Malloy Oil, LLC v. Kentucky Labor Cabinet, Department of Workplace Standards

• Court: Court of Appeals of Kentucky
• Decided: June 22, 2023
• Docket: 2022 CA 000123
• Status: Unknown

Opinion

RENDERED: JUNE 23, 2023; 10:00 A.M. NOT TO BE PUBLISHED

Commonwealth of Kentucky Court of Appeals NO. 2022-CA-0123-MR

MALLOY OIL, LLC AND DENNIS J. MALLOY, JR. APPELLANTS

APPEAL FROM HENDERSON CIRCUIT COURT v. HONORABLE KAREN L. WILSON, JUDGE ACTION NO. 21-CI-00202

KENTUCKY LABOR CABINET, DEPARTMENT OF WORKPLACE STANDARDS APPELLEE

OPINION REVERSING AND REMANDING

** ** ** ** **

BEFORE: ACREE, KAREM, AND TAYLOR, JUDGES.

KAREM, JUDGE: Malloy Oil, LLC (“Malloy”) and Dennis Malloy appeal the

Henderson Circuit Court’s order affirming the Kentucky Labor Secretary’s final

order requiring Malloy to pay minimum wage and overtime amounts to Lawrence

Malloy. We find that the final order failed to set forth sufficient findings to

explain the deviation from the hearing officer’s recommended findings as required

under Kentucky statute. Thus, we reverse the Henderson Circuit Court’s order and

remand with directions to remand the case to the Secretary to make findings of fact

and conclusions of law sufficient for appellate review under Kentucky Revised

Statute (“KRS”) 13B.120.

FACTUAL AND PROCEDURAL BACKGROUND

On March 11, 2016, Lawrence filed a complaint against Malloy and

Dennis with the Kentucky Labor Cabinet (the “Cabinet”), alleging unpaid wages.

Lawrence and his two brothers, Dennis, and Thomas Malloy (“Thomas”) had

formed Malloy as a Kentucky limited liability company on December 5, 2013.

Thomas sold his one-third interest to Lawrence and Dennis on or

about June 18, 2015. Subsequently, on February 24, 2016, Lawrence sold his fifty

percent share of Malloy to Dennis, leaving Dennis as the company’s sole owner.

The Kentucky Secretary of State administratively dissolved Malloy on October 1,

2016.

At the initial organizational meeting in 2013, the Malloy brothers

agreed that Lawrence would handle the company’s day-to-day operations and

receive a $4,000 monthly salary. However, soon after Malloy’s formation, the

record reflects that it encountered financial hardships. To alleviate some of the

-2- financial burdens, Lawrence agreed to defer his salary until Malloy had the money

to pay him. He received his first paycheck in April 2014, including all the amounts

he was owed at that time. Malloy timely paid Lawrence’s salary until November

2014, bringing his total paid wages to $40,000.

However, in November 2014, Malloy entered another period of

financial hardship. Again, Lawrence offered, and the brothers agreed, to defer his

salary until there was adequate money to pay. Unfortunately, the company never

reached a position where it could pay before it was dissolved. Consequently,

Malloy did not pay Lawrence any other amounts after the initial $40,000.

In his complaint with the Cabinet, Lawrence alleged Malloy owed

him a remaining $63,310.34. The Cabinet investigated Lawrence’s claim,

determined that Malloy owed Lawrence the amounts alleged, and issued a Notice

of Violation and demand letter to Malloy on January 23, 2017.

Malloy requested an administrative hearing under KRS Chapter 13B,

which was held on May 20, 2019. On December 6, 2019, the Hearing Officer

issued Findings of Fact, Conclusions of Law, and Recommended Order (the

“Recommended Order”) in favor of Dennis and Malloy. Specifically, the Hearing

Officer concluded that the Cabinet should not impose a civil penalty or obligation

of restitution on either Malloy or Dennis in his individual capacity.

-3- After reviewing the evidence in the case, the Secretary subsequently

issued a Final Order on February 5, 2021 (the “Final Order”), which affirmed in

part, and reversed in part, the Recommended Order. The Secretary determined the

evidence showed that Lawrence had waived part of his salary, but Malloy still

owed him $20,126 for the period of November 1, 2014, through February 24,

2016, because the law did not allow an employee to contractually waive any

minimum wages and overtime earned by that employee. The Secretary also

determined that Malloy and Dennis were jointly and severally liable for the

amounts owed pursuant to KRS 337.010 and KRS 337.055.

On March 22, 2021, Dennis and Malloy filed an appeal in Henderson

Circuit Court. The circuit court entered an order affirming the Final Order. After

the circuit court denied their motion to alter, amend, or vacate, Malloy and Dennis

filed this appeal.

ANALYSIS

a. Standard of Review

In reviewing an administrative action, “this Court generally confines

its review to: (1) whether the findings of fact are supported by substantial

evidence of probative value; and (2) whether the administrative agency applied the

correct rule of law to the facts.” Ford Contracting, Inc. v. Kentucky Transp.

Cabinet, 429 S.W.3d 397, 406 (Ky. App. 2014). Here, where the circuit court

-4- upheld the administrative decision, we must determine whether the circuit court’s

findings are clearly erroneous, keeping in mind that “[t]he circuit court’s role as an

appellate court is to review the administrative decision, not to reinterpret or to

reconsider the merits of the claim, nor to substitute its judgment for that of the

agency as to the weight of the evidence.” 500 Associates, Inc. v. Nat. Res. and

Environmental Protection Cabinet, 204 S.W.3d 121, 131 (Ky. App. 2006)

(footnote omitted).

Lastly, we must review whether the administrative action was

arbitrary and whether the administrative agency acted properly within its delegated

powers. American Beauty Homes Corp. v. Louisville and Jefferson County

Planning and Zoning Commission, 379 S.W.2d 450, 456 (Ky. 1964).

b. Discussion

Malloy first argues that the Cabinet’s Secretary failed to timely issue

the Final Order under KRS 13B.120(4)(b) and is therefore void. KRS 13B.120(4)

states in relevant part, “the agency head shall render a final order in an

administrative hearing within ninety (90) days after . . . [t]he hearing officer

submits a recommended order to the agency head, unless the matter is remanded to

the hearing officer for further proceedings.” The Cabinet concedes the Final Order

was not issued within ninety (90) days but argues that is not a fatal flaw because

the deadline is merely directory and does not require strict compliance.

-5- In Kentucky, failing to comply with a “directory” – as opposed to a

“mandatory” – statutory provision is harmless error. Knox County v. Hammons,

129 S.W.3d 839, 842-43 (Ky. 2004). As stated by our Supreme Court, “[t]his

determination is vital because [a] proceeding not following a mandatory provision

of a statute is rendered illegal and void, while an omission to observe or failure to

conform to a directory provision is not.” Id. at 843 (internal quotation marks and

citation omitted).

When determining whether a statute is directory or mandatory, “if the

directions given by the statute to accomplish a given end are violated, but the given

end is in fact accomplished, without affecting the real merits of the case, then the

statute is to be regarded as directory merely.” Varney v. Justice, 86 Ky. 596, 6

S.W. 457, 459 (1888). The Fyffe Court reiterated that:

[If a statutory] provision relates to some immaterial matter, not reaching the substance, or not of the essence of the thing to be done, and by an omission to observe it the rights of those interested will not be prejudiced – as where compliance is a matter of convenience or the directions are given merely with a view to securing proper, orderly, or prompt procedure - it is generally regarded as but directory.

Skaggs v. Fyffe, 266 Ky. 337, 98 S.W.2d 884, 886 (1936).

Significantly, the administrative hearing procedures outlined in KRS

Chapter 13B do not specify a consequence for an agency’s failure to issue a final

order within ninety (90) days, signaling that the timeframe is directory and not

-6- mandatory. Moreover, the Final Order in this case was not void because it

accomplished the intended end of issuing the agency’s final order without affecting

the case’s merits. The timeline for issuing final orders stated in KRS 13B.120 is

merely directory and not mandatory; therefore, Malloy’s argument for voiding the

Final Order is without merit.

We next address the issue of whether the final order violates the

requirements of KRS 13B.120. KRS 13B.120 empowers the “agency head” – in

this case, the Secretary – to accept, modify, or reject, in whole or part, the Hearing

Officer’s recommended order when entering a final order. If rejected or modified,

KRS 13B.120(3) mandates that the final order “shall include separate statements of

findings of fact and conclusions of law.”

Our Court has explained the separate findings of fact and conclusions

of law mandate of KRS 13B.120(3). In Cabinet for Health and Family Services v.

RiverValley Behavioral Health, 465 S.W.3d 460, 468 (Ky. App. 2014), the Court

of Appeals stated that, while the final order need not “refute every finding of fact

and conclusion of law made in the recommended order,” it must “articulate a

rationale for departing from the recommendation which is sufficient to explain the

reasons for the deviation and to allow meaningful appellate review.” Id.

In this case, the Final Order included one sentence whereby it

imposed a $20,126 judgment against Malloy and Dennis, stating that minimum

-7- wage and overtime earned cannot be waived under Metro Louisville/Jefferson

County Government v. Abma, 326 S.W.3d 1, 9-10 (Ky. App. 2009). However,

Kentucky’s minimum wage law applies only to “employees.” See KRS 337.275;

see also KRS 337.285 and City of Louisville, Div. of Fire v. Fire Service Managers

Ass’n ex rel. Kaelin, 212 S.W.3d 89, 100 (Ky. 2006) (“supervisory, salaried

personnel [are] not entitled to time-and-a-half overtime pay under KRS 337.285.”).

In discussing Lawrence’s status, the Hearing Officer found that

Lawrence “was an owner of the company, a manager, and an employee, all three.”

The Final Order did not specifically state that it was reversing this finding, and the

definition of “employee” under KRS 337.010(2)(a)2. specifically exempts “[a]ny

individual employed in a bona fide executive, administrative, supervisory, or

professional capacity[.]”

Nothing in the Final Order indicated that Lawrence was a non-exempt

statutory employee under KRS 337.010(2)(2)2. In fact, from November 2014 to

February 2016, Lawrence was the only person managing, operating, and

supervising Malloy. The record reflects that he had Malloy’s checkbook and paid

the company’s bills. Thus, we find the Secretary’s rationale for imposing the

$20,126 judgment insufficient “to explain the reasons for the deviation[.]”

RiverValley Behavioral Health, 465 S.W.3d at 468.

-8- Additionally, the Final Order found Dennis and Malloy jointly and

severally liable for the amounts under KRS 337.055, which requires an employer

to pay an employee all wages or salary earned by that employee. Similarly, the

Final Order included no findings that Dennis was an “employer” but merely cited

to KRS 337.010. However, KRS 337.010 contains ten different definitions broken

down into multiple sub-paragraphs. Nowhere in the Final Order does the Secretary

detail which definition he was referring to and, in fact, never uses the word

“employer” once. Thus, we find the Secretary’s rationale for the imposition of

joint and several liability on Malloy and Dennis insufficient “to explain the reasons

for the deviation.” RiverValley Behavioral Health, 465 S.W.3d at 468.

CONCLUSION

For the foregoing reasons, we reverse the Henderson Circuit Court’s

order and remand with directions to further remand the case to the Secretary to

make findings of fact and conclusions of law sufficient for appellate review under

KRS 13B.120. Particularly, we emphasize the importance of determining

Lawrence’s status as an “employee” and Dennis Malloy’s status as an “employer”

under the applicable statutes.

ALL CONCUR.

-9- BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE:

Christopher Hopgood James Leif Sanders Henderson, Kentucky Susan Lee Draper Frankfort, Kentucky Daniel W. Sherman Valparaiso, Indiana

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