On September 19, 2011, the U.S. Department of Labor (DOL) signed a memorandum of understanding with the IRS aimed at ending the business practice of misclassifying employees as independent contractors to avoid providing employment protections and employment-related benefits. “We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees,” said Secretary of Labor Hilda L. Solis. Within a matter of days after this announcement, a U.S. District Court in Ohio issued a ruling in a case (Solis v. Cascom, Inc.) filed by the DOL that reiterates the risks businesses face when they misclassify workers as independent contractors.
Background facts leading up to the decision
Cascom, Inc. had a business that contracted with Time-Warner Cable to install cable in homes in Southwestern Ohio. Julia J. Gress was the President of Cascom. To fulfill its contract with Time Warner, Cascom hired cable installers to do the installation. Before commencing with Cascom, each cable installer was required to complete an “employment application.” Cascom then hired each installer for an indefinite period of time, not allowing the cable installers to hire their own employees without Cascom approval. The installers were not paid hourly but were paid for each installation performed. The installers were free to work additional hours to increase their income but the cable installation service Cascom performed did not require the skill of an electrician. In fact, several workers had no experience even remotely related to cable installation prior to beginning with Cascom.
Cascom assigned work to its cable installers on a day-to-day basis. Once in the field, workers checked in with the dispatcher after each job, remained on the job until dismissed by Cascom and completed Cascom paper work, including work orders. The workers followed Cascom’s instructions for installation methods and work practices. Workers sometimes attended morning meetings led by Cascom supervisors. In addition, Cascom dictated all of the routes, which installers were required to accept or reject in their entirety. Workers had to wear shirts with the Cascom logo and to display Cascom’s logo on their vehicles. Workers had to request leave, in writing, if they wanted to take a day off.
Analysis of employment relationship under the FLSA
In the lawsuit, the Department of Labor (DOL) contended that the work arrangement between Cascom and the cable installers amounted to an employer-employee relationship for purposes of the Fair Labor Standards Act (FLSA), 29 U.S.C. § 201, et seq. The DOL argued that Cascom (and its president) violated the FLSA by misclassifying Cascom employees as independent contractors and, consequently, not compensating them for overtime work as required by the FLSA. As a result, the DOL sought to recover back wages for approximately 250 installers in excess of $800,000 and sought an equal amount in liquidated damages under the FLSA. After a two-day trial, the court found that Cascom’s installers were “employees” subject to the overtime and record keeping requirements of the FLSA.
In its opinion, the court emphasized that the FLSA defines “employee” in “exceedingly broad” terms. Although the defendants argued that the cable installers were independent contractors with whom they contracted to have work performed rather than FLSA employees, the court reminded the defendants that simply putting on an ‘independent contractor’ label does not remove the worker from the protection of the FLSA. Accordingly, the court articulated several factors, which it used to distinguish an employment relationship from a relationship with an independent contractor:
1) the degree of the alleged employer’s right to control the manner in which the work is to be performed;
2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill;
3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers;
4) whether the service rendered requires a special skill;
5) the degree of permanence of the working relationship; and
6) whether the service rendered is an integral part of the alleged employer’s business.
Since it is well settled that the answer to one of these factors alone is not sufficient to establish whether an employment relationship exists, the court emphasized that the entire relationship should be considered to make the determination. Accordingly, after applying the facts at issue to the above-referenced factors, the court determined that Cascom’s installers were employees under the FLSA, and thus Cascom should have paid them overtime and complied with the record keeping requirements of the FLSA.
So what does this all mean for you?
In the wake of Cascom, Secretary Solis explained that “[t]he misclassification of employees as independent contractors is an alarming trend. The practice is a serious threat to both workers, who are entitled to good and safe jobs, and to employers who obey the law and are undercut when others use illegal practices.” In light of these comments, and the DOL’s current initiative to seek out misclassification issues, we should expect to see more of these lawsuits filed in the near future. As a result, employers should ensure that workers are properly classified to avoid the significant exposure that results from violations of the FLSA. Conversely, workers who suspect they are misclassified, and improperly owed overtime wages, should consult with a qualified employment attorney to ensure their rights are protected.