Donovan v. Kentwood Development Co., Inc.

• Decision Date: 29 June 1982
• Docket Number: Civ. A. No. J-81-708.
• Citation: 549 F. Supp. 480
• Parties: Raymond J. DONOVAN, Secretary of Labor, United States Department of Labor, Plaintiff, v. KENTWOOD DEVELOPMENT COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — District of Maryland

549 F. Supp. 480

Raymond J. DONOVAN, Secretary of Labor, United States Department of Labor, Plaintiff, v. KENTWOOD DEVELOPMENT COMPANY, INC., et al., Defendants.

Civ. A. No. J-81-708.

United States District Court, D. Maryland.

June 29, 1982.

COPYRIGHT MATERIAL OMITTED

Dale J. Belock, Atty., U.S. Dept. of Labor, Philadelphia, Pa., J. Fred Motz, U.S. Atty., Andre M. Davis, Asst. U.S. Atty., Baltimore, Md., for plaintiff.

Alan M. Perlman, Silver Spring, Md., John H. MacVey, Washington, D.C., for defendants.

MEMORANDUM AND ORDER

SHIRLEY B. JONES, District Judge.

The Secretary of Labor filed this action under the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201-219, against Kentwood Development Company, Inc. (KDC) and Charlene Baden, individually and as president of KDC. KDC and Baden were alleged to have failed to pay overtime compensation to 29 employees and overtime and minimum wage to one other employee and to have failed to comply with the recordkeeping requirements of the FLSA. Backpay, liquidated damages, and injunctive relief were sought.

Defendants stipulated that if FLSA coverage was found, backpay was owed to 22 employees for overtime in the amounts claimed. Pretrial Order ¶ 4(b). They also stipulated to an annual gross volume of business in excess of $250,000 for each of the years 1977, 1978, 1979 and 1980. Defendants contested coverage under the FLSA, claimed an exemption from the wage and hour laws for certain employees, disputed the amounts claimed for Martin J. Lobb, and claimed good faith reliance on administrative interpretations of the FLSA. The case was tried to this Court or, November 4, 5, 6 and 25, 1981. The parties submitted posttrial memoranda on February 12, 1982. This opinion constitutes the Court's findings of fact and conclusions of law.

Coverage under the FLSA

The corporate offices of KDC are located in Chevy Chase, Maryland. In 1976 it purchased an apartment complex, Kentwood Apartments, located in Landover, Maryland for conversion to cooperative ownership.¹ KDC operated the development from 1976 to 1980, selling mutual ownership contracts on units and also leasing units with an option to buy. It employed resident managers, rental clerks, maintenance and repair personnel and others during this period. By the end of 1980 all mutual ownership contracts were sold, and KDC ceased operation of the complex.

Sales or lease options were made in Maryland. KDC advertised the lease option program in the Washington Post. Printed fliers advertising the development were distributed in Maryland and the District of Columbia. In 1978, 1979 and 1980 employees of KDC received, handled and worked with goods ordered and received from suppliers in the District of Columbia and Maryland. The goods consisted primarily of equipment such as stoves, refrigerators, and cabinets; and repair or maintenance supplies. One of the main suppliers of general items was General Supply Corporation, Washington, D.C., to which KDC paid $5,805 in 1978, $10,963 in 1979, and $23,986 in 1980 (P.Ex.1). Other purchases were made from Maryland suppliers for goods that had previously traveled in interstate commerce, for example $23,012 for cabinets distributed by a Virginia firm (P.Ex.1).

Charlene Baden is, and was at the relevant times, president of KDC. Her own testimony and that of former employees established that she set its policies and closely controlled operations; she was the boss. She is an employer within the meaning of 29 U.S.C. § 203(d).

The FLSA applies to any "enterprise engaged in commerce or in the production of goods for commerce," 29 U.S.C. §§ 206(a) and 207(a), which is defined, in pertinent part, as an enterprise that has "employee handling, selling or otherwise working on goods or materials that have been moved in or produced for commerce by any person," id. § 203(s), and does a gross volume of business of at least $250,000 per year, id. § 203(s)(1). It is not disputed that the volume test is met. KDC employees handled various goods or materials, some of which had been moved in interstate commerce.

Defendants rely on 29 U.S.C. § 203(i), which defines "goods." After reciting what is included in the definition, the subsection adds, "but does not include goods after their delivery into the actual physical possession of the ultimate consumer thereof other than a producer, manufacturer, or processor thereof." (Emphasis added). KDC contends that its employees handled or worked on goods only after delivery into the physical possession of KDC, the ultimate consumer. In 1974 Congress amended § 203(s) to its present wording, the key change being the addition of "or materials" after "goods." The change was made to clarify that the "handling" clause covered employees who handled goods consumed in their employer's operations, for example, soap used in a laundry. S.Rep. 93-690, 93d Cong.2d Sess. 17. This Court has found no decision of the United States Court of Appeals for the Fourth Circuit construing the amendment with the "ultimate consumer" exception. One other court of appeals and several district courts have held that local businesses whose employees use materials that have moved in interstate commerce are covered. Marshall v. Brunner, 668 F.2d 748, 748-52 (3d Cir.1982); Marshall v. Davis, 526 F.Supp. 325, 326-28 (M.D.Tenn.1981); Marshall v. Baker, 500 F.Supp. 145, 148-51 (N.D.N.Y.1980); Marshall v. Sunshine & Leisure, Inc., 496 F.Supp. 354, 358-59 (M.D. Fla.1980); Brennan v. Jaffey, 380 F.Supp. 373 (D.Del.1974); accord, Dunlop v. Industrial America Corp., 516 F.2d 498, 501-02 (5th Cir.1975) (dictum). Jaffey, Baker and Davis are particularly apposite. Each was an FLSA action against the owner-operator of an apartment complex in which coverage was upheld on the basis of employees' use of cleaning, maintenance and repair supplies in the course of the employer's business of managing the apartments.

A few cases specifically addressed the argument defendants make concerning the ultimate consumer exception of § 203(i) but have rejected it based on the legislative report cited above. Brunner, 668 F.2d at 751-52; Davis, 526 F.Supp. at 326-31; Marshall v. Whitehead, 463 F.Supp. 1329, 1336-38 (M.D.Fla.1978). The legislative history is brief concerning the reason for the 1974 amendment but rather clear that Congress intended to extend coverage to businesses that consumed interstate goods in the course of operation. KDC falls within the scope of the statute.

Defendants argue that Congress could not constitutionally extend coverage of the FLSA to this extent. That argument has been rejected by other courts. Davis, 526 F.Supp. at 328-31; Baker, 500 F.Supp. at 151-52. Congress may regulate intrastate activities that might have a substantial effect upon interstate commerce, e.g., United States v. Darby, 312 U.S. 100, 61 S.Ct. 451, 85 L.Ed. 609 (1941), and substantial effect is measured not only by the effect of the individual acts involved but also their aggregate effect, e.g., Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942). Marshall v. Rose, 616 F.2d 102, 104 (4th Cir.1980). The basis for the 1974 amendments can be determined from S.Rep. 93-690, to clarify Congressional intent to include employees handling goods consumed in their employers' businesses within the Act. The report notes the reason for the handling clause:

The "handling" language was added based on a retrospective view of the effect of substandard wage conditions.

While the original Act recognized the effect of such conditions on subsequent interstate outflow of products, it was not until the 1961 amendments that Congress specifically recognized their effect on the prior interstate inflow, based on the "obvious economic fact that demand for a product causes its interstate movement quite as surely as does production."

S.Rep. 93-690 at 17. Congress had a rational basis for the addition of the "handling" clause, and the same basis extends to the 1974 amendments.

Exemptions claimed

Defendants claimed that eight resident managers and others fell within the FLSA exemption from coverage for administrative employees. The exemption depends on the nature of the employees' duties and the basis of their pay. 29 C.F.R. §§ 541.202-.213 (1979). If employees are actually paid on an hourly rather than a guaranteed salary basis, regardless of the kind of duties performed, they are covered by the wage and hour laws. Id. § 541.212 (incorporating § 541.118). The evidence at trial demonstrated, and defendants conceded in their posttrial memorandum, that the employees for whom the exemption was claimed except Martin Lobb were actually paid on an hourly basis. The exemption does not apply. Plaintiff proved, based on defendants' payroll records, that time and a half for hours worked in excess of forty per week, or 86 hours semimonthly, was not paid.

The situation is different with respect to Martin J. Lobb. His pay was calculated on a draw vs. commission basis. He received a $500 commission on each sale and a $100 commission for every ten lease option contracts he secured. Commissions earned were credited toward a monthly draw of $500, paid $250 semimonthly, which he received regardless of whether he had made any sales for the month. Lobb also received a rent-free townhouse, valued at $200 per month, during the period of full-time employment. Lobb's pay arrangements meet the requirements of 29 C.F.R. § 541.212 (1979), which incorporates 29 C.F.R. § 541.118, in that Lobb received compensation regardless of the number of hours worked.

A final requirement for application of the exemption is that the employee receive a minimum compensation, exclusive of board or lodging, of at least $335.84 semimonthly or $671.67 monthly. Id. § 541.211. The fixed portion of Lobb's salary, exclusive of lodging, did not meet the criteria, and it is the "guaranteed" portion that determines whether the exception applies. See id. § 541.118(b). The exemption does not apply to...