We previously reported on Whitehead v. Vacation Charters, Ltd., where Vacation Charters, the owner and operator of the Split Rock timeshare resort, was found liable for a class action judgment in excess of $2.2 million for misclassifying sales employees as independent contractors during a three-year period.  We concluded that post by saying:

"This case illustrates that attempts to limit expenses by re-classifying employees as independent contractors can often backfire in a big way when even one former employee attempts to recover unemployment benefits."

Last week, the United States District Court for the District of New Jersey arrived at a similar conclusion.  In William Zanes, et al. v. Flagship Resort Development, LLC, the Plaintiff, and other former employees of the Defendant, initiated a collective action lawsuit pursuant to the Fair Labor Standards Act (“FLSA”). The Plaintiff (and others in the class) were former employees engaged in the sale of timeshare and related products and services on behalf of the Flagship Resort Development (d/b/a Fanta Sea Resorts), located near Atlantic City, New Jersey. 

The Plaintiffs alleged violations of the FLSA and New Jersey State Wage and Hour Law by asserting that they regularly worked in excess of 40 hours each week without receiving overtime compensation.  The Defendant responded by filing a Motion for Summary Judgment on the claims, arguing that the Plaintiffs are independent contractors and not “employees” within the purview of the FLSA (under section 7(a) of the FLSA, employees are generally required to be paid overtime for all hours worked in excess of 40 hours per work).

In evaluating the Defendant’s motion, the Court emphasized on three of the six factors used to determine whether a person is considered an “employee” of the FLSA: (1) the degree of the alleged employer’s right to control the manner in which the work is to be performed; (2) the worker’s opportunity for profit and loss depending upon his managerial skill; and (3) the degree of permanence of the working relationship (the three factors the Court did not consider are: (4) the worker’s investment in equipment or materials required for the task; (5) whether the service requires a special skill; and (6) whether the service rendered is an integral part of the alleged employer’s business). 

The Court found that the Defendant did control the overall manner of the Plaintiff’s work since the Defendant (i) set the overall compensation structure, (ii) established working hours and approval of vacation days, and (iii) required the Plaintiffs to adhere to the Defendant’s policies in performing work. 

The Court also found that the Defendant limited the Plaintiff’s opportunity for profit and loss (which is indicative of an employer-employee relationship) because the Plaintiff’s compensation structure was based on fixed schedule set by the Defendant, and the volume of clients that the Plaintiffs could see depended solely on the Defendant’s ability to attract potential customers to the resort in the first place. 

Finally, in evaluating the degree of permanence of the working relationship, the Court analyzed the “exclusivity, length and continuity” of the worker and alleged-employer relationship.  The Defendant pointed out that they had a very high turnover rate amongst its sales persons, indicating a low level of permanence (and therefore suggestive of an independent contractor relationship).  However, the Court focused on the “Independent Contractor Sales Coordinator Agreement” that certain Plaintiff/salespersons had executed, which agreement prevented the salesperson from “competing directly or indirectly [with the Defendant] during the course of [the salesperson’s] employment and for one year after.”  The Court found that this factor favored an employer-employee relationship. The Court ultimately denied the Defendant's Motion for Summary Judgment. 

In light of this case, and our earlier report, we caution our readers to tread lightly when it comes to determining whether a worker is classified as an employee or independent contractor.  Remember, in addition to FLSA claims, the IRS imposes severe penalties for misclassification: you may be liable for employment tax, interest, and penalties.