From Workforce, Jon Hyman discusses a recent case in which the court said that whether the workers formed corporations did not prevent a claim that they had been misclassified as independent contractors. Jon writes:
The distinction between independent contractors and employees continues to confound employers.
At issue in Acosta v. Jani-King of Oklahoma (10th Cir. 10/3/18) [pdf] is whether the Department of Labor could continue its FLSA claims on behalf of individuals who provide cleaning services as franchisees of a janitorial company. If the franchisees are independent contractors, then the FLSA does not cover them. If, however, the company misclassified them as independent contractors, then the DOL has something to litigate.
The 10th Circuit held that the DOL’s complaint said enough for the lawsuit to have continued.
“To determine whether an individual is an employee under the FLSA, courts apply the six-factor economic realities test, which considers “(1) the degree of control exerted by the alleged employer over the worker; (2) the worker’s opportunity for profit or loss; (3) the worker’s investment in the business; (4) the permanence of the working relationship; (5) the degree of skill required to perform the work; and (6) the extent to which the work is an integral part of the alleged employer’s business.” Thus, where the Secretary has alleged that Jani-King violated FLSA recordkeeping requirements with respect to “individuals … who personally perform the janitorial cleaning work as designated by Defendant,” the fact that these individuals are franchisees or have formed corporations does not end the inquiry.…”
“The complaint identifies individuals (those who “personally perform the janitorial cleaning work”) who could qualify as … “employees” under the economic realities test if all the Secretary’s well-pleaded factual allegations about the nature of the relationship between Jani-King and these individuals are accepted as true and viewed in the light most favorable to the Secretary.”
I often counsel employers that engaging individuals as independent contractors is high-risk under the FLSA, and that the safest course of action is to engage entities (corporations, LLCs, etc.) that in turn employ the individuals.
As Jani-King illustrates, however, even this strategy is not without risk, and the economic realities of the relationship still must support the contractor classification. If the classification is a scam to avoid paying employees overtime, court will not hesitate to call you on it and hold you responsible for the misclassification.