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On January 7, 2021, the Department of Labor (Department) published a final rule on independent contractor status under the Fair Labor Standards Act (FLSA). See 86 FR 1168 (2021 IC Rule). The Department subsequently published final rules to delay and withdraw the 2021 IC Rule on March 4, 2021, and May 6, 2021, respectively. See 86 FR 12535 (Delay Rule); 86 FR 24303 (Withdrawal Rule). On March 14, 2022, a district court in the Eastern District of Texas vacated the Department’s Delay and Withdrawal Rules, concluding that the 2021 IC Rule became effective as of March 8, 2021.  The Department has appealed the district court's decision.  The Department continues to believe that the 2021 IC Rule does not fully comport with the FLSA’s text and purpose as interpreted by courts and has proposed 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.  The Department published an NPRM on October 13, 2022.  For additional information, please see the Department’s fall regulatory plan narrative statement.

Statement of Need:

The Department believes it is appropriate to consider rescinding the 2021 IC Rule and setting 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 Legal Basis:

The Department's authority to interpret the analysis for determining whether workers are employees or independent contractors under the FLSA comes with its authority to administer and enforce the Act.  See 29 U.S.C. 201-219; see also Herman v. Fabri-Centers of Am., Inc., 308 F.3rd 580, 592-93 & n.8 (6th Cir. 2002) (noting that "[t]he Wage and Hour Division of the Department of Labor was created to administer the Act" while agreeing with the Department's interpretation of one of the Act's provisions); Dufrene v. Browning-Ferris, Inc., 207 F.3rd 264, 267 (5th Cir.2000) ("By granting the Secretary of Labor the power to administer the FLSA, Congress implicitly granted him the power to interpret."); Condo v. Sysco Corp., 1 F.3rd 599, 603 (7th Cir. 1993) (same).

Alternatives:

The Department assessed four regulatory alternatives in the proposed rule in addition to what it proposed.  For the first alternative, the Department considered codifying the common law control test, which is used to distinguish between employees and independent contractors under some other Federal laws, such as the Internal Revenue Code.  For the second alternative, the Department considered codifying an ABC test to determine independent contractor status under the FLSA similar to the ABC test recently adopted under California law.  For the third alternative, the Department considered a proposed rule that would not fully rescind the 2021 IC Rule and instead retain some aspects of that rule.  For the fourth alternative, the Department considered rescinding the 2021 IC Rule and providing guidance on employee or independent contractor classification through subregulatory guidance instead of through new regulations.

Anticipated Costs and Benefits:

The total one-time regulatory familiarization costs for establishments, governments, and independent contractors are estimated to be $408 million. Regulatory familiarization costs in future years were assumed to be de minimis. Employers and independent contractors would continue to familiarize themselves with the applicable legal framework in the absence of the rule, so this rulemaking would not be expected to impose costs after the first year. This would amount to a 10-year annualized cost of $56.4 million at a discount rate of 3 percent or $54.3 million at a discount rate of 7 percent.

Benefits would include increased consistency with existing judicial precedent and the Department’s longstanding guidance, as well as possibly reducing the occurrence of misclassification.

Risks:

This action does not affect public health, safety, or the environment.