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

Reflecting the Supreme Court’s 2011 decision regarding the scope of protected activity under the FLSA, the U.S. Department of Labor has issued Fact Sheet 77A, summarizing the Department’s view of the FLSA’s anti-retaliation provision.    Simultaneously, the Department also issued fact sheets addressing retaliation under the FMLA and the Migrant and Seasonal Agricultural Worker Protection Act.

Fact Sheet 77A sets forth the DOL’s assessment of the current legal landscape, including the Kasten decision, holding that the FLSA’s anti-retaliation provision (29 U.S.C. § 215(a)(3)) protects complaining employees “regardless of whether the complaint is made orally or in writing.” The fact sheet goes further, addressing the question the Supreme Court declined to answer in Kasten: namely, whether such written or oral complaints can be protected if made internally, or whether to be protected such complaint must be made formally to the Department of Labor or through a formal filing of a claim (i.e., a lawsuit). In the DOL’s view “most courts have ruled that internal complaints to an employer are also protected.” While this view has been endorsed in multiple forums, notably, courts within the Second Circuit have continued to adhere to the Second Circuit’s 1993 decision in Lambert v. Genesee Hosp., 10 F.3d 46, 55 (2d Cir. 1993), holding that a formal complaint is required. Son v. Reina Bijoux, Inc., 2011 U.S. Dist. LEXIS 116417 at * 12-14 (S.D.N.Y. Oct. 7, 2011) citing Lambert. 

The DOL’s fact sheet clarifies the Department’s position, but is not “news” to employers who monitor this space or otherwise educate themselves on these issues. Such employers also know that many state laws, including New York’s retaliation provision as modified by the 2011 Wage Theft Prevention Act, provide for greater protections than those contemplated under federal law and discussed in Fact Sheet 77A.

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As the volume of FLSA lawsuits remains high, the frequency of collective action trials – once unheard of – has correspondingly increased. On January 5, 2012, following a bench trial, Judge Edmund Sargus, Jr. of the United States District Court for the Southern District of Ohio ruled that 91 current and former “special investigators” for defendant Nationwide Mutual Insurance Company were exempt from minimum wage and overtime under the FLSA’s administrative exemption. Foster, et al. v. Nationwide Mutual Insurance Company, 2012 U.S. Dist. LEXIS 1384 (S.D. Ohio Jan. 5, 2012).

In the Court’s lengthy Order, the Court summarized the evidence presented at trial and applied it to the most commonly disputed component of the administrative exemption test -  whether the investigators’ work required the exercise of discretion and independent judgment with respect to matters of significance. In making such determination, the Court first sought, consistent with FLSA jurisprudence and guidance, to define the investigators’ “primary duty” in their work for Nationwide. The Court ultimately identified the primary duty “conduct[ing] investigations into suspicious claims with the purpose or goal of resolving indicators of fraud present in those claims.” In coming to this conclusion, the Court rejected Plaintiffs’ assertion that their primary duty was to “investigate suspicious claims by gathering and reporting facts” as too “narrow”, since it failed to account for the resolution of fraud indicators in the conduct of an investigation.

This distinction made all the difference to the Court’s ultimate determination, namely that the investigators exercise discretion and judgment because they were “tasked with resolving indicators of fraud” and had “nearly unilateral discretion in referring claims to law enforcement and the [National Insurance Crime Bureau].” In regard to resolving fraud indicators, the Court noted that “‘truth’ is not an entirely objective concept” and the investigator’s decision required factual determinations, the reaching of which “necessarily requires judgment and discretion.” This discretion was “significant” because in making factual determinations the investigators had “undisputed influence on Nationwide's decisions to pay or deny insurance claims.” These investigators were thus unlike the investigators addressed in other recent FLSA opinions.

The insurance industry has a decade-long history of misclassification claims involving investigators, adjusters and other “white collar” employees, as exemplified by Foster (a complaint from 2008). Misclassification litigation continues to weigh on employers, and the risks of such litigation should be considered by all counsel, business leaders and risk managers in determining classifications and formulating and refining underlying business models. 

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As we have repeatedly discussed, use of a so-called “auto-deduct”, wherein a predetermined amount of time is automatically deducted from an employee’s hours of work to correspond to a meal period with the understanding that the employee will perform no work during that period, can give rise to individual or class claims that an employee has in fact performed some work during that period on one or more days, rendering the time compensable. This is particularly so in professions such as health care or security services, where the need to provide assistance, however fleeting, can create an instance of arguable “work” any time the employee remains on the premises. Often, employees assert such claims as putative collective action claims, alleging a systemic practice of requiring or allowing employees to perform work during these meal break periods, and then automatically deducting the time from hours of work. In a pair of new decisions, two different district judges in Pennsylvania have decertified such collective actions against Pennsylvania hospitals, finding at the close of discovery that the putative collective action plaintiffs had failed to establish similarity between their claims: i.e., they failed to establish that the employer had a “policy or practice” of allowing such work to be performed and to go uncompensated. Camesi v. Univ. of Pittsburgh Med. Ctr., 2011 U.S. Dist. LEXIS 146067 (W.D. Pa. Dec. 20, 2011); Kuznyetsov v. West Penn Allegheny Health Sys., 2011 U.S. Dist. LEXIS 146056 (W.D. Pa. Dec. 20, 2011).

In these cases, the employers were able to establish through a combination of documentary and deposition evidence that they had adequate safeguards in place to ensure FLSA compliance. These safeguards included policies and practices which require the recording of all hours of work, and a mechanism (of which the employees were duly advised) for reporting any instance of work outside the scheduled time or during a meal break, which would otherwise be automatically deducted and thus not paid. In Camesi, the court observed “Ms. Camesi received training regarding [defendant]'s meal break cancellation policies, and pursuant to those policies, she was paid for working through meal breaks at least five times . . . [she] testified that her supervisor would not have been aware of whether she had worked through unpaid meal breaks, and she never complained to any superior about working through meal breaks and not being paid.” Thus, the hospital did not “suffer or permit” Plaintiff to work through lunch without pay if and when she performed work during lunch without availing herself of the policy, as she alleged.

While these are positive decisions, they were only obtained after significant litigation.  Employers must closely balance the administrative convenience attendant to such a practice with the heightened risk that an FLSA violation will occur or be alleged. Employers should adopt such policies with due care and at the least even if such policies are adopted ensure there are clearly communicated mechanisms for employees to report that they worked during such otherwise uncompensated periods. 

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In recent weeks, we have discussed challenges to FLSA exempt status brought by employees many might assume to be properly exempt, such as a Director for the Red Cross. In another recent rejection of a claim of this type brought by the the aggressive plaintiffs’ bar, a federal court in Pennsylvania has ruled, following a bench trial, that the Supervisor of the Toxicology Laboratory for Wilkes-Barre Hospital properly was classified as an exempt "learned" professional.  Hockenbury v. Wilkes-Barre Hosp. Co., LLC, 2011 U.S. Dist. LEXIS 141001 (M.D. Pa. Dec. 8, 2011).

Judge Edwin M. Kosik found that Plaintiff Hockenbury, who supervised fifteen technologists in the lab, possessed the requisite “educational degree and expertise in toxicology” to qualify as a learned professional under 29 C.F.R. § 541.301 (e)(1). The Court also concluded that Plaintiff was paid on a salary basis because he conceded that “he received in every single pay period the minimum of eighty hours pay, which was never reduced based on the number of hours he worked.”

Hockenbury represents another employer victory in a single FLSA plaintiff’s challenge to his or her exempt status. However, such scattered district court cases do little to alleviate the continued threat of FLSA litigation, and nothing to obviate the need for position-specific analysis of FLSA classification by all employers. In general, to qualify for the “learned” professional exemption, in addition to being paid on a salaried or fee basis, the employee must have a specific job-related advanced degree that is necessary for the performance of the job. State law also must be reviewed as some states, such as California, impose higher standards for exemption. 

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While the FLSA governs the payment of minimum wage and overtime, it does not by its statutory language regulate the receipt of gratuities.  However, Section 3(m) of the FLSA (29 U.S.C. § 203(m)) requires that employees paid pursuant to the “tip credit” provision (i.e., paid less than the standard minimum wage of $7.25 due to receipt of gratuities), retain all of their tips or share them only with employees who are customarily and regularly tipped and who do not qualify as a “employer” under the FLSA (Some states impose this principle even if a tip credit is not taken, and the USDOL recently issued guidance indicating it is taking the same position, contrary to case law). Thus, participation in a “tip pool” (wherein members of the service staff pool all tips for a given day or shift and redistribute them according to a pre-determined formula) is limited to employees who hold a customarily and regularly tipped position, and who do not meet the test for an employer under the FLSA. In a new decision involving prominent Washington D.C. eatery Marcel’s, a Federal District Judge rejected plaintiffs’ claims that the maitre ‘d who participated in the Marcel’s tip pool did so in violation of the FLSA. Arencibia v. 2401 Rest. Corp., 2011 U.S. Dist. LEXIS 146979 (D.D.C. Dec. 21, 2011). 

Plaintiffs alleged that Adnane Keiblar, the Restaurant’s long-standing maitre ‘d, should have not received tips because, in addition to his regular functions as maitre d’ where he was “responsible for organizing reservations, supervising the floor, ensuring the staffs' uniforms are clean, and generally accommodating   the requests of guests, including seeing that ‘regulars’ are seated at the tables they request,” he also exercised managerial authority rendering him an “employer” under the FLSA. The Court rejected this assertion by analyzing the four principal factors identified by courts in making this analysis, namely whether the individual had the authority to: hire or fire employees; set employee schedules; set employee compensation; and maintain employment records. The court also rejected claims that the restaurant’s director of sales should not have participated in the Marcel’s pool (even though she in fact did not), because her “direct interaction with customers to arrange private events” rendered her a properly tipped employee. 

Hospitality industry employers have been besieged by lawsuits and extensive regulation, including numerous challenges in New York and many other states as to the tip pool participation of various service positions outside of the universally understood tipped positions of server, and bus boy. Arencibia joins several other recent decisions which have rejected the narrow reading plaintiffs urge, which would limit tip pool participation to a small handful of titles not reflective of the versatile diverse nature of the hospitality industry workforce, particularly within the fine dining community.   Employers must carefully analyze their tip pool participants under both federal and state law. At all times, the employer must ensure that state law permits tip pooling and also be able to support its position that each participant is both not a manager and regularly involved in customer service.

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Assisting Lady Gaga with her day-to-day needs may be a dream to many, but does it make one exempt from overtime pay? Under DOL regulations, an administrative assistant who is paid on a salaried basis and exercises significant independent discretion and judgment is exempt under the "administrative exemption." 29 CFR § 541.203(d). This is the same exemption that applies to others who exercise significant independent discretion and judgment in performing "office or non-manual" work (as demonstrated by regulation 541.203), such as certain Human Resources employees. Challenges to the applicability of the exemption to executive or personal assistants are not new; the fact that the individual being assisted is a prominent professional in his or her industry is not determinative. Some courts applying the DOL’s regulation have expressed reluctance to rule that well-compensated individuals providing such assistance do not exercise "discretion and independent judgment, but case law remains unclear. See   Seltzer v. Dresdner Kleinwort Wasserstein, Inc., 356 F. Supp. 2d 288 (S.D.N.Y. 2005)(executive assistant to president of defendant investment bank qualified for exemption); Malena v. Victoria's Secret Direct, LLC, 2010 U.S. Dist. LEXIS 121320 (S.D.N.Y. Nov. 16, 2010)(denying summary judgment as to whether defendant's good faith belief that executive assistants performed exempt work precluded liability).

In a new challenge, a former personal assistant to chart-topping entertainer Lady Gaga has filed suit, alleging that she essentially worked around the clock in exchange for a fixed salary, and thus did not receive hundreds of thousands of dollars in premium overtime pay due under the FLSA and state law. O'Neill v. Mermaid Touring Inc., Civil Case No. 11-9128 (Southern District of New York, Dec. 14, 2011)(Jones, J). 

Employers and individuals retaining personal or executive assistants to perform similar services should be aware of the employment risks associated therewith. At the least, in addition to ensuring such employee is paid on a salaried basis, the employer must ensure that the assistant utilizes independent discretion in judgment in performing job duties.

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The proliferation of FLSA lawsuits brought by “non-exempt” employees for alleged uncompensated working time has highlighted several important FLSA questions. One prominent and thorny question concerns when and how an employer is deemed to have constructive knowledge of work allegedly performed by an employee, such that the employer will be deemed to have “suffered or permitted” that work, rendering such work compensable time. Often, employers are frustrated by this broad and unclear standard, which may entitle employees to compensation even when no member of management was aware that work was being performed. In a new decision, the Court of Appeals for the Seventh Circuit has identified circumstances under which an employer is not obligated to compensate the employee for such hours. Kellar v. Summit Seating Inc., 2011 U.S. App. LEXIS 24745 (7th Cir. Dec. 14, 2011).

Kellar concerned a sewing manager for Defendant who claimed that she regularly arrived at Summit's factory “between 15 and 45 minutes before the start of her 5:00 a.m. shift.” She characterized her activities upon arrival as follows:

about 5 minutes unlocking doors, turning on lights, turning on the compressor, and punching in on the time clock. Then she prepared coffee for the rest of Summit's employees, which took her about 5 minutes. Depending on her workload, she spent 5 to 10 minutes (or longer) reviewing schedules and gathering and distributing fabric and materials to her subordinates' workstations, "so that they could go straight to work, rather than waiting for [her] to bring [fabric] to them." For another 5 minutes, she drank coffee and smoked a cigarette. The remaining time was spent performing "prototype work" (preparing models for production), cleaning the work area, or checking patterns.

Id. at * 2-3. Plaintiff conceded that “no one told her that she needed to come in before her shift, but she arrived early because it would have been "a hassle" to show up at 5:00 a.m. and still get her subordinates up and running close to the start of their 5:00 a.m. work shifts.” Id. Plaintiff sometimes punched in early (as was common among Defendant’s employees), but when she forgot to do so she would write the “official” shift start time on her timesheet (i.e., 5 a.m.), and she did not complain at any time that her paycheck failed to capture her hours of work. 

The lower court held _that plaintiff was not entitled to compensation for the alleged pre-shift work, and she appealed to the Seventh Circuit. For purposes of the appeal, the parties did not dispute whether or not these activities took place (as typically is disputed). The legal questions before the court were simply: (1) whether these activities were “preliminary” and thus excludable from hours of work under the FLSA on that basis; (2) whether this time was “de minimis” and thus not compensable; and, (3) whether defendant had the aforementioned knowledge necessary to render this work compensable under the FLSA. 

After answering the first two questions in the negative, ruling that these activities would constitute compensable work if Defendant had suffered or permitted them, the court rejected Plaintiff’s claims. The Court observed that Plaintiff, as a manager, was aware of and at times enforced Defendant’s policy of forbidding unauthorized overtime, and participated in weekly meetings discussing the upcoming week’s schedule. The Court further noted that Plaintiff’s early punch-ins did not constitute notice to the employer of pre-shift work because early punching was a common practice at Defendant’s place of business, and “clocking in early would not necessarily have alerted Summit that Kellar was performing pre-shift work. Id. at * 17 citing 29 C.F.R. § 785.48.   Under these circumstances, the Court concluded that “[management] had little reason to know, or even suspect, Kellar was acting in direct contradiction of a company policy and practice that she herself was partially responsible for enforcing. Accordingly, no reasonable trier of fact could conclude that Summit had reason to know that Kellar was working before her shift.” Id. at * 19. 

The “suffer or permit” standard remains a relatively broad one, which can render employee activities compensable even if members of management or others with authority are not expressly aware of the activities at the time they are performed. Kellar provides valuable instruction to employers (particularly those within the Seventh Circuit’s reach, encompassing Illinois, Indiana and Wisconsin) in crafting FLSA-compliant policies for application to non-exempt employees. With that said, all employers should carefully scrutinize timekeeping and wage payment policies to avoid disputes of this ilk. 

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Quantifying the necessary “discretion and independent judgment” required to qualify for the administrative exemption continues to divide courts, and the conclusion is often in the eye of the judicial beholder. This is especially so where discretionary authority must be measured without reference to monetary benchmarks or limits, such as those applicable to insurance adjusters or purchasing agents. See Roe-Midgett v. CC Servs., 512 F.3d 865 (7th Cir. 2008)(insurance adjusters with sufficient discretion to approve claims qualified for exemption); see also 29 CFR § 541.203(f)(regarding purchasing agents). With that said, USDOL regulations and district courts interpreting the exemption have identified certain duties (often varying by industry) which constitute the hallmark of such discretion. In a new decision, one federal judge in New York State rules that a Director of Emergency Services for the Red Cross met this test. Raffe v. Am. Nat'l Red Cross, 2011 U.S. Dist. LEXIS 137340 (N.D.N.Y Nov. 30, 2011).

Plaintiff Raffe challenged the applicability of the exemption via the common technique of citing the repeatability of certain processes integral to his job, despite admitting “to having significant budgetary and fiscal responsibilities, including reallocation of emergency services funds, submitting grant applications, handling procurement, overseeing equipment and inventory, and authorizing purchases” (id. at * 37) and further admitting to “developing  and evaluating the [Red Cross] Chapter's Continuity of Operations Plan.” Id. at * 37-8. Plaintiff argued that his consultation with (and obtaining the approval of) the Chapter’s Executive Director or Board prior to the implementation of major decisions undercut his discretion and independent judgment. Rejecting this argument, the Court rightly observed that “[t]he fact that Raffe did not have sole or final authority to make decisions does not disqualify him from satisfying the conditions necessary for the administrative exemption.   Id. at * 38 citing 29 C.F.R. § 541.202(c). Because Raffe also met the other prongs of the administrative exemption test (including being paid on a salary basis), he qualified for exemption from minimum wage and overtime. 

Raffe is a positive result for employers in New York and the other jurisdictions within the Second Circuit, but also highlights the reality that director-level employees such as Raffe can mount expensive legal challenges to their exempt classification. The potential direct and indirect costs of such challenges must be factored into employers’ classification decisions and risk management plans.   A full understanding of the current judicial view of the scope of exemptions within each region in which each organization operates is vital to fully understand all potential risks.  

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As we reported here, the Wage and Hour Division of the U.S. Department of Labor previously announced it would propose a rule regarding the applicability of the companionship exemption to the FLSA's minimum wage and overtime requirements. This longstanding exemption was the subject of a rare Supreme Court opinion on FLSA issues, in which the Court upheld the exemption's historic application to individuals employed by third party agencies who provide care in a private home. Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007). According to news reports, Labor Secretary Hilda Solis will announce the Department's rulemaking proposal today. 

If enacted, the proposed rules will likely eliminate or eviscerate the exemption, bringing many if not most home health aides and other domestic workers within the ambit of FLSA protection. This regulatory change would pose difficult fiscal challenges to individuals who require such services on a regular, sometimes round-the-clock basis, and to agencies which are in the business of providing such services to Medicare or Medicaid-eligible individuals, and which are reimbursed for providing those services at a fixed rate.

Industry employers should review the proposed rule closely and prepare to participate in the mandatory 60-day notice and comment period which will follow its announcement, as the comment period will provide the employer community with its first and likely best opportunity to influence the rule. 

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In August, we discussed the California Supreme Court’s ruling addressing the circumstances under which a non-California resident can be covered by that state's employee-friendly Labor Code.  Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011).  Yesterday, the Court of Appeals for the Ninth Circuit adopted the state court’s ruling, rejecting Defendant’s constitutional challenges to that decision.  Sullivan v. Oracle Corp., 2011 U.S. App. LEXIS 24625 (9th Cir. Dec. 13, 2011).  California-based employers must be mindful of Sullivan's applicability to their non-California employees.

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We have repeatedly addressed the FLSA administrative exemption’s requirement that an employee exercise discretion and independent judgment, a concept which has confounded some courts and at times, led to inconsistent rulings. In a new decision, the Court of Appeals for the First Circuit (encompassing Rhode Island, Massachusetts, New Hampshire and Maine) has ruled that sales managers for an employer providing “high-end wedding receptions and other social functions” at banquet facilities in Boston and in Newport, Rhode Island exercised the requisite discretion and independent judgment to qualify for this exemption. Hines v. State Room, Inc., 2011 U.S. App. LEXIS 23680 (1st Cir. Nov. 28, 2011).

Hines concerned two plaintiffs who served as the “primary client contact on behalf of the event venues.” Their role was to “secure event business” by, among other tasks, speaking on the phone and in person with potential clients, touring the facilities, determining scheduling and analyzing what minimum charges would apply. As is customary in such a role, the purpose of these efforts was to “commit a prospective client to a contract for an event.” Plaintiffs also engaged in “broader sales efforts”, including attending Chamber of Commerce or other organizational meetings as a representative of the defendant. The Court observed that these duties “extended beyond securing the basic sale and event contracts,” and that the plaintiffs “stayed” with clients for the life of their relationship with the employer, working out all the details of their event, preparing internal paperwork relating to these details and attending events to ensure coordination of clients’ wishes. “The picture that emerges from the record,” in the Court’s view was “one in which the primary role of sales managers was to secure a steady stream of business by selling each prospective client on a package of options…and by ensuring that each event so planned was a success.” The Court did note that “within the course of navigating these options and client expectations, the plaintiffs had virtually no authority to make…financial decisions.” 

In applying the administrative exemption test to these duties, the Court first acknowledged and endorsed the parties’ agreement that the work performed by the sales managers was administrative, and related to defendant’s ”general business operations.” The Court stated the “sales aspect of the defendants’ businesses, although necessary to their success, is clearly ancillary to the principal function of…providing the banquet services.” Determination of exempt status thus turned on the parties’ dispute as to whether there was sufficient exercise of discretion and independent judgment. The Court rejected plaintiffs’ assertion that they exercised no discretion due to the limitations placed on their involvement in the employer’s “finances and contractual obligations.” Relying on its previous precedents analyzing the administrative exemption, the Hines court determined that the plaintiffs had a “primary duty of engaging potential clients in assisting them and selecting from various options.” Because they did not do so within a prescribed sales technique or pitch, but rather exercised discretion within the general guidance of the employer’s handbook, the Court determined that this required a “significant degree of ‘invention, imagination and talent.’” Finally, the Court determined that the discretion exercised by the sales managers pertained to matters of significance, as they were the “face” of the business to prospective clients, and their worked determined the attractiveness of the venues to the employer’s clients.

This decision bolsters the employer community’s position that those engaged in sales and marketing tasks who perform a mixture of direct sales activities and more generalized marketing duties, and who are not closely supervised or scripted in their sales and marketing work and interaction with customers and potential customers, are exercising discretion and independent judgment and thus qualify for exemption. However, employers must continue to analyze the applicability of this exemption on a case-by-case and jurisdiction-by-jurisdiction basis.  

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The Supreme Court's web site confirms that the nation's highest court has granted the petition for certiorari filed by the pharmaceutical sales representative (PSR) plaintiffs in Christopher et al. v. SmithKline Beecham Corporation.  The Court will now review the Ninth Circuit's ruling in Christopher that SmithKline properly classifies its pharmaceutical sales representatives as "outside sales" employees, despite the FDA regulations precluding PSRs from receiving money from the medical practitioners they visit.  Absent unforeseen delays, the parties (and the industry at large) should expect a ruling prior to end of the Court’s 2011/2012 term. 

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As the pharmaceutical community eagerly awaits the Supreme Court’s decision whether to grant certiorari in Christopher v. SmithKline Beecham Corp., courts within the Third Circuit (encompassing Pennsylvania, New Jersey and Delaware) continue to conform to the appeals court’s previous holding in Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), that pharmaceutical representatives meet the test for the administrative exemption under federal and Pennsylvania law. See Ibanez v. Abbott Labs., Inc., 2011 U.S. Dist. LEXIS 131945 (E.D. Pa. Nov. 14, 2011).

In Ibanez, as in previous cases such as Smith and Baum v. AstraZeneca LP, 372 Fed. Appx. 246 (3d Cir. 2010), the court determined that “plaintiff regularly exercised discretion and independent judgment in all aspects of his job, including pre-call planning, interactions with physicians, territory business planning, and the planning of events.” rejected plaintiff’s reliance on U.S. Department of Labor guidance concerning the applicability of the administrative exemption to positions and duties allegedly analogous to the PSR position. Some courts, relying on this guidance, have narrowly interpreted the exemption to apply principally (if not solely) to operational employees such as Human Resources, Accounting or Information Technology. ]

The continuing “wave” of wage-and-hour litigation seeking to find PSR’s non-exempt presents an important case study for employers in other industries, where assumptions about the exempt status of particular classifications of employees persist. A preventive audit is often the only way to detect potential wage-and-hour exposures (individual and/or class-wide) and make changes before they are identified via costly litigation.  As to PSR’s, the issue only will be resolved if the Supreme Court grants certiorari and provides guidance to the industry as to the applicability of both the administrative and outside sales exemptions.

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As we recently discussed, interplay between state wage-and-hour laws and other statutes (federal or state) is not always seamless, as neither the state wage statute nor the competing law or regulation at issue properly addresses the extent to which their scope might interfere with each other. However, as employment statutes, the wage-and-hour laws are often construed broadly, and some courts are reluctant to limit their scope regardless of the presence of another statute. In a recent example of this judicial reticence, the United States Court of Appeals for the Ninth Circuit reversed a trial court decision finding that a district court could not adjudicate plaintiffs’ state wage-and-hour law claims against SuperShuttle because it lacked subject matter jurisdiction. Kairy v. SuperShuttle Int'l, 2011 U.S. App. LEXIS 22161 (9th Cir. Nov. 3, 2011).       

Plaintiffs, “franchisee” van drivers for SuperShuttle in California, allege they were misclassified as independent contractors for the purposes of various provisions of the California Labor Code. The trial court applied a three-part test laid out by the California Supreme Court to resolve conflicts potentially implicating the jurisdiction of Public Utilities Commission (“PUC”). The trial judge determined that: 1) the PUC had authority to formulate policy regarding the classification of all drivers for so-called passenger stage corporations (“PSCs”), including SuperShuttle; 2) the PUC had exercised such authority by issuing a General Order relating to PSC conduct, and a decision interpreting that order; and, accordingly 3) that to allow plaintiffs’ wage action to proceed would interfere with this regulation of PSC drivers. Id. at 6-7. In reversing, the appellate court acknowledged that the PUC had authority to regulate the relationship between a PSC, such as SuperShuttle, and its drivers, and that it was a “close” question as to whether the General Order issued by the PUC constituted an exercise of this authority. However, the appellate court ruled that application of the wage/hour laws would not interfere with the PUC regulations governing drivers. Thus, the Public Utilities Code was “not implicated, and the district court retains subject matter jurisdiction over this case.”

Public sector employers, and all businesses performing work for public sector entities, must closely analyze the interplay of employment statutes and the regulatory environment governing their particular industry.

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As discussed by our colleagues at the California Workplace Blog, California governor Jerry Brown has signed into law AB 1396, requiring all employers doing business in California to draft written contracts for any agreements with employees that involve commissions as a method of payment for services.  California joins New York in the vanguard of making such a writing a requirement.  N.Y. Labor Law § 191(1)(c).  Of course, such a writing remains a best practice under almost all circumstances. 

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While states generally are free to enact wage and hour laws providing greater protections than contained in the Fair Labor Standards Act, sometimes such laws run afoul of federal statutes governing particular industries. In a recent decision exemplifying this type of preemption, a judge in the United States District Court of the Southern District of California ruled that the oppressive meal and rest break provisions of the California Labor Code (which will be clarified by the California Supreme Court following oral argument on November 8), conflict with and are preempted by the Federal Aviation Authorization Act of 1994 (FAAA), because the state requirements interfere with interstate commerce. Dilts v. Penske Logistics LLC, 2011 U.S. Dist. LEXIS 122421 (S.D. Cal. Oct. 19, 2011). This is a significant victory for industry employers as class action lawsuits alleging violation of these requirements have been prevalent in California.

Dilts concerned the meal and rest statute’s interference with the FAAA provision providing that “a State . . . may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier . . . or any motor private carrier, broker, or freight forwarder with respect to the transportation of property.” Id. at * 13 quoting 49 U.S.C. § 14501(c)(1).  California’s strict meal and rest break laws, which the Court characterized as fairly rigid, force drivers to alter their daily routes while searching out appropriate places to pull off the highway and park their vehicles, preventing them from making some daily deliveries. Allowing California to “insist exactly when and for exactly how long carriers provide meal breaks for their employees would allow other states to do the same, and do so differently,” Judge Janis L. Sammartino observed. Id. at * 27.

Navigating the maze of federal, state and local regulation of wage-hour laws is never easy, particularly in heavily regulated industries such as trucking or aviation. Employers in these industries must monitor the status of the law to determine how best to comply with potentially competing provisions on the state and federal level. This decision points that the first step of any analysis is first to determine a statute or regulation’s enforceability.

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This summary of recent motor carrier exemption case law was written by Jackson Lewis partner Jeff Brecher.

The motor carrier exemption is one of the original exemptions contained in the 1938 Fair Labor Standards Act.   But seventy years later courts continue to clarify its contours. In just the past few months, several decisions have addressed the exemption—some addressing basic threshold issues and others addressing changes made by dizzying legislation passed between 2005-2008 affecting the exemption and its applicability.  As a general proposition, the motor carrier exemption applies to employees who transport property in interstate commerce. But the devil is in the details.

The first case we discuss addresses a basic threshold issue: in determining whether a vehicle meets the 10,001 lb. weight requirement needed to establish the applicability of the exemption, does the weight include only the vehicle, or can it also include the trailer it is carrying? In Albanil v. Coast 2 Coast, Inc., 2011 U.S. App. Lexis 20842 (5th Cir. October 13, 2011), the Fifth Circuit held the combined weight is what counts.

A little background to understand why this dispute arose: from 1938 until August 10, 2005, the motor carrier exemption applied regardless of the weight of the vehicle. But after passage of SAFETEA-LU on August 10, 2005, the motor carrier exemption applies only to “commercial motor vehicles” (subject to a safe harbor provision extending coverage of smaller vehicles through August 10, 2006). A “commercial motor vehicle” is defined as a “self-propelled or towed vehicle used on the highways in interstate commerce to transport passengers or property, if the vehicle has a gross vehicle weight rating or gross vehicle weight of at least 10,001 lbs, whichever is greater (the definition also includes vehicles used to transport more than eight passengers or hazardous materials). 

Plaintiffs were employed as “chippers” who were responsible for removing hardened concrete from the inside of concrete mixer drums and other enclosed spaces. They traveled in pickup trucks with a trailer and attached compressor. While the pickup truck and trailer each were less than 10,000 lbs, when combined, the total weight exceeded 10,000 lbs.  Finding the statutory definition ambiguous, the Court relied on a Department of Transportation regulation, 49 C.F.R. § 390.5, defining a commercial motor vehicle to include the combined weight of the vehicle. 

The Court also explained this construction was consistent with the purpose of the Motor Carrier Act, since it brought heavy vehicles within the jurisdiction of the Department of Transportation, making safety regulations applicable. The Court noted that that Plaintiffs’ construction would allow coverage of a pickup truck that was 10,001 pounds and a trailer that was 10,001 lbs., but not a pickup truck weighing 10,000 lbs towing a trailer weighing 10,000 lbs (20,000 lbs combined) even though such a vehicle implicates the same, if not greater, safety concerns. Because it was undisputed the combined weight of the vehicles exceeded 10,001 lbs, the Court affirmed the grant of summary judgment.    

Two cases, one decided in September and the other October, address another basic threshold issue—under what circumstances does the exemption apply to “loaders”? In Lewis v. Eskridge Trucking, Co., Inc., 2011 U.S. App. Lexis 20476 (11th Cir. October 6, 2011), the Eleventh Circuit held an employee who was responsible for filling trailers with wood shavings and ensuring that the loads were balanced, weighing the trailers, and inspecting them for maintenance, was a loader covered by the exemption, and therefore affirmed the grant of summary judgment to the employer. The Court held that while the motor carrier exemption is most often applied to drivers of motor vehicles, it also applies to “loaders”—employees who duties include the proper loading of motor vehicles so that they may be safely operated on the highways and who exercise judgment and discretion in planning and building a balanced load or in placing, distributing, or securing the pieces of freight in such a manner that the safe operation of the vehicles on the highways in interstate or foreign commerce will not be jeopardized.

Similarly, in Graham v. Town & Country Disposal of Western Missouri, Inc., 2011 U.S. Dist. Lexis 106798 (W.D. Mo. September 20, 2011), the Court found plaintiffs who worked as “throwers,” responsible for loading garbage trucks with trash, were also exempt under the motor carrier exemption as “loaders” since they too exercised discretion and judgment in placing, distributing, and securing trash in such a manner to permit the safe operation of the vehicles on the road, and granted summary judgment to the employer.

Finally, in Johnson Jr. v. Hix Wrecker Service, Inc., 651 F.3d 658 (7th Cir. 2011), the Seventh Circuit addressed the issue of when the exemption applies to employees who travel only intermittently in interstate commerce. The Court adopted a “four-month” rule, set forth by the Department of Transportation, but reversed the grant of summary judgment to the employer finding the evidence submitted was insufficient to satisfy the employer’s burden of proving the applicability of the exemption. 

Relying on a 1981 Notice of Interpretation issued by the Department of Transportation, the Court held that for the motor carrier exemption to apply, the carrier must be shown to have engaged in interstate commerce within a reasonable period of time prior to the time at which jurisdiction is in question, and if jurisdiction is claimed over a driver who has not driven in interstate commerce, evidence must be presented that the carrier has engaged in interstate commerce and that the driver “could reasonably have been expected to make one of the carrier's interstate runs”.  Adopting the Notice of Interpretation, the Court held that evidence of driving in interstate commerce or being subject to being used in interstate commerce should be accepted as proof that the driver is subject to jurisdiction of the Department of Transportation for a 4-month period from the date of the proof.

In this case, however, the Court held the evidence submitted by the employer (an affidavit) was “inconclusive and ambiguous” regarding the extent to which the employer engaged in interstate commerce prior to the time in which it sought to rely on the exemption or that the employee was “subject to begin used in interstate commerce”, and therefore summary judgment was improper.  

While these cases add some clarity to the application of the motor carrier exemption, they highlight that this exemption, even though it has been part of the FLSA since 1938, still has many twists and turns that must be navigated.  Further, as with all exemptions, employers also must analyze applicable state law to ensure the exemption is applicable under state law, with or without any tangents.

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Most commonly, where an employee challenges his or her classification by his or her employer as exempt in an FLSA lawsuit, the defendant seeks summary judgment (opposed by plaintiff), arguing that the employer can establish as a matter of law based on the undisputed factual record that the exempt classification was appropriate. Less often, a plaintiff will move for summary judgment, arguing the evidence produced in discovery regarding the classification demonstrates as a matter law that the individual was non-exempt. A court recently rejected one such plaintiff’s motion, finding questions of fact as to applicability of the administrative exemption. Caveness v. Vogely & Todd, Inc., 2011 U.S. Dist. LEXIS 98144 (M.D. Tenn. Aug. 30, 2011)

Caveness concerned the job duties of plaintiff, a former estimator for the defendant body shop, which repaired and restored damaged vehicles. Plaintiff characterized her duties as being rote, and ministerial in nature, consisting of reviewing the visible vehicle damage, inputting the damage into a computer program, generating reports and following-up to ensure that the work was completed and that defendant was paid for its services. The body shop disputed this characterization of the duties, asserting that plaintiff “decided whether to: repair or replace damaged parts and components; use new, used, or refurbished parts; use parts manufactured by the original manufacturer or a third party; and, override computer software estimates regarding labor hours).” In rejecting plaintiff’s motion, the court found a questions of fact as to whether plaintiff’s work was “production” work (i.e., related to the body shop’s product of repairing vehicles), or rather related to the “general business operations” of the defendant. The court observed that defendant was in the business of repairing vehicles and plaintiff did not perform such repairs. The court also found questions of fact as to whether plaintiff exercised discretion and independent judgment in performing her work (as defendant alleged she did in determining whether to override computer estimates and also in independently determine the scheduling and prioritization of repair work), and whether plaintiff in fact worked more than 40 hours per week.

Caveness is yet another federal district court decision highlighting the highly specific and at times unclear analysis regarding the applicability of the administrative exemption. This analysis is especially murky when focused on whether a position is related to production (and accordingly outside the administrative exemption as a matter of law) or general business operations. It also points out that not tracking hours worked by exempt can create an additional trial issue and potentially subject the employer to liability based on the plaintiff’s assertions of hours worked. All employers should consider tracking hours for exempt employees in situations where the classification of exempt and non-exempt is not clear from court or agency precedent.

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The highly technical requirements of the FLSA’s learned professional exemption often result in findings that employees traditionally considered to be professionals are non-exempt. In order to satisfy the exemption, the employee must utilize advance knowledge that is “customarily acquired through prolonged academic instruction” when performing their primary duties In a new decision highlighting this analysis (as well as its deviation from the “common sense” understanding of a learned professional), Judge Michael Telesca of the Western District of New York applied the exemption on summary judgment to a funeral director. Rowe v. Olthof Funeral Home, Inc., 2011 U.S. Dist. LEXIS 118182 (W.D.N.Y. Oct. 12, 2011).

Plaintiff Rowe served as a licensed funeral director for defendant for four years. Prior to becoming so employed, Plaintiff completed a one year residency with defendant in conjunction with his obtaining his license from New York State. His primary duties included “removing bodies of deceased persons from the locations of their deaths, transporting bodies to [defendant’s premises], embalming bodies, dressing embalmed bodies and placing them in caskets, and cremating bodies.” The parties dispute hinged upon interpretation of a DOL regulation stating that “licensed funeral directors and embalmers who are licensed by and working in a state that requires successful completion of four academic years of pre-professional and professional study, including graduation from a college of mortuary science…generally meet the duties requirements for the learned professional exemption.” 29 C.F.R. § 541.301(e)(9). Plaintiff contended that “because the State of New York requires only an Associates’ degree to become a licensed funeral director, funeral directors in New York are not exempt [under this regulation].” The court rejected a formulaic application of the “four year” guideline contained in this regulation, instead observing that the proper determination of exempt or non-exempt status turned upon “the duties performed by plaintiff in the course of his employment, and [a determination of] whether the duties performed are those of a learned professional.” Id. at *10.  The court then ruled that plaintiff’s primary duties, as discussed above, required the use of the advance knowledge Rowe acquired through his academic background and licensing process. 

Rowe represents a win for employers particularly in the funeral home community, as the court rejected a draconian reading of the exemption requirement as set forth in the DOL regulations. Employers applying the learned professional exemption must continue to ensure that advanced knowledge in a field of science or learning is a prerequisite to perform the work, not simply a preference.  The absence of a specific job-related degree can doom the exemption argument.

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As previously discussed, last March the Supreme Court ruled that the FLSA’s anti-retaliation provision protects “informal” complaints, i.e., unwritten complaints alleging violation of the FLSA are protected activity to support a retaliation complaint.  Kasten v. Saint-Gobain Performance Plastics Corp., No. 09-834 (Mar. 22, 2011). However, the Court declined to resolve the open issue of whether the statute protects internal complaints (those made to an employer or agent of the employer) or only external complaints (those made to an agency or filed with a court).  Thus, Federal courts interpreting retaliation complaints under Kasten are left with the pre-existing body of law in their jurisdiction governing whether internal complaints are protected.  A New York federal judge recently reiterated that while many other Circuits protect such internal complaints, Second Circuit courts do not under the FLSA.  Son v. Reina Bijoux, Inc., 2011 U.S. Dist. LEXIS 116417 (S.D.N.Y. Oct. 7, 2011).

In Son, plaintiff’s retaliation complaint presented a strong factual case regarding her protected activity under the FLSA, including an alleged tape recording of a conversation in which managers arguably confirmed that Plaintiff, a non-exempt employee, was being terminated for refusing to work on Saturdays without overtime pay.  The complaint contained further scandalous allegations that defendants predatorily hired Korean-Americans due to their willingness to work in violation of the FLSA.  Observing that the Supreme Court did not elect to resolve the question of the internal complaint question in Kasten, the Court ruled that it was constrained to follow the Second Circuit’s long standing precedent in Lambert v. Genesee Hosp., 10 F.3d 46, 55 (2d Cir. 1993), and accordingly held the internal complaint to be unprotected. 

While Son reaffirms the Genessee Hospital doctrine regarding federal protection of internal complaints within the Second Circuit (New York, Connecticut and Vermont), the authority in other jurisdictions is directly contrary.  Furthermore, many State laws, including New York, provide broader protection for employee complaints, an issue not addressed in the Son opinion.  In other words, state law, as well as general employee relations and EEO best practices, must be considered when analyzing the propriety of disciplinary action in regard to an employee who has asserted a workplace complaint regarding wage and hour compliance.

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Courts continue to analyze the compensability of preliminary and postliminary time: time spent before or after a non-exempt employee’s shift on certain tasks related to the performance of the employee’s job. Many suits allege the time spent “donning and doffing” of personal protective equipment (“PPE”) related to dangerous work environments (slaughter houses, power plants, etc.) must be compensated as being “integral and indispensible” to the performance of the jobs in question. In a recent opinion, while Magistrate Judge George H. Lowe of the Northern District of New York observed that this legal issue has “troubled courts for more than sixty years,” the Court ultimately determined that former employees of the Massena West aluminum smelting facility operated by Alcoa were not entitled to compensation for time spent putting on and removing “flame retardant shirts and pants, metatarsal (or steel-toed) boots, spats, hard hats with snoods that cover the back of the neck, and safety glasses.” Adams v. Alcoa, Inc., 2011 U.S. Dist. LEXIS 110718 (N.D.N.Y Sept. 27, 2011)

The Adams plaintiffs worked in the potroom and ingot departments of the plant, jobs which required them to be near molten metal and wear the flame retardant shirts and pants, steel-toed boots, spats and hard hats. Alcoa provided the Plaintiffs with extra uniforms, laundered those uniforms, and permitted employees to don/doff the uniforms at home, or in a facility at Massena West. Magistrate Judge Lowe, relying on the Second Circuit’s “extremely narrow” interpretation of the “integral and indispensable” requirement in a factually similar case, along with a Department of Labor advisory memorandum addressing when donning and doffing time is compensable, ruled that the time spent by Plaintiffs putting on PPE was neither “integral” (which required that PPE be necessary to enter a “lethal atmosphere”) nor “indispensable” (which, under the DOL guidance, required that the donning and doffing by necessity occur on premises, not at home). Id. at * 16-27 citing Gorman v. Consolidated Edison Corp., 488 F.3d 586 (2d Cir. 2007). 

The scope of the compensable workday for non-exempt employees is a legal concept that is devoid of clairty, and DOL and court guidance on the issue has not always been consistent. Employers must assess what state and federal law require in their jurisdictions with respect to the compensability of all tasks performed by the employee at the employer’s behest.

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As we have discussed, federal courts generally interpret the FLSA in conformity with longstanding FLSA principles stated in, among other seminal cases, United States v. Klinghoffer Bros. Realty Corp., 285 F.2d 487 (2d Cir. 1960). Under the Klinghoffer rule, the FLSA generally just mandates: 1) the payment of overtime at the regular rate for hours in excess of 40; and, 2) that employees receive en toto at least minimum wage for all hours of work in a workweek. Thus, an employee who is paid for 35 hours at a rate above the minimum wage, and then later alleges that he or she worked 36 hours, has a claim under the FLSA only if inclusion of that additional hour pushes his or her regular rate for the 36 compensable hours below the minimum wage (currently $7.25/hour). A new decision calls this longstanding rule into question. Norceide v. Cambridge Health Alliance, 2011 U.S. Dist. LEXIS 103686 (D. Mass. Aug. 28, 2011).

In reviewing Defendant’s motion to dismiss a non-overtime off-the-clock claim under Klinghoffer, Judge Nancy Gertner observed that the courts following the Klinghoffer rule have “mostly done so by citing to Klinghoffer without any further analysis of whether, in fact, the weekly average rule effectuates the legislative intent of the FLSA's minimum wage law.” Id. at * 12. Observing that the First Circuit (encompassing Massachusetts) has not had cause to rule on the issue, the judge concluded that “the plain language of the minimum wage provision, the remaining parts of the FLSA, and the Congress' primary goal of protecting workers buttresses the conclusion that Congress intended for the hour-by-hour method to be used for determining a minimum wage violation.” Id. at * 19.

While many state laws already provide employee protection for gap time by requiring an agreed upon rate to be paid for all hours worked, Norceide is an adverse decision for all employers, particularly those with operations in jurisdictions regulated predominately or exclusively by the FLSA, and those within the First Circuit (Massachusetts, Rhode Island, New Hampshire, Maine and Puerto Rico). Such employers are not only liable for gap time claims but also the additional 100% liquidated damages available under the FLSA. Proper tracking of hours worked remains of paramount importance for all employers.

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Enterprise coverage under the Fair Labor Standards Act is broadly defined, seeking to include in its expansive definition of FLSA covered employers substantially all businesses with greater than $500,000 in gross revenues which have “employees engaged in commerce or in the production of goods for commerce, or that have employees “handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce.” 29 U.S.C. § 203(s)(1).   Even local businesses arguably falling outside this definition can be subjected to protracted legal proceedings under the FLSA, in which coverage is the initial focus of the dispute. A recent decision issued by Judge James C. Cacheris of the Eastern District of Virginia. Rains v. E. Coast Towing & Storage, LLC, 2011 U.S. Dist. LEXIS 106915 (E.D. Va. Sept. 20, 2011) is instructive as to the analysis and scope of “enterprise coverage.”.

Rains concerned the FLSA overtime claim of a plaintiff tow truck driver for defendant East Coast Towing & Storage, LLC, a company towing vehicles within Virginia. Because plaintiff produced “specific evidence suggesting that East Coast Towing had employees handling and working on goods and materials that had been moved in or produced for commerce”, including “truck[s] that had been manufactured outside . . . Virginia,” whether the business was a covered enterprise under the FLSA turned on the “revenue” prong of the enterprise coverage test, namely whether Defendant’s gross volume of sales was greater than $500,000 in any given year. In moving for summary judgment on the issue of coverage, Defendant produced tax returns for the years 2008 and 2009, as well as a Statement of Revenue and Expenses for 2010 indicating annual receipts between $201,322 and $428,176, along with an affidavit from the company’s owner stating that the company had never made more than $500,000. Plaintiff sought to rebut this evidence with testimony from himself and two other former employees which purported to estimate the average number of vehicles towed per day by Defendant, and the average amount charge per tow. Plaintiff asserted that, based on the figures at the lowest end of the range demonstrated by this evidence, Defendant had annual revenue of approximately $684,375. 

The court found this conflicting evidence sufficient to raise a genuine issue of material fact as to Defendant’s annual revenues, and rejected Defendant’s argument that plaintiff could not possibly have had personal knowledge of the number of vehicles towed during shifts when he was not working, based on his assertion that he had “constant interaction with East Coast Towing as a small company, and [was] one of only three night time staff.” The court also rejected Defendant’s attack on the supporting affidavit of one of the other employees which questioned the sufficiency of that employee’s knowledge of the amount Defendant received per tow, and further observed that the affidavit indicated the employer’s preference for accepting cash payments (evidence tending to indicate that Defendant’s “official” tax evidence did not encompass all revenue for purposes of the FLSA test). 

While some small businesses truly are not FLSA-covered under the enterprise coverage test, such “local” entities can still be subject to legal proceedings seeking to apply the FLSA’s provisions to their business, as Rains demonstrates. Further, businesses can be subject to FLSA suits from employees who are covered by the Act due to their individual involvement in commerce. And, of course, many state wage-and-hour laws provide broader coverage than the FLSA. Employers of all sizes, and particularly non-profit organizations, should analyze whether they are subject to coverage under the FLSA and/or applicable state laws.

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Of continued concern to governmental agencies – departments of labor, taxing authorities, workers compensation and unemployment boards – is the classification of workers as “independent contractors” and resulting exclusion of (and lost revenue from) such individuals from coverage under tax, benefits and wage statutes. Periodically, such agencies seek to coordinate their enforcement efforts with respect to misclassification, such as the Joint Enforcement Task Force on Employee Misclassification convened in 2007 by former New York Governor Eliot Spitzer. Earlier this month, the Internal Revenue Service and U.S. Department of Labor announced that they have entered into a memorandum of understanding to “improve departmental efforts to end the business practice of misclassifying employees in order to avoid providing employment protections.” The DOL also announced it had reached similar agreements with several state agencies.

This cooperative arrangement was followed shortly by a separate IRS announcement of a new Limited Amnesty Program for underpayments of federal employment taxes due to alleged misclassification. Under this program, an employer is eligible if it is: (a) not currently being audited by any federal or state agency regarding worker classification; (b) has consistently treated the subject workers as non-employees; and (c) has filed all required Form 1099s for the workers for the previous three years. An employer meeting those criteria can, through the program, voluntarily pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, without any additional interest or penalties. However, the employer must enter into a “closing agreement” with the IRS which, among other provisions, extends the statute of limitations for collecting back taxes (from three to six years) during the first three years following entrance into the program. The tax “amnesty” offered by the program, of course, does not extend to the bevy of other laws potentially applicable to the acknowledged misclassified contractors. 

“Coordination of misclassification enforcement efforts by governmental agencies is not a new concept,” notes Jackson Lewis tax partner Bruce Schwartz. “Unfortunately, none of the agencies has been able to provide a bright line definition for determining whether a worker is an employee or independent contractor and certain laws – for example, unemployment compensation laws – may use a definition of employees that is broader than the common law definition used by the IRS. Nevertheless, businesses should be aware that worker classification determinations made by government agencies usually have the presumption of being correct. Companies need to take this into account determining their business model in using employees and/or independent contractors.” 

These continued government initiatives coupled with the growth of class and collective wage and hour claims based on worker misclassification make it vital for all businesses to closely review their classification process and practices, particularly if contemplating participation in a government “amnesty” program, such as the one outlined above. Simply calling one a contractor, whether the individual requests or agrees to such classification, is not a legal defense, and neither is the participation in a voluntary program applicable to a particular statute. 

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Recently, we discussed the standard applicable to collective action certification of FLSA claims at the so-called “second stage”, which occurs after factual discovery. This is a more stringent standard than that applied to cases at the initial “conditional certification” stage, where courts apply a standard that varies from circuit to circuit, but is typically lenient. However, in a case defended by Jackson Lewis attorneys led by former USDOL Wage and Hour Administrator and current Jackson Lewis Wage and Hour Practice Group Leader Paul DeCamp, Federal Judge J. Phil Gilbert of the Southern District of Illinois recently rejected a plaintiff’s request for conditional certification of a group of store managers. Drew v. Shoe Show, 2011 U.S. Dist. LEXIS 106503 (S.D. Ill. Sept. 19, 2011).

Drew concerned the putative collective action claim of a plaintiff who worked as a store manager for one of defendant’s retail shoe stores in Illinois. She alleged that her primary duties were non-managerial and equivalent to those performed by hourly, non-exempt employees. Specifically, she alleged that she: 1) was not responsible for hiring or firing employees at the store; 2) was not given access to financials and other information relevant to store management; and 3) was subject to intense scrutiny and micromanagement from a district manager, who presided over several stores. In analyzing whether plaintiff’s evidence (which was not supplemented by affidavits of support from other store managers, or other current and former employees) satisfied plaintiff’s obligation to make the “modest factual showing” of a common policy required within the Seventh Circuit and many other courts necessary for conditional certification, the Court noted that in support of her motion, along with her own affidavit, plaintiff pointed only to corporate policies and a job description she believed were applied uniformly across defendant’s store managers.  However, she admitted that her beliefs about store manager duties, other than at her own store, were “based on her limited experience at two or three other [of defendant’s] stores and on several conversations she had with other store managers, but which she cannot recollect with any degree of specificity.” This allegation was further undercut by Defendant’s practice of classifying some store managers as exempt, and others as non-exempt, based on an individual analysis of their duties.

The court concluded that plaintiff had provided “no evidence that, beyond responsibility for those core functions [of store management], all store managers perform similar activities for the same percentage of work time such as they are similarly situated with respect to the question of whether they are properly categorized as exempt under the FLSA.” Absent this showing, the court found that plaintiff failed to meet her burden, and denied conditional certification. 

While defendants in putative misclassification collective actions continue to urge that courts should take the case-by-case, fact-intensive exemption analysis into consideration, many courts continue to permit conditional certification (and notice to putative collective action members) based solely on the affidavit of a named plaintiff alleging a uniformly-applicable job description applied to the duties of all employees holding the position. Employers should consider ease of certification in determining whether to apply a uniform classification to store managers (or any other job title), or to engage in a case-by-case duties analysis before reaching classification decisions. In the same vein, employers should consider the pros and cons of national policies and procedures and job descriptions.

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Confusion continues to reign throughout the federal district courts as to the scope of the administrative exemption as set forth in the regulations at 29 C.F.R. §§ 541.200-202. In a decision highlighting this lack of clarity, Federal District Judge Kevin Castel of the Southern District of New York recently denied cross-motions for summary judgment as to the applicability of the exemption to “research associates” for Gerson Lehrman Group, a company devoted to assisting clients to “find and engage experts in various industries and disciplines.” Cohen v. Gerson Lehrman Group, Inc., 2011 U.S. Dist. LEXIS 104551 (S.D.N.Y. Sept. 15, 2011).

The parties could agree only that Plaintiffs’ duties as Research Associates related to “interview[ing] clients and match[ing] them with appropriate experts, and perform[ing] research tasks delegated by more senior employees.” Observing that the parties submitted a record “laden with factual disputes,” the Court ruled that while certain disputes were “little more than disagreements about seemingly irrelevant jargon” others were “integral toward determining the application of the administrative exemption.” The Court identified numerous factual disputes relating to the primary duties of Research Associates, and whether they exercised independent judgment and discretion in performing such duties, which in the Court’s view rendered it impossible to determine on summary judgment whether they met the test for the administrative exemption. In short, the Court could not determine whether the duties were exempt duties related to the “general business” of Gerson Lehrman and its clients (and thus potentially eligible for exemption) or were “production” work as defined in Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009). Nor could the Court determine whether the requisite discretion and independent judgment was present. 

Cohen, like last year’s sister court decision in Henderson v. Transp. Group, 2010 U.S. Dist. LEXIS 66109 (S.D.N.Y. July 1, 2010), highlights the uncertainty in applying the administrative exemption to junior white collar professionals in numerous industries. While these employees have college degrees, possess substantial skills, and often are assigned important client responsibilities, the plaintiffs’ bar asserts that they are simply “producing” the white collar employer’s product, and that, as junior employees, they cannot possibly be involved in decision-making with respect to those clients requiring discretion and independent judgment. Unless and until the Supreme Court provides clarity regarding the scope of the exemption (by addressing one of the Circuit splits developing in particular industries), employers must continue to apply the exemption cautiously after review with counsel and with a full understanding of potential liabilities.

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Disputes regarding the application of the FLSA’s “learned” professional exemption can arise where many – but not all or even “most” – holders of a given position possess specific or substantially-job related academic credentials, but others do not. This is so due to some courts’ narrow interpretation of the learned professional exemption’s requirement that the position require advanced knowledge customarily acquired by a “prolonged course of “specialized intellectual instruction.” With the exception of a few universally-acknowledged professions such as doctors, lawyers and accountants (an industry which itself has been subject to challenge), litigation often centers on whether the requirements for an employer’s specific job are customarily based on academic instruction, or work experience. One such position is that of social worker. Recently, the Ninth Circuit, reversing the lower court’s grant of summary judgment, held that social workers employed by the State of Washington did not satisfy the exemption’s requirements. Solis v. Washington, 2011 U.S. App. LEXIS 18668 (9th Cir. Sept. 9, 2011).

Washington concerned a challenge to the state Department of Social and Health Services’ (DSHS) classification of its social workers as exempt. The district court agreed with DSHS’ position that the academic credentials of its social workers – who were required to hold a “[b]achelor's degree or higher in social services, human services, behavioral sciences, or an allied field," - were sufficiently specialized and related to their social work to establish the credential and academic instruction as a prerequisite to hold the job of social worker. In the district court’s view, the DSHS requirement that social workers have eighteen months’ social work field experience, along with the imposition of mandatory continuing education requirements, “weighed in favor of a finding of specialized training” and thus exempt status.

Reversing, the Ninth Circuit analyzed Department of Labor opinion letters concerning related positions and observed that “the ‘learned professional’ exemption applies to positions that require ‘a prolonged course of specialized intellectual instruction,’ not positions that draw from many varied fields. While particular coursework in each of the acceptable fields may be related to social work, DSHS admits that it does not examine an applicant's coursework once it determines that the applicant's degree is within one of those fields.” Id. at * 21 (emphasis in original). Because individuals with diverse academic training could hold the position, based on their professional experience, the Court reasoned that no specialized academic instruction could possibly be a prerequisite for the job. In the Circuit Court’s view, DSHS’ 18-month on-the-job training requirement further militated against exempt status because DOL regulations “state clearly that the exemption does not apply to ‘occupations in which most employees have acquired their skill by experience.’”    

This narrow application of the learned professional exemption creates a dilemma for employers: namely, hire the best candidates to perform a given position, regardless of the source of their superior qualifications, or limit employees hired in job titles classified under the learned professional exemption exclusively to those holding specific narrow degree prerequisites. This concern is underscored in certain professions such as social work by the limited monies provided by funding entities to compensate employees. Absent such a “hard line stance” with respect to this formal requirement, or a very academic, lengthy training program, employers are exposed to a risk of challenge of such a classification.  

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In the latest installment in a long running dispute regarding compensation of certain mid-level managerial employees at the Gristede’s chain of New York-area grocery stores, federal Judge Paul Crotty ruled last week that Gristede’s corporate CEO, John Catsimatidis, is an individually liable “employer” under the FLSA and New York Labor Law. Torres, et al. v. Gristede’s Operating Corp., et al., 04-CV-3316 (S.D.N.Y. Sept. 9, 2011).  

The Gristede’s litigation, settled on the eve of trial in 2009 but has persisted due to the corporate defendants’ failure to adhere to the payment schedule set forth in the settlement agreement. As the suit was initially filed against numerous corporate defendants and individuals, including Mr. Catsimatidis, the CEO of the operative corporation, Plaintiffs’ counsel renewed its motion to hold Mr. Catsimatidis individually liable when the payment scheduled was not adhered to.  In finding that Mr. Catsimatidis met the test for an “employer” as an individual under the FLSA’s “economic realities” test and the Second Circuit’s decision in Herman v. RSR Sec. Services Ltd., 172 F.3d 132 (2d Cir. 1999), Judge Crotty relied on undisputed evidence regarding his individual control and involvement in the management of the business, as well as on an affidavit submitted by Mr. Catsimatidis in an unrelated litigation attesting to his operational control of the company as CEO. 

Consistent with the FLSA’s broad, remedial purpose, courts have fashioned tests which seek to hold individuals liable for wages as employers (even without application of the corporate veil doctrine) where they exercise sufficient control and have sufficient authority to warrant imposition of such personal liability. As the Torres decision demonstrates, management of small, medium and large businesses (along with their employment and corporate governance counsel) must be aware of this potential liability, and take steps to ensure wage and hour compliance and minimization of personal risk.

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While this space frequently discusses decisions adjudicating the merits of FLSA plaintiffs’ “off-the-clock” claims, allegations that employees were not compensated for all hours worked, FLSA collective action litigation often does not reach this merits stage of the proceeding. Frequently, courts first review plaintiffs’ claims in the context of determining whether FLSA plaintiffs are “similarly situated” – an elusive and difficult two-stage inquiry. Recently, a federal district court in Pennsylvania analyzed whether a group of some 700+ opt-in plaintiffs in a putative collective action brought against funeral home operator Alderwoods Group were similarly situated. The Court held that they were not. Prise v. Alderwoods Group, 2011 U.S. Dist. LEXIS 101817 (W.D. Pa. Sept. 9, 2011).

Prise concerned claims brought by the named plaintiffs that they, and individuals holding a variety of other non-exempt job titles at defendant’s funeral homes, were not paid for time relating to: “(a) community work; (b) on-call work; (c) overtime preapproval; (d) training for insurance licenses; and, (e) meal breaks.” Id. at * 5.

In analyzing whether all 700 opt-in plaintiffs’ were similarly situated at the second, more stringent stage of the collective action process, the Court reviewed extensive record testimony from numerous plaintiffs across a number of states regarding the similarities and differences in the application of the allegedly “uniform” FLSA policies used by Defendant. This review constituted the required “fact specific review of each class member who has opted-in, taking into account factors such as employment setting, termination procedures, defenses asserted against various plaintiffs, and other procedural issues.” Id. at * 55. This analysis allows the court to consider “1. disparate factual in employment settings of the individual plaintiffs; 2. the various defenses available to defendant which appear to be individual to each plaintiff; and, 3. fairness and procedural considerations.” Id. citing Thiessen v. Gen. Elec. Capital Corp., 267 F.3d 1095, 1103 (10th Cir. 2001). 

Under this test, the court concluded, particularly in light of recent Western District of Pennsylvania authority as well as the denial of class certification of similar claims in a California lawsuit against the same Defendant, that “each of the factors reviewed for the classes supports decertification…because [plaintiffs] did not set forth substantial evidence that the opt-in plaintiffs are similarly situated to the named plaintiffs. Testimony from sample plaintiffs and management in each class were inconsistent regarding [Defendant’s] compensation practice.” Id at * 86-87.

Prise represents a victory for employers, as the court required the plaintiff to not merely allege a common policy applicable to a broad class of employees, but to adduce evidence through the discovery process supporting such an allegation in order to proceed to trial on a collective action basis. Where plaintiffs failed to do so, the court determined that they could not proceed collectively. Collective action litigation continues to be costly and complex, and employers must continue to take risk management steps to minimize their exposure to FLSA claims, particularly broad collective actions.  

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29 U.S.C. 215(a)(3) prohibits employer retaliation against an employee for complaints alleging FLSA violations (though the contours of what constitutes a protected complaint are still uncertain).  An unanswered question has been whether the FLSA’s anti-retaliation protections prohibit a prospective employer from considering an applicant’s FLSA activity arising out of previous employment?  Recently, the Court of Appeals for the Fourth Circuit ruled that such protections do not so extend, and that a prospective employer may consider such prior activity in making a hiring decision.  Dellinger v. Sci. Applications Int'l Corp., 2011 U.S. App. LEXIS 16635 (4th Cir. Aug. 12, 2011).

In Dellinger, plaintiff applied for employment with defendant SAIC.  After a contingent offer of employment was made, plaintiff disclosed to SAIC, in connection with the company’s required background check, her pending FLSA lawsuit alleging minimum wage and overtime violations against a previous employer.  The offer of employment subsequently was rescinded by SAIC.  Dellinger sued, alleging that the withdrawal was based on her disclosure of her FLSA activity, and that such an employment decision violated Section 215(a)(3)’s prohibition against retaliation by an employer “against any employee.”

In a two-to-one decision, with a dissent from Circuit Judge Robert King, the Appellate Court affirmed the lower court’s dismissal for failure to state a claim, ruling that the scope of the anti-retaliation provision was defined by the FLSA’s definition of an “employee,” contained in 29 U.S.C. § 203(e)(1).  Analyzing applicant Dellinger’s claims under this definition –“any individual employed by an employer” –the Court held that “Dellinger could only sue [SAIC] if she could show that she was an employee and that Science Applications was her employer.” Dellinger, 2011 U.S. App. LEXIS 16635 at * 8 (emphasis added).  In declining to broaden the scope of “employee” for Dellinger, the Court observed that the “core” purpose of the FLSA was to provide minimum wage and overtime protection to workers, and that permitting FLSA lawsuits from applicants on such a novel theory would impermissibly and inappropriately broaden the statute, even though “‘morally unacceptable retaliatory conduct’ may be involved.”

While Dellinger is a positive development for employers, specifically those located in the Fourth Circuit, making employment decisions based on an applicant’s prior attempt to assert his or her workplace rights and protections (as opposed to based on legitimate business criteria such as the qualifications of the applicant) remains fraught with legal risk. 

For further analysis of this decision by Jackson Lewis see here.

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The FLSA’s learned professional exemption provides an exemption from overtime for employees who have academic credentials in a field of “science or learning customarily acquired prolonged academic instruction” and who utilize this formal educational training in the performance of their job duties. Typical examples include doctors, lawyers, and certified public accountants, and doctors and lawyers need not even be paid on a salary basis. States with wage and hour laws generally have a similar exemption.

Historically, overtime disputes regarding the use of this exemption have centered in particular fields, such as engineering or, more recently, accounting. In a recent appellate decision from California, the Court of Appeal for the First Appellate District considered and rejected a challenge to the application of the California Labor Code’s learned professional exemption in the legal field. Zelasko-Barrett v. Brayton-Purcell, LLP, 2011 Cal. App. LEXIS 1080 (Cal. App. 1st Dist. Aug. 17, 2011).

In Zelasko, the Defendant firm utilized law students and law school graduates who had not yet passed the bar in the positions of Law Clerk I and Law Clerk II, respectively. Plaintiff held the Law Clerk II position prior to his admission to the bar for approximately 2 years, then moved on to the position of Associate Attorney. The Marin County Superior Court held that the plaintiff was properly classified as exempt when he held the position of Law Clerk II. 

Observing that the “federal regulations after which [the California learned professional exemption] was explicitly patterned . . . condition the learned professions exemption under federal law upon completion of an advanced course of education, not upon licensure,” the appellate Court ruled that possession of the degree, along with Defendant’s undisputed evidence that a Law Clerk II was required to perform all the same duties as a junior attorney, satisfied the exemption’s requirements.

Zelasko is an encouraging result for legal industry employers, which simultaneously highlights the broad scope of potential wage and hour liability. Industry employers must ensure that all employees classified as exempt are properly classified under federal and state law.  

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The FLSA and state law often both regulate the distribution of tips. See here. Under the FLSA, an employer can require all “customarily tipped employees” to pool tips generally or require a specific “customarily tipped employee” to share tips with another “customarily tipped employee.”  Disputes often arise as to whether an employee is a “customarily tipped employee” – one who provides service to an establishment’s patrons – thereby permitting his or her inclusion in the tip pool. In a recent decision from federal court in Texas, Judge Xavier Rodriguez denied a plaintiff’s motion for summary judgment seeking a ruling that a service bartender—who prepared drinks which he then provided to defendant restaurant servers, not to patrons—should not have received a share of customer tips. Barrera v. MTC, Inc., 2011 U.S. Dist. LEXIS 83468 (W.D. Tex. July 29, 2011).

In Barrera, plaintiffs attacked Mi Tierra Restaurant’s requirement that servers “tip out” 2% of gross sales into a tip pool that was divided between bussers, hosts, counter servers and service bartenders. While the service bartenders were in sight of customers, customers could not order drinks directly and, correspondingly, the bartenders did not receive tips directly. While observing that “front of the house” employees often are the only employees who share in tip pools, the Court, based on an analysis of the legislative history of Section 203(m) of the FLSA (addressing the FLSA’s tip credit and the customarily tipped employee requirement) and an analysis of industry custom, held that it was a factual issue as to whether the service bartenders in could be considered “customarily and regularly” tipped. In denying summary judgment, the Court compared the service bartender position to that of busboy, a position authorized to receive tips by 29 C.F.R. § 531.54.

As the Barrera decision highlights, hospitality establishments with tipped employees may have a tipping practice which does not necessarily correspond to a universally acknowledged “industry custom.. In such situations, the establishment must be prepared to defend its practice. See Kilgore v. Outback Steakhouse of Florida, Inc., 160 F.3d 294 (6th Cir. 1998) (hostesses) and Myers v. Copper Cellar Corp., 102 F.3d 546 (6th Cir. 1999) (salad preparers). As wage and hour litigation continues in the hospitality industry, industry employers must continue to regularly review their practices for compliance with federal and applicable state law.

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As often discussed in this space and elsewhere, Courts continue to widely differ in their analysis as to whether the administrative and/or outside sales exemptions are applicable to pharmaceutical sales representatives. Now, the Supreme Court will have another opportunity to weigh in on the applicability of the outside sales exemption to such employees, as the plaintiffs in Christopher v. SmithKline Beecham Corp., 635 F.3d 383 (9th Cir. 2011) have petitioned the Court to review the Ninth Circuit’s decision finding them to be properly classified as outside salespersons. Christopher, et al. v. SmithKline, Supreme Court Docket No. 11-204.

While acceptance of the petition and a ruling from the high court would hopefully provide welcome clarity in this area, even a resolution by the Supreme Court of the circuit split between Christopher and the Second Circuit’s decision in In Re Novartis will not resolve all outstanding issues relating to the classification of these employees, as Courts continue to differ on the applicability of the administrative exemption.

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In a long awaited decision, California’s Supreme Court has ruled that the State’s Labor Code provisions governing overtime pay may apply to non-residents working in California for “a California-based employer.” Sullivan v. Oracle Corp., 51 Cal. 4th 1191 (2011). A detailed analysis of the decision and its potential implications is available here.

California wage-and-hour practitioners and commentators continue to await the California Supreme Court’s ruling regarding the scope of the Labor Code’s “meal and rest” requirements in Brinker Restaurant Corp.

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In this post, we discussed two different courts’ analyses of hospital plaintiffs’ attempts to seek conditional certification of their claims that they were not paid for allegedly working meal periods due to the employers’ use of an auto-deduct for meal periods. In an opinion addressing such a claim on the merits (as opposed to the lower standard applicable to determining appropriateness of conditional certification of an FLSA collective action), a  Detroit federal court rejected, on summary judgment, such an assertion. Deppen v. Detroit Med. Ctr., 2011 U.S. Dist. LEXIS 78247 ( E.D. Mich. July 19, 2011).

In Deppen, the plaintiff nurse anesthetist claimed that the use of an auto-deduct for meal breaks, coupled with the fact that supervisors recorded employees’ time, demonstrated that she was not paid in a compliant fashion for 30 minute meal periods deducted per shift. After observing that defendant had demonstrated there were numerous work weeks where plaintiff either: 1) did not work over 40 hours (thus had no claim for gap time under the FLSA as discussed in this post); or 2) was overpaid for time she did not work, the court went on to determine the plaintiff had failed to “meet her burden showing that she performed substantial duties and spent her meal time predominantly for [the hospital’s] benefit.” Id. at *18 citing Myracle v. General Electric Co., 1994 U.S. App LEXIS 23307 (6th Cir. Aug. 23, 1994). The court further observed there was “adequate staffing to cover the patient caseload and allow the OB CRNA’s to take their meal breaks.” 

Wage/hour plaintiffs continue to regularly allege that automatic, systemic practices, such as an auto-deduct for meal periods or payment based on a set schedule such as 9:00 a.m. to 5:00 p.m, run afoul of the FLSA and applicable state laws. While potentially defensible, such policies and practices will always expose employers to greater risk of an allegation that wages paid did not correlate to actual hours of work. Employers should scrutinize such practices closely, and take additional measures to ensure compliance as necessary.

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As previously discussed in this blog, many (if not most) courts agree that an employee who receives a fixed salary for varying hours of work has a “clear mutual understanding” with his/her employer that such salary covers all hours of work, and that in the event overtime is deemed owed because the employee was not properly classified as an exempt salaried employee, such overtime should be paid pursuant to the half-time calculation.   Following a trial, Judge John Steele of the United States District Court for the Middle District of Florida, recently ruled that this half-time calculation is also appropriate when the plaintiff was misclassified as an independent contractor. Crumpton v. Sunset Club Props., L.L.C., 2011 U.S. Dist. LEXIS 83987 (M.D. Fla. Aug. 1, 2011).

Plaintiff Crumpton was a real estate broker whose job it was to market the Defendants’ low income housing units. She characterized the monthly payments she received (in addition to commissions for finding tenants for the units) as a salary which only covered her first 40 hours of work. Defendants maintained that the payments were a monthly draw against commissions, and in any event were intended to compensate her for all hours worked. She estimated that she worked in excess of 30 hours of overtime each week, and that she had not received any compensation for her overtime hours under the FLSA. The court disagreed, observing that where “certain conditions are met…the [overtime] rate is reduced to ‘half-time.’” Id. at 11. The Court went on to find that plaintiff’s receipt of the fixed salary satisfied this test. Id. at 12 citing Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir. 2008). 

While many courts have adopted the reasoning articulated in Crumpton, thereby limiting exposure for overtime damages to half-time, until there is a governing Supreme Court decision, employers cannot be certain as to how a court will calculate damages. To bolster the argument that a half time calculation is appropriate, Employers should continue to take measures to refute any arguments that an aggrieved individual may make that any salary paid to any employee (or contractor) was not intended to compensate that worker for all hours worked and/or services performed.  Language in offer letters or agreements is invaluable in making such an argument.

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Generally, employee-related liability for US-based employees flows from domestic statutes (such as the FLSA) while liability for employing workers in other countries typically flows from that country’s body of law. In a recent decision, the Seventh Circuit rejected an attempt by civil litigants who performed services overseas for a subsidiary of Firestone Natural Rubber Co. to hold the corporation liable under U.S. law. Flomo v. Firestone Natural Rubber Co., LLC, 2011 U.S. App. LEXIS 14179 (7th Cir. July 11, 2011).

The plaintiffs in Flomo were 23 Liberian children who alleged that their working conditions at a Liberian rubber plantation violated the 1789 federal Alien Tort Statute, which was enacted to hold accountable violators of “customary international law.” After first determining that a corporation could be held liable under this longstanding statute, the court went rejected plaintiffs’ claim on the basis that it was impossible to determine whether Firestone’s employment of the plaintiff children to work on the plantation improved or worsened their daily life and future outlook, when compared to other Liberian children not so employed.

While challenges to wage and other employment practices typically arise under the laws of the jurisdiction in which the services are provided, employers with international operations must evaluate all potential exposures arising from such employment.

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As noted in our recent article regarding proposed amendments to the FLSA, individuals providing care to the infirm or elderly in a private home are exempt from the minimum wage and overtime requirements pursuant to the companionship exemption, an exemption which was reviewed by the Supreme Court in its 2007 decision Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007). Recently, the Court of Appeals for the Eleventh Circuit rejected a plaintiff’s allegation that the exemption did not apply because more than 20% of her time was devoted to “ordinary housework” as opposed to exempt care as a companion. Rodriguez v. Jones Boat Yard, Inc., 2011 U.S. App. LEXIS 15509 (11th Cir. July 26, 2011).

The plaintiff in Rodriguez worked as a “live-in domestic” providing companionship and household services for an elderly woman in Coral Gables, Florida. The Aide worked from 7:00 am until 11:00 pm every day, assisting her client/employer getting out of bed, bathing, dying and combing her hair, and helping her ambulate. She also provided constant care “throughout the day” such as preparing all meals, assisting with dressing, buying necessary medicines, testing and administering her insulin, and assisting in meals. Plaintiff also performed other duties related to her employer’s medical care, including feeding and personal and residence hygiene. Analyzing plaintiff’s deposition testimony, the District Court concluded (and the Circuit Court affirmed) that the duties which were arguably of a general household nature (such as meal preparation, walking the dog, and cleaning the apartment) were incidental duties and did not come close to exceeding 20% of the total hours worked each week, which could jeopardize the applicability of the exemption. The Court also ruled that although the client’s son placed the Aide on his company’s payroll for the purposes of processing payments for these companionship services, this payroll arrangement did not make the son or the son’s corporation (Jones Boat Yard) plaintiff’s employer within the meaning of the FLSA.

The DOL is considering changes to the FLSA which would impact the applicability of the companionship exemption in cases such as Rodriguez. Previously, legislation has been proposed which would eliminate the exemption and reverse the impact of the Coke decision (though such legislation was not passed). Industry employers – and even individuals and their families employing in-home care such as that addressed in Rodriguez – should pay close attention to these developments. Many state laws also provide wage and hour protection to domestic workers.

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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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We previously discussed New York courts applying the FLSA’s executive exemption, which exempts employees whose primary duty is management (and who are paid on a salary basis) from minimum wage and overtime pay obligations. Recently, Judge Berman of the Southern District upheld the application of the exemption to a group of warehouse “Captains.” Ramos v. Baldor Specialty Foods, Inc., 2011 U.S. Dist. LEXIS 66631 (S.D.N.Y. June 16, 2011)(Berman, J).

Ramos concerned warehouse captains who oversee a team of 3-6 “pickers,” the employees responsible for compiling orders of merchandise within defendant’s warehouse and loading that merchandise onto trucks for delivery to defendant’s customers. Relying heavily on the testimony of plaintiff Jose Barranco, whom the parties stipulated would serve as the representative deponent for all eight Captain plaintiffs, the court observed that this testimonial evidence (along with other affidavits submitted by defendant from other Captains) established that each Captain was “in charge” of his pickers because captains:

·         Ensured that pickers arrive to work on time;

·         Ensured that pickers performed their job duties correctly and at an acceptable productivity level;

·         Counseled pickers who worked too slowly or made too many mistakes;

·         Gave particular assignments to specific pickers based on his or her belief that that individual picker could carry out the assigned task (i.e., obtain the correct product for the order);

·         Participated in the performance evaluations for those on their team and served as the primary source of information for the night warehouse manager (the Captains’ own supervisor) concerning pickers’ performance;

·         Could request transfer of pickers away from his or her team;

·         Had the authority to issue a warning to a picker; and,

·         Completed a picker production report for every picker on his team each night, and conducted a final sign-out and inspection of the pickers equipment. 

Calling these tasks “clearly managerial,” the court ruled, in line with DOL regulations, that these managerial tasks constituted the pickers primary duty and that each captain’s team constituted a recognized “department or subdivision” over which that captain had managerial control. Finally, the court found that while the credible evidence established that a Captain could hire or fire pickers, such finding was not determinative as “courts uniformly reject arguments that an employee cannot be an exempt executive if he cannot make hiring or firing decisions.” Id. citing Pollard v. GPM Invs., LLC, 2011 U.S. Dist. LEXIS 24199 (E.D. Va. Mar. 10, 2011) (collecting cases).

This decision highlights the fact- intensive inquiry necessary to determine if an individual is an exempt executive, especially if the individual is a “front line” supervisor responsible for hands-on review of the work performed by non-exempt employees. Employers must continually analyze the appropriateness of their classification of managers as exempt executives under both federal and state law. 

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The applicability of the FLSA’s “administrative” exemption continues to be a primary issue in a significant percentage of the cases comprising the ongoing wave of wage and hour litigation. Recently, two appellate courts, the Courts of Appeals for the Seventh and Third Circuits, issued new opinions endorsing a broader interpretation of this exemption. 

In Verkuilen v. MediaBank, LLC, No. 10-3009, 2011 U.S. App. LEXIS 10666 (7th Cir. May 27, 2011), the Seventh Circuit held that a customer account manager who worked at client sites managing custom software contracts  is “a picture-perfect example of a worker for whom the act’s overtime provision is not intended.” In reaching its conclusion, the court stated that while the DOL regulations explaining the exemption provide insufficient guidance as to its meaning, overtime requirements should not apply to employees who cannot be supervised and would be tempted to inflate hours, especially when the employee – consistent with the exemption’s requirements – is required to exercise independent judgment regarding management or general business operations. The Court found that the account manager was not merely responsible for fielding random technical calls, but was the “go-to” customer contact, responsible for managing the client’s expectations and ensuring that the software developers were tailoring their software programs appropriately. The Court emphasized that the employer would essentially be unable to determine how many hours the employee would need to perform her required tasks, and concluded that in this modern day, there is a “congeries of specialists” who will be exempted from the FLSA’s overtime provisions.

The Third Circuit’s conclusion in Swartz v. Windstream Communications, Inc., No. 10-3313, 2011 U.S. App. LEXIS 10593 (3d Cir. May 25, 2011), adopted similar reasoning. In Swartz, the Court held that a telecommunications account manager, responsible for developing and tailoring custom telephone platforms for an employer’s major clients, was an exempt administrative employee. The Court concluded that the account manager’s work related to “management and general business operations” and required “independent judgment with respect to matters of significance” since the employee was responsible for custom tailoring complex telephone systems for the company’s most significant clients.

While these decisions are favorable for all companies, even those in unrelated businesses,  employers should continue to take appropriate measures to ensure all employees are properly classified as exempt or non-exempt from overtime requirements in order to avoid costly wage and hour claims.

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While courts continue to issue varied rulings regarding the appropriateness of collective action certification in FLSA litigations, employers continue to attempt to limit exposure to such broad allegations through several mechanisms. One of these strategies is inclusion of class/collective waiver provisions in arbitration, employment or separation agreements. Such provisions bar initiation and participation in class or collective claims. The enforceability of such waivers in arbitration agreements recently received a boost from the Supreme Court, which held a California rule which presumptively invalidated such waivers contained in arbitration agreements to be preempted by the Federal Arbitration Act. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1744, 179 L. Ed. 2d 742 (2011). 

In one of the first rulings issued applying Concepcion, a Connecticut federal court upheld a class and collective action waiver contained in an arbitration agreement, forcing two of the three named plaintiffs in the lawsuit (which seeks unpaid wages on behalf of a class of exotic dancers) to arbitrate their claims on an individual basis. D'Antuono v. Serv. Rd. Corp., 2011 U.S. Dist. LEXIS 57367 (D. Conn. May 25, 2011). D’Antuono is being defended by Jackson Lewis attorneys including Detroit partner Allan Rubin and Wage/Hour Practice Group head Paul DeCamp. 

The Plaintiffs in D’Antuono were exotic dancers who performed at Defendant clubs pursuant to independent contractor agreements. These agreements provided for the leasing of space within the club by the dancer, and provided that any claims arising under the arrangement between the parties be submitted to individual arbitration. In holding that the two Plaintiffs in D’Antuono who were parties to the agreement at issue were required to submit their claims to individual arbitration (a third Plaintiff was not party to a signed agreement), the Court considered Plaintiffs arguments that the agreement was both procedurally and substantively unconscionable – i.e., that the agreement was formed under unlawful conditions, and that the terms of the agreement itself were unlawful. 

Addressing the former, the Court held that the waiver provision – which was prominently located on page four of the four-page document, above the signature block – was not hidden from Plaintiffs, and that the unequal bargaining power between the parties did not render it “procedurally unconscionable.” As to the latter, the Court rejected the Plaintiffs’ contention that such arbitration would be “prohibitively expensive”, thus requiring invalidation of the agreement. This ruling was made possible in part by Defendants’ agreement not to enforce provisions of the agreements which could drive up expenses (such as the potential shifting of defendants’ attorneys fees to plaintiff if unsuccessful). Citing earlier Connecticut authority, the Court held that Plaintiffs’ claims were large enough to warrant pursuit on an individual basis, and thus the class or collective action mechanism was not necessary to recovery, particularly since the Plaintiffs could recover separate attorneys fees in the contemplated arbitration, just as if proceeding before the Court. Id. citing Pomposi v. Gamestop, Inc., 2010 U.S. Dist. LEXIS 1819 (D. Conn. Jan. 11, 2010).

D’Antuono highlights the potential use of arbitration agreements with class/collective action waiver provisions to avoid class/collective claims. Employers should consider arbitration agreements, as well as numerous other risk-reducing mechanisms, in consultation with counsel to minimize exposure to claims, particularly in areas where class exposure is prevalent.    It is vital to note however that while Concepcion provides high court support for the class waiver concept in the arbitral setting, the law as to the enforceability of such waivers outside of the arbitration context is more unsettled.

[UPDATE]  On June 7, 2011, the Court in D'Antuono granted Plaintiffs' request to certify its Order for interlocutory appeal to the Court of Appeals for the Second Circuit.  D'Antuono v. Serv. Rd. Corp., 11-CV-33, Dkt. Entry 62 (D. Conn. June 7, 2011).  In granting Plaintiffs' request, the Court observed that, in light of Concepcion, "there is now a great deal of uncertainty surrounding the continuing validity of the federal common law of arbitrability doctrines on which Plaintiffs rely" and that the "continuing validity of those doctrines . . . are . . . controlling questions of law." 

[UPDATE]  On August 8, 2011, the Court of Appeals for the Second Circuit denied Plaintiffs’ request for an interlocutory appeal of the ruling compelling arbitration, finding “an immediate appeal is unwarranted.”  D’Antuono et al. v. Service Road Corporation, et al., Case No. 11-2451 at Dkt Entry 17 (2d Cir. Aug. 8, 2011).

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As we previously discussed, the airline industry, like the hospitality industry, has been assailed with lawsuits alleging that tips from customers intended for certain employees—in this case, baggage handlers, a/k/a skycaps—have been misappropriated by the employer, in violation of state statutes and common law. In the airline industry, conflicting authority has emerged even within the same federal judicial district as to whether such claims are preempted by federal law. Compare Brown v. United Air Lines, Inc., 656 F. Supp. 2d 244, 249-51 (D. Mass. 2009)(preempted) with DiFiore v. Am. Airlines, Inc., 688 F. Supp. 2d 15 (D. Mass. 2009)(not preempted). Recently, the Court of Appeals for the First Circuit reversed the lower court’s DiFiore decision and vacated the jury’s award to Plaintiffs.based federal on preemption DiFiore v. Am. Airlines, Inc., 2011 U.S. App. LEXIS 10306 (1st Cir. Mass. May 20, 2011).

The central issue in these cases is whether the Airline Deregulation Act, 1978 legislation designed to ensure that the federal de-regulation of the airline industry did not result in a body of inconsistent state regulations governing air carriers, preempts state statutes and common law theories relating to the tips through its language preempting all state laws “related to a price, route, or service.” Id. at 11, citing 49 U.S.C. § 401713. Observing that this preemption provision is “broad but vague,” and citing three Supreme Court cases providing general guidance regarding construction of the Act, the court concluded that while the Supreme Court would be unlikely to utilize the preemption clause to free airlines from many, if not most common law and wage law claims, the Massachusetts tip statute at issue in the court’s view had a direct connection to both price and service – the baggage handling at issue itself constituting a service – and thus fell within the preemption clause. 

Jackson Lewis Partner Roger Briton, a leading expert on all aspects of employment law within the aviation industry, observes “The DiFiori decision opens the door a bit further to allowing employers in the aviation industry to fight wage/hour claims based on ADA preemption. While most wage claims are remote from issues ‘related to a price, route or service’, this potential defense should be considered in all cases.” 

Litigation over gratuities and tip practices continues to assail all industries where the practice is prevalent, including hospitality, aviation and car washes. Employers must ensure they understand all applicable federal and state requirements related to gratuities.

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As previously discussed, the FLSA requires payment for all hours where an employer “suffers or permits” an employee to work. Compensable time can include time ostensibly designated for meal and other breaks if the employee in question is not completely relieved of duty and/or if the period is insufficient length. Aggrieved employees often allege that employers systemically deduct a fixed amount of time for a meal break, even if a a valid meal period is not provided (an “auto deduct”). This claim often arises in the health care industry where the demands of patient care often impacts an employee’s ability to take an uninterrupted 30 minute meal break. However, as one federal court recently observed, such an allegation is not necessarily appropriate for collective action certification under the FLSA. Cason v. Vibra Healthcare, 2011 U.S. Dist. LEXIS 47160 (E.D. Mich. May 3, 2011). 

In Cason, the Court concluded that while plaintiff nurse alleged that she performed work during meal periods for Defendant hospital but was not paid for such time due to an “auto deduct”, such allegation coupled with an unsupported assertion that other employees worked through meals but were not paid due to the “auto deduct” was insufficient to support conditional certification of the collective action. The Court observed that Plaintiff Cason had “not identified any other person who claims that her FLSA rights were violated by the automatic meal break deduction policy.”

While plaintiffs often argue in FLSA cases that a ruling such as Cason is antithetical to the “low standard” appropriate at the conditional certification stage in FLSA actions, a decision such as Cason is appropriate to spare a defendant the burden and costs of proceeding through the conditional certification and notice process, as well as collective action discovery.  In another recent case highlighting this dilemma, and the wisdom of the Cason decision, a previously conditionally certified collective action also alleging auto-deduct claims against a hospital employer was decertified on just such a theory. White v. Baptist Mem. Health Care Corp., 2011 U.S. Dist. LEXIS 52928 (W.D. Tenn. May 17, 2011).

While this is a positive decision for employers, business should continue to ensure they take appropriate measures to ensure employees are paid for all hours worked and that any wage and hour policies cannot be used by the plaintiffs bar to support class/collective claims.

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While it is understood that the FLSA applies to any “employee” employed by an “employer”, numerous courts have observed that this analysis does little to flesh who is an “employee”. In a recent appellate decision highlighting such difficulties, the Court of Appeals for the Sixth Circuit held students enrolled in a vocational training program at an accredited vocational high school were not employees entitled to minimum wage and overtime protections, affirming the district court. Solis v. Laurelbrook Sanitarium & Sch., Inc., 2011 U.S. App. LEXIS 8585 (6th Cir. Tenn. 2011).

Laurelbrook concerned a decades-old vocational program operated by a not-for-profit corporation associated with the Seventh-Day Adventist religion. Laurelbrook operated a boarding school as well as a 50-bed intermediate care nursing home, partially staffed by students as an integral component of their practical training and the school was accredited by the Tennessee Department of Education since sometime in the 1970s. Laurelbrook’s stated goals are to prepare students for a life of service after their education, such as missionary activities. As part of this training, students are assigned to the home’s kitchen and housekeeping departments, and at the age of 16, they also participate in a CNA (Certified Nurse’s Aide) program. Laurelbrook receives Medicaid funding from the federal government as payment for the care it provides to residents of the nursing home/sanitarium. 

The Secretary of Labor, acting on a tip from a private citizen, brought suit alleging the services provided by the enrolled students in the home were compensable work under the FLSA. 

The Secretary urged that the six-factor test developed by the DOL to address whether a “trainee” is an employee entitled to compensation should also apply to the students. The court rejected that approach, however, as “a poor method for determining employee status in a training or educational setting.” Opting for more flexible approach, the appellate court approved the District Court’s focus on “which party receives the primary benefit of the work performed by Laurelbrook students,” based on long-standing Supreme Court precedent. Id. at 21 citing Walling v. Portland Terminal Co., 330 U.S. 148, 149 (1947). After collecting various authority from around the country, the district court held that “the proper approach for determining whether an employment relationship exists in the context of a training or learning situation is to ascertain which party derives the primary benefit from the relationship.” The court then identified key factors, such as whether the relationship displaces paid employees and whether there is educational value derived from the relationship. 

The appellate court held the District Court did not err in ruling, after seven days of hearing testimony and receiving documentary evidence, that the students were the primary beneficiaries of the work performed. This was so because the students learned “practical skills about work, responsibility and the dignity of manual labor in a way consistent with the religious mission of their school.” Importantly, the District Court also found that while the school derived some benefit from the work performed by the students, the students did not displace compensated workers and that ultimately the home is “sufficiently staffed such that if the students did not perform work…the staff members could continue to provide the same services there without interruption.” 

In addition to the tangible benefits in the form of an accredited education, the Appellate Court also credited evidence in the record regarding the intangible benefits of participating in the school’s program, including an enhanced understanding of the importance of working hard and seeing a task through to completion, increased responsibility and leadership skills, sensitivity and respect for the elderly and infirm and a work ethic developed through the school. 

Laurelbrook represents a victory for the not-for-profit and academic community in upholding the treatment of properly enrolled students of accredited institutions as trainees not entitled to compensation under federal law. However, the FLSA reach remains broad, as the Laurelbrook court observed, and any decision to classify a student, trainee, intern or volunteer outside the protections of the statute must be made only after due consideration. Additionally, state law may provide broader protection. 

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The ubiquity of class and collective action lawsuits under the FLSA and state wage and hour laws requires employers to remain ever vigilant with respect to their wage practices. The ferocity of the plaintiffs’ bar is such that even seemingly settled FLSA doctrine is subject to attack. Recently, a federal district court in Illinois rejected one such attack. Brown v. Lululemon Athletica, Inc., 2011 U.S. Dist. LEXIS 18217 (N.D. Ill. Feb. 24, 2011). 

Lululemon concerned typical “off-the-clock” allegations, namely that the plaintiff sales clerk for the Defendant exercise apparel retailer was required to put in extra hours of work performing tasks for which she was not compensated but which Plaintiff alleged were all for the employer’s benefit and thus, compensable time. However, plaintiff did not allege that such activities pushed her over the statutory threshold for overtime of 40 hours in a workweek, or that by adding such unpaid hours to her total hours worked her rate of pay (as measured by her compensation divided by hours worked) fell below the minimum wage. Rather, plaintiff sought compensation for this as “gap time”, the time between her paid hours of work (which were under 40) and her actual hours of work based on these additional tasks (which were greater, but also under 40). 

Collecting more than a dozen cases from around the country (including a number of appellate decisions), the court rejected this claim, noting that Plaintiff sought to rely on a minority position permitting gap time claims within the Tenth Circuit Court of Appeals (which does not encompass Illinois). The court did note that where an overtime event has occurred, an employee can receive compensation for both gap time and overtime hours. Id. at 14-15, citing 29 C.F.R. § 778.315. 

Lululemon demonstrates a stark reality: employees and their counsel continue to bring wage claims in the face of contrary authority. Absent emphatic direction from either the relevant Circuit court or the United States Supreme Court (which has issued very few decisions addressing the FLSA), employers must remain proactive in this area, and be prepared to defend claims as they arise. Furthermore, state law may provide a cause of action for unpaid gap time. The best advice is to always act with caution. 

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As discussed at length on the Jackson Lewis web site here, the U.S. Department of Labor has announced the launch of its first free application for smartphones, releasing an “App” compatible with iPhone and iPod Touch (and available in English and Spanish), with which users can track regular work hours, break time and any overtime hours they work for one or more employers. This application raises numerous issues for employers relating to the implementation of official employer time tracking policies and recording of hours worked, topics analyzed in the very recent Second Circuit decision on these subjects. 

Employers must keep this new time tracking tool in mind when reviewing wage-and-hour policies, and when issuing company smartphones.

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As previously discussed, a federal court in the Western District of New York issued several important rulings in an FLSA case brought by a retail specialist responsible for the stocking, pricing and display of Black & Decker products at six Home Depot stores. In an omnibus decision reviewing all of these district rulings, the Second Circuit has held:

·         The district court properly ruled that the time plaintiff spent commuting to any of the six stores was non-compensable commuting time, even if it was preceded by compensable administrative work in the form of reviewing schedules or work-related communications; and

·         The district court erred in granting summary judgment as to Plaintiff’s off-the-clock claim, finding fact issues existed regarding whether Kuebel, who admitted to falsely shaving time from his time sheets to reflect only forty hours of work, was following instructions given by supervisors.

Kuebel v. Black & Decker Inc., No. 10-2273, 2011 U.S. App. LEXIS 9448 (2d Cir. May 5, 2011). Detailed analysis of this decision is available on the Jackson Lewis web site here.

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The FLSA limits when an individual can provide services to an organization without compensation. See post dated April 6, 2010 “We Don’t Have to Pay Our Interns – Do We?”  However, last month a panel of the Court of Appeals for the Fourth Circuit (including Retired Supreme Court Justice Sandra Day O’Connor sitting by designation) re-confirmed one such circumstance, holding that a full-time public school employee who also voluntarily coached a golf program for a small stipend was a volunteer under the FLSA and not entitled to minimum wage or overtime pay. Purdham v. Fairfax County School Board, No. 10-1048, 2011 U.S. App. LEXIS 4644 (4th Cir Mar. 10, 2011). Although the plaintiff alleged he worked 400-450 hours per year as a coach, because his regular, overtime-eligible position as a security assistant was not conditioned on his coaching position, he was considered a volunteer under the FLSA when performing services as golf coach.

The plaintiff proffered five arguments in support of his claim he was an employee entitled to minimum wage and overtime for coaching activities:

(1)   He subjectively considered himself an employee and not a volunteer;

(2)   The terms of his employment contract established that he was an employee and not a volunteer;

(3)   Defendant made a prior retroactive payment for overtime wages to all non-exempt employees who performed coaching duties;

(4)   Defendant provided paid administrative leave when coaching responsibilities conflicted with regular full-time work; and

(5)   Defendant paid a small stipend to coaches.

The court dismissed out-of-hand the plaintiff’s first two arguments, finding that plaintiff’s subjective views and the terms of his employment contract are not controlling. The court also found that the prior retroactive payment for overtime wages made to all non-exempt employees who performed coaching duties merely exhibited an “abundance of caution” on the part of the school district, especially in light of the extensive FLSA-related litigation occurring in other school districts at the time.  Similarly, paid administrative leave provided by the school district in order to allow coaches to perform their voluntary coaching responsibilities was found not to be prohibited under the FLSA, as such a rule would be inconsistent with the FLSA’s statutory goals.  Lastly, the court determined that the small stipend the plaintiff received was plainly permitted under controlling FLSA regulations, and as a result did not serve to defeat the volunteer work exemption in this instance. 

While volunteer public school coaches like the Plaintiff in Purdham may be considered volunteers in their coaching capacity, public employers must ensure that all requirements for a volunteer are satisfied (and that non-volunteer work is not performed during volunteer hours).  While a similar volunteer exemption applies in the private sector for non-profit organizations, the volunteer concept is not recognized in the for profit private sector. See 29 CFR § 553.101(a); DOL Op Ltr FLSA2008-3NA.

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Expanded Jackson Lewis coverage of New York’s Wage Theft Prevention Act is now available here. 

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While the US Supreme Court recently has rejected petitions for certiorari on key FLSA exemption issues, the highest court in the United States did this term elect to take up the scope of the statute’s protection of workers who make complaints of FLSA violations to their employer.  As discussed in greater detail here, the Court has ruled that the FLSA’s anti-retaliation provision, 29 U.S.C. § 215(a)(3), applies to oral complaints, as well as written ones.  The Court did not decide the related issue of whether such a complaint is protected when made internally, to the employer, or only where it is made to a public agency (such as the Department of Labor).  This ruling does not provide the clarification most had hoped for, but makes clear that a cautious employer will treat all such complaints by an employee as protected activity under the statute.

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The “retail or service exemption” to the FLSA, sometimes referred to as the “7(i) exemption”, noting the location where it is codified, 29 U.S.C. Section 207(i), has three requirements. While the first requirement, to pay time and one-half the minimum wage for all hours of work, is straightforward, the other two prongs—that an employee receive 50% of his or her income in the form of “bona fide commissions” and that the individual be employed by a “retail or service establishment”—sometimes lead to litigation. Recently, a district court in Vermont addressed these two prongs as applied to a cable installer. 

In Owopetu v. Nationwide CATV Auditing Servs., Inc., 2011 U.S. Dist. LEXIS 24948 (D. Vt. Mar. 11, 2011), the court held that a cable installer working for a subcontractor of the cable provider who was paid a percentage of the amount billed to the provider by the subconstractor received bona fide commissions. The court held a bona fide commission existed because his “ability to earn income fluctuated based upon the volume of customer work orders, he was paid a percentage of the value of each service performed, and he was provided performance-based incentives to increase his income.”   The court relied on several cases that have held a compensation system that creates an incentive to work faster and more efficiently is consistent with the existence of a bona fide commission. It was immaterial that the individual was not engaged in sales.

Nevertheless, the court denied summary judgment because the defendant had not produced evidence regarding whether the plaintiff was employed by a “retail or service” establishment. While the company established that it provided services that are not for resale (installation of cable at customer’s homes), which is one requirement need to satisfy the definition of a “retail or service establishment”, no evidence was presented regarding whether the services are “recognized as retail in the industry,” the other requirement.   The Defendant will have to establish that evidence at trial or seek permission to move for summary judgment on a fuller record.

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As discussed here, Section 3(m) of the FLSA (like many state laws) places restrictions on which employees within a workforce can receive and share in tips. While the FLSA permits tip pooling “among employees who customarily and regularly receive tips," litigation in the hospitality industry often centers around the legality of tip pool participation by restaurant employees other than the universally-accepted categories of waiters and busboys. On March 7, a Federal District Court in Chicago provided an expansive interpretation of “tipped employee.” Turner v. Millennium Park Joint Venture, LLC, 2011 U.S. Dist. LEXIS 22295 (N.D. Ill. Mar. 7, 2011).

Turner addressed Plaintiff’s contention that, as a server, he should not have been required to contribute $3 from his daily tips to a dedicated “silverware roller,” who rolled silverware into a napkin for place settings. Interestingly, in 2006, prior to Plaintiff’s hire in 2008, the defendant restaurant – Chicago’s Park Grill –held a vote in which the servers unanimously voted to use a silverware roller to do this work in lieu of the servers, and to provide the silverware roller with a portion of their tips. 

Plaintiff argued that an employee could only be one who “customarily and regularly receives tips” if that employee had direct customer contact. Id. at * 6-7. The Court rejected such a narrow reading, interpreting 3(m) to require only what it states: namely that an employee can be eligible for the tip pool “if that employee receives tips, either directly from customers or from other employees who themselves receive direct customer tips, on a regular basis.” The Court further noted that the arrangement with the silverware rollers was voluntary on the part of the servers, and thus did not run afoul of the spirit of DOL regulation 29 C.F.R. § 531.54. The Court provided further practical guidance and observation regarding the appropriateness of tip pool participation by employees assisting servers in the front-of-the-house service enterprise:

in real world terms it is readily understandable that employees receiving tips directly from customers may agree to share tips when they believe that the employees with whom they share help them to serve the customers better and more fully and thus to obtain additional tips and sweeten the pot for everyone. Just so with a silverware roller, who performs work that would otherwise be a waitperson function. Little wonder, then, that the Park Grill servers not only voted for the hiring of such personnel but gave management a standing ovation for acceding to that vote.

Finally, the Court held that Turner’s individual, explicit assent to the tip pool arrangement was not required for it to be upheld as lawful. Rather, “the very nature of the parties' employment relationship is such that no individual employee's separate agreement to the established arrangement was necessary to hold plaintiffs to it. Instead the agreement was implied from the fact of plaintiffs having been hired with that across-the-board understanding in place, in much the same way that an existing collective bargaining agreement binds new  hires into the bargaining unit.” 

Turner is a significant victory for employers operating tip pools which include positions not contemplated by outdated DOL regulations, particularly those within Illinois and the Seventh Circuit.  Hospitality employers – arguably the most popular target for wage-and-hour lawsuits – must continue to be vigilant in assessing their wage and tip practices under the FLSA and state law.

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Section 260 of the FLSA provides a defense to liquidated damages where an employer has acted in “good faith.” This test requires both subjective good faith (a belief the employer is proceeding lawfully) and objective reasonableness. A recent appellate decision addresses this second requirement. Mumby v. Pure Energy Servs. (USA), Inc., 2011 U.S. Appl. LEXIS 3460 (10th Cir. Wyo. Feb. 22, 2011). 

In arguing against an award of liquidated damages, the employer asserted it consulted with an attorney who provided basic advice regarding its payment structure and confirmed the legality of it. The record, however, revealed that the attorney did not understand the Company’s compensation structure or the applicable implementing regulation 29 C.F.R. § 778.112. The Court therefore held the good faith defense inapplicable.     

Employers seeking to avail themselves of the Section 260 good faith defense based on advice of counsel must ensure they consult with knowledgeable experience counsel who fully understands the relevant issues. As Mumby demonstrates, slavish reliance on advice of counsel is no defense. 

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In a case exemplifying that salary alone does not make an employee exempt, a district court in Idaho denied summary judgment to an employer in an overtime case brought by a Labor Manager earning $130,000/year. Wood v. Kinetic Sys., 2011 U.S. Dist. LEXIS 11221 (D. Idaho Feb. 4, 2011).

While it was undisputed the Plaintiff was paid $130,000 on a salary basis, questions of fact remained as to whether the Plaintiff performed primarily non-exempt duties, including working at times as a Project Superintendent, a non-exempt position he had previously held.  Noteworthy in this decision is the Court’s failure to afford any weight based on the employee’s high compensation. Curiously, the Court’s decision contained no reference to exemption to “highly compensated employees,” applicable to those earning more than $100,000 per year, where the duties test is easier to meet. 29 CFR § 541.601.  

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Businesses that outsource specific functions are often subject to allegations that they are a joint employer of the employees of the outsourced entity. A Pennsylvania District Court recently rejected this theory of liability and dismissed Bank of America from a lawsuit brought by call center employees employed by a vendor servicing Bank of America, who alleged they were not properly compensated for time spent booting up their computers. Lepkowski v. Telatron Mktg. Group, 2011 U.S. Dist. LEXIS 9388 (W.D. Pa. Feb. 1, 2011).

Observing that the Third Circuit Court of Appeals (which encompasses Pennsylvania) has not yet ruled on the appropriate legal test to apply to determine “joint employer” status, the court applied factors from the test utilized by the Second Circuit and Ninth Circuit. Id. at * 7-10 citing Zheng v. Liberty Apparel Co., Inc., 355 F.3d 61 (2nd Cir. 2003) and Bonnette v. Cal. Health & Welfare Agency, 704 F.2d 1465, 1470 (9th Cir. 1983). Because the plaintiffs failed to allege that Bank of America could hire and fire the call center employees, set rates of pay or schedules or maintain employment records, functions all performed by Telatron Marketing Group, Bank of America was dismissed from the case. Id. at * 26-27.

While this decision should be hailed as a victory for companies which outsource call center or other similar functions, the terms and conditions of individuals providing services to a business must be analyzed on a case-by-case basis to assess exposure under the factors identified in Zheng, Bonnette and other appellate authority.

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Despite the Circuit split created by this month’s decision from the Ninth Circuit, holding that pharmaceutical sales representatives are outside sales employees within the meaning of the FLSA, the Supreme Court has declined to take up Novartis’ appeal of the adverse ruling it received on this issue from the Second Circuit.  The Supreme Court’s ruling was contained in its Order List for February 28, and does not provide any insight into the Court’s thinking. 

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As previously discussed here and here, several Circuit courts have recently upheld use of the “half time” calculation of damages in FLSA misclassification cases. Urnikis-Negro v. Am. Family Prop. Servs., — F.3d. —, No. 08-3117, 2010 U.S. App. LEXIS 16126 (7th Cir. 2010); Desmond v. PNGI Charles Town Gaming, L.L.C., 2011 U.S. App. LEXIS 702 (4th Cir. Jan. 14, 2011). In its Order List for February 22, 2011, the Supreme Court denied the employee’s petition for review of the Seventh Circuit’s decision in Urnikis-Negro. While this denial means the high court will not provide definitive guidance on this issue, the Circuit courts which have addressed the issue and the Department of Labor all have held the half time method of calculation to be appropriate if the salary paid was intended to cover all hours worked.

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On February 14, 2010, the United States Court of Appeals for the Ninth Circuit held GlaxoSmithKline's pharmaceutical sales representatives (“PSRs”) are exempt from the FLSA's minimum wage and overtime requirements under the outside sales exemption, rejecting a contrary decision from the Second Circuit, and an amicus brief filed by the United States Department of Labor.  Christopher v. SmithKline Beecham Corp., 2011 U.S. App. LEXIS 2834 (9th Cir. Feb. 14, 2011).  The Ninth Circuit refused to defer to the DOL, finding the amicus brief was merely a new “reinterpretation” of the exemption by the DOL, set forth only in its amicus brief, not in any regulations, and constituted a break from pharmaceutical industry standards regarding what constitutes sales, which the DOL had not objected to since the FLSA’s inception decades ago.   According to the Ninth Circuit, “[i]n this industry, [a] ‘sale’ is the exchange of non-binding commitments between the PSR and physician at the end of a successful call. . . . [F]or all practical purposes, this is a sale.”  Id. at * 35 (emphasis added). 

Based on this Circuit split and the existing split between the Second and Third Circuits over the application of the administrative exemption to PSRs (not at issue in the Ninth Circuit decision), the Supreme Court may be more likely to weigh in on this issue.

We will continue to monitor developments surrounding this evolving issue.

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The 7(i) exemption from overtime is not limited to “local” retail or service establishments, and applies to employers who sell nationwide via phone or the internet, a Utah district court has held, rejecting DOL regulations, and finding them antiquated. See Selz v. Invest Tools, Inc., 2011 U.S. Dist. LEXIS 93604 (D. Utah, Jan. 27, 2011). 

Plaintiffs were employed as sales representatives at a call center and were responsible for selling, via phone, products and services to educate individual investors on how to personally invest in exchange markets on-line. In response to a suit for alleged unpaid overtime initiated by sales representatives, the employer moved for summary judgment based on the 7(i) exemption, which applies to employees who earn than 1.5 times the minimum wage, make over 50% of their income in commissions and are employed in a “retail or service establishment.” The court rejected plaintiff’s argument that the exemption could not apply because defendant sold their products nationally, not locally, finding the persuasive value of the DOL’s regulations defining a retail or service establishment to be “minimal,” noting they were drafted for the repealed 13(a)(2) exemption formerly applicable to all retail and service employees. The court further noted the regulations have not been updated to reflect the impact of the Internet. “The internet has fundamentally changed what is considered a retail or service establishment and insofar as the Department of Labor regulations do not take this into account, they are not a persuasive interpretation of the FLSA,” the court held.

In evaluating whether the call center was a “retail or service establishment,” the court examined whether the establishment sold goods to the general public, served the everyday needs of the community, was at the end of stream of distribution, and whether it took part in the manufacturing process, all of which the court held were satisfied. Further, the court held even though the employer did not have a physical location accessible by the public, it was accessible via phone and internet and thus, had an establishment available to the public that met its everyday needs. 

While the court granted summary judgment to the employer regarding its status as a “retail or service establishment,” the court denied summary judgment as the applicability of the exemption, finding a fact issue whether the employees earn 1.5 times minimum wage for each hour worked, one of the other requirements needed to establish the exemption.

The case reflects a growing trend of district courts recognizing that Department of Labor regulations defining a “retail or service establishment” are antiquated and are of limited use in interpreting the 7(i) exemption, given the changes in how business is now conducted, particularly through phone sales and the internet. Employees who sell via phone or internet should evaluate the applicability of the 7(i) exemption in light of this decision. Of course, state law also must be consulted.

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As discussed here and here, the availability of the FLSA’s administrative exemption continues to be a hotly-contested issue in wage and hour litigation. One of the many areas of dispute in applying the exemption concerns whether an employee performs a “production” role (rendering the exemption inapplicable) or an administrative role with duties related to the “general business operations” of the employer. 29 C.F.R. § 541.200(a)(2). Last week, a federal district court in Minnesota ruled that three employees who provided consulting services regarding the use and configuration of the Defendant’s enterprise resource planning software satisfied the administrative exemption. See Cruz v. Lawson Software, Inc., 2011 U.S. Dist. LEXIS 8184 (D. Minn. Jan. 27, 2011).

Plaintiffs in Cruz were Systems Consultants, Business Consultants and Technical Consultants of Lawson, who all spent approximately 80% of their time travelling to various sites and interfacing with Lawson’s clients regarding implementation of Lawson’s sophisticated software, designed to improve the client’s business operations. The court rejected Plaintiffs’ argument that they were “production line workers” who simply applied rote processes to perform the same task over and over again (in this case, the upgrading of software product), and instead held Plaintiffs were “consulting to assist in configuring the software in order to improve efficiency in whatever particular area they are working in for the client - HR, procurement, etc.”—an administrative task, not a production task. Id. at * 34.   The court determined that the Plaintiffs’ manual work necessary to implement a solution they developed (i.e., installing actual hardware or software) demonstrated the “prominence of the problem solving, planning and purchasing duties” the Plaintiffs performed for Defendant’s clients Id. at * 36. Interpreting DOL regulations, the Cruz court took an employer friendly view in defining Defendant’s “product” as the software suite itself, consistent with the regulation indicating that an employee who performs work relating the general business operations of the employer or the employer’s customers is an administrative employee. 29 C.F.R. § 541.200(a)(2). Thus, Plaintiffs were not “producers” of Defendant’s product, but rather administrative advisors as to how to best utilize that product. 

The court also concluded that Plaintiffs satisfied the other requirement of the administrative exemption—“the exercise of discretion and independent judgment with respect to matters of significance”—because they assisted Defendant’s clients with training, troubleshooting and modifications.   Id. at * 38 citing Verkuilen v. MediaBank, LLC, 2010 U.S. Dist. Lexis 77407 (N.D. Ill. July 27, 2010).

This decision provides helpful guidance for businesses whose employees provide services, specifically technology based services, for its customers. However, as this is a fact-sensitive analysis, employers must assess on a case-by-case basis the type of work performed and whether it entails the necessary discretion and independent judgment with respect to matters of significance.

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It is well understood that employees misclassified as exempt under the FLSA are entitled to overtime pay for hours worked in excess of forty in a week. However, while the United States Department of Labor takes the position that any unpaid overtime is calculated using the “half-time” method, not all of the Circuit Courts have confirmed the appropriateness of such calculation. Last week, the Court of Appeals for the Fourth Circuit (which covers Maryland, Virginia, West Virginia, North and South Carolina), joining the First, Fifth, Seventh and Tenth Circuit courts, held that such calculation is appropriate. Desmond v. PNGI Charles Town Gaming, L.L.C., 2011 U.S. App. LEXIS 702 (4th Cir. Jan. 14, 2011).

Desmond involved three former employees who worked as racing officials at Defendants’ race track who alleged that Defendants had misclassified them as exempt “administrative” employees. The court agreed with Plaintiffs, and held that they were owed “half time” overtime. Under this method, for each week within the limitations period, an employee’s weekly salary is divided by the number of hours they worked to determine their “regular rate,” and the employee receives 50% of that rate for each hour in excess of 40. Plaintiffs appealed, urging that an employer who is found to have misclassified an employee must calculate overtime by dividing the weekly salary by 40, then paying time-and-one-half (150%) of that rate for each overtime hour.

The Court first reviewed the appellate authority from other Circuits authorizing and approving the half time calculation, including the Seventh Circuit’s 2010 decision in Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir. 2010), discussed here. In reaching its decision, the court also noted “In addition to these decisions from our sister circuits, the Department of Labor also has approved using a 50% overtime premium to calculate unpaid overtime compensation in a mistaken exemption classification case.” Id. at * 11 citing Retroactive Payment of Overtime and the Fluctuating Workweek Method of Payment, Wage and Hour Opinion Letter, FLSA 2009-3 (Dep't of Labor Jan. 14, 2009).

While this decision is positive for employers, the appropriate calculation remains unaddressed in seven federal circuits, including the Second, Ninth and D.C. Circuits. Additionally, the plaintiff in Urnikis-Negro has petitioned the United States Supreme Court to review the Seventh Circuit’s decision, Supreme Court Docket No. 10-745. Employers should continue to monitor the state of the law in this area, given its impact on misclassification exposure. Further, employers should ensure that employees classified as exempt are not told anything other than that their salary covers all hours worked.

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In the latest decision addressing the applicability of the FLSA’s administrative exemption to claims-handling employees (such as adjusters), last week the Court of Appeals for the Fifth Circuit, affirmed a District Court’s grant of summary judgment, rejecting the assertion of an American Risk Insurance (“ARI”) adjuster that ARI misclassified him as exempt. Talbert v. Am. Risk Ins. Co., 2010 U.S. App. LEXIS 25889 (5th Cir. Dec. 20, 2010).

The Court’s review focused on whether Plaintiff exercised discretion and independent judgment in the performance of his duties. Id. at * 10-15. While ARI argued that Plaintiff’s responsibilities in making recommendations concerning coverage and settlement of claims rendered him exempt, Plaintiff attempted to minimize his involvement in coverage analysis by arguing that close supervision by his supervisor undermined any ability to exercise discretion or independent judgment. Id. The Court sided with ARI, noting that, under DOL regulations, the requirement of supervisory approval for Plaintiff’s claims recommendations does not preclude a finding that he exercised discretion and independent judgment in making those recommendations. Id. 

Though the Talbert opinion does not directly cite to authority from other circuit courts, it is consistent with other appellate authority regarding the classification of adjusters and similar industry positions as exempt. See Robinson-Smith v. Gov't Emples. Ins. Co., 590 F.3d 886, 897 (D.C. Cir. 2010)(collecting cases). Nevertheless, continued uncertainty (and litigation) regarding the proper application of the administrative exemption means that all employers must apply or rely upon the exemption with care.  And, of course, certain state laws with higher exemption standards, potentially muddy the waters.

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As previously noted here, New York Governor David Paterson has signed into law the Wage Theft Prevention Act.  The new law amends the New York Labor Law to create new recordkeeping obligations for employers, as well as significantly greater damages for violations of the Labor Law than previously were available.  

An expanded analysis of the Act is now available on www.JacksonLewis.com by clicking here.

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FLSA lawsuits seeking unpaid minimum or overtime wages typically are brought as “collective actions,” pursuant to 29 U.S.C. § 216(b). State law claims typically are brought – often in the same lawsuit – as class actions under Federal Rule of Civil Procedure 23. Despite the large number of wage and hour class and collective actions brought in New York District Courts, the Court of Appeals for the Second Circuit has never articulated the standard district courts should apply in determining whether to “conditionally” certify a collective action under the FLSA, and there are few Second Circuit decisions reviewing the grant or denial of class certification under Rule 23 in a wage and hour case. In Myers v. Hertz Corp., 2010 U.S. App. Lexis 22098 (2d Cir., October 27, 2010), the Second Circuit addressed both issues. 

First, the Court affirmed the district court’s denial of a motion for class certification under Rule 23, finding individual inquiries regarding the application of the executive exemption predominated over common issues, making class certification inappropriate. The plaintiffs were Station Managers of Hertz Corp. classified as exempt from receiving overtime under the executive exemption. Plaintiffs argued that even though they were identified as managers, their management duties formed only a small part of their overall duties, and thus they were misclassified. Addressing only the “predominance” requirement under Rule 23, the Second Circuit held the district court did not abuse its discretion in concluding that individual inquiries would predominate, noting the applicability of the exemption requires an analysis of the actual duties performed by each manager, “a complex, disputed issue” which turns on the application of detailed DOL regulations.  The Court rejected the plaintiffs’ argument that simply because the employer promulgated a policy classifying all Station Managers as exempt, this alone demonstrated that common issues predominated. “The existence of a blanket exemption policy standing alone, is not itself determinative of the ‘the main concern in the predominance inquiry: the balance between individual and common issues,’” the Court held. The Court also clarified that all factual and legal issues are to be determined when evaluating the predominance requirement necessary for class certification, including affirmative defenses relating to the applicability of an exemption. 

Second, although the Court held it did not have jurisdiction to review the district court’s denial of the Plaintiff’s motion for conditional certification under the FLSA, it nonetheless approved the two-step method for certifying collective actions that has been adopted by district courts, calling this approach, “sensible.”  Under this approach, to obtain conditional certification (step one), plaintiffs must “make a modest factual showing that they and potential opt-in plaintiffs together were victims of a common policy or plan that violated the law.” This typically occurs before substantial discovery has been completed and was described by the court as a “low standard”. At the second stage, after a fuller record, the Court then determines whether the case should continue to go forward on a class basis or whether it should be decertified. 

While dicta (because the discussion was not necessary to the determination of the case), the decision provides guidance to district courts in determining conditional certification motions, and is likely to be often cited. Employers with operations in New York, Connecticut and Vermont should monitor the impact of the Hertz decision on class and collective action wage lawsuits. The Second Circuit is a difficult forum in which to defend collective actions under the FLSA and this decision will likely not dissuade the plaintiffs’ bar from continuing to file multiple collective actions on close to a daily basis.

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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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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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The FLSA’s professional exemption has two subcategories: the “learned professional” (those who perform work requiring the use of advanced knowledge customarily acquired through prolonged academic instruction), and its sibling, the “creative professional” (those engaged in the “performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor"). See 29 C.F.R. § 541.302(a). This week, the federal Court of Appeals for the Ninth Circuit reviewed one of the few decisions analyzing the applicability of this exemption, and affirmed the lower court’s ruling that the defendant newspaper’s reporters did not meet its requirements.  Wang v. Chinese Daily News, 2010 U.S. App. LEXIS 19929 (9th Cir. 2010)

The Ninth Circuit focused on the DOL’s regulation addressing the potential applicability of the exemption to journalists. That regulation distinguishes between work requiring “invention, imagination, originality or talent” from work which depends primarily on “intelligence, diligence and accuracy.” 29 C.F.R. § 541.302(d). In affirming, the Circuit Court concluded that the materials submitted on summary judgment made clear that newspaper’s articles did not have the sophistication of the national-level papers, where there might be a “small minority of journalists who are exempt.” Moreover, the Court held the intense pace at which newspaper reporters worked precluded them from engaging in sophisticated analysis. Their primary duties did not involve "conducting investigative interviews; analyzing or interpreting public events; writing editorials, opinion columns or other commentary," even if they engaged in these activities some of the time, the Court held.  The Court concluded that characterizing journalists as exempt would therefore be “inconsistent with the Department of Labor's intent that ’the majority of journalists . . . are not likely to be exempt,’ and with the requirement that FLSA exemptions be construed narrowly.” Chinese Daily News, 2010 U.S. App. LEXIS 19929 at * 13-15 (internal citations omitted). 

When the district court granted summary judgment to the plaintiffs it noted that as of that date there was only one case where a court found a newspaper reporter to be exempt. Lynne Wang v. Chinese Daily News, Inc., 435 F. Supp. 2d 1042, 1053 (C.D. Cal. 2006) citing Sherwood v. Washington Post, 871 F. Supp. 1471 (D.D.C. 1994)(exempting Washington Post bureau chief assigned to cover Mayor Marion Barry and later the vice presidential campaign). 

The Ninth Circuit’s decision, along with two earlier Circuit opinions it cites, is a cautionary tale regarding the narrow scope of the creative professional exemption, particularly as applied to journalists. Employers, especially those in the newspaper, magazine and related industries, must ensure that any individual treated as an exempt creative professional utilizes the requisite “invention, imagination, originality or talent” in performing his/her job duties. New media content providers must also be aware that - technological differences notwithstanding - authors and producers of Internet content will be analyzed under the same framework.

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As FLSA and other wage lawsuits continue to be prevalent, one threshold issue that often arises with small and/or local businesses, as well as non-profit entities, is whether the employer is an enterprise covered by the FLSA. This issue is relevant because in order for the FLSA to be applicable, either the individual employee must be engaged in interstate commerce (individual coverage) or the defendant employer must be an enterprise engaged in interstate commerce (enterprise coverage). Enterprise coverage is triggered where an employer: 1) "has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person"; and 2) has at least $500,000 of "annual gross volume of sales made or business done." 29 U.S.C. § 203(s)(1)(A).

Recently, the United States Court of Appeals for the Eleventh Circuit  analyzed the applicability of enterprise coverage in six consolidated cases brought against employers who asserted they were local businesses not covered by the FLSA. In its decision, the court clarified what constitutes “goods or materials that have been moved in or produced for commerce” for purposes of establishing enterprise coverage. Polycarpe v. E & S Landscaping Serv., 2010 U.S. App. LEXIS 18171 (11th Cir. Fla. Aug. 31, 2010). 

Specifically the court held that whether the employees, who performed different jobs for the several defendants, including “landscapers, security-system technicians, and construction workers, among other [occupations]”, were covered by the FLSA turned on whether they used any materials in conducting their employers’ business which had shipped in interstate commerce. Materials, held the court, should be read for FLSA purposes to mean “tools or other articles necessary for doing or making something.” The court specifically rejected the so-called “coming to rest” doctrine, wherein goods or materials shipped in interstate commerce ceased to be identified as such once they “come to rest within a state before intrastate purchase by a business.” The court reversed the dismissals at the district court level, remanding five of the six the cases for application of its “materials” test.  The sixth case was affirmed based on uncontroverted evidence that the employer did not meet the $500,000 annual revenues test. 

While a highly technical decision, Polycarpe stands for a very straightforward proposition: FLSA enterprise coverage (at least in the Eleventh Circuit based on the court’s definition of “materials”) is broad. Employers with $500,000 in gross revenues within the Circuit (encompassing Florida, Georgia and Alabama) must carefully analyze potential FLSA liabilities. 

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As discussed here and here, the FLSA provides an exemption for employees who 1) are employed by a “retail or service establishment”; 2) earn at least 1.5 the minimum wage for all hours worked; and, 3) earn more than 50% of their compensation in a representative period from commissions. In July 2009, a federal district court in Pennsylvania applied this “7(i)” exemption and found that commission-compensated sales associates of NutriSystem’s weight loss and weight management products were not entitled to overtime under the FLSA. Parker v. NutriSystem, Inc., 2009 U.S. Dist. LEXIS 66597 (E.D. Pa., July 30, 2009). This week, the Court of Appeals for the Third Circuit upheld this decision. Parker v. NutriSystem, Inc., 2010 U.S. App. LEXIS 18691 (3d Cir. Sept. 7, 2010).

On appeal, Plaintiff challenged the district court’s ruling that NutriSystem’s compensation plan established a "bona fide commission rate" and was therefore a "commission" within the meaning of the FLSA and the 7(i) exemption. In upholding the payments in question as commissions, the Third Circuit first noted the paucity of appellate case law defining a commission for purposes of the FLSA. Relying on Judge Posner’s opinion in Yi v. Sterling Collision Centers, 480 F.3d 505 (7th Cir. 2007), the Third Circuit concluded that the NutriSystem compensation plan, wherein “a flat rate fee is not paid unless a sales associate completes a sale . . . [and the fee is] is tied to both the time the sale is made and whether it is based on an incoming or outgoing call”, constituted the payment of bona fide commissions, even though the commission was not calculated as a flat percentage of customer costs. The Court observed that this method of compensation both incentivized the sales associates to make more sales calls, and, importantly, "decoupled [compensation] from actual time worked."

Employers utilizing piece rates, job rates, sales commissions or other forms of incentive pay should be aware of the potential applicability of this exemption. Of course, applicable state law also must be reviewed.

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Recently, a federal judge in Minnesota analyzed whether the confounding administrative exemption applies to investigators employed by a “full-service investigative firm specializing in insurance defense investigations.” Ahle v. Veracity Research Co., 2010 U.S. Dist. LEXIS 88250 (D. Minn. Aug. 25, 2010). In an opinion which addressed numerous other issues in the litigation, including rejecting the applicability of two other FLSA exemptions to the investigators (outside sales and motor carrier), Judge Ann Montgomery concluded that, while the investigators did perform work relating to the general business operations of Veracity and its customers (meeting the first prong of the administrative exemption test), they did not exercise sufficient discretion and independent judgment in performing that work, and thus could not qualify for the exemption.

Relying on the Seventh Circuit’s analysis in Roe-Midgett v. CC Services, Inc., 512 F.3d 865 (7th Cir. 2008), Judge Montgomery observed that even though the plaintiff investigators “produced” Veracity’s product (the investigations themselves), potentially making them “production” workers as opposed to administrative workers, the administrative/production dichotomy was of little use in analyzing a service business such as defendant’s, and, more importantly:

the core business function of Veracity's clients is not to produce investigations. For example, Veracity's insurance company clients are in the business of writing and selling insurance policies. The duty of conducting claims investigations is merely ancillary to producing and selling insurance policies, and thus falls on the administrative side of the "administrative-production dichotomy”

Ahle, 2010 U.S. Dist. LEXIS 88250 at * 11 citing Roe-Midgett, 512 F.3d at 872.

Judge Montgomery then turned to the final prong of the analysis: whether the investigators exercised discretion and independent judgment under the Department of Labor regulation 29 C.F.R. § 541.202. Analyzing Veracity’s investigators in light of previous FLSA decisions concerning insurance industry investigations, the Court ruled that no material issue of fact existed as to the presence of discretion and independent judgment because, “(1) Veracity's written guidelines explain in great detail how claims investigators should conduct an investigation, (2) the claims investigators are required to obtain all the facts regardless of their impact, and (3) the claims investigators do not include their own opinions, conclusions, or recommendations regarding the decision whether to pay or deny the claim.” This absence of independent analysis rendered the investigators employees who simply made “choices among established techniques, procedures or specific standards described in manuals or other sources." Thus, they could not qualify for the administrative exemption. 

The administrative exemption is a persistent source of confusion, and litigation. Employers must apply its multiple-pronged exemption test with care and ensure exercise of sufficient discretion and independent judgment as to matters of significance.

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The “salary basis” test is by far the most straightforward component of the white collar overtime exemptions, requiring only a fixed salary of $455/week (subject to state law) paid in compliance with the requirements of 29 CFR § 541.602. However, an employer’s use of an unusual compensation or bonus structure can still result in allegations that this requirement is not met. Such claims can arise even when the weekly payment in question far exceeds the minimum salary requirement. This was the nature of the Plaintiffs’ unsuccessful attempt to assert that the employer failed to satisfy the salary basis requirement in Bell v. Callaway, 2010 U.S. App. LEXIS 17981 (11th Cir. Aug. 26, 2010).[1]

In Callaway, the employer hired approximately 100 “bookkeeper/accountants” to assist Callaway in the restatement of a single company’s books (HealthSouth). Their compensation arrangement is summarized below:

Plaintiffs received a guaranteed weekly salary of $1600 or more that did not depend  on the quality or quantity of the work performed. This weekly salary was reduced by one-fifth of the weekly salary for every full day a Plaintiff took off from work for personal reasons during the normal workweek without substituting Paid Time Off ("PTO") [Ed.: a lawful deduction under 541.602]. But, a Plaintiff could work fewer than eight hours during any given workday without any reduction in his or her weekly salary. Second, Plaintiffs were eligible to receive additional incentive compensation (a "bonus") paid at a straight-time hourly rate based on the cumulative number of billable hours that Plaintiffs worked. Any bonus to be awarded was determined based on how many additional hours over forty a Plaintiff worked in a given week minus any "deficit" hours a Plaintiff had accumulated in past weeks. For example, if a Plaintiff worked seven and not eight hours on each regularly-scheduled workday in a given week, thus totaling 35 hours of work, he or she still earned the full predetermined weekly salary, but would not earn a bonus in a subsequent week until he or she made up the bonus-hour deficit of five hours and then worked more than 40 hours in a given week.

Id. at * 1-2. 

The Eleventh Circuit, affirming the district court, rejected Plaintiffs’ claim that they were “not paid on a salary basis because the amount of their bonuses fluctuated based on the cumulative number of hours worked.” Id. at * 4. The Court noted the DOL’s regulation which allows an employer to “provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly-required amount paid on a salary basis.” Id. at * 5 citing 29 C.F.R. § 541.604(a). Because the salary basis was met, exempt status was preserved, and the additional compensation was of no moment. The fact that the bonus was based on hours worked and subject to adjustment based on hours worked was irrelevant to the court’s analysis of salary basis compliance.

While Callaway is in line with other Circuit decisions addressing similar plans (See e.g. Havey v. Homebound Mortg., Inc., 547 F.3d 158 (2d Cir. 2008)(the fact that [plaintiff’s] overall compensation for quarter could be decreased due to quality errors does not render [plaintiff] a non-salaried employee if, under the employer's policy, the adjustments do not affect a "predetermined amount" [compliant with the salary basis test]), employers devising exempt compensation plans must beware of compensation arrangements that could result in assertions that rather than applying a proper FLSA exemption, they are attempting to circumvent the Act’s overtime requirement. See generallyAdams v. Department of Juvenile Justice, 143 F.3d 61 (2d Cir. 1998).

This decision points out the need for all employers to ensure that compensation programs for white collar-exempt employees are in full compliance with the salary basis requirements of the FLSA. 

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The subject of many FLSA actions is store managers and whether they are properly classified as exempt employees. In a recent victory for the employer community, Judge Glenn Suddaby of the Northern District of New York held as a matter of law that Express Mart properly classified its store manager in Cato, New York as exempt. Guinup v. Petr-All Petroleum Corp., 2010 U.S. Dist. LEXIS 86280 (N.D.N.Y Aug. 23, 2010).

Plaintiff Guinup was the store manager for Store 360, a combination convenience store and gas station. In her claim for overtime, she did not dispute that three of the four requirements for the executive exemption were met: namely, that she; 1) was paid on a salary basis and earned at least $455 per week; 2) customarily and regularly directed the work of two or more employees; and 3) had the authority to hire or fire employee or in the alternative make recommendations as to hiring and firing which received particular weight. Id. at * 17-18. Rather, Plaintiff argued that as a store manager she did not meet the requirement that her “primary duty [be] management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof.” Id. citing 29 C.F.R. § 541.100. 

The Court then reviewed the four factors utilized to determine whether an employee’s primary duty is management: “[1] the relative importance of the exempt duties as compared with other types of duties; [2] the amount of time spent performing exempt work; [3] the employee's relative freedom from direct supervision; and [4] the relationship between the employee's salary and the wages paid to other employees for the kind of nonexempt work performed by the employee.” Id. In holding that each factor militated in favor of exempt status  the Court observed that Plaintiff’s duties included:

interviewing and hiring new employees, scheduling, training, writing performance evaluations, reporting employee and customer injuries to corporate, discussing sales performance and promotions with corporate, conducting surveys of competitors' gas prices and convenience store business, and controlling "shrink." Plaintiff was also responsible for making recommendations to corporate regarding product ordering and pricing, new hire pay rates, employee discipline and termination, and certain Store 360 security measures. Furthermore, Plaintiff accepted phone calls at home from her subordinates at Store 360 regarding incidents that arose at Store 360 when she was not working.

Id. at * 21. 

Based on these duties, the Court observed that “Store 360 could not have operated successfully unless Plaintiff performed her managerial functions.” As the most senior on-site employee, the Court found she was relatively free from supervision on a day-to-day basis even if she had an “active” Area Supervisor because, inter alia, the Area Supervisor was responsible for ten stores. Finally, based on the Court’s estimate of the compensation of Plaintiff’s assistant manager, Plaintiff was paid approximately 31.7% more than that employee, her highest-ranking subordinate.

While the Guinup decision is favorable to employers, the applicability of the executive exemption continues to be a fact-sensitive, highly technical analysis with divergent court opinions. Whenever a managerial employee is not the highest ranking on-site employee (as Guinup was), particular care must be taken in assessing applicability of the exemption.  And even if the employee is the highest rank on-site there must be significant exercise of managerial duties. All retail employers must focus on this issue.

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The FLSA requires that employers pay employees for all work time, as well as for any time that the employee is “engaged to wait.”  An employee is “engaged to wait” when the employee is idle, but is constrained with respect to engaging in personal activities. Thus, the employee’s time is deemed to be “for the benefit” of the employer.  Examples may include time spent waiting to respond to on-site incidents, monitoring a work location, or maintaining a presence in a particular area for public safety reasons,. When the employee is deemed free to pursue personal interests, the employee is “waiting to engage”, and need not be compensated. The United States District Court for the Southern District of Iowa recently issued a decision analyzing and applying the  “engaged to wait” concept to lunch breaks in regard to security employees required to remain on-premises and on-call during their meal period.

Aiken v. Catholic Health Initiatives, No. 4:07-cv-018, 2010 U.S. Dist. LEXIS 79782 (S.D. Iowa 2010), concerned private security guards who worked on the premises of defendant’s hospitals.   The security guards were  allotted 30 minute unpaid meal breaks pursuant to defendant’s written policy and practice. However for the duration of this break they were required to: (1) remain on-premises; (2) carry their hospital radios;, and (3) respond to any incidents or assignments in the hospital, should they arise. If a security guard was unable to take a full thirty-minute meal break during his/her shift due to an incident, the employee was instructed to notify their supervisor so that they could be paid for the entire thirty-minute period. The security guards sought compensation for these unpaid meal periods under the FLSA

The court held that the security guards were not “engaged to wait” during this time, but rather were free to pursue personal interests, such as making personal calls, playing card games, and surfing the Internet, and therefore their meal breaks were not compensable. Although the court acknowledged that the employer derived some benefit from the security guards’ “deterrence value” when they remained on premises—especially considering that each hospital had only one security guard per shift—it nonetheless found that the “predominant benefit” of the meal break fell to the employees themselves. 

Interestingly, the security guards argued that they were free to pursue personal activities during extensive “down time” during their compensable work hours, and therefore the activities pursued during “working time” and during the meal breaks were indistinguishable and, thus, equally compensable. The court flatly rejected this argument, finding such time was plainly not work, even if the employer chose to compensate for such personal time during the actual workday. 

In rejecting Plaintiffs’ claims and holding that neither 1) the potential to have to perform work nor 2) the actual performance of work on an occasional basis converted all meals breaks to compensable time, the court did note that if the security guards’ meal breaks were interrupted with a high level of frequency then the meal breaks could potentially be considered working time. However, the interruptions here were too infrequent to rise to that level, and regardless employees were paid whenever they notified their supervisors of a meal break interruption,. 

Employers who wish to require employees to remain on-call during meal periods must be cautious of state laws and ensure that any such on-call time does not regularly restrict employees from engaging in personal activities.

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The Fair Labor Standards Act requires employers to pay non-exempt employees one and one half times their regular rate of pay for any hours worked in a workweek in excess of 40. United States Department of Labor regulations, as set forth in 29 C.F.R. § 778.114(a), allow an employer to utilize the fluctuating workweek (“FWW”) method of overtime payment. Pursuant to FWW, in determining overtime due, an employer divides the weekly wage by the total number of hours worked during the week and then pays additional half-time for overtime hours. The more overtime hours worked, the lower the regular rate of pay and the overtime due for each overtime hour. 

One would think that if a salaried employee is found to have been misclassified as non-exempt, this same formula should be applied in determining any overtime due. However, while the federal appellate courts have applies such formula, some district courts have taken the position that any overtime must be calculated by dividing the salary by 40 to determine the regular rate and paying 1.5 times the regular rate for all overtime hours. The difference in calculations can be significant as demonstrated by the following examples.

SALARY: $1,000

HOURS WORKED: 50

Half-time calculation (FWW): $1000/50 hours = $20/hour regular rate of pay/2 = $10 times 10 overtime hours -=$100 due

Time-and-a-half calculation: $1000/40 hours = $25/hour regular rate of pay X 1.5 = $37.50 times 10 overtime hours = $375 due

The difference between the amounts of overtime due under these two calculation methods is always at least three-fold. As the number of hours in the workweek increases, the spread between the two methods grows.

Earlier this week, the Court of Appeals for the Seventh Circuit endorsed the first FWW-type calculation. See Urnikis-Negro v. Am. Family Prop. Servs., — F.3d. —, No. 08-3117, 2010 U.S. App. LEXIS 16126 (7th Cir. 2010).  In finding this method of overtime calculation appropriate, the Seventh Circuit affirmed the district court’s determination that the parties “had a ‘clear and mutual understanding’ that [the employee’s] weekly salary of $1,000 was meant to compensate her for however many hours she worked, not 40 or some other number.”  Id. at *18.  Notably, in reaching this conclusion, the Seventh Circuit referred to an article published by Jackson Lewis partner Paul DeCamp (head of the Firm’s Wage and Hour Practice Group and former Wage and Hour Administrator for the United States Department of Labor) and associate Jacqueline C. Tully, Half-Time or Time and a Half? Calculating Overtime in Misclassification Cases, 278 Fair Lab. Stds. Handbook for States, Local Gov’t & Sch. Newsl. 3 (Nov. 2008). The Court specifically relied on this article for the proposition that the “proper focus in calculating [the] regular rate of pay for [a] misclassified employee is on whether [the] parties intended [a] fixed salary to compensate [an] employee for all hours worked in [a] work-week or solely for [the] first 40 hours.”  Id. at *45. 

The employee argued that “use of the more employer-friendly FWW method gives employers an incentive to misclassify employees as exempt from the FLSA’s overtime requirements or otherwise withhold overtime pay, as they will be little the worse off if and when sued to enforce the statute’s requirements.”  Id. at *55.  In response, the Seventh Circuit stated that the district court awarded liquidated damages, attorney’s fees and costs to the employee, thereby causing the employer to endure penalties for miscategorizing her as an exempt employee.

As with many other wage and hour issues, courts have not been fully consistent even when determining the regular rate is based on salary divided by total hours worked. Some courts have taken the position that time and a half the regular rate is due for all hours over 40 and not just additional half time. Further confusing the issue, some of these courts divide the salary by 40 hours to determine the regular rate, while others still use the total hours worked. These calculations are not supported by regulation but generally based on the court’s view of the equities. 

While this issue may ultimately need to be resolved by the Supreme Court, this is a helpful decision for employers, especially those within the Seventh Circuit. It also reminds employers to reiterate to all salaried employees that their salary covers all hours worked. The Court’s reference to the article published by Jackson Lewis attorneys also demonstrates that the Firm is at the forefront of legal analysis and theory in the wage and hour arena, the forum that continues to pose the highest level of risk related to workplace compliance.

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As discussed here, the FLSA contains a provision relating to the compensability of time spent donning and doffing uniforms, when the compensability of such time is addressed in a collective bargaining agreement. 29 U.S.C. § 203(o). However, even where a unionized employer through a collective bargaining agreement is not required to pay for such time, if the time is otherwise compensable under state law, the FLSA is no defense, held Judge Easterbrook of the Seventh Circuit this week. Spoerle v. Kraft Foods Global, Inc., 2010 U.S. App. LEXIS 15960 (7th Cir. Wis. Aug. 2, 2010).

Spoerle concerns the compensability of time spent putting on and taking off “safety gear, such as steel-toed boots and hard hats, plus a smock that keeps other garments clean” as well as hair nets and beard nets” at an Oscar Mayer plant in Wisconsin. Id. at * 2. The Court noted that it “takes a few minutes at the start of every day to put these items on, and a few more at day's end to take them off.” Id. Kraft Foods and the union agreed that this time is not compensable. Id. at * 2-3. However, Kraft Foods also conceded within the context of Spoerle that, but for the existence of a CBA, the time in question would be compensable under Wisconsin’s state wage law. 

As observed by the district court and reiterated by the Seventh Circuit, 29 U.S.C. § 218(a) of the FLSA states:

No provision of this chapter . . . shall excuse noncompliance with any Federal or State law or municipal ordinance establishing a minimum wage higher than the minimum wage established under this chapter or a maximum work week lower than the maximum workweek established under this chapter …. No provision of this chapter shall justify any employer in reducing a wage paid by him which is in excess of the applicable minimum wage under this chapter, or justify any employer in increasing hours of employment maintained by him which are shorter than the maximum hours applicable under this chapter.

This provision codifies an unequivocal proposition: the FLSA does not prevent states from enacting wage laws which provide greater rights to employees. The Court also specifically noted that 203(o) by its plain language is limited to calculating hours worked “for the purposes of sections 206 and 207 of this title.” Id. at * 5. Finally, as explained by the Court, the existence of the CBA did not itself preempt the state wage law because state rules that disregard, rather than interpret, collective bargaining agreements are not preempted by federal labor policy. Id. citing Lingle v. Norge Division of Magic Chef, Inc., 486 U.S. 399 (1988).

Spoerle highlights the need for every organization to develop a full and complete understanding of both the FLSA and all relevant state wage and hour laws. Employers with multi-state operations must be particularly careful to mind the niceties of individual state laws.

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As discussed here, here and here, the issue of independent contractor classification under wage, unemployment, tax and other laws is omnipresent, continuing to arise in litigation and legislative reform. In a rare victory for employers in this regard, this week the Fifth Circuit Court of Appeals (encompassing Texas, Louisiana and Mississippi) affirmed a district court’s decision that an individual performing work as a “splicer” (one who installs, cuts, repairs, and tests various high voltage cables) was properly classified as an independent contractor under the FLSA. Thibault v. BellSouth Telcoms., Inc., 2010 U.S. App. LEXIS 15267 (5th Cir. 2010).

The Thibault case arose from BellSouth’s efforts to rebuild its telecommunications grid in the aftermath of Hurricane Katrina. Unable to directly employ sufficient splicers to complete the huge volume of needed repairs, BellSouth contracted out some of the work. In fact, demand was so great that the contractor (Directional) subcontracted to a second entity (Parker), which in turn entered into a contractor agreement with Plaintiff Thibault. While Thibault was not an experienced splicer, he had extensive technical knowledge from a previous career, and operated his own business in his home state of Delaware. 

The Court described Thiabult’s work on the BellSouth repairs as follows:

In October, Thibault filled his trailer home with water and food, and the two men drove to Louisiana. From October 4, 2005 to January 6, 2006, Thibault worked as a splicer. In that time, Thibault made $ 51,628. Everyday, Thibault was required to report to Kenner Yard, a property rented by BellSouth.  At the first meeting, Thibault claims that a Parker supervisor informed them that they would be paid sixty-eight dollars an hour, would work at least eighty-four hours a week and would get a per diem and a place to park his motor home. Every day, Thibault showed up to Kenner Yard, and was assigned a specific splicing job in New Orleans. BellSouth  engineers created the overall rewiring plan for New Orleans. BellSouth supervisors designated the specific jobs to be done daily, and assigned Directional supervisors to distribute the assignments. When Thibault received his assignment, he was then required to take his truck to the job and work on the problem he was assigned. When completed, Thibault would return to Kenner Yard and would be assigned another splicing job. He worked in thirteen-day intervals with a one-day break in between. While Parker paid Thibault, BellSouth  had to approve all vacation and break time. On January 6, Parker laid off Thibault. Directional offered Thibault a job as a splicer, working directly for Directional, but Thibault declined. Instead, he returned to Delaware, and has not worked as a splicer since. Thibault brought this suit against Parker, Directional, and BellSouth for overtime pay under the FLSA, breach of contract, and Louisiana wage law statutes.

Id. at * 4-6.

In analyzing the “economic realities” of the arrangement between Thibault and the contracting entities, the Court noted that: 1) the relationship did not have a high degree of permanence as Thibault intended to return home to Delaware; 2) Thibault was subject only to limited supervision in his performance of the splicing work; 3) Thibault possessed a high degree of technical skill and initiative; and 4) Thibault had a high degree of investment in the tools necessary to be a splicer (bucket truck, cable splicer, pump, ventilator, ladder, climbing belt, harness, hard hat, safety vest and other miscellaneous tools), and controlled his profit or loss by managing his expenses while stationed in Louisiana. Furthermore, Thibault was a sophisticated business man with an independent business who was not economically dependent on splicing work.

While Thibault is a favorable decision and positive news for employers within the Circuit, it is important to note that the Plaintiff in the case possessed a high degree of skill, sophistication and autonomy: important components for creating a defensible independent contractor relationship. 

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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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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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In a case involving retailer Dollar General, another federal judge has refused to hold as a matter of law that a retail store manager is an overtime-exempt “executive” for purposes of the FLSA.  Judge James Jones denied summary judgment to Dollar General in Hale v. Dolgencorp, Inc., 2010 U.S. Dist. LEXIS 62584 (W.D. Va. June 23, 2010) based upon his “fact-intensive inquiry as to each prong of the five-factor [exemption] test.”  Id. at * 8. 

Plaintiff Hale had served as a full-time clerk and then an assistant store manager before her promotion to store manager.  Even though the parties agreed that as store manager Hale satisfied the salary basis test for exemption, and that “her work included the regular direction of two or more employees,” Plaintiff testified that she spent only ten percent of her time – six hours per week – on managerial tasks and the remainder of her time “performing menial labor: cleaning restrooms, scrubbing floors, checking out customers, and stocking shelves.” Id. at * 9. She further claimed that Dollar General’s policy of limiting her quota of labor hours for non-exempt employees forced her to run the store by herself or with a skeleton crew a large percentage of the time.

Consistent with the Eleventh Circuit’s similar decision in Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233, 1257-58 (11th Cir. 2008), the Court determined that “[b]ased upon the applicable five-prong test, a reasonable juror could determine that Hale's primary duty was not management.”  This test examines: (1) "the amount of time spent in performance of  [*6] managerial duties"; (2) "the relative importance of the managerial duties as compared with other types of duties," (3) "the frequency with which the employee exercises discretionary powers"; (4) "his relative freedom from supervision"; and (5) the relationship between the employee's "salary and the wages paid other employees for the kind of nonexempt work performed by the supervisor." Id at * 5-6 citing Morgan.  On this last issue, the Court observed that based on Plaintiff’s testimony that she worked 60-70 hours per week, a factual question existed as to whether the “effective rate” at which she was paid was actually less than that paid to the non-exempt employees who reported to her.

This highly technical attack on the use of the executive exemption in retail stores has divided courts, but highlights both the technical nature of the exemption and the need to ensure that for purposes of the FLSA an exempt “executive’s” primary duty is management and that such primary duty is reflected by documents such as evaluations and disciplinary notices.

[UPDATE]  On July 8, 2010 a second district judge echoed the reasoning in Hale, denying Dollar General’s motion for summary judgment in another misclassification case brought by a store manager in Missouri.  Kanatzer v. Dolgencorp, 2010 U.S. Dist. LEXIS 67798 (E.D. Mo. July 8, 2010).  In Kanatzer, the judge found material issues of fact as to all four factors set forth in 29 C.F.R. § 541.700(a).

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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, 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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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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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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Reinforcing the importance of properly crafted and enforced work-time tracking policies, Judge  Michael Telesca of the Western District of New York recently dismissed the balance of a plaintiff’s claims in a lawsuit alleging failure to compensate non-exempt employees for all overtime hours. The Court based its decision on the employer’s strong time tracking policies and protocols. Kuebel v. Black & Decker (U.S.) Inc., 2010 U.S. Dist. LEXIS 46533 (W.D.N.Y. May 12, 2010).

The plaintiff in Kuebel was a retail specialist responsible for the stocking, pricing and display of Black & Decker products at six Home Depot stores. Id. at * 8-9. He alleged that his supervisors instructed him to “shave” his timesheets to reflect forty hours worked each week, regardless of how many he actually worked, in contravention of Black & Decker’s written policies regarding timekeeping. Id. at * 22-23. Based on the Court’s review of the claims and plaintiff’s records of hours worked, as  reflected by his timesheets, his calendar and his company-issued PDA, the Court granted summary judgment to Black & Decker. Id. at * 32-45. 

In analyzing the Defendant’s summary judgment motion, the Court considered whether Plaintiff had demonstrated the two “essential” components of his “off the clock” claim, namely “1) the amount of uncompensated work he actually performed and (2) that defendant had actual or constructive knowledge of the amount of time that plaintiff was working off-the-clock.” Id. at * 30. 

As to the first prong, evidence of the amount of uncompensated work, the Court held that plaintiff failed to demonstrate the inadequacy of Defendant’s time records (which would have entitled Plaintiff to a lesser burden of proof). Id. at * 30-32. The time records were thus an accurate record of Plaintiff’s overtime worked. And, the Court further reasoned that based on plaintiff’s own contradictory statements regarding the percentage of his timesheets which were allegedly inaccurate, plaintiff could not prevail even if entitled to the lower standard, which typically is available to Plaintiffs in FLSA cases only where the employer has failed to maintain accurate records of hours worked. Id. Thus, Plaintiff could not provide evidence of the amount of allegedly uncompensated work he had performed. Id.

Even if plaintiff was able to present evidence of uncompensated time, the Court stated no monies would be due since plaintiff could not meet the second prong of the test, in that he failed to demonstrate that the Defendant possessed “constructive knowledge” of his uncompensated work hours, despite his allegations that Defendant’s managers instructed him to underreport his time. Id. 

In an earlier opinion in the same case, the Judge had dismissed Plaintiff’s claims for alleged unpaid commuting time. Kuebel v. Black & Decker (U.S.) Inc., 2009 U.S. Dist. LEXIS 43846 (W.D.N.Y. May 18, 2009)(commute time up to 60 minutes to and from varying job sites not compensable under FLSA).   There, the Court held that despite the fact that Plaintiff’s initial “commute” could be to any one of his six assigned stores, Black & Decker’s policy of designating the first hour of that commute as non-compensable commuting time did not violate the FLSA. The Court did not reach the question of whether the entire commute was non-compensable, as Black & Decker treated commuting time in excess of the first hour as compensable.

Kuebel demonstrates that it is possible for an employer to obtain summary judgment on a claim for alleged unrecorded unpaid work time even where that employee is a “field” employee not under the employer’s roof and immediate supervision. It is essential for all employers to ensure that their timekeeping policies comport with applicable federal and state law, expressly prohibit “off the clock” work and clearly and unequivocally advise employees to report all hours worked. 

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As wage and hour litigation continues to be the majority of litigation in the workplace law arena, many employers are faced with defending federal and state law claims in the same federal court lawsuit.  This poses a practical issue as the FLSA provides for an opt-in class while state laws generally provide for opt-out classes.   Many members of the defense bar feel that allowing the actions to coexist in a federal case renders the opt-in process practically irrelevant.  Further, such dual actions often have the result of a minimal opt-in class and a large opt out class.

While district courts within the Second Circuit (which covers New York, Connecticut and Vermont) have held that such claims can coexist in a federal court action, the Second Circuit Court of Appeals has not yet ruled on the issue. Such a ruling is expected in the near future as the Second Circuit recently agreed to consider a restaurant employer’s appeal of the district court’s decision allowing federal and state claims to proceed in a situation where only 22 of approximately 300 of the putative plaintiffs who comprise the state law opt-out class opted in to the FLSA action.  Shahriar et al. v. Smith & Wollensky Restaurant Group Inc. et al., Second Circuit Case No. 10-477-mv (Order dated May 14, 2010). Courts within other Circuits are divided as to the appropriateness of the “hybrid” opt-in/opt-out lawsuit which permits such claims to coexist.  Compare De Asencio v. Tyson Foods, Inc., 342 F.3d 301, 306 (3d Cir. 2003)(upholding refusal to certify 4,000+ member state law opt-out class in wage case with 447 potential opt-in participants) with Lindsay v. Gov't Emples. Ins. Co., 448 F.3d 416 (D.C. Cir. 2006)(reversing denial of certification of state law claim in certified federal action and holding that dual actions are permissible).   

Should the Second Circuit rule that such claims cannot coexist in a federal court action, there may be a significant reduction in wage and hour actions initiated in federal court within the Circuit, as Plaintiffs’ counsel seek solely large opt-out state law classes in New York state courts.  However, such a finding and strategic shift could also have the effect of requiring employers to simultaneously defend parallel cases in federal and state court.  This site will keep you apprised of the Court’s decision.

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When an independent contractor alleges s/he was misclassified and seeks alleged unpaid minimum wage and overtime, a significant issue is whether a prevailing plaintiff can receive a windfall.  Simply put, can an independent contractor alleging misclassification under the FLSA (or state law) keep fees for services already collected, and also collect a damages award for unpaid minimum wage and overtime?  In one recent decision, a federal judge has found the answer to be “not necessarily”.  Doe v. Cin-Lan, Inc., 2010 U.S. Dist. LEXIS 16447 ( E.D. Mich. Feb. 24, 2010)(Note: Jackson Lewis partner Allan Rubin represents Cin-Lan in this matter).

Cin-Lan concerns the classification of exotic dancers as independent contractors at a Michigan nightclub.  The named Plaintiff entered into an independent contractor arrangement under which she danced at the defendant club in exchange for a portion of “dance fees” collected from patrons; the balance of the dance fee went to the club.  The club did not pay Plaintiff minimum wage or overtime, though she often collected dance fees at a rate approaching $75/hour.  Significantly, the parties’ agreement called for the dance fees to serve as an offset to any wage liability if Plaintiff were ever found to be an employee. 

In rejecting Plaintiff’s motion to dismiss the counterclaim, the Court first rejected Plaintiff’s argument that the contract itself was “repugnant to the FLSA” and thus invalid.  The Court further observed that “the parties agreed that if there was ever a legal determination that their business relationship was in fact an employment relationship, then the alternative provisions of the [contract] would apply to define the parameters of that relationship. The counterclaim alleges that Doe agreed to such an arrangement” and therefore the Court declined to reject such an arrangement as a matter of law.  Finally, the Court rejected Plaintiff’s argument that all “dance fees” should be re-characterized as tips for purposes of the FLSA (and thus not credited against wages owed). 

While this decision is based on a very-specific fact pattern involving dancers in the nightclub industry, it highlights the importance and value of a well-drafted independent contractor agreement.  Even if such agreement does not support the independent contractor classification, potentially it can limit damages.

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Business owners, supervisors and managers performing services for corporate entities often believe that liability for wage and hour violations can be imposed solely on the incorporated entity.  To the contrary, as demonstrated by a recent New York Federal Court decision, various theories support individual liability under both federal and, in this case, New York State law.

In Flannigan v. Vulcan Power Group, L.L.C., 2010 U.S. Dist. LEXIS 41751 at * 10-13 (S.D.N.Y. Apr. 27, 2010), Judge Barbara Jones considered a motion to dismiss wage and hour claims brought against an officer/manager.In denying the motion, the court explained that corporate officers and principal shareholders, as well as supervisors and managers involved in wage and hour policymaking/decision-making, can be personally liable for unpaid wages under federal and state law.  Id. The Court cited Plaintiff’s allegations and documentary evidence to the effect that the individual defendant had met with her regarding the terms of her employment, and subsequently communicated with her about the status of her commission compensation, as sufficient to allege individual liability under the FLSA and New York law. Id. The court did however find that individual liability could not be imposed on the corporate shareholders under Section 630 of the New York Business Corporation Law because the defendant corporation was not incorporated in New York. Id.  Under BCL § 630, the ten largest shareholders of a closely held New York corporation are liable for unpaid wages and benefits.

Business owners (as well as supervisors and managers involved in wage and hour policymaking/decision-making) must recognize the various theories under which they can be subject to personal liability and of course take actions to minimize such potential liabilities. 

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The FLSA’s administrative exemption requires the party claiming exemption to establish that the employee was engaged in “administrative” work, as opposed to “production” work (the so-called administrative/production dichotomy). Determining whether an employee meets the administrative exemption can be challenging.   This determination is even more difficult in white-collar industries, where unlike in manufacturing, it is not so easy to differentiate between production and administrative work.

In 2009, the Second Circuit reversed a District Court and held an underwriter for Chase J.P. Morgan did not meet the administrative exemption since the employee “produced” the bank’s product, and did not service the business (like an accountant, Information Technology professional or human resources professional).   The Supreme Court yesterday declined to review the SecondCircuit’s decision.   Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 536 (2d Cir. 2009) cert denied 559 U.S. ___ (Supreme Court Case No. 09-1160, May 3, 2010). Therefore, in the Second Circuit white-collar employers need to evaluate the position in light of this decision before classifying employees as exempt administrators. This concern is underscored by the fact that the Second Circuit’s decision supports an argument that the exercise of independent discretion and judgment is not relevant to this analysis – if the employee is deemed to perform production work, a Court need not reach the question of the existence or lack of discretion and independent judgment.

This is a disappointing decision for employers hoping that the high court would grant cert and reverse Davis by holding that: 1) the District Court’s determination that the exemption applied in the case at bar was the proper one; and 2) the administrative/production dichotomy is of “limited assistance outside the manufacturing context.” Savage v. Unite Here, 2008 U.S. Dist. LEXIS 32219 (S.D.N.Y. Apr. 17, 2008).

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Under the FLSA (and most state laws), the fluctuating workweek method (FWW) of overtime payment allows employers to reduce overtime expense by paying “half time” for all overtime hours if the following four factors are satisfied: 1) employees’ hours fluctuate from week; (2) employees receive a fixed salary each week that does not vary with the number of non-overtime hours worked during each workweek; 3) the fixed salary provides compensation every week at a regular rate that is at least equal to the minimum wage, and 4) the employer and employees’ share a “clear mutual understanding” that Defendants will pay that fixed salary regardless of the number of hours worked.

However, as demonstrated by last week’s decision by United States District Court Judge Jose L. Linares of the United States District Court for the District of New Jersey, an employer who sets out to utilize the FWW approach pays a strict penalty for non-compliance. See Brumley v. Camin Cargo Control, Inc., 2009 U.S. Dist. LEXIS 126785 (D.N.J. Apr. 20, 2009). 

In his decision, Judge Linares denied summary judgment to defendants in this collective action based on the employer having made one impermissible deduction to one employee.   The Court rejected the employer’s argument that an isolated event of this type was statistically insignificant, stating that such an assertion goes to “weight.” More importantly, the Court granted summary judgment to the plaintiffs based on the employer making additional payments to employees, such as offshore pay, holiday pay and day-off pay, finding that due to such payments, the employer did not pay the fixed salary required to utilize the FWW overtime calculation method.

The negative implications of this decision did not end here.   In evaluating potential damages, the Court rejected the employer’s argument that damages should be calculated based on the half-time method that is part and parcel of the FWW calculation of overtime and held that “the default FLSA damage calculation, ‘time-and-a-half for all hours over 40,’” should apply to Plaintiffs who were not paid properly. The Court also denied summary judgment to both parties as to whether FLSA liquidated damages and a 3-year statute of limitations should be imposed, finding that trial testimony is necessary to determine whether the employer acted in good faith and took reasonable steps to comply with the FWW calculation methodology. Finally, citing to the FLSA regulations and precedent within the Third Circuit, the Court rejected the employer’s argument that overpayments from different pay periods be applied to offset liability.

Employees who avail themselves of the fluctuating workweek method of overtime should ensure they are properly implementing its requirements.

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On the heels of its ruling in Shady Grove regarding the inapplicability of state procedural rules in federal court (discussed here), on April 19, 2010, the Supreme Court issued a decision reviving another dismissed class action.  In Holster v. Gatco Inc., Case Number 08-1307, the Court granted the appeal petition of an individual seeking to bring a class action in New York federal court under the Telephone Consumer Protection Act (a different law than the one at issue in Shady Grove), and sent the case immediately back to the Second Circuit to consider whether the plaintiff could proceed with a Rule 23 class action in light of Shady Grove. Holster v. Gatco, Inc., 2010 U.S. LEXIS 3118 (U.S. Apr. 19, 2010).  This second ruling reinforces the initial interpretation of Shady Grove: namely, that class actions brought in federal court (including those alleging state law claims under statutes such as the New York Labor Law) are governed by Rule 23, and procedural limitations on those class actions contained in the state’s procedural rules may not apply. 

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On March 31, Magistrate Judge John Tunheim of the United States District Court for the District of Minnesota issued a lengthy opinion in several consolidated FLSA actions brought by a group of securities brokers who alleged they were misclassified as exempt under the FLSA.  In re Rbc Dain Rauscher Overtime Litig., 2010 U.S. Dist. LEXIS 32413 (D. Minn. March 31, 2010).  The opinion addresses several issues relevant to financial services industry employers including:

• The applicability of the “learned professional exemption – the Court denied summary judgment to the Defendant on this issue as to one broker because based on the record the Court could not determine that the knowledge utilized by the broker (who possessed a Series 7 license and an MBA) to perform his job was customarily acquired via academic instruction.  Id. at * 30-36;

• Whether a “non-forgivable” but recoverable draw satisfies the salary basis payment requirement - the Court held that a non-forgivable but recoverable draw that never fell below the minimum salary required for exemption ($455 per week under federal law) satisfied the salary basis, even though the draw was reconciled in calculating commissions.  Id. at * 37-43.  In reaching this finding the Court cited a United States Department of Labor opinion letter issued by then-Wage and Hour Administrator and current Jackson Lewis partner and head of the Jackson Lewis Wage and Hour Practice Group, Paul DeCamp; and

• Impact of the “Highly Compensated” exemption test – the Court held that brokers who met the “highly compensated” threshold set forth in 29 C.F.R. § 541.601 (i.e., payment of the salary basis minimum and total compensation of at least $100,000/year) were exempt, as they customarily and regularly performed exempt administrative duties by providing financial advice and analysis.  Id. at * 86-105.

In re RBC serves as a valuable primer for financial services firms seeking to identify and review the exemption issues that often arise in the financial services industry.  Unfortunately, the industry is under attack despite the high levels of compensation received by many industry employees. 

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Jackson Lewis previously advised clients and friends of the Health Care Reform Act’s provision requiring employers to provide employees breaks for breastfeeding: http://www.jacksonlewis.com/legalupdates/article.cfm?aid=2016. (Regulations interpreting such requirements are expected to be issued within the next 6 months.)  Also contained in the over two thousand-page enactment is Section 1558, which adds a new Section 18C to the FLSA.  This new FLSA provision prohibits employers from discriminating or retaliating against any employee who has:

(1) received a credit under section 36B of the Internal Revenue Code of 1986 or a subsidy under section 1402 of this Act; (2) provided, caused to be provided, or is about to provide or cause to be provided to the employer, the Federal Government, or the attorney general of a State information relating to any violation of, or any act or omission the employee reasonably believes to be a violation of, any provision of this title (or an amendment made by this title); (3) testified or is about to testify in a proceeding concerning such violation; (4) assisted or participated, or is about to assist or participate, in such a proceeding; or (5) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any provision of this title (or amendment), or any order, rule, regulation, standard, or ban under this title (or amendment).

Aggrieved current or former employees who assert claims under this provision are entitled to a jury trial.

Employers can expect this cause of action for retaliation to be another tool in the arsenal of Plaintiffs’ lawyers.

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In yet another wage-and-hour decision with the potential to disrupt longstanding practices within an industry, a federal court in Florida has ruled that the FLSA’s “learned professional” exemption does not apply to a group of caseworkers providing child protection services for an state-authorized agency. Talbott, et al v. Lakeview Center, 06-cv-378 (N.D. Fla. February 2, 2010). The learned professional exemption requires that:

• An employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

• The advanced knowledge must be in a field of science or learning; and

• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

In Talbott, Plaintiffs were caseworkers in two different job titles who provided counseling services to families under the supervision of their “casework counselor supervisor.” The Plaintiffs alleged that while many of them held a degree related to social work, their actual job did not require them to use that degree or exercise any discretion or judgment. Specifically, Plaintiffs asserted that Defendant’s “six- to eight-week . . . training course provided them with the knowledge necessary to perform their jobs” and accordingly the job requirements were “insufficient to meet the learned professional exemption’s requirement of advanced knowledge.” The Court agreed. It observed that while the Defendant had put forth evidence that it required a combination of education and experience to obtain the job, it was clear to the Court that “[t]he type of knowledge necessary to perform the duties . . . is gained by the employee in Lakeview’s training course.” The Court even found the violation to be willful and based on such finding extended the liability period to 3 years and awarded 100% liquidated damages.

Further (and economically devastating to the Defendant), the court concluded based on evidence in the record (including listing fixed hours in the job posting for the position and invoking an informal “flex time” concept with the employees to address circumstances where their hours would exceed 40) that the “contract” of employment with the Plaintiffs had been for 40 hours of work per week, and therefore Plaintiffs were entitled to overtime based on time and half their regular rate of pay based on a 40 hour workweek (i.e, 1.5 times (their weekly salary divided 40) times hours worked in excess of 40 in the week). The Court specifically rejected any overtime calculation based on dividing the weekly salary by total hours worked and paying ½ time for overtime hours. 

What are the lessons? First, all employers must ensure that individuals classified as exempt learned professionals have at the least Bachelors Degree in a specific discipline and that the educational coursework to achieve the degree is essential to the performance of job duties. Second, employers should be very wary of advising any employee classified as exempt that their salary covers a set number of hours per week. Rather, employers should advise employees that the salary covers all hours worked.

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Often when analyzing whether a position is exempt, we only focus on whether the job duties are sufficient for exempt status. However, in most instances, there is a second requirement: compliance with the salary basis test.   A recent decision issued by Judge Larimer of the Western District of New York is a reminder to not overlook salary basis test compliance. Simply put, deductions from the salary of an exempt employee must be carefully monitored to ensure that they comply with the FLSA regulations and do not destroy the exemption. 

At issue in Scholtisek v. Eldre Corp., 2010 U.S. Dist. LEXIS 26664 (W.D.N.Y. Mar. 22, 2010) was evidence presented at the summary judgment stage that the employer “both engaged in an actual practice of making unlawful deductions, and maintained a policy that created a significant likelihood of such deductions [from the salary of exempt employees]”, and that such a practice and policy destroyed the plaintiffs’ exempt status, entitling them to overtime under the FLSA. The Court granted plaintiffs’ motion for summary judgment, based on documentary evidence and admissions from the HR professionals responsible for the company’s payroll which together demonstrated that there had been a policy of making partial day deductions from the salaries of exempt employees for missed work time, in contravention of 29 CFR § 541.602. Defendant was not entitled to the “window of correction” to remedy the error, because the window is available to correct payroll mistakes, not unlawful policies.

The Court did not rule as to the appropriate remedy for this violation, observing that “[o]n the record before me, however, the Court cannot determine as a matter of law during what periods those improper deductions did occur, the extent to which they occurred, exactly which employees or job classifications were affected by this practice, or the number of hours for which plaintiffs are entitled to overtime pay. The amount of damages therefore remains to be decided.” The Court will ultimately need to rule as to whether the exemption loss was limited to only those who were subject to an actual deduction and/or whether for the period of time for which the exemption was lost is limited only to those individual workweeks in which the deduction was taken.

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In today’s world, it is not overly difficult for a prospective employer to learn that an applicant has sued a prior employer under the FLSA. Can the prospective employer decide not to hire based on this information? 

In Dellinger v. Sci. Applications Int'l Corp., 2010 U.S. Dist. LEXIS 32861 (E.D. Va. Apr. 2, 2010), Judge Cacheris of the United States District Court for the Eastern District of Virginia, Alexandria Division, held that an employer could do so, finding that the FLSA’s anti-retaliation provision only protects employees, and not applicants. In reaching its decision, the court relied on two district court cases from other jurisdictions with similar holdings – Harper v. San Luis Valley Regional Medical Center, 848 F.Supp. 911 (D. Colo. 1994) and Glover v. City of North Charleston, 942 F. Supp. 243 (D.S.C. 1996). Judge Cacheris continually referred to the express language of the FLSA and declined to expand the definition of “employee” (meaning one who is “suffered or permitted” to work) to include applicants, observing that the plaintiff had never performed any work for the defendant. 

While no appellate court has ruled on this particular issue, Dellinger supports an employer’s right to disqualify applicants based on previous filings of FLSA suits. 

Of course while such information regarding prospective employees can be easily acquired in the era of the online social network, with extensive information about almost any subject only a click or two away through so-called “open source” searches, there are numerous potential pitfalls including potential FCRA violations and violations of “lawful activities” statutes (such as N.Y. Labor Law § 201-d) in gathering such information.

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In the Second Circuit, employees generally can waive their right to bring a class or collective action as long as the cost of arbitrating the case on an individual basis is not cost-prohibitive  and does not “remov[e] the plaintiff’s only reasonably feasible means of recovery.”  See In Re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009).   In late March, Judge Gleeson of the Eastern District of New York analyzed the viability of such a collective/class action waiver in the wage and hour context.  The court upheld the waiver finding that the plaintiffs did not demonstrate that individual litigation would be “cost-prohibitive.”  Judge Gleeson rejected the plaintiffs’ claim that incurring arbitration costs of up to $1,500 to process the arbitration rendered the agreement substantively unconscionable.” See Reid, et al. v. Supershuttle International, Inc., 2010 U.S. Dist. LEXIS 26831 (E.D.N.Y. March 22, 2010).

This decision parallels the Southern District of New York’s recent decision in Arrigo v. Blue Fish Commodities Inc., 2010 U.S. Dist. LEXIS 9547 (S.D.N.Y. Feb. 4, 2010), in which the court also  dismissed an employee’s Fair Labor Standards Act collective action and required him to arbitrate his claim on an individual basis pursuant to the Federal Arbitration Act.  See “Federal Courts in New York Continue to Enforce Arbitration Agreements” http://www.jacksonlewis.com/legalupdates/article.cfm?aid=1989 for a further discussion of this decision and other recent New York federal court decisions addressing mandatory arbitration.

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The Supreme Court dealt a blow to New York wage-and-hour defendants sued in federal court last week, overruling established precedent requiring plaintiffs bringing New York Labor Law (“Labor Law”) class actions in federal court to waive the 25% liquidated damages “penalty” in order to proceed on a class basis.  In Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 2010 U.S. LEXIS 2929 (U.S. Mar. 31, 2010), the Supreme Court applied the age-old test from Erie R. Co. v. Tompkins, 304 U.S. 64 (1938) and held that the state law rule requiring such a waiver is “procedural” as opposed to “substantive”, and has no application in federal court, where opt-out class actions are governed by Federal Rule of Civil Procedure 23. 

Class action Labor Law plaintiffs in federal court now may seek a 25% penalty in behalf of all class members, increasing the potential class-wide damages.  It remains a divided question, unanswered by the higher courts, as to whether any wage-and-hour plaintiff may recover the 25% penalty and the 100% liquidated damages under the FLSA for the same time period.  Compare Yu G. Ke v. Saigon Grill, Inc., 595 F. Supp. 2d 240, 261 (S.D.N.Y. 2008) with Jin v. Pac. Buffet House, Inc., 2009 U.S. Dist. LEXIS 74901 at * 24 (E.D.N.Y. Aug. 24, 2009).

Other states containing class action limitations in their state procedural codes, whose federal courts previously had deferred to the state rule, may now also be subject to class actions in federal court seeking relief under the state’s wage-and-hour laws.   However, the Court did not conclusively state that all such provisions were unenforceable but rather focused its analysis on the intent of the New York provision requiring waiver of penalties.

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There are many reasons an employer may decide to reclassify an employee from exempt to non-exempt: changes in the law; modified court or DOL interpretations of existing law; as a result of an internal audit; or, simply based on changes in the business needs of the company. Does that decision to reclassify create evidence that the employee was “misclassified” as exempt, and that the misclassification was willful? No, said the court in Clarke v. JP Morgan Chase Bank, No. 08-CV-2400 (S.D.N.Y., March 26, 2010), holding that reclassification does not establish that the employee was misclassified, or that any violation was willful.

In Clarke, the employer decided to reclassify various technical computer workers based on the increasing number of FLSA suits. Because one of the plaintiffs who had been reclassified waited over two years after the reclassification to file suit, the FLSA claim was time barred unless he could establish the employer “willfully” violated the law, extending the FLSA statute of limitations to three years.

In support of his claim that he was misclassified and that the misclassification was willful (thus saving the claim), plaintiff argued the decision to reclassify itself demonstrated knowledge that the prior classification was wrong. The court rejected this, and held the decision to reclassify did not establish a willful violation, but just the opposite: a good faith effort by the Company to ensure that the company’s classification complied with the FLSA. The reclassification was likely a conservative measure adopted at a time when FLSA collective action overtime lawsuits were becoming more and more common, the court held.  Indeed, the court held “if the mere fact of a reclassification were enough to trigger the exceptional three year limitations period, it [the three year limitations period] would cease to become an exception.” 

Additionally, as to a second plaintiff whose claims were not time-barred, the court held the reclassification did not establish that the employee was misclassified. “The mere fact that an employee was reclassified cannot establish an employer’s liability for the period prior to the reclassification,” the court held, reemphasizing that, under the FLSA, it is the duties that control. In fact, despite the reclassification, the court granted summary judgment to the employer finding the employee was exempt under the computer professional exemption—one of only a handful of cases addressing that exemption. 

While plaintiffs’ counsel will certainly continue to argue that any decision to reclassify is evidence that the employee was previously misclassified, the reclassification decision alone will not, according to the Clarke court, provide evidence of a willful violation or establish that the employee was in fact misclassified in the first place. This decision provides some comfort to employers who decide to reclassify employees, and will permit employers to reclassify employees in cases where the exempt status is unclear with less fear that the decision to reclassify will be used against the company in a lawsuit challenging the original classification decision.     

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The Ninth Circuit recently revised and reissued its earlier opinion in Rutti v. Lojack Corp., No. 07-56599 (9th Cir. Mar. 2, 2010), holding upon further review that the Plaintiff’s commuting time is compensable under California law, while continuing to find that such time  is not compensable under the FLSA. The Court did not change its ruling that time spent on the required post-shift activity at issue in the case – the daily transmission of data – was compensable.

The Plaintiff, an automotive technician, installed and repaired vehicle recovery systems for the employer. Because technicians perform most of their duties at the clients’ locations, the employer required Plaintiff to use a company-owned vehicle to travel to clients’ sites. The employer prohibited technicians from carrying passengers in the company vehicles and from using the vehicles for personal business. The technicians also were required to keep their cell phones on while driving.

The employer paid Plaintiff on an hourly basis for the period beginning when he arrived at his first job and ending when he completed his final job, but not any commuting time. Plaintiff, on behalf of himself and all technicians, sued the employer to recover compensation for commuting time and for alleged preliminary and post-shift activities.

Addressing Plaintiff’s claim that the commuting time should be compensable under California law, the Court concluded that the district court erred in granting summary judgment to the employer. California law requires that employees be compensated for all time “during which an employee is subject to the control of an employer.” Morillion v. Royal Packing Co., 22 Cal. 4th 575, 578 (2000). In Morillion, the California Supreme Court held that the plaintiffs were “subject to the control” of their employer during a mandatory bus commute because “plaintiffs could not drop off their children at school, stop for breakfast before work, or run other errands requiring the use of a car.” The California Supreme Court reasoned the “[p]laintiffs were foreclosed from numerous activities in which they might otherwise engage if they were permitted to travel to the fields by their own transportation.”

Similarly, in Lojack, Plaintiff was required to drive the company vehicle, could not stop off for personal errands, could not take passengers, was required to drive the vehicle directly from home to his job and back, and could not use his cell phone while driving, except to answer calls from the company dispatcher. Accordingly, the Court found that “Plaintiff was under Lojack’s control while driving the Lojack vehicle en route to the first Lojack job of the day and on his way home at the end of the day.” Thus, the Court held that his commute was compensable under California law.

Employers that provide company vehicles and have restrictions regarding their use should expect increased challenges to their policies and claims that employees’ commutes are “compulsory,” rather than ordinary.  A more detailed analysis of the  Lojack decision is available here.

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While in New York all employees are at-will absent contractual language to the contrary, an employer may (intentionally or unintentionally) create a “contract” with an employee governing certain terms of employment (such as bonus compensation) without destroying the at-will nature of employment.  Properly drafted and agreed upon, such a contract can preclude employees from later claiming they were made oral promises regarding compensation and benefits at the time of hire (or later on) which are different than the terms reflected in the contract.  In Broyles v. J.P. Morgan Chase & Co., 2010 U.S. Dist. LEXIS 21861 (S.D.N.Y. Mar. 8, 2010), United States District Judge William Pauley rejected an employee’s attempt to do just that, finding that the letter of employment the Plaintiff had received and signed at the time of hiring: (1) was an enforceable contract, and (2) it contained “the entire understanding of the parties with respect to the terms and conditions of the offer of employment.”  Id. at * 7. 

When the Plaintiff was subsequently terminated, he brought suit claiming he had been orally promised a bonus for the year prior to the year in which he was terminated.  However, the letter of employment at issue provided that any bonuses were discretionary and would not be paid if the employee quit or was terminated.  The Court held that this clear language governing bonuses contained in the offer letter, coupled with an integration clause, precluded the employee’s claims that he was verbally promised a bonus.  The court found that the offer letter was an enforceable written agreement which precluded any oral agreements or quasi-contractual claims by the employee.  Finally, since the bonus was never “awarded” to the employee, he had no “vested” interest in it, and therefore could not pursue a claim for the unpaid bonus under the New York Labor Law.

It is difficult for employers to ensure that no statements regarding compensation are made by managers, co-workers or human resources during the hiring process.  Recruiters or other interviewers can unwittingly make oral promises or use poorly tailored language regarding the terms and conditions of employment.  To prevent such statements from causing issues down the road, employers should consider utilizing a well drafted employment letter, such as the one in Broyles, or a well drafted incentive compensation plan with an integration clause, in order to easily dispose of these claims if and when they do arise.

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On March 24, 2010, Nancy J. Leppink, the Deputy Administrator for the Wage and Hour Division of the United States Department of Labor, issued an “Administrator’s Interpretation” stating that employees who perform the typical job duties of a mortgage loan officer generally do not meet the prerequisites for the administrative exemption under the FLSA.   The issuance of the Interpretation is a significant departure from the Division’s past practice of generally issuing legal opinions solely in response to requests for guidance from the public, and may be a sign of a more aggressive Wage and Hour Division.  The Interpretation is directly contrary to a September 8, 2006 opinion letter issued by the Division stating that mortgage loan officers could qualify for the exemption, and in fact the Deputy Administrator stated that the previous opinion was based on a misleading assumption and a selective and narrow analysis.

The Division bases its new position on the following conclusions:

• A Mortgage Loan Officer’s primary duty is to make sales and accordingly he/she performs production work and not administrative work.  As stated by the Deputy Administrator, “[w]ork such as collecting financial information from customers, entering it into the computer program to determine what particular loan products might be available to that customer and explaining the terms of the available options and the pros and cons of each option, so that a sale can be made, constitutes the production work of an employer engaged in selling or brokering mortgage loan products.”

• While in certain situations, providing advice to a business regarding a potential mortgage to purchase land could qualify as exempt work based on it being related to the management or general business operations of the employer’s customers, home loans do not as “[i]ndividuals acting in a purely personal capacity do not have “management or general business operations.”

• Its belief that the September 8, 2006 opinion letter improperly created an alternative standard for the administrative exemption for employees in the financial services industry.

This is a significant development for industry employers that relied on the administrative exemption for loan officers based on the 2006 opinion letter.  This narrowing of the definition of “administrative” work by the DOL is also consistent with the Second Circuit’s recent decision in Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009)(underwriter “produced” bank’s product of making loans, and thus was not an administrative employee). 

While it is not a resolved legal issue, some courts have held that the 7(i) “commissioned employee” exemption also is inapplicable to mortgage loan officers because they do not work in a “retail” industry. Compare Gatto v. Mortgage Specialists of Ill., Inc., 442 F. Supp. 2d 529 (N.D. Ill. 2006) with In re: Wells Fargo Home Mortg. Overtime Pay Litig., 2008 U.S. Dist. LEXIS 46595 (N.D. Cal. June 11, 2008). This would leave the outside sales exemption as the only potential exemption on which employers in the industry can rely, however, such exemption typically has limited application in the industry as most mortgage loan officers perform services from a fixed location.  An additional open question remains as to whether loan officers who are “highly compensated” (i.e., are paid on an FLSA-compliant salary basis and receive more than $100,000/year in total compensation) may still qualify for exemption.  29 CFR § 541.601.

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The Supreme Court, on March 22, 2010, agreed to answer a question that has divided the circuit courts of appeal—whether the FLSA retaliation provision protects verbal complaints made by employees or only written ones. The Court will review the Seventh Circuit’s decision in Kasten v. Saint-Gobain Performance Plastics Corp., 570 F.3d 834 (7th Cir. 2009), where the Seventh Circuit held verbal complaints regarding unlawful pay practices do not fall under the protections of the FLSA’s anti-retaliation provision, 29 U.S.C. § 215(a)(3).  The decision follows the Second and Fourth Circuits, which previously held that an employee is not protected from retaliation under the FLSA where the employee has not complained in writing, based on the statutory requirement that the retaliation be in response to a “filing” (Note: the Second Circuit goes even further -- declining to protect internal written complaints and protecting only formal complaints to the DOL or a court). In Kasten, the Seventh Circuit agreed with this interpretation, and held that since Plaintiff’s complaints were “purely verbal”, this was fatal to his claim.  Id. at 838. 

Several circuit courts, including the First, Fifth, Sixth and Ninth, however, have ruled verbal complaints are sufficient. Three judges dissented in the Seventh Circuit’s subsequent decision in Kasten to deny rehearing en banc, citing these cases. Kasten v. Saint-Gobain Performance Plastics Corp., 585 F.3d 310 (7th Cir. 2009). The dissenters criticized the majority's decision, observing: "the [Seventh Circuit] has taken a position contrary to the longstanding view of the Department of Labor, departed from the holdings of other circuits, and interpreted the statutory language in a way that [we] believe is contrary to the understanding of Congress." Id. at 311.

The Supreme Court’s decision in Kasten, whether accepting or rejecting the Seventh Circuit’s employer-friendly approach, will hopefully provide some clarification regarding whether internal verbal complaints are protected under federal law. As always, state laws may (and do) differ.

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 In 1981, the Supreme Court issued general guidance as to what an employer can say to “putative class members” In doing so, the Court explained that the judiciary has the power to control communications See generally Gulf Oil v. Bernard, 452 U.S. 89 (1981) (holding a district court has both the “duty and broad authority to exercise control over a class action and to enter appropriate orders governing the conduct of counsel and parties,” including the duty and authority to enter orders limiting communications by class counsel for the plaintiff to members of the class). Since then, counsel for all parties in a class action have wrestled with the strategic and ethical implications of communicating with an individual who is not formally represented by either side (Note: this issue is further confounded by the collective action “opt-in” nature of the FLSA – an issue for another day). 

This communication process is made all the more difficult in the employment context, where management must interact with putative class members on a daily basis – because they still work for you! One recent opinion addressing communications from both plaintiff and defense counsel in a putative class action is Clincy v. Galardi S. Enters., 2010 U.S. Dist. LEXIS 22796 (N.D. Ga. March 12, 2010). In Clincy, a putative collective wage and hour action filed by several dancers at Club Onyx, an adult entertainment night club in Atlanta, counsel for plaintiffs sent a communication about the lawsuit to the homes of dancers who had not joined the lawsuit. In response, counsel for defendants circulated a memo to potential class members, correcting what they perceived to be misleading information contained in plaintiffs’ letter. Id. at * 8-11.

After reviewing these two submissions (and in light of already-substantiated allegations of retaliatory acts by the employer and other Defendants – some of which were partially captured on audiotape by the Plaintiffs), the Court cautioned Defendants strongly against any further retaliation or coercive behavior. Id. at * 10-11. Acknowledging Defendants’ need to communicate with putative participants in order to defend the case, the Court permitted future communication with those individuals, but required that any further written communication contain an “introductory paragraph” with specified language in a font “that is bold and larger than the text contained in the body of the communication”, reading:

This communication represents the opinion of the management of Club Onyx. It is unlawful for Club Onyx, its management, or any other Defendant, to retaliate against employees who choose to participate in this case or assist Plaintiffs' counsel in this case.

Id. 

Interaction with putative class members is one of the most difficult and subtle aspects of class action defense. It is important to consider all of the ramifications of any proposed communication, even when the subject matter does not directly relate to the lawsuit, before implementing a communication strategy. Employers do not want to put themselves in a position whereby by court mandate the credibility of their communication is expressly circumscribed.

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In the food service industry, an employer can take a tip credit against the minimum wage for customarily tipped employees, such as servers, bus persons and bartenders.  Under federal law, a restaurant can pay employees holding such positions $2.13 per hour, rather than $7.25 per hour, as long as the employees receive sufficient tips to make up the difference and the tips are only retained by customarily tipped employees.  For years, an issue that has bedeviled industry employers is how to handle prep time and clean-up time as in most establishments there is a period of time pre and post-shift and potentially even during busy hours, in which customarily tipped employees perform prep work and maintenance work.  Can a tip credit be taken for the entire shift?

The United States Department of Labor through its Field Operations Handbook has long taken the position that an employer may take a tip credit for time spent on prep and maintenance only if it consists of less than 20% of the employee’s shift.  The United States District Court for the Western District of Missouri recently addressed this issue, and upheld the USDOL’s position. However, the court stayed the pending FLSA action (involving over 5,000 plaintiffs) and allowed an immediate appeal to the United States Court of Appeals for the Eighth Circuit.   If the appeal is accepted, the Eighth Circuit will determine whether the USDOL’s position is consistent with the language and intent of the Fair Labor Standards Act.   

The Circuit court would have to balance the conflicting positions of industry employers with that of employees and employee advocacy groups.  Industry employers assert this prep and maintenance work is part and parcel of the job duties that result in tips and accordingly the key inquiries should be solely whether the non-tipped duties were part of the continuum of the tipped duties (i.e., the direct customer service duties) and whether the individual received sufficient tips to make up the tip credit.  Employee advocates argue that the 20% rule provides employers with necessary leeway to assign non-tipped duties during a shift, but provides an inappropriate windfall by only having to pay a subminimum wage for non-tipped work that should be compensated at the standard minimum wage or higher.  See Fast v. Applebee's Int'l, Inc., 2010 U.S. Dist. LEXIS 19571 (W.D. Mo. Mar. 4, 2010).

Of course, at all times, state law must be consulted.  Some states do not allow any tip credit; other states allow a lesser tip credit than federal law and many states impose tangents on its application.  For example, in some states the tip credit cannot be taken for any hour in which more than a de minimis amount of prep or maintenance work is performed.

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 The FLSA, as we know, is structured largely on a “workweek basis.” See, e.g. Bright v. Houston Northwest Medical Center Survivor, Inc., 934 F.2d 671, 678 (5th Cir. 1991). The standalone nature of each workweek can have draconian results for employers who overpay (intentionally or otherwise) in some workweeks, but underpay in others, as offsets generally only are available within the same pay period (and even then in limited circumstances). See, e.g. Herman v. Fabri - Centers of Am., 308 F.3d 580, 590 (6th Cir. 2002); Howard v. City of Springfield, Ill., 274 F.3d 1141, 1149 (7th Cir. 2001); also see Conzo v. City of New York, 2009 U.S. Dist. LEXIS 101949 (S.D.N.Y. Oct. 23, 2009)(observing that neither the FLSA nor DOL regulation define the time period for which offsets may apply).

However, one line of cases, based largely in “equity” (i.e., fairness), and exemplified by Singer v. City of Waco, Texas, 324 F.3d 813, 817 (5th Cir. 2003), permits offset against FLSA damages for overpayments made in other workweeks within the limitations period, or for already used (though unlawful!) compensatory overtime taken by the employee/plaintiff within the period. The Singer line of cases permitting this ‘cumulative’ offset was cited with approval and applied last week in Bray v. Dog Star Ranch, 2010 U.S. Dist. LEXIS 21983 (W.D. Mich. Mar. 10, 2010).

In Bray, two former employees had agreed to “bank” all hours worked over 40 in a workweek and take them as compensatory time in subsequent workweeks. This clearly violated the FLSA as “comp time” cannot be utilized in lieu of overtime with private sector non-exempt employees. However, during part of the time period at issue the employer paid the two employees for a full 40 hours, even when they worked fewer. In accepting the Defendants’ argument that they should receive a credit against overtime owed for those overpayments, Chief Judge Maloney wrote:

Plaintiffs are entitled to be made whole; they are not entitled to a windfall at Defendants' expense. Equity requires Defendants be credited with overpayments made to Plaintiffs during their employment. During certain pay periods, Defendants paid Plaintiffs as though they worked forty hours a week, even though Plaintiffs worked less than the hours for which they were paid. Defendants are entitled to a credit for those overpayments. Accordingly, this court agrees with Defendants that they are entitled to an offset.

Until the Supreme Court resolves these differing lines of case law, employers cannot rely with certainty on an offset defense based on overpayments in other pay periods. However, relevant circuit court decisions must be reviewed, as some courts do recognize this equitable defense.

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The Ninth Circuit Court of Appeals recently ruled that the FLSA does not restrict employer-mandated tip-pooling arrangements when no tip credit is taken by the employer against the minimum wage obligation.  Cumbie v. Woody Woo, Inc., et al., No. 08-35718 (9th Cir. Feb. 23, 2010).  Further, the Court rejected the DOL’s regulation at 29 C.F.R. § 531.35, and held that the employees in Woody Woo had no legal right under the FLSA to retain all of their tips, except where the tip credit is taken by their employer. 

In Woody Woo, all tips received by the restaurant went into a “tip pool”, the proceeds from which were redistributed to all employees, including the kitchen staff, who (it is universally understood) are not “customarily tipped” for the purposes of the FLSA in the restaurant industry.  Importantly, all employees received an hourly wage that complied with both federal and Oregon minimum wage laws: again (it can’t be said enough), no tip credit was taken. 

Based on this decision, in states where state wage-and-hour laws track the FLSA (or states with no applicable state wage law), especially those within the Ninth Circuit, employers may want to consider tip pooling arrangement similar to the one addressed by Woody Woo. Where the FLSA is the only statute at issue, Woody Woo stands for the proposition that, provided all employees receive the federal minimum wage (currently $7.25/hour), tips can be collected and redistributed to the entire labor pool, or even potentially kept by management, without violating the FLSA. 

However, in many states, state wage and hour laws expressly  prohibit the construct Woody Woo authorizes. In New York, for example, tip pooling and tip distribution is limited to voluntary pooling among employees who “customarily” receive tips and an employer or its agent cannot retain any tips. N.Y. Labor Law § 196-d.

Finally, even in states with no state law restrictions, common law theories of contract, quantum meruit or unjust enrichment (which are part of most states’ common laws), or statutory theories under consumer protection or business practices statutes can be utilized by employees to attack tip distribution arrangements where any tips are siphoned away from employees engaged in direct service. This concern is underscored if the customer is not explicitly advised that non-service personnel may receive a portion of tips. 

Further discussion of this decision can be found on www.JacksonLewis.com by clicking here.

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Determining whether an entity is covered by the Fair Labor Standards Act is not an easy analysis. One basis for jurisdiction is "enterprise coverage."

On March 3, Magistrate Judge Azrack of the Eastern District of New York ruled on summary judgment that St. Augustine’s Episcopal Church of Brooklyn is not an “enterprise” for purposes of the FLSA, and accordingly dismissed FLSA claims asserted by a former on site caretaker and custodian. Locke v. St. Augustine's Episcopal Church, 2010 U.S. Dist. LEXIS 18749 (E.D.N.Y. Mar. 3, 2010). In reaching this decision, Magistrate Azrack first declined to treat the church and the Diocese of Long Island (which was not named separately as a defendant) as a single enterprise. The court then focused its analysis on whether St. Augustine’s secular activities (principally, hosting functions and renting an apartment to the plaintiff at a below-market rate) rendered it an enterprise engaged in commerce.

Distinguishing Boekemeier v. Fourth Universalist Soc'y, 86 F. Supp. 2d 280 (S.D.N.Y. 2000) (as well as the Supreme Court’s decision in Tony & Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290 (1985)), the court ruled that “The undisputed facts show that St. Augustine's does not perform rental activity as a ‘business operation on the side.’” Id. at * 27. Unlike in Boekemeier and Alamo, the limited rental of St. Augustine’s function hall space (which the church did not advertise or maintain a staff to service and promote) did not make St. Augustine’s an enterprise because the church did not compete with commercial establishments, and the income earned was not substantial. Based on this analysis, the Court held that “Locke has not met the burden of establishing that St. Augustine's performed any activities for a business purpose. St. Augustine's does not constitute an enterprise.”
 

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In today's Employment Law 360 (subscription required), Jackson Lewis partner and leader of the Firm's Wage and Hour Practice Group offered his thoughts on a variety of wage and hour-related topics, including what he sees as the next wave of wage and hour cases:

These days, the plaintiffs’ bar is very focused on uncompensated increments of time, particularly at the start and end of the workday. Tip credit cases are big following [Fast v. Applebee's].

Independent contractor misclassification will continue to be a point of emphasis for DOL as well as the private bar. Most employers are out of compliance, and the best plaintiffs’ lawyers are always on the look-out for violations affecting a sizeable number of workers that can make a class or collective action viable.

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