About Us  |  About Cheetah®  |  Contact Us

Chevron’s alleged attempt to ‘contract around the FLSA’ survives first challenge by employees

By Ronald Miller, J.D.

Well-site managers for Chevron lacked standing to challenge the enforceability of Master Service Agreements (MSAs) entered into between a staffing agency, Cenergy, and corporate entities the employees formed through which they received their wages, ruled a federal district court in California. The employees alleged that Chevron attempted to “contract around the FLSA,” by contracting with Cenergy to act as an intermediary between Chevron and the employees. The corporate entities were required to reimburse Chevron and Cenergy for any losses stemming from the relationship under the terms of an indemnity provision. However, after finding that an FLSA defense did not confer subject matter jurisdiction and that the individual employees lacked standing to challenge the enforceability of the MSAs, the court granted Cenergy’s motion to dismiss the employee’s complaint (Cummings v. Cenergy International Services, LLC, June 15, 2017, O’Neill, L.).

Employees required to form corporate entities to receive wages. The employees, who worked as well-site managers for Chevron, alleged they were misclassified as independent contractors and impermissibly denied overtime wages under the FLSA. They are pursuing a separate collective action against Chevron. In this action, the employees claimed that although Chevron controlled their work and directly supervised them, it attempted to insulate itself from FLSA liability by creating a complex structure to employ them. Specifically, it contracted with Cenergy to be the intermediary between Chevron and the employees. As a condition of working for Chevron through Cenergy, the employees were required to form corporate entities through which they received wages.

Through these corporate entities, the employees entered into master service agreements (MSAs) with Cenergy under which they agreed (1) to be classified as independent contractors and not employees; (2) that these corporate entities would be solely responsible for payment of all wages to the employees; and (3) to indemnify Cenergy and Chevron against any loss arising out of the agreement. The MSAs were presented to the employees “as-is” with no negotiation. In addition to the indemnity provision, the agreement also contained an arbitration provision.

On March 21, 2017, Cenergy sent a demand letter to one of the corporate entities indicating that it had become aware that one of its employees had opted to be a member of an FLSA collective action against Chevron. Cenergy advised the corporate entity that Cenergy may be obligated to defend and indemnify Chevron for costs or damages from the lawsuit, and Chevron had already demanded that Cenergy pay its legal fees incurred in defense of the FLSA action. Citing the MSA, Cenergy demanded that the corporate entity reimburse it for all costs incurred as a result of the lawsuit. In response, the employees filed this action seeking a declaratory judgment that Cenergy had no legal right to attempt to collect the wages they sought from Chevron or associated penalties, including costs and attorney’s fees. The employees alleged that Chevron and Cenergy have attempted to “contract around the FLSA.” Cenergy filed a motion to dismiss for lack of subject matter jurisdiction.

Subject matter jurisdiction. The employees maintain that the declaration they sought arose from their rights under the FLSA. Cenergy argued that the FLSA arose only as a defense to its indemnity action, and did not confer subject matter jurisdiction under the well-pleaded complaint rule.

Federal question jurisdiction pursuant to 28 U.S.C. §1331 arises in two situations. First, a court may exercise federal question jurisdiction where a federal right or immunity is “an element, and an essential one, of the plaintiff’s cause of action.” Second, federal question jurisdiction arises where a state-law claim “necessarily raises a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.” To assess federal question jurisdiction, courts apply the “well-pleaded complaint” rule under which “federal jurisdiction exists only when a federal question is presented on the face of the plaintiff’s properly pleaded complaint.”

Where the complaint in an action for declaratory judgment seeks in essence to assert a defense to an impending or threatened state court action, it is the character of the threatened action which will determine whether there is a federal question jurisdiction in the district court. To perform this analysis, courts essentially “reposition the parties in a declaratory relief action by asking whether the court would have jurisdiction had the declaratory relief defendant been a plaintiff seeking a federal remedy.”

Declaration of FLSA rights. Here, the employees sought a declaration of their rights under the FLSA, which they claimed supplied a federal question for purposes of jurisdiction. However, under the factual circumstances presented in the complaint, the FLSA was raised only as a defense to Cenergy’s claim for indemnity under the terms of the MSAs executed between Cenergy and the employees’ corporate entities. The assertion of a federal defense does not confer subject matter jurisdiction. There was also no indication that any of the essential elements of Cenergy’s contractual indemnity claim necessarily incorporated a substantial question of federal law. Thus, repositioning the parties and considering the nature of Cenergy’s indemnity action did not establish federal question jurisdiction in this case. Moreover, the court found that the FLSA did not implicate the complete preemption doctrine and did not transform Cenergy’s coercive indemnity claim into one under federal law. Accordingly, there was no federal question jurisdiction over the employees’ complaint.

Standing. Additionally, the court concluded that the complaint lacked allegations sufficient to establish that the employees had standing to challenge the enforceability of the MSAs. The employees alleged that Cenergy’s indemnity claim abridged their rights under the FLSA because Chevron created a scheme to contractually shift its FLSA liability to its alleged employees through Cenergy. However, the court pointed out that Cenergy sought indemnity from the employees’ corporate entities, not the employees in their individual capacities. As a consequence, they failed to establish that they would be injured in their individual capacities. Accordingly, the employees lacked standing in their individual capacities to challenge Cenergy’s indemnity suit.