Recently a client informed me that some of his workers are independent contractors. I asked the client whether he’s sure these workers are properly classified as independent contractors. “Yes,” the client said. “They signed agreements. It’s not a problem.”
Actually it may be a problem. Under U.S. employment laws, whether a worker is an employee or an independent contractor depends on the application of a legal test, not on the existence of an independent contractor agreement.
Improper classification can result in liability to the employer, as illustrated by a recent case, Scantland v. Jeffry Knight, Inc. (11th Cir., July 16, 2013). The plaintiffs were technicians who installed and repaired cable services for the defendant, an installation and repair service contractor for a cable provider. The plaintiffs claimed they were entitled to overtime pay under the Fair Labor Standards Act. The defendant claimed the workers were independent contractors not entitled to the protections of the FLSA.
The court applied a six-factor test to measure the “economic reality” of the parties’ relationship: (1) the degree of the company’s control over how the work was to be performed; (2) the workers’ opportunity for profit or loss depending upon their managerial skill; (3) the workers’ investment in equipment or materials required for their work; (4) whether the services rendered required a special skill; (5) the degree of permanency of the working relationship; and (6) the extent to which the service rendered was an integral part of the company’s business.
Applying these factors, the court found that the technicians were employees. They were required to report to a company facility at the same time each morning, where they would get their assignments for that day. They could not reject an assignment without threat of termination or being refused work. The technicians were either not permitted or did not have the time to work for other companies. The company supervised and monitored the technicians’ work, leaving the technicians little discretion as to how to perform their jobs. The technicians had little opportunity to profit from their own managerial skills; their pay was simply a function of how much work they performed. While the technicians were required to supply their own vehicles and tools, they were not required to make a significant capital investment. The technicians were skilled, but their training was usually provided by the company. The technicians worked for the company for an average of more than five years, suggesting a permanent relationship with the company. And the services the technicians provided were integral to the company’s business. On balance, the court held, the economic reality made the workers employees entitled to overtime pay, not independent contractors.
And by the way, the workers had signed “Independent Contractor Service Agreements.” They weren’t worth the paper they were printed on.