Like virtually all U.S. employers, oil and gas companies and their business partners have faced a sharp rise in employment-related fines and litigation in recent years. But unlike most other employers, energy companies are facing specific, targeted scrutiny from the federal government on specific wage-and-hour issues – and, in some cases, seemingly minor errors in the way workers are paid has resulted in substantial fines and penalties for employers.

The Fair Labor Standards Act (FLSA) requires all employees to be paid at least the minimum wage, and to be paid overtime (one and one half times their regular hourly rate) for all hours worked over 40 in a week. Only employees who are exempt from the FLSA's protections (by being, for example, managers, "learned professionals," or certain types of administrators) can be paid without regard to the overtime requirements. But as basic as this 1930s-era law may be, in recent years enterprising lawyers have filed hundreds of lawsuits alleging that employees were misclassified – and recovering six- and seven-figure judgments in resulting class actions. FLSA cases filed in federal courts alone have grown by 300% just since 2000.

Compounding the exposure for wage-related litigation is the Department of Labor’s focus on ensuring that independent contractors are, indeed, contractors rather than employees – and imposing hefty fines when they conclude otherwise. The standard for independent contractor status is a 20-part fact-specific test that has no bright line rule, making it doubly hard for employer to determine who can be classified as a contractor. And because the test is so specific to the tasks actually being performed, employers cannot simply assume that any particular job title automatically means either employee or contractor classification is appropriate in every case. Similarly, simply paying a worker with a 1099 rather than a W-2 does necessarily mean the individual is a contractor under the FLSA.

Like so many other sectors of the economy, the energy sector has faced its own share of expensive private FLSA litigation and government fines, some of which have been triggered by increased scrutiny from the DOL. Indeed, the DOL recently has stated flatly that employee misclassification is "a problem we commonly come across in the oil and gas extraction industry" - suggesting that DOL enforcement efforts may now be focused specifically on the energy sector.

Several energy companies have paid stiff penalties recently for misclassifying employees. For example:

  • Honghua America paid over $680,000 in back wages to 133 employees. The DOL found that the company misclassified its crane operators and roughnecks as independent contractors.
  • Groundwater and Environmental Services Inc. (GES) paid $187,165 in back wages to 69 employees after the DOL found the company improperly classified junior environmental scientists and junior baseline samplers as exempt "professionals" who were ineligible for overtime pay. A DOL press release noted that the citation of GES was part of an ongoing "multiyear enforcement initiative focused on vendors who perform various phases of the oil and gas fracking process on the Marcellus Shale formation."
  • Rigid Oil Field Services agreed to pay $51,839 in overtime back wages to 28 current and former employees after the DOL found it had misclassified the employees as independent contractors.

Energy companies and their vendors can avoid being added to this list by undertaking a few simple measures:

  • Review all jobs classified as exempt to ensure that the work being done actually fits within one of the designated bases for exemption.
  • Review the "economic realities" test for independent contractor status to ensure that no contractors should actually be designated as employees.
  • If you do discover misclassifications – fix them as quickly as possible.

Top News from the Energy & Environmental Blog

TX Accommodation Doctrine

The Texas Supreme Court recently held that a surface owner had not established that the lessee of a severed mineral estate had failed to accommodate the owner's existing surface uses (i.e., cattle operations). See Merriman v. XTO Energy, Inc., No. 11-0494 (June 21, 2013). Addressing the owner's claims, the court stated: "But, even if Merriman's statements contain sufficient factual underpinnings so they are not entirely conclusory, they do not provide facts or evidence showing that there was no reasonable alternative method for him to conduct the sorting, working, and loading activities somewhere else on the tract. He did not explain why corrals and pens could not be constructed and used somewhere else on the tract; and if they reasonably could be, then his existing use was not precluded."

No Implied Duty to Develop Marcellus

So holds the Pennsylvania Superior Court in Caldwell v. Kriebel Resources Co., No. 1305-WDA-2012 (June 21, 2013). Plaintiffs sued because the operator's drilling activities involved only shallow formations to date, and did not involve exploring for or producing the Marcellus Shale. Among other things, the court rejected the plaintiffs' claim that the operator had an implied duty to develop each economically exploitable strata. Pointing to a disclaimer contained in the lease, the court stated, "[U]nder Pennsylvania law, we are not authorized to impose an implied duty on the lessee to develop the various strata in light of the language contained in their contract. This is so, particularly in light of the fact that the Defendants are producing gas pursuant to the Agreement, a fact that Appellants acknowledge."

Williams Processing Facilities

Williams is making a serious investment in the Appalachian Basin: "The propane, butane, pentane and ethane in West Virginia and neighboring states is so plentiful and profitable that Williams Partners is spending $4.5 billion to process the natural gas liquids. *** In Marshall County, the Tulsa, Okla.-based company has three sites of operation: the Fort Beeler processing plant; the Oak Grove processing plant, which is under construction; and the Moundsville fractionation plant. Once all projects are up and running, they will work as a cohesive unit to separate the liquid portions of the natural gas stream from the dry portions. Williams officials believe they will be able to process at least 2.5 billion cubic feet on natural gas per day. *** 'We did not expect there to be this much liquid in this gas," said Scott Carney, strategic outreach specialist for Williams, during a recent tour of the sites.'" (From the Intelligencer.)

Ohio Court Upholds Air Toxics Rule, Regulation of Additional Toxics Possible

On June 27, 2013, the Ohio Court of Appeals for the Tenth Appellate District issued a decision regarding the lawfulness of Ohio EPA's adoption of the Air Toxics Rule (OAC 3745-114-01), pursuant to Ohio Revised Code Chapter 3704.03(F)(3)(c). See Sierra Club v. Koncelik, 2013-Ohio-2739. While the adoption of the Air Toxics Rule was, in large part, upheld, the rule may need to be modified to include additional chemical compounds on the list of regulated air toxics.

Under the Air Toxics Rule, only air contaminants that pose a threat of "adverse human health effects" are required to be on the list of regulated air toxics. Ohio EPA, in its evaluation of the chemical compounds to be regulated as air toxics under the final Air Toxics Rule, excluded compounds categorized as irritants, acute exposure events, non-inhalation routes of exposure, consumer products, and compounds not currently used in Ohio. However, the court determined that Ohio EPA's categorical exclusion of compounds (1) demonstrated toxic through non-inhalation routes of exposure and (2) no longer used or produced in Ohio is inconsistent with express statutory language, and recommended that Ohio EPA "examine each individual compound in these two categories and determine if the compound is required to be placed on the list."