U.S. Court of Appeals for the Second Circuit

I often settle FLSA actions, as do many other lawyers, defense and plaintiff. It makes sense for both sides, given the costs and uncertainties of litigation and the protracted time it takes for a case to weave its way through the courts. There is now a growing controversy as to the degree that such settlements need to be reviewed by the courts. This dilemma has now found its way to the Second Circuit Court of Appeals in a case that may produce a watershed result. The case is entitled Yu v. Hasaki Restaurant Inc. et al., and was argued before the Court of Appeals for the Second Circuit.

A sushi chef who sued his employer and the employer wanted to settle the lawsuit for $20,000. The district court Judge (Jesse Furman) maintained that the statute required him to review the settlement for appropriateness. The matter has now been appealed to the appellate court where oral argument (and some tough questioning by the appellate panel) took place.

The plaintiff’s lawyer argued that Rule 68 of the Federal Rules of Civil Procedure explicitly provided that any agreement reached under that Rule had to be entered as a judgment. One of the appellate judges seemed to disagree, stating that this Rule was not intended to be used in that manner. The Judge observed “really, what is 68(a) about? … It’s about getting people to accept settlements in torts.” The lawyer responded that “it’s meant to create a settlement where there are disputes about the facts and what’s owed.” The lawyer noted that these kinds of disputes often exist in wage-and-hour cases.

The lawyer for the advocacy group Public Citizen asserted that the district court was right. She stated that the Judge Furman was correct in looking towards the Second Circuit’s recent holding in Cheeks v. Freeport Pancake House for guidance. That case closed the door on settling and dismissing FLSA cases under FRCP 41. The plaintiff’s lawyer countered by stating that there is no similar requirement in Rule 68, as there is in Rule 41, i.e. making sure that no other statute would preclude the proposed settlement.

Judge Debra Ann Livingston’s inquiries allowed the plaintiff’s lawyer to go into a speech about the long amount of time it takes for settlements to be approved by district courts. That Judge was also dubious of the applicability of the Cheeks holding. She observed that Rule 68 settlements were matters of pubic record, while Rule 41 settlements could be (and were) negotiated in a private setting.

The Takeaway

Settlements are such a vital part of the FLSA-litigation process that any obstacle that gets placed in the way of the facilitation of such settlements is bad for both plaintiff and the defendant…

This is an interesting case.  A class action that was denied certification, appealed to the Second Circuit, which reversed because the lower court did not properly interpret the job description on the key issue of duties qualifying for the employer to claim the protection of the Part 541 exemptions.  The employees were salesmen and installation technicians.  Now, they get another shot to prove they are worthy of class status. The case is entitled Sydney et al. v. Time Warner Entertainment-Advance/Newhouse Partnership and issued from the Court of Appeals for the Second Circuit.

plastic black toolbox with tools over white backgroundThe lower court had relied upon the outside sales exemption.  The panel, however, concluded that the jobs seemed much more inclined to be installation jobs, rather than selling jobs.  Therefore, it was too early and improper to grant summary judgment as there were issues of fact.  The Court stated that “we conclude that the district court erred in holding on summary judgment that plaintiffs’ primary duties were exempt sales, as opposed to nonexempt installations, and accordingly in its ultimate conclusion that the outside sales exemption applied.”

These workers, dubbed territory sales representatives, or TSRs, contacted apartment building owners in upstate New York.  Their role was to urge these owners to funnel their tenants to the Employer for their cable TV, internet and phone service needs.  They received a small salary and commissions.  The plaintiffs allege they spent some time making calls to get business but the majority of their time was supposedly spent doing the actual installations (which would obviously be non-exempt work).  They asserted that they worked 55-70 hours per week.

They sued but the lower court rejected their claims, relying on the outside sales exemption, finding that that “based on [the] undisputed facts, the court finds that plaintiff’s primary duty was making sales.”  The Second Circuit disagreed.  That Court noted that the men went to work in hard hats and safety glasses.  They also carried tool boxes full of different tools.  Also, there were other employees whose job was to focus on door-to-door sales.

The Takeaway

The issue on summary judgment was whether the facts, i.e., the job description, undisputedly showed that the men were outside salesmen.  If, however, the facts on the ground differ from the printed description, that job description will be worthless as a defense in proving the exemption.  In other words, if the workers spend the majority of the time at work performing nonexempt work, such as installations they are non-exempt.

Simple as that…

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…

I read an interesting post by Daniel Schwartz in the Connecticut Employment Law Blog. It concerned a recent Second Circuit decision that bodes well for employers in the never-ending fight against wage-hour class actions. The case is entitled Rodriguez-Depena v. Parts Authority, Inc. et al. and issued from the Court of Appeals for the Second Circuit.

Auto parts store shelvesThe Court therein ruled that the arbitration clause set forth in the employment agreement precluded the federal action.  Dan noted that the “clear logic” of the decision will be hard to overlook and I believe he is quite right. The Court relied upon an earlier decision that held that age discrimination claims could not be brought in court if a valid arbitration policy was in place.

The Court also examined the issue of whether the required judicial oversight of FLSA settlements would be a bar to arbitration of these claims. The Court held that it did not, as the guarantee of the fairness of a settlement of a claim filed in court did not mean that this right provided an ironclad right to file suit in court.

Dan notes that this “federal endorsement of arbitration provisions” will allow employers to adopt these provisions and provide themselves with another defense. It also provides yet another stratagem to be utilized in the early stages of a FLSA class action case.

The Takeaway

Maybe employers should consider utilizing such mandatory arbitration provisions. Arbitration is a much cheaper and faster litigation mechanism. I am a big advocate of taking the easiest way out of a class action federal court FLSA case and these kinds of provisions may be another weapon in that early dismissal arsenal.

Well done, Dan…

When I defend a FLSA case, the plaintiff’s attorney always seems to want to hire an expert on “damages” or actually does hire such an expert.  I usually am dumbfounded by that because I ask myself (and plaintiff’s counsel) why is there a need for an expert when “it’s just math” and no arcane or esoteric issues for such calculations ever exist?  I also see it as a ploy for the adversary to add more to his fee petition.  Well, I seem to have read the tea leaves correctly on this as the Second Circuit has just ruled that a winning plaintiff cannot be reimbursed for expert fees under the Fair Labor Standards Act.   The case is entitled Gortat v. Capala Brothers Inc. et al., in the Court of Appeals for the Second Circuit.

Copyright: olegdudko / 123RF Stock Photo
Copyright: olegdudko / 123RF Stock Photo

The panel reversed the lower court’s decision to award the plaintiff more than $10,000 in costs for an accounting expert who testified for the workers.  The Court made plain that a district court cannot award reimbursement for expert fees unless the statute under scrutiny explicitly references such awards.

The Court stated that “unlike other statutory provisions explicitly authorizing such reimbursement, 29 U.S.C. §216(b) of the FLSA does not expressly address awards reimbursing prevailing plaintiffs for expert fees.”  The Court affirmed all other aspects of the lower court’s decision to award the plaintiffs $514,000 in attorneys’ fees and nearly $68,300 in costs.

The Court also looked to Supreme Court precedent for the basis of its decision and stated that the decision was consistent with those emanating from four other federal circuit courts.  This was in direct contradiction to the district court which opined that “courts have awarded expert fees to prevailing parties in cases brought pursuant to the FLSA.”

The Takeaway

Maybe this will start a trend.  Hopefully.  Maybe the FLSA plaintiffs’ bar will start to understand that hiring an expert is superfluous and, if they understand that they will have to bear the costs for the expert themselves, maybe they will stop using them.  Or, maybe they will stop using the “threat” of utilizing an expert as leverage to extract a settlement.  I have seen that tactic tried numerous times.

After all, why is an expert needed?  It’s just math…

I have blogged about this matter several times, all the while applauding the lower court decision and employer’s legal position in the case, as I believed what these temporary lawyers were doing did constitute the practice of law.  The Second Circuit has now disagreed.   The Court has ruled that document review work does not equal, automatically, the practice of law.  The case is entitled Lola v. Skadden Arps Meagher Slate & Flom LLP in the Second Circuit Court of Appeals.

Copyright: andreyuu / 123RF Stock Photo
Copyright: andreyuu / 123RF Stock Photo

The Second Circuit agreed with the district Judge that the state law of North Carolina, where Lola worked, was the proper law to analyze, but concluded that the judge erred when he ruled that document review was “per se” the practice of law.  The Court noted that a “fair reading of the complaint in the light most favorable to Lola is that he provided services that a machine could have provided.  The parties themselves agreed at oral argument that an individual who, in the course of reviewing discovery documents, undertakes tasks that could otherwise be performed entirely by a machine cannot be said to engage in the practice of law.”

Thus, the law firm’s motion to dismiss victory was overturned.  There will now have to be the usual discovery and subsequent motions (e.g. summary judgment?) focusing on the question (as urged by the plaintiff) whether the “mechanical” document review work he performed was not the practice of law because it didn’t require any legal knowledge, skill or training,  according to the plaintiff.

The district court Judge concluded that as any kind of document review was deemed the practice of law in North Carolina, the claim had to be dismissed.  The Second Circuit disagreed and relied upon a North Carolina State Bar ethics opinion that stressed that there had to be “the exercise of at least a modicum of independent legal judgment” for it to be considered legal work.  Judge Poole, writing for the Court, noted that “moreover, many other states also consider the exercise of some legal judgment an essential element of the practice of law.”

The Takeaway

Maybe an en banc hearing is necessary for the “right” result to issue?   I believe that document review of the kind at issue here, does involve some exercise of discretion and independent judgment.  Such document review does involve some level of and demand for the worker being required to “think like a lawyer.”

I think this decision is wrong.  Maybe it will now go to trial?  Maybe it will now be settled, leaving the issue for another court and another day?

Maybe it will end up in the U.S. Supreme Court…

I have been following the protracted saga developing in the Second Circuit concerning whether interns are employees.  Recently, this Circuit overturned a lower court decision that granted conditional certification to an intern (and the putative class) alleging that they were statutory employees. That case is entitled Glatt et al. v. Fox Searchlight Pictures Inc.  Concomitantly, in Wang v. The Hearst Corp., the Second Circuit upheld a ruling that denied certification in another intern case.

Copyright: bialasiewicz / 123RF Stock Photo
Copyright: bialasiewicz / 123RF Stock Photo

The appellate court concluded that the “primary beneficiary test” should be utilized to determine if the plaintiffs were employees, rather than the test espoused by the plaintiffs, which was the individuals would be deemed employees if their “employer” derived some immediate benefit from their work.

The Second Circuit would not defer to the USDOL’s six-part test set forth in a 2010 fact sheet offering guidance as to what constituted an “unpaid internship,” concluding that this “test” was essentially derived from the almost seventy-year old US Supreme Court Portland Terminal Company decision and further opined that the DOL did not possess a “special competence or role” when it came to interpreting court rulings. The Court chided the DOL test for being “too rigid.”

The Court sided with the defendants who asserted that the correct analysis was whether the intern or the employer was the primary beneficiary of their relationship; the defendants urged scrutiny of seven non-exhaustive factors in that determination.

Those factors include: 1) if there is a clear understanding that there is no expectation of compensation; 2) whether interns receive training similar to what they would get an educational environment; and, 3) to what the extent the internship is tied to a formal education program. Even though the Court rejected the six factor DOL fact sheet, the Court did not express an opinion on the result in a “new” case brought under the primary beneficiary test.

The Takeaway

There certainly is an issue with possibly abusive internships involving what is commonly referred to as “grunt work.” These workers should be entitled to the protection of the FLSA, i.e. minimum wage and overtime. There are, however, a great many internships that people strive mightily to secure and which fit the criteria enumerated by the Second Circuit.

As is the case with so many wage-hour/personnel issues, a policy, clearly outlining the terms and conditions of the internship, will go a long way to establishing to a court (if need be) that the particular internship fits within these new guidelines.   Maybe new guidance will issue from the DOL.

Maybe the US Supreme Court will ultimately decide the issue…

In FLSA cases, the plaintiff will often sue not only the Company, but its owners and/or officers as well.  I know from personal experience in defending these cases that clients often are motivated to settle because they fear the specter of possible personal or individual liability.

The recent case involving the owner of Gristede’s Foods Incorporated illustrates this maxim in a graphic manner.  He has appealed to the Second Circuit Court of Appeals, arguing that he is not an “employer” under the Fair Labor Standards Act and thus should not be held liable for any portion of the $3.5 million settlement just arrived at to resolve overtime employees who were pursuing a class action.  The case is entitled Torres et al. v. Gristede’s Operating Corporation.

The CEO, John Catsimatidis, argues that he should not be liable to payments to the more than five hundred Department Managers (who were allegedly misclassified as exempt) because the day-to-day operations were handled by his deputies and their deputies and so on.  Thus, he disclaimed any operational control at the level where the working conditions, job duties, and, most importantly, hours, of the employees were regulated and directed from.  A lower federal Court had ruled in September 2011 that he “retained” control of the daily operations of the various stores and thus he was an “employer” as defined under the FLSA.

The CEO’s appeal focuses its attack on the legal standard used by the District Court.  He urges that the district court had applied the wrong legal standard and should have used the so-called “economic reality” test, which is the test used to determine independent contractor status under the FLSA.  The CEO argues that this test would zero in on an owner’s “actual relationship” with employees.  The appeal papers urged that “the district court did not apply the ‘economic reality’ test or focus on Catsimatidis’ relationship with the store employees in question. Instead, it looked at Catsimatidis’ overall corporate control and supervision.”  The evidence showed that for over a decade, the CEO has not played a role in hiring or firing decisions, did not make payroll decisions and did not negotiate with the labor unions representing the employees.

An affirmance would pose a danger for employers because it would expose controlling shareholders to liability in scenarios in which they may exercise general oversight of Company operations but are not “on the ground” in a particular store or facility (where decisions about exempt status and work hours may be made).  The Company claims that the “FLSA does not contemplate such disdain for the corporate form.”  On the other hand, the buck (all three million of them) may stop at the top.

To be continued.

In early January, I posted an entry regarding the exempt status of pharmaceutical sales representatives. In the past several months, there have been several significant developments with respect to this issue.

On February 14, 2011, the Ninth Circuit affirmed the District of Arizona’s ruling in Christopher, et al. v. SmithKline Beecham Corp., that a proposed class of pharmaceutical sales representatives (“Sales Reps”) were exempt from overtime pay pursuant to the “outside sales exemption.”

In affirming the District of Arizona’s decision, the Ninth Circuit acknowledged that the duties of Sales Reps are the “functional equivalent” of making an outside sale in that they “makes sales by obtaining commitments to prescribe…drugs from physicians. They are credited with those sales and compensated accordingly by means of incentive payments.” The plaintiffs have filed a petition for rehearing to overturn the decision.

The Ninth Circuit’s decision in Christopher is in direct contradiction to the Second Circuit’s stance on the applicability of the “outside sales exemption” to Sales Reps. Indeed, in cases against Novartis and Schering Corp., the Second Circuit determined that Sales Reps do not fall within the “outside sales exemption” because they do not “sell” or make any “sales.” Rather, the Second Circuit held that the Sales Reps are responsible for promoting and marketing drugs rather than actually selling them. On February 28, 2011, the United States Supreme Court denied the petition by Novartis and Schering Corp. to review the decision.

This issue will likely have to decided by the United States Supreme Court due to the split in authority among circuit courts. Moreover, the exempt status of Sales Reps will likely become further muddled as there are cases pending in the Seventh Circuit, Connecticut, Florida, and Ohio.

In the meantime, drug companies should be wary about classifying Sales Reps as exempt if they do not “sell” or make any “sales.”

In a September 16, 2010 posting in the New York Labor & Employment Report, John Ho wrote about the issue of joint employer status under the Fair Labor Standards Act (“FLSA”). These are potentially explosive situations, especially if employees work from one facility to another.  When employees float between ostensible joint employers, their hours must be aggregated, meaning that, oftentimes, overtime situations ensue, i.e. employer liability.

There are a number of factors that a court analyzes to determine joint employer status.  These were enumerated in a Second Circuit case entitled Zheng v. Liberty Apparel Company in 2003.  In Zheng, the entire case turned on whether the entities were joint employers.  The jury found that they were and the employer appealed.

The thrust of the appeal was that since the federal judge in the district court should have been the “decider” in ascertaining whether the entities were joint employers, not the jury.  The Second Circuit has just recently ruled that the proper deciding body was the jury.

There is a bigger question here than just the procedural issue of whether this mixed question of law and fact should have been decided by a judge or jury.  Employers must be aware that if they have a relationship with another entity that is more than a vendor or supplier relationship there could be an issue of joint employer status.  The factors enunciated in Zheng were: 1) do the workers work predominantly for the joint employer; 2) the permanence or duration of the working relationship; 3) if the alleged joint employer’s premises/equipment are used by the employees; 4) the extent of control exercised by the joint employer; 5) whether the workers are an integral part of the business; and, 6) whether the workers had a business organization that could shift as a unit from one putative joint employer to another.

Although these factors were set down in the context of the garment industry, many of them are applicable to any other industry.  The point, as John Ho stated, is that every employer must examine its relationship with other affiliated entities, as well as temporary staffing agencies that it may work with.  It is with these staffing agencies that the biggest danger for a joint employer finding arises.