Independent contractor misclassification costs Colorado employer $2 million

October 10, 2023

by Sarah R. WisorA federal judge in Colorado recently approved an agreement to settle a collective action in which oil and gas workers alleged they were misclassified as independent contractors and unlawfully denied overtime pay. Under the settlement, J&A Services, LLC, and related entities agreed to pay a total of $2 million, with the net recovery to each member of the class averaging more than $16,000.

Employee vs. independent contractor

J&A Services provides oil and gas well monitoring and maintenance services to energy companies throughout the United States. Two flow testers sued the company, alleging they were paid straight-time rates instead of overtime rates when they worked more than 40 hours per week because J&A misclassified them as independent contractors. They brought their lawsuit as a collective action on behalf of all current and former flow testers who were classified as independent contractors and denied overtime pay.

According to their complaint, the flow testers were paid on an hourly basis and instructed by J&A when, where, and how to perform their work. They also allege that J&A "hired/fired, issued pay, supervised, directed, disciplined, [and] scheduled [flow testers] and performed all other duties generally associated with that of an employer." The flow testers were required to submit internal billing "eTickets" at the start of every shift and turn in their hours worked once a week.

J&A allegedly provided safety training to the flow testers and assigned them upwards of 70 hours per week, which prevented them from working for any other companies. Their duties were integrated into J& A's operations, and many of the flow testers worked for the company for years at a time. They were required to follow the company's work rules and attend company meetings. According to the flow testers, all of those factors support a finding that they were employees, not independent contractors.

The U.S. District Court for the District of Colorado conditionally certified the case as a collective action, resulting in more than 70 workers filing consents to join the lawsuit. The workers sought to recover their unpaid overtime compensation, liquidated damages in an amount equal to their unpaid wages, and attorneys' fees and costs.

Settlement approved as a fair and reasonable resolution

After the company and the flow testers who filed the claims conducted discovery (pretrial fact-finding), they engaged in mediation and agreed to settle all claims. Under the Fair Labor Standards Act (FLSA), the settlement had to be approved by the court to ensure that it reflected a fair and reasonable resolution of the dispute.

Although J&A denied misclassifying the flow testers as independent contractors, it agreed to pay a total settlement of $2 million. The class members will receive $1,162,500, distributed according to a formula based on their invoiced hours. The remaining $837,500 will be paid to the employees' lawyer as attorneys' fees and reimbursement of costs. The court approved the settlement, noting that the case threatened to be complex, expensive, and lengthy and the settlement offered substantial and immediate relief. Howard v. J&A Servs., LLC, No. 1:12-cv-02987 (D.Colo., April 8, 2014).

Lessons for employers

This case illustrates the risks involved in classifying workers as independent contractors when you treat them like employees. The evidence alleged by the flow testers, including the company's control and direction over the time, manner, and location of their work, their hourly pay, required adherence to company work rules, mandatory attendance at company meetings, company-provided training, and the company's right to hire, fire, and discipline them, suggests an employment relationship rather than an independent contractor relationship.

You must examine the working relationship closely when you're determining whether a worker could be classified as an independent contractor. Getting it wrong can result in liability not only for unpaid overtime and the associated penalties but also for unpaid employment taxes, workers' compensation and unemployment insurance, and possibly other employee benefits.