Labor & Employment Law Daily Staffing company liable for its low-level employee’s failure to pay overtime; no FLSA right to indemnification or contribution
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Wednesday, March 4, 2020

Staffing company liable for its low-level employee’s failure to pay overtime; no FLSA right to indemnification or contribution

By Kathleen Kapusta, J.D.

The appeals court found no indication that Congress intended to create a right to contribution or indemnification for employers under the FLSA.

Consistent with the law of agency, the Ninth Circuit, affirming the decision of the court below, found that a staffing company that contracts with other companies to recruit employees and place them at jobsites, for which it then handles administrative tasks, was liable for the actions of its low-level employee who, while placed at another company to process payroll, paid all employee hours worked as “regular hours” instead of overtime. And because the employee, for more than a year, dismissed the payroll software’s repeated warnings that employees might not be receiving earned overtime, the violation was willful, said the court, affirming the award of liquidated damages. Finally, rejecting the company’s cross-claim for contribution or indemnification, the court, joining the Second Circuit, held that the FLSA does not imply a right to indemnification for liable employers (Scalia v Employer Solutions Staffing Group, LLC, March 2, 2020, Graber, S.).

Payroll processing. In 2012, Employer Solutions Staffing Group (ESSG) contracted with Sync Staffing, which placed ESSG’s recruited employees at a jobsite run by TBG Logistics unloading deliveries for a grocery store. TBG kept a spreadsheet of employee hours that it sent to Sync and Sync in turn forwarded to ESSG. One of ESSG’s employees, who had been trained by ESSG on the FLSA’s requirements, then processed the TBG payroll.

When the employee received the spreadsheet for the first time, she prepared and sent a report to Sync showing that employees who had worked more than 40 hours a week would receive overtime pay for those hours. A Sync employee, however, told her to pay all the hours as “regular” rather than overtime. In complying with those instructions, the employee dismissed numerous error messages from ESSG’s payroll software. Further, she not only processed this spreadsheet as instructed, she did so for all future spreadsheets she received. When ESSG’s relationship with TBG and Sync ended in July 2014, there were more than 1,000 violations in which employees were not paid overtime earned.

Lower court proceedings. More than two years later, the Secretary of Labor sued ESSG, TBG, Sync, and another company and ESSG brought cross claims for contribution or indemnification against the other defendants. The district court dismissed those claims and after the Secretary reached consent judgments with the other defendants, he moved for summary judgment against ESSG. Granting the motion, the lower court found that ESSG willfully violated the FLSA. Consequently, it ordered the company to pay $78,500 in unpaid overtime wages plus an equal amount in liquated damages.

Liability. On appeal, the Ninth Circuit first rejected ESSG’s assertion that it could not be liable for the actions of a low-level employee. ESSG chose the employee to process TBG’s payroll and it could not “disavow her actions merely because she lacked a specific title or a certain level of seniority in the company,” said the court, and allowing it “to evade liability simply because none of its ‘supervisors’ or ‘managers’ processed the payroll would create a loophole in the FLSA and run counter to the statute’s purpose of ‘protect[ing] all covered workers from substandard wages and oppressive working hours.’”

Willfulness. Further, for over a year the employee dismissed the payroll software’s repeated warnings that employees might not be receiving overtime pay. Nor did she ever receive any explanation from Sync that justified ignoring the warnings, said the court, finding that ESSG, through its agent, recklessly disregarded the possibility that it was violating the FLSA.

And while ESSG argued that an employer can act in good faith while willfully violating the FLSA, the court, citing Ninth Circuit precedent “which aligns with precedent in most other circuits that have reached the issue,” found that because the company’s violations were willful, it could not have acted in good faith. Accordingly, the court affirmed the award of liquidated damages.

Indemnification or contribution. ESSG also asserted that because employers face joint and several liability under the FLSA, the statute implicitly permits indemnification or contribution. However, the appeals court noted that the Supreme Court has rejected the argument that joint and several liability always goes hand-in-hand with contribution. “ESSG does not merely owe a debt to its employees; it committed a wrong against them. Thus, we remain unpersuaded that Congress necessarily codified a right to contribution when it enacted the FLSA,” the court reasoned.

Four-factor test. Turning to the Supreme Court’s four-factor test to determine whether a federal statute that does not expressly provide for a private right of action nonetheless implicitly created that right, the Ninth Circuit noted that the Second Circuit applied the text in Herman v RSR Sec. Servs. Ltd, in finding that the FLSA does not provide a right to contribution or indemnification for liable employees. Applying those factors here, the court found that as to the first factor—the statute’s text—the FLSA says nothing about a right to contribution or indemnification for employers that have violated the statute. Although that silence is not dispositive, the FLSA’s text “suggests just the opposite,” the court observed.

As to the second factor—the underlying purpose and structure of the statutory scheme—the FLSA’s central purpose, the court observed, is to enact wage and hour protections for employees, not employers. As to the third factor—the likelihood that Congress intended to supersede or to supplement existing state remedies—the court, quoting the Second Circuit, explained that the FLSA provides “comprehensive statutory remedies” and it is “not within our competence as federal judges to amend comprehensive enforcement schemes” by adding private remedies not intended by Congress. Noting that the fourth factor—the statute’s legislative history—is also silent on the right to contribution or indemnification for employers, the court found “no indication Congress intended to create a right to contribution or indemnification for employers under the FLSA.”

Federal common law. And while, as an alternative, ESSG asked the court to recognize those remedies under federal common law, the court found that although courts can craft federal common law in limited circumstances, none of those circumstances applied here. Accordingly, it declined to make new common law that recognized those remedies.

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