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

An ongoing issue in wage and hour litigation is the compensability of changing time – the time spent putting on and removing garments and protective material related to the performance of an employee’s duties. Earlier this month, the Court of Appeals for the Tenth Circuit affirmed the District Court’s grant of summary judgment to defendant in Salazar v. Butterball, LLC, holding that the donning and doffing of personal protective equipment at a turkey processing plant was non-compensable “changing clothes” time under the Fair Labor Standards Act, Section 3(o). See Salazar v. Butterball, LLC, No. 10-1154, 2011 U.S. App. LEXIS 13653 (10th Cir. July 5, 2011). A Jackson Lewis team led by Atlanta partner Steve Munger represented Butterball in this matter.

Plaintiffs in Salazar claimed that defendants should have paid them for time spent donning and doffing required frocks, aprons, gloves, boots, hard hats, safety glasses, knife holders, and arm guards, before commencing and after completing their shifts. The District and Circuit courts found that such time was non-compensable since the employer maintained a “custom and practice” of not compensating such time within the meaning of Section 3(o). In reaching its conclusion and affirming the court below, the Circuit reiterated that time spent changing clothes at the beginning or end of each workday can be excluded from the number of hours worked under Section 3(o) where a collective bargaining agreement’s “express terms or custom or practice” is not to compensate for such time. Although neither the CBA nor written company policy expressly stated that such time would not be paid, the employer did have a “custom or practice,” the Court held, since the employees’ union never sought to negotiate the pre-existing practice during its collective bargaining negotiations.

The plaintiffs argued that the protective equipment did not constitute “clothes” under applicable U.S. Department of Labor interpretive guidance. In its most recent pronouncement on this issue, the DOL stated that garments “designed to protect against workplace hazards, serve[] specialized functions, and required by the employer or by law” are not “clothes.” The appeals court disagreed, finding that the DOL’s interpretive guidance was not entitled to deference since the DOL’s position had changed repeatedly over the years. The Court found that the equipment fell within the broad dictionary definition of “clothes,” which includes all garments and accessories that are worn by an individual. The Court also held that, unlike the white-collar exemptions to overtime, a court is not constrained to narrowly interpret the section 3(o) exemption.

Unionized employers who require their employees to don and doff protective garments, equipment, and other accessories must continue to closely analyze the applicability of the Section 3(o) exemption in their jurisdiction, under federal and state law. The holding in Salazar is certainly a positive development for employers, especially employers within the Tenth Circuit (the federal circuit covering Oklahoma, Kansas, New Mexico, Colorado, Utah and Wyoming).

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As discussed in prior postings, a central issue in determining the application of the FLSA’s “7(i)” exemption is whether the payments to the employee constitute bona fide commissions.  In early July, Judge Gregory Frost of the Southern District of Ohio issued another ruling on this issue, finding that the compensation paid to managers and assistant managers at certain Mr. Tire Auto Service Centers constituted bona fide commissions for purposes of the exemption.  McAninch v. Monro Muffler Brake, 2011 U.S. Dist. LEXIS 71827 (S.D. Ohio July 5, 2011). 

McAninch involved a compensation scheme under which a manager or assistant manager received a percentage of the controllable profit for the store if the store met budgetary targets.  When the store deviated in performance from the precise budgetary figure set for the store, the manager’s compensation was recalculated pursuant to a detailed formula which considered monthly fluctuations in store performance, labor costs and controllable expenses.  In addition, the Company provided managers with a weekly guaranteed draw, designed to ensure continuity in their compensation, which was reconciled when calculating commissions earned.  The court rejected arguments that: (i) the draw negated the Company’s assertion that the commission plan was “bona fide”; (ii) tying the commission rate to store profits as opposed to store sales rendered the payments non-bona fide commissions; and (iii) the managers’ frequent failure to exceed the guaranteed draw affected the analysis.  Since the question of whether the payments based on the percentage of controllable profit consisted “bona fide commissions” was the sole prong of the 7(i) exemption (requiring also payment of time and one-half the minimum wage for all hours worked and employment at a “retail or service” establishment) raised by plaintiffs, summary judgment for defendants was appropriate. 

Use of commission and other forms of incentive compensation continues to be widespread among employers across all industries.  Employers contemplating implementation of a 7(i) compliant commission plan should consult with counsel and closely scrutinize applicable federal and state law.

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As we have previously discussed, the FLSA contains an exemption for commissioned employees in the retail or service industry who meet certain parameters: colloquially referred to as the “7(i)” exemption. California has a similar exemption which the California Court of Appeal, Second Appellate District recently applied to a sales consultant, holding that Defendant’s payments qualified as “commissions.” Areso v. Carmax, Inc., 195 Cal. App. 4th 996 (Cal. App. 2d Dist. 2011). 

Plaintiff Areso was engaged in selling defendant’s “used vehicles, warranty plans, used vehicle appraisals and vehicle accessories,” and received payments based on the products and services she sold. At issue were two different versions of Carmax’s sales consultant pay plan for California employees.  Under both, plaintiff was eligible to receive a fixed amount per sale of a car, and then a percentage of the purchase price of accessories sold. The trial court ruled both of these “per vehicle” pay plans were “a performance-based incentive system and thus, fairly understood to be a commission structure under Labor Code § 204.1.” Id. at 1000.

Areso appealed. The Court of Appeal began its analysis by noting that Wage Order 7-2001 exempts from California Labor Code overtime requirements “any employee whose earnings exceed one and one-half times the minimum wage if more than half of that employee’s compensation represents commissions.” Id. at 1002-3. This exemption mirrors 7(i), but without the requirement that the employee be in a “retail or service” industry. The court observed that the Cal. Labor Code also contains a definition of commission wages, namely “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” Id. citing Labor Code § 204.1 (emphasis in original). 

The Court then analyzed previous California appellate authority addressing other types of incentive compensation, such as a percentage of the hourly rate charged to a customer, and “point” systems based on the items sold, but not tied to the price of those items. The Court observed that “none of the[se] cases interpreting § 204.1 has involved the compensation system which, like Carmax’s, compensate sales people with a uniform payment for each item or service sold and as a result, no cases construed the word ‘amount’ in the statute. This is an issue of first impression, and new facts require new law.” Id. at 1007. Rejecting plaintiff’s contention that in order to be “proportionate”, the percentage of the items sold payable to the commission employee must fluctuate, the Court observed that “paying sales people a uniform fee for each vehicle is proportionate—a one-to-one proportion. The compensation will rise and fall in direct proportion to the number of vehicles sold.” Id. at 1008. 

The Carmax decision represents a welcome victory for California employers seeking to apply this overtime exemption. Observes Jackson Lewis Partner JoAnna Brooks, who regularly handles wage and hour litigation in California, “The decision is surprising because it rejects the Division of Labor Standards Enforcement’s traditional guidance that a commission must be a percentage of the actual sales price. Other forms of fixed incentives are typically deemed bonuses or piece rates. Thus, it may be lawful to pay a fixed commission, but calculating a fixed payment based on anticipated “profit” after deducting expenses, such as overhead costs, may still be deemed a bonus. The consequences are significant, because it can result in mis-classification of an inside sales worker.”

Despite this decision, California wage and hour laws remain full of pitfalls for employers. Employers should proceed with caution. As Brooks notes, “Even employers who meet California’s commission exemption must take additional steps to ensure they have a properly drafted commission plan explaining when commissions are earned, the applicable rates paid, calculation of overtime and the impact of separation from employment.” 

California employers must continue to stay in the vanguard of wage and hour compliance to avoid costly litigation. 

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The hospitality industry remains a favorite target for wage/hour lawsuits. On June 16, 2011, a group of industry associations led by the National Restaurant Association filed a lawsuit of its own in the District Court for the District of Columbia, challenging the new DOL regulations effective in May expanding the notice requirements associated with taking a tip credit against tipped employees’ wages, pursuant to 29 U.S.C. § 203(m). Representatives of the organizations observed that the rule creates draconian and confusing new burdens on small business owners such as restaurateurs, likely leading to exposure to regulatory and private enforcement action, and also that the changes were implemented without a notice and comment process to afford an opportunity for business leaders and others affected to provide input. 

“Hospitality industry employers have seen a disproportionate share of enforcement proceedings, in the form of both Department action and private litigation,” observes Jackson Lewis partner Paul DeCamp, former Administrator of the U.S. Department of Labor’s Wage and Hour Division. “This new lawsuit, like the similar action filed by the Mortgage Bankers Association earlier this year, sends a message to the Department about the need to follow the rules governing administrative procedure, as well as the importance to employers of being able to rely on agency rulings without worrying that they are going to be discarded each time the political winds change.”

We will apprise of further developments arising from this new litigation and other important developments in the heavily regulated hospitality industry.

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