The Wage and Hour Litigation Blog

Authored by Alex Passantino

Independent Contractors.  Subcontractors.  Franchises.  Employment Agencies.  According to the Wage & Hour Division, use of these relationships is an action that requires special scrutiny.  When WHD states that it is targeting "fissured industries," it means those industries in which it is more likely that workers are performing under one of these relationships -- anything where there is something less than a direct employee-employer relationship.

In recent weeks, WHD has brought the fissured industries back into the forefront.  In a lawsuit filed in federal court, WHD seeks to recover back wages for 800 workers who WHD alleges were misclassified.  See here.  The workers -- who apparently performed construction work -- were classified as members and owners of a limited liability company that provided workers to construction contractors.  WHD is using a full complement of enforcement tools, seeking back wages, liquidated damages, and a permanent injunction, and asserting joint employment among the companies that provided the workers and the companies that used the workers.

In a separate enforcement action [See here], WHD assessed back wages on behalf of four construction employees determined to have been misclassified as independent contractors.  

Why is WHD Pursuing this Fissured Industry Initiative?

WHD provides a pretty concise description in its press releases:

The misclassification of employees as something other than employees, such as independent contractors, presents a serious problem for affected employees, employers and to the economy. Misclassified employees are often denied access to critical benefits and protections, such as family and medical leave, overtime, minimum wage and unemployment insurance, to which they are entitled. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers’ compensation funds.  

With its recent agreements with state and federal taxing authorities, WHD's efforts in the fissured industries often have the result of increasing depleted government coffers in addition to the pockets of workers for whom it recovers back wages.  It's a win-win for WHD.  But for employers in the fissured industries -- hotels, restaurants, construction, janitorial services, employment agencies -- it's a cause for concern:  the entire industry is targeted for enforcement actions, not simply the companies that use the relationships.

Well . . . What Should We Do?

For companies that use one or more of the relationships above, take time to ensure that you have properly classified workers as independent contractors.  In addition, if you use subcontracting, franchising, or employment agencies, make sure that the entities providing these services are compliant with state and federal laws, including the FLSA.  As is the case in the lawsuit described above, the users of the services may be subject to liability under a joint employment theory. 

Of course, all employers in the hotel, restaurant, construction, janitorial services, employment agency, or other fissured industries -- regardless of whether they use one or more of the relationships -- should ensure that their wage and hour practices are in compliance.  (And consider attending our upcoming webinar.)

W.H.D.? (“What Happened, Dude?”) is a weekly blog post in which we break down recent enforcement activity by the U.S. Department of Labor’s Wage & Hour Division (WHD), look at what went wrong for the employer, and share some lessons for other employers.

Co-authored by Richard Alfred and Patrick Bannon

In a post last week, we predicted that the Supreme Court’s opinion in Comcast v. Behrend would have “monumental” implications for wage and hour class actions (read more here). Some of our readers, especially although not exclusively on the plaintiffs’ side interpreted the opinion much more narrowly. 

Exactly five days after issuing Comcast, the Supreme Court made its intentions clear by applying the decision to a wage and hour class action.

Yesterday, the Supreme Court ordered the Seventh Circuit to rethink its decision in Ross v. RBS Citizens, N.A., in which the appeals court affirmed the certification of a wage and hour class action.  Specifically, the Supreme Court granted review of the Ross case, vacated the lower court’s judgment, and remanded the case to the Court of Appeals “for further consideration in light of Comcast Corp. v. Behrend.”

Ross is a wage and hour class action in which two groups of bank employees were approved to pursue class claims for overtime pay allegedly due under the Illinois Minimum Wage Law.  One group sought pay for several different kinds of off-the-clock work.  The other claimed to have been misclassified as exempt from overtime. 

The Bank argued that neither group could be certified as a class because neither group could satisfy the requirement that common issues predominate over individual issues, as explained in Wal-Mart v. Dukes.  Each employee in the first group would have to prove what kind of off-the-clock work he or she performed, and the Bank would be entitled to prove that it did not know about the extra work or other employee-specific defenses.  Similarly, each employee claiming to have been misclassified would have to prove his or her specific duties.  Thus, the Bank argued, the case would inevitably be dominated by individual rather than class issues.

The district court and the Seventh Circuit both rejected that argument, ruling that whether the Bank had an unofficial policy of denying the plaintiffs earned compensation was enough of a common issue to justify class certification. 

The Supreme Court’s handling of Ross is, at a minimum, an instruction to lower courts to review carefully and apply Comcast -- and necessarily, Dukes -- before certifying state law wage and hour claims as class actions.  In fact, as we reported in our post last week, we think Comcast ultimately means much more -- that state law wage and hour claims requiring individualized proof of damages are generally inappropriate for class treatment.

We will follow and report on the Seventh Circuit’s consideration of Comcast when it reconsiders its decision in Ross.

Authored by Alex Passantino

Two months into the second term of the Obama Administration, we’re beginning to get a sense of the policy priorities for the Wage and Hour Division’s next four years.  With a flurry of activity in early 2013, WHD has all but completed the first term’s regulatory agenda.  And, although we have yet to see a comprehensive regulatory agenda, WHD’s recent activities provide us with some indication of where it plans to head.  Of course, without a confirmed Secretary of Labor or WHD Administrator, it is difficult to know the precise direction, but the President’s nomination of Thomas Perez is a clear signal that the course will not be changing all that much.

First, we take a look at where WHD -- or, perhaps more precisely, the Administration on WHD issues -- is going:

Proposal to Increase the Minimum Wage

During his State of the Union address on February 13, 2013, President Obama proposed increasing the minimum wage from $7.25 to $9.00, then indexing the minimum wage to inflation.  In the days that followed, policy-makers, economists, workers, small business owners, and countless others offered their opinions on the impact of such an increase. 

The President’s address once again brought the issue to the forefront, and legislation has been proposed to raise the minimum wage to $10.10 over three years, with subsequent indexing to the consumer price index.  For tipped employees, the proposed legislation would raise the cash payment from $2.13 per hour to 70% of the minimum wage.  The Senate held a hearing on increasing and indexing the minimum wage on March 14, 2013. 

Despite the renewed attention on the minimum wage, the political climate in Washington is such that an increase is not likely in the short term.  Nevertheless, the Administration has demonstrated that this is a second term priority, so we will continue to monitor closely.

Survey to Collect Information About Employees’ Experience with Worker Misclassification

Perhaps the most controversial regulatory initiative proposed by WHD in the first term was what has been called the “Right-to-Know” rule.  Last year, WHD placed the rulemaking on its long-term action agenda.  The long term agenda was described as “items under development but for which the agency does not expect to have a regulatory action within the 12 months after publication of this edition of the Unified Agenda.”  In the most recent Regulatory Agenda (December 2012), the Right-to-Know rulemaking remained a long-term action. 

Foreshadowing that future action, on January 11, 2013, WHD submitted for comment a proposal to collect information about employment experiences and workers' knowledge of basic employment laws and rules so as to “better understand” employees’ experience with worker misclassification.  There is little doubt that WHD intends to use the survey results to support a regulatory proposal in the same vein as the Right-to-Know proposal.  As a result, if and when the survey process begins -- at present, it is expected in late summer, early fall -- employers should be prepared to respond.  We will continue to keep you apprised as this situation develops.

In addition to these new proposals, WHD has nearly completed its first term agenda:    

Final Rule Regarding Nondisplacement of Qualified Workers Under Service Contracts

On January 18, 2013, nearly four years after the Executive Order establishing the requirement, the FAR Council and WHD rules requiring contractors and subcontractors who are awarded a federal service contract to provide the same or similar services at the same location to, in most circumstances, offer employment to the predecessor contractor’s employees in positions for which they are qualified, went into effect.  For a detailed discussion of the requirements, see Final Rules Regarding the Nondisplacement of Qualified Workers Under Service Contracts Go Into Effect on January 18, 2013.

Amendments to the Family and Medical Leave Act Regulations

On February 6, 2013, WHD issued a long-awaited final rule and regulations (effective March 8, 2013) implementing statutory changes in legislation passed in 2009 and 2010.  The new regulations:

•Increase and clarify scope of military exigency leave;

•Extend military caregiver leave;

•Clarify calculation of increments of intermittent FMLA leave; and

•Clarify airline flight crew employees FMLA eligibility requirements.

WHD made minor modifications to its forms and issued a new form for military caregiver leave for veterans. WHD also issued an Administrator's Interpretation regarding the definition of a "son or daughter" with respect the age of a son or daughter at the onset of a disability.

For additional information, take a look at Seyfarth’s Department of Labor Issues New FMLA Regulations newsletter.  

Amendments to Companionship and Live-In Worker Regulations

The final outstanding (non-long-term) item on the first term agenda relates to companionship services and live-in workers.  Back in December 2011, WHD published a notice of proposed rulemaking that would significantly limit the application of the FLSA’s companionship services exemption.  On March 21, 2012, the period for public comment ended.  Since that time, WHD has been reviewing the comments and developing the final rule.  On January 15, 2013, the final rule was sent to the White House’s Office of Information and Regulatory Affairs for review, which is one of the final steps before a rule is published.  It appears that a final rule on this issue can be expected this Spring.

Conclusion

It’s been a busy first two months, which should give an indication of things to come.  Over the coming weeks, we will continue to keep you updated on the regulatory developments at WHD, as well as provide some insight into the agency’s enforcement efforts. 

Authored by Alex Passantino

'Twas the week after Christmas, and all through the land     

Our readers were focused on their year '13 plans;                                                                  

And though we've no desire to knock you off track,                                                             

We thought that 2012 deserved one last look back.                                                             

Hours, exemptions, pay rates, and more;                                                                         

Nearly 100 posts (for those keeping score).                                                                           

We know every issue will not give you your kicks,                                                                  

So we considered them all, and we picked out just six.

At the top of the list, one case, it stood out.                                      

And our blog frequently mentioned what it was all about.                                                      

We note it again, cause it's not every day                                                                        

That the SCOTUS addresses the FLSA.                                                                          

Pharma Sales Reps were the source of debate                                                                    

As the justices considered their overtime fate. 

But beyond the exemption lay a larger issue,                                                                

Which brought Roberts, CJ, and eight justices, too.                                                               

A unanimous ruling that courts won’t defer                                                                          

To an agency brief that's made up on the spur.                                                                   

No Auer.  No Skidmore.  No Seminole Rock.                                                                           

No deference at all, which came as a shock.                                                                      

And five Justices found that sales’ “other disposition”                                                    

Includes what happens with drugs ‘tween sales rep and physician.

Our second big item for the past year                                                                             

Gives hospitals all over a reason to cheer.                                                                 

Automatic break cases have been oh so scary                                                                    

But departments and managers and practices vary,                                                            

And faced with these cases, this giant morass                                                               

Increasingly, courts have been saying "no class."

Third -- a crucial pairing that’s been quite hot of late                                                   

Collective wage claims and the word “arbitrate”                                                                  

Attacks on class waivers have sunk like a stone                                                                 

Since SCOTUS approved them in Concepcion.                                                           

Employment class waivers should have the same fortune                                                    

But first must maneuver around D.R. Horton.                                                                        

In Sutter, the Supremes decide if arbitrations are class-y,                                                      

While California, it seems, is contrary -- so sassy.

The fourth of our topics is only beginning,                                                                      

Soon SCOTUS will decide if Genesis is winning                                                                       

By offering a plaintiff all possible pay                                                                              

Then moving the court:   “Make this case go away.”                                                          

With the case fully briefed, and the arguments heard,                                                          

It won’t be ‘til next year that we learn the last word. 

Our fifth and sixth issues go hand-in-hand,   

It’s the wage-hour wave that’s been sweeping the land.                                                     

Whether it’s agency efforts or plaintiff-filed cases,                                                             

FLSA violations will get thrown in your faces.                                                               

Aggressive enforcement might lay you down flat.                                                               

Will your customers know?  Well, there’s an app for that.                                                   

And these targeted efforts to cause course correction,                                                       

Won’t be going away, due to Barack’s re-election.                                                             

And the plaintiffs’ bar will also be sticking around,                                                               

As their wage-hour case filings continue to abound.

So make sure that next year, you review all this “stuff.”    

And thanks for the page views; we can’t thank you enough.                                                

We wish you success in 2013.                                                                                        

From your favorite blogging (and book-writing) team.

THANKS TO ALL OF OUR READERS. BEST WISHES FOR A HAPPY, HEALTHY, AND PROSPEROUS NEW YEAR!

Authored by Kyle Petersen

Last year, we reported on the defense verdict in the Henry v. Quicken Loans case, in which a Detroit jury found that mortgage loan officers were not sales employees with limited decision-making authority.  Instead, the jury found that the mortgage loan officers were subject to the FLSA’s administrative exemption and therefore not entitled to overtime.  Last week, the Sixth Circuit Court of Appeals affirmed the jury's verdict.

After hearing 40 witnesses testify during the five-week trial, the jury made two key findings in Quicken’s favor.  First, the jury found that the plaintiff loan officers’ primary duty involved “work directly related to the management or general business operations” of Quicken or its customers.  Second, the jury found that the plaintiff loan officers exercised discretion and independent judgment with respect to matters of significance. 

On appeal, plaintiffs argued not only that the evidence did not support the verdict, but also that the question of whether the mortgage loan officers were eligible for the administrative exemption was not one of fact to be resolved by the jury; rather, plaintiffs advocated that the determination of whether the administrative exemption applies is a question of law for the court to decide (and thus was subject to de novo and not clear-error review). 

Not surprisingly, the Sixth Circuit declined to disturb the jury’s verdict, holding that there was “ample evidence” to support a finding in Quicken’s favor.  As is often the case, the Sixth Circuit deferred to the credibility determinations the jury made after hearing conflicting testimony from multiple witnesses about the loan officers’ day-to-day job duties. 

Perhaps more importantly for employers, the Sixth Circuit also rejected the notion that application of the administrative exemption is necessarily a matter of law subject to de novo review.  Rather, the Court explained, where there are material fact disputes about which duty is primary, the determination is factual and thus falls squarely within the province of the jury.  To be sure, the Court acknowledged, the exemption determination can be made as a matter of law in those cases where there are not material factual disputes as to what duties are primary. 

In its decision, the Sixth Circuit joins the Tenth Circuit in concluding that the primary duty determination is factual.  While these decisions may be relied upon by plaintiffs to defeat defense motions for summary judgment, there is a significant upshot for employers seeking to defeat collective or class certification in misclassification cases.  Indeed, fact-intensive inquiries ill-suited for summary judgment may be similarly inappropriate for determination on a class-wide basis.  The Court’s decision therefore provides another avenue for employers to defeat certification when there is conflicting evidence about the workers’ primary job duty.

In addition, demonstrating that there are disputed issues of fact regarding primary duties may also work to an employer’s advantage on the merits in FLSA cases that rely on a hyper-technical reading of the FLSA or its regulations.  In that situation, avoiding entry of summary judgment in favor of plaintiffs and proceeding to trial very well may tip the scales of justice in favor of the defense.  Indeed, at trial in such cases, an employer often has the more sympathetic position, particularly where the plaintiffs are highly paid.  

Co-authored by Brett Bartlett and Kevin Young

Any employer that has faced a putative FLSA collective action in Florida, Georgia, or Alabama since 2008 should be aware of Morgan v. Family Dollar Stores, Inc., a case in which the Eleventh Circuit upheld a $35 million trial verdict against the Family Dollar chain and refused to reverse a pretrial decision to allow the store manager misclassification case to proceed collectively in the first place.  Plaintiffs have since rung the Morgan bell often and indiscriminately, likening their cases to Morgan because of perceived similarities among the employees in their cases and those who sued Family Dollar.  An employer decided to classify all individuals in a position as exempt?  “That happened in Morgan, too!”  The employer had a manual describing its expectations of the employees in its stores?  “So did Family Dollar!”  Morgan, these plaintiffs have exclaimed, has required that employees like these must be “similarly situated,” the key requirement to proceed collectively.  After all, the Eleventh Circuit upheld the multi-million dollar verdict against Family Dollar.

But could they be wrong?  Would a district court in the Eleventh Circuit ever again decertify a store manager misclassification case?  The answer is yes.  The latest example surfaced early last week, arising from the very district court from which Morgan arose.  In a 21-page ruling, The Honorable Scott Coogler, of the Northern District of Alabama, decertified the conditionally-certified class in Knott et al. v. Dollar Tree Stores, Inc., which included 260+ Store Managers of various Dollar Tree stores who urged the court to deny decertification in their case because it was “nearly identical” to Morgan. 

It all began six years ago, when Susie Knott, a former Store Manager of a Dollar Tree in Tuscaloosa, Alabama, filed an FLSA collective action alleging that Dollar Tree misclassified her and all of its other Store Managers as overtime-exempt.  She alleged that the Store Managers—who, as the highest-ranking employees at their respective stores, were classified as exempt managers—were misclassified because their managerial duties were in fact “non-existent or extremely minimal.”  Each store’s management, she alleged, “was left to the District Manager[s],” not to the Store Managers themselves.  In 2007, she convinced the court to conditionally certify her alleged class and to authorize her attorneys to distribute notice of the lawsuit to Dollar Tree’s Store Managers across the country.

After what Judge Coogler described as “a war” between the parties over discovery, Dollar Tree moved to decertify Knott’s conditionally certified collective action.  The company argued that the evidence developed during discovery proved that Store Managers were not similarly situated because their duties varied significantly across the class, and that the duties that varied were the very ones that would ultimately dictate whether Dollar Tree properly classified each as overtime-exempt.  For example, Store Managers’ involvement in adjusting employees’ pay rates, evaluating them, training them, disciplining them, and securing the store would eventually be the duties examined to determine whether each was exempt, and the evidence showed—according to Dollar Tree—clear variation from manager to manager. 

Knott simply could not sustain her burden to establish that she and those managers who opted into her case were similarly situated despite all of the evident variations among them.  She argued that every Dollar Tree store was controlled tightly and identically, and that Store Managers like her spent over half of their time on non-management tasks (e.g., sweeping the parking lot, running the cash register, stocking shelves).  She also argued that the company could not possibly prevail at decertification because they had in fact classified everyone the same, as if everyone performed the same duties.  Judge Coogler didn’t buy it.

In granting Dollar Tree’s decertification motion, the court found that Knott and the other Store Managers failed to establish that they were similarly situated.  The evidence revealed too many differences in their management duties.  While some “may have performed uniform tasks mandated by a corporate manual, others routinely exercised their independent judgment and the amount of time they spent performing managerial duties is a matter of individual inquiry.”  “While the differences in the amount of time spent on any individual act of ‘management,’ such as training associates, might not seem material,” the judge explained, “as a whole [they] could … lead to differing conclusions as to each employee’s ‘primary duty.’”  Morgan could not save the class, even though Knott argued that her case was “nearly identical” to the one that sparked that lightning-rod ruling.

On that point, Judge Coogler’s sage ruling speaks volumes.  He recognized that the Eleventh Circuit in Morgan did not hold that the district court in that case got it right.  Rather, the appellate court “simply decid[ed] that the district court had not abused its discretion by finding the multiple plaintiffs similarly situated.”  In other words, the Eleventh Circuit held only that the district court had not gotten it completely wrong—it had not committed clear error when it denied Family Dollar’s motion to decertify.  The point?  Even in a case “nearly identical” to Morgan, provable differences in management duties across a class will justify decertification.

Given the landscape of FLSA litigation in the Eleventh Circuit and across the country, it would not be shocking to see Knott appeal this ruling, be it in the weeks to come or after her claims are resolved.  As many courts considering the case have noted, however, Morgan does not require a collective action trial of every misclassification case with arguably similar facts.  And if the Eleventh Circuit were to apply the same abuse-of-discretion in Knott’s case as it did in Morgan, Dollar Tree—and employers that take heart in its decertification victory—almost certainly will not be disappointed.

Co-authored by George Preonas and Hayley Macon

On July 23, 2012, in Harris v. Superior Court (Liberty Mutual Ins. Co.), a case that the California Supreme Court previously had reversed and remanded, the California Court of Appeal stuck by its prior conclusion and held that insurance claims adjusters do not qualify for the administrative exemption from overtime pay requirements.

The Harris case involved claims for unpaid overtime by a class of Liberty Mutual insurance claims adjusters.  The claims adjusters argued that they were misclassified as administratively exempt.  After class certification, the claims adjusters moved for dismiss Liberty Mutual’s affirmative defense that they were exempt employees.  The trial court denied the motion.  On appeal, the California Court of Appeal reversed, applying the “administrative/production worker dichotomy” test set forth in two Bell v. Farmers Insurance Exchange cases—(collectively “Bell”)—and found that, because claims adjusters did not perform administrative work, they could not qualify for the administrative exemption.  The California Supreme Court granted review of the decision.

On December 29, 2011, the Supreme Court reversed the Court of Appeal’s decision, concluding that it had erred in relying on Bell because it was distinguishable.  The Supreme Court further ruled that the Court of Appeal had erred in relying primarily on the administrative/production dichotomy, instead of following the language of the relevant wage order and regulations.  The Supreme Court remanded, ordering the Court of Appeal to first apply the language of the statutes and wage order to the facts, and only then, if the statutes and wage order failed to provide sufficient guidance, look to the administrative/production dichotomy.

At issue on remand was one of the four requirements for the administrative exemption – whether the work is administrative.  Under the California Wage Order 4 and the federal regulations, administrative work must be “directly related” to the management policies or general business operations of the employer.  In order to be “directly related,” the work must be both administrative in nature and of “substantial importance” to the management policies or general operations of the employer’s business.  Harris addresses only the nature of the work.  

To consider whether the nature of the claims adjusters’ work qualified as exempt administrative work, the Court of Appeal cited the interpretative federal regulations, which provide that an employee’s work duties meet the exemption test only if they “relat[e] to the administrative operations of a business as distinguished from ‘production.’”  Relying heavily on a 1991 Third Circuit case, Martin v. Cooper Elec. Supply Co., and a federal case from Connecticut, the Court of Appeal interpreted this regulation to include only duties involving establishment of management policies or general business operations.  Under this rationale, claims adjusters cannot be exempt because they adjust individual claims, rather than set broader policy or run general business operations. 

The Court of Appeal then applied the administrative/production dichotomy test in further support of its determination that claims adjusters are non-exempt.  Again relying on Martin from the Third Circuit, the Court of Appeal held that “production” employees do not qualify as exempt employees who are performing the exempt task of “servicing the business,” because they are not formulating general policy on behalf of the business.  The Court of Appeal reasoned that claims adjusters were production employees because Liberty Mutual’s product is risk transference, and claims adjusting is an essential part of risk transference.  Although the Court of Appeal thus applied the administrative/production dichotomy with the same result achieved in Bell, the Court of Appeal denied that it was following Bell, as the Court here was considering only employee’s duties, not their role. 

The Court of Appeal expressly declined to follow other federal and administrative authority, including applicable Ninth Circuit decisions, on the grounds that it is not bound by those other federal decisions, and instead preferred to rely on the Third Circuit’s decision in Martin.

The Court of Appeal also rejected Liberty Mutual’s argument that the class was too heterogeneous to certify a class, and instead relied on its categorical conclusion that the claims adjusters did not perform duties involving management policy or general business operations, so they could not be exempt. 

What Harris Means for Employer

The Court of Appeal’s decision is highly controversial because of its application of the administrative/production dichotomy, as well as its rejection of seemingly persuasive analogous federal law, including authority in the Ninth Circuit.  The panel’s decision to essentially reinstate what the Supreme Court had just reversed is difficult to reconcile with the high court’s decision.  Indeed, the appellate justice who authored the original opinion wrote a dissent from the panel’s decision on remand.

The Court of Appeal’s decision thus creates significant uncertainty for the trial courts and for employers.  If the decision stands, then the administrative exemption in California could have very limited application.  Insurance claims adjusters and many other employees currently classified as administratively exempt might have to be reclassified as non-exempt, unless they are among that small group of employees who are primarily involved in setting company policy or running general business operations.  We anticipate strenuous efforts to seek review of this decision.

Co-authored by Barry Miller and Jeremy W. Stewart

Owners and operators of gentleman’s clubs recently received a new arrow in their quiver in the ongoing dispute over a question that has created a barrage of lawsuits across the industry – “Are exotic dancers employees?”  A decision from the United States District Court for the Eastern District of Arkansas on July 12 answered this question in the negative, holding that exotic dancers were not employees under the FLSA or Arkansas Minimum Wage Act. 

Lawsuits asserting that exotic dancers are employees, rather than independent contractors, have increased in recent years, in part due to the varying answers courts have given on this question, the media attention these cases receive, and the substantial amount of potential damages such cases can place at issue.  As a result, club owners have been left with inconsistent guidance on this issue, which has been framed by some courts as a determination between whether these entertainers should be viewed as independent “booked acts” or more like servers who provide customers with drinks.  Club owners and dancers have traditionally treated the relationship as one between independent contractors because the realities of the adult entertainment industry provide club owners with very little control over the dancers who perform at their clubs, often on a very itinerant basis.

In Hilborn v. Prime Time Club, Inc., the court looked at several factors to determine whether entertainers who performed at Prime Time met the definition of “employee” under the FLSA, such as: who controls the manner in which the work is performed; who assumes the risk of loss or reward; who invests in the equipment and materials required to perform the work; whether there are special skills possessed by the worker; the degree of permanence of the working relationship; and whether the workers perform integral tasks of the business.  The entertainers in Hilborn agreed on several key points that ultimately tipped the scales in favor of Prime Time, including the fact that they kept approximately 75% of the fees they collected, submitted a schedule of the days and hours that they preferred to perform, largely controlled the number of performances they conducted and for whom, were responsible for providing their own supplies and equipment, and were free to perform at other clubs that were direct competitors of Prime Time.  The court also found that the entertainers possessed and exhibited special skills with respect to their activities at the clubs, even though none of those skills required a certification.  In analyzing whether the entertainers were integral to the business, the court noted that the entertainers were directly responsible for no more than one-quarter of Prime Time’s overall sales and revenues.  Based on these factors, the court concluded that the entertainers were not Prime Time’s employees for purposes of the state or federal wage and hour laws and dismissed the claims asserted in the lawsuit with prejudice. 

Even in states that have more burdensome laws pertaining to the use of independent contractors, courts have found reason for hesitation in concluding that exotic dancers are employees of the clubs at which they perform.  Massachusetts, for example, has a stringent independent contractor regime that requires workers to be classified as employees unless, among other requirements, the workers’ services are “performed outside the usual course of the business” of the putative employer.  Plaintiffs’ attorneys have argued that “strippers” working at a “strip club” are necessarily performing within the usual course of the club’s business and are therefore necessarily employees under this test.  However, as detailed in an opinion from the Massachusetts Superior Court in a case captioned Cruz  v. Kings Inn, the analysis is not so simple.  Analogizing to comedians working in a comedy club and actors performing in a dinner theater, Judge Raymond Veary noted that the specifics of the parties’ relationship are still critical to determining the relationship between a worker and the usual course of business of the facility in which the worker plies his or her trade.  Based on this more nuanced analysis of the governing statute, Judge Veary denied the plaintiffs’ motion for summary judgment on the question of their employee status.

Although the debate is likely to continue for some time, decisions like those in Hilborn v. Prime Time Club, Inc. and Cruz v. Kings Inn provide additional ammunition for club owners in litigating this issue. 

Co-authored by Richard Alfred, Alex Passantino and Jessica Schauer

This morning, a divided Supreme Court issued a 5-4 decision written by Justice Alito upholding decades of industry practice and finding that the Fair Labor Standards Act’s outside sales exemption applies to pharmaceutical sales representatives (PSRs).  The Court decided unanimously that the Department of Labor’s (DOL) amicus curiae briefs in which it first articulated its position that the outside sales exemption should not apply to PSRs should not be provided any “especially favorable weight.”

As readers of this Blog are aware, the critical question in Christopher v. SmithKline was whether the PSRs had a primary duty of “making sales,” which is required for application of the outside sales exemption.  The issue arose because federal law prohibits the sale of any prescription drug without the authorization of a licensed physician and PSRs cannot consummate a sale of their employers’ products to end-users.  Rather, the PSRs only encourage physicians to prescribe those products.  Rejecting the DOL’s argument that “sales” requires a transfer of title, Justice Alito’s opinion, with which Justices Roberts, Scalia, Kennedy and Thomas joined, found that the statute requires a “functional, rather than a formal, inquiry [] that views an employee’s responsibilities in the context of the particular industry in which the employee works.”  The Court then concluded that PSRs’ work is “tantamount to a sale” in the pharmaceutical industry.

Justice Breyer’s dissent, with which Justices Ginsburg, Sotomayor and Kagan agreed, did not challenge the majority’s decision with respect to the level of deference to be applied to the DOL’s amicus brief, but instead focused on the non-binding nature of the commitments obtained by PSRs, arguing that obtaining such a “definitely maybe” is more akin to “promotional activities” than true sales work.

Obviously, the impact of the Court’s decision will be felt most immediately in the pharmaceutical industry.  Dozens of pending cases around the country will likely be dismissed based on this decision.  Dozens more nascent lawsuits likely will never be filed, and the tens of thousands of employees who are currently working as PSRs will continue to be treated as exempt, at least under federal law and in states that follow the FLSA’s outside sales exemption.

But the Court’s decision in the Christopher case potentially permits employers in all industries to classify a wider variety of employees as outside sales, even if the employee does not directly effect a transfer of title.  Moreover, due to the Court’s decision on deference, the Christopher case is likely to reverberate throughout many other industries.

The Court’s decision on deference should be understood as a blow to the DOL’s aggressive amicus curiae program.  The Court decided that deference was not warranted because the interpretation would “impose potentially massive liability . . . for conduct that occurred well before the interpretation was announced,” resulting in “unfair surprise.”   The Court observed that the pharmaceutical industry had “little reason to suspect that its longstanding practice of treating detailers as exempt” might violate the FLSA prior to the start of the DOL’s amicus program in 2009 because the DOL’s position was not clear from the statute or regulations and “the DOL never initiated any enforcement actions or otherwise suggested that it thought the industry was acting unlawfully.”  The Court went on to state that DOL’s interpretation was also unpersuasive, pointing to the fact that the DOL had advanced different definitions of the term “sales” before the Ninth Circuit and the Supreme Court and that the DOL’s position was “flatly inconsistent” with the definition of “sales” in the statute. 

In light of the Court’s decision on the deference issue, other DOL amicus briefs addressing other issues may come under increased scrutiny.  Through its “regulation by amicus” program, DOL has influenced pending litigation related to tip pooling, the deductibility of certain expenses, whether certain activities are “interstate commerce” sufficient to establish FLSA coverage, the outside sales exemption, the administrative exemption, the propriety of “hybrid” FLSA/state law class actions, commissioned employees, donning and doffing, de minimis time, the continuous workday principle, the tip credit’s applicability to certain employees and/or side work, the use of representative testimony in class/collective actions, willfulness, and the good faith defense.  Many areas of FLSA law have been impacted, and the Supreme Court’s decision in Christopher should cause courts to reconsider a wide variety of issues, particularly where DOL has articulated a new or changed position in an amicus brief.

We will be posting a more detailed analysis of the Court’s decision and hosting a webinar on Wednesday at 2:30 EST to address the decision’s impact on employers.  For more information about the Webinar, please click here.

Co-authored by Richard Alfred and Jessica Schauer

The Seventh Circuit ruled yesterday that pharmaceutical sales representatives (“PSRs”) for Eli Lilly & Co. and Abbott Laboratories Inc. are exempt from overtime under the Fair Labor Standards Act (“FLSA”) under the Administrative Exemption.  The timing of the decision comes as a surprise in light of the fact that the exempt status of PSRs under the outside sales exemption is currently on review by the U.S. Supreme Court in Christopher v. SmithKline.  The High Court’s decision in that case is not expected until at least next month. 

The Seventh Circuit’s decision states that the plaintiff PSRs for both companies satisfy the administrative exemption “duties test” because they (1) perform work directly related to the general business operations of their employers, and (2) exercise independent judgment and discretion in carrying out that work. 

With respect to the first prong of the test, the court relied on prior cases such as Roe-Midgett v. CC Services Inc., 512 F.3d 865 (7th Cir. 2008), and Reich v. John Alden Life Ins. Co., 126 F.3d 1 (1st Cir. 1997), which held that employees who act as representatives of the business to third parties are involved in “servicing” the business and are therefore administrative employees.  The court stated that PSRs, “are the public face of their employer to the most important decision-maker regarding use of their companies’ products, the prescribing physicians” and thus their primary duty is administrative in nature.

The court went on to find that the PSRs at issue exercise independent judgment and discretion in their duties, despite the fact that the pharmaceutical industry is heavily regulated. Citing the extensive substantive training that PSRs receive with respect to the products they promote and the disease processes they treat, the Seventh Circuit found that the plaintiffs were not treated by the drug companies as “simple mouthpieces, reciting scripts.”  The court stated that even determining “when the physician’s inquiry is sufficiently nuanced to require a response from a more knowledgeable representative” requires a “significant amount of discretion.”  The court also found that PSRs exercise discretion in tailoring their conversations to the particular physicians with whom they meet.

Aside from the timing of the opinion, the Seventh Circuit’s decision is also somewhat surprising for what the court chose not to discuss.  For example, the Seventh Circuit virtually ignored the amicus brief filed by the Department of Labor (“DOL”) in support of the Plaintiffs and the issue of whether and, if so, how much deference the court should give to the DOL's views.  Addressing the DOL’s amicus position that PSRs do not qualify for the administrative exemption (previously adopted by the Second Circuit in Novartis) only in a footnote, the Seventh Circuit stated that the question of deference “might deserve significant attention if an interpretation of the regulations were in question.”  In what can only be seen as a slap at the DOL, the court then concluded that the analysis of the administrative exemption required only “application of an unambiguous regulation” to the facts of the case.

The Seventh Circuit’s decision is important to employers primarily for two reasons.  First, as we have previously stated on this Blog, if the Supreme Court were to rule in Christopher v. SmithKline that PSRs are not exempt under the outside sales exemption, the battleground over the exempt status of these employees would shift to the administrative exemption, an issue not raised in SmithKline. By joining the Third Circuit in Smith v. Johnson & Johnson and Baum v. AstraZeneca in finding that the administrative exemption does apply to PSRs, the Seventh Circuit has given the industry’s position a tremendous boost.  Second, in yesterday’s decision, the Seventh Circuit interpreted the administrative exemption broadly as to both the “directly related” and discretion and independent judgment prongs of the duties test.  This will be helpful to employers generally in defending against claims that they improperly applied the administrative exemption.

It is not yet clear whether the plaintiffs in the two cases decided yesterday will seek further review from the Seventh Circuit or Supreme Court.  We will update our readers as events warrant. 

Co-authored by Richard Alfred, Alex Passantino and Jessica Schauer

As reported previously on this Blog, next Monday, April 16, 2012, the U.S. Supreme Court will hear oral arguments in the case of Christopher v. SmithKline, which involves application of the outside sales exemption under the Fair Labor Standards Act (FLSA) to pharmaceutical sales representatives (“PSRs”).  Also before the Court will be the question of whether the Department of Labor’s (“DOL”) position on the exemption, as expressed in a series of amicus briefs, is due deference.  That question may have significant impact on the DOL’s active amicus brief program.

As readers of this Blog may already be aware, the outside sales exemption applies to certain employees “[w]hose primary duty is[] making sales.”  The plaintiff PSRs in SmithKline claim that they do not meet this requirement because federal law prohibits the sale of any prescription drug without the authorization of a licensed physician.  As a result, PSRs cannot consummate a sale of their employers’ products to end-users but instead can only encourage physicians to prescribe those products.  The argument will focus on whether the term “sales” requires a transfer of title or whether it must be interpreted broadly under a functional approach to include anyone who “in some sense” sells. 

The argument will also focus on the degree of deference to be afforded to the amicus brief submitted by the DOL in support of the plaintiffs’ position.  The Court will decide whether the DOL’s interpretation of its own regulations in the brief was entitled to controlling deference (as the Second Circuit held in a similar case 2010 case or whether the Ninth Circuit was correct in holding that no deference is required because the brief represents a departure from “pharmaceutical industry norms[] and the acquiescence of the Secretary [in the exempt classification of similar positions] over the last  seventy-plus years,” and the DOL regulations with respect to the outside sales exemption merely “paraphrase[s] the statutory language,” such that the DOL has no “special authority to interpret its own words.”

SmithKline sits at the intersection of a hot litigation topic, wage and hour law, and a perennial area of dispute at the Court, the limitations on a federal agency’s power to regulate.  As a result, the case has attracted a number of “friends of the court” (“amici”), ranging from trade groups, to PSRs, to constitutional law foundations.  As often is the case in Supreme Court amici briefs, these briefs provide additional insight into the legal arguments, as they address nuances not covered in the principal briefs. 

Most of the briefs in support of Respondent object to the plaintiffs’ view on the deference issue.  For example, the Equal Employment Advisory Counsel argues that the circumstances of the DOL’s unsolicited amicus brief in this case is unlike the amicus briefs at issue in prior Supreme Court cases that have given the DOL’s position deference.  Specifically, in Auer v. Robbins, the Court sought the DOL’s input on a test that was entirely the creation of the agency’s notice-and-comment rulemaking.  The Counsel argues that so-called “Auer deference” should be limited to such circumstances.  The Center for Constitutional Jurisprudence goes even farther, arguing that Auer deference amounts to an abdication of judicial power in violation of separation-of-power principles and is unconstitutional.  The NFIB Small Business Legal Center points out that affording the DOL’s brief deference would have devastating impacts on small businesses, as it would result in retroactive liability and unfair surprise.  Businesses already find it difficult to understand and comply with the overwhelming number of regulations published in the Code of Federal Regulations; subjecting them to regulatory changes set forth in unsolicited briefs filed in specific litigation would virtually ensure an inability to comply.  The Washington Legal Foundation, Allen Educational Foundation, and Cato Institute similarly lament that allowing deference to the DOL in this case would give agencies leave to avoid the formal protections of notice-and-comment rulemaking, which could  significantly undercut predictability.  

The Pharmaceutical Research and Manufacturers of America (“PhRMA”), on the other hand, focuses on the impact that the Court’s decision could have on the pharmaceutical industry.  The group points out that if PSRs are non-exempt, that may require the industry to drastically change that position in ways that may not necessarily be beneficial to the PSRs themselves.  A major benefit of the job as it currently exists is its flexibility, a characteristic that would necessarily change if PSRs were required to track their hours for overtime purposes. 

In support of the plaintiffs, the National Employment Lawyers’ Association and National Employment Law Project argue that the Ninth Circuit’s interpretation of the outside sales exemption would dilute that exemption, introducing uncertainty and “expos[ing] a wide swath of other workers to exclusion from FLSA overtime and minim wage safeguards.”  The brief further argues that, from a historical perspective, employees who do not make actual sales have routinely been held to be non-exempt under the FLSA, and that the exemption should be read narrowly. 

Two groups of PSRs who are or were plaintiffs in other exempt status cases filed briefs in support of the plaintiffs.  A group of PSRs for Johnson & Johnson  argue that all PSR work is “promotion” work, and thus falls outside of the scope of the outside sales exemption.  A group of PSRs for Schering, Pfizer and Sanofi-Aventis argue that the DOL’s position on PSRs has not changed, but rather that the position itself has changed over time due to regulatory changes.  (PhRMA, however, interestingly points out that all of the regulatory changes that these PSRs describe occurred more than half a century ago, yet the DOL did not change its position until recently.)  Finally, a group of medical professionals filed an amicus brief on the plaintiffs’ behalf arguing that, as a result of physicians’ ethical responsibilities, physicians cannot interact with PSRs as though they were buyers in a sales transaction, and “the role of PSRs in influencing prescription decisions [is] de minimis.” 

The influence that the varied views reflected in the briefs of these amici will have on the Supreme Court’s reasoning remains to be seen.  We will be attending the argument on Monday and will update our readers following the argument.

Co-authored by Jessica Schauer and Richard Alfred

The past two weeks have brought a number of important updates for those watching the Christopher v. SmithKline case, in which the Supreme Court will determine whether pharmaceutical sales representatives are properly classified as exempt from overtime as outside salespersons under the Fair Labor Standards Act (“FLSA”) and whether to defer to the Department of Labor’s (“DOL”) position expressed in amicus briefs that they are not.

First, the plaintiffs filed their merits brief with the Supreme Court a week ago on January 30.  As expected, they argue that pharmaceutical sales representatives “do not sell drugs, they promote them” because they are prohibited by law from selling prescription products directly to physicians or patients.  They also argue that DOL’s interpretation of the outside sales regulations, as described in the DOL’s lower court amicus briefs, is entitled to judicial deference.  According to the plaintiffs, the DOL’s outside sales regulations “elaborate substantially on the statute” and the agency’s amicus briefs provide “at the very least a permissible reading” of those regulations.

Second, the DOL filed an amicus brief in support of the plaintiffs this week.  While there are few surprises in the DOL’s arguments with respect to the outside sales exemption, which closely mirror the agency’s submissions in other pharma cases, the latest brief addresses the level of deference to be afforded to the DOL’s position through an argument that has obvious flaws.  The brief says relatively little about Auer deference, the type of deference applied by the Second Circuit in In re Novartis.  Instead, the brief spends more than 10 pages arguing that the agency’s reasoning is valid and not inconsistent with its prior guidance – factors most pertinent to the lesser level of Skidmore deference.  The DOL argues strenuously that its view on the definition of “sales” has not changed over time, but in doing so, it conflates two issues:  the definition of “sales” (whether a transfer of title is required under the statute) and the distinction between making sales and promoting sales.  The brief cites examples where the DOL has rejected suggestions that “promotional work” should be considered exempt work, but the DOL never makes clear whether in those instances the DOL was concerned that no sale had taken place or merely objected to the proposition that there need not be a direct tie between employee’s efforts and particular sales targets.  SmithKline will likely address the DOL’s deference arguments in its brief, due March 19th. 

Finally, last Friday the Supreme Court scheduled oral argument for Monday, April 16, 2012.  We plan to have members of Seyfarth Shaw’s Wage & Hour Litigation Practice Group in attendance for the argument and will report on it immediately afterwards.  Given this schedule, we do not expect a decision until late June.

Authored by Catherine Dacre

Commissioned sales is one of the few areas in which California law is arguably more favorable to employers than the FLSA or laws of other states.  Specifically, California law recognizes an exemption from overtime for sales employees in many industries, provided they are primarily engaged in sales, earn at least one and one half times the minimum wage, and more than half of their income comes from commission earnings. 

Dubbed the “inside sales exemption,” this often-overlooked exception to the obligation to pay overtime applies to sales employees who do not qualify for the outside sales exemption because they work at their employer’s place of business.  In an opinion interpreting the applicability of the exemption broadly, the court of appeal in Muldrow v. Surrex Solutions Corporation confirmed the applicability of the exemption to employment recruiters. 

The recruiters in Muldrow were paid commissions based on both the price paid for the employee placed and the cost to their employer.  Stated simply, they were paid based on profitability of the deal, not just price.  The court clarified that factoring in cost does not destroy the commissioned nature of the pay, and prior cases on the issue (most notably Keyes Motors v. DLSE) did not intend such a restriction.  

In addition, the court rejected Plaintiffs’ argument that activities such as cold calling, interviewing candidates, inputting data, and submitting resumes were not sales related, finding instead that they were essential to accomplishing the sales. 

Finally, the court upheld the plan as a bona fide commission system based on evidence of earnings across the class.  The court found that many employees (unlike the class representatives) were paid in excess of their draws and thus the plan was bona fide.  On that issue, the court observed that limiting focus to any one group of employees would reward the unmotivated or unproductive employee.   

This is a useful case for a number of reasons.  It can be relied on to support a sales-related activity theory in either and inside or an outside sales case.  In addition, it applies a broad definition of “commission” for purposes of such exemption cases.  Finally, in the class action context, it validates the notion that the court must look at the class as a whole in examining the issues, rather than focus on a few (often outlier) class representatives.

Co-Authored by Tripper Ortman and Robb McFadden

Insurance agents and other types of salespeople with the discretion to determine when, how, and whether to sell a company’s products may properly be classified as independent contractors, according to the California Court of Appeal’s recent holding in Arnold v. Mutual of Omaha Insurance Company — the first California decision to detail the circumstances under which insurance agents, and potentially other types of salespeople, may be classified as independent contractors. The Arnold court utilized California’s Borello “control test” -- a test similar to other control tests used in jurisdictions around the country -- to determine whether the plaintiff was correctly classified as an independent contractor. The court’s analysis provides a checklist of relevant factors for employers to consider when determining whether a particular worker should be classified as an independent contractor or an employee, as well as a roadmap for summary judgment in cases where the independent contractor status is challenged.

The Facts

Plaintiff Kimbly Arnold, a former insurance agent for Mutual of Omaha, brought a putative class action seeking the reimbursement of necessary business expenses, and penalties for the untimely payment of final wages upon termination of her relationship with Mutual of Omaha. Arnold also asserted a derivative cause of action for unfair competition.

Mutual moved for summary judgment, arguing that Arnold could not recover for the Labor Code violations alleged because those provisions applied only to “employees,” and Arnold was properly classified as an independent contractor. The lower court applied the common law test for independent contractor/employee status set forth in S. G. Borello & Sons, Inc. v. Dept. of Industrial Rel., 48 Cal.3d 341 (1989), found that Arnold was properly classified as an “independent contractor,” and granted Mutual’s motion for summary judgment. Arnold appealed.

The Court’s Decision in Arnold

The Court of Appeal rejected Arnold’s argument that division 3 of the Labor Code provides a statutory definition of the term “employee.” Instead, the court agreed with the trial court and held that the common law Borello test (also known as the “control test”) should be used to determine whether Arnold was an employee or an independent contractor.

Applying Borello, the Court of Appeal affirmed that Arnold was properly classified as an independent contractor because “Mutual had no significant right to control the manner and means by which Arnold” sold its products. As the court explained, “Arnold used her own judgment in determining whom she would solicit for applications for Mutual’s products, the time, place, and manner in which she would solicit, and the amount of time she spent soliciting for Mutual’s products.” Moreover, while Mutual offered several resources to its agents (such as training, office space, and prospecting accounts), agents were not required to take advantage of them. The court also was persuaded by the fact that Arnold’s appointment was non-exclusive, as she simultaneously contracted with multiple insurance companies to offer her clients competing products. 

Analyzing the secondary Borello factors, the court found that several factors weighed in favor of finding that Arnold was an independent contractor and not an employee: she was engaged in a “distinct profession” and was responsible for maintaining her own license with the California Department of Insurance; she was responsible for providing most of her own instrumentalities or tools needed to sell insurance; and was paid a commission “based on her results and not the amount of time she spent working on Mutual’s behalf.” The court also noted that the inclusion of an at-will provision in an independent contractor agreement “is not by itself a basis for changing that relationship to one of an employee,” particularly where both parties believed that they were creating an independent contractor relationship.

Lastly, the court brushed aside Arnold’s argument that summary judgment was inappropriate unless the Borello factors unanimously established that she was an independent contractor (i.e., that summary judgment must be denied if a single factor weighed in favor of an employment relationship). As the court explained, it had “little difficulty” affirming summary judgment in Mutual’s favor because “while the existence and degree of each factor is a question of fact, ... the legal conclusion to be drawn from those facts is a question of law.”

What Arnold Means for Employers

Although the court in Arnold did not indicate whether any single factor tipped its analysis, it is clear that Mutual’s agent program — which permitted agents to determine when, how, and whether to sell Mutual’s products, and imposed minimal direct supervision and established results-oriented performance standards — was critical in leading the court to conclude that the plaintiff was properly classified as an independent contractor. Because the Arnold court determined that the common law Borello control test was the appropriate test to analyze employment status in California—and many jurisdictions around the country employ similar control tests—this decision should have far-reaching implications for the insurance and other industries that employ independent contractor salespeople outside California. Post-Arnold, companies that utilize independent contractors to sell their products in such states may apply the analysis in Arnold as a benchmark to assess and review these relationships in order to determine whether changes should be made.

Co-authored by Brandon McKelvey and Fred Sanderson 

Citing the Supreme Court's recent decision in Dukes v. Wal-Mart, on December 30, 2011, the Ninth Circuit vacated its prior decision reversing a district court's denial of class certification under Federal Rule of Civil Procedure 23(b)(2). The Ninth Circuit's unpublished memorandum in Sepulveda v. Wal-Mart Store, Inc., indicates that the Supreme Court's decision in Dukes compelled the Ninth Circuit to reverse course.

The underlying case sought to certify a class of current and former assistant mangers of Wal-Mart who alleged they were misclassified as exempt from overtime requirements. Plaintiffs sought certification under Rule 23(b)(2) on grounds that class injunctive relief was appropriate, and under Rule 23(b)(3) on grounds that common questions of law and fact predominated on the misclassification issue. In 2006, a judge in the Central District of California denied class certification under both Rule 23(b)(2) and Rule 23(b)(3). As to Rule 23(b)(2), the court held that class certification was not appropriate because the monetary relief was not incidental to the injunctive relief sought, as plaintiffs were primarily seeking monetary relief in the form of overtime payments. On appeal, the Ninth Circuit reversed in part and held that the district court abused its discretion by denying class certification under Rule 23(b)(2) because it relied on the "not incidental test" not followed by the Ninth Circuit at the time. Wal-Mart then filed a petition for rehearing and the Ninth Circuit stayed its decision pending the Supreme Court's decision in Dukes v. Wal-Mart.

Last Friday, the Ninth Circuit vacated its prior order, acknowledging that the Supreme Court in Dukes explicitly adopted the "not incidental" test for certification under Rule 23(b)(2), and clarified that Rule 23(b)(2) "does not authorize class certification when each class member would be entitled to an individualized award of monetary damages." Because the putative class members primarily sought individual overtime payments and fewer than half of the putative class would benefit from injunctive relief, it was not an abuse of discretion for the district court to conclude that the monetary relief sought was not incidental to the injunctive relief.

The Ninth Circuit ruling ends plaintiffs' quest for class certification against Wal-Mart on assistant manager misclassification claims. This decision is consistent with other recent rulings from other district courts in the Ninth Circuit denying class certification based on Dukes in manager-misclassification suits, including similar cases against Dollar Tree and WinCo previously reported on this blog.

Authored by Noah Finkel

Since the Supreme Court’s decision earlier this year in AT&T Mobility LLC v. Concepcion, nearly all federal courts that have been faced with the issue, have enforced collective action waivers of federal wage-hour claims in arbitration agreements, assuming that the agreement was not unconscionable under state law.  But a troubling recent decision by a federal district court judge in the Southern District of New York distinguishes class action waivers of state wage-hour claims, which it found generally enforceable, from collective action waivers under the Fair Labor Standards Act, which this judge concluded are per se unenforceable.

 If this ruling is adopted by other courts, it could allow employees complaining of alleged FLSA violations to proceed on a collective action basis and be permitted to issue notice to purportedly similarly-situated current and former employees, despite their agreement to bring wage-hour claims only in arbitration on an individual basis.  Employers’ mandatory arbitration programs containing class and collective action waivers, would therefore lose much of their efficacy.  Indeed, even if this ruling is allowed to stand in a single circuit – here, the Second – that circuit quickly would become a favored forum by plaintiffs’ counsel seeking to bring nationwide collective actions.

In Raniere v. Citigroup, Inc., mortgage loan officers filed a hybrid FLSA opt-in collective action and New York law opt-out Rule 23 class action claiming that they were misclassified as exempt from the FLSA’s overtime requirements and thus owed back overtime pay and liquidated damages.  The employer moved to compel arbitration of the claims brought by the employees who had signed arbitration agreements that, among other things, provided that FLSA claims could only be brought in arbitration and, then, only on an individual basis.

Plaintiffs made two arguments that the collective action waiver was unenforceable.  First, consistent with another recent decision out of the Southern District of New York, the plaintiffs argued that, relative to their potential recovery, the costs and fees attendant to bringing the claim on an individual, rather than collective, basis effectively barred them from bringing suit at all.  Given the substantial back overtime pay and liquidated damages that plaintiffs sought, the court rejected this argument. 

Second, Plaintiffs argued broadly that giving effect to the collective action waiver would mean that the FLSA would not serve its remedial and deterrent functions.  Relying on authorities, including the Supreme Court’s decision in Gilmer v. Interstate/Johnson Lane Corp., several circuit courts have ruled that collective action waivers under the FLSA are enforceable, including the Third, Fourth, Fifth, Sixth, Seventh, and Ninth Circuits.  But the Raniere court nevertheless held otherwise in its 81-page opinion.  Rejecting those authorities, it reasoned that the right to proceed collectively is a substantive right that a party cannot waive.  It further reasoned that waiver of the right to proceed collectively is different in kind from waivers of the right to proceed as a class under Rule 23 because, unlike other federal statutes such as Title VII or the ADA that are governed by Rule 23, “Congress created a unique form of collective actions for minimum-wage and overtime pay claims brought under the FLSA” that “balance the need to incentivize the bringing of often small claims by way of collectivization in order to ensure the statute’s function, while barring actions brought on behalf of employees who had no real involvement in, or real knowledge of, the lawsuit.”  In the court’s view, the right to sue under the FLSA contains an “integral aspect” of “the ability of employees to pool resources in order to pursue a collective action.”  Under that view, an FLSA collective action waiver is, therefore, invalid per se.

The result of the Raniere ruling is that an arbitration clause requiring employees to bring their state law wage-hour claims in arbitration on an individual basis will be enforceable, while (even in the same case where there are both FLSA and state claims) the same arbitration clause will not be enforceable as to FLSA collective actions.  Employers would thus be in the difficult position of having to defend an opt-in collective action in federal court and deciding whether to compel arbitration of state wage-hour claims on an individual basis.  No other court has adopted such a seemingly illogical result.  Collective action waivers requiring FLSA claims to be arbitrated on an individual basis remain enforceable in every circuit that has considered this issue and under the precepts of Concepcion.  Whether the Second Circuit or ultimately the Supreme Court permit Raniere to stand remains to be seen.  In the meantime, employers should bear in mind that Concepcion did not necessarily end collective actions when an arbitration agreement contains a class and collective action waiver.

Co-authored by Richard Alfred and Jessica Schauer

At 10 a.m. EST today, the U.S. Supreme Court announced its decision to grant certiorari in Christopher v. SmithKline Beecham Corp.  The Court will review a decision of the U.S. Court of Appeals for the Ninth Circuit, reported at 635 F.3d 38 (see Seyfarth Shaw’s Wage & Hour Litigation Blog), that held that pharmaceutical sales representatives are outside salespersons for purposes of the Fair Labor Standards Act and therefore are exempt from overtime.  The Plaintiffs’ petition, which SmithKline and the industry did not oppose, sought review of two issues:

(1) Whether deference is owed to an amicus brief submitted by the Department of Labor interpreting the outside sales exemption and

(2) Whether the outside sales exemption applies to pharmaceutical sales representatives.

While the Supreme Court’s docket does not yet indicate the specific issues on which the Court granted certiorari, it is most likely that it did so as to both of these issues.

The Ninth Circuit, in its rulings on these issues, rejected the “rigid, formalistic interpretation” of the term “sales” advocated by the plaintiffs and adopted by several other federal courts.  The court compared the plaintiff pharmaceutical sales representatives to other types of sales employees and found that they “share many more similarities than differences,” including the fact that they “are driven by their own ambition and rewarded with commissions when their efforts generate new sales.”  The Circuit Court also held that an amicus brief filed by the Department of Labor (“DOL”) on behalf of the plaintiffs was not entitled to deference.  The Ninth Circuit did not reach and the Supreme Court’s review will not consider the applicability of the administrative exemption to pharmaceutical sales representatives.

The Ninth Circuit’s decision is contrary to the Second Circuit’s 2010 decision in In re Novartis Wage and Hour Litigation, which raised similar issues as well as the applicability of the administrative exemption to pharmaceutical sales representatives (which the Second Circuit rejected).  In that case, the Second Circuit ruled that sales representatives for Novartis Pharmaceutical Corporation did not meet the criteria for either the outside sales of administrative exemptions.  Giving controlling deference to an amicus brief filed by the Department of Labor (“DOL”), the Second Circuit held that because pharmaceutical sales representatives are prohibited by federal law from actually entering into contracts to sell their employer’s products, they do not qualify for the outside sales exemption, which applies to employees “[w]hose primary duty is[] making sales.”  Several district courts, including the Northern District of Illinois, Southern District of Florida and District of Connecticut have also rejected application of the outside sales exemption to pharmaceutical sales representatives on similar grounds.  Those decisions, along with cases decided in favor of the application of one or both exemptions by the Southern District of Indiana, Eastern District of Texas, and Eastern District of Pennsylvania, are either currently on appeal to the Fifth or Seventh Circuits or are expected to be appealed.

Given a typical schedule for briefing and argument at the Supreme Court, a ruling on this case is not likely until late next spring. 

Deference to the DOL

The Supreme Court’s decision in this case is likely to focus on the degree of deference to be afforded to the amicus brief submitted by the DOL in support of the plaintiffs’ position before the Ninth Circuit.  The amicus brief at issue is part of a larger strategy by the DOL – referred to as “ambush by amicus” by one pharmaceutical industry group – aimed at influencing the courts through the unsolicited submission of amicus briefs in cases it views as important.  The Second Circuit in Novartis ruled that the DOL’s interpretation of its own regulations in the brief was entitled to controlling deference.  The Ninth Circuit, in stark contrast, held that no deference is required in this circumstance because the amicus brief represents a departure from “pharmaceutical industry norms[] and the acquiescence of the Secretary [in the exempt classification of similar positions] over the last  seventy-plus years.”  The Ninth Circuit also decided that the DOL’s regulations with respect to the outside sales exemption merely “paraphrase[s] the statutory language,” and that the DOL has no “special authority to interpret its own words” in such cases.

The Outside Sales Exemption

The outside sales exemption applies to any employee “[w]hose primary duty is[] making sales.”   Because federal law prohibits the sale of any prescription drug without the authorization of a licensed physician, pharmaceutical sales representatives cannot consummate a sale of any of their employer’s products.  Rather, they visit with physicians, describing the features and benefits of those medications in an effort to obtain a non-binding commitment from the physician to prescribe the drug when medically appropriate.  The Novartis court held that such activities do not fit within the outside sales exemption because the term “sales” requires a transfer of title, while the Ninth Circuit held that the term “sales” must be interpreted broadly under a functional approach to include anyone who “in some sense” sells.  The Supreme Court’s review of this issue should clarify the scope of the outside sales exemption for employers and the courts.

Effect of the Supreme Court’s Decision

The Supreme Court’s decision in Christopher v. SmithKline will most directly affect the pharmaceutical industry.  A decision by the Supreme Court on the scope of the outside sales exemption will also impact the ability of other employers to apply the functional approach to this exemption in determining whether employees are “making sales” where the final step of the sales process – closing the sale – is performed by others.  Such a decision will mark the first time that Court has endeavored to interpret this exemption in the more than seventy-year history of the FLSA.  A Supreme Court decision upholding the Ninth Circuit’s decision will effectively resolve the exempt status of pharmaceutical sales representatives for those companies whose sales representatives operate in a manner similar to SmithKline’s.  On the other hand, if the Supreme Court reverses the Ninth Circuit’s decision regarding the application of the outsides sales exemption, then pharmaceutical companies (and other employers whose exemption of “sales” employees depend on a functional approach to the outside sales exemption) will be left with the administrative exemption to support the exempt status of these employees.

Finally, the expected Supreme Court decision will also determine whether the DOL’s “ambush by amicus” strategy will succeed.  If the Court holds that the DOL’s amicus brief in Christopher is entitled to deference – even if it is not entitled to the very high level of deference afforded by the Second Circuit in Novartis – it is likely that the agency will increase its involvement in wage and hour litigation going forward as a means to attempt to change positions taken by prior administrations without time-consuming notice-and-comment rulemaking.  A Supreme Court decision siding with the Ninth Circuit on this issue will put an end to the DOL’s amicus strategy and require the agency to engage in proper rulemaking.

We will update our readers about this case as developments warrant.

Co-authored by Fred Sanderson, Brandon McKelvey, and Ferry Lopez

Judge Breyer of the U.S. District Court for the Northern District of California refused to certify a proposed class of assistant managers at WinCo Food’s discount warehouse grocery stores in California.  In Gales v. WinCo Foods, No. C 09-05813 CRB, 2011 WL 3794887 (N.D. Cal 2011), a former assistant manager at one of WinCo’s California stores moved to certify a statewide class of current and former assistant managers, alleging that WinCo had a uniform policy of misclassifying assistant managers as exempt from overtime under California law.  WinCo, represented by Seyfarth, opposed class certification with evidence that the amount of time assistant managers spent on managerial duties varied from store to store and from assistant manager to assistant manager.  The Court agreed with WinCo and held that the individual issues as to how assistant managers actually spent their time predominated over common issues, thereby defeating class certification. 

WinCo operates thirty large discount warehouse grocery stores in California that are each managed by a team of managers, including one store manager and typically two assistant managers.  Plaintiff argued that despite the “manager” title, assistant managers were required to perform mostly non-management tasks, like unloading freight and stocking shelves.  Plaintiff argued that WinCo’s centralized policies and procedures dictated store purchasing, merchandising, staffing, employee discipline, and other management work, leaving assistant managers to perform largely nonmanagerial tasks.

In opposition to class certification, WinCo submitted 36 declarations of current and former assistant managers showing that the amount of time assistant managers spent performing management tasks varied at different stores depending on a variety of factors, such as store management style, community demographics, store volume, employee turnover, etc.  Relying heavily on WinCo’s declarations, the Court concluded that the class certification motion failed on two grounds: (1) WinCo presented “significant evidence of variation” in assistant manager responsibilities across stores, and (2) Plaintiff’s evidence failed to sufficiently demonstrate that assistant managers spend a majority of their time performing nonmanagerial duties.   

The court found Plaintiff’s reliance on centralized policies and procedures unpersuasive. Although this evidence provided a general sense of the assistant manager job, “it [did] not tell the Court with requisite specificity how [assistant managers] actually spend their time.”  Persuaded that the level of responsibility varied significantly within the class, the court determined that “individualized inquiries” predominated over common ones under Federal Rule of Civil Procedure 23(b).

In cases challenging the exempt status of assistant managers, evidence of variation in responsibility and time spent on particular tasks comprises the gravamen of defeating class certification. This decision is particularly useful in illustrating the utility of declarations in establishing sufficient variation among employees to defeat class certification. Additionally, the decision demonstrates that mere evidence of common centralized policies alone is not sufficient to satisfy Rule 23(b)’s predominance requirement.

Authored by Michael Fleischer 

On August 12, 2011, the plaintiffs in Christopher v. SmithKline Beecham Corp., filed a petition for writ of certiorari with the U.S. Supreme Court seeking review of the 9th Circuit's decision holding that pharmaceutical sales representatives for GlaxoSmithKline are exempt from overtime as outside sales employees under the Fair Labor Standards Act.  The Ninth Circuit reasoned that the Plaintiffs and other Glaxo sales reps "share many more similarities than differences" with sales representatives in other industries, including the fact that they "are driven by their own ambition and rewarded with commissions when their efforts generate new sales."  The court rejected a contrary position espoused by the DOL in an amicus brief, in part because the DOL's position departed from "pharmaceutical industry norms[ ] and the acquiescence of the Secretary [in the exempt classification of similar positions] over the last seventy-plus years."  The Ninth Circuit did not address the alternative issue raised in many of the exempt status classification cases regarding the application of the administrative exemption to pharmaceutical sales reps.

The Plaintiffs' cert petition presents two questions for Supreme Court review: (1) Whether deference is owed to the Secretary of Labor's interpretation of the Fair Labor Standards Act's outside sales exemption and related regulations; and (2) Whether the Fair Labor Standards Act's outside sales exemption applies to pharmaceutical sales representatives.  Glaxo's response is due on September 16, 2011.   

If the Court grants cert., this case would resolve a Circuit split between the Second Circuit and the Ninth Circuit on the applicability of the outside sales exemption to pharmaceutical sales representatives.  Earlier this year, the Supreme Court denied a petition by Novartis Pharmaceutical Corp. for review of the Second Circuit's decision in Novartis Pharmaceuticals Corp. v. Lopes.  In that case, contrary to the Ninth Circuit's decision, the court gave controlling deference to the DOL's positions expressed in an amicus brief and ruled that pharmaceutical sales representatives are not covered by the FLSA's outside sales or administrative exemption.  The Supreme Court's decision on Plaintiffs' cert. petition in Christopher is not expected until the late fall.  

Authored by Laura Reathaford

How should employers classify junior accountants who perform accounting work but do not hold a CPA license?  The Ninth Circuit has provided an answer: employers may, depending on the nature of the work performed, classify these employees as exempt from overtime pursuant to California’s “learned professional” and administrative exemptions.  While this decision is based on state law, its rationale may be applied nationally to claims brought under the Fair Labor Standards Act that challenge the exempt status of junior accountants and similar professionals.

The language of the professional exemption provides that it applies to any employee who is (a) licensed or certified by the State of California and is primarily engaged in the practice of law, medicine, dentistry, optometry, architecture, engineering, teaching or accounting (commonly referred to as the licensed professional exemption), or (b) primarily engaged in an occupation commonly recognized as a learned or artistic profession (commonly referred to as the learned professional exemption).

In Campbell v. PricewaterhouseCoopers, the Ninth Circuit considered whether a class of junior accountants who performed audits for PwC clients were properly classified as exempt from overtime under the learned professional exemption.  The plaintiffs argued that they were misclassified because they were not yet licensed but were engaged in the accounting profession. Plaintiffs’ position was based on the idea that since the accounting profession was listed as exempt under the licensed professional exemption, this was the only professional exemption which could apply.  Anyone who performs accounting work but does not hold a license, cannot be exempt under the learned professional exemption.

The Court disagreed.  Specifically, the Court held that the plain language of the exemption – specifically – the word “or”, indicates that an employee may satisfy either the licensed prong or the learned prong of the professional exemption   The Court also noted that since all of the IWC exemptions apply to individuals and not to professions as a whole, it would be illogical to conclude that the IWC intended to exclude the entire accountancy (or any other) profession from the learned professional exemption.

The Court rejected the idea that the exemption’s overall structure requires a contrary interpretation.  The Court found that while the exemption contemplates three categories of employees which could fall within the exemption (licensed, learned and artistic), nothing in the exemption’s text or structure suggests that the licensed category is exclusive from the remaining two categories.  Instead, the Court found that the structure of the professional exemption strongly suggests that the IWC intended for subsection (b) to cover some accountants.  It noted that subsection (e) mandates that subparagraph (b) should be construed in accordance with the then existing federal regulations which provided that if employees actually performed accounting work, they could fall within the professional exemption.

The Court did not overlook the widespread implications of a contrary decision either.  For example, adopting Plaintiffs’ view would mean that employers would likely have to pay mandatory overtime to people such as medical school graduates working as residents at hospitals and first year law firm associates who are waiting to receive their bar exam results.  These widespread implications, the Court held, could not be what was intended when the IWC created the professional exemption.

The Court also found that PwC was not precluded from relying on California’s administrative exemption.  Acknowledging that “Plaintiffs are on the low end of PwC’s hierarchy”, the Court saw “no authority that would bar their audit work from meeting the test of the administrative exemption.”  The Court recognized that the former federal regulations incorporated by the administrative exemption included white-collar employees such as tax consultants whereas examples of non-exempt employees included primarily clerical jobs such as bookkeepers.  Accordingly, the Court found that if PwC proved that the junior accountants performed “white collar” functions more than 50% of their time, it might succeed in establishing they met the test of the administrative exemption.

Although the Campbell decision is based on the California Labor Code, it could have nationwide implications since the California exemption closely parallels the federal regulatory definition of the administrative exemption.  In particular, the Court’s finding that audit work could relate directly to the management or general business operations of the employer could mean that these employees qualify for the same exemption under the federal Fair Labor Standards Act.

Authored by Dana Fleming

The Ninth Circuit recently affirmed a district court decision to decertify a class of full-time supervisors employed by United Parcel Service, Inc. (“UPS”) where the only basis for class-wide treatment was UPS’s uniform policy treating all of its supervisors as exempt from overtime pay and meal- and rest-break requirements.  A common strategy of plaintiffs’ counsel is to base their class certification argument on the argument that the mere existence of a uniform policy or practice treating a challenged job in a misclassification case as exempt suffices to obtain class certification for Rule 23 purposes.  In Marlo v. UPS, a case decided recently by the Ninth Circuit, the court rejected that argument.

Marlo sued UPS in 2003 on a class basis, claiming that UPS misclassified its full-time supervisors as exempt under California law.  The district court initially certified a class of approximately 1,200 full-time supervisors.  The following year, the district court granted summary judgment for UPS, but Marlo appealed, and the Ninth Circuit reversed and remanded. 

On remand, the district court decertified the class, concluding that the existence of a uniform policy classifying all supervisors as exempt was insufficient to proceed on a class-wide basis.  The court also concluded that California law requires a week-by-week showing that the work actually performed by employees will qualify them for exemption. 

Marlo proceeded to trial on an individual basis, and the jury returned a partial verdict in his favor. UPS and Marlo both appealed.

The Ninth Circuit affirmed both the district court’s decision to decertify the class and (unfortunately for UPS) the $1.4 million jury verdict for Marlo.  After reviewing the district court’s reasoning in the case, the Ninth Circuit found no abuse of discretion and concurred that Marlo had failed to satisfy his burden to establish predominance because he had only submitted evidence of UPS’s centralized control and its uniform policies and practices.  In the Ninth Circuit’s own words:  “The fact that UPS expects supervisors to follow certain procedures or perform certain tasks does not establish whether they actually are ‘primarily engaged’ in exempt activities during the course of the workweek.”

To maintain class certification, the court ruled, Marlo had to do more than point to a few general corporate policies about the exempt status or general duties of UPS supervisors.  He had to provide some “common proof” that all full-time supervisors at the company were actually engaged in nonexempt work.  This, the Ninth Circuit concluded, Marlo had failed to do. 

The Ninth’s Circuit decision in Marlo is consistent with recent rulings from the U.S. Supreme Court and Circuit Courts, which suggest closer scrutiny of certification decisions and a possible trend away from large-scale class action treatment.  Of course, the much anticipated Supreme Court decision in Dukes v. Wal-Mart will provide further guidance on this issue. (See Seyfarth Shaw's March 29, 2011 Management Alert for additional information in Dukes v. Wal-Mart.)

Authored by Barry Miller

Overtime class actions are now at epidemic proportions in the mortgage lending industry.  Dozens of lenders and brokers have been sued since the Department of Labor issued an Administrator’s Interpretation in March 2010 reversing the Department’s prior guidance regarding the application of the FLSA’s administrative exemption to mortgage loan originators (MLOs).  However, a number of MLO overtime lawsuits were filed even before the Department of Labor’s reversal.  One of the first and most highly publicized of such cases is Henry v. Quicken Loans, which was filed in the U.S. District Court for the Eastern District of Michigan in May 2004. 

The trial of the Quicken Loans case began in Detroit on February 8, 2011.  Following four weeks of testimony, the case will be turned over to the jury to decide after closing arguments on Monday, March 14.  The stakes are high, and the jury faces a daunting task.  In addition to very technical questions of liability and complex questions regarding damages, the jury will decide whether the testimony presented at trial can serve as representative proof that will determine the exempt status of loan officers who did not testify in the case.

Though Quicken asserted other defenses during the pre-trial stage of the case, at trail the company has relied exclusively on the administrative exemption.  Interestingly, the proposed jury instructions filed in the case suggest that the jury will consider the case in a framework that does not account for the DOL Administrator's Interpretation on MLOs.  This appears to result primarily from an amicus  brief that the DOL filed in the case in December 2010, in which the Department acknowledged that it would be unfair to apply its newly adopted position as described in the Interpretation to events that occurred before March 2010.   (See Seyfarth Shaw's January 13, 2011 posting.)

Stakeholders will  view the verdict in the Quicken case--however the jury decides--as a potential bellwether for the application of the administrative exemption in the mortgage lending industry.  Based on the hard fought nature of the litigation, the high stakes, and the parties’ briefing of numerous significant legal issues leading up to and through the trial, an appeal also appears very likely, whichever side wins the trial.

Co-authored by Peter Urias and Justin Curley

On February 15, 2011, the Ninth Circuit held oral argument in Campbell v. PricewaterhouseCoopers, LLP, a significant class action that concerns the exempt status of unlicensed accounting professionals under California law.  The case has potentially far-reaching consequences, as the Ninth Circuit’s decision may implicate the exempt status of unlicensed individuals in other professional fields, such as law, medicine, architecture, engineering, optometry and dentistry.

During oral argument, the three-judge panel expressed reluctance to affirm the district court’s decision holding that, as a matter of law, unlicensed accountants did not qualify for the California learned professions exemption.  The argument focused primarily on the portion of the district court’s order that ruled unlicensed accountants cannot be exempt under California’s learned professional exemption because “accounting” is one of the enumerated professions of the professional exemption.  The district court’s ruling potentially undermines the exempt status of unlicensed professionals in many other fields such as law and medicine.  The panel referred to the plaintiffs’ argument on the issue of the learned professional exemption as “convoluted,” indicating that it required a departure from the plain meaning of the applicable wage order. 

The court’s decision on this issue is highly anticipated, as several similar cases are pending against other accounting firms, and many of those cases also involve claims under the Fair Labor Standards Act. 

Background

The class at issue in Campbell encompasses associates within PricewaterhouseCoopers’
(“PwC”) Attest division in California who do not hold CPA licenses.  PwC managers and partners are required to hold CPA licenses, but associates are generally unlicensed due to the experience and examination requirements for CPA licensure. 

The class members perform audits of financial statements, designed to assure that they are prepared in accordance with Generally Accepted Accounting Principles and are free of material misstatements.  While the parties in Campbell disagree sharply as to the nature of the class members’ work, their primary job responsibility is to verify the accuracy of financial statement items by obtaining and reviewing their underlying documentation.  Associates are supervised by managers and partners, but the level of supervision is hotly contested by the parties.

At issue before the Ninth Circuit is the district court’s order granting plaintiffs’ motion for summary judgment, which held that (1) unlicensed accountants cannot meet the requirements for California’s learned professional exemption as a matter of law; and (2) because accounting regulations and PwC’s internal policies require that unlicensed associates be supervised, they cannot be exempt under the California administrative exemption.  The Ninth Circuit took the case under submission and will issue a formal written opinion. 

The Learned Professional Exemption

The district court held that because licensed accountants are exempt as one of the enumerated professions of Wage Order No. 4’s professional exemption, unlicensed accountants cannot be exempt under the learned professional exemption.  The district court reasoned that unlicensed accountants must be excluded from the learned professional exemption to avoid rendering the enumerated professions provision surplusage.  The court reasoned that there cannot be two tracks to the professional exemption; the enumerated professions provision is redundant unless application of that provision exempts an employee who would otherwise be non-exempt.

At oral argument, the plaintiffs raised additional statutory interpretation arguments, and attempted to distinguish unlicensed accountants from unlicensed professionals who hold advanced degrees, such as medical residents.

The judges characterized plaintiffs’ arguments as requiring the court to take several uncertain steps to reach the conclusion that unlicensed accountants could not be exempt under the learned professional exemption, and to “go out on a limb.”  The panel also seemed wary of plaintiffs’ emphasis on advanced degrees as a distinguishing factor between unlicensed accountants and other unlicensed professionals, noting that education will vary based upon each class member, and that other unlicensed professionals such as engineers may not have advanced degrees.  The panel implied that the district court’s reasoning would lead to absurd results, precluding employees such as unlicensed veterinarians, first year associates at law firms and unlicensed medical residents from qualifying for the learned professional exemption.

Administrative Exemption

The panel inquired into whether class members who lead audit engagements could be performing administrative duties as opposed to auditing duties.  However, the panel did not make any inquiries regarding the level of supervision of class members, which the parties fiercely disputed.  PwC argued, unchallenged, that the level of supervision is a question of fact for the jury, and cannot be determined as a matter of law, as the district court did. 

Summary Judgment

The panel indicated that the district court’s granting of summary judgment may have been premature.  It noted that the record contained disputed facts, and that PwC merely sought the opportunity to prove that its unlicensed associates met the professional and/or administrative exemption. 

Conclusion

While the panel’s questioning at oral argument is not necessarily predictive of its eventual decision, the panel did convey skepticism of the district court’s ruling.  In particular, the panel seemed unwilling to adopt the district court’s reasoning with regard to the learned professional exemption.  The panel did not seem to be persuaded by the district court’s statutory interpretation analysis, and expressed concerns over the broad reach of the district court’s decision into other professional fields.  The panel gave fewer signals regarding its impressions of other issues in the case, particularly the district court’s ruling with regard to the administrative exemption.

Authored by Mary Ahrens

In Omiatek v. Big Lots Inc., No. 09-CV-0352 (W.D.N.Y., January 20, 2011), a magistrate judge recommended that the district court deny the plaintiff’s motion for conditional certification under the Fair Labor Standards Act and for certification of the New York state claims under Federal Rules of Civil Procedure Rule 23.  In this misclassification/unpaid overtime case, the judge ruled that the job duties of the plaintiff assistant store managers (ASMs) differed so significantly that the plaintiffs’ claims could not be litigated on a collective or class basis. 

In making his ruling, the magistrate judge largely relied on a virtually identical nationwide lawsuit, Johnson v. Big Lots Stores, Inc., 561 F. Supp. 2d 567, 588 (E.D. La. 2008), in which the court ruled, after a seven-day bench trial, that the plaintiff ASMs’ claims against Big Lots could not be litigated in a collective action because their job experiences varied too much.  The Omiatek court agreed with this analysis and noted that the declarations and deposition testimony presented by the parties likewise showed that the ASMs’ job duties differed significantly.  Among other things, they differed in terms of the amount of managerial responsibility each ASM had (including hiring, firing and evaluating employees) and the amount of time that each ASM spent on non-managerial duties. 

Importantly, the ASMs who submitted declarations all stated that they perform non-managerial work at their discretion and that they continue to perform their managerial duties (such as supervising, directing work, training, and overseeing store operations) while they perform non-managerial work.  Although the procedural history in this line of cases is relatively rare, this opinion is useful in arguing that, where job duties vary, an analysis of each employee’s individual job experiences is necessary to determine his or her qualification for exempt status.  Further, by recognizing that an ASM could, concurrently with performing non-managerial work, perform management job duties, the court expressed an understanding of the realities of the workplace that courts too often have overlooked.

Co-authored by Tim Watson and Barry Miller

In the ongoing battle between the Department of Labor and the financial industry over the exempt status of mortgage loan officers, the Mortgage Bankers’ Association (MBA) struck the latest blow by filing suit seeking to vacate the DOL’s recent Administrator’s Interpretation (AI) declaring that mortgage loan officers, in general, do not qualify for the administrative exemption to the FLSA’s overtime requirements.  The DOL’s AI issued in March 2010 reversed the DOL’s own prior opinion letter from September 2006 stating that the specific mortgage loan officers discussed in the letter--and whose job duties were spelled out in the letter--did qualify for the administrative exemption.

According to the MBA’s complaint filed on January 12 in federal court in Washington, the DOL’s March 2010 AI violates Section 702 of the Administrative Procedure Act (APA), 5 U.S.C. § 702 for two reasons.  First, the DOL’s abrupt reversal of its longstanding interpretation, issued with no prior warning, violates the APA because the DOL failed to go through the process of notice and comment rulemaking required by the statute.  Second, the MBA asserts that the AI is arbitrary and capricious.  That is, the MBA alleges, “[b]ecause the AI conflicts with existing DOL regulations, and because those regulations have been afforded the force of law by courts, DOL’s issuance of the AI is arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with [the APA].”  Based on these grounds, the MBA asked the court to vacate and set aside the AI in its entirety.  The MBA also filed a motion for summary judgment along with its complaint, contending that there are no questions of fact that the court needs to resolve to determine whether the AI is valid. 

As a result of the AI, the financial services industry “now faces substantial exposure from private-party litigation alleging that well-compensated mortgage loan officers are misclassified and are entitled to collect both back overtime wages and penalties.”  Indeed, based on the AI’s reasoning that mortgage loan officers are not administratively exempt in part because they engage in sales activity, the AI has been used by plaintiffs’ lawyers to support misclassification claims on behalf of other employees in the financial services industry such as underwriters, personal bankers, brokers, loan originators, and consultants.

Authored by Kevin Young

In a move that could substantially impact businesses employing drivers and treating them as exempt from federal overtime requirements, the U.S. Department of Labor (the “DOL”) has narrowed its view of the Motor Carrier Exemption (the “MCE”) to the Fair Labor Standards Act (the “FLSA”), as set forth under 29 U.S.C. § 213(b).  The move, which the DOL announced in Assistance Bulletin 2010-2, will essentially require employers relying on the MCE to more persistently evaluate its applicability to their employees.

As a general matter, the MCE exempts from federal overtime requirements employees over whom the Secretary of Transportation has power to set qualifications and maximum hours.  As written, it exempts drivers, driver’s helpers, loaders, and mechanics whose work affects the safe operation of certain vehicles in interstate commerce.  Qualifying vehicles include those: (a) weighing over 5 tons; (b) designed to transport either (i) more than 8 individuals, for pay, or (ii) more than 15 individuals; or (c) used to transport certain hazardous materials.

Until now, the DOL’s position has been that the MCE applies to employees in four-month increments from the time that they perform, or could be asked to perform, the exempt work.  Rooted in DOT authority and endorsed by many courts, this stance was relatively generous for employers using the MCE, as a day-by-day review of the vehicle driven or worked upon by each employee is not necessary.  In light of recent amendments to Congress’s SAFETEA-LU legislation, however, the DOL has now changed course, explaining that the MCE cannot apply in a workweek in which an employee’s work is on a non-qualifying vehicle. 

To illustrate, suppose a freight company employs a pool of drivers, any of whom may be called upon to drive a truck weighing over 5 tons to transport goods to a site in another state.  Even after the DOL’s guidance, those drivers are, as a general matter, exempt from overtime requirements for a four-month period.  However, if a driver from the pool is asked to work on one of the company’s 2-ton pickup trucks, even for a day, then she is nonexempt for that week and must receive overtime pay for hours worked over 40, regardless of what trucks she works on the rest of the week, month, or year.

In sum, employers relying upon, or considering relying upon, the MCE should remain cognizant of these developments.  While the four-month rule remains in effect, the range the DOL once afforded it has no doubt been narrowed, perhaps requiring a daily qualification of the MCE for certain employees.  Although it remains to be seen how much weight, if any, a federal court will place on the guidance, its authority in the case of a DOL investigation is quite clear.