Zheng v. Liberty Apparel Company Inc.

This case asks us to decide whether garment manufacturers who hired contractors to stitch and finish pieces of clothing were "joint employers" within the meaning of the Fair Labor Standards Act of 1938 ("FLSA"), 29 U.S.C. § 201 et seq., and New York law. Plaintiffs, garment workers in New York City who were directly employed by the contractors, claim that the manufacturers were their joint employers 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. The manufacturers respond that the contractors, who, among other things, hired and paid plaintiffs to assemble clothing for numerous manufacturers, were plaintiffs' sole employers. Both plaintiffs and the manufacturers moved for summary judgment on the issue of joint employment.

The United States District Court for the Southern District of New York (Richard Conway Casey, Judge), applying the four-factor test set forth in Carter v. Dutchess Community College, 735 F.2d 8 (2d Cir. 1984), granted the manufacturers' motion, and held that the manufacturers could not be held liable for violations of the FLSA or its New York statutory analogues. The District Court also declined to exercise supplemental jurisdiction over a surviving New York claim.

We conclude that the District Court erred when it limited its analysis to the four factors identified in Carter. Accordingly, we vacate the judgment of the District Court and remand the cause to the District Court with instructions concerning further proceedings.

The relevant facts are laid out in Judge Casey's opinion, Zheng v. Liberty Apparel Co., 2002 WL 398663, at *1-2 (S.D.N.Y. Mar.13, 2002), and we recount only those facts necessary to resolve the issues on appeal. Unless otherwise noted, the facts are undisputed.

Plaintiffs-Appellants are 26 non-English-speaking adult garment workers who worked in a factory at 103 Broadway in New York's Chinatown. They brought this action against both (1) their immediate employers, six contractors doing business at 103 Broadway ("Contractor Corporations") and their principals (collectively, "Contractor Defendants"), and (2) Liberty Apparel Company, Inc. ("Liberty") and its principals, Albert Nigri and Hagai Laniado (collectively, "Liberty Defendants"). Because the Contractor Defendants either could not be located or have ceased doing business, plaintiffs have voluntarily dismissed their claims against those defendants with prejudice. Accordingly, plaintiffs now seek damages only from the Liberty Defendants.

Liberty, a "jobber" in the parlance of the garment industry, is a manufacturing company that contracts out the last phase of its production process. That process, in broad terms, worked 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, 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. The workers, including plaintiffs, were paid at a piece rate for their labor.

From March 1997 through April 1999, Liberty entered into agreements with the Contractor Corporations under which the Contractor Corporations would assemble garments to meet Liberty's specifications. During that time period, Liberty utilized as many as thirty to forty assemblers, including the Contractor Corporations. Liberty did not seek out assemblers; instead, assemblers came to Liberty's warehouse looking for assembly work. In order to obtain such work, a prospective assembler was required by Liberty to sign a form agreement.

Plaintiffs claim that approximately 70-75% of their work during the time period at issue was for Liberty. They explain that they knew they were working for Liberty based on both the labels that were sewn into the garments and the specific lot numbers that came with the garments. Liberty's co-owner, Albert Nigri, asserts that the percentage of the Contractor Corporations' work performed for Liberty was closer to 10-15%. He derives that figure from individual plaintiffs' handwritten notes and records.

The parties do not dispute that Liberty employed people to monitor Liberty's garments while they were being assembled. However, the parties dispute the extent to which Liberty oversaw the assembly process. Various plaintiffs presented affidavits to the District Court stating that two Liberty representatives — a man named Ah Sen and "a Taiwanese woman" — visited the factory approximately two to four times a week for up to three hours a day, and exhorted the plaintiffs to work harder and faster. In their affidavits, these plaintiffs claim further that, when they finished working on garments, Liberty representatives — as opposed to employees of the Contractor Corporations — inspected their work and gave instructions directly to the workers if corrections needed to be made. One of the plaintiffs also asserts that she informed the "Taiwanese woman" that the workers were not being paid for their work at the factory.

Albert Nigri, on the other hand, avers that Liberty's quality control person made brief visits to assemblers' factories and was instructed to speak only with Lai Huen Yam, a co-owner of the Contractor Corporations, or with his wife. Furthermore, Nigri asserts in his affidavit that Liberty representatives were expected to spend just thirty minutes at each of the assemblers' work sites. Finally, Nigri states that Liberty did not employ two quality control persons simultaneously; did not employ a quality control person during some of the relevant time period; and did not employ a man as a quality control person.

In their complaint, plaintiffs alleged that both the Liberty Defendants and the Contractor Defendants violated 29 U.S.C. § 206 and N.Y. Lab. Law § 652(1) ("§ 652(1)"), which require an employer to pay employees a legally mandated minimum wage. Plaintiffs alleged further that all of the defendants, including Liberty and its principals, violated 29 U.S.C. § 207 and N.Y. Comp.Codes R. & Regs. tit. 12, § 142-2.2 ("§ 142-2"), which require employers to compensate employees at one-and-one-half times the regular rate when an employee works in excess of 40 hours per week. Additionally, plaintiffs alleged that defendants violated N.Y. Lab. Law § 191, which requires employers to pay manual workers on a weekly basis, and N.Y. Lab. Law § 193, which prevents employers from making unauthorized deductions from employees' wages. Finally, plaintiffs alleged that, in violation of N.Y. Lab. Law § 345-a ("§ 345-a") — a statutory provision that applies to the apparel industry only — Liberty Defendants entered into contracts with the Contractor Corporations even though they knew, or should have known, that the Contractor Corporations failed to comply with the provisions of New York law that govern the payment of wages.

Liberty Defendants moved for summary judgment on all claims against them on the ground that plaintiffs were not their employees. Plaintiffs cross-moved for summary judgment, seeking a determination that they were employed by Liberty. In a March 13, 2002 Opinion and Order, the District Court granted Liberty Defendants' motion for summary judgment and dismissed every federal and state claim in the complaint on the merits except the claim arising under N.Y. Lab. Law § 345-a, which does not require an employment relationship. See Zheng, 2002 WL 398663, at *7-9. The District Court determined that Liberty Defendants were not joint employers under the FLSA because, based on the plaintiffs' own admissions, these defendants did not (1) hire and fire the plaintiffs, (2) supervise and control their work schedules or conditions of employment, (3) determine the rate and method of payment, or (4) maintain employment records. See id. (applying the factors identified in Carter, 735 F.2d at 12). The District Court then declined to exercise pendent jurisdiction over the surviving claim under N.Y. Lab. Law § 345, and dismissed the complaint. Id. at *9.

Plaintiffs appeal (1) the District Court's grant of summary judgment dismissing the FLSA claims; (2) the dismissal on the merits of plaintiffs' claims under New York's statutory analogues to the FLSA, i.e., the § 652(a) and § 142-2 claims; and (3) the District Court's refusal to exercise pendent jurisdiction over the § 345-a claim.1

The FLSA defines "employee" as "any individual employed by an employer." 29 U.S.C. § 203(e)(1). An entity "employs" an individual under the FLSA if it "suffer[s] or permit[s]" that individual to work. 29 U.S.C. § 203(g). This definition is necessarily a broad one, in accordance with the remedial purpose of the FLSA. See United States v. Rosenwasser, 323 U.S. 360, 363 & n. 3, 65 S.Ct. 295, 89 L.Ed. 301 (1945); Brock v. Superior Care, Inc., 840 F.2d 1054, 1058 (2d Cir.1988).

An entity "suffers or permits" an individual to work if, as a matter of "economic reality," the entity functions as the individual's employer. See Goldberg v. Whitaker House Coop., Inc., 366 U.S. 28, 33, 81 S.Ct. 933, 6 L.Ed.2d 100 (1961) (explaining that "`economic reality' rather than `technical concepts' is ... the test of employment" under the statute); see also Herman v. RSR Security Services Ltd., 172 F.3d 132, 139 (2d Cir.1999) ("[T]he overarching concern is whether the alleged employer possessed the power to control the workers in question."). The regulations promulgated under the FLSA expressly recognize that a worker may be employed by more than one entity at the same time. See 29 C.F.R. § 791.2 (2003); see also Torres-Lopez v. May, 111 F.3d 633, 639-45 (9th Cir.1997) (permitting claims against joint employers under FLSA); Antenor v. D & S Farms, 88 F.3d 925, 929-38 (11th Cir.1996) (same). In the present case, it is undisputed that the Contractor Defendants, who are no longer parties to this suit, employed plaintiffs. The issue is whether the Liberty Defendants also employed them.

In previous cases, we have applied two different tests to determine whether an employment relationship exists in light of the Supreme Court's admonition that "economic reality" govern our application of the FLSA. In Carter v. Dutchess Community College, 735 F.2d 8 (2d Cir.1984), we held that an inmate conducting tutorial classes in a program managed by a community college had raised genuine issues of material fact as to whether the college was an employer under the FLSA, where, among other things, the college sent compensation directly to the inmate and set the inmate's tutoring schedule. See Carter, 735 F.2d at 13-15. To reach that conclusion, we evaluated whether the college

(1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.

See Carter, 735 F.2d at 12 (borrowing factors from Bonnette v. Cal. Health & Welfare Agency, 704 F.2d 1465, 1470 (9th Cir. 1983)).

More recently, we applied the same four-factor test in Herman v. RSR Security Services Ltd., 172 F.3d 132, 139 (2d Cir.1999), and affirmed the trial court's judgment, after a bench trial, that a company's chairman and co-owner qualified as a joint employer under the FLSA. We ratified the District Court's judgment because "[e]vidence in the record support[ed] at least three of the four [Carter] factors." Id. at 140.

Four years after deciding Carter but more than ten years before deciding Herman, we decided Brock v. Superior Care, Inc., 840 F.2d 1054 (2d Cir.1988). There, en route to affirming the District Court's determination after a bench trial that nurses engaged by a health-care service were employees of the service rather than independent contractors, we applied a different, more expansive test. That test, drawn from cases distinguishing employees from independent contractors, examined

(1) the degree of control exercised by the employer over the workers, (2) the workers' opportunity for profit or loss and their investment in the business, (3) the degree of skill and independent initiative required to perform the work, (4) the permanence or duration of the working relationship, and (5) the extent to which the work is an integral part of the employer's business.

See Superior Care, 840 F.2d at 1058-59 (citing, inter alia, United States v. Silk, 331 U.S. 704, 716, 67 S.Ct. 1463, 91 L.Ed. 1757 (1947)).

We have stated that "[t]he [four-factor] Bonnette test," borrowed by us from the Ninth Circuit in Carter, "is useful largely in cases involving claims of joint employment[,]" Danneskjold v. Hausrath, 82 F.3d 37, 43 (2d Cir.1996),2 because, when an entity exercises those four prerogatives, that entity, in addition to any primary employer, must be considered a joint employer. The Superior Care factors, on the other hand, and particularly factors two and three — the workers' investment in the business, and the degree of skill and independent initiative required of workers — have been used primarily to distinguish independent contractors 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. Instead, they help courts determine if particular workers are independent of all employers.

Despite this distinction between joint employment cases and 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. Thus, in Lopez v. Silverman, 14 F.Supp.2d 405 (S.D.N.Y.1998), which arose out of a factual backdrop somewhat similar to ours, Judge Denise Cote attempted to combine the tests used in Carter and Superior Care. Drawing on those two cases, along with the Supreme Court's decision in Rutherford Food Corp. v. McComb, 331 U.S. 722, 67 S.Ct. 1473, 91 L.Ed. 1772 (1947),3 Judge Cote concluded that the following seven factors should be considered in determining whether garment workers are jointly employed by a "jobber":

(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.

See Lopez 14 F.Supp.2d at 419-20.4 In choosing these factors, Judge Cote concluded that the four factors identified in Carter could not, on their own, constitute the "economic reality" test, because they rarely permit a finding of joint employment "outside of situations involving direct corporate subsidiaries or managing administrators." Id. at 415. However, Judge Core concluded also that the five Superior Care factors, on their own, likewise could not make up the "economic reality" test, because those factors, when applied to joint employment cases, are "equally skewed in the opposite direction." Id.

The District Court in this case expressly declined to follow Lopez. Citing Herman, 172 F.3d at 139, Judge Casey reasoned 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." Zheng, 2002 WL 398663, at *6. The Court then declared that the Carter test, which was reaffirmed in Herman, remains the law of the Circuit for determining whether an entity possesses the requisite control over workers, and that Lopez cannot be reconciled with Carter. Id. Applying the four Carter factors only, the District Court concluded that the Liberty Defendants lacked sufficient control over plaintiffs to qualify as joint employers, and thus granted their motion for summary judgment. Id. at *7.

We conclude, for the reasons set forth below, that the District Court erred when, based exclusively on the four factors mentioned in Carter, it determined that the Liberty Defendants were not, as a matter of law, joint employers under the FLSA. 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. Moreover, as explained below, neither Carter nor Herman supports the application of a rigid four-part test in the instant case. In those cases, we held only that the four factors applied by the District Court in this case can be sufficient to establish employer status. We did not hold, nor under Rutherford could we have held, that a positive finding on those four factors is necessary to establish an employment relationship. Accordingly, the District Court's judgment in favor of the Liberty Defendants must be vacated.

As noted above, the relevant provision of the FLSA, 29 U.S.C. § 203(g), defines "employ" as including "to suffer or permit to work." This is "`the broadest definition [of `employ'] that has ever been included in any one act,'" United States v. Rosenwasser, 323 U.S. 360, 363 n. 3, 65 S.Ct. 295, 89 L.Ed. 301 (1945) (quoting 81 Cong. Rec. 7657 (1937) (statement of Sen. Hugo L. Black)),5 and it encompasses "working relationships, which prior to [the FLSA], were not deemed to fall within an employer-employee category," Walling v. Portland Terminal Co., 330 U.S. 148, 150-51, 67 S.Ct. 639, 91 L.Ed. 809 (1947).

Measured against the expansive language of the FLSA, the four-part test employed by the District Court is unduly narrow, as it focuses solely on the formal right to control the physical performance of another's work. That right is central to the common-law employment relationship, see Restatement of Agency § 220(1) (1933) ("A servant is a person employed to perform service for another in his affairs and who, with respect to his physical conduct in the performance of the service, is subject to the other's control or right to control."), and, therefore, the four-factor test may approximate the common-law test for identifying joint employers. However, the four-factor test cannot be reconciled with the "suffer or permit" language in the statute, which necessarily reaches beyond traditional agency law. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326, 112 S.Ct. 1344, 117 L.Ed.2d 581 (1992) (noting that the "suffer or permit to work" formulation "stretches the meaning of `employee' to cover some parties who might not qualify as such under a strict application of traditional agency law principles"); Bartels v. Birmingham, 332 U.S. 126, 130, 67 S.Ct. 1547, 91 L.Ed. 1947 (1947) (explaining that, under the economic reality test, "employees" are not limited to those who are subject to the physical control of an employer). Indeed, the narrow approach used by the District Court may be more rigid than the common-law approach.6

Rutherford confirmed that the definition of "employ" in the FLSA cannot be reduced to formal control over the physical performance of another's work. In Rutherford, the Supreme Court held that a slaughterhouse jointly employed workers who de-boned meat on its premises, despite the fact that a boning supervisor — with whom the slaughterhouse had entered into a contract — directly controlled the terms and conditions of the meat boners' employment. Specifically, the supervisor, rather than the slaughterhouse, (i) hired and fired the boners, (ii) set their hours, and, (iii) after being paid a set amount by the slaughterhouse for each one hundred pounds of de-boned meat, paid the boners for their work. Rutherford, 331 U.S. at 726, 730, 67 S.Ct. 1473.

In determining that the meat boners were employees of the slaughterhouse notwithstanding the role played by the boning supervisor, the Court examined the "circumstances of the whole activity," id. at 730, 67 S.Ct. 1473, but also isolated specific relevant factors that help distinguish a legitimate contractor from an entity that "suffers or permit[s]" its subcontractor's employees to work. First, the Court noted that the boners "did a specialty job on the production line"; that is, their work was "a part of the integrated unit of production" at the slaughterhouse. Id. at 729-30, 67 S.Ct. 1473. The Court noted also 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, closely monitored the boners' performance and productivity. Id. Based on its analysis of these factors, the Court imposed FLSA liability on the slaughterhouse.

Like the case at bar, Rutherford was a joint employment case, as it is apparent from the Supreme Court's opinion that the boners were, first and foremost, employed by the boning supervisor who had entered into a contract with the slaughterhouse. See id. at 724-25 (explaining that the boning supervisor exercised the prerogatives of an employer, including hiring workers, managing their work, and paying them). 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.7

Carter and Herman are consistent with Rutherford, and neither case supports the application of the test used by the District Court in the circumstances presented in the instant case to negate employer liability. The question before us in Carter was whether prisoners who performed work for an educational institution could be considered employees of that institution under the FLSA. Carter, 735 F.2d at 12. In rejecting the district court's conclusion that they could not be considered employees as a matter of law, we did not purport to identify all factors that could bear on the employer status question. Instead, we stated that the economic reality test "include[s]" an inquiry into the four factors. Id. (emphasis added). We then determined that summary judgment in favor of the defendant was inappropriate considering that the defendant exercised most of the "typical employer prerogatives" encompassed by the four factors. Id. at 14-15. 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.8

In our more recent decision in Herman, moreover, we affirmed the District Court's determination after a bench trial that a company chairman jointly employed the company's employees where the chairman exercised three of the four employer prerogatives identified in Carter. In doing so, we reiterated that "economic reality is determined based upon all the circumstances, [and] any relevant evidence may be examined so as to avoid having the test confined to a narrow legalistic definition." Herman, 172 F.3d at 139 (emphasis in original). 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 sugges