Employer Liability Issues

Topple of Estoppel? Eleventh Circuit Deals Blow to Bankruptcy Disclosure Defense in Discrimination Suit

Employees who sue their employers must disclose that lawsuit if they file for bankruptcy—right? Maybe not. In Slater v. U.S. Steel Corp., the Eleventh Circuit overruled prior precedent and impaired a valuable defense for early dismissal or settlement with bankrupt plaintiffs. This decision will affect strategy for employers that face litigation from bankrupt plaintiffs.

Legal Background

Judicial estoppel is an equitable defense that bars a plaintiff’s claim when he or she takes differing positions in court cases with an intent to make a mockery of the judicial system. Until now, courts in the Eleventh Circuit (that is federal courts in Alabama, Georgia and Florida) have applied the defense when a plaintiff pursues a lawsuit in one court and then files for bankruptcy without disclosing the employment lawsuit as an asset in the bankruptcy case. Courts apply the judicial estoppel defense in these circumstances to prevent plaintiffs from obtaining a windfall by concealing an asset that could be used to pay creditors (i.e., the potential recovery in the employment lawsuit).

Companies defending claims filed by bankrupt plaintiffs have prevailed on the judicial estoppel defense by reviewing sworn bankruptcy filings to see if their plaintiff failed to disclose the employment claim. If the plaintiff failed to notify the bankruptcy court about the employment claim, the employer could win the case based entirely on that failure to disclose.

The Slater Case

Ms. Slater was pursuing gender discrimination and retaliation claims against her former employer, U.S. Steel. After the company learned that Ms. Slater had filed for bankruptcy but failed to list her employment claim as an asset, U.S. Steel moved for summary judgment based on judicial estoppel. Relying on prior Eleventh Circuit caselaw, the district court granted the motion. Unfortunately, in an en banc decision (which means the entire court participated), the Eleventh Circuit not only overturned the district court’s decision, it overruled prior precedent, changing the law in the circuit. As a result, defendants will be less likely to prevail on this defense at the early stages of litigation.

The Eleventh Circuit reaffirmed that courts may apply judicial estoppel only when the employer can establish two things:

  • First, the plaintiff took a position under oath in the bankruptcy proceeding that was inconsistent with the plaintiff’s pursuit of the lawsuit; and
  • Second, the plaintiff intended to make a mockery of the judicial system.

What evidence is necessary to find that a plaintiff intended to make a mockery of the judicial system? Prior Eleventh Circuit decisions (Barger v. City of Cartersville and Burnes v. Pemco Aeroplex) endorsed a rule that the mere fact of the plaintiff’s nondisclosure is sufficient to show such intent, even if the plaintiff later corrected her bankruptcy disclosures. In the Slater case, the court granted en banc review to reconsider this precedent and overruled the prior Barger and Burnes decisions. Accordingly, courts in the Eleventh Circuit may no longer infer a plaintiff’s intent to misuse the judicial system without considering the individual plaintiff and the circumstances surrounding the nondisclosure of a lawsuit in the bankruptcy schedules. Among other factors, courts may consider the plaintiff’s level of sophistication, her explanation for the omission, whether she subsequently corrected the disclosures, and any bankruptcy court motions or orders concerning the nondisclosure.

According to the en banc panel, overruling prior precedent on judicial estoppel brings the Eleventh Circuit in line with the law in the Sixth, Seventh, and Ninth Circuits. On the other hand, the Fifth and Tenth Circuits still recognize that knowingly omitting a cause of action from bankruptcy schedules is enough to support the “intent to make a mockery of the judicial system” prong of the judicial estoppel defense.

Now What?

In the Eleventh Circuit, winning a case based on judicial estoppel because a plaintiff did not disclose a claim on bankruptcy disclosures just got harder. Merely relying on plaintiffs’ sworn bankruptcy schedules is no longer sufficient to prove the intent element of the judicial estoppel defense. Courts must now undertake a more rigorous inquiry of the plaintiff’s intent. Plaintiffs will be able to present self-serving factual arguments regarding the circumstances surrounding nondisclosure of a cause of action in bankruptcy.

Fortunately for defendants, Chief Judge Carnes wrote a concurring opinion clarifying that the judicial estoppel defense is not eradicated. In spite of the Eleventh Circuit’s new requirement to consider the “surrounding circumstances,” courts are “not required to accept the testimony of the plaintiff that her misstatements . . . were not made with intent to mislead, even if that testimony is uncontradicted.” If a bankrupt plaintiff denies any intent to mislead the court or creditors by not disclosing a cause of action, the court has the “authority and responsibility to find the facts and not blindly accept [such] testimony.”

Soup, Salvation and Overtime: Sixth Circuit Takes Up Televangelist’s FLSA AppealAre you entitled to FLSA coverage if you are doing the Lord’s work? In March 2017, a federal district court in Ohio answered “yes” and awarded almost $400,000 to unpaid employees/volunteers of a church restaurant. The Cathedral Buffet and the Rev. Ernest Angley are now casting a wing and prayer to the Sixth Circuit Court of Appeals to reverse the large judgment against them.

“Volunteers” and the Church

Rev. Angley and his Grace Cathedral mega-church near Cleveland, Ohio, operated Cathedral Buffet, a for-profit restaurant owned by Grace Cathedral, Inc. (which closed its doors to the public after the trial court’s ruling). For most of its existence, the Cathedral Buffet relied on church “volunteers” to operate the restaurant. Angley, as president of Cathedral Buffet, was heavily involved in the management and operations, and actively recruited volunteers from the church.

The restaurant maintained two classes of workers: employees who were paid an hourly wage and unpaid “volunteers.” The volunteers constituted the bulk of the restaurant’s workforce and performed virtually all the same jobs as the paid workforce.

As we all know, under the FLSA, covered employers must pay covered employees the minimum hourly wage and overtime compensation. The FLSA’s requirements cannot be waived as the FLSA affects public interest and protects against unfair competition in the economy. Decades ago, in Tony & Susan Alamo Found. v. Sec. of Labor, the Supreme Court ruled that individuals working in commercial businesses operated by religious organizations are covered by the FLSA’s minimum wage and overtime protections. An employer cannot evade the FLSA’s requirements simply by labeling workers as “volunteers” (even if the individuals considered themselves volunteers), even if the business was “infused with a religious purpose.”

The Department of Labor filed suit against Cathedral Buffet in August 2015 seeking back wages, liquidated damages, and a permanent injunction. After a bench trial, the district court found that the Cathedral Buffet, as a commercial, for-profit business, was a covered employer under the FLSA. Angley was also found to be an employer and personally liable for the judgment as allowed under the FLSA. Considering the economic realities of the relationship, the court also held that the multiple “volunteers” were, in fact, employees and, thus, entitled to minimum wages. The court rejected the Cathedral Buffet’s First Amendment, Free Exercise argument, finding nothing in the FLSA to create an exemption based on the workers’ motivation, be it religious or otherwise. The restaurant was found liable for liquidated damages as well as for acting in bad faith because of previous citations. In the end, the judgment totaled $388,507.

Calling on a Higher Authority

Angley and the church have appealed the decision to the Sixth Circuit, contending that because the restaurant was owned and subsidized by a tax-exempt church, did not make a profit even though it was a for-profit entity, and operated with the charitable intention of providing low-cost meals to the community through church volunteerism, the FLSA should not apply. Further, they argued that the volunteers did not expect to be paid and did not feel coerced to volunteer as shown by 134 affidavits submitted to the district court – a claim of questionable credibility, according to the DOL’s impeachment of several affiants. Testimony at trial suggested that Angley would personally exert pressure and influence upon would-be volunteers by threatening spiritual harm and God’s displeasure if they did not work at the restaurant when asked.

The DOL responded sharply in its recent briefing that the Cathedral Buffet was not a public agency to qualify for the FLSA’s narrow statutory exclusion and that, even if it were, such public agencies cannot use coercion or pressure to procure volunteers. Finally, the DOL emphasized that the FLSA prohibits the use of volunteer labor at for-profit businesses.

Takeaways

Commercial enterprises that are operated by religious or charitable organizations should take careful note of the district court’s ruling and stay tuned for the outcome of the appeal. Generally speaking, individuals who are part of a for-profit employer’s business, even if performed for a charitable purpose, will be deemed to be employees under the FLSA rather than volunteers, and businesses should act accordingly.

All Play and No Work: TN Body Clarifies When Recreational Activities Are Covered Under Worker’s Comp LawSince the early 1930s, the Tennessee Supreme Court has consistently ruled that an employee’s injury during voluntary recreational activity is not compensable as a work-related accident. However, Tennessee Code Annotated § 50-6-110(a)(6) provides that worker’s compensation benefits may be awarded under specific circumstances, such as if the employer required the participation or if the activity is part of the employee’s work-related duties and occurs during work hours. So when do you have to pay worker’s compensation benefits for an employee who breaks his leg at the company picnic? The Tennessee Workers’ Compensation Appeals Board recently provided some guidance in Pope v. Nebco of Cleveland Inc.

The Pope case involved a car salesman injured in a “mud run” charity event sponsored in part by his employer, Nebco. After a trial, the Court of Workers’ Compensation Claims ruled that Pope sustained a compensable injury because he was impliedly required to participate in the mud run and it was part of his work duties. It also awarded Pope’s attorney a fee based on Pope’s out-of-pocket expenses and medical bills. Nebco appealed, arguing that the mud run was not required and not part of Pope’s duties. The Appeals Board agreed.

The Appeals Board explained that a key question was whether Nebco applied pressure to Pope that amounted to an express or implied requirement to participate in the mud run. Nebco presented uncontradicted evidence from the general manager, another sales consultant, and Pope himself that no one told Pope he had to participate in the mud run. Furthermore, Pope acknowledged that he would not have faced any adverse employment consequences if he had declined to participate. The Appeals Board also found that participation in the mud run was not part of Pope’s work duties as a car salesman. Despite the fact that the event occurred during normal working hours, Pope was not paid to participate in the event and was not required to sell vehicles, network, or staff Nebco’s tent. He also did not wear any clothing to identify himself as a Nebco employee and at trial he failed to identify a work duty that Nebco expected him to perform at the mud run.

Based on the preponderance of the evidence, the Appeals Board reversed the trial court’s decision. Consequently, it declined to address the issue of Pope’s attorney’s fees because Pope had not suffered a compensable injury.

Tennessee employers who wish to avoid paying for employee injuries sustained during recreational or social activities should follow Nebco’s example. First, make it clear that participation is voluntary, not required. Second, the employer should not receive a direct benefit beyond improvement in employee health and morale. Third, if possible, have the recreational activity outside of employees’ work hours. Finally, make sure participation is not part of an employee’s work-related duties.