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

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

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

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

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

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Litigation regarding what constitutes a “retail or service establishment,” under the “7(i)” or “retail sales” exemption continues. We recently reported a district court decision applying the exemption to employees selling precious metals. See La Parne v. Monex Deposit Co., 2010 U.S. Dist. LEXIS 59768 (C.D. Cal. Apr. 29, 2010).  Just a couple of months later, another district court analyzed the applicability of the exemption, this time to a company that provides window washing services primarily to commercial high rise buildings that are paid for by a management company, not the individual tenants. Alvarado v. Corporate Cleaning Service, Inc., 2010 U.S. Dist. Lexis 62378 (N.D. Ill. June 21, 2010).

The Court explained that to fall within the definition of a retail or service establishment, two requirements must be met: (1) the establishment cannot earn more than 75% of its revenue from goods or services that are provided for resale; and (2) it must be recognized as retail in the particular industry. Plaintiffs argued the window washing services were resold (and not retail) because the defendant did not contract directly with the commercial or residential tenants to provide the service, but instead, with management companies, who then recovered the cost of such work either through rent, property management fees, or assessments. Therefore, the services were bought by the management company and then resold to the tenants.  The Court rejected this assertion, and held the building management companies were “merely conduits,” or agents facilitating the purchase of window washing services, not middlemen reselling window washing services. 

The Court also found the services were “recognized as retail in the industry” because they were sold to the general public (even though most of their customers were commercial clients, not residential clients, rejecting plaintiffs’ argument that the exemption only applies to residential sales); the services met the “everyday needs of the community”; the services were provided at the end of the stream of distribution; and the defendant did not engage in manufacturing. The Court also held the mere fact the services were sold to corporate accounts with multiple buildings (as opposed to individual owners or those with a single building), did not transform the sale to a “wholesale” transaction. The Court also rejected plaintiffs’ argument that providing proposals to customers estimating the cost of the services were not “retail” transactions, finding such proposals are not akin to competitive bidding (which Department of Labor regulations state are not recognized as retail).

Nevertheless, despite holding plaintiffs were employed by a “retail or service establishment,” the Court denied summary judgment to the employer finding a question of fact existed whether plaintiffs satisfied another requirement necessary to establish the exemption—being paid more than 50% in commissions. Plaintiffs were paid using a point system, whereby they were compensated based on the number of jobs completed. Each job was assigned a number of points based on the number of windows washed. Thus, the quicker and more efficiently the plaintiffs worked, the more they earned per hour.  The Court held a commission exists when there is some relationship or correlation between compensation paid to the employees and the amount charged to the customers. The court found questions of fact remained regarding whether a true nexus existed between pay received and the amount charged to the customer based on evidence produced by the plaintiffs that on occasion, the labor cost charged to a customer did not fluctuate based on the number of points.   

Employers relying on the 7(i) exemption under federal law should review the relevant regulations and cases to ensure that the business qualifies as a “retail or service establishment” and that the compensation it provides is a “commission” as defined in the case law.

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