Tag Archives: Business Purpose

2nd Cir.: Private Non-Profit Foster Home Not “Enterprise” Subject To FLSA Coverage, Notwithstanding Contractual And Regulatory Relationship With A Public Agency

Jacobs v. New York Foundling Hosp.

Appellants appealed from a judgment of the United States District Court for the Eastern District of New York (Azrack, M.J.) granting, inter alia, appellee’s (employer’s) motion for summary judgment and dismissing appellants’ claim that they were unlawfully denied overtime pay in violation of the Fair Labor Standards Act of 1938, 29 U.S.C. § 207(a)(1). Appellants contended appellee is an “enterprise” obligated to pay overtime because certain contractual and regulatory relations render its activities “in connection with the activities of a public agency” pursuant to § 203(r)(2)(C) and thus “performed for a business purpose.” The Second Circuit disagreed and affirmed the judgment below.

On appeal, the Employees contended that Foundling, a private, non-profit, independent contractor, is an “enterprise” under 29 U.S.C. § 203(r)(1) because its contractual and regulatory relations with the New York City Administration for Children’s Services (“ACS”) render its activities “in connection with the activities of a public agency” pursuant to 29 U.S.C. § 203(r)(2)(C) and thus “performed for a business purpose.” Accordingly, the Employees claimed, Foundling owes them overtime pay under the Act. Because it concluded that the FLSA’s definition of “enterprise” does not extend to a private, non-profit, independent contractor associated by regulation and contract with a public agency, the Second Circuit held Foundling was not obligated to pay overtime under the Act.

The Court cited the following facts as relevant to its analysis: “New York Foundling Hospital is a private, charitable provider of social services to children and families in the New York City area. Founded in 1869 by a Catholic religious order as a home for abandoned children, today its services include foster care, adoption, and physical and mental health initiatives.

All of the children served through Foundling’s Foster Home and Boarding Home Programs are referred by ACS, which is responsible for administering New York City’s child welfare services and is authorized to contract with private providers like Foundling under New York Social Services Law § 423(2). The Foster Home Program deals with approximately 150 abused or neglected children without special needs who have been removed from their biological families and placed with foster parents. The Boarding Home Program serves the same category of children who could not have or have not yet been placed with foster parents. Foundling’s funding is derived exclusively from charitable grants and other federal, state, and local government sources. Almost half of its total revenue originates as payments from ACS.

The relationship between ACS and Foundling is set forth in a number of agreements premised upon Foundling’s status as an independent contractor and, in turn, the entities’ operational independence. The contracts provide that Foundling’s “executive staff shall manage its affairs and programs and shall have the responsibility for the day-to-day provision of Services to and for each child placed with it.”Foundling “alone is responsible for … [the] work, direction, compensation and personal conduct” of its employees, as well as for their recruiting, screening, and training. Foundling can unilaterally terminate the agreements, in whole or in part, with thirty days notice.

ACS exercises no control over Foundling’s Board of Directors, structure, finances and governance, except to the extent that it retains some degree of oversight over Foundling’s programs and client relations. The Foster Care Agreement, for instance, requires Foundling to “recruit a sufficient number and variety of prospective foster parents” to meet the level ACS calculates is appropriate for a targeted area. Foundling must generally accept all ACS-referred children, establish grievance procedures for its service recipients with decisions appealable to ACS, and allow ACS to monitor and review all of its “program activities, procedures[ ][and] records … as ACS deems necessary … including, at reasonable times, unannounced and unscheduled visits” to Foundling’s offices and to its clients.”

Determining that Defendant was/is not an “enterprise” subject to FLSA coverage, the Court reviewed the applicable law:

“FLSA defines an “enterprise,” inter alia, as “the related activities performed … by any person or persons for a common business purpose … [excluding] the related activities performed for such an enterprise by an independent contractor.”§ 203(r)(1).  Generally, non-profit organizations that do not “engage in ordinary commercial activities,” Tony & Susan Alamo Found., 471 U.S. at 297 (quoting 29 C.F.R. § 779.214 (1984)), or “serve the general public in competition with ordinary commercial enterprises,” id. at 299, operate without a “business purpose” and therefore are not enterprises. See§ 203(r)(1).See also U.S. Department of Labor, Wage and Hour Division, Opinion Letter FLSA2005-8NA, 2005 WL 5419044 (Sept. 2, 2005) (private nonprofit children’s care facility not a FLSA enterprise); U.S. Department of Labor, Wage and Hour Division, Opinion Letter FLSA2004-30NA, 2004 WL 5303058 (Dec. 13, 2004) (private nonprofit foster home not a FLSA enterprise). The FLSA, however, ensures that certain types of entities that might otherwise be held to operate with a business purpose under the Act are nevertheless brought within its ambit. For example, under § 203(r)(2)(A) and (B), Congress expressly included within the definition of enterprise “the activities performed … in connection with” hospitals, institutions providing residential care to the sick, aged, or mentally ill, certain types of schools, and certain types of railway or other transportation providers. Congress deemed all of these entities operated “for a business purpose” whether they were public or private, or operated for profit or not for profit. See29 U.S.C. § 203(r)(2).”

The Court disagreed with Plaintiffs’ argument that regarding 203(r)’s ambiguity and adopted Defendant’s reading of the statute stating, ‘[T]he phrase ‘in connection with the activities of a public agency’ means activities performed by a public agency, not activities performed by a private nonprofit organization providing services to a public agency.’ Dep’t of Labor Br. 3.

Analysis of the Act offers significant support to the Department’s position, and we therefore find it persuasive. First, as previously noted, absent special circumstances inapplicable to Foundling, non-profit organizations do not operate for a business purpose and are not enterprises. See Tony & Susan Alamo Found., 471 U.S. at 297, 299. In § 203(r)(2)(A), (B), and (C), however, Congress singled out specific non-profits (i.e., medical, certain educational and transportation facilities, and public agencies) that are to be deemed enterprises nonetheless. The Employees concede that entities like Foundling-charitable independent contractors that support neglected children-are not included in this list, and they offer nothing other than their problematic plain language approach to § 203(r)(2)(C) to suggest that Congress intended such organizations to be engrafted onto the existing exceptions when they contract with a public agency. See Greene v. United States, 79 F.3d 1348, 1355 (2d Cir.1996) (“The ancient maxim expressio unius est exclusio alterius (mention of one impliedly excludes others) cautions us against engrafting an additional exception to what is an already complex [statute].”).

Second, § 203(r)(2)(A) and (B) end in parentheticals stating that the entities enumerated therein-hospitals, certain schools, certain common carriers, etc.-are covered “regardless of whether or not such [entities are] operated for profit or not for profit.”Section 203(r)(2)(C) lacks this parenthetical. If the “in connection with” phrase in § 203(r)(2)(C) were intended to cover private, third-party entities that contract with the government, the parenthetical would have been critical to include in the section because public agencies themselves-unlike schools and hospitals-are by definition solely public and non-profit. Its absence adds weight to the Department’s conclusion that § 203(r)(2)(C) encompasses only the public “activities performed by a public agency,” not the private acts of independent contractor organizations associated with an agency through contract and regulation, like Foundling.

Third, by limiting § 203(r)(2)(C) to “activities performed by a public agency,” the Department’s reading avoids the absurd result that follows from the Employees’ contrary interpretation. See United States v. Dauray, 215 F.3d 257, 264 (2d Cir.2000) (“A statute should be interpreted in a way that avoids absurd results.”). Ultimately, the Act applies to Foundling only if it qualifies both as an “enterprise” under § 203® and as an “enterprise engaged in commerce” under § 203(s).Section 203(s) defines an “enterprise engaged in commerce” as an “enterprise that … is an activity of a public agency.”§ 203(s)(1)(C) (emphasis added). Because “of” is a word used to indicate belonging or a possessive relationship, the Department points out that “Foundling’s activities are not the activities of ACS, even assuming it operates in connection with ACS.”See Powell v. Tucson Air Museum Found., 771 F.2d 1309, 1312 (9th Cir.1985) (“Because the Museum is a private corporation which is an independent contractor of Pima County, it is not an ‘activity of a public agency’ … and thus is not subject to the requirements of the FLSA.”).

Thus, § 203(r)(2)(C) and § 203(s)(1)(C) operate in tandem, and if the former is interpreted to encompass a third-party, private, independent contractor somehow associated with an agency, the Act still would not apply to that third-party because the “in connection with” phrase is missing from the latter. The Employees’ notion that § 203(r)(2)(C) includes Foundling while § 203(s)(1)(C) excludes Foundling is a result we are compelled to avoid. The Department’s interpretation of § 203(r)(2)(C), in contrast, allows the two sections to be read seamlessly: the “activities performed by a public agency” comports with both the activities “in connection with” a public agency and the activities “of” a public agency.

To the extent that § 203(r)(2)(C)‘s meaning remains unresolved after we have considered the section in its surrounding statutory context, we may turn to legislative history for clarification. Lee v. Bankers Trust Co., 166 F.3d 540, 544 (2d Cir.1999). To this end, the Department points out that:

[w]hile nothing in the legislative history specifically addresses the phrase “in connection with the activities of a public agency” in Section 203(r)(2)(C), the legislative history is replete with statements that the amendments were meant to extend FLSA coverage to federal, state, and local government employees. There is, by contrast, no indication that Congress intended to extend enterprise coverage to employees of nonprofit entities that provide services to a public agency. Dep’t of Labor Br. 7.

Because the Employees concede that legislative history offers no support for their position, and the district court’s own thorough analysis “reveal[ed] no mention of an intent to extend enterprise coverage to non-profits that act in conjunction with … agencies,” Jacobs v. N.Y. Foundling Hosp., 483 F.Supp. 251, 261 (E.D.N.Y.2007), legislative history further buttresses the Department’s view that “in connection with the activities of a public agency” means activities performed by a public agency and not those performed by private independent contractors providing services to that agency.

Finally, we note that through regulation, opinion letter, and other statements, the Department has consistently interpreted § 203(r)(2)(C) to apply the FLSA’s overtime provisions only to public agencies, not to private independent contractors dealing with such agencies.FN9This interpretation has stood for almost 35 years, and deeming the various independent contractors retained by public agencies enterprises might have unanticipated and uncertain consequences. We agree with the Department that, under these circumstances, carving a hole in the Act’s unequivocal exemption of independent contractors is a policy judgment best left to the legislative branch. See, e.g., United States v. All Funds Dist. to, ex rel., Weiss, 345 F.3d 49, 57 (2d Cir.2003) (stating that where a section of the Employee Retirement Income Security Act of 1974 ” ‘reflects a considered congressional policy choice … [i]f exceptions to this policy are to be made, it is for Congress to undertake that task’ “) (quoting Guidry v. Sheet Metal Workers Nat’l Pension Fund, 493 U.S. 365, 376 (1990)).”

Curiously, the Court noted, “[i]n this case, the parties do not dispute that Foundling is not a hospital, school, or any other type of institution listed under § 203(r)(2)(A), nor an actual municipal public agency under § 203(r)(2)(C). At issue, rather, is the meaning of the phrase “in connection with” as applied to “the activities of a public agency” in § 203(r)(2)(C).” It is not clear, but Foundling may have qualified as an enterprise under 203(r)(2)(A), an argument apparently waived by the Plaintiffs.

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