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Rhea Lana's Franchise Systems puts on semi-annual consignment sales of used toys, clothing, furniture, and the like. Staffed "principally by mothers and grandmothers," the sales are not much different from community fundraisers or garage sales -- except that Rhea Lana is a for-profit business that franchises its sales, but doesn't pay any of its salespeople.
Failing to pay its salespeople brought Rhea Lana to the attention of the Department of Labor, which sent the company a letter notifying it of its noncompliance and warning that penalties could be imposed for repeated or willful violations. Rhea Lana sought to challenge the DOL's determination that it was out of compliance -- and won the right to do just that in the D.C. Circuit last week. The ruling could greatly expand business's right to challenge DOL determinations before any enforcement action is taken.
For Profit Company, Volunteer Workers
The Department of Labor has long held that for-profit companies cannot use volunteer workers without violating the Fair Labor Standards Act, and its letter to Rhea Lana stated as much. But Rhea Lana's workers aren't entirely uncompensated. Their franchise sales are staffed by "consignor-volunteers" who sell their own goods at the sales, taking home at least 70 percent of the proceeds from their sales.
That, Rhea Lana thinks, sets it apart from companies who simply do not pay their workers. When the DOL contacted Rhea Lana, it sought to take pre-enforcement action in order to vindicate its view of the law.
But the district court found that challenge to be premature. Since the DOL's letter was not a final agency action (the agency had done nothing more than send a letter, after all; no fines were imposed, no legal proceedings starter) it could not be challenged. In so ruling, the court relied upon long-established D.C. Circuit precedent holding similar letters to be unreviewable.
Whence Legal Rights Flow
But, this was not just a simple advice letter, the D.C. Circuit ruled last week. The DOL's letter rendered the company vulnerable to future legal action, according to Judge Nina Pillard, who wrote the opinion for the two-judge panel. (Chief Judge Merrick Garland, President Obama's Supreme Court nominee, took part in the arguments, but did not participate in the opinion.)
The court analogized the DOL letter to the one in the Supreme Court's 2012 case of Sackett v. EPA. There, the EPA issued an administrative compliance order under the Clean Water Act. When the landowners sued, the EPA argued that the order did not qualify as final agency action under the Administrative Procedure Act. After all, like the DOL here, they had yet to issue any fines or take other action against the Sacketts.
The Supreme Court disagreed, finding that the letter "determined rights or obligations," including the obligation to come into compliance with the Clean Water Act. "Legal consequences flowed" from the order, including the risk of double penalties for willful violations, should future enforcement actions be taken.
As Sackett goes, so too Rhea Lana. Like the EPA's order, the DOL's letter determined that Rhea Lana was out of compliance with the Fair Labor Standards Act. Like the EPA's order, it threatened increased penalties in future enforcement actions. And that second part is key.
Were the DOL's letter simply "the type of workaday advice letter that agencies prepare countless times per year," it would not be reviewable. But the letter stated that Rhea Lana would now be eligible for civil penalties for willful violations, should it not change its business -- that would be a clear legal consequence, one which allows the company to challenge the department's determination.
Expect to see similar challenges in the future -- and perhaps a few changes to how the DOL composes it's FLSA violation notices, as well.