On a Friday afternoon in October 1988, the telephone rang at Pierce Processing, a small engineering consulting company near Cincinnati. On the other end was an attorney with the U.S. Department of Labor.
At the time, company owner William Pierce had built his five-year-old firm into an organization of 40 engineers and designers earning up to $70,000 a year. The company had offices in Louisville and Detroit as well as Cincinnati, contracts with Procter & Gamble and other Fortune 500 companies, and annual revenue of $1.7 million. Pierce was planning to buy the building where his company was headquartered.
Today, Pierce has been out of business since 1993, the same year he and his wife lost their $375,000 home to foreclosure. He's more than $100,000 in debt, owns no property to speak of, and has no bank account, lest the federal government or unpaid business creditors seize any money he puts into it. He has surrendered several patents because he could not pay the maintenance fees.
Pierce, his wife, Janet, and their three children live in a small home owned by his mother. He drives a 1988 automobile with 190,000 miles on its odometer. He can't get a job as an engineer, so he teaches math at a private high school for about one-fifth of what he once made. He is constantly getting phone calls from creditors, and he worries that his 17-year-old daughter will not get a college education because his credit rating is so bad that he can't co-sign for a student loan.
All due to events set in motion by that phone call. What crime did Bill Pierce commit to bring upon himself such punishment? He let his employees take a few hours off from work to play golf, go fishing, or tend to personal chores. If they did not claim the hours as vacation time or make them up later in the two-week pay period, he made deductions from their paychecks.
Although experts in employment law and personnel managers at big companies today know that docking salaried employees in such situations is a no-no, it was not widely known in 1988, because the DOL had not yet disseminated information about this interpretation of the law. Pierce had no way of knowing his policy violated DOL regulations. He assumed that arranging for time off was a matter to be resolved between him and his employees. It was a dangerous assumption.
On the phone that day was Kenneth Walton, a DOL attorney who asked Pierce if he was "ready to negotiate." Puzzled, Pierce asked, "What do you mean?"
Four months earlier in May, a DOL compliance officer named Sara Cazel had conducted a three-day audit of company records covering a two-year period. Cazel later testified that the audit was prompted by a complaint, a fact she had not disclosed to Pierce. After Cazel completed her audit, Pierce received no notice from the department about audit filings until Walton's phone call.
"Well, if you're not willing to negotiate," said Walton, "we'll just file a lawsuit."
"Don't I have a right to know what I did wrong?" Pierce asked.
"Well, can't you tell me?"
"Not if you're not willing to negotiate," said Walton. "I'll let the court system tell you what you did wrong."
Walton finally let Pierce have 10 days to arrange a meeting with DOL officials in Cincinnati, and he promised to mail him a copy of the audit report. What Pierce received from Walton, however, was just a notice that he owed $21,254, with no details.
He soon learned from department officials that the DOL objected to his company's flextime policy for salaried employees. In court documents, Walton acknowledged that Pierce's employees voluntarily took time off for "golf, fishing and flying model airplanes, as well as family and personal needs." But DOL officials said that by deducting money from their paychecks when they did not make up the time, Pierce was treating them like hourly workers instead of salaried employees. The DOL said the illegal deductions totaled $3,100.
Because of the deductions, Pierce was told, his employees could not be considered salaried, so he owed them $21,254 in unpaid overtime. Even though Pierce had classified his employees as salaried, his company had paid about $40,000 in overtime during the audit period–but at a straight hourly rate rather than time and a half. What he owed, said the DOL, was the total he should have paid minus the $40,000 he had paid.
When Pierce first discussed the problem with his attorney, they both believed it would be easily resolved. They were wrong. Says Pierce, "It's astonishing that such a minor little thing, such a trifle, could end up turning into such needless and unwarranted litigation and this bizarre experience, this monstrosity."
The Better Government Bureau, a citizens group based in Canton, Ohio, agrees. "It is hard to believe that what happened to Bill could happen in America," it said in its newsletter. "Idiotic rules and overzealous regulators have nearly ruined Bill's life….Bill's crime? He allowed his employees to pick and choose their own work schedule." The Cincinnati Enquirer called the case "an American horror story" that shows how federal regulations and litigation "can unjustly crush citizens, destroy businesses and kill jobs."
As Pierce learned more about DOL regulations, he discovered how bizarre and byzantine they can be. He found that he could have avoided a violation if his employees had taken an entire day off rather than part of a day. "If an employee is absent for a day or longer to handle personal affairs," the regulations say, "his salaried status will not be affected if deductions are made from his salary for such absences." In a sense, then, what Pierce did wrong was failing to insist that the golfers take the whole day off instead of just three hours.
Another thing Pierce shouldn't have done, it turned out, was to be so meticulous in his records of actual hours worked. He did this to avoid billing his clients for time when his employees had gone golfing or fishing. It was in his billing records, not in his payroll records, where Sara Cazel found the information on which the DOL based its claims.
In the lawsuit that it filed against Pierce in January 1989, the DOL alleged that he had willfully violated the Fair Labor Standards Act. The lawsuit said Pierce's willfulness increased the total amount he owed, including penalties and double damages, to nearly $50,000.
Pierce and his lawyer tried to reach a settlement with the DOL. They cited a "window of correction" in the regulations: "Where a deduction is inadvertent…the [salary basis] exemption will not be considered to have been lost if the employer reimburses the employee for such deductions and promises to comply in the future." Pierce offered to settle the case by reimbursing employees the $3,100 that the DOL claimed had been improperly deducted. He said his company had already changed its flextime policy to be in compliance.
The DOL would not budge, insisting on payment of the full amount based on the allegation of willfulness. Yet moments after Pierce's trial in U.S. District Court began in February 1992, Walton told the judge, "We made an allegation of a willful violation in this particular case, and we're withdrawing that allegation." He gave no explanation.
By that time–more than three years after Walton's phone call–Pierce Processing was on the brink of collapse. During 1991, annual revenue plunged almost 60 percent. The main reason for the precipitous decline, says Pierce, was the time the case forced him to be away from his business: hundreds of hours to research records and make calculations for replies to lengthy interrogatories from DOL attorneys. He was the company's entire marketing and business development department, and had little time left for that job.
Business expenses were not declining, however, and the company was still obligated under office rental, equipment lease, and business loan contracts. Pierce was taking little pay, often none at all, and had begun to lay off employees. He now realizes he kept some on the payroll too long. "I tried to keep the business going and keep the employees," he says, "but I held on longer than I should have."
In March 1992 U.S. Magistrate Jack Sherman ruled that Pierce could meet labor department requirements by reimbursing employees for the $3,100 in deductions, as he had repeatedly offered to do. Sherman disagreed with the DOL's contention that Pierce's deductions meant that his employees could not be considered salaried. "All other aspects of this case," he said, "point to a situation in which the employer intended…to operate within the letter and spirit of the Act."
At that point, however, Pierce was in such financial distress that he could not scrape together the $3,100. Nor could he borrow it through normal channels. In February 1993, with reimbursement still unpaid, Sherman reversed his ruling. His judgment was for $10,842, plus court costs. (Part of the overtime amount was dropped due to a time limit.)
Thousands of dollars in debt to his attorney, Pierce decided to continue the fight on his own–even though there was nothing for him to win except vindication. His business and house were gone, and he was deep in debt. The chance of recovering damages from the government was remote. Yet he continued to file appeals, and he still has not given up.
In retrospect, Pierce acknowledges that it might have been prudent to file for bankruptcy or to try borrowing the $3,100 from a relative or friend to pay the judgment and end the case. As for bankruptcy, he says, "I don't believe in doing things that way. I've kept in touch with my creditors about my intentions to pay them as soon as I can, and most of them are cooperative and understanding."
As for his fight: "I'm enough of a Don Quixote to believe I'm going to beat that windmill. If you just roll over dead, you just encourage the government to keep running over people. If I don't win, they may go after other small companies, too. But I'm committed to win, to prove that there really is liberty and justice for all in this country."
James H. Dygert (email@example.com) is the editor and publisher of Suburban Press and West Chester Press, weekly newspapers serving suburbs of Cincinnati.