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Acosta v. Wellfleet Communications, LLC

United States District Court, D. Nevada

November 8, 2017

R. ALEXANDER ACOSTA Secretary of Labor, United States Department of Labor, Plaintiff,
v.
WELLFLEET COMMUNICATIONS, LLC, et al., Defendants.

          ORDER

          GEORGE FOLEY, JR. United States Magistrate Judge

         This matter is before the Court on Defendants' Emergency Motion to Quash Plaintiff's Subpoena Duces Tecum on JPMorgan Chase Bank, N.A., Wells Fargo, N.A., and G&S Tax and Accounting Services, Inc. (ECF No. 39); and Motion for Protective Order (ECF No. 41), filed on September 11, 2017. Plaintiff filed his Opposition (ECF No. 46) on September 19, 2017. The Court conducted a hearing in this matter on September 21, 2017. Defendants filed a Reply (ECF No. 54) on September 27, 2017.

         BACKGROUND

         1. Nature of Claims and Defenses.

         Plaintiff has brought this action “to secure unpaid wages and damages for employees who worked daily shifts at a Las Vegas calling center, working the phones for a group of interrelated Las Vegas telemarketing companies, but who were not paid minimum wage for the hours they worked.” First Amended Complaint (ECF No. 44), pg. 2:4-6. Plaintiff alleges that Defendants operated telemarketing companies that sold long distance telephone products for telephone companies such as AT&T, Verizon and Birch Communications. Id. at pg. 3, ¶ 4. Defendants engaged individuals to sell their long distance telephone products. Defendants called these individuals “Direct Sellers” and classified them as independent contractors. Defendants and the workers entered into written contracts, entitled “Independent Contractor Agreement for Direct Seller, ” which stated that the workers were independent contractors, not employees, and that Defendants would not withhold any federal, state, or other taxes, including income tax, social security tax, FICA, Medicaid and unemployment tax, and that the workers would not be eligible for unemployment benefits. See Defendants' Motion to Dismiss or Alternatively Motion for Summary Judgment (ECF No. 64), pgs 4-6.[1]

         Defendants argue that their treatment of the workers as independent contractors complied with 26 U.S.C. § 3508(a) which states that “[f]or purposes of this title, in the case of services performed as a qualified real estate agent or as a direct seller - (1) the individual performing such services shall not be treated as an employee, and (2) the person for whom such services are performed shall not be treated as an employer.” The statute defines a “direct seller” as a person who is engaged in the trade or business of selling (or soliciting the sale of) consumer products in the home or otherwise than in a permanent retail establishment; substantially all of the remuneration for the performance of the services is directly related to sales or other output, rather than the number of hours worked; and the services are performed pursuant to a written contract between such person and the person for whom the services are performed, and which provides that the person will not be treated as an employee with respect to such services for Federal tax purposes. § 3508 (b)(2)(A), (B) and (C).

         Defendants assert that prior to the Department of Labor's investigation, their telemarketing business was audited by the State of Nevada which approved the “Independent Contractor Agreement for Direct Seller” as a legal operating document. Id. at pg. 2. Pursuant to the agreements, Defendants paid each worker commissions based on the sales actually completed. Id. at pg. 6. They did not pay the workers based on the number of hours worked, and consequently did not maintain records regarding the actual hours worked by the workers. Defendants state that after Plaintiff commenced its investigation, they complied with its demand to treat their telephone sales workers as employees. Defendants thereupon began keeping records regarding the employees' work hours and paid them minimum wages and overtime in compliance with the FLSA. They assert that the only remaining issues in this case are the amounts, if any, owed to employees who were not paid minimum wages or overtime prior to Defendants complying with Plaintiff's demand.

         One of the principal issues in this case is the applicable statute of limitations period. 29 U.S.C. § 255(a) provides that an action for unpaid minimum wages or overtime compensation must be commenced within two years after the cause of action accrues, except that a cause of action arising out of a willful violation may be commenced within three years after the cause of action accrues. Plaintiff's complaint against Defendants Wellfleet Communications and Allen Roach was filed on October 7, 2016. Defendants argue that they had a good faith belief that their call center workers qualified as independent contractors and, therefore, they can only be liable for unpaid minimum wages or overtime that accrued within two years before the filing of the complaint.

         Plaintiff responds by noting that the FLSA contains the broadest definition of “employee” under the law. See United States v. Rosenwasser, 323 U.S. 360, 362, 65 S.Ct. 295, 296 (1945). Courts have adopted an expansive interpretation of the definitions of “employer” and “employee” under the FLSA in order to effectuate its broad remedial purposes. Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748, 754 (9th Cir. 1979). Courts apply the economic reality test which considers a number of factors to distinguish employees from independent contractors. These factors include: (1) the degree of the alleged employer's right to control the manner in which the work is to be performed; (2) the alleged employee's opportunity for profit or loss depending upon his managerial skill; (3) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) whether the service rendered is an integral part of the alleged employer's business. The presence of any individual factor is not dispositive. Rather the determination of employee or independent contractor status depends upon the circumstances of the whole activity. Id.

         Plaintiff argues that the Internal Revenue Code provision regarding direct sellers does not apply to the determination of whether an individual is an employee or independent contractor under the FLSA. In Esquivel v. Hillcoat Properties, Inc., 484 F.Supp.2d 582, 584 (W.D.Tex. 2007), the district court rejected the application of 26 U.S.C. § 3508 in an FLSA action, stating as follows:

By its terms, § 3508 applies only to Title 26, the Internal Revenue Code. Defendants have cited no authority whatsoever for the proposition that a classification for income tax purposes has any application to the determination of employee status under the FLSA. Even if this were a factor to be considered, it would not supplant the five-factor fact-intensive test used to determine whether, as a matter of economic reality, the individuals in question are economically dependent upon the business to which they render their services.

See also Heidingfelder v. Burk Brokerage, LLC, 2010 WL 4364599, at *4 (E.D.La. Oct. 25, 2010) (relying on Esquivel to reject application of § 3508 to determine employee status under the FLSA); and Serino v. Payday California, Inc., 2010 WL 1678302 (9th Cir. April 27, 2010) (unpublished) (stating generally that the provisions of the Internal Revenue Code and court opinions interpreting those provisions do not bear on the definition of “employer” under the FLSA).

         In support of his argument that Defendants' call center workers were employees and not independent contractors under the economic reality test, Plaintiff makes the following factual allegations: The call center workers used computers, software and other equipment provided by Defendants to make calls. Defendants gave the workers a script that they were trained on and required to follow, which included information on the products Defendants were selling and their prices. Defendants determined the price of the products and services sold. Defendants' managers monitored the workers' calls to ensure that they stayed within the parameters of the script. Defendants required the workers to make calls from the call center and they were not allowed to make calls from home. Defendants gave the workers only a brief training before they began working. Defendants determined the rates they would pay the workers, which they listed on a pay scale attached to the form contracts the workers were required to sign. Defendants did not deduct anything from sales commissions. Defendants' payment records showed that some workers were only paid $3 during a week and there were 5, 788 instances in which a call center worker received less than $100 during a week. The call center was open from 7:00 a.m. to 7:00 p.m. and Defendants established a morning shift and afternoon shift. Workers worked regular shifts of five days-a-week, Monday through Friday, and had the option to work on Saturday. Some workers regularly worked 10-12 hours a day and Saturdays to make more sales. Plaintiff's Response to First Motion to Dismiss/Summary Judgment (ECF No. 7), pgs 10-1l.

         Plaintiff argues that Defendants' violations of the FLSA were willful and, therefore the three-year statute of limitations applies. Under McLaughlin v. Richland Shoe Co., 486 U.S. 127, 133, 108 S.Ct. 1677, 1681 (1988), “[a] violation of the FLSA is willful if the employer ‘either knew or showed a reckless disregard for the matter of whether its conduct was prohibited by the [FLSA].'” Plaintiff argues that Defendants' own evidence, namely their independent contractor agreements, demonstrate that they deliberately attempted to evade their obligations under the FLSA. Plaintiff argues that Defendants failed to submit admissible evidence showing that they consulted with a lawyer about the legality of treating the workers as independent contractors. Plaintiff's Response (ECF No. 7), at pg. 24. Plaintiff also argues that the statute of limitations should be equitably tolled because Defendants' wrongful conduct prevented the employees from asserting their claims for payment of minimum wages and overtime. Defendants did this by having the workers sign the independent contractors agreements which deceived them about their employment status. Id. at pg. 25 (citing Stoll v. Runyon, 165 F.3d 1238, 1242 (9th Cir. 1999) and Henchy v. City ...


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