Costly Wage and Hour Claims Under the FLSA: Four Questions Energy Companies Must Ask About Independent Contractors

Increased scrutiny of the oil and gas industry by the US Department of Labor (DOL) has led to investigations regarding compliance with complex regulations involving classification of workers and pay practices. As a result, some employers have paid large settlements to the US government. Beyond the immediate costs and reptutational damage these settlements can cause, they also lead to exposure to private collective- or class-action lawsuits for companies across the sector. The risk of exposure, whether through DOL audits or litigation, is high. For these reasons, preventative review of compliance with all aspects of the wage and hour laws is recommended.

Among the areas of closest examination by the DOL is the misclassification of workers as independent contractors (IC’s).  Oil patch companies routinely hire roughnecks, crane operators, welders, and other industry-specific freelancers, making these companies targets for regulatory authorities. Recent guidance issued by the DOL is explicit in its concern: “The misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy. Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces.”  The DOL states that employee misclassification results in substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. It hurts taxpayers and undermines the economy.  In addition to regulatory concerns, misclassification of workers can lead to potential and costly liability for companies managing risk in an already turbulent market.

Energy Ally Law

Accordingly, although the assessment is complicated, there are four key questions employers should ask themselves to determine whether they are properly classifying their workers:

Is the worker performing the same or similar duties as employees? 

Independent contractors, as defined by your company, should have special skills not found within the base of employees. Is he really in business for himself?  It’s important to have clear, written agreements with each IC that address the scope and terms of their work, and to review those agreements regularly to ensure the tasks IC’s are actually performing match those stated in the agreement both parties have signed.

Does the worker control the work he is performing?

A key consideration by the DOL in defining employees versus IC’s is whether a company controls the nature and degree of the work that is performed. It’s important that your IC’s provide their own tools and determine how the defined tasks should be carried out. Companies should avoid providing equipment, office space, or company email accounts to IC’s.

Does the IC work for a short, defined period of time? 

Based on the FLSA standard, companies should hire IC’s for a very specific period of time based on the services they provide or within the scope of a particular project to be completed.

 How do IC’s interact with your employees? 

Make certain IC’s do not take part in the same training programs as your employees do, and ensure IC’s do not receive similar bonuses or other awards for performance. Managers should be educated refrain from suggesting to IC’s that they have a formal employment relationship with the company.

No single factor is determinative.  Ultimately, the overarching issue for employers boils down to one question: as a matter of economic reality, is the worker economically dependent upon the company, or is he in business for himself?  The correct classification of workers is critical and may warrant legal review if your company employs IC’s to ensure you are not running afoul of this aspect of the DOL’s complex wage-and-hour laws.

By Ally Law.

For other Global Matters articles on issues relating to independent contractors, see Independent Contractor Or Employee: Canada Has A Third Classification and Independent Contractor or Employee: The U.S. Government Takes a Broad View Of The Definition of “Employee”.