In a perfect world, there would be a single employee vs. contractor test with a few clear-cut, easy to apply elements.
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For employers throughout the oil patch, misclassification of workers as independent contractors has morphed from an uneventful, everyday occurrence to a gaping hole that gives government agencies, trial lawyers and others the opportunity and the motivation to make employers’ lives miserable. Awareness of this changing legal and compliance landscape is particularly important given the industry’s historic reliance on contract workers.
Employers in the oil and gas industry should be well aware of the writing on the wall by now. After all, authorities have been focusing investigative resources on energy companies for several years. We’ve seen thousands of investigations and the recovery of more than $40 million in back wages. But the industry’s wildcatter spirit is strong, and many remain reluctant to change. Recognizing the problem and the risk at stake is an important first step, which we addressed in this commentary’s first installment. Now we will take a look at the self-examination tools necessary to stay out of trouble.
In a perfect world, there would be a single employee vs. contractor test with a few clear-cut, easy to apply elements. Instead, we have different tests used in various federal statutes (e.g., those governing tax, benefits, employment discrimination, unemployment compensation, workers’ compensation, labor unions). The task is even more complicated for multi-state employers who are subject to a variety of related state laws. Add to that, some of the tests have more than a dozen elements to consider and the weight accorded each element can vary with the type of work at issue.
Tests that help identify workers versus contractors contain some or all of the following elements:
- Right to Control – “Employees” are told by their employer when, where and how their job is to be done. “Contractors” may be told what the final result should be, but not how to get there.
- Integration – Employees’ work is part of the employer’s business operations. Contractors’ work is separate from and often unrelated to the product or service of the employer’s business. Having employees and contractors who perform the same tasks usually means the contractors are misclassified.
- Economic Dependency – Employees are usually dependent upon a single employer for their livelihood. Contractors are not, since they tend to work for a series of employers rather than for a single employer for an extended period of time or via a series of stints.
- Method of Payment – Employees are paid a wage, salary and/or commission. Contractors are paid a flat rate fee for each job. This approach supports the next element, in that employees are somewhat insulated from profit/loss via a regular wage or salary, but contractors are not.
- Potential for Profit/Loss – Employees are paid for their time and not necessarily the result of their efforts. Contractors stand to make a profit, if they negotiate an appropriate fee, use their time efficiently and manage their expenses. Contractors also stand to lose, since unsatisfactory work will need to be corrected without additional pay, of if they are poor managers of their resources.
- Work-Related Expenses – Employees are provided with a corporate credit card or reimbursed for work-related travel and similar expenses. Contractors build their expenses into their fee and are not reimbursed for discrete expenses.
- Tools and Equipment – Employees are provided with the tools and equipment necessary to do their jobs. Contractors provide their own tools and equipment, or pay a fee to use the employer’s tools and equipment.
- Investment – Employees have little or no investment in the employer’s business. Contractors are business owners and normally have a significant investment in their business. The U.S. Department of Labor recognizes that both the “contractor” and employer may have investment in their respective businesses, so they examine the contractor’s investment relative to the employer’s investment.
- Permanency of the Relationship – Employees, while often employed at-will, have a general expectation of continued employment if they are doing a good job. Contractors are hired for a project of limited duration, with no expectation of continued or repeat work.
- Right to Discharge – At-will employees can be discharged at any time and the employer has no further obligation to that person. Contractors who are discharged before an agreed-upon project is complete may be able to sue the employer for breach of contract.
- Right to Quit – At-will employees can quit at any time and have no further obligation to the employer. Contractors who quit before an agreed-upon project is complete can be sued by the employer for breach of contract.
Now that you understand the new landscape, here are recommended steps to help employers determine whether workers are employees or contractors under the law:
- Survey your payroll and accounting functions to identify how many contractors you are presently using. If there are quite a few, prepare a spreadsheet to show where they are (city, state), what their job functions are, how they’ve been paid, how much they’ve been paid, and how long they’ve been working for you.
- Research state law for the locations of your contractors to determine if there are statutes or regulations which must be used to determine employee vs. contractor status. Some states’ workforce commission websites offer plain language explanations of their tests.
- Determine if you have employees performing the same job functions as contractors. If the answer is “yes” you can likely skip the in-depth analysis and concede that these workers should’ve been classified as employees.
- For any contractors that remain, apply the tests discussed above. Your HR team, in-house lawyer or outside counsel with labor & employment expertise can help you complete the analyses.
- Decide how to handle misclassified workers (e.g., terminate the relationship, convert to employee status) and plan communication of your decision. Be prepared for this change to trigger questions about past entitlements (e.g., overtime, benefits).
- Centralize the authority for creating new or for renewing existing contractor relationships and impose a checklist which includes review of the aforementioned elements.
- Keep an eye open for changes in this rapidly developing area of law. Past attempts to create a single, federal test that employers could rely on failed, but Congress may try again.
Clearly, this is an issue that is not going away, and there’s already a long list of energy oriented businesses that have endured lawsuits by workers and enforcement actions by authorities. The risk at stake is very real, and awareness of the changing landscape and an action plan to correct employee status is something that every business in the energy space should be considering.
Audrey Mross is a senior partner at Munck Wilson Mandala, where she leads the firm’s Labor and Employment Section and writes a monthly update on employment issues called Legal Briefs for HR. You can request to be added to the distribution for this free service at firstname.lastname@example.org.
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