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10th Cir.: Workers for Recreational Marijuana Covered by FLSA, Notwithstanding Federal Law Which Renders Business Illegal
Following denial of the defendant-employer Helix’s motion to dismiss, Helix appealed. Helix–a company that provides security services in the state sanctioned recreational marijuana business–appealed contending that the FLSA did not apply to it. Specifically, Helix asserted that the FLSA does not apply to workers such as plaintiff, because Colorado’s recreational marijuana industry is in violation of federal law, the Controlled Substances Act (CSA). Rejecting this argument just as the court below had, the Tenth Circuit held that just because an employer – such as one in Colorado’s recreational marijuana industry – may be in violation of federal law, here the CSA, that does not mean its employees are not entitled to overtime under the Fair Labor Standards Act (FLSA).
Helix TCS, Inc., provides security services for businesses in Colorado’s state-sanctioned marijuana industry. One of its employees, Robert Kenney, alleged that he and other security guards regularly worked more than 40 hours per week without overtime pay.
Helix did not dispute the fact that Kenney worked more than 40 hours without overtime, nor did it try to argue that he was covered by one of the FLSA’s many overtime exemptions. Instead, it argued that the FLSA was in conflict with CSA’s purpose. The Tenth Circuit rejected this argument and held that employers are not excused from complying with federal laws because of their other federal violations.
The 10th Circuit compared the situation to the 1931 trial of Al Capone in which jurors convicted the gangster for failing to pay taxes on his ill-gotten income. Just as there was no reason then why the fact a business was unlawful should exempt it from paying the taxes it would otherwise have had to pay, the Tenth Circuit said there is no reason today why a recreational marijuana company should be exempt from paying overtime just because it may be in violation of the CSA.
Click Kenney v. Helix TCS, Inc. to read the entire decision.
DOL Publishes Final Rule Increasing Salary Thresholds for White Collar Exemptions
Following a court decision which struck down the prior regulations promulgated by the Obama administration, which would have rendered for more employees overtime eligible, the Trump has now increased the salary threshold for white collar exemption. This marks the first increase since 2004.
In addition to limiting the number of workers who will now receive overtime (versus the more expansive Obama-era rule), the current DOL rejected a provision automatically increasing the salary threshold over time, to ensure that another 15-20 years does not pass before the thresholds are re-examined and increased again.
The updated and revised the regulations issued under the Fair Labor Standards Act (FLSA) to allow 1.3 million workers to become newly entitled to overtime by updating the earnings thresholds necessary to exempt executive, administrative or professional employees from the FLSA’s minimum wage and overtime pay requirements.
The DOL has updated both the minimum weekly standard salary level and the total annual compensation requirement for “highly compensated employees” or HCEs to reflect growth in wages and salaries. The new thresholds account for growth in employee earnings since the currently enforced thresholds were set in 2004.
Key Provisions of the Final Rule
The final rule updates the salary and compensation levels needed for workers to be exempt in the final rule:
raising the “standard salary level” from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker);
raising the total annual compensation level for “highly compensated employees (HCEs)” from the currently-enforced level of $100,000 to $107,432 per year;
allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices; and
revising the special salary levels for workers in U.S. territories and in the motion picture industry.
Standard Salary Level
The DOL set the standard salary level at $684 per week ($35,568 for a full-year worker).
HCE Total Annual Compensation Requirement
In addition, the DOL set the total annual compensation requirement for HCEs at $107,432 per year. This compensation level equals the earnings of the 80th percentile of full-time salaried workers nationally. To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $684 per week on a salary or fee basis (without regard to the payment of nondiscretionary bonuses and incentive payments).
Special Salary Levels for Employees in U.S. Territories and Special Base Rate for the Motion Picture Producing Industry
The DOL is maintaining a special salary level of $380 per week for American Samoa. Additionally, the Department is setting a special salary level of $455 per week for employees in Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.
The DOL also is maintaining a special “base rate” threshold for employees in the motion picture producing industry. Consistent with prior rulemakings, the Department is increasing the required base rate proportionally to the increase in the standard salary level test, resulting in a new base rate of $1,043 per week (or a proportionate amount based on the number of days worked).
Treatment of Nondiscretionary Bonuses and Incentive Payments
The DOL’s new rule also permits employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, they must make such payments on an annual or more frequent basis.
If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52-week period) to retain his or her exempt status, the Department permits the employer to make a “catch-up” payment within one pay period of the end of the 52-week period. This payment may be up to 10 percent of the total standard salary level for the preceding 52-week period. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.
When Will the Current Thresholds Be Updated?
Although initially proposed, the Trump DOL inexplicably rejected a provision of the rule, overwhelmingly supported by workers and workers advocates which would have automatically raised the thresholds over time without the necessity of further rulemaking. As a result it is possible if not likely that there will be no further increase to the current thresholds for another 15 years if not more. In its final rule the DOL reaffirms its intent to update the earnings thresholds more regularly in the future through notice-and-comment rulemaking, but given the anti-worker sentiment of the current DOL, including the recent confirmation of a steadfast anti-worker advocate as the head of the DOL, this is most-likely best viewed as lip service.
The DOL’s final rule is available at Final Rule to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees.
6th Cir.: Purportedly “Volunteer” Firefighters, Paid Per Call as Independent Contractors, Are “Employees” Under FLSA
Mendel v. City of Gibraltar
This case was before the Sixth Circuit, following the district court’s order granting the defendant’s motion for summary judgment. Although the case concerned the issue of whether the defendant-City met the prerequisite for FMLA coverage (number of employees), the issue considered by the Sixth Circuit was “purportedly volunteer firefighters who receive a substantial hourly wage for responding to calls whenever they choose to do so are “employees” or “volunteers” for purposes of the Fair Labor Standards Act (“FLSA”) and Family Medical Leave Act (“FMLA”).” The Sixth Circuit held that the firefighters at issue were employees rather than volunteers, such that the defendant met the number of employee requirement to trigger FMLA coverage.
The Sixth Circuit laid out the following facts relevant to its inquiry of whether the firefighters were properly deemed to be employees or volunteers:
The volunteer firefighters of Gibraltar must complete training on their own time without compensation. While they are not required to respond to any emergency call, they are paid $15 per hour for the time they do spend responding to a call or maintaining equipment. They do not work set shifts or staff a fire station; they maintain other employment and have no consistent schedule working as volunteer firefighters. The firefighters generally receive a Form–1099 MISC from the City. They do not receive health insurance, sick or vacation time, social security benefits, or premium pay. The City does have an employment application for the firefighters, and it apparently keeps a personnel file for each firefighter. A volunteer firefighter may be promoted or discharged. [The Plaintiff] introduced evidence below of what several other local communities pay their full-time firefighters. According to his wife’s affidavit, she and Mendel discovered that certain other communities in the area pay hourly wages ranging from approximately $14 to $17 per hour. Also, the City pays its own part-time Fire Chief $20,000 per year, and the Chief testified in his deposition that he “tr[ies] to work 20 hours per week at the [Gibraltar] fire station.” Based on this information, the Secretary of Labor notes in her amicus brief that if one assumes the Fire Chief works fifty-two weeks per year, he effectively earns $19.23 per hour.
After explaining that the FMLA’s definition of “employees” incorporates the FLSA’s definition, the Court then examined the issue under the FLSA. Holding that the firefighters were employees and not volunteers, the Court explained:
Here, it appears that the Gibraltar firefighters fall within the FLSA’s broad definition of employee. The firefighters are suffered or permitted to work, see
29 U.S.C. § 203(g), and they even receive substantial wages for their work.
This is not the end of our analysis, however. In 1986, Congress amended the FLSA to clarify that individuals who volunteer to perform services for a public agency are not employees under the Act. Section 203(e) now includes the following provision:
The term “employee” does not include any individual who volunteers to perform services for a public agency which is a State, a political subdivision of a State, or an interstate governmental agency, if—
(i) the individual receives no compensation or is paid expenses, reasonable benefits, or a nominal fee to perform the services for which the individual volunteered; and
(ii) such services are not the same type of services which the individual is employed to perform for such public agency.
Thus, the question becomes whether the Gibraltar firefighters fall within this exception to the FLSA’s generally broad definition of “employee.” Specifically, the question before us is whether the wages paid to the firefighters constitute “compensation” or merely a “nominal fee.” If the hourly wages are compensation, then the firefighters are employees under the FLSA. Conversely, if the wages are merely a nominal fee, then the firefighters are volunteers expressly excluded from the FLSA’s definition of employee.
The official regulations provide guidance at this juncture. The regulations define “volunteer” as “[a]n individual who performs hours of service for a public agency for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered.” 29 C.F.R. § 553.101(a); see also 29 C.F.R. § 553.104(a) (employing similar language). The regulations proceed to recognize, “Volunteers may be paid expenses, reasonable benefits, a nominal fee, or any combination thereof, for their service without losing their status as volunteers.” 29 C.F.R. § 553.106(a). The specific provision addressing nominal fees provides, in part, “A nominal fee is not a substitute for compensation and must not be tied to productivity. However, this does not preclude the payment of a nominal amount on a ‘per call’ or similar basis to volunteer firefighters.” 29 C.F.R. § 553.106(e). Finally, the regulations caution, “Whether the furnishing of expenses, benefits, or fees would result in individuals’ losing their status as volunteers under the FLSA can only be determined by examining the total amount of payments made (expenses, benefits, fees) in the context of the economic realities of the particular situation.” 29 C.F.R. § 553.106(f).
In the context of the economic realities of this particular situation, we hold that the hourly wages paid to the Gibraltar firefighters are not nominal fees, but are compensation under the FLSA. The firefighters do not receive “a nominal amount on a ‘per call’ or similar basis.” 29 C.F.R. § 553.106(e). Rather, they render services with the promise, expectation, and receipt of substantial compensation. See 29 C.F.R. §§ 553.101(a), 553.104(a). Each time a firefighter responds to a call, he knows he will receive compensation at a particular hourly rate—which happens to be substantially similar to the hourly rates paid to full-time employed firefighters in some of the neighboring areas. Essentially, the Gibraltar firefighters are paid a regular wage for whatever time they choose to spend responding to calls. These substantial hourly wages simply do not qualify as nominal fees. Cf. Purdham v. Fairfax Cnty. Sch. Bd., 637 F.3d 421, 433–34 (4th Cir.2011) (holding that a School Board’s payment of a fixed stipend to a golf coach was a nominal fee where: (1) the stipend amount did not change based on either how much time and effort the coach expended on coaching activities or how successful the team was; and (2) the approximate hourly rate to which the coach’s stipend could be converted was only a fraction (less than¼) of the hourly wage he received as a full-time security assistant employed by the School Board).
Notably, the Supreme Court has held that those who “work in contemplation of compensation” are “employees” within the meaning of the FLSA, even though they may view themselves as “volunteers.” Tony & Susan Alamo Found., 471 U.S. at 300–02, 306, 105 S.Ct. 1953. Despite the fact that the Gibraltar firefighters are referred to as “volunteers,” the inescapable fact nevertheless remains that they “work in contemplation of compensation.” Thus, the Gibraltar firefighters are “employees” and not “volunteers” within the meaning of the FLSA. See Krause v. Cherry Hill Fire Dist. 13, 969 F.Supp. 270, 277 (D.N.J.1997) (“In view of the fact that the plaintiffs [firefighters] both expected and received hourly compensation, in an amount greater than a ‘nominal’ fee, it is clear that plaintiffs were not volunteers….”).
Finally, the Court rejected the defendant’s contention—apparently adopted by the court below, that the firefighters were not “employees” under the FLSA, because they fell within the purview of 207(y).
Thus, the Court concluded “under the relevant authority and the facts of this case, we are constrained to hold that, simply put, the substantial wages paid to these firefighters constitute compensation, not nominal fees, which makes the Gibraltar firefighters employees, not volunteers, for purposes of the FLSA and FMLA.”
Click Mendel v. City of Gibraltar to read the entire Opinion. Click DOL Amicus Brief, to read the DOL’s Brief in support of the Plaintiff-Appellant, relied upon in part by the Court.
DOL Announces Final Rule Extending Minimum Wage and Overtime Pay to Home Health Workers
In an announcement that has long been awaited by workers advocates and those in the home health industry as well, today the United States Department of Labor (DOL) announced a final rule, to go into effect on January 1, 2015, which extends the FLSA’s minimum wage and overtime protections to home health aides that perform typical CNA tasks in the homes of the aged and infirm. In an email blast, the DOL reported:
The U.S. Department of Labor’s Wage and Hour Division announced a final rule today extending the Fair Labor Standards Act’s minimum wage and overtime protections to most of the nation’s direct care workers who provide essential home care assistance to elderly people and people with illnesses, injuries, or disabilities. This change, effective January 1, 2015, ensures that nearly two million workers – such as home health aides, personal care aides, and certified nursing assistants – will have the same basic protections already provided to most U.S. workers. It will help ensure that individuals and families who rely on the assistance of direct care workers have access to consistent and high quality care from a stable and increasingly professional workforce.
Among other things, the final rule overrules the 2007 holding of the Supreme Court in Long Island Care at Home, Ltd. v. Coke, and requires 3rd party employers such as staffing agencies to pay companions and home health workers overtime under the FLSA when they work in excess of 40 hours per week.
The New York Times provides a pretty good synopsis of the changes to the Companionship Exemption, provided by the final rule:
Under the new rule, any home care aides hired through home care companies or other third-party agencies cannot be exempt from minimum wage and overtime coverage. The exemptions for aides who mainly provide “companionship services” — defined as fellowship and protection for an elderly person or person with an illness, injury or disability who requires assistance — are limited to the individual, family or household using the services.
If an aide or companion provides “care” that exceeds 20 percent of the total hours she works each week, then the worker is to receive minimum wage and overtime protections.
The new rule defines care as assisting with the activities of daily living, like dressing, grooming, feeding or bathing, and assisting with “instrumental activities of daily living,” like meal preparation, driving, light housework, managing finances and assisting with the physical taking of medications.
The companionship exemption will not apply if the aide or companion provides medically related services that are typically performed by trained personnel, like nurses or certified nursing assistants.
Live-in domestic service workers who reside in the employer’s home and are employed by an individual, family or household are exempt from overtime pay, although they must be paid at least the federal minimum wage for all hours worked.
Click Final Rule to read the published rule, or U.S. News and Report to read an article discussing the announcement.
11th Cir.: Student Externs, Required to Complete Externship in Order to Graduate, Were Not “Employees”
Kaplan v.Code Blue Billing & Coding, Inc.
This case was before the court on the consolidated appeal of three student externs who sued the administrators of their respective externships asserting that they had not been paid proper minimum wages. The courts below had all granted the respective defendants summary judgment, holding that the plaintiffs could not satisfy the “economic reality” test, and therefore they were not “employees” subject to the FLSA’s coverage. The Eleventh Circuit affirmed, applying the DOL’s six-factor test applicable to trainees. In so doing, the court rejected the plaintiffs’ contentions that the defendants benefitted from their work, while they essentially received no academic or monetary benefit.
The court reasoned:
Although Kaplan and O’Neill argue that their externship experiences were of little educational benefit, they did in fact engage in hands-on work for their formal degree program. Kaplan and O’Neill also received academic credit for their work and, by completing an externship, were eligible to earn their degrees.
Kaplan and O’Neill argue that, because they were performing tasks for Defendants’ businesses, Defendants benefitted economically from their work. The undisputed evidence, however, demonstrates that Defendants’ staff spent time—time away from their own regular duties—training Plaintiffs and supervising and reviewing Plaintiffs’ work. Even viewing the evidence in the light most favorable to Plaintiffs, Plaintiffs caused Defendants’ businesses to run less efficiently and caused at least some duplication of effort. Defendants received little if any economic benefit from Plaintiffs’ work. Thus, under the “economic realities” test, Plaintiffs were not “employees” within the meaning of the FLSA. See New Floridian Hotel, Inc., 676 F.2d at 470.
The Eleventh Circuit applied the DOL’s six factor test, derived from the Supreme Court’s decision in Portland Terminal—pertinent to determining whether a trainee qualifies as an employee under the FLSA, to reach its holding.
As explained in footnote 2, under the Administrator’s test, a trainee is not an “employee” if these six factors apply:
(1) the training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school; (2) the training is for the benefit of the trainees; (3) the trainees do not displace regular employees, but work under close supervision; (4) the employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion his operations may actually be impeded; (5) the trainees are not necessarily entitled to a job at the completion of the training period; and, (6) the employer and the trainees understand that the trainees are not entitled to wages for the time spent in training. Wage & Hour Manual (BNA) 91:416 (1975); see also Donovan v. Am. Airlines, Inc., 686 F.2d 267, 273 n. 7 (5th Cir.1982).
Reasoning that the externs at issue were not “employees” the court concluded:
The externship programs at Code Blue and EFEI satisfy all six of the Administrator’s criteria. The training provided was similar to that which would be given in school and was related to Plaintiffs’ course of study. The training benefitted Plaintiffs, who received academic credit for their work and who satisfied a precondition of graduation. Both Kaplan and O’Neill were supervised closely and did not displace Defendants’ regular employees. Defendants received no immediate advantage from Plaintiffs’ work and, at times, were impeded by their efforts to help train and supervise Plaintiffs. And both Kaplan and O’Neill admit that they were unentitled to a job after their externships and that they understood that the externship would be unpaid.
Click Kaplan v.Code Blue Billing & Coding, Inc. to read the entire decision.
S.D.N.Y.: Where Successor Liability Alleged, “Successor in Interest” Need Not Meet the $500,000 Threshold As Long as the Previous Employer Did
Alvarez v. 40 Mulberry Restaurant, Inc.
This case was before the court on the defendant’s motion for summary judgment. Plaintiff alleged that the defendant at issue was a “successor in interest” to his actual employers, whom he actively worked for and whose failure to pay him pursuant to the FLSA gave rise to his claims. The defendant alleged to be the “successor in interest” such that it had derivative liability (of plaintiff’s actual employers), asserted that the case was due to be dismissed against it, because plaintiff could not show that it grossed $500,000.00 or more in annual sales during the periods relevant to the claim. Explaining that this was an incorrect reading of the law, the court reasoned that the successor employer was covered, so long as the plaintiff’s actual employers were subject to enterprise coverage under the FLSA. However, because neither the plaintiff, nor the defendants addressed the issue of whether the plaintiffs actual employers were covered enterprises, the court remanded the case for further discovery on this issue.
Discussing the issue, the court explained:
Defendants 40 Mulberry and Chin claim that, because it has not been established that AR Restaurant has ever grossed $500,000 or more in annual sales, Alvarez’s FLSA claim must be dismissed. That is incorrect.
The FLSA covers only those workers employed by an “enterprise” that is “engaged in commerce.” 29 U.S.C. § 207. “An entity constitutes an enterprise where ‘the related activities performed (either through unified operation or common control) by any person or persons [are] for a common business purpose.’ ” Rodriguez v. Almighty Cleaning, 784 F.Supp.2d 114, 121 (E.D.N.Y.2011) (quoting 29 U.S.C. § 203(r)). An enterprise is “engaged in commerce or in the production of goods for commerce” if, inter alia, it: (1) “has employees engaged in commerce or in the production of goods for commerce;” or “has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person;” and (2) its “annual gross volume of sales made or business done is not less than $500,000 (exclusive of excise taxes at the retail level that are separately stated).” 29 U.S.C. § 203(s)(1)(A)(i)-(ii).
Defendants argue that, because the summary judgment record would not permit a fact finder to conclude that AR Restaurant has ever grossed $500,000 or more in annual sales, Alvarez cannot sue 40 Mulberry and Chin under the FLSA. But that does not logically follow. It is correct that, on the record before the Court, AR Restaurant’s financial condition would prevent an employee from suing under the FLSA based on work done at AR Restaurant. But Alvarez is not seeking to impose liability on 40 Mulberry and Chin based on AR Restaurant’s activities. Instead, he is claiming that, during his employment at the former Asia Roma, which ended in July 2010, the former Asia Roma (1) had $500,000 or more in annual sales; and (2) violated the FLSA’s substantive obligations as to overtime and other pay. He further alleges that defendants 40 Mulberry and Chin are responsible for those violations as successors in interest. Assuming arguendo that Asia Roma had $500,000 in annual revenues required by the FLSA in, say, 2009, the fact that AR Restaurant has not had such revenues would not shield defendants, if properly held to be responsible for Asia Roma’s conduct, from liability for FLSA violations during 2009. The financial condition of AR Restaurant is thus not determinative. The relevant question is, instead, whether Asia Roma was a qualifying “enterprise engaged in commerce” when it employed Alvarez, and whether 40 Mulberry and Chin are answerable for Asia Roma’s liabilities.
It does not appear that the parties have focused their discovery efforts on the critical question of whether Asia Roma had the requisite sales during Alvarez’s employment. However, this question is potentially dispositive, and the Court believes it must be addressed promptly.
The Court, accordingly, grants the parties one month to conduct further discovery—by means including, but not limited to, subpoenas to Asia Roma, Chan, Lee, or any other relevant party, person, or entity—on the question of whether Asia Roma constituted an “enterprise engaged in commerce” during the period of Alvarez’s employment. After the close of discovery, the Court will afford the defendants two weeks to move for summary judgment on the issue of whether Asia Roma was an “enterprise engaged in commerce” during the years it employed Alvarez. If summary judgment is granted for the defendants on that ground, such that Alvarez’s FLSA claims cannot go forward, the Court expects to dismiss, without prejudice, his state law claims. If, on the other hand, the FLSA sales threshold is met by competent evidence for all or some of these years, discovery may then go forward on the remaining issues in the case.
The court also denied the defendants’ motion for summary judgment to the extent they sought a finding that the subsequent business was not a successor in interest, reasoning that under the relevant tests (the traditional common law test OR the “substantial continuity test”) a finder of fact could certainly find that the subsequent business was a successor in interest to plaintiff’s actual employers.
Click Alvarez v. 40 Mulberry Restaurant, Inc. to read the entire Opinion & Order.
E.D.Cal.: Plaintiff Could Simultaneously Be Part-Owner of Closely-Held S-Corp. and Its FLSA-Covered Employee
Hess v. Madera Honda Suzuki
This case was before the Court on the defendant’s motion for summary judgment regarding all of plaintiffs’ claims. As discussed here, one of the issues the court was asked to resolve was whether someone can simultaneously be a part-owner of a closely held s-corporation and an employee thereof. The court distinguished the case from one concerning a business structured as a partnership, and held indeed the plaintiff could simultaneously be a part-owner of the defendant and its employee. Thus, the court denied defendant’s motion for summary judgment with regard to her FLSA claim for unpaid wages on this ground.
As relevant to this discussion, the court recited the following facts (following a period of employment where the plaintiff was solely defendant’s employee):
As support for the contention Plaintiff was not their employee, Defendants point to evidence in the record, primarily from Plaintiff’s deposition testimony, establishing the following. After investing $100,000 ($50,000 allocated to stock and $50,000 as a business loan) with her husband, Terry Hess, Plaintiff became a co-owner of Madera Honda Suzuki, controlling 24 percent of the 100,000 shares of common stock originally issued by Harry D. Wilson, Inc. (Terry controlled 25 percent; defendant Robert Wilson controlled 26 percent while his wife, Lisa, controlled 25 percent.) Plaintiff was then elected as a director and chief financial officer of the corporation. Pursuant to their investment, it appears Plaintiff and her husband provided personal guarantees to Central Valley Bank for money presumably borrowed by the company. Plaintiff further stated she and her husband provided personal guarantees to American Honda and Suzuki, presumably to cover debts and obligations that might be incurred by the company through its sale of Honda and Suzuki motorcycles. Plaintiff understood it was possible she might lose some or all of her investment, and that even if the business were successful, it would take some time before it would start showing a profit. Plaintiff further understood that although the shares of stock were split 51 percent/49 percent between the Wilsons and the Hesses, everything else—including profits—would be divided equally (i.e., 50/50 between the Wilsons and the Hesses). According to Plaintiff, the business never made a profit.
Plaintiff testified it was her responsibility to pay bills and that she had authority to pay certain expenses, such as rent and dealership insurance, without consulting the other officers. Plaintiff was authorized to issue payroll checks to herself and others if the company had sufficient funds, and it appears Plaintiff issued a check to herself at least once during her tenure as CFO. At his deposition, Wilson testified he and Plaintiff interviewed prospective employees together and that Plaintiff “had a say in everybody [the company] hired.” Wilson further testified Plaintiff handled employee disciplinary matters “95 percent of the time” and that she was not required to consult with him before terminating an employee. It also appears Plaintiff was afforded special benefits. Plaintiff testified “if [she or Wilson] took days off, since [they] were on salary, [they] would be paid the days.” Other employees also had paid vacation, but only for a limited number of days. The company paid for vehicles and fuel for the Wilsons and the Hesses, whereas other employees did not have a vehicle allowance. Per Wilson, the company paid the cost of health insurance for shareholders, including Plaintiff, whereas it covered only part of the premiums for employees, who had to contribute the rest. All of this evidence, Defendants contend, shows Plaintiff was a co-owner, not an employee.
In light of the above undisputed facts, the defendant argued “that Plaintiff [could not] be considered an employee because Plaintiff assumed significant business risk, had involvement and discretion in the corporate decision-making process and was entitled to benefits not available to Madera Honda Suzuki’s other employees, none of which was consistent with employee status.” However, the court disagreed.
The court distinguished case law that has held that partners of a partnership cannot simultaneously be FLSA employees, in part discussing a case previously discussed here, from the situation before it where the alleged employee had a part-ownership interest in an s-corp. The court explained:
Defendants have provided no authority—and the Court’s research reveals no authority—stating categorically that a co-owner and shareholder of a closely held corporation who works for the corporation in another capacity, as was apparently the case here, cannot also be the corporation’s employee for the purpose of the FLSA. Indeed, case law seems to suggest otherwise. See Goldberg v. Whitaker House Co-op, Inc., 366 U.S. 28, 32, 81 S.Ct. 933, 6 L.Ed.2d 100 (1961) (“There is nothing inherently inconsistent between the coexistence of a proprietary and an employment relationship. If members of a trade union bought stock in their corporate employer, they would not cease to be employees within the conception of [the FLSA]. For the corporation would ‘suffer or permit’ them to work whether or not they owned one share of stock or none or many”).
While the court noted similarities between the structures of a partnership and the closely-held s-corp. at issue here, ultimately it reasoned that the differences permitted a co-owner who lacked the ability to use the corporate assets as her own and lacked the ability to use the corporate assets as she thought fit. Further, contrary to the relationship partners have in a partnership where they are primarily investors, the court noted that shareholders such a plaintiff remain economically dependent on the s-corporation and their primary source of income is typically wages earned from the s-corporation:
The fact the company is a closely held corporation is key because shareholders view closely held corporations precisely as a means of acquiring corporate assets through employment: “Unlike the typical shareholder in a publicly held corporation, who may be simply an investor or a speculator and does not desire to assume the responsibilities of management, the shareholder in a close corporation considers himself or herself as a co-owner of the business and wants the privileges and powers that go with ownership. Employment by the corporation is often the shareholder’s principal or sole source of income. Providing employment may have been the principal reason why the shareholder participated in organizing the corporation. Even if shareholders in a close corporation anticipate an ultimate profit from the sale of shares, they usually expect (or perhaps should expect) to receive an immediate return in the form of salaries as officers or employees of the corporation, rather than in the form of dividends on their stock. Earnings of a close corporation are distributed in major part in salaries, bonuses and retirement benefits[.]” Hollis v. Hill, 232 F.3d 460, 467 (5th Cir.2000).
Having determined that part-ownership of an s-corporation does not preclude a finding of an employer-employee relationship under the FLSA, the court held that—taking the facts most favorably for plaintiff, the non-movant—plaintiff could meet the economic reality test and demonstrate that she was an employee subject to FLSA coverage. Thus, the court denied defendant’s motion for summary judgment on this ground.
Click Hess v. Madera Honda Suzuki to read the entire Order re: Motion for Summary Judgment or Summary Adjudication.
S.D.Fla.: “Gross Volume of Sales” For Purposes of Determining Enterprise Coverage Does Not Include Unrealized Revenue Attributable to Coupons or Discounts
Marckenson v. LAL Peker, LLC
Anyone who has been following for the last few years knows that the issue of “enterprise coverage,” relatively dormant for decades, has been hotly litigated throughout the Southern and Middle Districts of Florida-2 hotbeds of FLSA litigation- in recent years. In another recent decision weighing in on the issue, Judge Michael Moore in the S.D.Fla. was asked to decide whether the $500,000 annual gross sales requirement must take into account unrealized sales/revenues attributable to coupons or discounts a business gives to its customers. Specifically, here it was undisputed that the defendant-employer recorded actual sales of less than $500,000.00 per year during the relevant years. However, when discounts and coupons (unrealized revenue) were factored in, its sales rose above the $500,000.00 threshold. The defendants moved for summary judgment asserting that they were not a “covered enterprise” under the FLSA. The court agreed and granted the defendants summary judgment.
Discussing the issue, the court stated:
“The issue before the Court is whether “gross volume of sales made or business done” as used in 29 U.S.C. § 203(s)(1)(A) incorporates unrealized revenue attributable to coupons or discounts provided to customers. Interpretations of the FLSA are determined ultimately by the Court. See Mitchell v. Zachry, 362 U.S. 310, 80 S.Ct. 739, 4 L.Ed.2d 753 (1960); Kirschbaum v. Walling, 316 U.S. 517, 62 S.Ct. 1116, 86 L.Ed. 1638 (1942); see also 29 C.F.R. § 779.8 (2011). In interpreting the FLSA, the Court may rely on official interpretations of the FLSA promulgated by the Department of Labor. Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944) (“[T]he rulings, interpretations and opinions of the Administrator under [the FLSA], while not controlling upon the courts by reason of their authority, do constitute a body of experience and informed judgment to which courts and litigants may properly resort for guidance.”); Dade Cnty. Fla. v. Alvarez, 124 F.3d 1380, 1385 (11th Cir.1997). Title 29 C.F.R. § 779.259 provides helpful guidance in interpreting “gross volume of sales made or business done”:
The gross volume of sales made or business done means the gross dollar volume (not limited to income) derived from all sales and business transactions including, for example, gross receipts from service, credit, or other similar charges. Credits for goods returned or exchanged and rebates and discounts, and the like, are not ordinarily included in the annual gross volume of sales or business…. Gross volume is measured by the price paid by the purchaser for the property or service sold to him …
29 C.F.R. § 779.259 (2011) (emphasis added). When a coupon or discount is provided to a customer free of consideration, a true price reduction occurs, and the new price paid by the customer represents the sale amount. This is consistent with the Department of Labor’s view that “gross volume of sales” is measured by the price actually “paid by the purchaser for the property or service sold to him.” Id. Consequently, having found this interpretation reasonable, this Court adopts a view of “gross volume of sales made or business done” that excludes lost revenue attributable to coupons or discounts provided to customers.
In light of this interpretation, it is clear that enterprise coverage does not apply to Defendants. Excluding approximately $103,000 in discounts provided to customers from Plaintiff’s FY 2010 gross sales calculation, Defendants “gross volume of sales made or business done” falls well short of the $500,000 threshold required by 29 U.S.C. § 203(s)(1)(A). This is substantiated by the tax forms submitted on behalf of Defendants for fiscal years 2009 and 2010. Moreover, Plaintiffs alleged personal knowledge that Defendants’ weekly sales revenues “averaged above $8,000.00 per week and on occasions exceeded $11,000.00,” is insufficient to create a genuine issue of material fact in light of Plaintiff’s implicit acceptance and overt reliance on Defendants’ monthly sales reports from August 2009 through April 2011. Even discounting Plaintiffs acceptance of Defendants’ monthly sales reports, Plaintiffs’ alleged personal knowledge in no way conflicts with the amount of income reported by Defendants. Without any further specificity as to how much revenue Defendants’ collected, or without any articulation by Plaintiff as to how often and for what duration he closed Defendants’ register, Plaintiff’s assertion does not amount to more than a conclusory allegation. Thus, summary judgment on the issue of enterprise coverage is awarded in favor of Defendants.”
Click Marckenson v. LAL Peker, LLC to read the entire Order.
9th Cir.: Group Home Housing “Severely Emotionally Disturbed” Children Not An “Institution Primarily Engaged in the Care of the Sick, the Aged, Mentally Ill”
Probert v. Family Centered Services of Alaska, Inc.
This case was before the Ninth Circuit on the defendant’s appeal of an order granting plaintiffs- house parents at their various group homes of emotionally disturbed children- summary judgment, holding that each of defendant’s homes were subject to FLSA coverage as an “institution primarily engaged in the care of the sick, the aged, mentally ill or defective who reside on the premises of such institution.” 29 U.S.C. § 203(r)(2)(A). The Ninth Circuit reversed, holding that defendant’s homes were not primarily engaged in such care, although it was undisputed that they provided housing for same. In so doing, the Ninth Circuit ignored long-held jurisprudence requiring that courts liberally construe the FLSA’s coverage to serve the statute’s remedial goals.
Describing the relevant background facts, the Ninth Circuit explained:
“Plaintiffs Loretta and Robert Probert and Plaintiffs–Intervenors Debra and Eric Cloninger, Donna and John Grimes, Gene and Sandra Grissom, and Kenneth and Leona McDaniels are married couples who worked as “house parents” in FCSA’s Homes. Each Home housed up to five children. All the children were “severely emotionally disturbed” as defined by the Alaska law that qualifies the Homes for Medicaid funding, 7 Alaska Admin. Code § 43.471, and each of the children had at least one diagnosed mental disorder under Axis–I of the current Diagnostic and Statistical Manual of Mental Disorders. The children attended local public schools and participated in other activities away from the Homes. The children participated in group therapy conducted by clinicians in the Homes, but received most of their medical and psychological treatment outside the Homes. Plaintiffs were not licensed medical or social service professionals.
Plaintiffs sued FCSA for overtime pay under the FLSA. After denying Plaintiffs’ first motion for partial summary judgment, the district court granted a similar motion for partial summary judgment in their favor, concluding that FCSA through its Homes, was operating “an institution primarily engaged in the care of the … mentally ill or defective who reside on the premises of such institution,’ “ 29 U.S.C. § 203(r)(2)(A), and was therefore an enterprise subject to the FLSA’s overtime provisions, id. § 207(a)(1). The district court observed that the FLSA does not define “institution.” As an analogy, the district court looked to a federal Medicaid regulation, not directly applicable to this situation, that defined “institution” as “an establishment that furnishes (in single or multiple facilities) food, shelter, and some treatment or services to four or more persons unrelated to the proprietor,” 42 C.F.R. § 435.1010, and concluded that the “Homes (either individually or as a group) could be considered an ‘institution.’ “ The court also relied on FCSA’s own website, which described the Homes as “provid[ing] quality residential care to male and female youth ages 6–18 that are experiencing mental health and behavioral issues and are at imminent risk of psychiatric placement outside of their community.”
Holding that the defendant did not fall within the definition of 203(r)(2)(A), the court reasoned:
“Plaintiffs argue that each of the FCSA Homes in which they worked is covered by the statute as “an institution primarily engaged in the care of … the mentally ill … who reside on the premises of such institution.” The FLSA is a remedial statute that is “to be liberally construed to apply to the furthest reaches consistent with Congressional direction.” Dent v. Cox Communications Las Vegas, Inc., 502 F.3d 1141, 1146 (9th Cir.2007) (internal quotation marks omitted); see also 29 C.F.R. § 779.101 (“An employer who claims an exemption under the Act has the burden of showing that it applies.”). Nonetheless, we conclude that the language of the statute does not cover the FCSA Homes, for two primary reasons.
The first reason is that the Homes were not “primarily engaged” in providing “care,” as that term is used in the statute. The statute refers to “care” in relation to groups with special needs, namely “the sick, the aged, the mentally ill or defective.” 29 U.S .C. § 203(r)(2)(A). As such, we understand “care” in this context to include something more like treatment. What the Homes primarily provided, as their name suggests, was a home or a residence. As noted above, the children attended school, engaged in activities, and received most of their medical and psychological treatment from medical and mental health professionals outside the Homes. Obviously, for children a home should be more than simply a place to live, and the children presumably benefitted from Plaintiffs’ “care” as house parents. But Plaintiffs were not medical or social service professionals and were not primarily focused on providing the type of “care” that those professionals provide.
The language of the statute clearly suggests a covered institution must provide more than the general care of a residence. In addition to requiring that the institution’s patrons “reside on the premises of [the] institution,” the institution must provide “care” of the type that is provided to “the sick, the aged, the mentally ill or defective.” If residing on the premises were enough by itself to define the given premises as covered by the statute, then the requirement that the institution be “primarily engaged” in the “care” of the individuals residing there would be superfluous. We are to avoid interpreting a statute in that manner. See TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (“It is a cardinal principle of statutory construction that a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.” (internal quotation marks omitted)).
Second, the Homes do not appear to us to be “institutions” as that term is used in this statute. Around the time the 1966 amendment was drafted, the Oxford English Dictionary offered the following definition of “institution”:
An establishment, organization, or association, instituted for the promotion of some object, esp. one of public or general utility, religious, charitable, educational, etc., e.g. a church, school, college, hospital, asylum, reformatory, mission, or the like; as a literary and philosophical institution, a deaf and dumb institution, the Royal National Life-boat Institution, the Royal Masonic Benevolent Institution …, the Railway Benevolent Institution, etc. 5 Oxford English Dictionary 354 (1933, reprinted 1961). The FCSA Homes do not fit well within that definition.
Nor do the Homes fit well with the neighboring parts of the relevant statute. They are not very much like
a hospital, …, a school for mentally or physically handicapped or gifted children, a preschool, elementary or secondary school, or an institution of higher education (regardless of whether or not such hospital, institution, or school is operated for profit or not for profit). 29 U.S.C. § 203(r)(2)(A).”
Similar to reasoning in Christopher v. SmithKline Beecham Corp., broadly construing the outsides sales exemption and refusing to adopt the guidance of the DOL outside of regulations promulgated by the Administrator of the DOL, the court further reasoned:
“Plaintiffs argue that we should interpret § 203(r)(2)(A) to include FCSA’s Homes because guidance from the Department of Labor indicates that a reference to “nursing homes” in that provision should be interpreted broadly. See Dep’t of Labor, Wage and Hour Division, Field Operations Handbook (FOH), ch. 12, § 12g02 (“[Institutions primarily engaged in the care of the aged] are not limited to nursing homes, … but include those institutions generally known as nursing homes, rest homes, convalescent homes, homes for the elderly and infirm, and the like.”). Plaintiffs argue that by the same reasoning, “institution primarily engaged in the care of the … mentally ill” should be interpreted broadly to include FCSA’s Homes. We disagree.
The FCSA Homes are very different from nursing homes and the related facilities listed in the handbook. The children who live at the FCSA Homes spend much of their time, perhaps a majority of their waking hours, elsewhere. They leave the Homes to attend school, participate in activities, and receive medical and psychological treatment. Residents of nursing homes are not necessarily confined completely to those facilities, but the expectation is that the vast majority of their time is spent there. Those facilities are also staffed with professionals, not simply house parents, and residents may be expected to receive substantially greater “care” in those facilities.”
Combined with its recent decision in Christopher v. SmithKline Beecham Corp., this decision is particularly disturbing. It appears the Ninth Circuit is quickly moving away from long held tenets of FLSA jurisprudence, the twin constructs that FLSA coverage is to be liberally construed, while exemptions/exceptions to coverage are to be narrowly construed against employers. In any case, it clear that here, that the Ninth Circuit construed FLSA coverage as narrowly as possible in holding that defendant was not a covered enterprise.
Click Probert v. Family Centered Services of Alaska, Inc. to read the entire Opinion.
Are the FLSA’s Enterprise Coverage Requirements Outdated in Today’s Economy?
In his recent article, “Taking the Employer Out of Employment Law? Accountability for Wage and Hour Violations in an Age of Enterprise Disaggregation,” Professor, Timothy P. Glynn of Seton Hall School of Law makes a compelling argument that the answer is yes.
In the abstract to his article, Professor Glynn explains:
“Violations of wage and hour mandates are widespread at the low end of the labor market. The disaggregation of business enterprises into smaller, independent parts has been an important factor in this growing problem. Limitations on liability for work-law violations invite such arrangements since statutory protections for workers usually impose duties only on “employers.” That status, in turn, hinges on the level of control a firm exercises over the work, and when exacting control is not necessary, firms usually can avoid accountability by shifting work to independent third-party suppliers. This creates severe enforcement obstacles: detection becomes difficult, labor suppliers often are undercapitalized, and coverage uncertainties lead to unprosecuted claims and discounted settlements. Thus, disaggregation does far more than shift legal responsibility from one entity to another: it allows end-user firms to avoid noncompliance risks while benefiting from labor at a price discounted by the unlikelihood of enforcement.”
Thus, Professor Glynn proposes “eliminating the ’employer’ coverage barrier altogether.” Under his approach, “commercial actors would be held strictly liable for wage and hour violations in the production of any goods and services they purchase, sell, or distribute, whether directly or through intermediaries. The only limitation is that a firm’s liability would not exceed the proportion of the violations attributable to the goods or services it purchases, sells, or distributes.”
Adopting this less restrictive coverage requirement would lead to easier enforcement of wage and hour laws and thus, fewer abuses at the low end of the labor market. It doesn’t appear that there’s any push to adopt these logical changes which would no doubt further the remedial goals of wage and hour laws, but it’s a refreshing perspective nonetheless. In this day and age, Professor Glynn’s recognition that a modern fractured economy is far different than the economy of the past, with fewer larger actors, is largely unaddressed by wage and hour laws that are currently on the books.
Click Abstract to read more on Professor Glynn’s work.
Thanks to the Workplace Prof Blog for bringing this to our attention.