Fifth Circuit Court of Appeals says the agency pushed too far in worker misclassification case

As most employers know, the United States Department of Labor (DOL), along with many other federal and state agencies such as the Equal Employment Opportunity Commission, has focused on pursuing employers for misclassifying employees as independent contractors. In a rare, total rebuke of the agency’s tactics, the Fifth Circuit Court of Appeals in Gate Guard Services v. Perez recently assessed large monetary sanctions against the DOL for a frivolous lawsuit. The court said, “[r]ather than acknowledge its mistakes . . . the government here chose to defend the indefensible in an indefensible manner.”

Gate Guard contracts with oil companies to provide gate attendants for remote drilling sites. The attendants remain at the drill sites, recording the license plates of vehicles entering and leaving the oil fields. Because many locations are isolated, these attendants often live on-site, and Gate Guard employs service technicians to deliver them supplies. Gate Guard considers the attendants independent contractors and pays them between $100 and $175 per day.

After a complaint by one gate guard, the DOL initiated an investigation that eventually turned into a claim that a class of workers had been misclassified. An inexperienced investigator handled the DOL investigation, and it was, at best, “cursory” according to the court. The court said,

At nearly every turn, this Department of Labor ("DOL”) investigation and prosecution violated the department’s internal procedures and ethical litigation practices. Even after the DOL discovered that its lead investigator conducted an investigation for which he was not trained, concluded Gate Guard was violating the Fair Labor Standards Act (“FLSA”) based on just three interviews, destroyed evidence, ambushed a low-level employee for an interview without counsel, and demanded a grossly inflated multi-million dollar penalty, the government pressed on. In litigation, the government opposed routine case administration motions, refused to produce relevant information, and stone-walled the deposition of its lead investigator.

Based on only 17 interviews, the investigator concluded Gate Guard misclassified 400 gate attendants as independent contractors and failed to abide by the FLSA’s minimum wage and overtime requirements. The DOL demanded Gate Guard pay over $6 million in back wages and unpaid overtime.

Despite the poor investigation, the DOL sued Gate Guard when it refused to pay the demanded amount. Not only did Gate Guard not have to pay any back wages or overtime, but the district court awarded Gate Guard over $565,000 in attorneys’ fees. The Equal Access to Justice Act allowed Gate Guard to recover attorneys’ fees because the government’s position was not “substantially justified.” The district judge refused to find bad faith and award more. However, the Fifth Circuit determined the DOL had acted in bad faith and remanded the case to the district court to increase the attorneys’ fees the DOL would be required to pay to Gate Guard. Rather than wait for the district court to increase the penalties, the DOL settled with Gate Guard for $1.5 million.

Although employers must remain wary of the risks of worker misclassification and should carefully evaluate any independent contractor relationships to ensure they comply with applicable law, the Gate Guard case is a reminder that the DOL’s authority is not limitless and courts are empowered to penalize the agency for exceeding the bounds of the laws it enforces.