F.2d at 1534 (``Certain criteria have been developed to assist in
determining the true nature of the relationship, but no criterion is
by itself, or by its absence, dispositive or controlling.''); Selker
Bros., 949 F.2d at 1293 (``It is a well-established principle that
the determination of the employment relationship does not depend on
isolated factors . . . neither the presence nor the absence of any
particular factor is dispositive.'').
\129\ See McFeeley, 825 F.3d at 241 (``While a six-factor test
may lack the virtue of providing definitive guidance to those
affected, it allows for flexible application to the myriad different
working relationships that exist in the national economy. In other
words, the court must adapt its analysis to the particular working
relationship, the particular workplace, and the particular industry
in each FLSA case.'').
---------------------------------------------------------------------------

Regarding comments relying on the 2021 IC Rule's reference to an
appellate case law analysis to support the elevation of core factors,
the Department has carefully reconsidered the cases cited in the 2020
NPRM and 2021 IC Rule in support.\130\ The appellate cases relied on in
the 2020 NPRM \131\ and 2021 IC Rule to support the 2021 IC Rule's
creation of ``core factors'' do not, themselves, elevate these two
factors--rather, the 2021 IC Rule made assumptions about the reasoning
behind the courts' decisions that are not clear from the decisions
themselves and in some cases are contrary to the decisions'
instructions that the test should not be applied in a mechanical
fashion.\132\ In fact, most of the decisions cited as supporting a
``core factor'' analysis based on the case law review explicitly deny
assigning any predetermined weight to these factors, and instead state
that they considered the factors as part of an analysis of the whole
activity, with no determinative single factor.\133\ Particularly when
viewed in the context of repeated statements from the courts that no
one factor in the economic reality test is dispositive, divining from
the cases a conclusion that is the exact opposite from what the courts
say that they are doing is not persuasive. The Department now believes
that the 2020 NPRM and 2021 IC Rule's discussion of the case law in
support of the core factors improperly simplified the courts' analysis
in an attempt to quantify the probative value of certain factors in a
manner that is facially inconsistent with the decisions themselves.
---------------------------------------------------------------------------

\130\ The 2021 IC Rule referenced on several occasions a review
of appellate case law since 1975 to justify its elevation of two
``core'' factors. See 86 FR at 1194, 1196-97, 1198, 1202, 1240.
\131\ 85 FR 60619.
\132\ Federal courts of appeals have repeatedly cautioned
against the ``mechanical application'' of the economic reality
factors, including in the cases cited in support of the
predetermined elevation of core factions. See, e.g., Saleem v. Corp.
Transp. Grp., Ltd., 854 F.3d 131, 139 (2d Cir. 2017) (``Relevant
FLSA precedent, despite endorsing the Silk factors, cautions against
their `mechanical application.' '') (quoting Superior Care, 840 F.2d
at 1059). And as explained herein, courts of appeals make clear that
the analysis should draw from the totality of circumstances, with no
single factor being determinative by itself.
\133\ See, e.g., Hobbs, 946 F.3d at 829 (``No single factor is
determinative. Rather, each factor is a tool used to gauge the
economic dependence of the alleged employee, and each must be
applied with this ultimate concept in mind.'') (quotation marks
omitted) (citing Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th
Cir. 2008)); Parrish, 917 F.3d at 380 (noting that no one factor is
determinative and ``obviously, the factors should not `be applied
mechanically' '') (quoting Mr. W Fireworks, 814 F.2d at 1043);
Saleem, 854 F.3d at 139-40 (explaining that employment relationships
are determined by the circumstances of the whole activity);
McFeeley, 825 F.3d at 241 (``No single factor is dispositive,--all
six are part of the totality of circumstances presented.'') (citing
Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d 668, 675
(1st Cir. 1998)) (internal citation and quotation marks omitted);
Barlow v. C.R. England, Inc., 703 F.3d 497, 506 (10th Cir. 2012) (``
`None of the factors alone is dispositive; instead, the court must
employ a totality-of-the-circumstances approach.' '') (citing Baker
v. Flint Eng'g & Const. Co., 137 F.3d 1436, 1440 (10th Cir. 1998));
Schultz v. Capital Int'l Sec., Inc., 466 F.3d 298, 305 (4th Cir.
2006) (``No single factor is dispositive; again, the test is
designed to capture the economic realities of the relationship
between the worker and the putative employer.'').
---------------------------------------------------------------------------

Additionally, while there are certainly many cases in which the
classification decision made by the court aligns with the
classification indicated by the control and opportunity for profit or
loss factors, the 2021 IC Rule did not identify any cases stating that
those two factors are ``more probative'' of a worker's classification
than other factors. Rather, the 2021 IC Rule acknowledged that there
are cases in which the classification suggested by the control factor
did not align with the worker's classification as determined by the
courts.\134\ The Department has also identified appellate cases in
which the classification suggested by the profit or loss factor, for
example, did not align with the worker's classification as determined
by the courts or in which that factor was simply not addressed due to
the fact-specific nature of the analysis. See, e.g., Nieman v. Nat'l
Claims Adjusters, Inc., 775 F. App'x 622, 625 (11th Cir. 2019)
(concluding that worker was an independent contractor without
considering profit or loss or integral factors because facts were not
presented on those issues); Simpkins v. DuPage Hous. Auth., 893 F.3d
962, 967 (7th Cir. 2018) (reversing the district court's summary
judgment decision and remanding case for determination of employee
status without addressing opportunity for profit or loss); Thomas v.
TXX Servs., Inc., 663 F. App'x 86, 90 (2d Cir. 2016) (reversing summary
judgment on the issue of plaintiffs' status as employees

[[Page 1652]]

under the FLSA but not discussing opportunity for profit or loss);
Meyer v. U.S. Tennis Ass'n, 607 F. App'x 121, 123 (2d Cir. 2015)
(affirming summary judgment decision and concluding that district court
did not err in determining that plaintiffs were independent contractors
where district court found that the profit or loss factor ``cuts both
ways'') (quoting Meyer, 2014 WL 4495185, at *7); Johnson v. Unified
Gov't of Wyandotte Cnty./Kansas City, Kansas, 371 F.3d 723, 730 (10th
Cir. 2004) (affirming jury verdict that workers were independent
contractors despite concluding that ``[t]he jury could have viewed [the
profit or loss] factor as not favoring either side''); Donovan v.
Tehco, Inc., 642 F.2d 141, 143 (5th Cir. 1981) (noting that the worker
``could elect to be paid by the hour or by the job and thus profit from
foresight'' but that this and other facts were not sufficient ``to
counterbalance the strong indicia of employee status''). As such, it is
clear that mechanically deconstructing certain court decisions and
considering what those courts have said about only two factors--even
when the courts did not present their analyses in this manner--ignores
the broader approach that most courts have taken in determining worker
classification.
---------------------------------------------------------------------------

\134\ See 86 FR 1196-97.
---------------------------------------------------------------------------

Moreover, it is necessarily the case when applying a multifactor
balancing test that when any two factors of that test both point toward
the same outcome, the probability of that indicated outcome aligning
with the ultimate outcome increases. The 2021 IC Rule did not address
whether a different combination of two factors would yield similar
results. Yet, an in-depth review of the case law indicates that it
would yield similar results, as most of the cases cited in the 2020
NPRM and 2021 IC Rule in support of its core factor analysis had
multiple factors pointing in the same direction.\135\ This further
underscores the unduly narrow focus on two ``core factors'' in the 2021
IC Rule.
---------------------------------------------------------------------------

\135\ Unsurprisingly, most of the cases cited in support of the
core factor analysis had multiple factors pointing in the same
direction, not only control and opportunity for profit or loss. See,
e.g., Hobbs, 946 F.3d at 830-36 (all factors pointing in same
direction); Verma v. 3001 Castor, Inc., 937 F.3d 221, 230-32 (3d
Cir. 2019) (control, profit or loss, integral, skill, and investment
all pointing in same direction); Gayle v. Harry's Nurses Registry,
Inc., 594 F. App'x 714, 717-18 (2d Cir. 2014) (control, profit or
loss, and integral all pointing in same direction); Schultz, 466
F.3d at 307-09 (control, profit or loss, investment, permanence,
integral all pointing in same direction); Parrish, 917 F.3d at 379-
388 (control, profit or loss, skill, permanence all pointing same
direction); Saleem, 854 F.3d at 140-48 (control, profit or loss,
investment, permanence all pointing same direction); Mid-Atl.
Installation Servs., 16 F. App'x at 106-08 (control, profit or loss,
investment, skill all pointing same direction); Off Duty Police, 915
F.3d at 1059-1062 (profit or loss, investment, permanence, skill,
and integral all pointing in same direction); McFeeley, 825 F.3d at
243-44 (control, profit or loss, investment, skill, and integral all
pointing in same direction); Eberline v. Media Net, L.L.C., 636 F.
App'x 225, 228-29 (5th Cir. 2016) (control, profit or loss,
investment, and skill all pointing in same direction).
---------------------------------------------------------------------------

In any event, the 2021 IC Rule significantly altered the
``control'' and ``opportunity for profit or loss'' factors, changing
what facts may be considered for each, as discussed more fully in
section V. For example, contrary to the approach taken by most courts,
the 2021 IC Rule placed a significant focus on the worker's control
rather than the potential employer's control and recast the opportunity
for profit or loss factor as indicating independent contractor status
based on the worker's initiative or investment. Thus, irrespective of
whether control and opportunity for profit or loss were more frequently
aligned with the ultimate result in prior appellate cases, the new
framing of these factors, as redefined in the 2021 IC Rule, set forth a
new standard for analysis that is unsupported by precedent.
2. The Role of Control in the 2021 IC Rule's Analysis
The 2021 IC Rule identified ``the nature and degree of control over
the work'' as one of two core factors given ``greater weight'' in the
independent contractor analysis.\136\ In the NPRM, the Department
expressed concern that elevating the importance of control in every
FLSA employee or independent contractor analysis brings the 2021 IC
Rule closer to the common law control test that courts have rejected
when interpreting the Act. Accordingly, the NPRM proposed restoring
control to one of six factors to be considered, with no single factor
being determinative.
---------------------------------------------------------------------------

\136\ Id. at 1246-47 (Sec. 795.105(c), (d)).
---------------------------------------------------------------------------

Commenter views on the 2021 IC Rule's emphasis on control
overlapped with those responding to its creation of ``core factors.''
For example, several commenters in support of the NPRM asserted that
elevating the role of control makes the 2021 IC Rule's analysis too
similar to a common law control test. See, e.g., AFL-CIO; LIUNA; NABTU;
State AGs. Lawyers' Committee for Civil Rights Under Law & the
Washington Lawyers' Committee for Civil Rights and Urban Affairs
(``LCCRUL & WLC'') discussed court decisions where workers were found
to be misclassified employees under the economic reality test despite a
lack of ``actual control'' exercised by the employer, implying that the
outcomes might have been different if courts had applied the 2021 IC
Rule. NELP requested that the Department further deemphasize the
relevance of control, asserting that ``the `control' factor is furthest
removed from the statutory `suffer or permit' language, and that an
absence of control is not particularly telling given that language.''
Finally, several commenters asserted that the 2021 IC Rule's elevation
of control is doubly problematic in view of alterations to the control
factor which, in commenters' views, make the factor less likely to
indicate employee status. See NWLC (``[T]he 2021 Rule not only gave the
`control' factor outsized importance, but impermissibly narrowed the
concept of control itself by focusing on control over work exercised by
the individual worker, as opposed to the right to control by an
employer, and defining control primarily with reference to
considerations that are often disregarded as irrelevant by courts.'');
see also AFL-CIO; International Brotherhood of Teamsters (``IBT'').
As discussed earlier, commenters opposed to the NPRM stated that
the control factor should be given added weight in the economic reality
test (along with the opportunity for profit or loss factor), due to its
purported strong correlation with the ultimate outcomes of prior FLSA
court decisions. See, e.g., ABC; CPIE; Flex; FSI. CWI commented that
the 2021 IC Rule's elevation of control served a ``definitional
purpose,'' identifying control as a foundational aspect of the
``dependence'' in ``economic dependence.'' See also Club for Growth
(``[Because control is] virtually synonymous with what it means to be
an independent businessperson . . . it makes sense that [it] typically
matter[s] more than, for instance, the duration of a business
relationship or a worker's level of skill.''). The U.S. Chamber
commented that the 2021 IC Rule ``rightly elevated the importance of
control'' because ``courts and scholars have found . . . no functional
difference between'' the economic reality and common law control tests.
See also Club for Growth (``It would be odd to say that control, which
underpins the concept of employment and agency law generally, should
have no more weight than, say, whether the worker bought his own
boots.'').
As noted in the NPRM, although the 2021 IC Rule's analysis
regarding who is an employee and who is an independent contractor was
not the same as the common law control analysis, elevating the
importance of control in every FLSA employee or independent contractor
analysis brought the 2021 Rule closer to

[[Page 1653]]

the common law control test that courts have rejected when interpreting
the Act.\137\ The Supreme Court has repeatedly stated that the Act
establishes a broader scope of employment for FLSA purposes than under
a common law analysis focused on control.\138\ The Department remains
concerned that the outsized role of control under the 2021 IC Rule's
analysis was contrary to the Act's text and case law interpreting the
Act's definitions of employment and as such disagrees with commenters
who suggested that control is essentially synonymous with economic
dependence and should be given more weight. The Department, however,
also disagrees with NELP that the FLSA's ``suffer or permit'' standard
suggests that control should be afforded less weight than other
economic reality factors, as courts have similarly not adopted such an
approach.
---------------------------------------------------------------------------

\137\ The Department previously identified this concern as one
of the primary reasons for the Withdrawal Rule. See 86 FR 24311.
\138\ See Darden, 503 U.S. at 324-26; Portland Terminal, 330
U.S. at 150-51; and Rutherford, 331 U.S. at 728.
---------------------------------------------------------------------------

3. The 2021 IC Rule Improperly Altered Several Factors by Precluding
the Consideration of Relevant Facts
The NPRM stated that the Department remained concerned that the
2021 IC Rule's preclusion of certain facts from being considered under
the factors improperly narrowed the economic reality test and did not
allow for a full consideration of all facts which might be relevant to
determining whether a worker is economically dependent upon an employer
for work or in business for themself. Examples of such narrowing from
the 2021 IC Rule include: (1) stating that ``control'' indicative of an
employment relationship must involve an employer's ``substantial
control over key aspects of the performance of the work,'' excluding
requirements ``to comply with specific legal obligations, satisfy
health and safety standards, carry insurance, meet contractually
agreed-upon deadlines or quality control standards, or satisfy other
similar terms;'' \139\ (2) making the ``opportunity for profit or
loss'' factor indicate independent contractor status based on either
the worker's initiative or investment (even if either a lack of
initiative or lack of investment suggests that the worker is an
employee); \140\ (3) disregarding the employer's investments; \141\ (4)
disregarding the importance or centrality of a worker's work to the
employer's business; \142\ and (5) downplaying the employer's reserved
right or authority to control the worker.\143\ In each of these ways,
the 2021 IC Rule limited the scope of facts and considerations
comprising the analysis of whether the worker is an employee or
independent contractor.
---------------------------------------------------------------------------

\139\ 86 FR 1246-47 (Sec. 795.105(d)(1)(i)).
\140\ Id. at 1247 (Sec. 795.105(d)(1)(ii)) (``While the effects
of the individual's exercise of initiative and management of
investment are both considered under this factor, the individual
does not need to have an opportunity for profit or loss based on
both for this factor to weigh towards the individual being an
independent contractor.'').
\141\ Id.; see also id. at 1188 (``[T]he Department reaffirms
its position that comparing the individual worker's investment to
the potential employer's investment should not be part of the
analysis of investment.'').
\142\ Id. at 1247 (Sec. 795.105(d)(2)(iii)); see also id. at
1248 (noting through an example in Sec. 795.115(b)(6)(ii) that
``[i]t is not relevant . . . that the writing of articles is an
important part of producing newspapers''); accord id. at 1195
(responding to commenters regarding the Department's decision to
shift to an ``integrated unit of production'' analysis).
\143\ See id. at 1246-47 (advising, in Sec. 795.105(d)(1)(i),
that the control factor indicates employment status if a potential
employer ``exercises substantial control over key aspects of the
performance of the work'') (emphasis added); id. at 1247 (advising,
in Sec. 795.110, that ``a business' contractual authority to
supervise or discipline an individual may be of little relevance if
in practice the business never exercises such authority''); see also
id. at 1203-04 (same in response to commenters).
---------------------------------------------------------------------------

Numerous commenters opined on the 2021 IC Rule's general narrowing
of the economic reality test and the extent to which it justifies this
rulemaking. For example, IBT stated that ``[t]he current rule conflicts
with the intended broad definition and coverage of the [FLSA] and
adopts an impermissibly narrow test for determining employee status.''
See also, e.g., AFL-CIO (``Overall, the 2021 IC Rule contracted the
coverage of the FLSA, strongly contrary to congressional intent and
Supreme Court precedent.''); Outten & Golden LLP (``The January 2021
rule restricts FLSA coverage to a smaller subset of workers than those
whose work is `suffer[ed] or permit[ted]' under the statute's expansive
coverage.''). While some commenters focused on the 2021 IC Rule's
elevation of ``control'' as a core factor, other commenters
additionally addressed the rule's alteration of individual economic
factors. See, e.g., LCCRUL & WLC (describing the 2021 IC Rule as
``elevating facts tending to show independent contractor status, while
reducing the probative weight of other factors and downplaying facts
tending to show employee status''); NECA & IBEW (``The 2021 IC Rule
also narrowed the facts to be considered under the `non-core'
factors.''). The AFL-CIO and LCCRUL & WLC both identified two changes
to the factors from the 2021 IC Rule as particularly problematic: the
diminution of an employer's reserved right to control, and the
alteration of the ``integral part'' factor (excluding any consideration
of the importance or centrality of the work to the employer).
Other commenters defended the merit of the 2021 IC Rule's five
economic reality factors, as discussed in greater detail in section V.
As a general matter, these commenters praised the 2021 IC Rule's
description of the economic reality factors for reducing overlap and
redundancy compared to the approach taken by courts, stating that such
changes brought greater clarity to the regulated community. See, e.g.,
American Hotel & Lodging Association; Center for Workplace Compliance
(``CWC''); FSI; MEP; National Retail Federation and the National
Council of Chain Restaurants (``NRF & NCCR''). Discussing examples such
as the ``integrated unit'' factor's exclusion of the importance or
centrality of the individual's work to the potential employer's
business,\144\ CWI asserted that the 2021 IC Rule ``ensures that each
factor is properly tailored to address the ultimate determinant of
employee or independent contractor status--economic dependence.''
---------------------------------------------------------------------------

\144\ See 86 FR 1247 (Sec. 795.105(d)(2)(iii)).
---------------------------------------------------------------------------

Having considered the comments on this issue, the Department
believes that the 2021 IC Rule altered various economic reality factors
in ways that improperly narrowed the economic reality test, because
such alterations minimized or excluded facts which in many cases are
relevant for determining whether a worker is economically dependent
upon an employer for work or in business for themself. The Department
remains of the view that the 2021 IC Rule's alteration of several
economic reality factors provides another important justification for
this rulemaking. Commenter feedback on the proper articulation of each
factor in the economic reality test is described in greater detail in
section V.

B. Confusion and Uncertainty Introduced by the 2021 IC Rule

The 2021 IC Rule stated that it sought to ``significantly clarify
to stakeholders how to distinguish between employees and independent
contractors under the Act.'' \145\ However, as previously
discussed,\146\ the 2021 IC Rule introduced a new analysis regarding
employee or independent contractor classification that was materially
different from the longstanding analysis applied by courts and that
included

[[Page 1654]]

several new concepts that neither courts nor the Department had
previously applied. This final rule (and particularly rescission of the
2021 IC Rule) is needed in part because of the concern that the 2021 IC
Rule's new analysis and concepts did not provide the intended clarity.
---------------------------------------------------------------------------

\145\ Id. at 1168.
\146\ See supra section III.A.
---------------------------------------------------------------------------

First, as the Department explained in the NPRM, because the 2021 IC
Rule departed from courts' longstanding precedent, it is not clear
whether courts would have at some point adopted the Rule's analysis
were it not being rescinded as part of this rulemaking. The Department
further explained that this question could have taken years of
appellate litigation in different federal courts of appeals to sort
out, resulting in more uncertainty as to the applicable economic
reality test. Businesses operating nationwide would have had to
familiarize themselves with multiple standards for determining who is
an employee under the FLSA. This litigation and these multiple
standards would have likely caused confusion and uncertainty.\147\
---------------------------------------------------------------------------

\147\ See generally 87 FR 62229.
---------------------------------------------------------------------------

Second, as the Department noted in the NPRM, the 2021 IC Rule would
have introduced several ambiguous terms and concepts into the analysis
for determining whether a worker is an employee under the FLSA or an
independent contractor. For example, those following the guidance
provided in the 2021 IC Rule had to grapple with what it means in
practice for two factors to be ``core'' factors and entitled to greater
weight. In addition, they had to determine, in cases where the two core
factors point to the same classification, how ``substantial'' the
likelihood is that they point toward the correct classification if the
additional factors point toward the other classification. Additionally,
as explained in the NPRM, the 2021 IC Rule did not specify whether the
``additional factors'' that could be considered under that rule had
less probative value (or weight) than the three non-``core'' factors.
Assuming that they did, the 2021 IC Rule would have essentially
resulted in a three-tiered multifactor balancing test, with the
``core'' factors given more weight than enumerated non-``core''
factors, and the enumerated non-``core'' factors given more weight than
the ``additional'' factors. The 2021 IC Rule would have also improperly
collapsed some factors into each other, so that, for example,
investment and initiative would have been considered only as a part of
the opportunity for profit or loss factor, requiring courts and the
regulated community to reconsider how they have long applied those
factors. These new concepts, this new weighing of the factors, and this
new treatment of the factors would have likely caused confusion and
uncertainty.\148\
---------------------------------------------------------------------------

\148\ See generally id.
---------------------------------------------------------------------------

In sum, the NPRM explained that the 2021 IC Rule would have
complicated rather than simplified the analysis for determining whether
a worker is an employee or independent contractor under the FLSA, which
is further justification for this final rule to rescind and replace the
2021 IC Rule.
As a threshold matter, commenters disagreed over whether courts
would adopt and apply the 2021 IC Rule's analysis if it were left in
place. Multiple commenters agreed with the Department's concern, as
described in the NPRM, that courts might not adopt or apply the 2021 IC
Rule, which they criticized as an unlawfully narrow interpretation of
the FLSA. See, e.g., LIUNA (discussing ``the clear illegality of the
2021 Rule''); NELP (describing the 2021 IC Rule as ``a legally
incorrect standard'' that ``merits neither adherence, agency deference,
nor smallest persuasive effect''); UBC (``The 2021 Rule is so
abundantly flawed that it is ripe for challenge under the
Administrative Procedure Act.''). The State AGs commented that ``it
could take years of litigation to determine if and how courts will
adopt'' the 2021 IC Rule's analysis. See also SWACCA (``Judicial
disregard of the January 2021 Rule's interpretation of the FLSA would
create considerable confusion.''). UBC elaborated that uncertainty over
judicial adoption of the 2021 IC Rule poses a significant legal risk to
businesses, as ``any employer relying on the 2021 Rule faces the very
real possibility that their presumed compliance with the FLSA would in
fact be the opposite.'' See also NECA & IBEW (asserting that the 2021
IC Rule does not provide ``certainty and clarity'' for businesses
because courts will continue applying a broader economic reality test).
Notwithstanding their concerns with some aspects of the NPRM's proposed
guidance, some independent contractors and business stakeholders shared
the Department's concerns over whether courts would actually apply the
2021 IC Rule and the attendant risks that they would not. See, e.g.,
Ho-Chunk, Inc. (``Ho-Chunk supports the Department's revision of the
2021 IC Rule as we agree that [it] would have a confusing and
disruptive effect due to its deviation from established case law.'').
Commenters opposed to the NPRM, however, expressed confidence that,
if left in place, the 2021 IC Rule would be adopted by courts over time
and promote greater uniformity in the law. See, e.g., IMC Companies
(``After decades of uncertainty and imprecise applications of the law,
the [2021 IC Rule] was on the cusp of ushering in a new era of
streamlined analysis and consistent court decisions across all
jurisdictions.''); NRF & NCCR (``If left in place, [the 2021 IC Rule]
would undoubtedly increase consistency.''). Several of these commenters
asserted that the Department's concerns about the 2021 IC Rule's
reception by courts were speculative, unsupported by evidence, and
premature. See, e.g., American Bakers Association; CPIE; Freedom
Foundation. A comment from two fellows at the Heritage Foundation
asserted that courts would adopt the 2021 IC Rule given the deferential
standard of review afforded to agency rules that fill statutory gaps
under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
468 U.S. 837 (1984).\149\ Other commenters disputed the relevance of
the Department's concern over the 2021 IC Rule's adoption by courts,
asserting that courts were already applying different versions of the
economic reality test and arriving at different outcomes prior to the
2021 IC Rule. See, e.g., ASTA; Independent Women's Forum (``IWF''); see
also Club for Growth (``Without supporting experience, the critique is
no more than the same argument that could be leveled against virtually
any regulation.''). Finally, many commenters questioned the likelihood
that courts would adopt the NPRM's proposed guidance, which they viewed
as less consistent with the FLSA and judicial precedent than the 2021
IC Rule. See, e.g., CPIE; FSI; National Association of Manufacturers
(``NAM''); Workplace Policy Institute of Littler Mendelson, P.C.
(``WPI'').
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\149\ A far larger number of commenters--including those both
supportive and critical of the NPRM--asserted that any regulatory
guidance issued by the Department addressing employee or independent
contractor status under the FLSA would be a non-binding
``interpretive rule,'' given the Department's lack of explicit
rulemaking authority on the topic. See, e.g., Club for Growth; CWC;
NELP; Winebrake & Santillo, LLC; WPI.
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Having considered the comments, the Department continues to have
serious concerns about the extent to which federal courts would have
adopted the 2021 IC Rule, were it not being rescinded by this
rulemaking. The Department is unaware of a single federal court that
has applied the 2021 IC Rule's analysis. To the contrary, to the
Department's knowledge, only a few court decisions have even considered
the 2021 IC Rule and all expressly

[[Page 1655]]

declined to apply its analysis.\150\ Other courts that have considered
employee or independent contractor classification under the FLSA have
continued applying a broader economic reality test consistent with
their own longstanding precedent.\151\
---------------------------------------------------------------------------

\150\ See Wallen v. TendoNova Corp., No. 20-cv-790-SE, 2022 WL
17128983, at *4 (D.N.H. Nov. 22, 2022) (noting that the 2021 IC Rule
``is not controlling . . . and may not be valid''); Harris v.
Diamond Dolls of Nevada, LLC, No. 3:19-cv-00598-RCJ-CBC, 2022 WL
4125474, at *2 (D. Nev. July 26, 2022) (denying defendants' motion
to reconsider the court's earlier ruling that plaintiffs were FLSA-
covered employees in part because the 2021 IC Rule is ``not
binding''); Badillo-Rubio v. RF Constr., LLC, No. 18-CV-1092, 2022
WL 821421, at *13 (M.D. La. Mar. 17, 2022) (rejecting plaintiff's
argument that the court should apply the 2021 IC Rule's ``integrated
production'' factor as ``unnecessary'' in determining that plaintiff
was an employee). The Wallen decision is notable because, as the
court explained, the First Circuit has neither adopted nor rejected
a particular test, and thus the court was not bound by any prior
circuit-level precedent. Still, the Wallen court declined to apply
the 2021 IC Rule and applied ``the standard six-factor test.'' 2022
WL 17128983, at *3-4.
\151\ See, e.g., Acevedo v. McCalla, No. MJM-22-1157, 2023 WL
1070436, at *3-5 (D. Md. Jan. 27, 2023) (relying on the Fourth
Circuit's economic reality test to find that the worker failed to
state a claim for relief under the FLSA without reference to 2021 IC
Rule); Brunet v. GB Premium OCTG Servs. LLC, No. 4:21-CV-1600, 2022
WL 17730576, at *5-10 (S.D. Tex. Dec. 1, 2022) (applying the Fifth
Circuit's economic reality test without reference to 2021 IC Rule),
report and recommendation adopted, 2023 WL 2186441 (Feb. 23, 2023);
Ajquiixtos v. Rice & Noodles, Inc., No. 4:21-CV-01546, 2022 WL
7055396, at *2-4 (S.D. Tex. Oct. 12, 2022) (relying on the Fifth
Circuit's economic reality test and not referencing the 2021 IC Rule
to conclude that a worker was an employee and not an independent
contractor); Black v. 7714 Ent., Corp., No. 21-CV-4829, 2022 WL
4229260, at *6-8 (E.D.N.Y. July 29, 2022), report and recommendation
adopted, 2022 WL 3643969 (E.D.N.Y. Aug. 24, 2022) (relying on the
Second Circuit's economic reality test to conclude that a worker is
an employee and not an independent contractor without reference to
the 2021 IC Rule); Hill v. Pepperidge Farm, Inc., No. 3:22-CV-97-
HEH, 2022 WL 3371321, at *2-5 (E.D. Va. Aug. 16, 2022) (relying on
the Fourth Circuit's economic reality test to find that the worker
has stated a claim for relief under the FLSA without reference to
2021 IC Rule).
---------------------------------------------------------------------------

The Department disagrees with commenter assertions that the 2021 IC
Rule's analysis was more likely to be adopted by courts than the
analysis proposed in the NPRM. The Department's analysis in this
rulemaking is grounded in longstanding case law, while the new standard
and new concepts introduced by the 2021 IC Rule were a very significant
departure from that longstanding case law. For example, as previously
discussed, the 2021 IC Rule created ``core'' factors that were
automatically given greater weight in the analysis, contrary to how
every appellate court has described the economic reality test.\152\ In
line with the case law, this final rule has no ``core'' factors.
Similarly, while every federal court of appeals that has applied the
integral factor in an FLSA independent contractor case has examined
whether the worker's work is an ``integral part'' of the potential
employer's business,\153\ no circuit applies the 2021 IC Rule's
narrower inquiry into ``whether the work is part of an integrated unit
of production'' as the standard under this factor.\154\ And unlike the
2021 IC Rule, all but two circuits share the approach of listing
``investment'' and ``opportunity for profit and loss'' as separate
economic reality factors, consistent with the Supreme Court's original
listing of these factors in Silk.\155\
---------------------------------------------------------------------------

\152\ See supra section III.A.1.
\153\ See supra n.52.
\154\ See infra, section V.C.5.
\155\ 331 U.S. at 716. As discussed earlier, the Second and D.C.
Circuit Courts of Appeals describe ``investment'' and ``opportunity
for profit or loss'' as a single factor in the economic reality
test. See supra n.58.
---------------------------------------------------------------------------

Some commenters alleged that certain aspects of the NPRM's proposed
guidance were departures from judicial precedent, such as its proposal
that ``control implemented by the employer for purposes of complying
with legal obligations, safety standards, or contractual or customer
service standards may be indicative of control,'' \156\ and its
proposed consideration of investments made by the potential employer as
well as the worker.\157\ However, as the discussions of the control and
investments factors in section V explain, this final rule's guidance on
both issues is well-supported by the case law. Moreover, the Department
has made meaningful changes in this final rule to aspects of its
proposed guidance in response to comments, including the treatment of
control exercised to comply with legal obligations and the
consideration of investments made by the potential employer.\158\ The
Department believes that such changes further align this final rule's
guidance with the analysis presently applied by courts, providing
greater certainty for interested parties.
---------------------------------------------------------------------------

\156\ 87 FR 62275 (proposed Sec. 795.110(b)(4)).
\157\ 87 FR 62275 (proposed Sec. 795.110(b)(2)).
\158\ See infra, section V.C.
---------------------------------------------------------------------------

Apart from the 2021 IC Rule's reception by courts, commenters also
disagreed over whether the 2021 IC Rule's guidance brought clarity or
confusion as a standalone matter. Some commenters asserted that the
novelty of the 2021 IC Rule's analysis, for example, would have created
confusion as compared to the longstanding analysis applied by courts.
See, e.g., NELP (``By departing from decades of federal case law on the
scope of the Act's protections, and by downplaying relevant facts of an
employment relationship in the analysis, the 2021 IC Rule . . . creates
more confusion for employers and workers alike.''); SWACCA (asserting
that the ability to ``draw[] on 70 years of existing interpretations
from the courts and Department of Labor guidance'' under the NPRM's
guidance will ``save time and resources for all stakeholders compared
to the January 2021 Rule's novel, untested weighted framework.'').
In contrast, other commenters asserted that rescission and
replacement of the 2021 IC Rule would reduce certainty and clarity.
See, e.g., Americans for Prosperity Foundation (``AFPF''); Coalition of
Business Stakeholders; NAM; Republican Members of Congress; SHRM; U.S.
Chamber. Numerous commenters that preferred the 2021 IC Rule identified
its establishment of core factors as that rule's most clarifying
feature. See, e.g., Competitive Enterprise Institute (``CEI''); CWC;
IWF; Landmark Legal Foundation; National Association of Women Business
Owners (``NAWBO''); Raymond James Financial, Inc. (``Raymond James'').
Some commenters additionally supported the 2021 IC Rule's elimination
of purported redundant or overlapping considerations in various
economic reality factors. See, e.g., FSI (criticizing the NPRM's
proposed separation of the ``investment'' and ``opportunity for profit
or loss'' factors as ``yet another way in which the [NPRM] . . .
undo[es] the 2021 Rule's clarifying efforts to articulate an
appropriately weighted test with less overlapping redundancy''); MEP.
Having reviewed the comments, the Department continues to believe
that the 2021 IC Rule introduced uncertainty regarding the applicable
legal standard for determining whether a worker is an employee or an
independent contractor under the FLSA, contrary to its stated intent.
Prior to the 2021 IC Rule, there was certainty as to the applicable
legal standard for determining whether a worker was an employee or
independent contractor under the FLSA because federal courts of appeals
applied a totality-of-the-circumstances, economic reality test that did
not elevate any factors above the others. Despite slight variation in
the exact number and phrasing of specific economic reality factors,
courts and the Department generally examined the same economic reality
factors. The 2021 IC Rule, however, injected uncertainty into this area
of the law by putting forth new guidance that was at odds (for all of
the reasons discussed herein) with

[[Page 1656]]

the substantive standard applied by courts. As a result of the 2021 IC
Rule, the regulated community was confronted with inconsistent
standards for interested parties to apply to determine a worker's
status--the test from the 2021 IC Rule and the totality-of-the-
circumstances test in federal appellate case law.\159\ Leaving the 2021
IC Rule in place would have risked greater confusion regarding its
relation to well-settled circuit precedent. Thus, the 2021 IC Rule's
new standard introduced uncertainty that did not exist before.\160\
---------------------------------------------------------------------------

\159\ To the extent that there was any uncertainty around
outcomes when applying federal appellate case law beyond what would
be expected from any fact-specific test, the standard that courts
and the Department would apply prior to the 2021 IC Rule was known.
And with this rulemaking, the Department hopes to decrease any
uncertainty around outcomes by providing detailed guidance about the
application of each factor that is consistent with the case law, as
opposed to the new concepts that the 2021 IC Rule introduced.
\160\ The Department acknowledges that the 2021 IC Rule includes
several important principles from the case law, such as: economic
dependence is the ultimate inquiry, the list of economic reality
factors is not exhaustive, and no single factor is determinative.
However, as explained herein, the 2021 IC Rule was, on balance, a
departure from the case law to an extent that it introduced
uncertainty.
---------------------------------------------------------------------------

Additionally, the Department continues to believe that the aspects
of the 2021 IC Rule's analysis introduced confusion, making that rule's
guidance vulnerable to misapplication. Confusion about how to apply the
2021 IC Rule was evident in many of the comments submitted in
opposition to the Department's proposal to rescind and replace that
rule. For example, several commenters inaccurately described the 2021
IC Rule as establishing a ``two-factor test,'' see, e.g., CEI; National
Demolition Association (``NDA''), while others mistakenly assumed that
non-core factors were only considered when the two core factors pointed
to opposite classification outcomes. See, e.g., Information Technology
& Innovation Foundation; News/Media Alliance (``N/MA''); Professional
Golfers' Association of America (``PGA'').\161\ Some commenters
appeared to conflate the reduced importance of non-core factors under
the 2021 IC Rule's analysis with a reduced need to consider such
factors at all. See, e.g., National Federation of Independent
Businesses (``NFIB''); SHRM.\162\ Additionally, some commenters viewed
the 2021 IC Rule's economic reality test, in its totality, as
essentially the same as a common law control test.\163\ See The
National Council of Agricultural Employers (asserting that common law
definitions of independent contractor status ``are consistent with the
2021 IC Rule''); U.S. Chamber (asserting that ``despite the ostensible
variances between the economic realities and common law control tests,
`there is no functional difference between' these tests'').
---------------------------------------------------------------------------

\161\ The 2021 IC Rule explained that it rejected commenter
requests to ``state that if the two core factors point towards the
same classification, there is no need to consider any other
factors'' because ``in some circumstances, the core factors could be
outweighed by particularly probative facts related to other
factors.'' 86 FR 1202.
\162\ The 2021 IC Rule explained that ``there may be
circumstances where one or more of the non-core factors, upon
consideration, has little or no probative value.'' 86 FR 1202
(emphasis added).
\163\ Cf. 86 FR 1201 (``[T]he rule's standard for employment
remains broader than the common law.''); see also id. at 1239
(rejecting the adoption of a common law control test in the analysis
of regulatory alternatives).
---------------------------------------------------------------------------

Commenter confusion about the 2021 IC Rule is unsurprising because
that rule set forth a novel analysis which has not been applied by any
court. The confusion evident in the comments received reinforces the
Department's assessment, as explained in the NPRM, that the 2021 IC
Rule could have resulted in misapplication of the economic reality test
and may have conveyed to employers that more workers could be
classified as independent contractors than prior to the 2021 IC Rule.

C. Risks to Workers From the 2021 IC Rule

In the NPRM, the Department explained that to the extent the 2021
IC Rule's guidance resulted in the misclassification of employees as
independent contractors, the resulting denial of FLSA protections could
harm the affected workers. These protections include being paid at
least the federal minimum wage for all hours worked, overtime
compensation for hours worked over 40 in a workweek, and protection
against retaliation for complaining about, for example, a violation of
the FLSA. The Department further explained in the NPRM that the 2021 IC
Rule did not fully consider these potential consequences for workers.
The NPRM noted that this result could have a disproportionate impact on
women and people of color, to the extent such workers are
overrepresented in low-wage positions where misclassification is more
likely.\164\ The NPRM further noted that women and people of color
experience multiple types of economic inequities in the labor force,
including gender and racial wage gaps and occupational segregation, and
that the misclassification of these workers as independent contractors
deprives them of wage and hour protections that could help alleviate
some of this inequality.\165\
---------------------------------------------------------------------------

\164\ See 87 FR 62230 (describing commenter feedback from the
Withdrawal Rule asserting that ``misclassification is rampant in
low-wage, labor-intensive industries where women and people of
color, including Black, Latinx, and AAPI workers, as
overrepresented'').
\165\ Id.
---------------------------------------------------------------------------

Many commenters, including worker advocacy groups, labor unions,
and other stakeholders, shared views about the 2021 IC Rule's effect on
employees vulnerable to misclassification. The Department also received
significant feedback regarding the potential effects of this rulemaking
on independent contractors, as well as from commenters who did not
agree that the 2021 IC Rule would or could increase the prevalence of
misclassification.
Many commenters agreed with the Department's assessment that the
misclassification of employees as independent contractors remains a
serious problem for workers, businesses, and the broader economy.
Several commenters referenced studies or data estimating a high
prevalence of misclassification in the economy, in addition to those
mentioned in the NPRM's regulatory impact analysis.\166\ See, e.g.,
NABTU (citing multiple studies estimating the misclassification of
construction workers in various states); State AGs (discussing a June
2022 report estimating that ``at least 10 percent of New York State's
workers are misclassified as independent contractors'' and a December
2022 report estimating that ``approximately 259,000 workers in
Pennsylvania are wrongly classified as independent contractors'').
CLASP & GFI asserted that the misclassification of employees as
independent contractors is ``occurring with increased frequency as
workplaces `fissure,' '' and ``firms . . . outsource bigger and bigger
portions of their workforces to other entities and to workers
themselves.'' Similarly, the UFCW asserted that misclassification is a
``pervasive and growing problem,'' citing one report showing that in
Washington state, misclassification increased from 5 percent of
employers misclassifying workers in 2008 to 14 percent of employers
misclassifying workers in 2017, with construction workers, clerical
workers, and hotel and restaurant workers the most likely to be
misclassified.'' Several commenters emphasized the prevalence of
misclassification in specific industries. See, e.g., American
Federation of State,

[[Page 1657]]

County and Municipal Employees (custodial work); Farmworker Justice
(agriculture); IntelyCare Inc. (nursing); National Domestic Workers
Alliance (``NDWA'') (domestic and home care); REAL Women in Trucking
(trucking); Service Employees International Union (janitorial and gig
work); SMACNA (construction).
---------------------------------------------------------------------------

\166\ See 87 FR 62266 (citing a 2020 study from NELP estimating
that ``10 to 30 percent of employers (or more) misclassify their
employees as independent contractors).
---------------------------------------------------------------------------

Many commenters discussed how the misclassification of employees as
independent contractors deprives workers of wages. SWACCA, for example,
commented that ``the estimated 20 percent of construction workers who
should be treated as employees (but are not) lose close to $1 billion
in wages annually.'' Commenters pointed out that misclassification
undercuts employers that comply with the law and causes a ``race to the
bottom'' in labor standards. See, e.g., AARP; Indiana, Illinois, Iowa
Foundation for Fair Contracting; SWACCA (estimating that ``construction
companies that treat their workforce as independent contractors save at
least 20 to 30 percent on labor costs''). Gale Healthcare Solutions
stated that ``[t]emporary staffing platform companies that hire nursing
staff as W2 employees lose talent to companies that use a 1099 model,
as 1099 agencies promote wages that appear higher because they do not
provide traditional protections of employment or account for
withholding taxes and additional expenses required by the W-2 model.''
Alto Experience Inc., a ridesharing company that classifies its drivers
as employees, asserted that the misclassification of employees as
independent contractors constitutes an ``unfair method of competition
in commerce'' that the FLSA was passed to prevent.
Beyond wage effects, commenters identified and discussed many other
consequences of worker misclassification. For example, the NWLC
asserted ``by strengthening the employment test to reduce
misclassification, the Department can ensure that more nursing mothers
will be able to hold their employers accountable for providing
appropriate facilities and adequate break time.'' See also A Better
Balance (``[W]e are pleased that this rule will help to ensure that
workers are able to access their rights under the Family and Medical
Leave Act and the Break Time for Nursing Mothers law.''). As discussed
more fully in section VII, commenters also raised other negative
consequences of misclassification for workers beyond those directly
related to the FLSA, such as: decreased access to employment benefits
such as health insurance or retirement benefits, inability to access
paid sick leave, unemployment insurance, and worker's compensation, a
lack of ability to take collective action to improve workplace
conditions, and a lack of anti-discrimination protections under various
civil rights laws. See, e.g., Smith Summerset & Associates LLC; UFCW.
Several commenters emphasized the uniquely harmful risks and
consequences of misclassification for workers in certain demographic
groups. See, e.g., AARP (senior workers); California Immigrant Policy
Center (immigrant workers); Equal Justice Center (low-income workers);
LCCRUL & WLC (workers of color); NWLC (women workers). In a joint
comment, the Action Center on Race and the Economy, Color of Change,
Liberation in a Generation, Unemployed Workers United, MediaJustice,
the National Black Worker Center, Muslims for Just Futures, Raise Up
South Florida, Human Impact Partners, ROC United, Interfaith Center on
Corporate Responsibility, HEAL Food Alliance, and the Public
Accountability Initiative/<a href="http://LittleSis.org">LittleSis.org</a> (``ACRE et al.'') pointed to
the overrepresentation of workers of color in low-wage, labor-intensive
industries where misclassification is pervasive and asserted that they
``view misclassification as a critical racial justice issue that the
DOL must help address.''
Many commenters agreed with the Department's assessment that the
2021 IC Rule has increased the risk of misclassification. For example,
SWACCA asserted that challenges in enforcing misclassification in the
construction industry ``would be compounded if enforcement officials
had to pursue bad actors under the January 2021 Rule's novel
interpretation of the law that could require protracted litigation to
clarify and would permit more contractors to argue that their
classification of workers as independent contractors is permissible, or
at least defensible, under the FLSA.'' The International Association of
Machinists and Aerospace Workers asserted that the 2021 IC Rule
``creates perverse incentives for companies to misclassify workers,''
because ``[t]he more easily a company can misclassify its workforce,
the more incentive for other companies to do the same, creating a `race
to the bottom' in employment practices and social standards to the
detriment of workers.'' CLASP & GFI and Farmworker Justice both
commented that the 2021 IC Rule's elevation of the ``control'' and
``opportunity for profit or loss'' factors might exacerbate
misclassification among farmworkers, whose employment status is
particularly dependent on the consideration of factors other than the
2021 IC Rule's ``core'' factors.
Commenters opposed to this rulemaking generally did not dispute the
occurrence or importance of employee misclassification, at least in
certain industries. For example, a lawyer representing employers
acknowledged that ``independent contractor status can be abused.'' See
also, e.g., HR Policy Association (``The Association does not question
the fact that worker misclassification does occur and that individuals
may be deprived of rights and benefits crucial for their
livelihood.''); U.S. Black Chambers, Inc. (``[W]e agree that worker
misclassification is a pressing issue to be solved at the Federal
level[.]''). Some commenters, however, alleged that rescinding and
replacing the 2021 IC Rule would be an overbroad solution for a problem
that could be addressed with industry-specific measures. See H.R.
Policy Association; IMC Companies, LLC (trucking company) (``What we do
ask is that the WHD and legislators across our country recognize that
targeted regulation of these [app-based technology] companies is the
answer to this issue.''). Other commenters asserted that, in the NPRM,
the Department failed to explain how the 2021 IC Rule has increased the
risk of worker misclassification or otherwise hampered efforts to
reduce misclassification. See, e.g., IWF (``The Department has provided
no evidence that these drastic changes are necessary to prevent
misclassification, or even that widespread misclassification actually
occurred under the 2021 Rule.''); NAWBO. Some commenters referenced
Departmental press releases published after the March 2022 CWI v. Walsh
decision (which ruled that the 2021 IC Rule had taken effect in March
2021) as evidence that the Department is successfully using the 2021 IC
Rule to combat misclassification. See, e.g., Coalition of Business
Stakeholders (``DOL has repeatedly boasted about the cases it has
brought showing improper classification of independent contractors and
the amounts of back pay remedies it has secured.''); see also Flex;
U.S. Chamber.
Having considered the comments, the Department remains of the view
that the misclassification of employees as independent contractors is a
serious problem affecting workers who do not receive proper wages and
businesses that have to compete in the economy against businesses that
unlawfully misclassify their workers. As explained more fully in
section III.B., the 2021 IC

[[Page 1658]]

Rule increased the risk of worker misclassification by adding
considerable confusion and uncertainty over the proper analysis for
distinguishing between FLSA-covered employees and independent
contractors. By elevating certain factors, devaluing other factors, and
precluding the consideration of certain relevant facts, the novel--and
unprecedented--analysis in the 2021 IC Rule has improperly narrowed the
focus of the inquiry in a way that may have led employers to believe
the test no longer includes as many considerations; the comments
received evidenced such misunderstanding. If widespread misperceptions
about the 2021 IC Rule articulated by some of its supporters in the
comments are any indication, such confusion and misapplication of that
rule could deprive many workers of protections they are entitled to
under the FLSA.
The Department's 2022 press releases addressing misclassification
enforcement referenced by some commenters primarily involved
investigations by the Department that were initiated before the 2021 IC
Rule was published and/or covered a period of investigation prior to
March 8, 2021. In any event, the Department's ability to pursue some
enforcement actions involving misclassification while applying the 2021
IC Rule's guidance is not a persuasive reason to retain the 2021 IC
Rule. The Department is not promulgating this rule because the 2021 IC
Rule renders the Department powerless to enforce misclassification.
Rather, the 2021 IC Rule's guidance injected a new framework for
analyzing whether workers are employees or independent contractors
under the FLSA that is inconsistent with decades of case law
interpreting the Act. As explained earlier, the Department is further
concerned that widespread stakeholder confusion over the 2021 IC Rule
and its guidance regarding how its factors should be applied (as
discussed in section II.B.) may be causing some misclassification that
would not occur in the absence of the rule. For these reasons, the
Department believes that rescinding the 2021 IC Rule will likely both
reduce misclassification and restore the Department's ability to
consider all relevant facts under a totality-of-the-circumstances
economic reality test that does not predetermine the weight of certain
factors, consistent with the text of the FLSA and decades of judicial
precedent.
Other commenters expressed concern that rescinding the 2021 IC Rule
will result in the widespread reclassification of workers who should be
considered independent contractors. See Cambridge Investment Research,
Inc. (``[T]he practical result of the [NPRM] . . . will be that many
workers--including workers who want to be independent contractors--will
be reclassified as employees under the FLSA.''); SBA Office of Advocacy
(``Small businesses and independent contractors have told Advocacy that
this rule may be disruptive and detrimental to the millions of
businesses in industries that rely upon the independent contractor
model.''). This concern was also expressed by numerous self-identified
independent contractors, who feared reclassification or lost work
opportunities as an unintended consequence of the rulemaking.
Some commenters contended that the NPRM's guidance was
inappropriately broad and would encompass as employees individuals who
they assert are appropriately classified as independent contractors.
See, e.g., IBA (asserting that the NPRM would improperly ``broaden the
test and thereby expand the meaning of `employee' to encompass
individuals who under current law would qualify independent
contractors''); National Association of Insurance and Financial
Advisors (``NAIFA'') (``NAIFA believes that [the NPRM] wrongly
construes the scope of FLSA coverage and would thus misclassify many
independent insurance agents and brokers as employees.''). Other
commenters asserted that ambiguity inherent in reverting to a
``totality-of-the-circumstances'' analysis would deter businesses from
engaging with independent contractors. See, e.g., Beacon Center of
Tennessee (asserting that the NPRM would ``rob[ ] businesses of the
regulatory certainty needed to effectively operate and make personnel
decisions, which is likely to have a chilling effect on hiring new
employees or contractors''); NFIB (``Companies . . . will be less
likely to engage a contractor or consultant if there's uncertainty over
a worker's status since a finding of misclassification can result in
ruinous penalties''); Opportunity Solutions Project (``If implemented,
the proposal would make it more difficult for entrepreneurs and
independent workers to find companies willing to take on the risk of
becoming their client.'').
Other commenters disagreed that the Department's proposal would
result in the reclassification of appropriately classified independent
contractors. For example, an individual commenter wrote that
``[i]mproving classification rules and returning to a back-to-basics
approach used for over fifty years does not mean independent
contractors will automatically be classified as employees.'' Noting
that ``[t]he Proposed Rule is a restatement of decades of court
precedents and WHD guidance,'' UBC remarked that ``[a]ny employer who
has been correctly classifying its independent contractors has no worry
that the Proposed Rule will result in liability under the FLSA.''
Multiple business stakeholders and self-identified independent
contractors commented that they did not expect such reclassification
for workers in their industry. For example, LPL Financial stated that
it believes that the Department's proposal ``will not result in the
reclassification of independent financial professionals as employees''
and it ``commend[ed] the DOL for undertaking the rulemaking process and
proposing a rule that recognizes that entrepreneurs who establish and
build small businesses utilizing their managerial skills and
professional expertise can operate in an independent contractor model
to create multigenerational financial advising practices.'' Over 1,000
financial advisors affiliated with Ameriprise and LPL Financial
submitted separate campaign comments in support of the NPRM, asserting
that ``[the] proposal will allow me to continue to choose to be an
independent contractor.'' See also International Dale Carnegie
Franchise Association (``The IDCFA is confident that independent
instructors would not be reclassified as employees under the Proposed
IC Rule.'').
Having considered the comments, the Department continues to believe
that this rulemaking will not jeopardize legitimate independent
contracting arrangements. Fears to the contrary are not realistic given
that the Department is adopting guidance derived from the same analysis
that courts have applied for decades and have been continuing to apply
since the 2021 IC Rule took effect. There is no evidence that the
status quo prior to the 2021 IC Rule was hindering the use of
independent contractors.\167\
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\167\ The 2021 IC Rule asserted that ``legal uncertainty arising
from . . . shortcomings of the multifactor economic reality test may
deter innovative, flexible work arrangements,'' but declined to
provide any evidence in response to comments questioning that claim,
explaining it was ``unclear what empirical data could measure
innovation that is not occurring due to legal uncertainty.'' 86 FR
1175.
---------------------------------------------------------------------------

Because the FLSA's economic reality test is broad and fact-
specific, the Department cannot categorically declare that individual
workers in particular occupations or industries will always qualify as
independent contractors applying the guidance provided in this rule.
However, keeping in mind that the Department is adopting guidance in
this

[[Page 1659]]

rule that is essentially identical to the standard it applied for
decades prior to the 2021 IC Rule, the Department agrees with those
commenters who stated that workers properly classified as independent
contractors prior to the 2021 IC Rule will likely continue to be
properly classified as independent contractors under this rule and
disagrees with other commenter assertions that this rule will ``cause
workers who have long been properly classified as independent
contractors . . . to improperly lose their independent status.'' ABC;
see also, e.g., Finseca (expressing concern that the NPRM ``could
materially disrupt long-standing, well-understood, and properly
classified independent contractor relationships''); National
Association of Chemical Distributors (asserting that the NPRM would
``disrupt longstanding business models''). Rather, because this final
rule is aligned with longstanding case law, the Department does not
anticipate that independent contractors (who sometimes also self-
identify as freelancers or small/micro business owners) who are
correctly classified as independent contractors under current circuit
case law would be reclassified applying the guidance provided in this
rule.
In sum, the Department's rulemaking to rescind and replace the 2021
IC Rule is motivated, in part, by an assessment that the guidance
provided here will likely benefit workers as a whole, including those
workers at risk of being misclassified as independent contractors as
well as those who are appropriately classified as independent
contractors.

D. The Benefits of Replacing the Part 795 Regulations on Employee or
Independent Contractor Status

Until the 2021 IC Rule, the Department had not previously
promulgated generally applicable regulations on independent contractor
classification in the FLSA's 83 years of existence. In light of the
consistency of the economic reality test as adopted by the circuits,
the Department had instead relied on subregulatory documents to provide
generally applicable guidance for the Department and the regulated
community on determining employee or independent contractor status
under the FLSA. In the NPRM, the Department explained that, although it
believes that its earlier subregulatory guidance provided appropriate
guidance to the regulated community, the Department upon further
consideration recognized that publishing regulatory guidance would be
beneficial for stakeholders, particularly because the Department had
published a regulation in 2021. The NPRM elaborated that detailed
federal regulations would be easier to locate and read for interested
stakeholders than applicable circuit case law, potentially helping
workers and businesses better understand the Department's
interpretation of their rights and responsibilities under the law.
Additionally, the NPRM explained that adopting detailed regulations
that are aligned with existing precedent could better protect workers,
who were placed at a greater risk of misclassification as a consequence
of the 2021 IC Rule.\168\
---------------------------------------------------------------------------

\168\ See generally 87 FR 62230.
---------------------------------------------------------------------------

Several commenters agreed with the Department's reasons for
replacing the 2021 IC Rule with alternative regulatory guidance. These
commenters generally asserted that detailed regulatory guidance brings
added clarity to interested parties. See, e.g., NELP (``[T]o address
confusion that can stem from a multifactor balancing test, the
commentary to the proposed rule clarifies how each of the factors
(described in more detail below) informs the economic dependence
analysis, i.e., how and why each factor helps to answer the question of
whether a worker is truly in business for themself.''); State AGs
(``Subregulatory guidance is not as robust as promulgating a new
rule.''); Winebrake & Santillo, LLC (supporting the NPRM for
``clarifying topics which had not been fully explored by all courts'').
LIUNA asserted that the regulatory guidance's ``expert synthesis of
complicated precedents will . . . clarify the FLSA and promote its
uniform application.''
Other commenters commended the accessibility of generally
applicable regulatory guidance. See UBC (``In one place, without
searching through WHD guidance and court cases, employers and workers
can go to the rule for information that will assist in correct
classification. This need for rulemaking, albeit for slightly different
reasons, is where the interest of the proponents of the 2021 Rule and
drafters of the NPRM are aligned.''). Some business stakeholders also
agreed with the potential benefits of regulatory guidance. See, e.g.,
Consumer Brands Association (``The CPG industry believes strongly in
the potential opportunities afforded through clear rulemaking''); CWC
(``We . . . concur with DOL's assessment that a clear explanation of
the test in easily accessible regulatory text is valuable.'').
Some labor unions and worker advocacy organizations opined that the
Department needs to promulgate regulatory guidance to counteract
confusion introduced by the 2021 IC Rule. See State AGs (asserting that
``a new rule is necessary because the 2021 Rule was such a drastic
departure from the status quo''); UBC (``The 2021 Rule's confusion and
encouragement of misclassification . . . creates the necessity for the
Proposed Rule with its adherence to the intent of Congress and judicial
precedents.''); see also NECA & IBEW.
Several commenters, however, disagreed that the Department should
issue regulations addressing independent contractor status under the
FLSA. Some of these commenters asserted that the Department has no
legal authority or expertise to do so. See, e.g., ArcBest (``Congress
has not delegated authority to DOL to define `independent contractor'--
a definition with far-reaching economic and political consequences.'');
Boulette Golden & Marin L.L.P. (``[W]hile the DOL may have authority to
issue guidance on its view of the term `employee,' the DOL does not
have any authority to offer guidance on the meaning of the term
`independent contractor.' ''); IBA (``The DOL has no special expertise
in interpreting Supreme Court precedent.''). Insight Association and
several individual commenters asserted that Congress should address the
distinction between FLSA-covered employees and independent contractors
rather than the Department. Finally, CPIE asserted that ``this area of
the law is one that is not appropriate for general regulatory
guidance,'' urging the Department to ``continue its policy of issuing
subregulatory guidance on the application of the economic reality test
to specific facts'' if it rescinded the 2021 IC Rule.
Having considered the comments, the Department continues to believe
not only in the benefits of adopting alternative guidance on the
distinction between FLSA-covered employees and independent contractors,
but also in the value of providing such guidance in easily-accessible
regulatory text. Although the Department previously issued regulatory
guidance on this issue specific to the sharecropping and lumber
industries in parts 780 and 788,\169\ the Department believes that
regulatory text that can be applied to workers in any industry is
beneficial to the regulated community.
---------------------------------------------------------------------------

\169\ See supra, nn.63 and accompanying text.
---------------------------------------------------------------------------

Further, as noted in the 2021 IC Rule, the Department ``without
question has relevant expertise in the area of what

[[Page 1660]]

constitutes an employment relationship under the FLSA, given its
responsibility for administering and enforcing the Act and its decades
of experience doing so.'' \170\ As also noted in the 2021 IC Rule, the
Department's ``authority to interpret the Act comes with its authority
to administer and enforce the Act.'' \171\ The Department issues
interpretations on a range of issues under the Act, and addressing
which workers are employees protected by the Act or independent
contractors not subject to the Act is one such issue. The Department's
attention to relevant judicial precedent interpreting the Act is key to
providing such guidance.
---------------------------------------------------------------------------

\170\ 86 FR 1176.
\171\ Id.
---------------------------------------------------------------------------

The Department acknowledges that some commenters would prefer
Congress to address this issue through legislation and to adopt one
uniform standard that would apply across federal laws. See, e.g., ASTA;
CPIE. However, in the absence of congressional legislation to amend the
FLSA, the Department believes that this final rule will provide
detailed guidance on employee or independent contractor status that is
not only consistent with the FLSA and the decades of case law
interpreting it, but clearer and more robust than the Department's
earlier subregulatory guidance on the topic.

E. Timing of the Rulemaking

Many of the commenters opposed to this rulemaking asserted that the
Department's rulemaking to rescind and replace the 2021 IC Rule is
premature or otherwise ill-timed. See, e.g., CPIE (``[CPIE] urges DOL
to defer action until courts have had an opportunity to apply the 2021
IC Rule.''); CWI (``The most obvious alternative action `within the
ambit of the existing policy' is simply to allow the 2021 IC Rule to go
into effect and study its results, rather than assume unproven
consequences.''); MEP (``MEP strongly believes WHD should allow the
courts to weigh in on the current rule before determining the analysis
does not work and replacing it with a standard that will clearly create
substantial confusion and uncertainty for the regulated community.'').
Some commenters noted the added costs and uncertainty attributable
to the Department promulgating the 2021 IC Rule and subsequently
proposing to rescind and replace it. See American Association of
Advertising Agencies (``4A's'') (``The regulatory whiplash here is
real, and costly, and should not be taken so lightly by DOL.''); see
also App Association; N/MA; Vegas Chamber.
Other commenters cited to various economic conditions that caution
(in their view) against any rulemaking that would deter independent
contracting. See, e.g., NRF & NCCR (``As the American economy and the
modern workplace continue to evolve in the wake of the COVID-19
pandemic, it is imperative that policymakers account for the wide range
of innovative and imaginative methods by which individuals engage in
the marketplace and feed their families.''); Scopelitis, Garvin, Light,
Hanson & Feary (``Scopelitis'') (``The Proposed Rule would add pressure
to already stressed supply chains.'').
The Department disagrees with the various timing arguments advanced
by commenters urging the Department to delay or withdraw this
rulemaking, though it is mindful of the impact that changes in the
Department's guidance may end up having on the regulated community. As
the Department has explained, there are compelling reasons to rescind
and replace the 2021 IC Rule, including its significant departure from
judicial precedent, the confusion it has introduced for affected
stakeholders, and the consequences for workers and competing businesses
attributable to an increased risk of misclassification. Allowing the
2021 IC Rule to stay in effect for a longer period would not ameliorate
any of those concerns. To the contrary, as NELP pointed out, ``over
time . . . negative consequences . . . will be exacerbated.'' The fact
that no court has applied the 2021 IC Rule in the year since the
district court's decision in CWI v. Walsh is not a justification for
its retention.
The Department further finds arguments about stakeholder reliance
on the 2021 IC Rule to be unpersuasive. Before the 2021 IC Rule's
effective date, the Department issued rules intending to delay the
effective date of and then withdraw the 2021 IC Rule, while also
identifying concerns with the 2021 IC Rule. The Department then
announced on June 3, 2022 that it was initiating a new rulemaking on
employee and independent contractor classification under the FLSA.\172\
Thus, the regulated community has been on notice since very soon after
the 2021 IC Rule's publication as to the Department's concerns
regarding the 2021 IC Rule, including the way in which it upset decades
of precedent the regulated community and workers had previously been
relying on to distinguish between employees and independent
contractors.
---------------------------------------------------------------------------

\172\ See Jessica Looman, ``Misclassification of Employees as
Independent Contractors Under the Fair Labor Standards Act,'' U.S.
Department of Labor Blog (June 3, 2022), <a href="https://blog.dol.gov/2022/06/03/misclassification-of-employees-as-independent-contractors-under-the-fair-labor-standards-act">https://blog.dol.gov/2022/06/03/misclassification-of-employees-as-independent-contractors-under-the-fair-labor-standards-act</a>.
---------------------------------------------------------------------------

Finally, the Department disagrees with commenters that it is
obligated to wait for more time to gather data before rescinding the
2021 IC Rule and promulgating a new rule.\173\ As discussed in the
NPRM, the Department considered waiting for a longer period to monitor
the effects of the 2021 IC Rule but believed that the potential
confusion and disruption from the 2021 IC Rule outweighed any potential
benefit from this monitoring.\174\ In making the decision to proceed
with this final rule, the Department drew upon its extensive experience
in interpreting and enforcing the FLSA and its consideration of the
comments received.\175\ The Department believes that this rule, which
provides guidance that is consistent with longstanding precedent,
provides more consistency for stakeholders than the 2021 IC Rule.
---------------------------------------------------------------------------

\173\ ``[A]n agency need not--indeed cannot--base its every
action upon empirical data; depending upon the nature of the
problem, an agency may be entitled to conduct . . . a general
analysis based on informed conjecture.'' Chamber of Com. of U.S. v.
SEC, 412 F.3d 133, 142 (D.C. Cir. 2005) (internal quotation and
citation omitted).
\174\ See 87 FR 62219.
\175\ An agency's reliance on ``its own and its staff's
experience, the many comments received, and other evidence, in
addition to [ ] limited and conflicting empirical evidence'' meets
APA requirements. Chamber of Com., 412 F.3d at 142.
---------------------------------------------------------------------------

IV. Alternatives Considered

In the NPRM, the Department noted that it had considered four
alternatives to what it proposed.\176\ The Department further noted
that it had previously considered and rejected two of those
alternatives--issuing guidance adopting either the common law test or
the ABC test for determining FLSA employee or independent contractor
status--in the 2021 IC Rule.\177\
---------------------------------------------------------------------------

\176\ 87 FR 62230.
\177\ Id. (citing 86 FR 1238).
---------------------------------------------------------------------------

Regarding adoption of the common law test, as the Department
explained in the NPRM, that test is contrary to the ``suffer or
permit'' language in section 3(g) of the FLSA, which the Supreme Court
has interpreted as requiring a broader definition of employment than
under the common law. Accordingly, the Department stated that the
common law test is inconsistent with the FLSA because that test ``is
not sufficiently protective in assessing worker classification under
the FLSA.'' Regarding adoption of an ABC test, as the Department
explained, the Supreme Court has held that the economic reality test is
the applicable standard for determining workers' classification

[[Page 1661]]

under the FLSA as an employee or independent contractor, and ``the
existence of employment relationships under the FLSA `does not depend
on such isolated factors' as the three independently determinative
factors in the ABC test, `but rather upon the circumstances of the
whole activity.' '' Because an ABC test is, in the Department's view,
inconsistent with Supreme Court precedent interpreting the FLSA, the
Department explained that ``it could only implement an ABC test if the
Supreme Court revisits its precedent or if Congress passes legislation
that alters the applicable analysis under the FLSA.'' \178\
---------------------------------------------------------------------------

\178\ See generally id. at 62231.
---------------------------------------------------------------------------

As a third alternative, the Department considered proposing to only
partially rescind the 2021 IC Rule and instead retain some aspects of
it. In discussing this alternative, the Department listed numerous
instances in which its NPRM was consistent or in agreement with the
2021 IC Rule. The Department explained that it considered ``simply
removing the problematic `core factors' analysis from the 2021 IC Rule
and retaining the five factors as described in th[at] rule.'' However,
the Department rejected this approach because numerous ways in which
that rule described the factors were in tension with judicial precedent
and longstanding Department guidance and ``narrow[ed] the economic
reality test by limiting the facts that may be considered as part of
the test, facts which the Department believes are relevant in
determining whether a

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