Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

The surge of state wage and hour claims continues in California. Among the numerous California Labor Code provisions which has been the subject of repeated litigation is California Labor Code § 226(a) (“226”), which creates specific requirements concerning the content of employee wage statements. Included among its provisions is a requirement that wage statements indicate the “total hours worked by the employee, except for any employee whose compensation is solely based on a salary and who is exempt from payment of overtime.” Last month, a California appeals court analyzed this statute in the context of a claim brought by a non-exempt co-manager, who claimed that her wage statements violated this 226 requirement. Morgan v. United Retail, 2010 Cal. App. LEXIS 1194 (Cal. App. 2d Dist. June 23, 2010).

As recited by the court, the alleged unlawful wage statement contained the following information:

For employees who did not work any overtime hours during the pay period, their wage statements listed the total regular hours worked by the employee, which equaled the total number of hours worked. For employees who worked overtime hours during the pay period, their wage statements separately listed the total regular hours worked and the total overtime hours worked by the employee. However, the statements did not add the regular and overtime hours together and list the sum of those hours in a separate line.

Plaintiff Morgan’s claim, which had been rejected by the trial court on summary adjudication, was that this failure to combine non-overtime and overtime hours and provide a “separate line” indicating total hours constituted a violation of 226. 

The appeals court, after noting that no Court had previously analyzed a wage statement which “separately lists the total number of regular hours and the total number of overtime hours worked by the employee,” reviewed the existing decisions analyzing 226’s “total hours worked” requirement. Observing that the cases finding 226 violations focused on the inaccurate or misleading nature of the wage statements in question (such as wage statements providing an “average” number of hours worked, as opposed to actual hours worked), and citing a recent federal decision dismissing a 226 claim on a similar theory (Rubin v. Wal-Mart Stores, Inc., 599 F.Supp.2d 1176 (N.D.Cal. 2009)), the Court held that the failure to provide a separate line with the total hours did not constitute a violation. The Court rejected plaintiff’s contention that a violation occurred because the information provided was insufficient to calculate proper overtime, observing that the plaintiff and other putative class members were paid by the hour, and not on a “salary, commission, or piece-rate basis.”

Morgan provides some much-needed clarity regarding an employer’s obligations under 226. Inclusion of the “separate line” in wage statements (as Morgan indicates United Retail later did), reduces uncertainty and legal risk.  

Wage and hour compliance is a constant struggle due to the need not only to comply with the FLSA but also with all applicable state laws.

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In a decision reiterating important independent contractor issues for employers, the Ninth Circuit Court of Appeals last week reversed a lower court decision holding that certain delivery drivers were properly classified as independent contractors under various provisions of the California Labor Code. Narayan v. EGL, Inc., 2010 U.S. App. LEXIS 14279 (9th Cir. July 13, 2010).

At the trial court level, Judge Ronald M. Whyte of the Northern District of California concluded that the drivers, although residents of California providing delivery services in California, were independent contractors under the laws of Texas, the governing law set forth in the drivers’ “Leased Equipment and Independent Contractor Services” agreement with EGL, a nationwide provider of logistics services.  In a footnote, the court further held that “[t]he result would be no different if California law governed.”

Reversing the decision, the Ninth Circuit observed that ‘[w]hether the Drivers are entitled to those benefits [under the Cal. Lab. Code] depends on whether they are employees of EGL, which in turn depends on the definition that the otherwise governing law--not the parties--gives to the term ‘employee’” (emphasis added). The Circuit Court held that the parties’ selection of Texas law to “govern” the contract applied only to disputes about interpretation of the contract (i.e, Texas contract law), not the application of employment statutes like the California Labor Code. Simply put, the Circuit Court held that the drivers’ claims under the Cal. Labor Code did not “arise” from the contract (i.e., did not call primarily for interpretation of that contract) – the contract was simply relevant evidence relating to their claims of employee status.  Finally, the Court reversed Judge Whyte’s ruling that the drivers were independent contractors (even under California law) because, in the Court’s view, he “did not apply the relevant factors [for IC status] identified by the Supreme Court of California to the facts in this case.”

While the Appellate Court’s failure to recognize the choice of law clause may not be relevant to most employers, the central holding and vital takeaway is very straightforward: independent contractor status is generally narrowly construed and currently under intense scrutiny. Further some aspects of the relevant analysis vary not only from state to state but from statute to statute. Additionally, and critically, the intent of the parties as reflected by the parties’ agreement is often of little importance to an administrative agency’s or court’s analysis, as Narayan clearly demonstrates.

All employers, and especially those with multi-state operations, must focus on the propriety of their organization’s use of contractors.   A more detailed analysis of this issue can be found here.

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As previously reported here, the recent Health Care Reform legislation includes a provision, which became effective immediately upon passage of the Act, requiring employers to provide breaks for employees to express milk for nursing children.  The USDOL issued a fact sheet this week explaining its view of an employer’s obligations under this enactment.  The highlights are below and the full government Fact Sheet can be viewed here.

·         The requirement only applies to non-exempt employees however the DOL notes that state laws with similar requirements may cover all employees;

·         The break time need not be paid as long as the individual is completely relieved of work duties and the activity does not occur during an otherwise paid break period;

·         Reasonable break time must be provided for up to 1 year following birth.  There are no set rules regarding frequency or length and each situation stands alone;

·         An employer is required to provide a location shielded from view and a private bathroom will not suffice.  The space need not be dedicated but must be made available immediately when needed; and

·         Employers with under 50 employees can assert an undue hardship defense, however, there is no guidance as to whether this is determined on a location by location or employer-wide basis.  Forthcoming regulations from the USDOL will hopefully clarify this issue.

All employers must ensure compliance with this new legal mandate.

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As the surge of wage and hour collective actions continues, one strategy utilized by employers to avoid such multi-plaintiff litigations is the use of arbitration agreements with class/collective action waivers.  In essence, such provisions mandate that an employee arbitrate any wage and hour and other (subject to certain limitations) disputes on an individual basis.   Arbitration agreements containing these provisions prohibit individual and collective court actions as well as class/collective arbitration proceedings.  While there are potential hurdles to the enforceability of these agreements -- such as consideration, unconscionability and even (as discussed here) the National Labor Relations Act – in general an arbitration agreement with a well-drafted class/collective action waiver is enforceable as to wage and hour claims.  A recent decision of the United States District Court for the Eastern District of Virginia, Richmond Division, upholding such a class/collective action waiver is instructive.   See Johnson v. Carmax, Inc., 2010 U.S. Dist. LEXIS 70700 (E.D. Va. July 14, 2010). 

In Johnson, plaintiffs filed an FLSA collective action in federal court.  The employer moved to dismiss, asserting that each plaintiff signed an arbitration agreement requiring resolution of all disputes on an individual basis through arbitration.  In granting the employer's motion, the Court relied on the plain language of the relevant documents which "clearly prohibit Plaintiffs from bringing their claim in this Court and furthermore from pursuing this claim on a collective basis in any forum."  

The Court rejected Plaintiffs' assertion that the failure of the relevant documents to mention "collective actions" mandated denial of the motion stating that the documents both specifically referred to FLSA claims being covered and mandated arbitration on an individual basis.  Plaintiffs' argument that the arbitration agreement was procedurally and substantively unconscionable also was not given credence by the court.  Judge James R. Spencer stated that the presence of "alleged unequal bargaining" power based on the fact that the agreement was a condition of employment was insufficient to demonstrate unconscionability.  Similarly, the court held that since all remedies available to each plaintiff through a collective action are available through an individual arbitration proceeding: "[r]equiring Plaintiffs to arbitrate their claims individually does not diminish either the remedial or protective functions of the FLSA."

All employers must not only be vigilant in regard to wage and hour compliance but also constantly analyze potential strategies to limit the breadth of potential actions and properly implement such strategies.  In fact, in another decision issued the same week in the very same federal district, an employer was unable to foreclose potential collective arbitration of wage claims.  Davis v. Terminix International Co., 09-CV-00309 (E.D. Va. July 15, 2010).  In Davis, the arbitration agreement did not expressly address collective action claims, and referred generally to the parties’ obligations being governed by North Carolina’s arbitration statute.  The Court scheduled a hearing to determine whether the arbitration of the wage claims should proceed on a “consolidated” (i.e., collective action) basis with the approximately 30 opt-in Plaintiffs. 

Of course, use of an arbitration agreement poses numerous other considerations for employers.

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While a significant percentage of employees’ claims for gratuities emanates from the food service and hospitality industries, other industries, including Aviation, are not immune. Baggage handlers in Massachusetts, New York and Pennsylvania all have asserted claims challenging industry tip practices, alternatively alleging that the amounts paid by customers for curbside check-in are gratuities (which allegedly have been misappropriated by the employer) or that they are service charges which discourage the payment of additional gratuities (thereby decreasing their compensation below the minimum wage). In a recent decision, a federal court ruled that the Federal Airline Deregulation Act does not preempt the plaintiffs’ Pennsylvania state law claims for service charges allegedly misappropriated by their employer. Thompson v. US Airways, Inc., 2010 U.S. Dist. LEXIS 59088 (E.D. Pa. June 15, 2010).

In Thompson, the plaintiff skycaps alleged that the airline’s 2005 imposition of a mandatory $2 fee per bag (paid to the airline) caused a sharp decrease in tip income, causing their income to dip below the minimum wage and serving as a functional misappropriation of tips. Id. at * 4. As a threshold legal matter, the airline argued that the plaintiffs’ claims for wages under state law would have a "forbidden significant effect" on airline prices, and thus were preempted by the federal law (which was designed to ensure that states did not undermine federal airline deregulation through state regulation). Analyzing three different decisions on the issue with different reasoning from federal courts in Massachusetts, Judge Gene Pratter denied the airline’s motion to dismiss and determined that a verdict in favor of the plaintiffs would simply result in a modification of baggage handling practices, and would have only a tangential, remote impact on price, if any. 

While the court’s decision did not address the merits of the Thompson skycaps’ claims, the litigation reminds .all employers of tipped employees of the need to ensure legal compliance and transparency in regard to gratuity practices.

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A common refrain among senior management is a belief that employees who make a great deal of money are universally exempt from the overtime requirements of the FLSA. This belief is bolstered, in theory, by the so-called “highly compensated” exemption. 29 C.F.R. § 541.601. In short, the highly compensated exemption renders an employee exempt from overtime when s/he 1) is paid at least $455/week on a salary or fee basis; 2) receives at least $100,000 per year in total compensation; and, 3) “customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.” Id. 

It is this third prong, essentially a pared-down version of the “duties” tests necessary to meet one of the white collar exemptions, which is not always easy for an employer to apply or satisfy. A recent decision of the United Stated District Court for the District of Arizona in which a federal judge denied summary judgment to the defendant based on a finding that the plaintiff, a recruiter who made more than $100,000 per year, did not necessarily perform one or more of the duties of an administrative employee, is instructive as to this issue.  See Ogden v. CDI Corp., 2010 U.S. Dist. LEXIS 66686 (D. Ariz. June 30, 2010),

In Ogden, while it was undisputed that the Plaintiff earned in excess of $100,000 per year, the Plaintiff testified that his duties consisted solely of screening potential candidates for open positions the Defendant, a staffing company, was trying to fill. He further testified that his supervisor, the Account Manager, would make all decisions regarding which candidates to actually forward to the company’s clients. Based on this testimony, the Court declined to find Plaintiff’s review of candidates for positions and related duties sufficient to demonstrate that Plaintiff customarily and regularly performed an exempt duty. Citing the federal regulations, the Court held that Plaintiff’s characterization of his job was more akin to a non-exempt “personnel clerk who screens applicants” than the exempt duties of a recruiter, and distinguished recent authority which found that another recruiter met both prongs of the administrative exemption as her primary duty consisted of exempt duties (as opposed to the highly compensated exemption’s requirement that an individual “customarily and regularly” perform one exempt duty). Id. at * 13-16 citing Andrade v. Aerotek, Inc., 2010 U.S. Dist. LEXIS 30765 (D. Md. Mar. 30, 2010).

Ogden demonstrates the technical nature of the highly compensated regulation, particularly when the ambiguous administrative exemption test is at issue. Employers need to ensure that the highly compensated segments of their work force are properly classified as overtime claims from such employees create substantial financial exposure.  A high level of compensation standing alone is insufficient. And state laws may not even recognize the exemption.

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In a much-awaited decision, earlier this week  the U.S. Court of Appeals for the Second Circuit reversed a New York District Court and held that pharmaceutical sales representatives are not exempt outside sales or administrative employees.  In re Novartis Wage & Hour Litig., No. 09-0437-cv, 2010 U.S. App. LEXIS 13708 (2d Cir. July 6, 2010). The Court concurred with and deferred to the position of the U.S. Secretary of Labor, who appeared as amicus curiae or “friend of the court” at the appellate stage, and stated that  “the Secretary of Labor’s interpretations of her regulations are entitled to “‘controlling’ deference unless those interpretations are ‘plainly erroneous or inconsistent with the regulation.’”   In essence, the Second Circuit held that the representatives do not meet the outside sales exemption because “where [an] employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it[,] . . . it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.” In a similarly narrow interpretation of the FLSA, the Second Circuit, again deferring to the Secretary’s view, held that the representatives’ duties do not demonstrate the necessary exercise of independent discretion and judgment as to matters of significance for application of the administrative exemption, and performance of those duties required only skills gained through training

A petition for review likely will follow and the scope of the exemptions may need to be resolved by the U.S. Supreme Court, in light of conflicting authority including the Third Circuit’s contrary decision applying the administrative exemption to pharmaceutical sales representatives.  See Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010)

For a more detailed analysis of the Second Circuit’s decision, click here. 

[UPDATE].  On July 19, 2010, another district court within the Third Circuit relied on the Johnson & Johnson decision to hold that pharmaceutical sales representatives qualify for the administrative exemption.  Jackson v. Alpharma, 2010 U.S. Dist. LEXIS 72435 (D.N.J. July 19, 2010).  The ever-growing and sharply divided body of authority regarding applicability of the administrative exemption in the pharmaceutical industry make In Re Novartis a candidate for Supreme Court review.  We will continue to monitor developments in the case. 

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One commonly held misconception in wage-and-hour law is that all investment professionals in the financial industry are categorically exempt from overtime pay. In a decision contrary to such assumption, Judge Denise Cote of the Southern District of New York recently denied summary judgment to a boutique investment bank as to the exempt status of a financial analyst, and conditionally certified a class of similarly situated financial analysts, permitting the Plaintiff to invite them to join the case. Henderson v. Transp. Group, 2010 U.S. Dist. LEXIS 66109 (S.D.N.Y., Jul. 1, 2010).

As a financial analyst, Plaintiff Henderson worked as the junior member of an investment team consisting of financial analysts, associates and vice presidents. Financial analysts, although the junior members of the bank’s deal teams, participated in all major tasks, including “(1) making telephone calls and sending emails to prospective investors in order to market transactions, (2) assisting in the development of financial models using Microsoft Excel spreadsheets, and (3) developing term sheets to finalize a deal.” Henderson received a starting salary of $35,000 per year, sufficient to satisfy the “salary basis” prong of the exempt status test.

The Court acknowledged throughout the opinion that these tasks could give rise to the requisite discretion and independent judgment necessary to qualify for the administrative exemption, but denied the motion based on the bank’s failure to provide specific evidence of how financial analysts exercised discretion in carrying out these tasks. The Court wrote:

“The defendants have not, however, submitted evidence describing the specific tasks performed in providing that support and assistance and in creating term sheets. Similarly, with respect to financial modeling, the defendants' witness opines that ‘[p]utting together such a file is a sophisticated and dynamic process changing frequently in reaction to market and investor demand.’ But the witness does not describe, for example, what, if any, alternatives, variables, or considerations must be weighed to create or apply the model, how an analyst is expected to react to "market and investor demand," or what authority analysts possess to decide any matter of significance.”

Because this evidence of the nature and extent of the analysts’ discretion was lacking, the court denied summary judgment. This decision is consistent with other authority within the Circuit finding summary judgment inappropriate in applying the administrative exemption to analysts. See e.g. DiFilippo v. Barclays Capital, Inc., 552 F. Supp. 2d 417 (S.D.N.Y. 2008)(denying summary judgment as to applicability of administrative exemption to Government Clearance Analysts). 

Henderson is the most recent in a series of decisions pointing out concerns with a uniform exempt classification of financial services employees. Industry employers should review their current classifications of financial professionals as exempt or non-exempt as litigation of classification issues in the industry is expected to continue. 

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Litigation regarding what constitutes a “retail or service establishment,” under the “7(i)” or “retail sales” exemption continues. We recently reported a district court decision applying the exemption to employees selling precious metals. See La Parne v. Monex Deposit Co., 2010 U.S. Dist. LEXIS 59768 (C.D. Cal. Apr. 29, 2010).  Just a couple of months later, another district court analyzed the applicability of the exemption, this time to a company that provides window washing services primarily to commercial high rise buildings that are paid for by a management company, not the individual tenants. Alvarado v. Corporate Cleaning Service, Inc., 2010 U.S. Dist. Lexis 62378 (N.D. Ill. June 21, 2010).

The Court explained that to fall within the definition of a retail or service establishment, two requirements must be met: (1) the establishment cannot earn more than 75% of its revenue from goods or services that are provided for resale; and (2) it must be recognized as retail in the particular industry. Plaintiffs argued the window washing services were resold (and not retail) because the defendant did not contract directly with the commercial or residential tenants to provide the service, but instead, with management companies, who then recovered the cost of such work either through rent, property management fees, or assessments. Therefore, the services were bought by the management company and then resold to the tenants.  The Court rejected this assertion, and held the building management companies were “merely conduits,” or agents facilitating the purchase of window washing services, not middlemen reselling window washing services. 

The Court also found the services were “recognized as retail in the industry” because they were sold to the general public (even though most of their customers were commercial clients, not residential clients, rejecting plaintiffs’ argument that the exemption only applies to residential sales); the services met the “everyday needs of the community”; the services were provided at the end of the stream of distribution; and the defendant did not engage in manufacturing. The Court also held the mere fact the services were sold to corporate accounts with multiple buildings (as opposed to individual owners or those with a single building), did not transform the sale to a “wholesale” transaction. The Court also rejected plaintiffs’ argument that providing proposals to customers estimating the cost of the services were not “retail” transactions, finding such proposals are not akin to competitive bidding (which Department of Labor regulations state are not recognized as retail).

Nevertheless, despite holding plaintiffs were employed by a “retail or service establishment,” the Court denied summary judgment to the employer finding a question of fact existed whether plaintiffs satisfied another requirement necessary to establish the exemption—being paid more than 50% in commissions. Plaintiffs were paid using a point system, whereby they were compensated based on the number of jobs completed. Each job was assigned a number of points based on the number of windows washed. Thus, the quicker and more efficiently the plaintiffs worked, the more they earned per hour.  The Court held a commission exists when there is some relationship or correlation between compensation paid to the employees and the amount charged to the customers. The court found questions of fact remained regarding whether a true nexus existed between pay received and the amount charged to the customer based on evidence produced by the plaintiffs that on occasion, the labor cost charged to a customer did not fluctuate based on the number of points.   

Employers relying on the 7(i) exemption under federal law should review the relevant regulations and cases to ensure that the business qualifies as a “retail or service establishment” and that the compensation it provides is a “commission” as defined in the case law.

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