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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations
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This binary approach to data collection on a per employer basis prevents a disambiguation to analyze the actual number of misclassified workers in the labor force. This phenomenon is present is another study conducted by the Wisconsin Department of Revenue cited by NELP, which claimed that In 2018, 44% of audited employers were found to be misclassifying workers. 163
However, that data seems to be misleading for multiple reasons. First, the quotation does not appear to match the cited source. Appendix 2 of the Wisconsin Workforce Report states that in 2019 the percentage of audited employers with misclassified workers was 33.3 percent divergent from the 44 percent that NELP stated. Second, the number of businesses found to be misclassifying workers does not address how many workers were misclassified.
The percentage of workers misclassified was 10.6, across all of the audited employers, which is much smaller than either 33 or 44 percent. Finally, all of these estimates are compounded by the targeting bias described earlier, namely that the results only reflect businesses specifically targeted for audits, which presents only a partial picture of the incidence of such misclassification economy-wide.
Ultimately, and as explained above in Section VIG2, commenters estimates regarding current rates of misclassificationwhether accurate or nothave little bearing on how misclassification rates are likely to change as a result of this rule. This rule establishes a clearer test for when a worker is an independent contractor rather than an employee under the FLSA. As such, it would reduce inadvertent misclassification by employers who are confused by the prior test, particularly small businesses that lack resources to hire expensive attorneys. For example, one small business owner commented to explain that the ability to understand and properly determine worker status under the FSLA is paramount for small businesses who cannot afford the cost of litigation . . . I believe that with the proper transparency within the regulations, the better the outcome not only for small businesses, but the worker, and ultimately the care recipient. We want to comply, and I
have confidence that the proposed rule . . . will be highly effective in have misclassified 100 percent of their workforce as independent contractors.
163 Wisconsin Department of Workforce Development, Payroll Fraud and Worker Misclassification Report 16 2020, available at:
https dwd.wisconsin.gov/misclassification/pdf/
2019-2020-misclassification-task-force-report.pdf.

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achieving the desired clarity and certainty. A clearer test also means more workers will better understand their rights under the FLSA and can defend those rights through private litigation or complaints to the Department, which should deter unscrupulous employers from intentionally misclassifying them.
In summary, the Department believes that the simplicity and clarity this rule provides will reduce both inadvertent and intentional misclassification, which could produce transfers from employers to employees who are more likely to be correctly classified and given minimum wage and overtime pay. The Department is unable to calculate the exact transfer amount because it lacks reliable metrics on, for example, the existing misclassification rates in the general economy, the precise extent to which this rule improves legal clarity, and how firms will respond to that clarity.
7. Job Conversion Many commentators expressed concerns that the rule would cause businesses to reclassify their workers as independent contractors, causing those workers to lose the benefits of the FLSA
with little gain in return. See, e.g., Washington Center asserting that independent contractors tend to be worse-off than their wage-and-salary counterparts; National Womens Law Center if finalized, this rule will cost workers . . . in the form of reduced compensation; EPI estimating that converted workers would lose $6,963
per year. Some of these issues are discussed above. For example, the Department discussed possible earnings effects of workers converting from employee to independent contractor extensively in this section VID and concluded it could not definitively determine whether overall compensationi.e., earnings plus benefitsfor a job that is converted from employee to independent contractor classification in response to this rule is likely to rise or fall on average. Regardless, the Department acknowledges that whether the overall effect of job conversion is likely to be, on balance, positive depends on the individual, reclassified worker, the unique circumstances of the business, and whether or not the working conditions were changed in order to reclassify the worker.
If the converted position is an entirely new position, it is more likely to be filled by one of the many individuals who desire to work as an independent contractor, for example because they value the flexibility to choose when and where to work that the position
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may provide more than access to a steady income and benefits. 164 Such an individual may, for example, discount the value of certain types of compensation associated with employee classification, such as health insurance, that he or she might already enjoy from a different source. The individual may also simply prefer to trade overall compensation for the greater flexibility that often accompanies independent contractor roles. Thus, the lower paid converted new jobs do not necessarily reduce such workers welfare because they could offer tradeoffs that may be preferable to the workers who are most likely to sort themselves into those positions. On balance, the Department believes conversion of new jobs will have an overall positive impact on workers.
The second category of job conversion discussed above occurs when employers modify their working relationship with existing employees such that they are rendered independent contractors under this rule. As explained above, to act on the legal certainty provided by this rule, the converted position likely would have to provide the worker with substantial control over the work and a meaningful opportunity for profit or loss. The Department believes such conversions will be less common than conversion of future positions because the marginal cost of restructuring an existing work arrangement is greater than altering the arrangement of an unfilled position. And such restructuring would disrupt the preexisting working relationships, which risks negatively impacting worker morale, productivity, and retention. Nonetheless, some conversion of existing positions may occur, and some converted workers may prefer the additional flexibility and earn more by taking advantage of the opportunity for profit or loss that may accompany the conversion. The effect of the rule would be positive for these workers. Other converted workers may prefer the security, stability, and other features of an employment relationship or earn less due to, for example, reduction of employer-provided benefits, employment taxes, and loss of the FLSAs minimum wage and overtime pay. The effect of the rule would be negative for these converted workers, but, as explained above, the Department believes this type of conversion will be rare.
Finally, an employer may reclassify an existing employee position to an independent contractor position 164 See Coalition for Workforce Innovation 2020, supra note 77.

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