The Department of Labor, Internal Revenue Service (“IRS”), and state agencies such as the Texas Workforce Commission (“TWC”) are scrutinizing energy companies that have allegedly misclassified workers to avoid paying payroll taxes and other labor-related expenses. These government agencies are conducting audits to determine whether workers should be classified as employees or independent contractors of the business. Worker classification audits have spanned various industries, but many energy companies have been recently targeted. In addition, class action litigation has been filed against energy companies on behalf of workers allegedly misclassified as independent contractors.
The classification of workers can impact businesses in a number of ways and create more than employment tax exposure. Businesses can be exposed to liability for unpaid state payroll taxes, state workers’ compensation, unemployment benefits, penalties and fines for federal wage and hour law violations, and unfunded health insurance, fringe benefit, and retirement plan obligations.
Worker classification audits are of particular concern to energy companies with workers performing similar tasks in the field, with some workers classified as employees and others as independent contractors. In particular, the TWC has issued determination letters characterizing workers from “contractor companies” as employees of the energy company and not independent contractors. Generally, the TWC’s rationale is that the workers must be employees of the energy company if they are not considered employees of a “contractor company.”
The misclassification of workers is clearly a focus for the IRS. For example, in early 2014, the IRS launched an enhanced effort to promote its SS-8 program, which allows individual workers to file a Form SS-8 to initiate a review of their independent contractor status if these workers feel they have been misclassified. In addition, the IRS has entered into a memorandum of agreement with the Department of Labor which seeks to reduce incidences of misclassification of employees as independent contractors by providing for the sharing of information and collaboration by the tax and labor agencies, as well as employment tax examinations of questionable taxpayers brought to the attention of the IRS by the Department of Labor.
Additionally, the Department of Labor has recently issued grants to state agencies including the TWC to focus on worker misclassification. These agencies are using the funds to conduct audits and issue increasing numbers of determination letters classifying workers as employees. In Texas, a determination letter is disputed by participating in a “Rule 13 hearing.” This process is often burdensome, requiring businesses to expend significant resources defending their policies and procedures.
Energy companies that make substantial use of “contractor company” workers should review their strategies and procedures to assure compliance with labor and tax rules. Norton Rose Fulbright is pleased to consult with energy companies concerned about these issues.