Knowing the Proper Definition of “Contractor” can Save Money, Headache
By Carol Keough, Director, Labor & Employment Law Section
Board Certified in Labor and Employment Law
Coats Rose – Houston
In 2008, the Fifth Circuit Court of Appeals, which presides over Texas, Louisiana and Mississippi, demonstrated that it will closely scrutinize attempts by employers to circumvent overtime laws via an “independent contractor” status, under the Fair Labor Standards Act (FLSA).
In Joseph Hopkins, et al. v. Cornerstone America, et al., 545 F.3d 338 (5th Cir. 2008), the Fifth Circuit emphasized that an independent contractor is an independent business person, not just someone who declares himself to be an independent contractor, or someone who subjectively believes that he is an independent contractor. The Court focused on whether the worker is economically dependent upon the alleged employer or if he is in business for himself. Regardless of whether or not the worker signs an agreement stating that he is an independent contractor, the agreement will not control whether the worker is an employee under the FLSA for purposes of determining whether overtime is owed.
In the Cornerstone opinion, the employer argued that its sales leaders were independent contractors not subject to overtime laws. However, the Fifth Circuit analyzed a series of five factors to determine “employee” status under the FLSA. First, the Court evaluated whether the employer or the worker controlled the economic aspects of the worker’s business, and found that the employer controlled pricing, territories and the number of sales leads. The Court also determined the employer, and not the sales leaders, had made the greatest investment in the business (maintaining offices, brochures, accounting services).
Next, the Court factored in whether the worker had specialized skills to be an independent contractor, as well as the ability to determine how many hours he worked. After investigation, the Court found the sales leaders had generalized skills common to all effective managers, rather than specialized skills that could distinguish them as independent contractors. Simply working long hours by choice was not enough to make the sales leaders “independent contractors.”
Finally, the Court evaluated whether the sales leaders offered their services to several entities as an independent business, and found that the workers worked almost exclusively for the employer. The failure to properly categorize the workers as employees left Cornerstone liable for payment of overtime and employee benefits to the sales leaders. In addition, although not addressed by the Court, the IRS can demand the FICA contributions that should have been made and were not.
Employers should not “guess” or even rely on a worker’s belief that the worker is an independent contractor. Any mistake in determining whether a worker is an employee may result in a collective action by every worker in a similar job classification who is not properly categorized and paid as an employee as required by the FLSA.