Lu v. Red Koi, Inc.

Background

Four delivery workers—De Quan Lu, Dian Jin Jiang, Qi Gui Guo, and Wei Qin Zhu—asserted six counts under the Fair Labor Standards Act (FLSA) and New York Labor Law. They alleged that, from August 2014 through August 2015, they routinely worked twelve-hour days, six days per week, for a flat monthly salary of $1,000. They alleged that this amounted to $3.47 per hour, and that they were not paid overtime or spread-of-hours pay, did not receive required pay-rate notices or weekly compensation records, and were affected by failures to maintain accurate employment records.

The operative complaint alleged that Xiaohua Zhu and Ying Chen were among the plaintiffs’ employers. Zhu and Chen moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not allege enough facts to state a legally plausible claim.

Legal standard

Under the FLSA, an individual may be liable as an employer if the person acted directly or indirectly in the interest of an employer in relation to an employee. Courts apply an “economic reality” test that considers whether the alleged employer had the power to hire and fire workers, supervised or controlled their schedules or working conditions, determined their pay rate or method of payment, and maintained employment records. No single factor controls, and the factors are evaluated together. The court stated that the same test applies to the definition of employer under New York Labor Law.

At the motion-to-dismiss stage, plaintiffs must allege facts—not merely repeat the elements of the legal test—that make liability plausible. The court accepts well-pleaded factual allegations as true and draws reasonable inferences in the plaintiffs’ favor, but it does not accept legal conclusions presented as facts.

Ruling concerning Zhu

The court granted Zhu’s motion to dismiss in its entirety. It found that the complaint’s allegations that Zhu could hire and fire employees, set wages and schedules, retain records, and participate in daily operations were conclusory recitations of the economic-reality factors rather than supporting facts.

The complaint also alleged that Zhu owned part of Red Koi, contributed $38,000, and held a 23.75% shareholder interest. The court held that ownership alone did not establish that Zhu was an employer because the complaint needed to allege control over the company’s operations in a way related to the plaintiffs’ employment.

The court also rejected allegations that Zhu helped control the restaurant premises or brought employees to the restaurant beginning in March 2015. Those allegations did not connect Zhu to control over these plaintiffs, who were hired in August 2014. The court likewise found that the complaint’s successor-liability theory did not support personal liability against Zhu as a shareholder and lacked factual allegations showing that the requirements for successor liability had been met.

Ruling concerning Chen

The court granted in part and denied in part Chen’s motion. It granted the motion as to claims from the “early period,” approximately August 2014 through February 2015. The court found that the allegations concerning Chen’s ownership, the bringing of employees to the restaurant, control of the premises, and successor liability were insufficient and did not show that Chen was the plaintiffs’ employer during that period.

The court denied the motion as to claims from the “late period,” beginning approximately in March 2015. The complaint alleged that Chen became the restaurant’s manager, managed accounting, paid employees, reviewed profits, kept records, had signing authority over the restaurant’s bank account, made withdrawals and purchases, wrote checks to third parties, and executed documents for the restaurant.

The court held that these allegations plausibly supported at least the economic-reality factors concerning maintaining employment records and determining the method of payment. Although the court described the issue as a close case and found that the allegations supported only one or, at most, two factors, it concluded that the complaint was barely sufficient to allege that Chen was an employer during the late period. The court also rejected Chen’s argument that he could not be an employer because he allegedly had no direct contact with the plaintiffs, explaining that direct contact is not required. It further rejected the argument that Lin’s possible status as an employer excluded Chen, because the FLSA and New York Labor Law can impose liability on more than one employer.

Disposition

The court granted Zhu’s motion to dismiss in its entirety. It granted in part and denied in part Chen’s motion to dismiss—granting it as to the early-period claims and denying it as to the late-period claims. The court found that further leave to amend would be futile because the plaintiffs had already amended their complaint twice. It directed the Clerk of Court to terminate Zhu and to close the motion at docket entry 124. The court also scheduled a status conference for the remaining parties.