Wage & Hour Defense Blog : Wage & Hour Lawyer & Attorney : Epstein Becker Green Law Firm : DOL Enforcement, FLSA Coverage

by Kevin Vance

Just yesterday the U.S. Department of Labor released a Fact Sheet explaining the March, 2010 amendment to the Fair Labor Standards Act  that requires employers to provide breaks for nursing mothers.  The DOL's guidance is helpful because I have had several clients ask me about this law in recent months. 

The law requires employers to provide "reasonable break time for an employee to express breast milk for her nursing child for 1 year after the child's birth each time such employee has need to express the milk."  Employers must provide the breaks "as frequently as needed", and must give the employee a private place, other than a bathroom, to take the breaks.  The breaks need to be of "reasonable" length.  The employer does not have to pay the employee for the break time, unless the employer already provides compensated breaks, and the employee uses one of those breaks to express breast milk.

A couple of interesting points:  (1) the law applies only to non-exempt employees, and not to exempt employees; and, (2) employers with under 50 employees are not subject to the law "if compliance with the provision would impose an undue hardship."

This amendment will probably not lead to much litigation, but employers need to be aware that it is out there. 

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Suppose a group of your salaried employees sues your company under the Fair Labor Standards Act, claiming they’ve been improperly classified as exempt and are entitled to overtime pay for the last three years. And suppose you’re concerned about the strength of your exemption defense and want to calculate your potential exposure. Do you calculate the employees’ overtime hours at 1.5 times their regular rate? Or can you assert that even if the employees were improperly classified, their salary paid them at a straight time rate for all their overtime hours, and therefore any liability should be calculated at only a half-time rate? 

The answer depends on how many hours the employees’ salary was intended to cover. 

Here’s why. The FLSA requires that employers pay non-exempt employees overtime pay for hours worked in excess of 40 per week at a rate not less than one and one-half times the employee’s regular rate of pay.  29 U.S.C. § 207(a)(1).  The regular rate must be “must be drawn from what happens under the employment contract.” 29 C.F.R. § 778.108. Suppose you agree to pay an employee a weekly salary of $1,000 for a 40 hour workweek. The regular rate is determined by dividing total compensation by the number of hours the salary is intended to compensate. 29 C.F.R. § 778.113. Here, the employee’s regular rate is $25 per hour. If a court determines that the position is non-exempt, your company will be liable for overtime at 1.5 times the regular rate, i.e. $37.50.

Employers and salaried employees often do not have a specific agreement as to how many hours of work are required or expected. But if the facts warrant a conclusion that the salary was intended to cover a 40 hour workweek, the employer will still be liable for overtime hours at 1.5 times the regular rate. In a recent case, Talbot v. Lakeview Center, Inc., Case No. 3:06cv378/MCR/MD (N.D. Fla., February 2, 2010), the employer posted two job opening advertisements that listed the hours of employment as 8 a.m. to 5 p.m., Monday through Friday. Plaintiffs were expected to be on the job during normal business hours and did not believe they were permitted to work fewer than 40 hours per week. Although plaintiffs understood that evening or weekend work would sometimes be required, the employer used a “flex time” arrangement that permitted plaintiffs to arrive at work late if required to work on an evening or weekend. The court found these facts consistent with a contract for a 40 hour week and held that the employer was liable for overtime at 1.5 times the regular rate.

For employers, there is a better way. If you’ve made it clear to salaried employees that their salary covers all hours worked, irrespective of the number of hours they work, you can argue that the employees’ salary already compensated them at a straight time rate for all hours worked, and that even if the employees are found to be non-exempt, any overtime should be calculated at a half-time rate. Courts sometimes characterize this as a retroactive application of the “fluctuating workweek” method.

Under the Department of Labor’s “fixed salary for a fluctuating workweek” rule, “where there is a clear mutual understanding of the parties,” an employer can pay a non-exempt employee a fixed salary that serves as compensation for all hours worked if it is sufficient to compensate the employee for all straight time hours worked at a rate not less than the minimum wage and the employee is paid an additional one-half of the regular rate for all overtime hours. See 29 C.F.R. § 778.114. To be clear, when you treat employees as exempt, you are not actually utilizing the “fluctuating workweek” method because, by definition, you are not paying the employees any overtime. But if your exemption argument fails, many courts will allow you to apply the rule retroactively to limit overtime liability to a half-time rate.

For example, in Blackmon v. Brookshire Grocery Co., 835 F. 2d 1135 (5^th Cir. 1988), the plaintiffs had been promoted with the understanding that they would be paid a fixed weekly salary, and would work whatever number of hours were required to get the job done. The trial court found that plaintiffs were not exempt and calculated overtime at 1.5 times their regular rate. On appeal, the Fifth Circuit Court of Appeals, citing the fluctuating workweek rule, held that a half-time rate was appropriate. In Saizan v. Delta Concrete Prods. Co., 209 F. Supp. 2d 639, 640 (M.D. La. 2002), the court, citing Blackmon, reached the same conclusion. In Sutton v. Legal Services Corp., 11 W.H Cas.2d 401, 404 (D.C.Sup.2006), the court stated that “virtually every court that has considered the question” has upheld the remedial use of half-time in failed exemption cases.

A January 14, 2009 Department of Labor opinion letter (FLSA2009-3),  in which the DOL endorsed the fluctuating workweek method to compute the retroactive payment of overtime to misclassified employees, lends support to Blackmon and similar cases.

But recently, at least two courts have held that the fluctuating workweek method cannot apply retroactively. In In re Texas EZPawn Fair Labor Stds. Act Litig., 633 F. Supp. 2d 395 (W.D. Tex. 2008), the court stated that applying the method not only as a way to pay an employee, but also as a way to remedy misclassification, is inconsistent with the remedial provisions of the FLSA. In Russell v. Wells Fargo and Co., No. C 07-3993 (N.D. Cal. Nov. 17, 2009), the court reached the same conclusion and specifically found the DOL opinion letter (FLSA2009-3) unpersuasive.

In Torres v. Bacardi Global Brands Promotions, Inc., 482 F. Supp. 2d 1379 (S.D. Fla. 2007), the court side-stepped the issue altogether and held that the application of the fluctuating workweek method was not at issue because the employer was not relying on it.  The court nevertheless agreed with the employer that because the plaintiff had “already received his regular rate for all hours worked,” he was only entitled to half-time for those hours worked in excess of forty per week.  

While there is some disagreement in the case law about whether it is proper to use a half-time rate to calculate overtime liability in a failed exemption case, there is little or no disagreement that half-time is applicable, if at all, only where the employees’ salaries were intended to cover all hours worked. If the evidence shows that the employees’ salaries were intended to cover a 40-hour workweek, the employer’s half-time argument will fail.

And make no mistake, the difference between calculating overtime at a half-time rate and 1.5 times the regular rate is dramatic. As noted above, an employee who is paid a $1,000 weekly salary for a 40-hour workweek has a regular rate of $25 per hour. Ten hours of overtime will cost the employer $375 in back pay (25 x 1.5 x 10 = $375). Now consider an employee who is paid a $1,000 weekly salary with a clear understanding that her salary covers all hours worked. In a week in which the employee works 50 hours, the regular rate is $20 per hour. Using a half-time rate, the employer’s liability for ten hours of overtime is only $100 (20 x 0.5 x 10 = $100), a $375% difference.  

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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. 

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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.

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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.
 

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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.

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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.

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