Many employers continue to struggle with how to categorize workers; are they employees or are they independent contractors? This is in part because, as Jane B. Stranch, Circuit Judge for the Sixth Circuit indicated, “[t]The way we work in America is changing. The relationships between companies and their workers are more fluid and varied than in decades past.” While the Fair Labor Standards Act (FLSA) has not necessarily changed to reflect this evolution, the courts address it.
Case in point
A company provided private security and traffic control services performed by off-duty police officers and others who had no background in law enforcement. The company owner would receive requests for services and offer them to workers who had the appropriate qualifications. The workers had the option to accept or decline the assignments.
If workers accepted an assignment, the employer told them where to report, when to show up, and with whom to speak when they arrived. At the job site, workers followed the customer’s instructions, complied with company standard policies, and occasionally submitted to the supervision of other company workers. After completing an assignment, workers sent the employer an invoice with the number of hours they spent on the job. Workers were expected to pay for some of their necessary equipment.
The employer considered all these workers to be independent contractors, regardless of the compensation they received, the work they performed, or their background in law enforcement. Therefore, the workers never received overtime pay.
The U.S. Department of Labor sued the company, claiming that all the workers were actually employees and not independent contractors. In its post-trial decision, the district court held that the non-police workers were employees, while the police officers were independent contractors because they were not economically dependent on the company, but used the extra job to supplement their incomes. The decision was appealed, and the Sixth Circuit pointed out that, to determine whether a worker is an employee, the focus is on the economic reality of the situation, taking into consideration six factors:
- The permanency of the relationship between the parties,
- The degree of skill required for the rendering of the services,
- The worker’s investment in equipment or materials for the task,
- The worker’s opportunity for profit or loss, depending upon his skill,
- The degree of the alleged employer’s right to control the manner in which the work is performed, and
- Whether the service rendered is an integral part of the alleged employer’s business.
The Appeals court found that five (in italics) of the six economic-reality factors supported a finding that an employment relationship existed between the company and all its workers; therefore, all workers were actually employees, entitled to overtime.
This case is another sign that businesses must carefully look at who they categorize as independent contractors, as such relationships continue to be under the compliance microscope.