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Donovan v. Dialamerica Marketing, Inc, 757 F.2d 1376 | Casetext
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Donovanv.Dialamerica Marketing, Inc.
United States Court of Appeals, Third CircuitMar 13, 1985
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Decided March 13, 1985. Rehearing and Rehearing In Banc Denied April 9, 1985. As Amended April 18, 1985.
Charles I. Poret (argued), Mark R. Kook, Sharfman, Shanman, Poret Siviglia, New York City, for appellant in No. 84-5245 and appellee in No. 84-5217.
This opinion concerns an appeal by the Secretary of Labor (the "Secretary") from the district court's judgment for defendant, DialAmerica Marketing, Inc., in an action brought by the Secretary under the Fair Labor Standards Act, 29 U.S.C. §§ 201-219 (1982) (the "FLSA"). The Secretary alleged that DialAmerica had failed to comply with the minimum-wage and record-keeping provisions of the FLSA. The district court determined that the two groups of workers in question, persons who research telephone numbers for DialAmerica in their homes and those who also distribute telephone-research work to other home researchers ("distributors"), are independent contractors, not "employees" subject to the provisions of the FLSA. The court refused, however, to grant defendant's request for attorneys' fees under the Equal Access to Justice Act, 28 U.S.C. § 2412 (1982), holding that the Secretary's position in the case, though incorrect, was substantially justified.
The facts recited in this opinion are undisputed except as otherwise noted.
At a status conference, the district court, believing that there were no material facts in dispute, suggested to counsel that both parties attempt to stipulate the facts in the case and then file cross-motions for summary judgment. Counsel agreed to do so, but each side reserved the right to present testimony on any issues of fact that remained in dispute. As it developed, these remaining issues of fact included:
Counsel and the court had already agreed to bifurcate the case. First, the court would determine whether the workers in question were "employees" under the FLSA. Second, if they were held to be "employees," the court would then consider whether they were entitled to backpay or other relief. Any action on the second part of the case was to be suspended until the first part was completed.
(5) the extent to which the services provided by the home researchers and distributors were an integral part of DialAmerica's business.
See Donovan v. DialAmerica, Civil No. 81-4020 (D.N.J., June 4, 1982) (pre-trial order, part VIII).
The district court then held a two-day evidentiary hearing in which the Secretary presented ten witnesses and DialAmerica presented seven witnesses. On January 26, 1984, in an order accompanied by a letter opinion, the court granted the motion for summary judgment which DialAmerica had filed pursuant to Fed.R.Civ.P. 56. The court subsequently filed an order and accompanying letter opinion, denying DialAmerica's request for attorneys' fees. The Secretary now appeals the district court's grant of summary judgment (No. 84-5217). DialAmerica appeals the court's denial of its application for the award of attorneys' fees (No. 84-5245). Both appeals were timely. This court has jurisdiction pursuant to 28 U.S.C. § 1291 (1982).
Given that there were several disputed issues of material fact — which the district court resolved only after taking testimony from seventeen witnesses — we find it difficult to understand why the court characterized its decision as a summary judgment. Although the court inappropriately labelled its judgment, its course of action was correct. The two-day hearing was sufficient for the court to find the relevant facts, and we would gain nothing beyond delay by reversing the district court's grant of summary judgment and remanding the case for further fact-finding. It appears that there exists no additional documentary evidence or testimony which, if presented at trial, would have aided significantly in the adjudication of this case. Thus, we will simply treat the court's letter opinions as the findings of fact and conclusions of law required by Fed.R.Civ.P. 52, and its orders as judgments entered after trial pursuant to Fed.R.Civ.P. 58. We will review the court's findings of fact under a "clearly erroneous" standard. Our review of the district court's legal conclusions is, of course, plenary.
The court's letter opinion of January 26, 1984, includes some statements that are most accurately characterized as findings of fact. Examples of such findings by the court include statements that the home-research work at issue did not require a great investment nor much skill, presented little opportunity for profit or loss, and operated under the barest possible structure. Donovan v. DialAmerica Marketing, Inc., Civil No. 81-4020, letter op. at 7 (D.N.J. Jan. 26, 1984). Another example is the court's observation that "distributors were small business persons, who controlled their own fleet of distributees subject only to the scantiest oversight by DialAmerica." Id. at 8.
Congress and the courts have both recognized that, of all the acts of social legislation, the Fair Labor Standards Act has the broadest definition of "employee." See 81 Cong.Rec. 7657 (remarks of Senator Hugo L. Black); Equal Employment Opportunity Commission v. Zippo Manufacturing Co., 713 F.2d 32, 37 (3d Cir. 1983). In determining whether a worker is an "employee" of another person or organization within the purview of the FLSA, the Supreme Court, in Rutherford Food Corp. v. McComb, 331 U.S. 722, 67 S.Ct. 1473, 91 L.Ed. 1772 (1947), emphasized that the circumstances of the whole activity should be examined rather than any one particular factor. Id. at 730, 67 S.Ct. at 1476; see also Bartels v. Birmingham, 332 U.S. 126, 127, 67 S.Ct. 1547, 1548, 91 L.Ed. 1947 (1947) (determination of "employee" status under the Social Security Act); United States v. Silk, 331 U.S. 704, 705, 67 S.Ct. 1463, 1464, 91 L.Ed. 1757 (1947) (same).
As the district court aptly observed, the definitions included in the FLSA provide little assistance in determining the meaning of the word "employee." "Employee" is defined by the Act as "any individual employed by an employer." 29 U.S.C. § 203(e)(1) (1982). "Employer" is defined to include "any person acting directly or indirectly in the interest of an employer in relation to an employee. . . ." 29 U.S.C. § 203(d) (1982). Finally, the Act states "`Employ' includes to suffer or permit to work." 29 U.S.C. § 203(g) (1982).
In Rutherford, the Court held that boners who worked in a slaughterhouse were employees under the FLSA, even though they were paid collectively on a piece-rate basis, owned their own tools, and worked under individual employment contracts. Rutherford, 331 U.S. at 730, 67 S.Ct. at 1746. Specific factors examined by the Rutherford Court in rendering its decision included: whether the work being done is part of the integrated unit of production: whether the workers shift from one work-place to another as a unit; whether managers from the alleged employer keep in close touch with the workers; and whether the work is more like piecework than an enterprise dependent for success on the workers' initiative, judgment or foresight. Id. at 729-30, 67 S.Ct. at 1476-77.
Recently, the Court of Appeals for the Ninth Circuit, in Donovan v. Sureway Cleaners, 656 F.2d 1368 (9th Cir. 1981), refined the test for "employee" status originally set forth initially by the Supreme Court in Rutherford. This test lists six specific factors for determining whether a worker is an "employee":
656 F.2d at 1370 (quoting Real v. Driscoll Strawberry Associates, 603 F.2d 748, 754 (9th Cir. 1979)).
In addition, Sureway Cleaners instructs that neither the presence nor absence of any particular factor is dispositive and that courts should examine the "circumstances of the whole activity," 656 F.2d at 1370 (citing Rutherford Food Corp. v. McComb, 331 U.S. 722, 730, 67 S.Ct. 1473, 1476, 91 L.Ed. 1772 (1947)), and should consider whether, as a matter of economic reality, the individuals "are dependent upon the business to which they render service." 656 F.2d at 1370 (citing Bartels v. Birmingham, 332 U.S. 126, 130, 67 S.Ct. 1547, 1549, 91 L.Ed. 1947 (1947)). The Sureway Cleaners test has been previously cited with approval by this court in dicta. See Zippo, 713 F.2d at 36-37 (3d Cir. 1983). We now adopt it as the standard for determining "employee" status under the FLSA, and we will proceed to analyze the district court's decision in relation thereto.
The district court concluded that neither those persons who performed telephone-number research at home nor those who distributed search cards to the home researchers were "employees" under the FLSA. In reaching its conclusion, the court did not apply the Sureway Cleaners test as such. It did, however, rely on the judicial decisions upon which the Sureway Cleaners test is based. Moreover, the court identified as relevant all but one of the elements of the Sureway Cleaners test. Nevertheless, the court's opinion is based on only two of these elements: (1) the extent of DialAmerica's control over the home researchers; and (2) the extent to which the home researchers were economically dependent on DialAmerica. The court reasoned that, because these researchers worked at home without supervision and at the dates and times of their own choosing, DialAmerica exercised little control over them. Moreover, the court found that the home researchers were not economically dependent on DialAmerica because, for most of them, the money they earned from DialAmerica was not the primary source of family income, but merely "pocket money." We turn to an examination of the district court's analysis in the context of the entire Sureway Cleaners test — the six itemized factors and the economic-realities consideration.
The district court relied primarily on the five factors specified by the Supreme Court in United States v. Silk, 331 U.S. 704, 716, 67 S.Ct. 1463, 1469, 91 L.Ed. 1757 (1947) and Rutherford Food Corp. v. McComb, 331 U.S. 722, 730, 67 S.Ct. 1473, 1476, 91 L.Ed. 1772 (1947), as well as the general economic-dependence consideration propounded by the Court in Bartels v. Birmingham, 332 U.S. 126, 130, 67 S.Ct. 1547, 1549, 91 L.Ed. 1947 (1947). Only the integral-economic relationship factor, which is the sixth factor listed in Sureway Cleaners, was not identified as relevant by the district court.
Donovan v. DialAmerica Marketing, Inc., Civil No. 81-4020, letter op. at 7 (D.N.J. Jan. 26, 1984). These findings are not only supported in the record, they are clearly correct.
DialAmerica had contended that some of the home researchers made a significant investment in their business, particularly in the purchase of speed dialers and telephone directories.
The district court devoted most of its discussion, however, to explaining that defendant had very little control over the manner in which the home researchers did their work. The court emphasized that the home researchers had the freedom to work at any time and for as many hours as they desired, and that they were not directly supervised by defendant. See id. at 4-5. Had the district court been analyzing the status of a group of in-house workers, the court's emphasis on these facts would have been appropriate. But in the context of this case — one involving homeworkers — the court's emphasis was misplaced.
The court did recognize that defendant exercised some "minimal oversight" over the home researchers, such as requiring that the search cards be filled out properly, that cards be returned generally one week after obtaining them, and that proper dress be worn while visiting the office. The court, however, found little significance in these requirements.
That the home researchers could generally choose the times during which they would work and were subject to little direct supervision inheres in the very nature of home work. Yet, courts have held consistently that the fact that one works at home is not dispositive of the issue of "employee" status under the FLSA. In a seminal decision, Goldberg v. Whitaker House Co-operative, 366 U.S. 28, 81 S.Ct. 933, 6 L.Ed.2d 100 (1961), the Supreme Court held that members of a cooperative who made knitted goods in their homes and were paid on a piece-rate basis, were "employees" under the FLSA. Id. at 33, 81 S.Ct. at 936. The Court examined, inter alia, the legislative history of the FLSA and determined that, in general, homeworkers were intended to be encompassed by the Act. See id. at 30-32, 81 S.Ct. at 935-36. The Court then examined the specific homeworkers at issue and, upon analyzing the economic reality of their whole situation, concluded that they were indeed "employees":
The Supreme Court had held earlier that workers paid on a piece-rate basis were encompassed by the Fair Labor Standards Act. See United States v. Rosenwasser, 323 U.S. 360, 361, 65 S.Ct. 295, 296, 89 L.Ed. 301 (1945).
The members are not self-employed; nor are they independent, selling their products on the market for whatever price they can command. They are regimented under one organization, manufacturing what the organization desires and receiving the compensation the organization dictates. Apart from formal differences, they are engaged in the same work they would be doing whatever the outlet for their products. The management fixes the piece rates at which they work; the management can expel them for substandard work or for failure to obey the regulations. The management, in other words, can hire or fire the home-workers.
Other federal court rulings have been consistent with Goldberg, holding that homeworkers in various situations were "employees" under the FLSA. Thus, the facts relied on by the district court in concluding that defendant had only a slight degree of control over the manner in which the home researchers did their work were, to a large extent, insignificant. The district court therefore misapplied and over-emphasized the right-to-control factor in its analysis.
See e.g., Hodgson v. Cactus Craft of Arizona, 481 F.2d 464, 467 (9th Cir. 1973) (persons who manufacture novelty and souvenir gift items in their homes and are compensated at a piece rate are entitled to the minimum wage under the FLSA); Silent Woman, Ltd. v. Donovan, 585 F. Supp. 447, 451 (E.D.Wis. 1984) (persons who do needlework in their homes for a corporation, set their own hours, and are compensated at a piece rate set by the corporation are "employees" under the FLSA); Hodgson v. Rancourt, 336 F. Supp. 1119, 1122 (D.R.I. 1972) (persons who type labels and envelopes in their home for defendant and who had to complete work by a certain date set by defendant were "employees" of defendant under the FLSA); Wirtz v. McGhee, 244 F. Supp. 412, 415 (E.D.S.C. 1965) (persons manufacturing doll clothes and bodies in their homes constituted "employees" of defendant); Mitchell v. Nutter, 161 F. Supp. 799, 806 (D.Me. 1958) (homeworkers who knitted and crocheted infants' outerwear for distributor at a piece rate were "employees" under FLSA); Walling v. Freidlin, 66 F. Supp. 710, 712 (M.D.Pa. 1946) (expressly overruling an earlier decision, Walling v. Todd, 52 F. Supp. 62 (M.D.Pa. 1943), and holding that homeworkers to whom employer delivered waste rags, which homeworkers cut, served, and wound into balls, were "employees").
The district court did not apply two other factors specified in the Sureway Cleaners test: the degree of permanence of the working relationship and whether the service rendered is an integral part of the alleged employer's business. The working relationship between the home researchers and DialAmerica was, for the most part, not a transitory one. Although there was testimony presented that several researchers performed telephone calling services for other organizations following the termination of their work for the defendant, this was not true generally. Moreover, there was no evidence to show that more than three among dozens of home researchers performed similar services for another organization while he or she was working for the defendant. In short, the home researchers did not transfer their services from place to place, as do independent contractors. See Donovan v. Sureway Cleaners, 656 F.2d 1368, 1372 (9th Cir. 1981). Each worked continuously for the defendant, and many did so for long periods of time. As such, the permanence-of-working-relationship factor indicates that the home researchers were "employees" of the defendant.
The district court also did not expressly consider whether the service rendered by the home researchers was an integral part of the defendant's business. Given the evidence in the record, we conclude that it was. Although DialAmerica contends that beginning in June 1979, the home researchers accounted for the location of only 4%-5% of the total number of telephone numbers sought by defendant, this contention bears little relevance to the integral-economic-relationship factor. The factor relates not to the percentage of total work done by the workers at issue but to the nature of the work performed by the workers: does that work constitute an "essential part" of the alleged employer's business? See Sureway Cleaners, 656 F.2d at 1372; Hodgson v. Ellis Transportation Co., 456 F.2d 937, 940 (9th Cir. 1972). In other words, regardless of the amount of work done, workers are more likely to be "employees" under the FLSA if they perform the primary work of the alleged employer.
The final consideration included within the Sureway Cleaners test is whether, as a matter of economic reality, the workers at issue "`are dependent upon the business to which they render service.'" Sureway Cleaners, 656 F.2d at 1370, (quoting Bartels v. Birmingham, 332 U.S. 126, 130, 67 S.Ct. 1547, 1549, 91 L.Ed. 1947 (1947)). The district court clearly misinterpreted and misapplied this part of the analysis. The court reasoned that, because many of the home researchers used the money they earned from their work only as a secondary source of income for their households, they were not economically dependent upon DialAmerica. There is no legal basis for this position. The economic-dependence aspect of the Sureway Cleaners test does not concern whether the workers at issue depend on the money they earn for obtaining the necessities of life, as the district court suggests. Rather, it examines whether the workers are dependent on a particular business or organization for their continued employment. See Bartels v. Birmingham, 322 U.S. at 130, 67 S.Ct. at 1549; Equal Employment Opportunity Commission v. Zippo Manufacturing Co., 713 F.2d at 37; Usery v. Pilgrim Equipment Co., 527 F.2d 1308, 1311 (5th Cir.), cert. denied, 429 U.S. 826, 97 S.Ct. 82, 50 L.Ed.2d 89 (1976).
Although the district court's interpretation of "economic dependence" may appear to be reasonable on the surface, it would lead to senseless results if carried to its logical conclusion. Consider the following example. Two persons do exactly the same work for the same organization. The first worker, who relies on the job as a primary source of income, would be considered "economically dependent" on the organization and thus an "employee" subject to the minimum-wage provisions of the FLSA. The other worker, whose spouse provides the primary source of family income, would not be considered "economically dependent" and thus would not necessarily be entitled to receive the minimum wage. Moreover, upon the first worker's subsequent marriage to a spouse who would provide the primary source of family income, he or she might then lose the status as an "employee," resulting in a possible reduction in wage rate.
The district court concluded that the six or seven home researchers who distributed telephone-number research cards to the other home researchers were also not "employees" under the FLSA. In reaching its decision, the court again did not consider all of the factors specified in the Sureway Cleaners test for determining "employee" status. Nevertheless, upon application of the entire Sureway Cleaners test, we agree that the distributors were not "employees" and were not subject to the minimum-wage protection of the FLSA for their work in delivering cards to and from other home researchers.
We recognize that the distributors performed home research work for DialAmerica in addition to their distribution work. We hold that, while performing home research for DialAmerica, these persons were "employees" under the FLSA and entitled to payment of the minimum wage.
Moreover, we also defer to the district court's finding that the distributors risked financial loss if they did not manage their distribution network properly. The distributors were responsible for paying all of their expenses, which consisted primarily of transportation expenses. And each distributor had the authority to set the rate at which its distributees would be paid. Thus, theoretically at least, distributors could lose money if their expenses outweighed their revenues.
DialAmerica paid the distributors in a lump sum equal to one cent per card more than the piece rate times the number of completed cards returned by the distributor, regardless of whether the cards had been completed by the distributors or by one of their distributees. Initially, DialAmerica instructed the distributors to pay their distributees the going piece rate for each card completed and to keep the remaining one cent per card for themselves. Several years later, however, DialAmerica stopped giving instructions on how distributees were to be paid. Several distributors testified that they paid their distributees less than the going piece rate. One distributor testified that the rate he paid a distributee depended on the relative transportation expenses he incurred in delivering cards to and from that distributee.
The distributors also had to make an investment in their business. Again, this investment consisted primarily of transportation expenses. One distributor also used paid advertising in an effort to gain more distributees. Consideration of the investment factor, therefore, supports the conclusion that the distributors were independent contractors.
Transportation expenses could be significant for distributors who maintained a wide distribution area. One woman testified that she regularly traveled from her home in New Jersey to Long Island, New York, where some of her distributees lived.
As a result of our decision in this case, DialAmerica may be held liable for not paying the home researchers the minimum wage, even though the distributors — who are held not to be employees of DialAmerica — had discretion in setting the pay rates of some of these home researchers (their distributees). Such a result is possible because the distributors' status as independent contractors does not necessarily imply that they have the sole responsibility of paying their distributees the minimum wage required by the FLSA. Another employer — in this case, DialAmerica — may share that responsibility. See Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748, 756 (9th Cir. 1979) (the independent-contractor status of one party standing in the position of the direct employer of crop growers does not, as a matter of law, prevent the contractee from being a joint employer of these crop growers under the FLSA); Hodgson v. Griffin Brand of McAllen, Inc., 471 F.2d 235, 237 (5th Cir.) (claimed independent-contractor status of crew leaders, who supplied field workers for defendant-harvester, did not negate the possibility that defendant was an "employer" of the workers for FLSA purposes), cert. denied sub nom. Griffin Brand of McAllen, Inc. v. Brennan, 414 U.S. 819, 94 S.Ct. 43, 38 L.Ed.2d 51 (1973); see also Boire v. Greyhound Corp., 376 U.S. 473, 481, 84 S.Ct. 894, 898, 11 L.Ed.2d 849 (1964) (the independent-contractor status of firm under contract with defendant to clean bus terminals does not affect determination whether the cleaners are employees of defendant for purposes of the National Labor Relations Act).
Since all the home researchers were employees of DialAmerica — by application of the relevant legal test — it was DialAmerica's responsibility to ensure that the distributors paid their respective distributees the minimum wage. Indeed, when distributorships were first initiated, DialAmerica instructed the distributors on precisely the amount of money to be paid to each distributee. Although DialAmerica subsequently granted its distributors some discretion in paying distributees, DialAmerica demonstrated that it could control the rate of payment to distributees if it so desired.
Following the district court's grant of defendant's motion for summary judgment in this action brought by the Secretary of Labor, defendant filed with the court an application for attorneys' fees pursuant to the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412 (1982). The Act provides in relevant part that "a court may award reasonable fees and expenses of attorneys,. . . to the prevailing party in any civil action brought by or against the United States or any agency and any official of the United States acting in his or her official capacity in any court having jurisdiction of such action." 28 U.S.C. § 2412(b) (1982). The Act provides an exception to the award of attorneys' fees if "the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust." 28 U.S.C. § 2412(d)(1)(A). The district court denied defendant's application for attorneys' fees in an order and accompanying letter opinion dated March 5, 1984. Although it found defendant to be a "prevailing party" as defined by the Act, the court found that the Secretary's position was "substantially justified" under the three-part test set forth by this court in Dougherty v. Lehman, 711 F.2d 555 (3d Cir. 1983). DialAmerica appeals this judgment.
The Act expired by its own terms effective October 1, 1984. Equal Access to Justice Act, Pub.L. No. 96-481, § 204(c). Section 204(c) states, however, that the Act "shall continue to apply through final disposition of any action commenced before the date of repeal." Id. Because this case was commenced before the date of repeal, the terms of the Act still apply.
By our decision, DialAmerica does not prevail on the primary issue in this case, namely whether home researchers were "employees" under the FLSA. Yet, DialAmerica prevails on the less significant issue of the status of the distributors. We will therefore assume, without deciding, that DialAmerica remains a "prevailing party" for purposes of the EAJA. We will now turn to a review of the district court's determination that the position of the United States was "substantially justified."
The position of the United States includes not only its litigation position but also the agency position that made the lawsuit necessary. Dougherty, 711 F.2d at 563 n. 12; Natural Resources Defense Council, Inc. v. EPA, 703 F.2d 700, 708 (3d Cir. 1983). Substantial justification "constitute[s] a middle ground between an automatic award of fees to a prevailing party and an award made only when the government's position was frivolous." Dougherty, 711 F.2d at 563. The government has the burden of proving that it was substantially justified. Id. at 561. To satisfy its burden the government must demonstrate (1) a reasonable basis in truth for the facts alleged; (2) a reasonable basis in law for the theory propounded; and (3) a reasonable connection between the facts alleged and the legal theory advanced. Citizens Council of Delaware County v. Brinegar, 741 F.2d 584, 593 (3d Cir. 1984); Dougherty, 711 F.2d at 564.
We defer to the district court's finding that "there is complete congruence between the Department of Labor's actions at the pre-trial and trial level." See Donovan v. DialAmerica Marketing, Inc., Civil No. 81-4020, letter op. at 2 (D.N.J. Mar. 5, 1984).
The district court determined that the Secretary of Labor had satisfied its burden of proving the existence of each element in this three-part test. We agree.
Because we reach the same conclusion as the district court, we need not resolve the issue left open by this court in Washington v. Heckler, 756 F.2d 959, 963 n.4 (3d Cir. 1985). That decision did not determine the scope of review of the district court's "substantially justified" conclusion in a case tried in the district court as opposed to a case in which the district court performs the same function as this court in reviewing an administrative record.
The district court was correct in its conclusion that there was a reasonable basis in truth for the facts alleged by the Secretary. Most of the facts in the case were not disputed by the parties, and those that were disputed were in the nature of inferences drawn from the undisputed basic facts. Moreover, we concur with the court's determination that there existed a reasonable basis in law for the Secretary's position that the distributors were "employees" of DialAmerica, rather than independent contractors. In formulating its position, the Secretary relied on numerous judicial decisions which held that workers who perform their duties outside the office or factory and who are paid on a piece-rate basis are nevertheless "employees" under the FLSA. See supra note 11. Finally, we agree with the district court that the facts alleged by the Secretary reasonably supported the legal theory he advanced. As we observed in our analysis of the distributors' status, not all of the relevant factors support our conclusion. Analysis of the permanency-of-working-relationship factor as well as the economic-dependence consideration supports the Secretary's position that the distributors are employees rather than independent contractors. The closeness of the case, see supra p. 1388, is also evidence of substantial justification. We therefore concur with the district court's determination that the Secretary of Labor's position in this case was substantially justified. Thus, we will affirm the court's order denying DialAmerica's application for attorneys' fees.