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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations
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above fields could lack features that would facilitate a position conversion to independent contractor status.
With respect to overtime, CWS has further indicated that, before conditioning on covariates, primary independent contractors are more likely to work overtime or extra hours beyond what they usually work at their main job 30 percent for self-employed independent contractors and 19 percent for other independent contractors versus 18 percent for employees. The Department was unable to determine whether these differences were the result of differences in worker classification, as opposed to other factors. The Department has cited many sources throughout this analysis that point to a wide range of income for independent contractors, and does not believe that this rule will be especially applicable to any particular income segment of independent contractors.
Accordingly, the Department believes it prudent to rely on the numerous sources it has drawn on in the development of this rule, rather than to focus on any particular slice of the income distribution. And while independent contractors are not, by definition, subject to the minimum wage requirements of the FLSA, none of the evidence cited by commenters suggests that the final rule is likely to significantly impact this issue, and if so, to what extent. Accordingly, the Department did not attempt to quantify these potential transfers.
6. Misclassification Many commenters expressed concerns regarding misclassification of employees as independent contractors, which occurs when an individual who is economically dependent on an employer is classified by that employer as an independent contractor. FLSA
misclassification may be inadvertent or intentional and its direct effects could include a transfer from the worker to the employer if the employer fails to pay minimum wage and overtime pay to which the worker is entitled.
Conversely, reducing misclassification could result in a transfer from employers to workers.
Several commenters believe that clarifying the application of the test for independent contractor status will promote compliance with labor standards under the FLSA and, in turn, reduce worker misclassification.
Opportunity Solutions Project OSP;
see also, e.g., Truckload Carriers Association the increased clarity provided by the proposed rule would likely lead to reduced misclassification.; IAW This rule
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will clear up misclassifications;
Financial Services Institute we agree that it will reduce worker misclassification and litigation. Other commenters believe this rule may make it easier for employers to misclassify employees as independent contractors.
See, e.g., Equal Justice Center; Employee Rights Center; NELP; State AGs; TRLA.
These commenters cited reports purporting to show extremely high rates of misclassification. For example, a 2020 NELP report cited by many commenters reviewed state audits and concluded that these state reports show that 10 to 30 percent of employers or more misclassify their employees as independent contractors. 156 The Washington Center also cited a study conducted by the Department of Labor in 2000 to claim that between 10
percent and 30 percent of employers audited in 9 states misclassified workers as independent contractors. 157
These estimates, however, appear to be unreliable for at least two reasons.
First, they make generalized conclusions regarding rates of misclassification using nonrepresentative audit data. For example, the Departments 2000 study cited by the Washington Center states that audits were selected on a targeted basis because of some prior evidence of possible non-compliance. 158 The 2020
NELP report likewise explained that most studies on misclassification rely on audit data from unemployment insurance and workers compensation audits, targeted or random. 159 As a 2015 EPI report explained, audit methods vary across states in the extent to which they target employers for audit: They can base the audits on specific criteria e.g., a record of prior violation, or use a random sample of employers within industries prone to misclassification, or a mix of both 156 NELP, Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries, Oct. 2020, available at https www.nelp.org/publication/
independent-contractor-misclassification-imposeshuge-costs-workers-Federal-state-treasuries-updateoctober-2020.
157 Lalith de Silva, Adrian Millett, Dominic Rotondi, and William F. Sullivan, Independent Contractors: Prevalence and Implications for Unemployment Insurance Programs Report of Planmatics, Inc., for U.S. Department of Labor Employment and Training Administration 2000, available at https wdr.doleta.gov/owsdrr/00-5/005.pdf.
158 Id. emphasis added.
159 NELP, Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries, Policy Brief Oct.
2020, available at https www.nelp.org/
publication/independent-contractormisclassification-imposes-huge-costs-workersFederal-state-treasuries-update-october-2020/.

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methods. 160 Thus, even random audits are not necessarily representative because they target industries with high rates of misclassification. Because audits focus on groups of businesses or industries in which misclassification rates are the highest, their results would not support generalized conclusions regarding the wider population. As such, the reports generalized conclusion lack reliable and representative evidence, and are almost certainly significant overestimates.
Second, the audit data cited by NELP
and others do not necessarily focus on misclassification of employees as independent contractors; some states data are evaluated based on prevalence of employer violations, which is not representative of percentages of workers misclassified as independent contractors. For example, the 2020
NELP report appears to state that audits conducted by Ohio found a misclassification rate of 45 percent, but the cited Ohio report stated otherwise.
The report explained that the audits searched for unemployment insurance violations, not just misclassifications, and that 45% of the audits produce findings, in many cases for workers misclassification. 161 In other words, the Ohio audits found 45% of audited employers failed to comply with some unemployment insurance requirement, with an unspecified subset committing misclassification. This and other misunderstandings of state audit findings may result in a misleading estimate of the frequency with which employers misclassify employees as independent contractors. Furthermore, the reporting is based on misclassification or other issues, as documented above on a per employer basis. The employer rate of misclassification may not necessarily correspond to the rate of employee misclassification. For example, if an employer employs 100 employees and misclassifies only one of them, the employer is recorded as a misclassifying employer in the aggregated results.162
160 Employment Policy Institute. Carre, Francoise, Independent Contractor Misclassification. https
www.epi.org/publication/independent-contractormisclassification.
161 Report of the Ohio Attorney General on the Economic Impact of Misclassified Workers for State and Local Governments in Ohio 1617 Feb. 18, 2009, available at https iiiffc.org/images/pdf/
employee_classification/OH%20AG%20Rpt%20on %20Misclass.Workers.2009.pdf.
162 If 11 percent of businesses misclassify only one worker as an independent contractor, there are 100 businesses, and each employer has 20 workers, then the total percentage of these misclassified workers is actually 0.5 percent. To find that 11
percent of workers are misclassified as independent contractors, all of the businesses who misclassified workers as independent contractors would need to
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