Donovan v. I AND J, INC.

• Citation: 567 F. Supp. 93
• Decision Date: 26 May 1983
• Docket Number: No. CIV-79-885 C,CIV-79-885 C
• Parties: Raymond J. DONOVAN, Secretary of Labor, United States Department of Labor, Plaintiff, v. I AND J, INC., doing business as Baskin Robbins Ice Cream Franchise; and Ida and James Ruttler, Individuals, Defendants.
• Court: U.S. District Court — District of New Mexico

567 F. Supp. 93

Raymond J. DONOVAN, Secretary of Labor, United States Department of Labor, Plaintiff, v. I AND J, INC., doing business as Baskin Robbins Ice Cream Franchise; and Ida and James Ruttler, Individuals, Defendants.

No. CIV-79-885 C

United States District Court, D. New Mexico.

May 26, 1983.

William E. Everheart, Deputy Regional Sol., Max A. Wernick, Atty., Office of the Sol., U.S. Dept. of Labor, Dallas, Tex., Ronald Ross, Asst. U.S. Atty., Albuquerque, N.M., for plaintiff.

Bruce E. Pasternack, Albuquerque, N.M., for defendants.

MEMORANDUM OPINION

CAMPOS, District Judge.

This case was tried to the Court on April 18, 19 and 20, 1983. After careful consideration of the testimony and the exhibits adduced at trial and following a review of the legal authorities which bear upon the various issues raised by the parties, the Court, pursuant to the requirements of Fed.R. Civ.P. 52, enters this Memorandum Opinion as its findings of fact and conclusions of law.

STATEMENT OF THE CASE

This is an action brought by the Plaintiff, Raymond J. Donovan, in his capacity as the Secretary of Labor, pursuant to the provisions of the Fair Labor Standards Act, 29 U.S.C. §§ 201-219 (hereinafter "FLSA"). The Secretary seeks to enjoin the Defendants¹ I & J, Inc., Ida Ruttler and James Ruttler from violating the minimum-wage² and record-keeping³ provisions of the Act as proscribed by 29 U.S.C. §§ 215(a)(2) and 215(a)(5).⁴ The Secretary also seeks to restrain the Defendants from withholding the payment of minimum wages from the date they became due, that is to require the payment of backwages.

FACTUAL SETTING

The Defendants Ida and James Ruttler are residents of Albuquerque, New Mexico, and have been so for all of the period relevant to this controversy. The seeds for the present litigation were sown when the Ruttlers acquired the franchise to a couple of Baskin-Robbins Ice Cream stores with the aid of loans from the Small Business Administration. The Ruttlers obtained the Baskin-Robbins Store # 213 in April of 1973 and Baskin-Robbins Store # 224 on February 15, 1976 (see Plaintiff's Exhibit 1). Throughout this period and to the present time the Ruttlers have exercised total organizational and administrative control over the daily operation of the two stores. Together they constitute the ultimate repository of authority for the business.

On the advice of an officer of Albuquerque National Bank the Ruttlers decided to incorporate the two stores which had previously been sole proprietorships. This organizational transformation was accomplished on March 1, 1977 when ownership of the two Baskin-Robbins stores was transferred to the new corporation, I & J, Inc. in exchange for stock in the corporation. Ida and James are the sole officers of the corporation and together own 100% of its stock. Although the two stores were now both owned by the corporation they retained separate franchise agreements, separate leases, vendor accounts, state tax numbers, and inventory control. In July 1978 I & J, Inc. purchased Baskin-Robbins Store # 3207 (see Plaintiff's Exhibit 2). This store was soon sold in March of 1979 due to the Ruttlers' inability to manage all three stores by themselves.

Ida Ruttler called the Albuquerque office of the Wage and Hour Division (hereinafter "WHD") in February 1977 prior to the March incorporation. She spoke with an unknown employee of the WHD and detailed the current state of their business and the proposed incorporation. Ida told the person from WHD that (1) she and her husband were the sole proprietors of two retail stores which were maintained as separate franchises; (2) the stores individually had gross receipts of less than $250,000,⁵ but together exceeded that amount; (3) the proposed corporation would own both stores. She then asked if the incorporation would alter their present status of nonliability for the payment of minimum wage. Ida was then informed by the WHD employee that the incorporation would not affect that status. This initial inquiry was prompted by her concern that the business reorganization would change wage and hour liability.

After the incorporation Ida was still apparently concerned about I & J's wage and hour liability so, in August 1977, she directed John Gabbel, their accountant, to call the Albuquerque office of WHD. Gabbel did in fact telephone the Albuquerque WHD office and explained the basic business arrangement previously outlined by Ida Ruttler. An unknown female WHD employee then informed Gabbel that given the information he had provided I & J did not have to pay a minimum wage to its employees. Ida repeated his entire sequence within a week of Gabbel's call.⁶ Again, a WHD employee informed her that given the circumstances she described, I & J was exempt from the minimum wage requirements of the Act.

Business for I & J, Inc. proceeded as usual until June 14, 1978 when William Burns, a compliance officer with WHD, contacted Ida and informed her that he was investigating I & J's Baskin-Robbins' stores for possible FLSA violations. Mr. Burns examined sales records at their accountant's office and interviewed some of I & J's employees as part of his investigation. On June 15, 1978 Mr. Burns met with the Ruttlers at their home and reviewed summaries of employee payroll records. At this time he informed the Ruttlers that it was his determination that their business had become subject to the Act as of January 1, 1977 when the 1974 amendment eliminating a dollar volume of sales exemption as per then 29 U.S.C. § 213(a)(2) became effective.⁷ Mr. Burns then advised the Ruttlers that they were operating the stores in violation of the Act and, further, that their business had been liable for minimum wage since January 1, 1977. Therefore, he concluded, they owed employees, who had received a substandard wage, backwages. The Ruttlers, at this time, were told that Tony Chavez, manager of Store # 213, did not fall within the exception provided by 29 U.S.C. § 213(a)(1)⁸ and, therefore, they were in violation of the record-keeping provisions of the Act with regard to Mr. Chavez. Mr. Burns also explained the operative provisions of the law and provided the Ruttlers with some WHD publications. The same day Mr. Burns met the Ruttlers again, this time with their attorney present. Essentially, the WHD's position with regard to the minimum wage and hour liability of I & J, Inc. as determined by Mr. Burns was reiterated.

On August 15, 1978, the Ruttlers and their attorney had a meeting with George Rice, then acting area director of WHD. Although there are certain aspects of this meeting on which the testimony is conflicting, the Court finds that: (1) the payment of backwages was discussed; (2) Mr. Rice was left with the impression that minimum wage and overtime compliance had not yet been achieved; (3) the attorney for the Ruttlers was given until September 29, 1978 to submit a legal response to WHD for the record; (4) the Ruttlers agreed to begin paying prospective minimum wage and overtime if WHD would contact Albuquerque National Bank and the Small Business Administration on the Ruttlers' behalf. It is significant that at no time during this protracted administrative investigation did the Ruttlers make an unconditional offer to pay minimum wage and overtime, nor did they ever attempt to comply with the requirements of the law as outlined to them first by Mr. Burns on June 15, 1978.

After receiving the memorandum from the Ruttlers' attorney, Defendants' Exhibit 13, Mr. Rice concluded that compliance for I & J, Inc. would not be forthcoming. On October 6, 1978, a Joint Review Committee of Mr. Rice and an attorney from the solicitor's office, Mr. William Everheart, examined the file and made an administrative recommendation to submit the case to the solicitor's office for civil action. See Defendants' Exhibit 20. The Regional Office received the file and recommendation of Michael Ward, Area Director, which concurred with the Joint Review Committee's position, on November 14, 1978. See Defendants' Exhibit 21. The file was reviewed and transferred to the Regional Solicitor with a recommendation for civil action on February 12, 1979. See Defendants' Exhibit 22. The file was assigned to Eloise Velucci of the Regional Solicitor's Office on February 13, 1979 and was finally approved for civil action on August 23, 1979. Suit was filed in the United States District Court for the District of New Mexico on November 21, 1979.

The Defendants have raised a series of objections to the Secretary's pursuit of a remedy in this case. These defenses fall under two major sub-categories. First, there are those defenses which suggest that the Ruttlers and I & J, Inc. are either outside the definitional ambit of those businesses covered by the FLSA or that their stores were exempt from the minimum wage and overtime provisions. Second, there are those defenses which the Defendants' claim have arisen because of the Government's conduct. The Court will examine each of these arguments in turn.

"Enterprise" Under 29 U.S.C. § 203(r)

The concept of an enterprise for purposes of coverage under the FLSA first appeared in the 1961 amendments which had been designed to substantially expand the coverage of the Act. Brennan v. Arnheim & Neely, Inc., 410 U.S. 512, 516-17, 93 S.Ct. 1138, 1141, 35 L.Ed.2d 463 (1973); see Hodgson v. University Club Tower, Inc., 466 F.2d 745, 746 (10th Cir.1972). The coverage of the Act is to be liberally construed "to apply to the furthest reaches consistent with congressional direction." Mitchell v. Lublin McGaughy & Associates, Inc., 358 U.S. 207, 211, 79 S.Ct. 260, 263, 3 L.Ed.2d 243 (1959). That this is so should occasion no surprise, for "the Fair Labor Standards Act was enacted to provide a minimal standard of living necessary for the health, efficiency, and general well-being of workers and to prescribe certain minimum standards for working conditions." Brennan v. Plaza Shoe...