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MCLAUGHLIN v. DIALAMERICA MKTG.

March 23, 1989

ANN McLAUGHLIN, Secretary of Labor, U.S. Department of Labor, Plaintiff,
v.
DIALAMERICA MARKETING, INC., Defendant



The opinion of the court was delivered by: WOLIN

 ALFRED M. WOLIN, UNITED STATES DISTRICT JUDGE

 Currently pending before the Court is an action commenced by the Secretary of the United States Department of Labor ("Secretary") alleging that defendant DialAmerica Marketing, Inc. ("DialAmerica") violated the minimum wage and recordkeeping provisions of the Fair Labor Standards Act of 1938, 29 U.S.C. § 201 et seq. ("FLSA") in connection with its home telephone search program. Because of pronounced violations of the FLSA and a failure to pay a minimum wage to the participants in such program, the Court will order the payment of back wages and restrain DialAmerica from further withholding of minimum wages.

 I. BACKGROUND

 DialAmerica Marketing, Inc. is a Delaware corporation with offices in 20 states, including New Jersey, that employs over 2,400 people nationwide. For purposes of this action, DialAmerica concedes it is an enterprise within the meaning of Section 3(r) of the FLSA. Further, it agrees that it has gross volume of sales made or business done of not less than $ 250,000.00 and employees who are engaged in interstate commerce. Its business is telephone marketing of which a major part is the sale of magazine renewal subscriptions, its "expire" program. In order to sell these subscriptions, DialAmerica receives from publishers the name and address of subscribers whose subscriptions have or are about to expire. DialAmerica prints cards with the name and address of each subscriber ("expire cards"), has its employees attempt to locate a telephone number for each card, and then forwards the subscriber information to its sales offices throughout the country where telephone salespersons contact the subscribers in an attempt to sell magazines.

 Initially, DialAmerica employed in-house researchers at its Teaneck, New Jersey location to obtain subscribers' telephone numbers from telephone books and from directory assistance. In 1976, DialAmerica expanded its telephone number search capacity by instituting a home researcher program. DialAmerica initially recruited home researchers through five advertisements in a local shopper newspaper, but after May 1979, all prospective home researchers, upon hearing about the program from friends or family members, sought out DialAmerica for the opportunity to do home research. These people made an appointment to speak to someone in DialAmerica's lead processing department. At that time they were taught how to fill out a magazine expire card, and those who desired the homework signed an independent contractor agreement. DialAmerica never rejected anyone who wanted to be a home researcher. Between 1980 and mid-1982, DialAmerica employed hundreds of home researchers.

 The modus operandi employed by DialAmerica required that a home researcher travel to DialAmerica's Teaneck office. At that time he or she would be given a box of 500 cards to research and would make an appointment, generally for one week later, to return the cards and pick up new ones. If the researcher desired more time, he or she could reschedule the appointment. A home researcher could ask for as many cards as he or she wanted to research subject to a 500-card minimum and card availability. Experienced researchers would pick up as many as 3,000-4,000 cards per week. Researchers were restricted to the extent that they could not pick up a new group of cards to research until they had completed the group previously taken. The cards, when given to a home researcher, were presorted by state and area code, and home researchers were permitted to request cards containing addresses from states of their choice.

 These home workers then brought the cards home and attempted to obtain telephone numbers for the subscribers designated on each card. Numbers found were written on the card and the card became completed and compensable. The home researcher was unrestrained in the time he or she wanted to expend to complete the cards, since DialAmerica did not require a minimum or maximum number of hours. Nor was there an obligation to complete the cards that were taken. Some home researchers chose to spread the work over a full week regardless of the number of cards to research; some necessarily worked a full week because of the large number of cards; and some completed the work in two or three days. Each home researcher tailored his or her home research to fit his or her individual needs and life styles.

 The home researchers were paid on a piece rate basis -- initially five cents, later seven and then ten cents -- for each subscriber telephone number found. Occasionally, the piece rate was higher for groups of cards which involved subscribers for whom numbers were difficult to locate (e.g., children) and where the success rates were particularly low. By contrast, in-house researchers were paid the FLSA minimum wage for all hours worked. DialAmerica also required the home researchers, unlike the in-house researchers, to fill out independent contractor or subcontractor applications and to sign independent contractor agreements.

 In addition to the home researchers who picked up their cards directly from DialAmerica's Teaneck office, six or seven home researchers ("distributors") also distributed cards to other home researchers ("distributees") who could or would not travel to the Teaneck office. The distributors received one cent above the piece rate for each number found by their distributees. They received one check for the gross amount of all listed numbers found by them and by the distributees to whom they gave cards. Some of the distributors paid their distributees the full piece rate and kept the one cent; others paid less than the piece rate to their distributees. Originally, DialAmerica required the distributors to obtain signed independent contractor's agreements from their distributees. Copies of these agreements were initially retained by DialAmerica. Later in the program, when it ceased to require distributees to sign such agreements, the existing agreements were discarded. These distributors were not subject to any supervision from DialAmerica in running their distributor operations. DialAmerica had no contact with the distributees and does not possess records of the names of the distributees.

 For each of the home researchers (other than for distributees), DialAmerica maintained detailed records listing for each week the number of cards the home researcher received, the applicable piece rate, the number of cards for which listed telephone numbers were found and the total amount paid for that week. Because DialAmerica erroneously believed that the home researchers were not "employees" and were properly paid at a piece rate, DialAmerica did not keep any records of the number of hours the home researchers worked or the number of cards any of them could research in an hour (i.e., their respective production rates). Nor did DialAmerica require the home researchers to maintain a handbook recording the number of hours they worked. Thus, no home researcher kept any record of the rate per hour at which he or she could research cards.

 In June 1982, during the pendency of this lawsuit, DialAmerica ceased the home research program and terminated the employment of all of the home researchers except for a few who commenced working at defendant's Teaneck office.

 II. PROCEDURAL HISTORY

 This case was initiated by the Secretary of the Department of Labor alleging that defendant DialAmerica willfully violated the minimum wage and recordkeeping provisions of FLSA in connection with its home telephone research program.

 By an Opinion and Order dated January 26, 1984, this Court (Stern, J.) dismissed the complaint and awarded summary judgment to DialAmerica on the ground that the home researchers and distributors were not "employees" within the meaning of FLSA § 203, but were instead independent contractors. The Third Circuit Court of Appeals affirmed that decision in part and reversed in part on March 13, 1985, finding that the distributors were independent contractors, but that home researchers were statutory employees. Donovan v. DialAmerica, 757 F.2d 1376 (3d Cir.), cert. denied, 474 U.S. 919, 106 S. Ct. 246, 88 L. Ed. 2d 255 (1985). The Third Circuit remanded the matter to this Court for a hearing on the Department's claim that DialAmerica had not satisfied the minimum wage and recordkeeping provisions of the FLSA with respect to the home researchers.

 On October 27, 1987 this Court (Lechner, J.) granted DialAmerica's motion for partial summary judgment, holding that DialAmerica did not willfully violate the FLSA in treating home researchers as non-employees to whom the FLSA did not apply. The Court held that DialAmerica was not aware that its classification of home researchers as independent contractors was in violation of the FLSA and that its actions were not in "reckless disregard of the FLSA" pursuant to the Third Circuit standard set forth in Brock v. Richland Shoe, 799 F.2d 80, 81 (3d Cir. 1986), aff'd, 484 U.S. 813, 98 L. Ed. 2d 27, 108 S. Ct. 63 (1988). The Court also held that the Department's failure to reveal any evidence indicating willful behavior on the part of DialAmerica warranted the application of the standard two-year statute of limitations under the FLSA (as opposed to the three-year limitations period applicable to willful violations). *fn1"

 A bench trial was held on September 6, 7, 8, 22 and 23, 1988 in which this Court considered whether the Department could sustain its burden of proving that DialAmerica failed to comply with the minimum wage provisions of the FLSA with regard to any individual home researcher, and if so, whether the Court may order the payment of back wages to such persons. Necessary to that decision is the determination, through either direct or representative testimony, of the number of hours worked by each home researcher.

 III. EVIDENCE PRODUCED AT TRIAL

 A. Former Home Researchers -- Raw Data

 The bulk of the evidence presented at trial consisted of the testimony of 43 former home researchers, 24 live before the Court and 19 by deposition. With respect to each witness, the identical inquiries were made, namely, the number of cards completed per week; the number of hours expended per day and per week to complete a given number of cards; the method by which each witness engaged in the researching process; the usual number of telephone listings each could receive from an operator; the amount of money received per card researched; and finally, an estimate of the number of cards per hour that could be completed by the witness. Most witnesses received between 500 and 1,500 cards per week and processed them at rates on the average falling between 30 and 60 cards per hour. The witnesses generally testified to their ability to obtain between two and three listings from one operator, but claimed that some states were more generous in providing multiple listings.

 Initially, home researchers were paid five cents per number found. That amount subsequently increased to seven and then to 10 or 20 cents per number found. In 1980, the FLSA minimum wage was $ 3.10/hour, increasing to $ 3.35/hour in 1981 and 1982. *fn2" Most home researchers also testified that they were provided with written instructions directing them to pass over cards naming all schools, libraries, army bases, government installations and hospitals. *fn3"

 The witnesses at trial were asked whether they kept records of the hours spent researching a given number of cards. Several replied that they had maintained records at one time, but have since disposed of them; several claimed that they had timed themselves, but had never recorded their hours; and several, namely, Christine Poss, Thomas Milo, Rina Herdman and Roxanne Catrambone, submitted their records to the Court. *fn4"

 Those former home researchers who submitted records also operated as distributors, and their records set forth the number of cards given to distributees; the number of listed numbers found by the distributees; the amount paid by the distributor to the distributee; and in some cases, the rate of pay (i.e., five cents/card), including the commission received by the distributor at one cent above the rate received by the distributee. However, the number of hours worked by each employee was not recorded and was unavailable to the Court.

 Despite these somewhat detailed records, the principal issue persists: What was the production rate of each home researcher? This inquiry is necessarily relevant to the crucial determination of back wages due, and cannot be answered until the number of hours worked by each home researcher is ascertained. Since none of the testifying witnesses recorded the number of hours worked, this Court must, among other factors, look to their recollective estimates.

 B. Compliance Specialist -- Statistical Data

 (1) Calculation of Hours Worked

 In an effort to resolve the issue as to rates of production, the Department of Labor called compliance specialist William Devins as an expert witness. Devins testified that he was assigned the task of developing a computerized summary of all of the available data, including both the business records of DialAmerica *fn5" and the records supplied by several former home researchers.

 Because all available data were incomplete, Devins developed and advanced a number of mathematical formulae designed to solve for particular variables depending upon the information provided by the records under consideration.

 First, he assumed that a worker who is able to process 50 cards/hour (a figure readily ascertained from individual witness testimony) would expend 10 hours to complete 500 cards in one week. *fn6"

 500 received/50/hour = 10 hours

 In order to earn the minimum wage in that particular week, the worker would have had to be paid $ 31.00. ($ 3.10 x 10 hours) *fn7"

 (2) Calculation of Cards/Hour

 Devins' formula to solve for an unknown number of cards/hour is cards/hour = minimum wage X cards processed *fn8" /minimum wage due

 The production rate for the hypothetical employee would, therefore, equal

 3.10 X 500/$ 31.00 = 50 cards/hour

 (3) Calculation of Number of Cards/Hour Below Which a Minimum Wage Violation Exists Assuming that the following information is available for the hypothetical employee, Min. Actual Date Wage Rec'd. Lstd. Rate Pay 1/20/80 $ 3.10 1359 416 0.20 $ 83.20

 the inquiry here is what number of cards/hour would this worker have had to process in order for actual pay received ($ 83.20) from DialAmerica to have sufficiently provided the minimum wage of $ 3.10 in 1980? *fn9" Devins suggests that the proper formula is

 cards/hour = minimum wage x cards processed/gross pay

 Inserting the known sample data,

 cards/hour = $ 3.10 x 1359/$ 83.20 = 51.

 This solution demonstrates that this employee would have had to process 51 cards/hour in order for $ 83.20 to provide the appropriate minimum wage. *fn10" With a production rate of 50 cards/hour, this employee would be one card short of the number necessary in order for her actual pay to provide the minimum wage.

 Appendix A further displays Devins' mathematical analysis by providing a sample work week for each testifying employee (excluding distributees), and indicating the rate of production (i.e., cards/hour) that each worker would have had to achieve in the given week in order for actual salary received to reach the equivalent of the minimum wage.

 Clearly, only three of the 33 witnesses accounted for in Appendix A achieved, or conceivably could have achieved, the rates of production required to render their given salaries consistent with the appropriate minimum wage. *fn11" As for the remaining thirty witnesses, the numbers in the far righthand column ("Minimum Wage Viol. Below Indicated Cds/Hr.") establish obvious violations in the sample weeks. For instance, M. Sullivan, in receipt of 545 cards, would have had to, based upon Devins' formula, process cards at the impossible rate of 98/hour in order for her actual pay to provide the minimum wage. However, most employees testified to rates falling only between 30 and 60 cards/hour.

 A pattern of violations with regard to those not testifying can be inferred based on the representative testimony of these witnesses. Appendix B demonstrates similar unattainable rates of production for a sampling of 20 non-testifying employees. In fact, only two non-testifying witnesses in this random sample could have achieved the rate of production required to render her actual pay equal to the minimum wage (F. Hecht, at 45 cards/hour and M. Paolacci, at 25 cards/hour).

 (4) Calculation of Back Wages Due

 Continuing with the prior hypothetical home researcher, the next variable to be determined is the amount of back wages due. Once again, with an assumed rate of 50 cards/hour, Devins reasons that

 Back wages due =(cards received/cards/hour x minimum wage) - actual pay

 =1359/50 x $ 3.10 - $ ...


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