Legal perspectives: The ‘Right to Know Rules’ – What the oil and gas industry needs to know

Daniel Pipitone

Chamberlain Hrdlicka

Many ways exist for the government to dictate activities and behaviors of businesses in the oil and gas industry. Statutory guidelines created by Congress and regulations coming from federal government agencies are plentiful, while some even come from the judiciary. Knowledge of these mandates, whether in the form of a statute, a regulation, or a judicial precedent, is essential for any business to succeed. 

The Fair Labor Standards Act (FLSA), which was enacted by Congress in 1938, is of concern to any company. Among other things, the FLSA and the judicial precedents that interpret it define employee and independent contractor relationships. An individual classified as an employee rather than an independent contractor is entitled to minimum wage compensation and overtime wages under the FLSA. Thus, many businesses in the oil and gas industry, including those involved in offshore production, utilize independent contractors instead of employees, which allow these businesses to adapt to the requirements of the oil and gas industry and prosper.

However, in 2009, Hilda Solis, Secretary of State for the US Department of Labor (DOL), initiated a strategic plan to convert as many independent contractors to employees as possible. As part of this plan, Secretary Solis referenced the potential enactment of new regulations regarding worker classification known as the Right to Know Rules. The Right to Know Rules would substantially alter the FLSA, forcing companies to prepare written reports regarding their employee and independent contractor classifications, which would include an explanation of the basis for these characterizations. These reports would then be submitted to the DOL, which would conduct its own analysis and determine whether to pursue enforcement.

Unfortunately, determining whether an individual is an independent contractor or an employee is somewhat subjective. A five-factor analysis was issued to determine the classification of employee and independent contractor relationships. These factors include the degree of control and supervision exerted over an individual, a comparison of the relative investments of the individual and business, the extent to which an individual has an opportunity to enjoy a profit or suffer a loss, the skill and initiative required of the individual to perform the job requirements, and the permanency of the relationship. No factor is determinative, and whether a worker is an employee or independent contractor depends on the totality of the circumstances.

Although the creation of the Right to Know Rules was delayed until after the 2012 presidential election, its likely promulgation poses a serious threat to businesses in the oil and gas industry using independent contractors. The DOL has tremendous resources available to it, and approaches investigations with the assumption of being right. During her tenure, Solis initiated numerous actions directed toward what she perceived as misclassifications, using enforcement tactics designed to compel the re-classification of independent contractors as employees. Regrettably, most businesses folded rather than challenge the DOL charges due to either high costs or the challenge of confronting the federal government.

Fortunately, judicial oversight is available to those with the financial strength and fortitude to pursue it. Overly-aggressive efforts by the DOL to convert independent contractors to employees can be limited or eliminated through the judicial process. Recently, a federal court in Victoria, Texas, entered a summary judgment in favor of an oil and gas sector business that the DOL had accused of misclassifying its employees as independent contractors.  The decision marks the first time that the DOL has been unsuccessful in pursuing a supposed misclassification issue in the 75-year history of the FLSA, and erodes the perception of invincibility long enjoyed by the department. 

Although Solis’ tenure with the DOL has ended, her recently-nominated replacement, Thomas Perez, will most likely continue her misclassification enforcement efforts. Perez, an attorney who served as chief of the Civil Rights Unit of the US Department of Justice, is also focused upon the classification of individuals as employees rather than independent contractors. It is anticipated that Perez will not only continue the efforts initiated by Solis, but also will increase them through the promulgation of additional regulations. A far less obvious but equally significant mandate often arises from the thought processes and socio-political orientation of an individual appointed to lead an administrative agency. Perez has referred to the misclassification of employees as independent contractors as a pervasive practice “often used intentionally by employers to reduce their tax burden and avoid various laws designed to create protections in the work place.” Inasmuch as the interpretation of pertinent FLSA provisions and the application of the five-factor analysis are subjective and guided by predispositions, his sentiments do not bode well for companies in the oil and gas industry using independent contractor relationships.

Should, or more likely when, the Right to Know Rules are adopted by the DOL under Perez, businesses in the oil and gas sector must be careful in preparing a classification report for the department. The five-factor analysis should be the focus, as should efforts to create or marshal evidence to allow for an independent contractor determination. There are many methods that businesses in the oil and gas industry can employ to verify an independent contractor relationship. Thus, companies should utilize professionals who are well-versed in the FLSA and related mandates to avoid incorrect analyses or unintentional admissions to the department. Given the DOL’s aggressive stance regarding misclassification issues, proper posturing under the forthcoming Right to Know Rules may well avoid a DOL investigation. 

Editor’s note: This is the first of an ongoing, bi-monthly column on legal issues facing the offshore oil and gas industry. 

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