NTTC Ray Riley and Becky Perlaky

Contractor, employee classification issues require careful handling

Aug. 1, 2014
WITH federal and state agencies on heightened awareness—especially on issues relating to the oil and gas industry—companies have to adjust their approach toward employees and contractors, according to Ryan T Hand, an attorney for Lorance & Thompson, PC, in Houston, Texas.

WITH federal and state agencies on heightened awareness—especially on issues relating to the oil and gas industry—companies have to adjust their approach toward employees and contractors, according to Ryan T Hand, an attorney for Lorance & Thompson, PC, in Houston, Texas.

In “Watch Your Class: Dispatcher and Contractor Classification Issues,” Hand said these are the agencies to watch, and the reason why: US Department of Labor (Fair Labor Standards Act minimum wage and overtime pay); US Internal Revenue Service (federal payroll taxes); state agencies (unemployment, revenue, worker’s compensation); and agencies with sharing agreements. Hand spoke during the National Tank Truck Carriers Tank Truck Safety & Security Council annual meeting June 3-5 in San Antonio, Texas.

He said that since Thomas E Perez was nominated as Secretary of Labor by President Obama on July 23, 2013, the oil and gas industry has been closely monitored, and the DOL has launched a multi-year enforcement initiative on classification issues. The DOL has hired more investigators and is holding outreach forums to educate workers.

Under the Fair Labor Standards Act (FLSA), covered employees must be paid at least the federal minimum wage of $7.25 for all hours worked, plus time and one-half their regular rates, including commissions, bonuses, and incentive pay, for hours worked beyond 40 per week. Additionally, employers must maintain accurate time and payroll records.

He said that in 2011, the DOL collected more than $5 million in back wages for minimum wage and overtime violations under FLSA that resulted from employees being misclassified as independent contractors or otherwise not treated as employees.

Independent contractors are not subject to the FLSA. The DOL focus is on whether they’re economically dependent on the alleged employer or truly in business for themselves. It depends on the circumstances, and looks beyond the contract, he said.

There are five non-exhaustive factors: the degree of control exercised by the alleged employer; the extent of the relative investments of the worker and the alleged employer; the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer; the skill and initiative required in performing the job; and the permanency of the relationship.

“For most people who ship goods in interstate commerce, you would be covered by the motor carrier exemption,” Hand said.

He said the most common exemptions from the FLSA’s requirements for the payment of overtime are workers employed in bona fide executive, administrative, or professional capacities.

“It’s never determined solely by looking at a job title or classification given to a worker,” he said. “It depends on the nature and extent of the activities performed by the worker.”

There is a Primary Duty Test in which the “primary duty” consists of the “management of the enterprise” in which he/she is employed “or a customarily recognized subdivision thereof.” The executive employee’s work must include “the customary and regular direction of the work” of two or more employees.

The regulations define an exempt administrative employee as one whose “primary duty” consists of: office or non-manual work directly related to management policies or general business operations; work requiring the exercise of discretion and independent judgment; or work directly related to management or general business operations, not merely clerical or secretarial tasks or tasks that are routine or repetitive without judgment.

He said the FLSA exempts “any employee with respect to whom the Secretary of Transportation has power to establish qualifications and maximum hours of service pursuant to the provisions of” the Motor Carrier Act of 1935. The alleged employee must be “engaged in activities of a character directly affecting the safety of operations of motor vehicles in the interstate transportation of passengers and property.” (29 C.F.R. § 782.2) The exemption does not apply to drivers operating motor vehicles that weigh 10,000 pounds or less.

A driver is defined as an occupation that directly affects the safety of motor vehicles. Whether the transportation between two points in a single state is interstate or intrastate depends on the shipment’s “essential character.” Transporting cargo solely within a single state is subject to the Secretary of Transportation’s jurisdiction where the transportation is part of a “practical continuity of movement” across state lines. If a stoppage in the movement represents “a convenient intermediate step in the process of getting goods to their final destinations, the goods remain ‘in commerce’ until they reach those points.” Commodities moved in pipelines and/or by other means in interstate transport but moved by truck solely intrastate can be interstate commerce.

Hand gave these practical takeaways:

Carefully draft owner/operator agreements, contractor language, taxes, hiring/firing, indemnification, maintenance, and ownership of equipment.

Carefully review operations.

Make sure managers know the rules. Hand said employers should train managers on the FLSA requirements: document proof of such training; provide neutral job references for past employees or contractors; conspicuously post a fact sheet outlining the prohibition of retaliation against employees who exercise rights under the act.

Dispute unemployment claims. “Do you ever have unemployment claims from folks who are independent contractors? On occasion, I’ve seen where they file an unemployment claim and it might slip through. You need to be diligent if that ever happens in fighting unemployment claims, because that might tip off the state agency that this isn’t really a contractor—this is an employee.”

Have job descriptions with broad and specific job duties and job titles, such as “City Dispatch Supervisor.” “If you want to make sure that your dispatchers are deemed an exempt employee such that you are not responsible for overtime, you want to make sure the job description is very broad and includes specific duties as well as broad duties as well as the title in and of itself.”

Document hours worked. “With truck drivers normally with logging hours of service, it’s pretty well documented. But with dispatchers, you don’t have documentation of their hours worked and if the Department of Labor decides they’re actually a non-exempt employee, they could hit you with record-keeping violations because you can’t prove how much they worked over 40 hours.”

If it’s a small amount, consider paying overtime for debatable positions. “I’m sure word gets out in the trucking industry and dispatchers learn that if they can get additional funds, they might try to file collective action against an employer. They might make a complaint to the Department of Labor and you are subject to investigation. The way Texas and the DOL are kicking up this issue, you might want to be on the lookout if any of those complaints come through and be careful how you respond, and don’t have a knee-jerk reaction to potentially retaliate.”

Perform due diligence with contractors. “Do they have insurance, their own equipment, pay taxes for unemployment, etcetera? You want to make sure their businesses are running properly and they’re not failing to have worker’s comp, not failing to have insurance or pay their taxes. If something happens and the employee doesn’t have the right insurance or if taxes are not being paid, then employees and government agencies come looking at the general contractor, the motor carrier.”

Hand said the DOL targeted a Texas tank truck fleet and crude oil hauler in a lawsuit that is still pending.

The DOL investigator determined that nearly 100 owner/operators under lease to a tank carrier are employees, not independent contractors, and found that dispatchers are non-exempt, although they were salaried employees. They were prepared to award back wages and agreed the drivers were exempt, but found record-keeping violations on the driver’s work. The tank carrier filed a declaration action, and the DOL filed a motion to dismiss on ripeness and lack of exhausting administrative efforts.

“Dispatchers do more than just dispatch,” Hand said. “Whenever I talk to a driver, I ask, ‘Who do you report to? Who is your boss?’ They always say the dispatcher. To me it’s pretty basic. They have a supervisory role, but the DOL looks at it as they just assign routes. Well, it’s more than that. The DOL needs to be educated. It’s a good thing this tank carrier is pushing the issue, because the DOL needs to know it’s way more than assigning loads.”   ♦

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