One Employer's Strategy Against the DOL's Crackdown on Employee Misclassification

Until recently, employment counsel likely would have informed the employer in the above example that he has two choices: 1) enter into a settlement and pay the back wages, overtime and liquidated damages demand, which would have the effect of completely changing his business practices; or 2) refuse to settle and wait to defend a future “enforcement” action filed by the DOL, all the while accruing additional back wages and liquidated damages as time passes if he is ultimately found wrong.

Employers now may have a third option as a result of one Texas employer's recent victory against the DOL: Refuse to settle and be the “first to file” a lawsuit against the DOL seeking a declaratory judgment that the employer has not violated the FLSA and, thus, does not owe any back wages or liquidated damages. This is precisely what occurred in Gate Guard Services, L.P. v. Hilda L. Solis, United States Department of Labor., United Stated District Court for the Southern District of Texas, Victoria Division, Case No. 6:10-CV-91.

The Facts

Gate Guard Services, L.P. (GGS) enters into agreements with oil field operators by supplying them with gate attendants that perform the job of logging in vehicles entering and departing oil field operation sites throughout Texas. GGS treats those gate attendants, many of whom are retirees, as independent contractors and pays them between $100 and $175 per day. Many of the gate attendants are “snow birds” who travel to Texas during the winters only. The gate attendants enter into independent contractor relationships with GGS so they can work for multiple gate attendant companies, supplement their Social Security income, and maintain a flexible schedule. While performing their assignments, the gate attendants live out of their recreational vehicles and are visited only every two weeks by GGS service technicians, who service septic tanks and provide fuel for generators.

In July 2010, a DOL Wage and Hour investigator initiated an investigation, in large part, to determine whether GGS's gate attendants were properly classified as independent contractors. Just a few months later, in early October 2010, the DOL advised GGS of its findings. Specifically, it concluded that the gate attendants were misclassified as independent contractors and that GGS, therefore, must compensate the gate attendants at the federal minimum wage rate, plus overtime, for all hours worked beyond 40 hours per week. In fact, the investigator said that GGS must compensate the gate attendants 24 hours a day, seven days per week. According to the DOL's Summary of Unpaid Wages, GGS allegedly owed its approximately 345 attendants an astounding $6.2 million in minimum wage and overtime. (That back wage amount also includes overtime pay for service technicians who service the septic tanks and provide fuel for the gate attendants' recreational vehicles.) Additionally, the DOL insisted that GGS must treat its gate attendants as employees going forward. In November 2010, GGS again met with DOL representatives, who advised that enforcement litigation against the company would be initiated if it did not comply with the DOL's directive. GGS refused to acquiesce, contending that it had not violated the FLSA.

GGS Files First

Rather than wait for the DOL to file a lawsuit, on Nov. 19, 2010, GGS filed a declaratory judgment action against the Secretary of the U.S. Department of Labor. Specifically, GGS filed a complaint seeking a declaration from the court that GGS has not misclassified its independent contractors and that it does not owe $6.2 million in back wages. (GGS was represented by the authors.)

GGS saw several advantages to filing the declaratory judgment action. Most importantly, GGS would not need to wait to be sued by the DOL and could more expeditiously obtain a ruling on its decision to classify the gate attendants as independent contractors. Time was clearly of the essence so that GGS's owner could determine if and when his business would be affected. Additionally, from a procedural standpoint, a declaratory judgment action would allow GGS to litigate in the forum that is most convenient: the U.S. District Court for the Southern District of Texas, Victoria Division, where most of its gate attendants are located. Additionally, at trial, GGS would have the advantage of presenting its case first to a jury and the last to rebut the DOL's evidence. Given the significant financial impact on GGS's business, its attorneys felt that GGS had a right to judicial review and should not be at the mercy of the DOL as to the timing of a resolution.

Three months after GGS filed the declaratory judgment action in the Southern District's Victoria Division, the DOL filed a separate lawsuit in the Southern District of Texas's Corpus Christi Division. However, the Corpus Christi court granted GGS's motion to transfer the DOL's lawsuit to the Victoria Division. Once the case was transferred, the DOL moved to dismiss GGS's declaratory judgment action, alleging that the court lacked subject matter jurisdiction because the DOL's decision was not “final.” A “final” decision is required in order to waive the DOL's defense of sovereign immunity under the Administrative Procedures Act. The court denied the DOL's motion to dismiss finding that the decision was indeed final. The court further granted GGS's motion to consolidate the two lawsuits in Victoria based on the “first-to-file” rule. The order designated GGS as the named Plaintiff and the DOL was named the Defendant.

Conclusion

This decision is significant because it means that employers who have been admonished by the DOL for alleged violations of the FLSA need not sit and wait for the DOL to file a lawsuit against them. The employer can file a declaratory judgment action seeking a court's determination as to whether the DOL's decision is justified. This case presents a novel strategy for dealing with the DOL's crackdown on employers and provides an offensive remedy for employers who truly believe that they have not violated the FLSA.

Annette A. Idalski is Chair of Chamberlain Hrdlicka's Labor and Employment Litigation Group in Atlanta, and practices exclusively in the areas of labor and employment litigation. Daniel D. Pipitone, Chairman of Chamberlain Hrdlicka's Admiralty Section, focuses on the litigation and trial of various matters involving laws governing admiralty/maritime, commercial, equine, and product liability disputes. Kelly E. Campanella is an associate in the firm's labor and employment section.

Imagine that your client, a small business owner, alarmed by a recent visit from the United States Department of Labor (DOL), calls you. The DOL's Wage and Hour investigator has informed your client that he owes the government millions of dollars for violating the Fair Labor Standards Act (FLSA) and misclassifying as independent contractors hundreds of individuals that the investigator believes are employees. Moreover, the investigator states that the client will have to treat his contractors as employees going forward, thus forcing him to change his business practices drastically.

DOL Directive

There is no doubt that a significant number of employers and their counsel will be faced with this very scenario ' otherwise known as the “so-called misclassification label.” The reason for this is that the Obama Administration has made the enforcement of employee misclassification cases its “Strategic Goal #1 in 2011.” U.S. Department of Labor Strategic Plan Fiscal Years 2011-2016. The DOL devoted a whopping $12 million of its FY 2011 budget to pursuing misclassification enforcement actions, alone. U.S. Dep't of Labor, Fyi 2011 Budget In Brief 5 (2010). Another $13 million of that budget has been delegated to competitive misclassification training grants to the States and to the DOL's Solicitor of Labor for the purpose of litigating misclassification cases. U.S. Department of Labor Strategic Plan Fiscal Years 2011-2016. Such training appears to be needed, given the low percentage of misclassification enforcement actions pursued in prior years. As a result of the significant financial resources and high priority that the DOL has placed on these investigations, employers must be ready to defend themselves when the DOL comes knocking. How would you advise your client?

Until recently, employment counsel likely would have informed the employer in the above example that he has two choices: 1) enter into a settlement and pay the back wages, overtime and liquidated damages demand, which would have the effect of completely changing his business practices; or 2) refuse to settle and wait to defend a future “enforcement” action filed by the DOL, all the while accruing additional back wages and liquidated damages as time passes if he is ultimately found wrong.

Employers now may have a third option as a result of one Texas employer's recent victory against the DOL: Refuse to settle and be the “first to file” a lawsuit against the DOL seeking a declaratory judgment that the employer has not violated the FLSA and, thus, does not owe any back wages or liquidated damages. This is precisely what occurred in Gate Guard Services, L.P. v. Hilda L. Solis, United States Department of Labor., United Stated District Court for the Southern District of Texas, Victoria Division, Case No. 6:10-CV-91.

The Facts

Gate Guard Services, L.P. (GGS) enters into agreements with oil field operators by supplying them with gate attendants that perform the job of logging in vehicles entering and departing oil field operation sites throughout Texas. GGS treats those gate attendants, many of whom are retirees, as independent contractors and pays them between $100 and $175 per day. Many of the gate attendants are “snow birds” who travel to Texas during the winters only. The gate attendants enter into independent contractor relationships with GGS so they can work for multiple gate attendant companies, supplement their Social Security income, and maintain a flexible schedule. While performing their assignments, the gate attendants live out of their recreational vehicles and are visited only every two weeks by GGS service technicians, who service septic tanks and provide fuel for generators.

In July 2010, a DOL Wage and Hour investigator initiated an investigation, in large part, to determine whether GGS's gate attendants were properly classified as independent contractors. Just a few months later, in early October 2010, the DOL advised GGS of its findings. Specifically, it concluded that the gate attendants were misclassified as independent contractors and that GGS, therefore, must compensate the gate attendants at the federal minimum wage rate, plus overtime, for all hours worked beyond 40 hours per week. In fact, the investigator said that GGS must compensate the gate attendants 24 hours a day, seven days per week. According to the DOL's Summary of Unpaid Wages, GGS allegedly owed its approximately 345 attendants an astounding $6.2 million in minimum wage and overtime. (That back wage amount also includes overtime pay for service technicians who service the septic tanks and provide fuel for the gate attendants' recreational vehicles.) Additionally, the DOL insisted that GGS must treat its gate attendants as employees going forward. In November 2010, GGS again met with DOL representatives, who advised that enforcement litigation against the company would be initiated if it did not comply with the DOL's directive. GGS refused to acquiesce, contending that it had not violated the FLSA.

GGS Files First

Rather than wait for the DOL to file a lawsuit, on Nov. 19, 2010, GGS filed a declaratory judgment action against the Secretary of the U.S. Department of Labor. Specifically, GGS filed a complaint seeking a declaration from the court that GGS has not misclassified its independent contractors and that it does not owe $6.2 million in back wages. (GGS was represented by the authors.)

GGS saw several advantages to filing the declaratory judgment action. Most importantly, GGS would not need to wait to be sued by the DOL and could more expeditiously obtain a ruling on its decision to classify the gate attendants as independent contractors. Time was clearly of the essence so that GGS's owner could determine if and when his business would be affected. Additionally, from a procedural standpoint, a declaratory judgment action would allow GGS to litigate in the forum that is most convenient: the U.S. District Court for the Southern District of Texas, Victoria Division, where most of its gate attendants are located. Additionally, at trial, GGS would have the advantage of presenting its case first to a jury and the last to rebut the DOL's evidence. Given the significant financial impact on GGS's business, its attorneys felt that GGS had a right to judicial review and should not be at the mercy of the DOL as to the timing of a resolution.

Three months after GGS filed the declaratory judgment action in the Southern District's Victoria Division, the DOL filed a separate lawsuit in the Southern District of Texas's Corpus Christi Division. However, the Corpus Christi court granted GGS's motion to transfer the DOL's lawsuit to the Victoria Division. Once the case was transferred, the DOL moved to dismiss GGS's declaratory judgment action, alleging that the court lacked subject matter jurisdiction because the DOL's decision was not “final.” A “final” decision is required in order to waive the DOL's defense of sovereign immunity under the Administrative Procedures Act. The court denied the DOL's motion to dismiss finding that the decision was indeed final. The court further granted GGS's motion to consolidate the two lawsuits in Victoria based on the “first-to-file” rule. The order designated GGS as the named Plaintiff and the DOL was named the Defendant.

Conclusion

This decision is significant because it means that employers who have been admonished by the DOL for alleged violations of the FLSA need not sit and wait for the DOL to file a lawsuit against them. The employer can file a declaratory judgment action seeking a court's determination as to whether the DOL's decision is justified. This case presents a novel strategy for dealing with the DOL's crackdown on employers and provides an offensive remedy for employers who truly believe that they have not violated the FLSA.

Annette A. Idalski is Chair of Chamberlain Hrdlicka's Labor and Employment Litigation Group in Atlanta, and practices exclusively in the areas of labor and employment litigation. Daniel D. Pipitone, Chairman of Chamberlain Hrdlicka's Admiralty Section, focuses on the litigation and trial of various matters involving laws governing admiralty/maritime, commercial, equine, and product liability disputes. Kelly E. Campanella is an associate in the firm's labor and employment section.