Wage & Hour Insights - Guidance & Solutions for Employers

Misclassification of employees continues to bring a lot of headaches to employers.   I have worked with a wide variety of businesses on this issue – from Fortune 500 to “mom and pop” companies.  Each has its own way of doing things in this area and monitoring classification compliance is pretty low on the to-do list.  Nevertheless, this is an area of law that is not going away, and remains a high priority for the Department of Labor and provides big pay days for Plaintiff’s counsel.  Two recent settlements caught my eye and further demonstrate that employers of all sizes need to worry about proper classification and paying overtime.

On April 27, the review site Yelp agreed to pay $1.25 million to settle class allegations that it failed to pay overtime to nearly 1,000 account executives.  Yelp is an on-line start-up that allows individuals to review various service providers – ranging from doctors to restaurants.  According to the Complaint, these representatives make calls to potential sales leads and are paid a base salary, as well as additional pay for performance.  Plaintiffs claimed that they were misclassified as exempt and owed overtime.  Out of this settlement amount, $312,500 goes toward attorneys’ fees, $10,000 toward costs and $25,000 to the settlement administrator.  As a result, a big chunk of the settlement amount Yelp agreed to pay does not even go to the alleged victims. 

On May 1, the DOL announced that Wal-Mart agreed to pay $5.29 million to resolve overtime violations affecting current and former vision center managers and asset protection coordinators who were misclassified as exempt.  This amount includes $4,673,837 in overtime owed from June 2004 - March 2007 and $463,816 in civil monetary damages.  Despite Wal-Mart correcting the classification error in 2007, the DOL said it assessed civil monetary damages because of Wal-Mart’s repeated violations of various wage and hour laws.  Over the last couple of years, Wal-Mart had agreed to pay hundreds of millions of dollars to resolve numerous wage and hour suits.  The DOL wanted to put Wal-Mart and other employers on notice that they cannot avoid their obligations by improperly classifying workers as exempt.

Insight for Employers:

These recent settlements serve as a reminder that misclassification of employees can affect employers of all sizes and result in considerable monetary payments.  One thing to remember is that the cost of misclassification is more than just overtime owed.  Employers who misclassify workers as exempt can find themselves on the hook for attorneys’ fees, penalties, administration fees, etc. – all of which add up quickly. 

On April 3, 2012, a federal district court in South Carolina determined that two Dollar General store managers met the executive exemption from overtime pay under the FLSA.  Gooden v. Dolgencorp and Thomas v. Dolgencorp.  Granting summary judgment to Dolgencorp, the court held that Gooden’s and Thomas’s primary duties were managerial in nature based upon the facts in these cases.

In order to meet the executive exemption, an employee’s primary duty must be management.  Primary duty is defined as the “principal, main, major or most important duty that the employee performs.”  29 CFR § 541.700(a).  In analyzing whether management was the primary duty of Gooden and Thomas, the court looked at the following factors:  amount of time spent performing managerial duties, the relative importance of those duties, the frequency in which discretion was exercised, freedom from supervision, and comparison of compensation to nonexempt employees.  Gooden and Thomas met each of these factors:

1. Gooden and Thomas testified that they spent 70 to 75 percent of their time performing managerial duties, and even when performing nonexempt duties, they were still concurrently responsible for leading and overseeing their stores’ operations.
2. Both testified that their most important duty involved running the stores and ensuring their success, and that the stores could not operate absent their management.
3. Both exercised daily discretion in hiring, demoting and firing employees; training; setting and adjusting schedules; delegating and prioritizing tasks and assignments; and disciplining employees. 
4. Their discretion was rarely limited by Dollar General’s extensive standard operating procedures manual or district managers who visited once every few weeks or months.  The court noted that the company’s desire for standardization and uniformity does not take away a manager’s primary duty to manager her store.
5. Both were paid more than nonexempt employees, and earned approximately 10 to 30 percent more than assistant managers at their stores.  They also earned bonuses based on their stores’ profitability.

Based on these factors, the court found that Gooden and Thomas met the executive exemption under the FLSA.

Insight for Employers

These latest cases join other recent district and circuit court rulings that have granted summary judgment to Dolgencorp and other retailers on this very issue.  However, it is important to remember that a manager’s ability to qualify for a FLSA exemption is a fact-specific determination.  Just because one store manager meets the executive exemption does not necessarily mean that a manager in another store or company will meet the same exemption.  A 2008 decision by the Eleventh Circuit makes this crystal clear.  There, a $35.6 million dollar judgment in favor of Family Dollar Stores managers was affirmed on the basis that those managers did not meet the executive exemption.  The Court disagreed that management was the primary duty for these managers based on the facts in that case. 

So while these Dolgencorp cases are encouraging to employers who classify store managers as exempt, a company’s ability to establish management as the primary duty will always be determined based on the specific facts at issue and the individuals involved. 

The latest news in celebrity chef wage and hour litigation is that eight New York restaurants owned by Mario Batali have agreed to settle $5.25 million to settle a class action lawsuit alleging that they illegally withheld tips from hourly service workers. The proposed settlement, which must still be approved by the court following a fairness hearing, would establish a fund for approximately 1,100 captains, servers, waiters, bussers, back waiters, runners, barbacks and bartenders who worked at Babbo Ristorante e Enoteca, Otto, Casa Mono, Bar Jamon, Esca, Lupa, and Del Posto in New York City, and Tarry Lodge in Port Chester, N.Y. between July 22, 2007 and February 14, 2012. The primary claim in the lawsuit was that management at the eight restaurants deducted 4 to 5 percent of each shift's wine and other beverage sales from the restaurants' tip pools. The restaurants denied any liability in agreeing to the settlement. 

Legal Background

The claims in this lawsuit illustrate a common issue for restaurants and other employers in the hospitality industry: determining who may participate in a tip pooling arrangement. Under federal law, and that of most states, employers can take a credit toward their minimum wage obligations for tips received by an employee only if the employee retains all tips received. However, employees may be required to participate in a valid tip pooling or tip sharing arrangements that provide for the distribution of tips among employees who "customarily and regularly receive tips." In the restaurant context, this is generally limited to "front of the house" personnel such as servers, bussers, and service bartenders. "Back of the house" employees such as dishwashers, cooks, chefs and janitors do not customarily receive tips, and so may not participate in a tip pool. Likewise, management is prohibited from retaining any share of tips. 

At the federal level, there was some authority - out of the generally employee-friendly 9th Circuit Court of Appeals no less - for the proposition that these limitations on tip pooling arrangements applied only if an employer was actually taking a tip credit against its minimum wage obligations. See Cumbie v. Woody Woo, Inc. However, a recent memorandum from the Wage and Hour Division of the U.S. Department of Labor states that the Department is now taking the position that regardless of whether employers take a tip credit, they are prohibited from using employee tips for any purpose other than a credit against minimum wage as permitted by the regulations, or in furtherance of a valid tip pool. It is not clear yet whether that position will hold up in court, but for employers that have no desire to get into litigation with the Department of Labor, that may not matter.

Insights for Employers

• If your employees are permitted to accept tips, they must be allowed to retain all tips that they receive, unless they are required to contribute to a valid tip pooling or tip sharing arrangement. 
• "Back of the house" employees - dishwashers, cooks, etc. - may not be included in the tip pool. 
• Management cannot retain any portion of employee tips for any reason, either through managers participating in a tip pool or "the house" taking a cut of the pool. 
• The Wage & Hour Division maintains a fact sheet that provides a useful guide regarding requirements for tipped employees under the Fair Labor Standards Act. 

Q. A salaried, exempt employee who recently returned from a week of unpaid FMLA leave claims that he is entitled to be paid his full salary for entire week because he responded to a number of work-related e-mails and telephone calls while he was out. Do we have to pay?

A. Wage and hour law is confusing enough on its own, but it becomes even more so when it intersects with other complicated legal issues, like the Family and Medical Leave Act. On our FMLA Insights blog, my colleague Jeff Nowak explains how to deal with this situation from the perspective of counting the employee's time as FMLA leave. But that leaves open the question of whether and how much the employee is entitled to be paid. 

As we explained in a recent post regarding unpaid disciplinary suspensions, in most cases employees who are classified as exempt executives, administrators, and professionals under the Fair Labor Standards Act must be paid on a "salary basis," meaning that they must receive a fixed salary each workweek that does not vary regardless of the number of hours worked or the quality or quantity of work performed. 

However, the FLSA regulations provide certain exceptions from this general rule. Salary deductions are allowed when an exempt employee misses one or more full workdays for personal reasons other than sickness or disability. Deductions are also permitted for full-workday absences due to sickness or disability if the employer has a "bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by such sickness or disability," such as paid sick days or a short-term disability insurance plan. 

In the case of FMLA leave, however, the regulations go one step further. Here is the relevant text (29 CFR § 541.602(b)(7)):

An employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Rather, when an exempt employee takes unpaid leave under the Family and Medical Leave Act, an employer may pay a proportionate part of the full salary for time actually worked. For example, if an employee who normally works 40 hours per week uses four hours of unpaid leave under the Family and Medical Leave Act, the employer could deduct 10 percent of the employee's normal salary that week.

So, turning to our hypothetical question above: 

Much depends upon exactly how much time the employee is spending on e-mail and telephone calls while he is away from work. If all the employee does is spend a couple of minutes over the course of the week responding "OK" to e-mails or taking a quick phone call or two, the time at issue may be de minimus and not an issue. If, on the other hand, the employee is spending significant time working while on FMLA leave, the employee might arguably be entitled under the FLSA to a percentage of his regular salary proportionate to the time actually worked, but not his full salary for the entire workweek. 

That takes care of federal law, but what about state law? As noted in our discussion of disciplinary suspensions, Illinois rejected the 2004 amendments to the FLSA regulations that added the language quoted above. However, as stated in the preamble to the 2004 FLSA regulations, the exception for FMLA leave incorporated into the 2004 FLSA rules merely codified existing federal law. Indeed, the exception is written into the FMLA itself at 29 U.S.C. § 2612(c):

Except as provided in subsection (d) of this section, leave granted under subsection (a) may consist of unpaid leave. Where an employee is otherwise exempt under regulations issued by the Secretary pursuant to section 213(a)(1) of this title, the compliance of an employer with this subchapter by providing unpaid leave shall not affect the exempt status of the employee under such section.

Insights for Employers:

1. FMLA leave is the one situation in which an employer can take deductions from an exempt employee's salary in increments of less than one full work day. 
2. However, if an exempt employee is actually performing work during FMLA leave and the time involved is more than de minimus, the employee might be entitled to a pro rata portion of his or her salary for the time spent on work activities. 

Q. One of our salaried exempt employees appears to have violated our sexual harassment policy. We would like to suspend him without pay for 3 days. Is this allowed under the FLSA?

A. Maybe, but check your state's laws as well. 

With a few specific exceptions, employees whose duties qualify them as executive, administrative and professional employees under the Fair Labor Standards Act can be considered exempt only if they are paid on a "salary basis." This means for each week in which the employee performs any work, he or she must receive a fixed weekly salary that does not vary regardless of the number of hours worked or the quality or quantity of work performed. Taking improper deductions from an exempt employee's salary can potentially result in loss of exempt status not only for the affected employee, but for all employees in the same job classification. 

There are, however, certain exceptions to the rule against salary deductions. For example, if an employee is absent for one or more full workdays for personal reasons other than sickness or disability, the employee's salary can be reduced proportionately. Likewise, an exempt employee's salary can be reduced for full-day absences due to sickness or disability if the employer provides paid sick leave or other disability compensation. 

With respect to this specific question, the regulations also allow for salary deductions for "unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules" "imposed pursuant to a written policy applicable to all employees." In the example cited above, the sexual harassment policy is (hopefully) in writing, and (hopefully) applies generally to all employees in the organization. Consequently, suspending the employee for three full days without pay under these circumstances likely would not violate the FLSA.

But that's not the end of the story. While most states follow the U.S. Department of Labor's rules regarding exempt status, this is not universally so.  In our great state of Illinois, for one, the General Assembly specifically rejected the 2004 updates to the FLSA regulations that allowed for disciplinary suspensions for violations of written workplace conduct rules. Thus, in Illinois, an exempt employee can be suspended without pay for disciplinary reasons  only for violating a "safety rule of major significance," such as rules "prohibiting smoking in explosives plants, oil refineries, and coal mines."

So what can an employer in Illinois do if it wants to impose discipline that will hit an exempt employee's pocketbook without terminating the individual's employment? There are a few options:

• Suspend the employee for a full week. Provided that the employee does not perform any work during the week, no salary is due. However, no work means no work. Requiring the employee to participate in a conference call or respond to e-mails during the suspension could obligate the employer to pay the employee's full salary for the week, converting a disciplinary suspension into a paid vacation. 
• Require the employee to use available paid vacation or PTO while on suspension. So long as the employee's take-home pay is not reduced, deducting from the employee's bank of paid leave time does not result in loss of the employee's exempt status. 
• If the employee is eligible for any sort of discretionary bonus or other compensation in addition to their salary, consider reductions in those amounts if that is consistent with any applicable policies, plans or agreements. 
• Factor the infraction in to future compensation adjustments. While after-the-fact salary deductions are not permitted, bona fide prospective salary adjustments are allowed.