On 3 October 2018 the Tenth Circuit issued a decision in Acosta v Jani-King of Oklahoma, Inc, in which it reversed the dismissal of the US Department of Labour's (DOL's) lawsuit against a janitorial company for misclassifying janitorial workers as independent contractors. Jani-King provided janitorial services to its customers by contracting with individuals, pairs of related individuals or small corporate entities that were allegedly composed predominantly or entirely of individuals or pairs of related individuals to perform janitorial work on its behalf through franchise agreements. During the relevant period, Jani-King also began requiring its individual workers – both those already affiliated with Jani-King and those who were new – to form corporate entities, which would then become the named parties to the franchise.
The DOL filed a suit against Jani-King, alleging that it misclassified the janitorial workers as independent contractors in violation of the Fair Labour Standards Act. Specifically, the DOL asserted that based on the 'economic realities' test, the individuals who form corporate entities and enter franchise agreements as required by Jani-King "nonetheless personally perform the janitorial work on behalf of Jani-King" and are Jani-King's employees under the Fair Labour Standards Act. The district court dismissed the complaint, holding that the DOL's complaint "ignores corporate forms" by imposing liability on Jani-King itself rather than the purported franchisees, none of whom was named as a defendant.
The Tenth Circuit reversed, explaining that employment status under the Fair Labour Standards Act "is not limited to the contractual terminology between the parties or the way they choose to describe the working relationship". The fact that the workers themselves "are franchisees or have formed corporations does not end the inquiry"; rather, the court must conduct a proper assessment under the six-factor economic realities test to determine whether the individual workers are appropriately deemed Jani-King's employees or independent contractors, regardless of the contractual structure of their relationship.
Employers commonly use third-party corporate entities to secure services from independent contractors and rely on the existence of the separate corporate entity to ensure that the individual service providers are appropriately classified and treated as independent contractors. The Tenth Circuit's decision emphasises that courts will look past the corporate structures themselves in assessing the economic realities of the relationship between the workers performing the work and the employer. If the economic realities suggest that the worker is in fact an employee, the existence of corporate intermediaries in the contractual relationship will not immunise the employer from liability under the Fair Labour Standards Act. Thus, employers should independently assess and ensure that workers they retain through third-party corporate entities are appropriately classified.
For further information on this topic please contact Ruth Zadikany at Mayer Brown LLP's Los Angeles office by telephone (+1 213 229 9500) or email ([email protected]). Alternatively, contact Andrew S Rosenman, Corwin J Carr or Richard E Nowak at Mayer Brown LLP's Chicago office by telephone (+1 312 782 0600) or email ([email protected], [email protected] or [email protected]). The Mayer Brown LLP website can be accessed at www.mayerbrown.com.
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