Supreme Court Declines to Review CEO's Personal Liability

By Aaron Olsen

The United States Supreme Court declined to review the Second Circuit’s decision in Irizarry v. Catsimatidis, in which the Court of Appeals affirmed the District Court’s decision holding a CEO personally liable for violations of the Fair Labor Standards Act (FLSA).

By way of background, in July 2013, the United States Court of Appeals for the Second Circuit affirmed the District Court’s decision that the CEO of a supermarket chain could be held personally liable for damages in Irizarry v. Catsimatidis.  The District Court had granted summary judgment in favor of plaintiffs in the class action case and held that plaintiffs were entitled to liquidated damages on their claims concerning reduction of hours, withholding of overtime, misclassification as exempt employees, and retaliation. The parties entered into a settlement agreement. However, the corporate defendants later defaulted on their obligations under the agreement. Plaintiffs then moved for partial summary judgment on the CEO’s personal liability as an employer. 

Individual liability under the FLSA turns on whether an employment relationship exists between the employee and the purported employer, the individual defendant.  The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee….” 29 U.S.C. § 203(d). An “employee” is defined as “any individual employed by an employer.” 29 U.S.C. § 203(e)(1). Quoting from the U.S. Supreme Court’s decision Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947), the Court of Appeals in Irizarry stated that the FLSA contains “no definition that solves problems as to the limits of the employer-employee relationship under the Act.”

The District Court reasoned that the CEO hired managerial employees, signed all paychecks to the class members, had the power to close or sell the stores, routinely reviewed financial reports, worked at the corporate office and generally presided over the day to day operations of the company. The District Court concluded that there was no area of the store which was not subject to the CEO’s control, whether or not he chose to exercise it, and therefore the CEO had “operational control” and could held liable as an employer.

The CEO argued that he was a high-level employee who made symbolic or, at most, general corporate decisions that only affected the plaintiffs through an attenuated chain of causation.  

The Court of Appeals noted that it had previously set forth four factors to determine the “economic reality” of an employment relationship: (i) whether the alleged employer had the power to hire and fire the employees, (ii) supervised and controlled employee work schedules or conditions of employment, (iii) determined the rate and method of payment, and (iv) maintained employment records. However, the Second Circuit also stated that it had examined different indicia of “operational control” in other cases, with the intent of assessing whether a defendant exercised functional control over a worker.

The Court of Appeals concluded, in what it described as a “close case,” that there was no evidence that the CEO was responsible for the FLSA violations, or that he ever directly managed or otherwise interacted with the plaintiffs. Nevertheless, the CEO was an “employer” for the purposes of the FLSA because his control over the hiring of managerial employees, and his overall financial control of the company meant that he possessed “operational control” over the plaintiffs’ employment

The potential to be held personally liable for violations of the FLSA understandably creates concern for CEOs – especially those of medium-sized companies that have a large enough number of employees to create significant exposure but not enough resources for the Company to pay for a large judgment that may come from losing a class-action.
 

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.

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. 

DOL Tip Pooling Rule Held Invalid by Federal Court

By: Kara Maciel and Jordan Schwartz

As discussed in prior blogs, due to confusion surrounding FLSA tip pool requirements, the U.S. Department of Labor (“DOL”) Wage and Hour Division enacted a strict rule in 2011 related to proper tip pooling and service charge practices. This rule was met with swift legal challenges, and earlier this week the U.S. District Court for the District of Oregon 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 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 court, 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.

The DOL initially announced that in accordance with the Woody Woo decision, it would permit employers in the Ninth Circuit to impose mandatory tip pooling on employees who did not customarily and regularly receive tips. However, on April 5, 2011, the DOL issued regulations that directly conflicted with the holding in Woody Woo. At that time, it was unclear whether the DOL would enforce the new regulations against employers in the Ninth Circuit. In early 2012, the DOL clarified its position on tip pooling by fully rejecting the Ninth Circuit’s decision 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 rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.

Shortly after the DOL’s final rule, hospitality groups, including the Oregon Restaurant and Lodging Association, the Washington Restaurant Association, and the Alaska CHARR, filed a lawsuit against the DOL challenging the agency’s regulations that exclude back-of-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 court granted the plaintiffs’ summary judgment motion, holding that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The 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. Quoting the Ninth Circuit’s opinion in Woody Woo, the court explained that “[a] statute that provides that a person must do X in order to achieve Y does not mandate that a person must do X, period.”

The 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 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.

The Ninth Circuit Joins Other Circuits In Recognizing "Hybrid" Wage-Hour Class Actions

By Michael Kun

“Hybrid” wage-hour class actions are by no means a new concept. 

In a “hybrid” class action, the named plaintiff files suit seeking to represent classes under both the federal Fair Labor Standards Act (“FLSA”) and state wage-hour laws.  As the potential recovery and limitations periods for these claims are often very different, so, too, are the mechanisms used for each. 

In FLSA claims, where classes can be “conditionally certified” if a plaintiff satisfies a relatively low burden of establishing that class members are “similarly situated” – a phrase nowhere defined in the statute – only those persons who affirmatively “opt in” to the lawsuit become class members.  In state wage-hour claims, governed by Federal Rule 23 (or a state law equivalent), a plaintiff generally must satisfy a higher standard – establishing numerosity, commonality, typicality, adequacy and superiority – and, if a class is certified, only those persons who affirmatively “opt out” are removed from the class.

The differences between these two mechanisms can be confusing even for lawyers, particularly in “hybrid” class actions where both are used simultaneously.  It is not difficult to understand how class members would find such proceedings even more confusing, especially if they receive notices telling them how to “opt in” to one type of wage-hour class and “opt out” of another, where the claims themselves sound identical to a layperson.  If class members wish to participate in both classes, they need to figure out that they must “opt in” to the FLSA class and do nothing as to the state law class.  And if they wish to participate in neither, they need to figure out that they should do nothing as to the FLSA class, yet “opt out” of the state class.  Anyone who has every received a class notice in the mail knows that, try as the court and parties might, those notices can be as difficult to navigate as trying to read the instructions for assembling a new bicycle. 

Because of the differences between the two mechanisms, the way the claims proceed under them, and the potential confusion, some employers have successfully argued that the two mechanisms were incompatible – a plaintiff had to choose whether to pursue federal or state law claims.  However, the circuit courts around the country have increasingly weighed in, ruling that the claims are not incompatible and that plaintiffs may pursue “hybrid” class actions.  Now, the Ninth Circuit has joined the chorus, issuing an opinion in Busk v. Integrity Staffing in which it determined that federal and state wage-hour claims may “peacefully co-exist” in the same action.

Unless and until the Supreme Court weighs in with a different opinion, it would seem that they “hybrid” class action is here to stay.  For employers, that means increased potential exposure in wage-hour class actions as plaintiffs can and will pursue both federal and state claims in the same action.  And it also means increased litigation activities, as parties in “hybrid” class actions normally will deal with two separate sets of class certification briefing – one on the FLSA claims, one on the state law claims – as well as two notices if classes are certified on each. 

The upside for employers?  To the extent there is one, it is that the inclusion of the FLSA claim ensures that the case can be removed to federal court at the outset.           

Supreme Court Applies Strict Analysis in Bouncing FLSA Collective Action, Even After "Conditional Certification."

by Stuart Gerson

In Genesis Healthcare Corp. v. Symczyk, the Unites States Supreme Court held that a collective action under the FLSA was properly dismissed for lack of subject matter jurisdiction after the named plaintiff ignored the employer’s Fed. R. Civ. P. 68 offer of judgment. The Court concluded that the plaintiff had no personal interest in representing putative, unnamed claimants, nor did she have any other continuing interest that would preserve her suit from mootness.

The plaintiff’s collective action was originally filed in District Court for the Eastern District of Pennsylvania, and the employer made an offer of judgment that would have fully satisfied the plaintiff’s individual claim before any other claimants joined the case. Although the plaintiff did not respond to the offer of judgment, the District Court dismissed the case as moot.

The Third Circuit reversed and held that, while the plaintiff’s individual claim was moot, her collective action could go forward on the theory that a defendant should not be allowed to “pick off” named plaintiffs and thereby avoid certification of a collective action. 

The Supreme Court stated that the Courts of Appeals disagree over whether a Rule 68 offer that fully satisfies a plaintiff’s individual claim renders that plaintiff’s claim moot even if the offer is not accepted. However, the plaintiff in Symczyk had conceded that issue below. The Supreme Court therefore assumed (but did decide) that the plaintiff’s individual claim was moot even though she had not accepted the offer of judgment.

Distinguishing several cases with regard to headless classes being able to go forward where a named plaintiff’s case becomes moot, Justice Thomas, writing for a 5-4 majority (a straight conservative/liberal breakout) reversed the Circuit, holding that well-settled mootness principles control and that when the named plaintiff’s suit became moot (because the ignored Rule 68 motion covered all of her interests, including attorneys’ fees), she had no personal interest remaining that would allow her to represent others.

In so doing, the Supreme Court’s majority opined that while under Fed. R. Civ. P. 23, a putative class acquires an independent legal status once it is certified, no such independent status is conferred by” conditional certification” under the FLSA.

You may recall that I recently blogged about the Court’s decision in the Comcast case, suggesting that it presented a useful precedent that could be employed, not just in Rule 23 cases, but under the FLSA’s collective action jurisprudence, to require a court to hear merits arguments prior to certification and rule on standing then.  In fact, the Court’s decision today not only punctuates that view, it suggests that the FLSA allows for more stringent analysis of standing, even after “conditional certification.”

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 #3: What Records Must Be Provided to the Department of Labor?

By Michael D. Thompson

From restaurants in New York to childcare providers in Arkansas to the garment industry in Southern California, Department of Labor investigators continue to uncover FLSA violations by conducting unannounced workplace inspections.

Accordingly, in January, 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.

We previously blogged about how to prepare for an audit, and how to develop a general protocol for the investigation.  In this post, we will discuss which records should be made available to Wage Hour Investigators.

QUESTION:  Do we have to allow the DOL to inspect our private business records?  What records do we have to make available, and what documents should we withhold?

ANSWER:  Your company cannot rely on general claims of privacy or property rights as a basis for keeping the DOL from inspecting its wage and hour records .  In fact, Section 11(a) of the FLSA specifically authorizes representatives of the Department of Labor to investigate and gather data concerning wages, hours, and other employment practices:

  • The inspector may review documents showing the employer’s annual dollar volume of business transactions, involvement in interstate commerce, and/or work on government contracts.  Those documents are inspected to determine if the employer is a covered enterprise under the FLSA, or if the employees are protected by the FLSA because their work involves them in interstate commerce.

If you are certain that the FLSA applies to your company or its employees, you may wish to discuss with the inspector whether you can stipulate to coverage and therefore eliminate or streamline this part of the inspection.

  • Pursuant to Section 11(a), DOL investigators may review the wage hour records required by 29 C.F.R. Part 516.  Accordingly, an inspector may require your company to produce records for each of the company’s employees showing the employee’s (i) total daily or weekly straight-time earnings, and total premium pay for overtime hours; (ii) regular rate or pay for any workweek in which overtime compensation is paid; (iii) hours worked each workday and each workweek; and (iv) date of payment and the pay period covered by that payment.  An employer’s records must also show the amount and nature of each payment which is excluded from the “regular rate”, and any additions to or deductions from wages for each pay period.

Even if an inspection is the result of a specific complaint, the DOL generally will not limit its investigation to that complaint.  Rather, the DOL will likely review all personnel time records and payroll records to determine whether your company is in compliance with all aspects of the FLSA for all current and former employees on the employer's payroll for the past two to three years.

  • The DOL’s Wage and Hour Division is responsible for ensuring compliance with the employment eligibility verification recordkeeping requirements.  Thus, the DOL inspector may demand access to your company’s I-9 forms.

Refusing to produce documents requested by DOL investigators will generally do little more than antagonize the DOL.  However, employers should endeavor to avoid producing:    

  • Documents that were not specifically requested:  For example, if the inspector only requests records of wages and hours worked, don’t produce your job descriptions.  Similarly, if the investigator asks for employees’ I-9 forms, don’t turn over their entire personnel files.

There is often one exception to this rule.  Hopefully, your company has implemented a policy (i) prohibiting improper deductions and (ii) including a complaint mechanism through which employees may seek reimbursement for any improper deductions.  If followed, such a policy creates “safe harbor” that can protect the exempt status of employees who are subject to improper deductions.  That policy, therefore, should be provided to the DOL investigator.

  • Any analysis of the company’s wage hour issues prepared or requested by the company itself:  A self- audit of your company’s wage and hour practices is useful in identifying and correcting violations of the FLSA.  However, the DOL is likely to accept your conclusions about any violations identified in the audit, while giving no deference to any conclusions in your favor.  Therefore, you should not provide DOL investigators with a copy of your self-audit or similar materials.               
  • Trade secret or confidential business information:  Question the request to inspect trade secret or confidential business information, and discuss whether confidential information may be redacted from the requested records.  If you do produce such records, label them “Confidential and Proprietary.”

After locating the records to be produced to the DOL inspector, you should retain the original copies of every record produced to the DOL and track all documents produced on a Document Control Log.

In our next FAQ, we will discuss how to handle a “walkaround” inspection of the facility, in which the DOL inspector observes employee duties and looks for wage and hour violations.

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. 

District Court Rules That FLSA Cases Can Be Dismissed Based On Private Settlements, But Employers "Take Their Chances" On Enforcement.

By Michael D. Thompson

The prohibition against private settlements of FLSA claims was scrutinized again last week, when U.S. District Court for the Eastern District of New York held that parties could voluntarily dismiss an FLSA lawsuit without obtaining approval of the settlement agreement from the court.  Picerni v. Bilingual SEIT & Preschool Inc. 

Courts in FLSA cases have historically expressed the concern that individual waivers of FLSA rights would enable employers to use their superior bargaining power to extract individual waivers from their employees and “thwart the legislative policy [that the FLSA] was designed to effectuate.”  Brooklyn Sav. Bank v. O’Neill

Accordingly, in 1982, the Eleventh Circuit held that disputes under the FLSA could not be settled without the approval of a court or the Department of Labor.  Lynn’s Food Stores, Inc. v. United States.

However, in August 2012, we blogged about the Fifth Circuit’s decision to uphold the enforcement of a private settlement agreement resolving FLSA claims.  Martin v. Spring Break ’83 Productions LLC.  The United States Supreme Court subsequently declined to review the Fifth Circuit’s ruling and settle the split between the circuits.

Thus, when the issue arose in Picerni, the District Court considered whether a prohibition on private settlements for FLSA cases “runs afoul” of Federal Rule of Civil Procedure 41.  That rule provides that a federal lawsuit, with certain exceptions, may be voluntarily dismissed by the plaintiff before the defendant files an answer, and may thereafter be dismissed through a stipulation signed by all parties.

The District Court held that FLSA claims were subject to F.R.Civ.P. 41 and therefore the parties were allowed to dismiss their own lawsuit.

However, the District Court made it clear that it was offering no opinion regarding the enforceability of the underlying settlement agreement.

The Court cited Lynn Foods for the proposition that “[m]ost courts have at least suggested in dictum, if not held, that a private FLSA settlement will not be enforced without court approval.”  The District Court further noted that “[o]ther courts have allowed private settlements if the circumstances, when examined in subsequent litigation, are found fair” or “when the court finds that a plaintiff has received in settlement 100% of the wages that he should have been paid.”  See Martinez v. Bohls Bearing Equipment Co.; Mackenzie v. Kindred Hospitals East. L.L.C. 

Thus, the District Court stated that the parties could agree to a private settlement and dismiss their FLSA lawsuit.  In settling the matter without court or DOL approval, however, the parties assumed the risk that the settlement agreement might not be enforced to bar subsequent litigation. 

Nevertheless, “if parties want to take their chances that their settlement will not be effective,” the District Court stated that it would permit them to do so.

The ruling by the District Court for the Eastern District of New York in Picerni, in conjunction with the Fifth Circuit’s decision in Martin, signal an increasing willingness to accept the private settlement of FLSA cases.  However, employers should consider whether the need to keep such an agreement private outweighs the possibility that the agreement will not be enforced to preclude further litigation of the same claims.

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.

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.

Tip Pools: Challenging DOL's Amended Rule on Employee Participation

By:  Kara M. Maciel

In April of 2011, the U.S. Department of Labor (“DOL”) changed its rule defining the general characteristics of tips in an attempt to overrule the U.S. Court of Appeals for the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc. ruling that the FLSA does not impose any restrictions on the kinds of employees who may participate in a valid tip pool where the employer does not claim the “tip credit.” 

DOL’s Recent Position on Tip Pool Participation

The DOL’s amended rule provides that tips are the property of the employees, and may not be used by the employer for any purpose other than as a tip credit or in furtherance of a valid tip pool, regardless of whether the employer actually uses the “tip credit.”  Accordingly, the DOL will now find a tip pool to be invalid if it includes employees who do not “customarily and regularly receive tips” – a requirement that the DOL generally interprets to limit tip pools to employees who provide direct service to customers.

Earlier this year, the DOL issued a memorandum stating that it would be enforcing its new rules on tip pools uniformly throughout the country.  Accordingly, employers who have established mandatory tip pools but who do not use the tip credit may find themselves faced with DOL enforcement actions if they permit employees who do not provide direct service to participate in the tip pools.  Those businesses faced with such enforcement actions may find it in their interest to challenge the validity of the DOL’s position on tip pools and argue that it conflicts with the plain language of the FLSA. 

Legal Arguments to Challenge DOL’s Interpretation on Tip Pools

For those businesses seeking to challenge the DOL’s new rule on tip pooling, the Ninth Circuit’s opinion in Woody Woo, provides useful guidance.  Specifically, the Court concluded that that the plain language of Section 203(m) of the FLSA imposes limitations on mandatory tip pools only when the employer takes a “tip credit,” and does not state freestanding requirements for all tip pools.  Further, under the U.S. Supreme Court precedent, when a federal statute addresses a particular issue, courts must apply the plain language of the statute and may not rely on a federal agency’s interpretation of the law, particularly if the agency’s interpretation conflicts with the plain language of the statute.  Based on this case law, an employer could argue that the DOL’s position on tip pools is invalid because it conflicts with the plain language of Section 203(m) of the FLSA.  Specifically, the DOL has attempted to extend to all tip pools a restriction that Congress clearly limited to tip pools involving workers for whom the employer claims the “tip credit.” 

The DOL has attempted to get around this argument by claiming that Section 203(m) of the FLSA left a “gap” in the statutory scheme regarding the treatment of tips which the DOL may fill through its interpretation of the law.  Under Woody Woo, the problem with the DOL’s argument is that it mischaracterizes Congress’ clear intent to limit the FLSA’s restrictions on mandatory tip pools to those involving employees for whom the employer claims the “tip credit” as “silence” on the issue of whether those same restrictions apply to other kinds of tip pools.  However, a legislative decision to limit a particular rule’s application to one situation does not create a “gap” for a federal agency, like the DOL, to then apply that rule to other situations.  Indeed such an expansion of the rule would conflict with the limitations on its application that were expressly established by Congress.

While a federal agency, like the DOL, can fill “gaps” left by a statute it enforces, the agency does not have the power to simply make new law.  To the extent that the FLSA is “silent” about the restrictions on mandatory tip pools in situations in which the employer does not claim the “tip credit,” that is because the statute does not address the subject matter at all.  Rather, as the Ninth Circuit noted in Woody Woo, it regulates tip pools only to the extent that they are comprised of employees for whom the employer claims the “tip credit.”  A rule or enforcement position that imposes restrictions on such tip pools does not fill a “gap” left by Congress; it is nothing more than an attempt to create new law – something the DOL cannot do.

Review Tip Pool Practices

In light of the DOL’s enforcement efforts, all hospitality employers should review their tip pooling practices to ensure compliance with both federal (and state) laws.  While the safest approach to administering a tip pool may be to comply with the DOL’s current interpretation, and restrict participation to non-management employees who provide direct service to customers, hospitality businesses that are faced with enforcement actions based on their past practices may find it useful to raise these challenges to the DOL’s position.  A successful challenge to the DOL’s enforcement position can allow hospitality businesses to avoid significant monetary penalties and preserve valid tip pool arrangements that promote cooperation and harmony among their employees.

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.

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 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.

The Discretion to Formulate Business Strategies Remains Critical to the Status of Pharmaceutical Sales Representatives

By:  Michael Thompson

In Ibanez v. Abbott Laboratories, Inc., the Eastern District of Pennsylvania issued the latest ruling in the ongoing dispute over whether pharmaceutical sales representatives are exempt from the overtime requirements of the FLSA. 

The plaintiff in Ibanez was a former sales representative for Abbott.  Among other things, the plaintiff helped create “business plans which tracked doctors by market share and potential.”  The plaintiff also developed “game plan[s] or strateg[ies] for individual calls with physicians.”  Thus, the District Court ruled that the plaintiff exercised significant independent discretion, and therefore fell within the Administrative exemption of the FLSA. 

This dispute over the exempt status of pharmaceutical sales representatives has arisen as plaintiffs have argued with increasing frequency that the representatives do not fall under the Outside Sales exemption.  This argument is based on the fact that these sales representatives do not “close” any sales.  Rather, a sale is closed outside the presence of a sales representative (when a patient fills a prescription at a pharmacy). Accordingly, plaintiffs contend, the Outside Sales exemption is inapplicable to these sales representatives and they are therefore entitled to overtime.

The battle lines in this dispute over the status of pharmaceutical sales representatives have been drawn around the rulings of three federal circuit courts: the Ninth Circuit, which has applied the Outside Sales exemption to these sales representatives; the Third Circuit, which has applied the Administrative exemption to these sales representatives; and the Second Circuit, which has declined to apply either exemption, found sales representatives to be non-exempt and therefore required employers to pay overtime compensation.

The Ninth Circuit Court of Appeals in Christopher v. SmithKline Beecham Corp., for example, rejected the argument that pharmaceutical sales representatives did not qualify for the Outside Sales exemption. The Ninth Circuit recognized that the sales representatives do not “close” direct sales.  However, the Court noted that the sales representatives were prohibited by law from making direct sales.  The Ninth Circuit accordingly held that, in the context of the industry, “common sense” showed that the pharmaceutical sales representatives fell within the terms of the Outside Sales exemption.

Conversely, in In re Novartis Wage & Hour Litigation, the Second Circuit Court of Appeals concluded that the Novartis sales representatives did not meet the requirements of the Outside Sales exemption because they did not “make sales.”  

The Second Circuit then evaluated whether the sales representatives had enough independent discretion to qualify for the Administrative exemption.  It was undisputed that the Novartis sales representatives were required to visit a given physician a certain number of times.  It was undisputed that the Novartis sales representatives were required to promote a given drug a certain number of times, and it was undisputed that the Novartis sales representatives were required to hold at least a certain number of promotional events per trimester.  Thus, the Second Circuit accepted the sales representatives claim that she did “low-level discretionless marketing work” and did not exercise sufficient discretion and independent judgment to satisfy the Administrative exemption

Finally, in Smith v. Johnson & Johnson, the Third Circuit Court of Appeals found that thus it was unnecessary to consider the Outside Sales Exemption because the sales representatives in that case satisfied the FLSA’s Administrative exemption.  The Third Circuit noted that the plaintiff developed her own strategic plan to achieve higher sales.  The plaintiff herself prioritized her responsibilities in a manner that maximized business results. Indeed, the plaintiff admitted that “[i]t was really up to [her] to run the territory the way [she] wanted to.”  The Third Circuit concluded that, by formulating and implementing the strategies for her territory, the plaintiff exercised sufficient independent discretion to qualify for the Administrative exemption

Like the plaintiff in the Johnson & Johnson case, the plaintiff in Ibanez exercised the discretion to develop his own business plans and thus stood in contrast to the plaintiff in the Novartis case.  Indeed, the District Court cited to twelve admissions made by the plaintiff regarding his job duties.  Seven of those admissions related to plaintiff developing various strategic plans (e.g. business plans, call plans, focus plans, etc.).

Thus, Ibanez further demonstratesthat the key to establishing the Administrative exemption for pharmaceutical sales representatives is the exercise discretion in formulating business strategies. Accordingly, sales representatives who help to create their own business plans have a strong argument for exempt status, while sales representatives who carry out strategies given to them have a more difficult argument.

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

Combining State Court Rule 23 Class Action with Federal FLSA Collective Action

By Evan J. Spelfogel

For several years, employers’ counsel have moved to block the combining of state wage and overtime claims with federal Fair Labor Standards Act (“FLSA”) claims, arguing that Rule 23 opt-out class actions were inherently inconsistent with FLSA collective opt-in actions. For support, they cited to the decision of the Third Circuit in De Asencio vs. Tyson Foods, Inc., 342 F. 3d 301 (3rd Cir. 2003) reversing a district court’s exercise of supplemental jurisdiction because of the inordinate size of the state-law class, the different terms of proof required by the implied contract state-law claims, and the general federal interest in opt-in wage actions. Since De Asencio, numerous district courts in the Third Circuit have dismissed state law wage claims that paralleled FLSA claims because of the “inherent incompatability” between opt-in collective actions and opt-out class actions. 

On September 26, 2011, the Second Circuit U.S. Court of Appeals approved the combining of state law Rule 23 opt-out class wage claims with an FLSA opt-in collective action. Salim Shahriar, et al. vs. Smith & Wollensky Group, Inc. d/b/a Park Avenue Restaurant, et al., __________ F. 3d _________ (2nd Cir. No. 10-1884). The Court noted that nothing in the FLSA statutory language or legislative history precluded joint prosecution of FLSA and state law wage claims in the same federal action. The U.S. Department of Labor weighed in with an amicus brief stating that the Restaurant had misinterpreted the FLSA, urging the court to reject any attempt to use the FLSA to bar certification of a class action of state law wage claims in federal courts merely because a FLSA collective action was pending.

The Second Circuit in Smith & Wollensky approved and relied substantially upon the Seventh Circuit’s decision in Irvin vs. OS Restaurant Services, Inc., 632 F. 3d 971 (7th Cir. 2011) holding that a district court had abused its discretion in denying Rule 23 class action certification of state claims merely because of the existence of a parallel FLSA collective action. The Seventh Circuit noted that neither the text of the FLSA nor the procedures established by that statute suggested that the FLSA was intended generally to oust other ordinary procedures used in federal courts, or that class actions in particular could not be combined with an FLSA proceeding. 

The Ninth and District of Columbia Circuits also concluded that any alleged incompalability between the FLSA and Federal Rule 23 was insufficient to deny supplemental jurisdiction. See, Wang vs. Chinese Daily News, Inc., 623 F. 3d 743 (9th Cir. 2010) (vacated and remanded in light of Walmart, 564 U.S. _____, 10/3/11); and Lindsay vs. Government Employees Insurance Co., 448 F. 3d 416 (DC Cir. 2006). In summary, these Circuits have held that, while there may in some cases be exceptional circumstances or compelling reasons for declining jurisdiction, the “conflict” between the opt-in procedure under the FLSA and the opt-out procedure under Rule 23 was not a sufficient cause by itself to decline jurisdiction.   

Ultimately, the US Supreme Court may be called upon to review an apparent split in the Circuits on this issue. In the meantime, employers are urged to continue to raise the issue in courts that have not yet ruled, and to urge “exceptional circumstances” and “compelling reasons” for courts in the Second, Fourth, Seventh, Ninth and D.C. Circuits to bar hybrid state Rule 23 opt-out claims from the federal processes. 

This might include, for example, the size of the putative opt-out Rule 23 class in the state law claims as compared with the number of opt-ins in the FLSA collective action. Hybrid collective and class actions typically arise where only a small number of potential opt-in plaintiffs under a FLSA claim actually opt-in, while there are hundreds and perhaps thousands of putative class members with potential state law claims. One purpose of Congress in enacting the FLSA opt-in provision, it may be argued, was to control the volume of litigation and ensure that absent individuals would not have their rights litigated without their input or knowledge. The opt-in mechanism under the FLSA limits FLSA claims to those affirmatively asserted by employees “in their own right” and frees employers from the burden of representative actions. Allowing a Rule 23 opt-out option to be combined in the same lawsuit with an opt-in FLSA option allows plaintiffs to evade the requirements of the FLSA by permitting litigation through a representative action and bringing unnamed plaintiffs into the lawsuit. See, e.g., Dell vs. Citizens Financial Group, Inc., Western District Pennsylvania No. 2:10-Civ-00320, 6/8/11.

Vacating Chinese Daily News, The U.S. Supreme Court Signals That Wal-Mart Extends To Wage-Hour Cases

By Michael Kun, Regina Musolino and Aaron Olsen

Since the Supreme Court’s historic ruling in Wal-Mart Stores, Inc. v. Dukes, attorneys have debated the scope and impact of the decision.  Not surprisingly, plaintiffs’ counsel have argued that the decision was limited to its facts, or to discrimination cases, or to cases involving nationwide claims.  And they have argued that Wal-Mart has no application whatsoever to wage-hour class actions and collective actions.  In only a few words, the Supreme Court may have answered some of these questions.

Earlier this month, the United States Supreme Court quietly vacated a $7.7 million award in a wage-hour class action in Chinese Daily News v. Wang, remanding the case to the Ninth Circuit for further consideration in light of Wal-Mart.  While the Supreme Court did not provide any further analysis or guidance, and while the Ninth Circuit’s ultimate ruling cannot be predicted, the vacation order alone would seem to undermine a few of the arguments that many plaintiffs’ counsel have been making since Wal-Mart was decided – particularly that Wal-Mart was limited to its facts and has no application to wage-hour matters.  Simply, if the Supreme Court believed Wal-Mart was not applicable to wage-hour claims, there would have been no reason to vacate Chinese Daily News

The history of the Chinese Daily News class action is a long and tortured one that most readers of this blog would have little interest in.  It is a hybrid class action alleging claims under both the federal Fair Labor Standards Act (“FLSA”) and California state law for unpaid overtime wages, meal and rest break violations, wage statement violations and waiting time penalties as to approximately 300 employees working at a single facility.  A California district court certified a class under the FLSA, as well as under both Rule 23(b)(2) and Rule 23(b)(3).  The matter ultimately went to trial, where the class prevailed.  The Ninth Circuit subsequently affirmed the district court's decision to certify the class under Rule 23(b)(2), but declined to address whether certification was appropriate under Rule 23(b)(3).   

Given no guidance from the Supreme Court, it would be pure speculation how the Ninth Circuit will ultimately rule.  However it rules, the Ninth Circuit’s ruling on remand will have an enormous impact upon the defense of wage-hour actions throughout the country.  That impact could be short-lived, though.  However the Ninth Circuit rules, we should not be surprised to see one party seeking to take the ruling up to the Supreme Court.  And the Supreme Court reverses Ninth Circuit rulings in approximately 80% of the Ninth Circuit cases it hears.

Settling an FLSA Collective Action? Not So Fast!

By Amy Traub and Christina Fletcher

Once a settlement has been reached in an FLSA collective action, the defendant-employer typically wants that settlement to go into effect and end the case as soon as possible, so that the company can get past the myriad of distractions brought by the suit. However, as litigants increasingly are finding, the parties’ agreement to settle an FLSA collective action is nowhere near the end of the road, or the end of the case. There is a “judicial prohibition” against the unsupervised waiver or settlement of claims brought under the FLSA. Settlements must be “supervised” by the Department of Labor or a court, and gone are the days where the court would rubberstamp the parties’ FLSA collective action settlement agreement. Instead, courts nowadays are scrutinizing the settlement to ensure the “fairness” of the agreement.

A recent decision by District Judge Deborah K. Chasanow of the United States District Court for the District of Maryland describes the information that courts are requiring parties to provide in their settlement agreements and accompanying motions for approval of the settlement. In Lane v. Ko-Me, LLC, Judge Chasanow rejected the parties’ motion for approval of their FLSA settlement, finding the parties’ joint motion for approval to be “clearly deficient” in setting forth facts or arguments upon which the court could evaluate the fairness of the agreement.  The Lane decision is helpful in providing a roadmap as to what parties may want to consider including in their submissions to the court seeking approval of an FLSA collective action settlement:

  • Provide a detailed description of the parties’ respective positions as to each issue so the court may assess whether there is, in fact, a bona fide dispute.  The Lane parties “simply listed the points of disagreement” they had regarding various issues, such as their dispute over whether the plaintiffs were properly classified as independent contractors and their disagreement regarding the amount of hours worked by the plaintiffs.  In the court’s view, this was not enough to allow the judge to evaluate the disputed issues resolved by the parties’ settlement.  For example, if an employee’s entitlement to overtime is in dispute, the employer should articulate the reasons for disputing the employee’s right to overtime, and the plaintiff should articulate the reasons justifying his/her entitlement to the disputed wages.
  • Give the court sufficient data to allow it to assess the fairness of the settlement amount. In Lane, the judge rebuked the parties for only providing conclusory assertions that the proposed settlement fund of $90,000 represented the full amount due to the plaintiffs for all hours claimed to have been worked plus all liquidated damages, attorney’s fees, and costs. Instead, the judge wanted concrete data from the parties to allow her to assess whether the $90,000 settlement would fairly compensate the plaintiffs – i.e., the number of hours they claimed to have worked, the rates of pay they were owed, and the liquidated damages to which they claimed to be entitled.
  • Remind the plaintiffs’ counsel of their duty to prove to the court that their proposed fee award is reasonable. Courts are charged with independently assessing the reasonableness of the fee award proposed in an FLSA settlement. While the level of detail required may vary by district or judge, Judge Chasanow wanted the plaintiffs’ counsel to provide her with sufficient facts to allow her to evaluate the requested award of attorneys’ fees under the lodestar method, including declarations establishing the hours counsel had expended on the matter, broken down for each task, and demonstrating that their hourly rate was reasonable. Judge Chasanow also noted that it was imperative that the parties inform the court how the $90,000 proposed settlement award was to be apportioned between the plaintiffs and their counsel.
  • Present the court with a strong argument that any confidentiality provision in the settlement agreement is reasonable. The settlement agreement at issue in the Lane case contained a “Covenant of Confidentiality”, which compelled the plaintiffs’ silence as to the terms of the agreement and the negotiations leading to the agreement. Expressing doubt about the inclusion of such a provision, Judge Chasanow explained that confidentiality provisions in an FLSA settlement agreement operate in contravention of the FLSA, and, therefore, any agreement that contains such a provision must be rejected if it is unreasonable. The burden is on the parties to present arguments in support of their position that the proposed confidentiality provision is reasonable, enforceable, and should be approved by the court.

Following the steps outlined above when seeking court approval of an FLSA collective action may take more time and effort on the front-end, but may help smooth the way to getting the court’s approval and getting the case closed on the back-end.

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.

Bus Company Prevails in FLSA Motor Carrier Exemption Case

I am pleased to report that the United States Court of Appeals for the Eleventh Circuit has affirmed the district court's summary judgment in favor of our client, a bus company, in a case involving the motor carrier exemption.  The case is Walters v. American Coach Lines of Miami, Inc. (11th Cir., July 23, 2009).

 I first reported on this case and discussed the basics of the motor carrier exemption in a September 2008 post on the Florida Employment Law Blog.  My EBG colleague, Brian Molinari, recently summarized the Walters decision in a post on the Prima Facie Law Blog.

A quick refresher:  The motor carrier exemption is one of several exemptions from the Fair Labor Standards Act which generally requires employees engaged in commerce to be paid at least time and a half for the time worked above forty hours in one week. The motor carrier exemption provides:

The provisions of section 207 [maximum hours] of this title shall not apply with respect to. . . any employee with respect to whom the Secretary of Transportation has power to establish qualifications and maximum hours of service pursuant to the provisions of section 31502 of Title 49.”  29 U.S.C. § 213(b)(1). 

49 U.S.C. section 31502 grants “the Secretary of Transportation the power to regulate the qualifications and maximum number of hours for employees of motor carriers engaged in interstate transportation.”

The principal question in Walters was whether the ACLM's drivers, by driving trips to and from local airports and seaports, all of which are in Florida, were engaged in interstate transportation so as to trigger the Secretary of Transportation's jurisdiction over them.  If so, the motor carrier exemption would apply, and the drivers would not be entitled to overtime pay.

In answering that question in the affirmative, the court's opinion breaks some new ground in the Eleventh Circuit, which covers Florida, Georgia and Alabama. Among the court's holdings are the following:

  • The Secretary of Transortation's jurisdiction is not limited to transportation that crosses state lines, but extends to transporation that is part of the broader concept of "interstate commerce."
  • Purely intrastate transportation can constitute part of interstate commerce if it ispart of a “continuous stream of interstate travel."
  • The "incidental-to-air" exemption does not limit application of the motor carrier exemption. The court held that this exemption to the Secretary of Transportation's jurisdiction applies to economic regulation, not to safety regulation. Thus, the Secretary of Transportation has jurisdiction to prescribe safety regulation for transportation that is "incidental-to-air," i.e. within 25 miles of an airport.

The motor carrier exemption is complicated and has been the subject of much litigation. For employers in the Eleventh Circuit, the Walters decision clarifies several key issues. Still, the opinion leaves open a couple of issues:

  • Does a company have to engage in more than de minimus interstate transportation, where it has the appropriate federal licensing and indisputably performs some transportation crosses state lines? The court declined to answer this question, finding that even if such a test applied, ACLM engaged in more than de minimus interstate transportation.
  • Do airport-to-seaport trips constitute interstate commerce if they are not performed pursuant to formal contractual arrangements with airlines or cruise lines? The court declined to answer this question, finding that even if such a test applied, ACLM had contractual arrangements with cruise lines to transport passengers on its buses.
     

Litigation of these open issues is bound to occur as the proliferation of FLSA lawsuits continues. But for now, Walters is the latest word on the status of the motor carrier exemption in the Eleventh Circuit.

Wage-Hour Firm Strikes Back Against Federal Judge

Last month I reported that United States District Judge Kenneth L. Ryskamp had sanctioned the Shavitz Law Group, one of the leading plaintiff-side wage-hour firms in Florida, for soliciting plaintiffs in violation of Florida Bar Rules.  The case was Hamm v. TBC Corp. and Tire Kingdom, Inc., Case No. 07-80829-CIV-RYSKAMP/VITUNAC. 

The Shavitz firm recently struck back, filing a motion to disqualify or recuse Judge Ryskamp from presiding over a different case, a Fair Labor Standards Act collective action against Abercrombie & Fitch.  The motion quoted Judge Ryskamp's comments during a hearing in the Hamm case:

I have had our law clerk check and the Shavitz firm has filed 1,332 cases in the Southern District of Florida since 2000, so we see these things continually, virtually never see them go to trial, I think that I have had one trial with all the cases that have been filed.

In looking at the statistical numbers, they are usually closed within three months of the time they are filed, so what is very clear to me is that most defendants are saying how much is it going to cost me to defend this case and what is the claim and the claim is so small it would cost most to have the lawyers defend it, so they are basically nuisance type claims that get bought off, of course the lawyer’s fees are always – not always, but very often considerably more than the claim itself – and I think this is certainly an area for some Congressional oversight, I think there ought to be written into the statute a provision that a letter demand must be made upon the employer before a lawsuit can be filed because the way this thing is working is just a lawyer’s retirement bill. . . . this has gotten out of hand, I think we have more of these cases in the Southern District of Florida than there are anyplace else in the country and that’s probably because of the Shavitz law firm. . . . I think the problem needs to be resolved.

The Shavitz firm argued that these comments, and others that Judge Ryskamp has made about the Shavitz firm, demonstrate "an apparent bias or prejudice against Plaintiff and Plaintiff’s counsel, such that disqualification/recusal is mandatory."

Three days later, Judge Ryskamp issued an order recusing himself from the case. 

Judge Ryskamp's recusal notwithstanding, from my perspective as a defense attorney, his comments were on the money. Many, if not most, FLSA cases are settled on a nuisance value basis.  In such cases, there is often only a few thousand dollars of overtime pay at issue.  And the employer often has solid defenses which it could prove on summary judgment or at trial.  But after some frank discussions with defense counsel, the employer concludes that it makes more sense to settle the case for, say, $10,000 than to pay its own attorneys $50,000 to $100,000 to litigate the case.  An additional factor is the uncertainty of litigation:  if the employee proves liability, even for a small amount, the employer will be on the hook for the plaintiff's attorney's fees as well.  So these cases typically settle, and Shavitz (or one of his colleagues in the plaintiffs' bar) move on to their next case.  The cycle continues, and South Florida continues to lead the nation in wage-hour lawsuits.   

Amid Tough Times, Furloughs Can Save Employers Money and Employees Jobs

The following is a reprint of a client alert authored by EBG attorneys Doug Weiner and Frank Morris, Jr.  It should be of interest to all Florida employers that are considering a reduction in force.

For many employers, these are desperate economic times. Every entity facing diminished revenue must consider cost cuts to survive. As news reports show, reductions in force (RIFs) are being used daily to achieve cost savings, and for some employers they may be the best solution. In some cases, however, the savings are not immediate as a result of statutorily required or voluntary notice periods, as well as costs of severance pay.

A different approach may be a furlough strategy, customized to fit each employer’s needs, which may also achieve a significant cost-savings benefit. Implementing a furlough can help retain the employer’s experienced workforce at a reduced cost, to help the enterprise weather the economic crisis. Most employees faced with, for example, the choice of a 20 percent annual pay reduction or the loss of their job would not hesitate to choose a reduction in pay. Further, both employers and employees taking advantage of a furlough program are well-positioned to take advantage of any increase in business activity in the inevitable economic recovery, whether it be this year or next. Furloughs are often viewed by the workforce more favorably than layoffs, thus preserving morale in the organization as well.

The Fair Labor Standards Act (“FLSA”) requires hourly and non-exempt salaried employees to be paid time-and-one-half their regular rate for weekly hours worked over forty. Accordingly, the first place to look for cuts in employee payroll costs is in non-exempt employee overtime pay. The FLSA was designed to give employers an incentive to spread employment from employees who work over forty weekly hours to other workers who are working fewer hours. In an environment where costs are critical, it is generally an inefficient use of payroll dollars to pay the additional wage premium required for overtime work.

Eliminating non-exempt overtime work is only the first step in reducing payroll costs among hourly non-exempt employees, salaried non-exempt employees and salaried exempt employees. Take an example in which it has been decided that in a department of 100 employees, where all three categories of employees work, that payroll expenses must be cut by 20 percent. One possibility is to reduce the department headcount by 20 percent, eliminating 20 jobs and the costs associated with them. Another possibility is to implement a mandatory furlough period with 20 percent pay cuts for all 100 employees. The furlough strategy takes more administrative time to manage properly, but it potentially saves 20 jobs while achieving the necessary cost-saving objective.

The FLSA allows employers to implement a variety of options to impose salary reductions and pay cuts, as do most state laws. A salary may be prospectively reduced without violating the “salary-basis” test of the FLSA for exempt employees, including a reduction in pay proportionate to a reduction in the number of days worked. Managers may implement furloughs and RIFs simultaneously or in a phased sequence. As with all such strategies, any applicable state and local requirements need to be determined, as federal law will defer to a state or local standard that provides a greater protection to the employee. California, as shown by the state’s decision to furlough state employees, allows furloughs to be implemented in accord with particular wage-hour requirements that must be considered.

The FLSA permits prospective adjustments to an exempt employee’s salary, including revisions to commission agreements or bonus compensation plans based on the quantity or quality of work, which do not reduce the “predetermined amount” of the employee’s salary (of course, the terms of the plans also need to be checked before changes are made). In concept, if the duties test for exemption is satisfied, the predetermined salary of, e.g., an exempt Sales Manager, could be as low as $455 per week, while the compensation the employee actually receives could be substantially higher (based upon commissions for meeting sales goals or bonuses for meeting other performance criteria). To preserve the salary basis of the exempt employee, the predetermined amount of salary would have to be paid for workweeks in which there were no commissions, or for which no bonus payments were made.

Careful strategic planning is required before implementing a furlough. Considerations include:

• Exempt salaried employees may have their salaries prospectively reduced to a lower predetermined amount so long as they stay above $455 per week. Salary adjustments may not be designed to circumvent the requirements of the FLSA.

• Hourly workers must be paid for every hour they are directed or permitted to work. Permitting “extra” work as, for example, spending more than de minimus time checking a Blackberry®, even when unauthorized, may well give rise to the obligation to pay for the time. Accordingly, managers must take the necessary steps to ensure the furlough plan realizes the necessary cost savings.

• It is a good practice to give employees clear notice specifying that no “volunteer work” is permissible and no work is to be performed unless specifically authorized by a predetermined schedule or authorization by an appropriate manager. Implementing a strict policy of prohibiting unscheduled work and having an administrative procedure to uniformly enforce the policy is well advised.

• Managers may consider asking hourly and salaried non-exempt employees for the return of employer-owned remote access devices during a furlough. Employees who access their work email accounts while on their “time off” may be working, or may start working. If they are working, even though advised not to do so, the employer may well incur wage liability, defeating the purpose of the furlough. Unauthorized work by non-exempt employees in violation of the employer’s furlough policy may generate exposure to significant wage claims. Violations of the furlough policy should be considered a serious disciplinary issue, warranting sanctions, including suspension and discharge. Withholding pay for hours actually worked, however, is not a legal option, even when the hours worked were not authorized.

• Salaries for exempt and non-exempt employees may be prospectively reduced so long as those adjustments are not so frequent as to appear designed to circumvent the requirements of the FLSA. Quarterly adjustments have been found by the U.S. Court of Appeals for the Second Circuit to be in compliance with the FLSA. Adjustments to the predetermined amounts of salary should be implemented as infrequently as feasible so as not to raise an argument that the adjustments are a pretext to avoid compliance with the FLSA.

In sum, properly implemented salary reductions should comply with the salary requirements of the FLSA. Although it requires strategic planning and careful implementation, employers may find many benefits by implementing an effective cost-savings furlough plan that saves money and jobs, versus the RIFs dominating the news.