Claim by Directional Drillers for Overtime Pay. The boom for domestic energy producers, particularly in the Permian Basin, has been accompanied by the companion challenge of how to compensate transient oilfield professionals such as directional drillers. From the outset, oil patch companies have sought to utilize the talents of such individuals by contracting with them, directly or through staffing companies, as independent contractors. Many individuals have signed such contracts, have accepted payment for services rendered at daily or weekly rates, and then have invoked the federal Fair Labor Standards Act (FLSA) in an attempt to recover additional compensation on the basis that they were actually “employees” entitled to be paid statutory overtime wages and penalties, that is, not being paid at 1.5 times equivalent hourly pay for working more than 40 hours in a calendar work week. They also claimed they were entitled to recover a statutory penalty of 100 percent of unpaid wages for allegedly violating the FLSA in bad faith.
Criteria Used to Evaluate Independent Contractor Status. The United States Court of Appeals for the Fifth Circuit interjected itself into this ongoing skirmish last week in Parrish v. Premier Directional Drilling, L.P., in the process striking a blow for energy companies, when it ruled that the directional drillers who sought such additional compensation actually qualified as independent contractors, not as employees, and thus were not entitled to recover overtime pay or statutory penalties.
Judicial standards for determining employment status have existed since 1947 in the form of a five-part “non-exhaustive” test:
(1) the degree of control exercised by the alleged employer;
(2) the extent of the relative investments of the worker and the alleged employer;
(3) the degree to which the worker’s opportunity for profit or loss is determined by the alleged employer;
(4) the skill and initiative required in performing the job; and
(5) the permanency of the relationship.
The Parrish Court recognized that no one of these factors was determinative, and that the focus was on the totality of circumstances so as to yield an assessment of the “economic dependence” of the claimants. It therefore conducted a nuanced, “real world” analysis to scrutinize the facts of this case against the backdrop of these five criteria.
Factual Background. Premier Directional Drilling hired consultants to effect the goal of directional drilling, that is, avoiding obstructing subterranean objects while resulting in efficient oil extraction. Among these were directional-driller consultants (DDs). The DD’s job was advisory, derived from information provided by “measurement-while-drilling” consultants (MWDs).
The Parrish Court noted that some of the individuals performing “DD” services were employees of the Company, while others were classified as independent contractors, and that they had essentially the same job duties. The independent contractors were hired through staffing companies, each of them had a separate written agreement with the Company (including non-disclosure clauses), and each was paid through the staffing company. The DD consultants created their own business entities through which they operated as presumed independent contractors.
The DD consultants performed their work with little or no supervision, and had the right to decline work offered by the Company. Whereas Company employees performing directional driller tasks were paid a salary, a “day bonus” for each day on the job, a car allowance, a per diem, and benefits, the DD consultants were only paid by the job, along with mileage reimbursement for travel. Even though consultants could not be “promoted,” they could be eligible for a higher pay classification based upon experience.
Evaluating Economic Realities and Economic Dependence. Against this factual backdrop, the task undertaken by the Parrish Court of Appeals was to determine whether the individual claimant was, as a matter of economic reality, in business for himself. In reviewing the five factors identified above, the Court determined as follows:
Degree of Control. The Company did not dictate how the consultants were to complete their calculations, nor how they were to make the directional drilling plan work, nor whether they had to accept any particular project. The Court concluded that this lack of “control” leaned in favor of independent contractor status.
Relative Investments. As to the “investment” criterion, the Court determined that it tilted slightly in favor of “employee” status, because the Company clearly had invested more money at each drill site than had any individual DD consultant. Nevertheless, this factor was not accorded much weight, given the nature of the industry and the work involved.
Opportunity for Profit or Loss. For this criterion, the Court focused upon how the individual’s profits depended upon his ability to control his own costs. Significantly, the Court acknowledged that “evidence gleaned from tax returns can be useful.” The Court determined that the individual DD consultants had outside business interests where their profits from consulting for the Company were in several instances offset by losses they experienced in these other enterprises. Also, no individual DD consultant was paid when he was not performing work on one of the Company’s projects. The Court concluded that this factor weighed in favor of independent contractor status.
Skill and Initiative Required to Perform the Job. The claimants were all highly skilled individuals. This weighed in favor of independent contractor status.
Permanency of the Relationship. Because the work involved was to be performed on a project-by-project basis, and because no individual consultant worked for the Company for more than 10 months, the Court found that this factor weighed in favor of independent contractor status.
The Court briefly also considered three other factors, including the existence of express agreements with each consultant. The Court determined that the mere existence of a written agreement did not control the evaluation process, and that these individuals were highly paid enough to enjoy no specific protection under the FLSA because of their status.
On the basis of this evaluation, the Court ruled that these individuals were independent contractors. They thus were not eligible to recover allegedly unpaid overtime compensation.
Important Lessons for Employers. The Fifth Circuit’s decision in Parrish provides a blueprint for the appropriate way in which a company can establish a relationship with an individual consultant, through his or her entity, that qualifies under the FLSA as exempt from overtime because of the absence of “employee” status. Companies are well-advised to ensure not only the creation and use of specific independent contractor agreements, signed by separate “entities,” but also the establishing of a work and compensation structure that diverges from that used by the company with its full-time employees. The Court’s decision also highlights the evidentiary importance of independent contractor tax returns as a focal point for demonstrating economic independence.