Employers are urged to step carefully when engaging independent contractors. Why? A real-life answer can be found in Keller v. Miri Microsystems LLC. In this case, the U.S. Court of Appeals for the Sixth Circuit applied the “economic realities” test to determine whether a plaintiff’s claim to overtime pay under the Fair Labor Standards Act (FLSA) should stand.

Overtime claim

The plaintiff, a satellite dish installer, initially agreed to provide his services as an independent contractor. He later filed a lawsuit against the installation company that had engaged him, claiming he was actually an employee entitled to substantial overtime pay under the FLSA.

A trial court rejected the plaintiff’s claims but, on appeal, the Sixth Circuit reversed. It held that the FLSA claims should be tried by a jury, which could reasonably conclude that the company’s control over the plaintiff was consistent with that of an employee.

6 pertinent factors

To reach its decision, the appeals court applied the “economic realities” test. In doing so, the court considered six pertinent factors:

1. The permanency of the relationship. The court stated that independent contractors generally have variable or impermanent relationships with a company because they transfer from place to place as work is offered. Employees, on the other hand, generally work for one employer continuously.

The trial court had considered that the plaintiff didn’t have a contract with the company, nor did the two parties have an exclusive relationship. And the plaintiff did exercise control over the number of days he worked and jobs he took. But the plaintiff typically followed the work schedule he received from the company, and the company guaranteed the quality of his work.

Moreover, even though the installer was free to work for others, his geographic location made accepting other work difficult. Therefore, there was a genuine issue of fact as to the relationship’s permanency.

2. The degree of skill required. The court asserted that how the worker acquired his skill was an important inquiry. The company provided the installer with the training to obtain a necessary certification, which was more consistent with that of an employee.

3. The worker’s investment in equipment or materials. Here the appeals court stated that the worker’s investment in equipment should be compared to the company’s investment — with the worker’s investment being evidence of economic independence. The worker provided his own vehicle, tools and equipment.

But the court held that both the worker and the company invested capital into the business and that the equipment the worker provided could be used for personal use as well. Thus, there was an issue of fact as to whether the installer’s investments demonstrated economic independence.

4. The worker’s opportunity for profit or loss. The trial court pointed out that the plaintiff:

•  Determined the geographic region where he worked,
•  Exerted control over how many jobs he took,
•  Could have hired other technicians, and
•  Earned money from another company for selling products.

Therefore, the appeals court held that there was a material dispute as to whether the worker could have increased his profits if he’d improved his efficiency, hired assistants or requested more assignments.

5. The degree of the alleged employer’s right to control the manner in which the work was performed. The trial court considered that the plaintiff could refuse work assignments, and the company didn’t supervise or monitor how the plaintiff performed his work. Also, the plaintiff could work for other companies. But the company did influence the plaintiff’s daily work. It scheduled installations in blocks of time and technicians were expected to arrive at the customer’s house and finish their work within that time frame.

As such, the appeals court held that a reasonable jury could find that the way the company scheduled the installations made it impossible for the worker to provide his services to other companies. In addition, though the company didn’t supervise the plaintiff’s work, a jury could find that the company partly controlled his job performance through training he received.

6. Whether the service rendered was an integral part of the alleged employer’s business. The company provides only satellite installation and repair services. Thus, the appeals court held that a reasonable jury could find that the plaintiff’s services were an integral part of its business.

Careful classification

Just because a worker agrees to be an independent contractor for your organization doesn’t mean a court couldn’t reclassify that individual as an actual employee. Monitor and abide by the relevant factors of the economic realities test. Otherwise, you could be held liable for overtime and other benefits that employees are entitled to by law. 

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