In the Courts Again “Employee vs. Independent Contractor”

Since we had written a blog recently suggesting that, perhaps, staffing companies should hire more independent contractors, we feel obliged to cover a very recent (June 17, 2023) final judgement in a Minneapolis, MN Federal court case.

That case ultimately awarded employees $254,000 in back wages plus liquidated damages, but, not until 4 legal procedures were completed. This is not presented to suggest that using the independent contractor status is dangerous or should be avoided.

On the contrary, we believe, after reading this article, you will agree that this case shows that the law regarding use of the independent contractor status was indeed violated and that it makes no argument that it is “risky business” to use it. It does make reasonable case that any business depending on that designation for any of its workers should do so only after seeking a professional legal interpretation of the IRS guidelines for how to determine who is and who is not an “independent contractor”

In any case, here is what happened, and you be the judge.

First, there was a U.S Labor Department investigation in 2021 that found that the company, Alpha & Omega USA, Inc. had misclassified drivers as “independent contractors” perhaps simply to save the employer from paying their workers overtime and to allow the company to make questionable “Independent contractor type” deductions from employee wages for items like; van leasing, vehicle maintenance, insurance, etc., even to the point where workers took home less than a minimum wage. That motivation is unknown but that is what happened. The Labor Dept. therefore ordered compensation to the employees.

Second, the company then refused to pay the U.S. Labor Department settlement costs and to enforce their decision the Labor Dept. sued the company in the federal district court in Minneapolis. The Labor Dept secured a “Summary Judgement” against the company who was then ordered by the court to pay compensation to the employees plus liquidated damages.

The “liquidated damages” were assessed by the federal judge in that initial case (when he awarded the government a summary judgement) because he found that the company in that case “failed to show good faith and reasonable grounds for believing it was not in violation of the FLSA” (Fair Labor Standards Act) (See final paragraph under “Background” in the above cited document).

Third, in 2022 the company then appealed the district court’s decision to the 8th Circuit Court of Appeals, which reversed the district court’s decision, but which did remand the case back to that court for a jury trial.

The appellate court had found that the district court erred in issuing a “summary judgement” in the initial case because both the labor department and the company did make a case for their respective positions (in the “appeal” but the company probably did not in the original case. (see reasons for the liquidated damages above) and so it should not have been settled by simply a summary judgement, but that further proceedings were in order by way of a jury trial to review all the material facts of the case.

(A summary judgement usually ignores the losing party’s allegations, “even if true”, because they are deemed to be irrelevant to the major “material fact” in a case that is either obvious or proven to the judge and would not be overcome in a trial.)

Fourth, a jury trial was finally held this year, and just this month, on June 16th, it found in favor of the Dept of Labor and the employees and ordered back pay in the amount of $254,000 plus damages.

So, what can we learn from this case?

What we should not learn is that it might be better to avoid even the legitimate use of the independent contractor status. I am sure that almost every staffing company has had calls from clients needing some web-work done, some internal networking project, some software development or modifications.

These skilled technicians may work for many of your company’s clients so you may be able to keep them busy for a lot of time. It’s good for them and for you. But they are not dependent on you alone for their livelihood. They work for you and your clients when they are available. They are qualified legally to be independent contractors. And they might not be available any other way.

Your attorney can confirm the designation, set limits to it, and/or even ask for a confirming letter from the IRS or the U.S Dept. of Labor.

So, what about Alpha & Omega case and all the trouble this company and their drivers had. What about dealing with a lengthy investigation, about legal expenses defending against an initial “collection” lawsuit from the U.S Labor Dept., expenses in bringing an appeal to the 8th Circuit Court, defending against a second federal lawsuit, and finally paying the back wages and damages? That’s a lot of pain, suffering, and expense.

Was the company an actual victim or were their wounds unnecessary and self-inflicted? I vote for the latter.

Consider, the US dept of labor does a lengthy investigation and finds serious violations that had deprived 21 workers of $254,000 in wages they earned and were entitled to as a matter of law. The company refused to pay, and they were sued. What did they expect? They could have appealed the decision outside of court initially and if denied filed a suit themselves. But they did nothing and were sued.

Then they got a judgement from the district court which also added damages because, in the opinion of the presiding judge, the company “failed to show good faith and reasonable grounds for believing they were not in violation of the FLSA”. This might be one of the most serious charges of all.

The reversal by the EighthCircuit might seem a “win” but it actually sent them back for a full jury trial with more time and expense with the same conclusion expected. Yet this time the outcome would have the added weight of a full jury trial instead of the lesser weight but still decisiveness of a “summary judgement’.

The “Independent Contractor” status is being used legally and successfully by many staffing companies and especially the newer gig economy staffing platforms.

Many workers are looking for flexibility in their work life which being an independent contractor gives them. To be successful they need to do the hard work to develop skills that are in demand. Staffing companies can facilitate this work style while serving their clients and their own companies with excellence!

As always, Stay Safe, and continue to pray for Ukraine!