Most court cases filed on the heels of a Department of Labor investigation focus on misconduct by a contractor. In that respect, the Fifth Circuit’s recent decision in Gate Guard Services, L.P. v. Perez, 792 F.3d 554 (5th Cir. 2015), is unusual. The case is the result of an action by a contractor challenging misconduct by the Department of Labor. According to the decision, DOL investigators and attorneys acted unethically, frivolously, and in bad faith. Ultimately, DOL was forced to close the investigation by making a $1.5 million payment to the contractor.

What happened? Gate Guard provides gate attendants at remote drilling sites for oilfield operators. The gate attendants remain at the drilling sites and record the license plates of vehicles entering and leaving the site. Because many locations are isolated, attendants often live on site and Gate Guard hires service technicians to deliver supplies to them. Gate Guard considers attendants to be independent contractors and pays them between $100 and $175 per day.

In July 2010, DOL investigator David Rapstine received a tip that Gate Guard had misclassified its gate attendants as independent contractors instead of employees. If that were true, Gate Guard would be violating the Fair Labor Standards Act by not paying overtime and by not keeping detailed time records. Rapstine had little training or experience in contractor misclassification cases, but he decided to open an investigation. 

DOL’s “investigation”

Rapstine appeared unannounced at Gate Guard’s offices. Even though he knew the company was represented by counsel, he confronted a low-level employee and demanded to see payroll information. He appeared again two weeks later at a previously scheduled conference. What happened at the conference is unclear, but Rapstine emailed to a colleague that he let “them do all the talking and consequently, digging their own grave.”

After conducting only three interviews, Rapstine concluded that Gate Guard owed over $6 million in back wages, nearly the company’s entire net worth.

To support the conclusion he had already reached, Rapstine interviewed a few other gate attendants. He took handwritten notes. Then he composed his own version of their statements and then destroyed the notes.

Rapstine interviewed only a small number of the 400 gate attendants. The interviews were cursory.  Rapstine failed to ask basic questions, such as whether the attendants had declared themselves independent contractors on their tax returns, whether they maintained their own equipment, or whether they worked for Gate Guard’s competitors.

Even when he asked relevant questions, he ignored or discounted responses that contradicted his conclusion. He ignored the fact that Gate Guard did not supervise attendants. He ignored the fact that the attendants found their own relief workers, that they were not restricted from working for competitors, and that they were not evaluated or disciplined based on performance.

When he presented his “findings” to Gate Guard, the company denied wrongdoing. Gate Guard refused to treat the gate attendants as employees.

Rapstine sent the file to his supervisor, who found that Rapstine had committed several violations of DOL policy. Nonetheless, a higher level DOL official informed Gate Guard that an enforcement action was imminent, reasserted DOL’s position on liability, and ordered Gate Guard to treat the attendants as employees.

Gate Guard brings its own action

Instead of giving in to DOL’s demands, Gate Guard sued DOL, in United States District Court seeking a declaration that the company was in compliance with the FLSA. DOL immediately countered with its own FLSA enforcement action for back wages and injunctive relief.

During the litigation, the government opposed nearly every Gate Guard motion and filed its own specious motions.

The government’s conduct worsened as litigation entered the discovery phase. The government used bogus claims of privilege to withheld discoverable information from Gate Guard. The government sent harassing and misleading letters to individual gate attendants. During Rapstine’s deposition, the government attorney objected 102 times and directed Rapstine not to answer 18 times. The government’s lawyer spoke more during the deposition than Rapstine did and was later removed from the government’s team of lawyers.

While the case was pending, the legal basis for DOL’s position also began to erode. Other federal courts reached the conclusion that gate attendants are not “employees” under the FLSA. The Army Corps of Engineers had even classified its own gate attendants as independent contractors. The government nevertheless continued to pursue its allegations against Gate Guard. Eventually, the trial court granted summary judgment to Gate Guard.

Recovery of attorneys’ fees under EAJA

Gate Guard moved to recover attorneys’ fees under the Equal Access to Justice Act. EAJA provides two paths for a prevailing party to recover attorneys’ fees in a case against the government. First, a company with fewer than 500 employees and a net worth of less than $7 million may recover attorney’s fees as long as the government’s position was not “substantially justified.” Fees recovered on this basis are limited to $125 per hour plus cost-of-living adjustments.

Second, EAJA permits any private party to recover attorney’s fees whenever the common law would allow or another statute would allow it. Bad faith conduct is a recognized common-law basis for the recovery of attorney’s fees. While entitlement to fees for bad faith conduct is more difficult to prove, there is no size limit for eligibility and there is no $125/hour cap.

The district court awarded Gate Guard attorneys’ fees under the easier “prevailing party” standard.

The government appealed that decision, and the appellate court agreed that the district court had erred.  But the error was not the one the government had asserted.  The Fifth Circuit held that attorneys’ fees should have been awarded without regard to the $125/hour cap on the basis of the government’s bad faith conduct.

The court explained that “the common-law rule allows for attorneys’ fees . . . whenever a party has ‘acted in bad faith, vexatiously, wantonly, or for oppressive reasons.’” 792 F.3d at 561 (quoting Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 257 (1975). The court found that DOL’s position was poorly documented and legally dubious from the start. Instead of acting responsibly, acknowledging the overwhelmingly contradictory facts, and abandoning the case, the government not only pressed on, but employed abusive litigation tactics.

The court found the following conduct by DOL to have been improper:

  • Assigning an inexperienced and untrained investigator
  • Confronting a company’s low-level employee instead of communicating with company counsel
  • Expressing an intent to destroy a company
  • Conducting a cursory investigation
  • Destroying witness interview notes
  • Interviewing an insufficient number of employees
  • Misstating what a witness said in an interview
  • Discounting or ignoring facts that are favorable to the company
  • Failing to ask relevant questions during an investigation
  • Inflating the amount of damages due
  • Disregarding precedent in similar cases
  • Communicating with a company’s employees in a biased manner
  • Violating internal DOL policy
  • Continuing prosecution when the factual basis for it has eroded

The lower court had found that the government’s legal position was not frivolous because there were facts “pointing in both directions.” But the Fifth Circuit rejected that conclusion. It held that a government claim may be frivolous if the factual inquiries undeniably favor one party and no reasonable person could find otherwise. A finding of frivolousness also takes into account the government’s duty, as prosecutor, to pursue only clearly meritorious enforcement actions. In the view of the Fifth Circuit, DOL had chosen to “defend the indefensible in an indefensible manner.”  792 F.3d at 555.

Gate Guard had incurred about $800,000 in attorneys’ fees to defeat DOL’s action and obtained a judgment for about $565,000 at the trial court. Soon after the Fifth Circuit’s decision, DOL settled with Gate Guard for $1.5 million.