Labor & Employment Law Daily In revised opinion, Fifth Circuit finds oil industry consultant was an independent contractor
Friday, February 21, 2020

In revised opinion, Fifth Circuit finds oil industry consultant was an independent contractor

By Lisa Milam, J.D.

The panel substituted its opinion, which had held the consultant was FLSA-exempt under the “highly compensated employee” provision. The outcome was the same—he was not entitled to overtime—but because he was an independent contractor.

A former practicing attorney who took a consulting job with an oil and gas services company was not entitled to overtime under the FLSA, the Fifth Circuit held. The appeals court withdrew its earlier opinion which found that he was exempt from overtime under the statute’s highly compensated professional exemption, and instead reached the same conclusion based on his status as an independent contractor under the economic realities test. Either way, the FLSA’s overtime requirements did not apply. Judge Ho dissented from the original decision; the revised opinion gained his concurrence (Faludi v. U.S. Shale Solutions, LLC, February 14, 2020, Elrod, J.).

Consulting gig. The plaintiff was a practicing attorney for 16 years before he took a consulting position with a newly formed oil and gas services company. The parties signed an “Independent Contractor Master Consulting Services Agreement,” under which the plaintiff was employed for an indefinite period of time at a rate of $1,000 per day for every day he worked in Houston and $1,350 per day for every day he worked outside of Houston. He submitted a number of prorated invoices for amounts less than $1,000 per day when he worked less than a full day. Nevertheless, his annualized compensation was approximately $260,000 during his work for the company. After an internal reorganization, he left the company, and filed an FLSA suit for unpaid overtime wages.

Previous rulings. The district court determined that genuine issues of material fact existed as to whether the plaintiff was an employee or independent contractor, and whether he fell within the FLSA’s “practice of law” exemption. However, the court granted summary judgment in the company’s favor nonetheless, finding the plaintiff was exempt under the highly compensated employee exemption. A divided Fifth Circuit panel affirmed summary judgment, agreeing with the district court that the plaintiff was exempt as a highly compensated employee and was not entitled to overtime.

It was undisputed the plaintiff earned at least $100,000 in annual compensation and that he performed exempt duties. Thus, the appeals court only considered whether he was compensated on a salary basis. The independent contractor agreement set a predetermined amount of compensation he was to receive and provided for the submission and payment of invoices on a less-frequent-than-weekly basis—twice a month. Thus, he regularly received a predetermined amount of compensation on a weekly or less frequent basis—and his voluntary reductions in his own compensation when invoicing the company did not render his salary “subject to reduction” within the meaning of the relevant FLSA regulation.

Having concluded that the highly compensated exemption applied, though, the appeals court did not reach the question of whether the plaintiff was an employee or independent contractor, or whether he fit into the practice of law exemption.

Independent contractor status. In its substituted opinion, the Fifth Circuit panel declined to address the highly compensated employee issue (although it noted the defendant’s arguments on that point were “well taken”), nor whether the plaintiff satisfied the practice of law exemption. Instead, the appeals court took up the independent contractor question and, finding the plaintiff was not a statutory employee, deemed it unnecessary to rule on the FLSA exemption issues.

Although the district court held that genuine issues of material fact remained as to whether the plaintiff was an independent contractor, the appeals court, turning to the economic realities test, found no factual dispute existed.

The company provided the plaintiff with an office and he usually worked there five days a week, but it did not expect him to be there during set periods of time—he managed his own schedule—nor did it provide him with an access card. The plaintiff provided his own phone and computer and the company reimbursed him for those purchases, along with work-related travel expenses. The plaintiff paid his own continuing education expenses and invested in his own home office equipment.

The plaintiff chose his own assignments, thereby controlling his opportunity for profit and loss (although as he pointed out, he had no opportunity to lose money). He worked on a variety of matters for the company, using his considerable skill and initiative, including analyzing contracts, evaluating litigation exposure, and conducting settlement negotiations—projects to which he was assigned precisely because of his extensive legal experience. He worked independently and managed his own workload, and the company did not give him performance reviews.

Also, the relationship lacked permanency. The plaintiff only worked for the company for about 16 months, and under the contract, he could leave whenever he wanted on 15 days’ notice. The plaintiff pointed out that he worked exclusively for the defendant during his time with the company and had no other source of income. He also noted that he was bound by a noncompete clause from working for the defendant’s competitors. However, “the mere existence of a non-compete clause does not automatically negate independent contractor status,” the Fifth Circuit panel said. On these facts, the plaintiff was an independent contractor.

From dissent to concurrence. In the original opinion, Judge Ho parted ways with the panel majority, in a dissent invoking the Founders, The Federalist Papers, and the lamentable demise of the nondelegation clause. Still, he concluded that for better or worse the operative DOL regulations controlled, and as Ho construed them, the plaintiff was not in fact paid on a salary basis, and thus he was not exempt under the highly compensated employee exemption.

Still, Ho had argued that the decision should turn on whether the plaintiff was an independent contractor and that, under this analysis, the plaintiff could not prevail on his overtime claim. With that reasoning now winning the day, Ho concurred in the substituted opinion.

Remanded on costs. On this holding, there was no change: The appeals court vacated the award of costs, and remanded to the district court because it had failed to state its reasons why it declined to award costs to the prevailing defendant.

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