The $6 Million Man: Independent Contractor or Employee?

The U.S. Department of Labor (DOL) has been cracking down on businesses that misclassify workers as independent contractors instead of employees. Employers often classify workers as independent contractors because contractors don’t have to be paid the federal minimum wage or given benefits. Believe it or not, there are cases in which a worker isn’t an employee (as that term is defined under the Fair Labor Standards Act (FLSA)) but is properly classified as an independent contractor.

A federal district court recently held that an oil field staffing company didn’t violate the FLSA when it classified its gate attendants as independent contractors. The court’s decision provides greater protection for employers that use independent contractors and gives hope to businesses that challenge DOL decisions. Here’s an overview of the decision and its implications for employers that use independent contractors.
Facts

Gate Guard Services, L.P. (GGS), a Texas company, hires independent contractors to monitor gate traffic at remote energy and construction sites. The contractors are paid $100 to $175 per day and work 12- or 24-hour shifts. In September 2010, the DOL conducted an investigation and found that the company had violated the FLSA because the gate attendants were employees, not independent contractors.

In November 2010, the DOL requested that GGS comply with the FLSA by reclassifying the workers and paying more than $6 million in back wages. GGS then asked the district court for a determination on whether it complied with the FLSA.

FLSA Requirements

The FLSA requires covered employers to pay nonexempt employees for all hours worked in excess of the defined maximum hours. Specifically, under 29 U.S.C. § 207(a)(1), covered employers must pay employees at least 1½ times their regular rate of pay for hours worked in excess of 40 per week. The FLSA authorizes the DOL to file an enforcement action against an employer for violating that provision.

A court determines whether a worker qualifies as an employee under the FLSA by focusing on whether the worker is economically dependent on the business to which he renders services. That determination is highly dependent on the particular employment situation presented, and no single factor generally is determinative. In deciding whether a worker is an employee or an independent contractor, a court considers:

1. The degree of control the employer has over the manner in which the work is performed;
2. The opportunities for profit or loss, depending on the managerial skill of the worker;
3. The worker’s investment in equipment or material;
4. The permanence of the working relationship; and
5. Whether the service rendered is an integral part of the employer’s business.

Gate Attendants Are Independent Contractors, Not Employees

Using those factors, the district court held that the gate attendants were independent contractors. The court found that GGS didn’t exert a great degree of control over the workers, and many of the workers provided their own equipment and supplies. Further, many performed other jobs, allowing each worker to control his own profits or losses.

The court did find that the gate attendant positions didn’t require particular skill or initiative. But because the contractors worked on a temporary or project-byproject basis, the determination ultimately skewed toward the independent contractor classification. Gate Guard Services, L.P. v. Solis, 2013 WL 593418 (S.D. Tex., Feb. 13, 2013).

Bottom Line

This decision marks the first time the DOL has lost an employee classification case since the enactment of the FLSA in 1938. It’s therefore an important result for employers across all industries, particularly those that customarily rely on independent contractors. Those employers may now have an advantage if their hiring practices come under DOL scrutiny.

You should be aware of the circumstances required for designating a worker an independent contractor because the penalty for an FLSA violation can be severe. Consider the five factors listed above to determine whether your worker is an employee or an independent contractor. Although GGS prevailed in this case, the DOL likely will continue to investigate employers’ classification of workers as independent contractors.

This article was featured in the March 2013 issue of the Wisconsin Employment Law Letter, which is edited by Attorney Timothy Edwards and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.

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