Wage & Hour Insights - Guidance & Solutions for Employers

On May 8, the House of Representatives passed a bill that would allow private sector employers to offer hourly workers the option of taking compensatory (“comp”) time in lieu of paid overtime.  The bill seeks to amend the Fair Labor Standards Act to allow private sector employers to offer comp time at a rate of 1.5 hours per hour of overtime worked instead of paying cash wages at time-and-a-half the employee’s regular rate for all hours worked over 40 in a workweek.

Under the bill, such a comp time arrangement would need to be agreed to in writing by both the employer and employee.  Any unused comp time would be paid out at the end of each year, and employees would also be allowed, upon request, to “cash out” any accrued comp time.

Although there is currently no companion bill in the Senate, Republican backers have touted the bill as a commonsense approach for the 21^st Century that provides workers with the flexibility needed to balance family and work obligations.  Private sector employees would now have the same flexibility as public sector employees (who are legally allowed to be offered comp time) to take such comp time to care for a sick child or chaperone their child’s field trip.  Conversely, Democrats claim the bill gives too much leeway to employers as to when the comp time can be taken and may lead employers to favor workers who choose a comp time arrangement in lieu of cash payment. 

We will have to wait and see if this measure picks up steam in the Senate.  In the meantime, it is important to remember that this bill is not law.  So if you are a private sector employer, you cannot offer comp time to your employees in lieu of paying overtime.  Private sector employers must pay their non-exempt employees 1.5 times their regular rate of pay for all overtime hours worked.

As 2012 comes to a close, we inevitably receive questions related to year-end bonuses.  Last year, I posted about whether employers were required to pay a pro-rata bonus to those employees who left their employment before the bonus was paid out.  This year, I thought it might be helpful to remind employers of certain rules relating to bonus payments made to non-exempt employees.

Bonus Payments and Overtime

The Fair Labor Standards Act (FLSA) requires that overtime pay be determined using the employee’s “regular rate” of pay, which includes all earnings paid to the employee during the workweek.  However, the FLSA specifically provides that certain earnings may be excluded from the regular rate, including certain bonuses where:

(a) the bonus remains completely within the employer’s discretion, which the employer exercises close to the end of the period for which the bonus is paid, and is in no way required by any contract, agreement, or promise such that employees may expect the bonus, or

(b) the bonus payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan; 29 CFR § 778.200(a). 

Continue Reading

While we generally look at overtime as a “wage and hour” issue, I am once again reminded of how overtime is connected to other employment statutes.  Recently, on an issue of first impression, the First Circuit found that the Family and Medical Leave Act (FMLA) allows a prevailing plaintiff to recover lost overtime as part of a back-pay award.  Pagan-Colon v. Walgreens of San Patricio Inc.

Pagan, an assistant manager at a Walgreens in Puerto Rico, brought a lawsuit under the FMLA alleging that he was fired in retaliation for taking a medical leave absence.  In addition to other damages, Pagan claimed he was entitled to overtime wages under the FMLA as part of “other compensation denied or lost.”  At the district court level, the jury returned a verdict in favor of Pagan on his FMLA retaliation claim. As part of his back-pay award, the district court included $20,637 in lost overtime wages.  In affirming the overtime award, the First Circuit reasoned that, under the FMLA, a prevailing plaintiff may recover “any wages, salary, employment benefits or other compensation denied or lost” due to violation of the statute and that overtime pay certainly falls into the category of “other compensation.” 

To calculate overtime owed, the district court estimated that Pagan would have worked 6.5 hours of overtime per week over the 125-week period between his termination and the judgment.  The district court obtained the 6.5 hours per week figure by using a year-to-date average of Pagan’s weekly hours during the four months preceding his termination.  The district court implicitly assumed that the year-to-date average was more reliable than a 12-month average for determining how much overtime Pagan would have worked going forward if he was not terminated.  The First Circuit found no “clear error” in the district court’s calculation of overtime.

Insight for Employers

This decision may not be an anomaly.  There have been other federal appellate courts that included overtime wages as part of a back-pay award under other employment statutes, such as Title VII.  Accordingly, employers should be aware of whether the appellate court(s) where they are located allow the inclusion of overtime in back-pay awards and how that overtime may be calculated.  When looking at potential damages in an employment claim, employers should consider whether including any potential overtime owed in the calculation of back-pay is appropriate.

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. 

The Seventh Circuit recently applied the Supreme Court’s Wal-Mart Stores, Inc. v. Dukes decision to class certification in a wage and hour action, and affirmed the certification of two classes.  Ross v. RBS Citizens N.A. d/b/a Charter One.  The Seventh Circuit held that the district court did not abuse its discretion in certifying two classes of bank employees and that this certification met the commonality requirement clarified in Dukes.

The district court had certified two classes of bank employees:  (1) nonexempt hourly employees who alleged that the Charter One’s unofficial policy denied them overtime pay; and (2) assistant branch managers who claim that they were misclassified as exempt employees.  On appeal, Charter One’s sole argument was that the certification order did not comply with Rule 23(c)(1)(B), because it did not adequately define the class, claims, issues or defenses  After the Supreme Court issued its Dukes opinion, the Seventh Circuit asked that the parties address the commonality requirement in light of that decision.

After reviewing the parties’ position statements, the Seventh Circuit determined that the classes met Rule 23(a)(2)’s commonality requirement under Dukes.  The court reasoned that the classes present a common claim based on a broadly enforced policy denying overtime pay to nonexempt employees and requiring assistant branch managers to perform nonexempt work without overtime, and that this policy potentially drives the resolution of this case.  While there might have been slight variations in how Charter One enforced its overtime policy, the Court found that both classes maintained a common claim, and this “common claim” was the “glue” necessary to satisfy the commonality requirement.  Unlike in Dukes, an individualized assessment of each assistant manager’s job duties was not necessary and did not destroy commonality.  The Court found such an assessment to be irrelevant as to whether a company-wide policy existed to deny them overtime pay.  Moreover, the Court focused on the fact that the class members at issue were substantially fewer than in Dukes and all were located in Illinois.

Finally, in an issue of first impression, the Seventh Circuit upheld the district court’s class certification order under Rule 23(c)(1)(B).  The Court felt there was no doubt as to which current and former employees would be included in the hourly and assistant manager classes because the order and memorandum indicate that this includes “all current and former employees who worked at an Illinois Charter One location within the last three years.”  The order also identified the claims and types of evidence that could be presented.  The Court declined to require a district court to list any and all possible methods of proof, suggesting this would border on the absurd.

While Dukes’ clarification of the commonality requirement is helpful to employers in defeating class certification, Charter One demonstrates that there are limits.  Just because a class can number in the thousands does not mean a court will find commonality lacking, particularly where there is a broadly enforced policy.  While the commonality argument will continue to develop, we will likely see more appellate courts weighing in as to how to apply Dukes.

In a previous post in August, I questioned whether the pharmaceutical companies were losing the exemption battle as it related to pharmaceutical sales representatives and the outside sales exemption.  The Supreme Court had declined to review the Second Circuit’s Novartis holding that pharmaceutical sales representatives do not qualify for the outside sales exemption because they do not make sales, and the District of Connecticut had recently found that Schering’s pharmaceutical sales representatives did not meet the administrative exemption test in contrast to the Third Circuit’s Johnson & Johnson decision.  Now, it looks that the Supreme Court will finally enter this battle. 

This morning, the Supreme Court announced that it has granted certiorari in Christopher v. SmithKline Beecham Corp., where the Ninth Circuit affirmed that Christopher, a pharmaceutical sales representative, was an “outside salesman” exempt from overtime under the FLSA.    In SmithKline, the Ninth Circuit concluded that it owed no deference to the Secretary of Labor’s current interpretation of the outside sales exemption and, in fact, disagreed with the Secretary’s interpretation.  This was in contrast to the Second Circuit’s Novartis decision, which adopted the Secretary’s interpretation.

 The two issues on appeal are as follows: 

1. Whether deference is owed to the Secretary of Labor’s interpretation of the outside sales exemption and related regulations; and
2. Whether the FLSA’s outside sales exemption applies to pharmaceutical sales representatives.

While I can’t read tea leaves, I wonder whether the Supreme Court decided to hear the SmithKline case because it disagrees with the Ninth Circuit’s holding.  The Supreme Court had the opportunity to look at this issue with Novartis earlier this year and declined.  On the other hand, with SmithKline, there is now truly a Circuit split on whether pharmaceutical sales representatives meet the outside sales exemption.  I guess we will just have to wait and see how this plays out.  Stay tuned.

Reading about a recent lawsuit filed against Groupon, I was reminded that even the most cutting edge businesses may not understand the nuances associated with calculating overtime and find themselves a target for running afoul of wage and hour laws.  My colleague and fellow blogger, Bill Pokorny, wrote a helpful blog entry last week on calculating overtime for salaried employees.  I thought it might be useful for our readers if a follow-up entry was posted discussing how to calculate overtime for salaried, non-exempt employees who also receive commissions.

The key in calculating overtime is to determine the regular rate of pay.  Generally speaking, adding commission payments to the mix does not alter this calculation; you still must divide the employee’s total non-overtime compensation for the week by the total number of hours worked.  As Bill points out in his post, things get trickier when a non-exempt employee is paid a salary.  Adding a weekly commission payment does not really affect that calculation too much – the commission is simply added to the salary received for the week.  Here is a sample calculation using Bill’s prior example (and also assuming my math is correct):

1. Chuck is paid a salary of $1,000 per week.  The employee handbook states that the normal workweek consists of 40 hours, thus the base salary is intended to cover 40 hours of straight-time work.  In one week, Chuck works 50 hours – 40 hours of straight time, and 10 hours of overtime.  The Company is also able to determine that Chuck earned $250 in commissions that week.  Chuck’s pay would be calculated as follows:
   
   Regular rate = $1,000 + 250/40 hours = $31.25
   Total pay =  (Regular salary + commission) + 10 hrs at time and-a-half
   Total pay = $1,250 + (10 hrs x 31.25/hr x 1.5) = $1,718.75
2. Now assume that Chuck and the Company have an understanding that the $1,000 is intended to cover up to 50 hours of work per week.  As a result, Chuck would be entitled to the additional overtime premium for 10 hours at one-half of the regular rate of pay:
   
   Regular rate = $1,000 +250/50 = $25/hr
   Total pay = (Regular salary + commission) + 10 hrs at half the regular rate
   Total pay = $1,250 + (10 hrs x $25/hr /2) = $1,375

But things get trickier when that employee is paid both a weekly salary and a monthly commission, and the employer is not able to determine exactly what workweek in the month the employee earned a commission.  Here, Chuck earns $1,200 this month in commissions but the Company cannot tie the commissions earned to a specific workweek.  In such a situation, the Company must allocate the commissions equally to each workweek in the period covered by the commission payment.  Therefore, to calculate Chuck’s regular rate of pay under these circumstances, divide the total commission amount ($1,200) by the number of weeks in the pay period (4) to determine the weekly commission earned ($300).  So, here is how you would then calculate Chuck’s overtime using the examples above:

1. Regular rate = $1,000 + 300/40 hours = $32.50
   Total pay =  (Regular salary + commission) + 10 hrs at time and-a-half
   Total pay = $1,300 + (10 hrs x 32.50/hr x 1.5) = $1,787.50
2. Regular rate = $1,000 +300/50 = $26/hr
   Total pay = (Regular salary + commission) + 10 hrs at half the regular rate
   Total pay = $1,300 + (10 hrs x $26/hr /2) = $1,430

Hopefully, these examples will help guide employers through the perils of calculating overtime owed.  As Bill points out, such overtime calculations may be different if the employer uses a fluctuating workweek method for paying employees.  This will be addressed in a future post.

Q.        My Company anticipates embarking on a big project this fall that will have extreme importance to the Company’s future and require extra hours at the office.  The Company wants to give a little extra pay to employees who work on this important project.  A number of these employees are classified as exempt.  May the Company provide extra compensation to exempt employees for their work on this project?

 A.        Yes.  Exempt employees are not required to receive extra compensation for extra work, but the FLSA allows employers to provide extra pay and still maintain their employees' exempt status.  Specifically, the FLSA regulations provide that an employer may provide an exempt employee with additional compensation so long as the employment arrangement also includes a guarantee of at least the minimum weekly-required amount or $455 paid on a salary basis. 

Generally, in these types of situations, the risk facing employers is whether the format of the additional compensation will invalidate the salary basis requirement, resulting in a loss of the overtime exemption.  The regulations provide limited examples of acceptable additional compensation that will not affect the salary basis qualification.  If your Company chooses to pay exempt employees additional compensation for this extra work, one of the payment formats with the least risk of destroying the employees' exempt status would be that of a flat sum bonus.  An employee’s exempt status – already difficult to establish - might be even more difficult to prove if the employee is paid time-and-a-half for the extra hours, like a non-exempt employee. 

Do you have employees who visit California for business? If so, now may be a good time to brush up on California wage and hour law. On June 30, 2011, the California Supreme Court ruled that the California Labor Code's overtime provisions applied to three non-resident employees of Oracle Corporation who performed work within the state. Sullivan v. Oracle Corporation (.pdf).  

Summary of the Ruling

According to the decision, the three plaintiffs, Donald Sullivan, Deanna Evich and Richard Burkow, formerly worked for Oracle as Instructors and were responsible for training Oracle customers on the use of the company's software products. While Orcale is based in California, Sullivan and Evich reside in Colordado, while Burkow lives in Arizona. They worked mostly in their home states, but also traveled to California and multiple other states. During the time period at issue in the litigation (2001-2004), Sullivan worked 74 days in California, Evich worked 110 days, and Burkow worked 20 days. 

After extensive discussion of the relevant statute and California's rules for reconciling conflicts among different states' laws, the California court held that the California Labor Code applies to "overtime work performed in California for a California-based employer by out-of-state plaintiffs in the circumstances of this case, such that overtime pay is required for work in excess of eight hours per day or in excess of forty hours per week." The Court further held that the state's unfair competition law applied to the plaintiffs' claims as to overtime work performed inside of California, but not to overtime work performed outside the state. 

Insights for Employers

On its face, the court's ruling is limited to non-resident employees of California-based employers who perform work within the state. However, many of the arguments underlying the court's decision to apply California law to visiting employees would apply equally to employers "based" outside of California, particularly if those employers have a permanent presence within the state. Consequently, employers who regularly send workers to California on business should consider whether they may be subject to the state's overtime laws.