Oil & Gas Industry Is Next Target for Independent Contractor Compliance Misclassification Lawsuits

by Locke Lord LLP
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A cottage industry for plaintiffs’ class action lawyers has been independent contractor (IC) misclassification lawsuits, and one of the industries taking the brunt of those types of legal proceedings is energy, particularly companies that operate in the oil patch.

In the oil and gas industry, companies have recently been making use of ICs to provide specialized talent for limited project needs, reduce their reliance on a static workforce, and shrink their payroll costs.  IC misclassification is not more prevalent in the oil and gas fields than it is in other industries; it just seems as though class action lawyers have been targeting this area of the energy arena in the last few years.

What can large and small companies that use ICs in the oil fields do to minimize any such IC misclassification liability and, correspondingly, maximize their compliance with federal and state IC laws?

Before answering those questions, we will review some recent cases affecting companies in the oil and gas industry to give you an idea of the types of IC misclassification challenges that are afflicting companies in this industry.

Rig Welder Brings Class Action for IC Misclassification.  This case involves a modest-size oil exploration and production company, Whiting Petroleum, which was sued last year in Colorado in a proposed class action by a rig welder who claims he and other similarly situated workers were misclassified as independent contractors.  He alleged that the welders should have been paid overtime as employees when they worked over 40 hours in a workweek, allegedly in violation of the federal Fair Labor Standards Act (FLSA).

The welder claims that he worked exclusively for Whiting Petroleum and the company’s clients/customers; was prohibited from working for other companies while “employed” on the company’s jobs; and was “supervised” by the company, which allegedly controlled his work schedule or other “conditions of employment,” even though he often worked off company premises.  He also alleged that Whiting enforced  compliance with the company’s or its clients’ policies and procedures and unilaterally determined the rate and method of payment for all of the welders.

The company filed a motion to dismiss the case, arguing that the complaint did not sufficiently plead that Whiting Petroleum was the plaintiff’s employer under the FLSA, but a federal court denied the motion.  It found that the allegations were sufficient to allow the case to proceed to the discovery stage. Whiting has denied the claims and the case is currently scheduled for mediation in an effort to settle the case.

Well Site Managers Sue Large Energy Company for Misclassifying Them as ICs.  This case against Chevron Corp. was brought last year in California by oil and well site drilling managers who were paid on a 1099 basis but claim they were misclassified as ICs and denied minimum wage and overtime under the FLSA.  The plaintiffs allege that they were “supervised” by Chevron; that the company determined their work schedules and set their rates of pay without negotiation; that Chevron provided all of the equipment including laptops, email addresses, printers, internet access, and uniforms; that it required the managers to follow instructions, processes, and policies regarding how to complete their work; that the workers were required to submit daily reports with details outlining their work; and that Chevron required them to attend meetings and trainings.  Chevron disputed those claims.

The drill site managers made a motion to have the case certified by the court as a class action –  and they prevailed, over the strenuous opposition of Chevron.

 Oil Field Workers Monitoring Wells Settle Their IC Misclassification Case for $2 Million.  Flow testers who monitored oil and gas wells brought a lawsuit against J & A Services LLC, an Oklahoma oil patch company, alleging that they were misclassified as ICs in violation of the FLSA. Specifically, the plaintiffs claimed that J & A supervised and directed the flow testers; scheduled and disciplined them; required them to attend meetings; instructed them when, where, and how to perform their work; provided safety training to the workers; and mandated that they follow rules when performing services.  The plaintiffs  sought to represent all current and former hourly paid workers treated by J & A as independent contractors who monitored and maintained oil and gas wells for the company.

J & A maintained throughout the litigation that the flow testers were ICs; nonetheless, the company agreed to conditional certification of the workers as a collective class.  After substantial pre-trial discovery, the parties consented to enter into mediation, where J & A agreed to settle the case with 71 workers for $2 million.  A number of the plaintiffs have received over $40,000 each, and 40% is being paid to the plaintiffs’ class action lawyers.

Welders for Chinese Oil Rig Company Sue for IC Misclassification. Honghua America LLC was sued in Texas by two welders who claimed they were misclassified as independent contractors in violation of the FLSA. The company tried to dismiss the case on summary judgment but the court denied its motion and set the case down for trial.  The court found that a number of key factual issues would have to be decided at trial: the extent to which Honghua America retained or exercised  control  over the welders; whether the welders provided their own tools and equipment; whether the welders had an opportunity to control their own profits and losses; the level of skill and initiative needed to perform the services; and the permanency of the relationship between the welders and the company.

Two months after the court denied Honghua’s motion for summary judgment, the company  settled the case for an undisclosed amount.

What Can A Company in the Oil and Gas Industry Do To Minimize IC Misclassification Liability?

Although the U.S. Department of Labor has dialed down its crackdown on IC misclassification and leveled the playing field under a new Administration, class action lawyers have not diminished their focus on these types of lawsuits against companies in the oil and gas industry. For example, in January 2018, another proposed class action lawsuit was filed against a company by Measurement While Drilling (MWD) operators paid on a 1099 basis. They allege that they and other similarly situated MWD operators have been misclassified as ICs and not paid overtime for all hours worked over 40 in a workweek, in violation of the federal wage and hour laws.

The threshold inquiry by any company using ICs should be whether the workers in question are suitable candidates for payment on a 1099 basis.  Not all workers are.  Although the tests for IC status vary dramatically between the states and there are different tests under various federal statutes, it is not particularly challenging to determine, as an initial matter, whether any particular group of workers might qualify as valid ICs.

While most tests for IC status consist of several factors, some as many as 20 or more, there is one factor that is constant in every test: is the individual told “how” to perform his or her services? Plainly, every IC and every employee are directed as to “what” work they are expected to do.  But unlike employees, who are subject to being told “how” to do their work, the most important factor in determining IC status is whether the workers themselves decide the manner and means by which they render services, consistent of course with industry standards and any legal or client requirements.

Even if the workers in question may qualify as ICs, companies all too often create their own exposure to IC misclassification if they fail to properly structure, document, and implement their IC relationships in a manner that complies with IC laws.  This is where a comprehensive process, such as IC Diagnostics™, can be effectively deployed, assessing well over 48 factors bearing on workers’ IC status before an IC relationship is established – or, if it is already in existence, determining how it can be restructured, re-documented, and re-implemented to minimize IC misclassification exposure.

The tests for IC status have plagued legal practitioners and companies for years.  Although the laws oftentimes require companies to dot many i’s and cross many t’s, a great number of the factors bearing on IC status are counter-intuitive.

What can happen to a company that does not structure or document its IC relationships in a manner that enhances compliance? The results can be costly, such as what happened to one of the country’s Fortune 500 companies, FedEx. The wording of its independent contractor agreement covering its Ground Division drivers was held by two federal appellate courts as creating an employment relationship as a matter of law.  As a result, FedEx was forced to settle several dozen IC misclassification cases for nearly $500 million in the past several years.

Solid documentation alone will not always protect a company; it is not uncommon for companies with decent IC agreements to fail to carry out or implement its IC relationships in a way that is consistent with IC laws and the IC agreement.

What is a company in the oil patch to do?  There are no shortcuts or “quick fixes” when seeking to enhance IC compliance, and “one size fits all” solutions are likely to be ill-fitting.  Companies that rely on ICs should seek out sustainable solutions that offer state-of-the-art approaches to enhancing IC compliance. While such an approach is more time-intensive, a customized approach is far more likely to effectively minimize IC misclassification exposure.

One final note:  IC agreements containing arbitration provisions with class action waivers can provide some level of protection against most class actions brought by private litigants.  While such provisions are not applicable to governmental agencies conducting audits, investigations, or administrative proceedings, their inclusion in IC agreements is favored by many employers. For example, in the Chevron case discussed above, that company was able to obtain an order from the court compelling arbitration of the plaintiffs’ claims.  There is, however, a question about the enforceability of mandatory arbitration agreements with class action waivers.  That issue is currently pending before the U.S. Supreme Court, but there are ways to draft such arbitration provisions to increase their enforceability.

This article was published in abbreviated form on the E&P website (May 2, 2018), which can be found by clicking here. Those portions are reprinted here with permission from E&P Copyright 2018 (800.372.1033).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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