President Obama's Minimum Wage Order: Can Employees Enforce it?

 

  By Rebecca Rogers, SLN Attorney

 

The morning after President Obama’s State of the Union speech, I arrived at the office in the middle of a spirited discussion at our morning meeting.  President Obama had pledged to issue an Executive Order that would require government contractors to pay their employees a minimum wage of $10.10 per hour.  We handle a fair number of employment cases, including cases under the Massachusetts Wage Act and claims for violation of state and federal minimum wage laws, and were all wondering how such a provision would actually be enforced if a company was unscrupulous enough to represent to the federal government that it would pay $10.10 per hour but still pay its employees less. 

Here is why that is a question without an easy answer: there are state and federal statutes protecting a worker’s right to be paid minimum wage that provide for awards of multiple damages and attorneys’ fees if an employer does not meet that obligation.  But “minimum wage” is established by statute, not executive order.  There are also state statutes providing similar remedies if an employer does not pay agreed upon wages in a timely manner, whether minimum wage or otherwise.  But this federal subcontractor minimum wage is arguably neither: it is a creature of executive order, not the minimum wage statutes, and it is really an agreement between the subcontractor and the federal government, not between the subcontractor and its employees.  Clearly an employer could lose its status as a federal government contractor for violating this requirement, but would there be any remedy for the aggrieved employee?

After a few minutes we settled on the possibility of bringing a suit as a third party beneficiary to the contract between the employer and the federal government.  It turns out that the world of third party beneficiaries to government contracts is a fascinating place with plenty of twists and turns.  Most statements of the law appear deceptively simple at first, and most courts maintain that they are following the Restatement (Second) of Contracts, §302, which divides the world into intended beneficiaries of contracts, who are third party beneficiaries who can sue to enforce a promise, and incidental beneficiaries of contracts, who are not and cannot maintain such a lawsuit.  The Restatement explains that:

 

“Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.... An incidental beneficiary is a beneficiary who is not an intended beneficiary.”

Or, put more simply, “[i]n order to recover as a third-party beneficiary, the plaintiffs must show that they were intended beneficiaries of the contract.”  Cumins Society Inc. v. BJ’s Wholesale Club, Inc., 455 Mass. 458, 464 (2009).  Any third party right to sue is further limited by § 313 of the Restatement, which limits the situations under which a company that has contracted to provide goods or services to the public can be held contractually liability to a third party beneficiary.  Some courts have interpreted this provision to foreclose third party beneficiary status unless the contract contains specific language providing plaintiffs with the right to enforce its terms.  Jama v. United States Immigration and Naturalization Service, 334 F.Supp.2d 662, 687 (N.J. 2004). 

And indeed there is an impressive amount of variation in the case law on the subject.  This variation is probably due the wide variety of situations in which the question of third party liability can arise in a contract with the federal government.  For example, there is a large body of case law devoted to construction workers building large public works projects.  In those cases allowing any member of the public as an intended beneficiary of the contract could open up a construction company to all manner of contractual liability that might be contrary to the public good and decisions in favor of third party status are rare.  But on the other hand, consider an organization that has a contract to provide homeless services to veterans in a particular city.  Allowing those veterans to sue to enforce the promises made in the contract regarding the services that would be provided appears to be entirely consistent with the public policy goals of the contractual arrangement.  More recently, courts have considered whether home owners are third party beneficiaries to the contracts between banks and Fannie Mae signed as part of the HAMP program that tried to encourage mortgage modification and reduce foreclosures.  

The common refrain from these cases is that if there is language in the contract clarifying the intent of the parties to exclude people as third party beneficiaries then individuals who did not sign the contract are unlikely to be found to be intended beneficiaries.

A good illustration of this is a line of Massachusetts cases deciding the contractual liability of housing authorities to the residents of the buildings they manage.  In the housing authority cases the Massachusetts Supreme Judicial Court first held, in 1989, that a resident could be a third party beneficiary to a contract between a housing authority and the federal government.  Ayala v. Boston Housing Authority, 404 Mass. 689 (1989).  In reaching this conclusion, the court observed that “[t]o rule that these plaintiffs were not intended beneficiaries would mock the very goals which Congress and HUD set out to achieve through the Section 8 program…to afford children of families of meager means a decent, safe, and sanitary place to live.”  Id. at 700-701.  But shortly after this decision language was added the contracts between the housing authority and the federal agency that said that residents were not intended third party beneficiaries.  Eight years later, when faced with nearly identical claims but working with the new contract with the exclusionary clause for third party status, the SJC held that, despite its earlier ruling, residents under the new contracts no longer had third party status and could not bring breach of contract claims.   Barnes v. Metropolitan Housing Assistance Program, 425 Mass. 79, 84 (1997).

Courts have deferred to similar language even when it is not in the contract itself but is incorporated into the contract by reference.  Thus, in Markle, which dealt with question of whether a home owner/borrower was a third party beneficiary to the contract between a mortgage lender and the federal government as part of the Home Affordable Modification Program (“HAMP”), the court relied on exclusionary language in Fannie Mae’s “Selling and Servicing Guides,” which were incorporated into the contract by reference.  Markle v. HSBC Mortgage Corp. (USA), 844 F. Supp. 2d 172, 181 (D. Mass. 2011).  That exclusionary language provided that “no borrower or other third party is intended to be a legal beneficiary of the MSSC or the Selling Guide or Servicing Guide or to obtain any rights or entitlements through Fannie Mae’s lender communications or contracts.”  Id. at 181.  The court deferred to that characterization of the contract and held that the homeowner did not have standing to sue based on a breach of contract.

It is a puzzle to many of us that courts have so consistently concluded that distressed homeowners are not “intended beneficiaries” of a comprehensive program enacted by the federal government to help distressed homeowners.  It seems unlikely that President Obama intended to leave borrowers with such limited recourse when their loan servicers failed to follow the requirements of HAMP, but the language of the contracts have led to exactly that result.  The moral of the story seems to be that, if the Obama administration wants to empower employees to enforce the new $10.10 minimum wage, care should be taken to ensure that the language of the agreements with subcontractors reflects that intent.