Donovan v. Sureway Cleaners
25 Wage & Hour Cas. (BNA) 105, 656 F.2d 1368 (1981)
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Rule of Law:
Whether a worker is an employee or an independent contractor under the Fair Labor Standards Act (FLSA) is determined by the economic reality of the relationship, not contractual labels. Furthermore, the FLSA's statute of limitations for bringing new actions does not apply to civil contempt proceedings used to enforce a pre-existing injunction.
Facts:
- Sureway Cleaners, a laundry and dry cleaning business, operated numerous retail outlets through individuals it called 'agents.'
- Following a 1971 court decision, Sureway issued new contracts to these agents, relabeling them as independent contractors and, in some cases, franchisees.
- Under the new contracts, Sureway continued to own or lease the retail outlets, supply fixtures, pay property taxes, and conduct the majority of the advertising.
- Sureway required the agents to have all cleaning performed at Sureway's plants, effectively controlling a core aspect of the business.
- The agents made no significant capital investment in the outlets and their work required no specialized skills, with training lasting only five days.
- While agents theoretically could set their own prices and hours, in practice they generally adhered to Sureway's suggested price list and maintained similar operating hours.
- After implementing the new contracts, Sureway ceased paying overtime compensation to the agents.
Procedural Posture:
- In 1971, the Secretary of Labor sued Sureway Cleaners in federal district court for violations of the Fair Labor Standards Act's overtime and record-keeping provisions.
- On October 29, 1971, the district court held that Sureway's 'agents' were employees and granted a permanent prospective injunction to prevent future violations.
- On September 22, 1975, the Secretary filed an application to enforce the 1971 injunction, alleging Sureway was in civil contempt for failing to pay overtime.
- The district court found Sureway in contempt, concluding the agents were still employees and ordered Sureway to pay the withheld overtime compensation.
- Sureway (appellant) appealed the district court's contempt finding to the U.S. Court of Appeals for the Ninth Circuit; the Secretary of Labor is the appellee.
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Issue:
First, do workers operating under Sureway Cleaners' revised contracts qualify as 'employees' rather than 'independent contractors' under the FLSA's economic reality test? Second, does the FLSA's statute of limitations for unpaid overtime actions apply to a civil contempt proceeding brought by the Secretary of Labor to enforce a pre-existing injunction?
Opinions:
Majority - Reinhardt, Circuit Judge.
First, yes. The workers are employees because, as a matter of economic reality, they are dependent upon the business to which they render service. The court applied a six-factor test analyzing: 1) control, 2) opportunity for profit or loss, 3) investment, 4) skill, 5) permanency, and 6) whether the service is an integral part of the business. The court found that Sureway exercised control over all meaningful aspects of the business, the agents bore no risk of capital loss and had no meaningful investment, the job required no special skills, the relationship was permanent, and the agents' work was an integral part of Sureway's operations. The changes in the post-judgment contracts were deemed superficial and insufficient to alter the fundamental economic dependence of the agents on Sureway. Second, no. The Fair Labor Standards Act's statute of limitations does not apply to a civil contempt proceeding. A contempt proceeding is not the commencement of a new, independent action but is instead a part of the original cause of action, instituted to remedy disobedience of a court's existing order. The purpose of a statute of limitations is to protect employers from 'wholly unexpected liabilities,' but an employer already under a prospective injunction is on notice of its obligations, so future liability for violations is not unexpected. Applying the statute would undermine the effectiveness of injunctions and reward employers who successfully conceal their non-compliance.
Analysis:
This decision solidifies the principle that courts will prioritize the substance of a working relationship over its form when applying FLSA protections. It serves as a strong precedent against attempts by employers to reclassify employees as independent contractors through cosmetic contractual changes that do not alter the underlying economic realities. The ruling on the statute of limitations is also highly significant, as it preserves the long-term enforceability of FLSA injunctions, ensuring they remain a potent tool for the Department of Labor without the need for repeated investigations and litigation every few years.
