U.S. Court of Appeals for the Tenth Circuit

It is not often when an employer defends a FLSA lawsuit by asserting that it is in an illegal business and therefore immune to suit. Sound funny? Well, that is precisely what a Colorado employer that furnishes security services to legal cannabis growers/sellers has pressed on the Tenth Circuit. The employer’s theory is that the workers are not entitled to allegedly unpaid overtime under the Fair Labor Standards Act because their work is illegal under federal law. The case is entitled Kenney v. Helix TCS, and was argued before the Court of Appeals for the Tenth Circuit.

The Company’s counsel argued that the collective action cannot proceed as the FLSA only applies to legal businesses. The lawyer claimed that all job functions engaged in by the workers amount to trafficking in illegal drugs. This case is fascinating because it highlights the tension between a state legalizing cannabis and its continuing illegality under federal law. The lawyer for the Company argued that this controversy entered the “legally ambiguous” sphere in which legal cannabis businesses operate.

The named plaintiff, an armed security guard who guarded growers and sellers, claimed he worked overtime many weeks and was not paid properly. He sought class certification for all such guards, going back three years. The Company moved to dismiss, arguing that the employee’s work (as he was dealing with a Schedule 1 drug under federal law) violated the federal Controlled Substances Act and was thus outside of FLSA coverage.

The district court Judge denied the motion and observed that other courts have not endorsed this concept. The Judge noted that in other cases involving businesses that violate federal laws, e.g. immigration, courts have ruled that these violations did not mean the businesses could not comply with other federal laws. However, the Judge certified the ruling for immediate appeal and thus it went (quickly) to the Tenth Circuit.

The lawyer for the plaintiff asserted that the FLSA does not have a requirement that employees subject to its jurisdiction must be engaged in “only” legal businesses. There was no outright mention of “lawfulness” in the law and there was nothing in the state statute that voided the dictates of the FLSA.

The Takeaway

Maybe Congress should make an exception to the FLSA for this industry, but it has not done so. Consider the implications of granting the employer’s motion to dismiss—it would be giving a business illegal under federal law an advantage over legal businesses by sanctioning the avoidance of paying overtime.

Hmm. Food for thought…

When plaintiffs file a FLSA collective action, they always claim that the employer acted willfully, so the plaintiff (and class) can reap the benefit of an extra year, a third year, on the statute of limitations. One of the defenses to such a claim is that the employer acted in good faith on the recommendation or advice of its counsel in putting into practice the compensation practices at issue.

When an employer, however, does not take the advice of counsel, then (obviously) the good faith defense to willfulness is lost.  That is precisely what happened in a case entitled Mumby v. Pure Energy Services (USA), Inc., which came out of the Tenth Circuit.  The issue concerned whether an employer could legally pay its field service employees a “day rate.”  As the employer did not take the advice, the extra statute year was found warranted.  The defense was denied because, in a strange twist, the employer claimed it could rely upon and then disregard the advice of its lawyers.  Can’t have it both ways, ruled the Tenth Circuit.

The employees, who worked for an oil company, worked twelve-hour shifts, seven days a week, making a total of eighty-four hours for each work week.  As compensation, they received a lump sum for each day, a so-called “day rate.”  Under the plan, the employees received the same compensation, regardless of the hours worked in any week, which were always in excess of forty (entitling them to overtime payment).  The employer also neglected to keep records of the hours worked, whether on a daily or weekly basis. Although overtime hours were worked, the employer did not pay any premium compensation.

In 2005, a new management team took over and a payroll manager became concerned that the compensation practice did not comply with the FLSA.  The Company then sought an attorney’s advice; the payroll manager confirmed that the method of payment was appropriate, as long as the day rate was separated into straight time and overtime rates and the number of hours worked in a day did not exceed twelve.  The Company, however, ignored the advice and continued not to properly pay employees, i.e. by showing the breakdown of hourly rates and also had employees work more than twelve hours in a day.

Under these facts, the Tenth Circuit refused to allow the employer the benefit of the good faith defense.  That was a costly refusal for the employer as, depending on the number of employees involved and the hourly rates at issue, that extra year could produce hundreds of thousands of dollars of additional liability.  The lesson for employers is plain—-always check with labor counsel conversant in wage hour law as to the legality of certain compensation practices (e.g. classification issues, computation of overtime) and follow the advice.

It pays off on the front end, by effecting compliance with the law and pays off on the back end (if it gets that far) by avoiding a third year of potential liability in a FLSA collective action.