Donovan v. Sureway Cleaners

• Decision Date: 21 September 1981
• Docket Number: No. 79-4778,79-4778
• Citation: 656 F.2d 1368
• Parties: 25 Wage & Hour Cas. (BN 105, 25 Wage & Hour Cas. (BN 195, 92 Lab.Cas. P 34,075 Raymond DONOVAN, * Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. SUREWAY CLEANERS, a corporation, Sexton Cleaners, Inc., a corporation, and Pay-Less Cleaners, a corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1368

656 F.2d 1368

25 Wage & Hour Cas. (BN 105, 25 Wage & Hour

Cas. (BN 195,

92 Lab.Cas. P 34,075

Raymond DONOVAN, ^* Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. SUREWAY CLEANERS, a corporation, Sexton Cleaners, Inc., a corporation, and Pay-Less Cleaners, a corporation Defendants-Appellants.

No. 79-4778.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 11, 1981.

Decided Sept. 21, 1981.

Dennis R. Murphy, Diepenbrock, Wulff, Plant & Hannegan, Sacramento, Cal., for defendants-appellants.

Barbara E. Kahl, Atty., Washington, D. C., for plaintiff-appellee.

Appeal from the United States District Court for the Eastern District of California.

Before HUG, POOLE and REINHARDT, Circuit Judges.

REINHARDT, Circuit Judge.

Sureway Cleaners ¹ appeals from a district court determination that (1) despite changes in the contracts with its "agents," the "agents" continue to be "employees" rather than independent contractors within the meaning of the Fair Labor Standards Act, 29 U.S.C. §§ 201-219, and (2) the statute of limitations, 29 U.S.C. § 255(a), applicable to the underlying overtime violations does not apply to a civil contempt proceeding brought by the Secretary to enforce an outstanding injunction granted in a previous action under section 17 of the Act, 29 U.S.C. § 217. We affirm.

Sureway is engaged in the laundry and dry cleaning business. Prior to 1971, Sureway owned or leased a total of 105 retail outlets. Most of these outlets were operated by "agents" pursuant to a written agreement (the pre-judgment contract). Today Sureway owns or leases ninety-one retail outlets. Twenty-five of the outlets are company stores in which Sureway concedes the workers are employees. However, Sureway maintains that the remaining sixty-six are operated by "agents" who are independent contractors and not employees.

In 1971 the Secretary of Labor brought suit under section 17 of the FLSA ² against Sureway, claiming that Sureway had violated the overtime compensation ³ and recordkeeping provisions of the FLSA. The Secretary sought an injunction to prevent further violations of the Act by Sureway. On October 29, 1971, the district court held that Sureway's "agents" were employees rather than independent contractors. The court therefore ruled that the employees were entitled to overtime compensation. A permanent prospective injunction was granted.

Thereafter, Sureway issued a new contract (the first post-judgment contract) in an attempt to convert its court-determined "employees" into independent contractors. Of the sixty-six retail outlets, forty now operate pursuant to the first post-judgment contract. The remaining twenty-six operate under a second post-judgment contract (a franchise agreement) which was issued after a 1975 determination by the State of California that Sureway was offering a franchise. ⁴

On September 22, 1975, the Secretary filed an application for enforcement of the 1971 injunction because Sureway had failed to pay overtime compensation to its employees. The Secretary disputed Sureway's assertion that its workers were independent contractors. Instead, the Secretary argued that they were still employees within the meaning of the Act and thus entitled to overtime compensation. The district court agreed with the Secretary and found Sureway in contempt of the 1971 injunction. The court ordered Sureway to pay its employees the withheld overtime compensation.

On appeal, Sureway argues that the post-judgment contracts with its retail outlets had substantially changed the employment relationship so as to make the employees genuine independent contractors. Alternatively, Sureway claims that even if it was properly found in contempt of the 1971 injunction, its liability for unpaid overtime compensation is limited by the statute of limitations contained in section 255(a).

I. EMPLOYEE OR INDEPENDENT CONTRACTOR

In determining whether a person is an "employee" for purposes of social legislation such as the FLSA, the courts have identified a number of factors that should be considered. Although the list is not exhaustive, the court in Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748 (9th Cir. 1979), identified the following relevant factors:

1) The degree of the alleged employer's right to control the manner in which the work is to be performed; 2) the alleged employee's opportunity for profit or loss depending upon his managerial skill; 3) the alleged employee's investment in equipment or materials required for his task, or his employment of helpers; 4) whether the service rendered requires a special skill; 5) the degree of permanence of the working relationship; 6) whether the service rendered is an integral part of the alleged employer's business.

Id. at 754 (footnote omitted). ⁵

Neither the presence nor the absence of any individual factor is determinative. Whether an employer-employee relationship exists depends "upon the circumstances of the whole activity," Rutherford Food Corp. v. McComb, 331 U.S. 722, 730, 67 S.Ct. 1473, 1477, 91 L.Ed. 1772 (1947), and ultimately, whether, as a matter of economic reality, the individuals "are dependent upon the business to which they render service." Bartels v. Birmingham, 332 U.S. 126, 130, 67 S.Ct. 1547, 1550, 91 L.Ed. 1947 (1947).

The district court, after an extensive analysis of the facts, and under the factors identified in Real v. Driscoll Strawberry supra, concluded that Sureway's "agents" were in fact employees within the meaning of the Fair Labor Standards Act. After reviewing each of the six factors considered by the district court, we agree with the district court that Sureway's "agents" were, as a matter of economic reality, dependent on Sureway and therefore within the protections and benefits afforded by the Act.

A. Control

The post-judgment contracts require that all work taken in by the "agents" be performed by Sureway's plants. The "agents" therefore have no control over where to send the items they receive for cleaning or repair, and are denied the power to search out the best price. In addition, Sureway selects the location of the retail outlets, owns or leases them, supplies the fixtures, furnishes the supplies, pays all real and personal property taxes levied on the outlets, does most of the advertising, ⁶ unilaterally imposes the terms of the contracts, ⁷ pays all utility bills which it then charges to the "agent's" accounts, and requires the "agents" to charge the advertised price on any advertised specials. Further, an agent may not assign his rights under the contract unless Sureway consents. Although the district court found that the "agents" could now set their own hours and retail prices, it also found that in practice most outlets were open similar hours and that Sureway supplied a "suggested price list" which was usually adhered to.

Sureway argues that the district court failed to recognize the "extensive powers and options" exercised by several of its "agents." ⁸ This argument, however, ignores the "circumstances of the whole activity" and the "economic reality" of sixty-four "agents" and focuses instead on specific factors relating to two. The district court was correct in its analysis of this factor when it suggested that "(i)n evaluating control, the test is not what the 'agent' could do but what in fact the 'agent' does do." E.g., Usery v. Pilgrim Equipment Co., Inc., 527 F.2d 1308, 1312 (5th Cir.), cert. denied, 429 U.S. 826, 97 S.Ct. 82, 50 L.Ed.2d 89 (1976); Mednick v. Albert Enterprises, Inc., 508 F.2d 297, 302-03 (5th Cir. 1975). Thus, the fact that Sureway's "agents" possess, in theory, the power to set prices, determine their own hours, and advertise to a limited extent on their own is overshadowed by the fact that in reality the "agents" work the same hours, charge the same prices, and rely in the main on Sureway for advertising.

Regarding the issue of control in Usery v. Pilgrim, the court there stated: "Control is only significant when it shows an individual exerts such a control over a meaningful part of the business that she stands as a separate economic entity." 527 F.2d at 1313. In the instant case, we agree with the district court's conclusion that Sureway, rather than its "agents," exercises control over the meaningful aspects of the cleaning business.

B. Risk of Profit and Loss

"Agents" make no capital investment and therefore bear no risk of a significant loss; most of the factors that determine profit (advertising, price setting, location, etc.) are controlled by Sureway. Although "agents" are responsible for bad checks, theft losses, and the disposal of abandoned clothing, the district court found these to be burdens that Sureway chose to place on them. See Usery v. Pilgrim, 527 F.2d at 1313. Thus, the lack of opportunity for loss of capital investment and the control by Sureway of the major factors determining profit indicate that in this respect also the "agents" are economically dependent upon Sureway.

C. Investment

"Agents" make no capital investment. A new "agent" simply buys out the old "agent's" stock, and gets his or her money back when customers pick up their belongings. A similar investment plan was properly characterized by the court in Pilgrim as "nothing more than a method of settling accounts between outgoing and incoming operators" and has no relationship to the cost of setting up and operating a retail outlet. 527 F.2d at 1313-14.

The district court further found that while the "agents" pay more rent under the post-judgment contracts, they also get more return on the first $100 of cleaning. The end result of these contractual changes is that the latter change offsets the former. ⁹ Based on these facts, the district court was correct in concluding that Sureway, and not the "agents," supplies the necessary risk capital to run the retail outlet.

D. Skills

Neither long training nor highly developed skills are required to...