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

As previously discussed here, the New York legislature recently enacted the Construction Industry Fair Play Act. The law is effective tomorrow. In sum, the law provides that an individual providing services in the construction industry only qualifies as an “independent contractor” under the Act, if s/he meets the following test:

(1) [the worker] is free from control and direction in performing the job, both under his or her contract and in fact; (2) the service performed is outside the usual course of business; and (3) the worker is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue

This is an example of what is commonly referred to as the “ABC” test for independent contractor status. It is utilized by various state agencies to define who is excluded from employee status for purposes of, for example, workers compensation or unemployment benefits. See generally 22 Berkeley J. Emp. & Lab. L. 295. The use of the phrase “and” requires that all three prongs of the test be met for contractor classification. The result is a very broad definition of “employee.”

The New York State Department of Labor has issued the mandatory posting required to be displayed by covered employers. The poster is available here.

New York construction industry employers must analyze whether they are covered by the Act (necessitating among other things immediate posting of this new NYSDOL poster), and how the Act’s narrow definition of “independent contractor” impacts their classification of workers. This legislation is similar to numerous pieces of legislation in other states. In certain instances, such legislation, and related state initiatives, is not limited to the construction industry.

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As most employers know, the United States Department of Labor has extensive regulations regarding the nature and scope of records employers covered by the Act must maintain. See 29 CFR § 516.1, et seq. Many state laws contain analogous provisions. See, e.g. NY Labor Law § 195. While violations of these recordkeeping requirements can lead to civil penalties, (standing alone a reason for compliance), wage records can be even more important as evidence of hours worked in defending claims for alleged unpaid overtime. See our earlier discussion regarding the implications of failing to maintain such records for the defense of wage/hour claims here.

However, employers also need to understand that falsification of wage and benefits records can also give rise to criminal penalties. The recent New York State court decision in People v Saxton, 2010 NY Slip Op 6011, 1 (3d Dep't 2010) is exemplary. In Saxton a New York state appeals court reviewed the jury conviction of the former executive of a failing business on three counts, including “falsifying business records in the first degree.”

The Defendant, Richard Saxton, had been the officer of a fledgling Internet start-up, Wurld Media, Inc. He supervised the company’s payroll and its general ledger. When Wurld Media encountered serious financial difficulty, it suspended payroll (a likely wage-and-hour violation itself), and instituted an “advance” program, wherein employees who had not received their regular paychecks could “request an advance of money when needed.” Wurld Media, through Defendant, listed these payments as loans, not wage payments, and as such did not pay taxes on these amounts.

After Wurld Media employees complained to the criminal authorities regarding the company’s failure to pay wages, an investigation was conducted giving rise to a nine-count indictment which included charges of: 1) offering a false instrument for filing in the first degree (two counts); 2) falsifying business records in the first degree, 3) failure to withhold income taxes, 4) failure to pay benefits, 5) grand larceny in the second degree, 6) grand larceny in the third degree, 7) criminal contempt in the second degree, and 8) money laundering in the fourth degree. Saxton was convicted on several of these charges.

In upholding Saxton’s conviction for falsifying business records, the appeals court cited evidence in the record “[that] payroll taxes were not withheld from those advances, that Wurld Media recorded those advances as loans on the general ledger and that defendant signed two quarterly tax reports that did not reflect that those advances were, in fact, payroll to avoid payroll tax liabilities.” 

Saxton is not an isolated case. In 2008, a prominent New York restaurateur was arraigned on 242 counts of, among other offenses, failing to pay wages, falsifying business records and defrauding the state unemployment insurance system. See “The American Dream, Delivered Perhaps Too Much on the Cheap” (The New York Times December 18, 2008). Failure to maintain proper wage records can have serious ramifications for a business. Creating and maintaining false ones is, unsurprisingly, even more dangerous for employers and executives.

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While wage-and-hour compliance programs traditionally focus on FLSA and, as regularly discussed in this space, any applicable state laws, county and municipal governments also have the right to impose additional requirements. See previous post here. Two proposed municipal laws which would mandate that employers provide paid sick leave to employees hit snags last week.

In Milwaukee, a proposed ordinance requiring large businesses to provide workers with nine paid sick days, and smaller businesses to provide five paid sick days, was put on hold further following a 3-3 decision by the Wisconsin Supreme Court on whether Milwaukee County Circuit Judge Thomas Cooper properly struck down the proposed law. Milwaukee Association of Commerce v. City of Milwaukee, 2010 WI 122 (Oct. 14, 2010). Based on the deadlock, the Supreme Court remanded the case back down to a lower appellate court for review. Id.

In New York City, City Council Speaker Christine Quinn indicated she would not support a proposed paid-sick leave bill, effectively tabling the measure indefinitely despite widespread belief that, if put to a vote, the bill would pass. The Speaker promised to continue a dialogue with the legislators responsible for the bill.

As legislators continue to balance a struggling economy with the goal of worker protection, more and more local governments may seek to take action to fill in perceived gaps in the federal or state floor. Employers in larger municipalities (and in active counties such as Miami-Dade) must be aware of these developments.

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A Pennsylvania company that sells Sprint cellular phones, service plans, and cell-phone accessories is a “retail or service establishment” under the 7(i) exemption, a Pennsylvania district court holds, granting partial summary judgment to the employer.  Haskins v. VIP Wireless LLC 300, 2010 U.S. Dist. LEXIS 106205 (W.D. Pa. Oct. 5, 2010).  A sales representative employed by VIP Wireless alleged that he and over 100 other sales representatives were misclassified as exempt because they did not meet the requirements of the administrative exemption (due to a failure to exercise independent discretion and judgment) or the executive exemption (since they did not supervise two or more people).  But he and his counsel failed to consider the applicability of the “7(i)” exemption. 

Unlike many FLSA exemptions, the 7(i) exemption does not depend on the duties of the employee, but rather on his or her compensation and the business of the employer.  The exemption applies to employees of a “retail or service establishment” who earn at least 50% of their compensation from commissions and at least one and one-half times the minimum wage for all hours worked. Often, as here, the issue in cases applying the exemption is whether the particular establishment meets the definition of a “retail or service establishment.”   

Citing Department of Labor regulations, the Court held a retail or service establishment is one that typically sells goods and services to the general public (as compared to the wholesale market); sells goods or services that meet the everyday needs of the community; provides for the “comfort and convenience of the public” in the course of its daily living; and sells goods and services at the end of the distribution stream. The Court had little difficultly in concluding the cell-phone stores met this standard—noting that in this day and age, cell phones certainly meet an “everyday need”, they are sold to the general public, and they are not purchased by consumers or businesses with the intent of reselling them. 

Relying on a DOL list of entities lacking a retail concept contained in the FLSA regulations, the Plaintiff argued the cell-phone retailer was not a “retail or service establishment” but rather a “telephone company”, an entity specifically identified by the DOL as lacking a retail concept. The Court rejected this argument. “VIP Wireless was a type of ‘exclusive distributor,’ ‘authorized agent’ or other form of contractor whose function was to solicit customers for Sprint and Nextel cell phones and service plans and to provide a retail outlet for those products. . . . VIP Wireless was an outlet for Sprint/Nextel, a telecommunications or telephone company, but it was not itself such a company,” the Court held. It cited, among other things, the “Preferred Retailer” agreement VIP Wireless entered into with Sprint as support.

Although the Court’s decision only resolved whether one prong necessary to establish the exemption had been met, the employer argued that given the individualized inquiry necessary to assess the other two prongs (50% commissions and 1.5 times the minimum wage), the collective action allegations should be dismissed.  The Court found, however, that it was too soon to determine whether individual inquires would predominate, and a determination whether the case could proceed collectively would have to await further discovery and would be resolved when the plaintiff made a motion for conditional certification.      Employers in the retail and service industries with commissioned employees should carefully analyze the potential applicability of the 7(i) exemption.

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In the latest installment of the ongoing litigation over whether pharmaceutical sales representatives are exempt from overtime under the FLSA (see earlier post here), a district court in Indiana declined to reconsider its decision holding that PSRs do qualify for the outside sales exemption. See Schaefer-Larose v. Eli Lilly & Co., S..D. Ind. Docket No. 07-CV-1133, Order dated Sept. 29, 2010. 

The Court observed that “a substantial amount of activity has occurred in courts throughout the country with regard to the question of whether pharmaceutical sales representatives are exempt under the FLSA [since the court issued its decision holding that outside sales exemption applies].” Order at 2; Schaefer-Larose v. Eli Lilly & Co., 663 F. Supp. 2d 674 (S.D. Ind. 2009). While acknowledging that some of these rulings “do not correspond with our analysis” – including the Second Circuit’s recent Novartis decision – absent guidance from the relevant appeals court (the Seventh Circuit), the Court stated that its decision on the issue “cannot be a swinging pendulum, vacillating back and forth as each new ruling addressing this question is handed down by some court or another across the nation.” Id. at 3. 

The resolution of whether PSRs qualify for the outside sales or administrative exemption likely will ultimately need to be resolved by the United States Supreme Court.

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