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Perez v. Five M'S

United States District Court, N.D. Indiana

March 1, 2017

THOMAS E. PEREZ, Secretary of Labor, United States Department of Labor, Plaintiff,
FIVE M'S, an Indiana limited liability company d/b/a PREMIER AUTO, PREMIER AUTO SALES, and VALPARAISO CAR CARE AND TRANSMISSION, R-WAY, INC., an Indiana corporation d/b/a L&W AUTO SALVAGE, and JOHN MORGAVAN, an individual, Defendants.


          William C. Lee, Judge United States District Court

         This matter is before the court on a motion for summary judgment filed by the plaintiff, Thomas E. Perez, Secretary of Labor, United States Department of Labor (“DOL”), on August 1, 2016. The defendants, Five M's and John Morgavan, filed a response to the motion on September 1, 2016, to which the DOL replied on September 19, 2016.

         Also before the court is a motion to strike portions of the declaration of Nancy Alcantara, filed by Five M's on September 1, 2016. The DOL responded to the motion to strike on September 19, 2016. Five M's declined to file a reply.

         Also before the court is a motion to strike the affidavit of Neal Guidarelli, filed by the DOL on September 19, 2016. Five M's has not filed a response.

         Summary Judgment

         Summary judgment must be granted when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A genuine issue of material fact exists when “the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Not every dispute between the parties precludes summary judgment, however, since “[o]nly disputes over facts that might affect the outcome of the suit under the governing law” warrant a trial. Id. To determine whether a genuine issue of material fact exists, the court must construe all facts in the light most favorable to the non-moving party and draw all reasonable inferences in that party's favor. Heft v. Moore, 351 F.3d 278, 282 (7th Cir. 2003). A party opposing a properly supported summary judgment motion may not rely merely on allegations or denials in its own pleading, but rather must “marshal and present the court with the evidence she contends will prove her case.” Goodman v. Nat'l Sec. Agency, Inc., 621 F.3d 651, 654 (7th Cir. 2010).


         On May 1, 2015, the DOL filed a complaint against Five M's seeking injunctive relief, restraining minimum wage, overtime, and recordkeeping violations of the FLSA, and recovery of unpaid compensation with an equal amount in liquidated damages under the FLSA. The DOL's lawsuit specifically seeks a total of $28, 954.12 for 35 employees in unpaid wages ($1, 676.83) and unpaid overtime ($12, 800.23) and liquidated damages ($14, 477.06).

         The DOL alleges that Five M's history of FLSA violations dates back to 2005, when the DOL's Wage and Hour Division (“Wage and Hour”) first conducted an investigation of Valparaiso Transmission and owner John Morgavan. Then, like now, Wage and Hour determined that Mr. Morgavan failed to pay an employee his last paycheck (a minimum wage violation), paid hourly employees who worked more than 40 hours per workweek their regular rates for all hours worked (an overtime violation), and failed to keep records of hours worked (a recordkeeping violation). More than ten years later, Valparaiso Transmission, Premier Auto Sales, and L & W Auto Salvage (hereinafter, the “three businesses”) are still operating under Mr. Morgavan's complete direction and control, and the DOL contends that Mr. Morgavan is still disregarding the obligations he and the three businesses have as employers subject to the FLSA.

         The three businesses, which are an auto repair shop (Valparaiso Transmission), a salvage yard (L & W Auto Salvage), and a used car lot (Premier Auto Sales), operate as one vertically integrated enterprise with a common business purpose - buying, selling, and servicing used cars. The three businesses are open to the public. Valparaiso Transmission provides a range of car services to customers, while L & W Auto Salvage buys cars, dismantles junk cars for parts, and sells usable car parts on a walk-in basis directly to customers. However, Valparaiso Transmission and L & W Auto Salvage are also each other's “customers, ” even though no money changes hands. L & W Auto Salvage supplies car parts to Valparaiso Transmission on an as-needed basis, and it is the first stop when Mr. Morgavan needs cheap parts to fix up used cars to sell at his Premier Auto Sales. Likewise, when used cars for sale at Premier Auto Sales need repairs or detailing, Valparaiso Transmission provides those services. In turn, Valparaiso auto technicians work at L & W Auto Salvage, providing services such as pulling parts.

         Wage and Hour's findings in the investigation that resulted in this lawsuit mirror its findings in the 2005 investigation. The only thing that seems to have changed since 2005 is the fact that Mr. Morgavan created a parent company (Five M's) to make filing his taxes easier. The DOL now seeks summary judgment to require Mr. Morgavan and his three businesses to comply with the FLSA.

         The DOL first argues that the three business are a covered “enterprise” under the FLSA. The FLSA defines an “enterprise” as “the related activities performed (either through unified operation or common control) by any person or persons for a common business purpose, and includes all such activities whether performed in one or more establishments or by one or more corporate or other organizational units . . . .” 29 U.S.C. § 203(r)(1). Thus, there is a three-part test to establish enterprise coverage: (1) related activities; (2) unified operation or common control; and (3) common business purpose. See Brennan v. Arnheim & Neely, Inc., 410 U.S. 512, 518 (1973); 29 C.F.R. § 779.202. Determining whether the three businesses are an “enterprise” is a question of law. Hicks v. Avery Drei, LLC, 654 F.3d 739, 747 (7th Cir. 2011) (citations omitted). The FLSA requires employees of “an enterprise engaged in commerce” to be paid the minimum wage and the overtime premium. See 29 U.S.C. §§ 206(a), 207(a)(1).

         In the present case, Five M's does not dispute that the three businesses are a covered “enterprise” under the FLSA. Additionally, Five M's admitted in an interrogatory answer that Mr. Morgavan is a § 3(d) employer under the FLSA. Accordingly, this court finds that the three businesses are an “enterprise” subject to the FLSA and that Mr. Morgavan is an individual employer pursuant to § 3(d) of the Act.

         The DOL next argues that Five M's failed to maintain required records. The FLSA requires employers to maintain records of hours worked each workday and total hours worked each workweek. 29 U.S.C. § 211(c); 29 C.F.R. §§ 516.2(a)(7); 516.6(a)(1). FLSA § 11(c) requires employers to “make, keep, and preserve such records of the persons employed by him and of the wages, hours, and other conditions of employment maintained by him, ” as prescribed by regulation of the DOL. 29 U.S.C. § 211(c). The United States Supreme Court recognized the importance of accurate recordkeeping in the FLSA enforcement scheme and held that an employer's failure to maintain accurate records of hours actually worked or kept records that are inaccurate or inadequate shifts the burden of proof concerning back wage liability to the employer. Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1945); see also Wirtz v. Turner, 330 F.2d 11 (7th Cir. 1964); U.S. Dep't of Labor v. Cole Enterprises, Inc., 62 F.3d 775, 780-81 (6th Cir. 1995).

         Thus, for any period in which the employer has failed to maintain accurate records as required by the Act, the DOL's burden of proof as to the extent of any back wage liability is met by showing that work was performed which was not properly compensated and by producing sufficient evidence to show the nature and extent of that work as a matter of just and reasonable inference. The burden then shifts to the employer either to come forward with precise evidence of the work performed or to rebut the reasonableness of the inference to be drawn from the DOL's evidence. Mt. Clemens, 328 U.S. at 687-88; see also Turner, 330 F.2d at 13. The employer must not be allowed to profit from difficulties of proof created by his own misconduct. Mt. Clemens, 328 U.S. at 688. Evidence that provides a reasonable basis for inference of a “pattern or practice” concerning the actual hours worked is sufficient for approximation of a remedy that includes non-testifying employees. Martin v. Tony & Susan Alamo Foundation, 952 F.2d 1050, 1052 (8th Cir. 1992).

         Five M's admit that they maintained time cards for an unknown time after the hours were reported to the payroll company, “[a]nd then after a while, [Five M's] would probably dispose of them.” (Guidarelli Aff. ¶ 34). Mr. Guidarelli, the manager in charge of payroll for all three businesses, told Wage and Hour that he believed time cards could be disposed of after calling hours into the payroll company. (Id. ¶ 35). Five M's retained “book rate” hours of Valparaiso Transmission technicians for no more than six weeks. (Id. ¶ 36). Five M's admit that there was no policy regarding time sheets that Five M's employees used to record their hours worked (Id. ¶ 37), despite being repeatedly told by Wage and Hour that maintaining and preserving records of hours worked for two years are required by the Act.

         These basic time records showing hours worked are required to be preserved for two years, and Five M's failed to do so. See 29 C.F.R. § 516.6(a)(1). Five M's payroll records (DOL Ex. J) did not accurately reflect the number of hours worked based on Wage and Hour's interviews of 20 employees. Investigator Alcantara used Five M's year-to-date payroll reports (DOL Ex. J at 1-30) to identify employees' hourly rate and Five M's' weekly payroll journals (Id. at 31-58) to identify employees' gross pay. (Guidarelli Aff. ¶ 54). Because Five M's did not maintain complete or accurate time records for the investigatory period, the DOL relied on the interviews of twenty employees of Valparaiso Transmission and L & W Auto Salvage and Five M's operating hours to determine the actual hours worked. (Id.).

         L & W Auto Salvage is open to the public from 8:00 am to 5:00 pm Monday through Friday and from 8:00 am to 4:00 pm on Saturday. (DOL Ex. C 241:19-242:3). Employees typically worked during these operating hours, which equal 47 hours per workweek when a one-hour daily lunch is deducted. Therefore, the DOL used a 47-hour workweek for L & W Auto Salvage employees when calculating back wage amounts due. (Id. ¶ 54a). The DOL states that the 47-hour workweek was consistent with employee interview statements.

         Valparaiso Transmission is open to the public from 8:00 am to 5:00 pm Monday through Friday and from 8:00 am to 12:00 pm on Saturdays. (DOL Ex. C at 242:10-16). Employees typically worked Monday through Friday from 8:00 am to 5:15 pm; the extra fifteen minutes is a result of employees parking cars inside Valparaiso Transmission's garage bays at the end of the day. This equals 43.75 hours Monday through Friday when a half-hour daily lunch is deducted. Valparaiso Transmission employees typically worked from 8:00 am to 2:45 pm on Saturdays, which equals 6.25 hours on Saturday. Therefore, the DOL used a 50-hour workweek for Valparaiso Transmission employees when calculating back wage amounts due. The 50-hour workweek was consistent with employee interview statements.

         Five M's has not addressed the DOL's argument that it failed to comply with FLSA recordkeeping requirements. Moreover Five M's admits that it had no policy regarding time cards, maintained time cards for an unknown time after the hours were reported to Paycor, and retained “book rate” hours of Valparaiso Transmission technicians for no more than six weeks. In response to the DOL's request for all timesheets, time cards, and other time records for their employees, Five M's produced payroll records for February 2012 through September 2014 and were only able to produce copies of 22 time cards. As the DOL notes, Five M's submitted no evidence that it complies with the FLSA's recordkeeping requirements. Therefore, this court finds as a matter of law that Five M's violated the FLSA's recordkeeping requirements and will enter a recordkeeping injunction against all Defendants.

         Next, the DOL argues that Five M's failed to pay at least $7.25 per hour for certain hours worked. The DOL has proffered the declaration of Investigator Nancy Alcantara in support of its assertions.[1] Employers are prohibited from paying employees less than the applicable minimum wage per hour as defined by the Act. 29 U.S.C. § 206. The DOL asserts that the current investigation covering the period from June 30, 2012, through September 20, 2014, revealed several minimum wage violations. First, Five M's payroll records reflect that Salaried Parts Puller James Wilhelm's pay was docked during his last two workweeks (weeks ending October 26, 2013, and November 11, 2013), which brought his pay below the minimum wage rate. Mr. Wilhelm earned a weekly salary of $420.00, but he was paid only $210.00 and $105.00 during his last two workweeks. Mr. Wilhelm is due $315.61 in unpaid minimum wage.

         Second, on August 16, 2013, Book Rate Technician Thomas Bade was paid by a check for $111.83 with insufficient funds, resulting in a minimum wage violation because it brought his pay below the minimum wage rate. Mr. Bade is due a total of $67.72 in unpaid minimum wage. Five M's recalls an issue with issuing a bounced check to Thomas Bade, but does not know how it was resolved.

         Valparaiso Transmission paid some technicians a weekly salary (“Salaried Technicians”); most technicians were paid using the “book rate” system in which they were paid based on the amount of time it should take an average mechanic to perform a specific task instead of being paid based on the actual hours worked (“Book Rate Technicians”). Section 7(I) of the FLSA permits employers to pay employees on this type of book rate basis “if (1) the regular rate of pay of such employee is in excess of one and one-half times [the minimum wage in section 6 of the Act] and (2) more than half his compensation for a representative period (not less than one month) represents commissions on goods or services.” 29 U.S.C. § 207(I); see also Wage and Hour's FIELD OPERATIONS HANDBOOK ¶ 21(h) (available at /FOH/FOH_Ch21.pdf.). Five M's has “no idea” whether anyone at the company is responsible for ensuring compliance with the FLSA, and no one at the three businesses verified that Book Rate Technicians earned at least the Federal minimum wage.

         Wage and Hour investigated Five M's pay practices with respect to the Book Rate Technicians on a workweek-by-workweek basis. If the regular rate of a Book Rate Technician was more than one and one-half times the minimum wage ($10.88 per hour), then no back wages were due. (See 29 U.S.C. ยง 207(I)). If the regular rate of a Book Rate Technician were less than $10.88 per hour, then the employee was entitled to minimum wage and overtime. In order to determine whether the employee was paid minimum wage and overtime, for each workweek Wage and Hour took the Book Rate Technicians' gross pay from Five M's payroll records and divided that number by the 50-hour workweek to determine the regular rate. If that rate were less than $7.25, the difference between $7.25 and the regular rate was multiplied by 50 hours. The record shows that, in certain workweeks, four of the Book Rate Technicians' regular hourly rates ...

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