?Takeaway: Employers that engage independent contractors should review their classification of these workers to ensure the arrangements comply with the Fair Labor Standards Act (FLSA) and any applicable state law, which may be different from the FLSA.
In particular, companies should consider reviewing their independent contractor agreements and the application of those agreements to the day-to-day relationship between the company and the workers in order to evaluate whether they have properly classified the workers as independent contractors.
?An owner-operator engaged by a freight hauling company as an independent contractor stated a valid claim under the Fair Labor Standards Act (FLSA) and Wisconsin state minimum wage law because he had sufficiently pled that he could not exercise his contractual rights and did not truly control the conduct of his work, the 7th U.S. Circuit Court of Appeals ruled.
The former driver filed a lawsuit in the U.S. District Court for the Eastern District of Wisconsin, alleging that Schneider National Inc. violated the minimum wage requirements of the FLSA and Wisconsin law by misclassifying him as an independent contractor. He also claimed that the company unjustly enriched itself under Wisconsin law and violated federal Truth-in-Leasing regulations.
Two contracts governed the parties’ relationship: the driver’s lease of a Freightliner truck from Schneider, and an operating agreement under which the driver leased his truck back to Schneider and received 65 percent of gross revenue for shipments he hauled for Schneider. The terms of the operating agreement gave the driver substantial control over his work, including provisions permitting him to haul loads for other carriers and hire other drivers to assist if he desired.
Schneider argued that this agreement established that the driver had a high degree of control over his work and that Schneider had therefore properly classified him as an independent contractor.
According to the driver, his operating agreement did not reflect the economic reality of his work because Schneider “exercised complete control over all meaningful aspects of the transportation business” in which he worked.
The district court disagreed and granted Schneider’s motion to dismiss all claims. The driver appealed.
The appeals court reversed the district court’s motion to dismiss the ruling and held that the driver stated a valid minimum wage claim under the FLSA and Wisconsin law. The 7th Circuit also found that the driver had stated valid unjust enrichment and Truth-in-Leasing claims.
Under the FLSA, workers are employees when “as a matter of economic reality, [they] are dependent upon the business to which they render service.”
This economic reality test includes analyzing the nature and degree of the company’s control as to the manner in which the worker performs the work, and the worker’s opportunity for profit or loss, depending upon the worker’s managerial skill.
In reversing dismissal of the driver’s minimum wage claims, the 7th Circuit concluded that the district court had “erred by giving decisive effect to the terms of [its] contracts,” when “what matters is the economic reality of the working relationship, not necessarily the terms of a written contract.”
For instance, while the operating agreement gave the driver the ability to choose the route and schedule to follow when delivering a shipment, the driver alleged that “the economics of his work constrained his route selection, so his nominal freedom to choose a route did not determine whether he controlled his labor.”
Similarly, while the operating agreement gave the driver the ability to choose which Schneider shipments to haul (and in theory, to select more shipments with higher profit margins), the driver alleged that he could not actually exercise this theoretical right to turn down shipments. The driver further alleged that, despite the terms of his contract, Schneider did not allow him to hire workers or haul freight for other carriers.
Thus, according to the appeals court, the driver’s complaint had pled sufficient facts to allow a plausible inference that Schneider controlled his work as an employee.
Brant v. Schneider National Inc., 7th Cir., No. 21-2122 (Aug. 3, 2022).
Natalie F. Bare is an attorney in the Philadelphia office of Duane Morris LLP.
