Independent Contractor or Employee? Eleventh Circuit Says Real-World Facts – Not Contracts – Decide

The Eleventh Circuit Court of Appeals gave more guidance to employers on the “economic reality test” used to distinguish employees from independent contractors under the Fair Labor Standards Act (FLSA). The court’s recent ruling is an important reminder that the actual working conditions and economic realities of the employer-employee relationship – not the labels put on it – will decide the outcome of legal challenges to the relationship.

The Eleventh Circuit Court of Appeals’ “Economic Reality Test”

The Eleventh Circuit’s “economic reality test” is the same test set forth in the U.S. Department of Labor’s March 2024 rules. As background, to determine whether a worker is an employee or an independent contractor under the FLSA, the Department of Labor and the Eleventh Circuit apply an “economic reality test.” The test assesses whether the worker is economically dependent on the alleged employer.

In that analysis, the Eleventh Circuit has emphasized that the relationship between the worker and alleged employer is not determined by the labels the parties use, or “how one could have acted under the contract,” but instead on how the parties actually behaved. In Scantland v. Jeffry Knight, Inc., the Eleventh Circuit established a six-factor framework for this analysis:

1. 1. 1. The degree to which the alleged employer has control over how the work is done.
      2. The worker’s opportunity for profit or loss.
      3. The worker’s investment in equipment or labor.
      4. The amount of special skill and initiative required for the work.
      5. The duration or permanence of the working relationship.
      6. The extent that the worker’s role is an integral part of the alleged employer’s business.

The Eleventh Circuit intended the Scantland factor framework be a guideline, not checklist, which simplifies and clarifies the historically ambiguous “economic reality test.” But since its adoption, there has been little to no opportunity for the court to apply the framework in other cases to illustrate its practical application to employers. That is until the Eleventh Circuit issued its recent decision in Galarza v. One Call Claims.

The Eleventh Circuit’s Ruling in Galarza v. One Call Claims

In Galarza, an insurance agency (Texas Windstorm Insurance Association (TWIA)) engaged a staffing company (One Call Claims, LLC (OCC)) to supply licensed insurance adjusters after Hurricane Harvey. Although these adjusters were licensed and experienced, they were required to complete in-house certification with the agency to ensure they were familiar with additional legal requirements applicable to TWIA.

While their written contracts with OCC labeled them as independent contractors for “standalone assignments of indefinite duration,” in practice, the adjusters’ assignments lasted one and one-half to two years. During this time, they worked full-time on behalf of TWIA.

After completing their assignments, three of the adjusters filed a lawsuit against OCC and TWIA to recover unpaid overtime pay. They argued they were misclassified as independent contractors and should have been paid overtime due to employees under the FLSA. On cross motions for summary judgment filed by the parties, the district court applied the Scantland factor framework. It concluded that four factors favored independent contractor status and two favored employee status, entering a judgment for the defendants on the overtime claims.

On appeal, the Eleventh Circuit reversed. It held that a jury could reasonably conclude the adjusters were employees entitled to overtime pay. Applying the same Scantland factor framework as the district court, the appellate court found that five factors favored employee status and only one favored independent contractor status. The court explained that the Scantland factors were not exhaustive, and no one factor dominates the analysis. The ultimate analysis is whether the worker was economically dependent on the alleged employer.

In its application of the Scantland factor framework, the Eleventh Circuit offered a detailed discussion about each factor:

1. Control Over Work 

This factor examines the nature and degree of the alleged employer over the manner in which the worker performs the work. Some relevant questions are whether the alleged employer dictates pay, hours, schedules and work methods. The alleged employer’s control must be significant to support employee status, and “control is significant if it reveals that the alleged employee does not stand as a ‘separate economic entity’ who is ‘in business for [itself]’’’. In Galarza, workers claimed that TWIA set their schedules and hours, reviewed their timesheets, used software to track their performance, docked their pay for absences, and controlled task execution. And the workers did not work for anyone else (except for one who briefly quit to do so) during the relationship. Thus, the appellate court held that this factor favored employee status because a jury could conclude that the defendant companies exerted so much control over the workers’ performance of their job tasks to suggest the workers were not a “separate economic entity” distinct from the companies.

2. Worker’s Opportunity for Profit or Loss

This factor considers whether the worker can influence their earnings through managerial skill. Its key element is the source of that opportunity. An important consideration is whether the worker or the alleged employer sets the price for the work being performed. In Galarza, the court concluded that the workers had no control over their paychecks as they were paid non-negotiable, fixed daily wages.

The companies pointed to the workers’ claiming tax deductions as independent contractors for their business expenses.

The court was not swayed by this argument, noting the broad definition of “employee” under the FLSA and reiterating that “labels” are not dispositive. It also explained the companies’ argument was “far afield” from the relevant considerations, which focus on whether the worker can take actions to increase his or her compensation, not whether he or she can reduce their taxes owed. As a result, the appellate court held that this factor weighed in favor of employee status and reiterated that labels and tax treatment do not control FLSA classification. 

3. Worker’s Investment in Equipment or Labor

This factor compares the worker’s investment to the alleged employer’s investment by considering which provides the equipment and/or materials needed to complete the work. In Galarza, the workers had minimal independent investment, whereas the companies provided the bulk of the equipment and material required to perform the work—computers, laptops, emails, and computer networks, applications, and software. As such, the appellate court held that this factor favored employee status.

4. Special Skill Requirement

This factor considers the level of special skills required to perform the work and whether the alleged employer provides any necessary skill training to the workers. In Galarza, the workers were licensed and skilled insurance adjusters. They acquired those licenses and skills before the relationship with the defendant companies. The court explained that a jury could discount the importance of these facts, but concluded they weighed in favor of independent contractor status. 

5. Permanency and Duration of Relationship

This factor considers whether the work relationship is short-lived, permanent, or only lasts for the length of a specific project, and whether the work relationship is exclusive. In Galarza, the contracts between the adjusters and the agency were for an unspecified time to be determined by TWIA, as opposed to expiration on completion of a specific claim, a certain number of claims, or even after all Harvey-related claims. And the workers (other than one for a brief period) did not work for any other company during the length of the business relationship. The court reasoned that the economic reality of the foregoing facts – not its labels – suggested a permanent relationship between the parties that aligned with employee status.

6. Worker’s Integral Role in Business

This factor considers the extent that the worker’s role is an integral part of the alleged employer’s business. In Galarza, the workers role as insurance adjusters were central to the insurance agency’s operations, described by the court as “the goods that OCC provides”.  The court held this factor weighed heavily in favor of employee status.

In summary, the Eleventh Circuit concluded that the special skills the workers were required to possess to perform the work weighed in favor of independent contractor status, but all of the other factors weighed in favor of employee status. But it stated its “bottom-line inquiry” is whether the workers were economically dependent on the alleged employers under the totality of the circumstances. Because the workers in Galarza “acted more like employees depending on an employer,” the appellate court reversed the summary judgment rulings in favor of the defendants and remanded the case back to the district court for further proceedings.

What Can Employers Take Away from Galarza?

Independent contractors fall outside of the protections of the FLSA, including its requirements of minimum wages and overtime pay. Misclassification can lead to significant legal and financial consequences.

While agreements or other written documents that designate workers as “independent contractors” should still be used, if applicable, employers should not rely on them. Employers should proactively assess the business relationship on the front end, and periodically update that assessment throughout the working relationship, to determine if the actual facts and economic realities of the relationship support that label. In doing so, the factors used by the Eleventh Circuit in Galarza should be the employer’s guide. Consultation with experienced employment law counsel who can assist the employer with that evaluation is also key to the analysis.

Please contact Michael E. Turner, Abigail W. White, Kameron K. Smithers or any member of the Phelps Labor and Employment team if you have questions or need advice or guidance.