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INSIGHT: Fifth Circuit Gives Employers Blueprint on Independent Contractors

March 20, 2019, 8:00 AM

The Texas oil boom, particularly in the Permian Basin, has exacerbated the challenge of how to compensate transient oilfield professionals such as directional drillers (DDs) who perform essential drilling and production services.

From the outset, oil companies have sought to use the talents of such individuals by contracting with them as independent contractors. Many of them have signed contracts and accepted payment for services rendered at daily or weekly rates. Some have later invoked the federal Fair Labor Standards Act (FLSA) in an attempt to recover additional compensation on the basis that they were actually “employees” entitled to be paid statutory overtime wages and penalties.

Win for Energy Companies

In a landmark decision on Feb. 28, the U.S. Court of Appeals for the Fifth Circuit interjected itself into this ongoing skirmish in Parrish v. Premier Directional Drilling L.P. The result is a win for energy companies.

This ruling provides a blueprint for the appropriate way in which a company can establish independent contractor relationships with consultants, through the vehicle of a properly structured consultant’s entity that qualifies under the FLSA as exempt from overtime because of the absence of “employee” status.

Companies are well-advised to ensure not only the creation and use of specific independent contractor agreements, signed by separate “entities,” but also the establishment of a work and compensation structure that diverges from that used by the company with its full-time employees.

The Fifth Circuit applied a long-standing five-part test that focused upon such factors as degree of control and DDs’ opportunity for profit and loss. The court concluded that the evidence demonstrated that the economic realities of the relationship between the company and these DDs was one of economic independence for the DDs.

The court therefore ruled that the DDs who sought such additional compensation were actually properly classified as independent contractors, not as employees, and thus were not entitled to recover overtime pay or statutory penalties.

Evaluating Economic Realities and Economic Dependence

The task undertaken by the Parrish court was to determine whether the individual claimant was, as a matter of economic reality, in business for himself. In reviewing the five factors identified above, the court determined as follows:

1. Degree of Control. The company did not dictate how the consultants were to complete their calculations, nor how they were to make the directional drilling plan work, nor whether they had to accept any particular project. The court concluded that this lack of “control” leaned in favor of independent contractor status.

2. Relative Investments. As to the “investment” criterion, the court determined that it tilted slightly in favor of “employee” status, because the company clearly had invested more money at each drill site than had any individual DD consultant. Nevertheless, this factor was not accorded much weight, given the nature of the industry and the work involved.

3. Opportunity for Profit or Loss. For this criterion the court focused upon how the individual’s profits depended upon his ability to control his own costs. Significantly, the court acknowledged that “evidence gleaned from tax returns can be useful.” The court determined that the individual DD consultants had outside business interests where their profits from consulting for the company were in several instances offset by losses they experienced in these other enterprises.

Also, no individual DD consultant was paid when he was not performing work on one of the company’s projects. The court concluded that this factor weighed in favor of independent contractor status.

4. Skill and Initiative Required to Perform the Job. The claimants were all highly skilled individuals. This weighed in favor of independent contractor status.

5. Permanency of the Relationship. Because the work involved was to be performed on a project-by-project basis, and because no individual consultant worked for the company for more than 10 months, the court found that this factor weighed in favor of independent contractor status.

Author Information

Lionel Schooler is a senior partner at Jackson Walker LLP, resident in its Houston office, and has practiced employment law for more than 40 years, with an emphasis on Fair Labor Standards Act matters.