2 Recent Decisions Hold That an Employer-Defendant Cannot Avoid Liquidated Damages By Relying on Involuntary Administrative Governmental Audits

As FLSA cases have proliferated in recent years, among the formally sleepy areas of jurisprudence that has seen a dramatic rise in litigation is the so-called “good faith” defense. Although in its earliest years the FLSA provided for mandatory liquidated damages, a subsequent amendment to the FLSA, through the Portal-to-Portal Act, now allows for a defendant to avoid the imposition of liquidated damages (in addition to the underlying unpaid wages damages) if it can demonstrate that it took affirmative steps to attempt compliance with the FLSA, but violated the FLSA nonetheless. Two recent cases reiterate that a defendant’s burden is not met solely by demonstrating that it had a subjective belief that it was complying.

McLean v. Garage Management Corp.

In the first case, the defendant sought to avoid liquidated damages by relying on a series of involuntary misinformed DOL audits, which it claimed it reasonably relied upon in establishing their belief that its illegal pay methodology, whereby it treated hourly employees as executive exempt from the FLSA’s overtime provisions. While the DOL has in fact found the defendant’s classification to be proper, the court noted that the DOL’s finding was based on its examination of the employees’ duties alone, because the defendant had misrepresented to the DOL that the employees were paid on a salary basis, at the required rate under the applicable regulations in the initial audit. Subsequent audits simply compounded this initial incomplete investigation, based on the information the defendant provided to the DOL in the initial audit.

Significantly, the court rejected the defendants’ claimed reliance on the DOL audits for 3 separate reasons. First, it found that any informal conversations do not constitute “active steps” to ascertain the dictates of the law. Second, the court noted that the audits were involuntary and defendant had not requested same and thus, giving government investigators access to records and employees did not relieve defendant of its own obligation to determine what the labor laws require. Third, the court noted that defendant had not shown that any government investigator focused with care on its time and payroll records for the employees in question, and thus the DOL had not undertaken a review to see whether the defendant indeed paid a predetermined amount that did not vary, as required to meet the “salary basis” prong of the executive exemption. “Without such full disclosure, [the defendant] cannot reasonably rely on the existence of the investigations and their failure to find any inadequacies in the compensation system for [the employees].”

Finally, the court held that the defendant was not entitled to rely on the fact that it periodically consulted with outside counsel, because it had invoked its attorney-client privilege. The court explained that absent a waiver of the privilege, the defendant could not sustain a defense based on good faith reliance on the advice of counsel.

Click McLean v. Garage Management Corp. to read the entire Opinion and Order.

Solis v. R.M. Intern., Inc.

In the second case- concerning an alleged misclassification of drivers under the Motor Carrier Act (MCA) exemption- the defendant sought to avoid the imposition of liquidated damages, by relying on a prior involuntary Department of Transportation (DOT) audit/citations and the advise of counsel it received as part of the audit process. As in McLean above, the court rejected this evidence of “good faith” as insufficient to meet the defendant’s heavy burden.

The court noted:

Defendants maintain they have demonstrated both their subjective good faith and objectively reasonable belief that their failure to pay overtime wages to their drivers did not violate FLSA. To meet their burden, Defendants rely almost exclusively on their compliance with DOT rules and the DOT’s citation of “some” of their intrastate-only drivers. The DOT’s citation of “some” of Defendants’ intrastate-only drivers, however, does not provide a sufficiently reasonable basis for concluding all such drivers were under the DOT’s jurisdiction and, therefore, exempt from FLSA. The objective reasonableness of Defendants’ failure is undermined by the fact that the determination as to whether the Department of Labor or the DOT has jurisdiction is resolved on a driver-by-driver basis, as the Court explained at length on summary judgment, and, in any event, DOT jurisdiction for a driver who only occasionally drives in interstate commerce lasts only 4 months from the last such trip. See Reich v. Am. Driver Serv., Inc., 33 F.3d 1153, 1155–56 (9th Cir.1994). Furthermore, exemptions to FLSA, such as the Motor Carrier Exemption relied on by Defendants, are to be construed narrowly and only apply to employees who “plainly and unmistakably” fall within their terms. See Solis v. Washington, 656 F.3d 1079, 1083 (9th Cir.2011). Thus, the Court concludes Defendants’ generalizations about entire classes of their drivers on the basis of DOT citations of some of its drivers are insufficient to establish the objective reasonableness of Defendants’ failure to comply with FLSA. Similarly and in light of the lack of testimony in this regard, the fact that Defendants required both their interstate and intrastate drivers comply with DOT regulations neither establishes Defendant’s subjective belief nor its objective reasonableness.

Defendants also maintain their belief that their drivers were exempt from FLSA is reasonable in light of the fact that they hired counsel to assist with the November 2009 DOT compliance audit. Although there is not any direct evidence as to the purpose of counsel’s representation, the Court concludes it is fair to infer that counsel was hired to ensure Defendants’ compliance with DOT regulations rather than to ensure Defendants were compliant with FLSA. In any event, there is not any evidence on this record from which the Court can find that Defendants took “the steps necessary to ensure [its] practices complied with [FLSA].” Alvarez, 339 F .3d at 910 (“Mistaking ex post explanation and justification for the necessary affirmative ‘steps’ to ensure compliance, [the defendant] offers no evidence to show that it actively endeavored to ensure such compliance.”). Thus, the Court concludes on this record that Defendants did not satisfy their “difficult” burden to show their subjective good faith failure to comply with FLSA or the objective reasonableness of their actions, and, therefore, the Court concludes Plaintiff is entitled to liquidated damages in the amount equal to the unpaid overtime wages.

Click Solis v. R.M. Intern., Inc. to read the entire Supplemental Findings of Fact and Conclusions of Law and Verdict.

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Filed under Affirmative Defenses, Liquidated Damages

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