If you have read the news in the past year or so, you have probably noticed that the United States Department of Labor has gone on the offensive to investigate and charge oilfield companies for violations of the overtime provisions of the Fair Labor Standards Act (“FLSA”). Likewise, plaintiff’s attorneys are heavily advertising for past and present employees of oilfield companies paid on a “day rate” basis to assert collective actions for overtime violations. Collective actions are similar to class actions but require the employee or party to “opt in” to the lawsuit. Basically, the FLSA requires that employers pay overtime compensation for all nonexempt employees at the rate of not less than one and one-half their regular rate of pay for all hours worked in excess of forty (40) in a given workweek. An employer who violates this provision is liable for the back pay owed, plus an equal amount of liquidated damages, plus attorney’s fees. A day rate or field bonus can, at times, result in a failure of the employer to properly calculate overtime, assuming that the employee is not exempt from the FLSA overtime provisions. As mentioned above, there are two methods of enforcement of the FLSA provisions. First, a plaintiff or plaintiffs (typically past and present employees) can file a civil lawsuit to recover unpaid wages, damages and attorney’s fees. Second, the Department of Labor has the authority to conduct investigations of workplaces and bring enforcement actions against employers found to be in violation of the FLSA.
Most of these recent reported matters were initiated through enforcement by the Department of Labor and resulted in settlements. One of the largest was over $18 Million dollars paid by Halliburton. The Department of Labor has taken the position that certain specialty or highly-trained employees who are being paid on a common pay structure of a fixed salary plus a day rate or field bonus, such as drilling engineers, mud loggers and other specialized technicians, are not exempt from the overtime provisions of the FLSA and are not being properly paid overtime. Additionally, the Department of Labor is finding that many companies are not keeping the proper records of hours worked in compliance with the FLSA to make the appropriate assessments if the companies are paying on a day rate for any hours worked in the field.
The good news is that a few weeks ago, an employer successfully argued to a Federal judge in Texas that their specialty employees were exempt. In Dewan v. M-I, LLC, 2016 WL 695717 (S.D. Tex. 2016), the Southern District of Texas ruled that the Drilling Fluid Specialists, also known as “mud engineers” were exempt from the overtime provisions of the FLSA under what is referred to as the administrative exemption. This was a civil case brought by former employees and it was decided on a motion for summary judgment before there was a full trial. In the motion, the employer argued that the employee plaintiffs were exempt under both the administrative and sales exemptions. The Court ruled that while the employee plaintiffs were not exempt under the sales exemption, such employees were exempt under the administrative exemption. For that reason, this article will be limited to the court’s ruling as it relates to the administrative exemption of the FLSA.
The defendant, M-I, LLC, d/b/a M-I SWACO (“M-I”), is an industry leader in engineering drilling fluid systems and additives for oil and gas well drilling operations that improve efficiencies, reduce costs and minimize HSE impacts of drilling. The plaintiffs were employed for M-I as mud engineers and filed suit claiming they were not paid overtime compensation for hours worked in excess of forty (40) in a given workweek.
Whether an employee is exempt or not exempt under the FLSA is mainly a fact issue determined by his salary and duties and applications of the factors in 29 C.F.R. § 541.0 et seq., but the ultimate decision is a question of law. Lott v. Howard Wilson Chrysler-Plymoth, Inc., 203 F. 3d 326, 330-31 (5th Cir. 2000). To qualify for the administrative exemption, the FLSA requires the employee to be (1) paid on a salary or fee basis of a rate of not less than $455 per week (approximately $23,660.00 annual salary), (2) have a primary duty of performing office or non-manual work directly related to the management policies or general business operations of the employer or its customers, and (3) whose primary duties include the exercise of discretion and independent judgment with respect to matters of significance. It is the actual day-to-day activities of the employee, not the labels the employee or the employer apply to those duties, that determine whether the employee is exempt under the FLSA. Tyler v. Union Co. v. Calif., 304 F.3d 379, 404 (5th Cir. 2002).
The first requirement of the administrative exemption is self-explanatory. However, it should be noted that the Department of Labor has proposed new overtime rules which would increase the salary threshold to $970 per week (or approximately $50,440.00 annual salary).
As to the second requirement, the worker must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment. Kohl v. Woodlands Fire Dep’t, 440 F. Supp. 2d 626, 784 (S.D. Tex. 2006).
The third requirement of exercising discretion and independent judgment generally involves the comparison and evaluation of possible course of conduct, and acting or making a decision after the various possibilities have been considered. King v. Stevenson Beer Distributing Co., 11 F. Supp. 3d 722, 784 (S.D. Tex. 2014). The Courts have held that employees can still be found to exercise discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level of company supervisors. Thus, the term “discretion and independent judgment” does not require that the decisions made by an employee have a finality that goes with unlimited authority and complete absence of review. § 541.202 (c).
As to the second and third requirements, these job requirements must be the employee’s “primary duty.” 29 C.F.R. § 541.700 (a) defines an employee’s “primary duty” as the principal, main, major or most important duty that the employee performs. In determining an employee’s primary duty the court considers which aspects of the employee’s job are of principal value to the employer. The determination must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole. King, 11 F. Supp. 3d at 781. Factors to be weighed in this analysis include the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. Id.
In this case, there was no dispute that the plaintiffs were paid a salary of more than $455 per week. As to the second requirement, the court found that the evidence showed that a mud system is a crucial part of a drilling operation that performs the following critical functions: (1) stabilizing the drilling hole to keep it from collapsing in on the drill string; (2) lubricating, cooling, and supporting the drill string; (3) removing cuttings from the drill hole; (4) preventing drill string corrosion; (5) powering hydraulic tools at the cutting end of the drill string; (6) constructing a barrier to keep the mud and material in the drill hole from leaking onto the surrounding geological formations, thus minimizing the impact on the environment; (7) preventing unwanted gas and oil from entering into the drill hole during drilling; (8) facilitating cementing and completion; and (9) permitting the drilling crew to drill faster if the drilling mud is properly maintained.
The defendant’s Manual stated:
Drilling fluid engineering almost always requires tradeoffs in treating and maintaining the properties needed to accomplish the regular functions. For example, a high mud viscosity might improve hole cleaning, yet it might lower the hydraulic efficiency, increase drill solids retention, slow the penetration rate, and change dilution and chemical treatment requirements. Experienced drilling fluid engineers are aware of these tradeoffs and understand how to improve on function while minimizing the impact of mud property changes on other functions.
Likewise, one of the plaintiffs testified in his deposition that if the mud is improperly maintained, the results can be severe and even catastrophic. It can result in the loss of circulation which can prevent the mud from removing cuttings from the hole, cause the drilling operations to stop until the circulation is restored, cause a stuck pipe or cause the hole to collapse in on the drill string, also causing a stuck pipe, which would then require costly repairs, lead to intrusion of gas and oil into the hole, which can result in “gas kicks” or explosions, and result in excessive intrusion of drilling mud into the geologic formation, which can cause environmental damage.
Thus, the court found that the plaintiffs’ primary duty, the management of the mud systems of M-I’s customers, directly related to the general business operations of the employer or the employer’s customers and that the drilling fluid specialists’ duties not only related directly to the general business operation of M-I’s customers, but they were of substantial importance to both the customers and to M-I.
As to the third element, one of the plaintiffs testified that before drilling began, he was given a mud plan drafted by an engineer with specifications on historical drilling in the area and with parameters for him to attempt to adjust the mud to meet, but actual conditions in the well bore or drilling hole would vary from those in the plan and required him to exercise judgment and discretion with respect to additives. To determine the actual downhole conditions, he would perform a series of physical and chemical tests on the mud, determine the physical qualities of the mud in various locations and at the centrifuges and shakers, which remove cuttings from the mud. He would also talk to the drilling crew about any problems or issues that they were having. After determining the actual downhole conditions from that data, he would decide the proper types and amounts of additives to the mud and would draft recommendations for changes to the mud and drilling speeds for the client’s representative, who was in charge of the drilling site. He also testified that his recommendations were usually accepted, he worked independently, and was the only M-I employee and the only mud engineer on site.
The court found that the plaintiffs’ primary duty included the exercise of discretion and independent judgment with respect to matters of significance, such as quality control of the mud, which M-I has shown is a vital part of drilling.
Based on the above, the court ruled that the plaintiffs were exempt from the overtime provisions of the FLSA under the administrative exemption and dismissed the claims against M-I.
It should be noted by anyone with similarly situated specialist employees that this case is not yet controlling throughout the Federal Court system outside of the Southern District of Texas, nor specifically in the State of Louisiana, but it is significant none the less. This is a well-reasoned opinion that may be used in future overtime civil cases filed by plaintiffs against their employers. If this case is appealed and affirmed by the United States Court of Appeals for the 5th Circuit, it will be controlling case law in Louisiana. However, as mentioned above, the determination of whether or not an employee is exempt from the overtime provisions of the FLSA is a very fact-specific inquiry, so even if this case becomes controlling, it would only be controlling as to Drilling Fluid Specialists, even though one may argue the similarities to other specialist employees.
Furthermore, it is my opinion that this case is in contrast to the Department of Labor’s current position on day rate payments to specialist employees. Accordingly, if an employer is being investigated by the Department of Labor, as opposed to being sued in court, it is likely this case will have no persuasion with the Department of Labor. This is certainly a case to follow for any developments.
If you have any questions about this case or about the FLSA’s wage and hour provisions as it relates to you, please do not hesitate to contact me for more information.