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Hollins v. Regency Corp.

United States District Court, N.D. Illinois, Eastern Division

October 27, 2015

VENITIA HOLLINS, Individually and on behalf of all others similarly situated, Plaintiff(s)
v.
REGENCY CORPORATION, et al., Defendant(s)

          For Venitia Hollins, Plaintiff: Leon Marc Greenberg, LEAD ATTORNEY, Leon Greenberg, Las Vegas, NV; Christian James Gabroy, Robert Orman & Associates, Chicago, IL; Robert Orman, Law Office of Robert Orman, Chicago, IL.

         For Regency Corporation, Hayes Batson, Defendants: Samuel S Shaulson, LEAD ATTORNEY, O'Melveny & Myers, New York, NY; Christopher Joseph Boran, Sari M. Alamuddin, Morgan, Lewis & Bockius LLP, Chicago, IL; Meredith E Riccio, Morgan Lewis & Bockius, Chicago, IL.

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         MEMORANDUM OPINION AND ORDER

         John J. Tharp, Jr., United States District Judge.

         Named plaintiff Venitia Hollins was a cosmetology student enrolled at the Regency Beauty Institute, which is owned and operated by defendant Regency Corporation (" Regency" ).[1] Hollins sues individually and on behalf of a class seeking to recover unpaid wages under the Fair Labor Standards Act, 29 U.S.C. § 201 (FLSA) and related Illinois and Indiana wage payment statutes. As the curriculum required, while enrolled at Regency Beauty Institute, Hollins performed various cosmetology services for paying customers. She alleges that performing these services transformed her from Regency's student to Regency's " employee" within the meaning of the FLSA, and that she is thus entitled to compensation. Regency moves for summary judgment arguing its students do not fall within the purview of the FLSA. For the following reasons, Regency's motion is granted.[2]

         Background

         A. Regency's Curriculum

         Regency operates state licensed and accredited cosmetology schools throughout the country, including in Illinois and Indiana. DSOF ¶ 1. Regency's stated educational goals are to prepare students to pass the required state cosmetology exams and to teach them the entry-level skills needed to work in a professional salon. DSOF ¶ 17. Regency is a fully accredited for-profit, private cosmetology school.

         As an accredited cosmetology school, Regency is governed by detailed state regulations and the National Accrediting Commission of Career Arts & Sciences (" NACCAS" ). DSOF ¶ ¶ 7-15. In both Indiana and Illinois, these regulations require that Regency's curriculum comprise

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at least 1500 hours of " clock time" and cover the chemical treatment of hair, hair styling, nail technology, shop management, and other cosmetology-related subjects. 68 Ill. Admin Code § 1175.530; 820 Ind. Admin Code § § 4-4-4; DSOF ¶ ¶ 14-15. These regulations also require that students receive instruction on proper sanitation techniques and best practices. 620 Ill. Admin Code § 1175.505 (c); 820 Ind. Admin Code § § 3-1-1; DSOF ¶ 13. Both the NACCAS and state law require that this instruction take the form of both classroom and practical learning methods. DSOF ¶ 59. As such, Regency requires that students practice sanitizing all instruments before and after each use, using clean towels on each model, and ensuring that the floors, walls, and furniture are kept clean at all times. Examples of appropriate practical learning methods listed by the NACCAS include " student salon activities," and much of Regency's practical training occurs in such an environment. DSOF ¶ 59.

         To comply with these statutory requirements and to accomplish its teaching objectives, Regency divides its 1500-hour curriculum into three periods: the workshop phase, the rehearsal phase, and the performance phase. DSOF ¶ 20. The workshop phase consists of 320 hours of introductory education on the various subjects Regency is required to teach under Indiana and Illinois state law. DSOF ¶ 22. To move from the workshop phase into the rehearsal phase, students must successfully pass a battery of written and performance-based tests. After successfully completing the exams, students then rotate between the rehearsal phase--which consists of additional classroom instruction--and the performance phase.

         Following the workshop phase, students spend the first two days of the week in classroom for the rehearsal phase, where they study the principles of hair design, hairstyling, haircutting, professional development, and business building. DSOF ¶ 25. For the remaining three days of the week, the students are on Regency's " performance floor" for the performance phase. DSOF ¶ 29. Regency admits that the performance floor is designed to replicate a modern salon, but contends that it is not in fact an actual salon. DSOF ¶ 29. In many ways, however, the performance floor is indistinguishable from a fully licensed commercial salon. The students perform cosmetology services on paying customers, describe and recommend products and services to the same customers, and book their appointments. They are also required to conduct safety and sanitation practices, which often requires the students to clean the salon areas, including the salon restrooms. PSOF ¶ 18. Although the students are not paid, for each minute they spend on the floor during the performance phase, students receive " practical service" credit toward graduation. DSOF ¶ 39. Oftentimes the students are required to be on the performance floor on weekends, or they face a monetary penalty. PSOF ¶ 28.

         Regency charges customers a fee for the student provided services. DSOF ¶ 44. But Regency sets the prices for the services at a rate that is considerably lower than the rates offered by licensed cosmetologists. PSOF ¶ 32. It is undisputed that from these below-market fees Regency generated total revenue of $9,651,580 in 2011; $10,725,731 in 2012; and $10,700,000 in 2013. PSOF ¶ 3. This accounted for roughly 10% of all of the company's revenue during the same periods. PSOF ¶ 3. The amount of profit made by the Regency from the salons is subject to dispute, however. The plaintiffs contend that performance floor sales accounted for 76.36% of Regency's profits. PSOF ¶ 10. But Regency argues that in calculating this figure the students are comparing the total revenue

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obtained from performance floor sales (which does not deduct expenses) with Regency's total profit (which is revenue, less expenses) made during the same three-year period. Id. Regency further asserts that operating expenses from the performance floors actually exceeded the total guest-service and product-sales revenues. PSOF ¶ 10.

         B. Hollins' Enrollment at Regency

         In January 2011, Hollins enrolled as a full-time cosmetology student at Regency's Merrillville, Indiana location; she later transferred to Regency's school in Tinley Park, Illinois location, where she graduated in April 2012. DSOF ¶ 3. Hollins completed the curriculum discussed above and, after passing the requisite licensing exam, began working as a cosmetologist. She has continuously worked in two salons and runs her own separate cosmetology business on the side. Hollins testified that she was very satisfied with her overall experience at Regency " relative to her expectations" and that her education there prepared her for employment in the cosmetology industry. She added that the skills taught at the Regency are portable to a variety of different jobs within the field. DSOF ¶ 78. DSOF ¶ 66.

         With respect to her time on the performance floor, Hollins stated she understood that she would not be compensated for her time spent working with paying customers. DSOF ¶ ¶ 79-80. She even went as far as saying that, to her, it was a matter of " common sense" that she would not be paid by Regency. DSOF ¶ 80. She also acknowledged that Regency did not guarantee that she would be employed upon graduation. DSOF ¶ ¶ 79-80. She now contends, however, that while they were practicing the techniques learned in the rehearsal phase--and earning credit hours required by state law--she and her peers were not Regency's students, but were rather Regency's employees and, accordingly, should have been paid for their work on the performance floor.

         Discussion

         Hollins claim relates to the time she spent on the Regency performance floor practicing cosmetology techniques on paying customers. She contends these activities entitled her to wages under the FLSA.[3] Regency now moves for summary judgment, arguing that Hollins and other students were not " employees" within the meaning of the FLSA and related state law. To prevail on a summary judgment motion, the movant must demonstrate that there is no genuine dispute as to any material fact and that she is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). In deciding Regency's motion for summary judgment the Court construes all disputed facts and draws all reasonable inferences in favor of the students, who are the nonmoving party. Love v. JP Cullen & Sons, Inc., 779 F.3d 697, 701 (7th Cir. 2015).

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          Although there are a number of disputed facts on the record presented, they are largely immaterial because whether Regency's students are " employees" as defined by the FLSA is a legal question. See, e.g., Sec. of Lab., U.S. Dept. of Lab. v. Lauritzen, 835 F.2d 1529, 1535 (7th Cir. 1987) (finding that " employee" status under the FLSA is a question of law). Ultimately, Regency's motion requires the Court to weigh competing interpretations of the term " employee" within the meaning of the FLSA. Arguing for an application of the " economic realities" test, Regency contends that the totality of the circumstances illustrates that the students received the primary benefit of their relationship with Regency, and thus were not the school's employees. In response, Hollins offer two arguments that are articulated in a variety of ways throughout her opposition brief. She contends that by charging performance floor customers below-market rates for student provided services, Regency is displacing licensed cosmetologists who charge full price for that same service. Pls.' Resp. to Def.'s Summ. J. Mot. at 5-11. Hollins argues that because one of the purposes of the FLSA is to prevent " unfair competition," classifying the students as employees is necessary to prevent " displacement," and to further that purpose. Id. She also contends that because the school allegedly incurred an economic benefit from the students' performance floor activities, the students were necessarily employees. Id. at 13-19. For the reasons stated below, the Court finds her arguments unpersuasive.

          Although the text of the statute is the starting point for a determination of whether Hollins and her fellow students qualify as employees under the FLSA, the statute itself does not provide an answer because its definition of employee is circular: an employee is one who is employed by an employer. 29 U.S.C. § 203(e). To determine whether someone is an FLSA " employee," then, the Seventh Circuit has instructed district courts to assess the " economic reality" of the relationship between the proffered employee and his alleged employer. Vanskike v. Peters, 974 F.2d 806, 808 (7th Cir. 1992) (citing Goldberg v. Whitaker House Coop., Inc., 366 U.S. 28, 33, 81 S.Ct. 933, 6 L.Ed.2d 100 (1961)). But what are the " economic realities" that distinguish whether one should be subject to the minimum wage? In some sense, this instruction is no more helpful than the FLSA's circular definition of employer; it merely begs the question. Solis, 642 F.3d at 522-23. It does not help much to add that the economic reality analysis is a pragmatic inquiry that depends on the " totality of the circumstances rather than any technical label." Id.

         In an effort to focus the inquiry on factors that distinguish an employee from an independent contractor for FLSA purposes, the Seventh Circuit has endorsed the " six-factor test" set forth in Lauritzen, 835 F.2d at 1534-35. See also Estate of Suskovich v. Anthem Health Plans of Virginia, Inc., 553 F.3d 559, 565 (7th Cir. 2009).[4] The Circuit Court's embrace of

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the Lauritzen six-factor test appears tentative, however, as evidenced by the fact that Lauritzen actually posited a seven-factor test[5] and because despite its endorsement of the test in Estate of Suskovich, the Court of Appeals did not apply it, opting instead to employ a ten factor test set forth in the Restatement (Second) of Agency because the case also presented narrower common law and ERISA claims. See 553 F.3d at 565-66.[6] And in Vanskike, the Court appeared to disdain formal consideration of the Lauritzen factors in concluding that the unique relationship between the state and prisoners so completely removed the question from the normal context of private consensual economic relationships as to render the FLSA inapplicable. 974 F.2d at 812 (" Yanskike was not in a true economic employer-employee relationship with the DOC, so the statutory language does not cover him." ). Thus, although the Seventh Circuit has clearly directed district courts to consider the economic realities of the relationship in assessing whether a worker is an employee covered by FLSA, it does not appear to have provided a definitive analytical framework by which district courts must conduct that analysis.

         Moreover, as Vanskike 's treatment of the issue suggests, the context of the relationship under examination is critical. Here, as in Vanskike, the context is not a conventional economic relationship in which one party provides a service and the other pays for it; although the comparison may make Regency squirm, there is an analogy to be drawn between the work performed by prisoners and by students because in both cases that work is a component of required training for the workers. That component--the need for training--further complicates the analysis of the " economic reality" of the relationship between vocational students and a school or business that uses their services.

         The Seventh Circuit has not had occasion to consider the economic realities of the relationship between student trainees and a business that makes use of their services, but as both parties suggest in their briefs, that assessment should begin with the Supreme Court's seminal opinion Walling v. Portland Terminal Co., 330 U.S. 148, 67 S.Ct. 639, 91 L.Ed. 809 (1947). In Portland Terminal, the Court held that unpaid trainees who participated in a brakeman training program, offered by the defendant railroad company, were not employees within the meaning of the FLSA. Id. at 149. The program, which lasted approximately one week, consisted of the trainees performing the actual work of brakemen under the instruction and supervision of the defendant's permanent yard crew. Id. The court indicated that " [w]ithout doubt the [FLSA] covers trainees, beginners, or learners if they are employed to work for an employer for compensation." Id. at 151. But in finding the trainees were not employees within the meaning of the FLSA, the Court observed that the FLSA was " obviously not intended to stamp all persons as employees who, without express or implied compensation agreement, might work for their own advantage on the premises of another." Id. at 152. Because the railroad received " no immediate advantage" from any of the work done by the trainees, the Court determined the railroad should not be penalized for providing free vocational instruction that most benefited the trainee, rather than the trainer. Id. at 153. Put differently, the Court found that a student who attends a program to learn a skill or trade that they could take to gain employment elsewhere, while providing little or no benefit to the trainer, is the primary beneficiary of the relationship and cannot be the trainer's " employee." See id. at 152-53.[7]

         Recently, in Glatt v. Fox Searchlight Inc., the Second Circuit applied Portland Terminal to a class of unpaid student interns who argued they were employees under the FLSA. 791 F.3d 376, 383 (2d Cir. 2015). The students, some of whom were receiving academic credit for the internship, worked on the defendant's movie set performing various production-related tasks for no pay. Id. at 379-380. Recognizing that the Supreme Court has not yet addressed the status of student workers under the FLSA, the Second Circuit aptly recognized that Portland Terminal was the most analogous federal precedent to the modern student intern/clinical experience.

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[Entire Page Contains Footnote]

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Id. at 381-82. Yet, it also recognized that it did not accurately " reflect a central feature of the modern internship--the relationship between the internship and the intern's formal education." Id. at 385. In order to align Portland Terminal with the modern learning experience, the Second Circuit identified a set of factors for lower courts to consider when determining when ...


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