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

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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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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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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California Governor Jerry Brown recently signed the new law regarding “willful” misclassification of independent contractors under the California Labor Code summarized previously.  Further details regarding the enactment of this new law are available at the Jackson Lewis California Workplace Law Blog here.

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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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California, like several other states including Massachusetts and New York, has historically been harsh on employers which abuse the independent contractor designation, classifying individuals who are integrated into their business and function as employees as contractors for the purposes of avoiding tax and wage costs. In fact, Federal Express’ now decade-long battle with courts and agencies over its classification of drivers as independent contractors originates in part from the California state appellate decision in Estrada v. Fedex Ground Package System, Inc., 154 Cal. App. 4th 1 (2007). Now, the California legislature has added a new measure which, barring an unlikely veto, expands misclassification liability further.

Senate Bill 459, passed on September 8, 2011, would make it unlawful for any “person” to willfully misclassify an individual as an independent contractor—not just for a statutory “employer” to do so. This raises the specter of individual liability for misclassifications under the new law. The bill also imposes a penalty of $5,000 to $15,000 for each violation, with escalators to the $10,000 to $25,000 range based on the finding that a given person or company has engaged in a “pattern or practice” of violation. The law also provides that anyone found in violation must post a notice to employees and the public regarding the violation, potentially creating a “ripple effect” for further claims. 

Violations of 459 are predicated on “willful misclassification”, which is defined as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” This broad language, with the conjunctive requirements of voluntariness and knowledge, will create ambiguities (and of course litigation) in the wake of the law’s passage as to interpretation of this definition.

The difficult and expensive wage-and-hour compliance environment in California is not news. However, this new enactment, once it receives the likely approval of Governor Brown, would expand exposure both in terms of potentially liable parties (i.e., individuals) and the costs of misclassification. Any entity or individual conducting business in the State of California which has not yet analyzed its classification of workers as contractors is well advised to do so now.

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While it is generally understood that decisions of courts apply retroactively (as interpretations of the law) while newly enacted statutes do not (as pronouncements of new law) unless expressly provided by the statutory language, challenges to these principles often arise, especially when the decision or enactment modifies recoverable damages. In a victory for employers, Massachusetts’ highest court ruled last week that the 2008 legislation which created a “treble damages” remedy for violations of the Massachusetts Wage Act applies only to violations which occurred after the statute’s enactment date of July 12, 2008. Rosnov v. Molloy, 2011 Mass. LEXIS 735 (Mass. Aug. 31, 2011). This decision is in accord with a prior federal court decision.  DiFiore v. Am. Airlines, Inc., 688 F. Supp. 2d 15 (D. Mass. 2009).

Rosnov concerned an attorney who worked for a separate law office and, after leaving that office, was able to prove at trial that she was entitled to a commission for a referral based on an oral contract.  Following the jury’s verdict, plaintiff argued to the trial court that the treble damages provision should apply even though her claim was brought in 2007 and related to events occurring in an earlier time period. The trial court agreed, and awarded treble damages.  In analyzing the case under the traditional rule regarding retroactivity, the Supreme Judicial Court of Massachusetts observed that “the distinction between legislation that concerns ‘substantive rights,’ and legislation that concerns ‘procedures’ and ‘remedies,’ has proved to be difficult to draw.” Nevertheless, the court ruled that “Absent an express legislative directive to the contrary . . . the mandatory treble damages . . . should not be retroactively applied.” Finding no such express directive, the court held that the provision did not apply to claims accruing before the enactment date of July 12, 2008.   

While this ruling is favorable to employers, and hopefully will inform courts analyzing retroactivity of damages provisions  under other statutes, such as New York’s Wage Theft Prevention Act (and the decisions to date have indicated the statute does not apply retroactively), the harsh reality in Massachusetts is that the treble damages provision remains applicable for wage claims accruing after July 2008, creating significant potential liabilities.

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

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

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

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

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

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

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

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The 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, 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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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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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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During the week of April 26, senior Labor Department officials discussed upcoming rules and initiatives. In a web chat, Nancy Leppink, deputy administrator of the Wage and Hour Division, stated that the agency will issue proposed rules covering numerous areas including companionship services, child labor and recordkeeping within the next 18 months.    The proposed recordkeeping rules are the most imminent and are expected in August.  Not surprisingly, these proposed rules will focus on the use/misuse of the independent contractor classification by employers.   Ms. Leppink indicated that the rules should "enhance awareness among workers of their status as employees or independent contractors" and may even require employers to explain to any contractor the basis for a contractor, non-employee classification.  In fact, a 2010 Regulatory Agenda Fact Sheet addressing the proposed recordkeeping regulations includes the following statement - "DOL is considering a proposed rule requiring covered employers to notify workers of their rights under the FLSA, and to provide information regarding hours worked and wage computation. Any employers that seek to exclude workers from the FLSA’s coverage will be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to give to WHD enforcement personnel who might request it."  The Fact Sheet can be accessed via this link.

Ms. Leppink's comments mirror those of Deputy Labor Secretary Seth Harris.  At a conference, Mr. Harris discussed the DOL's "misclassification initiative", which encompasses various labor department agencies as well as the IRS and several state agencies.  Mr. Harris stated that the goal of the initiative is to ensure "employers will no longer be able to opt employees out" of statutory and regulatory protections.  

With an increasingly aggressive USDOL, employers must continue to take steps to ensure their practices, especially in regard to employee classification, comply with federal and, as applicable, state law.

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