Independent Contractors Redux: Fifth Circuit Returns to Oil Patch to Address Independent Contractor Status Under the Fair Labor Standards Act

January 21, 2020 | Insights

By Lionel Schooler

Overtime Pay in the Oil Patch

The boom for domestic energy producers, particularly in the Permian Basin, has been accompanied by the companion challenge of how to compensate transient oilfield service providers within the strictures of the federal Fair Labor Standards Act (FLSA). Oilfield service providers have frequently recruited specialized individuals to perform services on their projects, classifying them as independent contractors for compensation purposes. Such a classification, if correct, precludes subsequent attempts by such individuals to be re-classified as “employees” entitled to be paid statutory overtime wages and penalties.

In early 2018, the United States Court of Appeals for the Fifth Circuit issued its decision in Parrish v. Premier Directional Drilling, L.P., which upheld independent contractor status of individual drilling consultants and thus rejected their eligibility for overtime pay. In the wake of this decision, energy producers have taken solace from the fact that relationships incorporating indicia of “independence” and bearing the label of “independent contractor” may well spare them from having to pay FLSA overtime wages and penalties.

A recent decision by the Fifth Circuit in Hobbs v. Petroplex Pipe and Construction, Inc., demonstrates that the form of a superficial classification combined with shards of indicia of “independence” will not prevail over the substance of a relationship that should actually be classified as that of “employer-employee.”

Factual Background

Petroplex is an oilfield contractor and service company in Midland. One of its clients, Pioneer Natural Resources, asked Petroplex in February 2014 to provide pipe welding services at locations where Petroplex was constructing oil treatment and storage facilities for Pioneer. Petroplex hired individuals to perform such services. These individuals were classified by Petroplex as independent contractors, although the pipe welders never signed a contract with Petroplex to that effect. Two such individuals eventually sued Petroplex, claiming that they had been misclassified, and therefore were entitled to overtime pay. The evidence in the case demonstrated the following facts.

Tenure. One of the plaintiffs had worked continually for Petroplex for three years; the other had worked for Petroplex from July to October 2014, then left to work closer to home, then returned to work at Petroplex in January 2016, and stayed on-site until June 2016.

Job Duties. These plaintiffs worked primarily as pipe welders, but in the course of a workweek would sometimes perform structural welding, complete maintenance jobs, and operate forklifts.

Rate of Pay. These plaintiffs were typically paid a straight hourly rate of $70 or $80. They claimed that they were not given the opportunity to negotiate their rate of pay.

Work Commitment. These plaintiffs worked a shift from 7 a.m. to 5 p.m., six days a week. When they were performing work for Petroplex, they did not provide pipe welding services to other companies. They acknowledged that there were times where they missed work for weeks at a time.

Investment in Work Equipment and Supplies. The plaintiffs supplied their own trucks, welding machines, beveling machines, grinders, torches, torch hoses, leads, jack stands, hand tools, levels, and squares. They were also responsible for their own meals and housing, and purchased campers in which to live while working for Petroplex.

By contrast, Petroplex paid for and supplied the welders with consumables, such as oxygen acetylene for coating, welding rods, buffing wheels, grinding disks, face shields, and sanding pads, and also made a large investment on all of its equipment at each construction site. Petroplex also compensated the welders for the time they spent undergoing testing and certification by Petroplex’s customer.

Income Tax Treatment of Compensation. In their tax returns, plaintiffs listed themselves as self-employed and took thousands of dollars in deductions on work-related expenses.

Control Issues. Petroplex set the welders’ hours, and if they showed up late, sent them home for the day. Indeed, one plaintiff’s relationship with Petroplex ended after he showed up to work late; the other plaintiff ceased his relationship with Petroplex after being informed that Petroplex was running out of work for him.
The welders also took their breaks and lunches at the same time as Petroplex’s employees. However, they did not receive any Petroplex employee handbook, uniforms, or vehicles.

The supervisor overseeing the welders’ work gave them specific instructions, such as which job assignments to complete each day, as well as dividing up job assignments, pulling measurements on welds, providing diagrams for the welders, and sending the welders home when they showed up to work late.

Criteria Used to Evaluate Independent Contractor Status

Judicial standards for determining employment status have existed since 1947, yielding 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.

Disregarding superficial criteria, such as that the plaintiffs were professionally skilled welders, or that they characterized their activities for tax purposes as “self-employment,” the Hobbs Court instead emphasized that no one factor was determinative, such that the focus was on the totality of circumstances to assess the existence or non-existence of “economic dependence.” The Court therefore conducted a nuanced, “real world” analysis to scrutinize the facts of this case against the backdrop of these five criteria.

Evaluating Economic Realities and Economic Dependence

The task therefore undertaken by the Hobbs Court was to determine whether each plaintiff was, as a matter of economic reality, in business for himself. In reviewing the five factors identified above, the Court determined as follows:

  1. Degree of Control. The Court noted, first, that the “control” criterion would only be significant when it showed an individual’s exertion of control over a meaningful part of the business so as to exist as a separate economic entity. It further stated that analysis of this criterion focused upon whether the worker had a viable economic status that could be traded to other companies. The Court held that while Petroplex did lack control over certain aspects of the pipe welders’ work, nevertheless, Petroplex regularly assigned specific tasks and the hours to be worked, including requiring a fixed work schedule, as well as the fact that the welders were sometimes required to work late; and it imposed upon the welders the requirement that if they showed up to work late, they would be sent home for the day. The Court also characterized as “significant” the fact that at times, Petroplex assigned the welders to perform tasks other than pipe welding. Finally, in contrast to the situation presented in the Parrish case, the welders never refused to work on assigned projects.
    The Court concluded that the facts pertinent to evaluating this control criterion, including the imposition of discipline for arriving to work late, supported a finding of “employee” status.
  2. Relative Investments. As for the “investment” criterion, the Court determined that it tilted slightly in favor of “employee” status, because the Company clearly had invested more money in its work for its client than had any of the welders. It cited as examples of this disproportion Petroplex’s providing a forklift to move pipes, paying welders’ helpers, paying for forklift testing and safety school for the welders, and spending approximately $30,000 to outfit a welding shop. At the same time, the Court noted the substantial sums invested by the welders, but ultimately did not accord this factor much weight, given the nature of the industry and the work involved.
  3. 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, as part of the formula it utilized to evaluate this criterion, the Court echoed the evidentiary focus in the Parrish ruling that “evidence gleaned from tax returns can be useful” when evaluating this factor. The Court further noted that it was appropriate to consider whether Petroplex’s control over the worker’s schedule and pay had the effect of limiting his opportunity, as an independent contractor, for profit or loss. Against this backdrop, the Court held the record supported the finding that the welders never negotiated their rate of pay, and that Petroplex fixed the hourly rate of pay. The Court further held that the work schedule imposed by Petroplex severely limited the welders’ opportunity for profit or loss, that is, the welders regularly worked more than 40 hours a week (on average, they worked 60 hours per week). This work schedule effectively prevented them from engaging in outside work. Further, the Court determined that the welders’ year-end profits or losses did not depend on their ability to find welding work with other companies consistently or other work generally. Indeed, in this case, one of the Plaintiffs worked exclusively for Petroplex for three years; the other Plaintiff worked exclusively for Petroplex when he was employed by it. The welders could not supplement their income with work from outside companies while they were working for Petroplex.
    Based upon this evidence, the Court upheld the categorization of this factor as favoring “employee” status.
  4. Skill and Initiative Required to Perform the Job. In addressing this factor, the Court noted at the outset that the relevant consideration was the extent of discretion the welder had over his daily tasks and whether he was obliged to take initiative to find consistent work. The plaintiffs were highly skilled, but not required to demonstrate initiative. On the basis of the record before it, the Court sustained the determination that this factor was “neutral” in the calculus of assessing independent contractor status.
  5. Permanency of the Relationship. Invoking the teaching of the Parrish decision, the Court prefaced its analysis of the “permanency” factor by noting that the work involved was not being performed on a project-by-project basis. Petroplex hired the pipe welders to work on all its pipe welding work as needed, irrespective of Petroplex’s tasks performed for its customer.
    The Court thus deemed the length and nature of the welders’ relationship with Petroplex to resemble more closely “employee” status. It also pointed to evidence indicating that during downturns in the oil and gas industry, Petroplex used its pipe welders for jobs other than pipe welding. The Court thus upheld the determination that categorization of this factor as favoring “employee” status.
  6. Other Factors. The Court briefly also considered other factors, such as that the welders did not wear company uniforms, did not have Petroplex vehicles, and did not receive Petroplex’s employee handbook. The Court found this evidence to be of little significance when viewed against the backdrop of the substantial evidence of the economic realities of the situation.

On the basis of its evaluation, the Court concluded that these individuals were employees eligible for overtime compensation under the FLSA.

Important Lessons for Employers

The Hobbs decision concludes with an interesting message from the Court for employers: “This case is not the first occasion we have had to consider whether welders or workers in the oil and gas industry were employees under the FLSA.” It goes on to acknowledge that in this case there were certain evidentiary indices of independent contractor status; however, it emphasized that overall the evidence supported the trial court’s determination of employee status, a determination that could not be disturbed because it was not “clearly erroneous.”

The Hobbs decision demonstrates two realities for energy industry employers:

First, the Fifth Circuit will not support an independent contractor classification based upon superficial labeling or efforts to camouflage the true nature of a relationship by myopic focus based upon the skill of the worker involved; and

Second, employers will be obliged to ensure that they can satisfy proof of independent contractor status in a majority, if not all, of the enumerated factors thoroughly reviewed by the Court in this case.

To establish the existence of a relationship that qualifies under the FLSA as exempt from overtime, Hobbs accentuates the importance of following explicitly the independent contractor template upheld in Parrish. Companies are thus well-advised to ensure not only the creation and use of specific independent contractor agreements, but also the creation of a work and compensation structure that diverges from that used by the Company with its full-time employees.

Meet Lonnie

Lionel M. Schooler is a management-side employment lawyer and recognized authority on employment law, federal appellate practice, and arbitration. Lonnie’s employment practice focuses on counseling clients and litigating, on a nationwide basis, claims under all employment laws, wage and hour claims, and investigations by the Equal Employment Opportunity Commission, the U.S. Department of Labor, and the Texas Workforce Commission. Lonnie is also experienced as an arbitrator on the Commercial and Employment Panels of the American Arbitration Association and as an advocate. He was selected for inclusion by the National Association of Distinguished Neutrals and is certified as a Fellow of the Chartered Institute of Arbitrators for international arbitration matters. Since 2017, Lonnie has served on the Board of Directors of the Houston Bar Association. His previous editorial experience includes serving as editor-in-chief of The Houston Lawyer, a bimonthly publication of the Houston Bar Association.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice.