Because even Al Capone had to pay his taxes on illicit income

Let’s assume that you run a business that may operate illegally under federal law.

For example, what if your business provided security services for the marijuana industry? Marijuana is a Schedule One drug. Schedule One drugs are illegal under the federal Controlled Substances Act. So, while the business may operate legally under state law (say, in Colorado). the business may be illegal under federal law.

So, does that mean that your business can avoid the overtime obligations of another federal law, the Fair Labor Standards Act?

The FLSA requires that employers pay nonexempt employees for hours worked over 40 per workweek (any fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods) at a rate not less than one and one-half times the regular rate of pay. The penalties for not paying overtime can be stiff: unpaid wages and liquidated damages (multiplied by the number of shortchanged employees) and attorney’s fees.

So, which federal law controls in a situation in which you have non-exempt employees performing more than 40 hours of potentially illegal work in a workweek?

Non-exempt employees get paid overtime — even if the work is potentially illegal.

Back when I blogged about this issue last year (here), a federal district court in Colorado concluded (here) that the FLSA trumps the CSA and employers must pay overtime to non-exempt employees performing for than 40 hours of work in a workweek — even if that work is potentially illegal.

The employer appealed the lower court’s decision and, earlier this month, the Tenth Circuit Court of Appeals (here) affirmed the district court’s ruling. Citing “a legal theory as flawed today as it was in 1931 when jurors convicted Al Capone of failing to pay taxes on illicit income,” the appellate court re-emphasized that “case law is clear that employers are not excused from complying with federal laws because of their other federal violations.” Thus, employees like the plaintiff, being “covered by the FLSA is in line with both the plain reading and the overall purposes of that statute, and doing so does not require disavowal of the CSA.” Ultimately, “employers are not excused from complying with federal laws just because their business practices are federally prohibited.”

Now, some of you FLSA wonks may be wondering, “Does the FLSA cover someone performing allegedly illegal services in a single state?” That is, under the FLSA, only those employees who are engaged in interstate commerce or in the production of goods for commerce, or who are employed in an enterprise engaged in commerce or in the production of goods for commerce may seek recovery under the FLSA’s overtime wage provisions.

At the lower court, the employer failed to raise the defense that it doesn’t engage in commerce within the meaning of the FLSA. Thus, it did not preserve that issue for appeal.

Oops.

What about state law?

Good question. Although, it’s a moot point because the FLSA claims will survive. However, the plaintiff does not appear to have pursued state law wage-and-hour claims against the employer. Presumably, those would have survived too.

What about you?

Generally speaking, if you have non-exempt employees, make sure that you’re paying them minimum wage and time-and-a-half for overtime.