Third Circuit decision on third-party bonuses could impact oil and gas industry employers

The payment of safety and performance or efficiency bonuses by oil and gas companies to employees of oilfield services contractors is fairly common and designed to encourage both safe work practices and faster drilling of wells. A recent decision by the US Court of Appeals for the Third Circuit impacts the overtime payment obligations of contractors whose employees receive such bonuses. Secretary of Labor v. Bristol Excavating, Inc., No. 17-3663, 2019 WL 3926937 (3d Cir. Aug. 20, 2019). The Third Circuit's decision is binding legal authority in the states of Pennsylvania, Delaware and New Jersey, and in the US Virgin Islands.

The defendant, Bristol Excavating, is a small excavating company that provided services to Talisman Energy Inc. in Pennsylvania. Bristol's employees typically worked 12 and a half hours a day on a two-weeks-on, one-week-off schedule—a schedule that resulted in a significant amount of overtime. Bristol's employees became aware that Talisman paid several different types of bonuses to employees of its contractors and asked Bristol if they could receive them. Bristol asked Talisman and Talisman agreed.

Bristol agreed to do the necessary administrative work. It identified Bristol employees who had earned the bonuses, emailed Talisman, invoiced Talisman, accepted the payments, deducted taxes, and distributed the bonuses to the employees. It also took an administrative fee for doing so. However, Bristol did not include the bonuses in the employees' regular rates of pay for purposes of calculating the overtime rate.

Bristol was subsequently audited by the US Department of Labor, which concluded that Bristol should have included the bonuses in the regular rate for purposes of calculating overtime, and, as a result, underpaid employees for overtime. Three different bonuses were at issue: (i) an efficiency bonus (paid for drilling a well faster than scheduled), (ii) a Pacesetter bonus (paid for drilling a well deeper than scheduled), and (iii) a safety bonus that provided US$20 or US$25 per day (paid when a job was completed without a reportable accident). When Bristol refused to settle, the Department of Labor sued in the US District Court for the Middle District of Pennsylvania alleging that Bristol had violated the Fair Labor Standards Act (FLSA). The District Court granted summary judgment for the Department of Labor, concluding the bonuses should have been included in the regular rate. Bristol appealed.

On appeal, the Third Circuit rejected the Department of Labor's position that all third-party bonuses must be included in the regular rate, announced a new test for when such bonuses must be included, and found that summary judgment was appropriate under that test with respect to the safety bonus only.

Remuneration for employment

The Court rejected the Department of Labor's position that all third-party bonuses must be included in the regular rate absent a statutory exception. The Court focused on the language of the FLSA that only "remuneration for employment" is included in the regular rate under 29 USC. § 207(e). Because the FLSA does not define the term "remuneration for employment" or address payments by third parties, the Court looked to the history of the FLSA, Congressional purpose, and Supreme Court precedent on the regular rate to conclude that "remuneration for employment" should be understood as including what the employee and the employer agreed would be paid for the job. That agreement, the Court reasoned, only includes third-party payments if the employee and employer reached an understanding that they are part of the employee's compensation. The required agreement between the employer and employee can be either explicit or implied. Determining whether an implied agreement exists presents the greatest difficulty for employers.

Implied agreements

The Court concluded that whether an implied agreement exists can only be resolved by a "holistic consideration" of the particular facts of each case. "[T]he question is whether there has been a course of dealing sufficient to characterize the payment as one that is legitimately expected by the employees and legitimately understood as being sponsored in a meaningful way by the employer."

As a threshold matter, the third-party payment must be regularly and actually received by the employee in order for there to be any possibility that it is part of an implied compensation agreement. An employee cannot expect a bonus that he does not know he is entitled to, the Court concluded, so there cannot be any agreement to include it as part of his compensation. Likewise, the mere fact that the employer allows its employees to receive third-party bonuses and does something to assist the employees in receiving them does not mean there is an implicit agreement that the bonuses are part of the employee's remuneration for employment. Acting solely as a conduit for payments is not enough. Likewise, withholding taxes is not enough.

In contrast when the employer attempts to induce certain behaviors by regularly relying on payment of a bonus, that is a significant factor in determining that the bonus is remuneration for employment, even if the bonus is paid by a third-party. And the more steps the employer takes to assure receipt of the payments, the more likely it is that the employer has created an implied agreement with its employees.

Assuming that the threshold issue of whether the employees regularly and actually receive the third-party payments is satisfied, The Third Circuit held that a court should next consider three questions, whether:

1. the specific requirements for receiving the payment are known to the employees in advance of performing the work;
2. the payment is for a reasonably specific amount; and
3. the employer's role in assisting with the payment was significantly more than serving as a pass through.

Only if the answers to all three questions are "yes" should a court then conduct a "holistic assessment of the level of the employer's involvement" to determine whether the employer and employees have adopted the third-party bonuses as part of the employment agreement.

Talisman's bonuses

With respect to the bonuses in the case before it, the Third Circuit concluded that the evidence did not conclusively establish the first and second factors for the efficiency and Pacesetter bonuses. Just knowing they could receive some sort of a bonus for good job performance is not sufficient. The record before the Court suggested that Bristol's employees may not have been aware of the specific requirements for earning those bonuses. The Court found that the record only established conclusively that employees knew the efficiency bonus was paid for drilling a hole "faster" than Talisman anticipated and the Pacesetter bonus for drilling a hole "deeper" on a given day than anticipated. The Court concluded those criteria were not specific enough and that there was no evidence the Bristol employees knew what the terms meant, or what bonus would be paid if they were achieved. As a result, it could not be said as a matter of law, the Court concluded, that those bonuses were part of the employment agreement. For that reason, the Third Circuit reversed the District Court's grant of summary judgment and remanded those claims to the District Court.

The safety bonuses, however, were different. With respect to those, it was clear from the record that: the bonus was regularly paid to the employees; and that the employees knew the specific dollar amount of the bonus, that it was a bonus for each day worked, and that it would be paid if there were no accidents or injuries during the job. As a result, the employees had an expectation of receiving the bonus if they did what was required. The record evidence also showed that Bristol acted as more than a pass through for the safety bonus.

Those facts required the next level of analysis. The Court concluded Bristol's involvement in payment of the bonus was sufficient to find that Bristol effectively adopted the safety bonus as part of its compensation plan, creating an implicit agreement with its employees. Bristol approached Talisman to ask if its employees could participate (at the request of Bristol's employees). Bristol tracked which employees earned the bonus, reported that information to Talisman, invoiced Talisman for payment, was responsible for getting the invoices approved by Talisman, paid the bonus to its employees, and collected a processing fee.

Because the safety bonus was part of Bristol's implied compensation agreement with its employees, the Court held it was remuneration for employment. Because that was true, Bristol should have included it in the regular rate when calculating its employees' overtime rates.

Conclusion

Bristol Excavating does not provide a bright line rule for when bonuses paid by a third-party can impact the overtime rates of a contractor's employees, but it does identify the relevant risk factors. An impact on the regular rate and so on overtime owed is more likely to exist:

1. the more regularly an employee receives the bonus;
2. the more details the employee knows about how to achieve the bonus and how much it will be if achieved; and
3. the greater the employer's involvement in obtaining, processing, and paying the bonus to employees.

As each of those risk factors increases, the likelihood that a court in the Third Circuit would find that the bonus is part of an implied compensation agreement also increases. When the third-party bonus can be said to be part of the agreed compensation, an employer needs to recalculate the regular rate and overtime rate for any work weeks in which the bonus was earned and make supplemental overtime payments for those weeks.

In light of Bristol Excavating, oil and gas industry employers doing work in the Third Circuit should examine any third-party bonus payments made to their employees to evaluate the risk of whether those payments should be included in their employees' regular rates of pay.