Companies should tread lightly when forming working relationships and arrangements with employees, independent contractors and franchisees. In the trial court, the company successfully had the case dismissed. But the Secretary of Labor who brought the case under the Fair Labor Standards Act (the FLSA) appealed the loss to the Tenth Circuit Court of Appeals who reversed that decision. The Tenth Circuit confirmed that, when determining whether an individual is an “employee” under the FLSA, inquiry is not limited to the way the parties choose to describe the working relationship but rather the “economic realities” of that relationship.

Jani-King of Oklahoma, Inc., a janitorial company, engages individuals, pairs of related individuals, or small corporate entities to perform janitorial work on its behalf through franchise arrangements. Jani-King began requiring that these individuals and pairs of related individuals form corporate entities. These corporate entities then became the named party in a franchise arrangement.

The Secretary of Labor filed a complaint against Jani-King of Oklahoma, Inc., alleging violations of the FLSA and seeking an injunction requiring that Jani-King maintain employee records required by the FLSA. In support of its complaint, the Secretary alleged that despite forming corporate entities, the individuals who form those corporate entities “nonetheless personally perform the janitorial work on behalf of Jani-King” and, due to the economic realities of the relationship, must be considered employees under the FLSA. The Secretary further asserted the individuals were improperly classified as independent contractors, when, in fact, they are employees.

Under the FLSA, employees of covered employers are afforded minimum wage and overtime pay protections. The Act defines an “employee” as “any individual employed by an employer.” An FLSA employer is required to maintain certain records, including records regarding minimum wage and overtime pay. The Secretary is empowered under the FLSA to investigate employers’ compliance with these recordkeeping requirements and to seek enforcement against employers who violate the Act.

Jani King filed its motion to dismiss the Secretary’s amended complaint, arguing in part that the Secretary was not at liberty to ignore its corporate organization. The district court agreed with Jani-King, concluding that the Secretary’s complaint “ignores corporate forms[.]” The district court based its dismissal on its determination that the Secretary’s complaint was overly broad and included corporate entities which could never be “employees” under the FLSA because they are not “individuals.” The Tenth Circuit concluded the district court improperly ignored the “economic realities test.”

The economic realities of an individual’s working relationship with the employer – not necessarily the contractual form – determines whether the individual is an employee under the FLSA. The test considers six factors:

• The degree of control exerted by the employer over the worker,
• The worker’s opportunity for profit or loss,
• The worker’s investment in the business,
• The permanence of the working relationship,
• The degree of skill required to perform the work, and
• The extent to which the work is an integral part of the employer’s business.

Although it must be noted that the Tenth Circuit did not render an opinion as to the merits of the Secretary’s case against Jani-King, the Court’s opinion serves as a firm reminder that the label or structure overlaying an employment relationship is not determinative of an employment relationship. Corporate form alone will not shield a supposed employer from obligations arising under the FLSA if the economic realities suggest an employment relationship exists.

The case will go back to the trial court to be examined under the economic realities test.

By Helen M. Callahan, HCallahan@dsda.com