It is common, if not industry standard, for companies in oil and gas to utilize a "day rate" structure. For example, drillers may agree to pay a contractor $600/day per employee for certain services. That contractor will then likewise engage talent at a per-day rate plus per diems for expenses. While that talent isn't paid overtime, annualized compensation can still exceed six figures per year. Everyone is happy, right? Not exactly.

The US Department of Labor is now challenging this historic practice. "There is a misconception in the [energy] industry that − because workers typically earn more than the minimum wage − they are being paid legally. That is not always the case," said Cynthia Watson, regional administrator for the Wage and Hour Division's Southwest Region. "You can't pay a flat day rate with no regard for hours worked, misclassify employees as independent contractors, or make deals with employees that violate labor laws."

Court cases likewise are now singing the same chorus. For example, the US Court of Appeals for the Tenth Circuit upheld a finding of a "willful violation" of the Fair Labor Standards Act (FLSA) for oilfield employees who were paid on a day rate. Mumby v. Pure Energy Servs., Inc., 636 F.3d 1266, 1268 (10th Cir. 2011) (defendant's day rate pay scheme did not track hours worked and “violated the FLSA”).

Press reports confirm that challenges are indeed widespread:

  • "[U]nless the employer is particularly careful in crafting its pay plan, it can and should expect to be sued if it pays a day rate or anything that looks like one."
  • "[S]uch cases [challenging day rates] 'have flooded the Pennsylvania and Ohio dockets' in the past year. There are at least 25 such suits in western and central Pennsylvania, they calculated, and urged oil and gas companies to review their employment practices."
  • "In the past several years, the DOL has carried out hundreds of investigations into the oil and gas industry. This initiative has resulted in:
    • An $18.3 million settlement to more than 1,000 Halliburton workers who were classified as exempt from overtime pay
    • A nearly $2 million payout to 2,200 workers for Hutco in Louisiana, Texas and Mississippi"

Being on the wrong end of such litigation is expensive. One of the ten most expensive FLSA settlements in 2016 – at just over $9 million – was a case involving pipeline inspectors. This, moreover, is not merely the exposure of those contractors. Companies which handle their own payroll properly but contract out work on a day rate basis are also vulnerable.

Entities contracting out work are now being sued repeatedly for the FLSA violations of their contractors as "joint employers." Salinas v. Commercial Interiors, Inc., 2017 WL 360542 (4th Cir. Jan. 25, 2017) (finding that both jointly employed employees for purposes of the FLSA). Even where there is no joint employer relationship, separate businesses are being sued for "aiding and abetting" violations of state wage-hour laws. Green v. Parts Distribution Xpress, Inc., 2011 WL 5928580 (D. Mass. 2011).

Put simply, the prevalence of day rates in oil and gas coupled with the risk of joint employment has created a perfect storm of litigation. But is all hope lost for such day rate systems? There is potentially some room for some day rates but only if the day rates are guaranteed for enough days per week; are high enough to meet the "highly compensated" salary level (currently $100,000 per year); and are for jobs that can meet FLSA exemption tests on duties.

Exempt status requires not only exempt duties but also a guaranteed salary. Where the day rates are guaranteed for multiple days per week, there is the potential for meeting that salary requirement. Hughes v. Gulf Interstate Field Servs., 2:14-cv-00432 (S.D. Ohio Aug. 8, 2016) (granting summary judgment for employer where day rate pipeline inspectors were guaranteed 6 days per week). But, even more critical is meeting the test for "highly compensated" employees – currently $100,000 per year. That test permits a shortened/simplified duties test.

The significance of that simplified test is readily apparent in Zannikos v. Oil Inspections, Inc., 2015 WL 1379882 (5th Cir. Mar. 27, 2015). There were three plaintiffs in that case, all holding the same job as oil inspectors supervising the transfer of oil to/from ships. One earned more than $100,000 while the other two earned less. Only the highly compensated inspector was exempt. The normal exemption test requires multiple findings including "independent judgment and discretion" which this job lacked, but the highly compensated exemption eliminated "the need for a detailed analysis of the employee's job duties." (Plaintiff's work was exempt because it included "quality control, safety, and legal and regulatory compliance").

That is a narrow window for legally safe usage of day rates. Portfolio companies with day rates, or using day rates as the basis for contracting out work, need to monitor the FLSA exposure carefully. What was time honored is now challenged; further, the fact that "everybody else is doing it" is no defense (as everybody else is now finding out as the pandemic of these lawsuits continues to spread).