Wage & Hour Insights - Guidance & Solutions for Employers

On September 12, 2012, Family Dollar announced that it will pay up to $14 million to settle a class action in the Southern District of New York.  Similar to other class actions filed against Family Dollar over the years, New York store managers claimed that the Company failed to pay them overtime.  Although the agreement has not yet been finalized, the proposed settlement would affect more than 1,700 store managers in New York who are covered by the certified class. 

As we mentioned in our prior blog post back in April, court rulings have come down on both sides of the issue as to whether store managers at discount retailers, such as Family Dollar, are exempt from overtime.  Back in 2008, the Eleventh Circuit upheld a $35.6 million judgment in favor of Family Dollar Stores managers on the basis that those managers did not meet the executive exemption.  Since then, court rulings addressing this issue have varied depending upon the facts of each case.  Most recently, in April 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.  Similarly, in August 2012, a North Carolina district court found that a Family Dollar store manager met the executive exemption.  Ward v. Family Dollar Stores.   

Given some of the more recent rulings finding that the executive exemption applied to store managers, it is not entirely clear why Family Dollar chose to settle this New York class action.  Needless to say, each case must be reviewed based upon its own set of individual circumstances.  Like all employers, Family Dollar likely looked at the facts and risks associated with further litigation and made a determination as to whether the settlement made sense.  In any event, this case does not suggest that Family Dollar and other retailers cannot meet the executive exemption by demonstrating that management is the primary duty for its store managers in the future.  At most, this is a reminder to employers that such a determination will always be based on the specific facts at issue and the individuals involved.

I wanted to give our readers a quick update on the status of mortgage loan officers.  In Mortgage Bankers Ass’n v. Solis, a federal district court in Washington D.C. recently rejected a challenge to the March 2010 DOL administrator’s interpretation that mortgage loan officers do not generally meet the administrative exemption under the FLSA.   As previously mentioned, on March 24, 2010, the Wage and Hour Division (WHD) announced it was no longer issuing opinion letters in response to specific questions but would issue administrative interpretations containing general interpretations of the law and regulations.  At the same time, the WHD issued its first administrator’s interpretation, which concluded that employees performing typical duties of a mortgage loan officer do not qualify as administrative employees exempt from overtime, thus reversing its own previously issued opinion letter, dated October 5, 2006.

The Mortgage Bankers Association (MBA) were the recipients of the original 2006 opinion letter from the DOL and filed suit in January 2011, claiming that the DOL had improperly reversed its opinion letter without engaging in appropriate rulemaking and notice requirements.  In rejecting MBA’s claims, the Court found no substantial and justifiable reliance on the DOL’s 2006 opinion letter and that the interpretation was not arbitrary and capricious and contrary to the law.  The Court noted that the 2006 opinion letter had only been in effect for four years, whereas the DOL had previously taken the position that mortgage loan officers were not exempt.  The Court reasoned that the exempt status provided in the opinion letter was short lived and there would be no damages resulting from the prior interpretation due to good faith reliance.  Moreover, the Court was persuaded by the DOL’s argument that the interpretation was not arbitrary or capricious, despite the flip-flop in its stance.

The issue as to whether mortgage loan officers are exempt is not likely to end with this case.  As we previously reported in March 2011, at least one jury has rejected the DOL’s administrative interpretation that mortgage loan officers are non-exempt.  The conflict in how courts apply the law is just another example of why employers need to carefully make classification decisions based on the facts related to each specific job. 

Louisiana is the latest State to sign a Memorandum of Understanding and join forces with the U.S. Department of Labor to combat employee misclassification.  These Memorandums of Understanding with state government agencies arose as part of the U.S. Department of Labor's Misclassification Initiative, with the goal of preventing, detecting and remedying employee misclassification. Louisiana is now the thirteenth State to sign one of these Memorandums after California, Colorado, Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington.  The Memorandums allow the DOL to share information and to coordinate efforts with participating states as part of its Misclassification Initiative.

As we have previously mentioned, the DOL is laser focused on employers who misclassify employees as independent contractors.  And as misclassification continues to grow, so does the DOL’s resolve.  In 2011, the Wage and Hour Division collected more than $5 million in back wages for minimum wage and overtime violations under the FLSA that resulted from employees being misclassified as independent contractors or otherwise not properly treated as employees.  With that kind of money being collected, this issue is not going away any time soon.

Insight for Employers

Whether a worker is an independent contractor or an employee is a very fact specific analysis.   Like other misclassification issues, when left unchecked, failure to properly classify a worker as an employee may lead to serious monetary damages down the road.  Even if you are familiar with these rules, if your business uses independent contractors, it may be worth a few minutes of your time to confirm with an experienced employment attorney that your workers are properly classified. 

My last blog entry on travel time only touched on one issue that may arise as we see more employees being asked to take on additional responsibilities and assignments in lieu of hiring new personnel.  Indeed, consolidation of jobs or responsibilities can lead to a number of other potential wage and hour issues that can have a significant impact on employers.  One such issue arises when an exempt employee takes on additional jobs or duties that are non-exempt.  How should an employee be treated for overtime purposes if working both exempt and non-exempt positions? 

When an employee performs work in more than one capacity for the same employer – e.g. as a clerical worker (non-exempt) and manager (exempt) – employers must consider the character of the employee’s job as a whole.  The standard for determining whether the combined job duties are exempt is the primary duty test.  In other words, if the exempt managerial duties are the primary duty, the employee will be exempt.  If the clerical duties are the primary duty, the employee will be non-exempt, and normal regular rate principles apply in calculating overtime for all hours worked for both jobs in the workweek. 

Factors to consider when determining the primary duty of an employee include, but are not limited to:

• the relative importance of the major or most important duty as compared with other types of duties;
• the amount of time spent performing the major or most important duty;
• the employee's relative freedom from direct supervision; and
• the relationship between the employee's salary and the wages paid to other employees for performance of similar work.

http://www.dol.gov/elaws/esa/flsa/overtime/glossary.htm?wd=primary_duty.  The amount of time spent performing the specific duty can be a useful guide in determining whether such work is the primary duty of an employee.  Under the FLSA, employees who spend more than 50 percent of their time performing a specific duty will generally satisfy the primary duty requirement. However, employers must remember to check to see if their State law is different than the FLSA.  For example, in Illinois, if employees spend more than 20 percent of their time on non-exempt work, they will generally be considered non-exempt.  However, it is important to note that time alone is not the sole test; employees may nonetheless meet the primary duty requirement if the other factors (listed above) support such a conclusion.

Misclassification of employees has the potential to cause significant problems for employers.  As employers are looking for ways to cut costs, they need to keep these factors in mind to avoid losing the benefits of an employee’s exempt status.  Because there is no bright line test, if going down this road, check with an experienced employment attorney before making any such decisions on job consolidation. 

Earlier this week, the U.S. Department of Labor held a ceremony at which Secretary of Labor Hilda Solis signed a memorandum of understanding with the Internal Revenue Service to "improve departmental efforts to end the business practice of misclassifying employees in order to avoid providing employment protections." The DOL also signed or has agreed to sign memorandums of understanding with officials in 11 states to coordinate efforts to crack down on independent contractor misclassification, including Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington. 

Although misclassifying workers as independent contractors can result in violations of numerous laws, including the tax code and wage and hour laws, the various government agencies charged with enforcing those laws have historically not shared information or coordinated their enforcement efforts. That now now appears to be coming to an end, as the DOL becomes more aggressive in its enforcement efforts and state and federal governments look for opportunities to enhance their revenues.

At the same time, the IRS has announced a new "Voluntary Classification Settlement Program" to encourage employers who have misclassified workers in the past to "get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit." To be eligible for this program, applicant employers must (1) consistently have treated the workers as nonemployes, (2) have filed all required 1099s for the workers for the prior three years, and (3) not currently be under audit by the IRS, DOL, or a state agency concerning the classification of the affected workers. Employers accepted into the program will be required to pay an amount "effectively equaling just over one percent of the wages paid to the reclassified workers for the past year." No penalties or interest wll be assessed, but for the first three years under the program, the employers must agree to an extended statute of limitations for the IRS to pursue payroll tax violations. Unfortunately for employers, the IRS program would not provide any amnesty for violations of other laws, such as state or federal overtime laws or state tax violations. The IRS announcement also makes no mention of whether the agency will shre information from the settlement program with the Department of Labor or other agencies. 

Because misclassification violations implicate a wide range of laws and frequently involve multiple workers, they can represent a significant liability for employers, particularly for small and midsize businesses without significant financial reserves to defend or settle these claims. Given the risks and the spotlight that the DOL is shining on this issue, businesses that use independent contractors should act now to ensure that their workers are properly classified. Among other things, this means making sure that when you classify a worker as an "independent contractor," you are prepared to prove that your classification decision is warranted under all of the relevant laws, including but not limited to the Fair Labor Standards Act, state wage and hour laws, workers' compensation statutes, and the state and federal tax codes. Unless you are well-versed in these laws, this is yet another area where a few hours of consultation with an experienced employment lawyer now may help avoid serious liability down the road.

Recently, another group of pharmaceutical sales representatives successfully demonstrated that they are not exempt from overtime under the FLSA.  Kuzinski, et al., v. Schering Corp  Focusing on the administrative exemption, the District Court of Connecticut held that the sales representatives’ work was not directly related to Schering’s management or general business operations and they lacked the necessary exercise of discretion and independent judgment to meet the requirements of the exemption.  The sales representatives did not directly sell pharmaceutical products, instead individualizing Schering’s canned sales pitch to promote certain products to identified customers.  At the end of the day, the sales representatives simply used the core messages and promotional strategies developed by Schering, rather than developing those messages and strategies themselves.

 Litigation Background

Pharmaceutical companies have traditionally classified sales representatives as exempt under the outside sales exemption, but have recently faced difficulty convincing courts that pharmaceutical representatives meet this exemption since they do not make “sales” in the traditional sense.  While the results have been mixed at the district court level, the most noteworthy case, the Novartis wage and hour litigation, put a hole in the companies’ defense.  Affirming the district court, the Second Circuit concluded that the Novartis sales representatives do not make sales and, therefore, do not qualify for the outside sales exemption.  The U.S. Supreme Court recently declined to review that decision and the holding remains. 

Notwithstanding the impact of the Novartis decision, there was a glimmer of hope that pharmaceutical sales representatives could still be classified as exempt, but under the administrative exemption.  In Smith v. Johnson & Johnson, the Third Circuit concluded that the administrative exemption was satisfied because Smith’s work related to the company’s core business operations and her primary duties involved the use of her discretion in making significant decisions.  Specifically, Smith had to form a high-level strategic plan to maximize sales in her territory, and exercised significant discretion and independent judgment while performing her duties without direct oversight.  But not all sales representatives are alike and so the administrative exemption will not apply across the board.  The Schering court focused on this issue, contrasting the “management-scripted,” “core messages” used by the Schering sales representatives with that of Smith, a senior professional sales representative who ran her territory as she saw fit.  Finding the Schering sales representatives duties were more like those of Novartis, the Court concluded they did not fit the narrow facts supporting the holding in Smith.

 Insights for Employers

The decisions in Schering and Smith further underscore the fact intensive nature of the administrative exemption.  This exemption is not a “one size fits all” category based on job title, but depends on whether the employee actually fulfills the requirements.  To truly meet the administrative exemption, companies must prove that the employee’s work is directly related to its management or general business operations and that the employee exercises discretion and independent judgment in matters of significance. 

For sales representatives, this may be achieved by giving the representatives actual control and management of their sales territory and allowing them to exercise the necessary level of discretion and independent judgment.  Companies should consider holding the representatives accountable for specific sales goals or targets, while leaving the means of achieving those ends primarily up to them.  This means that while the representatives may receive general guidance about how to approach a customer, the crafting of the precise message, the number of times conveyed and to whom, should be left up to the representative.  While there is no guarantee that a court will find the exemption met, such a proactive approach will definitely put the company in a better position if sued or subjected to a DOL audit.