Don’t Bottle Trouble

Winter 2017 Artisan Spirit[Originally Published in Winter 2017 Issue of Artisan Spirit]

Implications of Labor Laws in the Context of Bottling Parties and Similar Events

Hardly a week goes by without an announcement crossing my social media stream about an upcoming bottling event at a craft distillery.  In many cases, my feed tells me that the distillery is looking for passionate supporters of the brand to come down to the facility and help with the bottling on a given day — in exchange for which these helpers will earn the locally required minimum wage, get the opportunity to purchase one of the bottles and possibly receive a hearty lunch.  Not a bad deal, really.

Perhaps more often, however, the distillery is asking for volunteers to assist with bottling.  The volunteers will still receive the hearty lunch and the opportunity to buy a bottle and some merchandise — possibly with the benefit of the distillery’s friends, family and employee discount — but will not earn any actual cash.  And this is the sort of thing that keeps me up at night.  You see, I really want to participate in a bottling party.  I’d love nothing more than spending a Saturday at a distillery filling bottles, applying labels and packing cases of one of my favorite spirits.  But  I just can’t bring myself to do it.  And it isn’t because I’m too busy or can’t be bothered; it is because I really don’t want to get these small distilleries in trouble, and I know that under state and federal law these kinds of bottling parties are problematic.

Under a federal statute known as the Fair Labor Standards Act (FLSA), the use of volunteers to provide labor is highly regulated.  That doesn’t mean it is prohibited.  But if the volunteer doesn’t fit within the very narrow confines of what the Department of Labor (DOL) considers a volunteer, then the individual is most likely actually an employee under applicable federal law.  And that means that the business benefiting from the labor will have failed to pay the individual a minimum wage.  That failure carries with it some rather draconian potential consequences, including not only the obligation to pay the unpaid wages but also liquidated damages in an additional amount equal to the unpaid wages, plus the attorney’s fees of any individual who successfully brings a claim.  Depending on the business location, an individual may be able to obtain additional penalties and remedies under state and local wage and hour laws.  And if that weren’t enough, it makes for a very bad and very public spectacle, which can result in significant reputational damage. With this as the potential consequence of mischaracterizing volunteers, it is important to understand who is — and who is not — a volunteer.

Under the FLSA, an individual may only be classified as a volunteer if her labor meets the following criteria:

  • It is performed for public service, humanitarian or religious objectives;
  • It is performed without the expectation or receipt of any kind of compensation; and
  • It does not displace employees and is not of the type that would otherwise be performed by employees.

The DOL is quite strict in its application of these principles.  For example, the DOL has opined that individuals could be characterized as volunteers if — while assisting a hospice center — they sat with patients simply to provide the patients’ families with needed breaks or attended funerals.  But they could not be characterized as volunteers if, instead of sitting with patients, they were providing general clerical or administrative support to the hospice.  The first set of activities — according to the DOL — were in the nature of public service, humanitarian and religious activities.  The second set of activities were not.

Taking each of these in turn and in the context of a small distillery, we can see how allowing “volunteers” to help with bottling could lead to a violation of the FLSA.  While we may appreciate the social or other community benefits of fine spirits, it is obviously difficult to argue that our test subject is volunteering as part of a public service, humanitarian or religious exercise.  The labor is being performed without the expectation of cash compensation — but by providing her with a discount on her purchases and the aforementioned hearty lunch the distillery is actually providing our pseudo-volunteer with a form of compensation.  And since she’s almost certainly being solicited to help with bottling for the sole purpose of avoiding the need to hire employees to perform the task, her work is exactly the kind of labor that would otherwise be performed by employees and does in fact displace employees.

For those keeping score, this means our dutiful laborer has failed each of the three required prongs for being considered a volunteer under the FLSA and if our distillery engages her on this basis it is breaking federal law and probably other state and local laws as well.  Recognizing this, some distilleries seek to claim that our laborer is actually more appropriately classified as an intern.  Unfortunately, this claim too likely fails — as internships are also quite closely regulated.

Under the FLSA, an individual can provide services without compensation if she is an intern.  But an internship or training program will only qualify for this exclusion from the requirement to pay minimum wage if the specific facts and circumstances of the program meet all of the six following criteria:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under the close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern and on occasions its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Turning back to our distillery and laborer, let us again examine each of these criteria.  Under DOL guidelines, the more an internship is structured around a classroom or academic experience, the more likely it is that the internship will satisfy the first criterion.  Suppose, therefore, that our distillery agreed to provide an internship to a would-be distiller who wanted to learn how to separate a distillation run into heads, hearts and tails, the internship involved a heavy dose of instruction in chemistry and was being offered in conjunction with the intern’s enrollment in a university or community college course relating to distilling and for which she was to receive academic credit.  Under these circumstances, it seems quite likely that our internship meets the first of these criteria.  But in the context of the bottling party these aren’t really our circumstances.  Instead, our intern is probably going to be given a quick course in how to operate some bottling equipment — or possibly how to apply a label on that bottle — and sent on her way at the end of the day.  There’s nothing particularly educational or academic about that interaction; our internship likely fails the first criterion.

Similarly, it is hard to see how our internship meets the second criterion.  Our intern is not the primary beneficiary of her labors — the distillery is.  Under DOL guidelines, the fact that the intern may be receiving some benefits in the form of a new skill or improved work habits will not exclude them from the protections of the FLSA (i.e., getting paid and any overtime requirements) if the employer is benefitting from the intern’s work. In our situation, the intern can perhaps say that she has a new skill — but how often is she really going to benefit from her newfound ability to operate a bottle-filling apparatus?  By contrast, how beneficial was her work to the employer?  The relative benefit of the internship appears heavily weighted in favor of the employer.  Our internship has failed the second criterion as well.

We considered the third criterion when we tried to characterize the bottling party as a volunteer experience.  The laborer is intended to perform work that would otherwise be performed by employees. An excellent argument can be made that this is not the sole purpose of the bottling party (a secondary purpose is to obviously create community around the distillery’s brand and deputize new brand evangelists).  But this secondary purpose does not change the fact that our intern’s work will — by design — displace employees.  So, as with our inability to satisfy this criterion in the context of a volunteer classification, we similarly do not satisfy it in the context of an internship.

With respect to our fourth criterion, I can report that many distilleries have told me that having bottling parties does — in fact — impede their operations.  Sometimes it impedes them quite severely, as when the helping hands manage to drop full bottles on the floor, apply labels incorrectly or generally cause a ruckus.  But this is only half of the criterion — and probably not even the important half.  The bigger question is whether the employer actually derives a meaningful benefit from the intern’s work.  And unless the distiller has been unfortunate enough to organize the world’s worst bottling party — where everything that can go wrong does in fact go wrong and at the end of the day the distillery is in a shambles, nothing has been bottled and the floor is now wet with spilled spirit, the distillery has probably received some meaningful benefit from the efforts of the intern.  If the distillery has received a quantifiable economic benefit from the activities of the intern, we’ve just failed the fourth criterion.

With respect to the fifth criterion, we have probably (finally) reached some good news.  The intern is almost certainly aware that she is not likely to receive a job offer at the end of this engagement.  Assuming that is true, then we will have met our obligation for calling the bottling party an internship.  But note that there is a trap here for the unwary.  DOL guidelines state that if an intern is placed with an employer for a trial period — during which she will be evaluated for a permanent position — then the intern is likely an employee during that trial period as well and should be paid a wage.

For our sixth criterion, we turn away from the facts of the engagement and get to the understanding of the parties.  Like the fifth criterion, the sixth presents some potential good news for our employer as well as another trap.  The good news is that if both the employer and the intern understand that the position is one for which no wages will be owed, then we will have met the criterion.  But beware the trap — or rather traps — presented by this test.  First, it requires a meeting of the minds between the employer and the intern.  And since the distillery is only one side of that equation it is possible that the employer would believe there was agreement when in fact the intern did not agree and did expect to be paid.  In that circumstance, the criterion would not be met.  Secondly, note that the guidelines are somewhat unclear on whether the criterion can be met if the intern understands that she is not entitled to payment but her understanding is incorrect because — for example — the internship fails any one of the preceding five criteria.  In that circumstance too it is possible that the internship will fail the sixth.

So, how did we score on the internship test?  Not great.  One or two out of six is not good.  But this exam is pass/fail — and that means we fail.  Our internship must meet all of the six criteria in order to qualify for the exclusion from FLSA wage protections — and ours didn’t measure up.

Of course, some distilleries will try to get past these volunteer and internship issues by having the laborers sign an agreement — possibly even one they spent good money getting an attorney to draft — that claims to waive their rights to payment under the FLSA and applicable state and local law.  And if the bottling party situation is enough to keep me up at night, the waiver issue is enough to make me puke the still.

Let me take this opportunity to be unequivocal.  If an individual is entitled to the wage protections of the FLSA, that individual cannot waive those rights.  Such a waiver is unenforceable and will be disregarded by the DOL or any court that considers the matter.  Sure, having someone sign a waiver may have a slight deterrent effect; to the extent that they believe they have waived any rights they have it may make them less likely to bring a claim.  But at the same time, having someone sign a waiver suggests that the employer knew the laborer was entitled to the protections of the FLSA.  So, by requiring that the would-be volunteer or intern sign the waiver, the employer has actually strengthened the case of the DOL or any plaintiff trying to bring a claim for unpaid wages.  On balance, an employer is probably better off not seeking an unenforceable waiver that makes it look like they were trying to skirt the law.  And if the distillery’s attorney told them the waiver would work, the distillery needs a new attorney.

At this point, a distillery might well acknowledge that using this type of labor is a technical violation — a foot fault if you will — but question whether that liability has any real likelihood of surfacing.  A recent case suggests that it does.  The case doesn’t relate to spirits producers, but does concern a similarly passionate group of individuals — yoga practitioners.

In October 2016, a class action lawsuit was filed in United States District Court for the Northern District of California, alleging violations of the FLSA and California state labor laws arising from a program operated by CorePower Yoga, LLC.  The case hinged on the following basic fact: for years, CorePower had operated a program in which it engaged individuals to assist with the maintenance and cleaning of its yoga studios in exchange for reduced-cost membership at the studios.  Subsequently (possibly at the insistence of counsel?), CorePower changed this program to pay its laborers a minimum wage — but required that they pay back a significant portion as part of their membership fee.  In each case, the individuals provided 1-3 hours of labor per week.  Most were quite happy to have done this and enjoyed the arrangement.  The limited labor was a small price for them to pay in order to get to participate in their weekly yoga sessions at the studios.

But for whatever reason, one individual didn’t stay happy with this arrangement.  That individual brought the lawsuit on behalf of himself and all other individuals who had been part of this program.  He didn’t win the case at trial.  But he really didn’t have to win it.  CorePower — staring down potential damages equal to several times the maintenance and cleaning costs it had saved over the years by operating the program, quickly settled the case for total payments to the plaintiff class members (and the law firm that brought the case) in the amount of $1.65 million.

Three things are worth noting here.  First, as I mentioned many — possibly even most — of the individuals that had participated in the CorePower program were happy to have done so.  They liked their yoga and thought the price was right.  They may even have felt good about providing the cleaning and maintenance services to their local yoga studio and considered it doing something good for their community.  But none of that mattered in the case and it doesn’t matter under applicable law.  They were entitled to receive wages for their work — and once it began paying those wages, CorePower could not legally require them to pay them back in the form of membership fees.  Doing that was a violation of state and federal law.

Secondly, even if the individuals were willing to provide the services for free or repay their wages, they made that decision on the basis of an assumption about the likely amount of those wages.  A volunteer today who understands that she is giving up $10 per hour in minimum wage for her efforts today may feel very differently about that interaction a year later if she learns that she’s now entitled to receive $20 per hour for her work that day — simply because the distillery didn’t pay her the minimum wage at the time.

Which brings me to my third and final point.  If a distillery decides to accept volunteer or intern labor and in so doing mischaracterizes employees and fails to pay wages, what the business is actually doing is creating a contingent and hidden liability.  That liability, although not reflected on the business’ balance sheet, will exist and will remain hanging over the business’ head until the relevant statute of limitations has expired.  For claims brought under the FLSA, that means that the distillery has potential exposure for a period of two years from the last date on which it received the benefits of the labor but failed to pay wages.  If the employer’s actions were willful, the period is extended back three years.  And since a successful claim carries with it a right to recover attorney’s fees and interest from the date that the wages should have been paid, the amount of that liability increases with every day that passes until it is extinguished — either by payment or the lapse of the statute.

Creating and allowing that liability to linger does not benefit a business over the long term.  Rather, it creates a fiscal sword of Damocles.  The sword may not fall today.  It may not fall ever.  But if it falls, it will be painful.  The business that experiences this misfortune will wish it had simply paid workers the minimum wage for their efforts.  This is because a claim is made or because a prospective buyer of the business, upon reviewing the employment records of the business, discovers the potential for liability and reduces the price it is willing to pay.   Many of those workers would have probably turned around and bought a bottle or two at the end of the day.  I know I would.

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