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

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

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

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

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

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

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

All employers must ensure compliance with this new legal mandate.

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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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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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On Friday, May 21, 2010, the Department of Labor, Wage and Hour Division held a public Stakeholder Forum, during which key members of the Wage and Hour Division (WHD) discussed WHD's goals and regulatory agenda. Jackson Lewis attended the Forum. 

After welcoming the crowd, Nancy Leppink, the WHD Deputy Administrator pointed out some of WHD's accomplishments over the past year, including hiring 250 new investigators (with plans to hire 100 more in 2010) and starting the “We Can Help” campaign, aimed to reach vulnerable workers who wouldn’t otherwise report violations and non-compliance.

Next, Michael Hancock, WHD's Acting Director of Interpretation and Regulatory Analysis, explained that WHD's performance goals are to: (1) ensure that the most vulnerable workers are employed in compliance with wage and hour laws; (2) make certain that employers, including the most persistent violators, are brought into and maintain compliance with the laws enforced by the WHD; (3) foster a customer-oriented, quality-driven culture with WHD; (4) issue prevailing wage determinations that are current and accurate; and (5) pursue regulatory initiatives that broadly support and advance the Department of Labor’s vision.  Mr. Hancock indicated that to achieve these goals, WHD will:  (1) target industries in which violations are most likely to occur; (2) employ resources-leveraging strategies and technologies to affect compliance; (3) pursue corporate-wide compliance strategies to ensure that employers take on responsibility for their compliance behavior; (4) target public awareness and outreach efforts to workers populations and industries in which workers are reluctant to report violations; (5) use  penalties, sanctions, the FLSA hot goods provision, and similar strategies – as appropriate – to ensure future compliance among violators and to deter violations among other employers; and (6) implement revised Davis-Bacon wage survey processes to improve the quality and timeliness of wage determinations.

Mr. Hancock then turned to WHD’s regulatory agenda and discussed the newly issued regulations for child labor in non-agriculture, previously discussed here.  He also advised that WHD is planning to develop regulations covering the following issues with the goal of better advising both employers of legal obligations and employees of their rights to prevent violations in the first place:

1. Non-displacement of qualified workers under service contracts.  Consistent with President Obama's Executive Order, the regulations would require a covered employer to offer employment to a predecessor's employees;
2. The statutory changes to the FMLA imposed by the expanded rights to leave for active military veterans;
3. Recordkeeping obligations under the FLSA.  Such regulations would potentially require employers to advise all individuals performing services of whether they are classified as employees or contractors and provide an explanation for such determination.  (The pending Employee Misclassification Act seeks to impose similar obligations).  WHD would also like the regulation to codify burden shifting analysis for recordkeeping violations originally stated in Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946), and clarify record keeping obligations for live-in domestics;
4. Application of the FLSA to domestic services companions; and
5. Child labor in agriculture. 

Employers must recognize that the newly aggressive WHD is focusing on compliance and consider internal or external audits to review wage and hour compliance.  Employers in traditional low wage industries must take special notice of the WHD's initiatives.

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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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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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On April 22, 2010, a revised version of the Employee Misclassification Prevention Act (“Act”) was introduced. If enacted, the Act, would amend the FLSA and provide a host of new enforcement mechanisms and penalties to combat employer use of the “independent contractor” classification to avoid minimum wage and overtime payment obligations.

If passed the Act would (among other provisions):

• require employers to keep records reflecting the correct status of each worker as an employee or nonemployee (which the FLSA currently does not require);

• require employers to notify workers in writing of their classification as an employee or nonemployee (not required); and

• make it unlawful to retaliate against non-employee workers who advocate for their rights under the Act (as discussed here, the FLSA does not typically protect non-employees from retaliation for seeking alleged unpaid monies).

Due to the federal and state focus on misclassification, all employers should closely review whether contractors are “economically dependent” on the business as well as (1) the degree of control exercised by the employer over the workers; (2) the workers' opportunity for profit or loss and their investment in the business; (3) the degree of skill and independent initiative required to perform the work; (4) the permanence or duration of the working relationship; and (5) the extent to which the work is an integral part of the employer's business.” See, e.g. Velu v. Velocity Express, Inc., 666 F. Supp. 2d 300 (E.D.N.Y. 2009). 

A more detailed Jackson Lewis analysis of the proposed legislation is available here.

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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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Employers must not only ensure compliance with the federal minimum wage but also any applicable state minimum wage.  Nevada’s minimum wage is dependent on whether an employer offers qualified health insurance benefits.  Effective July 1, 2010, the Nevada minimum wage increases to $8.25 per hour for employers that do not offer qualified health insurance benefits, and to $7.25 per hour for employees that do offer such benefits.   While the $7.25 rate comports with the FLSA, it is still relevant to Nevada employers as Nevada requires payment of daily overtime if an employee works more than 8 hours in a day and has a regular rate of pay of less than 1½ times the state minimum wage. 

For further information, see Nevada Minimum Wage, Daily Overtime to Increase on July 1 at http://www.jacksonlewis.com/legalupdates/article.cfm?aid=2037. 

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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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For years, students and recent graduates have accepted internships with employers to gain work and practical experience.   Many, if not most, employers have treated and continue to treat these internships as “unpaid.” What’s more, in many industries (including film and advertising) this practice is an institutional rite of passage – part of “dues paying”.  Recent actions and pronouncements by representatives of the federal and various state departments of labor require employers to review their practices to ensure that good intentions (or professional rites of passage) are not leading to wage and hour liability. 

Technically, under the FLSA, there is no such thing as an “intern.”  In general, in order for an employer to avoid any minimum wage obligations an individual must be a “volunteer” or a “trainee”.  Since volunteers generally are not recognized in the for-profit sector, the utility of that classification is limited.   Thus interns, if they are to be unpaid, most likely must be “trainees” for FLSA purposes. In order to determine if an individual is a “trainee” exempt from minimum wage, the following six factors generally must be satisfied. 

1.      The training, even though it includes actual operation of the facilities of the employer, is similar to what would be given in a vocational school or academic educational instruction;

2.      The training is for the benefit of the trainees;

3.      The trainees do not displace regular employees, but work under their close observation;

4.      The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded;

5.      The trainees are not necessarily entitled to a job at the conclusion of the training period; and

6.      The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

The rub is that in many instances the intern is performing productive work that would normally be performed by a paid employee. In such a situation, even if the intern is receiving school credit, minimum wage is due under the FLSA.  In fact, per Nancy J. Leppink, the acting director of the USDOL’s Wage and Hour Division: ““If you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law.”   It is also vital for those with internship programs to note that M. Patricia Smith, the Solicitor of Labor responsible for coordinating the Wage and Hour Division, initiated investigations against several businesses for their use of interns during her tenure as New York Commissioner of Labor.

As always, state law also must be considered.  While many states track the FLSA standard, there are various differentiations particularly relevant to multi-state employers.   For example, in New York, if an individual is receiving school credit, the individual generally is exempt from minimum wage payment obligations under state law.

What is the takeaway?  Businesses need to analyze exactly what the intern will do during the internship.  If the intern’s time will be spent primarily on productive work that would normally be performed by another employee, the business should consider paying the intern minimum wage to avoid any trailing legal issues.

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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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On March 23, President Obama signed a bill which amended the FLSA to require most covered employers to provide breaks to mothers for the purposes of breastfeeding (as well as furnish private space for them to do so).  While the new law does not require that nursing mothers be paid for such break time, state law may.  An in depth analysis of the new law is available 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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