On July 2, 2015 the U.S. Court of Appeals for the Fifth Circuit held the U.S. Department of Labor (DOL) liable for an employer’s attorneys’ fees resulting from a bungled and abusive investigation of alleged violations of the Fair Labor Standards Act (FLSA). The facts of the case – Gate Guard Services, L.P. v. Thomas E. Perez – are a sobering reminder to employers that the DOL is not a federal agency to be trifled with. On the other hand, the opinion also sounds a warning to the DOL that when they choose “to defend the indefensible in an indefensible manner,” they will be called to task by the courts.

Gate Guard Services, L.P. (GGS) is a Texas company that contracts with oil companies to provide gate attendants to remote drilling sites. In 2010, the DOL began investigating GGS on a tip from a former employee that the company had misclassified some 400 gate attendants as independent contractors in violation of wage and overtime provisions of the FLSA.

The DOL’s lead Wage and Hour Investigator conducted what the Fifth Circuit described as a “cursory” interview process, during which the investigator interviewed fewer than five percent of GGS’ 400 gate attendants. The investigator “failed to ask basic questions relevant to the attendants’ FLSA classification” and “ignored or discounted responses” that supported GGS’ classification of the attendants as independent contractors. The DOL ultimately concluded that GGS had misclassified the 400 gate attendants in violation of the FLSA and demanded that GGS pay over $6 million in back wages and unpaid overtime, an amount slightly more than GGS’ net worth.

GGS sued the DOL in federal district court in Texas, seeking a judicial declaration that it was in compliance with the FLSA. The DOL filed its own enforcement action against GGS and the two cases were ultimately consolidated. GGS sought to recover its attorneys’ fees under the Equal Access to Justice Act, 28 U.S.C. §2412. The trial court found that GGS had correctly classified its gate attendants as independent contractors and therefore had not violated the FLSA wage and overtime provisions. The court awarded GGS over $565,000 in fees on the ground that the DOL’s findings were not “substantially justified.” However, the trial court denied GGS’ request for fees under the “bad faith” provision of the EAJA. Both the DOL and GGS appealed the trial court‘s judgment.

In a blistering opinion, the Fifth Circuit voiced strong disapproval of the DOL’s conduct, not only during its FLSA investigation, but also in the ensuing litigation. The Fifth Circuit noted the DOL investigator “violated numerous internal procedures and ethical litigation practices,” including either shredding or burning notes taken during witness interviews. Moreover, the DOL “opposed nearly every motion – even routine case administration motions – on spurious grounds and filed specious motions of its own.” The Fifth Circuit also pointed out that while the case was pending before the trial court, the very same district court held, in a nearly identical case, that gate attendants are not employees under the FLSA. The DOL even persisted in its assertion that the attendants were FLSA-eligible employees even after learning that the U.S. Army Corps of Engineers – a federal governmental entity – utilizes gate attendants and classifies them as independent contractors, not employees. In light of these circumstances, the Firth Circuit reasoned, “the DOL should have abandoned this litigation” yet it refused to do so.

The Gate Guard Services case is a textbook example of how constitutional “checks and balances” can work to prevent one branch of the government from going rogue and abusing its formidable power. But for the good folks at GGS who have spent the past five years and over $800,000 battling the DOL and trying to manage their workforce and payroll practices through the uncertainties of litigation, it will take some time for life to return to whatever normal was before the DOL came knocking on their door.

Once the DOL’s anticipated new rule significantly increasing the number of employees eligible to receive overtime pay takes effect next year, employers can no doubt expect closer scrutiny by the DOL’s Wage and Hour Division for FLSA violations. They can also expect, with a significantly increased caseload, more time-consuming investigations and longer wait times to learn of DOL decisions on pending investigations. Hopefully, in light of Gate Guard Services v. Perez, employers may also take heart, assured that the DOL’s Wage and Hour Division can and will be held accountable for the manner in which it conducts its affairs.

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