Employee or Independent Contractor Classification Under the Fair Labor Standards Act

Federal RegisterJan 10, 2024

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 780, 788, and 795

RIN 1235-AA43

Employee or Independent Contractor Classification Under the Fair Labor Standards Act

AGENCY:

Wage and Hour Division, Department of Labor.

ACTION:

Final rule.

SUMMARY:

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

DATES:

This final rule is effective on March 11, 2024.

FOR FURTHER INFORMATION CONTACT:

Amy DeBisschop, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division (WHD), U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Alternative formats are available upon request by calling 1-866-487-9243. If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services.

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

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

SUPPLEMENTARY INFORMATION:

I. Executive Summary

This final rule addresses how to determine whether a worker is properly classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA or Act). Congress enacted the FLSA in 1938 to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.”

To this end, the FLSA generally requires covered employers to pay nonexempt employees at least the Federal minimum wage for all hours worked and at least one and one-half times the employee's regular rate of pay for every hour worked over 40 in a workweek. The Act also requires covered employers to maintain certain records regarding employees and prohibits retaliation against employees who are discharged or discriminated against after, for example, filing a complaint regarding their pay. However, the FLSA's protections do not apply to independent contractors.

29 U.S.C. 202.

As used in this rule, the term “independent contractor” refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and are in business for themselves. Such workers play an important role in the economy and are commonly referred to by different names, including independent contractor, self-employed, and freelancer. This rule is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.

Determining whether an employment relationship exists under the FLSA begins with the Act's definitions. Although the FLSA does not define the term “independent contractor,” it contains expansive definitions of “employer,” “employee,” and “employ.” “Employer” is defined to “include[ ] any person acting directly or indirectly in the interest of an employer in relation to an employee,” “employee” is defined as “any individual employed by an employer,” and “employ” is defined to “include[ ] to suffer or permit to work.”

As detailed below, courts have developed an analysis that recognizes that independent contractors are not encompassed within these definitions.

29 U.S.C. 203(d), (e)(1), (g).

Since the 1940s, the Department and courts have applied an economic reality test to determine whether a worker is an employee or an independent contractor under the FLSA, grounded in the Act's broad understanding of employment. The ultimate inquiry is whether, as a matter of economic reality, the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor). In assessing economic dependence, courts and the Department have historically conducted a totality-of-the-circumstances analysis, considering multiple factors to determine whether a worker is an employee or an independent contractor, with no factor or factors having predetermined weight. There is significant and widespread uniformity among federal courts of appeals in the adoption and application of the economic reality test, although there is slight variation as to the number of factors considered or how the factors are framed. These factors generally include the opportunity for profit or loss, investment, permanency, control, whether the work is an integral part of the employer's business, and skill and initiative.

In January 2021, the Department published a rule titled “Independent Contractor Status Under the Fair Labor Standards Act” (2021 IC Rule), providing guidance on the classification of independent contractors under the FLSA applicable to workers and businesses in any industry.

The 2021 IC Rule marked a departure from the consistent, longstanding adoption and application of the economic reality test by courts and the Department of how to determine whether a worker is an employee or an independent contractor under the FLSA. It identified five economic reality factors to guide the inquiry into a worker's status as an employee or independent contractor.

Two of the five identified factors—the nature and degree of control over the work and the worker's opportunity for profit or loss—were designated as “core factors” that were the most probative and carried greater weight in the analysis. The 2021 IC Rule stated that if these two core factors pointed towards the same classification, there was a substantial likelihood that it was the worker's accurate classification.

The 2021 IC Rule also identified three less probative non-core factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production.

The 2021 IC Rule stated that it was “highly unlikely” that these three non-core factors could outweigh the combined probative value of the two core factors.

The 2021 IC Rule also

limited consideration of investment and initiative to the opportunity for profit or loss factor in a way that narrowed, in at least some circumstances, the extent to which investment and initiative are considered. The facts to be considered under other factors (such as control) were also narrowed, and the factor that considers whether the work is integral to the employer's business was limited to whether the work was part of an integrated unit of production.

Finally, the 2021 IC Rule provided that the actual practice of the parties involved was more relevant than what may be contractually or theoretically possible.

86 FR 1168. The Office of the Federal Register did not amend the Code of Federal Regulations (CFR) to include the regulations from the 2021 IC Rule because, as explained elsewhere in this section, the Department first delayed and then withdrew the 2021 IC Rule before it became effective. A district court decision later vacated the Department's rules to delay and withdraw the 2021 IC Rule, and the Department has (since that decision) conducted enforcement in accordance with that decision while the 2021 IC Rule has been in effect.

Id.

at 1246-47 (§ 795.105(d)).

Id.

at 1246 (§ 795.105(c)).

Id.

at 1247 (§ 795.105(d)(2)).

Id.

at 1246 (§ 795.105(c)).

Id.

at 1246-47 (§ 795.105(d)(1) and (d)(2)(iii)).

Id.

at 1247-48 (§ 795.110).

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.

The district court concluded that the 2021 IC Rule became effective on the original effective date of March 8, 2021.

See Coal. for Workforce Innovation

Walsh,

No. 1:21-CV-130, 2022 WL 1073346 (E.D. Tex. Mar. 14, 2022),

appeal filed,

No. 22-40316 (5th Cir. May 13, 2022) (“

CWI

Walsh

”).

On October 13, 2022, the Department published a Notice of Proposed Rulemaking (NPRM) regarding employee or independent contractor classification under the FLSA, proposing to rescind and replace the 2021 IC Rule.

The Department explained in its proposal that upon further consideration, the Department believed that the 2021 IC Rule did not fully comport with the FLSA's text and purpose as interpreted by courts and departed from decades of case law applying the economic reality test. The NPRM identified provisions of the 2021 IC Rule that were in tension with this case law—such as designating two “core factors” as most probative and predetermining that they carry greater weight in the analysis, considering investment and initiative only in the opportunity for profit or loss factor, and excluding consideration of whether the work performed is central or important to the employer's business. The NPRM stated that these provisions narrowed the economic reality test by limiting the facts that may be considered as part of the test, facts which the Department believes are relevant in determining whether a worker is economically dependent on the employer for work or in business for themself.

87 FR 62218.

After careful consideration, the Department decided it was appropriate to move forward with a proposed rescission of the 2021 IC Rule and a replacement regulation. As explained in the NPRM, the Department believed that retaining the 2021 IC Rule would have a confusing and disruptive effect on workers and businesses alike due to its departure from case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test. Further, because the 2021 IC Rule departed from legal precedent, it was not clear whether courts would adopt its analysis—a question that could take years of appellate litigation in different federal courts of appeals to sort out, resulting in more uncertainty as to the applicable test. The Department also explained in the NPRM that it believed the 2021 IC Rule's departure from the longstanding test applied by the courts could result in greater confusion among employers in applying the new analysis, which could place workers at greater risk of misclassification as independent contractors due to the new analysis being applied improperly, and thus could negatively affect both the workers and competing businesses that correctly classify their employees.

The initial deadline for interested parties to submit comments on the NPRM was November 28, 2022. In response to requests for an extension of the time period for filing written comments, the Department lengthened the comment period an additional 15 days to December 13, 2022, resulting in a total comment period of 61 days.

The Department received approximately 55,400 comments on the proposed rule.

87 FR 64749.

As described below, after considering the views expressed by commenters, the Department is finalizing its proposal with some modifications. For the reasons explained in the NPRM and detailed in section III, the Department concludes that it is appropriate to rescind the 2021 IC Rule and set forth an analysis for determining employee or independent contractor status under the Act that is more consistent with existing judicial precedent and the Department's longstanding guidance prior to the 2021 IC Rule.

Summary of the Major Provisions of the Final Rule

In addition to rescinding the 2021 IC Rule, the Department is adding part 795. Specifically, this final rule modifies the regulatory text published on January 7, 2021, at 86 FR 1246 through 1248, addressing whether workers are employees or independent contractors under the FLSA. Instead of using the “core factors” set forth in the 2021 IC Rule, this final rule returns to a totality-of-the-circumstances analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity. In addition to this critical reversion to the longstanding analysis that preceded the 2021 IC Rule, this final rule returns to the longstanding framing of investment as its own separate factor, and the integral factor as one that looks to whether the work performed is an integral part of a potential employer's business rather than part of an integrated unit of production. The final rule also provides broader discussion of how scheduling, remote supervision, price setting, and the ability to work for others should be considered under the control factor, and it allows for consideration of reserved rights while removing the provision in the 2021 IC Rule that minimized the relevance of retained rights. Further, the final rule discusses exclusivity in the context of the permanency factor, and initiative in the context of the skill factor.

While the above modifications from the 2021 IC Rule were all proposed in the NPRM, the Department also made several adjustments to the proposed regulations after consideration of the comments received. Notably, as discussed further below, the portion of the Department's proposal for the control factor stating that control implemented for purposes of complying with legal obligations may be indicative of control generated many comments. The Department is modifying the proposed language to address confusion and concern regarding potential unintended consequences.

Additionally, the Department received many comments regarding the investment factor. In response to a number of comments concerning the Department's proposal to consider the relative investments of the worker and the potential employer, the Department is clarifying in the final rule that consideration of the relative investments of the worker and the potential employer should be compared not only in terms of dollar value or size of the investments, but should focus on whether the worker is making similar types of investments as the employer (albeit on a smaller scale) that would suggest that the worker is operating independently. Further, in response to

comments regarding the unilateral nature of some costs imposed by potential employers on workers, which could appear to be capital or entrepreneurial in nature, the Department is including language recognizing that costs that are unilaterally imposed are not indicative of a worker's capital or entrepreneurial investment.

Further clarifications and adjustments to the regulatory text that reflect a range of comments made by employers; workers; those who view themselves as independent contractors, self-employed, or freelancers; labor unions; legal services providers; policy and research organizations; and counsel for both businesses and employees have been made as well and are discussed under the section-by-section analysis that follows.

The final rule reiterates that part 795 contains the Department's general interpretations for determining whether workers are employees or independent contractors under the FLSA. Further, it reiterates that economic dependence is the ultimate inquiry, meaning that a worker is an independent contractor as opposed to an employee under the Act if the worker is, as a matter of economic reality, in business for themself. The final rule explains that the economic reality test is comprised of multiple factors that are tools or guides to conduct the totality-of-the-circumstances analysis to determine economic dependence. The six factors described in the regulatory text should guide an assessment of the economic realities of the working relationship, but no one factor or subset of factors is necessarily dispositive. The final rule provides guidance on how six economic reality factors should be considered—opportunity for profit or loss depending on managerial skill, investments by the worker and the potential employer, the degree of permanence of the work relationship, the nature and degree of control, the extent to which the work performed is an integral part of the potential employer's business, and skill and initiative. Just as under the 2021 IC Rule, and in accordance with longstanding precedent and guidance, additional factors may also be considered if they are relevant to the overall question of economic dependence.

The Department recognizes that this return to a totality-of-the-circumstances analysis in which the economic reality factors are not assigned a predetermined weight and each factor is given full consideration represents a change from the 2021 IC Rule. However, the Department believes that this approach is the most beneficial because it is aligned with the Department's decades-long approach (prior to the 2021 IC Rule) as well as with federal appellate case law, and is more consistent with the Act's text and purpose as interpreted by the courts. The Department believes that this final rule will provide more consistent guidance to employers as they determine whether workers are economically dependent on the employer for work or are in business for themselves, as well as useful guidance to workers on whether they are correctly classified as employees or independent contractors. Accordingly, the Department believes that the guidance provided in this final rule will help protect employees from misclassification. Moreover, this final rule recognizes that independent contractors serve an important role in our economy and provides a consistent approach for those businesses that engage (or wish to engage) independent contractors as well as for those who wish to work as independent contractors.

II. Background

A. Relevant FLSA Definitions

Enacted in 1938, the FLSA generally requires that covered employers pay nonexempt employees at least the Federal minimum wage (presently $7.25 per hour) for every hour worked, and at least one and one-half times the employee's regular rate of pay for all hours worked beyond 40 in a workweek.

Among other protections, the FLSA also regulates the employment of children,

prohibits employers from keeping employee tips,

and requires employers to provide reasonable break time and a place for covered nursing employees to express breast milk at work.

Finally, the FLSA requires covered employers to “make, keep, and preserve” certain records regarding employees, and prohibits retaliation against employees who engaged in protected activity, such as filing a complaint regarding their pay.

29 U.S.C. 206(a), 207(a).

29 U.S.C. 212.

29 U.S.C. 203(m)(2)(B).

See

29 U.S.C. 218d (added by the PUMP for Nursing Mothers Act, Public Law 117-328, 136 Stat. 4459 (Dec. 29, 2022)).

29 U.S.C. 211(c), 215(a)(3).

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.”

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.”

Finally, section 3(g) provides that the term “ `[e]mploy' includes to suffer or permit to work.”

29 U.S.C. 203(e)(1).

29 U.S.C. 203(d).

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' under the FLSA had been given `the broadest definition that has ever been included in any one act.' ”

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.”

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.

United States

Rosenwasser,

323 U.S. 360, 362, 363 n.3 (1945) (quoting 81 Cong. Rec. 7657 (statement of Senator Hugo Black)).

Nationwide Mut. Ins.

Darden,

503 U.S. 318, 326 (1992).

Id.; see also, e.g.,

Walling

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.”

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.

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].”

Courts have thus recognized a need to delineate between

employees, who fall under the protections of the FLSA, and independent contractors, who do not.

Portland Terminal,

330 U.S. at 152.

See, e.g., Rutherford Food Corp.

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”).

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.”

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.

Unlike the control-focused analysis for independent contractors applied under the common law,

the economic reality test focuses more broadly on a worker's economic dependence on an employer, considering the totality of the circumstances.

Id.

at 728.

Courts invoke the concept of “economic reality” in FLSA employment contexts beyond independent contractor status. However, as in prior rulemakings, this final rule refers to the “economic reality” analysis or test for independent contractors as a shorthand reference to the independent contractor analysis used by courts for FLSA purposes.

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

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. 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

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.”

In relevant part, the

Hearst

Court rejected application of the common law standard, noting that “the broad language of the [NLRA's] definitions . . . leaves no doubt that its applicability is to be determined broadly, in doubtful situations, by underlying economic facts rather than technically and exclusively by previously established legal classifications.”

322 U.S. at 118-20; 29 U.S.C. 152(3).

Id.

at 123-25, 129.

On June 16, 1947, the Supreme Court decided

United States

Silk,

331 U.S. 704 (1947), addressing the distinction between employees and independent contractors under the SSA. The Court favorably summarized

Hearst

as setting forth “economic reality,” as opposed to “technical concepts” of the common law standard alone, as the framework for determining workers' classification, but acknowledged that not “all who render service to an industry are employees.”

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.”

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

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.

331 U.S. at 712-14.

Id.

at 716.

Id.

The same day that the Supreme Court issued its decision in

Silk,

it also issued

Rutherford Food Corp.

McComb,

331 U.S. 722 (1947), in which it affirmed a federal court of appeals decision that analyzed an FLSA employment relationship based on its economic realities.

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].”

Accordingly, the Court rejected an approach based on “isolated factors” and again considered “the circumstances of the whole activity.”

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.

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.”

331 U.S. at 727.

Id.

at 723-24.

Id.

at 730.

See id.

Id.

at 729-30.

On June 23, 1947, one week after the

Silk

and

Rutherford

decisions, the Court decided

Bartels

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.”

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.”

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.

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.

332 U.S. at 130.

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.”

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.”

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.

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)).

SSA of 1948, Public Law 80-642, sec. 2(a), 62 Stat. 438 (1948) (codified as amended at 26 U.S.C. 3121(d)).

See NLRB

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

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,

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.”

Such facts, among others, established that the homeworkers at issue were FLSA-covered employees.

366 U.S. at 33 (quoting from

Silk,

331 U.S. at 713, and

Rutherford,

331 U.S. at 729).

Id.

at 32.

Subsequently, in

Nationwide Mutual Insurance Co.

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.

Darden,

503 U.S. at 325-26.

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

Since

Rutherford,

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

Usery

Pilgrim Equip. Co.,

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

Bartels,

332 U.S. at 130).

When determining whether a worker is an employee under the FLSA or an independent contractor, federal courts of appeals apply an economic reality test using the factors identified in

Silk.

No court of appeals considers any one factor or combination of factors to invariably predominate over the others.

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.

Like other federal courts of appeals, the Eleventh Circuit repeats the Supreme Court's explanation from

Silk

that no one factor is controlling, nor is the list exhaustive.

See Brock

Superior Care, Inc.,

840 F.2d 1054, 1058-59 (2d Cir. 1988);

Donovan

DialAmerica Mktg., Inc.,

757 F.2d 1376, 1382-83 (3d Cir. 1985);

McFeeley

Jackson Street Ent., LLC,

825 F.3d 235, 241 (4th Cir. 2016);

Pilgrim Equip.,

527 F.2d at 1311;

Acosta

Off Duty Police Servs., Inc.,

915 F.3d 1050, 1055 (6th Cir. 2019);

Sec'y of Labor, U.S. Dep't of Labor

Lauritzen,

835 F.2d 1529, 1534-35 (7th Cir. 1987);

Walsh

Alpha & Omega USA, Inc.,

39 F.4th 1078, 1082 (8th Cir. 2022);

Real

Driscoll Strawberry Assocs., Inc.,

603 F.2d 748, 754 (9th Cir. 1979);

Acosta

Paragon Contractors Corp.,

884 F.3d 1225, 1235 (10th Cir. 2018);

Scantland

Jeffry Knight, Inc.,

721 F.3d 1308, 1311-12 (11th Cir. 2013);

Morrison

Int'l Programs Consortium, Inc.,

253 F.3d 5, 11 (D.C. Cir. 2001).

See, e.g., Parrish

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

Arkla Indus., Inc.,

699 F.2d 748, 752 (5th Cir. 1983));

Scantland,

721 F.3d at 1312 n.2 (the relative weight of each factor “depends on the facts of the case”) (quoting

Santelices

Cable Wiring,

147 F. Supp. 2d 1313, 1319 (S.D. Fla. 2001));

Martin

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 1311-12.

Id.

at 1312 n.2.

Some courts of appeals have applied the factors with some variations. For example, the Fifth Circuit typically does not list the “integral part” factor as one of the considerations that guides its analysis.

However, recognizing that its list of enumerated factors is not exhaustive, the Fifth Circuit has considered the extent to which a worker's function is integral to a business as part of its economic realities analysis.

Similarly, the Second and D.C. Circuits vary in that they describe the employee's opportunity for profit or loss and the employee's investment as a single factor, but they still use the same considerations as the other circuits to inform their economic realities analysis.

See Pilgrim Equip.,

527 F.2d at 1311.

See Hobbs

Petroplex Pipe & Constr., Inc.,

946 F.3d 824, 836 (5th Cir. 2020) (considering “the extent to which the pipe welders' work was `an integral part' of Petroplex's business”). Every other federal court of appeals that has decided an FLSA case involving alleged independent contractors includes the “integral part” factor among the list of enumerated economic reality factors.

See

the cases cited

supra

at n.52 other than

Pilgrim Equipment.

See, e.g., Franze

Bimbo Bakeries USA, Inc.,

826 F. App'x 74, 76 (2d Cir. 2020);

Superior Care,

840 F.2d at 1058-59. The D.C. Circuit has adopted the Second Circuit's articulation of the factors, including treating opportunity for profit or loss and investment as one factor.

See Morrison,

253 F.3d at 11 (citing

Superior Care,

840 F.2d at 1058-59).

In sum, since the 1940s, federal courts have analyzed the question of employee or independent contractor status under the FLSA using a multifactor, totality-of-the-circumstances economic reality test, with no factor or factors being dispositive. The courts have examined the economic realities of the employment relationship to determine whether the worker is economically dependent on the employer for work or is in business for themself, even if they have varied slightly in their articulations of the factors. Despite such variation, all courts have looked to the factors first articulated in

Silk

as useful guideposts while acknowledging that those factors are not exhaustive and should not be applied mechanically.

3. The Department's Application of the Economic Reality Test

The Department has applied a multifactor economic reality test since the Supreme Court's opinions in

Rutherford

and

Silk.

For example, on June 23, 1949, the Wage and Hour Division (WHD) issued an opinion letter

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.”

The guidance cautioned that no single factor is controlling, and “[o]rdinarily a definite decision as to whether one is an employee or an independent contractor under the [FLSA] cannot be made in the absence of evidence as to [the worker's] actual day-to-day working relationship with [their] principal. Clearly a written contract does not always reflect the true situation.”

WHD Op. Ltr. (June 23, 1949).

Id.

Subsequent WHD opinion letters addressing employee or independent contractor status under the FLSA have provided similar recitations of the

Silk

factors, sometimes omitting one or more of the six factors described in the 1949 opinion letter, and sometimes adding (or substituting) a seventh factor: the worker's “degree of independent business organization and operation.”

Numerous opinion letters have emphasized that employment status is “not determined by the common law standards relating to master and servant,” and that “[t]he degree of control retained by the principal has been rejected as the sole criterion to be applied.”

See, e.g.,

WHD Op. Ltr. (Oct. 12, 1965) (discussing degree of independent business organization); WHD Op. Ltr. (Feb. 18, 1969) (same); WHD Op. Ltr. FLSA-314 (Dec. 21, 1982) (discussing three of the

Silk

factors); WHD Op. Ltr. FLSA-164 (Jan. 18, 1990) (discussing four of the

Silk

factors).

See, e.g.,

WHD Op. Ltr. FLSA-106 (Feb. 8, 1956); WHD Op. Ltr. (July 20, 1965); WHD Op. Ltr. (Sept. 1, 1967); WHD Op. Ltr. (Feb. 18, 1969); WHD Op. Ltr. FLSA-31 (Aug. 10, 1981); WHD Op. Ltr. (June 5, 1995).

In 1962, the Department revised the regulations in 29 CFR part 788, which generally provides interpretive guidance on the FLSA's exemption for employees in small forestry or lumbering operations, and added a provision addressing the distinction between employees and independent contractors.

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.”

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.”

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.”

See

27 FR 8032; 29 U.S.C. 213(b)(28) (previously codified at 29 U.S.C. 213(a)(15)).

27 FR 8033 (29 CFR 788.16(a)).

Id.

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.

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.

Both provisions—29 CFR 780.330(b) and 788.16(a)—remained unchanged until 2021.

See

37 FR 12084, 12102 (introducing 29 CFR 780.330(b)).

Id.

In 1997, the Department promulgated a regulation applying a multifactor economic reality analysis for distinguishing between employees and independent contractors under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), which notably incorporates the FLSA's “suffer or permit” definition of employment by reference.

The regulation (which has not since been amended) advises that in determining if the farm labor contractor or worker is an employee or an independent contractor, the ultimate question is the economic reality of the relationship—whether there is economic dependence upon the agricultural employer/association or farm labor contractor, as appropriate. The regulation elaborates that “[t]his determination is based upon an evaluation of all of the circumstances, including the following: (i) The nature and degree of the putative employer's control as to the manner in which the work is performed; (ii) The putative employee's opportunity for profit or loss depending upon his/her managerial skill; (iii) The putative employee's investment in equipment or materials required for the task, or the putative employee's employment of other workers; (iv) Whether the services rendered by the putative employee require special skill; (v) The degree of permanency and duration of the working relationship; (vi) The extent to which the services rendered by the putative employee are an integral part of the putative employer's business.”

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).

See

62 FR 11734 (amending 29 CFR 500.20(h)(4));

see also

29 U.S.C. 1802(5) (“The term `employ' has the meaning given such term under section 3(g) of the [FLSA]”).

29 CFR 500.20(h)(4).

Also in 1997, WHD issued Fact Sheet #13, “Employment Relationship Under the Fair Labor Standards Act (FLSA).”

Like WHD opinion letters, Fact Sheet #13 advises that an employee, as distinguished from a person who is engaged in a business of their own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which they serve. The fact sheet identifies the six familiar economic realities factors, as well as consideration of the worker's degree of independent business organization and operation.

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—apart from the addition of an advisory note referring to the 2021 IC Rule—is identical to the current March 2022 version (available at

https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship

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).

AI 2015-1 reiterated that the economic realities of the relationship are determinative and that the ultimate inquiry is whether the worker is economically dependent on the employer or truly in business for themself. It identified six economic realities factors that followed the six factors used by most federal courts of

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

AI 2015-1 is available at 2015 WL 4449086 (withdrawn June 7, 2017).

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 November 20, 2023).

In 2019, WHD issued an opinion letter, FLSA2019-6, regarding whether workers who worked for companies operating self-described “virtual marketplaces” were employees covered under the FLSA or independent contractors.

Like the Department's prior guidance, the letter stated that the determination depended on the economic realities of the relationship and that the ultimate inquiry was whether the workers depend on someone else's business or are in business for themselves. The letter identified six economic realities factors that differed slightly from the factors typically articulated by the Department previously: (1) the nature and degree of the employer's control; (2) the permanency of the worker's relationship with the employer; (3) the amount of the worker's investment in facilities, equipment, or helpers; (4) the amount of skill, initiative, judgment, and foresight required for the worker's services; (5) the worker's opportunities for profit or loss; and (6) the extent of the integration of the worker's services into the employer's business.

The Department later withdrew Opinion Letter FLSA2019-6 on February 19, 2021.

See

WHD Op. Ltr. FLSA2019-6, 2019 WL 1977301 (Apr. 29, 2019) (withdrawn Feb. 19, 2021).

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.

See note at https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA

(last visited November 20, 2023).

C. The Department's 2021 Independent Contractor Rule

1. Overview

On January 7, 2021, the Department published the 2021 IC Rule, with an effective date of March 8, 2021.

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.

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.

See

86 FR 1168. The Department initially published a NPRM soliciting public comment on September 25, 2020.

See

85 FR 60600. The final rule adopted “the interpretive guidance set forth in the [NPRM] largely as proposed.” 86 FR 1168.

86 FR 1246-48.

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.”

It stated that the existing economic reality test applied by the Department and courts suffered from confusion regarding the meaning of “economic dependence,” a lack of focus in the multifactor balancing test, and confusion and inefficiency caused by overlap between the factors.

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.

Id.

at 1172, 1240.

Id.

at 1172-75.

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

Id.

at 1246 (§ 795.105(a)-(b)).

The 2021 IC Rule identified five economic realities factors to guide the inquiry into a worker's status as an employee or independent contractor, while acknowledging that the factors were not exhaustive, no one factor was dispositive, and additional factors could be considered if they “in some way indicate whether the [worker] is in business for him- or herself, as opposed to being economically dependent on the potential employer for work.”

In contrast to prior guidance and contrary to case law, the 2021 IC Rule designated two of the five factors—the nature and degree of control over the work and the worker's opportunity for profit or loss—as “core factors” that should carry greater weight in the analysis. Citing the goal of providing greater certainty and predictability in the economic reality test, the 2021 IC Rule determined that these two factors were more probative of economic dependence than other economic realities factors. If both of those core factors indicate the same classification, as either an employee or an independent contractor, the 2021 IC Rule stated that there was a “substantial likelihood” that the indicated classification was the worker's correct classification.

Id.

at 1246-47 (§ 795.105(c) and (d)(2)(iv)).

Id.

at 1246 (§ 795.105(c)).

The 2021 IC Rule's first core factor was the nature and degree of control over the work, which indicated independent contractor status to the extent that the worker exercised substantial control over key aspects of the performance of the work, such as by setting their own schedule, by selecting their projects, and/or through the ability to work for others, which might include the potential employer's competitors.

The 2021 IC Rule provided that requiring the worker to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed upon deadlines or quality control standards, or satisfy other similar terms that are typical of contractual relationships between businesses (as opposed to employment relationships) did not constitute control for purposes of determining employee or independent contractor classification.

Id.

at 1246-47 (§ 795.105(d)(1)(i)).

Id.

The 2021 IC Rule's second core factor was the worker's opportunity for profit or loss.

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

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

Id.

(§ 795.105(d)(1)(ii)).

The 2021 IC Rule also identified three other non-core factors: the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the employer, and whether the work is part of an integrated unit of production (which it cautioned is “different from the concept of the importance or centrality of the individual's work to the potential employer's business”).

The 2021 IC Rule provided that these other factors were “less probative and, in some cases, may not be probative at all” of economic dependence and were “highly unlikely, either individually or collectively, to outweigh the combined probative value of the two core factors.”

Id.

(§ 795.105(d)(2)).

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, and provided five “illustrative examples” demonstrating how the analysis would apply in particular factual circumstances.

Finally, the 2021 IC Rule rescinded any “prior administrative rulings, interpretations, practices, or enforcement policies relating to classification as an employee or independent contractor under the FLSA” to the extent that such items “are inconsistent or in conflict with the interpretations stated in this part,” and explained that the 2021 IC Rule would guide WHD's enforcement of the FLSA.

Id. at

1247-48 (§§ 795.110-.115).

Id.

at 1246 (§ 795.100).

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

See https://www.dol.gov/agencies/whd/opinion-letters/search?FLSA

(last visited November 20, 2023), noting the withdrawal of Opinion Letters FLSA2021-8 and FLSA2021-9.

2. Delay and Withdrawal

On February 5, 2021, the Department published a proposal to delay the 2021 IC Rule's effective date until May 7, 2021—60 days after the Rule's original March 8, 2001, effective date.

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.

86 FR 8326.

86 FR 12535.

On March 12, 2021, the Department published a NPRM proposing to withdraw the 2021 IC Rule.

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.

In explaining its decision to withdraw the 2021 IC Rule, the Department stated that the Rule was inconsistent with the FLSA's text and purpose and would have had a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent. The Withdrawal Rule stated that it took effect immediately upon its publication in the

Federal Register

on May 6, 2021.

86 FR 14027.

86 FR 24303.

Id.

at 24320.

3. Litigation

On March 14, 2022, in a lawsuit challenging the Department's Delay and Withdrawal Rules under the Administrative Procedure Act (APA), a district court in the Eastern District of Texas issued a decision vacating the Department's Delay and Withdrawal Rules.

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,”

failed to show “good cause for making the [Delay Rule] effective immediately upon publication,”

100

and acted in an arbitrary and capricious manner in its Withdrawal Rule by “fail[ing] to consider potential alternatives to rescinding the Independent Contractor Rule.”

101

Accordingly, the district court vacated the Delay and Withdrawal Rules and concluded that the 2021 IC Rule “became effective as of March 8, 2021, the rule's original effective date, and remains in effect.”

102

The district court's ruling did not address the validity of the 2021 IC Rule; rather, the case was focused solely on the validity of the Delay and Withdrawal Rules.

CWI

Walsh,

2022 WL 1073346.

Id.

at *9. The court specifically faulted the Department's use of a shortened 19-day comment period in its proposal to delay of the 2021 IC Rule's original effective date (instead of 30 days), and for failing to consider comments beyond its proposal to delay the 2021 IC Rule's effective date.

Id.

at *7-10.

100

Id.

at *11.

101

Id.

at *13.

102

Id.

at *20.

The Department filed a notice of appeal of the district court's decision.

103

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

103

See

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

D. The Department's Proposal

Following a series of stakeholder forums on the classification of workers as employees or independent contractors under the FLSA, the Department published an NPRM on October 13, 2022 proposing to rescind the 2021 IC Rule and replace it with new part 795 regulations.

104

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

104

See

87 FR 62218.

E. Comments

days to December 13, 2022, resulting in a total comment period of 61 days.

105

87 FR 64749. Although several commenters requested a longer extension or otherwise objected that the comment period was inadequately short, the resulting 61-day comment period was more than twice as long as the 30-day comment period for the NPRM for the 2021 IC Rule, when the Department initially proposed regulatory guidance on employee and independent contractor status under the FLSA.

See

85 FR 60600. The Department declined several requests to extend the comment period for the 2020 NPRM.

See https://www.regulations.gov/document/WHD-2020-0007-0193.

The Department received approximately 55,400 comments on the NPRM. Comments were submitted by a diverse array of stakeholders, including employees, self-identified independent contractors, businesses, trade associations, labor unions, advocacy groups, law firms, members of Congress, state and local government officials, and other interested members of the public. This section provides a high-level summary of commenter views. Significant issues raised in the comments received are discussed in subsequent sections of this preamble, along with the Department's response to those comments and a discussion of resulting changes that have been made in the final rule's regulatory text. All comments received may be viewed on the

http://www.regulations.gov

website, docket ID WHD-2022-0003.

Many of the comments the Department received can be characterized in the following ways: (1) very general statements of support or opposition; (2) personal anecdotes that did not address a specific aspect of the proposal; or (3) identical or nearly identical “campaign” comments sent in response to comment initiatives sponsored by various groups.

106

Other comments provided specific data, views, and arguments, which are described throughout this preamble. Commenters expressed a wide variety of views on the merits of the Department's proposal. Acknowledging that there are strong views on the issues presented in this rulemaking, the Department has carefully considered the comments submitted.

106

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

As a general matter, most employees, labor unions, worker advocacy groups, and other affiliated stakeholders generally expressed support for the NPRM, asserting that its proposed guidance was more consistent with judicial precedent and would better protect employees from misclassification than the 2021 IC Rule. By contrast, most commenters who identified as independent contractors, business entities, and commenters affiliated with those constituencies generally expressed opposition to the NPRM, criticizing the Department's proposed economic reality test as ambiguous and biased against independent contracting.

The Department received several comments addressing topics that are beyond the scope of this rulemaking. For example, numerous individuals submitted comments expressing support or opposition to the “Protecting the Right to Organize Act”, H.R. 842, 117th Cong. (2021), proposed legislation that would amend the NLRA. Other commenters expressed views on possible legislative reforms to extend wage-and-hour protections and other employment benefits to workers classified as independent contractors.

See, e.g.,

Center for Cultural Innovation (“CCI”) (discussing collective bargaining rights and sector wage standards as “two promising approaches to guaranteeing [wage-and-hour] protections to independent workers”); DoorDash (“[L]aws should be updated to preserve the independence workers like Dashers value, while clearing the way for new protections and benefits that independent contractors have historically lacked.”); Uber (“We look forward to working with the Department to address the shortcomings of existing laws, including unlocking access to benefits for independent contractors such as app-based workers.”). Such legislative efforts are beyond the scope of this rulemaking as they would require congressional action; the scope of this regulation is limited to providing guidance regarding employee or independent contractor classification under the FLSA as currently enacted.

Some commenters addressed the rulemaking's potential effect on workers other than those classified as independent contractors. For example, the Labor Relations and Employment Law Society at St. John's University School of Law requested the Department to apply the NPRM's proposed economic reality test to evaluate the employment status of unpaid student interns. Similarly, Boulette Golden & Marin L.L.P. asserted that the NPRM's proposed guidance creates a “false dichotomy” where “every worker in the United States is either an employee or an `independent business.' ” To clarify, this rulemaking specifically addresses the legal distinction between FLSA-covered employees and independent contractors; it does not replace or supplant the analyses that courts and the Department apply when evaluating FLSA coverage of other kinds of workers, such as unpaid interns, students, trainees, or volunteers.

107

Coverage for these types of workers is not addressed in this rule.

107

See, e.g.,

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

Finally, some commenters opined on potential compliance or enforcement measures. For example, the Sheet Metal and Air Conditioning Contractors' National Association (“SMACNA”) requested that the Department introduce a mandatory “Notice of Independent Contractor Status” form for businesses and independent contractors in the construction industry, to notify “true independent contractors” of their tax obligations and help enforcement against misclassification. This suggestion, however, is outside the scope of this rulemaking, which has not proposed any mandatory notice and focuses specifically on the legal distinction between FLSA-covered employees and independent contractors. Further, some commenters raised compliance with employment verification requirements under the Immigration Reform and Control Act (IRCA), both to note that some employers are incentivized to misclassify immigrant workers as independent contractors in part because they do not have to verify the work authorization of independent contractors,

see, e.g.,

Equal Justice Center; SMACNA, and to note that being able to operate as an independent contractor or in business for oneself provides economic opportunity for people who lack work authorization,

see

TheDream.US. Because this rulemaking pertains only to the question of employee classification under the FLSA, it does not address employers' compliance obligations with respect to employees as determined under other laws, such as IRCA. The FLSA's various worker protections apply to FLSA-covered employees regardless of their citizenship or immigration or work authorization status.

III. Need for Rulemaking

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

basic workplace protections, including the rights to minimum wage and overtime pay.

108

Meanwhile, employers that comply with the law are placed at a competitive disadvantage compared to other businesses that misclassify employees, contravening the FLSA's goal of eliminating “unfair method[s] of competition in commerce.”

109

108

Workers who are employees under the FLSA but are misclassified as independent contractors remain legally entitled to the Act's wage-and-hour protections and are protected from retaliation for attempting to assert their rights under the Act.

See

29 U.S.C. 215(a)(3). However, many misclassified employees may not be aware that such rights and protections apply to them or face obstacles when asserting those rights.

109

29 U.S.C. 202;

see also id.

at 1206-07.

The Department previously explained these concerns about the 2021 IC Rule at length in the Withdrawal Rule,

111

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

111

See

86 FR 24307-18.

In the NPRM, the Department acknowledged that its proposal departed from the approach taken in the 2021 IC Rule, and further discussed the rationale used in the 2021 IC Rule and why the Department had carefully reconsidered that reasoning and determined that modifications were necessary.

112

As the NPRM noted, the Department had identified four reasons underlying the need to promulgate the 2021 IC Rule: (1) confusion regarding the meaning of “economic dependence” because the concept is “underdeveloped”; (2) lack of focus in the multifactor balancing test; (3) confusion and inefficiency due to overlapping factors; and (4) the shortcomings of the economic reality test that are more apparent in the modern economy.

113

The 2021 IC Rule had also suggested as a fifth reason that the economic reality test hindered innovation in work arrangements.

114

As discussed further below, the Department explained in the NPRM that it believed that the proposed rule's approach offers a better framework for understanding and applying the concept of economic dependence by explaining how the touchstone of whether an individual is in business for themself is analyzed within each of the six economic realities factors. Further, the Department believed that the proposal's discussion of how courts and the Department's previous guidance apply the factors brings the multifactor test into focus, reduces confusion as to the overlapping factors, and provides a better basis for understanding how the test has the flexibility to be applied to changes in the modern economy, such that the Department no longer viewed the concerns articulated in the 2021 IC Rule as impediments to using the economic reality test formulated by the courts and the Department's longstanding guidance.

112

See

87 FR 62226 (citing

FCC

Fox Television Stations, Inc.,

556 U.S. 502, 515 (2009)).

113

Id.

(citing 86 FR 1172-75).

114

Id.

(citing 86 FR 1175).

Thousands of commenters opined on this rulemaking. Most commenters that expressed support for the NPRM—including labor unions, worker advocacy organizations, and workers—were highly critical of the 2021 IC Rule, often referencing or attaching earlier comments filed in opposition to that rule when it was proposed.

See, e.g.,

American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”); National Women's Law Center (“NWLC”); Northwest Worker Justice Project; United Brotherhood of Carpenters and Joiners of America (“UBC”). Using common template language, several dozen advocacy organizations and local unions affiliated with the United Food and Commercial Workers (“UFCW”) characterized the 2021 IC Rule as an “anti-worker rule” which “narrowed the scope of who is considered an employee under the FLSA.” Many of these commenters also asserted that the 2021 IC Rule “contravenes the [FLSA's] statutory definitions and Supreme Court precedent.” Additionally, numerous commenters supportive of the Department's rulemaking asserted that replacing the 2021 IC Rule with the NPRM's proposed economic reality test would reduce the misclassification of employees as independent contractors, given the proposed test's fuller consideration of facts that were minimized or excluded under the 2021 IC Rule.

See, e.g.,

AARP; Joint Comment of the National Electrical Contractors Association and the International Brotherhood of Electrical Workers (“NECA & IBEW”); REAL Women in Trucking.

A number of commenters supportive of the NPRM also stated that the economic reality test applied by courts is not only compatible with the modern

economy, but preferable to the 2021 IC Rule's elevation of certain factors as controlling.

See, e.g.,

AARP (“It is precisely because work arrangements are more varied and complex in today's economy that no one factor should be controlling or exclusive to others.”); Coalition of State Attorneys General and State Labor Departments (“State AGs”) (“As State AGs who enforce and defend state wage and hour laws, we know that a flexible standard that considers the totality of the circumstances is required to address changing work arrangements.”). Some business stakeholders expressed support for the NPRM, but for different reasons. For example, some employers—including Alto Experience, Inc., Gale Healthcare Solutions, IntelyCare, Inc., and various union-affiliated contractor associations—expressed support for the NPRM on the grounds that its guidance would better prevent rival businesses from obtaining an unfair competitive advantage through the misclassification of employees as independent contractors, consistent with the FLSA's goal of eliminating unfair methods of competition in commerce. Additionally, some business stakeholders stated that they preferred the economic reality test applied by courts to the 2021 IC Rule.

See, e.g.,

Ho-Chunk Inc. (supporting the proposed analysis because the 2021 IC Rule “deviat[ed] from established case law”); Small Business Legislative Council (“SBLC”) (“While the SBLC has not taken a position on whether the economic realities test strikes the right balance, applying a test like the economic realities test that has been fleshed out over years through case law and administrative guidance certainly makes this complex issue easier to navigate.”);

see also

Opera America (“The `totality-of-the-circumstances' approach allows for the nuance necessary to truly evaluate the nature of an employment or contractor relationship”); Texas Association for Home Care and Hospice (“We support the reiteration in the [NPRM] that the enumerated factors should each be equally relevant, including any additional relevant factors that indicate economic dependence or independence.”).

Other commenters, including most business-affiliated stakeholders and many self-identified independent contractors, disagreed with the Department's proposal to rescind and replace the 2021 IC Rule. Many of these commenters argued that the 2021 IC Rule was based on judicial precedent.

See e.g.,

Coalition for Workforce Innovation (“CWI”); Independent Bakers Association (“IBA”); Pacific Legal Foundation. Commenters opposed to this rulemaking further stated that the 2021 IC Rule's analysis is clearer than the NPRM's proposed economic reality test, asserting that returning to a totality-of-the-circumstances analysis would increase litigation and deter businesses from engaging with independent contractors.

See, e.g.,

American Society of Travel Advisors (“ASTA”); Financial Services Institute (“FSI”); U.S. Chamber of Commerce (“U.S. Chamber”). While many commenters opposed to the NPRM acknowledged that the misclassification of employees as independent contractors might be a problem in some industries, several commenters disputed the need for generally applicable guidance that (in their view) could be disruptive to businesses and legitimate independent contractors in their particular industries.

See, e.g.,

American Translators Association; IMC Companies, LLC;

see also

HR Policy Association. Finally, many self-identified independent contractors and advocacy groups asserted that the Department's proposal would “misclassify” independent contractors as employees.

See, e.g.,

American Society of Journalists and Authors; Cambridge Investment Research, Inc.; Fight for Freelancers; Transportation Intermediaries Association (“TIA”).

Commenters opposed to this rulemaking agreed with the 2021 IC Rule's assessment that the economic reality test traditionally applied by courts is incompatible with the modern economy.

See, e.g.,

Institute for the American Worker (“I4AW”); Society for Human Resources Management (“SHRM”); TIA. Several commenters pointed to differences in the economy today compared to the 1930s and 1940s, when the FLSA was enacted and the Supreme Court first endorsed the economic reality test.

See, e.g.,

Flex Association (“Flex”) (“It is no longer 1938, when Congress enacted the FLSA. Today, independent contractors can leverage app-based technology to build their own businesses in ways we could not have conceived even 20, let alone 84, years ago.”); National Association of Professional Insurance Agents (“[I]n many ways, the 1938 Congress could not have conceived of the present-day global economy or the variations among worker statuses that have emerged and continue to evolve therefrom.”).

Several commenters stated that the Department's proposal would deter businesses from engaging with independent contractors, which in turn would have disruptive economic consequences. In a joint comment, 33 business advocacy organizations and over 100 local Chambers of Commerce (“Coalition of Business Stakeholders”) asserted that, under the NPRM, “the only scenario in which a hiring entity can be sure it is safe from an enforcement action by the DOL is when it classifies, or misclassifies, its workers as employees” and concluded that the NPRM would “upend millions of legitimate, productive independent contractor relationships.”

see also id.

at 1201 (advising that other factors would only outweigh the two core factors “in rare cases”).

121

Id.

at 1246 (§ 795.105(c)).

Many commenters expressed concerns about the 2021 IC Rule's elevation of two “core factors” and supported the Department's proposal to restore a totality-of-the-circumstances analysis where no factor (or set of factors) is given a predetermined weight. Several commenters asserted that the use of core factors was contrary to Supreme Court precedent.

See, e.g.,

International Association of Machinists and Aerospace Workers, AFL-CIO; Laborers' International Union of North America (“LIUNA”); National Employment Law Project (“NELP'). The AFL-CIO and the North America's Building Trades Unions (“NABTU”) further commented that the 2021 IC Rule's elevation of control and opportunity for profit or loss effectively (and impermissibly) adopted a common law test for independent contractor status. The Signatory Wall and Ceiling Contractors Alliance (“SWACCA”) stated that “[b]y giving greater emphasis to these two factors . . . the [2021 IC Rule] improperly narrows the analysis of the facts and circumstances surrounding the business-worker relationship, thereby reducing the scope of the FLSA's protections.”

See also

State AGs (commenting that the 2021 IC Rule's “emphasis on two `core' factors . . . negated the need to fully consider the remaining factors”). Farmworker Justice commented that the 2021 IC Rule's use of core factors could facilitate the misclassification of farmworkers, whose employment status is particularly dependent on the economic reality factors examining the skill and integrality of the work being performed.

See also

Joint Comment from the Center for Law and Social Policy & Governing for Impact (“CLASP & GFI”) (same).

Other commenters supported the 2021 IC Rule's use of core factors and did not agree with the Department's proposal to change the 2021 IC Rule's analysis. Pointing to the Department's review of appellate case law described in the 2021 IC Rule preamble,

122

several commenters stated that the elevation of the control and opportunity for profit or loss factors was fully consistent with the outcome of FLSA court decisions, if not their explicit reasoning.

See, e.g.,

Associated Builders and Contractors (“ABC”); Coalition to Promote Independent Entrepreneurs (“CPIE”); Flex; FSI. Several commenters, like the Club for Growth, Flex, and Modern Economy Project (“MEP”) agreed with the 2021 IC Rule's determination that the control and the opportunity for profit or loss factors “drive at the heart” of economic dependence.

123

CWI asserted that “it is simply inaccurate that

court has determined, as a general rule, that any core factor should be afforded greater weight in determining whether an individual is an [employee].”

See also

CPIE.

122

See

86 FR 1196-98.

123

Id.

at 1196.

Having considered the comments, the Department continues to believe that the 2021 IC Rule was in tension with the Act, judicial precedent, and congressional intent. As the Department explained in the NPRM, there is no statutory basis for such a predetermined weighting of the factors and the Department is concerned that prioritizing two core factors over other factors may not fully account for the Act's broad definition of “employ,” as interpreted by the courts. The Department agrees with those commenters that noted that the elevation of two core factors improperly narrowed the analysis of the relevant facts, thereby reducing the scope of the FLSA's protections. For example, if facts relevant to the control and opportunity for profit or loss factors both point to independent contractor status for a particular worker but weakly so, those factors should not be presumed to carry more weight than stronger factual findings under other factors (

e.g.,

the existence of a lengthy working relationship under the “permanence” factor and the performance of work that does not require specialized skills and is an integral part of the business), which would indicate that the worker is an employee.

Moreover, the Department is not aware of any court that has, as a general rule, elevated any one economic reality factor or subset of factors above others, despite receiving several comments suggesting that there was such case law. The 2021 IC Rule did not cite or rely on any particular decision where a court announced such a general rule predetermining the weight of some of the economic reality factors. Further, the Department has examined cases raised by commenters in support of the core factor analysis and none stand for the proposition that a predetermined elevation of any factor or set of factors is appropriate under the economic reality analysis for worker classification under the FLSA. Rather, the cases cited by commenters are either relevant to a different statute such as the Americans with Disabilities Act (“ADA”) or Title VII, reference a joint employment analysis rather than an employee classification analysis, or have had excerpts taken out of context.

124

While

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

124

For example, although some commenters cited

Walsh

Medical Staffing of America,

that case explicitly stated that “[n]o single factor in the six-factor test is dispositive as `the test is designed to capture the economic realities of the relationship between the worker and the putative employer.' ” 580 F. Supp. 3d 216, 229 (E.D. Va. 2022) (quoting

McFeeley,

825 F.3d at 241). The

Medical Staffing

court's reference to

Smith

CSRA,

12 F.4th 396, 413 (4th Cir. 2021), is unpersuasive since that case addressed employment status under the Americans with Disabilities Act, not the FLSA.

See CSRA,

12 F.4th at 412-13. Other cases cited by commenters in support of core factors are inapposite.

See Brown

BCG Attorney Search,

No. 12 C 9596, 2013 WL 6096932, at *1 (N.D. Ill. Nov. 20, 2013) (citing

Knight

United Farm Bureau Mut. Ins. Co.,

950 F.2d 377, 378 (7th Cir. 1991), which concerned Title VII not the FLSA);

Meyer

U.S. Tennis Ass'n,

No. 1:11-cv-06268 (ALC)(MHD), 2014 WL 4495185, at *6 (S.D.N.Y. Sept. 11, 2014) (citing

Wadler

Eastern Coll. Athletic Conference,

No. 00-civ-5671,

2003 WL 21961119, at *2 (S.D.N.Y. Aug. 14, 2003), a Title VII case not an FLSA case);

see also

AFL-CIO; International Brotherhood of Teamsters (“IBT”).

As discussed earlier, commenters opposed to the NPRM stated that the control factor should be given added weight in the economic reality test (along with the opportunity for profit or loss factor), due to its purported strong correlation with the ultimate outcomes of prior FLSA court decisions.

See, e.g.,

ABC; CPIE; Flex; FSI. CWI commented that the 2021 IC Rule's elevation of control served a “definitional purpose,” identifying control as a foundational aspect of the “dependence” in “economic dependence.”

See also

Club for Growth (“[Because control is] virtually synonymous with what it means to be an independent businessperson . . . it makes sense that [it] typically matter[s] more than, for instance, the duration of a business relationship or a worker's level of skill.”). The U.S. Chamber commented that the 2021 IC Rule “rightly elevated the importance of control” because “courts and scholars have found . . . no functional difference between” the economic reality and common law control tests.

See also

Club for Growth (“It would be odd to say that control, which underpins the concept of employment and agency law generally, should have no more weight than, say, whether the worker bought his own boots.”).

As noted in the NPRM, although the 2021 IC Rule's analysis regarding who is an employee and who is an independent contractor was not the same as the common law control analysis, elevating the importance of control in every FLSA employee or independent contractor analysis brought the 2021 Rule closer to

the common law control test that courts have rejected when interpreting the Act.

137

The Supreme Court has repeatedly stated that the Act establishes a broader scope of employment for FLSA purposes than under a common law analysis focused on control.

138

The Department remains concerned that the outsized role of control under the 2021 IC Rule's analysis was contrary to the Act's text and case law interpreting the Act's definitions of employment and as such disagrees with commenters who suggested that control is essentially synonymous with economic dependence and should be given more weight. The Department, however, also disagrees with NELP that the FLSA's “suffer or permit” standard suggests that control should be afforded less weight than other economic reality factors, as courts have similarly not adopted such an approach.

137

The Department previously identified this concern as one of the primary reasons for the Withdrawal Rule.

See

86 FR 24311.

138

See Darden,

503 U.S. at 324-26;

Portland Terminal,

330 U.S. at 150-51; and

Rutherford,

331 U.S. at 728.

3. The 2021 IC Rule Improperly Altered Several Factors by Precluding the Consideration of Relevant Facts

The NPRM stated that the Department remained concerned that the 2021 IC Rule's preclusion of certain facts from being considered under the factors improperly narrowed the economic reality test and did not allow for a full consideration of all facts which might be relevant to determining whether a worker is economically dependent upon an employer for work or in business for themself. Examples of such narrowing from the 2021 IC Rule include: (1) stating that “control” indicative of an employment relationship must involve an employer's “substantial control over key aspects of the performance of the work,” excluding requirements “to comply with specific legal obligations, satisfy health and safety standards, carry insurance, meet contractually agreed-upon deadlines or quality control standards, or satisfy other similar terms;”

139

(2) making the “opportunity for profit or loss” factor indicate independent contractor status based on either the worker's initiative or investment (even if either a lack of initiative or lack of investment suggests that the worker is an employee);

140

(3) disregarding the employer's investments;

141

(4) disregarding the importance or centrality of a worker's work to the employer's business;

142

and (5) downplaying the employer's reserved right or authority to control the worker.

143

In each of these ways, the 2021 IC Rule limited the scope of facts and considerations comprising the analysis of whether the worker is an employee or independent contractor.

139

86 FR 1246-47 (§ 795.105(d)(1)(i)).

140

Id.

at 1247 (§ 795.105(d)(1)(ii)) (“While the effects of the individual's exercise of initiative and management of investment are both considered under this factor, the individual does not need to have an opportunity for profit or loss based on both for this factor to weigh towards the individual being an independent contractor.”).

141

Id.; see also id.

at 1188 (“[T]he Department reaffirms its position that comparing the individual worker's investment to the potential employer's investment should not be part of the analysis of investment.”).

142

Id.

at 1247 (§ 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).

143

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).

Numerous commenters opined on the 2021 IC Rule's general narrowing of the economic reality test and the extent to which it justifies this rulemaking. For example, IBT stated that “[t]he current rule conflicts with the intended broad definition and coverage of the [FLSA] and adopts an impermissibly narrow test for determining employee status.”

See also

SWACCA (“Judicial disregard of the January 2021 Rule's interpretation of the FLSA would create considerable confusion.”). UBC elaborated that uncertainty over judicial adoption of the 2021 IC Rule poses a significant legal risk to businesses, as “any employer relying on the 2021 Rule faces the very real possibility that their presumed compliance with the FLSA would in fact be the opposite.”

See also

NECA & IBEW (asserting that the 2021 IC Rule does not provide “certainty and clarity” for businesses because courts will continue applying a broader economic reality test). Notwithstanding their concerns with some aspects of the NPRM's proposed guidance, some independent contractors and business stakeholders shared the Department's concerns over whether courts would actually apply the 2021 IC Rule and the attendant risks that they would not.

See, e.g.,

Ho-Chunk, Inc. (“Ho-Chunk supports the Department's revision of the 2021 IC Rule as we agree that [it] would have a confusing and disruptive effect due to its deviation from established case law.”).

Commenters opposed to the NPRM, however, expressed confidence that, if left in place, the 2021 IC Rule would be adopted by courts over time and promote greater uniformity in the law.

See, e.g.,

IMC Companies (“After decades of uncertainty and imprecise applications of the law, the [2021 IC Rule] was on the cusp of ushering in a new era of streamlined analysis and consistent court decisions across all jurisdictions.”); NRF & NCCR (“If left in place, [the 2021 IC Rule] would undoubtedly increase consistency.”). Several of these commenters asserted that the Department's concerns about the 2021 IC Rule's reception by courts were speculative, unsupported by evidence, and premature.

See, e.g.,

American Bakers Association; CPIE; Freedom Foundation. A comment from two fellows at the Heritage Foundation asserted that courts would adopt the 2021 IC Rule given the deferential standard of review afforded to agency rules that fill statutory gaps under

Chevron U.S.A., Inc.

Natural Resources Defense Council, Inc.,

468 U.S. 837 (1984).

149

Other commenters disputed the relevance of the Department's concern over the 2021 IC Rule's adoption by courts, asserting that courts were already applying different versions of the economic reality test and arriving at different outcomes prior to the 2021 IC Rule.

See, e.g.,

ASTA; Independent Women's Forum (“IWF”);

see also

Club for Growth (“Without supporting experience, the critique is no more than the same argument that could be leveled against virtually any regulation.”). Finally, many commenters questioned the likelihood that courts would adopt the NPRM's proposed guidance, which they viewed as less consistent with the FLSA and judicial precedent than the 2021 IC Rule.

See, e.g.,

CPIE; FSI; National Association of Manufacturers (“NAM”); Workplace Policy Institute of Littler Mendelson, P.C. (“WPI”).

149

A far larger number of commenters—including those both supportive and critical of the NPRM—asserted that any regulatory guidance issued by the Department addressing employee or independent contractor status under the FLSA would be a non-binding “interpretive rule,” given the Department's lack of explicit rulemaking authority on the topic.

See, e.g.,

Club for Growth; CWC; NELP; Winebrake & Santillo, LLC; WPI.

Having considered the comments, the Department continues to have serious concerns about the extent to which federal courts would have adopted the 2021 IC Rule, were it not being rescinded by this rulemaking. The Department is unaware of a single federal court that has applied the 2021 IC Rule's analysis. To the contrary, to the Department's knowledge, only a few court decisions have even considered the 2021 IC Rule and all expressly

declined to apply its analysis.

150

Other courts that have considered employee or independent contractor classification under the FLSA have continued applying a broader economic reality test consistent with their own longstanding precedent.

151

150

See Wallen

TendoNova Corp.,

No. 20-cv-790-SE, 2022 WL 17128983, at *4 (D.N.H. Nov. 22, 2022) (noting that the 2021 IC Rule “is not controlling . . . and may not be valid”);

Harris

Diamond Dolls of Nevada, LLC,

No. 3:19-cv-00598-RCJ-CBC, 2022 WL 4125474, at *2 (D. Nev. July 26, 2022) (denying defendants' motion to reconsider the court's earlier ruling that plaintiffs were FLSA-covered employees in part because the 2021 IC Rule is “not binding”);

Badillo-Rubio

RF Constr., LLC,

No. 18-CV-1092, 2022 WL 821421, at *13 (M.D. La. Mar. 17, 2022) (rejecting plaintiff's argument that the court should apply the 2021 IC Rule's “integrated production” factor as “unnecessary” in determining that plaintiff was an employee). The

Wallen

decision is notable because, as the court explained, the First Circuit has neither adopted nor rejected a particular test, and thus the court was not bound by any prior circuit-level precedent. Still, the

Wallen

court declined to apply the 2021 IC Rule and applied “the standard six-factor test.” 2022 WL 17128983, at *3-4.

151

See, e.g., Acevedo

McCalla,

No. MJM-22-1157, 2023 WL 1070436, at *3-5 (D. Md. Jan. 27, 2023) (relying on the Fourth Circuit's economic reality test to find that the worker failed to state a claim for relief under the FLSA without reference to 2021 IC Rule);

Brunet

GB Premium OCTG Servs. LLC,

No. 4:21-CV-1600, 2022 WL 17730576, at *5-10 (S.D. Tex. Dec. 1, 2022) (applying the Fifth Circuit's economic reality test without reference to 2021 IC Rule),

report and recommendation adopted,

2023 WL 2186441 (Feb. 23, 2023);

Ajquiixtos

Rice & Noodles, Inc.,

No. 4:21-CV-01546, 2022 WL 7055396, at *2-4 (S.D. Tex. Oct. 12, 2022) (relying on the Fifth Circuit's economic reality test and not referencing the 2021 IC Rule to conclude that a worker was an employee and not an independent contractor);

Black

7714 Ent., Corp.,

No. 21-CV-4829, 2022 WL 4229260, at *6-8 (E.D.N.Y. July 29, 2022),

report and recommendation adopted,

2022 WL 3643969 (E.D.N.Y. Aug. 24, 2022) (relying on the Second Circuit's economic reality test to conclude that a worker is an employee and not an independent contractor without reference to the 2021 IC Rule);

Hill

Pepperidge Farm, Inc.,

No. 3:22-CV-97-HEH, 2022 WL 3371321, at *2-5 (E.D. Va. Aug. 16, 2022) (relying on the Fourth Circuit's economic reality test to find that the worker has stated a claim for relief under the FLSA without reference to 2021 IC Rule).

The Department disagrees with commenter assertions that the 2021 IC Rule's analysis was more likely to be adopted by courts than the analysis proposed in the NPRM. The Department's analysis in this rulemaking is grounded in longstanding case law, while the new standard and new concepts introduced by the 2021 IC Rule were a very significant departure from that longstanding case law. For example, as previously discussed, the 2021 IC Rule created “core” factors that were automatically given greater weight in the analysis, contrary to how every appellate court has described the economic reality test.

152

In line with the case law, this final rule has no “core” factors. Similarly, while every federal court of appeals that has applied the integral factor in an FLSA independent contractor case has examined whether the worker's work is an “integral part” of the potential employer's business,

153

no circuit applies the 2021 IC Rule's narrower inquiry into “whether the work is part of an integrated unit of production” as the standard under this factor.

154

And unlike the 2021 IC Rule, all but two circuits share the approach of listing “investment” and “opportunity for profit and loss” as separate economic reality factors, consistent with the Supreme Court's original listing of these factors in

Silk

155

152

See supra

section III.A.1.

153

See supra

n.52.

154

See infra,

section V.C.5.

155

331 U.S. at 716. As discussed earlier, the Second and D.C. Circuit Courts of Appeals describe “investment” and “opportunity for profit or loss” as a single factor in the economic reality test.

See supra

n.58.

Some commenters alleged that certain aspects of the NPRM's proposed guidance were departures from judicial precedent, such as its proposal that “control implemented by the employer for purposes of complying with legal obligations, safety standards, or contractual or customer service standards may be indicative of control,”

156

and its proposed consideration of investments made by the potential employer as well as the worker.

157

However, as the discussions of the control and investments factors in section V explain, this final rule's guidance on both issues is well-supported by the case law. Moreover, the Department has made meaningful changes in this final rule to aspects of its proposed guidance in response to comments, including the treatment of control exercised to comply with legal obligations and the consideration of investments made by the potential employer.

158

The Department believes that such changes further align this final rule's guidance with the analysis presently applied by courts, providing greater certainty for interested parties.

156

87 FR 62275 (proposed § 795.110(b)(4)).

157

87 FR 62275 (proposed § 795.110(b)(2)).

158

See infra,

section V.C.

Apart from the 2021 IC Rule's reception by courts, commenters also disagreed over whether the 2021 IC Rule's guidance brought clarity or confusion as a standalone matter. Some commenters asserted that the novelty of the 2021 IC Rule's analysis, for example, would have created confusion as compared to the longstanding analysis applied by courts.

See, e.g.,

NELP (“By departing from decades of federal case law on the scope of the Act's protections, and by downplaying relevant facts of an employment relationship in the analysis, the 2021 IC Rule . . . creates more confusion for employers and workers alike.”); SWACCA (asserting that the ability to “draw[] on 70 years of existing interpretations from the courts and Department of Labor guidance” under the NPRM's guidance will “save time and resources for all stakeholders compared to the January 2021 Rule's novel, untested weighted framework.”).

In contrast, other commenters asserted that rescission and replacement of the 2021 IC Rule would reduce certainty and clarity.

See, e.g.,

Americans for Prosperity Foundation (“AFPF”); Coalition of Business Stakeholders; NAM; Republican Members of Congress; SHRM; U.S. Chamber. Numerous commenters that preferred the 2021 IC Rule identified its establishment of core factors as that rule's most clarifying feature.

See, e.g.,

Competitive Enterprise Institute (“CEI”); CWC; IWF; Landmark Legal Foundation; National Association of Women Business Owners (“NAWBO”); Raymond James Financial, Inc. (“Raymond James”). Some commenters additionally supported the 2021 IC Rule's elimination of purported redundant or overlapping considerations in various economic reality factors.

See, e.g.,

FSI (criticizing the NPRM's proposed separation of the “investment” and “opportunity for profit or loss” factors as “yet another way in which the [NPRM] . . . undo[es] the 2021 Rule's clarifying efforts to articulate an appropriately weighted test with less overlapping redundancy”); MEP.

Having reviewed the comments, the Department continues to believe that the 2021 IC Rule introduced uncertainty regarding the applicable legal standard for determining whether a worker is an employee or an independent contractor under the FLSA, contrary to its stated intent. Prior to the 2021 IC Rule, there was certainty as to the applicable legal standard for determining whether a worker was an employee or independent contractor under the FLSA because federal courts of appeals applied a totality-of-the-circumstances, economic reality test that did not elevate any factors above the others. Despite slight variation in the exact number and phrasing of specific economic reality factors, courts and the Department generally examined the same economic reality factors. The 2021 IC Rule, however, injected uncertainty into this area of the law by putting forth new guidance that was at odds (for all of the reasons discussed herein) with

the substantive standard applied by courts. As a result of the 2021 IC Rule, the regulated community was confronted with inconsistent standards for interested parties to apply to determine a worker's status—the test from the 2021 IC Rule and the totality-of-the-circumstances test in federal appellate case law.

159

Leaving the 2021 IC Rule in place would have risked greater confusion regarding its relation to well-settled circuit precedent. Thus, the 2021 IC Rule's new standard introduced uncertainty that did not exist before.

160

159

To the extent that there was any uncertainty around outcomes when applying federal appellate case law beyond what would be expected from any fact-specific test, the standard that courts and the Department would apply prior to the 2021 IC Rule was known. And with this rulemaking, the Department hopes to decrease any uncertainty around outcomes by providing detailed guidance about the application of each factor that is consistent with the case law, as opposed to the new concepts that the 2021 IC Rule introduced.

160

The Department acknowledges that the 2021 IC Rule includes several important principles from the case law, such as: economic dependence is the ultimate inquiry, the list of economic reality factors is not exhaustive, and no single factor is determinative. However, as explained herein, the 2021 IC Rule was, on balance, a departure from the case law to an extent that it introduced uncertainty.

Additionally, the Department continues to believe that the aspects of the 2021 IC Rule's analysis introduced confusion, making that rule's guidance vulnerable to misapplication. Confusion about how to apply the 2021 IC Rule was evident in many of the comments submitted in opposition to the Department's proposal to rescind and replace that rule. For example, several commenters inaccurately described the 2021 IC Rule as establishing a “two-factor test,”

see, e.g.,

CEI; National Demolition Association (“NDA”), while others mistakenly assumed that non-core factors were only considered when the two core factors pointed to opposite classification outcomes.

See, e.g.,

Information Technology & Innovation Foundation; News/Media Alliance (“N/MA”); Professional Golfers' Association of America (“PGA”).

161

Some commenters appeared to conflate the reduced importance of non-core factors under the 2021 IC Rule's analysis with a reduced need to consider such factors at all.

See, e.g.,

National Federation of Independent Businesses (“NFIB”); SHRM.

162

Additionally, some commenters viewed the 2021 IC Rule's economic reality test, in its totality, as essentially the same as a common law control test.

163

See

The National Council of Agricultural Employers (asserting that common law definitions of independent contractor status “are consistent with the 2021 IC Rule”); U.S. Chamber (asserting that “despite the ostensible variances between the economic realities and common law control tests, `there is no functional difference between' these tests”).

161

The 2021 IC Rule explained that it rejected commenter requests to “state that if the two core factors point towards the same classification, there is no need to consider any other factors” because “in some circumstances, the core factors could be outweighed by particularly probative facts related to other factors.” 86 FR 1202.

162

The 2021 IC Rule explained that “there may be circumstances where one or more of the non-core factors,

upon consideration,

has little or no probative value.” 86 FR 1202 (emphasis added).

163

Cf.

86 FR 1201 (“[T]he rule's standard for employment remains broader than the common law.”);

see also id.

at 1239 (rejecting the adoption of a common law control test in the analysis of regulatory alternatives).

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

C. Risks to Workers From the 2021 IC Rule

In the NPRM, the Department explained that to the extent the 2021 IC Rule's guidance resulted in the misclassification of employees as independent contractors, the resulting denial of FLSA protections could harm the affected workers. These protections include being paid at least the federal minimum wage for all hours worked, overtime compensation for hours worked over 40 in a workweek, and protection against retaliation for complaining about, for example, a violation of the FLSA. The Department further explained in the NPRM that the 2021 IC Rule did not fully consider these potential consequences for workers. The NPRM noted that this result could have a disproportionate impact on women and people of color, to the extent such workers are overrepresented in low-wage positions where misclassification is more likely.

164

The NPRM further noted that women and people of color experience multiple types of economic inequities in the labor force, including gender and racial wage gaps and occupational segregation, and that the misclassification of these workers as independent contractors deprives them of wage and hour protections that could help alleviate some of this inequality.

165

164

See

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

165

Id.

Many commenters, including worker advocacy groups, labor unions, and other stakeholders, shared views about the 2021 IC Rule's effect on employees vulnerable to misclassification. The Department also received significant feedback regarding the potential effects of this rulemaking on independent contractors, as well as from commenters who did not agree that the 2021 IC Rule would or could increase the prevalence of misclassification.

Many commenters agreed with the Department's assessment that the misclassification of employees as independent contractors remains a serious problem for workers, businesses, and the broader economy. Several commenters referenced studies or data estimating a high prevalence of misclassification in the economy, in addition to those mentioned in the NPRM's regulatory impact analysis.

166

See, e.g.,

NABTU (citing multiple studies estimating the misclassification of construction workers in various states); State AGs (discussing a June 2022 report estimating that “at least 10 percent of New York State's workers are misclassified as independent contractors” and a December 2022 report estimating that “approximately 259,000 workers in Pennsylvania are wrongly classified as independent contractors”). CLASP & GFI asserted that the misclassification of employees as independent contractors is “occurring with increased frequency as workplaces `fissure,' ” and “firms . . . outsource bigger and bigger portions of their workforces to other entities and to workers themselves.” Similarly, the UFCW asserted that misclassification is a “pervasive and growing problem,” citing one report showing that in Washington state, misclassification increased from 5 percent of employers misclassifying workers in 2008 to 14 percent of employers misclassifying workers in 2017, with construction workers, clerical workers, and hotel and restaurant workers the most likely to be misclassified.” Several commenters emphasized the prevalence of misclassification in specific industries.

See, e.g.,

American Federation of State,

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

166

See

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

Many commenters discussed how the misclassification of employees as independent contractors deprives workers of wages. SWACCA, for example, commented that “the estimated 20 percent of construction workers who should be treated as employees (but are not) lose close to $1 billion in wages annually.” Commenters pointed out that misclassification undercuts employers that comply with the law and causes a “race to the bottom” in labor standards.

See, e.g.,

AARP; Indiana, Illinois, Iowa Foundation for Fair Contracting; SWACCA (estimating that “construction companies that treat their workforce as independent contractors save at least 20 to 30 percent on labor costs”). Gale Healthcare Solutions stated that “[t]emporary staffing platform companies that hire nursing staff as W2 employees lose talent to companies that use a 1099 model, as 1099 agencies promote wages that appear higher because they do not provide traditional protections of employment or account for withholding taxes and additional expenses required by the W-2 model.” Alto Experience Inc., a ridesharing company that classifies its drivers as employees, asserted that the misclassification of employees as independent contractors constitutes an “unfair method of competition in commerce” that the FLSA was passed to prevent.

Beyond wage effects, commenters identified and discussed many other consequences of worker misclassification. For example, the NWLC asserted “by strengthening the employment test to reduce misclassification, the Department can ensure that more nursing mothers will be able to hold their employers accountable for providing appropriate facilities and adequate break time.”

See also

A Better Balance (“[W]e are pleased that this rule will help to ensure that workers are able to access their rights under the Family and Medical Leave Act and the Break Time for Nursing Mothers law.”). As discussed more fully in section VII, commenters also raised other negative consequences of misclassification for workers beyond those directly related to the FLSA, such as: decreased access to employment benefits such as health insurance or retirement benefits, inability to access paid sick leave, unemployment insurance, and worker's compensation, a lack of ability to take collective action to improve workplace conditions, and a lack of anti-discrimination protections under various civil rights laws.

See, e.g.,

Smith Summerset & Associates LLC; UFCW.

Several commenters emphasized the uniquely harmful risks and consequences of misclassification for workers in certain demographic groups.

See, e.g.,

AARP (senior workers); California Immigrant Policy Center (immigrant workers); Equal Justice Center (low-income workers); LCCRUL & WLC (workers of color); NWLC (women workers). In a joint comment, the Action Center on Race and the Economy, Color of Change, Liberation in a Generation, Unemployed Workers United, MediaJustice, the National Black Worker Center, Muslims for Just Futures, Raise Up South Florida, Human Impact Partners, ROC United, Interfaith Center on Corporate Responsibility, HEAL Food Alliance, and the Public Accountability Initiative/LittleSis.org (“ACRE et al.”) pointed to the overrepresentation of workers of color in low-wage, labor-intensive industries where misclassification is pervasive and asserted that they “view misclassification as a critical racial justice issue that the DOL must help address.”

Many commenters agreed with the Department's assessment that the 2021 IC Rule has increased the risk of misclassification. For example, SWACCA asserted that challenges in enforcing misclassification in the construction industry “would be compounded if enforcement officials had to pursue bad actors under the January 2021 Rule's novel interpretation of the law that could require protracted litigation to clarify and would permit more contractors to argue that their classification of workers as independent contractors is permissible, or at least defensible, under the FLSA.” The International Association of Machinists and Aerospace Workers asserted that the 2021 IC Rule “creates perverse incentives for companies to misclassify workers,” because “[t]he more easily a company can misclassify its workforce, the more incentive for other companies to do the same, creating a `race to the bottom' in employment practices and social standards to the detriment of workers.” CLASP & GFI and Farmworker Justice both commented that the 2021 IC Rule's elevation of the “control” and “opportunity for profit or loss” factors might exacerbate misclassification among farmworkers, whose employment status is particularly dependent on the consideration of factors other than the 2021 IC Rule's “core” factors.

Commenters opposed to this rulemaking generally did not dispute the occurrence or importance of employee misclassification, at least in certain industries. For example, a lawyer representing employers acknowledged that “independent contractor status can be abused.”