By Georgia D. Koutouzos, J.D.
Applying the “totality-of-the-circumstances” test, DOL did not commit a clear error in judgment when applying the relevant factors to the facts of the for-profit company’s case.
The Department of Labor did not act in an arbitrary and capricious manner in determining that “consignor/volunteers” who help organize and run a for-profit company’s consignment sales events are employees under the FLSA, the D.C. Circuit concluded, affirming summary judgment favoring DOL after the company challenged the agency’s determination. The Department applied the correct legal governing whether a worker is an employee or a volunteer, carefully considered whether the at-issue workers had an expectation of compensation in exchange for their services, and examined the degree of control exercised by the company, as well as the extent to which the consignors’ services were integral to the company’s business (Rhea Lana, Inc. v. U.S. Department of Labor, June 7, 2019, Srinivasan, S.).
Opportunity to shop. Rhea Lana, Inc., and Rhea Lana’s Franchise Systems, Inc., (collectively “Rhea Lana”) operate semiannual consignment sales for children’s clothing, toys, and merchandise. The sales are staffed by the company’s managers who work for compensation, but the individual consignors who supply the merchandise also work five-hour shifts providing assistance, such as organizing merchandise, removing tags from clothing, and processing customers’ purchases at the point of sale. The consignors are not paid for their efforts; rather, they are given an opportunity to shop before the sales are open to the public.
DOL determination. In a 2013 investigation of Rhea Lana’s labor practices, the Wage and Hour Division determined that the for-profit company’s employees were subject to FLSA requirements—including the individuals who were acting as “consignors/volunteers.” Rhea Lana challenged DOL’s decision as arbitrary and capricious, but the lawsuit initially was dismissed in 2014 by a federal trial court on the ground that the agency’s determination was not a final agency action. The D.C. Circuit Court of Appeals reversed the trial court’s decision, however, concluding that DOL’s determination was “final” because it had legal consequences.
Trial court agrees. On remand, the Department filed an administrative record containing all contemporaneous agency materials supporting its determination. Included in the documentation was a declaration by the District Director in the Wage and Hour Division who had sent the company the letter advising it of the FLSA status. Rhea Lana moved to strike the declaration, which summarized the contents of the administrative record and further described how the record contemporaneously supported the challenged agency determination, as an after-the-fact document. In 2017, the trial court denied the motion to strike and granted summary judgment favoring DOL, after which Rhea Lana again appealed.
Admissibility of the director’s declaration. As a threshold matter, the appeals court concluded that although the district director’s declaration normally would be excluded from appellate review as a post hoc submission, the particular circumstances of the instant case provided adequate assurances that the declaration accurately reflected DOL’s contemporaneous reasoning in concluding that the consignor/volunteers were employees for FLSA purposes. For one thing, the declaration came from the same agency official who had issued the Department’s final determination as to the employment status of the workers at issue.
In addition, the declaration largely echoed the rationale contained in the contemporaneous record. While post hoc materials have been barred from consideration on appeal when they present an entirely new theory, such materials can be considered when they illuminate the rationale that already is implicit in the internal materials, the appeal court explained. The district director’s declaration captured much of the same rationale contained in the pre-decision materials, thus providing further assurances that the document captured the actual reasons for DOL’s determination.
Finally, the specific posture of the case supported the permissibility of relying on the director’s post hoc recapitulation because DOL was unaware when it made its determination that the decision would be deemed a final agency action subject to judicial review. Because the declaration was admissible, the trial court’s denial of Rhea Lana’s motion to strike the declaration was affirmed.
Employees or volunteers? On the merits of the company’s challenge to DOL’s determination, the appeals court held that DOL applied the correct legal test established under U.S. Supreme Court precedent governing whether a worker is an employee or a volunteer, i.e., the totality-of-the-circumstances approach that focuses on economic reality of the relationship (Tony & Susan Alamo Found. v. Sec’y of Labor (1985). The Department carefully considered whether the at-issue workers had an expectation of compensation in exchange for their services, examining the degree of control exercised by Rhea Lana and the extent to which the workers’ services were integral to the company’s business.
No conclusory premise. Rhea Lana did not meaningfully dispute that the DOL’s decision, as recounted in the director’s declaration, turned on the correct factors under the applicable case precedent. Instead, the company contended that the agency had improperly started from a conclusory premise that individuals cannot volunteer with for-profit companies.
But that contention was belied by the explanation in the director’s declaration, which, after eight paragraphs of analysis addressing whether consignors are properly considered employees rather than volunteers, only mentioned the company’s for-profit status and the Department’s longstanding position that for-profit companies generally cannot treat workers as volunteers instead of employees under the FLSA. That statement by its own terms only set out further support for a conclusion already reached by the agency—not an antecedent premise of that conclusion.
Compensation expectation. As to whether DOL made a clear error in judgment in applying the totality-of-the-circumstances test to the facts and concluding that the Rhea Lana workers were employees rather than volunteers, the appeals court agreed that the Department’s findings on each of the relevant factors had adequate support in the record. For evidence of the workers’ expectation of in-kind compensation, the agency cited Rhea Lana’s solicitations to the workers to sign up for shifts in exchange for the opportunity to “shop early” and the company’s offer to pay people $8 per hour to work shifts at the sales when it could not induce enough individuals to work in exchange for the opportunity to shop early. DOL also pointed to statements from the consignors themselves indicating that they had been motivated to work at the sales by the opportunity to shop early.
Control of volunteers who were company’s “lifeblood.” For evidence of the control exerted by Rhea Lana over its workers, the Department referenced statements from the consignors indicating that they had been supervised by Rhea Lana’s employees. And for evidence that the work was integral to the company’s business, the agency cited Rhea Lana’s admission that the workers were the lifeblood of its sales events, as well as statements from workers indicating that their labor was for the benefit of the company’s general sales operations.
In sum, DOL considered the relevant factors and did not commit a clear error in judgment when applying those factors to the facts; its determination that Rhea Lana’s workers are employees rather than volunteers was not arbitrary or capricious.
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