Atlanta Employment Attorneys Blog
Incorrectly classifying a worker as an independent contractor when they really are an employee under the law can have many adverse consequences for the worker and the employer alike. In addition to tax liability, misclassifications can trigger liability under the Fair Labor Standards Act for minimum wage violations or unpaid overtime. To avoid these pitfalls, businesses should consult an Atlanta wage and hour lawyer to ensure they have correctly classified their workers.
To complete the employee-versus-independent-contractor classification process, one needs to understand what the laws governing the distinction between employees and independent contractors dictate. A recent unpaid overtime case before the 11th Circuit Court of Appeals offers a helpful reminder that classification status turns on economic reality, not simply the label the parties place on a worker.
The three plaintiffs in the case were insurance claims adjusters assigned to work claims in Texas in the aftermath of Hurricane Harvey. The client, a Texas insurance agency, contracted with a staffing firm to provide adjusters. The adjusters’ contracts with the staffing firm labeled them as “independent contractors.”
Many of the adjusters put in long hours. One adjuster asserted that he worked from 8:00 a.m. to 6:00 p.m. Monday through Friday and 8:00 a.m. to 5:00 p.m. Saturday and Sunday.
The adjusters ultimately sued in federal court in Alabama, alleging they were employees of the agency, not independent contractors, and were entitled to overtime compensation for hours worked in excess of 40 per week.
The trial court ruled against the adjusters, concluding that they were independent contractors. The 11th Circuit Court of Appeals, however, reversed that ruling.
The reason the appeals court sided with the adjusters was that, in its opinion, the trial court did not correctly apply the “economic reality” test for differentiating independent contractors from employees. In 2013, the 11th Circuit, in the case of Scantland v. Jeffrey Knight, Inc., put forth six relevant factors courts should use to guide their analysis of employee-versus-independent-contractor classification. The court also cautioned readers that the factors are mere guides and “no one factor dominates, and even the sum of factors should be rejected if they do not reflect the economic reality.”
Applying the Six’ Economic Reality’ Factors
The six factors the court put forward in the Scantland case were:
(1) the nature and degree of the hiring entity’s “control over the manner in which work is performed”,
(2) the worker’s opportunity for profit or loss;
(3) the worker’s investment in materials or hiring additional workers;
(4) whether the worker’s job requires a special skill;
(5) the permanency and duration of the relationship; and
(6) the degree to which the worker’s services are an “integral part” of the hiring entity’s business.
Breaking down each factor, the court explained that an alleged employer’s “control must be significant to support employee status.” Hallmarks of significant control include things like whether the alleged employer controlled pay rates, hours, and schedules, “in addition to whether the alleged employer closely monitored the quality of the work.”
Factor two examines how workers are paid. According to the court, the key to this factor is “whether the workers can earn additional income through their own initiative by negotiating a rate, selling additional goods or services, or similar methods.”
For factor three, courts should consider the relative investments of the worker versus the alleged employer by looking into which party provided the equipment and/or materials necessary to do the job. Factor four required an analysis of whether the job required the workers to possess any special skills. This can include things like specialized experience and/or licenses.
When it comes to factor five (permanency or duration of the relationship), the courts look at both the temporal aspect and exclusivity. Factor six requires, as the name suggests, courts to assess whether the work the workers performed was or was not “integral” or essential to the hiring entity’s business.
The court, applying the factors to the adjusters’ situation, found that five factors supported an employee status determination. The agency controlled the adjusters’ pay rates, hours, schedules, and many aspects of how they processed claims. The adjusters were paid a pre-set rate, meaning that they could not earn additional income through their own initiative.
Additionally, in reviewing factor three, the court noted that the insurance agency provided the adjusters with laptop computers, email accounts, online networks, and software applications for completing claims-processing tasks.
Furthermore, factors five and six favored employee status. The agency retained the adjusters for an indefinite period of time “akin to at-will employment.” By contrast, had the agency retained the adjusters for a specific duration — such as “the completion of a particular claim, a certain number of claims, or even all Hurricane Harvey-related claims,” factor five might have tilted toward independent contractor status. Finally, as required by factor six, the work was essential. The agency was an insurance entity in the business of paying or denying claims filed by its customers. Analyzing and adjusting those claims was vital to that business.
Only factor four favored independent contractor status, according to the 11th Circuit. The adjusters had specialized training and state-issued licenses. That reality weighed against employee status.
The outcome of the adjusters’ case shows that the economic reality analysis of employee-versus-independent-contractor classifications is complex and multifaceted, extending well beyond whether a worker is classified as an “independent contractor” in a hiring contract. If you have questions about employee-versus-independent-contractor classifications, get in touch with the knowledgeable Atlanta wage and hour attorneys at the law firm of Parks, Chesin & Walbert. Our team is highly experienced in handling these matters and can provide you with the reliable advice and effective advocacy you need. Contact us through this website or at 404-873-8048 to schedule a consultation today.