# Employee or Independent Contractor Classification Under the Fair Labor Standards Act > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2022-21454 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** October 13, 2022 - **Citation:** 87 FR 62218 ## Text DEPARTMENT OF LABOR Wage and Hour Division 29 CFR Parts 780, 788, and 795 RIN 1235-AA43 Employee or Independent Contractor Classification Under the Fair Labor Standards Act AGENCY: Wage and Hour Division, Department of Labor. ACTION: Notice of proposed rulemaking. SUMMARY: The U.S. Department of Labor (the Department) is proposing to modify Wage and Hour Division regulations to revise its analysis for determining employee or independent contractor classification under the Fair Labor Standards Act (FLSA or Act) to be more consistent with judicial precedent and the Act's text and purpose. DATES: Submit written comments on or before November 28, 2022. ADDRESSES: You may submit comments, identified by Regulation Identifier Number (RIN) 1235-AA43, by either of the following methods: • Electronic Comments: Submit comments through the Federal eRulemaking Portal at https://www.regulations.gov. Follow the instructions for submitting comments. • Mail: Address written submissions to Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210. Instructions: Please submit only one copy of your comments by only one method. Of the two methods, the Department strongly recommends that commenters submit their comments electronically via https://www.regulations.gov to ensure timely receipt prior to the close of the comment period, as the Department continues to experience delays in the receipt of mail. All comments must be received by 11:59 p.m. ET on November 28, 2022, for consideration in this rulemaking; comments received after the comment period closes will not be considered. Commenters submitting file attachments on https://www.regulations.gov are advised that uploading text-recognized documents— i.e., documents in a native file format or documents which have undergone optical character recognition (OCR)—enable staff at the Department to more easily search and retrieve specific content included in your comment for consideration. This recommendation applies particularly to mass comment submissions, when a single sponsoring individual or organization submits multiple comments on behalf of members or other affiliated third parties. The Wage and Hour Division (WHD) posts such comments as a group under a single document ID number on https://www.regulations.gov. Anyone who submits a comment (including duplicate comments) should understand and expect that the comment will become a matter of public record and will be posted without change to https://www.regulations.gov, including any personal information provided. Accordingly, the Department requests that no business proprietary information, copyrighted information, or personally identifiable information be submitted in response to this notice of proposed rulemaking (NPRM). Docket: For access to the docket to read background documents or comments, go to the Federal eRulemaking Portal at https://www.regulations.gov. FOR FURTHER INFORMATION CONTACT: Amy DeBisschop, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division (WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Alternative formats are available upon request by calling 1-866-487-9243. If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services. Questions of interpretation and/or enforcement of the agency's regulations may be directed to the nearest WHD district office. Locate the nearest office by calling WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or logging onto WHD's website for a nationwide listing of WHD district and area offices at https://www.dol.gov/whd/america2.htm. SUPPLEMENTARY INFORMATION: I. Executive Summary Congress enacted the FLSA in 1938 to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” 1 To this end, the FLSA generally requires covered employers to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least one and one-half times the employee's regular rate of pay for every hour worked over 40 in a workweek. The Act also requires covered employers to maintain certain records regarding employees and prohibits retaliation against employees who are discharged or discriminated against after, for example, inquiring about their pay or filing a complaint with the U.S. Department of Labor. However, the FLSA's minimum wage and overtime pay protections do not apply to independent contractors. As explained below, as used in this proposal, the term “independent contractor” refers to workers who, as a matter of economic reality, are not economically dependent on their employer for work and are in business for themselves. Such workers play an important role in the economy and are commonly referred to by different names, including independent contractor, self-employed, and freelancer. Regardless of the name or title used, the test for whether the worker is an employee or independent contractor under the FLSA remains the same. This proposed rulemaking is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves. 1 29 U.S.C. 202(a). Determining whether an employment relationship exists under the FLSA begins with the Act's definitions. Although the FLSA does not define the term “independent contractor,” it contains expansive definitions of “employer,” “employee,” and “employ.” “Employer” is defined to “include[ ] any person acting directly or indirectly in the interest of an employer in relation to an employee,” “employee” is defined as “any individual employed by an employer,” and “employ” is defined to “include[] to suffer or permit to work.” 2 2 29 U.S.C. 203(d), (e)(1), (g). For more than 7 decades, the Department and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA. The ultimate inquiry is whether, as a matter of economic reality, the worker is either economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor). To answer this ultimate inquiry of economic dependence, the courts and the Department have historically conducted a totality-of-the-circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor under the FLSA. There is significant and widespread uniformity among the circuit courts in the application of the economic reality test, although there is slight variation as to the number of factors considered or how the factors are framed. These factors generally include the opportunity for profit or loss, investment, permanency, the degree of control by the employer over the worker, whether the work is an integral part of the employer's business, and skill and initiative. In January 2021, the Department published a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), providing guidance on the classification of independent contractors under the FLSA applicable to workers and businesses in any industry. 3 The 2021 IC Rule identified five economic reality factors to guide the inquiry into a worker's status as an employee or independent contractor. 4 Two of the five identified factors—the nature and degree of control over the work and the worker's opportunity for profit or loss—were designated as “core factors” that are the most probative and carry greater weight in the analysis. The 2021 IC Rule stated that if these two core factors point towards the same classification, there is a substantial likelihood that it is the worker's accurate classification. 5 The 2021 IC Rule also identified three less probative non-core factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production. 6 The 2021 IC Rule stated that it is “highly unlikely” that these three non-core factors can outweigh the combined probative value of the two core factors. 7 The 2021 IC Rule also limited consideration of investment and initiative to the opportunity for profit or loss factor in a way that narrows in at least some circumstances the extent to which investment and initiative are considered. The facts to be considered under other factors (such as control) were also narrowed, and the factor that considers whether the work is integral to the employer's business was limited to whether the work is part of an integrated unit of production. 8 Finally, the 2021 IC Rule provided that the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible and provided illustrative examples demonstrating how the analysis would apply in particular factual circumstances. 9 3 86 FR 1168. The Office of the Federal Register did not amend the Code of Federal Regulations (CFR) to include the regulations from the 2021 IC Rule because, as explained elsewhere in this section, the Department first delayed and then withdrew the 2021 IC Rule before it became effective. A district court decision later vacated the Department's rules to delay and withdraw the 2021 IC Rule, and the Department has (since that decision) conducted enforcement in accordance with that decision. 4 Id. at 1246-47 (§ 795.105(d)). 5 Id. at 1246 (§ 795.105(c)). 6 Id. at 1247 (§ 795.105(d)(2)). 7 Id. at 1246 (§ 795.105(c)). 8 Id. at 1246-47 (§ 795.105(d)(1) and (d)(2)(iii)). 9 Id. at 1247-48 (§§ 795.110, 795.115). The effective date of the 2021 IC Rule was March 8, 2021. On March 4, 2021, the Department published a rule delaying the effective date of the 2021 IC Rule (Delay Rule) and on May 6, 2021, it published a rule withdrawing the 2021 IC Rule (Withdrawal Rule). On March 14, 2022, in a lawsuit challenging the Department's delay and withdrawal of the 2021 IC Rule, a Federal district court in the Eastern District of Texas issued a decision vacating the Delay and Withdrawal Rules. 10 The district court concluded that the 2021 IC Rule became effective on the original effective date of March 8, 2021. 10 See Coalition for Workforce Innovation v. Walsh, No. 1:21-CV-130, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022). After further consideration, the Department believes that the 2021 IC Rule does not fully comport with the FLSA's text and purpose as interpreted by courts and departs from decades of case law applying the economic reality test. The 2021 IC Rule included provisions that are in tension with this case law—such as designating two factors as most probative and predetermining that they carry greater weight in the analysis, considering investment and initiative only in the opportunity for profit or loss factor, and excluding consideration of whether the work performed is central or important to the employer's business. These provisions narrow the economic reality test by limiting the facts that may be considered as part of the test, facts which the Department believes are relevant in determining whether a worker is economically dependent on the employer for work or in business for themself. While the Department considered waiting for a longer period of time in order to monitor the effects of the 2021 IC Rule, after careful consideration, it has decided it is appropriate to move forward with this proposed regulation. The Department believes that retaining the 2021 IC Rule would have a confusing and disruptive effect on workers and businesses alike due to its departure from case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test. Because the 2021 IC Rule departed from legal precedent, it is not clear whether courts will adopt its analysis—a question that could take years of appellate litigation in different Federal circuits to sort out and will result in more uncertainty as to the applicable test. The Department also believes that departing from the longstanding test applied by the courts may result in greater confusion among employers in applying the new analysis, which could in some situations place workers at greater risk of misclassification as independent contractors due to the new analysis being applied improperly, and thus may negatively affect both the workers and competing businesses that correctly classify their employees. Therefore, the Department believes it is appropriate to rescind the 2021 IC Rule and set forth an analysis for determining employee or independent contractor status under the Act that is more consistent with existing judicial precedent and the Department's longstanding guidance prior to the 2021 IC Rule. While prior to the 2021 IC Rule the Department primarily issued subregulatory guidance in this area under the FLSA, it believes that its proposal to both rescind the 2021 IC Rule and replace it with detailed regulations addressing the multifactor economic reality test—in a way that more fully reflects the case law and provides the flexibility needed for application to the entire economy—would be helpful for both workers and employers. And as the 2021 IC Rule explained, workers and employers should benefit from affirmative regulatory guidance from the Department further developing the concept of economic dependence. Accordingly, the Department is now proposing, in addition to rescinding the 2021 IC Rule, to again add part 795. Specifically, the Department proposes to modify the text of part 795 as published on January 7, 2021, at 86 FR 1246 through 1248, addressing whether workers are employees or independent contractors under the FLSA. As discussed below, the Department is not proposing the use of “core factors” but instead proposes to return to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity. The Department is further proposing to return the consideration of investment to a standalone factor, provide additional analysis of the control factor (including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered), and return to the longstanding interpretation of the integral factor, which considers whether the work is integral to the employer's business. The Department recognizes that this return to a totality-of-the-circumstances analysis in which the economic reality factors are not assigned a predetermined weight and each factor is given full consideration represents a change from the 2021 IC Rule. As discussed below, however, it believes that this approach is the option that would be most beneficial for stakeholders because this proposal provides guidance that is aligned with the Department's decades-long approach (prior to the 2021 IC Rule) as well as circuit case law. The Department believes that this proposal, if finalized, will provide more consistent guidance to employers as they determine whether workers are economically dependent on the employer for work or are in business for themselves, as well as useful guidance to workers on whether they are correctly classified as employees or independent contractors. Accordingly, the Department believes this proposal will help protect workers from misclassification while at the same time recognizing that independent contractors serve an important role in our economy and providing a consistent approach for those businesses that engage (or wish to engage) independent contractors. II. Background A. Relevant FLSA Definitions Enacted in 1938, the FLSA generally requires that covered employers pay nonexempt employees at least the Federal minimum wage (presently $7.25 per hour) for every hour worked, 11 and at least one and one-half times the employee's regular rate of pay for all hours worked beyond 40 in a workweek. 12 The FLSA also requires covered employers to “make, keep, and preserve” certain records regarding employees. 13 11 29 U.S.C. 206(a). 12 29 U.S.C. 207(a). 13 29 U.S.C. 211(c). The FLSA's wage and hour protections apply to employees. In relevant part, section 3(e) of the Act defines the term “employee” as “any individual employed by an employer.” 14 Section 3(d) defines the term “employer” to “includ[e] any person acting directly or indirectly in the interest of an employer in relation to an employee.” 15 Finally, section 3(g) provides that the term “ `[e]mploy' includes to suffer or permit to work.” 16 14 29 U.S.C. 203(e)(1). 15 29 U.S.C. 203(d). 16 29 U.S.C. 203(g). Interpreting these provisions, the U.S. Supreme Court has stated that “[a] broader or more comprehensive coverage of employees within the stated categories would be difficult to frame,” and that “the term `employee' had been given `the broadest definition that has ever been included in any one act.' ” 17 In particular, the Court has noted the “striking breadth” of section 3(g)'s “suffer or permit” language, observing that it “stretches the meaning of `employee' to cover some parties who might not qualify as such under a strict application of traditional agency law principles.” 18 Thus, the Court has repeatedly observed that the FLSA's scope of employment is broader than the common law standard often applied to determine employment status under other Federal laws. 19 17 United States v. Rosenwasser, 323 U.S. 360, 362, 363 n.3 (1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Hugo Black)). 18 Nationwide Mut. Ins. v. Darden, 503 U.S. 318, 326 (1992). 19 Id. at 326; see also, e.g., Walling v. Portland Terminal Co., 330 U.S. 148, 150-51 (1947) (“[I]n determining who are `employees' under the Act, common law employee categories or employer-employee classifications under other statutes are not of controlling significance. This Act contains its own definitions, comprehensive enough to require its application to many persons and working relationships, which prior to this Act, were not deemed to fall within an employer-employee category.”) (citation omitted). At the same time, the Supreme Court has recognized that the Act was “not intended to stamp all persons as employees.” 20 Among other categories of workers excluded from FLSA coverage, the Court has recognized that “independent contractors” fall outside the Act's broad understanding of employment. 21 Accordingly, the FLSA does not require covered employers to pay an independent contractor the minimum wage or overtime pay under sections 6(a) and 7(a) of the Act, or to keep records regarding an independent contractor's work under section 11(c). However, merely “putting on an `independent contractor' label does not take [a] worker from the protection of the [FLSA].” 22 Courts have thus recognized a need to delineate between employees, who fall under the protections of the FLSA, and independent contractors, who do not. 20 Portland Terminal, 330 U.S. at 152. 21 See, e.g., Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947) (noting that “[t]here may be independent contractors who take part in production or distribution who would alone be responsible for the wages and hours of their own employees”). 22 Id. The FLSA does not define the term “independent contractor.” While it is clear that section 3(g)'s “suffer or permit” language contemplates a broader coverage of workers compared to what exists under the common law, “there is in the [FLSA] no definition that solves problems as to the limits of the employer-employee relationship under the Act.” 23 Therefore, in articulating the distinction between FLSA-covered employees and independent contractors, courts rely on a broad, multifactor “economic reality” analysis derived from judicial precedent. 24 Unlike the control-focused analysis for independent contractors applied under the common law, 25 the economic reality test focuses more broadly on a worker's economic dependence on an employer, considering the totality of the circumstances. 23 Id. at 728. 24 Courts invoke the concept of “economic reality” in FLSA employment contexts beyond independent contractor status. However, as in prior rulemakings, this NPRM refers to the “economic reality” analysis or test for independent contractors as a shorthand reference to the independent contractor analysis used by courts for FLSA purposes. 25 In distinguishing between employees and independent contractors under the common law, courts evaluate “the hiring party's right to control the manner and means by which the product is accomplished.” Community for Creative Non-Violence v. Reid, 490 U. S. 730, 751 (1989). “Among the other factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party's discretion over when and how long to work; the method of payment; the hired party's role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.” Id. (footnotes omitted). B. Judicial Development of the Economic Reality Test 1. Supreme Court Development of the Economic Reality Test In a series of cases from 1944 to 1947, the U.S. Supreme Court considered employee or independent contractor status under three different Federal statutes that were enacted during the 1930s New Deal Era—the FLSA, the National Labor Relations Act (NLRA), and the Social Security Act (SSA)—and applied an economic reality test under all three laws. In the first of these cases, NLRB v. Hearst Publications, Inc., 322 U.S. 111 (1944), the Court considered the meaning of “employee” under the NLRA, which defined the term to “include any employee.” 26 In relevant part, the Hearst Court rejected application of the common law standard, 27 noting that “the broad language of the [NLRA's] definitions . . . leaves no doubt that its applicability is to be determined broadly, in doubtful situations, by underlying economic facts rather than technically and exclusively by previously established legal classifications.” 28 26 322 U.S. at 118-20; 29 U.S.C. 152(3). 27 322 U.S. at 123-25. 28 Id. at 129. On June 16, 1947, the Supreme Court decided United States v. Silk, 331 U.S. 704 (1947), addressing the distinction between employees and independent contractors under the SSA. In that case, the Court favorably summarized Hearst as setting forth “economic reality,” as opposed to “technical concepts” of the common law standard alone, as the framework for determining workers' classification. 29 But it also acknowledged that not “all who render service to an industry are employees.” 30 Although the Court found it to be “quite impossible to extract from the [SSA] a rule of thumb to define the limits of the employer-employe[e] relationship,” the Court identified five factors as “important for decision”: “degrees of control, opportunities for profit or loss, investment in facilities, permanency of relation[,] and skill required in the claimed independent operation.” 31 The Court added that “[n]o one [factor] is controlling nor is the list complete.” 32 The Court went on to note that the workers in that case were “from one standpoint an integral part of the businesses” of the employer, supporting a conclusion that some of the workers in that case were employees. 33 29 331 U.S. at 712-14. 30 Id. at 712. 31 Id. at 716. 32 Id. 33 Id. The same day that the Supreme Court issued its decision in Silk, it also issued Rutherford Food Corp. v. McComb, 331 U.S. 722, in which it affirmed a circuit court decision that analyzed an FLSA employment relationship based on its economic realities. 34 Describing the FLSA as “a part of the social legislation of the 1930s of the same general character as the [NLRA] and the [SSA],” the Court opined that “[d]ecisions that define the coverage of the employer-Employee relationship under the Labor and Social Security acts are persuasive in the consideration of a similar coverage under the [FLSA].” 35 Accordingly, the Court rejected an approach based on “isolated factors” and again considered “the circumstances of the whole activity.” 36 The Court considered several of the factors that it listed in Silk as they related to meat boners on a slaughterhouse's production line, ultimately determining that the boners were employees. 37 The Court noted, among other things, that the boners did a specialty job on the production line, had no business organization that could shift to a different slaughter-house, and were best characterized as “part of the integrated unit of production under such circumstances that the workers performing the task were employees of the establishment.” 38 34 331 U.S. at 727. 35 Id. at 723-24. 36 Id. at 730. 37 See id. 38 Id. at 729-30. On June 23, 1947, one week after the Silk and Rutherford decisions, the Court decided Bartels v. Birmingham, 332 U.S. 126 (1947), another case involving employee or independent contractor status under the SSA. Here again, the Court rejected application of the common law control test, explaining that, under the SSA, employee status “was not to be determined solely by the idea of control which an alleged employer may or could exercise over the details of the service rendered to his business by the worker.” 39 Rather, employees under “social legislation” such as the SSA are “those who as a matter of economic reality are dependent upon the business to which they render service.” 40 Thus, in addition to control, “permanency of the relation, the skill required, the investment [in] the facilities for work and opportunities for profit or loss from the activities were also factors” to consider. 41 Although the Court identified these specific factors as relevant to the analysis, it explained that “[i]t is the total situation that controls” the worker's classification under the SSA. 42 39 332 U.S. at 130. 40 Id. 41 Id. 42 Id. Following these Supreme Court decisions, Congress responded with separate legislation to amend the NLRA and SSA's employment definitions. First, in 1947, Congress amended the NLRA's definition of “employee” to clarify that the term “shall not include any individual having the status of an independent contractor.” 43 The following year, Congress similarly amended the SSA to exclude from employment “any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an independent contractor.” 44 The Supreme Court interpreted the amendments to the NLRA as having the same effect as the explicit definition included in the SSA, which was to ensure that employment status would be determined by common law agency principles, rather than an economic reality test. 45 43 Labor Management Relations (Taft-Hartley) Act, 1947, Public Law 80-101, sec. 101, 61 Stat. 136, 137-38 (1947) (codified as amended at 29 U.S.C. 152(3)). 44 Social Security Act of 1948, Public Law 80-642, sec. 2(a), 62 Stat. 438 (1948) (codified as amended at 26 U.S.C. 3121(d)). 45 See NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256 (1968) (noting that “[t]he obvious purpose of” the amendment to the definition of employee under the NLRA “was to have the Board and the courts apply general agency principles in distinguishing between employees and independent contractors under the Act”). Despite its amendments to the NLRA and SSA in response to Hearst and Silk, Congress did not similarly amend the FLSA following the Rutherford decision. Thus, when the Supreme Court revisited independent contractor status under the FLSA several years later in Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28 (1961), the Court affirmed that “ `economic reality' rather than `technical concepts' ” remained “the test of employment” under the FLSA, 46 quoting from its earlier decisions in Silk and Rutherford. The Court in Whitaker House found that certain homeworkers were “not self-employed . . . [or] independent, selling their products on the market for whatever price they can command,” but instead were “regimented under one organization, manufacturing what the organization desires and receiving the compensation the organization dictates.” 47 Such facts, among others, established that the homeworkers at issue were FLSA-covered employees. 48 46 366 U.S. at 33 (quoting from Silk, 331 U.S. at 713, and Rutherford, 331 U.S. at 729). 47 Id. at 32. 48 Id. at 33. Most recently, in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992), the Court again endorsed application of the economic reality test to evaluate independent contractor status under the FLSA, citing to Rutherford and emphasizing the broad “suffer or permit” language codified in section 3(g) of the Act. 49 49 Darden, 503 U.S. at 325-26. 2. Application of the Economic Reality Test by Federal Courts of Appeals Since Rutherford, Federal courts of appeals have applied the economic reality test to distinguish independent contractors from employees who are entitled to the FLSA's protections. Recognizing that the common law concept of “employee” had been rejected for FLSA purposes, courts of appeals followed the Supreme Court's instruction that “ `employees are those who as a matter of economic realities are dependent upon the business to which they render service.' ” 50 50 Usery v. Pilgrim Equip. Co., 527 F.2d 1308, 1311 (5th Cir. 1976) (quoting Bartels, 332 U.S. at 130). When determining whether a worker is an employee under the FLSA or an independent contractor, Federal circuit courts of appeals apply an economic reality test using the factors identified in Silk. 51 No court of appeals considers any one factor or combination of factors to predominate over the others in every case. 52 For example, the Eleventh Circuit has explained that some of the factors “which many courts have used as guides in applying the economic reality test” are: (1) the degree of the alleged employer's right to control the manner in which the work is to be performed; (2) the worker's opportunity for profit or loss depending upon their managerial skill; (3) the worker's investment in equipment or materials required for their task, or their employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) the extent to which the service rendered is an integral part of the alleged employer's business. 53 Like other circuits, the Eleventh Circuit repeats the Supreme Court's explanation from Silk that no one factor is controlling, nor is the list exhaustive. 54 51 See Brock v. Superior Care, Inc., 840 F.2d 1054, 1058-59 (2d Cir. 1988); Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376, 1382-83 (3d Cir. 1985); McFeeley v. Jackson Street Ent., LLC, 825 F.3d 235, 241 (4th Cir. 2016); Pilgrim Equip., 527 F.2d at 1311; Acosta v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1055 (6th Cir. 2019); Sec'y of Labor, U.S. Dep't of Labor v. Lauritzen, 835 F.2d 1529, 1534-35 (7th Cir. 1987); Walsh v. Alpha & Omega USA, Inc., 39 F.4th 1078, 1082 (8th Cir. 2022); Real v. Driscoll Strawberry Assocs., Inc., 603 F.2d 748, 754 (9th Cir. 1979); Acosta v. Paragon Contractors Corp., 884 F.3d 1225, 1235 (10th Cir. 2018); Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311-12 (11th Cir. 2013); Morrison v. Int'l Programs Consortium, Inc., 253 F.3d 5, 11 (DC Cir. 2001). 52 See, e.g., Parrish v. Premier Directional Drilling, L.P., 917 F.3d 369, 380 (5th Cir. 2019) (stating that it “is impossible to assign to each of these factors a specific and invariably applied weight”) (quoting Hickey v. Arkla Indus., Inc., 699 F.2d 748, 752 (5th Cir. 1983) (applying economic realities test in Age Discrimination in Employment Act case)); Martin v. Selker Bros., 949 F.2d 1286, 1293 (3d Cir. 1991) (“It is a well-established principle that the determination of the employment relationship does not depend on isolated factors . . . neither the presence nor the absence of any particular factor is dispositive.”); Scantland, 721 F.3d at 1312 n.2 (the relative weight of each factor “depends on the facts of the case”) (quoting Santelices v. Cable Wiring, 147 F. Supp. 2d 1313, 1319 (S.D. Fla. 2001)). 53 Scantland, 721 F.3d at 1311-12. 54 Id. at 1312 n.2. Some courts of appeals have applied the factors with some variations. For example, the Fifth Circuit typically does not list the “integral part” factor as one of the considerations that guides the analysis. 55 Nevertheless, the Fifth Circuit, recognizing that the listed factors are not exhaustive, has considered the extent to which a worker's function is integral to a business as part of its economic realities analysis. 56 The Second and D.C. Circuits vary in that they treat the employee's opportunity for profit or loss and the employee's investment as a single factor, but they still use the same considerations as the other circuits to inform their economic realities analysis. 57 55 See Pilgrim Equip., 527 F.2d at 1311. 56 See Hobbs v. Petroplex Pipe & Constr., Inc., 946 F.3d 824, 836 (5th Cir. 2020). 57 See, e.g., Franze v. Bimbo Bakeries USA, Inc., 826 F. App'x 74, 76 (2d Cir. 2020); Superior Care, 840 F.2d at 1058-59. The D.C. Circuit has adopted the Second Circuit's articulation of the factors, including treating opportunity for profit or loss and investment as one factor. See Morrison, 253 F.3d at 11 (citing Superior Care, 840 F.2d at 1058-59). In sum, since the 1940s, Federal courts have analyzed the question of employee or independent contractor status under the FLSA by examining the economic realities of the employment relationship to determine whether the worker is economically dependent on the employer for work or is in business for themself, even if they have varied slightly in their articulations of the factors. Nevertheless, all courts have looked to the factors first articulated in Silk as useful guideposts while acknowledging that those factors are not exhaustive and should not be applied mechanically. 58 58 See, e.g., Superior Care, 840 F.2d at 1059. C. The Department's Application of the Economic Reality Test The Department has applied a multifactor economic reality test since the Supreme Court's opinions in Rutherford and Silk. For example, on June 23, 1949, the Wage and Hour Division (WHD) issued an opinion letter distilling six “primary factors which the Court considered significant” in Rutherford and Silk: “(1) the extent to which the services in question are an integral part of the `employer[']s' business; (2) the amount of the so-called `contractor's' investment in facilities and equipment; (3) the nature and degree of control by the principal; (4) opportunities for profit and loss; . . . (5) the amount of initiative judgment or foresight required for the success of the claimed independent enterprise[;] and [(6)] permanency of the relation.” 59 The guidance cautioned that no single factor is controlling, and “[o]rdinarily a definite decision as to whether one is an employee or an independent contractor under the [FLSA] cannot be made in the absence of evidence as to his actual day-to-day working relationship with his principal. Clearly a written contract does not always reflect the true situation.” 60 59 WHD Op. Ltr. (June 23, 1949). 60 Id. Subsequent WHD opinion letters addressing employee or independent contractor status under the FLSA have provided similar recitations of the Silk factors, sometimes omitting one or more of the six factors described in the 1949 opinion letter, 61 and sometimes adding (or substituting) a seventh factor: the worker's “degree of independent business organization and operation.” 62 Numerous opinion letters have emphasized that employment status is “not determined by the common law standards relating to master and servant,” 63 and that “[t]he degree of control retained by the principal has been rejected as the sole criterion to be applied.” 64 61 See, e.g., WHD Op. Ltr. FLSA-314 (Dec. 21, 1982) (discussing three of the Silk factors); WHD Op. Ltr. FLSA-164 (Jan. 18, 1990) (discussing four of the Silk factors). 62 See WHD Op. Ltr. (Oct. 12, 1965); WHD Op. Ltr. (Feb. 18, 1969). 63 See, e.g., WHD Op. Ltr. (Feb. 18, 1969); WHD Op. Ltr. (Sept. 1, 1967); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981); WHD Op. Ltr. (June 5, 1995). 64 See, e.g., WHD Op. Ltr. FLSA-106 (Feb. 8, 1956); WHD Op. Ltr. (July 20, 1965); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981). In 1962, the Department revised the regulations in 29 CFR part 788, 65 which generally provides interpretive guidance on the FLSA's exemption for employees in small forestry or lumbering operations, and added a provision addressing the distinction between employees and independent contractors. 66 Citing to Silk, Rutherford, and Bartels, the regulation advised that “an employee, as distinguished from a person who is engaged in a business of his own, is one who `follows the usual path of an employee' and is dependent on the business which he serves.” 67 To “aid in assessing the total situation,” the regulation then identified a partial list of “characteristics of the two classifications which should be considered,” including “the extent to which the services rendered are an integral part of the principal's business; the permanency of the relationship; the opportunities for profit or loss; the initiative, judgment or foresight exercised by the one who performs the services; the amount of investment; and the degree of control which the principal has in the situation.” 68 Implicitly referring to the Bartels decision, the regulation advised that “[t]he Court specifically rejected the degree of control retained by the principal as the sole criterion to be applied.” 69 65 See 27 FR 8032. 66 See 29 U.S.C. 213(b)(28) (previously codified at 29 U.S.C. 213(a)(15)). 67 27 FR 8033 (29 CFR 788.16(a)). 68 Id. 69 27 FR 8033-34 (29 CFR 788.16(a)). In 1972, the Department added similar guidance on independent contractor status at 29 CFR 780.330(b), in a provision addressing the employment status of sharecroppers and tenant farmers. 70 This regulation was nearly identical to the independent contractor guidance for the logging and forestry industry previously codified at 29 CFR 788.16(a), including an identical description of the same six economic reality factors. 71 Both provisions—29 CFR 780.330(b) and 788.16(a)—remained unchanged until 2021. 70 See 37 FR 12084, 12102 (introducing 29 CFR 780.330(b)). 71 Id. In 1997, the Department promulgated a regulation applying a multifactor economic reality analysis for distinguishing between employees and independent contractors under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), 72 which notably incorporates the FLSA's “suffer or permit” definition of employment by reference. 73 The regulation (which has not since been amended) advises that “[i]n determining if the farm labor contractor or worker is an employee or an independent contractor, the ultimate question is the economic reality of the relationship—whether there is economic dependence upon the agricultural employer/association or farm labor contractor, as appropriate.” 74 The regulation elaborates that “[t]his determination is based upon an evaluation of all of the circumstances, including the following: (i) The nature and degree of the putative employer's control as to the manner in which the work is performed; (ii) The putative employee's opportunity for profit or loss depending upon his/her managerial skill; (iii) The putative employee's investment in equipment or materials required for the task, or the putative employee's employment of other workers; (iv) Whether the services rendered by the putative employee require special skill; (v) The degree of permanency and duration of the working relationship; (vi) The extent to which the services rendered by the putative employee are an integral part of the putative employer's business.” 75 This description of six economic reality factors was very similar to the earlier description of six economic reality factors provided in 29 CFR 780.330(b) and 788.16(a). 72 See 62 FR 11734 (amending 29 CFR 500.20(h)(4)); see also 29 U.S.C. 1861 (explicitly providing that “[t]he Secretary may issue such rules and regulations as are necessary to carry out this chapter”). 73 See 29 U.S.C. 1802(5) (“The term `employ' has the meaning given such term under section 3(g) of the [FLSA]”). 74 29 CFR 500.20(h)(4). 75 Id. Also in 1997, WHD issued Fact Sheet #13, “Employment Relationship Under the Fair Labor Standards Act (FLSA).” 76 Like WHD opinion letters, Fact Sheet #13 advises that “an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.” 77 The fact sheet identifies the six familiar economic realities factors, as well as consideration of the worker's “degree of independent business organization and operation.” 78 76 See WHD Fact Sheet #13 (1997) https://web.archive.org/web/19970112162517/http:/www.dol.gov/dol/esa/public/regs/compliance/whd/whdfs13.htm ). WHD made minor revisions to Fact Sheet #13 in 2002 and 2008, before a more substantial revision in 2014. In 2018, WHD reverted back to the 2008 version of Fact Sheet #13, which remains the current version (available at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/whdfs13.pdf ). 77 Id. 78 Id. On July 15, 2015, WHD issued additional subregulatory guidance, Administrator's Interpretation No. 2015-1, “The Application of the Fair Labor Standards Act's `Suffer or Permit' Standard in the Identification of Employees Who Are Misclassified as Independent Contractors” (AI 2015-1). 79 AI 2015-1 reiterated that the economic realities of the relationship are determinative and that the ultimate inquiry is whether the worker is economically dependent on the employer or truly in business for him or herself. It identified six economic realities factors that followed the six factors used by most Federal courts of appeals: (1) the extent to which the work performed is an integral part of the employer's business; (2) the worker's opportunity for profit or loss depending on his or her managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. AI 2015-1 further emphasized that the factors should not be applied in a mechanical fashion and that no one factor was determinative. AI 2015-1 was withdrawn on June 7, 2017. 80 79 AI 2015-1 is available at 2015 WL 4449086. 80 See News Release 17-0807-NAT, “US Secretary of Labor Withdraws Joint Employment, Independent Contractor Informal Guidance” (June 7, 2017), https://www.dol.gov/newsroom/releases/opa/opa20170607 (last visited June 30, 2022). In 2019, WHD issued an opinion letter, FLSA2019-6, regarding whether workers who worked for companies operating self-described “virtual marketplaces” were employees covered under the FLSA or independent contractors. 81 Like the Department's prior guidance, the letter stated that the determination depended on the economic realities of the relationship and that the ultimate inquiry was whether the workers depend on someone else's business or are in business for themselves. 82 The letter identified six economic realities factors that differed slightly from the factors typically articulated by the Department previously: (1) the nature and degree of the employer's control; (2) the permanency of the worker's relationship with the employer; (3) the amount of the worker's investment in facilities, equipment, or helpers; (4) the amount of skill, initiative, judgment, and foresight required for the worker's services; (5) the worker's opportunities for profit or loss; and (6) the extent of the integration of the worker's services into the employer's business. 83 Opinion Letter FLSA2019-6 was withdrawn on February 19, 2021. 84 81 See WHD Op. Ltr. FLSA2019-6, 2019 WL 1977301 (Apr. 29, 2019) (withdrawn Feb. 19, 2021). 82 See id. at *3. 83 See id. at *4. Opinion Letter FLSA2019-6's “extent of the integration” factor was a notable recharacterization of the factor traditionally considered by courts and the Department regarding the extent to which work is “an integral part” of an employer's business. 84 See note at https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited June 30, 2022). D. The Department's 2021 Independent Contractor Rule On January 7, 2021, the Department published a final rule titled “Independent Contractor Status Under the Fair Labor Standards Act,” with an effective date of March 8, 2021 (2021 IC Rule). 85 The 2021 IC Rule set forth regulations to be added to a new part (part 795) in title 29 of the Code of Federal Regulations titled “Employee or Independent Contractor Classification under the Fair Labor Standards Act,” providing guidance on the classification of independent contractors under the FLSA applicable to workers and businesses in any industry. 86 The 2021 IC Rule also addressed the Department's prior interpretations of independent contractor status in 29 CFR 780.330(b) and 788.16(a)—both of which applied to specific industries—by cross-referencing part 795. 87 85 See 86 FR 1168. The Department initially published a notice of proposed rulemaking (NPRM) soliciting public comment on September 25, 2020. See 85 FR 60600. The final rule adopted “the interpretive guidance set forth in the [NPRM] largely as proposed.” 86 FR 1168. 86 86 FR 1246-48. 87 Id. at 1246. The Department explained that the purpose of the 2021 IC Rule was to establish a “streamlined” economic reality test that improved on prior articulations described as “unclear and unwieldy.” 88 It stated that the existing economic reality test applied by the Department and courts suffered from confusion regarding the meaning of “economic dependence” because the concept is “underdeveloped,” a lack of focus in the multifactor balancing test, and confusion and inefficiency caused by overlap between the factors. 89 The 2021 IC Rule asserted that shortcomings and misconceptions associated with the economic reality test were more apparent in the modern economy and that additional clarity would promote innovation in work arrangements. 90 88 Id. at 1172, 1240. 89 Id. at 1172-75. 90 Id. at 1175. The 2021 IC Rule explained that independent contractors are not employees under the FLSA and are therefore not subject to the Act's minimum wage, overtime pay, or recordkeeping requirements. 91 It adopted an economic reality test under which a worker is an employee of an employer if that worker is economically dependent on the employer for work. 92 By contrast, the worker is an independent contractor if the worker is in business for themself. 91 Id. at 1246 (§ 795.105(a)). 92 Id. at 1168, 1246 (§ 795.105(b)). The 2021 IC Rule identified five economic realities factors to guide the inquiry into a worker's status as an employee or independent contractor, 93 while acknowledging that the factors are not exhaustive, no one factor is dispositive, and additional factors may be considered if they “in some way indicate whether the [worker] is in business for him- or herself, as opposed to being economically dependent on the potential employer for work.” 94 But in contrast to prior guidance and contrary to case law, the 2021 IC Rule designated two of the five factors—the nature and degree of control over the work and the worker's opportunity for profit or loss—as “core factors” that should carry greater weight in the analysis. Citing the need for greater certainty and predictability in the economic reality test, and in an effort to sharpen the concept of economic dependence, the 2021 IC Rule determined that these two factors were more probative of economic dependence than the other economic realities factors. If both of those core factors indicate the same classification, as either an employee or an independent contractor, the 2021 IC Rule stated that there is a “substantial likelihood” that the indicated classification is the worker's correct classification. 95 93 Id. at 1246 (§ 795.105(c)). 94 Id. at 1246-47 (§ 795.105(c) and (d)(2)(iv)). 95 Id. at 1246 (§ 795.105(c)). The 2021 IC Rule's first core factor is the nature and degree of control over the work, which indicates independent contractor status to the extent that the worker exercised substantial control over key aspects of the performance of the work, such as by setting their own schedule, by selecting their projects, and/or through the ability to work for others, which might include the potential employer's competitors. 96 The 2021 IC Rule provides that requiring the worker to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) does not constitute control. 97 96 Id. at 1246-47 (§ 795.105(d)(1)(i)). 97 Id. at 1247 (§ 795.105(d)(i)). The 2021 IC Rule's second core factor is the worker's opportunity for profit or loss. 98 The Rule states that this factor indicates independent contractor status to the extent the worker has an opportunity to earn profits or incur losses based on either (1) their exercise of initiative (such as managerial skill or business acumen or judgment) or (2) their management of investment in or capital expenditure on, for example, helpers or equipment or material to further the work. 99 While the effects of the worker's exercise of initiative and management of investment are both considered under this factor, the worker does not need to have an opportunity for profit or loss based on both initiative and management of investment for this factor to weigh towards the worker being an independent contractor. 100 This factor indicates employment status to the extent that the worker is unable to affect his or her earnings or is only able to do so by working more hours or faster. 101 98 Id. (§ 795.105(d)(1)(ii)). 99 Id. 100 Id. 101 Id. The 2021 IC Rule also identified three other non-core factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production (which it cautioned is “different from the concept of the importance or centrality of the individual's work to the potential employer's business”). 102 The 2021 IC Rule provided that these other factors are “less probative and, in some cases, may not be probative at all” of economic dependence and are “highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors.” 103 102 Id. (§ 795.105(d)(2)). 103 Id. at 1246 (§ 795.105(c)). The 2021 IC Rule also stated that the actual practice of the parties involved is more relevant than what may be contractually or theoretically possible, 104 and provided five “illustrative examples” demonstrating how the analysis would apply in particular factual circumstances. 105 Finally, the 2021 IC Rule rescinded any “prior administrative rulings, interpretations, practices, or enforcement policies relating to classification as an employee or independent contractor under the FLSA” to the extent that such items “are inconsistent or in conflict with the interpretations stated in this part,” 106 and explained that the 2021 IC Rule would guide WHD's enforcement of the FLSA. 107 104 Id. at 1247 (§ 795.110). 105 Id. at 1247-48 (§ 795.115). 106 Id. at 1246 (§ 795.100). 107 Id. On January 19, 2021, WHD issued Opinion Letters FLSA2021-8 and FLSA2021-9 applying the Rule's analysis to specific factual scenarios. WHD subsequently withdrew those opinion letters on January 26, 2021, explaining that the letters were issued prematurely because they were based on a rule that had yet to take effect. 108 108 See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA (last visited June 30, 2022), noting the withdrawal of Opinion Letters FLSA2021-8 and FLSA2021-9. E. Delay and Withdrawal of the 2021 Independent Contractor Rule On February 5, 2021, the Department published a proposal to delay the 2021 IC Rule's effective date until May 7, 2021—60 days after the Rule's original March 8, 2001, effective date. 109 On March 4, 2021, after considering the approximately 1,500 comments received in response to that proposal, the Department published a final rule delaying the effective date of the 2021 IC Rule as proposed (“Delay Rule”). 110 109 86 FR 8326. 110 Id. at 12535. On March 12, 2021, the Department published a notice of proposed rulemaking (NPRM) proposing to withdraw the 2021 IC Rule. 111 On May 5, 2021, after reviewing approximately 1,000 comments submitted in response to the NPRM, the Department announced a final rule withdrawing the 2021 IC Rule (“Withdrawal Rule”). 112 In explaining its decision to withdraw the 2021 IC Rule, the Department stated that the Rule was inconsistent with the FLSA's text and purpose and would have had a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent. 113 The Withdrawal Rule stated that it took effect immediately upon its publication in the Federal Register on May 6, 2021. 114 111 Id. at 14027. 112 Id. at 24303. 113 Id. at 24307. 114 Id. at 24320. F. Litigation Over the 2021 Independent Contractor Rule On March 14, 2022, in a lawsuit challenging the Department's Delay and Withdrawal Rules under the Administrative Procedure Act (APA), a district court in the Eastern District of Texas issued a decision vacating the Department's Delay and Withdrawal Rules. 115 While acknowledging that the Department engaged in separate notice-and-comment rulemakings in promulgating both of these rules, the district court concluded that the Department “failed to provide a meaningful opportunity for comment in promulgating the Delay Rule,” 116 failed to show “good cause for making the [Delay Rule] effective immediately upon publication,” 117 and acted in an arbitrary and capricious manner in its Withdrawal Rule by “fail[ing] to consider potential alternatives to rescinding the Independent Contractor Rule.” 118 Accordingly, the district court vacated the Delay and Withdrawal Rules and concluded that the 2021 IC Rule “became effective as of March 8, 2021, the rule's original effective date, and remains in effect.” 119 The district court's ruling did not address the validity of the 2021 IC Rule; rather, the case was focused solely on the validity of the Delay and Withdrawal Rules. 115 Coalition for Workforce Innovation, 2022 WL 1073346. 116 Id. at *9. The court specifically faulted the Department's use of a shortened 19-day comment period in its proposal to delay of the 2021 IC Rule's original effective date (instead of 30 days), and for failing to consider comments beyond its proposal to delay the 2021 IC Rule's effective date. Id. at *7-10. 117 Id. at *11. 118 Id. at *13. 119 Id. at *20. The Department filed a notice of appeal of the district court's decision. 120 In response to a request by the Department informing the court of this rulemaking, the Fifth Circuit Court of Appeals entered an order staying the appeal until December 7, 2022 (subject to considering a further stay at that time). 120 See Fifth Circuit No. 22-40316 (appeal filed, May 13, 2022). III. Need for Rulemaking The Department recognizes that independent contractors and small businesses play an important role in our economy. It is fundamental to the Department's obligation to administer and enforce the FLSA, however, that workers who should be covered under the Act are able to receive its protections, as the misclassification of employees as independent contractors remains one of the most serious problems facing workers, businesses, and the broader economy. In the FLSA context, misclassified workers are denied basic workplace protections including rights to minimum wage and overtime pay. 121 Meanwhile, employers that comply with the law are placed at a competitive disadvantage compared to other businesses that misclassify employees, contravening the FLSA's goal of eliminating “unfair method[s] of competition in commerce.” 122 121 Workers who are employees under the FLSA but are misclassified as independent contractors remain legally entitled to the Act's wage and hour protections and are protected from retaliation for attempting to assert their rights under the Act. See 29 U.S.C. 215(a)(3). However, many misclassified employees may not be aware that such rights and protections apply to them or face obstacles when asserting those rights. 122 29 U.S.C. 202(a)(3); see also Tony & Susan Alamo Found. v. Sec'y of Labor, 471 U.S. 290, 302 (1985) (noting that the misclassification of employees “affect[s] many more people than those workers directly at issue . . . [because it] exert[s] a general downward pressure on wages in competing businesses”). After further consideration, the Department believes that the 2021 IC Rule does not fully comport with the FLSA's text and purpose as interpreted by the courts. The Department believes that retaining the 2021 IC Rule would have a confusing and disruptive effect on workers and businesses alike due to its departure from decades of case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test. While the 2021 IC Rule recognized the need to further develop the concept of economic dependence, the rule includes provisions that are in tension with this longstanding case law—such as designating two factors as most probative and predetermining that they carry greater weight in the analysis, considering investment and initiative only in the opportunity for profit or loss factor, and excluding consideration of whether the work performed is central or important to the employer's business. These provisions narrow the economic reality test by limiting the facts that may be considered as part of the test, facts which the Department believes are relevant in determining whether a worker is economically dependent on the employer for work or in business for themself. The 2021 IC Rule's elevation of certain factors and its preclusion of consideration of relevant facts under several factors may result in misapplication of the economic reality test and may have conveyed to employers that it might be easier than it used to be to classify certain workers as independent contractors rather than FLSA-covered employees. Elevating certain factors and precluding consideration of relevant facts may increase the risk of misclassification of employees as independent contractors. The 2021 IC Rule did not address the potential risks to workers of such misclassification. Therefore, in light of the vacatur of the Withdrawal Rule, the Department believes it is appropriate to rescind the 2021 IC Rule and set forth an analysis for determining employee or independent contractor status under the Act that is more consistent with existing judicial precedent and the Department's longstanding guidance prior to the 2021 IC Rule. While prior to the 2021 IC Rule the Department primarily issued subregulatory guidance in this area, as explained in greater detail below, it believes that rescinding the 2021 IC Rule and replacing it with detailed regulations addressing the multifactor economic reality test—in a way that both more fully reflects the case law and continues to be relevant to the evolving economy—would be helpful for both workers and employers. The Department further believes that this proposal will protect workers from misclassification while at the same time providing a consistent approach for those businesses that engage (or wish to engage) with properly classified independent contractors, who the Department recognizes play an important role in the economy. As noted in the 2021 IC Rule, the Department “without question has relevant expertise in the area of what constitutes an employment relationship under the FLSA, given its responsibility for administering and enforcing the Act and its decades of experience doing so.” 123 The Department continues to believe, as it stated in the 2021 IC Rule, that “a clear explanation of the test for whether a worker is an employee under the FLSA or an independent contractor not entitled to the protections of the Act in easily accessible regulatory text is valuable to potential employers, to workers, and to other stakeholders.” 124 Upon further consideration, however, the Department believes that the most valuable approach for stakeholders would be an accessible regulation that is more consistent with case law. As the 2021 IC Rule noted, rulemaking regarding employee or independent contractor status can have “great value regardless of what deference courts ultimately give to it.” 125 The Department also believes, however, that this proposal is more likely to have such value because it is better aligned with judicial precedent and longstanding principles used by circuit courts and the Department. 123 86 FR 1176 (internal citations omitted). 124 Id. 125 Id. The Department acknowledges that it is changing the approach taken in the 2021 IC Rule, and that this warrants further discussion of the rationale used in that rule and why the Department has carefully reconsidered that reasoning and determined that modifications are necessary. 126 As noted above, the Department identified in the 2021 IC Rule four reasons underlying the need to promulgate the rule: (1) confusion regarding the meaning of “economic dependence” because the concept is “underdeveloped”; (2) lack of focus in the multifactor balancing test; (3) confusion and inefficiency due to overlapping factors; and (4) the shortcomings of the economic reality test that are more apparent in the modern economy. 127 Moreover, the Department suggested as a fifth reason for the 2021 IC Rule that legal uncertainty based on the concerns identified with the economic reality test hindered innovation in work arrangements. 128 The Department believes that this proposed rule's approach offers a better framework for understanding and applying the concept of economic dependence by explaining how the touchstone of whether an individual is in business for themself is analyzed within each of the six economic realities factors. The proposal's discussion of how courts and the Department's previous guidance apply the factors brings the multifactor test into focus, reduces confusion as to the overlapping factors, and provides a better basis for understanding how the test has the flexibility to be applied to changes in the modern economy, such that the Department no longer views the concerns articulated in the 2021 IC Rule as impediments to using the economic reality test formulated by the courts and the Department's longstanding guidance. 126 See FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009). 127 86 FR 1172-75. 128 Id. at 1175. The Department continues to believe that the concept of economic dependence is underdeveloped in the case law. As noted in the 2021 IC Rule, a minority of courts have applied a “dependence-for-income” approach that considers whether the worker has other sources of income or wealth or is financially dependent on the employer instead of a “dependence-for-work” approach used by the majority of courts and the Department that appropriately considers whether the worker is dependent on the employer for work or depends on the worker's own business for work. 129 The Department is therefore proposing to continue to include its interpretation, as it did in the 2021 IC Rule, that economic dependence is the ultimate inquiry, and that an employee is someone who, as a matter of economic reality, is economically dependent on an employer for work—not for income. 130 129 See id. at 1172-73. 130 See id. at 1246 (§ 795.105(b) (“An employer suffers or permits an individual to work as an employee if, as a matter of economic reality, the individual is economically dependent on that employer for work.”)); see also infra section V.B.; proposed § 795.105(b) (“An `employee' under the Act is an individual whom an employer suffers, permits, or otherwise employs to work. . . . [This is] meant to encompass as employees all workers who, as a matter of economic reality, are economically dependent on an employer for work. . . . Economic dependence does not focus on the amount of income earned, or whether the worker has other income streams.”). Rather than give primacy to only two factors as indicators of economic dependence, upon further consideration, the Department believes that developing the concept of economic dependence is better accomplished by, in addition to elaborating on the general meaning of economic dependence, sharpening the focus of each of the six factors' probative value as to the distinction between economic dependence on the employer for work and being in business for oneself. By focusing on that distinction in its discussion of each factor, this proposal would provide the further development of the concept of economic dependence that the 2021 IC Rule indicated would be welcomed by workers and employers, but would do so in a way that is generally consistent with case law and the Department's prior guidance. To address what the Department viewed as a “lack of focus in the multifactor balancing test” that led to uncertainty as to how a court would balance the factors and which would be deemed more probative, the 2021 IC Rule identified two factors as more probative than the others. 131 The Department now finds that giving extra weight to two factors cannot be harmonized with decades of case law and guidance from the Department explaining that the economic reality test is a multifactor test in which no one factor or set of factors automatically carries more weight and that all relevant factors must be considered. Regardless of the rationale for elevating two factors, there is no legal support for doing so. 132 Moreover, elevating certain factors in such a predetermined fashion overlooks that each factor can be probative of the distinction between a worker who is economically dependent on the employer for work and a worker who is in business for themself. Thus, the Department believes that refining the factors with this distinction in mind and consistent with case law is a better approach to giving the multifactor test more focus than the novel approach of elevating two factors. 131 86 FR 1173. 132 See infra section III.A. The Department believes upon further consideration that any purported “confusion and inefficiency due to overlapping factors” was overstated in the 2021 IC Rule and that, in any event, when each factor is viewed under the framework of whether the worker is economically dependent or in business for themself, the rationale for considering facts under more than one factor is clearer. The Department explains in more detail below why considering certain facts under more than one factor is consistent with the totality-of-the-circumstances approach of the economic realities analysis used by courts. And the Department provides guidance below regarding how to consider certain facts, such as the ability to work for others and whether the working relationship is exclusive, under more than one factor. The Department believes that this flexible approach is supported by the case law and preferable to rigidly and artificially limiting facts to only one factor, as the 2021 IC Rule did. Finally, in the 2021 IC Rule, the Department stated that “technological and social changes have made shortcomings of the economic realities test more apparent in the modern economy,” thus justifying the 2021 IC Rule's characterization of the integral, investment, and permanence factors as less important in determining a worker's classification. 133 However, upon further consideration, the Department believes that the multifactor economic reality test relied on by courts where no one factor or set of factors is presumed to carry more weight remains a helpful tool when evaluating modern work arrangements. The test's vitality is confirmed by its application over seven decades that have seen monumental shifts in the economy. Modern work arrangements utilizing applications or other technology must be addressed, but the underlying economic reality test, which considers the totality of the circumstances in each working arrangement, offers the most flexible, comprehensive, and appropriately nuanced approach which can be adapted to disparate industries and occupations. It can also encompass continued social changes because it does not presume which aspects of the work relationship are most probative or relevant and leaves open the possibility that changed circumstances may make certain factors more important in certain cases or future scenarios. 133 86 FR 1175. A. The 2021 IC Rule's Test Is Not Supported by Judicial Precedent or the Department's Historical Position and Is Not Fully Aligned With the Act's Text as Interpreted by the Courts Among other reasons the Department is proposing to rescind and replace the 2021 IC Rule, the Department does not believe that the Rule is fully aligned with the FLSA's text as interpreted by the courts or the Department's longstanding analysis, as well as decades of case law describing and applying the multifactor economic reality test. 1. The 2021 IC Rule's Elevation of Control and Opportunity for Profit or Loss as the “Most Probative” Factors in Determining Employee Status Under the FLSA The 2021 IC Rule set forth a new articulation of the economic reality test, elevating two factors (control and opportunity for profit or loss) as “core” factors above other factors, asserting that the two core factors have “greater probative value” in determining a worker's economic dependence. 134 Notably, the 2021 IC Rule further provides that if both core factors point towards the same classification—either employee or independent contractor—then there is a “substantial likelihood” that this is the worker's correct classification. 135 Although it identifies three other factors as additional guideposts and acknowledges that additional factors may be considered, it makes clear that non-core factors “are less probative and, in some cases, may not be probative at all, and thus are highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors.” 136 In justifying this stratified analysis, the 2021 IC Rule disagreed that, as a general matter, the economic reality test “requires factors to be unweighted or weighted equally,” 137 asserting that “[t]he Department's review of case law indicates that courts of appeals have effectively been affording the control and opportunity factors greater weight, even if they did not always explicitly acknowledge doing so.” 138 134 86 FR 1246 (§ 795.105(c) and (d)). 135 Id. (§ 795.105(c)); see also id. at 1201 (advising that other factors would only outweigh the two core factors “in rare cases”). 136 Id. at 1246 (§ 795.105(c)). 137 Id. at 1197. 138 Id. at 1198. Upon further review of judicial precedent, the Department is not aware of any court that has, as a general and fixed rule, elevated any one economic reality factor or subset of factors above others, and there is no statutory basis for such a predetermined weighting of the factors. To the contrary, the Supreme Court has emphasized that employment status under the economic reality test turns upon “the circumstances of the whole activity,” rather than “isolated factors.” 139 Federal appellate courts have repeatedly cautioned against a mechanical or formulaic application of the economic reality test, 140 and specifically warn that it “ `is impossible to assign to each of these factors a specific and invariably applied weight.' ” 141 The 2021 IC Rule's elevation of two “core factors” is also in tension with the position, expressed by the Supreme Court and Federal courts of appeals, that no single factor in the analysis is dispositive. 142 Thus, the Department recognizes that the 2021 IC Rule's predetermined and mechanical weighting of factors is not consistent with how courts have, for decades, applied the economic reality analysis. 143 139 Rutherford, 331 U.S. at 730; see also Silk, 331 U.S. at 716, 719 (denying the existence of “a rule of thumb to define the limits of the employer-employee relationship” and determining employment status based on “the total situation”). 140 See, e.g., Superior Care, 840 F.2d at 1059 (“Since the test concerns the totality of the circumstances, any relevant evidence may be considered, and mechanical application of the test is to be avoided.”). 141 Parrish, 917 F.3d at 380 (quoting Hickey, 699 F.2d at 752); see also Scantland, 721 F.3d at 1312 n.2 (the relative weight of each factor “depends on the facts of the case” (quoting Santelices, 147 F. Supp. 2d at 1319)). 142 See, e.g., Silk, 331 U.S. at 716 (explaining that “[n]o one [factor] is controlling” in the economic realities test); Selker Bros., 949 F.2d at 1293 (“It is a well-established principle that the determination of the employment relationship does not depend on isolated factors . . . neither the presence nor the absence of any particular factor is dispositive.”); Morrison, 253 F.3d at 11 (“No one factor standing alone is dispositive and courts are directed to look at the totality of the circumstances and consider any relevant evidence.”); Dole v. Snell, 875 F.2d 802, 805 (10th Cir. 1989) (“It is well established that no one of these factors in isolation is dispositive; rather, the test is based upon a totality of the circumstances.”); Lauritzen, 835 F.2d at 1534 (“Certain criteria have been developed to assist in determining the true nature of the relationship, but no criterion is by itself, or by its absence, dispositive or controlling.”). 143 See McFeel ey, 825 F.3d at 241 (“While a six-factor test may lack the virtue of providing definitive guidance to those affected, it allows for flexible application to the myriad different working relationships that exist in the national economy. In other words, the court must adapt its analysis to the particular working relationship, the particular workplace, and the particular industry in each FLSA case.”). As explained in the Withdrawal Rule, the Department believes that the review of appellate cases 144 relied on to support the 2021 IC Rule's creation of “core factors” is not complete and makes assumptions about the reasoning behind the courts' decisions that are not clear from the decisions themselves. 145 For example, the 2021 IC Rule's discussion of the case law review did not provide full documentation or citations, did not make clear what the scope of the review entailed ( e.g., whether it included only published circuit court decisions or all cases, whether it included cases that were simply remanded to the district court for any reason, etc.), and oversimplified the analysis provided by the courts because court decisions regarding classification under the FLSA generally emphasize the fact-specific nature of the totality-of-circumstances analysis. Mechanically deconstructing court decisions and considering what courts have said about only two factors—even when courts did present their analyses in this manner—ignores the broader approach that most courts have taken in determining worker classification. 144 The 2021 IC Rule references on several occasions a review of appellate case law since 1975 to justify its elevation of two “core” factors. 86 FR 1196, 1198, 1202, 1240. 145 See 86 FR 24309-10. In fact, many decisions explicitly deny assigning any predetermined weight to these factors, but instead state that they considered the factors as part of an analysis of the whole activity. 146 While there are many cases in which the classification decision made by the court aligns with the classification indicated by the control and opportunity for profit or loss factors, the 2021 IC Rule did not identify any cases stating that those two factors are “more probative” of a worker's classification than other factors. Moreover, the 2021 IC Rule concedes that there are cases in which the classification suggested by the control factor did not align with the worker's classification as determined by the courts. 147 It is necessarily the case that if any two factors of a multifactor balancing test point toward the same outcome, then that outcome becomes increasingly likely to be the ultimate outcome. However, the 2021 IC Rule did not address whether a different combination of factors would yield similar results. Particularly when viewed in the context of repeated statements from the courts that no one factor in the economic reality test is dispositive, the selective reading of an undefined set of cases to support the opposite conclusion is not persuasive. 146 See supra nn.139-142. 147 See 86 FR 1197 n.45. In any event, the 2021 IC Rule significantly altered both these factors, changing what may be considered for each. For example, contrary to the approach taken by most courts, the 2021 IC Rule downplays the employer's right to control the work and recasts the opportunity for profit or loss factor as indicating independent contractor status based on the worker's initiative or investment. Thus, irrespective of whether control and opportunity for profit or loss were more frequently aligned with the ultimate result in prior appellate cases, the new framing of these factors, as redefined in the 2021 IC Rule, sets forth a new standard for analysis without precedent. Finally, the Department has concerns that prioritizing two “core factors” over other factors may not fully account for the Act's broad definition of “employ,” as interpreted by the courts. For example, if facts relevant to the control and opportunity for profit or loss factors both point to independent contractor status for a particular worker but weakly so, those factors should not be presumed to carry more weight than stronger factual findings under other factors ( e.g., the existence of a lengthy working relationship under the “permanence” factor and the performance of work that does not require specialized skills). Courts and the Department may focus on some relevant factors more than others when analyzing a particular set of facts and circumstances, but that does not mean that it is possible or permissible to derive from these fact-driven decisions universal rules regarding which factors deserve more weight than the others when the courts themselves have not set forth any such universal rules despite decades of opportunity. Numerous commenters responding to the Department's proposed withdrawal of the 2021 IC Rule voiced similar concerns. 148 148 Id. at 24307-11. In sum, the Department believes that the 2021 IC Rule's elevation of the control and opportunity for profit or loss factors is in tension with the language of the Act as well as the position, expressed by the Supreme Court and in appellate cases from across the circuits, that no single factor is determinative in the analysis of whether a worker is an employee or an independent contractor and does not better determine who is in fact economically dependent on their employer for work as opposed to being in business for themself. 2. The Role of Control in the 2021 IC Rule's Analysis As explained above, the 2021 IC Rule identifies “the nature and degree of control over the work” as one of two core factors given “greater weight” in the independent contractor analysis. 149 The 2021 IC Rule addressed and rejected comments which opined that focusing the analysis on two core factors—one of which would be control—would narrow the analysis to a common law control test. 150 149 Id. at 1246-47 (§ 795.105(c), (d)). 150 Id. at 1200-01. Although the 2021 IC Rule's standard for determining who is an employee and who is an independent contractor is not the same as the common law control analysis, the Department continues to believe, as expressed in the Withdrawal Rule, that elevating the importance of control in every FLSA employee or independent contractor analysis brings the Rule closer to the common law control test that courts have rejected when interpreting the Act. As previously noted, section 3(g) of the FLSA expansively defines the term “employ” to include “to suffer or permit to work.” 151 The Supreme Court has repeatedly stated that this provision establishes a broader scope of employment for FLSA purposes than under a common law ( i.e., agency) analysis focused on control. 152 In light of this directive, the Department remains concerned that the outsized role of control under the 2021 IC Rule's analysis is contrary to the Act's text and case law interpreting the Act's definitions of employment. 151 29 U.S.C. 203(g). 152 See Darden, 503 U.S. at 324-26; Portland Terminal, 330 U.S. at 150-51; and Rutherford, 331 U.S. at 728. 3. The 2021 IC Rule Improperly Altered Several Factors by Precluding the Consideration of Relevant Facts As previously discussed in the Withdrawal Rule, the Department remains concerned that the 2021 IC Rule's preclusion of certain facts from being considered under the factors improperly narrows the economic reality test and does not allow for a full consideration of all facts which might be relevant to determining whether a worker is economically dependent upon an employer for work or in business for themself. Examples include: (1) advising that “control” indicative of an employment relationship must involve an employer's “substantial control over key aspects of the performance of the work,” excluding requirements “to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms;” 153 (2) making the “opportunity for profit or loss” factor indicate independent contractor status based on the worker's initiative or investment (not both); 154 (3) disregarding the employer's investments; 155 (4) disregarding the importance or centrality of a worker's work to the employer's business; 156 and (5) downplaying the employer's reserved right or authority to control the worker. 157 In each of these ways—as explained in greater detail below—the 2021 IC Rule limits the scope of facts and considerations comprising the analysis of whether the worker is an employee or independent contractor. 153 86 FR 1246-47 (§ 795.105(d)(1)(i)). 154 Id. at 1247 (§ 795.105(d)(1)(ii)). 155 Id.; see also id. at 1188 (“[T]he Department reaffirms its position that comparing the individual worker's investment to the potential employer's investment should not be part of the analysis of investment.”). 156 Id. at 1247 (§ 795.105(d)(2)(iii)); see also id. at 1248 (noting through an example in § 795.115(b)(6)(ii) that “[i]t is not relevant . . . that the writing of articles is an important part of producing newspapers”); accord id. at 1195 (responding to commenters regarding the Department's decision to shift to an “integrated unit of production” analysis). 157 See id. at 1246-47 (advising, in § 795.105(d)(1)(i), that the control factor indicates employment status if a potential employer “ exercises substantial control over key aspects of the performance of the work”) (emphasis added); id. at 1247 (advising, in § 795.110, that “a business' contractual authority to supervise or discipline an individual may be of little relevance if in practice the business never exercises such authority”); see also id. at 1203-04 (same in response to commenters). As further explained below, the 2021 IC Rule's narrowing of certain economic realities factors by precluding consideration of certain facts provides another justification for the Rule's rescission and replacement. B. Confusion and Uncertainty Introduced by the 2021 IC Rule One of the 2021 IC Rule's primary goals was to “significantly clarify to stakeholders how to distinguish between employees and independent contractors under the Act.” 158 Although the stated intent was to provide clarity, it has introduced several concepts to the analysis that neither courts nor the Department have previously applied, as discussed above. 159 This rulemaking arises in part from a concern that these changes will not provide clarity because of the inconsistency with circuit court case law, and that the conflict between the 2021 IC Rule's analysis and circuit precedent will inevitably lead to greater uncertainty as well as lead to inconsistent outcomes, rather than increase clarity or certainty. 158 Id. at 1168. 159 See supra section III.A. As a threshold matter, because the 2021 IC Rule departed from courts' longstanding precedent, if left in place, it is not clear whether courts would adopt its analysis—a question that could take years of appellate litigation in different Federal circuits to sort out. If some courts try to reconcile the 2021 IC Rule's analysis with their precedent and the statute and some courts do not, it will create conflicts among courts and between courts and the Department, resulting in more uncertainty as to the applicable economic reality test. Businesses operating nationwide will have had to familiarize themselves with multiple standards for determining who is an employee under the FLSA across different jurisdictions. 160 160 See, e.g., 86 FR 1241 n.255 (noting, while rejecting the “ABC” test for worker classification, that companies operating “nationwide businesses[ ] are likely to comply with the most demanding standard if they wish to make consistent classification determinations”). In addition to uncertainty resulting from the 2021 IC Rule's reception by courts, the Rule introduces several ambiguous terms and concepts into the analysis for determining whether a worker is an employee under the FLSA or an independent contractor. For example, courts and regulated parties now must grapple with what it means in practice for two factors to be “core” factors and entitled to greater weight. In addition, they must determine, in cases where the two “core” factors point to the same classification, how “substantial” the likelihood is that they point toward the correct classification if the additional factors point toward the other classification. Additionally, the 2021 IC Rule cautions that its list of factors is “not exhaustive,” 161 but does not specify whether the “additional factors” referenced in § 795.105(d)(2)(iv) have less probative value (or weight) than the three “other factors” listed in § 795.105(d)(2)(i) through (iii). 162 Assuming that they do, the 2021 IC Rule has essentially transformed the analysis that courts and the Department have previously applied into a three-tiered multifactor balancing test, with “core” factors given more weight than enumerated “other” factors, and enumerated “other” factors given more weight than unspecified “additional” factors. Rather than weighing all factors against each other depending on the facts of a particular work arrangement, courts and the regulated community must evaluate factors within and across groups in a new hierarchical structure, which will likely cause confusion and inconsistency. Adding to the confusion, the Rule improperly collapses some factors into each other, so that investment and initiative are only considered as a part of the opportunity for profit or loss factor, requiring courts and the regulated community to reconsider how they have long applied those factors. 163 161 Id. at 1246 (§ 795.105(c)). 162 Id. at 1247. 163 Id. (§ 795.105(d)(1)(ii)). The Department believes that the 2021 IC Rule has complicated rather than simplified the analysis for determining whether a worker is an employee or independent contractor under the FLSA and does not provide clarity behind the meaning of economic dependence or reduce confusion. 164 For the reasons explained above, the Department believes that the 2021 IC Rule has introduced substantial confusion and uncertainty on the topic of independent contractor status, to the detriment of workers and businesses alike. 164 The 2021 IC Rule includes several important principles from the case law, such as that economic dependence is the ultimate inquiry, that the list of economic reality factors is not exhaustive and that no single factor is determinative—principles that the Department continues to agree with and has included in this NPRM. The 2021 IC Rule, however, also incorporates provisions that are in tension with these well-established judicial principles, such as the predetermined elevating of two factors. The Department is also concerned with this internal inconsistency in the 2021 IC Rule. C. Risks to Workers From the 2021 IC Rule As part of its regulatory impact analysis, the 2021 IC Rule quantified some possible costs (regulatory familiarization) and some possible cost savings (increased clarity and reduced litigation). 165 It identified and discussed—but did not quantify—numerous other costs, transfers, and benefits possibly resulting from the 2021 IC Rule, including “possible transfers among workers and between workers and businesses.” 166 The 2021 IC Rule “acknowledge[d] that there may be transfers between employers and employees, and some of those transfers may come about as a result of changes in earnings,” but determined that these transfers cannot “be quantified with a reasonable degree of certainty for purposes of [the Rule].” 167 The 2021 IC Rule concluded that “workers as a whole will benefit from [the Rule], both from increased labor force participation as a result of the enhanced certainty provided by [the Rule], and from the substantial other benefits detailed [in the Rule].” 168 165 86 FR 1211. 166 Id. at 1214-16. 167 Id. at 1223. 168 Id. The preliminary regulatory impact analysis for this proposed rule is provided below in section VII. As a general matter, the Department notes here that it does not believe that the 2021 IC Rule fully considered the likely costs, transfers, and benefits that could result from the Rule. This concern is premised in part on WHD's role as the agency responsible for enforcing the FLSA and its experience with cases involving the misclassification of employees as independent contractors. The consequence for a worker of being misclassified as an independent contractor is that the worker is excluded from the protections of the FLSA to which they are entitled. These protections include being paid at least the Federal minimum wage for all hours worked, overtime compensation for hours worked over 40 in a workweek, and protection against retaliation for complaining about, for example, a violation of the FLSA. The Department concludes that, to the extent the 2021 IC Rule results in the reclassification or misclassification of employees as independent contractors, the resulting denial of FLSA protections would harm the affected workers. To the extent that women and people of color are overrepresented in low-wage positions where misclassification as independent contractors is more likely, this result could have a disproportionate impact on these workers. In comments on the Withdrawal Rule, several commenters cited a study finding that seven of the eight occupations with the highest rate of misclassification were held disproportionately by women and/or workers of color, asserting that “misclassification is rampant in low-wage, labor-intensive industries where women and people of color, including Black, Latinx, and AAPI workers, are overrepresented.” 169 These workers already experience multiple types of economic inequities in the labor force, including gender and racial wage gaps and occupational segregation. When comparing the median wages of women who worked full-time, year-round to the wages of men who worked full-time, year-round, women were paid 83 cents to every dollar paid to men. 170 For women of color, this wage gap is even greater—Black women were paid 64%, and Hispanic women (of any race) were paid 57% of what white non-Hispanic men were paid. The misclassification of these workers as independent contractors deprives them of the minimum wage and overtime protections that could help alleviate some of this inequality. 169 Id. at 24312. 170 U.S. Department of Labor, Women's Bureau. Connecting the Dots: “Women's Work” and the Wage Gap (2022) https://blog.dol.gov/2022/03/15/connecting-the-dots-womens-work-and-the-wage-gap?_ga=2.244962629.155756293.1655992165-662785877.1655992165. In sum, the Department's proposal to rescind and replace the 2021 IC Rule is motivated, in part, by an assessment that doing so will benefit workers as a whole, including those workers at risk of being misclassified as independent contractors as well as those who are appropriately classified as independent contractors. D. The Benefits of Replacing the Part 795 Regulations on Employee or Independent Contractor Status In its rulemaking last year to withdraw the 2021 IC Rule, the Department declined to propose alternative regulations. 171 The Department had not previously promulgated generally applicable regulations on independent contractor classification in the FLSA's 83 years of existence. 172 Particularly in light of the consistency of the economic reality test as adopted by the circuits, the Department had for decades relied on subregulatory documents to provide generally applicable guidance for the Department and the regulated community on determining employee or independent contractor status under the FLSA. 173 171 See 86 FR 24307. 172 The FLSA was enacted in 1938. 29 U.S.C. 201. Until 2021, the Department had not promulgated generally applicable regulations regarding the classification of workers as employees or independent contractors. 173 See, e.g., 86 FR 24318-20. In its decision invalidating the Withdrawal Rule, the Eastern District of Texas faulted the Department for failing to consider “less disruptive alternatives” to withdrawal, such as “promulgat[ing] a regulation that enumerated six factors instead of five” or “adopting the seven factors that the Department previously set forth in Fact Sheet #13 as the applicable economic realities test.” 174 While the Department believes that its subregulatory guidance provided appropriate guidance to the regulated community, upon further consideration, it recognizes that publishing regulatory guidance on the distinction between FLSA-covered employees and independent contractors is beneficial for stakeholders, particularly because the Department published a regulation in 2021. In addition, detailed Federal regulations would be easier to locate and read for interested stakeholders than applicable circuit caselaw, potentially helping workers and businesses better understand the Department's interpretation of their rights and responsibilities under the law. In contrast to WHD's earlier opinion letters on independent contractor status and its prior regulations on the topic located in parts 780 and 788, new part 795 would also provide guidance to workers and businesses in any industry. 174 Coalition for Workforce Innovation, 2022 WL 1073346, at *18. Adopting detailed regulations aligned with existing precedent that help workers and businesses to better understand their rights and responsibilities under the law could also better protect workers, who have been placed at a greater risk of misclassification as a consequence of the 2021 IC Rule. As described in sections III.A. and B., the 2021 IC Rule's elevation of certain factors and its preclusion of consideration of relevant facts under several factors may result in misapplication of the economic reality test and may have conveyed to employers that it might be easier than it used to be to classify certain workers as independent contractors rather than FLSA-covered employees. Elevating certain factors and precluding consideration of relevant facts may increase the risk of misclassification of employees as independent contractors. Because the Department has serious concerns about the 2021 IC Rule, it is proposing to rescind and replace it with regulations that are fully aligned with the text of the FLSA as interpreted by the courts, the Department's longstanding subregulatory guidance, and decades of court cases interpreting the Act while still providing additional clarity to workers and employers on the concept of economic dependence. IV. Alternatives Considered The Department assessed four regulatory alternatives to this proposed rule below in section VII.F. of the regulatory impact analysis. The Department previously considered and rejected, on legal viability grounds, the first two alternatives—codifying either a common law or ABC test for determining employee or independent contractor status—in the 2021 IC Rule. 175 The Department continues to believe that legal limitations prevent the Department from adopting either of those alternatives. 175 See 86 FR 1238. For the first alternative, the Department considered codifying the common law control test, which is used to distinguish between employees and independent contractors under other Federal laws, such as the Internal Revenue Code. 176 The focus of the common law control test is “the hiring party's right to control the manner and means by which [work] is accomplished,” 177 but the Supreme Court has explained that “other factors relevant to the inquiry [include] the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party's discretion over when and how long to work; the method of payment; the hired party's role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.” 178 176 See 26 U.S.C. 3121(d)(2) (generally defining the term “employee” under the Internal Revenue Code as “any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee”). The Supreme Court has advised that the common law control test applies by default under Federal law unless a statute specifies an alternative standard. See Darden, 503 U.S. at 322-23 (“ `[W]hen Congress has used the term `employee' without defining it, we have concluded that Congress intended to describe the conventional master-servant relationship as understood by common-law agency doctrine.' ”) (quoting Reid, 490 U. S. at 739-40). 177 Reid, 490 U.S. at 751. 178 Id. at 751-52. Although the common law control test considers some of the same factors as those identified in the proposed rule's “economic reality” test ( e.g., skill, length of the working relationship, the source of equipment and materials, etc.), courts generally recognize that, because of its focus on control, the common law test is more permissive of independent contracting arrangements than the economic reality test, which examines the economic dependence of the worker. 179 179 See, e.g., Baker v. Flint Eng'g & Const. Co., 137 F.3d 1436, 1440 (10th Cir. 1998) (recognizing that the “economic realities” test is a more expansive standard for determining employee status than the common law test). Codifying a common law control test for the FLSA could create a more uniform legal framework among Federal statutes, in the sense that entities would not, for example, have to understand and apply one employment classification standard for tax purposes and a different employment classification standard for FLSA purposes. However, the Department does not believe that adopting a common law control test for determining employee or independent contractor status under the FLSA would, in fact, simplify the analysis for the regulated community because courts and enforcement agencies applying a common law test for independent contractors have considered a greater number and different variation of factors than the six or so factors commonly considered under the economic reality test. 180 180 See RESTATEMENT (THIRD) OF AGENCY sec. 7.07, Comment (f) (2006) (identifying 10 factors); IRS Tax Topic No. 762 Independent Contractor vs. Employee (May 19, 2022), https://www.irs.gov/taxtopics/tc762 (explaining the common law analysis through three main categories: behavioral control, financial control, and the relationship of the parties); Reid, 490 U.S. at 751-52 (identifying 13 factors). Regardless, applying the common law test would be contrary to the “suffer or permit” language in section 3(g) of the FLSA, which the Supreme Court has interpreted as demanding a broader definition of employment than that which exists under the common law. 181 Accordingly, the Department believes it is legally constrained from adopting the common law control test and that the common law test is not sufficiently protective in assessing worker classification under the FLSA. 181 See, e.g., Darden, 503 U.S. at 326; Portland Terminal, 330 at 150-51. For the second alternative, the Department considered codifying an ABC test to determine independent contractor status under the FLSA, similar to the ABC test recently adopted under California's state wage and hour law. 182 As described by the California Supreme Court in Dynamex Operations W., Inc. v. Superior Court, “[t]he ABC test presumptively considers all workers to be employees, and permits workers to be classified as independent contractors only if the hiring business demonstrates that the worker in question satisfies each of three conditions: (a) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (b) that the worker performs work that is outside the usual course of the hiring entity's business; and (c) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.” 183 182 See Dynamex Operations W., Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018); Assembly Bill (“A.B.”) 5, Ch. 296, 2019-2020 Reg. Sess. (Cal. 2019) (codifying the ABC test articulated in Dynamex ); A.B. 2257, Ch. 38, 2019-2020 Reg. Sess. (Cal. 2020) (retroactively exempting certain professions, occupations, and industries from the ABC test that A.B. 5 had codified). The ABC test originated in state unemployment insurance statutes, but some state courts and legislatures have recently extended the test to govern employee/independent contractor disputes under state wage and hour laws. See Keith Cunningham-Parmeter, Gig-Dependence: Finding the Real Independent Contractors of Platform Work, 39 N. Ill. U. L. Rev. 379, 408-11 (2019) (discussing the origins and recent expansion of the ABC test). 183 416 P.3d at 34 (emphasis in original). California's ABC test is slightly different than versions of the ABC test adopted (or presently under consideration) in other states. For example, New Jersey provides that a hiring entity may satisfy the ABC test's “B” prong by establishing either: (1) that the work provided is outside the usual course of the business for which the work is performed, or (2) that the work performed is outside all the places of business of the hiring entity. N.J. Stat. Ann. sec. 43:21-19(i)(6)(A-C). The Department has chosen to analyze California's ABC test as a regulatory alternative because businesses subject to multiple standards, including nationwide businesses, are likely to comply with the most demanding standard if they wish to make consistent classification determinations. Codifying an ABC test could establish a simpler and clearer standard for determining whether workers are employees or independent contractors. The ABC test only has three criteria, and no balancing of the criteria is required; all three prongs must be satisfied for a worker to qualify as an independent contractor. However, the Department believes it is legally constrained from adopting an ABC test because the Supreme Court has held that the economic reality test is the applicable standard for determining workers' classification under the FLSA as an employee or independent contractor. 184 Moreover, the Supreme Court has stated that the existence of employment relationships under the FLSA “does not depend on such isolated factors” as the three independently determinative factors in the ABC test, “but rather upon the circumstances of the whole activity.” 185 Because the ABC test is inconsistent with Supreme Court precedent interpreting the FLSA, the Department believes that it could only implement an ABC test if the Supreme Court revisits its precedent or if Congress passes legislation that alters the applicable analysis under the FLSA. 184 See Tony & Susan Alamo, 471 U.S. at 301 (“The test of employment under the Act is one of `economic reality.' ”); Whitaker House, 366 U.S. at 33 (“ `economic reality' rather than `technical concepts' is . . . the test of employment” under the FLSA) (citing Silk, 331 U.S. at 713; Rutherford, 331 U.S. at 729). ABC tests are not the same as the FLSA economic realities test. For example, the ABC test does not consider the totality of the circumstances of the working relationship between the employer and the worker; instead, it considers three specific circumstances. In addition, the ABC test does not weigh or balance the various considerations; instead, the test results in a finding of employee status if any one factor is not met regardless how close the facts are on that factor and regardless what the other two factors indicate. 185 Rutherford, 331 U.S. at 730. For the third alternative, the Department considered a proposed rule that would not fully rescind the 2021 IC Rule and instead retain some aspects of that rule. As the Department has noted throughout this proposal, there are multiple instances in which this NPRM is consistent or in agreement with the 2021 IC Rule. Specifically, the Department has noted its agreement with the following aspects of the 2021 IC Rule: a totality of the circumstances test should be applied to appropriately determine classification as an employee or independent contractor; the concept of economic dependence needs further development; and a clear explanation of the test for whether a worker is an employee or independent contractor in easily accessible regulatory text is valuable. This proposal also includes several other important principles from the case law that were included in the 2021 IC Rule: economic dependence is the ultimate inquiry; the list of economic reality factors is not exhaustive; and no single factor is determinative. Further, with respect to specific factors, this proposal reinforces certain aspects addressed in the 2021 IC Rule such as that an exclusivity requirement imposed by the employer is a strong indicator of control, and that issues related to scheduling and supervision over the performance of the work (including the ability to assign work) are relevant considerations under the control factor. Despite these areas of agreement, the governing principle of the 2021 IC Rule is that two of the economic reality factors are predetermined to be more probative and therefore carry more weight, which may obviate the need to meaningfully consider the remaining factors. Upon further consideration, as discussed in this proposal, the Department believes that this departure from decades of case law and the Department's own longstanding position that no one factor or subset of factors should carry more or less weight would have a confusing and disruptive effect on employers and workers alike. The Department considered simply removing the problematic “core factors” analysis from the 2021 IC Rule and retaining the five factors as described in the rule. However, the Department rejected this approach because other aspects of the rule such as considering investment and initiative only in the opportunity for profit or loss factor and excluding consideration of whether the work performed is central or important to the employer's business are also in tension with judicial precedent and longstanding Department guidance. These provisions narrow the economic reality test by limiting the facts that may be considered as part of the test, facts which the Department believes are relevant in determining whether a worker is economically dependent on the employer for work or in business for themself. Therefore, after considering all of the common aspects of the 2021 IC Rule and whether to retain some portions of that rule, the Department has concluded that in order to provide clear, affirmative regulatory guidance that aligns with case law and is consistent with the text and purpose of the Act as interpreted by courts, a complete rescission and replacement of the 2021 IC Rule is needed. For these reasons, the Department is not proposing a partial rescission of the 2021 IC Rule. For the fourth alternative, the Department considered rescinding the 2021 IC Rule and providing guidance on employee or independent contractor classification through subregulatory guidance instead of through new regulations. To begin with, for the reasons set forth in this NPRM, the Department believes that rescission of the 2021 IC Rule is appropriate, regardless of the new content proposed for its replacement. Specifically, the Department believes that the 2021 IC Rule does not fully comport with the FLSA's text as interpreted by the courts, and that retaining the 2021 IC Rule would have a confusing and disruptive effect on workers and businesses alike due to its departure from decades of case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test. The 2021 IC Rule's provisions—such as designating two factors as most probative and predetermining that they carry greater weight in the analysis, considering investment and initiative only in the opportunity for profit or loss factor, and excluding consideration of whether the work performed is central or important to the employer's business—are in tension with this longstanding case law. The Department recognizes that the 2021 IC Rule sought to “clarify and sharpen the contours of the economic reality test used to determine independent contractor classification under the FLSA.” 186 However, as noted above, although the stated intent was to provide clarity, the 2021 IC Rule introduced several concepts to the analysis that neither courts nor the Department have previously applied. 187 The Department believes that these changes will not provide clarity because of the inconsistency with circuit court case law, and that the conflict between the 2021 IC Rule's analysis and circuit precedent will inevitably lead to greater uncertainty as well as lead to inconsistent outcomes, rather than increase clarity or certainty. 186 86 FR 1172. 187 See supra sections III.A, B. Given the substantial uniformity among the circuit courts in the application of the economic reality test prior to the 2021 IC Rule, the Department believes that rescinding the 2021 IC Rule would provide greater clarity than retaining the 2021 IC Rule. For more than 80 years prior to the 2021 IC Rule, the Department primarily issued subregulatory guidance in this area and did not have generally applicable regulations on the classification of workers as employees or independent contractors. This subregulatory guidance was informed by the case law and set forth a multifactor economic reality test to answer the ultimate question of economic dependence. However, as explained in section III above, the Department believes that replacing the 2021 IC Rule with regulations addressing the multifactor economic reality test that more fully reflect the case law and continue to be relevant to the modern economy will be helpful for both workers and employers in understanding how to apply the law in this area. Specifically, issuing regulations allows the Department to provide in-depth guidance that is more closely aligned with circuit case law, rather than the regulations set forth in the 2021 IC Rule which have created a dissonance between the Department's regulations and judicial precedent. Additionally, issuing regulations allows the Department to formally collect and consider a wide range of views from stakeholders by electing to use the notice-and-comment process. Finally, because courts are accustomed to considering relevant agency regulations, providing guidance in this format may further improve consistency among courts regarding this issue. Therefore, the Department has decided not to rescind the 2021 IC Rule and provide only subregulatory guidance, but to instead propose these regulations. V. Discussion of Proposed Rule In view of the foregoing concerns and considerations, the Department is proposing modifications to title 29 of the Code of Federal Regulations addressing whether workers are employees or independent contractors under the FLSA. In relevant part, and as discussed in greater detail below, the Department proposes: • Not using “core factors” and instead returning to a totality-of-the-circumstances analysis of the economic reality test that has a refined focus on whether each factor shows the worker is economically dependent upon the employer for work versus being in business for themself, does not use predetermined weighting of factors, and that considers the factors comprehensively instead of as discrete and unrelated. • Returning the consideration of investment to a standalone factor, focusing on whether the worker's investment is capital or entrepreneurial in nature, and considering the worker's investments on a relative basis with the employer's investment. • Providing additional analysis of the control factor, including detailed discussions of how scheduling, supervision, price-setting, and the ability to work for others should be considered when analyzing the degree of control over a worker, and not limiting control to control that is actually exerted. • Returning to the longstanding Departmental interpretation of the integral factor, which considers whether the work is integral to the employer's business rather than whether it is exclusively part of an “integrated unit of production.” As in the 2021 IC Rule, the Department is proposing to include cross-references to the interpretations set forth in this proposed rule in 29 CFR 780.330(b) and 788.16(a); these provisions contain industry-specific guidance. Additionally, in the 2021 IC Rule, the Department declined to revise its regulation addressing employee or independent contractor status under MSPA in 29 CFR 500.20(h)(4), stating, in part, that the MSPA regulation and the 2021 IC Rule both applied an economic reality test in which the ultimate inquiry was economic dependence. 188 Although the Department has again considered revising the MSPA regulation, it proposes the same approach that it took in 2021—which is to not make any revisions at this time. The Department continues to recognize that MSPA adopts by reference the FLSA's definition of “employ,” 189 and that 29 CFR 500.20(h)(4) considers “whether or not an independent contractor or employment relationship exists under the Fair Labor Standards Act” to interpret employee or independent contractor status under MSPA. 190 The test contained in the MSPA regulation is substantially similar to the proposed test here, so the Department believes that there is not a need to revise the MSPA regulation at this time. The Department, however, welcomes comments regarding whether 29 CFR 500.20(h)(4) should be revised to more fully reflect the interpretation of employee or independent contractor status set forth in this proposed rule. 188 See 86 FR 1177. 189 29 U.S.C. 1802(5). 190 The MSPA regulations consider, for example, whether a worker is economically dependent upon an agricultural association or farm labor contractor. See 29 CFR 500.20(h)(4). Finally, the Department is also proposing to formally rescind the 2021 IC Rule and to add a new part 795. In the Department's view, the operative effects of proposing to rescind the 2021 IC Rule follow. If finalized, the proposed rule would formally rescind the 2021 IC Rule. That rescission would operate independently of the new content in any new final rule, as the Department intends it to be severable from the substantive proposal for adding a new part 795. For the reasons set forth in this NPRM, the Department believes that rescission of the 2021 IC Rule is appropriate, regardless of the new content proposed in this rulemaking. Thus, even if the substantive provisions of a new final rule were invalidated, enjoined, or otherwise not put into effect, the Department would not intend that the 2021 IC Rule become operative. Since the passage of the FLSA until the 2021 IC Rule, the Department primarily issued subregulatory guidance in this area and did not have generally applicable regulations addressing the classification of workers as employees or independent contractors. The Department's subregulatory guidance was informed by the case law and set forth a multifactor economic reality test to answer the ultimate question of economic dependence that is consistent with the analysis set forth in this proposal. Should the 2021 IC Rule be rescinded without any replacement regulations, the Department would rely on circuit case law and provide subregulatory guidance for stakeholders through existing documents (such as Fact Sheet #13) and new documents (for example, a Field Assistance Bulletin). As explained below, there is widespread uniformity among the circuit courts in the application of the economic reality test, with slight variation as to the number of factors considered or how the factors are framed. 191 The well-known multifactor, totality-of-the-circumstances analysis that had been in place prior to the 2021 IC Rule has been reflected in the Department's subregulatory guidance for many years and accurately represents this case law. Thus, the Department believes reliance on this case law and subregulatory guidance, rather than the 2021 IC Rule, would be preferable due to the 2021 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2022-21454. Public record. Not legal advice.