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 a decision reiterating important independent contractor issues for employers, the Ninth Circuit Court of Appeals last week reversed a lower court decision holding that certain delivery drivers were properly classified as independent contractors under various provisions of the California Labor Code. Narayan v. EGL, Inc., 2010 U.S. App. LEXIS 14279 (9th Cir. July 13, 2010).

At the trial court level, Judge Ronald M. Whyte of the Northern District of California concluded that the drivers, although residents of California providing delivery services in California, were independent contractors under the laws of Texas, the governing law set forth in the drivers’ “Leased Equipment and Independent Contractor Services” agreement with EGL, a nationwide provider of logistics services.  In a footnote, the court further held that “[t]he result would be no different if California law governed.”

Reversing the decision, the Ninth Circuit observed that ‘[w]hether the Drivers are entitled to those benefits [under the Cal. Lab. Code] depends on whether they are employees of EGL, which in turn depends on the definition that the otherwise governing law--not the parties--gives to the term ‘employee’” (emphasis added). The Circuit Court held that the parties’ selection of Texas law to “govern” the contract applied only to disputes about interpretation of the contract (i.e, Texas contract law), not the application of employment statutes like the California Labor Code. Simply put, the Circuit Court held that the drivers’ claims under the Cal. Labor Code did not “arise” from the contract (i.e., did not call primarily for interpretation of that contract) – the contract was simply relevant evidence relating to their claims of employee status.  Finally, the Court reversed Judge Whyte’s ruling that the drivers were independent contractors (even under California law) because, in the Court’s view, he “did not apply the relevant factors [for IC status] identified by the Supreme Court of California to the facts in this case.”

While the Appellate Court’s failure to recognize the choice of law clause may not be relevant to most employers, the central holding and vital takeaway is very straightforward: independent contractor status is generally narrowly construed and currently under intense scrutiny. Further some aspects of the relevant analysis vary not only from state to state but from statute to statute. Additionally, and critically, the intent of the parties as reflected by the parties’ agreement is often of little importance to an administrative agency’s or court’s analysis, as Narayan clearly demonstrates.

All employers, and especially those with multi-state operations, must focus on the propriety of their organization’s use of contractors.   A more detailed analysis of this issue can be found here.

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When an independent contractor alleges s/he was misclassified and seeks alleged unpaid minimum wage and overtime, a significant issue is whether a prevailing plaintiff can receive a windfall.  Simply put, can an independent contractor alleging misclassification under the FLSA (or state law) keep fees for services already collected, and also collect a damages award for unpaid minimum wage and overtime?  In one recent decision, a federal judge has found the answer to be “not necessarily”.  Doe v. Cin-Lan, Inc., 2010 U.S. Dist. LEXIS 16447 ( E.D. Mich. Feb. 24, 2010)(Note: Jackson Lewis partner Allan Rubin represents Cin-Lan in this matter).

Cin-Lan concerns the classification of exotic dancers as independent contractors at a Michigan nightclub.  The named Plaintiff entered into an independent contractor arrangement under which she danced at the defendant club in exchange for a portion of “dance fees” collected from patrons; the balance of the dance fee went to the club.  The club did not pay Plaintiff minimum wage or overtime, though she often collected dance fees at a rate approaching $75/hour.  Significantly, the parties’ agreement called for the dance fees to serve as an offset to any wage liability if Plaintiff were ever found to be an employee. 

In rejecting Plaintiff’s motion to dismiss the counterclaim, the Court first rejected Plaintiff’s argument that the contract itself was “repugnant to the FLSA” and thus invalid.  The Court further observed that “the parties agreed that if there was ever a legal determination that their business relationship was in fact an employment relationship, then the alternative provisions of the [contract] would apply to define the parameters of that relationship. The counterclaim alleges that Doe agreed to such an arrangement” and therefore the Court declined to reject such an arrangement as a matter of law.  Finally, the Court rejected Plaintiff’s argument that all “dance fees” should be re-characterized as tips for purposes of the FLSA (and thus not credited against wages owed). 

While this decision is based on a very-specific fact pattern involving dancers in the nightclub industry, it highlights the importance and value of a well-drafted independent contractor agreement.  Even if such agreement does not support the independent contractor classification, potentially it can limit damages.

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During the week of April 26, senior Labor Department officials discussed upcoming rules and initiatives. In a web chat, Nancy Leppink, deputy administrator of the Wage and Hour Division, stated that the agency will issue proposed rules covering numerous areas including companionship services, child labor and recordkeeping within the next 18 months.    The proposed recordkeeping rules are the most imminent and are expected in August.  Not surprisingly, these proposed rules will focus on the use/misuse of the independent contractor classification by employers.   Ms. Leppink indicated that the rules should "enhance awareness among workers of their status as employees or independent contractors" and may even require employers to explain to any contractor the basis for a contractor, non-employee classification.  In fact, a 2010 Regulatory Agenda Fact Sheet addressing the proposed recordkeeping regulations includes the following statement - "DOL is considering a proposed rule requiring covered employers to notify workers of their rights under the FLSA, and to provide information regarding hours worked and wage computation. Any employers that seek to exclude workers from the FLSA’s coverage will be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to WHD enforcement personnel who might request it."  The Fact Sheet can be accessed via this link.

Ms. Leppink's comments mirror those of Deputy Labor Secretary Seth Harris.  At a conference, Mr. Harris discussed the DOL's "misclassification initiative", which encompasses various labor department agencies as well as the IRS and several state agencies.  Mr. Harris stated that the goal of the initiative is to ensure "employers will no longer be able to opt employees out" of statutory and regulatory protections.  

With an increasingly aggressive USDOL, employers must continue to take steps to ensure their practices, especially in regard to employee classification, comply with federal and, as applicable, state law.

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On April 22, 2010, a revised version of the Employee Misclassification Prevention Act (“Act”) was introduced. If enacted, the Act, would amend the FLSA and provide a host of new enforcement mechanisms and penalties to combat employer use of the “independent contractor” classification to avoid minimum wage and overtime payment obligations.

If passed the Act would (among other provisions):

• require employers to keep records reflecting the correct status of each worker as an employee or nonemployee (which the FLSA currently does not require);

• require employers to notify workers in writing of their classification as an employee or nonemployee (not required); and

• make it unlawful to retaliate against non-employee workers who advocate for their rights under the Act (as discussed here, the FLSA does not typically protect non-employees from retaliation for seeking alleged unpaid monies).

Due to the federal and state focus on misclassification, all employers should closely review whether contractors are “economically dependent” on the business as well as (1) the degree of control exercised by the employer over the workers; (2) the workers' opportunity for profit or loss and their investment in the business; (3) the degree of skill and independent initiative required to perform the work; (4) the permanence or duration of the working relationship; and (5) the extent to which the work is an integral part of the employer's business.” See, e.g. Velu v. Velocity Express, Inc., 666 F. Supp. 2d 300 (E.D.N.Y. 2009). 

A more detailed Jackson Lewis analysis of the proposed legislation is available here.

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In today's Employment Law 360 (subscription required), Jackson Lewis partner and leader of the Firm's Wage and Hour Practice Group offered his thoughts on a variety of wage and hour-related topics, including what he sees as the next wave of wage and hour cases:

These days, the plaintiffs’ bar is very focused on uncompensated increments of time, particularly at the start and end of the workday. Tip credit cases are big following [Fast v. Applebee's].

Independent contractor misclassification will continue to be a point of emphasis for DOL as well as the private bar. Most employers are out of compliance, and the best plaintiffs’ lawyers are always on the look-out for violations affecting a sizeable number of workers that can make a class or collective action viable.

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