Executive Summary: Are a company’s independent contractors really employees? And, is the company not paying overtime pay to these employees who should be receiving this extra pay? The federal and state governments are visiting companies and finding violations of overtime laws. Employees are filing suits individually and as groups. Executives are found individually liable and are not covered by the company’s insurance policy. As a result, more companies and their lawyers are conducting internal audits to manage and eliminate the risks of suit.

From July 2006 until December 2009, Kendric Truitt (“Truitt”) worked full-time as an armed security guard for International Detective & Protective Service, Ltd. (the “Company”). While employed, Truitt was primarily assigned to guarding construction sites and strip malls in the Chicago area. Although he was required to sign a contract stating that he was an independent contractor, he always considered himself an employee and not an independent contractor. The U.S. Department of Labor (“DOL”) agreed. After conducting an investigation, the DOL sued the Company and also sued the company’s president and chief operating officer individually for improperly classifying the security guards as independent contractors rather than as employees. The DOL sought unpaid overtime, liquidated damages and an injunction. On May 24, 2011, the judge found that the guards were employees and not independent contractors and ordered the Company, its president and chief operating officer to pay $230,155.20 to the guards. Sec’y of Labor v. Int’l Detective & Protective Service, Ltd, William L. Lillard, and Arnett Lillard, Case No. 09-c-4998, (N.D. Ill. 2011).  

Due to rising employment costs for taxes, medical insurance, pensions, and workers’ compensation and increasing global competition, many companies are continuing to use “independent contractors” to gain or maintain a competitive advantage. Often, companies will enter into an “independent contractor” agreement with former employees who were terminated in a previous reduction-in-force. By hiring former employees, the Company seeks to “win” because it avoids having to train or educate the individual about the company’s internal policies and procedures and because it avoids having to pay all of the employment taxes and insurance costs. However, as in Int’l Detective, the company and its owners and officers often “lose” when they are found liable for substantial amounts of money when the company misclassifies the individuals as independent contractors and not as employees.  

Here, the judge analyzed six (6) factors to determine if the guards were properly classified as independent contractors. These factors are designed to look beyond any written agreements and seek to understand the actual “economic reality of the employment arrangement.” Employers with independent contractors should review their relationships using these same six (6) factors:

  1. Control: If the employer oversees the “manner and method” of how the alleged employees are to perform their work, they are probably employees rather than independent contractors. Here, Int’l Detective provided and enforced written policies and procedures for how the guards were to perform their work, the order that the work was to be performed and how to react to suspicious activity.
  2. Opportunity for Profit or Loss: Because the guards’ compensation was strictly based on hours worked multiplied by their rate of pay with no opportunity to earn a profit if they worked more effectively or efficiently, the judge ruled that the guards were employees and not independent contractors.
  3. Investment in Equipment: Although the guards were responsible for buying their guns, handcuffs and uniforms as well as other equipment, the Company provided the vehicles, gas, insurance and cell phones.
  4. Special Skills: The guards needed to be licensed and familiar with the use of firearms. However, because they were not expected to use their firearm and were mainly responsible for walking job sites, checking for unauthorized entry and overnight parking and completing shift reports, no specialized skills were required to perform their security work.
  5. Permanency: Notwithstanding, the written “independent contractor agreements” which contained no specific term of employment and created an “at-will” relationship, the judge found that the Company and the guards expected a long-term relationship. For example, the judge noted that the Company had provided security services for some clients for many years and had a system of titles similar to a police department (officers, sergeants, lieutenants, commanders, captain) and that this system of internal promotion gave the guards incentives to remain with the Company for extended periods of time.
  6. Integral Part of Business: Because the Company was in the business of providing worksite monitoring for criminal activity and because the guards were in place to protect client’s property, the guards were actually performing the services that the Company offered to its clients and were, therefore, an integral part of the business.

Conclusion

With so many clients and friends of the firm currently utilizing the services of “independent contractors,” the case is a useful reminder that, regardless of any written independent contractor agreements, the courts will seek to understand the actual “economic realities” of the working relationship based on these six factors. With so much focus on the misclassification of employees as independent contractors by various state and federal agencies, we urge all executives to consult with the firm’s employment lawyers to conduct a risk analysis to avoid a government or employee-initiated lawsuit, unbudgeted legal fees, and the executive’s name on a public complaint seeking individual liability.