Fourth Circuit Issues Significant FLSA Case
The action was filed in superior court, but Sara Lee removed it to the EDNC, where Judge Howard dismissed some claims under Rule 12(b)(6) and later, after discovery, granted summary judgment to Sara Lee on the remainder. The plaintiffs appealed. The Fourth Circuit disagreed with much of Judge Howard's reasoning.
First, the Fourth Circuit agreed with Judge Howard that the plaintiffs failed to state claims for conversion and unfair trade practices, and thus affirmed the Rule 12(b)(6) dismissal of those claims, because the North Carolina Supreme Court has not recognized causes of action for conversion or unfair trade practices in employer-employee disputes over unpaid wages, and there is no basis for concluding it would do so if given the opportunity. The Fourth Circuit cited the familiar line of cases holding that Chapter 75 (G.S. 75-1.1) doesn't normally cover employment disputes. While there are exceptions to that general rule (including, ironically, a case brought by Sara Lee -- see Sara Lee Corp. v. Carter, 519 S.E.2d 308 (N.C. 1999)), the exception doesn't apply in a wage dispute.
Second, the Fourth Circuit held that Judge Howard erred in dismissing the plaintiffs' fraud claim under Rule 12(b)(6). This claim alleged that Sara Lee made a false promise, at the time class members were hired, to pay them for all time compensable under the FLSA, and then concealed the compensability of time spent adhering to the uniform and dress policy. As for the element of reasonable reliance, the complaint asserted that "Class Members did not know and could not have reasonably discovered that they were entitled to compensation that was not being paid to them because of the comparative difference in power and knowledge between them and Sara Lee," and that they "reasonably relied on Sara Lee's promise to pay agreed upon hourly compensation." Judge Howard had concluded that Sara Lee's failure to compensate the workers wasn't intentional (hence no intent to deceive) but instead was, at worse, based on a misinterpretation of the Fair Labor Standards Act (FLSA). The Fourth Circuit held, however, that even if evidence ultimately may show that an FLSA violation was unintentional, such a determination shouldn't be made at the Rule 12(b)(6) stage. Cf. IntraComm, Inc. v. Bajaj, 492 F.3d 285 (4th Cir. 2007) (affirming district court's conclusion, at summary judgment stage, that employer's misclassification of employee as FLSA-exempt "was done in good faith" in view of ambiguity in applicable regulation).
Third, the Fourth Circuit held that Judge Howard erred in holding that the remaining claims -- for breach of contract, negligence, and fraud -- are not preempted by the FLSA. The Fourth Circuit held these state law claims are indeed preempted under principles of conflict preemption, because they all depend on establishing that Sara Lee violated the FLSA, either in good faith or willfully. The Court's preemption analysis is quite extensive. The key here is that the state law claims were deemed to be duplicative of an FLSA claim in the sense that the claims were predicated on violations of the FLSA's requirements. This apparently creates a circuit conflict. Certainly district courts have been all over the place on this preemption issue.
It should be noted that the Fourth Circuit rejected Sara Lee's argument that preemption should result in a final judgment for Sara Lee that would end the action. Instead the Court remanded for a dismissal without prejudice to "give the Class Members an opportunity to pursue any FLSA claims they may possess." So it appears that this action, originally filed in January 2003, is about to restart as an FLSA class action.
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