Submitted via www.regulations.gov
Division of Regulations, Legislation, and Interpretation
Wage and Hour Division
U.S. Department of Labor
Room S-3502
200 Constitution Avenue NW
Washington, DC 20210
Re: RIN 1235-AA34, Comments in Response to Proposed Rulemaking: Independent Contractor Status Under the Fair Labor Standards Act
To Whom It May Concern:
The National Employment Lawyers Association (NELA) is submitting these comments regarding the U.S. Department of Labor (“Department”)’s Notice of Proposed Rulemaking (NPRM) on the status of independent contractors under the Fair Labor Standards Act (FLSA).
NELA is the largest professional membership organization in the country comprised of lawyers who represent employees in labor, employment, wage and hour, and civil rights disputes. Our mission is to advance employee rights and serve lawyers who advocate for equality and justice in the American workplace. NELA and its 69 circuit, state, and local affiliates have a membership of over 4,000 attorneys who are committed to working on behalf of those who have faced illegal treatment in the workplace. NELA has filed numerous amicus curiae briefs before the United States Supreme Court and other federal appellate courts regarding the proper interpretation of federal civil rights and worker protection laws and comments on relevant Notices of Proposed Rulemaking (NPRMs). NELA also engages in legislative advocacy on behalf of workers throughout the United States. Many NELA members represent workers who have been misclassified as “independent contractors”, allowing employers to deny them the most basic protections guaranteed under the FLSA. Thus, NELA has both an interest in, and extensive expertise, regarding the practical impact of any proposed modifications.
Worker misclassification is a serious, growing problem across the country. Yet the Department’s Proposed Rule on Independent Contractor Status under the Fair Labor Standards Act (“Proposed Rule”) fails to remedy — and indeed, would exacerbate — this widespread problem. While we agree with the Department that the current multi-factor test can lead to inconsistent results[1], the Proposed Rule does not solve that problem. A more consistent test is needed, but the policy choices in the current proposal, at almost every turn, benefit employers at the expense of workers, and inject even more confusion into worker classification. The Department’s proposed test undermines the FLSA’s broad, remedial purpose and flies in the face of Supreme Court precedent by elevating two factors of the multi-factor test above the others.[2] It sanctions the trend of employers misclassifying workers as independent contractors in order to deny them the benefits and rights of employee status.
As the California Supreme Court recently recognized in its landmark decision in Dynamex Operations W. v. Superior Court, 416 P.3d 1 (2018), “[i]n recent years, the relevant regulatory agencies of both the federal and state governments have declared that the misclassification of workers as independent contractors rather than employees is a very serious problem, depriving federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.”[3] The Department of Labor has previously stated that “the misclassification of employees as independent contractors” is “one of the most serious problems facing affected workers, employers and the entire economy.”[4] In fact, studies have estimated that between ten and thirty percent of employers misclassify workers, resulting in millions of workers being mislabeled as independent contractors.[5]
In addition to failing to address the growing issue of worker misclassification, the practical problems created by the Proposed Rule are wide-ranging. The slipshod cost-benefit analysis included in the Proposed Rule singularly focuses on the cost of its proposal to companies, while utterly ignoring the financial ramifications for workers and the resulting economic tumult.[6] The Proposed Rule is a last-minute, results-oriented gift of an anti-worker Department to so-called “gig economy” employers like Uber, Lyft, and DoorDash, many of which fail any traditional misclassification test. The Department’s ultimate aim of aiding businesses in more easily classifying workers as independent contractors is especially evidenced by the two factors that the Department chose to prioritize in its proposed revised test, both of which the Department has reinterpreted to focus on the worker, not the employer.[7] First, the control analysis has historically been, and should continue to be, on the control that the employer has over the employee, not that the employee has over their work. Second, contrary to the analysis that the Department proposes, the “opportunity for profit or loss” factor should focus on whether the employer structures an environment that allows for profit or loss and what strictures it might impose.[8] The Department had a menu of simple tests to choose from; it just chose the most pro-employer option, ignoring key factors that courts have historically recognized protect workers against misclassification.
Moreover, the Proposed Rule was apparently designed to lend support to arguments raised frequently by defendants in misclassification cases, particularly in the gig economy, who have recently been seeking to undermine decades of precedent on employment status under federal (and state) law. The Proposed Rule is a clear effort to validate these arguments, even though they have been generally rejected in the courts. See, e.g., Razak, 951 F.3d at 148 (vacating district court’s grant of summary judgment to Uber on drivers’ FLSA misclassification claim); The People v. Uber Technologies, Inc. et al., Case Nos. A160701, A160706, 2020 WL 6193994, at *1 (Cal. Ct. App. Oct. 22, 2020) (affirming trial court’s grant of preliminary injunction to California Attorney General and requiring Uber and Lyft to reclassify their drivers as employees under California “ABC” test); Matter of Vega, 149 N.E.3d 401 (N.Y. 2020) (finding Postmates couriers are employees under New York unemployment statute).
At a time when many states are moving in the opposite direction of the Proposed Rule, reforming their employee classification tests so that workers are more likely to be classified as employees,[9] the Department has taken the opposite approach by announcing a Proposed Rule that makes it less likely that workers will be classified as employees. The Proposed Rule flies in the face of the pro-worker legislative intent and goals of the FLSA. The policy choices do not match the statutory policy of a broad definition of employer, which has been repeatedly affirmed through decades of precedent. See United States v. Rosenwasser, 323 U.S. 360, 362-63 (1945); Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992). This broad definition was intentionally adopted to maximize overtime and minimum wage protections. See Antenor v. D & S Farms, 88 F.3d 925, 933 (11th Cir. 1996) (“Indeed, the ‘suffer or permit to work; standard was developed to assign responsibility to businesses that did not directly supervise putative employees.”). The Proposed Rule also undermines the original purpose of the FLSA as a remedial statute designed to address worker exploitation. Usery, 527 F.2d at 1310. The FLSA was “designed to defeat rather than implement contractual arrangements,” especially for workers who are “selling nothing but their labor.” Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1545 (7th Cir. 1987). The California Supreme Court recently confirmed this principle in Dynamex, finding that “given the intended expansive reach of the suffer or permit to work standard as reflected by its history, along with the more general principle that wage orders are the type of remedial legislation that must be liberally construed in a manner that serves its remedial purposes [], the suffer or permit to work standard must be interpreted and applied broadly.” Dynamex, 232 Cal.Rptr.3d at 416 (emphasis added, internal citations omitted).
Though NELA advocates for a simpler test that yields consistent and predictable results, the Proposed Rule is not it. Instead the Proposed Rule does not use the correct cost-benefit analysis, it undermines the pro-worker goals of the FLSA, it is contrary to precedent, and it creates far more problems than it solves.
I. The Cost-Benefit Analysis Included in the Proposed Rule Focuses Solely on Companies, Not Workers.
The cost-benefit analysis included in the Proposed Rule, which the Department argues is central to its decision to implement such a misclassification test, completely ignores the costs to workers and the loss of tax revenue that the proposal would incur.[10] This (presumably intentional) oversight alone renders the Proposed Rule arbitrary and capricious.[11] Specifically, the Proposal ignores the massive cost to misclassified workers who will be deprived of minimum wage and overtime protections, employee benefits and Social Security contributions, not to mention critical protections under federal and state civil rights and unemployment laws. The Department cannot simply ignore this cost to workers by providing such meager economic analysis of a Proposed Rule that potentially upends the employment relationship for millions of workers.[12]
Additionally, the Department’s analysis does not account for reduced payroll taxes for the Federal Government and the States. The federal government has previously estimated that more than one billion dollars is lost in tax revenue each year due to existing worker misclassification.[13] This lost revenue would only grow under the employment test adopted in the Proposed Rule.[14] Similarly, there are likely to be significant costs to the Social Security and Medicare Trust Funds that do not seem to have been accounted for. The Proposed Rule, with its employer-friendly result, will only serve to penalize companies that properly classify their workers as employees by requiring them to incur the costs of providing such benefits to their workers. Employers already have many incentives to misclassify workers, and this Proposed Rule only provides such scofflaw employers with more cover. It also heightens economic pressure on complying competitors to shirk labor protections themselves.
II. The Proposed Rule Ignores Statutory Text and Binding Precedent Defining Employment Broadly.
The Proposed Rule collapses the broad, multi-factor economic reality test into a narrow, control-dominated inquiry resembling the common law agency analysis that Congress and the Supreme Court have long rejected.
As a remedial statute meant to protect workers from oppressive working conditions, the FLSA defines the employment relationships it governs broadly. Under the Act, an “employer” is “any person acting directly or indirectly in the interest of an employer in relation to an employee,” 29 U.S.C. § 203(d); an “employee” is “any individual employed by an employer,” id. § 203(e)(1); and the term “employ” is defined to “include to suffer or permit to work,” id. § 203(g). These expansive definitions of employment are meant to reach a wide range of workers and work relationships. Indeed, as the Supreme Court has observed, “[a] broader more comprehensive coverage of employees . . . would be difficult to frame.” Rosenwasser, 323 U.S. at 362-63; Darden, 503 U.S. at 326 (noting that the “striking breadth” of the Act’s definition of “employ” “stretches the meaning of ‘employee’ to cover some parties who might not qualify as such under a strict application of traditional agency law principles”).
The FLSA’s use of the “suffer or permit” standard to define an employment relationship was no accident of history. Congress intentionally adopted this broad definition to maximize the reach of the FLSA’s overtime and minimum wage protections. Borrowed from state child labor statutes, the “suffer or permit” standard was designed to expand the definition of employment beyond the traditional common law agency and control framework. See Antenor, 88 F.3d at 933. By adopting the “suffer or permit” standard, Congress squarely rejected the prevailing common law control test, making clear that it should not apply in the FLSA context. See Walling v. Portland Term. Co., 330 U.S. 148, 150-51 (1947) (explaining that common law employee categories “are not of controlling significance” under the FLSA because the Act “contains its own definitions, comprehensive enough” to reach many persons and relationships that previously “were not deemed to fall within an employer-employee category”); Salinas v. Comm. Interiors, Inc., 848 F.3d 125, 137 (4th Cir. 2017) (“[R]eliance on common-law agency principles does not square with Congress’s intent that the FLSA’s definition of ‘employee’ encompass a broader swath of workers than would constitute employees at common law.”).
Recognizing Congress’s policy choice in adopting the “suffer or permit” standard, the Supreme Court long ago adopted the multi-factor economic reality test to give the statute the liberal construction Congress intended. Rutherford Food Corp. v. McComb, 331 U.S. 722, 730-31 (1947); Goldberg v. Whitaker House Co-op., Inc., 366 U.S. 28, 33 (1961). Under the economic reality test, courts determine a worker’s employment status by assessing whether the worker “is economically dependent on the business to which he renders service or is, as a matter of economic reality, in business for himself.” Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298, 304 (4th Cir. 2006) (quoting Henderson v. Inter–Chem Coal Co., 41 F.3d 567, 570 (10th Cir. 1994)). Instead of narrowly focusing on “a hiring party’s right to control the manner and means by which a product is accomplished,” as the common law control test that Congress rejected does, Darden, 503 U.S. at 323, the economic reality test poses a broader inquiry, analyzing six interrelated factors that tend to shed light on whether a worker economically depends on his or her putative employer. Lauritzen, 835 F.2d at 1534.
Importantly, since the inception of the economic reality test, the Supreme Court has been clear that “no one [factor] is controlling nor is the list [of factors] complete.” United States v. Silk, 331 U.S. 704, 716 (1947). The existence of an employment relationship “does not depend on [] isolated factors but rather the circumstances of the whole [work] activity.” Rutherford, 331 U.S. at 730. The economic reality inquiry therefore cannot be answered without “employ[ing] a totality-of-the-circumstances approach.” Baker v. Flint Eng’g & Const. Co., 137 F.3d 1436, 1441 (10th Cir. 1998); Superior Care, 840 F.2d at 1059 (“No one of these factors is dispositive; rather, the test is based on a totality of the circumstances.”); Bartels v. Birmingham, 332 U.S. 126, 130 (1947) (“It is the total situation that controls.”).
Contrary to these legislative and judicial mandates, the Department’s Proposed Rule seeks to flatten this expansive, totality-of-the-circumstances test by elevating two “core factors”—control and the opportunity for profit or loss—above the rest. Under the Department’s proposal, “where the two core factors align, the bulk of the analysis is complete,” and “their combined weight is substantially likely to outweigh the combined weight of the other factors.” 85 Fed. Reg. at 60618. The Department advises that, in such scenarios, interested parties “may approach the remaining factors and circumstances with skepticism.” Id. at 60618. While the Proposed Rule does not go so far as to say that the “other factors” may be skipped entirely, it does tell courts, businesses, and workers that in many cases employment status “can be largely determined … by [answering the] two simple questions” posed by the core factors. Id. at 60621. Instead of “employ[ing] a totality-of-the-circumstances approach,” Baker, 137 F.3d at 1441, an approach that courts have relied on in some form or another for 70 years, the Proposed Rule sanctions an abridged analysis that cannot be squared with text or precedent. See Rutherford, 331 U.S. at 730; Bartels, 332 U.S. at 130.
What is even more concerning is the fact that one of the two factors the Department seeks to privilege is the control factor. By affording the control factor greater weight in the economic reality analysis, the Department slides back toward the common law agency test that the FLSA’s “suffer or permit” standard was meant to depart from. When it enacted the FLSA, Congress rejected the common law test in favor of a broader employment definition. Since 1947, the Supreme Court has held that “common law employee categories . . . are not of controlling significance” in the FLSA context, Walling, 330 U.S. at 150-51, and circuit courts have cautioned against “overemphasiz[ing] the right-to-control factor in the [economic reality] analysis.” Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376, 1384 (3d Cir. 1985); Brennan v. Partida, 492 F.2d 707, 709 (5th Cir. 1974) (“[I]t is erroneous to focus on a single factor, such as control, and thereby fail to consider the entire circumstances of the work relationship.” (citing Rutherford, 331 U.S. at 730)). And yet, in its Proposed Rule, the Department elevates a version of the control test to a near-controlling stature. See 85 Fed. Reg. at 60618. This heightened emphasis on control represents a reversal from the comprehensive standard Congress adopted. See 29 U.S.C. § 203(g); Walling, 330 U.S. at 150-51; Rutherford, 331 U.S. at 730. The Department is engaging in Lochner-esque time travel in contravention of Supreme Court precedent.
III. The Proposed Rule Overemphasizes Both the Control and Opportunity for Loss or Profit Factors, Thus Distorting the Economic Dependence Inquiry.
The Department’s proposal to assign greater weight to the control and opportunity for loss or profit factors of the economic reality test would undermine decades of FLSA jurisprudence, in which courts have steadfastly refused to adopt what the Department proposes here: a rigid application of the test. Rather, the ultimate inquiry in an FLSA misclassification case has (correctly) been focused on “the degree of dependence of alleged employees on the business with which they are connected. It is dependence that indicates employee status. Each test must be applied with that ultimate notion in mind.” Usery, 527 F.2d at 1311.
The economic reality factors are simply inquiries that courts have used to arrive at this ultimate result. “No one of [the economic reality factors] can become the final determinant, nor can the collective answers to all of the inquiries produce a resolution which submerges consideration of the dominant factor—economic dependence.” Id. See also Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir. 2008) (“No single factor is determinative. Rather, each factor is a tool used to gauge the economic dependence of the alleged employee, and each must be applied with this ultimate concept in mind.”) (emphasis in original) (internal citation omitted); Scantland, 721 F.3d at 1312 (the economic realities factors “serve as guides, [and] the overarching focus of the inquiry is economic dependence”); Azad v. United States, 388 F.2d 74, 76 (8th Cir. 1968) (“It is settled that . . . no one facet of the [work] relationship is generally determinative.”); Solis v. Cascom, Inc., Case No. 3:09–cv–257, 2011 WL 10501391, at *4 (S.D. Ohio Sept. 21, 2011) (“There is no exhaustive list of factors, and whether a particular case involves an employment relationship is not to be decided on th[e] basis of any one particular factor, but ‘upon the circumstances of the whole activity.’” (quoting Rutherford, 331 U.S. at 730)).
The Department’s proposal to weigh two factors above the others flies in the face of the balanced and circumstance-specific approach that the economic realities test has historically taken. See Goldberg, 366 U.S. at 33 (the economic realities of the worker’s relationship with the employer control, rather than any technical concepts used to characterize that relationship); see also Cascom, 2011 WL 10501391, at *4; Scantland, 721 F.3d at 1312 (the economic realities factors “serve as guides, [and] the overarching focus of the inquiry is economic dependence”); Usery, 527 F.2d at 1311 (The economic realities factors “are aids—tools to be used to gauge the degree of dependence of alleged employees on the business with which they are connected. It is dependence that indicates employee status. Each test must be applied with that ultimate notion in mind.”); Cromwell v. Driftwood Elec. Contractors, Inc., 348 Fed. App’x 57, 59 (5th Cir. 2009) (describing the five factors it identifies as “non-exhaustive”); Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1043 (5th Cir. 1987) (same). It risks allowing the test to dictate the result by emphasizing certain factors over what should be the “ultimate inquiry”: the worker’s economic dependence on the putative employer.
IV. The Proposed Rule Flips the “Control” Inquiry on Its Head to the Detriment of Workers.
The Proposed Rule shifts the focus of the control inquiry from the degree of control the putative employer has over the worker’s work to the degree of control the worker has over his or her own work. Although the Department downplays the impact of this change, it cannot deny that its proposal casts the control inquiry differently than the Supreme Court, courts of appeals, and the Department have in the past. The purpose behind this recasting is clear: The Department intends to make it easier for businesses to classify workers who exercise some discretion over their work as independent contractors excluded from the FLSA’s protections.
For decades, the focus of the control inquiry has been on the extent of the putative employer’s control over the work performed. The Supreme Court has consistently approached the control question in this way, see Goldberg, 366 U.S. at 33 (analyzing management’s control over piece rates and its ability to expel workers for substandard work or for failing to comply with regulations); Rutherford, 331 U.S. at 730 (considering the extent to which the plant’s managing official “kept close touch on the operation”), and federal appellate courts have as well. See, e.g., Razak, 951 F.3d at 145 (assessing “the degree of the alleged employer’s right to control the manner in which the work is to be performed”); Scantland, 721 F.3d at 1315 (focusing on the alleged employer’s control over plaintiffs’ tasks, pay, hours, schedule, quality of work, and ability to earn additional income from customers); Lauritzen, 835 F.2d at 1536 (“The defendants exercise pervasive control over the operation as a whole.”). To be sure, worker control plays a role in the analysis, Schultz, 466 F.3d at 305 (describing the issue as the “degree of control that the alleged employer has in comparison to the control exerted by the worker”), but the inquiry begins with and centers on the control the alleged employer exerts over the work at issue.
The Department’s Proposed Rule turns away from the employer-focused approach that courts and the Department have historically relied on and instead adopts a control test that focuses on the “nature and degree of the individual [worker]’s control over the work.” 85 Fed. Reg. at 60639. The Department acknowledges this change in a footnote, but ultimately writes it off as unimportant. 85 Fed. Reg. at 60612 n.34. (“Many courts articulate this factor as the degree of control over the work by the potential employer as opposed to by the worker. This distinction, however, is of no consequence” because “the regulatory text and accompanying discussion make clear” that both aspects are considered.).[15] Notwithstanding the Department’s assurances to the contrary, this change is consequential. By framing the control inquiry this way, the Proposed Rule encourages courts and businesses to focus their attention first and foremost on the aspects of a job that workers exert control over. The worker’s authority and discretion over the work, however meager, drives the analysis, while the putative employer’s control is relegated to a secondary, comparative role. This shift in focus defies decades of precedent and signals that the employer side of the employment relationship is now of lesser importance to the employee status analysis. See Goldberg, 366 U.S. at 32-33; Scantland, 721 F.3d at 1315; Superior Care, 840 F.2d at 1060. Courts have rejected efforts by gig economy companies like Uber and Postmates to focus on the employee’s work and not the employer’s control of the work. See, e.g., Razak, 951 F.3d at 145-46; Matter of Vega, 149 N.E. 3d at 405 (“The touchstone of the analysis is whether the employer exercised control over the results produced by the worker or the means used to achieve the results.”).
The Proposed Rule also alters another key aspect of the control test by excluding from the analysis evidence of putative employer requirements that workers comply with specific legal obligations, health and safety standards, insurance mandates, or quality control standards. 85 Fed. Reg. at 60613. The Department claims that case law supports this approach but only offers two unpublished decisions that gave the issue cursory treatment, Iontchev v. AAA Cab Serv., Inc., 685 F. App’x 548, 550 (9th Cir. 2017); Chao v. Mid-Atl. Installation Servs., Inc., 16 F. App’x 104, 106 (4th Cir. 2001), and another inapposite decision. Mr. W Fireworks, 814 F.2d at 1048 (determining that district court erred when it found that the alleged employer’s work requirements were mandated by state law). The majority view among courts, however, is that evidence of a business compelling its workers to comply with certain legal obligations or customer requirements is probative of control over the work relationship. See Scantland, 721 F.3d at 1316 (alleged employer’s quality control measures were relevant to the control analysis); Narayan v. EGL, Inc., 616 F.3d 895, 902 (9th Cir. 2010) (work requirements imposed by putative employer to meet DOT regulations and customer requirements were evidence of control consistent with an employment relationship). Courts have routinely held that employer guidelines put in place to ensure that workers conform with the law or follow safety regulations constitute control over employees. See, e.g., Narayan, 616 F.3d at 902; Morse v. Mer Corp., 2010 WL 2346334, at *3 (S.D. Ind. June 4, 2010) (finding that workers were employees, despite Defendant’s attempt to downplay its control by arguing that many of the rules were imposed to protect the Plaintiffs and to ensure compliance with the law); The People, 2020 WL 6193994, at *18 (rejecting Uber’s argument that its control of drivers was compelled by public safety regulations and noting “it does not follow that legally compelled practices are irrelevant to an assessment of the scope of their normal course of business.”). Courts have also rejected employer arguments that control exerted to meet customer requirements should be treated differently from other forms of control. See Hurst v. Buczek Enterprises, LLC, 870 F. Supp. 2d 810, 826 (N.D. Cal. 2012); Molina v. S. Florida Exp. Bankserv, Inc., 420 F. Supp. 2d 1276 (M.D. Fla. 2006) (“Any employer’s business is, in essence, directed by the needs of its customers.”). In Scantland, the Eleventh Circuit explained why such control evidence is relevant:
721 F.3d at 1316.
The Proposed Rule disregards this precedent and instead encourages courts to ignore evidence of employer control, no matter how probative, based on the employer’s professed reasons for exerting control. This approach does precisely what the Eleventh Circuit cautioned against: it allows employers to escape FLSA’s requirements by citing business needs. If the control test is about who — the potential employer or the worker — “exercises substantial control over key aspects of the performance of the work,” then the reasons behind the exercise of control should not matter. 85 Fed. Reg. at 60639. The Department’s proposed carve-out for evidence that generally weighs in favor of employee status is a giveaway to employers and reveals much about the goals of this rulemaking.
V. The Proposed Rule Diminishes or Eliminates the Role of Other Critical Factors.
The Department contends that there is limited probative value to whether the work performed is integral to the employer’s business. In fact, the opposite is true, as this factor has historically been critical to determining whether a worker is an employee or independent contractor. See DialAmerica Mktg., 757 F.2d at 1385 (“[W]orkers are more likely to be ‘employees’ under the FLSA if they perform the primary work of the alleged employer”); Rutherford, 331 U.S. at 729 (workers were employees in part because their work was “part of the integrated unit of production”). Courts have found the “integral” factor to be a key part of the economic realities analysis. See Snell, 875 F.2d at 811 (holding that work performed by cake decorators “is obviously integral” to the business of selling cakes which are custom decorated); Lauritzen, 835 F.2d at 1537-38 (“It does not take much of a record to demonstrate that picking the pickles is a necessary and integral part of the pickle business.”); Shultz v. Mistletoe Express Service, Inc., 434 F.2d 1267, 1270 (10th Cir. 1970) (“The terminal operators are an integral part of the Mistletoe transportation business”); Superior Care, 840 F.2d at1058 (“[T]he services rendered by the nurses constituted the most integral part of Superior Care’s business, which is to provide health care personnel on request”). The rationale underlying courts’ emphasis on this factor is obvious: employers should not be permitted to escape their obligations by classifying individuals who perform work that is critical to the business as independent contractors.
Determining workers’ investments in the business – and specifically, comparing workers’ investments to the employer’s investments–has also been a critically important factor in the economic realities test analysis. This analysis must be done in the context of the working relationship; if the worker’s investment is relatively minor, that would suggest that the worker and the employer are not on similar footings and that the worker may be economically dependent on the employer. See Baker, 137 F.3d at1442 (comparing rig welders’ investment to employer’s “hundreds of thousands of dollars of equipment at each work site” did not indicate that the rig welders were independent contractors); see also Snell, 875 F.2d at 810-11 (comparing cake decorators’ $400 investment in their tools to employers’ business investments, including paying for rent, advertising, operating expenses, and labor, in addition to supplies and decorating equipment); Sakacsi v. Quicksilver Delivery Systems, Inc., 2007 WL 4218984, at *7 (M.D. Fla. Nov. 28, 2007) (holding relative investment weighed in favor of employee status where courier service’s cost for purchasing software used to scan deliveries into system far outweighed the costs to drivers for the purchase of cars, gas, maintenance, and automobile insurance); Clincy v. Galardi South Enterprises, Inc., 808 F. Supp. 2d 1326, 1346-47 (N.D. Ga. 2011) (relative investment weighed in favor of employee status where dancer’s $50,000 annual investment related to her work did not exceed the nightclub’s investment in its business); Mr. W. Fireworks, 814 F.2d at1053 (relative investment weighed in favor of employee status where “[b]ut for [defendant’s] provision of all costly necessities, [plaintiffs] could not operate”).
Discounting this important piece of the economic reality test, as the Department has done here, plainly makes it easier for businesses to require workers to make significant financial investments without risking a finding of employee status.
Purporting to eliminate confusion and duplication, the Proposed Rule downgrades and narrows the permanence and exclusivity inquiry. Like many of the other proposed changes, this proposal will only weaken the analytical utility of the economic realities test. Courts have generally used the permanence factor to assess the length and character of a worker’s relationship with a potential employer. See, e.g., Lauritzen, 835 F.2d at 1537-38 (migrant farmers work permanently and exclusively for the duration of a harvest season and often return year after year); DialAmerica Mktg., 757 F.2d at 1384-85 (home researchers were not “transfer[ing] their services from place to place, as do independent contractors”); Schultz, 466 F.3d at 309 (assessing the length of security agents’ service). Evidence of an enduring relationship between a worker and a business goes to the heart of the economic dependence inquiry. An individual who works for the same entity for an extended period of time, on a regularly recurring or exclusive basis, is more likely to be economically dependent on that entity for continued employment. Id. By relegating permanence to the list of secondary “other factors” and by eliminating any consideration of exclusivity in the permanence analysis, despite its natural and widely-recognized relevance to the employment inquiry, the Department’s proposal hamstrings what has been a useful analytical tool for gauging economic dependence. See Usery, 527 F.2d at 1311-12 (“The [] tests are aids—tools to be used to gauge the degree of dependence of alleged employees on the business with which they are connected. It is dependence that indicates employee status. Each test must be applied with that ultimate notion in mind.”). Misclassifying employers alone stand to benefit from this change.
Another important analytical tool the Department seeks to constrict and demote is the special skill or initiative factor. Under this prong of the economic reality analysis, courts typically assess whether workers are required to use specialized skills, beyond those typically acquired through occupational and technical training, in an independent way to perform their job. See Superior Care, 840 F.2d at 1060 (“The nurses in the present case possess technical skills but nothing in the record reveals that they used these skills in any independent way.”); Lauritzen, 835 F.2d at 1537 (“Skills are not the monopoly of independent contractors.”); Mr. W Fireworks, 814 F.2d at 1053 (“[R]outine work which requires industry and efficiency is not indicative of independence and nonemployee status”). A worker who does not exercise any independent business initiative or judgment is more likely to be economically dependent on the business for which he works. Id. As with the permanence and integral-part factors, the Department seeks to relegate the skill inquiry to a lower tier of factors that only matter when the “core” factors point in opposite directions. See 85 Fed. Reg. at 60618. The Department also seeks to redirect the factor’s focus away from a worker’s business initiative and independence, opting instead to assess the “amount of [generic] skill required for the work.” Id. at 60639. These changes muddle, dilute, and shroud the inquiry. It is clear that this factor, which often favors employee status, does not suit the Department’s purposes. Rather than simply eliminate it, the Department has elected to strip the factor of its meaning and bury what is left of it.
VI. The ABC Test Offers a Simplified and Streamlined Analysis of the Independent Contractor Misclassification Inquiry
The purpose of the Proposed Rule, according to the Department, is to simplify and streamline independent contractor tests, which currently vary by jurisdiction and are “too complex”.[16] But the Proposed Rule would in fact do the opposite, sowing more confusion, rather than minimizing it. As discussed above, for decades, courts have employed the multi-factor economic realities test to analyze a worker’s classification under the FLSA, with no one factor being given greater weight than any other. See supra Sec. 2. The Proposed Rule would upend an entire line of FLSA jurisprudence, leaving businesses, courts, and advocates scrambling to understand the new standard, which has been offered by the Department without any bright-line rules or examples of practical application.
If the Department is truly seeking a more simplified test for independent contractor misclassification, it should adopt the ABC test. In fact, the Department itself acknowledges that the ABC test is “a simpler, more structured test than a multifactor balancing test and would likely lead to more consistent classification outcomes.” 85 Fed. Reg. at 60636. Yet the Department rejects adopting such a test because it is “stringent” and would purportedly have a disruptive impact on certain industries.[17] This argument is directed at the wrong problem. In actuality, the problem is not that the ABC test is “too stringent”, but rather that companies are rampantly misclassifying their workers as independent contractors at unprecedented rates, with little consequence. See, e.g., David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Harvard Univ. Press, Feb. 3, 2014); David Weil, Enforcing Labour Standards in Fissured Workplaces: The US Experience, 22 Econ. & Lab. Rel. Rev. 2, at 33-54 (July 2011). As the California Supreme Court recognized in adopting an ABC test in 2018, this misclassification is caused by an unabated, continued manipulation of the economic reality test factors. See Dynamex, 232 Cal.Rptr.3d at 416 (holding that the ABC test “will provide greater clarity and consistency, and less opportunity for manipulation, than a test or standard that invariably requires the consideration and weighing of a significant number of disparate factors on a case-by-case basis”).
Not only would a nationwide ABC test rein in the misclassification of workers who should already be classified as employees, and provide more consistent classification decisions, but an ABC test is more faithful to the broad, remedial purpose of the FLSA. At its core, the FLSA is a remedial statute designed to address worker exploitation. Usery, 527 F.2d at 1310. Courts have thus “consistently construed the [FLSA] ‘liberally to apply to the furthest reaches consistent with congressional direction.’” Tony and Susan Alamo Found., 471 U.S. at 296. The FLSA was “designed to defeat rather than implement contractual arrangements,” especially for workers who are “selling nothing but their labor.” Lauritzen, 835 F.2d at1545. As the California Supreme Court recognized in Dynamex, the remedial purpose of any employment legislation must always be taken into account in the classification analysis. Dynamex, 232 Cal.Rptr.3d at 416.
The Department also contends that an ABC test would be “unduly restrictive and disruptive to the economy”. This fear is not borne out by the experiences of jurisdictions that have implemented the ABC test. In Massachusetts, for example, the legislature enacted the current version of its ABC test in 2004, and employers across the state have had no trouble staying in business and remaining competitive in the last two decades. Many other states, including New Jersey, Illinois, Connecticut, and Hawaii, use an ABC test for certain purposes, and have similarly suffered no disruption to their economies.
Moreover, contrary to the Department’s argument, there is no bar on adopting the ABC test, and it can be used for the FLSA. The Department argues that it cannot adopt an ABC test because the Supreme Court has purportedly held that an “economic reality” test must be used.[18] Yet none of the cases on which the Department relies suggest that the multi-factor test is the only way to test “economic reality” or that the ABC test ignores “economic reality”. Rather, the Supreme Court used the phrase “economic reality” to distinguish employment tests under the NLRA and FLSA from “technical concepts pertinent to an employer’s legal responsibility to third persons for the acts of his servants,” Silk, U.S. 331 U.S. at 713; in other words, tests related to vicarious liability of agents. The Supreme Court did not require the use of the current multi-factor test for the FLSA, and there is no statutory requirement for such a test. Furthermore, California adopted the ABC test as a refinement of prior precedent under multi-factor tests, see S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 357 (Cal. 1989); Martinez v. Combs, 49 Cal.4th 35, 64 (2010); Ayala v. Antelope Valley Newspapers, Inc., 59 Cal.4th 522 (2014), which the Department could likewise implement here. In any event, the Department’s proposal itself upends the long-standing multi-factor “economic reality” test; but its reconfiguration of the factors is heavily weighted toward concluding that workers are independent contractors.
VII. The Proposed Rule Will Make It More Difficult for Workers to Address Misclassification
It is already exceedingly difficult for misclassified workers to challenge misclassification. The Department’s Proposed Rule only makes this problem worse.
Misclassification cases are often complex, particularly as collective and class actions. The multi-factor analysis is intensely factual. Hundreds of attorney hours are required to prepare a case, including many hours interviewing workers. These cases are made more difficult with the widespread use of arbitration agreements for workers classified as independent contractors. Many of these agreements include class action waivers that require cases to be arbitrated individually, making them even more costly and labor-intensive. See Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1623 (2018).
Further adding to the complexity of misclassification cases, many states are legislating in a different direction than the Department’s proposal, reforming the test for misclassification so that workers are more likely to be recognized as employees. See, e.g., Va. Code § 40.1-28.7:7; Cal. Labor Code § 2750.3 (2020); Hargrove v. Sleepy’s, LLC, 220 N.J. 289 (2015). Instead of seeking to benefit employers (as the Department does here), these states have determined that the societal cost of misclassification to workers and their families and to state revenue, is significant, and they have adopted tests that are more employee-friendly. As sophisticated practitioners often file cases alleging violations of both the FLSA and state law, courts in these states are forced to employ two divergent tests and may reach different results under state and federal law, within the same employment relationship. In addition to being a challenge for employees and practitioners, this inconsistency also poses a problem for employers who have businesses that cross over state lines.
The number of attorneys who are able and willing to take on these complex and labor-intensive cases is small. NELA and its state and local affiliates have a membership of more than 4,000 attorneys. Of that total, only about 300 attorneys participate in the national organization’s wage and hour practice group, and fewer than 150 members attend NELA’s biannual wage and hour seminar. These numbers can serve as an approximation of the number of experienced practitioners who regularly take on representation of wage and hour cases.
The Department of Labor also takes on relatively few of these cases. In FY2019, for instance, the DOL Wage and Hour Division had only 18,844 registered complaints in total, a historically low number. Wage and Hour Division Fiscal Year Data, https://www.dol.gov/agencies/whd/data/charts/all-acts (last visited Oct. 19, 2020). Only a fraction of these complaints likely involved misclassification issues.
Misclassification is a widespread problem that requires the concerted efforts of government and private attorneys to correct. National and state studies have estimated that 10 to 30 percent of employers misclassify their employees as independent contractors. National Employment Law Project, Independent Contractor Misclassification Imposes Huge Costs, at 2 (Sept. 2017) (citing Department of Labor, Government Accountability Office, and state agency reports). If these estimates are accurate, this means that millions of American workers are misclassified. Id. Despite these staggering misclassification numbers, only 6,780 FLSA cases were filed in 2019. Seyfarth Shaw LLP, Annual Workplace Class Action Litigation Report: 2020 Edition (Jan. 2020). And only a small number of these cases involved misclassification issues. See 85 Fed. Reg. at 60632 (estimating that 7 percent of the federal FLSA cases filed in 2019 involved misclassification issues). Comparing these numbers reveals the mismatch: there are not enough attorneys taking on these cases.
Any rule that makes it more difficult (or that appears to make it more difficult) for workers to be classified as employees will make it less likely that attorneys take on these already demanding cases.
VIII. Conclusion
Though the Department claims that the goals of the Proposed Rule are to simplify and clarify the FLSA misclassification test, the proposal achieves neither. The Proposed Rule does not use the correct cost-benefit analysis, purposely ignoring the economic havoc that it would wreak on workers and annual tax revenues. It also flies in the face of the pro-worker intent of the FLSA, which was created as a remedial measure with a broad scope for the purpose of protecting workers. The Proposed Rule breaks from decades of precedent, weighing two employer-friendly factors above the others. For the foregoing reasons, we urge the Department to abandon this anti-worker Proposed Rule and instead adopt a test that fairly and adequately addresses the widespread problem of worker misclassification.
Sincerely yours,
Laura M. Flegel
National Employment Lawyers Association
Legislative & Public Policy Director
[1] “In summary, the Department believes the current multifactor economic reality test suffers because the analytical lens through which all the factors are to be filtered remains inconsistent; there is no clear principle regarding how to balance the multiple factors; the lines between many of the factors are blurred; and these shortcomings have become more apparent in the modern economy. The result is legal uncertainty that obscures workers’ and businesses’ respective rights and obligations under the FLSA. Such uncertainty is especially acute when it comes to the growing number of more flexible and nimble work relationships. While such relationships benefit workers and businesses alike, they also lead to complex questions about a worker’s classification under the FLSA, which are difficult to answer due in part to the shortcomings described above.” Independent Contractor Status Under the Fair Labor Standards Act, 85 Fed. Reg. 60600, 60636 (Sept. 25, 2020).
[2] See, e.g., Walling v. Portland Term. Co., 330 U.S. 148, 150-51 (1947); Tony and Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 296 (1985).
[3] Citing United States Department of Labor, Wage & Hour Division, Misclassification of Employees as Independent Contractors <https://www.dol.gov/whd/workers/misclassification/> (as of Apr. 30, 2018); California Department of Industrial Relations, Worker Misclassification <http://www.dir.ca.gov/dlse/ worker_misclassification.html> (as of Apr. 30, 2018); see also National Employment Law Project, Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries (July 2015) pp. 2-6 <http://nelp.org/content/uploads/Independent-Contractor-Costs.pdf> (as of Apr. 30, 2018).
[4] Misclassification of Employees as Independent Contractors, U.S. Dep’t of Lab., https://www.dol.gov/whd/workers/misclassification (last visited Sept. 10, 2018), archived at https://perma.cc/54PM-88EV. This language originally appeared on the Department of Labor’s website. See https:// web.archive.org/web/20161219231838/https://www.dol.gov/whd/workers/misclassification, archived at https://perma.cc/54ZN-QRLF but has since been removed.
[5] Nat’l Emp’t Law Project, Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries 1–2 (July 2015), http:// www.nelp.org/content/uploads/Independent-Contractor-Costs.pdf, archived at https://perma.cc/G3FC-829L; Francoise Carré, EPI Briefing Paper #403: (In)Dependent Contractor Misclassification 1, 10 (Econ. Pol’y Inst. June 8, 2015), http:// www.epi.org/files/pdf/87595.pdf, archived at https://perma.cc/E2SL-TBV5.
[6] 85 Fed. Reg. at 60627; “This rule could decrease employers’ tax liabilities and increase independent contractors’ take-home compensation. However, there are costs to independent contractors if they become unemployed or injured or ill on the job because they no longer are protected, unless they purchase their own private insurance. The Department did not attempt to quantify the cost of changes in coverage or whether the net effect is a benefit or cost to the worker.” 85 Fed. Reg. at 60628.
[7] The Department’s overemphasis on the “control” factor tips the balance in favor of employers. See Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1313 (11th Cir. 2013) (“‘Control is only significant when it shows an individual exerts such a control over a meaningful part of the business that she stands as a separate economic entity.’”) (quoting Usery v. Pilgrim Equip. Co., Inc., 527 F.2d 1308, 1312-13 (5th Cir. 1976)). Indeed, the “control” factor should not play an oversized role in the analysis of whether a worker is an employee or an independent contractor; cases must not be evaluated based on the control factor alone. See Brock v. Superior Care, Inc., 840 F.2d 1054, 1059 (2d Cir. 1988) (“No one of these factors is dispositive; rather, the test is based on a totality of the circumstances.”). Similarly, the Department has misinterpreted and overemphasized the “opportunity for profit or loss” factor, incorrectly asserting that workers responding to employers’ needs is evidence of workers taking initiative to maximize profits. See Dole v. Snell, 875 F.2d 802, 811 (10th Cir. 1989) (cake decorators’ “earnings did not depend upon their judgment or initiative, but on the [employer’s] need for their work”); see also Scantland, 721 F.3d at 1316-17 (“Plaintiffs’ opportunity for profit was largely limited to their ability to complete more jobs than assigned, which is analogous to an employee’s ability to take on overtime work or an efficient piece-rate worker’s ability to produce more pieces.”).
[8] See, e.g., Razak v. Uber Technologies, Inc., 951 F.3d 137, 147 (3d Cir. 2020) (vacating grant of summary judgment in Uber’s favor, in part because factfinder could conclude that Uber, not drivers, controlled drivers’ opportunity for profit).
[9] See, e.g., Va. Code § 40.1-28.7:7; Cal. Labor Code § 2750.3 (2020); Hargrove v. Sleepy’s, LLC, 220 N.J. 289 (2015).
[10] “This Department believes that it has chosen the least burdensome but still cost-effective methodology to clarify its interpretation of the FLSA’s distinction between employees and independent contractors. Although the proposed regulation would impose costs for regulatory familiarization, the Department believes that its proposal would reduce the overall burden on organizations by simplifying and clarifying the analysis for determining whether a worker is classified as an employee or an independent contractor under the FLSA. The Department believes that, after familiarization, this rule will reduce the time spent by organizations to determine whether a worker is an independent contractor. Additionally, revising the Department’s guidance to provide more clarity could promote innovation and certainty in business relationships.” 85 Fed. Reg. at 60623; 60638.
[11] See, e.g., Bus. Roundtable v. S.E.C., 647 F.3d 1144, 1151 (D.C. Cir. 2011) (in a case where petitioner was represented by now-Secretary Scalia, holding agency’s rule arbitrary and capricious where agency failed to conduct adequate cost-benefit analysis).
[12] The Proposed Rule seems to suggest that the biggest cost will be in “regulatory familiarization,” while ignoring the actual cost to workers. 85 Fed. Reg. at 60623; 60630.
[13] U.S. Gov’t Accountability Office, GAO-06-656, Employment Arrangements: Improved Outreach Could Help Ensure Proper Worker Classification 2 (2006), http:// www.gao.gov/new.items/d06656.pdf, archived at https://perma.cc/2T5J-ABL8; The Cost of Misclassification: Government, MBO Partners (Oct. 5, 2017), https://www.mbopartners.com/blog/the-cost-of-misclassification-government, archived at https://perma.cc/TW55-7LDP (describing how federal and state governments estimate losses caused by employee misclassification).
[14] Although businesses can classify workers as employees for purposes of wage laws while classifying them as independent contractors for other purposes, see, e.g., Camargo’s Case, 479 Mass. 492, 501 (2018), as a practical matter, most companies classify their workers as employees or independent contractors for all purposes. Thus, if workers are classified as employees for purposes of minimum wage and overtime, it has been recognized that they are likely to be classified as employees for other purposes, such as payroll obligations. A consistent, easily applicable employee classification test would therefore be beneficial not only for the protection of workers under the FLSA, but also to states and the federal government by ensuring consistent revenue streams through payroll taxes. See, e.g., Mass. Advisory A.G., Doc. No. 2008/1 at 4 (2008) (“[E]ntities that misclassify individuals deprive the Commonwealth [of Massachusetts] of tax revenue that the state would otherwise receive from payroll taxes.”).
[15] This statement begs the question: If there is no discernible difference between the two control-factor formulations, why replace the most prevalent one with an uncommon alternative?
[16] Press Release, U.S. Department Of Labor Proposes Rule To Clarify Employee And Independent Contractor Status Under The Fair Labor Standards Act, (2020), dol.gov/newsroom/releases/whd/whd20200922 (last visited Oct 19, 2020); “In summary, the Department believes the current multifactor economic reality test suffers because the analytical lens through which all the factors are to be filtered remains inconsistent; there is no clear principle regarding how to balance the multiple factors; the lines between many of the factors are blurred; and these shortcomings have become more apparent in the modern economy. The result is legal uncertainty that obscures workers’ and businesses’ respective rights and obligations under the FLSA. Such uncertainty is especially acute when it comes to the growing number of more flexible and nimble work relationships. While such relationships benefit workers and businesses alike, they also lead to complex questions about a worker’s classification under the FLSA, which are difficult to answer due in part to the shortcomings described above.” 85 Fed. Reg. at 60609; Vin Gurrieri, Diversity Training Guidance On The Horizon, DOL Chief Says, (October 1, 2020) https://www.law360.com/publicpolicy/articles/1315905 (“Our proposal aims to clear away the cobwebs and inconsistencies that have grown up around the analysis by offering an interpretation of ‘independent contractor’ that simplifies, clarifies and harmonizes the principles federal courts have used for decades”).
[17] “Whereas no single factor necessarily disqualifies a worker from independent contractor status under an economic reality test, each of the ABC test’s three factors may alone disqualify the worker from independent contractor status. Thus, adoption of an ABC test to govern independent contractor status under the FLSA would directly result in a large-scale reclassification of many workers presently classified as independent contractors into FLSA-covered employees. This reclassification effect would be particularly disruptive in industries that depend on independent contracting arrangements within the ‘usual course of the hiring entity’s business,’ such as transportation, residential construction, cable installation, etc.” 85 Fed. Reg. at 60636.
[18] The DOL argues that “the Department believes it is legally constrained from adopting California’s ABC test because the Supreme Court has instituted the economic reality test as the relevant standard for determining workers’ classification under the FLSA as an employee or independent contractor.” 85 Fed. Reg. at 60636.
