Misclassification

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When will employers learn?  They keep classifying retail Store Managers and Assistant Managers as exempt, when these workers are often misclassified, not intentionally, but because the nature of their duties often tends to undermine the primary duty test and render them non-exempt.  Another example is a recent case where Store Managers have been granted conditional certification in their FLSA collective action.  The case is entitled Spack et al. v. Trans World Entertainment Corp. and was filed in federal court in the Northern District of New York.

The plaintiffs can now send out notices to current and former store managers so they might opt in to the case.  The plaintiffs also want a class of Assistant Managers for alleged off the clock work.  The Company, however, won that round, convincing the Judge that it was too soon to certify such a class, asserting that it had not yet been ascertained if these workers were non-exempt, which would allow them to make these claims.

The Judge appeared to reserve decision on a combined class and also indicated that the class could also be de-certified.  The Court stated that “should additional discovery demonstrate the existence of significant differences between the SMs or between the SMs and SAMs, the court can choose to deny any future motion seeking conditional collective certification of the SAMs, or, at the second stage of the analysis, decertify the collective.”

The plaintiffs met the “modest” burden at this conditional stage by submitting twelve Certifications from opt-in plaintiffs who claimed they worked 50-70 hours per week and spent the vast majority of their time performing non-exempt, low-level tasks that were not managerial in nature.  The Company also submitted statements from managers that showed they performed managerial (i.e. exempt) work and tried to undermine the plaintiffs’ statements but the Court would not allow these manager statements to bear the weight that the Company urged they should be accorded.

The Takeaway

My advice to employers is to test the duties of their management personnel, especially lower level managers, against the criteria in the FLSA regulations.  This can be done via a “self-audit” or internal audit, of which I have conducted dozens.  You also need to check the law of the particular state in which the controversy may be litigated, as the state law may be tougher than the FLSA standards, such as in California or New York.

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.

I have often written about the scourge of Assistant Manager class actions. The employee category is particularly subject to this kind of lawsuit as these workers often perform some non-exempt work and it is unclear many times if they possess and exercise sufficient and proper supervisory authority. A recent case in New Jersey provides yet another example. A federal judge has just conditionally certified a class of Assistant Store Managers who work for Panera Bread. They allege that they were misclassified as exempt. Interestingly, the Court would not certify such classes in Massachusetts and New York.  The case is entitled Friscia v. Doherty Enterprises Inc. and was filed in federal court in the District of New Jersey.

Waitress carrying three platesThe judge concluded that the lead plaintiff Jacqueline Friscia made a “modest factual showing” concerning the alleged misclassification but refused to certify classes in other states. The court stated that “put simply, Friscia has not produced sufficient evidence to show that she is similarly situated to assistant managers in New York or Massachusetts.”

As is typical in these cases, the named plaintiff claims she worked 55-80 hours per week. She also claims that she performed many non-exempt tasks and that these tasks comprised the majority of her work time per week These tasks included preparing food, taking food orders, cleaning the store, working at the cash register and dish washing. Other than her weekly salary of $800, she asserted that she never received overtime for her long hours.

The company took the position that since the named plaintiff worked in only one store, she could not know conditions at other stores or whether the other Assistant Managers were “similarly situated.” The company also contended that there was an arbitration agreement in place and thus the workers could not be included all together in the same class actions. The judge was not impressed by these arguments, finding that the plaintiffs had met the “lenient burden” to receive conditional certification.

The Takeaway

The company can still defeat this class action by making a motion to de-certify the class later on. This would entail taking more discovery, perhaps many more depositions, in an effort to show that there is too much individual difference between the workers across the system to allow for class treatment. This will be expensive and may not be successful.

Or, the company can bite the bullet and settle…

I have done a lot of independent contractor work in New Jersey, defended many such cases, from (numerous) unemployment audits to FLSA class actions. The New Jersey test, the A-B-C test, is well-established and one of the hardest for the putative employer to prevail upon. The test was, just a few years ago, reinforced by the NJ Supreme Court. Now, Governor. Phil Murphy has signed an Executive Order creating a task force to look into this issue of employee misclassification, as the Governor opines that millions and millions of dollars in taxes are being lost because of this practice. My question is—why do it?

New Jersey Silhouette in OrangeThe Task Force on Employee Misclassification will make recommendations on strategies the state will use to deal with the arguably widespread misclassification of employees as independent contractors. The Task Force will look at existing enforcement practices in and will seek to set out best practices to strengthen enforcement in this area, as well as making education outreach.

The Executive Order states that “with some audits suggesting that misclassification deprives New Jersey of over $500 million in tax revenue every year.” The Order is a product of a NJDOL report issued during the transition that contained a section on misclassifying workers. The report referenced a fairly new NJ Supreme Court case on misclassification and USDOL guidance which had “clarified the factors to be examined in determining a worker’s status.” The Report cited some benefits (UI insurance, family leave) that employees receive and independent contractors do not.

The NJDOL audits, in supposedly random fashion, approximately 2% of employers to gauge if these employers are correctly reporting all employees for unemployment and disability insurance purposes. I have handled perhaps fifty (50) such audits and can safely say that the tendency of the agency is to find that most individuals are, in fact, employees.

Under the IRS test, many factors are looked at, with a seeming emphasis on the control factors. Under the New Jersey A-B-C test, the most important factor is whether the individual is in an “independently established business.” This third factor is where, nine of ten times, the putative employer’s defense goes south. However, there has been a recent judicial development (the Garden State Fireworks decision) that might swing the pendulum a little back towards the middle.

The Takeaway

One commentator has said that the classification “disease” affects all industries but asserted that the problem is pervasive in the construction, trucking and landscaping spheres. That may be so but I know that the state of enforcement by the NJDOL is already fairly aggressive and I do not understand the point of the task force being created. If it is to advise that there is “a lot” of misclassification, well, we already know that. Maybe the Task Force will recommend stronger and more aggressive enforcement of the existing laws.

From my vantage point, I thought the agency was already doing that…

Employers are always trying to cut off the head of a class action, i.e. the named plaintiff, in order to bring the case to an end. What happens when the named plaintiff is gone from the case but some people have opted in? Do they become named plaintiffs, with the case continuing?  The Eleventh Circuit has seemingly answered that question in the affirmative. The court has just ruled that workers who opt into collective actions under the Fair Labor Standards Act only have to file that little piece of paper, the consent form, to then become a named party to the case,  The case is entitled Mickles et al. v. Country Club Inc.

The Elbert P. Tuttle U.S. Courthouse in Atlanta, Georgia, now home to the U.S. Court of Appeals for the Eleventh Circuit.
By Eoghanacht [Public domain], from Wikimedia Commons
Importantly, the ruling is a published one, meaning it is precedential. The panel reversed the lower court which held that the three opt-ins were not properly added to the case and should have been eliminated from the suit after the original plaintiff did not succeed in securing conditional certification and then settled. The Judge who wrote the decision stated that this was a case of first impression.

The Court noted that the FLSA, on its face, buttressed the conclusion that workers who opt into a collective “become party plaintiffs upon the filing of a consent and that nothing further, including conditional certification, is required.” The Court stated that “we conclude that filing a written consent pursuant to [FLSA] section 216(b) is sufficient to confer party-plaintiff status.”

The case was filed in 2014 by a single named plaintiff Andrea Mickles, a dancer at Goldrush. The suit alleged that the company (Country Club Inc.) had misclassified her and other dancers as independent contractors and thus they were denied proper minimum wages and overtime monies. She sought a class of current and former dancers; three other dancers then opted in by filing consents.

The lower court denied the motion to conditionally certify the class, as it was filed beyond the deadline set forth in local court rules for such a motion. There was no mention, however, of what would happen to the three opt-in plaintiffs. The Company then asked the court to specify which individuals would stay in the case. The company claimed the opt-ins had never become named party plaintiffs and thus were eliminated from the case when the conditional certification motion was denied.

The three additional workers claimed they could not be dropped from the case because the conditional certification motion was denied. The lower court held that the three had not been ruled similarly situated to the original plaintiff and had not been joined to the collective action. Then, the original plaintiff settled with the company and the three opt-ins appealed to the Eleventh Circuit.

That appellate court noted that there was no determination made as to the “similarly situated” element for the three workers, as needed to be done. Although opt-ins must be similarly situated to the original plaintiff, as no ruling on this issue had been made, the three employees stayed as parties until that ruling was made; if they were not ruled to be similarly situated, then they would be dismissed from the case.

The Eleventh Circuit therefore ordered that the opt-in cases be dismissed without prejudice so they were free to refile their claims, or proceed with their own suits. The court stated that “the “appellants were parties to the litigation upon filing consents and, absent a dismissal from the case, remained parties in the litigation, Thus, the district court erred in deeming appellants non-parties in the clarification order, which had the effect of dismissing their claims with prejudice.”

The Takeaway

This is a major change in the FLSA litigation landscape and makes it harder for an employer to get a case dismissed or to even settle a case. Yes, it is only one circuit, but the reasoning and rationale may spread to other circuits.

I hope not…

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…

Classification issues are annoying ones, to state the obvious. Especially decisions and issues as to who is and who is not an independent contractor. And, it does not matter whether the defending entity is a mom-and-pop candy store or one of our most elite educational institutions, such as Harvard University. That august institution has just recently agreed to revise its university-wide worker classification system as part of a settlement of a class action involving allegations of misclassification. The case is entitled Donahue v. Harvard University and was filed in state court in Massachusetts.

A massage therapist treating a female client on a table in an apartmentThe settlement included a class of approximately 20 acupuncturists and massage therapists who worked at the University’s Center for Wellness from January 2013 to December 2017. These workers will now be re-classified as employees and receive up to $30,000 each in back pay. When the University re-classifies other workers, the side “benefit” will be that they will be eligible to join unions.

The plaintiff’s attorney complimented the university. She stated, “from the outset of this case, I have said that Harvard should be a role model for other employers. I am very proud of this settlement and hope that it sets an example of how other employers should respond when a concern is raised that its workers have been misclassified.”

The named plaintiff, Kara Donohoe, a massage therapist, sued the University in January 2016, alleging it misclassified her and others as independent contractors. They were, consequently, denied certain employee-related benefits. She will receive $30,000 in back pay and an extra $30,000 for being the named plaintiff, a so-called “incentive award.” Other workers will receive up to $30,000 in back pay. Harvard has now tasked a group of people (e.g. HR) with revising its policies concerning classification of individuals as independent contractors. This study will be guided by federal and state law principles.

The Takeaway

A wholesale classification of any group of individuals as independent contractors is dangerous. As I have harped on many times, the starting point for any such analysis, whether under FLSA principles or state law, any state’s law, is to ascertain if the individual has other customers or clients or works solely/mostly for the putative employer.  In this case, if these Therapists worked only for Harvard, they were not engaged in an “independently established business” and that is the death knell for any employer defense in an independent contractor case.

Sorry, but, on this one, Harvard gets an “F.”

I have blogged many times about the rash of intern cases that have popped up over the last few years. Now maybe there will be a consistent, uniform test for determining whether interns are really statutory “employees.” The US Department of Labor has endorsed such a test. The agency is approving the so-called “primary beneficiary” standard.

Students/interns sitting at a table with laptops talking
Copyright: bialasiewicz / 123RF Stock Photo

The agency has endorsed a seven-part test for determining intern status. This was set forth in the Second Circuit decision in the 2015 ruling in Glatt v. Fox Searchlight Pictures Inc. That test analyzes the “economic reality” of interns’ relationship with the putative employer to ascertain who is the primary beneficiary of the relationship. This test has been applied in a number of cases and industries of industries, where courts have found that, as the primary beneficiaries of these internships, the individuals are not employees under the FLSA and therefore cannot file claims for misclassification and wage violations.

The agency noted that four federal appellate courts have rejected the six-part DOL test set forth almost a decade ago. The agency issued a statement asserting that the “Department of Labor today clarified that going forward, the department will conform to these appellate court rulings by using the same ‘primary beneficiary’ test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.”

Under the “old” test, an intern is an employee unless all of the six factors were satisfied. These included whether the intern displaced a regular employee and whether the employer derived any “immediate advantage” from the intern’s work. The updated test now restates the seven non-exhaustive factors that constituted the Glatt test. Those include: 1) whether there’ exists a clear understanding that no expectation of compensation exists; 2) whether interns receive training similar to what they would receive in an educational environment; and, 3) to what extent the internship is tied to a formal education program. The agency specifically noted that the primary beneficiary standard is “flexible,” and that determinations on intern-employee status hinge upon the unique circumstances of each case.

The Takeaway

I believe this is a better, fairer, more realistic test. Is it, as I postulated, “definitive guidance?”We will see…