On February 28, 2019, the United States Court of Appeals for the Fifth Circuit issued a decision that could have a significant impact for companies using independent contractors, especially those in the oil and gas industry. There are many independent contractor misclassification cases being litigated in the Fifth Circuit, but few Fifth Circuit decisions addressing the question. This case is particularly significant because it has many facts that plaintiffs’ counsel normally point to as indicia of employee status. Despite the existence of those facts, the Fifth Circuit reversed a grant of summary judgment to the plaintiffs and rendered judgment for the alleged employer instead. Companies in Texas, Louisiana, and Mississippi, should use this decision to evaluate or reevaluate independent contractor classification decisions.
Parrish v. Premier Directional Drilling, L.P.
The case, Parrish v. Premier Directional Drilling, L.P., was brought by four individuals who performed services for Premier as directional driller consultants (DDCs). The facts described below are taken from the Court’s opinion. The four plaintiffs claimed they were misclassified as independent contractors and were owed overtime for working more than 40 hours in a week. In simplest terms, directional drilling involves drilling at an angle horizontal to the surface to reach an oil deposit, and is extremely complex. The DDCs advised Premier’s clients, oil companies, how best to effectuate the well plan prepared by the oil companies. There was no dispute that the DDCs were highly skilled and that an error by a DDC could result in Premier losing large amounts of money, potentially hundreds of thousands of dollars.
The arrangement for retention of DDCs by Premier is one we see frequently in the oil and gas industry. Premier had contracts with staffing agencies. The staffing agencies entered into contracts with the individuals. Premier paid the staffing agencies and the staffing agencies then paid business entities set up by the individuals. The plaintiffs were paid a day rate (for a 12-hour shift) and mileage reimbursement. Although a day rate was the basis of compensation, according to the Court, DDCs were retained on a project basis.
Facts plaintiffs relied on to argue misclassification
Interestingly, Premier also had employees who worked as directional drillers. In fact, some of the DDCs were previously Premier employees who were converted to contractors. This fact is one plaintiffs’ counsel normally seize on as a clear indication of employee status. Although both the DDCs and employees had written pay scales based on experience, employees had significantly different types of pay and benefits. And, unlike their employee counterparts, DDCs could turn down work and had the ability to negotiate their rates.
The DDCs were required to sign non-disclosure agreements, undergo mandatory safety training, and comply with Premier’s drug and alcohol policy. They also had a set schedule and work location and were required to submit reports and updates to Premier and its clients. All of these facts are also facts plaintiffs typically rely on to argue for employee status.
Premier provided the DDCs with equipment and resources, including a particular computer program that was required for the DDCs to perform their work. Premier also provided laptop computers and, if necessary, fire retardant clothing. Most significantly, Premier provided the DDCs with other personnel and expensive equipment to take the measurements necessary for the DDCs to perform their work. Again, all of these facts are typically used to argue in favor of employee status.
Finally, the plaintiffs in the case had all performed work for Premier for a significant amount of time – more than 10 months – considering both their service as employees and as DDCs. Plaintiffs argued that this showed an employee-like permanency in the relationship.
The District Court relied on these facts to find that the DDCs should have been classified as employees instead of independent contractors, and granted summary judgment for the plaintiffs.
More important facts show proper classification as independent contractors
Why did the Fifth Circuit conclude the district court got it wrong? It was not because the district court applied the wrong law. The Fifth Circuit agreed with the test applied: whether the DDCs were economically dependent on Premier as a matter of economic reality. Or, stated another way, did the economic reality of the working relationship show that the plaintiffs were in business for themselves. Instead, the Fifth Circuit reversed and rendered judgment for Premier because it disagreed with the weight and significance the district court gave to many of the facts described above, concluding that other facts were more significant and entitled to greater weight. The district court found most persuasive the fact that both the employee DDs and DDCs were treated the same, and supervised the same, with no appreciable difference other than how they were compensated. The Fifth Circuit disagreed with the lower court’s emphasis on this point and found the following facts more significant and weightier.
- The extremely high skill level of the DDCs, and their ability to exercise initiative and discretion when performing the work. In contrast to the performance of routine work that simply requires industry and efficiency.
- The formation of corporate entities by the individuals and information on their corporate tax returns showing the deduction of business expenses.
- Premier did not dictate how the DDCs substantively performed the work. The DDCs were given the well plan and it was up to them to figure out how to make it work. In light of this the Court found insignificant the fact that DDCs were required to submit reports, and adhere to an assigned schedule, location, and hours. Likewise insignificant were the required safety training and adherence to the drug and alcohol policy and requirement to sign a confidentiality agreement. The court explained that requiring everyone working at an oil-drilling site to be educated on safety protocol, and not be under the influence of illegal drugs, is required for safe operations.
- In light of the nature of the industry and the type of work involved, the obvious difference in the relative investments in tools and equipment were not significant.
- The DDCs’ opportunity for profit and loss was not controlled by Premier, even though no DDC had lost money in connection with their work with Premier. The Court focused on the content of the DDCs’ tax returns, which showed they incurred often significant expenses associated with their work for Premier – expenses which they could control – and therefore the DDCs had the ability to control their own profit and loss. They could also impact their revenue stream through their ability to turn down work.
- The mere fact there were no “appreciable differences” between the job duties of the DDCs and employee DDs did not mean that the plaintiffs lacked skill and initiative of an independent contractor. The Court adopted the analogy that a company with a highly skilled general counsel can still hire an outside lawyer as an independent contractor, even if the general counsel is a more skilled lawyer.
Of greatest significance and weight was the fact that DDCs performed work on a project-by-project basis. Although paid a day rate, they were retained for a specific project. That fact “counsels persuasively” in favor of independent contractor status, the Court stated, even when the relationship with a contractor has lasted for a significant length of time. This is particularly so where the individual possesses highly specialized skills that are widely demanded, because that can lead to more economic independence.
Next steps for companies using independent contractors
Each independent contractor situation is unique and classification decisions are always highly dependent on the facts of a particular case. A thorough legal review of all classification decisions is always prudent. The Parrish case does not mean that all highly skilled oil field workers can be classified as independent contractors. But it does strongly suggest that where the critical facts described above exist, particularly retention on a project basis, there is a much greater likelihood of defending classification as an independent contractor. Because the case gives a new emphasis to certain critical facts, a thorough review of existing classification decisions may be beneficial to your organization.
Essential Corporate News: Week ending September 18, 2020
In September 2020, the International Corporate Governance Network (IGGN, published a “Viewpoint” document to provide insight and guidance on what annual general meetings (AGMs) and other shareholder meetings might look like in future, following major changes enabled by emergency legislation in many jurisdictions in the midst of COVID-19 pandemic.