Was Worker for Process-Service Company Owed Overtime?

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By Christine Pulfrey

“You owe me overtime pay for all the extra hours I spent traveling to deliver legal papers,” said Brody, who worked for a process-service company. “I spend a lot of time driving and my expenses are starting to add up.”

“We don't owe you any more money,” said his supervisor, Monty. “You signed an agreement stating that you'd be an independent contractor, so you don't qualify for overtime compensation.”

FACTS: A worker delivered legal papers for a process-service company.

The worker signed an agreement with the company that said he was an independent contractor. Because of the worker's status, based on the agreement, the company would not provide fringe benefits or worker’s compensation contributions. The company would not withhold federal or state income taxes, but it provided Form 1099-MISC, Miscellaneous Income, showing the amount he earned each year.

The worker filed Schedule C, Profit or Loss from Business, with his annual federal income tax Form 1040, U.S. Individual Income Tax Return, on which he deducted delivery expenses, resulting in minimal personal-income tax liability.

Clients generally submitted delivery of legal paper requests to the company, which notified process servers of each request. After being notified by the company, the worker could accept or decline assignments, which had delivery-time requirements.

The worker picked up legal papers at the company office. He did not have to report for work and was not told when to work, did not maintain a daily schedule, and did not report the hours spent to perform services for the company. He also did not notify the company when he was unavailable, and the company did not discipline him for failing to take an assignment. He carried out his duties by using a mobile phone, computer, and car, all of which were his own.

Eventually, he started serving legal papers in counties farther from his home, sometimes staying in a hotel to make deliveries the next day. He told the company that his expenses had increased.

He considered some counties as unprofitable or not worth the time, effort, or expenses to get to. If he did not receive certain assignments, he would change his schedule, take weekends off, and limit how far he was willing to travel for deliveries.

The worker filed a lawsuit against the company to recover unpaid overtime wages that he said were owed under the federal Fair Labor Standards Act and state minimum-wage laws.

A district court submitted the question of the worker’s employment status to a jury with instructions about applying the economic-realities test. The court said that no single factor should decide the question, but rather the entire relationship should be considered.

In its verdict, the jury found that the worker was not an employee and was not covered under federal and state wage and hour laws. Because of the verdict, the worker was not owed overtime compensation.

The worker appealed, claiming that he was a company employee and that the district court abused its discretion by excluding evidence about how much the company deducted each year in business expenses.

ISSUE: Was the worker an employee of the company and owed overtime?

DECISION: The trial evidence was sufficient to support the jury’s conclusion that the worker was an independent contractor under the FLSA, applying the economic realities test in the jury instruction documents, the appeals court said, affirming the district court ruling.

If a district court submits, with all parties’ consent, an FLSA issue of law to a jury and then adopts the jury’s verdict, the appeals court must uphold the district court’s ruling if the evidence is sufficient to support the verdict, the appeals court said.

The court affirmed that the worker was an independent contractor because he could accept or refuse assignments, leave for vacation without permission, accept assignments from other companies, and serve legal papers at hours convenient to him and not controlled by the company. These factors lent themselves to the conclusion that a reasonable jury could conclude that he was an independent contractor, the court said.

Regarding the worker’s challenge to evidence that was excluded, comparing the amount that he spent on his cars or deducted on Schedule C of his tax returns with the company’s total expenses had little relevance to determining acceptance and completion of duties, the court said ( Karlson v. Action Process Serv. & Private Investigations LLC, 8th Cir., No. 15-3322, 6/26/17 ).

POINTERS: Independent contractors are not employees under the FLSA. The critical factor in determining whether an individual is an employee or independent contractor for FLSA purposes is the underlying economic realities of the parties' relationship, the Supreme Court said.

For more information, see the Payroll Administration Guide's “Fair Labor Standards Act: General Rules and Principles” chapter.

By Christine Pulfrey

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This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.

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