Locke Lord

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 maximize their compliance with federal and state IC laws?

Before answering those questions, we will comment on 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 E&P 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 in violation of the federal Fair Labor Standards Act (FLSA).  The company filed a motion to dismiss the case but a federal court denied the motion.  Whiting has denied the claims, and the case was 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 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.

Oilfield 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. After substantial pre-trial discovery, the parties consented to enter mediation, where J&A agreed to settle the case with 71 workers for $2 million.

Welders for a 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. 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?

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 MWD operators paid on a 1099 basis. They allege 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, and he tests for IC status vary dramatically between the states and there are different tests under various federal statutes. 

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.

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.

This post was written by Locke Lord partners Michael Rose, who is board certified in labor and employment law; Richard Reibstein, co-head of the firm’s independent contractor misclassification and compliance practice; and Bill Swanstrom, co-chair of the firm's energy practice group.