Misclassifying Employees Can Have Major Consequences

March 21, 2019

Practice Area: Labor & Employment Law

Today’s economy is saturated with new ways to earn money without being subject to a set schedule or traditional employer demands. With so many individuals working part-time jobs with more autonomy than ever, companies are struggling to determine whether to classify those workers as independent contractors or employees. The distinction between those two categories is extremely important and can affect all aspects of your business, including benefits, overtime pay, and workers’ compensation.

While determining employee classification is a fact-intensive process, a recent decision out of the 6th Circuit made it clear that employers cannot rely on the fact that workers are part time, maintain control over the work they accept, or are operating exclusively on client sites as proof alone that workers are independent contractors. In Acosta v. Off Duty Police Servs., Inc., 915 F.3d 1050 (6th Cir. 2019), Off Duty Police Services, Inc. (“ODPS”) frequently hired off-duty law enforcement officers to provide private security and traffic control services in Kentucky. ODPS contracted with businesses in need of security and traffic control services and sent offers to qualified workers when a request was submitted to the company. After a worker accepted an assignment, ODPS would tell the worker where to report and any specific assignment details.

In evaluating whether the workers were employees and needed to be paid overtime under the Fair Labor Standards Act (“FLSA”), the 6th Circuit applied the six-factor Economic Realities Test (“ERT”) and found that the workers should have been classified as employees. The ERT evaluates the following factors:
  1. The permanency of the relationship between the parties;
  2. The degree of skill required for the services provided;
  3. The worker's investment in equipment or materials for their tasks;
  4. The worker's opportunity for profit or loss based upon her skill level;
  5. The degree of the company’s right to control how the work is performed; and
  6. Whether the services provided are an integral part of the company’s business.

While OPDS’s work might be part time and at the discretion of the employee, the fact that workers were moonlighting while off duty did not make them independent contractors. Many worked for ODPS for several years. Additionally, the job required no real specialized skill, and there was little relative investment in equipment or tools. It was essentially an hourly position with no opportunity to increase profit for the worker, and there was a fair amount of control over the way that work was performed given employer policies. Finally, the Court considered whether the services were integral to the employer’s business. Although ODPS claimed it was just a conduit for the worker to connect with the client, an argument that has been successful for some ride-sharing services, the Court did not find that argument compelling here. The Court emphasized that, given the FLSA’s extremely broad definition of "employee" and the statute's humanitarian purpose, workers will more often be deemed employees when factors are split or when there are close calls.

Hon. Jane Stranch, writing for the 6th Circuit, said it best when she wrote that “[t]he way we work in America is changing” and “[t]he relationships between companies and their workers are more fluid and varied than in decades past.” This case demonstrates that, even in the modern economy where many workers work remotely or on their own schedule, these workers may likely be determined employees.

Mistakenly classifying employees as independent contractors can result in back pay of overtime coupled with multiplying damages and unexpected tax obligations that can be extremely costly. Recently, it was reported that two companies settled for large sums as a result of misclassifying workers, one company agreeing to a $100 million settlement and another to a $20 million settlement. The misclassification of workers can and oftentimes will lead to burdensome, expensive, and unnecessary litigation that could have been prevented with proper planning and counsel.
 
About the Author: Anthony M. Batt is an associate with PilieroMazza in the Government Contracts, Litigation, and Labor & Employment Groups. He may be reached at abatt@pilieromazza.com.
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