Is Your Company on an Independent Contractor Misclassification “Hit List”?

As reported six months ago in an article in the E&P Journal, the oil and gas industry is one of those that is under attack by plaintiffs’ class action lawyers filing independent contractor misclassification lawsuits. My colleagues Bill Swanstrom and Mike Rose joined me then 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.

While on the lookout for additional IC misclassification cases in the oil and gas industry, we came across a website page for a plaintiffs’ class action law firm that focuses on  several industries and includes “hit lists” of companies as potential defendants in claims alleging independent contractor misclassification.  In the oil and gas industry, the list names more than 130 companies, and the site suggests that workers “may have claims” if they are performing any of the following types of services:  Base Operators, Flow Back Operators, Pipeline Inspectors, Drillers, Field Specialists, Field Engineers, Field Operators, Field Coordinators, and Tool Pushers.

Other industries with “hit lists” on that website page include trucking and transportation, chain restaurants, banking and financial services, and retail sales – each with a list of company names.

This type of advertising by plaintiffs’ class action lawyers is increasingly common.  What can companies do to minimize the risk that they will become a defendant in a class action IC misclassification lawsuit?  After summarizing some of the new cases affecting the oil and gas industry, we provide an in-depth analysis and then discuss on our “Takeaways” some steps that companies in all industries can take not only to maximize compliance with federal and state IC laws but also to reduce the likelihood of becoming a defendant in those types of class actions.

Recent IC Misclassification Cases in the Oil and Gas Industry

While we report below on three recent cases in one industry, these sorts of IC misclassification lawsuits are similar to those affecting companies in almost every other sector of the economy.

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 him 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 his 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 there was disputed evidence as to four of the six factors: the company’s degree of control over the services performed by 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 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 with which it contracted, 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 Can Minimize IC Misclassification Exposure and Maximize Compliance with IC Laws

Regardless of whether your company is on “hit list” created by a plaintiffs’ class action law firm, there are a number of steps you can take to reduce the likelihood of IC misclassification liability and to enhance your compliance with federal and state IC laws.  Here are three:

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

While the U.S. Department of Labor may have dialed down its crackdown on IC misclassification and leveled the playing field under the Trump administration, class action lawyers have increased their focus on these types of lawsuits.

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 among 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 validly 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 crucial in every test: is the individual directed “how” to perform his or her services? Plainly, every business directs every IC and every employee 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 with industry standards and any legal or client requirements.

Even if the workers in question may qualify as valid ICs, companies all too often create their own exposure to IC misclassification if they, or a party they contract with, 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 one already exists, determining how it can be restructured, re-documented, and re-implemented to minimize any 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 is found by a court or regulatory agency to be non-compliant? 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, over the past several years, FedEx has chosen to settle several dozen IC misclassification cases for nearly $500 million.

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 their IC agreements.

What is a company to do, whether they are in the oil and gas industry or, for that matter, any other sector of the economy?  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, without changing a company’s business model.

  1.  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.  This is likely to require 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 less costly 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 put an end to a class or collective action at the preliminary or final stages of a lawsuit.

  1.  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, many of our monthly news updates include cases where companies have successfully compelled individual arbitration in response to the filing of a proposed class action.  For example, in one of those blog posts, 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 that provided services to 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. 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 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.

Other industries listed on that law firm’s independent contractor hit list are: staffing companies; commercial construction; retailers; financial services; home care; IT, software and computer technology; accounting; marijuana products; insurance; entertainment; real estate; delivery services and short-haul transportation; and telemarketing.

If the third-party contractor that had 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.  Or, even if they chose to pursue the matter, Check-6 may have been able to accomplish what Chevron did – compel arbitration and forestall the class action lawsuit.

Of course, it is imperative that an arbitration clause with a class action waiver be well drafted and anticipate the types of arguments that plaintiffs’ class action lawyer typically raise in response to a motion to compel arbitration – as we pointed out in our blog post entitled “How to Effectively Draft Arbitration Clauses With Class Action Waivers in Independent Contractor Agreements.”

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

Written by Richard Reibstein

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