Zheng v. Liberty Apparel Co.:

A New Standard to Determine “Joint Employer” Status under the FLSA

By Ellen C. Kearns*

Introduction

On December 20, 2003, the Second Circuit Court of Appeals issued a significant decision that has the potential to impact employers who contract out some aspect of their production process.  The decision, Zheng v. Liberty Apparel Co.,[1] held that the federal trial court in the Southern District of New York had applied the wrong legal standard in determining that a garment manufacturer was not a joint employer of twenty-six New York City garment workers who had not been paid minimum wage or overtime pay for their work.  This article explores many facets of the case — factual, legal, and various advocacy positions — analyzes the outcome and offers some comments on its implications for the future.

The Federal District Court Case in Zheng

The Case as Presented to the District Court

The non-English-speaking plaintiffs all worked in a factory in New York’s Chinatown.  They were employed by six different contractors who were doing business at the factory.  The plaintiffs’ job was to stitch and finish garments which included sewing buttons and labels into garments, cuffing and hemming the garments and hanging the garments.  They were directly employed by the contractors, who hired them at piece rates and paid them to assemble clothing for numerous manufacturers, including Liberty Apparel Company.  When the contractors failed to pay the workers thousands of dollars in wages, the plaintiffs sued the contractors, Liberty Apparel Company (“Liberty”), and its two principals, Albert Nigri and Hagai Laniado (hereinafter referred to as the “Liberty Defendants”) under the Fair Labor Standards Act (“FLSA”).  They also sued under various New York state laws that addressed minimum wage and overtime requirements, the requirement to pay on a weekly basis, and the prohibition against making unauthorized deductions.  According to plaintiffs, the owner of the factory closed up shop and fled to Virginia, leaving them with no means of recourse.[2]  So, the plaintiffs dismissed their claims against the contractors.[3]

The Liberty Defendants moved for summary judgment on all claims against them on the ground that the twenty-six plaintiffs were not their employees.  Plaintiffs cross-moved for summary judgment, seeking a determination that they were jointly employed by the contractors and the Liberty Defendants, because they worked predominantly on the manufacturers’ garments, they performed a line job that was integral to the production of the manufacturer’s product, and their work was frequently and directly supervised by the manufacturers’ agents.[4] The evidence relied upon by the plaintiffs to show a joint-employment relationship included the following.

Plaintiffs claimed that 70 to 75 percent of their work during the time period at issue (March 1997 through April 1999) had been done for Liberty.  Plaintiffs alleged that they knew that they were working for Liberty, based on the labels that were sown into the garments and the specific lot numbers that came with the garments.[5]

Liberty employees oversaw the assembly process, visited the factory several times a week for up to three hours at a time, and urged the workers to work harder and faster.  Various plaintiffs presented affidavits supporting these claims, identifying “a man named Ah Sen and a Taiwanese woman” whom they claimed visited the factory regularly and exhorted the plaintiffs to work faster.  The affidavits also alleged that Liberty representatives, as opposed to employees of the contracting companies, inspected their work and gave instructions directly to the workers if corrections needed to be made.[6]

The Liberty Defendants responded to this evidence as follows.  They asserting that during the time period in question, the percentage of Liberty work performed by the contractors at issue was between 10-15 percent.  This figure was derived from the plaintiffs’ handwritten notes.[7]  Albert Nigri, a principal of Liberty, provided an affidavit to the court that stated that Liberty’s quality control person made brief visits to assemblers’ factories and was instructed to speak only with the owner of the contracting companies or with his wife, and not to the employees.  Nigri further asserted that Liberty representatives were instructed to spend just thirty minutes at each of the assemblers’ worksites.  Finally, Nigri stated that Liberty did not employ two quality control persons at the same time, and did not employee a man as a quality control person.[8]

Liberty is considered a “jobber,” that is, a manufacturing company that contracts out the last phase of its production process.  The Second Circuit describes the entire production process as follows:

First, Liberty employees developed a pattern for a garment, cut a sample from the pattern, and sent the sample to a customer for approval.  Once the customer approved the pattern, Liberty purchased the necessary fabric from a vendor, and the vendor delivered the fabric to Liberty’s warehouse.  There, the fabric was graded and marked and spread out on tables, and, finally, cut by Liberty employees.

After the fabric was cut, Liberty did not complete the production process on its own premises.  Instead, Liberty delivered the cut fabric, along with other essential materials to various contractors for assembly.  The assemblers, in turn, employed workers to stitch and finish the pieces, a process that included sewing the fabrics, buttons, and labels into the garments, cuffing and hemming the garments, and, finally hanging the garments.[9]

Liberty’s arrangement with the contractors required the contractors to assemble the garments to meet Liberty’s specifications.  During the time period at issue, Liberty used as many as thirty to forty assemblers, including the contractor defendants in this case.  As noted in the Second Circuit opinion, Liberty did not seek out assemblers; rather, assemblers came to Liberty’s warehouse looking for assembly work.  In order for these assemblers to obtain work, they had to sign a form agreement.[10]

Second Circuit Precedent Informing the District Court’s Decision

In Carter v. Duchess Community College,[11] an inmate at the Fishkill Correctional Facility (“FCF”) participated in a program conducted by Dutchess Community College (“DCC”), under which the inmate acted as a teaching assistant to the regular staff.  (The inmate was chosen for this role because he had a four-year college degree.)  The inmate alleged that he was compensated by DCC at well below the federal minimum wage in violation of FLSA; DCC claimed that it had no employer/employee relationship with the inmate, and was not required to pay him the federal minimum wage.  The district court in Carter agreed, found that DCC was not a joint employer with the NY prison system, and dismissed the case. 

However, the Second Circuit reversed, holding that the ultimate control exercised by New York State prison officials over inmates did not preclude finding an employer-employee relationship between the inmate and the state community college within the meaning of the FLSA.  The Second Circuit then set forth four factors to be used to determine joint employment status: does the employer (1) have the power to hire and fire the employee; (2) supervise and control the employee’s work schedule or conditions of employment; (3) determine the employee’s rate of pay and method of pay; and (4) maintain employment records of the employee.[12]  The Second Circuit did not apply these factors in Carter, noting “We do not hold one way or the other on that ultimate issue.”[13]  It remanded the case to the district court for further proceedings including appropriate discovery proceedings.[14]

The District Court’s Decision in Zheng

In Zheng, District Court Judge Richard Casey applied the four factors enunciated by the Second Circuit in Carter to the Liberty Defendants, and concluded that the Liberty Defendants were not joint employers under the FLSA.  The lower court found that the Liberty Defendants had no power to hire and fire the plaintiffs, did not supervise or control their work schedules, did not determine the plaintiffs’ rates of pay or method of payment, and maintained no employment records for the plaintiffs.[15] On that basis, the district court granted the Liberty Defendants motion for summary judgment.[16]

Public Reaction

Following the district court decision, there was a storm of protest from various advocacy groups, representing the interests of immigrant workers.  On January 16, 2003, some 200 women gathered at a rally in front of the Federal Court House in Manhattan.  The women carried signs demanding that the U.S. Court of Appeals for the Second Circuit re-examine the district court decision in Zheng.[17]  Jim Reef, attorney for the plaintiffs said: “Everybody knows that you can’t get redress from contractors.   If the courts aren’t willing to say that the workers are really employed by the manufacturers, then there isn’t going to be any remedy for these wage and hour violations.”[18]  According to the plaintiffs’ advocates “the system of contracting, which allows employers to maximize their profit margins without responsibility, might come under scrutiny with a legal victory.  The implications could include a more clearly defined understanding of the FLSA laws, which might spread throughout all sub-contracting systems — not just the garment industry, but industrial and service industries as well.”[19]

The Second Circuit’s Decision in Zheng

At oral argument before Circuit Judges Winter, Leval and Cabranes in the Zheng case, the judges questions gave an indication that the court might be moving the law in a different direction.  According to those present, the judges appeared to be well-versed on the subcontracting system in the garment industry, and on some of its deleterious affects on contract workers.[20]

Eleven months later, the court issued its decision.  Judge Cabranes wrote the  unanimous opinion, introducing a new test to determine “joint employer” status.  The Second Circuit opined that if the definition of “employee” is to be given a broad application, that application might cover the Liberty Defendants in this case, even though they did not meet the Carter test for being an employer.

Under the broad language of 29 U.S.C. § 203(g), as interpreted in Rutherford Food Corp. v. McComb,[21] a district court must look beyond traditional agency principles before declaring that the entity is not an employer under the FLSA.  Accordingly, although an entity’s exercise of an employer’s formal prerogatives — hiring and firing, supervising schedules, determining rate and method of payment, and maintaining records — may be sufficient to establish joint employment under the FLSA, it is not necessary to establish joint employment.[22]

It suggested a new test for “joint employer” status, a test that requires consideration of four factors: (1) the “competing economic reality” tests; (2) the language of the statute; (3) the Supreme Court’s decision in Rutherford Food Corporation v. McComb,[23] and (4) a review of Second Circuit precedents – Carter and Herman v. RSR Security Services Ltd.[24]  A brief summary of the court’s deliberations on each of these matters is set forth below.

Competing Economic Reality Tests

The FLSA defines an employee as “any individual employed by an employer.”[25]  The FLSA provides that an entity “employs” an individual if it “suffer[s] or permit[s]” that individual to work.[26]  In United States v. Rosenwasser,[27] the  Supreme Court quoted from Senator Black’s statement on the Senate floor in which he said that the term “employee” in the FLSA had been given the “broadest definition that has ever been included in any one act.”[28]

The Supreme Court first used the words “economic reality test” to determine whether an individual was an “employee” or an independent contractor under the FLSA in Goldberg v. Whitaker House Cooperative.[29]  In that case, the Court found that home-worker-members of a cooperative, that made and sold knitted and embroidered goods, were employees of the cooperative and not independent contractors.[30]

The members are not self-employed; nor are they independent, selling their products on the market for whatever price they can command.  They are regimented under one organization, manufacturing what the organization desires, and receiving the compensation the organization dictates.[31]

The Court explained that “economic reality rather than ‘technical concepts’ is . . . the test of employment” under the FLSA.[32]

The Second Circuit began its analysis in Zheng by noting that it has applied two different tests to determine whether an employment relationship exists.[33]   In Carter, the Second Circuit borrowed factors from Bonnette v. California  Health & Welfare Agency,[34] to set forth a four factor test for determining whether a college and the New York prison system could be “joint employers” of an inmate.[35]  The Second Circuit then noted that it had recently applied those four factors in Herman v. RSR Security Services Ltd.,[36] where it affirmed a trial court’s judgment that the company’s chairman and co-owner qualified as a “joint employer” along with the company.  “We ratified the District Court’s judgment because ‘evidence in the record support[ed] at least three of the four [Carter] factors.’”[37]

The Second Circuit then noted that between its decisions in Carter and Herman, it had decided Brock v. Superior Care, Inc.,[38] in which it affirmed a district court’s finding that nurses, engaged by a health-care service were employees of the service and not independent contractors.  In reaching the conclusion that the nurses there were “employees,” the Second Circuit did not apply the Carter factors, but “a different, more expansive test.”[39]  The Superior Care test was drawn from a number of federal cases that distinguished an “employee” from an “independent contractor,”[40] taking into consideration:

·         the degree of control exercised by the putative employer over the workers,

·         the workers’ opportunity for profit and loss and their investment in the business,

·         the degree of skill and independent initiative required to perform the work

·         the permanence or duration of the working relationship, and

·         the extent to which the work is an integral part of the employer’s business.[41]

As the Second Circuit noted, the Superior Care factors, “particularly factors two and three” have been used primarily to distinguish independent contactors from employees, because unlike the Carter factors, they do not bear directly on whether workers who are already employed by a primary employer are also employed by a second employer.  The Superior Care factors primarily assist the courts to determine whether individual workers are “independent of all employers.”[42]

Judge Cabranes then set forth an important element of the Second Circuit decision: “Despite this distinction between [the test for] joint employment cases, and [the test for] independent contractor cases we have never suggested that in analyzing joint employment, the four Carter factors alone are relevant, and that other factors that bear on the relationship between workers and potential joint employers should be ignored.”[43]

Judge Cabranes then cited with approval Lopez v. Silverman,[44] a case with a factual background similar to the Zheng case.  In Lopez, the court considered seven factors in determining whether the garment workers in that case were jointly employed by a “jobber” and the contractor that, in fact, paid their wages.

(1) the extent to which the workers perform a discrete line-job forming an integral part of the putative joint employer's integrated process of production or overall business objective;

(2) whether the putative joint employer's premises and equipment were used for the work;

(3) the extent of the putative employees' work for the putative joint employer;

(4) the permanence or duration of the working relationship between the workers and the putative joint employer;

(5) the degree of control exercised by the putative joint employer over the workers;

(6) whether responsibility under the contract with the putative joint employer passed "without material changes" from one group of potential joint employees to another; and

(7) whether the workers had a "business organization" that could or did shift as a unit from one putative joint employer to another.[45]

Judge Cabranes notes that the court in Lopez chose these factors because it concluded that the four Carter factors, standing on their own, could not constitute the “economic reality” test, “because they rarely permit a finding of joint employment ‘outside of situations involving direct corporate subsidiaries or managing administrators.’”[46]  Similarly, as Judge Cabranes noted, the Lopez court that the five Superior Care factors could not, on their own, make up the “economic reality test” because those factors, when applied to joint employment cases, are “equally skewed in the opposite direction.”[47]

Although Lopez had been decided four years earlier and involved a similar fact pattern, the district court in Zheng expressly declined to follow it, instead holding that in order to be held liable under the FLSA’s economic reality test “an alleged employer must, at a minimum, possess the power to control the workers in question.”[48]  The district court in Zheng concluded that the Carter test, remained “the law of the Circuit for determining whether an entity possessed the requisite control over workers, and that Lopez could not be reconciled with Carter.”[49]  The Second Circuit disagreed and held that the lower court had erred in limiting its test for joint employment status to the four factors laid out in Carter:

In our view, the broad language of the FLSA, as interpreted by the Supreme Court in Rutherford, demands that a district court look beyond an entity’s formal right to control the physical performance of another’s work before declaring that the entity is not an employer under the FLSA.[50]

The Language of the Statute

In the Second Circuit’s opinion, the broad expansive definition of employee found in the FLSA cannot be reconciled with the “unduly narrow” four-part test used by the district court to determine joint employment status, which concentrates on the formal right to control the physical performance of another’s work.  That test, said the Second Circuit “is central to the common-law employment relationship” but cannot be reconciled with the “suffer or permit” language found in the FLSA[51] which, according to the court, reaches beyond traditional agency law.[52]

Rutherford Food Corporation v. McComb

In Rutherford Food Corp. v. McComb,[53] the Supreme Court held that a slaughterhouse and a boning supervisor jointly employed workers who de-boned meat on the slaughterhouse premises.  The boning supervisor entered into a contract with the slaughterhouse for the de-boning of meat, and (1) hired and fired boners to debone the meat, (2) set their hours, and (3) after being paid a set amount by the slaughter house for each one hundred pounds of de-boned meat, paid the boners for their work.  The slaughterhouse argued that it was not an employer because the boning supervisor directly controlled the terms and conditions of the meat boners’ employment. 

The Supreme Court examined the “circumstances of the whole activity”[54] in determining that the boners were jointly employed by the slaughterhouse and the supervisor.  First, the Court noted that the boners “did a specialty job on the production line” and that their work “was a part of the integrated unit of production” at the slaughterhouse.[55]  The Court also noted that responsibility under the boning contracts passed from one boning supervisor to another “without material changes” in the work performed at the slaughterhouse; that the slaughterhouse’s premises and equipment were used for the boners’ work; that the group of boners “had no business organization that could or did shift as a unit from one slaughterhouse to another;” and that the managing official of the slaughterhouse, in addition to the boners’ purported employer (the supervisor), closely monitored the boners’ performance and productivity[56]

Based on these factors, the Court found the slaughterhouse to be an employer, and liable for FLSA violations.  The Supreme Court’s analysis in the Rutherford case is critical to the Second Circuit’s decision in Zheng: “Rutherford thus held that, in certain circumstances, an entity can be a joint employer under the FLSA even when it does not hire and fire its joint employees, directly dictate their hours, or pay them.”[57]

Carter and Herman

After concluding that Rutherford was the proper standard to apply in analyzing joint employment relationships, the Second Circuit looked to see whether Carter and Herman, precedents in the Second Circuit with respect to “joint employment” relationships,  were consistent with the Rutherford decision: “Carter thus stands solely for the proposition that the four factors applied by the District Court in the instant case can be sufficient to establish employer status.  Carter did not hold, nor could it have held in light of Rutherford, that those factors are necessary to establish an employment relationship.”[58]

Turning to Herman, the Second Circuit wrote: “Thus, as in Carter, we indicated in Herman that where the four factors weigh in favor of a district court’s finding of joint employment, that finding will not be disturbed on appeal.  We did not suggest — indeed, we expressly denied — that the four factors borrowed from the Ninth Circuit in Carter are the exclusive touchstone of the joint employment inquiry under the FLSA.”[59]

The Second Circuit then vacated the judgment of the District Court because it had interpreted Second Circuit precedents as requiring an exclusive four factor test for determining joint employment status.[60]  It remanded the case for further proceedings.

Instructions on Remand

The Second Circuit set forth six factors, which it said were drawn from Rutherford, to assist the district court in making the determination whether the Liberty defendants should be deemed to be the joint employer of the plaintiffs and urged the district court “to consider any other factors it deems relevant to its assessment of the economic realities.”[61]  The six factors (listed in no particular order said the Second Circuit) are:

(1) whether Liberty's premises and equipment were used for the plaintiffs' work; (2) whether the Contractor Corporations had a business that could or did shift as a unit from one putative joint employer to another; (3) the extent to which plaintiffs performed a discrete line-job that was integral to Liberty's process of production; (4) whether responsibility under the contracts could pass from one subcontractor to another without material changes; (5) the degree to which the Liberty Defendants or their agents supervised plaintiffs' work; and (6) whether plaintiffs worked exclusively or predominantly for the Liberty Defendants.[62]

The Second Circuit first described why it believed these factors were relevant to the determination of joint employment status.  “These particular factors are relevant because, when they weigh in plaintiffs’ favor, they indicate that an entity has functional control over workers even in the absence of the formal control measured by the Carter factors.”[63]  Then, the court meticulously described why each of these six factors was important to the joint employment determination.

Whether Liberty’s premises and equipment were used for the plaintiffs’ work is relevant, said the Second Circuit, because “shared use of premises and equipment may support the inference that a putative joint employer has functional control over the plaintiffs’ work.”[64]  Whether the contractor had a business that could or did shift as a unit from one jobber to another is relevant because “a subcontractor that seeks business from a variety of contractors is less likely to be part of a subterfuge arrangement than a subcontractor that serves a single client.”[65] 

With respect to the third factor – the extent to which plaintiffs performed a discrete line job that was integral to Liberty’s production process – the court noted that: “this factor could be said to be implicated in every subcontracting relationship, because all subcontractors perform a function that a general contractor  deems ‘integral’ to a product or a service.”[66]  However, the Second Circuit cautioned that it does not interpret this factor, derived from Rutherford, quite so broadly.  Rather, the Second Circuit construed Rutherford to mean that work on a production line occupies a special status under the FLSA, at least when it lies on “the usual path of an employee.”[67]

The court stated that Rutherford:

offers no firm guidance as to how to distinguish work that “in its essence follows the usual path of an employee” from work that can be outsourced without attracting increased scrutiny under the FLSA.  In our view there is no bright-line distinction between these two categories of work.[68]

The Second Circuit attempted to draw such a distinction, but it may be a distinction without a difference.  According to the Second Circuit:

On one end of the spectrum lies the type of work preformed by the boners in Rutherford — i.e.  piecework on a producer’s premises that requires minimal training or equipment, and which constitutes an essential step in the producer’s integrated manufacturing process.  On the other end of the spectrum lies work that is not part of an integrated production unit, that is not performed on a predictable schedule, and that requires specialized skills or expensive technology.  In classifying business relationships that fall in between these two poles, we are mindful of the substantial and valuable place that outsourcing, along with the subcontracting relationships that follow from outsourcing, have come to occupy in the American economy. . . .  We are also mindful that manufacturers, and especially manufacturers of relatively sophisticated products that require multiple components, may chose to outsource the production of some of those components to increase efficiency.”[69]

To determine the weight and degree of importance that integration with the jobber’s production process should carry in determining joint employment, the Second Circuit urged the lower court to consult both industry custom and historical practice.[70]  Industry custom is relevant, said the court, because to the extent that the practice of using subcontractors to complete a particular task is widespread, it is unlikely to be a mere subterfuge to avoid complying with labor laws.[71]  Historical practice may also be relevant because if plaintiffs can prove that, as an historical matter, a contracting device has developed in response to and as a means to avoid applicable labor laws, the prevalence of that device may, in particular circumstances, be attributable to widespread evasion of labor laws.[72] 

The Second Circuit further noted

the mere fact that a manufacturing job is not typically outsourced does not necessarily mean that there is no substantial economic reason to outsource it in a particular case.  However, as Rutherford indicates, the type of work performed by plaintiffs can bear on the overall determination as to whether a defendant may be held liable for an FLSA violation.[73]

Turning to the fourth factor — whether responsibility under the contracts could pass from one subcontractor to another without material changes — the Second Circuit stated that it was derived from the Rutherford Court’s observation that “responsibility under the boning contracts without material changes passed from one boner to another.”[74]  It noted that this factor weighs in favor of a determination of joint employment when employees are tied to an entity such as a slaughterhouse rather than to an ostensible direct employer such as a boning supervisor.  “Where on the other hand, employees work for an entity (the purported joint employer) only to the extent that their direct employer is hired by that entity this factor does not in any way support the determination that a joint employment relationship exists.”[75]

The court noted that the fifth factor — the degree to which the Liberty Defendants or their agents supervised plaintiffs’ work — might be misinterpreted to transform “run-of-the-mill subcontracting relationships” into joint employer relationships.[76]  It attempted to demonstrate the appropriate application of this factor by contrasting the supervision exercised in Rutherford with that exercised in Moreau v. Air France.[77]  In Moreau, the Ninth Circuit found that Air France’s supervision of workers was not indicative of joint employment because Air France merely gave “specific instructions to a service provider” concerning performance under a service contact.  In Rutherford, on the other hand, the slaughterhouse owner’s close scrutiny of the boners’ work weighed in favor of joint employment because it demonstrated effective control of the terms and conditions of the plaintiff’s employment.[78]

Finally, the court emphatically stated that its use of the words “exclusively or predominantly” in the sixth factor — whether plaintiffs worked exclusively or predominately for the Liberty Defendants — was intentional.[79]  Thus, the court noted, if a “majority” of the subcontractor’s employees’ work is performed for a single company (as distinguished from “exclusively or predominately”) that alone is not a basis to find joint employment.  However, if the contractor’s employees are assigned exclusively or predominantly to work for only one “client” of the contractor, the “client” may de facto become responsible for the amount workers are paid and for their schedules — traditional indicia of employment.

The Second Circuit concluded its analysis of these six factors by noting:

the “economic reality” test — which has been distilled into a nonexclusive and overlapping set of factors — gives content to the broad ‘suffer or permit’ language in the statute…However, by  limiting FLSA liability to cases in which defendants, based on the totality of the circumstances function as employers of the plaintiffs rather than mere business partners of the plaintiffs’ direct employer, the test also ensures that the statute is not interpreted to subsume typical outsourcing relationships.  The “economic reality’ test, therefore, is intended to expose outsourcing relationships that lack a substantial economic purpose, but it is manifestly not intended to bring normal, strategically-oriented contracting schemes within the ambit of the FLSA.[80]

Application of the Factors on Remand

The Second Circuit avers that it “intimate[s] no view as to whether plaintiffs, under a proper application of the economic reality test derived from Rutherford, will have presented sufficient evidence to survive a renewed motion for summary judgment on remand.”[81]  But, the Second Circuit reminded those subject to its jurisdiction that in order to find an employer for FLSA purposes, three determinations must be made with respect to each of the factors outlined above.  First, there must be historical findings of fact underlying each of the relevant factors.  Second, there must be findings as to the existence and the degree of each factor.  Finally, a conclusion must be drawn from applying the factors — i.e. whether or not a joint employer relationship exists.[82]

With respect to the first two determinations, the district court’s findings of fact “must be accepted on appeal unless clearly erroneous.”[83]  As to the third determination — whether a party is a joint employer — the Second Circuit opined that that is a legal conclusion, reviewed de novo.[84]  The Second Circuit stated that the lower court need not decide that every factor weighs against joint employment in order to grant summary judgment to the Liberty Defendants and that summary judgment might be granted to plaintiffs, even if isolated factors point against imposing joint liability.

The court concluded by noting that the Zheng case was quite different from Rutherford. 

In Rutherford, unlike in this case, every relevant factor described above weighed in favor of a joint employment relationship, and the record as a whole compelled the conclusion that the slaughterhouse exercised functional control over the boners.  . . . .  Should the District Court, on remand, deny summary judgment in favor of defendants, it will be incumbent upon the Court to conduct a trial.”[85]

The Factors That May Have Influenced the Second Circuit to Move to a New Economic Reality Test

Attempting to divine the reasoning of any judicial decision that moves the law in a new direction is, of course, speculative.  However, in this case some practical realities provide an important backdrop that may provide substance to speculation.  The first reality is the increasing use of immigrant workers in America to perform many tasks that American citizens choose not to engage in.  As President Bush stated when introducing his Temporary Worker Program:

Reform [of our immigration laws] must begin by confronting a basic fact of life and economics: some of the jobs being generated in America’s growing economy are jobs American citizens are not filling.[86]

A second reality with respect to these immigrant workers[87] is that it is estimated by one source that there are as many as 12 million undocumented immigrants in the U.S.[88]  Moreover, President Bush suggests “many employers turn to the illegal labor market for workers.”[89]  To an undocumented immigrant, complaining about minimum wage and overtime violations is a slippery slope.  If the worker persists in complaining about wage and hour violations, unscrupulous employers threaten to report the workers’ illegal status to immigration officials.

Whether any of these factors influenced the Second Circuit, the Zheng decision does not inform us.  However, there have been several recent cases involving immigrant workers, alleged wage/hour violations and employment status issues that may have influenced the Second Circuit, even though the Zheng opinion did not reference them.  In these cases, the issue was whether the workers were employees or independent contractors[90]

In Ansoumana v. Gristede's Operating Corporation,[91] the U.S. District Court for the Southern District of New York held that delivery workers for a drugstore chain in Manhattan were not independent contractors, and were due minimum wage and overtime payments under the FLSA.  There, Duane Reade operated two hundred drugstores in Manhattan and surrounding areas and provided its customers with delivery service of its drugs and food.  The delivery service was outsourced to two agencies – Hudson and Chelsea, paying them $250 to $300 per week per employee engaged in delivering Duane Reade’s products.  The employees, most of whom were immigrants from West Africa, worked eight to eleven hours per day, six days a week and were paid a flat rate of $20 to $30 per day. 

The employees primarily made deliveries to Duane Reade customers who lived within walking distance of the stores.  In their spare time, they helped customers with heavy items, provide bagging services at registers, and stocked shelves.  Hudson and Chelsea treated the workers as independent contractors and did not keep records for them as required by the FLSA and the New York Minimum Wage Act.

In concluding that the workers were employees and not independent contractors, the court applied a five-factor economic reality test and found that:

·         Hudson and Chelsea had control over the workers’ rate of pay and their workers’ hiring and firing.

·         There was little skill or initiative needed to find one’s way from a Duane Reade store to a customer’s residence.

·         The nature of the workers’ duties was integral to Hudson’s and Chelsea’s businesses – providing delivery services.

·         The workers were not in business for themselves and had no opportunity for profit or loss.[92]

The court also held that Duane Reade, as a joint employer, was jointly liable for the failure to pay minimum wage and overtime.  It held that Duane Reade did not have the right to outsource its requirements for delivery service as a way to evade its obligations under the FLSA and the New York Minimum Wage Act.[93]

Another factor that may have informed the Second Circuit’s decision in Zheng is the recent case law involving the garment industry.  The Second Circuit’s approach to “joint employment” status in the garment industry as enunciated in Zheng, was preceded by three recent cases in New York, and one in California.  The first, Lopez v. Silverman,[94] is noted with approval in Zheng.  It is the case from which the Second Circuit borrowed extensively to craft its six factor test. 

The second case is Liu v. Donna Karan International, Inc.[95]  In that case, the plaintiffs also were Chinese immigrant garment workers who worked in garment factories owned by Jen Chu Apparel, Inc and Jen Jen of New York, both immigrant-owned sewing shops.  These shops made clothes for manufacturers, including Donna Karan International.  Plaintiffs’ claimed that most of the garments on which they worked were made for Donna Karan.  They alleged that they worked 80 hour weeks, were never paid overtime, and that their income was less than minimum wage.  They brought suit against the sewing shops and Donna Karan asserting that each was liable as a joint employer of the plaintiffs for FLSA and New York state labor law violations.  Donna Karan moved to dismiss the complaint as against it, arguing that in the Second Circuit, the Carter test should be applied to determine joint employer status and that under the Carter test, Donna Karan was not an employer.  Even though it maintained that Lopez departed from Second Circuit law, Donna Karan also addressed the factors set forth in that case, asserting that none of the Lopez factors were applicable to it.  Ultimately, the district court, noting that all it had before it was a motion to dismiss, concluded that plaintiffs complaint was sufficient to withstand that motion. 

Although the decision in Donna Karan had issued before the Second Circuit decided Zheng, the Second Circuit did not reference it.  Nor, did it reference another case involving the manufacture of clothing for Donna Karan enterprises, Bravo v. Eastpoint International, Inc.,[96]  In Bravo, garment workers brought suit against, inter alia, Eastpoint, their employer, Karan International, and Donna Karan, individually, for unpaid minimum wages and overtime.  The district court acknowledged that the defendants “controlled plaintiffs’ wages and hours through ‘establishing contract prices and dates of production’” and that the Karan defendants “supplied all of the ‘materials, assembly instructions, patterns, cutting control sheets, tags, zippers, buttons, pre-cut pieces of fabric [and] care labels’” and “had a representative present in the factory at least once a day.”  Nonetheless, the district court found that that plaintiffs had made no allegations of fact supporting the power of control, and granted the motion to dismiss all the Karan defendants except Karan International.

It is interesting to note that although the Second Circuit cited the Lopez case with approval, it did not mention either of the Donna Karan cases, nor Zhao v. Bebe Stores,[97] a California case in which the court applied the economic realities test to find that a clothing manufacturer with whom a garment sewing company did a majority of its business was not a joint employer.  There, Apex Clothing Corporation sewed garments for clothing manufacturers, including Bebe Stores, Inc., with whom it did a majority of its business.  Immigrant workers employed by Apex to sew garments, claimed that Apex violated various federal and state labor laws, including the FLSA.  Plaintiffs moved for summary judgment seeking a declaration that pursuant to the FLSA, Bebe Stores was a “joint employer” with Apex.  The court, applying the “economic realities” test, concluded that although Bebe Stores actively reviewed the work product of Apex’s employees for quality control purposes and retained a monitoring company to insure that Apex (and other companies with whom it contracted) complied with applicable labor laws, Bebe Stores was not a joint employer with Apex.

The Impact of Zheng

It is submitted that the Zheng case will have significant impact in the wage and hour world of employees.  First, the decision is helpful in emphasizing the important difference between sufficient conditions and necessary conditions.  The Zheng court opined that a “yes” answer to the four Carter questions meant that that an employment relationship existed, but did not infer that a “no” answer to those questions meant no employment relationship existed.

Second, the decision in Zheng reaches “outsourcing relationships” that have to date not been subject to great FLSA scrutiny.  The court’s singling out factors such as “done on the same premises” and “shifting as a unit,” both newly identified possible distinctions, may take the developing law in a somewhat off-the-track direction.  There is a hint in the decision that the court thinks Rutherford would have been decided differently if the boning operation had been done off site.  That seems a highly unlikely conclusion.

Third, there is no direct evidence in the decision that anything the Department of Labor has been doing vis-a-vis the garment industry affected the development of “joint employment status.”  Yet, it may have done so.  The Department’s garment industry initiative, begun about ten years ago, saw the first assertions of joint employment theory in cases where facts similar to those in Zheng were present.  In those cases, the Labor Department insisted that the manufacturers agree to monitor contractors for potential wage and hour violations, in exchange for the labor Department’s agreement to back away from a hot goods injunction.  Monitoring agreements with the Department of Labor have continued to grow over the past ten years. 

Fourth, perhaps one of the most important aspects of this decision is that although the court mentions the DOL’s joint employment interpretive rule once, it does not refer to the substance of the rule or rely on it in its analysis at all.  This rule, codified at 29 CFR 791, provides that:

(b) Where the employee performs work which simultaneously benefits two or more employers, or works for two or more employers at different times during the workweek, a joint employment relationship generally will be considered to exist in situations such as: (1) Where there is an arrangement between the employers to share the employee’s services, as, for example, to interchange employees; or (2) Where one employer is acting directly or indirectly in the interest of the other employer (or employers) in relation to the employee; or (3) Where the employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer. 

Perhaps reference to subpart (b)(3) of this rule would have allowed the Second Circuit’s decision to proceed on a much cleaner basis.

Finally, it would appear that in moving away from a “right to control” test to determine joint employer status, the likelihood of finding a joint employer relationship is increased.  Where employers subcontract out some aspects of their production process, Zheng seems to imply that some monitoring of the subcontractors’ pay practices, to assure their compliance with applicable wage and hour law is highly recommended.  To what extent that monitoring increases the risk that a court would find the putative joint employer “controls” the workers, leading to joint employer status, is difficult to gauge. 

 

This document has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company.

 

© 2004 Epstein Becker & Green, P.C.