Tag Archives: Independent Contractor

White House Backs Bill To Close Independent Contractor Tax Loophole; RTT News Reports

RTTNews.com is reporting that:

“Sen. John Kerry, D-Mass., and Rep. Jim McDermott, D-Wash., released a statement Wednesday noting that the White House has endorsed their legislation to close a tax loophole currently allowing businesses to misclassify workers as “independent contractors.”

Kerry and McDermott said that the Fair Playing Field Act of 2010 would protect workers from losing benefits and protections as the result of the tax loophole.

Vice President Joe Biden said, “When employees are classified as independent contractors, whether by design or because the rules are unclear, they are denied access to critical benefits and protections, at significant cost to government at all levels.”

“For these reasons, stopping worker misclassification is a priority for the President’s Middle Class Task Force, which I chair, and I applaud Senator Kerry and Congressman McDermott for introducing this bill,” he added.

In addition to providing guidance about worker classification, the bill would also increase the penalties for the failure to deduct and withhold income taxes and the employee’s share of FICA taxes.”

To read the entire article, click here.

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S.D.Ind.: Exotic Dancers Are Employees, Not Independent Contractors; Plaintiffs’ Motion for Summary Judgment Granted

Morse v. Mer Corp.

Before the Court were the parties’ cross motions for summary judgment.  Plaintiffs, exotic dancers, alleged that they were employees of Defendant, the owner of the adult entertainment facility where they worked.  Defendant alleged that Plaintiffs were independent contractors and thus, not covered by the Fair Labor Standards Act (FLSA).  The Court granted Plaintiffs’ motion and denied Defendants motion.

Reciting the facts pertinent to its inquiry, the Court explained:

“The Plaintiffs in this case were all exotic dancers at Dancers Showclub, an establishment owned and operated by the Defendant, in Indianapolis, Indiana. To be hired by the Defendant, an individual had to go to the club, complete an audition application, provide sufficient identification, and perform an audition by dancing to two or three songs. Individuals who passed their auditions and were hired by the Defendant were given a copy of the Entertainer Guidelines (Docket No. 58 Ex. 3). Many of these guidelines, such as those prohibiting the Plaintiffs from leaving with male patrons and those banning family and significant others from the club while the Plaintiffs were performing, were put in place to keep the Plaintiffs safe and to ensure that the Plaintiffs followed the law.

The Defendant classified the Plaintiffs as independent contractors. Accordingly, the Defendant never paid any of the Plaintiffs a wage or other compensation. Instead, the Plaintiffs earned their income by collecting tips from customers. The Defendant did not monitor the Plaintiffs’ income.

None of the Plaintiffs had set work schedules. They were free to come to work on whatever dates and times they chose. They were also free to develop their own clientele and could generate business by advertising on the internet. The Plaintiffs’ dancing rotation was set on a first come, first served basis. Once at work, the Defendant preferred that the Plaintiffs work at least a six-hour shift. At some point during her shift, each Plaintiff was required to pay a House Fee to the Defendant. The House Fee was based on when a Plaintiff checked in to work.

The Entertainer Guidelines suggest that the Plaintiffs pay a “tip out” to the bar and the disc jockey (“DJ”) at the end of every shift. The suggested gratuity is ten percent to the bar and five percent to the DJ. However, this is not a requirement, and the Plaintiffs were not prohibited from working if they failed to pay the recommended tip out.

According to the Entertainer Guidelines, the Plaintiffs were to charge a minimum of $20 for VIP dances. Some Plaintiffs charged more than $20 for VIP dances and, according to the Defendant, no Plaintiff was ever disciplined for charging less than $20 for a VIP dance. A Plaintiff’s success as an exotic dancer was based, in large part, on her ability to entice interaction with her customers.

Discussing and applying the relevant law, the Court explained:

“The Plaintiffs filed this collective action lawsuit alleging that the Defendant violated the Fair Labor Standards Act (“FLSA”), 29 U .S.C. § 201, by failing to pay them a minimum wage. The parties agree that the relevant inquiry is whether the Plaintiffs were employees or independent contractors. This determination of a worker’s status is a question of law. Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1535 (7th Cir.1985). “For purposes of social welfare legislation, such as the FLSA, ‘employees are those who as a matter of economic reality are dependent upon the business to which they render service.’ ” Id. at 1534 (quoting Mednick v. Albert Enters., Inc., 508 F.2d 297, 299 (5th Cir.1975)). To determine the parties’ economic reality, the Seventh Circuit “do[es] not look to a particular isolated factor but to all the circumstances of the work activity.” Id. The six factors considered by courts in this circuit are:

(1) the nature and degree of the alleged employer’s control as to the manner in which the work is to be performed; (2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill; (3) the alleged employee’s investment in equipment or materials required for his task, or his employment of workers; (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 alleged employer’s business.  Id. at 1535.

There is no analogous Seventh Circuit case law, and the only federal appellate court to examine the issue of whether exotic dancers are employees or independent contractors was the Fifth Circuit in Reich v. Circle C. Investments, Inc., 998 F.2d 324 (5th Cir.1993). Like the Plaintiffs in the instant litigation, the exotic dancers in Circle C claimed that they were employees, not independent contractors. After applying the Fifth Circuit’s version of the economic realities test, the court of appeals agreed.”

Similarly, here the Court applied the various factors to determine that Plaintiffs were indeed employees, and not independent contractors:

“A. The Defendant’s control as to the manner in which the work is performed.

With respect to the control factor, the Fifth Circuit explained that the club “exercise[d] a great deal of control over the dancers .” Circle C, 998 F.2d at 327. The dancers were “required to comply with weekly work schedules, which Circle C compile[d].” Id. Dancers who were tardy were fined. Circle C set the prices for table and couch dances. Although dancers could choose their own costumes and their own music, both the costume and the music had to meet standards set by Circle C. Id. Circle C also extensively controlled the dancers’ conduct by promulgating rules including: “[N]o flat heels, no more than 15 minutes at one time in the dressing room, only one dancer in the restroom at a time, and all dancers must be ‘on the floor’ at opening time.” Id. Dancers who violated the code of conduct were fined.

The Plaintiffs in the instant case are “subject to a broad range of control by Defendant when it comes to the manner in which their work is performed.” Docket No. 57 at 8. When they are hired, the Plaintiffs receive and review a copy of the Entertainer Guidelines. These guidelines require that, among other things, the Plaintiffs: work at least a six hour shift; charge at least $20 for all VIP dances; refrain from inviting significant others or family members to the club while the Plaintiffs are working; and avoid walking with a lit cigarette, chewing gum, drinking anything from a bottle, or having a cell phone on the club floor. Docket No. 58 Ex. 3 ¶¶ 9-10, 12, 15. Another version of the Entertainer Guidelines prohibits the Plaintiffs from frequenting the club on days when they are not working. See Docket No. 58 Ex. 6 ¶ 13.

The Defendant claims that the Entertainer Guidelines were “of no real import,” Docket No. 64 at 12, because there was no written record of violations. Docket No. 65 Ex. 2 at 27, lines 18-20. Further, certain violations such as chewing gum on the floor were not punished. Id. at 36, lines 3-10. In addition, the Defendant argues that some of the Entertainer Guidelines were included “to ensure that the Entertainers’ behavior conformed with the law and to keep both the patrons and Entertainers safe.” Docket No. 64 at 15. Finally, the Defendant asserts that Circle C is distinguishable because the Plaintiffs in this case were free to work on the dates and times that they chose and thus they largely set their own schedules.

Despite the Defendant’s arguments otherwise, this case is analogous to Circle C. The Defendant in the instant case regulated the Plaintiffs’ behavior with a written code of conduct. Although the Defendant claims that the rules in the Entertainer Guidelines were never enforced, there is nothing in the record indicating that anyone informed the Plaintiffs of this fact. The Defendant cannot claim that it did not impose a significant amount of control on the Plaintiffs by arguing, with absolutely no evidentiary support, that the rules did not actually apply. While it is true that the Plaintiffs in the instant case could set their own work schedules, once at the club, the Defendant asked the Plaintiffs to work for a certain amount of time. The Plaintiffs could request music, but the music was ultimately controlled by the Defendant. See Docket No. 58 Ex. 5 at 46, lines 8-14. The Plaintiffs could pick their own costumes; however, as in Circle C, the Defendant had ultimate veto power. See id. 46-47. Further, the Defendant prohibited the Plaintiffs from being at the club in their free time and also prohibited the Plaintiffs’ families and significant others from coming to the club while the Plaintiffs were working. Docket No. 58 Ex. 6 ¶¶ 13, 16. Finally, the Defendant’s argument that many of the rules were imposed to protect the Plaintiffs and to ensure compliance with the law is unavailing. See Circle C, 998 F.2d at 327 (rejecting Circle C’s attempt to downplay its control). In short, all of the parties’ admissible evidence indicates that the Defendant exerted a significant amount of control over the Plaintiffs. Thus, although the Defendant exercises less control than the club in Circle C, the Defendant’s conduct still indicates that the Plaintiffs were employees.

B. The Plaintiffs’ opportunity for profit or loss.

As to the opportunity for profit and loss, in Circle C the Fifth Circuit noted that although a dancer’s “initiative, hustle, and costume significantly contribute to the amount of her tips,” Circle C, 998 F.2d at 328, the dancers were not responsible for drawing customers to the club in the first place. “Circle C is responsible for advertisement, location, business hours, maintenance of facilities, aesthetics, and inventory of beverages and food.” Id. The court concluded that “[g]iven its control over determinants of customer volume, Circle C exercises and high degree of control over a dancer’s opportunity for ‘profit.’ ” Id. Therefore, “[t]he dancers are ‘far more akin to wage earners toiling for a living, than to independent entrepreneurs seeking a return on their risky capital investments.’ ” Id. (quoting Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1051 (5th Cir.1987)).

In the instant case, a Plaintiff’s only “opportunity for loss comes in the form of a ‘House Fee’ that she is required to pay for each shift, the amount of which ranges from $0.00-$30.00.” Docket No. 57 at 12. “All other potential risks of loss, be they food and beverage related or liability-related, are borne solely by Defendant .” Id. at 13. Similarly, an entertainer has no real opportunity to profit. At best she can “increase her earnings by taking care of herself, working harder, and enticing social interaction with her customers.” Id. The Defendant tacitly acknowledges that this was one way in which the Plaintiffs could enhance their profits. However, the Defendant refuses to acknowledge that this argument has been rejected by every court that has considered it. See, e.g ., Harrell, 992 F.Supp. at 1350; Priba Corp., 890 F.Supp. at 593. The Defendant also emphasizes that the Plaintiffs were allowed to advertise and market themselves by using MySpace, Facebook, and simple word of mouth. Docket No. 64 at 17. This may be true, but the simple fact remains that, like the club in Circle C, the Defendant is primarily responsible for drawing customers into the club. See Circle C, 998 F.2d at 328. Thus, the second factor also tips in favor of employee status.

C. The Plaintiffs’ investment in equipment or materials.

In Circle C, the Fifth Circuit noted that “a dancer’s investment is limited to her costumes and a padlock.” Circle C, 998 F.2d at 327. Although the court acknowledged that some dancers spend a significant amount of money on their costumes, the court concluded that “[a] dancer’s investment in costumes and a padlock is relatively minor to the considerable investment Circle C has in operating a nightclub.” Id. at 328; see also Harrell, 992 F.Supp. at 1350. “Circle C owns the liquor license, owns the inventory of beverages and refreshments, leases fixtures for the nightclub … owns sound equipment and music, maintains and renovates the facilities, and advertises extensively.”   Circle C, 998 F.2d at 327. Thus, this factor indicated that the dancers were employees.

The instant case is markedly similar to Circle C. The Plaintiffs “do not make any capital investment in Defendant’s facilities, advertising, maintenance, security, staff, sound system and lights, food, beverage, and other inventory.” Docket No. 57 at 14. The Plaintiffs’ only investment is in their costumes and their general appearance (i.e. hair, makeup, and nails). Id. at 15. Thus, as in Circle C, this factor tips in favor of employee status.

D. Special skills required.

The Fifth Circuit concluded that the dancers in Circle C “do not need long training or highly developed skills to dance at a Circle C nightclub.” 998 F.2d at 328. Indeed, many of Circle C’s dancers had never before worked at a topless dance club. Id. Other courts have consistently held that little skill is necessary to be a topless dancer. See, e.g., Harrell, 992 F.Supp. at 1351; Priba Corp., 890 F.Supp. at 593; Jeffcoat v. Alaska Dept. of Labor, 732 P.2d 1073, 1077 (Alaska 1987) (applying federal courts’ economic realities analysis).

In the instant case, the Defendant claims that although the entertainers are not trained dancers, they must possess special skills “in communicating, listening, and (to some minor extent) counseling” in order to be successful. Docket No. 64 at 21. According to the Defendant, an Entertainer must be a peculiar combination of a customer service representative and counselor: she must have excellent listening skills, the ability to read another person’s affect and discern from that demeanor his particular conversational or emotional needs, and the ability and willingness to fulfill those needs in a purely non-sexual way. Id. at 21-22. This argument is unconvincing, especially because nothing in the record indicates that the Defendant’s hiring process included an assessment of a prospective dancer’s communication or counseling skills. Having examined all of the parties’ admissible evidence, the Court is convinced that this factor indicates that the Plaintiffs are employees.

E. The degree of permanency of the working relationship.

The Circle C court noted that “most dancers have short-term relationships with Circle C.” Circle C, 998 F.2d at 328. “Although not determinative, the impermanent relationship between the dancers and Circle C indicates non-employee status.” Id. However, the court concluded that “[t]he transient nature of the work force is not enough here to remove the dancers from the protections of the FLSA.” Id. at 328-29. Thus, despite the fact that this factor tipped in favor of independent contractor status, the court was convinced that the economic realities of the relationship indicated that the dancers were employees. Id. at 329.

In the case presently before this Court, the Plaintiffs argue that the Defendant considered the relationship between the parties to be ongoing. See Docket No. 57 at 16-17. Thus, according to the Plaintiffs, their situation is materially different “from the limited-duration relationship typical to independent contractors.” Id. at 17. However, the Defendant submitted admissible evidence indicating that most of the dancers only worked at the Defendant’s club for six months. Docket No. 65 Ex. 6 ¶ 3. Thus, as in Circle C, this factor tips in favor of independent contractor status.

F. The extent to which the Plaintiffs’ service is integral to the Defendant’s business.

The Fifth Circuit does not include this factor in its economic realities analysis. However, other district courts have considered this issue and have concluded that “[e]xotic dancers are obviously essential to the success of a topless nightclub.” Harrell, 992 F.Supp. at 1352; see also Jeffcoat, 732 P.2d at 1077. Although the Defendant claims that no more than ten percent of its profits came from the dancers, and thus, “the Entertainers are not a vital part of its business,” Docket No. 64 at 24, this assertion is belied by the Defendant’s own deposition testimony. Manager James Nicholson stated that “[p]robably less than one percent” of the club’s customers go to the club solely for food and drink. Docket No. 58 Ex. 1 at 27, line 20. When asked what would happen “if the club limited the use of dancers at the facility,” Nicholson stated: “The same thing if McDonald’s got rid of hamburgers, all right? We wouldn’t be that business.” Id. at 27, lines 21-25; id. at 28, line 1.

The Defendant’s argument that the dancers are non-essential forms of extra entertainment, “like televisions at a sports bar” is simply unconvincing. Robert W. Wood, Pole Dancers: Employees or Contractors? TAX NOTES, Nov. 9, 2009, at 673, 675. Indeed, the Defendant’s own manager apparently does not believe this assertion. The Plaintiffs are critical to the Defendant’s current business model. Thus, this factor indicates that the Plaintiffs are employees, and not independent contractors.

Having considered all of the parties’ admissible evidence and viewing the evidence in the light most favorable to the Defendant, the Lauritzen factors indicate that the Plaintiffs are employees.”

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Companies Slash Payrolls By Calling Workers Independent Contractors; Costly To IRS And States, L.A. Times Reports

The LA Times reports that the “Internal Revenue Service and 37 states are cracking down on companies that try to trim payroll costs by illegally classifying workers as independent contractors, rather than as full employees, The Associated Press has learned. The practice costs governments billions in lost revenue and can leave workers high and dry when they are hurt at work or are left jobless.

Many who have studied the problem believe it’s worsened during the economic downturn, fueling even more aggressive recovery efforts by states.”

The article points out that “[t]ypically, unless workers fight for and win a ruling that they should have been treated as full employees, they aren’t able to collect workers’ compensation for the injury or unemployment benefits when left jobless.”

To read the full article click here.

To read more about the legal factors that determine whether someone is misclassified as an independent contractor vs employee, and industries where misclassification is rampant click here.

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5th Cir.: Cable Installers Are Employees, Not Independent Contractors; Summary Judgment For Employer Reversed

Cromwell v. Driftwood Elec. Contractors, Inc.

The trial court in this case previously granted the Defendant-employer summary judgment finding that the Plaintiff-employee-cable installers were independent contractors and not employees.  The 5th Circuit reversed on appeal, finding that although it’s a close call, Plaintiffs were employees, thus entitled to the protections of the FLSA.

The Court cited the following facts as relevant to its inquiry:

“[Plaintiffs] provided cable splicing services for Driftwood for approximately eleven months, and were required to work twelve-hour days, thirteen days on and one day off. They were paid a fixed hourly wage for their work. BellSouth was Driftwood’s customer on the restoration project. AT & T appears to have had nothing to do with the facts of this case. Cromwell and Bankston reported to BellSouth’s location every morning to receive their assignments, unless they had not completed their jobs from the prior workday, in which case they were permitted to check in by phone. Cromwell and Bankston were given prints describing the type of work that needed to be performed for each assignment and were instructed by BellSouth supervisors to follow certain general specifications. Driftwood and BellSouth representatives checked on the progress of work, but did not train Cromwell and Benson or control the details of how they performed their assigned jobs.

Cromwell and Bankston provided their own trucks, testing equipment, connection equipment, insulation equipment, and hand tools, totaling over $50,000 for Cromwell and approximately $16,000 for Bankston, while BellSouth supplied materials such as closures and cables. Cromwell and Bankston were responsible for their own vehicle liability insurance and employment taxes, but Driftwood provided workers’ compensation insurance and liability insurance for Cromwell and Bankston’s work.”

Applying the relevant law, the Court stated, “[t]o determine if a worker qualifies as an employee under the FLSA, we focus on whether, as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself. Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir.2008). To aid in that inquiry, we consider five non-exhaustive factors: (1) the degree of control exercised by the alleged employer; (2) the extent of the relative investments of the worker and the alleged employer; (3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship. Id. No single factor is determinative. Id. The ultimate conclusion that an individual is an employee within the meaning of the FLSA is a legal, and not a factual, determination. Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1045 (5th Cir.1987); see also Beliz v. W.H. McLeod & Sons Packing Co., 765 F.2d 1317, 1327 & n. 24 (5th Cir.1985) (citing and reconciling cases). Therefore, “we review the determination that [plaintiffs] were not employees as we review any determination of law,” which is de novo. Donovan v. American Airlines, Inc., 686 F.2d 267, 270 n. 4 (5th Cir.1982). Because there are no disputes of material fact, we also conclude that the district court was correct to resolve the matter on summary judgment.

The defendants-appellees argue that the facts of this case are similar to those in Carrell v. Sunland Const., Inc., in which we held that a group of welders were independent contractors under the FLSA. 998 F.2d 330 (5th Cir.1993). In Carrell, we noted that several facts weighed in favor of employee status, including that the defendant dictated the welders’ schedule, paid them a fixed hourly rate, and assigned them to specific work crews. Id. at 334. However, we held that the welders were independent contractors because the welders’ relationship with the defendant was on a project-by-project basis; the welders worked from job to job and from company to company; the average number of weeks that each welder worked for the defendant each year was relatively low, ranging from three to sixteen weeks; the welders worked while aware that the defendant classified them as independent contractors, and many of them classified themselves as self-employed; the welders were highly skilled; the defendant had no control over the methods or details of the welding work; the welders performed only welding services; the welders supplied their own welding equipment; and the welders’ investments in their welding machines, trucks, and tools averaged $15,000 per welder. Id.

In Carrell, we distinguished our prior decision in Robicheaux v. Radcliff Material, Inc., 697 F.2d 662 (5th Cir.1983), in which we held that a group of welders were employees under the FLSA, on the grounds that the welders in Robicheaux worked a substantial period of time exclusively with the defendant in that case, ranging from ten months to three years; the welding in Robicheaux required only “moderate” skill; the defendant in Robicheaux told the welders how long a welding assignment should take; the welders in Robicheaux spent only fifty percent of their time welding, and the remaining time cleaning and performing semi-skilled mechanical work; and the defendant in Robicheaux provided the welders with “steady reliable work over a substantial period of time.” Carrell, 998 F.2d at 334 (citing Robicheaux, 697 F.2d at 667). The welders in Robicheaux had signed a contract with the defendant in that case describing themselves as independent contractors; furnished their own welding equipment, in which they had invested from five to seven thousand dollars each; provided their own insurance and workers’ compensation coverage; invoiced the defendant on their own business letterheads, filed federal income tax returns on IRS forms as self-employed individuals, and received a higher hourly wage than did other welders employed by the defendant who did not furnish their own equipment and who were considered by the company to be employees. Robicheaux, 697 F.2d at 665.

The facts of this case lie somewhere between those of Carrell and Robicheaux. Similar to the facts in Carrell, the plaintiffs in this suit are highly skilled and perform only services requiring the use of those skills, the defendants here did not control the details of how the plaintiffs performed their assigned jobs, and the plaintiffs provided their own trucks, equipment, and tools, in which they had invested substantial sums. However, there are some significant dissimilarities between the facts in the instant case and the facts in Carrell, such that the facts of this case are not as readily distinguishable from those in Robicheaux. The plaintiffs in this case worked full-time exclusively for the defendants for approximately eleven months, within the time range that the Robicheaux welders had worked for the defendant in that case. The plaintiffs in this case did not have the same temporary, project-by-project, on-again-off-again relationship with their purported employers as the plaintiffs in Carrell did with their purported employer. The defendants-appellees argue that Cromwell and Bankston’s work-restoring damaged telecommunications lines along the Mississippi Gulf Coast in the wake of Hurricane Katrina-was by nature temporary, but “courts must make allowances for those operational characteristics that are unique or intrinsic to the particular business or industry, and to the workers they employ.”   Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1054 (5th Cir.1987) (“[W]hen an industry is seasonal, the proper test for determining permanency of the relationship is not whether the alleged employees returned from season to season, but whether the alleged employees worked for the entire operative period of a particular season.”). Thus, the temporary nature of the emergency restoration work does not weigh against employee status.

It is common in FLSA cases that “there are facts pointing in both directions” regarding the issue of employee status, see Herman v. Express Sixty-Minutes Delivery Serv., Inc., 161 F.3d 299, 305 (1998) (quoting Carrell, 998 F.2d at 334), but the facts in this case truly appear to be nearly in equipoise. However, on balance, we believe that, as a matter of economic reality, Cromwell and Bankston were economically dependant upon Driftwood and BellSouth, and were not in business for themselves. The facts of this case simply appear closer to those in Robicheaux than in Carrell. The most significant difference between the facts in those cases, in terms of the economic reality of whether the plaintiffs were economically dependant upon the alleged employer, was that the Robicheaux welders worked on a steady and reliable basis over a substantial period of time exclusively with the defendant, ranging from ten months to three years, whereas the Carrell welders had a project-by-project, on-again-off-again relationship with the defendant, with the average number of weeks that each welder worked for the defendant each year being relatively low, ranging from three to sixteen weeks. Similar to the Robicheaux welders, Cromwell and Bankston worked on a steady and reliable basis over a substantial period of time-approximately eleven months-exclusively for their purported employers. The permanency and extent of this relationship, coupled with Driftwood and BellSouth’s complete control over Cromwell and Bankston’s schedule and pay, had the effect of severely limiting any opportunity for profit or loss by Cromwell and Bankston. Although it does not appear that Cromwell and Bankston were actually prohibited from taking other jobs while working for Driftwood and BellSouth, as a practical matter the work schedule establish by Driftwood and BellSouth precluded significant extra work. Also, the fact that Driftwood and BellSouth provided Cromwell and Bankston with their work assignments limited the need for Cromwell and Bankston to demonstrate initiative in performing their jobs. See Carrell, 998 F.2d at 333 (“As for the initiative required, a Welder’s success depended on his ability to find consistent work by moving from job to job and from company to company. But once on a job, a Welder’s initiative was limited to decisions regarding his welding equipment and the details of his welding work.”). Although there are facts that clearly weigh in favor of independent contractor status, notably that Cromwell and Bankston controlled the details of how they performed their work, were not closely supervised, invested a relatively substantial amount in their trucks, equipment, and tools, and used a high level of skill in performing their work, these facts are not sufficient to establish, as a matter of economic reality, that Cromwell and Bankston were in business for themselves during the relevant time period. The judgment of the district court is VACATED, and this case is REMANDED to the district court for proceedings consistent with this opinion.”

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Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention, GAO Study Says

A report released this week by the United States’ Government Accountability Office (GAO), highlights the issues created when employers improperly misclassify employees as independent contractors and calls for the DOL and IRS to step up enforcement measures to crack down on the abuses.

According to a summary of the report released on the GAO’s website Wednesday, “When employers improperly classify workers as independent contractors instead of employees, those workers do not receive protections and benefits to which they are entitled, and the employers may fail to pay some taxes they would otherwise be required to pay. The Department of Labor (DOL) and Internal Revenue Service (IRS) are to ensure that employers comply with several labor and tax laws related to worker classification. GAO was asked to examine the extent of misclassification; actions DOL and IRS have taken to address misclassification, including the extent to which they collaborate with each other, states, and other agencies; and options that could help address misclassification. To meet its objectives, GAO reviewed DOL, IRS, and other studies on misclassification and DOL and IRS policies and activities related to classification; interviewed officials from these agencies as well as other stakeholders; analyzed data from DOL investigations involving misclassification; and surveyed states.

The national extent of employee misclassification is unknown; however, earlier and more recent, though not as comprehensive, studies suggest that it could be a significant problem with adverse consequences. For example, for tax year 1984, IRS estimated that U.S. employers misclassified a total of 3.4 million employees, resulting in an estimated revenue loss of $1.6 billion (in 1984 dollars). DOL commissioned a study in 2000 that found that 10 percent to 30 percent of firms audited in 9 states misclassified at least some employees. Although employee misclassification itself is not a violation of law, it is often associated with labor and tax law violations. DOL’s detection of misclassification generally results from its investigations of alleged violations of federal labor law, particularly complaints involving nonpayment of overtime or minimum wages. Although outreach to workers could help reduce the incidence of misclassification, DOL’s work in this area is limited, and the agency rarely uses penalties in cases of misclassification. IRS enforces worker classification compliance primarily through examinations of employers but also offers settlements through which eligible employers under examination can reduce taxes they might owe if they maintain proper classification of their workers in the future. IRS provides general information on classification through its publications and fact sheets available on its Web site and targets outreach efforts to tax and payroll professionals, but generally not to workers. IRS faces challenges with these compliance efforts because of resource constraints and limits that the tax law places on IRS’s classification enforcement and education activities. DOL and IRS typically do not exchange the information they collect on misclassification, in part because of certain restrictions in the tax code on IRS’s ability to share tax information with federal agencies. Also, DOL agencies do not share information internally on misclassification. Few states collaborate with DOL to address misclassification, however, IRS and 34 states share information on misclassification-related audits, as permitted under the tax code. Generally, IRS and states have found collaboration to be helpful, although some states believe information sharing practices could be improved. Some states have reported successful collaboration among their own agencies, including through task forces or joint interagency initiatives to detect misclassification. Although these initiatives are relatively recent, state officials told us that they have been effective in uncovering misclassification. GAO identified various options that could help address the misclassification of employees as independent contractors. Stakeholders GAO surveyed, including labor and employer groups, did not unanimously support or oppose any of these options. However, some options received more support, including enhancing coordination between federal and state agencies, expanding outreach to workers on classification, and allowing employers to voluntarily enter IRS’s settlement program.”

The GAO recommends that, “[t]o assist in preventing and responding to employee misclassification, and to increase its detection of Fair Labor Standards Act (FLSA) and other labor law violations, the Secretary of Labor should direct the Wage and Hour Division (WHD) Administrator to increase the division’s focus on misclassification of employees as independent contractors during targeted investigations.”

A full copy of the GAO report is available here and the summary is available here.

Go here to learn more about employers misclassification of employees vs independant contractors.

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M.D.Fla.: Cable Installer Is An Employee Not An Independent Contractor Of Contractor To Cable Company

Parrilla v. Allcom Const. & Installation Services, LLC

This matter came before the Court after a one-day bench trial on the issue of whether Plaintiff, was an independent contractor, and thus exempt from the overtime compensation requirements of the Fair Labor Standards Act (the “FLSA”). In its decision, on this highly litigated issue, the Court held that Plaintiff was an employee, notwithstanding Defendant’s argument otherwise, after reviewing the six factor “economic reality” test.

Initially the Court laid out the oft-used test:

“In determining whether an individual is an employee or independent contractor, the United States Supreme Court has explained that lower courts must consider the “economic realities” of the parties’ relationship-not the labels or formalities by which the parties characterize their relationship. See generally Rutherford Food Corp. v. McComb, 331 U.S. 722, 67 S.Ct. 1473, 91 L.Ed. 1772 (1947); see also Bartels v. Birmingham, 332 U.S. 126, 130, 67 S.Ct. 1547, 91 L.Ed. 1947 (1947). The Eleventh Circuit has noted that the following factors guide this inquiry:

(1) the nature and degree of the alleged employer’s control as to the manner in which the work is to be performed;

(2) the alleged employee’s opportunity for profit or loss depending upon his managerial skill;

(3) the alleged employee’s investment in equipment or materials required for his task, or his employment of workers;

(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 alleged employer’s business.

Freund v. Hi-Tech Satellite, Inc., 185 F. App’x 782, 783 (11th Cir.2006) (unpublished) [hereinafter "Freund"] (quoting Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1535 (7th Cir.1987)); see also 29 C.F.R. § 500.20(h)(4).”

The Court then discussed its factual findings as applied to the six factor test:

“A. Nature and Degree of Control Exerted by Defendant Over Plaintiff

The testimony and record evidence in this case establishes that Defendant exerted significant control over Plaintiff. Specifically, Defendant controlled Plaintiff’s daily work schedule, the type of work Plaintiff performed, the amount of time Plaintiff could take off from work, and the manner in which Plaintiff carried out his work.

Defendant determined Plaintiff’s daily work schedule, the resulting number of hours that Plaintiff worked, and the type of jobs that Plaintiff performed. Defendant required Plaintiff to arrive at its place of work at approximately 7:30 a.m. each day; Defendant would then hand Plaintiff a list of work orders to perform for the day. Plaintiff had no control over the work orders that he received, the types of jobs that he could perform or the order in which he carried out the work orders. Plaintiff could not, for instance, perform work orders relating only to Internet service. He had to carry out the work orders that Defendant gave him and in the order that Defendant specified. Furthermore, if a customer requested additional work, or work that differed from what was printed on an existing work order, Plaintiff could not accept the new work unless Bright House and Defendant’s supervisors first approved the new work and Plaintiff received a new work order. Finally, Defendant did not permit Plaintiff to perform cable installation work for any other cable installation provider.

Plaintiff also had little control over when to perform the work orders or the order in which he choose to carry out the work orders. When Bright House customers schedule an appointment with a technician, they are given a two-hour window in which they must wait for the technician to arrive and start performing the work. To ensure that its technicians would be able to meet these windows, Defendant assigned its work orders based largely on geographical proximity. Plaintiff had no control over this assignment process and was required to meet Bright House customers’ time windows. He could not re-schedule customer appointments. Furthermore, Defendant would sometimes instruct Plaintiff to leave a particular job (even if the job were not complete) and go to another job; Plaintiff did not have any meaningful discretion to refuse those instructions.

Defendant also controlled the amount of time, and the manner in which, Plaintiff could take time off. While there was conflicting evidence on this issue, the Court finds that the more credible evidence revealed that Defendant would penalize, or at least threatened to penalize, technicians who frequently requested time off, failed to show up each morning at Defendant’s office, or failed to attend Defendant’s mandatory weekly meetings. Although Defendant appears to have made some allowances for doctors’ appointments, family emergencies and vacations that were planned in advance, it would penalize or terminate technicians who simply decided that, for whatever reason, they did not want to work on a particular day. Indeed, Defendant’s manager testified that its technicians needed to “request” time off.

Defendant also supervised, to a significant extent, the manner in which Plaintiff carried out his work. Defendant provided Plaintiff with specifications (that came mostly from Bright House) on how his work was to be performed. If Bright House informed Defendant that it was not satisfied with the manner in which Plaintiff performed an installation, Defendant would assess Plaintiff with fixed monetary penalties (or “charge-backs”) based on the type of job performed (e.g., the penalty for an unsatisfactory modem installation might be $50, while the penalty on an unsatisfactory television installation might be $25). Defendant automatically deducted these charge-backs from the weekly payments it made to Plaintiff’s company. In some instances, these penalties actually exceeded the total amount Plaintiff was supposed to be paid on a job. Plaintiff had no way of disputing or negotiating the amount of a particular charge-back. Finally, Defendant and Bright House sometimes sent supervisors to “spot-check” or monitor Plaintiff and other technicians after they completed a job or even during a job.

B. Plaintiff’s Opportunity for Profit or Loss Depending on His Managerial Skill

The testimony and record evidence in this case establishes that Plaintiff’s opportunity for profit or loss did not depend upon his managerial skill. Instead, Plaintiff’s compensation was based simply on the number and type of jobs that Defendant gave him and the quality and pace of Plaintiff’s work.

Because Plaintiff was paid on a piece work basis, Plaintiff’s opportunity for profit or loss was, in a simplistic sense, a function of the number of jobs he could complete in a finite time frame. Excluding charge-backs, the more jobs Plaintiff could quickly complete, the more Plaintiff stood to profit.

As noted, supra, however, Plaintiff’s profit was also a function of the type of work orders that Defendant assigned him (and the amount of charge-backs Plaintiff received). Because the types of jobs that Plaintiff performed each paid differently, notwithstanding the amount of time it took to complete those jobs, Plaintiff would experience days that were more profitable than others simply as a result of the type of work orders that Defendant assigned to him. For example, assuming cable modem installations paid more than television installations, if all the work orders Plaintiff received on a given day were for cable modem installations, Plaintiff would make more on that day, ceteris paribus, than if he had been assigned all television installations. Of course, if cable modem installations took twice as long as television installations, it might be the case that Plaintiff could earn the same amount (or more) by just doing television installations throughout the day. Importantly, though, Plaintiff had no control over the types of work orders that he was given and, in at least some instances, Defendant instructed him to leave particular jobs to perform other potentially less profitable jobs.

Furthermore, Plaintiff was not permitted to install cable services for other cable installation companies. Nor was he permitted to provide additional services for Bright House customers without first obtaining a new work order authorized by both Bright House and Defendant.

No matter how quickly or efficiently Plaintiff worked, Defendant’s charge-backs, the manner in which it assigned jobs, and the directives it gave to sometimes leave jobs prior to their completion obviated Plaintiff’s ability to rely upon his own managerial skill.

C. Plaintiff’s Investment in Equipment or His Employment of Others

The testimony and record evidence in this case establishes that Plaintiff did not make any significant investment in capital or employ others.

Although Plaintiff provided most of the equipment necessary for performing installations on behalf of Defendant, Plaintiff’s relative investment in that equipment was small. In total, the cost of the hand tools, cable fishing stick, crimper, hammer drill, cable meter, and ladder that Defendant required Plaintiff to purchase amounted to perhaps no more than $1,000 (the cable meter and hammer drill, for instance, cost $500 and $150, respectively). Bright House provided the actual cable, cable modems, digital video recorders and other material inputs required for the installations. While Plaintiff used his own vehicle (a mini-van) to drive to customer’s houses, that vehicle was also for personal use.

*5 Defendant ostensibly gave Plaintiff the option to hire others through his own company. But that option was illusory. With the exception of just one husband and wife team, none of Defendant’s technicians, including Plaintiff, ever utilized or substituted others to carry out the work orders that Defendant assigned.

D. Special Skills Required for Plaintiff’s Services

The testimony and record evidence in this case establishes that Plaintiff’s work did not require the application of particularly special, or difficult to acquire, skills.

Although Plaintiff’s work involved proper cable wiring, connecting and configuring Internet cable modems, the use of a cable meter, and answering customer’s questions, Defendant’s manager testified that those skills could be acquired in as little as two weeks of on-the-job training. In fact, Defendant often assigned experienced technicians to work with new technicians for a one or two week period in order to get new technicians up to speed. After this short training period, Defendant would start sending the new technicians out into the field.

E. The Degree of Permanence and Duration of Plaintiff’s Working Relationship With Defendant

The testimony and record evidence in this case establishes that there was a high degree of permanence in Plaintiff’s relationship with Defendant. As noted, supra, Plaintiff was not permitted to provide cable installation services for any other cable installation company while we worked for Defendant. Plaintiff was expected to show up at Defendant’s office each morning, six days a week, and was given work orders that typically amounted to a full day’s worth of work. This relationship continued for nearly one and a half years.

F. The Extent to Which Plaintiff’s Work Was Integral to Defendant

The testimony and record evidence in this case establishes that Plaintiff’s work was clearly integral to Defendant’s business. In the absence of Plaintiff’s work, and the work of Defendant’s other installation technicians, Defendant would not succeed as an ongoing enterprise. Defendant conceded as much in its trial brief (Doc. 52 at 5) and later at trial.

V. Conclusion

Based on the totality of the circumstances, it is clear that Plaintiff was an employee-and not an exempt independent contractor-for purposes of the FLSA. Taken together, all six of the factors comprising the “economic reality” test overwhelmingly support the conclusion that Plaintiff was an employee who was economically dependent on Defendant.”

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E.D.N.Y.: Alleged Operators Of Garment Factory May Constitute Plaintiffs’ Employers Or Joint Employers Under FLSA; Motion To Dismiss Denied

Lin v. Great Rose Fashion, Inc.

In this Fair Labor Standards Act (“FLSA”) case, Plaintiffs allege that they were deprived of a minimum wage and overtime pay while working in a garment factory, and ultimately discharged from their employment in retaliation for pursuing their rights to this compensation. Plaintiffs had previously moved for both a preliminary injunction and a TRO, based on alleged retaliatory conduct from Defendants, and allegations that Defendants were seeking to strip the factory where Plaintiffs had been employed of their assets. Of particular interest on the parties Motions currently before the Court, the Defendants sought to dismiss Plaintiffs’ claims based on alleged lack of standing—arguing that that Defendants were not Plaintiffs’ employers under the FLSA. Denying Defendants’ Motion to Dismiss based on lack of standing, the Court reviewed the elements of joint employers under the FLSA as well as those used to distinguish between independent contractors and employees. The Court held an evidentiary hearing and made factual findings regarding the nature of the parties’ relationship.

“Defendants argue that Plaintiffs lack standing to sue because they were not ‘employees,’ as defined in the FLSA, but rather ‘independent contractors.’ Defendants claim they ‘outsourced the packing and trimming work to Wen Ming Lin and Yu Jiao Lin,’ and Wen Ming Lin’ in turn employed a group of ‘independent contractors,’ the Packer Plaintiffs. In support of their view, Defendants assert that they did not hire, fire, supervise, or manage the workers. They claim that the ‘subcontractors’ maintained the other workers’ employment records, negotiated a pay rate for the group and collected checks on one desk, and that ‘the plaintiffs themselves decided when they should arrive, depart, and the amount of time for which they were to work.’

The evidence presented at the Hearing exposed each of these assertions to be patently false. Applying the Brock factors, there is simply no question that these Plaintiffs “depend[ed] upon someone else’s business for the opportunity to render service” and were not “in business for themselves.” See Brock, 840 F.2d at 1059. The Plaintiffs were low-skilled, immigrant piece-workers toiling for long hours of manual labor in a garment factory. At least one, Yu Jiao Lin, expressed that she was illiterate. The testimony of the Plaintiffs established that they were interviewed, hired, fired, assigned work and hours, and supervised and managed by Mrs. Lin and Fang Zhen, or others under their control. (Tr. 31, 33-36, 78-81.) Contrary to the Defendants’ assertions, there is no evidence that Wen Ming Lin or Yu Jiao Lin had the power to hire, fire, manage assignments and schedules, or discipline other workers. (Id.)

It is plain that Mrs. Lin and Fang Zhen exercised a degree of control over the workers commensurate with the role of an employer. The Defendants’ collective denial of control over the workers is not credible. Wen Ming Lin’s referral of prospective workers to Mrs. Lin for her to interview does not elevate him to the role of independent contractor. (Tr. 52-53.) The Defendants’ additional arguments are similarly unavailing and unsupported by the evidence. For example, the Defendants’ repeatedly point to a single paycheck issued on December 9, 2005 and marked “payment for the assigned contractors” as evidence that “Plaintiffs shared and shared alike,” creating a relationship “best [ ] characterized as a partnership.” (Def. Post-Hearing Opp. 3, Def. Ex. A.) The Defendants’ choice to unilaterally label the Plaintiffs “contractors,” and to attempt to pay them via a collective paycheck on one occasion years ago, does not control the legal question before the court. This crude argument fails to set the Plaintiffs apart as independent contractors.

Considering the remaining Brock factors, the Defendants’ “independent contractor” theory proves even more preposterous. There is zero evidence that Plaintiffs had any opportunity for profit or loss or an “investment” in the business. The packers and thread-cutters were engaged in low-skilled factory labor, which was obviously not a matter of “independent initiative.” The Plaintiffs who took the stand worked at the Factory on a permanent, daily basis for three years. Their work at the Factory was not an occasional project. The Plaintiffs performed discrete tasks that assisted the line production, assembly, and packaging of goods. It is clear that their work was “an integral part of the employer’s business.”

Defendants’ contrived efforts to distance themselves from their workers and treat them as “subcontractors” have failed. The Defendants’ argument is nothing more than a transparent attempt to use a legal fiction to escape liability for their alleged labor abuses. The notion that these Plaintiffs acted as independent contractors outside the protection of the FLSA is so thoroughly without merit that it borders on an affront to the dignity of this court.”

B. Silver Fashion and Mrs. Lin Constitute “Employers” Under the FLSA

As a matter of economic reality, the Plaintiffs were employed by the Factory and the entities that owned it over the years: Silver Fashion, Great Rose, and Spring Fashion. Under the Carter factors, Silver Fashion maintained formal control over the Plaintiffs through the actions of its principal managers. Since Mrs. Lin’s parents were absentee, nominal owners of the business, Mrs. Lin controlled the company. The persistent euphemism that Mrs. Lin was just “helping out” her parents and that Fang Zhen was “helping” Mrs. Lin cannot be taken seriously. The only conceded owners or managers of Silver Fashion were Mrs. Lin’s parents, who live in China and appear to have no involvement whatsoever in the operations of this company held in their names. As Mrs. Lin eventually summarized: “Basically I was running the company.”(Tr. 262.)

As reviewed above, Plaintiffs were interviewed, hired, fired, assigned work and hours, and supervised and managed by Mrs. Lin and Fang Zhen, or others under their control. (Tr. 31, 33-36, 78-81.) There is no serious dispute that Mrs. Lin or others acting on her behalf determined the rate and method of payment. Mrs. Lin also maintained employment records, as demonstrated by the Defendants’ production of the Weekly Trim/Packing Reports. (See Def. Ex. A (original records in blue ink).) These records purport to show the quantity and price of the piecework performed by the Packer Plaintiffs, which formed the basis for their weekly compensation. At a minimum, Plaintiffs have standing to sue Silver Fashion, its predecessor entities, and Mrs. Lin under the FLSA. The court reserves judgment pending discovery as to the role of Fang Zhen in the employment scheme.

C. Great Wall and Mr. Lin May Constitute Joint Employers Under the FLSA

Defendants also argue that the case should be dismissed as to Great Wall and Mr. Lin, because they had no “operational control” over the Plaintiffs. (Def. Post-Hearing Opp. 10-15.) The agency regulations promulgated under the FLSA expressly recognize that a worker may be employed by more than one entity at the same time. See29 C.F.R. § 791.2 (2003); Zheng, 355 F.3d at 66 (citing Torres-Lopez v. May, 111 F.3d 633, 639-45 (9th Cir.1997) (permitting claims against joint employers under the FLSA); Antenor v. D & S Farms, 88 F.3d 925, 929-38 (11th Cir.1996) (same)). Plaintiffs have standing to sue Great Wall and Mr. Lin, in addition to the other Defendants, if they exercised “functional control” over the Factory and its workers. See Barfield, 537 F .3d at 143;
Zheng, 355 F.3d at 66, 72.

Discovery is needed to determine whether a functional employment relationship existed between the Plaintiffs and Great Wall under the Zheng factors. The economic reality test intentionally reaches beyond traditional concepts of agency law to encompass “working relationships, which prior to [the FLSA], were not deemed to fall within an employer-employee category.” Zheng, 355 F.3d at 69 (quoting Walling v. Portland Terminal Co., 330 U.S. 148, 150-51 (1947)). Under the theory of functional control, “an entity can be a joint employer under the FLSA even when it does not hire and fire its joint employees, directly dictate their hours, or pay them.” Zheng, 355 F.3d at 70 (interpreting Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947)). Evidence already establishes that purported agents of Great Wall-Mrs. Lin and Fang Zhen, who each testified that they were employed exclusively by Great Wall-supervised the Plaintiffs’ work in the Factory. The ownership of the premises and the equipment used in the Factory could be imputed to Great Wall, given the tangled leasing relationships between Mr. and Mrs. Lin and the fact that the Factory’s space was distinguished from Great Wall’s space by nothing more than a pile of paper boxes. The Second Circuit has also recognized that a company can de facto set employees’ wages and “dictate[ ] the terms and conditions” of their employment, though they do not “literally pay the workers,” where those employees perform work exclusively in service of that company. Id. at 72.In effect, Plaintiffs functionally worked for Great Wall, because they worked in a Factory that manufactured garments exclusively for Great Wall. Upon review of the preliminary evidence before the court, the relationship between Plaintiffs and Silver Fashion appears to have had “no substantial, independent economic purpose” beyond serving as a “subterfuge meant to evade the FLSA or other labor laws” for the benefit of Great Wall.Id.

In light of the court’s obligation to look beyond the strictures of formal tests and consider all relevant facts, the court finds that Defendants’ dubious uses of the corporate form and the interlocking relationships between the Defendant Corporations are pertinent to the joint employer inquiry in this case. Defendants’ attempt to distinguish Great Wall as a mere “customer of Silver Fashion” is a fallacy. Nearly every aspect of these businesses was intertwined. Together, the Lins controlled both companies. Mr. Lin owned Great Wall, and his wife operated Silver Fashion. Mrs. Lin’s parents appear to be nothing more than straw owners of Silver Fashion. Great Wall was Silver Fashion’s landlord and sole client. Silver Fashion manufactured garments exclusively for Great Wall. In turn, Mr. Lin could not identify a single supplier to his company other than Silver Fashion. Mrs. Lin owned the building where both companies were housed, yet leased the entire building to a company wholly controlled by her husband, so that he could sublet part of it back to her parents for $18,000 a month. (See Section II.A supra.)From the rent and the garment sales, significant funds flowed between these related companies on a regular basis. These entities were functioning as complementary components of a single business enterprise.FN9Based upon these facts, Plaintiffs may have standing to hold Great Wall and Mr. Lin liable either as their functional employers or under other legal theories. The court denies Defendants’ Motion to Dismiss for lack of standing in its entirety.”

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