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Feb. 7 --A federal district court in New York ruled Feb. 6 that it can exercise supplemental jurisdiction over a restaurant's counterclaim in a Fair Labor Standards Act lawsuit even if the allegation that one of the plaintiffs stole company pay records did not arise out of the same set of allegations in the wage and hour action (Nicholsen v. Feeding Tree Style, Inc., 2014 BL 32313, S.D.N.Y., No. 1:12-cv-06236, 2/6/14).
Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York said many courts have declined to assert jurisdiction over counterclaims in wage and hour lawsuits even if they arise out of the same employment relationship as FLSA minimum wage or overtime claims. However, Oetken said, Feeding Tree Style Inc., a New York restaurant operator, may be able to pursue a counterclaim that Ewen Salmon took a ledger in which the employees recorded their hours worked.
Observing the parties “will almost certainly litigate whether this ledger exists,” Oetken said he may have to decide whether to sanction Salmon for taking the ledger or Feeding Tree for failing to preserve it. Under the circumstances, the court said, he would exercise jurisdiction over a properly stated counterclaim.
According to the decision, Salmon worked at Feeding Tree, a New York restaurant, from November 2003 through July 2012. He alleged he often worked 65 hours a week for $450 without overtime pay, and was paid only $50 each for the 11-to-12 hour shifts that he worked on normal days off.
Salmon alleged that he complained about the employer's minimum wage and overtime violations, and was fired because of his protest. Former employees Nicoda Nicholson and Rosetta Nathaniel allege they were similarly fired for complaining about the wage and hour violations.
The three employees sued under the FLSA and the New York Labor Law. In addition to denying the allegations against the company, Feeding Tree filed a counterclaim alleging that Salmon breached a fiduciary duty and a duty of loyalty to the company by stealing a ledger in which the employees had recorded for several years the start and ending times for each shift they worked.
The plaintiffs moved to dismiss the counterclaim, arguing it was not part of the same case or controversy as the wage and hour claims, and was therefore outside the court's supplemental jurisdiction. The plaintiffs also argued Feeding Tree failed to state a viable claim against Salmon under New York law.
A counterclaim that does not arise from the same transaction or occurrence as the plaintiffs' claims is “permissive,” the court said. It explained that the court may assert jurisdiction over a permissive counterclaim if it shares a common nucleus of operative fact with the allegations made in the complaint.
But in wage/hour actions, Oetken said, courts have held that even if a counterclaim and a wage/hour claim arise out of the same employment relationship, that is not enough of a connection to sustain supplemental jurisdiction. “Many” courts agree on this general principle, the judge wrote.
However, in the current case, “[i]t is overwhelmingly likely that, during the course of this litigation, the court will need to determine (1) whether the ledger existed and (2) whether [Salmon] stole it,” Oetken said.
The FLSA requires employers to keep accurate records of the hours employees work, but if the records do not exist, an employee may rely on his own recollection or estimates to demonstrate the hours worked, the court said. It explained that in such a case, the burden shifts to the employer to rebut the employee's estimates with evidence showing either the exact number of hours worked or the unreasonableness of the employee's estimate.
Noting that Feeding Tree alleged the missing ledger is “critical” to showing the hours worked by the plaintiffs, Oetken said he will have to determine whether the ledger existed in order to decide how to allocate between the parties the burden of producing evidence in the lawsuit.
The court also observed that Feeding Tree will likely demand that Salmon produce the ledger during discovery, but since Salmon denies having the ledger, he will refuse, and the employer will probably move for discovery sanctions. On the other hand, the court said, Salmon may argue that sanctions should be imposed on the employer for failing to preserve records that are both required by law and relevant to the lawsuit.
“These operative facts distinguish this case from other FLSA cases dismissing permissive counterclaims for lack of supplemental jurisdiction,” Oetken said. In other cases, he wrote, employers have used counterclaims to raise allegations of misconduct that had nothing to do with the plaintiff's wage and hour allegations.
“Here, however, litigation of the FLSA claims will entail a substantial portion of the operating facts underlying the theft of the ledger,” the judge said. He held that the court “therefore has supplemental jurisdiction over the counterclaims.”
But the court found that Feeding Tree has not yet stated a viable counterclaim under New York law.
While the company alleged that Salmon stole a valuable ledger, the counterclaim did not specifically allege that the theft occurred during Salmon's employment, Oetken said. He said the company also failed to allege that if Salmon took the ledger after the end of his employment, he acted at a time when he had some continuing duty to the employer.
The court dismissed the counterclaim without prejudice but said it would not necessarily be futile for Feeding Tree to amend its allegations against Salmon. The court gave the employer 30 days to file an amended counterclaim.
Jennifer Smith of Beranbaum Menken LLP represented the former employees. Delmas A. Costin represented Feeding Tree. Both attorneys practice in New York.
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Text of the opinion is available at http://www.bloomberglaw.com/public/document/Nicholsen_et_al_v_Feeding_Tree_Style_Inc_et_al_Docket_No_112cv062.
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