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Federal Register / Vol. 86, No. 86 / Thursday, May 6, 2021 / Rules and Regulations
Institute WPI claimed that employers had already begun to implement the Rule, even though it had not yet gone into effect. WPI claimed that, in the withdrawal NPRM, the Department ignored the costs of compliance preparation that many businesses have already undertaken in anticipation of the rule becoming effective. The commenters did not provide information on the types of activities that businesses have taken to implement the Rule, or how much time they spent.
The Department also did not receive any data on the number of businesses that have incurred implementation costs, or the magnitude of these costs, so the Department has not quantified them here. Any costs that were incurred by businesses in response to the publication of the Independent Contractor Rule are sunk costs, and would not be affected by the withdrawal. Commenters did not provide any information on what changes businesses would have to undo following the withdrawal.
In discussing the effects of the Independent Contractor Rule, many commenters referenced the analysis that the Economic Policy Institute EPI
provided in their comment to the 2020
Independent Contractor NPRM. EPI
itself commented to again explain the results of its study, which estimated that the Independent Contractor Rule would have cost workers more than $3.7
billion annually. This figure represents $400 million in new annual paperwork costs and a transfer to employers of at least $3.3 billion in the form of reduced compensation for employees who are converted to independent contractors.
EPI also estimated a loss of $750 million in employer contributions to social insurance funds such as Social Security, Medicare, Unemployment Insurance, and Workers Compensation. The Department believes that although the magnitude of this estimate may be overstated, for reasons discussed in response to the comment on the Independent Contractor Rule, the discussion of impacts to workers is valid. EPI did not directly address the Departments criticisms of its estimates in the Independent Contractor Rule, but it agreed with the Departments statement in the NPRM that EPIs analysis may be useful in understanding the types of impacts the Rule would have had on workers.
Michael D. Farren and Liya Palagashvili of the Mercatus Center provided a detailed comment evaluating the Departments economic analysis. In their comment, they estimated the costs associated with withdrawing the Independent Contractor Rule, stating
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that the annual cost of withdrawing the Rule is approximately $1.85 billion.
After thoroughly reviewing this analysis, the Department concludes that this cost estimate is not accurate, for the reasons described below.
Farren and Palagashvili note that their analysis is based on the framework provided by EPI, in order to allow their estimate to be comparable. They begin by estimating the own-wage elasticity of employment costs from a meta-analysis of literature, finding that the average own-wage elasticity with respect to changes in employment costs is 0.66.
They conclude that this suggests that workers capture 66 percent of the decrease in employer costs associated with reclassifying employees as independent contractors. The Department believes that this is not an accurate application of the findings of the meta-analysis. The studies indicate that on average, the impact of a 1.0%
increase in taxes is a 0.66% decrease in wages for employees. It may be inappropriate to assume that this estimate for employees also applies to independent contractors. Additionally, it is unclear whether non-tax labor costs would have the same elasticity as taxes.
The Department also notes that the studies referenced in their meta-analysis come from many different countries, some of which may reflect a different economic situation than that of the United States, and may not be applicable to an analysis of worker classification in the United States.
Although the Department recognizes that regulatory impacts are often experienced across both workers and employers and, more generally, labor market outcomes are the result of tradeoffs made by both workers and employers, the Departments analysis on earnings does not find that independent contractors capture a large portion of the decrease in employer costs. As discussed in section IVD4, when controlling for observable characteristics related to earnings, the data fail to show that independent contractors have an earnings premium over employees sufficient to cover the increased tax liability.
The Mercatus Center commenters also estimate the average willingness to pay for flexible work, by stating that a National Bureau of Economic Research NBER working paper finds that the average worker is willing to accept a salary that is 10.4 percent lower for a flexible job. Although the Department could not find this figure in the three papers that were cited in the comment, two of the three papers have a range of results that include approximately 10

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percent.190 The Department does not believe that the first paper cited is appropriate for applying to the analysis, because that study was a field experiment using a Chinese job board, and only looked at college-educated workers with 510 years of experience, all applying for professional/executive positions. The tradeoff between wages and flexibility for this population might not be comparable to that of the total population of workers in the United States. The authors of the paper also note that they look at a narrow set of jobs and at one employer, so the results may not generalize to different types of jobs and the workers searching for them.
The Mercatus Center assumed that workers would receive increased flexibility if they are reclassified as independent contractors, but this is not necessarily true. Many employees already enjoy flexible work schedules 191and the share of employees with such flexible work arrangements is likely to increase as a result of the COVID19 pandemic.192 If an employee with a flexible work arrangement is converted to an independent contractor, that worker might or might not experience an increase in flexibility. Though the Mercatus Center stated that it would be illegal for an employer to convert an employee to an independent contractor without increasing their flexibility, this 190 The three papers cited were Haoran He, David Neumark, and Qian Weng, Do Workers Value Flexible Jobs? A Field Experiment NBER Working Paper No. 25423, National Bureau of Economic Research, Cambridge, MA, July 2020, 26; Nicole Maestas et al., The Value of Working Conditions in the United States and Implications for the Structure of Wages NBER Working Paper No.
25204, National Bureau of Economic Research, Cambridge, MA, October 2018. M. Keith Chen et al., The Value of Flexible Work: Evidence from Uber Drivers, Journal of Political Economy 127, no. 6 December 2019: 273594.
191 Flexible work schedules do not prevent courts from finding workers to be employees. See, e.g., Silk, 331 U.S. at 706 finding that coal unloaders were employees despite their ability to show up to work when they wish and work for others at will; Verma v. 3001 Castor, Inc., 937 F.3d 221, 230 3d Cir. 2019 finding that dancers were employees and not independent contractors despite fact that they could select their own shifts and work for competitors; DialAmerica Mktg., 757 F.2d at 1380 finding that home researchers were employees even though they were free to choose the weeks and hours they wanted to work.
192 See Society for Human Resources Management, Managing Flexible Work Arrangements, https www.shrm.org/Resources AndTools/tools-and-samples/toolkits/Pages/
managingflexibleworkarrangements.aspx last visited April 28, 2021 Now that many employers have experienced how successful telecommuting can be for their organization or how work hours that differ from the normal 9-to-5 can be adopted without injury to productivity, offering flexible work arrangements may become even more commonplace..

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