[Editor's note: A version of this story appears in the September 2020 issue of Oil and Gas Investor magazine. Subscribe to the magazine here.]

Oil and gas employers face unique legal challenges. Because the nature of work in the oil field and on pipelines is cyclical and requires flexibility, it is often necessary for companies to rely on both independent contractors and employees. This novel compensation structure often makes companies targets for class action litigation by plaintiffs’ lawyers, who do not always understand the industry and the nuances of the two professional roles.

To that end, oil and gas companies must be careful to not exert too much control over independent contractors so that they are actually deemed employees in a legal proceeding. By contrast, many highly skilled employees who are exempt from overtime must be paid a weekly guarantee and perform exempt duties to eliminate an employer’s liability.

Given these complexities and the high salaries involved, plaintiffs’ lawyers continuously look for ways to attack employers for perceived violations.

Because of this, oil and gas employers must examine their internal policies and procedures when it comes to arbitration agreements, job descriptions, offer letters, employee handbooks and other important human resources records. These documents often serve as the first line of defense against litigation, and if designed correctly, they can save oil and gas employers hundreds of thousands of dollars and preserve their business models.

Arbitration agreements

Arbitration agreements with class action waivers offer the best way for an employer to substantially limit the scope of litigation, and oil and gas companies, as well as their service companies, should require all their employees and contractors to sign them. These agreements must include not just the employer but also customers and vendors so that all businesses are protected against indemnification and additional litigation.

Arbitration allows additional benefits for employers, including limitations on the amount of public information available regarding the dispute and, in general, more efficient resolution.

However, the most important benefit of an arbitration agreement is its ability to foreclose a class action by prohibiting an employee from bringing such claims or joining any preexisting class action. Every oil and gas company should pay close attention to this risk management issue.

A properly executed arbitration agreement containing a class action waiver mandates an employee bring claims only in an individual capacity. If the employee attempts to file a lawsuit in a representative capacity, a motion may be filed with the court whereby his claims will be dismissed and he will be compelled to arbitration.

Similarly, an employee subject to an arbitration agreement containing a class action waiver is ineligible for inclusion in a preexisting class in which he would otherwise be a member.

These waivers take on increased importance when an employer is faced with a class action under the Fair Labor Standards Act (FLSA) where court-approved notice is sent to individuals to inform them of the existence of the lawsuit and their right to opt-in. The recent trend among courts—including the influential Fifth Circuit covering Texas, Louisiana and Mississippi—is to disallow such notice from being sent to individuals who are subject to arbitration agreements containing class action waivers.

Class action waivers may be used when confronting any class action brought by employees—discrimination claims, etc.—not just those in the wage and hour context. Because of this, the successful use of an arbitration agreement requires careful drafting by experienced defense counsel consisting of employment lawyers that specialize in wage and hour class actions. Lawyers without this expertise often make mistakes when drafting these agreements, which can prove costly.

It is critical for companies to choose their employment lawyer wisely. They must consider their successes with litigation brought against oil and gas employers, experience drafting complex arbitration agreements and whether they have litigated against the plaintiffs’ attorneys who typically sue oil and gas companies.

Arbitration agreements must be disseminated to employees for their review and, although not required, their signature. Courts frequently infer employee consent to the agreement at issue by continued employment, particularly when the agreement clearly states that continued employment constitutes consent.

However, to remove any doubt, employers are strongly recommended to secure an employee’s handwritten or electronic signature. They should also remove arbitration agreements from handbooks and disseminate them instead as a separate document because arbitration agreements are contracts.

Employers in the oil and gas industry have long been a frequent target of plaintiff’s counsel. A recent trend has emerged where plaintiff’s counsel often seek to sue only the clients of service companies that contract for labor provided by the service company.

In many instances, the service company has arbitration agreements in place with its personnel. However, the agreements often do not explicitly include the client as an entity covered by the agreement. From the opposition’s perspective, the rationale is clear: There is no money to be made litigating 50 individual arbitrations against the service company as compared to litigating a nationwide collective or class action against the client.

Of course, this ignores that it is the service company, not the client, that hired, paid and otherwise directed the work of the plaintiffs. Given this trend, it is more important than ever that service companies’ arbitration agreements be drafted in a manner to explicitly include their clients as entities covered by the agreement.

Other documentation

Handbooks and the policies contained therein are an effective means of preventing and defending against litigation and must be drafted with this purpose in mind. Accordingly, employers in the oil and gas realm should review and update handbook policies to reflect changes in the legal landscape and ever-evolving best practices.

For example, in Bostock v. Clayton County (published on June 15, 2020), the Supreme Court of the United States ruled that Title VII of the Civil Rights Act of 1964 prohibits employment discrimination on the basis of an employee's sexual orientation or gender identity. Employers should carefully review the equal employment policies contained within their handbooks to ensure they prohibit discrimination based on sexual orientation and gender identity.

Handbooks also provide an opportunity for employers to explicitly state the exempt or nonexempt status of employees. Listing the specific duties expected of an exempt employee is often helpful. Such evidence often proves critical in meeting the duties test, a requirement to establish exempt status under the FLSA.

Similarly, pay letters are critical in proving that the employee at issue is exempt from overtime or is a contractor rather than an employee. The letter should state that the employee will be paid a weekly guarantee not subject to reduction based on quality or quantity of work. Pay letters take on increased importance in the oil and gas industry where employers frequently take advantage of alternative methods of compensation such as day rates or piece rates which, while legal under the FLSA, are often mischaracterized by plaintiff’s counsel in an effort to pursue overtime violations.

Annette A. Idalski is the National Chair of Chamberlain Hrdlicka’s Labor & Employment Group. She represents employers in the oilfield throughout the United States. She may be reached at annette.idalski@ chamberlainlaw.com. Brian Smith is an associate in the practice.