Laid-off Flexsteel workers add to their claims of self-dealing by company executives

A Polk County man and his daughter have been awarded a total of $8 million in a defamation case against a Des Moines lawyer. (Creative Commons photo via Pxhere.com)

A group of former Flexsteel employees who are suing the Iowa-based company for allegedly enriching top executives at the direct expense of laid-off workers have added to their complaint in federal court.

The original complaint that forms the basis of the lawsuit was filed in early March in U.S. District Court for the Northern District of Iowa. The newly amended complaint is a more explicit accounting of how executives allegedly violated their fiduciary duties to the company and its workers.

The six plaintiffs in the case are seeking class-action status for their lawsuit, alleging the Dubuque-headquartered company violated the Iowa Wage Payment Collection Act, as well as the federal Worker Adjustment and Retraining Notification Act of 1988 and the Employee Retirement Income Security Act of 1974.

They allege that when the pandemic hit in early 2020, Flexsteel was deep into a previously announced corporate restructuring that would leave plants in California, Arkansas, Mississippi and Iowa shuttered. Up until that time, the company had allegedly been providing workers with 60 days’ notice of their termination in accordance with Worker Adjustment and Retraining Notification Act of 1988, and with severance pay in accordance with the Employee Retirement Income Security Act of 1974.

In May 2019, for example, the company closed its California plant that produced residential furniture, and allegedly gave its 87 workers 60 days’ notice and severance pay. A few weeks later, notice and payouts were provided to 109 employees at an Arkansas plant that was preparing to close.

In March 2020, the World Health Organization declared COVID-19 a global public health emergency. Two weeks later, Flexsteel notified employees in Dubuque that it intended to permanently lay off 208 employees there, but it allegedly refused to pay severance or give 60 days’ notice of closure as required by the WARN Act. It also notified workers at its Starkville, Mississippi, plant that it was permanently closing that facility, effective immediately, resulting in the termination of all 170 employees there.

According to the lawsuit, company officials said they had provided no notice or severance pay for the Dubuque and Starkville workers because the closures were “not reasonably foreseeable until recently when the full impact of COVID-19 became clear.”

A few weeks after the announcement, Congress approved the CARES Act, which provided Flexsteel with $12.7 million in taxpayer-funded assistance.

The lawsuit alleges that just five weeks after COVID-19 was declared a public health emergency, Flexsteel CEO Jerald K. Dittmer purchased 2,787 shares of company stock. A few weeks later, he purchased an additional 1,000 shares, and Flexsteel offered 78,884 stock options to Chief Financial Officer Dereck P. Schmidt at $9.97 per share.

Over the next few months, as Flexsteel plants shut down, Schmidt purchased 49,000 shares of company stock. As of Feb. 9, 2021, those shares were valued at more than $35 — almost three times the price they commanded in June 2020.

Flexsteel has since sold its facilities in Dubuque, Pennsylvania, Arkansas, Mississippi and California, with revenue from those sales allegedly totaling $50 million.

The lawsuit alleges Dittmer, Schmitt and others defunded the company’s severance-pay plan, closed the plants and put “their own self-interest ahead” of the workers’ interests.

In the most recent court filings, the plaintiffs allege that after the Iowa workers were laid off without notice or severance pay, Dittmer reported that the company’s profitability had been restored with double-digit growth, strong consumer demand and historic high levels of orders and inventories.

“The series of events leading to the plant closures and refusal to pay severance show that defendants used COVID as an excuse to accelerate the restructuring at a reduced cost, at the expense of terminated employees,” the newly filed complaint states. It alleges that top executives diverted money allocated for the employee-termination benefit fund in an effort to increase the value of the company’s stock price, then engaged in self-dealing through stock purchases for themselves.

In a court brief filed in response to the original complaint, Flexsteel admits it did not pay severance to the employees laid off in Mississippi or Iowa. But the company disputes that what it calls “isolated severance payments that Flexsteel made to some former employees in unique instances” somehow established a “long-term obligation for Flexsteel to also pay severance” to the Iowa workers who lost their jobs due to the pandemic.

The company says even if such an obligation existed, “employers are free to amend and terminate” such benefit plans “at any time and for any reason without any need for justification.” The company argues that if, as the plaintiffs claim, Flexsteel had the ability to choose when and under what circumstances to pay severance, “then it certainly had discretion to not pay severance” to the Iowa workers who lost their jobs.

The plaintiffs in the case include former Flexsteel workers Tony Jelinek, Rodney Carroll and Todd Van Der Jagt of Iowa, as well as Jerry Ray, Fred Minor and Stephen Anderson, who worked for the company in Mississippi.

Dittmer has served as Flexsteel CEO since early 2019, and Schmidt has served as chief financial officer since April 2020.

Clark Kauffman
Deputy Editor Clark Kauffman has worked during the past 30 years as both an investigative reporter and editorial writer at two of Iowa’s largest newspapers, the Des Moines Register and the Quad-City Times. He has won numerous state and national awards for reporting and editorial writing. His 2004 series on prosecutorial misconduct in Iowa was named a finalist for the Pulitzer Prize for Investigative Reporting. From October 2018 through November 2019, Kauffman was an assistant ombudsman for the Iowa Office of Ombudsman, an agency that investigates citizens’ complaints of wrongdoing within state and local government agencies.