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Federal Register / Vol. 86, No. 4 / Thursday, January 7, 2021 / Rules and Regulations
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without meaningfully changing the nature of the job in response to the added legal clarity provided by this rule. Employers could be most confident of such reclassification under this rule if the preexisting job already provided the worker with substantial control over the work and a meaningful opportunity for profit or loss. The Department believes this phenomenon is likely to be rare because the current position would have to be held by an individual who is in business for himor herself as an economic reality but is nonetheless presently classified as an employee.
While many commenters warned that economically dependent employees may be improperly classified as independent contractors, none expressed concern that there is widespread classification of individuals who are in business for themselves as employees.165 Such employees may nonetheless exist and be converted into independent contractors as a result of this rule. Features of these converted workers work, for example the level of flexibility and stability, would remain unchanged because the job remains the same. Firms could potentially reclassify existing workers who are already in business for themselves in a manner that reduces overall compensation, but their ability do to so would be constrained because such reduction could negatively impact worker morale, productivity, and retention.166
Nonetheless, the sharpening of the economic reality test may negatively impact some current employees who could be reclassified as independent contractors in a manner that results in reduced overall compensation but are 165 Commenters in the business and freelancer community indicated thatrather than classify independent entrepreneurs as employee in response to legal uncertainty regarding classification business simply decline to do business with those entrepreneurs in the first place. See, e.g., ASTA
The prospect of inconsistent determinations has had a chilling effect on the growth of businesses in industries reliant on contract workers which has resulted in fewer opportunities for individuals who choose to offer their services as independent entrepreneurs.; CPIE uncertainty associated with worker classification under the FLSA . . .
discourages companies from doing business with independent entrepreneurs. The effects described by these commenters are unsurprising. For example, it makes little sense for a business to classify a worker as an employee, thus obligating themselves to pay a premium rate for overtime work under the FLSA, if it is the worker and not the business who determines how many hours to work each week. Rather, the business likely would either not hire the worker at all or hire him or her as an employee but insist on controlling hours worked.
166 Most firms can already reduce the overall compensation of their employees whose wages exceed the minimum wage through more direct means than reclassification as independent contractors but do not do so because of risks regarding morale, productivity, and retention.

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not afforded non-pecuniary benefits, for example additional flexibility, in return.167 EPI and likeminded commenters believe these workers would be doing the same job for substantially less compensation as an independent contractor, and that this class of worker comprises the majority or even all of the workers impacted by this rule. The Department agrees that some workers could be impacted in this manner, but believes such occasions are likely to be rare because two necessary conditions limit the number of such workers.
First, in order for conversion to have an unambiguously negative affect, a converted workers overall compensation must be at the minimum wage. Generally, firms impacted by the rule can already directly reduce wages and benefits of their employeesthey do not need to convert those employees to independent contractor to achieve these labor cost savings. However, most firms do not reduce their employees compensation due to the risk of lowering morale, reducing productivity, and causing turnover. That is to say, the labor markets in which most firms operate prevents them from setting compensation without regard for worker preferences. The Department believes that a firms ability and willingness to reduce its employees compensation is shaped by the tradeoff between labor savings, on one hand, and the risk of lower productivity and higher turnover, on the other. Clarifying the legal requirement for firms to convert a position from employee to independent contractor status would not make firms any more willing or able to reduce compensation unless the worker was already earning the minimum wage and receiving no benefits. According to BLS, based on CPS data, in 2017 there were 370,000 adult 168 employees paid at the minimum wage, which comprise 0.24
percent of the U.S. labor force.169
167 Employers and employees could make similar conversions to independent contractor status for reasons outside the sharpening of the economic reality test this rule provides. Such shifts would not be identified as impacts in this analysis because the impetus for such conversion is due to factors other than this rule.
168 This figure excludes workers under the age of 19. If excluding workers under the age of 24, this figure drops over 40 percent to 221,000. This figure does not include workers who make less than the minimum wage, a vast majority of whom work in the restaurant industry and receive tips for their work. The average earnings of a restaurant worker who receives tips is significantly above the minimum wage. The figure includes part time workers, who would not likely receive overtime compensation due to the limited number of hours they work.
169 In 2017, there were approximately 152,000,000 workers in the U.S., according to the U.S. Bureau of Labor Statistics.

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Second and as explained above, the converted worker whose job remains unchanged is likely to already have substantial control over the work and a meaningful opportunity for profit or loss such that he or she can be classified as independent contractor with the most legal certainty this rule can provide.
The Department was unable to determine how many of the 370,000
current minimum wage employees also meet these two criteria, although it expects the number to be low. The Department attempted to identify examples of minimum wage employees who enjoy substantial control over their work and a meaningful opportunity for profit or loss, but was unable to do so.
Nor did commenters provide specific data or examples of minimum wage employees who would meet these criteria. Several commenters argued that the Department failed to adequately consider the effects of these possible conversions from employee to independent contractor, or the potential negative effects of misclassification on workers. NELA, for instance, asserted that the NPRMs cost-benefit analysis focused solely on companies rather than workers and further claimed that the Department ignores the massive cost to misclassified workers. Other commenters stated that the final rule would harm workers by either increasing the rate of misclassification or by allowing employers to reduce wages and benefits of employees who are converted into independent contractors. See, e.g., Washington Center for Equitable Growth Washington Center asserting that independent contractors tend to be worse-off than their wage-and-salary counterparts; Appleseed Center expressing concern that rule will harm workers across a broad spectrum, but will have a disproportionate impact on Black and Hispanic workers who are overrepresented in the low-paying jobs where independent contractor misclassification is common; National Women Law Center if finalized, this rule will cost workers . . . in the form of reduced compensation; EPI
estimating that individual workers would lose $6,963 per year.
As is explained in greater detail below, the Department disagrees with these comments that the rule will broadly harm workers. The Department agrees with the numerous commenters, including nearly all individual commenters who self-identified as freelancer workers, who asserted that the rule would encourage flexible work arrangements and thereby create meaningfulthough not easily measurable value for workers. One
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