Grease Guard Service Technician To Receive Unpaid Overtime Following Arbitration

In February 2014, a former service technician for Rooftop Solutions filed a lawsuit in federal court in Atlanta alleging that the company and one of its executives had failed to pay him overtime compensation even though he worked more than 40 hours per week. Rooftop Solutions is the “servicing division” of Grease Guard, LLC, the manufacturer of a system designed to capture oils and greases deposited on commercial and industrial rooftops around exhaust equipment. According to the complaint, the former Rooftop Solutions service technician worked throughout Georgia, Tennessee, Alabama, and South Carolina for approximately one year in 2013 and 2014.

After the lawsuit was filed, the case was sent to arbitration to be decided by a private arbitrator rather than a judge. After a lengthy time in arbitration, Grease Guard and the executive ultimately agreed to pay the former service technician $3,000 in unpaid wages to settle his overtime claims. The arbitrator then awarded the employee $33,485.92 in attorney’s fees and $3,398.57 in costs of arbitration, for a total award of $39,884.49. The employee has now returned to the original court moving to make the arbitrator’s award entered as the court’s final judgment.

The Fair Labor Standards Act ensures that employees can pursue even small claims for unpaid overtime and minimum wages by guaranteeing attorney’s fees and costs to a plaintiff who prevails on an overtime or minimum wage claim. That guarantee applies even when the employee is forced into binding arbitration by his employer. If this were not the case, employers could act like “petty tyrants” and break the minimum wage and overtime laws with impunity, knowing that their employees’ claims are too small to justify paying for a lawyer’s time. The FLSA and several other federal employment laws make sure that employers who undercompensate their employees can be held accountable.

The case against Grease Guard is captioned Thomas v. Grease Guard, LLC d/b/a Rooftop Solutions, Civil Action No. 1:14-cv-619-MHC (N.D. Ga.). The plaintiff is represented by attorneys from DeLong Caldwell Bridgers Fitzpatrick & Benjamin, LLC in Atlanta, Georgia.

Workers Sue Townsend Tree Service Over Unpaid Overtime

In June, three former employees of Townsend Tree Service sued two Townsend companies, alleging that the companies failed to pay them overtime as required by federal law. The three plaintiffs, who have worked for Townsend as foremen, operators, climbers, and groundsmen, brought their lawsuit as a collective action on behalf of all current and former Townsend tree crew members with unpaid overtime wages. Townsend Tree Service is one of the nation’s largest companies performing tree-trimming, clearance and integrated vegetation management services, operating in 30 states across the country.

The three named plaintiffs describe several practices at Townsend that they argue violated federal overtime laws. Specifically, they claim that Townsend paid them at one hourly rate for their first 40 hours of work, then lowered their hourly rate for hours worked over 40 hours per week. According to the plaintiffs, Townsend disguised the underpayments of overtime wages by labeling them as “other pay” on their paystubs.

The former tree crew members also claim that they were not relieved of their duties for meal breaks, but that Townsend automatically deducted 30 minutes from their pay each day, regardless of whether they could take a meal break or not. Finally, the plaintiffs also claim that Townsend did not compensate them for daily preparation time and travel time, although their job duties began long before they arrived at job sites and started getting paid. The result of these practices, the plaintiffs argue, is that they and other Townsend tree crew members regularly worked far in excess of 40 hours per week but received no additional compensation.

Townsend was previously sued in Georgia in 2013 by eight of its former tree crew members who similarly claimed that the company did not pay them overtime wages. That case ultimately settled and was never certified by the court as a collective action.

Unpaid meal breaks and travel time are frequent sources of minimum wage and overtime litigation. While employers typically are not required to pay employees for meal breaks of 30 minutes or longer, that rule does not apply when workers are not truly relieved of their duties. If employees may be interrupted and required to begin work at any time, or if they are required to eat lunch at their desks, that time may count towards their total compensable hours under the federal minimum wage and overtime laws.

Similarly, travel to and from work is usually not compensable and will not count towards an employer’s minimum wage and overtime obligations. But that can easily change when an employee must begin working before leaving home, travels in a company vehicle and transports heavy equipment, meets other employees at a “staging point” before going to a job site, or when the worker travels out of state to moving job sites. The U.S. Department of Labor’s regulations regarding compensation for travel time are notoriously complex and whether a violation occurred has to be determined on a case-by-case basis.

The case against Townsend Tree Service is captioned Hart et al. v. The Townsend Corporation et al., Civil Action No. 1:17-cv-2126-SCJ (N.D. Ga.). The plaintiffs are represented by attorneys from DeLong Caldwell Bridgers Fitzpatrick & Benjamin, LLC in Atlanta, Georgia.

Recent FLSA Settlements

Cook v. Statewide Wrecker Service, Inc., Civil Action No. 1:15-cv-00101-ODE (N.D. Ga.)

A dispatcher who worked for Statewide Wreck Service from January 2012 through November 2014 claimed that the company had improperly denied him overtime wages. The company asserted that the plaintiff had not in fact regularly worked in excess of 40 hours per week and therefore was not underpaid.

On March 31, 2016, Judge Orinda Evans approved a settlement agreement pursuant to which the plaintiff would be paid $14,623.85 as compensation for claimed back wages and $14, 623.85 for claimed liquidated damages, with attorney’s fees and costs to be later determined. Because the parties were unable to agree on an award of attorney’s fees, the plaintiff filed a fee petition. After making modest reduction of 1.4 hours of total time billed, Judge Evans approved an attorney fee award of $31,214.00 and reimbursement of costs in the amount of $2,059.00.

The plaintiff was represented by attorneys Charles R. Bridgers, Kevin D. Fitzpatrick, Jr., Mitchell D. Benjamin, and Matthew W. Herrington of the firm DeLong, Caldwell, Bridgers, Fitzpatrick & Benjamin, LLC in Atlanta, Georgia.

Walker et al. v. RKJ And Sons, LLC d/b/a Subway et al., Civil Action No. 4:15-cv-183-CDL (M.D. Ga.)

This FLSA collective action was filed two former managers of a Subway restaurant franchisee claiming unpaid overtime wages. The plaintiffs alleged that their employers had a policy of making improper deductions for partial days of work missed, thereby failing to pay them on a true “salary basis” as required for any employee to be classified as an exempt executive employee. The Court earlier approved a motion for conditional collective certification and a notice of the lawsuit was sent to potential opt-in plaintiffs. A total of 31 current and former Subway managers ultimately consented to join the lawsuit.

The parties reached a settlement in the amount of $234,950, of which $68,000 represented alleged unpaid overtime wages, $68,000 represented alleged liquidated damages, $4,950 represented incentive pay to the named plaintiff and one opt-in plaintiff, and $94,000 represented attorney’s fees and costs. Back wage awards to the opt-in plaintiffs ranged from $25 to $9,354.

The plaintiffs in this case were represented by attorneys John L. Mays and Dustin L. Crawford of the firm Mays & Kerr LLC in Atlanta, Georgia.

Holloman v. Land Headquarters, Inc. et al., Civil Action No. 3:15-cv-148-TCB (N.D. Ga.)

The plaintiff formerly worked for Land Headquarters, Inc., a company in the business of selling manufactured homes and lots in rural areas throughout multiple states, from 1996 through January 2015. During her time at LHI, the Plaintiff stated that her responsibilities included researching and locating properties for the company to purchase, communicating with prospective customers, inspecting and maintaining the company’s properties, and attending dispossessory and other court hearings related to the company’s properties. She alleged that the defendants had not paid her overtime wages in the approximate amount of $15,000. The company claimed that the plaintiff was an independent contractor rather than an employee and was therefore not entitled to the FLSA’s overtime protections.

On June 16, 2016, the parties filed a motion for approval of settlement, which was granted the same day. Per the terms of the settlement agreement, the plaintiff will receive $7,000 designated as payment for alleged unpaid overtime, $7,000 designated as payment for alleged liquidated damages, $1,000 in consideration for the plaintiff’s general release of claims, and $10,000 in attorney’s fees and costs of litigation.

The plaintiff in this case was represented by attorney Regan Keebaugh of the law firm Radford & Keebaugh, LLC in Decatur, Georgia.


Eleventh Circuit Reverses District Court’s Dismissal of Overtime Case

In a recent opinion, the U.S. Court of Appeals for the Eleventh Circuit, based in Atlanta, Georgia, reversed a district court order dismissing a plaintiff’s overtime claims against her former employer. While the appellate decision was not published, it is nevertheless an important decision because it overturned a district court order that could have had very dangerous consequences for virtually all office workers denied overtime wages.

The plaintiff, Rebecca Ramsey, was one of approximately six office workers who supported the operations of Wallace Electric Company in McDonough, Georgia, all of whom the company classified as exempt from the overtime requirements of the Fair Labor Standards Act. Ramsey had no specific job title, she was the lowest or second-lowest paid of Wallace’s office workers. Ramsey testified that her regular job duties included inputting payroll data; checking in supply deliveries and physically moving such supplies to pallets; inputting data from material tickets, time slips, and packing slips; inputting data from employee insurance forms; answering the company’s “service” telephone line; making and receiving service calls; “pulling” permits for scheduled jobs; contacting power companies to turn power on or off; and compiling paperwork for the company’s employee insurance plan. She did not have authority to assign specific service technicians to particular jobs and could not supervise anyone or conduct performance reviews.

In March 2015, the District (trial) Court dismissed Ramsey’s overtime claim finding that she was an exempt administrative employee. The court concluded that Ramsey “exercised judgment in creating invoices, determined whether there was a discrepancy in a time-sheet or an invoice, and that Defendants relied on her to ensure that the time billed on invoices was accurate.” Further, the district court noted that Ramsey’s “role in creating invoices was crucial to the business operations of WEC” and that her work had a substantial effect on the company’s business operations.

In its opinion reversing the district court’s dismissal of Ramsey’s claims, the Eleventh Circuit did not provide a detailed analysis of Ramsey’s duties. Instead, it merely referred to discussions that were had at oral argument and concluded that the district court had made improper inferences generally, and specifically when it decided that Ramsey exercised discretion over substantive decisions.

As the Eleventh Circuit previously explained in Rock v. Ray Anthony Int’l, LLC, “to be exempt, [under the FLSA’s administrative exemption] the employee’s primary duty must involve the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. The ultimate question is whether the employee has the ability to make an independent choice, free from immediate direction or supervision. . . . the employee’s duties must involve more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources” (quotations omitted).

Because the appellate court’s opinion contains little analysis, it is not particularly useful as guidance on the application of the FLSA’s administrative exemption. However, the opinion is nevertheless important to current and future plaintiffs because it prevented the district court’s opinion from becoming binding law in the Northern District of Georgia. Had the district court’s order stood, FLSA defendants would have pointed to it as authority for the idea that virtually every office worker who has some degree of customer contact may qualify as an exempt administrative employee.

This appeal was captioned Ramsey v. Wallace Electric Company, LLC et al., Appeal No. 15-11746 (11th Cir.). The district court action is captioned Ramsey v. Wallace Electric Company, LLC et al., Civil Action NO. 1:13-cv-3808-WSD (N.D. Ga.). The plaintiff/appellant is represented by Charles Bridgers, Kevin Fitzpatrick, and Matthew Herrington of the firm DeLong, Caldwell, Bridgers, Fitzpatrick & Benjamin, LLC in Atlanta, Georgia.

Adult Novelty Stores Underpaid Overtime, Truncated Hours

Last week, a federal district court judge ruled that Starship Enterprises of Atlanta, Inc., which operates a chain of 22 adult novelty stores, violated the Fair Labor Standards Act by illegally truncating employee time records.

The plaintiff was an assistant store manager who was paid on an hourly basis. The parties disagreed as to how many hours per week the plaintiff worked, and whether she was forced to work off the clock. However, the company’s employee time and payroll records indicated that the plaintiff had not even been paid appropriately as to the hours that were recorded.

As the court put it, “Defendant consistently failed to compensate her for much of her recorded time.” The court then gave examples of two consecutive days when the plaintiff had worked 8 hours and 23 minutes and 8 hours and 21 minutes, but was paid for only 8 hours of work on each day. “There are weeks, and even months, in which Defendant reduced Plaintiff’s hours by .25 to .5 for every day that she worked.”

While the court found that the company had underpaid the plaintiff by failing to pay her for recorded overtime hours worked, it refused to rule on the question of whether the plaintiff had worked other, unrecorded hours, leaving that question for a jury. The court also refused to rule on the question of whether Starship Enterprises had acted in good faith in its compensation of the plaintiff, concluding that the evidence was conflicting.

This week, the plaintiff filed a motion asking the court to reconsider the question of good faith, pointing to evidence that the court did not consider in its order, which shows that Starship earlier admitted that it did not investigate its potential FLSA liability at any time prior to the lawsuit, and because the company’s own records showed that plaintiff had not been compensated for overtime hours. The defendant has not yet responded to that motion.

While the case has been brought as a collective action on behalf of all Starship Enterprises employees affected by the illegal practices, to date no other employees have joined the case as plaintiffs. Until they file consent forms to join the lawsuit or file their own lawsuits independently, the statute of limitations will continue to eat away at any claims for unpaid overtime wages that they may have.

This case is captioned Pippin v. Starship Enterprises of Atlanta, Inc., Civil Action No. 1:15-CV-0507-LMM (N.D. Ga.). The plaintiff is represented by Andrew Frisch of Morgan & Morgan in Plantation, Florida.

T.I. and Scales 925 Sued by Restaurant Servers

On Tuesday, several former employees of Atlanta restaurant Scales 925 sued the restaurant and its owner, Clifford Joseph Harris, Jr., also known as the rapper T.I. The employees, all of whom worked as servers at Scales 925, allege violations of the federal minimum wage and overtime laws, as well as fraud and breach of contract stemming from numerous irregularities in the restaurant’s pay practices.

According to the plaintiffs, Scales 925’s time and billing software, called “Aloha,” would automatically record tips they had not earned and would automatically clock them out while they were still working. The plaintiffs claim to have complained about these problems to the restaurant, but to no avail.

They also allege that Scales 925 would change their payroll records when they worked more than 40 hours per week to avoid paying overtime, and even altered the restaurant’s sales figures to avoid paying out promised bonuses.

The plaintiffs also claim that they spent 30-40% of their time performing work that did not involve interaction with customers, such as preparing tables, making sweet tea or lemonade, rolling utensils, washing dishes, and cleaning the restaurant. They appear to be seeking the full $7.25 minimum wage, rather than only $2.13 per hour, for time spent on such non-tipped work.

Finally, the plaintiffs also allege that Scales 925 would require them to pay $4.00 out of their paychecks for broken glasses, regardless of whether or not glasses had been broken, and that the restaurant retained a portion of their tips, falsely claiming to give that money to the busboys.

While the merits of these plaintiff’s claims are not yet certain, wage violations of this type are nothing short of rampant in the restaurant industry. Common violations of the Fair Labor Standards Act include failure to pay tipped employees any wages at all, violating the FLSA’s “tip credit” provision (which allows employers to pay $2.13 per hour rather than $7.25), retention of tipped employees’ tips by managers or other non-tipped employees, or requiring that the employees pay kickbacks in the form of fees and fines. Tipped employees are also frequently underpaid overtime wages due to widespread ignorance of the overtime rules for tipped employees.

The case is captioned Wright et al. v. Scales 925 Atlanta, LLC et al., Civil Action No. 1:16-cv-2425-CAP (N.D. Ga.). The plaintiffs are represented by Michael O. Mondy of Michael O. Mondy, P.C. in Atlanta, Georgia.

Recent FLSA Settlements

Gwizdak et al. v. DSY Investment Group, LLC et al., 1:15-cv-2657-LMM (N.D. Ga.)

Two plaintiffs, a husband and wife, brought overtime and minimum wage claims against Howard’s Mobile Home Park in Griffin, Georgia. Defendants argued that plaintiffs were independent contractors and that their business was not a covered enterprise under the FLSA. The parties have reached a settlement under which the plaintiffs will receive a total of $39,008.08 and plaintiffs’ counsel will receive $27,241.92 in attorney’s fees and litigation costs. Plaintiffs are represented by Jean Marx and Robert Marx of Marx & Marx, LLC in Atlanta, Georgia.

Roy v. Aerogroup Retail Holdings, Inc., 1:15-cv-2941-RWS (N.D. Ga.)

A store manager brought a collective action against a chain of retail stores selling women’s shoes claiming that the company failed to properly pay its store managers overtime wages.  The company argued that its store managers were properly classified as exempt from the FLSA’s overtime requirements under the executive and administrative exemptions. 55 other store managers opted in to the collective action. The parties reached a settlement under which the defendant would pay the collective a total of $390,000. $290,000 would go to the plaintiffs on a pro rata basis, with individual payments ranging from $8.57 to over $20,000. The named plaintiff would receive $10,000 as incentive pay, and plaintiffs’ counsel would receive $90,000 in attorney’s fees and litigation costs. The parties withdrew their motion to approve settlement pending the addition of additional language and have not yet refiled the motion for court approval. Plaintiffs are represented by Jason Doss of The Doss Firm, LLC in Marietta, Georgia and J. Allen Schreiber of Burke Harvey, LLC in Birmingham, Alabama.

Williams v. M.B.D. Properties, LLC et al., 1:15-cv-3552-ELR (N.D. Ga.)

A worker who had been employed at a motel with the job title of “property manager” sued two companies she alleged had failed to pay her overtime wages as required by the FLSA. The plaintiff alleged that she was not salaried and had been paid on an hourly basis, and that her primary duty was non-exempt work such as working the front desk, checking rooms for cleanliness, and walking the property. The defendants argued that the plaintiff was exempt under the FLSA’s executive and administrative exemptions. They also disputed the number of hours worked by the plaintiff and the applicable rate at which overtime should be calculated. The plaintiff and one of the defendants reached a settlement under which the plaintiff will receive $4,175, which represents more than full payment for her unpaid hours at the overtime rate argued by the defendant. Plaintiff’s counsel will receive $3,000 in attorney’s fees and $325 in reimbursement of litigation costs. The second defendant has filed a notice of settlement but no motion to approve settlement has yet been filed. The plaintiff in this case is represented by V. Severin Roberts of Barrett & Farahany, LLP in Atlanta, Georgia

Court Certifies Collective Action for Furniture Repairers

Last Friday, a federal judge issued an order conditionally approving a collective action brought by furniture repairers to recover unpaid overtime wages. As a result, all the employees who might have similar claims against the defendant will receive a court-approved notice and an opportunity to join the litigation as plaintiffs.

The Defendant, The Refinishing Touch, Inc., is an Alpharetta, Georgia company that provides furniture repair and upholstering services for commercial clients primarily in the Metro Atlanta area. Its clients include hotels, universities, and government facilities. The plaintiff, Floyd Crawford, worked as a furniture repairer for The Refinishing Touch for approximately one year, and claims that during that time 40-50 other furniture repairers worked for The Refinishing Touch doing similar work.

According to Crawford, he and the other furniture repairers regularly worked more than 40 hours per week, and often more than 60. He further claims that the company provided the furniture repairers with a “playbook” that established his minimum hours and work schedule, and had supervisors on site to supervise the repairers’ work. The Refinishing Touch, however, classified the furniture repairers as “independent contractors” and paid them on a piece-rate basis without additional overtime pay for hours worked over 40 in a single workweek. Thus, he claims, “If I completed 10 sofas in the week, at a piece rate of $83, 1 would be paid $830, regardless of whether it took me 40 hours or 70 hours to complete the work.”

In support of his argument that he and other furniture repairers were employees entitled to overtime wages, Plaintiff Crawford testified that he never hired or fired helpers, that The Refinishing Touch provided all the tools he used for his work, that he worked under supervision, that furniture repairers were required to wear company t-shirts, and that the furniture repair work he performed was the core service that The Refinishing Touch provided to its customers. Crawford further claims that The Refinishing Touch required him to sign an “Independent Contractor Agreement” that “includes numerous false representations about the nature of the work[].” If that is true, such an agreement could be used as evidence that The Refinishing Touch had reason to know it was violating the federal overtime laws by misclassifying its employees.

In its order approving a collective action on behalf of all The Refinishing Touch’s furniture repairers, the court noted that the plaintiff had presented sufficient evidence that other current and former employees wished to join a collective action, and that those employees had been treated similarly by the defendant with respect to their job requirements and methods of pay. Because the plaintiff had met this burden, the court ordered that a notice be prepared to be mailed out to all current and former furniture repairers who might have similar overtime claims against the company. While The Refinishing Touch asked that any notice include the names and contact information for the company’s own attorneys, the court rejected that request stating that “recipients need only know the contact information of their potential counsel – Plaintiffs’ counsel,” and noted that providing the defense counsel’s contact information could potentially lead to confusion.

Worker misclassification as independent contractors is a major source of wage theft across the country. Employers who misclassify their employees often do so in an attempt to excuse their non-payment of overtime and minimum wages, which are only guaranteed to actual employees. The problem of worker misclassification is prevalent that the U.S. Department of Labor’s Wage and Hour Division just last year issued an Administrator’s Interpretation stressing the breadth of the Fair Labor Standards Act’s “suffer or permit” standard, which was “specifically designed to ensure as broad of a scope of statutory coverage as possible.” As the Wage and Hour administrator noted, “[i]n applying the economic realities factors, courts have described independent contractors as those workers with economic independence who are operating a business of their own. On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA.” Because employees cannot contract away their statutory right to minimum and overtime wages, employers who attempt to create “agreements” for employees to work as independent contractors do so at their own peril.

This case is captioned Crawford et al. v. The Refinishing Touch, Inc., 1:15-cv-03027-SCJ (N.D. Ga.). The plaintiffs are represented by Severin Roberts, Amanda Farahany, and Benjamin Stark of the firm Barrett & Farahany in Atlanta, Georgia.

26 U.S.C. § 7434: The Consequences of Misclassifying Employees as Independent Contractors

Employment attorneys often speak of “misclassification” of employees as independent contractors, and often include allegations of misclassification in their court pleadings. But misclassification alone is not usually what employees sue their employers over. Rather, they sue because their employer has failed to pay them the minimum wage or overtime wages required by the Fair Labor Standards Act or similar state laws. In such cases, the “misclassification” is often incidental to the to the employee’s legal claims against their employer. In other words, the misclassification is just the excuse the employer offered for not paying appropriate wages (i.e., “you’re an independent contractor, not an employee, so you don’t get overtime”).

Misclassifying an employee as an independent contractor does not alone create a right for an employee to sue. Also, federal law (and Georgia law) does not protect an employee from retaliation if she complains to her employer about the misclassification. Thus, a misclassified employee may find herself in a difficult position: unable to demand to be properly treated as an employee without risking termination.

The consequences of misclassification—aside from separate minimum wage and overtime violations—are numerous. Misclassified employees may be unable to collect worker’s compensation or unemployment benefits, and at the very least they can expect to have to hire an attorney and fight like hell to get those benefits if they ever need them. Most importantly, misclassified employees whose pay is reported on an IRS Form 1099 rather than a W-2 have to pay the half of their FICA (Social Security and Medicare) taxes that their employer should be paying.  And because no withholdings are made throughout the year, they often find themselves facing a large tax bill in April.

While there is no right to sue for “employee misclassification” itself, recently, more and more plaintiff-side employment attorneys have discovered a tool that comes very close to just that: 26 U.S.C. § 7434. This law is part of the Internal Revenue Code and is described as “Civil damages for fraudulent filing of information returns.” The connection between such a law and employee misclassification is not immediately obvious, which explains why it has taken so long for most employment attorneys to take advantage of it.

Since § 7434 is relatively little known, it is worth quoting the entire section at length:

(a) In general If any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.

(b) Damages In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the greater of $5,000 or the sum of—

(1) any actual damages sustained by the plaintiff as approximate result of the filing of the fraudulent information return (including any costs attributable to resolving deficiencies asserted as a result of such filing)

(2) the costs of the action, and

(3) in the court’s discretion, reasonable attorneys’ fees.

(c) Period for bringing action Notwithstanding any other provision of law, an action to enforce the liability created under this section may be brought without regard to the amount in controversy and may be brought only within the later of—

(1) 6 years after the date of the filing of the fraudulent information return, or

(2) 1 year after the date such fraudulent information return would have been discovered by exercise of reasonable care. 

(d) Copy of complaint filed with IRS Any person bringing an action under subsection (a) shall provide a copy of the complaint to the Internal Revenue Service upon the filing of such complaint with the court.

(e) Finding of court to include correct amount of payment The decision of the court awarding damages in an action brought under subsection (a) shall include a finding of the correct amount which should have been reported in the information return.

(f) Information return For purposes of this section, the term “information return” means any statement described in section 6724(d)(1)(A).

The most straightforward use of § 7434 is to sue when someone issues a tax information return (such as a Form W-2 or 1099) that fraudulently misattributes income to an individual, and thus increases that individual’s tax burden. It is also conceivable that someone might sue under § 7434 where an employer has fraudulently underreported income. Even though the plaintiff might not have suffered extra tax obligations due to the underreporting, they can still claim a reward (at least $5,000) for having uncovered the fraud.

The connection between § 7434 and employee misclassification lies in the filing of an IRS Form 1099-MISC by the employer to report “nonemployee compensation” for an employee’s earnings, rather than an IRS Form W-2, which is used for reporting employee wages. Because a Form 1099 is an “information return” within the meaning of the law, several courts have found that misrepresenting payments as nonemployee compensation rather than employee wages can lead to liability under § 7434. See especially Seijo v. Casa Salsa, Inc., 2013 U.S. Dist. LEXIS 167205, 2013 WL 6184969 (S.D. Fla. Nov. 25, 2013).

It is important to keep in mind, however, that § 7434 is not an appropriate claim for every instance where an employee has been misclassified as an independent contractor. § 7434 only provides relief for those who have been damaged by filing of “fraudulent” information returns. Where an employee has been issued a Form 1099, the misclassification must have resulted from intentional wrongdoing, rather than a simple error. In many cases, it may be extremely difficult to prove that an employer knew he was misclassifying an employee. For example, an employer might point to his own lack of sophistication or even a standard industry practice of using independent contractors to excuse the misclassification. While fraudulent intent can be proven by circumstantial evidence alone, a plaintiff must be able to point to something concrete to show that intent. In many instances, such evidence will be unavailable.

Deciding which misclassification cases to treat as § 7434 violations can be tricky, but certain situations scream out for a § 7434 claim:

  • where no industry practice could possibly excuse the misclassification (e.g., waitresses and bartenders, who no employer could ever legitimately mistake for an independent contractor)
  • where the employer has previously written an employment verification letter for the misclassified employee (this occurs quite often, since misclassified employees often don’t have pay stubs to show their salary or hourly wage and thus need verification letters to get apartments or loans)
  • where the employer misclassifies only some employees, especially where the misclassified employees have higher wages than the others, or work longer hours
  • where the employer classifies everyone as an independent contractor, regardless of the type of work they do or how long they have been employed

Practice Points

Don’t forget to send a copy of your complaint alleging a § 7434 violation to the IRS, which is required by subsection (d). The most straightforward way to do so is by using an IRS Form 3949-A (Information Referral).

The “willful” element of a § 7434 claim is usually not an issue where fraudulent intent is present. The requirement seems to be intended to protect innocent tax preparers or bookkeepers who actually file the information returns, but who personally were unaware of the fraud.

The IRS uses the common law test for determining whether a worker is an employee or independent contractor. This is very similar, but not identical, to the Economic Realities Test used to answer the same question under the Fair Labor Standards Act. IRS Publication 15-A and Publication 1779 describe the common law test in detail.

Be prepared to face an FRCP 12(b)(6) motion to dismiss for failing to plead fraud adequately pursuant to FRCP 9(b). Plead the facts with as much detail as possible.

Sonny’s BBQ and Buckhead Saloon Settle Employees’ FLSA Claims

A Sonny’s BBQ in Conyers, Georgia and the Buckhead Saloon have both reached settlement agreements with former employees to settle claims that the restaurants failed to pay them—a server and bartender, respectively—the federal minimum wage.

Sonny’s BBQ

In the first case, a former Sonny’s waitress alleged that her employer had paid her and other servers $2.13 per hour, but had improperly deducted uniform costs from their checks, and had falsified their payroll records to show more tips received than in reality. According to the plaintiff, she and other servers at Sonny’s were making less than $7.25 per hour total in tips combined with the $2.13 per hour paid by Sonny’s. To hide the fact that the servers were making less than the federal minimum wage, the plaintiff alleged that her employer intentionally overreported her tips in its payroll records. Initally, Sonny’s counterclaimed against the server alleging “tortious interference with business or contractual relations,” but later voluntarily dismissed the counterclaim after the plaintiff filed a motion to dismiss.

The server also accused Sonny’s of violating 26 U.S.C. § 7434 by filing fraudulent tax information returns with the Internal Revenue Service. Specifically, she alleged that Sonny’s had reported the falsely inflated tip amounts to the IRS (presumably on a Form W-2). If she had succeeded on that claim, § 7434 would have provided no less than $5,000 for each fraudulent information return filed, plus costs of litigation and reasonable attorney’s fees.

In their settlement agreement, the parties agreed that Sonny’s would pay the server $5,000 plus reasonable attorney’s fees and costs that will be later negotiated or determined by the court, and that the server would agree to a general release of all claims and would keep the settlement confidential. Whether such a confidentiality agreement is actually enforceable against the plaintiff is questionable, since the settlement agreement is a public record, and numerous courts around the country have refused to enforce confidentiality provisions in FLSA settlements.

Buckhead Saloon

In the second case, a former bartender claimed that the Buckhead Saloon paid her only $2.13 per hour plus tips, but was not entitled to use the FLSA’s “tip credit” because it failed to pay her for all her hours worked, failed to pay her overtime wages, and improperly permitted its managers to take a portion of her tips. She also alleged that other Buckhead Saloon employees suffered similar FLSA violations.

In their settlement agreement—reached before the Defendants even filed an answer—the parties agreed that the plaintiff would release both her FLSA claims and any and all other claims against the Buckhead Saloon. In exchange, the Buckhead Saloon agreed to pay a total of $24,028.46, of which $15,000 is attorney’s fees and costs, and the remainder a combination of back wages, liquidated damages, and severance pay. While the agreement does not include a confidentiality provision, the plaintiff did agree not to “disparage” the Buckhead Saloon and its owners, or “encourage” any third parties to file similar claims.

The two cases are captioned Olliff v. NEA-BBQ, LLC d/b/a Sonny’s BBQ, 1:15-cv-4206-ELR (N.D. Ga.) and Falanga v. BTW Atlanta, LLC d/b/a Buckhead Saloon et al., 1:16-cv-1155-MHC (N.D. Ga.). Plaintiff Olliff is represented by attorneys Andrew Weiner and Jeffrey Sand of the Weiner Law Firm in Atlanta, GA, and Plaintiff Falanga is represented by Robert Falanga of Falanga & Chalker in Alpharetta, GA.