New Jersey Labor and Employment Lawyer & Attorney : Fox Rothschild LLP Law Firm : Serving Essex County, Sussex County, Roseland, New Jersey

The financial services industry has been and will continue to be, in my view, hard hit by wage-hour class actions.  The attack will be and has been that these employees are non-exempt and therefore entitled to overtime.  These employees also, typically, work much more than forty hours in a week.  A bad mix for a class action.  This is what has just happened (again) to JP Morgan.

Loan officers filed suit in federal court in New York City.  They claim that as commission employees, they cannot be exempt under federal and state wage-hour law.  One of the fundamental tenets of classifying someone as exempt is paying him on a salary basis.  If the facts show that they were solely commission based, they are, in fact, correct that they are non-exempt.  They could arguably fit within the commission exemption of the FLSA, under Section 207(i) of the Act, but they would not fit the Part 541 exemption tests of the federal regulations.

This attack is but one of many coming against financial houses.  Under the revised FLSA regulations, financial people who have selling as their primary duty are non-exempt.  Although the regulations do enumerate many functions performed by financial people that are exempt, e.g., analyzing information regarding a customer''s income, investments, assets and debts, advising the customer regarding the advantages and disadvantages of certain financial products, once the conversation turns to sales, which it almost inevitably must, that is non-exempt selling work. 

Where bright lines will be drawn in this area is anyone's guess and I believe there really are no bright lines.  Given the hours worked by many, if not all, of these folks and the compensation that many of them earn, the overtime exposure is astronomical.  Employers in this industry are duty-bound to make a careful analysis of the "true" job duties of financial service employees so re-classifications of wrongly classified employees can take place.  Or, cut the hours they work to forty (if operationally possible).  Put bluntly and simply---get out in front of it!

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There are more than twenty (20) exemptions from overtime enumerated in the Fair Labor Standards Act.  Mostly, employers only are concerned with the three so-called white-collar exemptions (executive, administrative, professional).  There is, however, an exemption for truck drivers, bus drivers and other individuals who drive for a living and who cross state lines.  This is called the Motor Carrier Exemption and there must be an element of interstate commerce involved.

Interstate commerce is easy to understand if a driver crosses state lines.  But, what if the driver does not cross state lines and drives entirely within one state.  That movement can still be considered interstate commerce under the doctrine known as "practical continuity."  If there is such a practical continuity of movement for the shipment, such that the intent of the shipper was to have that shipment pass through interstate commerce, in a single, unified trip, then the interstate nature of the trip also continued.  The otherwise intrastate driving truckers would nevertheless be exempt from overtime under the Motor Carrier exemption.  Thus, the drivers working for an intrastate beer distributor were found to be exempt from overtime because the beer they drove, which had been imported from out-of-state, was originally destined for the in-state customers by the shipper in the distant state.

Further, concerning bus drivers,  if an passenger can buy a ticket which is good for both an intrastate trip and then an interstate trip, this is known as "through-ticketing" and also is considered part of the continuous stream of interstate commerce.  Similarly, where a Colorado ski resort contracted with a limousine service to provide transportation from the Denver airport to the ski resort, those drivers were found to be in interstate commerce because they completed the last leg of the interstate trip  It should be highlighted that the amount of interstate traffic to qualify for the exemption is rather minimal. 

For employers of drivers, this exemption must be considered.  It could save thousands of dollars in overtime costs.

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Under the Fair Labor Standards Act (“FLSA”), the general rule is that employers must pay overtime to non-exempt employees who work in excess of forty (40) hours per week, at the rate of one and one-half times the employee’s regular rate of pay. As a rule, most non-exempt employees are paid an hourly wage. The overtime calculation on that hourly wage is easy (i.e. time and one-half) and is also fixed by law as being time and one-half of that hourly rate.

It is perhaps a little known fact that the law does not command that employers pay non-exempt employees by the hour. It only mandates that such employees receive overtime, after forty hours of actual work. Employers may pay non-exempt employees by a salary, or per diem, or by piece rate. The overriding constant remains payment of overtime following forty hours of work. There are occasions when employers, for employee morale or “perception” reasons choose to pay non-exempt employees a salary. The FLSA (and most, but not all, state wage-hour laws) allows an employer and employee(s) to agree that they will be paid a fixed weekly wage to compensate them for all hours worked during the week. The calculation of overtime for such employees involves what is known as the “fluctuating work week” (“FWW”) method of overtime.

Employees who are compensated on a salaried basis and whose hours of work fluctuate from week to week may be paid a salary such that the fixed amount covers all straight time pay for whatever hours are worked in a given week. The following conditions must be met: 1) Hours must fluctuate from week to week; and, 2) There must be a clear and mutual understanding between the employee and employer that the fixed salary is compensation for the hours worked each work week, whatever the number; 3) The amount of salary must be sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked; and, 4) The agreed-upon salary must be paid even though the workweek is one in which a full schedule of hours is not worked.

Neither the federal regulations nor the case law establish a requirement as to the degree of fluctuation in hours that must occur, but they do state that typically the salary is paid to employees who do not customarily work a regular schedule of hours. Under this method, the salary is intended to compensate the employee at a straight time rate for whatever hours are worked during the workweek. As such, the regular hourly rate of the employee will vary from week to week and is determined by dividing the total number of hours worked in the workweek into the amount of the salary. Overtime is then calculated by multiplying the hours in excess of forty by the regular rate for that week by one-half.

There may be only limited circumstances in which an employer will choose to utilize the FWW method of paying overtime. For one thing, the calculation of the “regular rate,” upon which all overtime is based will change every week. Therefore, the employer must either assign these computational tasks to an employee or buy/devise a software program to accommodate the necessary calculations. Second, there is the quid of paying employees their full salary in weeks in which they perform any work. Balanced against these is the distinct advantage of being able to pay half-time, instead of time and one-half, overtime. This becomes of great significance if the position at issue is borderline from the perspective of exempt status and the employer wishes to lower its exposure if a subsequent Department of Labor audit or lawsuit results in a finding that the position is non-exempt. Perhaps of equal importance, there is the positive employee relations gained through employee perception of their job as a “white collar,” as opposed to a blue collar, position.

Just be aware that if this payment procedure is not implemented correctly, the workers could be transformed into hourly employees and then there would be possible significant liability for the employer

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Amidst a wave of recent cases dealing with the exempt status of sales representatives, one case has shown what employers can do to eliminate liability for such workers as well as potential pitfalls that need to be avoided. In Barnick v. Wyeth, a judge dismissed a proposed class action against the Wyeth company, ruling that the a group of sales representative plaintiffs were exempt under the California statute they sought to bring suit under.

The judge granted Wyeth’s motion for summary judgment finding that the proposed plaintiff class—“representatives” of pharmaceutical products—were actually functioning as sales representatives, and therefore, were subject to the “outside salesperson” exemption.

This case teaches that the first step for employers to undertake when sued in a wage-hour class action is to examine whether it is a state or federal claim that is being brought against them. Employees may sue under either a state statute, the FLSA, or both and a particular state exemption or overtime law may likely have different, and often stricter, standards than the federal Fair Labor Standards Act (“FLSA”). The California wage and hour statute at issue in Wyeth did have tough requirements on employers—requiring overtime pay, meal breaks, and other benefits, highlighting that the FLSA and state laws are not always parallel, even though they can appear strikingly similar. In Wyeth, the federal judge refused to apply the FLSA’s definition of “sales” to California’s “outside salesperson” exemption, finding the definition to be “not persuasive” in his interpretation of the California statute.

In Wyeth, the salesperson at issue was hired on the basis of his sales experience, his job was referred to by his employer (and also himself) as a sales position, he received specialized “sales training” throughout his time there, and his pay was based in part on the sales he generated. According to the judge, all of these factors were significant in finding that the product “representative” was actually a functioning outside salesperson, and therefore exempt under the statute.

Thus, this claim was defeated in one fell swoop before it even got off the ground. A ruling of exemption for an entire class, or, more particularly, the named plaintiff(s) at a (hopefully) early stage of the litigation will erase the class action. The tough part is to know if there is an exemption defense to be raised and the manner and timing as to how to do it.

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It is important for employers to feel that they have selected the right job title for their employees, but just because the title sounds perfect, that does not mean the chosen title will automatically shield employers from misclassification liability under the exemption rules of the Fair Labor Standards Act (“FLSA”). When deciding if a position is to be exempt or non-exempt, it is important for an employer to look at the components of each particular position to find out what is unique about each. In other words, employers should consider that even within different positions of a particular job title, some positions may be part time, others may be “as needed” and some may require much longer hours than others. Classifying one position as exempt or non-exempt in a particular job title does not mean that all of the positions in that job title should be treated the same.

 
A recently published United States Department of Labor (“DOL”) Opinion Letter has clarified that choosing the right title is not the end of the inquiry, as liability can come from misclassifying some positions within a particular job title and not others. The Letter provided an example of a group of nurses that could be classified “as needed,” and therefore classified as non-exempt under the overtime rules, and yet, such a classification would not change the status of other nurses who were classified as exempt.

 
The DOL noted that the key to proper employee classification as exempt or non-exempt is based on two factors—salary (or compensation) and job duties. Providing a hypothetical situation, it noted that an employer can pay some employees within a particular job title on an hourly basis and other employees in that same job title on a salary basis, and the fact that some are paid hourly will not necessarily affect the exempt status of the exempt/salaried employees. This is because determinations of exempt status are based on an assessment of each individual employee’s unique job duties and salary basis of compensation.

 
In this same Opinion Letter, the DOL clarified that an exempt nurse’s exempt status is not affected by paying shift differentials because a “pre-determined salary does not have to include all of the compensation that the employee will be paid.” This guidance makes it easier for employers to feel free to pay salaried employees on an hourly or shift basis for extra work without having to incur liability, assuming the threshold salary of at least $455 per week (under the FLSA) is paid. This is important to the ever-important goal of keeping tabs on a workforce that is becoming more flexible, whether because the business is growing, or just because the overall nature of the workplace is changing.

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The new (e.g. almost three years) Fair Labor Standards Act (“FLSA”) regulations on exempt status differ in some significant aspects from the old, but still leave employers with numerous, problematic decisions as to which employees are/are not overtime eligible. If the employer guesses wrong, the possibility for a single plaintiff lawsuit or, more disturbingly, a class action is created, with considerable exposure. There are, however, ameliorative steps that can and should be taken.

The FLSA expressly exempts three major categories of employee from overtime requirements: executive employees, administrative employees and professional employees. Whether an employee is exempt depends on: 1) his duties and responsibilities; and, 2) payment of a statutorily prescribed salary. The salary component of the test is fairly easily met. The new regulations set the salary threshold below at $455 per week ($23,660/year), significantly up from the antediluvian $250/week.

The final executive duties test requires employees to be involved in supervising two or more employees and have authority to hire or fire or where the suggestions of such employees in such areas as hiring, firing, advancement, promotion or other change in status are given particular weight. The previous requirement that an employee “customarily and regularly exercises discretionary powers” is now gone. The regulations give specific guidance as to how to determine whether an employee’s suggestions are in fact given “particular weight.”

The final administrative duties test retains the requirement that an employee have a “primary duty” of “performing office or non-manual work related to the management or general business operations of the employer or the employer’s customers,” and, regretfully, retains the “discretion and independent judgment” language of the prior regulation. The DOL proposal was to replace the “discretion and independent judgment” requirement with a requirement that the employee hold “a position of responsibility” with the employer or perform work requiring a high level of skill or training. That would have made the job of classifying employees as “administrative” far easier, but now, employers must still make fine-line determinations of whether employees are using skill and experience, as opposed to discretion and independent judgment. Thus, the revision removes few of the gray areas that have surrounded this exemption for many years.

The proposed professional duties test would have recognized exempt “learned professionals” as certain employees who gain sophisticated, professional-type knowledge and skills not only through formal education, but through alternative means such as a combination of job experience and education. This proposal did not survive, although there remains a small window to fit an employee within this exemption under a “combination” theory. The biggest field of battle on this issue will be in the computer field, where job titles number in the thousands and many employees acquire high level, important positions without always having a degree in “computer science.”

In my experience, I have often seen the firing of a single employee (for the right reasons!) lead to a complaint to the state/federal Department of Labor, triggering an audit that could lead to significant exposure if employees have been incorrectly classified. The best way to avoid such a contingency is to be proactive and ascertain for yourself and your organization the accuracy of your current classification of employees through an “internal audit.” In such an audit, the duties of various employees are matched up against the new regulations (and case law) with conclusions drawn. If the employee is deemed non-exempt, the next thorny decision is whether to pay he/them the back pay theoretically owed. The most important lesson learned from such an audit, however, is what to do going forward to be in compliance---and then breathe a little easier about this sticky, oftentimes gray area of law!

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