Xue v. Koenig

Background

Feng Xue and Calculus Trading Technology, LLC brought wage-related claims under the Fair Labor Standards Act (FLSA) and state labor laws against Stewart Koenig and Prime Consulting International, LLC. The defendants asserted that Xue was an independent contractor rather than an employee and filed counterclaims based on alleged breaches of contract, promissory estoppel, and tortious interference.

Xue worked as a software engineer for a financial-services firm from June 2005 through December 2017. Prime Consulting arranged the placement and paid Xue through Calculus Trading Technology, the limited liability company Xue created at Koenig’s suggestion. Prime Consulting paid Xue hourly and required weekly reports. When the relationship ended, Prime Consulting had received payment for Xue’s work during the last three months of 2017 but did not pass all of that money to him. The parties disputed the amount owed.

The defendants’ counterclaims relied on three agreements: a 2005 Noncompetition Agreement, a 2009 Consulting Agreement, and a 2009 Indemnification Agreement. In an earlier order, the court had dismissed the noncompetition claims with prejudice, dismissed claims under the consulting agreement without prejudice while allowing more detailed pleading, and deferred ruling on the indemnification claims until deciding whether Prime Consulting was Xue’s FLSA employer.

FLSA Employee Status

The defendants moved to dismiss the FLSA claims for lack of subject-matter jurisdiction and sought summary judgment under Federal Rule of Civil Procedure 56. The court applied the Second Circuit’s five-factor economic-reality test for deciding whether a worker is an employee or an independent contractor: control, investment, skill and independent initiative, permanence, and integration into the employer’s business.

The court found that the factors favored employee status. Prime Consulting set Xue’s initial hourly wage and six-month trial-period terms, required weekly hour reports, and retained the ability to raise his hourly wage. The court explained that direct daily supervision was not required to establish control. The investment factor favored Xue because the record showed that he invested only his labor in Calculus, and the defendants provided no information refuting that evidence.

Although Xue was a skilled software engineer, the record did not show that he used those skills independently to locate work opportunities. The permanence factor strongly favored employee status because the relationship lasted about 12.5 years. The integration factor also favored Xue because providing information-technology experts was an integral part of Prime Consulting’s business. The court concluded that, as a matter of economic reality, Xue depended on Prime Consulting for the opportunity to provide services and that Prime Consulting was his FLSA employer.

The court therefore held that it had subject-matter jurisdiction over the FLSA claims and denied the defendants’ motions to dismiss for lack of subject-matter jurisdiction and for summary judgment. Because the defendants were Xue’s FLSA employer, the court also held that the Indemnification Agreement was void as against public policy and dismissed all counterclaims based on that agreement with prejudice.

Consulting-Agreement Counterclaims

The plaintiffs moved for judgment on the pleadings under Rule 12(c), which tests whether the pleadings state a legally sufficient claim. The defendants alleged that the parties continued to operate under an implied-in-fact Consulting Agreement after the written agreement expired.

The court held that the defendants had not alleged enough facts to show that the plaintiffs had agreed to be bound by the unsigned written Consulting Agreement before it expired. Without facts showing that the written agreement had been effective, the parties’ later conduct could not reasonably establish an implied agreement with substantially the same terms. The court granted the plaintiffs’ Rule 12(c) motion and dismissed the amended counterclaims without prejudice to the extent they relied on the Consulting Agreement.

Disposition

Judge Roman denied the defendants’ motions to dismiss the plaintiffs’ FLSA claims for lack of subject-matter jurisdiction and for summary judgment. The court granted the plaintiffs’ motion concerning the amended counterclaims. Counterclaims based on the Noncompetition Agreement had already been dismissed with prejudice; counterclaims based on the Indemnification Agreement were dismissed with prejudice in this order; and the remaining counterclaims based on the Consulting Agreement were dismissed without prejudice.