Sticky situation: Phlebotomists’ OT pay win has 3 lessons about “independent contractors”

A federal judge in Michigan has granted summary judgment to a group of phlebotomists who alleged that they had been misclassified as independent contractors and improperly denied overtime pay.

For the uninitiated, the entry of summary judgment meant that the employees won right out of the gate, without the need for a trial. Ouch!

Despite its brevity, Rayford v. Mobile Phlebotomy of Central Michigan provides three procedural and substantive lessons for employers who classify workers as independent contractors.  

No. 1: Wage and hour lawsuits can mushroom in size.

Six months after the lawsuit was filed, the judge ordered the employer to provide the plaintiffs with contact information for all of its current and former phlebotomists, so that they could be given the chance to join the lawsuit.

The legal standard under the federal Fair Labor Standards Act for determining when contact information must be disclosed is in a state of flux. Some courts apply a lenient test, and others a more stringent test. The Supreme Court has yet to resolve the conflict.

Once the applicable test is satisfied, notices are sent to all “similarly situated” employees informing them of the lawsuit and giving them the chance to join.

If you’re a wee bit cynical, like me, you may see this as an invitation for easy money that most employees and ex-employees will accept.

In this case, after the notices were issued, the number of phlebotomists seeking back pay tripled.

Like I said, issuance of a notice can cause a wage-hour case to mushroom. The bigger the employer, the bigger the mushroom.

We hope that the Supreme Court will eventually adopt a stringent test for issuing notices to others.

But for now, if your company is sued for alleged violations of the FLSA, and your attorney tells you that you may have to provide the plaintiff with contact data for all similarly situated current and former employees, don’t shoot the messenger.  

No. 2: Your personal assets can be up for grabs.

The order in Mobile Phlebotomy does not discuss the owner’s liability as an individual. But she was named as an individual defendant, the FLSA allows for individual liability, and the court granted summary judgment against the owner as well as her company.

If the time comes to address the owner’s individual liability, the court is likely to consider her power to (1) hire and fire employees, (2) supervise and control employee work schedules or conditions of employment, and (3) determine their rates and methods of compensation.

Does any of this apply to you? If so, your life savings could be up for grabs in an FLSA lawsuit.

Do I have your attention now?

No. 3: Evaluate independent contractor status before you apply that label to any worker.

Properly classifying workers as independent contractors can save companies direct and indirect costs -- including fringe benefits and matching Social Security taxes, as well as the administrative costs associated with both.

But if all you do is label someone as an “independent contractor,” and get them to sign an independent contractor agreement, you may not like the outcome if they sue you for unpaid overtime.

In determining whether a worker is an employee or an independent contractor, most federal courts will apply some variation of the “economic realities test.”

That test considers six factors:

• The permanency of the relationship between the parties
• The degree of skill required to render the services
• The worker’s investment in equipment or materials for the task
• The worker’s opportunity for profit or loss based on skill
• The degree of employer control over the way the work is performed
• Whether the service rendered is an integral part of the alleged employer’s business

In the phlebotomists’ case, the court found in favor of the plaintiffs without the need for a trial, based on the following:

Permanency. All the plaintiffs worked for more than six months and were required to sign noncompete agreements. The court contrasted these facts with those applicable to the claims of pickle harvesters who worked for only the 30-40 days of the annual pickle harvest. (Who knew? I thought pickles grew in barrels at my neighborhood deli). 

Degree of skill. Blood sucking (sorry, I couldn’t resist) is not complex work, requiring a high degree of skill acquired through education, apprenticeship, or years of experience.

Investment in equipment. Capital investment is most significant if it reveals that the worker performs a specialized service that requires specialized tools or applications that the worker has paid for and mastered. (The next time a plumber or electrician comes to your house, just look in the back of the truck for an example of this type of investment.) No such investments were made by the phlebotomists, and the court found that this factor “decisively favored Plaintiffs['] being employees.”

Opportunity for profit or loss. With this factor, the courts look at whether the worker had an opportunity for greater profits based on his or her management or technical skills. In this case, it was undisputed that no phlebotomist could make more money based on efficiency or performance. 

Degree of control. Courts also assess whether the alleged employer retains the right to dictate the way in which the worker performs the work. In this case, the defendants controlled the phlebotomists’ appearance, conduct, and schedules, and required them to sign noncompete agreements. The court found that “this factor weighed heavily in favor of” employee status.

Integral part of the business. With this factor, the court evaluates whether the services provided by the alleged independent contractor are integral to the defendant’s business. If so, the worker is likely to be an “employee” and not an independent contractor. In this case, although other factors were found to “decisively” or “heavily” favor employee status, this one was a home run because the phlebotomists’ “services comprised the entire essence of the Defendants’ business model.”

The noncompete agreements supported two of the six factors, and their very existence is difficult to reconcile with independent contractor status. How can someone be free and independent to ply their trade when a contract prohibits them from doing so?

Stick a fork in them. These defendants were done.

Don’t be left holding the bag on unpaid overtime

Wage and hour class and collective action lawsuits have grown exponentially over the past 20 years, and many involve workers who are (mis)classified as independent contractors.

In addition, some state and local governments have filed lawsuits seeking unemployment compensation contributions and other taxes on behalf of individuals classified as independent contractors.

Before you decide that designating someone as an “independent contractor” is the way to go, think again, and make sure you can pass the economic realities test.

If you can’t, your personal blood, sweat, and tears may be up for grabs.