The use of independent contractors is prevalent in the oil and gas industry. Using such workers has certain advantages, including savings in employee benefits costs and payroll tax liabilities and additional flexibility to respond to shifting business needs. However, using such workers causes a business to run the risk of misclassifying individuals who should be treated as employees as independent contractors, which could result in significant wage, tax, and other liabilities. This risk has grown as oversight from governmental agencies has increased.
In recent years, businesses have faced enhanced enforcement efforts from the U.S. Department of Labor (DOL) and Internal Revenue Service (IRS) concerning the misclassification of employees as independent contractors. The DOL concluded that the oil and gas industry in particular is “ripe for noncompliance” with wage-hour laws due to the “fissured landscape” in which job sites that “used to be run by a single company can now have dozens of smaller contractors performing work.” Since 2012, the DOL has concluded more than 1,000 investigations and recovered more than $41,500,000 in back wages in an initiative focused on oil and gas related industries.
The DOL and IRS have pledged to share information and coordinate enforcement efforts to reduce the incidence of misclassification, reduce the tax gap, and improve compliance with federal tax and labor laws.
Businesses that classify workers as “independent contractors” (or other nonemployee workers) should ensure that their workers are properly classified. This is no simple task, as businesses that use such nonemployee workers must be able to justify such classification under all relevant laws, including the Fair Labor Standards Act, state wages and hour laws, workers’ compensation and unemployment compensation statutes, and state and federal tax codes.
Longstanding industry practice does not guarantee that a given classification decision will be upheld or insulate a business from liability for misclassification. Further, different but similar standards apply for determining whether a worker is an employee or an independent contractor under the various laws. Generally, these standards all depend on the degree of control the employer retains over the work performed and the amount of independence retained by the worker.
Often the best first step for an employer concerned about worker classification is to conduct an internal audit to help identify potential misclassification issues and develop a plan to address any potential deficiencies located in the audit. Particular care should be taken to ensure that like individuals are treated alike so that individuals performing the same job functions are not classified inconsistently. Members of Thompson & Knight’s Labor and Employment Practice Group and Tax Practice Group are available to assist employers with conducting audits and taking other steps to avoid misclassification issues and to help ensure compliance with applicable tax and employment laws.
 Press Release, U.S. Department of Labor Wage and Hour Division, Release No. 14-1883-PHI (Dec. 10, 2014).
 News Release, U.S. Department of Labor Wage and Hour Division, Release No. 16-1221-SAN (Sept. 8, 2016).
 Memorandum of Understanding between the Internal Revenue Service and the United States Department of Labor (Sept. 19, 2011).
Thompson & Knight LLP