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Employee or Independent Contractor? The Answer May Be Costly . . . and Your Agreement May Be Irrelevant

Posted by Eric Parzianello on July 20, 2010

Recent court rulings continue to make clear that regardless of what your independent contractor agreement says, minimum and overtime wages may be required to be paid to workers under the Fair Labor Standards Act (“FLSA”). An Indiana federal court recently found exotic dancers to be employees of a topless nightclub and a Tennessee federal court found nurses who signed Independent Contractor Agreements to nevertheless be employees of a business which provides nurses for long-term nursing care. Once a company is found liable, corporate officers who have operational control and are involved in the day-to-day business operation or have some supervision responsibility for the employees are personally liable for back wages and overtime. Additionally, joint employers may be liable where the alleged employer had the power to hire and fire the employee, supervised and controlled the employee’s schedule and conditions of employment, determined the rate and method of payment, and maintained employment records.

The FLSA requires employers to pay minimum wage to “employees” and wages at a rate of one and one-half times their regular rate of pay to “employees” who work more than 40 hours in one workweek. While the Act provides little guidance in its definition of “employee” as “any individual employed by an employer,” courts have interpreted “employees” to be “those who as a matter of economic reality are dependent upon the business to which they render service.”

The “economic realities” test considers these factors: (1) the permanency of the relationship between the parties; (2) the degree of skill required for rendering the services; (3) the extent of the worker’s investment in equipment or materials for the task; (4) the worker’s opportunity for profit or loss; (5) the degree of the employer’s right to control the manner in which work is performed; and (6) whether the service rendered is an integral part of the employer’s business. Importantly, the parties’ written agreements do not control whether a worker is considered an employee for FLSA purposes. Although a contract may provide some evidence of the economic relationship between parties, the FLSA is designed to defeat contractual arrangements.

On June 21, 2010, applying the factors to nurses in the case of Lemaster v. Alternative Healthcare Solutions, Inc., a federal court in Tennessee found: (1) the most transient nurse worked for over six months and the permanence factor therefore leaned slightly in favor of an employment relationship; (2) while nurses are skilled workers, nothing suggested that they were capable of finding their own clients, a factor clearly supporting a finding of employee status; (3) the nurses supplied their own stethoscopes and blood pressure cuffs, but otherwise did not provide any medical equipment used at the patients’ homes, a factor weighing in favor of finding that the nurses were employees; (4) all of the nurses were compensated at an hourly rate and they had no opportunity for profit or loss beyond their hourly wage, a factor falling squarely on the side of employee status; (5) the company exercised control over the nurses’ work schedules which weighed slightly on the side of employee status; and (6) because nurses are integral to a company in the business of recruiting nurses, this factor also weighed in favor of finding employee status.

The court concluded that the nurses were employees regardless of their Independent Contractor Agreements (“ICAs”). As to the agreements, the court went out of its way to signal a possible attorney malpractice action by stating: “The attorney drafted the ICAs and advised [the employer] on the use of independent contractors, although she never mentioned the application of the Fair Labor Standards Act to the nurses.”

On June 4, 2010, an Indiana federal court found that topless dancers were employees of the Dancers Showclub in Indianapolis. The court in Morse v. Mer Corp. found that the club’s exercise of control over the dancers, the lack of the dancers’ control over their profit and the fact that “a dancer’s investment is limited to her costumes and a padlock,” all weighed in favor of employee status. As to the issue of whether the dancers required highly developed skills, the court rejected the club’s argument that a dancer “must be a peculiar combination of a customer service representative and counselor: she must have excellent listening skills, the ability to read another person’s affect and discern from that demeanor his particular conversational or emotional needs, and the ability and willingness to fulfill those needs in a purely non-sexual way.” The court found that argument to be “unconvincing, especially because nothing in the record indicates that the [club’s] hiring process included an assessment of a prospective dancer’s communication or counseling skills.”

These cases highlight the dangers of hiring independent contractors without a careful analysis of whether the FLSA requires compliance with minimum wage and overtime laws. Even if you have a written agreement and pay an hourly rate which is significantly higher than minimum wage, the workers or the Department of Labor may challenge your workers’ status and seek to collect back wages from your company and its officers.


2 Responses to “Employee or Independent Contractor? The Answer May Be Costly . . . and Your Agreement May Be Irrelevant”

  1. Good article. Increasingly employers are taking advantage of employees by misclassifying them as 1099 contractors rather than employees. This cheats employees out of benefits, overtime, workers compensation, payment of social security taxes and job protections afforded under state and federal laws to employes. For more information on this topic check out the related postings on my blog

  2. Well done, informative and I look forward to other updates. I work for lawyers and you are getting the word of your business out there. – Dan

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