Ohio Supreme Court Affirms BWC Decision that Workers Were Misclassified as Independent Contractors

 Earlier this week, a divided Ohio Supreme Court affirmed a decision of the Bureau of Workers’ Compensation and agreed that there was sufficient evidence to show that workers were employees and not independent contractors under the common law right to control test.  State ex rel. Ugicom Ents., Inc. v. Morrison, Slip Opinion No. 2022-Ohio-1689.   While some evidence supported the employer, there was sufficient evidence to show that the employer exercised too much control over the workers to consider them independent. 

According to the Court’s opinion, following a 2009 audit, the BWC found that the workers had been misclassified as independent contractors for the past five years and assessed the employer with $346,817 in unpaid premiums.  The employer appealed and was initially successful because the BWC had applied the 20-factor test instead of the common law test.  Upon remand and following an evidentiary hearing, the BWC again found that the workers had been misclassified. 

The employer was a Time-Warner Cable contractor.  Workers had to be approved by TWC and pass TWC’s drug and background checks.  The workers would be assigned jobs at a certain price by the employer, but were not required to accept them and could schedule them at any time (with the authorization of the property owner), although they were expected to respond within 2 hours.  The cables were supplied by TWC, but the workers otherwise used their own tools.  The workers drove their own vans (but with the employer’s logo and TWC identified on them) and wore TWC contractor badges.  The workers were required to sign one-year agreements which contained non-compete clauses (which did not apply post-employment) and could be terminated on 60-days' notice.   A quality inspector checked about 20% of the work.  There was some dispute about the amount of skill required, but it was once described as just digging and filling a trench for the cable and connecting it to the house.

There is no bright line test for the common law test, and a number of factors are considered. 

The factors which demonstrated employment status included:  The work was an integral part of the employer’s business.  The workers did not seem independent from the employer because they wore badges and vests and drove vans with the names of the employer and TWC.  This factor is one of the most important considerations in evaluating employment status.  The jobs were posted at set prices with a take-it-or-leave it approach and were not negotiated or bid on by the worker and this was found to exercise control over the workers.  The workers did not advertise or offer their services elsewhere and had long-term and ongoing  relationships with the employer.   The workers could not offer their services to the employer’s competitors because of non-compete clauses.  The work involved required minimal skill or training.

The factors which indicated independent contractor status included: They signed independent contractor agreements and received 1099 tax forms. They were able to accept or reject jobs based on their complexity and distance.  The workers supplied their own tools, ladders, vehicles, cell phones, etc. and the BWC was found to have erred in not crediting this factor.  The BWC was also found to have erred in construing control over the details and quality of work, which were factors that supported independent contractor status.  No one told the workers where or how to dig.  This was not just an indication of competence; “a lack of supervision is indicative of a lack of control.”  They could accept or reject any assignment and set their own hours of labor.  The quality standards were set by TWC, not the employer.  Nonetheless, “even if [the employer] had prescribed the standards, a contract provision stating that a job shall be performed subject to the “ ‘approval or satisfaction of the employer * * * is not an assumption by the employer of the right to control the person employed as to the details or method of doing the work, but is only a provision that the employer may see that the contract is carried out according to the plans.’ ” That TWC might fine the employer for substandard work was not indicative of whether the workers were employees of the employer.

The Court agreed that the BWC erred in construing piece rate offers by the employer to be indicative of an employment relationship because it mistakenly relied on a different test under the FLSA: “the bureau erred in concluding that the installers’ receipt of piece-rate compensation (essentially, payment per job rather than payment per hour) was evidence of an employment relationship.”  Nonetheless, the “take it or leave it” approach and lack of negotiation for making the offers was evidence of control by the employer.

The Court was also unmoved that the BWC disregarded and gave no weight to uncontroverted affidavits from a couple of workers confirming that they believed that they were independent contractors.   Similarly, the Court found no abuse of discretion that the BWC also refused to assign any weight to the independent contractor label used in the parties’ agreement. 

Although the bureau was perhaps too dismissive of the contract—by suggesting that such a contract may be a “red flag”—the bureau’s conclusion that it was not bound by the parties’ labels was nevertheless correct, because “a description by the parties of their future relationship is not necessarily determinative when viewed in light of their actual subsequent activities,”

Ultimately, the Court agreed that while there was evidence supporting contrary conclusions, it was bound by an abuse of discretion standard. “[W]e are not called upon to reweigh it here; rather, our function is to determine whether the bureau abused its discretion by entering an order that is not based on some evidence in the record.”  Albeit some of the factors weighed in the employer’s favor, there was enough evidence in the record to support the BWC decision.

The Court also affirmed the BWC decision that the quality control inspector was an employee and not an independent contractor.  Although he held himself out as an independent contractor and maintained his own workers’ compensation policy, the employer was his sole source of income, making him financially dependent on the employer.

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.

Franklin County Appeals Court Finds Drivers to be Independent Contractors Under Unemployment Statute

Last week, the Franklin County Court of Appeals affirmed the trial court decision that a trucking company was not a statutory employer under Ohio’s unemployment statute with respect to the truckers who drove her long-haul trucks.  Evans v. Dir. Ohio Dept. Job & Family Servs., 2015-Ohio-3842.  While there were facts that supported arguments for and against employment under the 20 factors contained in Ohio Administrative Code §4141-3-05(B), the Court ultimately found that the trial court did not abuse its discretion in finding the truckers to be independent contractors.

According to the Court’s opinion, the trucking company leased its trucks to a freight broker, and also agreed to provide drivers.   However, the freight broker advertised, interviewed and hired the drivers, who then signed independent contractor agreements with the trucking company, were paid more than a third of her payment by the freight broker and were issued 1099 tax forms.  The drivers never met the trucking company owner and did not receive any training from the trucking company.  Although drivers could refuse routes and could choose their own route, they could not substitute another driver for themselves.  The drivers set their own hours and only got paid if the trucking company got paid.  They could work for multiple companies, but were not permitted to haul cargo for other companies in the trucking company’s trucks.

The Ohio Department of Job and Family Services directed the trucking company in 2008 to begin making contributions on behalf of the drivers.  On administrative appeal, the UCBR found that the trucking company’s right to control the drivers made her an employer even though she never exercised that right of control and, instead, delegated it to the freight broker.  On appeal, the common pleas court found the UCRB decision was unsupported by substantive, reliable and probative evidence.  He found the drivers to be independent contractors.  The Franklin County Court of Appeals concluded that there was no abuse of discretion in light of the ambiguity of some of the evidence.

Ohio employers must contribute to Ohio's unemployment compensation fund. R.C. 4141.23. The definition of "employer" includes individuals who "ha[ve] in employment at least one individual." R.C. 4141.01(A)(1)(a). "Employment" is:

[S]ervice performed by an individual for remuneration under any contract of hire, written or oral, express or implied * * *, unless it is shown to the satisfaction of the director that such individual has been and will continue to be free from direction or control over the performance of such service, both under a contract of service and in fact.

R.C. 4141.01(B)(1).  

 Consistent with the statutory definition of "employment," Ohio Adm.Code 4141-3-05(A) provides:

[A] worker is in employment when an "employer-employee" relationship exists between the worker and the person for whom the individual performs services and the director determines that:

(1) The person for whom services are performed has the right to direct or control the performance of such services; and

(2) Remuneration is received by the worker for services performed.

Ohio Adm.Code 4141-3-05(B) sets forth 20 factors "[a]s an aid to determining whether there is sufficient direction or control present" to establish employment.

 

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.

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.

Sixth Circuit Reverses Employer’s Summary Judgment in FLSA Overtime and Misclassification Case

Last week, a divided Sixth Circuit Court of Appeals reversed an employer’s summary judgment on a FLSA overtime compensation claim brought by satellite technician who had been classified as an independent contractor.  Keller v. Miri Microsystems LLC, No. 14-1430 (6^th Cir. 3-26-15).  After weighing a number of typical and a few new factors to determine the economic realities of the situation, the Court concluded that there was a factual dispute as to whether the plaintiff was an employee or independent contractor.    In addition, the Court found sufficient evidence to show that the plaintiff typically worked more than 60 hours each week – even without payroll records -- based on his testimony and the employer’s admission of how many jobs he generally completed each day and how long each job typically took.

According to the Court’s opinion, the employer provided consumer installation services for two satellite internet providers.  The plaintiff was hired as an independent contractor technician/installer by the employer and was paid by the job based on a percentage of what the employer was paid by its two customers.  He worked six days each week and had completed an installation certification course provided by the employer before he was hired.  He filed this lawsuit after he resigned and went to work directly for one of the customers.

In determining whether the plaintiff’s classification as an independent contractor was appropriate, the Court noted that “‘employees are those who as a matter of economic reality are dependent upon the business to which they render service.’”  Although no single factor is controlling, the Court identified the following eight factors and discussed six of them: 

·        The permanency of the relationship between the parties;

Generally, independent contractors have variable or impermanent working relationships with the principal company because they “often have fixed employment periods and transfer from place to place as particular work is offered to them, whereas ‘employees’ usually work for only one employer and such relationship is continuous and indefinite in duration. . . . . If a worker has multiple jobs for different companies, then that weighs in favor of finding that the worker is an independent contractor.

However, “even short, exclusive relationships between the worker and the company may be indicative of an employee-employer relationship.”  Moreover, it is irrelevant whether the parties have a written contract because the FLSA was meant to “defeat,” not implement, contracts.   Employees – like independent contractors – may work for multiple employers without losing the protection of the FLSA.  Unlike employees, contractors have more control over which days they work and how long they work each day. 

In this case, the Court found mixed indications about the working relationship.  Although the plaintiff worked exclusively for the employer for 20 months and claimed to have so many time-consuming assignments that he did not have time to work for anyone else, there was no exclusivity requirement and he could largely set his own schedule.  Accordingly, there were disputed issues of fact to be resolved by a jury.  

·        The degree of skill required for the rendering of the services;

The principle factor in this analysis is whether the worker’s “profits increased because of the ‘initiative, judgment[,] or foresight of the typical independent contractor,’ or whether his work ‘was more like piecework.’” The Court found “ample evidence” that the technicians were skilled and required specialized training and certification, including knowledge of electrical codes, how to operate power tools and computer software.  Nonetheless, he acquired his skills through the employer and those skills only increased his efficiency and did not affect the amount of his profits.  Accordingly, there were disputed issues of fact to be resolved by a jury, according to the majority.  

It is also important to ask how the worker acquired his skill. . . . If a worker learned his craft through formal education, an apprenticeship, or years of experience, then it is more likely that the worker’s compensation varies with his unique skill and talent. On the other hand, if the worker’s training period is short, or the company provides all workers with the skills necessary to perform the job, then that weighs in favor of finding that the worker is indistinguishable from an employee.

·        The worker’s investment in equipment or materials for the task;

“The capital investment factor is most significant if it reveals that the worker performs a specialized service that requires a tool or application which he has mastered or that the worker is simply using implements of the [company] to accomplish the task.”  Nonetheless, the Court adopted a new standard in this case: mandating a comparison of “the worker’s investment in the equipment to perform his job”  and particularly, “whether that capital investment is evidence of economic independence” with the employer’s “total investment, including office rental space, advertising, software, phone systems, or insurance.”  This is surprising because most small companies will never match the investment or overhead of a large corporate customer which retained them.  In conducting this new analysis, the Court disregarded worker purchases which are commonly purchased by employees, such as cars and laptops.   In examining the facts, the Court noted that while the worker invested in some equipment, the employer’s investment was greater. Accordingly, there were disputed issues of fact to be resolved by a jury.

 

·        The worker’s opportunity for profit or loss, depending upon his skill

The trial court found that the plaintiff had control over this economic success because he controlled the size of his region, how many jobs he took each day, and whether to hire assistants.  Surprisingly, the Court disagreed. Although it conceded that the plaintiff sometimes brought assistants which helped him to finish jobs quicker and might have helped him complete more jobs each day, it concluded that “hiring employees carries additional costs that would have affected [his] ability to earn a greater profit” and there was no evidence that even with assistants, “he could complete more than four installations each day.”   Nonetheless, the Court acknowledged that the plaintiff sometimes made extra income from outside, but related, activities. Accordingly, there were disputed issues of fact to be resolved by a jury.

 

·        The degree of the alleged employer’s right to control the manner in which the work is performed

While the Court acknowledged that the employer never controlled or monitored the manner in which the work was performed on a day-to-day basis, never provided step-by-step guides or uniforms or logos, and the worker could refuse and rearrange assignments, the Court found that other factors created a disputed issue of fact.  For instance, the Court considered how long it took the worker to drive to assignments and perform the work.  In addition, the employer required and provided certain certification courses.   The employer also required to be notified when each project began and ended, and to receive photos of the completed work and shared customer feedback with the worker. The employer also required the worker to guarantee the quality of work and repair any problems identified within 30 days without additional charge.   The employer also controlled how much the consumer paid.

·        Whether the service rendered is an integral part of the alleged employer’s business.

This factor undeniably weighed in favor of employment status since the installation and repair on satellite dishes is the employer’s primary business.

Although the Court initially identified the following two additional factors, it did not discuss them.

·        Whether the business had “authority to hire or fire the plaintiff,” and

·        Whether the defendant-company “maintains the plaintiff’s employment records.”  

Instead, it considered the following factors as weighing in favor of employee status even though none of it was required by the employer:

·        The plaintiff did not obtain an federal employer identification number;

·        He wore a logo hat of the employer’s primary customer (which he purchased from the employer) and identified himself as a representative of that company (instead of as an independent contractor); and

·        He had no business cards.

 As to whether the plaintiff could prove that he was entitled to unpaid overtime compensation if he had been an employee, the Court decided that his testimony alone could establish sufficient evidence.  There were obviously no payroll records in this case.   “In the absence of those employer records, however, a plaintiff’s testimony is enough to create a genuine issue of fact.”  Moreover, the employer’s records confirmed that the plaintiff worked six days each week as he claimed.   In addition, the employer confirmed that the plaintiff typically completed four installations each day and that each installation averaged about 2.5 hours each.  That would end up being approximately 60 hours per week, not including the travel time between each assignment and the time the plaintiff spent completing the employer’s forms.

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 Reverses Employer’s Summary Judgment on FLSA Claim Brought by Class of Potentially Misclassified Outside Salespersons

Yesterday, the Sixth Circuit issued an important FLSA decision concerning the enforceability of employee waivers of FLSA class actions and the applicability of the outside sales exemption in the FLSA.   Killion v. KeHe Distributors LLC, Nos. 13-3357/4340 (6^th Cir. 7-30-14).  In that case, the plaintiffs held “sales representative” jobs with a food distributor, worked mostly in grocery and big box stores stocking and re-ordering products, and were laid off.  Some of the plaintiffs signed separation agreements waiving their rights to bring a class action or other claim.  They sued, claiming that that they had typically worked 60 hours/week but were not paid overtime wages.   Instead, they were paid commissions.   The Sixth Circuit reversed the denial of class certification to the plaintiffs who had signed the class action waiver on the grounds that such waivers were unenforceable for FLSA claims.  In addition, the Court found that a jury could find that they were not exempt outside sales representatives because evidence existed which showed that the plaintiffs (i) were inventory controllers that did not make sales, (ii) spent most of their time stocking and cleaning shelves, (iii) were compensated mostly (68%) for stocking shelves and store maintenance, and (iv) conducted promotional activities to increase the sales of account managers, not their own sales.   

The employer had argued that the class action waiver should be as enforceable as arbitration agreements in other FLSA claims.  However, the Sixth Circuit disagreed on the basis that there is a strong public policy in favor of arbitration agreements, which does not exist in a simple class action waiver.  Accordingly, the Court distinguished decisions from other circuits enforcing similar waivers on the grounds that those cases also involved arbitration agreements.

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.

DOL Announces $4.8M Settlement with Wal-Mart Over Overtime Pay Owed to Misclassified Employees

Yesterday, the federal Department of Labor announced that it had reached a settlement with Wal-Mart Stores, Inc. over the nationwide misclassification of more than 4,500 individuals employed as asset protection coordinators and vision center managers between 2004 and 2007. The settlement includes payments to the affected employees of unpaid overtime over a three-year period, plus an equal amount as liquidated damages. In addition, Wal-Mart will pay the DOL $463,815 in civil penalties because of the repeated nature of the violations. The settlement follows an investigation by the Wage & Hour Division, re-classification of the employees by Wal-Mart in 2007 and negotiations over the past four years. The DOL did not explain how Wal-Mart had misclassified the employee. For instance, it did not explain whether the employees did not exercise independent discretion, were not paid on a salary basis, or lacked sufficient managerial authority.

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.

Federal Court in Dayton Finds Employer Liable for Not Paying Overtime to Employees Misclassified as Independent Contractors

The federal government has taken a renewed interest in the misclassification of employees as independent contractors. In my view, this is one of the most common management faux pas I see. Employers do not need to pay overtime or taxes, provide insurance benefits, withhold taxes or worry about unemployment compensation liability in connection with independent contractors and this provides a powerful financial incentive for employers to take risks concerning legal requirements when everyone else is doing it. However, if it quacks like a duck . . . . . . About a decade ago, this was a very hot issue because Microsoft found itself on the wrong side of the IRS on this issue (and then had to provide stock to the misclassified employees under its benefit plants because of how it defined eligible “employees.”). Then the issue disappeared. On September 19, 2011, the DOL entered into a highly publicized arrangement with the IRS and 11 state tax agencies to turn over employers who misclassify employees as independent contractors. A recent federal case in the Dayton demonstrates that employers cannot rely on the “but everyone else is doing it” defense – (aka industry practice) to avoid or minimize its liability.

Near the end of September, the United States District Court concluded that an employer and its president misclassified employees as independent contractors and would be, therefore, liable for unpaid overtime and failing to maintain records of hours worked. Solis v. Cascom, Inc., Case No. 3:09-cv-257 (S.D. Oh, 9/21/11). The Fair Labor Standards Act essentially classifies everyone as an employee who is permitted to work and expects compensation (i.e., not true volunteers). However, it impliedly does not include paying overtime to independent businesses (such as those firms advertising in the yellow pages or on their own commercial websites). Courts typically apply the economic realities test, and the outcome depends on a number of factors and the facts of each individual case.

In this case, the Court found a number of factors weighed strongly in favor of finding the individuals to be employees and not independent contractors:

1) Employer’s right to control the manner in which the work is performed.

This factor weighed heavily in favor of employee status. The individuals completed employment applications, were hired for indefinite periods under terms that could be changed at any time by the defendant employer and, for liability reasons, were not allowed to hire their own assistants without the employer’s permission. Moreover, the employer controlled both the manner and means of performing the work: scheduling their appointments on a take-it-or-leave it basis, requiring them to remain on each job until dismissed by their supervisors, providing detailed training and instructions and requiring the completion of the employer’s forms. The employer also required mandatory attendance at meetings, required them to wear shirts and drive cars with the company logo and required them to seek permission in advance to take a day off work. In addition, the employer also made deductions from pay for errors and other customer issues that were sometime beyond the employee’s control. Most importantly, the individuals were performing the primary work of the company. Indeed, they were the only individuals performing the work that constituted the company’s core business: cable installation.

2) Alleged Employee’s Opportunity for Profit or Loss Depending upon Own Managerial Skill

This factor also weighed in favor of employment status because there were no opportunities for the individuals to increase their profit based on managerial skill (such as scheduling, material acquisition, hiring assistants, etc.). The only way to earn more money was to work longer hours.

3) Alleged Employee’s Investment in Equipment or Materials Required for His Task, or His Employment of Helpers

The Court found this factor to be neutral. The individuals did not invest in advertising or hold themselves out as independent entrepreneurs. They were, however, required to purchase their own tools (and could do so from the employer through payroll deduction) and to supply their own vehicle (or lease one from the employer). The employer provided the materials to be installed.

4) Requirement of a Special Skill to Render the Service

This favor also weighed in favor of employment because the job required minimal skill which could be apparently taught to anyone with six weeks of on-the-job training.

5) Degree of Permanence of the Working Relationship

This favor also weighed in favor of employment because the individuals were treated like at-will employees and remained employed for as much as several years.

6) How Integral the Services Are to the Employer’s Business

This favor weighed very heavily in favor of employment. “More than integral, more than core, cable installation was the entirety of Cascom’s business.”

Finally, the Court rejected the employer’s good faith defense that it was simply following an industry practice: “As for industry standards, “the law...is that ‘simple conformity with industry-wide practice’ fails to demonstrate good faith under the FLSA.”

Employers who are found to have misclassified employees as independent contractors can find themselves liable for unpaid overtime (for the past 2-3 years), unpaid state and federal employment taxes, tax penalties and possible liability under health insurance and pension plans. When the DOL announced its new enforcement agreement with the IRS, the IRS also announced an amnesty program encouraging employers to fix misclassified employees by paying only 1% fines, but does not cover any potential liabilities to state tax agencies or to the individual employees for back pay and pension obligations.

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.