DOL Targets Shale Gas Subcontractors over Pay Practices

The U.S. Department of Labor (DOL) is targeting the shale gas drilling industry in northeastern Pennsylvania for enforcement actions. The specific issue they are targeting is subcontractors who DOL claims are intentionally misclassifying workers as independent contractors (“1099”) instead of as regular employees (“W2”). By doing so, DOL claims employers are skirting tax withholdings and payment of workers’ compensation and workers are denied benefits like paid holidays, family leave and overtime pay.

What evidence of this “widespread problem” has the DOL hot-and-bothered enough to launch a full-out attack on small businesses in PA? A study—with suspect data.

In an article the Labor Department is circulating in industry publications, it cites statistics from Economic Modeling Specialists Inc. showing that mining, quarrying and oil and gas extraction had the largest drop in workers covered by unemployment insurance of any employment sector, at a time when nine of the 11 fastest-growing jobs in the country are tied to oil and gas extraction.

In 2005, 67 percent of the sector’s workers were covered by unemployment insurance, the department wrote. But by 2010, the number had dropped to 47 percent.

"This evidence suggests a major shift in the industry toward classifying workers as independent contractors rather than employees," the department wrote.

Federal and state labor departments consider worker misclassification a pervasive problem, especially in industries like construction where work is contracted out to a chain of subcontractors, each of which is trying to reduce costs to win bids.

"When it happens it is typically not an accidental violation," said Mark Price, an economist with the Keystone Research Center, a labor-backed think tank based in Harrisburg. "It is typically part of a pattern where an employer has figured out this is a way to make money."

Employees who are wrongly categorized as independent contractors are often not paid fairly for overtime, travel time to job sites, or the time they spend unloading equipment and material before and after regular shifts. They are also not protected by minimum wage laws, family and medical leave benefits and unemployment insurance.

The practice harms other contractors by creating unfair competition for bids and cheats state and federal governments of tax revenue, the department said.

"Due to the rapid growth of the fracking industry, and the industries that support it, [the Wage and Hour Division] wants to ensure that employees in all of these industries are paid in compliance with applicable laws," the department said in a written response to questions.

It would not comment on how many violations have been uncovered so far, but said "where violations are disclosed, we will follow the chain to include all employers who may be in violation."(1)

MDN went searching for the study by Economic Modeling Specialists Inc. (EMSI) that has the DOL all worked up. We found an article by EMSI reviewing their data on the oil and gas industry. In a section of the article titled “The Rise of Contract Oil and Gas Workers” this is what EMSI says about their own data:

In last month’s GOVERNING Magazine, William Fulton wrote about the “1099 economy”—the shift by employers to hire temporary workers who file a 1099 form with the IRS rather than a W-2 and don’t receive benefits. No other industry has seen this move to 1099 workers more dramatically than mining, quarrying, and oil and gas extraction.

A recent EMSI analysis revealed that the share of 1099 workers in this sector increased from 33% in 2005 to 53% in 2010, the biggest percentage jump among the 20 broadest-level sectors. Mining, quarrying, and oil, and gas extraction now has the third-highest share of contract workers, behind real estate (74%) and agriculture, forestry, fishing and hunting (68%).

At least part of this influx could be attributed to land owners cashing in on royalties after leasing their property for drilling. Through the quirks of how the Census’ Bureau of Economic Analysis* tracks the the oil and gas extraction industry — and how the industry data is tied to occupations — some of these jobs could be counts of landowners who are claiming additional income from oil and gas royalties. If that’s the case, they would be better placed in the real estate and leasing industry.

Please note: For these reasons, EMSI “noncovered” data (i.e., data on 1099 workers plus more traditional state data, etc.) for oil and gas jobs should be treated with caution. Also, the jobs numbers for 2010 are estimates at this point, so it will take more time to see how these trends play out. We’ll touch on this more below.

*The Bureau of Labor Statistics measures only workers covered by unemployment insurance and who thereby file a W-2. EMSI’s “complete” dataset adds proprietors and other “noncovered” workers by combining BLS and state data with various Census datasets.(2)

Did you catch that? EMSI says they have a concern that the government’s own quirkiness in how they classify the numbers may mean some (many?) of the jobs showing up as 1099 jobs (independent contractors) may be landowners claiming additional income from oil and gas royalties. They then say this data should be “treated with caution.” They are saying, in essence, “Hey, don’t rely on these numbers, they probably aren’t right.”

And it is on the basis of those numbers the DOL is going after small businesses in the shale drilling industry to try and prove they’re intentionally skirting employment laws. Our wonderful government at it’s best.

(1) The Scranton Times Tribune (Jun 14, 2012) – U.S. Labor Department investigating pay practices in gas industry

(2) Economic Modeling Specialists Inc. (Jun 7, 2012) – The Explosion of Oil and Gas Extraction Jobs