By Rachael Stein, a summer law clerk at Washington Legal Foundation who is entering her third year at the University of Georgia School of Law this fall.
In recent years, federal and state workplace regulators have put intense pressure on employers to move away from the use of independent contractors. This pressure was thrown into sharp relief in a recent U.S. Court of Appeals for the Fifth Circuit decision, Gate Guard Services L. P. v. Perez, involving a highly-questionable investigation and lawsuit by the Department of Labor (DOL).
Gate Guard Services is a company that provides gate attendants to oil companies at remote drilling sites. Gate Guard classifies its attendants as independent contractors because the attendants find their own relief workers, are not evaluated based on performance, are not restricted from working for competitors, and are not supervised by Gate Guard. The federal investigation arose from a conversation DOL investigator David Rapstine had with a friend, who complained about the wages he received when formerly working at Gate Guard. Rapstine believed Gate Guard attendants were employees and not independent contractors, and therefore believed Gate Guard may have violated the Fair Labor Standards Act (FLSA) by not paying overtime or keeping accurate records of attendants’ working hours.
Believing Gate Guard was unlawfully classifying its workers as contractors, Rapstine opened a Fair Labor Standards Act (FLSA) investigation, despite his substantial lack of experience in misclassification cases. First, Rapstine made an unannounced visit to Gate Guard’s offices. He targeted a low-level employee for payroll information when he knew the company’s attorneys were not present. After the opening conference in the investigation, Rapstine declared that Gate Guard was “digging its own grave.” After conducting only three interviews and without further investigation, Rapstine calculated that Gate Guard owed over $6 million in back pay. Rapstine later conducted a few more brief interviews with other attendants. He used handwritten notes to compose formal statements, and then destroyed his notes without explanation. Though Rapstine committed numerous violations of internal policy, DOL still sued Gate Guard for refusing to pay over $6 million and for not reclassifying its attendants as employees.
DOL’s litigation tactics were as heavy-handed as Rapstine’s investigation methods. DOL attorneys opposed even routine motions filed by Gate Guard, including a motion to consolidate the government’s FLSA enforcement action and Gate Guard’s declaratory judgment action. Its counsel objected 102 times during Rapstine’s 45-minute deposition. The government refused to produce witness statements, and claimed some statements were privileged even after it filed the same statements as evidence (and therefore waived any possible privilege).
DOL’s legal basis weakened during the case’s pre-trial stage. In a nearly identical case in the same federal district, the court held that gate attendants were not employees under FLSA. See Mack v. Talasek, No. V-09-53, 2012 WL 1067398 (S.D. Tex. Mar. 28, 2012). DOL also learned that the Army Corps of Engineers classifies its gate attendants as independent contractors.
The district court granted Gate Guard summary judgment, holding that its attendants were not FLSA employees, and DOL did not appeal. See Gate Guard Servs. L.P. v. Solis, No. V-10-91, 2013 WL 593418 (S.D. Tex. Feb. 13, 2013). Gate Guard moved to recover attorneys’ fees under the federal Equal Access to Justice Act (EAJA).
Defendants in lawsuits brought by the government are generally responsible for their own fees, but can recover from the federal agency plaintiff under the EAJA in two circumstances. First, the government may be liable under 28 U.S.C. § 2412(b) for attorneys’ fees “to the same extent that any other party would be liable under the common law.” This occurs when a party has “acted in bad faith, vexatiously, wantonly, or for oppressive reasons” or when a “litigant has conferred a substantial benefit on a class of persons.” F.D. Rich Co., Inc. v. U. S. ex rel. Indus. Lumber Co. Second, § 2412(d) of the law allows courts to award attorneys’ fees “unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.” Section 2412(d) does not apply to high net worth individuals or corporations and limits attorney compensation to $125 per hour absent special factors.
The trial court in Gate Guard granted some attorneys’ fees under the § 2412(d) “not substantially justified” provision, but denied the company’s request to recover fees under the EAJA’s bad faith provision. Gate Guard appealed this determination, and asked the Fifth Circuit to grant recovery for all attorneys’ fees under § 2412(b).
The Fifth Circuit reversed the trial court, criticizing its “rigid” test for bad faith. First, the court focused on the need for flexibility in common law equity. Second, the court noted that frivolousness is not necessary for a finding of bad faith. Third, the court stated that misconduct during the proceeding may indicate bad faith. While emphasizing that the bad faith exception to the usual rule for attorneys’ fees is very narrow, the court found that the facts of this case were egregious enough to merit the exception: “The government’s intransigence in spite of its legally deteriorating case, combined with extreme penalty demands and outrageous tactics, together support a bad faith finding. Thus, the government’s bad faith is established.”
DOL’s actions illustrate the extent to which federal regulators will go in their campaign against the independent-contractor employment model. In the wake of an Administrative Interpretation DOL recently released on independent contractors, companies should expect an even greater uptick in misclassification investigations and suits. Investigation targets should be grateful that Gate Guard not only vigorously defended itself in court, but moved to extract attorneys’ fees, something courts rarely allow. Perhaps the Fifth Circuit’s decision will at least be on DOL investigators’ minds as they advance the agency’s crusade.