Given the recent, sharp decline in the price of crude oil, many businesses operating in the oil sector are considering how to reduce costs to remain profitable. One way to control costs, or in some cases, to survive low commodity prices, is to reduce recurring overhead attributable to labor costs through workforce restructuring or adjustment to employment terms and conditions.
Current market conditions may also affect employment decisions once the price of crude oil rebounds, particularly if the price increase is minimal or subject to volatility. For example, employers who have trimmed their workforce during a down economy are often reluctant to staff back up once conditions, in this case oil prices, improve. Rather than permanently expanding the workforce and committing to the recurring overhead associated with such expansion, employers in rebounding industry sectors often rely instead on temporary workers or contractors to meet staffing needs. In this update, we will provide a brief overview of potential concerns associated with restructuring and rebuilding a workforce during the depressed or unpredictable economic climates currently faced by employers in the oil and gas sector.
Redundancies, reductions in force, and “rightsizing”
Large-scale employment terminations have a multitude of different names depending on the jurisdiction. Commonly known as “redundancies” in the EU and EEA and “reductions in force” or RIFs in the U.S., these workforce actions have even been termed “downsizing” or “rightsizing,” as least by employers undertaking such actions. Whatever term is used, it is unquestionable that redundancies or RIFs are already being implemented on a significant scale as an immediate cost-control strategy by employers in the oil sector. Indeed, according to a March 20, 2015 report1, over 100,000 global oil-industry jobs have already been lost. That same report notes that, while some experts believe the price per barrel has bottomed out, others predict it may slide even further to US$20 barrel, making more drilling operations unprofitable and likely necessitating further job cuts by sector employers. And, even if oil prices rebound in the near term, the increased efficiency of oil operations realized by fracking and other innovative techniques has created an oil surplus in the U.S. Such surplus may cause companies to cut production – and employees – in the short term, and may reduce the need for labor in the long term, without regard to the current price per barrel.
It is clear that, no matter what happens with the price of oil, employers in the oil sector are and will continue to consider workforce restructurings as means of meeting business goals. How such workforce actions proceed and what legal risks are created by such actions depend on many factors, including obligations to trade unions by agreement or by law, the presence of individual employment contracts, the size of the proposed action, whether a severance or reduction package will or must be offered, and how employees are selected for inclusion in the workforce reduction.
An employer contemplating any workforce action must consider whether it has any obligations affecting the RIF’s implementation by union agreement or by law. For example, in the EU and EEA, trade unions or other employee representatives must be consulted when collective redundancies are proposed. Time for consultation, the length of which varies widely from country to country, must be factored into any planning process. In the U.S., businesses with unionized workforces will also need to consider whether collective bargaining agreements require notice to or “bargaining” with the union. Such employers must also consult the union contract to determine whether certain procedures, such as selection of employees for reduction in accordance with seniority, must be followed in carrying out the RIF.
Whether cuts occur in the U.S. or elsewhere, employers must also consider any individual employment agreements to determine whether there are pre-existing contractual severance or notice obligations to employees who are parties to such agreements.
Absent individual or union agreements, employees in the U.S. are generally considered to be employed “at-will” and can be legally dismissed on an individual basis from employment, without notice, severance, or cause. However, in the event of large-scale reductions-in-force, notice and/or pay-in-lieu of notice may be required by law. Specifically, the federal WARN Act requires that employers with at least 100 employees (as defined by WARN) provide 60 days notice to employees of certain workforce actions, or pay and benefits in lieu of notice, as well as notices to government officials and union representatives. These requirements may be triggered by RIFs, layoffs exceeding six months, and/or a reduction in employee hours, that in each case, affect at least 50 employees. Employers considering such actions, should seek legal advice regarding the applicability of WARN (or individual state laws, called “mini-WARN” or “baby WARN” acts, which often have their own triggers) to their business and the particular action contemplated and the drafting of any required notices. Even if WARN or its state counterparts do not apply, employers should seek legal advice on how to select employees for reduction in order to minimize legal risk.
Employers also may wish to offer separation or redundancy packages to employees let go in connection with a RIF in order to secure a release of possible employment claims, such as discrimination or breach of contract claims, which predate or are created by the reorganization. Counsel should be consulted when drafting separation agreements and redundancy packages (which have often been generous in the oil industry) that may be offered to employees who are let go in connection with a “rightsizing” effort, as particular language and disclosures are often required in order to secure an effective release of claims, particularly under U.S. law. Additionally, businesses that have historically offered separation or redundancy packages need to determine whether they must continue to do so or whether, in light of current economic conditions, they may reduce the assistance offered, considering the employee relations consequences or potential legal risks associated with the reduction.
Changing terms and conditions of employment
In the longer term, employers may also consider changing the terms and conditions of employment of the remaining workforce to reduce employee overhead and reduce on-going costs. In some cases, employers in the sector, at least for now, are eschewing employee reductions in favor of changes to the terms and conditions of employment, such as reduced schedules, temporary lay-offs, or compensation reductions2. But, implementing these types of creative measures may not be straightforward.
In Europe, at the most basic level, employees may have to consent to the changes. Depending on where employees work, and whether they are represented by a union, negotiation and/ or consultation with trade unions or works councils may be needed. This is often time-consuming, and may mean that it is not possible to make the changes, either at all or within the desired time-frame.
In the U.S., employee consent is not required in the absence of a union or individual employment contract and many, if not most, U.S. employees are employed at-will. However, the implementation of such measures should be carefully considered and documented in consultation with counsel, particularly with respect to temporary lay-offs or hour reductions, which may impact employee entitlement to overtime or minimum wages, or as discussed above can also trigger notice or pay in lieu of notice under U.S. federal and state law.
Increased use of atypical workers
Employers that have undertaken workforce reorganizations and survived a period of economic downturn are often reluctant to quickly staff back up once conditions stabilize. For this reason, in the future, businesses in the oil sector may want to consider using atypical worker contracts, staffing agencies, or independent contractors rather than hiring employees, as these measures typically afford employers greater flexibility to respond to market conditions. While the UK and U.S. have relatively flexible labor markets, this is not necessarily the case in other countries, where there may be restrictions on the types of contractual arrangements that can be used for staff.
Employers in all jurisdictions should be wary of the risks of such alternative arrangements; particularly to the extent they are protracted. For example, in the U.S., a business using workers through a staffing agency may still be deemed a joint employer for purposes of U.S. discrimination, leave, and wage and hour laws and find itself subject to unexpected unemployment lawsuits that eat up any cost-savings achieved by the alternative labor arrangement. Additionally, any written agreement for temporary labor – whether with a staffing agency or individual contractor – should be carefully scrutinized in order to minimize legal risks. Nevertheless, no temporary labor agreement can reduce every employment risk. For example, employers should be wary of relying too heavily on independent contractors, as such individuals may be viewed as an employee for purposes of U.S. employment and tax laws.
Regardless of which measures employers in the oil sector choose to weather the current storm, there are significant local variations in employment law that make it difficult to adopt a "one size fits all" approach – or at least to do so to the same timescale in a number of global locations. For this reason, consideration of how to implement and document such measures should be undertaken with counsel.