Under President Obama, the Labor Department has been on an agressive crusade to crack down on what it sees as abusive or otherwise unfair business practices.
That crusade has led it to repeatedly warn an Arkansas-based consignment store franchise that it cannot let people volunteer at its 76 locations, even if that is what those people want to do. The franchise, called Rhea Lana Inc., has been locked in a three-year legal battle with the Labor Department over its very survival.
What is interesting about the case is that while the government has accused Rhea Lana of violating the Fair Labor Standards Act, it cannot apparently point to anyone who says they were harmed by the company’s policies — despite having reached out to people who had worked there.
Nevertheless, the administration has pursued the case out of an apparent fear that if the company’s practices go unchallenged, it would create a precedent that other businesses might exploit in the future.
The case is just one example of how the Labor Department under Secretary Tom Perez has sought to reinterpret old rules to expand its reach, an approach that allows it to bypass Congress. The department has updated rules on overtime, investor legal advice and “persuaders,” lawyers who advise management on union-related issues, all with the intent of removing what it saw as loopholes exploited by employers.
It has been an uphill fight for Rhea Lana, but it won a key court victory on June 3 when the D.C. Circuit Court of Appeals overturned a lower court’s ruling that prevented it from challenging the department’s actions.
“The outcome of this case will set an important precedent about the right to judicial review, the scope of the government’s control over U.S. commerce and whether individuals are free to volunteer their time for their own benefit,” said Alfred J. Lechner Jr., president of Cause of Action, a nonprofit law firm that is representing Rhea Lana.
The victory doesn’t resolve the case. It merely allows the company to challenge the government’s declaration that its volunteers are employees. Whether they are will determine whether the company can survive.
The Rhea Lana case represents the kind of gray-area practice that Labor Department lawyers have been keen to shut down: It is a for-profit company that relies on volunteers.
The company holds what are essentially big semi-annual yard sales. People who provide clothing or other items for the sales get 70 percent of the profits from the items they donate, as well as first crack at the other merchandise. Its business model is similar to that of eBay in that it effectively creates a marketplace for people to sell goods.
The donors often assist at the events, which last only a couple of days, by maintaining the displays or making sales transactions. That helps them ensure that their own items get sold. That’s also what got Rhea Lana in trouble with the federal government.
The Labor Department’s Wage and Hour Division told the company in a 2013 letter that it was violating the Fair Labor Standards Act because only nonprofits can have volunteers. While it didn’t penalize it at the time, it did say that any “repeated or willful violations” would result in fines “not to exceed $1,100 for each such violation.”
In effect, the department told Rhea Lana that if it continued running its business this way, the government would bleed it to death financially.
More ominously, the department’s letter also said it was was searching for people to make complaints against the company. “Letters have been sent to the consignors/volunteers informing of their private right under the FLSA to bring an independent suit to recover any back wages due,” it stated.
The company did admit to one mistake and paid more than $6,300 in back wages to 39 people it admitted should have been listed as independent contractors, not volunteers. But it otherwise rejected the department’s assertion that the others were really employees.
The agency explained its thinking in a 2013 letter to then-Rep. Tim Griffin, R-Ark.: Only “religious, charitable, civic, humanitarian or similar nonprofit organizations” legally can have volunteers.
It cited a 1945 Supreme Court ruling that found that the labor act must “be applied even to those who would decline its protections.” Otherwise, the court said, “employers might be able to use superior bargaining power to coerce employees to make such assertions.”
Rhea Lana has rejected the assertion as absurd, arguing that it has no power or other leverage over the volunteers. Asked if the government could identify any “consignors/volunteers” who had responded to its early inquiry, or just anyone who had worked for Rhea Lana who was complaining about its practices, a Labor Department spokesman declined.
“The Wage and Hour Division does not reveal the source of a complaint filed with the agency or even if a complaint was filed with the agency,” said spokesman Jason Surbey.
Before this month, it wasn’t clear that Rhea Lana would get its day in court. In another innovative move, the Labor Department said the company lacked the standing to challenge its declaration that the volunteers were employees since it hasn’t actually fined Rhea Lana, merely threatened to.
That created a catch-22 for the company: It couldn’t ignore the letter and go on as usual since that would mean it likely would be hit with legal sanctions. The company decided to roll the dice in court. The appeals court sided with the company, stating that the legal consequences the letter warned about meant it could be challenged.
“It was clear the [Labor Department] didn’t want to give Rhea Lana the opportunity to challenge their actions, which meant she would be stuck in legal limbo,” said Robert Cresanti, president of the International Franchise Association, a trade group whose members include Rhea Lana.
