Reich v. Bay, Inc.

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.

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 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