Worker Misclassification

Under the Fair Labor Standards Act (FLSA), employees are not allowed to volunteer their services to for-profit private sector employers; although in the vast majority of circumstances, individuals may volunteer services to public sector employers. The United States District Court for the District of Columbia made this clear on September 26^th when it held that a for-profit business that hosts semi-annual consignment sales of used children’s clothing and merchandise could not rely on the labor of unpaid “consignor/volunteers”, who donated their time in exchange for early access to shop the sales merchandise, to help organize and run the event. The Department of Labor determined, and the court upheld, that the laborers were employees and therefore were entitled to back wages for the work they conducted on behalf of the employer.

The court noted that the “economic reality” test is determinative, even if the person views their own role as that of a volunteer. The court further noted that while a variety of factors may be used when applying the test, such as the fact that the consignors/volunteers expected a benefit in exchange for working, the business exercised some control over and depended upon the work of the consignors/volunteers. Throughout the record before the court was a long list of corroborating statements from volunteers that stated that they worked in order to obtain early access to shop the merchandise, “not simply for personal pleasure or out of the goodness of their hearts.”

Additionally, the fact that the work conducted by the “consignors/volunteers” was imperative for the success of the business meant that the consignment shop received an “immediate advantage” from the labor performed. Without the “volunteers/consignors” hanging and folding clothes, opening doors for shoppers, straightening merchandise, working cash registers, helping customers, and sorting items after the sale ended, the business owner would have been forced to find hourly wage workers—which she did when an insufficient number of consignors/volunteers signed up.

Because the consignors/volunteers acted like employees and were treated like employees, the court held that comporting with the “underlying ‘remedial and humanitarian’ purpose of the FLSA,” the Department of Labor was correct in concluding that the consignors/volunteers were employees and thus were entitled to wages and overtime compensation under the law.

Image via pixabay.

The Fair Labor Standards Act (“FLSA”) was designed to protect workers from employers who may otherwise take advantage of their employees. Generally, the FLSA requires employers to pay an overtime premium to non-exempt employees of one and a half times the employee’s regular rate of pay for all hours worked in excess of 40 within a workweek and to also pay at least the minimum wage for all hours worked.

In the rapidly growing oil and gas industry, however, wage and hour violations have become more common as companies seek ways to lower their labor costs:

1. Day Rate Pay Without Overtime

One common type of violation occurs when an employee receives a “day rate” payment without overtime. A “day rate” method of payment is a flat sum for a day’s work without regard to the number of hours worked in the day. Simply paying employees a day rate does not, however, negate the FLSA’s requirement that non-exempt employees receive overtime at a rate of 1.5 times the regular rate for all hours worked over 40. To comply with the FLSA, employers who use this method of compensation must therefore pay non-exempt employees a premium overtime rate. There is often plenty of room for error in calculating an employee’s overtime on a day rate of pay, as this rate can fluctuate depending on the amount of hours worked.

2. Independent Contractor v. Employee Misclassification

Additionally, some employers try to avoid their obligations under the FLSA by classifying workers as independent contractors, rather than employees. Independent contractors are not subject to the many of the FLSA’s protections, including overtime, so employers often “misclassify” workers to eliminate certain tax obligations or other costs otherwise owed to employees.

This technique is fairly common in the oil and gas industry, where much of the day-to-day work on oil rigs and gas wells is sub-contracted out to other companies. But it is the actual employment relationship—not the label—that controls whether an individual is an employee or an independent contractor for the purposes of the FLSA. For example, one of the various tests applied by courts in making this determination (“economic reality test”) takes into consideration 6 different factors: (1) the permanency of the relationship; (2) the degree of skill required; (3) whether the worker contributes services that are an integral part of the business; (4) the employer’s control over the worker; (5) the worker’s opportunity for profit or loss; and (6) the worker’s investment in materials and equipment.

Defining employee status can be complex and it all depends on the circumstances surrounding the employment relationship as a whole. Additionally, misclassification can expose employers to serious liability—including payment of back wages, liquidated damages, and attorney’ fees—when violations are found.

Life Alert Emergency Response Inc. sought and received court approval last year of a $3.2 million wage and hour settlement with more than 2,000 current and former employees in a Fair Labor Standards Act (FLSA) minimum wage and overtime suit.

The workers’ class action suit filed as a collective pursuant to Federal Rule 216(b) alleged that Life Alert, a maker of emergency-response devices for senior citizens, misclassified them as independent contractors and thus failed to pay their proper overtime wages. In April this year, a United States District Judge issued the FLSA settlement order.

FLSA settlement order for Life Alert

The deal covers three settlement classes: the workers in New York and the workers in Florida classified as independent contractors from Sept. 15, 2000 to March 31, 2016; and those who joined the FLSA class action before Oct. 1, 2015, within three years of their employment.

Of the $3.2 million settlement amount, 23% is allocated by the court to the FLSA class, 34% to the New York class and 43% to the Florida class. These are based on their work weeks and the likely damages they would have recovered if they won their case, according to the court.

Participation in the Settlement

Reports estimated that the 781 workers from the New York class will receive an average award of $2,136 each; the 957 Florida workers an average of $1,711 each; and the 372 members of the FLSA class an average of $1,499 each.

One of the WAG Lawyers, a group of FLSA lawyers dedicated to ensuring people receive their proper wages, said more qualified Life Alert workers could have recovered a part of their unpaid wages through the deal had they opted in . He expressed hopes that in the future, more of the affected workers will join the FLSA collective suit or, in the case of the New York and Florida classes, more will submit claims. He encouraged all misclassified workers to discuss with a qualified lawyer whether they have a claim, since companies often convince the workers they are independent contractors not entitled to overtime, when in fact they are employees who should receive overtime pay.

In the Life Alert deal signed to end the workers’ employment class suit, many of the affected workers do not stand to recover their unpaid wages. The covered FLSA class consists of 372 sales persons who joined the FLSA collective, out of the 1,400 potential FLSA plaintiffs who worked in Life Alert offices nationwide.  Those covered FLSA class members can recover their share in the settlement without filing a claim form, said US District Judge Lorna Schofield in her opinion and order last April.

The New York and Florida parties to the settlement, meanwhile, cover only those who submitted a proper and timely claim form — 781 workers from New York and 957 from Florida — because in Life Alert’s settlement, they are Rule 23 opt-out classes. The class members who submitted claim forms represented 53% of the New York class work weeks and 59% percent of the Florida class work weeks.

The lawyers who represented the workers are set to receive 21.5% of the total settlement amount, plus more than $34,000 as reimbursement of their expenses in prosecuting the case.  Life Alert will retain any unclaimed part of the $3.2 million settlement, in this case no less than $709,963.54.

The oil and gas industry continues to support millions of jobs across the country.  In particular, major fracking operations employ many Americans in a wide variety of positions.  Employers in fracking operations often pay workers on a salary and bestow titles like “supervisor” on them in an effort to create the illusion they are exempt from receiving overtime.

Recently, in a case pending in Western District of Pennsylvania, a class of “frac supervisor I’s” obtained a $2.1 million dollar settlement against their employers: Keane Frac GP LLC, Keane Frac LP and Keane Group Holdings LLC (“Keane”).   The class members alleged that their employers violated the Fair Labor Standards Act (FLSA) by misclassifying them as exempt from overtime.  Although the class members were given the title of “Supervisor,” the class members argued that their primary duty was not to supervise hourly employees, but instead, to work alongside the hourly employees in the performance of manual labor tasks such as working on the hydraulic fracking pumps, and rigging up and down.

In response to the Complaint, Keane raised 23 affirmative defenses.  Specifically, Keane relied heavily on the Executive Exemption to the overtime requirements of the FLSA.  The Executive Exemption applies to employees if: 1) they are compensated on a salary basis; 2) their primary duty is management; 3) they customarily and regularly direct the work of two or more other employees; and 4) they have authority to hire or fire other employees or their suggestions and recommendations on personnel decisions are given particular weight.

No decision was reached regarding whether the application of the exemption was lawful because the parties reached the $2.1 million dollar settlement shortly after the Court granted the plaintiffs motion for conditional class certification.  Keane’s alleged misclassification of its employees has become an all too common complaint in the fracking industry.

Recent Guidance from the United States Court of Appeals for the Fifth Circuit

On May 30, 2017, the United States Court of Appeals for the Fifth Circuit found in favor of a group of mud engineers that were also classified as exempt from overtime.  A mud engineer works in a fracking operation to ensure the properties of the drilling fluid, also known as drilling mud, are within designated specification as set forth in the mud plan, which is created by a project manager.  The Plaintiffs testified that they did not have authority to deviate from the mud plan.  To ensure the drilling mud is performing adequately and within its designated parameters, mud engineers run a number of tests on the mud’s PH, rheology, weight, and viscosity.  The Fifth Circuit reversed the lower court’s decision that the mud engineers were exempt from overtime and held that the case should proceed for a jury to decide whether the administrative exemption should apply.  The full opinion can be found at Dewan v M-I, LLC, 858 F.3d 331 (5^th Cir. 2017). 

Violations of Federal Labor Laws and the Department of Labor’s Intervention

The fracking industry provides a number of occupations and job titles to Americans.  There are also a number of different methods of paying employees that work in the industry.  For example, many workers in the industry are paid on a day-rate basis, which pays a flat rate regardless of the number of hours worked in a day.  However, in many circumstances, an employer’s decision to pay an employee on a day-rate basis can implicate serious violations of state and federal law.

Congress enacted the FLSA in an effort to ensure that each employee covered by the Act would receive a fair day’s pay for a fair day’s work.  One way that the FLSA seeks to achieve this goal is through its overtime provision, which requires and employer to compensate any covered employee who works in excess of 40 hours in a workweek at a rate not less than one and one-half times the employee’s regular hourly rate.

In the fracking industry, employers continue to be the target of scrutiny from the Department of Labor for what might politely be described as questionable practices in the way they classify their employees.  In 2012, the Department of Labor (DOL) began a special enforcement initiative aimed at cracking down on misclassification and unpaid wages in the fracking industry.  Since then DOL began its special enforcement initiative, there has been an uptick in successful lawsuits from employees in a wide array of fracking positions.