by Michael P. Maslanka

And so it goes: Employers come to the crossroad—designate a worker as an employee or as an independent contractor. A lot rides on the path taken. Erroneously pick contractor, and you’re on the hook for unpaid overtime, often on a class action basis. The money owed can add up—fast! Read on.

Wrong choice

Berry’s Reliable Resources hires personal care workers to serve the elderly with tasks such as taking their medication, daily bathing, making meals, and going to medical appointments. It treated a group of these workers as contractors, not employees. (Note: Berry’s also had workers that it treated as employees who performed pretty much the same duties as the ones they treated as contractors.)

The workers sued, claiming they were—under the law and in fact—employees entitled to overtime under the Fair Labor Standards Act (FLSA). The federal trial court agreed and granted the workers summary judgment (dismissal in their favor without a trial).

Case goes to appeals court

On appeal, the U.S. 5th Circuit Court of Appeals (the federal appeals court that covers Texas) agreed with the trial court. Here are key highlights from the appeals court’s decision:

• The trial court properly decided that merely because there was some dispute over whether the underlying facts showed independent contractor or employee status doesn’t mean the company was entitled to a jury trial. The facts were basically so one-sided that the court was correct in finding for the workers without a trial.
• The legal question for the trial court was whether the workers were “in business for themselves.” Not in the sense that we are each responsible for hustling to make more money or working hard to get a promotion. Rather, it meant in the sense that the worker owns a business, living off the profit.
• In making its legal determination about employee classification, a court must consider five factors—the same five factors you must consider in deciding whether to take the employee or independent contractor path.

Five factors

Here are the five factors the 5th Circuit considered:

1. How much control did Berry’s exercise over the details of the workers’ work?

A lot. Berry’s determined what services would be provided to the elderly. The workers weren’t allowed to alter the type, scope, or duration of the services, period. So, they could not be considered “separate economic entities”—aka, businesses of their own.

2. What is the relative investment of the company and the workers?

How much money do the company and the worker each invest? The trial record was unclear on this factor. It’s likely Berry’s—through advertising, complying with any state or federal regulations (lawyers are expensive), and maintaining an administrative staff—invested the most money by a lot. The more one invests, the more one is likely to be a separate, honest-to-goodness business. Conversely, the less one invests, the more likely employee status is.

3. Could the workers increase the amount of money they made?

Very little. Berry’s set their rate of compensation. It wasn’t the subject of negotiation. Nor could they determine when they worked. Just like, well, an employee, not the owner of a stand-alone business.

4. What is the skill and initiative needed in performing the job?

This means that the workers in question had a unique skill set or some ability to exercise significant initiative within the business. In other words, the type of juice associated with the owner of a business. Here, the talents were fungible, and in fact, the workers performed the same work as those the company treated as employees.

5. Is the relationship more permanent than transitory?

If the relationship between the worker and the company is transitory, that is more like an independent contractor going from job to job. If it is more permanent, that is more suggestive of a typical employee. Badon et al v. Berry’s Reliable Resources (5th Cir., 2024).

Bottom line

The 5th Circuit’s opinion doesn’t talk about the bill coming due because of the misclassification. But it includes liquidated damages, which is a doubling of the unpaid overtime wages. And the employer is 100% responsible for payment of the workers’ attorneys’ fees. A tidy sum for going down the wrong path. So, be sure you make a considered decision about which path to take.

Michael P. Maslanka is a professor at the UNT-Dallas College of Law. You can reach him at michael.maslanka@untdallas.edu.