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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations
those that currently or may in short order face an independent contractor versus employee classification determination, the Department accordingly reduces the estimated pool to better estimate the establishments affected by the rule by assessing regulatory familiarity costs only for those establishments that engage independent contractors.
In 2019, Lim et al. used extensive IRS
data to model the independent contractor market, finding that 34.7
percent of firms hire independent contractors.175 These data are based on annual tax filings, so the dataset includes firms that may contract for only parts of a year. The 34.7 percent of establishments provides a figure of 2,758,928, which forms the foundation of the multiplier used in this analysis.
The Department did not estimate familiarization costs for companies that may decide to work with independent contractors only after the new rule is finalized, because they would need to familiarize themselves with the current legal framework even in the absence of this rule.176 Although firms that do not currently use independent contractors are not counted in this universe of employers, to allow for an error margin, the Department is using a rounded 35
percent of the total number of establishments defined above 7,950,800, resulting in 2,782,780
establishments estimated to incur familiarization costs.
The Pennsylvania Department of Labor & Industry PA L&I commented that the Department underestimated the cost of the rule by failing to include businesses that are newly incentivized to consider reclassifying workers to independent contractors. As stated above, even without the new rule any firm that does not currently engage any independent contractors but chooses to do so in the future would have already had to familiarize itself in the baseline case, so this rule does not impact those firms. Since the commenters point is premised on the fact that the firm may be incentivized to investigate the regulation, it would be reasonable to assume that any firm without independent contractors that reviews the new rule and ultimately decides to 175 Table
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10: Firm sample summary statistics by year 20012015, https www.irs.gov/pub/irs-soi/
19rpindcontractorinus.pdf.
176 An added dimension is that the final rule is expected to provide significant clarity, which would result in time and cost savings net of regulatory familiarization costs for those outside the pool of firms with existing independent contractor relationships. These net cost savings are not included in this analysis, consistent with this analysis treatment of resulting growth in the independent contractor universe.

hire independent contractors is doing so because the firm believes the new relationship will be beneficial to itself and the independent contractor also believes that the new relationship will be beneficial to him or herself. Such a situation would result in net benefits to the employer that more than fully compensate for any familiarization costs. Notably, and for comparability in estimates, the Department does not add these potential firms to the Benefits section either.
The Department assumes that a Compensation, Benefits, and Job Analysis Specialist SOC 131141 or a staff member in a similar position will review the rule.177 According to the Occupational Employment Statistics OES, these workers had a mean wage of $33.58 per hour in 2019 most recent data available. Given the proposed clarification to the Departments interpretation of who is an employee and who is an independent contractor under the FLSA, the Department assumes that it will take on average about 1 hour to review the rule as proposed. The Department believes that an hour, on average, is appropriate, because while some establishments will spend longer than one hour to review the rule, many establishments may rely on third-party summaries of the changes or spend little or no time reviewing the rule. Assuming benefits are paid at a rate of 46 percent of the base wage, and overhead costs are 17 percent of the base wage, the reviewers effective hourly rate is $54.74; thus, the average cost per establishment conducting regulatory familiarization is $54.74.
Therefore, regulatory familiarization costs to businesses in Year 1 are estimated to be $152.3 million $54.74
2,782,780 in 2019 dollars.
For regulatory familiarization costs for independent contractors, the Department used its estimate of 18.9
million independent contractors and assumed each independent contractor will spend 15 minutes to review the regulation. The average time spent by independent contractors is estimated to be smaller than for establishments. This difference is in part because the Department believes independent contractors are likely to rely on summaries of the key elements of the
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177 A Compensation/Benefits Specialist ensures company compliance with Federal and state laws, including reporting requirements; evaluates job positions, determining classification, exempt or non-exempt status, and salary; plans, develops, evaluates, improves, and communicates methods and techniques for selecting, promoting, compensating, evaluating, and training workers. See BLS, 131141 Compensation, Benefits, and Job Analysis Specialists, https www.bls.gov/oes/
current/oes131141.htm.

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rule change published by the Department, worker advocacy groups, media outlets, and accountancy and consultancy firms, as has occurred with other rulemakings. Furthermore, the repercussions for independent contractors are smaller i.e., the litigation costs, damages, and penalties associated with misclassification tend to fall on establishments.178 This time is valued at $46.36, which is the mean hourly wage rate for independent contractors in the CWS, $27.27, with an additional 46 percent benefits and 17
percent for overhead, then updated to 2019 dollars. Therefore, regulatory familiarization costs to independent contractors in Year 1 are estimated to be $218.6 million $46.36 15 minutes
18.9 million.
The estimate of 18.9 million independent contractors captures the universe of workers over a one-year period. Using this figure for the overall cost estimate results in an artificially high value because it includes workers who would have otherwise been included in the baseline case without the rule and thus spent time familiarizing themselves with the legal framework in the matter of course, without incurring a supplementary cost.
Furthermore, the Department believes that it is probable that independent contractors would review the regulation only when they had reason to believe that the benefits would outweigh the costs incurred in familiarizing themselves with the rule, and since this analysis does not attempt to calculate those economic benefits it is possible that the costs presented in this section are overestimated.179
The total one-time regulatory familiarization costs for establishments and independent contractors are estimated to be $370.9 million.
Regulatory familiarization costs in future years are assumed to be de minimis. Similar to the baseline case for employers, independent contractors would continue to familiarize themselves with the applicable legal framework in the absence of the rule, so this rulemakinganticipated to provide more clarityis not expected to impose costs after the first year.180 This 178 An independent contractor that hires independent contractors would already be captured in the establishment calculation.
179 For example, independent contractors in states with classification frameworks that are known to be more stringent than the existing FLSA classification framework, such as in California, may not review the rule since it would be unlikely to affect their classification.
180 As explained below, the Department considers that the regulation may produce benefits along this dimension in future years by simplifying the regulatory environment.

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