Federal Judge Timothy Brooks Friday evening granted a summary judgment in favor of plaintiffs in a lawsuit alleging state minimum wage law violations in Hendren Plastics’ use of unpaid labor at its plastics factory in Gravette.
Brooks’ harshly criticized Hendren Plastics, headed by Sen. President Pro Tempore Jim Hendren and the drug rehab agency, DARP, for acting in bad faith by avoiding law compliance in their own self-interest. He said they had manipulated the labor market.
The award could potentially be as high as $1.2 million — $636,317 for unpaid wages and liquidated damages in that amount. John Holleman, one of the winning attorneys, said the judge has asked for more legal briefs on whether Hendren and DARP are entitled to a 30-cent-an-hour credit against wages, or about $22,000, for in-kind benefits — room, board and transportation. They also will be asked to offer evidence that stipends were paid to participants in the program for successful completion of work stints. DARP has claimed on tax returns that it paid almost $179,000 in stipends from 2014 to 2018. But it won’t total that amount in this case, Holleman said, because that DARP figure covers payments for other workers in Oklahoma who didn’t work at Hendren. Holleman commented that the couple that operated DARP paid themselves $517,000 during that time period.
The prevailing attorneys will be seeking fees once the case is concluded.
Sen. Jim Hendren responded:
We are very disappointed with the judge’s ruling. It is especially shocking that he would not even allow us an opportunity to present our case to a jury. We will be appealing this decision not only because our attorneys have told us it is clear that it conflicts with the law and with numerous precedents across the country, but also because I continue to believe that rehabilitation and recovery efforts are preferable to filling our prisons with nonviolent drug and alcohol offenders. Rather than obtaining help recovering from addictions as well as work force training and employment opportunities, this ruling will ensure offenders will fill our already full prisons and jails where they will be far more likely to become career criminals. I do not regret trying to help when asked by Arkansas Courts to provide people a second chance for people who want to turn their lives around. It is undisputed that Hendren Plastics paid more than minimum wage for every hour worked. I do regret that our justice system has been so abused. However we are confident justice will prevail in the end.
Timothy Steadman, another of the plaintiffs’ lawyers, said:
We are incredibly gratified with Judge Brooks’ decision in this important case. Although Arkansas drug courts are an important tool to help vulnerable Arkansans who are battling addiction, it is important to note that DARP admits it did not provide drug and alcohol treatment, and it was not licensed to provide any such treatment. The Arkansas Minimum Wage Act exists to protect Arkansas’s citizens and prevent unfair competition among business. Participants in drug court should not be turned into an unpaid labor source for “unashamedly for-profit” manufacturers like Hendren Plastics. We look forward to continuing to fight to make sure that justice is done for our clients and the class members.
Workers were assigned to a rehabilitation program in Decatur by the local drug court as an alternative to prison.
The practice of using free labor from rehab agencies has become the focus of court battles in both Oklahoma and Arkansas after investigative reporting that suggested the workers were kept in poor conditions and got little in the way of rehabilitation other than work. Last week, a federal judge in Oklahoma allowed a suit to go forward against Simmons Industries, a major poultry producer in Northwest Arkansas. That claim was originally part of the action including Hendren Plastics, but it was severed and moved to Oklahoma.
Hendren has said he paid the equivalent of the state minimum wage to DARP, but didn’t know what arrangement it had with workers. He defended the arrangement, but he terminated it in October 2017 after lawsuits were filed.
Brooks had certified the case against Hendren as a class action for work back to 2014. Hendren had fought that and the motion for summary judgment with one of his own.
Brooks’ order concluded the workers met the definition of employees and they should have received the minimum wage, even though Hendren said he paid the equivalent amount to DARP based on time clock records. The workers had signed an agreement acknowledging they would not be paid.
Hendren argued that neither the plastics company nor DARP should be viewed as employers under federal law. And, Hendren said, even if so, the DARP had a valid order from drug court to withhold payment to workers in return for participation.
Brooks reached back for precedent to a case decided against the Tony Alamo Foundation for workers who’d toiled for the felonious late evangelist without pay.
From this, the Court identified a test for determining whether a self-avowed volunteer—like an Alamo Foundation associate—should nonetheless be considered an employee under the FLSA. If the worker expected to receive compensation in the form of in-kind benefits in exchange for their work, then the worker was an employee under the law, regardless of the worker’s subjective expectation of cash wages.
Hendren tried to differentiate its situation from the Alamo case, but Brooks wasn’t persuaded. He said it was a joint employer with DARP and thus responsible.
Hendren claims in its brief in support of summary judgment that “[u]nlike the Alamo case, Hendren Plastics was not involved in a scheme to obtain low-cost labor for an indefinite period in an effort to obtain a competitive advantage—a key consideration in the passage of the FLSA.” The evidence proves otherwise. Hendren’s contractual dealings with DARP generated a captive workforce that Hendren paid less than its entry-level employees and significantly less than workers Hendren periodically sought from temporary employment agencies. Hendren also benefited by avoiding the expense and administrative costs involved in paying DARP’s workers’ Social Security taxes, Medicare taxes, federal and state unemployment insurance, and worker’s compensation insurance. In other words, Hendren saved money by hiring DARP residents, who, in turn, displaced private-sector workers Hendren would have ordinarily paid a higher rate of pay (along with mandatory state and federal taxes and insurance withholdings).
As for DARP, its residents directly competed with private citizens in the Arkansas labor market for employment at Hendren, and DARP directly competed with temporary employment agencies supplying such a workforce. The undisputed facts show that DARP provided local businesses like Hendren with a workforce paid at a much cheaper rate than the employment agencies provided. This was because DARP negotiated rates of pay for their residents’ labor that profited DARP and the local businesses, and by entering into such contracts with DARP, the businesses could avoid paying employment taxes and making state and federal employment insurance withholdings.
DARP also argued it was good public policy to have such arrangements because its program diverted people from prison.
The Court does not share DARP’s views. DARP’s claim that its business model is the only viable one for residential substance abuse programs is unsupported by any evidence, financial or otherwise. More importantly, DARP’s position ignores the strong public policy reasons behind the implementation of the AMWA [minimum wage act], which are: to establish minimum wages for workers in order to safeguard their health, efficiency, and general well-being and to protect them as well as their employers from the effects of serious and unfair competition resulting from wage levels detrimental to their health, efficiency, and well-being.
Brooks observed, too, that workers had little choice but to agree to the unpaid labor, lest they go to prison.
Finally, the undisputed facts reveal that DARP’s power was jointly held with Hendren, as Hendren also held the keys to the prison cell, so to speak, through its ability to notify DARP whenever a worker performed unsatisfactorily and would not be permitted to return to work.
The above analysis brings the Court to the common-sense conclusion that businesses that profit from the labor of non-incarcerated drug addicts must still comply with the AMWA’s strict requirements.
The Court also observes that the Defendants were not operating as charities. They were businesses that manipulated the labor market and skirted compliance with the labor laws for their own private ends. Consequently, they are jointly and severally liable under the AMWA for their failure to pay minimum-wage and overtime compensation to the class.
The court rejected Hendren’s argument that the firm shouldn’t be liable because the drug courts tacitly agreed to the arrangement.
Of course, Hendren can point to no evidence to show the state ever audited DARP or was provided with a copy of the Contract Labor Agreement that DARP and Hendren entered into to avoid paying wages and associated payroll taxes. There is no evidence to show that state drug court judges were personally aware of the details of DARP’s and Hendren’s business arrangement.
The most that can be assumed from the facts in the record is that drug court judges referred participants to DARP’s program because they trusted DARP to comply with state and federal law, i.e., by calculating the workers’ minimum hourly and overtime wages earned, and then subtracting from those totals the reasonable value of in-kind services that were deductible by law. However, the record indicates that DARP has yet to calculate the value of its in-kind services and has not considered how much of a deduction from wages it may reasonably take under the law. Instead, DARP has simply assumed that its residents are not employees and are not entitled to cash wage.
Hendren’s argument that state law allows defendants to be charged for cost of their care is not the same as saying their wages may be reassigned to DARP, saying, ” the Court has not been presented with any objective data to demonstrate the program’s costs in relation to the cash wages the class members would have earned during the relevant class period.
Hendren tried to invoke a 2019 law that removed a cap of 30 cents an hour on the amount a rehab agency may deduct from worker pay to offset in-kind services. The judge said that law couldn’t apply retroactively. We wrote of that law change at the time and opponents’ argument that it was meant to help Hendren and passed under false pretenses. Rep. Robin Lundstrum described the bill as a “cleanup.” Hendren said at the time he had no role in its passage.
The judge said plaintiffs were entitled to damages equal to the full amount of regular and overtime pay earned. He said the defendants had not acted in good faith in complying with the minimum wage law. DARP knew it was out of step with every other facility in the state in its pay scheme. It was clear, the judge said, it was operating in its own self-interest and had “no honest intention” to follow the law.
The judge was equally harsh on Hendren.
As for Hendren, it contends that it acted in good faith because it paid DARP for the class members’ labor. This might be a good argument if Hendren had reasonably believed its payments to DARP were being passed along to the class members as cash wages. But as the Court explained above in section III.C.1, Hendren knew full well that its labor payments were not being passed through to the class members in the form of wages. Hendren understood that its payments to DARP were being used to offset the program’s operating expenses. And while the Court accepts at face value the notion that Hendren had altruistic reasons for partnering with DARP in support of its mission, the Court believes that Hendren was also motivated by its own economic interests––including less expensive hourly labor rates and avoidance of payroll taxes and worker’s compensation premiums. The Court therefore finds that Hendren’s payments to DARP in exchange for a supply of laborers does not sufficiently demonstrate a good faith and reasonable basis for believing that it was complying with Arkansas’s wage and hour laws.
Hendren’s next argument is that it acted in good faith because its owner, Jim Hendren, “spoke to a sitting judge and was assured this program was appropriate and beneficial to society.. The Court does not credit this argument. The remark that Mr. Hendren attributes to Circuit Judge Tom Smith (Benton County’s presiding judge over juvenile cases and drug court programs) was made with regard to the merits and community need for programming––including DARP’s––that offers drug offenders alternatives to incarceration. The context of the conversation does not support the notion that Mr. Hendren was trying to ascertain whether DARP’s program complied with the AMWA. Moreover, judicial officers are not permitted to dispense private advisory opinions on regulatory compliance matters. It was unreasonable for Mr. Hendren to have thought back then––much less argue now––that Judge Smith’s passionately held beliefs about alternatives to incarceration in the context of a private conversation) were somehow intended as an assurance that Hendren’s arrangement with DARP complied with Arkansas’s wage and hour laws.
In addition to the workers’ lawsuits, the ACLU has sued DARP for alleged human trafficking and Hendren had filed a defamation lawsuit against Timothy Steadman, one of the lawyers in this case, for equating the unpaid labor scheme to slavery. But that suit was dismissed by joint agreement, with each side agreeing to pay its own legal fees.