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DOL penalized for ‘bad faith’ conduct

published in McAfee & Taft EmployerLINC | September 30, 2015

“5th

By Michael F. Lauderdale

The Department of Labor recently agreed to pay an employer $1.5 million for costs and attorneys’ fees it had incurred in a lawsuit filed by the DOL. The 5th Circuit Court of Appeals determined that the employer was entitled to recover from the federal agency its fees under the Equal Access to Justice Act. Specifically, the appeals court determined that the “government’s conduct before and during the litigation amounted to bad faith.” This case is particularly instructive for employers in making sure they receive a fair and impartial investigation.

Bad behavior from start to finish

The DOL investigated Gate Guard Services to determine whether the gate attendants it provided to oil companies’ drill sites were improperly classified as independent contractors. Interestingly, the DOL investigator received a “tip” from a former Gate Guard employee who was also a “drinking companion.” The investigator notified Gate Guard that an investigation was underway and scheduled an opening conference with the employer. However, a week before the opening conference, the investigator appeared unannounced at Gate Guard’s offices and demanded payroll information, even though he was aware Gate Guard was represented by counsel. The opening conference was held, and the investigator subsequently sent an email to a colleague stating, “Wish you could have been there, it was a good example of being quiet and letting them do all the talking and consequently, digging their own grave.”

The investigator interviewed three employees and immediately began calculating a penalty. He concluded that more than $6 million in back wages were owed by Gate Guard, which was nearly the company’s entire net worth. After the calculation, the investigator proceeded with additional interviews, taking handwritten notes and composing formal interview statements. Once the statements were completed, he destroyed his original notes. The court found that the investigation was “cursory” and that the investigator failed to ask basic questions relevant to the classification issue. When relevant questions were asked, the investigator ignored or disputed the responses.

Next, the investigator presented his findings to Gate Guard, demanding payment of the $6 million in penalties. After the closing conference, the investigator’s DOL supervisor reviewed the file and found several violations of internal policy, such as beginning back wage calculations before determining a violation had occurred and not seeking voluntary compliance before demanding penalties. Even more troubling, the penalty was inflated by $4 million because the investigator erroneously determined that sleeping and eating time was compensable.

Gate Guard and the DOL filed lawsuits against one another over the investigation and its findings. During the ensuing litigation, the DOL opposed nearly every motion filed by Gate Guard on spurious grounds and filed its own spurious motions. During the investigator’s initial deposition, the DOL attorney objected 102 times, and on 18 occasions instructed the investigator not to answer questions posed by the employer’s counsel. The conduct was so disruptive that the deposition was stopped after only 45 minutes, and Gate Guard sought relief from the court. The DOL subsequently agreed that its offending attorney would not attend further depositions, that it would not coach witnesses, and that the investigator would appear for another deposition and further questioning by Gate Guard. The appeals court described other DOL conduct as “belligerent litigation tactics.” The conduct included refusing to produce witness statements (even though some were offered as evidence), sending harassing and misleading letters to gate attendants, and not agreeing to an order protecting Gate Guard’s trade secrets and confidential information.

According to the court, more troubling was the fact that the legal basis for the DOL’s position was eroding. The court had previously ruled that gate attendants were not FLSA employees. Further, the DOL continued its prosecution of Gate Guard after learning the Federal Army Corps of Engineers – like Gate Guard – utilized gate attendants and classified them as independent contractors, not employees.

When it awarded attorney fees to the employer, the court said, “the government’s position was poorly documented and legally dubious at the commencement of the litigation,” and “the government’s intransigence in spite of its legally deteriorating case, combined with extreme penalty demands and outrageous tactics together support bad faith finding.”

Takeaways for when the DOL comes knockin’

So, what are the lessons that an employer can learn from this decision when faced with a DOL investigation?

  1. Immediately advise the DOL that you are represented by counsel and that all communications, including requests for information, must go through counsel.
  2. During the opening conference, counsel should be present. The opening conference is a time to listen and to work with the DOL regarding its requests for information. The opening conference is not a time for the DOL to conduct fact finding or discovery. The investigator should describe the intended scope and duration of the inspection and deliver the first request for documents and information.
  3. A preservation notice should be provided to the DOL requiring it to keep any and all evidence and information generated regarding the investigation including handwritten notes, electronic correspondence, etc.
  4. The DOL will likely request interviews of employees. The employer has a right to be present for interviews of supervisory employees. Request a list of any employees that the DOL seeks to interview. An employer should insist that a reasonable sample of employees be interviewed if it believes that the DOL is not obtaining accurate information regarding the subject matter of the investigation.
  5. Determine whether the DOL has conducted investigations into the same issues that are the subject of your investigation. Research any court opinions that would support the employer’s position.
  6. Request the specific basis for the calculations on an employee-by-employee basis of any penalty assessments.
  7. If the employer believes that it has complied with the FLSA, consideration should be given to filing a declaratory action in federal court. However, prior to filing a declaratory action, a final conference must have been conducted with the DOL demanding a penalty and declaring the employer is in violation of the FLSA.
  8. Once litigation is commenced, if the DOL engages in tactics similar to what occurred in the Gate Guard litigation, the DOL should be put on notice that the employer will seek recovery of fees if such conduct continues.
  9. In any subsequent lawsuit, discovery should be undertaken to ensure the investigation was properly conducted, to ensure the DOL’s own policies and procedures were followed.

Gate Guard Service, L.P., et al. v Thomas E. Perez, Case No. 14-40585 (5th Cir.)