11th Circuit Clarifies “Employee” vs. “Contractor” Definition – What Does This Mean for Mortgage?

The Eleventh Circuit’s recent decision in Galarza v. One Call Claims, LLC is a signal that courts, like regulators, may closely scrutinize the line between independent contractors and employees under the Fair Labor Standards Act (FLSA).

The ruling reinstated an overtime case brought by three insurance adjusters who had been classified as contractors, holding that a jury could find they were actually employees entitled to FLSA protection.

While the case arose outside the mortgage industry, its reasoning has direct implications for lenders and brokers that rely on so-called “1099” loan originators or contract processors.

Court Rejects “Independent Contractor” Label

The plaintiffs, licensed insurance adjusters engaged by a claims outsourcing company, argued they worked full-time for nearly two years under tight schedules and oversight following Hurricane Harvey.

Although their contracts labeled them as independent contractors, the Eleventh Circuit emphasized that labels do not control.

What matters under the FLSA is the economic reality of the relationship.

The court applied the existing six-factor test, finding that five of the six factors supported employee, rather than contractor, status:

• Control: The company dictated hours, monitored productivity, required timesheets, and restricted work for others.

• Profit or Loss: Pay rates were fixed; workers had no meaningful opportunity to increase income through managerial skill.

• Investment: The company provided most tools, software, and systems, while worker investments were minimal.

• Permanency: The engagement lasted nearly two years, with no real ability to work elsewhere.

• Integral Role: The adjusters performed the company’s core function, claims adjustment.

Only the specialized licensing requirement marginally supported contractor status.

Because the workers were economically dependent on the company, the Eleventh Circuit reversed summary judgment and sent the case back for trial.

Why It Matters for Mortgage Executives

For lenders and brokers that rely on commission-based or 1099 loan originators, the Galarza decision underscores increasing judicial skepticism toward contractor classifications.

The court’s “economic reality” approach, emphasizing control, exclusivity, duration, and dependence, closely parallels the tests regulators and courts often use in employment cases.

Key takeaways for mortgage companies:

• Labeling is irrelevant. Calling a worker an “independent contractor” will not withstand scrutiny if the relationship functions like employment.

• Exclusive or full-time work is risky. Requiring 1099 LOs to work set hours or prohibiting side business can suggest employee status.

• Providing tools and systems (e.g., loan origination platforms, leads, or branding) can weigh heavily toward an employer-employee finding.

• Control over compensation, such as dictating commissions, pricing, or loan terms, reinforces dependence.

The Bottom Line

The Eleventh Circuit’s ruling serves as a wake-up call: courts are looking past contract language to the actual economic relationship.

For mortgage firms, that means renewed focus on how compensation, supervision, and exclusivity clauses are structured.

A misstep could convert an entire 1099 sales force into employees for FLSA, tax, and state-law purposes, bringing substantial wage-and-hour and regulatory exposure.

We leave aside regulatory concerns that can arise if the individuals actually are contractors, and are not suggesting this is a clearly settled area of law.

Need Guidance?

Our firm helps lenders and mortgage companies audit their compensation and classification models for FLSA and Dodd-Frank compliance.

For more information, contact troy@garrishorn.com.