In a recent decision, the Fifth Circuit reversed the award of attorney fees to a prevailing plaintiff. In Cervantes v. Cotter, the lower court severely reduced the plaintiff’s fee request by some 75% because the plaintiff’s success was, in the view of the trial court, small. The plaintiffs, noted the trial court, were only warded $409 in lost overtime payments. The district court rejected the plaintiffs’ claim for liquidated damages and their claim for retaliation. So, their recovery was just the $409. Yet, the plaintiffs’ attorneys sought $14,000 in attorney fees. The trial court considered that to be an “extraordinary” amount in light of the relief obtained.

But, the purpose of the attorney fee provision in the Fair Labor Standard Act is to to encourage attorneys to accept these small cases. No attorney would accept a case in which the hard, economic damages was a mere $409. And, as the Fifth Circuit noted on appeal, there are twelve factors in assessing attorney’s fees, not just the one factor involving success at trial. See the Fifth Circuit decision here.

The lower court’s decision is not well thought out. The Magistrate discussed the settlement offers and lack of counter-offers by the parties. The Magistrate then concluded that the plaintiff lawyers were “greedy” and the defense attorney was “penny-pinching.” It is an extraordinary decision. The district court ignored eleven of the twelve factors in Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-19 (5th Cir. 1974). Johnson requires lower courts to look at twelve factors, including the success of the plaintiff, when it assesses a request for attorney’s fees.

The lower court in Cervantes looked just at one factor, the success of the plaintiffs. Then, it went beyond that and looked at the relative settlement success of the two parties. It mentioned one offer of $17,000 in attorney fees and a second offer of $22,000 in attorney fees. It noted the response by the employer of $210 in overtime pay and $1,000 in attorney fees. It almost seemed like the judge was annoyed at having to hear a small case when the parties could have easily settled the matter. I find that unfortunate. These “small” cases are quite large to those involved. The Fair Labor Standards Act is a federal law. If federal courts will not enforce federal laws, who will? In truth, these apparently small cases are not small, at all. These relatively small cases reflect a wider problem with many employers underpaying their employees and generally getting away with it. The Department of Labor can enforce the FLSA, but it rarely does. It is left to these “small” lawsuits to stand up for the little guy whose pay is being stolen by employers. If there is one plaintiff filing a case for a lost overtime of $210, then there are ten others who also suffered similar losses, but chose not to file suit. There was a time when I was working my way through college and law school. In those days, $210 was a very large amount to me indeed.

In effect, the trial court imposed some new requirement that appears to involve second-guessing settlement strategy. I think it was this that caught the eye of the Fifth Circuit. It vacated the trial court’s ruling in a per curiam, unpublished decision. “Per curiam” decisions are those which the court views as simple, routine, not needing extensive explanation. The higher court is saying this should be a simple issue. Courts cannot truly second-guess settlement strategy. There are just too many unknowns.

Judges matter. The life experiences they bring to the bench matter. So, when I see a concurrence like the one written by Judge Jones of the Fifth Circuit, I become concerned. In Pineda v. JTCH Apartments, LLC, No. 15-10932 (5th Cir. 12/19/2016), the employee recovered some $5,000 in damages. Santiago Pineda was a maintenance worker for the apartments. He and his wife lived in the apartments. He sued to recover unpaid overtime. Three days after filing suit, the apartment owner evicted Mr. Pineda and his wife for nonpayment of rent. The eviction action sought repayment of the rent from Maria Pena, Mr. Pineda’s wife. After being evicted, Maria Pena joined the lawsuit and alleged retaliation. After a three day trial, the jury awarded the plaintiff $1400 in lost wages and $3700 for the retaliation claim. The judge awarded liquidated damages, which in effect doubled the lost wage award.

The judge then awarded the plaintiff’s attorney some $76,000 in attorney’s fees. The judge reduced the attorney fee request by 25% because, said the trial court, the amount sought was “grossly” disproportionate to the amount recovered.

Both parties appealed. The plaintiffs appealed because they believe the court should have allowed emotional damages. Many courts have allowed a claim for emotional distress damages under the Fair Labor Standards Act. This three-judge panel concluded there was no reason why the district court could not have done so. It found the lower court should have allowed a claim for emotional distress damages.

The defendant argued that the claim for attorney’s fees was too high. It claimed the plaintiff’s attorney did not settle the case when he could have. This is a claim unique to Texas state law, described as the “doctrine of excessive demand.” They also claimed the complaint was filed in bad faith. But, said the court, the defendant waived this argument by not bringing it before the trial court. The higher court then ordered the case be remanded to address the claim for emotional distress damages. But, cautioned the court, the attorney’s fees are already quite high. So, counsel should proceed expeditiously.

Judge Jones then dissented, accusing the plaintiff’s attorney of engaging in hardball tactics in freezing the bank account of the employer during the lawsuit. Judge Jones accused the plaintiff attorney of freezing the bank account ex parte – meaning it was done without notice to the defendant. She also claimed that testimony “implied” that Mr. Pineda may have sued for this “tiny” sum only because the apartment manager reported Mr. Pineda for possible child abuse. She described the attorney’s efforts as possible procedural abuse. My concern is that having done collections type legal work, I know that freezing bank accounts is exceedingly difficult. It is possible to freeze the account ex parte, but if so, one must provide notice to the defendant immediately. Too, this vase reflects the purpose of having a statute that allows for attorney fees. If there were no attorney’s fees available, then such smaller claims would not be pursued.

Too, I do not know how many maintenance workers Judge Jones has known throughout her lifetime, but at least to the maintenance workers I have known, $1400 is not a “tiny” sum. In truth, Judge Jones may have never spoken to an actual maintenance worker. Yes, a judge’s life experiences do matter.

As I review the Docket Sheet, I do not see anything out of the ordinary in this lawsuit. It was not over-worked in some way. Neither party seems to have filed unnecessary motions. The defendant did not seek dismissal or summary judgment. The reality is that even relatively small amounts require a great deal of attorney time. If there is a problem of some sort, it may be that the plaintiff did not accept the amount offered in settlement. But, that is not unusual. Judge Jones appears to be looking for issues with which to cast the plaintiff in a negative light.

 

In federal court, sanctions are a real possibility. A state court can also award sanctions if a lawsuit is found to be frivolous. But, state court judges are more reticent about awarding sanctions than federal judges. In federal court, sanctions rarely occur, but they do occur. The law firm representing the plaintiffs in Elfoulki v. Brannons Sandwich Shop, No. 14-cv-5964 (S.D.N.Y. 6/22/16),  found that to be true. They filed the lawsuit alleging failure to pay minimum wage at a small sandwich shop. They filed suit on behalf of two named plaintiffs and sought collective action certification. The court approved the collective action. But, no other employees opted in to the lawsuit. So, the collective action was later decertified.

The employer then asked for sanctions. The employer did not actually gross more than $500,000 in sales and had not grossed more than $159,000 in sales since it opened about ten months before the lawsuit. Grossing more than $500,000 in one of the way a business qualifies for coverage under the FLSA. The employees would still be covered by the Fair Labor Standards Act if they could show the employees were directly involved in interstate commerce. But, the plaintiffs did not make such an allegation. In accordance with federal rules, the Defendant submitted a notice to the Plaintiffs declaring their gross revenues were way below the $500,000 threshold and invited the plaintiffs to dismiss their lawsuit. The plaintiffs did not respond. The Defendant moved for summary judgment.

To award sanctions, there must be a showing of “objective unreasonableness.” The court does not want to chill any future FLSA lawsuits. So, it asked the question, in a run-of-the-mill wage lawsuit, how would the plaintiffs find out how much the employer had in gross sales? The court suggested the plaintiff firm could have simply looked at the menu and interviewed customers. The law firm could also look at other shop locations, review court filings of similar businesses, review plans for expansion, etc. The court would not limit the inquiry and did not expect the investigation to be perfect. The plaintiff law firm explained various factors that the court found unpersuasive. The defendant had not submitted its “safe harbor” notice until a year into the lawsuit. The lawyers had assumed the employer was interested in settling. The two attorneys could not be sure the owner’s gross income was below $500,000 until he had been deposed. But, the court noted it was the pre-lawsuit investigation that was at issue, not what transpired after they filed the lawsuit.

So, the court sanctioned the law firm $4,000 under Fed.R.Civ.Pro. Rule 11. The defense attorneys had billed its client some $8,500.  See decision here. There are some things every lawyer should be sure of before filing suit. Whether the lawsuit will survive a motion for summary judgment is critically important.

Pres. Obama updated the rules on overtime. He essentially brought them forward to allow for inflation. I wrote about that change in the overtime rules here and here. Well, now many states and business groups are filing suit to stop the changes. Of course, Ken Paxton and Texas are one of the leaders of the lawsuit. See San Antonio Express News report. Otherwise, the new rules would go into effect on December 1, 2016.

So, fewer “managers” will be eligible for overtime. The Department of Labor raised the salary rate at which overtime would apply. I previously wrote about this change here. The salary level for certain low level managerial jobs is currently $23,660. If a low level manager is paid that amount or less, s/he would be entitled to overtime. So, employers had some incentive to make persons who should be hourly “managers” in name only. See CBS news report.

The new regulation takes effect in December. Employers have time to become familiar with the new requirements.

On-call scheduling has not been well received. It is a new trend in reducing personal costs. But, it causes workers substantial stress, since they do not know until a few hours before or the night before whether they will be working. This late notice makes arranging child care virtually impossible. Attorneys general from eight states and the District of Columbia are investigating the practice. So far, they have simply sent letters seeking payroll records and policies. But, those letters prompted some large companies to drop the practice. See ABA Bar Journal report.

I would expect on-call scheduling would have greater impact on female workers, since they are more often the workers arranging child care. So, this sort of practice would impose a greater burden on women. The practice would then constitute disparate impact on female workers. I could also see how such scheduling could also aversely impact workers with disabilities. This sort of business practice may cost an employer much more over the long-term than it saves near term.

Well, two dancers won their trial last March. So, now Tiffany’s Cabaret has settled with the remaining dancers. I previously wrote about this case and trial here. The dancers sought a collective action, which is the name for a class action under the Fair Labor Standards Act. About half the dancers could not join the collective action because they had previously signed arbitration agreements. But, the rest of the dancers, about half of the 45 who asked to join, were allowed to join the collective action. They settled their claims after the Magistrate Judge denied the employer’s motion to dismiss. See San Antonio Express News report here.

It looks like the employer realized it should settle. The two dancers who went to trial last March, after all, were awarded $250,000, plus attorney’s fees. At the time, Tiffany’s Cabaret said they would appeal. But, I expect a more sober assessment has changed that plan, as well,

The Department of Labor, Wage and Hour Division, has issued new interpretative guidance regarding independent contractors. As I have mentioned before, many employers are trying to stretch the limits of independent contractors to include as many employees as possible. See my post here. This trend has been ongoing for a decade or more. The Administrator’s Interpretation No. 2015-1 can be found here. The guidance makes it clear that the old common law test will not apply to cases under the Fair Labor Standards Act. Courts applying the FLSA should apply the “economic realities” test. DOL adds in a footnote that while many cases involve alleged independent contractors, many other cases involve purported “partners,” “owners,” or members of a limited liability company. In such instances, the economic realities test will still apply. The economic realities test essentially asks whether the worker is economically dependent on the employer. The Guidance addresses each factor in detail:

  • Is the work an integral part of the employer’s business? That is, if the employer is a grocery and it hires an electrician, then the electrician is likely to be found to be an independent contractor
  • Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? If the employer schedules the hours and work time for the worker, that indicates the worker depends on the employer for profit. But, if the work, such as a cleaning company, schedules its own workers based on its own needs, that suggests the worker is independent.
  • How does the worker’s investment compare to the employer’s investment? Essentially, this factor addresses who provides the material and equipment for the work. For example in one case, farm workers provided their own gloves. That investment did not compare to the farm owner’s investment in tools and equipment.
  • Does the work performed require special skills or expertise? Permanency or indefinite work assignment suggest the worker is an employee.
  • What is the nature of the employer’s control of the work? If the employer merely assigns work goals or end products allowing the worker to determine how to create or effect that end product, then that lack of control indicates the worker is acting with some independence. Who decides the goal and who decides how to reach that goal?

These factors are not new. But, the Guidance does pull together the better caselaw on this critical test.

San Antonio based restaurant China Sea, agreed to pay $504,577 to 82 former workers for minimum wage, overtime and record-keeping violations. China Sea used two sets of books, one real, one not so real. Some kitchen workers were paid a salary that did not equate to minimum wage. And some workers worked 60 hours per week, but their hours were not recorded. And, servers were not properly paid. The Department of Labor filed suit against the corporate owner, PCXAC LLC and WKHK Investment LLC, which own three China Sea restaurants. The suit originally sought over $1 million in damages on behalf of 164 workers.

The lawsuit was filed in 2012. The parties completed discovery and apparently agreed to a settlement after a mediation session. See Cause No. 12-CV-1210. See San Antonio Express News report.

President Obama announced that the administration will change regulations to allow overtime pay for managers who make up to $970 per week. The current level is $455 per week, which makes the overtime regulation largely meaningless. Indeed, this regulation has lost much of its effectiveness since 1975, when it applied to 65% of management. Now, under the current level, the overtime requirement only applies to 12% of managerial workers. See CNN news report. The increase to $970 per month means overtime will apply to 47% of managers.

For decades, this overtime provision has provided a scam for employers. They could often save money by re-naming a position as managerial, assign some minimal supervisory duties,  and thereby avoid having to pay overtime. The current salary level of $455 per week was set by Pres. Bush in 2004.