ISSUES
1. Does the Department of Labor (DOL) have the authority to sue in federal court for private companies' alleged violations of the Fair Labor Standards Act?
a. Does the phrase "commerce among the several states" imply only commerce between the states themselves, or does it include commerce between citizens of different states?b. If the Department of Labor has the authority, may it sue in federal court?
2. Is the DOL required to exhaust its administrative remedies before suing in federal court?
3. If not, may a court exercise discretion to stay a suit until the DOL makes its final findings?
SUMMARY
1. Yes. The phrase "commerce among the several states" has been judicially interpreted to include commerce between private citizens of different states. Congress has extremely broad powers to regulate this area, and has even extended its reach to regulating labor standards for state governmental entities that have survived Tenth Amendment challenges.
Under 28 U.S.C. §§1331, 1337, and 1345 the federal district courts have original jurisdiction over suits arising out of federal legislation.
2. No. Neither the employee nor the DOL need wait until the Secretary of Labor has made final determinations before filing suit. In fact, both are held to the two-year statute of limitations stated in the Portal to Portal Act, which begins to run when the harm occurred, and not after the administrative findings have been issued. Furthermore, the filing of an administrative claim does not toll the statute. The courts distinguish between statutes in which the administrative agency is the forum of original jurisdiction, and those in which the plaintiff is granted original jurisdiction in the federal courts, such as the Fair Labor Standards Act.
But if the DOL failed to implement its regulations regarding notice of penalty and the opportunity to contest it, it might be possible to obtain a stay or a dismissal of the suit until the Department complies with its regulations.
3. Yes. The court must use a balancing test to weigh various factors in deciding whether it should stay proceedings pending the completion of administrative review.
STATEMENT OF FACTS
Acme Jones is an architectural limited liability company whose main office and place of business is located in Mills Beach, California. The DOL alleges that defendant company has engaged in "commerce" as defined in §3(s) of the Fair Labor Standards Act, and that defendant has violated Sections 7 and 15 (a)(2) by failing to pay overtime to employees working a week of more than forty hours, and by failing to keep adequate time records.
DISCUSSION
1. The Fair Labor Standards Act applies to private employers.
The Fair Labor Standards Act provides for the establishment of "fair labor standards in employments in and affecting interstate commerce." 29 U.S.C. §201 (1997). "Commerce" is defined as "trade, commerce, transportation, transmission, or communication among the several States or between any State and any place outside thereof." 29 U.S.C. §203 (b). The Fair Labor Standards Act originally applied only to private sector employers, but has gradually been extended to public agencies including federal, state and local governments. 29 U.S.C. §203 (d) and (e).
The Fair Labor Standards Act has been held to be a valid exercise of Congress's power to regulate interstate commerce. Opp Cotton Mills v. Administrator of Wage and Hour Division of Department of Labor (5th Cir. 1940) 111 F.2d 23, aff'd. (1941) 312 U.S. 126, 657, 61 S.Ct. 524, 85 L.Ed. 624 (1942). Enactment of this chapter was Congress' exercise of its power to regulate commerce among the several states. Wirtz v. Mayer Const. Co. (D.N.J. 1968) 291 F. Supp. 514.
The phrase "among the several states" is taken from the Commerce Clause of the United States Constitution (Article 1, §8, clause 3), which states that Congress has the power "to regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes." Courts have long interpreted the phrase "among the several states" to include contracts between private citizens residing in different states. See, e.g., Gibbons v. Ogden (1824) 22 U.S. 1, 9 Wheat 1, 6 L. Ed. 23; Addyston Pipe & Steel Company v. United States (1899) 175 U.S. 211, 20 S.Ct. 96, 44 L.Ed. 136; Heart of Atlanta Motel v. U.S. (1964) 379 U.S. 241, 85 S.Ct. 348, 13 L.Ed.2d 258.
In Gibbons, Chief Justice John Marshall discussed at length the purpose of the interstate commerce clause:
The word "among" means intermingled with. A thing which is among others, is intermingled with them. Commerce among the States cannot stop at the external boundary line of each State, but may be introduced into the interior. It is not intended to say that these words comprehend that commerce, which is completely internal, which is carried on between man and man in a State, or between different parts of the same State, and which does not extend to or affect other States . . . . Comprehensive as the word "among" is, it may very properly be restricted to that commerce which concerns more States than one.9 Wheat at 194.
He also stated, "It has, we believe, been universally admitted, that these words comprehend every species of commercial intercourse . . . . No sort of trade can be carried on . . . to which this power does not extend." Id. at 193-94.
The Supreme Court stated later that "Commerce among the states, we have said, consists of intercourse and traffic between their citizens, and includes the transportation of persons and property." Hoke v. U.S. (1913) 227 U.S. 308, 320, 33 S.Ct. 281, 57 L.Ed. 523.
The Supreme Court has expressly ruled on the issue of Congress's ability to regulate contracts between private citizens. In Addyston Pipe & Steel Co., supra, the Court held that Congress' power to regulate interstate commerce includes the power to legislate on the subject of private contracts in respect to such commerce:
[T]he liberty of the citizen is, to some extent, limited by the commerce clause of the Constitution, and . . . the power of Congress to regulate interstate commerce comprises the right to enact a law prohibiting the citizen from entering into those private contracts which directly and substantially, . . . regulate to a greater or less degree commerce among the states.Id. at 229, 20 S.Ct. at 103.
The Court explained:
If a state, with its recognized power of sovereignty, is impotent to obstruct interstate commerce, can it be that any mere voluntary association of individuals within the limits of that state has a power which the state itself does not possess? What sound reason can be given why Congress should have the power to interfere in the case of the state, and yet have none in the case of the individual? Commerce is the important subject of consideration, and anything which directly obstructs and thus regulates that commerce which is carried on among the states, whether it is state legislation or private contracts between individuals or corporations, should be subject to the power of Congress in the regulation of that commerce.
Id. at 230, 20 S.Ct. at 103.
The Supreme Court continues to hold that contracts among private citizens are a proper subject of the interstate commerce clause. See, e.g., Heart of Atlanta Motel, supra, 379 U.S. at 256, 85 S.Ct. at 357 ("Commerce among the states, we have said, consists of intercourse and traffic between their citizens, and includes the transportation of persons and property.").
The House and Senate Conference Report of the Fair Labor Standards Act stated:
(b) It is hereby declared to be the policy of this Act, through the exercise by Congress of its power to regulate commerce among the several States, to correct and as rapidly as practicable to eliminate the conditions above referred to in such industries [engaged in commerce].
"Commerce" is defined in §3 as "trade, commerce, transportation, transmission, or communication among the several States or from any State to any place outside thereof."
Neither the Senate Bill, the House Amendment, the Statement of the Managers on the Part of the House, nor the Conference Agreement deviate from this definition. House Report No. 2738, 75th Congress, 3d Session. Thus, it appears that Congress intended to incorporate the established usage of the interstate commerce clause, which includes private contracts between citizens of different states.
2. The Department of Labor might be required to exhaust administrative remedies before filing suit.
Under the facts submitted, it is not clear whether the DOL completed its investigation before filing suit. Thus, it is possible that the DOL filed suit while investigation was still underway. If so, this action raises the issues of exhaustion of administrative remedies and the possibility of a judicial stay, as well as the potential that the DOL violated its own procedures regarding the provision of notice and the opportunity for an administrative hearing regarding the finding of a violation.
A. Procedural issues
Claimants under the Fair Labor Standards Act can sue directly in "any Federal or State court of competent jurisdiction." 29 U.S.C. §216(b) (1997). In addition, "the Secretary [of Labor] may bring an action in any court of competent jurisdiction to recover the amount of unpaid minimum wages or overtime compensation and an equal amount as liquidated damages." 29 U.S.C. §216 (c). But the Secretary's filing of the suit terminates the employee's individual suit. Ibid. The Secretary may also bring an action enjoining the violation under §17 of the Act. 29 U.S.C. §217. The Secretary of Labor may bring these actions in federal district court under 28 U.S.C. §1331 (federal question), §1337 (commerce and antitrust regulations), or §1345 (United States as plaintiff).
The DOL has promulgated some regulations regarding the assessment of penalties for overtime and wage violations. See 29 Code of Federal Regulations §580 et seq. These regulations provide that, whenever the Administrator determines that there has been a violation of the child labor provisions or a repeated violation of sections six or seven of the Act (minimum wage and overtime provisions), and determines that the imposition of a civil money penalty for such violation is appropriate, the Administrator shall issue and serve a notice of the penalty on the violater in person or by certified mail. Where the party does not accept service by certified mail, notice shall be deemed received on the date of attempted delivery. 29 CFR §580.3.
The notice must set forth the Administrator's determination as to the penalty's amount and the reasons therefor, state the right to object to the assessment of penalties and the right to request a hearing on the determination, inform the party that the absence of a timely exception to the determination and a request for a hearing within 15 days of the receipt of the notice shall render the determination final and unappealable, and include the time and method for requesting a hearing and the relevant procedures. 29 CFR §580.4.
On receipt of a timely objection, the matter is referred to the Chief Administrative Law Judge for a prehearing conference and hearing. The judge shall render a statement of findings and conclusions with an order. 29 CFR §§580.10, 580.11, 580.12.
Any party desiring review of the Administrative Law Judge's decision may file an appeal with the Secretary within thirty days. Id. 580.13. The Secretary's decision is then considered final. Id. §580.16.
Once the decision has become final, the amount is immediately due and payable to the U.S. Department of Labor. Id. §580.18(a). The amount may also be recovered in a civil action brought by the Secretary if the party does not voluntarily remit the amount within a reasonable time. Id. §580.18(b)(2). The Secretary may also bring an action for violation of §15(a)(4) (child labor) or repeated or willful violation of §15(a)(2). Id. 580.18(b)(2).
If the party does not file a written objection within 15 days, the determination is deemed final and collection and recovery of the penalty shall be instituted. 29 CFR §580.5.
B. Exhaustion of remedies
Under the doctrine of exhaustion of administrative remedies, parties are not entitled to resort to federal courts until they have been through all administrative procedures. McCarthy v. Madigan (1992) 503 U.S. 140, 144-45, 112 S.Ct. 1081, 1086, 117 L.Ed.2d 291. Exhaustion is required because it serves the twin purposes of protecting administrative agency authority and promoting judicial efficiency. Id. at 145, 112 S.Ct. at 1086. But this doctrine only applies to claims that an administrative agency must process first:
The well-recognized rule that administrative remedies must be exhausted before resort can be had to the judicial processes has application to claims which are cognizable in the first instance only by an administrative agency. In respect to claims of that kind, judicial interference is withheld until the administrative course has been exhausted. But since the cause of action pleaded in the complaint herein was cognizable in the first instance in the court, the statute referred to [requiring exhaustion of administrative relief] is without application.Aguilar v. Clayton (E.D. Okla., 1978) 452 F. Supp. 896, 899, citing U.S. v. Winegar (10th Cir. 1958) 254 F.2d 693, 695-96 (action by Department of Labor under Walsh-Healey Act which provides labor standards for government contracts).
In Aguilar, the court noted,
There is no reference in §216(b), which confers jurisdiction on this court, to any administrative prerequisite whatsoever before filing suit. Likewise, in §255(a) of the Act, which sets forth the period within which suit must be brought, there is no reference in any way to administrative proceedings tolling or otherwise affecting the time limitations prescribed for court actions." (1)
Id. at 900.
The court held that the source of the cause of action is in the statute, not in the Secretary of Labor's findings. Id. at 899, citing Unexcelled Chemical Corp. v. United States (1952) 345 U.S. 59, 65-66, 73 S.Ct. 580, 583-84, 97 L.Ed. 821 (action brought by Department of Labor under Walsh-Healey Act). The court noted,
The cause of action accrued when the violation of the Act occurred. The fact that due deference to the administrative process should make a court hold its hand until the administrative proceedings before the Secretary of Labor have been completed is a matter of judicial administration and of no relevancy here.
Id. at 899.
The court thus held that the filing of an administrative claim does not in any way toll or otherwise affect the two-year limitation imposed by §255(a) (the Portal to Portal Act) on seeking judicial relief for violations of the Fair Labor Standards Act. Thus, the United States has the right at any time within the applicable period of limitation to institute and maintain the action. Ibid.
The Aguilar court added that an aggrieved employee seeking overtime compensation can immediately file a court action and then apply for a stay pending the outcome of his administrative remedies. By so doing, the employee satisfies the requirements of the statute of limitations. Ibid.
Thus, it appears that the DOL's administrative procedures are not a prerequisite for filing suit by either the aggrieved employee or the Department itself.
C. Agencies must follow their own
regulations.
On the other hand, agencies are required to follow their own regulations. Confederated Tribes and Bands v. F.E.R.C. (9th Cir. 1984) 746 F.2d 466. In Confederated Tribes, the FERC issued a license without following its regulations requiring an impact statement or consulting with fishery agencies and Indian tribes as its regulations required. The Ninth Circuit held that these regulations were part of the FERC's obligations to investigate fishery matters; thus, the failure to follow them supported the court's decision to reverse the license order and remand it to the Commission. Id. at 474-75.
An agency is bound by its regulations so long as they remain operative, but may repeal them and substitute new rules in their place. Romeiro de Silva v. Smith (9th Cir. 1985) 773 F.2d 1021, 1025; United States v. Nixon (1974) 418 U.S. 683, 696, 94 S.Ct. 3090, 3101, 41 L.Ed.2d 1039. This is particularly true when the procedures are designed to protect an aggrieved party's rights. Chrysler Corp. v. Brown (1979) 441 U.S. 281, 99 S.Ct. 1705, 1718, 60 L.Ed.2d 208.
A failure to follow its own regulations is fatal to the deviant action. Mine Reclamation v. FERC (D.C. Cir. 1994) 30 F.3d 1519, 1524. Federal courts are permitted to review decisions of agencies. 5 U.S.C. §706. Section 706 provides: "The reviewing court shall . . . (2) hold unlawful and set aside agency action, findings, and conclusions found to be . . . (D) without observance of procedure required by law."
A particular rule's or statement's binding quality of a will depend on whether the agency intended to establish a substantive rule, one that is not merely interpretative but that creates or modifies rights enforceable against the agency. The issue of whether the regulation has the force of law turns on certain substantive and procedural requisites. Chrysler Corp. v. Brown, supra, 99 S.Ct. at 1717. A "substantive" or "legislative-type rule" affects "individual rights and obligations." Id. 99 S.Ct. at 1718. The issue also involves a careful examination of Congress's grant of quasi-legislative authority, including an examination of the Executive Orders. Id. 441 U.S. at 302-309, 99 S.Ct. 1718-1720.
Agency regulations not mandated by federal law are not entitled to the degree of judicial deference and enforcement due those promulgated under compulsion of law. Onslow County, N.C. v. U.S. Department of Labor (4th Cir. 1985) 774 F.2d 607, 611. In Onslow County, the court held that the Secretary of Labor's failure to conduct an audit every two years was not fatal to the Department's right to seek recoupment against a party for non-grant funds. Id. at 611. The court noted that Congress did not condition recoupment on timely audits. Ibid.
It is not clear, then, whether the DOL would be required to follow the procedure outlined in the Code of Federal Regulations before filing a suit. The procedure does affect individual rights and obligations--at least those of the company. On the other hand, the cause of action is not conditioned on the Department's administrative procedure; hence, the Department's final determination is not required for suit.
D. Judicial stay
Although the DOL's potential failure to follow its procedures might not be fatal to its case, it might provide the basis for a stay. When an action is instituted during the pendency of the administrative proceeding but before the making of findings of fact therein, whether the judicial action should be stayed for a reasonable time to await completion of the administrative proceeding is a question addressed to the court's sound judicial discretion. U.S. v. Winegar, supra, 254 F.2d at 696.
Courts must balance the individual's interest in prompt access to a federal judicial forum against countervailing institutional interests favoring exhaustion. McCarthy v. Madigan, supra. The courts look first to whether Congress has required exhaustion. Id. 503 U.S. at 152, 112 S.Ct. at 1090. If not, then the court evaluates institutional factors, such as the interest in encouraging internal resolution of grievances, preventing the undermining of the agency's authority, and its special expertise, versus individual factors, such as whether the administrative remedy would cause undue prejudice to a later court action--for example, via a long delay--and whether the agency is biased or has predetermined the issue before it. Id. 503 U.S. at 146-149, 112 S.Ct. at 1087-1089.
CONCLUSION
The Fair Labor Standards Act properly applies to private companies such as Acme Jones, as a valid extension of Congressional powers under the Constitution's Commerce Clause. The Commerce Clause has been defined as including contracts between private citizens of different states.
The Department of Labor and the aggrieved employee(s) may sue directly in federal court to redress violations without waiting for the DOL to complete investigations. But it is not clear whether the DOL may do so without having followed its own procedure for notice and an opportunity for a hearing.
The facts are not clear at present as to whether these procedures were followed. If it turns out that they were not followed, it might be possible to stay or dismiss the current action until administrative action is exhausted. This issue is within the federal court's discretion.
FOOTNOTES
1. Under the Portal to Portal Act, 29 U.S.C. §255, the statute of limitations for willful violations of the Walsh-Healey Act, as well as the Fair Labor Standards Act, is three years (two years for non-willful violations). Continuing violations are deemed to be a series of single violations, each starting a separate statute-of-limitations clock.