DOL Issues Administrative Interpretation that Most Workers are Employees, Not Independent Contractors

Yesterday, the Department of Labor issued an  Administrative Interpretation 2015-1  concerning the common misclassification of employees under the Fair Labor Standards Act as independent contractors.  While Administrative Interpretations do not have the weight of regulations, they are afforded some deference by courts.  More importantly, in this case, the Interpretation does not break much new ground in terms of how the Sixth Circuit has applied the economic realities test which controls whether a worker is an employee or independent contractor.   What is troubling, however, is that the DOL indicates that it will apply to the same test to determine whether an individual is a statutory employee or an owner, partner or LLC member (who are often paid, if at all, only out of the profits of a business even when they are not majority owners).  “In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor.”

As faithful readers may recall, the FLSA employs the broadest possible test of who is covered under the Act. 

The FLSA’s definition of employ as “to suffer or permit to work” and the later-developed “economic realities” test provide a broader scope of employment than the common law control test. . . . . Instead, the FLSA defines “employ” broadly as including “to suffer or permit to work,” 29 U.S.C. 203(g), which clearly covers more workers as employees.”

A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of “employ” under the Act, most workers are employees under the FLSA. The application of the economic realities factors must be consistent with the broad “suffer or permit to work” standard of the FLSA.

As mentioned, the DOL has indicated an intent to also police how business owners, partners and limited liability company members compensate themselves:

While most misclassified employees are labeled “independent contractors,” the Department has seen an increasing number of instances where employees are labeled something else, such as “owners,” “partners,” or “members of a limited liability company.” In these instances, the determination of whether the workers are in fact FLSA covered employees is also made by applying an economic realities analysis.

That being said, the DOL recognizes that the economic realities test has been accepted by the courts and provides a number of examples of how it has been and, in its opinion, should be applied.   

In undertaking this analysis, . . . . no single factor is determinative.  . . .The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee. . . .The application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers, as evidenced by the Act’s defining “employ” as “to suffer or permit to work.”

The labels attached by the parties are deemed “irrelevant” by the DOL, as is the employee’s tax status:

 . . . the economic realities of the relationship, and not the label an employer gives it, are determinative. Thus, an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status. . . . Likewise, workers who are classified as independent contractors may receive a Form 1099-MISC from their employers. This form simply indicates that the employer engaged the worker as an independent contractor, not that the worker is actually an independent contractor under the FLSA.

The factors of the economic realities test typically include:

               (A) the extent to which the work performed is an integral part of the employer’s business;

               This factor examines whether the work performed is an integral part of the employer’s business? “If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer.”

Example: For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.

In contrast, the same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor.

               (B) the worker’s opportunity for profit or loss depending on his or her managerial skill;

               This factor examines whether the worker’s managerial skill affects his or her opportunity for profit or loss.  For instance, a “worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and do little to separate employees from independent contractors—both of whom are likely to earn more if they work more and if there is more work available.”

Example: A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available and his willingness to work more. This lack of managerial skill is indicative of an employment relationship between the worker and the cleaning company.

In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.

               (C) the extent of the relative investments of the employer and the worker;

               This factor examines how the worker’s relative investment compares to the employer’s investment.

Example: A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.

A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. She regularly (as opposed to on a job-by-job basis) purchases material and equipment to provide cleaning services and brings her own equipment (vacuum, mop, broom, etc.) and cleaning supplies to each worksite. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works. These types of investments may be indicative of an independent contractor.

 
               (D) whether the work performed requires special skills and initiative;

               This factor examines whether the work performed requires special skill and initiative. 

A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent. “[T]he fact that workers are skilled is not itself indicative of independent contractor status.”  . . . The technical skills of cable installers, carpenters, construction workers, and electricians, for example, even assuming that they are special, are not themselves indicative of any independence or business initiative.  . . . Only carpenters, construction workers, electricians, and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors.

Example: A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly-skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.

In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

               (E) the permanency of the relationship; and

Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. . . . Most workers are engaged on a permanent or indefinite basis (for example, the typical at-will employee). Even if the working relationship lasts weeks or months instead of years, there is likely some permanence or indefiniteness to it as compared to an independent contractor, who typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer.

Example: An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.

Another editor has worked intermittently with fifteen different publishing houses over the past several years. She markets her services to numerous publishing houses. She negotiates rates for each editing job and turns down work for any reason, including because she is too busy with other editing jobs. This lack of permanence with one publishing house is indicative of an independent contractor relationship.

               (F) the degree of control exercised or retained by the employer.

According to the DOL, the “worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.”  As an example, “an employer’s lack of control over workers is not particularly telling if the workers work from home or offsite.”

Example: A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship. 

Another registered nurse who provides skilled nursing care in nursing homes is listed with Jones Nurse Registry in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.

 

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Sixth Circuit Affirms Decision Finding Migrant Farm Workers to Be Employees Under FLSA

Yesterday, the Sixth Circuit affirmed the decision in Perez v. Howes, 7 F. Supp. 3d 715 (W.D. Mich. 2014), aff’d No. 14-2026 (6^th Cir. 6-22-15).  The Court agreed that an examination of the six factors from the economic realities test showed that the migrant farm workers picking pickle cucumbers were employees under the FLSA instead of independent contractors as specified in their engagement contracts.  The Court also found that the defendant farm also violated the FLSA by failing to keep track of hours worked each day when the farm only kept track of hours worked by each worker each week.  Moreover, the Court also agreed that the defendant farm violated the Migrant and Seasonal Agricultural Worker Protection Act by supply sub-standard housing for its workers.

The Court essentially adopted the District Court’s opinion, which is summarized briefly here.

 " Whether an employment relationship exists under a given set of circumstances is not fixed by labels that parties may attach to their relationship nor by common law categories nor by classifications under other statutes."  . . . Rather, courts focus on the " economic reality" of the relationship between the parties to determine whether it is an employment relationship. Id. " [I]n distinguishing between employees and independent contractors, courts have focused on whether, as a mater of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself."

Permanency and Duration of Relationship.  This factor was essentially neutral because the harvest only lasted 45 days.  Some of the workers had part-time and temporary jobs elsewhere, but most worked full-time picking cucumbers for the 45 days.   Almost 70% of the workers had worked on the farm during the prior year’s harvest as well.

Degree of Skill. This factor weighed in favor of employment.  While the workers would report problems with the plants to the farm owner (such as the plants require water or fertilizer or insecticide), they performed very little care for the plant (such as weeding, watering, trellising, etc.) and therefore, required very little experience or training.  The workers could be trained in one hour how to harvest pickles, but – like anything else -- would become more efficient with experience.

Worker’s Investment.  This factor likewise weighed in favor of employment.  The owner’s investment dwarfed that of the workers, who sometimes supplied their own rubber gloves and wheelbarrows.  The owner supplied collection boxes, forklifts, and hoes. The Court only considered the farm’s investment during the harvest, rather than all of its prior investments.

Opportunity for Profit.  This factor also weighed in favor of employment because the workers bore no risk of financial loss, other than making poor use of their time (which is not an issue the Court was willing to credit).

Workers were paid according to how many pickles they picked. They had no input into selecting a buyer or negotiating a price for the pickles. Under the system in place, workers could simply increase their wages by working longer, harder, and smarter--this does not constitute an opportunity for profit.

Defendant’s control.  This factor weighed slightly in favor of employment.  In some cases, workers are contractors when they enter into sharecropping relationships to control a piece of land, set their own schedules and direct the owner when to plant in order to accommodate the workers’ schedules.  In others, workers are employees when the owner supervised the harvest, hired, fired and assigned rows to workers.   In this case, the workers set their own schedules and picked their own harvesting plots.  The owner supervised the harvest, but not closely.  However, the owner retained control over the timing of the harvest and care of the plants.

Services as integral part of defendant’s business.  This weighed heavily in favor of employment because the defendant derived 84% of his income from pickle farming.  The Court refused to consider whether the workers were economically dependent on the defendant’s farm as part of this factor.

The factors weigh in favor of a finding that the workers were employees, and the record supports a finding that the workers were dependent on Defendant, rather than in business for themselves. This was not a sharecropper relationship as in Brandel, but rather an employment relationship in which the workers' wages were dependent upon their production. Such a payment structure, on its own, does not transform an employee into an independent contractor. The " economic reality" of the situation indicates an employer-employee relationship.

The DOL had not moved for summary judgment yet on payment of minimum wages. The farm had previously agreed to split the profit from the sale of the pickles.

The DOL also obtained summary judgment on the owner failing to keep a record of hours worked each day.  Instead, the owner had asked each worker how many hours he worked that week to determine their hourly earnings.  This constituted a violation of the FLSA.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can be changed or amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.

Divided Sixth Circuit Counts Paid Volunteer Firefighters as Employees for Purpose of FMLA Coverage

Last week, the Sixth Circuit reversed summary judgment for a city employer on an FMLA claim on the grounds that the employer had the requisite 50 employees if paid volunteer firefighters were counted as employees of the employer. Mendel v. City of Gilbralter, No. 12-1231 (6^th Cir. 8-15-13). In that case, the plaintiff claimed that his termination violated the FMLA. The employer defended on the grounds that it was not subject to the FMLA, having only 41 employees instead of the requisite 50. However, the plaintiff pointed out that the defendant city would have more than 50 employees if volunteer firefighters were considered. The firefighters were responsible for their own training, were never required to respond to any fire or other emergency, were not provided with any employee benefits and were treated as independent contractors. Nonetheless, they were paid $15/hour when they did respond, which was comparable to the wage paid regular firefighters in surrounding communities and their own fire chief. The Court's majority found that the firefighters fit within the FLSA's definition of employees and not within the definition of "volunteer" because they were paid a substantial amount. Accordingly, the defendant city was subject to the FMLA. The dissenting judge concluded that the choice was not limited to employee or volunteer and that the firefighters could qualify as independent contractors, which would place the defendant city below the FMLA's 50-employee threshold.

According to the Court's opinion, the FMLA borrows its definition of "employee" from the Fair Labor Standards Act. The FLSA defines "employee" as "to suffer or permit to work." 29 U.S.C. § 203(g). This broad definition encompasses individuals who might not qualify as an employee under common law principles. Nonetheless, courts typically apply the "economic realities test" in determining whether an individual is an employee under the FLSA. In this case, the Court's majority concluded that the firefighters were employees because they were suffered or permitted to work and were paid a substantial wage for their efforts.

The majority also considered the FLSA amendment for volunteers, which provides at 29 U.S.C. §203(e) in relevant part that:

The term "employee" does not include any individual who volunteers to perform services for a public agency which is a State, a political subdivision of a State, or an interstate governmental agency, if—

(i) the individual receives no compensation or is paid expenses, reasonable benefits, or a nominal fee to perform the services for which the individual volunteered; and

(ii) such services are not the same type of services which the individual is employed to perform for such public agency.

The Court's majority concluded that the $15/hour paid to volunteer firefightes was more than a nominal fee because it was comparable to the wages paid to regularly employed firefighters. "Essentially, the Gibraltar firefighters are paid a regular wage for whatever time they choose to spend responding to calls. These substantial hourly wages simply do not qualify as nominal fees." 
 

Notably, the Supreme Court has held that those who "work in contemplation of compensation" are "employees" within the meaning of the FLSA, even though they may view themselves as "volunteers." Tony & Susan Alamo Found., 471 U.S. at 300–02, 306. Despite the fact that the Gibraltar firefighters are referred to as "volunteers," the inescapable fact nevertheless remains that they "work in contemplation of compensation." Thus, the Gibraltar firefighters are "employees" and not "volunteers" within the meaning of the FLSA.

The dissenting judge found the majority's analysis to be too narrow:

Volunteer status precludes employee status under the Leave Act; but that someone is not a volunteer does not necessarily mean they are an employee. Some types of workers fall into neither category, such as independent contractors, prisoners, and residential assistants in college dorms.

The dissent also found the $15/hour to be nominal in light of all of the unpaid training the firefighters must complete each year to maintain their certification. When those unpaid hours are considered, the average wage drops to less than $9/hour. 
 
Moreover, the city did not control their work, as required to fit within the FLSA definition:

The first firefighter to respond to a fire typically controls the scene; the City does not send anyone to supervise them. And the City does not require a firefighter to respond to any fires in the first place. Indeed a firefighter could go for years without responding to a single fire—and the City would not discipline him. . . . Persons that need a Family and Medical Leave Act are presumably persons who need leave not to show up for work. That description does not apply to the City of Gibraltar's firefighters.

NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.