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Fifth Circuit Turns the Table on Department of Labor, Sanctions Government for Bad Faith Conduct During Investigation and Subsequent Litigation

Sometimes the hunter becomes the hunted.  That’s a lesson the U.S. Department of Labor (“DOL”) recently learned.  In an opinion dated July 2, 2015, the United States Court of Appeals for the Fifth Circuit reprimanded the DOL for pursuing “poorly documented” and “legally dubious” claims.  The Fifth Circuit found that the DOL had engaged in “uncivil and costly litigation tactics,” attempting to prevail by oppressively pursuing a very weak case.  Ultimately, the court held that the DOL had “acted in bad faith” and ordered the district court to enter an award against the DOL for hundreds of thousands of dollars in attorneys’ fees.

Gate Guard Services, L.P. v. Perez, No. 14-4585 (5th Cir. July 2, 2015), involved a company that provides gate attendants at remote drilling sites.  In July 2010, a DOL investigator received a tip from his “drinking companion” and former Gate Guard service technician regarding the company’s classifications and pay practices.  Based on this tip and two other informal discussions with former Gate Guard personnel, the DOL investigator concluded that the company had misclassified its gate attendants and violated the Fair Labor Standards Act (“FLSA”) by failing to pay overtime and keep accurate records of work hours.

Despite the investigator’s lack of training or experience in contractor misclassification cases, he opened a formal investigation into Gate Guard’s employment practices.  A week before the scheduled opening conference, the investigator appeared unannounced at Gate Guard’s offices.  Even though he knew the company was represented by counsel, the investigator demanded that a low-level employee produce payroll records.  After conducting the formal opening conference, the investigator sent an email to a colleague stating, “[w]ish you could be there, it was a good example of being quiet and letting them do all the talking and … digging their own grave.” 

The DOL investigator proceeded to interview only 17 gate attendants out of 400 and concluded that Gate Guard owed more than $6 million in back wages (nearly the company’s entire net worth).  Documents obtained during litigation also showed that the investigator’s interviews were “cursory” and failed to ask basic questions.  Furthermore, the investigator burned his investigation notes – destroying key pieces of evidence.  Although the DOL’s own file showed that the investigator had violated internal policy and had erroneously inflated penalties by nearly $4 million dollars, the DOL continued to demand that Gate Guard reclassify its gate attendants and pay millions of dollars in penalties.  When Gate Guard denied liability, the DOL threatened legal action.

On November 19, 2010, Gate Guard beat the DOL to the punch and filed suit against the agency in the U.S. District Court for the Southern District of Texas seeking a declaration that it was in compliance with the FLSA and an award of attorneys' fees under the Equal Access to Justice Act (“EAJA”).  Thereafter, the DOL filed its own complaint for back wages and injunctive relief under the FLSA. 

During the litigation, the DOL opposed nearly every motion and filed numerous “specious” motions of its own.  Additionally, the DOL forced Gate Guard to seek court-ordered production of witness statements, which the agency claimed were privileged.  The DOL’s attorney also objected over 100 times during the investigator’s 45-minute deposition – which had to be stopped due to such disruptions, requiring Gate Guard to seek court supervision of future depositions.  Likewise, Gate Guard had to seek a protective order when the agency sent harassing and misleading letters to gate attendants. 

While the case progressed, the DOL’s legal basis for its claims against Gate Guard began eroding.  For example, the same court held, in a nearly identical case, that gate attendants are not FLSA employees.  Further, it was discovered that the Army Corps of Engineers utilizes gate attendants and classifies them as independent contractors.  Nonetheless, the DOL continued to prosecute its case against Gate Guard.  As stated by the Fifth Circuit, “[p]redictably, given the legal precedents and botched investigation, the district court found the DOL’s case so weak, it granted summary judgment for Gate Guard.”  The district court also awarded attorneys’ fees to Gate Guard under the EAJA finding that the government’s case “was not substantially justified.”  However, it reduced the award to $565,000, because it held that the government’s case was “not entirely frivolous,” and, thus, “bad faith” could not be proven under 28 U.S.C. 2412(b).

The DOL appealed the district court’s award of attorneys' fees to the Fifth Circuit.  Gate Guard cross-appealed, arguing that it was entitled to additional attorneys’ fees because the DOL had acted in bad faith.  The Fifth Circuit rejected the DOL’s arguments and agreed with Gate Guard. 

The Fifth Circuit noted that, under the EAJA, there are two paths to recovering attorneys’ fees from the government.  Under 28 U.S.C. § 2412(b), courts can award attorneys’ fees when the government acts “in bad faith, vexatiously, wantonly, or for oppressive reasons.”  Conversely, under 28 U.S.C. § 2412(d), courts can award attorneys’ fees where the government’s position is not substantially justified.  However, § 2412(d) limits the recovery of attorneys’ fees to $125 per hour absent special circumstances.

The Fifth Circuit ruled that the district court’s analysis of “bad faith” was unduly rigid.  Noting that the power to award fees for bad faith conduct originated from the “authority of the chancellor to do equity in a particular situation,” the court reasoned that the law affords courts certain flexibility when exercising its equitable powers.   The court held that a “finding of bad faith is warranted where an attorney knowingly or recklessly raises a frivolous argument, or argues a meritorious claim for the purpose of harassing the opponent.”   Thus, the Fifth Circuit found that the “government’s intransigence in spite of its legally deteriorating case, combined with extreme penalty demands and outrageous tactics, together support[ed] a finding of bad faith.”  The court also found that there was bad faith in the government’s “abuse of judicial process and the method of prosecution.”  Accordingly, the court reversed the district court’s reduction of attorneys’ fees and remanded the case to the district court for a calculation of fees based on the DOL’s bad faith conduct under 28 U.S.C. § 2412(b).

This case underscores the importance of getting legal counsel involved promptly whenever a possible DOL investigation is imminent.  It also highlights that when the government oversteps its authority, employers sometimes may be able to seek attorneys’ fees.  At no time, however, should any DOL investigation be taken lightly.  The DOL has stepped up its enforcement initiatives and companies are well advised to review their employment practices and monitor continued compliance with wage and hour laws. 

  • Matthew S. Disbrow

    Matt Disbrow is a labor and employment attorney who advises clients concerning a wide spectrum of employment matters, including wage and hour issues, overtime issues, executive employment and compensation, employment ...

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