O'Brien v. Smoothstack, Inc.

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JUSTIN O'BRIEN, on behalf of himself and all others similarly situated, Plaintiff, v. SMOOTHSTACK, INC., Defendant,

Civil Action No. 1:23-cv-491 (RDA/LRV)

United States District Court, E.D. Virginia, Alexandria Division

March 28, 2024

MEMORANDUM OPINION AND ORDER

ROSSIE D. ALSTON, JR. UNITED STATES DISTRICT JUDGE

This matter comes before the Court on Defendant Smoothstack Inc.'s (“Defendant”) Motion to Dismiss (Dkt 21) and Plaintiff Justin O'Brien's (“Plaintiff”) Motion for Court-Authorized Notice Pursuant to 29 U.S.C. § 216(b) (Dkt. 32). This Court has dispensed with oral argument as it would not aid in the decisional process. Fed.R.Civ.P. 78(b); Local Civil Rule 7(J). This matter has been fully briefed and is now ripe for disposition.

Considering Defendant's Motion to Dismiss (Dkt. 21), Defendant's Memorandum in Support (Dkt. 22), Plaintiff's Opposition (Dkt. 27), and Defendant's Reply (Dkt. 28), as well as Plaintiff's Motion for Court Authorized Notice (Dkt. 32) Plaintiff's Memorandum in Support (Dkt. 33) Defendant's Opposition (Dkt. 39), and Plaintiff's Reply (Dkt. 40), it is hereby ORDERED that Defendant's Motion to Dismiss (Dkt. 21) is GRANTED, and Plaintiff's Motion for Court-Authorized Notice (Dkt. 32) is GRANTED-IN-PART and DENIED-IN-PART for the reasons that follow.

I. BACKGROUND

Before setting forth the factual and procedural history of the instant case, the Court will provide an overview of the statutory and regulatory background relevant to the instant motions.

A. The Fair Labor Standards Act

Congress enacted the Fair Labor Standards Act (“FLSA”) to put an end to “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers,” 29 U.S.C. § 202(a), and to ensure that workers receive “a fair day's pay for a fair day's work,” A.H. Phillips, Inc. v. Walling, 324 U.S. 490, 493 (1945). The “FLSA establishes federal minimum-wage, maximum-hour, and overtime guarantees that cannot be modified by contract.” Genesis Healthcare Corp. v. Symczyk, 569 U.S. 66, 69 (2013). The FLSA requires that “employers pay their employees at least the federal minimum wage and provide them overtime in the amount of one and one-half times their regular rate of pay for each hour worked beyond forty hours in a given work week.” Ketner v. Branch Banking & Tr. Co., 143 F.Supp.3d 370, 374 (M.D. N.C. 2015) (citing 29 U.S.C. §§ 206(a)(1), 207(a)(1)). Pursuant to the Department of Labor's guidance with regard to the FLSA, an employer must also pay wages “free and clear,” meaning that:

Whether in cash or in facilities, “wages” cannot be considered to have been paid by the employer and received by the employee unless they are paid finally and unconditionally or “free and clear.” The wage requirements of the [FLSA] will not be met where the employee “kicks-back” directly or indirectly to the employer or another person for the employer's benefit the whole or part of the wage delivered to the employee.

29 C.F.R. § 531.35. A “free and clear” claim is only cognizable where the effect of the condition complained of would actually reduce the employees' wages below minimum wage. Franks v. MKM Oil, Inc., No. 10 CV 00013, 2010 WL 3613983, at *4 (N.D. Ill. Sept. 8, 2010).

The FLSA also contains a collective action provision that allows employees to bring collective actions against their employers on behalf of themselves and those similarly situated. 29 U.S.C. § 216(b). The purpose of this provision is “to allow workers to lower individual costs to vindicate rights by the pooling of resources,” and to increase judicial efficiency. Hoffmann-La Roche, Inc. v. Sperling, 493 U.S. 165, 170 (1989); Gagliastre v. Capt. George's Seafood Rest., LP, No. 2:17CV379, 2018 WL 9848232, at *2 (E.D. Va. Mar. 13, 2018), modified on clarification, No. 2:17CV379, 2018 WL 9848233 (E.D. Va. June 14, 2018).

B. Factual Background^[1]

On April 13, 2023, Plaintiff commenced this action on behalf of himself and all others similarly situated, seeking unpaid minimum wages and unpaid overtime pay pursuant to the FLSA, a declaratory judgment that Defendant's practices are illegal, and backpay. Three other individuals have since “opted in” to this case. Dkt. Nos. 31; 41. Defendant owns and operates a staffing company that recruits information technology (“IT”) workers (“Recruits”) who are in the early stages of their careers, provides them with training, and then places them with new clients mainly in Fortune 500 companies. Dkt. 19 ¶ 1. Once the Recruits are placed with clients, they become “Consultants.” Id. ¶ 3

Plaintiff was employed by Defendant beginning in the Spring of 2020. Id. ¶ 29. Plaintiff alleges that Defendant recruits young professionals with promises of jumpstarting their careers but does not live up to those promises. For example, Plaintiff alleges that Recruits are told that they will receive paid training followed by placement at a Fortune 500 company. Id. ¶¶ 1-2. But Plaintiff contends that, in reality, Defendant requires that Recruits complete “14-15 weeks” of training, for which the first 2-3 weeks of training is unpaid, and the rest is underpaid. Id. ¶¶ 8; 11; 64; 139. During the first 2-3 weeks of training, Plaintiff claims that Recruits work more than 40 hours, and that company-wide policy does not allow them to record their hours, regardless of how many hours are worked. Id. ¶ 126. Plaintiff further alleges that during the rest of the training period, Recruits are paid minimum wage for 40 hours a week, though they often work many more hours than that. Id. ¶¶ 9, 11, 63, 65-67, 101-03. For instance, Plaintiff claims that Recruits can work more than 80 hours a week and are required to: (i) attend online classes after work hours; (ii) attend meetings before normal business hours; and (iii) complete weekend assignments. Id. ¶¶ 8, 103-21. Plaintiff also claims that Recruits work around the clock to complete various assignments, and that they were required to perform their own research to teach themselves how to complete the assignments. Dkt. 33 at 6-7. However, Plaintiff alleges that their pay is capped at 40 hours per week. Dkt. 19 ¶ 101. Thus, Plaintiff claims that Recruits are paid under minimum wage. According to Plaintiff, the Training Program is the same for all Recruits nationwide. Id. ¶¶ 6-9. Plaintiff also alleges that, during these long hours of training, Recruits did not receive any “generally marketable” training, credentials, licenses, or degree upon completion as the training focused heavily on Defendant's “own needs.” Dkt. 27 at 1.

Further, as part of the program, Plaintiff alleges that Defendant requires that Recruits sign a Training Repayment Agreement Provision (“TRAP”) at various stages of their employment. Plaintiff alleges that Recruits are first required to sign a TRAP shortly after they are hired as a condition of their continued employment. Dkt. 19 ¶¶ 16-17. The TRAP provides that Recruits are required to bill 4,000 hours of client work, approximately two years of full-time work, before they have met their obligation to Defendant. Id. If a Recruit fails to abide by the TRAP, he or she is required to pay Defendant a penalty in the range $24,000-$30,000. Id. The TRAP states that the purpose of this penalty is to offset Defendant's costs for training the Recruits as well as “marketing[] and on-boarding,” the “cost to train replacements, the cost associated with interruption of work on a project, loss of goodwill, and potentially, loss of income generating projects.” Id. ¶¶ 127, 149-51. Thus, Plaintiff contends that his paycheck and the paychecks of those in his putative collective are contingent upon remaining employed at Defendant through the next pay period. Once Recruits become Consultants, and before they are placed with one of Defendant's clients, they must sign an Employment Agreement that contains another TRAP that is nearly identical to the initial TRAP. Id. Plaintiff alleges that, as a result of the TRAP, Recruits cannot quit their jobs during the training and that Consultants cannot quit their job during their first few years working with a client without paying thousands of dollars in penalties. Dkt. 33 at 8. As a result, Plaintiff claims that his wages and the wages of those similarly situated were not paid “free and clear” in violation of the FLSA. Dkt. 19 ¶ 129.

Plaintiff also claims that, due to the TRAP, both Recruits and Consultants live under threat that their wages will be scaled back if they quit or if they are fired for cause. Plaintiff further alleges that Defendant warns Recruits and Consultants that it will sue to enforce the TRAP. Dkt. 33-2 ¶ 17 (“O'Brien Decl.”). Thus, according to Plaintiff, the imposition of the TRAP brings Recruits' and Consultants' wages well below minimum wage. Dkt. 19 ¶¶ 141, 147-48. Finally, Plaintiff alleges that Defendant uses coercive tactics to pressure its workers to sign broad separation or settlement agreements that restricts them from disclosing the contents of their agreements and their experiences working for Defendant. Id. ¶ 5.

C. Procedural Background

Plaintiff filed his initial complaint on April 13, 2023, on behalf of himself and all other similarly situated workers. Dkt. 1. On May 12, 2023, Defendant filed its first Motion to Dismiss. Dkt. 13. On May 23, 2023, the parties jointly stipulated to dismiss Counts III, V, and VI of the initial complaint, and on May 25, 2023, Plaintiff filed his Amended Complaint. Dkt 19. On June 6, 2023, Defendant filed a Motion to Dismiss Count III of Plaintiff's Amended Complaint, Dkt. 21, along with its Memorandum in Support, Dkt. 22. Plaintiff filed his Opposition on June 20, 2023 and Defendant filed its Reply on June 26, 2023. On July 31, 2023 Pl...