IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
October 13, 2008
No. 07-10952 Charles R. Fulbruge III
Clerk
JOSEPH HOPKINS; COLLECTIVE ACTION MEMBERS
Plaintiffs - Appellees-Cross-Appellants
v.
CORNERSTONE AMERICA; MID-WEST NATIONAL LIFE INSURANCE
COMPANY OF TENNESSEE; UNITED INSURANCE COMPANIES INC
Defendants - Appellants-Cross-Appellees
SHERRIE BLAIR; ANDREW BOWMAN; CHRIS FOX; BOB HOWELL;
MARK MANN; COLLECTIVE ACTION MEMBERS
Plaintiffs - Appellees-Cross-Appellants
v.
CORNERSTONE AMERICA; MID-WEST NATIONAL LIFE INSURANCE
COMPANY OF TENNESSEE; UNITED INSURANCE COMPANIES INC
Defendants - Appellants-Cross-Appellees
NORM CAMPBELL; MARK CROUCHER; JEFF GESSNER; TERRENCE
JOHANESEN; DONNIE KLEIN; SCOTT ROUGHEN; STEVE WOODHEAD;
DAVID YOUNG; COLLECTIVE ACTION MEMBERS
Plaintiffs - Appellees-Cross-Appellants
v.
No. 07-10952
CORNERSTONE AMERICA; MID-WEST NATIONAL LIFE INSURANCE
COMPANY OF TENNESSEE; UNITED INSURANCE COMPANIES INC
Defendants - Appellants-Cross-Appellees
Appeal from the United States District Court
for the Northern District of Texas
Before GARZA and ELROD, Circuit Judges, and HICKS,* District Judge.
EMILIO M. GARZA, Circuit Judge:
Fourteen former sales leaders (“Sales Leaders”) of defendant Cornerstone
America (“Cornerstone”) filed suit for unpaid overtime wages under the Fair
Labor Standards Act (“FLSA”). The federal district court granted summary
judgment in favor of the Sales Leaders on the threshold issue of whether the
Sales Leaders were employees or independent contractors under the FLSA.
Cornerstone now appeals this ruling. The Sales Leaders cross-appeal, alleging
that the district court erred in dismissing the claims of one of their members,
Chris Fox (“Fox”), on the grounds of judicial estoppel. For the following reasons,
we affirm in part and vacate in part.
I
Cornerstone is the sales and marketing division of defendant Mid-West
National Life Insurance Company of Tennessee (“Mid-West”), a corporation that
issues and sells health insurance policies. Cornerstone uses a pyramid system
of approximately 1,200 sales agents, each of whom agrees to work as an
independent contractor on a commission basis. Some of these agents are
*
District Judge of the Western District of Louisiana, sitting by designation.
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No. 07-10952
subsequently promoted to the position of “sales leader,” a management-level
position in the Cornerstone hierarchy.
By contract, sales leaders agree to remain as independent contractors
when they are elevated from the position of sales agent by Cornerstone.
However, their opportunity to engage in personal sales diminishes, and they
become primarily responsible for recruiting, training, and managing a team of
subordinate sales agents. As the leaders progress in their careers, their
primary income derives from overwrite commissions on their subordinates’ sales.
Despite this economic dependency, there is no formal relationship between the
sales leaders and their team members. Each subordinate agent contracts directly
with Cornerstone, and Cornerstone alone controls the hiring, firing, assignment,
and promotion of the agents in each leader’s team. Cornerstone also unilaterally
determines the sales leaders’ territories, and prevents the sales leaders from
selling other insurance products or operating other businesses. Finally,
Cornerstone controls the distribution of sales leads—the “lifeblood” of the
business model—and prohibits sales leaders from purchasing leads from outside
sources.
Despite this fairly rigid structure, sales leaders possess a great deal of
flexibility with regard to their hours and day-to-day affairs. They receive no
employment benefits, and Cornerstone withholds no wages for tax purposes.
According to Cornerstone, corporate oversight is minimal, and the sales leaders’
attendance at Cornerstone meetings and training sessions is generally
considered optional.
The plaintiff-Sales Leaders in this case are all former sales leaders of
Cornerstone—four were district sales leaders, nine were regional sales leaders,
and one was an area sales leader. They filed suit against Cornerstone and its
parent companies in federal district court, alleging that they were entitled to
unpaid overtime wages as employees under the FLSA. Because the FLSA
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applies to employees but not to independent contractors, the district court
initially sought to determine the employment status of the Sales Leaders. After
both sides submitted summary judgment motions, the court ruled in favor of
employee status for all of the Sales Leaders (except Chris Fox), allowing them
to proceed with their FLSA claims. As to Fox alone, the district court concluded
that judicial estoppel barred him from asserting employee status because he had
previously claimed to be an independent contractor in an unrelated lawsuit.
After the district court issued its summary judgment order, Cornerstone
sought permission to file an interlocutory appeal on the FLSA issue. See 28
U.S.C. § 1292(b) (permitting interlocutory appeal of “controlling question[s] of
law as to which there is substantial ground for difference of opinion”). The
district court granted permission to appeal and certified the following question
for our review: “Whether, under the undisputed facts, Plaintiffs are employees
of Defendants or independent contractors under the FLSA.” After Cornerstone
petitioned this Court for permission to appeal on the certified question, the Sales
Leaders petitioned for permission to cross-appeal solely on the estoppel ruling
against Fox. We granted both petitions.1
II
Cornerstone contends that the district court erred in concluding that the
Sales Leaders were employees under the FLSA. We review de novo a district
court’s legal conclusion as to employment status in a grant of summary
judgment. Carrell v. Sunland Constr., Inc., 998 F.2d 330, 332 (5th Cir. 1993).
1
There was some debate in the briefing over whether we had jurisdiction to hear the
estoppel-issue cross-appeal. When a district court identifies a particular “controlling question
of law” from its order for interlocutory review, we have discretion to address any issue
contained in the original order. Yamaha Motor Corp., U.S.A. v. Calhoun, 516 U.S. 199, 205
(1996). Because we granted the Sales Leaders’ petition for permission to cross-appeal, which
only raised the estoppel issue, we believe it appropriate to exercise our discretionary review
on the matter.
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Given the limited scope of the certified question, we consider only the
undisputed facts.
The definition of employee under the FLSA is particularly broad. See
Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992) (noting that the
FLSA “stretches the meaning of ‘employee’ to cover some parties who might not
qualify as such under a strict application of traditional agency law principles”).
To determine if a worker qualifies as an employee, we focus on whether, as a
matter of economic reality, the worker is economically dependent upon the
alleged employer or is instead in business for himself. Herman v. Express
Sixty-Minutes Delivery Serv., Inc., 161 F.3d 299, 303 (5th Cir. 1998). To aid us
in this inquiry, we consider five non-exhaustive factors: (1) the degree of control
exercised by the alleged employer; (2) the extent of the relative investments of
the worker and the alleged employer; (3) the degree to which the worker’s
opportunity for profit or loss is determined by the alleged employer; (4) the skill
and initiative required in performing the job; and (5) the permanency of the
relationship. Id. No single factor is determinative. Brock v. Mr. W Fireworks,
Inc., 814 F.2d 1042, 1043–44 (5th Cir. 1987). Rather, each factor is a tool used
to gauge the economic dependence of the alleged employee, and each must be
applied with this ultimate concept in mind. Id.
A.
Under our economic-realities approach, “[c]ontrol is only significant when
it shows an individual exerts such a control over a meaningful part of the
business that she stands as a separate economic entity.” Mr. W Fireworks, 814
F.2d at 1049. “[T]he lack of supervision over minor regular tasks cannot be
bootstrapped into an appearance of real independence.” Id. Cornerstone
contends that the control factor weighs in favor of independent-contractor status
because the Sales Leaders possessed independence in their day-to-day affairs
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No. 07-10952
and because Cornerstone exerted little control beyond what insurance-industry
regulations required.
After a review of the record, we are convinced that Cornerstone controlled
the “meaningful” economic aspects of the business. See Mr. W Fireworks, 814
F.2d at 1049. First, Cornerstone controlled the hiring, firing, assignment, and
promotion of the Sales Leaders’ subordinate agents. Because most of the Sales
Leaders relied on overwrite commissions as their primary source of income, the
Sales Leaders’ lack of control over personnel decisions is significant. Second,
Cornerstone at least partially controlled the advertising for new recruits by
providing the Sales Leaders with approved ads and monitoring their placement.
Third, Cornerstone exclusively determined the type and price of insurance
products that the Sales Leaders could sell. As Cornerstone’s corporate
representative acknowledged, “one of the tenets” of Cornerstone’s business was
that leaders could not sell competing products if they wanted to “receive leads”
and “have their compensation advanced.” Fourth, Cornerstone controlled the
number of sales leads the Sales Leaders would receive, and prevented the Sales
Leaders from purchasing leads from other sources. Finally, Cornerstone
determined the geographic territories where the Sales Leaders and their
subordinates could operate.
Because Cornerstone controlled the meaningful aspects of the business
model such that the Sales Leaders could not plausibly be considered “separate
economic entit[ies],” see Mr. W Fireworks, 814 F.2.d at 1049, we conclude that
the control factor weighs in favor of the Sales Leaders’ employee status.
B.
In applying the relative-investment factor, we compare each worker’s
individual investment to that of the alleged employer. See Herman, 161 F.3d at
304 (declining to aggregate the alleged employees’ investments). Here, it is clear
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No. 07-10952
that Cornerstone’s investment—including maintaining corporate offices, printing
brochures and contracts, providing accounting services, and developing and
underwriting insurance products—outweighs the personal investment of any one
Sales Leader. Cornerstone does not dispute this, but argues that the Sales
Leaders made “substantial investments” in their individual offices. While this
may be true, Cornerstone’s greater overall investment in the business scheme
convinces us that the relative-investment factor weighs in favor of employee
status. See id.
C.
We next consider whether the worker or the alleged employer controlled
the “major determinants of the amount of profit which the [worker] could make.”
See Usery v. Pilgrim Equip. Co., Inc., 527 F.2d 1308, 1313 (5th Cir. 1976).
Cornerstone contends that the Sales Leaders primarily determined their own
profit through recruiting new agents, controlling office costs, and motivating
subordinates. We disagree.
The major determinants of the Sales Leaders’ profit or loss were controlled
almost exclusively by Cornerstone. Cornerstone controlled the hiring, firing, and
assignment of subordinate agents, and thus effectively regulated overwrite
commissions—the Sales Leaders’ primary source of income. Cornerstone
controlled the distribution of sales leads, and restricted the Sales Leaders from
selling competing products. Cornerstone unilaterally defined the Sales Leaders’
territories, and Cornerstone could (and did) assign competing sales leaders
within these territories. Finally, Cornerstone prevented the Sales Leaders from
owning and operating other businesses.
Our decision in Hickey v. Arkla Industries, Inc. provides an instructive
comparison. 699 F.2d 748 (5th Cir. 1983) (applying the economic-realities test
in an ADEA case). In Hickey, we determined that a gas-products salesman was
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an independent contractor because his profit hinged on his ability to increase
customer volume through initiative and skill. Id. at 752. We also noted that the
salesman could sell competitors’ products. Id. By contrast, the Sales Leaders
are restricted from selling other insurance products, and their customer volume
hinges on Cornerstone’s distribution of leads and assignment of subordinate
salesmen. Thus, the opportunity-for-profit factor weighs in favor of employee
status.
D.
We also consider whether the worker exhibits the type of skill and
initiative typically indicative of independent-contractor status. See Pilgrim
Equip., 527 F.2d at 1314 (“Routine work which requires industry and efficiency
is not indicative of independence and nonemployee status.”). Generally, we look
for some unique skill set, see Carrell, 998 F.2d at 333 (noting that “[p]ipe
welding, unlike other types of welding, requires specialized skills”), or some
ability to exercise significant initiative within the business, see Hickey, 699 F.2d
at 752 (noting that the plaintiff-salesman controlled “major components” of the
business open to initiative, including advertising, marketing, and the choice of
other products to sell). Here, Cornerstone argues that the Sales Leaders
required skill and initiative to successfully recruit, train, and motivate a team
of sales agents.
Certainly, the Sales Leaders required a general set of skills to effectively
manage their offices and teams. However, these are not specialized skills; they
are abilities common to all effective managers. See Pilgrim Equip., 527 F.2d at
1314 (suggesting that general skills, “such as business sense, salesmanship,
personality and efficiency,” are not relevant to the employee-status inquiry).
Cornerstone’s corporate representatives acknowledged that successful sales
leaders did not need any specific skill set. Furthermore, the Sales Leaders had
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little opportunity to exercise initiative within the business. “All major
components open to initiative—advertising, pricing, and most importantly the
choice of [insurance-policy providers] with which to deal—are controlled by
[Cornerstone].” See Mr. W Fireworks, 814 F.2d at 1053. Cornerstone also
prevented the Sales Leaders from exercising true initiative in personnel issues,
as Cornerstone controlled the ultimate hiring and firing and provided the Sales
Leaders with company-approved recruitment ads. Accordingly, we conclude that
the skill-and-initiative factor weighs strongly in favor of employee status.
E.
Finally, we consider the permanency of the working relationship. Mr. W
Fireworks, 814 F.2d at 1047. Most of the Sales Leaders worked for Cornerstone
for many years. However, Cornerstone notes that the Sales Leaders’ contracts
provided for at-will termination, and argues that, as a result, this case is
controlled by Hickey. In Hickey, we held that a salesman was an independent
contractor to the gas-products manufacturer whose products he sold. 699 F.2d
at 751–52. Although the salesmen had actually sold the manufacturer’s
products for ten years, we reasoned that the salesman was permitted to sell
competitors’ products and “was capable of terminating relations with [the
manufacturer] upon 30 days notice and taking his business organization and
talents to other manufacturers.” Id. Cornerstone contends that Hickey requires
us to give more weight to contractual language than to the actual length of the
working relationship. However, such a rule would be contrary to our general
approach to the economic-realities doctrine, see, e.g., Mr. W Fireworks, 814 F.2d
at 1047 (“[I]t is not what the [parties] could have done that counts, but as a
matter of economic reality what they actually do that is dispositive.”), and at
odds with our more recent applications of the permanency factor, see, e.g., id. at
1053–54 (discussing the actual length of the working relationship). We think
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Hickey’s conclusion is best confined to the situation it was addressing—a
nonexclusive business relationship between a supplier and a salesperson.
In this case, almost all of the Sales Leaders worked exclusively for
Cornerstone for several years. Cornerstone’s corporate representative
acknowledged that sales leaders generally remained in their positions for “a
significant period of time.” Furthermore, unlike the salesman in Hickey, the
Sales Leaders could not easily terminate the relationship and take their
“business organization” elsewhere. See Hickey, 699 F.2d at 752. The foundation
of the Sales Leaders’ business organization—their team of subordinate
salesmen—belonged exclusively to Cornerstone. As a matter of economic reality,
the permanency factor weighs in favor of employee status for the Sales Leaders.
F.
Because our factors are non-exhaustive, Cornerstone contends that certain
other factors weigh in favor of independent-contractor status. Specifically,
Cornerstone notes that the Sales Leaders contractually agreed to be, and
actually believed themselves to be, independent contractors. While this may be
accurate, “[s]ubjective beliefs cannot transmogrify objective economic realities.
A person’s subjective opinion that he is a businessman rather than an employee
does not change his status.” Mr. W Fireworks, 814 F.2d at 1049 (citations and
internal quotations omitted). Furthermore, “facile labels . . . are only relevant
to the extent that they mirror economic reality.” Id. at 1044 (internal quotations
omitted).
Cornerstone also contends that a finding of employee status will have a
profound effect on the insurance industry, in which the use of independent
contractors to sell policies is common. This concern is unfounded, as we deal
only with the management-level sales leaders in this case, not sales agents
generally.
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G.
After reviewing the undisputed facts in light of our five factors, we are
convinced that the district court correctly determined the Sales Leaders to be
employees under the FLSA. As a matter of economic reality, the Sales Leaders
were dependent upon Cornerstone to such an extent that they could not
plausibly be considered “in business for [themselves].” See Herman, 161 F.3d at
303. The Sales Leaders worked exclusively for Cornerstone for significant
periods of time and lacked the ability to exercise true initiative within the
business model. Cornerstone controlled the geographic territories, the choice of
products to sell, and the price of those products. Cornerstone unilaterally
determined the number of sales leads the Sales Leaders could receive and
effectively prevented the Sales Leaders from selling competing products or
operating other businesses. Perhaps most importantly, Cornerstone controlled
the foundation of the Sales Leaders’ ultimate success—the hiring, firing,
assignment, and promotion of the subordinate salespeople on whom the Sales
Leaders relied. Given these facts, we conclude that the Sales Leaders were
employees of Cornerstone as a matter of economic reality.
III
The Sales Leaders contend that the district court erred in invoking judicial
estoppel to dismiss Fox’s claims on summary judgment. While a grant of
summary judgment is generally reviewed de novo, we review the use of judicial
estoppel only for abuse of discretion. Kane v. Nat. Union Fire. Ins. Co., 535 F.3d
380, 384 (5th Cir. 2008). The abuse-of-discretion standard includes review of
whether the court was guided by erroneous legal conclusions. Id.
Judicial estoppel is an equitable doctrine that “prevents a party from
asserting a position in a legal proceeding that is contrary to a position previously
taken in the same or some earlier proceeding.” Hall v. GE Plastic Pac. PTE Ltd.,
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No. 07-10952
327 F.3d 391, 396 (5th Cir. 2003) (citations omitted). The purpose of the doctrine
is to “protect[] the essential integrity of the judicial process” by reducing the
“risk of inconsistent court determinations.” New Hampshire v. Maine, 532 U.S.
742, 750–51 (2001) (internal quotations omitted). Generally, we have recognized
at least two requirements to invoke the doctrine: (1) the party’s position must be
clearly inconsistent with its previous one, and (2) the previous court must have
accepted the party’s earlier position. Hall, 327 F.3d at 396; see also New
Hampshire, 532 U.S. at 750–51 (approving of the requirements in Hall as
general factors rather than inflexible or exhaustive prerequisites).
Sales Leader Fox was previously sued for sexual harassment under the
Texas Commission on Human Rights Act (“TCHRA”). See Tex. Lab. Code Ann.
§ 21.001 et seq. (Vernon 1996). As a defense to that action, Fox asserted in his
pleadings and during his deposition that he was an independent contractor and
thus outside scope of the TCHRA. The matter eventually settled before trial.
In this case, the district court invoked judicial estoppel to prevent Fox from
asserting his employee status under the FLSA. The court reasoned that Fox’s
prior defense in the TCHRA action was clearly inconsistent with his current
claim, and that Fox intended for the previous court to accept his defense.
Fox contends that the district court erred in determining that his claim of
employee status under the FLSA was “clearly inconsistent” with his earlier
claim of independent-contractor status under the TCHRA. We agree.
Despite the semantic inconsistency, it is legally possible to be an employee
for purposes of the FLSA and an independent contractor under most other
statutes. See Nationwide Mut., 503 U.S. at 326 (noting that the FLSA “stretches
the meaning of ‘employee’ to cover some parties who might not qualify as such
under a strict application of traditional agency law principles”). The TCHRA,
which was modeled after Title VII of the federal Civil Rights Act, uses a “hybrid
economic realities/common law control test” to determine employee status.
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No. 07-10952
Johnson v. Scott Fetzer Co., 124 S.W.3d 257, 263 (Tex. App.—Fort Worth 2003,
pet. denied). Because this hybrid test focuses on traditional agency notions of
control, it results in a narrower definition of employee than under a true
economic-realities test. See Deal v. State Farm County Mut. Ins. Co. of Texas,
5 F.3d 117, 118–19 (5th Cir. 1993) (discussing the hybrid test); Nationwide Mut.,
503 U.S. at 326. Furthermore, it is clearly possible for Fox to be an employee
under the FLSA even if he actually believes himself to be an independent
contractor. As the court below acknowledged, “[a] person’s subjective opinion
that he is a businessman rather than an employee does not change his status”
for purposes of the FLSA. Mr. W Fireworks, 814 F.2d at 1049. In sum, there is
no legal inconsistency in claiming to be an employee under the FLSA and an
independent contractor under the TCHRA.
While this conclusion may seem paradoxical, we are convinced that it is
in line with the purposes of the doctrine. Judicial estoppel is designed to reduce
“the risk of inconsistent court determinations.” New Hampshire, 532 U.S. at
750–51. Because Fox’s claim of employee status under the FLSA could not result
in a legally inconsistent court determination, we conclude that the district court
abused its discretion in applying judicial estoppel.2
2
Although our analysis of the clearly-inconsistent requirement disposes of the current
appeal, we note that the contours of our judicial-acceptance requirement are vague. In
practice, we have required that the prior court actually accept the party’s earlier position,
“either as a preliminary matter or as part of a final disposition.” See, e.g., In re Superior
Crewboats, Inc., 374 F.3d 330, 335 (5th Cir. 2004) (finding that the bankruptcy court accepted
the party’s previous position by issuing a “no asset” discharge). The Supreme Court appeared
to approve of this actual-acceptance approach in New Hampshire. 532 U.S. at 750–51 (“Absent
success in a prior proceeding, a party’s later inconsistent position introduces no risk of
inconsistent court determinations, and thus poses little threat to judicial integrity.”) (internal
citations and quotations omitted). On the other hand, New Hampshire did not purport to
establish “inflexible prerequisites,” id. at 751, and we have at times implied a broader
approach to our judicial-acceptance requirement, see Hall, 327 F.3d at 399. In Hall, we noted
in dicta that “[o]ur cases suggest that [judicial estoppel] may be applied whenever a party
makes an argument with the explicit intent to induce the district court’s reliance.” Id. In the
present case, the district court apparently relied on this statement from Hall in applying
judicial estoppel absent any indication that the prior court had accepted Fox’s position. While
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IV
For the foregoing reasons, we AFFIRM the district court’s grant of
summary judgment on the employee status of the plaintiffs under the FLSA. We
VACATE the district court’s grant of summary judgment on the issue of judicial
estoppel against Chris Fox, and REMAND for further proceedings consistent
with this opinion.
we need not rule on the validity of this decision here, we note its potential inconsistency with
our general approach and with the Supreme Court’s analysis in New Hampshire. 532 U.S. at
750–51.
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