Use of Independent Contractors May Create Unexpected Liability
With a struggling economy, many businesses may be tempted to classify their workers as independent contractors rather than employees because of the benefits this classification provides to employers. For example, many federal antidiscrimination laws do not apply to independent contractors, since they only cover "employees." Additionally, a company may be shielded from certain other types of liability to which it would be subject if the individual was an employee.
Employers should be aware, however, that misclassifying employees as independent contractors can result in litigation and potentially significant legal liability. For example, a federal trial court in Georgia recently ordered an adult entertainment night club to reinstate a group of entertainers that it fired after the workers sued the nightclub. In Clincy v. Galardi South Enterprises (N.D. Ga. Sept. 2, 2009), the entertainers filed suit under the Fair Labor Standards Act (FLSA), claiming they were denied minimum wage and overtime payments because the club misclassified them as independent contractors. Additionally, the workers claimed the club retaliated against them by firing them after they filed the lawsuit. The workers asked the court to grant a preliminary injunction ordering the employer to reinstate them and ordering that they and other similarly situated individuals not be adversely affected by participation in the lawsuit.
A party seeking a preliminary injunction must demonstrate "(1) a substantial likelihood of success on the merits of the underlying case; (2) the movant will suffer irreparable harm in the absence of an injunction, (3) the harm suffered by the movant in the absence of an injunction would exceed the harm suffered by the opposing party if the injunction issued, and (4) an injunction would not disserve the public interest." The court found that the workers met these requirements and granted the preliminary injunction, ordering the employer to reinstate them.
As this case demonstrates, courts will closely examine employee misclassification claims, thus it is important that any company who wishes to classify its workers as independent contractors do so only after a careful review of the factors considered by courts and the Department of Labor (DOL) in analyzing whether a worker truly is an independent contractor. These factors include:
the nature and degree of the alleged employer's control over 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.
Additionally, even if an individual is properly classified as an independent contractor, that person's actions may subject the employer to liability under federal discrimination laws. For example, in Halpert v. Manhattan Apts., Inc. (decided Sept. 10, 2009), the Second Circuit held that an employer potentially can be held liable for discrimination by an independent contractor who acts for the employer. In this case, Halpert sued Manhattan Apartments, Inc., under the Age Discrimination in Employment Act (ADEA), claiming the person who interviewed him for a job showing rental apartments told him he was "too old" for the job. Manhattan Apartments claimed it couldn't be liable for these alleged comments because the interviewer was an independent contractor, not an employee.
The Second Circuit disagreed, holding that the ADEA's prohibition on age discrimination applies regardless of whether the employer uses its own employees or independent contractors to interview for open positions. "If a company gives an individual authority to interview job applicants and make hiring decisions on the company's behalf, then the company may be held liable if that individual improperly discriminates against applicants on the basis of age." The court also held that an independent contractor can act as an agent, or an apparent agent, of the company for the limited purpose of interviewing and potentially hiring job applicants while still retaining his independence for any number of other purposes. In this case, the court found that there were factual issues regarding whether the interviewer was acting as the hiring agent or apparent hiring agent for Manhattan Apartments when he interviewed Halpert, or whether he was simply hiring on his own account. Accordingly, the court reversed the trial court's grant of summary judgment in favor of Manhattan Apartments.
As these cases demonstrate, a variety of legal issues may arise with the use of independent contractors. Additionally, courts and the DOL will closely examine a worker's status where a claim of misclassification is raised. If you have any questions about the appropriate classification of workers or other wage and hour issues, please contact your attorney.