Have you ever considered the possibility that you might be the next person your contract attorney sues? As frightening as that sounds, that’s exactly what happened in the bizarre dispute leading up to a recent Fifth Circuit decision, Faludi v. U.S. Shale Solutions, L.L.C. There the plaintiff was an unlicensed attorney who contracted with the defendant to be a legal consultant. The defendant paid him on a day rate basis, required him to sign a non-compete, and treated him as an independent contractor. Once the plaintiff left the company, he immediately filed a Fair Labor Standards Act (“FLSA”) lawsuit where he claimed that he had actually been an employee who was misclassified as exempt and was entitled to unpaid overtime wages.
Fortunately for the defendant, the Fifth Circuit concluded that the plaintiff had been properly classified as an independent contractor. Fortunately for us, the case demonstrates several lessons about certain business practices and FLSA compliance.
First, employers who use simple day rate compensation structures should be wary of whether they are improperly classifying workers as exempt employees. Here, the plaintiff was compensated on a day rate basis, and this fact complicated the issue of whether he met the salary basis requirement applicable to all white-collar employee exemptions under the FLSA. This was a problem because the salary basis test requires that workers receive a predetermined amount of compensation on weekly or less frequent basis that is not subject to reduction based on the number of days or hours worked, and simple day rate compensation schemes reduce workers’ pay as a direct function of the number of days worked. This fact alone was enough to threaten the employer’s ability to claim any employee exemptions for the plaintiff, regardless of the nature of the plaintiff’s work responsibilities.
Second, the case shows that many exemptions overlap in their “duties” tests. While the plaintiff was an unlicensed attorney, and therefore could not qualify for a “practice of law” exemption, his duties were still enough to meet the duties requirements for other FLSA exemptions. Employers should be aware of each of the potential exemptions available to them and confirm that employee positions meet all of the requirements for one or more of the exemptions, before classifying the position as exempt.
Third, and finally, the dispute warns employers about the classification risks associated with overusing non-competition agreements with independent contractors. While the Fifth Circuit ultimately concluded that the plaintiff here was an independent contractor, that decision was made as a result of a large number of case-specific facts supporting the determination. The presence of a non-compete was one of the few facts pointing in the other direction. While a non-compete alone is generally not enough to find an employee-employer relationship, employers should be aware that such agreements will work against them in cases where a contractor challenges their classification.