Third Circuit Addresses Individual Liability, Joint Employment and Successor Liability Under the FLSA

by Michael D. Thompson

In Thompson v. Real Estate Mortgage Network, the Third Circuit addressed a variety of ways in which a plaintiff could pursue claims against entities that claimed they were not her employer.

The plaintiff was hired as a mortgage underwriter by defendant Security Atlantic Mortgage Company (“SAMC”).  Allegedly in response to an investigation being conducted into SAMC 's mortgage practices, the plaintiff and others were directed to complete job applications for Real Estate Mortgage Network ("REMN"), a “sister company” of SAMC.  The plaintiff completed the application, and subsequently her paychecks were issued by REMN instead of SAMC, and SAMC became "defunct.”

The Plaintiff’s Claims

After leaving REMN, the plaintiff filed a complaint U.S. District Court for New Jersey, alleging that she was misclassified as an exempt employee and unlawfully deprived of overtime. 

The plaintiff sued REMN and SAMC, and also sued two individuals who were co-owners and executives for SAMC (and later became officers of REMN).  The plaintiff contended those individuals were joint employers by virtue of their positions with the defendant companies, and therefore were "personally, jointly and severally liable for the violations” of the FLSA and the New Jersey Wage and Hour Law.

The District Court dismissed the plaintiff's complaint without prejudice pursuant to Rule12(b)(6), and she appealed to the Third Circuit.

Joint Employment

The Third Circuit found that the plaintiff’s allegations were sufficient to state a claim that SAMC and REMN were joint employers under the FLSA based on the “Enterprise test” set forth in In re Enterprise Rent-A-Car Wage & Hour Emp't Prac. Litig., 683 F.3d 462, 467-68 (3d Cir. 2012), which looks to the following non-exhaustive list of factors:

(1)    the alleged employer's authority to hire and fire;

(2)    the alleged employer's authority to promulgate work rules and assignments and to set the employees' conditions of employment (compensation, benefits, and work schedules, including the rate and method of payment);

(3)    the alleged employer's involvement in day-to-day employee supervision, including employee discipline; and

(4)    the alleged employer's actual control of employee records, such as payroll, insurance, or taxes.

The Third Circuit held that the plaintiff had stated a claim for joint employment status by alleging that (i) an employee of REMN trained SAMC employees, (ii) REMN and SAMC were referred to as "sister companies," and (iii) Plaintiff and some other SAMC employees were “abruptly and seamlessly” integrated into REMN's business, and some employees continued to be paid by SAMC even after that integration.

The Third Circuit did not address joint employer status under the New Jersey Wage Hour Law.

Successor Liability

The Third Circuit then concluded that REMN could be liable not only for its own violations, but also for the violations of SAMC as a successor corporation. 

The Third Circuit applied a federal common law standard, which considers (1) continuity in operations and work force of the successor and predecessor employers; (2) notice to the successor-employer of its predecessor's legal obligation; and (3) ability of the predecessor to provide adequate relief directly.

The Third Circuit concluded that the plaintiff had alleged facts sufficient to support such liability, because it contended that all facets of the business at issue, including work in progress, operations, staffing, office space, email addresses and employment conditions remained the same whether plaintiff was an employee of SAMC or REMN. 

The Circuit Court stated that, for the same reasons, the plaintiff could pursue atheory of successor liability under the New Jersey Wage and Hour Law.

Individual Liability

In regard to the individual defendants, the Third Circuit cited to case law under the FLSA and FMLA providing that an individual may be subject to liability when he or she exercises "supervisory authority over the complaining employee and was responsible in whole or part for the alleged violation" while acting in the employer's interest.  An individual supervisor has adequate authority over the complaining employee when the supervisor "independently exercises control over the work situation."

For purposes of Rule 12(b)(6), the plaintiff satisfied these requirements by alleging that the individual defendants made decisions concerning “day-to-day operations, hiring, firing, promotions, personnel matters, work schedules, pay policies, and compensation," and were consulted when personnel issues arose at SAMC.   The Third Circuit did not address individual liability under the New Jersey Wage Hour Law.

In light of the foregoing, the Third Circuit reversed and remanded the case to the District Court.

Supreme Court To Decide Whether Employees Must Be Paid for Time Spent in Security Screenings

By John Fullerton

The U.S. Supreme Court has agreed to resolve a split among the federal circuits regarding whether time spent in security screenings is compensable under the Fair Labor Standards Act (FLSA), as amended in 1947 by the Portal-to-Portal Act.  The outcome of the case, Integrity Staffing Solutions v. Busk, could have a significant economic impact on employers who require employees to submit to security searches before or after they begin their workday if employers are required to pay for the time employees spend doing so.

The case arises from claims filed by two former employees of Integrity Staffing Solutions, which provides warehouse space and staffing to clients.  At the end of each shift, after clocking out, the employees were required to pass through a security clearance (including removal of wallets, keys and belts and passing through a metal detector) designed to prevent employee theft of goods, for which they waited upwards of 25 minutes without pay.

The issue is whether such security screenings are “integral and indispensable” to the employee’s principal work activities.  The Portal-to-Portal amendments to the FLSA preclude compensation for activities that are “preliminary” or “postliminary” to the “principal activity or activities,” unless those activities are “integral and indispensable” to those principal activities.  The applicable test is whether the activity is “necessary” to the principal work and done for the employer’s benefit.  Under this standard, for example, time spent donning and doffing protective gear in a meat packing plant has been found “integral and indispensable,” while time spent at work dressing in required uniforms that could be donned at home instead has been found not to be “integral and indispensable.” 

The district court dismissed the complaint based on decisions of the Second and Eleventh Circuits in 2007 that held that preliminary security screenings at the beginning of the workday were not compensable.  The Ninth Circuit reversed, finding that the complaint on its face, by alleging that “the security screenings are necessary to employees’ primary work as warehouse employees and done for Integrity’s benefit,” stated a “plausible claim for relief” under the FLSA sufficient to withstand a motion to dismiss.  The Ninth Circuit also found relevant the distinction between the preliminary screenings required in the Second and Eleventh Circuit cases, which in the former case applied to everyone who entered a nuclear power plant, and in the latter were mandated by Federal Aviation Administration rules, and the postliminary screening at issue in this case.  We see a compelling argument, however, that a security check at the end of the workday for employees with access to millions of dollars of merchandise is neither “necessary” to the work they perform (certainly not in the same sense as wearing protective gear when working with sharp knives all day) nor solely for the employer’s benefit, as prevention of theft is a public concern that benefits everyone in numerous ways.

Because of relative ease in which an individual claim under the FLSA can be elevated to a collective action involving hundreds or even thousands of employees provided they are “similarly situated” to the lead plaintiff, the stakes are high for employers.  As stated in the brief on behalf of several amici in favor of Integrity, including the U.S. Chamber of Commerce, “the Ninth Circuit’s decision has created nationwide legal uncertainty and enormous potential financial liability for thousands of employers.”  (Petition at 11).  The case will not be decided until the next Supreme Court term that begins in October 2014.

New York Federal District Court Awards Undocumented Immigrants FLSA Damages

by Robert S. Groban, Jr.

On December 19, 2013, the U.S. District Court for the Southern District of New York denied the defendant’s motion for discovery regarding the plaintiffs’ immigration status in Colon v. Major Perry St., Inc., No. 1:12-cv 03788 (S.D.N.Y. 2013).

In Colon, several workers, some of whom are undocumented aliens, sued under the Fair Labor Standards Act (“FLSA”) to recover minimum and overtime wages that the employer refused to pay. The defendant argued that under the Second Circuit’s decision in Palma v. NLRB, 723 F.3d 176 (2nd Cir. 2013), the plaintiffs were barred from collecting back pay under the FLSA if they were here illegally. In Palma, the Second Circuit held that the workers, who were undocumented aliens at the time they were fired, were precluded from collecting back pay under the National Labor Relations Act.

The district court explained that the text of the FLSA made clear that its provisions were “unambiguously” intended to apply to undocumented workers by defining the term “employee” as “any individual employed by the employer.” The court further noted that the FLSA focuses on back pay as a remedy to ensure that employers don’t gain an advantage by violating immigration laws. If this were not the case, then employers would be exempt from wage and hour standards for undocumented employees. Applying the FLSA to undocumented workers, the court found, furthers the purpose of the Immigration and Reform Control Act—to punish employers for employing undocumented workers.

This case serves as another critical reminder to employers that unauthorized aliens are covered under the FLSA’s definitions of an “employee” and, thus, are entitled to the statutory mandated wages for work performed. In other words, employers that hire unauthorized aliens still must comply with federal labor and employment laws.

Read more from our recent Immigration Alert.

Tipped Employees Under the FLSA

Our colleagues Kara Maciel and Jordan Schwartz, both of Epstein Becker Green, recently cowrote an article for PLC titled "Tipped Employees Under the FLSA."

Following is an excerpt:

Wage and hour lawsuits certainly are not new phenomena, but in recent years, service industry employees have increasingly made claims regarding tips and service charges. In particular, employers in states such as Massachusetts, New York and California have seen a surge in class actions involving compulsory tip pools and distributions of service charges to employees. Commonly targeted employers include large restaurant and coffee chains, as well as upscale eateries, many of which feature celebrity chefs.

The US Department of Labor (DOL) Wage and Hour Division (WHD) under the Obama Administration has taken an aggressive stance against wage and hour violations, leading to strict rules regarding proper tip pooling and service charge practices. As a result, many businesses with tipped employees, most notably in the food service and hospitality industry, face significant legal exposure arising from improper practices relating to the retention and distribution of tips and service charges.

To help employers comply with this complex and developing area of the law, this Note discusses and explains:

  • Federal law on tips and service charges and the interaction with state laws.
  • Who are considered tipped employees.
  • Disbursement of tips and service charges.
  • Tip pooling requirements.
  • States experiencing a high volume of class action litigation on this topic.
  • Best practices for compliance.

Download the full article, here, in PDF format.

Take 5 Views You Can Use: Wage and Hour Update

By: Kara M. Maciel

The following is a selection from the Firm's October Take 5 Views You Can Use which discusses recent developments in wage hour law.

  1. IRS Will Begin Taxing a Restaurant's Automatic Gratuities as Service Charges

Many restaurants include automatic gratuities on the checks of guests with large parties to ensure that servers get fair tips. This method allows the restaurant to calculate an amount into the total bill, but it takes away a customer's discretion in choosing whether and/or how much to tip the server. As a result of this removal of a customer's voluntary act, the Internal Revenue Service ("IRS") will begin classifying automatic gratuities as service charges, taxed like regular wages, beginning in January 2014.

This change is expected to be problematic for restaurants because the new treatment of automatic gratuities will complicate payroll accounting. Each restaurant will be required to factor automatic gratuities into the hourly wage of the employee, meaning the employee's regular rate of pay could vary from day to day, thus adding a potential complication to overtime payments. Furthermore, because restaurants pay Social Security and Medicaid taxes on the amount that its employees claim in tips, restaurants are eligible for an income-tax credit for some or all of these payments. Classifying automatic gratuities as service charges, however, would lower that possible income-tax credit.

Considering that the IRS's ruling could disadvantage servers as well, restaurants may now want to consider eliminating the use of automatic gratuities. Otherwise, employees could come under greater scrutiny in reporting their tips as a result of this ruling. Furthermore, these tips would be treated as wages, meaning upfront withholding of federal taxes and delayed access to tip earnings until payday.

Some restaurants, including several in New York City, have begun doing away with tips all together. These restaurants have replaced the practice of tipping with either a surcharge or increased food prices that include the cost of service. They can then afford to pay their servers a higher wage per hour in lieu of receiving tips. This is another way for restaurants to ensure that employees receive a sufficient wage, while simultaneously removing the regulatory burdens that a tip-system may impose.

  1. The New DOL Secretary, Tom Perez, Spells Out the WHD's Enforcement Agenda

On September 4, 2013, the new U.S. Secretary of Labor, Tom Perez, was sworn in. During his remarks, Secretary Perez outlined several priorities for the U.S. Department of Labor ("DOL"), including addressing pay equity for women, individuals with disabilities, and veterans; raising the minimum wage; and fixing the "broken" immigration system.

Most notably, and unsurprisingly, Secretary Perez emphasized the enforcement work of the Wage and Hour Division ("WHD"). Just last year, the WHD again obtained a record amount—$280 million—in back-pay for workers. Employers can expect to see continued aggressive enforcement efforts from the WHD in 2013 and 2014 on areas such as worker misclassification, overtime pay, and off-the-clock work. In fact, Secretary Perez stated in his swearing-in speech that "when we protect workers with sensible safety regulations, or when we address the fraud of worker misclassification, employers who play by the rules come out ahead." By increasing its investigative workforce by over 40 percent since 2008, the WHD has had more time and resources to undertake targeted investigation initiatives in addition to investigations resulting from complaints, and that trend should continue.

  1. DOL Investigates Health Care Provider and Obtains $4 Million Settlement for Overtime Payments

On September 16, 2013, the DOL announced that Harris Health System ("Harris"), a Houston health care provider of emergency, outpatient, and inpatient medical services, had agreed to pay more than $4 million in back wages and damages to approximately 4,500 current and former employees for violations of the overtime and recordkeeping provisions of the Fair Labor Standards Act ("FLSA"). The DOL made this announcement after the WHD completed a more than two-year investigation into the company's payment system, prompted by claims that employees were not being fully compensated.

Under the FLSA, employers typically must pay their non-exempt employees an overtime premium of time-and-one-half their regular rate of pay for all hours worked in excess of 40 hours in a workweek. Employers within the health care industry have special overtime rules. Notably, for all employers, an employee's "regular rate of pay" is not necessarily the same as his or her hourly rate of pay. Rather, an employee's "regular rate of pay" includes an employee's "total remuneration" for that week, which consists of both the employee's hourly rate as well as any non-discretionary forms of payment, such as commissions, bonuses, and incentive pay. The FLSA dictates that an employee's "regular rate" of pay is then determined by dividing the employee's total remuneration for the week by the number of hours worked that week.

The DOL's investigation concluded that Harris had failed to: (i) include incentive pay when determining its employees' regular rate of pay for overtime purposes, and (ii) maintain proper overtime records. As a result, Harris owed its employees a total of $2.06 million in back wages and another $2.06 million in liquidated damages.

Because an employee's "total remuneration" for a workweek may consist of various forms of compensation, employers must consistently evaluate and assess their payment structures and payroll systems to determine the payments that must be included in an employee's overtime calculations beyond just the hourly wage. Additionally, employers should conduct periodic audits to ensure that they are maintaining full and accurate records of all hours worked by every employee.

  1. Federal Court Strikes Down DOL Tip Pooling Rule

In 2011, the WHD enacted a strict final rule related to proper tip pooling and service charge practices. This final rule was met with swift legal challenges, and, this summer, the U.S. District Court for the District of Oregon ("District Court") concluded that the DOL had exceeded its authority when implementing its final rule. See Oregon Rest. and Lodging Assn. v. Solis, No. 3:12-cv-01261 (D. Or. June 7, 2013).

Inconsistent interpretations of the FLSA among various appellate courts have created confusion for both employers and courts regarding the applicability of valid tip pools. One of the most controversial interpretations of the FLSA occurred in early 2010, when the U.S. Court of Appeals for the Ninth Circuit held that an employer could require servers to pool their tips with non-tipped kitchen and other "back of the house staff," so long as a tip credit was not taken and the servers were paid minimum wage. See Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). According to the Ninth Circuit, nothing in the text of the FLSA restricted tip pooling arrangements when no tip credit was taken; therefore, because the employer did not take a tip credit, the tip pooling arrangement did not violate the FLSA.

In 2011, the DOL issued regulations that directly conflicted with the holding in Woody Woo. As a result, employers could no longer require mandatory tip pooling with back-of-the-house employees. In conjunction with this announcement, the DOL issued an advisory memo directing its field offices nationwide, including those within the Ninth Circuit, to enforce its final rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.

Shortly after the issuance of the DOL's final rule, hospitality groups filed a lawsuit against the DOL challenging the agency's regulations that exclude back-of-the-house restaurant workers from employer-mandated tip pools. The lawsuit sought to declare the DOL regulations unlawful and inapplicable to restaurants that pay employees who share the tips at least the federal or applicable state minimum wage with no tip credit. On June 10, 2013, the District Court granted the plaintiffs' summary judgment motion, holding that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The District Court stated that the language of Section 203(m) of the FLSA is clear and unambiguous; it only imposes conditions on employers that take a tip credit.

The District Court's decision may have a large impact on the tip pool discussion currently before courts across the country, especially if employers in the restaurant and hospitality industries begin to challenge the DOL's regulations. Given the District Court's implicit message encouraging legal challenges against the DOL, the status of the law regarding tip pooling is more uncertain than ever. Although the decision is a victory for employers in the restaurant and hospitality industry, given the aggressive nature of the DOL, employers in all circuits should still be extremely careful when instituting mandatory tip pool arrangements, regardless of whether a tip credit is being taken.

  1. Take Preventative Steps When Facing WHD Audits

In response to a WHD audit or inspection, here are several preventative and proactive measures that an employer can take to prepare itself prior to, during, and after the audit:

  • Prior to any notice of a WHD inspection, employers should develop and implement a comprehensive wage and hour program designed to prevent and resolve wage hour issues at an early stage. For example, employers should closely examine job descriptions to ensure that they reflect the work performed, review time-keeping systems, develop a formal employee grievance program for reporting and resolving wage and hour concerns, and confirm that all written time-keeping policies and procedures are current, accurate, and obeyed. Employers should also conduct regular self-audits with in-house or outside legal counsel (to protect the audit findings under the attorney-client privilege) and ensure that they address all recommendations immediately.
  • During a DOL investigation, employers should feel comfortable to assert their rights, including requesting 72 hours to comply with any investigative demand, requesting that interviews and on-site inspection take place at reasonable times, participating in the opening and closing conferences, protecting trade secrets and confidential business information, and escorting the investigator while he or she is at the workplace.
  • If an investigator wants to conduct a tour of an employer's facility, an employer representative should escort the investigator at all times while on-site. While an investigator may speak with hourly employees, the employer may object to any impromptu, on-site interview that lasts more than five minutes on the grounds that it disrupts normal business operations.
  • If the DOL issues a finding of back wages following an investigation, employers should consider several options. First, an employer can pay the amount without question and accept the DOL's findings. Second, an employer can resolve disputed findings and negotiate reduced amounts at an informal settlement conference with the investigator or his or her supervisor. Third, an employer can contest the findings and negotiate a formal settlement with the DOL's counsel. Finally, an employer may contest the findings, prepare a defense, and proceed to trial in court.

In addition, employers should review our WHD Investigation Checklist, which can help them ensure that they have thought through all essential wage and hour issues prior to becoming the target of a DOL investigation or private lawsuit.

Following these simple measures could significantly reduce an employer's exposure under the FLSA and similar state wage and hour laws.

DOL Extends FLSA Protection to Direct Care Workers

by Jeffrey H. Ruzal

On September 17, 2013, the U.S. Department of Labor (“DOL”) issued a final rule extending the federal minimum wage and overtime pay protection under the Fair Labor Standards Act (the “FLSA”) to many direct care or domestic service workers, including home health aides, personal care aides and nursing assistants. The rule will take effect on January 1, 2015. 

For almost 40 years, an exemption from the minimum wage and overtime requirements of the FLSA has applied to domestic service workers employed to provide “companionship services” for an elderly person or a person with an illness, injury, or disability. 

Under the new rule, direct care workers employed by home care agencies and other third parties will no longer be exempt from the minimum wage and overtime requirements. Individual workers who are employed directly by the person or family receiving companionship services will remain exempt under the FLSA. 

Furthermore, the tasks that comprise “companionship services” are now more clearly defined. “Companionship services,” according to the DOL, means services for the care, fellowship, and protection of persons who because of advanced age or infirmity cannot care for themselves. Such services include meal preparation, bed making, and clothes washing.

Direct care workers who perform medical or medically-related services for which training is a prerequisite are not considered companionship workers, and thus are not exempt from protection under the FLSA.

General household work can be “companionship services,” as long as it does not exceed 20% of the total weekly hours worked by the companion employee. If this 20% limit is exceeded, the employee must be paid in compliance with the minimum wage and overtime pay requirements of the FLSA. 

According to the DOL’s news release, there are an estimated 1.9 million direct care workers in the United States, nearly all of whom are currently employed by home care agencies. 

Supreme Court Raises Bar for Class Certification

By Stuart Gerson

Wage-hour lawsuits filed under the federal Fair Labor Standards Act (FLSA) represent one of the fastest growing and most problematic areas of litigation facing employers today, especially when such cases are brought as collective actions. A recent Supreme Court case based in class action analysis provides a potentially-useful analog for employers to stave off such collective actions.  

Class action criteria are set forth in Fed. R. Civ. P. 23, and they allow for one or more individual named plaintiffs to sue on behalf of a large – sometimes very large – group of unnamed employees, where: 1) the number of putative class members is so large that it would be impractical for them to participate; 2) where the putative class claims are defined by common questions of law or fact; 3) where the representative plaintiffs’ claims or defenses are typical of those of everyone else; and 4) where the named plaintiffs will fairly and adequately represent the interests of the rest of the putative class. 

The courts have long recognized, as did the drafters of Rule 23, that there are good reasons and bad reasons for a class action. Economy is the most prominent of the good reasons. The “opt out” feature of a Rule 23 class results in a single proceeding that allows relief for a large number of claimants. In the wage-hour context, it also protects against retaliation as to workers who benefit from the general anonymity and group force of the collective. All too frequently, however, a class action is brought to raise the economic risk to the defendant employer and so to force a large settlement of a case that might otherwise never have been mounted.

While class actions are not uncommon, it should be remembered that class treatment is an exception to the general way in which lawsuits are presented, and plaintiffs and their attorneys can go too far. The bell-weather case in that regard is Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011). However, Wal-Mart was in many ways unique, describing a potential nationwide class so large and crossing so many fields of activity for hundreds of thousands of workers at significantly different levels and locations that the lack of commonality among sometimes- competing claimants was not hard to understand. Still, the Supreme Court was divided and, in subsequent cases, some courts have tried to limit the application of Wal-Mart. The favored technique for that avoidance has been to hold that facts ultimately going to the merits of the suit cannot be explored at the class-certification phase of a case.

Plaintiffs’ lawyers took heart as to gaining such routine certification of class actions when the Supreme Court handed down its decision in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (decided February 27, 2013), upholding virtually-automatic certification of a securities fraud class action. However, it is clear that the holding in that case is dependent upon the unusual, judicially-created fraud on the market theory that essentially forestalls the need to weigh facts that might distinguish the reliance element of class members. The Court has now broken that collective heart.

Within the past few days, on March 27, 2013, the Supreme Court, in Comcast Corp. v. Behrend, No. 11-864, exploded the theory that merits analysis could not be undertaken in considering class certification. Comcast, while an antitrust case, not a wage-hour case, offers an instructive conclusion that should govern at least some of the more complex versions of the latter type.

A divided Court overturned a controversial Third Circuit decision that certified a class action against the cable television provider Comcast because the plaintiffs failed to establish that the case could manageably be tried as a class action. On the required element of money damages, plaintiffs failed to provide reliable evidence that common issues of fact and law predominated over individual issues—an absolute prerequisite for certification of a class action. The case arose from a suit filed by six cable subscribers in the Philadelphia area who claimed that Comcast violated federal antitrust laws. The trial court had certified the plaintiffs as representatives of a class of all Comcast cable television subscribers from the 650 franchise areas that comprise the entire Philadelphia market. A federal district court in Pennsylvania certified the class more than five years ago. A divided panel of the U.S. Court of Appeals for the Third Circuit affirmed the certification order in 2011. The majority was no doubt moved by the apparent fact that the only reason the plaintiffs’ lawyers sought class certification in this case was to coerce the defendant into settling without regard to the merits of the plaintiffs’ claims.

The Supreme Court held that the Third Circuit ran afoul of the Court’s precedents, namely Wal-Mart, when it refused to entertain arguments against respondents’ damages model that bore on the propriety of class certification simply because they would also be pertinent to the merits determination.  Taken in conjunction with Wal-Mart, Comcast should be of clear value, by analogy, in defending against collective action in the wage-hour context,  at least in those wage-hour cases that involve complex issues, numerous potential plaintiffs, multiple locations and, for example, classification issues that depend upon non-uniform employee activities. Where individual issues can be found to predominate over allegedly common ones, or where pleaded damages models don’t adequately reflect variant situations among workers, employers and their counsel have been given useful ammunition by the Supreme Court to examine relevant factual issues and to confine litigation to individual claims where the facts and law compel it before massive litigation costs and expansive risk obtain.

Wage & Hour FAQ #2: What to Do When a Wage Hour Investigation Team Arrives to Start Auditing

By Douglas Weiner

Last month, we released our Wage and Hour Division Investigation Checklist for employers and have received terrific feedback with additional questions. Following up on your questions, we will be regularly posting FAQs as a regular feature of our Wage & Hour Defense Blog.

In this post, we address an increasingly common issue that many employers are facing in light of aggressive government enforcement at the state and federal level from the Department of Labor.

QUESTION: If a DOL team of Wage Hour Investigators arrive unannounced demanding the immediate production of payroll and tax records and access to employees for confidential interviews what should we do?

ANSWER: An unannounced arrival to investigate signals some adverse information has been submitted to the DOL concerning your wage and hour practices from either an employee complaint or referral from another law enforcement agency such as a state or federal taxing authority, or even possibly from a competitor or labor union. Effectively managing the investigation from the very beginning is essential to obtaining the best possible results. First, advise the leader of the DOL’s investigation team that you are contacting your designated wage and hour representative  to promptly arrive to provide the investigators with assistance. Courteously direct the investigation team to a comfortable but secure location such as a conference room where normal business operations will not be disrupted.

Upon arrival, our practice is to verify the credentials of the investigators, and conduct an opening conference to ascertain the purpose and focus of the investigation. Our immediate goal is to engage the DOL in a discussion to learn what they are seeking. Clarifying the specific focus of the DOL’s inquiry enhances initial communication, and allows narrowly tailored responses. For clarity, we ask the DOL to provide written requests for documents and employee interviews. Reminding the DOL the employer has the right to cooperate with the investigation in a manner that does not disrupt normal business operations, we ascertain from our client and discuss with the DOL an acceptable protocol for the conduct of the investigation. 

Upon ascertaining the specific focus of the investigation, we advise the DOL we understand what they seek, and propose continuing the investigation in a few days after the identified documents have been gathered (and internally reviewed). We invite the investigators to our firm’s conference rooms where payroll records and other documents may be inspected without returning to our client’s facilities. If the lead investigator is unreasonable in demanding immediate access to records and employees, we consider requiring the DOL to obtain a subpoena. If possible it is preferable to establish an agreed protocol to an investigation to avoid giving the DOL reason to believe you have something to hide, the loss of control over the scope of the investigation and the benefits of good faith cooperation. 

In sum, we suggest three things to do, and three things not to do:

Do:

1.      Notify your representative immediately.

2.      Allow your representative to take control of the management of the DOL’s investigation.

3.      Maintain a courteous and forthright demeanor until your representative arrives.

Do not:

1.      Ask if the investigation has been prompted by a complaint.

2.      Ask the DOL to identify a complainant.

3.      Allow immediate inspection of records or employee interviews to take place before your representative has arrived or an opening conference has been conducted.

* * * * * * * * * *

In subsequent FAQs, we will discuss in more detail a protocol to produce documents, and what information your wage-hour representative needs to respond to DOL audits, whether scheduled or surprise. But, in the meantime, regular internal reviews and audits of your wage and hour practices and documentation is key to protecting against costly exposure from a government investigation.

Be sure to check out our Wage and Hour Division Investigation Checklist for more helpful tips and advice about preparing for and managing a Wage Hour Inspection.

Wage & Hour FAQ #1: How to Prepare for a Wage Hour Inspection

By: Kara M. Maciel

Earlier this month, we released our Wage and Hour Division Investigation Checklist for employers and have received a lot of great feedback with additional questions. Following up on that feedback, we will be regularly posting FAQs as a regular feature of our Wage & Hour Defense Blog.

In this post, we address a common issue that many employers are facing in light of increased government enforcement at the state and federal level from the Department of Labor.

QUESTION: “I am aware that my industry is being targeted by the DOL for audits and several of my competitors in the area are facing wage and hour investigations.  What should I be doing now to proactively prepare my company in the event we are next for an audit?”

ANSWER:  Even though your company may not be in the midst of an investigation, there are still several action items that you can implement to place your company is the best possible position to defend against any DOL investigation.  For example:

  • Check current 1099’s as well as all 1099’s going back several years and review the actual job duties of those persons paid as independent contractors to verify that they were not, in fact, employees.
  •  Examine all written job descriptions to ensure that they: (i) accurately reflect the work done, (ii) have been updated where necessary, and (iii) indeed justify the applicable exemptions.
  • Review time keeping systems to ensure that non-exempt employees are being paid for all work performed, including work pre- or post-shift and during meal breaks
  • Ensure that required payroll records and written policies and procedures are current, accurate, and compliant.

Training staff is another key component of protecting your company from costly wage and hour claims. Not only could all managers be familiar with the FLSA and state wage and hour laws, but all employees should understand their role in proper record keeping and overtime. Key managers and personnel should be aware of the DOL’s inspection rights and what the DOL can and cannot do while on your property.

Finally, developing a response team with legal counsel is critical to being prepared if an inspection official knocks on your door unannounced. The response team should be armed with information and protocols so they know how to address the DOL’s subpoenas, questions, document requests, and other investigative demands.

In subsequent FAQs, we will discuss in more detail who should participate in a response team and what information they need to have in the event of an unscheduled DOL audit. But, in the meantime, regular internal reviews and audits of your wage and hour practices and documentation is key to protecting against costly exposure from a government investigation.

* * * * * * * * * *

Be sure to check out our Wage and Hour Division Investigation Checklist for more helpful tips and advice about preparing for and managing a Wage Hour Inspection.

 

Labor Secretary Hilda Solis Resigns: How Will the Enforcement Policy of the Wage and Hour Division Change?

By Douglas Weiner and Kara Maciel

“There’s a new sheriff in town.”  With those words in 2009, Secretary Hilda Solis initiated a policy at the Department of Labor that emphasized increased investigations and prosecutions of violators rather than the prior administration’s emphasis on providing compliance assistance.

Her departure – announced yesterday – is unlikely, however, to have much effect on the Department’s current aggressive enforcement policy, as the top enforcement officer of the Department remains Solicitor of Labor M. Patricia Smith.  Solicitor Smith was previously the New York State Commissioner of Labor, where she introduced task force investigations and procedures for government agencies to share information to enhance enforcement initiatives.  Under Solicitor Smith’s leadership, the Department has implemented many of these same techniques and hired additional investigators and attorneys to strengthen the Department’s enforcement of the Fair Labor Standards Act, and related wage and hour statutes. 

We expect enforcement to remain a top priority of the Department under the second term of the Obama Administration no matter who is appointed to replace Secretary Solis.  Accordingly, with the start of the new year, employers would be wise to take the time to closely examine payroll policies and practices, including exempt and independent contractor classifications, meal break deductions, and overtime calculations. Our advice is to be proactive with a self-audit that is protected by the attorney-client privilege and correct inadvertent errors before a government investigator or plaintiffs’ attorney comes knocking at your door. 

Work at Home Overtime Claim Blocked by Employer's Timekeeping Systems

By Evan J. Spelfogel

In recent years employees have asserted claims for time allegedly worked away from their normal worksites, on their Blackberries, iPhones or personal home computers.  Until now, employers have been faced with the nearly impossible task of proving that their employees did not perform the alleged work.  The US Department of Labor and plaintiffs’ attorneys have taken advantage of the well-established obligation of employers to make and maintain accurate records of the hours worked by their non-exempt employees, and to pay for all work “suffered or permitted” to be performed.

Now, the United States Court of Appeals for the Tenth Circuit has issued a decision holding that an employer is shielded from an employee’s FLSA overtime claim where it has an automated time keeping system that the employee failed to utilize, to report the hours allegedly worked at home.  Frank Brown v. ScriptPro LLC, Case No. 11-3293 (10th Cir. Nov. 27, 2012).

The three judge panel held that a plaintiff has the burden of proving that he performed work for which he was not properly compensated, citing earlier Tenth Circuit and US Supreme Court precedent:  Baker v. Barnard Construction Co., Inc., 146 F 3d. 214, 220 (10th Cir. 1998); Anderson v. Mt. Clements Pottery Co., 328 US 680, 687 (1946).  It was plaintiff’s burden, the Tenth Circuit held, to produce evidence to show the actual amount and extent of his work.

Here, the Court held, plaintiff had failed to set forth the specific facts showing there was a genuine issue for trial, and granted the company’s summary judgment motion. 

In so doing, the Tenth Circuit acknowledged that plaintiff had produced to the district court in opposition to the company’s motion for summary judgment, “uncontroverted evidence that he actually worked overtime.”  This evidence, the Appeals Court said, included plaintiffs own testimony, his wife’s testimony and certain discussions between plaintiff and one of his supervisors concerning plaintiff’s work at home. 

However, plaintiff failed to show the actual amount of overtime by any justifiable or reasonable inference. 

The key to the Tenth Circuit’s decision was that ScriptPro kept accurate records of employees’ time worked, and had installed an automated recordkeeping system that allowed employees to access the timekeeping system from home and enter their daily time onto that system.  The burden on individual employees to show the amount of overtime worked is only relaxed, the Tenth Circuit held, where an employer fails to keep accurate records. 

In this case, the Court held, there was no failure by ScriptPro to keep accurate records, only a failure by plaintiff to comply with ScriptPro’s timekeeping system.  In summary, the Court concluded, where the employee fails to report time to the employer through the established overtime recordkeeping system, the failure by an employer to pay overtime is not an FLSA violation. 

In view of the Tenth Circuit’s ScriptPro decision, employers should review their recordkeeping and timekeeping systems, and may be well advised to implement systems that allow employees to enter asserted home work time into the systems directly.  Of course, this will require monitoring by employers to ensure employee accuracy and honesty in time reporting. 

Many employers utilize employee time recording systems for employees who spend significant amounts of their workdays away from a centralized jobsite.  Such a system could be easily be adapted to include time reporting for employees who legitimately spend time working from home or at other remote jobsite locations. 

The remedy historically available to employers where employees assert they are working unauthorized overtime hours (against company policy or in direct and flagrant disregard of orders from supervisors) has been to discipline the employee and, if necessary, terminate the employment relationship – but the employer has always been required to pay for the asserted overtime work. 

The Tenth Circuit’s ScriptPro decision is a wakeup call to employers to review their timekeeping systems and, where appropriate, to implement new techniques that would apply to employees allegedly working at home.

Independent Contractor Misclassification Should Remain Key Area of Concern for Employers

By Frederick Dawkins and Douglas Weiner

Earlier this month, at the ABA Labor and Employment Law Conference, Solicitor of Labor M. Patricia Smith reaffirmed that investigating independent contractors as misclassified remains a top priority of the U.S. Department of Labor’s (“DOL”) enforcement initiatives.  The DOL will continue to work with other federal and state agencies, including the IRS, to share information and jointly investigate claims of worker misclassification.  The joint enforcement effort is certainly driven by, among other things, an interest in collecting unpaid tax revenue, and could result in significant liability to employers.  

In addition to potential liability resulting from strengthened federal enforcement initiatives, in previous blog posts, we have emphasized that misclassification could become the subject of the next wave of class and collective actions, particularly in view of states enacting new legislation providing for higher penalties.  Further, the re-election of President Obama may augur the re-emergence of the Employee Misclassification Prevention Act, would require employers to keep records of all workers performing labor or services for them, and to notify each worker of their classification and exemption status.  Finally, the Affordable Care Act (“ACA”) adds yet another challenge to employee misclassifications as the reclassification of workers from independent contractors to employees could push an employer over the 50 full-time employee threshold for ACA coverage. 

The expenses of  misclassification are often significant – including calculations of unpaid overtime wages, back employment taxes, income tax withholdings, unpaid workers’ compensation and unemployment insurance premiums, contributions to Social Security and Medicare, and perhaps 401K matching and pension contributions. 

In short, over the next four years of the Obama Administration, which will continue to fund the DOL’s aggressive enforcement efforts, it is undeniable that contractor misclassification investigations will continue to increase in volume and strength.  Employers are best advised to scrutinize their own independent contractor classifications in self-audits before federal and state investigators, or perhaps even worse, plaintiffs’ class action lawyers target what had been common practices.

California Court of Appeals Confirms That Time Rounding Is Permissible

By Michael Kun and Aaron Olsen

Agreeing with the recent federal district court opinion in our case Alonzo v. MAXIMUS, Inc., 832 F.Supp.2d 1122, 1126 (2011), the California Court of Appeals has confirmed in a case against See’s Candy that California employers may round employees’ time entries so long as the employer’s rounding policy does not consistently result in a failure to pay employees for time worked.

In  Alonzo, a federal district court granted summary judgment in favor of our client MAXIMUS, Inc. on the plaintiffs’ time rounding claims.  The Alonzo Court explained that the federal standards regarding time rounding apply to employees’ time rounding challenges brought under California law.  In the case against See’s Candy , the plaintiff urged the California Court of Appeals to reject the federal court’s analysis in Alonzo.  The California Court of Appeals, however, stated, “We agree with the Alonzo court.  In the absence of controlling or conflicting California law, California courts generally look to federal regulations under the FLSA for guidance….  Assuming a rounding-over-time policy is neutral, both facially and as applied, the practice is proper under California law because its net effect is to permit employers to efficiently calculate hours worked without imposing any burden on employees.” 

Given the number of employers throughout California that have time-rounding policies, the California Court of Appeals' decision to adopt the reasoning from the federal court in  Alonzo is another welcome development for employers.  Indeed, plaintiffs’ counsel likely had a number of time rounding class actions lined up to file in the event the Court of Appeals held that time rounding policies were unlawful.  Those class action complaints have likely found their way to the recycling bin.

Modifying Workweeks to Avoid Overtime: Employers Should Still Proceed With Caution

By:  Elizabeth Bradley

The U.S. Court of Appeals for the Eighth Circuit recently confirmed that the Fair Labor Standards Act (“FLSA”) does not prohibit an employer from modifying its workweek in order to avoid overtime costs. The Court’s ruling in Redline Energy confirms that employers are permitted to modify their workweeks as long as the change is intended to be permanent. Employers are not required to set forth a legitimate business reason for making the change and are permitted to do so solely for the purpose of reducing their overtime costs. The only requirement on employers is that the change must be intended to be permanent.

While the ruling appears to provide employers with the green light to go forward unrestrained in changing the definition of their workweek to avoid overtime costs, employers should proceed with caution by taking the following steps to best protect against potential claims:

·         Provide Written Notice to Employees – The change will not go unnoticed by employees, especially if it impacts their compensation. Employers should provide employees with advanced written notice of the change so that no employees are “surprised” when their paychecks arrive. Open communications between employers and employees is the first defense to potential wage claims. The written notice should provide an explanation of the reason for the change, when it will go into effect and how employee compensation may be impacted. 

·         Comply with FLSA Regulations FLSA regulations provide direction on how employee compensation is to be calculated when a permanent change in the defined workweek results in “overlapping” hours that fall within both the old and new workweeks. Employers should ensure that they comply with these rules and, when in doubt, pay the higher of the two rates for that pay period.

·         Internally Document the Business Reasons – While employers are not required to establish a legitimate business reason for making the change, having contemporaneous documentation of the rationale will provide employers with defenses against potential retaliation claims and can establish that the change was intended to be permanent.

·         Review State and Local Requirements – Employers outside the Eighth Circuit can rely on this decision because there are no conflicting decisions in the federal circuit or district courts; however, this decision is applicable only to changing workweeks under the FLSA. Many states and local municipalities have enacted laws that provide employees with greater protections.  Employers must ensure that there are no state or local wage and hour provisions that restrict the ability to modify the defined workweek. 

Hurricane Sandy Is About to Blow Our Way: Wage & Hour Implications for Employers

By:  Kara M. Maciel

Hurricane Sandy is approaching this weekend, so employers along the East Coast should refresh themselves on the wage and hour issues arising from the possibility of missed work days in the wake of the storm.

A few brief points that all employers should be mindful of under the FLSA:

  • A non-exempt employee generally does not have to be paid for weather-related absences. An employer may allow (or require) non-exempt employees to use vacation or personal leave days for such absences. But, if the employer has a collective bargaining agreement or handbook policies, the employer may obligate itself to pay through such policies.
  • An exempt employee generally must be paid for absences caused by office closures due to weather, if he/she performs work in that week. The Department of Labor has stated that an employer may not dock a salaried employee for full days when the business is closed because of weather. Partial day deductions for weather related absences are not permitted.
  • If certain employees are required to be on-call (such as public safety, IT, or other essential personnel) during the storm, and the employee cannot use the time effectively for his or her own purpose, the on-call time is compensable and the employee must be paid. However, if the employee is simply at home and available to be reached by company officials, then the time is not working time and an employer does not have to pay for that time.

Policies and procedures to keep in place:

  • Decide whether your company will offer “weather days” for non-exempt workers who are absent because of disasters.
  • Ensure that your payroll systems are prepared for employees working from home, longer shifts, or not taking lunches.
  • Decide whether employees absent because of weather will be allowed / required to use vacation or PTO time.
  • Ensure safety of payroll records and ability to process payroll from alternate location if needed.

Natural disasters pose a myriad of employment and HR issues from wage-hour to FMLA leave and the WARN Act. The best protection is to have a plan in place in advance to ensure your employees are paid and well taken care of during a difficult time. Our reference tool contains answers to common questions, and while aimed at employers in the Gulf Coast, if you have operations anywhere along the East Coast, you should find it helpful.

Navigating the Murky Waters of FLSA Compliance

On September 19, 2012, several members of EBG’s Wage and Hour practice group will be presenting a briefing and webinar on FLSA compliance.  In 2012, a record number of federal wage and hour lawsuits were filed under the Fair Labor Standards Act (FLSA), demonstrating that there is no end in sight to the number of class and collective actions filed against employers. Claims continue to be filed, raising issues of misclassification of employees, alleged uncompensated "work" performed off the clock, and miscalculation of overtime pay for non-exempt workers.

In this interactive briefing and live webinar, we will discuss the recent trend in enforcement and class action lawsuits, as well as highlight several common mistakes that managers make when trying comply with the ever-changing and confusing area of the FLSA. Specifically, this briefing will teach you how to:  

  • Determine overtime eligibility
  • Determine whether an employee is exempt
  • Calculate overtime compensation correctly
  • Avoid unauthorized overtime
  • Navigate tip credits, tip pooling, and overtime calculation for wait staff
  • Understand what constitutes off-the-clock work and other traps
  • Develop strategies for avoiding additional wage and hour risks 

You can register for the complimentary briefing here.

Landmark Fifth Circuit Ruling Allows Private FLSA Settlements Without DOL/Court Supervision

By: Greta Ravitsky and Jordan Schwartz

On July 24, 2012, the Fifth Circuit became the first federal appellate court in over thirty years to enforce a private settlement of a wage and hour dispute arising under the Fair Labor Standards Act (“FLSA”) in Martin v. Spring Break ’83 Productions LLC.

For decades, federal courts have consistently held that FLSA wage and hour disputes may not be settled privately without approval from either the Department of Labor (“DOL”) or a federal district court.  This apparently “settled” area of law was based exclusively on the Eleventh Circuit’s decision in Lynn’s Food Stores, Inc. v. United States. As a result, courts and employment attorneys alike have cautioned employers to undertake a private resolution of an FLSA dispute at their own peril.  Until now, the Eleventh Circuit wasthe only court of appeals that had ruled on this issue. In this recent groundbreaking decision, the Fifth Circuit declined to apply Lynn’s Food Stores’ requirement of supervision and approval of private settlements, finding that a private settlement unapproved by either the DOL or federal district court can be enforceable under certain circumstances.

In Martin, the plaintiffs,several unionized lighting and rigging technicians, filed a grievance claiming they had not been paid for all hours worked during the filming of the upcoming movie “Spring Break ’83.” Upon concluding that it would be impossible to determine that the plaintiffs worked the days they alleged to have worked, the union and the employer entered into a settlement agreement with regard to the disputed hours worked, waiving the claimants’ right to file any claims with regard to those disputed hours. Before the settlement agreement was signed by union representatives, the plaintiffs filed this lawsuit against Spring Break’ 83 Productions, L.L.C. Thereafter, once the settlement agreement was executed, the plaintiffs accepted and cashed the disbursed payments. The district court granted defendants’ motion for summary judgment, enforcing the private settlement agreement. 

On appeal, the Fifth Circuit upheld the district court’s decision, holding that the payment offered to and accepted by the plaintiffs pursuant to the settlement agreement constituted an enforceable resolution of their FLSA claims, which were predicated on a bona fide dispute about the time worked. The court further noted that the settlement agreement was not a compromise of guaranteed substantive rights under the FLSA, but simply a compromise of plaintiffs’ claims; therefore, it did not contravene the Supreme Court’s restriction on union representatives’ waiver of substantive FLSA rights of their members. The Fifth Circuit found Lynn’s Food Stores to be distinguishable in that, unlike the Lynn’s Food Stores employees, the Martin plaintiffs were represented by counsel who had filed a lawsuit specifically seeking overtime pay for the plaintiffs before the settlement agreement was executed, and thus, the settlement constituted a valid release.  “The money [plaintiffs] received and accepted . . . for settlement of their bona fide dispute did not occur outside the context of a lawsuit, hence the concerns that the Eleventh Circuit expressed in Lynn’s Food Stores [were] not implicated.”

Martin’s common sense reasoning is certainly welcome news for employers who have been hesitant to enter into a private settlement agreement, given the myriad of issues inherent in obtaining approval of the settlement from the DOL or federal district court.  Certainly, the ability to settle FLSA disputes privately and confidentially should help employers avoid the potential of facing “copycat” lawsuits as a result of a settlement that has been put in the public record.  While this decision provides support for entering into an unsupervised private settlement agreement of wage and hour claims in the Fifth Circuit (Texas, Louisiana and Mississippi), particularly where the FLSA claimant is represented by counsel and an adversary process is underway, it is still advisable for employers in other jurisdictions to seek DOL or court approval for FLSA settlements in order to ensure the validity of the release of claims.

We will be sure to keep you apprised of any trends or developments arising out of this landmark decision that could pave the way for private FLSA settlements to be treated and enforced in the same manner as settlement agreements in all other employment-related disputes.

Unpaid Internships May Prove to be Meal Ticket After All . . .

By Amy Traub and Desiree Busching

Just as designers must be cognizant of copycat fashions, employers must be cognizant of copycat lawsuits.  In February of this year, Xuedan “Diana” Wang filed a lawsuit against her former employer, Hearst Corporation, on behalf of herself and others similarly situated, alleging that the company violated federal and state wage and hour laws by failing to pay minimum wage and overtime to interns working for Harper’s Bazaar.  Wang had worked for Harper’s Bazaar during the fall of 2011.  Her lawsuit was filed in February 2012, only five months after a similar one had been filed by interns working for Fox Searchlight Pictures, Inc., who claimed that unpaid interns were performing compensable work in connection with the production of the film, “Black Swan.”  Following Wang’s February lawsuit, in March 2012, a third intern filed suit against her employer, “The Charlie Rose Show,” citing the same claims as her predecessors.

On Tuesday, July 3rd, yet another lawsuit was filed.  This time, however, the copycat was Wang herself.  Wang’s second lawsuit is now against Dana Lorenz and her company, Fenton Fallon, for whom she worked in the summer of 2011 – before she worked for Hearst Corporation at Harper’s Bazaar.  Not surprisingly, the allegations in the lawsuit are strikingly similar to the allegations in her previous lawsuit against Hearst Corporation, and those against Fox Searchlight Pictures, Inc., and those against the “The Charlie Rose Show.”  Wang is alleging that she and interns with whom she worked side-by-side were not paid appropriate wages for their work.

As we previously advised in February and March, these cases should have alerted employers to examine their own practices and policies with regard to their internship programs in order to protect themselves from future wage and hour liability under both federal and state wage and hour laws.  Considering that the FLSA has a 2-year statute of limitations, or a 3-year statute of limitations if a violation is “willful,” employers should now be looking back to examine past practices and proactively assessing potential risk and liability in the event a former intern of their own “follows suit.”  In fact, although Wang’s first lawsuit against Hearst Corporation was filed in February 2012, the company now finds itself defending against alleged violations from three years ago.  On Thursday, July 12, 2012, U.S. District Court Judge Harold Baer in Manhattan conditionally certified a class of interns that includes all persons who worked as unpaid or underpaid interns at any of Hearst’s magazines dating back to February 2009.

In assessing the potential exposure associated with a wage and hour claim by unpaid interns, employers should also consider ancillary costs, such as the effect of negative publicity on a company’s image, disclosure of confidential business information during litigation proceedings, or the substantial litigation costs of defending against a potential class action claim.  If an employer believes that it may be vulnerable to a potential lawsuit by former unpaid interns, understanding its potential liability and legal options before a lawsuit is filed could prove to be an invaluable decision.

Bottom line – Employers must be wary of the fact that copycat lawsuits are continuing in this arena and take affirmative steps to avoid being the subject of one.  Indeed, as soon as the first “unpaid intern” potential class/collective action hit the scene, other interns immediately took note, following with their own similar lawsuits.  And now, some may even be considering making careers as full-time plaintiffs.

Supreme Court Will Decide Whether an Employer Can Moot an FLSA Collective Action With an Offer of Judgment to the Plaintiff

By Amy Traub, Michael Kun, and Anna Kolontyrsky

As employers know, not only are FLSA collective actions more prevalent than ever, but they can be costly to defend or resolve.  In an attempt to bring quick closure to such cases, somedefendants have attempted to settle such claims with the individual plaintiff alone through a Rule 68 offer of judgment before a class has been conditionally certified.   

This strategy has come under attack.  And the United States Supreme Court will now determine whether it is permissible.

The United States Supreme Court has elected to review a Third Circuit decision holding that an employer could not avoid conditional class certification by offering to resolve the named plaintiff’s claims.  The case, Symczyk v. Genesis Healthcare Corp., 656 F.3d 189 (3d Cir. August 31, 2011), petition for cert. filed, ___ U.S.L.W. ___ (U.S. February 18, 2012) (No. 11-1059), is bound to have a significant impact on the litigation strategy in FLSA collective actions.

In Symczyk, the plaintiff, a registered nurse, claimed that her employer violated the FLSA when it implemented a policy that imposed an automatic meal break deduction regardless of whether workers had performed compensable work during that time.  The plaintiff sought a total of $7,500, including both her unpaid wages, as well as her attorneys’ fees, costs, and expenses of litigation.

The employer promptly served the plaintiff with a Rule 68 offer of judgment for $7,500, the full amount she could possibly recover.  Even though the offer was rejected, the employer argued that an offer to accord all relief that a plaintiff demands renders a case moot, unless the plaintiff retains some additional stake in the litigation.  Since the plaintiff had not had a chance to move for conditional certification and, consequently, no other workers had yet opted in, the district court held that the plaintiff’s claims were moot, and dismissed the suit.

The Third Circuit reversed that decision and remanded the case.  The court acknowledged that Rule 68 was designed “to encourage settlement and avoid litigation,” but noted that in the context of a collective action, “Rule 68 can be manipulated to frustrate rather than to serve these salutary ends.” Instead of mooting the action, the Third Circuit found that the “relation back” doctrine should have been employed.  Analogizing the case to a Rule 23 class action where the claims of class members relate back to the filing of the complaint even though the certification of the class occurs much later, the court noted that once a Rule 23 class has been certified, mooting a class representative's claim does not moot the entire action.  Under the “relation back” doctrine, the court ruled that the plaintiff should have been allowed to file a motion for certification of the collective action as if it had been filed at the time the suit began.  Consequently, a Rule 68 offer of judgment on her claims alone would not have mooted the claims of the other putative collective action members, if at least one other plaintiff opted in.

In its petition for certiorari to the Supreme Court, Genesis argued that a direct conflict exists between “decisions of the Fourth and Eighth Circuits (holding that settlement before certification renders a case moot) and decisions of the Third, Ninth, and Tenth Circuits (holding that certification after settlement can vitiate mootness by ‘relation back’ to the complaint).”

Genesis further argued that the “key question … is whether it makes sense to extend … [the] treatment of mootness in class actions to a context like the FLSA in which the individual plaintiff has no representative relationship to the absent parties.” 

In answering this “key question,” the Supreme Court will certainly shape the litigation strategies of plaintiffs and defendants alike in FLSA collective actions.  A ruling that an offer of full relief moots an FLSA collective action would certainly operate to lead more defendants to make Rule 68 offers at the outset of the case, as Genesis did.  It would also likely lead to plaintiffs’ counsel filing suit using multiple plaintiffs, to make this practice less enticing to defendants, or in their filing motions for conditional certification earlier to try to thwart the effects of such an offer by identifying other individuals to effectively replace the named plaintiff.   

And if the Court affirms the Third Circuit decision, one of defendants’ strategies to bring an early end to FLSA collective actions will be lost.

The Supreme Court Holds That Pharmaceutical Sales Representatives Are Exempt From Overtime Requirements Under The "Outside Sales" Exemption

By: Michael Thompson

The United States Supreme Court has ruled that pharmaceutical sales representatives (PSRs) are “outside salesmen” who are not entitled to overtime under the Fair Labor Standards Act (FLSA). The high court’s ruling was predicated on its finding that, in the pharmaceutical industry’s “unique regulatory environment,” the commitments obtained by PSRs equate to traditional sales. Furthermore, the Supreme Court rebuked the Department of Labor (DOL) for “unfairly surprising” the industry by filing amicus briefs arguing that PSRs were not exempt from the FLSA’s overtime requirements.

PSRs provide physicians with information about the efficacy and benefits of their company’s products, but cannot “close” sales. Rather, within the regulatory scheme governing pharmaceuticals, PSRs attempt to convince doctors to make non-binding promises to prescribe their products. For that reason, the DOL (along with plaintiffs and some federal courts) has contended that PSRs do not make “sales” and thus are not covered by the “outside sales” exemption.

The Supreme Court, however, did not defer to the position asserted by the DOL. Rather than immediately diving into the language of the FLSA, the high court first considered the issue from a practical perspective. 

The Supreme Court noted the pharmaceutical industry’s “longstanding practice” of classifying its salespeople as exempt outside salespeople. The high court then pointed out that the DOL has never brought an enforcement action challenging this classification. The majority opinion concluded that, “other than acquiescence” to this practice, “no explanation for the DOL's inaction is plausible.” Accordingly, deference to the DOL's interpretation would result in “unfair surprise” to the pharmaceutical industry.

The Supreme Court pointed out that the DOL’s position was based on its interpretation of the term “sales” as used in Code of Federal Regulations (CFR). The high court stated that the definition suggested by the DOL has shifted even since the DOL began filing amicus briefs on this issue in 2009. Thus, the DOL’s interpretation of its own regulations lacked “the hallmarks of careful consideration,” and was not entitled to controlling deference.

The Supreme Court went on to discuss its own interpretation of the term “sales.” The high court noted that the CFR defines the term to include any “sale … or other disposition” of a product or service. The Supreme Court concluded that the term “other disposition” was a “catchall phrase” that should be interpreted according to the context in which it is applied. Thus, “when an entire industry is constrained by law or regulation from selling its products in the ordinary manner, an employee who functions in all relevant respects as an outside salesman should not be excluded from that category based on technicalities.” The high court therefore concluded that, in the context of the industry, the PSRs made “sales” for purposes of the FLSA and were exempt outside salespeople under the FLSA.

Finally, offering another dose of common sense, the Supreme Court pointed out that the PSRs bore the “external indicia of salesmen" because they were hired based on sales experience, were trained to close sales, worked away from the office with minimal supervision and were compensated on an incentive basis. Furthermore, the petitioners each earned more than $70,000 per year and had flexible schedules. Thus, they were “hardly the kind of employees that the FLSA was intended to protect.”

The Supreme Court’s ruling is a huge win for the pharmaceutical industry, and a signal that both employers and the DOL should consider the practical implications of classifying a position as exempt or non-exempt under the FLSA.

Seventh Circuit: Pharmaceutical Sales Representatives Are Exempt Because They Use Significant Discretion In Visits With Physicians.

By Michael Thompson

The Seventh Circuit has ruled that pharmaceutical sales representatives are covered by the Administrative exemption to the FLSA because “the core function of the representatives’ duties, the physician office visits,” requires significant discretion and independent judgment. While other courts have applied a case specific analysis to determine the applicability of the Administrative exemption in this context, the Seventh Circuit’s analysis appears to be applicable to virtually all sales representatives in the pharmaceutical industry. Indeed, without separate analyses, the Court of Appeals dismissed two distinct class actions (against Eli Lilly and Abbott Laboratories) in one fell swoop.

The exempt status of pharmaceutical sales representatives is a hotly litigated issue because pharmaceutical sales representatives do not actually consummate sales. Thus, the Second Circuit Court of Appeals has held that they are not covered by the Outside Sales exemption. Conversely, the Ninth Circuit Court of Appeals has held that, in the context of the industry, “common sense” shows that these sales representatives fall within the terms of the Outside Sales exemption. The United States Supreme Court has granted the plaintiffs’ petition to review the Ninth Circuit ruling, and is poised to resolve the conflict regarding the Outside Sales exemption.

In the event that the Outside Sales exemption is held to be inapplicable to pharmaceutical sales representatives, employers will have to rely on the Administrative exemption if they wish to defend the exempt status of their sales representatives. That defense, however, has met with mixed results. 

For example, the Second Circuit Court of Appeals in In re Novartis Wage & Hour Litigation, concluded that Novartis sales representatives did not have enough independent discretion to qualify for the Administrative exemption. Conversely, in Smith v. Johnson & Johnson, the Third Circuit Court of Appeals found that the named plaintiff formulated and implemented strategies for her territory, and thus exercised sufficient independent discretion to qualify for the Administrative exemption.

The Seventh Circuit took up this issue through a consolidated opinion on two collective actions, Schaefer-LaRose v. Eli Lilly & Co. and Jirak et al. v. Abbott Laboratories Inc.  The Court of Appeals first concluded that the sales reps did “administrative” work directly related to the general business operations of their employers because “[t]he representatives before us are the public face of their employer to the most important decision-maker regarding use of their companies’ products, the prescribing physicians.”

The Seventh Circuit went on to evaluate whether the pharmaceutical sales representatives used independent discretion in “the core function of the representatives’ duties, the physician office visits.”  The Court of Appeals briefly addressed the related tasks performed outside the presence of the physicians, which it said “manifest a substantial measure of judgment.” The Seventh Circuit noted that sales representatives exercised discretion because they could choose “to see physicians not on their call plans or non-physicians who may influence prescribing patterns,” were expected to propose “comprehensive visit plans for the territories” and spent “the vast majority of their time entirely unsupervised.”

While these considerations were relevant, the Seventh Circuit placed greater emphasis on the sales representatives’ face-to-face meetings with physicians. The Court stated that “these physician interactions [are] the critical function of the job and the place in which discretion is most evident.” The Court of Appeals explained that “[i]n speaking to individual physicians, the representatives must tailor their messages to respond to the circumstances, whether those be the time or attention constraints from the physician or the concerns and objections that are voiced during a particular or previous visit.” The Seventh Circuit further noted that “[t]he representative who is unable to tailor the conversation to the time and circumstances, or to engage the physician in an intelligent conversation, is understandably not an effective representative to the professional community whose estimation of the company is key to its success.”

For those reasons, the Seventh Circuit held that the FLSA's administrative exemption applied to pharmaceutical sales representatives (and that the applicability of the Outside Sales exemption was therefore moot). Accordingly, the Seventh Circuit Court of Appeals affirmed the summary judgment in favor of Eli Lilly and reversed the summary judgment against Abbott Laboratories.

In the Name of "Fairness," a New Jersey Federal Court Strikes the Confidentiality and Release Provisions from a Fair Labor Standards Act Settlement Agreement

By Douglas Weiner and Meg Thering

In one of the many “wrinkles” in Fair Labor Standards Act (“FLSA”) litigation, settlements of wage and hour disputes between an employer and its employees are only enforceable if supervised by the U.S. Department of Labor or approved by a court. Courts will approve settlements if they are “fair”; however, as demonstrated in a recent decision arising out of New Jersey - Brumley v. Camin Cargo Control - courts may need to be reminded that employers also have rights and legitimate interests. The Brumley Court took what was a bargained-for exchange between both parties and turned it into what could only be considered a one-sided deal, good only for the plaintiffs. 

After litigating and negotiating alleged overtime violations with 112 opt-in plaintiffs over a four year period, Camin Cargo Control, Inc. ultimately offered to pay $3.9 million in exchange for the release of all wage claims and a confidentiality provision. Plaintiffs then filed an unopposed motion to approve these terms of settlement.  Unfortunately for Camin Cargo Control, Inc., the Court granted Plaintiffs their full benefit of the bargain – including $1.3 million in costs and attorneys’ fees – but in the name of “fairness” denied the portion of the motion containing the confidentiality provision and release of claims.

In Brumley,the Honorable Jose Linares, citing Brooklyn Sav. Bank v. O’Neil, a U.S. Supreme Court case from 1945 and Dees v. Hyradry, Inc., a 2010 casefrom the Middle District of Florida, refused to approve the parties’ agreement as submitted because he found that the confidentiality provisions ran afoul of “the ‘public – private’ rights granted by the FLSA and thwart[ed] Congress’s intent to ensure widespread compliance with the statute.” Additionally, citing Dees, he stated: “[i]n practice, leaving an FLSA settlement to wholly private resolution conduces inevitably to mischief.” He also deemed the release unfair because he interpreted it as a release of both prior and prospective claims.

In light of this opinion, employers should double check the language of release provisions in FLSA settlement agreements to make sure that they unambiguously release all claims prior to the date of the agreement (and no claims after the date of the agreement). 

Employers should also keep in mind that courts are becoming increasingly hostile to confidentiality provisions in FLSA settlements. Thus, employers may no longer assume that their confidentiality provisions will be approved. 

We will keep an eye on this decision and report if it is appealed or distinguished by courts in other jurisdictions.

EBG Complimentary Webinar: Don't Be a Target of the Wage and Hour Class Action Epidemic: Tips for Avoiding Exposure

Wage and hour investigations and class action lawsuits continue to be a potentially serious problem for many employers, resulting in an abundance of new cases filed and many large settlements procured.  In addition, in September 2011, under the guidance of the Obama Administration, the Department of Labor and IRS announced an effort to coordinate with each other to address misclassification of employees as independent contractors, which is resulting in additional investigations, fines, and/or legal liability levied on an employer.

Click here to register for this complimentary webinar.

Thursday, April 12, 2012
9:00 a.m. - 10:00 a.m. CDT - Program and Q&A Session 
 

Payday for Unpaid Interns?

By Amy Traub and Desiree Busching

Like the fashions in the magazines on which they work and the blockbuster movies for which they assist in production, unpaid interns are becoming one of the newest, hottest trends— the new “it” in class action litigation. As we previously advised, there has been an increased focus on unpaid interns in the legal arena, as evidenced by complaints filed by former unpaid interns in September 2011 against Fox Searchlight Pictures, Inc. and in February 2012 against Hearst Corporation. In those lawsuits, unpaid interns working on the hit movie “Black Swan” and at Harper’s Bazaar magazine, respectively, alleged that their high-profile employers violated federal and state wage-and-hour laws by failing to pay them for work they claim was more aptly suited for paid employees.

The newest case to hit the scene on this issue has been filed by Lucy Bickerton, a former unpaid intern of “The Charlie Rose Show” on PBS. In her March 14, 2012 complaint, Bickerton alleges that she worked for the show in 2007 for approximately 25 hours per week and that the show and its host had her performing “productive work”—work for which she claims she, and other interns like her, should have been paid.

According to a press release issued by the plaintiffs’ firm that has filed all three of these prominent unpaid intern cases, “[s]ince filing a lawsuit on behalf of unpaid Fox [Searchlight Pictures, Inc.] interns late last year, our office has received numerous calls from other current and former interns who were not paid for the productive work they performed. This [Bickerton] lawsuit should send a clear message to employers that the practice of classifying employees as ‘interns’ to avoid paying wages runs afoul of federal and state wage and hour laws.”

The clear message received is that this firm is on the offensive, and others will undoubtedly soon follow suit. For employers who have checked their unpaid internship programs to ensure that they are in compliance with the tests utilized by both federal and state agencies and courts in analyzing whether individuals qualify as “interns,” it is time to double-check. With the attention this issue is seeing in the media and before the courts, it is clear that if misclassified unpaid interns are not paid now, employers may just be paying later.

An Overview of Wage Hour Laws and Litigation: Avoiding the Pitfalls of Back Wage Claims

Wage Hour laws and regulations are complex, non-intuitive, and constantly changing.  Mistakes in wage and salary administration have led to class actions resulting in six and seven figure recoveries against the most sophisticated employers - banks and major industrial giants as well as smaller employers without in-house legal and high level Human Resources officials.  Peter M. Panken, Lauri Rasnick and Douglas Weiner in our New York Office have recently authored an article in conjunction with a major national Continuing Legal Education program in Washington entitled: “ An Overview of Wage Hour Laws and Litigation: Avoiding the Pitfalls of Back Wage Claims” which outlines the major traps employers can fall into and outlines ways to avoid the problems before litigation begins.

Compensating Non-Exempt Employees for Completing Web-Based Training

By:  Kara M. Maciel and Casey Cosentino

We were recently asked by a client to provide guidance on the wage and hour issues associated with company-provided on-line training programs for non-exempt employees.  Questions were raised as to when the training is "voluntary" and whether the time must be compensated if the training is completed at home using a personal computer.  The answer stems from federal wage and hour law, which provides that such time is likely compensable for non-exempt employees.     

The Fair Labor Standards Act requires employers to compensate employees for all hours worked regardless if the work performed is on or off the job site. Consequently, most time employees spend in training programs is compensable hours worked. Attending training is not compensable, however, if all of the following four criteria are met:

1. Attendance is outside of the employee’s regular working hours;

2. Attendance is in fact voluntary;

3. The training is not directly related to the employee’s job; and

4. The employee does not perform any productive work during such attendance.

Typically, it is the second and third factors that generate most of the wage and hour issues associated with employee training.      

First, training is not voluntary when it is required by the employer, or the employee understands or is led to believe that non-attendance would negatively affect his/her present working conditions or the continuance of his/her employment. Therefore, for attendance to be voluntary, employers must not directly or indirectly pressure employees to attend training programs, or impose employment-related consequences for non-attendance.  

Second, training is not directly related to an employee’s job when the training is designed to prepare the employee for advancement or promotion.  Conversely, training intended to improve employees’ efficiency and/or effectiveness in their current jobs is directly related to the employees’ job.

If an employer offers online training outside paid working hours and do not want to pay non-exempt employees for their time spent on the training, employers should do the following:  

·         Restrict employees’ participation in the training to non-working hours only;

·         Do not mandate employees’ participate, explicitly or implicitly;

·         Do not impose adverse consequences for employees non-participation;

·          Do not condition employees’ continued employment on completing the training;

·         Analyze the training to ensure it is designed to qualify employees for a new job or promotion (and is not intended to enhance employees’ current job skills); and

·         Ensure the employees do not perform other work during the training.

If all of the above factors are not satisfied, then employers must compensate their employees for any time spent completing the online training.  Because the requirements for providing non-compensable training are particular and precise, and the cost of non-compliance can be costly under the FSLA for unpaid time and/or missed overtime, the conservative wage and hour approach is to offer online training during paid working hours.    

 

 

The (Sort Of) Hired Help: Wage and Hour Implications of Hiring Unpaid Interns

By Amy Traub and Desiree Busching

On February 1, 2012, a former intern of the Hearst Corporations’ Harper’s Bazaar filed a class action lawsuit on behalf of herself and others similarly situated. The lawsuit alleges that the company violated the Fair Labor Standards Act (“FLSA”) and applicable state laws by failing to pay minimum wage and overtime to interns. The use of unpaid interns is a widespread practice, especially in the retail, publication, and real estate industries, as well as in Hollywood. In fact, in September 2011, a similar lawsuit was filed against Fox Searchlight Pictures, Inc., claiming that the company used unpaid interns so it could make the film “Black Swan” more cheaply.  As reported in the book Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy, internships save firms roughly $600 million every year. 

Aside from the prestige that may accompany an unpaid internship for a dream employer, recession markets lead many job seekers to try to get their foot in the door by interning without pay.  Similarly, companies often view unpaid internships as a win-win: they get additional staffing without increasing their budgets and can train them for possible future employment without incurring any costs, while the interns get field experience to help them land a paying job.  As the complaint against the Hearst Corporation asserts, “[u]npaid interns are becoming the modern-day equivalent of entry-level employees.” 

But as the recent complaints against the Hearst Corporation and Fox Searchlight Pictures, Inc. demonstrate, companies utilizing the services of unpaid interns must tread carefully or they could face significant wage and hour liability, especially in light of the increased focus on unpaid interns in the legal arena.   Federal and state wage and hour laws provide multi-factor tests to determine whether an intern is actually an “intern,” or if he/she should instead be classified as an “employee,” and thus entitled to compensation.

The U.S. Department of Labor (“DOL”), for example, uses the following six-factor test to determine whether such an individual qualifies as an “intern” under the FLSA:

  1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
  2. The internship experience is for the benefit of the intern;
  3. The intern does not displace regular employees, but works under close supervision of existing staff;
  4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
  5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
  6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

If the above factors are met, then the intern is not entitled to minimum wage or overtime under the FLSA.  However, many states have their own wage and hour laws with additional factors to consider in determining whether a worker is an “intern,” and thus not entitled to compensation, or an “employee,” who must be paid in accordance with minimum wage and overtime laws. For example, New York utilizes an 11-factor test, and California, which also previously had an 11-factor test but departed from that precedent in April 2010, now employs a 6-factor test similar to that used by the DOL.

Therefore, in order to protect themselves from wage and hour liability for use of unpaid interns, employers must be sure to check both federal and state wage and hour laws, and should speak with counsel if they are unsure if interns are being assigned appropriate work or are otherwise classified appropriately under applicable laws.

The Department of Labor Issues Proposed Rule Expanding FLSA Coverage to Companionship and Live-In Workers

By Dean Silverberg, Evan Spelfogel, Peter Panken, Douglas Weiner, and Donald Krueger

Reversing its prior stance, the U.S. Department of Labor (“DOL”) proposes to extend the minimum wage and overtime requirements of the Fair Labor Standards Act (“FLSA”) to domestic workers who provide in-home care services to the elderly and infirm. See Notice of Proposed Rulemaking to Amend the Companionship and Live-In Worker Regulations. In 1974, when domestic service workers were first included in FLSA coverage, the DOL published regulations that provided an exemption for such “companions”, whether employed directly by the families of the elderly and infirm, or by a third party employer/staffing agency. Now, heeding calls from organized labor and certain members of Congress, the DOL is moving to close this “loophole.” See“Is the Department of Labor Considering a Revision to the Domestic Service Exemption for Home Health Care Aides?” .

Specifically, the proposed rule would eliminate the exemption for third-party employers, like service staffing agencies, even if the employee is jointly employed by the staffing agency and the family. The new proposal if implemented, would likely drive up costs for families who wish to care for their elderly and infirm at home.

The change would be particularly onerous for Home Health Agencies if it is deemed to be merely a correction of a “misinterpretation” and given retroactive effect. This could lead to claims of past liability for extra overtime compensation for Home Health Agencies that had relied on the Department of Labor’s prior interpretation. The DOL’s prior interpretation, exempting third party employers and staffing agencies from FLSA overtime requirements had been upheld by the United States Supreme Court in the Coke case.

The change in the federal DOL’s interpretation could also affect State Wage Hour Regulations (like New York). These provide favorable treatment for employers of employees who are exempt under the FLSA.

The public has been invited to comment on the proposed new rule. Potentially adversely affected employers may use the public comment period to point out the impropriety of the proposed change after thirty five years of consistent industry wide application of the current rule. Employers might also point out that an unintended effect of the changed rule may be to force the care of the elderly and infirm from their homes to an institutional setting, such as a nursing home or assisted care facility.

First Circuit Finds Employees Exempt from Overtime Pay

By Peter M. Panken, Michael S. Kun, Douglas Weiner, and Larissa Lalor-Rosado

Misclassification of employees as exempt from overtime compensation has become a cottage industry for plaintiff’s lawyers and for the United States Department of Labor (“DOL”) in the Obama years.  One of the most difficult issues is whether employees meet the so-called administrative exemption to the Wage Hour laws.  In Hines v. State Room, the United States Circuit Court in New England offered some clarity and help to beleaguered employers holding that former banquet sales managers were exempt from overtime requirements under the Fair Labor Standards Act (“FLSA”).

The FLSA, requires overtime pay at the rate of one and one half times the regular rate of pay for all hours worked in excess of 40 hours in a seven day period unless the employee is exempt. The three pronged test for exemption for administrative employees is whether the employee is (1) salaried (paid a regular amount of at least $455 for all hours worked in a workweek); (2) the employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (3) the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Plaintiffs were banquet sales managers whose job included seeking potential customers for events at the employer, developing the elements of the party or other event and submitting the proposed contract terms for approval by senior officials of the Banquet Halls.

The Court found that Plaintiffs met the first two prongs for exemption: Plaintiffs were paid on a salary basis, and their work was primarily administrative because it was ancillary to the employer’s actual business of providing banquet services.

Plaintiffs claimed that they did not meet the third prong for exemption because they lacked the authority to make any decisions of financial consequence, supervisory authority or policy-making authority.

The Court found that while the plaintiffs’ discretion in matters having significant financial impact was subject to managerial approval, such restrictions did not detract from the judgment exercised in developing a proposal for the client. Plaintiffs’ duties included maintaining primary contact with a client, tailoring an event to their needs, and overseeing the event through to execution. The Court ruled that plaintiffs exercised adequate discretion as sales people to be designated as exempt.

Other Factors Considered for Exemption

The preamble to the current DOL regulations identifies a host of factors that courts have found sufficient to demonstrate that employees exercise independent judgment. 69 Fed. Reg. at 22144. Such factors include:

·                     the ability to exercise discretion and independent judgment,

·                     freedom from direct supervision,

·                     personnel responsibilities,

·                     trouble-shooting or problem-solving activities on behalf of management,

·                     use of personalized communication techniques,

·                     authority to handle atypical or unusual situations,

·                     responsibility for assessing customer needs, primary contact to public or customers on behalf of the employer, the duty to anticipate competitive products or services and distinguish them from competitor’s products or services,

·                     advertising or promotion work, and coordination of departments, requirements or other activities for or on behalf of employer or employer’s clients or customers.

Unfortunately these factors are very fact intensive and do not provide a bright line test for exemption, But the Hines case does offer some useful precedent and guidance for employers. In any event, care must be taken to be sure that the law in a particular state or in a particular circuit does not impose a stricter limitation on the discretion and independent judgment issue.

Take-Away

An employer may retain the right to review an employee’s ability to create financial and contractual obligations and still properly classify the employee as exempt. Requiring managerial approval for these purposes does not necessarily detract from the judgment exercised by the employee at arriving at the proposal in the first place. In addition, as set forth above, there are numerous other factors that courts can consider in determining whether an employee should be designated as exempt.

U.S. Supreme Court Grants Review of the "Outside Sales" Exemption Found Applicable to Pharmaceutical Sales Representatives

By David Garland and Douglas Weiner

In February 2011, the U.S. Court of Appeals for the Ninth Circuit gave a resounding victory to employers in the pharmaceutical industry by finding that pharmaceutical sales representatives are covered by the outside sales exemption of the Fair Labor Standards Act (“FLSA”). Christopher v. SmithKline Beecham, No. 10-15257 (9th Cir. Feb. 14, 2011). Plaintiffs, and the U.S. Department of Labor (“DOL”) in an amicus brief, had argued the exemption did not apply because sales reps are prohibited from making the final sale. Prescription medicine in the heavily regulated pharmaceutical industry can only be sold to the ultimate consumer with the authorization of a licensed physician. Sales reps use their “selling skills” to persuade doctors to prescribe their employer’s products when the doctor’s patients have a medical need for them. Sales reps do not transfer title to the medicine themselves.

Previously the Second Circuit, in In Re Novartis, took a contrary view and adopted the Secretary of Labor’s position that the outside sales exemption did not apply to pharmaceutical sales representatives specifically because they were prohibited by regulation from making direct sales. The Ninth Circuit rejected the plaintiffs’ and DOL’s “rigid, formalistic interpretation” of the FLSA’s definition of “sale,” which provides that “Sale” … includes any “sale … or other disposition.” 29 U.S.C. 203(k). Because of the uncertainty in this unsettled area of law, both the employee plaintiffs and the employer asked the U.S. Supreme Court to review the Ninth Circuit’s decision.

Pertinent to the aggressive approach the DOL has recently taken in submitting unsolicited amicus briefs in significant cases, another issue the Supreme Court may review is the degree of deference, if any, the court owes to an amicus brief submitted by the DOL. Again in stark contrast, the Second Circuit gave the DOL’s amicus brief “controlling deference” to interpret the DOL’s own regulations while the Ninth Circuit gave the DOL’s amicus brief “no deference” finding it was a departure from established industry norm that the DOL used to short-cut the public notice – and – comment rule making procedures.       

It would be a most welcome development for the Supreme Court to affirm the Ninth Circuit and resolve this dramatic split in the circuit courts. However, even if the Second Circuit’s view of the “outside salesman” exemption is upheld, there are circumstances when sales reps may be exempt by virtue of the administrative exemption. Employers need clarity to structure employment practices without the ever-present threat of class action litigation.

Proposed Legislation May Expand the Scope of the Computer Employee Exemption

By Douglas Weiner and Meg Thering

On October 20, 2011, the Computer Professionals Update Act (“the CPU Act”) – one of the first potential pieces of good news for employers this year – was introduced in the U.S. Senate.  If passed, the CPU act would expand the computer employee exemption of the Fair Labor Standards Act (“FLSA”).  S. 1747

Unlike much of the other legislation affecting employers that has been proposed or passed this year, the CPU Act would make business easier for employers and decrease the risk of employee misclassification lawsuits.  If the proposed legislation passes, employers would be able to classify more employees as exempt from the overtime provisions of the FLSA.  This would be a welcome change from the persistent drum beat of enhanced enforcement initiatives announced by government agencies and upticks in class and collective actions this year.

The computer employee exemption currently is limited to employees who earn at least $27.63 an hour and work as computer systems analysts, computer programmers, software engineers, or other similar positions.  Employees are exempt if their primary duties consist of: (1) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (2) the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (3) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) a combination of such duties.  29 U.S.C. § 213(a)(17); 541 C.F.R. § 400; U.S. Department of Labor Fact Sheet #17E.  In contrast, employees whose work consists of repairing or manufacturing computer equipment are not exempt. 541 C.F.R. § 401; U.S. Department of Labor Fact Sheet #17E.

The CPU Act would broaden the exemption to include any employee who works in a “computer or information technology occupation (including but not limited to, work related to computers, information systems, components, networks, software, hardware, databases, security, internet, intranet, or websites) as an analyst, programmer, engineer, designer, developer, administrator, or other similarly skilled worker.”  The primary duties for the exemption to apply would also be broader under the CPU Act, which would consider employees exempt if their primary duties are: (1) “the application of systems, network or database analysis techniques and procedures, including consulting with users, to determine or modify hardware, software, network, database, or system functional specifications;” or (2) “the design, development, documentation, analysis, creation, testing, securing, configuration, integration, debugging, modification of computer or information technology, or enabling continuity of systems and applications.”  Employees who perform a combination of these duties would still be considered exempt.  Also, employees who are “directing the work of individuals performing duties described [above], including training such individuals or leading teams performing such duties” would be considered exempt.  S. 1747

IRS Announces Voluntary Classification Settlement Program

by Dean L. Silverberg, Jeffrey M. Landes, Susan Gross Sholinsky, and Jennifer A. Goldman

On September 21, 2011, the Internal Revenue Service ("IRS") announced a new program that will give businesses the opportunity to resolve prior worker classification issues by voluntarily reclassifying their non-employee workers (such as consultants, freelancers, and independent contractors) as employees for federal employment tax purposes. Officially called the "Voluntary Classification Settlement Program" ("VCSP"), this program is part of a larger "Fresh Start" initiative at the IRS to aid taxpayers and businesses in addressing their federal tax liabilities.

Read the full advisory online

Hurricane Irene Threatens the East Coast: Employers Don't Forget the Wage Hour Issues

By Kara M. Maciel

As Hurricane Irene is moving up the East Coast and threatening states from North Carolina, Virginia, Maryland, New Jersey, New York and Massachusetts, employers should refresh themselves on the wage and hour issues arising from the possibility of missed work days in the wake of the storm.

A few brief points that all employers should be mindful of under the FLSA:

  • A non-exempt employee generally does not have to be paid for weather-related absences. An employer may allow (or require) non-exempt employees to use vacation or personal leave days for such absences. But, if the employer has a collective bargaining agreement or handbook policies, the employer may obligate itself to pay through such policies.
  • An exempt employee generally must be paid for absences caused by office closures due to weather, if he/she performs work in that week. The Department of Labor has stated that an employer may not dock a salaried employee for full days when the business is closed because of weather. Partial day deductions for weather related absences are not permitted.
  • If certain employees are required to be on-call (such as public safety, IT, or other essential personnel) during the storm, and the employee cannot use the time effectively for his or her own purpose, the on-call time is compensable and the employee must be paid. However, if the employee is simply at home and available to be reached by company officials, then the time is not working time and an employer does not have to pay for that time.

Policies and procedures to keep in place:

  • Decide whether your company will offer “weather days” for non-exempt workers who are absent because of disasters.
  • Ensure that your payroll systems are prepared for employees working from home, longer shifts, or not taking lunches.
  • Decide whether employees absent because of weather will be allowed / required to use vacation or PTO time.
  • Ensure safety of payroll records and ability to process payroll from alternate location if needed.

Natural disasters pose a myriad of employment and HR issues from wage-hour to FMLA leave and the WARN Act. The best protection is to have a plan in place in advance to ensure your employees are paid and well taken care of during a difficult time. Our reference tool contains answers to common questions, and while aimed at employers in the Gulf Coast, if you have operations anywhere along the East Coast, you should find it helpful.

Are Job Interviews Compensable Time?

According to a federal judge in California, the answer is "Yes."  Judge Wilken of the U.S. District Court for the Northern District of California issued a summary judgment ruling on October 16, 2009 holding that temporary employees of Kelly Services were owed overtime for time spent in interviews for job placement.  The rationale for the decision included findings that Kelly arranged the interviews, helped the applicants prepare for the interviews, and debriefed them afterwards.  The judge rejected Kelly's arguments that the interviews were purely voluntary, and for the benefit of the applicants (since they presumably wanted a job), and found that the interviews were "controlled" by Kelly.   The Judge did throw a bone to the temp agency by declaring that time spent traveling to interviews was not compensable. 

This case will no doubt be relied upon as a basis for class actions against temporary staffing companies around the country.  Any employer in this industry should be aware of this ruling and take a hard look at its policies to alleviate arguments of "control" over job interviews.  In the meantime, one can only hope that the appellate court will apply a bit more common sense. 

 

Senators Press DOL to 'Close the Loophole' Exempting Home Health Care Workers from Minimum Wage and Overtime Exemption

Doug Weiner and Matthew Miklave recently prepared a Client Alert noting an effort underway in Congress to broaden the application of the Fair Labor Standards Act in the Health Industry.  That Alert is excerpted below.

Fifteen United States senators have stepped forward to urge the U.S. Department of Labor ("DOL") to repeal a broad exemption from the minimum wage and overtime requirements of the federal Fair Labor Standards Act ("FLSA") for home health care workers. Under current DOL regulations, home health care aides who perform companionship services for the elderly and infirm are exempt from the FLSA. The exemption applies to all workers in domestic service who provide companionship services for individuals unable to care for themselves. Domestic service is work performed within the residence of the family using the services. Companionship services are those that provide fellowship, care and protection to persons who, because of advanced age or physical or mental infirmity, cannot care for their own needs. Home health care workers, whether employed directly by the family or by an employer or agency other than the household using their services, are exempt from the FLSA's minimum wage and overtime pay requirements under Section 13(a)(15). 29 C.F.R. § 552.109(a). In 2007, the United States Supreme Court upheld the current rule against a strong legal challenge. Long Island Care at Home, Ltd. v. Coke, 549 U. S. 1105, 127 S. Ct. 853 (2007).

Recently, however, 15 senators wrote to U. S. Secretary of Labor Hilda Solis pressing the DOL to close this "loophole." Citing a $9 an hour industry-wide average wage, the senators argue in favor of extending federal wage requirements to "thousands of low-wage workers, primarily women, who are doing difficult, dangerous, yet extremely important work." Secretary Solis has already signaled that the DOL is reviewing this exemption.

Reversing the exemption may have significant consequences for individuals and companies providing or paying for home health care workers for seniors and the disabled. Coupled with an ever-increasing population in need of services, the DOL's actions could result in an additional strain on scarce resources.

We note that some state laws already narrow the federal exemption or otherwise limit its application. Pennsylvania, for example, exempts only home health care aides employed directly by a family for work performed within their home. New York requires time-and-one-half the minimum wage for overtime hours worked. Wherever a state law provides greater protection to employees than the FLSA, the state law prevails over federal law.

Is Now Really The Right Time to Be Considering a Federal Paid Vacation Act?

by Michael Kun

It has not received much publicity -- yet -- but Representative Alan Grayson of Florida has introduced the Paid Vacation Act, a proposed amendment to the Fair Labor Standards Act.

In short, if passed, the Paid Vacation Act would require employers with 100 or more employees to provide one week of paid vacation each year to each of its employees who had worked for 25 weeks or 1,250 hours. Three years after passage, the Act would require those employers to provide two weeks of paid vacation, and smaller employers (those with more than 50 employees) would have to provide one week of vacation.

Of course, the overwhelming majority of employers already provide employees with paid vacation, so the Act would have little or no impact upon them.

As for the remainder, without going into all of the business reasons an employer might have for not providing paid vacation, one has to question whether this is really the time to be considering such an amendment to the FLSA.

The economic climate in the country is dire enough, and employers in virtually every industry have had to conduct layoffs just to remain in business.

Employees aren't concerned about vacations. They're concerned about keeping their jobs.

Is adding another business cost to struggling businesses wise, knowing that it would likely force some of those businesses to conduct additional layoffs or reduce employee compensation?

Or might someone be playing to the masses by proposing it?

Of course, time will tell whether the Paid Vacation Act gains any traction. But it certainly seems that this is one bill that deserves to be tabled until the economy (hopefully) rebounds.
 

There is No Such Thing as a Free Lunch

One of the issues that repeatedly rears its head in wage and hour litigation and Department of Labor investigations is whether employees are being compensated properly for meal periods.  One practice that is almost always controversial, in this regard, is the automatic payroll deduction for lunch.

Absent thorough policies and safeguards to prevent inaccurate timekeeping, the automatic deduction is a significant legal risk that should be used with extreme caution.  The reason -- it is too easy for employees to claim they have been asked to work through lunch, or that they can not always leave their workstation at the designated time to take advantage of the full period.  Some tips to avoid "he said - she said" litigation in this area include the following.

  1. Implement a clear off the clock policy explaining that employees should not work off the clock and should report any supervisor who makes such a request.
  2. Maintain clear procedures for "exceptions" to automatic lunch deductions so that supervisors can correct payroll as warranted by special circumstances or business needs.
  3. Require employees to acknowledge any deviation from automatic deduction practices.
  4. Train managers on the importance of payroll polices and procedures.

Following these simple steps can help avoid misunderstandings and eventual litigation.  Even if you prevail, wage and hour litigation can be fact intensive and expensive.  Accordingly, this is one area where you can ill afford to not have comprehensive policies and procedures in place.

 

Court Rejects "Ultimate Consumer" Defense to FLSA Enterprise Coverage

A federal court in the Southern District of Florida has rejected the "ultimate consumer" defense to enterprise coverage under the Fair Labor Standards Act.  The case is Exime v. E.W. Ventures, Inc., Case No. 08-60099-CIV-SEITZ/O'SULLIVAN (S.D. Fla., December 23, 2008). 

First, some background: To establish coverage under the Fair Labor Standards Act, a plaintiff must show that: (1) she was “engaged in commerce or in the production of goods for commerce”  [individual coverage]; or (2) that she was employed in an enterprise “engaged in commerce or in the production of goods for commerce” [enterprise coverage].  See 29 U.S.C. § 207(a)(1).

With respect to FLSA enterprise coverage, the relevant provisions are set forth in 29 U.S.C. § 203(s)(1)(A) and 29 C.F.R. § 779.238:

“Enterprise engaged in commerce or in the production of goods for commerce” means an enterprise that --

[H]as employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person; and

[I]s an enterprise whose annual gross volume of sales made or business done is not less than $500,000. . .

29 U.S.C. § 203(s)(1)(A)(i)-(ii).

. . . An enterprise described in [29 U.S.C. § 203(s)(1)] will be considered to have employees engaged in commerce or in the production of goods for commerce. . .if during the annual period which it uses in calculating its annual sales for purposes of the other conditions of these sections, it regularly and recurrently has at least two or more employees engaged in such activities. On the other hand, it is plain that an enterprise that has employees engaged in such activities only in isolated or sporadic occasions, will not meet this condition.

29 C.F.R. § 779.238.

Based on these rules, courts have adopted a two-prong test for enterprise coverage: (1) the enterprise commerce requirement; and (2) the gross sales requirement. Both prongs must be met in order to establish FLSA enterprise coverage.

The "Ultimate Consumer" Defense

The "ultimate consumer" defense asserts that employees' handling of interstate goods or materials cannot be used to establish FLSA enterprise coverage  if the employer is the ultimate consumer of those goods or materials. The defense is derived from 29 U.S.C. § 203(i) and § 203(s)(1)(A)(i), which state as follows:

“Enterprise engaged in commerce or in the production of goods for commerce” means an enterprise that. . .has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person;

29 U.S.C. § 203(s)(1)(A)(i).

“Goods” means goods (including ships and marine equipment), wares, products, commodities, merchandise, or articles or subjects of commerce of any character, or any part or ingredient thereof, but does not include goods after their delivery into the actual physical possession of the ultimate consumer thereof other than a producer, manufacturer, or processor thereof.

29 U.S.C. § 203(i) (emphasis added).

Judge Rejects "Ultimate Consumer" Defense

In Exime, the employer was a dry cleaning business.  The vast majority of the employer's equipment (dry cleaning machines, pressing machines, boilers, and vans) was manufactured outside Florida.   The chemicals that the employees used were purchased mostly from local retailers.  And the employer served only Florida customers.

Under these facts, the employer argued that to the extent employees handled interstate goods and materials, the employer was the ultimate consumer of those goods and materials, and therefore the employees' handling of such goods and materials could not be used to establish enterprise coverage.

Judge Patricia Seitz rejected this argument, stating in part as follows:

Defendants' argument.... ultimately turns on the assumption that the terms “goods” and “materials” share the same statutory definition. But, in order to accept Defendants' narrow interpretation, it would be necessary to wholly ignore the 1974 amendment to § 203(s)(1)(A)(i), as well as the accompanying Senate Report. That Report provides:

The bill also adds the words “or materials” after the word “goods” [in § 203(s)(1)(A)(i)] to make clear the Congressional intent to include within this additional basis of coverage the handling of goods consumed in the employer's business, as, e.g., the soap used by a laundry. . .S.Rep. No. 93-690, 93rd Cong., 2nd Sess. at 17 (1974) (emphasis added).

Significantly, the specific example cited in the 1974 Senate Report, “e.g., the soap used by a laundry,” demonstrates a clear Congressional intent to expand enterprise jurisdiction to companies whose employees handle interstate materials used in the employer's own business, regardless of whether that employer is the ultimate consumer of those materials. In other words, the additional term “materials” broadens FLSA jurisdiction by substantially constricting the “ultimate consumer” defense now asserted by Defendants....

The "ultimate consumer" defense, read broadly, is a potentially powerful weapon for employers in defense of an FLSA lawsuit. There are many small businesses, such as dry cleaners, that are the ultimate consumers of interstate materials, but who serve only local customers and do not otherwise handle, sell or work on goods in interstate commerce. But under Judge Seitz's narrow reading of the defense, businesses that do not handle, sell or work on interstate goods, but use interstate materials in their operations, are nevertheless covered under the FLSA. It is the rare business indeed that uses only intrastate materials in its operations. Thus, under Judge Seitz's interpretation, the "ultimate consumer" defense is effectively dead.

Is Exime the last word on the "ultimate consumer" defense? Stay tuned.