Rhea Lana, Inc. v. United States , 925 F.3d 521 ( 2019 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 21, 2018 Decided June 7, 2019
No. 17-5259
RHEA LANA, INC. AND RHEA LANA’S FRANCHISE SYSTEMS,
INC.,
APPELLANTS
v.
UNITED STATES DEPARTMENT OF LABOR,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:14-cv-00017)
Julie A. Smith argued the cause for appellants. With her
on the briefs were Joshua N. Schopf and John E. McGlothlin.
Sydney Foster, Attorney, U.S. Department of Justice,
argued the cause for appellee. With her on the brief were Jessie
K. Liu, U.S. Attorney, Mark B. Stern, Attorney, and Dean A.
Romhilt, Senior Attorney, U.S. Department of Labor.
Before: SRINIVASAN and KATSAS, Circuit Judges, and
GINSBURG, * Senior Circuit Judge.
*
Senior Circuit Judge Ginsburg was a member of the panel at the
time the case was submitted but did not participate in this opinion.
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Opinion for the Court filed by Circuit Judge SRINIVASAN.
Concurring opinion filed by Circuit Judge KATSAS.
SRINIVASAN, Circuit Judge: Rhea Lana is a for-profit
business that organizes consignment sales of children’s
merchandise. The consignors who supply the merchandise for
sale can also work at the sales. They are not paid for that work
but instead are given the opportunity to shop at the sales earlier
than the general public.
The Department of Labor determined that Rhea Lana’s
workers qualified as “employees” under the Fair Labor
Standards Act. The company brought a challenge to that
decision, contending that the workers should be considered
volunteers rather than employees. The district court rejected
the challenge and sustained the Department’s determination.
Rhea Lana now appeals, and we affirm the district court.
I.
The Fair Labor Standards Act guarantees all “employees”
a federal minimum wage. 29 U.S.C. § 206(a); see id.
§ 203(e)(1). The Act does not extend its protections to workers
who are volunteers rather than employees. See Tony & Susan
Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 299–303
(1985). Nor does it protect independent contractors. See
Morrison v. Int’l Programs Consortium, Inc., 253 F.3d 5, 10–
11 (D.C. Cir. 2001).
Plaintiffs Rhea Lana, Inc. and Rhea Lana’s Franchise
Systems, Inc. (collectively, Rhea Lana) run semiannual
consignment sales for children’s clothing, toys, and other
merchandise. A consignment sale is an arrangement whereby
a seller (or consignor) entrusts goods to a reseller (or
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consignee) for resale. A consignor receives compensation for
the goods only if the consignee successfully resells them.
Otherwise, the goods go back to the consignor.
Rhea Lana’s events are staffed by the company’s
managers, who work for compensation. But Rhea Lana’s sales
also require additional workers to perform everyday tasks like
organizing merchandise, removing tags from clothing, and
processing customers’ purchases at the point of sale. For those
tasks, Rhea Lana solicits consignors to work five-hour shifts.
As an incentive to work at the sales, Rhea Lana offers
consignors the opportunity to shop before the general public.
A consignor’s priority in the shopping order depends on how
many five-hour shifts she works. The consignors fall into four
groups—called Primo Moms, Super Moms, Early Workers,
and Workers—with the first of those groups working four
shifts and getting to shop first, the second group working three
shifts and getting to shop second, and so on.
In 2013, the Department of Labor’s Wage and Hour
Division began investigating Rhea Lana’s labor practices. In
August 2013, Robert A. Darling, a District Director in the
Division, sent a letter to Rhea Lana stating that “[the
Department’s] investigation [has] disclosed that your
employees are subject to the requirements of the FLSA.”
Letter from Robert A. Darling to Rhea Lana Rhiner, J.A. 311.
That determination included the “group known as
consignors/volunteers.” Id.
Rhea Lana challenged the Department’s determination as
arbitrary and capricious. The district court initially dismissed
the company’s challenge on the ground that the Department’s
determination was not final agency action. See Rhea Lana, Inc.
v. U.S. Dep’t of Labor, 74 F. Supp. 3d 240, 244–46 (D.D.C.
4
2014). We reversed, concluding that the determination was
final because it had “legal consequences.” Rhea Lana, Inc. v.
U.S. Dep’t of Labor, 824 F.3d 1023, 1031–32 (D.C. Cir. 2016).
On remand, the Department filed an administrative record
with the district court containing all contemporaneous agency
material supporting its determination. In addition, the
aforementioned Robert Darling prepared a declaration that
“summarize[d] the contents of the administrative record and
further describe[d] how the record contemporaneously
supported the challenged agency determination.” Darling
Decl. 1, J.A. 99. The Department submitted the Darling
Declaration as part of the record, and Rhea Lana moved to
strike the declaration on the ground that it was an after-the-fact
document.
The district court denied the motion to strike the Darling
Declaration and then granted summary judgment in favor of the
Department. In sustaining the Department’s determination that
the consignors qualified as employees for purposes of the Fair
Labor Standards Act, the court relied on the Department’s
rationale as set out in the Darling Declaration. Rhea Lana now
appeals.
II.
Rhea Lana challenges the Department’s determination that
the consignors are employees rather than volunteers as
arbitrary and capricious. We review the agency’s decision
directly, “according no particular deference to the judgment of
the District Court.” Holland v. Nat’l Mining Ass’n, 309 F.3d
808, 814 (D.C. Cir. 2002).
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A.
Before taking up the merits of Rhea Lana’s challenge, we
first determine the scope of the administrative record—and, in
particular, whether the Darling Declaration can be considered
as part of the record explaining the basis for the Department’s
decision. Ordinarily, we review an agency action based solely
on the record compiled by the agency when issuing its decision,
not on “some new record made initially in the reviewing court.”
Camp v. Pitts, 411 U.S. 138, 142 (1973) (per curiam); see also
SEC v. Chenery Corp., 318 U.S. 80, 87 (1943). That rule
generally prohibits “ex post supplementation of the record by
either side.” Walter O. Boswell Mem’l Hospital v. Heckler, 749
F.2d 788, 793 (D.C. Cir. 1984).
The Darling Declaration was not part of the record before
the Department when it determined that the consignors who
work at Rhea Lana’s consignment sales qualify as statutory
employees rather than volunteers. And a post hoc account like
the Darling Declaration would normally be excluded from our
review. But the particular circumstances of this case provide
adequate assurances that the Declaration accurately reflects the
contemporaneous reasoning of the Department. We conclude
that the Declaration may be considered in the specific context
of this case even though it is a post hoc submission.
First, the Declaration comes from the same official who
issued the Department’s final determination about the
employment status of Rhea Lana’s workers. “When final
decisionmaking authority is vested in an [agency], the
determinations of that body, and not the mere
recommendations of [others], are the principal concern of a
reviewing court.” Williams v. Bell, 587 F.2d 1240, 1246 (D.C.
Cir. 1978). We thus have allowed reviewing courts to rely on
post hoc declarations in certain situations when the declarations
6
have come from the relevant agency decisionmaker. See, e.g.,
Olivares v. Transp. Sec. Admin., 819 F.3d 454, 464 (D.C. Cir.
2016); Alpharma, Inc. v. Leavitt, 460 F.3d 1, 7 (D.C. Cir.
2006). Darling was the agency decisionmaker, and his
reasoning is the proper subject of our review.
Additionally, the Declaration largely echoes the rationale
contained in the contemporaneous record. We have barred
consideration of post hoc materials when they present an
“entirely new theory,” Consumer Fed’n of Am.v. U.S. Dep’t of
Health & Human Servs., 83 F.3d 1497, 1507 (D.C. Cir. 1996),
or when the contemporaneous record discloses “[n]o basis for
[the agency] determination” whatsoever, AT&T Info. Sys., Inc.
v. GSA, 810 F.2d 1233, 1235 (D.C. Cir. 1987) (per curiam).
But we can permit consideration of post hoc materials when
they “illuminate[] the reasons that are [already] implicit in the
internal materials.” Olivares, 819 F.3d at 464 (internal
quotation marks omitted).
That is the case here. Although the contemporaneous
record contains no materials from Darling himself, it does
contain documents from Tamara Haynes, the Department’s
investigator in this case. The Haynes documents, like the
Declaration, conclude that “[t]he class of worker known as
consignors/volunteers . . . [a]re employees.” Tamara Haynes,
FLSA Narrative at 8, J.A. 306. Haynes supports that
conclusion with analysis under many of the same factors
contained in the Darling Declaration, including the incentive to
work (i.e., the expectation of in-kind benefits) and the scope of
duties assigned to the workers (i.e., the degree of control
exercised by the employer and the benefit that accrued to the
employer).
Rhea Lana observes that much of the analysis in the
Haynes documents focuses on whether Rhea Lana’s workers
7
are independent contractors rather than whether they are
volunteers. But for our purposes, the question is whether the
Darling Declaration is “consistent with the administrative
record.” Olivares, 819 F.3d at 464 (emphasis added) (quoting
Manhattan Tankers, Inc. v. Dole, 787 F.2d 667, 673 n.6 (D.C.
Cir. 1986)). And nothing in the Haynes documents that
addresses the independent-contractor question is at odds with
the reasoning of the Darling Declaration.
First, the factors that govern the independent-contractor
question share substantial overlap with the factors that govern
the volunteer question. Cf. Morrison, 253 F.3d at 11
(recognizing the applicability of either of two “different,
although similar, set[s] of factors” to determine employee
status, so long as either test permits the agency to “look at the
totality of the circumstances and consider any relevant
evidence”). Second, it is not especially significant that Haynes
also analyzed whether the workers qualify as independent
contractors in addition to assessing whether they are
volunteers. After all, to conclude that Rhea Lana’s workers
were employees, the Department would need to determine that
the workers were neither volunteers nor independent
contractors. The Darling Declaration, in sum, captures much
of the same rationale contained in the pre-decision materials,
providing further assurances that the Declaration captures the
actual reasons for the Department’s determination.
We note, finally, that the specific posture of the case
supports the permissibility of relying on Darling’s post hoc
recapitulation. When the Department made its determination,
it was unaware that the decision would be deemed final agency
action subject to judicial review. In fact, it appears to have
assumed that the determination was not final agency action.
See Rhea Lana, 824 F.3d at 1031. And when an agency
believes it “had no obligation to explain its actions
8
contemporaneously,” it is common for “the entire record, or a
good part of it, [to be] actually created for the sole purpose of
judicial review.” Women Involved in Farm Econ. v. U.S. Dep’t
of Agric., 876 F.2d 994, 999 (D.C. Cir. 1989). Any resulting
explanation will be “by definition . . . post-hoc.” Id. In that
situation, there is more reason to permit a post hoc account,
especially one from the agency’s decisionmaker himself.
In short, the particular circumstances of this case lead us
to conclude that the Darling Declaration is admissible for our
consideration. And because we conclude that the Darling
Declaration is admissible, we affirm the district court’s denial
of Rhea Lana’s motion to strike the Declaration. See Fed. R.
Civ. P. 56(c)(4) (allowing for striking of declaration if it “set[s]
out facts that would [not] be admissible in evidence”).
B.
We now turn to the merits of Rhea Lana’s challenge to the
Department’s determination. In assessing whether the
agency’s decision was arbitrary and capricious, we ask
“whether the decision was based on a consideration of the
relevant factors and whether there has been a clear error of
judgment.” Citizens to Preserve Overton Park, Inc. v. Volpe,
401 U.S. 402, 416 (1971).
The Fair Labor Standards Act protects “employees,” a
term that excludes both volunteers and independent
contractors. See Alamo, 471 U.S. at 299–303; Morrison, 253
F.3d at 10–12. Rhea Lana has not argued that the consignors
who work at its sales are independent contractors rather than
employees. Instead, the company has argued only that its
workers are volunteers rather than employees. See Rhea Lana
Br. 20–21. We thus limit our consideration to whether the
consignors are volunteers or employees, and we have no
9
occasion to consider whether they may qualify as independent
contractors.
The first question is whether the Department applied the
correct legal test to determine whether Rhea Lana’s workers
are volunteers or employees under the Act. The governing
precedent is Tony & Susan Alamo Foundation v. Secretary of
Labor, 471 U.S. 290 (1985). Alamo establishes that “[t]he test
of employment under the Act is one of economic reality.” Id.
at 301 (internal quotation marks omitted). In the volunteer-
versus-employee context, the Supreme Court has placed
particular emphasis on one consideration: the expectation of
in-kind compensation. See id. Still, “no one factor standing
alone is dispositive and courts are directed to look at the totality
of the circumstances and consider any relevant evidence.”
Morrison, 253 F.3d at 11.
Here, the Department correctly employed a totality-of-the-
circumstances approach. Most importantly, the Department
carefully considered whether the workers had an expectation of
compensation in exchange for their services. See Darling Decl.
¶¶ 5–8, 10. The Department also examined the degree of
control exercised by the employer and the extent to which the
workers’ services were integral to Rhea Lana’s business. See
id. The Department thus looked to appropriate factors under
Alamo.
Rhea Lana does not meaningfully dispute that the
Department’s decision, as recounted in the Darling
Declaration, turned on the correct factors under Alamo.
Instead, Rhea Lana contends that the Department improperly
started from a “conclusory premise that individuals cannot
volunteer with for-profit companies.” Rhea Lana Br. 20. That
contention is belied by the explanation in the Darling
Declaration.
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The Declaration, after eight paragraphs of analysis
addressing whether Rhea Lana’s consignors are properly
considered employees rather than volunteers, says only the
following about a company’s for-profit status: “In
addition, Rhea Lana was a for-profit company. [The
Department’s] longstanding position is that, with very limited
exceptions, for-profit companies cannot treat workers as
volunteers instead of employees under the FLSA. That
position was further support for our conclusion that the workers
at issue were employees.” Darling Decl. ¶ 9. That statement
by its own terms only sets out “further support” for a
conclusion already reached by the agency, not an antecedent
“premise” of that conclusion. We thus reject Rhea Lana’s
contention that the Department improperly rested its
determination on a “conclusory premise” about the salience of
the company’s for-profit status.
The second question is whether the Department made a
clear error of judgment in applying the Alamo test to the facts
and concluding that the workers are employees rather than
volunteers. The scope of our review in that regard is
circumscribed, and we are not to “substitute [our] judgment for
that of the agency.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v.
State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
The Department’s findings on each of the relevant factors
finds adequate support in the record. For evidence of the
workers’ expectation of in-kind compensation, the Department
cites Rhea Lana’s “solicitations to the workers to sign up for
shifts in exchange for the opportunity to shop early” and Rhea
Lana’s “offer to pay people $8 per hour to work shifts at the
sales when it could not induce enough individuals to work in
exchange for the opportunity to shop early.” Darling Decl. ¶ 6.
The Department also points to statements from the workers
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themselves indicating “that they were motivated to work at the
sales by the opportunity to shop early.” Id. ¶ 8.
For evidence of the control exerted by Rhea Lana over its
workers, the Department references statements from workers
indicating that they “were supervised by Rhea Lana’s
employees.” Id. And for evidence that the work was integral
to Rhea Lana’s business, the Department cites Rhea Lana’s
admission that the workers “were the lifeblood of their sales
events.” Id. ¶ 6. The Department also notes statements from
workers indicating that their labor was “for the benefit of Rhea
Lana’s general sales operations.” Id. ¶ 8.
In sum, the Department considered the relevant factors and
did not commit a clear error in judgment when applying those
factors to the facts. The Department’s determination that Rhea
Lana’s workers are employees rather than volunteers therefore
was not arbitrary or capricious.
* * * * *
For the foregoing reasons, we affirm the judgment of the
district court.
So ordered.
KATSAS, Circuit Judge, concurring: Rhea Lana argues
that its workers are volunteers—and therefore not employees—
under the Fair Labor Standards Act. On the facts of this case,
it was not arbitrary for the Department of Labor to find that the
workers, who expected to and did receive in-kind
compensation, are not volunteers.
In an appropriate case, I would be open to the argument
that workers like Rhea Lana’s are not employees for a different
reason: because they are independent contractors. The lack of
“permanence or duration of the working relationship” weighs
in favor of independent-contractor status. Morrison v. Int’l
Programs Consortium, Inc., 253 F.3d 5, 11 (D.C. Cir. 2001).
Here, that consideration seems to favor Rhea Lana strongly. As
the Department’s own investigator found, “[t]he persons in
question work for relatively short periods of time at irregular
intervals in between personal activities” and “work 2 times per
year at the most.” J.A. 303. It also appears that Rhea Lana has
only limited control over “work schedules or conditions of
employment”—another consideration favoring independent-
contractor status. Morrison, 253 F.3d at 11; see J.A. 304–05
(finding that workers choose whether to work at individual
sales and “feel free to bring helpers with them”). Nevertheless,
Rhea Lana failed to argue that their workers are independent
contractors, so I agree that we must affirm.