United States Court of Appeals,
Fifth Circuit.
No. 93-7505.
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.
June 17, 1994.
Appeal from the United States District Court for the Southern
District of Texas.
Before WOOD,* SMITH, and DUHÉ, 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. § 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
*
Circuit Judge of the Seventh Circuit, sitting by
designation.
1
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
2
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
1
Although BBI's offices were recorded as the home of Kenneth
Berry, Allen Berry, the president, worked out the fourth floor of
the Berry building.
2
Marvin L. and Laura Berry are the parents of Kenneth,
Allen, Dennis, and Marvin G. Berry.
3
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.
4
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 907 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
5
single enterprise for the purposes of 29 U.S.C. § 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. §
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. § 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
6
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 907 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 C.F.R.
§ 779.306; see also Brennan v. Veterans Cleaning Serv., Inc., 482
F.2d 1362, 1366-67 (5th Cir.1973) (discussing the meaning of
"related" and "auxiliary and service activities"). Bay and BBI had
extensive related activities for the purposes of Section 203(r).
2. Unified Operation or Common Control
Section 203(r) also requires proof of either common control
or unified operation of the companies. 29 U.S.C. § 203(r); Dunlop
v. Lourub Pharmacy, Inc., 525 F.2d 235, 236 (6th Cir.1975). The
Code of Federal Regulations provides guidance as to what
constitutes "common control":
The word "control" may be defined as the act of fact of
controlling; power or authority to control; directing or
restraining domination. "Control" thus includes the power or
authority to control.... [It] includes the power to direct,
restrict, regulate, govern, or administer the performance of
the activities. "Common" control includes the sharing of
7
control and it is not limited to sole control or complete
control by one person or corporation. "Common" control
therefore exists where the performance of the described
activities are controlled by one person or by a number of
persons, corporations, or other organizational units acting
together.
29 C.F.R. § 779.221.
The similarities between those in control of Bay and BBI were
extensive:
Berry Family Member Bay Positions BBI Positions
_________________________ ______________________________
____________________
Kenneth Vice-President, Assistant Secretary, and
Director Director
Dennis Vice President Director
Marvin G. Vice President Director
Marvin L. Director & Owner
Laura Director & Owner
Allen Sole Owner
11/88-12/90;
Director
The only individuals unrelated to the Berry family who held
management positions in BBI were Howard Kovar, James G. Gilbert,
Jr. and Donald Spangler, vice-presidents; and Charlene Washburn,
Secretary-Treasurer.
In determining whether Bay and BBI had common control, "the
determinative question is whether a common entity has the power to
control the related business operations." Donovan v. Easton Land
& Development, Inc., 723 F.2d 1549, 1552-53 (11th Cir.1984), citing
8
Shultz v. Mack Farland & Sons Roofing Co., 413 F.2d 1296, 1301 (5th
Cir.1969). At the time Bay and BBI entered into the labor
arrangement at issue, three of the Berry brothers held positions of
control in both companies, and members of the Berry family owned
both companies. These facts support the conclusion that Bay and
BBI were under common control. See Mack Farland, 413 F.2d at 1301
("Common control may exist ... despite the separate management of
the individual establishments.").
Bay and BBI also had a unified operation. The Code of
Federal Regulations also informs on the definition of a unified
operation:
Whether there is unified operation of related activities
will thus be of concern primarily in those cases where the
related activities are separately owned or controlled but
where, through arrangement, agreement or otherwise, they are
so performed as to constitute a unified business system
organized for a common business purpose.
29 C.F.R. § 779.220 (1993). Bay performed many different functions
for BBI, including advertising for recruitment, payroll, and
bookkeeping. As the district court explained, Bay and BBI
were mutually parasitic. Both Bay and BBI received benefits
because of their unification. Bay saved money by having BBI
administer the worker's compensation, insurance and
unemployment coverage. BBI benefitted from its relationship
with Bay through reduced administrative costs, increased rent,
and combined recruitment costs.
These facts suggest that BBI and Bay were engaged in a unified
business operation. See Easton Land, 723 F.2d at 1552.
3. Common Business Purpose
Having established that Bay and BBI were engaged in related
activities and had unified operation or common control, it becomes
9
manifest that Bay and BBI also shared a common business purpose.
A common business purpose exists if "the separate corporations
engaged in complementary businesses, and were to a significant
degree operationally interdependent." Donovan v. Janitorial
Services, Inc., 672 F.2d 528, 530 (5th Cir.1982). See also Donovan
v. Grim Hotel Co., 747 F.2d 966, 971 (5th Cir.1984); Brennan v.
Veterans Cleaning Serv., Inc., 482 F.2d 1362, 1367 (5th Cir.1973).
As previously explained, Bay and BBI complemented and depended on
each other; Bay filled its labor needs with BBI employees, and
constituted over 907 of BBI's business. Bay and BBI do not raise
any arguments that challenge this conclusion. Because all three
elements of an enterprise are satisfied, the district court
correctly held that Bay and BBI were a single enterprise for the
purposes of the FLSA from February 2, 1988 to December 31, 1990.
B. Violation of the FLSA
Whether the compensation method used by Bay and BBI violated
the FLSA is the central issue presented by this appeal. The
defendants rely on Durkin v. Santiam Lumber Co., 115 F.Supp. 548
(D.Or.1953), as persuasive authority that their compensation method
was permissible. In Santiam Lumber, truck drivers who owned their
own truck received two payments: their salary and a rental payment
for use of their truck. Id. at 549. When the drivers were
required to work overtime, their rental payment decreased and their
wage rate increased. Id. The district court held that an
owner-operator can occupy a dual role, as "both an entrepreneur
owning capital equipment and a laborer operating such equipment."
10
Id. at 550. The court reached that conclusion because the
non-labor costs of operating log-hauling trucks decreased as use
increased. Id.3
The district court in this case, however, found that Santiam
Lumber was wrongly decided. The district court reasoned that
Santiam Lumber treated the employees as independent contractors,
which they were not. Instead, the district court relied on Donovan
v. Global Divers & Contractors, Inc., 1982 WL 2162 (W.D.La.1982),
and Goldberg v. Maine Asphalt Road Corp., 206 F.Supp. 913
(D.Me.1962).
In Global Divers, the employer paid its employees an hourly
rate plus overtime compensation, and a gear rental fee. 1982 WL
2162, at *1. After the employee worked a specific number of hours,
in most cases the daily rental fee was reduced by the amount of
overtime compensation paid to the employee on that day. Id. The
court held that this practice violated the FLSA, explaining that
the FLSA was intended to reduce the burden of working lengthy hours
and to put financial pressure on employers to spread employment,
and that Global Divers' compensation scheme circumvented these
goals. Id. at *3. See also Walling v. Helmerich & Payne, Inc.,
323 U.S. 37, 42, 65 S.Ct. 11, 14, 89 L.Ed. 29 (1944).
Similarly, in Maine Asphalt the employer hired employees who
owned their own trucks. 206 F.Supp. at 913. The employer paid
3
Although we have not conducted an in-depth study of the
log-hauling industry, we wonder whether the district court in
Santiam Lumber took into account the depreciation surely
associated with increased truck usage in reaching its cost
determination.
11
each driver their wages and a truck rental fee. Id. When the
employee worked overtime their wage was increased by 507 and the
truck rental was reduced by an equal amount. Id. The court held
that this practice violated the FLSA, noting the absence of an
independent economic or other reason for the offsetting rates of
compensation. Id. at 915-16.
The defendants attempt to distinguish Global Divers and Maine
Asphalt by pointing out that in those cases, employees were
required as a condition of employment to furnish their own
equipment, whereas they were not at Bay and BBI. This argument is
without merit for two reasons. First, nothing in the Maine Asphalt
opinion reveals that employees were required to furnish their own
equipment—the defendant's claimed distinction therefore does not
exist. Second, giving employees the option of either renting their
equipment out at reduced rates after 40 hours or not renting it out
at all is a false choice. Bay and BBI could no more do that under
the FLSA than give their single-hand welders (those without rigs)
the choice of either forgoing additional overtime compensation or
finding a different employer.
The reasoning of Global Divers and Maine Asphalt fits well in
this case. As Global Divers and Maine Asphalt noted, one of the
primary purposes of the FLSA is to financially pressure employers
to spread employment. Permitting negligible net pay increases for
overtime hours worked, as occurred with Bay and BBI, would
eviscerate the incentive provided by the FLSA to use more workers
for forty hours rather than fewer workers for longer hours.
12
Although the defendants argue that the number of rig hours (the
hours that the rig is utilized in any given week) did not
necessarily correspond with the man hours (amount of time that the
rig welders actually work) for each employee, a review of the
record suggests that on the whole the number of man hours and rig
hours largely offset, in effect avoiding the overtime provisions of
the FLSA. The net effect was to provide less than time-and-a-half
compensation to Bay and BBI employees, violating the FLSA.
The defendants also argue that their method of computing wages
was not a scheme to circumvent the FLSA, but rather was necessary
to compete in the marketplace. That argument is fallacious,
however, for all employers competing in the marketplace must comply
with the overtime provisions of the FLSA. The defendants have
provided no credible economic or other explanation of why the
reduction in rental rates largely offsets the overtime pay
increases mandated by the FLSA. The district court therefore
correctly concluded that the compensation method of Bay and BBI
impermissibly circumvented the FLSA.
C. Wilfulness
As a final issue, the defendants argue that their violations
of the FLSA were not willful, and therefore were subject to a
two-year, rather than three-year, statute of limitations. See 29
U.S.C. § 255(a). The proper test for determining whether a party
acted willfully is contained in McLaughlin v. Richland Shoe Co.,
13
486 U.S. 128, 133, 108 S.Ct. 1677, 1681, 100 L.Ed.2d 115 (1988).4
In Richland Shoe, the Court held that violations under the FLSA are
willful if the employer "knew or showed reckless disregard for the
matter of whether its conduct was prohibited by the statute." Id.
The conduct of Bay and BBI falls within the Richland Shoe
definition of wilful. Bobby Scott, the District Director for the
local Wage and Hour office, contacted Don Spangler, one of the
defendants' representatives, and informed him that the overtime
payment practices of Bay and BBI violated the FLSA. Continuing the
payment practices without further investigation into the alleged
violation could constitute "reckless disregard" of the FLSA. Bay
and BBI had sufficient time after hearing from Mr. Scott to
investigate their payment practices and correct the problem. The
fact that Bay continued a substantially similar arrangement with
PCI after BBI became defunct bolsters this conclusion. The
district court correctly decided to apply the three-year statute of
limitations.
The district court order granting summary judgment in favor of
the plaintiff, enjoining the defendants from paying less than
4
The district court incorrectly applied a slightly different
test. To find willfulness "entails a determination of whether
"there is substantial evidence in the record to support a finding
that the employer knew or suspected that his actions might
violate the FLSA." Donovan v. Sabine Irrigation, 695 F.2d 190,
196 (5th Cir.1983). The court in Sabine Irrigation cited Coleman
v. Jiffy June Farms, Inc., 458 F.2d 1139, 1142 (5th Cir.1971),
cert. denied, 409 U.S. 948, 93 S.Ct. 292, 34 L.Ed.2d 219 (1972),
as the source for the test on willfulness. Jiffy June, however,
was criticized and rejected by the Richland Shoe Court because it
"virtually obliterates any distinction between willful and
nonwillful violations." Richland Shoe, 486 U.S. at 132-34, 108
S.Ct. at 1681-82.
14
time-and-a-half overtime compensation, and awarding their employees
$152,186.93 in withheld overtime compensation is AFFIRMED.
15