Corporate Officers May Face the “Economic Reality” of Individual Liability for Misclassifying Workers Under the Fair Labor Standards Act

In recent years, the U.S. Department of Labor has increasingly prosecuted businesses for misclassifying their workers under the Fair Labor Standards Act (FLSA), a trend that is likely to continue and possibly expand as the federal government maximizes its efforts to increase tax revenues in the current economic climate. In a recent decision out of the Northern District of Illinois, Solis v. International Detective & Protective Service, Ltd. (N.D. Ill. May 24, 2011), the court made clear that damage awards for FLSA violations are not limited to businesses, but that corporate officers can also be held individually liable for misclassifying members of their workforce.

When evaluating whether a worker is an employee or an independent contractor under the FLSA, courts apply a six-factor “economic realities” test considering: (1) the degree and nature of control that the company has over the manner in which the worker performs the work; (2) the opportunity that the worker has for profit or loss depending on his or her skill; (3) the worker’s own investment in the equipment or materials needed to complete the work; (4) whether the service at issue requires special skills; (5) whether the employment relationship is permanent; and (6) the extent to which the alleged employee’s service is an “integral part” of the employer’s business.

In Solis, the court applied the “economic realities” test to the business relationship between security officers and the security company for which they worked. Even though each of the security officers signed Independent Contractor Agreements verifying their status as independent contractors, the court nevertheless concluded that the workers should have been classified as employees who were eligible for overtime at the time-and-a-half rate.

The court’s decision was based on the following key factors:

• Control. The company controlled the manner in which work was performed because it provided its security officers with operating procedures for completing their tasks, conducted regular meetings to instruct its workers on those procedures, and monitored compliance with them. The court rejected the company’s position that its clients, and not the company, controlled how the guards performed their work.

• Opportunities for Profit or Loss. The guards maintained time sheets and were paid by the hour, and thus had no opportunity to earn additional profit or share in the company’s overall profits or losses based on their skill level.

• Investment in Equipment.  The workers did not have a substantial investment in equipment where the company provided vehicles, gas, car insurance and cell phones; the guards worked under the company’s security contractor license; and the company supplied liability insurance. The court discounted that the guards provided some of their own equipment (e.g., uniforms, firearms, bullets and handcuffs).

• Special Skills. The security guards’ responsibilities, which included: (i) walking or driving around worksites to detect unauthorized activity; (ii) checking overnight parking and safety equipment such as fire extinguishers; (iii) completing reports detailingany incidents during the shift; and (iv) following procedures for providing security services, did not require a high degree of technical expertise or skill.

• Permanency. The incentive for promotion and advancement within the company evidenced an intent to have the guards continue their relationship for an extended period of time. A provision in the Independent Contractor Agreements, which specified that the work was performed at-will, had no bearing on whether the relationship was considered permanent.

• Integral Part of Business. The services provided by the guards were an integral part of the private security service’s business, which includes monitoring worksites for criminal activity and protecting the client’s property.

Having determined that the security guards were employees, and not independent contractors, the employer was liable for over $100,000 in unpaid overtime and liquidated damages. The court noted that awarding liquidated damages and doubling the amount of unpaid overtime is the “norm, not the exception.”

Importantly, the court also concluded that corporate officers with significant ownership interests, day-to-day control of operations, and involvement in the supervision and payment of employees can be held personally liable for the corporation’s failure to pay owed wages. Consequently, the court found that the president and sole owner of the company—who was responsible for payroll, accounting and invoicing, signing payroll checks and controlling the corporate activities—and the chief operating officer—who oversaw work assignments and maintained time records—fell within the definition of “employer” under FLSA § 203(d) and were individually liable for any unpaid overtime compensation.

Solisis yet another example of the risks and penalties associated with improperly classifying employees as independent contractors. Companies that regularly utilize independent contractors should evaluate whether their use of those contractors would pass muster if scrutinized by the Department of Labor or a federal court.