The Big Payback: Companies Owe Millions for Misclassifying Workers

Chris Sutton, Partner – Clover Global Solutions, LP

For generations, the American workforce was comprised primarily of full-time employees who received all of the benefits – overtime pay, health insurance, paid vacations, etc.,– that their statuses conferred. Yet in recent years, a rising tide of independent contractors has saturated businesses from coast to coast.  The financial incentive to employers for hiring contractors is easy to understand:  Independent contractors aren’t covered by federal or state wage and hour laws, for instance, and are ineligible for employee benefits such as health insurance and participation in company retirement plans. In addition, employers aren’t required to pay Social Security, Medicare and unemployment taxes for independent contractors.

In other words, companies can save substantially on wages and other associated costs by hiring contractors instead of full time employees. Some businesses are even trying to capture those savings by misclassifying their workers.

There’s No Outsmarting the FLSA

Despite strict IRS guidelines intended to help employers distinguish between employees and independent contractors for tax purposes, some 20% of businesses have made what are known as 1099 misclassifications – classifying a worker as a contractor when he or she is really an employee  (1099, of course, refers to the IRS form used to report payments to an independent contractor).  Some of these misclassifications are honest mistakes. But in other cases, employers have deliberately misclassified employees as independent contractors in order to dodge taxes and avoid providing benefits mandated by the Fair Labor Standards Act (FLSA).

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According to the IRS, misclassifying employees as independent contractors and failing to provide W-2 forms can subject an employer to back taxes of as much as 41.5% of the contractors’ wages (a figure that includes Social Security tax, federal income tax and unemployment insurance), with penalties going back three years.

As a result, companies who’ve been caught by the U.S. Department of Labor (DOL) violating FLSA provisions by misclassifying employees have paid millions of dollars in fines, penalties and remuneration of employees’ lost wages. In the most costly misclassification case in recent years, FedEx in 2007 learned it owed the IRS $319 million in back taxes for misclassifying FedEx Ground drivers as independent contractors. Since then, two California newspapers also paid considerable sums – the San Diego Union Tribune $11 million and the Orange County Register $22 million – when they were found guilty of misclassifying paper carriers as independent contractors.

Rough times for misclassifying roughnecks

Oil and gas companies have also been investigated for FLSA violations, although so far the paybacks have been smaller than those higher profile cases.

In 2012, HongHua, a Houston-based equipment manufacturer and drilling service provider, had to pay more than $687,000 in overtime back wages to 133 roughnecks and crane operators after an investigation by the US Department of Labor’s Wage and Hour Division. The government determined the company had misclassified the workers as contractors then paid them straight time instead of overtime for the hours they worked beyond the regular 40 per week.

In Carlsbad, NM, Morco Geological was also found in violation of various provisions of the FLSA. The company was forced to pay more than $597,000 in back wages to 121 current and former mud logging technicians, many of whom were working more than 100 hours per week but weren’t being paid any overtime. Earlier this year, two oilfield services companies were ordered to pay back lost overtime to misclassified workers. Oklahoma-based Rigid Oil Field Services settled its case for nearly $52,000 while J&A Services LLC agreed in Colorado federal court to pay $2 million to its misclassified workers.

Oil field service personnel – many of whom easily put in 80-hour weeks – are among the most frequently misclassified oil and gas workers among a list that includes:

  • Electricians
  • Mechanics
  • Oilfield delivery specialists
  • Directional Drillers
  • Wireline Operators
  • Roustabouts
  • Toolpushers
  • Well Testers
  • Rig Clerks
  • HSE/Safety Advisors
  • Wellsite Advisors

Misclassification might cost you more than money

In addition to the hefty fines the IRS can assess on a company, the agency can also levy criminal penalties of $1000 and/or one year in prison for failure to properly classify workers. If the IRS obtains a felony conviction against a person or company for tax evasion due to 1099 misclassifications, the fine can be as much as $100,000 for an individual or $500,000 for a corporation. But that’s not all:  felony convictions can also come with a prison sentence of up to five years.

Row of Jail Cells

Furthermore, individuals such as corporate officers or those who have authority over the financial affairs of a business may be personally liable for up to 100 percent of any uncollected taxes relating to misclassification and may also be subject to criminal prosecution.

Cracking down even harder on violators

Worker misclassification is increasingly the subject of state and federal legislation. On the federal level, the DOL and IRS both have misclassification task forces dedicated to investigating use of independent contractors, including conducting random and focused audits of employers.  The agencies hope to raise $7.3 billion for the federal coffers by cracking down on misclassifications.  The DOL has even awarded $10.2 million to 19 states to help them upgrade their worker misclassification detection and enforcement.

Late last year, Sen. Bob Casey (D-PA) introduced the Payroll Fraud Prevention Act of 2013 at a hearing of the Senate Subcommittee on Employment and Workplace Safety. The bill takes aim at curtailing the misclassification of independent contractors, which the sponsors equate with “payroll fraud.”

Moreover, the IRS, which began its crackdown a few years ago, is promising to be even more vigilant. Those in favor of stricter rules on misclassification say they are protecting not only workers, but companies who already play by the rules. However, since the passage of the Patient Protection and Affordable Care Act (also known as the ACA or “Obamacare”), advocates of stricter regulations fear that employers will be further motivated to keep workers off the books as official employees.

ACA red flags:  What the feds are looking for

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The employer mandate portion of the ACA will require employers with 50 or more full-time employees to provide healthcare coverage to those employees starting in 2015. Some employers have already been cutting employee hours as one tactic to reduce their full-time headcount, while others have instituted layoffs, hiring freezes, or simply hiring independent contractors instead of full-time employees.

While it may seem tempting to begin classifying workers as independent contractors, the cases just described show the danger inherent in that move. As the IRS continues its efforts against worker misclassification, the agency is looking for red flags such as a W-2 employee suddenly showing a 1099 classification instead.

One solution is for companies to utilize contractors who are the legal W-2 employees of a staffing firm. In that case, the worker counts toward the staffing firm’s headcount, not the company’s, and the company remains in compliance with FSLA, IRS and ACA. In today’s new generation of American business, that’s a smart and safe way to proceed.

A few questions come to mind for the readers:

  1. Can a clear, concise statement of work minimize the number of  1099 misclassifications?
  2. What other solutions might help companies to meet compliance requirements?
  3. Other than the oil & gas industry, what industries are notorious for worker misclassification, if any?

Chris Sutton has a sound foundation in the energy sector contracting from both Client and Contractor sides with specific expertise in building alliances to facilitate service capabilities. To contact Chris with any questions or comments, please send an email to Chris.S@clovergs.com. 

Posted in 1099 Compliance, Contingent Workforce, Risks | Tagged , ,

A Solution to Fracking’s Water Problems?

Chris Sutton – Partner, Clover Global Solutions, LP

Hydraulic fracturing, or fracking has helped spark U.S. oil and gas output in the past five years, but the practice also uses massive amounts of fresh water.  Millions of gallons of water are needed to frack just one well.  A lack of water can easily hinder fracking, which would in turn slow oil and gas output.

To ensure a continuous water supply for fracking, some drillers – especially drillers in parts of the country affected by droughts and water shortages — are exploring the use of recycled water.  Drought has become an issue in Texas over the last few years, and although the recycling practices are slow to catch on there, some of these new methods are proving to be very beneficial.

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The Apache Solution

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Apache Corporation has more wells in the Permian Basin of West Texas than any other drilling company.  In fact, in the Permian Basin’s Wolfcamp shale play, Apache is a water recycling pioneer.  The production manager for Apache says that the company recycles 100% of “produced” water, a byproduct of oil and natural gas drilling.  Moreover, the company recycles “flowback” water, the water that is pushed out of the well during the fracking process.  

In addition to the recycled, produced and flowback water, Apache uses brackish water  from the Santa Rosa aquifer, and   has completely eliminated the need for a fresh water supply from at least one of its oil wells in Wolfcamp.

Apache treats produced and flowback water with chemicals to remove bacteria and unwanted minerals such as iron.  Once treated, the water is stored above ground and piped to a well to use in fracking.  Recycling has turned out to be an economical solution for Apache: treating flowback water costs an average of 29 cents a barrel. If the flowback water isn’t recycled, Apache has to pay $2.50 per barrel for a third-party company to dispose of it. 

Slowly Catching On

Despite Apache’s successes with reusing water, recycling has been slow to catch on in most of Texas. Although a recent drought caused a shortage of water, in general, fresh groundwater is low cost and plentiful. Furthermore, waste disposal is relatively easy in Texas compared to other states.  For example, in the Marcellus shale play in Pennsylvania, operators must drive their waste to Ohio because the geography around the play doesn’t allow for disposal wells. 

Although slowly, water recycling is catching on in the Lone Star State and Apache isn’t the only company to reuse fracking water.  For example, Fasken Oil and Ranch, operating near Midland, recycles close to half of the water it uses for fracking.  However, unlike Apache, which has saved money by recycling, Fasken says that recycling is actually adding to their cost—about $70,000 for each hydraulic fracture.  In this specific case, recycling is costly for Fasken because access to fresh groundwater from the 165,000 acres owned by the company bears almost no cost.

Permit applications show further evidence that water recycling is catching on in Texas:  Applications for oil field water recycling have gone up from just one or two per year to 9 so far in 2013, and 13 last year.  However, there may be more even more recycling going on because the state does not require “mobile recyclers,” which recycle water on or near a fracking site, to get permits.

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Conclusion: The Future of Water Recycling

Although water recycling hasn’t eliminated the demand for fresh water in fracking, there has been a shift in attitudes in recent years.  Because of factors like droughts and community concern over water usage, companies are beginning to see produced water as an asset instead of waste that needs to be disposed of.  If water recycling becomes fully adopted by oil and gas companies, then it’s likely that more money will go into future development.  The possibilities go beyond fracking, too – water is already used for other purposes, such as cooling water in power plants.  If water recyclers can get water clean enough that it can be used for drinking and household purposes, we could see considerable value.

A few questions come to mind for the reader:

  • What do you think is stopping other operators from recycling their produced water?
  • Is it too late to apply solutions with fracking’s water problems or getting a justified ROI on a fracking water recycling program?
  • Do you think that there are some parts of U.S. shale play where recycling won’t work?
  • What are other uses for produced water?

Chris Sutton has a sound foundation in the energy sector contracting from both Client and Contractor sides with specific expertise in building alliances to facilitate service capabilities. To contact Chris with any questions or comments, please send an email to Chris.S@clovergs.com. 

Posted in Uncategorized

The Rise of Women in the Oil & Gas Industry

Amal Abdallah – Social Media & Marketing Coordinator, Clover Global Solutions, LP

One thing can be said about the career-oriented woman; no longer is there a typical job or a ‘suggested’ career path for the young female professional. Long gone are the days of basic office roles and run-in-the-mill positions for the driven woman. This fact has proven to be true in recent years; especially noticeable with the ever-changing, ever-dynamic oil and gas industry.

In fact, career prospects for women in the oil and gas industry have improved in recent years and an increasing number of women are taking advantage of such opportunities. The Diversity and Inclusion Report conducted yearly by BP suggested that 60% of respondents expect to see an increase in female representation within the industry.

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An unsurprising 72% of the oil and gas professionals surveyed for the Diversity and Inclusion Report said that oil and gas is still a male-dominated industry. Regardless, a sense of urgency remains to attract more women to the industry; we can’t have the best industry if we don’t have the best talent, regardless of the gender divide. In order to fix the problem, we have to find a solution to the imbalance.

Now in order to find the solution, we need to identify the problem, which is the fact that by the time these women graduate, they’ve already excluded engineering as a potential career path – so to counter this, we must reach out to the youth and inspire them to pursue STEM (science, technology, engineering & mathematics) degrees and instill this interest in them from the beginning.

In an interview with the Houston Chronicle, former oil patch worker-turned Interior Secretary Sally Jewell suggested that diversity in the oil and gas industry isn’t a mirror of the diversity in the country. “We all need to work together to create an environment that is welcoming of women, of people of color, of people with different backgrounds, because the industry is missing some super-talented folks who could strengthen it,” she said.

On the other hand, women are beginning to take notice and pay more attention to the industry – according to the U.S. Bureau of Labor Statistics, women filled nearly one-third of the jobs added in the upstream oil and natural gas sector in the first quarter of 2013. Once more, a recent report from IHS Global suggests that by 2030 the industry could add 185,000 more women to its ranks.

Furthermore, the report suggested that women will share in the growth of more skilled white-collar jobs in the industry – opportunities will exist for female petroleum engineers, managers and other professionals, and the number of job opportunities is expected to grow by 70,000 from 2010 to 2030.

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The Current Situation

While the challenges females in the industry are facing may not be deal-breakers, they are still just as important to recognize and take note of. In an NES Global Survey examining the gender and talent gap, women noted most of their grievances and challenges within the industry as those which inhibit their job career/job growth opportunities – a lack of mentorship, no opportunities for working in offshore positions, or a recruiting system that is less than open-minded when it comes to recognizing people with transferable skills. Some respondents also expressed that they are paid less and have to work twice as hard as men do to prove themselves. Obviously these issues are not exclusive to the oil and gas sector, as they are experienced by women working in many different professions. However, in order to create a truly diverse workforce throughout OUR industry, these challenges need to be acknowledged and addressed.

Still, women are paying more attention to this field, regardless of the potential setbacks. The share of women in the traditionally female-dominated ‘office and administrative support’ category in the oil & gas industry is predicted to fall, although this field will always be a key source of potential opportunities for women.

Furthermore, the number of semi-skilled and unskilled blue collar workers is projected to decline further and hold down the overall increase in female employment, there is significant potential for female blue collar employment due to large numbers of job opportunities projected in blue collar positions.

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Outlook for the Future

The future for women in the oil and gas industry is predicted to be a very bright one; but this future is contingent upon the current situation and how we handle it going forward.  One way we can change this is by changing the perception of working in this lucrative industry. Carolyn Stewart, regional business development manager North America for NES Global Talent says that the overall workforce is portrayed heavily as men in hard hats working on drilling platforms in rough aspects of the industry, so it’s not so attractive to young women who may potentially want a family and kids (as these images portray a lot of time away from home). According to Stewart, the perception needs to change and the industry as a whole needs to make women aware of opportunities in project management, finance and business development to help dissolve this imagery.

As for the women engineers currently working in the industry, it’s essential to make growth opportunities available for them, and make them well known – you don’t necessarily have to be a roughneck to go offshore. The industry must work harder to show women that they can succeed in an O&G career, and support them in reaching their goals to encourage more women to join the industry. It is not just about being fair and equal in the workplace, either. With so many skilled engineers due to retire within the coming years, attracting and retaining these talented individuals is critical if the industry is to continue meeting our global energy needs.

My Perspective

After writing this article, I’ve become aware of challenges that may [potentially] lie ahead for me. That being said, I’ve gained a unique perspective of the truth about women in the oil and gas industry and I’ll be the first to say that regardless of the obstacles we may face, I am optimistic. I’m in the second year of my career, and for the past year I’ve had excellent first-hand experience working in this industry for a successful woman-owned company. I’m always given the opportunity to be challenged and grow as a female business professional. I’ve learned about the progressive changes and milestones the company has witnessed and have seen the success earned by those who work hard and earn their recognition given the right opportunities and by taking chances. I truly believe that there is no limit as to how far up the figurative career ladder women will be able to climb. Given the right opportunities, women in this industry have the chance to become pioneers and powerhouses.

Our 18-year passion for excellence isn’t our own – in fact, many of our peers also believe in equal opportunities for men & women alike in the industry. Even some of our biggest clients have a strong bias for action when it comes to placing talented individuals in high-level positions, pushing all gender divides aside and raising the bar for generations ahead. In the past year, what I’ve gathered is that it’s obvious the glass ceiling has clearly been broken.

Here are a few questions that came to mind for the readers:

  • Having read this article, which point of concern do you believe is most important to address?
  • Do you agree that the opportunities for women will continue to grow as predicted?
  • What other obstacles do you foresee other than the ones discussed?
  • What does this forecast mean to female professionals in oil & gas?

Amal Abdallah is a communications professional with a forte in marketing and thought leadership for the Oil & Gas Industry. To contact Amal with any questions or comments, please send an email to amal.abdallah@clovergs.com. 

Posted in Uncategorized

OPEC On The Rebound

Chris Sutton – Partner, Clover Global Solutions, LP

It’s safe to say that few acronyms have carried as much global economic weight over the past 50 years as OPEC.

When The Organization of Petroleum Exporting Companies – OPEC – was organized in the early 1960’s, its goal was to coordinate and unify petroleum policies among its member countries, specifically to secure fair and stable prices for their petroleum products.  However, because the group controls as much as 81% of the world’s crude oil reserves, OPEC has had the power to limit world production, keep prices artificially high, and use its economic clout for political purposes.

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In recent years, however, OPEC’s dominance has declined. In December 2013, the cumulative output of its dozen member nations (Saudi Arabia, Iran, Iraq, Kuwait, Venezuela, Libya, Algeria, Nigeria, Ecuador, United Arab Emirates, Qatar, and Angola) reached its lowest point in more than 31 months.  Libya accounted for the largest single decline, with production cut by more than half because of strikes and protests.

But beyond the drop caused by political tension, the rise in domestic oil production by the U.S. – historically OPEC’s largest customer – which has reached an estimated 8 million barrels per day and lessened America’s need for imported crude, contributed significantly to OPEC’s falling numbers.

During the first quarter of 2014, however, it appeared that OPEC was staging a complete revival, mostly on the back of growing demand from Asia, India, and Europe. China has massive projects with Saudi Arabia, Iraq, and Iran, and is increasing its imports from both Venezuela and Angola. India has become Nigeria’s biggest customer. And with Europe’s economy in recovery, oil stocks in industrialized countries are at their lowest in five years and ripe for replenishment.

The effect is that in February, for example, OPEC’s output averaged 29.96 million barrels per day, up from 29.79 million barrels per day in January, but still shy of its nominal target of 30 million barrels per day. Shipments from Iraq and Angola rose noticeably, and with energy and economic sanctions against Iran loosened, Iranian exports began to creep up as well.

March told a different tale, though, with Iraqi shipments of Kirkuk crude plunging due to sabotage, oilfield maintenance in Angola, and continued unrest in Libya outweighing additional output from Nigeria, Iran, and top producer Saudi Arabia.

Still, observers suggest that total OPEC output will continue to increase through 2015, even as production from non-OPEC countries, including the U.S., also rises.

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Here are some questions for the readers to consider:

  1. US oil production has been on the rise, and has lessened the need for imported crude oil –  what other factors not mentioned here might have contributed to OPEC’s falling numbers?
  2. Observers believe that OPEC oil production will continue to rise through 2015; do you agree or disagree?
  3. What effect could Russia’s oil reserves have on OPEC?

Chris Sutton has a sound foundation in the energy sector contracting from both Client and Contractor sides with specific expertise in building alliances to facilitate service capabilities. To contact Chris with any questions or comments, please send an email to Chris.S@clovergs.com. 

Posted in Oil & Gas | Tagged , , ,

Competence Assurance Gaining Momentum in O&G Industry

Chris Sutton – Partner, Clover Global Solutions, LP

An increasing number of companies in the oil and gas industry are looking to the Competence Assurance process to help them achieve some of their most fundamental goals: protecting their employees, promoting safety and ensuring quality.

Competence Assurance is a very structured practice that allows companies to assess workers’ performances against a specific set of standards. It’s used to ensure that employees have the skills and knowledge they need to do their jobs safely and effectively. The resulting information is critical because it allows companies to manage risk more effectively as they measure the gaps between performance and the required standard for a job, and training can then be adjusted as needed.

This practice is especially valuable in the oil and gas industry, where challenges can include increasing and changing regulations, older equipment, and a significant rise in the volume of petrochemical jobs coming online.  Furthermore, Competence Assurance can play a valuable role in protecting a company’s reputation and illustrating its commitment to safety and quality.

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It may sound like a complicated process – and it can be – but following a few best practices can help a company create a solid system.

Getting Started with Competence Assurance

The Competence Assurance process begins when companies, or paid consultants, design a system that allows them to evaluate the skills and knowledge of their personnel and ensure they are complying with industry and government regulations.

A recommended course for companies is Competence Management accreditation through an industry association, which provides proof that they have implemented an effective program.  The International Association of Drilling Contractors for instance, evaluates companies’ processes for defining competencies within each position as well as assessing and maintaining employee knowledge and proficiency. 

While Competency Assessment systems will vary by company, there are some general guidelines for creating a successful program:

  • Competency should be assessed at all levels of an organization. It should be site and job specific.
  • Expect to provide more customized training in some cases.
  • Training should always include detailed safety procedures.
  • On-the-job training should be as structured as theory/process training.
  • Training should include preparation for crisis/emergency situations.
  • Understand that “competency” means more than an understanding of the concepts/practices covered in training. It also involves experience and confidence with it.
  • Be sure your trainers and assessors are trained in their roles and are credible.

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Worthwhile Investment

While designing and implementing a Competence Assurance program requires a significant investment in time and effort, it does yield dividends. By participating in this process, companies establish documented proof that their workforce is competent and meeting standards. Additionally, they will have created an inventory of company standards.

Companies can add even more value to their system, if they choose, by aligning mission and safety competencies to their business goals, in addition to focusing on safety and quality standards.

The process also can be beneficial from a human resources point of view. A Competence Assurance program helps companies make sound advancement choices with personnel.  At the same time, employees have a clear picture of what is expected of them and the competencies they will need for career advancement.

The Competence Assurance process becomes even more important as inevitable changes develop in policy, procedures, regulations, technology, equipment and business goals. As new standards are developed, companies will want to make sure their staff is prepared to handle them.  While a Competence Assurance system will not guarantee that a company will meet these objectives, it will reduce risk and make good performances considerably more likely.

Here are some questions for the readers to consider:

  • How important is competence assurance in your area or discipline?
  • What measures has your company taken to ensure employee competence? Is a program under development?

Chris Sutton has a sound foundation in the energy sector contracting from both Client and Contractor sides with specific expertise in building alliances to facilitate service capabilities. To contact Chris with any questions or comments, please send an email to Chris.S@clovergs.com. 

Posted in Uncategorized | Tagged