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

Employers with New York State operations must ensure they understand the New York State Department of Labor's current position as to new hire notices and wage deductions.

New Hire Notices

As previously reported here, since October 26, 2009, New York state employers have been obligated to notify all new hires in writing of their hourly rate, overtime rate (if applicable) and payday, and receive a written acknowledgment of such notification.  The Department has issued model forms for various types of pay structures, all of which can be found on the Department's website, but continues to advise employers that use of the model forms is not mandatory.   One of the Department's model forms is directed to new hires the employer intends to treat as exempt employees, and both the form and its accompanying instructions require employers to list the exemption applicable to such employees.  However, this form and its accompanying instructions were not fully consistent with the general guidelines for compliance, also posted by the Department on its website.  Such guidelines simply stated that the exemption “should” be listed; it did not make doing so mandatory.  

Recently, the Department modified its general guidelines and now consistently advises that the exemption must be listed for exempt employees on the new hire notice.  In order to comply with the Department’s position, employers must ensure they carefully analyze the appropriate exemption(s) prior to listing them on any notice to ensure such statement is accurate.   It is important to note however that this new directive goes beyond the statutory requirement contained in Section 195 of the Labor Law, although the statute does provide the Department with the right to issue "requirements as to content and form."  

Wage Deductions

In addition to permitting deductions "in accordance with the provisions of any law or any rule or regulation issued by any governmental agency", Section 193 of the Labor Law permits deductions "for the benefit of employee" as long as such deductions are authorized in writing.   Over the years, the Department, through opinion letters, has advised that this language permits deductions for various issues (such as wage overpayments and repayment of loans) as long as the employer obtained written consent and limited such deduction to 10% of gross wages for the payroll period. 

However, since 2006, based on New York State Court of Appeals’ decision in Angello v. Labor Ready, the Department has consistently narrowed its interpretation of the phrase “for the benefit of the employee.”   For example, in a 2007 opinion letter, the Department stated that in order for a deduction “for the benefit of the employee” to be permissible it must be  a deduction which benefits the employee which is also similar to those enumerated in the statute (i.e., insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, payments for dues or assessments to a labor organization). Thereafter, through opinion letters, the Department modified its prior position as to the legality of certain wage deductions, such as a deduction from a final paycheck to cover used but unaccrued paid time off, and deductions for loan repayments and wage overpayments. The Department now states that such deductions are impermissible regardless of the employee's written consent.  Based on the Department's consistently evolving, highly-protectionist pro-employee position, employers should carefully review their wage deduction practices in New York State.

Every business with New York operations should review these wage and hour compliance issues with counsel to ensure compliance.

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The Fair Labor Standards Act contains an exemption from overtime for employees of a “retail or service establishment” who earn at least 1.5 the minimum wage for all hours worked and more than 50% of their compensation from commissions. This exemption is often referred to as the “retail sales exemption” or “7(i) exemption,” referencing the section in which it is codified. Often the difficulty in applying the exemption lies with determining which establishments fall within the definition of a “retail or service establishment” and which do not. Department of Labor regulations provide a long list of retail non-retail establishments, but several courts have noted the list does not provide any rationale for distinguishing retail and non-retail and is of limited assistance. See e.g., Martin v. The Refrigeration School, Inc., 968 F.2d 3, 7 n. 2 (9th Cir. 1992). 

Recently, a California District Court was faced with the question of whether account executives responsible for selling precious metals (e.g., gold and platinum) to customers via phone were employed by a “retail or service establishment,” and thus exempt from overtime under the 7(i) exemption.  Parne v. Monex Deposit Co., 2010 U.S. Dist. Lexis 59768.  Relying on the definition of a “retail or service establishment” contained in the 13(a)(2) retail and service exemption [now repealed], the Court explained a retail or service establishment is one that (1) does not earn more than 75% of its revenue from goods or services that are provided for resale; and (2) is recognized as retail in the particular industry. 

In applying this definition, the Court first held that even though customers typically bought metals for investment purposes with the ultimate goal of reselling them for a profit (some customers did not even take possession of the metal), the precious metals were not goods provided for “resale,” as contemplated by the statute, because the metals were not sold with the understanding the metals would be immediately resold. Second, despite competing evidence regarding whether the industry viewed the Defendant as a retail seller (plaintiffs argued the Defendant was similar to a brokerage house), the Court held that summary judgment was still proper because the Defendant satisfied the standard courts have used in determining whether a particular establishment is “recognized as retail”—it sold goods to the general public; it did not take part in the manufacturing process; it provided a product that served the everyday needs of the community; and, it sold goods at the end of the stream of distribution. The factor that presented a “close[] question,” according to the Court, was whether selling precious metals served the “everyday needs of the community”. After noting that cases lack a unified approach in answering this question, the Court held “everyday needs” means “basic” or “integral” needs of members in the community, and collecting and investing metals fell within this standard.

As wage and hour cases continue to be an active area of litigation, the different prerequisites for application of the 7(i) exemption, including which services and goods also meet the “basic” or “integral” needs of the community, will likely continue to be litigated.  Before utilizing the exemptions, employers relying on the 7(i) exemption, should review the relevant regulations and case law to ensure that their business qualifies as a “retail or service establishment”.

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As discussed here, Connecticut’s highest court has clarified that discretionary bonuses are not subject to that state’s wage claim statute, Conn. Gen. Stat. 31-72, et seq.  See Ziotas v. The Reardon Law Firm, P.C., SC 18292 (Conn., June 8, 2010). Ziotas concerned a law firm associate employed pursuant to an at-will employment agreement which included a provision for a discretionary bonus. The Supreme Court reinstated the trial court’s original decision (reversed by the intermediate appellate court on appeal), that because the bonus was discretionary and based on factors other than simply the employee’s performance (such as the firm’s overall performance), it did not constitute “wages” within the meaning of the wage payment statute, even though the employee might be entitled to the same bonus under the contract itself. This decision is consistent with the general legal principle in many states (such as New York, discussed here) that incentive compensation (such as bonuses and commissions) becomes “wages” under the law once that compensation is “earned”. As Ziotas demonstrates, defining the factors used to determine any potential incentive payment as well as any earning criteria is often essential if an employer wishes to keep claims for incentive compensation outside the purview of wage statutes (and the attorneys fees provision often contained therein).

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In Samiento v World Yacht, 10 NY3d 70 (2008), the New York Court of Appeals held that whether a labeled service charge is a “gratuity” for purposes of N.Y. Labor Law § 196-d that must be distributed to service staff depends on the “reasonable customer’s” understanding. One of the many questions unanswered by the decision is whether this standard applies only prospectively to § 196-d compliance following the Court’s February 2008 ruling. In a blow to industry employers, the Appellate Division’s First Department, the intermediate appeals court encompassing Manhattan, has ruled that employers can be subject to liability for undistributed service charges prior to the World Yacht decision. Ramirez v Mansions Catering, Inc., 2010 NY Slip Op 4857, 2 (N.Y. App. Div. 1st Dep't June 8, 2010). A New York federal court is currently considering the same issue. 

Generally, the question of retroactivity turns on whether a new judicial decision constitutes “the creation of a new legal principle.” Id. at * 1. If it does not, then it is simply an interpretation of the law, and has retroactive application. In Ramirez, the Court observes that the question answered by World Yacht had been acknowledged but, importantly, not answered by the Court of Appeals’ earlier opinion on the same subject. Id. at * 2 citing Bynog v Cipriani Group, (298 AD2d 164 (2002), affd as mod 1 NY3d 193 (2003). Because the legal issue addressed in World Yacht – namely “whether mandatory service charges could constitute "gratuities" under Section 196-d” – had not been resolved previously, World Yacht “was not a departure from existing law” and did not constitute a “new rule.” Id.  This conclusion ignores the fact that the entire industry generally believed that, consistent with federal law, the combination of using the term “service charge” and taxing the collected monies provided an employer with the right to retain the collected monies in whole or in part.

Food service and hospitality industry employers have been focused on this issue for over 2 years. While all such employers should ensure their current practices fully comply with this decision, at least based on this decision, liability can be imposed for periods prior to February 2008 within the 6 year statute of limitations. 

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As discussed here, an employer’s maintenance of accurate records of hours worked by employees is not only a substantive requirement of the FLSA, but an essential component to defending against “off the clock” claims. But what happens if an employee brings such a claim and the employer has not maintained records? Is the employer defenseless?

The answer is “Not necessarily,” as highlighted in the recent decision issued by a federal judge following an trial in the District of Maryland. Almendarez v. J.T.T., 2010 U.S. Dist. LEXIS 57371 (D. Md. June 8, 2010). In Almendarez, a jury found that all seven plaintiffs worked overtime, and that Defendants did not maintain appropriate records. However, the jury found that only three of the plaintiffs worked overtime for which they were not properly compensated. The  jury found that the employer properly compensated the four remaining plaintiffs for overtime hours worked. These four plaintiffs moved for an order that they were entitled to an overtime award as a matter of law based on the jury’s factual findings, or in the alternative for a new trial.

In denying the plaintiffs’ request, the Judge first explained that in the absence of the records required by the FLSA, evidence regarding hours actually worked and overtime paid were governed by the framework set forth in Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 692 (1946). To recover on an unpaid overtime claim under Mt. Clemens, a Plaintiff is “required to show, by a preponderance of the evidence, that he actually worked overtime hours for which he was not compensated at the required rate.” Almendarez, 2010 U.S. Dist LEXIS 57371 at * 11. Because making this determination in the absence of proper records is “heavily dependent on the jury's assessment of the credibility and veracity of the witnesses”, and since the jury considered the admissible evidence as to overtime hours worked and overtime compensation paid, the court held that the jury’s verdicts were not subject to reversal as a matter of law. The jury was entitled to credit the Defendant’s evidence in the form of “testimony regarding the number of hours required to complete Plaintiffs' work day and how much they were paid”, along with some “documentary evidence regarding the amounts Plaintiffs were paid in specific periods.” Id. at * 11-12. 

While the failure to maintain proper records both constitutes a likely FLSA violation and can hinder the defense of FLSA overtime actions, Defendants faced with FLSA claims for alleged unpaid working time should consider all the evidentiary means available to rebut allegations of alleged unpaid work.

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The Second Circuit recently affirmed a district court’s decision dismissing security guards’ claims for minimal amounts of allegedly uncompensated work time. In doing so, the Court reiteratedthe general principle applied by federal courts that “"[w]hen the matter in issue concerns only a few seconds or minutes of work beyond the scheduled working hours, such trifles may be disregarded. . . . It is only when an employee is required to give up a substantial measure of his time and effort that compensable working time is involved." Albrecht v. Wackenhut Corp., 2010 U.S. App. LEXIS 10973 at * 3 (2d Cir. N.Y. May 28, 2010) quoting Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 692 (1946).

In Albrecht, the security guards alleged that time spent obtaining and returning their firearms and radios pre and post-shift constituted a “principal activity” under the FLSA, and thus was compensable. The court held that the Plaintiffs failed to controvert evidence in the record that such “arming up” and “arming down” involved only 30-90 seconds, and thus was de minimis. Id. at * 5. 

The Court acknowledged Plaintiffs’ argument that a requirement that non-exempt employees be present and available “15 minutes before the start of a scheduled shift” could give rise to a viable claim under the FLSA, but held that this claim was not properly alleged in the original complaint, which was limited to the time related to arming up and down. Id. at * 5-6.

Despite this favorable result, employers should be conservative in deeming mandatory time spent on premises to be non-compensable as a preliminary and/or de minimis activity.  In fact, the USDOL generally does not recognize the de minimus defense.

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As we previously reported here, the USDOL is focused on corporate-wide compliance strategies to ensure that employers take active responsibility for their compliance efforts.  In a speech at New York University, Solicitor of Labor M. Patricia Smith touted a recent settlement with Tyson Foods as an example of the DOL’s new approach.    Ms. Smith explained that even though the DOL’s enforcement action was limited to the employer’s Blountsville, Alabama facility, the settlement includes a nationwide injunction which broadly covers other company facilities and workers.  Smith explained “[t]hat’s the type of settlement you will see us entering into more and more in the future….if we find a violation at one facility, it should be corrected at all the company’s facilities.” See Solis v. Tyson Foods Inc., N.D. Ala., No. 02-CV-1174, Docket Entry 521-1 (proposed consent judgment), June 3, 2010.  During the same speech, Ms. Smith reiterated that “the Labor Department is open once again.”  

The business community must recognize the expanded efforts of an increasingly active and ambitious DOL, and review compliance practices to minimize the likelihood that a DOL site investigation will evolve into a nationwide audit and/or litigation.

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In light of other case law, a recent pro-employer decision from the Eleventh Circuit Court of Appeals, holding that a salaried dispatcher for a crane rental company qualified as an exempt administrative employee, adds credence to a question often asked by legal and human resources professionals: is the administrative exemption in the eye of the beholder? Rock v. Ray Anthony Int'l, LLC, 2010 U.S. App. LEXIS 10775 (11th Cir. Fla. May 26, 2010).

At the trial court level, the district court found that Rock’s duties as dispatcher included “customer communication, choosing the appropriate crane for specific jobs, assigning operators to cranes, overseeing other employees, preparing and reviewing job tickets, and maintaining the crane rental schedule . . . He was also responsible for selecting the type of materials, supplies, machinery, equipment, and tools that were needed to meet the customers' needs.” Id. at * 5-6. The trial court concluded that these duties “related to servicing or running [defendant’s] general business operations”, rendering him eligible for the administrative exemption. Id. at * 6.

On appeal, Rock argued that the recently issued DOL Administrative Interpretation regarding loan officers (discussed here), which opined that employees performing sales work generally are engaged in “production” and not eligible for classification as exempt “administrative” employees, supported a non-exempt finding, as his responsibilities were “more akin to sales and retail.”

The Eleventh Circuit, relying on precedent within the Circuit, observed that “even when employees engage in sales, their duties are administrative if the majority of their time is spent advising customers, hiring and training staff, determining staff pay, and delegating matters to staff.” Id. at * 9 citing Hogan v. Allstate Ins. Co., 361 F.3d 621, 627 (11th Cir. 2004). Because the trial court found that Rock’s duties “went beyond mere sales” and included management of the crane division, the administrative classification was upheld.  Id.

Rock is welcome news for employers within the 11^th Circuit’s purview of Florida, Georgia and Alabama. However, the general lack of clarity as to what constitutes “administrative” work is highlighted when the Rock decision is juxtaposed with a recent decision involving dispatchers issued by a New York federal court. In Iaria v. Metro Fuel Oil Corp., 2009 U.S. Dist. LEXIS 6844 (E.D.N.Y. Jan. 30, 2009), the court denied the employer’s motion for summary judgment as to its classification of a dispatcher as an exempt administrative employees. In part, the Court’s decision in Iaria was premised on crediting the plaintiffs’ testimony that their duties did not involve supervisory or management responsibilities, but were limited to “monitoring drivers' deliveries, responding to drivers' problems, handling some customer service calls, routing, entering data in the computers, and checking the drivers' logs.” Id. at * 3.  The Court stated that these dispatcher plaintiffs’ “duties relate more directly to the service and product that [defendant] provides -- the delivery of fuel for heating -- than they do to servicing the business.” Id. at * 11.   

Employers utilizing the administrative exemption, especially with sales and quasi-sales position, must closely review the DOL’s current position and the applicable law in their Circuit, as well as applicable state law, to ensure understanding of all potential risks.

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As recently discussed here¸ a properly drafted commission agreement is essential in New York (and every state) to minimize exposure to a variety of claims, including claims for alleged unpaid commissions and improper wage deductions. In fact, in New York and other states, a written signed commission agreement is required pursuant to state law, absent which adverse inferences can be drawn.

A counter-example to the Swig Equities decision (see discussion linked above), which demonstrated the value of such an agreement, is the recent decision of the New York state trial court in Nichols v. SG Partners, Inc., 2010 NY Slip Op 30174U (N.Y. Sup. Ct. Jan. 25, 2010). Plaintiffs in Nichols were two former executive recruiters who received a base salary plus commissions. Upon termination they sued to collect alleged outstanding commissions for placements they had made. In their Complaint, they described the employer’s practice in calculating commissions to be to “more or less annually tally the placements made by plaintiffs and make additional payments based upon a percentage of the revenues from the placements.” The employer asserted that no such enforceable oral contract existed, or in the alternative was barred by various defenses to contract formation. 

Because no written contract governed the parties’ agreement regarding, inter alia, when a commission was earned, the Court refused to dismiss as a matter of law Plaintiffs’ claims that the employer breached the oral contract governing payment of commissions. Further, the Court did not dismiss the Plaintiffs’ assertion that the company’s commission payment/reconciliation process constituted an unlawful deduction from wages. Relying on precedent, the Court held that the claim under Section 193 was not duplicative of the claim for breach of contract, even though the claim sought recovery of the same commission compensation. This ruling also revived Plaintiffs’ claims under Labor Law § 198.1-a for a 25% penalty on the owed wages and attorneys’ fees.

Failure to enter into a written commission agreement creates enormous potential exposure for all businesses that employ commissioned staff.

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Reacting to outcry from the employer community, on June 3, 2010 the Miami-Dade County (FL) County Commission amended its recently enacted wage ordinance which defined “wage theft” as failing to pay an employee any portion of his or her wages within 14 calendar days of the work having been performed. Prior to this amendment, the ordinance potentially rendered all semi-monthly pay plans unlawful with respect to covered employees. This amendment will become effective June 13^th unless vetoed by the Mayor. A veto is not expected.

The revised Ordinance provides that it is lawful for an employer to pay wages either:

1. no later than 14 calendar days from the date on which the work was performed, or

2. pursuant to any other pay schedule that an employer has established, by policy or practice, “whereby employees earn and are consistently paid wages according to regularly recurring pay periods.”

The potential penalties for “wage theft” violations, which include back wages, liquidated damages, treble damages based on economic losses resulting from non-payment and costs and attorney's fees, remain unchanged.

More extensive discussion and best practices guidelines regarding the new law are available here.

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In general, when calculating the regular rate of pay for purposes of determining overtime under the FLSA, all remuneration must be included.  This rule is subject to certain limited exceptions for, inter alia, discretionary bonuses and reimbursement of legitimate expenses.  But, if an employer decides to provide an hourly “per diem” and classify it as expense reimbursement, can the employer exclude the “per diem” from the regular rate of pay?  In a decision issued last week, the Fifth Circuit Court of Appeals, affirming the District Court’s finding of a willful violation of the FLSA, held that an employer violated the Act by excluding such “per diem” from the regular rate of pay in an attempt to artificially lower the regular rate of pay.  Gagnon v. United Technisource Inc., 2010 U.S. App. LEXIS 10880 (5th Cir. May 27, 2010).

The facts before the court were simple.  The employer initially paid the plaintiff a straight time rate of $5.50 per hour, plus a per diem of $12.50 per hour for the first 40 hours worked each workweek, and an overtime rate of $20 per hour thereafter.    Later on, the employer increased the plaintiff’s hourly per diem and hourly overtime rate by $1 (i.e., to $13.50 and $21.00 respectively) while leaving the straight time rate unchanged, characterizing this increase as a “raise.”  When Plaintiff sued for alleged unpaid overtime, the employer asserted that its overtime payments exceeded legal obligations as the overtime rate was much greater than time and a half the hourly rate of $5.50 per hour.  The employer further asserted that the per diem reasonably approximated reimbursable expenses and thus did not need to be included in the regular rate of pay.     

The Court rejected the employer’s defenses.  While recognizing that a per diem could be excludable from the regular rate, the Court deferred to the Department of Labor’s position, as delineated in the Field Operations Handbook, that any per diem or similar payment that is based upon hours worked must be included in the regular rate. Id. at fn. 6.  The Court expressed its belief that the employer had attempted to artificially reduce the regular rate and reduce overtime costs and stated “we can conceive of no reason why a legitimate per diem would vary by the hour and be capped at the forty-hour mark, which not so coincidentally corresponds to the point at which regular wages stop and the overtime rate applies.”  Id. at * 9. The Court also: (i) rejected the employer’s attempt to offset liability with allegedly overpaid per diem that the plaintiff should not have received based on a change in his home address which moved him closer to the workplace and theoretically reduced his expenses (on the basis that the per diem was actually part of the regular rate of pay and not expense reimbursement in the first place); (ii) reiterated that a counterclaim is inappropriate in an FLSA action pursuant to precedent (and must be brought separately, if at all); and (iii) stated that plaintiff’s attorneys were entitled to recover fees for their work on the appeal while vacating the initial fee award due to the District Court’s failure to explain the basis therefore (which, as an aside, was 6 times back pay and liquidated damages awarded to the Plaintiff, combined).

All employers should review their overtime calculation protocols to ensure they are paying time and a half the properly calculated regular rate of pay for all overtime hours.  To the extent an employer provides a per diem for expense reimbursement, if the per diem is based on hours worked, there is a significant concern with excluding the “per diem” from the regular rate calculation.

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