Klick v. Cenikor Foundation

Case: 22-20434 Document: 00516859682 Page: 1 Date Filed: 08/16/2023

United States Court of Appeals

for the Fifth Circuit

United States Court of Appeals

Fifth Circuit

____________ FILED

August 16, 2023

No. 22-20434 Lyle W. Cayce

____________ Clerk

Timothy Klick; Wilton Chambers; Malik Aleem; John

Potter; Anthony D. Woods,

Plaintiffs—Appellees,

versus

Cenikor Foundation,

Defendant—Appellant.

______________________________

Appeal from the United States District Court

for the Southern District of Texas

USDC No. 4:19-CV-1583

______________________________

Before Graves, Higginson, and Douglas, Circuit Judges.

Dana M. Douglas, Circuit Judge:

Cenikor Foundation brings this interlocutory appeal challenging the

district court’s determination that a collective action of its drug rehabilitation

patients may proceed under the Fair Labor Standards Act (“FLSA” or “the

Act”), 29 U.S.C. § 201, et seq. Finding that the district court applied the

correct legal standards and did not abuse its discretion in certifying a

collective action, we AFFIRM.

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I.

A.

Cenikor Foundation is a 501(c)(3) nonprofit rehabilitation center

assisting individuals with alcohol and/or drug addiction, as well as behavioral

health issues, with locations throughout Texas and Louisiana. At issue in this

lawsuit is an adult long-term inpatient treatment program (“the Program”

throughout) run by Cenikor, in which patients were assigned jobs and

required to work. 1

Cenikor describes the Program in therapeutic language, calling it

“vocational therapy” which involves a “highly regulated regimen with

clearly stated expectations for behavior and psychological and behavioral

rewards,” including “morning and evening house meetings, job assignments,

group sessions, seminars, personal time, recreation, and individual

counseling.” Appellees describe Cenikor as a “staffing agency” who has

“outsourced its patients through its Work Program to work for various

private companies” to its benefit.

The Program included three specific phases: orientation, primary

treatment, and reentry. During the orientation phase, lasting up to 60 days,

patients “learned the rules of the program, participated in group and

individual therapy, and worked with counselors to develop an individualized

treatment plan.” When patients entered the primary treatment phase,

lasting 16 to 18 months, Cenikor added “vocational therapy and training to

the patients’ program.” The “vocational therapy” took place either in

Cenikor’s own facilities 2 or with one of the “community businesses” that

_____________________

1

Since the summer of 2021, Cenikor had discontinued the Program.

2

The patients who worked within Cenikor’s facilities are not a part of the proposed

collective.

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partnered with Cenikor, and patients did not keep any of the money from

their work. If patients reached the reentry phase, they were required to find

full-time employment and arrange for a permanent residence and reliable

transportation to complete the Program. It was only during this phase that

patients began earning wages from their employer directly.

Many long-term patients received treatment for free or at a reduced

rate. All patients received access to room, board, food, clothing, security,

counseling, transportation, and medical care during their tenure. Every

patient signed a form explaining that Cenikor’s “comprehensive therapeutic

treatment program includes work assignments as part of rehabilitation” and

“[r]esidents receive no monetary compensation for assigned responsibilities

in the facility, or any on-the-job training during the primary treatment

phase.” By signing, the patients attested that “I further understand that

under no circumstances can Cenikor be under any obligation to me; that I am

a beneficiary and not an employee.” Instead of making money off their

“vocational therapy,” patients attested that they understood that the funds

paid to Cenikor “go directly back to the Foundation to help offset the cost of

treatment services.” To further offset costs, Cenikor also required patients

to apply for government assistance, such as food stamps, and assign those

benefits to Cenikor.

As part of the Program, Cenikor had contracts with community

business partners (“outside businesses” throughout) to provide Program

participants for particular jobs. These outside businesses were then billed by

Cenikor for the hours worked by the Program participants. In 2017, Cenikor

billed these outside businesses more than $7 million dollars for the labor of

the Program participants. In 2018, Cenikor invoiced $6.9 million dollars to

these outside businesses. Cenikor was paid directly for the labor provided by

the Program participants at rates contractually agreed upon between Cenikor

and the outside businesses. In accordance with labor laws governing

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overtime pay, Cenikor also charged outside businesses an overtime premium

of 1.5 times the regular hourly rate when participants worked more than 40

hours a week. 3

Cenikor paid for workers’ compensation insurance for all Program

participants and marketed this benefit to potential outside business partners.

The Program did not vary across locations. Cenikor decided which outside

businesses its patients were assigned to, and if an outside business wished to

change the job duties of a patient, it was required to first obtain Cenikor’s

permission to do so.

If a patient refused a work assignment, they would be disciplined by

Cenikor, up to and including termination from the Program and removal from

the facilities. Cenikor’s intake forms specifically stated that if “unable to

particulate” in the Program, participants would “be subject to termination

from Cenikor.”

B.

In 2019, after the Center for Investigative Reporting published a series

of podcasts and articles “reporting that Cenikor had sent thousands of

individuals in Louisiana and Texas to work without monetary compensation

at major companies such as Walmart, Shell, and ExxonMobil,” various

plaintiffs filed six different lawsuits against Cenikor in three different federal

district courts. Named plaintiff Klick filed the first suit in the Southern

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3

The contract with the outside businesses regarding overtime pay provided:

“Vocational workers are presumed to be nonexempt from laws requiring premium pay for

overtime and holiday work, or weekend work.” (emphasis added). Although the contract

clearly identified Cenikor’s patients as “nonexempt” from laws requiring premium pay, its

CFO testified that it was intended to mean the patients were considered “volunteers.”

However, Cenikor could and did bill these outside businesses overtime whenever a patient

worked more than 40 hours in a week.

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District of Texas, and all lawsuits were transferred to that court and

consolidated on February 25, 2020. Shortly after the case was filed, the

plaintiffs filed motions for conditional certification under the then-widely

used framework for conditional certification established in Lusardi v. Xerox

Corp., 118 F.R.D. 341 (D.N.J. 1987). Following this court’s decision in Swales

v. KLLM Transp. Servs., LLC, 985 F.3d 430, 434 (5th Cir. 2021), which

rejected the Lusardi framework, and because Plaintiffs indicated that they

would file an amended motion for certification following pre-certification

discovery, the district court found the pending motions were moot and

denied them without prejudice.

The parties then exchanged written discovery and held depositions of

the named plaintiffs and a 30(b)(6) corporate representative of Cenikor. A

total of 226 individuals consented to join the lawsuit as plaintiffs of the 2,736

individuals that had participated in the Program since May of 2016.

Following a renewed motion for certification, the district court

certified a collective action under the FLSA. Specifically, the district court

certified a “proposed class of individuals who participated in the primary

phase of Cenikor’s long-term residential program from May 2016 to the

present and performed work for outside businesses or individuals without

monetary compensation.” Cenikor filed this interlocutory appeal pursuant

to 28 U.S.C. § 1292 and now asks this court to reverse the district court’s

decision to certify a collective action.

II.

This court reviews de novo the appropriate legal standard to apply

when determining whether an individual is an employee under the FLSA.

Swales, 985 F.3d at 439. Once the correct legal standard is ascertained, we

review the district court’s decision certifying a collective action for abuse of

discretion. Id. “A district court abuses its discretion if it bases its decision on

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an erroneous view of the law or on a clearly erroneous assessment of the

evidence.” Hesling v. CSX Transp., Inc., 396 F.3d 632, 638 (5th Cir. 2005).

III.

The Fair Labor Standards Act of 1983 created “a comprehensive

federal wage-and-hour scheme.” Aldridge v. Miss. Dept. of Corrs., 990 F.3d

868, 871 (5th Cir. 2021). Congress enacted the FLSA to eliminate “labor

conditions detrimental to the maintenance of the minimum standard of living

necessary for health, efficiency, and general wellbeing of workers.” Id. The

principal purpose of the Act is “to protect all covered workers from

substandard wages and oppressive working hours.” Id. (quoting Barrentine

v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739 (1981)). Workers

covered under the Act are entitled to a minimum wage and overtime

compensation. 29 U.S.C. §§ 206-07.

“The FLSA protects employees (not independent contractors) ….”

Swales, 985 F.3d at 434. Moreover, collective actions may only proceed

under the FLSA so long as the potential members are “similarly situated.”

Id. at 433. “District courts should ‘rigorously enforce [the FLSA’s similarity

requirement] at the outset of the litigation.” Id. at 443. In determining

whether “employees” are “similarly situated,” district courts must

scrutinize all facts and legal considerations material to determining such

status, including merits questions. Id. at 434, 441-42. Here, where a merits

question is wrapped up in a threshold determination—whether the

rehabilitation patients are considered employees entitled to compensation

under the FLSA—the dispositive threshold issue must be resolved before a

collective can be certified and notice can be sent. See id. at 441 (“The fact

that a threshold question is intertwined with a merits question does not itself

justify deferring those questions until after notice is sent out.”).

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A.

Cenikor argues that the district court applied the wrong legal standard

to determine whether Cenikor’s patients were FLSA “employees.”

Appellees argue that the district court properly applied binding Supreme

Court precedent to the facts of this case in finding that the employment

question may be decided on a collective-wide basis.

Collective actions can be certified as to the very question of whether a

specific group of individuals qualify as “employees” under the FLSA. See

Hobbs v. Petroplex Pipe and Const., Inc., 946 F.3d 824, 828-29 (5th Cir. 2020).

While the determination of whether an individual is an “employee” is a

matter of law, there are often associated factual inquiries required before such

a determination can be made. The ultimate determination turns on the

“economic reality” of the relationship between the parties involved. See

Tony & Susan Alamo Found. v. Sec’y of Lab., 471 U.S. 290, 301 (1985). While

a finding of “whether a worker is an employee for FLSA purposes is a

question of law,” Parrish v. Premier Directional Drilling, LP, 917 F.3d 369, 377

(5th Cir. 2019), the “economic-reality” test requires the application of facts

that may be in dispute, as they are here. See Hopkins v. Cornerstone Am., 545

F.3d 338, 346 (5th Cir. 2008).

Both parties agree that central to this analysis—whether Cenikor’s

rehabilitation program participants are employees under the FLSA—is the

Supreme Court decision in Tony & Susan Alamo Found. v. Sec’y of Lab., 471

U.S. 290 (1985). We agree with the parties that Alamo should guide this

determination. The Tony and Susan Alamo Foundation was a nonprofit

religious organization that derived its income largely from the operation of

commercial businesses staffed by the Foundation’s “associates,” most of

whom were “drug addicts, derelicts, or criminals” before their rehabilitation

at the Foundation. Id. at 292. These workers received no cash salaries, but

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were provided with food, clothing, shelter, and other benefits. Id. The

Secretary of Labor filed an action against the Foundation alleging violations

of the minimum wage, overtime, and record keeping provisions of the FLSA.

Id. at 293.

The Supreme Court held that “[A]n individual who, without promise

or expectation of compensation, but solely for his personal purpose or pleasure,

worked in activities carried on by other persons either for their pleasure or

profit, is outside the sweep of the act.” Id. at 295 (internal quotation omitted)

(emphasis added). Although the associates themselves protested coverage

under the Act, the Supreme Court determined this was not dispositive, since

the test of employment under the Act is one of “economic reality.” Id. at

301. The fact that the compensation was primarily in the form of benefits

rather than cash was “immaterial” in this context, “such benefits being

wages in another form.” Id. Since the associates received in-kind benefits

and were dependent on the Foundation for long periods of time, the Supreme

Court held that the district court did not clearly err in finding they were

“employees” within the meaning of the Act. Id.

Contrary to Cenikor’s arguments, the district court properly relied on

Alamo in answering the threshold question of whether the patients are

“employees” under the Act by certifying a collective that seeks to answer

that question on the merits through ongoing litigation The district court

noted that although the rehabilitation patients may have known they would

not be monetarily compensated during the Program, “they nonetheless

understood they would be provided with in-kind benefits.” It pointed to the

Consent for Services agreement where program participants agreed to work

for outside businesses and receive in-kind benefits, such as housing, food,

medical care, and clothing. The district court thus found that the Program

participants worked “in exchange” for in-kind benefits. The fact that the

Program participants who made it to the reentry phase had to pay Cenikor

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for rent and transportation fees provided additional support for the district

court’s determination. The district court went on to distinguish this case

from others relied upon by Cenikor, emphasizing that Cenikor collected

nearly $14 million dollars from outside businesses for the labor of its Program

participants within two years, that participants were required to work at risk

of termination from the Program, could not possess money, and were

economically dependent on Cenikor for 16 to 18 months.

Cenikor relies on Williams v. Strickland, 87 F.3d 1064 (9th Cir. 1995),

claiming that it modeled the language in its Consent for Services agreement

after the language there. In Williams, a participant of the Salvation Army

Rehabilitation Center brought claims that he was an employee under the

FLSA during his six-month stay, in which he was offered room, board, work

therapy, and spiritual counseling and engaged in a treatment plan in-house

refinishing furniture sold through Salvation Army’s thrift stores. Id. at 1065.

Williams signed a “Beneficiary’s Admittance Statement” that indicated the

Salvation army was under no obligation to him and that he was a beneficiary,

not an employee. Id. A majority of the Ninth Circuit held that he was not an

employee because he had “neither an express nor an implied agreement for

compensation with the Salvation Army and thus was not an employee.” Id.

at 1067. However, we do not find Williams persuasive. Alamo and its

predecessor cases explicitly hold that rights under the FLSA cannot be

waived, see e.g., Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 704-05 (1945),

and any forms patients sign indicating that they are beneficiaries and not

employees do not control this analysis.

Because the district court utilized Alamo in reaching its decision, it

relied on the appropriate legal standard. Its threshold determination that the

rehabilitation patients constitute “employees” under the Act because they

worked in expectation of compensation was not an abuse of discretion.

“[T]he district court needed to consider the evidence relating to this

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threshold question in order to determine whether the economic-realities test

could be applied on a collective basis.” Swales, 985 F.3d at 442. It properly

did so here and found the merits question could be answered collectively

based on ample evidence in the record from preliminary discovery.

B.

Cenikor also takes issue with the district court’s finding that the

rehabilitation patients were “similarly situated” to each other for purposes

of certifying a collective action. As noted, plaintiffs bear the burden of

proving a collective is similarly situated. Swales, 985 F.3d at 442-43. The

statute, however, does not define “similarly situated.” Id. at 435. As this

court explained in Swales, “to determine if and when to send notice to

potential opt-in plaintiffs,” “a district court should identify, at the outset of

the case, what facts and legal considerations will be material to determining

whether a group of ‘employees’ is ‘similarly situated.’” Id. at 441.

A showing that members of a collective action are similarly situated

does not require members to be identically situated but requires plaintiffs to

show a demonstrated similarity between the purported collective, such as a

factual nexus that binds the claims together so that hearing all claims in one

proceeding is fair to all parties and not beset with individual inquiries. See id.

at 443. This necessarily requires a consideration of proposed defenses to

determine whether they are so individualized that denial of certification is

required.

After the completion of preliminary discovery, the district court

determined that the evidence and testimony showed that the key aspects in

determining the ultimate merits question of whether an employer/employee

relationship exists may be determined on a collective-wide basis because: (1)

all patients signed the same paperwork disclaiming employee status and

stating they would not be paid during the primary phase; (2) the paperwork

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promised that Cenikor would provide all basic personal needs including

housing, food, emergency medical care, and clothing; (3) all plaintiffs agreed

to perform work to receive these in-kind benefits; (4) all program participants

received their work assignments and schedules from Cenikor; and (5) all

plaintiffs were subject to the same organization-wide policies and procedures

irrespective of location. The district court ultimately concluded that it could

determine collectively the central question whether the primary phase

participants were employees under the FLSA because all proposed members

were subject to a company-wide policy in which they performed labor

without monetary compensation.

C.

Cenikor next argues that its rehabilitation patients are not similarly

situated because the district court handled its defenses in a way that

contravenes Swales. Appellees argue that the district court correctly

determined that these defenses could be addressed collectively.

Turning to Cenikor’s three proposed defenses — the Motor Carrier

Act (“MCA”) exemption, the offset defense, and the Rooker-Feldman

doctrine — the district court properly concluded that these defenses were

either inapplicable or that Cenikor had not, at this stage, demonstrated they

would require individualized inquiries.

To qualify for the MCA exemption, a loader aka “an employee of a

carrier” must have duties that include, “among other things, the proper

loading of his employer’s motor vehicles.” 29 C.F.R. § 782.5(a) (emphasis

added). Here, there is no allegation that any of the outside businesses were

the patients’ employer. Instead, Cenikor is the sole employer defendant.

Accordingly, the MCA defense does not apply to any individual patient.

Regarding the offset defense, the district court noted plaintiffs’

argument that the calculations could be completed on a class-wide basis – “by

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subtracting aggregate costs from aggregate payments and dividing by the

number of participants to determine an average.” Because these benefits

could be deducted in a uniform manner, they should not warrant

individualized inquiries.

Finally, as to the Rooker-Feldman doctrine, the Fifth Circuit

recognizes, in conformity with the Supreme Court, that Rooker-Feldman is a

narrow jurisdictional bar. See Truong v. Bank of America, N.A., 717 F.3d 377,

381-82 (5th Cir. 2013) (citing Exxon Mobil Corp. v. Saudi Basic Indus. Corp.,

544 U.S. 280, 284 (2005)). The doctrine applies only “where a party in

effect seeks to take an appeal of an unfavorable state-court decision to a lower

federal court.” Lance v. Dennis, 546 U.S. 459, 466 (2006). Here, this

doctrine has no bearing on the alleged FLSA claims. Appellees are not “state

court losers” who are challenging state court decisions that require them to

attend Cenikor’s rehabilitation treatment center in lieu of serving jailtime.

Rather, they are challenging Cenikor’s decision not to pay them for their

labor in violation of federal law.

Here, the claims and defenses largely turn on the same question:

whether the rehabilitation patients are employees under the FLSA. The

district court applied the correct legal standard to determine if plaintiffs were

similarly situated in applying Swales. Furthermore, the district court did not

abuse its discretion in considering Cenikor’s defenses and determining that

merits determinations could be considered collectively.

D.

Finally, Cenikor argues that the district court erred in requiring it to

provide the contact information of patients to provide notice of the lawsuit

because federal privacy laws strictly forbid such disclosure without good

cause. Appellees counter that they have satisfied the good cause standard

required to permit disclosure of patients’ names and contact information.

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Disclosure of patient records in federally funded drug and alcohol

abuse treatment programs is governed by the Substance Abuse and Mental

Health Services Act (“SAMHSA”). Cenikor is correct that federal law

prevents disclosure of records containing the identity of patients maintained

in connection with the performance of any program or activity relating to

substance abuse treatment. See 42 U.S.C. § 290dd-2(a); 42 C.F.R. §§ 2.11-

13. However, § 290dd-2 permits disclosure of patient identifying

information if authorized by “an appropriate order of a court.” 42 U.S.C. §

290dd-2(b)(2)(C). A party seeking disclosure must establish good cause by

showing that: (1) other ways of obtaining the information are not available or

would not be effective; and (2) the public interest and need for the disclosure

outweigh the potential injury to the patient, the physician-patient

relationship, and the treatment services. 42 C.F.R. § 2.64(d).

Good cause for notice is satisfied here. As the district court found,

although Cenikor points to “publicized news articles and social media posts”

as alternatives to obtain the names and contact information, these attempts

previously only yielded 226 out of 2,736 individuals who participated in the

Program, and thus have not been particularly effective. Additionally, the

public interest in enforcing federal labor laws against employers who violate

them outweighs potential injury to the patient and/or physician-patient

relationship, especially where the Program no longer exists as of 2021 for

such relationships to exist. The district court also imposed appropriate

safeguards to protect against unauthorized disclosures by entering a

protective order. Accordingly, the district court did not err in requiring

Cenikor to send notice to potential opt-in plaintiffs.

IV.

Here, the district court applied the correct legal standards to this case

in its reliance on Alamo and Swales and appropriately concluded that it could

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decide the central question of whether the Program participants were

employees under the FLSA who were entitled to compensation collectively.

We find no abuse of discretion.

AFFIRMED.

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