Exemptions

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The retail industry is notoriously prone to FLSA collective action misclassification lawsuits because there are many levels of management, especially so-called lower management, where the employees may/may not discharge actual/true supervisory powers. Another illustration of this principle has resulted in a large dollar settlement that will pay employees known as “sales team managers” a fairly large amount of money, although the exact amount has not been disclosed. What was disclosed is that the plaintiffs’ lawyers will receive almost two million dollars in attorney fees! The case is entitled , and was filed in federal court in the Eastern District of Texas.

ArbitrationThe Judge examined the six-factor test under the Fair Labor Standards Act for granting approval to such settlements and concluded that there was no evidence of fraud and also, importantly, that the settlement addresses the plaintiffs’ possibility of prevailing on the merits. The Court stated that “after considering the factors, the court finds that the settlement agreement should be approved because it is a fair and reasonable settlement of a bona fide dispute.”

The hundreds of sales team managers claimed that they performed the same job duties as their subordinates, such as selling, restocking products and maintaining the organization of the store and the clothing racks. The employees denied that they performed any managerial tasks, such as hiring or firing. In sum, they alleged that although they had the title of “manager,” they were not at all performing the tasks required under the Part 541 regulations that address exempt status. There were 384 workers who had opted in.

As is typical in these cases, the parties devised a formula for determining the amounts of money workers will receive. It will be based on the number of weeks they worked in the three years before they opted in. It remains unclear the aggregate amount of money that the employees will receive, as that (important) fact was redacted.

The Judge noted that the fourth factor, the “probability of the plaintiffs’ success on the merits,” was the “most important factor absent fraud and collusion.” The Judge observed that the employees “face considerable hurdles in succeeding on the merits.” Thus, the Judge concluded that the settlement represented a “fair and reasonable recovery.”

The Takeaway

As these lawsuits are so common, my advice to my clients for years has been to treat lower level managers as non-exempt and pay them hourly. It is possible to take the salary being paid and “back into” a correct hourly rate so that, even with the anticipated overtime worked, the employer’s labor costs will not be increased. That puts an end to the threat of a misclassification lawsuit.

It works…

When an employer realizes that a certain classification or number of employees has been misclassified as exempt, the employer may do the right thing and, henceforth, treat those people as non-exempt and pay overtime accordingly.  That corrective measure, however, leaves a gap because the workers can sue for overtime for the period preceding the change.  That is just what happened in a case where the employer agreed to pay $2.75 million to settle a class action involving inside sales representatives claims for overtime.  The case is entitled Bisaccia v. Revel Systems Inc. and was filed in federal court in the Northern District of California.

Salesperson holding the receiver of a corded desk phone while dialing in the office.There were 264 employees who would be part of the settlement.  The attorney fees and costs would be around $750,000.  The lawyer for the plaintiffs asserted that “this settlement avoids expenditures of resources for all parties and the court, and provides ‘significant benefit that [plaintiffs] would not receive if the case proceeded — certain and prompt relief.”  The settlement is also reasonable because the proposed release only requires plaintiffs to release claims they might bring against Revel relating to their classification as exempt ISRs.”  To date, 151 people have opted in.

The plaintiffs claimed they should have been paid overtime prior to when they were changed over to non-exempt employees and overtime eligible.  These kinds of positions used to be (routinely) deemed exempt but now they are viewed as white-collar production jobs and simply a glorified form of “production,” i.e. non-exempt work.

The papers filed by the plaintiffs stated that “this settlement provides favorable resolution for all plaintiffs, without the need for litigating decertification or motions to compel arbitration.” Their attorney said that he was “pleased with the outcome, which we believe provides very good value to the inside sales representatives in this case.”

The Takeaway

When an employer converts people from exempt to non-exempt, he must always determine what to do with the years in the past.  One tactic is just ignore it and hope for the best, knowing that the statute of limitations gets eroded away week by week.  Another is to do a calculation of what people are owed for the two years prior to the change and make “restitution” on those hours.  I think the proactive way is the better way.

It will no doubt be cheaper than another litigation.

New Jersey Silhouette in Rubber Stamp StyleThe issue of who is and who is not an independent contractor has exploded on the legal scene in recent years. Many agencies are honing in on this topic and I have, over the last five years, probably defended more than fifty audits, inspections and lawsuits involving this issue. Well, the landscape just got murkier, or more difficult for employers as the US Department of Labor and the NJ Department of Labor have just signed a cooperation agreement to target the misclassification of individuals as independent contractors in New Jersey.

This memorandum of cooperation will enhance enforcement efforts by facilitating the coordination of investigations by the agencies as well as sharing resources. The agencies want to send a “strong message” to the business world that misclassification laws “are being strictly enforced.”

Commissioner Robert Asaro-Angelo stressed that his agency’s strong goal is to ensure that workers are shielded from “unscrupulous business practices.” He stated that “this partnership with U.S. DOL will help ensure that our business partners and the state’s workers all get the protections they deserve.” The sectors most amenable to misclassification problems are the construction, transportation and information technology. The new so-called gig economy is also a focus of these issues.

Mark Watson, of the USDOL stated that the agreement “will amplify the effectiveness of both agencies.” He added that “the U.S. Department of Labor looks forward to improving coordination and increasing joint outreach and compliance assistance efforts with all of our state partners.”

This agreement follows an earlier New Jersey initiative where the Governor announced he wanted to take a harder line on this misclassification issue. That initiative was the establishment of a cross-agency task force to focus on the problem of misclassification. Finding more people to be true “employees” would generate more money for the State

The Takeaway

I know a lot of employers classify people as independent contractors when, perhaps, they should not be. I also know that a lot of these individuals want those relationships to exist as one of independent contractor status. In New Jersey, under the strict ABC test, it was very difficult to win on the third prong, the “independently established business” prong, until the advent of the Garden State Fireworks case. We will see where that goes.

But, employers now need be aware if they are found to have violated the New Jersey unemployment statute on independent contractor, they may find the USDOL alleging that under that statute, the workers are really employees.

It is vital for employers to remember that when non-exempt employees earn commissions, those commissions must be included in the computation of their regular rate when they work overtime. The inclusion of the commissions bumps up the regular rate a little but if this is not done, then these small amounts of money can quickly add up if an employee or, worse yet, a class of employees files a lawsuit. That is exactly what has happened in a recent case involving sales representatives in a class action. The case is entitled Johnson v. Cincinnati Bell Inc. et al., and was filed in federal court in the Southern District of Ohio.

Salesperson holding the receiver of a corded desk phone while dialing in the office.The named plaintiff, Michael Johnson, was a sales representative for less than one year. His theory was that the failure to include the commissions in the regular rate violated the Fair Labor Standards Act. He moved for conditional certification in May and then the parties filed a joint stipulation in which they agreed to the definition of the class as certified and they also agreed on a method for advising potential members.

The court found that the class was appropriate, as there was a low standard of proof that needed for the establishment of a class. The judge stated that she was “satisfied that both the agreement of the parties and evidentiary submissions by plaintiff demonstrate the modest showing necessary to support conditional certification of the proposed class.”

There were affidavits, as well as payroll records which undergirded the theory that these employees, the outbound sales representatives, who worked in the telesales department “had certain standard duties, [were] paid in the same manner and regularly worked more than forty hours per week, and defendants did not include commission payments in the regular rate of compensation for purposes of overtime.”

The Takeaway

This case highlights the complexity of the Fair Labor Standards Act and all of its nuanced regulations. It is very easy for a well-intentioned, good faith employer to make a mistake. If it affects but one employee, that is all it is, a simple mistake, maybe costing a few dollars. If it affects a class, it is a much bigger issue.

Much bigger. And costlier…

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…