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Donovan v. Dialamerica Marketing Inc.

March 13, 1985


Appeal from the United States District Court for the District of New Jersey (D.C. Civil No. 81-4020).

Gibbons, Becker, Circuit Judges, and Van Dusen, Senior Circuit Judge.

Author: Becker


BECKER, Circuit Judge.

This opinion concerns an appeal by the Secretary of Labor (the "Secretary") from the district court's judgment for defendant, DialAmerica Marketing, Inc., in a action brought by the Secretary under the Fair Labor Standards Act, 29 U.S.C. § 201-219 (1982) (the "FLSA"). The Secretary alleged that DialAmerica had failed to comply with the minimum-wage and record-keeping provisions of the FLSA. The district court determined that the two groups of workers in question, persons who research telephone numbers for DialAmerica in their homes and those who also distribute telephone-research work to other home researchers ("distributors"), are independent contractors, not "employees" subject to the provisions of the FLSA. The court refused, however, to grant defendant's request for attorneys' fees under the Equal Access to Justice Act, 28 U.S.C. § 2412 (1982), holding that the Secretary's position in the case, though incorrect, was substantially justified.

Because we believe the district court misapplied the relevant legal test for determining "employee" status under the FLSA, we hold that the court erred in concluding that the home researchers were not employees of DialAmerica. On the other hand, we hold that the district court did not err in its conclusion that the distributors were independent contractors rather than employees. Moreover, we agree with the court's determination that the Secretary's position in this case was substantially justified and therefore that DialAmerica is not entitled to an award of attorneys' fees. Accordingly, we will in part affirm and in part reverse the judgment of the district court. Further, we will remand the case so that the district court may determine whether DialAmerica has in fact complied with the requirements of the FLSA in connection with its employment of the home researchers.

I. FACTS*fn1

DialAmerica Marketing, Inc., is a telephone marketing firm that operates in twenty states and maintains its principal place of business in Teaneck, New Jersey. A major aspect of DialAmerica's business is the sale of magazine renewal subscriptions by telephone to persons whose subscriptions have expired or are near expiration. Under this "expire" program, publishers supply DialAmerica with the names and addresses of subscribers, and DialAmerica locates phone numbers for these subscribers and telephones them in an effort to sell renewal subscriptions.

Initially, DialAmerica located subscribers' phone numbers by employing in-house researchers who would find numbers by consulting telephone books and calling directory-assistance operators. In 1976, DialAmerica initiated its home-researcher program as a method of increasing its capacity to locate needed telephone numbers. Under the program, persons would travel to DialAmerica's office in Teaneck and pick up cards, each of which contained the name and address of a subscriber whose telephone number was needed. They would then take these cards home, use telephone books or operators to locate the telephone numbers of the persons listed, write the numbers on the cards in a specified manner, and then return the completed cards to DialAmerica's office. The home-research program remained in effect until 1982, when it was discontinued.

In June 1979, DialAmerica began a computerized telephone-number search operation. During the period from 1979 to 1982, this operation accounted for the locating of about 50% of all telephone numbers searched by DialAmerica. Another 20% of the numbers were located by the company's in-house researchers. The home-search program accounted for the discovery of about 4%-5% of all numbers sought: the remainder apparently were never found.

Upon deciding to begin the home-research program, DialAmerica sought researchers by placing a total of five newspaper advertisements, the last of which ran in May 1979. After that date, prospective home researchers approached DialAmerica after learning about the program from others. Those desiring such work met with an officer of the company. During the meeting, they were instructed how properly to complete the magazine expire cards, and they were asked to sign a document labeled an "Independent Contractor's Agreement." DialAmerica never rejected anyone who applied for such work, although it did subsequently discharge some home researchers who performed their work inadequately.

Upon signing the agreement to do home-research work, a worker was given an initial box of 500 cards to be researched. The worker was expected to set up an appointment to return the cards one week later. Appointments were designed to prevent too many of the home researchers (generally women some of whom brought their small children along) from being present in the office at one time.

Home researchers were free to choose the weeks and hours they wanted to work and the number of cards they wished to research (subject to a 500-card minimum per batch and to the sometimes-limited availability of cards). DialAmerica instructed the researchers not to look for the phone numbers of schools, libraries, government installations, or hospitals. The researchers were instructed to keep all duplicate cards separate. DialAmerica required the use of a black ink or Flair pen and sold such pens to the researchers. The researchers were required to place their initials and the letter "H" (for home researcher) on each card they completed. When DialAmerica installed a machine to read and process the completed cards automatically, DialAmerica required that the home researchers place numbers on the cards by writing them in ink around dots pre-printed on the cards. Finally, the home researchers were instructed not to wear shorts when they came to the office to pick up or deliver cards. DialAmerica did not, however, require the home researchers to keep records of the hours that they worked.

During the course of this program, six or seven of the home researchers acted as distributors for DialAmerica, picking up and delivering the cards of other home researchers. In some cases, the distributors recruited new home researchers and instructed them as to the proper method of completing the cards. Initially, DialAmerica instructed the distributors to require each of their distributes to sign the same independent contractor's agreement that was given to the other home researchers. DialAmerica retained copies of these signed agreements. Later in the program, however, DialAmerica chose not to require distributors to sign the agreements, and it discarded the ones that it had in its possession.

When the program began in 1976, DialAmerica paid its home researchers five cents for every completed telephone-number card. At the same time, DialAmerica was paying its in-house researchers the minimum-wage hourly rate. The piece rate paid to home researchers was eventually raised to seven cents and then to ten cents per card. On special projects, DialAmerica set the piece rate higher to compensate for the lower percentage of correct numbers that were likely to be found. Generally, one week after a home researcher had returned a group of cards, DialAmerica would make payment to that researcher of a check equal to the piece rate times the number of cards completed. DialAmerica made no deductions from these checks. Distributors were paid a lump sum equivalent to one cent more than the going piece rate for every completed card they returned to DialAmerica, regardless of whether the card had been completed by them or their distributees. Initially, DialAmerica instructed the distributors to pay distributees the going piece rate and to keep the remaining one cent per card for themselves. Later, however, DialAmerica gave no instructions as to the amount to be paid to distributees, allowing the distributors to negotiate their own piece rates.


The Secretary of Labor filed the complaint in this action in the United States District Court for the District of New Jersey on December 30, 1981, alleging that DialAmerica was willfully compensating the home researchers and distributors at a rate below the minimum wage, in violation of 29 U.S.C. §§ 206, 215(a)(2), and that DialAmerica had willfully failed to keep adequate records of its employees' wages, hours, and other conditions of employment, in violation of 29 U.S.C. §§ 211, 215(a)(5). The Secretary sought to enjoin DialAmerica from further violating the FLSA and to obtain other appropriate relief, including the payment of wages found to be due and owing. DialAmerica denied the Secretary's allegations, contending that its home researchers and distributors were not "employees" under the FLSA. Nevertheless, on June 1, 1982, DialAmerica discontinued its home-researcher program as a result of the filing of this lawsuit.

At a status conference, the district court, believing that there were no material facts in dispute, suggested to counsel that both parties attempt to stipulate the facts in the case and then file cross-motions for summary judgment.*fn2 Counsel agreed to do so, but each side reserved the right to present testimony on any issues of fact that remained in dispute. As it developed, these remaining issues of fact included:

(1) the extent to which home researchers and distributors were dependent on DialAmerica;

(2) the extent to which they had an opportunity for profit or loss;

(3) the extent to which they exercised initiative, business judgment, or foresight in their activities;

(4) the extent of any financial investment in conjunction with their work ...

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