FLSA Rising: How independent is that worker? Courts, employers wrestle with the question

By Stephanie N. Grimoldby | Aug 24, 2015

Editor’s note: This is the third installment in a series examining labor litigation brought under the Fair Labor Standards Act. The Cook County Record has delved into the issues driving FLSA litigation, examining the growth in the number of lawsuits and the impact such litigation is having and will have on employers of all sizes and types and their employees.  

Amid the rising tide of wage and overtime lawsuits brought in the last 25 years under the federal Fair Labor Standards Act, employers of all sizes have faced a series of questions.

Foremost for many, however, is the question of how to classify their workers.

As the economy has shifted, many have attempted to turn to the use of so-called freelancers, otherwise known as independent contractors.

In 2014, two leading freelance companies - Freelancers Union and Elance-oDesk, now known as UpWork - commissioned independent research firm Edelman Berland to find out how many Americans engage in freelance work.

The study, “Freelancing in America: A National Survey of the New Workforce,” found that 53 million Americans - 34 percent of the workforce - are freelancers.

The study went a step further and divided the term “freelancer” into five different segments, including one for independent contractors, who were described as “‘traditional’ freelancers [who] don’t have an employer and instead do freelance, temporary, or supplemental work on a project-to-project basis.”

Of the 53 million freelancers, 40 percent of the independent workforce - 21.1 million professionals - was made up of independent contractors.

But this seismic shift in the country’s workforce has also spawned an equally huge development in wage and hour litigation: Continuing tussles over who can and cannot properly be classified as an independent worker.

While many workers can and do benefit from independent contracting arrangements, many others are improperly classified by businesses as employers look to cut labor costs, said Chicago attorney John Billhorn, who practices exclusively in wage and hour law.

“It’s a major cost cutting tool, if you will, for an employer,” Billhorn said. “You not only get rid of requirements for overtime, worker’s comp insurance, employment taxes .. you stay insulated from many of the federal employment statutes. There’s just not that many ways for [businesses] to do it compliantly.”

And when they don’t, the ramifications can be huge.

In June, FedEx Corp. agreed to pay $228 million to resolve a decade-long lawsuit in which more than 2,300 California workers at FedEx Ground and FedEx Home delivery claimed they were misclassified as independent contractors. The Ninth Circuit Court of Appeals had ruled in 2014 that the drivers were, in fact, misclassified, and FedEx paid for its mistake.

Regionally, Billhorn said his highest percentage of successful litigation under the FLSA has come from lawsuits dealing with the misclassification of independent contractors.

And a major reason is that most workers don’t fully pass the economic realities test the FLSA uses to determine whether a worker is an employee or independent contractor.

There are six points of emphasis in the test meant to help decipher whether workers are dependent on an employer, and thus should be classified as employees, or rather if those in business for themselves are more correctly classified as independent contractors.

One point contemplates the extent to which a worker performs the same service that the employer is in business to provide.

“What is the purpose of the business?” asked Chicago attorney Maureen Salas, a shareholder in Werman Salas PC, a firm which handles large volumes of wage and hour cases in Chicago’s federal court. “We have a lot of cases where cable installation businesses classify [their workers] as independent contractors. The whole business, the whole purpose, is to install cable. How could these workers be anything but employees? Or delivery driver cases, [such as] FedEx - they deliver packages to people in their homes.”

Another point considers the worker’s motivation to operate as in independent business owner.

“If you’re just hiring an individual who is focused specifically on doing work just for you, and they’re not doing work for a variety of other customers or clients, that indicates the likelihood they would not pass the legal test of an independent contractor,” Billhorn said.

Still, similar to other parts of the FLSA that businesses deem difficult to understand, the economic realities test isn’t a hard-and-fast rule.

In a fact sheet published on the DOL’s Wage and Hour Division website, the DOL admits that it’s difficult to come up with a definitive answer regarding employment status.

“The Supreme Court has indicated that there is no single rule or test for determining whether an individual is an employee or independent contractor for purposes of the FLSA,” the fact sheet reads. “The Court has held that the totality of the working relationship is determinative, meaning that all facts relevant to the relationship between the worker and the employer must be considered.”

Often, businesses will contend that their workers meet several factors that could classify them as independent contractors, though Billhorn said it’s often not enough.

“There is one contracting situation that meets all points - the old contract of construction, [where there is a] general contractor and everyone else has their sub-specialties,” Billhorn said. “It can be replicated in some other industries, but that’s a good model of what a compliant independent contractor situation is.”

Workers in the building trades best fit the bill because they fulfill a majority of the economic realities test factors.

“Subcontractors, like plumbers, may have hundreds of different customers,” Billhorn said. “They advertise; they use their own tools; control of their own work is minimal; they own insurance. That’s evidence of a true independent contractor relationship.”

Federal courts have seen an increasing number of businesses sued over the misclassification of their employees, enough to warrant a 15-page document from Labor Department Administrator David Weil.

In Administrator’s Interpretation No. 2015-1, issued July 15, Weil strove to provide the courts with further guidance on the subject, said Salas.

“The administrator comes out and he says the definition of ‘employee’ is a broad definition,” said Salas. “He concludes by saying that most workers are employees under the FLSA.”

That could spell trouble for a number of businesses who work almost exclusively with independent contractors, including ridesharing company Uber Technologies, commonly recognized as the most valuable startup in the world.

In California, Uber currently is facing a possible class action lawsuit in which 160,000 of its drivers - classified as independent contractors - allege they are actually employees of the $50 billion company, and as such, deserve reimbursement for mileage and tips.

The outcome of the case could affect other service-oriented companies with similar business models and how they classify their workforce.

Awareness of the misuses of independent contractor classification has become well known even outside of private litigation, Billhorn said. The IRS may look at a company’s 1099 forms and challenge employers on the employment taxes owed to the state and federal government. And the Illinois Department of Employment Security routinely conducts audits, using its own list of parameters to determine whether a worker is correctly classified as an independent contractor.

Companies not only can be liable for overtime compensation and back pay, but back taxes and penalties, Billhorn said.

“In general, the companies that are avoiding this expensive litigation are the ones being proactive,” Billhorn said. “Defense lawyers are writing their employee handbooks. [You almost have to] pay someone to keep you out of federal court. Sometimes it’s a really good investment.”

Editor's note: The U.S. Chamber Institute for Legal Reform owns the Cook County Record.

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