You can now vote for your favorite wage and hour blog in the ABA Journal’s search for the 100 best legal blogs.  We would love to have your support!

We started this blog about a year ago with the purpose of provding employers and lawyers with legal analysis and useful insight for handling those common, yet pesky issues that arise under the Fair Labor Standards Act and related state wage and hour laws.  Whether we are highligting a significant court case, agency developments or questions we have received from our own clients (the well-received FAQs), we have attempted to give employers the tools they need to effectively spot and manage (and hopefully avoid) wage and hour violations.  We have enjoyed communicating with our readers over the last year and, as always, appreciate your support as we continue with our blog.   

If you find value in our blog and like what we are about on Wage and Hour Insights, we would be honored if you took a quick minute to nominate us for the ABA’s Blawg 100 by completing the (very few) questions asked.  You will be asked to provide your contact information and a statement as to why you’re a fan of Wage and Hour Insights.

If you have any feedback on our Wage and Hour Insights blog and how we might get your vote in the future, please do not hesitate to contact Bill Pokorny or me.

Unlike the upcoming Presidential election, you can vote now and for more than one blog.  The deadline for voting is September 7.  Thanks in advance for your support.

WorkerWorkingXSmall.jpgI read this morning that there have been 7,064 lawsuits filed under the Fair Labor Standards Act so far this year.  I believe this is a record for wage and hour violation claims and the year is only half over.  This is also nearly sixty more FLSA lawsuits than was filed in all of 2011 and more than double the amount of cases filed ten or twelve years ago.  The Department of Labor’s wage and hour division alone has collected a record $224 million from employers over the last fiscal year, and is continuing its campaign against misclassification of employees, including its cooperation with other federal and state agencies in going after employers who misclassify workers.  In other words, this issue is not going away for employers.

As you have heard us mention many times on this blog, the primary focus of these lawsuits is misclassification of employees.  For every employer victory (i.e., Christopher v. SmithKline Beecham) there is always a grenade waiting in the wings ala the Wal-Mart DOL settlements or the Family Dollar Store court decisions.  Recent trends only stress the need for employers to take notice of this issue and audit their wage and hour practices.

Employers can expect to see more of these lawsuits by both the DOL and private plaintiffs in the remaining months and for the near future.  The economy is still slumping and the plaintiffs’ bar is continuing to pursue these cases, viewing them as a “cash cow” and a way to thrive in the current economy.  If your company classifies workers as exempt or independent contractors, don’t just sit back and wait to see if you get sued. It is important to review your workers’ status and take steps to either make sure that these classifications are in compliance or that your workers are reclassified and paid in accordance with state and federal law. 

Camp SignMost regular readers of this blog will be familiar with the most common exemptions to the overtime requirements of the Fair Labor Standards Act, those being the “white collar” exemptions for executive, administrative, and professional employees. However, the FLSA also contains a number of less well-known exemptions covering specific establishments or industries. In this post, we take a look at the exemption for seasonal amusement and recreational establishments. 

Seasonal Establishment Exemption: Basics

FLSA Section 13(a)(3) (29 U.S.C. § 213(a)(3)) provides an exemption from the FLSA’s minimum wage and overtime provisions for employees of amusement or recreational establishments, organized camps, or religious or non-profit educational conference centers if either:

  1. The establishment does not operate for more than seven months in any calendar year, or
  2. During the preceding calendar year, the establishment’s average receipts for any six months were not more than 1/3rd of its average receipts for the other six months of the year. 

For purposes of the first test, whether an establishment “operates” during a particular month depends upon whether it operates as a covered establishment during the month. For example, a seasonal camp that is closed to guests but that carries on maintenance operations during a given month is not regarded as “operating” in that month.

For purposes of the second test, the monthly average receipts for the six individual months (not necessarily consecutive) in which receipts were lowest are compared to the monthly average receipts for the six months in which receipts were highest. For example, consider a seasonal camp whose monthly revenue looks like this:

  • January – Closed ($0)
  • February – Closed ($0)
  • March – $15,000
  • April – $20,000
  • May – $30,000
  • June – $70,000
  • July – $75,000
  • August – $50,000
  • September – $50,000
  • October – $25,000
  • November – $10,000
  • December – Closed ($0)

In this scenario, the six months with the highest revenue are May, June, July, August, September, and October. Revenue in those six months totals $300,000, or an average of $50,000 per month. The six months with the lowest revenue were January, February, March, April, November, and December. Total revenue for those months was just $45,000, or an average of $7,500 per month. Because $7,500 is less than 1/3rd of $50,000, the camp meets the average receipts test and would qualify for the FLSA exemption. 

What Is An “Establishment”?

One of the key questions that arises when applying the seasonal establishment exemption is what, exactly, constitutes an “establishment”; for purposes of the exemption. 

Consider, for example, a summer “camp” for high school students on the campus of a college or university. It is not clear from the statute whether such a camp would constitute a separate “establishment” for purposes of the Sec. 13(a)(3) exemption, particularly if the camp is operated by the college or university itself rather than by a separate organization that just happens to be using the the campus by arrangement with the school. However, the Department of Labor Wage and Hour Division’s Field Operations Handbook suggests at Section 25j09 that at least some camps of this type may qualify for the exemption:

Some elementary or secondary schools or institutions of higher education which are academically accredited during the fall through spring semesters operate establishments that provide summer recreation or summer camp programs. Where such programs meet the requirements of Sec 13(a)(3)(A) or (b) and are not a part, continuation, or extension of the accredited academic program of the school, such an establishment may qualify as “an amusement or recreational establishment, organized camp, or religious or nonprofit educational conference center” pursuant to the exemption, even though some credit courses may be offered on a voluntary basis along with the recreational activities. The applicability of Sec 13(a)(3) to employees of such an establishment is not defeated by the fact that the same distinct physical place of business is for part of the year a “school”, and for part of the year an “amusement or recreational establishment, organized camp, or religious or nonprofit educational conference center.” 

This does not, however, necessarily resolve the matter in all cases. For example, in a 2004 non-administrator opinion letter, the DOL considered whether a summer camp operated by a non-profit organization that also ran a year-round horseback riding school out of the same facility could qualify for the Sec. 13(a)(3) exemption. According to the letter, the summer camp was independent from the organization’s regular riding lessons, with separate accounting and a dedicated staff of 15-20 counselors and instructors. In the letter, the DOL relied upon the definition of “establishment” in the regulations interpreting the exemption for retail and service establishments. Specifically, 29 C.F.R. § 779.305 states that two or more physically separated portions of a business located on the same premises can constitute separate “establishments” if:

  1. Their activities are physically separated;
  2. They function as separate units with separate records and separate bookkeeping; and
  3. There is no interchange of employees between the units. 

The DOL determined that, although it was in most respects separately organized and operated, the summer camp could not be considered a separate “establishment” under Sec. 13(a)(3) because two of the organization’s employees – its general manager and administrative assistant – also spent a significant portion of their time during the summer administering the summer camp, and because the camp was not physically separated from the rest of the operation.

Applied to a college or university summer camp, this could suggest that a camp held on campus and administered in part by college or university employees may not qualify for the Sec. 13(a)(3) exemption, even if the bulk of the camp staff was hired solely for purposes of the camp. This is not to say that college or university employees can have nothing to do with the camp – the regulation makes clear that the problem arises when employees float freely between the two purportedly separate “establishments”:

The requirement that there be no interchange of employees between the units does not mean that an employee of one unit may not occasionally, when circumstances require it, render some help in the other units or that one employee of one unit may not be transferred to work in the other unit. The requirement has reference to the indiscriminate use of the employee in both units without regard to the segregated functions of such units.

Recent Rulings

The question of what constitutes an “establishment” for purposes of the Sec. 13(a)(3) exemption was addressed just last month in two district court decisions, Feagley v. Tampa Bay Downs, Inc. and McMillan v. BSA Aloha Council. In Feagley, there was no dispute that the defendant racetrack’s employees were exempt under Sec. 13(a)(3), but the plaintiff, a card dealer in a poker room on the race track’s premises, claimed that the poker room was a separate establishment and that the company had violated his FLSA rights by forcing him to pool his tips with non-tipped employees such as supervisors. The court held that the 3-factor test from 29 C.F.R. § 779.305 applied, but found that there were disputed factual issues that required the case to proceed to trial. 

In McMillan, the plaintiff was employed as a Camp Ranger, working at three Boy Scout camps operated by the Aloha Council. While he worked year-round, the camps primarily operated a 4-week summer camp program. Taken together, the camps satisfied the average receipts requirement for the seasonal establishment exemption. However, McMillan argued that he was actually employed by one of the camps, Camp Pupukea, and that the 4-week summer camp held there was a separate establishment from the year-round operation that employed him. The court rejected this argument, finding no evidence that the Aloha Council operated the 4-week summer camp as a unit separate from the other activities at the camp or that it did not interchange employees with the rest of the camp’s operations. 

Insights for Employers

Like other FLSA exemptions, the exemption for seasonal recreational and amusement establishments can be complicated and difficult to apply in practice. When applying this exemption, employers should be mindful of several factors:

  • The exemption is limited to amusement or recreational establishments, organized camps, and religious or non-profit educational conference centers. Other kinds of seasonal businesses need not apply.
  • The exemption will only apply to establishments that operate no more than seven months out of the year, or that meet the average receipts test described above. Again, it is important to understand what constitutes “operating” and how to properly calculate the average receipts. 
  • To properly apply the exemption, it is vital to understand how the regulations and courts define the term “establishment.”

Pharmaceutical sales rep iStock_000005240599XSmall.jpgThis morning the U.S. Supreme Court ruled 5-4 that pharmaceutical representatives are “outside salesmen” exempt from the overtime requirements of the Fair Labor Standards Act. Christopher v. Smithkline Beecham Corp. (.pdf). 

This has been a hotly-contested issue in the courts and the subject of a split between the federal appellate courts, with the Ninth and Seventh Circuits holding that drug reps could qualify for the outside sales exemption, and the Second Circuit holding that they could not. (For more background, see our prior posts here.)

Facts of the Case

As described by the Court, pharmaceutical sales representatives, also known as “detailers,” provide information to physicians about the company’s products in hopes of persuading them to write prescriptions for the products in appropriate cases. They also call on physicians within an assigned territories to discuss information regarding the company’s drugs, and seek nonbinding commitments from physicians to prescribe those drugs in appropriate cases. Detailers’ compensation includes an incentive component, based upon the sales volume or market share of their assigned drugs within their territories. Detailers normally work beyond normal business hours and with minimal supervision. 

Deference to the DOL?

The first issue addressed in the Supreme Court’s decision today is whether the courts should have deferred to the U.S. Department of Labor’s position that detailers are not exempt. The DOL first announced its view that pharmaceutical sales representatives were not exempt outside salesmen in an amicus brief filed in the Second Circuit Court of Appeals in 2009. The Department reiterated its position in amicus briefs filed in subsequent cases on the issue, including the case before the Supreme Court. Specifically, the DOL argued that pharmaceutical representatives were not “salesmen” because they did not make “sales,” in the sense that they did not directly consummate transactions, but rather secured only nonbinding commitments from healthcare providers to purchase their employers’ products. 

Ordinarily, courts will defer to administrative agencies’ interpretations of their own regulations. However, such deference is not required where the agency’s interpretation is plainly erroneous or inconsistent with the regulation, or does not reflect the agency’s fair and considered judgment on the matter in question. The latter might apply, for example, where the agency has changed its interpretation over time, or where it appears that the regulation is nothing more than a “convenient litigating position” or “post hoc rationalization.” 

In this case, the Court’s majority noted that the DOL’s position would create massive liability for pharmaceutical companies based upon conduct occurring before the DOL made its views public in 2009. The Court also observed that the DOL’s position was “preceded by a very lengthy period of conspicuous inaction” by the DOL to enforce its newly announced interpretation. The most plausible explanation for this inaction, the Court found, was that up until 2009 the DOL evidently did not think that pharmaceutical sales representatives were misclassified. Thus, the Court determined that the DOL’s interpretation of its regulations was not entitled to judicial deference. 

Detailers Are Exempt

Turning to the merits of the case, the majority of justices rejected the DOL’s argument that pharmaceutical reps are not exempt because they “promote” pharmaceuticals rather than actually “selling” them. The Court instead held that the FLSA requires a “functional, rather than a formal inquiry” on this issue, and that an employee’s responsibilities must be viewed “in the context of the particular industry in which the employee works.” In the pharmaceutical industry, “[o]btaining a nonbinding commitment from a physician to prescribe” a pharmaceutical company’s drugs “is the most that [sales representatives] were able to do to ensure the eventual disposition of the products” being sold. The Court held that given the regulatory environment applicable to the pharmaceutical industry, this arrangement comfortably fell within the regulatory language defining “sales.” 

The Court also observed that sales representatives “bear all of the external indicia of salesmen.” They were hired for their sales experience, trained to close sales, worked away from the office, and compensated with sales incentives. The Court noted that “it would be anomalous to require respondents to compensate petitioners with overtime, while at the same time exempting employees who function identically to petitioners in every respect except that they sell physician-administered drugs, such as vaccines and other injectable pharmaceuticals, that are ordered by the physician directly rather than purchased by the end user at a pharmacy with a prescription from the physician.” 

Dissent: No DOL Deference, But Detailers’ Work Is Promotion, Not Sales

In a dissenting opinion joined by Justices Ginsburg, Sotomayor, and Kagan, Justice Bryer agreed with the majority that the DOL’s interpretation of the regulations was not entitled to deference, but reached a different view regarding the merits of the case. Following an exhaustive review of the FLSA, the DOL’s regulations, Department of Labor reports, and industry ethics codes governing the Detailers’ work, Justice Breyer concluded that “the drug detailers do not promote their ‘own sales,’ but rather ‘sales made, or to be made, someone else,'” and therefore could not qualify as “outside salesmen” under the FLSA.

Insights for Employers

While certainly a major relief for pharmaceutical companies, it is not immediately clear that this case will have a major impact upon most employers. While certainly more esoteric, the most interesting piece of this decision is not the Court’s ruling on the scope of the sales representative exemption, but it’s determination that the DOL’s interpretation of its own regulations was not entitled to judicial deference. Given the current political climate, pushing through new legislation or even new regulations to change the FLSA is likely to be extraordinarily difficult if not impossible. That has left the DOL and other federal agencies in the position of having to change the law by modifying their interpretations of existing rules or changing their enforcement priorities. This case illustrates that legislation by administrative interpretation has its limits, and may encourage further challenges to some of the Department’s more aggressive interpretations of the FLSA and its regulations. 

PunchClock9472033.jpgQ. An employee works for the company full-time, 7.5 hours per day, 5 days per week, at $20 per hour. To make ends meet, the employee also voluntarily works a different part-time job for the company on Saturdays, usually working an additional 7.5 hours at $15 per hour. The two jobs are completely separate and could just as easily be done by different people. Do we have to pay overtime for the additional hours, and if so how do we calculate the amount due?

A. Yes. Under the FLSA and parallel state laws, overtime is due whenever a non-exempt employee works more than 40 hours for an employer in a single 7-day workweek. It makes no difference that some portion of those hours are spent performing different duties than other hours.

That leaves the question of how to calculate overtime given that the employee is paid at two different pay rates for the different jobs. The employee is due time and a half, but at what rate? Here there are basically two options.

First, absent some other agreement with the employee, overtime is generally calculated using the weighted average of the employee’s total pay. The math looks like this:

Job 1 – Straight Time

37.5 hours x $20/hour = $750

Job 2 – Straight Time

7.5 hours x $15/hour = $112.50

Overtime

Total hours: 45

Total Straight Time Pay: $$862.50

Weighted Average Rate = $862.50 ÷ 45 hours = $19.17/hour

Overtime rate = $19.17 ÷ 2 = $9.58/hour. 

Overtime pay = 5 hours x $9.72/hour = $48.60

Total Pay

$875 + $48.60 = $923.60

The other option, available under Section 7(g)(2) of the FLSA, is to reach an agreement or understanding with the employee that overtime pay for any hours in excess of 40 will be calculated using the straight-time pay rate for the work the employee is performing during the overtime hours. While this agreement can be oral, it would be prudent to get it in writing. In the scenario above, assuming that the Saturday hours fall at the end of the employer’s established workweek, the calculation of overtime pay using this method would be as follows:

Straight Time: $862.50

Overtime Rate: $15.00/hour ÷ 2 = $7.50/hour

Overtime Pay: 5 hours x $7.50/hour = $37.50

Total Pay: $900

Obviously this results in a lower rate of pay in this situation, but that may not always be the case if the employee reaches 40 hours while performing work in the higher-paid position. For example, suppose that instead of a workweek beginning on Sunday or Monday, the employer’s workweek begins on Saturday and ends Friday. In that case, the employee would reach 40 total hours on Friday, while working the $20/hour job, and the overtime pay due would be $50 instead of $37.50. 

Of course, if the goal is to avoid paying overtime altogether, the solution is to hire a second employee to perform the additional part-time job. While this may appear detrimental to the existing employee who simply wants to work some additional hours, remember that this is an intended consequence: part of the goal of the FLSA’s overtime requirements is to encourage employers to limit work hours for individual employees and instead spread available work around. 

MortgageApp.XSmall.jpgI 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. 

Big guy with cigar iStock_000004607261XSmall.jpgOn June 4, the U.S. Department of Labor Wage and Hour Division announced that a San Antonio-based car wash company has paid $246,438 in back wages to 308 employees following a DOL investigation. Among other things, the DOL found that the company had taken illegal deductions from employees paychecks for items including uniforms, insurance claims, and cash register shortages that resulted in employees’ pay falling below the federal minimum wage. 

It is not unusual for employers to seek to recover money from employees through paycheck deductions for items such as uniforms, shortages, lost tools, and damage to vehicles or other property. So what kinds of debts can employers recover from employees, and how do they do so without running afoul of wage and hour laws? 

One option would be to engage the services of someone such as the gentleman in the photo, but that approach may involve legal complications well beyond the wage and hour issues we will discuss here. So, here are some general guidelines:

Generally, Employees Must Receive At Least Minimum Wage “Free and Clear”

The basic requirement of the FLSA is pretty simple: employees must receive at least the minimum wage for all hours worked in the workweek. So, an employee who works 40 hours must receive at least $7.25 per hour, or $290. (If your state or municipality sets a higher minimum, that will apply.)

That $290 must be paid to the employee “free and clear,” with limited exceptions:

  • Employers obviously may (and in fact must) deduct employees’ share of taxes from their gross pay. They may not, however deduct the employer share of any tax. 
  • Employees may authorize deductions to be turned over to third parties, such as union dues, insurance premiums, and voluntary contributions to charitable, athletic and social organizations. 
  • Employers may also deduct sums to pay a creditor of the employee under a lawful garnishment order, wage attachment, trustee process, or bankruptcy, so long as the employer derives no profit or benefit from the transaction. 

Certain “Facilities” Can Be Credited Toward Wages

In addition to the deductions permitted above, employers can count the reasonable cost of board, lodging, or other facilities toward an employee’s pay if such items are customarily furnished to employees. Certain conditions must be met for an employer to take a credit for such items, including:

  • Only the “reasonable cost” of items may be charged to the employee. This may not include any profit or benefit for the employer or any affiliated person, and the employer should be prepared to show evidence that the credit taken is consistent with the employer’s reasonable cost. Simply setting an estimated price – for example, taking a meal credit for restaurant employees of one half of the regular retail price of the meal – will not suffice absent evidence that the price charged reflects the employer’s actual costs. Keep those receipts. 
  • The items provided must be primarily for the benefit of the employee rather than the employer. For example, if an employer provides lodging to an employee because it requires the employee to be on call at the employer’s behest, the employer may not be able to take any credit for the cost of the lodging. 
  • The employee must actually receive the benefits of the facilities furnished. For example, no credit can be taken for meals not actually provided to an employee. 
  • The DOL’s regulations provide that the employee must voluntarily accept the facilities furnished by the employer. However, several court decisions have declined to enforce that part of the regulations, finding it inconsistent with the language of the FLSA. (See, e.g., Davis Bros. Inc. v. Donovan, 11th Cir. 1983). 

Employees Can’t Be Required To Pay For Items That Primarily Benefit the Employer

As a general rule, employers cannot require employees to pay the cost of items that are primarily for the benefit of the employer if doing so would reduce the employee’s wages below the required minimum wage and overtime pay. This is so whether an employer deducts the cost of such items from the employee’s pay, requires employees to reimburse the costs, or requires employees to pay the costs directly. Items that the Department of Labor regards as being for the benefit of the employer include:

  • Tools and materials incidental to carrying on the employer’s business
  • Uniforms, uniform rental, laundering
  • Register shortages
  • Damage to the employer’s property
  • Financial losses due to customers not paying bills
  • Economic losses due to employee negligence
  • Employer-mandated physical exams

(See the DOL’s fact sheet for examples of these sorts of expenses.)

Bottom Line for Employers

In light of the restrictions above, employers as a general rule should not take any deductions from employee pay or require employees to pay costs that would reduce their pay below the required minimum wage and overtime payments. However, if an employee’s pay exceeds the required minimums, an employer may spread payments out over time so long as the employer receives at least the minimum wage and required overtime for all hours worked. 

Employers should also take note that federal law is not the only issue here: many states also restrict wage deductions, so be sure you understand the wage payment laws and regulations that apply to your location before you take any deductions. (In Illinois, employers need to comply with the Illinois Wage Payment and Collection Act and the regulations issued by the Illinois Department of Labor.)

 

iStock_000004431244XSmall.jpgQ. Our employees consider themselves “professionals” and don’t want to be treated as hourly workers. If our employees agree to it, can we still treat them as “exempt” even if they don’t meet all of the requirements under the FLSA or state law? 

A. In a word, no. This question comes up more often than you might think. In some cases, particular industries have developed a practice of treating certain categories of employees as “salaried” and assuming that they are exempt. In others, employees would simply rather be “salaried” or “exempt” because this suggests a higher status than an “hourly” position, or because they prefer not to have to track their time. 

Unfortunately for employers, an employee’s choice generally had nothing to do with whether or not the employee can legitimately be classified as “exempt” from overtime requirements under state and federal law. With very few exceptions, the rights provided by the Fair Labor Standards Act and its state equivalents can’t be waived or modified by an agreement with the employee. 

So how can employers manage employee expectations without running afoul of the law? 

Continue Reading Can Employees Agree to Be Exempt? [Wage & Hour FAQs]

pillbottle.XSmall.jpgThe Seventh Circuit recently weighed in on whether pharmaceutical sales representatives are exempt under the FLSA in Susan Schaeffer-LaRose v. Eli Lilly & Company.  In this consolidated case, the Seventh Circuit focused on the administrative exemption in determining that the sales representatives were exempt.  Because the Court found that the sales representatives met the administrative exemption, it did not address the outside sales exemption.  This decision is noteworthy because it is contrary to the more recent trend where such sales representatives were found not to meet the exemption. 

The Second and Third Circuits had previously ruled on this very issue in Novartis and Smith, respectively, while the application of the discretion and independent judgment prong in the pharmaceutical sales context was a question of first impression for the Seventh Circuit.  In Novartis, the sales representatives were found not to meet the administrative exemption, while in Smith, the sales representative did exercise the necessary discretion and independent judgment to meet the exemption.  In its opinion, the Seventh Circuit analyzed both of these prior rulings, as well as the Department of Labor’s regulations, rejecting the arguments of the Plaintiffs and the Department of Labor that the sales representatives in the instant consolidated case were not exempt.  

After examining the record, the Court was convinced that the sales representatives performed work directly related to the general business operations of the employer and were required to exercise a significant measure of discretion and independent judgment in their daily duties.  Specifically, the Court focused on the fact that these sales representatives were the public face of their employer to the most important decision-makers regarding use of their companies’ products and the freedom in which they were allowed to execute individually tailored and strategic analysis to their work without supervision.  As a result, the Court found that they met the administrative exemption.

While the Schaeffer-LaRose case further clarifies the use of the administrative exemption for pharmaceutical sales representatives, it is just one piece of the puzzle.  We are still waiting for a decision from the United States Supreme Court in Christopher v. SmithKline Beacham Corp as to whether the pharmaceutical sales representatives meet the outside sales exemption.  How the Supreme Court rules will have obvious ramifications on the industry and the exempt status of these sales representatives.  If the Court holds that these sales representatives meet the outside sales exemption, the issue will become moot.  However, if the Court holds that they do not meet the outside sales exemption, cases like Schaeffer-LaRose, Novartis, and Smith – that address the administrative exemption – will become more important in determining exempt status for pharmaceutical sales representatives.  We expect a decision in SmithKline at some point over the summer – so stay tuned!

iStock_Money_Small.jpgMisclassification 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.