On February 28, 2019, the United States Court of Appeals for the Fifth Circuit issued an important decision involving whether contract workers in the oil patch were entitled to overtime. In William Parrish, et al. v. Premier Directional Drilling, L.P., No. 17-511089, the Fifth Circuit reversed a trial court decision and rendered judgment in favor of Premier Directional Drilling, L.P. (“Premier”). Following a fact-intensive inquiry, the Fifth Circuit concluded that the directional drillers were not employees and not entitled to overtime under the Fair Labor Standards Act (“FLSA”).

The decision provides the oil and gas industry new leverage in contractor misclassification cases and acknowledges certain truths of the unique nature of oil patch work. But while companies in the oil and gas industry defending misclassification litigation in the Fifth Circuit may find some solace in the Court’s support of Premier’s independent contractor classification, the ruling left unaltered the Fifth Circuit’s five-factor test for determining employee status under the FLSA. As such, oil and gas companies should carefully consider what the Court’s decision means for their businesses, including evaluating their manpower on a position-by-position basis for services performed in Texas, Louisiana and Mississippi – the states governed by the Fifth Circuit’s ruling.

Background. In May 2016, William Parrish filed a lawsuit, claiming that Premier misclassified him as an independent contractor, thus failing to pay him and other similarly situated directional driller consultants overtime compensation under the FLSA. Four other contractors later joined the case, and in July 2017, the parties filed cross-motions for summary judgment. On November 27, 2017, the district court ruled in favor of the contractors, finding they were employees entitled to overtime. See Parrish v. Premier Directional Drilling, L.P., 280 F. Supp. 3d 954 (W.D. Tex. 2017). Premier appealed. The Fifth Circuit reviewed the decision de novo, and reversed and rendered judgment in favor of Premier.

The Fifth Circuit’s Analysis. The Fifth Circuit reaffirmed that, in moving for summary judgment on claims for unpaid overtime compensation, plaintiffs must prove four elements to make their prima facie case: (1) an employer-employee relationship existed during the unpaid overtime periods claimed; (2) the employee engaged in activities within the coverage of the FLSA; (3) the employer violated the FLSA’s overtime wage requirements; and (4) the amount of overtime compensation due. Johnson v. Heckmann Water Res. (CVR), Inc., 758 F.3d 627, 630 (5th Cir. 2014). The burden then shifts to the company to come forward with evidence to negate the inference established, if any.

In cases involving claims of contractor/employee misclassification, such as this one, the dispute between the parties focuses on the existence of the employer-employee relationship. The Fifth Circuit left undisturbed the five factor economic realities test to determine whether individuals are employees. The non-exhaustive factors are: “(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.” See, e.g., Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir. 2008).

In its opinion, however, the Fifth Circuit provided context in how those five factors could apply in the oil and gas industry. The Fifth Circuit discounted the importance of considering the amount of investment of the contractor relative to the company, noting it merited “little weight.” This second factor is particularly important in the oil and gas industry, because oilfield contractors (like directional drillers) will typically have significantly less investment in the equipment used for the job than the drilling and/or operating company.

With regard to the degree of control, the Fifth Court determined that while Premier told the directional drillers where to report, when to report, what equipment would be on site, and the nature of the well plan, it was the directional driller who determined the calculations for implementing the well plan, and who would need to make changes to the plan in real time. In addition, directional drillers were free to reject assignments without negative repercussions. The Fifth Circuit did not consider required safety and drug training by Premier as a point of employment, but rather a point of safety for all involved in the project. Additionally, while the Court acknowledged that the prevention of subcontracting is a degree of control, “[m]any times, as is the situation here, it is not unreasonable for a company to want to hire a specific person” especially when the contractor is “being hired for his advanced skill and specialized expertise.”

As to the third factor, the Fifth Circuit determined that evidence in plaintiffs’ tax returns demonstrated their ability to offset profits with losses of business ventures unrelated to their directional drilling. In reaching this conclusion, the Court highlighted the fact that one of the plaintiffs operated a goat farm between directional drilling assignments. Further, the Court noted that plaintiffs’ LLC tax records evidenced both losses, and significant deductions. The Fifth Circuit further found that the day rate and mileage, instead of a salary, also supported the notion that plaintiffs had an opportunity for profits and losses, because they did not get paid when they did not work.

Disagreeing with the district court’s analysis of the fourth factor, the Fifth Circuit explained that having comparable employees in the same position was not determinative of whether the job required specialized skill. The Fifth Circuit held that directional drilling work is “project by project,” which weighed in favor of a lack of permanency of the relationship, particularly when the down turn in the oil/gas business showed that directional drillers are not guaranteed future work. In doing so, however, the Fifth Circuit rejected Premier’s claim that directional drillers could work for other companies between projects as merely a hypothetical, as the evidence showed the plaintiffs generally did not do so.

Finally, the Fifth Circuit reaffirmed its position that courts should not consider the parties’ contractual relationship, and therefore the parties’ own assessment of contractor status, in evaluating whether a worker is correctly classified as a non-employee contractor.

Conclusion. While the decision is a positive development for the oil and gas industry, businesses should be careful in relying on the Parrish ruling in making future decisions about the classification of workers as non-employee contractors, particularly for workers outside of Texas, Louisiana and Mississippi, or when considering different positions. Moreover, care should be taken in determining whether the relationship of other oil and gas organizations, like exploration companies, to the workers at issue, are different than the type of relationship between the directional driller and the directional drilling company such that it may result in a different decision in the Fifth Circuit, or elsewhere. To reduce risk, oil and gas companies should continue to assess and analyze each classification, on a position-by-position basis, in the context of their own operations.