Do Lower Oil Prices Signal a New Wave of FLSA Actions in the Energy Industry?

August 11, 2015Articles New Jersey Law Journal

While lower oil prices, meaning lower prices at the pump, is good news for automobile drivers, the recent drop in oil prices could trigger an increase in the number of Fair Labor Standard Act (FLSA) suits against employers in the energy sector. When oil prices drop, oil and gas companies often cut costs by cutting back on overtime or by laying off workers. Although these measures may help companies weather the oil price downturn, they could also be a catalyst for FLSA claims as laid-off workers turn to the courts to seek redress for allegedly being improperly compensated.

Energy Sector Inherently Vulnerable to Wage-Hour Suits

Lower/falling oil prices may not affect all kinds of employment cases, but wage-hour suits are a genre of employment law cases that increase dramatically during price fluctuations because energy-sector businesses, particularly oil companies, rely heavily on independent contractors to conduct essential activities, such as transporting products, maintenance and logistics. By relying heavily on such independent contractors to conduct essential activities, a company is more likely to misclassify the worker as a nonemployee, when under the FLSA, they might well be considered "employees."

Under the FLSA, an employer does not have to pay overtime to an individual deemed an independent contractor, but if that person performs services integral to the company and/or is economically dependent upon the employer, that person will likely be found to be an employee. Whether such workers are actually employees is extremely fact sensitive, and the law (both federal and state) is generally tilted in favor of finding workers to be employees. Employers who are found to have violated the FLSA must pay back wages and (almost always) liquidated (i.e., double) damages. Hence, when looking for potential claims, an adept plaintiff-side attorney will focus on employer compensation procedures such as independent contractor classifications.

While an employer can ultimately seek to decertify a FLSA collective action, courts apply lenient standards to the initial grant of conditional certification. After a court grants a conditional class certification, notices are sent to all potential plaintiffs, perhaps exponentially increasing the number of claims and potential damages for the employer in a wage-hour suit. The FLSA is also a fee-shifting statute, further escalating the stakes and potential damages and oftentimes a key factor motivating employer settlement.

Spike in Wage-Hour Lawsuits Within Last Nine Months

Between November 2014 and July 2015, there have been more than 90 reported FLSA suits filed against energy-sector employers, a period roughly coinciding with the fall in oil prices. In contrast, between November 2013 and July 2014, there were only approximately 45 FLSA suits filed in court against such employers. There are a number of decisions in this industry that evidence a disturbing trend, as well as where areas of vulnerability remain.

For example, the U.S. Department of Labor (DOL) just completed an enforcement investigation into overtime pay violations and misclassification of workers as independent contractors in energy employers in Pennsylvania and West Virginia. In December 2014, the agency awarded $4.5 million in back wages for unpaid overtime to 5,310 employees due to the employer's misclassification of employees as either independent contractors or as exempt from the FLSA overtime provision. In a similar enforcement initiative, the DOL awarded $1.3 million in lost wages to workers in West Texas and Eastern New Mexico oil fields, employed by oil-producing companies and supporting industries (i.e., trucking, lodging, staffing providers). Investigations conducted by the DOL's Albuquerque district office found overtime violations, including misapplication of the exemptions from overtime, failure to include bonus payments made to employees when calculating overtime rates, and nonpayment for time spent working "off the clock." These energy firm misclassifications were not motivated by a desire to deprive their employees of overtime pay, but rather are the result of an industry practice born of the firms' common-sense decision to focus on their core business and to contract out those ancillary functions to vendors/labor experienced in those related industries/functions.

In January 2015, Schlumberger Ltd., a company that provides tools and services for oil and gas companies, laid off 9,000 workers. Promptly after the layoff, a group of employees sued under the FLSA and were granted conditional certification. The plaintiffs alleged that employees worked more than eight hours a day and 40 hours a week, and that the company used a fluctuating workweek to avoid paying overtime. Although the trial judge limited the action to employees working at Schlumberger's North Dakota plant, the class could include several hundred eligible employees. This suit was in response to energy firms' creative attempt (good-faith based as it might have been) to reduce overtime costs in an effort to remain profitable in this bitterly competitive industry.

The ripple effects of these suits are felt by businesses aligned with the energy industry, even though the employees involved are not energy producers. In Kemp v. Databank IMX (Civil Action No. H–14–1090, April 24, 2015), the Southern District of Texas granted a motion for class certification against British Petroleum (BP), because the plaintiff made a sufficient showing that BP was a joint employer along with Databank IMX. The plaintiffs, 70 data entry specialists, alleged that BP did not pay them for overtime, and that they were incorrectly classified as independent contractors. The plaintiff provided documents showing that BP had the power to supervise and assign work, controlled their work hours and hired and fired similarly situated workers. In Olibas v. Native Oilfield Servs., No. 3:11-CV-2388-B, 2015 WL 2165921, at *18 (N.D. Tex. May 8, 2015), the Northern District of Texas ordered Native Oilfield Services to pay a total of $3.7 million in back overtime, damages and costs to 108 current and former truck drivers for FLSA violations. The company argued that the workers were exempt from the FLSA's overtime pay provisions under the motor-carrier exemption but did not prove all of the exemption test elements at trial.

The Takeaway

Since it is relatively easy for plaintiffs to secure conditional class certification, energy sector employers must consider the potential for FLSA lawsuits when deciding on layoffs, certainly so-called "mass layoffs." Usually, laidoff workers attempt to secure new job opportunities in other companies within the energy sector before seeking legal recourse. However, given tight oil and gas job markets, it is more than possible that a laid-off employee (and/or group) will seek out an attorney for assistance.

As oil prices fall, reducing workforce numbers may be an attractive choice, especially for smaller oil producers and field service companies. This may result in a substantial increase in the number of enterprising plaintiff-side wage-hour attorneys filing suit against small and midsize employers. The smaller employers may be less able to bear the cost of defending a FLSA action, in part because of the fee-shifting nature of the law, which further greatly multiplies the fees and costs at issue.

Thus, the potential expenditures stemming from wage-hour class actions should persuade employers to seriously consider providing severance packages for laid-off employees (and having them sign releases waiving all statutory claims). In a backhanded sort of way, there may actually be relief for the energy sector from this spiking litigation from the U.S. Department of Labor's proposal to raise the salary threshold level for overtime exemptions from the current minimum level of $455 per week to almost $1,000 per week, and its recently proposed initiative to issue tighter guidelines for classifying workers as independent contractors. If implemented, these proposals would draw very bright lines that (might/should) lessen litigation by establishing clear exemption and classification guidelines. Many kinds of cases currently litigated under today's regulations would, simply, go away. Regardless, energy-sector businesses should always be wary of misclassifying employees as independent contractors.

In sum, the best way for a company to prevent wage-hour lawsuits is to conduct an internal audit of all company compensation practices, focusing especially on exemption and classification issues. While oil prices are unpredictable, proactive strategizing is not.

Reprinted with permission from the August 11, 2015, edition of the New Jersey Law Journal © 2015 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877.257.3382 -[email protected] or visit