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Sep 14, 2015

Who is Your Employee?

By: Paul Ebeltoft

It isn’t often that I write about a North Dakota Supreme Court decision bearing on the work of HR professionals. An opinion handed down just a few weeks ago gives me the chance.

The facts

BAHA Petroleum Consulting Corp. (BAHA) provided various services to oil and gas companies - among them, referring individuals to perform landman services. As most Bakken-savvy HR professionals know, landmen acquire mineral and surface rights from landowners, negotiate leases, research public and private records to determine ownership of mineral rights, and review the status of titles.

BAHA classified the landmen it referred to its clients as independent contractors. Job Service North Dakota (Job Service) audited BAHA. Job Service ruled that BAHA’s stable of landmen were BAHA’s employees and held BAHA liable for unemployment insurance taxes on the landmen’s compensation. BAHA appealed. A hearing was held before an appeals referee. The appeals referee upheld Job Service’s audit findings. BAHA appealed through the courts.

The significance of the appeal

It has been a given among HR professionals that the central question to ask when in doubt about whether a person is an independent contractor or an employee is “Who is in control?” The right to control is dispositive, HR professionals learned, whether or not the right is actually exercised. HR professionals also learned that the 20-factor common law test determines whether or not sufficient control is present in a particular case.

However, on July 15, 2015, just three weeks before the North Dakota Supreme Court’s decision in the BAHA case, the federal Department of Labor’s Wage and Hour Division weighed in on how to decide whether an individual is an independent contractor or an employee. DOL’s guidance explicates a six-factor “economic realities” test, not the 20-factor common law test. The six-factor test emphasizes the importance of the work to the business; focuses on whether there is a chance for profit or risk of loss; weighs the comparative size of the economic investment in the endeavor; analyzes business skills and judgment needed, not technical prowess; and determines whether the relationship is permanent or indefinite, While “control” remains one of the six factors, the feds said that it “should not play an oversized role in the analysis.” What is important, rather, is whether a worker is economically dependent on an employer (and thus is an employee) or if the worker is really operating his or her own business (and thus an independent contractor).

hither North Dakota?

In its opinion, BAHA Petroleum Consulting Corp. v. Job Service North Dakota, 2015 ND 199, the North Dakota Supreme Court upheld the referee. Applying the 20-factor common law test, the Court ruled that landmen referred by BAHA to its clients were BAHA employees.

The Job Service audit and the appeals process all were keyed to the North Dakota Administrative Code, which has adopted the 20-factor common law test. The Court was also construing North Dakota law for the purpose of determining the applicability of North Dakota tax liability. It was not analyzing status under the Fair Labor Standards Act for the purpose of determining compensation and overtime rights.

However, that the North Dakota Supreme Court did not even mention the federal administrative interpretation rendered three weeks earlier may be significant. Does this signal continued state adherence to the 20-point test while Federal law develops another six-point inquiry?

The decision

In its BAHA decision, the Court found employment status even though seven of the 20 factors favored independent contractor status and two were neutral. The lesson to be learned is that no single factor will carry the day. "Despite those factors that seem to weigh in favor of [finding each landman to be an] independent contractor, the greater weight of evidence in the record gives rise to the conclusion the landmen perform their services to [BAHA] in the role of employees."

Here are the factors that handed BAHA the loss, and a little about why the North Dakota Supreme Court felt each favored employment status:

• Training: As a general rule, the landmen BAHA supplied its clients were expected to be familiar with the type of work they were to perform. If not, BAHA’s client required the landmen to "job shadow" another BAHA landman. Without such job shadowing, the client would likely not allow the landman to perform services for them. This factor favors a finding that BAHA trained its landmen and thus the landmen were BAHA employees.
• Integration: BAHA’s business was to provide individual workers to its clients. While BAHA’s business owners themselves did not physically work at the client's site, their business interests were “interwoven into the very fabric of the services provided by the landmen” on behalf of the client. This factor favors a finding that the landmen were BAHA employees.
• Oral or written reports: The landmen had to provide duplicate copies of their work to the client and to BAHA to ensure the work had been accomplished in accordance with proper procedure and to verify that the assigned project had been completed. This factor “tips slightly” according the Court, in favor of a finding that the landmen were BAHA employees.
• Payment by hour, week, or month: The landmen were paid a day rate established by BAHA. Although the landmen were free to reject the proposed day rate, they had limited ability to negotiate the rate of pay. This factor favors a finding that the landmen were BAHA employees.
• Payment of business or traveling expenses: The landmen were responsible for providing their own transportation, fuel, repairs, equipment, and proof of insurance. However, the landmen were reimbursed mileage, per diem, and lodging. The reimbursement of these costs weighed in favor of an employer/employee relationship.
• Furnishing of tools and materials: The landmen were required to possess certain equipment and personal gear to perform their duties. Due to the costs associated with this equipment and the vehicle investment also required for their own transportation, this factor would normally weigh in favor of independent contractor status. However, because BAHA required the equipment and a specific vehicle type, the factor was indicative of the right to control and thus employment status even though the vehicle type specified was only prudent in view of the job.
• Realization of profit and loss: The landmen were not in a position to realize a profit or loss from the services performed as one would find in an individual operating an independent trade or business. Rather, the landmen were entitled only to the agreed upon amount of money for each day they performed services for BAHA’s clients and for their mileage, per diem, and lodging costs. This factor tips in favor of employee status.
• Working for more than one firm at a time: The landmen were free to work for others. However, there was no indication that they ever did so. In the absence of such a showing, this factor weighs in favor of employee status.
• Making services available to the general public: There was no evidence to show that the landmen advertised themselves as independent contractors or otherwise made themselves available to the general public as independent contractors. This factor weighs in favor of an employer/employee relationship with BAHA.
• Right to discharge: If BAHA’s client found that the services performed by any landman were unsatisfactory, the client could direct BAHA to no longer assign that landman to the client, even if no other work was available to the landman.
• The landmen’s right to terminate: The landmen had the right to terminate the relationship at will. This factor favors an employer/employee relationship.

How long will to take for North Dakota to adopt an “economic realities test” to work alongside or to replace the older “common law 20-point test? No one knows. It may be the work of administrative agencies or the legislature and not the courts to do so. Stay tuned. In spite, of perhaps because of the BAHA case, it is clear that HR professionals need to learn and apply both tests.

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Reprinted with permission from an article submitted for publication in the September, 2015 Southwest Area Human Resource Association newsletter.