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October 11, 2022
Determining Independent Contractors: Sometimes the Government Loses

By Steve Jones

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There’s been an ongoing battle between employers and the U.S. Department of Labor (DOL) over when someone is considered an independent contractor versus an employee. A recent decision from the U.S. 8th Circuit Court of Appeals (which covers employers in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota) to reverse summary judgment (dismissal without trial) in favor of the DOL gives employers some guidance and reason for hope.

Background Facts

Travelon hires drivers to take patients to and from medical appointments. It provides equipment, such as vans and electronic tablets, to drivers and pays for costs, including internet service and insurance for the vans. Customers pay the company for their transportation services, but Travelon provides the entire payment to the drivers.

Drivers don’t get to keep all the money from a trip, however. They are responsible for paying Travelon weekly expenses, which is how the company generates revenue. These expenses include a dispatch fee, 35% of the commissions generated by their weekly trips, insurance fees, vehicle lease fees, vehicle maintenance fees, and a tablet rental plus added costs for gigabytes of data used.

Travelon's dispatch service assigns trips to drivers through an application on their tablets, which monitor their GPS locations and their availability. Because drivers set their own schedules (and can change them daily), they’re encouraged to notify dispatch when they’re available to accept trips. When they’re available, dispatch assigns them rides and provides pick up and drop off instructions through the app.

Travelon classified its drivers as independent contractors and paid them as such. The DOL’s Wage and Hour Division (WHD) determined, however, that Travelon's drivers were employees. It sued Travelon on behalf of 21 drivers, alleging they were employees and that the company violated the Fair Labor Standards Act (FLSA) by failing to pay the minimum wage to 11 drivers, failing to pay overtime to 21 drivers, and not maintaining proper time records. The parties each filed for summary judgment, and the district court ruled in favor of the DOL. After the decision, Travelon appealed to the 8th Circuit.

How to Determine Independent Contractor Status

The court noted that FLSA defines an "employee" only as "any person acting directly or indirectly in the interest of an employer in relation to an employee,” which is not very helpful. It observed, however, that many courts use the “economic realities” test in making the determination of whether someone is an employee or independent contractor. The test evaluates:

  • "The degree of control exercised by the alleged employer over the business operations";
  • "The relative investments of the alleged employer and employee";
  • "The degree to which the alleged employee's opportunity for profit and loss is determined by the employer";
  • "The skill and initiative required in performing the job";
  • "The permanency of the relationship"; and
  • "The degree to which the alleged employee's tasks are integral to the employer's business.”

Of course, this case didn’t determine if the drivers were, in fact, employees or independent contractors. Since it involved a summary judgment, the issue was whether there were material facts in dispute that could only be resolved by a trial. It applied the “economic realities” test and found there were.

The Issue of Control

In reviewing the issue of “control,” the court found that Travelon did show control by assigning trips, supplying equipment, and regulating the time services could be provided. There was also evidence of independence, however, shown by the drivers setting their own hours, their ability to accept or reject driving assignments, and discretion in what equipment and services they would receive from the company.

In considering who controlled the opportunity for profit and loss, it was noted that courts generally consider whether workers had control over profits and losses depending on their "managerial skill." It was undisputed that Travelon set the rates and made assignments through the driving app on the tablet, which indicates employer control.

The court observed, however, there was evidence that suggested the drivers were able to earn additional income through their own initiatives, such as transporting multiple customers in one trip. Drivers could also supply their own tablets and vehicles rather than leasing from Travelon. In addition, there was testimony that drivers using their own vehicles had provided medical transportation independent of Travelon.

Ultimately, the court found that only a trial could determine if these facts weighed in favor of independent contractor status.

Were Drivers Integral to Travelon’s Business?

The degree to which the drivers were integral to Travelon’s business turned on “whether workers' services are a necessary component of the business." The DOL argued they obviously were since Travelon listed itself with the state as a provider of “special transportation services,” or STS, which would require drivers to accomplish.

Travelon, however, argued it was only an "intermediary company that supports the drivers' transportation businesses." The company also pointed out that they only made revenue by leasing vehicles and equipment to drivers and selling dispatch subscriptions. They argued that while they received initial payment from the customers, their actual income came from the drivers. The court found that whether Travelon was an STS provider or merely a technology company that supported the drivers' STS businesses was a disputed material fact that could only be resolved at trial.

For all these reasons, the court reversed the summary judgment granted to the DOL and sent the case back for trial.

Bottom Line

While it seems that companies using independent contractors face an uphill battle because of the hostility to such arrangements from the DOL (and IRS for that matter), this case shows that careful structuring of the relationship between the company and the independent contractors can be successful.

Here, Travelon was very careful to give drivers control over when they worked, the trips they accepted, and the equipment and services they purchased from Travelon. It was also very careful to limit the source of its revenue to payments from the drivers for those services and, importantly, not as direct payments from customers. As they say, a little planning can go a long way.

Steve Jones is an attorney with Jack Nelson Jones, P.A., in Little Rock, Arkansas, where he focuses his practice on labor and employment law and business litigationHe has served as Managing Partner and is presently Secretary and Vice-President for the firm. You can reach him at sjones@jacknelsonjones.com

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