Management May Face Claims Under RICO For Wage Violations

I remember several years ago writing about Brown v Cassens Transport Co, an opinion by the U.S. Court of Appeals for the Sixth Circuit. In that case, the appellate court approved claims under the federal Racketeer Influenced and Corrupt Organizations Act (RICO) against an employer when it, allegedly, along with a clinic and the worker’s disability compensation carrier, interfered with employees’ rights to receive benefits under the Michigan’s Worker’s Disability Compensation Act.

RICO is the law passed in 1970 to fight organized crime and that sent former Detroit Mayor Kwame Kilpatrick to federal prison for 28 years in 2013. Now, the federal appellate court has indicated that violations of the Fair Labor Standards Act (FLSA) may also violate RICO. You are going to want to see how this played out in Torres v Vitale, et al, to make sure you never cross the line!

Over the course of nearly two decades, Plaintiff Emilio Torres was an employee of Vitale’s Italian Restaurant in Grand Rapids and at two of its other five restaurant locations in western Michigan. The individual defendants are Salvatore Vitale (owner), Belinda Pierson (manager), Agostino Viatale, Angela LoGiudice-Polizzi and Giuseppe Polizzi (collectively referred to as the Vitale’s by the court).

The plaintiff alleges that he and other Vitale employees often worked more than 40 hours a week, but they were not paid time and a half their regular rate of pay for those extra hours.

Each week the employees turned in two timecards. The first timecard tracked time worked up to 40 hours and the second timecard tracked all time worked that week over 40 hours. Employees received a paycheck for the first time card and cash (at the regular rate of pay) for the hours reported on the second “overtime” card.

I know, by now all of you are shaking your heads wondering how the defendants thought this wouldn’t catch up with them. I have to admit, in nearly 30 years, I have never heard of such a scheme. Usually wage violations just involve misclassifying employees or not reporting or paying for all hours worked. But to actually have the employees create secondary timecards, evidence, of the unlawful scheme, well that’s a first for me.

This system was maintained until a customer threatened to report the owner for failing to pay overtime. After that, Pierson instructed the employees to take their second timecards home each night until the weekend, when they were to bring them to Pierson’s home, and she would pay them in cash (at their regular rate of pay) for the overtime hours the following Monday. Until the customer confronted Salvatore, the plaintiff alleges he did not question the restaurant’s practices.

In May 2018, the plaintiff filed his first lawsuit against the restaurant and its leadership. It was filed as a collective action under the Fair Labor Standards Act on behalf of a class of employees who were harmed by the timekeeping and wage practices. This lawsuit alone would be very expensive and devastating to the restaurant.

But, the case I am writing about is the plaintiff’s second class action lawsuit. This one was brought under RICO. The language in this case is so good at painting the picture that I am just going to quote from it. Plaintiff asserted several unlawful civil RICO violations, including:

(1) a tax evasion scheme through which Vitale’s defrauded local, state, and federal authorities in order to avoid paying tax withholdings; (2) a wage-theft scheme in which the two-timecard system was used to intentionally defraud the employees of proper wages; and (3) a worker’s-compensation-insurance scheme, through which Vitale’s defrauded its insurance carriers by submitting fraudulent wage amounts to the carriers that were relied upon in calculating insurance premiums. These schemes, [plaintiff] contends, amount to RICO violations through mail and wire fraud of the federal government, the state government, the city governments, the employees, and the insurance carriers.

[Plaintiff] maintains that the conduct of the Vitale’s amounted to a common illegal enterprise, the purpose of which was to defraud tax authorities, employees, and insurance carriers in order to realize greater profits. To further its fraudulent scheme, Vitale’s allegedly committed mail fraud and wire fraud by sending fraudulent pay stubs, W-2 forms, paychecks, and other documents through the mail and the wires. Finally [Plaintiff] contends that the mail fraud and wire fraud constituted a pattern of racketeering activity as required for a civil RICO claim. He sought certification of a class of all current and former employees of the three Vitale’s restaurants, where he had worked who had been paid in cash.

As [Plaintiff] sees it, Vitale’s engaged in tax evasion by under-reporting the hours its employees worked and failing to pay the required withholdings to tax authorities on the cash payments made for hours recorded on the second timecard. Similarly, [plaintiff] claims that Vitale’s decreased the employees’ taxable income by not properly reporting the cash payments to the tax authorities. According to [plaintiff], the effect of this under reporting was to expose him to tax liabilities and penalties and decrease his future social security benefits.

Those two last sentences (in bold) turn out to be key. There is more about the two-timecard system that is alleged and how every direct deposit that did not accurately reflect the wages earned amounted to wire fraud and the yearly W-2 forms amounted to mail fraud, and the insurance fraud, etc. You get the picture. It sounds serious. It is.

The district court dismissed the claims based, in part, because it concluded that the FLSA was the exclusive remedy for violations of the federal wage law and precluded RICO claims based on the same underlying conduct. The plaintiff appealed.

The appellate court took a deep dive into the legal analysis that I won’t bore you with and concluded that the FLSA is the sole remedy for federal minimum wage and overtime violations – but only for those violations. The preclusive effect of the FLSA does not bar other suits for other damages even when the underlying conduct in those claims also violates the FLSA.

But, does the FLSA preclude a RICO suit? To answer this question, the appellate court took another deep dive and concluded “that the FLSA preclude [sic] RICO claims to the extent that the damages sought are for unpaid minimum or overtime wages.”

Can you imagine the emotional roller coaster? Just when the defendants may have breathed a sigh of relief, another deep dive was initiated.

The appellate court noted, however, “when a RICO claim that is based on a dispute between an employer and an employee alleges damages that are distinct from unpaid wages, even if the RICO-predicate act arises from conduct that also violates the FLSA, then the RICO remedies do not fall within the ambit of the FLSA’s remedial scheme and are therefore not precluded.”

The appellate court then turned to whether this plaintiff’s claims survive. It found that the claim for underpayment of overtime wages was property dismissed because these are the same damage claims and the same remedy sought under the FLSA.

With regards to the plaintiff’s claim that Vitale’s falsely reported payroll to the worker’s disability compensation insurance carrier in order to defraud it, thus lowering its premiums, this was not harm that plaintiff, himself, suffered. The court noted that the insurance carriers may have more to say about this, but this claim was also properly dismissed as precluded by the FLSA.

Finally, by Vitale’s under reporting wages in order to avoid taxes, plaintiff and the other employees “were deprived of the employer’s half of the social security payments and were subjected to tax liabilities.” These are different damages than sought under the FLSA and harms that plaintiff and the other employees (not a third party) suffered. Thus, the court concluded that it could not say that this was a claim precluded by the FLSA. It may state a viable claim under RICO.

However, because the parties had not briefed this specific issue, the court declined to rule and remanded it for further consideration by the lower court. All that build up with no final resolution. Sorry., But given the appellate court’s analysis, it seems likely that the plaintiff’s RICO claim would be valid.

While these facts are fairly unusual, to say the least, the same analysis and damage claim could apply where there is a conspiracy that prevents employees from receiving their full pay and the resultant employer’s share of the Social Security contributions. The harm seems to naturally flow from any wage violation. The issue may be whether there was a conspiracy.

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