1. w w w. j a c k s o n k e l l y. c o m Erin E. Magee, Esquire Charleston, West Virginia Pittsburgh, Pennsylvania Phone: (304) 340-1360 (304) 539-8360 emagee@jacksonkelly.com www.jacksonkelly.com USING INDEPENDENT CONTRACTORS IN THE WEST VIRGINIA WORKPLACE 2013 WVONGA ANNUAL FALL MEETING WHEELING, WEST VIRGINIA SEPTEMBER 12, 2013

2. w w w. j a c k s o n k e l l y. c o m 2 TWO TYPES COMPANIES INDIVIDUALS

3. w w w. j a c k s o n k e l l y. c o m 3 COMPANIES Wages of the contractor’s employees Workplace injury lawsuits Indemnity issues Licensing

4. w w w. j a c k s o n k e l l y. c o m 4 CONTRACTOR EMPLOYEE WAGES Under the WV Wage Payment and Collection Act, a prime contractor can be liable for unpaid wages and fringe benefits of a subcontractor’s employees. W.Va. Code §21-5-7. If the employees file a valid mechanics lien against the prim contractor, they also can obtain a penalty for liquidated damages. W.Va.Code § 38-2-31.

5. w w w. j a c k s o n k e l l y. c o m 5 NOTIFICATION REQUIREMENT A prime contractor is required to notify the West Virginia Division of Labor of any contract that covers construction work or the severance, production or transportation of minerals within 10 days. W.Va. Code §21-5-16. Company must report the name of the contractor, the job site and the principal place of business.

6. w w w. j a c k s o n k e l l y. c o m 6 DOL REPORTING An employer that fails to report a contractor can be subject to a misdemeanor criminal penalty. An employer that reports a contractor to the DOL can limit its liability for unpaid wages and fringe benefits under §21-6-7 because the employee will be required to exhaust all administrative remedies against the employer before seeking relief from the prime contractor.

7. w w w. j a c k s o n k e l l y. c o m 7 LIABILITY FOR WORKPLACE INJURIES AND EMPLOYMENT ISSUES Employees of independent contractors who are injured on company property can sue under a negligence standard unless the company can show that they are “borrowed servants/loaned employees.” Then, the employee is required to use the deliberate intent standard of proof to establish liability. Watch for joint employer issues in adverse employment decisions, FMLA issues, traditional labor problems and the like.

8. w w w. j a c k s o n k e l l y. c o m 8 INDEMNIFICATION AGREEMENTS Independent contractor agreements always should require the contractor to indemnify the company for all liability related to suits the contractor’s employees assert. Public policy allows companies to shift all liability in this manner as long as the agreement requires the contractor to purchase insurance to cover those liabilities.

9. w w w. j a c k s o n k e l l y. c o m 9 CEASE AND DESIST ORDERS West Virginia law requires employers to post a bond for the wages and benefits of their employees unless the employer has been doing business in the State for at least five years.** W.Va. Code §21-5-14. All contractors involved in construction must have licensing as determined by the DOL. Failure to do either can result in the DOL issuing a cease and desist order, which a investigator can issue on a site inspection.

10. w w w. j a c k s o n k e l l y. c o m 10 INDEPENDENT CONTACTORS V. EMPLOYEES A high priority of the federal Department of Labor is addressing correcting the alleged misclassification of employees as independent contractors. Focus on minimum wage, unpaid overtime, leave and benefit, unemployment and FICA issues.

11. w w w. j a c k s o n k e l l y. c o m 11 I’M FROM THE GOVERNMENT AND I’M HERE TO HELP The Department’s Misclassification Initiative, launched under the auspices of Vice President Biden’s Middle Class Task Force, is making great strides in combating this pervasive issue and to restoring these rights to those denied them. In September 2011, Secretary of Labor Hilda L. Solis announced a major step forward with the signing of a Memorandum of Understanding (MOU) between the Department [of Labor] and the Internal Revenue Service (IRS). Under this agreement, the agencies will work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.

12. w w w. j a c k s o n k e l l y. c o m 12 THE DOL MISCLASSIFICATION INITIATIVE AND THE STATES

13. w w w. j a c k s o n k e l l y. c o m 13 WHY DO I CARE? The DOL has its eye on the industry: “The misclassification of employees as independent contractors is a serious threat to both workers, who are entitled to good and safe jobs, and to employers who obey the law and are undercut when others use illegal practices” said Cynthia Watson, the [DOL] Wage and Hour Division’s regional administrator for the Southwest. “The department is committed to remedying employee misclassification, which is a problem we commonly come across in the oil and gas industry. It often results in employees being denied their proper wages.” –June 3, 2012 DOL WHD New Release

14. w w w. j a c k s o n k e l l y. c o m 14 IT’S ALL ABOUT THE MONEY Honghua America LLC, an equipment manufacturer and drilling service provider, reportedly paid $687,469.00 in overtime back pay to 133 employees misclassified as contractors to settle their claims Rigid Oil Field Services reportedly paid $51,839.00 in back overtime wages to 28 misclassified employees to settle their claims.

15. w w w. j a c k s o n k e l l y. c o m 15 POSITIONS UNDER SCRUTINY Roughnecks Crane operators Welders Pumpers Service and maintenance

16. w w w. j a c k s o n k e l l y. c o m 16 THE DOL ON THE LAW … The Supreme Court has said that there is no definition that solves all problems relating to the employer-employee relationship under the Fair Labor Standards Act (FLSA). The Court has also said that determination of the relation cannot be based on isolated factors or upon a single characteristic, but depends upon the circumstances of the whole activity. The goal of the analysis is to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer. In general, an employee, as distinguished from an independent contractor who is engaged in a business of his own, is one who "follows the usual path of an employee" and is dependent on the business that he serves.

17. w w w. j a c k s o n k e l l y. c o m 17 THE FIRST FACTOR The extent to which the worker's services are an integral part of the employer's business –Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? –Does the worker perform a discrete job that is one part of the business' overall process of production? –Does the worker supervise any of the company's employees?

18. w w w. j a c k s o n k e l l y. c o m 18 SECOND AND THIRD The permanency of the relationship –How long has the worker worked for the same company? The amount of the worker's investment in facilities and equipment –Is the worker reimbursed for any purchases or materials, supplies, etc.? –Does the worker use his or her own tools or equipment?

19. w w w. j a c k s o n k e l l y. c o m 19 YEP, THERE’S MORE The nature and degree of control by the principal –Who decides on what hours to be worked? –Who is responsible for quality control? –Does the worker work for any other company(ies)? –Who sets the pay rate?; The worker's opportunities for profit and loss –Did the worker make any investments such as insurance or bonding? –Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?

20. w w w. j a c k s o n k e l l y. c o m 20 AND, FINALLY The level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise –Does the worker perform routine tasks requiring little training? –Does the worker advertise independently via yellow pages, business cards, etc.? –Does the worker have a separate business site?

21. w w w. j a c k s o n k e l l y. c o m 21 THE IRS ON THE LAW There is no “magic” to determining whether a worker is an employee or independent contractor The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

22. w w w. j a c k s o n k e l l y. c o m 22 FIRST, IT’S SIMPLE Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial Control: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

23. w w w. j a c k s o n k e l l y. c o m 23 BEHAVIORAL FACTORS Types of Instructions Given –An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work. –When and where to do the work. –What tools or equipment to use. –What workers to hire or to assist with the work. –Where to purchase supplies and services. –What work must be performed by a specified individual. –What order or sequence to follow when performing the work. Degree of Instruction –The more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. –Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

24. w w w. j a c k s o n k e l l y. c o m 24 MORE BEHAVIORAL FACTORS Evaluation System –If an evaluation system measures the details of how the work is performed, then these factors would point to an employee. –If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee. Training –If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. –Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. –Independent contractors ordinarily use their own methods.

25. w w w. j a c k s o n k e l l y. c o m 25 FINANCIAL CONTROL FACTORS Significant investment Unreimbursed expenses Opportunity for profit or loss Services available to others in the market Method of payment –Periodic wage v. commission or flat fee

26. w w w. j a c k s o n k e l l y. c o m 26 TYPE OF RELATIONSHIP FACTORS Written contracts Employee benefits Permanency of the relationship Services provided as key activity of the business

27. w w w. j a c k s o n k e l l y. c o m 27 OF COURSE THERE’S A FORM! http://www.irs.gov/pub/irs-pdf/fss8.pdf

28. w w w. j a c k s o n k e l l y. c o m 28 WV UNEMPLOYMENT LAW A worker is an employee unless: –(A) the individual has been and will continue to be free from the direction over the performance of the services, both under his or her contract of service and in fact; –(B) the service is either outside the usual course of the business for which the service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and –(C) the individual is customarily engaged in an independently established trade, occupation, profession or business [i.e., licensed]." W.Va. Code §21A-1A-16(7)

29. w w w. j a c k s o n k e l l y. c o m 29 WV EMPLOYMENT LAW "A request of a person to do certain work is only one of the elements to be considered in determining employment, other elements being compensation for such work and the power to discharge, but the most important element is the right or power of direction and control of the manner in which the work is to be performed.“ "Four factors enter into determination of the question whether a master-servant relationship exists within the contemplation of the doctrine of respondeat superior, (1) selection and engagement of the servant, (2) payment of compensation, (3) power of dismissal, and (4) power of control. The first three factors are not essential to the existence of the relationship; the fourth, the power of control, is determinative."

30. w w w. j a c k s o n k e l l y. c o m 30 POTENTIAL LIABILITIES Back wages and benefits (two to five years) Treble/liquidated damages Back taxes to the U.S. government Unemployment compensation taxes and benefits Attorney’s fees and costs

31. w w w. j a c k s o n k e l l y. c o m 31 THE END QUESTIONS? CONCERNS? COMMENTS? THANKS!