Understanding the Eleventh Circuit's Polycarpe Decision

Eleventh Circuit Court of AppealsRecently I reported that the Eleventh Circuit’s decision in Polycarpe v. E&S Landscaping Services, Inc. will lead to an increase in the number of FLSA cases filed against small businesses in Florida.  This week I will summarize Polycarpe and attempt to explain its significance. 

First, some background.  Employees may be covered by the FLSA’s provisions as individuals, which is known as individual coverage, or as employees of a covered business, which is known as “enterprise coverage.”  Enterprise coverage is triggered if a business (1)“has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person”; and (2) has at least $500,000 of “annual gross volume of sales made or business done.” 29 U.S.C. § 203(s)(1)(A) (emphasis supplied).

 

The highlighted language is known as the handling clause.  Congress added it to the FLSA in 1961, thereby expanding the FLSA’s reach to include retail and service businesses that were local in nature, so long as the employees of a business handled goods that had moved in interstate commerce.  Congress added the words “or materials” after the word “goods” in 1974.  But the precise reach of enterprise coverage under the FLSA was not often addressed by the courts, and never attempted before by the Eleventh Circuit.

The Polycarpe decision addressed this issue by tackling two questions.  First, do interstate goods or materials lose their interstate quality if the items have already come to rest within a state before they are purchased within the state by the business?  As an example, if a lawn service business purchases a lawnmower that is built out-of-state, does the lawnmower lose its interstate quality if the lawn service purchases it at the local Home Depot?  The Eleventh Circuit ruled no, rejecting the “coming to rest” doctrine as inconsistent with the text of the FLSA, a 1973 Fifth Circuit decision, Brennan v. Greene’s Propane Gas Serv., Inc., 479 F.2d 1027, 1030 (5th Cir. 1973) (which is binding in the Eleventh Circuit), and a Department of Labor regulation, 29 C.F.R. § 779.242 (stating that it is “immaterial . . . that the goods may have ‘come to rest’”).. 

The second question the court addressed involved the interplay of “goods” and “materials” under the handling clause, and the application of the “ultimate consumer” defense.  The court began by reciting the definition of “goods” under the FLSA:

“Goods” means goods (including ships and marine equipment), wares, products, commodities, merchandise, or articles or subjects of commerce of any character, or any part or ingredient thereof, but does not include goods after their delivery into the actual physical possession of the ultimate consumer thereof other than a producer, manufacturer, or processor thereof.

29 U.S.C. § 203(i) (emphasis supplied). 

The highlighted language is known as the “ultimate consumer” exception.  Employees’ handling of goods that fall under this exception will not trigger enterprise coverage.  But the handling of materials will not fall under this exception, and will trigger enterprise coverage. Thus, it becomes critical to distinguish between “goods,” which is defined in the statute, and “materials,” which is not.

To make this distinction, the court reasoned that the meanings of “goods” and “materials” must be different, and not overlap.  Applying these criteria to several different dictionary definitions, the court concluded that

the most accurate view of Congress’s intent for the interplay between “goods” and “materials” in the FLSA--one that does not impliedly repeal some of the statutory definition of “goods”--is to read “materials” in the FLSA this way: “materials” in the FLSA means tools or other articles necessary for doing or making something. See Webster’s Third New Int’l Dictionary: Unabridged 1392 (1993). We believe that this interpretation is true to the ordinary meaning of “materials” and avoids conflict with the statutory “goods” definition.

The court explained that this definition accorded with the legislative history of the 1974 amendments and the Department of Labor’s own view on the meaning of materials, as expressed in its amicus brief in the Polycarpe case.  

The court then addressed the question of how to determine whether the items in a given case are either goods or materials (or neither):

Whether an item counts as “materials” will depend on two things: 1) whether, in the context of its use, the item fits within the ordinary definition of “materials” under the FLSA and 2) whether the item is being used commercially in the employer’s business.

The court used china plates as an example to illustrate both prongs of the test.  As to prong 1:  When a catering business uses china plates, they are materials.  But when a department store sells the plates, they are goods.  As to prong 2:  When an accounting firm uses the china plates as decorative items in its lobby, they are not materials because they do not have a significant connection to the firm’s accounting work.

Unfortunately, the court did not provide an analysis of whether the six businesses whose cases were consolidated in Polycarpe were covered by the FLSA.  Instead, the court remanded the cases to the district courts to determine whether enterprise coverage had been triggered in view of the Eleventh Circuit’s holdings.  In particular, the district courts will now have to decide whether the items evidenced by plaintiffs as having moved in interstate commerce support enterprise coverage under the handling clause as either “goods” (not subject to the ultimate-consumer exception) or as “materials.” 

Not having worked on any of the cases at issue in Polycarpe, I will not venture to predict the outcomes of the cases in the lower courts.  Nevertheless, it seems clear that Polycarpe significantly expands the likelihood that any business in the Eleventh Circuit will be found to be covered by the FLSA.  No longer can a business rely on the fact that the interstate goods or materials its employees handled had “come to rest” within the state before the business purchased them.  Assuming a business meets the $500,000 gross sales threshold, the only way a business can avoid enterprise coverage is by proof that its employees do not regularly handle, sell or work on materials in interstate commerce, and that the business is the ultimate consumer of any interstate goods that its employees handle.  For service businesses that do not sell goods to consumers, it may be relatively easy to establish that it is the ultimate consumer of the goods in question.  But establishing that its employees do not regularly handle interstate materials would seem be more challenging, because the majority of materials that businesses handle are manufactured outside the state.  The saving grace for employers may be the requirement that the materials have a “significant connection” to the employer’s business purposes.  The Eleventh Circuit suggests that there will be cases in which this requirement will defeat a plaintiff’s claim of enterprise coverage:

[W]e believe that the ordinary meaning of “handling, selling, or otherwise working on” is not so expansive as to be limitless; not every employer that meets the $500,000 sales threshold must be subject to the FLSA. It seems to us that an employee who uses an item at work will only sometimes be “handling, selling, or otherwise working on” the item for the purposes of FLSA coverage: an item’s use must have a significant connection to the employer’s business purposes.

It remains to be seen, however, how courts will define “significant connection.”  China plates used to decorate an accounting firm’s lobby may not have a significant connection to the firm’s accounting work, but what about the computers, calculators, paper and pencils the firm uses?  Are these “materials” that have a significant connection to accounting work? If so, do the same materials used by a dry cleaner have a significant connection to the business of dry cleaning?  These are the types of questions that I believe courts in the Eleventh Circuit will grapple with in the post-Polycarpe world of FLSA litigation. I will keep you posted.

           

 

 

Court Rejects "Ultimate Consumer" Defense to FLSA Enterprise Coverage

A federal court in the Southern District of Florida has rejected the "ultimate consumer" defense to enterprise coverage under the Fair Labor Standards Act.  The case is Exime v. E.W. Ventures, Inc., Case No. 08-60099-CIV-SEITZ/O'SULLIVAN (S.D. Fla., December 23, 2008). 

First, some background: To establish coverage under the Fair Labor Standards Act, a plaintiff must show that: (1) she was “engaged in commerce or in the production of goods for commerce”  [individual coverage]; or (2) that she was employed in an enterprise “engaged in commerce or in the production of goods for commerce” [enterprise coverage].  See 29 U.S.C. § 207(a)(1).

With respect to FLSA enterprise coverage, the relevant provisions are set forth in 29 U.S.C. § 203(s)(1)(A) and 29 C.F.R. § 779.238:

“Enterprise engaged in commerce or in the production of goods for commerce” means an enterprise that --

[H]as employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person; and

[I]s an enterprise whose annual gross volume of sales made or business done is not less than $500,000. . .

29 U.S.C. § 203(s)(1)(A)(i)-(ii).

. . . An enterprise described in [29 U.S.C. § 203(s)(1)] will be considered to have employees engaged in commerce or in the production of goods for commerce. . .if during the annual period which it uses in calculating its annual sales for purposes of the other conditions of these sections, it regularly and recurrently has at least two or more employees engaged in such activities. On the other hand, it is plain that an enterprise that has employees engaged in such activities only in isolated or sporadic occasions, will not meet this condition.

29 C.F.R. § 779.238.

Based on these rules, courts have adopted a two-prong test for enterprise coverage: (1) the enterprise commerce requirement; and (2) the gross sales requirement. Both prongs must be met in order to establish FLSA enterprise coverage.

The "Ultimate Consumer" Defense

The "ultimate consumer" defense asserts that employees' handling of interstate goods or materials cannot be used to establish FLSA enterprise coverage  if the employer is the ultimate consumer of those goods or materials. The defense is derived from 29 U.S.C. § 203(i) and § 203(s)(1)(A)(i), which state as follows:

“Enterprise engaged in commerce or in the production of goods for commerce” means an enterprise that. . .has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person;

29 U.S.C. § 203(s)(1)(A)(i).

“Goods” means goods (including ships and marine equipment), wares, products, commodities, merchandise, or articles or subjects of commerce of any character, or any part or ingredient thereof, but does not include goods after their delivery into the actual physical possession of the ultimate consumer thereof other than a producer, manufacturer, or processor thereof.

29 U.S.C. § 203(i) (emphasis added).

Judge Rejects "Ultimate Consumer" Defense

In Exime, the employer was a dry cleaning business.  The vast majority of the employer's equipment (dry cleaning machines, pressing machines, boilers, and vans) was manufactured outside Florida.   The chemicals that the employees used were purchased mostly from local retailers.  And the employer served only Florida customers.

Under these facts, the employer argued that to the extent employees handled interstate goods and materials, the employer was the ultimate consumer of those goods and materials, and therefore the employees' handling of such goods and materials could not be used to establish enterprise coverage.

Judge Patricia Seitz rejected this argument, stating in part as follows:

Defendants' argument.... ultimately turns on the assumption that the terms “goods” and “materials” share the same statutory definition. But, in order to accept Defendants' narrow interpretation, it would be necessary to wholly ignore the 1974 amendment to § 203(s)(1)(A)(i), as well as the accompanying Senate Report. That Report provides:

The bill also adds the words “or materials” after the word “goods” [in § 203(s)(1)(A)(i)] to make clear the Congressional intent to include within this additional basis of coverage the handling of goods consumed in the employer's business, as, e.g., the soap used by a laundry. . .S.Rep. No. 93-690, 93rd Cong., 2nd Sess. at 17 (1974) (emphasis added).

Significantly, the specific example cited in the 1974 Senate Report, “e.g., the soap used by a laundry,” demonstrates a clear Congressional intent to expand enterprise jurisdiction to companies whose employees handle interstate materials used in the employer's own business, regardless of whether that employer is the ultimate consumer of those materials. In other words, the additional term “materials” broadens FLSA jurisdiction by substantially constricting the “ultimate consumer” defense now asserted by Defendants....

The "ultimate consumer" defense, read broadly, is a potentially powerful weapon for employers in defense of an FLSA lawsuit. There are many small businesses, such as dry cleaners, that are the ultimate consumers of interstate materials, but who serve only local customers and do not otherwise handle, sell or work on goods in interstate commerce. But under Judge Seitz's narrow reading of the defense, businesses that do not handle, sell or work on interstate goods, but use interstate materials in their operations, are nevertheless covered under the FLSA. It is the rare business indeed that uses only intrastate materials in its operations. Thus, under Judge Seitz's interpretation, the "ultimate consumer" defense is effectively dead.

Is Exime the last word on the "ultimate consumer" defense? Stay tuned.