Court Orders DOL to Pay Employer’s Attorneys’ Fees in Agency’s Bungled Misclassification Prosecution

Nearly 239 years after the Continental Congress declared a set of self-evident truths paving the way for a system of checks and balances, the United States Fifth Circuit Court of Appeals checked the United States Department of Labor (“DOL”), requiring it to pay an anticipated balance of $800,000.00 in attorneys’ fees to a Texas business. The Fifth Circuit held the DOL responsible for attorneys’ fees under the Equal Access to Justice Act’s (“EAJA”) bad faith provision on the grounds the DOL “chose to defend the indefensible in an indefensible manner.”

This matter dates back to 2010 when the DOL began investigating Gate Guard, L.P. a Texas company that contracts with oil companies to provide gate attendants at remote drilling sites. The DOL’s investigation alleged Gate Guard had violated wage and hour laws under the U.S. Fair Labor Standards Act (“FLSA”) by misclassifying employees (and thus not paying for all hours worked or overtime compensation). After conducting what the Fifth Circuit described as a “cursory” interview process, the DOL summarily concluded Gate Guard violated the FLSA, ordered Gate Guard to comply with the FLSA’s minimum wage and overtime provisions, and demanded that it pay a multi-million dollar penalty. The DOL further warned Gate Guard that an enforcement action was imminent if it refused to comply.

Rather than sit back and wait for the DOL to come to his doorsteps, Gate Guard’s owner Bert raised the ante by going on the offensive. Gate Guard filed a lawsuit in the United States District Court for the Southern District of Texas seeking a declaration that (i) Gate Guard was in compliance with the FLSA because its guards were independent contractors, not employees; and (ii) it is entitled to attorney’s fees under the EAJA in fighting off the DOL’s bad faith and frivolous claims.

During the same time the Gate Guard matter was pending, Senior District Judge John. D. Rainey decided in a nearly identical lawsuit across the hall that gate attendants are, in fact, not employees under the FLSA, but rather are independent contractors. In reaching his decision, Judge Rainey opined “that the underlying purpose of the FLSA would not be frustrated by a finding that Plaintiffs are not employees entitled to the protections of the FLSA.” Despite this ruling, the Gate Guard litigation pressed forward for a year thereafter until it was resolved on summary judgment in favor of Gate Guard. The District Court denied Gate Guard its attorney’s fees application based on EAJA’s bad faith provision, 28 U.S.C. § 2412(b), however, it did grant Gate Guard more than $565,000 in litigation fees under the EAJA’s provision requiring a court to award a EAJA-eligible prevailing party against the United States fees where the court does not find that the position of the United States was substantially justified, 28 U.S.C. § 2412(d). (Not all employers are eligible to receive EAJA fees; only those with a net worth of less than $7 million eligible.)

As is occasionally the case, neither side was entirely satisfied, and both appealed to the Fifth Circuit.

The Fifth Circuit voiced its disapproval with the DOL’s conduct not only during the investigation but throughout each step of the litigation, holding that “government’s conduct… was sufficiently egregious to warrant an award under” both EAJA’s substantial justification and its bad faith provision. The Fifth Circuit cited several procedural missteps in support of its decision, such as the government’s inadequate investigation, its refusal to produce relevant information during litigation, and continuing its prosecution even after it discovered that another federal agency utilizes gate attendants and classifies them as independent contractors.

What does all this mean?

For one thing, if you’ve followed this far, it means you have an extraordinary ability to keep up with acronyms. For the DOL, it means it is going to have to pay a significant chunk of change at a time it can ill afford to do so. The DOL faces looming budget cuts based on proposed legislation working its way through Congress. For employers on the other hand, the Fifth Circuit decision comes at a time where proposed FLSA overtime changes are anticipated to result in a shift in exempt status for approximately 4.6 million workers. Thus, even though FLSA provisions may expand to provide access to a broader spectrum of employees, the Government’s responsibility to properly investigate alleged violations of wrongdoing and comply in good faith with the litigation process remains intact. Fear not people of America, the Fifth Circuit is not afraid to play its role in our system of checks and balances. As the decision eloquently explains, it remains “better to acknowledge an obvious mistake than defend it. When the government acknowledges mistakes, it preserves public trust and confidence.”