This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. sec. 480A.08, subd. 3 (1996).

STATE OF MINNESOTA

IN COURT OF APPEALS

C8-96-2545

Carl Bot, et al.,

Appellants,

vs.

Residential Services, Inc., et al.,

Respondents.

Filed June 17, 1997

Affirmed

Schultz, Judge

[*]

St. Louis County District Court

File No. 69-C7-94-601568

Richard J. Leighton, Hanft, Fride, O'Brien, Harries, Swelbar & Burns, P.A., 1000 First Bank Place, 130 West Superior Street, Duluth, MN 55802-2094 (for appellants)

Joseph J. Mihalek, Fryberger, Buchanan, Smith & Frederick, P.A., 700 Lonsdale Building, 302 West Superior Street, Duluth, MN 55802 (for respondents)

Thomas Darling, Susan L. Segal, Gray, Plant, Mooty, Mooty & Bennett, P.A., 3400 City Center, 33 South Sixth Street, Minneapolis, MN 55402 (for amici curiae Association of Residential Resources in Minnesota and American Network of Community Options and Resources)

Considered and decided by Kalitowski, Presiding Judge, Schumacher, Judge, and Schultz, Judge.

U N P U B L I S H E D O P I N I O N

SCHULTZ, Judge

Appellant employees challenge the district court's finding that of the three respondents, only RSI Three, Inc. is liable to the employees. Respondent RSI Three appeals the district court's conclusion that RSI Three intentionally and willfully violated both state and federal Fair Labor Standards Acts, and challenges the district court's award of damages. We affirm.

FACTS

Respondent RSI Three operates several residential homes for developmentally-disabled individuals. Residential Services of Northeastern Minnesota, Inc. (RSNM) provides intermediate care facilities for more severely retarded persons. Residential Services, Inc. engages in fundraising for both RSI Three and RSNM. RSI Three, RSNM, and Residential Services are separately incorporated, nonprofit organizations under section 501(c)(3) of the Internal Revenue Code. The companies have the same officers and boards of directors and employ the same person as executive director. RSI Three is an employer within the meaning of both the state and federal Fair Labor Standards Acts (FLSA).

Plaintiff employees worked as relief and weekend staff for RSI Three between June 10, 1991 and June 10, 1994. Relief staff typically replaced full-time employees for periods of less than 24 hours that included an overnight shift from 10 p.m. to 6 a.m. Weekend staff typically worked shifts that exceeded 24 hours including the 10 p.m. to 6 a.m. shift.

During overnight shifts, or "sleep time," RSI Three allowed the employees to sleep, but required the employees to provide nighttime assistance to clients as necessary. The employees' sleeping facilities consisted of a hide-a-bed, cot, or couch, and a locker for personal effects, in the living room of the house. Although some clients were physically unable to exit their rooms without help from the staff, others could freely enter the employees' sleeping area throughout the night.

RSI Three did not generally compensate employees for sleep time. However, in the employer-employee contracts, RSI Three agreed to pay the employees at their regular rate of pay for any sleep time during which clients needed assistance from the employees. If, during one overnight shift, the employees spent more than three hours of sleep time helping clients, RSI Three agreed to compensate the employees at their usual wages for the entire overnight shift. In addition, the employee handbook provided:

There are two circumstances in which the overnight staff will be reimbursed. The first is when the live-in staff must be replaced during the week and the relief staff is unable to work at least eight hours around the overnight shift. The second is when a weekend staff is not able to work a complete 24 hours shift, which means sixteen hours of work in addition to the overnight. If these circumstances occur, the Program Director must approve the revised schedule. * * * Compensation for the approved overnight sleep time will be determined on an individualized basis using the Department of Labor guidelines.

The employees sued RSI Three, RSNM, and Residential Services to recover compensation allegedly due them for sleep time. The parties tried their case on November 20, 22, and December 20, 1995. On April 5, 1996, the district court entered its findings of fact, conclusions of law, and order. The district court found RSI Three, but not the other two respondents, liable to the employees for the failure to provide adequate sleeping facilities and to compensate the employees under the parties' agreements. The parties moved for amended findings and conclusions, which the court denied. On December 3, 1996, the court issued an order nunc pro tunc to its July 10, 1996 order.

On appeal, the employees argue that the district court erred by finding RSNM and Residential Services not liable. RSI Three argues on appeal that the district court erred by finding that RSI Three intentionally and willfully violated the applicable sleeping facilities regulations and underpaid the employees.

D E C I S I O N

I.

The employees argue that the district court erred by finding that RSNM and Residential Services are not liable to the employees. The employees contend that RSNM and Residential Services waived the affirmative defense that they were not employers within the meaning of FLSA, and that even if they did not waive the defense, the record compels a conclusion that RSNM and Residential Services are employers within the meaning of the FLSA and that they are therefore jointly and severally liable for the judgment against RSI Three.

Where the material facts are not in dispute, a reviewing court need not defer to the trial court's application of the law. Hubred v. Control Data Corp., 442 N.W.2d 308, 310 (Minn. 1989). Rule 8.03 requires that in pleading to a preceding pleading, a party shall set forth any matter constituting an affirmative defense. Minn. R. Civ. P. 8.03. The failure to plead an affirmative defense causes it to be waived. 1 David F. Herr & Roger S. Haydock, Minnesota Practice § 8.5 at 196 (2d ed. 1985). Affirmative defenses do not relate to the validity of the claim or negate any part of the plaintiff's prima facie case. Id.

To establish a prima facie case under the FLSA, a plaintiff employee must establish the existence of an employer-employee relationship with the defendant. See Reich v. ConAgra, Inc., 987 F.2d 1357, 1360 (8th Cir. 1993) (holding that secretary of labor has burden of proving employer-employee relationship under FLSA). As a result, the existence of an employer-employee relationship with RSNM and Residential Services constitutes an element of the employees' case and relates to the validity of the claim. The non-existence of the employer-employee relationship does not constitute an affirmative defense, and RSNM and Residential Services did not waive the defense that they are not employers for the purposes of this litigation.

Under both the state and federal FLSA, "employer" encompasses a corporation "acting directly or indirectly in the interest of an employer in relation to an employee." 29 U.S.C. § 203(d) (1994); Minn. Stat. § 177.23, subd. 6 (1996). Courts look to economic reality, including whether an alleged employer has "operational control of significant aspects of the corporation's day to day functions," to determine whether a party falls within the FLSA definition of employer. Donovan v. Agnew, 712 F.2d 1509, 1513, 1514 (1st. Cir. 1983). Thus, where an entity has undertaken the administrative or payment duties of the direct employer, a court may find that the entity is an employer within the meaning of the FLSA. International Union of Operating Eng'rs Local 57 v. Seaboard Sur. Co., 946 F. Supp. 141 (D.R.I. 1996).

Here, RSI Three, RSNM, and Residential Services have common officers and directors and employ the same bookkeeping staff and executive director. In addition, Residential Services raises funds for RSI Three. Neither RSNM nor Residential Services, however, has assumed administrative or payment duties of RSI Three. Nor does the record indicate that either RSNM or Residential Services has otherwise assumed operational control of significant aspects of RSI Three's day-to-day functions. Accordingly, the district court did not err by finding that RSNM and Residential Services were not employers within the meaning of the FLSA.

II.

RSI Three argues that the district court erred by finding that RSI Three failed to provide the employees adequate sleeping facilities. RSI Three contends that the sleeping facilities it provided for relief staff met the Department of Labor (DOL) requirements that they be private and homelike, and that the facilities it provided weekend staff were "adequate" within the meaning of applicable DOL regulations.

A. Relief Staff

Under DOL regulations, "an employee who is required to be on duty for less than 24 hours is working even though he is permitted to sleep * * * ." 29 C.F.R. § 785.21 (1996). The state FLSA (MFLSA) contains substantially similar language. See Minn. R. 5200.0121, subpt. 1 (1995). By memorandum dated June 30, 1988, the DOL adopted an enforcement policy of allowing employers to exclude sleep time of relief staff provided, inter alia, that the relief staff sleep in "private quarters in a homelike environment" and the employer compensate the relief staff for at least 8 hours of work in each 24-hour period. "Private quarters" means living quarters separate from the clients, furnished with the same items as contained in the clients' quarters, in which employees may leave their belongings during their on and off-duty periods. "Home-like environment" means facilities "similar to those found in a typical private residence or apartment rather than those found in * * * dormitories, barracks, and short term facilities for travelers."

Although DOL interpretations and opinions are not controlling, courts may properly resort to them for guidance in applying the law. Hultgren v. County of Lancaster, Neb., 913 F.2d 498, 504 (8th Cir. 1990). Where a DOL letter interpreting its own regulations is reasonable, it is entitled to deference by the courts. Bouchard v. Regional Governing Bd. of Region V Mental Retardation Servs., 939 F.2d 1323, 1330 (8th Cir. 1991), cert. denied, 503 U.S. 1005 (1992). In opinion letters issued in 1981 and 1985, and in its 1988 enforcement policy, the DOL stated that if an employer provides private quarters and a homelike environment for relief staff, the staff and employer may agree to exclude sleep time under the rule set forth in 29 C.F.R. § 785.22. Hultgren, 913 F.2d at 501-04.

Here, RSI Three provided relief staff with hide-a-beds, couches, and cots, and a locker for some of their belongings. But a "sofa or hide-a-bed in the living room, are simply not the same as the environment envisioned by the opinion letters." Id. at 506.[1] RSI Three did not provide relief staff with a bedroom containing the same furnishings as were available to the clients, where staff could leave their belongings during on and off-duty periods, and in which staff could gain some privacy by closing the bedroom door. Accordingly, the district court correctly found that RSI Three failed to provide relief staff with private, home-like sleeping facilities and improperly excluded sleep time from the relief employees' compensable time.

B. Weekend Staff

Where an employee is required to be on duty for 24 hours or more, the employer and the employee may agree to exclude * * * a bona fide regularly scheduled sleeping period of not more than 8 hours from hours worked, provided adequate sleeping facilities are furnished by the employer * * * .

29 C.F.R. § 785.22(a) (1996). The MFLSA contains substantially similar language. See Minn. R. 5200.0121, subpt. 2 (1995). The 1988 enforcement policy did not purport on its face to affect the "adequate sleeping facilities" definition of section 785.22. The Bouchard court stated, however, that the DOL's 1981 and 1985 letter rulings "uniformly required that [employees] be furnished with private sleeping quarters," and affirmed the district court's decision that the employer, who had not provided such facilities to a weekend employee, failed to establish a good faith defense to that violation. 939 F.2d at 1333-34.

Here, RSI Three provided each weekend employee with the same sleeping facilities as it furnished to its relief staff, i.e., a locker and a hide-a-bed, couch, or cot in a living room. Although the clients slept in separate rooms and some of them were incapable of leaving their rooms without assistance from the staff, nothing prevented many of the clients from entering the weekend employees' sleeping area throughout the night. RSI Three did not afford its weekend staff private and adequate sleeping quarters. The district court did not, therefore, err in finding that RSI Three improperly excluded weekend employees' sleep time from compensable time.

III.

RSI Three argues that the district court erred by awarding the employees liquidated damages because RSI Three is entitled to a good faith defense against liquidated damages. An employer who pays an employee less than the wages required under the MFLSA is liable to the employee for all of the wages and overtime compensation due, and "for an additional equal amount as liquidated damages and for costs and reasonable attorney's fees allowed by the court." Minn. Stat. § 177.33 (1994) (repealed 1996). Minnesota law provides no good faith defense to MFLSA violations. Accordingly, the district court properly found RSI Three was not entitled to a good faith defense to its violations of state law.

As under state law, an employer that willfully violates the federal FLSA is liable to the complaining employees in the amount of their unpaid wages "and in an additional equal amount as liquidated damages." 29 U.S.C. § 216(b) (1994). A court may, in its sound discretion, choose not to award liquidated damages if the employer shows to the satisfaction of the court that the employer's conduct was in good faith and that the employer had reasonable grounds for believing that the act or omission was not a violation of the FLSA. 29 U.S.C. § 260 (1994); Martin v. Selker Bros., Inc., 949 F.2d 1286, 1299 (3rd. Cir. 1991).

Here, RSI Three claims that it based its policies in part on information from a trade association and a local DOL investigator. Yet RSI Three regularly failed to compensate the employees for sleep time when the applicable regulations required that RSI Three do so. Although RSI Three agreed to comply fully with the FLSA, it does not claim that it ever referred to the sources of the sleeping facility requirements themselves--the regulations adopted under the FLSA or the enforcement policy memorandum interpreting the regulations. On this record, the district court did not clearly err in finding that RSI Three failed to show that its conduct was in good faith and that it had reasonable grounds for believing that it was not violating the FLSA. The court did not abuse its discretion by awarding the employees liquidated damages.

IV.

RSI Three further argues that the district court improperly applied a three-year statute of limitations to the employees's claims. Generally, a two-year statute of limitations applies to actions under the state and federal FLSA. 29 U.S.C. § 255(a) (1994); Minn. Stat. § 541.07(5) (1996). A party may commence suit based on a "willful violation" of the state and federal FLSA, however, within three years after the cause of action accrued. Id. To be willful, an employer's conduct must be voluntary, deliberate, or intentional, or done with reckless disregard for whether the FLSA prohibited it. McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133, 108 S. Ct. 1677, 1681 (1988).

Here, RSI Three had reason to know that its policies might violate the FLSA. When the DOL investigated RSI Three, it found that RSI Three failed: (1) to pay employees at least the minimum wage for all hours worked, in violation of FLSA section 6; (2) to pay statutory overtime for hours above 40 per week, in violation of FLSA section 7; and (3) to record the employees' hours properly, in violation of FLSA section 11(c). The DOL advised RSI Three that if RSI Three was ever found again to have violated the monetary provisions of the FLSA, it would be subject to liquidated damages.

Because the DOL investigation revealed numerous FLSA violations and the DOL warned RSI Three of the risk of liquidated damages if RSI Three failed to prospectively comply with the FLSA, the DOL investigation put RSI Three on notice that it needed to find out if it was complying with the FLSA. On this record, the district court did not err by finding that RSI Three's failure to comply with the FLSA was willful and justified application of the three-year statute of limitations.

V.

RSI Three further argues that the court improperly granted relief based on the parties' employment agreements because the employees did not state a claim for breach of contract in their pleadings. The employees asserted in each of their amended complaints, however, that respondents had failed to adequately compensate the employees. Although the employees could have pleaded a breach of contract claim more artfully, their complaints appear to have adequately put respondents on notice of the breach of contract claim asserted against them. The district court did not err by granting relief based on the parties' employment agreements.

RSI Three also contends that the district court erred by awarding the employees damages based on their regular hourly wages. A reviewing court will not disturb a damage award "unless its failure to do so would be shocking or would result in plain injustice." Hughes v. Sinclair Mktg., Inc., 389 N.W.2d 194, 199 (Minn. 1986).

RSI Three asserts that the court should have calculated the wages due based on DOL guidelines in accordance with the employee handbook. The handbook provides that RSI Three will determine compensation for sleep time "on an individualized basis using the Department of Labor guidelines." RSI Three urges this court to interpret the handbook in light of United States v. Klinghoffer Bros. Realty Corp., 285 F.2d 487, 490 (2d Cir. 1960), where the court stated that the:

Congressional purpose is accomplished so long as the total weekly wage paid by an employer meets the minimum weekly requirements of the statute, such minimum weekly requirement being equal to the number of hours actually worked that week multiplied by the minimum statutory requirement.

Klinghoffer is inapposite here. In Klinghoffer, the issue was whether officers of the employer were criminally liable for not paying their employees at least the federal minimum wage for each hour they worked. Here, in contrast, the issue is whether the corporate employer is civilly liable for failing to compensate the employees at the parties' agreed-upon wage rates.

Further, neither federal nor state law limits recovery by individual employees to the required minimum wage and overtime compensation. Applying the Klinghoffer rule here would have that effect, and thereby violate the terms of the parties' agreement relating to nonsleep time. In averaging the total regular-wage compensation for nonsleep time across the total sleep time and nonsleep time hours worked, the court would effectively reduce the employees' wage for nonsleep time duty below the wage agreed upon in the parties' agreements. The handbook stated that RSI Three would determine only sleep time compensation using DOL guidelines. It did not provide that RSI Three could compensate the employees for nonsleep time at any rate other than the wages the parties had mutually agreed upon.

On this record, the district court's award is not shocking and the failure to disturb it will not result in a plain injustice. We reject the notion that requiring companies such as respondent RSI Three to compensate their overnight employees for their sleep time or provide them with private and homelike sleeping quarters will unfairly burden the group home services industry.

Affirmed.

[ ]* Retired judge of the district court, serving as judge of the Minnesota Court of Appeals by appointment pursuant to Minn. Const. art. VI, § 10.

[ ]1 Contrary to RSI Three's assertions, the Eighth Circuit Court of Appeals did not "adopt a lenient interpretation of [the private quarters in a homelike environment] requirement" in Bouchard. Bouchard involved a claim that the employer had improperly excluded sleep time for employees who had allegedly not worked enough hours to qualify for sleep time exclusion. In holding that the employer was entitled to the 29 U.S.C. § 259 good faith defense, the court relied not on the 1988 enforcement policy memorandum, but on DOL letter rulings issued before 1988.