KEHLER v. ALBERT ANDERSON, INC. et al
Filing
6
OPINION. Signed by Chief Judge Jerome B. Simandle on 4/17/2017. (dmr)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
NICHOLAS J. KEHLER, DIRECTLY
AGAINST AND DERIVATELY ON
BEHALF OF ALBERT ANDERSON,
INC. D/B/A CONNECTED
ENTERTAINMENT,
HONORABLE JEROME B. SIMANDLE
Civil Action
No. 16-5318 (JBS/KMW)
Plaintiff,
OPINION
v.
ALBERT ANDERSON, INC. d/b/a
CONNECTED ENTERTAINMENT and
ALBERT ANDERSON,
Defendants.
APPEARANCES:
Christopher Joseph Macchi, Esq.
MACCHI LAW GROUP LLC
309 N. Fellowship Road, Suite 200
Mt. Laurel, NJ 08054
Attorney for Plaintiff
Georgios Farmakis, Esq.
WEIR & PARTNERS LLP
215 Fries Mill Road, Second Floor
Turnersville, NJ 08012
Attorney for Defendants
SIMANDLE, Chief Judge:
INTRODUCTION
Plaintiff Nicholas J. Kehler (hereinafter, “Plaintiff”)
brings this action arising out of a turbulent former employment
relationship between Plaintiff and Defendant Albert Anderson,
Inc., d/b/a Connected Entertainment and Defendant Albert
Anderson (hereinafter, “Mr. Anderson”), the principal majority
owner of Connected Entertainment (collectively, “Defendants”).
Plaintiff asks the Court for a declaratory judgment that he is
the 49% minority equity owner of Connected Entertainment, while
also bringing direct and derivative claims against Defendants
relating to compensation arising Plaintiff’s termination from
the company.
Defendants move to dismiss Plaintiff’s Complaint
under Rule 12(b)(1), Fed. R. Civ. P. for lack of subject matter
jurisdiction and under Rule 12(b)(6), for failure to state a
claim.
For the following reasons, the Court grants in part and
denies in part Defendants’ motion.
BACKGROUND1
A. Factual Background
On October 3, 2012, Mr. Anderson hired Plaintiff as a Sales
Associate with Connected Entertainment, a photo booth rental
company. (Compl. at ¶ 10.)
Plaintiff was initially paid $10.00
per hour as a “Sales Associate.” (Id.)
On January 1, 2013,
Plaintiff and Mr. Anderson allegedly entered into an oral
1
For purposes of the pending motions, the Court accepts as true
the version of events set forth in Plaintiff’s Complaint,
documents explicitly relied upon in the Complaint, and matters
of public record. See Schmidt v. Skolas, 770 F.3d 241, 249 (3d
Cir. 2014).
2
contract agreement regarding their business relationship, the
terms of which were as follows:
Mr. Anderson maintains 51% majority equity ownership in
Connected Entertainment, as Mr. Anderson started the
company by investing personal funds to commence business.
Plaintiff maintains 49% minority equity ownership in
Connected Entertainment through sweat equity. Mr. Anderson
was given the title “Owner/Chief Executive Officer” of
Connected Entertainment, and Plaintiff was given the title
“Owner/Director of Operations” of Connected Entertainment.
(Id. at ¶ 12.)2
After this point, Plaintiff began working under
the assumption that he would be an equity owner of the company,
eventually receiving 49% of the company in return for his sweat
equity. (Id. at ¶ 13.)
Plaintiff did not receive an hourly wage
after agreeing to the terms of the oral contract with Mr.
Anderson. (Id.)
Instead, he received biweekly stipends ranging
from $100 in January 2013 to $300 in February 2016. (Id. at ¶¶
15-17.)
These were the same amounts of money that Mr. Anderson
paid himself. (Id. at ¶ 71.)
In various client interactions after January 2013,
Plaintiff referred to himself as an “Owner/Director of
Operations” of Connected Entertainment, and Mr. Anderson never
objected to any of these characterizations.
This included
Plaintiff changing his company email signature to reflect his
2
Plaintiff alleges that the terms of this oral agreement are
evidenced in thousands of email messages between him, Mr.
Anderson and the company accountant through the course of
Plaintiff’s employment.
3
new title (Id. at ¶ 18), changing his business cards (Id. at ¶
19), and referring to Mr. Anderson as his “business partner.”
(Id. at ¶¶ 20, 22, 24-25, 29.)
Mr. Anderson also referred to
Plaintiff as his “business partner” as well. (Id. at ¶ 33.)
However, Plaintiff and Mr. Anderson eventually began to
clash regarding the direction of the company.
On April 23,
2015, Mr. Anderson emailed Plaintiff, “[i]t seems we have been
drifting apart over the last few months on how to run this and
the direction we are going.” (Id. at ¶ 27.)
Then, on September
10, 2015, in an email to the company accountant, Mr. Anderson
wrote, “[Plaintiff] is very interested in total control of the
company.
Long story short you can see his arrogance of how he
feels he built the company and thinks he can force me out . . .
He think he deserves the entire thing based on his work, which
is clearly not going to happen. I’d like to devise a way he can
buy me out of my 51% ownership while I also can receive certain
levels of income.” (Id. at ¶ 30.)
Two days later, in another
email to the company accountant, Mr. Anderson wrote, “[w]hile
[Plaintiff has] built the company to a position that is
generating money, it’s frankly not worth it anymore to work with
him.
You got a small taste of what it’s like to work with him .
. . The best option is to take a buyout, maybe $25,000, on this
investment and get some kind of percentage of the annual revenue
generated . . . I’ll step away and turn entire control and my
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51% ownership over to him with all the risk now being on him.”
(Id. at ¶ 31.)
In June and October 2015, Mr. Anderson made K-1
Distributions to himself in the amounts of $3,500 and $4,200,
but did not provide any K-1 Distribution to Plaintiff. (Id. at
¶¶ 28, 32.)
Buyout negotiations between Mr. Anderson and Plaintiff
commenced in January 2016, with Mr. Anderson stating that “[y]ou
were advised your investment was through sweat equity.
work, I offered 49%.
For your
This was offered to you several times last
year and would come in to play this year when we divided the
profits.
You also make more than I do in a paycheck. You agreed
to these terms when we talked and now wish to change them.” (Id.
at ¶ 40.)
Plaintiff countered that “[t]he reason we have so
much money coming in is because of what I built.
But I am the
one who puts every free minute I have into the business. That’s
my main issue. Doing all the work and making less than half.”
(Id. at ¶ 39.)
Mr. Anderson scheduled a meeting for February 11, 2016 to
further discuss the possibility of a buyout. (Id. at ¶ 43.)
After Plaintiff missed a meeting on February 16, the next day,
Mr. Anderson terminated Plaintiff via text message as
Owner/Director of Operations of Connected Entertainment. (Id. at
¶ 45.)
Mr. Anderson explained that “[b]ecause you missed last
nights (sic) meeting I am informing you now that you are no
5
longer employed with connected entertainment or Albert Anderson
inc.
I have paperwork to provide you with regarding this
separation which will explain everything in detail.” (Id. at ¶
46.)
On March 1, 2016, Plaintiff requested copies of financial
documentation from the company accountant to assess the value of
Connected Entertainment, but she denied his request and informed
him that he was not an equity owner and that he had no right to
inspect the company’s financial documents. (Id. at ¶ 48.)
The
accountant further asserted that Plaintiff was a “W-2 employee”
of Connected Entertainment, and Defendants confirmed this in a
letter to Plaintiff on the same day. (Id. at ¶ 48-49.)
According to Plaintiff, Mr. Anderson essentially stopped buyout
negotiations with Plaintiff, terminated and locked him out, and
then failed to pay him the fair value of his 49% equity interest
in the company, or a fair wage under federal and state law. (Id.
at § 103.)
B. Procedural History
Plaintiff filed a seventeen-count Complaint against
Defendants, asserting direct state law claims of fraud, breach
of oral contract, breach of implied-in-fact contract, quantum
meruit restitution/unjust enrichment, promissory estoppel,
constructive fraud, negligent misrepresentation, tortious
interference with business relations, and violations of N.J.S.A.
6
§ 34:11-4.3 (termination or suspension of employment), N.J.S.A.
§ 34:11-4.4 (withholding or diverting wages); N.J.S.A. § 34:114.8 (dispute over amount of wages); N.J.S.A. § 34:11-56a4;
(minimum rate), and N.J.S.A. § 34:11-24.2 (penalty for
violation). [Docket Item 1.]
Plaintiff asserts derivative
breach of fiduciary duty claims (duty of care, duty of loyalty,
and duty of good faith and fair dealing), as well as waste of
corporate assets. [Id.] Finally, Plaintiff asserts one federal
law claim – a violation of 29 U.S.C. § 206, for failing to pay
him minimum wage. [Id.]
Plaintiff requests (1) a declaratory
judgment stating that Plaintiff is the 49% minority equity owner
of Connected Entertainment, (2) compensatory damages based on
backpay owned to him or the value of the business at the time of
his termination, (3) punitive damages, (4) rescission of the
employment contract between Plaintiff and Mr. Anderson, (5)
piercing of the corporate veil of Albert Anderson, Inc. d/b/a
Connected Entertainment, (6) attachment of Mr. Anderson’s wages
and pension as a police officer to satisfy any judgment rendered
against Defendant, and (7) attorney’s fees. (Compl. Prayer for
Relief).
Defendants filed a motion to dismiss Plaintiff’s Complaint
for lack of subject matter jurisdiction under Rule 12(b)(1),
Fed. R. Civ. P., and for failure to state a claim pursuant to
7
Rule 12(b)(6), Fed. R. Civ. P. [Docket Item 4.]
Plaintiff filed
a timely opposition. [Docket Item 5.]
STANDARD OF REVIEW
A. 12(b)(1)
A motion to dismiss for lack of subject matter jurisdiction
pursuant to Fed. R. Civ. P. 12(b)(1) which is filed prior to
answering the complaint is considered a “facial challenge” to
the court's subject matter jurisdiction. Cardio–Med. Assocs. v.
Crozer–Chester Med. Ctr., 721 F.2d 68, 75 (3d Cir. 1983). This
is distinct from a factual attack on the court's subject matter
jurisdiction which can only occur after the answer has been
served. Mortensen v. First Federal Sav. and Loan Ass'n, 549 F.2d
884, 891 (3d Cir. 1977).
In deciding a Rule 12(b)(1) motion to
dismiss which is filed prior to an answer, the court must
“review only whether the allegations on the face of the
complaint, taken as true, allege facts sufficient to invoke the
jurisdiction of the district court.” Licata v. U.S. Postal
Serv., 33 F.3d 259, 260 (3d Cir. 1994).
When a defendant files
a motion under Rule 12(b)(1), the plaintiff bears the burden of
establishing subject matter jurisdiction for the sake of
remaining in federal court. Gould Elec., Inc. v. United States,
220 F.3d 169, 178 (3d Cir. 2000).
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B. 12(b)(6)
Pursuant to Rule 8(a)(2), Fed. R. Civ. P., a complaint need
only contain “a short and plain statement of the claim showing
that the pleader is entitled to relief.” Specific facts are not
required, and “the statement need only ‘give the defendant fair
notice of what the . . . claim is and the grounds upon which it
rests.’” Erickson v. Pardus, 551 U.S. 89, 93 (2007) (citations
omitted).
While a complaint is not required to contain detailed
factual allegations, the plaintiff must provide the “grounds” of
his “entitle[ment] to relief”, which requires more than mere
labels and conclusions. Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 555 (2007).
A motion to dismiss under Rule 12(b)(6), Fed. R. Civ. P.,
may be granted only if, accepting all well-pleaded allegations
in the complaint as true and viewing them in the light most
favorable to the plaintiff, a court concludes that the plaintiff
failed to set forth fair notice of what the claim is and the
grounds upon which it rests. Id.
A complaint will survive a
motion to dismiss if it contains sufficient factual matter to
“state a claim to relief that is plausible on its face.”
Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009).
Although a court
must accept as true all factual allegations in a complaint, that
tenet is “inapplicable to legal conclusions,” and “[a] pleading
9
that offers labels and conclusions or a formulaic recitation of
the elements of a cause of action will not do.” Id. at 678.
DISCUSSION
A. The Court Has Subject-Matter Jurisdiction
Defendants argue for dismissal of Plaintiff’s Complaint
under 12(b)(1), Fed. R. Civ. P. because the “crux” of the
Complaint is that Plaintiff “was not a W-2 employee, but a 49%
owner of Connected Entertainment.” (Def Br. at 8.)
To summarize
their argument: the Court derives jurisdiction from only
Plaintiff’s federal Fair Labor Standards Act (“FLSA”) claim
(Count XI), which the court must dismiss because the gravamen of
Plaintiff’s Complaint is that he is a 49% equity owner in
Connected Entertainment, not an employee.
Defendants
accordingly argue that once the FLSA claim is dismissed, the
court will be stripped of subject-matter jurisdiction and should
dismiss the case.
Plaintiff responds that he seeks to recover
damages as either an equity owner or an employee of Connected
Entertainment, and that failure to bring a cause of action under
29 U.S.C. § 206 would “have been grounds for attorney
malpractice.” (Opp’n at 6.)
Plaintiff asserts that because he
properly brings a claim under the FLSA, the Court has federal
question jurisdiction over his federal claim and has
supplemental jurisdiction over his state law claims.
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The parties here are not diverse.
Therefore, if federal
jurisdiction exists, it must rest upon the existence of a
federal question.
28 U.S.C. § 1331 vests in federal district
courts “original jurisdiction” over “all civil actions arising
under the Constitution, laws, or treaties of the United States.”
A case “aris[es] under” federal law within the meaning of § 1331
if “a well-pleaded complaint establishes either that federal law
creates the cause of action or that the plaintiff's right to
relief necessarily depends on resolution of a substantial
question of federal law.” Empire Healthchoice Assurance, Inc. v.
McVeigh, 547 U.S. 677 (2006)(citing Franchise Tax Bd. of Cal. v.
Construction Laborers Vacation Trust for Southern Cal., 463 U.S.
1, 27–28 (1983)).
Defendant incorrectly casts this issue as one of
jurisdiction. “A district court has federal question
jurisdiction in any case where a plaintiff with standing makes a
non-frivolous allegation that he or she is entitled to relief
because the defendant's conduct violated a federal statute.”
Growth Horizons, Inc. v. Delaware Cty., 983 F.2d 1277, 1281 (3d
Cir. 1993).
Defendants’ arguments here go to the merits of
Plaintiff’s FLSA claim, discussed infra, and they have not shown
that the FLSA claim is frivolous or immaterial, as they do not
dispute that Plaintiff only made $1.76 per hour during his time
at Connected Entertainment, well below the $7.25 per hour
11
federal minimum wage.
Moreover, legal insufficiency of a
federal claim does not deprive the federal court of
jurisdiction, as “dismissal for lack of jurisdiction is not
appropriate merely because the legal theory alleged is probably
false, but only because the right claimed is ‘so insubstantial,
implausible, foreclosed by prior decisions of this Court, or
otherwise completely devoid of merit as not to involve a federal
controversy.’” Kulick v. Pocono Downs Racing Ass'n, 816 F.2d
895, 899 (3d Cir. 1987) (quoting Oneida Indian Nation v. Cty. of
Oneida, 414 U.S. 661, 666 (1974)).
Because Defendants have not
shown that the FLSA claim is frivolous, the court denies the
motion to dismiss under 12(b)(1).
B. Fair Labor Standards Act Claim
Defendants also move to dismiss Plaintiff’s Complaint under
Rule 12(b)(6) for failure to state a claim.
The sole federal
claim in Plaintiff’s Complaint is Count XI – a violation of 29
U.S.C. § 206, for failure to pay minimum wage under the Fair
Labor Standards Act (“FLSA”).
The FLSA “establishes federal
minimum-wage, maximum hour, and overtime guarantees that cannot
be modified by contract.” Genesis Healthcare Corp. v. Symczyk,
133 S. Ct. 1523, 1527 (2013).
Under the FLSA, employers are
required “to pay their employees at least a specified minimum
hourly wage for work performed, 29 U.S.C. § 206 (emphasis
added).
The FLSA requires employers to pay certain employees
12
who engage in commerce or are “employed in an enterprise engaged
in commerce or in the production of goods for commerce” a
minimum wage ($7.25 an hour at all times relevant to this
litigation). 29 U.S.C. § 206(a).
Employees covered by the FLSA
may sue employers who fail to provide that minimum wage,
recovering “the amount of their unpaid minimum wages” along with
liquidated damages, costs and fees as the circumstances dictate.
Id. § 216(b).
“To state a claim under the FLSA for minimum wage and
overtime compensation, plaintiffs must allege that: (1) they are
employees of the defendant; (2) that their work [or their
business's work] involved some kind of interstate activity [;]
and (3) the approximate number of hours worked for which they
did not receive these wages.” Barrios v. Suburban Disposal,
Inc., No. 12-2663, 2013 WL 1504489 (D.N.J. Apr. 10, 2013); see
also 29 U.S.C. §§ 206, 207.
1. Employee-Employer Relationship
The “first inquiry in most FLSA cases is whether the
plaintiff has alleged an actionable employer-employee
relationship.” Thompson v. Real Estate Mortg. Network, 748 F.3d
142, 148 (3d Cir. 2014).
The FLSA defines an employer as “any
person acting directly or indirectly in the interest of an
employer in relation to an employee,” 29 U.S.C. § 203(d), and an
employee as “any individual employed by an employer.” Id. §
13
203(e)(1).
Under the FLSA, to employ means “to suffer or permit
to work.” Id. § 203(g).
The FLSA defines the employer-employee
relationship broadly, “‘cover[ing] some parties who might not
qualify as such under a strict application of traditional agency
law principles,’ in order to effectuate the remedial purposes of
the act.” Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326,
(1992).
But the term “does have its limits.” Tony & Sysan Alamo
Found. V. Sec’y of Labor, 471 U.S. 290, 295 (1985).
In the Third Circuit, courts look to the economic realities
of the relationship between the alleged employer and employee.
Donovan v. DialAmerica Mktg., Inc., 757 F.2d 1376, 1382-83 (3d
Cir. 1985).
In ascertaining the “economic realities” of the
relationship, the following factors should be considered:
1) the degree of the alleged employer's right to control
the manner in which the work is to be performed; 2) the
alleged employee's opportunity for profit or loss depending
upon his managerial skill; 3) the alleged employee's
investment in equipment or materials required for his task,
or his employment of helpers; 4) whether the service
rendered requires a special skill; 5) the degree of
permanence of the working relationship; [and] 6) whether
the service rendered is an integral part of the alleged
employer's business.
Id.
Courts applying the Donovan factors are instructed
that “[n]either the presence nor absence of any particular
factor is dispositive,” and to consider whether, “as a matter of
economic reality, the individuals are dependent upon the
business to which they render service.” Id. at 1382.
14
Here, Plaintiff states that “as asserted by Defendants,” he
is a “W-2 employee,” and attaches a series of exhibits where
Defendants state that Plaintiff wa
s an employee. (Compl. at § 128; Exs. B, D, F and G to Compl.)
But the Court must conduct an independent analysis of whether
Plaintiff is an employee under the FLSA, and cannot merely rely
on Defendants’ characterization of Plaintiff’s role after he was
terminated.
The Court finds that Plaintiff has sufficiently pled that
he is an employee under the FLSA in this instance.
Courts have
struggled with characterizing putative owners and partners that
also perform work for their companies, like Plaintiff here, as
the economic realities test is generally used to distinguish
between employees and independent contractors, not employees and
owners.
In Steelman v. Hirsch, 473 F.3d 124 (4th Cir. 2007),
for instance, the parties were domestic partners who worked
together at a dog grooming business founded by the defendant as
a sole proprietorship.
When their relationship collapsed, the
plaintiff brought an action against the defendant seeking an
ownership interest in the company and compensation for work she
alleged was performed in reliance on Hirsch’s promises, in
addition to or in lieu of damages under the FLSA.
The Court
found that Plaintiff was not an employee under the FLSA because
“a partnership was not consistent with an employer-employee
15
relationship,” as characteristics pertinent to partnerships,
such as the ability to share in profits, exposure to risk, and
managerial control, “introduce complexities and economic
realities which are not consonant with employee status.” Id. at
129; see also Wheeler v. Hurdman, 825 F.2d 257 (10th Cir.
1987)(holding that a partner at an accounting firm was not an
“employee” under the FLSA because characteristics of
partnerships like profit sharing, contributions to capital, part
ownership of partnership assets, and right to share in
management “are economic realities, and no definition of
‘employee’ is co-extensive”); Escobar v. GCI Media, Inc., No.
08-21956, 2009 WL 1758712, at *3 (S.D. Fla. June 22,
2009)(finding that a partner in a web design business was not an
“employee” under the FLSA); Godoy v. Restaurant Opportunity
Center of New York, Inc., 615 F. Supp. 2d 186, 191 (S.D.N.Y.
2009)(adopting the Wheeler reasoning for partnerships in holding
that workers laboring for and together with a not-for-profit
corporation toward the co-ownership of a business were not
“employees” under the FLSA).
However, in the instant matter, the corporate entity at
issue is not a partnership, but a close corporation. (Compl. at
¶ 5.)
Plaintiff thought he was a minority shareholder, but Mr.
Anderson terminated him.
The fact that Mr. Anderson was able to
fire Plaintiff despite his supposed 49% equity is evidence of
16
his right to control, indicating an employer-employee
relationship.
Additionally, “[t]the interest owned by a
minority shareholder in a closely held corporation is often a
precarious one,” and New Jersey courts have characterized the
relationship as being one of “acute vulnerability.” Walensky v.
Jonathan Royce Intern., Inc., 264 N.J. Super. 276, 280 (App.
Div. 1993).
As the court in Bostock v. High Tech Elevator Ind.,
260 N.J. Super. 432, 443-44 (App. Div. 1992) explained:
First, based upon its voting power, “the majority is able
to dictate to the minority the manner in which the
corporation is run.” Second, a minority interest in
a closed corporation is difficult to value because the
shares are not publicly traded and a fair market is often
not available. Dissention within a closed corporation makes
the minority interest even more undesirable and
unattractive. As a consequence, a shareholder challenging
the majority in a closed corporation finds himself on the
horns of a dilemma; he can neither profitably leave nor
safely stay with the corporation. “In reality, the only
prospective buyer turns out to be the majority
shareholder.” Thus, the limited market for the sale of a
minority interest makes the minority particularly
vulnerable to manipulation and oppression. A third factor
is that a closed corporation frequently originates in the
context of personal relationships. Often such business
entities are formed by family members or friends. Once the
personal relationship between shareholders is destroyed,
the viability of the business entity generally
deteriorates.
Most importantly, “[t]he controlling shareholders’ voting
power enables them to freeze-out minority shareholders by
terminating their employment, excluding them from participation
in management decision-making, and reducing their salary and
other income.” Mullenberg v. Bikon Corp., 143 N.J. 168, 176
17
(1996).
While large portions of Plaintiff’s Complaint speak to
why he should obtain reasonable value for his 49% equity, he
also pleads facts indicating how much control Mr. Anderson had
over him, from setting his stipend and compensation amounts to
eventually terminating him from the company.
As a result, the
corporate structure in this case is sufficiently different from
the partnership cases where courts held that the respective
plaintiffs were not employees under the FLSA.
Furthermore, Hess v. Madera Honda Suzuki, No. 10-1821, 2012
WL 4052002, at *5 (E.D. Cal. Sept. 14, 2012) provides support
that Plaintiff should be considered an “employee” under the FLSA.,
and stands for the proposition that the two roles of co-owner
and employee are not mutually exclusive. There, Plaintiff, who
was hired as an office manager by Defendants, who were close
corporations, brought an FLSA claim alleging that Defendants
unlawfully withheld Plaintiff’s wages and subsequently
terminated her. Id. at *2.
Defendants claimed that Plaintiff was
not an “employee” under the FLSA because she eventually became a
co-owner of one of the Defendants, controlling 24 percent of the
100,000 shares of common stock. Id. at *4.
While the court
conceded that Plaintiff’s “substantial ownership interest in the
company and partial control of the company’s finances,” along
with her “substantial involvement in managing and paying
workers” were “not characteristic of an employee,” it
18
nevertheless found Plaintiff to be an “employee” under the FLSA
because Defendants “provided no authority—and the Court's
research revealed no authority—stating categorically that a coowner and shareholder of a closely held corporation who works
for the corporation in another capacity, as was apparently the
case here, cannot also be the corporation's employee for the
purpose of the FLSA.
Indeed, case law seems to suggest
otherwise.”); see also Goldberg v. Whitaker House Co-op.,
Inc., 366 U.S. 28, 32 (1961) (“There is nothing inherently
inconsistent between the coexistence of a proprietary and an
employment relationship. If members of a trade union bought
stock in their corporate employer, they would not cease to be
employees within the conception of [the FLSA].
For the
corporation would ‘suffer or permit’ them to work whether or not
they owned one share of stock or none or many”).
The Hess Court
distinguished Steelman and Wheeler because the businesses there
were both partnerships, as opposed to closely held corporations,
and the structures differ in terms of how one own assets, how
profits are shared, and the length of the relationship. Hess,
2012 WL 4052002, at *8.
The court concluded that “insofar as
Plaintiff’s employment as officer manager was concerned,
Defendants had control over the conditions of Plaintiff’s
employment and determined her rate of payment, and that the
19
economic reality of the situation was Defendants were
Plaintiff’s employer and she their employee. Id. at *9.
The facts of the instant matter closely track the facts of
Hess.
Plaintiff states that he started out at the company
making an hourly wage (Compl. at ¶ 10), then changed his
compensation structure so that he could be a minority
shareholder (Compl. at ¶ 12), and then he was subsequently
terminated by the majority shareholder, Mr. Anderson, when
buyout negotiations deteriorated.
Given the nature of
Plaintiff’s relationship as a minority shareholder in a close
corporation, he has sufficiently demonstrated at this stage in
the litigation that he is an “employee” under the FLSA.
Plaintiff’s management duties and sweat equity do not preclude
him from being considered an “employee” for FLSA purposes. See
Aguirre v. Safe Hurricane Shutters, Inc., No. 07-22913, 2011 WL
5986817, at *1 (S.D. Fla. Oct. 29, 2011)(“{I]t appears from this
[FLSA] language that if an owner or manager performs work, that
person fits within the definition of an employee.”).
Plaintiff
has pled sufficient facts at this stage indicating that he was
“dependent upon the business to which [he] render[ed] service.”
Donovan, 757 F.2d at 1382.
2. Engaged in Commerce
Plaintiff must also establish that he was “covered” by the
FLSA's minimum wage provision.
The FLSA extends coverage to
20
employees by two means: (1) the employee himself may be engaged
in commerce or in the production of goods for commerce (socalled “individual” coverage), see 29 U.S.C. § 207(a)(1)(1); or
(2) the employee may be employed in an enterprise engaged in
commerce or the production of goods for commerce (so-called
“enterprise coverage.”), see 29 U.S.C. § 203(s)(1). See Genarie
v. PRD Mgmt., Inc., No. 04-2082, 2006 WL 436733, at *5 (D.N.J.
Feb. 17, 2006).
Commerce is defined as “trade, commerce,
transportation, transmission, or communication among the several
States or between any State and any place outside thereof.” 29
U.S.C. § 203(b).
Courts in this Circuit frequently hold that
alleging that the defendant was an enterprise engaged in
commerce under the FLSA “[i]s sufficient for purposes of a
motion to dismiss.” Dong v. Ren's Garden, No. 09-5642, 2010 WL
1133482, at *4 (D.N.J. Mar. 22, 2010) (internal citations
omitted); see also Razak v. Uber Technologies, Inc., No. 16-573,
2016 WL 5874822, at *5 (E.D. Pa. Oct. 7, 2016).
Here, Plaintiff alleges that he was “a W-2 employee of an
enterprise engaged in commerce, Connected Entertainment.”
(Compl. at ¶¶ 35, 128.)
Connected Entertainment is “a pop-up
photo booth company that allows customers to rent photo booths
to take pictures during various events, including, but not
limited to, weddings, banquets, family gatherings, professional
networking events, and parties of all kinds.” (Compl. at ¶ 4.)
21
This is sufficient to meet the second prong of an FLSA minimum
wage claim.
3. Minimum Wage Claim
Finally, the Court turns to whether Count XI of Plaintiff’s
Complaint adequately alleges that Defendants failed to pay
Plaintiff the minimum wage of $7.25 per hour, as required by the
FLSA. See 29 U.S.C. § 206(a)(1)(C).
A plaintiff's average
hourly wage is determined “by dividing his total remuneration
for employment . . . in any workweek by the total number of
hours actually worked by him in that workweek for which such
compensation was paid.” 29 CFR § 778.109; see 29 C.F.R. §
776.4(a) (“The workweek is to be taken as the standard in
determining the applicability of the Act.”)
Unlike claims
brought pursuant to the overtime provision of the FLSA, the
Third Circuit has not specifically addressed the level of
specificity required to plead a minimum wage claim under the
FLSA.
Plaintiff alleges that he was “paid $12,415.00 for 7,040
hours of work performed, both on and off the clock, for
Connected Entertainment, a rate equivalent to $1.76 an hour.”
(Compl. at § 128.)3
Plaintiff further explains that he worked at
Connected Entertainment for a total of forty months, working an
3
Specifically, Plaintiff “worked an average of 40 hours per week
for a period of 176 weeks.” (Ex. C. to Compl. at 2.)
22
average of 35-40 hours per week. (Id. at § 47.)
As a result, he
argues, this is a “clear violation” of the FLSA. (Id. at § 128.)
The Court finds these allegations present a plausible claim, as
nothing more is required of a Plaintiff at this stage,
especially the FLSA requires employers to keep records of the
“wages, hours, and other conditions and practice” of its
employees. 28 U.S.C. § 211(c).
Indeed, regulations advanced
pursuant to Section 211(c) of the FLSA require employers to
keep, inter alia, payroll records of the following: (1) hours
worked per day; (2) total hours worked per work; (3) total daily
or weekly straight-time earnings, and (4) total premium pay for
overtime hours. See 29 C.F.R. 516.2; see also Williams v. TriCounty Growers, Inc., 747 F.2d 121, 127 (3d Cir. 1984).
In
light of this burden, “it cannot be the case that a plaintiff
must plead specific instances of unpaid overtime or minimum wage
violations before being allowed to proceed to discovery to
access the employer's records.” Harris v. Scriptfleet, No. 114561, 2011 WL 6072020, at *3 (D.N.J. Dec. 6, 2011).
As a
result, Plaintiff’s pleading provides adequate factual grounds
to support his FLSA claim.
Therefore, Defendants’ motion to
dismiss under Rule 12(b)(6) with respect to the FLSA claim is
denied.
23
C. State Law Claims – Supplemental Jurisdiction
As stated above, Plaintiff asserts sixteen state-law counts
regarding to his employment dispute with Defendants.
Where
there is original jurisdiction, “the district courts shall
[also] have supplemental jurisdiction over all other claims that
are so related to claims in the action within such original
jurisdiction that they form part of the same case or controversy
under Article III of the United States Constitution.”
28 U.S.C.
§ 1367(a); see also United Mine Workers of Am. v. Gibbs, 383
U.S. 715, 725 (1966).
However, a district court may decline to
exercise supplemental jurisdiction over such claims when:
(1) The claim raises a novel or complex issue of State law,
(2) the claim substantially predominates over the claim or
claims over which the district court has original
jurisdiction, (3) the district court has dismissed all
claims over which it has original jurisdiction, or (4) in
exceptional circumstances, there are compelling reasons for
declining jurisdiction.
28 U.S.C. § 1367(c).
The dispositive provision here appears to focus on (c)(2),
regarding predomination.
Where “the state issues substantially
predominate, whether in terms of proof, of the scope of the
issues raised, or of the comprehensiveness of the remedy sought,
the state claims may be dismissed without prejudice and left for
resolution to state tribunals.” Gibbs, 383 U.S. at 726; see also
Borough of W. Mifflin v. Lancaster, 45 F.3d 780, 789 (3d Cir.
1995)(explaining that there are three ways in which a state law
24
claim may predominate for purposes of subsection 1367(c)(2): (1)
quantity of evidence; (2) comprehensiveness of remedy; and (3)
scope of issues raised).
Generally, a district court will find
substantial predomination “where ‘a state claim constitutes the
real body of a case, to which the federal claim is only an
appendage’–only where permitting litigation of all claims in the
district court can accurately be described as allowing a federal
tail to wag what is in substance a state dog.” De Asencio v.
Tyson Foods, Inc., 342 F.3d 301, 309 (3d Cir. 2003)(citations
omitted).
Here, the second criterion is plainly met because the state
law claims substantially predominate over the FLSA minimum wage
claim.
The core of this dispute concerns the corporate control
and breach of contract issues that are presented in the state
law claims that are advanced in Plaintiff’s Complaint. See Lyon
v. Whisman, 45 F.3d 758, 763 (3d Cir. 1995)(“[I]t is clear that
there is so little overlap between the evidence relevant to the
FLSA and state claims, that there is no ‘common nucleus of
operative fact’ justifying supplemental jurisdiction over the
state law claims”), Id. at 764 (“When a court exercises federal
jurisdiction pursuant to a rather narrow and specialized federal
statute [like the FLSA,] it should be circumspect when
determining the scope of its supplemental jurisdiction.”);
Krause v. Cherry Hill Fire Dist. 13, 969 F. Supp. 270, 282-83
25
(D.N.J. 1997)(plaintiff’s multifaceted state law claims, which
involve additional critical facts, clearly predominate over
relatively narrow FLSA minimum wage claim); Hyman v. WM
Financial Servs., Inc., No. 06-3038, 2007 WL 1657392, at *5
(D.N.J. June 7, 2007)(“[R]esolving these [state law] claims
would require the Court to engage in a journey of law and fact
afield from the issue raised in their FLSA action.”)
The
resolution of Plaintiff’s state law claims will determine, inter
alia, whether Plaintiff has equity ownership in Defendant’s
company and under what terms and conditions.
In this context,
Plaintiff’s federal minimum wage issue is plainly an ancillary
one.
It does not concern any unique issues of labor and
employment law.
Therefore, the various state law claims, not
the federal minimum wage claim, drive this litigation.
In the
exercise of discretion, the Court declines to exercise
supplemental jurisdiction, in accordance with 28 U.S.C. §
1367(c)(2).
The Court notes that Plaintiff still has recourse in state
court, and he may well have an ownership interest in Connected
Entertainment, or an action for fraud, breach of contract,
promissory estoppel, or quantum meruit or unjust enrichment, as
he pleads.
Importantly, Plaintiff also can address his minimum
wage claims under New Jersey’s minimum wage laws. See N.J.S.A. §
34:11-4.1 et seq; N.J.S.A. § 34:11-56.a et seq.
26
Since January
1, 2014, New Jersey has set a minimum wage that is substantially
higher than the federal level of $7.25 per hour. See N.J.S.A.
Const. Art. 1, ¶ 23 (setting the minimum wage to $8.25 per hour
and calling for annual increases based on changes to the federal
consumer price index).4
In the context of the present case, it
would not appear to make sense to litigate the lone FLSA claim
when more robust relief may be available under New Jersey’s
minimum wage laws.
As a result, the Court will stay litigation
on the FLSA claim pending the resolution of any state court
action that Plaintiff subsequently files, since the state law
claims clearly predominate in substance and weight over the lone
federal claim.
CONCLUSION
For the foregoing reasons, the Court will grant in part and
deny in part Defendants' motion to dismiss Plaintiff’s
Complaint.
The motion to dismiss Plaintiff’s FLSA claim in
Count XI is denied, while the motion to dismiss Plaintiff’s
remaining state law claims for lack of supplemental jurisdiction
will be granted without prejudice to Plaintiff’s right to file
same in the Superior Court of New Jersey.
Because those claims
clearly predominate over the sole federal claim under the FLSA,
4
While the New Jersey minimum wage was $7.25 per hour in 2013,
it increased to $8.25 per hour in 2014, and then to $8.38 per
hour in 2015 and 2016. See N.J.S.A. Const. Art. 1, ¶ 23.
27
the Court will temporarily stay and administratively terminate
the litigation of the FLSA claim, as to which either party may
seek to reopen the docket for the proceedings consistent with
law.
April 17, 2017
Date
s/ Jerome B. Simandle
JEROME B. SIMANDLE
Chief U.S. District Judge
28
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