Some Honest Talk about Honest Weight and Member-Workers at Consumer Co-ops

“Democratic member control” is the second of the seven Cooperative Principles – and,  at the Honest Weight Food Co-op in New York’s capital city of Albany late last year, there was an awe-inspiring example of Principle 2 in action.  The members of Honest Weight called a special meeting and exercised their right under their co-op’s bylaws to oust one board member – an embattled former president -- and elect three newcomers.

This was no mere popularity contest or expression of peevish personal pique.  At issue was a decision by the board of Honest Weight in October to end the co-op’s member work program in which consumers who belong to Honest Weight provide free laborto the co-op in exchange for a discount at the register.  A straw vote taken at the special member meeting in question on November 30 made clear the degree of member disapproval of this decision:  of the more than 600 members present, 85.7 percent said they wanted to keep the member worker program.

The turmoil did not end on November 30.  On January 5, four board members, not among those elected at the special membership meeting, resigned.  Their jointly issued resignation letter said, in part:  “We can no longer represent a membership or participate on a Board where a majority appears to be taking actions that knowingly and willfully disregard laws affecting the Co-op and the associated prohibitive costs that the Co-op cannot sustain.” 

The turmoil is understandable; worker member programs are a big deal at consumer cooperatives that have them.

Many food co-ops were founded upon this tradition, and at those consumer co-ops that have member labor programs they are both a profound tool of member commitment and solidarity as well as a source of economic advantage.  The Park Slope Food Co-op in Brooklyn is famous for having both the lowest grocery prices in New York City and members who are passionately committed; at Park Slope, only members may shop and all members, with rare hardship exceptions, must work.  While Honest Weight did not go quite that far, it’s clear that member work shifts have long been a hallowed tradition there as well.

So what went down in Albany?

Apparently the board concluded that the co-op’s member worker program is illegal – specifically, that it violates federal and state minimum wage laws.  The four board members who quit in January 5 accused their colleagues of ignoring legal advice as well as a 16-year-old letter from the state Department of Labor advising that worker members were entitled to minimum wage.

Board member Ned Depew posted a rebuttal to this claim on January 10.  According to Depew, “[t]here is absolutely no case law that settles the issue of whether Owner-workers in a true co-op, who offer their labor to the organization, can be classified as ‘employees’ for labor law purposes. This question has never been tested in Court. There is no ‘law’ to disregard.”

Another board member, attorney Kate Doyle, has circulated an analysis of the legal question.  The analysis, like Depew’s letter and other information about the controversy, is available at a grassroots web site set up for the purpose of broadcasting news of the turmoil at Honest Weight.  (There are board minutes and other documents on the co-op’s own web site, but all are password-protected and thus not available to people who are not members of Honest Weight.)   Citing a bunch of cases -- Liggett Co. v. Lee, 288 U.S. 517 (1933); Puget Sound Plywood, Inc. v. Commissioner of Internal Revenue, 444 T.C. 305 (1965); Fleming v. Palmer, 123 F.2d 749 (CA1, 1941); Brookings Plywood Corp., 98 NLRB 794 (1952); and United Furniture Co., 67 NLRB 1307 (1946) – Doyle’s conclusion is that “[t]he KEY test is, ‘does the worker owner control the co-op?’ WE DO.”

So who’s right?  Is it the faction of the Honest Weight board that claims the co-op is knowingly acting in an illegal fashion?  Or is it the faction believing that at a “true” co-op, worker owner programs do not run afoul of the requirement that employees be paid minimum wage?

It turns out that neither side is entirely correct.  To explain why, here’s a bit of legal analysis to buttress what Doyle provided.

Nearly 45 years ago, in Goldberg v. Whitaker House Co-op, Inc., 388 U.S. 28 (1961), the U.S. Supreme Court considered a case involving a cooperative in Maine whose members were some 200 home-based workers who knitted, crocheted and embroidered items that were sold through their co-op.  The U.S. Department of Labor sued the co-op, accusing it of violating the Fair Labor Standards Act (FSLA) – the act of Congress establishing a federal minimum wage.

The Whitaker House Co-op’s argument was straightforward:  members aren’t “employees” within the meaning of the FLSA and, thus, the minimum wage requirement did not apply.  The trial court – the U.S. District Court for the District of Maine – agreed with the co-op.  The U.S. Court of Appeals for the First Circuit in Boston agreed with the U.S. Department of Labor. 

The ruling of the U.S. Supreme Court?  “We conclude that the members of this cooperative are employees within the meaning of the Act.” Id. at 32.  The Whitaker House Co-op was obliged to pay minimum wage to its home-based knitters, crocheters and embroiderers.

Alas, this Supreme Court decision did not resolve the question definitively as to all co-ops.  The justices merely concluded that “[t]here is nothing inherently inconsistent between the coexistence of a proprietary and an employment relationship” – in other words, that member-owners can also be employees of their co-op.  Id.

Continued the Court: 

In this case the members seem to us to be both ‘members’ and ‘employees.’  . . . The members are not self-employed; nor are they independent, selling their products on the market for whatever price they can command. They are regimented under one organization, manufacturing what the organization desires and receiving the compensation the organization dictates. Apart from formal differences, they are engaged in the same work they would be doing whatever the outlet for their products. The management fixes the piece rates at which they work; the management can expel them for substandard work or for failure to obey the regulations. The management, in other words, can hire or fire the homeworkers. Apart from the other considerations we have mentioned, these powers make the device of the cooperative too transparent to survive the statutory definition of ‘employ’ . . . . In short, if the ‘economic reality’ rather than ‘technical concepts’ is to be the test of employment, these homeworkers are employees.

Id. at 32-33 (citations omitted).  Today, in a variety of contexts, Whitaker House Co-op is cited for the proposition that “economic reality” rather than formal rules (like those enshrined in co-op statutes, articles of incorporation, or bylaws) govern when someone is an employee entitled to the federal minimum wage.

As to the specific question of whether worker members at a consumer co-op that sells groceries are employees entitled to the federal minimum wage, Depew, Doyle and like-minded members of Honest Weight are correct.  There is no court case or fully litigated administrative decision that resolves the issue.  There is, however, a so-called “opinion letter” from the U.S. Department of Labor that was issued in 1997.  It was written at the request of an unidentified food co-op in substantially the same situation Honest Weight, and other food co-ops, are in today.

Here is the letter, in its entirety:

This is in response to your letter in which you raise a number of questions concerning the application of the Fair Labor Standards Act (FLSA) to member volunteers of a cooperative grocery store.

Under section 3(g) of the FLSA, “employ” is defined as “to suffer or permit to work.” However, the Supreme Court has made it clear that the FLSA was not intended “to stamp all persons as employees who without any express or implied compensation agreement might work for their own advantage on the premises of another.” In administering the FLSA, the Department follows this judicial guidance in the case of individuals serving as unpaid volunteers in various community services. Individuals who volunteer or donate their services, usually on a part-time basis, for public service, religious or humanitarian objectives, not as employees and without contemplation of pay, are not considered as employees of the religious, charitable and similar nonprofit corporations that receive their service. Please note examples of volunteer services in the enclosed “Employment Relationship Under the Fair Labor Standards Act.”

With regard to questions 1, 2, and 3, you indicate that cooperative members volunteer to stock shelves, sweep floors, slice meat, and operate cash registers in the store in exchange for discounts on purchases. The discounts may be used by the members at anytime during the two week period after they are earned. You ask if this practice violates the minimum wage provisions of the FLSA.

In this case, the cooperative members do not appear to be “volunteers within the meaning of the FLSA. This is so because the services volunteered are not for public service, religious, or humanitarian objectives as required by the FLSA, rather, the services are being donated for commercial business purposes. It is, therefore, our opinion that the cooperative members would be considered “employees” within the meaning of the FLSA, and would be subject to the minimum wage and overtime provisions of the Act. This determination would not change even if member employees were not given discounts, or if they performed tasks of their own choosing and worked anytime they chose.

As the Supreme Court recognized in Goldberg v. Whitaker House Cooperatives Inc., 366 U.S. 28 (1961), part ownership or any proprietary interest of a member in a cooperative does not preclude the existence of an employer-employee relationship. As the Court stated in that case, “[w]e fail to see why a member of a cooperative may not also be an employee of the cooperative.” Id. at 32. Moreover, the fact that the company is not operated for profit also is immaterial. See Farmers Irrigation Co. v. McComb, 337 U.S. 755, 768 (1949).

With respect to questions 4-7, there is not enough information in your letter for us to make a determination. Whether or not the professionals, board members, and committee members would be considered “employees” pursuant to the FLSA would depend upon all of the facts in the particular situation.

This opinion is based exclusively on the facts and circumstances described in your request and is given on the basis of your representation, explicit or implied, that you have provided full and fair description of all the facts and circumstances that would be pertinent to our consideration and the questions presented. Existence of any other factual or historical background not contained in your request might require a different conclusion than the one expressed herein.

We trust that the above information is responsive to your inquiry.

 Sincerely,

Maria Echaveste

Administrator

[The Westlaw citation for this opinion letter is 1997 WL 957908.]

In the face of this opinion letter, it would be difficult for an attorney hired by a consumer co-op to provide it with actionable legal advice to tell the co-op that it need not worry about whether its member worker program runs afoul of federal minimum wage law.  This is so even in light of the authorities cited in the analysis provided by the lawyer currently serving on Honest Weight’s board.  Here is why.

The first referenced case, Liggett Co. v. Lee, is a famous one from the earliest days of the Franklin D. Roosevelt Administration that concerns neither co-ops nor minimum wage law.  At issue was a Florida law intended to curb the dominance of investor-owned chains of drug stores.  The portion of the decision cited in the analysis is actually from a dissenting opinion penned by Justice Louis Brandeis.  See Liggett Co. v. Lee, 288 U.S. 517, 541 (1933) (Brandeis, J., dissenting in part).  Rebutting the argument that chain drug stores were no different than individually owned stores that formed purchasing and marketing cooperatives, Brandeis waxed eloquent in support of cooperatives.  What he said is worth reading, see id. at 577-79, but it has no bearing on whether Congress intended member workers of consumer co-ops to be subject to minimum wage requirements.

The second case is Puget Sound Plywood, Inc. v. Commissioner of Internal Revenue, 444 T.C. 305 (1965) – one of the most important judicial decisions ever concerning co-ops.  But the decision was made by the U.S. Tax Court and concerned not minimum wage requirements but, rather, what constitutes “operating on a cooperative basis” so as to be able to take advantage of the favorable tax treatment co-ops can obtain under Subchapter T of the Internal Revenue Code.  Puget Sound Plywood is in every textbook or article about cooperatives, but is of no help here.

The decision of the U.S. Court of Appeals for the First Circuit in Fleming v. Palmer, 123 F.2d 749 (CA1, 1941), is very much like the Whitaker House Co-op case that passed through the same court nearly 25 years later on its way to the Supreme Court.  This time the embroiderers were based in Puerto Rico and the case for treating their enterprise as a co-op was even less compelling.  The First Circuit said:  It suffices to say that a reading of [the relevant facts] can lead only to the conclusion that this cooperative is a far cry from the cooperative of which the late Justice Brandeis was thinking” when he paid tribute to co-ops in Liggett Co. v. Lee.  See id. at 762.

According to the legal analysis from the lawyer on the Honest Weight board, the Fleming case stands for the proposition that when a co-op is controlled by its members and not some outsider, it is a true co-op and thus need not concern itself with federal minimum wage requirements.  Unfortunately, it is not that simple.

Honest Weight is not controlled by its workers – it is a consumer co-op.  If Fleming truly applies only to cooperative workplaces whose employees are really controlled by some outsider, then essentially no employees of any co-op, regardless of their type, would be subject to minimum wage rules.  That would be absurd.  A court tasked with deciding whether a consumer co-op was subject to federal minimum wage requirements would quickly see that the co-op is not a sham, but it would also point out that it has paid employees working alongside the volunteers and is thus the sort of workplace subject to the Fair Labor Standards Act.

The two cases of the National Labor Relations Board cited in the Honest Weight board member analysis are not persuasive for the simple reason that they apply standards applicable to federal law covering the right to organize and bargain collectively rather than the federal law providing for a minimum wage.

So, the bottom line is that we have (1) a 1961 decision of the U.S. Supreme Court telling us when a worker co-op is required to pay the federal minimum wage, without shedding light on what circumstances would qualify a consumer co-op for an exemption, (2) a much earlier decision of the federal appeals court in Boston that likewise sheds light only on when a co-op can't evade minimum wage rules by pretending to be a co-op, and (3) a 19-year-old opinion letter making clear that, at least during the Clinton Administration, the U.S. Department of Labor thought the federal minimum requirement applied to member worker programs at consumer co-ops.  What in these circumstances is a responsible food co-op and its lawyers to do?

Well, if the cooperative is in New York, the only reasonable answer I can give is that I have no idea.  That's because businesses in New York are covered not just by the Fair Labor Standards Act but also by the minimum wage law adopted by the New York state legislature.  It is entirely possible that the New York statute is even more protective of workers and the minimum wage than its federal counterpart is.  As a Vermont lawyer who advises co-ops, I am well aware that several food co-ops in my state have member worker programs.  Federal and state labor authorities have so far left them undisturbed.  It is difficult to imagine the authorities throwing the book at a Vermont co-op for letting members provide volunteer labor in their store.  If that turns out to be against the law in Vermont, I am tempted to conclude that it is better to ask forgiveness than permission.

One thing that all co-ops could do is to take steps to align their member worker programs with minimum wage rules.  They could offer their member-workers a choice between minimum wage and a register discount that provides at least an equivalent monetary benefit.  Of course this begs certain other relevant questions, such as the applicability of workers compensation laws and laws providing for unemployment insurance.  At the very least, consumer co-ops should keep in mind the salutary purposes of laws guaranteeing workers at least the minimum wage.

Just as important, in my opinion, is attentiveness to the culture of one's cooperative, by which I don't just mean fidelity to the Cooperative Values and Principles.  As with many food co-ops founded in the 1960s and 70s, the member worker program of Honest Weight is obviously a deeply ingrained aspect of the cooperative's traditions -- something many members support as a means of staying connected to and receiving value from their co-op.  In these circumstances, a board examination of whether the program should continue should happen in an open an transparent fashion.  Cooperative scholar Brett Fairbairn of the University of Saskatchewan has warned against becoming a "black box" co-op -- one in which members simply do not understand their co-op, the benefits it provides and the business realities it confronts.  When that happens, and the board abets this trend by discussing key questions in secrecy, suspicion proliferates and (given the tenor of the times) people often draw the most sinister inferences they can about the motives of others.  This is a mortal threat to the survival of co-ops like Honest Weight, whatever the fate of member worker programs, given the looming challenges the food co-op sector confronts in the future.