Unlawful Misclassification Of Employees As Independent Contractors By Employers

What Are The Employee’s Rights?

I. INTRODUCTION

The legal issue of whether an employee is an independent contractor or an employee affects the employee and the employer in both the how the employee is entitled to be compensate pursuant to the Fair Labor Standards Act (FLSA), Florida minimum wage laws, the IRS Code and Chapter 440, Florida’s Workers’ Compensation Act. Both the Department of Labor and the IRS have substantial literature on this topic, guidelines and opinions. Additionally, there exists case law by the First District Court of Appeal in Workers’ compensation cases. The DOL announced it will no longer offer opinion letters on this legal issue, but may offer interpretations. Murray v. Principal case, CV 08-1094, “I think the judge got it right when she said, quoting Barnhart v. N.Y. Life Ins. Co., 141 F.3d, 1310, 1313 (9th Cir. 1998), ““in determining whether someone is an employee or an independent contract, all the factors must be considered together, and no single factor is dispositive.” And, that the test is very “fact specific””.

The test used by courts to determine whether an individual is an independent contractor, rather than an employee, is known as the "economic realities test." Perdomo v. Ask 4 Realty &Mgmt., Inc., 298 F. App'x 820, 821 (11th Cir. 2008). The economic realities test factors include:

1. the nature and degree of the defendant's control as to the manner in which the work is performed;
2. the plaintiff's opportunity for profit or loss depending on his managerial skill;
3. the plaintiff's investment in equipment or materials;
4. whether the service rendered requires a special skill;
5. the degree of permanency and duration of the working relationship; and
6. the extent to which the service rendered is an integral part of the defendant's business. Freund v. Hi-Tech Satellite, Inc., 185 F. App'x 782, 783 (11th Cir. 2006). No single factor is dispositive and courts must evaluate each individual under the totality of the circumstances. Perdomo, 298 F. App'x at 821.

II. FLORIDA MINIMUM WAGE LAWS

Fla. Stat. § 448.110, has a pre-suit notification clause, which requires that any employee asserting a claim for minimum wages pursuant to this section (not the FLSA) “shall notify the employer alleged to have violated this section, in writing, of an intent to initiate such an action.” The notice must identify the minimum wage to which the person aggrieved claims entitlement, the actual or estimated work date and hours for which payment is [*8] sought, and the total amount of alleged unpaid wages through the date of the notice. Fla. Stat. § 448.110(6)(a). 3 Under§ 448.110(6)(b), an employer has 15 calendar days after receipt of the notice to pay the total amount of unpaid wages or otherwise resolve the claim the satisfaction of the person aggrieve.

If an employer unlawfully misclassifies an employee as an independent contractor, the employee suffers financially. First, the employee loses the right to claim such wages towards unemployment benefits and if terminated, will be ineligible for unemployment compensation. Additionally, the employee will have to self-report the wages to the IRS, and essentially pay the full medicare and federal income taxes which if treated as an employee would be shared by the employer. Further, the employee wrongfully misclassified as an independent contractor is excluded from benefits from the employer such as LTD, STD, health insurance, retirement benefits and Cobra coverage. Further, the misclassified employee is not protected from civil rights violations (acts of discrimination, harassment or retaliation) or State or Federal Whistleblower Acts, and is further excluded from workers compensation benefits under Florida’s Workers’ Compensation Act, Chapter 440.

III. FLSA CASES OF SIGNIFICANCE

1. In a recent case of significance out of the United States District Court, Southern District of Indiana, the Court held that EXOTIC DANCERS are NOT independent contractors, and as such are entitled to minimum wage under the Fair Labor Standards Act. See Morse v. Mer Corp., The Court found in favor of the dancers as a class and held that the employer violated the FLSA as the dancers were not independent contractors, but employees entitled to minimum wage. As the court points out, the determination of whether the plaintiffs are employees or independent contractors is a question of law for the court. Using a definition by the 5th Circuit, of an employee in the FLSA, the court started with this definition: “…employees are those who as a matter of economic reality are dependent upon the business to which they render service.”. The court then looks to 6 factors, all circumstances of the work activity:

• the nature and degree of the alleged employer’s control as to the manner in which the work is to be performed
• the alleged employee’s opportunity for profit or loss depending upon his managerial skill
• the alleged employee’s investment in equipment or materials required for his task or his employment of workers
• whether the service rendered requires a special skill
• the degree of permanency and duration of the working relationship; and
• the extent to which the service rendered is an integral part of the alleged employer’s business.

Applying this analysis, the court found certain facts of significance for the employees. They were fined if they were tardy. The company exercised a high degree of control over a dancer’s opportunity for profit. The dancers did not have responsibility to bring customers to the club. All risks of loss, food and beverage or liability related are borne solely by the defendant. No real opportunity for profit. The only investment by the dancers was in costumes and a padlock. The Defendant owns the premises, equipment, and music, maintains and renovates the facilities and handles all advertising. It also owns the beverage inventory and the liqueur license.

The special skills required were as such that little skill is necessary to be a topless dancer. The defendant argued that only ten percent of its profits come from the dancers, and therefore the dancers are not an integral part of its business. However, an employee testified that less than 10% of the customers go to the club for food and drink solely. Further, when asked what would happen if the club limited the use of dancers at the facility, the employee made an analogy to McDonald’s getting right of its hamburgers. “we wouldn’t be in business”. The arguments by the employer that the dancers were non-essential forms of extra entertainment like televisions at a sports bar were deemed unconvincing at best. The court concludes that the dancers are employees, awards them summary judgment which therefore includes minimum wages for the class, plus liquidated damages and attorney’s fees.

2. Additionally, in Nationwide Mutual Insurance Company v. Darden, 503 U.S. 318, 322, 117 L. Ed. 2d 581, 112 S. Ct. 1344 (1992), the Supreme Court described the common law agency test for whether an individual is an independent contractor or employee as follows:

In determining whether a hired party is an employee under the general common law of agency, we consider the hiring party's right to control the manner and means by which the product is accomplished. Among the other factors relevant to this inquiry are the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party's discretion over when and how long to work; the method of payment; the hired party's role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.

IV. THE FLSA, AND FLSA ANTI-RETALIATION PROVISIONS

The Fair Labor Standards Act provides that every employer must pay its employees the required federally established minimum wage. Claims for recovery of the minimum wage must be brought within 2 years of the violation. The FLSA provides the employee the right to recover double the amount wrongfully withheld as liquidated damages plus recovery of attorney’s fees and expenses of the litigation. The FLSA, unlike the Florida Minimum Wage statute, does not have a pre-suit notification requirement, although courts may negate attorney’s fees if the employee’s attorneys failed to attempt to resolve the matter and merely pursued litigation in the courts.

The Supreme Court has made clear that the key to interpreting the FLSA anti-retaliation provision is the need to prevent employee’s fear of economic retaliation for voicing grievances about substandard conditions. See Lambert v. Ackerley, 180 F.3d 997, 1003 (9th Cir. Wash. 1999). The penalties for an FLSA retaliation action, unlike most other FLSA claims, can include compensatory and punitive damages. As the Seventh Circuit said in Travis v. Gary community Mental Health Ctr., Inc.: “any employer who violates the provisions of § 15(a)(3) of the Fair Labor Standards Act, 29 U.S.C.S. § 215(a)(3), shall be liable for such legal or equitable relief as may be appropriate to effectuate the purposes of § 15(a)(3), including without limitation employment, reinstatement, or promotion and the payment of wages lost and an additional equal amount as liquidated damages. Pub. L. 95-151, 91 Stat. 1252 (1977). This amendment authorizes "legal" relief, a term commonly understood to include compensatory and punitive damages.” 921 F.2d 108, 111 (7th Cir. Ind. 1990).

V. IRS LAWS AND EMPLOYER RISK

An employer which misclassifies an employee as an independent contractor can face penalties by the IRS, to include:

1. 1.5% of the wages paid to the employee;
2. 20% of the amount that should have been withheld from the employee’s wages for CICA, but was not due to the misclassification;
3. 3% of the wages paid to the employees; and
4. 40% of the amount that should have been withheld from the employee’s wages for FICA, but was not.

If the misclassification by the employer is willful or intentional, the employer is subject to more severe penalties and liability. If the employer is required by the IRS to pay an employee reclassification tax liability, the employer cannot recover the tax assess from the employee, and cannot deduce the amount of the tax assessed against the employee’s wages.

The IRS in Publication 15-A “employer’s supplemental tax guide (supplement to publication 15(circular e)) employer’s tax guide for use in 2010) states that the general rules is that if the persons is an independent contractor if you, the person for whom the services are performed, have the right to control of direct only the result of the work and not the mans and methods of accomplishing the result. Furthermore, under common-law rules, anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action.

VI. THE IRS ANALYSIS
W we cannot overlook the importance of the Internal Revenue Service’s opinions in analyzing these questions. The IRS has a twenty factor test it uses (and Courts often adopt) that further helps in our analysis. The list, as set out in Revenue Ruling 87-41, is described below:

1. Instructions

A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions. See, for example, Rev. Rul. 68-598, 1968-2 C.B. 464, and Rev. Rul. 66-381, 1966-2 C.B. 449.

2. Training

Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner. See Rev. Rul. 70-630, 1970-2 C.B. 229.

3. Integration

Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends, to an appreciable degree, upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business. See United States v. Silk, 331 U.S. 704, 91 L. Ed. 1757, 67 S. Ct. 1463, 1947-2 C.B. 167 (1947), 1947-2 C.B. 167.

4. Services Rendered Personally

If the services must be rendered personally, presumably, the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results. See Rev. Rul. 55-695, 1955-2 C.B. 410.

5. Hiring, Supervising, and Paying Assistants

If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the workers on the job. However, if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status. Compare Rev. Rul. 63-115, 1963-1 C.B. 178, with Rev. Rul. 55-593, 1955-2 C.B. 610.

6. Continuing Relationship

A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring, although irregular, intervals. See United States v. Silk.

7. Set Hours of Work

The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control. See Rev. Rul. 73-591, 1973-2 C.B. 337.

8. Full Time Required

If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses. See Rev. Rul. 56-694, 1956-2 C.B. 694.

9. Doing Work on Employer's Premises

If the work is performed on the premises of the person or persons for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere. Rev. Rul. 56-660, 1956-2 C.B. 693. Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the services involved and the extent to which an employer generally would require that employees perform such services on the employer's premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required. See Rev. Rul. 56-694.

10. Order or Sequence Set

 If a worker must perform services in the order or sequence set by the person or persons for whom the services are performed, that factor shows that the worker is not free to follow the worker's own pattern of work but must follow the established routines and schedules of the person or persons for whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order infrequently. It is sufficient to show control, however, if such person or persons retain the right to do so. See Rev. Rul. 56-694.

11. Oral or Written Reports

 A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control. See Rev. Rul. 70-309, 1970-1 C.B. 199, and Rev. Rul. 68-248, 1968-1 C.B. 431.

12. Payment by Hour, Week, Month

Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor. See Rev. Rul. 74-389, 1974-2 C.B. 330.

13. Payment of Business and/or Traveling Expenses

If the person or persons for whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the worker is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities. See Rev. Rul. 55-144, 1955-1 C.B. 483.

14. Furnishing of Tools and Materials

The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship. See Rev. Rul. 71-524, 1971-2 C.B. 346.

15. Significant Investment

If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship. See Rev. Rul. 71-524. [*17] Special scrutiny is required with respect to certain types of facilities, such as home offices.

16. Realization of Profit or Loss

A worker who can realize a profit or suffer a loss as a result of the worker's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. See Rev. Rul. 70-309. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor. The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risk to support treatment as an independent contractor.

17. Working for More Than One Firm at a Time

If a worker performs more than de minimums services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor. See Rev. Rul. 70-572, 1970-2 C.B. 221. However, a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.

18. Making Service Available to General Public

The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship. See Rev. Rul. 56-660.

19. Right to Discharge

The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications. Rev. Rul. 75-41, 1975-1 C.B. 323.

20. Right to Terminate

If the worker has the right to end his or her relationship with the person for whom the services are performed, at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship. See Rev. Rul. 70-309.

Thus, keeping Darden and Rev. Ruling 87-41’s twenty Point test in mind, here are a few distinctions that may sway how an employee or an employer values the strengths and weakness of this case:

1. Day-to-Day Control & Discretion

a. Contract Demands the Plaintiffs Obey Principal. The Plaintiffs own contracts state that while “you are free to exercise your own reasonable judgment in marking our policies … you are to conform to all of our rules, requirements and instructions.” Further, the contracts require Mr. Garcia and Ms. Pinho to “comply with our [Principal’s] instructions regarding marketing and servicing of policies.” There isn’t much room for discretion or control when Principal sets all the rules, requirements, and instructions and even dictates how the marketing can be done. Moreover, the qualifier of “reasonable” supports a reduced level of discretion. See Rev. Rul. 87-41 Factor 1

b. Constant Instruction and Monitoring. As discussed in the attached declaration (see Exhibit G), the Plaintiffs’ jobs were constantly monitored, they were instructed that working from home was unacceptable, how to market Princor products and even how to sell Princor products.[1]See also Rev. Rul. 87-41 Factor 1.

c. Furniture and Equipment is Principals. Usually, an employee will have equipment provided for by the employer, where an independent contractor is required to buy their own equipment. In what can only be described as unfair, Princor docked Mr. Garcia’s pay $50 per month for the use of a laptop (as if he was going to own it), and then at termination it said, “it is our equipment, you must return it.”[2] Principal is trying to have its cake and eat it too. This example strikes at the heart of how the so called “independent contractor agreement” is simply a façade. See also Rev. Rul. 87-41 Factor 15.

d. Insignificant Investment to Work. As indicated by Rev. Rul. Factor 15, the lack of a large upfront investment suggests an employer-employee relationship. In the Plaintiffs’ case, there are not heavy upfront investments. Individuals are instead nickel and dimed on some illusory office overhead charges. As an associate I remember that my law firm provided me with a chair, but if I wanted a better chair I had to buy it myself. The same can be said about Principal and the Plaintiffs. But I was an employee.

e. Working Schedule and Hours Set. The Plaintiffs are/were required to work a normal 40 hour work week, plus more. The purported class and Plaintiffs start out each week with a Monday morning meeting that lasts from 9:00-12:00, which includes a nationwide conference. After that it is back to the office until 4:30 p.m. for a mandatory calling session that last until 8:00 p.m. After that, another mandatory calling session from 8:30 a.m. until 10:30 a.m., and again the same on Friday from 9:00 a.m. until 2:30 p.m. If they do not comply, a phone call from a manager soon follows, threatening their jobs and taking leads away. Theses calling sessions speak to how little discretion these employees have. Rev. Rul. 87-41 Factor 10 discusses exactly how this is suggestive of an employee-employer relationship.

f. Monthly Compliance Reports. As outlined in the attached June 28, 2010, letter, Principal requires absolute adherence to its policies and procedures. It even requires “Price or Monthly Compliance Reports, (including, but not limited to, Checks and Securities log and copies of all Customer Correspondence)” As George Follstade makes clear in his letter he is “in charge” and “supervises” all Registered Representatives. Failure to comply can result in disciplinary action. This entire letter is a great example of why Mr. Garcia and Ms. Pinho are supervised employees. “Disciplining” is something an employer does with an employee. Copies of all customer correspondence are strict supervision to say the least. See Rev. Rule 87-41 Factor 11 “Oral or Written Reports”

2. The Commissions rates are set by Principal and can change. Typically if one hires an independent contractor the price, commission, or contract payment, is specified in advance and set for the life of the contract. This is not the case with Principal. Instead, the company sets the commission rate. Think of your associates, sure you tell them they make $160,000.00 staring salary, but if the firm isn’t doing well, you can at any time reduce this.

3. Exclusivity and No outside Ability for other Employment. Employees, like the Plaintiffs, have no ability to market other companies’ products or services. They are exclusive to Principal. They are restricted to selling Principal products. Furthermore, they cannot engage in unrelated activities, such as opening other businesses and buying corporations. They must work fulltime for Principal. They are not even allowed a part-time or weekend job (e.g. a landscaping business, a business wholly unrelated). See Also Rev. Rul. 87-41 Factors 17, 18.

4. The Fear of Being Fired. I think the real answer to whether the Plaintiffs are independent contractors or employees can be answered by the fear of being fired. A would be “gut check” -- employees like Pinho fear being fired. It cannot be compared to losing an account when you own a company. If you are an independent contractor, clients come and go. You don’t sweat if one leaves, because you know another might be around the corner. That’s not the case here. If the telephone rings and your “district manager” calls saying, “please be in my office at 9:00 on Friday”, you know what that means. You are getting fired. Your whole world comes crashing down. Your life feels as though it ceases for a moment. As Rev. Rul. Factor 19 “an employer exercises control through the threat of dismissal, which causes the worker to obey the employer’s instructions. An independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specification.” To me, there is no doubt that Principal keeps its employees in check through the threat of dismissal (See Exhibit D) and further terminates its employees even if the desired specification is met but personalities don’t mesh.

5. Subsidizing of Medical Benefits & Workers’ Compensation. Statutory employees may indeed be permitted to enjoy certain employee benefits and withholdings of Medicare and Social Security taxes, but most of these cases deal with insurance agents, not financial advisers who sell securities. In addition, I have not seen any cases where medical benefits were subsidized as Principal does in the Plaintiffs’ case.

6. Workers’ Compensation Payments Already Made. I discussed earlier the strategy to have a Florida Workers’ Compensation judge opine on whether Mr. Garcia is an employee and then ask the District Court to take judicial notice of this ruling. However, there is an additional point to make here, which is that Principal has already paid for some of Mr. Garcia’s visits to the Workers’ Compensation doctor. (See Exhibit E) I think this is evidence of the fact that he is an employee.

7. Meetings, then training, followed by meetings to discuss training. The scheduled meetings and training sessions (see Exhibit F) are clearly evidence of an employer-employee relationship. There are monthly meetings, annual meetings, quarterly meetings, weekly meetings, and daily calling sessions. These touch on several factors discussed by the Courts and Rev. Ruling 87-41, including that the “order, sequence, integration, full time requirement, doing work on employer’s premises, and set hours” as discussed above.