Some Ideas for Fighting Retaliatory Counterclaims and Third-Party Complaints in Cases Arising Under State Wage Laws

We recently drafted a brief in several related actions in which our clients claim the defendant violated Connecticut, New Hampshire, and New Jersey wage law by misclassifying them as independent contractors rather than employees. In many such cases, the defendant tries to intimidate the workers by filing counterclaims against the workers or third-party complaints against the corporate entities — usually LLCs — that the workers must form in order to work for the defendant.

These types of retaliatory counterclaims and third-party complaints are generally disallowed in lawsuits arising under the federal Fair Labor Standards Act (“FLSA“). However, there are not too many opinions addressing the legality of this bullying litigation tactic under state wage laws.

Here is some text from a brief we recently filed trying to convince the judge to extend the pertinent FLSA principles to the lawsuits arising under Connecticut, New Hampshire, and New Jersey wage laws. Hopefully, the following principles will help you if your client asserts state wage law claims and the defendant responds with retaliatory counterclaims and third-party complaints:

In wage rights lawsuits arising under the FLSA, courts generally prohibit civil defendants from asserting counterclaims or third-party complaints seeking indemnification. See, e.g., Martin v. Gingerbread House, Inc., 977 F.2d 1405, 1407-08 (10th Cir. 1992); Lyle v. Food Lion, Inc., 954 F.2d 984, 987 (4th Cir. 1992); LeCompte v. Chrysler Credit Corp., 780 F.2d 1260, 1264-65 (5th Cir. 1986). As one district court observed, “[a]llowing an employee to transfer the entirety of its FLSA liability onto another entity would disincentivize the employer from complying with the substantive provisions of the FLSA, which would contravene the FLSA’s purpose of protecting employees.” Robertson v. REP Processing, LLC, 2020 U.S. Dist. LEXIS 175456, *18 (D. Colo. Sept. 24, 2020).

The Second Circuit’s opinion in Herman v. RSR Security Services LTD, 172 F.3d 132 (2d Cir. 1999), is instructive. There, the Court held that “there is no right to contribution or indemnification for employers held liable under the FLSA.” Id. at 144. In reaching this holding, the Court considered that: (i) “the text of the FLSA makes no provision for contribution or indemnification;” (ii) the FLSA was intended to “benefit” employees rather than employers; (iii) the FLSA has a “comprehensive remedial scheme” and, as such, “counsels against judicially engrafting additional remedies;” and (iv) the FLSA’s “legislative history is silent on the right to contribution or indemnification.” Id.

Several courts have held that the above principles require the dismissal of indemnification claims even if the underlying lawsuit is brought by a purported “independent contractor” who has not yet been deemed an employee covered by the FLSA. As one district court explained: “If courts imposed an attorneys’ fees award against unsuccessful independent contractors that have indemnity agreements, it would incentivize employers to mis-classify employees as independent contractors in an independent contractor agreement that contains an indemnity provision based on the hope that the possibility of an attorneys’ fee award would dissuade litigation on the issue.” Abdul-Rasheed v. KableLink Communications, LLC, 2013 U.S. Dist. LEXIS 167159, *14-15 (M.D. Fla. Nov. 25, 2013); accord Cordova v. FedEx Ground Package Systems, Inc., 104 F. Supp. 3d 1119, 1129 (D. Or. 2015); Fernandez v. Kinray, Inc., 2014 U.S. Dist. LEXIS 17954, * 27 (E.D.N.Y. Feb. 5, 2014); Yaw Adu Poku v. Beavex, Inc., 2013 U.S. Dist. LEXIS 157364, *4-6 (D.N.J. Nov. 1, 2013).

Applying principles from the FLSA jurisprudence, courts have held that indemnification claims violate state wage laws.

Most state wage statutes are similar to the FLSA with respect to the underlying policy of protecting workers and bolstering compliance through private civil litigation. So it’s not surprising that courts have looked to FLSA jurisprudence in prohibiting civil defendants from seeking indemnification for alleged violations of state wage laws.

For example, in Gustafson v. Bell Atlantic Corp., 171 F. Supp. 2d 311, 328 (S.D.N.Y. 2001), a worker alleged that the company violated the FLSA and the New York Labor Law (“NYLL”) by misclassifying him as an independent contractor and denying him overtime pay and other benefits. See id. at 316. Like S-L, the company required the worker to form his own corporation – called J.A.G. Services, Inc. (“JAG”) – which contracted directly with the company. See id. at 316-17. In response, the company filed a third-party indemnification claim against JAG. See id. at 327. Applying Herman, the court dismissed the indemnification claim because it “would permit employers to contract away their obligations under the FLSA, a result that flouts the purpose of the statute.” Id. at 328. Next, the court dismissed the indemnification claim under the NYLL, finding that “the same reasoning holds for similar provisions of New York Labor laws” and that “[t]he policies behind the New York laws are similar to the federal statute.” Id. at 328 n. 8. Other New York courts have reached similar results. See, e.g., Fernandez, 2014 U.S. Dist. LEXIS 17954, at *25-35; Flores v. Mamma Lombardis of Holbrook, Inc., 942 F. Supp. 2d 274, 278 (E.D.N.Y. 2013); Goodman v. Port Authority of New York and New Jersey, 850 F. Supp. 2d 363, 388-89 (S.D.N.Y. 2012).

Likewise, in Cordova, supra, package delivery drivers alleged that FedEx violated Oregon’s wage statute by misclassifying them as independent contractors. See 104 F. Supp. 3d at 1122-25. FedEx responded by filing third-party indemnification claims against the corporate entities that purportedly employed the drivers per a contract between the entities and FedEx. See id. Relying on Gustafson and other cases, the court dismissed the third-party claims: “Allowing [FedEx] to assert indemnification and indemnification-type claims against Third-Party Defendants based on those contracts contravenes the [Oregon wage statute] and the public policies it enforces.” Id. at 1136.

Finally, in Villareal v. El Chile, Inc., 601 F. Supp. 2d 1011 (N.D. Il. 2009), employees asserted claims under both the FLSA and Illinois Minimum Wage Law (“IMWL”). See id. at 1013. In response, the employer asserted indemnification counterclaims. See id. at 1013-14. The court dismissed the counterclaims as violating the FLSA’s policy objectives. See id. at 1014-16. Then, the court dismissed the indemnification counterclaims as violating the IMWL’s similar policy objectives: “As with the FLSA, the IMWL’s statutory goals would be undermined by diminishing the employer’s compliance incentives if an employer were permitted to seek indemnity or contribution from its employees for statutory violations.” Id. at 1017.

S-L’s indemnification claims violate the pertinent New Jersey, New Hampshire, and Connecticut wage statutes.

Here, as in Gustavson, Cordova, and Villareal, this Court should hold that Counts I and II – both of which ask the LLCs to indemnify S-L for fees, costs, and damages stemming from the Worker’s wage lawsuits against S-L – violate the public policy underlying the New Jersey, New Hampshire, and Connecticut wage statutes. In order to provide some structure to the analysis, we view these state statutes against the four considerations described by the Second Circuit in Herman.

The first Herman consideration asks whether “the text of the [statute] makes no provision for contribution or indemnification.” Herman, 172 F.3d at 144. Here, none of the pertinent state wage statutes mention contribution or indemnification. See generally N.J.S.A. § 34:11-4.1, et seq.; N.H. Rev. Stat. Ann. §§ 274:42, et seq.; Conn. Gen. Stat. §§ 31-70, et seq. On the contrary, each statute expressly provides that workers’ wage rights cannot be altered by private agreement. See N.J.S.A. § 34:11-4.7; N.H. Rev. Stat. Ann. §§ 274:50; Conn. Gen. Stat. § 31-72.[1]

The second Herman consideration asks whether the statute is intended to “benefit” employees rather than employers. Herman, 172 F.3d at 144. Such is the case here. Specifically, New Jersey’s wage statute “is designed to protect an employee’s wages and to assure timely and predictable payment,” Hargrove v. Sleepy’s., LLC, 106 A.3d 449, 463 (N.J. 2015), and is so worker-friendly that it “presumes a person seeking protection . . . is an employee, id. at 464. Meanwhile, New Hampshire’s statute is “Protective Legislation” that must be construed broadly “to give effect to the legislature’s remedial purpose.” Ives v. Manchester Subaru, Inc., 498 A.2d 297, 303 (N.H. 1985) (Souter, J.). Finally, Connecticut’s statute is “remedial” legislation that “recognize[es] the important public policy of ensuring that employees receive wages due to them.” Butler v. Hartford Technical Institute, Inc., 704 A.2d 222, 227 (Conn. 1997).

The third Herman consideration addresses the statute’s “comprehensive remedial scheme.” Herman, 172 F.3d at 144. Here, the three pertinent state wage statutes – like the FLSA – permit workers to file private civil actions in order to enforce their statutory wage rights. See N.J.S.A. § 34:11-4.10(c); N.H. Rev. Stat. Ann. § 275:53; Conn. Gen. Stat. § 31-72. In addition, the three statutes limit the recovery of attorney’s fees to prevailing plaintiffs. See N.J.S.A. § 34:11-4.10(c); N.H. Rev. Stat. Ann. § 275:53; Conn. Gen. Stat. § 31-72. As one district court explained, “[b]y enacting provisions for attorney’s fees for prevailing plaintiffs but not prevailing defendants, the drafters of [legislation] made a clear policy choice intended to encourage citizens to bring wage and hour claims.” Fernandez, 2014 U.S. Dist. LEXIS 17954, at *31.

The fourth Herman consideration asks whether “legislative history is silent on the right to contribution or indemnification.” Herman, 172 F.3d at 144. In this regard, the undersigned’s research has revealed no legislative history suggesting that the New Jersey, New Hampshire, or Connecticut legislatures intended to allow civil defendants to seek indemnification for wage violations.

In sum, the New Jersey, New Hampshire, and Connecticut wage statutes – like the FLSA and the New York, Oregon, and Illinois statutes – are remedial legislation that would be undermined if employers and putative employers could seek indemnification for wage violations.

— PW

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