Hybrid Test Determines Employee or Independent Contractor Status under FMLA, ADA and ADEA

BY CHARLIE WITTMACK

Executive Summary

By their own terms, the FMLA, ADA and ADEA apply only to employees and not independent contractors. However, since these laws were enacted, there has been an ambiguity regarding the appropriate test to use when determining whether an individual has been properly classified by an employer as an employee or independent contractor.

The two competing tests are known as the “Darden Test” and the “Economic Realities Test.” The Darden test generally focuses on the degree of control that the principal shows to the agent, while the Economic Realities Test focuses more on the financial impact of the relationship.

The Eighth Circuit Court of Appeals recently had the opportunity to determine which test applies to the FMLA, ADA and ADEA, in a case that involved a physician and a hospital. In reaching their decision, the Eighth Circuit combined the two tests into a new “hybrid test” that combines the Darden Test and the Economic Realities Test.

The Court’s analysis focused on the degree of control the employer exhibited over the work of the individual. In this case, the professional and economic freedoms of the worker tilted the scale in favor of the individual being an independent contractor. The Court also found the individual was granted greater freedoms than other workers (who were inarguably employees).

Going forward, employers should note the degree of control and influence they exert over an individual’s performance if they want to maintain an independent contractor relationship rather than an employer-employee relationship.

Facts of the Case

Avera St. Luke’s (Avera) is a non-profit corporation which operates St. Luke’s Hospital in Aberdeen, South Dakota. Pathologist Larry Alexander began working for Avera in 1991 by entering a “Contract for Professional Services” with pathologist Roy Burt, who had an exclusive contract with Avera to supply its pathological services and direct its Department of Pathology. Alexander’s contract with Burt provided that:

  • Alexander would apply for and become a member of the Hospital’s medical staff.
  • Alexander’s services would be those of an independent contractor, not an employee of Burt.
  • Burt would have no authority to control the manner in which Alexander performed his pathology services.
  • Alexander would pay all applicable taxes and withholdings, including social security taxes.
  • Alexander would secure professional liability insurance.

In 1994, Alexander became Director of Pathology at the hospital, taking over that role from Burt. He entered into a new contract (Agreement for Pathology Services) with Avera at that time and into substantially identical contracts in 1998 and 2002. The contracts stated that:

  • Alexander would be an independent contractor.
  • Avera would have no authority to control Alexander’s performance.
  • Avera would not pay nor withhold taxes and Alexander would be responsible for: paying taxes; obtaining malpractice insurance; and paying for his professional licenses.
  • Alexander could hire assistants and substitute pathologists at his own expense.
  • Alexander must provide pathology services in accordance with Avera’s rules.
  • The majority of Alexander’s professional services would be confined to the hospital.
  • Alexander was to contract separately with Burt for Burt’s services.
  • Half the amount listed as Alexander’s annual compensation was to be paid to Burt.

The 2008 contract also included each of those provisions aside from those regarding payment of Burt. The 2008 contract reduced Alexander’s compensation and made him responsible for arranging and compensating a substitute pathologist if he was out for any reason, including illness or vacation.

For the duration of Alexander’s service, Avera provided all facilities, equipment and non-medical assistants. He was given a 1099 form rather than a W-2 and filled out a 1040 sole proprietor tax form. He determined his own schedule and Avera did not supervise his practice. Alexander was not assigned duties outside of his contract, but he served as Medical Director of the South Dakota Public Health Laboratory (as his contract allowed him to work outside of St. Luke’s).

Conflicts caused Alexander and Burt’s relationship to sour and in 2011, Burt told Avera of his intention to leave. Avera terminated Alexander’s contract as well. With their departures, Avera hired two new pathologists (Buttolph and Fritz). Their contracts, titled “Physician Employment Agreement”, differed from those signed by Alexander and Burt. According to these new contracts:

  • The Hospital, “employs the Physician.”
  • Avera would provide medical malpractice insurance for Buttolph and Fritz.
  • Avera would provide benefits, including health insurance and retirement plans.
  • Avera would withhold income taxes and FICA taxes.

Fritz and Buttolph agreed to:

  • Work a specified number of weekly hours.
  • Not compete with the hospital during employment or for two years after.
  • Practice medicine only with Avera unless given permission to practice elsewhere.

Outcome of the Litigation

Alexander brought a lawsuit under the FMLA, ADA and ADEA. The district court granted summary judgment for Avera, holding that each claim failed because Alexander was an independent contractor, not an employee protected by the statute. Alexander appealed to the Eighth Circuit.

On appeal, the Eighth Circuit agreed with the district court, finding that:

  • Alexander was an independent contractor.
  • Alexander was not protected by the FMLA, ADA and ADEA because these Acts extend their protections only to employees.
  • Summary judgment in favor of Avera was appropriate on all claims.

In reaching this conclusion, the Eighth Circuit found that:

  • The FMLA, ADA and ADEA cover employees and not independent contractors.
  • To determine whether an individual is an “employee”, Courts may utilize the Darden Test or the Economic Realities Test.

Additional Analysis

The Darden Test was created by the US Supreme Court in Nationwide Mutual Insurance v. Darden. In Darden, the Supreme Court noted that when Congress uses the word “employee” without defining it, it intends to describe the master-servant relationship as understood by common-law doctrine. The Supreme Court then went on to establish a set of common-law factors that indicate whether an individual should be considered an employee or independent contractor:

  • The hiring party’s right to control the manner and means by which the work is accomplished.
  • The skill required.
  • The source of instrumentalities and tools.
  • Location of the work.
  • The duration of the relationship between the parties.
  • Whether the party has the right to assign additional projects to the hired party.
  • The extent of the hired party’s discretion over when and how long to work.
  • The method of payment.
  • The hired party’s role in paying assistants.
  • Whether the work is part of the regular business of the hiring party.
  • Whether the hiring party is a business.
  • The provision of employee benefits.
  • Tax treatment of the hired party.

Prior to Darden, the Supreme Court construed this FLSA definition to mean that “employees are those who, as a matter of economic reality, are dependent upon the business to which they render service.” (Bartels v. Birmingham, 332 U.S. 126, 130 (1947)).

In this case, the Eight Circuit found that appellate courts have used a hybrid of the common-law and economic realities tests and that:

  • The hybrid test is not significantly different from the economic realities test.
  • The hybrid test expressly takes the economic realities into account.
  • Applying an FLSA economic realities test to Alexander’s FMLA claim would be inappropriate since Alexander’s “professional” work is exempt from FLSA coverage.
  • The conclusion that Alexander was an independent contractor rather than the employee does no harm to the economic realities of the FMLA since: Alexander had freedom to use his compensation to hire substitute pathologists; Alexander was responsible for paying his professional licensing and malpractice insurance expenses; Economic freedoms were reflected on Alexander’s tax payments and returns; and Alexander’s agreement met the FMLA minimum labor standards for unpaid leave.

The Eighth Circuit also affirmed the district court’s grant of summary judgment to Avera on Alexander’s ADA and ADEA claims, because Alexander was an independent contractor. In reaching this conclusion, the Eighth Circuit found that:

  • The most significant Darden factor in determining employee status is the hiring party’s degree of control over the manner and means by which the work is accomplished. Considering this and the other factors, the Eighth Circuit noted that: a hospital must assert some control over a doctor’s work because it has professional responsibility regardless of whether the doctor is an employee or independent contractor; no one exercised control over Alexander’s work; Alexander set his own schedule and determined the manner of his own performance; Alexander hired substitute pathologists at his own expense; and Alexander agreed in each contract that he was an independent contractor.
  • Other factors show that, in contrast to Avera’s relationship with Buttolph and Fritz (who were undoubtedly employees), Alexander: was not provided with malpractice insurance or benefits, reported his income on a Form 1099 as a self-employed contractor and was not subject to tax withholdings by Avera, had no weekly hours requirement, held other medical employment outside of Avera, and was never bound by a non-compete agreement.