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Misclassification of contractor hits Michigan employer

April 10, 2015

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

FLSA tops the list of employee lawsuits, by type, hitting employers today. Most of those suits have to do with misclassification of employees as contractors. That is no secret, so it would seem reasonable to expect most employers today to err on the side of caution when classifying their workers as employees or contractors. It does not always happen, however. The following case is a good primer on the factors to review to avoid liability for misclassification.

Miri is a limited liability company that operates in Michigan providing installation services for HughesNet and iDirect, nationwide providers of satellite internet systems and services. Keller was one of approximately ten satellite-internet technicians who installed satellite dishes for Miri. 

Michael Keller was considered a contractor of Miri.  Keller was paid by the job, not by the hour.  HughesNet pays Miri $200 for each basic installation, $80 for repairs, $80 for de-installation, and between $130–145 for upgrades. Miri pays the technician the bulk of these fees, but keeps a percentage.

Keller worked six days a week from 5:00 am to midnight, taking only Sundays off. Keller completed two to four installations per day, and he had to travel between jobs. Miri paid Keller $110 per installation and $60 for each repair he performed. Miri did not withhold federal payroll taxes from Keller’s payments or provide Keller benefits.

Keller quit working for Miri and then filed a federal lawsuit for failure to pay overtime. Miri moved for Summary Judgment, arguing that Keller was an independent contractor, not an employee. The court agreed, ruling for Miri.

Keller appealed. The 6th Circuit Court of Appeals recognized that under the FLSA, only employees are entitled to overtime and minimum-wage compensation and that independent contractors are not covered by the FLSA.  However, the 6th Circuit also recognized that the U.S. Supreme Court has acknowledged that businesses are liable to workers for overtime wages even if the company “put[s] . . . an ‘independent contractor’ label” on a worker whose duties “follow the usual path of an employee.” Therefore, the court had to determine whether Mr. Keller’s duties ‘follow(ed) the usual path of the employee” regardless of the label the company put on his job.  

Since the FLSA broadly defines an “employee” as “any individual employed by an employer,” the court had to determine if Keller is one who as a matter of economic reality is dependent upon the business to which they render service. The court then applied a six-factor economic reality test to determine Keller’s status:

1) The permanency of the relationship between the parties

2) The degree of skill required for the rendering of the services

3) The worker’s investment in equipment or materials for the task

4) The worker’s opportunity for profit or loss, depending upon his skill

5) The degree of the alleged employer’s right to control the manner in which the work is performed

6) Whether the service rendered is an integral part of the alleged employer’s business

The court stated that no one factor is determinative but the court reviews the whole of circumstances to determine Keller’s economic dependence on or independence from Miri.

First, the court stated that even though employees may work for more than one employer, they may still be covered under the FLSA with an employer.  Keller could have worked for more than one employer.  However, Keller ‘s actions suggest that he treated Miri as his permanent employer: he never turned down an assignment, and he believed Miri could fire him for intransigence.  He stated he had no time to work for any other employer. 

The court then stated that there is a genuine dispute of material fact as to whether Keller and Miri had an exclusive, permanent relationship in practice which would defeat Summary judgment.

Next, the court found that there was high level of degree of skill required for being a technician and that Miri helped the technician get the certifications required.  The issue of selection of a technician for a job was at question.  The court then stated that there is a genuine issue of material fact regarding whether the degree of skill required of Keller shows that he was an employee or an independent contractor.

Third, the court reviewed the capital investment Keller was required to make to do the job, stating that there was an issue as to relative investment made by both Keller and Miri for Keller to do the job.

Fourth, the court viewed Miri’s control of projects to Keller and found that there was a material dispute as to whether Keller could have increased his profitability had he improved his efficiency or requested more assignments.

Fifth, as can be expected, the court reviewed Miri’s control over the actual work Keller performed and found, again, that there was a material issue of fact as to the extent of the control.  Keller thought he could be “fired” by Miri for different reasons.

Finally, the court found that Keller was likely integral to Miri’s business. The only services Miri provides are satellite-dish installation and repair.  Accordingly, the court also believed that a jury needed to decide this issue as well.

The court reversed the Summary Judgment and sent back to the trial court for trial.

The takeaway for HR is that anytime you use a contractor to perform a given job, you should review the various factors to ensure that true contractor status exists. Failure to do so could lead to major liability both from the contractor/employee for failing to pay minimum wage and overtime, and from the government for failing to pay taxes, which could lead to criminal penalties as well.

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