The Sixth Circuit expands the definition of “employee” and puts your independent-contractor classifications at risk
The use of independent contractors has come under attack in recent years. Several states have passed laws increasing the penalties for misclassifying independent contractors. Further, the U.S. Department of Labor aggressively investigates independent-contractor classifications. Courts also have limited the use of independent contractors by expanding the definition of “employee.”
Consistent with this recent trend, on March 26, 2015, the Sixth Circuit Court of Appeals (which covers Michigan, Ohio, Kentucky, and Tennessee) broadened the scope of the employee/employer relationship and narrowed the independent-contractor definition. In Keller v. Miri Microsystems LLC, a satellite dish installer agreed to provide his services as an independent contractor, but later filed a lawsuit against the installation company claiming he was actually an employee entitled to substantial overtime pay under the Fair Labor Standards Act (FLSA). The U.S. District Court for the Eastern District of Michigan rejected the installer’s claims, holding that he was properly classified as an independent contractor. On appeal, the Sixth Circuit reversed, holding that the FLSA claims should be tried by a jury.
The Sixth Circuit followed the “economic realities” test for determining whether an individual is an employee or an independent contractor. Under this test, courts consider six factors:
- the permanency of the relationship;
- the degree of skill required;
- the worker’s investment in equipment or materials;
- the worker’s opportunity for profit or loss;
- the degree of the alleged employer’s right to control the manner in which the work is performed; and
- whether the service rendered is an integral part of the alleged employer’s business.
Even though the installer provided his own vehicle, tools, and equipment; could set his own schedule; was not required to wear a uniform; could work for other companies; and was able to hire his own staff, the Sixth Circuit found that it was possible he was misclassified as an independent contractor. In reaching that conclusion, the court found it significant that the installer never turned down an assignment and worked full-time for the company for twenty months. The court also noted that, even though the installer was free to work for others, his geographic location made accepting other work difficult. The court further reasoned that providing the installer with training to obtain a necessary certification was more consistent with employee status. Similarly, the court held that because the installer typically followed the work schedule he received from the company, and the company guaranteed his work, a jury could conclude that the company’s control over the installer was consistent with an employee classification. Accordingly, the Sixth Circuit reversed the district court and remanded the case for trial.
The Keller decision illustrates the dangers of classifying individuals as independent contractors when engaging in or structuring a business model. Keller makes clear that it is increasingly difficult to quickly dispose of misclassification challenges. More and more cases likely will go to trial. Companies should be proactive and regularly audit their classification and use of independent contractors in order to manage the risks associated with costly litigation or governmental investigations. For more information or guidance on this issue, please contact one of Honigman’s Labor and Employment attorneys.