Labor & Employment Law Daily Company can’t dodge liquidated damages by leaving FLSA compliance to PEO
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Friday, October 4, 2019

Company can’t dodge liquidated damages by leaving FLSA compliance to PEO

By Lisa Milam, J.D.

The employer argued it wasn’t liable for liquidated damages because it had contracted with a PEO to deal with “payroll and employee administrative obligations” and “didn’t think anything else about it,” an admission that conceded negligence.

A wireless company that failed to pay overtime to workers hired to drill holes and lay fiber optics lines could not avoid liability for liquidated damages because it had left its payroll and related obligations in the hands of a professional employer organization (PEO). The company CEO said he handed off these functions to the PEO and “didn’t think anything else about it.” This statement was evidence of negligence, a federal court in Ohio said, not of good-faith. The court also held the CEO was jointly and severally liable with his company, as he was also a statutory employer under the FLSA (Parks v. Central USA Wireless LLC, September 29, 2019, Barrett, M.).

The plaintiffs were six laborers hired to drill holes and lay fiber optics lines for projects run by Central USA Wireless, an Ohio company. The workers lived in Michigan but traveled to and stayed in Texas for the job. They worked about 12 hours per day, five-to-six days per week. They were hired at varying hourly rates, plus per diem to be paid on days worked. For the majority of their employment, about a nine-month period, specifically, they were not paid overtime for hours worked beyond 40 hours per week.

The workers sued the company and its CEO under the FLSA and Ohio Prompt Pay Act. The employer conceded liability for overtime due under the FLSA, a combined $228,000 to the six plaintiffs. However, the defendants argued they were not liable for liquidated damages because they had a reasonable, good-faith belief that the company was in compliance with the FLSA. They also asserted that the CEO could not be held liable as a statutory employer.

Individual liability. The defendants argued the CEO was not personally liable because he did not manage or control the company’s field operations, did not hire the workers or monitor the hours they worked, and did not set their pay structure. He also sought to evade personal liability by noting he had relied on a third-party professional employment organization (PEO) to perform the company’s employment-related administrative functions. But all of these factors were irrelevant to the central question of employer status under the FLSA: whether the putative employer exercised “significant operational control,” the court explained.

From a “corporate” standpoint, the CEO controlled the money spent by the company and had ultimate authority to make financial decisions on its behalf, including whether to accept business proposals. He did not hire or fire the workers—that was the project manager’s task—but he had to approve the compensation structure he negotiated with the workers, and he approved their contracts. (The CEO acknowledged that no one in the company could enter into a contract without his approval.) Also, from his office in Cincinnati, the CEO held conference calls two or three times per week to discuss the daily field operations in Texas. As such, although the project manager was the workers’ direct supervisor, he was in “constant communication” with the CEO about the operation, expenses, and workers’ pay. “Without a doubt,” the court said, the CEO was “top man” at the company, which functioned “for his sole profit” (before it became insolvent, that is). The CEO was “the head of the snake,” with “ultimate authority.” Therefore, he was a statutory employer, jointly and severally liable for the company’s FLSA violations.

Liquidated damages due. The workers sought liquidated damages in the amount of an additional one times the unpaid overtime, as is customary in FLSA cases, as the statute provides for such recovery unless the employer can show that its statutory violation “was in good faith and that he had reasonable grounds for believing that his act or omission was not a violation” of the Act. The defendants argued good faith by pointing to the fact that they had brought on the PEO to attend to its payroll and related obligations. However, the CEO did not make any inquiry to the PEO as to whether the workers were exempt employees (and thus not entitled to overtime), nor did he consult with legal counsel on this question. Rather, he attested that he brought on the PEO and “didn’t think anything else about it.” According to the court, this statement itself concedes negligence on the employer’s part, which “is sufficient to support an award of liquidated damages.”

State-law claims. The workers also alleged violations of the Ohio Prompt Pay Act. And while the defendants didn’t challenge “the general proposition of law that a federal overtime violation translates into a state prompt pay violation,” they did argue that the Ohio statute didn’t apply here because the workers were residents of Michigan and the work was performed in Texas, not Ohio. However, the employer is an Ohio company that conducts business within the state; thus, it is a covered employer, by the terms of the statute. And the statute requires covered employers to “pay all its employees the wages earned by them,” without regard to where those wages were earned. Therefore, the workers were entitled to additional liquidated damages of $200 for each pay period they were not paid overtime—a combined total of $33,400. (But the CEO was not liable as to these damages, because the workers did not name him as a defendant as to this claim.).

Relief granted. The court thus awarded overtime wages in the amount of $228,133 and liquidated damages in an equal amount, for which the company and CEO were jointly liable. The court awarded an additional $33,400 in liquidated damages on their claims under the Ohio Prompt Pay Act, for a combined recovery of $490,000.

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