THIS ARTICLE FIRST APPEARED IN HRLAWS.COM’S TENNESSEE EMPLOYMENT LAW LETTER BY BUTLER SNOW’S Kara E. Shea
A recent case from the U.S. Court of Appeals for the 6th Circuit (whose rulings apply to Tennessee employers) highlights the importance of ensuring you are certain about the status of any workers you’ve classified as independent contractors.
Off Duty Police Services (ODPS) offers private security and traffic services, such as directing traffic around construction zones. Most of ODPS’s workers are off-duty “sworn” law enforcement officers. Other “unsworn” workers don’t have a background in law enforcement. Many of the workers have been with ODPS for years or even decades, typically as a way of earning supplemental income.
ODPS schedulers call workers with assignments, which they can accept or refuse. However, workers who refuse may be taken off the list to receive assignments for a while, which some of them view as a form of disciplinary action. For each assignment, ODPS tells workers where to report, when to arrive, and whom to speak to for further instructions.
ODPS provides workers with some of the equipment and supplies needed for the jobs, such as stop-and-go signs, reflective jackets, and badge-shaped patches. All ODPS workers are required to wear uniforms and drive a police-style vehicle. Sworn off-duty police officers typically wear their uniforms and drive their police cruisers from their primary law enforcement jobs (sometimes paying fees to the primary employer to do so). Unsworn workers have to provide and pay for their own uniforms and vehicles. All workers are required to remain clean-shaven.
The workers are supervised by ODPS to various degrees at jobsites. Some workers claim that ODPS supervisors stop by their worksites each day, while others say they rarely see the supervisors. The nature of the job duties—sometimes just sitting in a vehicle, directing traffic, or acting as a night watchman to make sure a property is secure—don’t require much supervision. Workers report occasionally being reprimanded by supervisors for various infractions, such as violating dress and grooming requirements.
ODPS workers are typically paid by the hour and are only rarely paid by the project or assignment. The company classifies all of its workers as independent contractors and pays them by the 1099 process. The workers are never paid overtime. When they begin working for ODPS, they sign independent contractor agreements that include postemployment noncompete restrictions.
The U.S. Department of Labor (DOL) initiated an investigation into ODPS’s pay practices and ended up suing the company for violations of the record-keeping and overtime provisions of the Fair Labor Standards Act (FLSA). The DOL took the position that the company had misclassified its workers as independent contractors when they are actually employees subject to the FLSA.
After a four-day bench trial (a trial with just a judge and no jury), the trial court ruled the unsworn workers were employees subject to the FLSA, but the sworn police officers who work for ODPS while they’re off-duty were correctly classified as independent contractors. The DOL appealed the case to the 6th Circuit, asking it to take another look at the classification issue for the sworn workers.
The 6th Circuit first set forth the “economic realities” test, listing the factors to consider when determining whether an individual is an employee or an independent contractor:
- Permanency of the relationship between the parties;
- Degree of skill required for rendering the services;
- Worker’s investment in equipment and materials for the task;
- Worker’s opportunity for profit or loss, depending on his skill;
- Degree of the alleged employer’s right to control the manner in which the work is performed; and
- Whether the service rendered is an integral part of the alleged employer’s business.
The court noted that no single factor is determinative on its own, but each factor must be considered “with an eye toward the ultimate question—[the worker’s] economic dependence on or independence from” the alleged employer.
First, the 6th Circuit stated there was no question that the services provided by the workers are an integral part of ODPS’s business. In fact, it noted, the company was formed specifically for the purpose of providing the services to customers.
The court next looked at the skill required to perform the job, concluding the sworn off-duty police officers have specialized training and skills in the area of law enforcement. However, those skills aren’t really required to perform the job. In fact, the unsworn workers with no special training can perform the security and traffic-directing duties just as competently as the sworn workers. Bottom line, the court found it wasn’t the skills possessed by the workers but the skills required by the job that matter when assessing this factor.
Looking at the workers’ investment in equipment, the court stated it was appropriate to compare the employees’ investment with the company’s investment. Most of the sworn law enforcement officers spend little to nothing on equipment because they use equipment provided by either ODPS or their other employers. The unsworn officers do spend on average between $3,000 and $5,000 on equipment, but most of that is for acquiring and maintaining a police-type vehicle, which they also can use for personal transportation. The court found that outlay is minimal compared to the $200,000 per year ODPS spends to provide equipment and supplies for its workers.
With respect to the permanency of the relationship, the court noted that although the workers move from assignment to assignment with different customers, many have worked regularly for ODPS for years, even while they’re also employed elsewhere. On the latter point, the 6th Circuit said the trial court put too much emphasis on the fact that the sworn employees, who typically work full-time jobs in law enforcement, aren’t economically dependent on ODPS. The court pointed out that if having multiple jobs disqualifies individuals from employee status, employers could easily circumvent their FLSA obligations by offering only part-time positions so that employees are forced to take multiple jobs to make ends meet.
Moreover, the court noted that an employee having multiple sources of income is a more relevant factor if he transfers from place to place as certain work is offered to him. That isn’t the situation for the law enforcement officers who work for ODPS part-time. Rather, the length and consistency of the workers’ relationship with the company are the more compelling factors.
The court next examined whether the workers have an opportunity for loss or profit based on their business-management skills. The court observed that the jobs at ODPS require little skill, and all workers are typically paid the same rate. The only way the workers can control their income is by accepting or rejecting work, which doesn’t require any managerial skill. The court held that because the workers earn set wages to perform low-skill jobs for fixed periods, this factor mitigates against independent contractor status.
Finally, the court looked at the degree of control ODPS has over the work. The court noted the company maintains written policies dictating the dress code and workplace conduct, equipment requirements, and rules for exchanging assignments. OPDS argued that although it does maintain those kinds of policies and workers are subject to discipline for violations, it has never instituted or exercised such control. And in fact, there was evidence its supervisors visit the worksites only sporadically. However, other testimony indicated the company does supervise some projects closely and has implemented discipline on at least some occasions, including freezing out workers for a while after they decline a job.
The court further noted that although the workers can stop accepting assignments at any time, their noncompete agreements prohibit them for working for competitors of ODPS. When workers do accept jobs, The company tells them where to go, when to arrive, and how much they will be paid. There was no dispute that the company expects the workers to comply with its grooming and dress code policies.
In the end, the 6th Circuit concluded ODPS has the right to control both the sworn and the unsworn workers, even if it doesn’t always choose to exercise that right. After balancing all the factors and looking at the evidence presented at trial, the court ruled that all of the ODPS workers are employees covered by the FLSA. As a result, the 6th Circuit reversed the trial court’s holding with respect to the sworn workers and affirmed the holding with respect to the unsworn workers and found that all of the workers were entitled to overtime pay and that ODPS violated the record-keeping requirements of the FLSA for all of its personnel. Acosta v. Off Duty Police Services et al., Nos. 17-5995/6071.
Classifying workers as independent contractors is risky business. There certainly are situations in which it’s appropriate to deem workers independent contractors, but employers too often put little or no thought into the analysis. Rather, they stick with the most expedient and cost-effective method of classification, sometimes lulled into a false sense of security because their workers seem to accept or even prefer the arrangement, their methods have never been questioned, or their competitors follow similar practices.
Independent contractor classification issues can arise when disgruntled workers make complaints. But they can also come up in a perfectly happy workplace that’s subjected to an audit by the IRS, the DOL, or various state agencies. If you have any nagging questions about the classification status of your 1099 workers, it’s best to get advice from an experienced employment attorney immediately.