Can Outside Attorneys and Accountants Be Held Liable under the Fair Labor Standards Act?

The volume of litigation filed under the federal Fair Labor Standards Act (“FLSA”) and state counterparts has grown dramatically in recent years. Perhaps unsurprisingly, given the simultaneous trend towards clients being more willing to sue their professionals when they become embroiled in litigation, some employers defending FLSA claims have resorted to impleading their attorneys and accountants, alleging that bad advice led to the employers’ violations of the wage and hour laws. Recently, in Strauss v. Italian Village Restaurant, Inc., 2012 U.S. Dist. LEXIS 157385; 162 Lab. Cas. (CCH) P36,067, the United States District Court for the Northern District of Illinois decisively rejected one such employer’s efforts to deflect blame onto its professionals in the context of the underlying wage and hour lawsuit.

In the Strauss case, seven employees sued an Illinois restaurant for alleged violations of the FLSA and the Illinois state counterpart, the Illinois Minimum Wage Law. The employer in turn filed a third-party complaint against the law firm that negotiated employee contracts and advised about compliance with the wage and hour laws and the accounting firm that handled the restaurant’s payroll. The third-party complaint alleged that the employer relied on those professionals for compliance with the applicable wage laws. The claims against the third-party defendants alleged that they were liable for contribution and indemnity as joint tortfeasors as well as professional malpractice.

The District Court’s November 2, 2012 decision granted the third-party defendants’ motion to dismiss the third-party complaint. In doing so, the Court had little difficulty dismissing the third-party claims for contribution and indemnity. Under Section 203(d) of the FLSA, and the Illinois law, only an “employer” can be liable. The third-party complaint did not contain facts that would support a finding that the professionals were the plaintiffs’ employer, regardless of the employer’s putative reliance on the professionals to ensure compliance. The Court also relied on prior decisions holding that employers have no right under the FLSA to seek contribution and indemnity from non-employers based on tort theories that are not part of the FLSA statutory scheme, and two federal court decisions – one by the Second Circuit Court of Appeals – holding that outside professionals cannot be held liable under the FLSA.

Finally, the Court rejected the third-party plaintiffs’ allegations of professional malpractice as a basis for the contribution claims. In doing so, it again relied on the wage and hour laws’ purpose of protecting employees, rather than giving rise to rights on behalf of employers who have concededly failed to comply with those laws. This finding notwithstanding, it is important to note the limited nature of that holding. The Court did not rule that the law firm and the accounting firm did not commit malpractice as a matter of law. The employer would presumably be able to file a separate action for malpractice against the professionals.

What does this decision mean in a broader context? In the opinion of this writer, this is an extremely favorable development. Presumably, it will almost always be more favorable to be faced with the defense of a free standing malpractice claim, in which the various issues can be developed methodically and strategically with an eye towards obtaining a dismissal on dispositive motion or at trial, rather than in the context of an employment litigation. In the wage and hour context, the court may be eager to see that justice is done for the aggrieved employees and as a result short shrift may be given to issues such as whether the professionals’ advice was appropriate, whether the advice proximately caused the underlying injury and other potentially dispositive issues. That pressure may be particularly acute given that the federal courts’ dockets are increasingly clogged with employment claims and many federal judges appear eager to resolve those cases expeditiously to make room on the docket for their other cases. Additionally, the wage and hour plaintiffs have the right to recover liquidated damages and attorneys’ fees, and skilled plaintiffs’ attorneys use those claims for maximum leverage in seeking early resolution. Hence, the possibility of being held liable for liquidated damages and attorneys’ fees could increase the pressure upon third-party professionals and their carriers to contribute to a pre-trial settlement even when it appears unlikely that the professional can be held liable on the merits.