Earlier this year, in June, the state of California determined that an Uber driver was an employee rather than an individual contractor. As noted in this article, Uber finds itself in a high-profile fight with special interest groups with both the desire to attack the “on demand” economy and the budgetary means to sustain such a fight.
As far removed as this may be from the wilds of West Texas, this California ruling heralds the arrival of an existential threat to independent oilfield service companies in West Texas.
As I noted in an earlier post, one of the ways that both the exploration and production (or “e&p”) and oilfield service companies have thus far weathered the downturn in the economy has been through the reduction in the cost of services. What I did not note in the earlier post, and an important cog in this reduction that I have rarely seen discussed elsewhere, is how those reductions have been accomplished.
In short, there have been a host of “shadow layoffs” in the industry that have not been fully captured by recent data. In fact, an earlier article in the Economist that I referenced in that post mentioned that there have been as many as 20-30,000 layoffs in just the Midland, Texas region alone – but that article then went on to say that this was a reduction of “temporary workers”.
Much more likely, in the modern oilfield economy, what these workers were categorized by their employers was “independent contractors” rather than temporary workers. As the price of oil spiked and the demand went up for labor in all facets of the oilfield services industry, smaller service firms snapped up as many people as they could for the increasing demand. There was no follow-on for demand of support personnel, however, who many small firm owners view as a drain on resources.
Instead, these firms would draw up simple contract with each new “contractor” which paid them higher week-to-week wages in return for the lower demand of paperwork required by the employer. At the end of the year, the employer would simply issue the so called “1099’s” for the contractors, and the contractors either would (or, often, would not) file taxes based on the amounts listed on that form.
What this situation also allows for is for oilfield companies to modulate the level of manpower available for the demand in the market. As the demand for labor decreased (and the pressure to curb costs increased) they were able to simply no longer contract with these “independents” – the stealth layoffs I mentioned above.
This provides yet another pro-company benefit. The Worker Adjustment and Retraining Notification (WARN) Act requires that in certain situations, employers are required to provide ample notice to individuals subject to plant closings or mass layoffs. The reason you have not heard about more of these occurrences in West Texas is that the oilfield service companies (except for the largest of them) do not employ independent contractors. When those individuals are let go, they are simply released from their contract according to its terms.
This, however, all changes if the description of these individuals changes. If the California recent California decision is adopted by federal agencies, then it is conceivable that the nature of the contractor – contractee relationship between these parties will be forever altered. The news coming from West Texas would then become much more grim than it has been already.