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Misclassifying Independent Contractors in Today's "Modern Economy"

Feb 18, 2019
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The United States Court of Appeals for the Sixth Circuit, which encompasses Ohio, recently issued an opinion that should serve as a cautionary tale for employers who classify workers as independent contractors rather than employees.

In Acosta v. Off Duty Police Services Inc. et al., the Court held that full-time police officers working side jobs as private security guards and traffic controllers for a company were employees, not independent contractors, and were owed overtime under the Fair Labor Standards Act (“FLSA”). In its reasoning, the court acknowledged, for the first time, the changing nature of work in America, stating that traditional ideas of employment are “more fluid than in decades past.” “Many workers in the modern economy, including employees and independent contractors alike, must routinely seek out more than one source of income to make ends meet,” the Sixth Circuit said.

As background, Off Duty Police Services, Inc. (“ODPS”), a company based in Kentucky, offered part-time jobs to full-time police officers, typically as security guards for private events or directing traffic around construction zones. ODPS would collect these assignments from businesses in and around Louisville. The assignments would specify the services and qualifications needed (i.e. traffic control). ODPS would then offer those assignments to the off-duty officers, who were free to accept or reject the work.

ODPS classified these workers as independent contractors based on its view that these workers could decline assignments, were not regularly supervised in their day-to-day performance, provided some of their own materials, and, generally, held full-time jobs outside of ODPS as police officers.

The Department of Labor (“DOL”), however, filed a lawsuit alleging that these workers were employees, deserving of overtime pay, and not independent contractors.

In determining that these workers were employees under the FLSA, the Sixth Circuit applied the six-factor "economic reality” test. The court looked at the following:

  • the permanency of the relationship between the parties;
  • the degree of skill required for the rendering of the services;
  • the worker's investment in equipment or materials for the task;
  • the worker's opportunity for profit or loss, depending upon his/her skill;
  • the 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, however, ultimately sided with DOL, stating, “[m]any workers in the modern economy, . . . must routinely seek out more than one source of income to make ends meet…Although some officers testified that they occasionally accepted jobs from other companies, the consistent theme throughout trial was that the officers had two primary sources of employment — their day jobs and their positions at ODPS,” the panel said. “That is not the kind of itinerant work that independent contractors ordinarily perform.”

In evaluating the remaining factors, the court found that the officers worked for ODPS for many years, demonstrating a permanence to the relationship. The work required little specialized skill even though ODPS preferred that off-duty officers perform the work. The officers made little investment in equipment (e.g., they were provided with reflective vests and badges) and had no opportunity for profit or loss depending on their skill because the officers earned a set hourly wage. Finally, the court noted that the officers were providing a service that was integral to ODPS’ business because ODPS built its business on security and traffic control. The only factor the court found that favored ODPS was the limited amount of control and supervision ODPS exercised over the officers. This was not enough to properly classify them as independent contractors.

Based on the court’s ruling, employers must now evaluate independent contractor relationships with this new understanding of the changed nature of work in America in mind. Just because a worker may have a different full-time job, signed an independent contractor agreement, or have the ability to accept or reject work, does not guarantee that they are, in fact, independent contractors and, therefore, not subject to the FLSA’s minimum wage and overtime requirements.

Notably, other laws (i.e. the National Labor Relations Act, Employee Retirement Income Security Act, Internal Revenue Code) have their own standards in analyzing whether a worker is an independent contractor. The Acosta ruling applies only to the FLSA and does not impact those standards. If you have any questions regarding independent contractor classification, please feel free to contact Katie Basch, Travis Teare, or any other K|W|W attorney.