For the past several years, the nation’s oil and gas industry has boomed, creating multitudes of new millionaires. The growing wealth achieved by the industry has attracted some new actors with designs on grabbing their own piece of the oil/gas money pie—but these actors aren’t focused on what’s in the ground, but rather, who’s taking it out of the ground.  Specifically, plaintiffs’ wage and hour lawyers, the Department of Labor (“DOL”), and other regulators are applying ever-increasing scrutiny to the use by oil and gas companies of independent contractors and day rates to pay laborers.

While it may seem desirable to use independent contractors to eliminate overtime issues, our experience has taught us that this practice carries big risks.  Indeed, there are few employer wage/hour practices that trigger stricter scrutiny by the DOL than calling workers, independent contractors.  Companies must be careful not to misclassify workers as independent contractors when they should be classified as employees.  Such a misclassification could lead not only to suits for unpaid overtime, but also unwelcome attention from various government agencies seeking back taxes.

When determining whether a worker is an independent contractor, courts and the Department of Labor apply an “economic realities” test that seeks “to determine the underlying economic reality of the situation and whether the individual is economically dependent on the supposed employer.”  Some of the factors considered are: (1) the extent to which the worker’s services are an integral part of the employer’s business; (2) the permanency of the relationship; (3) the amount of the worker’s investment in facilities and equipment; (4) the nature and degree of control by the principal; (5) the worker’s opportunities for profit and loss; and (6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise.  Under this standard, a contract between the company and the worker (or even the worker’s business) is not sufficient.

In our experience, companies can lower the risk that a court would find that a worker was an employee, rather than an independent contractor, by choosing to avoid using the same independent contractor for an extended period of time, requiring independent contractors to use their own tools and equipment, and avoiding controlling the manner in which the independent contractor performs the work.

Other problems can arise when workers who should be treated as nonexempt employees are misclassified.  Oil workers with special technical knowledge may not qualify to be exempt managers, and are therefore entitled to overtime wages.  Many oil workers are paid on a per-day basis (which can be quite a large sum), but these employees are also entitled to overtime pay for time worked in excess of 40 hours per week.  Simply increasing the per-day pay to account for overtime hours will not eliminate the obligation to pay overtime wages and may backfire, as this will lead to a higher hourly and overtime wage in the event of a suit to collect back wages.  Employers who fail to monitor and pay overtime wages risk lawsuits from employees (including class actions) and government agencies.

Our experience suggests that companies, including those in the energy industry, can protect themselves by monitoring employees’ work hours to make sure overtime is paid, having workers sign class action waivers (although the NLRB is appealing the decision, the Fifth Circuit, which includes Texas, has held that class arbitration waivers do not violate the NLRA), and by making sure that workers are properly classified.