Wrongful Discharge Claims Arising From Employees Misclassified As Independent Contractors

Some employers attempt to avoid incurring some of the costs of employing employees by classifying employees as independent contractors. Sometimes this even happens after the employee has worked for some time as a regular employee but are then told they will be considered an independent contractor going forward. This can be a real problem because independent contractors, unlike employees, are not eligible for overtime pay, unemployment insurance, worker’s compensation and many other benefits that come with employee status. Employers may also argue that independent contractors are precluded from bringing wrongful termination claims because they were never actually employed by the company.

The federal and state governments are very interested in ensuring that employees are property classified because misclassified employees not only lose access to important legal benefits and protections, but cost state and federal government significant sums of money in the form of lower tax revenues, unemployment insurance, and workers’ compensation premiums. Employees are harmed because they are forced to pay 100% of their payroll (FICA) taxes and face future liabilities if the IRS determines that taxes and deductions taken by the employees were impermissible.

Whether a worker is an employee as defined by the Fair Labor Standards Act, or may properly be classified as an independent contractor, is a legal question that requires a careful analysis of the working relationship between the employer and the employee. The description assigned by the employer, or even agreed to by the parties, does not determine whether the classification is appropriate, which instead is based on the economic realities of that relationship. The determination essentially comes down to answering the question of whether a worker is economically dependent on the employer (making him or her an employee) or is really in business for him or herself (thus an independent contractor).

Many employees who believe that are being misclassified by their employers seek to remedy the situation by raising the issue with their employer and demanding that they be deemed employees and that they receive all the rights and benefits afforded to employees. Rather than rectify the situation some employers simply terminate the employees employment in favor of hiring someone else who won't complain. Such a termination could violate certain whistleblower protections afforded under state and federal law.

The United States Department of Labor raised these and other related claims in a lawsuit decided by the Third Circuit Court of Appeals in 1991. In Martin v. Selker Bros., Inc., 949 F. 2d 1286 (3rd Cir. 1991) the Court considered claims filed against Selker Brothers, a distributor of gasoline, oil and other related products, alleging that Selker Brothers had violated the Fair Labor Standards Act's minimum wage, overtime, recordkeeping and anti-retaliation provisions.

The Court found that Selker Brothers owned the gas that the gas stations  at issue sold, that station operators had no investment in the gas, and Selker Brothers determined the price of gas at every station. The operators had keys to the pumps, but Selker Brothers did not give them the keys to the gasoline storage tanks and did not allow the operators to paint cars or do body work at the stations.

The only compensation the station operators received from Selker Brothers was three cents commission on every gallon of gas sold and ten cents per gallon commission on sales of kerosene. This commission was not negotiable and could not be changed by the operators. For credit card sales of gasoline, operators were required by Selker Brothers to add a surcharge of three percent.

Each station had an island for pumping gas, a building for an office, as well as a sales area, storage area and garage. None of the station operators had written leases. The operators paid no rent, but did pay a portion of the stations' monthly utilities, which Selker deducted from their commission checks along with other deductions for supplies, shortages and start up inventory. Selker controlled the hours of operation of each station and illumination of the stations at night. Selker maintained no records of the wages, hours, and other conditions of employment for the station operators or for other persons employed at the stations.

One of the stations was run by Michael Cassano, who worked on average sixty hours per week, and employed workers to pump gas and do mechanical work. From July 20, 1986 through August 1988, Selker Brothers paid Cassano $19,826.01. Cassano supplemented these earnings by selling non-gasoline items including batteries, oil, candy and tobacco. His earnings from these sales averaged $400 per month. Selker Brothers fired Cassano and one of his assistants on August 31, 1988. Cassano testified that he had complained to Selker Brothers' owner, Bernard Selker, that earnings based on commissions per gallon fell short of the minimum wage and Selker had admitted the arrangement could be illegal. The Court found that Cassano and the assistant were wrongfully discharged because they complained Selker, and then to the Department of Labor, about FLSA violations at the station. That complaint was effectively that they had been misclassified as independent contractors rather than employees.

Although wrongful termination claims arising from an employee's misclassification as an independent contractor are not as common as other retaliatory discrimination claims they are no less valid. In order to preserve claims they must be brought in a timely manner and individuals are almost always best served by finding an experienced employment attorney to represent them. Unfortunately, its not always easy to find an attorney and it can be costly to hire a lawyer if you are unprepared. It is also important to avoid doing anything that can jeopardize your case.