Harris v. Pacific Ohana Hostel Corp. et al

Filing 40

ORDER DENYING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT 23 . Signed by JUDGE LESLIE E. KOBAYASHI on 12/27/2013. [Order follows hearing held 12/16/2013. Minutes of hearing: doc no. 36 ] (afc) CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
THOMAS E. PEREZ,. Secretary
of Labor, United States
Department of Labor,

)
)
)
)
Plaintiff,
)
)
vs.
)
)
PACIFIC OHANA HOSTEL CORP., a )
Hawaii Corporation, at. al., )
)
)
Defendants.
_____________________________ )

CIVIL 13-00324 LEK

ORDER DENYING DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT
On October 1, 2013, Defendants Pacific Ohana Hostel
Corp., a Hawaii corporation (“POHC”), Kim Voigt, an individual
doing business as Island Hostel (“Voigt”), and Adventures on 2
Wheels Inc., a Hawaii corporation (“Adventures,” collectively
“Defendants”), filed their Motion for Summary Judgment
(“Motion”).

[Dkt. no. 23.]

Plaintiff Thomas E. Perez, Secretary

of Labor, United States Department of Labor (“Plaintiff” or “the
Secretary”), filed his memorandum in opposition on November 25,
2013, and Defendants filed their reply on December 2, 2013.1
[Dkt. nos. 32, 34.]
This matter came on for hearing on December 16, 2013.
Appearing on behalf of Defendants were Jeffrey Harris, Esq., and

1

Defendants also filed their Supplemental Citation of
Authorities in Support of the Reply on December 6, 2013. [Dkt.
no. 35.]

Kristi O’Heron, Esq., and appearing on behalf of Plaintiff was
Andrew Schultz, Esq.

After careful consideration of the Motion,

supporting and opposing memoranda, and the arguments of counsel,
Defendants’ Motion is HEREBY DENIED because there are disputes of
material fact which render the claims incapable of summary
disposition, as set forth more fully below.
BACKGROUND
On June 28, 2013, Seth D. Harris, Acting Secretary of
Labor (“Harris”), filed his Complaint for Injunctive Relief and
to Recover Amounts Due under the Fair Labor Standards Act (29
U.S.C. 201 et seq.).

[Dkt. no. 1.]

On September 23, 2013, the

Secretary filed the First Amended Complaint for Injunctive Relief
and to Recover Amounts Due under the Fair Labor Standards Act (29
U.S.C. 201 et seq.) (“Amended Complaint”).

[Dkt. no. 19.]

The

Amended Complaint added the Secretary as a plaintiff to the
instant action, and terminated Harris.
Voigt owns and operates POHC, which primarily provides
hostel accommodations to guests.

[Defs.’ Concise Statement of

Facts in Supp. of Motion, filed 10/1/13 (dkt. no. 24) (“Defs.’
CSOF”), Decl. of Kim Voigt (“Voigt Decl.”) at ¶ 1.]
owns and operates Adventures.

[Id.]

Voigt also

POHC can provide

accommodations for approximately 160 guests at its two affiliated
properties: (1) Pacific Ohana Hostel, which consists of two
buildings; and (2) Island Hostel, which consists of one building.

2

[Id. at ¶¶ 2-3.]

From 2011 to present, over ninety percent of

POHC guests paid $28.00 to $95.00 per night for their rooms.
From June 28, 2011 through August 2012, less than ten percent of
guests staying in Pacific Ohana Hostel and Island Hostel were
unable to pay for their lodging, and offered to assist in the
maintenance and operation of POHC’s business in order to pay.
[Id. at ¶¶ 5, 7.]

Voigt states that, beginning September 2012,

she placed these guests on payroll, and paid them at least
minimum wage ($7.25 per hour) and time-and-a-half for every hour
worked over forty hours in any one week.

[Id. at ¶ 6.]

The

Secretary has identified some of Defendants’ employed guests in a
list that he attached to the Amended Complaint (“the Guest
Employees”).

[Amended Complaint at ¶ 10 (citing id., Exh. A).]

Defendants assert that:
Before September 2012, Ms. Voigt scheduled guests
who assisted in maintenance or operation of POHC’s
business only the amount of hours necessary to
cover the combined daily rate ($30 per day) of
their lodging for the week, crediting the guest
$7.25 for each hour the guest assisted in
maintenance and operation of POHC’s business. No
guest unable to pay for his or her lodging
assisted in maintenance and operation of POHC’s
business more than forty (40) hours in any week.
[Defs.’ CSOF at ¶ 7 (citing Voigt Decl. at ¶¶ 8-9).]

The

Secretary disputes this fact to the extent that Defendants claim:
that the Guest Employees did not work more than the amount
required to cover their lodging costs; current compliance; and
that no Guest Employee is owed overtime compensation.
3

[Pltf.’s

Concise Statement of Facts in Supp. of Opp. to Motion, filed
11/25/13 (dkt. no. 33) (“Pltf.’s CSOF”)2 at ¶¶ 7-8, 12-14 (citing
Pltf.’s CSOF, Declaration of Min Kirk (“Kirk Decl.”) at ¶¶ 10-11,
14-17).]

According to Kirk, Assistant District Director for the

Honolulu District Office of the Wage and Hour Division (“WHD”),
United States Department of Labor, the cost to Defendants to
provide lodging for the Guest Employees was less than $30 per
day, and usually less than the Guest Employees’ earned wages at
$7.25 per hour for their labor.

[Kirk Decl. at ¶¶ 10-11.]

Kirk

also states that the WHD began investigating Defendants’
practices in January 2012 (“the WHD Investigation”), and found
that, inter alia, the Guest Employees were owed back wages for
unpaid minimum wages and overtime compensation.

[Id. at ¶¶ 14-

17.]
During the WHD Investigation, the Department of Labor’s
investigator (“the WHD Investigator”) informed Voigt that guests
who assisted with POHC’s business to pay for their lodging

2

Plaintiff’s CSOF contains a chart listing the Defendants’
asserted facts and Plaintiff’s response to each fact
(“Plaintiff’s CSOF Chart”). [Pltf.’s CSOF at pgs. 2-7.] For
each of Defendants’ asserted facts, Plaintiff’s response states
whether or not, or to what extent, Plaintiff disputes the
asserted fact. Where applicable, Plaintiff’s responses also
refer to Plaintiff’s separate list of controverted facts. [Id.
at pgs. 8-10.] Both Plaintiff’s CSOF Chart and list of
controverted facts are organized by numbered paragraphs. For
purposes of clarity, this Court’s citations to numbered
paragraphs in Plaintiff’s CSOF will refer to those in Plaintiff’s
list of controverted facts.
4

constituted POHC’s employees.

The WHD Investigator also informed

Voigt that she could only consider the actual cost of lodging,
and not the rate that the guests had agreed to pay when they
began staying in the room.
Decl. at ¶ 11).]

[Defs.’ CSOF at ¶ 9 (citing Voigt

The Secretary disputes this fact based on

Kirk’s statement that the WHD denied a wage credit to Defendants
during the WHD Investigation for failure to meet the requirements
of 29 C.F.R. § 531.31.

[Pltf.’s CSOF at ¶ 11 (citing Kirk Decl.

at ¶ 14).]
According to Voigt, POHC incurred expenses in the
following categories to lodge guests each month at the Pacific
Ohana Hostel: general excise tax; transient occupancy tax;
electricity for common areas; telephone service; water; outside
(maintenance/repair) contractors; advertising; bank fees;
laundry; maintenance and operation supplies; building insurance;
parking fees; gas; garbage fees; legal fees; licensing fees;
payroll; Federal Insurance Contribution Act Tax; Unemployment
Tax; “lost rental income attributed to guests who maintained and
operated Pacific Ohana Hostel for all rooms in Pacific Ohana
Hostel (31 rooms)[;]” mortgage, property taxes, and depreciation
for one of the Pacific Ohana Hostel buildings, which Voigt owns;
rent and property taxes on the Pacific Ohana Hostel building that
Voigt leases.

POHC incurred generally the same categorical

expenses with respect to lodging guests at Island Hostel, which

5

Voigt leases.

[Defs.’ CSOF at ¶¶ 10-11 (citing Voigt Decl. at

¶¶ 13, 18.]
Based on Voigt’s summary of expenses, Defendants assert
that the actual cost of lodging all guests who assisted with
POHC’s business from June 28, 2011 through August 2012 was
$161,346.82.

From July 2011 through August 2012, a total of

28,202.22 hours were worked.

The number of hours worked

multiplied by the minimum wage rate of $7.25 per hour equals
$204,466.09 in earned wages.

Defendants therefore assert that,

in crediting the actual cost of lodging the Guest Employees
against their earned wages, POHC owes the difference of
$43,119.27.

[Defs.’ CSOF at ¶¶ 12-14 (citing Voigt Decl. at

¶¶ 13-24).]

The Secretary, however, disputes the reasonableness

of each of Defendants’ asserted expense categories, and disagrees
with Defendants’ calculations of the amounts owed to the Guest
Employees.

[Pltf.’s CSOF at pgs. 4-5.].
Furthermore, Defendants assert that Voigt kept and

maintained records of: the names, wages, and hours worked by the
Guest Employees; and supporting and verifying documentation of
all expenses incurred in lodging the Guest Employees.

Voigt

states that she provided all records and documents that the WHD
Investigator requested.
facts.

The Secretary disputes these asserted

[Defs.’ CSOF at ¶¶ 20-23 (citing Voigt Decl. at ¶¶ 30-33;

Pltf.’s CSOF at ¶¶ 2, 4-5, 9 (citing Kirk Decl. at ¶¶ 5, 7-8, 13;

6

id., Attachment 1 (“Att. 1")3).]
The Amended Complaint alleges that: (1) Defendants
violated 29 U.S.C. §§ 206 and 215(a)(2) by employing the Guest
Employees at wage rates less than the applicable federal minimum
(“Count I”); Defendants violated 29 U.S.C. §§ 207 and 215(a)(2)
for failing to pay overtime compensation to the Guest Employees
(“Count II”); and Defendants failed to maintain adequate records
with respect to the Guest Employees, pursuant to 29 U.S.C.
§§ 211(c) and 215(a)(5) (“Count III”).

[Amended Complaint at

¶¶ 7-9.]
DISCUSSION
The standard for summary judgment is well-known to the
parties and does not bear repeating here.

See, e.g., Rodriguez

v. Gen. Dynamics Armament & Technical Prods., Inc., 696 F. Supp.
2d 1163, 1176 (D. Hawai`i 2010).
I.

Count I and Count II - Violations of Minimum
Wage and Overtime Compensation Requirements
The Secretary alleges that Defendants willfully

violated the Fair Labor Standards Act (“FLSA”) by failing to
comply with the minimum wage and overtime compensation
requirements.

See 29 U.S.C. §§ 206, 207, 215.

Defendants do not

contest that they are subject to the FLSA for employing the Guest
3

The Court notes that the Secretary attached two documents
to the Kirk Declaration in Plaintiff’s CSOF (“Attachment 1" and
“Attachment 2"). The Kirk Declaration, however, does not
authenticate Attachment 1 or Attachment 2.
7

Employees.

Instead, Defendants argue that they are entitled to a

“wage credit” for the reasonable cost of providing lodging to the
Guest Employees, as described in 29 U.S.C. § 203(m).

Defendants

assert that, after deducting a wage credit for the reasonable
cost of providing lodging to the Guest Employees, the wages
Defendants paid to the Guest Employees satisfy the FLSA’s
requirements.

[Mem. in Supp. of Motion at 1-2.]

Defendants

therefore urge the Court to grant summary judgment in favor of
POHC with respect to all counts in the Amended Complaint.
[Motion at 2.]
A.

Applicable FLSA Law
The FLSA sets forth the federal minimum wage rates for

work and overtime compensation that employers are required to pay
their employees.

See §§ 206, 207.

“‘Wage’ paid to any employee

includes the reasonable cost, as determined by the Administrator,
to the employer of furnishing such employee with board, lodging,
or other facilities, if such board, lodging, or other facilities
are customarily furnished by such employer to his
employees . . . .”

§ 203(m).

In other words, the FLSA allows an

employer to make a lawful deduction from the wages of its
employees in the amount of the reasonable cost to the employer to
furnish board, lodging, or other facilities.

Under the Code of

Federal Regulations, “reasonable cost” means “not more than the
actual cost to the employer[,]” and “does not include a profit to
8

the employer or to any affiliated person.”
(b).

29 C.F.R. § 531.3(a),

Furthermore, “[t]he cost of furnishing ‘facilities’ found

by the Administrator to be primarily for the benefit or
convenience of the employer will not be recognized as reasonable
and may not therefore be included in computing wages.”
§ 531.3(d)(1).
When seeking a wage credit under the FLSA, the employer
has the burden of proving its reasonable costs.

Brock v.

Carrion, Ltd., 332 F. Supp. 2d 1320, 1325 (E.D. Cal. 2004)
(citing Donovan v. Williams Chemical Co., 682 F.2d 185, 190 (8th
Cir. 1982); Donovan v. New Floridian Hotel, Inc., 676 F.2d 468,
474 (11th Cir. 1982)) (noting that other circuits have placed the
burden of proving reasonable costs on the employer).

The Brock

court stated:
This is confirmed by the Code of Federal
Regulations, which imposes certain record-keeping
requirements upon employers who seek to offset
lodging costs against employees’ wages. Section
516.27 provides that: “[A]n employer who makes
deductions from the wages of employees for ‘board,
lodging, or other facilities’ . . . shall maintain
and preserve records substantiating the cost of
furnishing each class of facility.” 29 C.F.R.
§ 516.27(a). This can include the cost of
utilities, repairs and/or maintenance. Id. . . .
Additionally, employers must segregate permissible
deductions from impermissible ones. Brennan v.
Veterans Cleaning Service, Inc., 482 F.2d 1362,
1370 (5th Cir. 1973). Thus, where an employer
produces only evidence of costs including profit,
the employer has the burden of determining the
actual cost that may be deducted from that amount.
New Floridian, 676 F.2d at 475.

9

An employer must demonstrate compliance with
the above provisions in order to be entitled to a
credit for the reasonable cost of providing
lodging to employees. New Floridian, 676 F.2d at
474. “An employer’s unsubstantiated estimate of
his cost, where the employer has failed to comply
with the recordkeeping provisions of the FLSA, and
where there has been no determination of
reasonable cost by the Wage and Hour Division,
does not satisfy the employer’s burden of proving
reasonable cost.” Id. at 476. Courts routinely
deny employers offsets under the FLSA for failure
to keep adequate records. See, e.g., Williams
Chemical, 682 F.2d 185 (8th Cir. 1982); Marshall
v. Debord, 1978 WL 1705 (E.D. Okla.), 84 Lab. Cas.
¶ 33,721; Cuevas v. Bill Tsagalis, Inc., 149 Ill.
App. 3d, 102 Ill. Dec. 946, 500 N.E.2d 1047
(1986).
Id. at 1325-26 (some alterations in Brock) (emphasis in Brock).
B.

Whether Defendants are Entitled to a Wage Credit
Insofar as Defendants argue that they are entitled to a

wage credit, Defendants have the burden of proving their
reasonable cost for providing lodging to the Guest Employees.
Defendants contend that, in this case, the reasonable cost is the
rate that the Guest Employees initially agreed to pay for their
accommodations, and is not limited to actual cost.
Supp. of Motion at 3-4.]

[Mem. in

Alternatively, Defendants argue that,

even if Defendants are only permitted to deduct the actual cost,
POHC’s liability is less than the Secretary claims.
5.]

[Id. at 4-

In support of their argument, Defendants submit Voigt’s

summary of the asserted actual cost of providing lodging to the
Guest Employees from July 2011 to August 2012, which contains,
inter alia, lists of monthly expenses for Pacific Ohana Hostel
10

and Island Hostel.

[Id., Exh. A, Exh. B.]

The lists itemize the hostels’ monthly expenses by
category.

The Secretary disputes the reasonableness of certain

expense categories and amounts, and therefore argues that
Defendants are unable to meet their burden of establishing that
they are entitled to a wage credit.

[Mem. in. Opp. at 9-10.]

The Court agrees, and notes that, besides this summary,
Defendants have not submitted any other evidence to substantiate
their estimated costs.

Thus, although the Court will not comment

on any expense category in particular, the Court concludes that
there are remaining disputes of material fact as to the
reasonableness of Defendants’ asserted costs in providing lodging
to the Guest Employees.
C.

Applicable Statute of Limitations
The Secretary seeks relief for Defendants’ alleged

willful violations of the FLSA that occurred as early as June 28,
2010.

[Amended Complaint at ¶¶ 7-8, 11.]

Defendants argue that,

insofar as nothing in the facts suggest that POHC willfully
violated the FLSA, a two-year statute of limitations applies in
the instant case.

Thus, POHC is liable, if at all, for only the

wage violations occurring within the two years before the filing
of the Amended Complaint.

[Mem. in Supp. of Motion at 4.]

The

Secretary asserts that a three-year limitations period applies
where violations of the FLSA are willful, and that there are

11

genuine disputes as to this issue.

[Mem. in Opp. at 11-12.]

Generally, a two-year statute of limitations applies to
cases brought under the FLSA.

29 U.S.C. § 255(a).

Where

violations of the FLSA are willful, however, a three-year statute
of limitations applies.

Id.

“A violation of the FLSA is willful

if the employer ‘knew or showed reckless disregard for the matter
of whether its conduct was prohibited by the [FLSA].’”

Chao v.

A-One Med. Servs., Inc., 346 F.3d 908 (9th Cir. 2003) (alteration
in Chao) (some citations omitted) (quoting McLaughlin, 486 U.S.
at 133, 108 S. Ct. 1677, 100 L. Ed. 2d 115); see also Solis v.
Best Miracle Corp., 709 F. Supp. 2d 843, 858 (C.D. Cal. 2010)
(citation omitted).

The Ninth Circuit has stated, “an employer

need not knowingly have violated the FLSA; rather, the three-year
term can apply where the employer disregarded the very
‘possibility’ that it was violating the statute . . . .”

Alvarez

v. IBP, Inc., 339 F.3d 894, 908-09 (2003) (citations omitted).
The Secretary submits Kirk’s declaration, in which she
states that the WHD Investigator found that, in 2002, Defendants
were the subject of a Hawai`i state agency’s investigation.
According to Kirk, the state agency concluded that Voigt had
violated state requirements by taking a lodging credit in excess
of reasonable costs, i.e., she violated a provision identical to

12

the FLSA.

[Kirk Decl. at ¶¶ 14-16; id., Att. 2.4]

Based on

Kirk’s statements, the Secretary argues that he has submitted
evidence showing that Voigt was fully aware that she was only
able to deduct the actual cost of providing lodging from the
Guest Employees’ earned wages.

Viewing the facts in the light

most favorable to the Secretary, the Court finds that there are
existing issues of material fact as to whether Defendants’
alleged violations were willful.

Thus, insofar as the Motion

seeks summary judgment as to Count I and Count II for violations
that allegedly took place outside of the two-year, but within the
three-year, limitations period, the Motion is HEREBY DENIED.
D.

29 C.F.R. § 785.23
In their Reply, Defendants argue that, because the

Guest Employees lived in Defendants’ hostels for extended periods
of time, Defendants are entitled to invoke 29 C.F.R. § 785.23, an
exemption to the requirements of the FLSA.

[Reply at 2.]

Pursuant to Local Rule 7.4, “[a] reply must respond only to
arguments raised in the opposition.

Any argument raised for the

first time in the reply shall be disregarded.”

Insofar as

Defendants raised the argument pertaining to the § 785.23

4

The Court notes that Attachment 2 appears to be a copy of
the State of Hawaii’s Department of Labor and Industrial
Relations, Enforcement Division, report regarding its
investigation of Defendants in 2002. [Kirk Decl., Att. 2.] The
Court also notes that, aside from Voigt’s WHD Interview, [id.,
Att. 1,] the Secretary did not submit any documents pertaining to
the WHD Investigation.
13

exemption for the first time in their Reply, the Court must
disregard this argument.

The Court notes that, even if it did

consider Defendants’ argument, there is insufficient evidence in
the record to determine whether § 785.23 is applicable to the
instant case.
The Court concludes that there are disputed issues of
fact regarding Defendants’ calculations of the reasonable cost to
providing lodging to the Guest Employees under 29 U.S.C.
§ 203(m).

Thus, Defendants’ Motion for Summary Judgment is

HEREBY DENIED with respect to Count I and Count II.
II.

Count III - Violations of Record-keeping Requirements
The Secretary also alleges that Defendants failed to

comply with the record-keeping requirements of the FLSA.
[Amended Complaint at ¶ 9.]
The FLSA requires all employers subject to the Act to
make and keep records of the hours that their employees work.
U.S.C. § 211(c).

29

Employers must keep a record of, inter alia,

“[h]ours worked each workday and total hours worked each workweek
. . . .”

29 C.F.R. § 516.2(a)(7).

Furthermore, an employer

seeking a wage credit for the cost of providing lodging to its
employees must “maintain and preserve records substantiating the
cost of furnishing each class of facility . . . .”
§ 516.27.

29 C.F.R.

Failure to keep adequate records constitutes a

violation of the FLSA.

29 U.S.C. § 215(a)(5).

14

In the instant case, Defendants rely on Voigt’s
statements that she kept and maintained adequate records with
respect to the Guest Employees.

[Voigt Decl. at ¶¶ 30-31.]

Kirk, however, states that, in response to the WHD Investigator’s
request for Defendants’ payroll and time records for their
employees, “Voigt provided . . . records [that] did not meet the
requirements of 29 C.F.R. § 516.2.”

[Kirk Decl. at ¶ 5.]

The

Court finds both Voigt’s and Kirk’s statements are merely
conclusory.

The Court concludes that Defendants have not

demonstrated the absence of any genuine issue of material fact,
and HEREBY DENIES the Motion with respect to Count III.
CONCLUSION
On the basis of the foregoing, Defendants’ Motion for
Summary Judgment, filed on October 1, 2013, is HEREBY DENIED.
IT IS SO ORDERED.
DATED AT HONOLULU, HAWAII, December 27, 2013.

/s/ Leslie E. Kobayashi
Leslie E. Kobayashi
United States District Judge

THOMAS E. PEREZ, ETC. V. PACIFIC OHANA HOSTEL CORP., ET AL; CIVIL
NO. 13-00324 LEK-BMK; ORDER DENYING DEFENDANTS’ MOTION FOR
SUMMARY JUDGMENT

15