Independent Contractor Status Under the Fair Labor Standards Act

DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 780, 788 and 795

RIN 1235-AA34

Independent Contractor Status Under the Fair Labor Standards Act

AGENCY:

Wage and Hour Division, Department of Labor.

ACTION:

Final rule.

SUMMARY:

The U.S. Department of Labor (the Department) is revising its interpretation of independent contractor status under the Fair Labor Standards Act (FLSA or the Act) to promote certainty for stakeholders, reduce litigation, and encourage innovation in the economy.

DATES:

This final rule is effective on March 8, 2021.

FOR FURTHER INFORMATION CONTACT:

Amy DeBisschop, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division (WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Copies of this final rule may be obtained in alternative formats (Large Print, Braille, Audio Tape, or Disc), upon request, by calling (202) 693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information or request materials in alternative formats.

Questions of interpretation and/or enforcement of the agency's regulations may be directed to the nearest WHD district office. Locate the nearest office by calling WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or logging onto WHD's website for a nationwide listing of WHD district and area offices at

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

SUPPLEMENTARY INFORMATION:

I. Executive Summary

The FLSA requires covered employers to pay their nonexempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek, and it mandates that employers keep certain records regarding their employees. A worker who performs services for an individual or entity (“person” as defined in the Act) as an independent contractor, however, is not that person's employee under the Act. Thus, the FLSA does not require such person to pay an independent contractor either the minimum wage or overtime pay, nor does it require that person to keep records regarding that independent contractor. The Act does not define the term “independent contractor,” but it defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee,” 29 U.S.C. 203(d), “employee” as “any individual employed by an employer,”

id.

at 203(e) (subject to certain exceptions), and “employ” as “includ[ing] to suffer or permit to work,”

id.

at 203(g). Courts and the Department have long interpreted the “suffer or permit” standard to require an evaluation of the extent of the worker's economic dependence on the potential employer—

i.e.,

the putative employer or alleged employer—and have developed a multifactor test to analyze whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on a particular individual, business, or organization for work (and is thus an employee) or is in business for him- or herself (and is thus an independent contractor).

This economic realities test and its component factors have not always been sufficiently explained or consistently articulated by courts or the Department, resulting in uncertainty among the regulated community. The Department believes that a clear articulation will lead to increased precision and predictability in the economic reality test's application, which will in turn benefit workers and businesses and encourage innovation and flexibility in the economy. Accordingly, earlier this year the Department proposed to introduce a new part to Title 29 of the Code of Federal Regulations setting forth its interpretation of whether workers are “employees” or independent contractors under the Act.

Having received and reviewed the comments to its proposal, the Department now adopts as a final rule the interpretive guidance set forth in the Notice of Proposed Rulemaking (NPRM) (85 FR 60600) largely as proposed. This regulatory guidance adopts general interpretations to which courts and the Department have long adhered. For example, the final rule explains that independent contractors are workers who, as a matter of economic reality, are in business for themselves as opposed to being economically dependent on the potential employer for work. The final rule also explains that the inquiry into economic dependence is conducted by applying several factors, with no one factor being dispositive, and that actual practices are entitled to greater weight than what may be contractually or theoretically possible. The final rule sharpens this inquiry into five distinct factors, instead of the five or more overlapping factors used by most courts and previously the Department. Moreover, consistent with the FLSA's text, its purpose, and the Department's experience administering and enforcing the Act, the final rule explains that two of those factors—(1) the nature and degree of the worker's control over the work and (2) the worker's opportunity for profit or loss—are more probative of the question of economic dependence or lack thereof than other factors, and thus typically carry greater weight in the analysis than any others.

The regulatory guidance promulgated in this final rule regarding independent contractor status under the FLSA is generally applicable across all industries. As such, it replaces the Department's previous interpretations of independent contractor status under the FLSA which applied only in certain contexts, found at 29 CFR 780.330(b) (interpreting independent contractor status under the FLSA for tenants and sharecroppers) and 29 CFR 788.16(a) (interpreting independent contractor status under the FLSA for certain forestry and logging workers). The Department believes this final rule will significantly clarify to stakeholders how to distinguish between employees and independent contractors under the Act.

This final rule is considered to be an Executive Order 13771 deregulatory action. Details on the estimated increased efficiency and cost savings of this rule can be found in the regulatory impact analysis (RIA) in section VI.

II. Background

A. Relevant FLSA Definitions

Enacted in 1938, the FLSA requires that, among other things, covered employers pay their nonexempt employees at least the Federal minimum wage for every hour worked and overtime pay for every hour worked over 40 in a workweek, and it mandates that employers keep certain records regarding their employees.

See

29 U.S.C. 206(a), 207(a) (minimum wage and overtime pay requirements); 29 U.S.C. 211(c) (recordkeeping requirements). The FLSA does not define the term “independent contractor.” The Act defines “employer” in section 3(d) to “include[ ] any person acting directly or indirectly in the interest of an employer in relation to an employee,” “employee” in section 3(e)(1) to mean, subject to certain exceptions, “any

individual employed by an employer,” and “employ” in section 3(g) to include “to suffer or permit to work.”

1

The Supreme Court has recognized that “there is in the [FLSA] no definition that solves problems as to the limits of the employer-employee relationship under the Act.”

Rutherford Food Corp.

v.

McComb,

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

1

29 U.S.C. 203(d), (e), (g). The Act defines a “person” as “an individual, partnership, association, corporation, business trust, legal representative, or any organized group of persons.” 29 U.S.C. 203(a).

The Supreme Court has interpreted the “suffer or permit” language to define FLSA employment to be broad and more inclusive than the common law standard.

See Nationwide Mut. Ins. Co.

v.

Darden,

503 U.S. 318, 326 (1992). However, the Court also recognized that the Act's “statutory definition[s] . . . have [their] limits.”

Tony & Susan Alamo Found.

v.

Sec'y of Labor,

471 U.S. 290, 295 (1985) (internal citation omitted);

see also Walling

v.

Portland Terminal Co.,

330 U.S. 148, 152 (1947) (“The definition `suffer or permit to work' was obviously not intended to stamp all persons as employees.”). The Supreme Court specifically recognized that “[t]here may be independent contractors who take part in production or distribution who would alone be responsible for the wages and hours of their own employees.”

Rutherford Food,

331 U.S. at 729. Accordingly, Federal courts of appeals have uniformly held, and the Department has consistently maintained, that independent contractors are not “employees” for purposes of the FLSA.

See, e.g., Saleem

v.

Corporate Transp. Group, Ltd.,

854 F.3d 131, 139-40 (2d Cir. 2017);

Karlson

v.

Action Process Serv. & Private Investigation, LLC,

860 F.3d 1089, 1092 (8th Cir. 2017).

B. Economic Dependence and the Economic Reality Test

1. Supreme Court Development of the Economic Reality Test

As the NPRM explained, the U.S. Supreme Court explored the limits of the employer-employee relationship in a series of cases from 1944 to 1947 under three different Federal statutes: The FLSA, the National Labor Relations Act (NLRA), and the Social Security Act (SSA). 85 FR 60601 (summarizing

NLRB

v.

Hearst Publications, Inc.,

322 U.S. 111 (1944);

United States

v.

Silk,

331 U.S. 704 (1947);

Bartels

v.

Birmingham,

332 U.S. 126 (1947); and

Rutherford Food,

331 U.S. 722)).

In

Hearst,

the Supreme Court held that the NLRA's definition of employment was broader than that of the common law. 322 U.S. 123-25. Congress responded by amending the definition of employment under the NLRA on June 23, 1947, “with the obvious purpose of hav[ing] the [National Labor Relations] Board and the courts apply general agency principles in distinguishing between employees and independent contractors under the [NLRA].”

NLRB

v.

United Ins. Co. of Am.,

390 U.S. 254, 256 (1968).

On June 16, 1947, one week before Congress amended the NLRA in response to

Hearst,

the Supreme Court decided

Silk,

which addressed the distinction between employees and independent contractors under the SSA. In that case, the Court relied on

Hearst

to hold that “economic reality,” as opposed to “technical concepts” of the common law standard alone, determines workers' classification. 331 U.S. at 712-14. Although the Court found it to be “quite impossible to extract from the [SSA] a rule of thumb to define the limits of the employer-employe[e] relationship,” it identified five factors as “important for decision”: “degrees of control, opportunities for profit or loss, investment in facilities, permanency of relation[,] and skill required in the claimed independent operation.”

Id.

at 716. The Court added that “[n]o one [factor] is controlling nor is the list complete.”

Id.

One week after

Silk

and on the same day Congress amended the NLRA, the Court reiterated these five factors in

Bartels,

another case involving employee or independent contractor status under the SSA. In

Bartels,

the Court explained that under the SSA, employee status “was not to be determined solely by the idea of control which an alleged employer may or could exercise over the details of the service rendered to his business by the worker.”

Id.

Although “control is characteristically associated with the employer-employee relationship,” employees under “social legislation” such as the SSA are “those who as a matter of economic reality are dependent upon the business to which they render service.”

Id.

The same day as it decided

Silk,

the Court ruled in

Rutherford Food

that certain workers at a slaughterhouse were employees under the FLSA, and not independent contractors, by examining facts pertaining to the five factors identified in

Silk.

2

The Court also considered whether the work was “a part of the integrated unit of production” (meaning whether the putative independent contractors were integrated into the assembly line alongside the company's employees) to assess whether they were employees or independent contractors under the FLSA.

Id.

at 729-730.

2

For example, the Court noted that the slaughterhouse workers performed unskilled work “on the production line.” 331 U.S. at 730. “The premises and equipment of [the employer] were used for the work,” indicating little investment by the workers.

Id.

“The group had no business organization that could or did shift as a unit from one slaughter-house to another,” indicating a permanent work arrangement.

Id.

“The managing official of the plant kept close touch on the operation,” indicating control by the alleged employer.

Id.

And “[w]hile profits to the boners depended upon the efficiency of their work, it was more like piecework than an enterprise that actually depended for success upon the initiative, judgment or foresight of the typical independent contractor.”

Id.

In November 1947, five months after

Silk

and

Rutherford Food,

the Department of the Treasury (Treasury) proposed regulations r defining when an individual was an independent contractor or employee under the SSA, which used a test that balanced the following factors:

1. Degree of control of the individual;

2. Permanency of relation;

3. Integration of the individual's work in the business to which he renders service;

4. Skill required by the individual;

5. Investment by the individual in facilities for work; and

6. Opportunity of the individual for profit or loss.

12 FR 7966. Factors one, two, and four through six corresponded directly with the five factors identified as being “important for decision” in

Silk,

331 U.S. at 716, and the third factor corresponded with

Rutherford Food'

s consideration of the fact that the workers were “part of an integrated unit of production.” 331 U.S. at 729. The Treasury proposal further relied on

Bartels,

332 U.S. at 130, to apply these factors to determine whether a worker was “dependent as a matter of economic reality upon the business to which he renders services.” 12 FR 7966.

3

3

The Treasury proposal was never finalized because Congress amended the SSA to foreclose the proposal.

Congress replaced the interpretations of the definitions of “employee” adopted in

Hearst

for the NLRA and in

Silk

and

Bartels

for the SSA “to demonstrate that the usual common-law principles were the keys to meaning.”

Darden,

503 U.S. at 324-25. However, Congress did not similarly amend the FLSA. Thus, the Supreme Court stated in

Darden

that the scope of employment under the FLSA remains broader than that under common law and is determined not by the common law but instead by the economic reality of the relationship at issue.

See id.

Since implicitly doing so in

Rutherford Food,

the Court has not again applied (or rejected the application of) the

Silk

factors to an FLSA classification question.

2. Application of the Economic Reality Test by Federal Courts of Appeals

As the NPRM explained, in the 1970s and 1980s Federal courts of appeals began to adopt versions of a multifactor “economic reality” test based on

Silk, Rutherford Food,

and

Bartels

and similar to Treasury's 1947 proposed SSA regulation to analyze whether a worker was an employee or an independent contractor under the FLSA.

See

85 FR 60603.

4

Drawing on the Supreme Court precedent discussed above, courts have recognized that the heart of the inquiry is whether “as a matter of economic reality” the workers are “dependent upon the business to which they render service.”

Usery

v.

Pilgrim Equip. Co.,

527 F.2d 1308, 1311 (5th Cir. 1976) (quoting

Bartels,

332 U.S. at 130). Some courts have clarified that this question of economic dependence may be boiled down to asking “whether, as a matter of economic reality, the workers depend upon someone else's business for the opportunity to render service or are in business for themselves.”

Saleem,

854 F.3d at 139 (internal quotation marks and citations omitted). Courts have also explained that a non-exhaustive set of factors—derived from

Silk

and

Rutherford Food

—shape and guide this inquiry.

See, e.g., Usery,

527 F.2d at 1311 (identifying “[f]ive considerations [which] have been set out as aids to making the determination of dependence, vel non”);

Real

v.

Driscoll Strawberry Assocs., Inc.,

603 F.2d 748, 754 (9th Cir. 1979) (articulating a six-factor test).

4

As explained below, versions of this multifactor economic realty test have also been enforced and articulated by the Department in subregulatory guidance since the 1950s.

In

Driscoll,

the Ninth Circuit Court of Appeals described its six-factor test as follows:

1. The degree of the alleged employer's right to control the manner in which the work is to be performed;

2. the alleged employee's opportunity for profit or loss depending on his managerial skill;

3. the alleged employee's investment in equipment or materials required for his task, or his employment of helpers;

4. whether the service rendered requires a special skill;

5. the degree of permanency of the working relationship; and

6. whether the service rendered is an integral part of the alleged employer's business.

Id.

at 754.

Most courts of appeals articulate a similar test, but application between courts may vary significantly.

Compare, e.g., Sec'y of Labor

v.

Lauritzen,

835 F.2d 1529, 1534-35 (7th Cir. 1987) (applying six-factor economic reality test to hold that pickle pickers were employees under the FLSA),

with Donovan

v.

Brandel,

736 F.2d 1114, 1117 (6th Cir. 1984) (applying the same six-factor economic reality test to hold that pickle pickers were not employees under the FLSA). For example, the Second Circuit has analyzed opportunity for profit or loss and investment (the second and third factors listed above) together as one factor.

See, e.g., Brock

v.

Superior Care, Inc.,

840 F.2d 1054, 1058 (2d Cir. 1988). The Fifth Circuit has not adopted the sixth factor listed above, which analyzes the integrality of the work, as part of its standard,

see, e.g., Usery,

527 F.2d at 1311, but has at times assessed integrality as an additional factor,

see, e.g. Hobbs

v.

Petroplex Pipe & Constr., Inc.,

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

The NPRM highlighted noteworthy modifications some courts of appeals have made to the economic reality factors as originally articulated in 1947 by the Supreme Court.

See

85 FR 60603-04. First, the “skill required” factor identified in

Silk,

331 U.S. at 716, is now articulated more expansively by some courts to include “initiative.”

See, e.g.,

Parrish,

917 F.3d at 379 (“the skill and initiative required in performing the job”);

Karlson,

860 F.3d at 1093 (same);

Superior Care,

840 F.2d at 1058-59 (“the degree of skill and independent initiative required to perform the work”).

Second,

Silk

analyzed workers' investments, 331 U.S. at 717-19. However, the Fifth Circuit has revised the “investment” factor to instead consider “the extent of the relative investments of the worker and the alleged employer.”

Hopkins,

545 F.3d at 343. Some other circuits have adopted this “relative investment” approach but continue to use the phrase “worker's investment” to describe the factor.

See, e.g., Keller

v.

Miri Microsystems LLC,

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

Dole

v.

Snell,

875 F.2d 802, 805 (10th Cir. 1989).

Third, although the permanence factor under

Silk

was understood to mean the continuity and duration of working relationships,

see

12 FR 7967, some courts of appeals have expanded this factor to also consider the exclusivity of such relationships.

See, e.g., Scantland,

721 F.3d at 1319;

Keller,

781 F.3d at 807.

Finally,

Rutherford Food'

s consideration of whether work is “part of an integrated unit of production,” 331 U.S. at 729, has now been replaced by many courts of appeals by consideration of whether the service rendered is “integral,” which those courts have applied as meaning important or central to the potential employer's business.

See, e.g., Verma

v.

3001 Castor, Inc.,

937 F.3d 221, 229 (3rd Cir. 2019) (concluding that workers' services were integral because they were the providers of the business's “primary offering”);

Acosta

v.

Off Duty Police Servs., Inc.,

915 F.3d 1050, 1055 (6th Cir. 2019) (concluding that services provided by workers were “integral” because the putative employer “built its business around” those services);

McFeeley

v.

Jackson Street Entertainment, LLC,

825 F.3d 235, 244 (4th Cir. 2016) (considering “the importance of the services rendered to the company's business”).

Courts of appeals have cautioned against the “mechanical application” of the economic reality factors.

See, e.g.,

Saleem,

854 F.3d at 139. “Rather, each factor is a tool used to gauge the economic dependence of the alleged employee, and each must be applied with this ultimate concept in mind.”

Hopkins,

545 F.3d at 343. Further, courts of appeals make clear that the analysis should draw from the totality of circumstances, with no single factor being determinative by itself.

See, e.g., Keller,

781 F.3d at 807 (“No one factor is determinative.”);

Baker,

137 F.3d at 1440 (“None of the factors alone is dispositive; instead, the court must employ a totality-of-the-circumstances approach.”).

3. Application of the Economic Reality Test by WHD

Since at least 1954, WHD has applied variations of this multifactor analysis when considering whether a worker is an employee under the FLSA or an independent contractor.

See

WHD Opinion Letter (Aug. 13, 1954) (applying six factors very similar to the six economic reality factors currently used by courts of appeals). In 1964, WHD stated, “The Supreme Court has made it clear that an employee, as distinguished from a person who is engaged in a business of his own, is one who as a matter of economic reality follows the usual path of an employee and is dependent on the business which he serves.” WHD Opinion Letter FLSA-795 (Sept. 30, 1964).

Over the years since, WHD has issued numerous opinion letters applying a multifactor analysis very similar to the multifactor economic reality test courts use (with some variation) to determine whether workers are employees or

independent contractors.

5

WHD has also promulgated regulations applying a multifactor analysis for independent contractor status under the FLSA in certain specific industries.

See, e.g.,

29 CFR 780.330(b) (applying a six factor economic reality test to determine whether a sharecropper or tenant is an independent contractor or employee under the Act); 29 CFR 788.16(a) (applying a six factor economic reality test in forestry and logging operations with no more than eight employees). Further, WHD has promulgated a regulation applying a multifactor economic reality analysis for determining independent contractor status under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). 29 CFR 500.20(h)(4).

5

See, e.g.,

WHD Opinion Letter FLSA2019-6 at 4 (Apr. 29, 2019); WHD Opinion Letter, 2002 WL 32406602, at *2 (Sept. 5, 2002); WHD Opinion Letter, 2000 WL 34444342, at *3 (Dec. 7, 2000); WHD Opinion Letter, 2000 WL 34444352, at *1 (Jul. 5, 2000); WHD Opinion Letter, 1999 WL 1788137, at *1 (Jul. 12, 1999); WHD Opinion Letter, 1995 WL 1032489, at *1 (June 5, 1995); WHD Opinion Letter, 1995 WL 1032469, at *1 (Mar. 2, 1995); WHD Opinion Letter, 1986 WL 740454, at *1 (June 23, 1986); WHD Opinion Letter, 1986 WL 1171083, at *1 (Jan. 14, 1986); WHD Opinion Letter WH-476, 1978 WL 51437, at *2 (Oct. 19, 1978); WHD Opinion Letter WH-361, 1975 WL 40984, at *1 (Oct. 1, 1975); WHD Opinion Letter (Sept. 12, 1969); WHD Opinion Letter (Oct. 12, 1965).

The Department's sub-regulatory guidance, WHD Fact Sheet #13, “Employment Relationship under the Fair Labor Standards Act (FLSA)” (Jul. 2008), similarly stated that, when determining whether an employment relationship exists under the FLSA, common law control is not the exclusive consideration. Instead, “it is the total activity or situation which controls”; and “an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.”

6

The fact sheet identified seven economic reality factors; in addition to factors that are similar to the six factors identified above, it also considered the worker's “degree of independent business organization and operation.” On July 15, 2015, WHD issued Administrator's Interpretation No. 2015-1, “The Application of the Fair Labor Standards Act's `Suffer or Permit' Standard in the Identification of Employees Who Are Misclassified as Independent Contractors” (AI 2015-1). AI 2015-1 provided guidance regarding the employment relationship under the FLSA and the application of the six economic realities factors. AI 2015-1 was withdrawn on June 7, 2017 and is no longer in effect.

6

Fact Sheet #13 is available at

https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf.

WHD's most recent opinion letter addressing this issue, from 2019, generally applied the principles and factors similar to those described in the prior opinion letters and Fact Sheet #13, but not the “independent business organization” factor because it did not add to the analysis as a separate factor and was “[e]ncompassed within” the other factors. It also stated that the investment factor should focus on the “amount of the worker's investment in facilities, equipment, or helpers.” The opinion letter addressed the FLSA classification of service providers who used a virtual marketplace company to be referred to end-market consumers to whom the services were actually provided. WHD concluded that the service providers appeared to be independent contractors and not employees of the virtual marketplace company.

See

WHD Opinion Letter FLSA2019-6 at 7. WHD found that it was “inherently difficult to conceptualize the service providers' `working relationship' with [the virtual marketplace company], because as a matter of economic reality, they are working for the consumer, not [the company].”

Id.

Because “[t]he facts . . . demonstrate economic independence, rather than economic dependence, in the working relationship between [the virtual marketplace company] and its service providers,” WHD opined that they were not employees of the company under the FLSA but rather were independent contractors.

Id.

at 9.

As explained below, the Department's prior interpretations of independent contractor status, which themselves have evolved over time, are subject to similar limitations as that of court opinions, and the Department believes that stakeholders would benefit from clarification. For these reasons, the Department proposed promulgating a clearer and more consistent standard for evaluating whether a worker is an employee or independent contractor under the FLSA and is now finalizing that proposal, with some modifications based on comments received.

C. The Department's Proposal

On September 25, 2020, the Department published the NPRM in the

Federal Register

. The Department proposed to adopt an “economic reality” test to determine a worker's status as an FLSA employee or an independent contractor. The test considers whether a worker is in business for himself or herself (independent contractor) or is instead economically dependent on an employer for work (employee). The Department further identified two “core factors”: The nature and degree of the worker's control over the work; and the worker's opportunity for profit or loss based on initiative, investment, or both. The Department explained it was proposing to emphasize these factors because they are the most probative of whether workers are economically dependent on someone else's business or are in business for themselves. The proposal identified three other factors to also be considered, though they are less probative than the core factors: The amount of skill required for the work, the degree of permanence of the working relationship between the individual and the potential employer, and whether the work is part of an integrated unit of production. The Department further proposed to advise that the actual practice is more probative than what may be contractually or theoretically possible in determining whether a worker is an employee or an independent contractor.

D. Comments

The Department solicited comments on all aspects of the proposed rule. More than 1800 individuals and organizations timely commented on the Department's NPRM during the thirty-day comment period that ended on October 26, 2020. The Department received comments from employers, workers, industry associations, worker advocacy groups, and unions, among others. All timely comments may be viewed at the website

www.regulations.gov,

docket ID WHD-2020-0007.

Of the comments received, the Department received approximately 230 comments from workers who identified themselves as independent contractors (not including the over 900 comments received from Uber drivers discussed below). Of those, the overwhelming majority expressed support for the NPRM. These individuals identified themselves as freelancers or independent contractors in jobs including translator, journalist, consultant, musician, and many others. Among this group of commenters, over 200 expressed support for the proposed rule, while only 8 opposed it. The remaining individuals in this group did not express a specific position. Uber drivers submitted over 900 comments. While many expressed views on Uber corporate policies and not on the NPRM itself, the majority of these drivers who addressed the NRPM supported the Department's proposal. The Department also received a number of other

comments that are beyond the scope of this rulemaking. For example, several commenters expressed opinions related to the issues addressed in the Department's proposal but that were specific to state legislation or employer policies. Significant issues raised in the timely comments received are discussed below, along with the Department's response to those comments.

III. Need for Rulemaking

The NPRM explained that the Department has never promulgated a generally-applicable regulation addressing who is an independent contractor and thus not an employee under the FLSA. Instead, as described above, the Department has issued and revised guidance since at least 1954, using different variations of a multifactor economic reality test that analyzes economic dependence to distinguish independent contractors from employees. Such guidance reflects, in large part, application of the general principles of the economic reality test by Federal courts of appeals. Such guidance, however, did not reflect any public input. Indeed, the NPRM kicked off the Department's first ever notice-and-comment rulemaking to provide a generally applicable interpretation of independent contractor status under the FLSA. As recounted just above, the Department received many comments from stakeholders who are actually impacted by FLSA classification decisions, which are valuable information and insight that the Department has not previously gathered and many of which reinforced the Department's view that more clarity is needed in this area.

The Department explained in the NPRM preamble that prior articulations of the test have proven to be unclear and unwieldy for the four following reasons. First, the test's overarching concept of “economic dependence” is under-developed and sometimes inconsistently applied, rendering it a source of confusion. Second, the test is indefinite in that it makes all facts potentially relevant without guidance on how to prioritize or balance different and sometimes competing considerations. Third, inefficiency and lack of structure in the test further stem from blurred boundaries between the factors. Fourth, these shortcomings have become more apparent over time as technology, economic conditions, and work relationships have evolved.

The Department thus proposed to promulgate a regulation that would clarify and sharpen the contours of the economic reality test used to determine independent contractor classification under the FLSA. The NPRM explained that such a regulation would provide much needed clarity and encourage (or at least stop deterring) flexible work arrangements that benefit both businesses and workers.

Commenters in the business community and freelance workers generally agreed with the Department that the multifactor balancing test is confusing and needs clarification. The National Retail Federation (NRF) complained that “existing tests for independent contractor status tend to have a large number of factors which can be nebulous, overlapping, and even irrelevant to the ultimate inquiry.” The Workplace Policy Institute of Littler Mendelson, P.C. (WPI) stated that “[b]oth the Department and the courts have struggled to define `dependence' ” in the modern economy—resulting in confusion, unpredictability and inconsistent results.” The Society for Human Resource Management (SHRM) echoed this sentiment, writing “the business community and workers are left applying numerous factors in a variety of ways that is mired in uncertainty and, therefore, unnecessary risk.” The U.S. Chamber of Commerce stated that “[t]he confusion regarding whether a worker is properly classified as an employee or an independent contractor has long been a vexing problem for the business community, across many different industries and work settings.”

See also, e.g.,

World Floor Covering Association (WFCA) (“The current test has resulted in inconsistent decisions, much confusion, and unnecessary costs.”). Numerous individual freelancers and organizations that represent freelance workers also stated they would welcome “greater clarity and predictability in the application of the `economic realities' test.” Coalition to Promote Independent Entrepreneurs (CPIE);

see also

Coalition of Practicing Translators & Interpreters of California (CoPTIC) (requesting “greater clarity in Federal law”). Individual freelancers generally welcomed greater legal clarity. For example, one individual commenter wrote “to express [her] support for this proposed rule. As someone who has enjoyed freedom and flexibility as a freelancer for 20 years, this would be a welcome clarification.” Another individual freelancer stated that “[t]he clarity and updating of [the FLSA] through this NPRM is long overdue and the DOL should issue ruling on independent contracting. . . .”

These supportive commenters generally agreed with the Department that additional clarity would encourage flexible work arrangements that benefit businesses and workers alike. For example, the Coalition for Workforce Innovation (CWI) asserted that additional clarity of the economic reality test would “allow workers and businesses to pursue [ ] mutually beneficial opportunities as the United States economy evolves with technology.” Fight for Freelancers explained that its members value flexibility that comes with working as independent contractors and supported the Department's “efforts to protect [its members'] classification.”

Some commenters who opposed this rulemaking questioned the need for a regulation on this topic. The Southwest Regional Council of Carpenters (SWRCC) stated that the “[t]he first of the Rule's shortcomings is its assumption that a new rule is necessary in the first place,” and the American Federation of Labor & Congress of Industrial Organization (AFL-CIO) asserted that the Department's “quest for certainty . . . is quixotic.” Mr. Edward Tuddenham, an attorney, contended that the current test is “generally consistent and predictable” and thus does not need further clarification. He and others repeatedly questioned the Department's reasons for rulemaking by asserting that the Department did not identify cases where courts reached incorrect outcomes. Rather than focus on the outcomes in particular cases, the NPRM highlighted inconsistent or confusing reasoning in many decisions to explain why the regulated community would benefit from regulatory clarity.

See

85 FR 60605. Mr. Tuddenham and others also provided thoughtful and detailed comments criticizing specific aspects of the reasons presented in the NPRM's need for rulemaking discussion. The following discussion retraces those reasons and responds to these criticisms.

A. Confusion Regarding the Meaning of Economic Dependence

The NPRM explained that undeveloped analysis and inconsistency cloud the application of “economic dependence,” the touchstone of the economic reality test. 85 FR 60605. The Department and some courts have attempted to furnish a measure of clarity by explaining, for example, that the proper inquiry is “ `whether the workers are dependent on a particular business or organization

for their continued employment'

in that line of business,”

Brock

v.

Mr. W Fireworks, Inc.,

814 F.2d 1042, 1054 (5th Cir. 1987) (quoting

DialAmerica,

757 F.2d at 1385), or instead “are in business for themselves,”

Saleem,

854 F.3d at 139.

But the Department and many courts have often applied the test without helpful clarification of the meaning of the economic dependency that they are seeking.

The NPRM explained that the lack of explanation of economic dependence has sometimes led to inconsistent approaches and results and highlighted as an example the apparently inconsistent results in

Cromwell

v.

Driftwood Elec. Contractor, Inc.,

348 F. App'x 57 (5th Cir. 2009) (holding that cable splicers hired by Bellsouth to perform post-Katrina repairs were employees), and

Thibault

v.

BellSouth Telecommunication,

612 F.3d 843 (5th Cir. 2010) (holding that cable splicer hired by same company under a very similar arrangement was an independent contractor).

See

85 FR 60605. The

Thibault

court distinguished its result from

Cromwell

in part by highlighting Mr. Thibault's significant income from (1) his own sales company that had profits of approximately $500,000, (2) “eight drag-race cars [that] generated $1,478 in income from racing professionally[,]” and (3) “commercial rental property that generated some income.”

Thibault,

612 F.3d at 849. While these facts indicate that Mr. Thibault may have been in business for himself as a manager of a sales business, drag-race cars, and commercial properties, they are irrelevant as to whether he was in business for himself as a cable splicer.

7

The

Thibault

court nonetheless assigned these facts substantial weight because it understood economic dependence to mean dependence for income or wealth, which is incompatible with the dependence-for-work approach that other courts and the Department apply.

8

See, e.g., Off Duty Police,

915 F.3d at 1058 (“[W]hether a worker has more than one source of income says little about that worker's employment status.”);

Halferty,

821 F.2d at 268 (“[I]t is not dependence in the sense that one could not survive without the income from the job that we examine, but dependence for continued employment”);

DialAmerica,

757 F.2d at 1385 (“The economic-dependence aspect of the [economic reality] test does not concern whether the workers at issue depend on the money they earn for obtaining the necessities of life.”). As the

DialAmerica

court explained, the dependence-for-income approach “would lead to a senseless result” because a wealthy individual who had an independent source of income would be an independent contractor even though a poorer individual who worked for the same company under the same work arrangement is an employee. 757 F.2d at 1385 n.11. Mr. Tuddenham initially defended the reasoning in

Thibault,

but later listed that case as an example of “the occasional erroneous application of the [economic reality] test.”

7

The

Thibault

court also highlighted the fact that Mr. Thibault worked for only 3 months—although he intended to work for 7 or 8 months—before being fired.

See

612 F.3d at 846, 849. In contrast, the splicers in

Cromwell

worked approximately 11 months.

See

348 F. App'x at 58.

8

The

Thibault

case recognized that “[a]n individual's wealth is not a solely dispositive factor in the economic dependence question.” 612 F.3d at 849 n.4. This confirms that wealth was in fact a meaningful consideration, which runs against other cases explaining that dependence on wealth is an inappropriate lens.

The NPRM also highlighted the decision in

Parrish

v.

Premier Directional Drilling,

917 F.3d 369, as an example of inconsistent articulation of economic dependence. In that case, the court first applied a dependence-for-work concept to analyze the control factor and then explicitly departed from that framework in favor of a dependence-for-income analysis of the opportunity factor.

See

85 FR 60606. The

Parrish

court impliedly took a third concept of dependence to analyze the investment factor through a “side-by-side comparison” of each worker's individual investment to that of the alleged employer.” 917 F.3d at 383. AI 2015-1 took the same approach and explained that “it is the relative investments that matter” because “[i]f the worker's investment is relatively minor, that suggests that the worker and the employer are not on similar footing and that the worker may be economically dependent on the employer.” The comparative analysis of investments thus appears to rely on a concept of economic dependence that means “not on a similar footing,” which is different from the “dependence for work” concept that the Department believes to be correct.

In summary, courts and the Department typically economic dependence as “dependence for work,” but have sometimes applied other concepts of dependence to analyze certain factors, such as “dependence for income” and “not on similar footing.” Because economic dependence is the ultimate inquiry of FLSA employment, these different conceptions result in essentially different tests that confuse the regulated community. Accordingly, the economic reality test needs a more developed and dependable touchstone at its heart.

B. Lack of Focus in the Multifactor Balancing Test

The NPRM explained that the versions of the multifactor economic reality test used by courts since at least the 1980s and the Department since the 1950s lack clear, generally applicable guidance about how to balance the multiple factors and the countless facts encompassed therein.

See

85 FR 60606.The test's lack of guidance leads to uncertainty regarding “which aspects of `economic reality' matter, and why.”

Lauritzen,

835 F.2d at 1539 (Easterbrook J., concurring).

As examples of such uncertainty, the NPRM highlighted court decisions analyzing economic reality factors to reach an overall decision about a worker's classification without meaningful explanation of how they balanced the factors to reach the final decision. 85 FR 60606 (citing,

e.g., Parrish,

917 F.3d at 380;

Chao

v.

Mid-Atl. Installation Servs., Inc.,

16 F. App'x 104, 108 (4th Cir. 2001); and

Snell,

875 F.2d at 912). Even where many facts and factors support both sides of the classification inquiry, courts have not explained how they balanced the competing considerations.

See, e.g., Acosta

v.

Paragon Contractors Corp.,

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

Iontchev

v.

AAA Cab. Services,

685 F. App'x 548, 550 (9th Cir. 2017). The NPRM thus identified a need for guidance on which factors are most probative.

Even some commenters critical of the Department's approach in the NPRM conceded that the test as currently applied can create considerable ambiguity. Mr. Tuddenham asserted that the lack of general guidance regarding how to balance factors is “an unavoidable function of determining something as nebulous as `economic dependence.' ”

See also

Farmworker Justice (“[T]he test, as currently applied, creates necessary ambiguity.”). The Department disagrees that the concept of “economic dependence” is necessarily “nebulous.” FLSA employment itself depends on economic dependence, and nothing in the statute requires that this standard be nebulous and thus unmanageable.

See Usery,

527 F.2d at 1311 (“It is dependence that indicates employee status.”). Instead, the Department believes the correct concept of economic dependence tangibly defines FLSA employment to include individuals who are dependent on others for work, and to exclude individuals who are, as a matter of economic reality, in business for themselves.

See Saleem,

854 F.3d at 139. The Department thus believes it is

possible to provide generally applicable guidance regarding how to consider and balance the economic reality factors to assess this concept of economic dependence.

C. Confusion and Inefficiency Due to Overlapping Factors

The NPRM next explained that courts and the Department have articulated the economic reality factors such that they have overlapping coverage, which undermines the structural benefits of a multifactor test.

See

85 FR 60607. The NPRM noted that most of these overlaps did not exist in the Supreme Court's original articulation of the economic reality factors in

Silk

and were instead introduced by subsequent court of appeals decisions. The NPRM then explained several ways in which extensive overlaps may lead to inefficiency and confusion for the regulated community.

First, the “skill required” factor articulated in

Silk,

331 U.S. at 716, has been expanded by the Department and some courts to analyze “skill and initiative.”

See, e.g., Superior Care,

840 F.2d at 1060; WHD Fact Sheet WHD #13. Because the capacity for on-the-job initiative is already part of the control factor, the NPRM explained that this approach essentially imports control analysis into the skill factor. Indeed, the presence of control appears to overrides the existence of skill,

9

effectively transforming the skill factor into an extension of the control factor in some circuits, but not others.

10

The “skill and initiative” factor also overlaps with the opportunity factor, which considers the impact of initiative on worker's earnings, resulting in initiative being analyzed under three different factors. As an illustration of confusion resulting from this overlap, the NPRM highlighted a case in which a court found that workers exercised enough on-the-job initiative for the control and opportunity factors to point towards independent contractor status, but nonetheless found the `skill and initiative factor points towards employee status' due to `the key missing ingredient . . . of initiative.' ” 85 FR 60607 (quoting

Express Sixty-Minutes Delivery,

161 F.3d at 303).

9

See, e.g., Selker Bros.,

949 F.2d at 1295 (concluding that the skill factor weighed towards employee classification due to “the degree of control exercised by [the potential employer] over the day-to-day operation”);

Baker,

137 F.3d at 1443 (finding that the skill factor weighed towards employee classification where skilled welders “are told what to do and when to do it”);

Superior Care,

840 F.2d at 1060 (finding that the skill factor weighed towards employee classification for skilled nurses because “Superior Care in turn controlled the terms and conditions of the employment relationship”).

10

Some courts of appeal continue to analyze skill rather than control as part of the skill factor.

See, e.g., Paragon,

884 F3d at 1235 (considering “the degree of skill required to perform the work”);

see also Iontchev,

685 F. App'x at 550 (asking “whether services rendered . . . require[d] a special skill”);

Keller,

791 F.3d at 807 (analyzing “the degree of skill required”).

Next, the permanence factor originally concerned the continuity and duration of a working relationship but has since been expanded by some courts and the Department to also consider the exclusivity of that relationship.

See

85 FR 60608 (citing

Parrish

917 F.3d at 386-87;

Keller,

781 F.3d at 807-09;

Scantland,

721 F.3d at 1319; WHD Opinion Letter FLSA 2019-6 at 8). But exclusivity—the ability or inability for a worker to offer services to different companies—is already a part of the control factor. This overlap results in exclusivity being analyzed twice and causes the actual consideration of permanence being potentially subsumed by control.

Third, the “integral part” factor is used by some courts to be merely a proxy of control. As one such court explained: “It is presumed that, with respect to vital or integral parts of the business, the employer will prefer to engage an employee rather than an independent contractor. This is so because the employer retains control over the employee and can compel attendan[ce] at work on a consistent basis.”

Baker

v.

Dataphase, Inc.,

781 F. Supp. 724, 735 (D. Utah 1992). But the control factor already directly analyzes whether a business can compel attendance on a consistent basis. It is unclear what additional value can be gained by indirectly analyzing that same consideration a second time under the “integral part” factor.

11

11

As the NPRM explained, this presumption that firms would control all important services on which they rely may rest on a mistaken premise because, for example, manufacturers routinely have critical parts and components produced and delivered by wholly separate companies. 85 FR 60608. And companies whose business is to connect independent service providers with customers would find those service providers to be important even though they are independent from the company's business.

See State Dep't of Employment, Training & Rehab., Employment Sec. Div.

v.

Reliable Health Care Servs. of S. Nevada, Inc.,

983 P.2d 414, 419 (Nev. 1999) (“[W]e cannot ignore the simple fact that providing patient care and brokering workers are two distinct businesses.' ”)

Finally, while

Silk

articulated the opportunity for profit and loss and investment as separate factors, it analyzed the two together in concluding that truck drivers in that case were independent contractors in part because they “invested in their own trucks and had “an opportunity for profit from sound management” of that investment. 331 U.S. at 719. The Second Circuit recognized such clear overlap, noting that “[e]conomic investment, by definition, creates the opportunity for loss, [and] investors take such a risk with an eye to profit.”

Saleem,

854 F.3d at 145 n.29. Nonetheless, most courts and Department have analyzed opportunity for profit and loss and investment as separate factors. When done right, separate analysis leads to redundancy.

See, e.g., Mid-Atlantic Installation Servs.,

16 F. App'x at 106-07. When done wrong, it leads to analysis of investment without regard for the worker's profit or loss, such as by comparing the dollar value of a worker's personal investments against the total investment of a large company that, for example, “maintain[s] corporate offices.”

Hopkins

545 F.3d at 344. The NPRM explained that such a comparison says nothing about whether the worker is in business for himself, as opposed to being economically dependent on that company for work, and is therefore not probative and potentially misleading. 85 FR 60608. The NRPM concluded that reducing the above-mentioned overlaps would make the economic reality test easier to understand and apply.

The SWRCC contended that “overlapping factors [have] never been the source of—and the DOL cannot point to—any credible criticism,” but did not question or even acknowledge the above criticism discussed at length in the NRPM. In contrast, commenters that are significantly impacted by the FLSA's obligations generally agreed with the Department that overlapping factors have created confusion. For example, the Association of General Contractors stated that “[n]avigating and complying with the various overlapping and inconsistent standards are confusing and costly,” and WPI “agree[d] with the Department that such overlap and blurring of factors is confusing and inefficient.”

See also, e.g.,

Center for Workplace Compliance (CWC); NRF; U.S. Chamber of Commerce.

A multifactor test is a useful framework for determining FLSA employment in part because it organizes the many facts that are part of economic reality into distinct categories, thus providing some structure to an otherwise roving inquiry. However, this benefit is lost if the lines between those factors blur. Under prior articulations of the test, considerations within the control factor—capacity for on-the-job initiative, exclusivity, and ability to compel attendance—have been imported into analysis of three other factors: Skill, permanence, and integral

part. Indeed, those control-based considerations appear to be the most important aspect of the other factors, which obscures those factors' distinctive probative values. Moreover, considerations under the opportunity factor—the ability to affect profits through initiative—have been imported into the skill factor. And the ability to earn profits through investment overlaps completely with the investment factor. The Department continues to believe these overlapping coverages contribute to confusion and should be reduced where practicable.

D. The Shortcomings and Misconceptions That This Rulemaking Seeks To Remedy Are More Apparent in the Modern Economy

The NPRM explained that certain technological and social changes have made shortcomings of the economic reality test more apparent in the modern economy. It highlighted the effects of three types of change. First, falling transaction costs in many industries makes it more cost effective for firms to hire independent contractors rather than employees to perform core functions.

12

This in turn means analyzing the importance of the work through the “integral part” factor, which the Supreme Court never endorsed, is more likely to result in misleading signals regarding an individual's employment status. Second, the transition from a more industrial-based to a more knowledge-based economy reduces the probative value of the investment factor in certain industries because individuals can be in business for themselves in those industries with minimal physical capital. Third, shorter job tenures among employees dull the ability of the permanence factor to distinguish between employees and independence contractor.

See

85 FR 60608-09.

12

Ronald Coase,

Nature of the Firm,

4 Economica 386 (1937),

https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1468-0335.1937.tb00002.x. See also

Nobel Prizes and Laureates, Oct., 15, 1991,

https://www.nobelprize.org/prizes/economic-sciences/1991/press-release/

(explaining

The Nature of the Firm's

contribution to economics literature as a central reason for Coase's receipt of the 1991 Nobel Prize in Economics); Katz and A. Krueger, “The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015,” p. 25 (2018) (“Coase's (1937) classic explanation for the boundary of firms rested on the minimization of transaction costs within firm-employee relationships. Technological changes may be reducing the transaction costs associated with contracting out job tasks, however, and thus supporting the disintermediation of work.”).

Several commenters agreed with the Department's assessments of modern trends.

See, e.g.,

TechNet (“Given falling transaction costs, companies are more willing to allocate certain pieces of their production, even integrated parts, to independent contractors.”); Food Industry Association (“societal changes have resulted in innovative work arrangements and changes in job tenure expectation”). Former Deputy Under Secretary of Labor and retired law professor Henry H. Perritt, Jr. found the discussion of modern trends to be “particularly insightful and should be retained and expanded in the preamble to any final rule.” Other commenters disagreed. The AFL-CIO, for instance, theorized that lower transaction costs “might just as easily result in employers not taking steps to retain employees who perform work central to their business, but instead tolerate frequent turnover in such positions” and that the “job tenure of independent contractors may have fallen more” than for employees—though it did not provide evidence in support of its hypotheses.

13

The Department continues to believe that each of the above shortcomings of the previously applied economic reality test provides sufficient reason for this rulemaking and that technological and societal changes have made these shortcomings even more apparent.

13

The Department notes that it is unlikely that job tenures of independent contractors have fallen by more than employees because average job tenure for employees have dropped by many years, which is greater than the total duration of a typical independent contractor relationship.

See

Julie Hotchkiss and Christopher Macpherson,

Falling Job Tenure: It's Not Just about Millennials,

Federal Reserve Bank of Atlanta, June 8, 2015,

https://www.frbatlanta.org/blogs/macroblog/2015/06/08/falling-job-tenure-its-not-just-about-millennials.aspx.

(showing that median job tenure for individuals born in 1933 was ten years or longer while median job tenure for individuals born after 1983 was three years or less).

E. Effects of Additional Regulatory Clarity on Innovation

The NPRM expressed concern that the legal uncertainty arising from the above-described shortcomings of the multifactor economic reality test may deter innovative, flexible work arrangements that benefit businesses and workers alike. Some commenters questioned this assumption. The Coalition of State Attorneys General, Cities, and Municipal Agencies (State AGs), for instance, contended that the Department “provides no empirical evidence or data demonstrating that employers now hesitate to engage in innovative arrangements” and further argued that because “digital platforms have become part of the modern economy . . . they have not been stifled by the current test.” But the mere existence of certain types of businesses is insufficient evidence that other such businesses are not being stifled, and it is unclear what empirical data could measure innovation that is not occurring due to legal uncertainty. Commenters who represent technology companies stated that legal uncertainty regarding worker classification in fact deters them from developing innovative and flexible work arrangements.

See, e.g.,

CWI; TechNet. In addition, economists who study the impact of labor regulation on entrepreneurship also commented that clear independent contractor regulations would assist startup companies. Dr. Liya Palagashvilli (“71 percent of startups relied on independent contractors and thought it was necessary to use contract labor during their early stages”); Dr. Michael Farren and Trace Mitchell (“[G]reater legal clarity to employers and workers will allow for more efficient production processes and will reduce the resources wasted on determining a worker's employment classification through the legal process.”).

For the reasons mentioned above, the Department continues to believe that, unless revised, the multifactor economic reality test suffers because the analytical lens through which all the factors are filtered remains inconsistent; there is no clear principle regarding how to balance the multiple factors; the lines between many of the factors are blurred; and these shortcomings have become more apparent in the modern economy. The resulting legal uncertainty obscures workers' and businesses' respective rights and obligations under the FLSA and deters innovative work arrangements, thus inhibiting the development of new job opportunities or eliminating existing jobs. The Department is therefore issuing this final rule to increase legal certainty.

IV. Final Regulatory Provisions

Having reviewed commenter feedback submitted in response to the proposed rule, the Department is finalizing the addition of a new part 795 to Title 29 of the Code of Federal Regulations, which will address whether particular workers are “employees” or independent contractors under the FLSA. In relevant part, and as discussed in greater detail below, the part includes:

• An introductory provision at § 795.100 explaining the purpose and legal authority for the new part;

• a provision at § 795.105(a) explaining that independent contractors are not employees under the FLSA;

• a provision at § 795.105(b) discussing the “economic reality” test for distinguishing FLSA employees from independent contractors and clarifying that the concept of economic

dependence turns on whether a worker is in business for him- or herself (independent contractor) or is economically dependent on a potential employer for work (employee);

• provisions at § 795.105(c) and (d) describing factors examined as part of the economic reality test, including two “core” factors—the nature and degree of the worker's control over the work and the worker's opportunity for profit or loss—which typically carry greater weight in the analysis, as well as three other factors that may serve as additional guideposts in the analysis;

• a provision at § 795.110 advising that the parties' actual practice is more probative than what may be contractually or theoretically possible;

• fact-specific examples at § 795.115; and

• a severability provision at § 795.120.

The Department responds to commenter feedback on the proposed rule below.

A. The Purpose of Part 795

Proposed § 795.100 explained that the interpretations in part 795 will guide WHD's enforcement of the FLSA and are intended to be used by employers, businesses, the public sector, employees, workers, and courts to assess employment status classifications under the Act.

See

85 FR 60638. Proposed § 795.100 further clarified that, if proposed part 795 is adopted, employers may safely rely upon the interpretations in part 795 under section 10 of the Portal-to-Portal Act, unless and until any such interpretation “is modified or rescinded or is determined by judicial authority to be invalid or of no legal effect.”

Id.

(quoting 29 U.S.C. 259).

Few commenters specifically addressed proposed § 795.100, but several discussed issues relevant to its content. For example, a few commenters questioned the Department's legal authority to promulgate any regulation addressing independent contractor status under the FLSA.

See

Northern California Carpenters Regional Council (“At no time since the FLSA was passed has Congress made substantive amendments to the definitions of employee, employer, or the `suffer or permit to work' standard . . . nor has it directed any changes in the controlling regulations.”); Rep. Bobby Scott et al. (“Congress has not delegated rulemaking authority to the DOL with respect to the scope of the employment relationship under the FLSA.”). A few commenters requested that the Department explain its source of rulemaking authority and the level of deference it expects to receive from courts interpreting its proposed regulation. A diverse collection of commenters, including the American Trucking Association (ATA), the National Home Delivery Association (NHDA), the Northwest Workers Justice Project (NWJP), and Winebrake & Santillo, LLC, opined that the Department's proposed regulation would be entitled to

Skidmore

deference from courts, though these commenters diverged on the proposed rule's “power to persuade.”

Skidmore

v.

Swift & Co.,

323 US 134, 140 (1944). Finally, the AFL-CIO asserted that “[t]he proposed rule is based on considerations that did not motivate Congress when it adopted the FLSA, that the Department of Labor is not authorized to consider in construing the terms of the FLSA, and that the Department has no expertise regarding,” thus placing the proposed rule “outside the `limits of the delegation' from Congress to the Department contained in the Act.” (quoting

Chevron, U.S.A., Inc.

v.

NRDC, Inc.,

467 U.S. 837, 865 (1984)).

The Department appreciates commenter interest in these issues. The Department without question has relevant expertise in the area of what constitutes an employment relationship under the FLSA, given its responsibility for administering and enforcing the Act

14

and its decades of experience doing so. The Department's authority to interpret the Act comes with its authority to administer and enforce the Act.

See Herman

v.

Fabri-Centers of Am., Inc.,

308 F.3d 580, 592-93 (6th Cir. 2002) (noting that “[t]he Wage and Hour Division of the Department of Labor was created to administer the Act” while agreeing with the Department's interpretation of one of the Act's provisions);

Dufrene

v.

Browning-Ferris, Inc.,

207 F.3d 264, 267 (5th Cir. 2000) (“By granting the Secretary of Labor the power to administer the FLSA, Congress implicitly granted him the power to interpret.”);

Condo

v.

Sysco Corp.,

1 F.3d 599, 603 (7th Cir. 1993) (same). The Department believes a clear explanation of the test for whether a worker is an employee under the FLSA or an independent contractor not entitled to the protections of the Act in easily accessible regulatory text is valuable to potential employers, to workers, and to other stakeholders. It has a long history of offering interpretations in this area and believes this rulemaking has great value regardless of what deference courts ultimately give to it.

14

See

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

see also Fernandez

v.

Zoni Language Centers, Inc.,

858 F.3d 45, 48-49 (2d Cir. 2017) (noting that “[t]he DOL . . . administers the FLSA”).

While proposed § 795.100 emphasized that part 795 would state the Department's interpretation of independent contractor status under the FLSA, some commenters expressed concern that it would affect the scope of employment under other Federal laws. The United Food and Commercial Workers International Union (UFCW) believed that the proposal may narrow the coverage of the “Title VII of the Civil Rights Act of 1964, Americans with Disabilities Act, Age Discrimination in Employment Act (ADEA), and the Equal Pay Act.”

See also

National Women's Law Center (NWLC); CLASP. The Department reaffirms that the rule concerns the distinction between employees and independent contractors solely for the purposes of the FLSA, and as such, would not affect the scope of employment under other Federal laws.

15

15

Additionally and as explained in greater detail below, this rule does not narrow the longstanding standard for distinguishing between FLSA employees and independent contractors; employees are economically dependent on another for work, and independent contractors are in business for themselves as matter of economic reality.

Many commenters requested that the Department promulgate a standard more broadly applicable across other state and Federal employment laws.

See, e.g.,

American Society of Travel Advisors, Inc. (“[The NPRM . . . represents something of a missed opportunity insofar as it fails to address the longstanding difficulty associated with the continued use of multiple tests at the Federal level to determine worker status.”); Cambridge Investment Research, Inc. (“[W]ithout a more encompassing Department position or guidance addressing different state standards, some of the current uncertainty and unpredictability remain.”); Chun Fung Kevin Chiu (“[I]nconsistent Federal and state standards with regards to classification may render the DOL rules ineffective in practice for those independent contractors and businesses affected.”). While several commenters acknowledged the Department's lack of authority to interpret the scope of laws outside of its jurisdiction, the National Association of Manufacturers and the Mechanical Contractors Association of America (MCAA) urged the Department to collaborate with other Federal agencies to harmonize the varying employment definitions under Federal law. Finally, the Zobrist Law Group “urge[d] the Department to prohibit states from using classification tests that

conflict with the proposed rule,” asserting that “state law not preempted by the FLSA is narrow” and that state laws “shifting an independent contractor under the FLSA to an employee under state law . . . [impose] greater obligations upon those workers.”

But see

Truckload Carriers Association (“TCA understands that, due to our nation's federalist system, individual states such as California can pursue misguided statues that are more stringent than the Federal standard the Department is seeking to clarify[.]”).

While the Department appreciates the desire to achieve uniformity across the various state and Federal laws which may govern work arrangements, requests to modify definitions and tests under different laws are outside the scope of this rulemaking.

Some commenters supportive of the proposed rule requested that the Department make conforming edits to its MSPA regulation at 29 CFR 500.20(h)(4), addressing whether or not a farm labor contractor engaged by an agricultural employer/association is an independent contractor or an employee under MSPA.

See

Americans for Prosperity Foundation (AFPF) (“To further the Department's goal of clarification, simplification, and consistency . . . the same criteria used in the NPRM to define independent contractors for purposes of the FLSA also should apply to the MSPA, and to any other provision that references the FLSA.”); Administrative Law Clinic at the Antonin Scalia Law School (“[T]he Department should simply use its proposed regulations in 29 CFR 795.100,

et seq.,

to determine employee status under MSPA, and repeal [29 CFR 500.20(h)] as duplicative.”). Relatedly, Texas RioGrande Legal Aid (TRLA), which expressed opposition to the proposed rule, asserted that “the proposed rule will lead to considerable confusion among both employers and workers . . . because the proposed rule at odds with the Department's [MSPA] regulations,” but opined that any effort to revise 29 CFR 500.20(h) “would be in direct contravention of Congressional directives regarding the interpretation of the MSPA.”

As noted in the NPRM preamble, the Department acknowledges that MSPA adopts by reference the FLSA's definition of “employ,”

see

18 U.S.C. 1802(5), and that 29 CFR 500.20(h)(4) considers “whether or not an independent contractor or employment relationship exists under the Fair Labor Standards Act” to interpret independent contractor status under MSPA. At this time, however, the Department does not see a compelling need to revise 29 CFR 500.20(h)(4), as we are unsure whether application of the six factor economic reality test described in that regulation has resulted in confusion and uncertainty in the more limited MSPA context similar to that described in the FLSA context. Importantly, the regulatory standard for determining an individual's classification status under MSPA is generally consistent with the FLSA guidance finalized in this rule: “In determining if the farm labor contractor or worker is an employee or an independent contractor, the ultimate question is the economic reality of the relationship—whether there is economic dependence upon the agricultural employer/association or farm labor contractor, as appropriate.” 29 CFR 500.20(h)(4). Therefore, as explained in the NPRM, the Department prefers to proceed incrementally at this time by leaving the MSPA regulation at 29 CFR 500.20(h)(4) unchanged.

16 17

16

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

v.

FTC,

790 F.3d 198, 203 (D.C. Cir. 2015) (affirming that agency had discretion to “proceeding incrementally” in promulgating rules that were directed to one industry but no others);

Inv. Co. Inst.

v.

Commodity Futures Trading Comm'n,

720 F.3d 370, 378 (D.C. 2013) (observing that “[n]othing prohibits Federal agencies from moving in an incremental manner” (quoting

FCC

v.

Fox Television Stations, Inc.,

556 U.S. 502, 522 (2009));

City of Las Vegas

v.

Lujan,

891 F.2d 927,935 (D.C. Cir. 1989) (noting that “agencies have great discretion to treat a problem partially”).

17

Similar to the MSPA regulation at 29 CFR 500.20(h)(4), a regulation promulgated by the Department's Veterans' Employment & Training Service (VETS) at 20 CFR 1002.44 articulates a six-factor balancing test based on the tests used by courts under the FLSA for determining whether an individual is an employee or an independent contractor under the Uniformed Services Employment and Reemployment Rights Act (USERRA).

See

70 FR 75254 (“The independent contractor provision in this rule is based on Congress's intent that USERRA's definition of ‘employee’ be interpreted in the same expansive manner as the term is defined under the [FSLA].” (citing H.R. Rep. No. 103-65, Pt. I, at 29 (1993); S. Rep. No. 103-58, at 40 (1993))). Consistent with this rulemaking's incremental focus of the FLSA context, the Department declines to amend 20 CFR 1002.44 at this time.

The American Network of Community Options and Resources (ANCOR) expressed concern about the Department's statement in proposed § 795.100 that, if finalized, the proposed rule “would contain the Department's sole and authoritative interpretation of independent contractor status under the FLSA,” fearing that the statement could be interpreted to “render obsolete the Department's specific guidance on the application of the FLSA to shared living in Fact Sheet #79G and Administrator's Interpretation No. 2014-1.” The Department disagrees with this interpretation, noting that § 795.100 only rescinds earlier WHD guidance addressing independent contractor status under the FLSA “[t]o the extent . . . [that such guidance is] inconsistent or in conflict with the interpretations stated in this part.” As explained in the NPRM, the Department engaged in this rulemaking to “clarify the existing standard, not radically transform it,” 85 FR 60636, and none of the industry-specific guidance in Administrator's Interpretation No. 2014-1 is meaningfully affected by this final rule. For similar reasons, we believe that the assertion by the Nebraska Appleseed Center for Law in the Public Interest (Appleseed Center) that this rulemaking will “rescind years of [Departmental] guidance” is an overstatement. This rule is premised on familiar FLSA concepts that courts, employers, workers, and the Department have applied for years while providing updated and clearer explanations of what the concepts mean and how they are considered. Although this rule will change the Department's analysis for classifying workers as employees or independent contractors in some respect, those changes do not favor independent contractor classification (

i.e.,

the ultimate legal outcome) relative to the status quo, but rather offer greater clarity as to workers' proper classifications.

B. Clarification That Independent Contractors Are Not Employees Under the Act

Proposed § 795.105(a) explained that an independent contractor who renders services to a person is not an employee of that person under the FLSA, and that the Act's wage and hour requirements do not apply with respect to a person's independent contractors.

See

85 FR 60638-39. Proposed 795.105(a) similarly explained that the recordkeeping obligations for employers under section 11 of the Act do not apply to a person with respect to services received from an independent contractor.

Id.

The vast majority of substantive comments agreed with proposed § 795.105(a). One anonymous commenter suggested that the Department interpret the FLSA's minimum wage and overtime pay requirements to apply to independent contractors because the Act's “declaration of policy” at 29 U.S.C. 202 “suggests the purpose of the FLSA is to protect workers.” The Department does not adopt this interpretation because Federal courts of appeals have uniformly held, and the Department has consistently maintained, that “FLSA wage and hour requirements do not apply to true independent contractors.”

Karlson,

860 F.3d at 1092;

see also, e.g., Parrish,

917 F.3d at 384;

Saleem,

854

F.3d at 139-40;

Express Sixty-Minutes Delivery,

161 F.3d at 305;

see also Portland Terminal,

330 U.S. at 152 (holding that the FLSA “was obviously not intended to stamp all persons as employees”).

C. Adopting the Economic Reality Test To Determine a Worker's Employee or Independent Contractor Status Under the Act

Proposed § 795.105(b) would adopt the economic reality test to determine a worker's status as an employee or an independent contractor under the Act. As the proposal explained, the inquiry of whether an individual is an employee or independent contractor under the Act is whether, as a matter of economic reality, the individual is economically dependent on the potential employer for work.

See

85 FR 60611;

see also Pilgrim Equip.,

527 F.2d at 1311 (“It is dependence that indicates employee status.”). The proposal and this final rule provide further clarity as to the economic reality test's touchstone—economic dependence.

The NPRM preamble explained that clarifying the test requires putting the question of economic dependence in the proper context. “Economic dependence is

not

conditioned reliance on an alleged employer for one's primary source of income, for the necessities of life.”

Mr. W Fireworks,

814 F.2d at 1054. Rather, courts have framed the question as “ `whether, as a matter of economic reality, the workers depend upon someone else's business for the opportunity to render service or are in business for themselves.' ”

Saleem,

854 F.3d at 139 (quoting

Superior Care,

840 F.2d at 1059). This conception of economic dependence comports with the FLSA's definition of employ as “includ[ing] to suffer or permit to work.”

See

29 U.S.C. 203(g). An individual who depends on a potential employer for work is able to work only by the sufferance or permission of the potential employer. Such an individual is therefore an employee under the Act. In contrast, an independent contractor does not work at the sufferance or permission of others because, as a matter of economic reality, he or she is in business for him- or herself. In other words, an independent contractor is an entrepreneur who works for him- or herself, as opposed to for an employer.

18

The Department did not receive any substantive comments disputing this distinction between employee and independent contractor classification under the Act.

18

The Department's prior guidance has stated that “an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee.” Fact Sheet #13;

see also

WHD Opinion Letter FLSA-795 (Sept. 30, 1964). Upon consideration, however, the Department believes that describing an employee as someone who “follows the usual path of an employee” is circular and unhelpful.

The Department observed in the NPRM preamble that some courts have relied on a worker's entrepreneurship with respect to one type of work to conclude that the worker was also in business for him- or herself in a second, unrelated type of work.

See, e.g., Parrish,

917 F.3d at 384 (considering “plaintiff's enterprise, such as the goat farm, as part of the overall analysis of how dependent plaintiffs were on [defendant]” for working as consultants);

Thibault,

612 F.3d at 849 (concluding that plaintiff was an independent contractor as a cable splicer in part because he managed unrelated commercial operations and properties in a different state). This approach is inconsistent with the Supreme Court's instruction that the economic reality analysis be limited to “the claimed independent operation.”

Silk,

331 U.S. at 716. Thus, the relevant question in this context is whether the worker providing certain service to a potential employer is an entrepreneur “in that line of business.”

Mr. W Fireworks,

814 F.2d at 1054. Otherwise, businesses must make worker classification decisions based on facts outside the working relationship.

19

19

It is possible for a worker to be an employee in one line of business and an independent contractor in another.

At bottom, the phrase “economic dependence” may mean many different things. But in the context of the economic reality test, “economic dependence” is best understood in terms of what it is not. The phrase excludes individuals who, as a matter of economic reality, are in business for themselves. Such individuals work for themselves rather than at the sufferance or permission of a potential employer,

see

29 U.S.C. 203(g), and thus are not dependent on that potential employer for work. Section 795.105(b) therefore recognizes the principle that, as a matter of economic reality, workers who are in business for themselves with respect to work being performed are independent contractors for that work.

Many commenters supported the Department's decision to implement the economic reality test applying the above-described approach to economic dependence. WPI applauded the “decision to retain the long-standing economic reality test while sharpening the factors used to apply that test.” The NRF stated that the economic reality test “is the proper basis for distinguishing independent contractors from employees under the FLSA as articulated by the U.S. Supreme Court.” ATA) found that the economic dependence framework “comports with a thoughtful reading of decades of court precedent.”

See also

Americans for Prosperity Foundation; Cetera Financial Group; Center for Workplace Compliance (“DOL is correct to propose using the economic dependence standard for determining whether an individual is an employee or independent contractor”).

The majority of commenters agreed with the Department's proposal to adopt the economic reality test using the above-mentioned definition of economic dependence, including commenters that were generally critical of the proposed rule. For example, the State AGs approvingly stated that “[f]or nearly three-quarters of a century, the Supreme Court has held that whether a worker is a covered “employee” under the FLSA is governed by the economic reality test.”

See also

National Employment Law Project (NELP); Signatory Wall and Ceiling Contractors Alliance (SWACCA) (recommending adopting an economic reality test with a different number of factors). While objecting commenters challenged various aspects of the proposed rule, they did not dispute the sharpened explanation of the economic dependence inquiry. Commenters, both supportive and objecting, made a number of thoughtful suggestions, which are addressed below.

The Administrative Law Clinic at the Antonin Scalia Law School suggested further clarifying the test by adding “[a]n individual is not an `employee' merely because he or she is economically dependent in some way on the potential employer.” Such additional language may be redundant in § 795.105(b) because that section already articulates economic dependence as dependence on a potential employer for work, as opposed to being in business for oneself. As explained above, other forms of dependence, such as dependence on income or subsistence, do not count. However, given how important it is to apply the correct concept of economic dependence, the Department believes this point bears emphasis through a concrete, fact-specific example in the regulatory text. The Department is thus adding an example in § 795.115 to demonstrate that a different form of dependence,

i.e.,

dependence of income or subsistence, is not a relevant consideration in the economic reality test.

A number of individual commenters who generally support this rule requested that the Department allow workers who voluntarily agree to be independent contractors to be classified as such, regardless of other facts. For example, Farren and Mitchell urged the Department to “allow the parties themselves to explicitly define the nature of their labor relationship,” asserting that such an approach would respect worker autonomy, maximize legal certainty, and promote greater flexibility in work arrangements. This requested approach would allow voluntary agreements to supersede the economic reality test in determining classification as an employee or independent contractor. The Supreme Court, however, held in

Tony & Susan Alamo,

471 U.S. at 302, that the FLSA must be “applied even to those who would decline its protections.” In other words, an individual may not waive application of the Act through voluntary agreement.

See Barrentine

v.

Arkansas-Best Freight Sys., Inc.,

450 U.S. 728, 740 (1981) (“FLSA rights cannot be abridged by contract or otherwise waived, because this would `nullify the purposes' of the statute and thwart the legislative policies it was designed to effectuate.”) (quoting

Brooklyn Savings Bank

v.

O'Neil,

324 U.S. 697, 707 (1945));

Lauritzen,

835 F.2d at 1544-45 (“The FLSA is designed to defeat rather than implement contractual arrangements. If employees voluntarily contract to accept $2.00 per hour, the agreement is ineffectual.”) (Easterbrook J., concurring). Because this request would contradict this precedent by allowing the possibility of workers who are employees under the facts and law to waive the FLSA's protections by classifying themselves as independent contractors, the Department declines to implement it in the final rule.

Some commenters, including the Minnesota State Building & Construction Trades Council, PJC, and SWRCC, suggested that the rule include a presumption of employee status. The Supreme Court has said and the Department agrees that this is a totality of the circumstances analysis, based on the facts. The Department thus declines to create a presumption in favor of employee status.

NELA, Farmworker Justice (FJ), and several other commenters requested that the Department abandon the economic reality test in favor of the ABC test adopted by the California Supreme Court in

Dynamex Operations West

v.

Superior Court,

416 P.3d 1 (2018). By contrast, other commenters, such as the American Society of Travel Advisors (ASTA) and National Federation of Independent Business (NFIB), urged the Department to adopt the common law standard used to distinguish between employees and independent contractors under the Internal Revenue Code and other Federal laws. These requests are addressed in the discussion of regulatory alternatives in Section VI, which explains why the Department is not adopting either the common law control test or the ABC test for employment under the FLSA.

For the reasons discussed above, the Department adopts § 795.105(b) as proposed to adopt the economic realty test to determine whether an individual is an employee or independent contractor under the FLSA. Under that test, an individual is an employee if he or she is dependent on an employer for work, and is an independent contractor if that he or she is, as a matter of economic reality, in business for him- or herself.

D. Applying the Economic Reality Factors To Determine a Worker's Independent Contractor or Employee Status

Proposed § 795.105(c) explained that certain nonexclusive economic reality factors guide the determination of whether an individual is, on one hand, economically dependent on a potential employer for work and therefore an employee or, on the other hand, in business for him- or herself and therefore an independent contractor.

See

85 FR 60639. These factors were listed in proposed § 795.105(d), based on the factors currently used by the Department and most Federal courts of appeals, with certain proposed reformulations.

Id.

First, the Department proposed to follow the Second Circuit's approach of analyzing the worker's investment as part of the opportunity factor. The combined factor asked whether the worker has an opportunity to earn profits or incur losses based on his or her exercise of initiative or management of investments.

See

85 FR 60613-15, 60639. Second, the Department proposed to clarify that the “skill required” factor originally articulated by the Supreme Court should be used, as opposed to the “skill and initiative” factor currently used in some circuits, because considering initiative as part of the skill factor creates unnecessary and confusing overlaps with the control and opportunity factors.

See

85 FR 60615, 60639. Third, the Department proposed to further reduce overlap by analyzing the exclusivity of the relationship as a part of the control factor only, as opposed to both the control and permanence factors.

See

85 FR 60615-16, 60639. Lastly, the Department proposed to reframe the “whether the service rendered is an integral part of the alleged employer's business” factor in accordance with the Supreme Court's original inquiry in

Rutherford Food,

331 U.S. at 729, of whether the work is “part of an integrated unit of production.”

See

85 FR 60616-18, 60639.

20

20

Consistent with WHD Opinion Letter FLSA2019-6, the Department's proposal did not include the “independent business organization” factor mentioned in Fact Sheet #13. The opinion letter explained that the “independent business organization” factor was “[e]ncompassed within” the other factors. Because the ultimate inquiry of the economic dependence test is whether workers are “in business for themselves,”

Saleem,

854 F.3d at 139, analyzing the worker's degree of “independent business organization” restates the inquiry and adds little, if anything, to the analysis that is not already covered by the other factors.

Proposed § 795.105(c) further aimed to improve the certainty and predictability of the test by focusing it on two core factors: (1) The nature and degree of the worker's control over the work; and (2) the worker's opportunity for profit or loss. The proposed rule explained that if both proposed core factors point towards the same classification—whether employee or independent contractor—there is a substantial likelihood that that classification is appropriate.

See

85 FR 60618-20, 60639.

The following discussion addresses commenter feedback on the five proposed economic reality factors.

1. The “Nature and Degree of the Individual's Control Over the Work” Factor

The first core factor identified in the proposed regulatory text was the “nature and degree of the individual's control over the work.” 85 FR 60639. Proposed § 795.105(d)(1)(i) explained that this factor “weighs towards the individual being an independent contractor to the extent the individual, as opposed to the potential employer, exercises substantial control over key aspects of the performance of the work, such as by setting his or her own schedule, by selecting his or her projects, and/or through the ability to work for others, which might include the potential employer's competitors.” Proposed § 795.105(d)(1)(i) further explained that, in contrast, this factor “weighs in favor of the individual being an employee under the Act to the extent the potential employer, as opposed to the individual, exercises substantial control over key aspects of the performance of the work, such as by controlling the individual's schedule or workload and/or by directly or indirectly requiring the individual to

work exclusively for the potential employer.” In addition, the proposal stated that the following actions by the potential employer “do[ ] not constitute control that makes the individual more or less likely to be an employee under the Act”: “[r]equiring the individual to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships).” Numerous commenters requested changes to the proposed control section regarding (1) the perspective from which control is framed; (2) the examples of control that are relevant to the economic dependence inquiry; and (3) examples of control that are not.

a. Responses to Requests Regarding the Framing of Control

Some commenters asserted that the control factor should focus on the potential employer's substantial control over the worker instead of the worker's substantial control over the work. For example, the State AGs said that the “proposed control factor incorrectly focuses on the worker's control over the work” and that “[w]ell-established precedent makes clear that the proper focus is the employer's control over the worker.” According to NELA, “the control analysis has historically been, and should continue to be, on the control that the employer has over the employee, not that the employee has over their work.” NELA added that the Department “cannot deny that its proposal casts the control inquiry differently than the Supreme Court, courts of appeals, and the Department have in the past.” And the United Brotherhood of Carpenters and Joiners of America stated that the proposal's “focus on the individual's control over the work turns the `suffer or permit' standard on its head” because that standard “references the purported employer's behavior—not the worker's.”

See also

Northern California Carpenters Regional Council (noting that “[b]ecause the `nature and degree of the individual's control over the work' . . . focuses on the individual's control, as opposed to the employer's control, the factor skews towards most skilled tradespeople being classified as independent cont[r]actors”). Relatedly, attorney Richard Reibstein suggested that the title of the control subsection “be re-drafted in a manner that does not suggest it favors independent contractor status because the remaining text regarding [the control factor] is neutral.” Mr. Reibstein suggested that the title be changed from the “nature and degree of the individual's control over the work” to the “nature and degree of each party's control over the work.” Finally, WPI expected that some commenters would object to the Department's proposed articulation of the control factor, and it supported the Department's approach by saying that “the economic reality test focuses on the individual—whether the individual is economically dependent on another business or in business for him or herself,” and that, “[t]hus, the focus of each factor should also be on the economic realities of the individual, not the businesses with which [he or she] contracts.”

See also

CPIE (supporting “the NPRM's articulation of this factor”).

Notwithstanding differing commenter preferences over the primary articulation of the control factor, the proposed (and final) regulatory text at § 795.105(d)(1)(i) discusses both the individual worker's control and the potential employer's control.

21

This approach is consistent with that of courts, which also generally consider both the individual's control and the potential employer's control.

See, e.g., Razak,

951 F.3d at 142;

Hobbs,

946 F.3d at 829;

Saleem,

854 F.3d at 144-45;

Karlson,

860 F.3d at 1096. The Department explained in the NPRM preamble that whether the control factor is articulated with reference to the individual worker's control or the potential employer's control is a “distinction . . . of no consequence,” and that both “the nature and degree of control over the work by the worker and by the potential employer are considered to determine whether control indicates employee or independent contractor status.” 85 FR 60612 n.34. The Department reaffirms that statement now and reiterates that both the worker's control and the potential employer's control should be considered. To remove any ambiguity on this point, the Department has modified the title of subsection 795.105(d)(1)(i) to “[t]he nature and degree of control over the work,” removing the proposed rule's reference to “

the individual's

control over the work.” This revised articulation is closer to the Supreme Court's description of the economic reality test's control factor in

Silk,

331 U.S. at 716 (“degrees of control”), which does not indicate a focus on either the individual worker or the potential employer.

21

As Mr. Reibstein acknowledged, the proposed regulatory text beyond the title of the control section was written in a “neutral” manner. The final regulatory text is written in a similarly neutral manner.

Mr. Reibstein also suggested that the control factor “should be drafted in a manner that focuses attention on the key to control, which is control over the manner and means by which the work in question is performed.” He asserted that, as proposed, the control section “is ambiguous at best and may be misleading at worst,” and suggested that “control over the work” should be changed to “control over the performance of the work, particularly how the work is to be performed.” The Department, however, prefers to retain the “control over the work” articulation. It is purposefully broad to encompass various different types of control that the individual worker and the potential employer may exercise over the working relationship. Moreover, the Department agrees that who controls the manner and means by which the work is performed is a key component of the control analysis, and the Department believes that both the proposed and final regulatory text reflect the importance of the manner and means by which the work is performed.

b. Responses to Comments Regarding Examples of Relevant Control

A number of comments addressed the proposed regulatory text's three non-exhaustive examples of control that may indicate employee or independent contractor status, which were setting schedules, selecting projects, and working exclusively for the employer or working for others.

Several commenters sought clarification that these examples may not always be probative of an employment or independent contracting relationship. For instance, NRF stated “there may be limits on schedules that are consistent with business relationships that should not be treated as impacting the analysis,” such as delivery workers who can deliver only during the restaurant's operating hours and a retailer that arranges for after-hours cleaning services. The Department agrees that there are examples of impacts on a workers schedule that are not probative of the type of control that indicates economic dependence and that NRF has identified two such examples by pointing to the fact that a delivery worker can deliver for a restaurant only when the restaurant is open and a cleaning worker can clean a retailer only when it is closed. But the Department does not think any change to the regulatory text is warranted to clarify this point, as the regulatory text merely provides a few examples of facets of control that may—

or may not—be probative in any given case depending on the facts. NHDA sought clarification of the working for others example because, in its view, “it is not enough for the individual to claim he/she never turned down projects or never worked for others. Rather, the individual must demonstrate some action, implementation, or execution (in other words, act or conduct) by the potential employer that prevented the individual from turning down projects or working for others.” In response, the Department notes its statement in the NPRM preamble that “a potential employer may exercise substantial control, for example, where it explicitly requires an exclusive working relationship or where it imposes restrictions that effectively prevent an individual from working with others.” 85 FR 60613 (citing cases where the employer's schedule made it “impossible” or “practically impossible” for the worker to work for others). Where a worker could work for others, meaning the potential employer is not explicitly or effectively preventing the worker from doing so, the worker retains control over this aspect of his or her work. That he or she exercises this control by choosing to work only for one potential employer does not necessarily shift the control to the potential employer. Further, the parties' actions, including whether the potential employer enforced an explicit bar on working for others or has imposed working conditions that make doing so impracticable, are stronger evidence of control than contractual or theoretical ability or inability to control this aspect of the working relationship.

22

22

The Department received related feedback from commenters asking for proposed § 795.110 to discount the relevance of voluntary worker practices (

e.g.,

choosing to work exclusively for one business, declining to negotiate prices, etc.); as explained in greater detail in Section IV(F), coercive behavior by a potential employer (

e.g.,

vigilant enforcement of a non-compete clause, punishing workers for turning down available work, etc.) constitutes stronger evidence of employment status than such voluntary worker practices, but is not a prerequisite for such worker practices to have import under the FLSA's economic reality test.

Some commenters interpreted the few examples of control in the proposal as an effort to limit the types of control that may be considered. For example, Farmworker Justice stated that the proposal “improperly and erroneously tries to narrow the relevant considerations for the [control] factor.” According to Edward Tuddenham, the proposal “lists some `key' elements of control that . . . may have little or no significance whatsoever” and “[s]uch a rigid approach to the question of control can only wreak havoc with the established common law of FLSA employer/employee relationships.” However, the examples of types of control identified in the proposal were not an attempt to narrow or limit the control factor analysis. The Department cannot provide an exhaustive list of types of control and so instead focused on several key examples of types of control. Any type of control over the work by the individual worker or the potential employer may be considered. Such considerations should not be “mechanical,”

Saleem,

854 F.3d at 140, and instead must focus on whether the control exercised by either the individual or the potential employer answers the ultimate inquiry of “whether the individual is, as a matter of economic reality, in business for himself,” as opposed to being economically dependent on the potential employer for work. In any event, as explained below, the Department is clarifying types of control that may be relevant to the analysis.

Numerous other commenters suggested the addition of dozens of examples of types of control that indicate employee or independent contractor status. For example, WPI suggested that the following types of control by the individual worker are indicative of independent contractor status: Controlling whether to work at all; controlling the location of where to perform the work; controlling how the work is performed; setting prices or choosing between work opportunities based on prices; and hiring employees or engaging subcontractors. It suggested, conversely, that the following types of control by the potential employer are indicative of employee status: Requiring the individual worker to comply with company specific procedures regarding how the work is performed; requiring a set schedule or minimum hours; controlling when the individual can take meal and rest breaks; and controlling when the individual can take time off. CWI recommended addition of the following as examples of the individual worker's control over the work that are indicative of independent contractor status: The worker's ability to make decisions with respect to the details of how the work is performed, including the staging and sequencing of aspects of the work; the worker's selection of supplies, tools, or equipment to be used (or not used) by the worker; the worker's control over when the work is conducted (

e.g.,

worker flexibility in start and end times) where flexibility exists in the result to be accomplished or the time periods available to a worker to offer their services; the worker's control over where certain aspects of the services can be performed where the subparts do not change the results provided by the worker; and the worker's discretion to use the services of others to perform the work in whole or in part, or to support the worker's performance of services (including performing some of the contracted work and/or performing supporting services such as accounting, legal, administrative, or financial services to support the worker or services to support equipment or tools used by the worker to perform services). UPS stated that the proposal “fails to provide examples beyond controlling the worker's schedule or workload and restricting the worker's ability to work with other entities,” and that “courts have properly widened the lens when assessing control, looking at factors such as background checks, authority to hire and fire, training, advertising, licensing, uniforms, monitoring, supervision, evaluation, and discipline.” Farmworker Justice commented that the proposal did “not acknowledge other examples of employer control that unquestionably shape a worker's experience and performance of daily tasks” and provided as examples “[r]equirements about how a worker must dress, what language or tone she may use in a professional setting, or what prices she must charge customers.” Likewise, Sen. Sherrod Brown and 22 other senators commented that the proposal “ignore[s] other critical matters of control that an employer typically exercises or retains the right to, including setting the rate of pay and the manner in which the work must be performed and disciplining workers who do not meet their standards.” And Human Rights Watch commented that the proposed control factor “potentially omits other ways that gig companies control their workers, such as the ways in which they unilaterally change the formula for calculating base earnings, the setting of default tip options, and restrictions on the range of assignments that are offered to workers at a specific time or in a specific locale.” Other commenters provided various industry-specific examples that they viewed as indicative of control by the individual worker or the potential employer.

The Department has considered the various comments regarding additional examples of types of control that can be indicative of employee or independent contractor status and declines to make changes to the proposed regulatory text in response. While this preamble and

the regulatory test cannot (and should not) address each and every potential scenario and example, they clarify and articulate principles related to the control factor that can be applied to an array of fact patterns as they arise.

As an initial matter, a number of commenters' examples fall within the general categories of control already identified in the regulatory text. For example, the worker's controlling whether to work at all, controlling when the work is conducted, and choosing between work opportunities based on prices are all examples of the worker's setting his or her schedule or selecting his or her projects, which the regulatory text identifies as examples of the worker's control over the work. Similarly, the potential employer's requiring a set schedule or minimum hours, controlling when the individual can take meal and rest breaks, controlling when the individual can take time off, and restricting the range of assignments that are offered to the worker are all examples of the potential employer's control over the worker's schedule, workload, or both, which the regulatory text identifies as examples of the potential employer's control over the work.

Moreover, as explained in the NPRM preamble, the Department is concerned that application of the economic reality factors has resulted in certain overlaps between the factors.

See

85 FR 60607-08 (identifying ways in which the former skill/initiative, permanence, and “integral” factors considered control). Consistent with that discussion and in the interest of further clarification, the Department reiterates that the worker's ability to exercise significant initiative, whether the potential employer directly or indirectly requires the worker to work exclusively for it, and the potential employer's ability to compel the worker's attendance to work on a consistent basis or otherwise closely supervise and manage performance of the work are examples of relevant types of control and are part of the control analysis. And as stated above, the Department agrees that who controls the manner and means by which the work is performed is a key component of the control analysis. In addition, the Department approvingly cited in the NPRM preamble cases in which the workers' ability to accept or reject projects or deliveries without negative repercussions or retaliation,

23

the potential employer's lack of close supervision or specifications how the workers should do the work,

24

and the potential employer's allowing the workers broad discretion in the manner in which to complete their work

25

indicated substantial control over the work by the workers. Finally, the Department agrees that the various examples of types of control identified by the commenters above may, at least in some factual circumstances, be relevant to the control analysis.

23

See

85 FR 60612 n.35 (citing

Parrish,

917 F.3d at 382;

Express Sixty-Minutes Delivery,

161 F.3d at 303).

24

See id.

(citing

Thibault,

612 F.3d at 847).

25

See

85 FR 60612-13 (citing

Mid-Atl. Installation,

16 F. App'x at 106).

Ultimately, however, it is not possible—and would be counterproductive—to identify in the regulatory text every type of control (especially industry-specific types of control) that can be relevant when determining under the FLSA whether a worker is an employee or independent contractor. As explained above, the Department purposefully articulated the control analysis in a general manner to encompass various different types of control that the individual worker and the potential employer may exercise over the working relationship, and to avoid any unintended inferences regarding omitted types of control. Accordingly, any type of control over the work by the individual worker or the potential employer may be considered, although some types of control are not probative of economic dependence as set forth in the final regulatory text (and discussed below).

The Owner-Operator Independent Drivers Association (OOIDA) objected that the proposal “offers no guidance on how” the examples of types of control “should be weighed against each other” and asked whether the Department intends “that a worker must satisfy all of the criteria that it mentions in order to be an independent contractor,” or if there is “some other balance when evaluating this factor.” OOIDA noted that although the proposal stated that no single factor of the economic reality test is dispositive, “it does not offer the same clarification when considering the details within a single factor.” As explained above, any type of control over the work by the individual worker or the potential employer may be considered to the extent it is probative as to whether the individual is, as a matter of economic reality, in business for himself, as opposed to being economically dependent on the potential employer for work. No single example of control, if present or not present, is necessarily dispositive as to whether the control factor indicates economic dependence. The examples are simply that: Examples.

c. Responses to Comments Regarding Examples of Requirements That Are Not Probative

Despite the final rule's broad articulation of the control factor, not every requirement or limitation on the means of doing business constitutes control for the purpose of analyzing whether a worker is an employee under the FLSA. The proposed regulatory text contained examples of requirements by a potential employer that do not constitute control and thus are not probative to the ultimate inquiry of whether the individual is, as a matter of economic reality, in business for himself. These are requirements to “comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships).” In other words, insisting on adherence to certain rules to which the worker is already legally bound would not make the worker more or less likely to be an employee.

NELA challenged the Department's “claims that case law supports this approach” and asserted that “[t]he majority view among courts . . . is that evidence of a business compelling its workers to comply with certain legal obligations or customer requirements is probative of control over the work relationship” (citing

Scantland

v.

Jeffry Knight, Inc.,

721 F.3d 1308, 1316 (11th Cir. 2013), among other cases). NELA added that “[c]ourts have routinely held that employer guidelines put in place to ensure that workers conform with the law or follow safety regulations constitute control over employees” (citing

Narayan

v.

EGL, Inc.,

616 F.3d 895, 902 (9th Cir. 2010), among other cases). The National Women's Law Center similarly stated that “courts have regularly rejected arguments that external requirements imposed by the defendant company's customers are irrelevant to the right to control factor” (citing cases). NELP asserted that the Department's “attempts to take away consideration of certain employer controls based on the source of the control” is “nonsense” because “if legislators or regulators have placed an obligation on employers to comply with certain laws, that makes the worker less independent and more dependent on that employer, and this should be accorded weight.” AFL-CIO commented that the “categorical exclusion of evidence of control based solely on the reasons why the employer exercises the

control is both irrational and contrary to Supreme Court precedent and Congress' intent.” And the United Brotherhood of Carpenters and Joiners of America asserted that the Department's proposal would “create[ ] a gaping hole that is fertile ground for exploitation by irresponsible employers like the ones we find in the construction industry.”

On the other hand, the Coalition to Promote Independent Entrepreneurs “strongly agree[d]” with this proposal and “agree[d] that these types of requirements frequently apply to work performed by employees and independent contractors alike and thus are not probative of whether an individual is economically dependent on a company.” In addition, NRF asserted that “this clarification is important, as there is a difference between `control' and `quality control' and/or other performance standards.” And the Independent Bakers Association “strongly support[ed] the proposed clarification that requiring an individual to comply with specific legal obligations typical of business relationships would not constitute evidence of control or make an individual more or less likely to be an employee.”

See also

SHRM (“support[ing] the [p]roposed . . . recognition that contracting parties should be able to build compliance with, for example, specific legal obligations, satisfy health and safety standards, and the carrying of insurance into the contractual relationship”).

The Department understands that some courts have found requirements that workers comply with specific legal obligations or meet quality control standards to be indicative of employee status. In particular, the Eleventh Circuit in

Scantland

stated that it examines “the nature and degree of the alleged employer's control, not why the alleged employer exercised such control” and that “a company must hire employees, not independent contractors” if “the nature of [its] business requires [the] company to exert control over workers to the extent that [the defendant] has allegedly done.” 721 F.3d at 1316. The

Scantland

court correctly recognized that the ultimate inquiry in the economic reality test is “whether an individual is in business for himself or is dependent upon finding employment in the business of others.” 721 F.3d at 1312 (quotation marks omitted). But to answer that question it is necessary to consider “why” the potential employer imposed a requirement. If the reason for a requirement applies equally to individuals who are in business for themselves and those who are employees, imposing the requirement is not probative.

See Parrish,

917 F.3d at 379 (“although requiring safety training and drug testing is an exercise of control in the most basic sense of the word, . . . [r]equiring . . . safety training and drug testing, when working at an

oil-drilling site,

is not the type of control that counsels in favor of employee status.”).

The

Scantland

court's discussion of the control factor included the fact that “[t]echnicians could also be . . . fired, for consistently misbilling, fraudulently billing, stealing, . . . [and] having consistently low quality control ratings” as evidence that the control factor weighed in favored employee classification. 721 F.3d at 1314 (11th Cir. 2013).

26

However, employees and independent contractors alike are routinely terminated for fraud, theft, and substandard work. Such dismissal are therefore not probative as to whether and the dismissed workers were in business for themselves, as opposed to being economically dependent on the potential employer. In contrast, dismissals for failing to work mandatory hours or for disregarding close supervision would be probative because mandatory hours and close supervision are typically not imposed on individuals who are in business for themselves. At bottom, the question of “why” workers were dismissed matters a great deal.

26

The court also relied on the employers' close supervision, control over schedules, and ability to prevent technicians from hiring helpers or working for others to conclude that the control factors weighed in favor of employee classification.

Scantland,

721 F.3d at 1314-15.

In any event,

Scantland'

s reasoning appears to be in the minority among courts of appeals.

27

As explained in the NPRM preamble, other courts have concluded that requiring such types of compliance is not probative of an employment relationship.

See, e.g., Parrish

917 F.3d at 379;

Iontchev

v.

AAA Cab Serv., Inc.,

685 F. App'x 548, 550 (9th Cir. 2017) (noting that the potential employer's “disciplinary policy primarily enforced the Airport's rules and [the city's] regulations governing the [drivers'] operations and conduct” in finding that the potential employer “had relatively little control over the manner in which the [d]rivers performed their work”);

Mid-Atl. Installation,

16 F. App'x at 106 (rejecting an argument that backcharging the workers “for failing to comply with various local regulations or with technical specifications demonstrates the type of control characteristic of an employment relationship,” and noting that withholding money in such circumstances is common in contractual relationships);

cf. Mr. W Fireworks,

814 F.2d at 1048 (finding that, because a scheduling requirement was imposed by the potential employer and not by state law, it suggested control over the workers). And courts have reached analogous conclusions in joint employer cases.

See, e.g.,

Zheng

v.

Liberty Apparel Co. Inc.,

355 F.3d 61, 75 (2d Cir. 2003) (finding that control with respect to “contractual warranties of quality and time of delivery has no bearing on the joint employment inquiry” because such control is “perfectly consistent with a typical, legitimate subcontracting relationship”);

Moreau

v.

Air France,

356 F.3d 942, 950-51 (9th Cir. 2003) (noting that control exercised by potential joint employer over contractor's employees to “ensure compliance with various safety and security regulations” is “qualitatively different” from control that indicates employer status).

27

In

Narayan,

the Ninth Circuit applied California law—not the FLSA—and merely recited requirements imposed by the potential employer to comply with certain legal obligations among a litany of examples of control that precluded summary judgment on the employee versus independent contractor issue in that case.

See

616 F.3d at 900-02.

In addition to the supportive case law, the extent to which courts take differing approaches to the probative value of such requirements is yet another example of the need identified by the Department for a clear and uniform standard under the FLSA to distinguish between employees and independent contractors. Moreover, the Department believes that these types of requirements are generally imposed by employers on both employees and independent contractors (as some commenters indicated). Employers expect and often require all of their workers to, for example, comply with the law, satisfy health and safety standards, and meet deadlines and quality standards. Thus, the existence of the requirements themselves are not probative of whether the worker is an employee or independent contractor. Other indicia of control over the work, including the indicia of control identified in the final regulatory text, are more probative of the worker's economic dependence or independence. Accordingly, the Department retains in the final regulatory text's statement that requirements by the potential employer that the worker “comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between

businesses (as opposed to employment relationships)” are not “control that makes the individual more or less likely to be an employee under the Act.”

Although the ATA “strongly agrees” with the Department's proposal that requirements by the potential employer that the worker “comply with specific legal obligations” would not be “control that makes the individual more or less likely to be an employee under the Act,” it suggested that “specific” be changed to “any” in the final regulatory text. ATA explained that referring to “specific” legal obligations “may unfortunately result in a great deal of litigation over whether any particular aspect of a contract is `specifically' mandated by law.” It cited, as examples, laws that impose general safety standards with which employers determine the specifics of how to comply.

See also

NHDA (“The proposal carves out compliance with

specific

legal obligations. However, not all legal obligations are specific, making other language in the proposal unnecessarily problematic.”).

After careful consideration, the Department declines to adopt the suggested change. As an initial matter, the Department used the “specific legal obligations” language in its recent Joint Employer Status under the Fair Labor Standards Act final rule.

See

85 FR 2859 (finalizing 29 CFR 791.2(d)(3)).

28

The Department noted there that the obligations include compliance with the FLSA or other similar laws, sexual harassment policies, background checks, or workplace safety practices and protocols.

See id.

The Department did not intend a high degree of specificity there and intends the same meaning here. Moreover, a potential employer's requirement that a worker comply with legal obligations without any further specificity as to the law or the actual obligations is unlikely to be probative of control in the first place. Accordingly, retaining the word “specific” is consistent with the Department's position that, although requiring workers to comply with legal obligations could be some manner of control, such requirements reflect the applicable legal regime more than the potential employer's control, and encouraging such requirements in contractual work relationships has obvious benefits for employers, workers, and society generally.

28

The Department's Joint Employer final rule was mostly vacated by the U.S. District Court for the Southern District of New York for reasons unrelated to the “specific legal obligations” language.

See New York

v.

Scalia,

No. 1:20-cv-1689-GHW, 2020 WL 5370871 (S.D.N.Y. Sept. 8, 2020). The Department appealed the decision to the U.S. Court of Appeals for the Second Circuit on November 6, 2020.

Other commenters expressed support for the Department's proposal to carve out from the control analysis the identified employer actions toward individual workers, but also requested that the Department expand its proposal by identifying many additional employer requirements as not types of control that make the individual more or less likely to be an employee under the Act. For example, SHRM asserted that “the Final Rule must emphasize that all workers, regardless of their formal employment status, should be able to benefit from the training, resources, and positive workplace practices as those who are directly employed in the same workplace,” and it gave examples of workplace trainings and audit measures. The U.S. Chamber of Commerce stated that the Department “should expand this concept” and “explicitly state that workers and businesses should not be discouraged from incorporating terms (and audit and other certification processes) into their relationship that support sound, lawful, safe work practices.” It suggested the following examples of such terms: “Incorporation of an obligation that the work be performed pursuant to acceptable professional, industry and customer service standards, as well as commonly accepted safety, ethics, licensure and other standards and recommendations (such as compliance with limitations or control imposed or necessitated by law, regulation, order or ordinance).”

See also

Seyfarth Shaw (requesting that the following employer actions toward workers be excluded from the control analysis: “(1) compliance with professional obligations and ethics standards; (2) compliance with regulatory obligations, including over health and safety; (3) compliance with other published industry standards; (4) compliance with applicable local, state, and national licensure standards and rules; and (5) additional contractual term examples of agreed upon results and deadlines”);

29

WPI (asserting that the potential employer's practice or ability to do the following are not probative: Requiring the individual to comply with or pass down contractual and legal obligations to subcontractors and employees; requiring the individual to comply with customer requirements; tracking and monitoring data related to the individual; providing the individual with market data on pricing; establishing default pricing that the individual may change; providing the individual with information related to the establishment or running of a business; providing the individual with emergency assistance (

e.g.,

protective equipment during a public-health crisis); and complying with Federal, state or locals laws related to a contracting relationship). Likewise, the Financial Services Institute requested that the Department carve out from the control analysis requirements that “Independent Broker-Dealers” (IBDs) place on their “financial advisors” to “comply with requirements imposed by FINRA, the SEC, and state securities regulators” and exclusivity requirements that IBDs place on their financial advisors to comply with “the extensive supervisory obligations imposed by the SEC and FINRA.” OOIDA also expressed concerns about exclusivity requirements and sought clarification that a potential employer's compliance with “Federal regulations requir[ing] that an owner-operator lease[ ] his or her equipment exclusively to a carrier for the duration of the lease” not affect the control analysis. Finally, CPIE asked the Department to “make clear that duties or requirements imposed by any third party, whether it be a government agency or a third-party customer, . . . be disregarded” when applying the control factor.

See also

NHDA (“[C]ontrol weighing in favor of employee status should be control exercised by the potential employer that originates with the potential employer and does not originate from outside, independent forces or circumstances, such as customer requirements or governmental regulations.”).

29

In a separate section of its comment, Seyfarth Shaw recommended that the Department state that the following are not evidence of a potential employer's control over the work of the worker: The business provides information regarding the final result to be accomplished by the worker; the business provides customer specifications/details and feedback relating to the work (including requesting confirmation that the customer feedback has been addressed); the business provides time frames within which services can be provided in light of the services contracted for, and/or the time sensitivity or perishable nature of the services/products; the business' right to enforce contractual obligations; the business provides the worker suggestions, recommendations, guidance, and/or tips that are not mandated but informational relating to the services; and the business pays the worker by the hour where it is customary in the particular business/trade to do so (

e.g.,

attorneys, physical trainers).

The Department does not agree with CPIE that any requirement stemming from “duties or requirements imposed by any third party” be “disregarded” or with NHDA that only control “that originates with the potential employer” can indicate employee status. This is because a third party may explicitly or impliedly encourage businesses to

impose requirements on workers that signify employee classification. For example, clients of a home cleaning company may prefer that the company's workers wear uniforms, use the same equipment, and be closely supervised. Imposing such requirements, even to satisfy client preferences, makes the workers more likely to be classified as employees because those requirements are inconsistent with the workers being in business for themselves. A company may also require that workers it hires perform timely and high-quality work, as clients surely prefer. But contractually agreed-upon deadlines and quality standards do not signify employee classification because independent businesses routinely agree to meet deadlines and quality standards as part of their businesses.

In response to comments requesting that the Department identify many additional employer requirements as not types of control that make the individual more or less likely to be an employee under the Act, the Department declines to change its proposed regulatory text. As an initial matter, many of the requested additions are already covered by the proposed text. For example, the following requested additions are requirements to “comply with specific legal obligations” and thus already covered: Requirements to comply with limitations or control imposed or necessitated by law, regulation, order, or ordinance; regulatory obligations; Federal, state, or local laws related to a contracting relationship; requirements imposed by FINRA, the SEC, and state securities regulators; and Federal regulations requiring that an owner-operator lease his or her equipment exclusively to a carrier for the duration of the lease.

30

Other requested additions may fall into the “satisfy health and safety standards” category (for example: Requiring that the work be performed pursuant to commonly accepted safety standards; and providing the individual emergency assistance such as protective equipment during a public-health crisis) or the “meet contractually agreed-upon deadlines or quality control standards” category (for example: Agreements that the work be performed pursuant to acceptable professional, industry, or published industry standards; agreements to comply with applicable local, state, and national licensure standards and rules; and agreed upon results and deadlines). Other requested additions are narrow or industry-specific in nature, and the Department prefers general guidance that may be used by as many employers and workers as possible.

30

Uber requested that the Department clarify that background checks are not an indicia of control: “Where a business is required by law to engage in certain activities (such as screening potential workers for violent crime history), the Department should make clear that this required screening is not an indicia of control.” However, requiring a worker to undergo and pass a background check when the law requires it falls in the “comply with specific legal obligations” category. No further clarification is necessary.

In any event, it is not possible to identify in the regulation every employer requirement that is not the type of control that makes the individual more or less likely to be an employee under the Act. The regulatory text accounts for this with a broader final category: Requiring the worker to “satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships).” This category recognizes that contractual work relationships currently vary and will evolve going forward, and provides that additional employer requirements that are not expressly identified in the regulatory text but which are similar to those identified and are typical of such relationships do “not constitute control that makes the individual more or less likely to be an employee under the Act.”

SHRM requested that the Department exclude from the control analysis the offering of benefits such as “health insurance, bonuses, or retirement savings.” According to SHRM, “the modern workplace would suffer if businesses were effectively barred from providing workplace enhancements that all workers should enjoy like healthcare or retirement savings.” Other commenters made overlapping requests, although not necessarily in the context of applying the control factor. For example, TechNet requested that the Department add a “safe harbor” stating that “a worker does not lose his or her independent status solely because a network platform provides the worker with emergency aid or benefits allowed or required under state law.” Similarly, WPI requested a general “safe harbor” with respect to the provision of “protections or benefits as allowed or required by Federal, state or local laws, including but not limited to minimum guaranteed earnings, health insurance, retirement benefits, health or retirement subsidies, life insurance, workers compensation or similar insurance, unemployment insurance, sick or other paid leave, training and expense reimbursement.”

The Department declines to change the regulatory text in response to these comments. The offering of health, retirement, and other benefits is not necessarily indicative of employment status. For example, payment of proceeds owed into a worker's own health plan or retirement account would not indicate an employment relationship. This is because it is reasonable for an independent contractor to have a personal health or retirement plan, and the precise method of compensation—whether cash, contributions to an account, or some other method—is not relevant to the question of economic dependence. However, providing a worker with the same employer-provided health or retirement plans on the terms that a business also gives its own employees may indicate the worker is not an independent contractor but rather an employee. Certain other benefits could also suggest employee status. For example, sick or other paid leave, especially the potential employer's administration and authorization of the leave, could be indicative of the potential employer's control over the worker's schedule. Finally, offering a bonus to a worker may or may not be indicative of employee status. For example, a worker's participation in a bonus or profit sharing plan in which he or she receives a bonus depending on the employer's, a division of the employer's, or his or her own performance over a period of time could limit the worker's ability to affect his or her profit or loss through initiative or investment—suggesting economic dependence and thus employee status. But a contractual agreement to provide a worker with a fixed bonus if the worker completes a job by a certain deadline or completes a certain number of tasks over a fixed period is typical of contractual relationships between businesses and itself does not make the worker more or less likely to be an employee under the Act. Even if, based on the circumstances of a particular case, the provision of certain health, retirement, or other benefits suggests classification as an employee, that fact is not determinative by itself because other facts and factors must also be considered.

2. The “Opportunity for Profit or Loss” Factor

The second core factor identified in the proposed regulatory text was the “individual's opportunity for profit or loss.” 85 FR 60639. This factor, included at proposed § 795.105(d)(1)(ii), “weighs towards the individual being an independent contractor to the extent the individual has an opportunity to earn profits or incur losses based on his or her exercise of initiative (such as managerial skill or business acumen or judgment) or management of his or her

investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work.” Proposed § 795.105(d)(1)(ii) further explained that, “[w]hile the effects of the individual's exercise of initiative and management of investment are both considered under this factor, the individual does not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor.” In addition, under the proposal, this factor “weighs towards the individual being an employee to the extent the individual is unable to affect his or her earnings or is only able to do so by working more hours or more efficiently.” Numerous comments were submitted regarding the proposals to analyze investment through the lens of opportunity for profit or loss and to focus that analysis on the worker's investment rather than comparing the worker's investment to the potential employer's investment. One commenter requested eliminating this factor altogether, and several commenters requested changes to the other aspects of the proposed opportunity factor section.

a. Whether To Analyze Investment Through the Lens of Opportunity for Profit or Loss

Some commenters opposed the proposal to consider the individual worker's “management of his or her investment in or capital expenditure on, for example, helpers or equipment or material to further his or her work” as part of the opportunity factor. For example, NELA stated that a worker's investment has “been a critically important factor in the economic realities test analysis” and that “[d]iscounting this important piece of the economic reality test, as the Department has done here, plainly makes it easier for businesses to require workers to make significant financial investments without risking a finding of employee status.” The State AGs similarly commented that the proposed approach of considering investment only in the context of opportunity for profit or loss “inappropriately subordinates the investment factor to the opportunity for profit or loss” factor. According to the State AGs, “[c]ourts consider both factors, often together, but investment `is, itself, indicative of independent contractor status' especially in smaller businesses” (quoting

Saleem

v.

Corp. Transp. Group, Ltd.,

854 F.3d 131, 144 n.29 (2d Cir. 2017)). UPS said that “workers [who] make little or no monetary investment toward completion of the work . . . are more likely to be dependent on the company,” but that the Department's proposal “ignores that reality” by suggesting that initiative and investment “are on equal footing.” NELP stated that, although opportunity for profit or loss and investment “are linked, they are hardly duplicative and separately serve as useful indicia of an entity's status under the FLSA, as the Supreme Court's tests note.”

On the other hand, some commenters supported the proposal to consider investment in the opportunity factor. For example, according to WPI, “[t]he Department's proposal to combine [opportunity for profit or loss] with an individual's investment in facilities and equipment, following Second Circuit precedent, is a welcome change that will bring clarity and reduce overlap.” It added that “[w]ise decisions about investments are perhaps the clearest path to increasing profits or suffering losses.” CPIE supported the proposed “adoption of the Second Circuit's approach of combining the factors `opportunity for profit or loss' and `investment,' and not treating them as separate factors.” According to CPIE, the proposal “better captures both the manufacturing-based independent contractor (who likely has a tangible capital business investment) and the new-economy independent contractor (who likely does not).”

Having carefully considered the comments on this issue, the Department adopts its proposal, consistent with Second Circuit case law, to consider investment as part of the opportunity factor. Some courts have acknowledged that the two concepts are related while still keeping the factors separate.

See McFeeley,

825 F.3d at 243;

Lauritzen,

835 F.2d at 1537. Other courts do not expressly acknowledge that they are related but consider investment when evaluating opportunity for profit or loss—resulting in unnecessary and duplicative analysis of the same facts under two factors.

See, e.g.,

Mid-Atl. Installation,

16 F. App'x at 106-07 (finding that the worker's capital investments in tools, equipment, and a truck indicated independent contractor status under both the opportunity and the investment factors). And consideration of investment separately has caused other courts to discuss the worker's involvement in outside businesses in the context of opportunity for profit or loss.

See, e.g.,

Parrish,

917 F.3d at 384 (considering consultant's management of a goat farm). After considering these varying approaches, the Department believes that adopting the Second Circuit's approach best furthers the Department's goal: A clear and non-duplicative analysis for determining employee versus independent contractor status. In sum, the individual worker's meaningful capital investments may evince opportunity for profit or loss: “[e]conomic investment, by definition, creates the opportunity for loss, [and] investors take such a risk with an eye to profit.”

Saleem,

854 F.3d at 145 n.29;

see also Superior Care,

840 F.2d at 1060 (identifying “the workers' opportunity for profit or loss and their investment in the business” as a single factor).

Moreover, considering investment as part of opportunity for profit or loss is consistent with the Supreme Court's opinion in

Silk

which articulated the two factors separately but analyzed them together. In particular, the Court found that coal unloaders were employees because they had “no opportunity to gain or lose except from the work of their hands and [ ] simple tools,” while truck drivers who invested in their own vehicles had “opportunity for profit from sound management” of that investment by, for instance, hauling for different customers.

Id.

at 719. Thus, it framed the analysis as whether workers are more like unloaders whose profits were based solely on “the work of their hands and [ ] simple tools” or the drivers whose profits depended on their initiative and investments.

See id.

As the Court explained decades ago and as the Second Circuit noted much more recently in

Saleem,

investment is a pathway to opportunity for profit or loss.

In response to NELA and likeminded commenters' concern that employers may require significant investments by their workers to avoid employee status, the Department reiterates that the investment must be capital in nature and consistent with the worker being in business for him/herself for the investment to indicate an opportunity for profit or loss. Senator Sherrod Brown and 22 other senators stated that “[r]equiring [workers] to purchase a franchise or their own equipment, including a vehicle” or otherwise “take on financial risk as a condition of employment does not convert an employee into an independent contractor under the FLSA.” While no single fact or factor may “convert an employee into an independent contractor,” the prospect of financial risk and reward plays an important role in distinguishing “wage earners toiling for a living” from “independent entrepreneurs seeking a return on their risky capital investments.”

Mr. W. Fireworks,

814 F.2d at 1051. Moreover, it matters why certain investments are required. If certain capital investments

are necessary to perform the job for which the contractor is hired, then requiring a contractor to make such investments would be consistent with the contractor being in business for him- or herself. For example, a company that hires independent contractors to haul freight may obviously require that drivers bring their own vehicles.

Silk

331 U.S at 719. In contrast, a requirement to “invest” in specific, company-provided equipment would not be consistent with the worker being in business for him- or herself, and may constitute a consideration under the control factor that points towards employee status.

See Scantland,

721 F.3d at 1318 (concluding that technicians' “expenditures [in equipment and materials] detract little from the[ir] economic dependence on Knight” in part because “many technicians purchased specialty tools from Knight directly via payroll withholdings”). As such, OOIDA's concern “that any requirement that a worker must purchase services or equipment from the business for which they work [w]ould weigh in favor of employee status” is misplaced.

See also

SWRCC (“[T]his standard would provide a perverse incentive for companies to require putative employees to maintain their own equipment in an effort to steer those employees to independent contractor status.”). Consistent with the economic dependence inquiry, an investment must indicate an independent business by the worker, as opposed to merely being required by the potential employer, for it to indicate an opportunity for profit or loss.

In response to the State AGs, the Department's approach does not subordinate investment; it can still separately indicate independent contractor status as they suggest. Finally, the Department's approach is not contrary to UPS' assertion that workers who make little or no investment “are more likely to be dependent” on the potential employer.

31

Workers who make little or no investment are more likely to be employees than workers who make significant investments, but of course, such a worker's ultimate status as an employee or independent contractor will also depend on other factors. As the Department explained in the NPRM preamble, workers who do not make significant investments may still be independent contractors: “while the presence of significant capital investment is still probative, its absence may be less so in more knowledge-based occupations and industries. Indeed, technological advances enable, for example, freelance journalists, graphic designers, or consultants to be entrepreneurs with little more than a personal computer and smartphone.” 85 FR 60609 (citing

Faludi

v.

U.S. Shale Sols., L.L.C.,

950 F.3d 269, 276 (5th Cir. 2020));

see also Meyer

v.

United States Tennis Ass'n,

607 F. App'x 121, 123 (2d Cir. 2015) (concluding that workers who invested little were independent contractors primarily because of their control over the work and their initiative);

Lauritzen,

835 F.2d at 1540-41 (Easterbrook, J. concurring) (“[P]ossess[ing] little or no physical capital . . . is true of many workers we would call independent contractors. Think of lawyers, many of whom do not even own books. The bar sells human capital rather than physical capital, but this does not imply that lawyers are `employees' of their clients under the FLSA.”).

32

31

The American Society of Travel Advisors disagreed at least in part, commenting that “workers in many service industries may make only a minimal investment in equipment or materials and in such situations this consideration, by itself, should not be taken to weigh in favor of employee status.”

32

LocumTenens, an online company that specializes in the temporary placement of physicians and other health clinicians, requested that the Department eliminate from the economic reality test consideration of whether an individual has an opportunity for profit or loss. According to LocumTenens, its physicians and clinicians who provide temporary healthcare services “do not have an obvious investment or opportunity for profit when they step in” for another physician or clinician. However, as explained later, the Department believes that opportunity for profit or loss is very predictive of a worker's status as an employee or independent contractor. In addition, the rule requires a worker to exercise personal initiative or manage capital investments, but not necessarily both, for the opportunity factor to indicate independent contractor status. In other words, an absence of capital investment does not prevent an individual from having an opportunity for profit or loss, because such opportunity can be based on the individual's initiative. Nor does such absence necessarily prevent an individual from being properly classified an independent contractor, particularly in knowledge-based industries such as medicine where human capital matters more than physical capital.

b. Whether To Analyze the Worker's Investment or Compare the Worker's Investment With That of the Potential Employer

The Department noted in the NPRM preamble that, when considering investment, some courts use “a side-by-side comparison method” that directly compares the worker's individual investment to the investment by the potential employer.

See

85 FR 60614 (citing cases). The Department explained that “such a `side-by-side comparison method' does not illuminate the ultimate question of economic dependence,” but instead “merely highlights the obvious and unhelpful fact that individual workers—whether employees or independent contractors—likely have fewer resources than businesses” that, for example, maintain corporate offices.

Id.

(citing cases). The Department received a number of comments addressing its proposed rejection of the relative investment approach.

For example, UPS stated that the Department's proposal “undervalues comparative analysis of investment” and noted that courts “have evaluated investment comparatively—correctly measuring the worker's investment against the company's” (citing cases). NELA added that “comparing workers' investments to the employer's investments” has been “a critically important factor in the economic realities test analysis” and “must be done in the context of the working relationship.” TRLA objected that “the proposed test does not include the Fifth Circuit's `extent of the relative investments of the worker and alleged employer' factor” and asserted that, while its usefulness may vary “depending on the facts of individual cases,” “its wholesale exclusion from the test factors is not warranted, especially given the Supreme Court's caution against an exhaustive list” (citing

Silk,

331 U.S. at 716). The Southwest Regional Council of Carpenters described the relative investment approach as simple and efficient by “lining up the expenses between worker and company” and thus “advanc[ing] the key interest of all parties concerned with the predictability of this part of the independent contractor test.” According to the Pacific Northwest Regional Council of Carpenters, the Department acted “arbitrarily” in proposing to eliminate consideration of relative investments and asserted that, because “virtually every craftsperson who works in the various carpentry trades owns his or her own tools,” the proposal would make “all of those individuals more susceptible to being classified as” independent contractors regardless whether the investment is small or extensive.

Other commenters supported the Department's proposed position. For example, the ATA, the Arkansas Trucking Association, NHDA, and Scopelitis, Garvin, Light, Hanson & Feary (on behalf of various transportation companies) each agreed with the Department's proposal “that the relative investment test fashioned by the Fifth Circuit `does not illuminate the ultimate question of economic

dependence' ” (quoting 85 FR 60614). TechNet explained that “the relative sizes of the parties' investments” are not relevant to the analysis, asserting that “[l]arge businesses may contract with small businesses,” make investments that “typically exceed their smaller partners' investments by orders of magnitude . . . because of their size,” and “not endanger [their] partners' independence merely because [they are] bigger than [their partners] are.” CPIE stated that “the determinative inquiry relative to investment should be whether the individual has a sufficient investment in his or her trade or business as to enable the individual to operate independently,” asserting that “[t]he investment of a potential client has no discernible relevance to this inquiry.”

See also

WFCA (“The issue is whether a worker invested in his or her business, not how that investment compares to the employing company's investment.”).

Having carefully considered the comments, the Department reaffirms its position that comparing the individual worker's investment to the potential employer's investment should not be part of the analysis of investment. Comparing their respective investments does little more than compare their respective sizes and resources. In

Hopkins

v.

Cornerstone America,

545 F.3d 338, 344 (5th Cir. 2008), it was of course “clear that [the insurance company's] investment—including maintaining corporate offices, printing brochures and contracts, providing accounting services, and developing and underwriting insurance products—outweighs the personal investment of any one Sales Leader.” The court, however, never explained how this fact indicated the Sales Leaders' economic dependence.

See id.

Tellingly, when summing up the entirety of the facts and analyzing whether the workers were economically dependent on the insurance company as a matter of economic reality, the court did not even mention the insurance company's larger investment.

See id.

at 346. And in

Karlson,

860 F.3d at 1096, the court found that comparing the worker's investment with the potential employer's total operating expenses had little relevance because “[l]arge corporations can hire independent contractors, and small businesses can hire employees.”

Cf. Parrish,

917 F.3d at 383 (comparing relative investments, but noting that “[o]bviously, [the oil drilling company] invested more money at a drill site compared to each plaintiff's investments” and according the factor little weight in light of the other evidence). In sum, comparing the relative investments does not illuminate the worker's economic dependence or independence. By contrast, as explained herein, analyzing the extent to which the individual worker has an opportunity for profit or loss because of his or her investment in, or capital expenditure on, helpers or equipment or material to further his or her work is probative of the worker's economic dependence or independence.

c. Other Comments Concerning the Opportunity Factor

WFCA agreed that “an evaluation of a worker's investment and capital expenditures are relevant factors in determining whether he or she is an independent contractor” and suggested including of “a definition of what constitutes an investment or capital expense.” WFCA suggested the following: “Investments and capital expenditure shall include: The purchase or rental of tools, equipment, material, and office or work facilities; the payment for marketing and administrative expenses; the payment of costs incurred hiring or using other workers; and similar expenditures.” However, the regulatory text already identifies investment in “helpers or equipment or material” as relevant, and the “for example” preceding them in the regulatory text makes clear that the list is non-exhaustive. The Department believes that general and non-exhaustive examples are more helpful than trying to precisely identify as many examples of relevant investments as possible.

NRF commented that “it is important to emphasize that it is the `opportunity' or `ability' to earn profits or incur losses based on investment and/or initiative, as opposed to the actual level of investment or initiative shown by the individual.” Relatedly, NRF expressed concern whether this factor squares with the discussion in proposed § 795.110 that the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible, asserting that “the fact that someone might not engage in certain practices or take on certain risks that would further impact the level of profit or loss should not result in a finding that the individual is not an independent contractor, unless that person is prevented from doing so by the entity with whom the individual contracts.” Here, the Department believes that NRF is conflating the ultimate outcome of independent entrepreneurship (profit or loss) with the actions indicative of entrepreneurship (initiative and/or investment) that largely determine that outcome. While profits are hardly guaranteed for anyone in business for him/herself, the text at § 795.105(d)(1)(ii) makes clear that independent contractors typically “

exercise

. . . initiative” and/or “

manag[e]

. . . investment,” (emphasis added)

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