DOL’s Recent Guidance on the “Economic Realities” Test and Effects on Independent Contractor Misclassification in the Energy Industry

Paying hot-shot drivers by the load or mile? Contracting out repair work to vehicles or machinery? Are individuals who regularly perform work integral to your business being paid through accounts payable? Have welders that you regularly call for work? Under new guidance published by the U.S. Department of Labor (DOL), what might be considered standard or normal practices in the energy industry could expose employers to claims and the risk of significant damages under the Fair Labor Standards Act (FLSA).

Classifying workers as independent contractors has certain business advantages, including exemption from the FLSA’s requirements. However, the DOL has created an enforcement initiative focusing on whether such workers have been misclassified as independent contractors under federal wage laws. On July 15, 2015, David Weil, who assumed the post of Wage and Hour Division Administrator in May 2014, issued Interpretation No. 2015-1, explaining the Department’s stance on independent contractor classification, specifically clarifying its interpretations of each element of the “economic realities” test used by courts to determine employee/independent contractor status. 

This new guidance from the DOL has particular significance to the energy industry, in which the use of independent contractors is a common practice that reaches into and affects various facets of daily business and operations. With energy industry companies already in the crosshairs of challenges to its methods of compensation, understanding the nuances of the DOL’s recently pronounced position is important for all in the industry.

The guidance begins by pointing to the FLSA’s broad definition of “employ” as “to suffer or permit” an individual to work and opines that the vast majority of workers should accordingly be classified as employees in order to achieve the FLSA’s statutory purpose. Notably, the DOL is likely to use the same interpretation of the “economic realities” test in determining independent contractor status under the Family and Medical Leave Act, as the two statutes have the same definition of “employ.” 

According to the DOL, the ultimate goal of the “economic realities” test is “not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” Under the test, no single factor is determinative, but rather each should be viewed in light of all facts and circumstances.

Factor 1:  Is the Work Integral to the Company’s Business? 

Initially, determine whether the work being performed is integral to the company’s business. The question here is: “Are the worker’s duties primarily related to the products or services that the employer provides?” If the answer is yes, then the work is integral, and it is more likely the individual is an employee and not an independent contractor. DOL investigators and plaintiffs’ lawyers are very likely to contend that oilfield workers such as hot-shot drivers, welders, and mechanics are “integral” workers since they deliver, assemble, or repair crucial parts and components that keep the work on the well going or make it possible in the first place. Similarly, DOL investigators and plaintiffs’ lawyers will argue that “primarily related” is such a broad and flexible standard that nearly everyone who affects an oilfield company’s ability to serve its customers should satisfy this part of the test. Also, the DOL takes the position that being one of a large group of workers, or performing work away from the company’s premises, does not affect this analysis.

Factor 2: To What Extent Is the Worker Invested in the Company’s Business? 

Next, examine how invested the worker is in the company’s business. For example, did the worker purchase equipment or other assets of the company? If the investments are minor compared to the company’s overall investment—such as a driver who owns his work vehicle or a mechanic who owns his tools, compared to an employer’s investment in a project that may reach into the millions of dollars—this factor is less indicative of an independent contractor relationship.

Factor 3:  How Permanent Is the Relationship?

The third consideration is the permanency of the work relationship. Keep in mind that the traditional definition of an independent contractor is an individual who works a single job, with the option to continue performing work for the same company or to find work elsewhere. If the worker does not have this type of independence, the risk that the worker should be classified as an employee escalates. Thus, even if work is seasonal or an assignment lasts only for a few weeks or months, the worker may nevertheless be deemed an employee.

Factor 4:  What Degree of Control Does the Company Exercise Over the Worker?

Another significant issue is the degree of control the company exercises over the worker. A technician or inspector who controls his own schedule, hours, or daily duties is more likely an independent contractor. However, according to the DOL, a company’s lack of direct supervision over workers who work in the oilfield is not determinative, so long as the company directs other meaningful aspects of the work.

Additional factors that can aid the determination of independent contract status are whether the worker’s duties require special skills or initiative and whether the worker has an opportunity for profit or loss depending on the exercise of his or her managerial skill.

Federal investigators are committed to ferreting out non-compliant employers in industries in which the DOL has identified worker misclassification as a chronic issue. In light of this new guidance from the DOL, companies that apply 1099 treatment to certain workers or have independent contractor agreements designating them as such should be proactive in confirming their classifications are correct under the FSLA.