By Travis Hanson

Recently, the Kansas Court of Appeals affirmed a finding from a district court and the Kansas Department of Labor (KDOL) that nail technicians at a salon are employees rather than independent contractors for unemployment tax contribution purposes. This case has important tips for handling classification issues in any industry.

Review of the Record

In 2014, Leander and Hongmin (Amy) Fisher began doing business as Amy's Spa Services, LLC. The spa classified all of its nail technicians as independent contractors. The KDOL audited the business to determine whether it properly classified the technicians for unemployment tax withholdings.

For unemployment tax contributions in Kansas, an individual is an employee if the employer has the right to control the manner and means of the work performed. Whether it ever exercises that right is inconsequential.

The KDOL auditor reviewed the spa's independent contractor agreement, interviewed three nail technicians and Leander Fisher, and reviewed some of the spa's financial documents. The auditor's review of the independent contractor agreement stated that the parties intended to form an independent contractor relationship.

Under the agreement, the spa required the technicians to clean their workstations and supply the tools necessary to complete their jobs, and it gave them discretion to set their own prices, as long as they didn't undermine the spa's prices. The agreement also provided that the spa would receive all payments, which it would later distribute to the technicians, and that a noncompete agreement prevented them from performing similar services within 6 miles of the spa. Additionally, they could set their own work schedules.

The auditor's interviews with the technicians, however, contradicted the agreement. They explained that the spa gave instructions on how to clean their workstations, required them to work set hours, required notice if a technician wanted to quit, and only allowed them to use approved nail polishes.

KDOL's auditor concluded that the technicians were employees, not independent contractors. The spa challenged this determination, seeking administrative review. KDOL's chief of contributions reviewed the determination by analyzing whether the spa had the right to control the technicians and whether it exercised that right. Because the technicians weren't running their own businesses, there were pricing restrictions in place, and the company used a single-payment system, the KDOL concluded an employer-employee relationship existed. Still unsatisfied, the spa sought an administrative hearing.

The administrative hearing officer heard testimony from the auditor, the chief of contributions, and Leander Fisher. Fisher's testimony described the independent contractor agreement, the ability of the technicians to hold other jobs, and the lack of training provided. Based on all the evidence, however, the officer concluded the spa had the right to control both the end result and the manner of work of the technicians. Thus, they were properly classified as employees.

In making that determination, the hearing officer analyzed eight statutory factors for determining whether the spa had the right to control the technicians. After reviewing the factors, the officer concluded that five of the eight factors indicated they were employees. Most important, the officer noted how integral they were to the spa's overall business.

District Court and Court of Appeals: Affirmed

The spa unsuccessfully appealed to the district court, which found the KDOL's determination was supported by sufficient evidence and that it was neither arbitrary nor capricious. Finally, the spa appealed to the Kansas Court of Appeals on the basis that the KDOL misinterpreted or misapplied the law, that there wasn't substantial evidence to support its determination, and that its decision was unreasonable, arbitrary, or capricious. Because the spa was challenging the decision, it had the burden of proving the KDOL erred in classifying the technicians as employees.

Although the court acknowledged that the auditor's investigation was inadequate and contradictory, it concluded that substantial evidence supported KDOL's analysis of the eight factors and its determination. It found that the no-assignment clause, the advertising clause, the technicians' fixed schedules, the noncompete clause, the centralized payment system, and the integral nature of the technicians to the spa's business allowed a reasonable person to conclude that it had the right to control them and provided a sufficient basis for the KDOL to conclude that they were employees. Amy's Spa Servs. LLC v. Kan. Dep't. of Labor, 2018 Kan. App. Unpub. LEXIS 46 (Kan. App., Jan. 26, 2018).

Takeaways

This case is a good reminder that merely calling a worker an independent contractor doesn't automatically establish an independent contractor relationship. Furthermore, if you use independent contractors, be aware that retaining the right to control the manner and means of performance jeopardizes the classification.

The KDOL takes misclassification of workers very seriously, and the consequences for improperly classifying workers are severe. The KDOL makes determinations on a case-by-case basis after a detailed review of the facts. If you have any questions about the proper classification of workers, you should contact an experienced employment law attorney.

Travis Hanson is an associate working in Foulston Siefkin's employment law practice group. You can contact him at 316-291-9797 or thanson@foulston.com.