Department of Labor Seeks Court Order to End Corrupt Practices at IT Staffing Agency Smoothstack Inc.
On July 10, 2024, the U.S. Department of Labor (DOL) filed a Smoothstack lawsuit against Smoothstack Inc., a Virginia-based IT staffing company, and its co-founder Boris Kuiper, in the U.S. District Court for the Eastern District of New York. The Smoothstack lawsuit accuses the company of engaging in unlawful labor practices, which bind employees to the company through unfair contracts and extract significant financial penalties if they attempt to leave. According to the DOL, these practices amount to a form of modern-day indentured servitude, violating the Fair Labor Standards Act (FLSA).
Smoothstack Inc., which recruits IT professionals across the U.S., has been alleged to operate a system that coerces employees into remaining in their jobs by imposing exorbitant financial penalties for leaving before completing 4,000 hours of billable work—equivalent to nearly two years. This system, the lawsuit claims, causes some employees to earn less than the federal minimum wage, violating the FLSA’s wage and hour provisions.
The Department of Labor, through its Office of the Solicitor, is pursuing an injunction to stop these practices and enforce compliance with federal labor laws. The case raises critical questions about how employment contracts can be misused to control workers, especially in high-demand fields like IT, where many employees are eager to start their careers but find themselves trapped by exploitative agreements.
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Smoothstack’s Employment Practices: An Overview
According to the complaint, Smoothstack and Kuiper have been using contracts that compel workers to remain with the company for a minimum of two years. If employees fail to meet this requirement, they are forced to repay the company up to $30,000, supposedly to cover training costs, lost profits, and administrative expenses. These penalties apply whether employees voluntarily resign, are terminated for cause, or are found to have breached their contract in any other way.
This contractual obligation is tied to the completion of 4,000 hours of billable work. If workers leave before fulfilling this requirement, Smoothstack demands repayment for what they claim are “training costs.” In some cases, the company has taken legal action against former employees to enforce these repayment demands, often seeking amounts far greater than what the employees earned while working for Smoothstack.
The lawsuit asserts that this system unlawfully reduces employees’ wages below the federal minimum wage, as the employees are effectively forced to pay the employer for the right to work. Furthermore, this arrangement deprives employees of basic legal protections, such as the right to quit their job without facing ruinous financial penalties.
Violations of the Fair Labor Standards Act (FLSA)
The FLSA mandates that all U.S. employees must be paid at least the federal minimum wage and receive overtime pay for any hours worked beyond 40 in a week. Employers are also prohibited from retaliating against workers who exercise their rights under the FLSA, including filing complaints or cooperating with government investigations.
In Smoothstack’s case, the Department of Labor argues that the company’s employment contracts violate multiple provisions of the FLSA:
- Minimum Wage Violations: The lawsuit claims that the company’s demand for up to $30,000 in repayment forces employees to work for less than the federal minimum wage. Workers who leave before completing 4,000 hours of billable work can end up earning far less than what they are owed under the law due to these penalties.
- Overtime Violations: The complaint alleges that Smoothstack has failed to meet its obligations to provide overtime pay to employees who work more than 40 hours a week.
- Anti-Retaliation Violations: Smoothstack’s contracts allegedly include clauses that prohibit employees from discussing their employment terms, grievances, or pay rates, as well as non-disparagement and non-disclosure provisions. These contract terms effectively gag employees, preventing them from speaking out about potential FLSA violations. The company also allegedly requires employees to notify Smoothstack if they are contacted by government investigators and forbids them from providing information unless compelled by law.
- Obstruction of Investigations: The lawsuit further claims that Smoothstack and Kuiper have obstructed the Department of Labor’s investigation by threatening employees with financial penalties if they disclose any information about their employment conditions. This obstruction has hampered the Department’s ability to enforce federal labor laws and protect workers’ rights.
Retaliatory Practices and Gag Clauses
One of the more egregious elements of the case involves the non-disparagement and non-disclosure clauses that Smoothstack allegedly requires employees to sign. These provisions prevent workers from speaking about their employment conditions, including wages, grievances, and other employment-related issues, even after they leave the company. By doing so, Smoothstack not only stifles employees’ ability to advocate for themselves but also seeks to avoid scrutiny from regulatory agencies and the public.
The company has also allegedly threatened to enforce these provisions by demanding financial penalties from employees who violate them. These penalties—up to $30,000—serve as a deterrent against employees speaking out about their rights or cooperating with government investigations.
The Department of Labor contends that these practices violate the FLSA’s anti-retaliation provisions, which protect workers from being punished for asserting their legal rights. Smoothstack’s policies effectively prevent employees from engaging in “protected activity,” such as discussing wages or reporting workplace violations to government agencies.
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The Department of Labor’s Response
The Department of Labor’s lawsuit seeks to end these practices by obtaining an injunction that would prohibit Smoothstack and Kuiper from continuing to use training repayment agreement provisions that reduce employees’ wages below the federal minimum wage. The department also aims to eliminate the company’s broad non-disparagement and non-disclosure provisions, which prevent employees from exercising their federally protected rights.
In a statement, Solicitor of Labor Seema Nanda emphasized that employers cannot use contracts to circumvent their obligations under federal law. “Federal law requires employers to pay employees for their work, not the other way around,” Nanda said. “Our lawsuit alleges Smoothstack Inc. and co-founder Boris Kuiper brazenly disregarded the law by creating a system that traps workers in jobs through outrageous and illegal contracts.”
The Department of Labor has also warned other employers that it will take legal action to protect workers from similarly exploitative practices.
FAQs
What is Smoothstack Inc.?
Smoothstack Inc. is an IT staffing agency based in McClean, Virginia. It recruits IT professionals nationwide, particularly those at the beginning of their careers, with promises of paid training and work assignments with Smoothstack’s clients.
What is the lawsuit about?
The lawsuit alleges that Smoothstack and its co-founder Boris Kuiper have violated the Fair Labor Standards Act by using employment contracts that require employees to stay with the company for two years or face a penalty of up to $30,000. These contracts have caused some workers to earn less than the federal minimum wage and have stifled their ability to exercise their legal rights.
What laws did Smoothstack allegedly violate?
The company is accused of violating the FLSA’s minimum wage, overtime, and anti-retaliation provisions. Smoothstack allegedly obstructed the Department of Labor’s investigation by restricting employees from discussing their employment conditions or cooperating with government investigators.
What is the Department of Labor seeking?
The Department of Labor is seeking an injunction that would stop Smoothstack from enforcing its unlawful contracts and prevent the company from retaliating against employees who assert their legal rights. The department also aims to protect employees’ ability to speak out about their wages and working conditions.
How does this affect Smoothstack employees?
If the Department of Labor is successful, Smoothstack employees will no longer be subject to the company’s exploitative contracts and will be able to exercise their legal rights without fear of retaliation. They may also be entitled to back wages if the company is found to have underpaid them in violation of the FLSA.
