Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

As discussed here, here and here, the issue of independent contractor classification under wage, unemployment, tax and other laws is omnipresent, continuing to arise in litigation and legislative reform. In a rare victory for employers in this regard, this week the Fifth Circuit Court of Appeals (encompassing Texas, Louisiana and Mississippi) affirmed a district court’s decision that an individual performing work as a “splicer” (one who installs, cuts, repairs, and tests various high voltage cables) was properly classified as an independent contractor under the FLSA. Thibault v. BellSouth Telcoms., Inc., 2010 U.S. App. LEXIS 15267 (5th Cir. 2010).

The Thibault case arose from BellSouth’s efforts to rebuild its telecommunications grid in the aftermath of Hurricane Katrina. Unable to directly employ sufficient splicers to complete the huge volume of needed repairs, BellSouth contracted out some of the work. In fact, demand was so great that the contractor (Directional) subcontracted to a second entity (Parker), which in turn entered into a contractor agreement with Plaintiff Thibault. While Thibault was not an experienced splicer, he had extensive technical knowledge from a previous career, and operated his own business in his home state of Delaware. 

The Court described Thiabult’s work on the BellSouth repairs as follows:

In October, Thibault filled his trailer home with water and food, and the two men drove to Louisiana. From October 4, 2005 to January 6, 2006, Thibault worked as a splicer. In that time, Thibault made $ 51,628. Everyday, Thibault was required to report to Kenner Yard, a property rented by BellSouth.  At the first meeting, Thibault claims that a Parker supervisor informed them that they would be paid sixty-eight dollars an hour, would work at least eighty-four hours a week and would get a per diem and a place to park his motor home. Every day, Thibault showed up to Kenner Yard, and was assigned a specific splicing job in New Orleans. BellSouth  engineers created the overall rewiring plan for New Orleans. BellSouth supervisors designated the specific jobs to be done daily, and assigned Directional supervisors to distribute the assignments. When Thibault received his assignment, he was then required to take his truck to the job and work on the problem he was assigned. When completed, Thibault would return to Kenner Yard and would be assigned another splicing job. He worked in thirteen-day intervals with a one-day break in between. While Parker paid Thibault, BellSouth  had to approve all vacation and break time. On January 6, Parker laid off Thibault. Directional offered Thibault a job as a splicer, working directly for Directional, but Thibault declined. Instead, he returned to Delaware, and has not worked as a splicer since. Thibault brought this suit against Parker, Directional, and BellSouth for overtime pay under the FLSA, breach of contract, and Louisiana wage law statutes.

Id. at * 4-6.

In analyzing the “economic realities” of the arrangement between Thibault and the contracting entities, the Court noted that: 1) the relationship did not have a high degree of permanence as Thibault intended to return home to Delaware; 2) Thibault was subject only to limited supervision in his performance of the splicing work; 3) Thibault possessed a high degree of technical skill and initiative; and 4) Thibault had a high degree of investment in the tools necessary to be a splicer (bucket truck, cable splicer, pump, ventilator, ladder, climbing belt, harness, hard hat, safety vest and other miscellaneous tools), and controlled his profit or loss by managing his expenses while stationed in Louisiana. Furthermore, Thibault was a sophisticated business man with an independent business who was not economically dependent on splicing work.

While Thibault is a favorable decision and positive news for employers within the Circuit, it is important to note that the Plaintiff in the case possessed a high degree of skill, sophistication and autonomy: important components for creating a defensible independent contractor relationship. 

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In general, when calculating the regular rate of pay for purposes of determining overtime under the FLSA, all remuneration must be included.  This rule is subject to certain limited exceptions for, inter alia, discretionary bonuses and reimbursement of legitimate expenses.  But, if an employer decides to provide an hourly “per diem” and classify it as expense reimbursement, can the employer exclude the “per diem” from the regular rate of pay?  In a decision issued last week, the Fifth Circuit Court of Appeals, affirming the District Court’s finding of a willful violation of the FLSA, held that an employer violated the Act by excluding such “per diem” from the regular rate of pay in an attempt to artificially lower the regular rate of pay.  Gagnon v. United Technisource Inc., 2010 U.S. App. LEXIS 10880 (5th Cir. May 27, 2010).

The facts before the court were simple.  The employer initially paid the plaintiff a straight time rate of $5.50 per hour, plus a per diem of $12.50 per hour for the first 40 hours worked each workweek, and an overtime rate of $20 per hour thereafter.    Later on, the employer increased the plaintiff’s hourly per diem and hourly overtime rate by $1 (i.e., to $13.50 and $21.00 respectively) while leaving the straight time rate unchanged, characterizing this increase as a “raise.”  When Plaintiff sued for alleged unpaid overtime, the employer asserted that its overtime payments exceeded legal obligations as the overtime rate was much greater than time and a half the hourly rate of $5.50 per hour.  The employer further asserted that the per diem reasonably approximated reimbursable expenses and thus did not need to be included in the regular rate of pay.     

The Court rejected the employer’s defenses.  While recognizing that a per diem could be excludable from the regular rate, the Court deferred to the Department of Labor’s position, as delineated in the Field Operations Handbook, that any per diem or similar payment that is based upon hours worked must be included in the regular rate. Id. at fn. 6.  The Court expressed its belief that the employer had attempted to artificially reduce the regular rate and reduce overtime costs and stated “we can conceive of no reason why a legitimate per diem would vary by the hour and be capped at the forty-hour mark, which not so coincidentally corresponds to the point at which regular wages stop and the overtime rate applies.”  Id. at * 9. The Court also: (i) rejected the employer’s attempt to offset liability with allegedly overpaid per diem that the plaintiff should not have received based on a change in his home address which moved him closer to the workplace and theoretically reduced his expenses (on the basis that the per diem was actually part of the regular rate of pay and not expense reimbursement in the first place); (ii) reiterated that a counterclaim is inappropriate in an FLSA action pursuant to precedent (and must be brought separately, if at all); and (iii) stated that plaintiff’s attorneys were entitled to recover fees for their work on the appeal while vacating the initial fee award due to the District Court’s failure to explain the basis therefore (which, as an aside, was 6 times back pay and liquidated damages awarded to the Plaintiff, combined).

All employers should review their overtime calculation protocols to ensure they are paying time and a half the properly calculated regular rate of pay for all overtime hours.  To the extent an employer provides a per diem for expense reimbursement, if the per diem is based on hours worked, there is a significant concern with excluding the “per diem” from the regular rate calculation.

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