A common dispute that arises in overtime and minimum wage litigation is whether an individual hired by the defendant is an independent contractor or an employee. Many companies choose to hire independent contractors to perform work instead of hiring employees. Because independent contractors are not considered “employees” under the Fair Labor Standard Act (“FLSA”), the minimum wage and overtime wage provisions of the FLSA do not apply to independent contractors. Hiring independent contractors might also be beneficial to companies for tax purposes. However, as many companies have learned through litigation, labeling a worker an “independent contractor” will not automatically preclude that individual from being considered an “employee” under the FLSA.
Courts look to the “economic realities” of the relationship between the company and the individual the company hired to determine whether the individual is an “employee” or an “independent contractor.” To determine whether the individual is an employee as a matter of economic reality, courts consider the following 6 factors: (1) the degree of control exercised by the company on the individual; (2) the individual’s opportunity for profit and loss based on managerial skills; (3) the individual’s investment in equipment or personnel; (4) the skill required to perform the work; (5) the duration of the relationship between the company and the individual; and (6) whether the services performed by the individual are integral to the company’s business.
As the 6 factors suggest, the determination of whether an individual is an “independent contractor” or “employee” depends on the specific facts of each case. Adding more complexity to the analysis, courts do not mechanically apply the six factors. The weight that courts attribute to each factor ultimately depends on the court’s analysis and on the facts of each case. A good example of the distinction between “employee” and “independent contractor” is detailed in recent cases regarding adult entertainers. For example, in Stevenson v. Great Am. Dream, Inc., 2013 U.S. Dist. LEXIS 181551 (N.D. Ga. Dec. 31, 2013), a class of adult entertainers sued the nightclub that hired them (the “Nightclub”) for minimum and overtime wages. The court analyzed the facts in the case in relation to the six factors detailed above and found that the entertainers were “employees” because 5 of the 6 factors of the economic reality test suggested “employee” status.
As to the first factor (i.e., degree of control) the court found that while the entertainers were allowed to set their own schedules, the Nightclub possessed substantial control over them. The Nightclub made and enforced rules regarding the entertainers’ dress and makeup, the entertainers’ conduct with customers, the music that the entertainers would perform to, and the procedure for settling disputes arising with the Nightclub.
As to the entertainers’ opportunity for profit and loss, the Court found that the Nightclub bore the vast majority of the overhead costs in comparison to the entertainers. While the entertainers paid a daily fee to the Nightclub, the Nightclub was responsible for attracting customers, and making decisions regarding marketing, promotions, location, and pricing. The entertainers could increase their profit depending on their interactions with customers, but the court found that such opportunity for profit and loss was minimal.
The court also found that although the entertainers spent their own money on hair, makeup, clothing, and styling, the Nightclub spent substantially more money on necessary personnel and equipment. The third factor (i.e., investment in equipment) therefore suggested “employee” status.
The Nightclub argued that because the entertainers get better as they gain more experience, the work the entertainers performed required special skill. The court disagreed. The court acknowledged that different entertainers may possess varying degrees of skill, but found nothing to indicate that special skill was necessary for the work. As the court noted, “[t]aking your clothes off on a nightclub stage and dancing provocatively are not the kinds of special skills that suggest independent contractor status.” Stevenson, 2013 U.S. Dist. LEXIS 181551, at *15.
The court found that the fifth factor (i.e., the duration of the relationship between the company and the individual it hired) was the only factor that suggested “independent contractor” status because some of the entertainers’ relationships with the Nightclub were relatively short. However, because this was the only factor that suggested “independent contractor” status, this factor alone could not nudge the entertainers out of their status as “employees.”
Finally, the court found the last factor (i.e., whether the work performed by the entertainers was integral to the Nightclub’s business) to be “most definitive.” Because the Nightclub was an adult entertainment club, it required adult entertainers. Without the entertainers, the Nightclub could not conduct tis business. The entertainers’ work was therefore integral to the Nightclub’s business. Finding that 5 of the 6 factors suggested “employee” status, the court held that the entertainers were “employees” and not “independent contractors.”
The Stevenson case serves as an example that even when a company labels the individuals it hires “independent contractors,” courts might nonetheless consider those individuals “employees” under the FLSA. Companies could be required to pay those individuals unpaid minimum and overtime wages dating as far back as 3 years. The potential liability to the company can increase significantly if, as in Stevenson, several workers collectively sue the company in a class action. It is also important for companies to note that courts will generally not consider whether the hired individual signed a contract with the company wherein he or she agreed to be an “independent contractor.” For those reasons, companies should consider all aspects of an individual’s work and consult with an experience labor and employment attorney before deciding to treat a hired worker as an independent contractor.
Peter T. Mavrick has successfully represented many employers in labor and employment matters. This article is not a substitute for legal advice tailored to a particular situation. Peter T. Mavrick can be reached at: Website: www.mavricklaw.com; Telephone: 954-564-2246; Address: 1620 West Oakland Park Boulevard, Suite 300, Fort Lauderdale, Florida 33311; Email: firstname.lastname@example.org.