Karlson v. Action Process Service & Private Investigations, LLC

United States Court of Appeals
For the Eighth Circuit
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No. 15-3322
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Jeffrey Karlson
lllllllllllllllllllll Plaintiff - Appellant
v.
Action Process Service & Private Investigations, LLC, et al.
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Eastern District of Arkansas - Little Rock
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Submitted: January 10, 2017
Filed: June 26, 2017
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Before RILEY, Chief Judge,1 LOKEN and BENTON, Circuit Judges.
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LOKEN, Circuit Judge.
In 2007, college student Jeffrey Karlson began serving legal process for Action
Process Service & Private Investigations, LLC (“APS”), a new company that owner
Loretta Foster was running out of her mobile home. Karlson signed a Process Server
1
The Honorable William Jay Riley stepped down as Chief Judge of the United
States Court of Appeals for the Eighth Circuit at the close of business on March 10,
2017. He has been succeeded by the Honorable Lavenski R. Smith.
Agreement reciting that he “is an independent contractor with respect to [APS].”
Seven years later, Karlson began serving process for an APS competitor and soon
filed this lawsuit against APS and Foster to recover unpaid overtime wages allegedly
owed under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201, et seq., and the
Arkansas Minimum Wage Act (“AMWA”), Ark. Code Ann. § 11-4-201, et seq. After
a two-day trial, the jury returned a verdict that Karlson was not an employee of APS
or Foster. Karlson filed a renewed motion for judgment as a matter of law. The
district court2 adopted the jury’s conclusion, denied the renewed motion, and entered
judgment in favor of APS and Foster. Karlson appeals, arguing (1) the undisputed
facts show that Karlson was defendants’ employee as a matter of law, and (2) the
district court abused its discretion in excluding evidence of the amount of defendants’
business expenditures. We affirm.
I.
The FLSA states that “no employer shall employ any of his employees . . . for
a workweek longer than forty hours” without paying one-and-one-half times the
regular rate for any excess hours. 29 U.S.C. § 207. The critical issue is whether
Karlson was an employee, as opposed to an independent contractor, when working as
an APS process server. Like many federal statutes, the FLSA defines “employee,” in
circular fashion, as “any individual employed by an employer.” § 203(e)(1). But the
FLSA also defines “employ” as meaning “to suffer or permit to work,” § 203(g), a
broad definition derived from child labor statutes. See Rutherford Food Corp. v.
McComb, 331 U.S. 722, 728 (1947). While FLSA wage and hour requirements do
not apply to true independent contractors, see id. at 729, this broad definition of
employ “stretches the meaning of ‘employee’ to cover some parties who might not
2
The Honorable James M. Moody, Jr., United States District Judge for the
Eastern District of Arkansas.
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qualify as such under a strict application of traditional agency law principles.”
Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992).
Rather than the common law test Darden adopted for determining whether a
worker is an employee or an independent contractor under many federal statutes,
“[t]he test of employment under the [FLSA] is one of economic reality.” Tony &
Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 301 (1985) (quotation
omitted).3 That the contracts between Karlson and APS labeled Karlson an
independent contractor may be relevant but is not controlling. Rutherford, 331 U.S.
at 729. In United States v. Silk, 331 U.S. 704, 716 (1947), a Social Security Act case
decided the same day as Rutherford, the Court observed:
Probably it is quite impossible to extract from the statute a rule of
thumb to define the limits of the employer-employee relationship. The
Social Security Agency and the courts will find that degrees of control,
opportunities for profit or loss, investment in facilities, permanency of
relation and skill required in the claimed independent operation are
important for decision. No one is controlling nor is the list complete.
3
Karlson asserted unpaid overtime claims under both the FLSA and the
AMWA. The definition of employee in the AMWA tracks the FLSA -- “any
individual employed by an employer.” Ark. Code Ann. § 11-4-203(3). The AMWA
expressly excludes independent contractors and defines independent contractor as
“any individual who contracts to perform certain work away from the premises of his
or her employer, uses his or her own methods to accomplish the work, and is subject
to the control of the employer only as to the result of his or her own work.” §§ 11-4-
203(3)(E), -203(6). The Arkansas Administrative Code provides that the Department
of Labor “may rely on . . . federal precedent established under the Fair Labor
Standards Act in interpreting and applying the provisions of [the AMWA] . . . except
to the extent a different interpretation is clearly required.” § 010.14.1-112. The
parties and the district court agreed that the same analysis of this issue applies to
Karlson’s claims under the FLSA and the AMWA.
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In resolving this issue under the FLSA, many courts have adopted this passage as a
multi-factor “economic realities” test, though neither the Supreme Court nor this court
has ever held that it is the governing standard.
Whatever test is applied, deciding whether Karlson was an employee under the
FLSA involves questions of fact -- the precise nature of his duties and relationship
with the alleged employer -- but the ultimate question of “[w]hether or not an
individual is an ‘employee’ within the meaning of the FLSA is a legal determination
rather than a factual one.” Donovan v. Trans World Airlines, Inc., 726 F.2d 415, 417
(8th Cir. 1984). This rule, derived from governing Supreme Court decisions, has
caused considerable confusion in the trial and appeal of FLSA cases. See, e.g., Jarrett
v. ERC Props., Inc., 211 F.3d 1078, 1081-82 (8th Cir. 2000).
II.
In this case, at the close of evidence, the district court denied Karlson’s motion
for judgment as a matter of law and decided, without objection by any party, to submit
the employee/independent contractor issue to the jury. Jury Instruction No. 6 stated
that the jury “must determine” whether Karlson was “employed” by either or both
defendants, or was an “independent contractor,” as defendants alleged. Paraphrasing
the “economic realities” test from Silk, the instruction provided six factors the jury
“should consider” -- (i) the degree of control exercised by the alleged employer over
the business operations; (ii) the relative investments of the alleged employer and
employee; (iii) the degree to which the employee’s opportunity for profit and loss is
determined by the employer; (iv) the skill and initiative required in performing the
job; (v) the permanency of the relationship; and (vi) the degree to which the alleged
employee’s tasks are integral to the employer’s business. The instruction concluded:
“No one factor alone should decide the question; instead, you should consider the
economic realities of the entire relationship between the parties based on these factors
as a whole.” The verdict form told the jury to decide whether Karlson was employed
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by APS; whether Karlson was employed by Foster; and, if the jury answered “Yes”
to either question, how many hours Karlson worked each of the weeks at issue.
Karlson did not object to submitting the employee/independent contractor issue to the
jury. He raises no objection on appeal to either Instruction No. 6 or the verdict form.
During its deliberations, the jury submitted a question asking whether it could
find that Karlson was an employee, yet was paid what he was owed. After the court
discussed with counsel how the question should be answered, counsel for Karlson
said, “I think we’re all on the same page as to what they should be told.” The court
then instructed the jury, without objection:
[Y]ou have to decide the factual matter whether or not Mr. Karlson was
an employee or an independent contractor. And once you’ve made that
factual determination, you may or may not need to move on to the
damages. Based on the [answer] to those questions, I’m going to make
a determination as a matter of law what that means. So I don’t get to
make the determination whether or not he was an employee or a general
[sic] contractor, but once you make that determination for me, the law
kicks in as to what happens from then on.
The jury then returned a verdict answering “no” to whether Karlson was employed by
defendant APS or by Foster, and Karlson filed his renewed motion for judgment as
a matter of law.
When a district court decides the legal question whether plaintiff was an
employee or independent contractor after a bench trial, we review that ultimate
question of law de novo and any fact findings as to the nature of the relationship for
clear error. See, e.g., Reich v. Stewart, 121 F.3d 400, 404 (8th Cir. 1997); accord
Herman v. Express Sixty-Minutes Delivery Serv., Inc., 161 F.3d 299, 303 (5th Cir.
1998). Likewise, if the court conducts a jury trial and obtains from the jury special
findings regarding one or more of the “economic realities” factors from Silk (or the
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common law factors from Darden), those findings will be reviewed for clear error.
But the ultimate question of whether the plaintiff was an employee for FLSA purposes
remains an issue of law, and if the court submits that question to the jury, it “may not
ignore its duty to review that aspect of the jury’s verdict de novo.” Ernster v. Luxco,
Inc., 596 F.3d 1000, 1006 (8th Cir. 2010).
Here, although the district court instructed the jury to “consider” the widely-
used economic realities factors, it did not request special findings regarding any aspect
of the parties’ relationship or Karlson’s specific duties as an APS process server.
Rather, with the parties’ consent, the district court submitted only the ultimate
question of whether Karlson was an employee and told the parties and the jury, “[s]o
I don’t get to make the determination whether or not he was an employee.” Then, in
denying Karlson’s renewed motion for judgment as a matter of law, the district court
“adopted” the jury’s conclusion. In effect, then, we are reviewing a general jury
verdict on an issue of law. Fortunately, because this issue is both confusing and not
uncommon, we have controlling precedent telling us how to proceed.
If a district court with the parties’ consent submits an ultimate FLSA issue of
law to the jury, such as whether plaintiff was an employee or an independent
contractor, and then adopts the jury’s verdict, “we must affirm on this issue if the
evidence, viewed most favorably to the jury’s verdict, is sufficient to support that
verdict.” Jarrett, 211 F.3d at 1082; accord Guyton v. Tyson Foods, Inc., 767 F.3d 754,
760-61 (8th Cir. 2014); Ernster, 596 F.3d at 1006 & n.7; Johnson v. Unified Gov’t of
Wyandotte, 371 F.3d 723, 728-29 (10th Cir. 2004). Contrary to Karlson’s argument
on appeal, we do not independently analyze the various economic realities factors the
jury was instructed to consider, because neither the jury nor the district court made
specific findings relating those factors to their ultimate determination. Cf. Everest
Capital Ltd. v. Everest Funds Mgmt., LLC, 393 F.3d 755, 760 (8th Cir. 2005). Here,
Karlson proposed that the ultimate employee issue be submitted to the jury and did not
object to Instruction No. 6 or to the general verdict form. Thus, while he is correct
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that whether he was an “employee” is an issue of law under the FLSA, he failed to
preserve the entirely different legal analysis he urges on appeal. See Lopez v. Tyson
Foods, Inc., 690 F.3d 869, 879-80 (8th Cir. 2012).
III.
Reviewing the trial evidence under the deferential standard adopted in Jarrett,
the jury verdict adopted by the district court must be affirmed. The evidence at trial,
much of it undisputed, permitted the jury to find that clients submitted service-of-
process requests to APS, which notified process servers of each opportunity. Karlson
decided which assignments he was willing to accept. APS contracted with Karlson
to complete each assignment he accepted, paying him a flat rate per paper served after
Karlson turned in an affidavit of service. Assignments carried time commitments that
varied from a few minutes to several hours, and APS occasionally updated
assignments to “priority” status. Karlson picked up papers to be served at the APS
office and used his own car, phone, and computer to complete service of process. He
was not required to report for work and did not punch a time clock or otherwise report
his hours worked to APS. He provided status updates to APS through an online
application, emails, and calls to office staff. Foster testified that APS did not tell
process servers when to work, process servers did not report daily schedules to APS,
and Karlson did not inform APS in advance when he would be unavailable to serve
process. APS never disciplined process servers for failing to work.
A 2011 Work for Hire/Independent Contractor Agreement governed the parties’
relationship during the period Karlson sought unpaid overtime damages. The
Agreement provided that APS would not provide fringe benefits, contribute to
worker’s compensation, or withhold federal or state taxes for Karlson, but would
provide a Form 1099-MISC showing the amount it paid Karlson for his services each
year. Karlson filed a Schedule C (Profit or Loss From Business) with his annual
federal income tax Form 1040 on which he deducted his process serving expenses,
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resulting in minimal or no personal income tax liability. These factors are
“[e]specially indicative of an independent-contractor relationship.” Alexander v.
Avera St. Luke’s Hosp., 768 F.3d 756, 762 (8th Cir. 2014).
Starting in 2012, Karlson began serving process in Arkansas counties more
distant from his home, driving to a county, staying in a hotel, and serving papers the
following day. He complained to Foster in 2013: “I am finding that my expenses are
considerably higher and this is an issue. Certain counties are simply unprofitable and
not worth the time, effort, and expense to get to. . . . As an independent contractor,
I should be able to maximize my best interests. . . . If I do not get Faulkner County
jobs then I will change my schedule from 7 days a week to 5 days a week and I will
take weekends off. I will also limit the counties I will serve by distance to the
following counties . . . .”
Based on these findings, a reasonable jury applying the “economic realities” test
set forth in Instruction No. 6 could conclude that Karlson was an independent
contractor. As the district court explained in adopting the jury’s conclusion:
In the end, the fact that Plaintiff could choose to accept assignments or
refuse them based upon his personal criteria, that he could leave for
vacation without permission from the Defendant, that he accepted
assignments from other companies at one time, and served process at
hours which were convenient to him and not controlled by the Defendant
tipped the balance of the economic realities test toward the conclusion
that Plaintiff was an independent contractor. The Court adopts the jury’s
conclusion and finds that Plaintiff was an independent contractor.
On appeal, Karlson proffers a long list of allegedly undisputed facts that in his
view support the conclusion that he was an employee for FLSA purposes as a matter
of law. He derives many of these facts from his own trial testimony, which the jury
was entitled to disregard. See Stevenson v. Union Pacific Ry., 354 F.3d 739, 745 (8th
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Cir. 2004). At trial, the defense attacked Karlson’s credibility by referring to a Texas
felony conviction for fraudulent use and possession of identifying information, which
he failed to report on appointment documents certifying that he had not been
convicted of a crime involving dishonesty or false statement.
Like the district court, we conclude the evidence at trial was sufficient to
support the jury’s conclusion that Karlson was an independent contractor under the
FLSA, applying the “economic realities” test in Instruction No. 6.
IV.
Karlson further argues that the district court abused its discretion in excluding
evidence of how much APS deducted each year in business expenses. Instruction No.
6 included in the factors the jury was to consider “the relative investments of the
alleged employer and employee.” Prior to trial, the district court’s rulings on motions
in limine included:
The parties may introduce evidence regarding [Karlson’s] payment for
serving process for [APS]. The parties may also present evidence as to
which party is responsible for the costs of investment in the business.
Evidence as to the dollar amount of the investment is precluded.
Before the jury was chosen, Karlson urged the court to reconsider this exclusion:
[Counsel for Karlson]: The evidence that I anticipate would be
that when Mr. Karlson is on the stand, he will testify that he had 30 or
40,000 dollars a year in automobile expenses, so with that evidence in,
I had planned to ask . . . Ms. Foster a similar question how much did you
deduct in expenses, about $900,000, so the jury would have that ratio.
THE COURT: I don’t find that that’s relevant.
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* * * * *
I’m not going to let you billboard large numbers without any context of
what they are. And if you say do you likewise deduct expenses for your
automobiles and she says yes, that’s fine, but . . . I’m not going to let you
make a gross number comparison between his figures and the company’s
figures to try to make it look like he’s the little guy and they’re the big
guy.
“A district court has broad discretion whether to admit evidence, and we will
not reverse absent a clear and prejudicial abuse of that discretion.” SEC v. Shanahan,
646 F.3d 536, 548 (8th Cir. 2011) (quotation omitted). There was no such abuse
here. We agree with the district court that comparing the amount Karlson spent on his
automobiles or deducted on Schedule C of his tax returns with Foster’s total expenses
in operating APS has little relevance to determining whether Karlson’s self-controlled
activity in accepting and completing APS process server assignments made him an
employee or an independent contractor as a matter of economic reality. Large
corporations can hire independent contractors, and small businesses can hire
employees. Thus, the district court did not abuse its discretion in deciding it would
permit questions addressing the nature of the parties’ relative investments but would
not allow Karlson to “billboard large numbers” that would create the danger of unfair
prejudice.
The judgment of the district court is affirmed.
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