Chris Sutton – Partner, Clover Global Solutions, LP
The oil and gas industry has a strategic reliance on freelancers, 1099 contractors, consultants and small businesses, collectively referred to as “non-employees”. In both good times and current times of economic uncertainty the reliance depends upon continued availability and unique expertise of some contractors. Short-term, well-defined projects often turn into multiple years of full-time engagement.
At some point an individual who may be an employee of a contractor, is provided advice by their tax accountant that they should set-up their own company and become an independent contractor. The resulting legal entity may be an LLC, LP, or Inc. However, nothing about the consulting assignment has changed except a desire to control more of their bill rate and plans to claim additional tax deductions.
This scenario is somewhat unique versus other industries in which employers do not want to engage workers as employees. In oil and gas it is often employees who are asking to be classified as 1099s and creating the huge risks for employers as to fines, penalties, back-taxes, overtime claims and benefits.
SUBJECT: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.
Excerpts of this guidance as related to the Fair Labor Standards Act (FLSA) to be utilized in properly classifying workers and curtailing misclassification of employees as independent contractors follow:
Dr. David Well articulates, “Understanding that combating misclassification requires a multipronged approach, WHD has entered into memoranda of understanding with many of these states, as well as the Internal Revenue Service. In conjunction with these efforts, the Administrator believes that additional guidance regarding the application of the standards for determining who is an employee under the […] (FLSA or “the Act”) may be helpful to the regulated community in classifying workers and ultimately in [limiting] misclassification.”
Well points out, “an entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the entity. The factors typically include: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.
In applying the economic realities factors, courts have described independent contractors as those workers with economic independence who are operating a business of their own. On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA.
Moreover, the economic realities of the relationship, and not the label an employer gives it, are determinative. Thus, an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status.
The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.
In summary, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. […] Each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).”
Questions for you to consider:
- Based upon these guidelines, how many workers within your “non-employee” workforce are classified as independent contractor and have been properly vetted?
- What is the percentage of your contingent workforce that should be properly classified as W-2 employee of your company or should be a W-2 employee of a staffing firm on a contract assignment?
- Are you aware of the overtime claims, fines, penalties, and loss of company reputation that may result from your company’s misclassification and continued use of 1099/Independent Contractors?
- Would you like some assistance in answering questions 1 – 3 above? If so, contact 1099audit.com.
Chris Sutton has a sound foundation in the energy sector contracting from both client and contractor sides with specific expertise in working with oil and gas operators, senior leaders and program managers who are significantly challenged by today’s state of the industry and must deliver optimal results now, without creating new risks in: Re-engaging prior employees and furnishing client identified resources, cost reduction, HSE, compliance (day rate compensation plans and 1099 contractor compliance), flight risk, existing Vendor Management System (VMS) cost/value analysis, and supplier/contractor consolidation. To contact Chris with any questions or comments, please send an email to Chris.S@clovergs.com.