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Labor Secretary Wars Against Litigator Over Obama Wage Cases

Oct. 26, 2020, 2:49 PM

The whistleblower complaint that the Labor Department’s top West Coast litigator filed against Labor Secretary Eugene Scalia this summer is far broader than previously disclosed, with roots in the Obama-Trump policy divide and one of the most controversial enforcement issues in employment law.

The complaint Janet Herold lodged with the U.S. Office of Special Counsel in August alleges that Scalia ordered her transfer to a non-legal post in Chicago “in part due to her wage-and-hour work, including her work on the misclassification of workers as independent contractors,” her attorney, Alexis Ronickher, told Bloomberg Law.

When Herold’s lawyers first announced the complaint, they revealed that the Obama-era career appointee, who serves as regional solicitor for San Francisco and head of branch offices in Los Angeles and Seattle, believes she’s being retaliated against for accusing Scalia internally of trying to inappropriately intervene in the department’s pay-discrimination case against Oracle Corp. Scalia has denied taking any improper action in the case, which a DOL judge recently decided in the tech giant’s favor.

But the full extent of Herold’s claim, reported here for the first time because the OSC hasn’t made it public, exposes a rift over the fate of DOL’s Obama-era crackdown on employers that improperly classify workers as independent contractors, rather than employees who are owed minimum wage and overtime protections.

Herold was one of the architects of the Obama DOL’s push to aggressively pursue misclassification and “wage theft” lawsuits, and she has continued that quest under President Donald Trump, according to 15 current and former DOL officials and six attorneys who have been on the receiving end of Herold’s work.

That put her on a collision course with Scalia, who took the reins at DOL a year ago and has directed a more conciliatory, business-friendly stance on wage-and-hour enforcement.

Scalia is spearheading an effort to finalize a rule that would make it easier for businesses to classify workers as independent contractors—a regulation that would have significant ramifications for gig workers and businesses nationwide.

Yet at the same time, Herold and lawyers under her command are forging ahead with multiple prosecutions that embrace the Obama-era standard that most workers are employees.

Decision by Thanksgiving

In one pending case, in which an Arizona delivery company is on the hook for about $30 million in back pay for drivers allegedly misclassified as contractors, DOL political leaders have been scrutinizing Herold’s work, according to court records and four sources familiar with the suit.

DOL attorneys in Washington have taken the rare step of making detailed edits to pleadings before Herold was permitted to file them in court, the sources said.

“What is it these politicals are trying to make sure of?” said Michael Felsen, who was DOL’s regional solicitor in Boston before retiring in 2018.

“Are they making sure Janet is in fact enforcing the law as the law is now, as she should? Or are they making sure that she doesn’t enforce it in a way that might upset their principal constituency, which maybe is dominated by the business community? I suspect the latter, frankly,” Felsen added.

The Labor Department declined to comment for this article. A DOL spokesman told Bloomberg Law in September that Herold was being transferred for “legitimate reasons that are in the best interest of the Department.”

Herold deferred questions to her attorney.

Ronickher, a partner at Katz, Marshall & Banks, said Herold “was specifically told when she was reassigned that the reassignment was not due to performance.”

The Office of Special Counsel, an independent agency, has found preliminary evidence to support Herold’s allegations. It continues to investigate, but the outcome is unlikely to spare Herold from a Nov. 26 deadline to accept the transfer to head the Midwest region of DOL’s workplace safety agency or be terminated.

A final determination on the transfer’s legality would require Herold to appeal to the Merit Systems Protection Board, a process that would stretch into next year.

“It’s not good to threaten or treat people poorly just because of the work they had done for a prior administration, regardless of party,” said Jim Eisenmann, a former MSPB general counsel who isn’t involved in the case.

“But elections have consequences and policies change; and priorities, in terms of litigation, whether you’re at DOL or some other agency, can change,” said Eisenmann, now an attorney for federal-sector employees and employers.

While Trump’s first labor secretary, Alex Acosta, showed deference to regional officials, Scalia made a commitment to enforcement uniformity.

“The regulated public should be subject to a consistent nationwide interpretation of the laws we administer,” Scalia said in a speech at the Federalist Society convention in November 2019. “That interpretation should not vary based on the party involved, or the jurisdiction where the case arises.”

‘Central’ to Obama Strategy

Herold became “central” to the Obama DOL’s wage-enforcement regime shortly after being hired away from the Service Employees International Union in 2012, said Patricia Smith, DOL solicitor for most of the Obama presidency.

The West Coast regional office had little experience litigating cases, giving the impression to Smith and other attorneys that it was reluctant to go to trial and could be bullied by an employer’s counsel. Smith tasked Herold with reversing that reputation.

Herold built the regional office into a muscular, 40-attorney outfit known to operate like a pseudo-workers’ rights firm. They took on bolder, trickier wage cases that previously would’ve been settled or not brought at all, seven current and former DOL employees said.

Investigators in DOL’s Wage and Hour Division had been accustomed to a straightforward review of payroll records—crunching the numbers to determine if a worker’s hourly rate fell below the $7.25 minimum or if they received time-and-a-half for all hours beyond 40 in a week.

Misclassification involves a more fact-intensive analysis of a worker’s overall conditions to show if the business asserts enough control over the worker’s day to qualify as an employer.

Herold developed a training module and traveled nationwide to teach DOL investigators and attorneys how to examine a company’s complex relationship with its contractors or franchisees, Smith and other insiders recalled. She taught investigators how to think bigger, while ensuring that her attorneys were integrated into early stages of investigations to guide them in finding evidence that could sway a judge, six current or former DOL sources said.

This led to a wave of DOL complaints accusing companies of falsely classifying workers as contractors and shorting them in pay.

When employers were believed to be shredding evidence or threatening workers not to talk to investigators, Herold empowered her team to file temporary restraining orders, the six sources said.

And in 2018, her team persuaded a federal judge to slap sanctions on attorneys from management heavyweight Littler Mendelson for “coercive conduct.”

Battle in Phoenix

Management lawyers routinely complained to political leaders about Herold’s aggressive pursuit of wage-hour cases, Smith said. Two former Trump DOL officials said that outcry continued during the Trump administration.

But it wasn’t until Scalia’s arrival that DOL’s politically appointed attorneys began giving extra attention to Herold’s lawsuits.

DOL has worked this year to fast-track completion of its independent contractor rule, proposed in September, in case Trump isn’t reelected.

Internally, Herold raised alarm about the rule’s pro-business interpretation, two of the sources said.

Herold’s office filed suit against the Arizona company, Diligent Delivery Systems, in December 2016. DOL is awaiting a federal judge’s decision on whether to hold Diligent and a purported joint employer, Parts Authority Arizona, responsible for about $30 million in back pay to more than 1,400 allegedly misclassified delivery drivers. The companies paid drivers an average of 44 cents per hour, DOL said in a court filing.

DOL’s Washington office has meticulously edited documents in the case to soften language or ensure lawyers adjusted arguments to meet the narrowed joint-employment test DOL finalized in January—another departure from the Obama-era approach, four sources familiar with the case said.

But thus far, Scalia has allowed the prosecution to proceed, even though the Obama misclassification standard Herold is using would be undermined if the rulemaking on contractor status takes effect.

Nine attorneys across six firms that represent Diligent, Parts Authority, and Diligent CEO Larry Browne declined to be interviewed for this article or didn’t respond to messages.

But one former lawyer in the case recounted how Herold’s office handled the litigation.

“I thought the solicitor’s office was very aggressive in that case,” said Heather Vickles, an attorney at Sherman & Howard in Denver who defended Diligent until being replaced by a different firm last year. “I really felt in that case, the Department of Labor was attacking the entire business model, which of course there have been a lot of developments on since then.”

The pending rule on independent contractor status is the biggest of those developments.

But the rulemaking is incomplete, and the administration’s effort to finalize it could depend on the election’s results.

Herold remains steadfast in her litigation philosophy, which she described to Bloomberg Law in 2017: “There is no change in our enforcement practice in my region because the law has not changed.”

To contact the reporter on this story: Ben Penn in Washington at bpenn@bloomberglaw.com

To contact the editors responsible for this story: John Lauinger at jlauinger@bloomberglaw.com; Martha Mueller Neff at mmuellerneff@bloomberglaw.com

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