board of directorsCo-author Alexandria Moore

Let’s say two fellows are in the oil business and one of his activities is as a director of an exploration company. A deal comes in, they present it to the company, but take it for themselves, Did they steal the opportunity from the company? In Huff  Energy Fund LP v. Longview Energy Company, the jury said yes, to the tune of several hundred million dollars. Not so fast, said the court of appeals. Reversed and rendered for the directors.

The law

Here is when a director may take a corporate opportunity:

  • The opportunity is first presented to the director in his individual capacity;
  • The opportunity is not essential to the corporation;
  • The corporation does not have an interest or expectancy in the business; and
  • The director has not wrongfully employed the resources of the corporation pursuing the opportunity.

What they did        

  • HEF purchases stock in Longview, which entitled HEF to appoint Huff and D’Angelo to Longview’s Board of Directors.
  • HEF and Riley form Riley-Huff Energy.
  • HEF encourages its portfolio companies, including Longview, to explore opportunities in the Eagle Ford shale.
  • HEF and Longview discuss investment strategies, including the Eagle Ford shale.
  • Longview claims that Huff agreed to fund any investment that “Rick Pearce likes.” (Pearce is Longview’s COO and senior petroleum engineer.)
  • Longview meets with land brokers who do not present any specific leases; instead they drew circles on a map to indicate general areas where leases are available.
  • Management and D’Angelo meet to discuss plans to develop the Eagle Ford shale.
  • The same land broker is meeting with Riley.
  • At a meeting where management presents an investment proposal to the Board, Longview’s president distributes reading materials proposing a strategy for investing and economic projections.
  • Pierce presents the proposal to invest $40 million in Eagle Ford shale acres and shows a map that includes available acreage but not specific leases.
  • The Board does not vote on the proposal because D’Angelo and Huff won’t support an Eagle Ford investment.
  • Longview learns that three days before the Board meeting Riley-Huff signed a contract to purchase the same acreage that Longview was considering through the same land brokers.
  • Longview takes no further action on the Eagle Ford investment plan.

Longview sues Huff and D’Angelo for breach of fiduciary duty by taking a corporate opportunity that belonged to Longview.

The question for the jury

Did Huff and/or D’Angelo fail to comply with their fiduciary duty to Longview by taking a corporate opportunity?  The jury answered yes and the trial court rendered judgment on the verdict.

What so bad about that?

Not much, said the majority. The evidence was legally insufficient to hold that Huff and D’Angelo failed to comply with their fiduciary duty.

Longview did not have an expectancy in the opportunity. Longview was “in a general way, negotiating for and endeavoring to purchase the interests involved.” The Eagle Ford shale encompasses millions of acres across thousands of miles. Longview would acquire 20,000 acres and drill one well per tract to prove up the prospects. To characterize this strategy as an expectancy would give Longview “a virtual monopoly of extensive fields into which its officers and directors were forever precluded from entering.” An opportunity must be more than a desire to invest, especially if the investment is in an area as large as the Eagle Ford shale.

The purchase by Huff and Riley did not hinder or defeat Longview’s plans to also acquire Eagle Ford acreage.

Lawyers, pay attention

By virtue of what some (including the dissent) would see as legal mumbo-jumbo, the majority decided that a second question should not have been asked because it was not pled, and it was thus ignored.  See “Jury Question Number 2” on pages 13 through 21.

Next

The other side of the story.

We are within a few days of the 35th anniversary of John Lennon’s death. Hence, this musical interlude. (Not saying it beats the Isley Brothers)

les milesHow is that, you say?

  • Recruits well
  • Sometimes can’t get to TD
  • Occasional blowouts
  • Lingo often not understood by others
  • Eats/uses no more turf than necessary
  • Surely benefits from “white privilege”
  • Down but not out.

More on the Les mess:

  • Next time you encounter incompetence in action, just say, “They must work for Joe Alleva”.
  • If President F. King Alexander handles academics like he does athletics, LSU will be a bottom-tier university by the end of the decade.
  • After making a tactical error exiting campus after the game (note classy absence of Aggie-directed trash talk), I came to realize that the ObamaCare website and LSU’s post-game traffic directives must have been designed and implemented by the same people.

And now, on to our case

Co-author Brooke Sizer.

  NorAm Drilling Co. v. E & Pco Intern., LLC is important if you:

  • Use the IADC form Daywork Contract,
  • Wonder when letters and emails can amend a contract (hint: after, not before)
  • Wonder what it takes to  waive the benefits of a contract.

The events

E&P acquired two leases in Caldwell Parish, Louisiana, and began discussing a deal in August 2007 for NorAm to be its drilling contractor.

12/06/07 – E&P circulates an Addendum to a contract stating, if a deposit is not made by E&P the contract will be null and void.  Note:  There was no evidence that this addendum was ever signed by NorAm. 

12/12/07 – The parties execute a Drilling Bid Proposal and Daywork Contract.  NorAm is obligated to commence operations by 12/15/07, or by a date mutually agreed to.  The contract  required an escrow account to be set up with an amount to cover mob and demob, interest, and three months of operations. Note: E&P never paid a cent into escrow and NorAm never demanded that the escrow be paid.

1/16/08 – NorAm contacts E&P: The rig cannot continue to sit idle; offers a standby rate of $15,000 effective 1/21.

1/18  – E&P emails NorAm: The contract was contingent upon a Letter of Credit or Escrow Deposit, and was surprised that NorAm was proposing to mitigate the losses.

2/18 – NorAm emails E&P: It was NorAm’s understanding that the Daywork Contract would go on a standby rate of $15,000 per day commencing February 11 and continue on that rate until the rig is read to move to the first location.

2/21 – E&P responds, acknowledging the email request to place the rig on standby at $15,000 per day.

5/27 – NorAm contacts E&P: The rig has been on standby for six months.  The outstanding balance by the end of May will be $2,182,500.

6/02 – E&P emails NorAm: In the final stages of securing financing.

6/25 – NorAm sends E&P a letter: Based on discussions, NorAm could rent the rig to other operators in order to mitigate E&P’s damages, the contract was in full force and effect and E&P would continue to seek funding.  E&P acknowledges this letter by signature on June 26.

Ultimately, E&P received funding, but used a different operator. E&P never paid NorAm. NorAm filed suit in Louisiana. The contract selected Texas law to govern.

E&P argued that the parties both understood that the contract was subject to E&P obtaining funding. The trial court found that the Daywork Contract was in effect, starting on 2/11, per the email agreement. E&P’s conduct from 12/07 through 6/08 was inconsistent with a claim that E&P didn’t have an obligation under the contract. The court found breach of contract by E&P and damages at the standby rate from 2/11 through 6/25.

The Law

Under Texas law the escrow clause did not create a condition precedent for the existence of the contract. Additionally, Texas law permits the party that the condition precedent favors to waive it.  Thus, it was untenable for E&P to argue that because the escrow clause was not satisfied the Daywork Contract was unenforceable.  NorAm’s conduct showed a willingness to waive the condition.  Texas law additionally recognizes the right of parties to modify a contract by the use of letter agreements.

The appellate court affirmed the judgment of $2.01 million plus interest and attorney fees.

Our musical interlude is for sports fans everywhere.

truthinessTruthiness: A quality characterizing a “truth” that a person making an argument or assertion claims to know intuitively, “from the gut” or because it “feels right” without regard to evidence, logic, intellectual examination or facts.

Today we explore truthiness in action. Let’s start with the loftiest bully pulpit in the land. The Washington Post gave President Obama four pinocchios  for his justification for cancelling the Keystone XL Pipeline.

  • The Prez: Keystone oil “will bypass the United States and its products will end up in foreign markets”.
  • The Post: Most of the products to be refined at Gulf Coast refineries will be consumed the United States.
  • The Prez: Keystone was just for Canadian oil and we should be focusing on American infrastructure, American jobs and American producers.
  • The Post: 65,000 BOD will be moved from the Bakken; U.S. energy companies control 30% of Canadian oil sands production.

Propaganda disguised as truthiness

According to Energy in Depth, anti-fracking activists use lies to scare us, such as:

  • Fracking causes widespread water contamination,
  • Fracking causes earthquakes (specifically, all injection wells induce earthquakes),
  • Fracking causes climate change and increases air pollution (Really? See the Sierra Club article below),
  • Fracking negatively impacts health (especially in babies),
  • Fracking chemicals are not disclosed,
  • Fracking is not regulated,
  • The industry does not provide safety measures for workers.

See the article for details explaining why they are wrong.

Facts  

Michael Lynch in Forbes runs through 11 of what he calls myths about the economics of petroleum and labels them either wrong, misinterpreted, or irrelevant.

An Energy In Depth report quantifies the threat of earthquakes from injection wells. To summarize:

  • Percentage of U.S. disposal wells potentially linked to seismicity – 0.55%
  • Percentage of disposal wells operating without seismicity – 99.45%
  • Percentage of Class II injection wells potentially linked to seismicity – 0.15%
  • Percentage of Class II injection wells operating without seismicity – 99.85%

The numbers are similarly low in Texas.

Could go either way?

This could be truth or truthiness. Energy In Depth reports that the Sierra Club admits but downplays the contribution of cheap natural gas to the reduction in carbon emissions in the United States. Read the article itself and all the links and decide for yourself who is more correct. This one could be a matter of your point of view.

Why this blog uses cute pictures

A study examining truthiness was carried out by Eryn Newman of Victoria University of Wellington. Experiments showed that people are more likely to believe that a claim is true regardless of evidence when a decorative photograph appears alongside.

An interlude

Today we have a movie interlude. You will want to view this if college is in the present or future for you or someone for whom you are responsible.

Allen Toussaint RIP
Allen Toussaint RIP

Co-author Brooke Sizer

Creativity abounds: Your 16-year old “explaining” the empty Southern Comfort bottle and the roach clip; President Obama justifying his rejection of Keystone. The Louisiana Supreme Court isn’t much of a supporter, at least in statutory construction. Today we revisit McCarthy v. Evolution Petroleum Corp.  As we reported, the court of appeal had authorized causes of action under Mineral Code Article 122 for fraud by silence and fraud by affirmative misrepresentation.  The Supreme Court reversed; these causes of action may only be obtained contractually and not by “creative interpretations of Article 122”.

Article 122:

A mineral lessee is not under a fiduciary obligation to his lessor, but he is bound to perform the contract in good faith and to develop and operate the property leased as a reasonably prudent operator for the mutual benefit of himself and his lessor. Parties may stipulate what shall constitute reasonably prudent conduct on the part of the lessee.

The Supreme Court did not agree that the obligation to develop and operate the property “for the mutual benefit of himself and his lessor,” established a cause of action for “fraud by silence”, requiring disclosure of information in connection with Evolution’s purchase of mineral interests from its lessors.

Duties under Article 122

Four duties are derived from Article 122:

  • develop known mineral producing formations
  • Explore and test all portions of the leased premises after discovery of minerals in paying quantities;
  • Protect the leased property against drainage by wells located on neighboring property; and
  • Produce and market minerals discovered and capable of production in paying quantities.

All require the lessee to operate in the manner of a reasonable, prudent operator.

The court avoided “hide-and-go-seek” in statutory construction.  The true meaning of the statute won’t be hidden until found by a creative plaintiff. Duties requiring the disclosure of information will not be read into Article 122, said the court, especially because the article itself allows for contractual arrangements. A concurring opinion reasoned, “Courts should take care not to go beyond the plain meaning of the provisions of the Code where the meanings are clear and unambiguous and do not lead to absurd consequences.”

The causes of action approved by the court of appeals would be fine if they had been supplied by an agreement between the parties. It did not help the plaintiffs that an allegation of an inadequate price in a mineral sale is not actionable (that “lesion” thing we discussed in the first post). Nor was it helpful that the claims arose out of the purchase of mineral interests and not operations. Nor did it help that the article relieves the lessee of fiduciary obligations.

Takeaways

  • Lessor: If you want reporting, disclosure or other duties beyond those required by Article 122, negotiate them into your lease.
  • Lessee: You are off the hook for withholding information from your lessor, at least in this situation.

A musical interlude

 Allen Toussaint has nothing to do with the subject but much to do with Louisiana’s musical heritage.

Here is one he wrote and produced.

And another one that puts the New Orleans rhythm into a song you’ve heard a hundred times.

controlAre you an operator who hires contractors on location, … a contractor who hires subcontractors, … the party to be indemnified for injuries to the other party’s employees? This post is for you.

Salas v. Allen Keller Company One, LLC, is not about master service agreements, but it is instructive. Want to avoid responsibility for your sub’s employees? Don’t assert control over them.  Think Jason Garrett and his Cowboys, … John Boehner and the Freedom Caucus.

Mr. Saurez was killed while working for his employer, subcontractor C&B, on a highway construction project.  C&B and contractor AKC had a written construction subcontract in which C&B was to perform concrete work. His widow sued AKC for negligence.

The sub’s obligations – looks like an MSA

C&B represented and agreed:

  • It was capable and experienced in the construction,
  • It would supply its own materials, labor, tools and equipment,
  • It would procure its own insurance,
  • It would assume responsibility for claims arising out of death to injuries to persons or damages to property sustained in connection with C&B’s performance of the contract, and
  • It would take all reasonable safety precautions and comply with applicable laws.

C&B was to perform traffic control.  On the day of the accident Suarez was performing traffic control duties.

Did the contractor owe a duty?

Here is Texas law on a contractor’s duty to a sub’s employees:

  • Ordinarily, there is no duty to insure that an independent contractor performs its work safely.
  • A limited duty arises if the contractor retains some control over the manner in which the independent contractor performs its work. The contractor’s duty of care to the sub’s employee is commensurate with the control it retains over the independent contractor’s work.
  • There must be a nexus between the contractor’s retained control and the activity that caused the plaintiff’s injury.
  • The key is the actual exercise of control.
  • There must be more than a general right to order the work stopped or resumed to inspect progress, or make suggestions and recommendation which need not necessarily be followed, or prescribe alterations and deviations.
  • There must be such a retention of a right of supervision that the sub-contractor is not entirely free to do the work in its own way.

Factors that matter

AKC did not have a contractual right to control C&B’s performance but could have actually exercised such control in a manner that would give rise to a legal duty to C&B’s employees.

  • On-site orders or instructions on the means or methods to carry out a work order are important.
  • TxDOT’s inspections and directions was no evidence that AKC retained supervisory control over operations of the sub.
  • AKC never instructed the C&B crew on how to actually move and set out cones and signs.
  • There was no nexus between any exercise and control and Salas’ conduct which caused his injuries.

Salas Simplified

  • You can tell the sub what you want; don’t tell him how to do it.
  • Suggestions ≠ instructions.
  • Make sure your field personnel is mindful of the difference.

A musical interlude.

dodgeballYou might recall previous entries discussing Parr v. Aruba (here is one) – a suit for personal injuries from oilfield pollution (and a $2.9MM verdict for the plaintiffs). Not all similar suits have the same result.

You could liken Cerny v. Marathon Oil and Plains Exploration & Production to a game of legal dodgeball.  The “ball ” that the plaintiffs could not avoid  was causation, thanks to Merrell Dow Pharmaceuticals, Inc. v. Havner. 

Gray Reed attorneys Jim Ormiston and Mitch Ackal represented Plains. The summary judgment at the trial court was upheld by the court of appeal.

The claims  

The petition alleged, among other claims: 

  • continuous release of “ … strong odors and noxious chemicals into the environment, including the plaintiffs’ property, causing injury and harm to the plaintiffs’ property and to their persons … ” from Marathon wells and Plains facilities, and
  • health problems, including headaches, rashes, chest pain, “strange nerve sensations,” high blood pressure, nausea, difficulty breathing, nosebleeds, anxiety and depression.

The causes of action were private nuisance, negligence, and negligence per se.

The problem for the plaintiffs

To dodge Havner, the plaintiffs had to satisfy these requirements:

  • Prove with scientifically reliable expert testimony that their exposure to the defendant’s product more than doubled the plaintiff’s risk of contracting the disease.
  • Where multiple sources of exposure exist, prove substantial factor causation. “Some” or “any” exposure won’t get it done.
  • There must be defendant-specific evidence relating to the approximate dose to which the plaintiff was exposed, along with evidence that the dose was a substantial factor in causing the disease.
  • Present reliable epidemiological and scientific evidence.

Ducking the problem

In an effort to satisfy the requirements, the plaintiffs:

  • Disclaimed specific diseases, instead alleging symptoms,
  • Disclaimed “personal injury damages” (which would require expert testimony under Havner),
  • Sought recovery for “discomfort”, rather than disease,
  • Submitted affidavits and reports from an air quality expert, a forensic meteorologist, a toxicologist, the Cernys themselves, and a lay witness who collected air samples at the Cernys’ home and at a Plains facility several miles away.

The result

When considering the following conclusions, think “causation”:

  • The trial court struck virtually all of the plaintiffs’ evidence, expert and otherwise.  Thus, the plaintiffs had no proof. The evidence was speculative, hearsay, unreliable, and unqualified lay opinions.
  • The plaintiffs failed to establish that the pollution came from the defendants’ operations and facilities, and not from dozens of other oilfield operations in the area.
  • The court did not accept plaintiffs’ assertion that claims for symptoms, rather than disease, sidestepped Havner. It was still a toxic tort case.
  • There was no direct, scientifically reliable proof of actual causation.
  • Other potential causes of the Cernys’ illnesses were not addressed.
  • The Cernys had plenty of symptoms before the events they sued on.

Free advice

I submit that the plaintiffs had the wrong kind of expert.

lion eatingWhat should we make of the Oklahoma Supreme Court’s order sending a suit alleging injuries from an earthquake back to the trial court?  Did the court unleash the lions, tigers and bears of the litigation world … or not? At this point, the answer is, not much for an injection well operator to worry about now.  This was a procedural ruling.

Faced with a motion to dismiss, the court concluded that the district court, and not the Oklahoma Corporation Commission, has exclusive jurisdiction over the claims.

Ladra v. New Dominion is a private tort action in which a homeowner seeks damages for personal injuries and property damages she alleges were proximately caused by wastewater injection wells in Lincoln County, Oklahoma.

Since 2009 Oklahoma has experienced a drastic increase in the frequency and severity of earthquakes.  The one at issue for Ms. Ladra was 5.0 in magnitude.  Her house shook, the chimney fell into the living room, rocks fell and caused her significant injury to her knees and legs, says the petition.

In Oklahoma procedure, a motion to dismiss is generally viewed with disfavor. The court is to accept as true all of the plaintiff’s factual allegations, with all reasonable inferences to be drawn from them. The moving party bears the burden to show the legal insufficiency of the petition.

What the ruling actually did

The court’s conclusion was that the OCC’s jurisdiction is limited solely to the resolution of public rights, and the agency has no authority to hear and determine disputes between private parties in which the public interest is not involved.  The OCC has no authority to entertain a suit for damages. Private tort actions are exclusively within the jurisdiction of district courts.  By the same token, an OCC order approving an operation (such as a disposal well permit) does not immunize an operator from lawsuits in the district courts.

Takeaways

  • This ruling has nothing to do with the substance of the plaintiff’s claims. It’s about jurisdiction.
  • Don’t try to predict the outcome. There is lots scientific of evidence to develop, and there is the question of how an Oklahoma jury might balance the value of hydraulic fracturing against health and safety of residents living close to injection wells.
  • Operators are fond of saying that the typical earthquake in the vicinity of wastewater injection wells is minimal – 2.0 or 3.0 on the Richter scale. But this one is alleged to have been 5.0, which in the world of seismology exponentially more severe than a 2.0 or 3.0.
  • 2.0 to 3.9 earthquake damage ranges from felt slightly by some people, no damage, to noticeable shaking of interior objects (2.0 o 2.9); generally none to minimal damages, some objects may fall off shelves (4.0 to 4.9).
  • 5.0 to 5.9: Can cause damage of varying severity to poorly constructed buildings; none to slight damage to all other buildings. Felt by everyone.
  • Despite the breathless anticipation from radical environmental groups, this ruling does not present the demise of hydraulic fracturing.

In the end, it could be a good day for someone.

Co-author Brooke Sizer

Spoiler alert: Don’t expect a post about a weekend of Mardi Gras debauchery.

The owner of a landlocked tract can demand a right of passage over his neighbor’s property to the nearest public road. Does the law require the passage to be on the shortest route? No, says Phillips Energy Partners, LLC v. Milton Crow Ltd. Partnership, et al.

Phillips’ dilemma

Phillips owned a landlocked 160-acre tract. To the west is a Crow and Livingstone tract.  Chesapeake, in order to access wells on the two properties, built a road across the C-L property and on to the Phillips property, connecting both properties to a public road. Phillips dug several ponds on its property in order to sell water for hydraulic fracturing and used the road to access the property until C-L objected.  Landowners to the east allowed Phillips to construct a temporary road to finish the project, but refused to permit a permanent road through their property.

Phillips sued C-L to obtain a right of passage.  Three routes were proposed.

  1. Route One, to the east,
  2. Route Two, on C–L’s property to the west,
  3. Route Three, the Chesapeake road.

Routes One and Two would require construction of a roadway.  Phillips’ first choice was Route Three. Landowners to the east opposed Route One. C–L, opposed Routes Two and Three.

What Does  the Civil Code Say?

Art. 689.  Enclosed estate; right of passage

The owner of an estate that has no access to a public road … may claim a right of passage over neighboring property to the nearest public road … .  He is bound to compensate his neighbor for the right of passage acquired and to indemnify his neighbor for the damage he may occasion.

Art. 692.  Location of passage 

The passage generally shall be taken along the shortest route from the enclosed estate to the public road … at the location least injurious to the intervening lands.

Note “generally” in Art 692. That word indicates exceptions, two of which are recognized by jurisprudence:

  1. The shortest route is covered by water or is otherwise not accessible year-round.
  2. The costs associated with crossing the estate which is the shortest distance are so exceptional that from a practical standpoint it is economically unfeasible.

Testimony was presented at trial regarding the feasibility of Route One:

  • It was frequently muddy and impassable
  • It would be located near a where a deer feeder loaded with 150 pounds of corn was tipped over by the water
  • It would require a federal wetland mitigation permit
  • It would pass through a residential subdivision, and would not be well received by the residents
  • A road use permit could be used by the police jury
  • It was typically inundated with water and rarely dried out.

The trial court found that Route One presented environmental factors that resulted in the need for an exception. The court of appeal agreed.  Likewise, Route Two could result in safety and maintenance issues.  Route Three was the least injurious.

It’s Not all Good News for Phillips

Because Route Three was a permissible right of passage, Phillips was bound to indemnify C-L for damage the road may occasion.  The burden was on C-L – the servient estate – to prove the amount of damage resulting from the servitude.

For our musical interlude there will be no cute John Denver number. Let’s talk swampy and muddy Louisiana funk and second line.

You have the R&B and the Jazz.  Take your pick. no lyrics necessary.

hide the ballThe result was like others we’ve seen. Lessors Win. These wells are in Johnson and Tarrant County, Texas. Lessee Chesapeake Exploration sells to affiliate Chesapeake Marketing through affiliate-operator Chesapeake Operating. Plaintiffs sued Exploration and Operating for underpayments of royalty and overrides.

The Takeways

  • This decision demonstrates the reason for special royalty clauses addressing sales to an affiliate of the lessee: To prevent the lessee from monkeying around with the sales mechanism, and therefore the price, so that the affiliate makes money that would otherwise go to the lessor.
  • Courts more often than not believe it is their job to reject creative legal and factual arguments if the result would be to avoid the plain language of a written agreement.

Chesapeake Stung by a WASP

The leases in question are all similar. Two leases, Trinity Valley School and Bass, provide for alternative methods of determining market value. Plaintiffs argued there is an irreducible minimum starting point, the “weighted average sales price” (the “WASP”), which is the average of the two highest prices paid by purchasers in Tarrant County for gas of the same quality and quantity. This method does not allow for post-production cost deductions. Chesapeake claimed it used a net-back calculation, which was not really a deduction.

The Trinity Valley School leases allow deductions only if the point of first sale is located more than two miles from the leased premises. It was undisputed that the first point of sale was at the wellhead on the premises. The court ruled that no deductions were permitted.

The Bass leases allow for deduction of post-production costs only if the costs are:

  • charged at arms-length by an unaffiliated entity,
  • actually incurred by the lessee for the purpose of making the oil and gas production ready for sale or use or to move said production to market, and
  • incurred by the lessee at a location off of the leased premises.

Chesapeake asserted reasons why it complied with all three prongs of the test. The court enforced the plain language of the leases, rejecting those arguments.

The McKinney lease prohibits deduction of post-production cost in the event of a sale to an affiliate and also specifies that where gas is sold to an affiliate, the price paid for royalties should be determined by the WASP. The court construed the McKinney lease the same as the Bass leases.

The court enforced the contracts as written. Because Chesapeake sells to an affiliate, the market value is determined by the WASP.

For our musical interlude let’s imagine this post-settlement conversation, in which the lessors speak to the lessee.

Don't be like this fellow.
Don’t be like this fellow.

Co-author Michael Kelsheimer

It’s common knowledge: Fair Labor Standards Act audits from the U. S. Department of Labor and lawsuits from workers for overtime violations are coming faster than a blitzing safety on a third and long.

Native Oilfield Services is the latest target.  Dispatchers and truck drivers brought suit against Native alleging they were not paid for overtime hours.  The company settled with the dispatchers for an undisclosed amount, but Native elected to fight the drivers’ claims.

Neither the jury nor the federal judge accepted Native’s arguments that: (1) the drivers are exempt from overtime, and (2) time waiting for new loads should not be compensated.

With prices in the tank and layoffs prevalent, former employees are eager plaintiffs. One laid-off employee trying to feed the family can lead to a “collective action” on behalf of that employee and everyone else in that job category, past and present. Native had 104 drivers against it.

You don’t have to be worried about one settlement for a few overtime hours a week involving one job position going back two or three years. There’s more. Be concerned about every person who holds and has held that position for the last several years coming back against them.  Plus, the employees could recover statutory damages and attorneys fees.

What should I do?

  • Talk to an employment lawyer.  As good as payroll companies are for many things, do not rely on them for legal advice. Same goes for your CPA. One other reason: Your conversations with your lawyer are privileged from discovery, not so with your payroll company and your CPA.
  • Determine if the employees who are not paid overtime are actually exempt. They might be.
  • Learn if your independent contractors actually fit the legal definition.
  • Check to see if you are correctly paying travel time, wait time, and on-call time.
  • Make adjustments if necessary.
  • Settle potential claims with employees directly to avoid a lawsuit with double overtime payments and fees – for your lawyer and theirs.
  • Remember, it’s cheaper to be proactive than to stick your head in the sand over these claims.
  • If you elect to go ostrich, at least require employees to keep track of their hours. If you don’t think you owe overtime you are unlikely to keep track of employee hours. The result: The employees will estimate the number of hours they worked over 40 each week during the period in question. Do you think the estimate will be high or low?  Employers are hard-pressed to defend the number because they weren’t there to observe and have no contemporaneous records.  If you keep the records, you will have an honest assessment of what you might owe.

Feeling paranoid? You’re in good company. See what happened to Halliburton.

Here’s one for the workers.