Oilfield companies are increasingly relying on “consultants” hired by third party staffing firms for their well site personnel. Oilfield companies use consulting firms in an attempt to shield themselves from overtime liability. The way it typically works is this – Company A, an oil and gas exploration company, hires Company B, a staffing company, to provide consultants for a particular position or set of positions on all of Company A’s drill sites. Some common positions in which consultants are used are Operators, Inspectors, HSE advisors (a/k/a Safety Consultants), drilling supervisors, Directional Drillers, Wireline Operators, Flowback Operators, Pipeline Inspectors, Welders, Pumpers, and Well Site Consultants. Company B hires workers for these positions and outsources them, paying day rates or straight time instead of overtime,, charging Company A a higher amount and taking a cut of the money it charges Company A for itself. Often, in an effort o further insulate itself and its clients from overtime pay liability, the staffing company will require the workers to sign arbitration agreements and class action waivers. But what if the worker does not sue the staffing company, and instead sues the production company for violations of the overtime laws? Does the agreement signed with the staffing company still apply? Can the staffing company intervene to enforce the agreement? This question was recently addressed by a federal court in San Antonio.
In Flynn v. Sanchez Oil and Gas Corp., the plaintiff filed a collective action under the Fair Labor Standards Act, 29 U.S.C. § 201, et seq. (“FLSA”) on July 19, 2019 against Sanchez. Flynn alleged Sanchez failed to pay him and other oilfield workers all overtime compensation they are due. Sanchez responded to the Complaint by filing a motion to dismiss and compel arbitration, arguing that an arbitration agreement between Flynn and Cypress Energy Management-TIR, LLC (“Cypress-TIR”)—the entity providing oilfield workers like Flynn as personnel for Sanchez—compelled Flynn to arbitrate his FLSA claims against Sanchez. While the motion to compel arbitration remained pending, Flynn moved for conditional certification of a class of “all operators who worked for, or on behalf of, Sanchez, who were staffed through Tulsa Inspection Resources1 and paid a day rate at any time during the last three (3) years.” The Court issued an Order denying the motion to compel arbitration, holding that Sanchez was not a third-party beneficiary of the arbitration agreement between Flynn and Cypress-TIR, and the doctrine of direct-benefits estoppel did not apply to prevent Flynn from filing a lawsuit against Sanchez.
On February 4, 2020, Flynn and Sanchez filed a Stipulation to Conditionally Certify a Collective Action, Issue Notice, and Stay Case, by which they informed the Court of their agreement to stipulate to conditional certification of an agreed class and the stay of this case pending the effective date of Debtor Sanchez Energy Corporation’s bankruptcy plan. The stipulation also memorialized the parties’ agreement to certain processes with respect to issuing notice, determining which potential class members are entitled to notice, and how to handle pending discovery during the agreed stay. The parties defined the agreed class as follows:
all operators or production inspectors who functioned as operators who provided services to Tulsa Inspection Resources/Cypress Energy Management (“TIR”) and to Sanchez Oil & Gas Corporation and who may have been paid a day rate from a date three years prior to the issuance of notice to the present and who have not signed an arbitration agreement with SOG as of July 19, 2019.
The stipulation includes an agreement that Sanchez will send a subpoena to Cypress-TIR for the names, last known addresses, last known phone numbers, and last known e-mail addresses of potential class members.
Two days later, on February 6, 2020, Cypress-TIR, a non-party, filed the motions to intervene and stay that are the subject of this report and recommendation and order. By its motions, Cypress-TIR argues that it is entitled to intervene as of right and to permissive intervention under Rule 24 of the Federal Rules of Civil Procedure in order to protect its interests in this litigation. The Court held that Cypress-TIR failed to satisfy the standards for permissive intervention or intervention as a matter of right.
Cypress-TIR claimed that it was entitled to intervene as of right because Flynn and Sanchez’s stipulation to class certification and notice “directly impairs” Cypress-TIR because notice to potential class members in this lawsuit against Sanchez allows Flynn to collect information from Cypress-TIR’s employees that could be used in future litigation against Cypress-TIR. But the Court concluded that “the possibility of future litigation against Cypress-TIR is not ‘a direct, substantial, and legally protectable interest’ in the property or transaction that is the subject of this action. This possibility exists regardless of Flynn’s lawsuit against Sanchez, the joint stipulation, and the subpoena to obtain the names of those workers Cypress-TIR supplied to Sanchez.” The Court also rejected Cypress_TIR’s claim that the agreement between Plaintiffs and Sanchez was an illegal Mary Carter agreement, concluding that “[a] stipulation between two parties to conditional certification is not a void Mary Carter agreement. The stipulation merely agrees to notice to potential class members of possible claims against Sanchez. There has been no settlement of the claims at issue here or any stipulation as to liability. The parties’ stipulation does not create a legally protectable interest that could form the basis for Cypress-TIR’s intervention as of right.”
Cypress-TIR also argued that it was entitled to intervene as of right or permissively intervene because the stipulated notice targets its employees who have arbitration agreements and these employees are excluded from receiving notice under the Fifth Circuit’s opinion in In re JP Morgan Chase & Co., 916 F.3d 494, 502–504 (5th Cir. 2019). The Court rejected this argument, finding that “JP Morgan does not stand for the proposition that employees of a defendant cannot be sent notice because those employees may have an arbitration agreement with a third party that precludes them suing that third party. JP Morgan did not concern intervention…Nothing in JP Morgan suggests that a non-party like Cypress- TIR has a right to collaterally attack a court’s order denying arbitration between two other parties through intervention.”
As such, the magistrate judge recommended that the district court deny the motion to intervene. The district court subsequently adopted the magistrates report and recommendation, denying the motion to intervene. Cypress-TIR has appealed this ruling to the U.S. Court of Appeals for the Fifth Circuit.
In sum, this case provides a powerful reminder that oilfield companies cannot avoid FLSA liability merely by using third party consulting firms. Because of the broad definition of the phrase “employer,” these companies may be found to be liable under the FLSA regardless of whether they go through third party staffing firms or not.
About the author: Josh Borsellino is a Texas-based attorney who represents workers on claims for unpaid overtime. For a free consultation regarding an overtime matter, call Josh at 817.908.9861 or complete this form.
