Court Opinion

ID: 9556255
Source: CourtListenerOpinion
Date Created: 2023-08-16 18:01:09.485889+00
Date Added: 2024-06-11T16:42:02.423564
License: Public Domain

Case: 22-20434      Document: 00516859682           Page: 1     Date Filed: 08/16/2023

            United States Court of Appeals
                 for the Fifth Circuit
                                                                           United States Court of Appeals
                                                                                    Fifth Circuit

                                  ____________                                    FILED
                                                                            August 16, 2023
                                   No. 22-20434                              Lyle W. Cayce
                                  ____________                                    Clerk

   Timothy Klick; Wilton Chambers; Malik Aleem; John
   Potter; Anthony D. Woods,

                                                              Plaintiffs—Appellees,

                                        versus

   Cenikor Foundation,

                                            Defendant—Appellant.
                   ______________________________

                   Appeal from the United States District Court
                       for the Southern District of Texas
                            USDC No. 4:19-CV-1583
                   ______________________________

   Before Graves, Higginson, and Douglas, Circuit Judges.
   Dana M. Douglas, Circuit Judge:
          Cenikor Foundation brings this interlocutory appeal challenging the
   district court’s determination that a collective action of its drug rehabilitation
   patients may proceed under the Fair Labor Standards Act (“FLSA” or “the
   Act”), 29 U.S.C. § 201, et seq. Finding that the district court applied the
   correct legal standards and did not abuse its discretion in certifying a
   collective action, we AFFIRM.
Case: 22-20434          Document: 00516859682            Page: 2       Date Filed: 08/16/2023

                                          No. 22-20434

                                               I.
                                               A.
           Cenikor Foundation is a 501(c)(3) nonprofit rehabilitation center
   assisting individuals with alcohol and/or drug addiction, as well as behavioral
   health issues, with locations throughout Texas and Louisiana. At issue in this
   lawsuit is an adult long-term inpatient treatment program (“the Program”
   throughout) run by Cenikor, in which patients were assigned jobs and
   required to work. 1
           Cenikor describes the Program in therapeutic language, calling it
   “vocational therapy” which involves a “highly regulated regimen with
   clearly stated expectations for behavior and psychological and behavioral
   rewards,” including “morning and evening house meetings, job assignments,
   group sessions, seminars, personal time, recreation, and individual
   counseling.” Appellees describe Cenikor as a “staffing agency” who has
   “outsourced its patients through its Work Program to work for various
   private companies” to its benefit.
           The Program included three specific phases: orientation, primary
   treatment, and reentry. During the orientation phase, lasting up to 60 days,
   patients “learned the rules of the program, participated in group and
   individual therapy, and worked with counselors to develop an individualized
   treatment plan.” When patients entered the primary treatment phase,
   lasting 16 to 18 months, Cenikor added “vocational therapy and training to
   the patients’ program.” The “vocational therapy” took place either in
   Cenikor’s own facilities 2 or with one of the “community businesses” that
           _____________________
           1
               Since the summer of 2021, Cenikor had discontinued the Program.
           2
             The patients who worked within Cenikor’s facilities are not a part of the proposed
   collective.

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   partnered with Cenikor, and patients did not keep any of the money from
   their work. If patients reached the reentry phase, they were required to find
   full-time employment and arrange for a permanent residence and reliable
   transportation to complete the Program. It was only during this phase that
   patients began earning wages from their employer directly.
          Many long-term patients received treatment for free or at a reduced
   rate. All patients received access to room, board, food, clothing, security,
   counseling, transportation, and medical care during their tenure. Every
   patient signed a form explaining that Cenikor’s “comprehensive therapeutic
   treatment program includes work assignments as part of rehabilitation” and
   “[r]esidents receive no monetary compensation for assigned responsibilities
   in the facility, or any on-the-job training during the primary treatment
   phase.” By signing, the patients attested that “I further understand that
   under no circumstances can Cenikor be under any obligation to me; that I am
   a beneficiary and not an employee.” Instead of making money off their
   “vocational therapy,” patients attested that they understood that the funds
   paid to Cenikor “go directly back to the Foundation to help offset the cost of
   treatment services.” To further offset costs, Cenikor also required patients
   to apply for government assistance, such as food stamps, and assign those
   benefits to Cenikor.
          As part of the Program, Cenikor had contracts with community
   business partners (“outside businesses” throughout) to provide Program
   participants for particular jobs. These outside businesses were then billed by
   Cenikor for the hours worked by the Program participants. In 2017, Cenikor
   billed these outside businesses more than $7 million dollars for the labor of
   the Program participants. In 2018, Cenikor invoiced $6.9 million dollars to
   these outside businesses. Cenikor was paid directly for the labor provided by
   the Program participants at rates contractually agreed upon between Cenikor
   and the outside businesses.     In accordance with labor laws governing

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   overtime pay, Cenikor also charged outside businesses an overtime premium
   of 1.5 times the regular hourly rate when participants worked more than 40
   hours a week. 3
           Cenikor paid for workers’ compensation insurance for all Program
   participants and marketed this benefit to potential outside business partners.
   The Program did not vary across locations. Cenikor decided which outside
   businesses its patients were assigned to, and if an outside business wished to
   change the job duties of a patient, it was required to first obtain Cenikor’s
   permission to do so.
           If a patient refused a work assignment, they would be disciplined by
   Cenikor, up to and including termination from the Program and removal from
   the facilities. Cenikor’s intake forms specifically stated that if “unable to
   particulate” in the Program, participants would “be subject to termination
   from Cenikor.”
                                              B.
           In 2019, after the Center for Investigative Reporting published a series
   of podcasts and articles “reporting that Cenikor had sent thousands of
   individuals in Louisiana and Texas to work without monetary compensation
   at major companies such as Walmart, Shell, and ExxonMobil,” various
   plaintiffs filed six different lawsuits against Cenikor in three different federal
   district courts. Named plaintiff Klick filed the first suit in the Southern

           _____________________
           3
              The contract with the outside businesses regarding overtime pay provided:
   “Vocational workers are presumed to be nonexempt from laws requiring premium pay for
   overtime and holiday work, or weekend work.” (emphasis added). Although the contract
   clearly identified Cenikor’s patients as “nonexempt” from laws requiring premium pay, its
   CFO testified that it was intended to mean the patients were considered “volunteers.”
   However, Cenikor could and did bill these outside businesses overtime whenever a patient
   worked more than 40 hours in a week.

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   District of Texas, and all lawsuits were transferred to that court and
   consolidated on February 25, 2020. Shortly after the case was filed, the
   plaintiffs filed motions for conditional certification under the then-widely
   used framework for conditional certification established in Lusardi v. Xerox
   Corp., 118 F.R.D. 341 (D.N.J. 1987). Following this court’s decision in Swales
   v. KLLM Transp. Servs., LLC, 985 F.3d 430, 434 (5th Cir. 2021), which
   rejected the Lusardi framework, and because Plaintiffs indicated that they
   would file an amended motion for certification following pre-certification
   discovery, the district court found the pending motions were moot and
   denied them without prejudice.
          The parties then exchanged written discovery and held depositions of
   the named plaintiffs and a 30(b)(6) corporate representative of Cenikor. A
   total of 226 individuals consented to join the lawsuit as plaintiffs of the 2,736
   individuals that had participated in the Program since May of 2016.
          Following a renewed motion for certification, the district court
   certified a collective action under the FLSA. Specifically, the district court
   certified a “proposed class of individuals who participated in the primary
   phase of Cenikor’s long-term residential program from May 2016 to the
   present and performed work for outside businesses or individuals without
   monetary compensation.” Cenikor filed this interlocutory appeal pursuant
   to 28 U.S.C. § 1292 and now asks this court to reverse the district court’s
   decision to certify a collective action.
                                           II.
          This court reviews de novo the appropriate legal standard to apply
   when determining whether an individual is an employee under the FLSA.
   Swales, 985 F.3d at 439. Once the correct legal standard is ascertained, we
   review the district court’s decision certifying a collective action for abuse of
   discretion. Id. “A district court abuses its discretion if it bases its decision on

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                                     No. 22-20434

   an erroneous view of the law or on a clearly erroneous assessment of the
   evidence.” Hesling v. CSX Transp., Inc., 396 F.3d 632, 638 (5th Cir. 2005).
                                         III.
          The Fair Labor Standards Act of 1983 created “a comprehensive
   federal wage-and-hour scheme.” Aldridge v. Miss. Dept. of Corrs., 990 F.3d
   868, 871 (5th Cir. 2021). Congress enacted the FLSA to eliminate “labor
   conditions detrimental to the maintenance of the minimum standard of living
   necessary for health, efficiency, and general wellbeing of workers.” Id. The
   principal purpose of the Act is “to protect all covered workers from
   substandard wages and oppressive working hours.” Id. (quoting Barrentine
   v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739 (1981)). Workers
   covered under the Act are entitled to a minimum wage and overtime
   compensation. 29 U.S.C. §§ 206-07.
          “The FLSA protects employees (not independent contractors) ….”
   Swales, 985 F.3d at 434. Moreover, collective actions may only proceed
   under the FLSA so long as the potential members are “similarly situated.”
   Id. at 433. “District courts should ‘rigorously enforce [the FLSA’s similarity
   requirement] at the outset of the litigation.” Id. at 443. In determining
   whether “employees” are “similarly situated,” district courts must
   scrutinize all facts and legal considerations material to determining such
   status, including merits questions. Id. at 434, 441-42. Here, where a merits
   question is wrapped up in a threshold determination—whether the
   rehabilitation patients are considered employees entitled to compensation
   under the FLSA—the dispositive threshold issue must be resolved before a
   collective can be certified and notice can be sent. See id. at 441 (“The fact
   that a threshold question is intertwined with a merits question does not itself
   justify deferring those questions until after notice is sent out.”).

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                                         A.
          Cenikor argues that the district court applied the wrong legal standard
   to determine whether Cenikor’s patients were FLSA “employees.”
   Appellees argue that the district court properly applied binding Supreme
   Court precedent to the facts of this case in finding that the employment
   question may be decided on a collective-wide basis.
          Collective actions can be certified as to the very question of whether a
   specific group of individuals qualify as “employees” under the FLSA. See
   Hobbs v. Petroplex Pipe and Const., Inc., 946 F.3d 824, 828-29 (5th Cir. 2020).
   While the determination of whether an individual is an “employee” is a
   matter of law, there are often associated factual inquiries required before such
   a determination can be made. The ultimate determination turns on the
   “economic reality” of the relationship between the parties involved. See
   Tony & Susan Alamo Found. v. Sec’y of Lab., 471 U.S. 290, 301 (1985). While
   a finding of “whether a worker is an employee for FLSA purposes is a
   question of law,” Parrish v. Premier Directional Drilling, LP, 917 F.3d 369, 377
   (5th Cir. 2019), the “economic-reality” test requires the application of facts
   that may be in dispute, as they are here. See Hopkins v. Cornerstone Am., 545
   F.3d 338, 346 (5th Cir. 2008).
          Both parties agree that central to this analysis—whether Cenikor’s
   rehabilitation program participants are employees under the FLSA—is the
   Supreme Court decision in Tony & Susan Alamo Found. v. Sec’y of Lab., 471
   U.S. 290 (1985). We agree with the parties that Alamo should guide this
   determination. The Tony and Susan Alamo Foundation was a nonprofit
   religious organization that derived its income largely from the operation of
   commercial businesses staffed by the Foundation’s “associates,” most of
   whom were “drug addicts, derelicts, or criminals” before their rehabilitation
   at the Foundation. Id. at 292. These workers received no cash salaries, but

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   were provided with food, clothing, shelter, and other benefits. Id. The
   Secretary of Labor filed an action against the Foundation alleging violations
   of the minimum wage, overtime, and record keeping provisions of the FLSA.
   Id. at 293.
          The Supreme Court held that “[A]n individual who, without promise
   or expectation of compensation, but solely for his personal purpose or pleasure,
   worked in activities carried on by other persons either for their pleasure or
   profit, is outside the sweep of the act.” Id. at 295 (internal quotation omitted)
   (emphasis added). Although the associates themselves protested coverage
   under the Act, the Supreme Court determined this was not dispositive, since
   the test of employment under the Act is one of “economic reality.” Id. at
   301. The fact that the compensation was primarily in the form of benefits
   rather than cash was “immaterial” in this context, “such benefits being
   wages in another form.” Id. Since the associates received in-kind benefits
   and were dependent on the Foundation for long periods of time, the Supreme
   Court held that the district court did not clearly err in finding they were
   “employees” within the meaning of the Act. Id.
          Contrary to Cenikor’s arguments, the district court properly relied on
   Alamo in answering the threshold question of whether the patients are
   “employees” under the Act by certifying a collective that seeks to answer
   that question on the merits through ongoing litigation The district court
   noted that although the rehabilitation patients may have known they would
   not be monetarily compensated during the Program, “they nonetheless
   understood they would be provided with in-kind benefits.” It pointed to the
   Consent for Services agreement where program participants agreed to work
   for outside businesses and receive in-kind benefits, such as housing, food,
   medical care, and clothing. The district court thus found that the Program
   participants worked “in exchange” for in-kind benefits. The fact that the
   Program participants who made it to the reentry phase had to pay Cenikor

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   for rent and transportation fees provided additional support for the district
   court’s determination. The district court went on to distinguish this case
   from others relied upon by Cenikor, emphasizing that Cenikor collected
   nearly $14 million dollars from outside businesses for the labor of its Program
   participants within two years, that participants were required to work at risk
   of termination from the Program, could not possess money, and were
   economically dependent on Cenikor for 16 to 18 months.
          Cenikor relies on Williams v. Strickland, 87 F.3d 1064 (9th Cir. 1995),
   claiming that it modeled the language in its Consent for Services agreement
   after the language there. In Williams, a participant of the Salvation Army
   Rehabilitation Center brought claims that he was an employee under the
   FLSA during his six-month stay, in which he was offered room, board, work
   therapy, and spiritual counseling and engaged in a treatment plan in-house
   refinishing furniture sold through Salvation Army’s thrift stores. Id. at 1065.
   Williams signed a “Beneficiary’s Admittance Statement” that indicated the
   Salvation army was under no obligation to him and that he was a beneficiary,
   not an employee. Id. A majority of the Ninth Circuit held that he was not an
   employee because he had “neither an express nor an implied agreement for
   compensation with the Salvation Army and thus was not an employee.” Id.
   at 1067. However, we do not find Williams persuasive. Alamo and its
   predecessor cases explicitly hold that rights under the FLSA cannot be
   waived, see e.g., Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 704-05 (1945),
   and any forms patients sign indicating that they are beneficiaries and not
   employees do not control this analysis.
          Because the district court utilized Alamo in reaching its decision, it
   relied on the appropriate legal standard. Its threshold determination that the
   rehabilitation patients constitute “employees” under the Act because they
   worked in expectation of compensation was not an abuse of discretion.
   “[T]he district court needed to consider the evidence relating to this

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   threshold question in order to determine whether the economic-realities test
   could be applied on a collective basis.” Swales, 985 F.3d at 442. It properly
   did so here and found the merits question could be answered collectively
   based on ample evidence in the record from preliminary discovery.
                                          B.
          Cenikor also takes issue with the district court’s finding that the
   rehabilitation patients were “similarly situated” to each other for purposes
   of certifying a collective action. As noted, plaintiffs bear the burden of
   proving a collective is similarly situated. Swales, 985 F.3d at 442-43. The
   statute, however, does not define “similarly situated.” Id. at 435. As this
   court explained in Swales, “to determine if and when to send notice to
   potential opt-in plaintiffs,” “a district court should identify, at the outset of
   the case, what facts and legal considerations will be material to determining
   whether a group of ‘employees’ is ‘similarly situated.’” Id. at 441.
          A showing that members of a collective action are similarly situated
   does not require members to be identically situated but requires plaintiffs to
   show a demonstrated similarity between the purported collective, such as a
   factual nexus that binds the claims together so that hearing all claims in one
   proceeding is fair to all parties and not beset with individual inquiries. See id.
   at 443. This necessarily requires a consideration of proposed defenses to
   determine whether they are so individualized that denial of certification is
   required.
          After the completion of preliminary discovery, the district court
   determined that the evidence and testimony showed that the key aspects in
   determining the ultimate merits question of whether an employer/employee
   relationship exists may be determined on a collective-wide basis because: (1)
   all patients signed the same paperwork disclaiming employee status and
   stating they would not be paid during the primary phase; (2) the paperwork

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   promised that Cenikor would provide all basic personal needs including
   housing, food, emergency medical care, and clothing; (3) all plaintiffs agreed
   to perform work to receive these in-kind benefits; (4) all program participants
   received their work assignments and schedules from Cenikor; and (5) all
   plaintiffs were subject to the same organization-wide policies and procedures
   irrespective of location. The district court ultimately concluded that it could
   determine collectively the central question whether the primary phase
   participants were employees under the FLSA because all proposed members
   were subject to a company-wide policy in which they performed labor
   without monetary compensation.
                                         C.
          Cenikor next argues that its rehabilitation patients are not similarly
   situated because the district court handled its defenses in a way that
   contravenes Swales.     Appellees argue that the district court correctly
   determined that these defenses could be addressed collectively.
          Turning to Cenikor’s three proposed defenses — the Motor Carrier
   Act (“MCA”) exemption, the offset defense, and the Rooker-Feldman
   doctrine — the district court properly concluded that these defenses were
   either inapplicable or that Cenikor had not, at this stage, demonstrated they
   would require individualized inquiries.
          To qualify for the MCA exemption, a loader aka “an employee of a
   carrier” must have duties that include, “among other things, the proper
   loading of his employer’s motor vehicles.” 29 C.F.R. § 782.5(a) (emphasis
   added). Here, there is no allegation that any of the outside businesses were
   the patients’ employer. Instead, Cenikor is the sole employer defendant.
   Accordingly, the MCA defense does not apply to any individual patient.
          Regarding the offset defense, the district court noted plaintiffs’
   argument that the calculations could be completed on a class-wide basis – “by

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   subtracting aggregate costs from aggregate payments and dividing by the
   number of participants to determine an average.” Because these benefits
   could be deducted in a uniform manner, they should not warrant
   individualized inquiries.
          Finally, as to the Rooker-Feldman doctrine, the Fifth Circuit
   recognizes, in conformity with the Supreme Court, that Rooker-Feldman is a
   narrow jurisdictional bar. See Truong v. Bank of America, N.A., 717 F.3d 377,
   381-82 (5th Cir. 2013) (citing Exxon Mobil Corp. v. Saudi Basic Indus. Corp.,
   544 U.S. 280, 284 (2005)). The doctrine applies only “where a party in
   effect seeks to take an appeal of an unfavorable state-court decision to a lower
   federal court.” Lance v. Dennis, 546 U.S. 459, 466 (2006). Here, this
   doctrine has no bearing on the alleged FLSA claims. Appellees are not “state
   court losers” who are challenging state court decisions that require them to
   attend Cenikor’s rehabilitation treatment center in lieu of serving jailtime.
   Rather, they are challenging Cenikor’s decision not to pay them for their
   labor in violation of federal law.
          Here, the claims and defenses largely turn on the same question:
   whether the rehabilitation patients are employees under the FLSA. The
   district court applied the correct legal standard to determine if plaintiffs were
   similarly situated in applying Swales. Furthermore, the district court did not
   abuse its discretion in considering Cenikor’s defenses and determining that
   merits determinations could be considered collectively.
                                            D.
           Finally, Cenikor argues that the district court erred in requiring it to
   provide the contact information of patients to provide notice of the lawsuit
   because federal privacy laws strictly forbid such disclosure without good
   cause. Appellees counter that they have satisfied the good cause standard
   required to permit disclosure of patients’ names and contact information.

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          Disclosure of patient records in federally funded drug and alcohol
   abuse treatment programs is governed by the Substance Abuse and Mental
   Health Services Act (“SAMHSA”). Cenikor is correct that federal law
   prevents disclosure of records containing the identity of patients maintained
   in connection with the performance of any program or activity relating to
   substance abuse treatment. See 42 U.S.C. § 290dd-2(a); 42 C.F.R. §§ 2.11-
   13.   However, § 290dd-2 permits disclosure of patient identifying
   information if authorized by “an appropriate order of a court.” 42 U.S.C. §
   290dd-2(b)(2)(C). A party seeking disclosure must establish good cause by
   showing that: (1) other ways of obtaining the information are not available or
   would not be effective; and (2) the public interest and need for the disclosure
   outweigh the potential injury to the patient, the physician-patient
   relationship, and the treatment services. 42 C.F.R. § 2.64(d).
          Good cause for notice is satisfied here. As the district court found,
   although Cenikor points to “publicized news articles and social media posts”
   as alternatives to obtain the names and contact information, these attempts
   previously only yielded 226 out of 2,736 individuals who participated in the
   Program, and thus have not been particularly effective. Additionally, the
   public interest in enforcing federal labor laws against employers who violate
   them outweighs potential injury to the patient and/or physician-patient
   relationship, especially where the Program no longer exists as of 2021 for
   such relationships to exist. The district court also imposed appropriate
   safeguards to protect against unauthorized disclosures by entering a
   protective order. Accordingly, the district court did not err in requiring
   Cenikor to send notice to potential opt-in plaintiffs.
                                         IV.
          Here, the district court applied the correct legal standards to this case
   in its reliance on Alamo and Swales and appropriately concluded that it could

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   decide the central question of whether the Program participants were
   employees under the FLSA who were entitled to compensation collectively.
   We find no abuse of discretion.
         AFFIRMED.

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