As reported six months ago in an article in the E&P Journal, the oil and gas industry is under attack by plaintiffs’ class action lawyers filing independent contractor misclassification lawsuits. My colleagues Bill Swanstrom and Mike Rose joined me in commenting on some of the more notable lawsuits against energy companies that use independent contractors to perform specialty services in the areas of exploration and production.

We commented in that article on an IC misclassification case brought by a rig welder in Colorado against a modest-sized oil exploration and production company; another brought in California by well site managers who sued a large energy company; a third brought by flow testers against an Oklahoma oil patch company; and a fourth by welders in Texas against a Chinese oil rig company.

Even more lawsuits against companies in the oil and gas industry have surfaced in the past six months, several of which are discussed below.  While on the lookout for additional IC misclassification cases, we came across a website for a plaintiffs’ class action law firm includes a “hit list” of energy companies as potential defendants in claims for independent contractor misclassification.  That list has over 130 companies’ names, and the site suggests that workers “may have claims” if they are providing the following types of services:  Base Operators, Flow Back Operators, Pipeline Inspectors, Drillers, Field Specialists, Field Engineers, Field Operators, Field Coordinators, and Tool Pushers.

This type of advertising by plaintiffs’ class action lawyers is increasingly common.  What can companies do to minimize the risk of class action IC misclassification lawsuits?  After summarizing these new cases, we provide an in-depth analysis and then discuss in our “Takeaways” some ways that companies, including those in the oil and gas industry, can maximize compliance with federal and state IC laws and reduce the likelihood of becoming a defendant in these types of class actions.

More Recent IC Misclassification Cases in the Oil and Gas Industry

OIL AND NATURAL GAS COMPANY AGREES TO PAY OILFIELD WORKERS $2.9 MILLION IN SETTLEMENT OF IC MISCLASSIFICATION CLASS ACTION

Less than two weeks ago, a Pennsylvania federal court granted final approval of a $2.9 million settlement of a class and collective action brought by oilfield workers against Rice Energy, Inc., an oil and natural gas company. The plaintiff, a drilling fluid engineer, provided specialty services in Ohio and Pennsylvania in the Marcellus, Utica, and Upper Devonian Shales for six months beginning in August 2016.  The plaintiff asserted that Rice Energy engaged in violations of the federal Fair Labor Standards Act (FLSA) and state wage and hour laws as a result of its alleged misclassification of plaintiff and other oilfield workers as independent contractors and not employees.

According to the complaint, the plaintiff’s primary job duties included monitoring fluid activities at jobsites, operating oilfield equipment, coordinating transfer of fluids between rigs, controlling fluid within defined specifications, and building and maintaining various fluid systems associated with drilling and completion of wells. In support of the misclassification claims, the complaint alleged that: Rice Energy directed the hours and locations where the plaintiff worked, the tools he used, and the rates of pay he received; the plaintiff did not provide his own equipment or incur operating expenses like rent, payroll, marketing, and insurance; no real investment was required of the plaintiff; the plaintiff was economically dependent on the company and was prohibited from working other jobs while working on jobs for the defendant; Rice Energy directly determined the plaintiff’s opportunity for profit and loss; and that very little skill, training, or initiative was required of plaintiff to perform work for the company.

The defendant’s answer denied these allegations and focused on the fact that the plaintiff “independently contracted with Patriot Drilling Fluids, a company with which [Rice Energy] contracted to perform services at well sites.”  The answer also contained more than a dozen defenses, including: the plaintiff and proposed class and collective members were properly classified as independent contractors; they were engaged by a third party, Patriot Drilling Fluids, and not by the defendant; and any alleged damages were the sole responsibility of the third party and not the defendant. The court’s order approving the settlement expressly stated that it “makes no finding or judgment as to the validity of any claims released under the Settlement or whether Rice Energy is liable under the Fair Labor Standards Act or any other applicable law.” Williford v. Rice Energy, Inc., No. 2:17-cv-00945-DSC (W. D. Pa. Dec. 19, 2018).

ENERGY AND PETROCHEMICAL SERVICES COMPANY IS NOT ENTITLED TO SUMMARY JUDGMENT IN IC MISCLASSIFICATION COLLECTIVE ACTION BY CONSULTING “COACHES”, BUT SECURES DE-CERTIFICATION ORDER FROM THE COURT

Two months ago, an Oklahoma federal court denied the summary judgment motion of Check-6, Inc., a company in the business of providing consulting services in the energy, manufacturing, mining, petrochemical and transportation industries brought against it by consulting “coaches” who provided services at the work sites of Check-6’s clients. A collective group of coaches, consisting of the named plaintiff and 18 opt-ins, claimed that they were denied overtime compensation under the FLSA due to their alleged misclassification as independent contractors and not employees.  In its decision, the court stated that the Court of Appeals for the Tenth Circuit has “repeatedly denied summary judgment motions where there remained disputed facts material to the classification of workers as employees or independent contractors.” Applying the six-factor “economic realities” test, the court found that a reasonable trier of fact could find that the facts supported a determination that the coaches were employees and not independent contractors; therefore, the court held, summary judgment must be denied. Specifically, the court found that the evidence was in dispute as to four of the six factors: the degree of control over the coaches; their opportunity for profit and loss; the coaches’ investment in their individual business; and the permanence of the parties’ working relationship. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N.D. Okla. Oct. 18, 2018).

Although the court denied summary judgment in favor of the company, less than two weeks later the court “de-certified” the class/collective action.  It stated: “[D]ecertification is warranted by individualized issues, which include, but are not limited to, . . . the determination of each plaintiff’s status as an independent contractor or employee.”  With regard to the issue of whether the “coaches” were properly classified as independent contractors, the court utilized the fact-intensive economic realities test and concluded that any such determination would require individualized analysis of each of the opt-in plaintiffs especially because they worked at different Check-6 client sites and had different responsibilities depending on the site. Goodly v. Check-6, Inc., No. 16-CV-334-GKF-JFJ (N. D. Okla. Nov. 1, 2018).

DRILLING/WELL SITE CONSULTANT FILES IC MISCLASSIFICATION CLASS ACTION IN PENNSYLVANIA

This past September, a drilling consultant/well site supervisor filed a proposed class and collective action on behalf of himself and other oil field personnel against EdgeMarc Energy Holdings, LLC, an oil and natural gas company primarily doing business in Pennsylvania, Ohio, and West Virginia. The lawsuit is aimed at recovering unpaid overtime compensation under the FLSA and wage and hour laws of Pennsylvania and Ohio that the plaintiff claims is due because he and the other oil field workers were classified as independent contractors and not employees.

According to the complaint, the workers operate oilfield machinery; perform manual labor and work long hours in the field, and are paid a day-rate with no overtime compensation.  The complaint further alleged, among other things, that the daily activities of the workers were mostly governed by EdgeMarc’s or its clients’ standardized plans, procedures, and checklists; virtually every job function was pre-determined by EdgeMarc or its clients, including what tools to use, what data to compile, the schedule of work and related work duties; and the workers were prohibited from varying their job duties outside pre-determined parameters. The plaintiff also alleges that no substantial investment was required of him; that EdgeMarc or the company it contracted with exercised control over all aspects of the plaintiff’s job, including the hours and locations of work, tools used, and rates of pay received; he did not incur operating expenses like rent, payroll, marketing and insurance; he was prohibited from working other jobs for other companies; and his work required little skill, training or initiative.  Larsen v. EdgeMarc Energy Holdings LLC, No. 2:18-cv-01221 (W.D. Pa. Sept. 13, 2018).

Takeaways:  How Companies in the Oil and Gas Industry Can Minimize IC Misclassification Exposure and Maximize Compliance with IC Laws

1.  Restructuring, re-documenting, and re-implementing their IC relationships

While the U.S. Department of Labor may have dialed down its crackdown on IC misclassification and leveled the playing field under a new Administration, class action lawyers have increased their focus on these types of lawsuits against companies in the oil and gas industry.

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 directed “how” to perform his or her services? Plainly, every IC and every employee are directed as to “what” work they are expected to perform.  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 service providers 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 – or if the companies that directly engage ICs fail to do so.  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 vexed legal practitioners and companies for years, and 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 chose to settle several dozen IC misclassification cases for nearly $500 million in the past several years.

In the Larson v. EdgeMarc Energy case reported above, if the allegations are true that the company prepared standardized plans, procedures, and checklists for the oilfield workers treated as independent contractors, it would be far more challenging for the company to defend the case than if its documentation was free from direction and control.

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 their 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.

2.  Avoid treating all those classified as independent contractors in the same fashion

In the Goodly v. Check-6 case, the court de-certified the class/collective, which requires the plaintiff and each of the 18 opt-ins to litigate their cases on an individual basis. De-certification can sometimes lead to settlement on a far more cost-efficient basis. But de-certification can usually only be obtained where there are meaningful differences in treatment or circumstances between the plaintiff and many of the proposed class or collective members. While uniformity and consistency may create efficiencies, businesses that treat some contractors differently can lead to a court to out an end to a class or collective action at the preliminary or final stages of a lawsuit.

3.  Adding a state-of-the-art arbitration clause to IC agreements

In addition, companies should consider adding to their IC agreements arbitration provisions with class action waivers.  While such provisions are not applicable to governmental agencies conducting audits, investigations, or administrative proceedings, their inclusion in IC agreements has served the interests of many employers.

For example, in a blog post a year ago, we reported that a California federal court had granted Chevron Corporation’s motions to compel arbitration of collective action claims brought by well site/drill site managers who alleged that Chevron had violated the wage and overtime provisions of the FLSA due to alleged misclassification of the managers as independent contractors. Each of the four managers who were the subject of the motion to compel arbitration had entered into arbitration agreements with different consulting firms to provide services for Chevron. In granting the motion to compel arbitration, the court ruled that Chevron was entitled, as a third-party beneficiary, to enforce the arbitration provisions in the managers’ contracts with the consulting companies that had assigned the managers to work for Chevron. Each consultancy agreement contained similar arbitration language: “All claims, disputes or controversies arising out of, in connection with or in relation to this Agreement or the Services, including any and all issues of arbitration of such claim, dispute or controversy…shall be submitted to a mandatory and binding arbitration….”  McQueen v. Chevron Corp., No. C 16-02089 (N.D. Cal. Dec. 18, 2017).

When arbitration agreements are in place, class action lawyers oftentimes take a closer look at whether they wish to invest the time and resources necessary to pursue and litigate a class or collective action case.  The lawyers in the Williford v. Rice Energy case, which we summarized above, are located in Texas, but they were retained by a drilling fluid engineer who worked in Pennsylvania and Ohio.  That law firm has a robust internet presence and advertises its services by asking “Have you been misclassified as an independent contractor?”  While those lawyers don’t have a “hit list” of oil and gas companies, they do have a “hit list” of 14 industries they say on their website have “independent contractor issues,” and they list “oil and gas – both service companies and operators,” at the very top. If the third-party contractor that contracted with Rice Energy had included a Chevron-type arbitration clause with a class action waiver in its IC agreement with its independent contractors, the lawyers engaged by Williford may have chosen not to accept the case due to the existence of the arbitration clause.  Or, even if they chose to pursue the matter, Check-6 may have been able to do what Chevron accomplished – compel arbitration and forestall the class action lawsuit.

Ideally, companies that make use of ICs in the oil and gas industry – and in virtually all other industries – will seek to carry out all three of the above steps to minimize class action IC misclassification lawsuits while enhancing their compliance with IC laws.