If You Required Contractors to Form LLCs, Run This FLSA Employee Audit

The LLC paper does not answer the work question

A franchise agreement can look complete. Then a court says the workers were employees. In United States Department of Labor v. Jani-King of Oklahoma Inc., Judge Charles Goodwin granted the Department of Labor's summary judgment motion and denied Jani-King's motion on September 21, 2026. A federal judge found that an Oklahoma janitorial company wrongly treated its franchise owners as independent contractors rather than employees.

The order permanently enjoins Jani-King of Oklahoma, Inc. and persons acting at its direction from violating FLSA sections 11(c) and 15(a)(5). It obliges Jani-King of Oklahoma, Inc. to maintain proper employee records under 29 U.S.C. 211(c) and 215(a)(5). Goodwin of the US District Court for the Western District of Oklahoma required the company to begin maintaining employment records for its franchise owners under federal law. It connects Jani-King of Oklahoma, Inc.'s recordkeeping to hours and other employment conditions prescribed by 29 C.F.R. 516.0 et seq.

Who counts as an employee is the practical question. The economic realities test can make a franchise owner, contractor, or sole-prop operator an employee. A clean contract is not enough when the work is controlled.

Run the audit before payroll

Use this checklist when your business requires or pressures a worker to form an LLC, sole proprietorship, or other entity. It is a Monday-morning test, not a legal opinion. Bring the contract, the onboarding file, and the payroll file to the same table. Any failed item stops the audit and requires a written note.

• Name the person who actually performs the work, not the LLC or franchise entity.
• Mark whether your paperwork required or pushed that person to form an entity before starting.
• Score control over schedule, method, quality, and day-to-day performance.
• Pull records for hours, pay, and working conditions; missing records are an employee record gap.

The checklist starts with the person, because the law looks at the human being doing the work. A company-directed LLC can be evidence of control, not independence. Control is where most audits turn, and records are what a regulator or court will ask for first.

Control is the audit

Do not ask whether the worker has an EIN, a business card, or a vendor invoice. Ask whether your managers set the schedule, approve the method, inspect the quality, and direct the daily performance. Yes on several fronts makes the relationship look like employment, even when the contract says contractor.

Separate the law from good practice. The law requires you to determine FLSA employee status and keep required records when the person is an employee. Good practice is to document the control analysis before you onboard, not after a dispute. Control over the work, performed personally by the individual, makes contractor reclassification the safer path.

Reclassification triggers are payroll, overtime, taxes, and benefits. Each needs a different fix: wage and hour treatment, hours tracking, withholding and reporting, and eligibility review. You do not need to solve all of them in one meeting, but you need to know which ones are live.

Records are where the exposure shows

Recordkeeping is the proof of hours, pay, and conditions, not a paperwork formality. A contractor file with no hours, no schedule, and no quality notes cannot show independence. A file that looks like an employee file may not be saved by the entity label. The Jani-King records requirement is the practical endpoint of the audit: if the work is employee work, the records must be employee records.

When control is yes and records are no, stop calling the relationship contractor. Correct payroll, hours, taxes, and the file before the next invoice.