More than 7 months after hearing oral argument on an issue that will affect countless employers across the country – whether employers may implement arbitration agreements with class action waivers — the United States Supreme Court has issued what is bound to be considered a landmark decision in Epic Systems Corp. v. Lewis (a companion case to National Labor Relations Board v. Murphy Oil USA and Ernst & Young LLP v. Morris), approving the use of such agreements.

The decision will certainly have a tremendous impact upon pending wage-hour class and collective actions, many of which had been stayed while the courts and parties awaited the Supreme Court’s decision.  And it is likely to lead many more employers to implement arbitration agreements with class action waivers going forward, if only to avoid the in terrorem effect of those types actions.

In a 5-4 vote along the very lines that many commentators had predicted, with newest Supreme Court Justice Neil Gorsuch penning the majority opinion, the Supreme Court determined that the law is “clear” that class action waivers are enforceable under the Federal Arbitration Act (“FAA”) – and that they are not prohibited by the National Labor Relations Act (“NLRA”), as several Circuit Courts had concluded following the National Labor Relations Board’s (“NLRB”) DL Horton decision.

In reaching this decision, the Court took great pains to address – and reject – the various arguments presented by the former NLRB General Counsel, the related labor union and various amicus briefs submitted by the plaintiffs’ bar.  In so doing, the Court noted that for the first 77 years of the NLRA, the NLRB had never argued that class action waivers violated the Act; instead, the FAA and the NLRA had coexisted peacefully.  In fact, as the Court pointed out, as recently as 2010 the NLRB’s General Counsel had asserted that class action waivers did not violate the NLRA.

The decision is an unqualified victory for employers, particularly those who already have such arbitration agreements in place.  Given the prevalence of wage-hour class and collective actions, and the potential exposure in even the most baseless of suits, other employers would be wise to consider whether they, too, wish to implement such agreements.

Not unimportantly, the decision might give employers new grounds to argue that employees who sign such agreements are prohibited from pursuing representative claims under California’s Private Attorneys General Act (“PAGA”).  Even if those new arguments prove to be unavailing – to date, the California state courts have held that such claims cannot be compelled to arbitration because they belong to the state, not the employee –the Supreme Court’s decision could be used to require that an individual arbitrate his or her individual claims first such that he or she would not have standing to pursue the PAGA claims if the employer prevailed in arbitration.

And employers should be mindful that in some states (California again), an employer must pay virtually all of the costs of the arbitration process, a reality that has led more than a few plaintiffs’ lawyers to file multiple individual arbitrations in order to drive up employers’ costs to try to force them to the settlement table.

In many industries, sales are subject to ebbs and flows.  Sometimes the fish are biting; sometimes they aren’t.

A common device that employers with commissioned salespeople use to take the edge off of the slow weeks and to ensure compliance with minimum wage and overtime laws is the recoverable draw.  Under such a system, an employee who earns below a certain amount in commissions for a given period of time, often a week, receives an advance of as-yet unearned commissions to bring the employee’s earnings for the period up to a specified level.  Then in the next period, the employees’ commissions pay off the draw balance before the employee receives further payouts of commissions.  Occasionally, employees challenge these recoverable draw pay systems.

In Stein v. hhgregg, Inc., the U.S. Court of Appeals for the Sixth Circuit considered one such draw system.  The employer, a retail seller of appliances, furniture, and electronics at more than 220 stores nationwide, paid its salespeople entirely in commissions.  In weeks where an employee worked 40 or fewer hours and did not earn commissions sufficient to cover minimum wage for the week, the employee would receive a draw against future commissions sufficient to bring the employee’s earnings for the week up to minimum wage.  In weeks where the employee worked more than 40 hours, and did not earn sufficient commissions to cover one and a half times the minimum wage, the employee would receive a draw against future commissions sufficient to bring the employee’s earnings for the week up to one and a half times the minimum wage.  The purpose of this pay structure was, among other things, to achieve compliance with the overtime exemption in section 7(i) of the Fair Labor Standards Act (“FLSA”) for certain commissioned employees of a retail or service establishment.  The company’s policy also provided that upon termination of employment, an employee will immediately pay the company any unpaid draw balance.

Two employees of a store in Ohio brought a putative nationwide collective action under the FLSA, as well as a putative state law class action asserting unjust enrichment with respect to the company’s more than twenty-five locations in Ohio.  They alleged failure to pay the minimum wage or overtime based on the theory that offsetting draw payments against future commissions amounted to an improper kick-back of wages to the employer.  They also claimed that the employer did not pay for certain non-sales activities and encouraged employees to work off the clock.  The complaint did not specifically allege that the two named plaintiffs worked off the clock or that the one plaintiff who was a former employee had to repay a draw balance when his employment ended.  The district court granted the company’s motion to dismiss, concluding that there was no FLSA violation and declining to exercise supplemental jurisdiction over the state-law claims.

On appeal, after reviewing extensive interpretive guidance from the U.S. Department of Labor, the Sixth Circuit rejected the plaintiffs’ central theory that a recoverable draw amounts to an impermissible wage kick-back.  To the court, the key consideration is that under the pay system at issue, “deductions will be made from wages not delivered, that is, from future earned commissions that have not yet been paid.”  Because the company does not recover wages already “delivered to the employee,” the court “h[e]ld that this practice does not violate the ‘free and clear’ regulation.  See 29 C.F.R. § 531.35 (emphasis added).”  (Op. at 9-10.)

The divided panel reversed, however, in certain other respects.

First, the court determined that the FLSA section 7(i) overtime exemption does not apply because although the company’s pay plan provides for a minimum rate equal to one and one half times the minimum wage for any week where an employee works more than 40 hours, the exemption technically requires, among other things, a rate that is more than one and a half times the minimum wage.  (Note: federal minimum wage is $7.25 per hour, and 1.5 times that rate is $10.875 per hour.  Strictly speaking, a wage of $10.875 does not satisfy this aspect of the exemption, whereas $10.88 per hour does.  Perhaps on remand it will turn out that the company actually paid $10.88 per hour rather than $10.875, as it would be very unusual for an employer to use a pay rate that does not round up to the nearest cent.)

Second, the panel majority held that the company’s policy of requiring repayment of a draw balance upon termination of employment violated the FLSA as an improper kick-back.  This part of the decision is interesting because the majority parted ways with the dissenting judge and the district court over the issue of policy versus practice.  The complaint did not suggest that either named plaintiff actually paid back any draw balance, and at oral argument it became clear that the company never enforced that policy and, in fact, had eliminated the repayment policy during the litigation.  The dissenting judge, like the district court before him, believed that because the company had never applied the policy to the named plaintiffs, the policy would not support a claim for relief.  The majority, however, took a more expansive approach to the matter.  “Incurring a debt, or even believing that one has incurred a debt, has far-reaching practical implications for individuals.  It could affect the way an individual saves money or applies for loans.  An individual might feel obligated to report that debt when filling out job applications, credit applications, court documents, or other financial records that require self-reporting of existing liabilities.”  (Op. at 15.)  In short, the court arguably opened the door to allowing plaintiffs to bring FLSA claims even where they have suffered no injury cognizable under the FLSA, so long as the policy they challenge could potentially cause them other types of consequential damages beyond those covered by the FLSA.  This aspect of the ruling appears to be a first of its kind in FLSA jurisprudence.

Third, the panel majority concluded that the plaintiffs adequately alleged minimum wage and overtime violations based on the assertions regarding the company’s knowledge and encouragement of working off the clock.  Although the dissent pointed out that the complaint contained no allegation that either named plaintiff actually suffered a minimum wage or overtime violation as a result of working off the clock, the majority focused on the alleged practice, rather than its specific application to the named plaintiffs, determining that “Plaintiffs have alleged sufficient facts to support a claim that this practice violates the minimum wage and overtime requirements of the FLSA.”  (Op. at 19.)

This decision provides several lessons for employers:

  • Generally speaking, the FLSA allows for the concept of a recoverable draw against commissions.  Recovering a draw against future commissions is not automatically an impermissible wage kick-back.  (Note that there may be certain restrictions under state law, and under some conditions a recoverable draw may violate the FLSA.)
  • When relying on the FLSA section 7(i) exemption, ensure that the policy is clear that an employee will receive more than one and a half times the federal minimum wage for any workweek in which the employer will claim the exemption.
  • Closely review any policies regarding recovery of draw payments (or, indeed, any other types of payments) upon an employee’s termination.  Such policies are often subject to challenge, and they can serve as a trigger for claims by demanding a payment right at the time when a departing employee may cease to have an interest in maintaining a positive relationship with an employer.
  • Be very careful about policies or practices that may arguably encourage employees to work off the clock.  Employers should have clear written policies prohibiting employees from working off the clock, and employees and supervisors should receive periodic training on those policies.

In Jones-Turner v. Yellow Enterprise Systems, LLC, the Sixth Circuit recently upheld summary judgment in favor of an ambulance company in a collective action filed by three EMTs, finding that the plaintiffs’ meal and rest breaks were not compensable under the Fair Labor Standards Act (“FLSA”) and Kentucky law.  The Court analyzed whether the ambulance company’s policy of having “on-call” lunch periods required EMTs to be compensated for that time.

According to the “on-call” lunch period policy, EMTs in the field were not allotted a specific time period for lunch but were instructed to take advantage of down time between ambulance runs to eat a meal.  The EMT crews  were required to radio the dispatcher to request a lunch break.  During their lunch break, the crews were subject to various restrictions.  For instance, the crews had to eat within one mile of an assigned stand-by location.  If the crews were out of their unit, they had to maintain radio contact, they were expected to answer the radio after the first call and they were subject to any available run.  If an employee was unable to take a lunch break due to call volume, the company required the employee to submit a missed lunch form.

The Court noted that there did not appear to be any evidence that employees were frequently interrupted by radio contact.  Likewise, there was no evidence that crews could only eat in their ambulances.  To the contrary, the evidence showed that they could leave the ambulance so long as they maintained radio contact.   The Court explained that it may have reached a different conclusion if EMTs were required to stay in their ambulances or if they had to drive or perform other duties.

The decision is helpful to employers as it clarifies that merely carrying a radio or monitoring a radio during lunch does not result in the meal period being compensable under the FLSA.  Although employers must be careful that they do not require employees to perform work during their meal periods, being subject to an emergency call does not transform meal periods into compensable time under the FLSA.

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.

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.

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.

Despite the lenient standards for conditionally certifying an FLSA collective action, a federal court in Miami recently ruled that a collective action against a local auto dealership was inappropriate.

First, some background on FLSA collective actions. The Fair Labor Standards Act provides that an action for overtime compensation “may be maintained . . . by any one or more employees for and in behalf of himself or themselves and other employees similarly situated.”  29 U.S.C. § 216(b). The Eleventh Circuit Court of Appeals, which covers Alabama, Florida, and Georgia, has instructed district courts to follow a two-tiered procedure to determine whether plaintiffs are “similarly situated” for purposes of class certification under § 216(b).  At the initial stage, or “notice stage,” the district court’s decision is based only on the pleadings and any affidavits which have been submitted. The second stage of the two-tiered procedure typically occurs at the end of discovery when the matter is ready for trial and defendant has filed a motion for decertification of the class.

In deciding whether to authorize notice at the “notice stage,” the Court should strike a balance between allowing the named plaintiffs to contact potential class members to inform them of their rights, and the prohibition against solicitation of clients and the desire to avoid frivolous claims. One district court explained the rationale for this requirement as follows:

In seeking court-authorized notice, plaintiffs are in effect asking this court to assist in their efforts to locate potential plaintiffs and thereby expand the scope of the litigation. As a matter of sound case management, a court should, before offering such assistance, make a preliminary inquiry as to whether a manageable class exists. Moreover the sending of notice and consent forms to potential plaintiffs implicates concerns in addition to orderly case management. The courts, as well as practicing attorneys, have a responsibility to avoid the “stirring up” of litigation through unwarranted solicitation.

 

Severetson v. Phillips Beverage Co., 137 F.R.D. 264, 266 (D. Minn. 1991).

 

The Eleventh Circuit has held that a district court has the authority to enter an order requiring notice to individuals who are “similarly-situated,” but “before determining to exercise such power…the district court should satisfy itself that there are other employees…who desire to ‘opt in’ and who are ‘similarly situated.’” Dybach v. State of Florida Dep’t of Corrections, 942 F.2d 1562, 1567-68 (11th Cir. 1991). A plaintiff must offer “detailed allegations supported by affidavits which successfully engage defendants’ affidavits to the contrary.” Id.  Generalized, unsupported allegations are insufficient to discharge the plaintiff’s burden. Rather, a plaintiff has the burden of demonstrating a reasonable basis for crediting her assertion that aggrieved individuals exist in the proposed class. Rodgers, 2006 U.S. Dist. LEXIS 23272, at *7-8 (citing Haynes v. Singer Co., Inc., 696 F.2d 884, 887 (11th Cir. 1983)). 

 

Thus, plaintiff or her counsel’s mere belief in the existence of other employees who desire to opt in, and “unsupported expectations that additional plaintiffs will subsequently come forward, are insufficient to justify” certification of a collective action and notice to a potential class. Id.  Moreover, “[c]ertification of a collective action and notice to a potential class is not appropriate to determine whether there are others who desire to join the lawsuit.” Id. (citing Dybach, 942 F.2d at 1567-68). Rather, a plaintiff must show that others desire to opt in before the court can authorize notice. Id

 

When there is a lack of evidence to support a finding that other employees are interested in opting in to the litigation, a court should deny the Plaintiffs’ motion for conditional certification. 

 

That was exactly the result reached in a recent decision by United States District Court Judge Ursula Ungaro in Galban v. Bill Seidle’s Nissan, Inc., Case No. 1:09-cv-20310-uu (S.D. Fla.)  The plaintiffs, former salesmen, alleged in their complaint that they were denied the federal minimum wage based on the dealership’s "commission-only" pay plan.  They moved for conditional certification of a class, but failed to demonstrate that any other similarly situated salespeople had an interest in joining the litigation.  Absent such evidence, Judge Ungaro did not hesitate in denying the plaintiffs’ motion.

 

The Galban decision illustrates an important principle of FLSA litigation.  A so-called "collective action" is not a collective action until the court says it is.  And although the standards for certifying a collective action at the initial, "notice" stage are lenient, there are certain minimum requirements that a plaintiff must meet.  It is defense counsel’s role to hold plaintiffs to those standards and demonstrate, if possible, that a collective action is inappropriate.