Are Your “Independent Contractors” Entitled to Overtime?

By James W. Boyan III, Esq.
jboyan@pashmanstein.com

The United States Department of Labor recently proclaimed that “most workers are employees under the FLSA.”  On July 15, 2015, the DOL issued new guidance concerning the standard for determining whether an employee has been misclassified as independent contractor under the Fair Labor Standards Act’s (“FLSA”).   The FLSA, which was originally enacted 1938, is a federal law that requires employers to pay all covered employees overtime for all hours worked in excess of 40 hours per week.   Under the law, an individual is considered to be an “employee” of a person or entity that “suffer[s] or permit[s]” him or her to work.  Although the FLSA’s broad definition of the term “employ” has been around for over 75 years, courts have interpreted the standard in a variety of ways.

The DOL’s new guidance, entitled “Administrator’s Interpretation No. 2015-1,” makes it clear that the agency intends to interpret that definition in the broadest way possible.  To that end, the agency has concluded that the liberal “economic realities test” should be used to determine whether a worker is an employee or an independent contractor under the FLSA.  This test focuses on whether the worker is economically dependent on an employer or in business for him or herself.  If the worker is economically dependent on the employer, then he or she is deemed to be an employee who is potentially eligible for the protections of the FLSA.  Based on this expansive interpretation, the DOL has boldly asserted that “most workers are employees under the FLSA.”

The DOL’s economic realities test contains six factors:

• the extent to which the work performed is an integral part of the employer’s business;
• the worker’s opportunity for profit or loss depending on his or her managerial skill;
• the extent of the relative investments of the employer and the worker;
• whether the work performed requires special skills and initiative;
• the permanency of the relationship; and
• the degree of control exercised or retained by the employer.

The DOL has explained that each factor in the test must be “examined and analyzed in relation to one another, and no single factor is determinative.”  The agency has also emphasized that the “control” factor should not be given undue weight.  Finally, the DOL has stated that: “[t]he application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers.”

Companies that engage workers on a contract basis should carefully review the DOL’s recent guidance.  Employers who fail do so could be liable for back overtime wages, liquidated damages and attorneys’ fees under the FLSA.

Court Dismisses Class Action Lawsuit Challenging Classification of Workers as Independent Contractors

By Sean Mack, Esq.
smack@pashmanstein.com

Over the past year, numerous articles have been written warning employers that state and federal government agencies (and plaintiffs’ attorneys) have made it a priority to investigate and pursue claims of worker misclassification – that is, claims that workers have been wrongly classified and treated as independent contractors, instead of as employees.

A recent decision from a federal district court in New Jersey explored this issue and in the context of a trucking business, upheld the classification as independent contractors (for now).

The trucking industry, like many others that are largely built on a business model using independent contractors, was ripe for this type of challenge, and in New Jersey, there has been little judicial precedent to provide guidance to trucking companies regarding whether they are properly classifying their drivers.  Most of the trucks hauling containers out of New Jersey’s busy ports are operated by independent contractors, who own their trucks and lease them to trucking companies or brokers, who make the arrangements for pick-ups and deliveries.  This relationship usually is memorialized in a lease agreement that states that the drivers are independent contractors.

That business model was challenged in court last year when several operators filed a class action lawsuit against one of the Newark based trucking companies, alleging that they were really employees who had been misclassified as independent contractors.

On June 28, 2012, the Federal District Court in New Jersey issued its decision rejecting the drivers’ claims and dismissed their lawsuit.  In reaching its decision, the Court analyzed six factors to determine if the drivers were employees or independent contractors.

Federal courts in New Jersey use these six factors not just in the trucking industry, but anytime they are required to determine if a worker is an employee or independent contractor under federal wage laws:  (1) the degree of the alleged employer’s right to control the manner in which the work is to be performed, (2) the alleged employee’s opportunity for profit or loss depending on his managerial skill; (3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) whether the service rendered is an integral part of the alleged employer’s business.

The Court concluded that four of the six factors favored finding the drivers to be independent contractors, and were not outweighed by the two factors that favored finding them to be employees (i.e., (5) the degree of permanence of the relationship and (6) the service being an integral part of the business).  The Court concluded (factor 1) that telling the drivers where to report, when to report, what they would be paid and where to deliver the containers was insufficient to establish sufficient control over the manner in which the work is performed.  The drivers retained authority to select their delivery routes, to determine how to properly secure the load, to select when and where to rest, to select when and where to obtain gas and oil, to select where to repair the trucks, to determine how to finance the vehicle, to select insurance carriers, and to determine the working hours; all of which showed a lack of control.

The Court found (2) that there was an opportunity to profit because the drivers could acquire additional vehicles, could hire other drivers to work for them, and control how frequently they would drive and thereby control their pay since they were paid on a per trip basis.

The Court also noted (3) that the drivers invested in the vehicles used to conduct the business.

The Court (4) further determined that having to obtain a commercial drivers license to drive the trucks was a specialized skill not possessed by the average citizen.

Based on those factors, the court concluded that the drivers were not employees.  The Court has permitted the drivers to amend their lawsuit and refile it.  The case is Luxama v. Ironbound Express, Inc., Civ. No. 11-2224 (D.N.J.)