Are You Misclassified as an Independent Contractor? Court Reiterates Test in Context of Salon Industry

On October 29, 2019, in Romera v. Razzle Dazzle Barbershop, Inc., Case No. 18-12689, the Eleventh Circuit issued a ruling affirming the outcome of a verdict in Florida in which a trial court judge ruled that a salon in Miami correctly classified certain barbers as independent contractors. The ruling should not be interpreted to mean that all barbers can properly be classified as independent contractors. The outcome of the case was based on the unique evidence presented to the trial court judge and the strategies used by the attorneys representing both sides.

As discussed below, this case serves as a reminder of: (i) the test for determining whether a worker – regardless of industry – can be classified as an independent contractor; (ii) the best practices that employers should adopt when classifying any segment of its workforce as independent contractors; and (iii) what an individual should look for and do when the company they work for classifies them as an independent contractor, as such classification may result in the worker not receiving substantial overtime wages to which they would otherwise be entitled.

How to Determine an Employee v. Independent Contractor. As brief legal background, under the Fair Labor Standard’s Act (“FLSA”), all employees must be paid the minimum wage, in addition to overtime wages when working more than 40 hours in a workweek. The minimum wage and overtime protections apply to workers who are considered employees, but do not apply to independent contractors. Companies also don’t pay employment taxes on, and generally don’t provide any fringe benefits for, independent contractors. As a result of these costs savings (i.e., overtime wages, employment taxes, fringe benefits), many companies classify – often unlawfully – workers as independent contractors.

For purposes of the FLSA, the legal test for whether a worker is properly classified as an employee or an independent contractor depends on where the lawsuit is filed. In the Eleventh Circuit (which covers Georgia, Florida, and Alabama), the legal test, which was reiterated in the Romera case, is the so-called “economic realities” test. Under that test, a court should look to the actual circumstances surrounding the relationship between the alleged employee and the alleged employer and whether that relationship demonstrates dependence.

A number of factors guide the economic realities test analysis. Specifically:

1. The nature and degree of the alleged employer’s control over the manner in which the work is to be performed;
2. The alleged employee’s opportunity for profit or loss depending upon his managerial skill;
3. The agreement specified the job role of the worker, that worker subsequently changed job roles, and the agreement failed to contain a provision stating that such change is immaterial to enforcement. Some Florida courts have held that a change in position prevents enforcement of the agreement, absent such a provision stating otherwise.
4. The alleged employee’s investment in equipment or materials required for the task, or his employment of workers;
5. Whether the service rendered requires a special skill;
6. The degree of permanency and duration of the working relationship; and
7. The extent to which the service rendered is an integral part of the alleged employer’s business.

The U.S. Department of Labor (“DOL”) also previously released Fact Sheet Number 13 that provides, in its view, the meaning of the economic realities test and similar factors that courts consider. DOL Fact Sheets are not controlling law, but they are given considerable weight by courts.

Case Background. In the Romera lawsuit, two former employees of a barbershop in Miami, called Razzle Dazzle Barbershop, sued the barbershop and its owner for unpaid overtime under the FLSA. Specifically, they alleged that they were misclassified as independent contractors and that as a result they were owed overtime wages because they regularly worked more than 40 hours per work week.

At trial, the attorneys for the former salon workers introduced the following evidence to show that the barbers were actually employees under the FLSA:

• the barbers had to sign non-compete agreements that restricted where the barbers could work;
• the non-compete agreement referred to the barbers as “employees”;
• a staff manual existed that detailed the dress code, attendance policy, described various duties, and stated that there was no need for the barber to encourage customers to return just the specific barber; and
• the barbers also claimed they did not set their own schedule, were not allowed to choose what hair products to use and were required to wear specific uniforms.

Conversely, the attorneys for Razzle Dazzle Barbershop introduced the owner’s testimony that:

• the non-compete did not prevent the barbers from working for other salons outside the prohibited territory of the non-compete;
• the barbers set their own schedules, wore what they wanted, and were free to choose the hair products they used on their clients;
• the barbers used their own clippers, blow dryers, combs, scissors, and other barbering equipment; and
• the barbers had the opportunity to double their guaranteed hourly rate from tips and sales commissions.

The “jury” in this case was a trial judge, as the rules of civil procedure allow for a judge to serve as the decider of fact if both parties consent. The trial judge ruled, based on the evidence presented and his determination of witness credibility, that the barbers were properly independent contractors.

The Eleventh Circuit, as the appellate court, affirmed the trial court’s ruling that the barbers were not misclassified. Importantly, however, the Eleventh Circuit noted that, procedurally, the attorneys for the barbers failed to seek a directed verdict during trial. As a result, the Eleventh Circuit stated it was forced to affirm the trial judge decision if there was “any” evidence to support the ruling.

Takeaways for Employers and Workers Classified as “Independent Contractors.” Despite the outcome for the plaintiffs in the Romera case, the case may have turned out differently (in the barbers’ favor) had their attorneys not made certain strategic and procedural miscalculations. For example, it is likely more favorable to a worker to have a jury of peers (as opposed to a judge) decide a dispute over the misclassification of employees. The attorneys for the barbers also failed to make certain objections during trial that, had they been made, would have provided the appellate court more latitude in overturning the trial judge.

Regardless of the outcome, this case reminds employers in all industries, as well as workers who are classified as independent contractors, of several important considerations.

• First, despite a push by the U.S. Department of Labor and most states over the past decade to crack down on independent contractor misclassification it is still a major problem across many industries. The industries that most commonly misclassify independent contractors include construction, nursing, staffing, oil and gas, landscaping, care services, janitorial services, Internet and cable services, along with transportation and trucking. Whether you are an employer or a so-called “independent contractor” in one of these industries, it would be prudent to speak with your employment attorney concerning the classification.
• Second, non-compete agreements are generally considered antithetical to classification of a worker as an independent contractor. Independent contractors are thought to have the freedom to work for whomever they want, as opposed to being economically dependent on a single company. The trial court judge in Romera did not find the non-compete agreement at issue in that case to be dispositive to the classification dispute. That decision could have very well been different depending on the judge or if the non-compete had been more restrictive. Simply put, it is a red flag if a company requires a worker to sign a non-compete agreement and simultaneously classifies them as an independent contractor. As discussed in a previous article, when defending against the enforcement of non-compete agreements, one strategy is to determine if the individual was misclassified and, if so, the non-compete may not be enforceable due to failure to pay all overtime wages due.
• Third, if you’re an employer with any group of workers classified as independent contractors, ensure the workers sign an independent contractor agreement. Admittedly, such agreements, along with the issuance of IRS Form 1099’s, are given little to no consideration in court. As a practical matter, however, they often deter workers from questioning their classification in the first instance.
• Finally, workers who are classified as independent contractors but work exclusively or primarily for one company should consult with an employment attorney to determine if they are owed overtime wages. Under the “economic realities test,” the focus is economic dependency on a company. Remember, if someone is technically an employee, they are entitled to overtime for all hours worked over 40 in a workweek.

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