Using independent contractors can save money on benefits, overtime, workers’ compensation and a whole host of other costs associated with having employees.
But watch out if your agreements with independent contractors include a clause prohibiting them from taking “a position contrary” to their status as independent contractors.
Such clauses are generally designed to insulate employers from suits by contractors who want employee status. But they may have the opposite effect, actually inviting lawsuits. A new case highlights the danger.
Recent case: Joseph Hopkins and several other insurance agents contracted with Cornerstone America to sell the company’s insurance products. Their contracts specified that they were independent contractors who would be paid strictly on a commission basis and would receive IRS 1099 statements showing their commissions.
The contracts also specified that Hopkins and the others could not “take a position contrary to [their] status as an independent contractor.”
Hopkins and the other agents were convinced that they were employees and not independent contractors, since Cornerstone used an iron fist to control the way they operated their so-called independent businesses. The agents then sued, alleging the Fair Labor Standards Act () covered them.
Cornerstone fired the agents and withheld their earned commissions based on the no-contrary-position clause.
The court not only concluded that the agents were employees, but also found that the contract provision under which the agents were fired was illegal when applied to them. The court said the FLSA specifically states employees cannot waive their rights. (Hopkins, et al., v. Cornerstone America, No. 4:05-CV-332, ND TX, 2007)
Final note: The no-contrary-position clause may have been a great big bulls-eye for the agents’ attorneys to aim at, signaling exactly which argument a court would find persuasive.