Executive Summary: Applying the “economic realities” test, the Fifth Circuit (with jurisdiction over federal courts in Louisiana, Mississippi, and Texas) recently held that a consultant for an oil and gas company was not subject to FLSA overtime requirements because he was an independent contractor.
Factual Background and Procedural History
In November 2014, Jeff Faludi, a former attorney, began working for U.S. Shale Solutions, L.L.C. as a consultant. At this time, the parties entered into an “Independent Contractor Master Consulting Services Agreement.” Under the agreement, Faludi agreed to work for U.S. Shale for an “indefinite period” at a rate of $1,000 per day if he was working in Houston or $1,350 per day if he was working outside of Houston. Faludi submitted invoices for the hours and days he worked for U.S. Shale at least once or twice a month. In his role as a consultant, Faludi retained control over his hours and his assignments, provided his own phone and computer, paid his own continuing education expenses, and purchased home office equipment.
In March 2016, Faludi left U.S. Shale due to an internal reorganization. Shortly thereafter, he filed a lawsuit claiming unpaid overtime wages. In the District Court, U.S. Shale sought summary judgment against Faludi arguing two alternative theories: (1) Faludi was an independent contractor; or (2) Faludi was an exempt employee under either the “practice of law exemption” or the “highly compensated employee” exemption. The District Court issued its opinion granting summary judgment against Faludi on November 30, 2017. While it had found that genuine issues of material fact existed as to whether Faludi was an independent contractor or employee and whether Faludi was exempt under the practice of law exemption, the court held that Faludi was an exempt employee under the highly compensated employee exemption. Faludi appealed the decision to the Fifth Circuit Court of Appeals.
Earlier Fifth Circuit Decision
On August 21, 2019, the Fifth Circuit issued its original opinion affirming the District Court’s grant of summary judgment to U.S. Shale. It agreed with the District Court that Faludi fell under the highly compensated employee exemption because he received at least $100,000 in annual compensation on a “salary basis” and performed the duties of an executive, administrative, or professional employee. See 29 C.F.R. 541.601(a). Faludi had argued on appeal that he did not meet the salary basis requirement because his day rate of $1000 (or $1350) was: (1) not calculated on a weekly or less frequent basis; and (2) subject to reduction because of variations in the quantity of the work performed. However, the Fifth Circuit rejected these arguments and held that because Faludi was guaranteed at least $455 per week and regularly received that amount on a weekly or less frequent basis, he was exempt from the FLSA’s overtime requirements as a highly compensated employee. However, Circuit Judge James C. Ho dissented from the opinion and held that the method of compensation did not meet the salary basis test.
New Fifth Circuit Decision
Perhaps to avoid a rehearing en banc, the Fifth Circuit withdrew its August 21st opinion and issued a new opinion on February 14, 2020. In the new opinion, it declined to address the issue of whether Faludi was exempt from overtime under the highly compensated employee exemption. Instead, the Fifth Circuit found that Faludi was an independent contractor: “[a]lthough we think U.S. Shale’s arguments are well-taken as to why Faludi fits within the highly compensated employee exemption to the FLSA, we need not reach the issue given that Faludi is an independent contractor not covered by the FLSA’s requirements.” Faludi v. U.S. Shale Sols., L.L.C., 2020 U.S. App. LEXIS 4791, at *11 (5th Cir. February 14, 2020). Using the economic realities test, the Fifth Circuit walked through the following factors in determining that Faludi was an independent contractor: (1) the degree of control exercised by the alleged employer; (2) the extent of the relative investments of the work and the alleged employer: (3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship. No single factor is determinative, but if the balancing of the factors demonstrates that the worker is economically dependent on the employer, then he or she will not constitute an independent contractor and will be covered by the FLSA’s requirements.
With respect to the first factor, U.S. Shale argued that it did not exercise a large degree of control over Faludi because it allowed him to work independently and manage his own schedule. Next, it argued that Faludi made investments in his business by providing his own phone and computer, paying his own continuing education expenses, and purchasing home office equipment. As to the third factor, U.S. Shale demonstrated that Faludi controlled his own opportunity for profit and loss because he could choose the projects on which he worked. With respect to Faludi’s skill and initiative, U.S. Shale argued that it gave Faludi specific projects due to his legal education and experience. Lastly, U.S. Shale argued that the relationship with Faludi was not permanent, as Faludi could end it if he provided fifteen days’ notice. The Fifth Circuit found U.S. Shale’s arguments persuasive and rejected the District Court’s ruling that a material issue of fact remained on whether Faludi was an independent contractor. Additionally, the Fifth Circuit found that the existence of a non-compete clause in the agreement “[did] not automatically negate independent contractor status.” Overall, it held that the undisputed facts weighed in favor of independent contractor status, and thus affirmed the District Court’s grant of summary judgment to U.S. Shale, but for a different reason than in its prior opinion.
Employer Take Aways
This decision provides insight to employers on how to deal with consultants such as Faludi. Where an employer wishes to hire a consultant as an independent contractor, it should take steps to ensure that the factors support a finding that the worker is in business for himself and is not economically dependent on the employer. Additionally, employers may want to avoid any non-compete clauses in an independent contractor agreement. Although the court found here that such a clause did not negate the finding that Faludi was an independent contractor, such a fact could cause a different holding in a similar situation.
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