Employment: Employee staffing agency sued for unpaid minimum and overtime wages

Although the staffing agency argued these claims were barred by a prior lawsuit brought by the Department of Labor, the court disagreed because the specific claims were different from those in the Secretary’s suit.

Background

Smoothstack Inc. is an employee-staffing agency that recruits information technology professionals who are in the early stages of their careers, provides them with training and then places them with mainly Fortune 500 companies. Justin O’Brien and Skylar Reed bring a second amended complaint, or SAC, on behalf of themselves, and all other similarly situated individuals, seeking: (i) unpaid minimum wages and unpaid overtime pay pursuant to the Fair Labor Standards Act, or FLSA; (ii) a declaratory judgment that defendant’s practices are unlawful; (iii) backpay and (iv) damages. Smoothstack has filed a motion to dismiss.

Standing

Counts Three and Four assert a “failure to pay wages free and clear” claim and an “illegal kickback” claim under the FLSA brought on behalf of Reed and the FLSA collective. Defendant argues that plaintiffs have failed to establish standing for both counts.

It is undisputed that Reed—like O’Brien—never actually returned any wages, made any payment to defendant or had any wages deducted upon leaving his employment. Plaintiffs argue in their opposition, however, that Reed suffered an actual injury-in-fact through “real harms associated with owing, or believing he owed, Smoothstack a nearly $30,000 debt.”

While this court recognizes that an employee who has been fired for cause or resigns may have experienced legitimate harm by believing—pursuant to the Training Repayment Agreement Provision, or TRAP—that they incurred a debt, the court is unconvinced that merely alleging that Reed experienced “real harms associated with owing, or believing he owed, Smoothstack a nearly $30,000 debt” is sufficient, without more, to establish the kind of “concrete,” “not abstract” injury required for Article III standing.

As to imminent injury-in-fact, the court finds that, although an active threat of litigation may, in some cases, establish the required injury under Article III, defendant’s express written release of Reed from the service commitment period and waiver of any claims against Reed for breach of the same shows that Reed cannot have “an objective and reasonable apprehension of future litigation” sufficient to create Article III standing.

Counts Five and Six are brought on behalf of Reed and the class pursuant to Virginia common law. Count Five alleges that the TRAP is an unconscionable contract provision that is “so gross as to shock the conscience.”  Count Six alleges that the TRAP is an unenforceable contract provision.

Neither O’Brien nor Reed is presently employed by defendant, neither has made payments to defendant pursuant to the TRAP and defendant released any claims related to the TRAP against them prior to the filing of the amended complaint. Given that there is no ongoing relationship between the parties governed by the TRAP or an existing threat of enforcement that would create the requisite live controversy, the named plaintiffs cannot seek declarations stating that the TRAP is unconscionable and/or unenforceable because, at this point, they lack a legally cognizable interest in the outcome.

Noncompete

Count Seven, brought under Virginia Code § 40.1-28.7:8 and asserted on behalf of Reed and the class, alleges that the TRAP constitutes an unlawful non-compete clause. The TRAP does not contain an express restriction on post-employment competition. Nonetheless, plaintiffs argue that the TRAP functions as a de facto non-compete due to its deterrent effect on an employee to resign.

While the TRAP may influence an individual’s decision on when to terminate employment, it does not affect an individual’s ability to compete following termination of employment. Indeed, there is no reference to competition or future employment in the TRAP at all and the TRAP does not limit either a category of employers or the field of employment that individuals may seek after their employment with defendant ends.

VCPA

Counts Ten, Eleven and Twelve are Virginia Consumer Protection Act, or VCPA, claims. Defendant’s training and placement of plaintiffs with defendant’s clients does not constitute a “consumer transaction” within the meaning of the VCPA because it was provided as part of an employer-employee relationship. Accordingly these counts will be dismissed for failure to state a claim.

DOL lawsuit

Defendant argues that the filing of a lawsuit by the Department of Labor on July 10, 2024, barred the SAC, which was subsequently filed on July 16, 2024. However the weight of the case law is that the FLSA does not authorize “an employee to file an identical private civil action against the defendant once a claim has been filed against the defendant by the Secretary of Labor.” The court finds that plaintiffs’ claims for unpaid minimum wages, unpaid overtime wages, O’Brien’s individual retaliation and regular rate violation are not barred by 29 U.S.C. § 216(b) because they are “different from the Secretary’s suit.”

Defendant’s motion to dismiss granted in part, denied in part.

O’Brien v. Smoothstack Inc., Case No. 1:23-cv-491, July 11, 2025. EDVA at Alexandria (Alston). VLW 025-3-287. 31 pp.