The classification of a worker as an employee or an independent contractor has long been a significant point of debate for employers nationwide. Traditionally, courts have looked to the language of a contract and the degree of control an employer exercises over the worker’s tasks. However, in its recent decision in Galarza v. One Call Claims, LLC, the U.S. Court of Appeals for the 11th Circuit signaled a shift, emphasizing that employers should focus on the practical, day-to-day conditions and economic reality of the working relationship.
The Galarza Court used six (6) relevant factors to review the conditions of employment and determine whether a worker qualifies as an employee. These factors are: (1) the nature and degree of the alleged employer's control over the manner in which work is performed; (2) the worker's opportunity for profit or loss depending on managerial skill; (3) the worker's investment in materials or hiring additional workers as necessary to complete his task; (4) whether the worker's job requires a special skill; (5) the permanency and duration of the relationship between the worker and alleged employer; and (6) the extent to which the worker's services are an integral part of the alleged employer's business. These factors are not exhaustive and merely serve as guides. Nor can the sum of the factors ever outweigh the ultimate inquiry: whether the worker is economically dependent on the alleged employer.
Understanding how to properly interpret and apply these factors is essential for protecting a business. Misclassification can expose employers to significant liability under both federal and state law, including unpaid wages, tax penalties, and exposure under workers’ compensation and unemployment insurance laws.
So how did the Galarza Court conclude that the purported independent contractors were in fact employees under law?
- The first factor considers the nature and degree of the alleged employer’s control over how the work is performed. The court found the workers to be employees because the companies managed their daily schedules, controlled how the workers performed their tasks, and restricted them from working for other companies.
- The second factor considers whether the workers had an opportunity for profit or loss based on their managerial skill. The court found employee status because they were paid fixed, non-negotiable day rates with no ability to earn additional income through their own efforts. Their tax deductions did not affect this analysis.
- The third factor assesses the workers’ investment in equipment or materials required for their tasks or employment of workers. Because the workers neither employed others or made significant investments in the equipment and materials necessary for the job, this factor favored employee status.
- The fourth factor asks whether the job requires a “special skill.” The workers had obtained specialized training, licenses, and certifications before their assignment with the company, which aligned more with independent contractor status.
- The fifth factor examines the degree of permanency and duration of the working relationship. Although the contract suggested otherwise, the company retained the workers for an extended, indefinite period akin to at-will employment, which supported employee status.
- The final factor is the extent to which the service rendered is an integral part of the alleged employer’s business. Because of the workers’ central role in the business, the court found this factor weighed heavily in favor of employee status.
Even aside from the factors, the Galarza Court emphasized that the bottom-line inquiry into employee status is whether a worker is economically dependent on the putative employer under the totality of the circumstances. In Galarza, the workers functioned more like employees reliant on an employer than independent contractors operating their own businesses and thus were ultimately found to qualify as employees covered by the FLSA.
Whether you’re a worker or an employer, there’s no better moment to take a close look at your working relationships, review your procedures, policies, and payroll practices, and ensure legal compliance – and Cadogan Law is here to help every step of the way.
