Exemptions

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The Fair Labor Standards Act is eighty years old this month and commentators strongly suggest that the law needs updating in many areas.

cupcake with sparkler against a blue background, illustrating birthday conceptMy colleague Tammy McCutchen stated that a complaint-driven mechanism defense should be engrafted into the FLSA. She stated that “I think employers should get the opportunity to avoid [some liability] by having in place a system of compliance and taking appropriate action based on investigations, just like they have under Title VII and the ADA and the ADEA.”

In this manner, an employee complaint or issue about wages (e.g. overtime) would/could get resolved quickly and cheaply. Ms. McCutchen (a former DOL official) opines that if such a system is in place, that should work to limit employer liability if the employee ultimately sues. Under her theory, with which I concur, the “penalty” for such an employee who did not avail himself of the internal reporting system would be that he/she would not receive liquidated damages.

Another item on the management side wish list is a heartfelt desire to make securing class certification a little more difficult. In a typical FLSA collective action, the Plaintiff(s) first seek so-called conditional certification, fairly easy to secure, and then, later on, the employer can move to de-certify the class.

It should be harder to get over that first hurdle. Nowadays, plaintiffs use a few certifications, sometimes which are identical, and courts seem satisfied with such a meager showing. When a class is conditionally certified, the stakes and legal fees/costs for an employer rise dramatically. This contingency forces many employers into settlements which they might not otherwise have undertaken.

It should be harder, as perhaps with some multi-part test or standard, rather than a few similar sounding certifications.

Another area of concern and one badly in need of updating is the exemption “question.” For example, the outside sales exemptions emanates from a time when most salesmen were door-to-door or were, literally, outside all/most of the time. Nowadays, many sales are made and sales work done from a computer and a telephone, inside the employer’s place of business. Yet, the regulations still require that the salesman be “customarily and regularly” performing outside sales work. That is but one example. In that regard, reasonable people can differ on how exemption law should be applied, but there certainly is a need for more clarity, no matter which side you are on.

The Takeaway

These all sound pretty reasonable and common sensical to me.

Or is it my perspective?

I have often blogged (and am concerned about) working time issues, especially when they comprise the basis for a class action. These are “soft,” subtle activities that may rise to the level of compensable time, catching n employer unawares. A recent example of this is a class action filed seeking compensation for “homework” done after an employer mandated training session. The case is entitled Acevedo et al. v. Southwest Airlines Company and was filed in federal court in the District of New Mexico.

Child daydreaming while doing math homeworkThe customer service representatives were mostly successful in warding off the employer’s motion to dismiss, which was based on an exemption peculiar to the airline industry. They claim they worked off-the-clock and had to do more work at home following training. The Judge noted that examination of the employees’ job duties is necessary to ascertain if the exemption applies. The Court will make that ultimate determination after discovery is completed.

The Company required the customer representatives to attend training for six weeks; they were paid for that time, the classroom time, but they were not paid for the required homework assignments that were connected to and part of the classroom training. The homework took approximately 60-90 minutes, per night. The plaintiffs also contended that the Company only considered them to be on the clock when they opened a certain telephone program on their computer. The plaintiffs also allege they were not paid for work they were compelled to perform before they clocked in, or were allowed to clock in.

The Court rejected the Company’s attempt to dismiss state law wage claims because they were supposedly preempted by the Railway Labor Act. The Court found that the “plaintiff’s NMMWA claims are independent, state law claims that do not require contractual interpretation. For this reason, the court will not dismiss plaintiff’s NMMWA claims on the basis of preemption under the RLA.”

The Takeaway

Absent a victory on the exemption issue, which may be problematic, I frankly do not see how the Company can prevail on this. The classroom training hours were (obviously) work hours and were paid for as such by the Company. The homework time directly derived from the classroom work and was tied to it. Unless there is a viable de minimis argument/defense (which is, again, doubtful), my advice is to settle this case quickly, unless the Company believes it has a sure-fire winner on the exemption argument. The takeaway is that these soft, subtle types of working time claims can explode on an employer in an instant.

Too bad, back in elementary school, homework was not compensable…

Exemption class actions, i.e. lawsuits alleging misclassification, continue to pop up in different contexts and concerning different classifications. A bank has just agreed to settle a case by paying more than $2 million to put a close to a Fair Labor Standards Act (FLSA) collective action based on a theory that the bank misclassified certain computer/IT workers. The case is entitled Schaefer Jr. v. M&T Bank Corporation, and was filed in federal court in the Southern District of New York.

Network switch and ethernet cables,data center conceptThe settlement will pay almost $2.5 million to more than two hundred IT workers across the country. The parties have filed a joint motion asking that the settlement be approved. The motion notes that the employer denied liability as well as that it even was the employer of the workers. The motion then asserts that the settlement was “reasonable in light of the considerable risk that Plaintiffs face.” Naturally, the motion seeks money for attorney’s fees that would amount to 33% of the gross settlement funds and money for a settlement claims administrator.

The motion provides the rationale for the settlement by stating that “first, although plaintiffs obtained conditional certification, maintaining the collective and certifying a class through trial may be difficult. Defendant would likely argue that the differences among various job titles, departments and other individualized questions preclude class certification and would warrant decertification of the collective. Moreover, defendant could argue that the computer exemption applies to plaintiffs and ultimately convince the court that plaintiffs were properly classified as exempt from overtime pay. Although Plaintiffs disagree, other defendants have prevailed on such arguments in similar cases.”

The theory of the suit was that the bank did not properly pay overtime to technology department network computing analysts and staff specialists. The lead plaintiff, James Schaefer Jr., alleged that he was such an IT worker for several years and was not paid overtime because he was misclassified as exempt.

The Takeaway

These exemption cases prove difficult to win, often times. On the computer exemption issue, numerous titles abound which may or may not connote an exempt classification. A lot of gray here. With that said, the need-for-individualized-scrutiny defense sometimes works. Sometimes it does not and then the stakes for the employer-defendant are dramatically escalated.

Much better to settle…

I have blogged about and have long been concerned about working time issues and what constitutes compensable work hours. One of the thorniest of these issues is on-call time and when, if at all, on-call hours become working time. A recent case throws light on this issue, as a Court has held that an Admissions Director for a medical rehabilitation center may be eligible for overtime when she had to work more than forty hours in a week. The case is entitled Butler v. Ciena Health Care Mgt., Inc. and was filed in federal court in the Eastern District of Michigan.

Female doctor in white uniform writing on clipboard Although her title was “Director,” the employee may not have been an exempt employee, thereby making hours worked above forty to be overtime/compensable hours. The Court found that the employee might not have exercised independent judgment in the performance of her job. She “merely” followed admission guidelines and collected information that her boss then utilized to determine whether to admit a particular patient. In exemption issues, it is the duties performed, not the job title or the position description, that determines exempt status and whether someone is eligible for overtime.

The Court denied the defendant’s summary judgment motion and ordered a trial to determine if the employee was exempt. The Court, however, ruled that the worker was not entitled to compensation for the round-the-clock periods when she was required to be on call. The employee was on call twenty-four hours per day Monday-Friday and every other weekend. Workers will get paid for these on-call hours if they are impeded in the pursuit of their personal activities and personal pursuits.

This employee was home when she was on call and could not demonstrate that simply being in an on-call status had any “onerous impact” on her personal activities. The Court noted that the fact that a fraction of patient referrals came during non-work hours showed the Court that these interruptions were not burdensome.

The Takeaway

The great danger in a case like this is that if the employee is deemed non-exempt, so that overtime hours “matter,” the employer might face significant liability. The cure is to conduct an internal audit of all salaried positions, i.e. those normally classified as exempt and make pure up-and-down calls about exempt status.

Especially with the administrative exemption (as herein)…

There has not been much litigation over the HCE, the so-called Highly Compensated Employee exemption under the FLSA. Recently, an interesting case explored the issue of whether commission payments can form the entirety of the required salary. In Pierce v. Wyndham Vacation Resorts, Inc., a federal court interpreted this exemption to determine this issue. The case was filed in federal court in the Eastern District of Tennessee.

Dollar signs
Copyright: sergo / 123RF Stock Photo

The court observed that the regulation allowed a highly compensated employee to be paid on a salary or a fee basis. The Court looked at related regulations and found that the highly compensated administrative or professional employees could be compensated on a salary or fee basis to comply with the exemption, but held that a highly compensated executive had to be paid on a salary basis, as the fee type of compensation did not apply to the executive exemption. Thus, the Court held that an exempt executive had to receive a salary of $455 per week, but that other forms of compensation could help satisfy the requirements of the highly compensated employee exemption.

The Court went on to explicate that even if the fee form of compensation applied to exempt executives, the Court held that the commissions paid to the plaintiffs were not a fee basis type of compensation. The Court stated explicitly that the Company’s argument was “illogical.” In that regard, the Court reasoned that if a commission could be considered a “fee basis,” “there would be no need for the Department of Labor to include the work ‘commission’ in the second sentence of the regulation” as an acceptable form of additional compensation to reach the $100,000 annual threshold.” Moreover, there was no showing that the commission paid to the plaintiffs were akin to a fee, as the commissions were founded on sales made and were linked to the results of the job.

The Court then examined a USDOL Opinion Letter in which employees were paid commissions but they also received a guaranteed salary. In this case, the employees did not receive any salary but were paid entirely by commissions. Therefore, they failed to satisfy the requirements of the highly compensated employee exemption.

The Takeaway

This is an unusual case but with a very valuable lesson. When deciding whether to classify an employee as exempt under the HCE exemption, a component of the aggregate compensation paid must be “pure” salary.  Even if that salary is the statutory minimum of $455 per week. The failure of the employer to do so in this case means that these employees, some making hundreds of thousands of dollars per year, will be entitled to overtime!

How is that for the law of unintended consequences?

I remember with fondness the Sonny & Cher song, “The Beat Goes On.” That song could be easily applied to the saga of the USDOL overtime rule, which continues. Although the proposed rule has been shot down by the Fifth Circuit, the USDOL will now request that the Fifth Circuit reverse a Texas federal court order blocking the new rule. That new rule would have doubled the salary threshold for employees to be exempt.

The DOL has stated that it would request that the appellate court hold the appeal in abeyance “while the Department of Labor undertakes further rulemaking to determine what the salary level should be.” The agency, however, gave no details at all in the simple appeal notice. The cases are entitled State of Nevada et al. v. U.S. Department of Labor and Plano Chamber of Commerce et al v. R. Alexander Acosta, both filed in federal court in the Eastern District of Texas.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
There is another case on this issue pending. The Fifth Circuit is simultaneously considering the government’s appeal of a preliminary injunction Judge Mazzant issued in November 2016, which stopped the rule from taking effect, but a few days before it would have been implemented. The Obama DOL appealed the ruling before the new Administration took over.

The District Court Judge, Amos Mazzant, had concluded that the USDOL exceeded its authority when it doubled the salary requirement for exempt status. The Judge stated that the DOL “exceeded its authority” by “creat[ing] a final rule that makes overtime status depend predominantly on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.” The Obama DOL immediately appealed and although the Trump DOL initially followed up on the appeal, with the goal of having the Fifth Circuit affirm its power to set salary levels, the agency then requested that the Fifth Circuit dismiss the appeal prior to the grant of summary judgment.

One commentator observed “the appeal] is less about appealing Judge Mazzant’s decision to strike down the overtime regulations that had been proposed under President Obama’s administration and more about preserving the concept that the Department of Labor has the authority to modify the overtime rule to begin with.”

There is an expectation that the DOL will propose lifting the salary level to $30-35,000 per year. This would be what the 2004 level would now be, considering inflation. The Labor Secretary has given no indication of what the agency will do. He has, however, in the past, stated he might want to raise the salary level in that area.

The DOL issued a request for information in the summer, asking for public opinions on the manner in which the rule should be changed. Approximately 165,000 comments were submitted on different elements of any salary test, e.g. what level to set salary, whether geography should play a role.

The Takeaway

I believe the DOL has the authority to set salary levels, as it has done many times through the decades. The level that the agency chose, however, was unreasonable and would have been bad for business. I am also intrigued by the concept of making allowances for differences in salary level based on geography.

I think that makes good sense…

In every FLSA class action I have defended (as well as every demand letter I have seen on this subject) the plaintiff’s lawyer always alleges that the violations were “willful.” It does not matter what the facts are. No, they say, the violations are “always” willful. The violations rarely, in fact, are. Now, the Third Circuit has given defense practitioners some added ammunition to beat back these allegations. The case is entitled Souryavong v. Lackawanna Cty. and issued from the Third Circuit Court of Appeals.

Courthouse pillarsThe Court made clear that to allege that the employer acted only “unreasonably” is insufficient and that a degree of “actual awareness is necessary.” The Court held that this is so even if the employer produces insufficient evidence of good faith. The Court explained “a jury question on willfulness is present when [an employer] is well aware of the FLSA’s structures, sets up a bureaucracy to classify pay and benefits and properly calculate overtime, and then despite all that allows a misclassification of a monthly payment to continue for nine years.”

The Court explained that for a plaintiff (or class) to prevail, the plaintiff “must put forward at least some evidence of the employer’s awareness of a violation of the FLSA overtime mandate.”  In other words, even if the employer cannot produce sufficient evidence of good faith, the plaintiff must prove that the employer intentionally violated applicable laws.

The Court noted that it was a truism that the employer must establish good faith, but it remained the plaintiff’s burden to show intentionality, i.e. that the employer either actually knew that it was violating the law or acted with reckless disregard.

The Takeaway

Employers must do everything possible to comply with the law. Employers should address potential wage-hour violations in a prompt manner and effect the appropriate remedies.  This will blunt the effect of any allegations of willfulness. We recommend that employers regularly conduct wage and hour audits to make sure that employees are properly classified as either exempt or non-exempt and that non-exempt employees are paid overtime in accordance with the law. In addition, such an audit will include an overview and analysis of all of the employer’s compensation and wage-hour practices.

That’s the cure for willfulness…

I have written a number of times about law firms that have been sued in FLSA actions. Another example. Employees have sued two Florida personal injury law firms, alleging that they were misclassified and not properly paid proper overtime wages in violation of the Fair Labor Standards Act. In fact, there are two class actions filed. The cases are entitled Durrett v. Disparti Law Group PA et al and Hinkle v. Jodat Law Group PA. et al. Both cases were filed in federal court in the Middle District of Florida.

Law books and justice scales
Copyright: phartisan / 123RF Stock Photo

The employees at issue in the Disparti suit are case managers; these are the same kind of employees whose status is at issue in the Jodat case.  The employees claim that their duties are non-exempt. The Durrett plaintiff alleged, “in most if not all work-weeks, plaintiff was paid for 40 hours but was not compensated time and half for hours worked over 40.” She alleged that the “defendant would pay plaintiff straight time by personal check for all hours over 40 in a workweek. This disguised method of compensation was implemented to circumvent the FLSA’s requirement for overtime compensation.”

The plaintiffs claim that the founders of the firm knew of these illegal payment practices and have named both of them as individual defendants. The suit also alleges that sometimes the defendant gave Durrett compensatory time and failed to pay Hinkle for her time spent delivering mail between the offices, although she asserted this was a routine part of her duties.  Hinkle claimed that the “defendants were able to avoid paying overtime by not paying plaintiff travel time when she would transport firm mail between office locations.

The women employees claim all they did was manage cases, keep clients informed of status of their cases, order supplies and organize files.  Ms. Durrett made a very (potentially) damaging allegation, i.e., that she was ordered to clock out and then keep working, many times in excess of fifty (50) hours per week. Naturally, the employees claim the violations were willful and that there are many other workers at these two firms with similar claims.

The Takeaway

Law firms, or doctor offices, are not immune to FLSA lawsuits, particularly on misclassification grounds. It is always the employer’s obligation to classify employees properly. It sounds like the employees at issue do mainly ministerial tasks, run-of-the-mill tasks that do not smack of exemption. Unless the plaintiffs (and possible opt-ins), supervise workers so they might possibly fit within the executive exemption, the only realistic possibility is the administrative exemption.

The grayest and toughest of the white-collar exemptions for the employer to prove…

There have been so many cases involving employees in the financial services industries and their exempt status or lack thereof. In another variation on this theme, Provident Savings Bank is seeking review by the US Supreme Court of a Ninth Circuit decision that gave new life to allegations that its mortgage underwriters are non-exempt and entitled to overtime. The bank asserts that these employees are exempt under USDOL regulations, i.e. the administrative regulations. The case is entitled Provident Savings Bank, FSB v. Gina McKeen-Chaplin, et al. and has been submitted to the U.S. Supreme Court.

Banking and Financial Services
Copyright: sashkin7 / 123RF Stock Photo

The bank had defended the lawsuit by asserting that these workers did qualify as exempt administrative employees because their duties involved the “servicing” and “running” of the bank’s business by analyzing and evaluating whether the bank should risk money by rendering loans to certain borrowers. The petition states “nothing in the FLSA’s text or purpose justifies interpreting the ‘administrative’ exemption with a heavy thumb on the scale against the employer. Perhaps for that reason, this court has pointedly refused to apply the canon in recent FLSA cases.”

The Ninth Circuit concluded that the job functions of these workers, i.e. reviewing loan applications using guidelines set down by the bank and investors, were not the back office functions relating to management or general business operations that the exemption requires. The named plaintiff had appealed a lower court decision that granted summary judgment to the Bank.

The district court had first granted conditional certification but then threw the case out because it concluded that the underwriters fit within the administrative employee exemption because major, primary functions included “quality control.”  That is one of the functions enumerated in the regulations as work related to the management or general business operations of the bank.

The Takeaway

This case highlights the confusion in the regulations concerning the financial services industry. If these workers are “simply” using established guidelines and standards to make decisions, well, that is not “discretion and independent judgment.” Although quality control is certainly a back-office type business function, this particular exemption still requires employees to use discretion.

That is where these kinds of cases usually go south for the employer.

I have blogged (somewhat incessantly, I admit) about manager FLSA class actions and what the line(s) of defense are for the employer in these cases, and how to defeat these cases. Another case in point. A federal judge has now decertified a collective class, following the Magistrate Judge’s recommendation against the class continuing in this overtime action. The case is entitled McEarchen et al. v. Urban Outfitters Inc., and was filed in federal court in the Eastern District of New York.

Retail clothing storeJudge Roslynn R. Mauskopf adopted the Magistrate Judge’s report and recommendations, concluding that there was no plain error in the Report. Moreover, the Managers had not lodged objections to the Report/Recommendations. Magistrate Judge James Orenstein had ruled that there were too many differences in duties, responsibilities and authority among the members of the class to allow the claims to proceed as a collective action.

The Managers stated that they agreed not to object to the Report if the Company gave the Managers more time to file, perhaps, individual lawsuits. The original lawsuit alleged misclassification, i.e. that the Managers did not fit the executive exemption, they were not true managers and therefore were non-exempt under the FLSA. The plaintiffs moved to certify a class of all current/former department Managers at the Company’s 179 stores. The plaintiffs argued that all of the Managers had similar job duties and lacked meaningful discretion. There were notices sent to 1,500 potential opt-ins, following the granting of conditional certification. More than two hundred opted in and several were deposed.

The Magistrate Judge found that there were major differences between the duties and experiences of the opt-in plaintiff and the named plaintiffs. The Judge found that the opt-ins seemed to be exempt, as opposed to the named plaintiffs. The named plaintiffs asserted that they had little say in hiring and firing decisions. To the contrary, many opt-ins “described being active participants in the hiring and firing process,” Judge Orenstein wrote. The named plaintiffs posited that they spent but little time training hourly workers, but many opt-ins testified to a broad range of training responsibilities.

The Takeaway

This is another lesson for employers, not only in these Manager type cases but also for all employers defending almost any kind of FLSA (or state) class/collective action.  Bang away at individual differences in the class. It sure helps if the opt-ins to the class give favorable testimony at the expense of their own self-interest (and wallet). The interesting twist is that the plaintiffs extracted more time for possible plaintiffs to file their own individual cases.

Maybe they know something…