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4th Cir.: Strippers Are Employees NOT Independent Contractors; Trial Court Properly Applied the Economic Reality Test
In this case, multiple exotic dancers sued their dance clubs for failure to comply with the Fair Labor Standards Act and corresponding Maryland wage and hour laws. The district court held that plaintiffs were employees of the defendant companies and not independent contractors as the clubs contended. Following a damages-only trial and judgment on behalf of the dancers, the Defendant-clubs appealed the court’s finding that the dancers were employees and not independent contractors. The Fourth Circuit held that the court properly captured the economic reality of the relationship here, and thus affirmed the judgment.
The Fourth Circuit summarized the salient facts regarding the dancers’ relationship with the defendant-clubs as follows:
Anyone wishing to dance at either club was required to fill out a form and perform an audition. Defendants asked all hired dancers to sign agreements titled “Space/Lease Rental Agreement of Business Space” that explicitly categorized dancers as independent contractors. The clubs began using these agreements after being sued in 2011 by dancers who claimed, as plaintiffs do here, to have been employees rather than independent contractors. Defendant Offiah thereafter consulted an attorney, who drafted the agreement containing the “independent contractor” language.
Plaintiffs’ duties at Fuego and Extasy primarily involved dancing on stage and in certain other areas of the two clubs. At no point did the clubs pay the dancers an hourly wage or any other form of compensation. Rather, plaintiffs’ compensation was limited to performance fees and tips received directly from patrons. The clubs also collected a “tip-in” fee from everyone who entered either dance club, patrons and dancers alike. The dancers and clubs dispute other aspects of their working relationship, including work schedules and policies.
After discussing the traditional elements of the economic reality test, the Fourth Circuit discussed each element and concluded that, overall, they supported the district court’s holding that the dancers were employees and not independent contractors.
Here, as in so many FLSA disputes, plaintiffs and defendants offer competing narratives of their working relationship. The exotic dancers claim that all aspects of their work at Fuego and Extasy were closely regulated by defendants, from their hours to their earnings to their workplace conduct. The clubs, not surprisingly, portray the dancers as free agents that came and went as they pleased and used the clubs as nothing but a rented space in which to perform. The dueling depictions serve to remind us that the employee/independentcontractor distinction is not a bright line but a spectrum, and that courts must struggle with matters of degree rather than issue categorical pronouncements.
Based on the totality of the circumstances presented here, the relationship between plaintiffs and defendants falls on the employee side of the spectrum. Even given that we must view the facts in the light most favorable to defendants, see Ctr. for Individual Freedom, Inc. v. Tennant, 706 F.3d 270, 279 (4th Cir. 2013), we cannot accept defendants’ contrary characterization, which cherry-picks a few facts that supposedly tilt in their favor and downplays the weightier and more numerous factors indicative of an employment relationship. Most critical on the facts of this case is the first factor of the “economic realities” test: the degree of control that the putative employer has over the manner in which the work is performed.
The clubs insist they had very little control over the dancers. Plaintiffs were allegedly free in the clubs’ view to determine their own work schedules, how and when they performed, and whether they danced at clubs other than Fuego and Extasy. But the relaxed working relationship represented by defendants—the kind that perhaps every worker dreams about—finds little support in the record.
To the contrary, plaintiffs described and the district court found the following plain manifestations of defendants’ control over the dancers:
Dancers were required to sign in upon arriving at the club and to pay the “tip-in” or entrance fee required of both dancers and patrons.
The clubs dictated each dancer’s work schedule. As plaintiff Danielle Everett testified, “I ended up having a set schedule once I started at Fuego’s. Tuesdays and Thursdays there, and Mondays, Wednesdays, Fridays, and Saturdays at Extasy.” J.A. 578 (Everett’s deposition). This was typical of the deposition testimony submitted in the summary judgment record.
The clubs imposed written guidelines that all dancers had to obey during working hours. J.A. 769-77 (clubs’ rulebook). These rules went into considerable detail, banning drinking while working, smoking in the clubs’ bathroom, and loitering in the parking lot after business hours. They prohibited dancers from leaving the club and returning later in the night. Dancers were required to wear dance shoes at all times and could not bring family or friends to the clubs during working hours. Violations of the clubs’ guidelines carried penalties such as suspension or dismissal. Although the defendants claimed not to enforce the rules, as the district court put it, “[a]n employer’s ‘potential power’ to enforce its rules and manage dancers’ conduct is a form of control.” J.A. 997 (quoting Hart v. Rick’s Cabaret Int’l, Inc., 967 F.Supp.2d 901, 918 (S.D.N.Y. 2013)).
The clubs set the fees that dancers were supposed to charge patrons for private dances and dictated how tips and fees were handled. The guidelines explicitly state: “[D]o not [overcharge] our customers. If you do, you will be kicked out of the club.” J.A. 771.
Defendants personally instructed dancers on their behavior and conduct at work. For example, one manager stated that he “ ‘coached’ dancers whom he believed did not have the right attitude or were not behaving properly.” J.A. 997.
Defendants managed the clubs’ atmosphere and clientele by making all decisions regarding advertising, hours of operation, and the types of food and beverages sold, as well as handling lighting and music for the dancers. Id.
Reviewing the above factual circumstances into account the Fourth Circuit held that the district court was correct to conclude that the dancers were employees of the clubs under the FLSA and not independent contractors. The Court reasoned:
Taking the above circumstances into account, the district court found that the clubs’ “significant control” over how plaintiffs performed their work bore little resemblance to the latitude normally afforded to independent contractors. J.A. 997. We agree. The many ways in which defendants directed the dancers rose to the level of control that an employer would typically exercise over an employee. To conclude otherwise would unduly downgrade the factor of employer control and exclude workers that the FLSA was designed to embrace.
None of this is to suggest that a worker automatically becomes an employee covered by the FLSA the moment a company exercises any control over him. After all, a company that engages an independent contractor seeks to exert some control, whether expressed orally or in writing, over the performance of the contractor’s duties and over his conduct on the company’s premises. It is rather hard to imagine a party contracting for needed services with an insouciant “Do whatever you want, wherever you want, and however you please.” A company that leases space or otherwise invites independent contractors onto its property might at a minimum wish to prohibit smoking and littering or to set the hours of use in order to keep the premises in good shape. Such conditions, along with the terms of performance and compensation, are part and parcel of bargaining between parties whose independent contractual status is not in dispute.
If any sign of control or any restriction on use of space could convert an independent contractor into an employee, there would soon be nothing left of the former category. Workers and managers alike might sorely miss the flexibility and freedom that independent-contractor status confers. But the degree of control the clubs exercised here over all aspects of the individual dancers’ work and of the clubs’ operation argues in favor of an employment relationship. Each of the other five factors of the “economic realities” test is either neutral or leads us in the same direction.
Two of those factors relate logically to one other: “the worker’s opportunities for profit or loss dependent on his managerial skill” and “the worker’s investment in equipment or material, or his employment of other workers.” Schultz, 466 F.3d at 305. The relevance of these two factors is intuitive. The more the worker’s earnings depend on his own managerial capacity rather than the company’s, and the more he is personally invested in the capital and labor of the enterprise, the less the worker is “economically dependent on the business” and the more he is “in business for himself” and hence an independent contractor. Id. at 304 (quoting Henderson v. Inter-Chem Coal Co., Inc., 41 F.3d 567, 570 (10th Cir. 1994)).
The clubs attempt to capitalize on these two factors by highlighting that dancers relied on their own skill and ability to attract clients. They further contend that dancers sold tickets for entrance to the two clubs, distributed promotional flyers, and put their own photos on the flyers. As the district court noted, however, “[t]his argument—that dancers can ‘hustle’ to increase their profits—has been almost universally rejected.” J.A. 999 (collecting cases). It is natural for an employee to do his part in drumming up business for his employer, especially if the employee’s earnings depend on it. An obvious example might be a salesperson in a retail store who works hard at drawing foot traffic into the store. The skill that the employee exercises in that context is not managerial but simply good salesmanship.
Here, the lion’s share of the managerial skill and investment normally expected of employers came from the defendants. The district court found that the clubs’ managers “controlled the stream of clientele that appeared at the clubs by setting the clubs’ hours, coordinating and paying for all advertising, and managing the atmosphere within the clubs.” J.A. 1001. They “ultimately controlled a key determinant—pricing—affecting [p]laintiffs’ ability to make a profit.” Id. In terms of investment, defendants paid “rent for both clubs; the clubs’ bills such as water and electric; business liability insurance; and for radio and print advertising,” as well as wages for all non-performing staff. Id. at 1002. The dancers’ investment was limited to their own apparel and, on occasion, food and decorations they brought to the clubs. Id. at 1002-03.
On balance then, plaintiffs’ opportunities for profit or loss depended far more on defendants’ management and decision-making than on their own, and defendants’ investment in the clubs’ operation far exceeded the plaintiffs’. These two factors thus fail to tip the scales in favor of classifying the dancers as independent contractors.
As with the control factor, however, neither of these two elements should be overstated. Those who engage independent contractorsare often themselves companies or small businesses with employees of their own. Therefore, they have most likely invested in the labor and capital necessary to operate the business, taken on overhead costs, and exercised their managerial skill in ways that affect the opportunities for profit of their workers. Those fundamental components of running a company, however, hardly render anyone with whom the company transacts business an “employee” under the FLSA. The focus, as suggested by the wording of these two factors, should remain on the worker’s contribution to managerial decision-making and investment relative to the company’s. In this case, the ratio of managerial skill and operational support tilts too heavily towards the clubs to support an independent-contractor classification for the dancers.
The final three factors are more peripheral to the dispute here and will be discussed only briefly: the degree of skill required for the work; the permanence of the working relationship; and the degree to which the services rendered are an integral part of the putative employer’s business. As to the degree of skill required, the clubs conceded that they did not require dancers to have prior dancing experience. The district court properly found that “the minimal degree of skill required for exotic dancing at these clubs” supported anemployee classification. J.A. 1003-04. Moreover, even the skill displayed by the most accomplished dancers in a ballet company would hardly by itself be sufficient to denote an independent contractor designation.
As to the permanence of the working relationship, courts have generally accorded this factor little weight in challenges brought by exotic dancers given the inherently “itinerant” nature of their work. J.A. 1004-05; see also Harrell v. Diamond A Entm’t, Inc., 992 F.Supp. 1343, 1352 (M.D. Fla. 1997). In this case, defendants and plaintiffs had “an at-will arrangement that could be terminated by either party at any time.” J.A. 1005. Because this type of agreement could characterize either an employee or an independent contractor depending on the other circumstances of the working relationship, we agree with the district court that this temporal element does not affect the outcome here.
Finally, as to the importance of the services rendered to the company’s business, even the clubs had to concede the point that an “exotic dance club could [not] function, much less be profitable, without exotic dancers.” Secretary of Labor’s Amicus Br. in Supp. of Appellees 24. Indeed, “the exotic dancers were the only source of entertainment for customers …. especially considering that neither club served alcohol or food.” J.A. 1006. Considering all six factors together, particularly the defendants’ high degree of control over the dancers, the totality of circumstances speak clearly to an employer-employee relationship between plaintiffs and defendants. The trial court was right to term it such.
Significantly, the Fourth Circuit also affirmed the trial court’s holding that the performance fees collected by the dancers directly from the clubs’ patrons were not wages, and that the clubs were not entitled to claim same as an offset in an effort to meet their minimum wage wage obligations. Discussing this issue, the Court explained:
Appellants’ second attack on their liability for damages targets the district court’s alleged error in excluding from trial evidence regarding plaintiffs’ income tax returns, performance fees, and tips. The clubs contend that fees and tips kept by the dancers would have reduced any compensation that defendants owed plaintiffs under the FLSA and MWHL. According to defendants, the fees and tips dancers received directly from patrons exceeded the minimum wage mandated by federal and state law. Had the evidence been admitted, the argument goes, the jury may have awarded plaintiffs less in unpaid wages.
We disagree. The district court found that evidence related to plaintiffs’ earnings was irrelevant or, if relevant, posed a danger of confusing the issues and misleading the jury. See Fed. R. Evid. 403. Proof of tips and fees received was irrelevant here because theFLSA precludes defendants from using tips or fees to offset the minimum wage they were required to pay plaintiffs. To be eligible for the “tip credit” under the FLSA and corresponding Maryland law, defendants were required to pay dancers the minimum wage set for those receiving tip income and to notify employees of the “tip credit” provision. 29 U.S.C. 203(m); Md. Code Ann., Lab. & Empl. § 3-419 (West 2014). The clubs paid the dancers no compensation of any kind and afforded them no notice. They cannot therefore claim the “tip credit.”
The clubs are likewise ineligible to use performance fees paid by patrons to the dancers to reduce their liability. Appellants appear to distinguish performance fees from tips in their argument, without providing much analysis in their briefs on a question that has occupied other courts. See, e.g., Hart, 967 F.Supp.2d at 926-34 (discussing how performance fees received by exotic dancers relate to minimum wage obligations). If performance fees do constitute tips, defendants would certainly be entitled to no offset because, as noted above, they cannot claim any “tip credit.” For the sake of argument, however, we treat performance fees as a possible separate offset within the FLSA’s “service charge” category. Even with this benefit of the doubt, defendants come up short.
For purposes of the FLSA, a “service charge” is a “compulsory charge for service … imposed on a customer by an employer’s establishment.” 29 C.F.R. § 531.55(a). There are at least two prerequisites to counting “service charges” as an offset to an employer’s minimum-wage liability. The service charge “must have been included in the establishment’s gross receipts,” Hart, 967 F.Supp.2d at 929, and it must have been “distributed by the employer to its employees,” 29 C.F.R. § 531.55(b). These requirements are necessary to ensure that employees actually received the service charges as part of their compensation as opposed to relying on the employer’s assertion or say-so. See Hart, 967 F.Supp.2d at 930. We do not minimize the recordkeeping burdens of the FLSA, especially on small businesses, but some such obligations have been regarded as necessary to ensure compliance with the statute.
Neither condition for applying the service-charge offset is met here. As conceded by defendant Offiah, the dance clubs never recorded or included as part of the dance clubs’ gross receipts any payments that patrons paid directly to dancers. J.A. 491-97 (Offiah’s deposition). When asked about performance fees during his deposition, defendant Offiah repeatedly stressed that fees belong solely to the dancers. Id. Since none of those payments ever went to the clubs’ proprietors, defendants also could not have distributed any part of those service charges to the dancers. As a result, the “service charge” offset is unavailable to defendants. Accordingly, the trial court correctly excluded evidence showing plaintiffs’ earnings in the form of tips and performance fees.
This case is significant because, while many district courts have reached the same conclusions, this is the first Circuit Court decision to affirm same.
Click McFeeley v. Jackson Street Entertainment, LLC to read the entire Fourth Circuit decision.
N.D.Ill.: Former Attorney and Accountant Improper Third-Party Defendants in FLSA Case; Non-Employers Not Subject to Liability
Strauss v. Italian Village Restaurant, Inc.
This case was before the court on the third-party defendants’ motion to dismiss. The defendant, sued for FLSA violations, sought to implead its former attorneys and accountant, on the basis that the faulty legal/accounting advice they rendered resulted in the potential liability at issue in this wage and hour case. While indemnification by the professionals who rendered allegedly bad advice which led to the liability would seem to be a legitimate claim, the court dismissed the claim, because neither of the third-party defendants were alleged to be the plaintiffs’ employer (or joint employers), a prerequisite for the imposition of liability under the FLSA.
Reasoning that the professional consultants at issue were not subject to liability under the FLSA, Illinois state wage and hour laws, or similar counts derived from such statutes, the court explained:
Multiple employers may be held liable under the FLSA when “the facts establish that the employee is employed jointly by two or more employers.” The Supreme Court has held that the determination of whether a party is an employer is based on the “economic reality” of the situation. Courts have considered a variety of factors when making this determination, including the ability to hire or fire the employees, supervision of the employees’ schedules, determination of wages, and the maintenance of employment records. The Seventh Circuit has held that an “employer must exercise control over the working conditions of the employee.”
As these third-party defendants accurately point out, there is nothing in the Italian Villages’s conclusory allegations in these counts that suggests that these defendants could ever be considered “employers” within the meaning of the FLSA. There are no allegations that these third-party defendants had any control over these plaintiffs’ working conditions as the case law require; that they could hire, fire or manage them. Nor could there be. These firms were hired by the Italian Village to negotiate the employment contracts and to manage employee payroll. Their work in this respect was controlled by the Italian Village. Regardless of how much The Italian Village chose to rely on the advice and counsel of their third-party contractors with respect to these issues, there is no authority that the Court could find that supports the argument that the Italian Village’s reliance on these firms’ transforms these into “employers” under the FLSA.
Essentially the Italian Village is asking the Court to by-pass the statutory scheme set forth in the FLSA and shift responsibility for compliance with the FLSA from itself, the employer, to third-party consultants which it paid for services rendered. But nothing in the FLSA suggests that the Italian Village’s alleged “reasonable reliance” on its consultants can shift compliance with the law on to them as well. Moreover, there is ample authority that holds that the FLSA precludes all such potential blame-shifting and bars third-party actions for contribution and indemnity using any tort theories.
The Italian Village’s response to this raft of authority is that it is directed only at attempts by employers to shift liability to certain key employees, not to third parties like the accountants and attorneys sued here. Actually this is not correct. In Chao v. St. Louis Internal Medicine, the court held that an accounting firm could not be sued as a third-party defendant in an FSLA case under a tort theory. But even if this case did not so hold, this Court can see no real distinction between efforts to shift liability to employees, which is prohibited by the case law, and the Italian Village’s efforts to shift liability to their third-party consultants. Either scenario is barred by the FLSA’s express language that liability for compliance rests with the employer and the employer only so that the statute’s mandates are not diluted.
Click Strauss v. Italian Village Restaurant, Inc. to read the entire Memorandum Opinion and Order.
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.
Giuffre v. Marys Lake Lodge, LLC
This case was before the court on the defendant’s motion for summary judgment. At issue was whether its tip pool- which included its “expeditors”- complied with the FLSA. Holding that the defendant-restaurant was entitled to include the expeditor in the tip pool, the court reasoned that: (1) the expeditor was properly deemed a “front-of-the-house” employee with requisite duties to be deemed a “tipped employee;” (2) the expeditor was not an “employer” under the FLSA; and (3) the defendant had properly put plaintiff on notice of its intention to take the tip credit. Thus, the court granted the defendant’s motion.
Briefly discussing the chief issue of interest, the court explained:
MLL utilized the expeditor position on busy nights to assist in its restaurant. Defendants contend that the expeditor is a “front of the house” position that falls within the definition of a “tipped employee” for purposes of the FLSA, thus barring plaintiff’s claim that the tip credit is invalidated by the sharing requirement. See Roussell v. Brinker Int’l, Inc., 441 F. App’x 222, 231 (5th Cir.2011) (“Customarily, front-of-the-house staff like servers and bartenders receive tips. Back-of-the-house staff like cooks and dishwashers do not, and thus cannot participate in a mandatory tip pool.”). In arguing about whether the expeditor could share in tips, the parties focus on the position’s level of interaction with customers. See id. (“Direct customer interaction is relevant because it is one of the factors distinguishing these two categories of workers.”); see Townsend v.. BG–Meridian, Inc., 2005 WL 2978899, at *6 (W.D.Okla. Nov. 7, 2005) (“The cases that have considered whether a given occupation falls within the definition of a tipped employee have focused on the level of customer interaction involved in that occupation.”).
Plaintiff admits that, during the time he worked at MLL, the expeditor position was usually filled by Mikilynn Wollett. See Docket No. 64 at 3, ¶ 8; Docket No. 92 at 3, ¶ 8. Ms. Wollett descibes the expeditor as a “front of the house” position with the following responsibilities: “checking the plates as they come out from the kitchen cooks to make sure they match the tickets; placing the food on the serving trays; taking the serving trays to the tables and delivering the food to customers; checking in with customers about their meals and exchanging food if the customer has [a] complaint; refilling beverages; chatting with customers; and assisting the wait staff in any other way necessary.” Docket No. 64 –1 at 2, ¶¶ 1–2. According to Ms. Wollett, the “position is very similar to that of a waiter, and the attire is nearly identical, but the expeditor/food runner does not take the customers’ orders.” Id. at 1, ¶ 2.
Curiously, the court appears to have resolved factual issues with regard to the alleged duties of the expeditor and simply rejected plaintiff’s proffered evidence in that regard. As such, the court seemed to imply that with a stronger factual record- supported by testimony other than that of the named-plaintiff alone- it may have reached a different result, at least at the summary judgment stage. Thus, it’s not clear how much precedential value this case will have, if any.
Click Giuffre v. Marys Lake Lodge, LLC to read the entire 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.
When an employee is employed by a company, as long as that company is an enterprise covered by the FLSA, it is subject to the wage and hour requirements of the FLSA. But what about when the company alleged to have violated the FLSA changes hands before its employees have initiated a lawsuit or claim for their unpaid wages. Does the successor company, who acquires the assets of the alleged violator have successor liability under the FLSA? Two recent decisions discuss this very issue. However, given the factually intensive nature of the inquiry, as discussed below, both courts denied the respective defendants’ motions based on issues of fact.
Paschal v. Child Development Inc.
In the first case, Paschal v. Child Development, Inc., the plaintiffs’ subsequent employer (“CDIHS”) sought judgment as a matter of law at the pleading stage of the case, asserting that it could not be plaintiffs’ employer under the FLSA, because it was not in existence when the plaintiffs’ claims arose. In denying the subsequent employer’s motion as premature, the court explained the parameters for successor liability in FLSA cases.
The court explained that the test for liability of a successor company under the FLSA requires the examination of several elements:
The doctrine of successor liability has [ ] been recognized to apply to FLSA violations.” The question of successor liability is difficult based on the “myriad [of] factual circumstances and legal contexts in which it can arise;” therefore, the court must give emphasis on the facts of each case as it arises. A finding of successorship involves two essential inquiries: (1) whether there is continuity of the business; and (2) did the successor know of the violations at the time it took over the business. A court may also consider whether: (a) the same plant is being used; (b) the employees are the same; (c) the same jobs exist; (d) the supervisors are the same; (e) the same equipment and methods of production are being used; and (f) the same services are being offered.
In their Reply, CDIHS argues that Plaintiffs failed to plead any facts that put them in the category of being a successor in interest. Specifically, they argue that “[t]he business was not transferred, nor were employees or property transferred. There was no purchase of the business in any sense.” However, Defendants fail to address the two essential questions of whether they had notice of the violations and whether there was continuity of the business… Plaintiffs argue that “[s]ubstantial continuity of operations between CDI and CDIHS is a given.” They point to CDIHS’s website that indicates all of the efforts on CDIHS’s behalf to maintain the continuity of program. They also argue that based on CDIHS’s intervention, they were “aware of CDI’s potential liability for FLSA and ERISA violations.”
Ultimately, the court denied CDIHS’ motion as premature.
Click Paschal v. Child Development Inc. to read the entire Order Denying Motion to Dismiss.
Battino v. Cornelia Fifth Ave., LLC
In the second case, Battino v. Cornelia Fifth Ave., LLC, a different court applied a similar test to that discussed above. However, because the Battino case was before the court on the defendants’ motion for summary judgment (rather than a motion to dismiss at the pleading stage), it provides a greater insight into how courts apply the multi-factor test in ascertaining whether there is successor liability under the FLSA. In Battino, the court denied the subsequent employers’ motion for summary judgment holding that issues of fact precluded a finding in the defendants’ favor on this issue. As discussed here, the court primarily focused its inquiry on the second factor enunciated above, whether the successor knew of the violations at the time it took over the business.
Regarding the specific test applied by the Battino court, the court explained:
The substantial continuity test in the labor relations context looks to “whether the new company has acquired substantial assets of its predecessor and continued, without interruption or substantial change, the predecessor’s business operations.” Fall River, 482 U.S. at 43 (citation and quotation marks omitted). Courts applying this test typically look at the nine factors enunciated by the Sixth Circuit in the Title VII discrimination context in EEOC v. MacMillan Bloedel Containers, Inc., 503 F.2d 1086, 1094 (6th Cir.1974): (1) whether the successor company had notice of the charge or pending lawsuit prior to acquiring the business or assets of the predecessor; (2) the ability of the predecessor to provide relief; (3) whether there has been a substantial continuity of business operations; (4) whether the new employer uses the same plant; (5) whether he uses the same or substantially the same work force; (6) whether he uses the same or substantially the same supervisory personnel; (7) whether the same jobs exist under substantially the same working conditions; (8) whether he uses the same machinery, equipment, and methods of production; and (9) whether he produces the same product. Musikiwamba, 760 F.2d at 750 (paraphrasing MacMillan Bloedel ). “No one factor is controlling, and it is not necessary that each factor be met to find successor liability.” EEOC v. Barney Skanska Const. Co., 99 Civ.2001, 2000 WL 1617008, at *2 (S .D.N.Y. Oct. 27, 2000) (citation omitted).
In denying the defendants’ motion, the court held that there were issues of fact precluding same, because the successor company could not be said to be an “innocent purchaser,” inasmuch as one of its principals was also a principal in the prior company.
The court explained:
This is not a case of an “innocent purchaser” who “exercised due diligence and failed to uncover evidence” of any potential liability. Musikiwamba, 760 F.2d at 750, 752. Rather, SCFAL was fully aware of the potential liabilities to the unpaid employees and attempted to negotiate the APA accordingly. Thus, the Court is unable to conclude as a matter of law that Canizales cannot be liable as a successor to Cornelia Fifth because of a lack of notice of the claim to SCFAL.
Click Battino v. Cornelia Fifth Ave., LLC to read the entire Opinion and Order.
D.D.C.: High-Profile D.C. Chef Is An “Employer” And Personally Liable For Wage And Hour Violations At His Restaurant
Ventura v. Bebo Foods, Inc.
This case, concerning alleged Wage and Hour violations under the FLSA and the DCWPCL was before the Court on two issues: (1) whether defendant Roberto Donna (“Donna”) was personally liable for minimum wage and overtime violations of the Fair Labor Standards Act (“FLSA”) and the D.C. Wage Payment and Collection Law (“DCWPCL”); and (2) damages, if any, as to the corporate defendants. The Court held that Donna was personally liable for such violations, but deferred on the remaining issues.
Discussing the personal liability of Donna, the Court reasoned:
“The Court concludes that Donna is personally liable under the FLSA and DCWPCL for minimum wage, overtime, and equal pay violations because he is an employer under both the FLSA and DCWPCL. To be liable for violations of the FLSA, the defendant must be an “employer.” 29 U.S.C. §§ 206–207 (2010). The FLSA defines “employer” to include “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S .C. § 203(d). This definition is broadly construed to serve the remedial purposes of the act. Morrison v. Int’l Programs Consortium, Inc., 253 F.3d 5, 10 (D.C.Cir.2001). Thus, courts look to the “economic reality” rather than technical common law concepts of agency to determine whether a defendant is an employer. Id. at 11; see also Donovan v. Agnew, 712 F.2d 1509, 1510 (1st Cir.1983).
In applying the economic reality test, the Court considers “the totality of the circumstances of the relationship between the plaintiff/employee and defendant/employer to determine whether the putative employer has the power to hire and fire, supervise and control work schedules or conditions of employment, determine rate and method of pay, and maintain employment records.” Del Villar v. Flynn Architectural Finishes, 664 F.Supp.2d 94, 96 (D.D.C.2009) (citing Morrison, 253 F.3d at 11). This test may show that more than one “employer” is liable for violations of the FLSA. Dep’t of Labor v. Cole Enterprises, Inc., 62 F.3d 775, 778 (6th Cir.1995). As a result, a corporate officer may qualify as an employer along with the corporation under the FLSA if the officer has operational control of a corporation’s covered enterprise. Agnew, 712 F.2d at 1511. To determine whether a corporate officer has operational control, the Court looks at the factors above plus the ownership interest of the corporate officer. See Cole Enterprises, 62 F.3d at 778 (explaining that an individual has operation control if he or she is a high level executive, has a significant ownership interest, controls significant functions of the business, and determines salaries and makes hiring decisions).
Here, plaintiffs have demonstrated that Donna is an “employer” under the FLSA because he has operational control over the corporate defendants. First, Donna is an executive with significant ownership interest in the corporate defendants. He is the president and sole owner of Bebo Foods and was the president and sole owner of RD Trattoria. (Donna Dep. at 18:3-20:11, 29:16-17.) He also owned eighty percent of Galileo. (Id. at 33:7-8.) Second, Donna had the power to hire and fire, control work schedules and supervise employees, determine pay rates, and maintain employment records. For example, Donna transferred employees from Galileo to Bebo Trattoria when Galileo closed in 2006, and he took part in the hiring of other employees. (Pls.’ Opp’n  to Defs.’ Mot. to Dismiss Ex. 2; Donna Dep. 54:5-7.) Moreover, at the evidentiary hearing, several plaintiffs testified that Donna supervised plaintiffs on the floor of his restaurants. He also approved wage payments to plaintiffs, including the issuance of post-dated or unsigned checks, the payment of partial wages, and the withholding of any payment. (See, e.g., Ventura Aff. ¶¶ 7-9; Vuckovic Aff ¶ 4.) Furthermore, when plaintiffs complained about defendants’ payment practices, he informed them that he withheld wage payments-either in full or in part-from plaintiffs in order to pay Bebo Trattoria’s past debts for which he was behind in payment. (See, e.g., Ventura Aff. ¶ 7; Romic Aff. ¶ 10.) Indeed, plaintiffs’ evidence demonstrates that Donna exerted operational control over the corporate defendants.
Accordingly, Donna is an “employer” under the FLSA and is personally liable for the corporate defendants’ wage, overtime, and equal pay violations. Similarly, because the DCWPCL is construed consistently with the FLSA, Donna is an “employer” under the DCWPCL and is liable for the corporate defendants’ violations of its wage and overtime provisions.”
Due to the high volume of claims against restaurants and their chef-owners recently, this case will no-doubt will have wide-reaching reverberations.
To read the entire opinion, click here.
To learn more about laws and regulations applicable to tipped employees, click here.
S.D.Fla.: Counterclaim For Indemnity Against FLSA Plaintiff In Her Supervisory Capacity Dismissed; FLSA Does Not Permit Such Claims
Quintana v. Explorer Enterprises, Inc.
This case was before the Court on the Plaintiff’s Motion to Dismiss Defendants’ Counterclaim Against Marcia Martinez. Martinez had commenced suit against the Defendants alleging violations of the FLSA. Specifically, Plaintiff sought to dismiss the Defendants’ counterclaims against her alleging that she should indemnify them, as an employer in her supervisory capacity. Dismissing the counterclaim, the Court reasoned that such a counterclaim was not permissible under the FLSA.
The Court explained:
“The defendants brought the counterclaim under the FSLA alleging that Ms. Martinez is an employer within the meaning of the FLSA. The defendants claim that Ms. Martinez is potentially liable for violating the FLSA as a person who is “acting directly or indirectly in the interest of an employer in relation to an employee .” 29 U.S.C. § 203(d). In their Response (DE # 50, 4/20/10), the defendants claim that they are “unaware of a single case holding that one employer within the meaning of the FLSA is prohibited from seeking indemnification or contribution from a second employer with [sic] the meaning of the FLSA, and Martinez cites none.” (DE # 50 p. 5; 4/20/10) Although the Eleventh Circuit has not addressed the issue, other circuits have. In LeCompte v. Chrysler Credit Corp., 780 F.2d 1260 (5th Cir.1986), which is cited by the plaintiff, the Fifth Circuit found that the district court property dismissed the counterclaim for indemnity against two plaintiffs in their supervisory capacity. The defendants fail to distinguish LeCompte.
Instead, the defendants unsuccessfully attempt to distinguish the Tenth Circuit decision in Martin v. Gingerbread House, Inc., 977 F.2d 1405 (10th Cir.1992), on the basis that it was a third-party complaint rather than a counterclaim. Notably, in Martin, the Tenth Circuit expressly agreed with the Fourth and Fifth Circuits’ holdings that “indemnity actions against employees work against the policy of the FLSA.” Id. at 1408. In Martin, the Tenth Circuit explained that
[c]ompliance with the FLSA will not be furthered if employees must defend against indemnity actions. Such actions are not part of the comprehensive statutory scheme set forth by Congress. The conflict between the purposes of federal law and a state cause of action require the latter to yield. We therefore hold that a third party complaint by an employer seeking indemnity from an employee is preempted. Id.
In their Response (DE # 50, 4/20/10), the defendants concede that there are very few cases on point. The defendants, however, believe that the lack of case holdings prohibiting such indemnification indicates that defendants may seek such relief. Although the Eleventh Circuit has not addressed this issue, the circuits that have addressed the issue consistently found that indemnification claims against employees or owners are contrary to public policy and the legislative intent of the FLSA. See, e.g., LeCompte v. Chrysler Credit Corp., 780 F.2d 1260, 1264 (5th Cir.1986); Lyle v. Food Lion, Inc., 954 F.2d 984, 987 (4th Cir.1992); Martin v. Gingerbread House, Inc., 977 F.2d 1405, 1407 (10th Cir.1992); Herman v. RSR Sec. Services Ltd., 172 F.3d 132, 144 (2d Cir.1999).
The dispositive issue raised in the plaintiff’s motion to dismiss is whether the indemnification sought by the defendants would be allowed under the FLSA. The Supreme Court addressed a related issue in Northwest Airlines v. Transp. Workers Union, 451 U.S. 77, 94-95 (1981). The Supreme Court analyzed the legislative intent regarding an implied right to contribution under the Equal Pay Act when the Act contains no reference of such contribution. The Court determined that unless the “congressional intent can be inferred from the language of the statute, the statutory structure, or some other source, the essential predicate for implication of a private remedy simply does not exist.” Id. (emphasis added).
Several circuits have applied the reasoning of Northwest Airlines to their analysis of the viability of an indemnity claim under the FLSA. See, e.g., LeCompte v. Chrysler Credit Corp., 780 F.2d 1260, 1264 (5th Cir.1986); Lyle v. Food Lion, Inc., 954 F.2d 984, 987 (4th Cir.1992); Martin v. Gingerbread House, Inc., 977 F.2d 1405, 1408 (10th Cir.1992); Herman v. RSR Sec. Services Ltd., 172 F.3d 132, 144 (2d Cir.1999); Villareal v. El Chile, Inc., 601 F.Supp.2d, 1011, 1015 (N.D.Ill.2009); Spellman v. American Eagle Express, Inc., 680 F.Supp.2d 188, 191 (D.C.Cir.2010). Additionally, the Second, Fourth, Fifth and Tenth Circuits have consistently held that indemnity claims against employees under the FLSA are preempted by the Supremacy Clause of the United States Constitution. See LeCompte, 780 F.2d at 1264. See also Spellman, 680 F.Supp.2d at 191; Villareal, 601 F.Supp.2d at 1015; Lyle, 954 F.2d at 987 (adopting the reasoning of the court in LeCompte ).
The FLSA does not mention a right to seek indemnity. Indemnity against an employee would be contrary to the legislative intent. See LeCompte v. Chrysler Credit Corp., 780 F.2d 1260, 1264 (5th Cir.1986) (noting that such indemnity action would “undermine employers’ incentive to abide by the Act”). In Herman, the Second Circuit noted that the text of the FLSA makes no provision for contribution or indemnification and the Act’s legislative history is silent on a right to contribution or indemnification. Herman, 172 F.3d at 144; see also Lyle, 954 F.2d at 987 (holding that indemnity against an employee “is something the FLSA simply will not allow”). Most recently, in Villareal, 601 F.Supp.2d at 1015, the court affirmed the dismissal of an employer’s cross-claim against its supervisory personnel for indemnity claims under the FLSA (citing LeCompte ).
In LeCompte, the Fifth Circuit acknowledged that the supervisory personnel were partially at fault for the violation that resulted. Nonetheless, the court held that an indemnity claim against such personnel under the FLSA would be inappropriate as it would frustrate Congress’ purpose in enacting the FLSA. Id. at 1264. Similarly, in the case at hand, the defendants’ basis for the counterclaim against Ms. Martinez, as a store manager, is that she was the person most responsible for setting the plaintiffs’ rates of pay and schedule and that she was in the best position to ensure the defendants’ compliance with the FLSA. Applying the reasoning of the court in LeCompte, the counterclaim for indemnity is not viable.”
Thus, the Court granted Plaintiff’s Motion and dismissed Defendants’ counterclaim.
To read the entire order click here.
9th Cir.: Complaint That Failed To Allege Entity Exercised Control Over Nature And Structure Of The Employment Relationship Did Not Properly Allege Defendant Was “Employer”
Dianda v. PDEI, Inc.
Plaintiff-appellant Joseph Dianda worked for two days as a “best boy” in the production of a television commercial, but was allegedly paid three days late. Dianda sued the production company and PDEI, Inc. (“PDEI”) for various violations under the Fair Labor Standards Act (“FLSA”) and California law. In the case below, all defendants moved to dismiss the action. The district court denied the motion as to the production company, but granted the motion as to PDEI after determining that PDEI was not Dianda’s “employer” under the FLSA or California law. Dianda appealed and the 9th Circuit affirmed, discussing the requirements for an “employer” under both the FLSA and California law. Here, because the Complaint failed to adequately allege that PDEI exercised control over the nature and structure of the Plaintiff’s employment, the Court affirmed the dismissal as to PDEI.
“I. ‘Employer’ Status Under California’s Labor Code and FLSA
The essence of the test for “employer” status under the California Labor Code is “whether the principal has the right to control the manner and means by which the worker accomplishes the work.” Estrada v. FedEx Ground Package Sys., Inc., 64 Cal.Rptr.3d 327, 335 (Cal.Ct.App.2007). FLSA’s test is broader, asking whether the “individual [here, PDEI] exercises control over the nature and structure of the employment relationship.” Boucher v. Shaw, 572 F.3d 1087, 1090-91 (9th Cir.2009) (quotation marks omitted).
Dianda has not shown that PDEI had the right to control the details of his work or that PDEI exercised control over his employment relationship. In his deposition, Dianda admitted that PDEI did not tell him how to do his job, PDEI did not hire him, PDEI did not terminate him, PDEI never communicated with him in any way, and Dianda never took instructions or directions from PDEI concerning the commercial. Nonetheless, Dianda argues that his pay stub and W-2 form identify PDEI as the “employer.” However, “[t]he parties’ label is not dispositive and will be ignored if their actual conduct establishes a different relationship.” Estrada, 64 Cal.Rptr.3d at 335-36. See also Real v. Driscoll Strawberry Assocs., Inc., 603 F.2d 748, 755 (9th Cir.1979) (“Economic realities, not contractual labels, determine employment status for the remedial purposes of the FLSA.”). Furthermore, PDEI’s alleged use of its own account to pay wages and PDEI’s maintenance of payroll records are explainable as part of the service it provides as a payroll company. See, e.g., Moreau v. Air France, 356 F.3d 942, 950-52 (9th Cir.2004) (determining that Air France was not a joint employer of contracted service workers where Air France’s involvement was to ensure compliance with regulatory requirements).”
E.D.N.Y.: Alleged Operators Of Garment Factory May Constitute Plaintiffs’ Employers Or Joint Employers Under FLSA; Motion To Dismiss Denied
Lin v. Great Rose Fashion, Inc.
In this Fair Labor Standards Act (“FLSA”) case, Plaintiffs allege that they were deprived of a minimum wage and overtime pay while working in a garment factory, and ultimately discharged from their employment in retaliation for pursuing their rights to this compensation. Plaintiffs had previously moved for both a preliminary injunction and a TRO, based on alleged retaliatory conduct from Defendants, and allegations that Defendants were seeking to strip the factory where Plaintiffs had been employed of their assets. Of particular interest on the parties Motions currently before the Court, the Defendants sought to dismiss Plaintiffs’ claims based on alleged lack of standing—arguing that that Defendants were not Plaintiffs’ employers under the FLSA. Denying Defendants’ Motion to Dismiss based on lack of standing, the Court reviewed the elements of joint employers under the FLSA as well as those used to distinguish between independent contractors and employees. The Court held an evidentiary hearing and made factual findings regarding the nature of the parties’ relationship.
“Defendants argue that Plaintiffs lack standing to sue because they were not ’employees,’ as defined in the FLSA, but rather ‘independent contractors.’ Defendants claim they ‘outsourced the packing and trimming work to Wen Ming Lin and Yu Jiao Lin,’ and Wen Ming Lin’ in turn employed a group of ‘independent contractors,’ the Packer Plaintiffs. In support of their view, Defendants assert that they did not hire, fire, supervise, or manage the workers. They claim that the ‘subcontractors’ maintained the other workers’ employment records, negotiated a pay rate for the group and collected checks on one desk, and that ‘the plaintiffs themselves decided when they should arrive, depart, and the amount of time for which they were to work.’
The evidence presented at the Hearing exposed each of these assertions to be patently false. Applying the Brock factors, there is simply no question that these Plaintiffs “depend[ed] upon someone else’s business for the opportunity to render service” and were not “in business for themselves.” See Brock, 840 F.2d at 1059. The Plaintiffs were low-skilled, immigrant piece-workers toiling for long hours of manual labor in a garment factory. At least one, Yu Jiao Lin, expressed that she was illiterate. The testimony of the Plaintiffs established that they were interviewed, hired, fired, assigned work and hours, and supervised and managed by Mrs. Lin and Fang Zhen, or others under their control. (Tr. 31, 33-36, 78-81.) Contrary to the Defendants’ assertions, there is no evidence that Wen Ming Lin or Yu Jiao Lin had the power to hire, fire, manage assignments and schedules, or discipline other workers. (Id.)
It is plain that Mrs. Lin and Fang Zhen exercised a degree of control over the workers commensurate with the role of an employer. The Defendants’ collective denial of control over the workers is not credible. Wen Ming Lin’s referral of prospective workers to Mrs. Lin for her to interview does not elevate him to the role of independent contractor. (Tr. 52-53.) The Defendants’ additional arguments are similarly unavailing and unsupported by the evidence. For example, the Defendants’ repeatedly point to a single paycheck issued on December 9, 2005 and marked “payment for the assigned contractors” as evidence that “Plaintiffs shared and shared alike,” creating a relationship “best [ ] characterized as a partnership.” (Def. Post-Hearing Opp. 3, Def. Ex. A.) The Defendants’ choice to unilaterally label the Plaintiffs “contractors,” and to attempt to pay them via a collective paycheck on one occasion years ago, does not control the legal question before the court. This crude argument fails to set the Plaintiffs apart as independent contractors.
Considering the remaining Brock factors, the Defendants’ “independent contractor” theory proves even more preposterous. There is zero evidence that Plaintiffs had any opportunity for profit or loss or an “investment” in the business. The packers and thread-cutters were engaged in low-skilled factory labor, which was obviously not a matter of “independent initiative.” The Plaintiffs who took the stand worked at the Factory on a permanent, daily basis for three years. Their work at the Factory was not an occasional project. The Plaintiffs performed discrete tasks that assisted the line production, assembly, and packaging of goods. It is clear that their work was “an integral part of the employer’s business.”
Defendants’ contrived efforts to distance themselves from their workers and treat them as “subcontractors” have failed. The Defendants’ argument is nothing more than a transparent attempt to use a legal fiction to escape liability for their alleged labor abuses. The notion that these Plaintiffs acted as independent contractors outside the protection of the FLSA is so thoroughly without merit that it borders on an affront to the dignity of this court.”
B. Silver Fashion and Mrs. Lin Constitute “Employers” Under the FLSA
As a matter of economic reality, the Plaintiffs were employed by the Factory and the entities that owned it over the years: Silver Fashion, Great Rose, and Spring Fashion. Under the Carter factors, Silver Fashion maintained formal control over the Plaintiffs through the actions of its principal managers. Since Mrs. Lin’s parents were absentee, nominal owners of the business, Mrs. Lin controlled the company. The persistent euphemism that Mrs. Lin was just “helping out” her parents and that Fang Zhen was “helping” Mrs. Lin cannot be taken seriously. The only conceded owners or managers of Silver Fashion were Mrs. Lin’s parents, who live in China and appear to have no involvement whatsoever in the operations of this company held in their names. As Mrs. Lin eventually summarized: “Basically I was running the company.”(Tr. 262.)
As reviewed above, Plaintiffs were interviewed, hired, fired, assigned work and hours, and supervised and managed by Mrs. Lin and Fang Zhen, or others under their control. (Tr. 31, 33-36, 78-81.) There is no serious dispute that Mrs. Lin or others acting on her behalf determined the rate and method of payment. Mrs. Lin also maintained employment records, as demonstrated by the Defendants’ production of the Weekly Trim/Packing Reports. (See Def. Ex. A (original records in blue ink).) These records purport to show the quantity and price of the piecework performed by the Packer Plaintiffs, which formed the basis for their weekly compensation. At a minimum, Plaintiffs have standing to sue Silver Fashion, its predecessor entities, and Mrs. Lin under the FLSA. The court reserves judgment pending discovery as to the role of Fang Zhen in the employment scheme.
C. Great Wall and Mr. Lin May Constitute Joint Employers Under the FLSA
Defendants also argue that the case should be dismissed as to Great Wall and Mr. Lin, because they had no “operational control” over the Plaintiffs. (Def. Post-Hearing Opp. 10-15.) The agency regulations promulgated under the FLSA expressly recognize that a worker may be employed by more than one entity at the same time. See29 C.F.R. § 791.2 (2003); Zheng, 355 F.3d at 66 (citing Torres-Lopez v. May, 111 F.3d 633, 639-45 (9th Cir.1997) (permitting claims against joint employers under the FLSA); Antenor v. D & S Farms, 88 F.3d 925, 929-38 (11th Cir.1996) (same)). Plaintiffs have standing to sue Great Wall and Mr. Lin, in addition to the other Defendants, if they exercised “functional control” over the Factory and its workers. See Barfield, 537 F .3d at 143;
Zheng, 355 F.3d at 66, 72.
Discovery is needed to determine whether a functional employment relationship existed between the Plaintiffs and Great Wall under the Zheng factors. The economic reality test intentionally reaches beyond traditional concepts of agency law to encompass “working relationships, which prior to [the FLSA], were not deemed to fall within an employer-employee category.” Zheng, 355 F.3d at 69 (quoting Walling v. Portland Terminal Co., 330 U.S. 148, 150-51 (1947)). Under the theory of functional control, “an entity can be a joint employer under the FLSA even when it does not hire and fire its joint employees, directly dictate their hours, or pay them.” Zheng, 355 F.3d at 70 (interpreting Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947)). Evidence already establishes that purported agents of Great Wall-Mrs. Lin and Fang Zhen, who each testified that they were employed exclusively by Great Wall-supervised the Plaintiffs’ work in the Factory. The ownership of the premises and the equipment used in the Factory could be imputed to Great Wall, given the tangled leasing relationships between Mr. and Mrs. Lin and the fact that the Factory’s space was distinguished from Great Wall’s space by nothing more than a pile of paper boxes. The Second Circuit has also recognized that a company can de facto set employees’ wages and “dictate[ ] the terms and conditions” of their employment, though they do not “literally pay the workers,” where those employees perform work exclusively in service of that company. Id. at 72.In effect, Plaintiffs functionally worked for Great Wall, because they worked in a Factory that manufactured garments exclusively for Great Wall. Upon review of the preliminary evidence before the court, the relationship between Plaintiffs and Silver Fashion appears to have had “no substantial, independent economic purpose” beyond serving as a “subterfuge meant to evade the FLSA or other labor laws” for the benefit of Great Wall.Id.
In light of the court’s obligation to look beyond the strictures of formal tests and consider all relevant facts, the court finds that Defendants’ dubious uses of the corporate form and the interlocking relationships between the Defendant Corporations are pertinent to the joint employer inquiry in this case. Defendants’ attempt to distinguish Great Wall as a mere “customer of Silver Fashion” is a fallacy. Nearly every aspect of these businesses was intertwined. Together, the Lins controlled both companies. Mr. Lin owned Great Wall, and his wife operated Silver Fashion. Mrs. Lin’s parents appear to be nothing more than straw owners of Silver Fashion. Great Wall was Silver Fashion’s landlord and sole client. Silver Fashion manufactured garments exclusively for Great Wall. In turn, Mr. Lin could not identify a single supplier to his company other than Silver Fashion. Mrs. Lin owned the building where both companies were housed, yet leased the entire building to a company wholly controlled by her husband, so that he could sublet part of it back to her parents for $18,000 a month. (See Section II.A supra.)From the rent and the garment sales, significant funds flowed between these related companies on a regular basis. These entities were functioning as complementary components of a single business enterprise.FN9Based upon these facts, Plaintiffs may have standing to hold Great Wall and Mr. Lin liable either as their functional employers or under other legal theories. The court denies Defendants’ Motion to Dismiss for lack of standing in its entirety.”