Malloy Oil, LLC v. Kentucky Labor Cabinet, Department of Workplace Standards

RENDERED: JUNE 23, 2023; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2022-CA-0123-MR
MALLOY OIL, LLC AND DENNIS J.
MALLOY, JR. APPELLANTS
APPEAL FROM HENDERSON CIRCUIT COURT
v. HONORABLE KAREN L. WILSON, JUDGE
ACTION NO. 21-CI-00202
KENTUCKY LABOR CABINET,
DEPARTMENT OF WORKPLACE
STANDARDS APPELLEE
OPINION
REVERSING AND REMANDING
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BEFORE: ACREE, KAREM, AND TAYLOR, JUDGES.
KAREM, JUDGE: Malloy Oil, LLC (“Malloy”) and Dennis Malloy appeal the
Henderson Circuit Court’s order affirming the Kentucky Labor Secretary’s final
order requiring Malloy to pay minimum wage and overtime amounts to Lawrence
Malloy.
We find that the final order failed to set forth sufficient findings to
explain the deviation from the hearing officer’s recommended findings as required
under Kentucky statute. Thus, we reverse the Henderson Circuit Court’s order and
remand with directions to remand the case to the Secretary to make findings of fact
and conclusions of law sufficient for appellate review under Kentucky Revised
Statute (“KRS”) 13B.120.
FACTUAL AND PROCEDURAL BACKGROUND
On March 11, 2016, Lawrence filed a complaint against Malloy and
Dennis with the Kentucky Labor Cabinet (the “Cabinet”), alleging unpaid wages.
Lawrence and his two brothers, Dennis, and Thomas Malloy (“Thomas”) had
formed Malloy as a Kentucky limited liability company on December 5, 2013.
Thomas sold his one-third interest to Lawrence and Dennis on or
about June 18, 2015. Subsequently, on February 24, 2016, Lawrence sold his fifty
percent share of Malloy to Dennis, leaving Dennis as the company’s sole owner.
The Kentucky Secretary of State administratively dissolved Malloy on October 1,
2016.
At the initial organizational meeting in 2013, the Malloy brothers
agreed that Lawrence would handle the company’s day-to-day operations and
receive a $4,000 monthly salary. However, soon after Malloy’s formation, the
record reflects that it encountered financial hardships. To alleviate some of the
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financial burdens, Lawrence agreed to defer his salary until Malloy had the money
to pay him. He received his first paycheck in April 2014, including all the amounts
he was owed at that time. Malloy timely paid Lawrence’s salary until November
2014, bringing his total paid wages to $40,000.
However, in November 2014, Malloy entered another period of
financial hardship. Again, Lawrence offered, and the brothers agreed, to defer his
salary until there was adequate money to pay. Unfortunately, the company never
reached a position where it could pay before it was dissolved. Consequently,
Malloy did not pay Lawrence any other amounts after the initial $40,000.
In his complaint with the Cabinet, Lawrence alleged Malloy owed
him a remaining $63,310.34. The Cabinet investigated Lawrence’s claim,
determined that Malloy owed Lawrence the amounts alleged, and issued a Notice
of Violation and demand letter to Malloy on January 23, 2017.
Malloy requested an administrative hearing under KRS Chapter 13B,
which was held on May 20, 2019. On December 6, 2019, the Hearing Officer
issued Findings of Fact, Conclusions of Law, and Recommended Order (the
“Recommended Order”) in favor of Dennis and Malloy. Specifically, the Hearing
Officer concluded that the Cabinet should not impose a civil penalty or obligation
of restitution on either Malloy or Dennis in his individual capacity.
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After reviewing the evidence in the case, the Secretary subsequently
issued a Final Order on February 5, 2021 (the “Final Order”), which affirmed in
part, and reversed in part, the Recommended Order. The Secretary determined the
evidence showed that Lawrence had waived part of his salary, but Malloy still
owed him $20,126 for the period of November 1, 2014, through February 24,
2016, because the law did not allow an employee to contractually waive any
minimum wages and overtime earned by that employee. The Secretary also
determined that Malloy and Dennis were jointly and severally liable for the
amounts owed pursuant to KRS 337.010 and KRS 337.055.
On March 22, 2021, Dennis and Malloy filed an appeal in Henderson
Circuit Court. The circuit court entered an order affirming the Final Order. After
the circuit court denied their motion to alter, amend, or vacate, Malloy and Dennis
filed this appeal.
ANALYSIS
a. Standard of Review
In reviewing an administrative action, “this Court generally confines
its review to: (1) whether the findings of fact are supported by substantial
evidence of probative value; and (2) whether the administrative agency applied the
correct rule of law to the facts.” Ford Contracting, Inc. v. Kentucky Transp.
Cabinet, 429 S.W.3d 397, 406 (Ky. App. 2014). Here, where the circuit court
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upheld the administrative decision, we must determine whether the circuit court’s
findings are clearly erroneous, keeping in mind that “[t]he circuit court’s role as an
appellate court is to review the administrative decision, not to reinterpret or to
reconsider the merits of the claim, nor to substitute its judgment for that of the
agency as to the weight of the evidence.” 500 Associates, Inc. v. Nat. Res. and
Environmental Protection Cabinet, 204 S.W.3d 121, 131 (Ky. App. 2006)
(footnote omitted).
Lastly, we must review whether the administrative action was
arbitrary and whether the administrative agency acted properly within its delegated
powers. American Beauty Homes Corp. v. Louisville and Jefferson County
Planning and Zoning Commission, 379 S.W.2d 450, 456 (Ky. 1964).
b. Discussion
Malloy first argues that the Cabinet’s Secretary failed to timely issue
the Final Order under KRS 13B.120(4)(b) and is therefore void. KRS 13B.120(4)
states in relevant part, “the agency head shall render a final order in an
administrative hearing within ninety (90) days after . . . [t]he hearing officer
submits a recommended order to the agency head, unless the matter is remanded to
the hearing officer for further proceedings.” The Cabinet concedes the Final Order
was not issued within ninety (90) days but argues that is not a fatal flaw because
the deadline is merely directory and does not require strict compliance.
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In Kentucky, failing to comply with a “directory” – as opposed to a
“mandatory” – statutory provision is harmless error. Knox County v. Hammons,
129 S.W.3d 839, 842-43 (Ky. 2004). As stated by our Supreme Court, “[t]his
determination is vital because [a] proceeding not following a mandatory provision
of a statute is rendered illegal and void, while an omission to observe or failure to
conform to a directory provision is not.” Id. at 843 (internal quotation marks and
citation omitted).
When determining whether a statute is directory or mandatory, “if the
directions given by the statute to accomplish a given end are violated, but the given
end is in fact accomplished, without affecting the real merits of the case, then the
statute is to be regarded as directory merely.” Varney v. Justice, 86 Ky. 596, 6
S.W. 457, 459 (1888). The Fyffe Court reiterated that:
[If a statutory] provision relates to some immaterial
matter, not reaching the substance, or not of the essence
of the thing to be done, and by an omission to observe it
the rights of those interested will not be prejudiced – as
where compliance is a matter of convenience or the
directions are given merely with a view to securing
proper, orderly, or prompt procedure - it is generally
regarded as but directory.
Skaggs v. Fyffe, 266 Ky. 337, 98 S.W.2d 884, 886 (1936).
Significantly, the administrative hearing procedures outlined in KRS
Chapter 13B do not specify a consequence for an agency’s failure to issue a final
order within ninety (90) days, signaling that the timeframe is directory and not
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mandatory. Moreover, the Final Order in this case was not void because it
accomplished the intended end of issuing the agency’s final order without affecting
the case’s merits. The timeline for issuing final orders stated in KRS 13B.120 is
merely directory and not mandatory; therefore, Malloy’s argument for voiding the
Final Order is without merit.
We next address the issue of whether the final order violates the
requirements of KRS 13B.120. KRS 13B.120 empowers the “agency head” – in
this case, the Secretary – to accept, modify, or reject, in whole or part, the Hearing
Officer’s recommended order when entering a final order. If rejected or modified,
KRS 13B.120(3) mandates that the final order “shall include separate statements of
findings of fact and conclusions of law.”
Our Court has explained the separate findings of fact and conclusions
of law mandate of KRS 13B.120(3). In Cabinet for Health and Family Services v.
RiverValley Behavioral Health, 465 S.W.3d 460, 468 (Ky. App. 2014), the Court
of Appeals stated that, while the final order need not “refute every finding of fact
and conclusion of law made in the recommended order,” it must “articulate a
rationale for departing from the recommendation which is sufficient to explain the
reasons for the deviation and to allow meaningful appellate review.” Id.In this case, the Final Order included one sentence whereby it
imposed a $20,126 judgment against Malloy and Dennis, stating that minimum
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wage and overtime earned cannot be waived under Metro Louisville/Jefferson
County Government v. Abma, 326 S.W.3d 1, 9-10 (Ky. App. 2009). However,
Kentucky’s minimum wage law applies only to “employees.” See KRS 337.275;
see also KRS 337.285 and City of Louisville, Div. of Fire v. Fire Service Managers
Ass’n ex rel. Kaelin, 212 S.W.3d 89, 100 (Ky. 2006) (“supervisory, salaried
personnel [are] not entitled to time-and-a-half overtime pay under KRS 337.285.”).
In discussing Lawrence’s status, the Hearing Officer found that
Lawrence “was an owner of the company, a manager, and an employee, all three.”
The Final Order did not specifically state that it was reversing this finding, and the
definition of “employee” under KRS 337.010(2)(a)2. specifically exempts “[a]ny
individual employed in a bona fide executive, administrative, supervisory, or
professional capacity[.]”
Nothing in the Final Order indicated that Lawrence was a non-exempt
statutory employee under KRS 337.010(2)(2)2. In fact, from November 2014 to
February 2016, Lawrence was the only person managing, operating, and
supervising Malloy. The record reflects that he had Malloy’s checkbook and paid
the company’s bills. Thus, we find the Secretary’s rationale for imposing the
$20,126 judgment insufficient “to explain the reasons for the deviation[.]”
RiverValley Behavioral Health, 465 S.W.3d at 468.
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Additionally, the Final Order found Dennis and Malloy jointly and
severally liable for the amounts under KRS 337.055, which requires an employer
to pay an employee all wages or salary earned by that employee. Similarly, the
Final Order included no findings that Dennis was an “employer” but merely cited
to KRS 337.010. However, KRS 337.010 contains ten different definitions broken
down into multiple sub-paragraphs. Nowhere in the Final Order does the Secretary
detail which definition he was referring to and, in fact, never uses the word
“employer” once. Thus, we find the Secretary’s rationale for the imposition of
joint and several liability on Malloy and Dennis insufficient “to explain the reasons
for the deviation.” RiverValley Behavioral Health, 465 S.W.3d at 468.
CONCLUSION
For the foregoing reasons, we reverse the Henderson Circuit Court’s
order and remand with directions to further remand the case to the Secretary to
make findings of fact and conclusions of law sufficient for appellate review under
KRS 13B.120. Particularly, we emphasize the importance of determining
Lawrence’s status as an “employee” and Dennis Malloy’s status as an “employer”
under the applicable statutes.
ALL CONCUR.
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BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE:
Christopher Hopgood James Leif Sanders
Henderson, Kentucky Susan Lee Draper
Frankfort, Kentucky
Daniel W. Sherman
Valparaiso, Indiana
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