Don’t Get Sacked for a Financial Loss Over Employee Misclassifications

Posted by Kenneth N. Winkler on

This has been a tough off-season for the NFL and its team owners. While media attention has focused on the League drama surrounding Deflategate, individual NFL franchises have experienced legal problems of their own.
The Cincinnati Bengals recently agreed to pay up to $255,000 to settle a class action lawsuit brought by a cheerleader who alleged the Bengals paid its cheerleaders less than the minimum wage. The New York Jets, Buffalo Bills and Tampa Bay Buccaneers have also been sued by their cheerleading squads – not the type of distraction these teams needed given their sub-par performances last season. Many teams classify their cheerleaders as independent contractors and, therefore, have taken the position that cheerleaders are not covered by federal labor laws or entitled to minimum wage. These lawsuits have alleged that the cheerleaders are actually employees and not independent contractors.
Last year, the Oakland Raiders settled a lawsuit for $1.25 million to resolve a dispute involving 90 cheerleaders. In response to this lawsuit and concerns that professional cheerleaders were being exploited, on July 15, 2015, California governor Jerry Brown signed a bill into law requiring that any cheerleader who works for a professional sports team in the state receive minimum wage and other benefits. Moreover, the new bill removes the cheerleaders as independent contractors and instead recognizes them as employees, which entitles them to the labor protections available to team staff. The law becomes effective January 1, 2016. New York has since introduced an identical bill that would apply to both NFL and NBA franchises.

The rise in misclassification lawsuits is not a trend unique to NFL teams. Uber has faced legal attacks on multiple fronts as to its classification of drivers as independent contractors. Package delivery giants Federal Express and UPS are also battling lawsuits regarding the classification of their drivers.
In addition, the U.S. Department of Labor (“DOL”) claims that it continues to receive numerous complaints from workers alleging misclassification, and it continues to aggressively pursue enforcement actions against employers who misclassify workers. The DOL views misclassification as a serious problem because it deprives workers of overtime pay and benefits, such as unemployment insurance and workers’ compensation, and also undermines state and federal tax collections.
To address such concerns, on July 15, 2015, (the same day the California bill was enacted) the DOL published an Administrator’s Interpretation to provide additional guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act. More specifically, the DOL’s guidance adopts the DOL’s “economic reality” test to determine whether a worker is an independent contractor or an employee. The “economic reality” test is comprised of the following factors:

1. The extent to which the work performed is an integral part of the employer’s business.
2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss.
3. The relative investments in facilities and equipment by the worker and the employer.
4. The worker’s skill and initiative.
5. The permanency of the worker’s relationship with the employer.
6. The nature and degree of control by the employer.

Both the DOL and the courts have emphasized that all of the factors must be considered in each case, and no one factor (particularly the control factor) is determinative of whether a worker is an employee. One common misconception the DOL’s guidelines address is that labeling a worker as an independent contractor is not sufficient to establish an independent contractor relationship. In other words, the existence of a written independent contractor agreement is not determinative. Rather, the six factors are to be viewed in their totality as indicators of the broader concept of economic dependence.
Although the Administrator’s Interpretation is not law, courts give deference to the DOL’s interpretation of the FLSA and have applied the economics reality test in FLSA lawsuits. Moreover, the Administrator’s Interpretation makes clear the DOL’s commitment to aggressively challenge employers’ use of independent contractors. Employers that use independent contractors should, therefore, pay close attention to the Administrator’s Interpretation and carefully analyze whether its existing independent contractor relationships will withstand agency scrutiny.