In its continuing effort to strengthen employee rights in the workplace, the U.S. Department of Labor (“DOL”) has placed an increased emphasis on investigating compliance with the Fair Labor Standards Act (“FLSA”) in the oil and gas industry. In particular, the DOL is focusing on the industry’s classification of its workers, i.e., whether employers within the oil and gas industry are correctly identifying workers as independent contractors ineligible for overtime pay.

The FLSA requires all covered employees to be paid for all hours worked in a week. “Hours worked” includes all time an employee must be on duty, on the employer’s premises or at any other prescribed place of work, from the beginning to the end of the employee’s workday. Additionally, the FLSA requires covered employees to be paid at least the federal minimum wage for all hours worked, plus time and one-half their regular rates of pay (including commissions, bonuses and incentive pay) for hours worked beyond 40 hours per week. To ensure that employers accurately track time worked by their employees, the FLSA also requires employers to maintain accurate time and payroll records.

Often times, business models and day-to-day practices result in employers misclassifying workers as independent contractors rather than employees. As a result of this misclassification, employers believe they are exempt from the aforementioned minimum wage and overtime requirements of the FLSA. However, whether a worker is an employee or an independent contractor under the FLSA is determined by the actual relationship between the worker and the business – not by an employer’s subjective classification of the worker. Therefore, simply providing employees with IRS Forms 1099 instead of IRS Forms W-2, or signing a contract to that effect, does not transform them into legitimate independent contractors under the FLSA.

Instead, in determining whether a worker is an employee or an independent contractor, the DOL performs an Economic Reality Test. The factors analyzed by the DOL in employing the Economic Reality Test include:

  • The extent to which the services rendered are an integral part of the principal’s business;
  • The permanency of the relationship;
  • The amount of the alleged contractors’ investment in facilities and equipment;
  • The nature and degree of control by the principal;
  • The alleged contractor’s opportunities for profit and loss;
  • The amount of initiative, judgment or foresight in open market competition with others required for the success of the claimed independent contractor; and
  • The degree of independent business organization and operation.

The DOL is directly targeting employers within the oil and gas industry because the DOL believes that employers in this industry are failing to perform the Economic Reality Test and are misclassifying employees as independent contractors. In fact, in the last couple of years, the DOL has performed numerous investigations targeting worker classification in the oil and gas industry, recovering hundreds of thousands of dollars. One example is a recent investigation into oil and gas equipment manufacturer Honghua America LLC, who was required to pay over $687,000 in overtime back wages to workers it had misclassified as independent contractors. Another example is Groundwater and Environmental Services Inc., which was required to pay more than $187,000 in back wages for time and attendance violations resulting from misclassification of its workers.

Separately, the IRS is working with the DOL to expand the investigation and enforcement of claims for worker misclassification because such misclassification also results in a failure to pay appropriate payroll taxes. Therefore, if, for example, the DOL conducts and audit and determines that workers were misclassified, then, in additional to possible overtime pay, the employer also may be obligated to pay additional payroll taxes and penalties.

To help avoid potentially significant claims, employers should proactively engage counsel to review and assess their respective worker classifications. Employers can limit their potential financial exposure by having counsel review their worker classifications prior to an FLSA audit by the DOL. Please contact Brian Clark, Jill Lashay, Anthony Andrisano or your relationship attorney at Buchanan Ingersoll & Rooney for further assistance.