Reich v. Bay, Inc.

• Decision Date: 17 June 1994
• Docket Number: No. 93-7505,93-7505
• Citation: 23 F.3d 110
• Parties: 128 Lab.Cas. P 33,104, 2 Wage & Hour Cas. 2d (BNA) 136 Robert B. REICH, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. BAY, INC., BBI, Inc., a Corporation; and Allen Berry, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 110

23 F.3d 110

128 Lab.Cas. P 33,104, 2 Wage & Hour Cas. 2d

(BNA) 136

Robert B. REICH, Secretary of Labor, United States Department of Labor, Plaintiff-Appellee, v. BAY, INC., BBI, Inc., a Corporation; and Allen Berry Defendants-Appellants.

No. 93-7505.

United States Court of Appeals Fifth Circuit.

June 17, 1994.

Neil Martin, Gardere & Wynne, Houston, TX, for defendants-appellants.

William J. Stone, Paula Wright Coleman, Counsel, U.S. Dept. of Labor, Washington, DC, Anthony Parham, Office of Sol., U.S. Dept. of Labor, Dallas, TX, for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before WOOD, ^* SMITH, and DUHE, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

This appeal arises from proceedings the Secretary of Labor (the Secretary) instigated against Bay, Inc. (Bay), BBI, Inc. (BBI), and BBI president Allen Berry for violations of the Fair Labor Standards Act of 1938, 29 U.S.C. Sec. 201 et seq. (FLSA). Bay is a general contractor that provides construction management, materials, equipment, and other services to refineries. BBI, now defunct, was a subcontractor that provided labor and labor supervision to Bay and other companies. From February 2, 1988 until December 31, 1990, Bay obtained labor through BBI in order to minimize worker's compensation and insurance expenses.

BBI provided two different types of employees to Bay, rig welders and single-hand welders. Rig welders owned their own welding rigs and rented them to Bay for a separately negotiated fee. Single-hand welders, rather than owning their own welding rigs, would utilize equipment owned by Bay. BBI paid both classifications of welders predetermined hourly rates for straight-time and overtime. In addition to the hourly wage payments BBI paid to rig welders, Bay negotiated equipment rental rates with the rig welders. Thus, in each pay period each rig welder received two checks, one from Bay for rig rental and one from BBI for earned wages.

The rate structure for rig welders changed significantly for overtime hours. Although BBI paid rig welders time-and-a-half for time worked exceeding forty hours, Bay correspondingly reduced the rental rate for rigs used more than forty hours a week to offset roughly the increased hourly wage rate. Because the reduction in rental fees offset overtime wage increases, rig welders effectively received little overtime compensation, although in name BBI was paying them the required time-and-a-half.

The Secretary charged Bay and BBI with violating the FLSA, contending that their pay structure intentionally circumvented FLSA overtime provisions. Bay and BBI argue that their practice of discounting rig rental rates simply was the result of economic considerations, and that wages and rental fees are two distinct and independent transactions. Bay and BBI also contend that they are not sufficiently interrelated to justify examining in conjunction Bay's rig rental rates and BBI's hourly wage rates.

Regarding the interrelatedness of Bay and BBI, the two companies share the same principal office and place of business, a building wholly owned by Berry Contracting, Inc. ¹ The building is identified only by the sign "Berry." One person was responsible for maintaining the business records of both Bay and BBI, and did so in the same location of the Berry building. BBI paid an administration fee for payroll and accounts receivable to Bay.

In addition, members of the Berry family owned and controlled both companies. ² The officers of Bay include: Ken Luhan, President; K.L. Berry, Vice-President and Assistant Secretary; D.W. Berry, M.G. Berry, Robert M. Davis, Howard Kovar, James G. Gilbert, and Don Spangler, Vice Presidents; and Charlene Washburn, Secretary-Treasurer. Bay directors include M.L. Berry, Laura Berry, and K.L. Berry. Marvin and Laura Berry own all shares of Lone Star Equipment, Inc. (Lone Star), which owns Berry Contracting, Inc., which in turn owns Bay.

BBI also was owned by the Berry family. From December 1987 to November 1988, brothers Kenneth, David, and Martin Berry owned BBI. Kenneth was president, and David and Allen were vice-presidents, and Marvin was a vice-president, assistant secretary, and treasurer. From November 1988 until the demise of BBI in December 1990, another Berry brother, Allen, wholly owned BBI. Allen served as president, and his wife Cathy became secretary and treasurer. Kenneth, David, Marvin, and Allen served as directors of BBI throughout its existence.

The following "Memorandum of Understanding" also illustrates how Bay and BBI were interrelated:

MEMORANDUM OF UNDERSTANDING

Pertaining to Pay Rate for

Rig Welders and their Rigs

I ... understand and agree that while employed as a Rig Welder (WR) by Bay, Inc./BBI, Inc. that my pay will be calculated as follows:

FIRST 40 HOURS (each pay period) for welder at $10.50 per hour; first 49 hours for Rig (Equipment) at $12.00 per hour for a total of $22.50 per hour.

HOURS OVER 40 (Overtime) (each pay period) for welder at $15.75 per hour; hours over 40 for Rig (Equipment) at $7.00 per hour for a total of $22.75 per hour.

Other BBI employment forms contained the name of a Bay supervisor or the name or initials of Bay's personnel manager, Jim Hedges. These forms contained wage information, lease rate information for the rig welders' rigs, and federal withholding information. Bay used these forms to calculate the proper wage information and rental amount due to rig welders. Although rig welders received wage checks from BBI, Bay was responsible for calculating the wages pursuant to a payroll servicing agreement with BBI. Bay also performed the following other functions for BBI: (1) paid for and ran advertisements; (2) helped interview prospective employees; (3) supervised BBI employees in some instances, and had the authority to fire; (4) scheduled, assigned, and reviewed the work of BBI's welder employees; and (5) performed random drug testing of BBI employees.

Although BBI had one other client, BBI went out of business in December, 1990, when Bay stopped using BBI employees. Bay accounted for at least 90% of BBI's business. From January 1, 1991 to December 31, 1991, Bay used the services of Professional Constructors, Inc. (PCI) to obtain labor, and after January 1, 1992, ceased the practice of "subcontracting" an intermediate company to obtain labor.

On December 24, 1990, the Secretary filed this action against Bay, BBI, and Allen Berry, the president of BBI, seeking injunctive relief under FLSA Sections 7 and 15(a)(2). The Secretary seeks to enjoin defendants from willfully violating the overtime and record-keeping provisions of the FLSA and "to restrain the defendants from withholding the back wages determined to be due their employees for defendants' willful violations of the Act, an injunction to prohibit future violations of the Act's overtime and record-keeping provisions, and prejudgment interest."

Both parties moved for summary judgment. The district court denied the defendants' motion, but granted the Secretary's motion. The court entered judgment for the Secretary in the amount of $152,186.93 plus prejudgment interest, and enjoined defendants from future violations of the overtime and record-keeping provisions of the FLSA. The defendants filed a timely appeal from the district court judgment.

ANALYSIS

A. Single Enterprise

At the outset, we must determine whether Bay and BBI were a single enterprise for the purposes of 29 U.S.C. Sec. 203(r). Whether Bay and BBI were a single enterprise is a question of law, which we review de novo. Donovan v. Weber, 723 F.2d 1388, 1391-92 (8th Cir.1984); Dunlop v. Ashy, 555 F.2d 1228, 1229 (5th Cir.1977). To establish that two entities functioned as a single enterprise, the Secretary must demonstrate that the entities: (1) engaged in related activities; (2) were a unified operation or under common control; and (3) shared a common business purpose. 29 U.S.C. Sec. 203(r); Ashy, 555 F.2d at 1229. In addressing each of these elements, we must construe liberally the FLSA while applying it "with reason and in a common sense fashion." Ashy, 555 F.2d at 1234.

1. Related Activities

Because the FLSA does not define the term "related activities," the district court relied on 29 C.F.R. Sec. 779.206, citing S.Rep. No. 145, 87th Cong., 1st Sess. at 41, for a definition. That section of the Code of Federal Regulations indicates that

activities will be regarded as 'related' when they are the same or similar or when they are auxiliary or service activities such as warehousing, bookkeeping, purchasing, advertising, including, generally, all activities which are necessary to the operation and maintenance of the particular business.... The Senate Report on the 1966 amendments makes it plain that related, even if somewhat different, business activities can frequently be part of the same enterprise, and that activities having a reasonable connection with the major purpose of an enterprise would be considered related.

Id.

Under this definition the district court properly concluded that Bay and BBI engaged in related activities. The two companies shared office space under one name, "Berry," the family name of the owners of both companies. Bay and BBI also shared several officers and directors. Bay provided BBI with bookkeeping, payroll, recruitment, and advertising services. Both companies kept business records in the same area, and the same individual controlled the records of both companies.

Although Bay is in the business of leasing equipment and BBI was in the business of providing labor, two different purposes, the two entities operations were inextricably linked. Supplying Bay with labor constituted 90% of BBI's business, Bay received the majority of its blue collar labor from BBI, and BBI closed its shop when Bay ceased utilizing its services. The examples discussed in Code of Federal Regulations support this conclusion. See 29...